Conference_20130305_Andrew Wyckoff


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  • Thank you to the organisers
  • In 2005, the OECD Committee for Scientific and Technological Policy (CSTP) decided to launch a demand-driven programme of Country Reviews Scope: Comprehensive analysis of the respective national innovation system (with a focus on the role of government policy) Just released the Swedish review in late 2012.
  • It notes many of the mega-trends that we will be discussing today: 1) Fundamental Shifts due to technological change; 2) Emergence of new global actors – BRICS 3) Globalisation & corporate restructuring Talk about two of these: -- the emergence of global value chains -- the rise of KBC – knowledge based capital which I will define in a few minutes And their intersection.
  • GVCs have existed for decades: apparel; -- intermediate inputs represent 56 % of all world trade in goods; 73% of services This has happened for several reasons… Rise due to lower costs of coordination & transportation;; ICTs for coordination; containerisation + Air Cargo; modularity of some sectors, electronics, MV, aerospace … law trade liberalisation & emergence of new producers GVC is a broad concept that reflects how production occurs in 2012. Implications for trade, but also FDI / investment and domestic policies that affect how firms compete: skills, innovative capacity, business models, etc.
  • A few examples, Intensity of competition have made it difficult for one firm to do everything; rather specialisation is increasingly the competitive advantage; including “complex systems integration” such as that performed by Boeing or Airbus or even IKEA
  • … and even seemingly simple products like the Barbie Doll who is now 54 years old. Simple, but very profitable thanks to the intangibles such as the brand and the design. Same is true for Lego.
  • Electronics are probably the most advanced example – an iPod pulls in parts from around the world; This is an MP3 player – a low end, mass produced, heavily competed product. Why the success? Intangibles / KBC : Design, Brand; software – iTunes – now become a platform for all digital content – music, books, video, software data – click stream from iTunes (FT).
  • GVCs are not a new phenomenon, but the scale , speed and complexity raises several policy issues 5 key policy issues –; I will talk about two – the measurement challenge & strategies for climbing up the value chain and capturing more value.
  • When a good (or service) crosses borders several times at different stages of processing, conventional trade statistics record each time the full value of the good, including embodied (imported) intermediate inputs. This multiple counting is attributed to the final exporter. This conceals the true nature and impact of trade and economic globalisation whether in terms of income or employment. OECD is uniquely positioned to unravel this web of trade and estimate who contributed value where.
  • So, we in collaboration with the WTO, US ITC, IDE-Jetro have devised a system, TiVA = trade in value added, that is the parallel statistical activity linked to GVCs. Through the combination of input-output tables that account or 95% of the world’s production (57) countries and bilateral trade data we can re-construct the GVC at a fairly detailed industry level and back-out the value added at each stage: so we can disassemble the final assembly (1 = purple) and look up-stream at who supplied the intermediate inputs (2, 3, and 4 = green) as well as the inputs that were used to produce those inputs (5, 6 and 7 = tan) and so on… Through this technique we can derive a measure of the trade in value-added as opposed to gross trade flows (1 to country of final consumption).
  • German autos are only about 75% German with important inputs from the rest of europe Chinese electronics are only about ½ Chinese value added with Japan playing the key role.
  • Also this perspective gives us new insight into the role of services: -- gross: rather limited –average of 25% -- VA: nearly double that – almost 50% underscoring the critical importance of open and efficient services markets. Services = KBC: transport, logistics, finance, comms & business serviecs Also blurs the distinction between manuf and services which is increasingly meaningless --
  • Nordic average > 50% greater than its share of services in total gross exports: 32%
  • Sweden = 30% of the value if its imports come from abroad: especially Germany, Norway and the US
  • Can break it down by sector as well: chemicals / minerals depend heavily on foreign value added
  • When converted to a value added measure as opposed to a gross trade measure: -- Denmark’s trade deficit with Germany shrinks; -- it is eliminated with Norway -- while the trade surplus with Sweden declines Simply put:
  • For Finland, the value added measures show a decline in its trade surplus with Russia and a reversal of position from deficit to surplus with the USA.
  • For Norway, the trade surplus with Demark and Sweden both evaporate while the large surplus with the Netherlands falls dramatically
  • -- implications as well for policies that seek to improve competitiveness
  • … has caused many countries to focus on how they can climb up the global value added ladder -- Here is where the two streams of work intersect: KBC is an important element in this upgrading process -- forcing a rethink of strategies based on sectors to one more focused on activities
  • A classic Value Chain -- bad to be stuck on the middle Better to be up-stream or down-stream = KBC
  • KBC = CHS
  • But this it is these assets – what we call KBC – that fuel innovation, drive productivity and sustain competitiveness. Nestle Nespresso – patent on the capsules, direct & vertically integrated retail sales & distribution channel, organisational know-how as the Nespresso affiliate was spun off == physically moved out of Nestle marketing (Cloony) 50% profit margin on the capsules; 3x as expensive as regular expresso coffee 25% AARG since 1988; fastest growth Nestle brand A 2b€ revenue stream Combination of design, engineering & retail know-how / customer interaction
  • How does the Nordic World measure up?
