1. 2011 Know Your Region Webinar Series
Part 7: Global T
P t 7 Gl b l Trends in Competitiveness
d i C titi
and Productivity Growth
Webinar | April 7, 2011
McKinsey & Company |

2. How to compete and grow:
A sector guide to policy
McKinsey Global Institute
May 5, 2010
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited

3. More than ever before, the U.S. now relies on
productivity gains for GDP growth
Contributions to growth in real U.S. GDP, overall economy
Share of compound annual growth rate, 1960-2008, %
100% = 4.1
41 3.1
31 3.2
32 3.3
33 2.1
21 2.2
22
Increases in 35
value added 47
54 53
per worker
(productivity) 80 77
Increases in 65
53
the workforce 46 47
(labor inputs)
20 23
1960s 1970s 1980s 1990s 2000s1 2010 20E
2010-20E
1 2000-08 data used for 2000s
SOURCE: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; McKinsey Global Institute analysis McKinsey & Company | 2

4. Without a productivity boost, younger generations will
experience slower increases in their standard of living
Growth in per
Improvement in per capita GDP by year of birth Forecast Birth capita GDP
Indexed to 100 year Multiplier
260
1960 2.54x
240
220 1970 2.04x
200 1980 1.96x
180 1990 1.78x
160 2000 1.63x
1 63
140
120
100
0 5 10 15 20 25 30 35 40
Years from birth
SOURCE: U.S. Bureau of Economic Analysis; U.S. Census Bureau; Moody’s Economy.com; McKinsey analysis McKinsey & Company | 3

5. The productivity gains needed to sustain historic
GDP growth rates are ambitious
Productivity growth rates
Compound annual growth rate, %
2000s1 1.6
16
1990s 1.8
1980s 1.5
1970s 1.1
1960s 2.2
2.1 2.3
Productivity gain to sustain historical to sustain
required . . . 1.7% GDP per historical 2.8%
capita growth GDP growth
1 Includes 2000-08
SOURCE: U.S. Bureau of Economic Analysis; Census 2009 population estimates; McKinsey Global Institute analysis McKinsey & Company | 4

6. The U.S. can achieve historic levels of GDP growth,
or better
Potential GDP growth
Compound annual growth rate, 2010-20, %
0.2-0.5+ (not quantified)
GDP growth 1990-2008 = 2.8 0.7-1-1
1.2
0.6
0.4
1.0
Population Change in Adoption of Next-wave Increases in Changes in Productivity Potential
increase share of best practice innovation labor regulated enablers GDP growth
working-age (productivity) (productivity) utilization and sectors (productivity)
population immigration (productivity)
(labor input)
Demographic changes Levers available to Levers involving multiple actors
companies
SOURCE: Organisation for Economic Co-operation and Development; Central Intelligence Agency; World Bank;
McKinsey Global Institute analysis McKinsey & Company | 5

7. At the national level, the “trade-off” between aggregate
employment and productivity levels is at best short-term
Rolling periods of employment and productivity change, 1929-2009
%; periods
80 78 76 71
Employment 1
4 5 3
Productivity 6 3 8
Employment 15
Productivity 21
Employment
E l t
Productivity
99
Employment 89
Productivity 77
69
Annual
A l Three-year
Th Five-year
Fi Ten-year
T
periods periods periods
SOURCE: U.S. Bureau of Economic Analysis; McKinsey Global Institute Analysis McKinsey & Company | 6

8. Summary
▪ Our sector approach – and why it matters
▪ Patterns in sector contributions to growth
▪ How can governments tailor p
g policies to each
sector
McKinsey & Company | 7

9. MGI categorizes sectors into six groups according to
degrees of differentiation and tradability
Differentiation index Size of circle = relative amount
0 = average of sector value added in 2005
High 1.6
Pharma
R&D
Computer and
p Radio, TV, and
Business related activities communication
1.2 equipment
services Chemicals
entiation of products
Other
Aircraft and spacecraft
0.8 Local
Wholesale and Medical
services Resource-
Real estate
Real-estate instruments
p
retail trade
activities Post and intensive R&D-intensive
0.4 telecommunication Finance and industries manufacturing
insurance Pulp, paper, printing,
Other and publishing
0 Fabricated metals
Differe
Rubber and plastics
Electricity Basic
metals Motor vehicles
Infrastructure
-0.4 Construction Land Machinery and
Hotels and restaurants transport Agriculture, equipment
y
forestry, Wood
products
Manufacturing
and fishing
Low -0.8
1 10 100
Imports plus exports divided by sector gross output
%
Low Tradability of products High
SOURCE: EU KLEMS growth and productivity accounts; OECD input-output tables; McKinsey Global Institute analysis McKinsey & Company | 8

