4 November 1999 • Market Opportunities for Austrian Manufacturing Industry • Michael Böheim

After a long process of catching up and successful integration into the world economy, Austrian manufacturing industry now ranks among the best in Europe in terms of productivity, with the share of Austrian exports in the world market rising in the long run. The curbing of labour cost increases and the stabilisation of exchange rates, together with structural change and the opening of the borders to Eastern Europe, have led to a reduction of the high foreign trade deficit of the industrial sector.

However, the changing economic policy environment presents new challenges and demands a faster adaptation of industrial structures and organisations. As a country with an above-average level of productivity, Austria must be transformed at least partially from a technology user to a technology developer; for a high-wage industry with ambitious social and environmental standards, there is no other way but to outsource price-elastic production sectors as well as operations involving a large part of unskilled labour and concentrate on high-value market segments with a high level of specialised know-how and original developments. Business services are available to adjust production to the ever more highly differentiated requirements of investors. Several parts of the analysis show that Austria has not yet fully completed the transition from a country in the process of catching up to one holding a leading position.

Among Austria's persistent structural weaknesses delaying its sustainable establishment among the group of leading industrialised countries, over-specialisation on labour-intensive sectors of industry with concurrent under-specialisation on technology-driven industries as well as its inadequate positioning in quality-driven competition in the world market need to be mentioned. Nevertheless, the overall assessment of Austria as a business location by internationally experienced managers turns out to be satisfactory. Future market opportunities for Austrian manufacturing industry can be identified

• in market segments in which Austria has already established its competence and its market position,

• in niche markets of high-tech industrial sectors,

• in traditional sectors of industry where existing strengths can be maintained and consolidated through the upgrading of products.

If technological criteria are applied, the following cross-sectoral technologies are classified as most promising for Austria:

• information and communications technology,

• simulation models for development purposes,

• micro-system engineering,

• bio-technology,

• environmental engineering.

If competitive factors are used as a yardstick, Austria stands the best chances of being a market leader

• in the (few) markets in which Austria has a lead-market character on account of specific demand conditions,

• in the use of high technology in mid-tech areas which tend to be neglected by other industrialised countries,

• in market niches for special products and applications, provided the fulfilment of individual customer wishes and the production of small series "made to measure" determine the success in the market,

• in markets in which high-quality services are sold along with the principal product.

The economic policy conclusions to be drawn from the analysis are many-faceted. As a longer-term economic policy strategy aimed at the optimum realisation of the future potential of Austrian manufacturing industry, a systemic approach of the widest possible scope, taking account of the specific institutional framework, is to be considered. Operational measures (pilot projects, greater mobility between science and the business community, cluster formation, incentive-compatible state aid) ought to support this process.

There are few ways in which economic policy can directly improve Austria's initial position in locational competition. Essentially, the role of the government is limited to the provision of the best-possible economic conditions and targeted intervention in the event of market failure (economic support measures to create incentive-compatible structures and to strengthen the innovative drive of the Austrian economy).