Moving Up the Value Chain:
Staying Competitive in the Global Economy
MAIN FINDINGS

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MOVING UP THE VALUE CHAIN: STAYING COMPETITIVE IN THE GLOBAL ECONOMY  3


Foreword
Globalisation raises many important challenges and is high on the policy agenda
in many OECD countries. At the 2004 Ministerial Council Meeting, Ministers asked
the OECD to shed light on issues related to the increased outsourcing and offshoring
of production, since solid evidence to underpin policy discussion and formulation was
scarce.
To help implement this mandate, the OECD Council decided at the end of 2004
on an allocation of the OECDӢs Central Priority Fund for a study including a systematic
empirical overview of trends and developments on the globalisation of value chains.
The Committee on Industry, Innovation and Entrepreneurship (CIIE) provided
guidance on the scope of this study.
This document, presented to the OECD’s 2007 Ministerial Council meeting, brings
together some of the evidence on the globalisation of value chains and identifies the
most relevant policy issues in order to address concerns related to globalisation. A
compendium of the individual studies underlying this summary will be finalised later
this year.
© OECD 2007

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4 – MOVING UP THE VALUE CHAIN: STAYING COMPETITIVE IN THE GLOBAL ECONOMY


Table of Contents

Global Value Chains and Globalisation................................................................................ 5
The Economic Effects of Globalisation ................................................................................8
The Key Role of Multinationals.......................................................................................... 10
New Centres of Economic Growth ..................................................................................... 12
The Employment Effects of Globalisation.......................................................................... 14
The Productivity Benefits of Globalisation ........................................................................ 16
Structural Change Towards a Knowledge Economy .......................................................... 19
Policy Implications.............................................................................................................24
Bibliography ....................................................................................................................... 27



© OECD 2007

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MOVING UP THE VALUE CHAIN: STAYING COMPETITIVE IN THE GLOBAL ECONOMY – 5


Global Value Chains and Globalisation
Globalisation is not new…
The rapid pace of the globalisation process has attracted much attention in recent
years, but globalisation is not new. The process of international economic integration
has been underway for decades, facilitated by more open economic policies and trade
liberalisation in a growing number of countries. Technical advances, notably in
transport and communication, have lowered costs and also fostered globalisation.
Trade and foreign direct investment (FDI) are still the key channels for international
economic integration, with migration playing a more limited role. Technology transfer,
through multinational enterprises and other channels, has also become an increasingly
important factor.
…but has some distinctive features today.
The pace and scale of today’s globalisation is without precedent and is associated
with the rapid emergence of global value chains as production processes become
increasingly fragmented geographically. Information and communication technology
(ICT) has made it possible to slice up the value chain and perform activities in any
location that can help reduce costs. The globalisation of value chains results in the
physical fragmentation of production, where the various stages are optimally located
across different sites as firms find it advantageous to source more of their inputs
globally. This phenomenon has also been referred to in the literature as international
production sharing and vertical integration of production and is closely linked to the
growth of global production networks.
Globalisation also increasingly involves foreign direct investment and trade in
services, with many service activities becoming internationalised, especially since ICT
has enabled the production of many services independent of a specific location.
Another distinctive feature of current economic integration is that it is no longer
restricted to OECD countries, but also involves large emerging global players like
Brazil, China, India and Russia.
Global value chains…
The globalisation of value chains is motivated by a number of factors. One is the
desire to increase efficiency, as growing competition in domestic and international
markets forces firms to become more efficient and lower costs. One way of achieving
that goal is to source inputs from more efficient producers, either domestically or
internationally, and either within or outside the boundaries of the firm. Other
important motivations are entry into new emerging markets and access to strategic
assets that can help tap into foreign knowledge. Notwithstanding these anticipated
benefits, engaging in global value chains also involves costs and risks for firms.
© OECD 2007

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6 – MOVING UP THE VALUE CHAIN: STAYING COMPETITIVE IN THE GLOBAL ECONOMY


…imply outsourcing and offshoring…
The fragmentation of the production process across various countries has given
rise to considerable restructuring in firms including the outsourcing and offshoring of
certain functions. Outsourcing typically involves the purchase of intermediate goods
and services from outside specialist providers, while offshoring refers to purchases by
firms of intermediate goods and services from foreign providers, or to the transfer of
particular tasks within the firm to a foreign location (Figure 1). Offshoring thus
includes both international outsourcing (where activities are contracted out to
independent third parties abroad) and international in-sourcing (to foreign affiliates).
Figure 1. Outsourcing and offshoring
Location
National
International
Between fir ms
(outsourcing)
Domestic outsourcing
International outsourcing
Sourcing

