University of Bern Faculty of Social and Economic Sciences Economic Department Prof. Dr.

Haris Dellas Coached by Luzia Halter

An Estimation of Factors of Competitiveness

Philipp Hnggi 04-112-512 Grafenfelsweg 14 4500 Solothurn November 2010

Table of Contents
1. Introduction ....................................................................................................................... 1 2. Theoretical Background .................................................................................................... 3 3. The Model ......................................................................................................................... 5 3.1 Explanatory Variables.................................................................................................. 7 3.2 Dependent Variables ................................................................................................... 9 3.3 Countries in the estimation ........................................................................................ 10 4. Testing the model............................................................................................................ 10 4.1 Exports ...................................................................................................................... 11 4.2 Inward Investments ................................................................................................... 13 4.3 Outward Investments................................................................................................. 14 5. Conclusions..................................................................................................................... 17 6. Appendix ......................................................................................................................... 19 6.1 Stata-Output .............................................................................................................. 19 7. Sources ........................................................................................................................... 22 7.1 Data ........................................................................................................................... 22 7.2 Literature ................................................................................................................... 22 8. Selbstndigkeitserklrung ............................................................................................... 24

Charts
Chart 1 World Exports as Percentage of World GDP (Source: Worldbank 2010a) ................. 2 Chart 2 Sum of Exports and Imports of all OECD Countries (Source: OECD 2010) ............... 2 Chart 3 Average Export and Import Volume per Country (Source: OECD 2010) .................... 2 Chart 4 World Inward FDI (Source: Worldbank 2010b) ......................................................... 16 Chart 5 World Outward FDI (Source: Worldbank 2010c)....................................................... 16

Tables
Table 1 Estimation Results: Exports (Source: Compiled by the author) ................................ 11 Table 2 Estimation Results: Inward Investments (Source: Compiled by the author) ............. 13 Table 3 Estimation Results: Outward Investments (Source: Compiled by the author) .......... 14

1. Introduction
The content of this paper discusses the determinants of international competitiveness of industrialized countries based on a regression, testing several indicators on competitiveness. With regards to the order of the topic, first of all there will be a theoretical discussion about the topic, followed by an estimation of the model. The paper finishes with certain conclusions from the regression. The objective is to evaluate the influence of certain determinants on international competitiveness, such as technology, education and economic performance indicators. The estimation should show if some presumed main factors of competitiveness are really important or just overrated and if there are some underestimated factors, which should be paid more attention to. The aim of the paper is to evaluate a base for approaches to avoid insufficient competitiveness in an international embedded, industrialized economy in the future. The empirical part is supposed to bring the basis for a further discussion on the topic. The paper focuses merely on industrialized countries, because I was always interested in finding out what could be the next step of development in those countries. The beginning of the development in all industrialized countries was a strong industrial sector with mainly mass production and farming. Until now, the economies of those countries include also a mature service sector as well as mostly a high technology sector. Farming and industrial mass production has become less important. Some industries such as the textile industry in Switzerland become extinct. This dynamic system implies enduring change of factor endowments and a countrys infrastructure to be seen as new challenges. Therefore, the individual country must supervise its infrastructure and endowment (in a qualitative and quantitative way) to manage these continuous challenges. Besides these developments, there is also a change in the export intensity. The chart below shows world exports and services as a percentage of the worlds GDP from 1952 to 2007. It is evident that export intensity of GDP increased over the years. The more countries and companies export, the more increases the need to be able to manage competitive challenges. The chart also shows that the dependency of a countrys wealth on exports gets stronger.
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Chart 1 World Exports as Percentage of World GDP (Source: Worldbank 2010a)

The second chart represents the sum of exports and imports of all OECD countries from 1955 to 2009 in billions of 2005 US dollars. The upward slope demonstrates the trend of the above chart in absolute numbers.

Chart 2 Sum of Exports and Imports of all OECD Countries (Source: OECD 2010)

The next chart shows the global average export and import volume for all countries from 2005 to 2009. Except for the years of the global financial crisis, there is a strictly upward sloping curve. The long-term trend is also increasing; meaning trade intensity in general is growing.

