We might begin to develop the importance of international competitiveness to the UK economy by first reminding ourselves of the two main ways it is discussed in the literature. These are in terms of 'ability to sell' and 'locational attractiveness'. Accepting for a moment the usefulness of the notion of 'national competitiveness', a country's' ability to sell internationally will depend on its relative cost structure, productivity and exchange rate, so the policy areas more or less identify themselves automatically here (though not the policy options). The ability to sell approach is the traditional one. It focuses on the current account of the balance of payments, particularly the trade account. A premier measure of competitiveness is the relative unit labour cost (RULC), usually in manufacturing.

The locational attractiveness approach arises in the context of the internationalization and efficiency of financial markets, mobility of capital, and the way that intertemporal investment decisions are thought to follow a logic of utility maximization in an interdependent world. This approach would stress how balance of payments adjustments are secured via capital flows, and would look more to the decision of private agents in terms of their investment decisions, and thus focus on the capital account of the balance of payments. A premier measure of compet itiveness with this approach might thus be FDI flows. The policy areas here have to do with making a country attractive for investors, so they probably embrace a wider set of options than just the traditional ones associated with the ability to sell.

Although these two approaches are often presented as though we should choose between them (one is correct and the other isn't), it is probably wise to think of them as complementary and interdependent rather than as competitors. It is useful to examine ho w the UK has fared in relationship to both these main measures over the post-II World War period.

In the case of the RULC and 'ability to sell', the long term trend until the late 1970s was for the UK economy to show an improving competitiveness posit ion. There was a dramatic loss of international competitiveness between 1979 and 1981, and then the longer term trend of improving competitiveness, measured by RULC, tended to re-established itself. The story for the US economy is much the same as this, t hough the loss of competitiveness for the US lasted longer in the 1980s (to 1985) before the re-emergence of the older trend. The sources of improvements in the UK have mainly been through exchange rate adjustments (devaluations), while for the US economy they have mainly been through domestic labour cost adjustments. Comparing these experiences with those of Japan and Germany is interesting since there the trends have been more or less the opposite. Japan and Germany have been losing competitiveness in R ULC terms almost over the entire period since the 1960s.

Thus the counter-intuitive paradox here, noted first by Kaldor in the 1970s, was that as the US and the UK were improving their international competitiveness, they were loosing out on their trad e accounts, and while Japan and Germany were loosing their international competitiveness, they were improving or maintaining their trade account surpluses. This is probably a well known result amongst economists, but it is important rhetorically and polem ically. In as much that governments insist on driving down their relative labour costs in the name of some expected beneficial effects on their current account, if historical experience is anything to go by there may be no such benefits. To some large ext ent it is this kind of a result that led to a disillusionment with the RULC measure of international competitiveness, and the rise in popularity of the locational advantage approach. Let us now examine this in the UK context.

A great deal is made of t he terrific record of the UK as a destination for FDI, demonstrating the success of liberalization, deregulation and policies for flexibility adopted in the UK over the last fifteen years or so. However, this success should not be exaggerated. The UK has been a consistent net exporter of FDI in every year since the growth of FDI took off in the early 1980s, except for small surpluses in 1982 and 1990. During the 1980s it became the largest single outward investor in the world. In addition, before the 1980 s the UK was also a large external investor. The result is that in 1995 whilst the stock of inward investments was £160bn, the stock of outward investments was much larger at £219bn. This would seem to indicate to the 'locational non-attractiveness' of th e UK economy in this regard. The only large industrial economy that displays a long-term locational advantage on this measure is the USA, which since 1983 has consistently been a net importer of capital.

An important (policy) issue arises here concern ing the quality of official analysis in this area It is claimed that inward investment has served to preserve 770,000 British jobs, but given the net FDI exporting position, wouldn't we expect there to be an overall net loss of jobs as well? British indus try is being 'hollowed out' by this process. As far as I can judge there are no official calculations of this. Secondly, it is claimed that outward FDI added positive flows to the BoP in terms of interest, profit and dividend receipts -- £24bn in 1995. Bu t the net position was much less, at only £6bn. Also, what are the possible loss of export receipts to the UK economy as a result of the net export of its investment capital? One important thing a different incoming government could do, therefore, is to e stablish a serious and on-going 'social audit' on the full consequences of FDI flows into and out of the economy, so as to provide proper information on which to base public discussion and official decision making.

Clearly, both the approaches indicat ed above suffer analytical and policy problems, so perhaps we should not expect too much from either of them. The RULC approach continues to emphasise international cost and price competition. A possible resolution of the 'Kaldor paradox' mentioned above, then, is to highlight 'quality' rather than 'quantity' as the growing determinant of international success. In principle, this would seem extremely important and potentially fruitful. Whilst one does not want to (cannot) ignore prices and costs altogethe r, the emphasis is shifting to quality indicators. Here the UK has a mixed record to say the least. The disastrous consequences of ignoring quality can be judged by the recent beef crisis. Studying the ways continental Europe, and elsewhere, go about esta blishing and monitoring agricultural quality norms and standards, for instance, would be useful. Do we need a new 'economy of conventions'? The Anglo-American tradition tends to leave these important matters to either self-regulation, to the consumption-e nd of economic activity (retail chains and consumer choice), and to universalized information and dissemination packages (and packaging!). In Europe, and elsewhere, it is managed much more at the production level, or in respect to local producer/municipal organization (who do the monitoring themselves), and or has a stronger institutionalized base. The advantage of establishing, monitoring and regulating quality is that it is not so affected by 'globalization' as are other more overt policy initiatives. I t need not implicate treaty commitment already entered into with international organizations governing trade and commerce.

