Global Production Networks

Transcription

1 University of Bielefeld Faculty of Economics and Business Administration Master Seminar International Economics WS 2016/17 Global Production Networks Nazi Shengelia Drosselweg Bad Rothenfelde Matriculation Number: Submitted on: February the 3th, 2017 Supervisor: Prof. Dr. Gerald Willmann

2 1 Table of contents 1. Introduction.1 2. The framework of a global production network The definition and model of a Global Production Network The conditions and driving forces of global production network GPN, knowledge diffusion and economic development The offshoring concept of global production network Supply chain, outsourcing and offshoring Empirical evidence of offshoring: A developed country perspective Empirical evidence of offshoring: A developing country perspective Conclusion.16 References

3 2 1. Introduction The trend of fragmentation and geographical diffusion of the firm activities opens up a new research field for economists. The new organization of economic life makes it important for economists to build up the appropriate theoretical knowledge. The following paper will analyze the phenomena of Global Production Network (GPN). In section two I will analyze the theoretical framework of a GPN and give an example on it for the car manufacturing company BMW. I will describe how BMW is operating in the global economic network, how the manufacturing process is organized and dispersed, at which locations it takes place, who are the actors and how they are connected with each other. Moreover I will explain how the GPN, the supply chain and traditional trade differ from each other. This section considers also the driving forces of a firm to operate within a GPN and a supply chain and the conditions which encourage the formation of such networks. Finally I will consider the knowledge diffusion and its effect on development of a particular location. In section tree I will briefly show the theoretical background of offshoring and outsourcing and finally examine the effect of offshoring on developed economies on the one hand and on the other hand the links between a global value chain and labor markets in developing countries. M. Amiti and S.J. Wei (2009) measure the effect of service offshoring on the productivity from the perspective of the developed country USA.The measurement by Shepherd, B. and Stone, S. (2012) considers the issue of value chain from the perspective of developing countries. Here the authors examine if there is a linkage of firm activity within a supply chain and stronger labor demand and payment of higher wages. 2. The framework of a Global Production Network 2.1. The definition and model of a Global Production Network Production Network is the nexus of interconnected functions, operations and transactions through which a specific product or service is produced, distributed and consumed. 1 A global 2 production network with its interconnected nodes and links extends spatially across national boundaries and, in so doing, integrates parts of disparate national and subnational territories. The production networks become organizationally more complex as well as strongly global in their geographic extent. Such networks influence not only the firms which are integrating in these networks but also the whole society. Certain scientists distinguish between global production networks and global supply chains. The first one brightly sees the issue of economic globalization 1 See Dicken, P. (2015), p The term global means that the networks are highly geographically extensive and functionally integrated across national boundaries.

4 3 with many other actors which are also non-firms. The second one refers to inter- and intra- firm relationships. 3 The Global Value Chain (GVC) or rather Global Supply Chain (GSC) can be thought as a substantial part of GPN. The GPN framework illustrated in Figure 1 is an interaction of different actors: firms, transnational cooperations (TNCs), states, civil society, labor and consumers. In the middle the Figure 1 Major Actor-centred Network in the Global Economy Transnational Cooperations Staates Inputs Transformation Distribution Consumption Civil Society Organization Labor Consumers Source: Dicken, P. (2015): Global Shift: Mapping the Changing Contours of the World Economy, 7th edition, SAGE Publications Ltd, London, p. 58 transformation cycle can be seen starting with inputs and ending with consumption. The connections of these parts are illustrated with red and blue arrows. The red one represents the flows of materials and products and the blue one the flows of information. Under inputs we can understand both material and non-material resources. Transformation means the composition of input factors in output. Distribution includes all tools and strategies which insure the movement of this output through time and space. The last part is the demand of the people which are willing to buy these products. The actors which are influencing this transformation process are presented in circles. Transnational corporations are firms with the power to coordinate and control the operations in the network. The national state is an institution with regulatory systems. The national state includes here 3 See Neil, M. Coe, Dicken, Hess, M. (2008),p.272

