To try to explain the reasons for these high rates of “failure” in the M&A market, professors Christensen, Alton, Rising and Waldeck at the Harvard Business School, propose a theory that in summary says: “Many M&A fail to meet expectations because the acquisition targets are not chosen properly and as a consequence, many companies pay the wrong price and integrate the acquired company in a wrong way”

The researchers establish two main reasons that lead a company to undertake an acquisition:

1.- To boost company´s current performance

a) to hold on to a premium position or b) to cut costs. An acquisition that delivers those benefits almost never changes the company´s trajectory in part because investors anticipate and therefore discount the performance improvements

2.- To reinvent the company´s business model and fundamentally redirect the company

Almost nobody understands how to identify the best targets to achieve that goal, how much to pay for them, and how or whether to integrate them

The following is a summary of the paper published on the Harvard Business Review, in which the implications of the theory mentioned above are explored and is intended as a guide to improve the selection of acquisition targets, pay the correct price in a transaction and  to properly integrate an acquisition in order to improve the success rate.

What are we acquiring?

The success or failure of an acquisition lies in integration. To foresee how integration will play out, we must be able to describe what are we buying. The best way to do so is to think of the target in terms of its business model. As defined by authors a business model consist in four interdependent elements that create value: 1) Customer value proposition 2) Profit formula 3) Resources and 4) Processes. According to this, two types of acquisitions are proposed: i) those aimed at appropriating the “resources” of another company (LBM “Leverage the business model” ) and ii) acquisitions that seek to acquire new business models (RBM “Reinvent the business model”).

The authors indicate that in the right circumstances, the element “resources” can be extracted from an acquired company and plugged into the parent´s business model, because the resources exist apart from the company. On the other hand, profit formulas and processes do not exist apart from the organization and they rarely survive its dissolution. But a company can buy another firm’s business model, operate it separately and use it as a platform for transformative growth.

 How to achieve the objectives of an acquisition?

To achieve the objectives in a purchase transaction, it is necessary to be clear about for what purpose a company is being acquired. The authors mention two 2 basic objectives: a) Improve the current performance of the company or b) Reinvent the business model of the company

Improve the current performance of the company

So many companies turn to LBM acquisitions to improve the output of their profit formulas, but the conditions under which an acquisition’s resources can help a company accomplish either goal are remarkably specific.

Acquiring resources to command premium prices

The surest way to command a price premium is to improve a product or service, in other words one whose customers are willing to pay for better functionality. Companies do so by purchasing improved components that are compatible with their own products or acquiring the needed technology and talent (IP). In this case it is necessary to ask:

• What are the critical measures of performance that customers value in your product (speed, durability, functionality)?
• Would most customers be willing to pay more if you improved the product on those measures? (Do they value the extra speed, longevity, or functionality enough to pay more for it?)
• Can the resources of the acquired company substantially improve your product in ways that customers would pay more for?

Acquiring resources to lower costs

An acquisition of resources whose objective is to reduce costs is based on the fact that the acquiring company “plugs” certain resources of the acquisition in its existing model, discarding the rest of the acquired model and shutting down, laying off or selling redundant resources. To determine whether an acquisition of resources will help reduce costs, it must be established whether the acquisition resources are compatible with those of the acquirer and its processes, and then estimate whether the scale increases will actually have the desired effect.

If the resources of the target company are compatible with the resources and processes of the acquiring company, the acquisition is likely to improve turnover or use of assets and fixed costs. For companies in industries where fixed costs represent a large percentage of total costs, scaling up through acquisitions results in substantial cost savings in manufacturing, distribution and sales. But in industries where cost competitiveness can be achieved at relatively low levels of market share, a company that grows beyond that does not reduce its cost position, but replicates it. Acquisitions that are justified by economies of scale in administrative costs such as purchasing, human resources, or legal services often have disappointing effects on the profit formula.

Some critical questions posed by the authors of the research that should be formulated before an acquisition of this type:

Resources

• Will the acquisition´s products fit into my product catalog without creating confusion?
• Do its customers buy products like ours, and vice versa?
• Can the output of the acquisition´s factories be used with minimal adjustment by our supply chain and distributors?

