2011, in € billions
Thus, manufacturing is central for service companies’ (indirect) access to internation-al markets. In particular, SMEs profit from this carrier function, which are over-represent-ed in the service sectors. For these companies the supply of intermover-represent-ediates to large manu-facturing companies is an important opportunity to gain access to international markets.
Foreign trade is dominated primarily by large companies. For this uncontested “sty-lised fact”, only limited empirical evidence is available in official statistics. In the United States, for example, the ten largest companies account for 20 per cent of the manufacturing sector’s exports and the 50 largest companies account for 40 per cent (OECD, 2013). Ad-ditional evidence can be found in survey results. Examples are the EFIGE data set36 for European companies and the IW Future Panel37 for German companies.
36 The EU-EFIGE/Bruegel-UniCredit data set (in short the EFIGE data set) combines measures of firms’ international activi-ties (e. g. exports, outsourcing, FDI, imports) with quantitative and qualitative information on about 150 items including R&D and innovation, labour organisation, financing and organisational activities, and pricing behaviour. Data consist of a representative sample (at the country level for the manufacturing industry) of almost 15,000 surveyed firms (over ten em-ployees) in seven European economies (Austria, France, Germany, Hungary, Italy, Spain, United Kingdom). The data were collected in 2010, covering the years from 2007 to 2009. Special questions related to the behaviour of firms during the crisis were also included in the survey.
37 The IW Future panel is a survey panel covering 8,000 to 9,000 German firms from manufacturing, construction, utilities, logistics and business services. It deals with questions concerning the company’s strategy for globalisation, innovation and other success factors three times a year.
•
The EFIGE data set contains almost 15,000 industrial companies from seven Europe-an countries (Austria, FrEurope-ance, GermEurope-any, Hungary, Italy, Spain, United Kingdom).Twenty-nine per cent of these countries are not internationalised (zero mode) and 32 per cent only very weakly because they only import or export (single mode). One-third of the companies import and export (dual mode) and only around 5 per cent also produce abroad (triple mode). The average firm size increases continuously from the zero-mode company (33 employees) to the triple-mode company (276 employees).
Only 10 per cent of the companies are responsible for about 87 per cent of all trade flows. These companies have a significantly above-average company size.
•
The analyses of the IW Future Panel for Germany show similar findings. The foreign activities as well as the intensities increase with the size of the company (Table 4-7).Internationalisation activity and intensity in Germany
Table 4-72010, in per cent
Small Medium Medium-large Large Total
Activity – Share of firms with activity in …
Exports 31.0 42.3 56.6 73.6 59.5
Production 10.3 12.4 18.9 47.7 31.5
Employees 7.7 11.3 19.6 51.6 33.0
R&D 3.0 3.5 7.1 18.1 11.6
Intensity – Share of cross-border activities in …
Exports1 9.1 11.2 18.1 32.3 23.1
Production 4.0 4.3 5.1 13.8 9.3
Employees 1.5 1.9 4.2 17.8 10.4
R&D 1.8 1.7 2.8 7.3 4.8
Only manufacturing, construction, utilities and industry-related services (including logistics).
Small: 0 to 9 employees; medium: 10 to 49 employees; medium-large: 50 to 249 employees; large: 250 or more employees.
1 Share of exports in turnover.
Source: IW Consult, 2011
The below-average internationalisation of SMEs can be seen as a structural problem in all EU Member States. A greater internationalisation of these smaller companies is necessary, especially since empirical studies show that companies with international strat-egies and activities are more successful than others. The successful indirect integration in export value chains of manufacturing and large companies can only be part of the solution.
With its large export-oriented industry, the EU actively benefits from growing global markets. Moreover, it allows for the use of economies of scale in the production of indus-trial goods. Particularly for highly specialised producers, the domestic market is too nar-row to make use of large-scale effects. However, a greater focus on exports can also in-volve risks, mainly the vulnerability to larger economic global crises.
The export model contains a second potential structural risk. There is a latent trend that production follows demand and companies eventually produce where consumers are located. The reasons for this is the need for companies to be close to the market, but can
also derive from political pressure for local content requirements. Consequently, long and stable EU value chains are important. The same is true for global sourcing strategies that do not necessarily require production abroad. Moreover, policymakers have to keep in mind the latent dislocation incentive when they design policies which could make EU production considerably more costly or less attractive.
4.2.2 Potential of global value chain integration
Globalisation not only offers access to growing global markets, but also new possibil-ities on the production side. Companies can optimise their value chains through global sourcing and/or production abroad. For each operational activity, the world’s best location, using comparative advantages, can be found. Despite higher transaction costs and the need to control very complex structures, companies can thus lower their overall costs and im-prove their competitiveness. As shown below (see Figure 4-10, page 62), this is a precon-dition for thriving domestic production and EU exports. Also, from the point of view of the entire economy – and despite the shift of VA abroad – a gain in competitiveness is possible, which can result in higher exports and domestic production.
The following section highlights two important aspects:
•
the EU-27 is highly integrated in GVCs; and•
the integration in GVCs improves competitiveness and has overall positive effects.38 In the following section the most important concepts and results concerning GVCs are presented:•
global sourcing;•
fragmentation;•
foreign VA content; and•
hubs and network effects.Global sourcing
Global sourcing means procuring intermediate inputs from foreign countries. The EU is using this opportunity more and more. In the manufacturing sector, the rate of imported intermediates of the EU Member States is 25.2 per cent (2011) of the production value (Table 4-8). In this ratio, (intra-EU) intermediate imports from other EU countries are included. In other words, each euro output contains around 25 cents supplied from abroad.
The worldwide average is 17 cents.39 Global sourcing is therefore more significant in the
38 Regressions in several studies point out the importance of GVC integration for the productivity, competitiveness and export success of the respective countries. Increasing intermediates’ imports have positive effects on productivity (Ethier, 1982) and on export success (Feng/Swenson, 2012; Lo Turco/Maggioni, 2011). Ruigrok/Wagner (2004) give an overview of sev-eral studies concerning the link between competitiveness and internationalisation and find that both measures are positive-ly correlated; see OECD (2013a; 2013b).
39 Average of the 42 countries, which are included in the WIOD database.
EU than in other developed countries.40 In the United States, Japan and China the corre-sponding rates are considerably lower.
However, concerning sourcing strategies, EU industry is very concentrated in the European market as it receives most of its intermediate imports from other EU countries.
The share in global sourcing from regions outside the EU is approximately at the level of the United States or China. South Korea is significantly more integrated into international value chains. Similar results can be found for the exports of intermediates.
In summary, European industry is strongly involved in international procurement processes.
40 Analysis by the OECD (2013c) shows that outsourcing and offshoring in the context of GVCs help to make countries more competitive and improve their export specialisation. GVCs positively affect the international specialisation of countries by expanding their sourcing possibilities both within the domestic economy and abroad. This greater use of intermediates helps countries to increase their VA in export activities. The researchers found significant positive effects of outsourcing and offshoring on the export competitiveness of countries.