1 The business environment in emerging economies Prof. Olivier Cadot Spring Semester, 2014

2 S EMINAR OBJECTIVES Get the big picture o How is the world economy evolving? What is the role of emerging economies o Basic differences between industrial and emerging economies o What do we know about economic development? Understand to anticipate Learn to analyze data o Do and present descriptive statistics o Do and interpret basic regression analysis o Understand indices Learn to present and discuss your ideas o Select what you communicate o Give a «narrative» to your analysis o Provide constructive comments to others

3 S EMINAR EVALUATION Hands-on data analysis exercise o Get data o Organize it (cleaning, formatting) o Analyse it (descriptive statistics, econometric analysis) o Present your results Group project o Topic to be agreed with instructor/assistant o Original contribution (not just review of the literature) o Data analysis Discussion of group projects Optional: In-class case presentation and discussion

4 S EMINAR F ORMAT AND SCHEDULE Six introductory sessions February 20, 27; March 6, 13, 20, 27 Group work, phase I (topic determination & data gathering): April Group meetings with professor/asssistant, round I: Week of April 15 Group work, phase II (analysis and preliminary draft): May Group meetings with professor/assistant, round II: Week of May 12 Assignment of «discussant» roles Presentations and discussion: May 15, 22, 29

5 S UGGESTIVE LIST OF PAPER TOPICS o Governance in extractive industries o Country competitiveness analysis o Measuring «logistics friendliness» o Export entrepreneurship o Statistical analysis of competitiveness and other indices o Public-private partnerships in public utilities, with a focus on water privatization o Free-trade agreements o Product standards, technical regulations, and competition o NGO management & accountability o Project impact analysis

6 U NDERSTANDING GLOBALIZATION

7 T RADE GROWS FASTER THAN PRODUCTION Openness ratio Trade growth vs. GDP growth

8 S HIFTING PATTERNS, SHIFTING CENTER OF GRAVITY Source: JM Grether and N Mathys (2006), “Is the World’s Economic Center of Gravity Already in Asia?”, mimeo, Univ. of Lausanne 2015

9 T HE RISE OF A SIAN PLAYERS Service exports: India,

10 T HE DECLINE OF THE RICH COUNTRIES Income shares: current USD At PPP Growth : Developed vs. developing Growth : By region Second great divergence

11 T HE WORLDWIDE DISTRIBUTION OF INCOME, Source: Sala i Martin 2002 Income distribution over time: World,

12 Source: Sala i Martin 2002 Income distribution over time: World T HE WORLDWIDE DISTRIBUTION OF INCOME,

13 W HO ’ S LEFT ON THE ROAD SIDE ? GDP growth and growth of bottom 20% income GDP growth Average income growth, bottom 20% The global poverty reduction is also visible in Africa Remaining confined in fragile states

14 D IFFERENCES IN VALUES ( I ): H OFSTEDE (1980) Power acceptance Individualism “Masculinity” (competitiveness) Risk aversion Source :

15 D IFFERENCES IN VALUES ( II ): A CULTURAL DISTANCE INDEX Intra-country fragmentation index Inter-country distance index (Thoenig et al. 2009)

16 H AS CULTURAL DISTANCE SHRUNK ?

17 D ETERMINANTS OF CULTURAL DISTANCE

18 T HE INTERNATIONALIZATION OF COMPANIES Inward and outward FDI flows Inward Outward

19 G LOBAL TRADE PATTERNS ’ Source: Adapted from The Economist, A Survey of Logistics, 17 June 2006, p. 5. Million US dollars

20 T RADE IN VALUE ADDED Start from a material balance equation Invert it to get the “inverse Leontieff matrix” (output requirements per unit of final demand) Define the share of value added in gross output in country r, call it V Combine with Leontieff matrices to get VA as a share of gross output And with gross exports to get VA as a share of gross exports

21 B REAKING DOWN THE USES OF VALUE ADDED Foreign VA Domestic VA Absorbed domestically Exported As final good As intermediate For local absorption For export To third countries For re-export back home Multiple counting in trade stats Measuring trade flows in terms of gross exports generates multiple counting

22 T HE VALUE CONTENT OF EXPORTS : A PUZZLE On aggregate, the domestic content of exports correlates negatively with GDP per capita A possible explanation: Aggregation bias

23 E XPANDING THE INPUT - OUTPUT MATRIX TO BREAK DOWN THE USES OF VA Standard IO table Expanded IO table Breakdown estimated using trade data

24 … AND ISOLATING VA EXPORTED IN INTERMEDIATE PRODUCTS G ROSS EXPORTS

25 D ECOMPOSITION OF GROSS EXPORTS VARIES A LOT ACROSS COUNTRIES

26 B ACK TO THE VA BREAKDOWN : G LOBAL VALUE CHAIN PARTICIPATION Foreign VA Domestic VA Absorbed domestically Exported As final good As intermediate For local absorption For export For re-export back home To third countries GLOBAL VALUE CHAIN

27 A COUNTRY DOWNSTREAM IN THE VALUE CHAIN Foreign VA Domestic VA Absorbed domestically Exported As final good As intermediate For local absorption For export For re-export back home To third countries GLOBAL VALUE CHAIN

28 A COUNTRY UPSTREAM IN THE VALUE CHAIN Foreign VA Domestic VA Absorbed domestically Exported As final good As intermediate For local absorption For export For re-export back home To third countries GLOBAL VALUE CHAIN

29 I NDICES OF GVC POSITION AND PARTICIPATION

30 P ARTICIPATION AND POSITION IN ELECTRONIC GVC S Source: Adapted from Koopman et al. (2011), Figure 2 Well integrated, downstream Poorly integrated, little use of foreign intermediates Well integrated, upstream upstreamdownstream

31 C APTURING THE GAINS ALONG A GVC: T HE IPOD Source: Adapted from Dedrick et al Japan US Korea China Human capital, R&D Capital Re-captured by Apple Labor

32 H OW MUCH DOMESTIC VA IN EXPORTS ? Approach o Start from input-output table o Allocate VA to different uses in proportion to gross output o Calculate the fraction of domestic VA in gross exports

33 A SECOND LOOK AT GLOBAL TRADE IMBALANCES 45 o line Compare U.S. bilateral trade deficit with o China (red) o Japan (purple)

34 W HAT DOES IT CHANGE TO LOOK AT VALUE ADDED ? RCA Source: Koopman et al. (2011) RCA in finished metal products (ISIC 28)