Dr. Karl Lichtblau

For many years now an OECD working group has been developing and coordinating an internationally comparable quantification of the economic effects of digitalization. However, the practical value of this initiative is limited by the nature of the available data.

Manuel Fritsch / Karl Lichtblau IW

In a satellite account, a specific horizontal area of the economy is extracted from the System of National Accounts (SNA) and modelled as a separate product or industry group (satellite). The term “satellite” refers to the chosen subsets of sectors or economic activities in that system.

Manuel Fritsch / Karl Lichtblau IW

Although manufacturing industry forms the principal economic basis for the country’s prosperity and employment, industrial policy does not have a good reputation in Germany. This is because the term is usually used to mean selective state intervention in individual markets and sectors, or on behalf of individual companies, rather than the creation of a general regulatory framework in which industry can flourish.

Hubertus Bardt / Karl Lichtblau IW

A growth engine in the global economy

Institut der deutschen Wirtschaft Köln / Institut der deutschen Wirtschaft Köln Consult IW

Industry is the backbone of the economy. Due to strong spillover effects to other sectors, manufacturing is significantly more important to the overall economy than it is often given credit for. The following findings vividly illustrate the relevance of industry in various dimensions.Industry features as an economic hub to the economy because it offers an important market for suppliers from other sectors. The function of industry as a hub for the economy is underlined by the fact that the manufacturing sector accounts for 49 per cent of intermediate input transactions in the EU economy, while its share in total value added (VA) and employment amounts to 15 and 14 per cent, respectively. Business services as well as other non-industry sectors strongly benefit from industry.s demands in the course of upstream and downstream value chains. In fact, for every one euro of manufacturing output in the EU, 34 cents of input comes from other supply sectors. The symbiosis of industry and other sectors on the input level can be termed “Joint Production”. This deep and mutually productive integration, particularly with the service sector, renders the traditional dichotomy and antagonism between industry and services obsolete. Combined with this “Joint Production”, the relevance of industry is considerably higher than it is often given credit for. In the EU, this “Combined Sector” accounts for 24.3 per cent of VA in the total economy compared to a world average of 20.8 per cent. Furthermore, the share of the “Combined Sector” remained more or less constant between 2005 and 2011 in the EU. In Europe in particular, the manufacturing sector is a major hub for the organisation of value chains. While “Joint Production” accounts for only 3.7 per cent of total VA in the world on average, its share in the EU is considerably higher at 8.5 per cent. Due to this interconnectedness, industry generates strong positive spillovers to other sectors. Industry exerts higher multiplier effects on the total economy than other sectors. In fact, every unit of additional demand in the manufacturing sector generates 1.68 units of additional output in the total economy. Regarding employment, while manufacturing directly provides 32 million jobs in the EU, more than 20 million jobs indirectly depend on industry in related supply sectors. Thus, a vibrant and thriving industry in Europe will also benefit the economy overall. Industry fosters important growth factors. Manufacturing businesses account for a significant share of research. With a share of 15 per cent of VA in the total economy, industry is responsible for 65 per cent of research and technological development (R&D) expenditure and for 49 per cent of innovation expenditure. Large manufacturing firms. innovation intensity is twice as high as in large companies in other sectors. Industry relies heavily on employees with STEM (science, technology, engineering and mathematics) skills. These qualifications are considered particularly important when it comes to innovative capacity required to develop more efficient production processes. Moreover, STEM skills and practical experience are necessary throughout manufacturing firms to generate new, better and more marketable products. Industrial businesses are a motor for internationalisation. In the EU, they are responsible for 76 per cent of merchandise exports and 57 per cent of total exports (including service exports). In addition, the EU boasts a world export market share in manufacturing of 42 per cent. EU industry is strongly integrated into global value chains (GVCs) with particularly intense cross-border intermediate linkages among EU countries. The above factors enable the manufacturing sector to be more productive than other sectors. In industry, an hour of work generates nearly €32 of VA, a productivity level that is about 15 per cent higher than the average in all sectors. As a result, manufacturing provides a large number of high-quality jobs that offer higher wages and better income prospects than many other sectors. While industry concentrates on employees who have completed secondary education, industrial wages are above average in every skill class. Industry is a growth driver. Considering the relevance of industry for the above-mentioned growth drivers, it comes as no surprise that a strong industrial base goes hand in hand with higher economic growth and technical progress. In countries with an above-average specialisation in industry,5 the growth of Gross Domestic Product (GDP) has been stronger since 2000 (+149 per cent on average in euro terms) than in the comparison group of countries with below-average specialisation (+35 per cent on average). The same is true for the European Union but at a lower level: the industry-oriented Member States6 grow by 43 per cent, the comparison group by 38 per cent. Moreover, when the industry share (in the total economy VA) increases by one percentage point, total factor productivity (a measure for technical progress) rises on average by 0.28 per cent. Due to these beneficial spillover effects, a renaissance of industry would also have an important social dimension: it can help Europe to get out of the current crisis and reduce the burden of excessive unemployment in many parts of the EU.Apart from this outstanding macroeconomic relevance, industry offers solutions to societal challenges. The innovative and creative capacities of manufacturing businesses are essential to tackle many future challenges, e.g. population growth in emerging economies or dwindling natural resources.

Karl Lichtblau / Jürgen Matthes / Manuel Fritsch / Roman Bertenrath / Michael Grömling / Berthold Busch IW

Hybrid business models are successful. Companies which offer solutions bundling manufactured products and services are well endowed with success factors and achieve better growth in turnover and employment than the average of German companies. Despite this, hybrid models are not widespread. To date only 16 per cent of all companies have a hybrid character. One reason for this is the obstacles hybrid companies face. They must deploy more resources and master a higher level of complexity. Nevertheless, these companies are convinced that the benefits outweigh the drawbacks. Thus in five years a fifth of all companies in Germany are expected to be pursuing the hybrid model.Download | PDF

Hanno Kempermann / Karl Lichtblau IW