Note: This presentation reflects my personal views and not necessarily
those of the OECD or its member countries.
Research Institute for Economy Trade and Industry,
28 March 2006
The Globalisation of Value Chains and the Changing
Nature of Manufacturing – Evidence, Implications
and Policies
Dirk Pilat: dirk.pilat@oecd.org
1 1
This presentation
Briefly describes the policy context.
Q Describes some broad trends in manufacturing
Q Examines the globalisation of value chains.
Q Explores the potential impacts of globalisation.
Q Examines the key policy issues.
Q This work is still in progress and will only be
finalised by the end of 2006.
Q
2 2
Context
Q
Q
Project for 2005-2006, mainly in context of OECD’s
Committee on Industry and Business Environment.
Several areas of work currently underway:
– Work on the changing nature of manufacturing.
– Work on global interactions, using input-output tables and trade data
– which industries are most affected by globalisation?
– Work on the employment impacts of offshoring.
– Work with micro data, to study firm-level impacts on productivity.
– Work on manufacturing work – is it becoming more like services?
– Related work in other OECD groups, including Economics
Department.
Q
OECD is planning a synthesis of this work late 2006, to
feed into the 2007 Ministerial meeting, that will focus on
globalisation.
3 3
The 2 key policy challenges and questions
1. De-industralisation:
– What does the loss of manufacturing jobs imply?
– Is this primarily a loss of production capacity and a growing
focus of firms on high-value added activities?
– Can OECD countries do without a manufacturing sector?
– Which factors are responsible for the decline?
2. Globalisation:
− What does globalisation add to these issues?
− Can OECD economies adjust to the rise of China and India?
− What are the implications for policy?
4 4
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Manufacturing employment is falling steadily in
most OECD countries (% change over 1990-2003)
30
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5 5
Not all activities have declined equally manufacturing employment by key activity, G7 countries,
1990-2001, million workers
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growth of manufacturing employment by technology intensity,
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%
2
high-technology
medium-high-technology
medium-low -technology
low -technology
1
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-2
-3
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7 7
Manufacturing employment in China has not
risen markedly in recent years (million workers)
100
90
80
70
60
50
20
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19
98
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96
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8 8
Value added continues to rise, G7 countries, 1990-2002
Volume index, 1980=100
200
United States
Japan
175
150
Canada
125
United Kingdom
Germany
100
France
75
Italy
02
20
00
20
98
19
96
19
94
19
92
19
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19
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19
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19
80
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76
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72
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9 9
The share of high- and medium-high technology
manufacturing in value added is declining in most
countries, 1990-2003
%
22
Ireland
20
18
Korea
16
14
Japan
Hungary
12
10 EU excl. Lux and Irl
8
6
United States
Czech Republic
4
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002 2003*
10 10
But manufacturing still accounts for a large share
of total demand (final + intermediate)
Early 70s
Mid-70s
Early 80s
Mid-80s
Early 90s
Mid-90s
11 11
U nited States
U nited Kingdom
Poland
N orw ay
N etherlands
Korea
J apan
Italy
H ungary
G reec e
G erm any
F ranc e
D enm ark
C z ec h R epublic
C anada
Aus tralia
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50
45
40
35
30
25
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OECD countries still account for the bulk of global
manufacturing value added, 2002, billion USD
1 500
1 250
1 000
750
500
250
0
12 12
Although some non-OECD regions have grown
Share in global manufacturing value added, in %
8
1980
%
1985
1990
1995
2000
7
6
5
4
3
2
1
0
East Asia
excl. China
China
South Asia
Latin
America excl.
Mexico
Mexico
Middle East Sub-Saharan South Africa
and North
Africa excl.
Africa
South Africa
13 13
i te
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Exports are growing more quickly than production
Export to production ratio for manufacturing
140
120
1990
2003*
100
80
60
40
20
0
14 14
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Intra-industry trade is of growing importance
Intra-industry trade as % of total manufacturing trade, average 1996-2003
100
%
80
60
40
20
0
15 15
Intra-firm trade is important
Share of intra-firm exports in total exports of foreign affiliates
%
90
80
Sweden
70
60
United States
Canada
50
Netherlands
40
30
20
Japan
10
0
1990
91
92
93
94
95
96
97
98
99
00
2001
16 16
Some foreign affiliates mainly produce for export
Export and import propensity of foreign affiliates
Import propensity
Export propensity
Ireland
Czech Republic (2)
Austria
Portugal (2)
Finland
Netherlands (3)
Sweden
Poland (2)
Japan (3)
France
United States (2,3)
0
10
20
30
40
50
60
70
80
90
100
%
17 17
Manufacturing still provides an important contribution to
aggregate productivity growth
Contribution to average growth in value added per person, 1990-2003, in %
Manufacturing
Services
Other industries
4.5
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Ja
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Productivity and hourly labour costs for
manufacturing differ, 2003, in USD
35
30
25
20
15
10
5
0
19 19
%
100
1995
Ita
ly
Po
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Sp
N
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et
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U
rl a
ni
te
nd
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s
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do
m
Manufacturing still accounts for the bulk of R&D,
share in Business expenditure on R&D, in %
2003*
90
80
70
60
50
40
30
20
10
0
20 20
The interaction of manufacturing and services is growing
Share of production and services workers in manufacturing employment, 2002, in
%
Craft and related trade workers
Professionals
Other occupations
100
90
80
70
60
S
pa
in
G
re
ec
e
P
or
tu
ga
l
ly
Ita
Fr
an
ce
A
us
tri
a
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la
nd
B
el
gi
um
D
en
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ar
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Fi
nl
an
d
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w
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en
N
et
he
U
rla
ni
nd
te
s
d
K
in
gd
om
50
40
30
20
10
0
21 21
Overall trends in manufacturing
1. The share of manufacturing in OECD economies is declining,
although production continues to rise.
