Global Value Chains: Impacts and Implications Aaron Sydor Office of the Chief Economist Foreign Affairs and International Trade Canada
Overview What is a global value chain (GVC)? How GVCs fit into economic theory Offshoring and outsourcing High valued activities Wrap-up 2
What Is A Global Value Chain? 3
A simplified value chain Headquarters Corporate Services Finance HR/ Payroll R&D Inputs Assembly Distribution Sales Service Intermediate Input IT R&D Services Assembly Distribution Sales After Sales Service Marketing Logistics Intermediate Input 4
Headquarters Corporate Services R&D individual functions become separable Inputs Intermediate Distribution Service Inputs Assembly Distribution Sales Service Finance HR/ Payroll Intermediate Services Input Distribution After Sales Service IT Marketing Logistics R&D R&D Services Intermediate Input Intermediate Input Assembly Assembly Distribution Sales Sales After Sales Service R&D Assembly Sales 5
which can then be located anywhere in the world Company HQ Manufacturing Lawyers R&D Inputs Call-Centre & IT 6
Measurement can be very difficult Company HQ ContractCDIA CDIA Profits R&D Manufacturing Lawyers Exports Call-Centre & IT 7
A suite of measurement options Existing measures Merchandise trade, services trade, FDI flows and stocks, royalty payments Classification of trade by use Intermediate merchandise trade becomes proxy for GVCs Input/output tables Shows links between industries International linkages are not well measured, proportionality problem Value-added trade Custom surveys Lack of comparability, limited time dimension, survey burden and cost New survey in Canada, SIBS visit www.international.gc.ca/economisteconomiste 8
Why this matters Language causes confusion: GVCs = Integrative Trade = Offshoring/outsourcing Not just about multinationals. The measurement of GVS is an important issue. No one measure captures all aspects of GVCs. Challenge for communications. Difficult to design or assess the impact of policy. 9
How GVCs Fit Into Economic Theory 10
How GVCs fit into trade theory Classical Ricardo H-O New Trade Theory Krugman Why Firms Trade Differences in Technology Differences in Endowments Scale, Trade Costs Source of Advantage Location Often Country Industry Heterogeneous Firms Various Global Value Chains Fenstra and Hanson Grossman and Rossi-Hansberg IP, Management, Technology Activities Tasks Firm Within Firm 11
How GVCs explain trade Classical Resource exports Labour (capital) intensive exports from abundant countries New Trade Theory Industrial clustering Multinationals Heterogeneous Firms Performance differences between firms Global Value Chains Trade in intermediate inputs and services Move from horizontal to vertical FDI 12
Why this matters Global value chains do not make comparative advantage any less relevant (as some have claimed). In fact, the opposite is more likely the case GVCs give comparative advantage a finer edge. Same gains from trade! Gains from trade may be even greater when trade takes place at a more granular level. Provides an important link between trade in goods, services, inward and outward FDI, movement of ideas and of people. Competition increases and becomes more refined. 13
Drivers of GVCs 14
Rising oil prices don t seem to be having a major impact on global trade Oil Prices and Global Trade 1000 900 800 700 600 500 400 300 200 Index 1983 = 100 World Manufacturing Imports 100 Oil Price* 0 1983 1990 1995 2000 2005 2009 *U.S. dollars per barrel, near month Cushing future on NYMEX. Data: WTO and U.S. Department of Energy Source: Office of the Chief Economist, DFAIT 15
The growth of container shipping also seems to have had limited impact International Seaborne Trade 3000 Millions of Tons Loaded 2500 2000 1500 1000 500 0 80 90 00 08 80 90 00 08 80 90 00 08 80 90 00 08 Oil Main Bulks Contanier Other dry Data: UNCTAD, Review of Maritime Transport, 2010 Source: Office of the Chief Economist, DFAIT 16
Air transport appears to be an important contributor to the rise of GVCs 90 80 70 60 50 40 30 20 10 Percent Share of Canadian Exports by Air to Non-U.S. Destinations*, 2008 0 Total Scientific Equipment Electronics Aerospace Machinery * By Value Data: Statistics Canada and Transport Canada Source: Office of the Chief Economist, DFAIT 17
as does falling tariffs 15 Percentage Global Average Applied Tariff Rates on All Products 13 11 9 7 5 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Data: World Bank Source: Office of the Chief Economist, DFAIT 18
Why this matters GVCs will not stop or reverse as a result of high oil prices (up to a point). Although may slow and impact on what is traded. Much focus has been on movement of goods by shipping, but this is only a small part of the story. Frequent and inexpensive air transport may be more important, especially for high-valued goods and services. Tariffs also play an important role which is in the hands of policymakers. The role of ICTs likely key but lacking proof. 19
Offshoring and Outsourcing in Canada 20
What is offshoring and outsourcing? HOME COUNTRY LOCATION HOST COUNTRY FIRM OUTSIDE FIRM WITHIN FIRM DOMESTIC DIVISIONS/AFFILIATES DOMESTIC SUPPLIERS DOMESTIC OUTSOURCING FOREIGN AFFILIATES OFFSHORING FOREIGN SUPPLIERS OFFSHORE OUTSOURCING 21
Offshoring and inshoring are circular flows Global Circulation of Business Activities Offshoring Canada Percentage Of Firms All Industries: Manufacturing: 1.9% 5.2% World Percentage Of Firms All Industries: Manufacturing: 1.8% 5.0% Data: Statistics Canada SIBS Survey Source: Office of the Chief Economist, DFAIT Inshoring 22