5 4 also the supranational institutions like WTO, EU, NAFTA and etc. These organizations have a high political influence on GPN and are legitimized by national states. The labor can influence the operations within GPN in two ways: in being a factor of production or through organized labor unions. Consumers can influence the GPN with their demand of goods and services. The global civil organizations are willing to support different interests of particular social groups and influence the conditions within GPN. 4 Figure 2 BMW s GPN and regions in the EU and Asia EU Eastern Bavaria Asian Vietnam Malaysia ljhoihjoiujhohii uizgfi Philippines Germany > Investment > Materials BMW Munic, HQ and Full Production BMW Full production Plants BMW Logistics senter BMW CKD Assembly Plants Indonesia Non-Firm Institutions Foreign Suppliers Domestic suppliers Source: Neil M. Coe, Hess M., Wai-Chung Yeung H., Dicken P., Henderson J. (2004): Globalizing Regional Development: A Global Production Networks Perspective, Transactions of the Institute of British Geographers, p See Dicken, P. (2015),p

6 5 The main difference between a traditional trade and a supply chain trade is that in the traditional case a nation is producing goods and services and then selling them to other nations. The good or service is made of a combination of factors and technologies of one nation. The supply chain trade is characterized as a value chain process which combines one nation s knowledge with another nation s labor. Goods and services are here not made only by one nation but by several ones. The reason of supply chain is not the low trade barriers between the countries as it was for traditional trade but the global movement of know-how. The offshoring 5 of technologies and know-hows can be work when the actions of foreign firms in this location are ensured. There is a need for institutional background for ensuring the process of offshoring. The multilateralizing the supply chain areas requires a new organization like WTO The global production network can be illustrated using an example of BMW s GPN. As we can in see on Figure 1 the network comprises Europe and East Asia. Figure 2 shows that there is a moving of investments and technologies on the one hand and on the other hand a moving of materials within the GPN. Fathermore we can see the BMW s strategy to spread the production process across different places. The main office is located in Germany, Munich, full production partly in Europa, assembly plants in Asia, logistics in Germany and the suppliers both home and abroad. Moreover we can see that the both locations include non-firm institutions. The arrows show how the different places in the network are connected. The direct/continuous arrows present the flow of materials and the dashed arrows the flow of investments and technologies. For example, the logistic center provides the assembly plants in abroad and the full production plants in home country with materials. There are also investment and technology flow between logistics, Headquarters (HQ) and domestic suppliers. Moreover the logistics center is delivered from domestic and foreign suppliers The conditions and driving forces of GPN In analyzing of the GPN framework the scientists usually consider the three main aspects within GPN: The circulation processes or the logistic problem, the treatment of the firm and the relationship between the processes of production, distribution and consumption of goods and services and the environment. The circulation process means how the things in the network are functionally and physically connected. Globalization raises the importance of the logistic problems. The firms in 5 Offshoring is defined as relocating the activities of a firm in other country 6 See Baldwin, R. (2014), p See Neil, M. Coe, Hess M., Wai-Chung Yeung H., Dicken P., Henderson, J. (2004), p

