The Competitiveness of Armenias Private Sector: Moving to the Next Stage Washington, 2008 Economy and Values Research Center The presentation is based.

The Competitiveness of Armenia’s Private Sector: Moving to the Next Stage

Washington, 2008

Economy and Values Research Center

The presentation is based on the results of the first National Competitiveness Report of Armenia

Manuk HergnyanGagik GabrielyanAnna Makaryan

Presentation Highlights

NATIONAL COMPETITIVENESS REPORTNATIONAL COMPETITIVENESS REPORT

THE CHALLENGE OF COMPETITIVENESSTHE CHALLENGE OF COMPETITIVENESS

ARMENIA’S COMPETITIVENESS SCORECARDARMENIA’S COMPETITIVENESS SCORECARD

CURRENT ECONOMIC PERFORMANCE OF ARMENIA CURRENT ECONOMIC PERFORMANCE OF ARMENIA

DRIVING FORCES BEHIND THE PERFORMANCE DRIVING FORCES BEHIND THE PERFORMANCE

TOWARDS A COMPETITIVE ECONOMY TOWARDS A COMPETITIVE ECONOMY

The Report

For the third year Armenia is included in the Global Competitiveness Report (GCR) of the World Economic Forum (WEF).

Economy and Values research center as the partner organization of the WEF has initiated the preparation of the first National Competitiveness Report.

The first National Competitiveness Report of Armenia (ACR) analyses the economic situation and performance of Armenia in the context of competitiveness.

The Report will be launched in two weeks.

Goals and Objectives of the Report

To develop a premium tool for analysing economic competitiveness of Armenia.

The goal

Objectives

Role

• Evaluate competitiveness of Armenia’s economy;

• Identify challenges and priorities for Armenia;

• Identify competitive advantages of Armenia and opportunities for improving competitiveness;

• Recommend strategic approaches and key levers for tackling challenges and capturing opportunities.

• High quality data and analysis for public and private sector leaders

• A helpful tool for a dialogue between the government and the private sector;

• Ample material for university faculty members, students and researchers;

• A message to the international community that Armenia is committed to becoming an internationally competitive country.





CURRENT ECONOMIC PERFORMANCE OF ARMENIACURRENT ECONOMIC PERFORMANCE OF ARMENIA



Importance of Competitiveness

• Competitiveness is based on the nation’s capabilities and not its natural resources.

• Competitiveness is the source of prosperity for the citizens of the country.

• Competitiveness is the outcome of innovation and technological advancement and, at the same time, the driving force behind them.

• Competitiveness ensures increasing productivity of the companies in the country and their capability of competing in the international market.

Definition of Competitiveness

• The definition of Scott and Lodge (1985) views competitiveness as a capability of the nation to produce goods and service and distribute internationally.

• Porter’s definition (1990) underscores the productivity with which the nation utilizes its resources – focus on microeconomic basis.

• Xavier Sala-i-Martin’s (2004) definition underscores combination of macroeconomic and microeconomic factors including policies and institutions that determine the level of productivity and define the sustainable level of prosperity in a mid-term.

• ACR draws on these three definitions of competitiveness.

Competitiveness Rankings

• Internationally recognized organizations that offer country competitiveness rankings:

– The World Economic Forum (WEF),

– The Institute for Management Development ( IMD),

– The Institute for Industrial Policy Studies (IPS).

• WEF Global Competitiveness Report -GCR

– A leading and most comprehensive source for ranking country competitiveness;

– uses both statistical data and “soft data” (executive opinion surveys).

• GCR has two measurement indexes:

– Business Competitiveness Index (BCI) that measures the quality of business environment and the level of sophistication of company strategies and operations.

– Global Competitiveness Index (GCI) which has a wider coverage and includes macroeconomy, healthcare and education.

• Armenia is only covered by the WEF reports








Armenia’s Ranking in the GCR: the 93rd among 131 Countries

• Armenia’s ranking has declined though its absolute scores have slightly increased.

• Armenia’s ranking is relatively high in the macroeconomic, healthcare and primary education areas.

• However, at the micro-level Armenia’s indicators are rather low. With it Business Competitiveness Index Armenia is the 108th.

• Main problems are:– Imperfectness of business environment;– Low level of business sophistication;– Unsatisfactory level of higher education and training;– Poor cooperation between businesses and supporting

institutions;– Low level of innovation.

Global Competitiveness Index Composition

Armenia's Ranking in the GCROn Basic Requirements Armenia’s Ranking is Relatively Favorable

Poor indicators despite the improvements in recent years.

One of the major obstacles for the private sector.

The telecommunication is poorly developed.

Lack of a port considerably worsens Armenia’s ranking.

