The Competitiveness of British Industry

Readers Question: my syllabus asks me to “Make an appraisal of the competitiveness of British industry in both home and overseas markets” what will i be expected to know in this case?

Firstly, you won’t be expected to know any particular details and statistics of British industry. The most important thing here is an ability to understand the relative importance of different factors that determine the competitiveness of firms, both domestic and international.

It is an important skill to be able to evaluate there relative importance. For example, it is not enough to just say an appreciation reduces competitiveness, you need to think about long term factors as well.

It is important to find exam questions rather than studying the syllabus. Past exam questions are usually the best guide to how you need to prepare.

The competitiveness of British Industry will depend on many factors:

Relative Inflation Rates. If the UK has a higher rate of inflation that its major competitors then our goods will become relatively uncompetitive leading to a fall in demand. Note a rise in global cost push inflation won’t cause a decline in UK competitiveness because it affects all countries equally.

Exchange Rates. The exchange rate will have a significant bearing on the competitiveness of UK exports. A devaluation will cause exports to be cheaper and therefore improve competitiveness.

• However, a devaluation may only cause a temporary improvement in competitiveness. True, it reduces the foreign currency price of our exports, but, it doesn’t affect long term competitiveness. In fact, it is argued devaluation can reduce incentives to cut costs in the long term. Also a devaluation causes rising import prices which increase inflation and will contribute to reduced competitiveness in the long term

Wage Costs. An important factor in the declining competitiveness of UK manufacturing goods viz a viz China is that the UK’s average wages are much higher than China’s. China is benefiting from an elastic supply of labour which is keeping prices down.

• However, it depends on the industry. Some service sector industries like financial services are less labour intensive. Here the UK may be able to have a comparative advantage because of expertise and accumulation of knowledge.

Technological developments. Are UK firms able to innovate and invest in new technologies which are important for developing dynamic efficiencies.

Productivity. Labour productivity is the output per worker. If labour productivity increases then the UK will experience increased competitiveness. Labour productivity  may increase for various reasons such as better education and training, higher levels of motivation, increased use of technology.

Government policies to increase competitiveness 

What determines competitiveness