Wyckoffv1nordiccouncilgvc5march2013 130304161534-phpapp02


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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
  • Wyckoffv1nordiccouncilgvc5march2013 130304161534-phpapp02

    1. 1. 1 Exploiting Global-value Chains and Knowledge-Based Capital for Growth Andrew Wyckoff Directorate for Science, Technology & Industry Nordic Conference 5 March 2013
    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 www.oecd.org/sti/innovation/review s
    3. 3. OECD Reviews of Innovation Policy: Sweden Changing 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. www.oecd.org/sti/innovation/reviews
    4. 4. • 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. The rise of Global Value Chains
    5. 5. Airline industry: Boeing 787 Dreamliner Escape slides: Air Cruisers (USA) Horizontal Stabiliser: Alenia Aeronautica (Italy) Centre fuselage: Alenia Aeronautica (Italy) Final assembly: Boeing Commercial Airplanes (USA) Vertical Stabiliser: Boeing Commercial Airplanes (USA) Landing gear: Messier-Dowti (France) Electric brakes: Messier-Bugatti (France) Tires: Bridgestone Tires (Japan) Doors & windows: Zodiac Aerospace (USA) PPG Aerospace (USA) Tools/Software: Dassault Systemes (France) Navigation: Honeywell (USA) Pilot control system: Rockwell Colins (USA) Wiring: Safran (France) Centre wing box: Fuji Heavy Industries (Japan) Engines: GE Engines (USA), Rolls Royce (UK) Wing box: Mitsubishi Heavy Industries (Japan) Wing ice protection: GKN Aerospace (UK) Engine nacelles: Goodrich (USA) Aux. power unit: Hamilton Sundstrand (USA) Flight deck seats: Ipeco (UK) Lavatories: Jamco (Japan) Cargo doors: Saab (Sweden) Forward fuselage: Kawasaki Heavy Industries (Japan) Spirit Aerosystems (USA) Raked wing tips: Korean Airlines Aerospace division (Korea) Passenger doors: Latécoère Aéroservices (France) Prepreg composites: Toray (Japan) Rear fuselage: Boeing South Carolina (USA) Source: www.newairplane.com
    6. 6. Design: California, USA Body material: Chinese Taipei Nylon hair: Japan Clothing: China Moulds, paint pigments: USA Assembly: Indonesia and Malaysia Quality testing: USA Marketing: USA Source: Grossman and Rossi-Hansberg (2006) Toys: Barbie doll
    7. 7. 7 Apple’s iPod Distribution of the 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 consumer The Apple iPod = 299$ of Chinese exports to US
    8. 8. 1. Measurement of GVCs: Trade in Value Added (TiVA) 2. GVCs and trade policy 3. GVCs and national competitiveness… the recurring discussion on industrial policy 4. GVCs and global systemic risk 5. GVCs and upgrading – knowledge based assets 5 Key Policy Issues
    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 Database January 16, 2013 7:20 pm Trade’s added value: New statistics reveal glorious interdependence of countries Statistics is not always the bedfellow of lies and damned lies. At its best, it brings epiphanies. An initiative by the OECD and the World Trade Organisation to map the value added embodied in international trade flows should be an eye- opener for policy makers
    11. 11. OECD work on GVCs and TiVA 11 Final consumption 3 7 5 6 2 Final assembly 1 4 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1 2 3 4 5 6 7 Value added in the country of final production Value added by first tier suppliers Value added by second tier suppliers Trade in inputs (first tier suppliers) Trade in inputs (second tier suppliers) Decomposition of gross exports
    12. 12. TiVA: Value-added chains (by product) 12 Germany- automotive China - electronics
    13. 13. Trade in Services: Gross vs. Value Added % total exports of gross flows % total exports of value-added 0 10 20 30 40 50 60 70 China United States Germany Japan United Kingdom France Italy Canada Rest of World 1995 2009 Gross flows% China United States Germany Japan United Kingdom France Italy Canada Rest of World 1995 2009 Value-added flows
    14. 14. Services matter 14 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 Indonesia China Mexico Chile Norway RussianFederation Korea SouthAfrica Canada Brazil Australia Japan SlovakRepublic CzechRepublic Poland NewZealand Hungary Turkey Netherlands Slovenia Germany Austria Switzerland Italy Portugal India Iceland UnitedStates Finland Sweden Estonia Israel France Denmark Belgium Spain UnitedKingdom Ireland Greece Luxembourg Services value added as a % of exports, 2009 Domestic content Foreign content
