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The puzzle of measuring global value chains – The business statistics perspective
International Economics xxx (xxxx) xxx–xxx
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The puzzle of measuring global value chains – The business statistics perspective☆ Peter Bøegh Nielsen Statistics Denmark, Sejrøgade 11, DK-2100 Copenhagen Ø, Denmark
A R T I C L E I N F O
ABSTRACT
JEL classification: D22 F23 F61 L23 L25
Measuring Global Value Chains (GVCs) is recognized as a prioritized but complicated challenge for statistical offices as the concept is complex. GVC's are difficult to measure due to interlinked cross border relations of goods, services, labour and capital at the level of the individual enterprise. A focal point in GVCs is the relationship between enterprises and currently only few statistics measure directly linkages between enterprises (e.g. FATS statistics) and new types of statistical evidence needs to be developed by linking different data sources at enterprise level. Measuring GVCs consists of a number of conceptual and methodological aspects which need to be combined in an analytical framework. Pieces of the puzzle exist or are being developed already today, e.g. the Trade in Value Added (TiVA) concept, Trade by Enterprise Statistics (TEC), or Foreign Affiliates Statistics (FATS) which constitute elements of a measurement framework under elaboration but other elements are still missing, such as information on business functions, governance structures and network relations. This paper presents results of recent initiatives in business statistics within the European Statistical System addressing different aspects of GVCs by different approaches; partly by launching a new survey on international organisation and sourcing of business functions, and partly by linking existing statistical registers at enterprise level. Finally, the paper identifies new activities to be launched by the statistical community in order to improve the measurement of GVCs.
Keywords: Global value chains Micro data linking International sourcing Business functions
1. Introduction The division of labour and accompanying specialization have been main drivers of economic growth through history. Where international trade was involved, this allowed reaping the gains from comparative advantage as described by David Ricardo (Ricardo, 1817). Traditionally, this was thought about in terms of vertically organized supply chains within a domestic economy and international exchange of final goods (international trade in services has become important only more recently) (Baldwin, 2011). However, since the Mid-eighties, supply chains have been increasingly split up, with transactions costs falling as a result of, not least, plummeting costs of ICT and allowing market transactions to substitute for internal, hierarchical organisation as discussed by Oliver Williamson (Williamson, 1985). Lower trade and investment barriers, liberalized domestic markets, cheaper transportation and communication, and lower costs of information allowed the unbundling of value-chains to become international in nature, with the concept of “trade in tasks” entering trade theory (Grossman and Rossi-Hansberg, 2006). Indeed, the geographic and organizational unbundling of the value chain is occurring across core goods- and services-producing activities, as well as support services such as ICT, back-office functions, and even R & D. Well-known examples of production dispersion are production of aircrafts or mobile
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Comments from the Editor and two anonymous referees are gratefully acknowledged. E-mail address: [email protected].
http://dx.doi.org/10.1016/j.inteco.2017.05.004
2110-7017/ © 2017 CEPII (Centre d'Etudes Prospectives et d'Informations Internationales), a center for research and expertise on the world economy. Published by Elsevier B.V. All rights reserved.
Please cite this article as: Nielsen, P.B., International Economics (2017), http://dx.doi.org/10.1016/j.inteco.2017.05.004
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phones where the value chains are globally organized. The increased global organisation and fragmentation of value added chains constitute one of the most important and complex measurement challenges for economic, business and trade statistics. It involves fundamental measurement issues such as the relevance of different statistical units, monitoring of ownership structures and dealing with transfer pricing and double counting in global trade. These new challenges related to global value chains (GVCs) come on top of the “classic” problems of measuring services due to their intangible character and the dynamic content. Furthermore, while the main focus of national statistical institutes is on domestic economic events, GVCs are to a large extent based on cross-border transactions and business linkages. The good news is that new definitions and tools are being developed to capture these new patterns at both the macro level (e.g. Trade in Value Added (TiVA)1 and other international input-output datasets) and at the micro level (e.g. business function surveys or Micro Data Linking exercises utilizing existing statistical registers that seek to measure and understand firm heterogeneity and performance in the context of GVCs). Over the long run, new information on business function sourcing and better use of existing data will feed into and improve international input-output datasets such as TiVA, but much is left to be done before current data gaps can be filled and an understanding of the impacts of GVCs on our economies gained (Sturgeon, 2013). Understanding interdependencies within global value chains are key to explaining the competitiveness of enterprises and the potential productivity gains that can be achieved. This article utilizes the results of two projects within the European Statistical System addressing the issue of measurement of global value chains from two different perspectives and two different methods but both of innovative character. The first project is based on a traditional survey approach but introducing the collection of new variables for the production of statistics in the form of opening up the black box of the enterprise by collecting information about the different business functions carried out by the enterprise. The second project is innovative in its method by establishing tailor-made national databases with harmonized contents to be used for Micro Data Linking (MDL) in nine European statistical offices. This method allows for analysis based on firm level data of the internationally trading enterprises and their possible heterogeneity related to type of trading or ownership.
2. The concept of business functions Business functions can be conceived as an aggregation of certain tasks/products carried out by the enterprise. They are equally applicable to goods-producing and services-producing enterprises. The concept is similar to the concept of occupations, but is focused on business activities rather than the activities of individual employee (a specific business function will typically involve a range of job categories and tasks) (Lanz et al., 2011). For the purpose of statistical surveys, business functions can be defined in terms of international product classifications such as Central Product Classification (CPC) or Classification of Products by Activity (CPA), Extended Balance of Payments Services classification (EBOPS) or Harmonized commodity description and coding System (HS). However, since any business function can be the main output of an enterprise (for example for enterprises that provide manufacturing services, R & D and engineering services, customer contact services, etc., for other firms), business functions can also be linked to activity (industry) codes such as NACE, ISIC, and NAICS. The concept of business functions is a new tool in the statistical toolbox. Business functions offer statisticians a set of generic, easy-to-understand categories that describe the various activities carried out by enterprises, irrespective of their main economic activity. Business function statistics are needed because enterprises, in addition to producing the goods or services from which they earn their revenues, typically require a variety of service functions to support their core line of business. The motivation for recent business function surveys stems from the relatively new business practice of outsourcing either domestically or internationally support functions such as customer contact services, software coding, and “back-office” functions such as payroll and document management (Sturgeon et al., 2012). In some instances, even the R & D process has been fragmented and relocated, with various related activities interlinked via cross-border ICT systems. The growing potential for trade in such ICT-enabled services necessitates new approaches to collecting business and trade statistics due to the intangible character of these services. Outsourcing of services, as well as the rise of manufacturing services, has generated a need for approaches that can “look inside” the enterprise to measure activities beyond the core business function in order to better understand firm heterogeneity. As discussed further below, the first official survey to introduce the concept of business functions in a statistical context was the European survey on International Sourcing, initially carried out in 2007 and repeated in 2012. Statistics Canada used a similar approach in 2009 and 2012 in its Survey of Innovation and Business Strategy (Industry Canada, 2011). Because of this work, the business function concept has now been proven effective in several contexts. The results are unambiguous. Questions about business functions are well understood by enterprise managers and the results from surveys have begun to provide useful insights into important policy questions. For the first time, the extent and character of outsourcing can be known for entire enterprise populations, and the relationships between international sourcing and employment and wages have begun to be explored using direct firm-level evidence (Brown et al., 2013; Nielsen and Luppes, 2012). Business function statistics can be used to inform a wide variety of research and policy questions. So far, business function surveys have mainly been used to examine firm-level patterns of domestic and international sourcing. International sourcing surveys using a business function framework have been able to answer basic, yet important policy-relevant questions such as: What are the main business functions that are internationally sourced, and where are they sourced? (Eurostat, 2013). Are enterprises mainly 1 The OECD-WTO Trade in Value Added database is based on Inter-Country Input Output tables, cf. http://www.oecd.org/sti/ind/measuringtradeinvalueaddedanoecd-wtojointinitiative.htm
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Box 1.Business Functions used in the 2007 European Union Survey on International Sourcing. Core business function: This function is the primary activity of the enterprise and will in most cases equal the main activity of the enterprise. It includes production of goods or services intended for the market/for third parties carried out by the enterprise and yielding income. The core business function equals in most cases the primary activity of the enterprise. It may also include other (secondary) activities if the enterprise considers these to comprise part of their core functions. 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. The outputs of the support business functions are not themselves intended directly for the market/for third parties. The support business functions are in the survey divided into: Distribution and logistics: This support function consists of transportation activities, warehousing and order processing functions. Marketing, sales and after sales services including help desks and call centres: This support function consists of market research, advertising, direct marketing services (telemarketing), exhibitions, fairs and other market- ing or sales services. Also including call-centre services and after sales services such as help-desks and other customer supports services. ICT services: This support function includes 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 are excluded. Administrative and management functions: This support function includes legal services, accounting, book-keeping and auditing, business management and consultancy, HR management (e.g. training and education, staff recruitment, provision of temporary personnel, payroll management, health and medical services), corporate financial and insurance services. Procurement functions are included as well. Engineering and related technical services: This support function includes engineering and related technical consultancy, technical testing, analysis and certification. Design services are included as well. Research & Development: This support function includes research and experimental development. In the second survey on International Organisation and Sourcing of Business Functions (2012) this function was integrated with the support function Engineering and related technical services. Other business functions: Including facility management. Source: Nielsen: International sourcing: Moving business functions abroad (Statistics Denmark, 2008); (Anon, 2008). internationally sourcing low value-added functions such as manufacturing and back-office work or are strategic, high value functions such as R & D also being internationally sourced? (Eurostat, 2011). How do enterprises that internationally source various business functions perform relative to enterprises that do not? (Nielsen and Tilewska, 2011). Does the type of function or source country make a difference? Do countries tend to play specific roles in global value chains (GVCs) by specializing in specific sets of business functions (e.g., R & D vs. production)? (Sturgeon et al., 2012).
