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EUROPEAN COMMISSION
FORWARD STUDIES UNIT
European competitiveness and business
Alexis Jacquemin
Working Paper - 2000
Working Paper - 2000
Working Paper - 2000
Working Paper - 2000
Forward Studies Unit
EUROPEAN COMMISSION
FORWARD STUDIES UNIT
European competitiveness and business
Alexis Jacquemin
Working Paper, 2000
The contents of this publication do not necessarily reflect the opinion or position of
the European Commission.
Table des matières
Introduction ........................................................................................................... 7
New Technologies ................................................................................................ 11
New forms of organisation ................................................................................. 15
Conclusion ............................................................................................................ 21
Bibliographie ......................................................................................................... 23
7
European competitiveness and business1
Alexis Jacquemin2
In The Economics of Order and Disorder(1992), Jacques Lesourne reflects on the influence
of what he calls "exceptional personalities". According to his description, such personalities
are characterised by a devotion to their own specific objectives, an outstanding ability to
judge the resources and beliefs of the other players, a talent for gaining the cooperation of the
people working for them, an imagination enabling them to discern innovative behaviour, and
a creative capacity allowing them to devise complex decision-making rules.
This paper explores a field in which these capacities are crucial, namely the challenges that
European competitiveness poses to companies.
My starting point is two sources: Fernand Braudel and Joseph Schumpeter.
In his study on the dynamics of capitalism (La dynamique du capitalisme, 1985),
Fernand Braudel distinguishes three stages of development in our economies. The first is
"material life" based on habit and routine, in which people are subject to biological and
demographic determinism. The economy is characterised by subsistence farming for
consumption by the family or village, and its principal regulators are scarcity, famine, war
and illness.
Many so-called "developing" economies are still submerged in this vast realm of the everyday
and the routine.
Then in the second stage the market intervenes and we move from use value to market value.
Transparent competition mechanisms provide the link between production and consumption
in the form of the many daily transactions, local trading, trade fairs and stock exchanges
whose role expanded steadily in Europe between the 15th and 18th centuries. Adam Smith's
invisible hand provided self-regulation, adjusted supply and demand and led everyone to
adapt as much as possible to given market conditions.
1 Originally published as “Compétitivité et enjeux européens”2 Chief Adviser to the Directorate-General for Science, Research and Development and the Forward Studies Unitof the European Commission. Economics Professor at the Université Catholique de Louvain.
8
However, the germ of the third stage, capitalism, already existed at that time. For Braudel,
capitalism is based on the accumulation of past results, which can be, and are, used to control
the functioning of the markets. In contrast to the daily transactions of which all the details are
known in advance and the always moderate benefits can be calculated pretty accurately, the
capitalist system is based on thousands of ways of loading the dice by credit handling,
currency exchange, the superiority of information, intelligence and culture.
"Two types or patterns of activity are thus contrasted, the market and capitalist relations, and
they are governed neither by the same agents nor the same mechanisms. Capitalism is the
privilege of the few, the realm of the likes of Bardi, Jacques Cœur, Jakob Fugger, John Law
or Necker." These players have been capable of dramatically changing whole sectors of the
European, even the world economy. "They transform trade for their own ends," says Braudel,
"and overturn the established order."
Extending his reflections to the world as a whole, Braudel anticipated the analysis of the
current major regional groupings. "From the Middle Ages and even Antiquity," he writes,
"the world was divided into relatively centralised, relatively coherent economic areas, which
existed alongside each other ... These economic worlds were the fertile ground in which
European, then world, capitalism was to grow."
Another pioneer to highlight the role of the economic players is the Austrian economist
Joseph Schumpeter. For him, competition is by nature a dynamic process generating new
combinations where some win, partly by chance and partly by adopting the right strategy.
And it is not possible to adequately explore such a process with a model assuming that the
"contest" is totally determined and leads to equilibrium. It is in hisTheory of Economic
Development(1912) that he presents his vision of development as a phenomenon totally
distinct from that which can be observed in a circular flow or in a trend towards equilibrium.
It involves spontaneous, discreet changes in the flow channels, a disturbance to the balance,
which alter it irreversibly. In the sphere of production, he says, such a development emerges
with the introduction of a new product or a new quality or method of production, the
opening-up of new markets and new supply sources and, finally, the implementation of a new
way of organising industry.
