How Competitive Are We?

December 2006 / January 2007 Volume 4 Number 6

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The Changing Global Competitiveness Environment

The context for U.S. competitiveness has changed dramatically over the past two decades. The rapid entry of emerging markets into the global economy, the restructuring of global corporations to leverage those new opportunities and the growing value of innovation, services and intangibles have transformed the competitiveness environment for the U.S. economy, American companies and American workers.

Billions of people in emerging economies have entered the global trading system—€”opening consumer markets and labor pools of unprecedented size. The developed markets' near monopoly on advanced technology has ended as emerging economies have rapidly improved their technological capacity and now dominate exports of high technology goods.

New opportunities to reach consumers and talented workers in the developing world are spurring rapid growth in multinational corporations—€”driving their evolution to truly global enterprises and enabling them to offshore a range of corporate activities, from software development to accounting to research. U.S. regions and their workers now face global competition in areas that were once the exclusive domain of developed economies.

As advanced manufacturing capacity becomes globally available at low cost, its competitive value declines. Innovation, services and intangibles have become the primary source of value for U.S. companies and American workers.

The standard metrics of competitiveness that emphasize cross-border trade in goods no longer capture how and where value is created in the 21st century. America's greatest competitive strengths—€”creating innovative new ideas, building global networks, managing global brands, marketing new products and services—€”are often the most difficult to measure.

U.S. Prosperity—€”How Are Americans Doing?

Overall, Americans have benefited tremendously from these changes in the global environment—€”with increases in average income and wealth coupled with falling unemployment. But a rising bar for competition has increased inequality and the level of financial risk that most Americans face.

The United States is the wealthiest large economy in the world, and average incomes and wealth for Americans have grown rapidly over the past 20 years. But all the benefits of U.S. economic growth have not been distributed equally. As in most advanced nations, the wealthiest and the best educated have seen phenomenal growth in incomes and net worth while those at the middle and bottom of the income ladder have seen more modest gains. Only U.S. households headed by college graduates saw average incomes rise over the past two decades.

U.S. employment has grown significantly over the past two decades and the United States enjoys both higher rates of workforce participation and lower unemployment rates compared with its global peers. The U.S. labor market is extremely dynamic and increasingly diverse, integrating women, immigrants and minorities faster than most other economies around the world. The recession of 2001, however, appears to mark a change in the U.S. job market. While economic growth has rebounded quickly, employment growth has been significantly weaker than in previous recoveries. Unemployment has remained low, but increasing numbers of workers have dropped out of the labor force. And U.S. wages and income have grown slowly since 2001 if at all. The challenges of global competition have increased the level of anxiety that many Americans feel. Even as income and wealth have increased over the past 20 years, many Americans struggle today to pay for health care and to manage rising levels of debt. The dynamism that is the U.S. economy's greatest strength creates vast opportunities—€”and risks—€”for all Americans.

U.S. Performance—€”How Is America Doing?

Strong economic growth and rapid gains in productivity have driven U.S. prosperity and underpin the U.S. role as the world's global growth engine. As the largest global consumer, America's growth has also created financial imbalances that threaten future growth in the United States and the world.
The United States is not only the world's largest economy; it has also grown faster between 1986 and 2005 than any other major developed economy. The United States has been responsible for one third of global growth over the past 15 years. American workers are among the world's most productive, and they have increased productivity dramatically since 1995 through the production and use of information technology—€”increasing America's productivity lead on Europe and Japan. High levels of productivity allow Americans to compete against low-cost producers around the world. The United States remains the world's largest manufacturer and one of the world's top exporters.

But U.S. imports have risen faster than exports, driving growth in export-focused economies around the world and increasing America's trade deficit. Unprecedented flows of goods and capital into America's growing market have created global imbalances, leading to record U.S. current account deficits and a tripling of U.S. foreign debt since 1999. Emerging markets are financing U.S. deficits so that American consumers will continue to buy their exports—€”to the tune of $6 billion every working day.

Foundations of U.S. Competitiveness and Sources of Future Prosperity

Maintaining prosperity in the face of global and domestic challenges will require focus in four major areas—€”innovation, entrepreneurship, education and energy. Together they embody both America's greatest strengths and its most important challenges.

—€ Innovation—€”Can the United States sustain its advantage? America still leads the world in science and technology, but that lead is narrowing and will continue to narrow as other countries increase their investments in research and education. Countries around the world are striving to become world-class innovators. While most research still takes place in the developed world, emerging markets are making rapid gains. China ranks as the most attractive destination for new offshore R&D facilities.

America's strength in innovation is based on strong foundations—€”the most innovative companies in the world, a major lead in R&D investment and world-class research universities and national laboratories that increasingly leverage their lead in basic research to stimulate greater commercialization and regional innovation. The United States has more researchers than any other country and larger numbers of qualified engineers despite greater absolute numbers in emerging economies.

The strength of America's regional innovation hotspots continues to attract R&D investment. American companies continue to increase their R&D in the United States even as they expand globally. Foreign companies do more R&D in the United States than American companies do overseas.

—€ Entrepreneurship—€”Does the U.S. economic engine face threats or is it primed for continued success? Closely linked to innovation is entrepreneurship—€”turning new ideas into viable businesses. America leads the world in entrepreneurship, particularly in the creation of high-growth companies that have the potential to transform entire industries.

The sources of America's entrepreneurial advantage come from unparalleled access to capital, a culture that encourages experimentation and risk and a regulatory structure that enables firms to start up and enter new markets while enabling less productive firms to exit. The churn of business creation and destruction is a major driver of employment, productivity growth and innovation.

Small- and medium-sized business are responsible for more job growth than larger companies and the entry of new firms often drives productivity growth more than improvements within existing firms.

