COVER STORY • Mid-Term Prospects for the Global Economy — Where Is It Heading in the Midst of Structural Change & Geopolitical Crisis? • 6Manufacturinga New Future

By Reinhilde Veugelers

New Opportunities for Manufacturing
Manufacturing manages to take up a central position in politicians’
agenda. This is because it used to provide plenty of jobs for people.
Hence the need for products to be “Made in…” advocated in many
countries. The problem with such rhetoric is that it uses an oldversion of manufacturing that no longer holds. Manufacturing haschanged and hence why it matters for the economy. The new versionof manufacturing (sometimes called Industry 4.0) also requires
attention from politicians, but for different reasons than for it toprovide millions of production line jobs.
There are good reasons for politicians to “love” the new version ofmanufacturing. The manufacturing sector is using new technologicalopportunities, especially new digital technologies, to meet future
demand, bringing new kinds of manufacturing products to themarket, reinventing existing products into new offerings andimproving the efficiency of their manufacturing processes. Examplesinclude 3D printing, artificial intelligence, robotics, new materials,
smart communication systems and “Big Data” management amongothers.
The policy discussion on the future of manufacturing requires anunderstanding of the changing face of manufacturing and itschanging role as driver of economic growth. The innovations behindthe manufacturing sector’s resilience have changed how many, which
and where jobs are created. Digitization and robots have powered theautomation of production processes. Better transportation andinformation technology allowed firms to unbundle the different tasks— from design to assembly to sales — making it possible to designand coordinate more complex supply chains which cross country
and firm boundaries. Digital technologies, such as 3D printing, allow
keeping high-tech production close to the designers and engineers
who thought up the product, shortening lead times. Shorter value
chains will allow production jobs located close to where the markets
are and/or the sources for technological know-how. This may bringback some of the previously offshored jobs. Value creation has
shifted from the production and assembly of parts to developing anddesigning them and after-sales servicing. Manufacturing firms areincreasingly turning themselves into sellers of services. Car
manufacturers, for example, are reinventing themselves as providersof mobility services rather than producers and sellers of “machineson wheels”. Thanks to digital Big Data technologies, manufacturers
26 Japan SPOTLIGHT • January / February 2018

AuthorReinhilde Veugelers

can use the amount of data they accumulate on their products to sellrelated services. This may lead to a growth in jobs within theseformer manufacturing firms, but in services type of jobs. Apple isstill classified into manufacturing, while it owns no factories of itsown.
These new opportunities for manufacturing fuel expectations of ahefty potential for the sector to feed economic growth through newhigh value-added creation. But the realization of this potential
requires that (new) manufacturing firms fully exploit the potential
offered by new (digital) technologies and that incumbent firms areable to reinvent themselves. These (re)new(ed) manufacturing firms
will provide good jobs, but these new production jobs will however
no longer be the massive number of jobs associated with old-styleassembly line production jobs. But these will be jobs of the future,
not the past; they need skill and adaptability.

European Firms’ Response to New Opportunities
How well are European manufacturing firms responding to thenew opportunities for growth? And even if European firms are taking
up the new opportunities, the question remains whether rejuvenation
will generate the same number and type of jobs as in the past. This
discussion goes beyond a discussion about manufacturing
production activities. It cuts across sectoral boundaries and theclassic divide between manufacturing and services.
Bruegel Blueprint Remaking Europe: the new manufacturing as anengine for growth (available at http://bruegel.org/2017/09/remakingeurope/ updating and complementing a previous Bruegel Blueprint:
Veugelers, R. (ed) (2013) Manufacturing Europe’s future, at http://bruegel.org/2013/10/manufacturing-europes-future/) illustrates how
the European economy is taking advantage of new technologicalopportunities, and is reshaping into international value chains torevitalize and refocus on high value-added activities. However, thisrevitalization process is slow and remains concentrated in few firms
and few countries. It could take place much faster in Europe andcould be spread more broadly across more countries, companiesand sectors.
To boost EU manufacturing, greater capacity for creative
destruction and reallocation of resources is needed. What matters inthis process is reallocation to (i) sectors with scope for high valueadded growth and (ii) reallocation within sectors to higher value-COVER STORY 6TABLE

Creative destruction characteristic of the corporate R&D landscapecomparing the EU, US & Japan2015WorldEU28

USJAPANR&D to sales ratio

3.6%

2.6%

5.6%

3.25%

Share of IBG sectors in total corporate R&D

36%

31%

52%

15%

R&D to sales ratio in IBG sectors

9.2%

7.95%

10.3%

3.25%

Share of young among R&D leaders

38%

19%

54%

10%

Share of young among R&D leaders in IBG sectors

46%

19%

64%

8%

Notes: Calculations based on R&D expenditures of the 2,500 firms in the Global R&D Scoreboard of largest spenders, 2015. For the EU28 (N=1000) this corresponds to almost all ofthe BERD (Source: Eurostat/OECD). For the US (N=837) the coverage is 83%, for Japan (N=356) the coverage is 98%.
IBG=Innovation Based Growth Sectors: sectors which (i) have R&D intensity above average, (ii) R&D growth rate above average and/or (iii) above average share of young
companies. These sectors are: aerospace, biotech, computer hardware & services, healthcare equipment & services, Internet, pharmaceuticals, semiconductors, software,telecom equipment.
Young: born after 1975.
Leaders: Scoreboard firms belonging to the top decile of R&D spenders in their sector.