  • With many OECD countries now investing more in KBC than they do in machinery, equipment and buildings, we need to adjust our policies to this new reality, also as knowledge will only become more important as a source of growth [knowledge is, after all, the only asset that cannot be exhausted].
  • Public R&D expenditure: percentage of GDP (d) BERD: percentage of GDP Patenting firms less than 5 years old: per billion USD GDP PPP Confirmed by the Nordic Growth Entrepreneurship Review: 2006-9: 602 gazelles = almost 30 000 jobs
  • (k) Fixed broadband subscribers: per 100 inhabitants (l) Wireless broadband subscribers: per 100 inhabitants (q) International co-authorship: percentage of total scientific articles (t) 15-year-old top performers in science: percentage of 15-years-old more mixed (v) S&T occupations: percentage of total employment
  • Nodic world does well on framework conditions that encourage innovation & entrepreneurial activity, but this is a dynamic environment not a static one
  • These intangibles challenge a world and framework policies largely predicated on a world of tangible assets. BEPS – the cleaver use of tax incentives by MNEs to reduce their profits in high tax areas by shifting the costs or profits to other regimes. ½ of BEPS is achieved through the manipulation of knowledge assets such as brand or intellectual property and ICT services. is a great illustration of the growing interconnectedness and complexity of the global economy and the challenges it poses for policy. But it is leading to an unlevel playing field for small firms who can’t engage in these tax strategies are at a competitive disadvantage.
  • BEPS shows that these assets challenge our existing tax policies. But tax is only one of the many areas where these assets raise new questions for policy makers. For example, finance and competition policies are also being challenged. Finance = VC, angels & networks are better suited to KBC than debt Entrepreneurship: reducing the stringency of bankruptcy laws from the highest to the average level in OECD could raise capital flows to patenting firms by 35%; The end result is that as a share of GDP, the USA and Sweden invest about 2x as much in KBC as Italy and Spain, and patenting firms in the US and Sweden can attract 4X as much as capital as similar firms in Italy and Spain. More generally, our existing framework conditions are not well suited to the realities of 21 st Century production which is highly interconnected and driven by intangible assets like software, data, intellectual property, R&D and organisational know-how. Leads to a question about corporate reporting
  • But also corporate reporting. Note that Google’s Annual Report lists the value of its structures, equipment and some key personnel, but physical assets only accounted for 5% of Googles’ worth in 2009. but no mention is made of the value of their search algorithm or the data that they collect and store and use to target advertising,
  • Need to upgrade policies that set framework conditions For 10 countries from 2001 to 2011 young firms (<5yrs) accounted for only 18% of employment but 47% of all new jobs created
  • Conference_20130305_Andrew Wyckoff

    1. 1. Exploiting Global-value Chains andKnowledge-Based Capital for Growth Andrew WyckoffDirectorate for Science, Technology & Industry Nordic Conference 5 March 2013 1
    2. 2. OECD Reviews of Innovation Policy Completed: Luxembourg, Switzerland, New Zealand, South Africa, Chile, Norway, China, Hungary, Korea, Greece, Mexico, Russian Federation, Peru, Slovenia, Sweden Ongoing : Vietnam, Croatia, Colombia Under launch / discussion: Netherlands, France Regional reviews: Southeast Asia, Latin America Innovation s
    3. 3. OECD Reviews of Innovation Policy: SwedenChanging global conditions• Fundamental shifts in the world economy driven by institutional, societal and technological change.• Emergence of new global actors new market opportunities and new competition (including in high-end markets / segments of GVCs).• Global corporate restructuring – offshoring of MNE production activities and corporate research centres.
    4. 4. The rise of Global Value Chains• Rise due to technology (ICT & transportation); modular production, trade & investment liberalisation;• Growing complexity, fragmentation and specialisation of production, leading to networks of activities,• Shift in factors of competitiveness towards tacit factors – knowledge-based capital – R&D, IP, software, data, supply-chain mngt.
