Globalization and locational competition

Globalization and regionalization are the current buzzwords on the path toward development of many countries. Today people all over the world seem to live in a “global village,” especially with the great ease in transportation and communications, and with the internationalization of trade in goods and services. Globalization, as we know it, pertains to the increasing interdependence of markets-trade, cross-border flows of capital and exchanges in technology.  This has resulted in an international division of labor, the fragmentation of production and the rise of global value chains.

Because of globalization, we now see economic competition occurring on three levels: World product markets; world labor markets; and countries competing to attract capital, technology and skilled labor. The latter is termed as “locational competition,” popularized by German economists Herbert Griesch and Horst Siebert. Competition between locations—between the localities of an economy, between countries, or even between regions of the world, like the European Union and the United States—occurs in a number of channels of interaction, the most important of which is in the movement of capital, technology and people. Locational competition is about openly competing for endowments and mobile factors, like skilled labor and foreign direct investments (FDI). However, the relevant basis of “local competition” is still the quality of a country’s governance and social institutions.

At the regional level, the Philippines has been an active player in the Association of Southeast Asian Nations (Asean). The regional bloc is embarking on deeper economic integration through its blueprint for the Asean Economic Community (AEC), which hopes to establish a free flow of goods and services, as well as the free mobility of businesspeople, skilled professionals and investments, by 2015. The AEC is Southeast Asia’s response to locational competition.

As it traverses its economic growth and development path, the Philippines needs to be competitive in order to attract both capital and skilled workers from around the globe. It has to be an active player in locational competition. Within the country, cities play key roles in building the competitive advantages of the nation. First cities are usually the geographical growth drivers of a nation; they are also the economic and financial centers. More often than not, the seat of power and government is in one of these cities. It is where the headquarters of multinational firms and large domestic enterprises are usually located. More often than not, cities are culture hubs and the melting pots of people coming from all over the country. Last, cities are typically networked with other cities of the world and are, thus, the nation’s bridge to the outside world.

But what makes cities competitive?

In a report by the Economist Intelligence Unit (EIU) and Citi, city competitiveness was assessed through indicators grouped into eight distinct, thematic categories and assigned the following weights: economic strength, 30 percent; physical capital and financial maturity, 10 percent each; institutional character and human capital, 15 percent each; global appeal, 10 percent; social and cultural character, 5 percent; and environmental and natural hazards, 5 percent. The top five cities assessed by the EIU are New York, London, Singapore, Hong Kong and Tokyo. Out of 120 cities assessed worldwide, Manila was ranked 79th. Among our Southeast Asian neighbors, Jakarta was ranked 74th; Kuala Lumpur, 31st; and Bangkok, 62nd.

In the Philippines the National Competitiveness Council (NCC) has formulated a set of criteria and an index to assess the competitiveness of cities and municipalities. The competitiveness of a city is key to its economic development. The Cities and Municipalities Competitiveness Index was actually developed in 2012 because of the idea that a nation’s competitiveness can only be brought about by the competitiveness of its local components—in this case, cities and municipalities.

Utilizing various studies on competitiveness, the NCC index highlights three core components of what constitutes competitiveness and economic development:
1) Economic dynamism. This refers to activities that create the expansion of businesses and industries that leads to increased employment.
2) Government efficiency. It refers to the quality and reliability of government services and support for effective and sustainable productive expansion.
3) Infrastructure. This refers to the physical building blocks that connect, expand and sustain a locality and its surroundings to enable the provision of goods and services.

For each component, the NCC listed specific indicators, which were then used to compute the index and rank the cities.

The top 10 cities are Makati, Cagayan de Oro, Naga, Davao, Marikina, Iloilo, Cebu, Manila, Valenzuela and arañaque.  However, only 136 cities participated and submitted data. The NCC’s initiative to rank cities and municipalities is an important step in improving the whole country’s competitiveness amid increased locational competition in the global economy. As our cities and municipalities gain momentum in improving their competitiveness, the country’s overall economic growth and development will be sustained. More important, the high level of growth can be more inclusive as its sources become more diversified.

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Fernando T. Aldaba, Ph.D., is a professor of economics at the Ateneo de Manila University and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.

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