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The Competitiveness of Armenia’s Private Sector: Moving to the Next Stage
Washington, 2008
Economy and Values Research Center
The presentation is based on the results of the first National Competitiveness Report of Armenia
Manuk HergnyanGagik GabrielyanAnna Makaryan
Presentation Highlights
NATIONAL COMPETITIVENESS REPORTNATIONAL COMPETITIVENESS REPORT
THE CHALLENGE OF COMPETITIVENESSTHE CHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCORECARDARMENIA’S COMPETITIVENESS SCORECARD
CURRENT ECONOMIC PERFORMANCE OF ARMENIA CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY TOWARDS A COMPETITIVE ECONOMY
The Report
For the third year Armenia is included in the Global Competitiveness Report (GCR) of the World Economic Forum (WEF).
Economy and Values research center as the partner organization of the WEF has initiated the preparation of the first National Competitiveness Report.
The first National Competitiveness Report of Armenia (ACR) analyses the economic situation and performance of Armenia in the context of competitiveness.
The Report will be launched in two weeks.
Goals and Objectives of the Report
To develop a premium tool for analysing economic competitiveness of Armenia.
The goal
Objectives
Role
• Evaluate competitiveness of Armenia’s economy;
• Identify challenges and priorities for Armenia;
• Identify competitive advantages of Armenia and opportunities for improving competitiveness;
• Recommend strategic approaches and key levers for tackling challenges and capturing opportunities.
• High quality data and analysis for public and private sector leaders
• A helpful tool for a dialogue between the government and the private sector;
• Ample material for university faculty members, students and researchers;
• A message to the international community that Armenia is committed to becoming an internationally competitive country.
Presentation Highlights
NATIONAL COMPETITIVENESS REPORTNATIONAL COMPETITIVENESS REPORT
THE CHALLENGE OF COMPETITIVENESSTHE CHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCORECARDARMENIA’S COMPETITIVENESS SCORECARD
CURRENT ECONOMIC PERFORMANCE OF ARMENIACURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY TOWARDS A COMPETITIVE ECONOMY
Importance of Competitiveness
• Competitiveness is based on the nation’s capabilities and not its natural resources.
• Competitiveness is the source of prosperity for the citizens of the country.
• Competitiveness is the outcome of innovation and technological advancement and, at the same time, the driving force behind them.
• Competitiveness ensures increasing productivity of the companies in the country and their capability of competing in the international market.
Definition of Competitiveness
• The definition of Scott and Lodge (1985) views competitiveness as a capability of the nation to produce goods and service and distribute internationally.
• Porter’s definition (1990) underscores the productivity with which the nation utilizes its resources – focus on microeconomic basis.
• Xavier Sala-i-Martin’s (2004) definition underscores combination of macroeconomic and microeconomic factors including policies and institutions that determine the level of productivity and define the sustainable level of prosperity in a mid-term.
• ACR draws on these three definitions of competitiveness.
Competitiveness Rankings
• Internationally recognized organizations that offer country competitiveness rankings:
– The World Economic Forum (WEF),
– The Institute for Management Development ( IMD),
– The Institute for Industrial Policy Studies (IPS).
• WEF Global Competitiveness Report -GCR
– A leading and most comprehensive source for ranking country competitiveness;
– uses both statistical data and “soft data” (executive opinion surveys).
• GCR has two measurement indexes:
– Business Competitiveness Index (BCI) that measures the quality of business environment and the level of sophistication of company strategies and operations.
– Global Competitiveness Index (GCI) which has a wider coverage and includes macroeconomy, healthcare and education.
• Armenia is only covered by the WEF reports
Presentation Highlights
NATIONAL COMPETITIVENESS REPORTNATIONAL COMPETITIVENESS REPORT
THE CHALLENGE OF COMPETITIVENESSTHE CHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCORECARDARMENIA’S COMPETITIVENESS SCORECARD
CURRENT ECONOMIC PERFORMANCE OF ARMENIACURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY TOWARDS A COMPETITIVE ECONOMY
Armenia’s Ranking in the GCR: the 93rd among 131 Countries
• Armenia’s ranking has declined though its absolute scores have slightly increased.
