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Competitiveness proofing

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Competitiveness proofing is a reinforced analysis of the impacts of new policy proposals on enterprise competitiveness within the Commissions' integrated impact assessment approach. It is the Commission's response to the pressing need for better-targeted tools to boost productivity and growth in times of the economic slowdown.

The guidance is a twelve-step tool addressing the impacts of a policy proposal on enterprise competitiveness through its effects on the cost of doing business; on the affected sectors' capacity to innovate; and on their international competitiveness. It provides a simple and effective tool to deliver more thorough analyses of the impact of proposals on competitiveness.

Operational guidance for assessing impacts on sectoral competitiveness within the Commission Impact Assessment system" SEC(2012)91 pdf - 628 KB [628 KB] .

Implementation

Competitiveness Proofing Operational Guidance is continuously being used during the preparation of Commission initiatives. The following IAs accompanying a Commission proposal include a section on CP to date:

FAQ



What determines competitiveness?

The core determinant of the competitiveness at all levels (enterprises, industries, regions, member-states or the EU) is productivity. Productivity growth is intimately related to the propensity to innovate. Since resources (capital and labour) are finite, the long-term growth of the standards of living is determined by the nation's/firm's ability to produce output through a superior and innovative combination of existing resources. This is often identified with total factor productivity (the element unaccounted for by the contribution of factor inputs). Economic theory predicts that in successful enterprises, gains in market share, long-term profitability and rising real wages are unambiguously linked with vigorous productivity growth. And conventional indicators of competitiveness – unit labour costs or price and quality competitiveness – also reflect the underlying dynamics of productivity and innovation.

As productivity (defined as the value added per unit of input) is the core of assessing the competitive gains and losses caused by a policy, the analysis of competitiveness needs to look at cost and non-cost determinants of competitiveness. Competitiveness proofing takes into account the likely impact of a policy proposal on the cost of doing business. This includes above all the direct cost of compliance with new regulation; but also indirect changes in the prices of inputs (including energy) and factors of production that are caused by the new policy (economic costs of the policy). Costs however do not account for all competitive gains or losses. Products may become more attractive for consumers and gain market share due to better quality, design (including eco-design), technical specifications and functions. Technology development and innovation (of business products and/or processes) are of primary importance for both the cost and quality competitiveness of products. Thus policy-triggered productivity gains and losses can be identified through impacts on business costs (cost competitiveness) and on the business capacity to innovate (innovative competitiveness).

What is competitiveness?

Competitiveness is a multilevel concept. On the level of the economy competitiveness refers to the capacity of the nation or region to provide its citizens with sustained increase in living standards with jobs available for those willing to work*. Competitiveness of enterprises is a narrower but closely related concept referring to the ability of firms to sustain and gain in market share through their cost and pricing policy, innovative use of production factors and novelties in product characteristics. It is often measured by the share of the products of one manufacturer (in value terms) on the domestic and international market of those products. Accordingly, at the sector level, EU industry’s competitiveness refers to the sales performance (the market share and comparative (dis)advantage) of this industry in the EU and on the world market.

* SEC(2009) 1657 "Commission staff document: European Competitiveness Report 2009"

How to measure competitiveness?

The analysis of impacts on cost and capacity to innovate, however, is mainly about the drivers of competitiveness. Even though they should be of direct concern for policy-makers, the picture would not be complete if we did not assess them in an international comparative perspective, so that the likely impact of the proposal on European industries' market shares and comparative advantages are taken into account.

What is the objective of competitiveness proofing?

The objective of competitiveness proofing is to identify and, where needed and proportionate, to quantify the likely impacts of a new proposal in three dimensions of competitiveness:

  1. Cost competitiveness: the cost of doing business, which includes cost of intermediate consumption and of factors of production (labour and capital);
  2. Capacity to innovate: the capacity of the business to produce more and/or higher quality products and services that better meet customers' preferences;
  3. International competitiveness or the likely impact of the policy proposal on the European industries sales performance (market shares) and comparative advantages
How can policy intervention affect business competitiveness?

An EU policy proposal is designed to address a problem, which cannot be remedied by policy intervention at national level alone. The Commission's Impact Assessment Guidelines (2009) include detailed and well-illustrated guidance on how to define the problem that needs solution, the related objectives of the intervention, and the regulatory and non-regulatory instruments at hand. In general, public policy seeks either to address market or regulatory failures* to improve allocation of resources (economic efficiency); or to improve social inclusion and safety by redistribution of income. In all their variety these policy instruments determine the framework conditions in which the enterprises operate and compete. They can imply additional cost on business operations, or affect the enterprises' capacity to innovate, which – if competitors are not placed in the same conditions – may lead to losses in market shares.

* See Impact Assessment Guidelines Part III Annexes pp 19-23 for a detailed overview of market and regulatory failures

If impacts on competitiveness are included in the Commission’s Impact Assessment Guidelines, why do we need competitiveness proofing?

The economic impacts section the Impact Assessment Guidelines lists a number of questions with direct relevance to enterprises' price and cost competitiveness, their capacity to innovate and their external competitive positions*. Apart from these questions, the Guidelines contain in their annexes detailed guidance on identifying and measuring the impact of a policy proposal on SMEs (the SME test)**, as well as impacts on technological development and innovation***. Further to these two, there is also Guidance on assessing the impacts on competition****.