Institutions - 96 Infrastructure - 87

Public institutions are better developed than the private ones.

Public institutions - 77Relatively higher security level Lack of judiciary independence Protectionism in government

decisions Low trust towards politicians

Private institutions - 102 Poor ethics Low accountability Lack of protection of interests of

minority shareholders Low level of maintaining financial

audit and reporting standards

High economic growth

Low inflation

Improved national budget system

Effective management of government debt

Low level of savings

Large interest rate spreads

Fluctuations of the exchange rate of dram in the recent years

Unequal regional development

Unequal distribution of wealth

Macroeconomy - 57Healthcare and primary

education - 99

Decreasing infant mortality

The impact of tuberculosis, HIV/AIDS and similar diseases on businesses is not significant

Relatively high level of enrollment in primary education


Liberal trade regime is not an obstacle for efficiency of local market

Weak anti-monopolistic policy, limited nature of competition in the local market

Goods market efficiency - 104 Labor market efficiency - 40

Flexibility in defining salaries and wages

Flexible relations between employers and employees

Lack of well-trained leaders


Financial market sophistication- 110

Underdeveloped financial markets Difficulties to obtain loans (high interest rates, excessive collateral requirements) Underdeveloped securities market Lack of venture market

Market size- 111

Limited domestic market sizeSmall-scale foreign market size

Armenia's Ranking in the GCRArmenia’s Ranking in Efficiency Enhancers is Weak

High level of enrollment in secondary education

Continuous decline in number of people with higher education

Decreasing quality of education system

Very low level of the quality of business education

Low quality of instruction in mathematics and sciences

Lack of specialized trainings, R & D services

Low spending of companies for training

Local companies have developed capacities to absorb new technologies

Foreign direct investments are not the major source for transferring new technologies

Imperfectness of the legislative framework conducive to wide application of IT

Higher education and training - 95

Technological readiness - 104

Armenia's Ranking in the GCRArmenia’s Ranking in Innovation is Weak

Relatively high number of patents registered with the U.S. in comparison with other countries

Low level of quality of research institutions

Low spending on R&D by private companies

Weak cooperation between private sector and universities

Lack of state policy of procurement of high technologies

Weak IPR protection Not widespread practice of

obtaining new technologies by licensing or copying.

Lack of local specialized supplier and their relatively low quality

Production process based on intensive use of labor force and old generation technologies

Application of the simplest forms of marketing tools

High level of centralization of management decisions

Competitive advantages driven by low cost

Simple value chains

Innovation - 94Business Sophistication - 111



CHALLENGE OF COMPETITIVENESSCHALLENGE OF COMPETITIVENESS

ARMENIA’S COMPETITIVENESS SCOREARMENIA’S COMPETITIVENESS SCORE

CURRENT ECONOMIC PERFORMANCE OF ARMENIA CURRENT ECONOMIC PERFORMANCE OF ARMENIA



Prosperity is a choice. It is a choice between the alternatives of strategies and operations for efficient use of available resources and knowledge.

Competitiveness Ensures the Basis for Prosperity

Source: EV (2007) adapted from M. Porter (1998)

Three Sets of Countries are Selected for Benchmarking

CISCentral, Eastern and

Southeastern Europe

Eurasian Crossroad

Rationale

Common historical context, similar economic conditions, close economic ties

10 countries

Russia, Ukraine, Kazakhstan, Moldova, Belarus, Georgia, Azerbaijan, Uzbekistan, Kirgizstan, Tajikistan

Rationale

Considerable successes in the transition period. Perceived as a region including Armenia.

15 countries

Latvia, Lithuania, Estonia, Poland, Hungary, Czech Republic, Slovenia, Slovakia, Bulgaria, Romania, Bosnia, Albania, Serbia, Croatia, Macedonia

Rationale

Historic region encompassing Armenia, geographic crossroad on important Eurasian trade routes.

8 countries

Turkey, Azerbaijan, Georgia, Iran, Syria, Lebanon, Israel, Jordan

PRODUCTIVITYArmenia ranks low in terms of labor force participation and general productivity of labor force and is behind the majority of comparator countries

Source: WB, WDI

* The small chart on the leftt hand corner compares Armenia’s performance (production per employee) with that of Ireland (Ireland = 100).

PRODUCTIVITYThe situation is even worse in manufacturing.

Source: WB, WDI

INTERNATIONALIZATIONArmenia is in good position in terms of its export share growth in the global exports, however, in absolute terms it is still behind most of the comparator countries. Armenia’s share in global exports is less than its share in global GDP.

Source: WB, WDI, UNCTAD

* The small chart on the right hand corner compares Armenia’s performance (share of export in global exports) with that of Ireland (Ireland = 100).

