Source: EURLEX
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**COMMISSION** **OF** **THE** **EUROPEAN COMMUNITIES**

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                          C0M(94) 319 final

                          Brussels, 14.09.1994

         COMMUNICATION FROM THE COMMISSION TO THE COUNCIL

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**TO** **THE** **EUROPEAN PARLIAMENT, ECONOMIC AND SOCIAL COMMITTEE**

**AND THE COMMITTEE OF THE REGIONS**

##### AN INDUSTRIAL COMPETITIVENESS POLICY FOR THE EUROPEAN UNDN

**SUMMARY AND CONCLUSIONS**

1. It will not be possible to restore growth and consolidate the revival in the European Union
unless they are based on competitive, efficient and innovatory industry.

The Union must remain an attractive site for production and investment.

The Commission's White Paper on "Growth, competitiveness, employment", endorsed by
the European Council as the benchmark for the action taken by the European Union and its
Member States, advocated an approach to industrial development aiming at global competitiveness.

The objective of this approach is to bolster the Union's position on the markets of the future generating jobs and value added.

2. In recent years European industry has improved its competitiveness considerably, both in
commercial terms and in areas such as companies' research effort and financial structure.

But now, at a time when it is making an unprecedented effort to restructure and innovate,
it is facing:

mounting international competition;

far-reaching changes in the conditions for industrial competition, particularly under
the impact of the emergence of the information society and of the uncertainties concerning the environment in which it will develop;

the need for industrial change in the less developed regions;

the inadequacy of the major European networks (telecommunications, energy, transport, etc.) for reaping maximum benefit from the large market, which is certainly more
integrated but is still highly diverse and is not yet operating satisfactorily;

combinations of technological innovations (information technology, biotechnology,
new materials, etc.) which have led to intangible investment (in research, patents,
training, etc.) growing faster than capital investment.

3. The Treaty on European Union calls on the Community and the Member States, acting in
line with the subsidiarity principle, to ensure that the conditions necessary for the competitiveness of the Community's industry exist. The Commission considers that this objective
must be pursued vigorously and dynamically in order to create and attract new jobs in
Europe.

Although it is primarily up to businesses to ensure that they are competitive on the market,
the public authorities in turn must ensure the consistency of all the measures which could
enhance industrial efficiency.

4. To this end, the Commission is submitting "An industrial competitiveness policy for the
European Union", based on the principles set out in the 1990 "Industrial policy in an open
and competitive environment" and centring on four priorities: promote intangible investment, develop industrial cooperation, ensure fair competition and modernise the role of the
public authorities.

**-1 -**

The Commission has identified the action to be taken on these priorities and intends to
proceed immediately with the measures for which it is directly responsible. It has made a
number of proposals already in the communication entitled "Europe's way to the information society. An action plan", the follow-up to the May 1994 report on, "Europe and the
global information society" by the high level working party chaired by Mr Bangemann.

It calls on all concerned to join forces to ensure rapid implementation of all the action necessary, based on the following guidelines and practical measures:

_Promote intangible investment:_

The Commission:

will give greater priority to intangible investment in all its policies to support investment and will include improved vocational training and promotion of human resources
amongst the top objectives, taking account of the subsidiarity principle;

will ensure, in keeping with the commitment given in the Community's fourth framework programme on research and development activities (1994 to 1998), that research
policy takes fuller account of the needs of the market, notably by means of closer cooperation with the operators concerned;

will develop an integrated approach to the exploitation of intellectual property.

_Develop industrial cooperation_

The Commission:

will identify the obstacles to industrial cooperation both inside the Union and outside
and will take the measures necessary to facilitate such cooperation and ensure that
businesses can gain easier access to information and assistance which could contribute
to their schemes;

will support the organisation of industrial round tables to enable industrialists from
inside and outside Europe to identify and harness their mutual interests;

will propose the development of support mechanisms, exploring solutions similar to
partial guarantees for investments and appropriate technical expertise to assist operations of interest to the Community as a whole;

will submit specific proposals on industrial cooperation with some of the Union's partners, such as the countries of Central and Eastern Europe, the Latin American and
Mediterranean countries with the which the Union has traditional ties and certain

Asian countries;

will ensure that the instruments at its disposal are used jointly and closely co-ordinated
for the benefit of industrial cooperation.

_Ensure fair competition_

The Commission:

will step up the policy to reduce public aid, taking account of the regional imbalances,
and will shortly look at possible changes to the mechanisms for controlling state aids.
The intention will also be to simplify the monitoring mechanisms for minor cases;

**2 -**

will re-examine the criteria for approval of aid and simplify the rules, by reformulating
certain texts and facilitating opportunities for making comments by third parties
competing;

will make the rules on State aid and non-structural Community funding more compatible;

will continue efforts to find a solution to those issues remaining unresolved by the
Uruguay Round;

will grant priority to combating fraud, in particular that which concerns product ori
gin;

will submit proposals for the development of international rules on competition;

will establish a data base on the obstacles to proper operation of the markets and an
Industrial Assessment Mechanism to identify the industrial problems encountered by
European businesses on markets in third countries;

will continue to improve the structure of the common customs tariff in order to better
take into account the industrial interests of producers and users;

will consider ways of applying commercial policy instruments to services and of coordinating the schemes to promote exports;

will continue to play an extremely active role in removing distortions of competition
both inside the Union and at international level.

_Modernise the role of the public authorities_

The Commission:

will support the working party set up at the request of the European Council to simplify legislation and administrative procedures and will continue its efforts systematically to streamline procedures and make them more transparent;

will examine the possibilities offered by the Treaty to end the legislative, administrative or regulatory disparities creating problems for businesses;

will make use of the opportunities offered by the Community instruments (particularly
the Structural Funds) to facilitate the development of competitive industrial activities
in the Union, based on the specific situation in the different regions;

- ' will encourage administrative cooperation between the Member States and the Commission to overcome any difficulties encountered by businesses wishing to benefit
from proper operation of the internal market;

will examine ways of improving the decision-making structures, based on the experience acquired in the Union and by its partners.

In accordance with the Treaty, the Commission will take any useful initiative to promote
coordination of the national and Community action to foster industrial competitiveness.

Priorities for a competitiveness policy for the European Union

1. Promote intangible investment

Objectives Action

                       
- to adapt vocational training to _promotion_ _of_ _intangible investment in the general_
needs _support for investment; examination_ _of_ _ways of taking_
. ___ _.. . _fuller account_ _of_ _intangible assets, particularly in the_
_>_ to encourage greater participa- ^ .
tion by both sides of industry m,, ? T, _f, . . _context of taxation_ y

seeking new ways of organising  - _stepping-up_ _of research:_

worlc

                       _by proceeding with further action to take fuller ac-_

- to facilitate the emergence of _count of the needs of the market in RTD policy_
new markets, of new forms of,,  -  -,i # J ^ j
, *,.         - _by modernising the approaches_ _m_ _order to produce_
training and of total quality «.,,,, _._ _,_ _„_ /•,
°. n ^ wore _effective industrial spin-offs from research_
_. ._          - _by facilitating the establishment of consortia_ _ofEuro-_
_>_ to apply economic intelligence

_vr J_ ° /&an _companies_
_>_ to increase the capacity to keep _^_ _r_ _I-*._
,, -,    - i t    - _promotion of quality_
ahead of changes m technology
and on the markets  - _fuller integration_ _of_ _vocational training schemes in_

_other policies_
_>_ to ensure expansion and

                       take-up of R&D efforts _creation of a legal environment conducive to research_
_>_ to promote sustainable indus- - _development_ _of clean technologies and economic_
trial development _incentives_

_- introduction of new ways of organising work and_
_improvement of the fiscal environment, particularly_
_for small firms_

_- improvement of the dialogue between the two sides of_
_industry_

_- rational use of statistics_

**-4**

**Priorities** **for a competitiveness policy for the European Union**

**2.** **Develop industrial cooperation**

**Objectives** **Action**

- to bolster the presence of the
European Union's industry on
high-growth markets

- to take fuller account of the

industrial situation of the Euro
pean Union's partners

- to encourage private cooperation schemes of interest to the

Community

- to facilitate transfers of experience and know-how between

businesses, particularly small
businesses

_**(a) General measures**_

_- identification and removal of legal and fiscal obsta-_
_cles to industrial cooperation_

_- development of industrial cooperation tools, using as_
_**and**_ _example the experience_ _ofBC-Net_

_support for the development of trans-national initia-_
_tives targeted on growth markets using structural_
_funds_

_- industrial round tables_

_- recourse to the Working Party of the Heads of Indus-_
_trial Policy Departments to facilitate industrial coop-_
_eration operations and efforts to find information and_

_partners_

_- develop a coherent legal approach towards a com-_
_munal and efficient promotion of European foreign_
_investment_

_**(b) Central and Eastern Europe**_

_- exploring solutions similar_ _to_ _partial guarantees for_
_investments_

_- support for standardisation and certification_

_- expertise in international financial engineering and_
_offset activities_

_- support for harnessing potential energy resources_

_(c)_ _**Latin American and Mediterranean countries**_

_- closer technological cooperation_

_- participation in the fourth framework programme on_

_•_ _R&D activities and in the developments connected_

_with the information society_

_- establishment of networks of businesses_

_**(d)**_ _**Asian countries**_

_- cooperation programmes_

_- scientific and technological cooperation schemes_

_- training and dissemination of technology_

5

**Priorities for a competitiveness policy for the European Union**

**3.** **Ensure fair competition**

**Objectives** **Action**

_**External measures**_

- to take account of the growing
number of strategic alliances

- to identify the obstacles to export growth and increased in
vestment

- to put an end to discriminatory
bilateral agreements

- to promote more open trade,
while encouraging social pro
gress

- to consider the establishment of

multilateral rules to reduce

distortion of competition caused
by businesses themselves

- to establish environmental

protection criteria and apply
them effectively

- to harness more fully the commercial potential of the region
with which the European Union
has close ties for historical and

cultural reasons

_**Internal measures**_

_>_ to define a consistent approach
to open up markets and make
them more competitive

- to increase discipline within the
Union

- to make competition policy
more consistent with other

policies

_**External markets:**_

_- continue efforts to resolve problems not completely_
_dealt with by the end of the Uruguay Round_

_- efficiently combat fraud_

_- development and effective application of international_
_rules on competition_

_- taking account of the European Union's industrial_
_interests, both as an exporter and as an importer_

_- establishment of an Industrial Assessment Mechanism_

_- continue to improve the structure of the commons_
_customs tariff in order to better reflect the industrial_
_interests of producers and users_

_- database on the obstacles to smooth operation of the_
_markets_

_- improve commercial policy instruments with the aim_
_of making them more efficient and operational_

_- consideration of application of_ _commercial_ _policy and_
_~ defence_ _instruments_ _to services_

_- coordination between the measures taken_ _to_ _promote_
_exports and investment and the other policies_

_**Internal market:**_

_- further reduction of State aid, taking account of_
_regional imbalances_

_- shortly look at possible changes to the state aid_
_control mechanism_

_- re-examination of the aid authorisation criteria_

_- improve the coherence between the structural policies_
_and_ _the_ _policies for monitoring State aid_

_- improve the coherence between the rules applicable to_
_state aids and the arrangements for Community fi-_
_nancing under non-structural policies_

_- strengthening of the internal market (in gas, electricity_
_and telecommunications)_

-6

Priorities for a competitiveness policy for the European Union

4. Modernise the role of the public authorities

Objectives Action

                       
- to ensure smooth operation of _further deregulation,_ _examining,_ _for example, the_
the internal market _expediency of invoking Articles 101 and 102 of the_

_>_ to improve administrative co- ^

                       operation between the Member _redefinition of public service objectives_
States and the Commission w o * ^, r,, _._ .,, .,,

                       _use the Structural Funds to support industrial change_
_>_ to simplify the public media- _and to facilitate the development of clusters_ _ofcom-_
nisms affecting industrial com- _petitive activities_

"  _development of partnerships between big businesses_
_>_ to continue deregulation and _and small firms_
administrative simplification,. ., _A_ _[ •]_ _r_,
_r_ _- streamlining and greater transparency of procedures_
_>_ to modernise the public _(contribution to the working party set up to simplify_
authorities _administrative procedures and legislation)_
_>_ to ensure closer concertation - _faster establishment of trans-European networks for_
with operators on matters af- _the interchange of data between administrations_
fecting industrial performance,., _„_  - _ • . _. ._
» r _ _U_ _[se]_ _[ of the Community instruments to support interest ]_
_>_ to bring the administrative de- _cooperation projects of Community interest_
partments responsible for re- . ^ _._ _T_ _s-_ J i
,       - ..,,       - _examination_ _of_ _ways of improving decision-making_
search and industry _J_ closer to-,
_structures_
gether

- to reduce the costs arising from
the regulations

**- 7 -**

**CONTENTS**

**SUMMARY AND CONCLUSIONS** **1**

**INTRODUCTION** **9**

**A. The objective** **9**

**B.** **Previous achievements** **9**

**C.** **The** **new challenges** **11**

**D.** **Generating new jobs** **13**

**I. THE INDUSTRIAL COMPETITIVENESS OF THE EUROPEAN UNION** **15**

**A. Making the European Union more competitive in the global economy** **15**

_1._ _The competitive position of European industry_ _16_

_2._ _Knowledge and human resources_ _17_

_3._ _Development of trans-European networks and better organisation of production_ _18_

_4._ _Industrial_ _competitiveness and economic and social cohesion_ _19_

_5. Scientific and technological experience_ _20_

**B.** **Targeting growth markets** **21**

_1._ _The_ _potential of the European Union's industry on growth markets_ _21_

_(a) Strengths and weaknesses of the European Union on global markets_ _21_

_(b) The growth areas: a few examples_ _21_

_2._ _Harnessing the European Union's industrial tradition_ _23_

_(a) Conditions for competitiveness on established markets_ _23_

_(b) Harnessing the traditional industrial base_ _24_

**II.** **PRIORITIES FOR ACTION** **25**

**A. Promote intangible investment** **25**

**B.** **Develop industrial cooperation** **27**

**C.** **Ensure fair competition** **30**

**D.** **Modernise the role of the public authorities...** **35**

-8

**INTRODUCTION**

**A. The objective**

As the year 2000 approaches, European industry is making an unprecedented effort to restructure
and innovate in order to boost its competitiveness on the world market. At the same time it is fac

mounting international competition;

a longer economic recession than foreseen, in a context where the renewed growth expected
will not by itself be a decisive factor in job creation;

combinations of technological innovations (information technology, biotechnology, new materials, etc.) which have led to intangible investment (in research, patents, training, software,
etc.) growing faster than capital investment;

the inadequacy of the major European networks for reaping maximum benefit from the revolution in progress in the telecommunications and information sectors and the room for improvement in transport and energy transmission on the large market, which is certainly more integrated but is still highly diverse and is not yet operating satisfactorily;

the need for industrial change in the less developed regions.

In a global economy in which the various sectors of activity are interdependent, the pressures generated by the twin imperatives to innovate and to combat unemployment call for reconsideration of
the conventional forms of organisation of work, production and innovation and of the methods of
management and intervention employed by companies and the public authorities.

The communication adopted by the Commission in 1990 on "Industrial policy in an open and competitive environment", the conclusions of which were fully approved by the Council, defined the
basic principles of an industrial policy for the Community.

These principles were enshrined in the "industry" section of the Treaty on European Union.

The White Paper on growth, competitiveness and employment, and in particular the Chapter entitled "Towards global competitiveness", mapped out how these principles could be put into action.

The objective of and value added by this communication is, based on this past work, to identify and
propose action to make the Union's industry more competitive, taking account of:

the new challenges facing industry;

the need to create jobs and attract new jobs in Europe;

the fact that competitiveness is not an end in itself, but is an essential means of improving the
population's living conditions.

B. **Previous** achievements

The 1990 communication from the Commission entitled _"Industrial policy in an open and com-_
_petitive environment"_ paved the way for a new approach to industrial policy which:

clearly established the division of responsibilities between businesses which, naturally, are in
the front line, and the public authorities whose role is, above all, to create a dynamic environment favourable for industrial development;

                                                                       - 9 

abandoned the defensive, protectionist sectoral approaches followed all too often in the past.

This communication made it possible:

to reach a consensus on a policy tailored to the globalization of the markets and of the problems facing industry;

- to highlight the European problem of the different national approaches which, up until then,
had been artificially over confrontational;

to devise a modern approach to industrial policy based on the need to keep the various policies
with an impact on industry complementary: foreign trade, competition, internal market, environmental protection, research and development, networks, economic and social cohesion, and
small business policy.

Naturally, a stable, predictable macroeconomic environment remains a sine qua non for boosting
industrial competitiveness.

Since 1990 these basic principles have been applied successfully in various industrial policy initiatives taken by the Commission, particularly in the case of:

the motor industry, for which a balance has been sought to make Europe more competitive
during the transition period set by the arrangement with Japan;

the maritime industries, for which a broad-based forum has been set up in which all parties
concerned can jointly define solutions suited to undertakings' future;

biotechnologies, where the objective is to make the Community as attractive as its rivals for
development of such technologies, while taking due account of the needs to protect public
health and the environment.

The Commission is continuing to follow this general approach, particularly in two major new fields
of activity:

the information society which, once established, will have a decisive effect on all industrial activity in the Union;

cooperation with the countries of Eastern Europe, which, of course, in no way precludes closer
cooperation with the Union's other partners, particularly with countries with which it has
strong historical and cultural links.

Several of the objectives identified in the 1990 communication to promote industrial competitiveness have been largely achieved:

the completion of the area without internal frontiers in 1993 marked the most significant progress made by the Union towards making European industry more competitive;

the GATT negotiations have been completed;

substantial sums have been made available to promote industrial change under the cohesion
policy;

the Union's research policy now takes fuller account of the needs of the market and of businesses, particularly of small firms, as indicated by the priorities set for the Community's fourth
framework programme on research and development activities (1994 to 1998);

greater support is being provided for the establishment of trans-European networks;

the foundations of a human resources policy have been laid.

The consensus reached on the principles set out in the 1990 communication allowed inclusion in
the Treaty on European Union of the legal bases for implementing the industrial policy which, in
line with the subsidiarity principle, is defined as a **general obligation shared between the Com-**
**munity and the Member States for "the strengthening of the competitiveness of Community**

**10**

**industry"** (Article 3 of the Treaty) and to **"ensure that the conditions necessary for the com-**
**petitiveness of the Community's industry exist"** (Article 130(1)).

It is primarily up to the Member States and the decentralised authorities to foster industrial competitiveness with the aid **of a** system **of** open and competitive markets.

However, Article 130(2) adds that in order to attain these objectives the Member States _"shall_ _con-_
_sult each other in liaison with the Commission and, where necessary, shall co-ordinate their ac-_
_tion"._ The Commission is assigned the specific duty to _"take any useful initiative to promote such_
_coordination. "_

To support this national action, the Community will generally help to achieve this objective of improving competitiveness by taking horizontal measures under a series of common policies (on research, cohesion, vocational training, networks and foreign trade), implemented by qualified majority vote in most cases, and by implementing the competition policy.

The Council may also, ruling unanimously on a proposal from the Commission, _"decide specific_
_measures destined to support actions taken by Member States in order to attain stated objec-_
_tives"_ according to Article 130, paragraph 1 of the Treaty.

Accordingly, a policy for industrial competitiveness has a coherent legal basis in Title XIII
("Industry") of the Treaty on European Union, Title XV (Articles 13Of _et seq.)_ on research and
technological development, Title VIII (Article 123) on social policy and industrial changes, Title
XIV on economic and social cohesion (Articles 130a and 130b) and Title XII on trans-European
networks.

C. **The new challenges.**

Today the measures taken to implement industrial policy must take account of a series of new
factors:

**Persistent unemployment:** the transformation of the economic situation - with the strong
growth of the late 1980s giving way to one of the deepest economic crises since the '30s - has
generated particularly severe levels of unemployment which endanger cohesion. Moreover, this
high employment reduces the capacity of all concerned to accept the changes necessary in order to boost industrial competitiveness throughout the Union.

**The changes in the international context** marked by the geopolitical upheaval, the general
constraint for mobility in all fields, the conclusion of the Uruguay Round and the decision to
establish a World Trade Organisation. There are now clear signs that the world-wide recession
of the early '90s is being overcome. The renewed growth, rapidly falling interest rates and the
gradual increase in the number of job vacancies only confirm this trend.

**The emergence of new technologies,** particularly those associated with the information society, which has broken the link between economic growth and raw material consumption. This
has shifted the principal sources of value added towards control of "intangibles", as reflected
by the growing importance of services which are steadily becoming an integraf part of industrial activity, a development described by some as the "intelligence revolution". At the same
time the substitution of capital and labour allowed by the emergence of new production technologies has broken the link between growth and job creation. Renewed growth is no longer
enough to increase employment.

11

**Environmentally sustainable development** implies, as stressed in the Commission's communication on industrial competitiveness and environmental protection, that environmental quality
and growth must be considered interdependent. [1] Implementation of a global environment policy
can help industry to manage its resources better and rally public confidence while at the same
time opening up new commercial outlets. This is all the more important now that the shorter
life of certain products or the global consequences of using them can call into question their
economic viability or their contribution to growth. Consequently, industrial development must
take fuller account of the needs of society.