Chart 3 Average Export and Import Volume per Country (Source: OECD 2010)

Another fact, that needs to be considered with regards to the changing economical environment, is that money has become extremely versatile between countries. This fact increases competition between countries on capital investment as well as it

increases competition in general, according to the factor equalization theorem. It says that the remuneration of factors will equalize when trade between countries happens (Caves et al. 2007). Thus, this paper evaluates both export market shares and foreign direct investment (further FDI) together. The focus is on technology in both of its kinds, embodied and dis-embodied as well as on economic performance indicators. In this paper, absolute advantages are taken as a proxy for national competitiveness. The central theme in this paper follows the papers of Jan Fagerberg (International Competitiveness, 1988) and Rajneesh Narula and Katharine Wakelin (Technological Competitiveness, Trade and Foreign Investment, 1998). It is not to be seen as a replica of those papers, but more as resumption of the topic, as some of the results might be different after almost 20 years (the data Narula and Wakelin used were from 1975 to 1991). Therefore, it is of interest to observe the development of international trade in the years since.

2. Theoretical Background
In another paper in 1997, Narula and Wakelin found out that multinational enterprises (further MNEs) account for approximately 20% of the GDP in the major industrialized countries. This explains why and where MNEs locate their activities, has become crucial to understand economic growth and competitiveness. Even if the dominance of MNEs on production and trade is growing, very few studies have tried to evaluate the determinants of trade and FDI within a unified framework. Exceptions are Cantwell, 1989 and Narula, 1995. There are remarkable similarities between trade approaches and FDI theory, which underlines the differences in technology. This section highlights three fundamental aspects, which render the basis for the empirical part in this paper: the concept of competitiveness, the role of technology and the nature of these two concepts on a country specific basis (Narula and Wakelin 1998). Fundamental [] is the central role given to technology. Technology is characterized as both firm specific (ownership advantages in the FDI literature), and inherent in sector and country specific market structures. (Narula and Wakelin 1998). The treatment of technology can be summarized as follows (Narula and Wakelin 1998): 1.) Privileged access to technology, and differences in technology, are seen as the
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main motivation for trade and FDI, this is regarded as conferring ownership advantages to firms when internalized. 2.) The cumulative nature of innovation and skills is used as an explanation for the continuing existence of technology gaps over time. 3.) Location advantages prevail and are potentially available to all firms operating in that environment, where such technology is not firm specific, but inherent in industry and country specific structure of markets. 4.) The importance of learning-by-doing and learning-by-using effects in technological change is underlined by both perspectives, along with the potential to affect some of the benefits from innovation. This characterization leads to the localization of the profits of innovation and the obstacles of its unresisted diffusion. A common institutional framework and the relations between producers and users result in a singular technological profile for each country (Lundvall 1992). These national technological characteristics define an important determinant of export performance as well as FDI. Due to this cumulative nature of innovation, each country can create its own competitive advantages (Wakelin 1997). There are similarities in the concept of competitiveness. A companys or a locations competitive advantage is an absolute advantage over other companies or locations. Meanwhile, comparative advantage applies to the country level and influences the pattern of a countrys trade specialization, hence the sectoral structure. A companys competitive advantage influences the comparative which advantage can be supportive or contradictive. Dosi et al. (1990) concluded that technological differences are more influential than endowment-based comparative advantage with regards to trade patterns. Even if comparative cost considerations may be relevant, they suggest absolute differences in technology to be more important. It is to underline that competitiveness is a company specific as well as a country specific phenomenon. Even if country competitiveness represents the overall capability of companies of a given nationality in a given sector to compete with firms of another country in the same sector, this is not just the sum of the competitiveness of its companies (Lall 1990). The competitiveness of companies is influenced also by the general economic structure of the country in which they are located including relations among sectors, the national system of innovation and trade specialization patterns (Narula and Wakelin 1998).
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Both, the level of development of a country and the type of international economic activity vary the importance of the different components of structural competitiveness in determining company and national competitiveness (Narula 1995). Companies in industrialized countries usually have had a certain period of time to develop their own characteristics, and so, in general, may be less dependent on the characteristics of their home country (Narula and Wakelin 1998). Due to the fact that this paper focuses on industrialized countries, it will be more important for the competitiveness on how those companies and countries are engaged in international trade, determined mainly by the extent of multinationality of the companies and the nature of their international economical activity. This has got several consequences. First, ownership advantages of purely domesticly owned companies producing for the local as well as the international market are likely to have a stronger linkage with the structural competitiveness of its home country, than a foreign owned multinational company based in this country. Second, countries which are host to MNEs that do considerable international business, e.g. the industrialized countries, are more likely to be influenced by the country specific characteristics of the other countries in which these MNEs operate, than countries with relatively less internationalized firms. Third, different production sectors have different economies of scale or the demand may be heterogeneous across countries, thus having different propensities for internationalization (Narula and Wakelin 1998).

