A nations prosperity depends on its competitiveness, which is based on the productivity with which it produces goods and services. Sound macroeconomic policies and stable political and legal institutions are necessary but not sufficient conditions to ensure a prosperous economy. Competitiveness is rooted in a nations microeconomic fundamentalsthe sophistication of company operations and strategies and the quality of the microeconomic business environment in which companies compete. An understanding of the microeconomic foundations of competitiveness is fundamental to national economic policy.
Clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region. Clusters arise because they increase the productivity with which companies can compete. The development and upgrading of clusters is an important agenda for governments, companies, and other institutions. Cluster development initiatives are an important new direction in economic policy, building on earlier efforts in macroeconomic stabilization, privatization, market opening, and reducing the costs of doing business.
While some determinants of competitiveness are national in scope or the result of national policies, many are regional and local. Such things as the quantity and quality of specialized skills, infrastructure, and technology, and the presence of clusters vary markedly across regions. This leads to substantial differences in prosperity among states and regions within a nation. States and cities need economic strategies not just nations.
Past approaches to revitalizing economically
distressed inner city communities have defined the problem largely in social
terms, to be addressed with social programs. Efforts to foster economic
development in inner cities have been based on heavy subsidies and on distortion
or blunting market forces. To build healthy and sustainable inner city
communities, however, it is necessary to create healthy economies in and near
the communities themselves. Economic development in inner cities must be
approached from competitiveness perspective, and be based on business
opportunities in the inner city that are genuinely profitable. There are
existing and potential competitive advantages of inner cities that can support
viable businesses and jobs. The inner city can only prosper if it is integrated
into the regional and national economy. The private sector must play the leading
role in inner-city business development, motivated by self-interest instead of
charity. Inner city distress is as much an economic as a social problem.
The economic performance of rural
areas is lagging
that of urban areas in the United Sates and also in many other parts of the
world. While there have been many efforts to foster economic development in
rural areas involving substantial public and private investments, most have
failed. There is a pressing and widely recognized need for new approaches to
rural economic development, drawing on broader learning about the sources of
competitiveness in the global economy. Attempting to mitigate the generic
deficiencies of regions will not be sufficient. Instead, each rural region needs
a distinctive strategy that reflects its unique strengths, its particular mix of
clusters, and which integrates its economy with the closest urban centers.
A nations competitiveness and economic growth can be enhanced by coordinating economic policy among neighboring countries. Traditional views of strategy for cross-national
regions have focused on regions as free trade zones. However, new thinking emphasizes a regional strategy as a powerful tool to enhance competitiveness in each of the constituent nations. A regional strategy creates gains not only from internal trade and investment but also from policy coordination to create mutual benefits to productivity in all countries through specialization and capturing externalities and spillover effects across borders. A regional strategy is a powerful lever for speeding up the process of economic upgrading at the national level as well as a way to promote interest and investment in the region by the international community.
Microeconomic foundations of economic development are the operating practices and strategies of firms as well as the business inputs, infrastructure, institutions, and policies that constitute the environment in which a nations firms compete. Recent research suggests that microeconomic differences account for much of the variation across countries in GDP per capita. The microeconomic foundations of economic development are embodied in the diamond: factor conditions, demand conditions, context for firm strategy and rivalry and related and supporting institutions.
Innovation, in the form of new products, processes, and ways of managing, underpins the growth of productivity that is necessary for a rising standard of living. Innovative capacity is especially important for advanced nations if they are to support higher wages than developing economies who can rapidly imitate. Innovative capacity in a nation or region is heavily rooted in its microeconomic environment, in areas such as the intensity of scientists and engineers in the workforce, the degree of protection of intellectual property, and the depth of clusters. Innovation also holds the key to solving many of the worlds most pressing social challenges such as health care and improving the quality of the physical environment.