Globally Competitive Policy

 Public Policy as a Catalyst for Growth

In today’s global economy, government actions and public policy play a critical role for both country- and company-level competitiveness. The impact government policies can have across a number of competitiveness drivers – including trade; financial and tax systems; infrastructure development; labour and workforce productivity; research and innovation; energy and materials costs; intellectual property protection; environmental and other regulations; the tort system; and the cost of capital – are significant. They directly create both advantages and disadvantages for countries, relative to other nations and to companies working within their borders, and relative to other domestic and global competitors. The high level of influence public policy now has on manufacturing competitiveness is highlighted in The Future of Manufacturing report which stated: “The strategic use of public policy as an enabler of economic development will intensify resulting in a competition between nations for policy effectiveness and placing a premium on collaboration between policy-makers and business leaders to create win-win outcomes.” Helping to facilitate that collaboration through constructive dialogue – to create win-win outcomes – is the centrepiece of the Manufacturing for Growth project. 

In this section, the report takes step one on the path to developing a primer for public policy dialogue and collaboration between business and government leaders regarding manufacturing competitiveness and the role of government. It explores public policy through subjective, opinion-based analysis and policy recommendations coming from business leaders, as well as objective, fact-based analysis and country comparisons. In this volume you will find the information described below.

From a subjective perspective:

• Themes Regarding Effective Public Policy: From the CEO interviews and recommendations as well as the input gathered through the workshops conducted around the world, several common and recurring themes emerged regarding what constitutes effective public policy as well as the corollary of what defines problematic policy environments. The report attempts to synthesize all the input and distil the overarching themes of both effective and dysfunctional policy through the lens of business leaders.
• CEO Recommendations: The six sets of country-level policy recommendations – from chief executives to policy-makers in those countries – were provided by more than 70 executives around the world in face-to-face discussions from August 2012 through early January 2013. These represent policy imperatives that they believe would improve the competitiveness of the countries in which they reside or where they have major operations, and thereby their companies and industries. All recommendations have been synthesized from the one-on-one discussions and no attribution has been made to any individual business leader. In addition to the individual country-level recommendation summaries, the report highlights five public policy areas where common recommendations emerged. These five policy areas – and the consistent recommendations which emerged – should be viewed as relevant for policy-makers regardless of country or relative competitive position today. 

From an objective perspective:

• Country Policy Comparisons Table: The report compares country-level policies for the six focus countries that serve as the basis for this section and the overall report – Brazil, India and China, all considered emerging economy nations with a significant and growing role in shaping the global manufacturing competitiveness landscape; and the United States, Japan and Germany, the three most dominant developed economy nations from a manufacturing competitiveness perspective. This objective comparison is carried out through a comprehensive Country Policy Comparisons Table, developed through extensive research and a number of collaborative discussions convened by the National Association of Manufacturers. This section also highlights country comparisons in two key policy areas which consistently appeared high on the list of CEO recommendations and have an almost direct and immediate impact on competitiveness: tax and energy. The appendix provides excerpts from the Country Policy Comparisons Table. 
• Comparative Economic and Related Data: Throughout Section 1, the report includes key country-level economic and related data and analysis drawn heavily from the 2013 Global Manufacturing Competitiveness Index.¹
• This data comparing the most globally competitive manufacturing nations, including the six target countries, helps to provide a fact-based foundation to augment the Country Policy Comparisons Table as well as the more subjective CEO recommendations and themes analysis.

The Importance Manufacturing Plays in Economic Development and Job Creation

More and more, the factors that influence the competitiveness of countries and companies extend beyond traditional production inputs such as the cost of labour and materials. Today, manufacturing executives view competitiveness and the drivers that influence their companies’ ability to compete through a much broader lens to include public policies that impact economic, trade, financial, tax and legal systems.

As stated in The Future of Manufacturing, globalization of manufacturing has been a key driver of higher-value job creation and a rising standard of living for the growing middle class in emerging economies around the world such as China, India, South Korea, Mexico and Brazil. Developed countries have also benefited from sourcing lower-cost products from emerging economy nations that produce at lower wage rates. Based on this dynamic, the relationship between emerging and developed economy nations has dramatically changed, creating competition as well as co-dependency.

