Global Value Chains: Impacts and Implications - Center on ...

<strong>Global</strong> <strong>Value</strong> <strong>Chains</strong>:
<strong>Impacts</strong> <strong>and</strong> <strong>Implications</strong>
Aaron Sydor
Office of the Chief Economist
Foreign Affairs <strong>and</strong> International Trade Canada

Overview
What is a global value chain (GVC)?
How GVCs Fit In
Drivers
Measures
High <strong>Value</strong>s Activities
Offshoring <strong>and</strong> Outsourcing
Wrap-up
2

What Is A <strong>Global</strong> <strong>Value</strong> Chain?
3

Headquarters
Corporate
Services
Finance
HR/ Payroll
IT
Marketing
Logistics
R&D
R&D
A simplified value chain…
Inputs Assembly Distribution Sales Service
Intermediate
Input
Services
Intermediate
Input
Assembly
Distribution
Sales
After Sales
Service
4

Headquarters
Corporate
Services
Finance
HR/ Payroll
IT
Marketing
Logistics
R&D
R&D
R&D
R&D
…individual functions become
separable…
Inputs
Intermediate
Inputs Input Assembly Distribution Sales Service
Intermediate
Services Input
Services
Intermediate
Input
Intermediate
Input
Assembly
Assembly
Assembly
Distribution
Distribution
Distribution
Sales
Sales
Sales
Service
After Sales
Service
After Sales
Service
5

R&D
…which can then be located anywhere
in the world
Company
HQ
Lawyers
Call-Centre
& IT
Manufacturing
Inputs
6

How GVCs Fit In
7

A common definition of GVCs
A global value chain describes the full range of activities
undertaken to bring a product or service from its
conception to its end use <strong>and</strong> how these activities are
distributed over geographic space <strong>and</strong> across
international borders*
* Adapted from the global value chains initiative at Duke University
8

How GVCs fit into trade theory
Why Firms Trade
Classical
Ricardo Differences in Technology
H-O
New Trade Theory
Krugman
Heterogeneous Firms
<strong>Global</strong> <strong>Value</strong> <strong>Chains</strong>
Fenstra <strong>and</strong>
Hanson
Grossman <strong>and</strong>
Rossi-Hansberg
Differences in Endowments
Scale, Trade Costs
Various IP, Management, Technology
Activities
Tasks
Source of Advantage
Location –
Often Country
Industry
Firm
Within Firm
9

Classical
Resource exports
New Trade Theory
Heterogeneous Firms
<strong>Global</strong> <strong>Value</strong> <strong>Chains</strong>
How GVCs explain trade
Labour intensive exports from countries with cheap labour
Industrial clustering
Multinationals
Performance differences between firms
Trade in intermediate inputs <strong>and</strong> services
Move from horizontal to vertical FDI
10

Why this matters
<strong>Global</strong> 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 <strong>and</strong> outward FDI, movement of ideas <strong>and</strong> of people.
Competition increases <strong>and</strong> becomes more refined.
11

Drivers of GVCs
12

1000
900
800
700
600
500
400
300
200
100
0
Rising oil prices don’t seem to be having
a major impact on global trade
Index
1983 = 100
Oil Prices <strong>and</strong> <strong>Global</strong> Trade
1983 1990 1995 2000 2005 2009
*U.S. dollars per barrel, near month Cushing future on NYMEX.
Data: WTO <strong>and</strong> U.S. Department of Energy
Source: Office of the Chief Economist, DFAIT
World
Manufacturing
Imports
Oil Price*
13

3000
2500
2000
1500
1000
500
0
The growth of container shipping also
seems to have had limited impact
Millions of Tons Loaded
International Seaborne Trade
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
14

90
80
70
60
50
40
30
20
10
0
Percent
Air transport appears to be an important
contributor to the rise of GVCs…
Share of Canadian Exports by Air
to Non-U.S. Destinations*, 2008
Total Scientific
Equipment
* By <strong>Value</strong>
Data: Statistics Canada <strong>and</strong> Transport Canada
Source: Office of the Chief Economist, DFAIT
Electronics Aerospace Machinery
15

15
13
11
9
7
5
Percentage
<strong>Global</strong> Average Applied Tariff Rates on All Products
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Data: World Bank
Source: Office of the Chief Economist, DFAIT
…as does falling tariffs
16

