The environment for business has changed, necessitating a parallel evolution in industry-related policies. Rapid technological change, globalisation and heightened competition at the national and international levels have altered the landscape for enterprises. Many opportunities now derive from doing business in fundamentally new ways à¢Â€Â? e.g. through developing knowledge-based services and technology-intensive goods; through finding market niches for new software, business services or eco-friendly products; through exploiting the Internet and electronic commerce; and through combining assets with competitors in global mergers and joint ventures.
What does this mean for governments? In fast-moving and globalised markets, supporting specific technologies, sectors or firms can be particularly counter-productive. Subsidies or supports to the wrong targets lock in unviable activities and enterprises. Today, sectors based on information and communications technologies (ICT) are driving productivity growth across the OECD. Tomorrow, sectors related to biotechnology or advanced materials may be the top performers. Innovative start-up firms and sectors fast become sunset enterprises and industries, eclipsed by other dynamic actors.
Governments must create an industry and business environment that is conducive to ongoing structural change. Through the purchase and sale of assets, the entry and exit of firms, and the rise and fall of industries, resources are reallocated from losers to gainers in a competitive process that drives productivity growth and economic performance. Industry-related policies provide the broad frameworks for efficient market functioning. They also step in where markets fail to address societal concerns, e.g. to facilitate structural adjustment or environmental protection, or lead to underinvestment, e.g. in research or training.
OECD industry has evolved towards more knowledge-based activities, the predominance of services and a greater role for smaller firms. Industrial activities in knowledge-based economies are more directly based on the production, distribution and use of knowledge and information. The mastering of new technologies and their application to production processes and products is crucial to competitiveness. Across the OECD, industry is moving from lower value-added to higher value-added activities. Even traditional manufacturing sectors such as chemicals and steel are shedding less sophisticated product lines and emphasising more technology-intensive goods and services.
Manufacturing has slipped to less than 20% of gross domestic product (GDP) in the OECD area. Services now account for between one-half and three-quarters of the value of OECD production. Job creation in services is exceeding overall job growth in the OECD area, with about 65% of workers engaged in activities related to services. Traditional services, such as restaurants and health care, are booming, along with newer technology-based services such as software design.
A subset of strategic business services is making a significant contribution to growth. These are firms providing computer software and information processing, R&D and technical testing, advertising and marketing, human resource development, and organisational advice. Most prominent where industry is characterised by greater flexibility, specialisation, outsourcing and smaller production units, such services aid large firms in efficiently using their resources.
This industrial restructuring has been accompanied by the increased importance of smaller firms. Under the influence of new technologies and business structures, economies of scale tend to be less important to competitiveness. Large firms are becoming more specialised and focusing on core capabilities, while outsourcing goods and services production to small and medium-sized enterprises (SMEs). The rise of technology-based services is putting a premium on traits such as flexibility, innovativeness and speed à¢Â€Â? more characteristic of smaller firms. SMEs now make up over 95% of OECD enterprises and account for 60-70% of employment in most countries.
Productive entrepreneurship is now one of the main drivers of economic growth. It is associated with the ability of individuals to begin new ventures, the quantity and quality of start-up firms, and the ease with which enterprises can enter and exit the market. In a churning process, new establishments are created, some existing ones expand, and others dissolve operations. The entry and exit of firms shifts market share from the less to the more efficient, self-selects winning firms, and leads to knowledge and technology spillovers. It is through such competition that product and process innovation and increases in productivity are realised.
Educational systems and attitudes towards risk-taking and individualism are a major influence in spurring entrepreneurship. However, governments also play a role in fostering start-ups. They can ease regulatory burdens, stimulate venture capital supply, remove fiscal biases, strengthen secondary stock markets, and reform bankruptcy rules. Governments can also nurture small enterprises to help them survive. Disseminating information and technology, encouraging training and organisational change as well as assisting in globalisation efforts can help address barriers to small-firm development.