**The mounting competition** is forcing European companies into continuous productivity
drives. As economies grow increasingly interdependent the competitiveness of businesses in the
European Union is becoming more and more sensitive to their rivals' industrial strategies.
Added importance must therefore be attached to the problem of relocation and to relations between big businesses and their subcontractors, many of which are small firms. From now on
companies [1] strategies and decisions on the international division of their production will play a
more important part in the pattern of trade than conventional commercial policy measures
(in-house trade is now thought to account for over 50% of trade between the countries in the
Triad).

In addition, the **sharp fluctuations** in recent years, sometimes by as much as 50 to 100%, in
the exchange rates between the currencies of the European Union Member States, the USA and
Japan are a powerful incentive for companies to move production closer to their markets [2] .

It is primarily up to businesses to react to these changes, although they also call for updating
of the policies with an impact on competitiveness. As underlined in the White Paper, the
conditions for long-term competitiveness depend, in particular, on the establishment of a stable
macro-economic framework permitting sustainable growth and creating jobs. In such an environment, businesses and consumers may operate in a predictable manner, which in turn reduces the costs of economic operations. Improving the coordination of economic policies will,
furthermore, reinforce exchange rate stability. At the same time these policies must take account of the overriding objective of creating jobs, of the faster pace of industrial change and of
the new debates on, for example, the relocation of industrial activities. This shows how important it is for the competitiveness of European industry that the Union adopt a single currency
within the time-scale provided for in the Treaty.

The new dimension of the internal market, where the emphasis has now shifted from completion to effective and efficient operation.

The aim is no longer simply to endow the European Union with legislation removing the barriers to trade but to put into operation a "market" in the true sense of the term. This will entail
liberalisation of financial services, sustained deregulation of certain sectors to allow effective
access to the markets, greater flexibility on the labour market, reduction of the tax disparities
which lead to fragmentation of the markets and open, confident acceptance, by the Member
States, of mutual recognition of standards.

_The Treaty on European Union also strengthened the links between environmental protection and other_
_policies by stressing that "environmental protection requirements must be integrated into the definition_
_and implementation of other Community policies" and that "in preparing its policy on the environment,_
_the Community shall take account of (...) the potential benefits and costs of action or lack of action" and_
_"the economic and social development of the Community as a whole and the balanced development of its_
_regions", aspects of primordial importance for industrial competitiveness policy._

_See Table 1 of Annex II_

12

The internal market has also taken on a new dimension with the establishment of the major
networks, particularly of the telecommunications and energy transmission infrastructure, where
the lowering of tariffs and liberalisation are decisive factors in making industry more competitive.

The public authorities will play an essential role in this respect, both as the bodies responsible
for the regulatory environment and as investors and purchasers in certain fields. This is demonstrated particularly vividly by the recommendations in the report on "Europe and the global
information society" compiled, at the request of the European Council, by the high level working party on the information society, chaired by Mr Bangemann.

**Greater privatisation, more effective regulatory methods and the new role of the public**
**services:** out of concern to achieve greater economic efficiency, most Member States [3] have
embarked on policies on the privatisation of industrial activities, reduction of the costs arising
for industry from the regulations and modernisation of public services. All measures which aim
at improving overall economic productivity in the European Union must be encouraged, taking
account of experience acquired and of national differences.

**D.** **Generating new jobs**

**It will not be possible** **to** **substantially increase levelssustain the improvement in of**
**employment and consolidate the revival in growth in the Union unless they are based on**
**efficient, innovatory industry operating within an effective regulatory framework combined**
**with a more labour-intensive development model. Steps must be taken to ensure that the**
**European Union remains an attractive site for production and investment, including**
**investment from outside the Union.** **[4 ]**

By adopting the White Paper as the frame of reference for the action taken by the European Union
and its Member States, the European Council backed an approach to industrial development based
on global competitiveness as a key factor in growth and employment, with the objective of bolstering the European Union's presence on the markets of the future, particularly in telecommunications,
information, biotechnology, environmental protection, new materials and energy.

In practice, employment prospects are brightest, especially amongst small businesses, in the fields
constantly turning to new technologies, particularly if industrial development is backed up by development of the appropriate services. The integrated programme for small businesses recently
proposed by the Commission bears witness to the importance attached to the contribution which
businesses like these can make to industrial competitiveness. These are also the fields in which the
public authorities have a specific role to play, not only because the Member States and the European Union are investors and clients but also because the market and, in particular, the potential
demand depends on their efforts to promote pilot projects and steer the choices made on health
care, transport and environmental protection infrastructure. As demonstrated by the work on the information society, a change of direction seems essential for certain common Community policies,
particularly on:

research, which must take industry's needs into consideration at an earlier stage, as was the
case when preparing the fourth framework programme on R&D activities;

_Cf.,_ _for_ _example,_ _the_ _UK White Paper on "Competitiveness - Helping business to_ _win",_ _HMSO,_ _May_ _1994._

_Cf. on this_ _subject_ _the_ _German Government's_ _report on_ _the_ _future of_ _Germany_ _as an_ _industrial_ _site and_
_how to maintain_ _it,_ _Ministry_ _of Economic_ _Affairs,_ _publication_ _338._

**13-**

vocational training and, beyond that, education in new technologies;

common commercial policy to establish genuinely equitable conditions of competition at international level.

Accordingly, this communication starts with a **microeconomic** **evaluation of the potential com-**
**petitiveness of the European Union's industry** in the context of the global economy for these
growth markets, which are such an important source of jobs. [5 ]

In the light of this diagnosis, Part II of the communication defines the **four basic priorities** of a
competitiveness policy for the European Union tailored to the imperatives of technological change:

1. promote intangible investment;

2. develop industrial cooperation;

3. ensure fair competition inside the Community and at international level;

4. modernise the role of the public authorities.

_Annex 1 contains an updated analysis of the state of European industry compared with the 1990_
_communication._ _This evaluation is based on the latest information available, particularly from the_
_"Panorama of EC industry" compiled by the Commission each year, with the collaboration of all the_
_trade_ _associations._

-14

I. THE INDUSTRIAL COMPETITIVENESS OF THE EUROPEAN UNION

_A good third of the value added in the European Union is generated by industry, and almost_
_one out of every three jobs is provided by manufacturing industry. It is necessary that industry_
_be efficient and innovatory if Europe is to return to sustained economic growth and to the_
_generation of jobs._

_Many new service activities also depend directly on industrial activity. Industrial innovation_
_and investment are vital driving forces for progress in other important fields where the public_
_authorities play a key role, such as education, health care and environmental protection._

_Consequently, one of the central objectives must be to ensure that Europe remains attractive_
_for industry._

_In a properly functioning market economy the drive for industrial competitiveness must come_
_primarily from businesses. The public authorities must assume their responsibilities by sup-_
_porting development of the markets of the future and keeping ahead of the changes rather than_
_reacting to them._

_Consequently, steps must be taken to capitalise on the Union's advantages in order to increase_
_its presence on growth markets and create the most favourable conditions for industry's tran-_
_sition to the 21st century._

A. Making the European Union more competitive in the global economy

_Competitiveness is a complex concept, much debated by economists_ _[6]_ _. The OECD defines it as_
_the capacity of businesses, industries, regions, nations or supranational associations exposed,_
_and remaining exposed, to international competition to secure a relatively high return on the_
_factors of production and relatively high employment levels on a sustainable basis. More spe-_
_cifically, in the long term, increased competitiveness will lead to improved global productivity._
_In particular, increased work productivity is essential to improve competitiveness on markets_
_open to international competition, to permit a long term improvement in the quality of indi-_
_vidual life and to create new jobs. Finally, an increased level of productivity will permit better_
_use of competitive advantages, which will no longer be limited to the abundance of natural re-_
_sources in the economy, and world-wide competition._

_Given the multiple factors to be taken into account when assessing competitiveness and the big_
_impact of currency fluctuations, any general judgement about competitiveness is of little rele-_

_vance._

_Over the last ten years, particularly since 1990, the following points must be stressed:_

_the apparent productivity of labour in manufacturing industry has risen faster in the USA_
_and Japan than in the European Union;_

_labour costs in the European Union have risen less rapidly than in the USA and Japan._
_However, the trends vary widely from one Member State to another;_

_Cf._ _on_ _this subject the analyses in_ _the_ _Commission's_ _latest_ _Annual Economic_ _Report._

15

_**European industry has less of a presence on high-technology markets and markets with**_
_**high growth potential than US and Japanese industry.**_

_**Beyond these indicators of**_ _**an**_ _**extremely complex situation, it must be added that competitive-**_
_**ness depends on far more varied qualitative factors,**_ _**where**_ _**the European Union is better placed**_
_**than it appears.**_

_**1.**_ _**The competitive position of European industry**_

The most marked features of the industrial competitiveness trends in the European Union are the
contrasting situations, not only on the markets but also with regard to the strengths and weaknesses
of the individual Member States or of the Union as a whole.

This is due to the fact that several traditional industries and national champions are in decline but
other industries and operators, often offering products and services with a higher value added content, are emerging. Industrial change and the mounting competition throughout the world generate a
sense of insecurity and pessimism which is accentuated by the weak growth and the calling into
question of established values.

In recent years the Union's industrial competitiveness has improved on several fronts.

Exports of goods grew again in 1993, with extra-Community exports accounting for 9% of
GDP and intra-Community exports 13%. In this connection, with the growing economic integration within the European Union some of the trade with the rest of the world has been replaced by trade between the Member States [7] .

From a deficit of 2.7% of GDP in 1980 the European Union's balance of trade improved in the
early '80s to a surplus of 0.5% in 1986, then deteriorated again in the late '80s to a deficit of
0.8% in 1992 (see Figure 6 in the Annex) before recovering again at the start of the '90s [8] .
The European Union had a trade deficit with the USA in the late '80s [9], but improved its position appreciably in the early '90s when it cut its trade deficit with the USA by 90%, from ECU
21 billion in 1991 to ECU 2 billion in 1993.

At the same time the European Union's trade deficit with Japan shrank by 17% from ECU 30
billion to ECU 25 billion, while the USA's trade deficit with Japan rose by almost 45% from
ECU 35.1 billion to ECU 50.7 billion.

In 1991 the European Union's trade deficit with Japan was equivalent to 85% of the USA's
deficit but by 1993 it was down to scarcely 49%.

The research and development effort by the biggest undertakings in the Union has been growing faster than that of their US and Japanese counterparts, based on the 50 undertakings with
the highest research investment in each of these three regions; research spending by European
companies as a proportion of turnover almost doubled between 1984 and 1992 to stand at

_See_ _Table_ _5 of_ _Annex II_

_The_ _OECD forecasts_ _confirm_ _the_ _significant changes_ _in_ _world_ _trade:_ _Europe_ _is_ _expected_ _to_ _move_ _from a_
_deficit at the start of_ _the_ _'90s to a surplus in_ _1994,_ _while the_ _USA's_ _deficit will_ _continue_ _to grow and_
_Japan's surplus will rise_ _rapidly._

_Analysis of_ _trade between_ _the_ _Triad reveals_ _that_ _trans-Atlantic_ _and_ _trans-Pacific trade predominates_
_(see Figure_ _4_ _in the_ _Annex)._

-16

4.5% in 1992, whereas it increased by just under 40% for Japanese companies which, nonetheless, remain in the lead (on 5.8% in 1992) and by less than 30% for US companies (3.7% in
1992) (Cf. Table 18 in the Annex).

European companies' average long-term debt ratio (gearing) remains well below their rivals'
and their rate of return is generally higher.

Unit labour cost trends in the Union compare favourably with those of these leading rivals:
between 1980 and 1993 real unit wage costs fell more sharply in the Union (down 9.7%) than
in the USA (1.2%) and Japan (8.3%).

However, a series of handicaps remain or have been aggravated:

the European Union's share of world-wide exports of manufactured goods, although still bigger
than that of the USA and Japan, has declined; [10 ]

the Union is still less specialised in high technology products and still has less of a presence on
high-growth markets than either of its two leading rivals;

since 1986 the Union has had a trade deficit in high technology products; this deficit has been
giving particular cause for concern on the markets of most direct relevance to the establishment
of the information society;

European industry's productivity has been improving at a slower rate than that of US and
Japanese industry;

the research and development effort supported by the public authorities in the Union is far
more scattered than in Japan or the USA. Competition in the R&D field can speed up technical
progress and innovation in businesses but the public authorities must ensure that the best possible use is made of the limited resources at their disposal, in particular those which encourage
cooperation.

To help it withstand this situation, the European Union has considerable assets.

_2._ _Knowledge and human resources_

The European Union must be competitive on world markets in terms of quality, design, product reliability and deliverability. These factors are more decisive for export success than production costs alone. They imply investment in human resources and flexibility internally, externally and in management methods and intervention by the public authorities. The process of
structural change will continue at a rapid rate and jobs could continue to be lost in traditional
fields, while being created only very slowly in the emerging activities. Consequently, the
European Union must find ways of generating new jobs while continuing to support training,
advice and assistance for all who lose their jobs as a result of structural change.

National prosperity depends, increasingly, on the use of information and knowledge, with the
aid of the enormous progress made in information and telecommunications technologies. There
is a close correlation between the development prospects of individual technologies and products (telephones, active disk readers and combinations thereof) of the programs (computer
software, data bases, audio-visual programmes, etc.) and of the associated services and networks. The European Union is in a strong competitive position in several of these fields and
has every means of retaining or winning a substantial share of the market (for example, the
GSM market created on the basis of a European standard).

_**10**_ _The_ _share of_ _world trade_ _taken_ _by_ _exports from the_ _European Union_ _fell from 29% in 1980 to_ _25%_ _in_
_1986_ _and_ _24%_ _in_ _1992._ _In_ _1992 exports from the_ _USA_ _and_ _Japan_ _accounted for_ _17.3%_ _and_ _16.6%_ _of_
_world trade respectively (see Figure_ _3 in_ _the_ _Annex)._

**-17**

The European Union's greatest asset for boosting its industrial competitiveness is its capacity
to generate and use knowledge, with the aid of the great potential of its labour force and the
social consensus laying the foundation for harnessing it. Accordingly, involvement of the two
sides of industry in managing economic and social change is a key component of the European
model. Their contribution to modernisation of labour relations is a powerful factor in increasing cohesion and improving performance.

The impact of the rapidly emerging information society on all aspects of economic and industrial life and society makes human beings' capacity to extend and manage knowledge more important than ever. The Community's fourth framework programme on research and development activities provides for measures to improve training and make researchers more mobile, including those working in industry.

Infrastructure and environments must be developed:

to stimulate the spirit of enterprise;

to raise training standards;

to manage industrial change;

to take up new technologies;

to speed up dissemination of innovations;

to allow the reorganisation needed to boost industrial efficiency and to increase the value
added by production in the Community.

_3._ _Development of trans-European networks and better organisation of production_

The fact that wealth creation depends increasingly on intangibles is making the economy more
and more fluid and volatile. As a result, the mobility of factors of production and the capacity
to combine them effectively have become more important than raw material resources in the
current context of world-wide competition between businesses and nations. The geographical
thinking on which most policies with a bearing on industrial competitiveness are based must
gradually make way for thinking in terms of world-wide networks.

Rapid establishment of extensive integrated networks allowing efficient movement of persons,
goods, services, information and energy inside and outside the European Union is therefore a
key factor in industrial competitiveness.

The pipeline network is a good example of how integration of the major networks can contribute towards improving competitiveness. Because industry in the European Union does not yet
have the benefit of a large European pipeline network it operates under less favourable conditions than its rivals in North America, where such a network already exists. Establishment of a
large European pipeline network providing a safe means of transport while reducing congestion
on the roads would therefore help to make European industry more competitive.

Energy costs affect not only industries with large energy consumption but also industry as a
whole, for example because of the impact of energy prices on transport costs. Only an open
market on which energy users are free to choose the fuel they wish and the most efficient suppliers can generate competitive pricing. Completion of the internal energy market is therefore
needed more than ever.

Better organisational methods, leaving wide scope for the spirit of enterprise, teamwork and
cooperation, will have an increasingly decisive impact on the prospects for increasing overall
productivity and value added. To achieve these, efficient use must be made of all the oppor

                                            - 18

tunities offered by information and communication technologies and far closer relations must
be established between producers and users. Undertakings in the private and public sectors
must constantly rethink their organisational methods and strategies. This has given birth to the
BPR (business process re-engineering) concept. All administrative systems must be adapted to
achieve greater efficiency, transparency and coordination.

By virtue of this fact - and this takes us to the heart of the debate on the information society the conditions of access to information, to the networks carrying it and to the services facilitating use of the data are playing an increasing role in industrial competitiveness. The availability
and quality of telecommunications infrastructure and services (including high value-added
services, data bases, etc.) and, above all, cutting the cost thereof and developing new market
opportunities are now vital components of the Union's future competitiveness..

Industry remains central to production processes and must continue to play a fundamental role
in the European economy. Increasingly, the efficiency of capital investment depends on the associated intangible investment (in R&D, training, commercial measures, software, etc.). Already, intangible investment amounts to over half the sum spent on capital investment. This
trend dictates that investment should be regarded as all expenditure which improves the future
profit potential of the existing assets. Business strategies and public policies must take this into

account.

The Union has the richest, most varied territory in the world, in terms of quality of infrastructure, way of life, environment and cultural diversity. Greater use can be made of this considerable asset by adopting a more concerted approach to planning and land use, taking account of
the need for interconnection with other economic blocs, particularly where their geographical
proximity and similar cultures offer added advantages.

_4. Industrial competitiveness and economic and social cohesion_

The regions covered by the cohesion funds currently face numerous challenges resulting from
the completion of the internal market, the opening of trade linked to GATT and the opening of
EU economies to Eastern Europe economies. To respond to these challenges it is necessary
that the objectives of industrial competitiveness be integrated into economic strategies for these
regions and, conversely, that cohesion policy be taken fully into account.

A potential economic loss for the Union is caused by the high degree of centralisation of industrial activities in certain areas. This centralising tendency is not preordained: future competitiveness must rely less upon economies of scale and large series and more upon the capacity to
assimilate information and to ensure its appropriate dissemination, thereby offering the possibility of decentralised industrial growth.

In practice, interaction between industrial competitiveness policy and cohesion objectives signifies that industrial competitiveness policy may initially provide an analysis of the fundamental axis of future competitiveness such as proposed in the present document. This may lead
certain regions to fundamentally re-examine their current actions, such as is already happening,
for example, in the discussions concerning the next generation of community support frameworks.

For their part, the structural funds may contribute to the creation of new jobs not only by the
development of valuable jobs in less favoured regions but also by the promotion of growth
markets in this segment of the Union.

19

The genuine differences between the situation in the less developed and the other regions nevertheless serve as a reminder that globalization could militate against cohesion. [11] The European
Union must therefore ensure that industrial competitiveness and economic and social cohesion
each add strength to the oilier. Greater economic and social cohesion can generate externalities
which make the private sector more efficient by improving infrastructure, particularly health
care, education and research infrastructure, and optimising the general level of investment.
There is an increasingly direct correlation between economic and social cohesion and industrial
and economic performance. The Union must make full use of this correlation.

Future competitiveness will depend far more on the capacity to combine information and disseminate it appropriately. This could create potential for decentralised industrial growth provided appropriate support is given, particularly at regional level.

5. _Scientific and technological experience_

The European Union must place its science and technology base at the service of industrial
competitiveness and the needs of the market more effectively. The fourth framework programme on research and development activities drafted after detailed consultations with industry will contribute towards this objective. Greater attention must be paid to dissemination,
transfer and industrial application of research results and to bring up to date the traditional
distinction between basic research, pre competitive research and applied research which, in the
past, has not always allowed European industry to benefit from all the research efforts made.
In this regard account must also be taken of the strategies of our principal tiading partners
while, at the same time, respecting our international obligations (eg. the GATT code on aids).

As recommended in the White Paper, all the authorities responsible for supporting research
activities (the Member States and industry) must step up their overall research effort. The
Community's RTD activities will help to define, with the circles concerned, a forward-looking
approach to technologies of interest to Europe as a whole. They are separate from but complement the Eureka programme. All in all, the time has come for the European Union to give
greater priority to specific applications. This is one of the principal lines followed by the
Community's fourth framework programme on R&D activities, which, alongside the fundamental objective of developing generic technologies, also aims at closer and closer involvement
by users. The research and technological development chapter of the Treaty on European Union sets the Community the primary objective of strengthening the scientific and technological
bases of Community industry and encouraging it to become more competitive at international
level. Practical measures must be taken to attain this objective, including encouragement for
the establishment of research and development consortia of businesses from different Member
States.

Greater innovation can be achieved if transparent information and stronger competition allow
wider dissemination of the progress made amongst consumers and operators. Further innovation can also be achieved, closer to the market, by providing better protection for intellectual
property rights in all fields, both in the European Union and throughout the world, and pursuing an active policy to improve the collection, dissemination and competitive use of information
of all kinds.

In the specific field of the defence industries, as the common foreign and security policies are
developed the European Union must envisage closer coordination of its research and standardi

**/;** _Cf._ _on_ _this subject the_ _fifth_ _report on the socio-economic situation and trends in_ _the_ _Community._

**20**

sation work, develop common programmes and, above all, preserve and harness its science and
technology capacity (particularly its teams of researchers and engineers).

