Composite Competitiveness Indicators With Endogenous Versus Predetermined Weights : An Application to the World Economic Forum’s Global Competitiveness Index

This paper addresses an important methodological issue concerning the construction of a composite indicator, and in particular composite indicators of national competitiveness; these indicators often serve as a benchmark for policymakers and others to judge the relative success of their country. Most competitiveness indicators aggregate primitive data using predetermined fixed weight values that are applied uniformly to all countries. The use of fixed and uniform weights may bias inferences of relative performance since it ignores that countries can have different policy priorities or lack inherent capabilities on some dimensions. In addition, since the particular weight values chosen are not likely to be universally accepted, the credibility of any particular index is weakened. To address this issue, this paper proposes a procedure that allows for endogenously determined country specific weights that explicitly take account of a country’s own choices and achievement across primitive dimensions. We then illustrate our procedure by applying it to examine the widely cited Global Competitiveness Index developed by the World Economic Forum. Our resulting Revealed Competitiveness Index uses weights that allow that countries may choose different combinations of the underlying dimensions but still achieve the same level of overall performance. In general, our method will prove useful to those wishing to construct and compare indexes of performance, while minimizing objections about the “importance” of the different component dimensions that often arise when predetermined and uniformly applied weights are used.