3. Types of business functions The concept of business functions is based on the work of Michael Porter, who identified a list of nine generic business functions: R & D, design, production, marketing and sales, distribution, customer service, firm infrastructure, human resources, and technology development (Porter, 1985). A list of business functions was first utilized in a survey in 2000 as part of the EMERGENCE research project, funded by the European Commission. This project used a less-than-exhaustive list of seven business functions tailored to collect information about the outsourcing of information technology-related functions, such as software development and data processing (Huws and Dahlmann, 2004). The business functions lists used in subsequent, official surveys have sought to be exhaustive: they cover, in a parsimonious way, all business activities that enterprises either carry out internally or purchase from outside vendors, i.e. the whole value chain. A fundamental distinction, introduced in the European Survey on International Sourcing in 2007 and 2012 is between the core business functions of the enterprise and support business functions, as described in Box 1. The core business function represents the revenue-producing activity of the enterprise and will in most cases equals the main activity of the enterprise classified by NACE and registered and contained within the Business Register. It includes production of goods or services intended for the market. The core function may also include other (secondary) revenue generating activities if the enterprise considers these to be part of the core business function. Support business functions (ancillary activities) are carried out in order to permit or facilitate production of goods or services, but are not themselves sold directly for the market or to third parties. They do not directly generate revenues, only costs. However, the 3
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Fig. 1. Share of total number of persons employed broken down by detailed business functions, enterprises with 100 or more persons employed, selected activities 2011. Source: Eurostat: Survey on International Organisation and Sourcing of Business Functions 2012. The survey covered the following countries: Belgium, Bulgaria, Denmark, Estonia, Ireland, France, Latvia, Lithuania, the Netherlands, Norway, Portugal, Romania, Slovakia, Finland and Sweden. The survey covered enterprises with 100 or more employees in the non-financial market activities (NACE sections B to N excluding K).
cost and quality of support functions can make important contributions to the competitiveness of enterprises (e.g. R & D). To develop an exhaustive list of business functions, the function list must cover both core and support functions. As concerns the first, core or primary, revenue-raising function of the enterprise, the 2012 European Survey on International Sourcing showed that more than 75 per cent of all persons employed in enterprises with 100 or more employees, on average, were engaged in the core function of the enterprises. Only about one quarter worked in the supporting services functions, cf. Fig. 1 (Eurostat, 2014). Fig. 1 also shows the heterogeneity across business sectors, as the employment share of core functions was only two thirds for enterprises within high and medium tech manufacturing. This suggests that support business functions such as engineering and R & D services are more deeply integrated with manufacturing in knowledge intensive manufacturing enterprises. On the other hand, knowledge intensive services (KIS) are characterized by the largest share of persons employed in the core function of the enterprise, reflecting the labour intensity of knowledge intensive services and, possibly, a lesser need for certain support functions such as distribution and logistics in these services whereas, for example, administrative and management functions are of the same relative size as elsewhere. As concerns support services, a crucial feature of a business function list is that it is not only exhaustive but covers the full range of support functions in a parsimonious way while containing relevant, mutually- exclusive categories. Again, support functions are not directly revenue producing, but support the core function either directly or indirectly. While it is possible to designate support functions at a very detailed level, using long lists increases the respondent burden and sector-specificity that make them poorly suited for economy-wide business surveys. The purpose, therefore, is to create a concise list of generic support business functions that nevertheless cover the full range of possible business activities which enterprises must either accomplish with their own employees, or source from an outside enterprise or contractor. A main strength of the business function approach is its potential to identify support services and other intangible inputs to the enterprise such as R & D or IT services. Even if international sourcing is mainly carried out by manufacturing enterprises, support services functions are more commonly
Fig. 2. International sourcing broken down by core and support functions. Per cent of enterprises sourcing internationally, 2009–2011. Source: Eurostat Survey on International Organisation and Sourcing of Business Functions 2012
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sourced internationally than core functions (cf. Fig. 2). The international sourcing of services support functions and consequently a potential international trade with these functions – mainly ICT enabled -emphasizes the need for improving the current international trade in services statistics. 4. Sourcing destinations for European enterprises The survey on International Organisation and Sourcing of Business Functions showed that 44 per cent of manufacturing enterprises in the 15 European countries participating in the survey sourced to enterprises located in the member states being member of the European Union before 2004 (hereafter EU15)2 in the period 2009–2011; making this destination the most frequent destination for international sourcing, cf. Table 1. This destination was followed by the countries becoming member of the European Union in 2004 or later3; mainly Eastern European countries (hereafter EU12) as the second most frequent destination. Lower labour costs was given as the main motivation factor of the enterprises sourcing internationally and this is reflected by the importance of the Eastern European countries being the closest low wage destination for the enterprises located in the EU15. This pattern can be found both within high and medium technology (HMT) and low and medium technology (LMT) manufacturing4 as for the total nonfinancial market sector. For European manufacturing enterprises China was the third most important destination, as 17 per cent of the manufacturing enterprises sourcing internationally sourced to China; being a low wage country. Especially for HTM manufacturing enterprises China was an important destination, nearly as important as the European destinations. For LMT manufacturing enterprises China constituted a far less important destination as only 13 per cent sourced to this destination. The reason might be the relative importance of transportation costs for the products produced by the LMT industries when produced at locations located at distance from the customers. India is an important destination for not only services enterprises but also for HMT manufacturing enterprises as 15 per cent of all European HMT enterprises sourced to India. This finding is in line with the relative importance of knowledge intensive support services functions in HMT enterprises, cf. Fig. 2. If looking at Asia as one sourcing destination – including China and India – nearly half of all European HMT enterprises sourcing internationally has sourced to this continent. In comparison, only around one fourth of the LMT enterprises sourcing internationally sourced to Asia. Finally, it can be observed that the USA is a relatively important destination for HMT manufacturing enterprises as 10 per cent has sourced to this destination compared with only 3 per cent of the European LMT manufacturing enterprises; again reflecting the importance of knowledge intensive services in HMT enterprises. The manufacturing enterprises sourcing to EU15 countries are characterized by to a larger extent sourcing their core than support function to enterprises in these countries, but compared with other destinations the prominence of sourcing of core functions is small due to the fact that many foreign affiliates in other European countries have been sourcing support functions such as administrative or ICT support functions to their headquarters in the old member states. The same destination pattern can be found in the first European survey on international souring covering the period 2001–2006; showing that EU15 was the most frequent sourcing destination for manufacturing enterprises (34 per cent of all manufacturing enterprises sourcing internationally) closely followed by the EU12 member states (also 34 per cent), cf. Table 2. So the new member states were relatively of larger importance in the period prior to the crisis (and partly prior to their membership of the EU taking place in 2004). China was of equal importance in the two periods for HMT manufacturing enterprises while North America lost importance as a destination for moving business functions from the European manufacturing enterprises as the share was more than halved. In general, a relative new way of organizing the value chains globally by moving distinct business functions of the total value added chain abroad, from the outset shows a high degree of globalization as especially manufacturing enterprises have moved functions – and not only the core production function – globally. Especially China constitutes an important destination for international sourcing from European countries compared to the nearest neighboring countries, except for the EU12 due to cost efficiency seeking gains such as lower labour costs (Eurostat, 2011). 5. The concept of international orientation of enterprises The growing demand for information on global value chains requires the development of a standardized and harmonized concept of the international orientation of an enterprise or enterprise group. The concept used in this project is based on the dimensions; type of trader and type of ownership (here defined as foreign or domestic control). This concept enables statisticians to analyze the national and international component of business dynamics in terms of economic growth, employment and innovation, with respect to the different types of statistical units. As such this concept is now also part of the international work on global value chains, and is also referred to as ‘globalized enterprise’ (Nielsen and Luppes, 2012). 2 EU15 consists of the following countries Austria, Belgium, Germany, Denmark, France, Finland, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. 3 EU12 consists of the following countries the Bulgaria, Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Romania, Slovenia and Slovak Republic. 4 Manufacturing enterprises are classified according to technological intensity into High and Medium Technology activities (HMT)such as pharmaceuticals, electrical machinery and apparatus and Medium and Low Technology activities (LMT) such as production of food, textiles or rubber and plastic products according to the OECD (https://www.oecd.org/sti/ind/48350231.pdf).
