MNF and GVC R´ emi Bazillier Introduction

Lesson 2: Multinational Firms’ Location and Global Value Chain Firm Performance and Development Master 2 Development Economics Univ. Paris 1 Pantheon-Sorbonne

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

R´emi Bazillier 1

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[email protected] http://remi.bazillier.free.fr

Outline

MNF and GVC R´ emi Bazillier Introduction

Introduction

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014)

Stylized facts (Antras and Yeaples 2014)

Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Introduction

MNF and GVC R´ emi Bazillier Introduction

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Over the last two decades: firms rather than countries or industries at the central unit of analysis I

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Micro-level studies have shown international activity to be concentrated within a handful of very large firms: in 2000, the top 1% US exporters accounted for 81% of US exports (Bernard et al. 2009) 90% of US exports and imports flow through multinational firms

Definition of multinational firms (Caves 2007) “An enterprise that controls and manages establishments plants - located in at least two countries”

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC R´ emi Bazillier Introduction

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Multinational firms: I

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Parents are entities located in one country (source country) and affiliates are entities located in others countries (destination countries). The notion of control is often associated with ownership. Such ownership is the result of foreign direct investments which can alternatively involves the acquisition of an existing foreign firm (cross-border acquisition) or the establishment of a new affiliate (greenfield investment)

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC R´ emi Bazillier Introduction

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Traditional theory of multinational firms: I

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multinational firms were simply arbitrageurs that moved capital fromcountries where returns were low to countries where returns were high.

Modern theories: I

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Hymer (1960): an industrial-organization approach based on the notion that some firms own special assets that confer a strategic advantage over indigenous firms in foreign markets. Dunning’s OLI framework: Ownership, Location, Internalization

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Dunning’s OLI framework

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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The emergence of the multinational firm is explained by an ownership advantage stemming from firm-specific assets that allow firms to compete in unfamiliar environments I

a proprietary technology or reputation that provides its owner with some market power or cost advantage over indigenous producer

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Dunning’s OLI framework

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a Location advantage that makes it efficient to exploit the firm assets in production facilities in multiple countries I

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the development of these assets (tangible or intangible) entails significant fixed costs, but these assets can then be used in different locations simultaneously in a nonrival manner. This allows economies of scale to be exploited efficiently. Another branch of the literature has related location advantages to situations in which production is amenable to geographical fragmentation, thus allowing different parts of the production process to be undertaken in the location where it is most cost-effective to do so (→ Global Value Chain)

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Dunning’s OLI framework

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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an Internalization advantage that makes the within-firm ˇ exploitation of assets dominate exploitation at armSs length I

the internalization advantage is attributed to market failures in the transfer of technology-related to the partial nonexcludable, nonrival, and noncodifiable nature of technology-and to inefficiencies associated with market exchanges of highly customized intermediate inputs.

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC R´ emi Bazillier Introduction

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It took some time before integrating the insights of OLI framework in international trade theories because of the absence of a widely accepted general-equilibrium modeling of increasing returns to scale, product differentiation, and imperfect competition (compatible with OLI framework) Modeling of product differentiation and imperfect competition: Dixit-Stiglitz (1977) adopted by Krugman (1979, 1980) I

Krugman (1980), firm heterogeneity (Melitz 2003), Markusen (1984), Markusen and Venables (1998)

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC

Stylized facts

R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Antras and Yeaples (2014)

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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Fact 1: Multinational activity is primarily concentrated in developed countries where it is mostly two-way. Developing countries are more likely to be the destination of multinational activity than the source.

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Antras and Yeaples (2014)

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Antras and Yeaples (2014)

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The left-hand panel shows that a 1% increase in distance is associated with 0.57 fall in affiliate sales.

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The right-hand panel shows that as distance increases affiliate sales are falling less rapidly than trade volumes, so while gravity holds for affiliate sales, its effect on trade volumes is stronger.

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development

Source: Antras and Yeaples (2014)

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The logarithm of the ratio of the value of imported intermediates to the sum of local value-added plus imported intermediates is declining in the distance between the affiliate and the U.S. parent This suggests that vertical specialization is harder at long distances I

But the very open Asian economies of Hong Kong, Malaysia, the Philippines, Singapore, and Taiwan import large amounts of intermediate inputs despite their distance from the United States.

Costinot and Vogel (2013), Restud

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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Fact Three: The production of the foreign affiliates of multinationals falls off in distance, but at a slower rate than either aggregate exports or parent exports of inputs to their affiliates.