2. The character of manufacturing is changing – more focus on
high-value added activities, blurring with services, but no longer
growth of high-technology manufacturing.
3. A growing integration of manufacturing throughout the value
chain, though more in some industries than in others.
4. Innovation in manufacturing (as measured by patents) remains
dominated by OECD countries.
Q
Challenges:
–
–
Adjust to structural change.
If manufacturing is important for OECD countries – ensure that this
remains a viable sector of activity.
22 22
Second question: The globalisation of value chains –
what does this involve?
Q
Growing integration of production, increasingly at the
global level:
1. Which functions do firms keep in-house and which do they
out-source, either domestically or internationally?
2. Production can become fragmented, with growing trade in
intermediate inputs.
3. Firms may focus on core competences and strategic functions.
Q
Theoretical considerations:
– What are the transaction costs of engaging in outsourcing?
– How can firms control internal and external production?
– In practice, firms carefully weigh costs and benefits.
23 23
Evidence for the growth of global production networks
1.
2.
3.
4.
5.
6.
Intra-firm trade accounts for a large part of total trade.
Trade flows between parents and foreign affiliates have large
impacts on trade balances.
Intermediate products account for a growing share of global
trade flows.
Imported intermediate inputs are of growing importance for total
input in domestic production.
Foreign affiliates may mainly produce for exports (instead of for
domestic production), sometimes back to the country of origin.
A growing complexity of trade patterns and sources of
intermediate inputs.
24 24
A growing ratio of imported to domestic inputs, 1995-2000
Australia
Austria
Belgium
Denmark
Finland
France
Germany
Italy
Japan
Netherlands
Spain
Sweden
UK
USA
1995
2000
China
India
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
25 25
Key drivers
1. Competitive pressures – companies are looking for ways to
improve efficiency and costs.
2. Falling costs and growing efficiency of transport and
communications – enabling greater integration.
3. Growth of new markets, notably China and India, that offer
scope for expansion abroad.
4. Focus on core strengths.
5. Access to factor inputs, including skilled workers.
6. Increased in fixed costs for some areas of production – leading to
growing concentration.
7. Growing complexity of production – not all competencies may
be available within the firm.
26 26
Impacts of globalisation on employment
Q
Direct impacts:
–
–
Q
Indirect impacts:
–
–
Q
Short-term loss if domestic activities are off-shored.
Short-term gains if foreign affiliates locate within OECD economies.
Firms may focus on core strengths, with possible potential for growth.
Positive impacts through productivity growth, price effects and impacts on
consumer wealth and demand.
The available empirical studies suggest that the overall impacts
of globalisation on employment are relatively small, but:
–
–
Impacts in specific industries (e.g. textiles), regions (heavily concentrated
on industries that are in decline) and worker groups (low-skilled workers
that are older and with long job tenures) can be quite substantial.
Impacts on specific OECD countries may also be larger, in particular
countries that are heavily concentrated on industries that can be
outsourced.
27 27
Foreign affiliates are of growing importance for
employment – manufacturing, in 1000 persons
Thousands
7 400
7 500
7 000
6 500
5 968
6 000
United States
34.2%
5 500
5 000
4 500
United Kingdom
38.2%
11.8%
4 000
3 500
France
13.5%
12.0%
Germany
3 000
2 500
12.0%
2 000
8.3%
1 500
7.1%
1.5%
6.9%
2.0%
26.5%
1 000
500
Italy
Japan
5.1%
Other OECD (1)
20.9%
0
1995
2001
28 28
Foreign affiliates are of growing importance for
employment – services, in % of total employment
19 95
2 00 2
25
%
20
15
10
5
)
(2
l
s
ga
te
tu
ta
or
S
P
an
Fr
rla
d
et
he
ce
s
nd
a
us
tr i
te
ni
d
an
nl
Fi
ed
w
S
H
un
ga
en
ry
d
an
ol
P
gi
el
B
A
N
U
C
ze
ch
R
ep
ub
um
lic
0
29 29
Impacts of globalisation on productivity
Q
Globalisation is expected to enhance productivity:
–
–
–
Q
Firms will be able to specialise.
