The Post Keynesian Notion Of Competition

Published Date: 02 Nov 2017

DRAGATAKI EFSTATHIA

Contents

1. Introduction

It is general accepted that the competition and its effects on key economic variables have always been of high importance both for theoretical and empirical studies. The main theories of competition that will be analyzed in this paper are the neoclassical theory, the post-Keynesian and the classical theory (Shaikh, 1980; Eichner, 1985; Semmler, 1984, 1990; Ochoa and Glick, 1992) that are used in order to evaluate the competitive conditions in the manufacturing industry. In addition, studies regarding the manufacturing sector are presented so that the competitive conditions of the Greek market can be obtained. Furthermore, the results of different studies show the main factors of the competition in the manufacturing industry. The situation that exists in the last decade in Greece due to the economic crisis and its results in the manufacturing sector are also included in this paper. Proposals for improvement of the current situation are also presented in the end of the paper.

2. Literature Review

Manufacturing Sector

The competition that increases in the European Union and the markets affect the Greek Manufacturing sector. The manufacturing sector in Greece is relatively small compared with other European countries. The percentage of the workforce related to the manufacturing sector is approximately 20% in the Greek market. The main manufacturing centers in Greece are in the large cities such as Athens, Piraeus, Thessaloniki, Heraklion etc. The manufacturing industry is a sector that was always interesting for analysis and in this paper is presented the competitive conditions of the sector regarding the Greek market before and after the economic crisis.

In the past the manufacturing sector was developed in Greece as in many other countries. The companies in Greece are mainly small and medium enterprises which try to introduce new technologies and be competitive. There were many companies related to that sector which made large investments, were profitable and successful. It was actually a sector that employed a large amount of people in the geographically small Greece in comparison with other European countries. All the firms tried to be competitive and make short term or long term profits (Fotopoulos and Louri, 2000). In addition, there was a huge increase in production during before the Olympic Games of 2004.

Unfortunately the situation changed due to the worldwide economic crisis and especially the financial crisis that boomed in Greece. The operations in the manufacturing industry declined and the effects are obvious. In general during the last decades the manufacturing firms were re-located in neighbor countries in the Balkans so the operation costs can be less. What is more, the new regulations do not offer the opportunity for large investments and developments so many of the companies are nowadays trying to survive the crisis as in all the other sectors. It is general accepted that the banking system and the general current financial situation do not give any chances for funds and as a consequence the firms cannot be as competitive as they used to be in the past (Borg, M. (2009).

It is a matter of fact that there is a great amount of literature investigating the manufacturing sector and its competitive conditions such as Hindrinks (1999) and Gorg and Warzynski (2003). There is, however, a lack of recent research which investigates the market structure of the Greek manufacturing industry during the Greek Crisis.

3. Competitive Theories

This section presents the already mentioned competitive theories, their core models and the key variables of each model that are used in order to calculate the competitive conditions of the manufacturing firms.

Neoclassical theory

In the neoclassical theory the meaning of competition has a static meaning which would prevail if there were free entry and exits of companies. The firms in that theory are passive and influenced of the consumers preferences. They are influenced mainly from external parameters and that makes them the "passive" recipients. The competition is mainly dependent on the number of buyers and sellers of the company and also from the general structure of the industry. In Neoclassical theory the larger the number of the companies the more successful is their competitive behavior. On the other hand, it is stated that the smaller number of the sellers and buyers, the more oligopolistic model and behavior is the behavior of the firms. The key factor of the neoclassical theory is the market structure of a sector. According to Joe Bain (1951) the main strategic economic variables of the neoclassical theory are the concentration ratio, the entry barriers the collusion etc. in addition, he adds that these variables present the imperfection of the market. The model that is used for the neoclassical theory is:

(1)

where π is some measure of profitability,

c is the constant term,

CR is a measure of the concentration ratio

and MP is the imports penetration variable.

The plus and minus signs that are presented above the independent variables indicate the direction that is theoretically expected according to the changes of each variable. That also shows how the profitability of an industry is affected.

In this formula the profitability has a direct relationship with the concentration ratio.

Fisher and McGowan (1983),Long and Ravenscraft (1984), and Sherer and Ross (1990).

The Classical notion of competition

According to many theories such as Adam’s Smith (1776), David’s Ricardo (1817) and Karl’s Marx (1894) competition is the process which is mainly characterized by the mobility of capital and labor. In addition, they state that it is related with the sector’s equalization of the profit, supply and demand rates. In the classical theory the competition of the firms is an intertemporal process and the free competition is not taken under careful consideration as in the neoclassical theory. In general in the classical theory of competition, the competition is much broader than in the neoclassical theory.

The classical model which calculates the profit (margin) differentials is:

(2)

where π is some measure of profitability,

MP is the imports penetrationwhich is added to capture the international dimension of competition

KS is the capital-sales ratio,

and IS is the input (intermediate goods) to sales ratio.

According to the formula there is a significant relationship between profitability and the conditions of the production. What is more, the ratio of capital to sales is related to the profits. The positive and significant constant term represents the tendential equalization of profit rates across industries and the establishment of average profitability.