Measuring GVCs
17

R&D
CDIA
Measurement can be very difficult
Profits
Company
HQ
Contract
CDIA
Service
Imports
Lawyers
Exports
Call-Centre
& IT
Manufacturing
18

Existing measures
A Suite of Measurement Options
– Merch<strong>and</strong>ise trade, services trade, FDI flows <strong>and</strong> stocks, royalty payments
Classification of trade by use
– Intermediate merch<strong>and</strong>ise trade becomes proxy for GVCs
Input/output tables
– Shows links between industries
– International linkages are not well measured, proportionality problem
Custom surveys
– Lack of comparability, limited time dimension, survey burden <strong>and</strong> cost
– New survey in Canada, SIBS visit www.international.gc.ca/economist-economiste
19

Existing measures show a rising importance
of trade, investment, <strong>and</strong> services
X - Goods
X - Comm. Services
X - Royalties & Lic. Fees
X - R&D Services
Outward FDI
FA Sales Abroad
M - Goods
M - Comm. Services
M - Royalties & Lic. Fees
Growth In <strong>Global</strong> <strong>Value</strong> <strong>Chains</strong> in Canada
Growth Relative to Canadian GDP, 1990-2008
M - R&D Services
Inward FDI
FC Sales in Canada
GDP
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Percent
* For FA Sales <strong>and</strong> FC sales, period is 1999-2008.
Data: Statistics Canada
Source: Office of the Chief Economist, DFAIT
15.5x
20

Capital
Intermediate
Consumption
BEC data shows mixed results for trade
in intermediate goods
Growth
(2000-2008)
World
Exports by Type
Canada
U.S.
0 20 40 60
Percent
80 100 120 140
Data: UN Comtrade
Source: Office of the Chief Economist, DFAIT
Capital
Intermediate
Consumption
Share
(2008)
Canada
World
U.S.
0 20 40
Percent
60 80 10
21

Percent
80
70
60
50
40
30
20
10
0
But, I/O data shows the growing
importance of imported inputs…
Share of Inputs that are Imported
1961 65 70 75 80 85 90 95 '00 2006
Data: Statistics Canada
Source: Office of the Chief Economist, DFAIT
Manufactured
Total Economy
22

Percent
25
20
15
10
5
0
…especially for key types of services
Professional Service* Inputs
Share that are Imported (LHS)
Share of Total Inputs (RHS)
Percent
1961 65 70 75 80 85 90 95 '00 2006
* Engineering, scientific, accounting, legal, advertising software development <strong>and</strong> misc.
services to business.
Data: Statistics Canada
Source: Office of the Chief Economist, DFAIT
7
6
5
4
3
2
1
0
23

High <strong>Value</strong>d Activities
24

Headquarters (HQs)
Case studies of some high-valued
activities…HQs <strong>and</strong> R&D
– Employ relatively well paid, educated, skilled people
– Provide services to rest of enterprise
– Locally support other skilled professions such as legal, financial, etc…
– Make decisions about location <strong>and</strong> sourcing of activities (matters if local
bias)
– Philanthropy?
R&D
– Employ relatively well paid, educated, skilled people
– R&D activities ‘spill-over’ into local community
25

Methodology
How does Canada stack up as a location for these activities (HQs
<strong>and</strong> R&D)?
– Is Canada viewed as a desirable location from which to lead a
global company? Difference between HQ activities <strong>and</strong> HQs.
– Is Canada seen as a desirable location for global companies to
locate their R&D activities? Is Canada viewed as a good
location for sourcing R&D?
What environment / policy levers are most important for attracting
<strong>and</strong> retaining these activities?
26

Canada hosts the HQs of few global
companies…
Number of Companies on Fortune
<strong>Global</strong> 500 Scaled by Size of Economy
Switzerl<strong>and</strong>
Netherl<strong>and</strong>s
France
Japan
Britain
Sweden
South Korea
Belgium
Germany
U.S.
China
Irel<strong>and</strong>
Australia
Canada
Austria
Spain
Denmark
India
Italy
Brazil
Finl<strong>and</strong>
Norway
0 1 2 3 4
Index
Data: Fortune Magazine <strong>and</strong> World Development Indicators,
2010 list of companies, 2008 GPDs
Source: Office of the Chief Economist, DFAIT
27

