Jyrki Ali-Yrkkö, Petri Rouvinen, Timo Seppälä, Pekka Ylä-Anttila
Available statistics biases the true picture of the current stage of globalization, which is characterized by widespread outsourcing and offshoring. Our concern is that these flaws in available measures may lead to misguided policies in both the developed and developing countries, hurting both country groups. The implications of this are dealt with in our recent paper 'Who Captures Value in Global Supply Chains? Case Nokia N95 Smartphone', and we summarize our main arguments here.
Pervasive use of information and communication
technology (ICT) has enabled global geographical
dispersion of business activities at ever-finer resolution.
This aspect of globalization is known as 'trade-in-tasks'
or 'the second unbundling'.
Supply chains for producing goods and services now
resemble sliced carrots. For each slice, business
managers tirelessly ask: should a given activity be made
in-house or bought from an outsourcing partner?
Regardless of the first answer, the immediate follow-up
question is: where on the globe?
In the aggregate, businesses 'micro' decisions have
'macro' implications. In today's world, countries' fortunes
are in part determined by how attractive locations are
for high value-adding slices in the supply chains of
Our analysis suggests that value capture—the variable of interest for both businesses and countries—is considerably less dispersed geographically than tasks within a supply chain.
Admittedly, our analysis is rather specific. We perform grassroots investigative work to uncover the geography of the value added for a Nokia N95 smartphone circa 2007. We find that even when the phone was assembled in China and sold in the USA, Europe captured more than half of the value added despite the fact that it played little role in supplying the physical components (Table 1, middle row). In this context international goods trade statistics are virtually useless—the capture of value added is largely detached from the flow of physical goods.
On the basis of the supply chain's geography and the assembly volume of the N95 in Nokia's China plant, we estimate that service exports from Finland to China in 2007 were approximately €0.8 billion with respect to the N95. As recorded by Statistics Finland, however, the total service trade across all industries from Finland to China was €0.6 billion in 2007. Thus, the recorded overall figure does not account even for this one phone model, which in 2007 accounted for less than 1.5% of all Nokia phones sold and less than 7.5% of all Nokia phone sales.
In our calculations, we assigned Nokia's operating profits to the headquarters location in Finland, which is consistent with prevailing national accounts practices. It does not suggest that Finns would 'own' this part of the value added beyond their ownership of the company. Indeed, more than 90% of Nokia's stock is held abroad and profits earned belong ultimately to the shareholders, in this case primarily to USA-based institutions. Any dividends paid to foreigners are appropriately recorded in cross-border financial flows. It turns out, however, that companies' purchases of their own shares are not appropriately recorded, which in the case of Finland inflates its current account surplus.
Although our N95 analysis is a specific case study, to our understanding it is a representative one in the electronics industry. Furthermore, automobiles, textiles, and some other traditional industries, do not appear very different. Even in industries that feature less geographical dispersion, it is increasing nevertheless. Thus, broader conclusions can be drawn from our analysis.
Even though the location of the final assembly earns the 'Made in...' label for the location in question, the labelled country may command only a few per cent of the supply chain's overall value added of an advanced industrial good (Table 2). Even for manufactured goods, most of the value added is captured by services (both in-house and those purchased from external vendors) and various forms of intangibles (e.g., intellectual property).
Unlike the apparent conclusions drawn from the cross-border flows of the related physical components and goods, the developed countries continue to capture the lion's share of value added generated globally. This is not to say that globalization could not be a win-win proposition for all. However, the optimal game strategy of each society ultimately depends on its priorities.
Our analysis has several broader implications. First, it highlights the irrelevance of the lingering manufacturing vs. services discussion. The recorded value added by manufacturing has a significant service component; most services need supporting physical infrastructure and complementing goods. The distinction between manufacturing and services is immaterial and should perhaps be completely laid to rest.
Second, international commodity trade statistics that continue to record the gross values of cross-border goods flows can be highly misleading in economic analysis. Indeed, internationally concerted efforts should be taken to develop value added-based trade statistics. While complementing the goods flows with service trade statistics and balance of payments information should help in principle, this does not currently appear to be the case in practice. Our crude estimates suggest that service trade statistics and balance of payments information might be equally misleading, albeit for different reasons.
Third, in many countries, national policy makers appear to have an obsession with having a certain national capacity of final assembly. This can hardly be justified by its role in national value added. This is not to say that final assembly has no importance, just that its national importance may relate more to its links with other functions in the supply chain.
Nations compete for their citizens' high value-adding roles in globally dispersed supply chains. For a given level of effort, the national objective is then to capture as much value and generate as much national wealth as possible. This is easier said than done, but accumulating a stock of unique set of skills, competences, and intangible assets is a good place to start. This accumulation can only take place in an environment with sufficient economic and political stability as well as private entrepreneurial effort.
Jyrki Ali-Yrkkö, Petri Rouvinen, Timo Seppälä and Pekka Ylä-Anttila are at ETLA, The Research Institute of the Finnish Economy.
Based on the forthcoming article: Jyrki Ali-Yrkkö, Petri Rouvinen, Timo Seppälä, Pekka Ylä-Anttila (2011). 'Who Captures Value in Global Supply Chains? Case Nokia N95 Smartphone'. Journal of Industry, Competition and Trade. http://dx.doi.org/10.1007/s10842-011-0107-4