Processes

• Can the acquisition´s offering be sold according to our sales cycle?
• Can my people readily service the acquired customers?
• Can its products be produced in our factories, and vice versa?
• Will the quality of its offerings be enhanced by our rules for managing procurement, IT systems, and quality control systems?

The temptation of one-stop shopping

The authors warn that in circumstances in which companies seek to increase the current benefit through LBM agreements aimed at the acquisition of new customers, the success stories identified include the fact of selling to customers “acquired” the products they were already buying before the acquisition. Purchases made for the purpose of cross-selling products succeed occasionally and only if customers need to buy those products at the same time and place.

They cite as an example the Citigroup case and the acquisitions that it made to create a kind of “financial supermarkets,” thinking that customers’ needs for credit cards, checking accounts, wealth management services, insurance, and stock brokerage could be furnished most efficiently and effectively by the same company. Those efforts have failed, over and over again. Each function fulfills a different job that arises at a different point in a customer’s life, so a single source for all of them holds no advantage. Cross-selling in circumstances like these will complicate and confuse, and will rarely reduce sales costs.

Reinventing the business model

The  groundwork for long-term growth is creating new ways of doing business, since the value of existing business models fades as competition and technological progress erode their profit potential, RBM acquisitions help managers tackle that task.

If cash flow groes at the rate the market expects, the firm’s share price will grow only at its cost of capital, because those expectations have already been factored into its current share price. To persistently create shareholder value at a greater rate, managers must do something that investors haven’t already taken into account—and they must do it again and again.

Acquiring a disruptive business model

The authors mention that the most reliable sources of unexpected growth in revenues and margins are disruptive products and business models. Disruptive companies are those whose initial products are simpler and more affordable than the established players’ offerings. They secure their foothold in the low end of the market and then move to higher-performance, higher-margin products, market tier by market tier. Although investment analysts can see a company’s potential in the market tier where it’s currently positioned, they fail to foresee how a disruptor will move upmarket as its offerings improve. So they persistently underestimate the growth potential of disruptive companies.

Acquiring to decommoditize

One of the most effective ways to use RBM acquisitions is as a defense against commoditization. Over time, the most profitable point in the value chain shifts as proprietary, integrated offering metamorphose into modular, undifferentiated ones. The innovative companies supplying the components start to capture the most attractive margins in the chain. Firms in this situation should instead migrate to “where the profits will be”—the point in the value chain that will capture the best margins in the future.

Some critical questions posed by the authors of the research that should be formulated before an acquisition of this type:

Can This Acquisition Change Your Company’s Growth Trajectory?

• Is the acquired company’s product or service simpler and more affordable than the established players’ offerings?
• Do this simplicity and affordability enable more people to own and use the product or service? Is it good enough to suit the needs of a variety of customers?
• Can the acquired company’s business model scale upmarket to yield a stream of progressively higher-capability products and services?
• Do established players and the company’s offering profitable enough to replicate, or is the company playing in low-end markets that incumbents are content to ignore?
• Does the acquired company reposition you to capture the most attractive (future) profts in the industry’s value chain?

 Paying the right price

The authors state that because RBM acquisitions increase the shareholder value creation rate more effectively, they should have a relatively higher price than LBM acquisitions.

They indicate that in some cases of LBM acquisitions, prices have been paid well above the level that could justify the cost synergies. For that kind of deals, they say, it is crucial to determine the target´s worth by calculating the impact on profits from the acquisition.

For LBM acquisitions, the correct comparables would be companies that make similar products in similar industries. For RBM acquisitions,however,  such comparables make disruptive companies seem overpriced, deterring companies from pursuing the very acquisitions they need for reinvention.  In fact, they say, the right comparables for disruptive companies are other disruptors, regardless of the industry.

Avoiding integration mistakes

Authors say the approach to integration should be determined almost entirely by the type of acquisition made. If another company is acquired for the purpose of improving the current business model’s effectiveness, it is generally necessary to dissolve the acquired model as its resources are folded into the acquiring operations. But if a company is being acquired for its business model, it’s important to keep the model intact, most commonly by operating it separately. Failing to understand where the value resides in what’s been bought, and therefore integrating incorrectly, has caused some of the biggest disasters in acquisitions history.