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Table 1 Main sourcing destinations 2009–2011. Share of all enterprises sourcing internationally. Average for 15 European countries. Source: Eurostat: Survey on International Organisation and Sourcing of Business Functions 2012.
All activities Manufacturing high and medium high-tecnology Manufacturing Low and medium Low-tecnology manufacturing
EU15 Per cent
EU12
China
India
Rest Asia
USA
Brazil
44 41 34 45
28 30 31 30
12 17 25 13
16 12 15 9
9 8 8 5
7 6 10 3
2 1 1 1
Table 2 Main sourcing destinations 2001–2006. Share of all enterprises sourcing internationally. Average for 15 European countries. Source: Eurostat: Survey on International Sourcing 2007.
All activities Manufacturing high and medium high-tecnology Manufacturing Low and medium Low-tecnology manufacturing
EU15 Per cent
EU12
China
India
Rest Asia
USA
37,0 34,3 29,1 39,2
31,8 33,7 34,2 33,2
16,9 N/A 24,7 N/A
10,2 N/A 11,4 4,9
11,7 N/A 10,5 8,0
15,7 14,7 N/A N/A
The general definition of the concept of international orientation in many cases is restricted to the dimensions of type of trader, geography and ownership.5 International orientation of an enterprise is then defined as the intensity of international connectedness of an enterprise in terms of the presence of trade (imports, exports both goods and services) and the degree of influence and control across borders. The basic breakdown for ‘international orientation’ is outlined in Fig. 3. 6. Methodological approach of micro data linking As European business statistics to a large extent is based on common EU regulations, the central business or economic statistics such as structural business statistics, international trade in goods or statistics on foreign affiliates (FATS) are harmonized and thus comparable across the 28 member states of the European Union. However, due to the stove pipe production process of official statistics, i.e. each statistics is produced in isolation from one another, these micro data all focus on a limited number of aspects of the enterprise. But to measure the above mentioned internationalization of enterprises, we need to be able to use and analyze all these existing data sets simultaneously by constructing internationally harmonized statistical databases consisting of variables from different statistical sources to be used for micro data linking (MDL). In this way, a basic set of dummy variables indicating whether or not the enterprise is active in respectively imports, exports of goods, and information on enterprise structure (ownership) has been established. Eurostat and the European national statistical institutes have carried out several MDL projects in order to `modernize' the European enterprise and trade statistics. The main driver behind this development is twofold. Firstly, the analysis of cause and effect requires linking different types of variables at enterprise level which implies breaking through the traditional stove pipes of statistical production. Secondly, there is the practical argument of lowering the respondent burden on enterprises. Furthermore, the MDL approach increases the return on investment for the existing detailed micro data sets, and finally it also makes that the statistics can be more adequately used to guide policy makers. MDL has proven to be a successful analytical strategy in the development of statistical information on the international dimension and impact of GVCs. MDL serves as an appropriate method to analyze the current most addressed research questions on cross border activities (‘what kind of enterprises are trading’ instead of ‘what do countries trade’), firm heterogeneity (‘how are different types of enterprises contributing to GDP’) and the organisation of cross-border production processes (“what parts of the business organisation move up or down the value chain’). In the following section the results of a European project establishing harmonized databases as illustrated in Fig. 4 are presented. The analysis has been carried out using national databases that were constructed by each participating statistical institute containing a harmonized set of variables. The databases cover all active enterprises in the non-financial business economy (NACE Rev.2 sections B to N, excl. K) for the period 2008–2012. In each national database, annual business statistics data is linked through the national business registers at enterprise level with the statistical registers containing structural business statistics (employment, turnover), foreign affiliates statistics (country of ownership) as well as international trade in goods (imports, exports, destinations). 5
Linkages related to cross border financial flows are out of scope at this moment, as not all information is available at the level of the individual enterprises.
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Fig. 3. Breakdown of international orientation.
Fig. 4. Organisation of the European micro data linking (MDL) project.
7. Profiling enterprises trading internationally As mentioned above, the participation in global production chains is an important factor for improving the competitiveness of domestic enterprises. This section presents data on traders vs. non-traders of goods and is thus for analytical reasons limited to manufacturing. Do we find the same degree of connectedness across all European countries? Are enterprises in some European countries more linked to only regional, i.e. intra EU, production chains than in others? In total, nearly 94.400 out of 413.800 manufacturing enterprises – or 23 per cent - in 2012 in the eight European countries taking part in this exercise can be characterized as traders, cf. Table 3.6 The share of traders in manufacturing exporting or importing goods directly from abroad differs from country to country. With just above 40 per cent respectively, the share of traders is highest in smaller open economies such as Denmark and Austria, while in a large economy as Germany, the share is somewhat lower with 25 per cent. The number of German manufacturing enterprises being traders increased with 4 per cent in the period7; showing that German manufacturing enterprises are increasingly becoming integrated into the global value chains although a domestic market of considerable size exists. For the other countries, the number of traders generally was slightly decreasing during the period 2008– 2012, while the number of non-traders fell, also reflecting the general decline of manufacturing in the European countries in this
6 In this analysis, traders are defined as enterprises with either exports, imports or both above the threshold of minimum 5 per cent trade relative to turnover, and at least 5000 euros of trade value. 7 Unfortunately, data for Germany is only available from 2009; consequently the different base year hampers the exact comparison of the development in Germany to other countries.
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Table 3 Number of manufacturing enterprises. International Traders
All eight countries Denmark Germanya Latvia Austria Portugal Finland Sweden Norway a
Non trading enterprises
2008
2012
2008
2012
93 416 5 958 48 652 1 236 10 299 13 244 3 593 6 338 4 096
93 817 5 856 50 576 1 238 10 319 12 785 3 263 5 763 4 017
310 535 10 669 130 061 4 976 15 782 69 803 19 713 46 075 13 456
319 964 9 644 153 554 6 455 14 683 56 268 18 864 47 020 13 476
German figures refer to 2009 and 2012.
Table 4 No of employees (Full time equivalent) in manufacturing. International Traders
All eight countries Denmark Germanya Latvia Austria Portugal Finland Sweden Norway a
Non trading enterprises
2008
2012
2008
2012
6 966 601 296 896 4 599 206 86 726 505 229 472 089 363 573 478 920 163 662
6 973 857 229 597 4 904 099 59 553 494 937 416 118 301 769 414 940 152 844
2 298 797 50 981 1 582 068 31 057 77 859 261 250 84 685 133 164 77 733
2 303 326 34 211 1 706 105 18 852 68 073 191 897 83 202 129 552 71 434
German figures refer to 2009 and 2012.
period partly due to international sourcing as described in the first part of the article. The European exporting enterprises were hit dramatically by the economic crisis from late 2008 which is clearly reflected by the drastic decrease in employment in enterprises trading internationally in countries such as Denmark (decrease of 22.7 per cent), Finland (17.0 per cent) or Portugal (11.9 per cent), cf. Table 4. But it should be noted that the non-trading enterprises in both Denmark and Portugal lost even more employment (32.9 respectively 26.5 per cent). Germany was the only of the eight participating countries experiencing an employment growth in the trading enterprises during the economic crisis (6.6 per cent, but the nontrading enterprises actually grew even more (7.8 per cent)). The trading enterprises are characterized by being larger than the non-trading enterprises as they employ nearly 7 million employees (measured in no. of full time equivalent employees) or on average 74 employees per enterprises compared to 7 employees per non trading enterprise in 2012. The vast majority of trading enterprises within manufacturing are domestically owned enterprises, as the domestically owned enterprises constitute 90 per cent of all traders in all countries, except for Latvia (80 per cent) and Sweden (85 per cent). The structure has not been influenced by the economic crisis as the shares are stable in the period observed from 2008 to 2012. Due to data availability, it is only possible for a few countries to further break down the population of domestically controlled enterprises into the ones having foreign affiliates and the ones not having, cf. Fig. 5. This shows that international trade is mainly carried out by multinational enterprises being domestically or foreign controlled. Only in Denmark, a relative large share of traders in manufacturing is domestic controlled enterprises without foreign affiliates. Looking at the geographical markets, at which the traders operate, there is a clear pattern as the majority of the foreign owned enterprises in all countries can be characterized as global traders (trading with both Intra and Extra EU countries). The domestically owned enterprises are to a much lesser extent global traders but major differences across the countries can be observed. Austria, Germany and Sweden have the highest share of traders amongst domestic owned enterprises trading to countries outside the European Union, while in Portugal the majority of domestically owned traders trade with other EU countries (Fig. 6). Degree of openness can be seen as an indicator of integration into global value chains.8 In line with the previous results, foreign owned enterprises trading globally are more open to trade than domestic owned enterprises. This is the case in all countries, but it can be noted that in Germany and Norway, the degree of openness is relatively equal between foreign and domestically owned traders trading globally, cf. Fig. 7.