3. The Model
The empirical model evaluated in this paper aims to estimate the main determinants of international competitiveness. As dependent Variables I chose relative export market share as well as relative market share of inward and outward investment, respectively. The dependent variable for export market share is a countrys exports relative to the exports of the entire sample, normalized by the ratio of that countrys population, to the population of the whole sample. The same applies for the FDI dependent variables. These dependent variables are normalized in order to take account for the influence of different country sizes on them. The selected dependent variables represent a countrys absolute advantage on international markets in terms of exports and FDI (Narula and Wakelin 1998).

A traditional measure of a countrys international competitiveness is the relative unit labor costs (Fagerberg 1988). In my opinion, relative unit labor costs are, if they have an influence, just part of the model, namely as an explanatory variable. It cannot stand as an indicator (dependent variable) on its own. It may be noted that this approach is incompatible with the neoclassical equilibrium theory. In a perfectly competitive market, prices and quantities will always adjust, resources will be employed by the full extent and balance of payments equilibrium will be ensured (Fagerberg 1988). As an example - one might say that unit labor costs contain the level of technology, but technology is not equal to productivity, which is evidently important for competitiveness. Technological innovations can bring total new businesses and of course at the beginning of a new product era, productivity is low. But the innovation itself brings at least a temporary competitive advantage. Another reason for using unit labor cost as an explanatory variable is its questionable effect on competitiveness. Lets take Switzerland for instance. With a very high level of wages, it is still one of the most competitive countries in the world. The same applies for Scandinavian countries. This leads me to the assumption that the mix of all factors really matters. Lets have a quick look at innovations in the industrial sector. Without a competitive workforce (mainly low skilled workers) you cannot produce a new computer generation, which was invented by a highly educated workforce and R&D institutions. Therefore it is obvious that relative unit labor costs are neither useful as a proxy for technology nor for the skill level of a work force. It is just what it is, the cost of one unit of labor. Because costs are surely an important factor for decision makers (also for FDI), I integrated relative unit labor costs in the model in order to find out what influence they have on FDI and export market shares. The estimation in this model will be based on certain explanatory variables as proxies for the main factors of competitiveness. As mentioned, the model is based on the papers of Narula and Wakelin (1998) and Fagerberg (1988). All descriptive variables for a country are given on a per capita basis relative to the country with the highest per capita value in the sample. Export market shares as well as inward and outward investment will be tested with the following explanatory variables.

3.1 Explanatory Variables

TLi = Technology level of country i relative to the most advanced country of the sample

In this model, a nations technology level will be measured with patents granted in the country. Technology is taken as one of the most important pillars of international competitiveness. This variable represents the embodied sector of technology (i.e. innovation). I expect it to be positively related to export market shares as well as inward FDI. The effect on outward investments is supposed to be negative.
RULCi = relative unit labor costs in common currency for country i

The costs of labor are certainly to expect to have an influence on competitiveness. But the strength of this influence is not clear. As mentioned above, there are countries with high unit labor costs such as Switzerland or Scandinavian countries, which ultimately rank under the most competitive countries in global annual competitiveness rankings (World Economic Forum 2010). Another value is that in this model, there are only industrialized countries with similar levels of unit labor costs, so they cannot make the difference. For this, the role of unit labor costs will be interesting to observe in the estimation. RULC is measured by an index with level 100 in 2005. I expect RULC to be not that important (maybe insignificant) on every variable tested.
RHCi = tertiary graduates

