Flags from China
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File picture of the national flag
Last month entrepreneur Dr. Nayana Dehigama and I conducted a seminar on “Economic Security and Global Compulsions” organised by the National Defence College in Colombo. The participants, who were following the Master’s programme of the College, were from the tri-forces and the Police, including a few from other South Asian countries.
At the question and answer session, one of the participants had an interesting question:
“During the Independence Day celebrations, one of the street vendors I knew was selling national flags. Unfortunately, his business didn’t go well, because China too had produced Sri Lankan national flags and imported these to the country; these flags were sold at less than half the price of what we had produced locally. If we promote “free trade”, then how do we solve this problem?”
The problem of cheap imports from China was not limited only to the national flags; Chinese products at cheaper prices have been challenging many production lines all around the world. The case of national flags is a sensitive one to any Sri Lankan because it involves “national flags”.
They would feel that even our national flag is now imported from China! Probably, it has also been a contract offered by a Sri Lankan businessman to a Chinese company. However, we must keep our focus limited to its economics, free from the nationalist and cultural sentiments.
Growing or dying
This time the two of us, Nayana and I met exactly one year after our previous meeting. We have been meeting at least once a year at the National Defence College (NDC) where we both used to deliver lectures for its Master’s degree programme as well as to speak at the seminars as mentioned above.
Nayana, who has a doctorate in entrepreneurship from the Asian Institute of Technology (AIT) in Thailand, is the Executive Chairman of the Epic Technology Group – a group of companies specialising in the areas of financial technology and electronic governance. Since its establishment some 25 years ago in Sri Lanka, the company has grown and prospered locally and globally.
The following is a quotation from the company’s website: “Epic is undoubtedly a trendsetter amongst all business verticals it operates in. Our innovations have changed the competitive landscape of many industry sectors. We challenge and disrupt for the betterment of ourselves and our clients.”
The quotation is self-explanatory. It means that the Epic company strives through “innovations” to sail through market competition and to achieve success and provide innovative solutions to others to remain competitive. And such innovations are the key to business success in a competitive world. Its inverse is also true: A company which has no innovations is destined to wither away by the more competitive ones!
Accordingly, there are only two types of companies in the world – growing ones and dying ones. Growing ones continue to prosper because it strives for innovations above and beyond others. Dying ones continue to wither away because innovations by others threaten their existence.
Different perspectives
We both, Nayana and I spoke at the seminar on the same thing – wealth creation; Nayana spoke from an entrepreneurial perspective and, I from an economic perspective. He analysed it through a company perspective and, I from a national perspective.
We both, however, shared the same ground validating the argument that the integration to the global market and the market competition are essential for wealth creation. In the competitive global market, a company is challenged by other competitors, thus the company must overcome a competitive challenge and grow, contributing to wealth creation.
When we aggregate their wealth creation to national level, it is the wealth of the nation. Accordingly, a nation should have an enabling business environment with competition constantly changing the business landscape for such companies to grow, creating wealth for the nation.
It was in this context that the above question on national flags was sensible and pertinent. It was neither an isolated issue that might come randomly, because we all know that we have heard it quite often. In fact, Chinese businessmen find such business opportunities not only in Sri Lanka, but in every country around the world.
If someone’s product is copied and re-produced in a large scale at lower cost, apparently it would drive away the small local businesses. It is obviously an opportunity to lose, not to prosper, which is not an “entrepreneurship” but a survival strategy. Entrepreneurs know that the market is competitive, but they maintain their competitive vigour by engaging in “innovations” and grasping niche opportunities for progress.
Invention and innovation
Invention is the new knowledge, while innovation is the application of new knowledge through actions; both can be termed as creativity, which is crucial for any company to grow in the competitive market. The outcome of innovation is the differentiation of the product, and the differentiation helps the entrepreneur to find niche markets.
Differentiation is making one’s product “different” from competitor products. As a result, while some companies compete on costs, others may compete on quality difference, specific attributes, attractive appearance, durability, and other elements of differentiations meeting the consumer requirement in a niche market.
This is, however, not an easy task for each and every one. In any country, there is only a small share of people who can become entrepreneurs. What the majority needs is an employment with a regular income. In situations where employment opportunities are rare, there are many business activities that exist as survival strategies. As competition develops, regrettably such activities with no innovative capacity could wither away.
Why can’t the government interfere in such situations and “protect” local businesses? If we do not address this claim as well, our discussion is incomplete. This is, in fact, a politically attractive economic opinion in favour of protecting local businesses from import competition. There are also plenty of examples that someone can find from different countries to support an argument as such.
Import protection
What would be the outcome, if the government decides to control imports and limit competition in the domestic market? Apparently, the price of such commodities should go up so that the customers get penalised by import controls. Since there is no competition, the product is not challenged by competitive products in the market; this means that there is no incentive for innovation.
Accordingly, the local customers are forced not only to pay higher prices but also to buy products with inferior quality. A business as such has an easy-going time in a protected market by selling inferior quality products to local customers at higher prices.
If it is a national policy to protect the local market from import competition, what would be the national policy outcome? If competition is the driving force of innovations, in a protected market where competition is restricted there is little incentive for innovation.
There is no business growth as growth is limited by the size of the local market. If the businesses would not grow, there is no income generation and job creation; the country may remain poor, although the businesses can survive with the opportunity for exploiting the local customers who have lost choices and the benefit of competition.
Import substitution regimes
The answer to the national flag question is clear: There is no dispute that if the imports of national flags from China had been cut off, its local product would have survived, and the street vendor’s livelihood would have been protected. But there is no scope for “innovations” so that the business would not grow.
However, the issue is not limited to national flags; what about thousands of products that have been threatened by cheaper imports from China? In that case, import controls must be scaled up to a national policy covering all. Businesses may survive by selling inferior products at high prices to the local customers whose consumer rights have been deprived.
As a result, the lack of competition curbs scope for innovations on a national scale restraining the country from achieving growth and prosperity. And the country will remain poor with little scope for income generation and job creation, as it was the case during “import substitution” regimes in developing countries.
(The writer is Emeritus Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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