But while the United States leads the world in entrepreneurship, a handful of regions across the country dominate the picture. Expanding access to risk capital and other supports for entrepreneurship to regions across the United States represents an important opportunity for stimulating regional growth and innovation.

—€ Education—€”Are Americans equipped to prosper in the 21st century? The United States led the world in educational attainment in the decades after World War II, rapidly expanding access to high school and college. High school and college graduation rates have continued to improve for all racial and ethnic groups.

But after more than two decades of massive investment, little progress has been made in improving the test performance of American high school students and wide gaps remain between racial and ethnic groups. While the United States is one of the world leaders in education investment, American students perform near the bottom on a range of international tests. And though the United States continues to improve access to high school and college, a number of other countries have pulled ahead—€”leaving the United States 17th in high school graduation rates and 14th in college graduation rates. While U.S. performance lags, the demand for education has never been greater.

A technologically sophisticated and globally competitive economy demands different and increasingly higher level skills from all workers. An innovation-driven and increasingly conceptual economy also demands that workers continuously upgrade skills.

—€ Energy—€”How will we fuel future growth? Energy is literally the fuel of the U.S. economy, and two decades of relatively low energy prices have contributed to unprecedented economic growth and prosperity. But as global demand grows, prices are likely to increase; and U.S. demand continues to outstrip domestic supplies. While the United States has made gains in efficiency, other countries are outpacing U.S. progress.

The United States Is Facing the Competitiveness Challenges of the Global Economy
The Competitiveness Index: Where America Stands places the United States squarely in the center of an ever-changing, increasingly innovation-driven global economy—€”and discusses how changes in technology and in the economic policies of many countries around the world have had a profound impact on the economic environment in which all economies, including the United States, are operating.

Globalization is often characterized as an automatic process, like that of a force of nature: impacting everyone, everywhere indiscriminately. The reality, however, is quite different: Globalization is the result of purposeful investments in innovation and determined international efforts to reduce global barriers to trade and other relationships.

While some of the consequences of globalization could not, perhaps, have been predicted, the direction of change has been clear: for the past two decades, competitiveness and free and open trade have been the guiding principles across advanced and emerging markets around the world.

The United States has, in fact, been the leading proponent and key driver of the changes that have brought about globalization in its current form. It has done so with the expectation of greater prosperity for Americans and for other nations and people committed to a truly global economy.

The United States has been driving the transition to a truly global economy—€”and, as such, it has been as exposed to both the positive and negative effects of globalization more than other economies. In fact, the data presented in the Index indicate that U.S. success and prosperity have come about in large part due to an ability to adapt faster.

U.S. companies have been at the vanguard of the restructuring of global value chains—€”at the cutting edge of this transition from the 20th century multinational corporation to the emergence of global enterprises, U.S. firms have also dealt more quickly than their global peers with deciding which competencies and activities should remain core—€”and which should move out of the firm—€”and at times, out of the United States. U.S. companies have also aggressively pursued the promise of new technologies, both by investing in R&D as a source of competitive advantage and by leveraging new technologies to change operational practices and improve efficiency. U.S. regions have in the process become more specialized around regional clusters than regions in most other parts of the world. They have created business environments that cater to the specific needs of these clusters and have achieved higher rates of productivity, innovation and new firm creation.

Taking the lead in adjusting to the new global economic environment has created a new balance of opportunity and risk to which regions and individuals in the United States are exposed. Regions that do not develop a clear competitive profile, fail to upgrade their business environments and lack a healthy portfolio of clusters fall behind much faster than in the past. They will lose not only exports, but entire industries will relocate much more quickly than before.

Regions that meet the demands of the new environment, however, can leverage the potential of strong clusters and business environments by serving much larger global markets in the areas in which they have created competitive advantages.
The same logic applies to individuals: Americans with high skills face an increasing array of opportunities and higher returns to their abilities.
Americans with lower skills, however, face growing competition from other parts of the world: high-skill, low-wage competition—€”a calculus that is difficult to overcome.

This new global competitive environment creates a number of challenges for the United States. Our nation is more exposed than ever to competition from foreign companies and foreign business environments. We need to address our weaknesses. In today's environment, the harm from these weaknesses to U.S. prosperity will only grow over time. And we need to upgrade our strengths that set us apart from global competitors. Our advantages—€”properly leveraged and deployed—€”offer great promise in delivering even greater future prosperity. And our nation needs to ensure that more Americans are equipped to take advantage of the opportunities that the new economic environment offers. Access to continual skill development will probably be the most important issue as our nation ages and as Americans live longer and want to work longer and want to remain engaged productively and creatively in society and the economy.

Our economy and our society would face a bleak future if only the wealthy could access the skills and training necessary for engagement in the global economy, creating a vicious cycle freezing social mobility and dampening the sense of opportunity that characterizes the United States.

Does the United States Have the Capacity To Adapt?

Competitiveness is a dynamic challenge, not only a question of the microeconomic qualities that an economy has achieved at a given point in time. This is becoming increasingly clear as the global economy churns more and more, and the ability to adapt to a new economic environment becomes a paramount driver of economic success and prosperity.

The United States has a unique asset that is too often overlooked when looking at ourselves in the mirror. Our nation has a strong history and ability to act: to develop answers to new problems, and to be decisive in putting them in place.
Many other countries have faltered. The source of this strength stems from the structure of our society that distributes responsibility widely among different parts of government as well as between the public and the private sector.

And yet, our success as a nation constantly engaged in global competition is not assured. But we have all the capabilities needed to succeed, to creating prosperity not at the expense of others but by offering unique value in areas where others can not match them. If we fail, we have only ourselves to blame.

For a PDF version of the complete Index text, go to www.compete.org. Bound copies are also available from the Council on Competitiveness.