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Global value chains Global value chains and trade in services

Sébastien MiroudotOECD

“Selected Outstanding Issues in Services, Trade and Development”3-5 May 2011 – Manila, Philippines

Outline of the presentation

1. Global value chains: the role of servicesa) The fragmentation of production and global value

chains analysisb) Services in the value chainb) Services in the value chainc) Vertical specialisation in services

2. Evidence and measurement issuesa) Trade in intermediate servicesb) Intra-firm trade in servicesc) From vertical trade to the measurement of trade in

value-added terms for services3. Policy implications

a) Trade in tasks and offshoring in servicesb) Trade liberalisation and trade costs in services

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G O C S1. GLOBAL VALUE CHAINS:THE ROLE OF SERVICES

Background: the fragmentation of production

• The second “unbundling” (Baldwin, 2006)– First unbundling (1850-1914 / 1960s to present):

separation of production and consumptionp p p– Second unbundling (from mid-1980s): separation of

production in different stages (geographically and organisationally)

• Causes:– Reduction of trade costs (container, Internet…)… but also services trade liberalisation

Changing global demand structures (emerging – Changing global demand structures (emerging economies)

• Consequence: New firm strategies of vertical specialisation

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Typology of sourcing strategies

Offshoring

Domestic in-house production

Domestic outsourcing

Offshore-outsourcing

Vertical foreign direct investment

Ou t s o u r c i n g

Inside

the firm

Indepen

dent supplier

Domestic country Foreign country

g

Global value chains analysis

• The “commodity chain” (Hopkins and Wallerstein, 1977)

• The “global commodity chain” (Gereffi, 1994)

Apparel Apparel manufacturermanufacturer

Textile companiesTextile companies Retail outletsRetail outletsApparel Apparel manufacturermanufacturer

Textile companiesTextile companies Retail outletsRetail outlets

Natural Fibres:

Cotton, wool, silk etc.

Yarn

(spinning)

Fabric

(weaving, grading)

Garment factories

(design, pattern, nesting, cutting sewing, press &

packaged)

Domestic & overseas

subcontractors

Brand-named apparel (design

& brand)

Department stores

Specialty stores

Mass merch-andise chains

Discount chains

Factory outlets

Synthetic fibre:

Oil & natural gas

Petrochemicals Synthetic fibre

Overseas buying offices

Trading companies

Raw materialRaw materialnetworksnetworks Component networksComponent networks ProductionProduction

networksnetworksExport Export

networksnetworksMarketing Marketing networksnetworks

manufacturermanufacturer

Natural Fibres:

Cotton, wool, silk etc.

Yarn

(spinning)

Fabric

(weaving, grading)

Garment factories

(design, pattern, nesting, cutting sewing, press &

packaged)

Domestic & overseas

subcontractors

Brand-named apparel (design

& brand)

Department stores

Specialty stores

Mass merch-andise chains

Discount chains

Factory outlets

Synthetic fibre:

Oil & natural gas

Petrochemicals Synthetic fibre

Overseas buying offices

Trading companies

Raw materialRaw materialnetworksnetworks Component networksComponent networks ProductionProduction

networksnetworksExport Export

networksnetworksMarketing Marketing networksnetworks

manufacturermanufacturer

The apparel commodity chain(Appelbaum and Gereffi, 1994)

• The “global value chain” (Gereffi, Humphrey and Sturgeon, 2005)

• “Global production networks” (Coe and Hess, 2007)

networksnetworks networksnetworks networksnetworks networksnetworksnetworksnetworks networksnetworks networksnetworks networksnetworks

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The value chain: importance of services

• The value chain is a systematic approach to the systematic approach to the analysis of the competitive advantage of companies, developed by M.E. Porter in his book, Competitive Advantage (1985).

• The chain consists of a series of activities that create and build value, distinguishing between distinguishing between “primary activities” and “support activities”.

