Statistical Insights: Inclusive Globalisation, does firm size matter?

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OECD Statistics Directorate

The rapid increase in global value chains (GVCs) in the last two decades, in response to falling communication costs and reductions in trade barriers, has in large part been fuelled by large and multinational enterprises.  But across the OECD, 99.8% of enterprises are classified as SMEs, very few of which engage in international trade. Yet collectively, SMEs are responsible for two-thirds of employment and over half of economic activity in the OECD. This has raised policy concerns about the inclusive nature of globalisation and more specifically whether SMEs, and their employees, are less able to benefit from GVCs. While it is clear that SMEs face particular and more significant challenges to exporting compared to larger firms  (see for example the OECD Statistical Insights Who’s Who in International Trade) it is also true that direct export channels are not the only mechanism available to SMEs for integration into GVCs. A new report by the OECD, Nordic Countries in Global Value Chains, developed in collaboration with national statistical offices in the Nordic countries, shows that SMEs play an important role in GVCs as suppliers of larger exporting enterprises. In particular, it highlights that in the Nordics, more than half of the domestic value added of exports originates in SMEs.

In the Nordic countries, indirect exports through GVCs by Independent SMEs are around twice as important as their direct exports…

A significant share of total value-added (and hence employment) generated by SMEs is dependent on foreign markets, with the contribution of exports provided via indirect channels rising the smaller the firm. For example, while only 5% of value added generated by independent micro SMEs (SMEs with less than 10 employees) in Sweden is exported directly, an additional 24% of their value added is generated through value chains of downstream exporters, highlighting the significant dependencies of these firms on foreign markets. Figure 1 further illustrates this by separating dependent SMEs (firms with fewer than 250 employees which are part of a larger enterprise group) from independent SMEs (similar firms that do not have such ties). It shows that for the latter category, indirect exports are more than twice as important as direct exports.

Figure 1. Share of domestically produced value added that is exported

….reflecting the important channels provided by larger firms and MNEs…

Larger enterprises provide important channels for SMEs to access foreign markets and benefit from international growth, in particular in emerging economies where barriers to direct exports may be onerous for SMEs. Figure 2 illustrates that 28% of all SME’s exports are channelled through larger firms, with a significant share reflecting MNEs (both foreign and domestically owned).

Figure 2. Channels through which SMEs link to foreign markets

….which generate significant spillovers for jobs and income…

In turn, a quarter of every dollar of GDP created by exports of large firms reflects the value of goods and services provided by upstream SMEs (Figure 3), thus highlighting the important role larger firms can play in generating upstream spillovers in the form of income and employment. Indeed, in the Nordic countries, on average, each unit of value added by large exporting firms generates an additional 0.66 units of value-added in upstream (large and small) suppliers. This partly reflects the stronger focus of large firms on their core business functions. In this respect, it is also useful to mention that larger firms also typically include a larger share of imports in their exports: in other words, a higher import content of exports can go hand in hand with strong domestic supply chains.

Figure 3. Upstream contribution to exports of large enterprises: per cent of total domestic value added

..…particularly for SMEs in the services sector.

Upstream spillovers generated by larger firms are especially important for SME services providers. As Figure 4 illustrates, around 20% of the domestic value added exported by large manufacturing firms consists of services provided by upstream SMEs. Overall, services account for over 4o% of the gross exports of the main manufacturing industries. This shows the importance of e.g. efficient logistic services providers, and specialised business services such as accounting and legal services, for manufacturing exports.

Figure 4. SME services providers’ contribution to exports of large manufacturers

Policy relevance

The findings in the report Nordic Countries in Global Value Chains summarised above highlight the importance of policy measures (e.g. improved access to finance, skills and technology transfers that recognise the upstream role of SMEs in driving competitiveness of downstream exporters, as well as their ability to disperse the benefits of trade more widely), as complements to more ‘traditional’ measures that focus on direct exporters, such as removing red tape, special (export) financing schemes, and facilitating match-making with business partners abroad.

The measure explained

The indicators on the role of SMEs in GVCs have been developed via a unique and innovative collaboration between the OECD and the Statistical Offices in Denmark, Finland, Norway and Sweden. This cooperation allowed for the linking and integration of detailed and harmonised micro data into the Inter-Country Input-Output (ICIO) table that underpins the OECD-WTO Trade in Value Added (TiVA) indicators. Building upon standardised national linked micro datasets in all four countries, a shared SAS program ensured that identical calculations were performed in all countries without the microdata having to leave National Statistical Offices. The full report includes a detailed methodological annex that describes how data were combined and indicators derived.

The domestic value added in exports reflects the value of exports that is domestically produced (i.e. not imported), either by the exporting firm itself, or by its upstream suppliers (i.e. value that is indirectly exported).

