Raw Finance

A new report asserts that tech, although a high-growth industry, is too small to relied upon for significant economic and employment growth; rather the services sector will lead the way in the U.S.  According to the report, issued by McKinsey Global Institute, from 1995 to 2005, service sectors generated all net job growth in high-income economies and 85 percent of net new jobs in emerging economies.

The federal government’s efforts to stimulate job growth through high-tech and clean energy efforts, therefore, will likely prove to be less than desired, the report concludes.  An important reason why public intervention in markets has been hit or miss, the report explains, 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.

By analyzing 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.

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, McKinsey 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, McKinsey 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.

McKinsey 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.

McKinsey 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.

The key here for investors is to understand that where the government inserts itself to the greatest extent, that sector will suffer a negative impact on its operating income.

To read the McKinsey report, please click on the following link: How to compete and grow: A sector guide to policy.