Competitiveness Analysis of the Netherlands and the Dutch Dairy Cluster
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Competitiveness Analysis of The Netherlands and the Dutch Dairy Cluster Microeconomics of Competitiveness Spring 2011 Audrey Philippot | Francisco Aguilar | Linda Zou | Niyati Gupta | Zhen Liu EXECUTIVE SUMMARY The Netherlands is one of the richest and most productive countries in the world, with a long history of global trade and a global export leader in numerous clusters. However, growth has slowed down relative to new OECD members in recent years and the country faces several challenges: an aging population, social tensions, an export concentration in slowing mature markets, and relatively low public and private investment in research and development. While the Netherlands has maintained very good macroeconomic conditions, it must focus on a few key areas to return to rapid growth in productivity. The nation must improve its capacity for innovation by boosting research and development spending and encouraging greater private sector investments. It must also diversify its export products and markets to include fast growing frontier markets with similar demand conditions that are less cyclically correlated to its current Western European markets. Finally, it must address social tensions related to immigration and increase immigrant employment and productivity as part of its strategy for addressing its long‐run demographic challenges. The processed foods sector has the largest export share of any sector in the Netherlands economy. Within this sector, the dairy cluster dominates and is one of the most productive and export‐oriented in the world. The high level of productivity in the sector is driven by sophisticated domestic and neighborhood demand and competition, technological innovation, high regulatory standards, and a skilled workforce. However, the cluster faces competitive threats from emerging lower‐cost producers like New Zealand. To maintain its export share, the Netherlands dairy cluster must specialize in the highest‐quality products, increase its market share in emerging economies, and expand into new related product segments. 1 NETHERLANDS COUNTRY ANALYSIS The Netherlands is a high‐income European country with a history of strong economic and social performance. Despite having small geographic size (41,534 km2) and small population (16.8M people), it has long been a dominant trade and commercial player in Europe and in the world. Although it remains an important economic power, like many of its Western European neighbors, it no longer maintains a competitive growth rate and faces demographic challenges. To accelerate growth, the Netherlands must revise its economic strategy that builds on its historical core competencies of innovation and trade expansion. 1. Overview of Dutch Economic Performance 1.1. History of Dutch Economic Competitiveness The Netherlands is well placed to become a central trading post for Western Europe, with its 451 km coastline and networked waterways of rivers and canals. During its “Golden Era” in the 17th century, Amsterdam was one of the wealthiest countries in Western Europe, and the Netherlands established colonies and trading posts all over the world – in Asia for the spice trade and in the Americas for sugar and slaves. Despite competition from other seafaring European powers, such as Spain and Portugal, the Netherlands’ economic power grew steadily through innovation and expansion. Dutch companies introduced insurance, pension, and other financial services to support businesses and merchants. Technological and financial advancement promoted expansion of the shipping and banking sectors. The multinational Dutch East India Company developed the world’s first stock exchange in 1602 to finance its many ventures. The history of trade and economic innovation paved the way for the strong economic performance in the Netherlands in modern day. 2 1.2. Recent Economic Performance With a total GDP of US$680.4B in 2010, the Netherlands is the 22nd largest economy in the world. The country enjoys a high standard of living with a GDP per capita (US$40,500 in 2010) similar to that of other older OECD countries. Its GDP per capita growth trend, as well as its growth rate of 1%, from 1999‐2009 is also on par with this set of comparable countries.1 1.3. Economic Composition The Netherlands is a highly services‐oriented economy with 73% in services, 25% in industry, and 2% in agriculture. Financial services and logistics remain foundational to the services sector, although recent growth in both sectors has been slow.2 Industrial activity in the Netherlands is dominated by processing of mostly imported raw materials, primarily petroleum and chemicals. After the discovery of a natural gas field in 1959 (the economic consequence of which inspired the term “Dutch disease”), the “oil and gas products” cluster has been a large contributor to GDP and the second largest export cluster in the Netherlands. The largest sub‐cluster, petroleum processing, is the fourth largest in the world. Royal Dutch Shell, the largest petroleum refining company in the Netherland, has operations in over 1 CIA Factbook. 