9
It is from this incredibly topical perspective that, over the last few years, the European Union
has become aware of the radical changes which are transforming the conditions on which
business competitiveness depends.
Externally, the reduction of tariff and non-tariff barriers, the greater efficiency of transport
and communication systems and, more generally, the broad international dissemination of
capital and technologies have increased the globalisation of the economy and intensified
competition.
Internally, there is evidence to suggest that competitiveness is not determined solely by the
relative level of the direct costs of factors of production but also by the quality of education
and training, the efficiency of industrial organisation, the capacity to continuously improve
production processes, the extent of the research and development effort and its industrial
exploitation, the availability of effective infrastructures, product quality and the integration
into business strategies of the consequences of societal changes such as the importance of
environmental protection.
This was highlighted by the European Commission White Paper on growth, competitiveness
and employment, which statedinter alia that between 75 and 95% of the corporate payroll is
now devoted to organisational tasks (computing, consultancy work, training, accounts,
marketing, research) rather than direct production.
These factors can be grouped under the concept of "intangible" investment, which must in
future be given a priority in business strategies at least equal to that of tangible investment.
Two topics are particularly important here: new technologies and innovations in the way
businesses are organised.
11
New technologies
While numerous analyses show the crucial role played by the constant development of new
technologies, products and processes for productivity and growth, a recent study (P. Buigues
and A. Jacquemin, 1997) suggests that there are considerable differences between the
European Union and the United States in this field.
Using the classification proposed by the OECD, this study shows that in manufacturing
industries in 1994 high-technology sectors accounted for 25% of total added value in the
United States compared with 20.4% in the EU, and 20.4% of jobs in the US compared with
only 18% in the EU. However, in the medium-technology sector Europe is in a better
position than the United States in terms of both added value and employment.
These tendencies are reflected in trade. A breakdown of exports by technology level shows
that in 1994 high-technology goods accounted for 37.3% of American exports and only
22.8% of European exports. Generally speaking, US specialisation is at its maximum in
high-technology industries, average in medium-technology industries and weak in
low-technology sectors. By contrast, European specialisation is high in medium-technology
industries, medium in low-technology sectors and low in high-technology sectors.
If we separate out the positions of Germany, France and the UK, a number of differences
emerge.
Germany's specialisation is clearly different from France's or the UK's.
The EU's strong specialisation in medium-technology sectors is attributable mainly to
Germany: its specialisation coefficient in these activities (xi/x/Mi/M) increased to 155 in
1994. The chemical industry, machinery and equipment manufacturing, and the automobile
sector are the driving forces of German industry.
The corresponding coefficients for France and the UK are considerably lower - 100 and 98
respectively in the medium-technology sectors.
In contrast, in high technology, it is Germany whose specialisation is relatively low (87)
compared with France (102) and the UK (107).
12
Lastly, an examination of business size by sector also reveals considerable differences. In the
United States, 23% of small businesses are active in high-technology industries compared
with only 13.3% in Europe. These figures confirm that high-technology activities in Europe
are more concentrated in large businesses.
The example of patents relating to the human genome is symptomatic. According to the
magazineNature(4 April 1996), 40% of the human genome patents issued by the European
Patent Office are held by Americans and only 24% by Europeans. In the US, most of these
patents belong to small businesses, while in Europe hardly any small businesses hold one.
However, it is important not to draw erroneous conclusions from these findings.
An unfavourable trade balance for high-technology products may simply be a sign of high
imports. If these imports are then used for production purposes, this could indicate a
strengthening rather than a weakening of Europe's overall competitiveness (reports by the
Competitiveness Advisory Group, 1996, A. Jacquemin and L. Pench (eds) (1997). Confirming
this argument, an OECD report (1997) concluded that the invention and initial commercial
exploitation of new products and processes were less important than the rapid and broad
dissemination of this technology. This is mainly the case for services. It should be noted, in this
context, that the acquisition of technology in imported equipment such as computers and
machines is easy and seems to be more profitable than technology acquired at national level.
By contrast, strengthening Europe's position in certain high-technology sectors may be a very
costly business, both directly in budgetary terms and indirectly through the increase in the costs
of intermediate inputs for businesses and end users.
