OECD Economic Globalisation Indicators 2010

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E r C B D Measuring Globalisation Measuring Economic OECD Indicators Globalisation

2010 Measuring Globalisation OECD Economic Globalisation Indicators -:HSTCQE=U]YXZX:

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n e A r u OECD Economic L e c t Globalisation Indicators 2010 _it E d ORGANISATION FOR ECONOMIC CO-OPERATIONe it s io w n AND DEVELOPMENT o r yl B n

The OECD is a unique forum where governments work together to address the economic, social O O e

and environmental challenges of globalisation. The OECD is also at the forefrontda of efforts to l

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understand and to help governments respond to new developments and concerns,E suche as corporate e

governance, the information economy and the challenges of an ageing population.O R The Organisations

n e provides a setting where governments can compare policy experiences, seek answersA to commonr tu problems, identify good practice and work to co-ordinate domestic and international Lpolicies.e c The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members.

This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries.

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Also available in French: Mesurer la mondialisation : Indicateurs de l’OCDE sur la mondialisation économique

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Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda. © OECD 2010

You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to [email protected]. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit de copie (CFC) at [email protected]. FOREWORD _it E d e it s io w n o r yl

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n e A r Foreword u L e c t Appropriate indicators that can measure the magnitude and intensity of the globalisation process are increasingly important to underpin evidence-based policy. This publication is the second edition of the OECD’s Economic Globalisation Indicators, which responds to the demand of policy makers. It includes a range of indicators that are largely based on the OECD Handbook on Economic Globalisation Indicators, which provides a conceptual and methodological framework for gathering quantitative information and constructing indicators. The Handbook also provides national data compilers with the methodological and statistical guidelines needed to construct the chosen indicators and make them compatible with international standards. This second edition of OECD Economic Globalisation Indicators presents measures of globalisation related to capital movements and foreign direct investments, international trade, the economic activity of multinational firms and the internationalisation of technology. However, it goes beyond what is proposed in the Handbook as it also includes some indicators linked to the financial crisis, portfolio investments, environmental aspects and the emergence of global value chains. This volume results from the co-operation of four OECD directorates: the Directorate for Science, Technology and Industry (DSTI), the Directorate for Financial and Enterprise Affairs (DAF), the Statistics Directorate (STD) and the Environment Directorate (ENV). This second edition was prepared under the direction of Thomas Hatzichronoglou of DSTI with the help of Isabelle Desnoyers-James and Laurent Moussiegt who provided statistical assistance and managed all technical aspects of the report. Koen De Backer was responsible for the final revision. The authors of this publication are: ● Thomas Hatzichronoglou (DSTI) for Sections A, B, F, I, J and K; ● Ayse Bertrand (DAF) for D and E; ● Andreas Lindner (STD) for Section C and Prof. Lelio Iapadre (University of L’Aquila, Italy) for Indicator C.12 on intra-regional trade; ● Laudeline Auriol (DSTI) for Section G; ● Nick Johnstone and Xavier Leflaive (ENV) for Section H; ● Koen De Backer (DSTI) for Sections A and L. In addition, other OECD staff also made significant contributions, including Dirk Pilat, Andrew Wyckoff, Norihiko Yamano, Myriam Linster, Valérie Gaveau, Cécilia Piemonte, Eun-Pyo Hong, Florian Eberth, Bettina Wistrom, Patrizio Sicari, Eric Gonnard, Agnès Cimper, Chiara Criscuolo, Bo Meng, Sébastien Miroudot, Sonia Araujo, Joaquim Oliveira Martins and Philippe Hervé.

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n e A r Table of Contents u L e c t Executive Summary ...... 7

Part I. Globalisation and the Crisis ...... 13

A. Globalisation and the Financial Crisis ...... 15

Part II. Globalisation of Trade and Investment...... 37

B. Trends in International Trade and Investment...... 39

C. International Trade of Goods and Services ...... 57

D. Foreign Direct Investment ...... 83

E. Portfolio Investment ...... 105

Part III. Globalisation of Technology and Knowledge ...... 113

F. Internationalisation of Science and Technology ...... 115

G. Internationalisation of Highly Skilled Human Capital ...... 135

H. Internationalisation of Environmental Technology ...... 145

Part IV. Multinational Enterprises and Globalisation ...... 153

I. The Importance of Multinational Enterprises ...... 155

J. The Characteristics of Multinational Enterprises ...... 171

K. Multinational Enterprises and R&D ...... 189

Part V. Global Value Chains as a New Form of Globalisation ...... 205

L. Global Value Chains ...... 207

Annex. Main OECD Databases Used ...... 229

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n e A r Executive Summary u L e c t

The past decades have witnessed a rapid globalisation of economic activity which has significantly changed the outlook of the world economy. An increasing number of firms, countries and other economic actors take part in today’s global economy and all of them have become increasingly connected across borders. Globalisation results in a more efficient allocation of resources across countries and generates important welfare effects, including higher productivity and efficiency, increased average incomes and wages, greater competition, lower prices and increased product variety and quality. At the same time, the process of globalisation also raises concerns in many countries, and needs to be well managed to ensure its benefits are widely distributed.

Globalisation and the crisis

The recent economic crisis has underscored the power of globalisation but has also shown the vulnerability of the global economic system. Global linkages have increased the economic interdependence between countries and this facilitated the spread of the crisis. What started as a financial crisis in the United States turned rapidly into a global economic crisis, leading to a dramatic collapse of international trade and foreign direct investment. The financial crisis started with payment difficulties in the subprime mortgage segment of the US property market which resulted from high mortgage debts and falling housing prices. Securitisation, which was intended to distribute risk across a larger number of players, made financial institutions increasingly interconnected as the globalisation of the financial sector had already multiplied their relationships across countries (see Section A). As a result, the financial crisis spread rapidly around the globe and also reached the real economy, resulting in dramatic drops in stock markets and a deterioration of business and consumer confidence affecting all economic operators (see Figures A.3.1, A.3.2 and A.4.1). Financial institutions were unwilling to lend to each other, while households cut back their consumption and started to save more; access to credit became more difficult and more costly, undermining corporate investment especially in small businesses. Falling demand caused international trade and inward investment (including mergers and acquisitions) to contract, causing the crisis to spread over the entire global economy; trade in the OECD area fell on average by 25% between October 2008 and June 2009 (Figure A.5.1). While this fall in trade at the start of the crisis might have been similar to past downturns for individual countries, the synchronisation of the fall in trade was unprecedented as almost all OECD countries simultaneously reported drastic declines in trade (Figures A.6.1 and A.6.2). Foreign direct investment and mergers and acquisitions also dropped drastically (Figures A.7.1 and A.7.2).

7 EXECUTIVE SUMMARY _it E d e it s io w n The spread of global value chains o r yl B n

Global value chains, in particular, are believed to have played an important role in the O O e

D spread of the crisis. Production processes have become increasingly fragmentedda as goods l

are produced sequentially in stages in different countries in so-calledC global value chains. u

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Firms seek to optimise the production process by locating the variousO productionR stages s

n e across different sites according to the rule of comparative advantage, which A contributes tor u the restructuring of activities across countries. As a consequence, outsourcingL e c andt offshoring of activities have been on the rise, especially in manufacturing industries characterised by modular production processes, but recently also in services (see Section L). Global value chains have increased the economic interdependence between countries as intermediate inputs like parts and components are produced in one country and then exported to others for further production/and or assembly in final products. Such “vertical” trade involves arm’s length relationships with independent suppliers as well as intra-firm trade between headquarters and affiliates within multinational networks. The past decades have witnessed a steady growth in trade of intermediate inputs and in 2006, intermediate inputs represented 56% of trade in goods and 73% of services trade (Figure L.3.1). Correspondingly, the import content of exports has increased in almost all OECD countries, demonstrating the rising import dependency of countries in producing their exports, in particular from neighbouring countries and within geographical zones (Figures L.9.1, L.10.1 and L.10.2). Global value chains can give rise to a domino effect in times of adverse shocks as lower exports of final goods directly lead to relatively smaller imports of intermediate inputs. Empirical evidence suggests that the industries that have been most affected by the crisis are also those characterised by global production networks (Figures A.10.1 and A.10.2). But global value chains do not fully account for the dramatic drop in trade recorded during the crisis and other factors have also contributed to the global depth of the trade crisis. This includes the collapse in international demand; the fiscal stimulus plans of national governments that were mainly targeted at supporting the non-tradable sector; the spread of “murky” protectionism; and the credit crunch, which directly aggravated problems in trade finance. Trade flows within supply chains might be more resilient to adverse shocks since the development of global production networks entails large and often sunk costs. Furthermore, firms cannot easily drop or switch suppliers that produce very knowledge- intensive parts and components based on specific production technologies. Companies therefore consider alternatives very carefully before taking irrevocable steps to reduce their global value chain. Recent empirical evidence shows that firms are mainly reducing volumes instead of reducing their numbers of suppliers (Figure A.10.3).

The changing character of globalisation

International trade and foreign direct investment are still the two key channels for economic integration across borders (see Sections B, C and D). But while these economic linkages between countries are not new, their scale and complexity has substantially increased over the past decades due to, amongst others, the emergence of international

8 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 EXECUTIVE SUMMARY _it E d e it s io production networks. Global value chains have increased foreign directw investment flows n o and intra-firm trade, and have made them increasingly interdependent.r yl B n

Within international trade, services trade has grown strongly in recent years although it O O e

D still accounts for only a fraction of trade in goods (Figures B.1.1 and B.1.2). Whileda the l

number of regional integration agreements has grown, the share of intra-regionalC trade in u

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total trade has remained fairly constant over the past decade (Figure C.12.2).O R International s

investments, both direct and portfolio, have grown more strongly than internationaln trade e A r u but are highly volatile at the same time (Figure B.1.1). International mergersL e c andt acquisitions that are largely undertaken to restructure firms’ activities have contributed in particular to the strong surge in international investment flows (Figures D.10.1 and D.10.2). The internationalisation of technology is also an important characteristic of today’s globalisation process (see Sections F, G and H). Technology flows between countries have grown and cross-border relationships between countries have grown in many ways. International co-operation in science, technology and innovation is on the rise as illustrated by several indicators along different dimensions, including patents (Figures F.5.1 and F.5.2), co-authorship of scientific publications (Figure F.6.1) and formal co-operation arrangements (Figure F.5.3). Flows of human capital also contribute to the internationalisation of technology through increased international mobility and rising numbers of foreign students and researchers in countries (Figures G.1.1 to G.4.3). Environmental technologies and knowledge are increasingly exchanged across borders as countries collaborate to tackle global environmental challenges (Figures H.1.1 and H.2.2). The current globalisation process is spreading more widely and includes a growing number of countries. China, in particular, has become a major trading partner for most OECD countries and its market share in OECD export markets has risen significantly (Figures C.4.1 and C.5.1). China and the other BRIICS countries (Brazil, Russia, India, Indonesia and South Africa) have become important players in international investments both as hosts and investors (Figures B.5.3 and B.5.4) and also participate actively in global technology networks. Global value chains increasingly include emerging countries as locations of R&D and innovation activities, reflecting the increased capacity of these countries in research and innovation (Figure F.1.1). The economic crisis has hit some emerging countries hard although the economic dynamism of some of them, notably China and India, has contributed to the current recovery in the OECD area (Figure A.4.2).

The key role of multinationals

Multinational enterprises (MNEs) are the most important driver of globalisation, as they embody simultaneously the international transfer of capital, highly skilled labour, technology, and final and intermediate products (see Sections I, J and K). Due to their global reach, MNEs are able to shift activities within their multinational networks according to changing demand and cost conditions in order to co-ordinate production and distribution across many countries. Their affiliates abroad serve not only local markets in the host country but often also serve other neighbouring markets and, additionally, produce inputs for other affiliates in the multinational network. This intra-firm trade, i.e. cross-border trade between MNEs and their affiliates, accounts for an increasing share of international trade (Figures J.6.1 and J.6.2).

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 9 EXECUTIVE SUMMARY _it E d e it s io MNEs play a crucial role in the internationalisation of technology, sincew they develop and n o transfer proprietary knowledge which gives them a competitive edge.r In addition, MNEyl

headquarters largely fund R&D investments of their affiliates abroadB (Figure F.2.3),n O O e

resulting in an increasing share of R&D investments by these foreign affiliates in host l da

countries. In some smaller countries, MNEs account for the majorityC of R&D investment u E e e

(Figure K.2.1). MNEs play an important role in R&D investments across the world: the

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largest R&D spending MNEs are positioned among the top 10 countries investingn in R&D e A r in 2008, and the aggregate spending of the world’s eight largest MNEs in 2008 was largeru L e c t than the R&D investments of all individual countries, except for the United States and Japan (Figure F.3.1). Firm-specific knowledge and the corresponding production technologies that provide the core strength and rationale for MNEs differentiate them from firms under national control: foreign affiliates are observed to be significantly larger (Figures J.1.1 and J.1.2), more capital-intensive (Figures J.2.1 and J.2.2), and hence more labour-productive than national firms (Figures J.3.1 and J.3.2). Due to these distinctive characteristics, MNEs are responsible for a large share of employment, turnover and value added created in host countries (Figures I.1.1 and I.1.2), especially in high-technology industries in manufacturing (Figure I.4.3). However, the benefits of MNEs do not accrue only to host countries but increasingly also to the home countries because of the positive effects of outward foreign direct investment on economies, notably in enabling MNEs to tap into foreign technology and knowledge (Figure K.7.1).

A need for policy change?

The changing characteristics of current globalisation and the emerging spread of global value chains call for a rethinking of government policies. Traditional policies related to globalisation aim at enhancing competitiveness in the international economy, so as to safeguard employment and added value. These policies are often still focused on specific industries (manufacturing, services, high technology, etc.). However, following the international fragmentation of production, this industry dimension seems less and less valid. Given that stages and activities of the production process are located across different countries, competitiveness and comparative advantage might increasingly have to be interpreted in terms of activities instead of industries. How can policies in different areas (industry, innovation, attractiveness) better reflect this change and provide governments with effective policy tools? MNEs are forceful actors in the current globalisation process, and often limit the effectiveness and success of government policies. Countries need to take this changing reality into account and explore how policies can be designed that benefit both the country and the multinational. Facilitating the location of hubs and decision centres is particularly important, as these centres direct the technology and investment flows within MNEs networks. The internationalisation of technology particularly to emerging countries like China and India also raises questions about the long-term future of high-technology activities in more developed countries. How can countries safeguard their home-based R&D investments while at the same time being connected to global research centres?

10 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 EXECUTIVE SUMMARY _it E d e it s io Questions also remain about the interdependence of the economic crisisw and global value n o chains. Until now adjustments in the global value chains have mainlyr been in tradeyl

volumes rather than in number of suppliers. However, it remains to beB seen what the long-n O O e

term impacts of the crisis on global value chains will be and how these will bounce back l da

following the crisis. These and other questions will be explored in OECDC work on economic u E e e

globalisation over the coming years.