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Antras and Yeaples (2014)

MNF and GVC R´ emi Bazillier

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Fact Four: Both the parents and the affiliates of multinational firms tend to be larger, more productive, more RD intensive, and more export oriented than non-multinational firms. Fact Five:Within multinational enterprises,parents are relatively specialized in R&D while affiliates are primarily engaged in selling goods in foreign markets, particularly in their host market. Fact Six: Cross-Border Mergers and Acquisitions make up a large fraction of FDI (more than 50%) and are a particularly important mode of entry into developed countries I

For developed countries cross-border mergers and acquisitions accounted for 68% of FDI flows while for developing countries the number was only 18%.

Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Reference

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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Antr`as, P. and SR. Yeaple (2014). Multinational Firms and the Structure of International Trade. Handbook of International Economics, 4, 55. Unified theoretical framework: an extended Krugman (1980) model with heterogenous firms

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Determinants of FDI (Bloningen and Piger 2014)

MNF and GVC R´ emi Bazillier

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Numerous empirical studies on the determinants of FDI using gravity Recent theoretical models have emphasized additional dimensions (Carr, Markusen and Maskus 2001, Bergstrand and Egger 2007): I

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Gravity variables adequatly capture “horizontal FDI” where firms look to replicate their operations in other countries to be more proximate to consumers in those markets Additional control variables are necessary to explain “vertical FDI” where firms look for low-cost locations for labour-intensive production (relative labour endowments) These studies shows that FDI decisions are complex. Interactions between key variables (eg. GDP and skill endowments) may be necessary to account for nonlinear effects of these variables on FDI Potential role of common culture and common language

Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC R´ emi Bazillier Introduction

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In most studies! regression models involving specific sets of covariates determined by the researcher and one particular theoretical framework for FDI inference regarding the effects of included covariates can depend critically on what other covariates are included versus excluded

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→ Empirical studies may have different conclusions because of that

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The goal is to provide a set of robust determinants of FDI using a Bayesian approach to take into account the uncertainty on the set of covariates

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC

FDI determinants model

R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014)

Y = α + Xj βj + 

(1)

Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

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Uncertainty on the appropriate variables to include in Xj

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Comparison of alternative models using the Bayesian approach

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Blonigen and Piger (2014)

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Blonigen and Piger (2014)

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Blonigen and Piger (2014)

Main results

MNF and GVC R´ emi Bazillier Introduction

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Only seven variables have inclusion probabilities over 50% I

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This suggests a fairly parsimonious specification is sufficient to explain cross-country FDI patterns

Preferred specification: in logs because of the substantial skewness in the dependent variable. → Standard gravity variables with a few friction variables comprise the bulk of the variables with explanatory power for cross-country FDI patterns I

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Standard gravity variables: Real GDP for the host and parent countries, common language, colonial relationship Trade openess variables: RTA and host countries openness

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Main results

MNF and GVC R´ emi Bazillier Introduction

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Endowments differences: I I

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Little statistical support for: I

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host country skill-level and the squared skill difference All other endowments variables have very low inclusion probabilities Business costs, infrastructure, institutions in host countries Exception for legal institutions and corporate tax level

Very high inclusion probabilities for some variables not included in empirical FDI studies: I

GDP per capita in parent countries, remoteness of host countries, urban concentration of the host countries

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Specificities of FDI with less-developed countries

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014)

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Much more statistical problems, no reliable statistics on FDI stocks in poor countries More reliable information on cross-border merger & acquisition (M&A)

Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Blonigen and Piger (2014)

Additional results

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014)

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More endowments variables have high inclusion probabilities: I I

Education in parent and host countries Bilateral treaties (bilateral investment treaty, double taxation treaty and service sector agreements)

Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Implications

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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Debate on countries’ attractiveness I

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Little statistical support for variables related to the business environment Relations are much more complex

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What about social/labour and environmental factors? (→ next chapters)

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Global Value Chain is more and more complex (→ next section)

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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Reference: Blonigen, B. A., Piger, J. (2014). Determinants of foreign direct investment. Canadian Journal of Economics/Revue canadienne d’´economie, 47(3), 775-812.

