Cantonal Competitiveness Indicator 2018 Contents

Chief Investment Office GWM Investment Research

03 Editorial

04 High concentration of growth potential

06 The eight pillars of competitiveness

09 Cantonal competitiveness profiles

13 List of variables

Cantonal Competitiveness Authors Indicator 2018 Katharina Hofer This report was produced by UBS Matthias Holzhey Switzerland AG. Maciej Skoczek Please note the important legal notes Editor and disclosures at the end of this Viviane Vajda document. Desktop Publishing Publisher CIO Content Design UBS Switzerland AG Chief Investment Office WM Cover photo PO Box, CH-8098 Zurich gettyimages Publication date Languages 27 August 2018 German, French and English Editor in chief Contact Find out more: Katharina Hofer [email protected] www.ubs.com/cio

2 Cantonal Competitiveness Indicator 2018 CCI 2018

Editorial

Dear reader,

The strong Swiss franc has been causing headaches for this country’s exporters for some time. As soon as the exchange rate weakens a little, events such as the turbulent election results in Italy or the collapse of the Turkish lira lift the Swiss currency again. At the same time, the trade conflict between the USA and China or a possible failure of the negotiations for a framework agreement with the European Union is likely to have a negative effect on the Swiss export sector.

The impact of these developments on the economies of the different cantons varies. The cantons that are more heavily focused on exports feel events in the currency markets more than those with a domestic orientation. And cantons with a broadly based export sector are generally better equipped for turbulent times than ones dependent on demand from just a few trading partners or that concentrate on a small number of economic sectors. What’s more, changes to the structure of the economy as a consequence of declining exports can result in repercussions for the labor markets in the cantons concerned.

A diversified economic structure and a flexible labor market are two central ele- ments for increasing the long-term growth potential of the cantonal economies. In this Cantonal Competitiveness Indicator 2018, we also draw attention to other factors influencing the relative competitiveness of the 26 cantons in Swit- zerland over the long term, highlighting the challenges the cantons face when confronted with stiff international competition.

We hope you find it an interesting and informative reading.

Claudio Saputelli Katharina Hofer Head Global Real Estate Head Swiss Regions

Cantonal Competitiveness Indicator 2018 3 CCI 2018 High concentration of growth potential

The cantons of Zug, Zurich and Basel-Stadt occupy Cantonal Competitiveness Indicator (CCI) the top three spots in the Cantonal Competitiveness 2018 Indicator (CCI) 2018. Once again, they have the highest long-term growth potential compared to the other 1 ZG (1 = Ranking 2016) 100.0 cantons. Very good growth prospects are apparent 2 ZH (2) 96.6 for the group on their heels, consisting of Aargau, 3 BS (3) 94.4 Schwyz, Lucerne and Vaud. There is solid growth 4 AG (4) 82.1 5 SZ (8) 77.7 potential in a large, closely bunched group of 11 can- 6 LU (5) 77.4 tons; at the top of this group is Nidwalden, in central 7 VD (7) 76.3 Switzerland, while at the bottom is Obwalden. 8 NW (6) 73.5 Ranked in between are the cantons of Eastern Swit- 9 BL (9) 72.1 zerland (Thurgau, Schaffhausen, St. Gallen, Appenzell 10 TG (11) 69.8 11 GE (10) 69.1 Ausserrhoden) and the Mittelland region (Fribourg, 12 SH (15) 68.3 Bern, Solothurn). Basel-Landschaft and Geneva are 13 SG (13) 66.3 also in this group. The laggards in the CCI 2018 are 14 FR (12) 66.2 the two large mountainous cantons, Graubünden 15 BE (17) 63.0 and Valais, and the canton of Jura. 16 SO (16) 62.9 17 AR (18) 62.7 18 OW (14) 61.5 Alpine cantons improve their relative position 19 TI (21) 57.9 The ranking of the cantons is largely stable compared 20 NE (20) 57.4 to 2016. Fourteen of them, more than half, retained 21 AI (19) 55.7 the same position, though six climbed up the table. 22 GL (22) 54.1 23 UR (23) 50.8 Schwyz and Schaffhausen rose three places in 2018. 24 GR (24) 44.8 Bern and Ticino each climbed two notches, and Thur- 25 VS (25) 42.7 gau and Appenzell Ausserrhoden one. The sharpest 26 JU (26) 35.0 decline was Obwalden, down four places. Nidwalden, 50 60 75 90 100 Fribourg and Appenzell Innerrhoden fell two places, Top (>90) Moderate ( 50–60) and Lucerne and Geneva one each. However, the High (75–90) Low (<50) gaps between the cantons in the middle of the rank- Solid (60-75)

ing are small, which can result in positions changing Source: UBS rapidly.

