MSME’s in national competitiveness

MSMEs play a critical role in establishing national competitiveness. The ability to compete in international markets depends on macroeconomic policies and conditions (trade policies and exchange rates, etc.) and a nation’s comparative advantage, its factor endowment (land, labour and capital). From a government perspective, national competitiveness relates to the country's competitiveness as a whole, not an individual enterprise, which involves developing the whole sectors and supply chains of which MSMEs are part. However, there are a few exceptions to this. For example, Singapore became the most competitive country globally by adopting far-sighted policies that invested in institutions and human resources and attracted foreign direct investment (FDI) to make up for its lack of natural resources and capital. In addition, technology development also plays a vital role in economic competitiveness. However, the lack of measurable correlation between productivity change and technology development made it difficult to properly assess the impact of technology on economic development, growth and competitiveness.

Competitiveness is also dependent on the ability to achieve high productivity by deploying and using human resources and capital, and physical assets in the most effective manner. However, getting the macroeconomic fundamentals right will not necessarily lead to competitiveness, mainly if the enterprise sector is weak with little or no productive (supply) capacity. In this instance, new patterns of competition are necessary, requiring active micro policies and measures to shape new industrial locations. In turn, enterprises have to restructure activities and facilities and acquire skilled labour. Separately, governments focus their policies and programmes to create and enhancing competitive advantages among MSMEs.

Building on Porter’s Diamond Model, the Nine-Factor model is more comprehensive and dynamic than Porter’s original diamond model. This framework explains a nation’s competitiveness and the interaction between human and physical factors driving a nation’s development. This model embodies Porter’s notion that “national prosperity is created, not inherited.”179 In this nine-factor model, human factors comprising workers, politicians and bureaucrats, entrepreneurs and professionals, are the major spur behind national competitiveness by positioning and productively integrating the physical characteristics. Government officials are endogenous factors in this model, thus directly influencing national competitiveness. The chance event, an external factor, forms the basis of this new paradigm. Figure 2 shows the framework of the nine-factor model.

Figure 4. The Nine Factor Model

Figure 4. The Nine Factor Model

Source: Cho D. (1994) A Dynamic Approach to International Competitiveness: The Case of Korea, Journal of Far Eastern Business, 1(1), 17-36.

National competitiveness and related policies
Similar to MSMEs, governments also play a critical role in national or country competitiveness. Through policy making and intervention, the governments can impact investment, savings, and trade. Furthermore, the governments can strengthen the balance of payments and improve international competitiveness through a combination of trade liberalization and exchange rate adjustment. In Part II, various government policies relating to and influencing MSMEs were discussed. The guidelines aimed to intensify national competitiveness by enhancing macroeconomic factors, particularly fiscal and monetary policy and foreign exchange regime. Implementing conducive trade and investment policy to facilitate MSME internationalization also plays a significant role in lifting the national competitiveness. Lastly, competitiveness development is governed by the competition law that regulates MSME development.

The effect of government policies on a country competitiveness can be positive (stimulating competitiveness) or negative (obstructing competitiveness). Governments should take on the role of a catalyst and challenger, encourage, or even push, companies to aspire to higher levels of competitive performance, even though this process may be complex.180 Government policies that succeed are those that create an environment in which companies can gain a competitive advantage. Therefore, governments should embrace the following principles to promote national competitiveness:

  • Emphasize competitiveness infrastructure 
    Governments have critical responsibilities for developing and improving competitiveness infrastructures, such as education, science, research, transportation, and information technology. 
  • Enforce strict product, safety, and environmental standards
    Stringent standards for product performance, product safety, and environmental control pressure companies to improve quality, upgrade technology, and provide features that respond to consumer and social demands. 
  • Deregulate competition
    Reformation of regulations governing state monopoly, controlling entry to the industry, or fixing prices that hamper rivalry and innovation, encourages competition among enterprises. This will lift overall
  • MSME productivity and contribution to the economy in the long term. 
    Adopt strong domestic antitrust policies
    When applied to horizontal mergers, alliances, and collusive behaviour, these policies are fundamental to innovation. Government policy should generally favour new entry over acquisition. These policies provide MSMEs with a profound avenue to grow competitively. However, the expansion must not distort market equilibrium, hence the relevance of competition law. 
  • Intensify goal setting that leads to sustained investment 
    Governments can indirectly affect the goals of investors, managers, and employees through various policies. MSMEs need practical guidance in this area. 