but with important differences between activities Inshoring and Offshoring of Business Activities in Manufacturing Inshored Activities Production of goods Provision of services Distribution & logistics Call centers Marketing & sales Software development Data processing ICT Legal Services Accounting HR mgnt Financial mgnt Engineering R&D Offshored Activities 5 4 3 2 1 0 0 1 2 3 4 5 Percent of Firms Percent of Firms Data: Statistics Canada SIBS Survey Source: Office of the Chief Economist, DFAIT 23
Outsourcing is more prevelant Outsourcing of Business Activities In Manufacturing Production of goods Provision of services Distribution & logistics Call centers Marketing & sales Software development Data processing ICT Legal Services Accounting HR mgnt Financial mgnt Engineering R&D 0 2 4 6 8 10 Percent of Firms Data: Statistics Canada SIBS Survey Source: Office of the Chief Economist, DFAIT 24
Offshoring and outsourcing is mostly driven by costs Top Motivations for Offshoring or Outsourcing* - Manufacturers - Motivation % of Respondents Non-Labour Costs 69.7 Labour Costs 63.7 Access to New Markets 41.7 Delivery Times 34.5 Access to Knowledge 34.0 Logistics 29.6 Focus on Core Business 28.8 New goods or services 28.6 Following comp or clients 28.4 Tax or Financial 20.3 Lack of Labour 18.0 Other 2.9 * Those indicating medium or high motivation Data: Statistics Canada SIBS Survey Source: Office of the Chief Economist, DFAIT 25
Those offshoring and outsourcing face different obstacles than exporters Top Obstacles when Offshoring or Outsourcing* - Manufacturers - Obstacle % of Firms Distance to producers 55.5 Identifying providers 54.9 Language or cultural 45.1 Tariffs 43.9 Foreign legal or admin 41.3 Lack of mgmt expertise 37.4 Cnd Legal or Admin. 33.4 Distance to customers 32.7 Concerns of employees 32.0 Lack of financing 30.5 Tax 25.0 International standards 24.5 Social Values 20.4 IP 8.3 Those indicating medium or high motivation Data: Statistics Canada SIBS Survey Source: Office of the Chief Economist, DFAIT 26
Some evidence that Canada is lagging in use of international sourcing Percent of Firms Level of International Sourcing* (offshoring and/or outsourcing) * 100 or more employees, 2007-2009 for Canada, 2000-2006 for EU Data: Statistics Canada, Eurostat 27
especially for services Level of International Sourcing by Sector* Percent of Firms * 100 or more employees, 2007-2009 for Canada, 2000-2006 for EU Data: Statistics Canada, Eurostat 28
Why this matters Offshoring and outsourcing, like trade more generally, is a circular flow some activities will leave but others will expand or move in. Goal of policy should be to establish an environment that attracts and retains the high-value activities in Canada while allowing others to move where they can be performed most efficiently. There is some evidence that Canada is not taking full advantage of international sourcing opportunities. This could harm the international competitiveness of Canada-based firms and productivity performance more generally. There is potentially an important role for the TCS in helping firms overcome the obstacles they face when offshoring/outsourcing as well a inshoring. 29
High Valued Activities 30
Canada hosts the HQs of few global companies Number of Companies on Fortune Global 500 Scaled by Size of Economy Switzerland Netherlands France Japan Britain Sweden South Korea Belgium Germany U.S. China Ireland Australia Canada Austria Spain Denmark India Italy Brazil Finland Norway 0 1 2 3 4 Index Data: Fortune Magazine and World Development Indicators, 2010 list of companies, 2008 GPDs Source: Office of the Chief Economist, DFAIT 31
and they tend to be small Company Revenues of Fortune Global 500 Scaled by Size of Economy Switzerland Netherland France Britain Japan South Germany U.S. Belgium China Italy Sweden Spain Australia Denmark Finland Ireland Canada Norway Brazil India Austria 0 20 40 60 80 100 120 Index Data: Fortune Magazine and World Development Indicators, 2010 list of companies, 2008 GDPs. Source: Office of the Chief Economist, DFAIT 25 20 15 10 5 0 Operations of Canadian and U.S. MNEs Outside of North America* US level as a multiple of Canadian level 11 times 21 times 18 times GDP Sales Employment Data: Statistics Canada FATS and U.S. BEA operations of majority owned non-bank foreign affiliates, 2004. Source: Office of the Chief Economist, DFAIT 32
R&D is globalizing extremely quickly Percent 50 Share of R&D Budget Spent Outside of the Home Country* 40 30 20 10 0 95 98 01 04 95 98 01 04 95 98 01 04 Western Europe Japan North America * 209 MNEs, estimate for 2004 Source: Reger (2002) as report in Hall (2011) 33
Canada is more important as a destination than as a source Cross-Border R&D Shares Percent 50 40 30 20 As Source As Destination 10 0 Canada Europe U.S. Japan Other A/P Africa & ME Latin America Data: OECD Source: Hall (2011) 34
Why this matters Canada has relatively few global champions and the ones that we do have tend to be small. It is these companies that often lead global value chains. May reflect on Canada s attractiveness as a location for global HQs. R&D is globalizing quickly Some evidence that Canada performs not badly as a location for performing R&D. But as a source for R&D, Canada ranks low. How to make Canada the destination of choice for high-valued activities? 35
Wrap-up 36
Wrap-up GVCs is trade, but at a more granular level and produces the same gains. Competition becomes greater and more finely-tuned. Offshoring and outsourcing are strategies used by business to be competitive globally brings benefits to Canada. Domestic and international policies must work together to establish an attractive environment that for firms to undertake high-valued activities and from which to serve global markets. Little difference matter more than ever. 37
Shameless Pitch Canada s State of Trade: Trade and Investment Update 2011 www.international.gc.ca/economist-economiste Trade Policy Research, 2011 Global Value Chains: Impacts and Implications 38