TABLE OI CONTENTS
2 HYPOTHESIS FORMATION
2.2 DESIGN OF THE THESIS
3 LITERATURE VIEW
3.1 THEORETICAL FOUNDATION
3.2 C OMPETITION AND INNOVATION
3.3 C OMPETITION AND GROWTH
4 GERMAN AND CHINESE EXPORT ECONOMY
4.1 COMPETITIVENESS OF GERMANY AND CHINA
4.2 THE EXPORTS OF GERMANY TO RUSSIA
4.3 THE EXPORTS OF CHINA TO RUSSIA
4.4 COMPETITION OF GERMAN AND CHINESE FIRMS IN RUSSIAN MARKET
5 ANALYSIS OF THE THEORIES OF COMPETITION AND INNOVATION
5.1 DOES THE EXPORT COMPETITION BETWEEN CHINA AND GERMANY CONTRIBUTE TO THE INNOVATION OF THEIR ECONOMIES?
5.2 ARE BOTH ECONOMIES ENOUGH COMPETITIVE IN ORDER TO CO-EXIST?
5.3 IS CHINA A THREAT FOR GERMAN EXPORTS?
6 MEETING CHALLENGES OF COMPETITION IN GLOBAL ECONOMY
LIST OF FIGURES
Figure 1 - Impact of competition on TFP growth in technologically advanced and laggard Firms
Figure 2 - GCI 12 pillars of competitiveness
Figure 3 - Growth rate of German Foreign trade
Figure 4- The share of certain products in German exports
Figure 5 - Export destinations of Germany
Figure 6 - German trade with USA and China
Figure 7 - Wage costs For German companies from outsourcing and off-shoring
Figure 8 - Changing export composition of China
Figure 9 - China's top twenty export markets
Figure 10 - Future assessment of Chinese market share
Figure 11 - Germany according to GCI 2013/
Figure 12 - Main problems hindering business in Germany
Figure 13 - China according to 12 pillars of GCI 2013/
Figure 14 - The share of state in financial system of China
Figure 15: Obstacles For business in China
Figure 16 - Russian imports
Figure 17- Survey among German companies operating in Russia
Figure 18 - The share of certain export products from China to Russia
Figure 19 - The impact of Chinese competition on skill upgrading in Belgian companies
Figure 20 - Competition between China and European countries
Figure 21 - Crowding out of EU countries in world competition
Figure 22 - Crowding out of EU countries by China
Figure 23 - Enrichment and threat role of China
Figure 24 - Price policy and crowding out threat of China to Germany
Figure 25 - Threatened economic areas of Germany by competition pressure of China
Figure 26 - Opinion of Germans regarding piracy stemming From China
LIST OF TABLES
Table 1: German-Russian Trade
Table 2: list and value of exported German products to Russia
Table 3 - main products exported From Chinato Russia
Table 4 - exports of China to Russia (January-December)
Table 5 - Trade between China and Russia (January-December; min US dollars)
Table 6 - Trade between Germany and Russia (billion US dollars)
Table 7 - Impact of Chinese exports on increase of patents per worker, IT and TFP in Euro
LIST OF ABBREVIATIONS
illustration not visible in this excerpt
This master thesis researches the export competition between Germany and China. Russian market has been selected as an example in order to explain ongoing export competition in facts and figures. It has been noted that, competition is not only about battle of winners and losers, but it is also about impact of competition on growth and innovation of the economies. Following, the thesis finds out how competition impacts the growth and innovation of their economy and what further actions could be taken in this regard.
The ideas regarding the impact of competition on growth and modernization are controversial in economic literature and therefore different concepts are analysed. Moreover, the competitiveness of export masters has been researched which is an important part of international trade. The competitiveness of China and Germany is considered according to several criteria, which will be mentioned later in the thesis.
Germany and China play a significant role in the world trade and they have bigger shares in imports of different states. These countries have various export strategies in the world trade and in spite of this fact both of them could be considered successful in terms of international trade. Russia is in the list of 20 biggest importers of the world where the share of imports from China and Germany comprise substantial part.
It is notable to stress the fact that since 2010 China has won leadership in Russian market over Germany who has been a number first exporter for a long time. The sales of China to Russia has ever since further increased and exceeded the volume of German exports. This ongoing competition process and its analysis through competition theory take core place in the thesis.
