Governments can increase economies long-term potential by investing in new sectors such as clean tech but it would have little impact on job creation according to a US report on competitiveness and job creation that was published on Thursday.
The McKinsey Global Institute (MGI), the research unit of the consulting firm McKinsey, says in its report, How to compete and grow: A sector guide to policy, that experience shows that governments have, at best, a mixed record in job creation. 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. MGI says policy makers can have a bigger immediate impact on jobs by focusing their efforts on service businesses — such as retail and telecoms — than by trying to boost manufacturing or innovative technologies.
The authors cite the difference an emerging sector such as clean tech can have on jobs, by comparing it with the highly successful semiconductor industry. In the US, they note, the semiconductor sector accounts for 0.3% of total nonfarm employment. That compares to 11.3% for retail trade. Even India’s dynamic software industry accounts for only 0.1% of that country’s employment. "While many policy makers see innovative technologies as the answer to the challenge of job creation, our analysis indicates that governments are likely to be disappointed in such hopes,” the authors write. The report says low-tech green jobs like insulation work can have a bigger impact than developing renewable energy technologies.
MGI says finding ways to promote growth in service sectors, which have generated more than 100% of net job growth in wealthy countries over the past couple decades (goods-producing sectors lost jobs) is key. Some of the jobs are low paid but not so in sectors where specific skills are needed.
The report says South Korea and the Republic of Ireland have been phenomenally successful in their goods-producing sectors but at a cost to competitiveness of local services.; higher costs and the more limited number of restaurants and hotels, explains why in Sweden, consumption in this sector is less than half that in the UK.
MGI's analysis offers policy makers a pragmatic guide to help them make the right decisions and trade-offs, drawing on a bottom-up, sector-based approach. The report says research is based not only on McKinsey’s industry expertise but on nearly two decades of MGI sector-level analysis in more than 20 countries and 28 industrial sectors. In the latest research, MGI 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 analysing competitiveness at the sector level, MGI reaches conclusions that run counter to the way many policy makers 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 the MGI research shows that those countries that outperform their peers do not have a more favourable 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, policy makers 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 policy makers 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, MGI offers 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, MGI documents 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.
MGI documents 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 McKinsey 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.
MGI suggests 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 policy makers to the challenges they face, and become thought partners to governments on competitiveness policies.
Read the executive summary (PDF - 472 KB)
Read the full report (PDF - 5.56 MB)