    5. 5. Airline industry: Boeing 787 Dreamliner Wing box: Mitsubishi Heavy Industries (Japan) Forward fuselage: Wing ice protection: GKN Aerospace (UK) Kawasaki Heavy Industries (Japan) Centre fuselage: Alenia Aeronautica (Italy) Spirit Aerosystems (USA) Rear fuselage: Escape slides: Air Cruisers (USA) Vertical Stabiliser: Boeing Boeing South Carolina (USA) Doors & windows: Commercial Airplanes (USA) Zodiac Aerospace (USA) Lavatories: PPG Aerospace (USA) Flight deck seats: Jamco (Japan) Ipeco (UK)Raked wing tips: Korean AirlinesAerospace division (Korea) Horizontal Stabiliser: Alenia Aeronautica (Italy) Engines: GE Engines (USA), Rolls Royce (UK) Aux. power unit: Hamilton Centre wing box: Sundstrand (USA) Fuji Heavy Industries (Japan) Engine nacelles: Goodrich (USA) Passenger doors: Tools/Software: Dassault Systemes (France) Latécoère Aéroservices (France) Navigation: Honeywell (USA) Landing gear: Messier-Dowti (France) Pilot control system: Rockwell Colins (USA) Cargo doors: Saab (Sweden) Electric brakes: Messier-Bugatti (France) Wiring: Safran (France) Tires: Bridgestone Tires (Japan) Prepreg composites: Final assembly: Boeing Toray (Japan) Commercial Airplanes (USA) Source:
    6. 6. Toys: Barbie dollDesign: California, Nylon hair: JapanUSA Body material: Chinese TaipeiMoulds, paintpigments: USA Clothing: China Quality testing:Assembly: USAIndonesia and Malaysia Marketing: USA Source: Grossman and Rossi-Hansberg (2006)
    7. 7. Apple’s iPodThe Apple iPod = 299$ of Distribution of the Chinese exports to US value added • 299 US$ – 75$ profit to US (Apple) – 73$ whls/retail US (Apple) – 75$ to Japan (Toshiba) – 60$ 400 parts from Asia – 15$ 16 parts from the US – 2$ assembly by China • iTunes Music Store (2003) – 70% digital market share – Platform for everything – Data flow to the consumer7
    8. 8. 5 Key Policy Issues1. Measurement of GVCs: Trade in Value Added (TiVA)2. GVCs and trade policy3. GVCs and national competitiveness… the recurring discussion on industrial policy4. GVCs and global systemic risk5. GVCs and upgrading – knowledge based assets
    9. 9. 1. Measurement: Issues with current trade statistics• Three issues: 1. Multiple counting of intermediate goods and services 2. Tends to conceal the actual patterns of trade & beneficiaries 3.Incomplete picture as knowledge and income flows are not measured. 9
    10. 10. OECD-WTO TiVA DatabaseJanuary 16, 2013 7:20 pmTrade’s added value: New statistics revealglorious interdependence of countriesStatistics is not always the bedfellow of lies anddamned lies. At its best, it brings epiphanies.An initiative by the OECD and the World TradeOrganisation to map the value added embodiedin international trade flows should be an eye-opener for policy makers
    11. 11. OECD work on GVCs and TiVA 100% 7 Value added 90% 6 by second Decomposition 80% 70% 5 tier suppliers Value added of gross 60% 4 by first tier exports 50% 3 suppliers 40% 2 30% Value added in the 20% 1 country of Final 10% finalconsumption Final 0% assembly production 5 1 4 6 2 Trade in inputs Trade in 3 (second tier inputs (first tier suppliers) suppliers) 7 11
    12. 12. TiVA: Value-added chains (by product)Germany- automotive China - electronics 12
    13. 13. Trade in Services: Gross vs. Value Added % total exports of % total exports of gross flows value-added% Gross flows Value-added flows 1995 2009 1995 2009706050403020100 China United Germany Japan United France Italy Canada Rest of China United Germany Japan United France Italy Canada Rest of States Kingdom World States Kingdom World
    14. 14. 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 a i s e o d n I a n i h C M o c i x e e l i h C y a w r o NotrdeFnaisuR a e r o K a c i r f A h t u o S d n a C l i z a r B u A i l a r t s n p a J c i b u p e R k a v o l S i l b u p R h c e z C d n a l o P d n l a Z w e N Domestic content y r a g n u H y e k r u T s d n a l r h t e N a i n e v o l S y n a m r e G a i r t s u A d n a l r e z t i w S y l a t I l a g u t r o P a i d n I n a l e c I d s a S d e t i n U d a l n i F Services matter n d e w S Services value added as a % of exports, 2009 a i n o t s E Foreign content l e a r s I n a r F e c k r a m n e D m u i g l e B n i a p S m o g K d e t i n U d n a l e r I14 c e r G g r o b m e x u L
    15. 15. value-added in exports by country oforigin
    16. 16.
    17. 17.