But it is not just emerging economy nations that see the benefit of manufacturing and its ability to drive high-value job creation. Developed economy nations, such as Germany and more recently the United States, have also embraced the higher-value job creation powers of advanced manufacturing. Just how much of a positive impact do strong manufacturing sectors have on the economic prosperity for countries and their citizens?

Figure 3 illustrates the strong association between manufacturing GDP and overall GDP for a number of countries. The figure highlights the fact that higher manufacturing growth whether representing a large or small portion of a nation’s economy, drives higher total real GDP.

While the strength of the relationship seems to be especially true for emerging economies, which have relatively high rankings in manufacturing and real manufacturing compound annual growth rate (CAGR), the correlation is also true for developed economies, which have experienced slow manufacturing GDP CAGR and equally slow overall real GDP CAGR. Further, the correlation appears to hold true whether manufacturing GDP as a per cent of total GDP is high (i.e. over 30%) or low (i.e. less than 16%).

The Future of Manufacturing included an overview of recently released research by Ricardo Hausmann and Cesar Hidalgo (Harvard and MIT)² which looks in detail at the association between advancing manufacturing knowledge and capabilities and increasing economic prosperity for countries. Their extensive examination of manufacturing export trade data of nearly every nation in the world over the past 60 years indicates that as a nation begins to build the knowledge and capabilities necessary to manufacture goods – and trade those goods on global markets – its path to prosperity begins. 

Further, Hausmann and Hidalgo show that acquiring more knowledge and producing more complex products, and developing and deploying more advanced manufacturing processes, lead to greater economic prosperity for a country and its citizens. Finally, their research argues that the link between the knowledge networks and capabilities necessary to drive advanced manufacturing and the economic prosperity of a nation is a better predictor of the variation in incomes across countries than any other leading indices. More simply put, manufacturing matters: advanced manufacturing is a key driver of high-value job creation and economic prosperity.

It is no wonder that government policy-makers have become more active in pulling the levers that might bolster the relative competitiveness of their country. The levers that are most effective at improving manufacturing competitiveness are relative to a nation’s current competitive position, balanced against the costs to and societal demands of the nation. 

But what really drives the manufacturing competitiveness of a country? And which policy areas may require extra attention from government leaders?

The Drivers of Manufacturing Competitiveness for a Nation: A Mosaic of Strengths and Weaknesses 

In the 2013 Global Manufacturing Competitiveness Index, over 550 chief executives of manufacturing organizations were asked to rank 10 key drivers of competitiveness for a nation and 40 sub-drivers using a survey framework first developed in 2010. These 10 key drivers significantly overlap with and reinforce the key trends identified in The Future of Manufacturing. In addition, for 2013, these chief executives were asked to compare the six target nations – the US, Germany, Japan, China, India and Brazil – on the 10 key drivers of manufacturing competitiveness for a country. As shown in Figure 4, these chief executives, many of whom participated in the face-to-face interviews, have a nuanced and detailed perspective differentiating the relative strengths and weaknesses of each nation along a series of complex dimensions. The mosaic that emerges clearly demonstrates the advantage Germany, the US and Japan hold relative to talent-driven innovation as well as against most other drivers, with the exception of the cost of labour and materials. Not surprisingly, the survey revealed emerging economy nations hold an advantage with regard to the low cost of labour and materials; however, compared to their developed nation counterparts, they lag far behind when it comes to healthcare systems and legal and regulatory environments. 

Importantly, what also emerges from the CEO rankings shown in Figure 4 is the transformation that China is undergoing across its competitiveness drivers, clearly separating itself from India and Brazil. Further, the CEO ratings seem to suggest China is becoming more and more a developed nation competitor than its emerging economy counterparts. As China, India and Brazil continue to bolster their advanced manufacturing knowledge over the coming years, fascinating new patterns will emerge. 

Public policy can and does play a significant role in defining the strengths and weaknesses of a country relative to other countries. And because public policy threads wind through all the drivers that executives

believe create competitive advantages or disadvantages for their companies, a significant portion of the various discussions around the world centred on balancing the need for effective government action and public policy without creating bureaucracy, raising structural costs unnecessarily or disrupting markets. 

