Agree or Disagree 3

Post writer: Luis

1) Introduction
It took me lot of time for evaluating how to develop this DQ when finishing this exciting Module. I will base the following on OECD (2004) and WEF (2013) that analyses

indicators for international competitiveness, and I will show how the cost of capital consideration is present in those indicators. Other approachs for explaining the

international competitiveness of the countries could be as the known Porter’s Diamond Framework I refreshed on Porter (1990), and its improvements for example of

Rugman, Cruz and Joseph (1993) with a double diamond for explaining the Canadian experience, where also cost of capital consideration are present. Perhaps we could

discuss also Porter’s Diamond Framework during this week. Finally, I will present a real case of Colgate Palmolive in 1992 when we analysed the influence of the

interest rate on the investment opportunity for solution the supply of plastic containers for several lines of products.

2) Relationship between cost of capital and international competitiveness

OECD (2014) highlights qualitative factors for explaining international trade trends and macroeconomic performance of the countries, which are not easy for

quantification as technological innovation capacity, product specialization degree, quality of traded products and after-sales service value, and high productivity

growth. However, the authors explain that these favourable qualitative factors not necessarily would lead to the increase in sales in the foreign markets, because this

increase could be through exchange rate issues, holding constant the performance of exportation. Second, they affirm that it does not exist data of prices or costs for

many goods elaborated in many countries for measuring absolute costs differences between different suppliers. The possibility is to compare indicators about relative

prices or costs referred to certain base period showing changes in ‘relative competitiveness’ instead of levels of it. Third, the measures of competitiveness should be

for all sectors in competition, encompassing the opening to competition of all markets, and built with comparable data. Fourth, they recognize that the focus of the

competitiveness indicators is on the trade of manufactured goods, with strengths and weaknesses. (pp. 149-150). After several trade-offs between different criteria,

objectives, and technical considerations OCDE (2014) describes the international competitiveness indicators as import competitiveness, export competitiveness and

overall competitiveness. I will briefly analyze following the import competitiveness indicator, however you could see in OCDE (2014) how developed the others with

similar concepts.
The Import competitiveness indicator for the past at present defined as ‘PK – PMK’ where PK is the producer price in market K and PMK is the measured price of imports

in market K from country I. For the future it is used PCMK instead of PMK that is the constructed price of imports in market K pondering the sum of all the competitors

of countries i export prices to the market Kby the market share of competitor in market K’s total imports (p. 155). Let me try to perhaps oversimplify all this

referring to the indicator for the past at present then taking PMK. We know from Salvatore (2012) that the firms make pricing by for example the cost plus a mark-up

and that the cost of the products based on labour, capital costs and others. Then in this indicator of import competitiveness, we have besides the labour factor and

the mark-up, the cost of capital factor of both the producers in local market K and the producer in foreign market I. As explained by Salvatore (2012, p. 648) for US

and Japanese markets, cost of capital was one important contributor factor for explaining the competitiveness between both countries in the period 1981-1984 while

there were other forces that ‘overwhelmed’ these high costs of capital since 1995. OECD (2014) also produces other indicators of ‘relative competitiveness’ based on

other issues (p. 153).
WEF (2013) builds a global competitiveness index for each country based on the following subindexes with their corresponding pillars as following. First, the basic

requirements subindex has pillars as institutions, infrastructure, macroeconomic environment, and health and primary education (factor driven). Second, the efficiency

enhancers subindex has pillars as higher education and training, goods and labour efficiency, financial market development, technological readiness, and market size

(efficiency driven). Third, it is the innovation and sophistication subindex (innovation driven) (p. 9). According to the GDP per capita, they weigh the three

subindexes in five stages from factor driven with GDP<US$2,000 to innovation driven with GDP>US$17,000 (p. 10). Please observe the relationship of cost of capital with

the global competitiveness index in all the stages, for example, on the pillars of infrastructure, technological readiness, and innovation, respectively, where strong

investments needed. This indicator shows out of 148 countries, Uruguay 85 ranked (p. 384), Argentina 104 (p. 106), Brazil 56 (p. 134), UK 10 (p. 380), US 5 (p. 382),

for naming some countries.

3) Different interest rates and investment opportunities

From Salvatore (2012, p. 635) we know that one method for accepting an investment project is the net present value NPV function of the estimated cash flow Rt, number

of periods considered t, cost of capital k or risk-adjusted discount rate, and the initial cost C0,.and that the project needs to have NPV>0 for approval.

