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European Commission. Enterprise and Industry Directorate General. EU’s economic reform challenges - European Competitiveness Report 2006 Gert Jan Koopman , Director for Industrial Policy and Economic Reforms. Brussels, 1 December 2006. The Competitiveness Report.

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Enterprise and industry directorate general

European Commission

Enterprise and Industry Directorate General

EU’s economic reform challenges

- European Competitiveness Report 2006

Gert Jan Koopman, Director for Industrial Policy and Economic Reforms

Brussels, 1 December 2006


The competitiveness report

The Competitiveness Report

  • The European Competitiveness report is an annual publication produced since 1997, at the request of the Council (Resolution of 21 November 1994). This is its 9th edition.

  • It is an analytical paper. It examines key developments and factors that explain competitiveness -and are relevant to policy- from the point of view of economic theory and empirical research.

European Competitiveness Report 2006


The competitiveness report1

The Competitiveness Report

  • The 2006 Report has been redesigned to serve the analytical foundations of the microeconomic pillar of Lisbon strategy. This brought it closer to the policy agenda.

  • It reviewed a number of reforms:

    • Liberalisation of energy markets;

    • Business environment and better regulation;

    • Financing of innovation;

    • Designing innovation policies taking into account the lead markets concept.

  • and the competitive position of two industrial sectors:

    • the producers of Information and Communication Technology goods and services; and

    • The pharmaceutical industry.

European Competitiveness Report 2006


Structure of presentation

Structure of presentation

I.Facts on EU growth and productivity performance

II.Key policy challenges: innovation, energy, business environment

III.Competitiveness of EU manufacturing sectors

European Competitiveness Report 2006


Enterprise and industry directorate general

I.Recent economic performance: GDP and productivity growth

European Competitiveness Report 2006


Eu 25 growth contributions of employment and labour productivity

EU-25 growth: contributions of employment and labour productivity

Note:The two components sum up to the average annual GDP growth rate in the respective periods. Data source: European Commission (AMECO).

European Competitiveness Report 2006


Productivity levels by member state

Productivity levels by Member State

Note:Labour productivity defined as GDP per employed person.

Data source: European Commission (AMECO).

European Competitiveness Report 2006


Average growth of labour productivity by country 2000 2005

Average growth of labour productivity by country, 2000-2005

Note:Labour productivity defined as GDP per employed person.

Data source: European Commission (AMECO).

European Competitiveness Report 2006


Enterprise and industry directorate general

II. Key policy challenges: energy

European Competitiveness Report 2006


Electricity markets in the member states

Electricity markets in the Member States

European Competitiveness Report 2006

Source:European Commission report to the Economic Policy Committee, October 2006.


Liberalisation of european energy markets challenges and policy options

Liberalisation of European energy marketsChallenges and policy options

  • The European energy markets have been going through a process of liberalisation since the early 1990s.

  • Based on existing economic literature discussing both EU and non-EU experience, the Report presents an assessment of some of the effects of liberalising the European electricity and gas markets.

European Competitiveness Report 2006


Liberalisation of european energy markets challenges and policy options1

Liberalisation of European energy marketsChallenges and policy options

Liberalisation and efficiency

  • Liberalisation of energy markets will generate efficiency gains if competition is increased.

  • As competition in energy markets is still limited, we have not yet reaped the full benefits from liberalisation.

  • Competition in energy markets will entice firms to shift their R&D efforts towards efficiency-enhancing technologies.

European Competitiveness Report 2006


Liberalisation of european energy markets challenges and policy options2

Liberalisation of European energy marketsChallenges and policy options

Liberalisation and security of supply

  • Before liberalisation, security of supply was achieved by high level of overcapacity for which consumers paid the price.

  • Less overcapacity will lower energy prices but could also lead to larger price volatility.

  • Consumers can protect themselves through long-term fixed price contracts.

  • The internal energy market will promote reliability of networks, provided that interconnections are sufficient.

European Competitiveness Report 2006


Liberalisation of european energy markets challenges and policy options3

Liberalisation of European energy marketsChallenges and policy options

Liberalisation and environment

  • Impact of liberalisation on environment ambiguous as aggregate effect can be positive or negative, depending also on initial conditions.

