11 Oct 2006  Research & Ideas

U.S. Tops Business Competitiveness Index 2006

The United States and Germany continue to top an annual review of the business competitiveness of 121 countries, which is compiled by Professor Michael Porter's Institute for Strategy and Competitiveness at Harvard Business School. While India climbed in the rankings, China fell. Key concepts include:

  • The Business Competitiveness Index measures the underpinnings of a country's prosperity.
  • While a nation's macroeconomic factors are often considered fundamental to long-term prosperity, productivity depends on microeconomic factors such as the level of company sophistication and quality of the business environment.
  • Unless microeconomic capabilities improve, sustainable improvements in prosperity will not occur.

 

The United States and Germany remain atop the latest Business Competitiveness Index, with China continuing to slip in the rankings while India ascends, according to a report released from Harvard Business School's Institute for Strategy and Competitiveness.

In addition to ranking countries by overall competitiveness, the report identifies national competitive strengths and weaknesses, highlights global economic trends, and signals the ingredients of successful economic development. The Index is part of the research contributing to The Global Competitiveness Report 2006-2007, released Sept. 26 by the World Economic Forum.

The U.S., ranked number one in four of the last six years, scored high on business environment, financial markets, and innovative capacity. Germany, number two, benefited from its orientation on exports, the unique competitive positions of its companies, and the quality of its legal and regulatory framework.

Rounding out the Top 10 were Finland, Switzerland, Denmark, Netherlands, Sweden, United Kingdom, Japan, and Hong Kong SAR. Hong Kong increased its ranking by seven, in part by strengthening management education, the efficacy of government boards, and local availability of process machinery, the ISC reported.

Other high-income nations increasing their ranking included Qatar, Norway, and Malta. Advanced economies on the decline included Cyprus, the Czech Republic, Taiwan, and France.

China losing luster

China, which has retreated in the rankings since 2002, fell nine spots to 64, according to the ISC. "This year's decline was driven especially by higher levels of corruption, weaker assessment of buyer sophistication, and concerns about labor relations," the study found. Also contributing were weak property rights, poor board governance, and low quality of management education. "Overall it is clear that euphoria about China is moderating as the realities of its competitiveness become more apparent," the report concludes.

India moved up four rankings to 27, aided by improvements in its business environment and increasing levels of company sophistication.

The index explores a country's prosperity, measured by its level of gross domestic product per capita adjusted for purchasing power. "The focus is on sustainable prosperity and on identifying the specific areas that must be addressed if GDP per capita is to attain higher levels in the future," according to the report.

Among the dozens of variables analyzed are production process sophistication, per capita Internet and cell phone use, intensity of local competition, financial market sophistication, and intellectual property protection.

The report also attempts to gauge the ingredients necessary for long-term, sustainable growth. Although institutional stability, sound macroeconomic policies, market opening, and privatization are often seen as keystones to success, they are not by themselves sufficient for economic development, according to the ISC. Microeconomic activity such as the sophistication of company operations account for 80 percent of the variation in GDP per capita across countries, according to the report. Macroeconomic factors create a favorable business environment while microeconomic activity contribute to the productivity and competitiveness of individual firms.

Harvard Business School and Harvard University jointly created the Institute for Strategy and Competitiveness in 2001. It is led by Porter, the Bishop William Lawrence University Professor at HBS and one of the world's leading authorities on competitive strategy and the competitiveness of nations, states, and regions.

The report was co-written by Porter and the Institute's Christian Ketels and Mercedes Delgado, and based on research by the Institute's staff.

For more detailed information, please see a video interview with Porter here.

About the author

Sean Silverthorne is editor of HBS Working Knowledge.