Editor's note

Recently published European industrial analysis, i.e. “EU Industrial Structure Report- 2013” provided an expert view about the performance of EU industrial and service sectors in terms of productivity and its underlying drivers, the resultant changes to industrial and export specialization. This analysis has shown comparative advantages at EU and national level, and the position of the EU in increasingly global value chains. This edition also looks at the impact of the crisis and the difficult recovery on long-term structural trends.

Bottom line: European statistics is, generally, on the positive side: i.e. industrial outlook has improved but recovery remains fragile. Following the financial crisis, EU manufacturing seemed to recover from the beginning of 2009 and that the recovery came to a halt in the third quarter of 2011; since then manufacturing growth rates have again declined. The data for the first and second quarter of 2013 indicate a slow recovery of industrial production in the EU. However, the most recent data demonstrate the fragility of this recovery, as production declined again slightly in the third quarter of 2013.

Source: European Commission - MEMO/14/111- “2013 EU industrial structure report highlights challenges and opportunities of EU re-industrialization”, 17 February 2014. 

Note: Previous EU industrial reports’ editions could be found at the following links: EU Industrial Structure 2011, EU Industrial Structure 2009; EU Industrial Structure 2007; and EU sectoral competitiveness indicators 2005.   

Significant differences

Data on EU manufacturing recovery shows significant differences between the EU states. Thus, strong recoveries can be seen in Romania, Lithuania and Poland (by 12%), in Slovakia and Estonia by 7%, and in Latvia – by 3% (see report, p. 14). These states have regained and exceeded their pre-recession peaks.

There are also significant differences between sectors; for example, industrial sectors producing consumer staples such as food, beverages, and pharmaceuticals, have fared relatively better than others since the outbreak of the crisis. In addition, high-technology manufacturing industries, in general, have not been affected in the same extent as other industries.

Besides, overall, services have been hit less badly than the construction, manufacturing and mining industries.

EU competitiveness in the world

Global “value chains” can also strengthen the EU competitiveness; globalization has fragmented “value chains” in companies and firms. This process, in its turn, has led an increasing number of companies to establish cross-border networks.

As a result, world trade, investment and production are increasingly organized in global value chains (GVCs). The internationalization and the integration of EU firms in global value chains is a means to increase their competitiveness and ensure access to global markets in more favourable competitive conditions.

Links between manufacturing and services

These links are mutually beneficial: the pharmaceuticals sector has experienced sustained growth since the start of the financial crisis, while high technology manufacturing industries (high-tech) have not been, generally, affected to the same extent as other industries.

Manufacturing firms are increasingly using services as part of their business processes; in the development and sale of products, and for horizontal business activities such as accounting and logistics. Higher productivity growth in manufacturing can spill over to other sectors. The increased interdependence between manufacturing and services implies a “carrier function” of manufacturing for services that might otherwise have limited tradability. The interconnections between manufacturing and services are growing, as products are becoming more sophisticated and incorporate higher services content.

A good example is the marketing of "smart" mobile phones which require the use of other services such as software applications (commonly known as "apps"), to maximize their usefulness. The app service providers would have a much smaller market without the access given by manufacturers of the app using devices. This carrier function also stimulates innovation and qualitative upgrading for service activities.

Through these linkages, higher productivity growth in manufacturing can spill over to service sectors. This is particularly important in view of the fact that, in the first decade of 2000’s, employment grew only in the service industries. Hence, a strong manufacturing sector can help mainstream competitiveness gains across other sectors of the economy.   

Innovation as a stimulus

This has a stimulus effect on innovation and qualitative upgrading for service activities.

Services are important for the competitiveness of manufacturing; growing share of services in GDP is explained by higher income elasticity of demand for services, which tend to shift final demand towards services, as incomes grow over time. Falling relative prices of manufacturing compared to services due to higher productivity growth in manufacturing also tend to reduce the relative share of manufacturing in nominal terms.

With respect to employment, the sectoral shift is even more pronounced, due to the fact, that services are more labour intensive and typically have lower productivity growth.