Source: OECD, 2007

Costs and fragmented production (Jones & Kierzkowski, 2004)

Single production block, constant returns to scale

Two production blocks, each better suited to a region

Further degrees of gfragmentation lowering total marginal costs of production

Cost of service link activities (fixed cost)

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Vertical specialisation in services

• Mudambi and Venzin (2010): the banking industry– 5% of world GDP– Some banks are highly internationalised: Citigroup is present in

100 countries, HSBC in 87 countries. ICBC is the largest bank (in f k l

gterms of market capitalisation in 2009), 162 overseas subsidiaries

– Growth by serving new markets and by disintegrating the value-creating activities

– Branch offices at the end (contacts with customers) but most activities can be supplied cross-border due to their high degree of digitalisation

– Value-creating activities are undertaken in financial services hubs (such as London and New York) and in offshored locations hubs (such as London and New York) and in offshored locations with skilled human resources and processing capabilities.

– Example of vertical integration: Unicredit group• “Competence centers”: core banking competences located in Italy, asset

management in Ireland, investment banking in Germany, loans and mortgages in Austria, credit card in Turkey, payments in the Czech Republic.

The offshore services global value chain (Gereffi, 2010)

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Mapping of activities by country

India Philippines

Czech Republic

Chile

Source: Gereffi (2010)

Republic

C2. EVIDENCE AND MEASUREMENT ISSUES

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Trade in intermediate services

Imports of intermediate goods and services (1999=100) As a share of total trade

250 %

100

150

200

250

30%

40%

50%

60%

70%

80%

90%

100%

0

50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Goods Services

0%

10%

20%

Goods Services

Source: Miroudot et al. (2009)

Intra- and inter-regional imports of intermediate services (billion USD, 2005)

The map represents imports of intermediate services above 5 billion USD. Circles stand for intra-regional imports and arrows for inter-regionalimports. Arrows and circles are proportional to the value of the flows.

Source: Miroudot et al. (2009)

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Share of regions in world imports of intermediate services (2005)

0.8

0.9

1.0

Construction

Trade and repairsOther services

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Hotels and Restaurants

Transport, storage and aux.R&D

Other Business activities

Post and Telecommunications

FinanceRenting of Machinery and 

Equipment

Computer and related activites

Asia Europe (excluding intra‐EU trade) North America

Source: Miroudot et al. (2009)

Measuring trade in intermediates: goods versus services

Stage 3: identification of the using industry k

Stage 2: estimation of bilateral flows of intermediate inputs (by product/industry)

Stage 1: collection of bilateral trade data (by product)

Goods I/O coefficients in import matrix -αipkt

Iijkpt

OECD ITCS database(SITC Rev. 3)

BEC classification

Mijpt Iijpt

OECD TISP & I/O ffi i I

Services

OECD TISP & UN database(EBOPS)

Mijpt

Assumption: Share of intermediate services in bilateral services imports is the same across all partners

I/O coefficients in import matrix - αipt

Iijpt

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The ratio of FDI to trade

300%

350%

50%

100%

150%

200%

250%

300%

0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

FDI to services trade FDI to goods trade FDI to trade

Source: Miroudot et al. (2009)

Intra-firm trade in services

Total Affiliated Share Total Affiliated ShareA. Other private services 233,529 74,551 0.32 153,267 60,762 0.40

1. Education 17,796 [1] [1] 5,204 [1] [1]2. Financial services 60,190 9,723 0.16 19,143 7,636 0.403. Insurance services 10,756 [2] [2] 42,939 [2] [2]4 Telecommunications 9 163 3 916 0 43 7 193 (D)

Exports Imports

Cross-border trade in Other Private Services for the US in 2008

4. Telecommunications 9,163 3,916 0.43 7,193 (D)5. Business, professional, and technical services 113,525 55,483 0.49 76,284 50,603 0.66

Computer and information services 12,599 4,124 0.33 16,139 12,417 0.77

Computer and data information services 8,044 3,495 0.43 15,214 11,962 0.79

Database and other information services 4,555 629 0.14 925 455 0.49Management and consulting services 26,942 23,705 0.88 21,565 18,529 0.86Research and development and testing services 17,139 14,292 0.83 14,885 10,877 0.73Operational leasing 7,942 2,412 0.30 958 517 0.54

