Competitiveness: The Holy Grail of Industrial Policy

Germany’s federal budget for the next few years is still riddled with billions of euro in deficits. This means that a battle is about to be waged to determine whose budgetary requirements will be met and who will be forced to take a back seat.

Those on the Left have consistently called for a redistribution of wealth from the top down. On the one hand, this approach seems reasonable in light of current glaring inequalities and the fact that the wealthiest among us are not actually the people responsible for generating that wealth. On the other hand, the problem with the demand for redistribution is rooted in the very nature of the thing that is to be redistributed: the societal “wealth” generated under capitalism, which results from corporate calculations as part of global competition among capitalists. This “wealth” or “prosperity” is generated within a climate of competition between companies and locations. Central to this is the now infamous concept of “competitiveness”, which imposes strict limitations on the prosperity of the social majority, as well as on aspirations for redistribution.

Investment

“Whatever is distributed must first be generated”, according to a well-worn phrase used by conservatives and liberals alike to rebuff calls from the left for redistribution. It is a facile statement; it begins to makes sense only once we start to consider what it means to “generate” within the capitalist system — and it certainly does not refer simply to the production of commodities.

Wealth is generated when people work. And under capitalism, labour is performed whenever a company expects to be able to generate a profit from it. It is only then that a company will invest — or rather, purchase people’s labour and the means of production in order to generate commodities. Entrepreneurial investment[1] is the driving force not only of production, but also of growth. This is because the ultimate objective of investment is to increase the assets of those who own the companies,[2] their profit margins (or, put differently, to ensure that revenue exceeds expenses). The production process comprises what is known as “value added”, which is used in turn as the basis for calculating a country’s economic output in the form of its gross domestic product (GDP).

Private investment only accounts for a small proportion of Germany’s GDP — some 10 to 20 percent. Nevertheless, these investments act as the driving force of the country’s overall economic output; they determine when and where labour is performed and to what extent, and they generate other forms of income, such as wages and tax revenue.

Global real and financial wealth equates to a huge sum of money that has been invested with the aspiration of further growing that sum. This ultimately renders wealth something that is both precarious and colossally demanding.

The purpose of investment is to generate profit. “We can build the best cars in the world”, said Volkswagen CEO Oliver Blume in 2024, “but that doesn’t matter if we don’t earn any money with them”. And a declaration issued by some 100 German trade associations in April 2025 states: “Running a company in this country has to be profitable.” To ensure their “profitability”, companies have two options at their disposal: they can reduce their costs and/or increase the productivity of their labour force.

From the company’s perspective, however, it is not enough to simply generate a profit; this profit must also be sufficiently high. The question of whether an investment has ultimately been worthwhile is measured according to the ratio of expenditure to surplus — in other words, the return on investment. An investment’s (anticipated) return will dictate whether or not production takes place and how much labour is performed for what remuneration. The decisive factor for a company is whether the return is competitive; that is, whether the return for a country or industry is higher than average. If the expected return is lower than average, this would be seen as an argument against making the investment.

Return on investment as a measure of “growth” is therefore the source of what is known as the “growth imperative” under capitalism. After all, everything hinges on growth: jobs, tax revenue, military spending, and also spending in the social sector. “Without increased growth, Germany will struggle to maintain its social security systems. Germany requires long-term growth rates of at least two percent per annum just to finance the country’s increasingly costly pension and care system”,writes Deutsche Bank. This already reveals a fundamental contradiction: on the one hand, the welfare state requires growth in the form of profitable investment; yet at the same time, it has the potential to depress the return on investment. According to the employer-affiliated German Economic Institute (IW), “Latent increases in social security contributions are threatening to become an investment burden. Because they lead to increased labour costs … There is a threat of a sustained decline in price competitiveness, which would undermine efforts to create positive investment stimuli.”

Global Wealth: A Colossal Demand

When a company invests (for example, when it expends funds to build a factory or purchase machinery and labour), it is looking to make a return on that investment. However, whether or not a profit will actually be generated is determined on the market — that is, in competition with other companies. The company or shares in it are therefore a claim to valorization — their value is derived from the amount of profit that is expected to be generated in the future. A factory that operates at a sustained loss has no value, and a factory that operates at a profit is worth millions. The situation is similar when it comes to real estate or financial assets: the market value of these also depends on anticipated cash flows from interest, rental payments, or dividends. Should these fail to materialize, the asset’s value will decline, and it will ultimately evaporate.

It is not only companies that strive for competitiveness — countries do as well.

