The Switzerland-based International Institute for Management Development (IMD) produces an annual ranking of competitiveness which covers 64 countries for which there appears to be sufficiently robust data to perform rigorous analysis. This is published as part of a World Competitiveness Yearbook.
"The IMD World Competitiveness Yearbook (WCY), first published in 1989, is a comprehensive annual report and worldwide reference point on the competitiveness of countries. It provides benchmarking and trends, as well as statistics and survey data based on extensive research. It analyzes and ranks countries according to how they manage their competencies to achieve long-term value creation.”
Source: IMD.org
The ranking involves 334 factors which are aggregated up into several categories: Economic Performance; Government Efficiency; Business Efficiency; Infrastructure. Those categories are blended together into an Overall score.
The United States has generally appeared in the #1 spot, or near that spot, since the data has been available. However, it has recently begun to lose that consistently-high ranking, and in the last report it plunged to 10th place.
(Source: IMD, as of June 2021.)
The data show that at least some competitiveness factors are historically somewhat relevant to investment performance. For example, countries in the top quintile of IMD’s Digital Competitiveness ranking (the best 20%) averaged a 4.95% return, whereas countries in the bottom quintile of competitiveness (the worst 20%) averaged only a 1.48% return. The correlation between this rank and subsequent returns was positive 70% of the time.
(Source: Bowyer Research, analysis ranged from 6-30-13 through 12-31-21, most recently available. Past performance is not indicative of future results.)
This analysis should help to overcome the ‘home bias’ many U.S. investors have (the tendency for people to heavily allocate investments in the country where they live), and explain the potential benefits of expanding their investment options beyond the traditional focus on U.S. stocks. Beyond that, it should also help investors understand the importance of looking at alternatives to cap-weighted approaches to international investing, alternatives like the Vident Core International Equity IndexTM (VIEQX).
A deeper dive is in order to see if any of the other subcategories of IMD’s competitiveness report might be fruitful as a factor in index construction. Stay tuned for more on that here.
Index Definitions:
The Vident Core International Equity IndexTM is a strategy seeking to balance risk across developed and emerging countries and emphasize those with favorable conditions for growth.
The Morningstar Global Markets ex-U.S. Index measures the performance of the stocks located in the developed and emerging countries across the world (excluding the United States) as defined by Morningstar.
An investor cannot invest directly in an index.
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Investors cannot invest directly in an index. Indexes are not managed and do not reflect management fees and transaction costs that are associated with some investments. Past performance does not guarantee future results.