The global business

Economics Department

Globalisation has made the world a smaller place and has changed the way of doing business in OECD countries. But did you know that a significant part of global integration reflects trade within transnational firms and industries?

With globalisation, not only are businesses exporting their goods worldwide, they are also producing them worldwide, often through complex production chains across several countries. Indeed, trade among different parts of global enterprises, such as components of a final product being manufactured by affiliates in several countries, has increased significantly since the late 1980s. Such global companies or industries can be found in a range of sectors, like designer fashion, automotive components, computers and mobile phones.

International trade within single firms accounts for around one-third of goods exports from both Japan and the United States, and a similar proportion of all US goods imports and one-quarter of all Japanese goods imports. Few data are available for other countries, but given the increasing importance of foreign direct investment, it is likely that the importance of this intra-firm trade has increased at the global level.

The nature and extent of intra-firm trade seem to vary with the income level of the trading partners. Much intra-firm trade between high-income countries probably involves nearly finished goods destined for affiliate companies with little additional manufacturing taking place. About two-thirds of US intra-firm imports by multinationals with a foreign-based parent company are to an affiliate primarily involved in marketing and distribution, for instance. Even when the goods received are for further manufacturing, much of the production will be bound for local markets.

But intra-firm trade between rich countries accounts for a high share of bilateral trade for some middle-income economies, and here the primary role of the foreign affiliates is more likely to be manufacturing to produce goods destined for other markets, including the country of the parent company. For example, in 2000, two-thirds of US imports from Mexico were intra-firm due to extensive use of maquiladora – plants in Mexico under foreign control, located in the border region with the United States and devoted to the assembly and re-export of goods.

Trade between different firms of the same industry is also a strong feature of OECD countries, involving the import and export of similar goods by the same country. It could be the export and import of different models of car, for example, or the import of cheap textiles and the export of more expensive ones. The extent of intra-industry trade is typically much higher for manufactured goods than non-manufactured goods, and is highest for the more sophisticated manufactured products such as chemicals, machinery and transport equipment, electrical equipment and electronics. This is because sophisticated manufacturing is more likely to benefit from economies of scale in production and are easier to “differentiate” to the final consumer. More complex manufactured products which rely on many components and/or processes may also benefit more readily from splitting up production across countries.

Manufacturing intra-industry trade has risen in most OECD countries since the 1980s. In some countries, , it continues to rise from already high levels. For instance, in Mexico it rose from 63% of total manufacturing trade in 1988-91 to over 73% in 1996-2000. In the US it rose from 64% to 69% in the same period. In several countries, like Austria, France and the UK, manufacturing intra-industry trade has been in the 70-75% range for over a decade. In Korea and Japan it is lower, at around half of total manufacturing trade, and in a few countries, like Australia and Iceland, manufacturing intra-industry trade accounts for about a third of total manufacturing trade.

There are currently eight OECD economies – Austria, Belgium, Czech Republic, Hungary, Ireland, Luxembourg, Netherlands, and Slovakia – where both imports and exports account for more than half of GDP. These countries all tend to have relatively high intra-industry trade. Economist Paul Krugman argues that the emergence of such “supertrading” economies is essentially the result of the “slicing up of the value added chain” internationally. The number of these supertrading economies doubled over the 1990s; Mr Krugman reckoned that in 1990 there were six, but by 2000 there were at least twelve.

This internationalisation of production may mean that the initial consequences of any shock to demand are more dispersed across countries. At the same time, global trade may follow trends in the world economy more closely than in the past. The recent global slowdown has been accompanied by a severe downturn in world trade growth unprecedented since the first and second oil shocks, although the slowing in global GDP growth has so far been relatively modest.

Intra-industry and intra-firm trade may have accelerated the international transmission of certain industry- or product-specific signals, including shocks. The speed of the collapse in trade in high-tech products is an obvious recent example of this is, as reflected in a sharp fall in bilateral trade between the US and certain Asian countries. For countries and regions, the effects of such shocks may be asymmetric, with some feeling the pinch more than others, but the industry worldwide takes the impact.

As so much international trade takes place within firms and industries, trade levels may become less responsive to short-term changes in international price competitiveness than before. After all, if an increasing proportion of trade is in intermediate goods as part of an international production chain, then a devaluation, for instance, is unlikely to have much influence on competitiveness. But persistent exchange-rate realignments or shifts in unit labour costs between countries may lead firms to relocate entire plants to more predictable, if not more cost-competitive, countries. And if a multinational enterprise has to retrench in one market, it may cause cutbacks in other countries. All of which suggests that if globalisation has led to new ways of doing business, then policymakers have to think globally too.

References

Krugman, P., "Growing World Trade: Causes and Consequences", Brookings Papers on Economic Activity Vol. 1, Brookings Institute 1995.

OECD (2002), Economic Outlook, No 71. 

©OECD Observer No 234, October 2002




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