10. Summary
▪ Our sector approach – and why it matters
▪ Patterns in sector contributions to growth
▪ How can governments tailor p
g policies to each
sector
McKinsey & Company | 9

11. Three lessons learned for governments to keep in mind
as they seek to enable growth
LESSON 1
Success in emerging, i
S i i innovative
ti
sectors alone is not enough to
sustain growth
LESSON 2
The mix of sectors in an
economy i l
is less i
important th
t t than
the competitiveness of sectors
LESSON 3
Service sector growth is critical
– and particularly so for job
growth
h
SOURCE: McKinsey Global Institute analysis McKinsey & Company | 10

12. Competitiveness in new innovative sectors is not enough
Even in the United States, innovative new sectors make a
small direct economic contribution
Share of US employment, August 2009 (percent of nonfarm employment)
100% = 130 million
New innovative sectors Existing large employment sectors
Semi- Construc- Financial Retail
Biotech conductor Cleantech tion activities trade
11.3
5.9
4.9
0.6
06
0.2
02 0.3
03
SOURCE: The Clean Energy Economy, PEW, 2009; Bureau of Labor Statistics; Haver analytics McKinsey & Company | 11

13. Three lessons learned for governments to keep in mind as
they seek to enable growth
LESSON 1
Success in emerging innovative
emerging,
sectors alone is not enough to
sustain growth
LESSON 2
The mix of sectors in an
economy i l
is less i
important th
t t than
the competitiveness of sectors
LESSON 3
Service sector growth is critical
– and particularly so for job
growth
h
SOURCE: McKinsey Global Institute analysis McKinsey & Company | 12

14. Sector competitiveness matters more than sector mix
Sector performance has mattered more than the mix of
sectors for overall GDP growth in developed countries
Contribution to total value added, 1995–2005
Compound annual growth rate, %
Growth momentum Differences in
(growth predicted performance
Growth Total growth by initial sector mix) of sectors
United
High
States 3.3
33 2.3
23 0.9
09
S. Korea 2.6 1.8 0.7
United
U it d
Kingdom 2.6 2.2 0.4
France 2.1 2.3 -0.2
Germany 0.8 2.3 -1.5
Low Japan 0.4
04 2.1
21 -1.7
-1 7
SOURCE: Global Insight; McKinsey Global Institute analysis McKinsey & Company | 13

15. Three lessons learned for governments to keep in mind as
they seek to enable growth
LESSON 1
Success in emerging, innovative
g g
sectors is not enough to sustain
growth; existing sectors need
attention, too
LESSON 2
The mix of sectors in an
economy i l
is less i
important th
t t than
the competitiveness of sectors
LESSON 3
Service sector growth is critical
– and particularly so for job
growth
h
SOURCE: McKinsey Global Institute analysis McKinsey & Company | 14

16. For jobs, service sector competitiveness is key
Services have contributed 87 percent of GDP growth in
high-income countries in the last decades
Sector contribution to growth of value added in high-income countries,
1985–2005
100% = $10.4 trillion
100
R&D-intensive mfg 4
Goods Manufacturing 2 13
Resource-intensive 6
18
Business services
Services Local services 87
58
12
Infrastructure
SOURCE: Global Insight; International Labor Organization; National Statistics; McKinsey Global Institute analysis McKinsey & Company | 15

17. For jobs, service sector competitiveness is key
Service sectors generate most net new jobs across all
income groups – and over 100% in high income countries
Sector contribution to a country's net growth of employment, 1985–2005
%, million employees
Low-income Medium-income High-income
g
countries countries countries
100% = 324 100% = 50 100% = 74
29
100%
9
Goods 32
129
91
Services 68
SOURCE: International Labor Organization; National Statistics; McKinsey Global Institute analysis McKinsey & Company | 16

