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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
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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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MGI categorizes sectors into six groups according to
degrees of differentiation and tradability
Differentiation index
0 = average
High 1.6
Size of circle = relative amount
of sector value added in 2005
Pharma
Differentiation of products
R&D
Business
services
1.2
0.8
Real-estate
activities
0.4
Local
services
Other
Wholesale and
retail trade
Post and
telecommunication
Radio, TV, and
communication
equipment
Chemicals
Computer and
related activities
Finance and
insurance
Other
Resourceintensive
industries
Aircraft and spacecraft
Medical
instruments
R&D-intensive
manufacturing
Pulp, paper, printing,
and publishing
Fabricated metals
Rubber and plastics
0
Electricity
Infrastructure
-0.4
Construction
Hotels and restaurants
Low -0.8
1
Low
Land
transport
Basic
metals
Agriculture,
forestry,
and fishing
Wood
products
Motor vehicles
Machinery and
equipment
Manufacturing
10
100
Imports plus exports divided by sector gross output
%
Tradability of products
High
SOURCE: EU KLEMS growth and productivity accounts; OECD input-output tables; McKinsey Global Institute analysis
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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
McKinsey & Company
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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
SOURCE: McKinsey Global Institute analysis
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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
Biotech
Semiconductor
Existing large employment sectors
Cleantech
Construction
Financial
activities
Retail
trade
11.3
4.9
0.2
0.3
5.9
0.6
SOURCE: The Clean Energy Economy, PEW, 2009; Bureau of Labor Statistics; Haver analytics
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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
SOURCE: McKinsey Global Institute analysis
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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
(growth predicted
by initial sector mix)
Growth Total growth
High
United
States
3.3
S. Korea
2.6
United
Kingdom
2.6
France
Germany
Low
Japan
2.1
0.8
0.4
SOURCE: Global Insight; McKinsey Global Institute analysis
Differences in
performance
of sectors
2.3
0.9
1.8
0.7
2.2
0.4
2.3
2.3
2.1
-0.2
-1.5
-1.7
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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
SOURCE: McKinsey Global Institute analysis
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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
Goods
100
R&D-intensive mfg
Manufacturing
Resource-intensive
6
2
4
13
18
Business services
Services Local services
58
87
12
Infrastructure
SOURCE: Global Insight; International Labor Organization; National Statistics; McKinsey Global Institute analysis
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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
countries
100% = 324
Medium-income
countries
100% = 50
High-income
countries
100% = 74
29
100%
Goods
9
32
129
91
Services
68
SOURCE: International Labor Organization; National Statistics; McKinsey Global Institute analysis
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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
Differentiating sector-level policies by the degree of intervention
Degree of intervention
Low
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.
High
Building enablers
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.
SOURCE: MGI/PSO Sector Competitiveness Project
Tilting the playing
field
Government as
principal actor
Governments can
Governments can
choose to create
play a direct role by
favorable conditions for ▪ Establishing statelocal production
owned or
through:
subsidized
▪ Trade protection from companies;
global competition
▪ Funding existing
▪ Providing financial
businesses to
incentives for local
ensure their
operations
survival
▪ Shaping local
▪ Imposing
demand growth
restructuring on
through public
certain industries.
purchasing or
regulation.
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To be effective, policy tools need to be tailored
to sector characteristics
Degree of intervention
Low
High
Setting ground
rules/direction
Building enablers
Business
services
Local
services
Infrastructure
Tilting the playing
field
Government as
principal actor
R&D-intensive
manufacturing
Manufacturing
Resource-intensive
industries
SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project
Infrastructure
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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)
SOURCE: EU KLEMS; McKinsey Global Institute analysis
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To be effective, policy tools need to be tailored
to sector characteristics
Degree of intervention
Low
High
Setting ground
rules/direction
Building enablers
Business
services
Local
services
Infrastructure
Tilting the playing
field
Government as
principal actor
R&D-intensive
manufacturing
Manufacturing
Resource-intensive
industries
SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project
Infrastructure
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The majority of recent attempts to
establish local semiconductor industries
or clusters have failed
Successes and failures of semiconductor clusters
ROUGH ESTIMATES
$ Estimated cumulative countrywide government incentives
(USD billion)
Sustainable competitive edge
Present
Currently not present
Estimated date of industry reaching significant size
1970
1980
1990
2000
United States, $12–36
Japan, $19–54
Taiwan, $15–43
Taiwan Semiconductor
Manufacturing Company
(TSMC) first to introduce
novel business model of
foundry-only
semiconductor player
South Korea, $9–26
Singapore, $5–16
Germany, $2–7
China, $6–17
Malaysia, $1–3
SOURCE: SEMI World Fab Watch; expert estimates; McKinsey Global Institute analysis
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To be effective, policy tools need to be tailored
to sector characteristics
Degree of intervention
Low
High
Setting ground
rules/direction
Building enablers
Business
services
Local
services
Infrastructure
Tilting the playing
field
Government as
principal actor
R&D-intensive
manufacturing
Manufacturing
Resource-intensive
industries
SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project
Infrastructure
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Steel demand is strongly dependent on
growth in per capita GDP
Country population
Observed historical
consumption curve
2007 steel consumption
Kg/capita
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
Growth economies
Inflection economies
Mature economies
Korea Republic
Taiwan
Japan
Czech Republic
Ukraine
Thailand
Italy
Vietnam
0
Austria
Spain
Turkey
Iran
China
India
Sweden
Brazil
Egypt
5,000
Russia
Poland
Mexico
Argentina
South Africa
10,000
15,000
Saudi Arabia
Portugal
20,000
25,000
Canada
Germany
Australia
Greece
United States
France
United Kingdom
30,000
35,000
40,000
45,000
2007 GDP at PPP/capita
$
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.
SOURCE: J.F. King; World Bank; McKinsey Quarterly; McKinsey Global Institute analysis
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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
other MGI research are
available at:
www.mckinsey.com/MGI
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