This document discusses several topics related to industrial clusters and global value chains. It begins by noting the changing landscape in global trade away from multilateralism towards regional trade agreements. It then discusses the concept of global value chains and some challenges in measuring them. Several case studies are presented, including the global production of a Boeing Dreamliner airplane and a Nokia cell phone. Key points are made about the importance of small and medium enterprises, cluster theory, and examples of regional industrial policies from Korea. Smart specialization strategies and linkages between multinational enterprises and small suppliers are also addressed.

1. INDUSTRIAL CLUSTERS
IN THE GLOBAL
ECONOMY
Workshop on Facilitating Supporting
Industries in APEC Region
Hanoi, 11 September 2014
Andrea Goldstein
OECD Investment Division

2. 2
Changing Landscape in Global Trade
• Major economies turning away from multilateralism and Doha
Round, reinforced by strong push in RTAs (TPP and TTIP).
• Proposals for “new pathways/approaches” and “new issues”.
• Prelude to plurilaterals on Government Procurement,
Information Technology Agreement II; Trade in Services
Agreement negotiations.
• New GVC narrative and its policy prescriptions: liberalise
tariffs and services, reduce NTBs, promote trade facilitation.
• Until recently, ignores how countries can move up VCs and
structurally transform their economies.
• Moving up VC requires both conducive business environment
and industrial policy (“policy space”).

3. The measurement issue in GVC analysis
Global Value chain (GVC) has emerged in the business literature as a new analytical
framework.
It clearly shows that not only multinational enterprises (MNEs) but also specialised
suppliers are key actors of global production fragmentation
 It is closely linked to the globalisation of production filières, international networks of
production, etc. Indeed, this concept is very sophisticated and complex, since it also
includes dimensions like market power, global governance, etc
 It is an intrinsically dynamic and genuinely firm level concept: “companies compete
by continuously reshaping their position inside GVC”
 Measurement of GVC is still an open issue. Aggregated indicators are based on foreign
trade data and input output tables. Much of the firm-level empirical evidence is based on
qualitative assessment (case studies) or is model based with “weak” proxy variables.

4. Boeing Dreamliner 787
Source: Graphic News

6. Processors, €34, 6%
Memories, €15, 3%
Integr.circuits, €32, 6%
Display, €22, 4%
Camera (5 mp), €17, 3%
Other parts, €59, 11%
Licenses, €21, 4%
Nokia’s
operating
profit, €89, 16%
Final assembly, €11, 2%
Distribution, €19, 4%
Value added
in Nokia’s
internal
support
fns, €169, 31%
(Excl. Operating profit &
assembly listed below)
Retailing, €60, 11%
Who Captures Value in Global
Supply Chains?
Case Nokia N95
Source:
Jyrki Ali-Yrkkö, Petri Rouvinen,
Timo Seppälä & Pekka Ylä-Anttila
ETLA, The Research Institute of
the Finnish Economy

7. Global production chains – Ins and outs
International consumer
demand
Export processing
zones
Development of infrastructure
and technological progress
Lower applied tariffs
and trade policy
incentives
Outsourcing and offshoring
strategies
and FDI
Emergence of “Trade in
tasks”:
Need for new measures of
international trade and
investment and new policy
approaches
Global production chains
and world trade
• Dominance of trade
in intermediate
goods
• Development of
intra-firm trade
• Increase of
processing trade

8. • 60 to 70 per cent of jobs in most OECD countries
– 30-60 per cent of SMEs innovative, some 10 per cent are technology-based.
– Innovative SMEs tend to be market-driven rather than research-driven, and quicker
in responding to new opportunities than large firms.
– They play a key role in pioneering and developing new markets.
• Even higher share in non-OECD countries:
– typically account for more than 90% of all firms outside the agricultural sector,
– major source of employment, generate significant domestic and export earnings.
– SME development: key instrument in poverty reduction efforts, challenge of
informality
Importance of SMEs
Source: OECD - CFE