  • Liberalisation can strengthen the effect of market based environmental instruments such as the European Emissions Trading Scheme.

European Competitiveness Report 2006


Enterprise and industry directorate general

II. Key policy challenges: business environment

European Competitiveness Report 2006


Enterprise and industry directorate general

The Regulatory Environment in the context of the strategy for Growth and Jobs: findings from empirical research

Effects of product market reforms (PMR):

  • Product market reforms in OECD countries over the period 1985–1995 contributed to an increase of 0.2 – 0.3 percentage points in total factor productivity growth in the long run;

  • Moving to US levels of regulation in the EU would lead to a labour productivity growth rate increase of 0.15 percentage points in the long run;

  • Regulatory reforms aligning the overall regulatory stance with that of the most liberal OECD country could increase the annual rate of total factor productivity growth in continental EU by between 0.4 and 1.1% over 10 years.

    PMR facilitating firm entry

  • Entry liberalisation in service would boost annual multi-factor productivity growth in the overall business sector by about 0.1 to 0.2 percentage points in certain countries. Indirect effects would boost manufacturing annual productivity growth by 0.1 to 0.2 percentage points in certain European countries, most notably Germany, France, Italy and Greece.

  • Increasing the current firm entry rate by one percent lead to an increase in labour productivity by 0.60% and an increase in employment growth of 2.67%.

  • A 1% increase in the entry rate leads to an increase in output, employment and labour productivity growth rate of 2.2%, 2.7% and 0.6% respectively A 1% increase in exit rate reduces output growth rate of 0.8% (one year lag), while increases labour productivity growth by 0.7% (2-year lag)

  • Reducing the level of state control and entry barriers to entry to the best OECD practice would Increase long-term employment rates by between 1.3 and 2.5 percentage points (lower-bound estimate).

European Competitiveness Report 2006


Enterprise and industry directorate general

The Regulatory Environment in the context of the strategy for Growth and Jobs: findings from empirical research -2

PMR enhancing competition

  • Product markets reform aiming at increasing competition would lead to a GDP increase of about 2% in the medium run (acceleration of output growth by almost a quarter of a percentage point annually over a period of 7 to 8 years).

  • Competition-friendly product market reforms reducing the price-mark-up in the euro area by 10 percentage points would produce a long term increase in the GDP level in the euro area of 4.3%.

  • Product market reforms reducing the price mark-up in the euro area to US levels would bring a GDP level increase in the euro area of 8.6% (relative to its baseline level) in the long run.

    Reduction in administrative costs

  • A reduction of 25% in administrative burdens in the EU would lead to a real GDP level increase of 1% in the short run and a real GDP level increase of 1.4% in the long run.

European Competitiveness Report 2006


Enterprise and industry directorate general

The Regulatory Environment in the context of the strategy for Growth and Jobs: findings from empirical research –an example

The Ease of Starting a Business and Per Capita GDP

Source: European Commission calculations on the basis of data from the World Bank “doing business” database.

European Competitiveness Report 2006


Enterprise and industry directorate general

The Regulatory Environment in the context of the strategy for Growth and Jobs: findings from empirical research –an example

Cumulative GDP effects by 2025 of a 25% reduction in administrative costs(DG ENTR and CPB, 2006)

European Competitiveness Report 2006


The regulatory environment in the context of the strategy for growth and jobs

The Regulatory Environment in the context of the strategy for Growth and Jobs

Situation in Member States:

  • Different sets if indicators: OECD, WB, ID, Fraser Institute/World Economic Forum;

  • The group of countries with less restrictive regulatory environments: Cyprus, Denmark, Estonia, Finland, Ireland, Luxemburg, the Netherlands and the UK;

  • The group of countries with a more restrictive regulatory environment comprises the Czech Republic, Greece, Italy, Lithuania, Poland, Portugal and Spain.

European Competitiveness Report 2006


The regulatory environment in the context of the strategy for growth and jobs1

The Regulatory Environment in the context of the strategy for Growth and Jobs

National efforts, in terms of setting up:

  • explicit Better Regulation strategies;

  • Impact assessment systems

  • Simplification programmes;

  • Systematic consultation of stakeholders;

  • Programmes for measuring and reducing administrative costs.

