Economic Performance
Index: An Industry-Centric
Measurement Approach
Economic Performance Index: An Industry-Centric Measurement Approach
Content
1.Preface
3
2. Measuring economic performance: Ask the right questions
4
3. Core components: Drivers of industry growth
5
4. Key findings: Bringing economic performance into clearer focus
9
5. Implications: Using the results
15
6. Conclusion: EPI delivers targeted answers
16
7.Appendix
16
8.References
18
Acknowledgements
We are grateful to the members of the Global Economic Symposium (GES) and all the Towers Watson (TW) associates who played an important role in shaping this study. The initiative owes much to Professor Dennis J. Snower
(Director, GES), Dr. Alessio J. G. Brown (Executive Director, GES), John J. Haley (CEO, Towers Watson) and Mike
Orszag (Head of Research, Towers Watson) for their valuable inputs at each stage. The project team comprised
Urvi Shriram (project leader), Nitisha Patel, Alok Singh, Maximiliano Sosa (project managers) and the TW industry
research teams managed by Mercedes Aguirre, Anushri Bansal, Lucia Carrera, Vrinda Gupta, Daniel Nemoy, Anurag
Sharma, Abhishek Singh, Juan Ignacio Scasso and Jing Wang. The paper benefited greatly from the valuable comments and suggestions provided by Sharon Clark and Sharon Wunderlich (Corporate Marketing, Towers Watson).
Nancy Campbell and the GES design team deserve special thanks for their inputs in editing and in the design stage.
–2–
Economic Performance Index: An Industry-Centric Measurement Approach
Preface
A key tenet of the Global Economic Symposium (GES) is that the world’s economic challenges
are primarily global. Economic performance is no longer solely determined by a country’s resources, skills and capital, but rather by the idiosyncratic characteristics of companies operating across
national borders. When the products and services people buy daily come from all over the world,
it is anachronistic to continue treating the country as the basic unit of economic analysis. Yet the
research literature on economic growth and performance focuses almost exclusively through the
lens of the country, yielding insights that are invariably incomplete and often inaccurate.
Towers Watson advises global firms on employee benefits, rewards, risks and economic performance. In its work, it is very clear that economic performance relates more directly to industries
and companies than to countries. And even country-specific factors, such as the regulatory environment, affect industries and companies in significantly different ways.
As long-term partners and collaborators, the GES and Towers Watson are enthusiastic and passionate about developing better data and research to identify the key drivers of economic performance. In this effort, we measure economic performance and identify its drivers by examining industry- and firm-level data on innovation, financial performance, talent availability, the cost
of doing business and more. We developed a database of more than 500 variables, including
34,000-plus observations and data from more than 16,000 companies around the world.
The results so far are striking. At the industry level, so much economic activity is heterogeneous,
confirming the importance of this approach. We eagerly await your comments and input to this
exciting analysis.
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Economic Performance Index: An Industry-Centric Measurement Approach
Measuring economic performance: Ask the right questions
As they strive to overcome economic challenges and promote growth, policymakers and business leaders need solid analytics that accurately portray shifting patterns around the globe. The
progressive integration of the global economy has meant that national boundaries are becoming
less important for economic performance, whereas microeconomic characteristics of globally mobile firms are becoming more important. The geographic decomposition of value chains enables
companies to operate wherever local teams can add the greatest value, thereby changing the
nature of international competition. It is widely known that countries are no longer the primary
players; rather, companies—embedded in their industry sector—compete for market share in the
global economic arena. Yet, surprisingly, economic performance and competitiveness continue
to be measured in terms of nations. The Economic Performance Index (EPI) developed by GES
and Towers Watson goes to the heart of the action, recasting the perspective and language of
economic performance to the way business is done in practice: at the company and industrial
sector levels.
The EPI examines the microeconomic nature of competition and the factors driving the rise and
fall of companies and industries in a country, breaking down a country’s overall economic performance into its heterogeneous parts. In both the United States and China, for example, some
industries are booming, while others struggle to survive. Thus, overall economic performance
should be measured taking this heterogeneity into account.
To capture these dynamics, the EPI combines a robust empirical framework with a disaggregated
approach. Across the G-20 nations, we collected data for more than 16,000 companies, which are
clustered into 17 industries based on primary economic activity (Figure 1).
