EFFICIENCY IN MANUFACTURING AND THE NEED FOR GLOBAL COMPETITION

Reductions in trade barriers have exposed domestic manufacturers to gr eater foreign competition. This competition has caused domestic compan ies to restructure and reduce costs. Comparisons of manufacturing cost s and productivities of firms headquartered in different countries sug gest that, although U.S. manufacturing firms have higher average produ ctivity, Japan and some European countries are closing the gap. Cross- country comparisons of manufacturing productivity in specific industri es provide a somewhat different picture, however. In some sectors, Jap an and Germany have the lead. International comparisons of firms in th e same industry reveal even more dispersion in productivity. To date, relatively few studies have tried to explain these differences across countries, sectors, and firms. Baily and Gersbach summarize the result s of a joint study with the McKinsey Global Institute that compared th e productivity of U.S., German, and Japanese firms in nine industries. The authors conclude that a significant fraction of cross-border prod uctivity differences can be explained by the exposure of each industry to ''best-practice'' technologies. Baily and Gersbach begin by descri bing the results of an extensive field study conducted with McKinsey. To develop data on productivity differences, the authors and their ass ociates collected data on the operations of firms producing comparable products in the United States, Germany, and Japan. These products are in the automotive, automotive parts, metalworking, steel, computer, c onsumer electronics, food, beer, and soap and detergent industries. Th e data primarily cover the 1980s. After adjusting for differences in t he value of foreign currencies, the authors find that the data suggest the United States leads Germany in most of the nine industries but la gs Japan in automotive industries, metalworking, consumer electronics, and steel. The authors offer two explanations for these differences. The most obvious is that the differences are caused by scale economies , input mix, and allocative differences. Baily and Gersbach develop he uristics for ranking the importance of these factors. They conclude th at a significant fraction of observed productivity differences cannot be explained by these rankings. Baily and Gersbach next argue that the residual productivity differences appear related to an industry's exp osure to world markets and what they call ''best-practice'' technology . They develop this argument by ranking country-industry pairs accordi ng to the openness, or globalization, of the domestic market. They fin d a positive correlation between this globalization index and producti vity differences, which they interpret as evidence that exposure to fo reign competition increases productivity. The paper concludes by discu ssing the benefits of international versus national competition.