Transcript EU KLEMS Data

Vertical Production Networks:
Evidence from France
Michel Fouquin, Laurence Nayman, Laurent Wagner
Fourth meeting
Brussells, 16 March 2006
This project is funded by the European Commission, Research Directorate General as part of the 6th Framework
Programme, Priority 8, "Policy Support and Anticipating Scientific and Technological Needs".
EU 6. Framework Programme
Contents
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What is it about?
The Empirical model
Data
Estimation Issues
Results
EU 6. Framework Programme
What is it about?
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The rapid development of FDI causes concern over
the decline of industrial activities in developed
countries and their relocation in emerging
economies.
Horizontal FDI was viewed as the main channel
through which this phenomenon occurred on
account of higher trade and wage costs.
Nonetheless, vertical FDI expands rapidly and trade
in intermediate inputs amounts to 1/3 of world trade.
Multinational firms (MNF) are the major actors of
trade.
A substantial part of exports of US parent
companies to their manufacturing affiliates are
inputs for further processing against about 40% for
French ones.
Share of US exports for further processing in:
70
60
50
40
30
20
10
0
1977
US Total exports
1982
Parent companies exports
Source: Borga and Zeile (2004).
1989
1994
Parent companies exports to affiliates
1999
The Empirical Model
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Intra-firm exports of int. inputs would increase with lower
trade and wage costs and some policy characteristics of the
host country, so argue Hanson, Mataloni & Slaughter (2005).
There is then a continuum of production processes from
vertical to horizontal FDI, depending on the elasticities of
intra-firm exports to trade and wage costs.
To test this, we will focus on three flows:
- the affiliate imports more or less intermediate inputs and
services from the parent company,
- the affiliate re-exports the finished product to its parent
company,
- the affiliate takes advantage of the market size of the host
country to sell finished products at home or in the area.
The Empirical Model
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Objective: Tracing the determinants of intra-firm
trade in intermediate inputs for French
multinationals, using firm-level data.
The estimated equation is:
Sipcm = ip + 1 ln Wagec + 3 ln LPc + 3 ln Distancec
+ 3 ln (1-Corp Tax Ratec)+ 4 ln (1+Tariffscm)
+  Xpc+ eaipcm
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The imported inputs in the affiliate total costs are
measured by the share of imported inputs for further
processing in the affiliate’s turnover, Sipcm, where i
stands for the sector, p the parent company, c the
country, and m the imported input for further
processing.
The Empirical Model
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All exogenous variables are in logarithms.
Wage stands for the wage per employee in the
manufacturing sector of the host country.
LP is value added per employee.
Distance is a proxy for transportation costs and
measures the distance separating France from the
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host country.
X is a vector of miscellaneous control variables
This specification also includes a set of parent x
industry dummy variables, αip.
Equation is estimated by GEE
Data
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A merge of two surveys:
- one from the Ministry of Industry on MNF located in
France
- one from the Ministry of Economy on affiliates of
French firms abroad.
Due to missing crossed information, some assumptions
had to be made:
a single super-affiliate in the host country
regrouping several affiliates purchasing different
products from their parent company.
Estimation Issues
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In HMS (2005), it can be read: “We assume that U.S
parent firms have previously chosen in which
countries to locate affiliates. The remaining decision
is over which production activities affiliates should
perform”.
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We do believe that the analysis of production
activities requires, in the first place, to account for
unobservable characteristics inherited from location
decisions.
Estimation Issues
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By implementing a cluster analysis, on the whole set
of controls used so far, we obtain two main clusters.
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The opposition between developed and developing
through this clustering is unchallenging.
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We decided to split up our sample in two by
considering Spain PPP GDP per capita as the cut-off
point between developed and developing countries,
since it matches our cluster mapping.
Results
Wages :
Wages per employee impact positively on the import
to turnover ratio for the developed countries’
sample, and negatively for the developing countries
one. Cross-price elasticity of imported demand to
wages=1.9 for the developed countries and -0.2 for
the developing ones.
Wages per employee mirror the average skill
intensity of jobs in a country: the higher wages are,
the higher the average skill-content of jobs in the
country.
The less-skilled labour intensive affiliates are
located in countries where wage costs are relatively
lower, and conversely for the developed countries.
Results
Labour productivity :
Labour productivity matters a lot in explaining
patterns of intra-firm trade.
Real unit wages, the difference in the logarithms of
wages per employee and labour productivity
corroborate the dichotomy between developed and
developing economies.
It results, for the developed countries, into a
negative coefficient on unit wage costs. Conversely,
in the developing countries, the coefficient is rather
low but positive.
Results
Freight Costs :
The impact is negative for both developed and
developing countries.
These results match those of HMS.
Transport costs have a negative impact on imported
input flows, and this supports the vertical
production scheme of MNCs.
Results
Tariffs :
The strong presence of EU-15 countries does not
allow the real effect of tariffs on exports of
intermediates to be disentangled in the developed
countries’ sample but at least it is negative, meeting
HMS’ results.
For the developing countries’ sample, only when
controlling for the identity of the parent company, is
the impact strong and positive (tax rebates granted
to these firms?)
Results
Corporate tax rate :
No real evidence of tax rates effects could be found.
Institutional quality:
An improvement in economic conditions leads to
higher exports of parent companies to their related
parties located in developing countries.
Results
Partnership trade :
Trade performed by the MNCs with non related
subcontractors, and intra-firm trade appear to be
substitutes.
Partnership trade occurs more often with European
countries
Affiliate operations can be completed by a back-up
of production by non-related parties if need be, or
else, production can be separately carried out taking
advantage of specific assets in each location.
Results
Market Potential :
The market potential variable turns out to be
negative and significant in both samples.
This supports the idea that affiliates do not sell their
processed production in their own markets to take
advantage of the market size.
Results
Alternative Sample Splitting :
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40% of export flows are matched by imports of parent
companies from their affiliates. Hence, parent
companies may export intermediate products and
import assembled goods.
The whole Sample is split twice according to whether
products are reshipped to France or not and with
respect to the capital to labour intensity of imported
inputs. We used capital deepening from the
EUKLEMS database for France.
Results point to a mix of vertical and horizontal trade.