In the rest of this section, the basic structure of the Country Policy Comparison Table is laid out. Also, based on the face-to-face CEO interviews and additional supplemental research, the report takes a deeper look into two specific policy areas that business executives deemed critically important to their ability to compete globally – tax and energy policy.

Themes Regarding Effective Public Policy 

 Given the influence of public policy and its importance to business, it is of no surprise that executives participating in the working sessions and one-on-one interviews were both passionate and clear when sharing their perspectives and recommendations on improving government policy to serve as a catalyst for manufacturing growth. While the specific CEO recommendations vary based on country and the unique circumstances of that country, and in most cases the industry sector(s) where the chief executives’ organizations primarily compete, several common and recurring themes emerged regarding what constitutes effective public policy – as well as the corollary of what defines problematic policy environments. 

A striking observation based on all the interviews and discussions convened in support of this report is that most executives touched on a set of themes that were similar when describing concerns with public policy and outlining their desired state for the future public policy environment. Specifically, executives identified one or more of the following overarching themes in providing their input and recommendations to policy-makers:

• Consistency, stability and certainty: A consistent and stable policy environment, freed from election cycles, providing longer-term certainty for business investment decisions. As capital investment and workforce hiring decisions have long-term consequences – often 10- to 20-year or more time horizons – establishing policy stability over longer time periods facilitates the setting of business and investment strategies with greater confidence and enhances the ability to commit to stakeholders.
  • Common concern: Uncertainty was the number one concern mentioned by executives regarding public policy. Many executives said the level of uncertainty regarding the direction of key public policy decisions has reached epic proportions.
• Globally competitive, fair and enforced: Establishing policies that are globally competitive with other nations and which do not create competitive disadvantages for businesses (“do no harm”). Further, policies should strive to help level the playing field and be rigorously enforced for all global competitors. Policy-makers have a critical role to play regarding the establishment of fair and competitive global markets. Strong enforcement is essential particularly in the areas of intellectual property protection, currency manipulation and trade violations.
  • Common concern: Policies that result in a competitive disadvantage with other nations impacting an industry sector or the broader business community, e.g. higher tax rates; limited or poor infrastructure investments; unique and burdensome labour or environmental standards. 
• Developed through dialogue and collaboration: The development of policies based on meaningful dialogue and collaboration between business leaders and policy-makers contributing to more informed and thoughtful policy development, limiting unintended negative consequences. 
  • Common concern: Policies which significantly impact businesses but are established without the benefit of a dialogue and exchange of ideas with business leaders, resulting in either costly or otherwise competitively disadvantageous policy environments, often with unforeseen or unintended consequences. 
• Creates institutional legitimacy, credibility and market confidence: Policy that creates institutional legitimacy – in the court systems, the financial systems and markets, for intellectual property protection, for asset protection, for enforcement, and for fair and consistent consequences of infractions and violations – is essential for advanced economic markets to thrive and grow and to attract investment of capital and talent. Corruption should find no home in free markets.
  • Common concern: Environments that do not instil confidence for investors regarding government institutions – impacting the banking system, the court system, or legislative or regulatory processes. 
• Harmony and alignment: Policy-makers should strive to reduce the fragmentation and complexity of today’s policy environment through the synchronization and harmonization of national, state, and/or local policies and across agencies and branches of government.
  • Common concern: Government actions which are uncoordinated across responsible agencies or departments and which inadvertently undercut and work against one another. Also unnecessary complexity that adds greatly to the cost of compliance, further inhibits business investment and reduces competitiveness. 
• Financially prudent; balance costs versus benefits: Individual polices and the overall policy bundle must be financially affordable and reasonable for business and society. The costs associated with policies – even those that may be well intentioned and arguably necessary – should not outweigh the benefits.
  • Common concern: A burdensome high-cost policy or policy environment where the costs to implement and pay for the policy objective outweigh the benefits to society. Additionally, concern was expressed for policies which create a long-term fiscal burden (deficit) that becomes a drag on business investment and competitiveness. 