In other words, global real and financial wealth equates to a huge sum of money that has been invested with the aspiration of further growing that sum. This ultimately renders wealth something that is both precarious and colossally demanding — given that the labour force is expected to increase wealth by achieving a high level of productivity and the lowest possible costs, thereby preserving the value of global wealth. This is yet another point at which the fundamental contradiction becomes clear: On the one hand, wages and social security contributions constitute an expense for companies that diminish the company’s return and thus the value of its assets. But on the other hand, they represent consumer demand, which capital requires in order to profitably sell its products. On the one hand, corporate taxes constitute a deduction from profit. On the other hand, companies require state services in order to operate.

Competitiveness

Profit, economic performance, growth, and wealth are therefore contingent upon profitable investment. Whether or not a return is ultimately seen on an investment, whether or not the investment is a success or a “bad investment”, is in turn contingent upon the success of a company in competition with other companies that have also made investments. And this is where “competitiveness” comes into play, generally defined as a company’s capacity to survive in a climate of competition — in other words, its ability not to be driven from the market.

This “ability” does not, however, constitute an ability in the sense of a skill or a trait, such as the ability to drive a car. After all, a person retains their ability to drive a car regardless of whether other people are able do the same thing as well or better. The “competitiveness” of a company, on the other hand, is largely determined by the strategies of its competitors who are pursuing the same goal. This is what renders competitiveness the object of widespread dispute: it refers to the relative position of a company in a climate of competition and its ability to prevail over its competitors. Competitiveness is thus always simultaneously defensive and offensive in nature, a form of both attack and defence.

It is not only companies that strive for competitiveness — countries do as well. In a capitalistic region, however, competitiveness is not measured in terms of profit, return on investment, increases in turnover, or market share; instead, it is fundamentally determined by whether a location proves to be an appealing target for investment and a suitable production site for companies. Competitiveness assumes the perspective of the investor, who evaluates a country in terms of the return that can be achieved there. The investor evaluates the country as an aggregate of potential expenses and services for the company: from its infrastructure to its legal system and overall stability, from the cost of wages to social security contributions, energy prices, taxes, the health of the labour force, and their qualifications.

All of this is evaluated in relation to the conditions offered in other locations. This serves as the basis for locational rankings of competitiveness such as those provided by the World Economic Forum (WEF), which defines competitiveness “as the set of institutions, policies, and factors that determine the level of productivity of a country … The productivity level also determines the rates of return obtained by investments”. In some cases, the methods used are dubious. Generally speaking, however, politicians tend to bow to the standards imposed on their nations on behalf of investors. As German chancellor Friedrich Merz (CDU) put it, “Every day, every decision of my future government will have only one question: is it good for the competitiveness of our industry?”

Not only does geopolitical power require competitiveness and economic growth as a precondition within the prevailing economic system; growth also requires that a country have geopolitical power, to ensure that its government can be involved in determining trade and investment conditions on the global stage.

Given that a location’s competitiveness is evaluated in relation to other locations, it is possible for a country’s competitiveness ranking to fall without its conditions for investors actually having deteriorated. In fact, conditions may even have improved — but if taxes have fallen elsewhere, or if the infrastructure in other locations has been modernized or wages are even lower there, if the opportunities for growth are higher elsewhere or social security contributions have been lowered, then a country will slip to a lower ranking. It will then endeavour to improve its investment conditions once again so that it can outperform other nations.

One result of this is the race to reduce corporate tax rates, which has been ongoing for decades. While the global average corporate tax rate in 1980 was around 46 percent, last year it was only 25 percent, according to the US NGO Tax Foundation. In Germany, tax rates on retained earnings have been reduced by half since the mid-1980s from more than 60 percent to roughly 30 percent, while the average rate in industrialized countries has fallen from roughly 50 percent to 25 percent.

And it doesn’t stop there: in the US, President Donald Trump has made permanent the tax cuts he introduced in 2017. According to the Congressional Budget Office, the primary winners here are those who rank among the richest 1 percent of the population. Meanwhile, in Germany, the ruling coalition government has opted to reduce corporate income tax; according to estimates, this will primarily benefit the wealthiest 10 percent of the population.

Europe’s Lament

For some time now, there have been complaints, especially in Europe, about a decline in the competitiveness of economy and location. According to the German Economic Institute (IW), when compared with the United States or China, “it immediately becomes clear that the European Union is not doing so well with regard to competitiveness”. The Draghi report on European competitiveness, which was commissioned by the European Commission, identifies major deficits and an “existential threat” to Europe.