Entrepreneurs are increasingly women. Female start-up rates are outpacing the national average in several OECD countries. Women entrepreneurs are creating new business niches, but continue to face special barriers to enterprise creation and development. These obstacles are often linked to the characteristics of their firms (e.g. size, sector), but can also result from gender-related discriminatory practices. Ensuring a good environment for the start-up and expansion of women-owned businesses is important to growth and a growing policy concern for governments.
Owing to the pace of globalisation, industrial structures are also changing at the international level. Declining computing, communications and transport costs coupled with regulatory reform and trade and investment liberalisation have prompted firms to adopt global strategies. But their international activities now extend far beyond traditional forms of investment and trade. Cross-border mergers and acquisitions, international strategic alliances and electronic commerce are becoming common paths to internationalising operations, research and markets. Cross-border merger activity grew more than five-fold between 1990-2000, while international joint ventures and strategic alliances increased more than six-fold in this period. At the same time, firms are combining distant operations and selling in global markets through the Internet.
While firms downsize, they seek synergistic effects with other enterprises, including at the international level. Firms buy and sell branches and activities, and network with suppliers and competitors, on a global scale. Service firms seek partners to expand their geographical reach, while manufacturing companies use international acquisitions and collaborations for cost reduction and economies of scale and scope. While these deals grow in size and value, they are also more cross-sectoral, reflecting the blurred boundary between manufacturing and services. SMEs too are engaged in global networks of research, production and sales. Industrial assets and production structures are being reorganised on a global basis, which should lead to efficiency gains for firms, sectors and countries. However, governments must monitor developments to guard against anti-competitive effects and implement measures to realise positive spillovers.
Strategic business thinking has shifted away from products, inventories and tangible assets to customers, employees and intangible assets. Enterprises are adopting new organisational and managerial practices to better deploy and adapt technology, particularly ICT, and to situate themselves in the international setting. Mass production models have given way to leaner production and outsourcing. Hierarchical management has yielded to flatter organisations, team-working, and employee groups. A new customer focus has resulted in mass customisation, shorter product cycles, and goods and services geared to niche markets. And firms increasingly network with each other on product development, production, purchasing and marketing. Such practices, particularly when bundled together, result in improved firm performance and higher productivity.
Intangibles à¢Â€Â? such as technology and skills, organisation and computer software à¢Â€Â? are driving firm performance. Enterprises need to invest in research and development, staff training, managerial innovations and other immaterial items if they want to be competitive. Intangibles are supplanting factors such as (natural) resources, (physical) capital and (manual) labour in production functions. Governments often give tax credits for investment in research, but there are few incentives to other intangible investments. Start-up firms, which largely depend on human capital, know-how or software, may even be penalised by the lack of depreciation allowances for intangible assets.
Economic activity in OECD countries is increasingly immaterial, which should be reflected in national accounts as well as policies. Better measurement of intangibles could lead to improved firm decision making and resource allocation. Within enterprises, knowledge about intangibles and the ability to manage them varies widely. The benefits of intangible investments are often difficult for firms to capture, thus worsening problems of underinvestment. Improved accounting methods and better enterprise reporting could raise the profile of intangible investments and their role in business performance.
Corporate governance rules influence the choices of stakeholders in a firm, including investors, workers and managers. These regimes can affect the performance of firms, particularly with regard to financing, flexibility and innovation. For example, high levels of ownership concentration and corporate cross-holdings can lower competition as well as enterprise manoeuvrability. Whether firms engage in mergers or strategic alliances, downsize to smaller units or upsize to gain complementary assets is influenced by these regimes. Systems favouring wide, dispersed ownership tend to be more open, transparent and responsive to markets. But their drawbacks are short-term perspectives and weak monitoring of management. Rigidities in corporate governance in some countries may be stifling innovation and growth. As emphasised by the OECD Principles of Corporate Governance, systems must reach a balance between encouraging risk-taking and innovation while ensuring management monitoring and accountability.
