Chapter 4: Drivers of Production Analysis
The six Drivers of Production represent factors and conditions necessary to capitalize on emerging technologies and transform production systems. The following section describes the concepts covered in each driver and their importance to improving or achieving readiness for the future of production.
Technology & Innovation
This driver assesses:
- How advanced, secure and connected is an economy’s ICT infrastructure used for adopting technologies in production
- The ability to foster and commercialize innovations that have potential application in production
- Availability of ICT
- Use of ICT
- Digital Security & Data
Ability to Innovate
- Industry Activity
- Research Intensity
- Available Financing
Technology & Innovation is a key enabler for the future of production, as the adoption and diffusion of emerging technologies is the crux of the Fourth Industrial Revolution. In order to do this, countries need an advanced, connected and secure technology platform. They need to continually upgrade technology infrastructure to ensure their platform is advanced enough to fully operate emerging technologies. For example, the availability and speed of the internet matters when using the Internet of Things on the factory floor. Widespread breakthroughs for the future of production require a fully connected global ecosystem, which is only possible through interoperability across systems. Recognizing the need for international cooperation, Germany is working with other countries to develop and adopt global standards and norms that promote interoperability and data flows.62
Digital security and data privacy enabled through a strong cybersecurity policy, enforcement and other measures is critical for facilitating the adoption of technology. Connected production systems bring new cybersecurity challenges, and it is critical for people to trust the technology. If knowledge and data stored in the cloud is compromised, for example, not only does this jeopardize operations, but it also lowers trust and potentially future adoption. This can be especially challenging for Small and Medium Enterprises (SMEs) that have limited resources to protect themselves against cybersecurity threats. Cooperation between governments and companies of all sizes is needed to increase awareness of threats and protect themselves against these threats.
Innovation is the animating force behind the future of production. Technologies driving the Fourth Industrial Revolution were largely created from significant investments in research and development; new and innovative applications of these technologies in production are creating further value. There are different types of innovation that are critical to the future of production, such as generating continual, incremental improvements; adapting technologies developed abroad to fit location production systems and developing “greenfield” investments for production systems. Elite technical innovation, coupled with high R&D spend to secure patents, is concentrated among a small set of mainly advanced countries. Fifteen countries shown in Figure 4.1 are responsible for nearly 80% of all IP5 patents filed worldwide, with China, Germany, Japan, Republic of Korea and the United States accounting for 50%.
Figure 4.1: Leaders in Technical Innovation
Countries need to consider their position as either a technical innovator or as a technology adopter and frugal innovator. The availability of funding, talent and other factors will likely influence the levels and type of innovation that a country pursues within the future of production. The most attainable type of innovation for most countries is frugal innovation. Business models, prototypes and other areas in production that are not usually patented are ripe for disruption and offer tremendous potential for both emerging and developed countries.
A country can help generate innovation through several enablers. Geographic clusters, government procurement of advanced technologies and collaboration across academia, government and industry can all foster innovation. A strong financial system and available risk capital is also necessary to back promising developments occurring within borders. Innovation also requires softer elements that are harder to measure. A risk-taking culture and strong leadership to shepherd directed innovation, for example, can also help unlock human potential to foster new innovations.
This driver assesses:
- The ability to respond to shifts in the labour market (supply and demand) that are triggered by the Fourth Industrial Revolution
- Current labour force capabilities to adopt and use emerging technologies in production systems
- The ability to cultivate the right skills and talent in the future workforce through education outcomes, talent attraction and retention, and inclusion
Current Labour Force
- Labour Force Capabilities
Future Labour Force
- Education Outcomes
- Agility & Adaptability
People are at the forefront of the Fourth Industrial Revolution. Human Capital is critical to the transformation of production systems, as production facilities cannot evolve unless employees evolve too. Of course, the changing nature of production has significant implications for manufacturing employment worldwide. A combination of new production technologies and macro trends are changing the skills required in production, altering the number and nature of jobs across production ecosystems and geographies. For more insight and analysis on the geographies and types of workers in production who are most likely to be impacted from the Fourth Industrial Revolution, please refer to the World Economic Forum white paper Building the Workforce for the Future of Production, scheduled for publication in early 2018.