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n e A r PART I u L e c t Globalisation and the Crisis

A. Globalisation and the Financial Crisis...... 15

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n e A r A. GLOBALISATION u L e c t AND THE FINANCIAL CRISIS

A.1. The world economy prior to the crisis ...... 16

A.2. The financial crisis in the United States ...... 18

A.3. Global economic crisis: stock market trends ...... 20

A.4. Global economic crisis: GDP growth...... 22

A.5. Impact of the crisis on international trade ...... 24

A.6. Synchronisation of collapse in international trade . . . 26

A.7. Impact of the crisis on foreign direct investment . . . . 28

A.8. Impact of the crisis on mergers and acquisitions . . . . 30

A.9. Multinational enterprises and the crisis ...... 32

A.10. Global value chains and the crisis ...... 34

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 15 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.1. The world economy prior to the crisis o r yl B n

■ In 2007, macroeconomic imbalances between ■ The growing discrepancy between excess savings O O e

D countries and regions were growing but most of the in emerging countries and insufficientda savings in thel

world enjoyed strong economic growth. Emerging United States in particularC caused goods and capitalu E e e

countries, and China and India in particular, to flow from emerging countries, especially China, to O R s recorded high growth. the United States. US consumptionn greatly outstripped

e production, partly explainingA the deterioratingr US tu ■ Prior to the crisis, large current account trade and current deficit. US householdL e c consumption imbalances had built up globally. The United States was spurred by strong increases in debt, including to reported a large and growing deficit. The European the poorest households. Union’s deficit was much smaller. Japan, China and Middle East countries displayed a surplus, with ■ Oil prices rose 37% between 2007 and 2008 but have China’s current account surplus rising particularly plunged since autumn 2008. They started to climb back rapidly. from April 2009 despite falling global consumption. ■ ■ The US trade balance deteriorated substantially Consumer prices started to increase from mid-2007. between 2000 and 2008 especially in trade in goods, However, since the end of 2008 they have fallen since trade in services continued to generate a sharply, especially in the United States and Japan. surplus. The current account balance of the United States improved slightly between 2006 and 2008, entirely owing to a rising surplus from services and Sources investment income, especially inward investment. • International Monetary Fund, World Economic Outlook However, the trade balance in goods continued to Database, October 2009. deteriorate. •OECD, OECD Economic Outlook No. 86, December 2009.

16 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.1. The world economyo prior to the crisis r yl B n

Figure A.1.1. Current account balance O O e

USD billion da l C u

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500 O R s

426.1n e A r 400 u 345.3 L c t 300 e

200 136.2 157.1 100 45.9 55.9 17.7 0

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2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 United States European Union Japan China Middle East

1 2 http://dx.doi.org/10.1787/837503847624

Figure A.1.2. World oil and raw materials prices Figure A.1.3. Inflation1 in the main OECD areas, 2 2005 = 100 2007-2011 Year-on-year growth rate in percentage

Primary commodities excluding energy United States Euro area Crude oil Japan % 250 6

200 4

3 150 2

1 100 0

-1 50 -2

0 -3

2002 2003 2004 2005 2006 2007 2008 2009 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1

1 2 http://dx.doi.org/10.1787/837516366147 1. Consumer price indexes (harmonised for the euro area). 2. Forecasts from 2009 to 2011. 1 2 http://dx.doi.org/10.1787/837526483454

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 17 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.2. The financial crisis in the United States o r yl B n

■ The US household savings rate, which was already were neither regulated nor supervised. Credit risk was O O e

D among the lowest in the OECD area, turned negative thus transferred out of the bankingda system tol

in 2005, owing to the build-up of large debts for unregulated and non-transparentC lenders. Thisu E e e

housing. Rising housing prices created a “wealth effect” eventually undermined the stability of the financial O R s which encouraged households to contract excessive system. n

e amounts of debt. In the United States between 2003 A r ■ tu and 2008, mortgage debt increased strongly, with Securitisation was a key factor Lbecausee c it created outstanding home mortgages nearly doubling. high-risk, illiquid assets in the form of complex financial securities. Securitisation was employed ■ Property prices in the United States rose by over extensively in the United States in 2007 but fell 35% between 2000 and 2006, levelled off in 2006 but sharply in 2008. In Europe, however, securitisation started to fall in 2007. House prices started to fall in was relatively modest in 2007 but started to rise several countries in 2008 but the adverse effects of the in 2008, especially in the last quarter, when it decline on consumption are likely to be greater in outstripped the level in the United States. countries where mortgage lending was abundant such as the United States. Mortgage debt combined with falling house prices triggered the subprime Sources crisis. Subprime mortgages allowed poorer people and • US Bureau of Economic Analysis, January 2010. riskier borrowers to obtain mortgage loans on the •OECD, OECD Economic Outlook No. 86, December 2009. assumption that their ability to finance their homes • Board of Governors of the Federal Reserve System, was ensured by the capital gains inherent in rising January 2010. property prices. • Association for Financial Markets in Europe/European ■ Extensive securitisation, especially in the United Securitisation Forum, January 2010. States, enabled banks to pool and transfer risk. • Blanchard, O. (2009), The Crisis: Basic Mechanisms and Securitisation expanded the supply of credit but Appropriate Policies, IMF Working Paper. caused risk to be under-assessed. This was then • OECD Journal: Financial Market Trends, various compounded by the use of intermediate lenders that issues 2007-2009.

Securitisation

Asset-backed securities (ABSs) are created from a portfolio of assets (corporate bonds, consumer credit, mortgage loans, export credits, etc.). They are based on real and apprehendable risk. Being negotiable, they transform illiquid or privately traded loans into securities that may generate frequent and regular listing and a secondary market. ABSs are generally specialised. An ABS corresponding to a mortgage loan will group together a portfolio of property loans. These loans are classified by order of priority into three tranches: the most risky, representing a small percentage of the total, those representing an intermediate risk, and tranches that suffer losses only if the entire portfolio fails. Collateralised debt obligations (CDOs) are securities created in the same way as ABSs but from corporate bonds. ABS CDOs were formed after the intermediate risk tranche was found to be harder to sell to investors than the tranches on either side. This gave rise to the idea of mixing the intermediate tranches of several ABSs and slicing them up again into three tranches of rising risk: low, medium and high. This division in tranches has been one of the most toxic aspects of the subprime securitisation crisis. A credit default swap (CDS) is a contract whereby a lender insures against the risk of a company defaulting or going bankrupt. By paying a premium, the lender obtains the right to sell a bond issued by the company to the insurer at its face value. If the company goes bankrupt, the contract provides for either transfer of the bond or a cash payment. The CDS price indicates the confidence placed in the debt issuer and serves as a basis for setting the value of the debt product. CDOs have dried up since the crisis but CDSs are still listed and traded, though they are regarded as risky. Mortgage-backed securities (MBSs) are securities backed by a pool of subprime, Alt-A or prime mortgage loans. Holders of MBSs receive the repayments of capital and the interest on the underlying loans. Securitisation involves transforming loans into financial securities by means of a three-stage operation.

18 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.2. The financial crisiso in the United States r yl B n

Figure A.2.1. Individual savings as a percentage Figure A.2.2. Real housing prices in the United States O O e

of individual available income in the United States 2000 = 100 da l C u

% E e e

6.0 140 O R s

5.5

n e 135 A r 5.0 tu 4.5 130 L e c 4.0 125 3.5 3.0 120 2.5 115 2.0 1.5 110 1.0 105 0.5 0 100 2000 2001 2002 2003 2004 2005 2006 2007 2008

2000:Q1 2001:Q1 2002:Q1 2003:Q1 2004:Q1 2005:Q1 2006:Q1 2007:Q1 2008:Q1 2009:Q1

1 2 http://dx.doi.org/10.1787/837532818737 1 2 http://dx.doi.org/10.1787/837535071317

Figure A.2.3. Home mortgage1 debt outstanding Figure A.2.4. Debt securitisation in the United States in the United States and Europe

USD billion Quaterly issuance of ABS, MBS and CDOs 12 000 Europe United States EUR billion 10 000 800

700 8 000 600

6 000 500

400 4 000 300

2 000 200

100 0 0

2003:Q1 2004:Q1 2005:Q1 2006:Q1 2007:Q1 2008:Q1 2009:Q1

1. Mortgages on one- to four-family residences including 2007:Q12007:Q22007:Q32007:Q42008:Q12008:Q22008:Q32008:Q42009:Q12009:Q22009:Q3 mortgages on farm houses. 1 2 http://dx.doi.org/10.1787/837681003172 1 2 http://dx.doi.org/10.1787/837604821851

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 19 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.3. Global economic crisis: stock market trends o r yl B n

■ An expanded supply of credit and an under- crisis of confidence undermined corporate O O e

D assessment of risk combined with the use of investment, especially among smallda businesses. l

intermediate (often unregulated and non- C u ■ E e e

transparent) lenders to gradually undermine the Stock market indexes plunged on all markets

O R s

between June 2007 and February 2009, by amounts stability of the financial system. Owing to the extent n

e of the contagion across assets, institutions and ranging from 43% in the UnitedA Kingdom tor 59% in tu countries, the financial crisis rapidly acquired a global Hong Kong, China. Stock marketsL startede c to pick up character (Blanchard, 2009). again from March 2009 as investors regained some confidence. ■ The drying-up of interbank lending due to the collapse of confidence between financial institutions, ■ The market capitalisation of the New York stock the need to make huge provisions for toxic debt, and exchange, equivalent in 2007 to that of all the asset sales by banks in order to shore up their capital European exchanges plus Tokyo, had halved in value base caused stock prices to fall dramatically. by the end of 2008.

■ The financial crisis spread rapidly around the globe and affected the real economy, resulting in dramatic drops in stock markets and decreases in business and Sources consumer confidence. The financial meltdown set off • Yahoo Finance, January 2010. a crisis of confidence that affected all economic operators. Banks were unwilling to lend to each other, • Thomson Reuters Datastream. and households cut back their consumption and • World Federation of Exchanges, January 2010. started saving more. Access to credit became more • Blanchard, O. (2009), The Crisis: Basic Mechanisms and difficult and more expensive. Tighter credit and the Appropriate Policies, IMF Working Paper.

Stock markets

Principal causes of the decline in stock market prices From the beginning of June 2007 until March 2009, stock market prices plunged. The depreciation of assets was sparked off by the decline in the property market. Those with real-estate assets, to the extent that these were becoming a risk, and especially banks took the first losses. Since banks had to make provision for these losses, a share of their capital base simply melted away. Because banks are obliged to have a minimum amount of capital in order to make loans or buy other assets, they found themselves obliged to sell off large chunks of their assets in order to reconstitute their capital. At the same time, the difficulties experienced by businesses for financing their projects and the shortage of liquidity propelled investors into hastily liquidating their positions. A lack of confidence and aversion to risk also brought mergers and acquisitions to a halt and further undermined stock market prices, which in turn aggravated losses. Principal causes of the recovery Despite the deterioration of the employment market and public debt, from March 2009, many economic indicators, including business performance indicators began to look better than expected. This somewhat restored investors’ confidence and they began to anticipate an end to the recession and a return to growth. Financial assets were the first to reap the benefits of returning investor confidence, as were cyclical stocks (commodities, oil, etc.). A halt to the slide in the property market and recovery in the automobile sector, supported by various government stimulus packages, coupled with more reassuring macroeconomic indicators, all contributed to a remarkable turnaround. Less risk aversion and lower interest rates encouraged investors to seek higher returns and put their capital back into shares. A point to note is that certain securities offered high returns because of the discounts applied. At the same time, the restructuring that accompanied the emergence from the crisis encouraged the resumption of mergers and acquisitions, boosting the upward trend.

20 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.3. Global economic crisis:o stock market trends r yl B n

Figure A.3.1. Main stock market indexes1 since 1 September 2005 O O e

United States Japan Germanyda C u 15 000 20 000 9 000

October 07 June 07 E e e

14 000 December 07 18 000 8 000 O R s

13 000

n e 16 000 A r 12 000 7 000 tu 11 000 14 000 L e c 6 000 10 000 12 000 9 000 5 000 10 000 8 000 8 000 4 000 7 000 February 09 February 09 February 09 6 000 6 000 3 000

01-09-05 01-09-06 01-09-07 01-09-08 01-09-09 01-09-05 01-09-06 01-09-07 01-09-08 01-09-09 01-09-05 01-09-06 01-09-07 01-09-08 01-09-09

United Kingdom France Hong Kong, China 7 000 October 07 6 500 35 000 May 07 October 07 6 500 6 000 30 000 5 500 6 000 5 000 5 500 25 000 4 500 5 000 4 000 20 000 4 500 3 500 15 000 4 000 3 000 February 09 February 09 February 09 3 500 2 500 10 000

01-09-05 01-09-06 01-09-07 01-09-08 01-09-09 01-09-05 01-09-06 01-09-07 01-09-08 01-09-09 01-09-05 01-09-06 01-09-07 01-09-08 01-09-09

1. United States: Dow Jones Industrial Average; Japan: Nikkei 225; Germany: DAX; United Kingdom: FTSE 100; France: CAC 40; Hong Kong, China: Hang Seng. 1 2 http://dx.doi.org/10.1787/837733674302

Figure A.3.2. Market capitalisation of the world’s leading stock exchanges

End 2007 End 2008 End 2009 USD billion 18 000

16 000 15 651

14 000 11 838 12 000

10 000 9 209

8 000

6 000 4 331 3 306 4 223 3 852 4 000 3 116 2 869 2 796 2 654 2 305 2 102 1 868 2 105 1 292 2 000 1 329 1 111

0 New York Euronext (US) Tokyo New York Euronext London Hong Kong, China Germany (Europe)

1 2 http://dx.doi.org/10.1787/837741011742

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 21 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.4. Global economic crisis: GDP growth o r yl B n

■ Most OECD countries recorded positive economic for GDP growth in 2009. Almost all OECD countries O O e

D growth in 2007. While growth of gross domestic except Australia and Poland recordedda (strong)l

product (GDP) was relatively strong in the OECD area, negative growth ratesC for 2009. Mexico, Ireland,u E e e

it was much stronger in the emerging BRICS (Brazil, Iceland and Finland were particularly affected. O R s the Russian Federation, India, China and South n

e ■ A Africa). As in previous years, China recorded double- From the second half of 2009, some countriesr tu digit growth. started to report positive economicL growth.e c In the last quarter of 2009, the number of OECD countries ■ In 2008, overall economic growth was still positive recording positive GDP growth increased significantly, in most OECD countries but growth rates fell back although the recovery remained rather limited. sharply in the last quarter. Economic growth turned negative in several countries and in fact resulted in ■ While the financial/economic crisis hit the Russian negative annual growth rates in Ireland, Denmark, Federation, South Africa and to a lesser extent Brazil New Zealand, Italy, Japan and Sweden. as well, China and India were still able to realise significant GDP growth in 2009. ■ Emerging countries continued to record strong economic growth in 2008. Nevertheless, they were also affected by the crisis, and growth was significantly lower than in 2007. In China and India GDP grew slightly more than 8% and 6%, respectively. Sources ■ The global character and the consequences of the •OECD, Main Economic Indicators Database, January 2010. financial crisis are particularly evident in the figures •OECD, OECD Economic Outlook No. 86, December 2009.