7 6 networks specialize in such logistical systems through which the value chain becomes faster and more flexible. To reduce the logistical costs the firms practice such strategies like just-in-time, direct delivery, outsourcing, offshoring and etc. The social scientists and economic geographers assume that the time-space shrinking technologies of transportation and communication solve the problem of moving of materials, components and final goods. 8 Moreover it makes sense to look at the structure of the firm. How the firms act in a GPN depends on the intra-firm relationships. Firms are networks itself and are integrated in a global network like a GPN. The structure of a firm can be a lead (flagship) firm or a supplier. These are different positions and thus the firms have different influences within a GPN. We can distinguish between two different types of flagships: brand leaders like Cisco, IBM and contract manufacturers like Solectron, Flextronics. These suppliers offer supply chain services to the global brand leaders. Cisco as an example of brand leaders has 32 manufacturing plants worldwide. The brand leaders and contract manufacturers are legally connected. This organizational structure enables to benefit from cost reduction, product differentiation, high-margin manufacturing, a decreased span of time-tomarket and an increase in the shareholder returns. The flagships play a central role in allocating of resources efficiently, driving the innovations and capabilities and facilitating the diffusion of knowledge. In a GPN model are the local suppliers are domestic or foreign firms which directly deal with flagships. 9 A production can also be defined as involving flows of energy and chemical and physical transformations of elements of nature. The activities within a GPN influence the allocation of resources and thus the environment. 10 Fathermore a GPN includes actors apart from firms. The national state, international organizations, labor and consumers also play a relevant role in this network. A GPN allows building various forms of rents in the economic society. To generate a value requires conditions like employment, know-how, working conditions, production technologies, the knowledge of the particular circumstances of time and space. 11 These circumstances can be understood as all the possibilities that are known and taken advantage of by somebody. 12 The government, trade unions and other institutions play an important role in the process of value enhancement. These institutions are able to set the general conditions through which the value could be created and increased The industrial organization of nations shifted from multinational cooperation to global production networks during the last 25 decades. In this section I will refer to some driving forces of 8 See Neil, M. Coe, Dicken P., Hess, M. (2008), p See Ernst, D. (2002) p See Neil, M. Coe, Dicken, P., Hess, M. (2008) p See Neil, M. Coe, Dicken, P., Hess, M. (2008) p See Hayek, F.A. (1945), p. 521

8 7 GPN which are an institutional change through liberalization, a rapid development and diffusion of information and communication technology and competition. The liberalization itself includes four main parts: trade liberalization, liberalization of foreign direct investment policies and capital flows and privatization. An expansion of trade and foreign direct investment (FDI) cause an increase in demand for crossborder capital flows which increase the pressure for a liberalization of capital markets. More and more countries opened their capital accounts. These lead to further liberalization of FDI policies and to privatization. The foreign direct investment is an investment by one firm in another across national boundaries to gain a degree of control over this firm s operations. 13 The costs and risks of international transactions reduced and the international reserves increased. The winners from this process are at first the flagships. Their possibilities of entering a market improves through liberalization (trade, licensing, subcontracting, franchising) and they got better access to external resources and capabilities to operate with outsourcing. It fathermore opened the door for free spatial mobility. A second driver of GPN is IT and the related organizational innovations which provide effective mechanisms for buildup up flexible infrastructures that can connect and combine the economic transactions at distant locations. These two drivers changed the dynamics of competition in particular the geographic area of competition and additionally the competitive requirements for a firm which are to disperse and integrate in the global markets and develop strategies within global competition. 14 In the 1970s with the introduction of Manufacturing Resource Planning the production process shifted from economics of scale and mass production to more flexible and efficient Just-in-Time concept. Through Just-in-Time it is possible to produce more efficiently with regard to time and space. The production process has been become more global. The labor arbitrage trough global sourcing made it possible to reduce the costs of production. However the supply chain production provided new challenges for firms. The firms now have to deal with coordinating of a more complex inflows and outflows of materials and services and with increasing global competition GPN, knowledge diffusion and economic development In the previous section I mentioned that a GPN includes different kinds of firms. The flagships are more influential than the suppliers. The flagships transfer the bundle of knowledge which is relevant for managing a value chain of local suppliers. Local suppliers in turn buildup its capabilities and create an incentives for transferring more specific knowledge of product and process development. The Knowledge which can be transferred is distinguished by many economists in explicit and tacit 13 See Dicken, P. (2015), p See Ernst, D., Kim, L. (2002), p Park A., Nayyar, G., Low, P. (2013), p