Companies can make acquisitions that allow them to command higher prices, but only in the same way they could have raised prices all along—by improving products that are not yet good enough for the majority of their customers.

And companies can acquire new business models to serve as platforms for transformative growth—just as they could if they developed new business models in-house.

At the end of the day, the decision to acquire is a question of whether it is faster and more economical to buy something that could, given enough time and resources, be

In the following link you can find the article including some illustrative examples for the topics discussed.

Firms established in the market have confronted the threat of becoming obsolete by opening their innovation strategy to increase their exchanges with the startups ecosystem. Collaboration between corporations and startups has become crucial to innovate and accelerate disruptive and changing products and services; Corporate venturing is a rout to incorporate innovation into an organization in a relatively fast way.

According to the Business Dictionary Corporate Venturing is the “practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage”

The current increase in Corporate Venturing activity is a fact and there are many reasons that explain this growth: Cyclical improvements in the balance sheets  of corporates since the financial crisis of 2008, Faster cycles of innovation and technology adoption have led to the rapid demise of certain incumbents  in various sectors and, the growing awareness that commitment and external investment in R & D activities and open innovation are key to innovation in companies due to the fact that often R &D  internal initiatives can be slow. Google, BMW and General Mills among other corporations, have complemented traditional R & D activities with their own Corporate venture capital funds by joining other investors to invest in promising startups.

Companies that have the objective of acquiring new capabilities and agility in their innovation processes through Corporate Venturing can obtain many benefits from this activity. Some of these potential benefits are:

Faster Responses

Corporate Venturing can allow a firm to respond quickly to market transformations.  It is likely that developing new technological capabilities on their own could take companies for longer and more expensive. In a study of 71 venture initiatives by biopharmaceutical firms from 1985 to 2005, Hyunsung Daniel Kang and Vikram K. Nanda of Georgia Tech found that companies that made financially successful investments also experienced greater success in drug development.

Better View of Threats

A Corporate Venture Capital fund can serve as an intelligence-gathering initiative, helping a company protect itself from emerging competitive threats. Create a venture program to invest in competing technologies with the goal to gather strategic information at relatively low cost could be a tool that favors the business value of the company.

Easier disengagement

It gives executives a faster way to disengage from investments that seem to be going nowhere. Many companies find it difficult to abandon the not-quite-good-enough innovations that sometimes come out of internal labs. The arm’s-length relationship between companies and their venture funds offers advantages in this regard: The best funds tend to be quicker on the trigger than their corporate parents. Even if a corporation is unwilling to terminate an unpromising initiative, the presence of co-investors may force the decision.

A bigger bang

By combining its own capital with that of other Venture Capitals Funds, a corporate venture capital fund can magnify the impact of its investments. This is particularly beneficial when technological uncertainty is high; In 2008, the $100 million fund  iFund  and VC firm Kleiner Perkins Caufield & Byers co-invested in companies developing games and tools, on the day when outside developers were first allowed to begin working on apps for the iPhone. In this way, Apple rapidly built a critical mass of applications for its new phone while spending very little.

Increased demand

By encouraging the development of technologies that rely on the parent corporation’s platform, venture investments can help increase demand for the corporation’s own products. Intel Capital took this approach in late 1998, when it established a fund that would help speed the entry of Intel’s next-generation semiconductor chip into the market. Fund managers invested in many software and hardware makers (often Intel competitors) whose products capitalized on the new chip’s power. Those investments accelerated the chip’s adoption by several months, according to Intel.

Higher returns

For corporate venture capital funds, gaining strategic benefits is usually the main goal; historically, profits from venturing typically haven´t been significant enough to matter to the parent company’s bottom line; Many of today’s leading CVCs are structured with the clear objective of maximizing financial return.  CVCs have been structured with a critical set of features – returns-orientation, independent decision-making, strategic relevance and evergreen capital – that foster longevity for the CVC and trust with the start-up community.