• Armenia’s ranking is relatively high in the macroeconomic, healthcare and primary education areas.
• However, at the micro-level Armenia’s indicators are rather low. With it Business Competitiveness Index Armenia is the 108th.
• Main problems are:– Imperfectness of business environment;– Low level of business sophistication;– Unsatisfactory level of higher education and training;– Poor cooperation between businesses and supporting
institutions;– Low level of innovation.
Global Competitiveness Index Composition
Armenia's Ranking in the GCROn Basic Requirements Armenia’s Ranking is Relatively Favorable
Poor indicators despite the improvements in recent years.
One of the major obstacles for the private sector.
The telecommunication is poorly developed.
Lack of a port considerably worsens Armenia’s ranking.
Institutions - 96 Infrastructure - 87
Public institutions are better developed than the private ones.
Public institutions - 77Relatively higher security level Lack of judiciary independence Protectionism in government
decisions Low trust towards politicians
Private institutions - 102 Poor ethics Low accountability Lack of protection of interests of
minority shareholders Low level of maintaining financial
audit and reporting standards
High economic growth
Low inflation
Improved national budget system
Effective management of government debt
Low level of savings
Large interest rate spreads
Fluctuations of the exchange rate of dram in the recent years
Unequal regional development
Unequal distribution of wealth
Macroeconomy - 57Healthcare and primary
education - 99
Decreasing infant mortality
The impact of tuberculosis, HIV/AIDS and similar diseases on businesses is not significant
Relatively high level of enrollment in primary education
Armenia's Ranking in the GCROn Basic Requirements Armenia’s Ranking is Relatively Favorable
Liberal trade regime is not an obstacle for efficiency of local market
Weak anti-monopolistic policy, limited nature of competition in the local market
Goods market efficiency - 104 Labor market efficiency - 40
Flexibility in defining salaries and wages
Flexible relations between employers and employees
Lack of well-trained leaders
Armenia's Ranking in the GCROn Basic Requirements Armenia’s Ranking is Relatively Favorable
Financial market sophistication- 110
Underdeveloped financial markets Difficulties to obtain loans (high interest rates, excessive collateral requirements) Underdeveloped securities market Lack of venture market
Market size- 111
Limited domestic market sizeSmall-scale foreign market size
Armenia's Ranking in the GCRArmenia’s Ranking in Efficiency Enhancers is Weak
High level of enrollment in secondary education
Continuous decline in number of people with higher education
Decreasing quality of education system
Very low level of the quality of business education
Low quality of instruction in mathematics and sciences
Lack of specialized trainings, R & D services
Low spending of companies for training
Local companies have developed capacities to absorb new technologies
Foreign direct investments are not the major source for transferring new technologies
Imperfectness of the legislative framework conducive to wide application of IT
Higher education and training - 95
Technological readiness - 104
Armenia's Ranking in the GCRArmenia’s Ranking in Innovation is Weak
Relatively high number of patents registered with the U.S. in comparison with other countries
Low level of quality of research institutions
Low spending on R&D by private companies
Weak cooperation between private sector and universities
Lack of state policy of procurement of high technologies
Weak IPR protection Not widespread practice of
obtaining new technologies by licensing or copying.
Lack of local specialized supplier and their relatively low quality
Production process based on intensive use of labor force and old generation technologies
Application of the simplest forms of marketing tools
High level of centralization of management decisions
Competitive advantages driven by low cost
Simple value chains
Innovation - 94Business Sophistication - 111
Presentation Highlights
NATIONAL COMPETITIVENESS REPORTNATIONAL COMPETITIVENESS REPORT
CHALLENGE OF COMPETITIVENESSCHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCOREARMENIA’S COMPETITIVENESS SCORE
CURRENT ECONOMIC PERFORMANCE OF ARMENIA CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY TOWARDS A COMPETITIVE ECONOMY
Prosperity is a choice. It is a choice between the alternatives of strategies and operations for efficient use of available resources and knowledge.
