Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies European industries and the ongoing process of change – what challenges and opportunities? Robert Stehrer The Vienna Institute for International Economic Studies – wiiw Joint conference of the EPC-EESC “A New Industrial Policy for Europe”, November 12, 2014, Brussels.

 2 Content  Manufacturing in the global and long-term perspective  EU in the ‘global value chain’  Inside EU  Manufacturing in the (global) value chain

 3 Long-term trends – nominal value added and employment shares Source: EU KLEMS, wiiw calculations Declining shares  Demand shifts  Income  Relative prices  Relative prices  Offshoring and imports Even more pronounced  Productivity

 4 Share of manufacturing value added in % of GDP Source: WIOD, wiiw calculations  World share ~18%  Emerging markets show larger shares and gain weight  Positive real growth rates

 5 Manufacturing world market shares, in % of world manufacturing VA Source: WIOD, wiiw calculations World market shares relative to GDP shares

 6 International fragmentation of production and global value chains

 7 Screwdriver economics Source: Linden, et al. (2010) The iconic example – The iPod case

 8 International fragmentation of production and global value chains  Fuzzy line between challenges and opportunities  Fragmentation of production -Challenge: Competition from abroad Restructuring at firm, industry and country level -Opportunities: Allows upgrading of production Specialisation in (higher value added) activities Better exploit comparative advantages at finer scale  Emerging markets -Opportunities Larger and dynamic markets Increase in market size allows exploiting economies of scale -Challenges Competition with other suppliers in third markets Role of FDI

 9 Foreign VA content of exports in % of exports Source: WIOD, wiiw calculations Value added exports in % of GDP

 10 Structure of EU-27 exports by sector Source: Fontagné et al. (2013); Study for DG Trade

 11 Inside EU – Specialisation challenges and opportunities Note: Growth rates of manufacturing employment Source: Politecnico di Milano

 12 European Manufacturing Core and value added exports Source: WIOD database, own calculations. Value added exports in % of GDP Manufacturing share in % of GDP

 13 EU-27 specialisation dynamics, Note: Figure shows deviations in shares of manufacturing and businesss services from EU-27 average in 1995 (green dots) and 2011 (red dots)

 14 Core countries characterised by …  Strong intra-EU (intry-core) fragmentation of production  Increased particularly over last decade or so  Particularly in high-tech industries (electrical equipment, machinery, transport equipment)

 15 EU manufacturing in the (global) value chain

 16 Source: WIOD; wiiw calculations Services cost shares in manufacturing industries, 1995 and 2011 in % of gross output

 17 Source: WIOD; wiiw calculations EU-27 manufacturing VA share and manufacturing GVC share Manufacturing value chain share  How much value added is created in the EU for satisfying world demand for manufacturing products?  i.e. also including demand for manufactured products in non-EU countries  i.e. also including VA in non-manufacturing EU industries

 18 Services cost shares in manufacturing industries, 1995 and 2011 in % of gross output  Large range across countries (30% to 15%)  Generally lower in EU-12  Generally increased, though not extra-ordinarily  Tend to be larger in medium-high and high-tech industries  Business services between 5-10%  Share of imported business services small  > 4%: Ireland, Netherlands, Finland, Sweden  1-2% in majority of countries (particularly smaller and CEECs)  Business services are however most dynamic component over time  Econometric results suggest positive effects of BS on manufacturing performance  Large economies: mostly domestic  Small economies: foreign

 19 Source: WIOD; wiiw calculations Change in MVC share and share of business services in MVC, , in ppts

 20 Summary  Manufacturing in the global and long-term perspective -Decline follows long-term trend -EU as a global actor performs reasonably well -But: no guarantee for the future  EU in the ‘global value chain’ -Increasing world-wide fragmentation of production -Increasing share of GDP created due to value added exports -EU trade balance is more or less balanced  Inside EU -Pronounced patterns of specialisation -EU manufacturing core and business service providers -Also in terms of ‘manufacturing value chain’  Manufacturing in the (global) value chain -Business services play more important role (though maybe less dynamic as expected) -Do not compensate for loss in manufacturing share

 21 Summary  Need of a strong European manufacturing base -R&D, productivity drivers, etc. -Provision of capital goods (also for services activities) -Strong intra-manufacturing linkages important for learning-by-doing  EU specialisation patterns -Agglomeration gains -EU fragmentation and diversification