Company Revenues of Fortune <strong>Global</strong>
500 Scaled by Size of Economy
Switzerl<strong>and</strong>
Netherl<strong>and</strong>
France
Britain
Japan
South
Germany
U.S.
Belgium
China
Italy
Sweden
Spain
Australia
Denmark
Finl<strong>and</strong>
Irel<strong>and</strong>
Canada
Norway
Brazil
India
Austria
0 20 40 60 80 100 120
Index
Data: Fortune Magazine <strong>and</strong> World Development Indicators,
2010 list of companies, 2008 GDPs.
Source: Office of the Chief Economist, DFAIT
…<strong>and</strong> they tend to be small
25
20
15
10
5
0
Operations of Canadian <strong>and</strong> 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 <strong>and</strong> U.S. BEA operations of majority
owned non-bank foreign affiliates, 2004.
Source: Office of the Chief Economist, DFAIT
28

Percent
50
40
30
20
10
0
R&D is globalizing extremely quickly…
Share of R&D Budget Spent Outside
of the Home Country*
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)
29

Percent
50
40
30
20
10
0
Data: OECD
Source: Hall (2011)
…Canada is more important as a
destination than as a source
Cross-Border R&D Shares
As Source
As Destination
Canada Europe U.S. Japan Other A/P Africa &
ME
Latin
America
30

Offshoring <strong>and</strong> Outsourcing in Canada
31

<strong>Global</strong> Circulation of Business Activities
Canada
Offshoring <strong>and</strong> inshoring are circular
flows…
Data: Statistics Canada – SIBS Survey
Source: Office of the Chief Economist, DFAIT
Offshoring
Percentage Of Firms
All Industries:
Manufacturing:
1.9%
5.2%
Percentage Of Firms
All Industries:
Manufacturing:
1.8%
5.0%
Inshoring
World
32

5
4
3
Inshoring <strong>and</strong> Offshoring of Business Activities
In Manufacturing
Inshored Activities
2
Percent of Firms
…but with important differences
between activities
1
0
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
Data: Statistics Canada – SIBS Survey
Source: Office of the Chief Economist, DFAIT
Offshored Activities
0 1 2 3 4 5
Percent of Firms
33

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
34

Offshoring <strong>and</strong> outsourcing is mostly
driven by costs
Top Motivations for
Offshoring or Outsourcing*
- Manufacturers -
Logistics
Other
Motivation
Non-Labour Costs
Labour Costs
Access to New Markets
Delivery Times
Access to Knowledge
Focus on Core Business
New goods or services
Following comp or clients
Tax or Financial
Lack of Labour
* Those indicating medium or high motivation
Data: Statistics Canada – SIBS Survey
Source: Office of the Chief Economist, DFAIT
% of
Respondents
69.7
63.7
41.7
34.5
34.0
29.6
28.8
28.6
28.4
20.3
18.0
2.9
35

Those offshoring <strong>and</strong> outsourcing face
different obstacles than exporters
Top Obstacles when
Offshoring or Outsourcing*
- Manufacturers -
Tariffs
Tax
International st<strong>and</strong>ards
IP
Obstacle
Distance to producers
Identifying providers
Language or cultural
Foreign legal or admin
Lack of mgmt expertise
Cnd Legal or Admin.
Distance to customers
Concerns of employees
Lack of financing
Social <strong>Value</strong>s
55.5
54.9
45.1
43.9
41.3
37.4
33.4
32.7
32.0
30.5
25.0
24.5
20.4
8.3
% of
Firms
Those indicating medium or high
motivation
Data: Statistics Canada – SIBS
Survey
Source: Office of the Chief
Economist, DFAIT
36

Wrap-up
GVCs is trade, but at a more granular level – producing similar
gains.
Competition becomes greater <strong>and</strong> more finely-tuned.
Measures confirm growing importance of GVCs.
Some of the drivers, most notably tariffs, are controlled by policy.
Offshoring <strong>and</strong> outsourcing are strategies used by business to be
competitive globally – brings benefits to Canada.
Its all about establishing an environment that will create an
attractive location for firms to undertake high-valued activities
<strong>and</strong> from which to serve global markets.
Little difference matter more than ever.
37

Canada’s State of Trade:
Trade <strong>and</strong> Investment Update – 2011
www.international.gc.ca/economist-economiste
Shameless Pitch
Trade Policy Research, 2011
<strong>Global</strong> <strong>Value</strong> <strong>Chains</strong>: <strong>Impacts</strong> <strong>and</strong> <strong>Implications</strong>
Coming Soon
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