BPEA | 1995: Microeconomics

Efficiency in Manufacturing and the Need for Global Competition

Hans Gersbach and
Hans Gersbach Universities of Basel and Heidelberg and McKinsey Global Institute
Martin Neil Baily

Microeconomics 1995

ON AVERAGE, manufacturing productivity (measured by real value added per hour) is higher in U.S. operations than in Japanese or European operations, but productivity by industry varies substantially from country to country. What is not well established is why such international productivity differences exist. This paper explores international productivity differences in manufacturing industries across Germany, Japan, and the United States and offers an explanation for them. We develop an extension and a refinement of the industry-of-origin method to provide new measures of productivity in nine industries located in the three countries (automobiles, automotive parts, metalworking, steel, computers, consumer electronics, food, beer, and soap and detergent). Then we combine publicly available data with the industry knowledge and assessments by experts within McKinsey & Company to determine the reasons for productivity differences. The nature of the explanation takes place at two levels, the first of which is at the production process level. We look for differences in the use of capital, technology, and skills-how the variables that enter the production function differ across countries-and the synthesis of the industry results shows that physical capital and embodied technology are important factors that partially account for differences in labor productivity. The major part of the productivity differences, however, can be attributed to the way functions and tasks are organized and to the fact that some companies have designed the products they make so that they require less labor and material to manufacture.