Development of Methodologies and Measurement Methods to analyse Global Value Chains

1. Development of Methodologies and Measurement Methods to analyse Global Value Chains COST expert meeting Leuven 28.-29. April 2011 Peter Bøegh Nielsen Statistics Denmark

2. Contents • Survey on measuring International Sourcing • Background • Definition of International Sourcing • Definition of Business Functions • Survey design and results • Micro Data Linking • Measuring Global Value Chains • Definition of Global Value Chains • Measurement approaches • Survey design

3. The starting Point 2006: Anecdotal evidence…This is the 8.15 to Mumbai… It is carrying Indian commuters, on the way to do YOUR JOB

4. … and only few statistical sources • Trade statistics (goods and services) • FDI • Input-Output tables • Balance of Payment • Structural Business Statistics

5. Policy issuesaddressed • How many jobs are moved acrossborders? Which type of jobs and in which sectors? • Who are the receiving countries? • What are the overall employment impacts – in terms of job losses or gains? • What is the impact of international sourcing on the competitiveness of European firms? • Is there a risk of “hollowing out“ skill based activities?

6. Measurement Challenges Transnational activities Inter-enterprise relations Intra-enterprise organisation Introducing new concepts 6

7. Definition of International Sourcing The total or partial movement of business functions (core or support business functions) currently performed in-house or domestically outsourced by the resident enterprise to either non-affiliated (external suppliers) or affiliated enterprises located abroad. 7

8. Definition of insourcing and outsourcing

9. INPUT LABOUR ENTERPRISE PRODUCTION OUTPUT GOODSTURNOVER € £ $ The Business Statistics Approach Opening the black box of the enterprise

10. Opening the black box of the enterpriseby introducing 8 generic Business Functions • Core business function: • Production of final goods or services intended for the market/for third parties carried out by the enterprise and yielding income. • Support business function: • Support business functions (ancillary activities) are carried out in order to permit or facilitate production of goods or services intended for the market/for third parties by the enterprise. • Distribution and logistics • Marketing, sales and after sales services • ICT services • Administrative and management functions • Engineering and related technical services • Research & Development • Other support functions 10

11. Model Questionnaire Module 1: General information (for all enterprises) Module 2: Sourcing activity of the enterprise (for all enterprises) Module 3: Sourcing activity of the enterprise carried out inter­nationally during 2001-2006 (for enterprises carrying out international sourcing in 2001-2006) Module 4: Plans for international sourcing 2007-2009 (for enterprises with no prior international sourcing activity) Module 5: Future impact on employment (for enterprises with international sourcing during 2001-2006 and/or plans for international sourcing during 2007-2009) Module 6: Barriers on international sourcing (for all enterprises) 11

12. Share of enterprises carrying out international sourcing

13. Destinations for international sourcing. Core functions

14. International sourcing by business partner. Share of enterprises with international sourcing

15. Cost reductions as driver of international sourcing. Share of enterprises with international sourcing reporting the factor as Very important

16. Enterprises sourcing R&D functions and engineering functions; share of enterprises sourcing internationally (%)

17. Destinations for sourcing R&D functions; share of enterprises sourcing these functions (%)

18. Sourcing intensity, breakdown of enterprises by the number of functions sourced

19. Contents Survey on measuring International Sourcing Background Definition of International Sourcing Definition of Business Functions Survey design and results Micro Data Linking Measuring Global Value Chains Definition of Global Value Chains Measurement approaches Survey design

20. Micro Data Linking Project • Developing methodology for micro data linking • Utilising existing statistical registers: International Sourcing survey, SBS and Foreign Trade • Focusing on measuring impacts on employment and trade patterns

21. 4 main hypothesis • International sourcing has a negative impact on domestic employment • International sourcing implies higher personnel costs per employee domestically (low-skilled jobs are being sourced internationally) • International sourcing has a positive impact on value added creation per employee • International sourcing has an influence on foreign trade patterns

22. Contents Survey on measuring International Sourcing Background Definition of International Sourcing Definition of Business Functions Survey design and results Micro Data Linking Measuring Global Value Chains Definition of Global Value Chains Measurement approaches Survey design

23. Why expand the scope to GVCs? • Demand from policy makers: EU 2020 strategy: The Commission will draw up a framework for a modern industrial policy. The framework will address all elements of the increasingly international value chain from access to raw materials to after-sales service. • Real economy justification: Increased fragmentation of the production chain Increased digitalization of tasks, especially services Growing global trade in intermediates Rising trade between affiliates

24. What is a global Value Chain? • Global Value Chains encompass the full range of activities that are required to bring a good or service from conception through the different phases of production – provision of raw materials; the input of various components, subassemblies and producer services; the assembly of finished goods – to deliver to final consumers, as well as disposal after use. • In the context of globalization, the activities that constitute a value chain are generally carried out in interfirm networks on a global scale. (Cattaneo, Gereffi and Staritz (2010))

25. Measuring GVC’s: The micro approach Hard Drive by Toshiba  Japanese company, most of its hard drives made in the Philippines and China; it costs about $73 - $54 in parts and labor -- so the value that Toshiba added to the hard drive was $19 plus its own direct labor costs 451 parts that go into the iPod Video/multimedia processor chip by Broadcom American company with manufactures facilities in Taiwan. This component costs $8. The retail value of the 30-gigabyte video iPod that the authors examined was $299 in June, 2007 Controller chip by Portal Player American company with manufactures .This component costs $5 . • Final assembly done in China, costs only about $4 a unit The unaccounted-for parts and labor costs involved in making the iPod came to about $110 The largest share of the value added in the iPod goes to enterprises in the United States $163 of the iPod’s $299 retail value in the United States was captured by American companies and workers, breaking it down to $75 for distribution and retail costs, $80 to Apple, and $8 to various domestic component makers. The bulk of the iPod’s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain. Apple figured out how to combine 451 mostly generic parts into a valuable product. Source: Varian, Hal R. The New York Times, June 28, 2007. An iPod Has Global Value. Ask the (Many) Countries That Make It.

26. Measuring GVC’s: The industry approach Source: CGGC (http://www.cggc.duke.edu), More Information: Global Value Chains (www.globalvaluechains.org ) 26

27. Measuring GVCs: The macro approach

28. Measuring GVCs: The meso approach • The project is not going to measure individual products or firms as case studies or utilize macro economic statistics as indicators but to survey a representative sample of enterprises to produce enterprise statistics reflecting the importance of GVCs. • The proposed method will be to describe a phenomena, which is difficult to observe (GVCs) by observable variables (the questionnaire contents) • The impacts of GVCs will be analysed by micro data linking utilising existing statistical registers

29. Issues to be addressed (1) Revising the scope Not only measure movements but also structures (2) Developing a standardised classification of business functions Utilise existing methodological experiences to develop and propose a classification (3) Revising the questionnaire How to measure the volume of business functions? (4) Furthering micro data linking Build upon existing experiences and include new registers, e.g. FATS, R&D 29

30. CORE FUNCTIONS SUPPORT SUPPORT C. FUNCTIONS Measuring GVCs

31. Lead Firm Lead Firm Lead Firm Component and Material Suppliers Component and Material Suppliers Five GVC Governance Types Market Modular Relational Captive Hierarchy End Use Customers Integrated Firm Value Chain Price Full-package Supplier Relational Supplier Turn-key Supplier Suppliers Captive Suppliers Materials Degree of Explicit Coordination Low High Degree of Power Asymmetry 31

32. R & D Production Logistics Sales = IP Global group head Downward intra group relations Intra-group relations (1)

33. R & D Production Logistics Sales = IP Local group head Downward intra group relations Upward intra group relations Sideward intra group relations Intra-group relations (2)

34. Types of extra-group relations

35. Developing a standardised classification of business functions • Procurement:Procurement services • Engineering and related technical services: Engineering and related technical consultancy, technical testing, analysis and certification. Distribution and logistics: Consists oftransportation activities, warehousing and order processing. • Marketing and sales services : Market research, advertising, direct marketing services (telemarketing), sales services, exhibitions, fairs and other marketing or sales services. • After sales services: After sales services including call-centre services, help-desks and other customer supports services. • ICT services: IT-services and telecommunication. IT services consist of hardware and software consultancy, customised software data processing and database services, maintenance and repair, web-hosting, other computer related and information services. Packaged software and hardware excluded. • Finance and accounting:Accounting, book-keeping, auditing and corporate financial and insurance services • Other administrative and management functions: Legal services, business management and consultancy, HR management (e.g. training and education, staff recruitment, provision of temporary personnel, payroll management, health and medical services). • Research & Development: Research and experimention and product development • Facility Management: Cleaning, maintenance and canteen services

36. R & D Production Logistics Sales PRODUCT DEVELOPER PRODUCT TAKER = IP External provider Extra-group relations

37. Proposed Modules for Testing 1. GENERAL INFORMATION • THE VALUE CHAIN (END OF 2010) BUSINESS FUNCTIONS ABROAD: FOREIGN AFFILIATES BUSINESS FUNCTIONS ABROAD: EXTERNAL SUPPLIERS • INTERNATIONAL SOURCING 2007-2011 INTERNATIONAL SOURCING OF BUSINESS FUNCTIONS INTERNATIONAL BACKSOURCING OF BUSINESS FUNCTIONS TASKS RECEIVED DUE TO THE INTERNATIONAL SOURCING BARRIERS TO INTERNATIONAL SOURCING LOCATION OF SUPPORT FUNCTIONS 4. OTHER CHANGES IN VALUE CHAIN ACTIVITIES 2007-2011 5. FUTURE STRUCTURE OF VALUE CHAIN 2012-2015 (OPTIONAL) FUTURE PLANS FOR FOREIGN AFFILIATES FUTURE PLANS FOR INTERNATIONAL SOURCING 6. COMMENTS AND CONTACT DETAILS (OPTIONAL)

38. Example of question on GVC (1)

39. Example of question on GVC (2)

40. The Road ahead • Revision of questionnaire July 2011 • Launching of new survey Q.4 2011 • Full scale survey 2012 (first half) • Dissemination of results 2013 • Micro data linking 2012 (second half 2012) • Dissemination of results 2013

41. Thank you for your attention! If any questions, you are most welcome to contact me : pbn@dst.dk