8
Openness is calculated as (exports+imports)/(turnover+purchases).
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Share of enterprises 100 80 60 40 20 0 2012
2008
2008
2012
AT
2008
2012
DK
2012
LV
Domestic owned enterprises
SE
Domestic owned enterprises without foreign affiliates
with foreign affiliates
2008
Foreign affiliates
Fig. 5. Traders (no of enterprises) broken down by control (Foreign/Domestic with foreign affiliates/Domestic without foreign affiliates) manufacturing 2008 and 2012. Source: Eurostat: Micro Data Linking Project 2014–2015.
Furthermore, the established data sets give the opportunity of analyzing to which extent the traders are involved in both export and import activities (so-called two way traders) or just are exporters or importers. Fig. 8 illustrates that even though two-way traders only constitute around 40 per cent of all trader enterprises, they employ more than 75 per cent in all countries except Portugal. This picture is similar across countries, where especially Germany and Sweden shows a significant difference between share of enterprises and share of employment when looking at two-way traders. While in most countries importers count for less than 40 per cent off all trader enterprises, in Norway importers constitute around 65 per cent. The results show that especially MNEs are global traders being present not only at the closest markets but trading globally as a fundamental part of their business model. The results also show that the largest enterprises are two way traders – taking part in export as well as import activities as a part of their integration into to global value chains and reflecting the global fragmentation of their production processes.
8. The road ahead This article has presented the two most recent and important developments in European business statistics concerning measuring Global Value Chains. The puzzle of measuring Global Value Chains is continuously being added more pieces in terms of new statistical data or methods being tested or put in place by national statistical institutes. Below is mentioned the most important new initiatives taken by the European Statistical System in terms of business statistics: The current version of the new European Framework Regulation on Integrated Business Statistics (FRIBS) introduces the survey on International Sourcing and the concept of Business Functions as a part of the Regulation. The survey is expected to be carried out every third year. Furthermore, the UN Statistical Division is preparing a classification of business functions allowing for the production of business function statistics using a harmonized definition in the future (Nielsen and Sturgeon, 2014). Percent 100 80 60 40
AT
DE
DK Global trade
FI
LV Extra EU trade only
NO Intra EU trade only
Fig. 6. Enterprises broken down by control (Foreign/Domestic) and international orientation, manufacturing 2012. Source: Eurostat: Micro Data Linking Project 2014–2015.
9
PT
Foreign
Domestically
Foreign
Domestically
Foreign
Domestically
Foreign
Domestically
Foreign
Domestically
Foreign
Domestically
Foreign
Domestically
Foreign
0
Domestically
20
SE
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Percent
Foreign owned enterprises
70 60 50 40 30 20 10 0 AT
DE
LV
FI
DK
PT
NO
SE
Fig. 7. Degree of openness, global traders, broken down by control (Foreign/domestic). Source: Eurostat: Micro Data Linking Project 2014–2015.
Percent
Two way traders
Exporters only
Importers only
100 80 60 40
AT
DE
DK
FI
LV
NO
PT
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Enterprises
0
Employment (FTE)
20
SE
Fig. 8. Enterprises and employment broken down by types of trade, manufacturing 2012. Source: Eurostat: Micro Data Linking Project 2014–2015.
The Micro Data Linking approach has proven very promising, especially establishing new knowledge about the internationalization of enterprises, firm heterogeneity and the impact of heterogeneity on the performance of enterprises. But a number of methodological issues need to be explored further before European statistics based on MDL can be an integrated part of the statistical production. Especially the issue of linking different samples with different weights and how to calibrate the weights need to be analysed in depth to come up with harmonized guidelines for future production of statistics based on MDL. Furthermore, one of the strengths of this approach is also to include the longitudinal identity of enterprises in the data sets established when analyzing impacts on performance. Identity over time is a complex issue as M & A, spin offs or other demographic events need to be taken into account when analyzing the performance of an identical enterprise over a longer time period. This is an area within business statistics where more clear definitions and internationally harmonized rules need to be elaborated and adopted. Currently, explorative work is carried out by the statistical institutes of Denmark, Finland, Norway and Sweden together with the OECD on using micro data linking of the type of statistical registers described in this paper to improve the TiVA datasets by taking firm heterogeneity better into account. In this way, MDL will also feed into macro-economic statistics, especially when analyzing GVCs based on micro data (Statistics Denmark, 2017). References Baldwin, R., 2011. Trade and industrialisation after globalisation’s In: Proceedings of the 2nd unbundling: How building and joining a supply chain are different and why it matters NBER Working Paper No. 17716. Brown, Clair, Sturgeon, Timothy; and Cole, Connor., 2013. The 2010 National Organizations Survey: Examining the Relationships Between Job Quality and the Domestic and International Sourcing of Business Functions by United States Organizations.
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Eurostat, 2011. Global Value Chains – international sourcing to China and India. 〈http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Global_value_ chains_-_international_sourcing_to_China_and_India〉. Eurostat, 2013. International Sourcing of Business Functions 〈http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/International_sourcing_of_ business_functions〉. Eurostat, 2014. Foreign affiliates statistics – employment by business functions. 〈http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Foreign_ affiliates_statistics_-_employment_by_business_function〉. Grossman, G.M., Rossi-Hansberg, E., 2006. Trading Tasks: A Simple Theory of Offshoring,NBER Working Paper, No. 12721. Huws, U., Dahlmann, S., 2004. Outsourcing of ICT and Related Services in the EU: A Status Report. European Foundation for the Improvement of Living and Working Conditions. Office for Official Publications of the European Communities, Luxembourg〈www.eurofound.europa.eu/emcc/publications/2004/ef04137en. pdf〉. Industry Canada, 2011. Business Innovation and Strategy: A Canadian Perspective. Report based on the results of the survey of innovation and business strategy. Cat. No. lu. Lanz, R., Miroudot, S., Nordås, H.K., 2011. Trade in Tasks, OECD Trade Policy Working Papers, No. 117. http://dx.doi.org/10.1787/5kg6v2hkvmmw-en. Nielsen, Peter Bøegh (ed), 2008. International Sourcing – Moving Business Functions abroad, Statistics Denmark available at 〈www.dst.dk/globalisation〉 and 〈http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/International_sourcing_statistics〉. Nielsen, PeterBøegh, Tilewska, Zuzanna, 2011. Micro Data Linking – Creating new Evidence by Utilising existing Statistical Registers in International Statistical Institute (ISI): Proceedings of the 2011 World Statistics Congress of the (2011). Nielsen, PeterBøegh, Luppes, Martin, 2012. Globalised enterprises: a European approach. Presentation to the OECD-Eurostat workshop on TEC and GVCs. OECD headquarters (Paris), 25-26 October. Nielsen, PeterBøegh, Sturgeon, TimothyJ., 2014. Using business functions to measure international trade and economic globalization, paper prepared for the International Conference on Trade and Economic Globalization, 29 September – 1 October 2014, Aguascalientes, Mexico. Porter, Michael, 1985. Competitive Advantage. Free Press, New York. Ricardo, David, 1817. On the Principles of Political Economy and Taxation. Statistics Denmark, 2017. OECD, Statistics Finland, Statistics Norway and Statistics Sweden, Nordic Countries in Global Value Chains, 2017. Sturgeon, Timothy, 2013. Global Value Chains and Economic Globalization – Towards a New Measurement Frame-work. 〈http://epp.eurostat.ec.europa.eu/portal/ page/portal/european_business/documents/Sturgeon_report_Eurostat.pdf〉. Sturgeon, Timothy, Nielsen, Peter Bøegh, Linden, Greg, Gereffi, Gary, Brown, Clair, 2012. Direct Measurement of Global Value Chains: Collecting Product- and FirmLevel Statistics on Value Added and Business Function Outsourcing and Offshoring. Chapter 11 in Mattoo, Aaditya; Wang, Zhi and Wei, Shang-Jin (eds): Trade in value added: developing new measures of cross-border trade. Washington, DC; The International Bank for Reconstruction and Development/The World Bank. Williamson, Oliver, 1985. The Economic Institutions of Capitalism: Firms, Markets and Relational Contracting.