Figure 1 — Sectors based on Primary Economic Activity
• Aerospace & Defence
• Insurance
• Property & Construction
• Automobiles
• Food & Beverage
• Retail
• Banking
• Healthcare
• Technology, Media & Telecom (TMT)
• Chemical
• Natural Resources
• Tourism & Leisure
• Electronics
• Personal & Household Goods
• Transportation
• Pharmaceuticals
To measure industry performance, we examined more than 500 factors that are grouped into
seven core components. These reflect the market, government and industry-specific forces that
determine the value of an industry in a country. This bottom-up approach to economic performance enables policymakers and business leaders
to tailor their decisions and actions to companies and industries. The scores and the database
can guide business expansion by identifying the strengths of different locations and of various
industries in different locations. Policymakers can use the results to decide on investment in tangible and intangible resources at the company and industry levels. –4–
Economic Performance Index: An Industry-Centric Measurement Approach
Industry performances vary widely both within and among countries. In the Aerospace & Defense
and Electronics industries, India and Brazil outperform the U.S. and Japan. In the Pharmaceuticals
industry, the U.S., U.K. and Japan lead the pack, while in Technology, Media & Telecom (TMT),
South Korea, the U.K. and U.S. occupy top positions. Such distinctions—critical to effective decision making—are lost when the focus is strictly on country-level competencies.
The drivers of economic performance affect company and sector performance in different ways
and to varying degrees. For example, the regulatory environment is crucial to the TMT industry.
In the Transportation and Aerospace & Defense industries, government effectiveness and business environment matter more. A thriving TMT industry benefits other industries as improved connectivity sparks innovation elsewhere. The Tourism & Leisure industry generates more foreign
exchange than other industries, while boosts to manufacturing create more jobs.
While experts debate whether the Chinese juggernaut will knock the U.S. off its economic perch,
other, perhaps more relevant, questions are going unasked. Business leaders need new analytics to hone in on the microeconomic nature of competition and industry-level challenges to keep
their multinationals going strong, while policymakers might need to create different environments
for different sectors. Strategies based on outmoded analytics may not be sustainable and could
even cause countries and businesses to falter rather than flourish.
Looking Beyond Traditional Measures of Economic Performance
Traditional
Approach
• A top-down approach of looking through an
economy-wide lens to measure overall
economic performance. For example,
single measures like GDP
New
Industry-Based
• A bottom-up approach of looking at
Approach
companies and industries as drivers of
overall economic performance
Core components: Drivers of industry growth
There is no one-size-fits-all way to measure industry growth. Rather, translating the complex forces responsible for the growth of industries (and ultimately countries) into quantifiable indicators
of performance requires an in-depth examination of hundreds of underlying factors. To streamline
our analysis, we grouped all factors into seven core components that are both distinct and correlated with one another, reflecting the ongoing interplay between market and government forces.
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Economic Performance Index: An Industry-Centric Measurement Approach
1. Financial performance and productivity
2.Innovation
3. Cost of doing business
4. Talent availability and quality
5. Government effectiveness and infrastructure
6. Business environment
7. Industry-specific factors
While the same core components are applied to all industries, the factors that make up each
component vary by industry. We surveyed industry leaders in the GES community, asking them to
weight these categories by importance and relevance to their industry, and applied these weightings, as well as others described in the Appendix, to our results.
Country performance in each industry is an average of the country’s scores on the seven core
components.1 While the importance of each component varies from industry to industry, they all
influence competitiveness and performance, either directly or indirectly. These components are
interdependent, so weakness in one area might trigger poor performance in another. The seven
core components are described below.
Financial performance and productivity
Financial performance and productivity are measured by aggregating data from the top 70 percent of companies (by revenues) in each industry by country. Financial variables—such as revenues, profits, debt-to-liabilities ratios, market capitalization and loans—are applied according
to their relevance to each industry’s performance. Productivity measures include revenues-toemployment ratio, sales-to-employment ratio and profits-to-employment ratio.
Innovation
Innovation is an essential driver of sustainable industry growth. Discussions about the importance
of innovation in fostering national growth and competitiveness have occupied center stage in
economic policymaking for many decades. We use factors such as R&D investments, goodwill of
firms and patents filed to gauge an industry’s innovation capacity in each country.
Cost of doing business
This category considers operational costs such as labor, land, inflation, electricity, raw materials, total rewards and other capital costs. In manufacturing industries, for example, the relative
costs of labor and raw materials are among the most influential drivers of competitiveness across
countries. In resource-intensive industries, such as Energy & Utilities, cost is an especially crucial
factor in competitiveness.
1 Please see the Appendix for details on the methodology.
–6–
Economic Performance Index: An Industry-Centric Measurement Approach
Talent availability and quality
We capture variables that measure both the quality of talent and the availability of young workers
in each country, enrollment rates at different education levels, and number of technical and other
institutions. The category includes data on skilled workers, researchers and engineers, and factors such as employee engagement, employees’ attitudes toward job security and turnover rates.
Flexibility in labor markets also affects industry efficiency.
Business environment
This category encompasses a wide range of factors that shape an industry’s operating environment, taking into account both macroeconomic and industry-specific factors. These factors
include overall unemployment rate, foreign direct investment (FDI) as a proportion of gross domestic product (GDP), carbon emissions, oil price fluctuations, corruption level, freedom of conducting business and trade, investment freedom, firing cost and contract procedures. We also
measure the number and quality of suppliers along with the technological advancement of buyers. Financial market development determines ease of operation and thus is affected by variables
like access to financial markets, availability of loans, credit ratings, market size, literacy rates and
unemployment rates.