Is eco-efficiency an enterprise concern? Environmental strategies are a key aspect of organisational change. Across industry, enterprises are taking a more pro-active stance in addressing sustainable development concerns and becoming good corporate citizens. Many enterprises in both manufacturing and services are developing environmental strategies to reduce negative impacts on ecosystems. Improving performance through eco-efficiency, realising new commercial opportunities, improving public image and complying with corporate codes of conduct (such as the OECD Guidelines for Multinational Enterprises) are driving these strategies. Governments can reinforce such behaviour through promoting adoption of environmental management systems, better environmental reporting, and links to assessments by the financial community. Through diffusing information to consumers and stimulating environmental innovations, governments can help catalyse markets and drive the development of new and more sustainable industrial processes and products.
OECD industrial policies are no longer focused on sectors and subsidies. Traditional industrial policy approaches are less effective as technology and globalisation have changed competitive conditions. Governments realise that they are not good at "picking winners" and that providing selective supports is costly in an era of tight budgets. The focus is now on providing a business environment which enhances the ability of firms to be innovative, flexible and competitive.
Regulatory reform to increase competition and encourage new market entrants is key. OECD countries have made significant headway in sectors such as telecommunications, transport, financial services and retail trade, thereby reducing costs and promoting new efficiencies. Reducing direct support and strengthening competition laws have similar effects. Another emphasis is creating a propitious business environment for SMEs. Governments are aiding small firms in finding financing, exploiting new technology, enhancing managerial capabilities and skills development and gaining international market access. Other priorities are assuring a fiscal environment that provides incentives for firms to invest, innovate and reorganise; establishing corporate governance regimes which promote adequate capital flows and leeway for restructuring; and increasing openness to foreign alliances, investments and workers.
Becoming knowledge-based economies is also the goal of many countries beyond the OECD area. For example, Asian economies like Singapore, Chinese Taipei and Malaysia have developed ambitious national strategies for such a transition. China has made the development of knowledge-intensive industries a priority in its 10th Five-year Plan. Countries as diverse as Vietnam, Pakistan, Chile and Brazil are focusing on ICT-related and biotechnology-based sectors. In many cases, however, governments are using a top-down approach to target sectors and channel resources to particular technologies. Their plans tend to be over-ambitious given their technological capabilities and resources. A bias towards ICT manufacturing sectors can lead to neglect of service activities and contribute to widening the digital divide. OECD countries, through policy dialogue, investments, technical assistance and collaborative activities, can help non-member countries avoid the pitfalls of the transition to knowledge-based economies.
The Committee on Industry and Business Environment (CIBE) is charged with analysing the factors which affect business performance and recommending policy approaches to enhance it. Working with other OECD Committees and groups à¢Â€Â? in areas as diverse as technology, taxes, training and trade à¢Â€Â? the Committee identifies means for improving business conditions in the interest of growth. Through firm- and sector-level analyses, it studies the diverse factors affecting business and enterprise behaviour. It acts as a force for change by pointing out where reforms are needed from the viewpoint of the private sector and other actors.
The Committee seeks to clarify principles of good programme design and assist both OECD and non-OECD countries in improving evaluation of their policies and programmes. National approaches to corporate governance, intangible investment, regulatory reform, globalisation and other parameters are compared to highlight what works best in different contexts. Regular Business and Industry Policy Forums are held to confer with representatives of industry, trade unions and civil society on topics such as the services economy, sustainable development, global restructuring, and business use of the Internet.
The Working Party on Small and Medium-sized Enterprises explores aspects of entrepreneurship. It identifies best practice policies for small firms, and regularly publishes the results of evaluations on financing, management, access to markets and other policy directions. Analytical work on high-growth SMEs provides a picture of firms that perform exceptionally in terms of growth and job creation and shows how policy can spur such development. Comparative reviews of regulations and policies have led to recommendations for reforms to increase firm entry and exit and overall entrepreneurship. Studies and reviews are published in the biennial OECD Small and Medium Enterprise Outlook.
The Committee's Statistical Working Party is improving data and measurement of phenomena such as industrial productivity and globalisation. Enterprise demography including the size, age, life span and gender ownership of firms is another focus. Manuals are being developed to guide countries in collecting comparable statistics and using common methodological approaches.
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