The Competitive Edge: A Policymaker’s Guide to Developing a National Strategy

In a deeply integrated global economy with a growing number of industries tradeable across borders, more nations are competing for high-value-added, traded-sector industries. These nations know that losing the competitiveness race means fewer jobs and slower growth. Despite this, few nations, including the United States, have developed sophisticated competitiveness strategies. Rather, most competitiveness strategies focus on broad measures such as improving the business environment or supporting better factor inputs for firms. While necessary, these steps do not constitute an effective competitiveness strategy. Policymakers must go much deeper. An effective competitiveness strategy starts with a detailed “SWOT” analysis—assessing strengths, weaknesses, opportunities, and threats—for key traded industries and the country’s overall innovation system. It then tailors policy responses according to the findings.

Part I of this report provides an overview of competitiveness, including what it is, why nations need it, and how countries become more or less competitive. It then examines the past and current competitiveness performance of the United States and a selection of other developed and developing nations, highlighting how much less competitive the U.S. economy is today compared to two decades ago. It then discusses the history of competitiveness policies since World War II, how they have evolved, and how they differ between nations.

Part II provides a framework for thinking about competitiveness and national competitiveness policies, including whether nations actually compete and, if they do, on what basis. In addition, given the importance of the work of Harvard’s Michael Porter to the competitiveness field, it describes the original Porter framework and explains why it is no longer sufficient to guide national competitiveness efforts. It then examines why nations need a competitiveness strategy and explains why market forces alone will not lead to optimal levels of competitiveness. Finally, it discusses competitiveness policy as strategic positioning, as opposed to simply capabilities development, and it lays out a number of key strategic questions all nations need to address before implementing a serious competitiveness strategy.

Part III lays out a framework for a competitiveness agenda that most nations could use to inform their own agendas. This includes policy recommendations related to market framework conditions, factor inputs, organization incentives, competitiveness-focused R&D investments, industry-specific sectoral policies, trade policy, and finally government organization to develop and implement effective competitiveness policies.