How to compete and grow: A sector guide to policy McKinsey Global Institute May 5, 2010 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
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, or other institution McKinsey & Company | 1
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? McKinsey & Company | 2
Summary ▪ Our sector approach – and why it matters ▪ Patterns in sector contributions to growth ▪ How can governments tailor policies to each sector McKinsey & Company | 3
MGI categorizes sectors into six groups according to degrees of differentiation and tradability Differentiation index Size of circle = relative amount of sector value added in 2005 0 = average High 1.6 Pharma R&D Radio, TV, and Computer and Business communication related activities 1.2 equipment services Chemicals Differentiation of products Other Aircraft and spacecraft Local 0.8 Medical Wholesale and services Resource- Real-estate instruments retail trade intensive activities Post and R&D-intensive industries 0.4 telecommunication Finance and manufacturing Pulp, paper, printing, insurance Other and publishing Fabricated metals 0 Rubber and plastics Electricity Basic Motor vehicles Infrastructure metals -0.4 Land Construction Machinery and transport equipment Agriculture, Hotels and restaurants Wood forestry, Manufacturing products and fishing Low -0.8 1 10 100 Imports plus exports divided by sector gross output % Low High Tradability of products McKinsey & Company | 4 SOURCE: EU KLEMS growth and productivity accounts; OECD input-output tables; McKinsey Global Institute analysis
Summary ▪ Our sector approach – and why it matters ▪ Patterns in sector contributions to growth ▪ How can governments tailor policies to each sector McKinsey & Company | 5
Three lessons learned for governments to keep in mind as they seek to enable 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 LESSON 3 Service sector growth is critical – and particularly so for job growth McKinsey & Company | 6 SOURCE: McKinsey Global Institute analysis
Competitiveness in new innovative sectors is not enough Even in the United States, innovative new sectors make a small direct economic contribution Share of US employment, August 2009 (percent of nonfarm employment) 100% = 130 million New innovative sectors Existing large employment sectors Semi- Construc- Financial Retail Biotech conductor Cleantech tion activities trade 11.3 5.9 4.9 0.6 0.3 0.2 McKinsey & Company | 7 SOURCE: The Clean Energy Economy, PEW, 2009; Bureau of Labor Statistics; Haver analytics
Three lessons learned for governments to keep in mind as they seek to enable 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 LESSON 3 Service sector growth is critical – and particularly so for job growth McKinsey & Company | 8 SOURCE: McKinsey Global Institute analysis
Sector competitiveness matters more than sector mix Sector performance has mattered more than the mix of sectors for overall GDP growth in developed countries Contribution to total value added, 1995 – 2005 Compound annual growth rate, % Growth momentum Differences in (growth predicted performance Growth Total growth by initial sector mix) of sectors United High 3.3 2.3 0.9 States S. Korea 2.6 1.8 0.7 United 2.6 2.2 0.4 Kingdom France 2.1 2.3 -0.2 Germany 0.8 2.3 -1.5 Low Japan 0.4 2.1 -1.7 McKinsey & Company | 9 SOURCE: Global Insight; McKinsey Global Institute analysis
Three lessons learned for governments to keep in mind as they seek to enable 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 LESSON 3 Service sector growth is critical – and particularly so for job growth McKinsey & Company | 10 SOURCE: McKinsey Global Institute analysis
For jobs, service sector competitiveness is key Services have contributed 87 percent of GDP growth in high-income countries in the last decades Sector contribution to growth of value added in high-income countries, 1985 – 2005 100% = $10.4 trillion 100 R&D-intensive mfg 4 Manufacturing 2 Goods 13 6 Resource-intensive 18 Business services Services 87 Local services 58 12 Infrastructure McKinsey & Company | 11 SOURCE: Global Insight; International Labor Organization; National Statistics; McKinsey Global Institute analysis
For jobs, service sector competitiveness is key Service sectors generate most net new jobs across all income groups – and over 100% in high income countries Sector contribution to a country's net growth of employment, 1985 – 2005 %, million employees Low-income Medium-income High-income countries countries countries 100% = 324 100% = 50 100% = 74 29 100% 9 Goods 32 129 91 Services 68 McKinsey & Company | 12 SOURCE: International Labor Organization; National Statistics; McKinsey Global Institute analysis
Summary ▪ Our sector approach – and why it matters ▪ Patterns in sector contributions to growth ▪ How can governments tailor policies to each sector McKinsey & Company | 13
Our policy approach – framework Differentiating sector-level policies by the degree of intervention Degree of intervention Low High Setting ground Tilting the playing Government as rules/direction Building enablers field principal actor Governments can limit Without interfering with Governments can Governments can sector policies to market mechanisms, choose to create play a direct role by ▪ Setting the ▪ Establishing state- governments can favorable conditions for regulation covering support private-sector local production owned or labor, capital and activities by through: subsidized ▪ Expanding hard and ▪ Trade protection from land markets; companies; ▪ Establishing the ▪ Funding existing soft infrastructure; global competition ▪ Helping to ensure ▪ Providing financial general business businesses to environment, adequate skills incentives for local ensure their ▪ Setting broad through education operations survival ▪ Shaping local ▪ Imposing national priorities and training, ▪ Supporting R&D and road maps. demand growth restructuring on activities. through public certain industries. purchasing or regulation. McKinsey & Company | 14 SOURCE: MGI/PSO Sector Competitiveness Project
To be effective, policy tools need to be tailored to sector characteristics Degree of intervention Low High Setting ground Tilting the playing Government as rules/direction Building enablers field principal actor Business R&D-intensive services manufacturing Local Manufacturing services Resource-intensive Infrastructure Infrastructure industries McKinsey & Company | 15 SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project
Policy can determine domestic sector performance – retail sector performance varies widely around the world Retail sector performance in developed countries, 2005 Employment Hours worked per capita 100 90 80 70 60 50 40 0 0 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Labor productivity Value added (dollars per hour worked) McKinsey & Company | 16 SOURCE: EU KLEMS; McKinsey Global Institute analysis
To be effective, policy tools need to be tailored to sector characteristics Degree of intervention Low High Setting ground Tilting the playing Government as rules/direction Building enablers field principal actor Business R&D-intensive services manufacturing Local Manufacturing services Resource-intensive Infrastructure Infrastructure industries McKinsey & Company | 17 SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project
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