**B.** **Targeting growth markets**

_**Efficient companies can be found in every branch of industry and on every market The Euro-**_
_**pean Union's overall success against international competition depends on companies' capac-**_
_**ity to build up strong positions on growth markets, whatever the product and wherever it is**_
_**sold,**_ _**from**_ _**the**_ _**Union, which must remain a leading production**_ _**site.**_ _**Awareness of current**_
_**trends is particularly important to enable operators to adapt to the changes on the markets.**_

_**1.**_ _**The potential of the European**_ _**Union's**_ _**industry on growth markets**_

_(a) Strengths and weaknesses of the European Union on global markets_

A series of imbalances lie between the European Union's industrial capacity and its relative position on certain high-growth markets:

in geographical terms, i.e. growing presence on neighbouring markets and on the markets of
the countries with which the European Union traditionally co-operates but insufficient presence
on Asian markets, creating a risk of imbalances;

in terms of products, with the Community's position often strongest on stable or slow-growing
markets but not strong enough in fields with extremely fast-growing demand.

Diagnosis of this situation points to two conclusions:

greater efforts must be made to penetrate these markets; and

in order to achieve this, the European Union must support European industry to _secure or in-_
_crease the opening-up of our trading partners'_ _markets._ The measures taken to implement the
results of the Uruguay Round, determined action to remove obstacles to trade and the activities
of the World Trade Organisation to be set up must enforce the rules on fair competition and
fair trade to guarantee everyone equal access to world markets, while observing the disciplines
imposed on international trade.

_(b) The growth areas:_ _a_ _few examples_

**The public authorities do not know which products tomorrow's market will demand.** However, they must adapt to market trends and ensure that the markets are driven by competition. The
important role played by the public authorities as purchasers and investors can make a significant
contribution to dynamic growth of such markets: environmental protection, health care and communications are all examples. [12 ]

_**12**_ _See_ _the_ _Annex for figures on this point._

21

_**13**_

_**14**_

_Markets in knowledge and culture_

The emergence of multimedia activities harnessing the opportunities opened up by the digitisation of information in all its forms (text, image and sound) is creating new markets generating considerable numbers of jobs. The European Union's industry, particularly telecommunications, has proved its capacity to design and produce the tools needed for the information society of the future. Increasingly, the development of services generating and using such information is becoming the crucial question. This goes hand in hand with the development of an industry capable of generating this information whatever its form, whether audio-visual, scientific, economic or artistic. [13] This was the central issue discussed at the recent European conference on the audio-visual media held from 30 June to 2 July 1994.

_Markets in health care and biotechnologies_

The growth prospects in the field of health care and, more generally, industrial application of
biotechnologies, are extremely promising. The European Union has all the capacity needed to
remove the remaining obstacles to the development of these markets. These obstacles have
been to blame for leaks of industrial property or technologies to the Union's partners in certain
fields. This problem is examined in detail in the communication on the outlines of an industrial
policy for the pharmaceutical sector in the European Union. [14 ]

_Environmental protection markets_

The growth potential of the environmental protection markets is widely recognised, although at
the moment the size of the market far from reflects the real needs. This market can be attrib
uted not only to the new goods and services supplied to abate or control pollution but also to
all the spending to improve production processes and products and increase energy efficiency,
combined with the growing markets in "green" products and technologies.

Also, increasingly, the raising of environmental protection standards on certain markets outside
the Union is turning use of clean technologies into a precondition for success on international
markets.

_Top-of-the-range_ _products_

Utilisation of know-how and of the brand image of quality top-of-the-range products with a
high value added provides a means of harnessing the diversity of local production, preserving
highly skilled trades and penetrating the most impregnable markets. It is not only a question of
European industry's performance in luxury products, but also in its most traditional industries
which must develop appropriate advanced technologies or adapt to technical progress and in
very high-technology industries such as the space and nuclear industries.

In order to maintain the acquired social rights and overcome the differences in wage costs, the
European Union's industries must build on their strengths in manufacturing, the application of
production technologies and the development of global solutions allowing top quality. Produc

er _the_ _Green Paper on_ _the audio-visual policy of_ _the European Union_ _(COM(94)96)._

_COM(93)718._

**22-**

tion structures must change wherever necessary in order to attain the critical mass required for
competitiveness.

Effective legislation to combat counterfeiting - such as the Regulation agreed by the Council
on 16 June 1994    - must be developed to ensure fair trade in these products.

This can be backed up by cooperation with certain non-Union countries with know-how limited
mainly to the design and marketing of less complex products, thereby strengthening the European Union's overall position on world markets.

To reap full benefit from this cooperation, steps must be taken to strengthen all possible links
with the developing countries, whether industrial, economic, commercial, investment or in the
form of transfers of know-how, in order to contribute to full integration of these countries in
the world economy. In this connection, the ECIP (European Community Investment Partners)
scheme and the Generalised System of Preferences offer great opportunities. The Commission
recently proposed a new Generalised System of Preferences for the next ten years incorporating a number of significant innovations to encourage, for example, more sustainable forms of
development and strengthen the links between the economies of the Union and of the newly industrialised countries.

_2._ _Harnessing the European_ _Union's_ _industrial tradition_

_(a) Conditions for competitiveness on established markets_

On the established markets on which its industries are already in a strong position, the European Union must cope with the general trend towards products with higher value added and
with the changes in production methods which face all industry, but assume an added dimension in view of the importance of the industries concerned to the Community's economy. These
markets could be revitalised by creating a favourable environment for the efforts made by
businesses on quality, creativity and productivity and on modernisation of their production and
marketing structures.

In the basic industries, particularly the steel, aluminium and chemical industries, which face
specific problems (world price trends, environmental constraints, disequilibrium between supply and demand, industrial consequences of the transition of the countries of Central and Eastern Europe to a market economy)^ raw materials, energy, transport and capital investment remain the biggest cost items. All the action being taken to cut costs of these types in the European Union must therefore be encouraged. New opportunities for cooperation could be opened
up by innovatory plurilateral measures such as those agreed by the European Union with
Russia, the US, Canada, Australia and Norway which has culminated in a Memorandum of
Understanding linking Russian reductions in productions (together with and estimate of Western reduction of aluminium production) to future industrial cooperation). This type of approach could no doubt be used for other basic products.

Certain natural resources (non-metallic ores, rocks, etc.) and secondary resources (waste) are
in abundant supply in the European Union and can be tapped competitively, hence the need to
create an environment conducive to rational, sustainable use of such resources and to avoid
regulations creating unnecessary obstacles.

The capital goods industries with their important specific role will have to contribute to rapid
establishment of trans-European infrastructure networks.

**23-**

The European Union must also take account of the impact of the world-wide redistribution of
production in response partly to the growing strength of certain rival countries, whether or not
newcomers to these markets, and partly to their comparative advantages, particularly on wage,
raw material and energy costs. In some cases, in order to achieve the structural changes
needed, a concerted capacity-reduction policy could prove preferable to an approach based
solely on natural market forces. This is particularly the case where there are barriers to leaving
the market, in the form of heavy costs which cannot be recovered. Steps must therefore be
taken to make it easier to leave. The Commission set out the general lines of action which it
recommends on crisis cartels in its Twenty-third Report on Competition Policy.

_(b) Harnessing the traditional industrial base_

Preservation of the diversity of the Union's traditional industrial fabric plays an important role
for employment, balanced town and country planning, and the web of small businesses and
subcontractors. It must also be stressed that rural development is becoming increasingly
closely linked to the development of industrial activity and of the ancillary services, particularly of small businesses.

Transitions will therefore have to be organised:

to ensure that the industries concerned make the necessary adjustments as fast as possible;

to put irito action the Community policies which can help to speed up these adjustments;

to avoid perpetuation of situations which prevent competition and damage the European Union's overall industrial efficiency;

to provide industries and, in particular, small businesses with the support of efficient infra
structure.

**-24**

**II.** **PRIORITIES FOR ACTION**

_**The basic premise underlying the European**_ _**Union's**_ _**industrial policy is to follow a dynamic**_
_**horizontal approach smoothing the way for implementation of a consistent package of policies**_
_**to help make industry more**_ _**competitive.**_

_**In keeping with Article 130 of the Treaty which gives the Commission the possibility to take**_
_**any useful initiative, this communication is intended to identify areas in which it would be in**_
_**European industry's interest to**_ _**step**_ _**up the action by the Community. The objective is to show**_
_**how the industrial competitiveness**_ _**policy**_ _**can be implemented effectively, by pinpointing a lim-**_
_**ited number of objectives and activities in order, in particular, to strengthen European indus-**_
_**try's presence on growth markets generating jobs.**_

_**In essence, these are:**_

_**promote intangible investment;**_

_**develop industrial cooperation;**_

_**ensure fair competition;**_

_**modernise the role of the public authorities.**_

_A._ **Promote** **intangible** **investment**

_**Effective exploitation by the European Union of the new factors determining industrial com-**_
_**petitiveness calls for promotion of knowledge, human resources and the quality of products**_
_**and services, encouragement for innovation to improve the response to market trends and ad-**_
_**justment of organisations and**_ _**structures.**_

_**It calls for all government policies to take fuller account of intangibles and of the needs of the**_
_**market**_

_**1.**_ _**Objectives**_

Promotion of human resources, quality and innovation calls for efforts by both the public and private sectors, particularly at local level. But the European Union must facilitate coordination of
these efforts and:

bring the vocational training available closer into line with demand, in order to respond to industry's specific needs;

promote closer involvement by the two sides of industry at both national and European Union
level in seeking new ways of organising work;

facilitate the emergence, within the European Union, of:

new markets, such as the markets in knowledge and culture, environmental protection,
health care and biotechnologies;

new forms of training, such as distance learning, and of organisation, such as dynamic
management of economic data; and

25

"total quality" production;

capitalise on the European Union's assets for application of the new concept of _"economic in-_
_telligence",_ which is one of the main features of the information society. The aim must be to
ensure efficient exploitation, from the retrieval stage to distribution to businessmen, of all the
information which they need in order to devise and implement consistent strategies and organisational structures to improve their competitiveness;

increase industry's capacity, with its partners (users, public authorities, etc.), to keep ahead of
changes in technologies and on the markets (demand, regulatory and fiscal framework, etc.)
and to employ appropriate strategies, particularly in the research and technology fields
(creation of the ETAM (European Technology Assessment Mechanism) and of the Seville Institute in the 4th Framework Programme);

ensure expansion and take-up of the European Union's research and development efforts by
means of a cross-disciplinary, multisectoral approach taking into account the needs of the market in dialogue with industry;

promote sustainable industrial development by harnessing the competitive advantages stemming from improved environmental protection.

_2._ _Action_

_Promote intangible investment,_ particularly training and learning which must become the priority within the general policy to support investment (for example, by improving tax treatment
for such investment).

A range of measures must be taken to overcome the fact that the existing education and training systems are not up to the challenge of long-term competitiveness. Particular attention will
be paid to continuing training, to improving qualifications and to raising standards in basic
skills and new technologies. The Commission intends to proceed rapidly, in keeping with the
subsidiarity principle, with a review of the prospects of taking fuller account of intangible assets, particularly in the context of taxation, and of introducing incentives in favour of business
and private investors in continuing training.

_Step up the research effort:_

      - by companies, the Member States and the European Union:

     - _by taking filler account of the needs of the market,_ based on the Community's fourth
framework programme on research and development activities, and ensuring closer involvement of users by means of appropriate forms of interaction: _Industrial Advisory_
_Panels,_ as already the case with the hew RTD programme on information technologies, on
industrial development centres and on the networks of laboratories without walls;

     - _by modernising the approaches and practices_ to produce even more effective industrial
spin-offs, _modelled on the best international examples_ and schemes, while taking account
of the appreciable differences in social structures, culture and traditions;

     - _by facilitating the establishment of consortia of European companies_ in order to increase
the synergies in the R&D sector.

_Promote quality,_ fitting in with the European Union's approach to standardisation, taking account of the many factors influencing it (total quality management) since this is necessary to
harness the know-how of businesses in the European Union, while avoiding fragmentation of
the markets. The Commission will submit a communication on this specific subject to the
Council.

-26

_Promote fuller integration of vocational training_ in the European Union's policies aiming at
improving industrial competitiveness, particularly in the ADAPT Community initiative, without calling into question decentralisation and the primacy of national policies in this field.

_Create a legal environment conducive to research,_ by developing an integrated approach to
intellectual and industrial property, particularly in the field of patents - including patents for
inventions stemming from biotechnology - trade marks, designs and models, designations of
origin, etc.

_Step up and co-ordinate the research into clean technologies and develop economic incen-_
_tives_ to ensure earlier, wider use thereof in the European Union. In the general context of environmental protection, a global approach along the lines followed to reduce C0 2 emissions
taking account of the conditions imposed by world-wide competition would be preferable to a
plethora of different product-by-product taxes.

_Introduce new methods of organising work and improve_ _the_ _fiscal environment,_ particularly
for small businesses, by means of measures such as those proposed by the Commission on
taxation of small businesses, transfers of businesses and improvement of the fiscal environment
for small businesses.

_Improve the dialogue between the two sides of industry,_ taking account of national practices
and experience.

_Promote rational use of data_ managed and generated by information systems in order to increase the availability and quality of economic data.

B. Develop industrial cooperation

_Since 1990 the trend towards industrial cooperation in the European Union has gained pace_
_despite the slowdown in economic activity, as illustrated by the large number of strategic alli-_
_ances and mergers of_ _companies._

_Industrial cooperation schemes are, above all, the responsibility of the businesses and busi-_
_nessmen_ _themselves._ _However, it is necessary for the public authorities to develop a dynamic_
_approach in this area in order to establish a framework conducive to taking account of mutual_
_interest and to develop forums bringing together all concerned ("round tables_ _")._

_The Commission's primary objective in this field is to promote cooperation between operators_
_in the Community, by encouraging private initiatives of benefit to Europe as a whole wherever_
_justified, particularly amongst small businesses._

_As regards the Eastern European countries in particular, a consistent approach is needed to_
_globalization, to integration of these countries into the European area and to bolstering Euro-_
_pean industry's presence on expanding markets, while at the same time abolishing the restric-_
_tions on imports from these countries and abiding by the rules in force in the Union._

_1._ _Objectives_

Although the European Union is not responsible for setting up industrial cooperation schemes, it
must nevertheless endeavour to promote such schemes and:

help to bolster the presence of the European Union's industry on high-growth markets, on the
basis of harnessing mutual interests;

**27-**

take fuller account of each side's industrial situation in dealings with the European Union's
partners and, particularly in the case of the countries of Central and Eastern Europe, of the
objective of bringing their economies closer to the European Union with a view to accession,
integration in the world economy and strengthening economic ties between them;

encourage private schemes involving operators from several Member States, particularly where
the operators face R&D costs beyond their industrial capacity;

make businesses more competitive by facilitating transfers of experience and know-how between businesses, particularly small businesses.

_2._ _Action_

_(a) General measures_

_Identify_ _and remove the legal and fiscal obstacles to industrial cooperation_ (for example on
the protection of intellectual property rights).

_Develop industrial cooperation tools (including legal instruments)._ The European Union has
no appropriate legal instruments to support industrial cooperation. EEIGs are unsuitable for
industrial cooperation schemes, while the proposal concerning the European Company Statute
is only for big companies and has been blocked for political reasons. Ways in which the new
statute being discussed for European associations could facilitate industrial cooperation must
be examined or, where appropriate, a new instrument must be devised to enable undertakings
or local authorities to conclude cross-frontier industrial cooperation agreements, particularly
on networks. This would make it possible, for example, to avoid resorting to international
treaties before going ahead with projects such as the Channel Tunnel.

Continue to _support the development of industrial initiatives targeted on growth markets,_
_particularly schemes involving small businesses, and facilitate_ _appropriate use of the_
_Structural Funds, for example to assist schemes to set up venture capital undertakings._ This
approach has proved particularly beneficial for implementing Community's PEDIP pro
gramme.

_Organise industrial round tables_ as have already been set up with Japan and the Baltic countries and for specific industries (the Maritime Industries Forum and the round tables with the
countries of Central and Eastern Europe on the agri-food and consumer electronics industries).
The objective is to enable industrialists from inside and outside Europe to identify their mutual
interests from both the multisectoral and geographical angles and to encourage the development of private initiatives in the form of joint projects.

Recourse to the _Working Party of Heads of Industrial Policy Departments_ to make it easier to
identify and implement industrial cooperation schemes and for companies to find partners and
information on markets in third countries.

Continue to reinforce a favourable climate for investment and industrial cooperation by the _de-_
_velopment of a coherent legal approach towards a common and efficient support of_ _Euro-_
_pean investment_ in host countries. Such an approach may be developed along the lines of the
EU position on the principles of protecting investments in ACP countries within the context of
the Lomé Convention, which was set up on the basis of bilateral agreements on investment
protection agreed by the Member States and these countries.

_(b) In the case of the countries of Central and Eastern Europe_

The Commission will soon be preparing a communication on the industrial competitiveness of the
countries of Central and Eastern Europe with a view to their integration in the European Union.
The following action could be taken already:

                                                                    - 2 8 

_**15**_

Promote financial engineering, including considering the possibility of improving existing instruments and seeking solutions which _may partially guarantee investment,_ in order to
stimulate specific projects for which there is demand in the partner countries (in Central and
Eastern Europe) and which businesses in the European Union have the capacity to meet
(energy saving, water purification, telecommunications, transport schemes, etc.).

Such an initiative could be based on an analysis of the Member States' guarantee schemes to
ensure that the action taken by the Community genuinely provides added value.

Furthermore, Phare's emphasis should continue to shift towards support for investment and the
private sector and the provision of assistance directly to end-users in beneficiary countries.

In addition, the Commission may envisage proposing financial medium term assistance to
complement PHARE subventions and loans by the European Bank for Reconstruction and Development and the European Investment Bank intended for structural adjustment.

_Continuation of the support for standardisation and certification in Central and Eastern_
_Europe_ already being provided under the PHARE programme and provided for in the Europe
Agreements with a view to harmonisation with the European Union's industrial standards and
to application of certification criteria and procedures accepted at international and European
level: in particular, adoption and observance of European and international standards are essential preconditions for the success of industrial cooperation schemes which will smooth the
way for subsequent integration of these economies in the European Union's single market.
_Development of expertise in international financial engineering and_ _offset_ _[15]_ _activities_ to explore the technical prospects for developing cooperation between European industry and the
countries of Central and Eastern Europe, for raising the financial resources needed to acquire
the durables, technologies and know-how necessary to restructure their industrial base and establish modern market economies. Promising applications could be found in the transport, telecommunications and energy sectors.

_Support for action or initiatives based on the European Energy Charter_ in order to enable the
countries of Central and Eastern Europe and the former Soviet Union to harness their potential
energy resources and contribute towards improving the European Union's security of supply
and promoting investment by companies from the Union.

The introduction of guarantees covering part of investments and provision of technical assistance,
primarily in the form of advice for undertakings in the Union, would imply Community funding
which would have to be considered separately from the aid for economic reform provided by the
Commission.

_(c) Latin American and Mediterranean countries_

Cooperation with the countries with which the Union has traditional ties could lead to introduction
of a more integrated approach to industrial modernisation. This will become increasingly important
as these countries' growth rates increase, fuelled by their policies on stabilisation of the economy,
opening up of their markets, regional integration and privatisation.

_The objective of_ _developing_ _this expertise is to supply_ _information_ _on the extremely_ _sophisticated_
_techniques necessary in order to mount industrial cooperation_ _operations._

_One such technique_ _is_ _"offset",_ _a_ _form of_ _compensation which places an obligation_ _on foreign_ _suppliers_ _to_
_invest in the country_ _which purchases_ _the_ _equipment_ _they sell. In offset_ _arrangements,_ _the seller of_
_complex, costly equipment_ _undertakes_ _to grant the purchaser a series of_ _industrial_ _and_ _commercial_
_benefits related directly_ _or_ _indirectly to the_ _sale._

29

The European Union has always been one of the leading partners and investors in most of these
countries. Bilateral and regional cooperation agreements, programmes, instruments and institutions
to promote cooperation already exist and must be stepped up as regional economic integration ad
vances.

_closer technological cooperation:_ this will take the form of projects, notably in high-technology fields where it is opening up industrial opportunities already;

   _participation in the Community's fourth framework programme on R&D activities and in the_
_developments connected with the information society:_ such participation opens up numerous
opportunities to strengthen scientific, technological and industrial ties with the European Union
in both sides' mutual interest;

_establishment of networks of businesses from the European Union and non-member coun-_
_tries:_ also, active promotion of the instruments already at the Commission's disposal, such as
the European Community Investment Partners (ECIP) scheme, combined with encouragement
for European Investment Bank operations in these countries, would go a long way towards improving the situation.

_(d) Asian countries_

Historically, the Commission has conducted detailed, structured industrial talks with Japan and
these talks on industrial cooperation policy have indubitably helped to relieve the trade problems
and have given birth to particularly successful industrial cooperation schemes in both sides' inter
est.

