ENHANCING SERVICES SECTOR PERFORMANCE - Fostering Employment, Productivity and Innovation - Main Messages from the OECD Services Project RIETI BBL Seminar, Tokyo, April 4 th 2005 Director for Science, Technology and Industry OECD Nobuo TANAKA nobuo.tanaka@oecd.org 1 1
Source: OECD s Growth Report, The New Economy: Beyond the hype 2001. 2 2
Pick-up in MFP growth and increase in ICT use Change in PC intensity per 100 inhabitants, 1992-99 50 40 United States Sweden Norway Denmark 30 Netherlands Australia 20 Japan France New Zealand United Kingdom Germany Belgium Finland Canada Ireland 10 Spain Italy 0-2 -1.5-1 -0.5 0 0.5 1 1.5 Change in MFP growth corrected for hours worked Note: Change in multi-factor productivity growth corrected for hours worked, average 1990s minus average 1980s. Source: OECD 3 3
GDP per capita levels and growth rates: Gap vis-à-vis the United States Going for Growth Economic Policy Reforms (2005), OECD 4 4
Labour Productivity growth Change in average growth rates between 1985-1993 and 1994-2003 Winners Ireland Sweden US UK Australia Canada Losers Japan Germany Italy NDL Spain Economic Policy Reform; Going for Growth 2005 5 5
OECD Horizontal Project on Services Enhancing the Performance of the Service Economy Proposed by Japan (Hiranuma) at MCM 2003 DSTI, ECO, TRADE work together Section 1: Analysis of recent and prospective trends Section 2: Economy-wide factors that encourage services Section 3: Role of S&T, innovation policies, ICTs, and IPRs Will be reported to Ministers at MCM 2005 Short summary brochure Compendium of background papers Tokyo seminar on 14-15 July 6 6
Introduction: The Policy Challenge Services are of growing importance for economic growth, employment and productivity. Accounting for over 70% of total employment and value added Some services sectors have experienced rapid growth, in particular in some OECD countries. Such as Australia, Canada, Slovak Republic, US Almost all jobs created in OECD countries are in the services sector many are for highly skilled workers. Some concern about offshoring of services. Not all countries are doing well in the services sector, which points to a potential for improvement. The policy challenge enhancing employment and productivity in OECD countries the contribution of services needs strengthening. 7 7
The contribution of services to OECD economies is growing (share of services in total employment, 1970-2002, in %) 80 75 70 65 60 55 Canada France Germany Italy Japan UK USA 50 45 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Source: OECD STAN Database, 2004 Growing also in Japan But Japan is still more manufacturing oriented than others 8 8
But the contribution of services to employment rates varies considerably across countries (share of the working-age population employed in goods and services, 2002) 100 Services Goods 90 80 70 60 50 40 30 20 10 0 Poland Hungary Slova k Republic Greece Italy Spain Korea Austria Ireland Portugal EU Belgium France Germany Finland Japan Luxembourg Australia Switzerland Canada Sweden New Zealand Netherlands Denmark United Kingdom United State s Norway Source: OECD, Labour Force Statistics and STAN Database, 2004. 9 9
Services now account for almost all employment growth Contribution to aggregate employment growth, 1990-2002, percentage points 5 Market services Other services Manufacturing & other industries 4 3 2 1 0-1 -2 Finland Sweden Japan Hungary Denmark Belgium Norway Poland Greece Austria United Kingdom Italy France Portugal OECD EU Spain United States Slovak Republic Australia Canada New Zealand Germany Netherlands Korea Ireland Luxembourg in percentage points Source: OECD STAN Database, 2004 Growing services offsets decreasing manufacturing in Japan BUT, contribution of market services is smaller than other countries 1010
and for a considerable share of productivity growth Contribution to aggregate productivity growth, 1990-2002, percentage points 4.5 Total services Manufacturing and other industries 4.0 3.5 3.0 2.5 2.0 1.5 in percentage points 1.0 0.5 0.0 Spain France Netherlands Italy Austria New Zealand Belgium Japan Luxembourg Portugal Korea Germany Hungary Denmark Finland Canada Norway Sweden Australia United States Slovak Republic Greece Poland United Kingdom Source: OECD STAN Database, 2004 Services productivity in Japan grows twice as fast as manufacturing Employment is also growing in contrast with manufacturing 1111
