PARTICIPATION IN GLOBAL PRODUCTION CHAINS: IMPACT ON INDUSTRIAL DEVELOPMENT

UNIDO, Vienna 2015

Lilac NachumProfessor, Globalization and Management of Multinational Companies

WHO AM I?

http://www.wordle.net/

THE SHAPE OF CONTEMPORARY PRODUCTION CHAINS

outsourced:787 - 70% 777 – 50767 – 30707 – 5

SUPPLY CHAIN FOR IPHONE

LG – LCDSamsung – memory, processor

Broadcom, IntelTexas InstruCirrus Logic

Infineon - transceiverDialog – power mngt.

SRMicroelectronicsAKM -

compass

Unknown others

Supply Chain for iPhone Highlights Costs in China. NYT 7/5/10

WHO DOES WHAT IN GLOBAL PRODUCTION CHAINS Value added in developed countries

Capita

l

High-sk

illed l

abor

Medium

-skille

d l...

Low-sk

illed l

abor

0.36

0.17

0.33

0.14

0.39

0.220.3

0.09

Value added in emerging markets

Capita

l

High-sk

illed l

abor

Medium

-skille

d lab

or

Low-sk

illed l

abor

0.55

0.05

0.160.24

0.58

0.07

0.17 0.17

1995 2008

Timmer et al., Slicing Up Global Value Chains. Journal of Economic Perspectives 2014

‘The Factoryless US Economy’- Apple US employment ~25,000 - Apple-related employment in China (Foxconn)

250,000- Contract manufacturing - a $250 billion/year industry

THE SMILING CURVE STRATEGY OF DEVELOPED COUNTRY FIRMS

THE MAKING OF THE IPOD

Total employment (numbers)

13,920

27,250

US Non-US

Total wages (mil. US$)

753.3

318.5

US Non-US

Business Week, Mapping the iPod economy, 11/3/08

BEYOND THE IPOD:Employment and Wages by US MNEs

Number of employees

0

5000

10000

15000

20000

25000

1983 1987 1991 1995 1999 2003 2005

in the Us

O vers eas

Employees compensation

0

20000

40000

60000

80000

100000

120000

140000

1983 1987 1991 1995 1999 2003 2005

in the Us

Overseas

M. Desai, Securing jobs or the new protectionism. Harvard Business School W.P. 09-107, 2009.

XIAOMI LG SAM-SUNG

APPLE

1.3 0.5

18.7

28.7

KRAFT NESTLE OLAM

109

2

FOOD

Profit Margins, %

CISCO HUAWEI

20

8.4

SMART PHONES

TELECOM EQUIPMENT

OLAM CEO: ‘We are the brand behind the brands’

Nestle advertising spending:2013 $3.12 bil. 2011 $2.94 bil.

WHY (LOW) PROFIT MARGINS MATTER?

The Commodity

Trap

ESCAPE THE COMMODITY TRAP?

Change mid-set! Olam manager: ‘Olam’s culture is that of a hard-nosed trading

company that operates on volume and very thin margins. We are always trying to save a penny here, a penny there. At budget review meetings, Sunny will ask: ‘Why did overhead go up by $20,000?’ Can this co-exist with a more traditional food company, whose objective is to invest in R&D, new product development, and marketing to push up margins?...’ HBS case, p. 11

Compete with customers Foxconn CEO: ‘We’re not going to have our own brand, we’re not

going to compete with our customers.’ Convince shareholders.

RECORD OF SUCCESS: MIXED

SUCCESSULLY ESCAPED THE TRAP

JAPAN SOUTH KOREA INDIA [ISRAEL].

THE JUSRY IS STILL OUT…

TAIWAN ‘INVISIBLE GIANTS’ HTC, ASUSTEK,

QUALQOM [CHINA].

ROLE FOR POLICY NATIONAL POLICY

SUPPORT FIRMS’ UPGRADE [INNOVATION, BRAND NAME] [CAREFUL] EXPOSURE TO GLOBAL COMPETITION THE RISK OF PICKING WINNERS; SCARIFYING FREE

MARKET VALUES THE SUCCESS OF NUMMI JAPAN, NASSACOM INDIA THE STORY OF TAIWAN CHINA

INTERNATIONAL ORGANIZATIONS (UNIDO!) UNDERSTANDING CONTINGENCIES THAT DISTINGUISH

SUCCESS FROM FAILURE COMPARATIVE RESEARCH ACROSS COUNTRIES DATA (OECD INPUT/OUTPUT TABLES INITIATIVE) BASIS FOR GUIDE TO NATIONAL GOVERNMENTS.

AN EVER MORE IMPERATIVE TASK

Sources economic development

Early economic development

Subsequent economic development

Technology Import know-how; borrowed technology; catch-up

Approaching the technological frontier from imported know-how to own innovation

Labor - Productivity gain

Shift from (underemployment) in agriculture to export-oriented manufacturing

Additional productivity growth – mostly from services – slower/more difficult (no scale economies; fewer employees [India IT]

Capital (investment)

Higher earning more saving increased capital stock

Larger capital stock depreciation; requires higher saving rate to sustain

Accelerated growth Slower growth

Where to find me?

Run Out of Time after Thoughts

FORCES BEHAIND GLOBALIZATION OF SUPPLY CHAINS

Trade costsTransportation costs

Costs of crossing border

Management costsTechnology

Management over distance

US INTRA FIRM TRADEShares total imports

0.140.17

0.270.31

0.5

0.59

0.66

0.76

Textile

Oil&

gas

Food

Petrol.products

Electrical equip.

Chem

icals

Com

puters

Transport.equip.

0.070.08

0.18

0.270.29

0.440.49

0.650.66

0.730.740.76

Egypt

India

China

Russia

Brazil

Canada

U.K

.

Germ

any

Mexico

Singapore

Japan

Ireland

3-digit NAICs

As of 2000

Bernard at al, Intra-firm trade. Mimeo, The Tuck School 2007

By Industry By Country

2012 80% trade intra-firm UNCTAD, Global Value Added Chain and Development, 2013

Inter-firm trade Intra-firm tradeTrading with whom?

un-related bodies sub-units tied by ownership

Trade relationships?

market relationships ownership-based relationships

What is being traded?

Finished goods Intermediaries, services

Value added activity?

Sale Production

Driving force? Demand, consumer needs

Supply, production factors

Where to trade? Size, wealth of markets

Production and trade costs

Trading partners? Similar: wealthy (large)

Different: poor

Policy imperatives