Which industries are future-proof, and which need action?

Chief Economist Barbara Baarsma of PwC: 'Economic growth is not an end in itself but is necessary to achieve our ambitions in areas such as housing, healthcare, and defense. Current and future economic growth is hampered by global trends such as aging and climate change, as well as specific Dutch problems, such as the lack of physical space and nitrogen emissions. You could also say: we need to ensure that we do more with fewer people and with less reliance on scarce productive factors.'

The report provides a starting point for this. It examines fifteen industries, part of the commercial sector, over the period 1995-2023 from three different perspectives: their position in the economy, their economic contribution, and their reliance on scarce productive factors.

• Centrality: The first 'lens' relates to the extent to which an industry is connected to other industries. Central industries have many trade relationships with other industries and therefore hold a strategically important position in the economy. If they experience positive or negative shocks, it also has a disproportionate impact on the rest of the economy.
• Economic importance: The second lens examines the fifteen industries based on their economic importance: what do they contribute to the GDP? How high is their productivity growth? What do they spend on research and development (R&D)?
• Dependence on scarce resources: The third lens looks at the extent to which the different industries rely on scarce productive resources such as labour, capital, environment (greenhouse gases, nitrogen, and water) and physical space.
  

The industries that are most central, that make a significant contribution to the economy, and that also have a limited reliance on scarce productive resources are the industries with the most potential for sustainable growth. In 2023, these are high/medium-high-tech industries, other specialised business services, and wholesale and retail trade.

We have given scores to the industries in different areas. A detailed methodology can be found in the report. The darker yellow a box is, the more central the industry (first lens), the higher its share in GDP, the higher its labor productivity growth, and the higher its share in R&D investments (these three factors together form the second lens), and the lower its reliance on scarce productive resources (the third lens). The last column is the sum of the previous five columns. This score is added to summarize the three lenses and is not intended to formulate policies on. This can be done through the three lenses.

Create growth space for frontrunners

It is important to realise that the analysis was conducted at the industry level, while policy ultimately focuses on activities and companies within those industries. Baarsma explains: 'The restructuring of the economy takes place at the level of individual companies and not at the industry level. The difference in labour productivity within industries is greater than between industries. And even when it comes to pollution, innovation, or space usage, you cannot generalise all companies within an industry: there are also significant differences within an industry. Policy should focus on scaling down laggards within industries to create growth space for frontrunners.'

This report underscores the need for 'business model reinvention'

Veronique Roos-Emonds, member of the board of PwC in the Netherlands: 'Many companies are aware that they need to change. In our CEO Survey, four out of ten CEOs express doubts about the sustainability of their business model. This is related to trends such as ageing, technological disruption and climate change. As a result, they are not growing in the way they were used to in previous years. This report underscores the need for "business model reinvention" in companies in several industries. Business model reinvention goes beyond refining technology or streamlining processes; it is about redefining how an organisation creates and delivers value in a rapidly changing world. PwC's analysis shows which industries are best positioned for future growth and which industries need to reinvent themselves. This requires an approach that involves evaluating and adjusting all aspects of business operations. Only in this way can companies grow sustainably, thrive, and contribute to a strong economic structure.'

Focus on structural economic policies and increasing labour productivity

According to Baarsma, two types of policies are needed: general policies aimed at increasing labour productivity and structural policies aimed at adjusting the mix of activities to increase the added value per unit of scarce productive factor used.  

Baarsma: 'The growth of labour productivity can be stimulated by investments in education, knowledge development and the application of innovations in companies. Companies could focus on automation and digitization, internationalization, improving their management practices and adapting their business model to the external environment. Structural policy target industries that hold a central position in the economy, are productive and innovative, and have a relatively limited spatial and ecological footprint.' Baarsma: 'The government can steer this by implementing policies that make it more expensive to pollute or use a lot of water. Furthermore, active spatial planning policy is needed to free up space for more productive activities. Raising the statutory minimum wage could also help stimulate investments in productivity growth.'

Zooming in on industries

Baarsma says that PwC's analysis with the three lenses provides insights for policies aimed at increasing the structural growth capacity of the Dutch economy.

• The centrality analysis shows that the construction industry is central to the economy, meaning that many other industries have production relationships with it. However, labour productivity growth in this industry is lagging. Therefore, it is important that labour productivity in the construction industry increases significantly. This has an impact on other industries through these relationships. The government would do well to establish a productivity agenda with this industry. The same applies to wholesale and retail trade, an industry that is also central and has relatively low labour productivity.
• For industries with a large share in the economy, it is also important to invest in labour productivity growth. In addition to wholesale and retail trade, these include other specialised business services and renting and other business support. Due to the size of these industries, they have a significant impact on labour productivity growth at the macro level.
• The industries where R&D is significantly lagging are construction, transportation and storage, and accommodation and food serving. The government could specifically look at how innovation in these industries could be stimulated, especially since the Netherlands is falling behind the so-called Lisbon objectives of the EU regarding R&D expenditures. 
• When we look at the use of scarce production factors, it is noticeable that agriculture, forestry and fishing, and transport and storage place a disproportionately large burden on scarce production factors. To increase the growth capacity of the Dutch economy, it is necessary to reduce this burden and thus free up growth space for industries that can add more value per production factor, such as high/medium-high tech manufacturing, other specialised business services and wholesale and retail trade.