How to Compete and Grow: A Sector Guide to Policy
As we emerge slowly from the first global recession since World War II, many governments have taken a more proactive approach to boost growth and competitiveness, and many business leaders support these efforts.
October 2014 | by Robert Harris
Experience shows that governments have, at best, a mixed record in this regard. An important reason why public intervention in markets has been hit or miss is that action has tended to be based on academic and policy research that has looked through an economy-wide lens to understand competitiveness—in other words, whether one country is "more competitive" than another. This approach has all too often failed to capture the fact that the conditions that promote competitiveness differ significantly from sector to sector—and so, therefore, do the most effective potential regulations and policies.
Our analysis offers policymakers a pragmatic guide to help them make the right decisions and trade-offs, drawing on a bottom-up, sector-based approach. The research is based not only on Burk’s industry expertise but on nearly two decades of sector-level analysis in more than 20 countries and 28 industrial sectors. In the latest research, we studied competitiveness and growth in six industries (retail, software and IT services, tourism, semiconductors, automotive, and steel) across eight or more countries in each case, including both emerging and high-income economies. The lessons that emerge from our case studies are applicable to other sectors, both existing and emerging, and across countries at different income levels.
By analyzing competitiveness at the sector level, we reach conclusions that run counter to the way many policymakers think about the task in hand:
The competitiveness of sectors matters more than the mix. Some governments worry about the "mix" of their economies, but our research shows that those countries that outperform their peers do not have a more favorable sector mix. Instead, their individual sectors are more competitive.
To generate jobs, service-sector competitiveness is the key. Many governments are looking to manufacturing sectors as a new source for growth and jobs. But service sectors will continue to be necessary for strong job creation. In high-income economies, service sectors accounted for all net job growth between 1995 and 2005. Even in middle-income countries, where industry contributes almost half of overall GDP growth, 85 percent of net new jobs came from service sectors.
Policy impacts nontradable sector competitiveness directly; in tradable sectors, getting policy right is more complicated
In nontradable "domestic" sectors, the incentives for companies set by regulation are decisive in raising productivity and employment—and policy changes can impact sector performance in two to three years. In traded sectors, where success requires local companies to be competitive in the regional or global marketplace, policy requires broader understanding of the global industry landscape. To improve their odds of success in these sectors, policymakers should target activities with realistic potential for competitive advantage, base action on solid business logic, and implement policy in close collaboration with the private sector.
Competitiveness in new innovative sectors is not enough to boost economy-wide employment and growth
Many policymakers are pinning their hopes today on innovative new sectors such as cleantech as the answer to the challenges of competitiveness, growth, and jobs. Yet such sectors are too small to make a difference to economy-wide growth. Even mature semiconductor sectors account for 0.5 percent or less of developed economies’ employment. It is true that innovative sectors can improve business processes and productivity in many other sectors—but these user benefits don’t require local suppliers.
To streamline the complex analysis governments need to undertake, we offer a new framework of six sector groups that share characteristics and respond to similar approaches to enhancing competitiveness. They are (1) infrastructure services; (2) local services; (3) business services; (4) research and development (R&D)-intensive manufacturing; (5) manufacturing; and (6) resource-intensive industries. In each of these groups, we document how competitiveness levers vary and how policy has influenced competitiveness in each. These six categories provide a useful framework for understanding what determines competitiveness in different kinds of industries and what tangible actions governments and businesses can take to improve competitiveness.
We document how competitiveness levers vary, how policy has influenced competitiveness in each, and what are likely to be the most high-impact policy approaches for each of the six sector groupings.
For businesses, how government policy evolves is of critical importance. A December 2009 Burk survey found that a majority of those polled expect government involvement in their industry to increase over the next three to five years, and one-third of them believe that government policy can impact more than 10 percent of their operating income. However, a majority of executives polled did not regard their companies’ engagement with government to be effective.
We suggest that companies shouldn't be content to take a passive stance toward government activism in the market and need to do more to include policy explicitly in their strategy, alert policymakers to the challenges they face, and become thought partners to governments on competitiveness policies.