Source: Bruegel calculations on the basis of EC-JRC-IPTS Global R&D Scoreboard, 2015

added activities.
Much of the sustainable value-added growth will come frominnovation. But when looking at the EU’s capacity for innovationbased growth, the evidence shows that the EU’s corporate R&D
landscape is, like the Japanese, less dynamic compared to the UnitedStates. The Table illustrates this with some key numbers.
The EU has already been struggling for a long time with acorporate R&D deficit relative to the US and Japan, as witnessed bya lower corporate R&D to sales ratio, which is very persistent. Thispersistent R&D deficit is due to a failure to specialize in thosesectors where there is most scope for innovation-based growth. The
most prominent Innovation Based Growth (IBG) sectors are thedigital sectors and Bio/Pharma. While the US has more than half ofits corporate R&D based in these sectors, for the EU this is less than
one third and for Japan it is even less. The corporate R&D landscapein the EU is much more focused on medium-tech sectors. For
example, about a quarter of the EU’s corporate R&D comes from car
manufacturers. A failure to specialize in IBG sectors matters,
because these sectors offer more scope for innovation-based value
creation and growth, as their high R&D to sales ratio illustrates.
Correlated with the failure to specialize in innovation-based growth
sectors, and further demonstrating its failing creative destruction

capacity, is the low presence of young firms in the European
corporate R&D landscape. In the US, more than half of R&D by top
R&D spenders (i.e. the top 10% of spenders in their sector) is
accounted for by firms born after 1975. For the EU this is less than
20%. For Japan this is only 10%. These young leaders are
particularly pivotal actors in innovation-based growth sectors,
particularly in the digital sectors and in the US. The EU (like Japan)
has, however, fewer young firms even in innovation-based growthsectors.

The European “New Industrial Policy”
The evidence on the EU struggling with its innovation-based
growth and creative destruction capacity highlights the challenge forEuropean policymakers to promote and attract the high value-added
activities of the new manufacturing. Such activities are notnecessarily production related, but will increasingly have service-likecharacteristics and do not necessarily require all the activities of thewhole value chain to be located in Europe. Does Europe have theright conditions for its economies and firms to create and capture
value from new activities?
The potential for growth in manufacturing-related jobs feeds theJapan SPOTLIGHT • January / February 201827

COVER STORY 6

inclinations of politicians to support the revival of manufacturingwith “a new industrial policy”. But what should this policy look like?
What are the recommendations for EU policymaking to speed andspread manufacturing’s revitalization process?
In the “new industrial policy” discussion, the issue should not be
whether manufacturing is or should be important for economies, nor
how many manufacturing jobs to have or save. A policy target ofbringing the share of manufacturing in overall jobs or value added toa pre-determined value (like the 20% target stated in the 2012 EU
industrial policy after communication) is completely missing thepoint. What matters is what type of activities to focus on in the value
chain for goods. This focus on high-value activities cuts acrosssectoral boundaries. High-value activities can be identified within all
manufacturing sectors, both low-tech and high-tech, and extend into
service activities. We thus need a clear horizontal perspective on
Europe’s competitiveness, rather than a sectoral view. The
discussion should be about establishing the right conditions for
economies and firms to create and capture value from the activities
that contribute most strongly and sustainably to Europe’s growth andexternal competitiveness, wherever their geographical or sectoral
home base might be.
A priority should be a policy framework that removes barriers andcreates the framework conditions that give firms, wherever theirsectoral base is, the incentive to develop innovative strategies tocreate new higher-value activities. As large, open and interconnectedconsumer markets remain a major motivator for business, aneffective internal market and an innovation-friendly regulation andcompetition policy will and should remain EU priorities. Completingthe single market, particularly the single market for supporting
business services (including cross-border transport, digital andenergy infrastructure), is perhaps the most important policy
objective for reinforcing manufacturing’s role in driving growth.
A further challenge is the structural shift from classic production
jobs towards higher value-added types of jobs, and the implications
this has for the labor market. Governments will need to facilitate thisstructural shift. This implies an education policy agenda to ensurethat engineers and technical workers are in good supply and toprovide more vocational training and retraining programs to refreshthe skills of current workers or laid-off workers.
On May 29, 2017, the Council of the European Union called on theEuropean Commission to provide a holistic EU industrial policy
28 Japan SPOTLIGHT • January / February 2018

strategy in time for the spring 2018 European Council meeting. The
Council of the EU emphasized that this should be based on
integrated value chains and inter-clustering linkages, encompassing
enterprises of all sizes operating in the manufacturing industry andrelated services sectors. It highlighted that “this should embrace,
amongst others, human capital, research, development andinnovation, digital transformation, tackling efficiently and robustly
unfair commercial practices, sustainable and affordable energy
sources, resource efficiency, industrial servitisation and better
regulation.”
The direction taken in the latest communication towards a holistic,
horizontal EU growth policy seems to be the right one. But to ensurethat the EU is walking its talk, the effectiveness of its industrial policy
deployment should be closely monitored, with regular empiricalanalyses and feedback to inform follow-on policy making. This
monitoring should include a sectoral perspective, concentrating
particularly on how Europe is faring in new emerging sectors that are
still fragile. Such sectoral monitoring would allow assessment of
how the multitude of policy instruments, from various policy
domains and from EU, national or regional levels, interact to affectthe efficiency of the sectoral eco-system and would underpin policy
realignment when needed. Sectoral monitoring within an effectsbased holistic horizontal growth policy can thus substitute for exante targeting with specific actions and funding for selected“strategic” sectors and technologies.

Dr. Reinhilde Veugelers is a professor at KU Leuven in the Department ofManagement, Strategy and Innovation. She has been a senior fellow at Bruegel
since 2009. With her research concentrated in the fields of industrialorganization, international economics and strategy, innovation and science, she
has authored numerous well-cited publications in leading international journals.