Based on this experience, the following action is proposed to improve cooperation with the Asian
countries:

_Develop cooperation programmes_ with countries with which mutual interests can be identified, following the example of the pilot programme between the European Union and Japan on
_parts and components for consumer electronics_ and of the cooperation project on automobile
components or on components for computers and office equipment.

_Develop scientific and technological cooperation activities_ with a high industrial content to
which industrial cooperation schemes can be added, for example the pilot programme on automated production set up between the European Union and China or the project on training engineering, also with China.

Develop training and schemes to promote the transfer and dissemination of technologies and
know-how acquired in certain third countries (as in the case of various programmes with Japan).

C. Ensure fair competition

_One of the_ _objectives_ _of the Treaty on European Union is to open the markets to free competi-_
_tion._ _The Union was the first to adopt a policy designed to correct the impact of distortion of_
_competition on_ _trade._ _The Union has a fundamental interest in ensuring that all its trading_
_partners also effectively and systematically apply conditions allowing fair competition. Tight-_
_ening-up of the rules on competition within the Union must be accompanied by fair conditions_
_of competition at international_ _leveL_

**- 3 0 -**

_The European Union must implement an industrial approach making it possible to reap the_
_full benefits of the GATT agreements and to make rapid progress on the questions raised by_
_the globalization of the markets, which led to the decision to set up a World Trade Organisa-_
_tion._

_One particularly important point for the European Union's industrial competitiveness is that_
_the opening-up of international trade should be accompanied by development of competition_
_on the internal market, with each fuelling the other. Fair competition and fair trade_ _are_ _the_
_corollary_ _of_ _free trade._

_1._ _Objectives_

The current situation as regards the competition on and openness of the markets and application of
common rules and disciplines remains far from perfect, despite the efforts made by the States and
international organisations.

_External measures_

The European Union must define the terms of a consistent approach striking a balance between the
requirements for competitiveness, market competition, the necessary degree of protection for the
environment and sustainable economic development.

One consequence of the internationalisation of industry is that companies now have production
activities in many third countries, creating, in the process, new, complex situations. For example, in certain anti-dumping cases the Community's industrial interests can no longer be approached in purely geographical terms.

International competition is assuming an increasingly regional dimension: new Member States
will soon be joining the Union, the world's leading economic bloc, which has also concluded
economic agreements with the countries of Eastern Europe and Russia. Elsewhere, the USA,
Canada and Mexico have formed their own economic community (NAFTA) and free trade associations are being developed in other parts of the world (South-East Asia and South America).

Account must be taken of the increasing number of strategic alliances in order to avoid the
build-up of dominant positions world-wide. Parallel measures must be taken to encourage the
development of alliances of industrial and technological interest while at the same time allowing stronger competition on world markets. A balance, must be struck between these two objectives.

European companies' export and transplant potential is far from fully exploited because of the
difficulties created by the continued closure of some markets. Identification of these precise
obstacles to growth and specific action to remove them could make a significant contribution to
improving the outlets for the European Union's industries for the products and markets concerned.

One of the European Union's major concerns must be to avoid recourse to discriminatory bilateral agreements, such as the initial phase of the agreement between the USA and Japan on
semi-conductors. Markets must be opened up without discrimination. In this connection, it
must be stressed that failure to apply the rules on competition rigorously would allow industries in third countries to adopt practices which would stop competition and block or curb imports into their countries.

31

At the moment a growing number of countries are industrialising and becoming capable of
producing an ever wider range of manufactured goods. Many of these countries have liberalised their economies, often in an extremely difficult climate. These countries depend on easier
access to the markets in the industrialised world for their future prosperity. In return, they offer
attractive export opportunities for European industry. To ensure equal access to the market
and growth and job prospects, it is essential that the rules of the multilateral trading system
should be accepted and observed and that the decisions of the new disputes settlement mechanism expeditiously implemented by all contracting parties. It will therefore be necessary for
the new World Trade Organisation to deal with these issues in the appropriate way from the
start and for the procedures for implementing the regulations to offer the flexibility, transparency and simplicity required to create a climate in which European businesses can flourish.
Care must be taken to ensure that this situation does not deny European industry access to
growth markets and give rise to unfair competition which puts European industry in difficulty
on many markets on which it is well established, and even on the Community market.

The heavy protection of the markets of a limited number of industrialising countries with low
social conditions puts the exporting industries at an advantage but creates distortion of competition which becomes more and more serious as skill levels improve.

It is therefore desirable that, beyond the results of the Uruguay Round, the industrialising
countries should continue to open up their markets for all, by taking action on customs duties
and non-tariff measures, and that they apply the rules and disciplines accepted by all their
partners and agree to combat practices which restrict trade.

Particular attention should also be accorded to the development of mutual recognition agreements with our principal trading partners which will significantly contribute to trade liberalisation.

These circumstances clearly demonstrate that the World Trade Organisation will provide a forum
for ensuring fair international trade on a stable multilateral basis defined by the agreements stemming from the Uruguay Round.

Consequently, the objectives of the action taken by the European Union must be:

_to promote more open trade, while encouraging social progress._ The Union will have to
identify means of contributing to economic and industrial development in the countries which
subscribe to this objective. It should play an active part in the discussions on social issues
within the WTO, in collaboration with the International Labour Office, without impinging on
the comparative advantages enjoyed by the developing countries. However, the concern for
greater social progress must not turn into a pretext for obstructing these countries' right to economic development. In any scenario, in order to ensure effective action in this area, steps must
be taken to encourage ratification of the ILO conventions and to step up the resources for
monitoring them;

to raise, at multilateral level, within both the OECD and the WTO, the question of the introduction of rules to reduce distortion of competition caused by businesses themselves and to
provide our companies with effective access to markets not yet governed by provisions of this
type;

within the committee on trade and the environment, _to strive for the establishment and effec-_
_tive application of environmental protection criteria_ which safeguard the fundamental principles of the GATT, particularly non-discrimination;

based on the fact that over the last ten years international trade has grown faster inside regional
trade areas than between them, _to endeavour to harness the potential of the geographical_
_area_ with which it has close ties for historical and cultural reasons;

**- 3 2 -**

   - by promoting the international specialisation between the Union, the countries of Central
and Eastern Europe, Russia and other CIS states and also the Mediterranean countries;

   - by discussing strategy with regard to the specific needs of these countries and on adaptation of industrial production to satisfy them, and not just major export needs;

   - by promoting trade within this vast area, not only between the Union and each of the individual countries but also by encouraging these countries to open their markets up to each
other in order to attain significant economies of scale for local production;

   - by following the example set by the NAFTA agreement between the USA, Mexico and
Canada and seeking, together with the countries concerned, strict common rules of origin
to ensure closer economic cooperation and integration within the area plus clauses to avoid
social and environmental dumping which would inevitably create protectionist tensions
detrimental to the objective pursued.

_Internal measures_

The procedures for establishment of the European Union's internal market have been completed.
Now the priority is to make it operate efficiently. In particular, this will imply adequate implementation of the measures to complete the internal market in every Member State, effective opening-up
of public contracts, further mutual recognition of standards, more transparent rules for the internal
market and simplification of VAT, particularly the switch to the definitive taxation system in 1997,
when the taxes will be collected at the place of purchase, i.e. in the selling country.

Clear, rigorous application of the rules on competition contained in the Treaty or adopted to
take account of the new international situation (the Regulation on mergers) stimulates activity
and reduces inflationary pressures. It makes it possible to adapt industrial structures to the new
competitive environment and, in particular, to the technological revolution and to the new alliances being formed.

The European Union is an economic bloc with an extremely elaborate, highly structured competition policy. Completion of its internal market makes this policy even more important for
encouraging improvements in industrial competitiveness. In practice, since the removal of the
internal frontiers the risks of dominant positions and the distortions caused by State aid - which
remain too great - are growing appreciably.

A stronger competition policy is not an end in itself. It is implemented with an eye to the objectives of the other Community policies, as steadily demonstrated during implementation of
the Regulation on mergers, and helps to make them more effective. The disciplines imposed by
the European Union on competition policy set an example for non-member countries but can be
made more effective and more transparent.

The system for monitoring aid is based on a body of rules which have been built up in the
course of time and have gradually become more complex. In particular, this system includes
sectoral codes introduced originally for economic or serious structural reasons. Sometimes it is
based on heterogeneous criteria, such as "overcapacity", for which the definition and implementing provisions have gradually been refined to take fuller account of the features of the
specific market in question such as progress in production technologies and the degree of
globalization. Moreover, in the words of the White Paper, some aid criteria encourage "firms
to increase the capital intensity of production and to boost their physical as opposed to their
non-physical investment in order to improve productive efficiency".

The Commission intends to make the system for monitoring State aid even more rigorous, efficient arid neutral. In order to reflect the orientations contained in the White Paper, it will
shortly look at possible changes to the mechanism for controlling state aids. At the same time

**-33**

another objective will be to simplify and speed up the procedures for dossiers of minor impor
tance.

The policy for monitoring State aid can still be made more compatible with the Community's
objective of increasing economic and social cohesion. For one thing, the relatively large
amounts of State aid in the more prosperous regions remain an obstacle to economic and social
cohesion.

Finally, a similar effort must be made to make the Community's competition policy with regard
to State aid and mergers between companies more compatible with the action taken by the
Union under other policies implementing the Treaty, for example on research and transport.

_2._ _**Action**_

_**External markets**_

_Continue to seek resolution of issues_ which were not able to be resolved by the conclusion of
the Uruguay Round (aeronautics, steel, audio-visual, financial services, etc.)

_effectively combat_ _fraud,_ in particular that which concerns product origin (for example, high
technology products and textiles) by applying modern detection methods (notably that of electronic detection).

_Develop international rules on competition_ _and_ _mechanisms to ensure effective application_
_thereof,_ which take account of the consequences of the trend towards concentration and interpénétration of industries world-wide and open up markets still closed by practices which curb
competition.

Take account of the European Union's industrial interests both as exporter and as importer in
developing preferential relations with its trading partners.

_Establish an Industrial Assessment Mechanism_ along the lines of the Trade Assessment
Mechanism (TAM) based on the conclusions of the White Paper and on the Commission's existing resources in order to determine, with the cooperation of the non-member countries concerned, the nature and causes of the European Union's inadequate industrial performance on
markets on which the European Union's industry is potentially strongly competitive and drawing results therefrom in terms of priorities.

_Continue to improve the structure of the common customs tariff_ _m_ a manner which better reflects the industrial interests of producers and users.

_Establish a database (inventory),_ in collaboration with European industry, on the obstacles
standing in the way of European companies, market by market.

_Improve_ with the intention of making them more effective and operational _commercial policy_
_instruments,_ taking account of the changes in production structures and trade trends, particularly of the consequences of the increasing internationalisation of production.

_Consider ways in which commercial policy and defence instruments may contribute to the_
_development of services associated with the growing move away from a purely produc-_
_tion-based economy_ and to the smooth operation of markets.

_Improve_ _coordination between the measures taken to promote exports and investment and_
_other policies._

_**Internal market**_

_Continue to reduce overall public aid,_ taking account of regional imbalances, particularly by
making such aid more transparent, clarifying and simplifying the rules, which will entail reformulating some texts, and allowing easier intervention by third parties competing.

**34**

Look at, shortly, possible changes to the mechanism for controlling state aids

_Re-examine the aid authorisation criteria_ in order to redress the current bias towards physical
investment and to simplify the mechanisms for monitoring cases of minor importance.

_Continue the efforts to make the structural policies more consistent with the policies for_
_monitoring State_ _**aid.**_

**Improve coherence between** _**the rules**_ _applicable to state aids and the arrangements for_
_Community financing_ _**under non-structural**_ _policies._

_Strengthen the internal market,_ inter aha by supplying products and services on a competitive
basis to undertakings which, as industrial users, must have the best quality at the lowest cost if
they are to withstand international competition, particularly in the gas, electricity and telecommunications sectors.

**D.** **Modernise the** **role of** **the public authorities**

_**Modernisation of the Community and national authorities' organisational structures and sup-**_
_**port procedures just as fast as those applied by businesses will avoid adding to taxes and social**_
_**security contributions. This is essential in order to improve industrial competitiveness. Tradi-**_
_**tional administrative and managerial practices often excessively cumbersome and slow no**_
_**longer correspond to current economic developments. Public authorities must rapidly adapt to**_
_**this new reality.**_

_**The public authorities must also play their role effectively both in order to create an attractive**_
_**environment for industrial activity in the European Union and to promote the development of**_
_**areas for which they bear direct responsibility as a customer or investor, such as health care,**_
_**education and**_ _**communications.**_

_**1.**_ _**Objectives**_

The European Union has played a decisive role in the establishment of a single internal market,
which has removed a host of unnecessary inspections and forms created by the bureaucracy of the
past. The existence of this single market is a great asset. Completion of the single European market
without frontiers presents businesses with an opportunity to benefit from economies of scale, to cut
their administrative and financial costs, to gain easier access to more competitive markets and to
co-operate more closely with other firms. This integrated market must be harnessed dynamically
and further improvements made, for example on indirect taxation, standardisation and the openingup of public contracts. In order to reap the full benefits, the European Union must modernise its
support and:

_move on from the phase of establishing a legal framework (the objective for 1992) to the_
_phase of giving priority to cooperation._ The objective now, in a context marked increasingly
by deregulation and in which conventional harmonisation has reached its limits, is to enable
businesses in the Union to reap the full benefits of the integrated internal market by continuing
to eliminate the distortions created by the legislative, regulatory or administrative disparities.
To this end, consideration must be given to application, case by case, of the provisions of Articles 101 and 102 of the Treaty, as proposed in the Commission's communication on the subsidiarity principle (SEC(92)1990 final), in order to remove certain remaining obstacles with an
adverse effect on competitiveness;

35

encourage _administrative_ _cooperation_ _between the Member States and the Commission_ to
overcome the difficulties encountered by businesses wishing to benefit from the internal market;

_simplify the ways in which the public authorities organise and exercise their responsibilities_
with a bearing on industrial competitiveness, for example by a more systematic cost-benefit
evaluation of any proposed legislation on the EU's competitivity;

continue _deregulation and administrative simplification_ in order to remove unnecessary constraints which impair companies' competitiveness and act as a disincentive for innovation and
employment, particularly with a view to facilitating the introduction of new methods of organising work;

_encourage public authorities_ to adapt to the globalization of the world economy, which is already having consequences in the area of the information society for example, along lines
shared between competing activities and those applicable to the non-competitive sector;

ensure _closer cooperation with operators on matters affecting industrial performance,_ by improving the information on market trends, technologies and framework conditions likely to influence the performance of European industry;

_bring the administrative departments responsible for promotion of research and industrial_
_development closer together;_

continue the efforts to _reduce the costs arising from the national and Community regulations_
by evaluating the costs of and simplifying all new proposals;

create _conditions conducive to business expansion,_ innovation and research by removing the
regulatory and other obstacles and guaranteeing the free movement of factors of production in
the European Union.

The public decision-making centres shaping industrial activity are growing in number and exercising their powers without any real overview or constant coordination:

at world level, these responsibilities are shared between a large number of structures, some
permanent, others of various forms; often their effectiveness is disputed;

at Community level, decisions on industrial issues are taken at Council meetings on many different subjects (general affairs, industry, telecommunications, internal market, research, environment, transport or energy). What is more, Article 13Oh of the Treaty expressly recognises
the need for coordination, which was stressed by the European Council in Corfu, which invited
the Commission to take all necessary initiatives to promote such coordination in the area of research, notably in connection with all the issues arising from the information society, which
will be dealt with by the same Council of Ministers;

at national and regional level, administrative structures vary from one Member State to another
and the sharing of responsibility is extremely diverse (arbitrary division between industry, research, telecommunications, business policy, etc.).

The USA and Japan have addressed these problems by setting up broader cooperation bodies such
as the Competitiveness Policy Council in the USA, which brings together representatives of the
leading players involved in industrial development. The public authorities in Europe, including the
Commission, must consider the action to be taken on these trends.

_2._ _Action_

Continue the deregulation processes :

36

_**16**_

_**17**_

_**18**_

_**19**_

_**20**_

   - by examining, on the basis of the problems encountered by businesses, the prospects of
using Articles 101 and 102 to remove certain disparities stemming from the continuation of
national legislation diverging from that of other countries;

   - in particular, by drawing on the telecommunications scheme started by the Commission
with the aid of Directives based on Articles 90 and 100a, as regards the harmonisation aspects, on Article 129 in the case of the trans-European networks, on the Council Resolution of 22 June 1993 and on the conclusions of the high-level working party on the _infor-_
_mation society;_ and

   - adopting a dynamic approach to reinforce competition on the energy market in conjunction
with redefinition of tasks of general economic interest.

_Redefine public service objectives_ to make it clearer which tasks cannot be performed on the
basis of competition alone and define a management framework ensuring better use of regulatory instruments.

_Use the European Union's Structural Funds to bring forward and accompany industrial_
_change,_ both in general and with the aid of the new objective 4 of the Community initiative

programmes.
_Facilitate, notably in the new_ _Community_ _initiative_ _programmes,_ _[16]_ particularly the PME [17] and
ADAPT [18] initiatives, _the development of partnerships between big businesses and small firms_
_and the establishment of the networks and_ _clusters™_ essential to promote:

closer coordination between big businesses and their suppliers, for example between car
makers and component suppliers; [20 ]

_access for small firms to new technologies_ or technologies to add on to those already at
their disposal in order to reduce their "entrance fee";

_harnessing of the European Union's regional diversity,_ by combining its industrial, technological and geographical advantages.

_Systematically streamline procedures and make them more transparent,_ in order to facilitate
decision-making by operators, _based on an analysis of the impact of_ _the_ _national and Com-_
_munity regulations on competitiveness and employment;_ for example, in fields such as technical standards for machinery, rules on biotechnologies, legislation on emissions of pollutants,
health and safety at work, working hours and admission to certain professions. This exercise
will centre on the work of the Working Party set up within the Commission by the European
Council in Corfu to simplify legislation and administrativejjrocedures.

_The Community initiatives are proposals by the Commission to the Member States on action of particular_
_interest to the European Union to be taken in certain fields under the Structural Funds._

_The PME initiative is designed to help small firms in industry or the services sector, particularly firms in_
_the less developed_ _regions,_ _to adapt to the single market and become competitive at world level._

_The ADAPT initiative is designed to help the workforce to adapt to industrial change and to improve the_
_way the labour market works in order to restore growth, employment and the competitiveness of_
_undertakings in the European Union._

_A "cluster" is a group of industrial competitors which cooperate to form a dynamic pool of knowledge_
_generating external benefits (source: "European industrial competitiveness", Torger Reve & Lars_
_Mathiesen, joint study by the European Commission and the_ _UNICE,_ _June 1994)._

_Cf. the communication from the Commission on the European Union automobile industry_ _(COM(94)49)._

**37-**

Speed up the establishment of _trans-European networks for the interchange of data_ between
administrations and facilitate the development of information infrastructure and services for
businesses.

_Use the Community's instruments (research, Structural Funds, etc.)_ to support specific industrial cooperation projects involving companies from several Member States and to set a
particularly good example (notably by co-ordinating the appraisals of files by the national
authorities within the Community support frameworks).

Finally, the Commission proposes examining the expediency of simplifying the many structures involved in industrial policy and making them more consistent and of evaluating the experience with
broader concertation bodies such as the Competitiveness Policy Councils.

38

**EUROPEAN COMMISSION**

Rue de la Loi, 200 B-1049 Brussels, Belgium

line 32-2-295.79.65 Standard 32-2-299.11.11 . ^ 32-2-296.30.28

Telex COMEU B.2-1877 - Telegraphic address COMEUR Brussels

**•57**

**CONTENTS**

**ANNEX I. ANALYSIS OF THE STATE OF THE EUROPEAN INDUSTRY** **2**

**A.** **Diagnosis of industry's performance** **2**

**B.** **Relative position of the Member States** **2**

**C.** **Opinion of industry** **3**

**D.** **Competitiveness, cost of factors and relocation** **3**

**E.** **Competitiveness and differentiation strategies** **.** **5**

**F.** **Importance of service industries** **5**

**G.** **Performance of manufacturing industry** **'.** **6**

**ANNEX II. STATISTICAL TABLES** **10**

**ANNEX III.** **GRAPHICS** **29**

**A.l**

```
ANNEX I. ANALYSIS OF THE STATE OF THE EUROPEAN INDUSTRY

```

**A. Diagnosis of industry's performance**

**In** spite of the encouraging economic outlook in the short, medium and long terms, most
assessments of the state of EU industry continue to emphasize its worrying loss of competitiveness compared with its main competitors, particularly the other members of the
Triad.