Services are closely integrated with the manufacturing sector Input-output flows, in % of gross output Domestic final demand 56.4% 8.5% 24,5% Domestic final demand 24.4% Services Manufacturing 24.0% 6.2% 10.6% 32.1% Exports Exports Source: OECD Input-Output-Tables, 1995, 1997 1212
With multinational firms playing an important role Table 6.2. Labour productivity growth in US non-financial corporations, by sector and industry Percentage points, annual rate 1977-2000 1977-89 1989-95 1995-2000 Non-financial corporations 1.5 1.1 1.6 2.6 -- Contributions to growth -- MNEs 1.2 0.9 0.8 2.2 Manufacturing 0.8 0.6 0.7 1.3 IT equipment 0.5 0.4 0.4 0.9 Other manufacturing 0.4 0.3 0.3 0.5 Non-manufacturing 0.4 0.2 0.1 0.9 Domestically oriented 0.4 0.3 0.8 0.5 Source: Corrado et al. (2003). Source: STI Outlook 2004 1313
25 20 15 10 5 0 Services are intensive users of ICT capital IT capital as a percentage of value added per industry, 1990-2001, United States and EU4, annual average shares Non-Market Services Textiles Products Hotels & Catering Transport Services Wood Products Rubber & Plastics Food Products Electr. Equipment Chemicals Paper Products Retail Trade Wholesale Trade RE, Business Serv. Financial Intermediation Communications Total Economy USA EU4 EU4: France, Germany, Netherlands, United Kingdom Source: O Mahony and Van Ark, 2003 1414 in percent
0 10 20 30 40 50 60 70 % Italy Spain Services are highly innovative Share of innovative firms in each sector, in % 1515 Ge rm a ny Ice lan d Portu ga l L uxem b ou rg Sw ed e n Au stria Be lg ium Fin la n d N ethe rlan d s D en m a rk Fra n ce N orw ay Gre e ce Source: OECD, based on Eurostat CIS survey data Manufacturing
Services are more skill-intensive than manufacturing Percentage share of high-skilled employment in total employment 40 35 30 25 20 15 10 5 Manufacturing Services 0 % Portugal Italy Austria Netherlands Sweden Ireland UK France Denmark Finland Spain Belgium Source: OECD Labour Force Survey, 2003 1616
And have greater entry of new firms (fixed effects of entry regression for 10 EU countries, 1997-2000) Telecommunications*** Data base activities*** Hardware consultancy*** Labour recruitment *** Management consulting*** Market research*** Office mach. & computers*** Advertising*** Transport equipment*** Chemicals 0 2 4 6 8 10 12 14 16 18 20 % Indicates significance at the ***1 %, ** 5 %, * 10 % level Manufacture of food & beverages is the reference Source: Brandt, STI Working Paper 2004/1, OECD. 1717
But there are also factors that may constrain productivity growth Services are less exposed to international trade (trade to value added ratio of services and goods, 2002, in %) 300 % 250 Services Goods 200 150 100 50 0 Mexico United States Japan Poland Italy Australia France Hungary Canada Czech Republic Spain Korea Finland Germany Slovak Republic Portugal United Kingdom EU19 (2) Greece OECD New Zealand Switzerland Sweden Netherlands Norway Austria Belgium-Luxembourg Denmark Iceland Ireland Source: OECD, Science, Technology and Industry Scoreboard 2003. 1818
and are characterised by a small firm size (share of firms by size group in % of all firms) 70 60 50 40 30 20 10 0 0 Empl. 1-4 Empl. 5-9 Empl. 10-19 Empl. 20+ Empl. Manufacturing 70 60 50 40 30 20 10 0 n.a. Services % Belgium Denmark Italy Finland Spain Netherlands Portugal UK Sweden Source: Brandt (2004) 1919
ICT-using services has shown more rapid productivity growth in some OECD countries, but NOT in Japan (contribution to average labour productivity growth, in per cent) 1990-95 1996-2002* 1.4 1.2 1.0 Countries where productivity growth improved Countries where productivity growth deteriorated 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6 United States Australia United Kingdom Ireland Sweden Canada Denmark Netherlands Finland Spain Norway Austria Korea Japan New Zealand Italy Germany France Source: OECD, STAN Database, September 2004. Japan is categorised in countries where productivity growth deteriorated Productivity growth of ICT-using services decreased to 1/3!!! 2020
Increase in productivity growth, ICTusing industries, 1990-95 to 1996-2002 (% Which may be linked to high levels of product market regulation point) 1.5 1.0 0.5 0.0-0.5-1.0 Ireland United States Australia United Kingdom Netherlands Canada Spain Denmark Finland New Zealand Germany Austria Norway Sweden France Korea Japan Portugal Correlation = -0.54 T-statistics = -2.70 Belgium Italy 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Index of Product Market Regulation, 1998 2121
