Economic Performance Index: An industry-centric measurement approach

Mike Orszag, Urvi Shriram, Dennis J Snower 13 March 2014

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Measuring economic performance

As they strive to overcome economic challenges, policymakers and business leaders need solid analytics that accurately measure economic performance and competitiveness. A number of studies look at a range of criteria and rank countries based on their performance, including the Global Competitiveness Index by the World Economic Forum, the IMD World Competitiveness Yearbook, and research on national competitiveness (Delgado et al. 2012).

The Economic Performance Index (EPI) goes further 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 industry levels (Shriram et al. 2013). The progressive integration of the global economy is reducing the significance of national boundaries, making microeconomic characteristics of globally mobile firms more important. Countries are no longer the primary players; it is companies, embedded in their industry sector, who compete for market share in the global economic arena.

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. Across the G-20 nations, we collected data for more than 16,000 companies, which are clustered into the following industries based on primary economic activity (Figure 1).

Figure 1. Sectors based on primary economic activity

To measure performance, we examined around 500 factors that are grouped into core components that reflect the market, government and industry-specific forces determining the value of an industry in a country (see Figure 2).

Figure 2. Core components: Drivers of industry growth

The different ways of scoring and ranking countries

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. We use three different ways of ranking countries:

  • Rankings based on country-specific factors only. Ranks for each country are calculated by scoring them on only the country-specific factors in each core component.
  • Rankings based on equally weighted core components (including all country-specific as well as industry-specific factors). Ranks for each country in each industry are calculated by taking an average of its performance on all core components.
  • Rankings based on industry-specific factors only (excluding country-specific factors). Ranks are calculated for each country in each industry by scoring them on only the company/industry-specific performance factors.

Key findings: Bringing economic performance into clearer focus

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 3). 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 3. Rankings based on country-specific factors only

Source: Economic Performance Index.

A closer look at economic performance through the industry -based lens

Figure 4 ranks countries in each industry based on scores for all seven core components which include both country-specific and industry factors. 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 stronger relative effects of country-specific factors in the talent availability and quality, and government effectiveness and infrastructure components. On that broader basis, developed countries —the US, UK, Canada, Japan, and Germany — score highest, while India, Brazil and Argentina cluster at or near the bottom. The BRICs tend to score higher on the cost of doing business, financial performance, and productivity components.

Figure 4. Rankings based on equally weighted core components

Source: Economic Performance Index.

Tremendous heterogeneity in overall industry performance across countries and in factors affecting performance

It is interesting to observe that based on industry-specific factors which directly capture the performance of companies and other relevant factors for each industry only (i.e. excluding country-specific factors), the developed countries score highest in some industries, while the emerging markets score better in others (Figure 5).

In manufacturing industries like Aerospace & Defense, Automobiles and Electronics, emerging economies like China and India are overtaking developed superpowers like the US and Japan on a range of industry-specific performance factors. 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. Shifting demographic and economic forces are also changing the Retail industry. With consumer spending declining in the US and UK and accelerating in China, India, Brazil, Argentina, and elsewhere, emerging markets are fast becoming world-class players.

These changing dynamics of competition are affecting economic performance in ways that conventional wisdom and traditional theories cannot fully explain.

Figure 5. Rankings based on industry-specific factors only (excluding country-specific factors)

Source: Economic Performance Index.

EPI delivers targeted answers

Our bottom-up approach to economic performance shows that the economic performance of a country directly depends on a heterogeneous mix of rising and falling companies within sunrise and sunset industries rather than any homogenous movement of trends and indicators.

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.

References

Delgado, Mercedes, Ketels, Christian H. M., Porter, Michael E. and Stern, Scott, (2012), “The Determinants of National Competitiveness”, No 18249, NBER Working Papers, National Bureau of Economic Research, Inc.

IMD World Competitiveness Yearbook (WCY, 2011).

Schwab, Klaus, Sala i Martin, Xavier (2012), "The Global Competitiveness Report 2012-2013", World Economic Forum.

Shriram, Urvi, Dennis Snower and Mike Orszag (2013), “Economic Performance Index (EPI): An Industry-Centric Measurement Approach”, Global Economic Symposium, Kiel Institute for the World Economy and Towers Watson.

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Topics:  Frontiers of economic research

Tags:  EPI

Head of Research, Towers Watson

Economist, Towers Watson

President of Kiel Institute for World Economics and CEPR Research Fellow