Competitiveness - Sectors performance matter more than mix Are we applying evidence based policies?

Experience shows that governments have, at best, a mixed record in taking a more proactive approach to boost growth and competitiveness. 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 (as in the original UK Foresight analyses) —and so, therefore, do the most effective potential regulations and policies.

By analysing competitiveness at the sector level, McKinsey 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 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 non-tradable sector competitiveness directly; in tradable sectors, getting policy right is more complicated—in non-tradable "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 do not require local suppliers.

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 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.

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. These six categories provide a framework for understanding what determines competitiveness in different industries and what tangible actions governments and businesses can take to improve competitiveness.

How to compete and grow; a sector guide to policy McKinsey March 2010