Four steps on how regional governments can elevate economic competitiveness

Governments have always been influential, progressing national economies, with some being more influential than others in driving the development of sectors and organisations within their respective borders.

Given the uncertainty that now surrounds the wider business environment – as well as pandemic repercussions continuing to unfold – it is highly probable that governments will, over the coming months, provide more individual companies that make valuable contributions to the economy with financial aid or stimulus packages.

Already, home countries have committed to providing full financial support in light of pandemic-related losses. For example, GCC major carriers have received support due to the unprecedented cost implications concerning inbound and outbound flights being grounded – and similar practices have seen been seen globally.

Despite recent use cases such as these, lending support in this way inevitably comes with complexities to consider. Although government assistance in the current climate is sought-after by many, BCG research illustrates that companies backed by their governments from a financial standpoint – regardless of sector – have a tendency to deliver poorer results than those operating independently:

As an example, 10-year TSR (Total Shareholder Returns) for companies that did and did not receive government support is 14.2 per cent and 16.8 per cent, respectively. This does not, of course, prove that government support causes underperformance. However, it does emphasise that government support is often not sufficient to make a company successful.

Government support is most effective when it is invested at a sector or industry level, creating enabling environments with well-designed regulations, reliable infrastructure, open market access, and the requisite skilled workers. This approach establishes a level playing field from which winners – players with sound strategies and the right competencies – naturally emerge.

However, governments will still choose to support specific companies for many reasons including – but not limited to – boosting GDP, increasing job creation, driving the development of sectors and ecosystems, and achieving national security priorities. As such, it is clear that lending government support requires a different approach, one that is comprehensively constructed, seamlessly executed, and part of a wider economic development plan.

Empowering companies through valuable assistance
Because the global environment is evolving, the coming years will see increased government intervention. New political, economic, and business models are emerging – and all three areas are encouraging government involvement. Whatever the scenario, success and competitiveness hinges on governments adopting an investor’s mindset as the competitive landscape’s rules and regulations change – and accomplishing this can be accelerated through four essential steps.

The below steps, together with these global examples, can provide inspiration for GCC governments to emulate:

1. Establish support criteria
From the outset, governments should ensure that comprehensive standards are in place for organisations that are shortlisted for – and ultimately secure – support. Irrespective of favourable competitive positions, clear growth strategies, or flourishing track records in terms of societal contributions, every company should be bound by the same standards.

Governments can concentrate their supportive efforts towards organisations capable of driving valuable social or economic progress in various sectors. Whatever their decision, though, this best practice is a building block for becoming competitive globally. For instance, the South Korean government has approved a $1bn capital injection to Hyundai Merchant Marine and has since reaffirmed its support to prevent disruption of the Korean economy.

2. Set objectives and identify the required levers
There are three government support archetypes, and each can position companies as robust, resilient, and competitive global market players. In terms of aggressive growth, governments can focus on championing companies in a limited timeframe, with avenues including procurement contracts provision, mergers and acquisitions, and sector consolidation. Regarding international expansion, success can be attained via levers, including export financial assistance, partnership agreements with other governments, and lobbying leadership counterparts. Meanwhile, the third archetype – national priorities alignment – can be accelerated through CAPEX allocations, infrastructure development, and accommodating innovation and labor supply and demands.

Over a three-decade period from the 1960s–1980s, an Asian government advanced national industrialization through licensing agreements that limited competition in particular sectors. These see, the government supported a diversified, industrial conglomerate, created education partnerships, and provided access to government assets and contracts.

3. Create support to restrict market impacts
Becoming competitive also hinges on the government limiting market and competition distortions – and reducing associated risks is essential. After all, the end objective is that organisations become recognised competitors. Therefore, concrete company support timeframes should be finalised and brought into effect. When support has been initiated, international operations should be prioritised where applicable, be it through plans to enhance exports or grants to bolster foreign investment activities. At the same time, it would also be prudent to facilitate domestic growth should companies require substantial scale to compete. The US automotive industry bailout, under which the government required management changes, is a clear example of the benefits of establishing time limits for any form of company support.

4. Become agile and anticipate negative outcomes
During every phase, adapting quickly to new information and scenarios is a necessity. Therefore, governments must evaluate and oversee the market dynamics of those they are supporting so they are agile when presented with opportunities or risks. It is also paramount to accept that, for various reasons, desired success may not transpire.

As such, governments must also be prepared to recognise shortcomings and, when necessary, revoke their support. Backing substandard performs hinders productivity progress, and governments should constantly revert to results and landmark achievements to measure success.

For example, Malaysia’s sovereign wealth fund Khazanah Nasional Berhad made several opportunistic hospital-based investments from 2005 through 2012. These included purchasing 24 per cent of Parkway Pentai, one of South Asia’s largest private healthcare providers, and creating IHH Healthcare Berhad, which was the second-largest hospital group by market capitalization worldwide.

Middle East governments moving ahead with plans to provide company support must adopt an investor mentality and maintain this during every phase of the journey. Backed by the comprehensive actions and recommendations detailed above, success in helping companies reap financial rewards and establish themselves as a reputable global competitor is far more likely.

Rami Rafih is the managing director and partner at Boston Consulting Group