Although a strict comparison of the European Union's performance in terms of certain
macroeconomic factors clearly shows that the Union is in an unfavourable position (see the
tables and graphs annexed to the Communication), this pessimistic finding must be seen in
perspective:

—
_it is based on analysis of a narrow range_ _of_ _factors, while industrial competitiveness_
_is a very complex problem extending far beyond a simple comparison of_
_macroeconomic variables, however important these may be,_
— _the_ _aggregated_ _average figures for the Union do not take account of the relative_
_situation of the Member States, some of which have produced remarkable perform-_
_ances compared with other OECD countries,_

—
_the growing importance of service industries, which it is estimated account for over_
_60% of the added value and employment generated by total EU production, is not_
_fully taken into account,_

—
_it cannot reflect certain fundamental elements underlying all competitive perform-_
_ance: the microeconomic dimension, the enterprise spirit, individual effort, the_
_commercial approach of individual companies, and the dynamism of subsidiaries_
_and clusters of companies. The European Union has numerous examples of success_
_stories which can be traced back to these elements, the recipes for which merely_
_have to be more widely disseminated_ _within_ _the industrial fabric._

These comments are fiuidamental, because assessments of the state of EU industry are
being made in a context of economic crisis when it is difficult to determine to what extent
the unfavourable comparison of certain quantitative factors is not a reflection of the poor
economic environment.

It is also important to remember that industrial competitiveness is based essentially on the
existence, within the industrial fabric, of the largest possible number of companies in a
position to expand and make profits on all markets on which they are active. The more exacting the demand and the stronger the competition, the more a company's positive performance is indicative of competitiveness.

These conditions exist in the European Union, and the positive results achieved by a very
large number of companies demonstrate that they have been able to adjust to this competitive environment.

**B.** **Relative position of the Member** States

While EU manufacturing industry as a whole has clearly not yet managed to overcome
certain structural disadvantages, the 1993 edition of the World Competitiveness Report
paints a less alarming picture of the competitive position of the European Union. Taken
individually, certain Member States are up among the leaders for most of the 370
(quantitative and qualitative) factors assessed in this annual report.

-A.2

This is true in particular of Denmark (3rd), Germany (5th), the Netherlands (6th) and the
Belgo-Luxembourg economic union (10th). [1] Germany's slide to fifth position (2nd in
1992) is largely due to the impact of reunification. Other States (France and the United
Kingdom) have improved their positions compared with previous years and are at absolute
levels comparable with the best. Only Certain countries in the south of the Union continue
to have low levels of competitiveness due, to a large extent, to structural problems linked
to the restructuring of certain basic industries with low value added.

These rankings are important, because debates about competitiveness are often limited to a
comparison of certain quantitative (macroeconomic) factors which effectively exclude both
the relative performances of companies and the growing contribution of services and other
qualitative factors.

C. **Opinion of industry** **[2 ]**

Industry itself is of the opinion that there is no single factor in Europe to which the relative
decline in the competitive position of European industry (which is essentially expressed in
terms of trade performance on external markets) can be attributed. Likewise, there is no
single solution.

In addition to the well-known unfavourable elements (deterioration of the balance of trade,
exchange rate appreciation, lower growth rate, lack of flexibility of the human factor,
etc.), industry identifies the following additional factors:

hourly pay rates have increased faster, reaching a differential of about 20% in 1992,
the tax burden averages 40% in the European Union, compared with 30% for its part
ners,
there is a major difference in the productivity of manufacturing industry - about 30%
compared with the USA and 10% compared with Japan (McKinsey) - in spite of
similar growth rates over the last ten years,
there are deficiencies in the promotion of physical and intangible investments by companies (especially small and medium-sized companies) and weaknesses in management
expertise.

Among the solutions put forward, industry proposes the adoption of a series of policies
designed to improve the macroeconomic environment and to make markets work more efficiently.

D. Competitiveness, cost of factors and relocation

_In general, EU industry has focused its drive to regain competitiveness on costs and_
_productivity,_ and has achieved significant results in recent years.

Analysis of the financial state of the 1 380 largest European industrial companies [3] for the
period 1987-1992 shows that turnover per employee grew from ECU 99 000 to
ECU 136 000, [4] or about 6% a year, whereas the number of jobs increased by only 2.5%.
Moreover, the increase in jobs was partly due to mergers and acquisitions (carried out in
preparation for completion of the internal market) rather than real needs.

_Japan_ _(1st)_ _and the USA (2nd) took the first_ _two_ _places in_ _1993._

_UNICE_ _- Competitiveness Report 1994._
_Dable_ _database (DG_ _111)._

_The figures for the USA and Japan for the end_ _of_ _the period are ECU_ _150_ _000 and ECU 220 000_
_respectively._

**- A . 3 -**

The World Competitiveness Report 93 shows that eight Member States are among the top
ten OECD members in terms of growth in GDP per employee (period 1983-1991), with
rates nearing or exceeding 2% a year (Ireland - 3.68%, Italy - 2.60%, Portugal - 2.29%,
France - 2.15%, Benelux - 1.92% and Spain - 1.91%). Only Germany experienced negative growth (-2.33%) as a result of unification. As regards value added per employee in
manufacturing industry (base: 1989), the report shows that six Member States (Benelux,
France, Germany, Italy) are among the ten leaders, behind Japan. However, Japan's performance is 14% better than that of Benelux (the best placed Member State). The USA is
down in 11th position with a performance similar to that of Italy. In terms of the productivity of capital (value added per ECU invested), the USA is well in the lead with
ECU 6.63, ahead of three Member States (United Kingdom - ECU 5.15, Denmark ECU 5.06, Ireland - ECU 5.00). Japan's performance is the weakest of all the countries
studied (ECU 2.7, or about 1/3 of that of the USA).

These data tend to confirm that EU companies have clearly targeted their productivity
drive on reducing the labour factor and its cost, for obvious reasons.

_This trend appears to be far from over._ It started in large companies, and is now spreading to small and medium-sized companies, even though the production labour cost factor is
falling as a proportion of the costs of production of most products and services (at least in
manufacturing industry), while other factors, such as development, industrialization, control and distribution costs, are rising.

_This drive for improved cost competitiveness is sometimes accompanied by the drawing-_
_up of industrial relocation strategies_ to regions with comparative advantages in terms of
the cost of certain factors, in particular labour.

Analysis of the _direct foreign investment_ _(DFI)_ flows of EU companies shows that the
main objective of relocation strategies is to improve the companies' position on growth
markets rather than substitution strategies (production intended for re-exportation to
Europe). _The relocation of EU production to low-labour-cost countries is taking place_
_on a much smaller scale than is generally_ _believed_ _[5 ]_

Relocation is still limited to specific sectors (such as textiles, clothing, footwear, consumer
electronics, and electronic components) and activities (subcontracting of intellectual work
with little innovative content) for which the cost and flexibility of the labour factor are still
relatively important.

The DFI flows in 1991 of the four* most active Member States (France, Germany,
Netherlands, United Kingdom) break down as follows:

**1991** **ECU billion** %

Total direct foreign investment (DFI) 57.1 100

  - in other Member States 32.5 57

  - outside the Union 24.6 43

  - in non-OECD countries 5.8 10

-in Asia 3.6 6

**Total national investment of the 4 States*** **707.5**

_These figures show that DFI accounts for a relatively small proportion (8%) of total na-_
_tional investment, that the European Union is a major destination for DFI flows_

_"Investment strategies of EU_ _companies_ _in non-European countries", Panorama of the industry_
_of the Union 94._

**- A 4 -**

_(32.5%),_ _and that the proportion of_ _DFI_ _going to the least industrialized countries_
_(9.4%) is relatively modest._

From a sectoral point of view, DFI outside the European Union by EU companies is concentrated in manufacturing and energy (mainly oil). No data are available on which activities are subcontracted. The leading manufacturing sector is chemicals, followed by electrical engineering; food, drink and tobacco; and motor vehicles. However, DFI in the chemicals sector outstrips DFI in all these other sectors put together, accounting for nearly half
of extra-EU direct foreign investment (1991 data for the UK).

E. Competitiveness **and differentiation** strategies

_Although some efforts have been made in this direction, EU industry appears to be less_
_active in implementing measures to increase the added value of products by means of_
_differentiation_ _and_ _the development of competitive advantages._ This is particularly true
of a very large number of small and medium-sized firms which form part of the logistical
industrial fabric of large companies.

The problem of costs of production is very often approached exclusively from the angle of
reducing the cost of the labour factor by improving productivity. More detailed analysis
shows that reductions in production costs tend to involve structural changes accompanied
by increased qualification of labour and added value, rather than simple mechanical reductions in numbers of jobs, particularly production jobs.

This type of situation tends to affect all products, not only those intended for the final consumer, but also capital goods and intermediate products and their upstream manufacturing
processes and the services incorpoiated into them.

Industry itself recognizes the validity of this analysis when it recommends measures tending to encourage the development of dynamic industrial clusters and to improve management practices within companies. [6 ]

F. Importance of service industries

_Measurements of the competitive performance of EU industry (and that of its competi-_
_tors) generally fail to take account of the growing importance of service industries._

In the broad sense, service industries include both market services (repairs, commerce,
catering, accommodation, transport, communications, banking, insurance, etc.) and nonmarket services (health care, education, research, social welfare and public services).
These all help to strengthen the competitive advantages of the Union.

A recent essay [7] gives a clearer understanding of this dimension, in spite of problems of
methodology, data collection and data analysis.

In terms of added value and jobs, the service sector accounts for-almost two-thirds of the
EU economy. Three-quarters of the service sector is made up of market services, mainly
repairs and wholesale and retail distribution. The remainder is made up of non-market
services.

Since 1980 the added value of services has increased by 8.7% a year, whereas the average
annual increase in total added value in the EU was 7.8%. As a result, the contribution of

_UNlCE's_ _Competitiveness Report 1994._
_Panorama of Industry_ _1994:_ _"Service industries in a changing EC economy",_ _NEI._

**A.5**

the service sector to total added value has increased by 5.6 points, the share of market
services having increased slightly during the 1980s and that of non-market services having
fallen. This growth is largely due to the increase in the share of other market services.

In terms of _intra-EU direct foreign investment (DFI),_ services accounted for ECU 21.3
billion in 1989. Intra-EU investment exceeded both investment in the EU from non-EU

sources (ECU 16.8 billion) and EU investment outside the EU (ECU 11.9 billion). The
banking sector accounted for about 40% of intra-EU investment, totalling ECU 9.6 billion
between 1984 and 1989, thus contributing to the increase in intra-EU DFI. During the
same period, non-EU banking groups increased their investments in the Union by nearly
ECU 7 billion, out of a total for all service sectors of ECU 13.2 billion.

Similar trends are observed in terms _of jobs._ In 1990, nearly two-thirds of EU jobs were in
service-related activities (about 80 million people in 10 Member States). Compared with
the situation in 1980, total employment in these sectors had increased by 13.5 million
(+1.9% a year), whereas in agriculture and manufacturing industry it had decreased by 3
million and 4 million respectively. The percentage of jobs accounted for by the service
sector increased by 7.8 points, which is above the rate of growth in value added.

These data merely confirm the analyses of R. Reich on the new segmentation of the labour
market. [8] They also underline the absolute necessity of developing adequate data collection
and measurement instruments in this field.

G. Performance of manufacturing industry

Analysis of manufacturing trends shows that _consumer goods_ sectors have made the most
progress in the last six years. Of the 65 sectors analysed (see table below), about 40% (28
sectors) recorded constant growth, and three-quarters of these (20 sectors) recorded higher
export rates than internal production rates, examples being food and soft drinks. Most
sectors producing _intermediate products_ recorded medium to strong growth, the best
placed sectors being rubber and plastics processing and secondary transformation of metals.

The _investment goods_ sectors, on the other hand, recorded slow growth during this period.
The weak performance in these sectors appears to be continuing and remains a source of
concern for the public authorities insofar as these are high-value-added products accounting for a large share of extra-EU trade.

Most of the sectors recording strong growth are high-technology sectors characterized by
growing worldwide demand in recent years. In contrast, many of the sectors which recorded the weakest growth rates or negative growth are directly affected either by changes
in consumer tastes (e.g. furs, alcoholic beverages, tobacco) or by the increasing market
share taken by foreign competitors (e.g. musical instruments, watches, toys and sports
goods) to the detriment of EU producers.

_"The work of Nations"_ _1991._ _See also the study of_ _"European Industrial_ _Competitiveness", T. Rev_
_and_ _L._ _Mathiesen,_ _1994,_ _carried out jointly for DO_ _III/SNF_ _and_ _UN_ _ICE._

**- A . 6 -**

**Sectoral analysis of the growth of EU production and the trade balance**
**(manufacturing industries) (1986-1992)**

**(base = annual % growth)** **Capital** **Intermediate** **Consumer** **Total**
**Number of sectors** **goods** **products** **goods**

**Growing**

**—** **improvement of trade balance** **5** **3** **20** **28**
**greater than growth of EU**
**production**
**—** **improvement** **of trade balance less** **1** **1** **1** **3**
**than growth of EU production**
**— growth in EU production** **accom-** **3** **13** **8** **23**
**panied by deterioration** **of** **trade**
**balance**

**Declining**

**— fall in EU production partly offset** **1** **1** **5** **7**
**by improvement in trade balance**
**—** **fall in** **EU production accompanied** **3** **-** **1** **4**
**by deterioration** **in** **trade balance**

**Number of sectors analysed** _******_ **18** **34** **65**

**Source: Panorama of Industry 94**

**The following tables (see also annexes 24 and** 25) analyse **the** intensity **of** exports **and im-**
**ports in the main sectors of manufacturing industry for the period 1986-1992, using the**
**following classification: rapid-growth sectors (>5% a year), moderate-growth** sectors (35% **a** year) **and slow-growth or negative-growth sectors.**

**Rapid-growth sectors and intensity of foreign trade**

**(base 1992)** **Annual %** **Intensity of** **Intensity of**
**growth in** **exports** **imports**
**production**
**(86-92)**

**High intensity of exports**

**-** **Pharmaceuticals** ***** **315** **337**

**-** **Medical and surgical equipment** **'** **"„** _**.'**_
**Telecommunications equipment** **_',** **',** ***_**
**Office and computer equipment**

**Low intensity of exports**

**Plastics processing** **7.1** **9.0** **7.1**
**Secondary transformation of metals** **5.7** **4.8** **4.5**

**-** **Rubber and plastics** **5.3** **10.0** **8.1**
**Soft drinks, mineral waters** **5^)** _**22**_ **0.4**
**Source: Panorama of Industry** 94

Two of the eight sectors which have experienced rapid growth (more than 5%), pharmaceuticals and medical and surgical equipment, are closely linked to the rapid rise in demand for health services. Two other sectors, telecommunications equipment and office
computer equipment, have benefited from the sustained demand for industrial services and

-A.7

the trend towards "electronification". The growth of three other sectors, rubber, plastics
and the secondary transformation of metals, is due to the rapid expansion of demand in the
transport sector. The growth in the soft drinks and mineral waters sector must be interpreted in the light of changes in consumer tastes.

**Medium-growth sectors and intensity of foreign trade**

**(base 1992)** **Annual** **%**

**growth in**
**production**

**(86-92)**

**Intensity of**
**exports**

17.5

17.7

16.0

16.9

22.4

8.4

11.3

5.6

6.9

2.0

7.3

6.1

8.8

4.4

2.8

4.7
Ï.9

8.7

3.7

11.5

8.6

8.2

7.7

7.5

11.2

9.1

6.2

**Intensity of**
**imports**

12.7

19.4

11.3

13.0

40.1

17.7

7.2

21.2

2.3

1.8

3.7

11.0

19.3

50.6

0.8

5.1

2.3

34.3

2.8

8.8

2.5

27.3

5.3

6.5

8.2

7.2

4.8

**High intensity of exports**

— Electric lighting

—
Electrical engineering
— Domestic electrical appliances
— Chemicals and man-made fibres

— Consumer electronics

**Low intensity of exports**

—
Fruit and vegetable processing
— Motor vehicle parts
— Semi-finished wood products

— Cocoa and confectionery
— Wooden packaging
— Constructional steelwork

— Paper, printing and publishing
— Oils and fats

-r- Industrial preparation of wood
— Baking

— Meat

— Soaps, detergents and toiletries
— Pulp, paper, board

—
Forging
— Motor vehicles and components
— Animal feedingstuffs

—
Marine products
— Metal products

— Paper and board processing
— Glass

— Wooden furniture

—
Food, drink, tobacco

Source: Panorama of Industry 94

4.6

4.0

3.8

3.5

3.2

4.9

4.8

4.6

4.5

4.4

4.4

43

4.3

4.3

4.3

4.2

4.0

4.0

3.9

3.8

3.7

3.7

3.6

3.5

3.3

3.3

3.0

The medium-growth sectors with a high intensity of exports achieved major productivity
improvements during this period (while employment levels stagnated), which helped to
maintain their competitiveness on world markets. Those with a low intensity of exports
include a number of sectors where import penetration is also generally weak (the exceptions being wood and pulp, which import a large proportion of their raw materials from the
Nordic countries). No significant employment trend (upwards or downwards) can be detected on account of the heterogeneity of the sectors concerned.

A.8

The main cause of the relative; decline of the slow-growth sectors with low intensity of exports is the weakness of domestic demand. Many of these sectors are linked to the construction industry and were severely affected by the crisis, while certain foods have been
affected by a change in consumer tastes.

**Slow-growth sectors and intensity of foreign trade**

**(base 1992)** **Annual %**

**growth in**
**production**

**(86-92)**

**High intensity of exports**

Basic industrial chemicals 2.7

Optical & photographic instruments 2.6
Footwear 2.6

Instruments 2.5

Shipbuilding 2.0
Ceramic goods 1.6
Aerospace equipment 1.6
Toys and sports goods L2
Railway rolling stock 1.2
Mechanical engineering 0.9
Measuring and precision instruments 0.8

Knitwear 0.3

Textile machinery -0,2
Alcohol and spirits -0.2
Leather & leather goods -0.2
Transmission equipment -0.3
Musical instruments -1.4

Machine tools -1.6

Clocks and watches -2.9

Agricultural machinery -4.0
Furs and fur goods -5.3

**Low intensity of exports**

**Intensity of**
**exports**

18.7

50.3

22.3

34.7

25.8

20.4

39.5

27.8

29.3

31.5

20.8

22.1

61.6

28.0

31.8

25,8

36.0

28.1

73.5

22.0

65.1

**Intensity of**
**imports**

17.7
6Ô.4

23.5

41.7

14.4

9.1

35.0

60.1

8.7

17.7

16.7

38.7

26.4

3.4

35.2

17.7

55.7

18.8

88.2

11.5

59.4

Non-metallic mineral products
Cement, lime, plaster
Grain

Clothing
Clay products
Dairy products
Cycles and motorcycles
Boilers and metal containers

Foundries

Tobacco

 - Wine

Brewing and malting

Non-metallic mineral products 2.8 8.6 4.5
Cement, lime, plaster 1.9 2.3 2.4
Grain 1.8 8.0 0.4
Clothing 1,8 14.9 29.8
Clay products 1.6 3.9 0.7
Dairy products 1.6 5.9 1.2
Cycles and motorcycles 1.5 12.5 42.6
Boilers and metal containers 1.0 7.3 2.2

Foundries 0.6 5.2 3.3

Tobacco 0.4 3.7 1.3

- Wine 0.1 6.9 0.6
Brewing and malting 0.0 4.5 0.4

Source: Panorama of Industry 94

2.8

1.9

1.8

1,8

1.6

1.6

1.5

1.0

0.6

0.4

0.1

0.0

8.6

2.3

8.0

14.9

3.9

5.9

12.5

7.3

5.2

3.7

6.9

4.5

A.9

ANNEX II. STATISTICAL TABLES

Exchange rate fluctuations 1.

Link between industrial production and employment creation in the European Union 2.

_Competitive situation of the European Union_

Market shares of main economic regions 3.

Total trade in the TRIAD 4.

EU trade in goods 5.

Total EU trade balance 6.

Trade by region (in value terms) 7.

Trade by region - average annual growth 8.

Leading importers in world trade 9.

Leading exporters in world trade 10.

New industrial economies of Asia 11.

Foreign direct investment outflows 12.

EU foreign direct investment 13.

_Intangible investment_

Educational expenditure 14.

R&D investment by economic region (1991) 15.

EU R&D investment by sector (1989) 16.

Growth in R&D investment by companies 17.

Intensity of R&D investment by companies 18.

Inventions by region of origin 19.

Balance of technological payments 20.

Link between R&D and trade performance (1990) 21.

Link between technological intensity and wage level (1990) 22.

Wage level as a function of technological intensity 23.

_EU position on growth markets_

Production growth for some sectors in the EU (1986-92) 24.

Trade balance for some sectors in the EU (1986-92) 25.

Manufacturing output growth forecast (1992-2010) 26.

Sectoral specialization of exports of manufactured goods (1992) 27.

A. 10

Geographical specialization of exports of manufactured goods (1992) 28.

Sectoral and geographical specialization of EU exports of manufactured goods (1992) 29.

Sectoral specialization trends 30.

_Growth markets: some examples_

Data processing and telecommunications industries (1995) 31.

US information market (1995) 32.

Environment market: breakdown by region and market (2000) 33.

Environment industry: production and exports (2000) 34.

Top-of-the-range products market - breakdown by segment and growth rate 35.

Top-of-the-range products market - geographical breakdown 36.

Health and biotechnology market 37.

Specialization in high technology industries 38.

High technology products market - EU trade 39.

High technology products market-level of opening-up 40.

High technology products market - trade performance 41.

                                                         - A l l 

**1.** **Exchange rate fluctuations**

Because of the considerable fluctuations in exchange rates between European currencies,
including the ECU, on the one hand, and the US dollar and Japanese yen, on the other, the
following assessments of competitiveness should be viewed with caution.