Although the CVC have been operating for several decades, the today´s value proposition a CV offers to a corporation who wants to innovate is undeniable. CVCs develop a stronger network of business leaders, greater credibility and deeper domain expertise in focus areas,  serving as a bridge between the startups ecosystem and corporations and acting creatively and strategically by leveraging corporate assets to capture innovation outside the corporation.

This post is based on the article Corporate venturing published in the HBR https://hbr.org/2013/10/corporate-venturing

I.- Brand valuation based on market research

These models are based primarily on market research to determine the performance of brands. They measure, among other things, the behavior and attitudes of consumers that have an impact on the economic performance of brands. They attempt to explain, interpret, and measure consumer perceptions that influence buying behavior. This approach generally fails to establish the link between specific marketing indicators and financial performance of brands because the variables analyzed, are not integrated into an economic model and are insufficient to establish the economic value of brands.

II.- Brand valuation based on financial models

Within this category the various existing methodologies try to incorporate the market variables in a financial model that allows measuring the performance of the brand in economic terms. Under this approach there are several methods:

Historical costs

It define the value of a brand as the aggregate of all historical and replacement costs, that has been invested to bring the brand to the current market level (sum of all development costs, marketing, advertising and other communication costs, among others. ). This methodology does not establish the direct correlation between financial investment and value added by the brand; Nor does it incorporate the value of money over time.

Comparables

This methodology proposes to establish the brand value based on comparing it with other brands. This comparison is particularly difficult because, by definition, brands seek to differentiate and not be comparable with others. Moreover, the creation of value of a brand in the same sectoral category can be different even if many other aspects of business are similar between brands of the same sector. However, this method can be useful for cross-checking with results achieved with other methodologies.

Price premiums

In this method, the value of the brand is calculated as the net present value of the price premiums that a branded product would have on a similar generic product or equivalent. However, the goal of many branded products is to achieve higher levels of demand rather than premiums over price. It is usually difficult to obtain generic product information comparable to the branded product to be valued.

Economic value

This methodology is based on financial measures provided through market and financial information of the brand to be valued. The Economic Value approach was developed in 1988 and has become the most accepted method in the market for brand valuation. This method is based on the following principles:

A) Principle of Marketing: “Brands work within a business”. Consumer demand translates into purchasing, price and frequency volumes and brands ensure long-term demand through loyalty and product repurchase.

B) Financial Principle: “The net present value of expected future earnings”. The future earnings of a brand are identifiable and are discounted at an appropriate rate that reflects the risk that those gains will be realized.

This methodology is developed in five steps:

1.- Market segmentation 

The brand is valued in each market segment and the sum of the valuations of the segments constitutes the total value of the brand.

2.- Financial analysis

The sales revenues and profits of the intangibles generated by the brand in each segment are identified and projected. Intangible gains are defined as brand sales revenue less operating costs, taxes and capital charges.

3.- Demand analysis 

It determines the role of the brand in achieving the demand for the products and services offered in the markets in which it operates and determines what proportion of the intangible profits are attributable to the brand, measured by an indicator called ” brand””.

4.- SWOT Analysis

The brand’s competitive strengths and weaknesses are determined to calculate an appropriate discount rate that reflects the risk profile of expected future earnings (this is measured by an indicator called “Brand Strength Score”) that allows the calculation of the  Discount rate brand valuation. Establishing this indicator includes an extensive work of competitors analysis, the structure of the brand market, its stability, leadership position, growth trends, geographical coverage and legal protection of the brand, among others.

5.- Calculation of brand value

The value of the brand is calculated as the present value projected intangible gains of the brand, discounted by the Discount rate brand valuation. The Net Present Value of the brand includes both the explicit projection period and the value beyond that period, reflecting the brand’s ability to continue generating future profits.

It is becoming more frequent for companies, the need for valuing brands both from the management point of view and for transactions. The economic value approach is a  useful tool in the financial management of brands.

Despite the differences in focus on brand valuation and the difficulty of determining what portion of a company’s cash flows are attributable to the brand, the brand valuation process is very useful for management teams because it helps them to identify and analyze the brand value drivers when comparing them with other brands or companies or as a measure of accomplishment of  the company’s goals in a given period of time.

Based on the working paper “Brand valuation,  A chapter from brands and branding, An economist book” Interbrand, april,  2004.