    18. 18. 0 100 10 20 30 40 50 60 70 80 90 g r o b m e x u L ic b u p e R k a v lo S y r a g n u H d n la e r I a e r o K li b u p R h c e z C ia n o t s E s d n la r h t e N d n la e c I d la in F n d e w S m iu lg e B l e a r s I l a g u t r o P o ic x e M ia n e v lo S d n la r e z it w S k r a m n e D a in h C d n la o P e c n a r F y n a m r e G ia r t s u A iI da n c e r G y e k r u T d n a C d ln a Z w e N in a p S ile h C higher ratios Domestic value added to gross export ratio, %, 2009 rich countries have typically ly a t I m o g K d e it n U Large and mineral a ic r f A h t u o S n p a J ia s e o d n I y a w r o N li a r t s u A s a S d e it n U18 il z a r B What does the first release tell us? o t r d e F n ia s u R
    19. 19. Who trades with whom? Denmark trade balance, USD millions, 2009 Gross Trade Balance Value Added Trade Balance200001500010000 5000 0 -5000-10000-15000 Germany Netherlands Norway France United Italy China Spain United Sweden Rest of the Kingdom States World 19
    20. 20. Who trades with whom? Finland trade balance, USD millions, 2009 Gross Trade Balance Value Added Trade Balance1500010000 5000 0 -5000-10000 Russian Germany United France Sweden Japan Italy Norway United China Rest of the federation States Kingdom World 20
    21. 21. Who trades with whom? Norwegian trade balance, USD millions, 2009 Gross Trade Balance Value Added Trade Balance25000200001500010000 5000 0 -5000-10000 Korea China Denmark Sweden Italy United France Germany Netherlands Rest of the United States World Kingdom 21
    22. 22. Who trades with whom? Swedish trade balance, USD millions, 2009 Gross Trade Balance Value Added Trade Balance3000025000200001500010000 5000 0 -5000-10000-15000 Germany Denmark Norway France Finland Italy United Japan China United Rest of the Kingdom States World 22
    23. 23. GVCs and national competitiveness• Imports increasingly important for exports (no mercantilist approach: ‘exports are good, imports are bad’)• Better understanding the direct link between: o trade and income & jobs o manufacturing and services;• New opportunities for SMEs to gain access to global markets & new demands: timeliness, standards,
    24. 24. A GVC perspective is also important for upgrading, i.e. increasing value Old paradigm: creation From low to high value-added sectors New paradigm: From low to high value-added activities within sectors 24
    25. 25. Moving up the value chain – capturing more value Value creation along the value chain Source: Presentation G. Gereffi , GVC workshop ‘GVCs and emerging countries’ workshop , Paris (2010)
    26. 26. What is knowledge-based capital (KBC)? Three main types of assets:Computerised information • software & DatabasesInnovative property • patents, copyrights, trademarks & designsEconomic competencies: • brand equity, firm-specific human capital, business networks, organisational know-how that increases enterprise efficiency, etc.) 26
    27. 27. The rise of GVCs and the role of KBCs 27 Source: IMD (2000) Innovation and Rennovation: The Nespresso Story, IMD046, 03/2003
    28. 28. Nordic Strengths
    29. 29. KBC accounts for over half of all business investment in several countries … Business investment in KBC and tangible assets as a share of GDP, 2010 Source: OECD calculations based on INTAN-Invest and National Sources.
    30. 30. Competences and capacity to innovate Comparative performance of national science and innovation systems, (OECD median =100), 2011 Top/bottom 5 OECD values Middle range of OECD values OECD median Science Business R&D and Entrepreneurship innovation 200 Top half 150 OECD 100Bottom half 50 OECD 0 Source: OECD Science, Technology and Industry Outlook 2012.
    31. 31. Interactions and human resources for innovation Comparative performance of national science and innovation systems, (OECD median =100), 2011 Top/bottom 5 OECD values Middle range of OECD values OECD median Internet for Knowledge flows and Human resources innovation commercialisation 200 Top half 150 OECD 100Bottom half 50 OECD 0 Source: OECD Science, Technology and Industry Outlook 2012.
    32. 32. Framework Conditions 2.0 Tax Personal data CompetitionCorporate reporting Improving measurement Knowledge- Based Skills Capital Intellectual property rights Inequality Entrepreneurship Global value chains
    33. 33. Base Erosion & Profit Shifting 33 Source:
    34. 34. Relevant to many policy issues Tax Personal data CompetitionCorporate reporting Improving measurement Knowledge- Based Skills Capital Intellectual property rights Inequality Entrepreneurship Global value chains
    35. 35. What is an asset? 35
    36. 36. Upgrading Policies for GVCs and• GVCs KBC – Imports are essential for exports; – Services are key: 50% of VA generated by GVCs – Activities not industries; – Importance of tacit / “sticky” KBC• KBC – Innovation: more than R&D; reassess R&D Tax credits; recognise the importance of design – Entrepreneurship: young ≠ small; – Finance: debt is poorly suited to KBC.
    37. 37. Contact Information• Watch the video:• Use the interactive map:• Contact us: – – 37