Where and how economic values are created in the future Finland in global competition Paavo Okko professor emeritus paavo.okko@utu.fi Tallinn, February 12, 2013
Topics of the presentation The new style of globalization: the second great unbundling (the first unbundling already 1850 - ) Economic values are created in global networks, which are dependent both on production and transportation costs (transaction costs) and exchange rates, too The Finnish economy was a successful catching-up economy at the first front of technology challenges are different Now the question is: how develop new products and value-added and which activities (parts of the value chain) can remain at home?
The new paradigm of the global competition the second great unbundling (by Richard Baldwin)
The new paradigm of globalisation the second great unbundling (since the 1990`s) Development in ICTtechnologies and in transportation technologies enabled deeper decentralization of economic activities International competition concerns now different tasks/stages of value chain (not only entire products) Countries are competing with each other as locations of different type of tasks/activities (not entire industries) A global firm is an effective competition arena: within it different locations are competing with each other on different roles/tasks in the value chain (optimisation all the time) Competition concerns also services (R&D, ICT help, accounting, call centres...) This means more transportation and international trade, often intra-firm trade, and often digital information flows
Globalisation is a challenge to high income countries Crucial trade-off: productivity advantage must be large enough to compensate cost disadvantage A new feature is that also services are possible to outsource internationally (digital economy) Knowledge intensive products are not so strongly under the pressure to move out, but some stages of their production may be offshored, too Changes in production networks are 1) Unpredictable 2) Sudden, and 3) Concerning more individuals than firms or industries
Relative prices of manufactured goods have decreased by 40 % since 1980 * Teollisuustuotteiden maailmanmarkkinahinnat suhteessa kehittyneiden maiden BKT-hintaindeksiin (1980 = 100) Lähde: Pajarinen, Rouvinen & Ylä-Anttila, Kenelle arvoketju hymyilee? Koneteollisuus globaalissa kilpailussa, s. 22
Regional division of manufacturing output of % the world 1750-2100, % (ETLA) 70 60 East Asia 50 40 30 20 Northern America 10 0 1750 1800 1850 1900 1950 2000 2050 2100 Itä-Aasia = Kiina, Japani, Intia Pohjois-Amerikka = Yhdysvallat, Kanada Eurooppa = Saksa, Iso-Britannia, Ranska, Italia, Espanja, Ruotsi, Belgia, Sveitsi Europe
Where value is created and who will get it? Value is created in global value chains not within a firm Human capital and other immaterial factors (services) are important value creators Firm is a nexus of treaties (contracts) and its value share depends on its position in the value chain Product developers and goal keepers get a large share of value Value goes to experts and to service providers not largely to physical production workers Value goes to high income countries even if physical production was made in low income countries
Nokia N95 Retail price without taxes (547 ) Distribution of value added Internal services Pajarinen, Rouvinen, Ylä-Anttila: Missä arvo syntyy? Suomi globaalissa kilpailussa. Taloustieto (ETLA B 247). Sivu 14. Profit
Geography of value added 39 % the value added was left to Finland even if N95 was manufactured (assembly) in Peiging and exported to USA From Salo to Germany From Peiging to USA Pajarinen Rouvinen Ylä-Anttila: Missä arvo syntyy? Suomi globaalissa kilpailussa. Taloustieto (ETLA B 247). Sivu 79.
Distribution of value added: a bike (Helkama Velox) 3 alternative production sites: Finland, Estonia, Indonesia (ETLA) Suppliers Production Logistics (incl. profits) Distribution Finland Indonesia Estonia (best for Helkama)
Geographical distribution of value added (ETLA) Rest of world Asia Rest of EU Finland
Production and service activities within a manufacturing firm in the history and currently Manufacturing firm in the past and currently Services Physical production Physical production Pajarinen Rouvinen Ylä-Anttila: Missä arvo syntyy? Suomi globaalissa kilpailussa. Taloustieto (ETLA B 247). Sivu 87.
Export revenues of the Finnish ICT cluster (billion ) Communication equipments Services Mobile phones Pajarinen Rouvinen Ylä-Anttila: Missä arvo syntyy? Suomi globaalissa kilpailussa. Taloustieto (ETLA B 247). Sivu 85.
After financial crisis recovery in Eurozone has been slow, GDP 2008 = 100 (scale for China on the right hand side) 115 Yhdysvallat Euroalue Japani Suomi Kiina (oikea asteikko) BKT:n määrä, indeksi, 2008/I = 100 160 110 105 100 China USA 140 120 100 95 80 90 60 85 2008 2009 2010 2011 2012 Lähteet: Maiden tilastoviranomaiset, Eurostat ja Suomen Pankki. 26448@BKT_EA(2008) 40 15
The Finnish problem: paper industry and electronics have been loosing its share at the same time, %/GDP 6 Paperiteollisuus Osuus bruttokansantuotteesta, % Elektroniikkateollisuus 5 4 3 2 1 0 1975 1980 1985 1990 1995 2000 2005 2010 Lähde: Tilastokeskus. 24877 16
Terms of trade Export prices/import prices, index 2000=100
Value added per hour Which activities remain at home how much value can be saved? R&D Design Proto, pilot Starting production Brand values Maintanance Marketing Sales Distribution High cost countries Low cost countries Mass production Stages of value chain / production process
Conclusions Economic values are based largely on immaterial factors or production and values come more and more from services (they are often based on manufacturing) Deeper economic specialization changes geography of value added and increases international trade of goods and services and expands the (invisible) digital sector of the economy International value chain is sensitive to competitiveness of the home country and to transportation costs and to exchange rates, too The Baltic Sea Region is a favourable area for growth and integration because of cost level differences, which offer possibilities for value chain construction.