9. • Most OECD countries have programmes which support SMEs.
• Programmes for improving the diffusion of technology have shifted
from a supply focus to raising the capacity of SMEs to absorb
technology.
• But it’s mostly the business environment that penalizes SMEs
Importance of SMEs
Source: OECD - CFE

10. ▶Scope of Physical Clusters
- Type I : Industrial Complexes
- Type II : R&D Zones, Science Parks
- Type III : R&D Zones
- Type IV : Free Economic Zones
▶Components of Innovative Clusters
- Enterprises (MNEs and SMEs, but not only)
- Universities
- Research institutes
- Efficient administration
10
Industrial
Policy
Science
Technology
Policy
Regional
Policy
(Ⅱ) (Ⅰ)
(Ⅲ)
(Ⅳ)
Cluster Theory

11. 11
Theoretical
Evolution &
Needs
Policy Tools
1980s 1990s 2000s
Marshall Porter Miller & Morris
Industrial Parks:
Production
Concentration
Clusters:
Network
R&D Clusters
Industrial Infra
Industrial Complex
Skilled Labor
Innovative Infrastructure
Networking (diaporas)
Governance
Technology Transfer
Venture Business Ecology
Global Value Chains
Regional Industries
Accumulation of Human
Capital
Specialization
Collaboration
Innovative Investment
New Industries
Integrated Value Added
Practical R&D
Cluster Theory

12. 12
(‘94) Full fledged
autonomy
(‘03) Special Act for
Balanced National
Development
(‘67) Economic Dev Plan
(‘72) National Land Dev
Plan
(‘84) Capital
Region
Reshuffling Plan
(‘62) Industrial
Complexes
(‘70) Free Export Zones
(‘74) Science Park
Distribution of small &
medium industrial
Complexes
(‘95) Industrial Tech
Establishment Project
(‘99) Regional Industrial
Promotion Project
(‘09) Regional Industrial
Development Projects
(‘03) Industrial Tech
Establishment Project
(‘08) Establishment of
Regional Industrial
Development
Industrialization
(1960~1970s)
Spatial
Redistribution
(1980s)
National
Competitiveness
(1990~1997)
Endogenous
Growth
(1998~2002)
Regional
Industrial Dev
(2003~2007)
Deepening
Regional
Industrial Dev
(2008~2012)
Source: White Paper on Regional Industrial Policies
Korea – an Emerging (OECD) Economy

13. ▶Leading Industry Promotion Projects in seven (“5 + 2”) Economic Regions
▶ to foster into world-class industries
▶ to improve the industrial competitiveness of promising products
▶ to expand the foundation for value creation
▶Purpose
▶ to encourage collaborative cooperation across Provinces
13
Current Regional Industrial Policies

14. 14
Current Regional Industrial Policies
Sudo Economic Region
Global Business Hub
Financial Business
Advanced Manufacturing
Chungcheng Economic Region
Korean Silicon Valley
Medical Bio
Semiconductor
Honam Economic Region
Green Area
Solar Energy
Green Tech Industry
Gangwon Economic Region
Frontier Well-Being
Medical Bio
Tourism
Daegyeong Economic Region
Knowledge Industry Area
Mobile
Green Energy
Dongnam Economic Region
Logistic Hub
Machineries
Materials
Jeju Economic Region
International Free City
Water
Leisure

15. ▶Ministry of Knowledge
Economy(MKE)
▶KIAT : window agency of MKE
▶KIET : research institutes
▶Leading Industry Office (7)
anchor agency
▶Technoparks (18) & Specialized
Centers : anchor agency
▶Local Universities
15
Presidential Committee on Regional Dev (PCRD)
Ministry of
Educ Sci &
Tech (MEST)
Ministry of
Knowledge
Economy (MKE)
Other
Ministries
Nat. Research
Foundation
(NRF)
KOR Institute for
Advancement of
Tech (KIAT)
Leading
Industry
Offices
Technoparks,
Specialized Centers,
RRIs & RICs
Local Govt’s
HR Dev
Centers
Nation
Region
Province
County
Economic Region Dev Committees (ERDCs)
KIET
Governance

