Group Presentation For Geographical Economics:

Topic ‘C’ Outsourcing Vs. Firm Competition

Members of Group 4:Tilahun FekadeFelix Mulenga

Mwansa Sambo

Paper Review

• Title: Just How Big is Global Production Sharing

• Authored by Alexander J. Yeats

• Objective of presentation: Highlighting major contents of the above article

Production sharing Defined:“The internationalization of a manufacturing process in which several countries participate at the different stages of the manufacture of a specific good”

It thrives on the premise of “least cost” and “efficiency” of production.

Brief introductory history of “Production Sharing”

Primary commodities from developing countries/colonies were shipped to the big empires/ industrial nations for further processing, and part of processed products were were re-exported.

Example : Iron ores exported from Mauritania to Europe. Steel products then re-exported to Mauritania.

Mid 1960’s saw the unprecedented development of “specialized labor intensive production activities within vertically integrated international manufacturing industries”

Examples: industries producing computer components in Asian countries, and wearing apparels and leather goods in Caribbean countries

scope of the reviewed paper

• Relative importance of the production sharing in the overall trade

• Contribution and place of different countries

• Causes and promoting factors• Positive/negative impacts on the domestic

economies of the participating countries

Major Data Inputs Utilized

More disaggregated international trade statistics from the revised SITC(1 & 2) and OECD with regard to:

• Data on re-entry of domestically produced components assembled abroad

• The ease to locate and empirically estimate: (a) actual location of production of parts and components;(b) direction and composition of trade flows; and (c) magnitude of trade flows

In its revised form the SITC is most complete for the machinery and transport equipment group (SITC7) which is also the main focus of the study:

• SITC 1 identified 800 products of which 10 consisted of individual parts or components under the fifth digit;

• SITC 7 identified 50 individual products under 3, 4 and 5 digit groups

Notes on the SITC Identification

Only four of the forty-four SITC products taken together accounted for over 70 per cent of the total trade in parts and components:

Share of total (%)

Table 1The 1995 Value and Share of OECD Imports of Parts and Components Identified in the SITC Rev. 2System

Trade Balance: OECD Vs. Non-OECD CountriesExports of OECD exceed imports (17 %),

- Most assembly operations are labor intensive and non-OECD countries generally have a comparative advantage in these type of activities.

-Relative importance of such trade within trade blocks is more significant than with other countries outside the trade blocks.

-Decisions are not necessarily based on considerations of differences in real wage rate per se, in fact they rely on more secure trading arrangements trade blocks offer for member countries

Trends in Export:

-The total market share of Germany and US in the trade in parts and components decreased from 40% to 23% between 1978 and 1995;

-The share of developing countries showed significant increase (e.g., China’s share increased from 0.2 to 2.4%, associated with increases in the value of trade from $ 0.2 billion to $10.7 billion (Table 3)

Offshore Assembly Processing (OAP)

• Most industrialized countries’ tariff schedules provide special favorable treatment for re-imports of domestically produced components that are shipped for further processing

• Possibility for underestimation due to parallel free trade arrangements such as CBI and NAFTA

• 40 per cent of imports to US during 1993- 1994 were accounted by road motor vehicle parts.

• Plus: micro electric components and apparel

Some perspectives on factors affecting South -North production sharing (OAP):1. 1. Trade BarriersTrade Barriers

-Through OAP developing countries adopt outward oriented growth strategies of component assembly whereas firms, located in industrialized countries could handle marketing and distribution functions

2. Labor Costs

There are marked differences in wage rates, and lower wages in developing countries offer possibilities to the firms in the industrialized nations in terms of:

• Reducing overall production costs;

• Increasing profitability in domestic markets; and

• Increasing competitiveness in third markets.

3. Distance & Transport Costs

• When the share of transport costs out of the total value of a given product is low, then that offers possibility for its assembly abroad

• Despite very low wage rates, adverse transport costs have affected negatively the participation of most countries in SSA under OAPs

4. Governmental influences

• The investment climate: the attractiveness of investment and trade policies, e.g., the presence of tax holidays, availability of subsidized rent and infrastructure (industrial zones) and possibility to repatriate profits in foreign currency, practical measures to improve the levels of literacy, ICT

• Risk of supply disruption: linked with the level of good governance (stability of governments and policies) as well as the quality and efficiency of ICT and Transport infrastructure

Conclusion:• Global production sharing is indeed big: It accounts for

30% of the total exchange in trade in machinery and transport equipment;

• At least $ 800 billion of world trade in manufactures – which totaled approximately $ 2.7 trillion in the early 1990’s – consisted of some form of global production sharing operations;

• There is an increasing trend in trade between countries whereby such trade is increasingly taking the form of exchange in components and parts than in terms of finished products –Growing economic interdependence between countries

• However, production sharing is not spread evenly over countries and/or products.