Red-hot emerging markets have been the engine for much of the world's economic growth in recent years. So it's a bit surprising to see gazelles such as China and India outranked by more stately performers such as Switzerland and Denmark in the annual tally by Geneva's World Economic Forum of the world's most competitive economies, released on Nov. 1.
It comes down to the infrastructure and socioeconomic factors needed to build competitive advantage. While many emerging economies post double-digit annual growth rates, they often still lack sophisticated financial markets, highly developed education systems, and the macroeconomic stability needed to outrank more established rivals on the WEF list.
Looking at competitiveness through this lens gives an especially favorable picture of the U.S., which jumped from sixth place in last year's survey to No. 1 in 2007 on the back of strong R&D investment and world-beating financial markets.
A Competitive Europe?
"The U.S. leads the pack on innovation," says Jennifer Blanke, senior economist for the World Economic Forum who oversaw the study. But, she warns, "if it doesn't get its house in order over macroeconomic policy, it could start to see its position slip."
Perhaps the biggest surprise on this year's list is how competitively Europe ranks on the global stage, with 7 of the top 10 slots. That smartly revises the common but dated perception of a go-slow Europe of high taxes and inflexible labor rules. Only 2 of the top 10, on the other hand, are from the Asia-Pacific region—Singapore and Japan.
Out of the top European countries mentioned, three are Scandinavian. The region boasts world -class education systems, strong ties between universities and the business community, and places an emphasis on the high-tech economy.
Nordic Nations Rank High
Finland, which ranks No. 6 overall, has overcome its small domestic market by targeting export-driven growth. Home of mobile phone giant Nokia (NOK), the country has been able to take advantage of its sophisticated business environment and flexible workforce to sustain high standards at home. According to the World Economic Forum, the Nordic nation ranks first globally for higher education and health care and third for innovation.
Finland is not the only country to turn apparent disadvantages such as small size into competition beaters. Located at the heart of Europe, Switzerland, which ranks second overall, has combined its expertise in the financial services sector with high R&D spending for a global stature seemingly far beyond the reach of its 37th-ranked domestic market.
Not everything has gone Europe's way. Germany, which ranks fifth, continues to struggle with a 6.4% unemployment rate and labor laws that make it hard to fire workers. It ranks 126th out of 131 for its hiring and firing practices and 79th out of 131 for its inflexible labor market.
The Key Characteristics
While Europe takes most of the top spots, Singapore and Japan get high marks for a combination of highly efficient institutions and strong focus on innovation. That's particularly the case for Singapore, which ranks first for efficiency in its goods, labor, and financial markets. Similarly Japan finishes third globally for R&D spending, although the country's overall performance has been hindered by government debt that rose to 190% of GDP in 2006.
Despite this weakness, the Japanese economy shares key characteristics with other leading nations that make them highly competitive. Strong financial institutions, a focus on company innovation and R&D, and a high-caliber education system all are needed if a country truly wants to compete in the globalization age.
Click here to view a slide show of the top 10 countries in the 2007 World Economic Forum's global competitiveness survey.
And to see some earlier rankings of countries on various criteria, check out these slide shows:
The World's Most Networked Countries (BusinessWeek.com, 3/28/07) (WEF survey of world's most networked countries, March, 2007).
Racing to the Top of the Heap (BusinessWeek.com, 5/14/07) (IMD survey of world's most competitive countries, May, 2007).