Annexes to COM(2007)666 - Raising productivity growth: key messages from the European Competitiveness Report 2007 - Main contents
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| dossier | COM(2007)666 - Raising productivity growth: key messages from the European Competitiveness Report 2007. |
|---|---|
| document | COM(2007)666  |
| date | October 31, 2007 |
Skills upgrading as a competitiveness factor
Skills contribute directly to international competitiveness and productivity since a better educated workforce augments the efficiency of labour and raises the absorptive capacity of firms to more easily integrate new technologies and ideas. For example, empirical research indicates that raising the average duration of schooling by one year would increase productivity by 8 to 10% in the long run [9]. Skills upgrading is under way in all economic sectors, even in low-skill ones. Empirical analyses reveal that sectors employing a larger share of high or medium skilled workers exhibit higher productivity growth while a high share of low skilled workers in a sector exerts a negative influence on productivity growth. Furthermore, skills matter for the speed of convergence towards the technology frontier. As might be expected, convergence is faster in high skill intensive industries. Finally, a higher share of high and medium skilled workers spurs growth of exports.
At the level of individual industries, the analysis demonstrates that the skill upgrading process within industries contributes more to the increasing demand for highly skilled workers than shifts of employment between sectors or industries. Nonetheless, there is also a general shift of employment away from low-skill intensive industries towards medium- and high-skill intensive industries, and this shift occurs across all groups of EU countries.
Against this background, skill gaps can be seen, firstly, as an adjustment problem, arising after an increase in demand for (or a decrease in the supply of) a certain skill. In such a situation the government’s role could be to smooth the transition process whereas there seems to be limited scope for strong sector specific policies. Secondly, where skill gaps are due to the legacy of the past, policies should focus on measures to help the economy to reach a better mix of skills. But addressing the skill mismatch is not just a task for the government. Many more European enterprises will have to address the skill mismatch in their corporate strategies.
The efforts within the growth and jobs strategy to foster the accumulation of human capital, such as through a reduction in the number of early school leavers and the encouragement of academic enrolment in mathematics, science and technology, should support the increasing demand for skills connected to skill-biased technical change. Higher employment rates, notably of women, will also help to reduce the skill gap. Whereas education policies mainly remain a national competence, the education of top researchers in the EU will benefit from EU-wide initiatives such as the development of the European Institute of Technology and increased mobility of researchers.
4. Competitiveness of European industries
The state of play
Overall, the competitive performance of European industries, where SMEs play a considerable role, is strong. However, this masks a highly variable performance at the level of individual industries, both across countries and between sectors. For the period since 1995, the EU exhibits low performance in terms of the growth of value added, labour and total factor productivity, while appearing quite healthy in terms of trade performance. Foreign direct investments expand rapidly in each direction, with outward foreign direct investment growing more strongly.
Assessing the relative strengths and weaknesses by sector, the sectors of mining and, among manufacturing industries, the production of leather & footwear, clothing, textiles, nuclear fuel and tobacco are those presenting a decline not only in employment but also in value added. Conversely, apart from water transport, all the industries with the highest rates of value added growth in the European Union – communication equipment, office machinery and computers, as well as telecommunications and computer related services – relate to the new information and communication technologies.
Compared to the US, the biggest gap in sectoral performance can be found in the manufacturing of office machinery and computers, wholesale and retail trade, air transport, and the financial services. The latter three services sectors all appear to be rather sensitive to economies of scale and are likely to benefit from the larger integrated markets in the US. Conversely, the EU shows pockets of higher growth in selected areas of high-tech manufacturing, particularly pharmaceuticals, and the network industries.
Higher service content in European manufacturing
Taking the long view [10] indicates that Europe, whilst still being among the richest regions on a GDP per capita basis, will be overtaken by some of the emerging economies in terms of overall economic size. This is due both to demographic factors and the relatively strong growth in productivity as the emerging economies catch up. By 2050 Asia will most likely have become the most important market and pole of growth.
The analysis shows that over the next decades, manufacturing is set to continue to play a major role in the EU economy, contributing directly to welfare and productivity growth and generating significant demand for research and high skilled services which spills over to the rest of the economy [11]. At the same time, it is expected that manufacturing, defined in a narrow sense, will directly employ less people than today and will represent a relatively smaller part of the whole economy.
The trends on employment and relative size must not be confused with stagnation or decline. To a certain extent, they reflect the effect of differences in productivity growth. Additionally, these trends are of a statistical nature, i.e. the fragmentation of the value chain results in activities previously classified as manufacturing shifting to the services sector. The manufacturing industry with its related service sectors will remain a key pillar of the EU economy in the 21st century, not only because of its continued economic weight but also because it is an integral part of the innovation system of a modern economy.
The analysis suggests that the most successful of these firms will act as leaders of global value networks, providing planning, marketing and R&D services and integrating components from outside sources. Thus, the service content of manufacturing and also of the whole package sold with the final product is likely to increase further. This creates new revenue opportunities and valuable long lasting relationships with customers; however, it also increases the potential for outsourcing. Hence the existing statistical classifications of activities in manufacturing and services, respectively, will become increasingly less relevant and new types of analysis of company and market developments will become necessary.
It is not clear to which extent the emerging technologies (electromechanical microsystems, advanced materials, bio and nanotechnologies) will realise their perceived potential, although it must be underlined that their potential is very significant and could make a major contribution to productivity growth and innovation over the next decades. It is, however, likely that managing knowledge will become more important and the successful business models of the future will be those that perform better in this respect. Intellectual capital and intangibles are likely to become ever more important. This will probably lead to more complex organisational approaches, with a high degree of collaboration and networking with suppliers, customers, competitors and an increased use of external sources of knowledge, such as research institutions and universities.
