Brussels, 10 October 2012
Leading in energy efficiency and foreign investment EU industry needs to seize opportunities in globalization
The 2012 European Competitiveness Report1 seeks to identify opportunities to make European industries more competitive by maximising the benefits of globalisation.
EU competiveness performance in globalisation, energy efficiency and FDI in detail
This memo provides details on important developments which highlight the good competitiveness performance of EU industry in three areas:
The EU enterprises are overall increasingly integrated within global value chains.
Maximizing the domestic content of exports can be regarded as an important driver of industrial competitiveness. Around 87% of the value of EU exports was domestically produced based on 2009 figures. This good performance is to a large extent due to EU enterprises proactive global strategies and investments in R&D and innovation. EU exports have been a powerful driver of recovery.
EU leading worldwide in energy efficiency gains
EU manufacturing firms are overall global frontrunners in energy efficiency, innovation activities and investments in clean and more energy-efficient technologies and products and services.
The EU is the most important destination for global Foreign Direct Investment (FDI)
In 2011 the EU attracted 421 billion USD, 28% of total world FDI flows. Foreign firms contributed to foster job creation, value added and productivity growth, especially in EU-12 countries. EU-15 multinationals are the most important direct investors in the world.
1. Strong export performance and positioning of EU firms' within global value chains
Globalisation has changed the economic landscape. Almost all products are now no longer produced in one place. In this changing world, EU companies increased their performance as they successfully opened new markets and optimised costs. This is particular true for firms that are more dependent on intermediate products, such as carmakers. Moreover, the single market and, especially, the expansion into markets outside the EU have made EU economies more open and more competitive.
Against this background industrial competitiveness is now based on maximizing the domestic content of exports, rather than the mere increase of market shares in goods and services.
Breaking down the value of exports into parts that are produced domestically and parts that are produced abroad, Figure 1 shows that
Around 87% of the value of EU 15 exports is still domestically produced based on 2009 figures (EU 15 = EU Member States 2004)
This was the case for only 70% of EU 12 exports. (EU 12 = New EU Member States since 2004)
EU 12 and the EU 15 countries are closely linked: More than half of the value of EU 12 exports produced abroad comes from the EU 15.
Figure 1 Value of exports produced abroad (%)
Source: ECR2012, WIOD (World input-output database, the WIOD project was funded by the FP7 SSH research program, see www.wiod.org).
EU exports use more Chinese inputs: From 1995 to 2007 the share of imports from China in the EU exports expanded from below 1% to about 10% for EU 12 and from 5% to 15% for EU 15. The share of China in EU 15 exports increased less rapidly than in US and Japan's exports.
But increased use of imports in European exports has contributed to make EU firms more competitive on the world markets, in particular in sectors like transport equipment, electrical and optical equipment and machinery. These are sectors that are more dependent on inputs produced within global values chains.
Offshoring seems to be mainly cost driven. Upstream quality gains may provide a viable alternative to cost driven relocation.
EU industries’ positioning and performance in the global value chains, becomes as important as a guide for policy-making as the traditional measures based on export of finished goods.
What should the EU do for strengthening industry's position in globalisation?
Pro-active industrial policy may consider FDI promotion and better-targeting the promotion of investment in R&D and in process and marketing innovations are of utmost importance for the EU as well as
Reducing the barriers to the internationalization of SMEs, fostering their participation and optimal positioning in the global value chains.
2. EU firms are leading the world in energy efficiency gains in exports and…
The report studies the energy content of exports and presents new empirical evidence on how energy efficiency contributes to export competitiveness.
Over the period 1995-2009, EU firms increased exports and reduced significantly the energy embodied per unit of exports. EU-15 increased in particular energy efficiency of service exports and EU-12 of manufacturing exports.
Manufacturing firms are at the crossroads of energy efficiency and globalisation
Looking at eco-innovation, three results are highlighted:
manufacturing firms reduced relatively more their energy intensity and are more engaged in energy-saving innovation activities (see Figure 2).
EU firms introducing new energy saving products tend to be more successful innovators, particularly in the case of manufacturing firms.
EU firms are world leaders in the increasing cross-border "eco-investments" in clean and more energy-efficient technologies and services. For instance, EU firms account for almost two thirds of the Foreign Direct Investment (FDI) by multinational enterprises (MNEs) worldwide in renewable energy in the period 2007-2011. They are also global frontrunners in other eco-technologies (such as engines and turbines) used to provide environmental goods and services.