Offshoring
Within fir ms
(insourcing)
Domestic supply
International insourcing

Within co
untries
Between co untries

Sources: OECD (2005g, 2006f).
…of which some are relocations of existing activities.
The growth of international sourcing has also resulted in the relocation of
activities overseas, sometimes implying the total or partial closure of the production
in the home country while at the same time creating or expanding affiliates abroad
producing the same goods and services as in the host country. More often, it is about
the substitution of domestic stages of production by activities performed in foreign
locations, with goods and services being exported from the host country to the home
country. Relocation is not always interpreted in such a strict sense, and often
encompasses different forms of internationalisation such as the opening of a new
affiliate abroad to enhance market presence. While the different concepts may be
easily defined, their measurement is more complex. Firms are sometimes reluctant to
offer details on outsourcing and offshoring decisions, in particular on relocation. The
lack of hard data has contributed to the great diversity in views on the size and effects
of internationalisation.
Trade in intermediates is growing…
Global value chains allow intermediate and final production to be outsourced
abroad, leading to increased trade through exports and imports, and to a rapidly
growing volume of intermediate inputs being exchanged between different countries.
In 2003, 54% of world manufactured imports were classified as intermediate goods
(which includes primary goods, parts and components and semi-finished goods).
© OECD 2007

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MOVING UP THE VALUE CHAIN: STAYING COMPETITIVE IN THE GLOBAL ECONOMY – 7


Detailed information from input-output tables shows that the ratio of imported to
domestic intermediate inputs has increased in almost all OECD countries (Figure 2).
Figure 2. The ratio of imported intermediates to domestic intermediates, 1995 and 2000
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
ly
y
pan
ain
rea
stria
Ja
stralia
land rkey Ita
eece rwa
nada eden
France
Tu
rmany
lgium
Gr
ngary
No
Sp nmark rtugal Ko
Po
FinlanditzerlandCa Sw Au
Hu
Ireland
ited StatesAu
w Zealand
Ge
De
therlands
Sw
Un
Ne ited KingdomPo
Ne ech Republic
Un
Cz Slovak RepublicBe
1995
2000

Notes:
Australia: 1995 and 1999; Canada: 1997 and 2000; Greece: 1995 and 1999; Hungary: 1998 and 2000; Norway: 1995 and 2001;
Portugal: 1995 and 1999.
Source: OECD (2007).

…and domestic production increasingly relies on foreign inputs.
As a result of the growing global linkages between countries, a decreasing share of
production is created within national boundaries. A decline in the ‘production depth’
(value added over production) and a growing importance of intermediates can be
observed in the OECD area. The growing international sourcing of intermediates
within global value chains has resulted in manufacturing exports and imports of
individual countries increasingly moving together and growing faster than
production, indicating that international transactions between OECD countries are
growing very rapidly. The globalisation of value chains has also resulted in increasing
intra-industry trade (i.e. trade within the same industry, including the trade in
intermediate goods at various stages of production). While these evolutions are
observed in almost all countries, they become particularly clear in smaller OECD
countries with large FDI inflows.

© OECD 2007

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8 – MOVING UP THE VALUE CHAIN: STAYING COMPETITIVE IN THE GLOBAL ECONOMY


The Economic Effects of Globalisation
Not all manufacturing industries are equally affected…
Economic globalisation has resulted in a growing openness of the manufacturing
sector, as reflected in increasing export ratios and import penetration in all
manufacturing industries (Figure 3). But not all manufacturing industries are
affected to the same extent. High and medium-high technology industries are on
average generally more internationalised than less technology intensive industries.
This difference results partly from the growing complexity of many high technology
products; firms no longer have all the required knowledge in-house and increasingly
have to look outside. At the same time, traditional industries, such as textiles, are also
characterised by a high degree of international openness.
Figure 3. Import propensity and export ratio1 in selected OECD countries2, 2003
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
rs
s
raft
on
y
ls
ent
ls
s
d
ts
ng
pute
ent
ner
ica
icles
ica
lding
ning
uc
um
lothing icati
bacco
rinti
achi
eut
ipm
em
c metal
refi
oducts
, p
Com
nstr
s, c
pbui
mac
or veh
lic pr
al prod
fic i
xtile
mmun ical m
Shi
Mot
y, equ ort equipmentCh
bber, plastics Woo
oleum
rinks, to Met
Paper
ienti
Aircraft, spacec
Te
V, co
Phar
hiner
tal manufacturing
Basi
facturing, recycling
Ru
Petr
metal od, d
Sc
Electr
Transp
To
dio, T
Mac
Non-
Fo
Ra
her manu
Ot
Import penetration
Export ratio