As a matter of fact, Europe has indeed fallen behind — simply due to the fact that other regions have surged ahead. While the EU and US economies were roughly the same size 16 years ago, the US economy now produces 80 percent more than the European economy. And this has far-reaching consequences for Europe. According to Jared Cohen from the US investment bank Goldman Sachs: “Without economic growth, you start to evaporate geopolitically.” He adds, however, that this is not Trump’s fault; in the US, there is “a bipartisan move away from Europe due to this lack of economic growth”.

The complaint about reduced international competitiveness is especially prevalent in Germany, where the sale of goods across borders plays a greater role. The exports-to-GDP ratio (exports as a proportion of GDP) in Germany is 42 percent. In France it is only 33 percent, in the UK 30 percent, in Japan 23 percent, in China 21 percent, and in the US 11 percent. “The loss of price competitiveness is causing the German economy’s business model to falter”, says the IW. And according to the Ifo Institute for Economic Research, “German industry is struggling with structural disadvantages — for example in terms of energy prices, regulations, and investment conditions”.

Decisive reforms are now required to ensure that German industry does not fall even further behind in global competition. However, it is not only German exports that are subject to global competition; goods that are produced and sold domestically are also forced to compete with imported goods. Nowadays, every market is a global market; every supermarket shelf is stocked with products from all over the world.

In an effort to compete with the economic performance of rival locations, politicians around the world are focusing their efforts on achieving greater competitiveness: their aim is to ensure that as much capitalist wealth production as possible takes place on their own territory and in their own currency. 

The complaint about declining competitiveness is not restricted to Germany. According to the International Monetary Fund (IMF), countries around the world are endeavouring to increase their competitiveness. The IMF also takes a critical view of this, given that the concept of competitiveness is aimed at pitting different locations against each other: “If another country’s productivity is on the rise, it must be bad news, because their own country is becoming less competitive.” This logic perhaps fits a football match in which only one can win. “However, a key insight from economics is that world trade is not a zero-sum game”, says the IMF. “By allowing each country to specialize in the goods and services it can produce most efficiently, global trade increases productivity worldwide, and everyone is better off.”

Yet this harmonious vision of global trade stands in stark contrast to the reality of competition, which has recently been intensifying. The IMF itself admits that “policymakers around the world are struggling to find ways to stimulate growth and unlock new opportunities”. This is because there is a widespread lack of growth, and not just in recent years. As noted by the Bank for International Settlements, “Productivity growth has been trending down in many advanced economies for decades and more recently also in several emerging market economies, acting as a drag on growth overall”, with the US tariff war set to further exacerbate this fundamental problem.

The heightened battle for a share in global growth is also reflected in global overcapacity in many sectors, which is resulting in price wars, for example in the automotive sector. China is emerging as a competitor when it comes to producing high-quality industrial goods, and the Chinese market is becoming less of an economic engine for the West — including for Germany. According to the IW, “In an increasingly deglobalized economy, the industry-based and export-oriented economy is less and less able to participate in the growth of its main target countries.” As a result, in July of this year, more than one in every three German companies complained of a shortage of incoming orders. “The persistent lack of orders remains a key obstacle to a substantial economic recovery”, says the Ifo Institute.

Everyone Wants Increased Competitiveness

In an effort to compete with the economic performance of rival locations, politicians around the world are therefore focusing their efforts on achieving greater competitiveness: their aim is to ensure that as much capitalist wealth production as possible takes place on their own territory and in their own currency. This in turn results in the need to outperform the competition — to become the “leader”. “We want to be the frontrunners in climate friendly industries, in clean technologies, in green financing”, says EU Commission President Ursula von der Leyen. The term “frontrunner” implies being a leader to others, lighting the way for them. But in reality, it is about outperforming them in the field, or at least setting the standards of productivity for them. “Those who develop and manufacture the technology that will be the foundation of tomorrow’s economy will have the greatest competitive edge”, according to von der Leyen.

This desired competitive advantage is also expected to translate into political leverage. It is for this reason, for example, that the US government is endeavouring to “shape a national innovation strategy … that sustains and enhances our global leadership in foundational technologies like AI, quantum, biotech, semiconductors, robotics, and hypersonics”, explains Daleep Sing, former Deputy National Security Advisor under the Biden administration. The US expects that these technologies will offer “outsized promise to boost our economic growth potential and military prowess”.

Rather than competitiveness, what is required at this juncture is stronger cooperation between locations in order to ‘ground’ the competition and bring the race to a halt. Only then will we be able to better utilize wealth to fund our societies.