International services sourcing Offshoring not new, but it is increasingly taking place in the services sector (enabled by ICTs) and affects white collar jobs (both high and low skill) previously considered untouchable Occurs in response to: Increased competition, resulting from trade and investment liberalisation and reinforced pressures to cut costs, combined with rapid technological change, making services increasingly tradable Skills shortages ensuring a skills base is in place increasingly becomes a locational determinant of economic activity Source: DSTI/ICCP/IE/2004-19 final 2222
Offshoring/outsourcing/insourcing 2x2 matrix based on location and control National Location International Control Outsourced Domestic Outsourcing International outsourcing Offshoring Insourced Domestic supply International insourcing Anecdotal evidence suggests following breakdown: Outsourcing: 2/3 domestic, 1/3 international Offshoring: 2/3 insourcing, 1/3 outsourcing 2323
Aggregate illustration: the share of employment potentially affected by offshoring in total employment, EU15, USA, Canada and Australia, 1995-2003*/4 The differences in the levels are difficult to interpret because the classifications have not been harmonised, but the trends are revealing! (*USA 2003 is an estimate) 2424
Potential offshoring of ICT-intensive users Many business services sectors have a very high share of employment potentially affected by offshoring, as do some manufacturing sectors Illustration for EU15, sectors with a share >30%: NACE 2- digit Industry 2525 Share (%) 2003 >30% 72 Computer and related activities 79.5 66 Insurance and pension funding, except compulsary social security 71.6 67 Activities auxiliary to financial intermediation 68.1 65 Financial intermediation, except insurance and pension funding 62.9 30 Manufacture of office machinery and computers 51.4 74 Other business activities 47.7 70 Real estate activities 44.4 73 Research and development 41.4 51 Wholesale trade and commission trade, except of motor vehicles and motorcycles 37.5 23 Manufacture of coke, refined petroleum products and nuclear fuel 35.3 40 Electricity, gas, steam and hot water supply 33.0 32 Manufacture of radio, television and communication equipment and apparatus 32.7 24 Manufacture of chemicals and chemical products 30.9 Discussion on Globalisation and Structural Adjustment New work will be launched at the MCM 2005 Follow-up study under the GSA
Exports of other business services and computer and information services: (reported dollar value shares and average annual growth rates) % 1995 2002 CAGR 95-02 18 16 14 12 10 8 India Romania Peru Argentina Nicaragua 6 4 2 0 United States United Kingdom Germany France Netherlands India Japan Italy Ireland Austria Estonia Ireland Brazil Sweden China Japan: -4.7% 0 5 10 15 20 25 30 35 40 % Source: Adapted from the 2004 OECD Information Technology Outlook, Chapter 2. 2626
Employment of U.S. parent companies and of their affiliates abroad Millions of employees 25 20 Parent companies in the United States Affiliates of parent companies abroad Net employment(1) 25 20 15 15 10 10 5 5 0 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1. Employment of parent companies in the United States minus Employment of their affiliates abroad. Source: OECD, FATS database. 2727
R&D expenditures by US parent companies and their subsidiaries abroad, 1994 and 2002 Billion USD 1994 2002 250 200 195 150 138 120 100 91 50 13 28 29 16 12 21 0 Parent companies Affiliates under foreign control Other non-multinational companies US subsidiaries abroad All firms in the US In the US Abroad Source: OECD, Activities of Foreign Affiliates database. 2828
Why Does Policy Matter? Some of the variation in performance is due to exogenous factors The demand for services in OECD countries is linked to income levels, demographic factors, as well as to the comparative advantage of certain countries. The potential for improved performance in the services sector also differs by sector, depending on market structure, the role of regulation and the public sector, as well as the potential for technological change. At the same time, policy plays a role in two key ways: In fostering a business environment that can create incentives for employment creation and productivity growth. In complementing this environment with effective policies that can overcome barriers to innovation and technology diffusion. 2929