The international trade has been exposed to significant changes especially because of globalization process. The countries are opening borders, removing barriers for trade and adopting proper trade policies. In terms of trade, globalization offers both opportunities for countries and competition pressure. (Gorodnichenko et al, 2008, p. 3) The rapid growth of Chinese exports has put many world countries including EU under tough competition pressure. It has caused concerns and ræsed the question about competitiveness of European countries against China. (Bekovskis et al, 2014, p.1)
As the biggest economy and exporter of Europe Germany also encounters challenges from China. The focus of this thesis is to research the impacts of export competition between Germany and China. In order to have a deep look into the topic, the export competition of the countries on the Russian market has also been researched. Russia has been selected because it is bigger trade partner of both countries. The motivation to write this thesis has been to research the fact that since 2010 China has won leadership in Russian market where Germany has for a long time been number first exporter. (Internet Portal of Foreign Trade, MEDR, 2013) This fact encouraged investigating the factors that make Chinese and German exports successful and impacts of export competition on their economy. Severd theories and concepts explain positive and negative impact of competition. These theories have been applied in the thesis.
Obstacles to competition emerging because of improper government policies or anti-competitive practice by companies are wide-spread in developing countries. Such kind of situation limits the possibilities for innovation and growth; deteriorates the condition of buyers. Oppositely, competitive market enables to invest effectively on different spheres of economy, including education, R&D and infrastructure.
The impact of competition on growth has not been commonly agreed by researchers and there exist controversial ideas. According to Aghi on (2002) there is an inverted บ relationship between competition and innovation where market rewards the innovators.
He has later reconciled this theory with Schumpeterian model allow ing incumbent firms to innovate that are near to technological frontier. (Aghion et al, 2002, p. 3) Inverted บ relationship is effective when the initial level of competition is little so that the laggards have a chance to benefit and survive. (Aghion et al, 2002, p. 4)
The main opponent of this theory is Schumpeterian concept, which presumes that competition reduces the growth and innovation because the scope of the reward to innovators is limited because of tough competition. (Onori, 2013, p. 3) According to Schumpeter the competitive markets are not the most effective institutions to encourage innovation and growth. The stimulus to innovate is the distinction between the profits that can be obtained with investment on research and development or without it. (Gilbert, 2006, p. 159)
According to GCR 2013/2014 the competitiveness of a country is a set of institutions and factors that determine the level of productivity. It determines 12 pillars of competitiveness that have been covered in the next chapters. (GCR, 2013/2014, p. 4)
Atkinson (2013) supports the idea that competitiveness is related to economic health of region's or nation's traded sectors. Under the term economic health the scientist means several factors like jobs and value added. (The amount of value that traded sector firms add to the inputs of production that they purchase). According to author the true definition of competitiveness is capacity of the region to export in more value added terms than it imports. (Atkinson, 2013, p. 2) Moreover, the author states that artificial measures applied by government like discounts, artificial low taxes and currency, subsidies and barriers on imports don't contribute to competitiveness. Such policies may increase the trade surplus but they will not make a nation competitive. In contrast the competitive nation is the one that has trade surplus, few obstacles on imports and limited discounts for exporters. (Atkinson, 2013, p. 3)
The competitiveness of markets is not automatically created business climate but rather is a result of appropriate government policy. There should be no irrelevant obstacles hindering the entry of the company to the market and at the same time the massive exit of the companies because of certain reasons should be regulated by the government. (Godfrey, 2008, p. 4) There is a linkage between domestic and international competitiveness. If the companies of the country are not competitive in internal market then these firms have few chances to win competition in international trade. (Godfrey, 2008, p. 5)
There is observed tough competition between German and Chinese companies over the Russian market. Russia is among 20 biggest importers and it is largest country of the world. The country is rich with resources and it acts as an important supplier of energy resources for both Germany and China. In spite of the fact that, traditionally Germany has been export leader in Russian market in the last few years China has gained the leadership position. The exports of China to Russia have grown very rapidly in a short period of time. The reason of this shift in export leadership has been studied in the thesis.
There are many German and Chinese companies operating in Russia and the competition between them is very intense. This rivalry pushes both sides for innovation of their technologies and get more shares in world markets. From the perspective of competition and innovation theory this ongoing process has a positive impact on innovation and growth of economies.
The impact of Chinese exports on Germany is ambivalent. On the one hand it strengthens the purchase capacity of consumers and Chinese cheaper input products used for production make Germany competitive in the world markets. On the other hand the export destinations of China and Germany overlap in many world markets including in Russia and it overheats the competition.
The studies of Bekovskis and Silgoner (2013) have shown that Germany is less exposed to crowding out pressure of China and it is competitive to withstand competition. Mostly small and peripheral European countries have encountered tough crowding out from China. (Bekovskis & Silgoner, 2013, p. 7)
Moreover, the competition pressure affects positively on skill upgrading of European countries. In the case of Belgium, statistics show that competition pressure from China accounted for 42% skill improvement in Belgian firms. (Mion and Zhu, p. 2)
The competition pressure from China pushes European companies for technological upgrading and between 2000 and 2007 it accounted for 15% technological development. In the same period the patents per worker has increased simultaneously. (Bloom, Draca & Van Reenen, 2011, p. 4)
However, the conducted survey among German companies, politicians and various groups show that the opinions are contradictory. 80% of surveyed economic decision-makers and 70% of German politicians perceive China as a threat rather than enrichment for economy. (Huawei Studies & Infratest research institute, 2012, p 88) Especially the companies are worried about price policy of China, which puts German companies under hard situation. (Huawei Studies & Infratest research institute, 2012, p 90) The economic decision-makers are mainly concerned about three important branches like automobile industry, machinery and Information technologies. (Huawei Studies & Infratest research institute, 2012, p. 94) The exports of Chinato Germany for 2011 have been 79.3 billion Euros and vice versa 64.8 billion Euros. (Huawei Studies & Infratest research institute, 2012, p 26)
The number of German companies in China and oppositely increase periodically from which both sides benefit. Germany takes advantage from enormous internal market of China and at the same time huge labour force and China benefits from technological transfer from German side. (Huawei Studies & Infratest research institute, 2012, p. 98)
The growing environmental problems in the world necessitate switching to green technologies and renewable energies. These new areas of industry are also becoming subject to competition that requires from both sides the best green technology innovations.
It can decrease the dependence of both countries from natural resources and make them even more competitive in the world markets. This issue is discussed in the last chapter of the thesis.
Is China a threat for Germany or enrichment for its economy? Does competition really cause the growth and innovation of German and Chinese economies? These questions will be answered in the next chapters.
2 HYPOTHESIS FORMATION
The core point of this thesis will be to research the impact of export competition on growth and innovation of German and Chinese economies. In this respect competition and innovation theory, competitiveness and Schumpeterian concept will be explored.
- Competition, growth and innovation- According to Aghion (2002) there is an inverted บ relationship between competition and innovation. They are correlative.
- Schumpeterian theory seeks to state that competition is not the best way to increase the economy and it reduces the rewards for innovators.
- Competitiveness includes many factors that make a nation competitive in the world markets.
Traditional industrial organization theories have supported the idea that, the product market competition lowers the innovation because the scope of reward is reduced with high number of competitors. In contrast if there is a monopoly then the reward for an innovator is big and it stimulates the monopolist to innovate.
However, recent studies by Aghion (2002) and other scientists have showed a positive relationship between product market competition and innovation. These empirical researches have also reconciled the Schumpeterian paradigm and formed new approaches. (Aghion et al, 2002, p. 2) Accordingly, the incumbent firms whose technological opportunities are near to frontier they will resist new entries and innovate furthermore. If the company is far from technological frontier then in case of entry they will be driven out. (Aghion et al, 2002, p. 3)
Schumpeterian theory claims that the stimulus to innovate is the financial interest of the company how much capital is it going to make out of new innovation. Provided that the profit from innovation will be high the company will invest into innovation, in contrast when there is tough competition the incentive for innovation will be reduced. Schumpeter stressed the importance of intellectual property rights so the innovator enjoys its invention fully. (Gilbert, 2006, p. 159)
Competitiveness is a broad term that has been a topic for intensive debates among scientists. The pillars of competitiveness that have been reflected in GCI 2013/2014 are applied on our respected countries in order to measure their competitiveness. Moreover, the future perspectives and sustainability of German and Chinese exports have been considered.
In order to make rational outcome for the thesis and relate above- mentioned theories to our case three concepts will be important. Firstly, the theory of authors who support the positive correlation between innovation and competition will be considered. Secondly, Schumpeterian effect will be applied to look at different models of the impact of competition on growth and innovation. Thirdly, the pillars of competitiveness will be employed to research the competitiveness of China and Germany.
