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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