9 8 knowledge. The explicit knowledge is an encoded, formal or systematic knowledge. It is easy to communicate. The tacit knowledge is not encoded and not easy to communicate. This kind of knowledge is based on experience. It can be reached when the actors observe, imitate and practice. The knowledge transfer can be occurring through markets or through non-markets. When it takes place in markets then it involves a formal contract between knowledge buyer and supplier. But knowledge can also be transferred without payment, meaning through non-market mechanism in form of an original equipment manufacturing arrangements and etc. Internalization of explicit knowledge which means transformation of this knowledge in tacit knowledge generates effective knowledge diffusion, industrial upgrading and thus economic development in such locations. 16 The process of regional development within a GPN is illustrated in Figure 3. The process of value creation and enhancement depends on three issues. The first one is a matter of government policy like which means insuring the property rights and profit repatriation, legislate the laws for governing the ownership. The second one is the issue of firm s ownership involving questions as whether the firm is totally foreign or totally domestically owned or whether it is either based on joint-venture arrangement. Third is the kind of corporate governance. Is the corporate governance based on stakeholder or shareholder principles. This can be decisive for the economic development of a particular location. 17 The regional assets produce two kinds of economics: economics of scale and scope. The economics of scale can be obtained through knowledge, labor skills and practice. The bundle of knowledge, physical labor, regional advantages and other actors of a GPN makes it possible to create economics of scale in particular technologies and thus to provide an employment and generate the economic output. The economics of scope is related to spillover effects. This means the ability of a region to exploit these intangible benefits of learning and cooperative atmosphere. 18 The box in the middle presents the subject of regional development. Value creating occurs through a combined application of labor skills, process and product technologies, and the organizational expertise involved in coordinating complex production and logistical processes and in marketing and distribution. The value can be also interpreted as an economic rent. To enhance the value means to increase the surplus or profit trough product and process innovation, more labor productivity, more efficient logistical systems and so on Ernst, D., Kim, L. (2002), p Henderson, J., Dicken, P., Hess, M., Coe N., Wai-Chung Yeung, H. (2002),p See Neil M. Coe, Hess, M., Wai-Chung Yeung, H., Dicken, P., Henderson, J. (2004),p Dicken, P. (2015),p

10 9 Figure 3 A framework for analyzing regional development and global production networks GPN -Focal Firms -Subsidiaries and suppliers -Customers Local Institutions -Government Agencies -Labor Organizations -Business Associations Local development Strategic Coupling -Value Creation Dependence and -Value Enhancement Transformation Process -Value Capture Local Assets -Technology -Organization -Territory Source: Neil M. Coe, Hess M., Wai-Chung Yeung H., Dicken P., Henderson J. (2004): Globalizing Regional Development: A Global Production Networks Perspective, Transactions of the Institute of British Geographers, p. 470 The content of the top-right box can be summarized as a power commanded by many institutions with political authority. The source of power can be divided in three parts: in corporate, institutional and collective power. An example for collective power is combination of less influential firms to improve their collective situation within the GPN. The institutional power means the national and local state and international organizations like WTO, IMF, and WB etc. The collective power represents groups or organizations with particular economic interests. At the top-left box are the actors of the GPN itemized. The focal firms are the so-called brand leaders or flagships. In the same box we can see subsidiaries, suppliers and consumers. In additional the embeddedness is also a concept of a GPN and contains the functional and territorial connections within GPNs as well as the social and spatial arrangements in which the parts of a GPN, specially the firms, are embedded. The territorial embeddedness considers locational embeddedness of the firms. The firms are usually constrained by the economic activities and social dynamics which take place in particular locations. The network embeddedness can be depicted as the result of the building trust between the participants of the GPN. It is substantial for successful and stable relationships between these participants Henderson, J., Dicken, P., Hess, M., Coe N., Wai-Chung Yeung, H. (2002),p

