1

Exploiting Global-value Chains and Knowledge-Based Capital for Growth

Andrew WyckoffDirectorate for Science, Technology &

IndustryNordic Conference

5 March 2013

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/reviews

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

• 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

Airline industry: Boeing 787 Dreamliner

Escape slides: Air Cruisers (USA)

Horizontal Stabiliser:Alenia Aeronautica (Italy)

Centre fuselage: Alenia Aeronautica (Italy)

Final assembly: BoeingCommercial Airplanes (USA)

Vertical Stabiliser: BoeingCommercial 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: HamiltonSundstrand (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 AirlinesAerospace division (Korea)

Passenger doors:Latécoère Aéroservices (France)

Prepreg composites:Toray (Japan)

Rear fuselage:Boeing South Carolina (USA)

Source: www.newairplane.com

Design: California, USA

Body material: Chinese Taipei

Nylon hair: Japan

Clothing: China

Moulds, paint pigments: USA

Assembly: Indonesia and Malaysia

Quality testing: USA

Marketing: USASource: Grossman and Rossi-Hansberg (2006)

Toys: Barbie doll

7

Apple’s iPodDistribution 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

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

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

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

OECD work on GVCs and TiVA

11

Final consumption

3

7

5

62

Final assembly

1

4

0%10%20%30%40%50%60%70%80%90%

100%

1

234567

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

TiVA: Value-added chains (by product)

12

Germany- automotive China - electronics

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 UnitedStates

Germany Japan UnitedKingdom

France Italy Canada Rest ofWorld

1995 2009

Gross flows%

0

10

20

30

40

50

60

70

China UnitedStates

Germany Japan UnitedKingdom

France Italy Canada Rest ofWorld

1995 2009

Value-added flows %

Services matter

14

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Indo

nesi

aCh

ina

Mex

ico

Chile

Nor

way

Russ

ian

Fede

ratio

nKo

rea

Sout

h Af

rica

Cana

daBr

azil

Aust

ralia

Japa

nSl

ovak

Rep

ublic

Czec

h Re

publ

icPo

land

New

Zea

land

Hun

gary

Turk

eyN

ethe

rland

sSl

oven

iaG

erm

any

Aust

riaSw

itzer

land

Ital

yPo

rtug

alIn

dia

Icel

and

Uni

ted

Stat

esFi

nlan

dSw

eden

Esto

nia

Isra

elFr

ance

Den

mar

kBe

lgiu

mSp

ain

Uni

ted

King

dom

Irel

and

Gre

ece

Luxe

mbo

urg

Services value added as a % of exports, 2009Domestic content Foreign content

Foreign value-added in exports by country of origin

www.oecd.org/trade/valueadded

www.oecd.org/trade/valueadded

www.oecd.org/trade/valueadded

What does the first release tell us?

18

0

10

20

30

40

50

60

70

80

90

100

Luxe

mbo

urg

Slova

k Rep

ublic

Hung

ary

Irelan

dKo

rea

Czec

h Rep

ublic

Esto

niaNe

ther

lands

Icelan

dFin

land

Swed

enBe

lgium

Israe

lPo

rtuga

lM

exico

Slove

niaSw

itzer

land

Denm

ark

China

Polan

dFr

ance

Germ

any

Aust

riaIn

diaGr

eece

Turk

eyCa

nada

New

Zeala

nd Spain Chile

Italy

Unite

d King

dom

Sout

h Afri

caJa

pan

Indo

nesia

Norw

ayAu

stra

liaUn

ited S

tate

sBr

azil

Russ

ian Fe

dera

tion

Domestic value added to gross export ratio, %, 2009

Large and mineral rich

countries have typically higher

ratios

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

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

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

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 Trade Balance

Swedish trade balance, USD millions, 2009

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,

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 activitieswithin sectors

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

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.)

27Source: IMD (2000) Innovation and Rennovation: The Nespresso Story, IMD046, 03/2003

The rise of GVCs and the role of KBCs

Nordic Strengths

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.

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

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

50Bottom half

OECD

Top half OECD

Framework Conditions 2.0

Knowledge-BasedCapital

Tax

Personal data

Corporate reporting

Skills Intellectual property rights

Global value chains

Inequality Entrepreneurship

Improving measurement

Competition

33Source: Images.com/Corbis

Base Erosion & Profit Shifting

Relevant to many policy issues

Knowledge-BasedCapital

Tax

Personal data

Corporate reporting

Skills Intellectual property rights

Global value chains

Inequality Entrepreneurship

Improving measurement

Competition

What is an asset?

35

• 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

• Watch the video: www.youtube.com/watch?v=RZKX-0SK41U&feature=player_embedded

• Use the interactive map:www.oecd.org/trade/valueadded

• Contact us: – Andrew.Wyckoff@oecd.org– Tiva.contact@oecd.org

37

Contact Information