Thus, the thesis will focus on the impact of export competition on growth and innovation of German and Chinese economies. Following it will seek to answer these questions:
Does the export competition between China and Germany contribute to the growth and innovation of their economies?
As it was mentioned above, according to the theory of Aghion (2002) there is an inverted บ relationship between competition and growth. The companies of each country can be successful if they invest into R&D and make innovations. There is also Schumpeterian effect determining competition as a negative factor for innovation. The competition pressure from China has caused for growth of patents in Europe. In the next chapters of the thesis this fact will be explained through scientific researches.
Consequently there is a framework for both sides to innovate and increase economic growth.
Are both economies enough competitive in order to co-exist?
In order to understand this question the competitiveness of both sides will be investigated. Chinese and German firms are considered to be proportionally competitive and there are evidences that competition does not result with massive exits of any side.
Is China a threat for German exports?
To answer this question the survey conducted by TNS Infratest among German companies, politicians, social groups and statistical data regarding export volumes of Germany to Russia in different periods will be explored.
This thesis heavily founds on several economic theories that mainly are related to competition and innovation. Different economical articles have been intensively used to look deeper into the topic. The author seeks to explore the theories of competition and then check their impact on economies of China and Germany. In order to implement it several theories will be applied: competition theory, Schumpeterian concept, competitiveness and different attitudes to these theories.
There exist different school of thought and their view on the impact of competition on innovation and growth is contradictory. Thus the author will consider all theories and focus mainly on the concepts on which the theorists have reconciled their ideas.
The statistical data regarding GDP, FDI, export volume in different periods, economic growth rate, surveys and etc will be highlighted. These data will be described also in the form of diagrams. Case studies have been als0 used in the thesis in order to provide examples regarding the impact of competition on increase and modernization. There have been used various sources in three languages: German, English and Russian.
Finally the main method of this paper is to build theoretical foundation and then apply it to the practice.
2.2 DESIGN OF THE THESIS
The beginning of the thesis includes theoretical foundation regarding competitiveness, competition, innovation and growth. It will lead to the empirical considerations and research to be made.
The empirical share of the thesis will highlight the conducted researches and evidences in the specific area of economics to discuss the issues of competition, innovation, growth and competitiveness.
Consequently, the empirical research will contribute to answering main question of the thesis.
3 LITERATURE VIEW
3.1 THEORETICAL FOUNDATION
The core point of the thesis is competition and first this concept should be clarified. In general competition is the rivalry between entities (countries, companies and etc.) who strive for gaining maximum profit. ( Godfrey, 2008, p. 3)
There are classified two types of competition: perfect and imperfect competition. Imperfect competition exists when there are few sellers who are dominating the market. It has several forms like monopoly, oligopoly, and etc. (Policonomics economic dictionary, 2012)
Perfect competition defines the market that the members are not enough powerful to control the market and fix the price. Perfect competition rarely exists in world markets but its efficiency is different according to countries. There are several features of perfect competition:
- No obstacles for entry and exit
- Awareness of participants
- Property rights
- Awareness of participants
- Homogenous products
- Unlimited number of sellers, consumers, and etc.
This type of competition will not fully exist if above mentioned criteria are not met. The market has to be free for all participants so they trade equally. Moreover, the awareness of consumers regarding the products enables them to make rational choice and to be well informed about price, quality, product description and etc. The competition cannot exist without proper policy and therefore effective functioning of institutions or agencies are needed. (Policonomics economic dictionary, 2012) So far we explained the core point of the competition and in the next chapters the impact of competition on growth and innovation will be highlighted.
3.2 COMPETITION AND INNOVATION
As it was mentioned in previous chapters there is still not common point on the relationship between competition and innovation. Schumpeterian concept believes that there is a negative correlation between competition and innovation, because the competition reduces the rents from which the monopoly profits. Aghion (2002) and other scientists have noted to positive relationship between competition and innovation.
However, they have modified Schumpeterian model by allowing incumbent firms to innovate. The companies who are near to technological frontier are forced to innovate in order to escape competition because competition decreases their pre innovation rents. The figure 1 describes how competition affects both advanced and laggard firms.
Figure 1 - Impact of competition on TFP growth in technologically advanced and laggard firms
illustration not visible in this excerpt
Source: OECD (2008, p.19)
By innovating technological leaders will increase post innovation rents to some extent. The firms who are away from technological border will have no incentive to innovate because first they have to reach the level of market leaders and then innovate in order to progress.
