class: center, middle, inverse, title-slide # 5. Value Chains, Networks and Internationalization of Industrial Clusters ### Thierry Warin, PhD, HEC Montreal, Harvard University & Cirano --- ## Readings Mandatory readings: * Porter, M.E.; Ramirez-Vallejo, J.; van Eenennaam, F., (2011), « The Dutch Flower Cluster », Harvard Business School, 711507-PDF-ENG * Harald Bathelt (2004-02-01). « Clusters and knowledge: Local buzz, global pipelines and the process of knowledge creation », Progress in Human Geography, vol.28, no.1. --- ## Readings Recommended readings: * Timothy Sturgeon (2008-05-01). « Value chains, networks and clusters: reframing the global automotive industry », Journal of Economic Geography, vol.8, no.3. * Harald Bathelt (2014-01-01). « Global cluster networks – foreign direct investment flows from Canada to China », Journal of Economic Geography, vol.14, no.1. * Rabellotti, R (2013). « When do global pipelines enhance the diffusion of knowledge in clusters? », Economic geography, vol.89, no.1. * Michael Fritsch (2010-02-01). « The impact of network structure on knowledge transfer: an application of social network analysis in the context of regional innovation networks », The Annals of Regional Science, vol.44, no.1. --- ## Table of content 1. Networks between industrial clusters in different industries 2. Changes in inter-cluster networks through time 3. Globalization of value chains and effects on industrial clusters --- ## Current events [Global Supply Chains Paralyzed After World's 7th Largest Container Shipper Files Bankruptcy, Assets Frozen](http://www.zerohedge.com/news/2016-08-31/global-supply-chains-paralyzed-after-worlds-7th-largest-container-shipper-files-bank?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29) --- ## Introduction The globalization paradox: > "The local clustering of industries constitutes a globalization paradox in that, despite powerful globalization processes, a considerable part of global economic production is performed in such regions (Scott and Storper, 2007)." --- ## Introduction ### Porter's Diamond: the role of geography <img src="session5_resources/locationalCompetitiveAdvantage.png" width="600px" style="display: block; margin: auto;" /> --- ## Introduction ### Porter's Diamond: the role of government <img src="session5_resources/policyCompetitiveAdvantage.png" width="600px" style="display: block; margin: auto;" /> --- ## Introduction ### Externalities of industrial clusters according to Porter (2000) <img src="session5_resources/clusterExternalities.png" width="600px" style="display: block; margin: auto;" /> --- ## Introduction ### Value chain of an Airbus A320 aircraft <img src="session5_resources/airbusA320.png" width="600px" style="display: block; margin: auto;" /> --- ## Introduction ### Value chain of a t-shirt <img src="session5_resources/tShirtTravel.png" width="600px" style="display: block; margin: auto;" /> --- ## Introduction Keyword: > Connectivity <img src="session5_resources/reseau.png" width="600px" style="display: block; margin: auto;" /> --- ## 1. Networks between industrial clusters in different industries ### Index of working relations between lead firms and suppliers in the automobile industry <img src="session5_resources/indexGVC.png" width="700px" style="display: block; margin: auto;" /> Source: Sturgean et al. (2008) --- ## 1. Networks between industrial clusters in different industries - A consequence of the rise in Global Value Chains (GVC) is that international trade is increasingly dominated by the **trade in services** instead of **trade in goods** (Grossman and Rossi-Hansberg 2008). - Countries no longer exchange goods that have been produced in their entirety in the exporting country. On the contrary, an increasing share of international trade is the exchange of parts and components within the GVC, namely the **trade in services**. --- ## 1. Networks between industrial clusters in different industries - Trade in **intermediate products** accounts for about 2/3 of international trade (Johnson and Noguera 2012). - In addition, countries rely **increasingly on inputs** imported to produce their exports. --- ## 1. Networks between industrial clusters in different industries 1. Why was there a rise in GVC in recent decades? 2. How are Canada and Quebec involved in GVC? 3. What are the implications for the competitiveness of Quebec and Canada? (New OECD / WTO Database on Value Added Trade (VAT)) --- ## 1. Networks between industrial clusters in different industries > The value chain is the sequence of activities (or services) that a company carries out to design, manufacture, market, deliver, and provide after-sales service for a product. It is important to note that a value chain is not only **physical transformation processes** (main activities) but also **support activities** that are generally in the service sector. These include R&D, procurement, human resource management, and other tasks that are considered to be activities with **higher added value**. --- ## 1. Networks between industrial clusters in different industries - The value chain concept captures two **key forces** to understand the emergence of GVC: 1. Activities in a **value chain are linked to one another**. A subsidiary of a company **US** in **Canada**, for example, would require funding from its head office in the United States, inputs made in **Mexico**, and The information that is sent from its R&D center to **Ireland**. > The cost of obtaining these goods, capital, people and know-how tends to increase with distance, thus acting as a **centripetal** force to co-locate tasks in the same place. --- ## 1. Networks between industrial clusters in different industries 2. A quick look at the various activities in the value chain suggests that they are very heterogeneous. Tasks such as R&D and marketing are knowledge intensive. > On the other hand, tasks such as assembly are often labor-intensive. These heterogeneous characteristics of tasks create a **centrifugal** force to relocate tasks in countries that have a comparative advantage in the production of tasks. --- ## 2. Changes in inter-cluster networks through time - The increase in GVC can be attributed to the fact that the **centripetal force** has diminished during the last decades, while the **centrifugal force** has increased. - This has prompted many companies to split their supply chains and divide their activities among several countries, **forming global value chains (GVC)**. --- ## 2. Changes in inter-cluster networks through time - Four forces linked to globalization have reduced the centripetal force in the GVC: (i) improvement of information and communication technologies, (ii) reducing transport costs, (iii) trade