The amount of tertiary graduates compared to a nations population per year is the models proxy for the quality of the education system. It also stands for the disembodied technology sector, namely human capital. It is assumedly positive related to competitiveness in general (Fagerberg 1988). It is expected to have a positive coefficient in the export share model as well as in the inward FDI model. The effect on outward FDI is questionable, but if there is one, it is supposed to be negative.
RGNPi = GNP per capita

GNP per capita is an indicator for the level of development of a country. As Narula and Wakelin found out, it is the measurement with the highest explanatory power for a countrys development status. It is assumed that a higher level of development is associated with higher export as well as higher inward investment shares (Narula
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and Wakelin 1998). In my opinion, the effect on outward investment is not clear to predict in advance, due to a superior developed country has more money to invest, and in contrary, it might have a lot of interesting investment opportunities within its own territory.
RDEMDi = aggregate demand

RDEMD is a countrys aggregate private consumption. It is an indicator for the size of a countrys market. A larger market is assumed to be more attractive for foreign inward investment since economies of large-scale production is more likely to be captured than in a smaller market. On the other side smaller markets are expected to have higher export market shares as a result of the smaller domestic market. Smaller countries are also assumed to have higher outward investments than larger ones (Narula and Wakelin 1998).
RIWPOPi = stock of inward investment per capita

This variable is only tested in the export market share and outward investment models. In both models RIWPOP is expected to be positive related. Its aim is to consider the connection between trade and FDI. For the exports and outwards investment models, this means including the inward investment variable as an explanatory one. The relation is in both cases expected to be positive. A look on exports shows that companies frequently make inward investments in a country to export from that country afterwards. Particularly this might happen in countries that are part of a costums union (i.e. EU) or a free trade agreement (i.e. NAFTA) and has preferential access to markets. When a countrys domestic market is large enough, in ward FDI are not supposed to have an impact. In the case of outward FDI, a higher level is likely to attract high inward FDI, with companies seeking the sophisticated assets of the country (Narula and Wakelin 1998).
RTIi = Exports plus imports

The main influence on the development of a companys ownership advantages is the extent of its exposure to international competition. For the model testing the inward investment share, trade intensity (RTI) is measured by the sum of exports and imports. This captures the degree to which the country participates in international

markets (Narula and Wakelin 1998). It is expected to be positive related with inward FDI. Narula and Wakelin (1998) also included a proxy for the availability of natural resources. They argued that a high share of primary exports of all exports is an indicator for a less developed country. Therefore, in this paper, this variable is not included due to testing industrialized countries only. Narula and Wakelins argumentation on the result of this variable and the fact that there are high competitive countries without natural resources (i.e. Switzerland) confirm the decision to exclude this proxy. It is to mention that a lot of countries do have advantages from a high abundance of natural resources, but to be abundant of natural resources is just a sufficient and not a necessary condition to reach a high level of wealth. It is important to me to only include proxies, which occur in all the countries tested. Fagerberg (1988) also included terms of trade in his estimation, but with the RTI variable in my model, there is already a proxy for trade intensity. To avoid any unnecessary collinearity problems I decided to resign terms of trade in my estimations.

3.2 Dependent Variables

The variable for the export share is defined as the ratio of the export (X) share to population (pop) share. The market is given as the sum over i, where i represents all countries in the sample. The relationship with outward and inward investment is defined simultaneously (OW, IW). The models are estimated using ordinary least squares (OLS) and logarithms are taken of all variables. Following are the identities of the three models (Narula and Wakelin 1998).

X / X
i

pop / i pop OW / OW
i

= f (rgnp,rhc,tl,rulc,rdemd,riwpop)

pop / i pop
i

= f (rgnp,rhc,tl,rulc,rdemd,riwpop)

IW / IW pop / i pop

= f (rgnp,rhc,tl,rulc,rti,rdemd)

3.3 Countries in the estimation

The considered countries were: Japan, Australia, New Zealand, United States, United Kingdom, France, Netherlands, Denmark, Norway, Finland, Sweden, Austria, Italy and Switzerland.