INTERNATIONALIZATIONResource-intensive (raw materials) export share is substantially high in Armenia’s total exports, while share of high value added export is very small. Export structure is very centralized.


* The small chart on the right hand corner compares Armenia’s performance (non-mineral and non-raw material share of export) with that of Ireland.

INTERNATIONALIZATIONArmenia has average position in terms of attracting FDI. However, Armenia is behind most of the countries in terms of FDI per capita. The strategy of attracting FDI driven by privatization and infrastructure deals needs profound revision.


* The small chart on the right hand corner compares Armenia’s performance (per capita FDI, 2000-2005 (average)) with that of Ireland (Ireland = 100).

KNOWLEDGE

Armenia has not been able to recover its former capacities in R&D area. Very little expenses are being made in R&D. However, relatively large number of patents vs. expenditures were registered.

Source: WB, WDI, USPTO

* The small chart on the right hand corner compares Armenia’s performance (number of patents registered in the USA per one million persons) with that of Ireland (Ireland = 100).








FOUNDATIONS OF COUNTRY COMPETITIVENESS

Favorable macroeconomic environment is a necessary but not sufficient precondition for achieving high level of competitiveness.

Source: M. Porter

MACROECONOMIC ENVIRONMENT

Armenia’s macroeconomic environment is rather favorable.

Liberal economic environment

Privatization and dominance of private sector

High rate of economic growth

Low inflation Manageable level of fiscal

deficit Quite satisfactory budget

system

Significant fluctuations of exchange rates

Significant difference (spread) between the interest rates for deposits and loans

Positive achievements Distortions

MACROENVIRONMENT

Legal and Institutional Environment

Political Environment

Comprehensive legislative framework consistent with the WTO and other international requirements

There are serious issues with enforcement of legislation;

Imperfect secondary legislation;

Ambiguous procedures; Unsatisfactory human

and institutional capabilities

Insufficient independence of the judiciary

X The stability of political situation is shaken by recent post-election events

Many global investors still view Armenia as a country in war

Social Environment

Social situation is improving relatively fast.

Real level of poverty and unemployment (above 30%) is still high

Regional development is extremely disproportionate;

Distribution of wealth is unequal;

Salary range is still lower than the level in 1990

MICROENVIRONMENT The most serious competitive disadvantages of Armenia are on the micro level.

• Wealth, after all, is created by companies and not due to the best combination of macroeconomic indicators.

• The level of strategies and operations of companies defines their capability for competing and long-term profitability.

• On the other hand, they are driven by its immediate environment, i.e. business environment.

MICROENVIRONMENT On the conceptual side Porter’s “diamond” model is used for studying the microenvironment of the economy.

MICROENVIRONMENTFactor Assessment

Improved power supply

Improved air and land transportation infrastructure

Developments in telecommunication

Weak telecommunication infrastructure

Lack of a harbor

Physical infrastructure

Improved bureaucracy

Sufficient security

Inefficient legal framework

Dependent judiciary

Administrative infrastructure

Low quality specialists

Inefficiency of the educational system

Lack of high quality management schools

Human capabilities

Progress in obtaining U.S. patents

Low quality of R&D institutions

Weak cooperation between businesses and R&D institutions

Low level of spending for R&D institutions

Scientific and technological infrastructure

MICROENVIRONMENT

Financial sector is currently one of the major “constraints” of the Armenia’s business environment. Financial system’s participation in economic life is limited.

Source: WB, WDI

* The small chart on the right hand corner compares Armenia’s performance (local lending through bank system, 2005 (GDP%)) with that of Ireland (Ireland = 100).

MICROENVIRONMENT Root Causes of Financial Intermediation

Low and unequally distributed revenues => small savings

Low trust toward financial institutions

Lack of institutions accumulating “long” money; weak ties with international markets

High level of risk for overall economy => expensive capital

Supply

Demand

Regulation and Mediation

Structure of the Economy

Financing of large foreign companies from external sources

Opportunities for funding from internal sources from “informal tax privileges”

large share of small agricultural producers

Large share of construction, which is mostly funded by advance payments and private transfers

Shadow economy

Competitiveness is restricted to several sections

Tough regulation

Legal issues, weak mechanisms for sale of pledged collateral => tough collateral requirements

MICROENVIRONMENT Demand factors: the existing demand both in public and private sector still lack the quality to serve as an incentive for sophistication of goods and services.

• The impact of state procurement is also insignificant.

• Standards and other regulatory requirement have been improved but still do not have a serious impact.