Government effectiveness and infrastructure
Governments play an important role in industry growth. Excessive bureaucracy and corruption
harm all industries, especially those highly dependent on the government. Government’s roles
include investing in infrastructure, improving health and education, enacting efficient and fair
laws, devising regulations tailored to each industry’s dynamics and maintaining a stable macroeconomic environment conducive to business growth.
Businesses are hurt by rising inflation, fiscal deficits and ineffective exchange rates and FDI
flows. Industry efficiency requires high-quality physical infrastructure, as reflected by the quality
of roads, railroads, ports, air transport, telecommunications network, electricity generation and oil
production capacity.
Industry-specific factors
These factors include measures of competition, exit and entry barriers, and other competitive
dynamics. The variables include number of firms, size distribution of firms, number and types of
mergers and acquisitions (M&As), demand and supply indicators, and exports and imports that
determine market size.
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Economic Performance Index: An Industry-Centric Measurement Approach
Examples of other industry-specific factors
Aerospace & Defense: Government expenditure on Aerospace & Defense, Aerospace &
Defense budget compared with GDP, military and space budget compared with total budget
Automobiles: Exports of auto goods and services, pump price of gasoline per liter, car production, automotive industry public revenue, automotive industry employment, total production of commercial vehicles, automotive industry turnover, average passenger flow by road,
number of M&As
Banking: Risk-weighted assets, equity-capital-to-risk-weighted-assets ratio, bank non-performing loans, risk-assets-to-total-assets ratio, total risk-based capital, access to loans, local equity market financing, credit rating, investment freedom, financial freedom
Energy & Utilities: Fossil fuel energy consumption (% of total), share of primary energy from
renewables (%), coal consumption, natural gas consumption, share of alternative nuclear
energy, electricity generation, oil consumption, refinery capacities, share of energy in total
imports, energy production, electricity consumption
Health Care: Hospital beds per 1,000 people, number of private and public hospitals, total
number of hospitals, surgical procedures, outpatient visit rate, health expenditure per capita,
public health expenditure as % of total, inpatient admissions per 1,000 population, average
length of stay (days), life expectancy of women and men, infant mortality rate
Insurance: Insurance density, insurance penetration, distribution channels, total net premiums earned (non-life and life)
Pharmaceuticals: Pharmaceuticals market value, exports, M&A percentile, health care expenditure per capita, public health care expenditure compared with GDP, imports and exports
Transportation: Railway logistics business, air logistics business, population density, vehicles per 1,000 people, vehicles per kilometer, passengers per 1,000 people, total rail lines,
quality of port infrastructure, shipper connectivity, container port traffic, air transport registered carriers
Tourism & Leisure: International tourist arrivals (per 1,000 population), international tourism
receipts per tourist, efficient market branding, hotel rooms, average room prices (USD), airline ticket taxes and airport charges
Technology, Media & Telecommunication: Mobile and fixed-line telephones, fixed broadband
Internet connection charge, fixed broadband Internet speed, international bandwidth per
Internet user, estimated Internet users, DSL Internet subscriptions, cable modem Internet
subscriptions, proportion of households with computers, mobile call cost, mobile penetration, proportion of households with TV
–8–
Economic Performance Index: An Industry-Centric Measurement Approach
Methodology — The Process of Successive Aggregation
Stage Stage Stage Stage
1
2
3
4
Stage 1:
Indicators level
Stage 2:
Index level
Stage 3:
Scoring and ranking
Stage 4:
Final ranks
Identifying the
multiple factors
that underpin the
competitiveness of
each industry
Standardization of
individual factors
and then grouping
them together into
the seven core
components
Countries are
given scores on
each component in
each industry
An average of
scores on each
component is
taken to obtain the
overall score and
rank of each
country in each of
the 17 industries
Details of the methodology and robustness checks are given in the Appendix.
Key findings: Bringing economic performance into clearer focus
The EPI takes a nuanced approach to untangling the complexity/diversity of performance and
competitiveness across industry sectors, and their role in national economic performance. We
next highlight some of the most important findings for policymakers and business leaders. Tremendous variability in factors influencing industry performance
We find significant differences in how countries in each industry score on the 7 core components
of growth and performance. These differences highlight the need for tailored governmental and
corporate policies. Further, co-relation analysis reveals that different core components have more
or less effect on a country’s overall industry ranking. In the TMT and Pharmaceuticals sectors, for
example, innovation is key, but in Transportation and Aerospace & Defense, government effectiveness and business environment have a stronger effect on the relative rankings.