Competitiveness Ensures the Basis for Prosperity
Source: EV (2007) adapted from M. Porter (1998)
Three Sets of Countries are Selected for Benchmarking
CISCentral, Eastern and
Southeastern Europe
Eurasian Crossroad
Rationale
Common historical context, similar economic conditions, close economic ties
10 countries
Russia, Ukraine, Kazakhstan, Moldova, Belarus, Georgia, Azerbaijan, Uzbekistan, Kirgizstan, Tajikistan
Rationale
Considerable successes in the transition period. Perceived as a region including Armenia.
15 countries
Latvia, Lithuania, Estonia, Poland, Hungary, Czech Republic, Slovenia, Slovakia, Bulgaria, Romania, Bosnia, Albania, Serbia, Croatia, Macedonia
Rationale
Historic region encompassing Armenia, geographic crossroad on important Eurasian trade routes.
8 countries
Turkey, Azerbaijan, Georgia, Iran, Syria, Lebanon, Israel, Jordan
PRODUCTIVITYArmenia ranks low in terms of labor force participation and general productivity of labor force and is behind the majority of comparator countries
Source: WB, WDI
* The small chart on the leftt hand corner compares Armenia’s performance (production per employee) with that of Ireland (Ireland = 100).
PRODUCTIVITYThe situation is even worse in manufacturing.
Source: WB, WDI
INTERNATIONALIZATIONArmenia is in good position in terms of its export share growth in the global exports, however, in absolute terms it is still behind most of the comparator countries. Armenia’s share in global exports is less than its share in global GDP.
Source: WB, WDI, UNCTAD
* The small chart on the right hand corner compares Armenia’s performance (share of export in global exports) with that of Ireland (Ireland = 100).
INTERNATIONALIZATIONResource-intensive (raw materials) export share is substantially high in Armenia’s total exports, while share of high value added export is very small. Export structure is very centralized.
Source: WB, WDI, UNCTAD
* The small chart on the right hand corner compares Armenia’s performance (non-mineral and non-raw material share of export) with that of Ireland.
INTERNATIONALIZATIONArmenia has average position in terms of attracting FDI. However, Armenia is behind most of the countries in terms of FDI per capita. The strategy of attracting FDI driven by privatization and infrastructure deals needs profound revision.
Source: WB, WDI, UNCTAD
* The small chart on the right hand corner compares Armenia’s performance (per capita FDI, 2000-2005 (average)) with that of Ireland (Ireland = 100).
KNOWLEDGE
Armenia has not been able to recover its former capacities in R&D area. Very little expenses are being made in R&D. However, relatively large number of patents vs. expenditures were registered.
Source: WB, WDI, USPTO
* The small chart on the right hand corner compares Armenia’s performance (number of patents registered in the USA per one million persons) with that of Ireland (Ireland = 100).
Presentation Highlights
NATIONAL COMPETITIVENESS REPORTNATIONAL COMPETITIVENESS REPORT
CHALLENGE OF COMPETITIVENESSCHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCOREARMENIA’S COMPETITIVENESS SCORE
CURRENT ECONOMIC PERFORMANCE OF ARMENIACURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY TOWARDS A COMPETITIVE ECONOMY
FOUNDATIONS OF COUNTRY COMPETITIVENESS
Favorable macroeconomic environment is a necessary but not sufficient precondition for achieving high level of competitiveness.
Source: M. Porter
MACROECONOMIC ENVIRONMENT
Armenia’s macroeconomic environment is rather favorable.