    15. 15. Foreign value-added in exports by country of origin www.oecd.org/trade/valueadded
    16. 16. www.oecd.org/trade/valueadded
    17. 17. www.oecd.org/trade/valueadded
    18. 18. What does the first release tell us? 18 0 10 20 30 40 50 60 70 80 90 100 Luxembourg SlovakRepublic Hungary Ireland Korea CzechRepublic Estonia Netherlands Iceland Finland Sweden Belgium Israel Portugal Mexico Slovenia Switzerland Denmark China Poland France Germany Austria India Greece Turkey Canada NewZealand Spain Chile Italy UnitedKingdom SouthAfrica Japan Indonesia Norway Australia UnitedStates Brazil RussianFederation Domesticvalue addedtogross export ratio,%,2009 Large and mineral rich countries have typically higher ratios
    19. 19. Who trades with whom? 19 -15000 -10000 -5000 0 5000 10000 15000 20000 Germany Netherlands Norway France United Kingdom Italy China Spain United States Sweden Rest of the World Gross Trade Balance Value Added Trade Balance Denmark trade balance, USD millions, 2009
    20. 20. Who trades with whom? 20 -10000 -5000 0 5000 10000 15000 Russian federation Germany United States France Sweden Japan Italy Norway United Kingdom China Rest of the World Gross Trade Balance Value Added Trade Balance Finland trade balance, USD millions, 2009
    21. 21. Who trades with whom? 21 -10000 -5000 0 5000 10000 15000 20000 25000 Korea China Denmark Sweden Italy United States France Germany Netherlands Rest of the World United Kingdom Gross Trade Balance Value Added Trade Balance Norwegian trade balance, USD millions, 2009
    22. 22. Who trades with whom? 22 -15000 -10000 -5000 0 5000 10000 15000 20000 25000 30000 Germany Denmark Norway France Finland Italy United Kingdom Japan China United States Rest of the World Gross Trade Balance Value Added TradeBalance Swedish trade balance, USD millions, 2009
    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 creation 24 Old paradigm: From low to high value-added sectors New paradigm: From low to high value-added activities within sectors
    25. 25. Value creation along the value chain Source: Presentation G. Gereffi , GVC workshop ‘GVCs and emerging countries’ workshop , Paris (2010) Moving up the value chain – capturing more value
    26. 26. What is knowledge-based capital (KBC)? 26 Three main types of assets: Computerised information • software & Databases Innovative property • patents, copyrights, trademarks & designs Economic competencies: • brand equity, firm-specific human capital, business networks, organisational know-how that increases enterprise efficiency, etc.)
    27. 27. 27 Source: IMD (2000) Innovation and Rennovation: The Nespresso Story, IMD046, 03/2003 The rise of GVCs and the role of KBCs
    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. Top/bottom 5 OECD values Middle range of OECD values OECD median Science Business R&D and innovation Entrepreneurship Top half OECD Bottom half OECD 100 0 200 150 50 Competences and capacity to innovate Source: OECD Science, Technology and Industry Outlook 2012. Comparative performance of national science and innovation systems, (OECD median =100), 2011
    31. 31. Interactions and human resources for innovation Source: OECD Science, Technology and Industry Outlook 2012. Comparative performance of national science and innovation systems, (OECD median =100), 2011 Top/bottom 5 OECD values Middle range of OECD values OECD median Knowledge flows and commercialisation Internet for innovation Human resources 100 0 200 150 50 0 50 Bottom half OECD Top half OECD
    32. 32. Framework Conditions 2.0 Knowledge- Based Capital Tax Personal data Corporate reporting Skills Intellectual property rights Global value chains Inequality Entrepreneurship Improving measurement Competition
    33. 33. 33 Source: Images.com/Corbis Base Erosion & Profit Shifting
    34. 34. Relevant to many policy issues Knowledge- Based Capital Tax Personal data Corporate reporting Skills Intellectual property rights Global value chains Inequality Entrepreneurship Improving measurement Competition
    35. 35. What is an asset? 35
    36. 36. • GVCs –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. Upgrading Policies for GVCs and KBC
    37. 37. • Watch the video: www.youtube.com/watch?v=RZKX-0SK41U& • Use the interactive map: www.oecd.org/trade/valueadded • Contact us: – Andrew.Wyckoff@oecd.org – Tiva.contact@oecd.org 37 Contact Information