José J. Villamil  Estudios Técnicos , Inc.  October 5, 2012

Supply Chain Driven Development José J. Villamil  EstudiosTécnicos, Inc. October 5, 2012

Presentation Plan 3 7 13 18 A New Economic Vocabulary The Global System Supply Chains Policy Implications

A New Economic Vocabulary • Globalization and Technology have transformed the meaning of economic terms • Manufacturing and Advanced Services have merged creating a new sector • External linkages are now more complex than just trade and have changed the meaning of the external sector

A New Economic Vocabulary • GDP and GNP have been questioned as to their usefulness • Occupational classifications, as well as needs, have been transformed by technology • New terms such as “Input Trade Theory” have gained prominence • Risk Management is now part of the economic development lexicon

A New Economic Vocabulary • Comparative Advantage as the guiding principle for trade is no longer valid, we now use competitive advantage • Trade between nations involving movement of goods from one jurisdiction to another has given way to intangibles, intra-company trade and the Internet as key trade components.

A New Economic Vocabulary • Balance of Trade and Balance of Payments are no longer the measuring sticks of success or failure • The Bretton Woods world as the context for trade policies has been superseded by the new Group of 20 guidelines • Trade policy is now a component of a broader set of policies aimed at assuring effective insertion in the global economy.

The Global System • Production is no longer place bound • Distance has lost its constraining effect on economic activity and trade • Vertical integration has given way to horizontal integration and what has been called the “network” firm • As a result, intermediate goods are now a key component of trade

The Global System • Location of production activities has become the driver of trade through horizontal integration of firms • A new globalization centered in Asia is developing, modifying initial expectations of a U.S. and European driven process

The Global System • Intangibles (including technology and knowledge transmission) now prevail and are typically underestimated • Key components of intangibles trade: • Financial services • Education • Medical tourism • Technology • Knowledge Intensive Business Services • Others

The Global System • The channels through which trade occurs have also changed, as a result air and sea transportation have given way to electronic means • The internet is an increasingly important channel for the exchange of goods, services and knowledge

The Global System • Global firms maximize global income • The location of profit depends on tax considerations and not comparative advantage • Trade depends on where tax conditions indicate values of traded goods should be assigned • The result is profit shifting through transfer pricing, an accepted part of global firms’ business models

The Global System • Trade is no longer the only channel for integration or even its most important one • Integration now takes place through: • Technology transfers • Mergers and consolidations • Collaborative arrangements for material and knowledge production • Supply chain networks • Offshoring • External investment by domestic firms • International division of labor within the same firm • Population movements

Supply Chains “The supply chain is the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer.” Martin Christopher, Logistics and Supply Chain Management, Prentice Hall, 2005

Supply Chains • Supply Chains are increasingly important in economic development and trade • They lead to both trade between nations and internal exports, exports that do not cross national boundaries • The Basic / Non-basic distinction becomes crucial in determining economic priorities

Supply Chains • Completion of value chains has become a critical component in Development Policy • The increasing dependence on “offshoring” or “outsourcing” supply chains has, however, generated uncertainty and generated additional risk factors • Completing value chains within an economy’s boundaries is assuming a higher priority in development planning

Supply Chains • The evolution of the concept1 • Vertical integration and internal supply chains as the dominant approach in early 20th century • Horizontal integration and the network firm, beginning in the Post WWII years • The more recent development of complex networks, permitted by technology, interacting in unpredictable ways generate greater risk for firms and countries • 1. This section is based on work by SandorBoyson of the University of Maryland’s Supply Chain Center.

Supply Chains • From “chain links” and one on one interactions to networks and increased complexity • Risks and uncertainty in global networks have generated the need for control systems on the part of multinational firms • Supply Chain Management has become the management of complex networks and how these interact with others

Financial capital flows Population Technology flows Internal structures and processes Trade DFI Information flows Policy implications An economy as an open system In a small, open economy linkages with its external environment are determining factors in the organization of internal economic structures and processes, and thus, should be the focus of economic policies. The capacity to analyze the external context and relate it to internal objectives is essential.

Policy implications • Network creation and management should become a core competence for small, open economies • Exports should be stimulated but they are no longer the principal link to the global economy • Effective insertion in the global economy should be the key objective, not just exports as traditionally defined

Policy Implications • Supply Chain Policy in an Open Economy • Internal linkages and local value chain completion add value and reduce uncertainty • Law 73 has incentives to promote such links, but these are insufficient • Concrete measures and initiatives are still needed to make it possible for local firms to be effective participants in global and local supply networks

Policy Implications • Export promotion must incorporate “exports within boundaries”, a result of local supply chain linkages • Supply chain networks must include knowledge production, an area in which Puerto Rico has serious critical mass deficiencies • Denmark provides a “best practice” model of a small, open economy that has achieved success through integration with global knowledge production networks

Policy Implications Implementing the suggested approach • Understanding global transformations not just in markets, but also in technology, key players, market structures and geo-political conditions. • Having an institutional framework that makes it possible for the strategic intelligence on global issues to be translated into effective action. Ours was designed for an economic scenario that no longer describes today’s global context.

Policy Implications • The private sector has to be part of these efforts and it also must clearly understand the rapidly changing global context. Reading The World is Flat won’t do. • Promotional strategies must have two dimensions: be compatible with global trends and promote stability and sustainability.

Policy Implications • Intuition is no longer an adequate guide for economic policymaking given the complexity that characterizes development processes. • For small very open economies like Puerto Rico, economic policymaking must necessarily be seen as risk management

Thank you! Domenech 113 Hato Rey, Puerto Rico 787-751-1675 Jvillamil@estudios-tecnicos.com www.estudiostecnicos.com

José J. Villamil  Estudios Técnicos , Inc.  October 5, 2012