Traditionally, the Alpine cantons of Uri, Glarus, Graubünden, Ticino and Valais display relatively mod- Interpretation erate or low growth potential. However, they made The Cantonal Competitiveness Indicator (CCI) shows the long-term up ground on the leader Zug in 2018. relative competitiveness of a canton. It describes the potential of a canton to sustainably increase its economic output. Cantons with Regions in the top-ranked cantons also shine high relative competitiveness are likely to grow faster than the over- Zug sits at the top of the rankings both by canton and all Swiss economy over the long term. Cantons with low relative by region. All of the regions in the next-best cantons competitiveness can expect below-average growth. of Zurich, Basel-Stadt and Aargau also feature in the Methodology top 25 regions. The regions in the top four cantons The CCI is based on a comparative analysis of eight thematic benefit from their central geographic positions, which pillars with a total of 55 variables (see page 13). The variables are is reflected in their very good accessibility and catch- weighted and aggregated so that each canton receives a point ment area. The regions of the cantons of Zug, Zurich value between 0 and 100 for each pillar. To determine the CCI for each canton, the average of the number of points from the eight and Basel-Stadt also have high potential in terms of pillars is calculated and standardized so that the highest cantonal their economic structure and human capital. figure is 100.

4 Cantonal Competitiveness Indicator 2018 CCI 2018

Strong regional centers Indicative regionalization CCI 2018 Regional competitiveness ≤ 100 Basel ≤ 90 Winterthur ≤ 80 ≤ 70 St. Gallen Zürich ≤ 60 ≤ 50 ≤ 40

Biel/Bienne

Luzern

Bern

Lausanne

Genève

Lugano

Source: UBS

Bern and Vaud with largest regional centers have a much better economic structure differences than the other regions in their cantons. With The regions are relatively homogenous in the respect to economic structure, Lugano and cantons at the top of the ranking, but some Neuchâtel even figure in the top fifth of the cantons have large regional differences, as seen regional ranking. most clearly in Bern and Vaud. The urban regions of Bern and Lausanne, both with a In Valais, Lower Valais does better than Upper strong economic structure and good accessibil- Valais, and all regions of Valais have improved ity, feature in the top third of the ranking. On since 2016. Unlike Graubünden, Ticino and the other hand, the weakest regions in both Neuchâtel, however, the canton lacks a driving cantons, Saanen-Obersimmental and Pays- regional center. d’Enhaut, are at the bottom.

Stronger regional centers in cantons with weaker growth potential Within the cantons with relatively low or moderate growth potential, some regions are dis- tinct from the rest of the canton. The Chur region stands out clearly in Graubünden, the Lugano region in Ticino and Neuchâtel in the canton of the same name. All three regional

Cantonal Competitiveness Indicator 2018 5 Pillars The eight pillars of competitiveness

The Cantonal Competitiveness Indicator (CCI) covers 55 individual indicators of cantons’ competitiveness. The individual indicators are grouped into eight competitive pillars: economic structure, innovation, human capital, labor market, accessibility, catchment area, cost environment and government finances. For each competitive pillar, cantons are given a relative score between 0 and 100. This eight-dimensional view enables a detailed analysis of the relative strengths and weaknesses of a canton’s economy and serves as the basis for regional strategic decisions.

Economic structure Strong economic structure in city agglomerations The future economic dynamism of a canton Cantons on a scale of 1 to 100 depends on its economic structure. The most impor- 100 tant indicator is our competitiveness and market 97 87 85 82 positioning of the various industries. International 81 78 73 trade is also included in the cantonal comparison, 71 69 69 68 63 59 with growth potential taken into consideration 54 51 49 46 based on export intensity (exports as a percentage 42 32 of economic output) and the growth prospects of 28 26 26 the main trading partners. The economic structure 17 16

can also exhibit cluster risks if, for example, growth 0 is driven by just a few industries. Broadly diversified BS SH ZH BL VD GE ZG BE AG LU SO TI FR SG NE SZ TG NW AR VS UR OW JU GL AI GR cantonal economies are better placed to make up for weakness in one industry or a crisis in an export destination. A measure of concentration (the Herfin- dahl-Hirschmann index) assesses the extent to which cantonal economic output is dependent on individual sectors and trading partners.

Innovation Innovation concentrated in just a few cantons Entrepreneurial progress and maintaining economic Cantons on a scale of 1 to 100 competitiveness are based on innovation – the abil- ity to create and market new products and services. 100 Industry clusters (high regional concentrations of people working in related industries) offer an opti- 72 71 70 mal environment for innovation. A canton’s level 59 50 48 of innovation also depends on the percentage of 47 34 33 33 people engaged in research and development. The 32 31 29 24 23 22 21 20 20 number of patent filings and the amount of ven- 16 15 12 10 ture capital investments highlight the potential for 3 0 future competitive advantages arising from inno BS VD ZG NE ZH BL GE AG TI NW SH SZ JU LU SG SO FR AR VS TG BE GR AI OW GL UR vation. Other indicators of innovation include the number of successful startups, newly founded companies and jobs created at these companies.