These developments will put increased emphasis on the possession of skills. In particular, soft skills such as team working, learning, sharing and communicating, providing a service as well as a good and the ability to think in an interdisciplinary way will become crucial, especially for SMEs wanting to participate in the global networks. These skills may become necessary even for serving local markets.
Dynamic specialisation, i.e. when given competitive strengths not only persist but tend to be reinforced, suggests that Europe will maintain strong positions in many medium-high and high technology sectors (chemicals, including pharmaceuticals, mechanical engineering, cars, aerospace, embedded electronics). This will necessitate important R&D efforts to continuously expand the technological frontier in these industries so as to keep competitive edge. High quality products in traditional sectors may also be strongholds, where technological innovation together with design and marketing play an important role.
Much will also depend on the ability of European firms to capitalise on the opportunities represented by global challenges, such as ageing and climate change. Since Europe will need to address these challenges early on, there is a real opportunity for establishing lead market positions in products such as those linked to health care, convenience, leisure and entertainment and environmental technologies.
The horizontal policy framework matters for manufacturing
By taking a more quantitative, model based approach, it is possible to evaluate the impact of policies that aim at improving the general framework conditions for competitiveness and their relative importance in such a long term perspective. The results of such an approach depend strongly on the specifications and assumptions of the model; however, they give useful indications on the direction and order of magnitude of the outcomes generated by policy changes. The key determinant of longer-term growth and productivity is the degree of openness of the EU and world economy. Nevertheless, other structural policy reforms can have important effects.
The policies considered are upgrading skills, better regulation and less administrative burdens for firms, R&D and innovation, a more competitive Single Market and environmental policies, in the form of improved energy efficiency. Their individual impact on GDP by 2025 is in the range of 0.5-0.6 % (skills [12]) to3.0-3.5% (R&D), with the other structural policies in-between. Their cumulative impact amounts to around 8% to 9%.
Amongst the policies considered, R&D and innovation policies and strengthening the internal market have the strongest and most positive impact on manufacturing. Improving the horizontal policy framework will help slow down the trend decrease in the relative size of manufacturing in Europe. The model-based results confirm that with a favourable external environment some manufacturing sectors such as chemicals, rubber and plastics, combined machinery and equipment could approximately maintain their present shares in the EU economy. In terms of the EU share in world production, in the absence of improved framework conditions, there is no sector where the EU maintains its relative importance by 2025. In the presence of the above-mentioned policies, sectors such as transport equipment, wood and other manufacturing, energy carriers, research and development services, chemicals, rubber and plastics, transport services and other business services maintain or almost maintain their share in global production. This analysis confirms that the economic reforms are especially important for sectors exposed to trade, such as manufacturing.
5. Synthesis
The key conclusion of this Report is to underline the central role that productivity plays as a source for growth over the long term. The disappointing productivity performance of the EU over the recent past as well as the recent recovery is explained to a large extent by total factor productivity developments. This has clear policy implications, i.e. the importance of research and innovation as well as training and education policies and of economic reforms that enhance the general business environment and facilitate structural change and re-allocation of resources. Coordinated action in these areas produces, in most cases, superior benefits to acting alone. A major driver for increased economic efficiency is competition, either through trade openness, a reinforced Single Market, especially in services, continuous liberalisation of network industries or product market reform.
The future holds out the promise that the European manufacturing industry will continue to play a major global role in a context where the crucial assets will be knowledge and skills. The implementation of the policies and reforms referred to above will be central in realising this perspective.
[1] Commission Staff Working Paper SEC (2007), European Competitiveness Report 2007.
[2] The EU KLEMS Growth and Productivity Accounts database research project aims to create a database on measures of economic growth, productivity, employment creation, capital formation and technological change at the industry level for all European Union member states from 1970 onwards.
[3] Manufacturing and the whole economy display very similar, and synchronous, patterns of productivity growth even if the productivity growth rates of the former are generally higher.
[4] However, the EU uses more capital per worker which reduces the labour productivity gap with the US.
[5] See EU Economy Review 2007 and related Communication "Moving Europe's productivity frontier", forthcoming.
[6] Excluding intra-EU trade. "World" refers to an aggregate of countries which accounts for 86% of total world exports (in order to assure comparability of the shares across time by keeping the reporting countries stable).
[7] These results, taken in isolation, are prone to over-interpretation, i.e. losses of export market share could lead to the conclusion of a competitiveness decline where other factors (such as higher growth or consumption) might be in play.
[8] EU -27 or EU-25 services trade data are not available since 1996.
[9] Canton, E. (2007), Social returns to education: Macro-evidence, De Economist (forthcoming December 2007)
[10] On the basis of a literature review of foresight and futures studies, the backbone of which is three recent EU-wide foresight projects on the future of manufacturing in Europe FutMan, ManVis and Manufuture.
[11] One Euro of manufacturing goods sold requires between 22 (Netherlands) and 36 cents (Germany) of inputs from market services (2000 input-output data).
[12] The policy modelled is the achievement of the targets adopted in 2004 for 2010 (10% maximum of early school leavers, at least 85% of 22 years olds with upper secondary education, 20% reduction of 15 years olds with low reading literacy achieving , at least 12.5% participation in Lifelong Learning and 15% increase of S&T graduates). Their economic effect will increase very gradually only, as successive, better educated cohorts enter the work force.
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