On average, Canada, the U.S., U.K. and Germany outperform other countries in the macroeconomic factors captured in the business environment and government effectiveness and infrastructure components. In contrast, the BRICs tend to score higher on the cost of doing business,
financial performance and productivity components. So in industries where business costs and
productivity are the primary drivers, Brazil, Russia, India or China might be a better choice for a
location.
–9–
Economic Performance Index: An Industry-Centric Measurement Approach
A glance at economic performance through the country-based lens
The traditional approach of looking at only the country specific factors shows that the developed
countries like the US, Canada, Japan, Australia and the UK are at the top (Figure 2). This is
driven by their strong performance on the Business environment, Government effectiveness &
Infrastructure and Innovation components. We see emerging countries like China, Indonesia,
Saudi Arabia, Argentina emerge as winners on the Cost of doing business component.
Figure 2 — Rankings based on country-specific factors only
Ranks
Overall
Business
Environment
Cost of Doing
Business
Government
Effectiveness &
Infrastructure
Innovation
Talent Availability &
Quality
1
US
Australia
2
Canada
Canada
China
Canada
Japan
US
Indonesia
Australia
US
Canada
3
Japan
UK
Saudi Arabia
France
Korea
Australia
4
Australia
US
Argentina
Germany
Canada
Argentina
5
UK
Japan
US
Korea
Australia
Russia
6
Germany
Germany
South Africa
US
Germany
Korea
7
Korea
Saudi Arabia
Mexico
UK
South Africa
Brazil
8
France
France
Canada
Japan
UK
UK
9
Saudi Arabia
Korea
France
South Africa
France
China
10
China
South Africa
Germany
Saudi Arabia
China
Saudi Arabia
11
South Africa
Italy
Turkey
Turkey
Italy
Mexico
12
Mexico
Mexico
UK
Italy
Brazil
Japan
13
Italy
Turkey
Italy
Mexico
Russia
Germany
14
Turkey
China
India
Brazil
India
France
15
Argentina
Indonesia
Australia
China
Mexico
Indonesia
16
Indonesia
India
Brazil
Indonesia
Turkey
Turkey
17
Brazil
Brazil
Russia
Argentina
Argentina
Italy
18
Russia
Russia
Japan
Russia
Saudi Arabia
India
19
India
Argentina
Korea
India
Indonesia
South Africa
Source: Economic Performance Index.
Heterogeneity in overall industry performance across countries
Our results show that the economic performance of a country directly depends on a heterogeneous mix of rising and falling companies within sunrise and sunset industries. For example, our
approach shows that the meteoric rise of China and the gradual slowdown in U.S. growth do not
result from a homogenous movement of trends and indicators. Rather, the individual companies
and industrial sectors that combine to determine overall economic performances in each country
are a heterogeneous mix.
Figure 3 ranks countries in each industry based on scores for all seven core components. We
observe that the same countries tend to remain at the top, middle and bottom of the rankings
across industries. This is driven by the strong relative effects of factors such as talent availability
and quality, and government effectiveness and infrastructure. On that broader basis, developed
– 10 –
Economic Performance Index: An Industry-Centric Measurement Approach
Figure 3 — Rankings based on equally weighted core components
Aerospace
and
Defence
Automobiles
Banking
Chemical
Electronics
Food and
Beverages
Healthcare
Insurance
Natural
Resources
Personal &
Household
Goods
Pharma
Property
and
Construction
Retail
Technology,
Media &
Telecom (TMT)
Tourism &
Leisure
Transport
US
US
Australia
US
US
US
Japan
Canada
US
US
US
US
US
US
Canada
US
UK
UK
UK
Canada
Canada
Canada
US
US
Canada
Canada
UK
Canada
Canada
Canada
Australia
Canada
Canada
Germany
Japan
Germany
Australia
Japan
Australia
Australia
Australia
Australia
Japan
Australia
UK
Australia
US
Australia
Korea
Canada
Canada
Australia
Germany
Australia
Germany
France
Germany
Germany
Australia
UK
Germany
Japan
UK
Korea
Australia
Japan
US
Japan
Japan
Germany
South Korea
UK
UK
Japan
Germany
Germany
France
Germany
France
Germany
Germany
China
Germany
Korea
UK
UK
France
Japan
Japan
UK
Canada
Japan
Australia
UK
Germany
China
France
France
Korea
UK
Korea
Mexico
UK
Germany
Mexico
Korea
Korea
Saudi Arabia
Japan
France
Japan
Saudi