While there is significant concern about automation leading to job loss, technology can make the remaining jobs more productive and even create new jobs. Human ingenuity and creativity may become more, not less, important in the future of production. Figure 4.2 shows a clear relationships between performance on Human Capital and Technology & Innovation, as the top 10 countries and economies on these drivers also perform well on Institutional Framework.
Figure 4.2: Relationship between Institutional Framework, Human Capital and Technology & Innovation Drivers
The Fourth Industrial Revolution will result in a further shift from labour-intensive production to knowledge and skills intensive production. Countries will need an adequate pool of available digital, technical, commercial and management expertise to propel the immediate adoption and use of emerging technologies. The Fourth Industrial Revolution will also alter labour demand patterns and result in job losses and gains. Countries need to be agile and adaptable to make sure they have the right mix of human capital and are dynamic in matching labour demand and labour supply in the future of production.
The immediate near-term need, particularly for countries with a large production workforce today, is to train and re-train current employees to address skills gaps created by job changes. As jobs disappear, particularly at the mid-skill level, and new jobs appear, particularly at the high-skill level, it will be important for companies, with the support of government and academia, to reskill and upskill employees. Technical training programs, apprenticeship models, on-the-job training and other approaches can all help employees develop new capabilities required. It will also be critical that employees adopt a mentality of life-long learning, as reskilling will likely not be a one-time event, but rather something that occurs continually throughout a career.
Over the long term, countries need to develop their production workforce of the future. This requires new approaches for technical and vocational training. Education curricula and targets will need to be revised to produce different outcomes, such as new courses for teaching digital skills and more STEM (science, technology, engineering and mathematics) graduates. Migration of skilled labour to the country offers an additional channel for countries to acquire skills need in the future workforce. Given the speed and scale of change is increasing, flexible approaches will be required to continually reshape the workforce.
Global Trade & Investment
This driver assesses:
- Participation in international trade to facilitate the exchange of products, knowledge and technology, and to establish global linkages
- Availability of financial resources to invest in production-related development
- Quality of infrastructure to enable production-related activities
- Trade Openness
- Trade Facilitation and Market Access
- Investment and Financing
- Transportation and Electricity
Trade has historically underpinned manufacturing, as export-based models have fueled growth. While the advantages and viability of an export-based model for manufacturing may diminish, the importance of international trade as a determinant of growth for countries will remain relevant, for global connectivity is at the heart of the Fourth Industrial Revolution. Countries with high participation rates in international trade will continue to reap the benefits of increasing knowledge and specialization, gaining technology transfer, promoting competition and yielding economies of scale. The full benefits of global trade and investment require other countries to be open. However, there has been a recent trend of nationalism and protectionism sweeping several countries that may blunt the benefits some countries may be able to receive through this enabler.
Capital investments will be required to upgrade and connect technology platforms, train employees, adopt technologies and transform production systems. Countries will need to be attractive investment destinations in order to have access to the necessary capital. A strong domestic financial system, coupled with foreign direct investment, enables a country to properly finance the investments required for transformation. Advanced infrastructure is also necessary to remain on par with the standards expected from global value chains.
This driver assesses:
- Effectiveness of government institutions, rules and regulations in contributing to shepherding technological development, novel businesses and advanced manufacturing
- Efficiency & Effectiveness
- Rule of Law
Countries best positioned for the future of production traditionally offer a good institutional framework in the form of, but not limited to, regulatory efficiency, strong legal systems, rule of law, IP protection and data security. In addition, good governance fosters an environment that can promote performance across all other Drivers of Production. For example, reducing the red tape required to register and start a company can encourage industry activity; strong IP protection may incentivize more investment in research and development; changing education curricula can stimulate the development of digital skills; and so on. Conversely, poor governance can negatively impact performance across other drivers. For example, a high incidence of corruption can deter foreign investment.