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Contents lists available at ScienceDirect
International Economics journal homepage: www.elsevier.com/locate/inteco
The puzzle of measuring global value chains – The business statistics perspective☆ Peter Bøegh Nielsen Statistics Denmark, Sejrøgade 11, DK-2100 Copenhagen Ø, Denmark
A R T I C L E I N F O
ABSTRACT
JEL classification: D22 F23 F61 L23 L25
Measuring Global Value Chains (GVCs) is recognized as a prioritized but complicated challenge for statistical offices as the concept is complex. GVC's are difficult to measure due to interlinked cross border relations of goods, services, labour and capital at the level of the individual enterprise. A focal point in GVCs is the relationship between enterprises and currently only few statistics measure directly linkages between enterprises (e.g. FATS statistics) and new types of statistical evidence needs to be developed by linking different data sources at enterprise level. Measuring GVCs consists of a number of conceptual and methodological aspects which need to be combined in an analytical framework. Pieces of the puzzle exist or are being developed already today, e.g. the Trade in Value Added (TiVA) concept, Trade by Enterprise Statistics (TEC), or Foreign Affiliates Statistics (FATS) which constitute elements of a measurement framework under elaboration but other elements are still missing, such as information on business functions, governance structures and network relations. This paper presents results of recent initiatives in business statistics within the European Statistical System addressing different aspects of GVCs by different approaches; partly by launching a new survey on international organisation and sourcing of business functions, and partly by linking existing statistical registers at enterprise level. Finally, the paper identifies new activities to be launched by the statistical community in order to improve the measurement of GVCs.
Keywords: Global value chains Micro data linking International sourcing Business functions
1. Introduction The division of labour and accompanying specialization have been main drivers of economic growth through history. Where international trade was involved, this allowed reaping the gains from comparative advantage as described by David Ricardo (Ricardo, 1817). Traditionally, this was thought about in terms of vertically organized supply chains within a domestic economy and international exchange of final goods (international trade in services has become important only more recently) (Baldwin, 2011). However, since the Mid-eighties, supply chains have been increasingly split up, with transactions costs falling as a result of, not least, plummeting costs of ICT and allowing market transactions to substitute for internal, hierarchical organisation as discussed by Oliver Williamson (Williamson, 1985). Lower trade and investment barriers, liberalized domestic markets, cheaper transportation and communication, and lower costs of information allowed the unbundling of value-chains to become international in nature, with the concept of “trade in tasks” entering trade theory (Grossman and Rossi-Hansberg, 2006). Indeed, the geographic and organizational unbundling of the value chain is occurring across core goods- and services-producing activities, as well as support services such as ICT, back-office functions, and even R & D. Well-known examples of production dispersion are production of aircrafts or mobile
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Comments from the Editor and two anonymous referees are gratefully acknowledged. E-mail address: [email protected].
http://dx.doi.org/10.1016/j.inteco.2017.05.004
2110-7017/ © 2017 CEPII (Centre d'Etudes Prospectives et d'Informations Internationales), a center for research and expertise on the world economy. Published by Elsevier B.V. All rights reserved.
Please cite this article as: Nielsen, P.B., International Economics (2017), http://dx.doi.org/10.1016/j.inteco.2017.05.004
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phones where the value chains are globally organized. The increased global organisation and fragmentation of value added chains constitute one of the most important and complex measurement challenges for economic, business and trade statistics. It involves fundamental measurement issues such as the relevance of different statistical units, monitoring of ownership structures and dealing with transfer pricing and double counting in global trade. These new challenges related to global value chains (GVCs) come on top of the “classic” problems of measuring services due to their intangible character and the dynamic content. Furthermore, while the main focus of national statistical institutes is on domestic economic events, GVCs are to a large extent based on cross-border transactions and business linkages. The good news is that new definitions and tools are being developed to capture these new patterns at both the macro level (e.g. Trade in Value Added (TiVA)1 and other international input-output datasets) and at the micro level (e.g. business function surveys or Micro Data Linking exercises utilizing existing statistical registers that seek to measure and understand firm heterogeneity and performance in the context of GVCs). Over the long run, new information on business function sourcing and better use of existing data will feed into and improve international input-output datasets such as TiVA, but much is left to be done before current data gaps can be filled and an understanding of the impacts of GVCs on our economies gained (Sturgeon, 2013). Understanding interdependencies within global value chains are key to explaining the competitiveness of enterprises and the potential productivity gains that can be achieved. This article utilizes the results of two projects within the European Statistical System addressing the issue of measurement of global value chains from two different perspectives and two different methods but both of innovative character. The first project is based on a traditional survey approach but introducing the collection of new variables for the production of statistics in the form of opening up the black box of the enterprise by collecting information about the different business functions carried out by the enterprise. The second project is innovative in its method by establishing tailor-made national databases with harmonized contents to be used for Micro Data Linking (MDL) in nine European statistical offices. This method allows for analysis based on firm level data of the internationally trading enterprises and their possible heterogeneity related to type of trading or ownership.
2. The concept of business functions Business functions can be conceived as an aggregation of certain tasks/products carried out by the enterprise. They are equally applicable to goods-producing and services-producing enterprises. The concept is similar to the concept of occupations, but is focused on business activities rather than the activities of individual employee (a specific business function will typically involve a range of job categories and tasks) (Lanz et al., 2011). For the purpose of statistical surveys, business functions can be defined in terms of international product classifications such as Central Product Classification (CPC) or Classification of Products by Activity (CPA), Extended Balance of Payments Services classification (EBOPS) or Harmonized commodity description and coding System (HS). However, since any business function can be the main output of an enterprise (for example for enterprises that provide manufacturing services, R & D and engineering services, customer contact services, etc., for other firms), business functions can also be linked to activity (industry) codes such as NACE, ISIC, and NAICS. The concept of business functions is a new tool in the statistical toolbox. Business functions offer statisticians a set of generic, easy-to-understand categories that describe the various activities carried out by enterprises, irrespective of their main economic activity. Business function statistics are needed because enterprises, in addition to producing the goods or services from which they earn their revenues, typically require a variety of service functions to support their core line of business. The motivation for recent business function surveys stems from the relatively new business practice of outsourcing either domestically or internationally support functions such as customer contact services, software coding, and “back-office” functions such as payroll and document management (Sturgeon et al., 2012). In some instances, even the R & D process has been fragmented and relocated, with various related activities interlinked via cross-border ICT systems. The growing potential for trade in such ICT-enabled services necessitates new approaches to collecting business and trade statistics due to the intangible character of these services. Outsourcing of services, as well as the rise of manufacturing services, has generated a need for approaches that can “look inside” the enterprise to measure activities beyond the core business function in order to better understand firm heterogeneity. As discussed further below, the first official survey to introduce the concept of business functions in a statistical context was the European survey on International Sourcing, initially carried out in 2007 and repeated in 2012. Statistics Canada used a similar approach in 2009 and 2012 in its Survey of Innovation and Business Strategy (Industry Canada, 2011). Because of this work, the business function concept has now been proven effective in several contexts. The results are unambiguous. Questions about business functions are well understood by enterprise managers and the results from surveys have begun to provide useful insights into important policy questions. For the first time, the extent and character of outsourcing can be known for entire enterprise populations, and the relationships between international sourcing and employment and wages have begun to be explored using direct firm-level evidence (Brown et al., 2013; Nielsen and Luppes, 2012). Business function statistics can be used to inform a wide variety of research and policy questions. So far, business function surveys have mainly been used to examine firm-level patterns of domestic and international sourcing. International sourcing surveys using a business function framework have been able to answer basic, yet important policy-relevant questions such as: What are the main business functions that are internationally sourced, and where are they sourced? (Eurostat, 2013). Are enterprises mainly 1 The OECD-WTO Trade in Value Added database is based on Inter-Country Input Output tables, cf. http://www.oecd.org/sti/ind/measuringtradeinvalueaddedanoecd-wtojointinitiative.htm
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Box 1.Business Functions used in the 2007 European Union Survey on International Sourcing. Core business function: This function is the primary activity of the enterprise and will in most cases equal the main activity of the enterprise. It includes production of goods or services intended for the market/for third parties carried out by the enterprise and yielding income. The core business function equals in most cases the primary activity of the enterprise. It may also include other (secondary) activities if the enterprise considers these to comprise part of their core functions. 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. The outputs of the support business functions are not themselves intended directly for the market/for third parties. The support business functions are in the survey divided into: Distribution and logistics: This support function consists of transportation activities, warehousing and order processing functions. Marketing, sales and after sales services including help desks and call centres: This support function consists of market research, advertising, direct marketing services (telemarketing), exhibitions, fairs and other market- ing or sales services. Also including call-centre services and after sales services such as help-desks and other customer supports services. ICT services: This support function includes 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 are excluded. Administrative and management functions: This support function includes legal services, accounting, book-keeping and auditing, business management and consultancy, HR management (e.g. training and education, staff recruitment, provision of temporary personnel, payroll management, health and medical services), corporate financial and insurance services. Procurement functions are included as well. Engineering and related technical services: This support function includes engineering and related technical consultancy, technical testing, analysis and certification. Design services are included as well. Research & Development: This support function includes research and experimental development. In the second survey on International Organisation and Sourcing of Business Functions (2012) this function was integrated with the support function Engineering and related technical services. Other business functions: Including facility management. Source: Nielsen: International sourcing: Moving business functions abroad (Statistics Denmark, 2008); (Anon, 2008). internationally sourcing low value-added functions such as manufacturing and back-office work or are strategic, high value functions such as R & D also being internationally sourced? (Eurostat, 2011). How do enterprises that internationally source various business functions perform relative to enterprises that do not? (Nielsen and Tilewska, 2011). Does the type of function or source country make a difference? Do countries tend to play specific roles in global value chains (GVCs) by specializing in specific sets of business functions (e.g., R & D vs. production)? (Sturgeon et al., 2012).