Arabia
Japan
Korea
France
Mexico
France
Korea
Italy
South
Africa
Saudi
Arabia
France
South
Africa
France
Korea
South Korea
South
Korea
UK
Russia
Australia
Italy
France
South
Africa
South
Africa
South Africa
Korea
France
Saudi
Arabia
Saudi
Arabia
Korea
Mexico
Saudi Arabia
Saudi
Arabia
Japan
China
South Africa
South
Africa
Saudi
Arabia
Saudi
Arabia
France
Canada
Mexico
Korea
Mexico
Mexico
South Africa
Saudi
Arabia
Italy
South
Africa
France
India
Italy
Saudi
Arabia
Russia
Mexico
Saudi
Arabia
Brazil
Italy
China
South
Africa
France
China
South
Africa
Mexico
Turkey
South Africa
Brazil
Turkey
Turkey
Brazil
Brazil
China
Turkey
China
South
Africa
China
Italy
Turkey
Italy
China
Italy
Italy
Indonesia
Mexico
South
Africa
China
Italy
Saudi
Arabia
Saudi
Arabia
Brazil
Brazil
China
Brazil
Turkey
South Africa
China
Mexico
Mexico
China
Turkey
Turkey
Turkey
China
Brazil
Indonesia
Italy
Russia
Mexico
Russia
Russia
Mexico
Russia
Brazil
Russia
China
Italy
Indonesia
Mexico
Indonesia
Turkey
Turkey
Turkey
Indonesia
Brazil
Argentina
India
Brazil
Argentina
Argentina
Italy
Russia
Brazil
India
Turkey
Russia
India
India
Argentina
China
Turkey
Indonesia
Indonesia
India
Brazil
India
India
Argentina
Indonesia
Russia
Argentina
Argentina
Indonesia
Italy
Argentina
Brazil
Brazil
Argentina
Italy
Indonesia
Argentina
Russia
Indonesia
Indonesia
India
Brazil
India
India
India
Turkey
Russia
India
Argentina
Argentina
Russia
Indonesia
Indonesia
Indonesia
India
India
India
Source: Economic Performance Index.
– 11 –
Economic Performance Index: An Industry-Centric Measurement Approach
countries—the U.S., U.K., Canada, Japan and Germany—score highest, while India, Brazil and
Argentina cluster at or near the bottom.
The flexibility offered by the database structure and approach enables decision makers to score
countries based on all or any combination of the seven core components, assigning different
weights to different components, depending on the ultimate objectives. For example, a pharmaceutical company seeking a new location might want to assign more weight to innovation and
talent availability and quality than to some of the others. It is interesting to observe that based
on industry-specific factors only (i.e. excluding macroeconomic factors), the developed countries
score highest in some industries, while the emerging markets score better in others (Figure 4).
For example, Brazil and India are top scorers in the Aerospace & Defense industry, while South
Africa and Argentina score highest in the Retail industry. In the Banking and TMT industries, the
U.S., U.K., Australia and Germany score better than Brazil, Russia, India and China (the BRICs).
A closer look at heterogeneity through the industry-based lens
Emerging markets gather steam
China’s rapid rise in the Automobiles and Electronics industry reflects the breakneck pace of
development in China’s manufacturing industries over the last two decades. Growth has been
fuelled by a low cost base, an increase in skilled workers, especially engineers, and government
investment in technology and infrastructure. According to DeVol and Wong (2010) China is now
the second largest contributor to global manufacturing output (the U.S. is first). China was the
top auto producer in 2010, and forecasts are also encouraging (RIA Novosti 2009), with the auto
industry poised for strong growth over the medium term. China is also among the top five countries in the Food & Beverage and Transportation industries as calculated on the basis of industry
factors only.
India occupies the bottom of the pyramid in most industries, the exceptions being Aerospace &
Defense, Automobiles, Electronics, Energy & Utilities and Pharmaceuticals (based on industryspecific factors only). India’s growing research and engineering capabilities coupled with low
costs and innovation improvements are responsible for the success of these industries. Strong
demand arising from India’s large population base, growing government support and increasingly
open markets are also fuelling the growth of India’s Aerospace & Defense and Automobiles industries. However, India’s unfavorable business environment, political instability and lack of efficient
infrastructure hurt its performance in most other industries.