Useful links

This Statistics Insights accompanies the report “Nordic Countries in Global Value Chains”, which examines the role of SMEs, MNEs and trading enterprises Nordic Global Value Chains. The report can be downloaded here.

More information on Trade in Value Added (TiVA), the indicators and the ICIO table can be found at http://oe.cd/tiva.

From a Free Trade Regime to a Responsible Trade and Investment Regime

the-elephant-graph
The elephant in the room

Marten van den Berg, Director-General for Foreign Economic Relations, Ministry of Foreign Affairs, The Netherlands

Today’s economy is unquestionably global. National markets for goods and services have become increasingly integrated. This process of globalisation has taken place over the past centuries. But during the period of 1987-2000 we saw a big leap in globalisation. And we saw a rapid development of Global Value Chains (GVC’s). Many countries have benefitted enormously from this process of globalisation. Not only high income countries, but also hundreds of millions of people in low and middle income countries have been taken out of poverty because of international trade and investment.

International trade and investment generate employment and income. But they are also a channel for knowledge transfer, technology flows and for specialisation according to comparative advantage. Through trade, firms get better access to cheaper and better quality inputs. And cheap imports raise consumer welfare. Openness matters for growth. This is why so many trade agreements have been negotiated between so many countries. Or why now 154 countries are a member of the WTO.

There is substantial evidence that trade agreements have a significant effect on trade and investment relations and therefore on jobs and productivity growth. However we should acknowledge that there are also income and distributional effects. Some sectors will experience significant expansions, other sectors will contract. Productive firms gain from international trade, others will lose. At the same time some workers will see a rise in their wages, others will see their wages stabilise or decrease. The famous “elephant graph” illustrates where there are losers (low-middle income group in US/Europe/Japan) and where we see winners (middle income class in China and India).

The shift in relative importance of different sectors as a consequence of international trade and investment generates labour and capital displacement. This will lead to adjustment costs for those that need to change employment. These adjustment costs have raised questions about the benefits of international trade and investment. But there are also concerns about fairness (unfair competition) and about the relation between international trade and investment regimes and labour and environment standards. And concerns that international regimes limit room for manoeuvre at a national level.

In 2007 the process of rapid globalisation came to an end. Growth in global trade today is less than half the growth during the two decades prior to the global financial crisis. This slowdown is largely the result of the decline in investment, the rebalancing of China and the shortening of the GVCs. But stalled liberalisation in trade and the increase of protectionism are also holding back international trade and investment.

Together with the decline in global trade, we see more and more people standing up against international trade and investment agreements. For example, neither candidate in the US presidential race supports a free trade agenda. In Europe there is a lot of resistance against TTIP. Also among economists we see a more intensive debate about the winners and losers of international trade and investment.

The lack of progress in trade liberalisation and the opposition to international trade and investment agreements is understandable, but still bad news. We should not forget that international trade and investment are important sources for productivity growth. In fact, it is one of the few proven sources of productivity growth in a world that is characterised by low productivity growth. And reducing trade costs in low and middle income countries where the poor live increases the competitiveness of the goods and services traded by poor people in the lower income groups. And in an increasingly digitalised world even start-ups and tiny companies can operate on a global scale (mini-multinationals), making open trade essential for SMEs.  But the debate about those agreements is good news. In the past we probably were too much focused on the macro benefits of free trade and investment and did not sufficiently address the concerns among society of international trade and investment. Concerns about unfair elements of the international trade and investment system, about the negative effects of international trade on labor and environment standards, and about the adjustment costs of international trade and investment.

These concerns are genuine. How should we respond? Refusal to acknowledge these concerns undermines international trade and investment relations. So we have to rebalance our trade and investment policies. We have to shift from trying to organise a free trade regime to an architecture of a responsible trade and investment regime. We need to make the international trade and investment system fair and sustainable and inclusive. First we have to address the complexity issue of the system and include new economic and social developments. Secondly we need public discussion and consultation about those international trade and investment agreements. And finally, but perhaps most important, we need effective national policies to adequately complement international trade and investment policies.

Complexity and new issues

Through GVC’s markets and companies, including SMEs, are connected in many ways. Today our international markets are highly complex. It is almost impossible to regulate this complex system in a sustainable and fair way through a spaghetti bowl of regional and bilateral trade and investment agreements. We have to return to a more global architecture of the international trade and investment regime. We need a revival of the multilateral system. Therefore it is good news that we have seen small successes in the WTO negotiations in Bali and Nairobi. But a new success in Buenos Aires is also crucial. Not only on the Doha Development Agenda issues, but also on other issues relevant to international trade and investment. For example digital trade. But also on investment we have to focus more on a global architecture. The outcome of the G20 under Chinese presidency in concluding non-binding principles for investment was a very important step. We should continue on this path and international organisations like the OECD and UNCTAD can and should play a major role in this process.  The issue of sustainability should be an integral part of this agenda. Therefore it is good news that among the non-binding principles for investment responsible business conduct is one of them. The OECD guidelines for Multinational Companies are of key importance here.