11 10 The influences on local economies within GPNs can be summarized in the four main dimensions: capital injection, stimulation of local firms, knowledge diffusion and local employment creation. The free inflow of capital enables the extension of foreign direct investment, opens new markets and increases employment. The knowledge diffusion, mutual learning, makes it profitable for local firms to open the markets for their own products The Offshoring concept within GPN 3.1 Supply chain, outsourcing and Offshoring The circulation process is one main point in analyzing of GPNs. Under circulation process we understand the logistical issue within the network. The firms aim at minimizing the costs of production and distribution and choose different strategies to achieve their objectives. Figure 4 Movement of activities in offshoring and outsourcing Geographical location Domestic Abroad Organizational location Within the firm Offshoring Outside the firm Outsourcing Offshoring or international Outsourcing Source: Park A., Nayyar G., Low P. (2013): Supply Chain Perspectives and Issues, A Literature Review, Fung Global Institute and World Trade Organization, p.56 When the firms decide to buy products or services abroad but produce the final goods in the home country than we define this process as outsourcing. By contrast, when the activities of a firm, such as production, are geographically relocated from the firm s domestic country to a lower-cost foreign country, then we define it as offshoring. This means that the value chain activities take place across geographical boundaries. Offshoring can have two different effects: the effect on firm s which are operating with offshoring through increasing productivity and the effect on developing, low-cost countries through economical upgrading. 21 Dicken, P. (2015),p

12 11 In this section I will analyze the effects of service and material offshoring on productivity in manufactory industries in the US between 1992 and The Offshoring is a form of an organizational strategy of firms through which different parts of the firm s production system are located in different parts of the world. The offshoring strategy of a firm is involved in GPN framework. The US electronics firms were the first who set up the offshore assembly operations in East Asia and in Mexico after Empirical evidence of offshoring: A developed country perspective This empirical investigation analyzes the effect of service and material offshoring on the labor productivity in the US from 1992 to There are two different thoughts about how the offshoring can increase the productivity. The First one is the compositional change through offshoring. This means the savings for a firm which can be achieved through relocating the more inefficient parts of the production in abroad and concentrate on parts of the production in which it has a comparative advantage. The second one is the structural change which can be beneficial through involving of new computing and information services which result in an increased efficiency of the remaining workers. The model includes the following production function (1) for an industry i: Y i = A i (oss i, osm i )F(L i, K i, M i, S i ) (1) Where output of an industryi,y i, is a function of labor L i, capital K i, Materials M i and service inputs S i. A i is the function of offshoring of services (oss i ) and material inputs (osm i ). The model assumes that the firms choose the total amount of each input in the first stage while in the second stage they choose the proportion of material and service inputs. The fixed costs of materials and services are different for each industry because the required material and service for each industry are different. The Authors estimate the equation (1) taking the log function of this and using the ordinary least squares (OLS) estimator with robust standard errors corrected for clustering: lny it = α 0 + α 1 oss it + α 2 osm it + β 1 lnl it + β 2 lnk it + β 3 lnm it + β 4 lns it + δ t D t + δ i D i + ε it (2) where δ t is the year fixed effect and δ i the industry fixed effect, α 0 is the intercept, α 1 is the effect of service offshoring on output. The authors hypothesis is that the both, α 0 and α 1, are positive. ε it is an unobserved time varying effect across all industries. The service offshoring (oss it ) is defined as the share of imported service inputs for industry i at time t. To capture service and material inputs the authors calculate a proxy for service offshoring. 22 Dicken, P.(2015),p

13 12 input purchases of service j by industry i at time t oss it = [ total non energy inputs used by industry i at time t ] j imports of service j at time t [ ] production jt + imports jt exports jt The first term in brackets defines the share of service inputs as a proportion of total non-energy inputs of industry i at time t. This is calculated using annual input/output tables from 1992 to 2000 by the Bureau of Labor Statistics. (see, table 1 in appendix). The calculations include the following five service industries: telecommunications, finance, insurance, business service and computing and information. Therefore the value of oss for each industry i at time t is calculated with regard to these five service industries. The second term in brackets is the share of imports of services which is calculated by applying the economy-wide import share of each industry. We can see this share of imports in Table 1 in the last column. The share of business services in 2000 in the US was 2,2% which means that all manufacturing industries imported 2,2% of business services in the US in this year. This assumption is applied equally to all other service industries. Finally the offshoring in business services on average can be calculated as: = and it is about0,3%. To get the average service offshoring, oss it, for each industry i, in time t it has been aggregated across all five service inputs from above. The average material offshoring is calculated in the same way. The offshoring measurement faces even another problem than the assumption of the same import share for all industries. Here are the current values are used instead of quantity data which was not available for the US. Because the cost of importing services is likely to be lower than the cost of purchasing them domestically, using the current values of imports leads to an under-estimation of the value of offshoring. Table 2 presents the service and material offshoring and the growth rates of those in per cent from 1992 to For example the material offshoring in 2000 was 17,33% while the service offshoring was only 0,29%. Throughout these years the material offshoring grew by 4,38% while the service offshoring grew by 6,26%. In table 3 we can see the first estimation results of equation (2) by OLS Method. The estimation includes effects of independent variables as shown in table 4 on the total factor productivity which is measured by real output in industry i at time t. The column (1)-(4) includes the year fixed effects and the column (5)-(9) both year and industry fixed effects. Fathermore the column (1) includes the change in offshoring in time t, meaning in present time while column (2) includes the change in offshoring in time t 1, meaning in past time. In column (3) are included both the present and past time values of offshoring. To ensure that the changes in qualifications do not drive the results labor is split in production (proxy for unskilled) and non-production (proxy for skilled) workers. The results are illustrate in column (4). As we can see in column from (1) to (8) is