2 Economist Intelligence Unit, “The Netherlands: Country Profile 2008,” 2008. 3 90 countries, produces around 3.1M barrels of oil equivalent per day. Production technology, which builds on Dutch competencies in processing and production, is the top growth cluster in the Netherlands. Already a top 5 exporter of specialized process machinery, the country is advancing its position in the world market in other sub‐clusters as well.3 The historically important agriculture sector remains an important contributor to the Dutch economy as the country’s largest export cluster. Major products include floriculture (35% of total agriculture exports), livestock and meat (26%), and dairy products (20%). The sector has a long history of technological innovation and is one of the most productive in the world. As a result, the Netherlands commands 8% of the world market share in agricultural, second only to the US, and holds the largest world market share in flowers and specialty agricultural products. 1.4. Key Economic Drivers EXPORTS – Exports, which form 70% of the GDP, continue to drive the Dutch economy. In 2010, the Netherlands was the fifth largest exporter of goods in the world. The Dutch economy is particularly dependent on exports to Europe, with over 80% of total export shipped to EU.4 FDI – The Netherlands is the world’s eighth‐largest recipient of foreign investment, with net FDI inflows averaging 5% from 2005‐2009. According to the Dutch Foreign Investment Agency, the country provides a home for approximately 8,000 foreign companies, including global multinational companies such as Cisco Systems, Microsoft, Nike, Sabic, Siemens, and Yakult. Foreign companies have made direct investments worth US$597B and provide 15% of 3 Data from World Development Indicators and International Cluster Competitiveness Project. 4 Ministry of Economic Affairs, Agriculture and Innovation, "Holland Compared," 2011, <http://www.hollandtrade.com/publications/holland‐compared/> 4 all jobs in the Netherlands.5 LABOR PRODUCTIVITY – The Netherlands is one of the most productive countries within the OECD, with a labor productivity rate of US$35 of GDP per hour worked, compared to the OECD average of US$25. Whereas the EU‐27 averaged an hourly labor cost of US$21 and a labor cost growth rate of 2%, the hourly labor cost in the Netherland is US$27 and grew at 4%.6 INNOVATION – R&D spending in the Netherlands is relatively low at 1.7% of GDP, compared with the over 2% in the US and over 3% in Japan, Korea and Finland. The low expenditure is partly driven by the larger size of commercial services, which has inherently limited R&D intensity. Also, the proportion of medium‐ and high‐tech companies, which typically have high R&D expenditures, is relatively small in the Netherlands. Dutch patent production is also similarly low at 78 patent output per 1M population, compared to 268 in the US. 2. Determinants of Dutch Competitiveness 2.1. Endowments LOCATION – The Netherlands’ trade‐oriented economy continues to be well‐served by its networked waterways, strategic location in a wealthy neighborhood of innovative producers and sophisticated consumers, and access to global markets. NATURAL RESOURCES – The Netherlands is endowed with an abundance of natural resources, including petroleum, peat, limestone, salt, sand and gravel. As the third largest producer and the second largest net exporter of natural gas in Europe after Norway, the Netherlands has 1.4T ft3 of natural gas reserves valued at over US$166B in late 2006. 22% of the Dutch land area is arable allowing it to become 2nd largest global exporter in the agriculture products cluster. 5 Dutch Foreign Investment Agency. 6 Hourly growth rate measured between 1997 and 2005. 5 2.2. Macroeconomic Conditions: Macroeconomic Policies The Netherlands has enjoyed a history of macroeconomic stability. The recent global financial crisis reduced global demand for Dutch exports and placed a strain on the economy, which shrank by 3.9% in 1999. In 2010, international trade, the largest engine of the Dutch economy, increased again, and GDP was expected to grow by 1.75%.7 While this demonstrates a strong ability to absorb and resolve macroeconomic shocks, it also shows the Netherlands’ vulnerability to such shocks due to its trade dependency and export‐led economy. MONETARY POLICY – Since the adoption of the euro in 1999, the monetary policy of the Netherlands is under the control of the European Central Bank,