Policy action can help enhance the performance of services Some of the strong performance in the services of certain OECD countries (e.g. Australia, United States) seems clearly associated with policy action, notably regulatory reform. Case studies evidence suggests that successful and innovative new firms often emerged from policy action to open markets to competition. The opening of markets also allowed new firms to innovate and offer new services. 7 key areas for policy action can be pointed out. 3030
1: Opening domestic services markets For example, high levels of regulation in transport B. Transport 3 in several countries, 2003 6.0 5.0 4.0 3.0 2.0 1.0 0.0 United Kingdom New Zealand USA Australia Canada Denmark Finland Netherlands Sweden Japan Norway Austria Germany France Belgium Portugal Switzerland Spain Ireland Italy Greece Simple average of air, rail and road transport. Source: OECD, Product Market Regulation Database, 2004. Japan s level is not so high But Japan can follow UK, USA and Australia 3131
Poland High levels of product market regulation still remain an issue.. 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Australia United Kingdom Iceland United State s Irelan d Denma rk New Zealand Canada Swed en Luxembourg Japan Finland Belgiu m Netherlands Austria Slovak Republic Germ any Norway Korea Portuga l Spain Switzerland Fra nce Czech Republic Gree ce Italy Hungary Mexico Turkey The scale of indicators is 0-6 from least to most restrictive. Source: OECD, Product Market Regulation Database, 2005. 3232
Poland Turkey as do barriers to entrepreneurship 3.0 2.5 2.0 1.5 1.0 0.5 0.0 The scale of indicators is 0-6 from least to most restrictive. Source: OECD, Product Market Regulation Database, 2005. 3333 United Kingdom Canada Irelan d Norway Swed en Finland Australia New Zeala nd United State s Slova k Repub lic Luxembourg Denma rk Portuga l Italy J apan Hungary G erm any Ic eland G ree ce Spa in Fra nce Belgiu m Aus tria Netherlands Korea Switzerland Cze ch Repu blic Mex ico
Relative price of services and GDP per capita Ratio of the price level of consumer services to that of consumer goods and the level of GDP per capita Consumer services are a proxy for non-tradable products and goods (semi-durables and durables) are a proxy for tradable products. The level of GDP per capita in 2002 is measured in US dollars on the basis of 2000 PPPs. Going for Growth Economic Policy Reforms (2005), OECD 3434
Relative price of services and GDP per capita The relative price ratio adjusted for differences in the level of GDP per capita Measured as the difference between the actual and the fitted value of the price ratio appearing in previous slide. Going for Growth Economic Policy Reforms (2005), OECD 3535
2. Open international markets for trade in services More can be done to open services markets to foreign direct investment (indices of FDI restrictions, 1998) 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Construction Hotels and restaurants Highest in EU-19 Germany United States Japan Lowest in EU-19 Manufacturing Distribution Finance Business services Transport FDI restrictions is much higher in Japan Telecommunications Business services is outstandingly restricted Electricity Total Source: OECD Economic Outlook No. 73, June 2003 3636
Inward FDI positions of Japan per cent of GDP Source: OECD Economic Surveys Japan (2004) 3737
Foreign-controlled turnover as a share of total services and manufacturing turnover, 2002 Services (%) 35 Hungary 30 Poland Luxembourg (4) Belgium 25 Czech Republic 20 Norway (5) Sweden (2) Netherlands (1) 15 Finland (1) Italy (1) Austria (1) United Kingdom (5) Portugal (1) 10 Germany (1) Denmark (3) France (1) United States (6) 5 1. 2001. 2. 2000. 3. 1999. 4. 1998. Japan (1) 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 Manufacturing (%) 5. 1997 6. The data used for foreign affiliates are broken down by industry of sales to be compatible with national total data. Source : OECD, FATS database, November 2004, Eurostat New Cronos and US Census Bureau. 3838