3. Types of business functions The concept of business functions is based on the work of Michael Porter, who identified a list of nine generic business functions: R & D, design, production, marketing and sales, distribution, customer service, firm infrastructure, human resources, and technology development (Porter, 1985). A list of business functions was first utilized in a survey in 2000 as part of the EMERGENCE research project, funded by the European Commission. This project used a less-than-exhaustive list of seven business functions tailored to collect information about the outsourcing of information technology-related functions, such as software development and data processing (Huws and Dahlmann, 2004). The business functions lists used in subsequent, official surveys have sought to be exhaustive: they cover, in a parsimonious way, all business activities that enterprises either carry out internally or purchase from outside vendors, i.e. the whole value chain. A fundamental distinction, introduced in the European Survey on International Sourcing in 2007 and 2012 is between the core business functions of the enterprise and support business functions, as described in Box 1. The core business function represents the revenue-producing activity of the enterprise and will in most cases equals the main activity of the enterprise classified by NACE and registered and contained within the Business Register. It includes production of goods or services intended for the market. The core function may also include other (secondary) revenue generating activities if the enterprise considers these to be part of the core business function. Support business functions (ancillary activities) are carried out in order to permit or facilitate production of goods or services, but are not themselves sold directly for the market or to third parties. They do not directly generate revenues, only costs. However, the 3
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Fig. 1. Share of total number of persons employed broken down by detailed business functions, enterprises with 100 or more persons employed, selected activities 2011. Source: Eurostat: Survey on International Organisation and Sourcing of Business Functions 2012. The survey covered the following countries: Belgium, Bulgaria, Denmark, Estonia, Ireland, France, Latvia, Lithuania, the Netherlands, Norway, Portugal, Romania, Slovakia, Finland and Sweden. The survey covered enterprises with 100 or more employees in the non-financial market activities (NACE sections B to N excluding K).
cost and quality of support functions can make important contributions to the competitiveness of enterprises (e.g. R & D). To develop an exhaustive list of business functions, the function list must cover both core and support functions. As concerns the first, core or primary, revenue-raising function of the enterprise, the 2012 European Survey on International Sourcing showed that more than 75 per cent of all persons employed in enterprises with 100 or more employees, on average, were engaged in the core function of the enterprises. Only about one quarter worked in the supporting services functions, cf. Fig. 1 (Eurostat, 2014). Fig. 1 also shows the heterogeneity across business sectors, as the employment share of core functions was only two thirds for enterprises within high and medium tech manufacturing. This suggests that support business functions such as engineering and R & D services are more deeply integrated with manufacturing in knowledge intensive manufacturing enterprises. On the other hand, knowledge intensive services (KIS) are characterized by the largest share of persons employed in the core function of the enterprise, reflecting the labour intensity of knowledge intensive services and, possibly, a lesser need for certain support functions such as distribution and logistics in these services whereas, for example, administrative and management functions are of the same relative size as elsewhere. As concerns support services, a crucial feature of a business function list is that it is not only exhaustive but covers the full range of support functions in a parsimonious way while containing relevant, mutually- exclusive categories. Again, support functions are not directly revenue producing, but support the core function either directly or indirectly. While it is possible to designate support functions at a very detailed level, using long lists increases the respondent burden and sector-specificity that make them poorly suited for economy-wide business surveys. The purpose, therefore, is to create a concise list of generic support business functions that nevertheless cover the full range of possible business activities which enterprises must either accomplish with their own employees, or source from an outside enterprise or contractor. A main strength of the business function approach is its potential to identify support services and other intangible inputs to the enterprise such as R & D or IT services. Even if international sourcing is mainly carried out by manufacturing enterprises, support services functions are more commonly
Fig. 2. International sourcing broken down by core and support functions. Per cent of enterprises sourcing internationally, 2009–2011. Source: Eurostat Survey on International Organisation and Sourcing of Business Functions 2012
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sourced internationally than core functions (cf. Fig. 2). The international sourcing of services support functions and consequently a potential international trade with these functions – mainly ICT enabled -emphasizes the need for improving the current international trade in services statistics. 4. Sourcing destinations for European enterprises The survey on International Organisation and Sourcing of Business Functions showed that 44 per cent of manufacturing enterprises in the 15 European countries participating in the survey sourced to enterprises located in the member states being member of the European Union before 2004 (hereafter EU15)2 in the period 2009–2011; making this destination the most frequent destination for international sourcing, cf. Table 1. This destination was followed by the countries becoming member of the European Union in 2004 or later3; mainly Eastern European countries (hereafter EU12) as the second most frequent destination. Lower labour costs was given as the main motivation factor of the enterprises sourcing internationally and this is reflected by the importance of the Eastern European countries being the closest low wage destination for the enterprises located in the EU15. This pattern can be found both within high and medium technology (HMT) and low and medium technology (LMT) manufacturing4 as for the total nonfinancial market sector. For European manufacturing enterprises China was the third most important destination, as 17 per cent of the manufacturing enterprises sourcing internationally sourced to China; being a low wage country. Especially for HTM manufacturing enterprises China was an important destination, nearly as important as the European destinations. For LMT manufacturing enterprises China constituted a far less important destination as only 13 per cent sourced to this destination. The reason might be the relative importance of transportation costs for the products produced by the LMT industries when produced at locations located at distance from the customers. India is an important destination for not only services enterprises but also for HMT manufacturing enterprises as 15 per cent of all European HMT enterprises sourced to India. This finding is in line with the relative importance of knowledge intensive support services functions in HMT enterprises, cf. Fig. 2. If looking at Asia as one sourcing destination – including China and India – nearly half of all European HMT enterprises sourcing internationally has sourced to this continent. In comparison, only around one fourth of the LMT enterprises sourcing internationally sourced to Asia. Finally, it can be observed that the USA is a relatively important destination for HMT manufacturing enterprises as 10 per cent has sourced to this destination compared with only 3 per cent of the European LMT manufacturing enterprises; again reflecting the importance of knowledge intensive services in HMT enterprises. The manufacturing enterprises sourcing to EU15 countries are characterized by to a larger extent sourcing their core than support function to enterprises in these countries, but compared with other destinations the prominence of sourcing of core functions is small due to the fact that many foreign affiliates in other European countries have been sourcing support functions such as administrative or ICT support functions to their headquarters in the old member states. The same destination pattern can be found in the first European survey on international souring covering the period 2001–2006; showing that EU15 was the most frequent sourcing destination for manufacturing enterprises (34 per cent of all manufacturing enterprises sourcing internationally) closely followed by the EU12 member states (also 34 per cent), cf. Table 2. So the new member states were relatively of larger importance in the period prior to the crisis (and partly prior to their membership of the EU taking place in 2004). China was of equal importance in the two periods for HMT manufacturing enterprises while North America lost importance as a destination for moving business functions from the European manufacturing enterprises as the share was more than halved. In general, a relative new way of organizing the value chains globally by moving distinct business functions of the total value added chain abroad, from the outset shows a high degree of globalization as especially manufacturing enterprises have moved functions – and not only the core production function – globally. Especially China constitutes an important destination for international sourcing from European countries compared to the nearest neighboring countries, except for the EU12 due to cost efficiency seeking gains such as lower labour costs (Eurostat, 2011). 5. The concept of international orientation of enterprises The growing demand for information on global value chains requires the development of a standardized and harmonized concept of the international orientation of an enterprise or enterprise group. The concept used in this project is based on the dimensions; type of trader and type of ownership (here defined as foreign or domestic control). This concept enables statisticians to analyze the national and international component of business dynamics in terms of economic growth, employment and innovation, with respect to the different types of statistical units. As such this concept is now also part of the international work on global value chains, and is also referred to as ‘globalized enterprise’ (Nielsen and Luppes, 2012). 2 EU15 consists of the following countries Austria, Belgium, Germany, Denmark, France, Finland, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. 3 EU12 consists of the following countries the Bulgaria, Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Romania, Slovenia and Slovak Republic. 4 Manufacturing enterprises are classified according to technological intensity into High and Medium Technology activities (HMT)such as pharmaceuticals, electrical machinery and apparatus and Medium and Low Technology activities (LMT) such as production of food, textiles or rubber and plastic products according to the OECD (https://www.oecd.org/sti/ind/48350231.pdf).
