APPENDIX I

methodology and principles of analysis

By Suzanne Rosselet-McCauley

What is the World

Competitiveness Yearbook?
The IMD World Competitiveness Yearbook (WCY) is the Over 300 competitiveness criteria have been selected as
world’s most thorough and comprehensive annual report on a result of extensive research using economic literature,
the competitiveness of nations, published without interruption international, national and regional sources and feedback from
since 1989. It is considered to be the first access point to world the business community, government agencies and academics.
competitiveness, providing objective benchmarking and trends, The criteria are revised and updated on a regular basis as new
as well as a worldwide reference point to statistics and opinion theory, research and data become available and as the global
data that highlight the competitiveness of key economies. The economy evolves. A long-established collaboration with our
WCY analyzes and ranks the ability of nations to create and Partner Institutes worldwide also helps ensure that the data
maintain an environment that sustains the competitiveness is reliable, accurate and as up-to-date as possible.This year, we
of enterprises. An economy’s competitiveness cannot be have the privilege of collaborating with a unique network of
reduced only to GDP and productivity because enterprises 52 Partner Institutes.
must also cope with political, social and cultural dimensions.
Therefore nations need to provide an environment that has
the most efficient structure, institutions and policies that Who uses the World
encourage the competitiveness of enterprises. Competitiveness Yearbook?
This year, the WCY provides extensive coverage of 55 The WCY is an invaluable, dynamic and constantly updated
economies, all key players in world markets. In this 2008 benchmark for decision-makers. The business community
edition, we have added Peru as an additional country. All uses it to help determine and validate investment plans and
economies are chosen because of their impact on the global to assess locations for new operations. Governments fi nd
economy and the availability of comparable international important indicators to benchmark their policies against those
statistics. of other countries, to evaluate performance over time and to
learn from the “success stories” of nations that have improved
their competitiveness. The academic world also uses the
exceptional wealth of data in the WCY to better understand
and analyze how nations (and not only enterprises) compete
in world markets.
TABLE 1
Competitiveness Factors

Economic Performance (80 criteria) Macro-economic evaluation of the domestic economy:

Domestic Economy, International Trade, International Investment,
Employment and Prices.

Government Efficiency (73 criteria) Extent to which government policies are conducive to competitiveness:
Public Finance, Fiscal Policy, Institutional Framework, Business
Legislation and Societal Framework.

Business Efficiency (70 criteria) Extent to which the national environment encourages enterprises to
perform in an innovative, profitable and responsible manner:
Productivity and Efficiency, Labor Market, Finance, Management Practices
and Attitudes and Values.

Infrastructure (108 criteria) Extent to which basic, technological, scientific and human resources
meet the needs of business:
Basic Infrastructure,Technological Infrastructure, Scientific Infrastructure,
Health and Environment and Education.

472 IMD WORLD COMPETITIVENESS YEARBOOK 2008

How does the World
Competitiveness Yearbook measure
Competitiveness?
During the past two decades, the methodology to assess the The WCY uses different types of data to measure quantifiable
competitiveness of nations has constantly been fine-tuned to and qualitative issues separately. Statistical indicators
take into account the evolution of the global environment are acquired from international, national and regional
and new research. In this way, the WCY keeps pace with organizations, private institutions and our network of 52
structural changes in national environments and the rapidly Partner Institutes worldwide. These statistics are referred
changing technological revolution. We made these changes to in the WCY as Hard data and include 131 criteria used
gradually so that we could continue to compare the results to determine the overall rankings and 77 criteria presented
from year to year and highlight the evolution of an economy’s as valuable background information but not used in the
performance relative to the competitiveness of others. Based calculation of the rankings. The 131 Hard criteria represent a
on analysis made by leading scholars and by our own research weight of approximately two-thirds in the overall ranking. An
and experience, the methodology of the WCY divides the additional 123 criteria are drawn from our annual Executive
national environment into four main Competitiveness Factors: Opinion Survey and are referred to in the WCY as Survey
Economic Performance, Government Efficiency, Business data. The survey questions are included in the Yearbook as
Efficiency and Infrastructure. Each of these four factors has individual criteria and are also used in calculating the overall
been broken down into five sub-factors, each highlighting ranking, representing a weight of approximately one-third.
different facets of competitiveness. Altogether, the WCY
features 20 such sub-factors. (See Tables 1 and 2).
Executive Opinion Survey
Some of these sub-factors have been further divided into
categories that define competitiveness issues more explicitly. Every year, we conduct an Executive Opinion Survey in order
All criteria have been grouped into these sub-factors and to complement the statistics that we use from international,
categories. However, each sub-factor does not necessarily national and regional sources. Whereas the Hard data shows
include the same number of criteria (for example, it takes how competitiveness is measured over a specific period
more criteria to assess Education than to evaluate Prices). of time, the Survey data measures competitiveness as it is
Each sub-factor, independently of the number of criteria it perceived. The survey was designed to quantify issues that
contains, has the same weight in the overall consolidation of are not easily measured, for example: management practices,
results, that is 5% (20 x 5 = 100). This allows us to “lock” labor relations, corruption, environmental concerns or
the weight of the sub-factors regardless of the number of quality of life. The survey responses reflect present and
criteria they include. We believe that this approach improves future perceptions of competitiveness by business executives
the reliability of the results and helps ensure a high degree who are dealing with international business situations. Their
of compatibility with past results. Statistics are sometimes responses are more recent and closer to reality since there
prone to errors or omissions… Locking the weights of sub- is no time lag, which is often a problem with Hard data that
factors has the same function as building “fi re barriers”; it shows a “picture of the past”.
prevents problems from spreading in a disproportionate
way. In addition, the past five years’ results are calculated for The Executive Opinion Survey is sent to executives in top-
every economy covered by the WCY, in order to highlight the and middle management in all of the economies covered
evolution of competitiveness. by the WCY. In order to be statistically representative, we

