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EBRD Transition Report 2014 – BOX 2.3. Global production chains and the competitiveness of individual countries

TRANSITION REPORT 2014 Innovation in Transition

BOX 2.3. Global production chains and the competitiveness of individual countries

Competitiveness can be understood as a country’s ability to sell its products in the global market, so it has traditionally been measured as a country’s gross share of export markets. However, over the past two decades the world has witnessed rapid cross-border integration of production networks. This deep global integration means that analysis of a country’s gross export market share may result in misleading conclusions, since it does not account for the domestic share of value added in products. For example, if a particular export good contains many imported intermediate goods, the domestic share of value added will be small and gross export flows will say little about the country’s true competitiveness.

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To provide an accurate picture of competitiveness trends across the transition region, this box uses a methodology proposed by Benkovskis and Wörz37 to account for changes in the value-added content of trade. It combines a theoretically consistent breakdown of changes in export market shares with highly disaggregated trade data from UN Comtrade and information from the World Input-Output Database. This allows the traditional approach to measuring a country’s competitiveness (that is to say, changes in gross export market shares) to be compared with a value-added approach (in other words, changes in a country’s value added content in its gross export market share).

Both approaches allow changes in competitiveness to be broken down into two main components: the extensive margin of trade (in other words, changes that are due to new products or markets) and the intensive margin (that is to say, export growth in existing markets). In turn, the contribution made by the intensive margin can be broken down into four elements: price factors (such as the exchange rate); non-price factors (such as quality and taste); shifts in the structure of global demand (triggered, for instance, by shifts in preferences for individual products); and changes in the set of competitors (for instance, the emergence of new suppliers providing identical or similar products). The value-added approach introduces a new component that captures the role played by a country’s integration into global production chains.

The diamonds in Charts 2.3.1 and 2.3.2 indicate cumulative changes in selected transition countries’ global market shares for final goods in the period 1996-2011. The two charts paint a similar picture in terms of the growth of market shares. Bulgaria, Hungary, Poland, Romania, Slovak Republic and Turkey all increased their market shares, while Slovenia saw its global competitiveness decline. Thus, the trend in these countries was similar to that observed in other emerging economies, such as Brazil, China and India, which saw their global market shares rise overall during this period.

The new breakdown described in this box reveals that the underlying determinants of increases in global competitiveness are very different when the focus shifts to value added. For a number of countries (including Bulgaria, Hungary, Poland, Romania and Russia), the contributions made by price and non-price factors are the opposite of what one would see using traditional statistics. As in other emerging markets, traditional trade statistics overestimate improvements in the quality of exported products in the transition region.

The traditional approach suggests that improvements in non-price competitiveness have led to increases in market shares, while price developments have curbed competitiveness. A decline in the price competitiveness of Romania, for instance, means that, overall, the price of products that it exports in a given market has increased relative to the price of identical products sold by its competitors. Rising non-price competitiveness, on the other hand, could mean that the quality of products exported by Romania has increased overall relative to the average quality of identical products exported by other providers.

The new breakdown reveals that the price competitiveness of transition economies has in fact increased, while the contribution made by non-price factors has declined considerably (even becoming negative in the case of Poland). For instance, an increase in the price of products sold by Romania (a decline in price competitiveness) may actually be due to an increase in the price of the inputs that it imports in order to manufacture those products, rather than being due to an increase in its own production costs. Similarly, improvements to the quality of the products exported by Romania may have been made upstream in another country (rather than being made in Romania). The new breakdown based on value added distinguishes between these different effects.

Similar results are recorded for Brazil, China and India. Non-price competitiveness showed a negative – or, in the case of China, reduced – contribution to value-added market share gains.

Thus, for all of these countries, their apparent non-price competitiveness based on their shares of gross export markets is largely the result of deeper integration into global value chains. Foreign consumers seem to attach a greater value to products from these countries because they are perceived to involve higher-quality inputs and carry better branding owing to outsourcing. In the case of Russia, this change of approach reveals an extraordinarily strong positive contribution by price competitiveness and a shift in global production chains owing to its energy-dependent export basket.

In conclusion, this box shows that transition countries have been able to increase their share of global markets thanks to their ability to participate in global production chains. Poland, Romania and the Slovak Republic have been the primary beneficiaries of this change in global production. At the same time, the cost competitiveness of firms in the transition region allows them to build on their increased market shares. These firms’ ability to maintain price competitiveness despite unit costs converging with the levels seen in western Europe is an encouraging sign. Looking ahead, however, better branding and higher-quality production will remain key for all firms – irrespective of their participation in global value chains – when it comes to increasing their shares of world markets.

CHART 2.3.1

Source: UN Comtrade and authors’ calculations.

CHART 2.3.2

Source: UN Comtrade and authors’ calculations.