A strong institutional framework is thus critical to a country’s success, yet current legal frameworks, regulations, standards, strategies and institutions are not keeping up with the pace of change and innovation.63 Legal frameworks and regulations for new technologies at the global level are needed to reduce uncertainty and establish norms and standards. Regulators have a complicated role to play in shaping the ecosystem for emerging technologies.64 Uncertainty about technologies can cause regulators to not act, which can cause companies not to act because of uncertain regulations. Without proper regulations in place, the default may be to not use technologies to their full potential. Thus, it should not be a race to the bottom when it comes to regulation, as lax regulation is not necessarily the best. Doing nothing is a policy option that has its own set of implications and consequences.
Regulatory agencies also play a key role in establishing the ‘rules of the game’ for emerging technologies used across production in different sector and stages of the value chain. Governments need to set a level playing field and establish overall parameters. This will require balancing the need to protect consumers and citizens with encouraging companies to invest in and use new technologies. Furthermore, international coordination is required to establish global standards for both products and process. Sector-specific guidance at the global level may be most appropriate in many cases, as adapting to a wide range of country-specific regulations can cause inefficiencies and bottlenecks in global value chains.
There are varying views on industrial strategy—some countries believe it should be driven by the government while others put industry and companies in the lead. Regardless of the different roles, it is clear that governments can play an important part in ushering in the future. They can help facilitate dialogue between industry, academia and other stakeholders through initiatives such as Germany’s Plattform Industrie 4.0. Governments can also develop tools to guide the participation of in the Fourth Industrial Revolution, such as Singapore’s Smart Industry Readiness Index. Governments can also boost innovation through offering of tax incentives, such as those found in Italy’s Industria 4.0 National Plan.65
This driver assesses:
- The impact of production on the environment, including the efficient use of natural resources and alternative energy sources
- Energy and Emissions
The Fourth Industrial Revolution offers an opportunity for countries to usher in a more sustainable production future and counteract damage done by earlier industrialization. Manufacturing has adversely impacted the environment, as evidenced by the over-exploitation of natural resources, the pollution/destruction of ecosystems and reduction in biodiversity. Production systems today are responsible for 35% of all global electricity use, generate 20% of CO2 emissions and account for a quarter of all extractions of primary resources. Going forward, there is a clear need for sustainable production practices that minimize the use of natural resources and toxic materials and curb the emissions of waste and pollutants so as not to jeopardize the needs of future generations.
Furthermore, resource management is a key component of national economic development planning and must be a primary consideration of industrial strategies. Unless countries closely manage their resources, they may not achieve their development targets. Risks to a country’s natural resources—some of the most likely and high-impact risks—need to be monitored, mitigated and managed.
Within the assessment, Sustainable Resources has the weakest relationship with other Drivers of Production as well as with the Complexity category within the Structures of Production. While past data shows that some of the largest producers have been the least sustainable, there is a critical need to increase sustainable practices going forward. The way we produce goods needs to change, and the largest producers have the biggest opportunity to change.
Emerging technologies may hold the keys to not only a more productive future, but also a more sustainable future. New technologies, such as short-loop recycling for manufacturing or autonomous disassembly systems for remanufacturing, have the potential to accelerate sustainable production. For more insights on accelerating sustainable production through Fourth Industrial Revolution technologies, refer to the World Economic Forum white paper Driving the Sustainability of Production Systems with Fourth Industrial Revolution Innovation, scheduled for publication in early 2018.
It is important to note that technology solutions are not the all-encompassing answer to sustainable production. Actors within production systems have to play a critical role in tackling this market challenge and advancing meaningful change. Companies need to unlock new value in sustainable solutions, and governments need to safeguard their own people and future growth with responsible and sustainable management of the environment. Multistakeholder solutions are required for promoting sustainable production, and emerging technologies offer a new tool to accelerate this change.
This driver assesses:
- Access to foreign and local demand to scale production
- Sophistication of consumer base to drive diverse industry activity and new products
- Market Size
- Consumer Sophistication
The supply of goods produced is largely influenced by the demand environment. Countries with access to large domestic and foreign markets can expand production and enjoy the advantages of economies of scale. Capturing domestic or regional demand alone may not be sufficient, but can be used as a springboard to compete globally. Consumer sophistication will continue to drive production improvements throughout the Fourth Industrial Revolution, as the most demanding consumers will force companies to respond, react and, ultimately, improve. High consumer sophistication triggers innovation, improved production techniques and enhanced products and services.