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Global Value Chain

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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The global economy is increasingly structured around global value chains (GVCs) that account for a rising share of international trade, global GDP and employment For many countries, especially low-income countries, the ability to effectively insert themselves into GVCs is a vital condition for their development. I

It supposes an ability to access GVCs, to compete syccessfully and to “capture the gains” in terms of development

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

What are the Global Value Chains

MNF and GVC R´ emi Bazillier

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The value chain describes the full range of activities that firms and workers perform to bring a product from its conception to end use and beyond I

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Four basic dimensions (Gereffi and Fernandez-Stark 2011): I

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The activities that comprise a value chain can be contained within a single firm or divided among different firms

an input-output structure, which describes the process of transforming raw materials into final products A geographical consideration A governance structure, which explains how the value chain controlled An institutional context in hwich the industry value chain is embedded

Upgrading : the dynamic movement within the value chain examining how producers shift between different stages of the chain

Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Input-Output Structure

MNF and GVC R´ emi Bazillier

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A chain represents the entire input-output process that brings a product or service from initial conception to the ˇ hands consumerSs I

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The main segments in the chain vary according to the industry Typically these include: research and design, inputs, production, distribution and marketing, and sales, and in some cases the recycling of products after use

Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Figure : An example of GVC segments: the fruit and vegetables industry

Source: Gereffi and Fernandez-Stark 2011

Identify the dynamic and structure of companies under each segment of the value chain

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Gereffi and Fernandez-Stark 2011

Geographic Scope

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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International fragmentation of the production process I

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Usually, developing countries offer low labour cost and raw materials while rich countries are behind research and development and product design

One challenge for development policies: it is not enough to attract FDI but to attract FDI at a level of the GVC that creates values

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Governance

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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“authority and power relationships that determine how financial, material and human resources are allocated and flow within a chain” (Gereffi 1994) Initially, governance was described broadly in terms of “buyer-driven” or “producer-driven” I

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Buyer-driven: powerful role of large retailers (Wal-Mart, Tesco) and branded mechandisers (Nike, Reebok) Producer-driven: more vertically integrated along all segments of the supply chain

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Five GVC governance type

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Gereffi and Fernandez-Stark 2011

Institutional context

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014)

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How local, national and international conditions and policies shape the globalization in each stage of the value chain (Gereffi 1995) Economic, social and institutional dynamics

Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Development: Upgrading in the GVC?

MNF and GVC R´ emi Bazillier Introduction

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Upgrading: strategies used by countries, region, firms to maintain or improve their positions in the global economy

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain

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Economic upgrading: “firms, countries or regions moving to higher value activities in GVCs in order to increase the benefits (e.g. security, profits, value-added, capabilities) from participating in global production” Assembly → original equipment manufacturing → original brand name manufacturing → original design manufacturing

Rossi (2013), World Development Costinot and Vogel (2013), Restud

Four types of upgrading

MNF and GVC R´ emi Bazillier Introduction

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Process upgrading: which transforms inputs into outputs more efficiently by reorganizing the production system or introducing superior technology

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain

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Product upgrading: moving into more sophisticated product lines

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Functional upgrading: which entails acquiring new functions (or abandoning existing functions) to increase the overall skill content of the activities

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Chain or inter-sectoral upgrading: where firms move into new but often related industries

Rossi (2013), World Development Costinot and Vogel (2013), Restud

Upgrading Stages of selected countries in the fruit and vegetables value chain

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Gereffi and Fernandez-Stark 2011

The example of Torreon, Mexico for the blue jeans industry

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Gereffi and Fernandez-Stark 2011

From Economic to Social upgrading

MNF and GVC R´ emi Bazillier

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Social upgrading: the process of improvement in the rights and entitlements of workers as social actors, and enhances the quality of their employment (Sen 1999; 2000) I

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Access to better work, which might result from economic upgrading Enhancing working conditions, protection and rights The concept is framed by the ILO decent work framework: this promotes work taking place under conditions of freedom, equity, security and human dignity, in which rights are protected and adequate remuneration and social coverage is provided (ILO 1999)

Social upgrading depends on the workforce composition across different sector GVC (see next figure)

I Reference: Barrientos, S., Gereffi, G., Rossi, A. (2010). Economic

and social upgrading in global production networks: Developing a framework for analysis. International Labor Review, 150(3-4), 319-340.

Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Typology of workforce composition across different sector GVC

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Source: Barrientos, Gereffi and Rossi (2010)

Possible trajectories of social upgrading

MNF and GVC R´ emi Bazillier Introduction

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Small-scale worker upgrading: I

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where workers remain within home based production (agriculture or manufacture), but are still able to enjoy improvements in their work conditions eg. provision of more secure contracts for African workers in small-scale horticulture

Labour intensive upgrading: I

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where workers move to better labour intensive types of work where they can also obtain better working conditions eg. women workers in Bangladesh or Sri Lanka, who have migrated from subsistence farming to waged work in garments, and been able to obtain jobs in factories that have implemented codes of labour practice

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Possible trajectories of social upgrading

