Efficiency in Manufacturing and the Need for Global Competition.

This article explores international productivity differences in manufacturing industries across Germany, Japan and the U.S. and offers an explanation for them. The authors develop an extension and a refinement of the industry-of-origin method to provide new measures of productivity in nine industries located in the three countries. Then they combine publicly available data with the industry knowledge and assessments by experts within McKinsey & Co. to determine the reasons for productivity differences. The nature of the explanation takes place at two levels, the first of which is at the production process level. They look for differences in the use of capital, technology and skills--how the variables that enter the production function differ across countries--and the synthesis of the industry results shows that physical capital and embodied technology are important factors that partially account for differences in labor productivity.