TABLE 2
The Breakdown of Competitiveness Factors

Economic Performance Government Business Efficiency Infrastructure

Efficiency
Domestic Economy Basic Infrastructure
Public Finance Productivity
International Trade Technological
Fiscal Policy Labor Market Infrastructure
International
Investment Institutional Framework Finance Scientific Infrastructure

Employment Business Legislation Management Practices Health and Environment

Prices Societal Framework Attitudes and Values Education

IMD WORLD COMPETITIVENESS YEARBOOK 2008 473

 select a sample size which is proportional to the GDP of each How are the rankings computed?
economy.The sample of respondents should be representative
of the entire economy, covering a cross-section of the business The essential building block for the rankings is the standardized
community in each economic sector: primary, manufacturing value for all the criteria, which we call the STD value.The first
and services, based on their contribution to the GDP of the step is to compute the STD value for each criterion using
economy.The survey respondents are nationals or expatriates, the data available for all of the economies. (For more details,
located in local and foreign enterprises in the country and see Data Processing Methodology that follows).We then rank
which, in general, have an international dimension. They are the economies based on the 254 criteria that are used in the
asked to evaluate the present and expected competitiveness aggregation, 131 Hard and 123 Survey data. The additional 77
conditions of the country in which they work and have criteria are presented for background information only. They
resided during the past year, drawing from the wealth of are not included in the aggregation of data to determine the
their international experience, thereby ensuring that the overall rankings. In most cases, a higher value is better, for
evaluations portray an in-depth knowledge of their particular example, for Gross Domestic Product; the economy with the
environment. We try to contact most IMD alumni and all highest standardized value is ranked first while the one with
responses returned to IMD are treated as confidential. The the lowest is last. However, with some criteria the inverse may
surveys are sent in January and are returned in March; in be true, where the lowest value is the most competitive, for
2008, we received 3,960 responses from the 55 economies example, Consumer Price Inflation. In these cases, a reverse
worldwide. ranking is used: the economy with the highest standardized
value is ranked last and the one with the lowest is first.
The respondents assess the competitiveness issues by
answering the questions on a scale of 1 to 6.The average value Since all economies’ statistics are standardized, they can be
for each country is then calculated and converted into a 0 to aggregated to compute indices. We use these index values,
10 scale. Finally, the survey responses are transformed into which we call “scores”, to compute the following rankings:
their standard deviation values, from which the rankings are the Overall Scoreboard, Competitiveness Factor rankings
calculated.

TABLE 3
Computing the Rankings

474 IMD WORLD COMPETITIVENESS YEARBOOK 2008

and Sub-factor rankings. When data is unavailable or too old The STD value for criteria i is calculated as follows:
to be relevant for a particular country, the economy appears
at the bottom of the statistical table for the criterion being
measured and a dash is shown. In the aggregation of the (STD value ) i = x − x
S
statistics, all missing data is replaced with a STD value equal
to zero. Although this might lead to an overly optimistic view Where:
of the competitiveness situation of an economy, we believe
that it is the fairest method to use. See Table 3: Computing the x = original value
Rankings. x = average value of the 55 economies
N = number of economies
S = Standard Deviation