Even though the necessary elements for a comprehensive assessment of impacts on competitiveness are in place in the current Guidelines, their application is not streamlined in the practice of impact assessment. One of the possible explanations is that Commission services were asked to assess these impacts, but were not told how to do so. The competitiveness proofing guidance offers a comprehensive methodology and lists data sources that can be used when assessing impacts on competitiveness within the integrated impact assessment process.

* Impact Assessment Guidelines, pp. 33-34
** Annexes to Impact Assessment Guidelines pp.32-34 Section 8.4
*** Annexes of the Impact Assessment Guidelines, pp. 34-38 Section 8.5
**** Impact Assessment Guidelines, p. 40

If the purpose of Impact Assessment is to assess the overall impact of a policy proposal, why does the enterprise/sector dimension need a separate assessment?

An overall positive impact of a policy measure or regulation may mask large differences at the sectoral level that may be relevant when assessing the economic and social costs. Firstly, the burden of the measure or regulation may not be large at the aggregate level but fall on just a few sectors. A case in point is the implementation of the Emissions Trading Scheme. While the impact at the aggregate could seem mild, energy-intensive sectors like the cement industry may be more affected. Secondly, when a single or few sectors bear most of the costs of a measure or regulation, and if these sectors are geographically concentrated in a few regions, the social costs can be considerably amplified. For instance, if the sector needs to cut production and employment, and is concentrated in a single region, a relatively large workforce with similar qualification will be looking for jobs at the same time in the same region without much chance for employment.

Taking the perspective of the industry better into account should, however, not come at the expense of the overall welfare approach of the Impact Assessment. In line with the Impact Assessment rationale, competitiveness proofing is designed to help better identify winners and losers and the cost borne by respective sectors; and accordingly to devise mitigating measures without compromising the long-term societal objective of the policy intervention. For instance, it was the examination of the impact of the Emission Trading Scheme in energy-intensive sectors that led to the allocation of free emission allowances to the sectors exposed to the risk of carbon leakage.

When should we apply competitiveness proofing?

Not all Impact Assessment need competitiveness proofing. In its Industrial Policy Flagship Communication the Commission committed to "... ensure that all policy proposals with a significant effect on industry undergo a thorough analysis for their impacts on competitiveness. Examples of such measures are new internal market legislation, major financial market regulations, that might affect access to finance, and new climate change or environmental legislation."* The Guidance (see p. 9) provides a simple check-list to help the authors of an Impact Assessment decide whether the expected impacts on businesses are likely to be significant.

* COM(2010) 614 "An Integrated Industrial Policy for the Globalization Era: Putting Competitiveness and Sustainability at Centre Stage", p. 5

Does Competitiveness proofing replace Impact Assessment for initiatives with significant impact on the business?

No, it neither replaces Impact Assessment, nor is it a stand-alone test separate or parallel to Impact Assessment. The Commission’s Impact Assessment system is based on an integrated approach, which analyses both benefits and costs, and addresses all significant economic, social and environmental impacts of possible new initiatives. This is an instrument to provide policymakers with additional information on impacts on competitiveness, which are vital for smart regulation. This complementary analysis should be proportionate to the quantitative, qualitative and political significance of the impacts on competitiveness. And more importantly, it is not an instrument to overemphasise specific impacts and stakeholders' expectations at the expense of others and thus to compromise the overall core objective of the policy proposal.

Does competitiveness proofing impose additional efforts?

Yes, additional efforts are needed to assess the impacts on competitiveness. It is important, however to ascertain that these extra efforts are in line with the principle of proportionate analysis and are more than offset by benefits in terms of better evidence-based law-making. The Commission's approach to competitiveness proofing seeks to optimize costs in two ways:

  1. a simple check-list to help us judge if the policy proposal is likely to have substantial impact on enterprise competitiveness, i.e. if the Impact Assessment needs to contain a competitiveness proofing part;
  2. a flexible modular approach, which allows the Impact Assessment team to decide about the scope and depth of the analysis in line with the principle of proportionate analysis; and to apply only those steps in the process that are relevant for their specific task without compromising the consistency of assessment.

The application of the principle of proportionate analysis implies the right choice for instance between i.a. the following options

  • whether to apply mainly qualitative analysis using the available sector studies and statistics (i.e. interpret the existing data), or to go to fully-fledged quantification of expected impacts, through more sophisticated modelling or econometric exercise (i.e. producing new data/evidence from the available data)
  • whether to look at the directly affected sectors only or to look as well at the indirectly affected sectors
  • Whether to look at direct costs of compliance with the proposed regulation, or to assess as well the economic costs (e.g. changes of prices of inputs and factors of production, entailed by the policy intervention but not necessarily related to compliance); etc.
What happens if the policy proposal does not pass the competitiveness test?

Competitiveness proofing is not a 'make it or break it' test of new policy proposals. Its purpose is not to block an initiative, but to bring to the attention of decision makers evidence of impacts on enterprises that might require mitigating measures in order to minimize negative consequences for society with regard to growth and employment.

What is the result of competitiveness proofing? How does it change the Impact Assessment?

CP is not a 'make it or break it' test of new initiatives. It could ensure that the lightest option for EU industry is taken, as long as it allows reaching EU objectives. Therefore the additional analysis may affect the ranking of policy options, or could lead to the introduction of mitigating measures to make the preferred option less damaging for affected enterprises.

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