Other business, professional, and technical services 48,901 10,952 0.22 22,736 8,263 0.36Accounting, auditing, and bookkeeping services 1,399 809 0.58 2,269 518 0.23Advertising 4,019 2,832 0.70 2,194 822 0.37Architectural, engineering, and other technical services

5,918 1,097 0.19 1,086 411 0.38Construction 1,679 652 0.39 827 205 0.25Industrial engineering 3,776 609 0.16 1,603 714 0.45Installation, maintenance, and repair of equipment 9,661 1,386 0.14 4,945 2,648 0.54Legal services 7,269 136 0.02 1,902 153 0.08g , ,Mining services 3,080 1,159 0.38 728 8 0.01Trade-related services 6,112 1,626 0.27 1,047 741 0.71Training services 1,414 45 0.03 779 37 0.05

6. Other services 22,099 5,428 0.25 2,505 (D)Film and television tape rentals 13,598 5,428 0.40 1,878 (D)

[1] Education consists of expenditures for tuition and living expenses by students studying in foreign countries, so these are transactions between unaffiliated parties.[2] Most insurance services transactions are deemed to be unaffiliated even when they are between affiliated companies, because the services are deemed to be provided to the policyholders who pay the insurance premiums and who are unaffiliated with either company.Source: US Bureau of Economic Analysis

Notes: Millions of US Dollars; (D) - Suppressed to avoid disclosure of data of individual companies.

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Share of intra-firm trade in US private services imports and exports

25%

30%

25%

30%

0%

5%

10%

15%

20%

2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8

0%

5%

10%

15%

20%

2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8

Source: US Bureau of Economic Analysis

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Share of Affiliated in Total Exports (i.+ii.)

i. Share of US Parents in Total  Exports

ii. Share of US Affiliates  in Total Exports

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Share of Affiliated in Total Imports (i.+ii.)

i. Share of US Parents in Total  Imports

ii. Share of US Affiliates  in Total  Imports

Sales of vertical affiliates: estimates based on firm-level data

Sales of vertical Sales of verticalAs a share of cross-border As a share of cross-border

39.2% 30.6%28.1% 32.5%32.7% 36.9%Complex FDI

Percentage of affiliates

Percentage of affiliates

Manufacturing industriesHorizontal FDIVertical FDIComplex FDI

Services industriesHorizontal FDIVertical FDI

Sales of vertical foreign affiliates

Sales of vertical foreign affiliates

Total (Mil. USD) Goods (%) Services (%) Total (Mil. USD) Goods (%) Services (%)

Australia 7,633 2.2% - Japan 53,763 2.9% 25.4%

Austria 7,840 3.2% 9.4% Korea 583 0.0% -

Belgium 31,499 0.2% 41.9% Luxembourg 26,492 125.2% -

Canada 21,135 1.4% 21.2% Mexico 720 0.2% -

Chile 69 0.2% 0.1% Netherlands 10,830 1.5% -

Czech Republic 57 0.0% 0.0% New Zealand 48 - -

Denmark 4,154 1.0% 6.5% Norway 9,468 13.4% -

Estonia 76 - 3.0% Poland 59 0.0% -

Finland 9,954 13.4% - Portugal 626 0.0% -

France 95,825 10.0% - Slovak Republic 229 0.3% -

trade (imports) trade (imports)

, p

Germany 70,369 5.2% - Slovenia 495 0.2% -

Greece 363 0.0% - Spain 27,032 4.5% -

Hungary 1,245 1.1% - Sweden 16,414 4.8% -

Iceland 664 0.4% - Switzerland 107,403 62.2% -

Ireland 16,854 23.0% - United Kingdom 53,946 0.9% -

Israel 174 - 1.0% United States 257,192 7.2% -

Italy 29,766 5.2% - Total OECD members 863,024 5.6% -

Source: Lanz and Miroudot (2011)

