INTERCONNECTED ECONOMIES: BENEFITTING FROM GLOBAL VALUE CHAINS THE CZECH REPUBLIC Koen De Backer Conference of Economic Counselors, Prague, 25 June 2013
Outline GVCs as a new phase in economic globalisation Czech engagement and positioning in GVCs Upgrading, innovation and knowledge based capital Conclusions 2
Global Value Chains Final consumption Final assembly 1 5 4 6 2 Trade in inputs (first tier suppliers) 3 Trade in inputs (second tier suppliers) 7 3
Global Value Chains case studies Wing box: Mitsubishi Heavy Industries (Japan) Wing ice protection: GKN Aerospace (UK) Vertical Stabiliser: Boeing Commercial Airplanes (USA) Centre fuselage: Alenia Aeronautica (Italy) Rear fuselage: Boeing South Carolina (USA) Lavatories: Jamco (Japan) Doors & windows: Zodiac Aerospace (USA) PPG Aerospace (USA) Forward fuselage: Kawasaki Heavy Industries (Japan) Spirit Aerosystems (USA) Escape slides: Air Cruisers (USA) Flight deck seats: Ipeco (UK) Raked wing tips: Korean Airlines Aerospace division (Korea) Horizontal Stabiliser: Alenia Aeronautica (Italy) Aux. power unit: Hamilton Sundstrand (USA) Passenger doors: Latécoère Aéroservices (France) Cargo doors: Saab (Sweden) Prepreg composites: Toray (Japan) Centre wing box: Fuji Heavy Industries (Japan) Landing gear: Messier-Dowti (France) Electric brakes: Messier-Bugatti (France) Tires: Bridgestone Tires (Japan) Engines: GE Engines (USA), Rolls Royce (UK) Engine nacelles: Goodrich (USA) Tools/Software: Dassault Systemes (France) Navigation: Honeywell (USA) Pilot control system: Rockwell Colins (USA) Wiring: Safran (France) Final assembly: Boeing Commercial Airplanes (USA) 4 Source: Rivoli (2005), WTO (1998), Feenstra (1998), www.newairplane.com, Linden et al. (2009)
Rising foreign value added in world exports 35% 30% 25% 20% 15% 10% 5% 0% 1995 2000 2005 2008 2009 5
OECD work on Trade in Value Added (1) Final consumption Final assembly 1 Decomposition of gross exports 5 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 7 6 5 4 3 2 1 Value added by second tier suppliers Value added by first tier suppliers Value added in the country of final production 2 Trade in inputs (first tier suppliers) 3 4 6 Trade in inputs (second tier suppliers) 7 6
OECD work on Trade in Value Added (2) Global Input-Output Model: national IO tables linked by bilateral trade statistics Official statistics making it mainstream work Large and growing coverage 57 countries > 95% of GDP, > 90% of world trade China; processing and non-processing trade First release (of results) on 16 January 2013 new release during OECD Ministerial Meeting (May 2013) Trade flows in value added and applied indicators Further work: employment and skills, income, firm heterogeneity 7
Exports are an important driver for the Czech Republic 8
The majority of Czech exports are in GVCs GVC participation, 2009 9
characterised by a relatively low domestic value added Domestic value added of exports 10
Strong integration into in a number of manufacturing industries 11
The composition of Czech exports, 2011 12
The composition of Czech exports, 2000 13
Czech exports also characterized by a relatively low price 14
The need for upgrading (1) Much value creation occurs upstream and downstream.. The smiley curve, electronics 15
The need for upgrading (2) and this may be becoming more important Value added The smiley curve, electronics R&D Global Value Chain in the 2000s Services Design Marketing Logistics: purchase Logistics Production Value Chain in the 1970s Pre-production Intangible Pre-production Tangible activities Post-production Intangible Value chain activities 16
The importance of knowledge based capital SPORT SHOES: 100 EURO (final retail price) Source: IMD (2000) Innovation and Renovation: The Nespresso Story, IMD046, 03/2003. Nespresso Source: Trudo Dejonghe (Lessius) A SUIT MADE IN CHINA, SOLD IN UNITED STATES Source: Fung Global Institute General Motors, Chevy Volt 17
OECD work on knowledge-based capital 18
Investment in knowledge based capital Source: Corrado et al., (2012).
ISR FIN SWE KOR (1999, 2008) JPN CHE (2000, 2008) USA (1999, 2008) DNK AUT (2002, 2009) DEU OECD (1999, 2008) ISL (1999, 2008) FRA AUS (1999, 2008) BEL CHN LUX (2000, 2009) SVN IRL EU27 GBR CAN CZE NOR NLD RUS PRT ESP HUN ITA EST ZAF (2001, 2008) NZL (1999, 2007) TUR SVK POL MEX (1999, 2007) GRC (1999, 2007) CHL (2008) 1999 0.0 1.0 2.0 3.0 % Low Business R&D and Business enterprise expenditure on R&D, 1999 and 2009 As a percentage of GDP Source: OECD Science, Technology and Industry Scoreboard 2011
mainly driven by foreign affiliates % Share of foreign-controlled affiliates in total business sector R&D expenditure, 2007 Hungary Belgium Czech Republic Austria United Kingdom Slovak Republic Sweden Canada Poland Norway Italy Spain (2005) Germany Portugal France Finland (2006) United States Japan 0 10 20 30 40 50 60 70 Source: OECD, Economic Globalisation Indicators 2010 %
Services value added content of manufacturing exports, 2009 22
Upgrading, innovation and knowledge-based capital Capabilities in supplying non-replicable products essential in retaining value and making value stick to a location, e.g. through: Quality of institutional frameworks Business environment, including links between firms (large and small) and with universities and knowledge institutions Education and skills Domestic capabilities, including the strength of the SME supplier base Links with production: co-location of activities The social fabric of society Services, services, services 23
Conclusions Growing interconnectedness with the global economy growing integration of the Czech Republic: Joining instead of building GVCs the Czech Republic has strongly benefitted from its integration in GVCs Openness in all dimensions of GVCs, not just trade Alignment between objectives of multinational firms and policy objectives no longer assured Growing importance of innovation and for competitiveness Complementary to low-cost competitiveness What you do matters more than what you sell New phase for Czech economic development need for innovation and differentiation More advanced skills, more radical innovation, more creative destruction Building a productive and high-quality services sector 24
Interconnected Economies Benefiting from Global Value Chains CH. 1: CH. 2: CH. 3: CH. 4: CH. 5: CH. 6: CH. 7: CH. 8: The rise of GVCs Measuring Trade in Value Added GVCs and trade policy GVCs and investment policy GVCs and economic development National competitiveness and GVCs GVC upgrading and knowledge based assets GVCs and global systemic risk 25
FOR MORE INFO: koen.debacker@oecd.org oe.cd/gvc