In Brazil, massive government investment in industries like Aerospace & Defense, steel and petrochemicals explain why these industries are flourishing. Brazil ranks among the top 10 car producers in the world; the industry benefits from an infusion of foreign capital, abundance of iron
ore and steel, and financial support from the government for setup costs, which are expensive
(Countriesrequest.com 2010). Brazil has a highly competitive Aerospace & Defense industry, with
– 12 –
Economic Performance Index: An Industry-Centric Measurement Approach
Figure 4 — Rankings based on industry-specific factors only
Aerospace
and
Defence
Automobiles
Banking
Chemical
Electronics
Food and
Beverages
Healthcare
Insurance
Natural
Resources
Personal &
Household
Goods
Pharma
Property
and
Construction
Retail
Technology,
Media &
Telecom (TMT)
Tourism &
Leisure
Transport
India
UK
UK
Germany
Germany
Mexico
Japan
France
Brazil
Mexico
USA
Brazil
South
Africa
Korea
Korea
US
Brazil
China
Australia
US
China
Argentina
France
Canada
Canada
Canada
UK
France
Argentina
UK
France
Korea
US
US
Canada
Saudi
Arabia
Korea
China
Korea
Australia
Mexico
France
Japan
Saudi Arabia
US
US
UK
China
France
Germany
Mexico
Korea
France
South
Africa
Italy
South
Africa
Australia
Germany
South
Africa
Turkey
Brazil
France
Turkey
France
China
Indonesia
Germany
Mexico
UK
US
US
Indonesia
Argentina
US
Mexico
Indonesia
Mexico
Germany
Australia
Italy
UK
Brazil
Turkey
France
Brazil
Indonesia
Germany
UK
Saudi
Arabia
Brazil
Italy
Argentina
Korea
Canada
US
Germany
Korea
Japan
Saudi
Arabia
UK
Argentina
Canada
China
China
US
Korea
China
US
France
Australia
Germany
Saudi
Arabia
Germany
Turkey
Japan
Russia
Mexico
Saudi
Arabia
UK
Brazil
France
China
Russia
China
Saudi
Arabia
Saudi Arabia
China
Canada
Russia
Italy
Indonesia
Turkey
South Africa
France
South Africa
US
Korea
Saudi
Arabia
Saudi
Arabia
South Africa
Germany
Italy
Canada
Russia
Canada
Argentina
South
Africa
Canada
Italy
Italy
Brazil
South
Korea
Japan
Japan
Korea
UK
UK
Russia
South
Africa
UK
Australia
South Africa
US
Brazil
India
Korea
Australia
Mexico
Indonesia
Australia
Turkey
Germany
Turkey
Mexico
Italy
Australia
Mexico
France
China
US
Japan
Turkey
Saudi
Arabia
Russia
UK
France
Canada
Russia
Argentina
Japan
Japan
India
China
Japan
Indonesia
Turkey
India
Russia
Germany
Italy
Germany
Mexico
Canada
China
Saudi
Arabia
Brazil
Korea
Italy
Australia
Turkey
Russia
Saudi
Arabia
Germany
UK
Argentina
India
Russia
China
Japan
Brazil
Argentina
France
Korea
South
Africa
Canada
UK
Indonesia
Japan
Turkey
South
Africa
Indonesia
Australia
Australia
Brazil
India
Mexico
Canada
Brazil
Indonesia
Russia
Germany
Canada
India
China
Indonesia
Argentina
Japan
Italy
Turkey
Mexico
South Africa
Russia
Russia
India
Australia
Brazil
Mexico
Turkey
South
Africa
Turkey
Australia
Korea
Indonesia
Indonesia
Indonesia
India
Australia
Argentina
Argentina
Japan
Australia
Italy
India
Canada
India
Japan
South Africa
Indonesia
India
Italy
Saudi Arabia
India
Brazil
Italy
India
India
Turkey
Italy
India
Source: Economic Performance Index.
– 13 –
Economic Performance Index: An Industry-Centric Measurement Approach
Embraer being the key player. Brazilian firms are highly integrated into the global aerospace supply chain, and have extensive technological linkages and spillovers as well as high productivity.
Also a high scorer on natural resources, Brazil holds vast mineral wealth, and offshore petroleum
and natural gas deposits that make the nation a significant oil and gas producer. A growing middle
class with greater purchasing power and access to credit, growth in online retail, greater Internet
penetration and online banking all contribute to Brazil’s success in the Retail industry (Thomas
White 2012). High scores on the financial index capturing company performance elevate Brazil’s
competitive position in these industries. Brazil’s lower scores on macroeconomic factors under
the business environment and government effectiveness components highlight where targeted
efforts by policymakers could improve its industry position.
Developed markets struggle to stay on top
The developed countries—U.S., U.K., Canada, Australia, Germany and Japan—are top scorers
in all industries when ranked by their performance across all core components (Figure 3). This is
primarily because of their high rankings on the business environment, government effectiveness
and infrastructure, and talent availability and quality components. With many top-quality educational institutions, these countries offer a talented and highly skilled workforce, which is important
for all industries and critical in the Pharmaceuticals, Chemical, Energy & Utilities and TMT industries. Moreover, these countries consistently score highest on parameters measuring government
effectiveness, such as low corruption levels, thereby creating a favorable operating environment.
The world-class infrastructures in these economies also support industry growth.
However, as scored on industry-specific factors only (Figure 4), some emerging countries topple
developed economics from the top positions. The U.S. remains in the top half of the pyramid in
almost all industries, with its companies boasting high productivity and efficiency. The U.S. has
also been the site of massive technological developments, which accounts for most of the growth
in its per capita income. Germany also remains in the top half in almost every industry. Despite the
economic downturn and Euro crisis, German companies consistently perform well on financial indicators, especially in the Automobiles, Electronics, Personal & Household Goods, and Chemical
industries. Germany benefits from exports to China, India and Brazil, where demand is high for
Germany’s specialized and advanced systems and tools.
