Tuesday, July 18, 2017

Global Value Chains and Productivity

Production processes have become more likely to cross international borders, thus creating what are called "global value chains" or "global supply chains." Chiara Criscuolo and Jonathan Timmis discuss "The Relationship Between Global Value Chains and Productivity" in the Spring 2017 issue of International Productivity Monitor  (vol. 32, pp. 61-83). I'll start here with a few facts, and then lay out the linkages they discuss. They write: 
"Economies can participate in GVCs [global value chains] by using imported inputs in their exports (the so-called backward linkages in GVC) or by supplying intermediates to third country exports (forward linkages). The overall participation in GVCs which is the total of backward and forward participation differs substantially across countries. Overall participation measure (measured as the sum of backward and forward linkages) reflects the importance of GVCs for an economy, with GVCs accounting for between one-third and two-thirds of gross exports (of goods and services) for OECD economies in 2011 ..."

In the next figure, the blue bars showing the growth of global value chains across countries, while the red triangles show the growth rate of exports. The growth of global value chains is consistently faster than growth of exports, although you have to look closely at the figure to see this, because the blue bars are measured on the left-hand axis and the red triangles with the smaller numbers on tgghe right-hand axis. 
The bulk of these global value chains are regional: in particular, there is an east Asian cluster of value chains, a European cluster, and a North American cluster. There's some evidence that the growth of these global value chains may have slowed in the last few years, although this is a subject of ongoing research. One possible reason is that "there may also be changes in the structure of global production networks, such as China's domestic upgrading and the reorganization of East. Asian value chains, or the shortening of value chains to mitigate supply chain risks and rising labour costs in emerging economies."

How might global value chains affect productivity? Here's a taste of the details on these arguments (with citations omitted here for readability):
"Trade in goods, services and intangible inputs is at the heart of global value chains. The bulk of trade is comprised not of final goods or services, but of trade in intermediate parts and components and intermediate services. Among OECD economies , trade in intermediate inputs accounted for 56 per cent of total goods trade and 73 per cent of services trade over the period 1995-2005. ... GVCs present a new means to access international markets: economies need no longer build complete supply chains at home; instead, they can leverage foreign inputs in their production. The available variety and quality of foreign inputs (capital, labour and intermediates) can positively impact firm productivity. ... A large literature finds that productivity gains in firms that directly import these inputs. In addition, foreign competition in the domestic input market may also lead to price reductions or quality improvements for domestic suppliers, benefiting users of domestic inputs too.  ...
"GVCs are a well-established vehicle for productivity spillovers to local firms. A substantial part of GVC integration is mediated through FDI [foreign direct investment], and such multinational enterprises are typically at the global frontier of productivity, innovation and technology. Exposure to the global frontier can provide an opportunity for local firms to increase productivity through learning about advanced technologies or superior organizational and managerial practices. A large literature has investigated FDI spillovers and arrives at a broad consensus in favour of positive productivity spillovers to industries that supply multinationals through backward linkages, with little evidence through other linkages ... 
"Knowledge acquisition is an important motive for FDI, which may increase the scope for knowledge diffusion. Firms may relocate some activities, including innovation activities, to obtain access to so-called strategic assets - skilled workers, technological expertise, or the presence of competitors and suppliers - and learn from their experience . Firms locate in leading edge countries close to the technology frontier, in order to benefit from the diffusion of advanced technologies. In addition, MNE [multinational enterprise] acquisition of foreign firms can lead to a relocation of innovative activities to where they are most efficiently undertaken and increase knowledge diffusion to affiliates within the group. ...

"To participate directly in GVCs requires scale. For the largest, most productive firms that are able to export, access to new customers in foreign foreign markets can not only lead to increased learning and innovation but also incentivize complementary investments and the restructuring of internal processes to meet the additional demand. ... Upscaling may yield productivity gains. The cost of many productivity-enhancing investments, including those concerning GVC participation listed above, is largely fixed. Such investments are only viable for sufficiently large firms that can spread the fixed costs over high sales volumes. Firm upscaling may therefore contribute to productive investments."
One of the preeminent economic problems of our time is slow economic growth. Given that global value chains have expanded rapidly and seem to contribute to growth, would disrupt these production chains should face a high degree of skepticism.

Those who would like some additional  background on global value chains and productivity might want to look back at some earlier posts on the subject: