Introduction
Country or region competitiveness is very strategic as it determines the
ability of the businesses to operate profitably and compete effectively in the
global markets (Grigorescu and Chillian). For the strategic manager,
country/region factors are unavoidable for purposes of determining the success
of the business. This makes such factors very important for purposes of
determining which country to operate from. Country compentitiveness is
therefore very important for purposes of attracting foreign direct investment,
retaining current industry players within the countries, and influencing the
global competitiveness of businesses by setting technological standards through
collaboration in research and development and establishing strict legal
frameworks for compliance (Murat and Pirotti, 2010). According to Iordan, Grigorescu
and Chillian (2012), the five indicators that can be used to describe the
competitiveness of an economy or country are: exports, imports, internal
investments, internal foreign investments, and innovation production. On the
whole, competitiveness is relative and must be compared to other countries and
regions where the most competitive economy takes over in attracting investors
and having greater control of global trade (Murat and Pirotti, 2010). For Europe, mounting
competition is posed by China which has been experiencing rapid economic
development buoyed by attractiveness to foreign investors, low cost production
advantages, and mastery of technological developments. In spite of this threat,
this paper finds that the EU still has the capacity to maintain its comparative
competitiveness when compared to China.
Population, demand and political risks
Local businesses and their prospects for realising generic growth are the
main determinants of country competitiveness. Investors seek to operate in
markets where business regulations, access to credit, and demand levels are
good enough to facilitate the profitability of businesses (Li
and Ling 2013). Also
important are the legal provisions that encourage cross border trade. The EU is
structured such that laws and regulations are designed to converge with the
main source of reference being the European laws are enacted by the region’s
top institutions such as the European Parliament and the European Commission (Gillia,
Mazzantia and Nicollia, 2013). The individual states within the EU are net implementers
of laws developed by these institutions. While arguments against this form of
structure are common, investors find it convenient as it facilitates
cross-border transactions and expansion within the Euro Zone. This means that
the average business has a large pool of demand to tap from.
In comparison to Europe, China has almost thrice the population of the EU
with the populations being 1.35billion and 505million respectively (Gillia,
Mazzantia and Nicollia, 2013; Li and Ling 2013). This means that the Chinese businesses may have a
much larger demand pool to tap into, save for the fact that as a developing
country, China is faced with high poverty rates that make their populations
unable to consume as much as the European populations do (Vandenbussche,
Comite, Rovegno and Viegelahn, 2013). The disparity of spending power is such that
European businesses are able to make much higher profits than their Chinese
counterparts. However, per capita incomes among the average Chinese citizen are
projected to grow exponentially with China projected to be the driver of luxury
markets by 2020 (Vandenbussche, Comite, Rovegno and
Viegelahn, 2013). This could see Europe lose its competitive edge. Besides, the major
difference between the EU and China is that while the latter is a unitary state
with unitary national institutions, the EU is characterised by voluntary
membership where member states still have the prerogative to enforce laws using
national institutions (Belová, Smutka, Rosochatecká and Bazina,
2012). Where cross-border enforcements
are needed, information sharing becomes a hurdle in the EU with legal
challenges being highest in combating crimes such as cybercrime.
Nevertheless, the EU institutions are more independent than China and this
lowers the political risks that the businesses are exposed to. This gives the
EU an advantage in the eyes of the investors and the advantage is likely to be
maintained for decades as it becomes unlikely that the Chinese system of
governance will fully embrace the independence of institutions (Vandenbussche,
Comite, Rovegno and Viegelahn, 2013; Li and Ling 2013). Independence of institutions
insulates markets from political upheavals that often come with changes in the
political leadership of countries. China remains essentially communist with the
communist party being the only political party allowed in China. Even though
the country has enacted major legal reforms aimed at protecting the investor,
the constitutional framework allows for interference and this heightens
political risks (Zhang, Ebbers and Mulder, 2012). The level of independence in
the EU has been so high that member countries have been decrying the
diminishing importance of their national parliaments. This independence is good
for maintaining a stable business environment and it makes Europe a good place
to invest in.
FDI attractiveness
The factors that drive competitiveness of businesses also impact
attractiveness to foreign direct investment FDI. In addition to factors
explained in the section above, the cost of doing business, the level of
industry rivalry, and legal provisions
restricting foreign investments are among the factors that impact the inflow of
FDI. Some of the leading countries in FDI attractiveness are found in Europe (Maplecroft,
2013). These rankings are evaluated
based on the level of political stability, legal insfrastructure, economic
performance, and the cost of labour among other factors (Maplecroft,
2013). Despite having high political
risks, China remains one of the most attractive countries to FDI. This
attractiveness has in the past been linked to low labour cost advantages with
countries such as Germany benefiting from technological attractiveness.
However, recent developments have seen China evolve into a technological
powerhouse with companies such as Huawei and Lenovo excelling in the
international stage. The EU has some of the strictest rules for labour where
organisations have reduced levels of flexibility in negotiating wages (Blauberger
and Krämer, 2013). This raises the cost of labour, even though labour productivity is
considerably high. In terms of ranking, labour productivity in Europe is much
higher than in Asian regions with the USA being the leader in labour
productivity in the world. China is nevertheless tipped to improve with the
country investing in improved productivity to counter rising minimum wage
levels.
Technological developments
Europe has for a long time been the hub of research and development. To
date, the culture of innovation remains very high with Chinese companies only
spending a fraction of what European companies spend on research and
development (Epstein, 2012). European pharmaceuticals are leading in the world in
innovation and creation of latest remedies for emerging health issues.
Countries such as France lead in the production of luxury products and
cosmetics while Germany leads in the production of high value technological
products. The products from Europe are
credited for being of a much higher quality than Chinese products and this
makes our Europe as being more competitive than China as far as technology is
concerned. Investment in research and development makes it necessary for
countries to develop ethical codes for ensuring that certain standards are
upheld at all times.
There has been great similarities between Europe and China when it comes
to regulating technologies, protecting intellectual property rights, and
guiding the ethics of the practice. This is the finding by Dalton-Brown (2012)
in her comparison of the ethics in nanotechnology between EU and China. She
found that both countries have sound frameworks which are comparable. However,
implementation frameworks in China were observed to be quite weak with Europe’s
strong institutions making them better able to enforce the regulations set.
The approach to innovation within the EU has been centred on the need to
produce green products where wastes are minimised, recycling encouraged, and
the use of clean energy enhanced. Germany leads in environment-based
innovations within the UK with fuel efficiency in machineries and vehicles
produced as well as manufacturing processes being the main point of focus (Maplecroft,
2013). Strict environmental
regulations raise the cost of business. This means that investors could opt to
invest in countries where stringent environmental requirements may be
relatively low and this puts the EU at a disadvantage. In order to overcome
this, the EU has taken advantage of its position as a strategic market for most
companies around the world and imposed environmental sustainability standards
before their products can be sold within their markets (Dalton-Brown,
2012). This is in addition to
sponsoring influential international non-governmental organisations and the
United Nations agencies to lobby for the adoption of similar standards for
environmental regulation around the world. The EU is not alone in this push as
it emerges that environmental regulation is bound to be globalised with time.
This means that environmental regulations may not be a source of competitive
disadvantage for the EU in the long run.
Sustainability of Europe’s competitiveness
Competitiveness is not absolute: it is relative. Even if Europe fails to
make mistakes that could make it less competitive, the growing competitiveness
in other regions and countries could render them vulnerable (Bongardt,
Torres, Hefeker, Wunsch and Hermann, 2013). China is one of the countries that have invested
actively in enhancing their level of competitiveness. Like Europe, China has a
vast population to tap demand from where the population is 3 times larger that
Europe’s. This means that if the Chinese population was to have a spending
power equal to their European counterparts, the Chinese market would be very
attractive to investors. China’s approach to improving its competitiveness has
been based on efforts to encourage technological advancements and enable local
companies to compete effectively in the international markets (Li and Ling,
2013). Building the country brand is an important aspect of promoting
competitiveness and China’s efforts have been yielding fruits as the country
brand has been able to shed the tag of substandard quality.
The sustained competitiveness of the EU is likely to depend on a number of
factors: enhanced integration between member states, control of the cost of
production, sustained innovation, and economic stability (Cheung
and Gill, 2013). The
EU has been faced with economic crises characterised by the collapse of some of
the economies such as Greece, Italy and Spain (Cheung and Gill,
2013). This is a major challenge for
the region and is liekly to negatively impact the stability and performance of
the currency. If the crisis is not overcome in time, the competitiveness of the
EU may not be sustainable.
The EU’s record on innovation is impressive with heavy investment often
being made into research and development. This is an important area of competitiveness.
As countries like China master production and communication technologies, it is
only through continuous innovation that the EU can maintain its competitiveness
(Jiang
and Strandenes, 2012). The sustainability of this competitiveness may be threatened by the
emergence of a technologically vibrant market in China with Chinese companies
mastering reverse engineering and technological advancements. For instance,
personal computers and communications fields are no longer a reserve of the
West as Chinese companies Lenovo and Huawei edge towards emerging as the
definite market leaders in the respective industries (Vieweg,
2012; Vandenbussche, Comite, Rovegno and Viegelahn, 2013; Li and Ling 2013).
China is also taking over from Europe as one of the most potent markets
for various industries such as the luxury product segments. This means that as
China’s economic development continues, the demand in China is likely to grow
and this could surpass Europe as the EU expands to incorporate poorer countries
within the region (Vandenbussche, Comite, Rovegno and
Viegelahn, 2013; Li and Ling 2013). Demand drives competitiveness and China’s growth
impacts rlative competitiveness of the EU. Even in the event that China fails
to surpass the EU in terms of per capita income, its improvement makes China
competitive and this is bound to divert foreign investors from the EU.
In spite of these findings, the EU remains more stable politically as
characterised by the existence of very strong institutions. Its heavy investments
in research and development is likely to contribute to competitiveness in
future (Epstein,
2012). However, the existence of
conflicts between national and regional institutions could cost the region and
negate the gains made in terms of encouraging cross-border trade. The weak
economic performance would also need to be checked if the region is to sustain
its competitiveness.
Conclusion
When a comparison is made between China and the EU, the former is on an
upward trend while the latter is stagnating and on the verge of a decline. The
EU brings together a large number of countries with a total population of over
505million. When compared to China’s 1.35billion, this is a small population.
However, it is a highly potent population with a much higher consumer power
than the Chinese population. The EU is also at an advantage in terms of
political stability and technological advancements. These advantages are
expected to be sustained into the future. However, continued innovation and
investment in research and development will be necessary if China’s quick
mastery of technology is to be overcome. From the arguments above, it can be
said that China is in a good position to cut down on the relative
competitiveness of the EU. The EU would need to fix its economy, enhance more
technological advancements, and enforce greater cooperation between member
states for them to maintain their competitiveness as a region.
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