liberalization, and (iv) liberalization of investment. --- ## 2. Changes in inter-cluster networks through time - The reduction of **centripetal forces** is not sufficient to generate GVC. Companies must also have an economic incentive to disperse the production of tasks in several countries. - The production of a task always requires a combination of inputs such as manpower, technology, capital, knowledge, etc. And this combination of inputs may differ considerably for tasks along the value chain. R-D, for example, is a knowledge-intensive task. Assembly, on the other hand, is generally a standardized, repetitive and labor-intensive task. --- ## 2. Changes in inter-cluster networks through time - According to the traditional theory of comparative advantage, companies have the incentive to locate services that **intensively** use certain inputs to countries with an **abundance of these inputs** in order to reduce these costs (Jones and Kierukowski, 1990; Van Assche, 2012). --- ## 2. Changes in inter-cluster networks through time > This specialization scheme gives rise to the "smile of value creation" (Mudambi, 2008). - A strategic concern for developed countries such as Canada is **how to maintain and increase** their specialization in high value-added activities. - For developing countries, the concern is **how to become a producer of higher value added services** (Taglioni and Winkler, 2014). --- ## 2. Changes in inter-cluster networks through time ### The smile of value creation <img src="session5_resources/cvmSourire.png" width="600px" style="display: block; margin: auto;" /> --- ## 2. Changes in inter-cluster networks through time - How important are GVC in international trade? > Trade flows between countries are traditionally measured on a **gross** basis where all the value is attributed to the country that exported the product. However, since a country often uses imported components to manufacture its exports, the gross export value does not necessarily correspond to the domestic value added in exports. --- ## 2. Changes in inter-cluster networks through time - Xing and Detert (2010) estimate that each iPhone assembled by the Taiwanese firm Foxconn in China adds US$ 178.96 to Chinese exports. - However, the value added created in China represents only 3.6% of the gross export value. - There is now an understanding that data on **gross exports do not reflect the added value** that has been created in a country, and that this may lead to a misinterpretation of how value added is exchanged between countries (Johnson, 2014, Koopman et al., 2014). --- ## 3. Globalization of value chains and effects on industrial clusters ### Organization of gross exports between trade in GVC and regular trade <img src="session5_resources/cvmCommerce.png" width="600px" style="display: block; margin: auto;" /> --- ## 3. Globalization of value chains and effects on industrial clusters Integration in the GVC: - **GVC-E** is the backward linkage that the exporting country creates in the GVCs using the imported inputs to produce its exports. - **GVC-D** is the forward linkage that the exporting country creates in the GVC by exporting intermediate goods that are then used for the production of exports from other countries. - The third part is the domestic added value created in a country that is not part of the GVC. > How important is GVC trade in world exports? --- ## 3. Globalization of value chains and effects on industrial clusters ### Share of the GVC trade in gross world exports <img src="session5_resources/cvmExportations.png" width="600px" style="display: block; margin: auto;" /> --- ## 3. Globalization of value chains and effects on industrial clusters ### Share of the GVC trade in gross world exports, by region <img src="session5_resources/cvmExportationsRegions.png" width="600px" style="display: block; margin: auto;" /> --- ## 3. Globalization of value chains and effects on industrial clusters ### US and EU participation rates <img src="session5_resources/cvmUsaEu.png" width="600px" style="display: block; margin: auto;" /> --- ## 3. Globalization of value chains and effects on industrial clusters Why is Canada so weakly integrated into GVC compared to other countries? - Exports of **extractive industries** such as oil account for just over one-quarter of all Canadian merchandise exports. This sector is **inherently weakly integrated** at the rear in the GVC, with few imported components contained in its exports. In addition, mining products are mainly exported to the world's largest economy, the United States, which relies relatively little on imported inputs to produce exports. --- ## 3. Globalization of value chains and effects on industrial clusters The **GVC-E / GVC-D** ratio can be used to identify whether a country is relatively upstream or downstream in the GVC: - A **high ratio** indicates that the country is **upstream of the GVC** by producing mainly intermediate goods that are used for exports from other countries. - A **low ratio** suggests that the country is **downstream in the GVC** using inputs imported for its exports. --- ## 3. Globalization of value chains and effects on industrial clusters - The scatter plot suggests that **the GVC-E / GVC-D ratio increases with the GDP per capita of a country**. --- ## 3. Globalization of value chains and effects on industrial clusters ### Position of European and North American countries in the GVC <img src="session5_resources/cvmRatios.png" width="600px" style="display: block; margin: auto;" /> --- ## 3. Globalization of value chains and effects on industrial clusters Who consumes the finished products manufactured by GVC? - The figure below shows that about **40% of domestic value added** in North American exports is finally consumed **intra-regional**. - This share is higher than in Asia, which in 2008 saw about 30% of its domestic value added consumed internally in Asia. - On the other hand, the share is lower than in Europe, where 55% of its domestic value added is consumed internally in Europe. Value chains are therefore **rather regional than global**. --- ## 3. Globalization of value chains and effects on industrial clusters ### Share of the Canadian value added in exports <img src="session5_resources/cvmCanadaExports.png" width="600px" style="display: block; margin: auto;" /> --- ## Conclusion - To be able to carry out these analyzes of the effect of trade policies on the Quebec economy, there is an urgent need for new data and analysis. - Value-added exchange data do not exist at the Quebec level, so we do not have a good idea how our companies are integrated into GVC. More efforts are needed in the future to develop quantitative measures of Québec in the GVC.