A sector guide to policy McKinsey Global Institute May 5, 2010 - - PowerPoint PPT Presentation

How to compete and grow: A sector guide to policy

McKinsey Global Institute May 5, 2010

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McKinsey Global Institute

▪ The McKinsey Global Institute (MGI),

founded in 1990, is McKinsey & Company’s business and economics research arm.

▪ MGI’s research is a unique combination of

two disciplines: economics and

• management. By integrating these two

perspectives, MGI is able to gain insights into the microeconomic underpinnings of the broad trends shaping the global economy.

▪ MGI’s research is funded by the partners of

McKinsey & Company and not commissioned by any business, government,

• r other institution

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To provide a fact base, our research sought to answer two questions How do sectors differ in what matters for competitiveness? How do government policies impact sector competitiveness and growth?

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Summary

▪ Our sector approach – and why it matters ▪ Patterns in sector contributions to growth ▪ How can governments tailor policies to each

sector

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1.6 1.2 100 10 1 0.4 0.8

• 0.8
• 0.4

Infrastructure Local services Business services Resource- intensive industries Manufacturing R&D-intensive manufacturing

MGI categorizes sectors into six groups according to degrees of differentiation and tradability

SOURCE: EU KLEMS growth and productivity accounts; OECD input-output tables; McKinsey Global Institute analysis

Size of circle = relative amount

• f sector value added in 2005

Differentiation index 0 = average Differentiation of products High Low Tradability of products Imports plus exports divided by sector gross output % Low High

Electricity Construction Hotels and restaurants Land transport Wholesale and retail trade Post and telecommunication Finance and insurance Real-estate activities Computer and related activities R&D Pulp, paper, printing, and publishing Agriculture, forestry, and fishing Wood products Rubber and plastics Basic metals Fabricated metals Machinery and equipment Motor vehicles Pharma Chemicals Radio, TV, and communication equipment Medical instruments Aircraft and spacecraft Other Other

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Summary

▪ Our sector approach – and why it matters ▪ Patterns in sector contributions to growth ▪ How can governments tailor policies to each

sector

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Three lessons learned for governments to keep in mind as they seek to enable growth

SOURCE: McKinsey Global Institute analysis

LESSON 3 Service sector growth is critical – and particularly so for job growth LESSON 1 Success in emerging, innovative sectors alone is not enough to sustain growth LESSON 2 The mix of sectors in an economy is less important than the competitiveness of sectors

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Even in the United States, innovative new sectors make a small direct economic contribution

SOURCE: The Clean Energy Economy, PEW, 2009; Bureau of Labor Statistics; Haver analytics

Share of US employment, August 2009 (percent of nonfarm employment) 100% = 130 million New innovative sectors 0.6 0.3 0.2 11.3 5.9 4.9 Existing large employment sectors

Competitiveness in new innovative sectors is not enough

Biotech Semi- conductor Cleantech Construc- tion Financial activities Retail trade

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Three lessons learned for governments to keep in mind as they seek to enable growth

SOURCE: McKinsey Global Institute analysis

LESSON 3 Service sector growth is critical – and particularly so for job growth LESSON 1 Success in emerging, innovative sectors alone is not enough to sustain growth LESSON 2 The mix of sectors in an economy is less important than the competitiveness of sectors

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Sector performance has mattered more than the mix of sectors for overall GDP growth in developed countries

SOURCE: Global Insight; McKinsey Global Institute analysis

Growth Total growth Contribution to total value added, 1995–2005 Compound annual growth rate, % United States

• S. Korea

United Kingdom France Germany Japan High Low

Sector competitiveness matters more than sector mix

Growth momentum (growth predicted by initial sector mix) Differences in performance

• f sectors

2.1 2.3 2.3 2.2 1.8 2.3 0.4 0.8 2.1 3.3 2.6 2.6

• 1.7

0.7 0.9

• 1.5
• 0.2

0.4

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Three lessons learned for governments to keep in mind as they seek to enable growth

SOURCE: McKinsey Global Institute analysis

LESSON 3 Service sector growth is critical – and particularly so for job growth LESSON 1 Success in emerging, innovative sectors is not enough to sustain growth; existing sectors need attention, too LESSON 2 The mix of sectors in an economy is less important than the competitiveness of sectors

McKinsey & Company | 11 SOURCE: Global Insight; International Labor Organization; National Statistics; McKinsey Global Institute analysis

Sector contribution to growth of value added in high-income countries, 1985–2005 100% = $10.4 trillion

Services have contributed 87 percent of GDP growth in high-income countries in the last decades

For jobs, service sector competitiveness is key

58 18 12 6 2 4 13 87 100 R&D-intensive mfg Manufacturing Resource-intensive Business services Local services Infrastructure Goods Services

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Low-income countries 100% = 324 Medium-income countries 100% = 50 High-income countries 100% = 74