16. ▶KIAT (Korea Institute for Advancement of Technology) : a window agency
- The Regional Industry Division
studies regional industrial development policies
manages and evaluates regional industrial promotion projects
disseminates successful projects
16
Central governance

17. 17
Current Regional Industrial Policies
- Strategic Industries in Provinces
Bio
Medical Devices
New Materials
Tourism
Electronics
New Materials
Bio
Cultures
Machineries
Robot
Knowledge Home
Bio
Automobiles
Maritime
Fine Chemicals
Environments
Logistics
Parts
Tourism
Film
Logistics
Automobile
Machineries
IT
Electronics
Auto Parts
Culture
Bio
Auto Parts
Bio
New Energy
Tourism
Tourism
Health Bio
Environments
Digitals
IT
Bio
Software
Logistics
IT
Bio
Hi tech Materials
Mechatronics
Photovoltaics
Electronics
Auto Parts
Design
Bio
Shipbuilding
Logistics
Tourism
Mechatronics
Electronics
Textile
Bio
Seoul
Digitals
IT
Bio
Finance
Bio
Semi Conductor
Mobile Phone
2nd Battery
Incheon
Daejeon
Jeonnam
Gwangju
Jeonbuk
Jeju
Gangwon
Gyeongbuk
Gyeongnam
Ulsan
Busan
Daegu
Chungbuk
Chungnam
Gyeonggi

18. ▶Sustainable Consistent Policies
- long-term planning under stable policies
- trial & error over time due to frequent changes in policy
▶Wariness of Complexity & Inefficiencies
- governance (& Quango) problem from multi layers of policies
18
Prospect of Regional Industrial Policies

19. Smart specialisation – what is it?
• Focus on a limited number of priority areas for knowledge-based investments,
linked to a region’s strengths and comparative advantages on the basis of:
– More effective spending of public resources.
– The creation of synergies between public support mechanisms for R&D
and innovation, industrial promotion and training institutions.
– The elimination of fragmentation and duplication of policy interventions.
– The identification of the most promising domains for entrepreneurship
and growth through a careful analysis of existing capabilities, assets and
competences.
– Mapping and benchmarking of clusters.
– Evidence-based monitoring and evaluation systems.

20. Smart specialisation – what is required
• Strong leadership and stakeholders‘ involvement.
• Government interventions on a solid market basis – which implies
robust framework conditions, that allow market driven allocation of
innovation, capital and labour: only competitive and open markets are
amenable to innovation.
• Government needs to listen to market signals when allocating its own
budgets for innovation - entrepreneurial discovery – interventions
should meet the market test.
• Avoid capture by vested interest – which implies transparency,
accountability and evaluation of policies.
• Readiness to terminate projects that don’t pass the evaluation test.

21. • Determinants of a good investment
climate include:
– Market size (national, regional)
– Regulatory framework (including import and
export, taxation)
– Infrastructure
– Financial system (access to capital, ease of
transfer)
– Availability of local suppliers
MNE-SME Linkages

22. Lead
Company
1st tier
supplier A
3rd tier
supplier 1a
2nd tier
supplier 1
1st tier
supplier B
2nd tier
supplier 2
3rd tier
supplier 2a
1st tier
supplier C
Backward linkages:
technology & knowledge transfer
Technology, know-how,
management and
product standards
Domestic
market,
Export,
GVC
TECH & KNOWLEDGE
TRANSFER
Role of
policy:
SME policy,
financing,
vocational
training

23. Management Accounting
ISO & other
certifications
Linkages “training”
Industry-specific – company-driven, IP issues, branding

24. Sourcing
Global
Local
Long-lasting supplier
relationships
Guaranteed quality of
inputs
Packaging
Maintenance
Basic services
Raw materials
Intra-company trade
Source: OECD Investment Policy Review, Costa Rica
Supply side challenges vs exogenous
factors – e.g.: MNE sourcing
Global contracts