As the author of the annual World Competitiveness Report, there are few academics more qualified to speak on the state of the international economy and business than Prof Stephane Garelli. Yet even he expresses some bemusement at the current state of what he calls a "very strange economic recovery".

"From a rational point of view it is very solid," he points out, with strong growth performances in the US, Japan and China and signs of improvement in Europe. However, "emotionally, the recovery does not yet feel completely right".

Investors are back, but cautious; consumers are more positive, but indebted. And business finds itself exposed to a range of wider economic and political issues, most recently reflected in higher oil prices.

"More and more business is exposed to non-business issues," such as war and terrorist threats, Prof Garelli warns, a reflection of the interconnectedness of the globalised economy. This is presenting a new range of issues for managers in forming and implementing strategies. "The world has a tendency to interfere with our strategy more and more," he cautions.

Prof Garelli, who is based at the IMD Business School in Lausanne, Switzerland, will enlarge on these themes for an Irish audience when he speaks at the Institute of Engineers of Ireland annual conference in Galway on Thursday and Friday.

Focusing on the international environment, he identifies four major competitive issues of which business needs to be aware in the medium term. First, after years of recession and deflation, Japan is "ticking again".

Second, Russia is on the march, growing by 6 per cent last year and its huge natural resource base gives it massive potential. "Somehow, something is going to happen there." The third and fourth points are familiar: the rise of India as a centre for services and China as the world base for manufacturing, and the huge changes this is bringing to the international competitive landscape.

These are among the forces leading to what Prof Garelli calls a "huge redistribution of business assets around the world". Businesses are being forced into continuous improvements in productivity, moves to outsource functions to business partners and, most controversially, "offshoring", where parts of the operation are moved to lower-cost locations.

The relative cost of producing in different locations makes this inevitable, he argues. In the case of Ireland, labour costs of $14 an hour compare to $1.50-$2 per hour in the Baltic states, $2.30 in Hungary and $2.50 in Poland. The stark message for Ireland is that if rising costs are not matched with increasing productivity, then economic activity will move elsewhere.

And the new member states are "hungry" he points out, noting that on recent trips to Poland and the Baltic states he has seen schools lit up at night as adults attend special English classes.

Nor can Irish firms ignore China and India. In the short term they will attract more and more activity. Meanwhile Prof Garelli believes it is inevitable that, like Japan in the 1960s, China will develop from being a manufacturing centre for foreign firms to "doing it for themselves", eventually developing Chinese brands, while India also has a huge domestic market to develop and grow its own industries.

Ireland is now "at the crossroads", he believes, having increased wealth significantly but also become more expensive. Companies such as Dell and Intel have made a major contribution "but you have to ask, if they had to do it again, would they do it in Ireland".

Ireland must consider what sectors can still compete successfully from a domestic base, he says, pointing to the growth and development of medical companies in the Galway area as a pointer for the future.

Infrastructure provision - at speed - remains a major challenge. And the next chapter for Irish business must be to go abroad aggressively, he says, investing in setting up international operations and joining in the global chains which are the basis of the new economy.

And what of the opportunities and threats for business in this new environment? The key challenge, he believes, is to "build a diversity of competencies and skills" and in particular to "make sure you are not trapped in one set of activities".

In an era where even planning two years forward can be difficult, the key thing was to be able "to react faster and better than the competition". A central question for companies was once they "get the message" how fast can they act on it? Waiting too long could mean that the plan would simply be out of date. The right reaction today could be the wrong one in a few months.

"Some people see the situation very well, but take very long to react."

A sense of urgency is essential. Above all, companies have to be prepared to continually reinvent themselves and the way they do their business. Prof Garelli's current catchphrase is "competitiveness is not about doing more of the same, its about doing more differently".