The US dollar lost 54% of its value against the ECU between 1985 and 1993, while the
yen appreciated by 29% between 1990 and 1993.

**1980-84** **1985-89** **1990-93**

ECU/US$ -43% 44% -8%

ECU/Yen ^41% -16% -29%

_Source: EUROSTAT_

**2.** **Link between industrial production and employment creation in the European Union**

The downward trend of industry's share of GDP and the corresponding upward trend in
services must not blind us to the essential role that industry plays in the economy. There is
a clear correlation over a long timescale (1970-1995) between growth in industrial production and employment creation.

_Competitive situation of_ _**the**_ _European Union_

**3.** **Market shares of** **main** **economic regions**

Although it is still higher than that of the United States or Japan, the European Union's
market share of world exports of manufactured goods has fallen: from 29% in 1980 to
25% in 1986 and 24% in 1992.

**Market share as % of world exports of** **1980** **1986** **1992**
**manufactures**
(current prices and exchange rates)

EU 29% -25% 24%

USA 18% 14% 17%

Japan 15% 18% 17%
Others 39% 43% 42%

_Source: OECD_

**4.** **Total trade in the TRIAD**

Analysis of triangular trade between the members of the Triad - the European Union, the
United States, and Japan - shows a predominance of transatlantic and transpacific trade.

The balance of trade between the European Union and the United States went into the red
in the late 1980s, but recovered substantially in the early 1990s: between 1991 and 1993
the European Union's trade deficit with the United States fell by 90% from ECU 21 billion
to ECU 2 billion.

At the same time, the European Union's trade deficit with Japan fell by 25% from ECU 30
billion to ECU 25 billion, while the United States' trade deficit with Japan increased by
45% from ECU 35.1 billion to ECU 50.7 billion.

-A.12

In 1991, the European Union's trade deficit with Japan was equivalent to 85% of the
United States' deficit with Japan. In 1993 it was equivalent to just 49%.

Trade Balance (ECU billion) 1991 _1992_ 1993
EU-US -21.0 43.0
EU-Japan -30.0 -31,0
US-Japan -35.1 -38.0

-2.0

-25.0

-50.7

_Source: OECD_

-21.0

-30.0

-35.1

43.0
-31,0
-38.0

EU trade **in goods**

The increased integration of the European Union has been accompanied by the substitution
of trade with the rest of the world by trade between Member States of the Union.

Since the end of the 1960s, intra-EU trade (13% of GDP in 1994) has exceeded exports to
non-EU countries (9% of GDP in 1994). In recent years this gap has widened on account
of the relative decline of exports to non-EU countries as a proportion of the GDP of the
European Union.

**International trade** as % **of GDP** **1980** **1990** l?94fcst T )
Intra-EU trade 12% 14% 13%
Extra-EU exports 10% 9% 9%

12%

10%

14%

9%

13%

9%

_Source: EUROSTAT_

Total EU trade balance

Goods still make up the bulk of the European Union's exports. Since the mid-1980s, however, the contribution of trade in goods to the trade balance has been declining and even
became negative in the early 1990s. In spite of a relative decline, trade in services continues to make a positive contribution to the overall balance of trade.

Trade balance (ECU billion) 1985
_**mm**_ _**mm**_
Goods 9 _**WE**_ M l
Services 27

9

27

_**WE**_ M l

111

**11**

_Source: EUROSTAT_

_**WE**_
**11**

Trade by region (in value terms)

World trade totalled US$ 3 700 billion in 1992. Asia is the leading trading area, followed
by North America and the European Union (extra-EU trade).

US$ billion-1992 Imports Exports Balance

```
                                                                                           1 I l » l M I I II I I I | 1 I I I I I I I I I I I I I L I l l Hill
```

Asia `806` `885` 79

`92` 2

`569` -68

_Source: GATT_ _-_ _Euros tat_

79

107

-101

406

- of which Japan
North America

-ofwhich USA

Latin America

Middle East

Africa

Central and Eastern Europe and CIS
EU (excl. intra-EU trade)

```
806

233

684

554

173

128

102

 90

636

```

```
885

340

583

448

151

125

 95

 92

569

```

-22

.3.

*7

A.13

8. Trade by region - average annual growth

The rapid expansion of world trade is a result of the structural changes which have been
taking place for many years in the world economy and of more recent developments/The
structural changes include the growing share of manufactured goods in world trade, the
boost given to world trade by the multiplication of international investments, and the fall in
the price of transport and communications, while the recent trends include the unification
of Germany and the resulting surge in imports, the strong growth of imports into North
America and Latin America and the continuing strength of the markets in certain Asian
countries.

The trade figures for these regions for 1992 clearly show that the expansion in world trade
is due to the large rise in the volume of imports into and exports from North America,
Europe and Asia, in particular the dynamic economies of Asia.

**Annual growth** (1980-1992) - volume Imports Exports
Asia 7.3% 8.9%

North America 6.5% 5.9%
Western Europe 5.6% 6.4%

8.9%

5.9%

6.4%

2.5%

-4.4%

~L9%

_Source: GATT_

Latin America

Middle East

Africa

9,10. Leading importers and exporters in world trade

7.3%

6.5%

5.6%

2.8%

1.9%

5.0%

Outside the European Union, in 1992 the United States remained the world's leading goods
exporter, followed by Japan and Canada.

The fastest growing markets were Hong Kong, China, South Korea, Taiwan, and Malaysia.

US$ billion -1992

US$ billion -1992 annual growth

(1980-92) - volume

Imports Exports Balance Imports Exports

EU (extra-EU) 636 569 -68 5% 5%
USA 554 448 -106 7% 6%

Japan 233 340 107 4% 8%

Imports Exports Balance

107

5

-4

-5

4

10

-9

0

-16

-10

6

-1

1

5%

6%

8%

5%

16%

13%

14%

13%

569

448

340

134

120

77

85

82

64

66

46

44

56

43

41

-68

-106

5%

7%

4%

6%

15%

11%

12%

11%

10%

5%

9%

7%

3%

6%

11%

Canada

Hong Kong

South Korea

China

Taiwan

Singapore
Switzerland

Mexico

Austria

Sweden

Australia

Malaysia

636

554

233

129

123

82

81

72

72

66

62

54

50

44

40

10%

7%

8%

8%

5%

6%

10%

_Source: GATT_

A.I4

11. **New industrial economies of Asia**

Trade is developing rapidly in Asia. However, the new industrial economies of Asia are
still minor trading partners for Europe, and Europe invests much less there than the United
States and Japan.

**US$billidnil992** **Exports** **Imports** **Trade**
**balance**

**US$billidnil992** **Exports** **Imports** **Trade** **International**
**balance** **investments**

EU **39** **51** **-12** 842
**USA** ill **is:;-** 1298

11;;

Japan II **i i** 1065

**39**
ill
II

**51**
11;;

**-12**
**is:;-**
**i i**

842

1298

1065

**12.**

_Source: OECD_

**Foreign direct investment outflows**

The countries of the Triad generate the bulk of international investment.

Foreign investment by the European Union increased substantially in the 1980s, from an
annual flow of ECU 10 billion in 1982 to ECU 32 billion in 1991. Investment flows increased dramatically after 1985, reaching ECU 43 billion in 1989, before falling to
ECU 32 billion in 1991.

During the 1980s, foreign investment by the United States and Japan followed a similar
trend to that of the European Union. US foreign investment started rising rapidly in the
mid-1980s, then slowed down from 1988. In 1989, Japanese foreign investment was
greater than the foreign investment of the European Union, but it has slowed down considerably since then.

_Source:_ _DRI_

**13.** **EU foreign direct investment**

The stock of foreign investment in the European Union doubled between 1987 and 1991,
while European investment in the rest of the world increased by 50% over the same period.

In spite of the faster growth of foreign investment in the European Union, the balance
remains negative for the European Union, which invests more abroad than it attracts from
abroad.

-A.15

**ECU billion** imlâirili0ïl **Outward** **FDI** **Balance**

```
1987 108 201

1988 134 253

1989 169 275

1990 170 275

1991 195 297

```

```
108

134

169

170

195

```

```
201

253

275

275

297

```

```
   93

  119

  106

  105

  103

```

_Source:_ _DRI_

**Intangible investment**

**14.** **Educational expenditure**

Education is a prime example of intangible investment, as it prepares the future of the
individual and of society.

The resources devoted to education can be measured in terms of public expenditure on
education expressed as a percentage of GNP. During the 1980s the relative weight of public expenditure on education fell slightly in the Triad to a similar level of about 5% of
GDP/GNP.

**Educational expenditure as % of**
**GDP/GNP**

**EU**

**USA**

Japan

**15.** **R&D investment by economic region (1991)**

**1980** **1985** **1989**

**5.3%**

**6.7%**

**5.8%**

**5.1%** **4.9%**

**5.0%** **5.3%**

**5.0%** **4.7%**

_Source: UNESCO_

Total EU expenditure on R&D expressed as a percentage of GNP is barely equal to the
world average and is much lower than that of Japan, the United States and the new industrial economies of Asia.

**R&D spending as a** % **of** **GDP** 1991

EU

USA

Japan

Industrialized Asia

World

**16.** **EU R&D investment by sector (1989)**

2.0%

2.8%

3.1%

2.7%

2.0%

_Source: UNESCO_

Industrial R&D is generally concentrated in high-demand, high-technology sectors, which
account for 75% of total research and development.

-A.16

**R&D in industrial production (EU)**
_**mm**_
Aerospace 17.0%
Pharmaceuticals 12.1%

Electronics 11.5%

Chemicals 3.8%
Land transport 3.2%
Capital goods 2.5%
Other industries 0.5%

Total 2.3%

_Source: OECD_

**17.** **Growth in R&D investment by companies**

In the European Union, the average annual rate of growth of industrial R&D was around
5% during the 1980s. In the United States, which accounts for almost half of all R&D in
OECD countries, R&D expenditure has more or less stagnated since 1985. In Japan, R&D
expenditure rose rapidly up to 1985 (increasing by more than 10%). The rate of increase
in R&D spending by Japanese companies also appears to have slackened since 1985, but
is still high compared with other countries (about 8%).

**Average annual growth rate** **75-81** 81-85 85-89 89-92
EU, 4.8% 4.9% 4.8% 2.1%
USA 4.5% 8.6% 1.3% -0.8%

Japan 8,2% 11.2% 7.4% 8.5%

4.8%

4.5%

8,2%

4.9%

8.6%

11.2%

4.8%

1.3%

7.4%

8.5%

_Source: OECD_

2.1%

-0.8%

**18.** **Intensity of** **R&D** **investment by companies**

EU companies have increased their spending on research and development more rapidly
than their US and Japanese competitors: if we look at the 50 companies with the highest
research budgets in each of these three areas, research spending as a percentage of turnover almost doubled between 1984 and 1992 at European companies, reaching 4.5% in
1992, while at Japanese companies it increased by a little under 40%, although Japan still
has the highest level (5.8%), and at US companies it increased by less than 30% (to 3.7%
in 1992).

```
EU USA Japan

```

2.7%

4.4%

4.5%

2.9%

3.3%

3.7%

4.2%

5.4%

5.8%

_Source: DABLE_

19.

_**RSiD**_ **as % of turnover**

**(50 big R&D spenders)**

```
 1984

 1988

 1992

```

Inventions **by region** of origin

In terms of the number of inventions of supranational importance, Europe was the leading
producer of new technologies during the last two decades: it registered 40% of world patents between 1985 and 1989.

However, the European Union's leading position is slowly being eroded: its share fell from
43% in the period 1975-79 to 40% during the period 1980-84 and 38% during the period
1985-89. Japan has shown the fastest growth in the number of inventions.

-A.17

**Inventions** **in thousands** **1975-79** **1980-84** **1985-89**

EU 120 136 147

North America 82 97 105

**Japan** 43 68 95

136

97

68

43

147

105

Others

120

82

43

37

95

42

**20.**

_Source: Panorama_

As regards scientific production, the European Union, with 30% of scientific publications
in 1993 compared with 24% in 1983, comes second after the United States (40%). The
disciplines in which the European Union has made the greatest progress are clinical medicine, biomedical research, biology, chemistry and science in general.

**Balance of technological payments**

**Trade** in technology covers imports **of** technologically complex goods, the purchase of
technologies (patents, licences, know-how, services with a technical content, etc.) and the
setting-up and purchase of production and distribution units as part of direct foreign investment operations.

Technological imports into the European Union are far higher than technological exports,
whereas the United States has a large technological trade surplus and Japanese technological trade is broadly balanced.

**Technological payments in US$ billion**
**1990**

**EU**

USA

**Japan**

**Receipts** **Payments** **Balance**

**-5.3**

13.4

**-0.3**

_Source: OECD_

13.1

16.5

**2.3**

18.4

**3.1**

**2,6**

**21.** **Link between R&D and trade performance (1990)**

The degree to which R&D spending is reflected in an economy's trade performance depends on its capacity to innovate: paradoxically, and in contrast to the situation observed
in Japan, the European Union's research spending yields a poorer performance on hightechnology markets than on the market in general.

As % of _omtmmmmm_ **Company R&D**
**investment**

**High-tech**
**exports**

As % of _omtmmmmm_ **Company R&D** **High-tech** **Total** **ex-**
**investment** **exports** **ports**

EU 28% 36% 41%

USA 45% 24% 15%

Japan 21% 19% 13%
Others 6% 21% 31%

41%

15%

13%

31%

_Source: OECD_

28%

45%

21%

6%

36%

24%

19%

21%

**22.** **Link between technological intensity and** wage **level (1990)**

High-technology industries generally have high wage levels. Economies with a higher proportion of high-technology industries also have a higher proportion of high wage industries.

-A.18

**Share of added value (1990)** **High tech in-**
**dustries**

**Share of added value (1990)** **High tech in-** **High wage indus-**
**dustries** **tries**

Italy 14% 16%
UK 20% 25%

Japan 22% 23%
USA 20% 29%

Germany 21% 29%

14%

20%

22%

20%

21%

16%

25%

23%

29%

29%

_Source: OECD_

23. **Wage level as a function of technological intensity**

The positive correlation between the degree of technological sophistication and the wage
level is observed everywhere, except in the medium-technology sectors in Japan, Germany
and the United Kingdom, which have a wage level equal to or higher than that of the hightechnology sectors.

**Total manufacturing =** **100 ;** **High tech-**
**nology**

**Medium**

**technology**

**Total manufacturing =** **100 ;** **High tech-** **Medium** **Low tech-**
**nology** **technology** **nology**

UK (1988) 108 108 93
Germany (1989) U0 116
USA (1989) 118 112 **•**
Japan (1989) 100 115

108

U0

118

100

108

116

112

115

93
ill

**•**
**il**
_Source: OECD_

- A . 1 9 

EU **position on growth markets**

**24.** **Production growth for some sectors in the** EU **(1986-92)**

Average real annual growth (1986-92)

Pharmaceuticals **niW 1111** **111111** _**w,**_ **11in** **ru** 7.3%
Plastics processing 7.1%
Secondary transformation of metals 5.7%
Telecom equipment 5.4%
Rubber and plastics 5.3%
Computer & office equipment 5.1%
Soft drinks* mineral water 5.0%
Processing of fruit and vegetables 4.9%
Motor vehicle parts 4.8%
Electric lighting 4.6%
Semi-finished wood products 4,6%
Cocoa & sugar confectionery 4.5%
Wooden containers 4.4%

Constructional steelwork 4.4%
Paper, printing and publishing 4.3%
Oils and fats 4.3%
Sawing and first processing of wood 4.3%
Bread and flour 4.3%

Meat 4.2%
Soaps, detergents, perfumes & toiletries 4.0%
Pulp, paper & board 4.0%
Forging 3.9%
Motor vehicles & parts 3.8%
Domestic electrical appliances 3.8%
Compound feed 3.7%
Processing and preserving of fish 3.7%
Metal products 3.6%
Man-made fibres 3.5%
Paper and board processing 3.5%
Glass 3.3%

Wooden furniture 3.3%

Consumer electronics 3.2%
Foods, drink & tobacco 3.0%

Non-metallic mineral products 2.8%
Basic industrial chemicals 2.7%
Optical & photographic equipment 2 + 6%
Instrument engineering 2.5%
Footwear and clothing 2.1%
Shipbuilding 2.0%
Grain milling LS%
Clothing 1.8%
Clay products 1,6%
Ceramic goods L6%
Aerospace equipment 1.6%
Dairy products L6%
Cycles and motorcycles 1.5%
Toys and sports goods L2%
Railway rolling stock 1.2%
Boilers & metal containers 1.0%
Mechanical engineering 0.9%
Measuring & precision instruments 0.8%
Foundries 0.6%

Tobacco 0.4%

Knitwear 0.3%

Wine 0.0%
Brewing & malting 0.0%
Textile machinery -0.2%
Alcohol & spirits -0.2%
Leather & leather goods -0.2%
Transmission equipment -0.3%
Musical instruments -1.4%

Machine tools -1.6%

Clocks & watches -2.9%
Agricultural machinery -4.0%
Furs and fur goods -5.3%

_Source: DEBA_

**A.20**

**25.** **Trade balance for** some sectors in **the** EU (1986-92)

ECU million (1992) **(*)** **(*)**

Mechanical engineering 36 543 0.4% Glass 731 -7.9%
Computer & office equipment 11791 1,2% Wine 629 -1.8%
Motor vehicles & parts 8 367 -13?. 8% Bread and flour 568 5.5%
Food, drink & tobacco 6 601 15.2% Electric lighting 494 -2.0%
Pharmaceuticals 4 889 4.4% Paper and board processing 483 -4.5%
Metal products 4 647 -6.8% Measuring & precision inNon-metallic mineral prod- struments 468 -6.8%
ucts 4 282 -2,4% Foundries 366 -5.8%
Textile machinery 4 065 7.4% Soft drinks, mineral water 316 8.0%
Soaps, detergents, perfumes Clay products 194 -3.1%
& toiletries 3 320 9.3% Forging 140 -5.0%
Dairy products 3 221 5.9% Secondary transformation of
Alcohol & spirits 3 216 8.4% metals 79 15.9%
Aerospace equipment 3 010 31.5% Furs and fur goods 74 -12.3%
Machine tools 2 414 -3.5% Wooden containers 6 16.7%
Shipbuilding 2 400 15.7% Meat -278 12.6%
Rubber and plastics 2 317 -9.1% Man-made fibres -348 NA
Motor vehicle parts 2 181 -15.3% Musical instruments -354 7.5%
Ceramic goods 2 024 2.4% Leather & leather goods -510 16.7%
Plastics processing 1755 -5.7% Optical & photographic inAgricultural machinery 1429 -4.9% struments -1563 13.2%
Basic industrial chemicals 1322 -18.8% Semi-finished wood products -1589 4.7%
Telecom equipment 1295 -12.6% Clocks & watches . -1694 10.0%
Domestic electrical appli- Processing of fruit and vegeances 1247 8.7% tables -2 088 12.1%
Railway rolling stock 1209 8.4% Oils and fats -2 320 -4.3%
Cocoa & sugar confectionery 1 149 8.9% Processing and preserving of
Constructional steelwork 1 147 -7.9% fish -2 325 14.3%
Transmission equipment 1 138 1.6% Cycles and motorcycles -2 445 40.6%
Brewing & malting 1061 2.5% Instrument engineering -2 949 37.9%
Boilers & metal containers 1 022 0.0% Toys & sports goods -4 592 33.6%
Tobacco 941 18.7% Sawing and first processing
Grain milling 874 10.6% of wood -5 466 3.5%
Wooden furniture 777 -13.7% Knitwear -5 472 50.4%

Paper, printing & publishing -9 139 6.5%
Clothing -9 739 23.5%
Footwear and clothing -10 863 57.6%
Pulp, paper & board -11875 5.3%
_(*) Annual growth (1986-1992)_

Source: DEBA

A.21 

**26.** **Manufacturing output growth forecast (1992-2010)**

The growth forecasts for the main industrial sectors identify the following growth markets:

**27.**

**Average annual growth in the EU** **1992-2010**
**Office & EDP equipment** 4.2%
**Rubber** **&** **plastics** 4.1%
**Electrical equipment** 3.0%
**Transport equipment** 3.0%
**Pulp,** paper and printing 2.9%
Mechanical engineering 2.8%
**Metal** products 2.8%
**Chemicals** 2 + 7%

Non-metallic minerals 2.6%

**AVERAGE** 2.6%

Miscellaneous products 2.6%
Textiles and clothing 1.8%
Food, drink & tobacco **1.7%**
**Ore** & metals -1.9%

_Source: DR1_

**Sectoral specialization of exports of manufactured goods (1992)**

To assess the extent to which industries have succeeded in adjusting to changes in the
structure of demand, manufacturing subsectors have been grouped into three categories
according to demand growth:

**strong-demand sectors** for which international demand is growing more rapidly
than economic activity in general (chemicals, pharmaceuticals, office machinery
and computer equipment, precision and optical instruments, and electrical equipment and machinery);

**moderate-demand sectors** for which demand is keeping pace with the average
growth of the economy (machinery and equipment, transport equipment, food,
drink and tobacco, paper and printing, rubber and plastics);

**weak-demand sectors** for which international demand is growing slowly (ferrous
and non-ferrous metals, non-metallic minerals, metal products, textiles, clothing,
leather goods and footwear, and other manufactured products).