The way this has taken off (perhaps only half-heartedly, however) in the UK is via 'benchmarking'. The trouble with this is that it may just encourage a simple 'copying' of already existing, products, techniques and processes, which mirrors current best practice. Competitive advantage is gained by an innovative capacity to jump to a new performance plateau, so benchmarking leaves all this work still to be done. But one shouldn't be too cynical. Enhancing and developing the benchmarking process at least provides a means by which best practice technique could be diffused. Bye and large British companies are unused to this and often openly hostile to the levels of cooperation it requires. If they refuse to cooperate, however, there is little that can be done at present. In general terms the UK has a smaller stock of 'world class companies' that the size of its economy would warrant.

The introduction of the nature of British companies serves to raise a number of other issues associated with international competitiveness. The RLUC and FDI measures pertain to economies rather than to companies, and it may be worthwhile trying to kee p these two apart at a number of levels. To start with there is the old nut about comparative advantage and competitive advantage; the one pertaining to the economy, the other to its companies. Whilst it is clear (as Jonathan remarked in his previous pres entation) that an economy always has a comparative advantage in some line of production, it is not clear that an economy will always have a competitive advantage in a line of production if such a competitive advantage is dependent upon the success of its companies. Companies may be unsuccessful in all lines of production. This is doubly so if we take the dynamic increasing returns modelling literature seriously. Bandwagon effects, positive feedbacks, learning by doing, etc. can all lead to successful traj ectories for companies or products, that completely out-compete others, but which are not necessarily the most efficient or optimal outcomes.

John Kay has argued that the UK maintains a national comparative advantage in areas where the English languag e is important -- publishing and audio-visual media, and tertiary education -- in areas like chemicals and pharmaceuticals, in aviation electronics and engines, in insurance and some other financial services, and in retailing. These have been British succ ess stories, based upon the competitiveness of British firms. Thus the key to a revealed comparative advantage for the UK economy is the competitive advantage of its companies. It is important, therefore, for both companies and governments to recognize an d foster those factors that account for the present configuration of performative success, and to nurture those that might present opportunities to construct new comparative advantages in the future. From this perspective there is little point in trying t o enhance the existing domestic competitive configuration of sectors or branches where other countries and their firms already demonstrate current comparative advantage. Trying to emulate the current comparative success of elsewhere is unlikely to enhance the long-run strengths of the home economy, it is argued. However, this can be successful at times, as shown by the decision to foster the European aircraft industry against the predominant strength of that in the USA. Thus contrary to the fine grain of Kay's strictures a country should not totally write-off the potential of a coordinated attempt to emulate or outperform an already highly successful international competitor.

An important consequence of stressing the differences between companies and countries is that we can draw a sharper distinction between what might be good for an company and what might be good for an economy. These two do not always coincide. For instance, what firms do to improve their international efficiency and competitivenes s may have detrimental effects upon the economy as a whole, as in the case the way the labour market operates to displace problems of employment and training away from firms and on to the economy as a whole. Th Decisions by UK companies over FDI mentioned above is another potential example of this mismatch. Thus there may well be very efficient and internationally competitive firms operating in an economy while that economy overall is becoming less internationally competitive or declining. Indeed, this in creasingly looks to be the pattern settling in around the UK economy. Small 'pockets' of economic efficiency, wealth and competitiveness, congregated around successful firms or branches of industry, co-existing with a generalised poor performance of the a ggregate economy characterised by stagnation, growing poverty, inequality and inefficiency.

Finally, we might want to be modest in the expectations that can be generated from any policies to promote international competitiveness organized around the c oncerns expressed so far amongst this group. Historical reflection demonstrates that there is no systematic or robust evidence to causally link economic innovativeness, educational levels, R&D expenditures, training competencies, or any of the other worth y (socialist or social-democratic) supply-side initiatives that are spoken about, with international economic performance and success. Much more important than these specific measures are the general institutionalized operation of the labour market (eg., centralized v decentralized bargaining), the forms of the 'social settlement' between the social partners or organized interest groups, the form of the financial system, the constitutional nature of company governance systems, and so on. The question is, how far are these institutionalized structural features of the British system open to reform or policy initiatives?

And as a final footnote it should be emphasised that all these approaches concentrate exclusively on economic measures of international competitiveness. In fact this emphasis typifies all debate in this field. But it is worth making the point that this narrowly defined way the international competitiveness debate has been set up leads to a neglect of other important elements that go to m ake a nation 'competitive', many of which are non-economic. For instance, the idea that a country can be successful in the modern world without it having a lively, innovative, pluralistic and open political and aesthetic culture is hardly credible. Yet th ese are precisely the issues neglected and dismissed by the headlong rush to redefine everything in terms of economic competence and managerial prerogative. A country that refuses to actively foster a critical 'culture of ideas' will quickly become margin alized and isolated. This will eventually impact on its international competitiveness in an adverse way.