Does Manufacturing Co-Locate with Intermediate Services?: Analysing the World Input-Output Database Advanced Graduate Workshop on Development and Globalization 2015 13 January 2015 Ming Leong Kuan University of Cambridge
Slide 2 Background I A successful argument for a government manufacturing policy has to go beyond the feeling that it s better to produce real things than services None [of the economic rationales for US industry policy] are completely convincing. Christina D. Romer Professor of Economics University of California, Berkeley Former Chair of the US Council of Economic Advisers
Slide 3 Background II If General Electric manufactures its turbines abroad, why can it not use that experience in providing, in production of some service in America, whatever know-how that is gained from the manufacturing operations undertaken elsewhere through transfer of necessary experienced personnel from overseas to home? Jagdish N. Bhagwati Professor of Law and Economics Columbia University
Slide 4 Background III Generalised view of specialisation: High-cost advanced economies specialise in exporting services to developing countries manufacturing goods Is this desirable? Different production and export structures Different implications for economic development (Hidalgo et al., 2007; Hausmann et al., 2007) Is this feasible?
Slide 5 Outline Motivations The Relationship Between Manufacturing and Services Empirical Strategy Selected Findings Concluding Remarks
Slide 6 Outline Motivations The Relationship Between Manufacturing and Services Empirical Strategy Selected Findings Concluding Remarks
Slide 7 Motivations Research Question: Are manufacturing and services still co-located with each other, particularly with globalisation and the fragmentation of global value chains? Policy Implications: Attraction of foreign direct investments Deindustrialisation
Slide 8 Outline Motivations The Relationship Between Manufacturing and Services Empirical Strategy Selected Findings Concluding Remarks
Slide 9 Advanced Graduate Workshop on Development and Globalization 2015 The Relationship between Manufacturing and Services Agriculture Manufacturing Services (Fisher, 1935; Clark, 1940; Bell, 1973) Services have a higher income elasticity of demand Symbiotic relationship between manufacturing and services Greenfield (1966): All production requires the application of services to transform physical material Livesey (2006): Manufacturing involves an entire value chain of activities that comprises services Pisano & Shih (2009, 2012): Manufacturing and services share industrial commons (collective pool of resources that sustains innovation)
Slide 10 Advanced Graduate Workshop on Development and Globalization 2015 The Relationship between Manufacturing and Services Two opposing forces have altered the services element in manufacturing: Bhagwati (1984): Offshoring and outsourcing ( splintering ) of previously-integrated services Vandermerwe & Rada (1988): Servitisation of manufacturing to enhance their competitiveness Mutual dependence is asymmetrical Input-Output Analyses (Park, 1989; Park & Chan, 1989) Manufacturing contributes more spillovers for services than vice versa Sustained employment and output growth in services is tied to concomitant development of manufacturing
Slide 11 Outline Motivations The Relationship Between Manufacturing and Services Empirical Strategy Selected Findings Concluding Remarks
Slide 12 World Input-Output Database (WIOD) Released by the European Commission in May 2012. Time series extended in November 2013 Data between 1995 and 2011 40 countries (EU 27, North America 2, Latin America 2, Asia and the Pacific 9) Australia Austria Belgium Canada Cyprus Denmark Finland Developed Economies (22 in 1995) France Germany Greece Ireland Italy Japan Luxembourg Netherland Portugal South Korea Spain Sweden Taiwan UK US Developing Economies (18 in 1995) Brazil Bulgaria China Czech Republic Estonia India Indonesia Hungary Latvia Lithuania Malta Mexico Poland Romania Russia Slovak Republic Slovenia Turkey
Slide 13 Input-Output Analysis For country i, M = manufacturing; S = services; Z = others e = exports d = final demand by households and the government, GFCF, changes in inventories
Slide 14 World Input-Output Database (WIOD) Australia Austria Belgium Canada Cyprus Denmark Finland Developed Economies (22 in 1995) France Germany Greece Ireland Italy Japan Luxembourg Netherland Portugal South Korea Spain Sweden Taiwan UK US Developing Economies (18 in 1995) Brazil Bulgaria China Czech Republic Estonia India Indonesia Hungary Latvia Lithuania Malta Mexico Poland Romania Russia Slovak Republic Slovenia Turkey
Slide 15 Backward and Forward Linkages Inter-industry interdependences occur through backward and forward linkages between industries (Hirschman, 1958) Backward linkages: From manufacturing to the services industries that it draws inputs from Forward linkages: From the services sector to domestic and foreign manufacturing industries
Slide 16 Outline Motivations The Relationship Between Manufacturing and Services Empirical Strategy Selected Findings Concluding Remarks
Slide 17 Findings 1. Manufacturing and services continue to have a strong propensity to co-locate with each other
86-91% of Intermediate Services are still co-located with Manufacturing Slide 18
Slide 19 Findings 2. Manufacturing-services linkages differ across industries
Manufacturing-Services linkages differ across industries Slide 20
Slide 21 Findings 3. Deindustrialising advanced economies are losing domestic intermediate services demand, without being adequately compensated by exports to industrialising developing countries
Slide 22 Most developing countries have belowaverage ratio of IS to Mfg Output 5% Annual Change in Ratio of Intermediate Services to Manufacturing Output (1995-2011) Malta 4% Latvia Luxembourg 3% Developing Country Developed Country Estonia 2% Ireland 1% Russia India France Indonesia Romania Netherlands 0% 0.1 0.15 0.2 0.25 0.3 0.35 China Average Ratio of Intermediate Services South Korea Czech Republic -1% to Manufacturing Output (1995-2011)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Slide 23 World Intermediate Services Output (1995-2011) 7 6 5 4 3 2 1 US$ Bllions Domestic IS (Mfg) Exported IS (Mfg) 0
Slide 24 Composition of World Services Output (2011) 1.0% 8.9% 1.3% 28.9% 56.8% Domestic IS (Mfg) Domestic IS (Non-Mfg) Domestic Svcs (Final Dd) 3.1% Exported IS (Mfg) Exported IS (Non-Mfg) Exported Svcs (Final Dd)
Slide 25 Findings 4. For deindustrialising countries, business services offer healthy potential for export. Financial Services have not played a catalytic role in intermediate services exports
Slide 26 Share of Exported World Intermediate Services Output, 1995-2011 35% 30% 25% 20% 15% 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Retail Trade Wholesale Trade Hotels & Restaurants Transport Communications Financial Services Business Services (ex. Real Estate) Real Estate Activities Other Services
Slide 27 Share of Domestically-Consumed IS in Total Intermediate Services, 1995-2011 100% 95% 90% 85% 80% 75% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total Services Wholesale Trade Retail Trade Hotels & Restaurants Transport Communications Financial Services Business Services (excl. real estate) Real Estate Activities Other Services
Slide 28 Outline Motivations The Relationship Between Manufacturing and Services Empirical Strategy Selected Findings Concluding Remarks
Slide 29 Concluding Remarks Manufacturing and services remain strongly co-located. Deindustrialisation: Loss of manufacturing activity and important producer services tied to manufacturing Intermediate producer services have a strong relationship with innovation, income levels and economic development (Ciccone & Matsuyama, 1996; Francois & Reinert, 1996). Manufacturing and services are highly heterogeneous. Possible extension: Can the loss of manufacturing and intermediate services (to manufacturing) be compensated by the growth of services to nonmanufacturing activities?
Thank you Advanced Graduate Workshop on Development and Globalization 2015 13 January 2015 Ming Leong Kuan University of Cambridge