Data Processing Methodology

There are 331 criteria in The World Competitiveness Aggregation of Data and Rankings
Yearbook, of which 254 are used to calculate the Overall
Competitiveness rankings. The remaining 77 criteria are First, for each individual criterion, the economies’ standardized
presented as background information only. values are calculated based on the STD Method described
above. Based on the results, the economies are shown in
Every economy’s performance is assessed for each criterion ranking order for each of the 254 ranked criteria. A high
using the Standard Deviation Method (SDM) which is STD value can reflect good or bad performance; again, this
described below. In most cases, a higher value is better, for depends on what the data is intended to measure and which
example, for Gross Domestic Product; the economy with the competitiveness factor it is in.
highest standardized value is ranked first while the one with
the lowest is last. However, with some criteria, the lowest The sub-factor rankings are then determined by calculating
value is the most competitive, which is the case for Consumer the weighted average of the criteria STD values that make
Price Inflation. In these cases, a reverse ranking is used: the up the sub-factor, excluding the background criteria. All the
economy with the highest standardized value is ranked last hard data have a weight of 1. The survey data are weighted so
and the one with the lowest is first. that the survey accounts for one-third in the determination
of the overall ranking. Thus, for 2008, each survey criterion
has a weight of 0.5. When data is unavailable for particular
Standard Deviation Method economies, the missing values are replaced by a STD value
equal to 0. The weighted average for each sub-factor enables
As most of the criteria are scaled differently, a comparable us to “lock” the weight of the 20 sub-factors independently
standard scale is used to compute the overall, factor and sub- of the number of criteria they contain so that each sub-factor
factor results. The Standard Deviation Method (SDM) is used. has an equal impact on the overall ranking, that is 5%.
It measures the relative difference between the economies’
performances; therefore, each country’s relative position in Next, we aggregate the sub-factor average STD values to
the final rankings is more accurately assessed. determine the Competitiveness Factor rankings which are
shown in the Competitiveness Factors section. Only ranked
First, for each criterion, we compute the average value for the criteria are aggregated to obtain these rankings.
entire population of economies. Then, the standard deviation
is calculated using the following formula: The STD values of the Competitiveness Factors are then
aggregated to determine the Overall Scoreboard. All the
ranked criteria comprised in the four competitiveness factors
¦ (x - x )
2
are thus included in the consolidation of data.
S=
N The 77 remaining criteria are presented as background
information only and are not included in any aggregation
of data to determine rankings. Some background data
Finally, we compute each of the 55 economies’ standardized are presented in ranking order while others are shown
values (STD) for the 254 ranked criteria. The STD is calculated alphabetically, depending on what the data is meant to
by subtracting the average value of the 55 economies from the measure.
economy’s original value and then dividing the result by the
standard deviation. Since all of the statistics are standardized, they can be
aggregated to compute indices. We use these index values,
which we call “scores”, to compute the rankings for the four
Competitiveness Factors and the Overall Scoreboard.

It should be noted that across the four Competitiveness

Factors, only one economy will have a value equal to 100 and

IMD WORLD COMPETITIVENESS YEARBOOK 2008 475

 one economy will have a value equal to 0. To calculate the 2. Average annual percentage growth rate (n = number of
Overall Scoreboard, we take the average of the four Factors’ periods):
scores and then convert them into an index with the leading
economy given a value of 100. value 2008 − value value 2007 − value
2007
+ 2006
+ ...
value 2007 value 2006
×100
Survey Criteria n −1

Each year we conduct a survey to quantify issues related to But growth formulas may have shortcomings. The average
competitiveness for which there are no hard statistics, or for annual growth rate fails to reveal the real extent of changes, as
data that are available with a time lag. The survey is an in-depth it flattens or inflates year-to-year growth rates. For example,
123-point questionnaire sent to top- and middle management an average growth rate over two years might be calculated
in the 55 economies covered by the WCY. The distribution at 15 percent, while in reality there was 5 percent growth
reflects a breakdown of industry by sectors: Agro/Extracting, between the first and second years, and 25 percent between
Industry/Manufacturing and Services/Finance. In order to be the second and third years. The average annual growth is used
statistically representative, we select a sample size which is only when data vary widely in the middle years of a period, and
proportional to the GDP breakdown of economic sectors of less widely between the first and last years of the period. It is
the economy. also used in cases where it is impossible to combine negative
and positive initial and final values. This approach gives a more
In 2008, we had 3,960 executives respond to the survey for accurate picture than does the compound rate under these
an average of approximately 72 per country. The target list is circumstances.
determined by IMD and has been developed over many years
with the collaboration of our Partner Institutes worldwide.
Confidentiality is ensured and the list is revised and updated Deflated values
every year. The questions only concern the country in which
the executives work and have resided for the past year; The following formula is used when calculating real growth
therefore, the results refl ect widespread knowledge about rates from nominal values, because it takes into account
each economy and draw on the wealth of their international cumulative inflation (e.g. real growth in Private Final
experience. Consumption Expenditure). The final deflated value is then
used to obtain the annual real growth rate.
The respondents assess the competitiveness issues by
answering the questions on a scale of 1-6, with the response Taking a 5-year time span as an example:
1 generally indicating a negative perception and 6 indicating
the most positive perception.The WCY calculates the average Deflated final value (i = inflation rate):
value for each economy, then the data is converted from a
1-6 scale to a 0-10 scale. Finally, the survey responses are value 2008
transformed into their standard deviation values, from which § i 2004 · § i 2005 · § i ·
the rankings are calculated. ¨1+ ¸ × ¨1+ ¸ × ... × ¨1+ 2008 ¸
© 100 ¹ © 100 ¹ © 100 ¹

Trends

A trend or growth rate, while offering a more dynamic

assessment than absolute values, is meaningful only if a
economy’s actual comparative advantage or disadvantage
at one point in time is also measured. The formulas used to
calculate trends and growth rates are explained below:

1. Annual real growth rate (i = inflation rate):

§ ·
¨ ¸
¨ value 2008
−1¸ ×100
¨ § i 2008 · ¸
¨ value 2007 ¨1+ ¸ ¸
© © 100 ¹ ¹

476 IMD WORLD COMPETITIVENESS YEARBOOK 2008