Competitiveness of the Euro Zone Manufacturing: A Panel Data Analysis

Article excerpt

The purpose of this paper is to assess the main aspects involved in the competitiveness of manufacturing industries in the Euro zone area (EZ-12). To this end, we apply the generalized method of moments to a panel data error correction model. Our sample spans the period from 1970 to 2007, and our findings provide insight into the impact of manufacturing on the international competitiveness of European firms and industries. From the estimated magnitude of the relevant coefficients, we conclude that in the long run, a change in labor and capital compensation is not fully passed on to manufacturing growth, while an increase in the market power of the manufacturing sector will negatively affect its competitiveness.

Keywords Competitiveness * Euro zone manufacturing * Panel data * Generalized method of moments

JEL E00 * L6 * L16 * C33

Introduction

Despite the changing face of the business economy, manufacturing still plays a key role in Europe's prosperity (European Commission 2011a). The manufacturing industry in Europe has been going through a process of structural changes for decades (European Commission 2009). The current and sudden economic crisis that has affected the Euro zone area in recent years has pointed to the importance of adjustment and structural change more than ever (European Commission 2011b). Indeed, there is a compelling need for better understanding and more insight into the adjustment pressure that individual economic sectors experience, the adjustment performance of sectors and countries, and the institutional framework that directly impacts the need and the capabilities of change. The ability of the manufacturing industry to adapt to change and proactively stimulate structural change is pivotal for achieving the European Union's (EU) overall growth and job objectives (Ibid). The EU's ability to adapt to changing market realities and technological developments seems to lag behind those of its key competitors, notably the U.S., but probably even more behind new global players such as Russia, India, or China (Stehrer et al. 2011).

Competitiveness has become a cornerstone in an increasingly open and integrated world economy (European Commission 2010). Despite its widespread importance, the concept of competitiveness is often controversial and misunderstood. There is neither general consensus among the economists and government officials regarding the definition of competitiveness nor a universally accepted theory to explain it. According to the eminent Harvard professor M. Porter (2005), competitiveness is the fundamental determinant of the level of prosperity a country can sustain. To firms, competitiveness means the ability to compete in world markets with a global strategy (Porter 1998a, b). Economic success has been closely associated with the level of competitiveness, i.e., the ability to compete. However, there has been controversy in defining the relevant factors involved and the corresponding concept of competitiveness. In particular, while competitiveness is readily defined at the firm level, the concept becomes rather vague when applied at the industry and national levels. The EU has often tried to redefine the term by providing sectoral competitiveness indicators and shares. According to the latest definition, exemplified in the 2011 European Competitiveness Report (European Commission 2011b, p. 33), the key factor for competitiveness in the long run is the impact of overall economic activity on productivity attained through industrial R&D activity and innovation.

The purpose of this paper is to assess the main drivers involved in the competitiveness of manufacturing industries in the Euro zone area (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain). The econometric estimation is based on pooled time-series cross-section data for 13 industries covering the period 1970-2007. …