Firms outsource to enhance efficiency and reduce costs.
Globalisation will increase pressures on companies to innovate and
become more efficient.
Evidence:
–
–
Foreign affiliates have demonstrable direct and indirect impacts on
productivity performance.
Econometric work with firm-level data shows that globally engaged firms
have stronger productivity performance, e.g. in:
•
•
•
–
Being engaged as a multinational
Being engaged as an exporter in foreign markets
Sourcing inputs from abroad, in off-shoring some of its production.
Globalisation has increased real wages.
30 30
Foreign affiliates have a considerable impact on
productivity growth
Contribution to annual productivity growth in manufacturing, 1995-2001, in
percentage points
Contribution of foreign affiliates
Labour productivity growth
7
3
-1
Czech
Republic
Sweden
United
Kingdom
France
Norway
Finland
Hungary
United
States
Netherlands
Japan
Spain
Portugal
31 31
In sum
1.
Globalisation is having considerable impacts:
•
•
•
•
2.
In changing trade patterns and comparative advantage of OECD and nonOECD countries
In creating a larger global market.
In improving productivity growth and increasing wealth and incomes.
In affecting employment in some countries and regions and for some
worker groups. – Overall, however, the employment impacts appear to be
rather small.
The main challenges are:
•
•
•
Adjusting to these changes – enabling structural change and moving into
new areas of economic activity (or retaining existing strengths).
Innovation
Inclusiveness.
32 32
Some preliminary policy implications (1)
1.
Adjust to structural change – policies are well known and are
currently being elaborated further:
•
•
•
•
•
Competitive product markets, where resources can be allocated from
growing to declining sectors of the economy.
Well-functioning labour markets and institutions.
Well-functioning financial markets
Sound macro-economic policy.
OECD has a wide range of work available on these issues,
including the OECD Jobs Study, which is currently being reexamined.
33 33
Some preliminary policy implications (2)
2.
Move up the value chain – what is now an innovative product,
will eventually be a commodity. Key policies:
•
•
•
•
•
•
•
ƒ
ƒ
Innovation and technology policies
Foster new areas of economic activity
Cluster policies and local efforts
Upgrade human resources
Enhance attractiveness
Protect IPR – build on intangible assets
A level playing field – trade and investment policies.
Moreover, countries may also have unique strengths (e.g. natural
resources) that enable them to compete internationally.
These policies all accept that globalisation is happening and has
thus far delivered considerable benefits to OECD economies and
many non-member economies.
34 34
Some preliminary policy implications (3)
3.
Avoid protectionist policies that may reduce the benefits of
globalisation or that only offer a short-term solution to the
adjustment challenge:
ƒ
4.
For example, policies that penalise companies engaging in off-shoring are
likely to reduce efficiency and raise costs.
Avoid a political backlash against globalisation:
ƒ
ƒ
ƒ
Assist those workers that are most affected by globalisation, e.g. by an
activating social safety net, active labour market policies and policies for
life-long learning.
Spread the benefits of globalisation as widely as possible, by using trade,
investment and development policies to create greater opportunities for
countries that may be left behind, notably in Africa.
Address other global concerns that are linked to globalisation, such as
environmental challenges, to make globalisation considered an
opportunity, rather than a threat.
35 35
Finally
•
•
•
•
This work is still preliminary – it will be finalised in the course
of this year.
This presentation presents my personal views, and does not
necessarily reflect the views of the OECD, or its member
countries.
Comments are welcome.
Sources and key references follow on the next page.
Thank you.
36 36
Key OECD sources and references
•
Sources:
•
•
•
•
OECD STAN database: www.oecd.org/sti/stan
OECD Input-Output tables: www.oecd.org/std/io-tables/data
Other OECD data: see www.oecd.org/statistics
Selected references:
•
•
•
•
•
OECD (2005a), Science, Technology and Industry Scoreboard 2005,
www.oecd.org/sti/scoreboard
OECD (2005b), Economic Globalisation Indicators, OECD, Paris.
Chiara Criscuolo (2005), The contribution of foreign affiliates to
productivity growth, STI Working Paper 2005/8, OECD, Paris.
Dirk Pilat and Anita Wolfl, Measuring the Interaction between
Manufacturing and Services, STI Working Paper 2005/5, OECD, Paris.
Dirk Pilat, Agnes Cimper, Karsten Olsen and Colin Webb, The Changing
Nature of Manufacturing in OECD Economies, STI Working Paper,
forthcoming.
37 37