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 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.