1. The Competitiveness of the Technological Sectors A Benchmark Analysis Prof. Dr. J. Konings A study commissioned by Agoria

2. Structure: Analysis of Labor Costs, Productivity and Financial Performance 1. International Benchmarking:  Comparison with the Netherlands, France, Germany and the UK 2. Sectoral Benchmarking  Comparison with total manufacturing, but also with a number of selected sectors, such as the Chemical, pharmaceutical, steel, textile and food and drink sector.  Comparison with other technological sectors

3. Method  Representative and comparable sample of companies active in the technological sectors in Belgium (about 6000 firms in Belgium) and other countries  Time Frame: 1997-2004  Source: Amadeus data set of company accounts  Benchmarking on the basis of averages, medians, percentiles  Econometric model of employment and productivity

4. Which Sectors? Sector Employment Share in Total Manuf % Metals in Primary Form 3 Metal products 9.7 Machinery and Equipment 7.3 Office Equipment, Computers 2.9 Electrical Machinery, Medical Equipment 5.3 Motor Vehicles 8 Other Transport 1.7

5. International Benchmarking

6. Evolution Average Labor Cost: Belgium, The Netherlands, France, Germany Average labor cost in firms with at least 200 workers

7. Evolution Average Labor Productivity

8. Average Labor Cost Gap between Belgium and its Neighbors in large enterprises in 2004 Annual Labor cost per worker Percentage cost disadvantage with Belgium Belgium 52 900 0 Netherlands 49 500 7% Germany 50 900 4% France 43 200 22%

9. Effects of Labor Cost Differentials on Jobs? Econometric Model of Employment Determination  Demand for Labor = F(output, capital, labor cost differential between Belgium and country i, time effects, firm specific effects), i=N,D,F 1/ High labor costs have a negative effect on job creation: A reduction of 10% in labor costs in Belgium would result in increased demand for labor of 6% in the short run, of 10% in the long run. Or this corresponds to a labor cost elasticity of 1. 2/ Hence: A reduction of labor costs in Belgium to the level of those in the Netherlands would result in an additional 16000 jobs in the technological sectors.

10. Financial Performance?  EBIT:Earnings before interest and taxes

11. Return on Capital Employed

12. Investments Investment as a % of Value Added Belgium12.8 Germany9.08 Netherlands8.6 France7.5

13. Economic Mechanism at Work  Chain of causation High and Increasing Labor Costs Investment in Capital Intensive Production Techniques Job Destruction High Fixed Capital Costs Low Profitability Labor Productivity increases to compensate the increase in labor costs

14. Sectoral Benchmarking

15. Labr Costs in 2004

16. Labor Productivity in 2004

17. Average Labor Productivity in other Technological Sectors, 2004

18. EBIT

19. Net Profit Margin (after Taxes)

20. What do we learn from sectoral benchmarking?  Compared to other manufacturing sectors, labor costs and productivity in the technological sectors are around the average of total manufacturing  The financial performance in the technological sectors is slightly above the average of total manufacturing  The chemical, pharmaceutical and steel sector perform the best of all sectors

21. Conclusion  Belgian firms active in the technological sectors have a labor cost handicap relative to our neighboring countries, which is increasing.  As a result, labor intensive production techniques are replaced by more capital intensive ones, such that labor productivity increases to compensate for higher labor costs  However, due to the high fixed capital costs, financial performance in terms of profitability is low compared to comparable firms abroad  Firms in the technological sector perform close to the average of total manufacturing in Belgium.