The Competitiveness of Armenia

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The Competitiveness of Armenias Private Sector
Moving to the Next Stage
Economy and Values Research Center
Manuk Hergnyan Gagik Gabrielyan Anna Makaryan
The presentation is based on the results of the
first National Competitiveness Report of Armenia

• Washington, 2008

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Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
THE CHALLENGE OF COMPETITIVENESS
ARMENIAS COMPETITIVENESS SCORECARD
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
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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.

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Goals and Objectives of the Report

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

The goal
Objectives

• Evaluate competitiveness of Armenias 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.

Role

• 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.

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Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
THE CHALLENGE OF COMPETITIVENESS
ARMENIAS COMPETITIVENESS SCORECARD
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
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Importance of Competitiveness

• Competitiveness is based on the nations
  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.

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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.
• Porters definition (1990) underscores the
  productivity with which the nation utilizes its
  resources focus on microeconomic basis.
• Xavier Sala-i-Martins (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.

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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

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Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
THE CHALLENGE OF COMPETITIVENESS
ARMENIAS COMPETITIVENESS SCORECARD
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
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Armenias Ranking in the GCR the 93rd among 131
Countries

• Armenias ranking has declined though its
  absolute scores have slightly increased.
• Armenias ranking is relatively high in the
  macroeconomic, healthcare and primary education
  areas.
• However, at the micro-level Armenias 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.

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Global Competitiveness Index Composition
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Armenia's Ranking in the GCROn Basic
Requirements Armenias Ranking is Relatively
Favorable
Institutions - 96
Infrastructure - 87

• 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 Armenias
  ranking.

• Public institutions are better developed than the
  private ones.
• Public institutions - 77
• Relatively 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

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Armenia's Ranking in the GCROn Basic
Requirements Armenias Ranking is Relatively
Favorable
Macroeconomy - 57
Healthcare and primary education - 99

• 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

• 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

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Armenia's Ranking in the GCROn Basic
Requirements Armenias Ranking is Relatively
Favorable
Goods market efficiency - 104
Labor market efficiency - 40
? Liberal trade regime is not an obstacle for
efficiency of local market ? Weak
anti-monopolistic policy, limited nature of
competition in the local market

• ? Flexibility in defining salaries and wages
• ? Flexible relations between employers and
  employees
• ? Lack of well-trained leaders

Financial market sophistication- 110
Market size- 111
? Underdeveloped financial markets ?
Difficulties to obtain loans (high interest
rates, excessive collateral requirements) ?
Underdeveloped securities market ? Lack of
venture market

• Limited domestic market size
• Small-scale foreign market size

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Armenia's Ranking in the GCRArmenias Ranking in
Efficiency Enhancers is Weak
Higher education and training - 95
Technological readiness - 104

• ? 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

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Armenia's Ranking in the GCRArmenias Ranking in
Innovation is Weak
Innovation - 94
Business Sophistication - 111

• 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 RD 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

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Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
CHALLENGE OF COMPETITIVENESS
ARMENIAS COMPETITIVENESS SCORE
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
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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)
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Three Sets of Countries are Selected for
Benchmarking
CIS
Central, 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
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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 Armenias performance
(production per employee) with that of Ireland
(Ireland 100).
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PRODUCTIVITYThe situation is even worse in
manufacturing.
Source WB, WDI
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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.
Armenias 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 Armenias performance
(share of export in global exports) with that of
Ireland (Ireland 100).
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INTERNATIONALIZATIONResource-intensive (raw
materials) export share is substantially high in
Armenias total exports, while share of high
value added export is very small. Export
structure is very centralized.
Source WB, WDI, UNCTAD The small chart on the
right hand corner compares Armenias performance
(non-mineral and non-raw material share of
export) with that of Ireland.
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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.
Source WB, WDI, UNCTAD The small chart on the
right hand corner compares Armenias performance
(per capita FDI, 2000-2005 (average)) with that
of Ireland (Ireland 100).
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KNOWLEDGEArmenia has not been able to recover
its former capacities in RD area. Very little
expenses are being made in RD. However,
relatively large number of patents vs.
expenditures were registered.
Source WB, WDI, USPTO The small chart on the
right hand corner compares Armenias performance
(number of patents registered in the USA per one
million persons) with that of Ireland (Ireland
100).
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Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
CHALLENGE OF COMPETITIVENESS
ARMENIAS COMPETITIVENESS SCORE
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
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FOUNDATIONS OF COUNTRY COMPETITIVENESS
Favorable macroeconomic environment is a
necessary but not sufficient precondition for
achieving high level of competitiveness.
Source M. Porter
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MACROECONOMIC ENVIRONMENT Armenias
macroeconomic environment is rather favorable.
Positive achievements
Distortions

• 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

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MACROENVIRONMENT
Legal and Institutional Environment
Political Environment
Social 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 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

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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.

