class: center, middle, inverse, title-slide # 3. Concept of Connectivity: Intra-Firms Networks in the Industry and the Development of Clusters ### Thierry Warin, PhD, HEC Montreal, Harvard University & Cirano --- ## Readings * Kennedy, R.E.; Ramos, T., (1998), « Chile: The Latin American Tiger? », Harvard Business School, 798092-PDF-ENG * Ekaterina Turkina (2012-07-01). « Cross-border Inter-firm Networks in the European Union’s Eastern Neighbourhood: Integration via Organizational Learning », Journal of Common Market Studies, vol.50, no.4. Suggested lectures: - Schilling et Steensma (2001). The Use of Modular Organizational Forms: An Industry-Level Analysis, Academy of Management Journal, Vol 44, no 6. - Slater, S.F. & E.M. Olson (2002) A Fresh Look at Industry and Market Analysis, Business horizons, 45, Issue 1, pp. 15-22. --- ## Content - 1. Structural differences in intra firms networks and perspectives for social exchanges (innovation and knowledge transfers) - 2. Changes in structural differences in intra firms networks through time - 3. Market convergence and degree of industrial concentration: Porter's model in emerging countries --- ## 1. Introduction: A fast-changing world Three centuries of globalization have changed the face of our economies. This globalization has taken place in **two stages** (Baldwin, 2012). The first globalization is characterized by the "industrialization" of the northern countries. - **Innovation and economies of scale** give the North **important comparative advantages**. Technological progress and learning by doing enable a great increase in productivity in the North while there is stagnation or even negative evolution in the South (Baldwin, Martin, & Ottaviano, 2001). It is a period characterized by an increase in the gap between rich and poor countries. --- ## 1. Introduction: A fast-changing world During the second half of the 20th century, **new information and communication technologies (ICTs)** and differences in wages between the northern and southern regions were the triggers for the second globalization. - Indeed, ICTs allow companies to no longer be limited in space and thus benefit from the cheap labor power of the countries of the South. - These **relocations** - mainly in the manufacturing sector at first and now also at the service sector (OECD, 2006) - and the new international mobility of technologies reverse the trend by allowing the **reindustrialisation** of the southern countries. --- ## 1. Introduction: A fast-changing world - **Technology transfers** and **open borders** enable emerging countries to increase their productivity in several manufacturing sectors. - All of the developed countries, Canada and Quebec among them, are facing a new environment that needs to be apprehended fairly in order to remain competitive throughout the world. --- ## 1. Introduction: A fast-changing world When mentionning emerging countries, it is usual to refer the BRICS countries, namely: Brazil, Russia, India, China and South Africa. - Other countries could be added to this list, and in particular Mexico. - When adding China's, India's, Brazil's and Mexico's populations, these four countries now account for more than 40% of the world's population. They also see significant long-term GDP growth. --- ## 1. Introduction: A fast-changing world ### Percentage of GDP growth in constant prices between 1990 and 2012 <img src="session3_resources/croissancePib.png" width="800px" style="display: block; margin: auto;" /> --- ## 2. Structural differences in intra-firms networks ### Total number of establishments in the manufacturing sector <img src="session3_resources/nombreEtablissements.png" width="900px" style="display: block; margin: auto;" /> --- ## 2. Structural differences in intra-firms networks | Group | Industries | |:-------------------:|:---------------------------:| |$I_1$|Consummables (food and beverages)| |$I_2$|Textiles| |$I_3$|Wood and paper| |$I_4$|Petrochemicals and plastics| |$I_5$|Mineral products and metal products| |$I_6$|Machinery| |$I_7$|Electrical and electronical products| |$I_8$|Medical equipments| |$I_9$|Tranportation| |$I_10$|Others| --- ## 2. Structural differences in intra-firms networks Concerning the evolution of the number of establishments, several facts can be noticed: - the **number of manufacturing firms** in Quebec appears to be declining or stagnating in all manufacturing sectors. - this phenomenon is particularly evident within the **textile industry**. --- ## 2. Structural differences in intra-firms networks ### Number of firms in Québec <img src="session3_resources/dixSecteursQc.png" width="700px" style="display: block; margin: auto;" /> Two sectors seem to be stagnating: the medical equipment sector as well as the other industries (I10) sector, such as furniture production, manufacturing or recycling. --- ## 2. Structural differences in intra-firms networks ### Number of firms in China <img src="session3_resources/dixSecteursChine.png" width="700px" style="display: block; margin: auto;" /> --- ## 2. Structural differences in intra-firms networks ### Number of firms in Brazil <img src="session3_resources/dixSecteursBresil.png" width="700px" style="display: block; margin: auto;" /> --- ## 2. Structural differences in intra-firms networks ### Number of firms in India <img src="session3_resources/dixSecteursInde.png" width="650px" style="display: block; margin: auto;" /> --- ## 2. Structural differences in intra-firms networks ### Number of firms in Mexico <img src="session3_resources/dixSecteursMexique.png" width="800px" style="display: block; margin: auto;" /> --- ## 2. Structural differences in intra-firms networks - First, data for Mexico indicate a large increase in the number of establishments since the early 2000s. - Although this result seems impressive when looking at the evolution of manufacturing as a whole, it can be specified with more precision by observing industries one by one. - The trend of this curve is **only related to the consumable sector** which is growing very strongly in Mexico. The other sectors are stagnating at the same decline. --- ## 2. Structural differences in intra-firms networks India and Brazil seem to appreciate a gradual increase in firms (especially from 2003 for India). - Between 2003 and 2010, China (already superior to India and Brazil) **doubled the number of its firms** in the manufacturing sector, from 200,000 to more than 400,000 firms. - Although China and India are often placed at the same level when referring to their impressive economic developments, it would seem that there are important nuances. - The increase in the number of establishments for China is much more representative than that of Mexico. Indeed, in the case of China, this is a growth in all sectors of the manufacturing industry. --- ## 2. Structural differences in intra-firms networks - The number of establishments in Canada appears to have stagnated since 2005. - It appears that the number of Quebec companies in the manufacturing sector has been declining since 2006. From 8,000 in 1998 to a peak of about 21,000 establishments in 2006, the number of establishments is now estimated to be about 20 000 (estimate of the authors). --- ## 2. Structural differences in intra-firms networks ### Total number of firms in the manufacturing sector (Quebec, real data and predictions) <img src="session3_resources/nbEtabQc.png" width="600px" style="display: block; margin: auto;" /> --- ## 2. Structural differences in intra-firms networks - In China, the textile industry seems to grow less rapidly and that the **medical equipment** industry. - In Brazil, the number of establishments seems to be slowly increasing in all sectors, except for stagnation in the machinery sector. The textile and mineral and metal industries are growing more rapidly. - In India, it was not until 2005 that some sectors have witnessed an increase in the number of establishments. The machinery industry is stagnating and two sectors seem to stand out with a greater growth in the number of factories since 2002. This is the **consumables industry** but especially the **minerals and metallic materials**. --- ## 2. Structural differences in intra-firms networks - In Mexico, the situation is very particular with a ** decrease in the number of establishments in all sectors ** since 2005, except for the consumables industry and mineral and metallic materials, with an increase in the number of establishments of more than 250,000 units between 1998 and 2010 for the consumables sector. - The Mexican economy is particularly focused on the production of consumables (meat, fish, fruits, vegetables, processed fats, dairy products, grain and animal feed, other food products, beverages, tobacco products). --- ## 2. Structural differences in intra-firms networks - China, Brazil and India see most of their major manufacturing groups evolving (in terms of number of establishments), while Quebec is in a significant decline. - Mexico appears as a special case for which specialization in the consumable sector ensures its economic survival by export. Indeed, in 2010, 76% of Mexican exports are manufactured goods (compared with 6% of mining products and 17% of petroleum and mining products). - Mexico is the 3rd country of origin of US imports of manufactured products with a total of 12% of imports (after China with 26.4% and the European Union with 19.7%). --- ## 3. Structural differences in intra-firms networks through time Réseaux inter-entreprises (Schilling M. & Steensma K., 2001 - lecture recommandée) : - Modular and flexibal organizational forms (Coase, Williamson, etc.) --- ## 3. Structural differences in intra-firms networks through time <img src="session3_resources/figure1.png" width="900px" style="display: block; margin: auto;" /> --- ## 3. Structural differences in intra-firms networks through time ### Forces pushing to use modular organizational forms <img src="session3_resources/figure2.png" width="400px" style="display: block; margin: auto;" /> --- ## 3. Structural differences in intra-firms networks through time ### Forces pushing to prefer intra firms alliances <img src="session3_resources/figure3.png" width="500px" style="display: block; margin: auto;" /> --- ## 3. Structural differences in intra-firms networks through time ### Forces pushing to prefer alternative forms of work <img src="session3_resources/figure4.png" width="500px" style="display: block; margin: auto;" /> --- ## 3. Structural differences in intra-firms networks through time - Ecosystems and industrial clusters - Symbiotic innovation in industrial clusters - Organizational learning --- ## 3. Structural differences in intra-firms networks through time <img src="session3_resources/crossBorderNetworks.png" width="800px" style="display: block; margin: auto;" /> --- ## 4. Market convergence and industrial concentration The convergence of markets and the reasons for industrial concentration: 1. A different **macroeconomic environment**: global integration 2. A **mesh and breakdown of MNEs** due to lower transaction costs (Coase, Williamson, etc.) --- ## 4. Market convergence and industrial concentration ### Porter's Diamond (1990) for studying the competitive advantages of Nations <img src="session3_resources/porterDiamond.png" width="500px" style="display: block; margin: auto;" /> --- ## 4. Market convergence and industrial concentration However, the analysis of the evolution of the percentage of annual GDP growth in emerging countries is not as simple as a few years ago. - While the growth before and after the global economic crisis was much higher for these countries (mainly for China and India), the trend seems to have changed since 2010. - Although China is still growing well above all others, **India and Brazil** are experiencing a significant drop in the latter (Brazil already having a lower level than that of Canada or the United States). --- ## 4. Market convergence and industrial concentration In Mexico, there is a **negative change** in trends around the early 2000s that corresponded to China's entry into the WTO in 2001. - This accession allows the **explosion of Chinese exports**. The low cost of Chinese industries and its large production capacities have resulted in very significant competition, which considerably reduced Mexico's share of the US market (Kamil & Zook, 2013). --- ## 4. Market convergence and industrial concentration - Between 2001 and 2005, Chinese manufacturing exports to the United States grew at an average annual rate of 24%, while Mexico's export growth slowed sharply, averaging about 20% to 3% per year during this period (Kamil & Zook, 2013). - As a result, the Mexican manufacturing sector is largely affected, which explains the decline in the number of establishments, productivity and wages in most sectors. --- ## 4. Market convergence and industrial concentration ### Wages are still more competitive in the emerging countries and still far from catching up to Quebec's levels <img src="session3_resources/salairesHebdo.png" width="600px" style="display: block; margin: auto;" /> --- ## 4. Market convergence and industrial concentration - China in particular seems to catch up with Quebec in the near future (5 to 10 years). This is the **phenomenon of convergence**. - Moreover, with the availability of data limiting us to 2010, it is reasonable to believe that in 2014 and despite the crisis much of the way has already been done. The implications are significant for entrepreneurs in the various manufacturing sectors. --- ## 4. Market convergence and industrial concentration | Group | Industries | |:-------------------:|:---------------------------:| |$I_1$|Consummables (food and beverages)| |$I_2$|Textiles| |$I_3$|Wood and paper| |$I_4$|Petrochemicals and plastics| |$I_5$|Mineral products and metal products| |$I_6$|Machinery| |$I_7$|Electrical and electronical products| |$I_8$|Medical equipments| |$I_9$|Tranportation| |$I_10$|Others| --- ## 4. Market convergence and industrial concentration ### Wages in Québec <img src="session3_resources/salaireQuebec.png" width="700px" style="display: block; margin: auto;" /> --- ## 4. Market convergence and industrial concentration ### Wages in China <img src="session3_resources/salaireChine.png" width="700px" style="display: block; margin: auto;" /> --- ## 4. Market convergence and industrial concentration ### Wages in Brazil <img src="session3_resources/salaireBresil.png" width="600px" style="display: block; margin: auto;" /> --- ## 4. Market convergence and industrial concentration ### Wages in India <img src="session3_resources/salaireInde.png" width="600px" style="display: block; margin: auto;" /> --- ## 4. Market convergence and industrial concentration ### Wages in Mexico <img src="session3_resources/salaireMexique.png" width="700px" style="display: block; margin: auto;" /> --- ## 4. Market convergence and industrial concentration It is often written that the emergence of economic giants like China with very low labor costs push developed countries to increase their value added within global value chains. - The theoretical reasoning behind this type of analysis comes directly from the **neo-classical models** initiated in particular by the Heckscher, Ohlin and Samuelson of the XXth century (Leamer, 2012). - China has indeed become the workshop of the world at the beginning of the 21st century, initially with a **relatively low added value** (Van Assche, 2009). --- ## 4. Market convergence and industrial concentration However, the world is becoming more **complex**. - As China develops, it gains in technology transfer and knowledge development. It has become the country where the **number of patent filings** is the highest: 652,777 claims in 2012, ahead of the United States with 542,815 claims. - The growth rate of patent applications increased by 24% in China between 2011 and 2012 against 7.8% in the United States over the same period (WIPO, 2013). --- ## 5. Conclusion The global integration is the result of several factors: - industrial revolutions - convergent institutional policies - the mobility of MNEs with the establishment of intra firms networks, industrial concentration and industrial clusters.