14 13 the effect of both present and past time of service offshoring is positive and significant at a p-value of less than 1%. The effect of material offshoring is in some specifications, for example in column (2) and (6) negative. To ensure that there is no biased estimation using OLS (because of endogeneity) the equation (2) is in additional re-estimated by Generalized Methods of Moments (GMM). Endogeneity means that explanatory variables become endogenous. For example, low productivity of a firm can also encorage the firm to carry out a large share of global production strategies like offshoring to improve the own productivity. To avoid the causality instrument variables have been used and estimated by Method of GMM. The results can be seen in table 3 in column (9). The effect of service offshoring remains positive, significant but it is now a little bit smaller than before. The effect of material offshoring now is higher than before and it is also significant. To address the endogeneity of the variables labor and material and service inputs the effect of offshoring on labor productivity has been estimated. The labor productivity is calculated by the value added per worker meaning the difference between real output and real materials and services divided by employment. In table 4 the results are illustrated. The effect of material and service offshoring in past time and with year fixed effect remains positive. The same effects now adding the present time and industry fixed effect becomes significant. However the material offshoring in column (4) to (6) becomes insignificant. (see the table 4 in appendix). In the next step the authors involve two other variables which are high-technology capital 23 and the share of imports by industry 24 in their measurement. The results are pictured in table 5. The effect of high-technology capital is with year and industry fixed effect positive and mostly significant. The effect of import share under robust regression is positive and highly significant. With industry fixed effects the coefficients for service offshoring are positive and mostly significant. Table 5 illustrates in column (5) as robustness test the results with an outlier industry like Tobacco industry. In this case are the coefficients mostly the same but higher than in case without this industry. Finale results of the correlation are presented in table 6. In table 1 we can see that the service offshoring increased from 1992 to 2000 from 0.18 to 0.29, thus by 0.1 percentage points, while the effect is varying between 0.26 and This implies that an increase of service offshoring by 0.1 percentage point leads to an increase of labor productivity ceteris paribus approximately on average by 2.6 to 6.7 per cent over this sample period. ln(value added per worker) = (α 1 oss it ) 100% = (( ) 0.1) 100% = 2.6% 6.7% 23 High technology capital includes hardware and software equipment. Each capital asset is multiplied by its expost rental price to acquire the share of high-tech capital services for each asset within each two-digit SIC industry. 24 Import share is defined a ratio of total imports to output by each industry