50 40 30 20 10 0 Percentage of patents with foreign coinventors 1 (EPO filings) (56) 1999-2000 Luxembourg Singapore Russian Federation Greece China Belgium India Czech Republic Hungary Canada Switzerland Ireland Austria Brazil New Zealand Norway United Kingdom South Africa Spain Chinese Taipei Australia Denmark Sweden Netherlands Israel France Finland United States Germany Italy European Union Korea Japan Share of patent applications to the EPO with at least one foreign co-inventor in total patent invented domestically. Source: OECD, Patent database, September 2004. 3939 %
THE CONTRIBUTION OF R&D TO PRODUCTIVITY GROWTH 1% more in business R&D generates 0.13% in productivity The effect has increased since 1980 The effect is larger in R&D intensive countries 1% more in public R&D generates 0. 17% in productivity The effect is larger in countries where business R&D intensity is higher (higher education is important) 1% more in foreign R&D generates 0.45% in productivity The effect is larger is smaller countries The effect is larger in R&D intensive countries: only own efforts allow any country to learn from others. Source: STI working paper 2001/3 by D. Guellec DSTI/DOC(2001)3 4040
Employment/population ratio in services, persons aged-15-64 (%) 3: Reforming labour markets Labour market reform creates new employment opportunities in services 75 70 65 60 55 50 45 40 Employment/population ratios in services and for women, 2002 Poland Slovak Republic Hungary Greece Austria Ireland Korea Spain Italy France Finland Portugal Germany Belgium Switzerland Japan Sweden Norway Denmark Canada Netherlands UK US New Zealand Australia Luxembourg 25 30 35 40 45 50 55 60 65 Employment/population ratio for women aged 15-64 (%) Labour force participation by providing jobs that are needed to attract new worker groups For example, high employment in services goes hand-in-hand with high employment for women 4141
Countries with high EPL may have lower employment in services (EPL: Employment Protection Legislation) 4 3.5 Portugal Correl = -0.37 EPL 3 2.5 2 1.5 1 Poland Greece Spain France Belgium Sweden Italy Germany Austria Netherlands Finland Slovak Rep. Korea Hungary Japan Switzerland Ireland Australia Canada Norway Denmark New Zealand United Kingdom 0.5 US 0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0 Employment rate in services, 2002 Japan does not in a bad position But can learn more from US, UK and Canada 4242
Reform may raise woman participation rate by 20% in Japan ( Going for Growth : Economic Policy Reform OECD 2005) 4343
4: Adapting education and training policies For example, human capital remains a cornerstone of services innovation (Share of employees with higher education, 2000) France Finland Norway Luxembourg Belgium Greece Sweden Spain Germany Portugal Iceland Netherlands Italy Austria Denmark Manufacturing 0 10 20 30 40 50 % Share of highly educated employees is much higher in services Lack of suitably trained HR is frequently reported services 4444
5: Adapting innovation policies to the growing importance of services Some service sectors are more innovative than manufacturing Innovative firms as a % of firms of each sector in JAPAN 50 % 40 30 20 10 0 Manufacturing Services (average) Wholesale & retail trade Transport Post & communications Financial intermediation Business services Source: OECD, based on Japanese innovation survey Service firms are in general less innovative than manufacturing BUT, some services are more innovative than manufacturing average (e.g. post & communications, finance, business services) 4545
6: Remove impediments to the effective use of ICT ICT-using productivity growth may be linked to the levels of Increase in productivity growth, ICTusing industries, 1990-95 to 1996-2002 (% point) 1.5 1.0 0.5 0.0-0.5-1.0 product market regulation Ireland United States Australia United Kingdom Netherlands Canada Spain Denmark Finland New Zealand Germany Austria Norway Sweden France Korea Japan Portugal Correlation = -0.54 T-statistics = -2.70 Belgium Italy 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Index of Product Market Regulation, 1998 Countries with high level product market regulation show low productivity growth of ICT-using industries (such as JAPAN) 4646