Further, governments and not the market must ensure social equality or justice in sustainable development. Such is done by addressing market imperfections via restricting tendencies that lead to faults (law, regulation of competition, anti-trust acts, etc.). These tasks, however general, are essential for national competitiveness as well. Consequently, specific new181 duties and responsibilities have emerged: 

  • Development of R&D capacities182,
  • Reduction of social inequalities,
  • Prevention or correction of the disintegrating effects of globalisation and regionalisation in the economy and society,
  • Management of interest conciliating and coordinating mechanism with employers' and employees' representatives,
  • Development of environment-conscious culture in society,
  • Promotion of social cohesion, cooperation and solidarity; prevention of alienation, segregation and marginalization; xenophobia and racism; ethnical, religious and other conflicts.

Accordingly, three interlinked spheres of the role of government in the process of development to improve competitiveness can be distinguished183

  • Initiating and promoting structural changes in the economy and institutional reforms; and taking care of public health, education, cultural life, social security as well as political freedom;
  • Creating directly and indirectly “competitive advantages”, thereby improving the export competitiveness of its products and services, attracting FDIs, and providing “home base” for TNCs of foreign and local origin; 
  • Regulating through market-conform methods and legal acts; the economic activities within the country; encouraging savings and investments; influencing by various incentives and legally prescribed rules the investment orientation under a national development strategy; promoting the generation of input-output linkages within the national economy, and also correcting socially undesired effects following from the operation of the market.

To aid in advancing policy on national competitiveness, the World Economic Forum produces the Global Competitiveness Report and the Global Competitiveness Index (GCI). The report aims to broaden the views of policymakers, businesses and the public on looking beyond growth in their pursuit of enhancing economic productivity and broader resilience. It serves as a useful benchmarking that provides a new compass for the future direction of economic growth. Consequently, the GCI is an annual yardstick for policy-makers to look beyond short-term and reactionary measures and instead assess their progress against the complete set of factors that determine productivity. It analyzes the economic foundations of nearly all countries by evaluating each country’s competitiveness in achieving sustained economic productivity, growth and prosperity. These are organized into 12 pillars of competitiveness: institutions, infrastructure; ICT adoption; macroeconomic stability; health; skills, product market, labour market, financial system; market size, business dynamism; and innovation capability. A country’s performance on the overall GCI results and each of its components is reported as a ‘progress score’ on a 0-to-100 scale. 100 represents the ‘frontier’, an ideal state where an issue ceases to be a constraint to productivity growth. Each country should aim to move closer to the frontier on each component of the index. The GCI allows economies to monitor progress over time. This approach emphasizes that competitiveness is not a zero-sum game between countries—it is achievable for all countries.

Considering the significance of MSMEs, benchmarking enables countries to also assess the health of their MSMEs by identifying their strengths and weaknesses. This allows policymakers, private sector associations and investors to make better informed, evidence-based decisions. International value chains provide an opportunity for MSMEs to internationalize and scale up their operations. Through its SME Benchmarking tool, the International Trade Centre (ITC) supports governments in designing sustainable trade strategies and enabling change in firms’ capacities to compete and participate in international value chains.


179 Source: Cho D. (1994) A Dynamic Approach to International Competitiveness: The Case of Korea, Journal of Far Eastern Business, 1(1), 17-36.

181 “New” in the sense that States to advance national competitiveness need to address the three pillars of sustainable development. Images of rioting in the streets, extreme poverty next to extreme wealth for example may not attract FDI and thus push a country further down the competitiveness ladder.

182 Up-grading national development resources, including the establishment of “science parks” in a country.