Figure A.4.1. Quarterly growth rate of GDP, 2007 to 2009 Growth rate compared to previous quarter, seasonally adjusted

United States France Japan United Kingdom Germany % 2

-1

-2

-3

-4 2007:Q1 2007:Q2 2007:Q3 2007:Q4 2008:Q1 2008:Q2 2008:Q3 2008:Q4 2009:Q1 2009:Q2 2009:Q3 2009:Q4

1 2 http://dx.doi.org/10.1787/837786062215

22 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.4. Global economico crisis: GDP growth r yl B n

Figure A.4.2. Real GDP growth O O e

% 2007 da C u

E e e

12 O R s

n e A r 10 u L e c t 8

Italy China India Brazil Korea Spain Japan Poland Ireland Iceland TurkeyGreece Finland AustriaMexicoNorway Canada France Australia BelgiumSwedenGermany PortugalDenmark Hungary NetherlandsSwitzerland Luxembourg South Africa New Zealand United States Slovak Republic Czech Republic United Kingdom Russian Federation

% 2008 10

-2

-4

Italy China India Brazil Korea Spain Japan Poland NorwayGreece Austria MexicoIceland Turkey Finland CanadaFrance Ireland Australia Germany BelgiumHungary PortugalSweden Denmark Netherlands Switzerland South Africa United States Luxembourg New Zealand Slovak Republic Czech Republic United Kingdom Russian Federation

% 2009 10 8 6 4 2 0 -2 -4 -6 -8 -10 nd Italy a China India Korea Brazil Spain Japan el Poland GreeceNorway France Canada Austria Turkey FinlandIcelandIr Mexico Australia PortugalBelgium Denmark Sweden Germany Hungary Switzerland Netherlands New Zealand South AfricaUnited States Luxembourg Czech RepublicUnited Kingdom Slovak Republic Russian Federation

1 2 http://dx.doi.org/10.1787/837820507733

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 23 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.5. Impact of the crisis on international trade o r yl B n

■ The decline in international trade in 2008 triggered trade in goods remained positive in 2008, but O O e

D by the crisis has been the deepest decline on record, surpluses were lower by a factor of five,da brought downl

much deeper than during the Great Depression. The by trade deficits betweenC August and December. u E e e

fact that the downturn was steeper in terms of value

O R s

■ In the first quarter of 2009, world trade picked up than of volume suggests that a “price effect” also n

e played a part in some countries. The scale of the again. Trade balances in goodsA began also tor recover tu decline reflects the increasing interdependence of slightly especially in Japan andL ethec euro area. trade, which can accelerate the spread of cyclical International Monetary Fund projections also suggest effects. Hence, the recession caused by the crisis a slow recovery in trade volumes of only 2.5% in 2010. intensified the drop in world trade, which resulted The regions expected to lead the recovery are the from the concurrent decline of trade flows in almost BRICs (Brazil, the Russian Federation, India and every country of the world. China), and the driving sectors are expected to be pharmaceuticals, agribusiness and other services, ■ In 2008, trade flows in goods generated deficits which are less countercyclical than investment goods. both in the United States and in the euro area. While Japan still recorded a surplus it was four-and-a-half times smaller than in 2007; in the last quarter of 2008 Japan also displayed a deficit. In the United States, Sources the 2008 deficit remained at the same level as in 2007 •OECD, OECD Economic Outlook No. 85, June 2009. as a result of a faster decline in imports, particularly •OECD, Monthly Statistics on International Trade, in the last quarter. In the euro area, the balance of January 2010.

Figure A.5.1. Trends in world trade volume USD billion, 2005 prices

18 000

16 000

14 000

12 000

10 000

8 000

6 000

4 000

2 000

0 2000:Q1 2001:Q1 2002:Q1 2003:Q1 2004:Q1 2005:Q1 2006:Q1 2007:Q1 2008:Q1 2009:Q11 2010:Q11

1. Forecasts. 1 2 http://dx.doi.org/10.1787/837837844021

24 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.5. Impact of the crisis oon international trade r yl B n

Figure A.5.2. Trends in monthly trade balance of goods since January 2007 O O e

Index January 2007 = 100 and billion current USD da l C u

United States

E e e O R s

Balance (right scale) Exports Imports

n e Index A USD billion r u 140 L e c0 t 120 -10 -20 100 -30 80 -40 60 -50 40 -60

20 -70

0 -80 Jan. 2007 Jan. 2008 Jan. 2009

Japan Index USD billion 160 12

140 10 8 120 6 100 4 80 2 60 0 -2 40 -4 20 -6 0 -8 Jan. 2007 Jan. 2008 Jan. 2009

Euro area1 Index USD billion 160 20

140 15

120 10

100 5

80 0

60 -5

40 -10

20 -15

0 -20 Jan. 2007 Jan. 2008 Jan. 2009

1. Excluding intra-euro zone trade. 1 2 http://dx.doi.org/10.1787/837844825261

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 25 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.6. Synchronisation of collapse in international trade o r yl B n

■ The dramatic collapse in world trade in 2008 seems seven out of the nine months since the beginning of O O e

D to have resulted from strongly synchronised drops in the crisis. The situation is the sameda on the importl

trade across countries due to the combined effects of side: all OECD countriesC registered negative growth u of E e e

several factors: the credit crunch, the spread of global imports of more than 10% from January through O R s value chains, and falling consumer and producer June 2009. The synchronous n fall in trade flows across

e confidence. countries enhanced the fall inA trade in individualr tu countries and contributed significantlyL e c to the ■ The drop in trade at the start of the crisis was similar dramatic collapse of trade at the aggregate level. to past downturns for individual countries, but what is remarkable is the number of countries simultaneously ■ More detailed data show that trade has not reporting drastic decreases in trade. Global collapsed evenly across all products. The largest interdependence and interaction among countries has contributor is the drop in machinery and transport strengthened crisis propagation mechanisms and equipment, followed by mineral fuels and related enhanced the impact on individual countries. products, manufactured goods and chemicals. Trade in services (based on quarterly data, not shown in the ■ The degree of synchronisation is clear from an graphs) has been more resilient than the trade in analysis of the number of countries with negative goods. monthly year-on-year growth in imports and exports. By the end of 2008, 90% of OECD countries showed a decline in exports and imports of more than 10%. This share reached 100% at the end of the first quarter Source of 2009. • Araujo, S. and J. Oliveira Martins (2009), “The Great Synchronisation: tracking the trade collapse ■ Drops in growth of exports of more than 10% with high-frequency data”, www.voxeu.org occurred in more than 90% of the OECD countries in (www.voxeu.org/index.php?q=node/4290).

Synchronisation of trade flows

This synchronisation is calculated as the number of OECD countries that exhibit negative growth in trade flows over the period 1998-2009. Monthly year-on-year growth rates have been calculated for exports and imports that are either: i) negative; ii) below –5%; iii) below –10%. The OECD Monthly Statistics on International Trade Database (for goods) is used to calculate the growth rate for the 30 OECD member countries. The graphs show the percentage of the 30 OECD countries that exhibit growth rates which are negative, below –5% and below –10%, respectively.

26 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.6. Synchronisation of collapseo in international trade r yl B n

Figure A.6.1. Number of magnitudes of decline in monthly export growth rates (year-on-year) O O e

Percentage of total number of countries da l

C u

Number < 0 Number < -5% E e Number < -10% e

In percentage of total number of countries O R s

n e A r u 100 L e c t

1998 June1998 Oct.1999 Feb.1999 June1999 Oct.2000 Feb.2000 June2000 Oct.2001 Feb.2001 June2001 Oct.2002 Feb.2002 June2002 Oct.2003 Feb.2003 June2003 Oct.2004 Feb.2004 June2004 Oct.2005 Feb.2005 June2005 Oct.2006 Feb.2006 June2006 Oct.2007 Feb.2007 June2007 Oct.2008 Feb.2008 June2008 Oct.2009 Feb.2009 June

1 2 http://dx.doi.org/10.1787/838045556643

Figure A.6.2. Magnitudes of decline in monthly import growth rate (year-on-year) Percentage of total number of countries

Number < 0 Number < -5% Number < -10% In percentage of total number of countries

100

1 2 http://dx.doi.org/10.1787/838073584746

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 27 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.7. Impact of the crisis on foreign direct investment o r yl B n

■ In 2008, inward foreign direct investment (FDI) was ■ Quarterly data on FDI show that the overall decline O O e

D down overall in developed countries, particularly in in international investment has continuedda in 2009 inl

the OECD area (–35%), but increased in non-OECD the OECD area. InflowsC in and outflows fromu E e e

countries (+13%), particularly in Asia. FDI declined in OECD countries dropped fell below their 2008 levels O R s the European Union by around 43% while it increased and the slight recovery startedn in the second quarter

e in Japan by 11%. In contrast, foreign direct investment seems not be sustained in the thirdA quarter ofr 2009. tu increased by some 16% in the United States in spite of L e c ■ Preliminary OECD projections suggest recovery in the crisis. FDI flows is expected to start slowly in 2010 and speed ■ That increase in the United States, particularly in up only in 2011. If FDI policies remain open, the exit of the second and fourth quarters of 2008, was public/government funds from sectors such as essentially attributable to loans by foreign parent financial services following the crisis might spur a companies to subsidiaries in the United States. new surge in cross-border M&As. Plummeting profits, the credit crunch and a higher dollar from the fourth quarter onwards caused serious liquidity problems for foreign subsidiaries, which Sources sought help from their parent companies. At the same • OECD International Direct Investment Database, time, the value of mergers and acquisitions declined January 2010. by 18% as a result of problems for financing buy-outs •OECD, Main Economic Indicators Database, January 2010. and the fall in asset values following the stock market • International Monetary Fund, Balance of Payments collapse. Statistics, January 2010.

Figure A.7.1. Total OECD 1 outflows and inflows of FDI, Q1 2007 to Q3 2009

Total OECD outflows Total OECD inflows USD billion 800

700

600

500

400

300

200

100

0 2007:Q1 2007:Q2 2007:Q3 2007:Q4 2008:Q1 2008:Q2 2008:Q3 2008:Q4 2009:Q1 2009:Q2 2009:Q3

1. Excluding Australia. 1 2 http://dx.doi.org/10.1787/838127533368

28 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.7. Impact of the crisis on foreigno direct investment r yl B n

Figure A.7.2. Inward FDI flows by development level O O e

da l World OECD Non-OECDC countries

USD billion E e e

2 500 O R s

n e A r 2 000 u L e c t

1 500

1 000

500

0 2000 2001 2002 2003 2004 2005 2006 2007 2008

OECD

EU27 United States Japan USD billion 1 200

1 000

800

600

400

200

-200 2000 2001 2002 2003 2004 2005 2006 2007 2008

Emerging economies

China Russian Federation Brazil India South Africa Indonesia USD billion 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008

1 2 http://dx.doi.org/10.1787/838150670704

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 29 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.8. Impact of the crisis on mergers and acquisitions o r yl B n

■ The fall in international investment during/after between 2007 and 2008, but estimates indicate that it O O e

D the crisis is also reflected in recent figures on mergers fell by 62% between 2008 and 2009.da Internationall

and acquisitions (M&As). International M&As are on M&As by companies basedC in Brazil, China, India,u E e e

track to decline by more than 50% in 2009 from 2008. Indonesia, Russia and South Africa dropped from O R s

However, there are major differences across countries USD 121 billion in 2008 to USDn 46 billion in 2009.

e A r and regional zones. u ■ Inward M&A activity into these emergingL e c t countries ■ M&A activity by firms based in the OECD area has also fell in 2009 by almost 40%. fallen especially sharply, from USD 1 trillion to USD 454 billion, a decline of almost 60%.

■ Both outward and inward M&A activity by emerging countries is also forecast to fall strongly Sources in 2009. International M&A activity by companies • OECD Investment Newsletter, December 2009. based in emerging countries increased by 30% • Dealogic M&A Database.

30 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.8. Impact of the crisis on mergerso and acquisitions r yl B n

Figure A.8.1. International mergers and acquisitions, world O O e

D USD billion da l

1 800 C u

E e e

1 600 O R s

n e 1 400 A r tu 1 200 L e c

1 000

800

600

400

200

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 1 2 http://dx.doi.org/10.1787/838155668143 Figure A.8.2. International M&A activity by firms based in the OECD area

USD billion 1 600

1 400

1 200

1 000

800

600

400

200

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

1 2 http://dx.doi.org/10.1787/838165361721 Figure A.8.3. International M&A activity by firms based in six major emerging economies1 USD billion 140

120

100

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

1 2 http://dx.doi.org/10.1787/838167335161 * Forecast based upon completed international M&As through 26 November 2009. 1. Brazil, China, India, Indonesia, Russian Federation and South Africa.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 31 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.9. Multinational enterprises and the crisis o r yl B n

■ Foreign affiliates contribute to a host country’s affiliates is likely to be more affected than in other O O e

D international competitiveness through several countries. In Japan, employment inda foreign affiliatesl

channels. They provide access to new markets and has been less responsiveC to the employment cycle u in E e e

new technologies for domestic suppliers and buyers manufacturing, but in any case, the weight of foreign O R s along the value chain, they generate knowledge affiliates in employment is son small as to be negligible.

e spillovers to domestic firms, and they invest a higher A r ■ tu share of their revenue in research and development Responsiveness is measured Lase thec estimated (R&D). elasticity of foreign affiliates’ manufacturing employment to total manufacturing employment. ■ Over 1996-2007, trends in employment of foreign The estimate is based on an ordinary least squares affiliates in the manufacturing sector have roughly (OLS) regression on the first-order differences of paralleled total manufacturing employment in natural logs. Only coefficients significant at the 10% OECD countries. However, employment of foreign level and below are reported. affiliates dropped more strongly in the aftermath of the ICT crisis in early 2000. If this trend recurs in the current crisis, losses of manufacturing jobs will be Source larger in foreign affiliates than in domestic firms. • OECD, calculations based on AFA Database, January 2010. ■ Employment under foreign control has especially followed trends in total manufacturing employment For further reading in Norway, Italy and the United States. In these three • OECD (2005), Measuring Globalisation: OECD Handbook on countries, manufacturing employment in foreign Economic Globalisation Indicators, OECD, Paris.

32 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.9. Multinational enterpriseso and the crisis r yl B n

Figure A.9.1. Changes in foreign affiliates’ manufacturing employment over the business cycle, OECD1 O O e

1996-2007 da l

C u

Foreign affiliates’ employment Total employmentE e e

% O R s

8 n e A r u L c t 6 e

-2

-4 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1. Aggregate OECD includes the Czech Republic, Finland, France, Germany, Hungary, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, the United Kingdom and the United States. 1 2 http://dx.doi.org/10.1787/838213656168

Figure A.9.2. Responsiveness of foreign affiliates’ manufacturing employment to business cycles 1996-2007

Norway (2000-07)

Italy (2001-07)

United States

Luxembourg (1996-2005)

Ireland

Spain (1999-2007)

Hungary

United Kingdom (1998-2007)

France

Sweden

Poland

Czech Republic (2000-07)

Netherlands (1996-2005)

Japan (1996-2006)

-0.5 0 0.5 1.0 1.5 2.0

1 2 http://dx.doi.org/10.1787/838216821277

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 33 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.10. Global value chains and the crisis o r yl B n

■ The link between the economic crisis and global ■ From the opposite perspective, the impact of the O O e

D value chains is not straightforward and has recently crisis on global value chains isda not clear. Thel

received a lot of attention in policy discussions. economic crisis and theC corresponding drop in tradeu E e e

However data on the effects of the crisis are scarce. and foreign direct investment (FDI) might be O R s Figures on international trade and foreign direct damaging to firms that aren (heavily) dependent on

e investment have decreased dramatically in the sourcing from overseas. Additionally,A it mightr sever tu aftermath of the crisis (see earlier), and some data linkages between industries in differentL e c countries. also show that the activities of multinationals have Companies might reconsider their investment been hard hit by the crisis. strategies and retrench to core markets and key suppliers might face bankruptcy. ■ The quarterly survey of multinationals’ affiliates in Japan shows for example a large drop in the activities of ■ Trade flows within supply chains might however be multinationals relative to the same quarter in the more resilient to adverse shocks such as the economic previous year. Sales to both the local “home” market and crisis, since the development of global production foreign markets have dropped significantly as has networks entails large, often sunk, costs. Companies employment by affiliates. Preliminary figures for the will consider alternatives very carefully before taking second quarter of 2009 published by METI show that irrevocable steps to reduce their global value chains. affiliates’ employment in the manufacturing sector Empirical evidence on French exporting firms shows across all regions has been steadily decreasing and is now that most of the trade collapse occurred in their 14% below what it was in the second quarter of 2007. volumes rather than in the number of exporters, a clear sign that the major adjustments are taking place ■ A number of studies have discussed the role of along the intensive margin (i.e. reducing volumes) global value chains and showed that the impact of the instead of along the extensive margin (i.e. reducing crisis on trade and investment has been amplified by the number of suppliers). The same results also show the spread of global value chains. The argument is that French exporters belonging to industries that that vertical specialisation has resulted in goods and largely rely on intermediate imports have services being produced sequentially in different underperformed during the crisis. countries. Intermediates such as parts and components cross borders several times before the ■ A lot of questions remain about the interdependence final product is sold to the final customer. The result of the economic crisis and global value chains. For is larger drops in trade than in GDP. Empirical example, are the large drops in export volumes of evidence seems to suggest that the industries that individual companies only a short-term have been most affected by the crisis are also those phenomenon? Will many companies exit in the longer characterised by internal production networks. run? Will global value chains take some time to pick up again if networks are reduced by the crisis, as large ■ Recent research casts doubt on this view by sunk costs and time are needed to set up international showing that global value chains do not fully account production networks. for the dramatic drop in trade. They have certainly contributed to the so-called multiplier effect of trade vis-à-vis GDP, but the causality is not always clear. Sources Other factors have also contributed to the rising GDP • Eurostat, NewCronos Database. elasticity of trade, composition effects in the first place, since trade is mainly in manufacturing while • OECD Input-Output Database, January 2010. services account for the largest part of GDP. Additional •OECD, Bilateral Trade Database, January 2010. factors, such as the collapse in internal demand and • Bricongne, J.-C., L. Fontagné, G. Gaullier, D. Taglioni production, the fiscal stimulus plans of national and V. Vicard (2009), “French Exports in Turmoil”, governments which were more targeted to the non- CEPII working paper. tradable sector, the rise of “murky” protectionism, and • Altomonte, C. and G.I.P. Ottaviano (2009), “Resilient to the credit crunch which has directly aggravated the Crisis? Global Supply Chains and Trade Flows”, problems in trade finance, are also at work. www.voxeu.org (www.voxeu.org/index.php?q=node/4289).