7: Provide a financial environment that is conducive to services Services firms more often face financial barriers: European example % of firms identifying a factor as highly relevant, as a share of all firms expressing relevance 35 % 30 25 20 15 Services Manufacturing 10 5 0 Economic risks Innovation costs Lack of financing Org. rigidities Lack of personnel Lack of tech. info. Lack of market info. Regulations constraints Lack of response Economic factors Internal factors Other factors Economic factors are ranked higher than any other factors Service sectors more frequently mention economic factors than manufacturing 4747
European firms survey shows weak participation of services firms in government programme Share of innovative firms benefiting of public support programmes Manufacturing Services Finland Italy Austria Greece Netherlands Sweden Spain Norway France Portugal Belgium Germany Firms receiving public funding was considerably fewer in services than in manufacturing. It is important to design or adapt support programmes to be more relevant and useful to the service sector. Luxembourg n.a. Denmark 60 40 20 0 20 40 60 % 4848
The main messages 1. Improve the broader business environment for services to increase incentives for innovation and foster demand: Continue with regulatory reform. Open international markets. Provide an appropriate financial climate. 2. Help workers adjust to structural change: Reform labour markets. Help workers acquire new skills and competencies. 3. Foster innovation and technological change: Consider how innovation policies need adjustment. Remove barriers to the effective use of ICT. Policy messages are closely aligned to those of a parallel OECD project on Trade and Structural Adjustment. 4949
In conclusion Policy makers have an opportunity to strengthen services sector performance: This is key to strengthening productivity and employment growth. And will help in addressing the globalisation of services. Improved performance of the services sector will also benefit other industries, such as manufacturing. Reform will have different effects on sectors: In some, they may enhance employment and productivity. In others, they may reduce employment. The overall effects of reform tend to be positive, however. Structural adjustment policies can help facilitate the adjustment to a services economy. TASAP 5050
Trade and Structural Adjustment (TASAP) another OECD horizontal project reported to MCM 2005 Comprehensive and consistent policy strategy is needed. Macroeconomic policy for promoting stability and growth Labour market policies for developing worker s skills and facilitating resources transfer Efficient regulatory framework fostering competition and market openness Institutional/governance framework with public understanding and acceptance of reform measures Liberal trade and investment policies supporting structural adjustment 5151
Ireland: Success of Comprehensive Strategy for Growth Education reform to create skilled workers ( English speaking and relatively low-cost ) Trade Liberalization to enter EU in 1973 Attract Foreign Direct Investment in manufacturing ( tax incentives ) Regulatory reform Invest in R&D by Higher Education as well as Foreign Business National = Regional Strategy in the expanding EU 5252
Conclusion Restructuring or Boneyard : the Need for Speed While restructuring our Company in the 1980s, we spent much of our time talking about the accelerating pace of change: in world politics, in technology, in product introduction and in the increasing demands of customers. We don t have to do that anymore. Change is in the air. Newspapers and networks hammer it home daily. XX people today understand that pace of change, the need for speed, and the absolute necessity of moving more quickly in everything we do, from inventory turnover, to product development cycles, to a faster response to customer needs. They understand that slow-andsteady is a ticket to the boneyard in the 1990s. 5353
Some references to STI work on services Productivity and employment patterns: Anita Wölfl (2005), The Service Economy, STI Working Paper 2005/3 Firm creation: Nicola Brandt (2004a), Business Dynamics, STI Working Paper 2004/1 The role of ICT: OECD (2004), The Economic Impact of ICT Information Technology Outlook 2004 Multinationals and productivity: Multinationals Enterprises and Productivity Growth Insights at the Firm Level, Chapter 6, STI Outlook 2004 Criscuolo and Martin, Multinationals and US Productivity Leadership, STI Working Paper 2004/5 Innovation and ICT: Science, Technology and Industry Outlook 2004 Offshoring DSTI/ICCP/IE/2004-19 final And work by the Economics Department and the Trade Directorate. 5454