The inter-linkages between manufacturing and services are growing. Manufacturing firms’ use of intermediate services has increased across almost all industries since 1995.  

Manufacturing is changing from being dominated by machine operators and assembly line workers to a sector, which relies more and more on service occupations and service inputs. This shows up in the increased share of employees with services-related occupations, including activities such as R&D, engineering design, software design, market research, marketing, organizational design and after-sales training, maintenance and support services.

Analysis of trade in services indicates that the EU has a comparative advantage in almost all sectors except construction and travel. By comparison, the US economy has a comparative advantage in relatively few sectors (financial and insurance services and travel). Russia and China specialise in construction services, as does Japan. India is highly specialised in computer and information services, while Brazil exhibits high RCA (revealed comparative advantage) values in other business services.

As the general trend, services' sector was growing faster than manufacturing: on average, during 2000-12, market services (those typically provided by the private sector) grew in the EU-28 by 1,7 percentage points, and now make up half of EU GDP.

The share of non-market services (typically provided by the public sector) also increased, reaching 23% of GDP in 2012; hence, during 2001-10, employment grew in the service industries, whereas it declined in manufacturing.

Latvian efforts: example

From the EU's long-term financial planning period (2014-20), about € 500 million would be available for Latvian projects in perspective research and innovation projects.

The entire funding should not be invested in one sector. It is necessary to balance sectors' financial appetite, explained Latvian Economy minister, V. Dombrovskis.

There are five “smart” specialization areas in Latvian “manufacturing” (in line with the EU-2020 strategy), i.e. biomedicine, smart materials, information and communication technologies, bio-economy and energy efficiency.

Each of these areas requires its own state support policy, assessing available technological specifics, business capacity, as well as scientific potentials.

The most optimal investment solution should be sought through a dialogue with other ministries, research institutions and scientific community, said Latvian minister.

Source: eng/Technology/&doc=88043, 19.02.2014.

Main growth features in the Baltic States

GDP growth in Latvia (2000-12; change-share): Agriculture/forestry sector 0.5 - 5.0; Mining (-05 – 06); Manufacturing (0.1 - 14.5); Electricity, gas, water supply (0.4 - 4.5); Construction (-0.6 - 6.2); Market service (3.4 - 53.7); Non-market services (-4.2 - 15.6).

Only construction and non-market sectors were in negative share, the rest were positive. However, most active were such sectors as manufacturing (+14,5), construction (+6,2), electricity (+4,5); though market services increased to 53,7 per cent and non-market to 15,6 per cent. 

Agricultural sector is still about 5 per cent in GDP with about 0,5 per cent growth. In Lithuania and Estonia agricultural sector is at the level of 4 per cent, which is too high compared to other developed EU states, e.g. Denmark – 1,4 per cent in GDP.   

The corresponding features in Lithuania and Estonia are the following (change-share):

Lithuania (years 2000-12): agriculture (-2.3 & 4.0), mining (-0.3 & 0.4), manufacturing (2.0 & 20.8), electricity & gas (-0.3 & 3.9), construction (0.0 & 6.0), market services (5.5 & 49.5), non-market services (-4.5 & 15.5). 

Estonia (years 2000-12): agriculture (-0.6 & 4.1), mining (0.2 & 1.3), manufacturing (-1.7 & 15.4), electricity & gas (1.0 & 4.5), construction (1.9 & 7.8), market services (-0.7 & 50.2), non-market services (0.0 & 16.7).

Compared to, e.g. Denmark:

Denmark (years 2000-12): agriculture -1.4, mining - 3.6, manufacturing- 11.0, electricity & gas - 2.4, construction - 4.8, market services - 49.4, and non-market services - 27.

For more information see:

= The full report "EU industrial structure report 2013: Competing in Global Value Chains" can be found at: http://ec.europa.eu/enterprise/policies/industrial-competitiveness/competitiveness-analysis/eu-industrial-structure/index_en.htm;