That said, it remains the case that high-technology activities are characterised by rapidly
increasing demand, high productivity, a high-calibre workforce and high salaries. More
generally, a strong presence in a high-technology sector often leads to a comparative advantage
which is self-sustaining if there are significant external savings. These result both from the
knock-on effect of technological knowledge on other businesses, which increases producer
efficiency, and from market size, which increases supplier productivity (Krugman, 1991).
13
These external savings justify public support for high-technology research and facilitate links
between science and industry.
According to a study recently carried out by the National Science Foundation, 73% of the
documents cited by American industrial patents are from the domain of public science, and
their authors from universities, government bodies or other public institutions. In other
words, a close interdependence between research and development, academic, industrial and
governmental communities is an important factor in technological progress.
That said, however, it must not be forgotten that Europe can still boast a vast range of
specialisations (pharmaceutical products, chemical products and the aerospace industry, for
example). According to the European report on scientific and technological indicators
(Rapport européen sur les indicateurs scientifiques et technologiques) (1997), the EU has also
increased its share in world scientific publications and is now on a par with the United States
and ahead of Japan.
However, the European share in American and European patents has declined considerably
since the 1980s. Currently, Japan is single-handedly obtaining more patents in the United
States than all the European countries put together.
Certain signs suggest that the approach of European businesses has been too specifically
"scientific" and that as a result insufficient attention has been paid to market requirements and
demand structures. Europe must translate its high level of achievement in basic science into
commercial success. From this point of view, in the field of high technology, it seems that
European businesses suffer less from technological weaknesses than from difficulty
transforming their research and development activities into innovations and aggressive
strategies which would enable them to acquire significant shares in the world market.
15
New forms of organisation
One of the key elements in the implementation of the strategies referred to above is not
technical innovation, but organisational innovation. Traditionally divided and segmented
structures must give way to rapid information systems, more flexible interaction and
considerably simplified procedures. Cases of successful industrial innovation, such as the
introduction and spread of so-called "lean production" in the car industry, are based more on
an administrative and organisational revolution than on a direct application of technological
discoveries. In a survey of more than 200 European businesses3 directors expressed the view
that human resource management had become the paramount concern. One of the
conclusions of the survey was that there was apparently not much of a link between
investment in capital and investment in human resources.4 The key is to reconcile flexibility
and productivity, basing the second on the first - namely on flexibility of tasks, labour force
and operations. This means opening up new channels of communication between the various
services, which implies extensive worker participation, which in turn requires new powers,
worker involvement and broad-based qualifications.
More generally, the efficiency of Taylorian organisation stemmed from the rigour of its
divisions between different business functions, tasks and jobs, and from the accuracy of
planning. Yet these principles, which enable costs to be reduced within a stable environment,
work strongly against variety, reactivity and, above all, quality and innovation. Hence a
major reversal: while Taylorism was entirely constructed on an ideal of zero communication,
the new productivity is directly linked to the capacity forcooperationof all parties in the
production system, from those upstream right through to the customer via supporting services,
suppliers, etc. "Efficiency is based on relationships. Operational productivity is giving way
to interface productivity", (P. Veltz, 1994).
Current changes can be represented as the transition from a "traditional business" model to a
"flexible business" model. The "flexible business" is characterised by the ability to constantly
redeploy resources so as to create and exploit new market segments with greater added value.
The achievement of this objective generally presupposes that the business will concentrate its
efforts on the development of "basic skills" or on the application of "evolutionary
productivity", (OECD, 1996).
3 Booz-Allen and Hamilton (1992).4 Report drawn up by the Task Force for Human Resources (1993)
16
More specifically, the changeover from a "traditional business" to a "flexible business"
implies an adjustment across the board: development of products and organisation of
production, style of management and organisation of work (Table 1). The main features of
the change are: greater product differentiation, fewer levels of hierarchy, abolition of
professional barriers. These changes must be accompanied by an improvement in employee
skills and motivation, which is generally associated with an improvement in professional
relationships, which should now be cooperative rather than conflictual, (A. Jacquemin and
L. Pench, 1997).
17
Table 1: Traditional business and flexible business
"Traditional business" "Flexible business"
Development of products and organisation of production
Standard product
Production chain
Single objective mechanisation
Variety of products
Modular production
Flexible mechanisation
Management style
Hierarchical management
Vertical division of labour
(separation between planning
and execution)
"External" control
Participatory management
Vertical integration of jobs
(enrichment)
Internal self-regulation
Organisation of work
Horizontal division of labour
(extreme fragmentation of tasks)
Workers linked to the job
Individual work
Fixed hours
Horizontal integration of jobs
Rotation
Group work
Autonomous time
management
Skills/motivation/professional relationships
Unqualified workers
Low motivation (indifference)
Conflictual working relations
Qualified workers
High motivation
(identification)
Cooperative working
relations
The growing importance attributed to the quality organisation of human resources is
corroborated by empirical data on business performance.