34 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 A. GLOBALISATION AND THE FINANCIAL CRISIS

_it E d e it s io w n A.10. Global valueo chains and the crisis r yl B n

Figure A.10.1. Drop in imports of goods Figure A.10.2. Import content of exports, O O e

D by EU27 between July 2008 and July 2009 manufacturing da l

Growth rate, in percentage PercentagesC u

E e e

Mining and quarrying OECD average 2005 O R OECD average 1995 s

Basic metals n e A r u Coke, refined petroleum Coke, refined petroleum L e c t Machinery and equipment, nec Radio, TV and communication equip. Motor vehicles Manufacturing nec Non-metallic mineral products Office machinery and computers Electrical machinery nec Basic metals Rubber and plastics Motor vehicles Rubber and plastics Wood and wood products Chemicals Fabricated metal products Electrical machinery nec Office machinery and computers Scientific instruments Paper, printing and publishing Fabricated metal products Radio, TV and communic. equipment Machinery and equipment, nec Scientific instruments Wood and wood products Chemicals Textiles, leather and footwear Textiles, leather and footwear Paper, printing and publishing Other transport equipment Other transport equipment Manufacturing nec Non-metallic mineral products Food, beverages and tobacco Food, beverages and tobacco -60 -50 -40 -30 -20 -10 0 0 10 20 30 40 50 60 70 % %

Note: Based on EU data, large product categories classification 1 2 http://dx.doi.org/10.1787/838252766633 (SITC Rev.3) does not fully correspond with industry classification. 1 2 http://dx.doi.org/10.1787/838221228315

Figure A.10.3. Total value of French exports and total number of French exporters, January 2000 to April 2009

Total exports Number of firms (right scale) 3 months moving average (total exports) 3 months moving average (number of firms) EUR million Number 38 000 60 000

36 000 55 000

34 000 50 000

32 000 45 000 30 000 40 000 28 000 35 000 26 000 30 000 24 000

22 000 25 000

20 000 20 000 02 03 04 07 09

Jan. 00May 00Sept. 00Jan. 01May 01Sept. 01Jan. 02May 02Sept. Jan. May 03Sept. 03Jan. 04May Sept. 04Jan. 05May 05Sept. 05Jan. 06May 06Sept. 06Jan. 07May Sept. 07Jan. 08May 08Sept. 08Jan. 09May

1 2 http://dx.doi.org/10.1787/838320087688

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 35 _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r PART II u L e c t Globalisation of Trade and Investment

B. Trends in International Trade and Investment ...... 39 C. International Trade of Goods and Services ...... 57 D. Foreign Direct Investment ...... 83 E. Portfolio Investment ...... 105

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 37 _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r B. TRENDS IN INTERNATIONAL TRADE u L e c t AND INVESTMENT

B.1. International trade and investment flows ...... 40

B.2. Trade of goods ...... 42

B.3. Trade of services ...... 44

B.4. Portfolio investment flows ...... 46

B.5. Foreign direct investment flows ...... 48

B.6. Other investment flows ...... 50

B.7. Investment income flows ...... 52

B.8. Current account and financial account balances . . . . . 54

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 39 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.1. International trade and investment flows o r yl B n

■ International trade and investment flows are the wave of mergers and acquisitions, declined in 2002, O O e

D primary drivers of globalisation. Measured in the then rose until 2007, followed by a da smaller drop thanl

balance of payments, current accounts encompass in the two other categoriesC of investments. In value,u E e e

exports and imports of goods and services, along with direct investment amounts to roughly a third of O R s all types of income generated by international portfolio or other investment.n It plays a stabilising role

e investment. The three categories of international in the structure of business capital.A r tu investment are: portfolio investment, direct investment L e c ■ and other investment. Because of their particular Growth in trade in goods and services was more nature, flows involving derivative instruments are dealt stable over the period, with roughly similar rates in with separately. the two categories. International trade in goods has long been four times trade in services. ■ Financial transactions (portfolio investment, direct investment and other investment) have posted the highest growth rates and constituted the most dynamic segment of international transactions since the early 1990s. The upsurge in all three categories of Sources investment has been especially sharp since the latter • International Monetary Fund, Balance of Payments half of the 1990s. Statistics. ■ These investment flows have been highly volatile. •OECD, National Accounts of OECD Countries Database, Portfolio investment, for example, slumped in the December 2009. early 1990s, tripled between 1995 and 1999, then declined until 2002 before rising steeply until 2006 For further reading and declining rapidly in 2008 to the level of 2002. • World Trade Organization (2002), Manual on Statistics of International Trade in Services (MSITS). ■ Foreign direct investment, after a spectacular • International Monetary Fund (1995), Balance of Payments upswing in 2000 which was largely due to an exceptional Manual, 5th edition (BPM5).

Main components of international trade and investment

Balance of payments current account Trade in goods and services. Data relating to trade in goods and services correspond to each country’s exports to, and imports from, the rest of the world. These data are collected to determine the balance of payments. Data relating to international trade in goods are also collected in customs surveys but are generally not systematically comparable to balance of payment data. Since trade data need to be compared with data on international investment, the balance of payments has been chosen as source data to ensure comparability of trade and investment data. Investment income. This covers receipts and payments on external financial assets and liabilities, including receipts and payments on portfolio investment, direct investment and other investments, and receipts on reserve assets. Balance of payments financial account Foreign direct investment. Direct investment is a category of international investment whereby the investor holds at least 10% of the ordinary shares or voting rights in the non-resident entity with the objective of establishing a “lasting interest”. This implies the existence of a long-term relation between the direct investor and the direct investment enterprise, and a significant degree of influence by the direct investor in the management of the non-resident direct investment enterprise. A direct investment relationship does not necessarily require complete control. Portfolio investments include equity securities and debt securities in the form of bonds and notes and money market instruments. In cases where the equity securities held by foreign investors account for less than 10% of the capital (ordinary shares or voting rights) of an enterprise, the investment is classified as a “portfolio investment”. This type of investment usually corresponds to “short-term” investments where the investor does not intend to influence the management of the firm. Other investment. This is a residual category that covers all financial transactions not covered by direct investment, portfolio investment or reserve assets. It includes trade credits, loans, currency and deposits, and other assets and liabilities.

40 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.1. International trade oand investment flows r yl B n

Figure B.1.1. Trends in international trade and investment components,1 OECD O O e

1995 = 100, current prices da l C u

Direct investment Portfolio investment E Tradee in services e

Other investment Investment income O RTrade in goods s

n e A r 800 u L e c t 700

600

500

400

300

200

100

-100

-200 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1. Average imports + exports or average assets + liabilities. 2. Excluding financial derivatives. 1 2 http://dx.doi.org/10.1787/838328885725

Figure B.1.2. Average of the main components Figure B.1.3. Average of the main components of the current account as a percentage of GDP, OECD of the financial account as a percentage of GDP, OECD Gross basis, average 2005-08 Net basis, average 2005-08

% % 22 22 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 Trade in Investment Trade in Other Portfolio Direct goods income services investment investment investment

1 2 http://dx.doi.org/10.1787/838338838771 1 2 http://dx.doi.org/10.1787/838368835021

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 41 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.2. Trade of goods o r yl B n

■ Since 2003, Germany has been the OECD’s leading than they do in the United States. Moreover, the bulk O O e

D exporter of goods, and the United States has been the of German exports are capital da goods for whichl

foremost importer. In recent years some non-OECD demand is especiallyC strong from emergingu E e e

countries also show strong trade performance in goods, economies. O R s becoming large exporters as well importers of goods. n

e A r u ■ Theoretically, the larger a country, the greater the L e c t value of its exports and imports. In contrast, the ratios Source of exports and imports to GDP are generally inversely • International Monetary Fund, Balance of Payments proportional to a country’s size. Statistics.

■ Despite the difference in size between Germany For further reading and the United States, the small differential between • OECD (2005), Measuring Globalisation: OECD Handbook on German and US exports stems partly from their Economic Globalisation Indicators, OECD, Paris. industrial structures. In Germany, manufacturing • International Monetary Fund (1995), Balance of Payments industries account for almost double the share of GDP Manual, 5th edition(BPM5).

International trade in the context of the balance of payments

Three sources of data on international trade are used in this publication: • balances of payments; • customs data; • data on the trade of multinational firms. The first two sources involve data classified by product, whereas statistics on the trade of multinational firms are compiled by industry. There are two essential differences between trade data formulated for the balance of payments and customs data, even though both are presented at the product level: a) The import values provided by customs authorities include the cost of freight and insurance. This is not the case for balance of payments data. Expenditures on these costs are posted to other items of the balance of payments, which are included among services. b) The date on which a commercial transaction is recorded in customs statistics corresponds to the date on which the goods in question cross the border. In contrast, for the balance of payments, the relevant date is the one on which the contract is agreed. From this standpoint, established rules for the balance of payments eliminate two major sources of the asymmetry that typifies customs data. In customs data, the values of imports reported by an importing country are generally greater than the values reported by the partner exporting country, insofar as import values also include the cost of insurance and freight, which are not included for the exports. A second reason why customs data are not symmetrical is that products shipped from one country to another are not recorded at the same time by both countries’ customs authorities. This recording gap is essentially due to shipping time, but it can also result from administrative differences and the statistical practices of the two countries involved. Another difference between customs and balance of payments data involves the level of aggregation and geographical references. As a rule, the balance of payments data are too aggregated and do not furnish information on each bilateral flow, while customs data do. A more detailed geographical breakdown was introduced recently in balance of payments statistics in respect of services, which are not recorded by customs authorities.

42 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n o B.2. Trade of goods r yl B n

Figure B.2.1. G7 countries’ exports of goods, Figure B.2.2. G7 countries’ imports of goods, O O e

1997-2008 1997-2008 da l

C u Germany United States Germany E United States e e

Italy United Kingdom Italy United Kingdom O R s

Japan France Japan France

n e Canada Canada A r USD billion USD billion tu 1 600 2 200 L e c 2 000 1 400 1 800 1 200 1 600 1 000 1 400 1 200 800 1 000 600 800 400 600 400 200 200 0 0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1 2 http://dx.doi.org/10.1787/838375187321 1 2 http://dx.doi.org/10.1787/838381208002 Figure B.2.3. Exports of goods, 2005-08 Figure B.2.4. Imports of goods, 2005-08 Average Average

Germany United States China Germany United States China Japan United Kingdom France Japan Italy France United Kingdom Italy Netherlands Netherlands Canada Canada Korea Spain Russian Federation Korea Belgium-Luxembourg Belgium-Luxembourg Mexico Mexico Spain India Switzerland Russian Federation Sweden Switzerland Brazil Australia Austria Turkey Australia Austria India Poland Norway Sweden Poland Brazil Indonesia Czech Republic Ireland Denmark Czech Republic Indonesia Turkey Hungary Denmark Ireland Hungary South Africa Finland Greece South Africa Finland Chile Portugal Slovak Republic Norway Israel Israel Portugal Slovak Republic New Zealand Chile Slovenia New Zealand Greece Slovenia Estonia Estonia Iceland Iceland 2 000 1 500 1 000 500 0 0 500 1 000 1 500 2 000 USD billion USD billion

1 2 http://dx.doi.org/10.1787/838401527351 1 2 http://dx.doi.org/10.1787/838442510050

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 43 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.3. Trade of services o r yl B n

■ While OECD economies are increasingly geared made up for the USD 21 billion deficit generated by O O e

D towards services (in many, services account for two- trade in services. da l

thirds of GDP), trade in services remains quite limited. C u ■ E e e

Many service activities require a local presence and do Other countries that ran notable deficits on their

O R s

trade in services include Canada, Korea and, to a not lend themselves to being traded internationally. n

e Moreover, services that can be exported or imported lesser extent, Ireland andA Mexico.r Some tu are still subject to numerous restrictions, as the Doha Mediterranean countries (Greece, Portugal,L e c Spain and Round accords of the General Agreement on Trade in Turkey) generated surpluses on their balance of trade Services (GATS) have yet to be ratified. in services, thanks in part to tourism. However, these did not offset their deficits on trade in goods. ■ The United States, simultaneously the leading ■ exporter and importer of services, exports only two- Non-OECD economies showing strong trade fifths as much in services as in goods and imports five performance in services are China, the Russian times more goods than services. As a result, for Federation and India. While this is directly related to 2005-08, the trade balance for trade in services, which their (economic) size, India’s large exports and imports averaged a surplus of USD 105 billion, could not offset of services are closely linked to their information and the USD 823 billion average deficit on trade in goods. communication technology activities.

■ The United Kingdom ranks second in exports of services but third in imports after Germany. Between Source 2005 and 2008, UK trade in services generated a • International Monetary Fund, Balance of Payments surplus of USD 69 billion but a USD 155 billion deficit Statistics. in trade in goods.

■ Germany, despite its rank as the third-largest For further reading exporter of services between 2005 and 2008, recorded • OECD (2005), Measuring Globalisation: OECD Handbook on Economic Globalisation Indicators, OECD, Paris. a deficit of USD 37.4 billion, which was amply offset by a USD 232 billion surplus in trade in goods. • World Trade Organization (2002), Manual on Statistics of International Trade in Services (MSITS). ■ In Japan, trade surpluses on goods, amounting to • International Monetary Fund (1995), Balance of Payments USD 79.5 billion over the review period, more than Manual, 5th edition (BPM5).

