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Relocating the value chain: offshoring agglomeration in the global economy

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Relocating the value chain: offshoring agglomeration in the global economy

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    1. Relocating the value chain: offshoring & agglomeration in the global economy Richard Baldwin Tony Venables 10 September 2010 ETSG, Lausanne

    2. The 1st & 2nd unbundlings 1st unbundling: Spatial separation of production & consumption. 2nd unbundling: 2.1 Factories. 2.2 Offices. 2

    3. 1st unbundling & specialisation Lower trade costs opened door to separation. Scale economies & competition pushed economy through the door.

    4. Globalisation’s First Unbundling 4

    5. Estimated Transport costs, 1870 - 2000 5

    6. 1st Unbundling: Separation of production & consumption Conceptual framework: “Old paradigm” Facts 1-3 (Trade, indus/de-indust, N-S inequality) Krugman & Venables (1995) “Globalization and the Inequality of Nations”. Fact 3&4 (inequality & growth take-off) Baldwin, Martin & Ottaviano (2001) “Geography of growth take-offs”. Urbanisation: Obvious result of heightened agglomeration forces. Within nation economic effects: Trade theory (Heckscher-Ohlin-Helpman-Krugman synthesis). 6

    7. Globalisation’s Second Unbundling 7

    8. The ICT ‘shock’ ICT revolution takes-off mid to late 1990s. Biggest impact on services. EU cities are mostly about services.

    9. Moore’s and Gilder’s laws

    10. Information revolution Factoids: In 2001 more information could be sent over a single cable in a second than was sent over the entire internet in a month in 1997. The cost of transmitting a trillion bits of information from Boston to Los Angeles fell from $150,000 in 1970 to 12 cents in 2001. (probably marginal cost of zero today)

    11. ICT revolution indicators 11

    12. Outward processing trade, 1967 – 2005. 12

    13. Number of Japanese auto and electrical machinery plants in East Asia, 1975 – 2004 Source: Fujita and Hamaguchi (2006). 13

    14. Widening and deepening of Factory Asia, 1985 and 2000 14

    15. Unbundling 2.1: Factory Asia

    16. Unbundling 2.1: Factory Asia

    17. 2nd Unbundling : “New paradigm” Conceptual framework “Trade in tasks, not only trade in goods” 4 Princeton professors: Blinder, Grossman&Rossi-Hansberg (and Krugman) 2.1: Factories (Grossman&Rossi-Hansberg 2009) 2.2: Offices (Blinder, Krugman) Urban – unbundling link For 2.1 (factory unbundling) same basic economics as 1.0 in terms of location effects. National economic effects different channels. 17

    18. Unbundling 2.2: Offices

    19. Unbundling 2.2 Cheap computing power + cheap telecomm: Changed work pattern in service sectors. Joint work on editable files (*.doc, *.xls, *.ppt, *.etc) Technical support, etc. Data entry ERGO: Unbundled offices (some tasks) Evidence of ICT & services trade link: Andrea Ariuy and Giordano Mion (2010)

    20. All jobs to India?

    21. Blinders’ blinders

    22. This paper Study the process of 2nd unbundling taking seriously engineering details of supply chain.

    23. Spider & Snake 23

    24. Basic assumptions Perfect competition, constant returns. All final consumption in North Shipping costs of final good ?t. Traditional trade costs Offshoring cost of a part, ?(i)? Costs that explain why factories bundled spatially even within nations. 24

    25. Specifically Parts are indexed by type y e Y Unit production cost in S is b(y); =1 in N. low b parts can be produced more cheaply in S refer to low b parts as ‘labour-intensive’ Assembly of each part costs of these are aN, aS. per-unit off-shoring costs is t?(y) if not produced in region of assembly (shipping & coordination costs). If assembly in S then ta is paid. 25

    26. Spider 26

    27. Single agent cost minimisation Assembly in S iff is greater than 27

    28. Cost minimising location 28

    29. Nash in parts location Multiple eq’m arise: 29

    30. Snake 30

    31. Snake More difficult as cannot freely re-order the parts by comparative advantage. 31

    32. Conclusion Early stage in theory development. Theory needs guidance from facts on unbundling in specific industries. Please see: www.VoxEU.org 32

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