Get stakeholders involved

Second, it is extremely important that relevant stakeholders are involved in the process of designing and implementing international trade and investment agreements. CETA is a very good step forwards in this respect. Canada and the European Union have committed themselves to a stakeholder consultation process: employers, unions, business organisations and environmental groups are getting a key role in the implementation of CETA. In the future public discussions and stakeholder involvement should be an integral part of our international trade and investment agenda. That’s the way to make trade and investment a “race to the top” in terms of standards.

Complementary national policies

Finally, national policies need to effectively complement international trade and investment policies. More (pro-)active labour market and social security policies are needed to minimise adjustment costs. We need targeted education and skill policies to help vulnerable groups to keep up with the fast changing demands of labour markets. We need stronger tax policies to address the issue of inequality, e.g. implementing the OECD guidance on tackling Base Erosion and Profit Shifting (BEPS). In lower income countries national policies are needed in order to address challenges like lack of infrastructure and education to ensure that lower trade barriers actually benefits the poor.

To conclude, we need to shift from a free trade regime to a sustainable and inclusive trade and investment regime. And we need national policies to make globalisation work for all. I look forward to discuss this in the meeting of the Global Strategy group at the OECD on 28-29 November. These changes are needed and the only way to restore public trust and to build public support for globalisation and for an international trade and investment regime. And we absolutely need this, because international trade and investment are crucial engines for productivity growth, for implementing the SDGs and to abolish poverty.

Useful links

OECD work on trade

International trade: Free, fair and open? Patrick Love, OECD Insights

Tackling modern slavery in global supply chains

How many slavesRoel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct (@nieuwenkamp_csr)

The recent migrant crisis paired with shocking exposes of labour issues in global supply chains has heightened public attention to modern slavery, forced labour and human trafficking. Children working in cobalt mines for the Apple and Samsung supply chains, Syrian refugees working under terrible circumstances for garment supply chains in Turkey, Rohingya refuges working as slaves in the Thai fishing industry and North African migrants working in agriculture in Italy and Spain.

The International Labour Organization estimates that 21 million people are victims of forced labour, of which 44% are migrants. In total, forced labor generates an estimated $150 billion in illegal profits every year. A recent ETI survey found 71% of companies suspect the presence of modern slavery in their supply chains.

In response, a number of binding regulations regarding modern slavery in supply chains have been introduced. On an international level, the ILO has adopted the Forced Labor Protocol that requires States to take measures regarding forced labor. Domestically, the California Transparency in Supply Chains Act of 2010 is intended to ensure consumers are provided with information about the efforts to prevent and eradicate human trafficking and slavery from their supply chains. President Obama also launched a far reaching executive order to avoid human trafficking in federal contracts and passed a law allowing for stronger enforcement of the Tariff Act of 1930, which aims to block the import of products to the US produced using child labour.

Currently two lawsuits related to slave labour in supply chains of Thai shrimp are pending against well-known multinationals in US federal courts. Likewise earlier this year the US Supreme Court declined to hear an appeal for the dismissal of a lawsuit alleging that three large multinational enterprises aided and abetted child slave labor on cocoa plantations in Africa.

The recent UK Modern Slavery Act applies to all companies that do any part of their business in the UK if they have annual gross worldwide revenues of £36 million or more each year. These companies have to publish an annual slavery and human trafficking statement. The OECD Guidelines for Multinational Enterprises are referenced in the statutory guidance of the Act, noting that “whilst not specifically focused on modern slavery, they provide principles and standards for responsible business conduct in areas such as employment and industrial relations and human rights which may help organisations when seeking to respond to or prevent modern slavery.’’

The OECD Guidelines are recommendations to companies backed by 46 adhering governments and recommend that companies carry out supply chain due diligence to identify, prevent, mitigate and account for all adverse impacts that they cover, including child labour and forced labour. The OECD has developed more detailed guidance on how these expectations can be responded to in specific sectors. The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, the global standard on mineral supply chain responsibility, provides a 5 step framework for due diligence to manage risks in the minerals supply chain including forced and child labour in the context of artisanal mining. The FAO and OECD recently jointly developed a Due Diligence Guidance for Responsible Agricultural Supply Chains which also provides due diligence recommendations to manage risks related to forced labour and child labour in high risk agriculture sectors including palm oil and cocoa. Such approaches could be applied in the Thai shrimping industry as well. The OECD is also developing a Due Diligence Guidance on Responsible Garment and Footwear Supply Chains, which provides specific recommendations for addressing risks of forced and child labor. This Guidance will be launched later this year and will be relevant to migrant workers in textiles factories and cotton fields.

Although the OECD Guidelines are a non-binding mechanism they are accompanied by a unique grievance mechanism, the National Contact Points (NCPs). NCPs in the 46 countries that adhere to the Guidelines facilitate dialogue and mediation with companies who allegedly do not observe their recommendations. Several issues regarding forced or child labor in supply chains have been brought to the NCP mechanism and some have resulted in successful outcomes.

For example, in 2011 complaints were submitted to the NCP mechanism regarding sourcing of cotton from Uzbekistan cultivated using child labour. NCP mediation led to several agreements with companies involved in sourcing the products as well as heightened industry attention to this issue. In a follow up to the NCP processes several years later the European Center for Constitutional and Human Rights (ECCHR) concluded that the submission of the cases had encouraged traders to take steps to pressure the Uzbek government to end forced labour, although company commitment and media attention around the issue diminished over time. Nevertheless the report also noted that the NCP cases triggered investment banks to monitor forced labour issues in Uzbekistan in the context of their investments.

Other NCP cases, while not resulting in agreements between the parties have led to statements determining that certain companies were not observing the recommendations of the OECD Guidelines in the context of forced labour impacts, resulting in reputational harm to those enterprises (e.g. see DEVCOT) . Currently the Swiss National Contact Point is overseeing mediation between the Building and Wood Worker’s International (WWI) and FIFA regarding forced labor issues in Qatar. The results will have important implications for global sporting events and for managing risks of forced labour in large scale infrastructure projects.

Companies themselves have been proactive in addressing these issues. For example Nestlé, despite currently being subject to a lawsuit related to slave labour in its supply chain, participated in and released a report developed with the non-profit organization Verité which identified labour abuses in its supply chain with regard to Thai-sourced seafood.  Within the report the company outlined plans to tackle the problem, and notes that other companies that do business in this sector likely face the same risks.

Several MNEs also participate in the Shrimp Sustainable Supply Chain Task Force set up in 2014 by retailers such as Costco. This brings together manufacturers, retailers, governments and CSOs to conduct independent audits on Asian fishing vessels to ensure seafood supply chains are free from illegal and forced labour. The first round of audits is expected to be complete by July 2016.

In February this year, H&M asked all of its suppliers to sign an agreement prohibiting the use of cotton from Turkmenistan and Syria, on pain of termination in order to avoid sourcing of cotton from ISIS controlled territories, produced through forced labour. H&M also terminated a sourcing relationship with a Turkish supplier after discovering a Syrian migrant child working in its factory, responding to documented abuses against Syrian refugees in the Turkish textile industry.

Labour issues in global supply chains present a serious and pressing problem, therefore it is encouraging to see they are being taken seriously. In addition to regulatory approaches non-binding mechanisms such as the OECD Guidelines, accompanied by the NCP system, and industry initiatives have resulted in important progress and provide alternative models for managing forced labour risks throughout global supply chains. While litigating these issues can be a forceful tactic in bringing companies to account, non-judicial grievance mechanisms can provide a more affordable and more accessible platform for tackling forced labour issues.

In the context of modern slavery, all stakeholders must step up their efforts. Governments should promote due diligence in global supply chains among their companies as outlined in the OECD Guidelines and its related industry-specific instruments. Civil society can continue to be instrumental in reporting upon and exposing these issues and furthermore should rely on the NCP platform for reaching resolutions on supply chain issues with MNEs. Finally, as the current migrant crisis will last many years, companies should conduct heightened due diligence to ensure that they are not linked to forced labour throughout their supply chains, particularly in contexts with large migrant populations.

Useful links

Anti bribery ministerial

The rise of the robots – friend or foe for developing countries?

High school students design a robot in Ghana
High school students design a robot in Ghana

Johannes Jütting, Manager of The Partnership in Statistics for Development in the 21st Century (PARIS21), and Christopher Garroway, Economic Affairs Officer at the United Nations Conference on Trade and Development (UNCTAD)

In January, the World Economic Forum meeting in Davos, Switzerland saw members of the global elite extolling the virtues of the so-called “4th industrial revolution”. The catch-all term, also known as “Industry 4.0,” ties together a wide range of cutting-edge digital technologies – such as 3-D printing, machine intelligence, the internet of things, cloud computing, and big data – into a vision of a future world of work. In this brave new world, smart factories will operate by automation with machines exchanging data seamlessly. The consequences for the work force in both developing and developed countries will be huge.

To start with, the hoped-for productivity gains from the 4th industrial revolution will have a global impact on the amount, type and quality of jobs available and on worker competitiveness. Most of the worries expressed so far about the rise of the robots have focused on job losses in developed economies. But there will be consequences, too, for those developing countries that depend for their competitive advantage on low-cost, low-skilled labour. For example, we could see the re-localisation of low-skill jobs (and even many medium-skill jobs) back to developed countries that possess robots. That could turn global value chains on their head, potentially spelling their demise as a development strategy, as mentioned in some of the targets and commitments of the new United Nations 2030 Agenda for Sustainable Development and in the Addis Ababa Action Agenda.

So how can developing countries confront this possible widening of the digital divide, and its potential threat to their development strategies? One thing they need to do is turn the possibly liberating power of open data and big data to their own advantage. If data are the lifeblood of the robot revolution, then they must also be used to defend and compensate those who might lose out from these disruptive technologies.

Open data and big data can be important tools for helping entrepreneurs in developing countries maintain a stake in global value chains. Take the example of business-2-business web marketplaces like China’s Alibaba, which connects small- and medium-sized businesses to global markets. The more these businesses in developing countries can get online and engage in e-commerce, the greater chance they will have of following the changing patterns of global value chains. Another promising example is the US data-driven trade-analysis solutions company, Panjiva, which uses machine learning and data visualization tools to mine publicly available customs data. This allows entrepreneurs to identify and source new suppliers and new importers. While today a European importer might be using such tools to find a supplier in Asia, as the 4th industrial revolution kicks in, these tools may soon be connecting entrepreneurs from the developing world to robot factories in Germany, for example. But for this to work in everyone’s interest, open data standards and big data analysis skills need to be more widely embraced and prioritized in developing countries. This also means putting in place the right institutions that can allow their use to spread – and empower – citizens.

Outside factories and boardrooms, the technologies of the 4th industrial revolution can be used to enable a wide range of new services to help guarantee and protect citizen rights. The impact of these technologies is also already being felt through the expansion of public “smart” services: Smart cards and RFID technology, for example, are being used to create unique identification numbers for citizens in many developing countries, not only to improve civil registration, but also to enable financial inclusion and payment of government benefits as countries expand social protection. Agricultural productivity can also be improved: In East Africa, for example, cell-phone services are offering real-time price data to farmers.

One of the biggest challenges to embracing these new technologies in developing countries may be that the relevant policies and legal frameworks are in their infancy or non-existent, as UNCTAD’s Global Cyberlaw Tracker reveals. Data literacy, official statistical capacity and investment in 4th industrial revolution technologies are particularly low in these countries. Legal standards and frameworks are outdated or non-existent, and individual rights with respect to data collection and privacy almost unheard of.

To realize a “digital dividend” from Industry 4.0, the World Bank’s recent 2016 World Development Report says countries need to put in place “analogue components”. This means providing a level playing field for healthy competition between tech companies; raising the tech skills of all workers; and holding brick-and-mortar government accountable to citizen’s online rights. These “analogue components” are at play in the ongoing dispute in India over Facebook’s Free Basics service, which rolls out limited online services on mobile phones to underserved markets. Some see it as a promising idea for expanding the digital citizenry, helping improve poor people’s skills and use of new technology. However the telecoms regulator in India has just come out against the service because it provides free access only to some websites, rather than to the internet as a whole.

By its very nature, technology can be both liberating and disruptive. Attempting to resist it can also be futile or counterproductive. But the promise of the 4th industrial revolution suggests that disruptiveness does not have to mean divisiveness. Open data, big data and smart services, working hand in hand with the right policies, can go a long way to counterbalancing the disruption caused by robots, machine intelligence and the internet of things.

Useful links

Public-Private Partnerships for Statistics: Lessons Learned, Future Steps

Continue the conversation on twitter with Johannes (@Jo_Jutting), Chris (@chelnikov) and PARIS21 (@ContactPARIS21)

Benefiting from the Next Production Revolution

NAECAlistair Nolan and Dirk Pilat, OECD Directorate for Science, Technology and Innovation

The production of goods and services has been transformed in many ways over recent years. First, production increasingly takes place across borders, in global value chains. Second, production is increasingly knowledge-based and involves a mix of goods and services, a phenomenon also known as the “servitisation of manufacturing”. Third and closely related, a growing part of production, in particular in the services sector, is affected by digitalisation and can sometimes be delivered through digital means. And finally, a new wave of technological change is now fundamentally altering the nature of production, heralding what has been referred to as a next production revolution. Ensuring that these transformations support overall growth and wellbeing requires sound policies in many areas and is a current focus of OECD work.

Global value chains. Over recent decades, the world has witnessed a growing movement of capital, intermediate inputs, final goods and people. Technological progress and innovation, notably in transport and communication, alongside trade liberalisation, have led to the fragmentation of production across borders and across tasks. Goods and services, and their components, are produced and assembled in different locations, often geographically clustered at the local and regional level, before reaching their target markets. This partitioning of production in global value chains (GVCs) has drawn attention to the role of different stages in a GVC to overall value creation. Indicators derived from the OECD-WTO Trade in Value Added (TiVA) database point to the growing importance of global value chains for international trade and production, and point the heterogeneity and complexity of trade flows in these GVCs. Whether for domestic or international consumption, the increasing reliance of production on intermediate inputs produced elsewhere stresses the need for countries to act so as to exploit their comparative advantages and fully benefit from GVCs.

Knowledge-based capital (KBC). At the same time, sustained competitive advantage in production is increasingly based on innovation, which in turn is driven by investments in R&D and design, software and data, as well as organisational capital, firm-specific skills, branding and marketing, and other knowledge-based assets. Generating higher value-added largely hinges on the (continuous) development of superior and often firm-specific capabilities and resources. These are frequently intangible, tacit, non-tradable and difficult to replicate. Investment in KBC has become an important driver of success in GVCs. Much value creation occurs in upstream activities, such as R&D, design, and the manufacturing of key parts and components, as well as in downstream activities, such as marketing, branding and customer service. OECD countries increasingly specialise in developing ideas, concepts and services that are related to the production of physical goods, and less on the production of physical goods as such. As physical production has increasingly relocated to emerging economies, manufacturers in OECD countries rely more on complementary non-production functions to create value, using KBC to develop sophisticated and hard-to-imitate products and services.

The digitalisation of the economy and society. Important as they are, KBC and GVCs would not have provided the opportunities they have without the rise of digital technologies. These have triggered deep changes in economy and society and enable strong productivity gains. It is not just the digital sector which makes a difference, the Internet and other digital technologies are now ubiquitous and underpin economic activities in all sectors. The innovations spurred by digital technologies hold huge potential for boosting growth and driving societal improvements, including in such areas as public administration, health, education and research. For example, the creation of large volumes of data and the ability to extract knowledge and information from them (“big data”) is initiating a new wave of (data-driven) innovation and productivity gains. The analysis of these data (often in real time), increasingly from smart devices embedded in the Internet of Things, opens new opportunities for value creation through optimisation of production processes and the creation of new services. This is what some dub the “industrial Internet” as empowering autonomous machines and systems that can learn and make decisions independently of human involvement generate new products and markets.

The Next Production Revolution. As the global economy continues to transform, new technologies mix and amplify each other’s possibilities in combinatorial ways. Many potentially disruptive production technologies are on the horizon and some are already starting to have an impact, e.g.:

  • Data analytics and big data increasingly permit machine functionalities that rival human performance.
  • Robots are set to become more intelligent, autonomous and agile.
  • Synthetic biology, still in its infancy, could become transformative, for instance allowing petroleum-based products to be manufactured from sugar-based microbes, thereby greening production processes.
  • 3D printers are becoming cheaper and more sophisticated. Objects can now be printed (such as an electric battery) that embody multiple structures made from different materials.
  • Bottom-up intelligent construction and self-assembly of devices might become routine, based in part on greater understanding of the principles of biological self-construction.
  • Nanotechnology – which uses the properties of materials and systems below the 100 nanometre scale – could make materials stronger, lighter and more electrically conductive, among other properties.
  • Cloud technology is enabling the rapid growth of Internet-based services.

The precise economic implications of these and other near-term technologies are unknown. But they are likely to be large. These new production technologies will be able to significantly boost productivity, particularly if they can be diffused across less productive firms and support an inclusive growth process. New technologies could also make production safer, as robots replace humans in the most dangerous manufacturing tasks. New production technologies also hold the promise of cleaner production and the creation of an array of products that could help meet global challenges. For instance, facilities producing bio-based chemicals or plastics could help to address environmental and waste issues and generate new jobs.

Challenges for policy. At the same time, various barriers might hinder the potential impact of the next production revolution on productivity, growth, jobs and wellbeing. For one, there is still a low level of digital technology adoption in most businesses, preventing realisation of their full potential. And enabling the next production revolution is not only about technological change: benefiting from new technology also rests on the ability of firms, workers and society to adjust to change, and on government policies that ensure that this transformation is inclusive and yields broad-based gains across the population. Organisational change, workplace innovation, management and skills are some of the areas where firms will need to invest to support rapid technological change, supported by complementary public investments in education, research and infrastructure. Enabling resources to flow to the most productive and innovative firms is also essential. Trust will also be critical to maximising the social and economic benefits of the digital economy. And, as our dependency on digital technologies increases, so too do our vulnerabilities, making on-line security, privacy, and consumer protection ever more essential.

The more governments and firms understand the implications of new technologies for production, the better placed they will be to prepare for the risks, shape appropriate policies, and reap the benefits. The OECD is therefore undertaking work on possible developments in production technologies, and their risks and opportunities, so as to help policy makers and business leaders realise the benefits and minimise the costs of the next production revolution.

Useful Links

OECD work on innovation in science, technology and industry

Learning from Firms in East Asian Production Networks

production networks previewGaneshan Wignaraja, Advisor, Economic Research and Regional Cooperation Department, Asian Development Bank

Slowing growth in the Peoples Republic of China (PRC) – the world’s second largest economy – is grabbing the headlines with some suggesting a third wave of the 2008 global financial crisis. While this topic deserves attention because of its global economic implications, there is insufficient analysis of firms in global production networks (GPNs), which were at the forefront of the economic transformation in PRC and the rest of East Asia, and lessons for latecomers to GPNs.

GPNs entail a type of sophisticated industrial organization which is different from a textbook idea of a single large vertically integrated factory situated in a country. It involves the location of different production stages (e.g. design, assembly and marketing) across different countries, linked by a complex web of trade in intermediate inputs and final goods. For example, the Toyota Prius – a hybrid electric mid-size hatchback car – for the US market was designed in Japan and is presently assembled there. But some parts and components for the Prius are made in Thailand, other ASEAN economies, and the PRC.

The extent of East Asia’s participation in GPNs is significantly greater than elsewhere and has spurred the region’s global rise to the coveted “Factory Asia” league with rapid growth and rising per capita incomes over several decades. East Asia’s share of world production networks exports rose from 38% to 48% between 2001-2004 and 2009-2013. The PRC is the leading player within East Asia with its share rising from 13% to 25%. Korea’s share rose from 4% to 5% and the share of the 10 ASEAN economies remained at about 9%. Japan’s share fell from 11% to 8% but this figure seems understated as Japanese firms are present in GPNs in other East Asian economies. The 2009-2013 figure for East Asia compares with 28% for the European Union, 7% for the US, 6% for Latin America, less than 1% for India and less than 1% for Africa.

GPNs in East Asia originated in the 1980s in the clothing and electronics industries and have since penetrated many industries including consumer goods, food processing, automotives, aircraft, and machinery. The role of services in GPNs in East Asia is increasingly important but has been underestimated due to serious data problems.

The role of firms in GPNs in East Asia is a new frontier in economics. While there are insightful case studies of the organizational aspects of individual firms in GPNs in East Asia, little research attempts to generalize the findings of case studies to multiple firms though econometric analysis. The recent availability of microdata from enterprise surveys has enabled identification of the benefits of joining GPNs in East Asia and the characteristics of firms in GPNs.

Evidence from Malaysia and Thailand suggests that joining GPNs brings tangible benefits such as raised profits and value added at firm-level. Furthermore, these benefits arise when firms actively invest in building technological capabilities focusing on assimilating and using imported technologies rather than formal Research and Development (R&D) by specialized engineers. Strikingly, firms in the PRC generally have higher levels of technological capabilities than those in ASEAN economies, which partly explains the PRC’s impressive record in GPNs. The gap in technological capabilities between PRC and ASEAN firms is associated with higher levels of foreign ownership, skills, managers’ education and capital.

It is observed that more developed East Asian economies like Japan and Korea have a deep base of industrial suppliers to large firms in GPNs including small and medium enterprises (SMEs). SMEs account for most of the jobs in ASEAN economies but have a limited presence as suppliers in GPNs. Evidence from Malaysia suggests that even among SMEs, larger SMEs benefit from economies of scale and set lower prices than smaller SMEs when joining GPNs. However, size is not the whole story. Licensing foreign technology, building technological capabilities and actively using preferences in free trade agreements (FTAs) also facilitates SMEs joining GPNs. Access to credit from commercial banks is another crucial factor for SMEs to participate in GPNs as indicated by the PRC and ASEAN economies. Financial access for SMEs in these East Asian economies is in turn influenced by managerial experience, availability of collateral and financial audits.

GPNs in East Asia are interwoven with forces associated increasing globalization and regionalization. They are underpinned by strategies of multinational firms, technological advances (e.g., information, communications, and transport technologies), improvements in logistics and trade facilitation, and tumbling barriers to trade and investment. At the national-level, outward-oriented market-friendly strategies supported the participation of East Asian firms in GPNs. While there are subtle differences in the strategies pursued, East Asian economies commonly emphasized attracting export-oriented foreign direct investment (FDI) into export processing zones (EPZs); investing in ports, roads from EPZ to ports and airports; streamlining business regulations; notable spending on education and training; and developing banking systems.

An important implication of the PRC’s growth slowdown and rising wage costs is the increased opportunities to attract FDI and participate in GPNs especially in labor-intensive activities. East Asia’s rich GPN experience offers valuable lessons for industrial latecomers in the developing world. First, participating in GPNs offers a fast track means to achieve higher levels of economic development. Second, it is crucial to focus on the role of firms in GPNs, particularly the process of building technological capabilities and accessing finance. Third, continuity with deep policy reforms provides a supportive business environment for joining GPNs. Fourth, mainstreaming GPNs into policy dialogues with aid donors and multilateral development banks will help to generate development finance for policy reforms and infrastructure development.

