Swiss Business Hub in Russia sat down with Arturo Bris, Professor of Finance at IMD and the Director of the IMD World Competitiveness Center, to lift the veil on Switzerland’s recipe for competitiveness, investigate the most important factors that influence a country’s competitive standing, and find out what Russia and other countries can do to improve their standing in the rankings.
IMD is a Swiss business school, world leader in executive education according to The Financial Times.
What factors explain Switzerland’s #2 position in the IMD World Competitiveness ranking 2016? What played a role in the country moving up 2 spots in comparison to the 2015 ranking?
Historically Switzerland was number two in the IMD World Competitiveness ranking. It has moved down because of an economic crisis caused by depreciation of the franc after the country has joined the Schengen zone but has not joined the European Union. The crisis was a reason for the country’s competitive standing to suffer.
Since then, Switzerland has been gradually recovering, the economy has been improving, and now we can say that the country has finally adjusted to the new normal. Companies cut costs, adapted to a more expensive currency, learned how to efficiently export, and the competitive standing of the country has improved.
What makes Switzerland particularly attractive for foreign investment?
First, Switzerland has a friendly and flexible regulation of business, which is why it is very easy to start a business in this country and allocate financing. Second, Switzerland is a stable country – both politically and economically, and this stability is good for business. Third, the country has historically been forced to innovate, to compete with its peers that have had more natural resources or have had access to the sea. It is geographically land-locked by the rest of Europe; it does not have oil or access to seaways. This historical competition with other countries is exactly the reason why the country turned out to be so friendly for entrepreneurs and so innovative.
Of course, I would also mention taxation regulation, which is favorable for business. Moreover, Switzerland has an advantage of not being part of the European Union. Finally, the fact that Switzerland is a federal country makes its regions – or cantons – compete with one another. Cantons compete to attract the most capital and the best companies. Competition from the outside and from within is good for business and makes the country more attractive overall.
Another thing to mention, Switzerland is very attractive for foreign talent. The country ranks first in our IMD World Talent Ranking (it has actually been first ever since 2005, except for one year – 2006 – when it was ranked second after Austria), which evaluates countries’ success in developing, attracting and retaining talent to sustain the talent pool available for enterprises operating in those economies.
The government’s international approach and clear regulations, coupled with a need for qualified specialists to sustain its competitive standing (local population is not sufficient for that), makes Switzerland dominate our ranking of countries’ attractiveness for talent.
What other countries such as Russia can learn from Switzerland in terms of business competitiveness?
Switzerland is a very difficult model to replicate. During my trip to Moscow, I have been seeing the progress that Russia has made throughout the years. Russia has been forced to start thinking differently about its path to recovery due to economic sanctions. Companies that I have been meeting throughout my trip show amazing examples of new business models, of new ways of producing and generating new services.
Although there are some similarities between Russia and Switzerland – as Switzerland has also been forced to innovate and strive for competitiveness in complicated conditions – Russia is much more of a manufacturing, industrial economy than Switzerland. It is larger, obviously has more natural resources, and has larger industrial enterprises compared to Switzerland where most jobs are created by small or medium-sized enterprises.
In order for Russia to improve its competitiveness, the country needs to pay attention to the government’s approach towards business and its central functions, which is an extremely difficult process. However, the federal structure of Russia exists, and if there was more delegation of authority to regions and more competition between them, it would somehow repeat Switzerland’s approach. In Switzerland, the regions – cantons – are almost completely independent from the central government.
What are the key lessons you’ve learned while studying competitiveness of different countries of the world? What are the main steps a country might undertake to improve its position? What are the main factors influencing a given country’s competitive standing globally?
A country needs three conditions to be competitive. First, you need good governance. Countries that have a good government that cares about people and business are more competitive than those that do not. Second, you need to have a well-developed private sector, so that companies are able to create jobs for people. It is not the government’s job to generate jobs.
Finally, you need the first two things to work together. The government has to be friendly to the business, and the private sector has to trust the public sector and the government. Companies should be able to expect the government’s help whenever it is necessary. And whenever the government provides its help to the business, it has to maintain the private sector’s independence.
It is not a government’s responsibility to create jobs. On the contrary, it only sets the rules of, for example, accessing capital, makes sure market actors follow these rules, and lets competition in the private sector do the rest.
Any trends in countries’ global competitiveness that you’re seeing?
There are two major trends that I’d like to mention, especially those evident on the emerging markets. First, there is a trend towards service-oriented economies. For dozens of years many countries have focused on manufacturing specific types of goods, for example, cars in South Korea, consumer goods in Switzerland and electronics in Taiwan. That specialization in manufacturing has been targeting the export market. Now many countries refocus towards services. And in turn, wide and developing service sectors are great creators of jobs.
Second big trend is specialization. More and more countries are choosing a particular sector to focus on. For example, Eastern Europe is investing a lot in IT, Thailand targets the tourism sector, and Asian countries such as South Korea focus on consumer electronics. This trend is important, and in my opinion, developed European countries would also benefit from more specialization.
How does the competitive standing of a country influence its innovative potential? Potential for entrepreneurial success?
A competitive standing of a country is fundamental for innovative success and entrepreneurial activity. In turn, the more country innovates the more competitive it is on a global level. Because of the world becoming more global, countries need to have a stable system that allows them to constantly innovate. Of course, this innovation infrastructure cannot result from a top-down approach; it should not be prescribed by the law, but should be intrinsic for the business principles of a particular company.
At IMD, you have directed programs for senior executives in several industries and continents. In your opinion, what are (if any) common characteristics of senior executives in companies that contribute to the economy & people and successfully expand to other markets?
Of course, successful companies have ambition, and their executives intend to share this ambition. They have a very clear idea of the future they pursue for their company. Moreover, the best executives are those that are able to see the bigger picture, notice and understand the current global trends, and grasp the flow of the global economy.
You have said that important economic reforms need to be implemented by companies, not by the government. The government only sets the rules of the game and makes sure nobody breaks them. Is this approach true for Switzerland?
Switzerland is an extreme example of an ‘invisible’ government. In Switzerland, not everyone knows the name of the President, and the central government is not well known. I think that this is due to the fact that the government has set the rules of the game some time ago, and the private sector led on.
Russia is another extreme. During my visit to Moscow I went to the Skolkovo innovation lab – a Silicon Valley of Russia – and here is where innovation is driven by the government. But Russia is not the only country where the government takes the lead and the private sector follows.
By the way, I was really impressed by some of the Skolkovo’s projects I’ve seen. I believe Skolkovo is going to be an amazing social value creation for Russia and an amazing scene for innovation.
You are an international expert in corporate governance. What are the characteristics of successful corporate governance in Swiss companies?
The most successful companies in Switzerland are family businesses or private companies such as cantonal banks. These banks are, in fact, owned by their customers. Some of the biggest global names that have settled in Switzerland like Nestle, Roche and Novartis were originally family businesses. A family business is a unique and very successful model of corporate governance compared to public companies.
How would you characterize the Russian corporate governance?
I think that it is improving. Competitive standing of Russia has not been very good. First of all, because of the influence of the state in the private sector, and second of all, because of the fact that minority holders in Russia get almost no protection from the will of majority holders. But the situation is slowly getting better.
Are there any corporate governance traits that Russian companies may try to adopt from successful Swiss companies?
Corporate governance can change through regulation. Some rules implemented in Switzerland can be replicated in Russia. But most importantly, there needs to be a change in values such as approach towards sustainable development, ethics in business, and corruption, and this is a very slow and difficult process. However, I am looking forward to seeing the country’s steps towards such a change.