Figure 2 Energy intensity changes and energy-saving innovation adoption
Note: Both panels in Figure 2 refer to 18 MSs (Community Innovation Survey –CIS- data are available only for Bulgaria, Cyprus, the Czech Republic, Estonia, Finland, France, Germany, Hungary, Ireland, Italy, Lithuania, Latvia, Malta, The Netherlands, Portugal, Romania, Slovakia, and Sweden).
3. The EU is still the most important destination for global FDI
The EU is a major player in global foreign direct investment (FDI), both inward and outward. This reflects both the potential of the Single Market and the ability of EU companies to successfully compete in EU and non-EU markets.
The EU is still the most important destination for global FDI: The EU attracted 421 bn USD, 28% of total world FDI flows in 2011 (see figure 3). However, international competition for attracting FDI is increasing.
The report finds that the major drivers of FDI inflows have been the single market, the single currency and, in the case of west-east flows, cost advantages.
The importance of fiscal incentives for attracting FDI is not confirmed empirically; the impact of unit labour costs and tax rates differs between countries. In terms of the impact of FDI on host economies, there is a significant variation across industries. Figure 4 shows that in the EU 15 foreign Multinational enterprises (MNEs) have the highest share of value added in pharmaceuticals (53 %) followed by paper and chemicals.
Within services, information and communication services have the highest share of foreign-controlled enterprises (29%), exceeding the degree of internationalisation of total manufacturing. In the EU-12 countries foreign MNEs play a more important role in almost all industries.
Foreign MNEs were responsible for 21% of the employment in manufacturing in 2008 (EU 15: 19% and EU 12: 30%). Above-average shares are found in sectors such as chemicals, transport equipment and electrical and optical equipment. Regarding services, the role of MNEs in employment is significant in ICT (EU-15: 16%/EU-12: 32%), administrative and financial activities (EU-15: 14%/EU-12: 22%) and financial and insurance activities (EU-15: 9%/EU-12: 68%).
Figure 3 – FDI inflows by countries and regions (1990-2011)
Foreign enterprises contribute to productivity growth above average
In the EU-15 countries foreign enterprises in the manufacturing sector account for 54% of total productivity growth in the period 2000-2007. The corresponding contribution for the EU-12 countries is 62%.
There are significant positive indirect effects from inward FDI, for example in the diffusion of innovations, technologies and knowledge.
Foreign firms act as catalysts encouraging domestic suppliers to introduce technological innovations. Domestic firms that supply larger shares of their output to industries with a predominance of foreign MNEs tend to be more innovative. Another example is that 40% of firms having licences from foreign-owned companies engage in R&D activities, while only 21% of firms without these licences perform R&D activities.
Figure 4– Share of value added of foreign affiliates in the EU based
Internationalisation of firms is a major driver of competitiveness
Internationalisation of firms is a major driver of competitiveness as they exert positive impacts on growth, technological capabilities, labour productivity and wages and also on the aggregate international performance of an economy.
EU-15 MNEs are the most important direct investors in the world. Outward FDI is often considered an important engine of economic growth, for example by securing competitive assets or opening markets abroad. EU 15 MNEs seem to be globally more competitive in manufacturing industries (e.g. machinery and vehicles) than in services.
What should the EU do?
Since FDI can help boost the competitiveness of European firms the EU must design policies for attracting FDI and maximising its benefits. Industrial policy should focus on encouraging the formation of networks and facilitate technology transfer between domestic firms and foreign MNEs.
Globalisation is also changing the way firms cooperate. Clusters and networks offer additional benefits from inter-firm spillovers. Networks enable EU SMEs to reach critical mass, share information and enlarge their industrial scope.
The report also looks at the neighborhood policies as a source of competitive and value chain gains and argues that globalization starts at our doorsteps and that the low-hanging fruits of globalization are not fully picked yet.
The 2012 Competitiveness report looks at the major globalisation trends and the implied costs and benefits and the challenges ahead for EU businesses. It contains six chapters analysing:
the performance of exports in the recession
the development of global value chains and their impact on the value added of exports;
energy efficiency as a determinant of export performance;
the potential of Foreign Direct Investment (FDI) flows;
the role of business networks; and
the potential of European neighbourhood policies for reaping the benefits of globalisation.