Liberal economic environment
Privatization and dominance of private sector
High rate of economic growth
Low inflation Manageable level of fiscal
deficit Quite satisfactory budget
system
Significant fluctuations of exchange rates
Significant difference (spread) between the interest rates for deposits and loans
Positive achievements Distortions
MACROENVIRONMENT
Legal and Institutional Environment
Political Environment
Comprehensive legislative framework consistent with the WTO and other international requirements
There are serious issues with enforcement of legislation;
Imperfect secondary legislation;
Ambiguous procedures; Unsatisfactory human
and institutional capabilities
Insufficient independence of the judiciary
X The stability of political situation is shaken by recent post-election events
Many global investors still view Armenia as a country in war
Social Environment
Social situation is improving relatively fast.
Real level of poverty and unemployment (above 30%) is still high
Regional development is extremely disproportionate;
Distribution of wealth is unequal;
Salary range is still lower than the level in 1990
MICROENVIRONMENT The most serious competitive disadvantages of Armenia are on the micro level.
• Wealth, after all, is created by companies and not due to the best combination of macroeconomic indicators.
• The level of strategies and operations of companies defines their capability for competing and long-term profitability.
• On the other hand, they are driven by its immediate environment, i.e. business environment.
MICROENVIRONMENT On the conceptual side Porter’s “diamond” model is used for studying the microenvironment of the economy.
MICROENVIRONMENTFactor Assessment
Improved power supply
Improved air and land transportation infrastructure
Developments in telecommunication
Weak telecommunication infrastructure
Lack of a harbor
Physical infrastructure
Improved bureaucracy
Sufficient security
Inefficient legal framework
Dependent judiciary
Administrative infrastructure
Low quality specialists
Inefficiency of the educational system
Lack of high quality management schools
Human capabilities
Progress in obtaining U.S. patents
Low quality of R&D institutions
Weak cooperation between businesses and R&D institutions
Low level of spending for R&D institutions
Scientific and technological infrastructure
MICROENVIRONMENT
Financial sector is currently one of the major “constraints” of the Armenia’s business environment. Financial system’s participation in economic life is limited.
Source: WB, WDI
* The small chart on the right hand corner compares Armenia’s performance (local lending through bank system, 2005 (GDP%)) with that of Ireland (Ireland = 100).
MICROENVIRONMENT Root Causes of Financial Intermediation
Low and unequally distributed revenues => small savings
Low trust toward financial institutions
Lack of institutions accumulating “long” money; weak ties with international markets
High level of risk for overall economy => expensive capital
Supply
Demand
Regulation and Mediation
Structure of the Economy
Financing of large foreign companies from external sources
Opportunities for funding from internal sources from “informal tax privileges”
large share of small agricultural producers
Large share of construction, which is mostly funded by advance payments and private transfers
Shadow economy
Competitiveness is restricted to several sections
Tough regulation
Legal issues, weak mechanisms for sale of pledged collateral => tough collateral requirements
MICROENVIRONMENT Demand factors: the existing demand both in public and private sector still lack the quality to serve as an incentive for sophistication of goods and services.
• The impact of state procurement is also insignificant.
• Standards and other regulatory requirement have been improved but still do not have a serious impact.
Lack of specific demand
Weak pressure
on businesses
Weak incentives
forsophistication
Simple business
procedures
Lack of Strong
Clusters
MICROENVIRONMENT
Related and Supporting Industries
• Limited information flow and lack of integration between the enterprises, suppliers and buyers
• Weak connections with other industries
• Underdeveloped support institutions
• Extreme need for professional training centers
• Very limited flow of information within industries
Given numerous synergetic impact the clusters are considered to be the source of competitive advantages. This fact is not fully recognized in Armenia.
MICROENVIRONMENT
Fundamental issues exist in corporate management and internal competition.
Relatively good relations between employers and employees
Protectionism in government decrees
Lack of corporate management practices
Inadequate reporting
No protection of interests of minority shareholders
Weak IPR protection.
Drivers
External trade administration is relatively liberal
The impact of corruption on businesses is not prohibitive
Fragmentation of local competition (extremely differs by sector or market segment)
Dominance of powerful groups in selected mass markets
Weak protection of economic competition
Internal Competition
MICROENVIRONMENT
Poor strategies of companies account for their most significant competitive disadvantages.