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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Higher-skill upgrading: I

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where workers move both towards better paid employment associated with progressive social upgrading eg. workers in India or China who have been able to gain sufficient education and training to move from lower-paid low skilled work into the IT sector, and at the same time obtain higher paid employment in firms where labour standards are improving

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Rossi (2013), “Does Economic Upgrading Lead to Social Upgrading in Global Production Networks? Evidence from Morocco”, World Development

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One example of the linkages between economic and social upgrading The authors shows that functional upgrading often translates into social upgrading and downgrading simultaneously for different workers I

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This is due to contradictory commercial requirements imposed by global buyers in GVC Unskilled workers employed in the last segments of the GVC such as packaging, storage, and loading are negatively affected by functional upgrading

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Costinot and Vogel (2013), “An elementary Theory of Global Supply Chains”, Review of Economic Studies I

Standard trade literature has entered the debate on GVC by investigating how the possibility to fragment production processes across borders may affect the volume, pattern and consequences of international trade; see e.g. Feenstra and Hanson(1996), Yi (2003) and Grossman and Rossi-Hansberg (2008)

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In this paper, the research question: how does technological change, either global or local, affect different countries participating in the same supply chain?

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How does vertical specialization shape the interdependence of nations?

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

The model

MNF and GVC R´ emi Bazillier

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A simple theory of trade with sequential production I

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A World economy with multiple countries, one factor of production (labor) and one final good Production is sequential and subject to mistakes. Production of the final good requires a continuum of intermediate stages. Mistakes occur along the supply chain at a constant Poisson rate, which is an exogenous technological characteristic of a country When a mistake occurs at some stage, the intermediate good is entirely lost.

Free trade I

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It exhibits vertical specialization: countries with lower probability of making mistakes, at all stages, specialize in later stages of production, where mistakes are more costly. Because of the sequential nature of production, absolute productivity differences are a source of comparative advantage among nations

Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

The effect of global technical change

MNF and GVC R´ emi Bazillier Introduction

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An increase in complexity (increase in the lenght of the production process)

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A standardization (uniform decrease in failures rate worldwide)

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Both increase in complexity and standardization lead all countries to “move up” the supply chain (economic upgrading) Opposite effects on inequalities I

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Increase in complexity increases inequality around the World Standardization benefits poor countries. It may even lead to a welfare loss in the most technologically advanced country

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

The spillover effects of local technical change

MNF and GVC R´ emi Bazillier

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Two forms of local technical change: (1) labor-augmenting technical progress, and (2) a decrease in a country’s failure rate (routinization) Labour-augmenting technical progress: I

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An increase in the supply of labor (in efficiency units) in one country tends to raise total output at all stages of production As a result, countries at the bottom of the GVC move down and countries at the top move up Ambiguous effects on inequalities: I

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It decreases inequality between nations at the bottom of the chain At the top, two conflicting forces: (1) countries are moving up (↑ inequalities) (2) they are performing fewer stages (which reduces the volume of imports and amount of labor necessary to produce one unit of their export ↓ inequalities)

Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

MNF and GVC R´ emi Bazillier Introduction Stylized facts (Antras and Yeaples 2014)

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Routinization (decrease in the failure rate) I I

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All countries move up the supply chain It increases inequalities among countries at the bottom of the chain It decreases inequalities among countries at the top of the chain

Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Main results

MNF and GVC R´ emi Bazillier Introduction

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At the bottom of the chain, depending on the nature of technological changes, countries may move up or down, but whatever they do, movements along the chain fully determine changes in the world income distribution within that region. At the top of the chain, in contrast, local technological progress always leads countries to move up, but even conditioning on the nature of technological change, inequality between nations within that region may fall or rise

Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud

Conclusions

MNF and GVC R´ emi Bazillier

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Multinational firms location and organization of the GVC have important implications in terms of development 1. Determinants of location choices are complex but the bunch of robust determinants of FDI is rather limited (and in concordance with the prediction of gravity models) 2. No strong empirical support for the role of business environmnent 3. Attracting FDI is not enough for development. “Capturing the gain” in the Global Value Chain (Economic upgrading). 4. Economic upgrading does not necessarily lead to social upgrading 5. Technological changes (both global and local) have strong implications in terms of inequalities, depending on the position in the GVC

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Next lectures: what role for labour and environmental regulations in these dynamics?

Introduction Stylized facts (Antras and Yeaples 2014) Determinants of FDI (Bloningen and Piger 2014) Global Value Chain Rossi (2013), World Development Costinot and Vogel (2013), Restud