Therefore intensive competition will negatively affect laggard companies and reduce their post innovation rents. Shortly said when the level of competition is low there is a chance for laggards to take profit, but in the case of intense competition only neck and neck companies will be able to survive and escape competition by innovating. Neck and neck firms are those who have lower unit costs and they are considered leaders of the market. (Aghion et al, 2001, p. 4)
Aghi on (2001) and the co-authors have brought the activity of UK companies as an evidence of positive correlation between competition and innovation. The empirical research is founded on several UK firms including the period of 1968-1997. (Aghion et al, 2001, p. 5) This period is convenient to study the impact of competition on innovation because at this time lots of changes and reforms took place. These changes were due to execution of EU Single Market program, reforms after the investigation of MMC under the Fair Trading Act and huge privatizations. (Aghion et al, 2001, p. 25)
The data includes 461 companies and out of them 236 are with patent. The data from US patent Office has been extensively used in the studies. (Aghion et al, 2001, p. 26) The conducted research has measured innovative product, the level of competition in the industry, the degree of technological gap between companies (neck and neckness) and threat of bankruptcy. (Aghion et al, 2001, p. 27)
Aghion (2001) also claims that when there is a financial pressure on the firm and it is near to fall into debts the chance for innovation is higher. Because the firm will have to innovate in order to reduce the costs and avoid bankruptcy. (Aghion et al, 2001, 44) The conducted research established the following:
- There is an inverted บ relationship between competition and innovation
- The equilibrium level of technological "neck and neckness” among firms decrease with competition
- The higher the "neck and neckness” in an industry, the deeper บ relationship between competition and innovation (Aghion et al, 2001, p. 43)
The equilibrium level of technological neck and neckness among companies diminishes with competition and the larger the level of neck and neckness in the market, the deeper is the inverted บ relationship between competition and innovation. Schumpeterian theory dominates when the degree of competition is high and laggards cannot catch up with innovators. Another point that Aghion (2001) and his colleagues put forward is debt pressure which makes firms innovate especially in the low levels of competition. The usage of empirical researches and evidence regarding UK firms confirm inverted บ relationship between competition and innovation. (Aghion et ฟ, 2001, p. 45)
Gilbert (2006) has researched competition and innovation focusing mainly on intellectual property rights that have a big impact on research and development. R&D is a driving engine that stays behind the innovation. (Gilbert, 2006, p. 160)
The author states that exclusive rights create stimulus for modernization in high competitive markets and nonexclusive rights have opposite effect. (Gilbert, 2006, p. 192)
However, there are some exceptions, which will be discussed in the thesis. The power of intellectual property protection is a big factor for profit from invention because it defines to what extent the owner can enjoy the new invention. If the inventor has an opportunity to license new discovery then the amount of profit will be high. (Gilbert, 2006, p. 162) In contrast if an inventor does not have strength to prevent the invention from imitation the profitability will decrease. In general the new inventions are protected according to exclusive intellectual property rights like patent. By using patent the inventor will be able to maximize the profit and to raise the value of discovery. However, the patent will not stop the competition from other firms who can discover something around of new invention. (Gilbert, 2006, p. 163)
Competition affects negatively on R&D if there exist nonexclusive rights as there is no protection for inventors. (Gilbert, 2006, p. 204) However, it is unrealistic to believe that most markets grant such rights for inventers and therefore most of them prefer to keep the discovery in secrecy. If compare the monopolist who has filli intellectual property right and the firm in competitive market, then the latter has more incentive for modernization. The monopolist enjoys the benefits from old technology and it has less incentive to innovate as the profits from old technology will be lost. There is not pressure on the monopolist from other firms. Arrow shows that, the company with exclusive rights in competitive market will have more stimuli for innovation. (Gilbert, 2006, p. 165)
Gorodnichenko (2008) and other scientists focus mainly on the impact of globalization on innovation in their studies. According to authors large multinational companies and their supply chain all over the world contribute to the transfer of knowledge and other capabilities to domestic firms. Apart from it the external competition also drives domestic firms to innovate and withstand the rivalry. The authors claim that innovation by domestic firms takes place mainly because of foreign direct investment and foreign competition. (Gorodnichenko et al, 2008, p. 31)