Business administration
Production operations
Labor Force
Marketing and international
sales
Global competitiveness
• Not ready to delegate• Shortage of professional management
• Enterprises are willing to use new technologies but make little spending on R&D
• Production processes and operations are not sophisticated
• Low spending on education and training of employees
• Companies do not use advanced tools for marketing and do not establish international distribution networks
• Limited industries are internationally competitive• Companies do not master profoundly the tactics for
competing in international markets
“The Growth-Competitiveness”
Paradox
Diagnostic Summary
The economy is growing, but the competitiveness is falling.
Presentation Highlights
NATIONAL COMPETITIVENESS REPORTNATIONAL COMPETITIVENESS REPORT
CHALLENGE OF COMPETITIVENESSCHALLENGE OF COMPETITIVENESS
ARMENIA’S COMPETITIVENESS SCOREARMENIA’S COMPETITIVENESS SCORE
CURRENT ECONOMIC PERFORMANCE OF ARMENIACURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY TOWARDS A COMPETITIVE ECONOMY
BUILDING COMPETITIVENESS
The issue of competitiveness assumes different approaches in the short- and in the long-run.
Quick Wins Strategic Breakthrough
• Quick wins, even if small, serve as an incentive to strive for long-term strategic
• Create basis for coalitions for changes
• Allow to quickly improve Armenia’s international rankings
Short-term Long-term
• Strategic targeting assumes building a holistic picture
• Allows to identify the criteria for assessment of different actions
• Makes comprehensible the directions of reform initiatives
• Establishes a sustainable competitive advantage
0
25
50
75
100
125
Currently in 2-3 years
0
25
50
75
100
125
Quick Win
Quick Win
10-12 years
0
25
50
75
100
125
Time
• Certain improvement of current competitiveness position can be achieved very quickly through several initiatives and improvements
• However, regional and international competitiveness new, “higher level” of actions are required with the timeframe of 10-12 years.
BUILDING COMPETITIVENESS Quick wins and strategic breakthrough address different issues.
QUICK WINS Short-term priorities can be identified by using a newly developed tool called “Prioritization filter”.
IDENTIFIED QUICK WINS
STRATEGIC TARGETING
Strategic targeting assumes presentation of main value proposal as the basis for the main regional role.
THE SYSTEM OF COMPETITIVE LEVERS (LEVERAGE) To ensure sustainability of respective positioning and to gain advantages in regional competition it is necessary to identify the key competitive levers.
BASIS FOR LEVERSThe system of levers should be used in addition to the general economic policy.
• The basis for levers is a three-component system that will establish an efficient context for applying the levers.
• The central role is prescribed to the cluster policy, which should become a model for organizing the economic system rather than a set of isolated initiatives in selected areas.
• Economy should be viewed as a group of clusters.
• Clusters should be upgraded based on the main value proposition.
• Cluster policy becomes the link between the innovation policy and the regional development policy.
• The three components are coordinated together and support each other.
LEVERSCompetitive levers are the selected factors that would ensure the strategic breakthrough.
Education in Armenia may not be only a general factor for improving competitiveness, but also basis for regional positioning.
FDI should become a source for large scale investments and transfer of technology into Armenia. In addition, it will improve the competitiveness through expansion in international sector.
With relevant policy background the use of the Diaspora resources may become focused, cluster-specific and aligned with innovation and regional development policies.
IMPLEMENTATION The logic behind levers assumes a renewed institutional approach.
The use of the leverage system may be efficient in a relevant organizational and institutional environment.
Renewed institutional approach firstly assumes modernization of existing institutions and in some instances establishment of new ones
In the context of introducing key levers it is important to involve large investors and Diaspora representatives in such institutions.
COMPETITIVENESSIncreased competitiveness is as vital for Armenia as its national security.
Competitiveness
Renewed strategic approaches
Renewed institutional approaches