Foreign competition stimulates productivity in manufacturing industry

27/11/2008 15:00

Manufacturers exposed to fierce foreign competition on the domestic market tend to operate more efficiently, though their profit margins are lower. Consumers benefit from foreign competition.

More efficiency

Due to strong foreign competition, Dutch companies are forced to work more efficiently. This results in more productivity. On average, an increase by 10 percentage points of the market share of foreign goods on the Dutch market leads to an increase in output growth of Dutch companies of 0.1 percent point.

On the domestic market for transport equipment, the foreign share nears 79 percent. Annual productivity growth averaged 1.26 percent in the Dutch sector transport equipment. In the sector printing and publishing, the share of foreign companies is less than 10 percent. Annual productivity growth in the sector printing and publishing averaged 0.5 percent.

Productivity growth manufacturing industry by sector, 1995-2005 (graph contains mouse-over texts)

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Selling prices and profits increasingly under pressure

Increased foreign competition puts selling prices under pressure. Dutch companies cannot simply pass on rising costs to consumers. Eventually, Dutch consumers benefit from foreign competition.

Fierce foreign competition invariably leads to lower corporate profits. In most cases, the pressure on selling prices cannot be offset entirely by productivity growth.  The profitability rate is highest in the sector printing and publishing.

Profitability in manufacturing industry by sector, 1995-2005 (graph contains mouse-over texts)

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Effect of foreign competition varies widely

Within manufacturing industry, there are major differences with respect to the degree of exposure to foreign competition. The sector printing and publishing is hardly affected, whereas manufacturers of textile and electro-technical products face keen competition from abroad. 

Share imports on Dutch market, 1995-2005

Share imports on Dutch market, 1995-2005

Dirk van den Bergen, Erik Veldhuizen