44 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n oB.3. Trade of services r yl B n

Figure B.3.1. G7 countries’ exports of services, Figure B.3.2. G7 countries’ imports of service, O O e

1997-2008 1997-2008 da l

C u Germany United States Germany E United States e e

Italy United Kingdom Italy United Kingdom O R s

Japan France Japan France

n e Canada Canada A r USD billion USD billion tu 600 500 L e c

500 400

400 300 300 200 200 100 100

0 0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1 2 http://dx.doi.org/10.1787/838477151773 1 2 http://dx.doi.org/10.1787/838482573411

Figure B.3.3. Exports of services, 2005-08 Figure B.3.4. Imports of services, 2005-08 Average Average

United States United States United Kingdom Germany Germany United Kingdom France Japan Japan France Belgium-Luxembourg China Spain Italy China Belgium-Luxembourg Italy Ireland Netherlands Spain Ireland Netherlands India Canada Switzerland Korea Canada Russian Federation Korea Denmark Denmark Sweden Sweden India Austria Australia Greece Austria Australia Norway Norway Brazil Russian Federation Switzerland Turkey Indonesia Poland Mexico Brazil Poland Finland Finland Portugal Greece Israel Israel Mexico South Africa Czech Republic Hungary Hungary Turkey Indonesia Czech Republic South Africa Portugal New Zealand Chile Chile New Zealand Slovak Republic Slovak Republic Slovenia Slovenia Estonia Estonia Iceland Iceland 500 400 300 200 100 0 0100200 300 400 500 USD billion USD billion

1 2 http://dx.doi.org/10.1787/838542155283 1 2 http://dx.doi.org/10.1787/838552315365

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 45 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.4. Portfolio investment flows o r yl B n

■ Portfolio investment is quite volatile, but it ■ Between 2000 and 2003 Ireland and Japan ranked first O O e

D accounts on average for a third of the aggregate value in portfolio investment assets. Betweenda 2005 and 2008,l

of all investment categories. France ranked first, alongC with the United States. u

E e e

O R s

■ n e In 2008, inward portfolio investment in the United A r Source u States dropped to the level of 2003. Other countries L e c t (the United Kingdom, Germany, Belgium- • International Monetary Fund, Balance of Payments Statistics. Luxembourg, France and Ireland) took in the bulk of portfolio investment, but in these countries the values For further reading of assets held by residents and of liabilities held by • International Monetary Fund, Balance of Payments non-residents were more evenly balanced. Manual, 5th edition (BPM5).

Content of portfolio investment

Equity securities Debt securities

• Shares 1. Bonds and other debt securities, such as: • Stocks •Non-participating preferred stocks and shares •Participation certificates (for example: American Depository Receipts •Convertible bonds or ADR certificates) •Bonds with optional maturity dates •Preferred stock and shares that provide for participation in the distribution • Negotiable certificates of deposit of residual earnings or in the residual value upon liquidation (participating •Dual currency bonds preference shares) •Floating rate and indexed bonds •Mutual funds • Collateralised mortgage obligations (CMOs) and participation certificates 2. Money market instruments or negotiable debt securities, such as: •Treasury bills •Commercial and finance paper •Bankers’ acceptances • Negotiable certificates of deposit with original maturities of one year or less • Short-term notes issued under note issuance facilities (NIFs)

46 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.4. Portfolioo investment flows r yl B n

Figure B.4.1. G7 countries’ assets,1 1997-2008 Figure B.4.2. G7 countries’ liabilities,2 1997-2008 O O e

l Germany United States Germany da United States

Italy United Kingdom Italy C United Kingdom u E e e

Japan France Japan France

Canada Canada O R s

USD billion USD billion n e A r 500 1 200 u L e c t 400 1 000 300 800 200 600 100 400 0 -100 200 -200 0 -300 -200

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1 2 http://dx.doi.org/10.1787/838582626105 1 2 http://dx.doi.org/10.1787/838624658838

Figure B.4.3. Average assets,1 2005-08 Figure B.4.4. Average liabilities,2 2005-08

United States United States 910 France United Kingdom Ireland Belgium-Luxembourg Germany Germany Belgium-Luxembourg France Japan Ireland United Kingdom Spain Norway Japan Switzerland Italy Netherlands Netherlands Canada Australia Australia Austria Sweden Norway China Greece Spain Portugal Denmark China Austria Sweden Denmark Korea Brazil Finland Finland Italy India Portugal Switzerland Greece Canada Chile South Africa Russian Federation Iceland Israel Mexico Iceland Turkey South Africa Indonesia Czech Republic Hungary Poland Korea Hungary Israel Slovenia Poland Indonesia New Zealand Turkey Chile New Zealand Czech Republic Estonia Slovak Republic Slovak Republic Slovenia India Estonia Brazil Russian Federation 300 250 200 150 100 50 0 -50 -500250 50 100 150200 300 350 USD billion USD billion

1 2 http://dx.doi.org/10.1787/838645028774 1 2 http://dx.doi.org/10.1787/838681542018 1. Assets = outward investment flows. 2. Liabilities = inward investment flows.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 47 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.5. Foreign direct investment flows o r yl B n

■ Since the latter half of the 1980s, foreign direct ■ Between 2005 and 2008, the OECD area continued O O e

D investment has played a fundamental role in to be a net exporter of direct investmentda capital.l

international economic integration. Worldwide it has Strong contributorsC were the United States,u E e e

been the most dynamic factor in industrial restructuring. Luxembourg, France, the United Kingdom and O R s

Germany. Among the majorn countries, Japan

e ■ A However, the bulk of direct investment over the continued to record a wide gap between assetsr and tu past 15 years corresponds to acquisitions, i.e. to liabilities, a pattern that has been presentL e c since 2000. transfers of ownership, rather than creation of new businesses or expansion of the capacities of existing ■ Non-OECD countries such as China and India have firms. become noteworthy host countries for foreign direct investment, with significant amounts of inward flows. ■ The scope of inward direct investment depends on In recent years, some non-OECD countries have a host of factors: size of the domestic market, skills of become active investors as well. the workforce and quality of infrastructure, labour costs, taxation, the level of technology, and the development of the banking and financial system. Source ■ The United States is not only the leading investor • International Monetary Fund, Balance of Payments but also the leading host country. Between 2005 Statistics. and 2008, Luxembourg continuously ranked second, in absolute value, as both host and investor. This is For further reading due to the presence in Luxembourg of foreign • OECD (2005), Measuring Globalisation: OECD Handbook on financial holding companies that channel their Economic Globalisation Indicators, OECD, Paris. investment through that country. In Europe, over the • OECD (1996), OECD Benchmark Definition of Foreign Direct period, Luxembourg was the leading host country Investment: 4th edition, OECD, Paris. for foreign direct investment, followed by the • International Monetary Fund (1995), Balance of Payments United Kingdom and France. Manual, 5th edition (BPM5).

Foreign direct investment flows

Foreign investment is said to be “direct” if the investor resident in another economy holds at least 10% of the ordinary shares or voting rights of the firm in which it has made the investment. The 10% threshold means that the direct investor is in a position to influence the management of the firm and to play a role in its affairs, without necessarily wielding control over the firm. Direct investment is measured in terms of flows and stocks. Direct investment flows in the reporting economy or abroad comprise: equity capital (assets, liabilities), reinvested earnings (net) and other capital (assets, liabilities). Direct investment enterprises are entities that are either directly or indirectly owned by the direct investor. A direct investment enterprise may be: a) a subsidiary: an enterprise of which more than 50% is owned by a non- resident investor; b) an associate: an enterprise of which 10% to 50% is owned by a non-resident investor; or c) a branch or an unincorporated enterprise wholly or jointly owned by a non-resident.

48 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.5. Foreign directo investment flows r yl B n

Figure B.5.1. G7 countries’ assets,1 1997-2008 Figure B.5.2. G7 countries’ liabilities,2 1997-2008 O O e

Germany United States Germany da United States C u

Italy United Kingdom Italy United Kingdom E e e

Japan France Japan France O R s

Canada Canada

USD billion USD billion n e A r 400 350 c tu 350 300 L e 300 250 250 200 200 150 150 100 100 50 50 0 0 -50

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1 2 http://dx.doi.org/10.1787/838742687784 1 2 http://dx.doi.org/10.1787/838767535245

Figure B.5.3. Average assets,1 2005-08 Figure B.5.4. Average liabilities,2 2005-08

United States United States Belgium-Luxembourg Belgium-Luxembourg France United Kingdom United Kingdom China Germany France Spain Canada Japan Spain Netherlands Germany Switzerland Netherlands Italy Russian Federation Canada Austria Austria Hungary Hungary Italy Russian Federation Brazil Sweden Sweden China India Norway Mexico Denmark Australia Ireland Switzerland Brazil Turkey India Poland Australia Chile Korea Japan Israel Czech Republic Poland Denmark Mexico Israel Finland Indonesia Portugal South Africa Indonesia Portugal Iceland Finland Chile New Zealand Greece Norway South Africa Korea Turkey Greece Czech Republic Slovak Republic Slovenia Estonia Estonia Iceland New Zealand Slovenia Slovak Republic Ireland 250 200 150 100 50 0 -50 0250 100 15000 250 USD billion USD billion

1 2 http://dx.doi.org/10.1787/838810453283 1 2 http://dx.doi.org/10.1787/838835017007 1. Assets = outward investment flows. 2. Liabilities = inward investment flows.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 49 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.6. Other investment flows o r yl B n

■ Between 2005 and 2008, other investment flows States and Germany (in terms of assets) and behind O O e

D took on greater importance than at the beginning of the United States and France (in termsda of liabilities).l

the 2000s. Their average value is now close to that of C u ■ E e e

portfolio investment and nearly twice that of direct In 2006, Japan recorded a negative value for

O R s

liabilities. Over the earlier period, asset values had investment. n

e been negative as well, especiallyA in 1999 and 2003.r u ■ The figures show that two countries occupy a L e c t dominant position in this regard: the United States and the United Kingdom. Between 2000 and 2007 the United Kingdom led the United States in average Source assets and liabilities in this investment category. • International Monetary Fund, Balance of Payments However, in both countries, these assets and liabilities Statistics. dropped dramatically in 2007 and 2008. For further reading ■ Luxembourg also plays an important role in these • International Monetary Fund, Balance of Payments investment flows and ranks just behind the United Manual, 5th edition (BPM5).

Other investment flows

Other investment flows cover short- and long-term trade credits; loans [including use of International Monetary Fund (IMF) credits, loans from the IMF, and loans associated with financial leases]; currency and deposits (transferable and other – such as savings and term deposits, savings and loan shares, shares in credit unions, etc.); and other accounts receivable and payable. Transactions covered under direct investment are excluded. The traditional distinction, which is based on original contractual maturity of more than one year or one year or less, between long- and short-term assets and liabilities applies only to other investment. In recent years, the significance of this distinction has clearly diminished for many domestic and international transactions. Consequently, the long- and short-term distinction is accorded less importance in the IMF Balance of Payments Manual. However, because the maturity factor remains important for specific purposes – analysis of external debt, for example – it is retained for other investment.

50 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.6. Othero investment flows r yl B n

Figure B.6.1. G7 countries’ assets,1 1997-2008 Figure B.6.2. G7 countries’ liabilities,2 1997-2008 O O e

Germany United States Germany da United States C u

Italy United Kingdom Italy United Kingdom E e e

Japan France Japan France O R s

Canada Canada

USD billion USD billion n e A r 1 500 1 500 u L e c t 1 000 1 000 500 500 0 0 -500 -500 -1 000

-1 000 -1 500

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1 2 http://dx.doi.org/10.1787/838840010143 1 2 http://dx.doi.org/10.1787/838847263148

Figure B.6.3. Average assets,1 2005-08 Figure B.6.4. Average liabilities,2 2005-08

523.6 United Kingdom United Kingdom United States United States Germany France Belgium-Luxembourg Belgium-Luxembourg France Ireland Ireland Spain Netherlands Germany Italy Netherlands China Italy Russian Federation Russian Federation Japan Switzerland Spain Norway Austria China Canada Denmark Sweden Canada Denmark Greece Switzerland Austria Australia Korea Norway Australia Greece Sweden Mexico Turkey Finland India Iceland Japan Korea Poland Brazil Iceland Turkey Hungary Indonesia Finland Portugal Portugal Czech Republic Brazil Hungary South Africa Israel Slovenia Slovenia New Zealand Chile Czech Republic Slovak Republic Chile Estonia Estonia Poland Slovak Republic South Africa Mexico New Zealand Israel India Indonesia 350 300 250 200 150 100 500 -50 -500 50 100 150 200 250 300 350 400 USD billion USD billion

1 2 http://dx.doi.org/10.1787/840047713484 1 2 http://dx.doi.org/10.1787/840064585834 1. Assets = outward investment flows. 2. Liabilities = inward investment flows.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 51 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.7. Investment income flows o r yl B n

■ Investment income relates to all three categories of in 2008 by the United States and the United Kingdom O O e

D investment: portfolio investment, direct investment amount to only 0.9% and 2.7% of theirda respective GDP.l

and other investment. Since 1997, the United States In 2008, Japan, with 3.1%,C had the largest positive netu E e e

has generated the largest net income (credits minus investment income relative to GDP, followed by Sweden O R s debits) in absolute value. The bulk of US income stems (2.3%), Denmark (2.1%) and Germanyn (1.7%).

e from direct investment and, to a lesser extent, from A r ■ tu other investment, whereas net income from portfolio The largest net investment lossL ine 2008,c relative to investment is negative. GDP, was incurred by Ireland (–14.4%).

■ The United Kingdom generates the second largest investment income derived exclusively from direct investment; net income from both other investment Sources categories is negative. The same holds true for France. • International Monetary Fund, Balance of Payments Japan’s overall positive income is attributable to Statistics. portfolio investments and Germany’s to other •OECD, National Accounts of OECD Countries Database, investment. Since 2005 Canada has recorded net December 2009. losses on all three categories of investment. For further reading ■ If net investment income is compared not in absolute • International Monetary Fund (1995), Balance of Payments value but relative to countries’ GDP, the gains recorded Manual, 5th edition (BPM5).

Investment income

Investment income – property income in the System of National Accounts (SNA) – covers income derived from a resident entity’s ownership of foreign financial assets. The most common types of investment income are income on equity (dividends) and income on debt (interest). Dividends, including stock dividends, are the distribution of earnings allocated to shares and other forms of participation in the equity of incorporated private enterprises, co- operatives and public corporations. Interest, including discounts in lieu of interest, comprises income on loans and debt securities (i.e. such financial claims as bank deposits, bills, bond notes and trade advances). Net interest flows arising from interest rate swaps also are included. The components of investment income are classified as direct investment, portfolio investment and other investment income. Direct investment income is broken down into income on equity (dividends, branch profits and reinvested earnings) and income on debt (interest). Portfolio investment income comprises income transactions between residents and non-residents and is derived from holdings of shares, bond notes and money market instruments, and associated financial derivatives. It is broken down into income on equity (dividends) and income on debt (interest). Other investment income covers interest receipts and payments on all other resident claims (assets) on and liabilities to non-residents respectively. This category also includes, in principle, imputed income to households from net equity in life insurance reserves and in pension funds. Source: International Monetary Fund Balance of Payments Manual, 5th edition, § 274-281.

52 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.7. Investmento income flows r yl B n

Figure B.7.1. G7 countries’ credit flows, 1997-2008 Figure B.7.2. G7 countries’ debit flows, 1997-2008 O O e

Germany United States Germany da United States C u

Italy United Kingdom Italy United Kingdom E e e

Japan France Japan France O R s

Canada Canada

USD billion USD billion n e 900 800 A r c tu 800 700 L e 700 600 600 500 500 400 400 300 300 200 200 100 100 0 0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1 2 http://dx.doi.org/10.1787/840072036161 1 2 http://dx.doi.org/10.1787/840140848800

Figure B.7.3. Average credit flows, 2005-08 Figure B.7.4. Average debit flows, 2005-08

697 United States United States 608 United Kingdom United Kingdom Germany Belgium-Luxembourg Belgium-Luxembourg Germany France France Japan Ireland Netherlands Netherlands Switzerland Italy Ireland Spain Italy Switzerland Spain Canada China Russian Federation Canada Australia Sweden Japan Russian Federation Sweden Norway China Austria Brazil Denmark Austria Australia Norway Finland Denmark Korea Mexico Portugal Portugal India Poland Brazil Chile Israel Finland Hungary Hungary Mexico Indonesia Greece Greece Turkey Czech Republic Czech Republic Korea South Africa India Chile Turkey Poland South Africa Indonesia New Zealand New Zealand Israel Iceland Slovak Republic Slovenia Iceland Slovak Republic Estonia Estonia Slovenia 500 400 300 200 100 0 0 100 200 300 400 500 USD billion USD billion

1 2 http://dx.doi.org/10.1787/840224870354 1 2 http://dx.doi.org/10.1787/840253318867

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 53 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.8. Current account and financial account balances o r yl B n

■ Following the double-entry accounting rules for current deficit of Spain has deteriorated and is now O O e

D establishing the balance of payments, the sum of the second to that of the United States, da and the amount l is

current account and the capital and financial account greater than that recordedC by most countries. u E e e

is theoretically equal to zero. As a result, the current

O R s

■ However, if current account deficits are expressed balance and the balance of the financial account are n

e theoretically symmetrical. Nevertheless, because data relative to GDP, the countries withA the largestr deficits tu are in many cases compiled independently from are Iceland, Greece and Portugal. L e c different sources, this may not be the case.