Japan scores well in Health Care and Pharmaceuticals. However, its aging population, rising
manufacturing costs and paucity of natural resources are displacing Japanese companies from
their dominant position in the global manufacturing chain (Corwin and Puckett 2009).
Changing dynamics in certain industries
In some industries, the dynamics of competition are changing. These changes are affecting economic performance in ways that conventional wisdom and traditional theories cannot fully explain.
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Economic Performance Index: An Industry-Centric Measurement Approach
In manufacturing industries like Aerospace & Defense, Automobiles and Electronics, emerging
economies like China and India are overtaking developed superpowers like the U.S. and Japan
on a range of industry-specific performance factors. These developing countries are poised to develop the breadth of capabilities necessary to sustain a competitive position and growth in these
industries.
Even though the developed countries continue to dominate Health Care, population and income
growth in emerging economies are stimulating demand for health services and thus increasing
their growth potential (The Economist 2011). Shifting demographic and economic forces are also changing the Retail industry. With consumer
spending declining in the U.S. and U.K. and accelerating in China, India and elsewhere, emerging
markets are fast becoming world-class players. According to IMAP (2010) in the recent economic
recession, falling income and consumer confidence triggered a 3.7 percent decline in global retail
sales in 2009, affecting every segment and most areas (except Africa and the Middle East).
In the global telecommunication industry, companies plan product/service customization, expansion and infrastructure upgrades around four major drivers: competition, customers, deregulation
and technology advances (Deloitte 2009). Over the next few years, emerging market players,
including Latin America, India and Africa, are expected to grab the lion’s share of the market, as
they perform better on these industry drivers.
Implications: Using the results
The main purpose of this analysis is to recast the perspective and language of economic performance to the way business is carried out in practice. The clear message is that a country-level
focus creates a mismatch between economic solutions and economic activity on the ground.
As policymakers worldwide struggle to cope with a recessionary environment—tight fiscal budgets and high debt—funds for performance-boosting factors like infrastructure, health and education are limited. The EPI framework, database and approach, can further help decision makers
discern strengths and weaknesses and identify factors that contribute most to a country’s success
in different industries. These insights can guide various policy decisions depending on the government’s role in an industry. The EPI framework is also useful for businesses seeking to expand their global footprint and to
assess strengths and weaknesses of countries/industries while making mergers and acquisitions
decisions. Our database and approach identifies the strengths of different locations as well as
of various industries in different locations. Properly targeted, the EPI can give business leaders
a deeper understanding of the fundamental drivers of success in a specific location. Companies
can assess different scenarios by assigning different weights to the components, depending on
their industry and objectives. For example, an organization might want to assign a higher weight
to the cost of doing business component in one industry and then assess results for different
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Economic Performance Index: An Industry-Centric Measurement Approach
locations in that industry. The framework can also be easily adapted to include an organization’s
internal data, such as financial or talent-related information, to compare the organization to the
industry average on those measures.
Conclusion: EPI delivers targeted answers
With our results so dependent on industrial context, effective action requires more attention to
the underlying heterogeneity in economic performance. As our evidence-based insights clearly
demonstrate, in dealing with the opportunities and dangers posed by today’s global economy,
companies need analytics that capture the specific strengths and weaknesses of their industry.
Not surprisingly, this also holds true for governments, which need to tailor their policies to meet
the needs of different industries, moving away from a one-size-fits-all approach to national economic performance.
Despite widespread acknowledgement of these realities, action on the ground remains largely
based on traditional top-down approaches. Strategies based on outmoded premises may not be
sustainable and, sooner or later, are likely to hold countries and businesses back. The clear message is that decision makers need to be careful about accepting solutions based on analytics at
a country level which is mismatched with where activity is really taking place.
Appendix
Data
Data are gathered from publicly available statistical databases (country level and some industry-specific data). Company financial data for all industries across the G-20 countries are from
Bloomberg and Towers Watson proprietary databases. Data are compiled for the top companies
in each industry, which are those contributing at least 70 percent of total industry revenue in a
country.
Methodology
Formation of core components
1. All raw data are transformed into standardized z-score values for comparison purposes. a.
Variables for which the highest data point indicates better performance have been
normalized as: z`x’ = (`x’ - r(mean))/r(sd), where z`x’ is the z-score of variable `x’,
r (mean) is the sample mean of the variable, and r(sd) is the standard deviation.
b.
Similarly, we normalize variables for which a high data point indicates poor performance as: z`x’= (r(mean) - `x’)/r(sd).