Useful links

Donor Support for Connecting Firms in Asia to Value Chains, William Hynes and Frans Lammersen, OECD, in Ganeshan Wignaraja (Ed.), Production Networks and Enterprises in East Asia: Industry and Firm-level Analysis: Springer, 2016

OECD work on global value chains

Getting globalization right: the East Asian Tigers Dani Rodrik on the Insights blog

Two secrets concerning a value chain approach to corporate climate change risk-management

MNE_4li-72dpi_17may13Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct (@nieuwenkamp_csr)

This coming week the world’s leaders will gather in Paris to discuss approaches to addressing climate change, kicking off the 21st annual meeting of countries which want to take action for the climate, otherwise known as COP 21.

A well-hidden secret is that under the OECD Guidelines for Multinational Enterprises (‘the Guidelines’) businesses are expected to do their due diligence on environmental impacts such as climate impacts. This concerns not only their own negative environmental impacts, but also the impacts in their value chain. Another – less well-kept – secret is that the OECD Guidelines include a unique grievance mechanism known as National Contact Points (NCPs) that could also be utilized for climate-related grievances concerning multinational enterprises.

The Guidelines expect companies to behave responsibly through making a positive contribution to economic, environmental and social progress with a view to achieving sustainable development. Besides, the 46 adhering governments expect companies to avoid causing or contributing to negative environmental impacts. In addition the Guidelines expect companies to seek to prevent or mitigate adverse climate impacts directly linked to their operations, products or services by a business relationship. To achieve this, businesses are called upon to carry out due diligence throughout their value chains to identify, prevent, mitigate adverse impacts and account for how they are addressed.

Due diligence, importantly, applies not only to actual impacts but also to risks of impacts. This is particularly relevant in the context of greenhouse emissions as the extent of climate impacts and what they will mean for a company’s bottom line are as of yet not precisely known.

The Guidelines also include a specific chapter on environment which outlines recommendations for responsible business behaviour in this context. For example businesses are encouraged to continually seek to improve corporate environmental performance at the level of the enterprise and, where appropriate, of its supply chain, by encouraging such activities as: development and provision of products or services that reduce greenhouse gas emissions; providing accurate information on greenhouse gas emissions and exploring and assessing ways of improving the environmental performance of the enterprise over the longer term, for instance by developing strategies for emission reduction. Furthermore, the disclosure chapter of the Guidelines also encourages social, environmental and risk reporting, particularly in the case of greenhouse gas emissions, as the scope of their monitoring is expanding to cover direct and indirect, current and future, corporate and product emissions.

These expectations suggest that enterprises should not only be concerned with their direct emissions and impacts on climate change, but that they should also be aware of their carbon footprint throughout their supply chains and that their due diligence efforts should be targeted accordingly. A value chain approach is particularly important in the context of climate change issues as often the majority of emissions will be generated throughout supply chains rather than direct emissions. For example, Kraft Foods, one of the world’s largest food and beverage conglomerates, found that value chain emissions comprise more than 90 percent of the company’s total emissions.

However the supply chain approach has yet to be mainstreamed in the field of corporate emissions management. For example a recent OECD report, Climate change disclosure in G20 countries: Stocktaking of corporate reporting schemes, found that most of the mandatory corporate emissions reporting schemes among G20 countries only require companies to report on direct greenhouse gas emissions produced within national boundaries, whereas significant volumes of emissions are often produced lower down on a company’s supply chain, and often in jurisdictions where that do not have reporting requirements. Likewise a survey conducted by CDP and Accenture in 2013 found that only 36% of 2,868 companies responding report emissions throughout their value chains (known as Scope 3 emissions) and only about 11% set either absolute or intensity Scope 3 targets.

Identifying risks is a primary element of due diligence and therefore the limited amount of supply chain reporting in this context is worrisome and suggests that currently companies are not collecting the information they need to effectively prevent and mitigate risks.

This is problematic not only with respect to the expectations of business to act responsibly but also because increasingly investors are seeing fossil fuel dependence as a systemic risk. For example, the CDP reports that currently 822 institutional investors request climate change disclosure from investee companies. Assets managed by these investors comprise up to a third of all global financial assets. However, this demand had not been reflected in generation of useful information. Research on the top 500 global asset owners found that only 7% of them are able to calculate their emissions, only 1.4% have reduced their carbon intensity since 2014, and none of them has yet calculated its portfolio-wide fossil fuel reserves exposure.

As of yet climate change due diligence has not been considered by the NCP network. However as corporate responsibility to mitigate against climate impacts becomes increasingly prominent, continued industry inaction could lead to a complaint being brought on this subject.

The upcoming two weeks will bring thousands of participants together to brainstorm solutions to perhaps the greatest global crisis facing us today. We hope that the event will prove to be historic and that the implications of corporate value chain approaches and due diligence will be adequately considered.

Useful links

OECD COP21