These ventures had an influence on the investment portfolio management strategy by promoting investments in venture capital funds and riskier shares of young companies that still had no profits. This was because the challenge of high risk / high return investments was accompanied by the creation of a brand new investment class: private equity and venture capital, responding to the financing needs of new companies committed to innovation. high risk.

At present, a young generation of social entrepreneurs is breaking through, trying to make a difference and improve people’s lives. In most cases, the social sector is made up of numerous charitable social service providers who do not have enough capital to finance their activities beyond a year and are supported by foundations that have significant assets in their balance sheets.

How can capital markets do for entrepreneurs and social organizations, just as successfully with business entrepreneurs?

How can they be connected to financial markets? How can one finance those capable of creating and implementing innovative solutions so that they reach an adequate scale for the population and the severity of the social problems on which they work?

In 2007 Sir Ronald Cohen co-founded the firm Apax Partners and decided to join several friends and found Social Finance (SF) an organization whose aim is to develop a social investment market in the United Kingdom, bringing together under one roof financial expertise and social. Within three years of its launch, SF had already developed the Social Impact Bond (SIB) and the UK Ministry of Justice had agreed to make payments in accordance with the reduction of the recidivism rate to be achieved, among those inmates freed from the Peterborough prison. This marked a turning point in the management of charitable organizations whose social performance could already be measured accurately and this performance could be contractually tied to a return perceived by those investors who wanted to improve the quality of life of the released criminals. The payment of interest and capital was to be jointly handled by the Ministry of Justice and the Big Lottery Fund, with the expectation that it would represent for the Ministry only a minority share of its potential future savings. If the required minimum performance was not achieved, investors would lose their money, in effect making a charitable contribution. If the required performance threshold was exceeded, the return for investors would be between 2 and 13%, according to the reduction achieved in the recidivism rate.

This was the first of more than 20 SIBs that have now been placed in the United Kingdom, the US, Australia and the Netherlands, covering areas such as recidivism, homelessness, youth at risk of unemployment, adoption, problem families, education And asthma in disadvantaged populations. The most recent bonus announced by SF USA in December 2013, is a $ 13 million issue (the largest to date) This voucher is helping released New York state prisoners. It was placed by Bank of America Merrill Lynch and the Rockefeller Foundation assumed responsibility for the initial 10% of any loss.

For current charitable organizations, the SIB is no more than the first financial instrument linked to social advancement. Beyond the SIB, other instruments such as quasi-equity, unsecured debt and senior debt are complementarily financing grants to many NGOs to strengthen their balance sheets. On the other hand, a range of investors are emerging in search of different combinations of social and financial returns, from charitable organizations willing to accept low returns, individuals that require higher returns to pension funds that aspire to similar returns to the market.

Impact investment is the answer to the financing needs of social entrepreneurs and organizations oriented towards innovation and growth.

It is increasingly a significant part of the investment portfolios through Impact Private Equity, Impact Real Estate Developments and Absolute Impact Return in addition to Fixed Income and Public Equities.

We are just witnessing the emergence of this social sector conceived from the innovation so that these organizations do not move away from their social mission before the pressure of obtaining financing and the challenges are still many.

In order for social entrepreneurs to expand the scope of services offered, they will need to obtain more capital and must understand how to prepare a business plan to attract teams with qualifications and above all they must be able to measure their social performance and re-report it on comparable terms in the same way That financial results are reported, therefore there is also a need for defined and audited measures presented in a standardized way as functional bases of social investment.

For governments to be able to benefit from the development of impact investments (innovation, obtaining financing linked to the achievement of successful objectives and the possibility of pre-financing social aspects), they must lead the creation of ecosystems that support investment And social entrepreneurship and become constructive managers of impact investment paying attention to reducing the cost of achieving a successful outcome.

“One can anticipate the day when, for each social problem, each country will have an estimate of the cost of an effective social intervention, of the savings that the government could expect from its intervention and, above all, of its value to society. Some interventions will be achieved in more economic ways than others, some funders will value some results more than others and some entrepreneurs will leave their mark on the most difficult social challenges, but both social entrepreneurs and philanthropic investors will concentrate equally on achieving social results more than in Achieve donations “.

