relocating the value chain: offshoring & agglomeration in
TRANSCRIPT
Relocating the value chain: offshoring & agglomeration in
the global economy
Richard BaldwinTony Venables
4 February 2011RIETI, Tokyo
The 1st & 2nd unbundlings1st unbundling: Spatial separation of production & consumption.
2nd unbundling:2.1 Factories.
2.2 Offices.
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Growing Automobile Agglomeration in Pearl River Delta
Nissan
Honda 1
Honda 2
Toyota
Unbundling 2.1: Factory Asia
2nd Unbundling : “New paradigm”
• Conceptual framework• Grossman & Rossi-Hansberg
– Simple model of ‘tasks trade’.• Baldwin & Robert-Nicoud
– Integrates tasks trade into Hecksher-Ohlin & monopolistic competition trade theory.
– Offshoring as ‘shadow migration’ on quantity side and technological change on price side.
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This paper• Study the process of 2nd unbundling taking
seriously engineering details of supply chain.
Part 1
Part 2
Part 3
Component 1
Final assembly
Part 4
Part 5Component 2 Domestic sales
Part 6
Part 7 Part 8
Export sales
Spider & Snake
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Assembly
Part 1 Part 2 Part 3Part 4
“spider”
AssemblyPart 1 Part 2 Part 3 Part 4
“snake”
Basic assumptions• Perfect competition, constant returns.• All final consumption in North• Shipping costs of final good t.
– Traditional trade costs• Offshoring cost of a part, (i)
– Costs that explain why factories bundled spatially even within nations.
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Specifically• Parts are indexed by type y ε Y• Unit production cost in S is b(y); unit costs of all
parts normalised to 1 in N.• Low b parts can be produced more cheaply in S
– refer to low b parts as ‘labour-intensive’• Assembly of parts: aN, aS in N & S. • Per-unit off-shoring costs is tθ(y) if not
produced in region of assembly (shipping & coordination costs).
• If assembly in S then tα is paid to ship to N consumers. 9
Spider
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bbN = 1 + θ
bS = 1 - θ
N
S
NS
b
b
1
Part’s relative cost in S
Part’s Offshoring cost
Threshold part; assembly in S
Threshold part; assembly in N
Spider
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bbN = 1 + θ
bS = 1 - θ
N
S
NS
b
b
1
Part’s relative cost in S
Part’s Offshoring cost
Each part is a point in b, space.-3 sets of parts, N, NS, S-N is set always cheapest in N & S in S.-NS, cheapest location of part depends upon location of assembly.
Single agent cost minimisation• Assembly in S iff
• is greater than
• NB: – if t=0, then NS disappears => pure comparative
advantage for parts & assembly.– If t=, trade costs dominate; all parts made in N &
assemble in North.– For intermediate, get tension trade costs vs
comparative advantage.12
dyyytybdyyayyN
SNSN
)()()()(
dyyybdyyyttayyS
NSSN
)()()()(1
(1)
.
Cost minimising location• Focus on comparative advantage;
- Assume all offshoring costs equal for all parts, soo horizontal axis now “t” , not theta
• Start with assembly in North; assume aS<aN.
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2/)( bbtA 2/)( bbtR
2/)( bbtA 2/)( bbtR
Result: Offshoring “overshooting” of parts
Assembly in S tAssembly in N
b = 1
N
S
NS
Another example• S’pose S has strong c.a. in parts, but N has c.a.
in assembly aS>aN.
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)(tA 2/)( bbtR
tbOS 1
tbON 1
b
btAssembly in S Assembly in N
b = 1
tA
Assembly in N
tA
2/)( bbtA )(tR
Nash in parts location• Multiple eq’m arise:
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Figure 5: Equilibrium locations, low cost assembly in S (aS < aN)
t
b
b = 1
2/)( bbtA
tbOS 1
tbON 1
b
Assembly in S
Assembly in N Ω
Basic assumptions• Stages of produciton continuum; z (0,1)
– z = 0 the most upstream• Each stage combines primary factors with the
output of the previous stage. • In general factor intensity need not vary
continuously with z, but we assume this. • Factor cost in S is c[z]; normalised to 1 in N.
– Low c[z] = “very L-intensive”• Off-shoring costs z]t;
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Snake: General issues• More difficult as cannot freely re-order the parts
by comparative advantage.• Parts vary by c.a. and by offshoring costs
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D
2z2z1zz
13z
A B C1
c(z)
τ(z)t
0
Relative cost in S
OS cost if stage done in S
Snake: General issues• If stages 0 to z1 in S
– Save area A on factor cost, but pay ([0]+[z1])t in offshoring costs.
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D
2z2z1zz
13z
A B C1
c(z)
τ(z)t
0
General results• Won’t get infinitely small segments of supply
chain offshored; cluster tendency• Offshore overshooting again; if one stage is
offshored already, trade costs favours production of immediate up and down stream stage in S.– In multiple S world, suggests agglomeration.
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Example 1: Upstream offshoring• S’pose c[z] increase (i.e. upstream parts are
most L-intense and so c.a. in S).– Single break in supply chain, z-hat.
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dztzdzzczUzz
z 1
ˆ
ˆ
0)ˆ()()(:]1,0(ˆ
c=1
z
c[z]
z'
Upstream offshoring• Factor cost savings vs OS’ing costs
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$
Z-hat
Total cost saving (z-hat)
z'
Shipping cost (z-hat)
[z]t
Labour mkt implications• Baldwin & Robert-Nicoud insight• Start with standard HO 2x2x2 model with free
trade in goods but no offshoring.• Assume N has Hicks neutral tech advantage.
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1 * 11*
w wr p r p
-1 -1T TA A
* *1* *
X L X LY K Y K
-1 -1A A
Allow offshoring• N can combine its superior tech with lower
prices S labour and re-import that stage.• Means N can produce same output with fewer
resources, i.e. shadow migration.
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Offshoring : Equilibrium• Full-employment conditions (‘o’ offshoring)
→ “Shadow migration”
→Offshoring in L-intensive sector tends to shift N towards L-int production
1* 1; (1 )O O O w
OO O O
L X XL L L LL L LK Y YK K K
A A 0
*
1 1*( ) ,O OO
O OO
X XL L* XY YK K* Y
A A A A
Home Foreign
11 1
LXI LYI
KX KY
a aa a
A
• Pricing conditions
→Cost saving technical progress (Stolper-Samuelson)
→Wage effects depends upon cost savings by sector, not nature of cost-savings per se.
* *
1* *
1 1X O XO O O
Y O O O YO O O
S w Sw w wS p r p Sr r r
T T TA A A
Offshoring : Equilibrium (ctd.)
* *
1 1 * *
1 1( ) O O O
O O OO O
w w wp r pr r
T T T TA A A A
Home Foreign (no change)