4. Testing the model

Before discussing the results, a few things need to be mentioned: I will compare the findings with those of Narula and Wakelin where my results were not equal (concerning significance and signs of the coefficients). A complete comparison is still not possible because Narula and Wakelin used pooled data, whereas I used panel data. In addition, the time frame differs. Narula et al used data from 1975 to 1991, therefore their data describes a longer time frame in another era. As mentioned in the introduction, our global economic system is very dynamic, and therefore it is to expect that my results might differ. This is ultimately the essence of this paper. The three regressions were tested for multi-collinearity with the VIF test in Stata and a partial correlation matrix, but the results are negative, so there is no multi-collinearity problem. It is also important to highlight that only industrialized countries were tested, therefore the results will be different to other models testing also developing countries. Almost complete satisfied markets like in Europe and northern America also behave different from developing markets in certain ways. Last but not least, whenever I am speaking about a variable being significant, it is significant at a 10% level of significance or lower. The exact level of significance of each variable is marked in the tables by footnotes.

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4.1 Exports
Variable Coefficient .4831573 .5013181 .0132483 -.0895908 -.0238627 -.4759862 .1067626 t-Statistics 0.75 3.251 0.62 -0.56 -1.63 -9.301 7.231

RGNP RHC

TL RULC RDEMD RIWPOP Adjusted R2 Observations

1

0.7504 125

Significant at 1%

Table 1 Estimation Results: Exports (Source: Compiled by the author)

The estimation of the model of export market shares showed a highly significant result for the influence of GNP per capita on exports. This result was expected as a higher level of production leads to more supply left to serve foreign markets. It is to remark that the United States of America is an exception. There is a high level of production per capita but the size of the market is large enough, that there is simply no incentive to export goods and services to achieve higher economies of scale. Another consent of my expectations is the significant positive relation between exports and relative inward FDI. A country with a high level of inward investments seems to have more capacities for production (ergo more exports), so this result makes absolutely sense and shows a complementary relationship between trade and FDI (see also Narula and Wakelin 1998). The results become more interesting when it comes to the technology variables. The coefficient of granted patents is insignificant and surprisingly negative. The negative sign of the coefficient is an enigma. There is no explanation that makes sense. Therefore it is to be accepted, stressing the fact that it is anyway insignificant. The number of tertiary graduates has a positive coefficient and is also insignificant. Compared to the results of Narula and Wakelin where the patent variable is positive and significant and the tertiary graduates variable is negative (at least in the regression without the inward investment variable) and insignificant, there is a need
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for explanation. My interpretation for the insignificance of the patents variable in the regression is that in this model, the variable only includes the patents granted, but it does not say anything about how many of these patents became successful products and how much return they created. It is also possible that those patents were sold to companies in countries where production is cheaper. Another point of view would be to say that today, industrial countries are more dependent on process-related advancements than on product innovations. It is almost impossible to create an indicator, which accounts for such learning-by-doing effects. Therefore, to find a proxy for this would be very difficult. A similar problem might be influential in the tertiary graduate variable case. Not every field of tertiary education has the same influence on a modern economy. So it depends on how many graduates every country has in every field that matters for competitiveness. Fields like engineering sciences or natural sciences might be more effective for the development of new products as social sciences or humanities. This thesis relies on the fact that several industrialized countries have a lack of graduates from engineering sciences (FAZ 2010), while the numbers of tertiary students tends to increase (OECD 2010). To evaluate this topic, another regression would be needed. Another Thesis would be that in industrialized countries the mobility of the highly educated workforce brings in a bias. A lot of graduates from universities tend to go abroad to gain work experience and to learn a foreign language. Some of them might stay forever. In other words, every industrialized country educates people on a global scale to a certain degree. As expected, relative unit labor costs is scarcely not significant and also the coefficient is very low. As mentioned before, we can find countries (i.e. Switzerland, Sweden or Japan) with relative high wages and/or social charges, still being able to compete with other countries with lower unit labor cost countries. The key is the quality of labor supply of a country, which is almost impossible to measure on a countrywide base. As mentioned above, all of the countries mentioned in the sample have a similar level of unit labor costs (except for the Scandinavian countries). As expected, the demand variable has a negative sign and is highly significant. This confirms the expectations on this variable: A smaller domestic market is an incentive to produce for foreign markets to achieve economies of scale, while larger countries can attain the same scales in their own markets.

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4.2 Inward Investments

Variable Coefficient -2.015034 -.0565173 .2398521 .4130493 .0840839 1.934637 1.204314 t-Statistics -0.67 -0.07 2.421 0.54 1.20 7.011 4.691

RGNP RHC

TL RULC RTI RDEMD Adjusted R2 Observations

1

0.3615 125

Significant at 1%

Table 2 Estimation Results: Inward Investments (Source: Compiled by the author)

The inward FDI model surprisingly showed that GNP per capita has no significant influence on inward FDI. With a closer look on this topic, it is visible that a higher GDP per capita, which stands for a higher economic development of a country (Narula and Wakelin 1998). This could implement a satisfied or highly competitive market with low margins. Low margins, as commonly known, are not very attractive to foreign investors. On the other hand, a high GNP per capita is not a proof for or against investment opportunities. It also depends which sectors a country does compete in and which of those are already highly competitive and which are new, emerging markets with higher expected returns on investment. The number of tertiary graduates per citizen has a positive coefficient and is significant. According to the results, a higher amount of citizens with higher education attracts foreign investments. On the other hand, more patents do not have an influence on inward investments. The interpretation on this is the same as in the first regression. The number of patents granted does not tell anything about how many of them end up as products on markets and how high their returns are as well as if those products will be produced in the same country. If it is known that patents in a certain country were often sold to other countries, investors are harder to find. Relative unit labor costs are not significant, as expected. Narula and Wakelin (1998) received the exact the opposite results, so the roles of education level and the amount of patents granted have changed over time.
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Still a strong significant variable is RTI, which measures trade intensity of a country. It is intuitive that a strong participation in trade attracts investments from abroad. I also estimated the model with the RTI variable replaced by export share. The result is very close to the model with RTI. The coefficient is approximately the same and it is significant on the same level (1%). In conclusion, export market share is a good proxy for trade participation as well. The result of the last variable (relative demand) in the model is consistent with the expectation. Larger markets attract more inward investments. But there is an important point to take into consideration: in this regression, there are only industrialized countries, but a lower demand could be the case in a less developed country. In such case, it could still be interesting to invest in such a country, because of the higher growth potential in developing and emerging countries than in industrialized economies. In other words, this variable would change its sign in a model for less developed countries.

4.3 Outward Investments

Variable Coefficient -.2814231 1.532793 -.1315598 -.6541518 -.0370865 -.4223916 .4654958 0.5205 121
2

t-Statistics -0.13 2.941 -1.712 -1.20 -0.73 -2.401 9.321

RGNP RHC

TL RULC RDEMD RIWPOP Adjusted R2 Observations

1

Significant at 1%; Significant at 10%

Table 3 Estimation Results: Outward Investments (Source: Compiled by the author)

The outward FDI model shows a positive and significant influence of GNP per capita on outward FDI. This result confirms the intuition that more developed countries have more capital to invest. Therefore, they will spread their investments globally. The significance at 1% underlines the importance of economic development for the ability to invest globally and profit from emerging markets.
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The result of the RHC variable is additionally not surprising. The negative sign of its coefficient shows that the higher the level of education hence the quality of the work force in a country is, the lower are the investments in other markets versus domestic. The coefficient of the patents granted variable has the same sign, but it is not significant. The reason might be in the generality of the used data. As mentioned above, the number of patents granted includes all patents, but does not say anything about the returns these patents have when they result in mature products as well how many of those actually become products. Narula and Wakelin (1998) received the opposite concerning significance and a positive sign for the patents variable. After observing this in both FDI estimations, it seems that the level of education becomes more important for the last ten years. As expected, relative unit labor costs are not significant here as well as in the regressions above. But the negative sign is a surprise. After three estimations with the same result, namely insignificance, it is to scrutinize if relative unit labor costs are a useful proxy in these models. As cited from Fagerberg in the theoretical section of this paper, relative unit labor costs are not really qualified to measure competitiveness. It would be helpful to have more specific and long-term data on this topic. A productivity index could solve the problem, but how can one measure the productivity of a whole economy? As an example, lets take natural scientists in R&D. A lot of their work contains thinking about a problem and analyze the situation. How can somebody measure the effort and quality of a scientists way of thinking about a problem? It is almost impossible to find an indicator for sorts of productivity and bring them down to an index. The demand variable has the same influence on outward FDI as on export market shares. As mentioned, a higher domestic demand implements a larger market. The market size of a country is able to influence the number of investment opportunities. If we take the United States of America for instance, we can see there is a large enough market to profit from economies of scale. Therefore it is not necessary to invest in foreign companies if the domestic market offers comparable attractive alternatives. Narula and Wakelin received a positive sign in their estimation so it seems that the role of demand, when it comes to outward FDI, has changed over the years. Additionally it is more comprehensible that investors from a larger market are more interested in domestic investments as investors from smaller markets.