Lack of specific demand

Weak pressure

on businesses

Weak incentives

forsophistication

Simple business

procedures

Lack of Strong

Clusters

MICROENVIRONMENT

Related and Supporting Industries

• Limited information flow and lack of integration between the enterprises, suppliers and buyers

• Weak connections with other industries

• Underdeveloped support institutions

• Extreme need for professional training centers

• Very limited flow of information within industries

Given numerous synergetic impact the clusters are considered to be the source of competitive advantages. This fact is not fully recognized in Armenia.

MICROENVIRONMENT

Fundamental issues exist in corporate management and internal competition.

Relatively good relations between employers and employees

Protectionism in government decrees

Lack of corporate management practices

Inadequate reporting

No protection of interests of minority shareholders

Weak IPR protection.

Drivers

External trade administration is relatively liberal

The impact of corruption on businesses is not prohibitive

Fragmentation of local competition (extremely differs by sector or market segment)

Dominance of powerful groups in selected mass markets

Weak protection of economic competition

Internal Competition

MICROENVIRONMENT

Poor strategies of companies account for their most significant competitive disadvantages.

Business administration

Production operations

Labor Force

Marketing and international

sales

Global competitiveness

• Not ready to delegate• Shortage of professional management

• Enterprises are willing to use new technologies but make little spending on R&D

• Production processes and operations are not sophisticated

• Low spending on education and training of employees

• Companies do not use advanced tools for marketing and do not establish international distribution networks

• Limited industries are internationally competitive• Companies do not master profoundly the tactics for

competing in international markets

“The Growth-Competitiveness”

Paradox

Diagnostic Summary

The economy is growing, but the competitiveness is falling.








BUILDING COMPETITIVENESS

The issue of competitiveness assumes different approaches in the short- and in the long-run.

Quick Wins Strategic Breakthrough

• Quick wins, even if small, serve as an incentive to strive for long-term strategic

• Create basis for coalitions for changes

• Allow to quickly improve Armenia’s international rankings

Short-term Long-term

• Strategic targeting assumes building a holistic picture

• Allows to identify the criteria for assessment of different actions

• Makes comprehensible the directions of reform initiatives

• Establishes a sustainable competitive advantage

0

25

50

75

100

125

Currently in 2-3 years

0

25

50

75

100

125

Quick Win

Quick Win

10-12 years

0

25

50

75

100

125

Time

• Certain improvement of current competitiveness position can be achieved very quickly through several initiatives and improvements

• However, regional and international competitiveness new, “higher level” of actions are required with the timeframe of 10-12 years.

BUILDING COMPETITIVENESS Quick wins and strategic breakthrough address different issues.

QUICK WINS Short-term priorities can be identified by using a newly developed tool called “Prioritization filter”.

IDENTIFIED QUICK WINS

STRATEGIC TARGETING

Strategic targeting assumes presentation of main value proposal as the basis for the main regional role.

THE SYSTEM OF COMPETITIVE LEVERS (LEVERAGE) To ensure sustainability of respective positioning and to gain advantages in regional competition it is necessary to identify the key competitive levers.

BASIS FOR LEVERSThe system of levers should be used in addition to the general economic policy.

• The basis for levers is a three-component system that will establish an efficient context for applying the levers.

• The central role is prescribed to the cluster policy, which should become a model for organizing the economic system rather than a set of isolated initiatives in selected areas.

• Economy should be viewed as a group of clusters.

• Clusters should be upgraded based on the main value proposition.

• Cluster policy becomes the link between the innovation policy and the regional development policy.

• The three components are coordinated together and support each other.

LEVERSCompetitive levers are the selected factors that would ensure the strategic breakthrough.

Education in Armenia may not be only a general factor for improving competitiveness, but also basis for regional positioning.

FDI should become a source for large scale investments and transfer of technology into Armenia. In addition, it will improve the competitiveness through expansion in international sector.

With relevant policy background the use of the Diaspora resources may become focused, cluster-specific and aligned with innovation and regional development policies.

IMPLEMENTATION The logic behind levers assumes a renewed institutional approach.

The use of the leverage system may be efficient in a relevant organizational and institutional environment.

Renewed institutional approach firstly assumes modernization of existing institutions and in some instances establishment of new ones

In the context of introducing key levers it is important to involve large investors and Diaspora representatives in such institutions.

COMPETITIVENESSIncreased competitiveness is as vital for Armenia as its national security.

Competitiveness

Renewed strategic approaches

Renewed institutional approaches

The Competitiveness of Armenias Private Sector: Moving to the Next Stage Washington, 2008 Economy and Values Research Center The presentation is based.

Documents

definition of competitiveness

views competitiveness

context of competitiveness

definitions of competitiveness

year armenia

countries armenias ranking

competitive economy

level of productivity