Notes:
1. The export ratio measures the share of production that is exported (i.e. X/Y); the import propensity shows to what degree
domestic demand is satisfied by imports M (i.e. M/(Y-X+M)).
2. OECD includes Austria, Canada, Denmark, Finland, France, Germany, Italy, Japan, Korea, Netherlands, Norway, Portugal,
Spain, Sweden, United Kingdom, and the United States.
Source: OECD (2005a).
© OECD 2007

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MOVING UP THE VALUE CHAIN: STAYING COMPETITIVE IN THE GLOBAL ECONOMY – 9


…and globalisation is now also increasingly affecting the services sector.
While manufactured goods still account for the largest share of international
trade, globalisation increasingly extends to FDI and trade in services. The offshoring
of services has been significantly increasing in all OECD countries, driven by the
liberalisation in services sectors and technological advances (Figure 4). Improve-
ments in technology, standardisation, infrastructure growth and decreasing data
transmission costs have all facilitated the sourcing of services from abroad. Rapid
advances in ICT have also increased the tradability of many service activities and
created new kinds of tradable services. In particular, ‘knowledge work’ such as data
entry and information processing services and research and consultancy services can
easily be carried out via the Internet and e-mail, and through tele- and video-
conferencing.
Figure 4. Offshoring/outsourcing1 abroad in market services, 1995 and 2000
50%
40%
30%
20%
10%
0%
y
pan
land ain Italy
rkey
eece
rea
stria
rwa
Francestralia
Sp
rmanyTu
nadartugal
eden
ngary
lgium
ZealandGr Ca
nmarkKo
Po
Finland
Sw
No Ireland
ited StatesJa
Au
Ge
w
itzerland
De
therlandsBe
Un
ited KingdomPo
Ne
Sw
ech RepublicAu
Ne
Un
Cz
Slovak Republic
Hu
1995
2000

Notes:
1. Offshoring/outsourcing is calculated as the share (in %) of imported intermediates in the total of non-energy inputs.
2. Australia: 1995 and 1999; Canada: 1997 and 2000; Greece: 1995 and 1999; Hungary: 1998 and 2000; Norway: 1995 and 2001;
Portugal: 1995 and 1999.
Source: OECD (2007).

© OECD 2007

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10 – MOVING UP THE VALUE CHAIN: STAYING COMPETITIVE IN THE GLOBAL ECONOMY


The Key Role of Multinationals
The flexibility of multinational enterprises (MNEs)
The growth of international outsourcing involves the sourcing of inputs inter-
nationally through arm’s-length relationships as well as within firms. Within this
global value chain, multinational firms play a prominent role as they have a global
reach that allows them to co-ordinate production and distribution across many
countries and shift their activities depending on changing demand and cost condi-
tions. Corresponding to the strong increase of FDI, foreign affiliates have become
increasingly important in host countries where they account for a growing part of
turnover, value added, employment and R&D (Figure 5). The importance of MNEs in
today’s global economy is linked to their strengths in a range of knowledge-based
assets, such as management and intellectual property, that allow them to take
advantage of profitable opportunities in foreign markets by setting up subsidiaries
and affiliates abroad.
Affiliates under foreign control are not only engaged in serving local markets in
the host country, but have become essential links in global value chains as they serve
other (neighbouring) markets and produce inputs for other affiliates in the multi-
national’s network. Cross-border trade between multinational firms and their affiliates,
often referred to as intra-firm trade, accounts for a large share of international trade
in goods. A growing part of such intra-firm trade concerns the exports and imports by
foreign affiliates that manufacture (part of) products destined for other markets.
These intra-firm trade flows increasingly affect the interpretation of trade deficits:
part of the US trade deficit in ICT products with China relates to intra-firm imports
from subsidiaries of US firms.
Small and medium-sized enterprises (SMEs) face new challenges and
opportunities
The development of global value chains also offers new opportunities to SMEs by
enabling them to expand their business opportunities across borders, although
reaching international markets is often a difficult step for SMEs. The increased
opportunities for SMEs come along with important challenges in terms of manage-
ment, finance and the ability to upgrade and protect in-house technology. Suppliers
are often given more responsibilities in the value chain to undertake more and more
complex tasks than in the past. SMEs increasingly feel pressures to merge, in order to
achieve the critical mass to support R&D, training of personnel, control over firms in
lower levels of the chain, and to fulfil requirements in terms of standards and quality.
© OECD 2007

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Document Outline

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