Industrial policies (IP) at the national level, which a number of countries are now implementing, are consequently becoming increasingly important. As the IMF explains, “The most common motive for pursuing IPs is to boost strategic competitiveness of the targeted products.” The race to reduce corporate taxes to a “competitive level” is also being advanced, while climate targets that incur costs for companies are being weakened. The welfare state is facing mounting political pressure, as evidenced by the current German budget, and so are wages in general: “Higher-than-average” increases in unit labour costs “are likely to have adversely affected the price competitiveness of German … companies”, explains the Bundesbank.

Calls for more jobs point in the same direction, in Germany as well as in other countries. “We have too many young people who are slow to enter the job market”, complains France’s finance minister Éric Lombard; “we have too many older people who are retiring too early. And we have slightly more holidays and absences than in Germany. What’s more, the industrial share in our economic output is insufficient.”

More Competitiveness = More Growth?

It remains to be seen, however, whether an increase in competitiveness will automatically translate to increased economic growth, for the following reasons:

• Firstly, tax cuts or better infrastructure only serve to improve the conditions for investment. Whether or not the desired growth actually comes to fruition is contingent on a number of other factors. In reality, it may transpire that the “conditions for a competitive and growing economy” (as stated in the coalition agreement between the CDU/CSU and SPD) do not equate to a tangible acceleration in growth.
• Secondly, from a growth perspective, many of the measures that are implemented in pursuit of increased competitiveness are contradictory. If wage levels fall, labour becomes cheaper for companies — but consumer demand also falls. If taxes are reduced for companies, the post-tax return increases — but the state is also left with less money at its disposal. Reducing climate protections may reduce capital costs in the short term — but in a few years’ time, the resultant accelerated impact on the global climate system could incur even greater expenses. Additionally, reduced climate protections diminish the incentive for companies to invest in climate-friendly technology, which is generally regarded as one of the markets of the future (take electronic vehicles, for example).
• Thirdly, what is important for an individual location is not only which measures are introduced in an effort to increase the return on investment, but also whether or not other competing locations make further advancements and thereby decimate their rival’s competitive edge. The race to reduce corporate tax rates comes to mind here.

The inherent contradiction in the concept of competitiveness can also be seen in the plans for military armament that are currently being drawn up by a number of industrialized nations. Not only does geopolitical power require competitiveness and economic growth as a precondition within the prevailing economic system; growth also requires that a country have geopolitical power, to ensure that its government can be involved in determining trade and investment conditions on the global stage. The economic armament of a given location is therefore supplemented by military armament, which is currently being financed by many billions in new debt, as well as tax cuts. This debt anticipates growth. Should that growth fail to materialize, a new debt crisis would be imminent. In this way, competitiveness is becoming a practical necessity for all locations if they are to ensure growth and national security, which is what they are competing for.

Redistribution in the Age of Competitiveness

The concept of competitiveness is rooted in competition — specifically, international competition for a share of global growth. Liberals extol this as a force that compels increased efficiency and productivity, and even some on the Left have been known to frame it in favourable terms. It is clear, however, that this battle cannot be won by everyone (equally) and that it is exacerbating already existing contradictions — even to the point of inciting a trade war.

This is problematic even from an investment perspective, much less from a left-wing one. After all, the objective of increased competitiveness is not to ensure a good life for everyone, but rather to attract investors. And the decisive factor in the competition between locations and companies is the productivity of workers, who are placed in competition with each other: as former US president Joe Biden once put it, “American workers can out-compete anyone, but they need a government that fights for them”. “Anyone” in this instance refers to the workers in other countries whose labour will be devalued. Sabine Stephan of the Macroeconomic Policy Institute (IMK) laments that the US’s industrial policy is “massively jeopardizing jobs in Europe”.

Rather than competitiveness, what is required at this juncture is stronger cooperation between locations in order to “ground” the competition and bring the race to a halt. Only then will we be able to better utilize wealth to fund our societies. “It’s difficult to see how a wealth tax will work except as part of a coordinated global program”, writes Matthew Brooker in an opinion piece for the financial company Bloomberg. In other words, as long as society’s wealth continues to be generated as the result of competition for labour productivity, there will be strict limitations on how it is redistributed.

Adherence to the concept of the nation as a “location” whose revenues are redistributed at the national level is thus a problematic idea, invariably open to right-wing influence. This is because in the prevailing system, a given location is in competition with other locations that compete with it for profits. The idea of siding with one’s “own” country, which is being forced to compete against other nations, is the very antithesis of international solidarity. On the contrary: it is the domain of the political right, which stands to benefit from heightened global competition.

Translated by Louise Pain and Anna Dinwoodie for Gegensatz Translation Collective.