The post-Keynesian notion of competition

Another important theory is the Post-Keynesian theory of competition that many economists support. This theory is mainly related with sectors that have a large number of producers and are characterized of short run supply and flexible prices. In this theory the capital is related mainly by demand and not by profitability. The changes in the rates don’t affect directly the prices, and the prices are changing according to the cost. The model that is used to calculate the profits is the following:

(3)

where π is a measure of profitability,

CR is the concentration ratio , MP is the imports penetration,

GD represents the growth rate of demand,

and IKOR is the incremental capital-output ratio, " Eichner (1986, p. 50).

In this model the increase of the profits are related to the concentration ratio, the growth rate of the sector and the capital-output ratio. As already mentioned in previous models the positive and significant constant term stands for the positive average rate of profitability.

4. Competition and Profitability

According to Porter (1990) the competitiveness of national economies has turned into a major parameter of the economic policy the last decades worldwide. In addition, according to Zahra and Govin (1993) the need of the firms to be globally competitive led the manufacturing strategies one of the most important factors in the market success.

During the last years there were made many researches and analyses regarding the manufacturing industry and the low levels of competitiveness. One of these studies is the one of Skinner (1969) who tried to define the manufacturing strategy and how it can both be supported by productive investments and be integrated in corporate strategy. Another factor that was studied in manufacturing sector is the huge development of information technology and the competition that it created among the firms. It is a crucial factor regarding that sector according to Zahra and Govin (1993).

What is more, regarding the new developments and technologies Hamel states that "Nothing is the same as yesterday", (Hamel, 1996). That is true because the companies that could not respond in the technological changes and be competitive they faced many difficulties of survival.

Korter states that the companies that could not invest in new technologies, human resources, sales and other operational changes , didn’t have any competitive advantage and it was difficult for them to face the competitors (Kotter, 1995).

It is a matter of fact that many businessmen in Greece believe that the low productivity is a matter that is influenced mainly from external factors and not in the company (Thracian Manufacturers Association Newsletter, 1997; Duck, 2001).

The main factors of the competition in the manufacturing industry which are related with the cost and affect the competition between the firms are many. For example, the quality of the products used is very important factor. In addition, the technology and the new products, the networking and the services provided to the customers are of high importance as well. The rapid reaction to the general external conditions of the market and the competitors and the continuously satisfaction of the customers should also be taken under careful consideration. According to Christensen, the companies that will survive into high competition are those who will develop and invest in new knowledge and technology (Christensen , 2000). By that way the manufacturing firms will operate effectively and efficiently and will be successful.

Another important factor that plays a major role in the competition in the manufacturing industry is the adaptation of the new developments. The way that the companies adapt for example the new technologies are divided into two main categories according to Clark (OECD, 1996; Clark et all, 2004).

The first way refers to the process of production internally such as the manufacturing strategies and the improvement in the general operations. The second way that companies adapt the competition changes has mostly to do with the external environment, the position of the company in the market place and the adaptation of the new market regulations.

In order to be able to have a correct conclusion regarding the investments and the competition in the manufacturing industry, should investigate many different firms according to Skinner (1974). In his study he investigated many companies and he emphasized in the capital investments and the competitive advantage of the companies. He concluded that there are some investments which can give the competitive advantage in the manufacturing companies. One of them is the investment in the manpower. Another important investment that a company can make is the smart marketing tools which can help the company to attract more customers. The investment in new products and new technology that is always developing is of high importance, too.

The research regarding the competitiveness of a manufacturing company should be qualitative and quantitative measuring the cost, the quality and the satisfaction of the customers Bain (1956). Furthermore, he adds that the competitive advantage of a company can be measured of the investments in the employees, education and products in comparison with its competitors.

In the study of Kotha and Orne, the results regarding the competition in the Greek manufacturing companies were not very satisfactory. According to their findings, the investments were made only to reduce the costs of the company. In addition, the low cost production led the satisfaction of the customers to be a less important factor for those companies. Last but not least, the investment decisions and changes in most of the companies were made only for short term success and profit (Voulgari, F., Asteriou, D. & Agiomirgianakis, G.,2000).

The manufacturing sector is not growing the last years due to the economic situation in Greece and companies try to find solutions in order to be competitive. Some of them changed their target groups and other tried to operate in different Balkan countries where there is much more chances of growth. Due to the crisis that the sector is facing the last years, the firms in order to stay competitive are trying to find new lower labour cost markets.

According to a later research from Reziti and Kalatzi (2011) the Greek manufacturing sector does operate under non competitive conditions during the period 1984-2007.

In addition, they state that the sector appears to operate under imperfect competition in more detail the findings of the research are the following:

1984-1993 there was an increase in the manufacturing sector due to the Single European Market

1993-1994 decrease in the sector due to the new Development Laws and Operation programs

1994-2000 increase due to the banking system

2000-2007 increase of the manufacturing sector due to the launch of Euro

5. Conclusions-proposals

The competitive conditions of the Greek manufacturing sector are an issue that is of high importance. The main competitive factors that play important role in the growth and the success of a firm is the new developments and investments according to the market’s needs and the quick adjustments in the regulations. It is very interesting that the findings of previous researches in the Greek market showed that the competitive strategies are not efficient in the long term. The general situation that exists in Greece such as the regulations, the banking system and the new measurements that the government takes had led the companies to search for other markets. That should change so that there will be created a healthier environment for the manufacturing industry and will help its growth. The increase of the cash flows, the good bank relations, the research of alternative financing solutions and new strategies (investments) should lead to the future improvement of the competitiveness of the Greek manufacturing firms.