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Vertical trade in services: the import content of cross-border services exports

Trade and repairs

Finance and insurance

Research and development

Computer activities

Post and telecommunications

Other business activities

1995

2005

0% 5% 10% 15% 20% 25% 30%

Transport, storage & auxiliary activities

Construction

Source: Miroudot and Ragoussis (2009)

Towards the measurement of trade in value-added terms

• Traditional international trade statistics do not adequately describe current trade flows nor allow full understanding of the nature and impact of economic globalisation whether in terms of income or employment.

• When a good or service crosses borders several times at different stages of processing, g g p g,conventional trade statistics record each time the full value of the product, including embodied (imported) intermediate inputs.

– Leads to “multiple-counting”

– Tends to hide actual patterns of trade among countries as the economy producing the final good or service seems to export the whole value when in reality it may have only marginally contributed to this value.

• What can we do?

– New indicators to assess the impact of vertical specialisation on trade and to understand international production networks.

– Measuring the value-added content of trade and calculating the contribution of each economy to the global value chain.

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Issues regarding value-added trade in services

• Low quality of bilateral services trade statistics by industry– Many missing observations (when a full matrix would be

needed)– Disaggregated data represent a small share of aggregate totalsDisaggregated data represent a small share of aggregate totals

• BEC classification does not cover services: lack of adequate methodology to distinguish between intermediate and final consumption

• Weak correspondence between EBOPS and ISIC classifications

• But we need services:– Exports of goods in value added terms have to account for

imported servicesimported services– Vertical specialisation in services industries

• Services traded through Mode 3: ‘domestic’ value-added?

O C C O S3. POLICY IMPLICATIONS

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Trade in tasks and offshoring in services

• Division of labour is an important source of productivity gains…– … but affects patterns of employment

• Fragmenting services activities: the “trade in tasks” paradigm• Concerns about the number of jobs “offshorable” but offshoring in services

remains limited:d ll h h– Trade costs in services are still high

– Tasks may come as a “bundle” : complementarities • How trade affects labour markets is a complex question

– No effect on total employment– Effect on the composition of labour demand (and potentially wages but evidence is

mixed)– Polarisation in the US and the EU: shift towards high-skill and low-skill jobs at the

expense of medium-skill jobs. Trade or skill-biased technological change?• Evidence that offshoring lowers the costs, enhance productivity and create

space for expansion and new hiring in the offshoring firm:Off h i i di i h i i i i h fi (Gö d l – Offshoring intermediate services enhance innovation in Irish firms (Görg and Hanley, 2009)

– In Germany, offshoring of tasks is associated with a shift towards more non-routine and interactive tasks being performed onshore (Becker et al., 2009)

• Benefits of trade in tasks:– Expanding variety and transmission of productivity gains across international

boundaries– Optimal spending share on intermediates (Jones, 2011)

Trade liberalisation and trade costs in services

• Trade costs in services remain high and could explain why vertical specialisation is lower in services than in goods (despite an important increase in recent years)

• No progress in multilateral trade

Trade costs indices for goods and services (cross-border trade)

• No progress in multilateral trade negotiations on services (GATS was 17 years ago)

• Many new RTAs with improved services commitments but services trade liberalisation is mainly ‘unilateral’

• Key sectors for global value chains are still highly regulated (e.g., transport, financial services, professional services) – also an impediment on goods trade.

• Complementarities between services: about 40 different types of services are i l d h f t i fi

85

90

95

100

105

Tra

de

cost

s in

dex

(19

95=

100

)

involved when a manufacturing firm internationalizes its production (Swedish National Board of Trade, 2010).

• To what extent non-discrimination commitments translate into lower trade costs for firms?

1995 2000 2005 2010Year

Goods Services

Source: Miroudot, Sauvage and Shepherd (2010)

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www.oecd.org/trade

Contact

sebastien.miroudot@oecd.org