  • Conclusion: we are at the beginning of a long process. Those starting from a less favourable position should do more.

European Competitiveness Report 2006


Enterprise and industry directorate general

II. Key policy challenges: innovation

European Competitiveness Report 2006


The financing of innovation

The Financing of Innovation

The rationale for public intervention:

  • Limited appropriability of innovation

    • Response: direct subsidies and fiscal incentives

  • Imperfections of the capital markets: (information asymmetries, adverse selection and moral hazard).

    • Response: business angels, venture capital, loans and guarantees.

  • The chapter looks at what MS propose to do (in their NRPs) and draws conclusions on possible policy gaps.

European Competitiveness Report 2006


The financing of innovation the findings

The Financing of Innovation – the findings

  • Wide variation on delivery mechanisms for grants and tax incentives;

  • New measures favour tax incentives more;

  • Particular attention to seed and early stage venture capital;

  • Schemes change frequently and often are complex.

No. of Member States

European Competitiveness Report 2006


The financing of innovation1

The Financing of Innovation

Policy gaps:

  • Need to facilitate venture capital mobility;

  • More consideration should be given to facilitate debt finance of innovation;

  • There is scope for mutual learning and exchange of best practice;

  • Need for more systematic evaluation of existing measures.

  • Not to forget: finance is an important but small part of the innovation process.

European Competitiveness Report 2006


The lead markets approach in innovation policy

The Lead Markets approach in Innovation policy

  • Objective: What is a lead market? Is there a case for policy intervention? If yes, through which mechanisms?

  • Varied meanings of the term in economic literature.

  • Most common definition: the market where an innovation is first widely used that later becomes successful internationally regardless of where that innovation was invented

European Competitiveness Report 2006


Lead markets stylised international diffusion pattern of an innovation design source zew

Lead Markets: stylised international diffusion pattern of an innovation design (source: ZEW)

European Competitiveness Report 2006


Lead markets diffusion of internet in selected countries source itu

Lead Markets: diffusion of Internet in selected countries (source: ITU)

European Competitiveness Report 2006


The lead markets approach in innovation policy conclusions

The Lead Markets approach in Innovation policy: conclusions

  • The conclusion of the Report is that innovation and technology policies should incorporate those factors that contribute to a successful lead market strategy:

    • incorporation of foreign market needs, preferences of global customers, global trends;

    • emphasis on lowering costs of production;

    • allowing competition among different innovation designs.

  • There is little empirical evidence in support of policies to administratively create lead markets for specific “champion” products and technologies.

European Competitiveness Report 2006


Enterprise and industry directorate general

III. Competitiveness of manufacturing sectors

European Competitiveness Report 2006


Manufacturing sectors in eu 25 with highest production growth in 2001 2005

Manufacturing sectors in EU-25 with highest production growth in 2001-2005

European Competitiveness Report 2006


Manufacturing sectors in eu 25 with steepest decline in production in 2001 2005

Manufacturing sectors in EU-25 with steepest decline in production in 2001-2005

European Competitiveness Report 2006


Sectors in eu 25 with highest productivity growth in 2001 2005

Sectors in EU-25 with highest productivity growth in 2001-2005

European Competitiveness Report 2006


Sectors in eu 25 with slowest productivity growth in 2001 2005

Sectors in EU-25 with slowest productivity growth in 2001-2005

European Competitiveness Report 2006


Sectors in eu 25 with strongest revealed comparative advantage in 2004

Sectors in EU-25 with strongest Revealed Comparative Advantage in 2004

European Competitiveness Report 2006


Sectors in eu 25 with weakest revealed comparative advantage in 2004

Sectors in EU-25 with weakest Revealed Comparative Advantage in 2004

European Competitiveness Report 2006


The competitiveness of the eu ict sector

The competitiveness of the EU ICT sector

The importance of ICT, direct:

  • In 2003, the ICT sector represented 3% of total EU25 employment and 4% of GDP.

  • In 2003, ICT services accounted for 70% of total EU25 ICT sector employment, 80% of value added and for about 90% of its enterprises.

  • In 2003, the EU15 ICT sector contributed to 45% of total EU15 market economy labour productivity growth.