■ Eleven OECD countries run surpluses on their Sources current accounts, mainly Germany, Japan, Switzerland, • International Monetary Fund, Balance of Payments Norway, the Netherlands and Sweden. For all except Statistics. Switzerland, the main source of the surplus is the trade •OECD, National Accounts of OECD Countries Database, balance for goods. Savings are significantly larger than December 2009. investments in these countries. For further reading ■ In 2008, the current account deficit of the United • International Monetary Fund (1995), Balance of Payments States exceeded USD 570 billion. Since 2003, the Manual, 5th edition (BPM5).

The current account and the financial account

Current account A country’s current account balance (CAB) equals: CAB = X – M + NY + NCT = S – I, where: X = exports of goods and services M = imports of goods and services NY = net income from abroad NCT = net current transfers S = gross domestic saving I = gross domestic investment It can be shown (see Chapter III of the International Monetary Fund’s Balance of Payments Manual, BPM5) that the balance of trade in goods and services plus net investment income from abroad and net current transfers is equal to gross domestic saving and to gross domestic investment. Consequently, an increase in domestic investment relative to domestic saving will have the same short-term effect on the current balance as a decline in saving relative to investment. In the longer term, a rise in the surplus or reduction of the deficit must necessarily be counterbalanced by a rise in saving relative to domestic investment. Financial account The financial account can be broken down into two major categories: a) financial operations per se, consisting of direct investment, portfolio investment and other investment, which in turn comprise commercial credit, loans and deposits; and b) transactions involving reserve assets. There are direct linkages between the components of international transactions. For example, because goods imports are in many cases financed by non-residents, a rise in imports is counterbalanced by a financial inflow. The basic principle of double-entry accounting for the balance of payments assumes that the sum of transactions in the current account and the capital and financial account, including transactions involving reserve assets, is theoretically equal to zero.

54 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 B. TRENDS IN INTERNATIONAL TRADE AND INVESTMENT

_it E d e it s io w n B.8. Current account and financialo account balances r yl B n

Figure B.8.1. G7 countries’ current account balance, Figure B.8.2. G7 countries’ financial account balance, O O e

1997-2008 1997-2008 da l

C u Germany United States Germany E United States e e

Italy United Kingdom Italy United Kingdom O R s

Japan France Japan France

n e Canada Canada A r USD billion USD billion tu 400 1 000 L e c

200 800 600 0 400 -200 200 -400 0

-600 -200

-800 -400

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1 2 http://dx.doi.org/10.1787/840275036832 1 2 http://dx.doi.org/10.1787/840332861730

Figure B.8.3. Current account balance Figure B.8.4. Financial account balance as a percentage of GDP, 2008 as a percentage of GDP, 2008

21.2 Norway Iceland 77.1 Sweden Hungary China Greece Germany Estonia Russian Federation Portugal Netherlands Ireland Switzerland Spain Denmark Poland Austria Slovak Republic Finland Chile Japan Slovenia Canada Turkey Belgium-Luxembourg Australia United Kingdom South Africa Korea Czech Republic Indonesia Israel France United States Israel Italy Czech Republic India Brazil France Italy Finland Chile Belgium-Luxembourg Mexico Mexico United States United Kingdom Ireland Brazil Australia Sweden Slovenia New Zealand Turkey Netherlands South Africa Denmark India China Slovak Republic Indonesia Hungary Canada Poland Switzerland Spain Japan New Zealand Austria Estonia Korea Portugal Russian Federation Greece Germany -37.4 Iceland Norway -20.3 20 15 105 0 -5 -10 -15 -20 -10 -5 0 5 10 15 20 % %

1 2 http://dx.doi.org/10.1787/840350688224 1 2 http://dx.doi.org/10.1787/840380437162

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 55 _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r C. INTERNATIONAL TRADE OF GOODS u L e c t AND SERVICES

C.1. Trade as a percentage of GDP...... 58

C.2. Trade balance as a percentage of GDP ...... 60

C.3. Merchandise trade with the rest of the world ...... 62

C.4. Merchandise trade with partners China and Hong Kong (China) ...... 64

C.5. World export market shares...... 66

C.6. World export market shares (cont.) ...... 68

C.7. Geographical distribution of shares of exports of goods . 70

C.8. Geographical distribution of shares of export of goods (cont.) ...... 72

C.9. Geographical distribution of shares of exports in services 74

C.10. Import penetration of goods and services ...... 76

C.11. Sensitivity of trade flows to price and income changes. 78

C.12. Intra-regional trade ...... 80

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 57 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.1. Trade as a percentage of GDP o r yl B n

■ International trade in goods and services illustrates minor role of services in international trade contrasts O O e

D countries’ integration into the world economy. In with their contribution to the domesticda economies lof

relation to their gross domestic product (GDP), small member countries, whereC the proportion of totalu E e e

countries are generally more integrated. They tend to value added is around 70% and rising. O R s specialise in a limited number of sectors and, to n

e ■ A satisfy domestic demand, they need to import and Growth rates of goods and services trade showr the tu export more goods and services than larger countries. very strong performance of the OECDL e accessionc and Size alone, however, does not determine the level of enhanced engagement countries. China, India, the trade integration. Russian Federation, Estonia and Slovenia all showed significant higher growth rates than the OECD ■ The ratio of exports and imports to GDP, in current average. In addition, some OECD member countries, prices, increased between 2000 and 2007 in 21 out of especially in eastern Europe, showed strong trade 30 OECD countries. The largest increases within OECD performance, probably owing to their integration in countries were in the Slovak Republic (+20 percentage the European Union. This development is also points) and Luxembourg (+17 percentage points), reflected in the import penetration rates for goods for while Ireland’s (–22 percentage points) and Canada’s these countries (see Section C.10). (–26 percentage points) trade-to-GDP-ratios decreased the most. Luxembourg remained the OECD member country with the highest trade-to-GDP ratio at 327% in 2007, owing to financial services. The OECD Sources countries with the lowest ratios were the United • OECD Trade Indicators, May 2009. States (29% in 2007) and Japan (33%), in part because, • United Nations Statistics Division, National Accounts in general, larger economies depend less on external Main Aggregates Database, 2009. markets to satisfy domestic demand. For its part, Estonia, a very small economy, has the highest import For further reading penetration rate of all OECD accession countries. • OECD Trade Indicators, www.oecd.org/std/its/ tradeindicators. ■ In 2007, the average OECD-area trade-to-GDP ratio • United Nations Statistics Division, National Accounts for goods was 70%, up from 66% in 2000. OECD-area Main Aggregates Database, http://unstats.un.org/unsd/ trade in services was only 26.5% of GDP. The relatively snaama.

Average trade-to-GDP ratio

The most frequently used indicator of the importance of international transactions relative to domestic wealth creation is the trade-to-GDP ratio, which is the average share of exports and imports of goods and services in GDP. International trade tends to be more important for countries that are small (in terms of size or population) and surrounded by neighbouring countries with open trade regimes than for large, relatively self-sufficient countries or those that are geographically isolated and thus penalised by high transport costs. Other factors also help explain differences in trade-to-GDP ratios across countries, such as history, culture, (trade) policy, the structure of the economy (especially the weight of non-tradable services in GDP), re-exports and the presence of multinational firms (intra-firm trade). The trade-to-GDP ratio is often called the trade openness ratio. However, the term “openness” to international competition may be somewhat misleading. In fact, a low ratio does not necessarily imply high (tariff or non-tariff) obstacles to foreign trade, but may be due to the factors mentioned above, especially size and geographic remoteness from potential trading partners.

58 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.1. Trade aso a percentage of GDP r yl B n

Figure C.1.1. Sum of exports and imports of goods and services as a percentage of GDP, 2000 and 2007 O O e

da l 2000 2007 C

% u 200 E e e

Luxembourg: 279 %(2000), 327% (2007) O R s

180 OECD OECD

n e accessionA enhancedr 160 countries tengagementu L e c countries 140

120

100

0 1 Italy Korea Spain Japan Israel Chile IndiaBrazil Ireland Austria FinlandPoland Iceland Mexico Greece FranceTurkey China Belgium Hungary Sweden Norway Canada EstoniaSlovenia Denmark Germany Portugal Australia Indonesia Netherlands Switzerland Luxembourg New Zealand United States South Africa Slovak RepublicCzech Republic United Kingdom OECD30 average Russian Federation

1 2 http://dx.doi.org/10.1787/840405326334

Figure C.1.2. Trade in goods and services Average annual growth rate 2000-07 at current prices

Exports (%) China 25 SVK

CZE POL 20 India Russian Federation Chile HUN Estonia Brazil Slovenia LUX OECD30 average TUR 15 AUT DEU ISL South Africa NOR GRC IRL ESP PRT NLD DNK AUS CHE ITA FIN SWE 10 BEL NZL Indonesia GBR FRA KOR MEX Israel USA JPN CAN 5 51015 20 25 Imports (%)

1 2 http://dx.doi.org/10.1787/840410504674

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 59 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.2. Trade balance as a percentage of GDP o r yl B n

■ Trade balance data for 2000 and 2007 for OECD mainly due to a large trade deficit in machinery and O O e

D countries, OECD accession countries and countries of transport equipment. da l

the Enhanced Engagement Programme (EEP) vary C u ■ E e e

widely. Some countries are in surplus or in deficit in For services trade, Luxembourg showed the highest

O R s

trade-balance-to-GDP ratio in 2007 with 40.5% (33.5% both years. Countries’ surpluses or deficits may n

e in 2000), followed by SwitzerlandA with 8.5%r (6.8% deteriorate, improve or remain stable. u in 2000). Iceland had the highest negativeL e c valuest (–4.0% ■ The changes are due first to different export and in 2007). import trends. In the Czech Republic, the Slovak Republic and China, the trade balance improved because of growth of exports. In the United States, the Sources trade balance deteriorated because of the sharp rise in • OECD Trade Indicators, May 2009. imports. In Estonia and India where the balance • United Nations Statistics Division, National Accounts deteriorated, exports and imports expanded at the Main Aggregates Database, 2009. same pace but because the export/import ratio was significantly lower than 1, the deficits widened. For further reading • OECD Trade Indicators, www.oecd.org/std/its/ ■ For the merchandise trade balance, the highest tradeindicators. ratios in 2007 were in Norway (14.0%) and Ireland • United Nations Statistics Division, National Accounts (11.8%). The highest negative ratios were in Greece Main Aggregates Database, unstats.un.org/unsd/snaama. (–18.7%) and Spain (–8.5%). In both countries, this was

Trade balance, export-import ratio and international competitiveness

The trade balance (exports less imports) is probably the macroeconomic indicator most frequently used to gauge the competitiveness of a country or of a sector or product at national level. The export-import ratio (exports to imports) is also used. The two measurements are not alternatives but complements, given that one can improve and the other deteriorate at the same time. The interpretation of trade balances needs to take account of the factors that influence it. The most important may be: 1. Improvement of price-competitiveness and structural competitiveness The main question is to what extent an improved trade balance or import-export ratio may be attributable to improved competitiveness or other factors. An improvement in relative prices can contribute to trade surpluses but this will also depend on the factors responsible. If, for example, the improvement is the outcome of more efficient control of production costs or an improvement in non-price factors (structural competitiveness) such as innovation, product quality, etc., then this result does reflect improved competitiveness. The factors mentioned below, on the other hand, can help improve the trade balance but are unrelated to competitiveness. 2. Cyclical lag When export market demand grows more rapidly than a country’s domestic demand, the trade balance will tend to improve as long as no other obstacles prevent export growth (e.g. a lack of spare capacity). In the same way, if domestic demand grows faster than export markets, other things being equal, the trade balance will tend to deteriorate. However, permanent excessive domestic consumption can be due to structural causes, mainly an imbalance between savings and investment. 3. Terms of trade If the price of imported goods rises more slowly than that of exported goods, or if the import price of certain primary commodities declines (oil, raw material, food, etc.), the trade balance would improve, but the country’s competitiveness would not be in any way responsible for the improvement. 4. Other factors The introduction of structural adjustment policies made necessary as a result of excessive government borrowing, for example, may be intended to increase exports and massively cut imports. The factors mentioned above are not exhaustive, but are among those that should be given prime consideration when analysing the influence of competitiveness on the trade balance. In this document, the main results are presented but the causes and links between trade balance trends and competitiveness are not analysed.

60 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.2. Trade balance aso a percentage of GDP r yl B n

Figure C.2.1. Trade balance in goods and services O O e

As a percentage of GDP, 2000 and 2007 da l

C u

2000 2007 E e e

% O R s

Luxembourg 32% (2007)

20 n OECD OECDe accessionA enhancedr tu 15 countries L e cengagement countries 10

-5

-10

-15 1 Italy Spain Korea Japan Israel Chile IndiaBrazil IcelandGreece Turkey PolandFrance Mexico FinlandAustria Ireland China Hungary Canada Belgium Sweden Norway Estonia Slovenia Portugal Australia Denmark Germany Indonesia NetherlandsSwitzerland United States New Zealand Luxembourg South Africa United Kingdom Slovak Republic Czech Republic OECD30 average Russian Federation

1 2 http://dx.doi.org/10.1787/840415044605

Figure C.2.2. Trade balance in goods Figure C.2.3. Trade balance in services As a percentage of GDP, 2000 and 2007 As a percentage of GDP, 2000 and 2007 2000 2007 2000 2007

Norway Luxembourg Chile Switzerland Ireland Greece Russian Federation Estonia Germany Austria Netherlands Slovenia Finland Sweden Sweden United Kingdom Czech Republic Denmark Canada OECD30 average Korea Portugal Japan Turkey Switzerland Israel Belgium Norway Austria Belgium Hungary Spain Italy Czech Republic OECD30 average Hungary Denmark Chile New Zealand Poland Mexico1 United States Slovak Republic Netherlands Australia Slovak Republic France France Israel Finland Poland Mexico1 Slovenia Australia United States New Zealand United Kingdom Italy Iceland Japan Turkey Ireland Luxembourg Canada Spain Germany Portugal Korea Estonia Russian Federation Greece Iceland 3020 10 0 -10 -20 -20 -10 0 10 20 30 40 % % 1 2 http://dx.doi.org/10.1787/840427658247 1 2 http://dx.doi.org/10.1787/840478782446 1. Data from the United Nations Statistics Division (National Accounts).

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 61 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.3. Merchandise trade with the rest of the world o r yl B n

■ OECD’s trade deficit grew steadily during the Japanese yen. Japan is the second exporter of O O e

D reference period to reach USD 942 billion in 2007. machinery and transport equipmentda in the OECD. l

A detailed analysis of the trade balance of the United C u ■ E e e

States, Japan and the European Union reveals The EU15 did not generate trade surpluses with the

O R s

rest of the world during the reference period. In 2007, different dynamics. n

e the trade deficit reached USD 208A billion. r u ■ The United States present a persistent and L e c t increasing trade deficit with the rest of the world, which reached a record USD 855 billion in 2007. Sources ■ Japan has maintained a positive trade balance with • OECD International Trade by Commodity Statistics (ITCS) the rest of the world (with a USD 92 billion surplus Database, HS 1996, May 2009. in 2007). The Japanese recession at the turn of the • OECD (2005), OECD Economic Surveys: China, OECD, Paris. century particularly affected exports of computers, electronics, metals and shipbuilding; however, Japan For further reading has succeeded in preserving its trade surplus in spite • International Trade in Goods, www.oecd.org/std/trade- of a sharply devalued US dollar relative to the goods.