15 14 Taking the average of these estimations (average of 0.26 and 0.67 and 0.18 and 0.29) we can interpret the effect as an average increase in labor productivity by 46% when the average increase in service offshoring is 10%. In contrast to the positive and significant effect of service offshoring, the effect of material offshoring is insignificant or considerably smaller but still positive. The reason for the different effects of material and service offshoring on labor productivity could be the more recent practice in service offshoring than in material offshoring. This means that the advantages of material inputs are more utilized than the advantages of service inputs.( like computing and information). 3.3 Empirical evidence of offshoring: A developing country perspective In this section I consider the he effects of a Global Value Chain (GVC) on the labor market in developing countries. These analyzes are made by a working party of the trade committee of the OECD. For the empirical test firm-level dataset have been used provided by the World Bank s Enterprise Surveys. This Enterprise survey includes information from 2006 up to the most recent survey wave in In this survey overall firms are involved from 115 mostly developing and transition economies and five key partner countries. (See Table 7 in Appendix). This dataset provides information on firms performances such that it is possible to analyze factors like labor demand, wages, skills of the employer, etc. Moreover the dataset allows to identify the firms that export a part of their production, firms that import a part their intermediate input supply and firms which are foreign owned (foreign investor involvement). These three linkages are the proxy variables to capture the relationships within a GVC. The explanatory variables are illustrated in table 8 in Appendix. The authors estimate the impact of International Linkage participation in exporting, importing or being foreign owned on employment and wages by using OLS with country-sectoryear fixed effect. These are factors which are common for a firm within a sector, such as economic fluctuation or regulatory measures. The first is the labor demand model in Log-Log form: log(employees fsct ) = f cst + b 1 log(sales fsct ) + b 2 log(wage fsct ) + b 3 log(capital fsct ) + b 4 direct exporter fsct + b 5 foreign fsct + b 6 importer fsct + e fsct (1) Where Employees mean the total number of workers employed by the firm, sales the total value of the firm s sales, Wages the total wage bill of the firm and Capital the total capital stock measured by the net book value of total assets. The model includes also dummy variables which take the value on in case of the firm being a direct exporter, foreign owned or an importer intermediate goods. The last term e is the residual. The estimation of this model is illustrated in Table 9. The column (1) includes all countries for which the data was available, Column (2) includes key partner countries like Brazil, India, Indonesia,

16 15 China and south Africa, column (3) includes only OECD countries Chile, the Czech Republic, Hungry, Mexico, Poland, The Slovak Republic, Slovenia and Turkey - for which the data was available. For example an increase in the total value of firm s approximately c.p. on average by 0.168%. sales by 1% increases the labor demand Table 9 Labor Demand Regression Results (1) (2) (3) (All) (Key Partner) (OECD) Log(Sales) Log(Wages) (0.001) Log(Capital) Exporter Foreign (0.010) (0.075) (0.531) Importer (0.012) (0.005) Observations R Source: Shepherd B., Stone S. (2012): Global Production Networks and Employment: A Developing Country Perspective, TAD/TC/WP, The OECD Conference Centre, p.1 The interpretation makes not much sense. But as we can see all variables in column (1) have a positive effect on labor demand. It is the same for column (2) and (3). In column (3) we can see that the effect of Foreign is negative but insignificant. The second model is the wage model in Log-Log form. This model considers the effects on wages. The explanatory variables are mostly the same ones as in model (1) with two differences. This sales fsct model includes explanatory variables like labor productivity calculated by ( ) and the employees fsct Exporter fsct. The results are presented in table 10. The effects in column (1) are mostly positive and all significant. For example the effect of firm size measured by Sales is on Wages is positive and highly significant with p Value of 1%. This means with regarding this estimation the bigger the firm size

17 16 the higher the wages they pay for their workers. Surprisingly the labor productivity has a negative effect on wages. The effect is highly significant. Table 10 Wage Regression Results (1) (2) (3) All Key Partner OECD Log(Sales) Log(Labor Productivity) Log(Capital) (0.001) (0.001) Exporter (0.007) (0.969) (0.041) Foreign (0.060) (0.417) (0.293) Importer (0.055) (0.556) (0.031) Observations R Source: Shepherd B., Stone S. (2012): Global Production Networks and Employment: A Developing Country Perspective, TAD/TC/WP, The OECD Conference Centre, p. 15 The reason could be the weak measurement of labor productivity, namely as a share of sales. All other effects are also positive and significant. In column (2) are the results for Key Partner countries. In contrast to the results from the first estimation the three main effects of Exporter, Foreign and Importer become insignificant here. The results for OECD countries are presented in column (3). All effects except of the effect of forein are significant. The effect of Labor Productivity remains negative. 4. Conclusion Changing economic organization of the world requires a rethinking in traditional trade theory. This paper gives a brief introduction in the theory of the Global production networks. Such a network coordinates and connects the economic life of people which are integrated in these global