Service sectors generate most net new jobs across all income groups – and over 100% in high income countries

32 68

SOURCE: International Labor Organization; National Statistics; McKinsey Global Institute analysis

Sector contribution to a country's net growth of employment, 1985–2005 %, million employees Goods Services 9 91 29 129 100%

For jobs, service sector competitiveness is key

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Summary

▪ Our sector approach – and why it matters ▪ Patterns in sector contributions to growth ▪ How can governments tailor policies to

each sector

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Our policy approach – framework

Degree of intervention High Low Government as principal actor Tilting the playing field Building enablers Setting ground rules/direction Governments can limit sector policies to

▪ Setting the

regulation covering labor, capital and land markets;

▪ Establishing the

general business environment,

▪ Setting broad

national priorities and road maps. Without interfering with market mechanisms, governments can support private-sector activities by

▪ Expanding hard and

soft infrastructure;

▪ Helping to ensure

adequate skills through education and training,

▪ Supporting R&D

activities. Governments can choose to create favorable conditions for local production through:

▪ Trade protection from

global competition

▪ Providing financial

incentives for local

• perations

▪ Shaping local

demand growth through public purchasing or regulation. Governments can play a direct role by

▪ Establishing state-

• wned or

subsidized companies;

▪ Funding existing

businesses to ensure their survival

▪ Imposing

restructuring on certain industries.

SOURCE: MGI/PSO Sector Competitiveness Project

Differentiating sector-level policies by the degree of intervention

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To be effective, policy tools need to be tailored to sector characteristics

SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project

Infrastructure Resource-intensive industries Infrastructure R&D-intensive manufacturing Business services Local services Manufacturing

Degree of intervention High Low Government as principal actor Tilting the playing field Building enablers Setting ground rules/direction

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20 18 19 16 17 Employment Hours worked per capita 90 Labor productivity Value added (dollars per hour worked) 60 70 40 100 80 50 22 11 10 9 8 21 7 12 14 15 13 24 23 6

Policy can determine domestic sector performance – retail sector performance varies widely around the world

Retail sector performance in developed countries, 2005

SOURCE: EU KLEMS; McKinsey Global Institute analysis

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To be effective, policy tools need to be tailored to sector characteristics

SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project

Infrastructure Resource-intensive industries Infrastructure R&D-intensive manufacturing Business services Local services Manufacturing

Degree of intervention High Low Government as principal actor Tilting the playing field Building enablers Setting ground rules/direction

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The majority of recent attempts to establish local semiconductor industries

• r clusters have failed

SOURCE: SEMI World Fab Watch; expert estimates; McKinsey Global Institute analysis

Successes and failures of semiconductor clusters

Present Currently not present Sustainable competitive edge ROUGH ESTIMATES Estimated cumulative country- wide government incentives (USD billion) $

2000 1980 1990 1970 United States, $12–36 Japan, $19–54 Taiwan, $15–43 South Korea, $9–26 Singapore, $5–16 Germany, $2–7 Malaysia, $1–3 China, $6–17 Estimated date of industry reaching significant size

Taiwan Semiconductor Manufacturing Company (TSMC) first to introduce novel business model of foundry-only semiconductor player

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To be effective, policy tools need to be tailored to sector characteristics

SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project

Infrastructure Resource-intensive industries Infrastructure R&D-intensive manufacturing Business services Local services Manufacturing

Degree of intervention High Low Government as principal actor Tilting the playing field Building enablers Setting ground rules/direction

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Steel demand is strongly dependent on growth in per capita GDP

SOURCE: J.F. King; World Bank; McKinsey Quarterly; McKinsey Global Institute analysis 1 General steel intensity curve based on findings by Louis Schorsch. See for example Schorsch and Ueyama, “New game, new rules,” McKinsey Quarterly, May 1993.

Country population Observed historical consumption curve

100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

Argentina China Mexico India United States Brazil

2007 steel consumption Kg/capita

Ukraine Russia Japan Vietnam Austria Portugal Taiwan Sweden Germany Saudi Arabia Turkey Egypt Iran Thailand United Kingdom France Italy Korea Republic South Africa Greece Czech Republic Australia Poland

2007 GDP at PPP/capita $

Spain Canada

Growth economies Inflection economies Mature economies

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A sector perspective on competitiveness and growth

▪ Growth aspirations need to be grounded on a realistic view of sector

contributions to growth

– Success in emerging, innovative sectors is not enough – The mix of sectors matters less than their competitiveness – Service sector growth is critical – particularly for job growth

▪ Effective growth policies are tailored to the levers that matter in each

sector, yet odds of success vary

– Policy can determine sector performance in local sectors… – … but cannot guarantee success in globally traded industries

▪ In tradable sectors, odds improve if policies target economic activities

with a strong business case for local production; and are executed in collaboration with the private sector

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Thank you

This report and

• ther MGI research are

available at: www.mckinsey.com/MGI