Most of the strong-demand sectors have a high technological content. Conversely, weakdemand sectors are characterized by low technological content, high natural resources
and/or labour input and low wage levels.

The situation of EU industry is marked by a higher level of specialization than the Triad
average on low-growth markets but a lower level on medium- and high-growth markets.

**Sectoral distribution of manufacturing** **Weak de-** **Moderate** **Strong**
**exports (1992). Average** **=** **0** **mand** **demand** **demand**

**EU** **19** **-4** **-11**
**USA** **-27** **8** **11**
Japan **-44** **7** **29**

**19** **-4** **-11**

**-27** **8** **11**

**-44** **7** **29**

_Source:_ _COMEXT,_ _Commission departments_

**19**

**-27**

**-44**

**-4**

**8**

**7**

_**-**_ A.22 **-**

28. Geographical specialization of exports of manufactured goods (1992)

For our analysis of the geographical specialization of European exports of manufactured
goods, world markets have been divided into eight economic areas: EFTA, United States
and Canada, Japan, NICs, China, Latin America, ACP countries and the rest of the world.
This breakdown shows whether the European Union is performing well on the most dynamic international markets, such as Latin America and certain countries in Asia (newly
industrialized countries and China), where forecast medium-term growth rates exceed 3%.

Geographical specialization within the Triad is measured by dividing the shares of the
European Union, the United States and Japan by the Triad average.

On this basis, we find that the European Union trades mainly with EFTA member countries and ACP countries, and very little with the NICs, China and Latin America. The
United States trades mainly with Japan, Latin America and the European Union. Japan's
trade focuses on the European Union, the United States and Canada, the newly industrialized countries and China.

Geographical distribution of exports of EU USA Japan
manufactured goods (1992).
Average — 0
NICs -46 -7 79

Latuiv America -43 98 -49

China -26 -23 68

USA + CA -16 -8 34

Japan -8 95 NA
Other 49 -46 -22

ACP 5 2    - 3 1 -45

EFTA 112 -80 -79

_Source: COMEXT_

29. Sectoral and geographical specialization of EU exports of manufactured goods

Neither the sectoral not the geographical specialization of the European Union's manufacturing industry is optimal.

Analysis of the sectoral and geographical breakdown of the European Union's exports of
manufactured goods shows that:

for **sectors with strong demand and** high technological **content,** the European
Union has a clear specialization only in exports to the ACP countries and Latin
America;

for sectors with moderate demand, the European Union is specialized only in
exports to China;

the share of the sectors with weak demand in total EU exports is the highest of
the Triad as regards exports to all geographical areas except China and Latin
America.

As regards the most dynamic geographic markets, the European Union has a slight specialization in strong-demand sectors in its exports to Latin America, a specialization in
weak-demand sectors in its exports to the newly industrialized countries, and a specialization in moderate-demand sectors in its exports to China.

                                                       - **A.23**

**1992 - Average =** **0** **Weak de-** **Moderate** **Strong**
**mand** **demand** **demand**

EFTA 9 -5 -3

USA + CA 29 -7 -4
Japan 7 -6 3
NICs 23 8 -21

**1992 - Average =** **0** **Weak de-**
**mand**

**Moderate**

**demand**

9

29

-3

-4

3

-21

China

Latin America

ACP

Others

7

23

-37

**-12**

0

15

-5

-7

-6

8

20

2

-5

2

_Source: COMEXT_

-7

4

13

However, the European Union is the only industrial region with a substantial presence in
**all** industrial sectors. v

**30.** **Sectoral specialization trends**

To stimulate growth in manufacturing industry, production capacity must be redirected
towards products for which demand is strong (office machinery and computer equipment,
information technology, electrical and electronic equipment and machinery, chemicals and
pharmaceuticals). The more companies focus on growth markets, the stronger and more
sustained will be the growth of manufacturing industry.

Between 1980 and 1990, European industry did not succeed in adjusting as quickly as industry in the United States and Japan in order to take advantage of openings on growth
markets: the contribution to value added of European companies producing goods for
which demand is strong increased less quickly than in Japan, while the contribution of
sectors with weak growth fell less quickly than in the United States and Japan.

**Gross value added in manufacturing**
**(1980-90)** **'T**

Weak demand sectors

Moderate demand sectors

Strong demand sectors

**Growth markets: some examples**

**EU-6** **USA:** **Japan**

**-4%**

**- 1 %**

5%

-5% -9%

1% -8%

4% 17%

_Source: national accounts_

**31.** **Data processing and telecommunications industries (1995)**

The world market for data processing and telecommunications is forecast to be worth
ECU 880 billion in 1995. Of this, 45% will come from data processing (hardware, software and services) and 55% from telecommunications equipment and services.

The European market for data processing and telecommunications is expected to account
for more than a quarter of the world market - ECU 250 billion in 1995 - of which 45%
will come from data processing (hardware, software and services) and 55% from telecommunications equipment and services.

A.24

19t95 **(in** ECU **billion)**

Data processing hardware
Software

Data processing services
Telecom equipment
Telecom services

Total

**32.** **US information market (1995)**

**World**

market

20%

8%

17%

13%

42%

880

EU market

18%

8%

19%

10%

45%

290

_Source:_ _EITO_ _94_

The US information market is forecast to be worth US$ 995 billion in 1995. Of this,
45.3% will come from data processing (hardware, software and services) and 25.3% from
telecommunications equipment and services. The remaining 29.2% is accounted for by
media markets.

1995 **Annual** sales - US$

**billion**

Relative share

32.0%

4.7%

5.2%

14.1%

1.3%

1.1%

2.3%

1.7%

3.3%

20.8%

13.3%

100.0%

Computer and electronic equipment
Telecom equipment

Long distance service
Local & cellular telephone services
Yellow pages

Radio

Video

Cable TV

Broadcasting
Printing & Publishing
Software and information services

Total

318

47

52

140

13

11

23

17

33

207

132

993

33.'

_Source: Columbia University,_ _CTIS_

Environment market: **breakdown** by region **and market** (2000)

The market for environmental protection products is growing rapidly, especially in the industrialized countries. The average rate of growth is estimated to be between 5% and 6% a
year. The world market is expected to be worth US$ 300 billion in the year 2000.

In the year 2000, the largest national market is expected to be the United States, accounting for 38% of the total. Europe is expected to account for 26%.

The main segments of the environmental protection industry, defined according to their
final use, are water and effluent treatment, waste management, and air quality monitoring.

**Breakdown** **by** **region** **Breakdown by market**

Others

Japan

USA

Europe

23% Services

13% Other equipment
38% Air

26% Waste

Water

27%

11%

14%

21%

28%

_Source: OECD_

_-_ **A.25**

34. **Environment industry: production and** **exports** **(2000)**

The main producers of environmental equipment and services are the United States, Germany and Japan. Production straddles a number of sectors, including industrial machinery,
electrical equipment, chemicals and services.

2000 **Production (US$ billion)** **Export rate** (as % **of production)**
Europe 68
USA 80
Japan 30

68

80

30

20%

10%

6%

35.

_Source: OECD_

**Top-of-the-range** **products market - breakdown by segment and growth rate**

Top-of-the-range products are those which can sustain **a** high price, i.e. a price substantially higher than that of products which are functionally comparable.

The main top-of-the-range markets are haute couture, motor vehicles, clothing and footwear, cosmetics and perfumes, spirits, wines and champagne, clocks and watches, porcelain, crystal glass and silverware, and jewellery. Between 1985 and 1989, all these markets
recorded annual growth rates of between 4% (porcelain) and 17% (clocks and watches),
i.e. substantially higher than the average rate of market growth.

**Breakdown** **by** **Growth rate**
**segment** (1989) (1986-89)

Haute couture 23% 8.5%

Automobiles 18% 6.0%

**Breakdown** **by**
**segment** (1989)

8.5%

6.0%

9.0%

7.0%

11.0%

7.0%

17.0%

10.5%

6.5%

4.0%

13.0%

5.5%

4.5%

7.5%

8.2%

5.4%

_Source: McKinsey_

Fashion accessories, leather goods
Cosmetics

Perfumes

Spirits
Watchmaking

Champagne
Shoes

Chinaware

Jewellery
Wine

Goldware

Crystal making
Total top-of-the-range products
Total manufacturing industry

23%

18%

14%

10%

10%

9%

4%

3%

3%

3%

_\_ _2%_

1%

1%

1%

100%

**36.** **Top-of-the-range products market** - **geographical breakdown**

**In** 1989, the total market for top-of-the-range products was worth ECU 42 billion. Europe
is the main market for top-of-the-range products, accounting for 43% of the world market
in 1989. However, demand for top-of-the-range products is growing most rapidly in. the
United States (13%), followed by Europe (10%) and Japan (7.5%).

A.2(>

**Geographical breakdown** **Market share (1989)** **Annual growth**
**(1985-89)**

EU-4 43% 10.0%

USA 32% 13.0%

Japan 17% 7.5%
Others 8% 7.9%

43%

32%

17%

10.0%

13.0%

8%

7.5%

7.9%

_Source: McKinsey_

37. **Health and biotechnology market**

The European Union is world leader in terms of production and exports of pharmaceutical
products. Total EU production was worth ECU 64 billion in 1992. This sector has a sustained trade surplus.

The production and consumption of pharmaceuticals increased rapidly from 1983 to 1992,
at an average real rate of about 7% a year. Exports grew by 2.6% a year, while imports
grew by an average 5.4% a year: these rates of growth are much higher than the average
rates for manufacturing industry.

Pharmaceuticals will remain a rapid growth sector throughout the 1990s on account of
health concerns and demographic ageing.

**Pharmaceutical products in the EU**
**(ECU** **billion)**

1985
Ë990

1995

**Apparent con-**
**sumption**

35

55

**74**

**Production** **Exports**

39

59

79

6

iliii
**il**

_Source:_ _EUROSTAT/DRI_

**38.**

39.

**Specialization in high technology industries**

In 1990, the United States accounted for 24% of OECD exports of high technology products, 13% of exports of medium technology products and 11% of exports of low technology products. The European Union, on the other hand, accounted for 36% of OECD exports of high technology products, 44% of exports of medium technology products and
41 % of exports of low technology products.

By specializing in relatively unsophisticated products for which world markets are not
growing, European industry is becoming increasing exposed to price competition.

Indeed, European industry is already facing growing competition from the countries of
South-East Asia for labour-intensive, low- to medium-technology products.

**Specialization index = relative share of** **high** **technol-**
**ogy** **exports** **-** **Average** **=** **0**

EU

USA

Japan

**High technology products market** - EU **trade**

**1970** **1992**

_**m**_

59

24

**-18**

51

44

_Source: OECD_

The definition of high technology products used here is based on a classification of each
industry according to its spending on research and development (R&D expenditure as a

A.27

proportion of turnover or production). Products which are highly dependent on R&D expenditure are considered to be high technology products.

At the end of the 1980s, high technology products accounted for about a quarter of the
value of all trade in manufactured products among developed countries. The value of EU
exports of high technology products increased from ECU 27 billion in 1978 to some
ECU 71 billion in 1990, while the value of EU imports had increased fivefold since 1978,
reaching ECU 93 billion in 1990.

During the period 1982-1990, EU exports of high technology products increased a little
more rapidly (59.5%) than total EU exports (47.8%), while during the same period EU
imports of high technology products increased three times as much (137.8%) as total EU
imports (38%). In other words, EU imports of high technology products increased at an
average annual rate of 11.4%, double the rate of increase of EU exports of such products
(6%). This resulted in **a** progressive deterioration in the European Union's trade balance in
high technology products, which went from **a** surplus of ECU 5 billion in 1982 to a deficit
of ECU 22 billion in 1990.

EU **trade - ECU** **billion** **Exports** **Imports** **Balance**
`1978` 27 19 **7**

`1984` 59 60 **-1**
`1989` 71 **IP** **-22**

27

59

71

19

60
**IP**

19 **7**

60 **-1**
**IP** **-22**

_Source: EUROSTAT_

**40.** **High technology products market - level of opening-up**

Analysis of the openness of those economies for which these figures exist shows that the
propensity to import high technology products is inversely proportional to its capacity to
export such products.

**Level of opening (1990)** **Proportion of con-**
**sumption imported**

**Level of opening (1990)** **Proportion of con-** **Proportion of** **pro-**
**sumption imported** **duction exported**

Germany 33% 15%
UK 37% 9%

USA 17% 24%
Japan 7% 19%

33%

37%

17%

15%

9%

24%

7%

19%

_Source: OECD_

**41.** **High technology products market - trade performance**

The European Union's relative trade performance on high technology markets deteriorated
between 1980 and 1990: the European share of world exports fell from 40% to 36%.

**Trade performance**
**(relative share of world exports)**

EU-4

USA

Japan
Others

40%

25%

15%

20%

**1980** **1990**

36%

24%

19%

21%

_Source: OECD_

A.28

ANNEX III. GRAPHICS

Exchange rate fluctuations 1.

Link between industrial production and employment creation in the European Union 2.

_Competitive situation of the European Union_

Market shares of main economic regions 3.

Total trade in the TRIAD 4.

EU trade in goods 5.

Total EU trade balance 6.

Trade by region (in value terms) 7.

Trade by region - average annual growth 8.

Leading importers in world trade 9.

Leading exporters in world trade 10.

New industrial economies of Asia 11.

Foreign direct investment outflows 12.

EU foreign direct investment 13.

_Intangible investment_

Educational expenditure 14.

R&D investment by economic region (1991) 15.

EU R&D investment by sector (1989) 16.

Growth in R&D investment by companies 17.

Intensity of R&D investment by companies 18.

Inventions by region of origin 19.

Balance of technological payments 20.

Link between R&D and trade performance (1990) 21.

Link between technological intensity and wage level (1990) 22.

Wage level as a function of technological intensity 23.

_EU position on growth markets_

Production growth for some sectors in the EU (1986-92) 24.

Trade balance for some sectors in the EU (1986-92) 25.

Manufacturing output growth forecast (1992-2010) 26.

Sectoral specialization of exports of manufactured goods (1992) 27.

Geographical specialization of exports of manufactured goods (1992) 28.

Sectoral and geographical specialization of EU exports of manufactured goods (1992) 29.

Sectoral specialization trends 30.

-A.29

_Growth markets: some examples_

Data processing and telecommumcations industries (1995) 31.

US information market (1995) 32.

Environment market: breakdown by region and market (2000) 33.

Environment industry: production and exports (2000) 34.

Top-of-the-range products market - breakdown by segment and growth rate 35.

Top-of-the-range products market - geographical breakdown 36.

Health and biotechnology market 37.

Specialization in high technology industries 38.

High technology products market - EU trade 39.

High technology products market- level of opening-up 40.

High technology products market -trade performance 41.

-A.30

# Figure 1: Exchange rate fluctuations

##### **Figure 2: Link between industrial production and** **employment creation in the European Union**

**10%**

**5%**

**0%**

**-5%**

**•10%**

**1970** **1975** **1980** **1985** **1990**

**Source:** **Eurostat.**

**2%**

**1%**

**0%**

**•1%**

**•2%**

**1995**

### **Figure 3: Market shares of main economic regions**

**as** **%**
**of world exports of manufactured products**

**Source: OECD.**

**US->Japan®**

**Japan->US**

**balance**

**EU->Japan**

**Japan->EU**

**balance**

**EU->US@**

**US->EU**

**balance**

##### **Figure 4: Total trade in the Triad**

**-**
**exports (value** **billion ECUs)**

**71.2**

**91.9**

**•21**

**Source: Eurostat** **&** **OECD,**

```
15%

13%

11%

9%

7%

```

**15%**

**13%**

**11%**

**9%**

```
7%

```

### **Figure 5: EU merchandise trade**

**as** **% of** **GDP**

**intra-EU trade**

**extra-EU exports**

<llgg§llNK> _Jjf_

```
  1970 1975

Source: Eurostat.

```

```
1980 1985 1990

```

##### **Figure 6: Total EU trade balance**

**billion ECU**

**Source: Eurostat.**

### **Figure 7: Merchandise trade by region**

**billion $US** **-1992**

**Asia**

**->** **of** **which Japan**

**North America**

**->** **of** **which** **USA**

**Latin America**

**Middle East**

**Africa**

**Central and Eastern**

**Europe and** **CIS**

**Imports**

**EU** **(excl.** **intra EU trade)**

**0**

**Source: GATT.**

**•Exports**

**200** **400** **600** **800**

**^**

**Asia**

**North**

**America**

**Western**

**Europe**

**Latin**

**America**

**Middle**

**East**

**Africa**

**World**

##### **Figure 8: Merchandise trade by region**

**average annual growth (1980-1992) in volume**

**Imports**

_**M**_ **Exports**

**8%** **10%**

**-4%**

**Source: GATT.**

**-2%** **0%** **2%** **4%** **6%**

### **Figure 9: Leading importers in world trade**

**EU (extra-EU)**

**USA**

**Japan**
**Canada**

**Hong-Kong**
**South Korea**

**China**

**Taiwan**

**Singapore**
**Switzerland**

**Mexico**

**Austria**

**Sweden**

**Australia**

**Thailand**

**Malaysia**

**700** **600 500 400 300 200** **100.-OK** **2% 4% 6% 8%** **10% 12% 14% 16%**

**Imports (billion $US** **-1992)** **average annual growth**

**(1980-92)** **in** **volume**

**Source: GATT.**

# Figure 10: Leading exporters in world trade

Source: GATT.

### **Figure 11: New industrial economies of Asia (*)**

**billion** **$US** **-1992**

**1500**

**40**

**1000**

**.** **.**

**20**

**0**

**-20**

**exports**

**imports**

- •

**500**

**0**

- 500

**EU**

**39.1**

**50.7**

trade balance

international investments (**)

**USA** **Japan**

**54.8**

**82.6**

**78.9**

**31.5**

_**(*)**_ _**Hong-Kong,**_ _**Taiwan,**_ _**South Korea and**_ _**Singapore.**_
_**(**)**_ _**Investments**_ _**coming from the EU,**_ _**USA**_ _**and**_ _**Japan**_ _**in the new industrial**_ _**economies**_ _**of Asia.**_
**Source: OECD.**

# Figure 12: Foreign direct investment outflows

billion ECU

Source: DRI.

# Figure 13: EU foreign direct investment

billion ECU

Source: DRI.

