Tenth pillar: Market size

Ninth pillar: Technological readiness

Eighth pillar: Financial market sophistication

Seventh pillar: Labor market efficiency

Sixth pillar: Goods market efficiency

Fifth pillar: Higher education and training

Quality higher education and training is crucial for economies that want to move up the value chain beyond simple production processes and products. The importance of vocational and continuous on-the-job training, neglected in many economies, cannot be overstated, as it ensures a constant upgrading of workers’ skills to the changing needs of the production system.

Countries with efficient goods markets are positioned to produce the right mix of products and services given supply-and-demand conditions, and such markets also ensure that these goods can be most effectively traded in the economy. Healthy market competition, both domestic and foreign, is important in driving market efficiency and thus business productivity, by ensuring that the most efficient firms, producing goods demanded by the market, are those that survive.

The efficiency and flexibility of the labor market are critical for ensuring that workers are allocated to their most efficient use in the economy. In a productive economy, workers are allocated appropriately and provided with incentives to give their best effort in their jobs.

An efficient financial sector is needed to allocate the resources saved by a nation’s citizens to its most productive uses. A proficient financial sector channels resources to the best entrepreneurs or investment projects rather than to the politically connected. A thorough assessment of risk is therefore a key ingredient.

This pillar measures the agility with which an economy adopts existing technologies to enhance the productivity of its industries. Whether the technology used has or has not been invented within its borders is immaterial for analyzing competitiveness. The central point is that the firms operating in the country have access to these advanced products and blueprints. That is, it does not matter whether a country has invented electricity, the Internet, or the airplane. What is important is that these inventions are available to the business community.

The size of the market affects productivity because large markets allow firms to exploit economies of scale.

When Belgium sells goods to the Netherlands, the national accounts register the transaction as an export (so the Netherlands is a foreign market of Belgium), but when California sells the same kind of output to Nevada, the national accounts register the transaction as domestic (so Nevada is a domestic market of California). By including both domestic and foreign markets in our measure of market size, we avoid discriminating against geographic areas (such as the European Union) that are broken into many countries but have one common market.