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MICROENVIRONMENT On the conceptual side Porters
diamond model is used for studying the
microenvironment of the economy.
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MICROENVIRONMENTFactor Assessment
Physical infrastructure
Administrative infrastructure
Human capabilities
Scientific and technological infrastructure

• Improved power supply
• Improved air and land transportation
  infrastructure
• Developments in telecommunication
• Weak telecommunication infrastructure
• Lack of a harbor

• Improved bureaucracy
• Sufficient security
• Inefficient legal framework
• Dependent judiciary

• Low quality specialists
• Inefficiency of the educational system
• Lack of high quality management schools

• Progress in obtaining U.S. patents
• Low quality of RD institutions
• Weak cooperation between businesses and RD
  institutions
• Low level of spending for RD institutions

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MICROENVIRONMENTFinancial sector is currently
one of the major constraints of the Armenias
business environment. Financial systems
participation in economic life is limited.
Source WB, WDI The small chart on the right
hand corner compares Armenias performance (local
lending through bank system, 2005 (GDP)) with
that of Ireland (Ireland 100).
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MICROENVIRONMENT Root Causes of Financial
Intermediation
Demand

• 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

• Low and unequally distributed revenues gt 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 gt
  expensive capital

Supply
Regulation and Mediation

• Competitiveness is restricted to several sections
• Tough regulation
• Legal issues, weak mechanisms for sale of pledged
  collateral gt tough collateral requirements

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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.
Lack of specific demand
Weak pressure on businesses
Weak incentives for sophistication
Simple business procedures

• The impact of state procurement is also
  insignificant.
• Standards and other regulatory requirement have
  been improved but still do not have a serious
  impact.

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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

Lack of Strong Clusters
Given numerous synergetic impact the clusters are
considered to be the source of competitive
advantages. This fact is not fully recognized in
Armenia.
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MICROENVIRONMENT Fundamental issues exist in
corporate management and internal competition.
Drivers
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.

• 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

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MICROENVIRONMENTPoor strategies of companies
account for their most significant competitive
disadvantages.
Business administration

• Not ready to delegate
• Shortage of professional management

Production operations

• Enterprises are willing to use new technologies
  but make little spending on RD
• Production processes and operations are not
  sophisticated

Labor Force

• Low spending on education and training of
  employees

Marketing and international sales

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

Global competitiveness

• Limited industries are internationally
  competitive
• Companies do not master profoundly the tactics
  for competing in international markets

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Diagnostic SummaryThe economy is growing, but
the competitiveness is falling.
The Growth-Competitiveness Paradox
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Presentation Highlights
NATIONAL COMPETITIVENESS REPORT
CHALLENGE OF COMPETITIVENESS
ARMENIAS COMPETITIVENESS SCORE
CURRENT ECONOMIC PERFORMANCE OF ARMENIA
DRIVING FORCES BEHIND THE PERFORMANCE
TOWARDS A COMPETITIVE ECONOMY
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BUILDING COMPETITIVENESSThe issue of
competitiveness assumes different approaches in
the short- and in the long-run.
Long-term
Short-term

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 Armenias international
  rankings

• 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

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BUILDING COMPETITIVENESS Quick wins and
strategic breakthrough address different issues.

• 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.

Quick Win
Quick Win
Time
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QUICK WINS Short-term priorities can be
identified by using a newly developed tool called
Prioritization filter.
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IDENTIFIED QUICK WINS
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STRATEGIC TARGETING Strategic targeting assumes
presentation of main value proposal as the basis
for the main regional role.
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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.
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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.

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LEVERSCompetitive levers are the selected
factors that would ensure the strategic
breakthrough.
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.
Education in Armenia may not be only a general
factor for improving competitiveness, but also
basis for regional positioning.
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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.

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COMPETITIVENESSIncreased competitiveness is as
vital for Armenia as its national security.
Renewed strategic approaches
Competitiveness
Renewed institutional approaches