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Table 1 Main sourcing destinations 2009–2011. Share of all enterprises sourcing internationally. Average for 15 European countries. Source: Eurostat: Survey on International Organisation and Sourcing of Business Functions 2012.
All activities Manufacturing high and medium high-tecnology Manufacturing Low and medium Low-tecnology manufacturing
EU15 Per cent
EU12
China
India
Rest Asia
USA
Brazil
44 41 34 45
28 30 31 30
12 17 25 13
16 12 15 9
9 8 8 5
7 6 10 3
2 1 1 1
Table 2 Main sourcing destinations 2001–2006. Share of all enterprises sourcing internationally. Average for 15 European countries. Source: Eurostat: Survey on International Sourcing 2007.
All activities Manufacturing high and medium high-tecnology Manufacturing Low and medium Low-tecnology manufacturing
EU15 Per cent
EU12
China
India
Rest Asia
USA
37,0 34,3 29,1 39,2
31,8 33,7 34,2 33,2
16,9 N/A 24,7 N/A
10,2 N/A 11,4 4,9
11,7 N/A 10,5 8,0
15,7 14,7 N/A N/A
The general definition of the concept of international orientation in many cases is restricted to the dimensions of type of trader, geography and ownership.5 International orientation of an enterprise is then defined as the intensity of international connectedness of an enterprise in terms of the presence of trade (imports, exports both goods and services) and the degree of influence and control across borders. The basic breakdown for ‘international orientation’ is outlined in Fig. 3. 6. Methodological approach of micro data linking As European business statistics to a large extent is based on common EU regulations, the central business or economic statistics such as structural business statistics, international trade in goods or statistics on foreign affiliates (FATS) are harmonized and thus comparable across the 28 member states of the European Union. However, due to the stove pipe production process of official statistics, i.e. each statistics is produced in isolation from one another, these micro data all focus on a limited number of aspects of the enterprise. But to measure the above mentioned internationalization of enterprises, we need to be able to use and analyze all these existing data sets simultaneously by constructing internationally harmonized statistical databases consisting of variables from different statistical sources to be used for micro data linking (MDL). In this way, a basic set of dummy variables indicating whether or not the enterprise is active in respectively imports, exports of goods, and information on enterprise structure (ownership) has been established. Eurostat and the European national statistical institutes have carried out several MDL projects in order to `modernize' the European enterprise and trade statistics. The main driver behind this development is twofold. Firstly, the analysis of cause and effect requires linking different types of variables at enterprise level which implies breaking through the traditional stove pipes of statistical production. Secondly, there is the practical argument of lowering the respondent burden on enterprises. Furthermore, the MDL approach increases the return on investment for the existing detailed micro data sets, and finally it also makes that the statistics can be more adequately used to guide policy makers. MDL has proven to be a successful analytical strategy in the development of statistical information on the international dimension and impact of GVCs. MDL serves as an appropriate method to analyze the current most addressed research questions on cross border activities (‘what kind of enterprises are trading’ instead of ‘what do countries trade’), firm heterogeneity (‘how are different types of enterprises contributing to GDP’) and the organisation of cross-border production processes (“what parts of the business organisation move up or down the value chain’). In the following section the results of a European project establishing harmonized databases as illustrated in Fig. 4 are presented. The analysis has been carried out using national databases that were constructed by each participating statistical institute containing a harmonized set of variables. The databases cover all active enterprises in the non-financial business economy (NACE Rev.2 sections B to N, excl. K) for the period 2008–2012. In each national database, annual business statistics data is linked through the national business registers at enterprise level with the statistical registers containing structural business statistics (employment, turnover), foreign affiliates statistics (country of ownership) as well as international trade in goods (imports, exports, destinations). 5
Linkages related to cross border financial flows are out of scope at this moment, as not all information is available at the level of the individual enterprises.
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Fig. 3. Breakdown of international orientation.
Fig. 4. Organisation of the European micro data linking (MDL) project.
7. Profiling enterprises trading internationally As mentioned above, the participation in global production chains is an important factor for improving the competitiveness of domestic enterprises. This section presents data on traders vs. non-traders of goods and is thus for analytical reasons limited to manufacturing. Do we find the same degree of connectedness across all European countries? Are enterprises in some European countries more linked to only regional, i.e. intra EU, production chains than in others? In total, nearly 94.400 out of 413.800 manufacturing enterprises – or 23 per cent - in 2012 in the eight European countries taking part in this exercise can be characterized as traders, cf. Table 3.6 The share of traders in manufacturing exporting or importing goods directly from abroad differs from country to country. With just above 40 per cent respectively, the share of traders is highest in smaller open economies such as Denmark and Austria, while in a large economy as Germany, the share is somewhat lower with 25 per cent. The number of German manufacturing enterprises being traders increased with 4 per cent in the period7; showing that German manufacturing enterprises are increasingly becoming integrated into the global value chains although a domestic market of considerable size exists. For the other countries, the number of traders generally was slightly decreasing during the period 2008– 2012, while the number of non-traders fell, also reflecting the general decline of manufacturing in the European countries in this
6 In this analysis, traders are defined as enterprises with either exports, imports or both above the threshold of minimum 5 per cent trade relative to turnover, and at least 5000 euros of trade value. 7 Unfortunately, data for Germany is only available from 2009; consequently the different base year hampers the exact comparison of the development in Germany to other countries.
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Table 3 Number of manufacturing enterprises. International Traders
All eight countries Denmark Germanya Latvia Austria Portugal Finland Sweden Norway a
Non trading enterprises
2008
2012
2008
2012
93 416 5 958 48 652 1 236 10 299 13 244 3 593 6 338 4 096
93 817 5 856 50 576 1 238 10 319 12 785 3 263 5 763 4 017
310 535 10 669 130 061 4 976 15 782 69 803 19 713 46 075 13 456
319 964 9 644 153 554 6 455 14 683 56 268 18 864 47 020 13 476
German figures refer to 2009 and 2012.
Table 4 No of employees (Full time equivalent) in manufacturing. International Traders
All eight countries Denmark Germanya Latvia Austria Portugal Finland Sweden Norway a
Non trading enterprises
2008
2012
2008
2012
6 966 601 296 896 4 599 206 86 726 505 229 472 089 363 573 478 920 163 662
6 973 857 229 597 4 904 099 59 553 494 937 416 118 301 769 414 940 152 844
2 298 797 50 981 1 582 068 31 057 77 859 261 250 84 685 133 164 77 733
2 303 326 34 211 1 706 105 18 852 68 073 191 897 83 202 129 552 71 434
German figures refer to 2009 and 2012.
period partly due to international sourcing as described in the first part of the article. The European exporting enterprises were hit dramatically by the economic crisis from late 2008 which is clearly reflected by the drastic decrease in employment in enterprises trading internationally in countries such as Denmark (decrease of 22.7 per cent), Finland (17.0 per cent) or Portugal (11.9 per cent), cf. Table 4. But it should be noted that the non-trading enterprises in both Denmark and Portugal lost even more employment (32.9 respectively 26.5 per cent). Germany was the only of the eight participating countries experiencing an employment growth in the trading enterprises during the economic crisis (6.6 per cent, but the nontrading enterprises actually grew even more (7.8 per cent)). The trading enterprises are characterized by being larger than the non-trading enterprises as they employ nearly 7 million employees (measured in no. of full time equivalent employees) or on average 74 employees per enterprises compared to 7 employees per non trading enterprise in 2012. The vast majority of trading enterprises within manufacturing are domestically owned enterprises, as the domestically owned enterprises constitute 90 per cent of all traders in all countries, except for Latvia (80 per cent) and Sweden (85 per cent). The structure has not been influenced by the economic crisis as the shares are stable in the period observed from 2008 to 2012. Due to data availability, it is only possible for a few countries to further break down the population of domestically controlled enterprises into the ones having foreign affiliates and the ones not having, cf. Fig. 5. This shows that international trade is mainly carried out by multinational enterprises being domestically or foreign controlled. Only in Denmark, a relative large share of traders in manufacturing is domestic controlled enterprises without foreign affiliates. Looking at the geographical markets, at which the traders operate, there is a clear pattern as the majority of the foreign owned enterprises in all countries can be characterized as global traders (trading with both Intra and Extra EU countries). The domestically owned enterprises are to a much lesser extent global traders but major differences across the countries can be observed. Austria, Germany and Sweden have the highest share of traders amongst domestic owned enterprises trading to countries outside the European Union, while in Portugal the majority of domestically owned traders trade with other EU countries (Fig. 6). Degree of openness can be seen as an indicator of integration into global value chains.8 In line with the previous results, foreign owned enterprises trading globally are more open to trade than domestic owned enterprises. This is the case in all countries, but it can be noted that in Germany and Norway, the degree of openness is relatively equal between foreign and domestically owned traders trading globally, cf. Fig. 7.
