Global Value Chains and the Italian Case.

What do they explain?

Vertical organization of the production chain Ownership component: extent of vertical integration. Geographical component: location choices. Often interchangeable: delocalization, offshoring, outsourcing…

Intersection of at least four fields: Economic geography / Trade: How is the geography of value

added changing? Which sectors provide higher value added? Microeconomics/contract theory: How important is contracting

in the value chain? To what extent does the law favour integration?

Industrial Organization: How do pricing and quality choices as well as other typical IO variables change?

Management/Organization: How does the internal organization of the firms change?

Ownership - Some theory

Benefits from vertical integration: greater coordination; exploitation of scale economies; control over the production chain; no need to use contracts for transactions.

Costs of vertical integration / Benefits from vertical disintegration: firm more focused and specialized in what they do; small scale, less bureaucratic structure; more flexibility.

Vertical integration related to ownership, not to physical location (although location can be affected).

Geography - Some theory

Benefits from physical proximity (along the production chain): decreasing in transportation costs; decreasing in communication costs; increasing in the amount of “soft” and informal

communication.

Benefits from physical proximity outside the production chain: Incentives to share information depend on complementarity

versus substitutability of firms; positive externalities are predominant in the ICT world; network externalities, multiple-sided markets; in general, complementarities prevail in expanding markets.

Agglomeration and the new world

How do recent changes shape the global value chain?

Transportation costs declining in % of GDP but not that significantly. But not declining in absolute terms. And heavily dependent on the price of raw materials.

Communication costs greatly decreased for “codable” communication. Internet and new technologies.

Complementarities between sharing technologies and physical proximity Edward Glaeser, “The Triumph of the City”.

Current Trends

Agglomeration of the “brain” of the production chains, especially in ICT sectors and where innovation matters the most. Substitute for large firms ? Externalities and complementarities in that case are

prevalent. Silicon Valley.

Dispersion (both geographical and proprietary) of the vertical production chains: Where codable knowledge matters the most.

What do they explain?

Global Value Chains

Analyze inter-firm links with a systemic approach. Substitute for large firms ?

Where does value added lay? Go back to theory. Competition versus monopoly. Monopoly often triggered by innovation

Design, development and branding capture a high share of value added. Assembly much less.

Policy implications?

From firms to countries

Being strong in the sectors where the value added is generated essential for a country.

The outcome for a country can be summarized in four aspects: which value chains is the country in? which nodes within those value chains? Are firms delocalizing part of their production? If so,

which parts? What is their delocalization strategy? Ownership or

suppliers?

Intel: delocalization with vertical integration; Nike: delocalization with suppliers.

Different types of value chains

Subtler than integration/disintegration tradeoff. Captive:

Dominant firms as leaders. Suppliers supply specialized and non standardized

products, and not essential. They can be replaced at small cost. Bargaining power by the leading firm (e.g., shoes and

textile)

Relational chain. Products are not standardized (e.g., clothing).

Supply network Power balanced (e.g., electronics).

Trade and networks

Recent trends in trade and networks. Industrial upgrading.

Increase in the technological content of import.

Increase in the import content of export. Measure of geographical interdependencies and vertical

disintegration.

Of course, country size plays a role. Processing trade plays a very important role

55% of Chinese export.

50% of international trade is intra-firms trade. Vertical integration with delocalization!

Downstreamness

How long are the production chains? Data at the plant level.

Big variation. Surprising result by Atalay, Hortacsu, Syverson

(2014, 2015): Firms do use plants belonging to the same group, even if

such firm exists.

Why then do firms vertically integrate? Not for the reasons mentioned in our theory

introduction.

Managerial capital?

Productivity and networks

Firms in international supply chains are more productive than those that are not. Results similar to the traditional ones on large firms. Largely contingent on sectors.

Why? Treatment effect. Firms in the international supply chain

have better opportunities to learn. Selection effect. Better (more productive) firms are

selected to take part in the international value chains. Especially true for supply network (to a lesser extent,

relational chains).

The position and the upgrading in the global value chains have a prominent impact.

Industrial Policies and Networks

Firms in high level supply chain have similar performances throughout Europe. Do not depend on the country.

Evidence of “globalization of productivity”? Producing in Italy is possible, as long as firms are

involved in essential nodes of the supply chains. Important not to be the passive part of the supply

chains.

Automotive industries More than 4.000 firms in Italy. Many firms are sub-suppliers. First-level suppliers produce modules and systems.

Second and third level suppliers are more upstream. Less able to generate value added.

High transportation costs: Supply chain organized near the downstream markets. Regional value chains. Italian firms are follower. They are involved in far less

relationships, than, for instance, their French counterpart. With a macro perspective, in many cases they are

captive, and passive, in the supply chain

Automotive industries II Still, Italian firms have been able to diversify.

They now supply many German producers. Fiat does not have the lion’s share.

First level suppliers somehow coordinate small supply chains that look at the international market.

Relatively resilient to the economic crisis. Second and third level suppliers flexible enough to

reconfigure their production in response to the changing needs of the market.

Significant financial problems.

Aerospace industries I

Small global players. Top suppliers in international programs.

Alenia, Finmeccanica.

Specialized production, highly innovative. Important role for the Italian firms. Participation in the European projects.

Complex network, usually of medium-high level. Few leader companies, few suppliers.

Peculiar bargaining situation.

Aerospace industries II

No responsibility for projects (big weakness). Jet airliners.

Differently than Spain, France. Airbus’ outsourcing decisions key in shaping the

aerospace industry. Significant role of the government

Also related to the cost structure. Significant investment costs, low variable costs.

Chemical industries

Basic chemistry industry has disappeared. Mostly located in emerging countries. Positive from an environmental perspective? Only Germany still has an important share in Europe, albeit

declining.

At the same time, specialization in cosmetics. Small firms, usually contract manufacturers. Unbranded production. High level of innovation, not requiring economies of scale. Medium- low contribution to value added. Not very active

role in the supply chain. But make up, parfums, body products often engineered by

Italian contract manufacturers.