  • The importance of ICT, indirect:

    • ICT impacts on the rest of the economy through ICT investment, ICT production and ICT use. ICT uptake is one of the major drivers enabling firms in the rest of the economy to increase their productivity and competitiveness.

    • ICT capital contribution in EU15 amounted to 32% of total EU15 GDP growth between 1995 and 2004.

  • European Competitiveness Report 2006


    The competitiveness of the eu ict sector1

    The competitiveness of the EU ICT sector

    Strengths…

    • The EU ICT sector is successful in producing sophisticated and high-quality ICT products (scientific instruments, electronic components and telecommunication equipment).

    • It is particularly strong in chip design, software development and ICT services.

    • One of the key strengths of the EU ICT sector is its human capital.

    • Strategic R&D is performed in the EU while less knowledge-intensive market oriented R&D is located in South-East Asia.

    European Competitiveness Report 2006


    Enterprise and industry directorate general

    The competitiveness of the EU ICT sector:export shares in ICT manufacturing industries 1995 and 2004 (percent).

    EU

    EU

    EU

    EU

    EU

    European Competitiveness Report 2006


    The competitiveness of the eu ict sector2

    The competitiveness of the EU ICT sector

    …andweaknesses

    • The ICT manufacturing trade deficit was 55 billion euros in 2004.

    • Large parts of ICT hardware production software coding have been relocated to South-East Asia.

    • The ICT uptake in other parts of the economy is slower than in USA and Japan.

    • Lower investment growth than in emerging economies threatens lower value added activities in the EU.

    • Lower R&D intensity than US or Japan, R&D concentrated in larger companies.

    European Competitiveness Report 2006


    The competitiveness of the eu ict sector3

    The competitiveness of the EU ICT sector

    Conclusions

    • The answer to the challenge from low-cost producers lies in further climbing up the quality ladder.

    • Raising R&D investments of the EU ICT sector and ensuring the availability of skilled labour will be crucial for the EU ICT sector’s future competitiveness.

    • Policies that matter most for the EU ICT sector’s competitiveness include those fostering R&D and innovation, entrepreneurship, IPR, e-skills, ICT uptake and completing the Single Market (i.e. Growth and Jobs strategy).

    European Competitiveness Report 2006


    Pharmaceuticals

    Pharmaceuticals

    • A fast growing global market of around 450bn€ in 2005. Two major players:

      • US market: a little less than 50%

      • EU: around 30%

    • In both markets, production, employment and productivity are rising.

    • Moreover, the EU has a positive and growing trade balance while the US turned negative, especially with the EU.

    • US investments in the EU explain these trends.

    European Competitiveness Report 2006


    Pharmaceuticals1

    Pharmaceuticals

    The bad news

    • the pharmaceutical innovation system becomes global and is increasingly dominated by the US:

      • Increasing share of US held patents;

      • Increasing value of US patents (on basis of citations);

      • Central US position in collaborative R&D projects.

    European Competitiveness Report 2006


    Pharmaceuticals2

    Pharmaceuticals

    The bad news (continued)

    • The central role of smaller, dedicated biotechnology firms in the innovation system: Much more present in the US, both as initiator and developer, of collaborative R&D projects.

    • The fast rise of China, Brazil, India in pharma R&D.

    European Competitiveness Report 2006


    Pharmaceuticals3

    Pharmaceuticals

    Different market dynamisms

    • US market more concentrated and more contested than EU: new drugs command much higher prices, when patents elapse –or more innovative drugs appear- prices drop abruptly;

    • Product turnover much slower in Europe;

    • European markets remain fragmented by different regulatory regimes; but,

    • A visible price convergence exists in the EU.

    European Competitiveness Report 2006


    Pharmaceuticals4

    Pharmaceuticals

    Factors:

    • Parallel trade;

    • regulation at national level;

    • External reference pricing.

    • Lower price group: SP, PT, EL, EU-10.

    European Competitiveness Report 2006


    Pharmaceuticals5

    Pharmaceuticals

    Policyimplications

    • Sector level: Pharmaceutical Forum

      • Cost-containment policies and innovation;

      • Unifying effectiveness testing of drugs.

    • Horizontal level: Strategy for Jobs and growth:

      • R&D;

      • Innovative entrepreneurship.

    European Competitiveness Report 2006


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