8
Openness is calculated as (exports+imports)/(turnover+purchases).
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Share of enterprises 100 80 60 40 20 0 2012
2008
2008
2012
AT
2008
2012
DK
2012
LV
Domestic owned enterprises
SE
Domestic owned enterprises without foreign affiliates
with foreign affiliates
2008
Foreign affiliates
Fig. 5. Traders (no of enterprises) broken down by control (Foreign/Domestic with foreign affiliates/Domestic without foreign affiliates) manufacturing 2008 and 2012. Source: Eurostat: Micro Data Linking Project 2014–2015.
Furthermore, the established data sets give the opportunity of analyzing to which extent the traders are involved in both export and import activities (so-called two way traders) or just are exporters or importers. Fig. 8 illustrates that even though two-way traders only constitute around 40 per cent of all trader enterprises, they employ more than 75 per cent in all countries except Portugal. This picture is similar across countries, where especially Germany and Sweden shows a significant difference between share of enterprises and share of employment when looking at two-way traders. While in most countries importers count for less than 40 per cent off all trader enterprises, in Norway importers constitute around 65 per cent. The results show that especially MNEs are global traders being present not only at the closest markets but trading globally as a fundamental part of their business model. The results also show that the largest enterprises are two way traders – taking part in export as well as import activities as a part of their integration into to global value chains and reflecting the global fragmentation of their production processes.
8. The road ahead This article has presented the two most recent and important developments in European business statistics concerning measuring Global Value Chains. The puzzle of measuring Global Value Chains is continuously being added more pieces in terms of new statistical data or methods being tested or put in place by national statistical institutes. Below is mentioned the most important new initiatives taken by the European Statistical System in terms of business statistics: The current version of the new European Framework Regulation on Integrated Business Statistics (FRIBS) introduces the survey on International Sourcing and the concept of Business Functions as a part of the Regulation. The survey is expected to be carried out every third year. Furthermore, the UN Statistical Division is preparing a classification of business functions allowing for the production of business function statistics using a harmonized definition in the future (Nielsen and Sturgeon, 2014). Percent 100 80 60 40
AT
DE
DK Global trade
FI
LV Extra EU trade only
NO Intra EU trade only
Fig. 6. Enterprises broken down by control (Foreign/Domestic) and international orientation, manufacturing 2012. Source: Eurostat: Micro Data Linking Project 2014–2015.
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PT
Foreign
Domestically
Foreign
Domestically
Foreign
Domestically
Foreign
Domestically
Foreign
Domestically
Foreign
Domestically
Foreign
Domestically
Foreign
0
Domestically
20
SE
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Percent
Foreign owned enterprises
70 60 50 40 30 20 10 0 AT
DE
LV
FI
DK
PT
NO
SE
Fig. 7. Degree of openness, global traders, broken down by control (Foreign/domestic). Source: Eurostat: Micro Data Linking Project 2014–2015.
Percent
Two way traders
Exporters only
Importers only
100 80 60 40
AT
DE
DK
FI
LV
NO
PT
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Employment (FTE)
Enterprises
Enterprises
0
Employment (FTE)
20
SE
Fig. 8. Enterprises and employment broken down by types of trade, manufacturing 2012. Source: Eurostat: Micro Data Linking Project 2014–2015.
The Micro Data Linking approach has proven very promising, especially establishing new knowledge about the internationalization of enterprises, firm heterogeneity and the impact of heterogeneity on the performance of enterprises. But a number of methodological issues need to be explored further before European statistics based on MDL can be an integrated part of the statistical production. Especially the issue of linking different samples with different weights and how to calibrate the weights need to be analysed in depth to come up with harmonized guidelines for future production of statistics based on MDL. Furthermore, one of the strengths of this approach is also to include the longitudinal identity of enterprises in the data sets established when analyzing impacts on performance. Identity over time is a complex issue as M & A, spin offs or other demographic events need to be taken into account when analyzing the performance of an identical enterprise over a longer time period. This is an area within business statistics where more clear definitions and internationally harmonized rules need to be elaborated and adopted. Currently, explorative work is carried out by the statistical institutes of Denmark, Finland, Norway and Sweden together with the OECD on using micro data linking of the type of statistical registers described in this paper to improve the TiVA datasets by taking firm heterogeneity better into account. In this way, MDL will also feed into macro-economic statistics, especially when analyzing GVCs based on micro data (Statistics Denmark, 2017). References Baldwin, R., 2011. Trade and industrialisation after globalisation’s In: Proceedings of the 2nd unbundling: How building and joining a supply chain are different and why it matters NBER Working Paper No. 17716. Brown, Clair, Sturgeon, Timothy; and Cole, Connor., 2013. The 2010 National Organizations Survey: Examining the Relationships Between Job Quality and the Domestic and International Sourcing of Business Functions by United States Organizations.
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Eurostat, 2011. Global Value Chains – international sourcing to China and India. 〈http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Global_value_ chains_-_international_sourcing_to_China_and_India〉. Eurostat, 2013. International Sourcing of Business Functions 〈http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/International_sourcing_of_ business_functions〉. Eurostat, 2014. Foreign affiliates statistics – employment by business functions. 〈http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Foreign_ affiliates_statistics_-_employment_by_business_function〉. Grossman, G.M., Rossi-Hansberg, E., 2006. Trading Tasks: A Simple Theory of Offshoring,NBER Working Paper, No. 12721. Huws, U., Dahlmann, S., 2004. Outsourcing of ICT and Related Services in the EU: A Status Report. European Foundation for the Improvement of Living and Working Conditions. Office for Official Publications of the European Communities, Luxembourg〈www.eurofound.europa.eu/emcc/publications/2004/ef04137en. pdf〉. Industry Canada, 2011. Business Innovation and Strategy: A Canadian Perspective. Report based on the results of the survey of innovation and business strategy. Cat. No. lu. Lanz, R., Miroudot, S., Nordås, H.K., 2011. Trade in Tasks, OECD Trade Policy Working Papers, No. 117. http://dx.doi.org/10.1787/5kg6v2hkvmmw-en. Nielsen, Peter Bøegh (ed), 2008. International Sourcing – Moving Business Functions abroad, Statistics Denmark available at 〈www.dst.dk/globalisation〉 and 〈http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/International_sourcing_statistics〉. Nielsen, PeterBøegh, Tilewska, Zuzanna, 2011. Micro Data Linking – Creating new Evidence by Utilising existing Statistical Registers in International Statistical Institute (ISI): Proceedings of the 2011 World Statistics Congress of the (2011). Nielsen, PeterBøegh, Luppes, Martin, 2012. Globalised enterprises: a European approach. Presentation to the OECD-Eurostat workshop on TEC and GVCs. OECD headquarters (Paris), 25-26 October. Nielsen, PeterBøegh, Sturgeon, TimothyJ., 2014. Using business functions to measure international trade and economic globalization, paper prepared for the International Conference on Trade and Economic Globalization, 29 September – 1 October 2014, Aguascalientes, Mexico. Porter, Michael, 1985. Competitive Advantage. Free Press, New York. Ricardo, David, 1817. On the Principles of Political Economy and Taxation. Statistics Denmark, 2017. OECD, Statistics Finland, Statistics Norway and Statistics Sweden, Nordic Countries in Global Value Chains, 2017. Sturgeon, Timothy, 2013. Global Value Chains and Economic Globalization – Towards a New Measurement Frame-work. 〈http://epp.eurostat.ec.europa.eu/portal/ page/portal/european_business/documents/Sturgeon_report_Eurostat.pdf〉. Sturgeon, Timothy, Nielsen, Peter Bøegh, Linden, Greg, Gereffi, Gary, Brown, Clair, 2012. Direct Measurement of Global Value Chains: Collecting Product- and FirmLevel Statistics on Value Added and Business Function Outsourcing and Offshoring. Chapter 11 in Mattoo, Aaditya; Wang, Zhi and Wei, Shang-Jin (eds): Trade in value added: developing new measures of cross-border trade. Washington, DC; The International Bank for Reconstruction and Development/The World Bank. Williamson, Oliver, 1985. The Economic Institutions of Capitalism: Firms, Markets and Relational Contracting.
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