Industrial Structure

Chapter 9PP. 251-252, 255-258, 265-

276

INTRODUCTION Any country produces many different

types of goods and services The mix of these and the combination

of industries that exists is called the industrial structure of that country

There are differences between industrial structure of various countries

Structure of Industry Entrepreneurship is the process of

bringing together the factors of production of land labor and capital to produce goods and services

Structure of Industry – Levels of Production Primary production is the

extraction of raw materials Secondary production is the

processing of raw materials by manufacturing into a product

Tertiary production is the distribution of the finished product

Structure of Industry – 3 Sectors Industries that deal with natural

resources like farming and mining make up the primary sector

Industries which process these natural resources make up the secondary sector

Service industries make up the tertiary sector

Different kinds of companies by Classification by level of activity

otherretailing

telecommunications

transportairlines banking insurance

Hotels and restaurants, catering

electronicscomputers

Food processing, beverages

aerospaceVehiclemanufacturingengineering

otherschemicals

oil

Sectors of economy and selected product groupsSectors of economy and selected product groups

Secondary Secondary Primary Primary

Tertiary Tertiary

Agriculture & mining

Look at the logos of the many well-known company’s brands. Q: Which sector do you think they belong to?

other

retailing

telecommunications

transportairlines banking insurance

Hotels and restaurants, catering

electronicscomputers

Food processing, beverages

aerospaceVehiclemanufacturing

engineering

others

chemicals

oil

Sectors of economy and selected product groupsSectors of economy and selected product groups

Secondary Primary

Tertiary

Agriculture & mining

p

p

p

s

s

s

s

s s

s

s

s

s

T

T

T

T

T

TT

T

sT

Measuring Industrial Structure Changes in industry occur over

time due to:• development of new products, resulting in new industries• new patterns of demand, resulting in the decline of some industries and the rise of others• changes in society

Industrial Structure Trends In advanced economies, like the EU,

industrial structure trends as measured by employment show:

Decreases in employment levels in agriculture and manufacturing

Increases in employment levels in the service sector

A gradual trend away from employment in primary sectors toward the tertiary sectors

Industrial Structure Trends In advanced economies, like the

EU, industrial structure trends as measured by output and employment show:

Primary and secondary sectors have declined in importance, while the tertiary sector has increased in importance

Three Main Reasons for Restructuring Deregulation, leading to greater

international competition Greater competition from third-

party countries, especially less developed, low wage countries

Increasing competition from the reduction of trade barriers

Responses by Companies to Restructuring Increased investment to boost

productivity Increased merger activity, both

horizontally and vertically Greater specialization in production

(focusing on market segments) Greater flexibility in the production

process, by increasing automation, subcontracting increased use of part-time and temporary workers

Mini Case (P. 263) Life Cycle Model Life cycle model can be applied

equally to a market, an industry or industrial sector

4 phases – development, growth, maturity and decline

Causes of Change in Industrial Structure Demand factors Supply factors

Demand Factors Changing demand patterns results

in changes in industry structure Changes in demand may result

from:• changes in taste and fashion• changes in population structure• changes in level of income

Changes in Income Levels As income rises, spending rises, but spending

habits change as income increases Increasing income will increase spending on

goods and services with high income elasticities of demand (like luxury items)

Increasing income will result in small increases or a fall in demand for other goods

The effect of rising income on demand for goods and services partly explains the growth in the service (tertiary) sector in advanced economies

Supply Factors Changes in industrial structure can

also be initiated by changes in supply conditions

Example: Oil crisis in the 1970s Technological change gives rise to

new products and methods of production

Deindustrialization The decline in the importance of

manufacturing is called deindustrialization The causes of deindustrialization are: Crowding out Productivity International competition Specialization R&D Education system Level and type of investment Non-price factors Skills shortages in manufacturing Financial system Lack of qualified managers Government Policy

Crowding Out Crowding out is the argument that the

growth of the public sector has been at the expense of the private sector

Resources that could have been used to expand the private sector have gone to the public sector

The weakness of this argument is that, at higher levels of unemployment, it’s not a matter of where resources are being directed, but that resources are not being used

Productivity Low productivity may result in decreasing

international competitiveness This can be offset by lower wages in order

to stop costs from rising, which may be passed on to consumers as higher prices

Alternatively, the exchange rate could fall so that prices remain competitive internationally

Mini Case (P. 268) Productivity How are these charts useful? What are the difficulties in

measuring productivity? What factors affect productivity? What are the implications of low

productivity?

International Competition Increasing competition from countries with

lower wage rates will result in lost markets Imports will increase, and exports may fall In the UK, the problem is evidenced by a

widening balance of payments deficit for manufactured goods

High exchange rates contribute to the decline

Specialization An economy that tends to

specialize in sectors that do not have great export potential will result in a change in manufacturing structure

R&D Stagnant spending on R&D

Education System For example, the U.K. education

system is said to be biased towards the arts and pure sciences rather than applied scientific, engineering, and business-type subjects

Level of Investment Low investment may result in

capital stock that is “old”

Non-Price Factors Quality, design, and after-sale

service Total quality management

Skills shortages Difficulty in finding suitably skilled

workers for manufacturing

Case Study (P. 272) Spending on Leisure Services Why has spending on leisure services,

like theme parks, increased? What demand factors are affecting

the structure of the theme park sector?

What supply factors? What does demand trend indicate for

the future of theme parks?