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C. Gopinath

States in India have long complained about their poor economic condition by blaming the Centre for not locating major projects within the state. What is important is for a state to look within and see if it has created the right conditions for enterprise to flourish in the state. The state needs to listen to the economic players within — whether they may be commercial enterprises, educational institutions, or professional groups and alleviate their concerns.

THE competitiveness of a firm can be described as its ability to maintain or increase its share of the market-space by outperforming its rivals. Each firm has its own view of the market place and the nature of the competition within that space. It also has some goals in mind over the long term and a set of measures to evaluate its performance. Thus, competitive firms are constantly watching the actions of their competitors, and the needs of their current and potential customers to make the kind of decisions that would keep them at the front of the pack.

How do we translate this idea of competitiveness to that of a state? Sure, states compete with each other to attract investment to their geographic region. However, the competitiveness of a state is contingent upon the competitiveness of the institutions and people that occupy it. A state is successful if the organisations that are based in and operate in that state are successful. So the notion of competitiveness of a state needs to be carried through to the micro foundations of competitiveness, namely the individuals and institutions in that state.

And that is what the Beacon Hill Institute (an affiliate of Suffolk University) decided to do for the 50 states of the US pertaining to the year 2001. In a report released recently, Massachusetts was found to be at the top, second only to Delaware.

The report views competitiveness in terms of "the policies and conditions that ensure and sustain a high level of per capita income and its continued growth". To do this, a state must be able to attract and sustain businesses. The study looked at nine broad categories of the environment:

Government and fiscal policy (tax rates and financial discipline of the state);

Institutions and security (regulatory burden, a legal system sympathetic to business, and crime rates);

Infrastructure (ease of commuting, housing costs, etc);

Human resources (availability and costs of a skilled labour force, commitment to education and training);

Technology (research funding, proportion of technically qualified in the labour force);

Finance (mobilising investment);

Openness (how connected the firms in the state are with the rest of the world);

Domestic competition (business formation and exit rates);

Environment policy (nature of environmental problems and extent of regulation)

To measure these nine groups 38 objective indicators were identified. The state's competitiveness index was then calculated. A secondary index, called the `State Competitiveness Opinion Index' was also calculated based on a survey of opinion leaders in eight states. Although based on objective indicators, Massachusetts was ranked second, based on the opinions, it was ranked seventh out of the eight states. Part of the reason for the difference could be explained by the timing of the collection of the opinion data (the downturn in the economy had already begun). Yet, some interesting twists show up in a comparison of the data. For instance, although based on objective indicators the state was found to be weak on infrastructure, respondents saw it as good! The state has projected a good image.

Delaware, in first place, counts on business-friendly government policies, good infrastructure, and being open to foreign trade and investment among its credits. It also has very low crime rates. The last state in the rankings, Mississippi, was also the lowest in eight out of the 38 variables used. Human resources and infrastructure showed that there was plenty of room for improvement.

More to it than ranks

While at one level it is interesting to look at state ranks in relation to each other, studies such as this provide several useful pointers to policy makers. The first is the very notion that a state is only as good as its constituents. A second important lesson is that it is not one major dam, or steel plant that makes for the success of a state. It is the hundreds of little things that a state needs to do to remain competitive.

One state does not compete with another simply by announcing incentives for investment or having a few major industries in its territory. States in India have long complained about their poor economic condition by blaming the Centre for not locating major projects within the state. What is important is for a state to look within and see if it has created the right conditions for enterprise to flourish in the state. The state needs to listen to the economic players within — whether they may be commercial enterprises, educational institutions, or professional groups and alleviate their concerns. At an early stage in the development of India, public sector projects went to remote areas and had to set up housing, schools, and clinics as part of producing transformers or steel plates. Things have changed a lot since then.

A broad swath of development has reduced the need for the state to be directly involved in many economic and social activities. But at the same time, growth and development mean that linkages become more complicated. A reputation for a rapacious bureaucracy discourages firms from locating in a state. Poorly maintained roads and an inefficient port can countermand all the expected benefits from free-trade zones. Restrictive rental laws and a weak enforcement system can result in shortage of housing and drive out professionals. Poor school systems result in a weak labour force keeping out high paying industries and attracting only the marginal ones.

Coming back to Massachusetts, a certificate of competitiveness about the past does not necessarily mean that policy makers, or the state's leadership, can rest on their laurels. Moody's Investor Service has recently downgraded the state's credit outlook from stable to negative. The state is in an economic crunch. Part of the problem is the general downturn of the nation's economy, but it has been compounded in the state due to a voter-approved tax cut last year that has shrunk revenues. A negative `credit outlook' could presage a credit downgrade down the line, which would mean higher interest rates on state borrowings. The state is beginning to act to control the damage. Facing severe deficits, the Acting Governor of Massachusetts has announced a series of program cuts and spending freezes. The elected legislators and interest groups are worried about the expected cuts in social services and the horse-trading inherent in any democracy has begun about what can and cannot be cut.

As companies exited businesses and many small enterprises/start-ups collapsed, it boosted the growing number of the unemployed. Since the high tech industry has a strong base in Massachusetts, the job losses have come from the layoffs of all the major computer firms such as Lucent Technologies, Cisco Systems and EMC. And the category affected is the engineers and executives — the highly paid white-collar jobs. It would have been suicidal for the state to step in and prevent businesses adjusting to the downturn. Inefficient businesses and locked-up capital would have been a permanent drain on the economic landscape, preventing fresh growth. In the process of trimming its expenses, it is now up to the state to ensure that it keeps the foundations of its competitiveness sound, so that when the economy rebounds, it will be in the best position to turnaround fast.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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