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Economic Performance Index: An Industry-Centric Measurement Approach
2. Our performance-driving measures (normalized raw data) are then grouped into the seven
core components: financial performance and productivity, innovation, cost of doing business,
industry dynamics and structure, government effectiveness and infrastructure, business environment, and talent availability and quality, with the specific factors underlying these core
components varying by industry. We used simple arithmetic mean to aggregate individual
variables into each core component. To check the robustness and consistency of the framework, we also used Principal Component Analysis (PCA), which enabled us to check consistency in terms of the number of core components used and the adequacy of the underlying
variables. Importantly, for each industry, the choice of variables is based on several subjective
choices: aggregation method (simple average or aggregation based on weights given by PCA
analysis), expert opinions, theoretical models and literature. However, the robustness of the
ranks for each industry has been verified in several ways to confirm the validity of the results.
3. To determine the importance of each core component in driving industry performance, we
surveyed industry leaders from the GES community, asking them to weight these components
by their importance and relevance to their industry.
4. Based on the weights and other weighting mechanisms, we calculated rankings for each
country for each industry (depending on their scores on each of the core components). In
Banking, for example, we ranked each country on the seven core components first and then
aggregated the rankings to determine the relative position of the G-20 countries in the industry.
Robustness checks
Conveying the complexity of economic performance poses several empirical challenges, such
as variable selection, data quality, aggregation methods and weighting. Thus, we used different
methods to verify the robustness of our results.
To check the consistency and accuracy of the EPI from a statistical point of view, we carried out
different univariate and multivariate statistical analyses. For each data point, our univariate analysis checked for missing values and outliers, and addressed issues that could bias the results. For
our multivariate analysis, we obtained the rankings by using PCA and Factor Analysis to check
the number and combinations of core components and variables used to analyze industry performance.
In every composite indicator analysis, the final index is an outcome of several subjective choices
of the weighting and aggregating method. In some cases, these choices are based on common
practice or industry experts’ opinions. To check the effect of these choices on the rankings, we
performed a few other robustness checks. We checked that the ranks obtained by assigning different weights—the GES survey weights and zero weight to each core component—do not affect
a country’s overall ranking in an industry. Specifically, we ensure that the position of the top five
and the bottom five countries remains the same in any weighting scheme. We also compare the
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Economic Performance Index: An Industry-Centric Measurement Approach
results of equal weighting with those using weights obtained by Factor Analysis to verify that the
shift in rankings is not drastic. We find that the rankings are robust and balanced. The final results
are obtained by assigning equal weights to all core components in each industry.
Limitations and scope for improvements
Data limitation: We aggregate company data to obtain data points for each industry. We first identify the top 70 percent of companies in each industry by revenues and then use the median value
of all variables to arrive at the average figure for each industry. One limitation is that our representative sample for most industries includes data only for listed companies (data on non-listed
companies were not available for every country and industry). Future outlook: This pilot study is based on one year’s worth of data, which makes predictions
difficult. The approach and conclusions could be strengthened by building a repository of industry
data and performing econometric/statistical analyses for company and industrial sector outlooks
for the future.
Selection of countries and industries: We selected the G-20 countries for the pilot study because
they represent a range of populations, sizes, stages of development, government policies, regions, philosophies and more. Studying these countries provides a clear view of the global economic landscape. The 17 industries were chosen based on their importance in terms of size and
data availability. In the future, we can include more countries and industries depending upon data
availability.
References
Corwin, J. and R. Puckett. 2009. Japan’s Manufacturing Competitiveness Strategy: Challenges
for Japan, Opportunities for the United States. U.S. Department of Commerce, International Trade
Administration.
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(accessed March 22, 2013).
Countriesrequest.com. 2010. Economy, Manufacturing - Brazil. Countriesrequest.com.
www.countriesquest.com/south_america/brazil/economy/manufacturing.htm (accessed March
22, 2013).
Deloitte. 2009. Telecommunications. Deloitte.
www.deloitte.com/view/en_AL/al/industries/technologymediaandtelecommunications/telecommunications/index.htm (accessed March 14, 2012).
DeVol, R., and P. Wong. 2010. Jobs for America: Investments and Policies for Economic Growth
and Competitiveness. Milken Institute.
www.milkeninstitute.org/pdf/JFAFullReport.pdf (accessed March 22, 2013).
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Economic Performance Index: An Industry-Centric Measurement Approach
IMAP. 2010. Retail Industry Global Report — 2010. IMAP RETAIL Report
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Jan. 19, 2012).
RIA Novosti. 2009. China Becomes World’s Largest Car Market. RIA Novosti, February 6. http://en.rian.ru/world/20090206/120007709.html (accessed March 22, 2013).
The Economist. 2011. World: Healthcare Outlook. Economist Intelligence Unit, Healthcare Briefing
and Forecasts (April)
www.eiu.com/index.asp?layout=ib3Article&article_id=338164218&country_id=1510000351&pub
typeid=1152462500&industry_id=&category_id=775133077 (accessed Nov. 14, 2011).
Thomas White. 2012. BRIC Spotlight Report: Retail Sector in Brazil – Riding the Wave of Middle
Class Growth and Consumer Credit Boom. Thomas White Global Investing.
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2013).
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