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The large proportion of FDI activity among industrialized countries explains at least partly the positive relation of inward and outward investments (Narula and Wakelin 1998). It would be interesting to test if the same relation exists between import volumes and export volumes. Anyways, the following charts show how symmetrically inward and outward FDI behave.

Chart 4 World Inward FDI (Source: Worldbank 2010b)

Chart 5 World Outward FDI (Source: Worldbank 2010c)

I think that an explanation for the high significance of inward FDI on outward FDI could be that in a country, which attracts a lot of foreign investments, the possibilities to invest in this market decreases for domestic investors. In other words, the supply of investment opportunities in a country stays the same while the demand for those increases. Therefore, domestic investors are forced to invest in foreign countries.

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5. Conclusions
After estimating three indicators for international competitiveness among

industrialized countries and comparing the results with those from a regression made ten years ago (the data used is even older), some remarkable changes, or differences, were observed. Even though the proxies used in the models are not exactly the same, the comparable explanatory power of both estimations allows a comparison of what are or were important indicators for measuring competitiveness. First of all, I will discuss my own findings and then I will bring them in relation to the situation ten years ago. I start with one of the main findings of the estimation. It is a real disappointment that the technological variables were not as significant as I expected. As previously mentioned, the numbers I used might have not been specific enough to describe the situation. A good proxy for measuring the efficiency of a work force is almost impossible to create as well as one for a countrys quality of technology. It would be necessary to find an index, which represents the performance of a work force in all sectors compared to their education level discounted with its quality compared with other countries quality of education. This index should include explicitly the efficiency with which the GDP is reached. The level of unit labor cost does not say anything about efficiency, neither does the share of tertiary students in population. The same counts for technology. The index should ideally include the economic potential of innovations and inventions made in a country and especially to which extent it is exploited. The largest problem would be to find all the necessary data, because it is not to expect that enough companies would be willing or able to supply the essential economic numbers. After the process of writing this paper, I realized that there is a high potential to increase the explanatory power of economic indicators. For some purposes, there is no sufficient data available. The technology variables used in this model are good examples. Of course, the economic performance of an invention is private information; therefore it would be difficult to argue that companies must make them public. On the other hand, we live in a system, in which we require a lot of information about the status quo in order to make responsible decisions for the future. Maybe an acceptable trade-off for both sides might help. It is not my intension to talk politics here, but for sustainable scientific work, specific data is indispensable.
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Therefore I hope in the future, scientists will have access to more useful data to conduct more valuable economic investigation. More satisfying findings were the results of the economic indicator variables. Gross National Product and domestic demand as well as inward FDI and trade intensity play a significant role in the model. The most influential variable in the estimations seems to be domestic demand. Since it stands for the size of a market, this implies that large domestic markets face another form of competition than smaller markets: in large markets (more import intensive), domestic companies compete with a lot of foreign companies in their own country, while in smaller markets, domestic companies compete more in foreign markets. In other words, companies from smaller markets are more forced to get along with different legislatures than companies from larger markets. As a consequence, companies from smaller markets might be more able to answer challenges more effectively on new competitive situations. The grade of economic development, measured with GNP per capita, is crucial as well. The more developed an economy is, the more it can compete on international markets. The estimations leave one question concerning inward FDI. Does a country increase its exports if inward FDI increases, or vice versa? In my opinion, an economy, which is strong in exports, attracts foreign investors (because of economies of scale etc.), which enforces competitiveness even more on international markets. The trade intensity variable has an implicit conclusion. If a country is strongly engaged in trade, it attracts a lot of foreign investors. This implies that investors trust in trade. This again leads back to a very often-mentioned phrase in international trade books: With trade, everyone is better off! After all findings on the regressions, there is one point left to mention. Chart number three in section one shows the influence of the financial crisis on international trade. In 2007, imports and exports dropped as a direct consequence of the crisis. Chart number four and five state the same for FDI. One of the drivers in the crisis was the lack of trust in companies (foremost banks) and institutions, as well as governments like a German study showed (Musiol et al. 2009). Trust is fundamental when it comes to economic interactions. Therefore, no matter how well endowed and competitive a countrys economy is, when there is no trust, there is no trade.