6 Cantonal Competitiveness Indicator 2018 Pillars

Human capital City cantons have the highest human capital The level of education of the population and the Cantons on a scale of 1 to 100 human capital available are key drivers of economic 100 98 growth. A better-educated population normally 93 generates more added value. Local availability of a skilled workforce also makes the canton more 73 57 attractive for companies. To compare the level of 52 51 education among cantons, the percentage of the 44 42 38 37 33 31 29 population with a university degree or higher pro- 28 27 27 26 25 25 fessional qualification is determined. Another indi- 17 10 7 4 cator used is net migration of graduates between 2 0 cantons. BS ZG ZH GE VD BE NW LU AG BL SZ TI NE FR OW AR SG TG SH SO GR VS GL UR AI JU

Labor market Labor market weak in small border cantons The more heavily the population participates in Cantons on a scale of 1 to 100 the labor market, the better use is being made of a 100 97 97 canton’s economic potential. However, the percent- 91 82 age of pensioners, people on disability benefits 81 80 79 78 76 75 74 and the unemployed reduces participation in the 72 70 70 69 62 59 58 labor market. Youth and long-term unemployment 54 are considered particularly bad, as these can per- 41 manently reduce the labor force potential. By con- 30 30 23 trast, expected growth in the working population 19

(growth in the cohort of 16- to 65-year-olds) has a 0 positive effect on a canton’s score, as it implies a FR SZ ZG OW VD GR NW TG LU ZH AG AI GE UR VS SG AR GL BE SO BL BS SH NE TI JU higher percentage of the population is potentially productive.

Ease of access Accessibility limited in Alpine cantons Good accessibility means infrastructure as well as Cantons on a scale of 1 to 100 procurement and sales markets can be reached 100 quickly. Accessibility describes the average time 92 needed to reach airports, universities or regional 82 75 centers. The calculation is based on travel times 70 68 67 62 61 59 59 58 58 58 using public transport and private car. All Swiss uni- 57 55 54 53 52 50 47 46 versities, the nearest metropolitan area and the 40 34 closest regional center as defined by the Federal 25 Office for Spatial Development (FOSD) are taken into consideration. The four international airports 0 of Basel, Geneva, Zurich and Milan are taken into BS GE ZH BL ZG VD AG TI SO TG LU SZ SH GL BE FR SG NE NW JU AR UR OW AI VS GR account when assessing accessibility to flight con- nections, along with regional airports.

Cantonal Competitiveness Indicator 2018 7 Pillars

Catchment area Large catchment area in city cantons The catchment area refers to the number of people Cantons on a scale of 1 to 100 that can reach an area within a certain time. A large catchment area is doubly advantageous for 100 89 companies: they enjoy greater availability of suppli- ers and potential employees, and the sales market 67 62 is larger. The catchment area is determined based 58 57 44 42 on travel time by private car and public transport. 38 36 35 34 34 The number of cross-border commuters in a canton 30 29 28 25 23 23 indicates the catchment area from neighboring 19 17 12 9 4 countries. 1 0 ZH BS GE AG ZG BL LU SO VD BE SZ TI TG SH SG NE JU FR NW AR GL OW AI UR GR VS

Cost environment Attractive cost environment in Appenzell and Local costs are a key variable when companies are in Central Switzerland deciding where to locate. Location costs matter Cantons on a scale of 1 to 100 both for new companies moving in and for retain- 100 99 ing existing companies. They include commercial 94 93 88 88 84 rents, energy prices, wages and tax rates. The tax 93 91 83 81 75 rates for high-income individuals are taken into 67 76 65 63 account, as well as income and capital tax rates on 58 49 47 legal entities. 52 45 38 36

30 17

AI AR NW LU UR GL SZ OW TG GR SH ZG SG AG NE TI FR SO VS JU BL BE ZH VD BS GE

Hypothetical values for the cost environment pillar based on the eﬀective income tax burden as shown in the cantons’ implementation plans in Tax Proposal 17. For cantons with two reform scenarios, the average of the scenarios was used. Source: FDF, SFTA; as at March 2018.

State finances Eastern and Central Switzerland with top rankings Sound state finances are essential for a growth- Cantons on a scale of 1 to 100 oriented fiscal and economic policy. Sustainable use of scarce financial resources is reflected in a lean 100 89 88 87 86 84 82 82 administration and a high percentage of capital 78 76 75 74 73 investment. A canton’s scope to improve its com- 71 69 68 65 64 62 58 petitiveness through fiscal policy measures (such as 54 48 47 tax cuts or infrastructure investments) is reduced as 41 the level of debt rises. In addition to the debt level, 34 net investments, average interest costs and cover-

age of the public-law pension funds of a canton are 0 taken into account. AI OW SZ GL TG GR NW AG ZG SG AR UR SH ZH SO LU FR BE VS BL BS TI VD JU NE GE

8 Cantonal Competitiveness Indicator 2018 Cantons Cantonal competitive pr ofiles

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The median canton is a reference canton made up of the median values of the eight pillars of competitiveness. Median Economic structure 100 The median value of each pillar divides the ranking list of State Innovation canton 75 the cantons into an upper and a lower half, each consisting finances of 13 cantons. 50 25 Cost Human When it comes to interpreting the cantonal competitive- environment 0 capital ness profiles, the higher a canton’s score, the better its relative ranking.

Catchment Labor market area Cantonal value Median canton Accessibility

1 ZG Economic structure 2 ZH Economic structure 100 100 State Innovation State Innovation 75 75 finances finances 50 50

25 25 Cost Human Cost Human environment 0 capital environment 0 capital