Based on a speech by Sir Ronald Cohen, Chairman of the Working Group on Social Impact Investment established by the G8 on 23 January 2014 at The Mansion House (London-UK)

The first 6 pillars are: 1) Institutions 2) Infrastructure, 3) Macroeconomic environment, 4) Health and primary education, 5) Higher education and training, and 6) Efficiency of markets.

The remaining 6 pillars on which the competitiveness of the countries is measured according to the WEF GCI

7 .- Seventh Pillar: Labor market efficiency

Labor market must have the necessary flexibility to facilitate the exchange of workers from one economic activity to another quickly and at low cost, as well as allowing fluctuations in wages without major social disturbances. Labor market must also ensure clear and strong incentives for workers’ efforts and reward meritocracy in jobs and ensure equal opportunities for both men and women. This flexibility has a positive effect on the performance of workers and manages to attract the talents necessary for competitiveness.

8.- Eighth pillar:  Financial market development

Efficient financial sectors allocate the resources saved by the citizens of a nation and those of those who enter the economy of that country from abroad, to the most productive uses. They channel resources to entrepreneurs or investment projects with expected high rates of return rather than giving primacy to political connections. A meticulous and appropriate determination of risk is a key ingredient of a sound financial market. Because private investment is critical to productivity, sophisticated markets are able to provide resources for such investments. That is why the banking sector must be reliable and transparent and must have the appropriate regulations to protect investors and other players in the economy.

9.-Ninth pillar: Technological readiness

This pillar measures the agility with which an economy adopts existing technologies to improve the productivity of its industries, with special emphasis on its ability to make full use of information and communication technologies (ICT) in its daily activities and production processes To increase efficiency and enable innovation for competitiveness. The origin of the technology used in a country is not so important, as the technology is available to improve productivity. The technological availability measured in this pillar is different from that of innovation as measured in pillar 12 and is related to a country’s ability to conduct research and develop new technologies.

10.-Tenth pillar: Market size

The market size affects productivity because a large market allows companies to exploit economies of scale. With globalization markets have expanded beyond the borders of a country, this is especially beneficial for countries with small local markets. There is a general consensus that international trade has positive effects on the growth of a country’s economy (even considering asymmetries in trade relations) especially for countries with small markets. Therefore exports are seen as a complement to domestic demand to determine the total size of the business market and should be considered as part of an expanded market for a country’s enterprises.

11.- Eleventh pillar: Business sophistication

This pillar has to do with two intrinsically related elements: the quality of a country’s business networks and the quality of operations and strategies of individual companies. The first aspect is measured by the quantity and quality of local suppliers and the extent of their interactions. When companies and their suppliers focus on specific geographic areas, called clusters, efficiency increases by creating new opportunities for innovation and reducing barriers to entry for new competitors. The second element measures aspects of companies such as brand management, marketing, distribution production processes and the production of unique and sophisticated goods. Both aspects have positive effects on the economies of the countries and modernize the business processes in the different sectors of a country.

12- Twelfth pillar: Innovation

This pillar measures technological innovation (the non-technological is measured in the previous pillar). While all previous pillars translate into gains for the economies and societies of the countries, they all tend to diminish the economic returns in the short term. In the long run, the well-being of a society can be significantly improved through technological innovation. Great technological advances have been the basis of many of the productivity gains of economies in the past. Not only are the ways of doing things changed, but they open up a wider range of possibilities in terms of products and services. Enough investment in innovation and development, public and private, quality institutions in the areas of scientific research, collaboration between universities in research and technology, and protection of intellectual property as well as access to risk capital and financing are some of the Aspects that are measured in this pillar.

The 12 pillars are intimately related however to build the GCI are measured separately so that each country has information on areas for improvement. On the other hand, although all pillars are important for all economies, some are more relevant than others depending on the level of development in which each country is. For this reason, the ICG attributes greater relative weights to those pillars that are more relevant to an economy given its particular level of development.