62 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.3. Merchandise trade witho the rest of the world r yl B n

Figure C.3.1. OECD30 merchandise trade Figure C.3.2. US merchandise trade O O e

D with the rest of the world with the rest of the worldda l

USD billion USDC billion u

E e e

Net balance (X-M) (right axis) Net balance (X-M) (rightO Raxis) s

Imports Exports Imports n Exports e A r u 3 500 1 500 2 200 L e c t 600 2 000 400 3 000 1 000 1 800 200 2 500 500 1 600 0

2 000 0 1 400 -200

1 200 -400 1 500 -500 1 000 -600 1 000 -1 000 800 -800

500 -1 500 600 -1 000 19992000 2001 2002 2003 2004 2005 2006 2007 19992000 2001 2002 2003 2004 2005 2006 2007

1 2 http://dx.doi.org/10.1787/840561265321 1 2 http://dx.doi.org/10.1787/840601411532

Figure C.3.3. EU15 merchandise trade Figure C.3.4. Japan merchandise trade with the rest of the world with the rest of the world USD billion USD billion

Net balance (X-M) (right axis) Net balance (X-M) (right axis) Imports Exports Imports Exports 2 500 400 800 150

700 100 2 000 200 600 50

1 500 0 500 0

400 -50 1 000 -200 300 -100

500 -400 200 -150 19992000 2001 2002 2003 2004 2005 2006 2007 19992000 2001 2002 2003 2004 2005 2006 2007

1 2 http://dx.doi.org/10.1787/840636878010 1 2 http://dx.doi.org/10.1787/840644776721

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 63 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.4. Merchandise trade with partners China and Hong Kong (China)o r yl B n

■ The OECD area’s recent trade performance is high level of exports to Hong Kong (China) explains O O e

D closely linked to trade with China and Hong Kong why only Japan has succeeded in generatingda a tradel

(China): (almost) half of the total OECD trade deficit is surplus with China andC Hong Kong (China). A look u at E e e

due to its deficit with these partners. The deterioration the trade balance with mainland China alone during O R s has accelerated since 2002 and exceeded the same period reveals a persistentn trade deficit in

e A r USD 500 billion in 2007. goods of around USD 20 billion. u L e c t ■ Imports of goods from China and Hong Kong ■ The European Union’s trade deficit with China and (China) to OECD countries have grown significantly. Hong Kong (China) has deepened since 2002. This also Only Japan has succeeded in aligning its exports on its corresponds to the entry into force of the euro and the imports from China and thus in limiting its trade continuous appreciation of the European currency deficit or generating a trade surplus. China’s exports against the yuan. This has helped to make Chinese consist principally of manufactured goods, of which manufactured goods provided to European consumers computers, telecommunications equipment, clothing, competitively priced. electrical machinery and semiconductors.

■ The United States’ persistent trade deficit in goods with China and Hong Kong (China) has risen steadily Sources to reach USD 262 billion in 2007. In that year, more • OECD International Trade by Commodity Statistics (ITCS) than one-quarter of the United States overall negative Database, HS 1996, May 2009. balance was due to this trade deficit (compared to • OECD (2005), OECD Economic Surveys: China, OECD, Paris. only one-fifth in 1999). For further reading ■ Japan has had a trade surplus since 2002, which • International Trade in Goods, www.oecd.org/std/trade- peaked in 2007 at USD 19 billion. Japan’s relatively goods.

64 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.4. Merchandise trade with partners China ando Hong Kong (China) r yl B n

Figure C.4.1. OECD30 merchandise trade with China Figure C.4.2. US merchandise trade with China and O O e

D and Hong Kong (China) Hong Kong (China)da l

USD billion USDC billion u

E e e

Net balance (X-M) (right axis) Net balance (X-M) (rightO Raxis) s

Imports Exports Imports n Exports e A r u 1 200 600 400 L e c t 400 350 300 1 000 400 300 200 800 200 250 100

600 0 200 0

150 -100 400 -200 100 -200 200 -400 50 -300

0 -600 0 -400 19992000 2001 2002 2003 2004 2005 2006 2007 19992000 2001 2002 2003 2004 2005 2006 2007

1 2 http://dx.doi.org/10.1787/840654121730 1 2 http://dx.doi.org/10.1787/840702573560

Figure C.4.3. EU15 merchandise trade with China Figure C.4.4. Japan merchandise trade with China and Hong Kong (China) and Hong Kong (China) USD billion USD billion

Net balance (X-M) (right axis) Net balance (X-M) (right axis) Imports Exports Imports Exports 400 400 160 80

350 300 140 60

300 200 120 40

250 100 100 20

200 0 80 0

150 -100 60 -20

100 -200 40 -40

50 -300 20 -60

0 -400 0 -80 19992000 2001 2002 2003 2004 2005 2006 2007 19992000 2001 2002 2003 2004 2005 2006 2007

1 2 http://dx.doi.org/10.1787/840713513260 1 2 http://dx.doi.org/10.1787/840718033031

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 65 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.5. World export market shares o r yl B n

■ The United States remained the largest exporter of average annual growth rate for exports of goods O O e

D goods and services in 2007 with 9.6%, despite a between 2000 and 2007 (+12.8%), followedda by Polandl

marked decrease of almost five percentage points (+11.0%) and the CzechC Republic (+10.1%). u E e e

between 2000 and 2007. Germany, the OECD country

O R s

■ For exports of services in 2007, the United States with the second highest share, increased its market n

e share by almost 1.1 percentage point (from 7.9% to had the OECD’s largest worldA export marketr share tu 9.0%) in the same period. (14.5%, down 5.0 percentage pointsL e c from 2000), followed by the United Kingdom (8.3%, up ■ Among OECD accession countries, the Russian 0.4 percentage points). Ireland had the highest Federation had the largest export market share average annual growth (+13.2%) during this period, in 2007 (2.2%, up 0.8% percentage points from 2000). followed by Finland (+7.6%). Israel was the only country of this group that lost market share during the period (down by 0.2 percentage points to 0.4%). Sources ■ In 2007 the OECD country with the highest export • OECD Trade Indicators, May 2009. market share for goods was Germany (10.0%, • United Nations Statistics Division, National Accounts an increase of 1.2 percentage points from 2000), Main Aggregates Database, 2009. followed by the United States (8.8%, a decrease of 3.6 percentage points). Germany gained market share For further reading especially in manufactured articles and machinery/ • OECD Trade Indicators, www.oecd.org/std/its/ transport equipment. The United States lost market tradeindicators. share for all categories of commodities except mineral • United Nations Statistics Division, National Accounts fuels/lubricants. The Slovak Republic had the highest Main Aggregates Database, unstats.un.org/unsd/snaama.

66 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.5. Worldo export market shares r yl B n

Figure C.5.1. World export market shares in goods and services, 2000 and 2007 O O e

Current prices da l

C u 2000 2007 E e e

10 O R s

United States 14% (2000) n OECD OECDe 9 A r accession uenhanced countries tengagement 8 L e c countries 7

Italy Japan Korea Spain ChileIsrael ChinaIndiaBrazil France Mexico AustriaIreland Poland Turkey Finland Greece Iceland Canada Belgium Sweden Norway SloveniaEstonia Germany Australia Denmark Hungary Portugal Indonesia Netherlands Switzerland United States Luxembourg New Zealand South Africa United Kingdom Czech Republic Slovak Republic OECD30 average Russian Federation

1 2 http://dx.doi.org/10.1787/840745523132 Figure C.5.2. World1 export market shares in goods Figure C.5.3. World1 export market shares of OECD countries in services of OECD countries Current prices Current prices

2000 2007 2000 2007 USA 2000 (19.5), 2007 (14.6 ) Germany United States United States United Kingdom USA 2000 (12.5) Japan Germany France France Italy Japan Netherlands Spain United Kingdom Italy Belgium Netherlands Canada Ireland Korea Belgium Mexico Switzerland Spain Luxembourg Switzerland Sweden Sweden Korea Austria Canada Australia Denmark Poland Austria Norway Greece Ireland Norway Czech Republic Australia Turkey Turkey Denmark Poland Hungary Portugal Finland Finland Slovak Republic Mexico Portugal Czech Republic New Zealand Hungary Greece New Zealand Luxembourg Slovak Republic Iceland Iceland %1086 4 2 0 0468210% 1 2 http://dx.doi.org/10.1787/840773680304 1 2 http://dx.doi.org/10.1787/840823413724 1. Values in world total for 2006 rather than 2007 for Venezuela, Iran and Chinese Taipei.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 67 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.6. World export market shares (cont.) o r yl B n

■ The (geometric) average annual growth rates of ■ Other leading OECD exporters are Germany O O e

D market shares for total trade, for 2000 to 2007, show the (chemicals, manufactured goods. andda machinery andl

differences in countries’ export performance. The OECD equipment), France (foodC and beverages and tobacco),u E e e

member with the highest average growth rate was the Norway (mineral fuels) and the Netherlands (animal O R s Slovak Republic (an average annual increase of 11.1%), and vegetable oils). n

e followed by the Czech Republic (+8.7%) and Poland A r tu (+8.0%). The largest average decreases were observed in L e c Canada (–5%), Japan (–5%) and the United States (–4.9%).

■ Among the OECD accession countries and the countries of the OECD Enhanced Engagement Sources Programme, China and India increased their export • OECD Trade Indicators, May 2009. market shares the most, with annual increases of • United Nations Statistics Division, National Accounts with +12.8% and +9.7%, respectively. Main Aggregates Database, 2009.

■ In 2007, the United States was the OECD’s top For further reading exporter for food and live animals, crude materials • OECD Trade Indicators, www.oecd.org/std/its/ and miscellaneous manufactured articles and was in tradeindicators. second place for chemicals and related products and • United Nations Statistics Division, National Accounts machinery and transport equipment. Main Aggregates Database, unstats.un.org/unsd/snaama.

Export market shares and competitiveness

Export market shares (XMSij) for a country i and a product j concern the share of exports (Xij) of products j by firms in country i in relation to world exports of the product or by reference area (in this document, the world, i = 1…n). 100X XMS = ij ij n X i=1 ij

Traditionally, firms have tended to establish a direct link between trends in their export market shares and competitiveness. However, a direct link between export market shares and competitiveness is not obvious since many factors directly or indirectly affect export market shares (foreign direct investment, firms’ strategic choices, changes in specialisation, exchange rate fluctuations).

68 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.6. World exporto market shares (cont.) r yl B n

Figure C.6.1. World export market shares in goods and services O O e

Average annual growth rate 2000-07, current prices, in percentage da l C u

% E e e

O R s

12 n e A r tu 10 L e c

-2

-4

-6

Italy China India Chile Brazil Spain Korea Israel Japan Poland TurkeyAustria IcelandGreece Ireland Finland FranceMexico EstoniaHungarySlovenia Norway SwedenBelgium Canada Germany PortugalDenmarkAustralia Indonesia Netherlands Switzerland Luxembourg South Africa New Zealand United States Slovak RepublicCzech Republic United Kingdom OECD30 average Russian Federation

1 2 http://dx.doi.org/10.1787/840855776481

Figure C.6.2. Top three OECD exporters of goods, by category of commodities, 2007 World export market shares, current prices in percentage

% 16 FRA

14 USA DEU DEU 12 USA USA USA 10 DEU JPN DEU GBR BEL USA DEU 8 AUS CAN NLDDEU NLD 6 USA ITA ESP ITA NOR CAN USA

4 NLD

0 0: Food and 1: Beverages 2: Crude 3: Mineral fuels 4: Animal and 5: Chemicals 6: Manufactured 7: Machinery 8: Miscellaneous live animals and tobacco materials lubricants and vegetable oils and related goods classified and transport manufactured inedible related materials fats and waxes products chiefly by material equipment articles except fuels

1 2 http://dx.doi.org/10.1787/840861067658

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 69 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.7. Geographical distribution of shares of exports of goods o r yl B n

■ In 2007, Germany was the largest exporter of goods ■ The United States’ share of exports to the Japanese O O e

D to the European Union (EU25) with an export market market decreased from 29.6% in 2000da to 17.9% in 2007.l

share of 17.7%, slightly higher than in 2000 (16.4%). At the same time, China’sC exports recordedu a E e e

During the same period, France, the United Kingdom, significant increase, from 18.9% in 2000 to 29.1% O R s the United States and Japan recorded losses in export in 2007. Between 2000 and 2007,n Australia is the only

e market shares. The export shares of the Netherlands OECD country with a significantA increase in itsr share tu and Belgium increased notably, as did those of Poland, of exports to Japan. This is probablyL e c related to the Czech Republic and Hungary. China and the Australia’s specialisation in the production of raw Russian Federation with 5.2% and 3.4%, respectively, materials and Japan’s strong demand owing to its of total exports to the European market also had meagre natural resources. significant increases.

■ For the United States’ domestic market, exports from Canada, Mexico and Japan accounted for about 47.5% of the total in 2007. This aggregate share has declined Sources sharply from about 58.1% in 2000. NAFTA agreements •OECD, International Trade by Commodity Statistics (ITCS) have nonetheless secured for Canada and Mexico the Database, May 2009. highest shares of exports. Since 2000, however, China’s • UN Comtrade Database, 2009. share of exports to the United States has grown at an average annual rate of 15.7% to reach 15.8% of the total For further reading in 2007. China has thus surpassed Japan in terms of • International Trade in Goods, www.oecd.org/std/ relative export shares to the United States. trade-goods.

Geographical distribution of export shares

For each OECD country, accession country or enhanced engagement country i, the export shares XSi referring to another country j of the same grouping are measured as follows: j j X XS =100 i with n = 40 (total number of OECD countries, accession countries and enhanced engagement i nX j i i countries) and i  j.

where XS j i ; export shares of country i in country j; nX j i i : total exports of 39 countries (except exports of country j) destined for country j (40 countries if j is neither an OECD country, an accession country or an enhanced country).

70 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.7. Geographical distribution of shareso of exports of goods r yl B n

Figure C.7.1. Highest shares of goods exported to EU25 by OECD+,1 2000 and 2007 O O e

Current prices, in percentage da l

C u 2000 2007 E

% e e

20 O R s

n e A r 16 u L e c t 12

Italy China Spain Japan France Poland Norway Austria Ireland Germany Belgium Sweden Hungary Denmark Netherlands Switzerland United States United Kingdom Czech Republic Russian Federation 1 2 http://dx.doi.org/10.1787/840867385488 Figure C.7.2. Highest shares of goods exported to the United States by OECD+,1 2000 and 2007 Current prices, in percentage

2000 2007 % 20 22.5 26.4

Italy India Chile China Japan Korea France Brazil Israel Spain Canada Mexico Belgium Ireland Sweden Germany Indonesia Netherlands Switzerland United Kingdom 1 2 http://dx.doi.org/10.1787/841072138766 Figure C.7.3. Highest shares of goods exported to Japan by OECD+,1 2000 and 2007 Current prices, in percentage

2000 2007 % 20 29.1 29.6

Chile Italy India China Korea France Brazil Canada Belgium Ireland Australia Indonesia Germany Switzerland Netherlands United States South Africa New Zealand United Kingdom Russian Federation 1 2 http://dx.doi.org/10.1787/841074002111 1. OECD+ groups OECD, accession countries and enhanced engagement countries (40 countries).