This data has shown that, for a broad sample of American and European businesses, the
"intangible" factors, including innovation, speed of marketing, product quality, service quality
and image, were the main determinants of competitiveness, (PIMS, 1994, and Table 2).
Case studies highlight this development. A particularly eloquent example is that of the
Finnish company Nokia. Formerly a manufacturing conglomerate, Nokia streamlined itself
18
into a dynamic telecommunications business, which operates worldwide and is the world
leader on the cellular infrastructures and handsets market. It has a turnover of ECU 20 billion
and employs of 55 000.
Nokia had to take up the challenge of rapid growth, preservation of entrepreneurship and
improvement of staff training in a highly competitive and constantly changing market. It did
so by making structural and cultural changes in organisation and management.
Training and development activities, which were closely linked to professional strategy, were
supplemented by rotation between jobs and reassignments. Technology is also used to
facilitate information sharing, personal development and training in all aspects of the
business.
Nokia thus substantially expanded its operations and, while maintaining its flexibility and
capacity to innovate, in spite of ferocious competition. As a result, it has become the market
leader.
This example shows the importance of a close link between investment in production and
investment in human resources.
In the same context, an American study shed light on the following question: does the
promotion of human resources increase productivity? (C. Ichniowski, K. Shaw and
G. Prennushi, 1995). For this study, the authors put together basic data relating to 26 steel
production units using the same production process. They also collected precise data on
working practices.
The conclusion was that the adoption of a coherent system of new working practices,
including teamwork, flexible allocation of work, training for several jobs and the use of
financial incentives leads to much higher levels of productivity than those obtained by
traditional methods. Furthermore, isolated, individualistic working practices do not have a
positive effect on productivity.
19
One interpretation by the authors is support for the argument in favour of theoretical models
which stress the importance of complementarity in working practices (see Milgrom and
Roberts, 1990; Holmstrom and Milgrom, 1994).
These conclusions are confirmed by research conducted by the Boston Consulting Group,
(Bilmes, Wetzker and Xhonneux, 1997). The authors examined about a hundred German
businesses, in ten branches of industry, including car manufacturing, banks and the
pharmaceutical industry, over a period of seven years. The results are impressive. In all the
branches of industry, the companies which promoted autonomy and freedom to make
decisions and take the initiative, flexible working hours, a network type of organisation, fewer
hierarchical levels, the possibility of acquiring new skills and a link with their financial
performance have a significantly higher output than their competitors, in the form of strong
growth in the share and dividend value. These companies also created the most jobs.
21
Table 2: Determinants of competitive performance
"Intangible" "Tangible"Speed ofmarketing
Relative R&D
effort
Intellectual property
advantage
Relative
costs/prices
Relative innovation Relative qualityEmphasis on
distribution
Competitiveness
(relative market shares and profitability)
Relative positionin termsof image/service
Source:Adapted from PIMS (1994)
Conclusion
The pursuit of productivity and competitiveness through high-technology activities and new
forms of organisation is not an end in itself. They must go hand-in-hand with improvements
in working and living conditions, better protection of the environment, savings in natural
resources and energy, meeting the challenges of the ageing population and promoting
sustainable growth.
From this point of view, innovation is not merely an economic mechanism or a technical
process. It is first and foremost a social phenomenon through which individuals and societies
express their creativity, needs and wants. As a result it is closely interwoven into the social
conditions in which it is produced and ultimately into history, culture, education, institutional
organisation and social protection systems. Management and labour, which in various
Member States have concluded significant and often innovative agreements on work
organisation linked to new technologies, have an essential role to play in this regard.
22
To succeed, our societies must become "cognitive societies", in which each and every one of
us can continue to learn actively through life-long education and training. This educational
imperative will reduce the risk of transforming the "information society" into a new source of
inequality between regions or citizens. It is a crucial condition for the promotion of solidarity
and cohesion, values to which the countries of Europe have always given a high priority.
23
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