##### **Figure 14: Educational expenditure**

**as % of GDP/GNP**

**Source: UNESCO.**

_**.r-**_

### **Figure 15: R&D investment by economic region**

**ratio R&D expenditure/GDP (1991)**

**EU**

**USA**

**Japan**

**industrialised**

**Asia**

**World**

0%

R&D spending/GDP

**Source: UNESCO.**

2%

**EU**

**2%**

1%

**USA**

**2.8%**

**Japan**

**3.1%**

industrialised

Asia

2.7%

3%

World

2%

##### **Figure 16: R&D investment by sector**

**R&D expenditure/industrial production** **(EU-1989)**

**aerospace**

**pharmaceutical**

**electronics**

**chemical**

**ground transport**

**equipment goods**

**other industries**

**total**

**0%** **5%** **10%** **15%**

**Source: OECD.**

_**\S**_

##### **Figure 17: Enterprises R&D investment**

**average annual growth rate (current prices and exchange rates)**

l«75-R1 ŒR1-R5 MRfi-R9 fflR9-9? I

**Source:** **OECD.**

**6%**

**5%**

**4%**

**3%**

**2%**

**EU**

**USA'**

**Japan**

#### **Figure 18: Enterprises R&D investment**

**R&D** **as % of** **turnover (50 big R&D spenders)**

_mmmmmi_ _^iimmmmam_

**. . . W A « « * K** **[:]** **:** **[:]** **: %** **[:]** **:** **[:]** **# £** **[:]** **: %** **[:]** **: ^**

**EU «USA** **««Japan**

**1984** **1985** **1986** **1987** **1988** **1989** **1990** **1991** **1992**

2.7%

2.9%

'4.2%

2.9%

3%

4.6%

**4%**

**3.5%**

**5.3%**

**4.2%**

**3.4%**

**5.5%**

**4.4%**

**3.3%**

**5.4%**

**4.3%**

**3.4%**

**5.5%**

**4.3%**

**3.6%**

**5.7%**

**4.4%**

**3.4%**

**5.5%**

**4.5%**

**3.7%**

**5.8%**

**Source:** **Dable.**

### **Figure 19: Inventions by region of origin**

**in thousands**

**160**

**1975-79** **«1980-84 «1985-89**

**140**

**120**

**100**

**80**

**60**

**40**

**20**

**0**

**EU** **North America**

**EU** **North America** **Japan** **Others**

**1975-79** **120** **82** **43** **37**

**43**

**37**

**120**

**82**

**68**

**95**

**1980-84**

**1985-89**

**136**

**147**

**97**

**105**

**43**

**42**

**Source:** **Panorama** **of** **EU Industry.**

##### **Figure 20: Balance of technological payments (*)**

**billion** **$US** **-1990**

_**(*) Operations related to elements of industrial property**_ _**(patent,**_ _**technical**_ _**licences,**_ _**process,**_ _**know-how,**_ _**drawings, models) and to services**_
_**with technical content and to intellectual services (engineer studies, technical**_ _**assistance,**_ _**R&D services, etc.).**_
**Source:** **OECD.**

**\ 3 \**

### **Figure 21: R&D effort and trade performance**

**in** **% of** **OECD total (1990)**

**EU**

**USA**

**Japan**

**others**

30%

**Japan**

**20.5%**

**19.1%**

**12.8%**

0% 10%

**EU**

20%

**USA**

**45.1%**

**23.7%**

**14.8%**

40% 50

others

6.1%

21%

31.3%

enterprises

R&D investment

high tech exports

total exports

**Source: OECD.**

**28.3%**

**36.2%**

**41.1%**

#### **Figure 22: Technological intensity and wages**

**share in the added value** **-1990**

**30%**

high tech industries^) Bhigh wage industries(

**25%**

**20%**

**15%**

**10%**

**5%**

**0%**

**Germany**

high tech industries!*)

high wage industriesf**)

19.7%

**24.8%**

**21.9%**

23%

20%

**28.6%**

**20.5%**

**28.9%**

_(*)_ _High_ _technology industries_ _include_ _aerospace,_ _EDP,_ _radio_ _and_ _telecom_ _equipment,_ _electrical_ _machinery,_ _pharmaceutical products_ _**and**_ _precision_
_instruments._

_(**)_ _High_ _wage_ _industries include industries in which_ _wages_ _are_ _15%_ _above_ _average._
**Source: OECD.**

**^>,**

### **Figure 23: Wage level and technological intensity^)**

**total manufacturing = 100**

**120**

**110**

**100**

**90**

**80**

**high technology**

**medium technology**

**low technology**

high technology •medium technology Blow technology

**UK (1988)** **Germany (1989)** **USA (1989)** **Japan** **(1989)**

**108**

**108**

**93**

**110**

**116**

**83**

**118**

**112.**

**86**

**100**

**115**

**91**

_**(*) Industries are grouped according to the R&D intensity which is defined as the R&D/turnover ratio.**_

**Source: OECD.**

**^?.**

**Fig.** **24: Production growth for some industrial** **sectors** **in the EU**

**Pharmaceuticals**
**Plastics processing**
**Secondary transformation of metals**

**Telecom equipment**
**Rubber and plastics**
**Computer & office equipment**

**Soft drinks, mineral water**
**Processing** **offrait** **and vegetables**

**Motor vehicles parts**

**Electric lighting**
**Semi-finished** **wood products**

**Cocoa & sugar confectionery**

**Wooden containers**

**Constructional steelwork**
**Paper, printing & publishing**

**Oils and fats**
**Sawing and first processing of wood**

**Bread and flour**

**Meat**
Soaps, detergents, perfumes & toiletries

**Pulp,** **paper & board**

**Forging**
**Motor** vehicles & parts
Domestic electrical appliances

Compound feed
Processing and preserving of fish

Metal products
Man-made fibres
**Paper and board processing**

**Glass**

**Wooden furniture**

Consumer electronics

**Food,** **drink** & tobacco
Non-metallic mineral products

**Basic** industrial chemicals
Optical & photographic instruments

Instrument engineering

Footwear and clothing

Shipbuilding
Grain milling

Clothing
Clay products
Ceramic goods
Aerospace equipment

Dairy products
Cycles and motorcycles

Toys & sports goods

Railway rolling stock
Boilers & metal containers

Mechanical engineering
Measuring & precision instruments

Foundries

Tobacco

Knitting

Wine
Brewing & malting

Textile machinery

Alcohol & spirits
Leather & leather goods
Transmission equipment

Musical instruments

Machine tools
Clpcks & watches
Agricultural machinery

Furs and fur goods

**-6%** **-4% -2%** **0%** **2%** **4%** **6%** **8%**

**average real annual growth (1986-92)**

**Source: DEBA.**

**tfs^**

**Fig.25:** **Trade balance for** **some** **industrial sectors in the EU**

**Mechanical engineering**
**Computer & office equipment**

**Motor vehicles & parts**

**Food,** **drink** **& tobacco**

**Pharmaceuticals**

**Metal products**
**Non-metallic mineral products**

**Textile machinery**
**Soaps,** **detergents, perfumes & toiletries**

**Dairy products**
**Alcohol & spirits**
**Aerospace equipment**

**Machine tools**

**Shipbuilding**
**Rubber and plastics**
**Motor vehicles parts**

**Ceramic goods**
**Plastics processing**
**Agricultural machinery**
**Basic industrial chemicals**

**Telecom equipment**
**Domestic type electrical appliances**

**Domestic electrical appliances**

**Railway rolling stock**
**Cocoa & sugar confectionery**

**Constructional steelwork**
**Transmission** **equipment**

**Brewing & malting**
**Boilers & metal containers**

**Tobacco**
**Grain milling**
**Wooden furniture**

**Glass**

**Wine**

**Bread and flour**
**Electric lighting**
**Paper and board processing**
**Measuring & precision instruments**

**Foundries**
**Soft drinks, mineral water**

**Clay products**

**Forging**
**Secondary transformation of metals**

**Furs and fur goods**
**Wooden containers**

**Meat**

**Man-made fibres**

**Musical instruments**

**Leather & leather goods**
**Optical & photographic instruments**

**Semi-finished wood products**

**Clocks & watches**
**Processing of fruit and vegetables**

**Oils and fats**
**Processing and preserving of fish**

**Cycles and motorcycles**

**Instrument engineering**

**Toys & sports goods**
**Sawing and first processing of wood**

**Knitting**
**Paper, printing & publishing**

**Clothing**
**Footwear and clothing**

**Pulp,** **paper & board**

**1986**

**1992**

**I** **I** **L_J** **I** **I** **I** **L** **J** **I** **I** **L**

**-20** **-10** **0** **10** **20** **30** **40**

**billion ECU**

**Source: DEBA.**

##### **Figure 26: Production growth in manufacturing**

**average annual growth forecast in the EU (1992-2010) in volume**

**office & EDP**

**rubber & plastics**

**electrical equipment**

**transport equipment**

**pulp, paper and printing**

**mechanical** **engineering**

**metal products**

**chemicals**

**non-metallic minerals**

**AVERAGE**

**miscellaneous products**

**textiles and clothing**

**food,** **drink & tobacco**

**ore & metals**

**-2%** **- 1 %** **0%** **1%** **2%** **3%** **4%** **5%**

**Source:** **DRI.**

**20**

**0**

**-20**

**-40**

**weak demand**

**moderate demand**

### **Figure 27: Specialisation of exports**

**sectoral distribution of manufacturing exports (1992)**

 - weak demand

S moderate demand

 - strong demand

**19.3**

**'•4.3**

**•27.4**

**8.4**

**strong demand** **•10.5** **10.8**

_**Specialisation index**_ **= market share in a given sector compared to average market share of the TRIAD.**
_**Strong demand**_ _**sectors**_ **= chemicals, pharmaceuticals, EDP, precision and optical instruments and electrical goods.**
_**Moderate demand**_ _**sectors**_ **= machinery, transport equipment, food, beverages and tobacco, paper and printing products, and rubber and**

**plastics.**

_**Weak**_ _**demand**_ _**sectors**_ **= metals, non-metallic minerals, metal products, textiles, clothing, leather and footwear, and other manufactured**
**products.**

**Source: Eurostat, Commission services.**

**strong demand**

**•10.5**

**^**

100

**50**

**0**

**-50**

**EU**

**USA**

### **Figure 28: Specialisation of exports**

**geographical distribution** **of** **manufacturing exports (1992)**

**•** **EU** **•** **USA.** **•** **Japan**

**« t e**

_**&$>**_
**V A '**

_**fi**,/**_ _***''**_

**NICs** **Latin**

**America**

**China** **USA+CA** **Japan** **Other** **ACP** **EFTA**

**•46**

**•6.7**

**•43.2**

**97.8**

**•16.2**

**•7.6**

**49.2**

**•45.7**

**•25.7**

**•23.4**

**•7.8**

**94.5**

**Japan** **79.4** **•48.9** **67.8** **34.2** **•22.2**

**™r»'*|** **^ Z** **I** _**1^1**_ **I** **^** **I** **^** **I** **I** _**ÎZÏ**_ **L**
_**specialisation index =**_ **market share in a given sector compared to average market share of the TRIAD**

**52.4**

**•30.8**

**•44.9**

**111.6**

**•79.5**

**•79.1**

**•48.9**

**34.2**

**67.8**

**Japan**

**79.4**

**Source:** **Eurostat.**

**^0}**

### **Figure 29: Specialisation of EU exports**

**geographical and sectoral distribution** **of** **manufacturing exports (1992)**

_**Specialisation**_ _**index**_ _**=**_ **market share in a given sector compared to average market share of the TRIAD.**
_**Strong demand**_ _**sectors**_ **=** **chemicals,** **pharmaceuticals, EDP, precision and optical instruments and electrical goods.**
_**Moderate demand**_ _**sectors**_ **= machinery, transport equipment, food, beverages and tobacco, paper and printing products, and rubber and plastics.**

_**Weak**_ _**demand**_ _**sectors**_ **= metals, non-metallic minerals, metal products, textiles, clothing, leather and footwear, and other manufactured products.**

**Source: Eurostat.**

**k**

**20%**

**15%**

**10%**

**5%**

**0%**

**•5%**

**10%**

**EU-6**

**USA**

**Japon**

### **Figure 30: Sectoral specialisation of industry**

**evolution** **of** **gross value added** **in** **manufacturing (1980-90)**

**IB EU-6 EHUSA** **•** **Japon**

**weak demand sectors** **moderate demand sectors** **strong demand sectors**

**•3.8%**

**•5.3%**

**•9.4%**

**-1.2%**

**1%**

**•7.7%**

**5%**

**4.2%**

**17.2%**

_**Strong demand**_ _**sectors**_ **= chemicals, pharmaceuticals, EDP, precision and optical instruments and electrical goods.**
_**Moderate demand**_ _**sectors**_ **= machinery, transport equipment, food, beverages and tobacco, paper and printing products, and rubber and plastics.**

_**Weak**_ _**demand**_ _**sectors**_ _**=**_ **metals, non-metallic minerals, metal products, textiles, clothing, leather and footwear, and other manufactured products.**

**Source:** **National accounts.**

**\**

##### **Figure 31: Data processing and telecom markets** **(1995)**

**world** **market** **=** **ECU 880** **Bn** **European** **market = ECU 290** **Bn**

**hardware**

**software**

**data services**

**Source:** **EITO** **94.**

**hardware**

**telecom**

**services software**

**data services**

**telecom**

**services**

**telecom**

**equipment**

**telecom**

**equipment**

#### **Figure 32: U.S. Information market**

**1995:** **$995 Billion** **=** **16%** **of** **GDP**

**Telecom**

**Equipment** **4.7%**

**Long Distance**
**Service** **5.2%**

**Local** **&** **Cellular**

**Telep** **14.1%**

**Yellow Pages** **1.3%**
**Radio** **1.1%**

**Video** **2.3%**

**Cable TV** **1.7%**

**Broadcast** **3.3%**

**Printing** **&**
**Publishing** **20.8%**

**Source: Columbia Univ.,** **CTIS** **- U.S. Industrial Outlook - BellSouth Corp. -** **NBI,** **Inc.**

**Computer** **&**

**Electronic** **32.0%**

**Software** **&**

**Info.** **Servi** **13.3%**

**Others**

**Japan**

##### **Figure 33: Environment market**

**breakdown by region and market (2000)**

**Europe** **Services**

**Other**

**equipment**

**USA**

**Water**

**Waste**

**Source:** **OECD 1992,**

##### **Figure 34: Environment industry**

**-**
**production (billion $US** **2000)**

**20**

**40** **60** **80**

**^ ^ ^ M** _**WÊÊÊÊÊÊÊmfrW**_

**Europe**

**USA**

**Japan**

**0%**

i production

exports

**Source: OECD,**

Japan

**30**

**6%**

**20%**

Europe

**68**

**20%**

**5%** **10%** **15%**

**export rate (as %** **of** **production** **-** **2000)**

USA

**80**

**10%**

##### **Figure 35: Top of the range products market**

**haute couture**

**automobile**
**fashion** **accessories, leather goods**

**cosmetic**
**perfumery**

**spirits**
**watch** **making**

**champagne**

**shoes**

**chinaware**

**jewellery**

**wine**
**silver & goldware**

**crystalware**

**total** **top of the range** **products**

**total manufacturing**

**total top of the range products**
**= 100%**

**25%** **20% 15% 10% 5%** **0%** **5%** **10%** **15%** **20%**

**breakdown by segment (1989) growth rate** **(1985-89)**
**Source: McKinsey.**

##### **Figure 36: Top of the range products market**

**geographical breakdown**

**EU-4**

_T7m^_ _***'*<**_

**USA**

                                                                                                                                                                                                                                                                                                            - • • • • _* ' •_

**Japan**

**other**

**50%** **40%** **30%** **20%** **10%**

**worldwide market share (1989)**

**0%** **5%** **10%**

**average annual growth (1985-89)**

USA

**32%**

**13%**

Japan

**17%**

**7.5%**

other

8%

7.9%

! market share _M_

(1989)

annual growth i l
i (1985-89)

EU-4

**43%**

**10%**

**Source: McKinsey.**

**100**

**80**

**60**

**40**

**20**

**0**

##### **Figure 37: Health and biotechnology market**

**pharmaceutical products in the Ell (billion ECU)**

««apparent consumption

«production

"•exports

_**«*S0**_

Safe-".

**. ^ g P * ^**
^stfSSiPP* [5] '

_***àê**_

**1990** **1995**

**1985**

**Source: Eurostat /** **DRI.**

### **Figure 38: Specialisation in high tech industries**

**specialisation index** **=** **relative share** **of** **high technology exports** **(*)**

**EC**

**USA**

**Japan**

**-20** **0** **20** **40** **60**

```
USA

59

51

```

```
1970

1992

```

```
EC

-14

-18

```

```
Japan

 24

 44

```

_**(*)**_ _**The**_ _**definition**_ _**of**_ _**high technology products**_ _**is**_ _**related**_ _**to**_ _**the**_ _**level**_ _**of**_ _**intensity**_ _**ofR**_ _**&**_ _**D**_ _**(ratio**_ _**R&D**_ _**expenditures/production).**_ _**High**_
_**technology industries include**_ _**aerospace,**_ _**EDP,**_ _**radio**_ _**and**_ _**telecom**_ _**equipment,**_ _**electrical**_ _**machinery,**_ _**pharmaceutical products**_ _**and**_
_**precision**_ _**instruments.**_

**Source: OECD.**

### **Figure 39: High technology products market (*)**

100

80

60

40

20

**EU trading - billion ECU**

"Exports

Imports

**1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990**

_**(*)**_ _**The definition**_ _**of**_ _**high**_ _**technology**_ _**products**_ _**is**_ _**related to the level**_ _**of**_ _**intensity ofR &**_ _**D**_ _**(ratio**_ _**R&D**_ _**expenditures/production).**_

Source: Eurostat.

### **Figure 40: High technology products market (*)**

**level** **of** **opening** **up** **(1990)**

**Germany**

**UK**

**USA**

**Japan**

I imported share
of consumption

I exported share
of production

0% 10% 20% 30% 40%

Japan

7.4%

19.1%

USA

**17.4%**

**23.7%**

UK

**37%**

**9.2%**

imported share
of consumption

exported share
of production

Germany

**32.8%**

**14.6%**

**(*)** _**The**_ _**definition of high**_ _**technology**_ _**products**_ _**is**_ _**related**_ _**to the**_ _**level**_ _**of**_ _**intensity**_ _**of R&D**_ _**(ratio**_ _**R&D**_ _**expenditures/production).**_ _**High technology**_
_**markets include**_ _**aerospace,**_ _**EDP,**_ _**radio**_ _**and**_ _**telecom**_ _**equipment,**_ _**electrical**_ _**machinery,**_ _**pharmaceutical**_ _**products**_ _**and**_ _**precision**_ _**instruments.**_
**Source: OECD.**

### **Figure 41: High technology products market (*)**

**trade performance (relative share in world exports)**

_htWm_

**15.3%**

**Others**

**20%**

**39.6%**

**USA**

**25.1%**

**36.2%**

**23.7%**

**19.1%**

**36.2%** **23.7%** **19.1%** **21%**

_**(*) The definition of high technology products is related to the level of intensity**_ _**ofR**_ _**&**_ _**D**_ _**(ratio**_ _**R&D**_ _**expenditures/production).**_ _**High**_
_**technology markets include**_ _**aerospace,**_ _**EDP, radio and**_ _**telecom**_ _**equipment,**_ _**electrical**_ _**machinery,**_ _**pharmaceutical products and**_
_**precision instruments.**_

**Source: OECD.**

**COMMUNICATION** **FROM** **THE**

**COMMISSION ON AN INDUSTRIAL COMPETITIVENESS**

**POLICY** **FOR** **THE EUROPEAN UNION**

**FINANCIAL STATEMENT**

**1.** **TITLE OF OPERATION**

An industrial competitiveness policy for the European Union.

**2.** **BUDGET HEADING INVOLVED:**

See point 7.2.

**3.** **LEGAL BASIS**

Treaty on European Union and, in particular, Articles 3 and 130 thereofj Title XIII
on industry, Title XV on research and technological development (Articles 13 Of
et seq.), Title VIII on social policy and industrial changes (Article 123) and
Title XII on trans-European networks.

**4.** **Description of operation**

**4.1** **Specific objectives of operation**

- To make European industry more competitive.

- To coordinate the consultations between the Member States and the decentralized

authorities:

=> by taking general _horizontal_ measures under a series of common policies (on
research, networks and foreign trade);

=> by taking _specific_ measures to help industry to adapt to structural changes more
effectively, to create an environment conducive to initiative, to the development of
undertakings and to cooperation between undertakings and to foster fuller
exploitation of the industrial potential of innovation, research and technological
development policies.

4.2 **Duration**

The action proposed in this communication forms part of a continuous industrial
policy.

**,^n**

**4.3** **Target population**

Member States, regional and local authorities, businesses, etc.

5. **CLASSIFICATION OF EXPENDITURE OR REVENUE**

5.1 Non-compulsory expenditure.

5.2 Differentiated appropriations.

5.3 Type of revenue involved.

Not applicable.

```
6. TYPE OF EXPENDITURE OR REVENUE

```

Specific arrangements are planned for each measure referred to in point 7.2.

7. **FINANCIAL IMPACT**

**7.1** **Method of calculating total cost of operation**

This communication and the action provided for therein will have no fresh impact
on the budget.

7.2 **Itemized breakdown of cost**

This communication will have no additional impact on the budget and fits in with
the financial perspectives for 1993 to 1999.

7.3 **Operating expenditure on studies, meetings of experts, etc.**

Not applicable.

7.4 **Indicative schedule of commitment appropriations**

Not applicable.

**8.** **ELEMENTS OF COST-EFFECTIVENESS ANALYSIS**

**8.1** **Specific and quantifiable objectives; target population**

To make industry more competitive, closer coordination will be needed, partly via
a series of common policies, particularly on research, cohesion, vocational
training, networks and foreign trade, and partly by closer consultation between the
Member States. The priority actions, already identified in the White Paper on

growth, competitiveness and employment, will be to promote intangible
investment, to develop industrial cooperation, to ensure fair competition and to
modernize the role of the public authorities.

8.2 **Grounds for the operation**

European industry is making an unprecedented effort to restructure and innovate
in order to boost its competitiveness on the world market. In particular, these
efforts must enable it to withstand the changes in the international context (marked
by the geopolitical upheaval and the conclusion of the Uruguay Round) and the
mounting international competition, partly from undertakings with the advantage
of less stringent social, regulatory or fiscal constraints, together with the economic
recession, the rapid development of combinations of technological innovations
(information technology, biotechnology, new materials, etc.) which have led to
intangible investment (in research, patents, training, software, etc.) growing faster
than capital investment and the inadequacy of the major European networks for
reaping maximum benefit from the revolution in progress in the
telecommunications and information sectors.

Cost:

Not applicable

Spin-offs

8.3 **Evaluation**

Regular evaluations are provided for by the specific procedures for each measure
mentioned in point 7.2.

In addition, the Commission must submit an annual report on competitiveness to
the Council from 1994 on.

**9.** **ADMINISTRATIVE EXPENDITURE**

The action provided for in this communication comes under a number of common
policies and is covered by the general headings mentioned in paragraph 7.2. It will
have no additional impact on the budget. Nevertheless, the expansion of certain
activities and, in particular, the growing coordinating role to be played by the
European Union, as defined in Title XIII of the Treaty on European Union, could
probably generate requests for extra staff. However, no firm estimates can be
made at this juncture, before analysing the requirements in detail, with the
Member States where appropriate.

**y/?<**

**ISSN 0254-1475**

**COM(94)** **319 final**

### **DOCUMENTS**

**E N** **0113** **IO**

**: CB-CO-94-417-EN-C**
**Catalogue number** **,**

**ISBN 92-77-80657-5**

**Office for Official Publications of the European Communities**

**L-2985** **Luxembourg**