Businesses and governments

Evaluate strategies which may be used by businesses and governments to improve the competitiveness of a country’s goods and services. Competitiveness is the ability of a firm or a nation to offer goods and services that meet the quality standards of the local people and world markets at prices that are competitive and provide adequate returns on the resources employed or consumed in producing them. 

Governments have an important role for improving the competitiveness of their country’s goods and services. Governments are able to change regulations and taxes according to what they believe about their country’s state of economy. For example, a government may decide to decrease the corporation tax in order to improve the competitiveness of a country’s goods and services. A decrease in the corporation tax will encourage new firms to set up and existing firms to invest. Corporation tax is a levy placed on the profit of a firm with different rates used for different levels or profits. They are taxes against profits earned by businesses during a given taxable period. 

If there is a decrease in the corporation tax, it means that firms will have an increased retained profit since less money goes to the government revenue. This will allow firms to use this money to improve competitiveness. More spending on investment will be possible which will increase productivity. If the firms invest on capital goods such as machinery that will benefit the firm by producing at lower cost, then the firm might able to set lower prices in order to improve price-competitiveness. For example the UK government reduced the headline corporation tax rate from 30% to 28% in 2007 Budget.

Reducing corporation tax increased the retained profits for UK firms that can plough back into investment projects. This should help to boost the UK capital stock. It should also help the UK to keep attracting foreign direct investment which improves the competitiveness furthermore since British firms may gain from the advanced technology and innovation of foreign multinationals. (Technology transfer) 

However, if the government decreases corporation tax, there might be some firms that decide to save the retained profits instead of spending on investment. This might be because there is a period of recession and firms might find it risky to invest. In addition many firms have chosen not to reinvest as they have been more concerned with making short term profits rather than investing in the future. If firms choose to save rather than invest their retained profits, a decrease in the corporation tax wouldn’t improve competitiveness. 

Another measure to improve competitiveness is to increase government spending on education and training. If the government can improve the quality of teaching in schools and universities and encourage more people to go to university, then this should lead to increase in productivity of the workforce in the future. Greater productivity will lead to greater efficiency in firms which will in turn lead to lower average costs of production. This may improve the price competitiveness of UK goods and services. In addition it would improve the non price competitiveness since a more educated workforce is likely to be able to be more creative and innovative. Greater innovation should lead to better quality products and the creation of patents, copyrights, brands etc.

However, increased spending on education and training by the government does not always lead to increased global competitiveness. It will depend greatly on exactly how the money is spent. For example expenditure for improving school buildings or Ofsted inspections may not necessarily improve the effectiveness of the teachers and the quality of education. On the other hand spending on training teachers and advancing their professional development, might be a more effective means of improving educational standards in the future and increasing productivity. However even in this case the effects are not likely materialise until the longer term.