18 17 relationships. The actors in this network are not only the firms but also the state and transnational cooperations, consumers, labor and different social organizations. These actors build up such a network and influence the economic life of each other and get influenced themselves. The conditions under which the development of a GPN was possible are the institutional change through liberalization of trade, FDI policies and capital flows, knowledge diffusion, extension of information technology and competition. These conditions drive the firms to offshore and outsource the production process and thus influence the economic development of a particular location. The measurements of the effect of offshoring and value chain face some econometric weakness in capturing of data and the problem of endogeneity. Nevertheless the empirical evidence of offshoring and value chain in developed and developing economies delivers positive results and supports the expectations of many scientists. References Amiti, M., Wei, S.J. (2009): Service Offshoring and Productivity: Evidence from the US, The World Economy Baldwin, R. (2014): WTO 2.0: Governance of 21st Century Trade, The Review of International Organizations Dicken, P. (2015): Global Shift: Mapping the Changing Contours of the World Economy, 7th edition, SAGE Publications Ltd, London Ernst, D., Kim, L. (2002): Global Production Networks, Knowledge Diffusion, and Local Capability Formation, Research Policy Hayek, F.A. (1945): The Use of Knowledge in Society, The American Economic Review Henderson, J., Dicken, P., Hess, M., Coe N., Wai-Chung Yeung, H. (2002): Global Production Networks and the Analysis of Economic Development, Review of International Political Economy Neil, M. Coe, Dicken, P., Hess, M. (2008): Global Production Networks: Realizing the Potential, Journal of Economic Geography Neil, M. Coe, Hess, M., Wai-Chung Yeung, H., Dicken, P., Henderson, J. (2004): Globalizing Regional Development: A Global Production Networks Perspective, Transactions of the Institute of British Geographers Park, A., Nayyar, G., Low, P. (2013): Supply Chain Perspectives and Issues, A Literature Review, Fung Global Institute and World Trade Organization

19 18 Shepherd, B., Stone, S. (2012): Global Production Networks and Employment: A Developing Country Perspective, TAD/TC/WP, The OECD Conference Centre Appendix Table 1 Service Inputs, by Type: 1992 and 2000 Source: Amiti M., Wei S.J. (2009): Service Offshoring and Productivity: Evidence from the US, The World Economy, Input/Output Tables and IMF, Balance of Payments Statistics Yearbook, p. 209 Table 2 Material and Service Offshoring, Source: Amiti M., Wie S.J. (2009): Service offshoring and productivity: Evidence from the US, The World Economy, 2009, p. 204

20 19 Table 3 Total Factor Productivity Source: Amiti M., Wei S.J. (2009): Service Offshoring and Productivity: Evidence from the US, The World Economy, p Table 4 Labor Productivity Source: Amiti M., Wie S.J. (2009): Service offshoring and productivity: Evidence from the US, The World Economy, p. 214

21 20 Table 5 Labor Productivity and Additional Controls Source: Mary Amiti, Wie S.J., (2009): Service offshoring and productivity: Evidence from the US, The World Economy, p.216

22 21 Table 6 labor productivity GMM Analysis Sources: Amiti M., Wei S.J. (2009): Service Offshoring and Productivity: Evidence from the US, The World Economy, p. 218

23 22 Table 7 Country coverage in the Enterprise Surveys sample (bold=oecd mermber or key partner country) Source: Shepherd B., Stone S. (2012): Global Production Networks and Employment: A Developing Country Perspective, TAD/TC/WP, The OECD Conference Centre, p.23 Table 8 Variable definitions and sources Source: Shepherd B., Stone S. (2012): Global Production Networks and Employment: A Developing Country Perspective, TAD/TC/WP, The OECD Conference Centre, p.24