Common policy recommendations essential to growth

Our face-to-face CEO interviews provided perspectives from six different developed and emerging economy nations (United States, Japan, Germany, China, India and Brazil), each with unique policy frameworks and relative strengths and weaknesses, resulting in six sets of country level recommendations from CEOs to policy-makers in those countries. Throughout these discussions, there were five public policy areas where common themes emerged and consistent recommendations were given from executives around the world. As such, these five policy areas and the consistent recommendations which surfaced should be viewed as relevant for policy-makers regardless of country or relative competitive position today.

• Competitive tax policy applied within simplified tax systems: Executives participating in our discussions, regardless of where in the world their companies were located or maintained operations, consistently expressed concern with both business tax policy and complex national tax systems that negatively impact competitiveness. While specific country tax systems varied, country-to-country, executives broadly felt that those countries that could offer competitive advantages in lowering an organization’s overall effective tax rate, as well as remove resource and cost burdens often associated with compliance, would be the winners. Eliminating double-taxation or redundant taxes and creating tax incentives for innovation, research and development, workforce development and other capital investments were viewed as important levers and when effectively applied, could significantly improve a country’s competitive advantage.
• Policy that promotes and protects free and fair trade: Trade was frequently and passionately mentioned by almost all of the executives participating in our discussions. Participants consistently called for policy-makers to increase both the number of free trade agreements and the pace at which new agreements are formed and ratified. While most executives preferred an effective global WTO solution and noted the important objectives of the Doha rounds, many were skeptical that would be accomplished. Executives were equally passionate about trade agreements being fair along multiple dimensions and considerate of broader elements than are normally included, addressing labour practices and working conditions for example. Finally, the subject of trade agreement enforcement was also a common theme. Executives felt effective trade policy must address enforcement of existing agreements. Ensuring a fair and level playing field was equally as important, if not more important, than the number of and speed with which new agreements are forged.
• Energy policy promoting efficiency, security, strong infrastructure, and low cost: Energy policy was consistently mentioned in our discussions with manufacturing executives around the world – both from a cost perspective and from an energy security, stability of supply perspective. Executives broadly felt that countries that could provide clean and sustainable sources of energy at a competitive cost would offer a significant advantage over other nations. They also felt it was incumbent on policy- makers to develop comprehensive national energy policies that effectively and responsibly build a portfolio of strategic sources of energy, ensured efficient delivery through world class infrastructure, and supported appropriate R&D efforts into alternative sources of clean energy. Given rapid growth globally in the demand for energy, rigorous efficiency standards, research in alternative sources of energy, and appropriate and responsible development of current sources of energy were all very important to manufacturing executives. Often, executives further suggested that effective energy policy should also drive opportunities for innovation and economic development. Finally, executives generally supported efforts by policy-makers to establish a price on carbon emissions and to develop effective mechanisms to engage all nations around the world on a reasonable march toward clean energy sources.
• Education and workforce policy which develop superior talent: The ability to develop and attract the world’s most talented workers was critical to every executive participating in our discussions regardless of where in the world they resided. Executives consistently felt that their ability to drive innovation was directly linked to their ability to access highly educated workers. And while STEM (science, technology, engineering and mathematics) literacy was important, it is interesting to note that executives consistently felt STEM is not, by itself, sufficient. Many commented that creativity and imagination are key ingredients to producing great innovation. As a result, they stressed manufacturers need STEM educated, multidisciplinary thinkers that are also creative and can problem solve in a team environment. Executives consistently felt that public policy must ensure high quality education for students at all levels and support effective industry- led workforce training and development.
• Science, technology and innovation policy which promote advanced manufacturing: Finally, executives felt a highly educated workforce with strong STEM and creativity skills combined with policies that consistently promote superior science and technology research and development through to commercialization – including the development of advanced manufacturing processes – were essential to national competitiveness. Policies which support long term funding for research institutions and public-private research partnerships as well as promote the strong connectivity between research institutions and manufacturing enterprises were considered key ingredients to the development of powerful “manufacturing-innovation ecosystems”, enhancing overall workforce productivity and competitiveness and driving prosperity for the citizens of a nation.