Thinking on the import competitive indicator I remember in 1992 an analysis we made in Colgate Palmolive. This company used to buy locally to one large manufacturer

all the containers for the lines it produced as the cleaner Fabuloso, the detergent Axion, the powder for cleaning Odex, the deodorant Palmolive de Lujo, the talc

Palmolive de Lujo, etc. Blow and injection molding were the plastic technologies for producing all these containers with respective lids. We were having high costs

from our supplier then asked them for reducing costs however, there was a negative position and charged us incremental prices accordingly to the large inflation of

those years. We began to analyse other options for lowing costs that were to import all of them, to distribute the purchases of these components in several smaller

companies, or to install a facility for producing them. We analysed scenarios for the future inflation, however we knew for security that inflation would reduce so

this would not be a problem. We listed the demand of all the products, and calculated for a period of ten years Ri for each option. We asked for prices from possible

local suppliers, asked for prices that other subsidiaries were having, and estimated costs we would have with an own plant. We also made a project investment to

determine the estimated costs and the initial investment Co of the facility. The Financial Manager together with his colleagues of the other subsidiaries that could

supply us, could estimate labour, financial, and other costs of each container then could estimate together the price that they could give us for a long period. I

remember that these prices were very high despite the economies of scale the other subsidiaries managed. Finally, we selected the option of investing in a plant for

manufacturing the plastic containers. I do not remember the numbers however I remember that there were three issues that definitively made us to take this decision.

One, we could build a robotized plant that no other local manufacturers had then improving the productivity they had. Two, as we had many different containers from

those of the subsidiaries we should have to invest in molding especially for us then we could not take advantage of their production scale. Three, the cost of capital

that Colgate Palmolive could access was much lower than other local manufacturers because of being a MNC of first line. Any optional local manufacturer also had to

invest in new machines for supplying Colgate Palmolive with same labour costs and becoming to have similar manufacturing structure.

4) Conclusions

I analysed the relationship between cost of capital and international competitiveness through OECD (2004) and WEF (2013) indicators for international competitiveness.

There are other approachs that could be used as the Porter’s Diamond Framework I refreshed on Porter (1990), and its improvements as developed by Rugman, Cruz and

Joseph (1993) with a double diamond for explaining the Canadian experience, where also cost of capital considerations are present.

OECD (2014) considers qualitative and quantitative factor at the time of explaining international trade trends and macroeconomic performance of the countries. The

first, as technological innovation capacity, product specialization degree, quality of traded products and after-sales service value, and high productivity growth, are

not easy for quantification. They also not necessarily would lead to the increase in sales in the foreign markets as could be through exchange rate issues, holding

constant the performance of exportation. The second are import competitiveness, export competitiveness and overall competitiveness. The Import competitiveness

indicator for the past at present defined as ‘PK – PMK’, difference between PK, the producer price in market Kand PMK, the measured price of imports in market K from

country I, has implicit the cost of capital factor of both the producers in local market K and the producer in foreign market I.

WEF (2013) builds a global competitiveness index for each country based on three subindexes, the basic requirements (factor driven), the efficiency enhancers

(efficiency driven), and the innovation and sophistication subindex (innovation driven) each with its pillars, weighed in five stages according to GDP per capita. I

observe the relationship of cost of capital with the global competitiveness index in all the stages, for example, on the pillars of infrastructure, technological

readiness, and innovation. Uruguay is ranked 85, Argentina 104, Brazil 56, UK 10, and US 5 in a total of 148 countries.

I showed through an example of Colgate Palmolive how we evaluated different options for solving the problem of the increase of the plastic containers prices by the

supplier we had, with theNPV investment evaluation method. We considered to importing the containers, to distribute the purchases of the components in several local

smaller companies, and to install a facility for producing them. We listed the demand of all the products, and calculated for a period of ten years the cash flow for

each option. The Financial Manager could estimate labour, financial, and other costs of each container if imported then could estimate the prices that the subsidiaries

would give in the following years. Finally, we selected the option of investing in a plant for manufacturing the plastic containers for three reasons. First, because

of improving the productivity local suppliers had. Second, many containers were different from those manufactured by the subsidiaries then requiring to invest in

molding. Third, the cost of capital that Colgate Palmolive could access was much lower than other local manufacturers who also had to invest in new machines if wanted

to supply Colgate Palmolive.

References:
OECD (2004) Indicators of International Competitiveness: Conceptual Aspects and Evaluation, [Online]. Available at: https://www1.oecd.org/eco/outlook/33841783.pdf

(Accessed: 27 September 2014).
WEF (2013) The Global Competitive Report 2013-2014, [Online]. Available at: http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf (Accessed: 27

September 2014).
Porter, M. E. (1990) ‘The Competitive Advantage of Nations’, Harvard Business Review, 68 (2), pp. 73-93, The University of Liverpool (n.d.) Library homepage [Online].

Available at:http://eds.a.ebscohost.com.ezproxy.liv.ac.uk/eds/pdfviewer/pdfviewer?vid=1&sid=2a8d90e5-8e2a-4a9b-bac0-3eedf8e47203%40sessionmgr4001&hid=4205 (Accessed:

27 September 2014).
Rugman, A. M; Cruz, D. and Joseph R. (1993) ‘The “double diamond” model of international competitiveness: The Canadian experience’, Management International Review, 33

(2), pp. 17-39,The University of Liverpool (n.d.) Library homepage [Online]. Available at:

http://search.proquest.com.ezproxy.liv.ac.uk/docview/202690452/fulltextPDF/AD70F01FD7E34AA4PQ/11?accountid=12117 (Accessed: 27 September 2014).
Salvatore, D. (2012) Managerial Economics in a Global Economy. 7th edn. New York: Oxford University Press.