International competitiveness: overview

Drivers of competitiveness

4. The economic drivers of competitiveness can be split between macro- and micro-economic factors. The Scottish Government has more limited influence over macro factors such as the political and social environment; the regulatory (including labour market) and legal environment; the tax regime (individual and business taxes); and openness (to trade and migration). Stability is often viewed as a pre-requisite for competitiveness across these factors.^[5] Globally, and within the UK, the most recent period has been highly unstable given external events.

5. The Scottish Government has a significantly higher degree of policy control over microeconomic factors, for example: competitiveness of our businesses/sectors; some taxes/business rates; business investment and R&D; skills and labour market; access to finance; and planning.

6. It is necessary to underline that Scotland is part of a large, island economy, which is highly integrated with the UK economically, so many relevant important elements/factors influencing the competitiveness of the UK will also affect Scotland’s competitiveness.

7. These are reflected in the factors used by the IMD for their ranking, which is based on 336 criteria, derived from research on drivers of competitiveness, and summarised as follows:

Economic performance – domestic economy, international trade and investment, employment, prices

Government efficiency – public finance, tax policy, institutional framework, business legislation, societal framework

Business efficiency – productivity and efficiency, labour market, finance, management practices, attitudes, and values

Infrastructure – basic infrastructure, technological infrastructure, scientific infrastructure, health and environment, education

8. With 336 criteria, the drivers of competitiveness range widely, for example, from “hard” factors such as tax policy, labour costs, interest rates, and tariffs, to aspects such as the availability of skilled labour, the gender unemployment ratio, attitudes towards globalisation and income distribution.

9. Based on this index, the three most competitive global countries are Singapore, Switzerland, and Denmark, with the UK ranked 28^th. The IMD notes that the top performing countries are small economies that make good use of their access to markets and trading partners.

10. The rankings are also illustrative of the different paths countries can take to achieve competitiveness. For example, the top performing countries according to the IMD (see table below) vary significantly in their tax policy rankings, with the top ten featuring both lower tax and higher tax economies. Other factors, such as education, are more uniformly prominent in the rankings of the top ten.

11. In another example, of the top ten countries in a global ranking of international tax competitiveness^[6] only two feature in the IMD top twenty and only Switzerland features in the top ten.

12. It can be seen, then, that competitiveness is based on a broad package of factors that includes taxes, including personal/income taxation, but that a key consideration is not simply the level of these taxes but how the revenue raised is spent – and tied in with effective institutional arrangements – to achieve the wider package of outcomes which together drive competitiveness.^[7]

13. The dynamic of time is also important to consider, as are differences between perceptions of competitiveness and actual competitiveness. Businesses will look to the longer term beyond the political cycle when making investment decisions. Changes in competitiveness usually happen incrementally over time, reflecting a major political, technological, or structural change in an economy or market, with adjustment taking place through market factors such as labour supply, wages, prices, and technology. However, some elements of competitiveness can change more quickly, such as those affected by unexpected tax and spending decisions, Given the range of factors which influence a country’s competitiveness, it is difficult to attribute change to a specific factor. However, a weakening or strengthening of a country’s competitiveness is manifested through changes in growth, living standards, and general well-being.

14. More broadly, the Scottish Government’s wellbeing economy ambitions support a focus on competitiveness, not as an end in itself, but to support a strong economy that has a purpose. A fair, green, and growing economy, which benefits all of Scotland’s communities and people, is critical to delivering the four interconnected priorities identified by the First Minister.^[8] A thriving economy is essential to eradicating child poverty, as well as tackling the climate emergency and delivering stronger public services, making a positive impact on the lives of people across Scotland. Competitiveness should therefore be considered through a broader perspective. This is consistent with the World Economic Forum’s evolving approach to competitiveness.

Case Study: EU Exit

EU exit is an example of a more immediate change in competitiveness. It has meant an increase in trade frictions for businesses and a reduction in openness in the UK and Scottish economies, which has affected competitiveness and productivity by negatively impacting trade, labour supply (through recruitment constraints), and investment. The Office for Budget Responsibility assumes this will lead to a 4% reduction in productivity in the long-run and the National Institute for Economic and Social Research estimated a 2.5% hit to GDP due to EU exit in 2023, increasing to 5.7% by 2035. It, notably, has reduced the attractiveness of the UK as an English-speaking base for exporting to EU markets, resulting in it being overtaken by France as the leading destination for FDI into Europe (though FDI into the UK rose in the last year). (EY Attractiveness Survey, Europe, June 2024 ).