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6. Appendix
6.1 Stata-Output

19

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7. Sources
7.1 Data
The data on outward and inward FDI, relative demand and relative unit labor cost was taken from the OECD: http://stats.oecd.org/index.aspx The data on export market share, gross national product and trade intensity was taken from the UN data explorer: http://data.un.org/Explorer.aspx?d=KI The data on patents granted was taken from the World Intellectual Property Organisation: http://www.wipo.int/ipstats/en/statistics/patents/ The data on tertiary graduates was taken from the UNESCO data center: http://stats.uis.unesco.org/unesco/TableViewer/document.aspx?ReportId=143&IF_Language =eng

7.2 Literature
Cantwell, J. (1989), Technological Innovation and Multinational Corporations, Oxford. Caves, R. E. et al. (2007), World Trade and Payments, An Introduction, 10th Edition, Boston. Dosi, G. et al. (1990), The Economics of Technical Change and International Trade, Brighton. Fagerberg, J. (1988), International Competitiveness, in: Economic Journal 98, pp. 355-374. Frankfurter Allgemeine Zeitung (FAZ) (2010), Der Ingenieurmangel kommt mit Wucht, Online on the Internet: URL: http://www.faz.net/s/RubC43EEA6BF57E4A09925C1D802785495A/Doc~E0CBA323 7CCD241A8B2EDB606C18FFAAA~ATpl~Ecommon~Scontent.html [11/26/2010]. Lall, S. (1990), Building Industrial Competitiveness in Developing Countries, Paris.

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Lundvall, B. A. (ed) (1992), National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning, London. Musiol, K. G. et al. (2009), Vertrauen in der Krise II, Eine aktuelle Bestandsaufnahme und Implikationen fr Markenverantwortliche, Online on the Internet: URL: http://www.mcbrandnews.de [11/04/2010]. Narula, R. (1995), Multinational Investment and Economic Structure, London. Narula, R. and K. Wakelin (1997), The Pattern and Determinants of US Foreign Direct Investment in Industrialized Countries, TSER-TEIS Working Paper Series No. 8. Narula, R. and K. Wakelin (1998), Technological Competitiveness, Trade and Foreign Investment, in: Structural Change and Economic Dynamics 9, pp. 373-387. OECD (2010), Stat Extracts, Online on the Internet: URL: http://stats.oecd.org/index.aspx [7/18/2010]. Wakelin, K. (1997), Trade and Innovation: Theory and Evidence, Aldershot. Worldbank (2010a), Exports of Goods and Services (% of GDP), Online on the Internet: URL: http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS/countries?display=graph [11/04/2010]. Worldbank (2010b), Foreign Direct Investment, Net Inflows (% of GDP), Online on the I Internet: URL: http://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?display=graph [11/04/2010]. Worldbank (2010c), Foreign Direct Investment, Net Outflows (% of GDP), Online on the Internet: URL: http://data.worldbank.org/indicator/BM.KLT.DINV.GD.ZS?display=graph [11/04/2010]. World Economic Forum (2010), The Global Competitiveness Report, Online on the Internet: URL: http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/inde x.htm [11/26/2010]. 23

8. Selbstndigkeitserklrung
Ich erklre hiermit, dass ich diese Arbeit selbststndig verfasst und keine anderen als die angegebenen Quellen benutzt habe. Alle Stellen, die wrtlich oder sinngemss aus Quellen entnommen wurden, habe ich als solche gekennzeichnet. Mir ist bekannt, dass andernfalls der Senat gemss Artikel 36 Absatz 1 Buchstabe o des Gesetzes vom 5. September 1996 ber die Universitt zum Entzug des aufgrund dieser Arbeit verliehenen Titels berechtigt ist.

Philipp Hnggi

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