Based on The Global Competitiveness Report 2013 – 2014. Part 1 Measuring Competitiveness World Economic Forum

For more than 3 decades, WEF’s annual Global Competitiveness Reports have been studying and measuring the various factors that underpin the competitiveness of countries. The main objective is to provide knowledge and stimulate discussion among all parties involved in strategies and policies that help countries to improve their competitiveness.

Definition of competitiveness according to WEF

The WEF defines competitiveness as “the set of institutions, policies and factors that determine the level of productivity of a country. The level of productivity in turn determines the level of prosperity that can be achieved by an economy. ” The concept of competitiveness therefore involves static and dynamic components. The ICG tries in an open and non-definitive way to capture a weighted average of these various components, each of which measures a specific aspect of competitiveness. These components are grouped into 12 pillars of competitiveness. Below is a brief description of each one.

1.-First pillar: Institutions

The institutional environment is determined by the legal and administrative framework within which individuals, firms, and governments interact to generate wealth.This framework influences investment decisions, the organization of production and the way benefits are distributed and the costs of development policies and strategies are borne. It also includes the government’s attitude towards markets, freedoms and the efficiency of its operations. Bureaucracy, excessive regulations, corruption, dishonesty, lack of transparency and lack of independence of the judicial system impose significant costs on businesses and slow down the development process. Another factor considered is the proper management of public finances. Transparency of the private sector, essential for business, is also measured through the use of standards as well as auditing and accounting practices that ensure access to information in a timely manner.

2.- Second pillar: Infrastructure

Extensive and efficient infrastructure is important in determining the level of economic activity and the types of activities and sectors that can be developed within a country. Good infrastructure reduces the effects of distances between regions by integrating and connecting markets at low cost. It also helps reduce inequalities and poverty in different ways. Measures such as transport and communications infrastructure, effective modes of transport (quality of roads, railways, ports and air transport) are measured in order to obtain goods and services in safe and timely conditions and to facilitate the mobilization of labor . This pillar also includes the quality and reliability of the electricity supply and the telecommunications network.

3.- Third pillar: Macroeconomic environment

While it is true that macroeconomic stability alone can not increase the productivity of a nation, it is recognized that macroeconomics can cause damage to a country’s economy, as has been seen recently in many countries in Europe and elsewhere. The government can not provide services efficiently and deprives it of maneuvering power over the future effects of economic cycles if it is managed with high levels of fiscal deficit. Firms in turn can not operate efficiently when there are high inflation rates. In short, the economy can not grow in a sustainable way unless there is a stable macroeconomic environment.

4.-Fourth pillar: Health and primary education

A healthy workforce is vital to the competitiveness and productivity of a country. Low levels of public health bring significant costs to businesses, increasing work absenteeism and operating at low levels of efficiency. In addition to moral considerations, investments in the provision of health services are critical to healthy economies. This pillar also takes into account the quantity and quality of basic education received by the population, considering that basic education allows the development of the potential of workers facilitating their incorporation into more advanced production processes and increasing the individual efficiency of each employee.

5.- Fifth pillar: Higher education and training

Higher quality education and continued job training are crucial factors for economies that want to move forward in the value chain beyond the simplest production processes. The current globalized economy requires that countries promote well-prepared workers’ teams capable of developing complex tasks and rapidly adapting to the changing environment. This pillar contemplates among others, the measurement of aspects that have to do with the recruitment rates and the quality of the education as it is evaluated by the business leaders and the scope of the training in the jobs to ensure the constant updating of the workers talents.

6.- Sixth pillar: Goods market efficiency

Countries with efficient goods market are well-positioned to produce the right mix of products and services according to their particular supplier-demand conditions. They also ensure that these goods can be traded more efficiently in the economy. Generally, markets that are developed efficiently have minimal government intervention. Excessive controls and regulations and heavy fiscal burdens discourage private investment and economic growth. The efficiency of the markets also depends on the conditions of the demand and the sophistication of the buyers and their exigencies that can lead to a country to develop some competitive advantages.

In our next post we will comment on the remaining 6 pillars of competitiveness used to calculate the GCI of the World Economic Forum (WEF).

Based on The Global Competitiveness Report 2013 – 2014. Part 1 Measuring Competitiveness World Economic Forum.