The Competitiveness of Nations: Why Some Countries Prosper While Others Fall Behind JAN FAGERBERG and MARTIN SRHOLEC University of Oslo, Norway and MARK KNELL * NIFU-STEP, Norway Summary. — Why do some countries perform much better than other countries? This paper out- lines a synthetic framework, based on Schumpeterian logic, for analyzing this question. Four dif- ferent aspects of competitiveness are identified: technology, capacity, demand, and price. The contribution of the paper is particularly to highlight the three first aspects, which often tend to be ignored due to measurement problems. The empirical analysis, based on a sample of 90 countries on different levels of development during 1980–2002, demonstrated the relevance of technology, capacity, and demand competitiveness for growth and development. Price competitiveness seems generally to be of lesser importance. Ó 2007 Elsevier Ltd. All rights reserved. Key words — competitiveness, development, innovation, Sub-Saharan Africa, Asian tigers 1. INTRODUCTION Why do some countries grow so much faster and have much better trade performance than other countries? What are the crucial factors behind such differences? Which policies can governments pursue to improve the relative performance of their economies (and welfare of their citizens)? Questions such as these moti- vate a concern for the competitiveness of coun- tries. Although the concept of country competitiveness has proven to be controversial, the importance of the underlying challenges makes it unlikely that this issue will lose the attention of policy makers soon. 1 The ‘‘competitiveness of countries’’ is a rela- tive term. What is of interest is not an absolute performance, however we define it, but how well a country does relative to others. Further- more, the concept usually has a double mean- ing, it relates to both the economic well being of its citizens, normally measured through GDP per capita, and the trade performance of the country. 2 Our underlying assumption is that these things are intimately related. We out- line an analytical framework, based on Schumpeterian logic, which justifies why we should focus on both GDP and trade perfor- mance and their mutual relationship to explain competitiveness of countries. Arguably, there is a tendency among many economists to obscure the discussion of com- petitiveness by focusing on extremely simplified representations of reality that abstract from the very facts that make competitiveness an impor- tant issue for policy makers and other stake- holders in a country. A well-known example of this is the idea of ‘‘perfect competition,’’ * Earlier versions of this paper were presented at the UNECE Spring Seminar, Geneva, February 23, 2004, the Second Globelics Conference, Beijing, October 18–20, 2004, and the DRUID Tenth Anniversary Sum- mer Conference 2005, Copenhagen, June 27–29, 2005. We wish to thank the participants and three anonymous reviewers for useful suggestions. Final revision accepted: January 22, 2007. World Development Vol. 35, No. 10, pp. 1595–1620, 2007 Ó 2007 Elsevier Ltd. All rights reserved 0305-750X/$ - see front matter doi:10.1016/j.worlddev.2007.01.004 www.elsevier.com/locate/worlddev 1595