18. Summary
▪ Our sector approach – and why it matters
▪ Patterns in sector contributions to growth
▪ How can governments tailor policies to
g
each sector
McKinsey & Company | 17

19. Our policy approach – framework
Differentiating sector-level policies by the degree of intervention
Degree of intervention
Low High
Setting ground Tilting the playing Government as
rules/direction Building enablers field principal actor
Governments can limit Without interfering with Governments can Governments can
sector policies to market mechanisms, choose to create play a direct role by
▪ Setting the governments can favorable conditions for ▪ Establishing state-
regulation covering support private-sector local production owned or
labor, capital and activities by through: subsidized
land markets; ▪ Expanding hard and ▪ Trade protection from companies;
▪ Establishing the soft infrastructure; global competition ▪ Funding existing
general business ▪ Helping to ensure ▪ Providing financial businesses to
environment, adequate skills
q incentives for local ensure their
▪ Setting broad through education operations survival
national priorities and training, ▪ Shaping local ▪ Imposing
and road maps. ▪ Supporting R&D demand growth restructuring on
activities. through p
g public certain industries.
purchasing or
regulation.
SOURCE: MGI/PSO Sector Competitiveness Project McKinsey & Company | 18

20. To be effective, policy tools need to be tailored
to sector characteristics
Degree of intervention
Low High
Setting ground Tilting the playing Government as
rules/direction Building enablers field principal actor
Business R&D-intensive
R&D i t i
services manufacturing
Local
Manufacturing
services
Infrastructure Resource-intensive Infrastructure
industries
SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project McKinsey & Company | 19

21. Policy can determine domestic sector performance –
retail sector performance varies widely around the world
Retail sector performance in developed countries, 2005
Employment
Hours worked per capita
100
90
80
70
60
50
40
0
0 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Labor productivity
Value added (dollars per hour worked)
SOURCE: EU KLEMS; McKinsey Global Institute analysis McKinsey & Company | 20

22. To be effective, policy tools need to be tailored
to sector characteristics
Degree of intervention
Low High
Setting ground Tilting the playing Government as
rules/direction Building enablers field principal actor
Business R&D-intensive
R&D i t i
services manufacturing
Local
Manufacturing
services
Infrastructure Resource-intensive Infrastructure
industries
SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project McKinsey & Company | 21

23. The majority of recent attempts to ROUGH ESTIMATES
establish local semiconductor industries $ Estimated cumulative country-
wide government incentives
or clusters have failed
l t h f il d (USD billion)
Successes and failures of semiconductor clusters Sustainable competitive edge
Present
Currently not present
Estimated d t f i d t
E ti t d date of industry reaching significant size
hi i ifi t i
1970 1980 1990 2000
United States, $12–36 Taiwan Semiconductor
Manufacturing Company
M f t i C
Japan, $19–54 (TSMC) first to introduce
novel business model of
Taiwan, $15–43 foundry-only
semiconductor player
South Korea, $9–26
Singapore, $5–16
Germany, $2–7
China, $6–17
Malaysia, $1–3
SOURCE: SEMI World Fab Watch; expert estimates; McKinsey Global Institute analysis McKinsey & Company | 22

24. To be effective, policy tools need to be tailored
to sector characteristics
Degree of intervention
Low High
Setting ground Tilting the playing Government as
rules/direction Building enablers field principal actor
Business R&D-intensive
R&D i t i
services manufacturing
Local
Manufacturing
services
Infrastructure Resource-intensive Infrastructure
industries
SOURCE: McKinsey Global Institute/Public Sector Office Sector Competitiveness Project McKinsey & Company | 23

25. A sector perspective on competitiveness and growth
▪ Growth aspirations need to be grounded on a realistic view of sector
contributions to growth
– Success in emerging, innovative sectors is not enough
emerging
– The mix of sectors matters less than their competitiveness
– Service sector growth is critical – particularly for job growth
▪ Effective growth policies are tailored to the levers that matter in each
sector, yet odds of success vary
– Policy can determine sector performance in local sectors…
– … but cannot guarantee success in globally traded industries
▪ In tradable sectors, odds improve if policies target economic activities
with a strong business case for local production; and are executed in
collaboration with the private sector
McKinsey & Company | 24

26. Thank you
This report and
other MGI research are
available at:
www.mckinsey.com/MGI
McKinsey & Company | 25