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 71 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.8. Geographical distribution of shares of export of goods (cont.)o r yl B n

■ Between 2000 and 2007, some OECD countries lost ■ From 2000 to 2007, Japan and the United States O O e

D large shares of exports to India: Belgium (from 12.1% experienced a decrease in their sharesda of exports tol

to 6.0%), the United Kingdom (from 11.8% to 4.8%) Asia from 21.2% to 16.1%C and from 21.6% to 13.7%,u E e e

and Japan (from 9.4% to 5.1%). In contrast, China’s respectively. Small central European exporters such as O R s export shares increased from 5.9% in 2000 to 19.7% the Slovak Republic, Poland n and Hungary are gaining

e in 2007. This trend illustrates the growing “south- market shares in Asia. China’sA export sharesr have tu south” trade that is gradually replacing traditional jumped from 13.5% to 24.0%. Due toL thee cdiversity of its trade links. economic base, India’s trade volume with the rest of Asia is still low has increased from 1.2% in 2000 to ■ OECD countries have generally lost relative export 2.1% in 2007. shares to China and Hong Kong (China). Leading global exporters, specialisation in exports of raw materials and geographical proximity can explain the Sources still good performances of Germany, Australia and •OECD, International Trade by Commodity Statistics Korea, respectively, for exports to the Chinese market. Database, May 2009. Among OECD countries, Japan remained the most • UN Comtrade Database, 2009. important exporter to China (including Hong Kong, China). However, there has been a relative decrease of For further reading its shares of exports to the Chinese market (from • International Trade in Goods, www.oecd.org/std/trade- 30.1% to 25.5%) during the reference period. goods.

72 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.8. Geographical distribution of shares of oexport of goods (cont.) r yl B n

Figure C.8.1. Highest shares of goods exported to India by OECD+,1 2000 and 2007 O O e

Current prices, in percentage da l C u

2000 2007 % E e e

20 O R s

n e 16 A r u L e c t 12

Italy Chile China Korea Japan France Israel Belgium Canada Sweden Mexico Germany Australia Indonesia NetherlandsSwitzerland United States South Africa United Kingdom Russian Federation 1 2 http://dx.doi.org/10.1787/841074666420 Figure C.8.2. Highest shares of goods exported to China and Hong Kong (China) by OECD+,1 2000 and 2007 Current prices, in percentage 2000 2007 % 20 25.5 30.1

India Italy Chile Japan Korea France Brazil Israel Canada Belgium Sweden Germany Australia Indonesia Switzerland Netherlands United States South Africa United Kingdom Russian Federation 1 2 http://dx.doi.org/10.1787/841088310562 Figure C.8.3. Highest shares of goods exported to Asia by OECD+,1 2000 and 2007 Current prices, in percentage 2000 2007 % 24.0 21.2 21.6 16

Italy ChinaJapan Korea India ChileBrazil Spain Israel France Ireland AustriaFinland MexicoTurkey Poland Canada Belgium Sweden Norway Hungary GermanyAustraliaIndonesia Denmark Portugal Netherlands Switzerland United States South Africa New Zealand United Kingdom Czech Republic Slovak Republic Russian Federation 1 2 http://dx.doi.org/10.1787/841156313221 1. OECD+ groups OECD, accession countries and enhanced engagement countries (40 countries).

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 73 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.9. Geographical distribution of shares of exports in services o r yl B n

■ The United States is by far the largest OECD registered the most important loss of export shares O O e

D exporter of services (relative to available OECD during the reference period (fromda 11.9% in 2000 tol

countries in 2000 and 2006) to the European Union. Its 8.7% in 2006). C u E e e

share has however weakened, from 26.6% in 2000 to

O R s

■ The United States accounted for 41.3% of services 22.6% in 2006. The United Kingdom, Germany, Spain n

e and Japan have instead slightly improved their export exports to India in 2006, down fromA 46.2% in 2000.r The tu shares over the period. United Kingdom, Germany andL eAustraliac have improved their relative export shares to India. ■ The United Kingdom increased its relative share of ■ services exports to the United States from 17.0% to The OECD’s leading exporters of services to China 20.2% during the reference period. This reflects the are the United States and Japan (27.9% and 18.2% United Kingdom’s specialisation in insurance and in 2006, respectively). However, their shares have financial services for the rest of the world, including declined since 2000 (34.4% and 24.2%, respectively). the United States, and the growing importance of Korea, Germany, the United Kingdom, France, Sweden these service activities in the globalised economy. and Australia have gained export shares while Canada, Austria and Italy have lost shares. ■ Canada’s and France’s relative export shares to the ■ United States have decreased while Ireland, Germany, In Asia, the United States still has the bulk of services Norway and Denmark have improved their relative exports with 41.5% of the total (down from 50.7% export shares. Ireland’s improvement (from 1.1% to in 2000). Japan, the United Kingdom, Germany, France, 4.2%) is due to its specialisation in computer and the Netherlands, Denmark and Australia have seen their information services, also a crucial service activity in relative market shares expand over the period. the integrated world economy. At the same time, however, Ireland pays very large royalties and licence fees to the rest of the world (half of the total goes to Source the United States). •OECD, Database on Trade in Services by Partner Country, May 2009. ■ The United States leads in exports of services to Japan, with about 56.0%. Other important service For further reading exporters to Japan include the United Kingdom, • International Trade in Services, www.oecd.org/std/trade- Korea, Germany, France and Australia. Korea services.

74 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.9. Geographical distribution of shareso of exports in services r yl B n

Figure C.9.1. Shares of services1 exported to the Figure C.9.2. Shares of services1 exported to the O O e

D EU25, 2000 and 2006 United States, 2000 andda 2006 l

Current prices, in percentage Current prices,C in percentage u

E e e

2000 2006 O 2000R 2006 s

n e USA 2006 (22.7) 2000 (26.6) A UKM 2006r (20.2) u United States United Kingdom L e c t United Kingdom Japan Germany Canada Spain Germany Italy France Netherlands Korea Japan Netherlands Sweden Ireland Denmark Italy Portugal Greece %20 15 10 5 0 05101520% 1 2 http://dx.doi.org/10.1787/841178673683 1 2 http://dx.doi.org/10.1787/841188115272 Figure C.9.3. Shares of services1 exported to Japan, Figure C.9.4. Shares of services1 exported to India, 2000 and 2006 2000 and 2006 Current prices, in percentage Current prices, in percentage

2000 2006 2000 2006

USA 2006 (56.0) 2000 (55.4) USA 2006 (41.4) 2000 (46.2) United States United States United Kingdom United Kingdom Korea Germany Germany France

Australia Australia 77.1 France Japan Netherlands Denmark Italy Netherlands Denmark Italy Canada Canada %20 15 10 5 0 05101520% 1 2 http://dx.doi.org/10.1787/841224723532 1 2 http://dx.doi.org/10.1787/841322640128 Figure C.9.5. Shares of services1 exported to China Figure C.9.6. Shares of services1 exported to Asia, and Hong Kong (China), 2000 and 2006 2000 and 2006 Current prices, in percentage Current prices, in percentage

2000 2006 2000 2006

USA 2006 (27.9) 2000 (34.4) USA 2006 (41.5) 2000 (50.7) United States United States Japan Japan JPN 2000 (24.2) Korea United Kingdom United Kingdom Germany Germany Australia Australia Netherlands France France Denmark Denmark Canada Italy Sweden Sweden %20 15 10 5 0 05101520% 1 2 http://dx.doi.org/10.1787/841331154153 1 2 http://dx.doi.org/10.1787/841351572730 1. Ten highest shares of exports in services in OECD countries for which data are available.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 75 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.10. Import penetration of goods and services o r yl B n

■ The highest penetration of imports of goods and for Ireland (–22 percentage points from 2000) and O O e

D services is observed in smaller countries such as Canada (–8 percentage points). For theseda countries thel

Luxembourg (import penetration rate of 218% reason was not decreasingC import values but the factu E e e

in 2007), Belgium (88%), the Slovak Republic (86%), that their gross domestic product (GDP) increased O R s Hungary (80%) and Ireland (78%). Import penetration significantly more than then value of imports. The

e is lowest in larger countries such as the Japan (16.2%) opposite was true for the SlovakA Republic,r where tu and the United States (16.4%). imports increased more than GDP. L e c

■ Among OECD accession countries, Estonia had the ■ The import penetration rates for trade of services highest import penetration rate (77% in 2007), show Luxembourg to have by far the highest degree of followed by Slovenia (70%). While the import import penetration (150%, up by 55 percentage points penetration rates of Slovenia, Israel and Chile from 2000). The OECD countries with the lowest increased between 2000 and 2007, the rates of Estonia import penetration of services were Mexico (1.6%), and especially of the Russian Federation decreased. Turkey (2%), the United States (2.7%) and Japan (3%).

■ Of the OECD enhanced engagement countries, China had the highest import penetration rate (35% in 2007, up by 13 percentage points from 2000), Sources followed by South Africa (33%). India’s import •OECD, Trade Indicators Database, May 2009. penetration rate also showed a rather strong increase • United Nations Statistics Division, National Accounts (25% in 2007, up by 12 percentage points from 2000). Main Aggregates Database, 2009.

■ Import penetration rates for goods from OECD For further reading countries for 2000 and 2007 show that the Slovak • OECD Trade Indicators, www.oecd.org/std/its/ Republic had the highest import penetration rate (78% tradeindicators. in 2007, up by 16 percentage points from 2000). • United Nations Statistics Division, National Accounts Distinct negative changes in the ratios were observed Main Aggregates Database, unstats.un.org/unsd/snaama.

The rate of import penetration

The rate of import penetration (MPij) for a country i and a product j corresponds to the share of domestic demand (Dij) in country i for product j, which is met by imports Mij.

MPij = 100 Mij/Dij. If P, X and M stand respectively for a country’s output, export and imports, its domestic demand, D will be equal to D = P – X + M and then the import penetration in country i for product j will be

MPij = 100 Mij/(Pij – Xij+ Mij). Competitiveness on the domestic market, as measured by the rate of import penetration, is based on the notion that a national industry endeavours to win, or at least keep, its shares in its own market. A low import penetration rate does not necessarily reflect import barriers but may be due to a good matching of output to domestic demand by highly competitive domestic firms capable of confronting foreign competition. Conversely, a high import penetration rate may reflect weak competitiveness on the part of domestic firms, especially when the export ratio is low. The size of the countries involved is also very important. The level of import penetration is usually greater in small countries because they are more open to the world economy and because of the way they specialise. As they are unable to specialise in many sectors, they become more dependent on imports. In the longer term, however, if the import penetration rate rises faster than domestic demand and is not accompanied by equivalent gains in export markets, this could indicate some deterioration of competitiveness.

76 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.10. Import penetration oof goods and services r yl B n

Figure C.10.1. Import penetration of goods and services, 2000 and 2007 O O e

Current prices, in percentage da l

C u 2000 2007 E e e

163 % O R s

100 218

n e OECD countries A OECD OECDr 90 accession tenhancedu countriesL e c engagement 80 countries 70

Italy Korea Spain Japan IsraelChile China IndiaBrazil Ireland Austria Finland Poland Iceland GreeceMexico FranceTurkey Belgium Hungary Sweden NorwayCanada EstoniaSlovenia Denmark Germany Portugal Australia Indonesia Netherlands Switzerland Luxembourg New Zealand United States South Africa Slovak RepublicCzech Republic United Kingdom OECD30 average Russian Federation

1 2 http://dx.doi.org/10.1787/841351801071 Figure C.10.2. Import penetration of goods, Figure C.10.3. Import penetration of services, 2000 and 2007 2000 and 2007 Current prices, in percentage Current prices, in percentage 2000 2007 2000 2007 Lux. 150% (2007) 96% (2000) Slovak Republic Luxembourg Belgium Ireland Czech Republic Denmark Hungary Belgium Luxembourg Netherlands Netherlands OECD30 average Austria Iceland Switzerland Sweden Poland Hungary Ireland Austria OECD30 average Norway Sweden Finland Germany Switzerland Korea Czech Republic Denmark Slovak Republic Finland Germany Portugal United Kingdom Canada Korea Mexico New Zealand Iceland Spain Greece Canada Norway Italy Spain Poland Turkey Portugal Italy France France Greece New Zealand Australia United Kingdom Japan Australia United States United States Turkey Japan Mexico (2006) 8070 60 50 40 30 20 10 0 0210 0304050 % % 1 2 http://dx.doi.org/10.1787/841436083618 1 2 http://dx.doi.org/10.1787/841441777180

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 77 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.11. Sensitivity of trade flows to price and income changes o r yl B n

■ The sensitivity of trade flows to price changes is ■ Sensitivity of trade flows to income changes is O O e

D measured through price elasticity. For most OECD measured by income elasticity. For allda OECD countriesl

countries, price elasticities of both imports and both imports and exportsC are very sensitive uto E e e

exports are negative and inelastic for the period changes in domestic and external income, O R s from 1970 to 2006. This means that, when the price respectively. Income elasticitiesn of imports and

e goes up, the trade volume decreases but by less than exports range between 1.5A and 4, with rimport tu the price increase. Mexico, with an elasticity of –1.38, elasticity being more uniform acrossL e countries.c For is the only country where imports are relatively more two-thirds of OECD countries, import income sensitive to a price change. Although trade flows react elasticities are higher than those of exports. Eight in general rather insensitively to prices changes, countries, including Ireland, Korea, Luxembourg and relative sizes of the sensitivity vary significantly. For Turkey, are exceptions; they show significantly higher imports, the price elasticities of eight countries are income elasticities of exports. less than 0.2 in absolute terms and those of seven countries are more than 0.4 in absolute terms. Furthermore, export elasticities of two countries are Sources less than 0.2 and those of ten countries are more •OECD, Annual National Accounts Database. than 0.4. • World Bank, World Development Indicators Database.

Trade elasticity

Trade elasticity reveals the impact of changes in internal or external conditions on volume of imports and exports or terms of trade. They are calculated as a ratio of the percentage change in quantity (import or export) to the percentage change in price or income. If the elasticity of external demand price is low, for example, changes in external conditions or changes in exchange rates are unlikely to have much impact on the current accounts or the growth of an economy. In addition to the size, stability of the elasticity is also important. If it is unstable, the effect of such changes on the economic movement cannot be determined with any degree of confidence. The OECD’s National Account Database was used to extract data on imports and exports (both volume and value) and total gross national income (GNI) for each OECD member country. Imports and exports include both goods and services. The World Development Indicators Database was used to collect data on world GNI. All the information is in annual frequency for 1970-2006 and valued in US dollars. The import and export prices are estimated as a ratio between imports and exports at current and constant prices, respectively. Eastern European OECD member countries, i.e. the Czech Republic, Hungary, Poland and the Slovak Republic, are excluded from the analysis because of the shorter length of their time series. Basic equations utilised to estimate import and export elasticity are as follows:

Mt = F[Mt–1, DDt, Pm,t], where Mt is imports, DDt is domestic income and Pm,t is import price; and

Xt = F[Xt–1, DWt, Px,t] where Xt is exports, DWt is external income and Px,t is export price. A Generalized Least Square model was used to estimate import (export) elasticity, with lagged import (export), import (export) prices and domestic (external) income as explanatory variables. Volume data were used for both imports and exports and domestic and external income. Size of elasticities of imports and exports seems to be very sensitive to inclusion or exclusion of lagged dependent variables or trend.

78 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.11. Sensitivity of trade flows to priceo and income changes r yl B n

Figure C.11.1. Import elasticity of price, 1970-2006 Figure C.11.2. Export elasticity of price, 1970-2006 O O e

da l

Mexico Luxembourg C u

Iceland Ireland E e e

Canada Turkey O R s

Italy Canada n e Portugal A r Sweden c tu Turkey Netherlands L e Japan Portugal Norway United Kingdom United States Finland Germany1 Spain France Australia1 Spain Germany Finland Korea1 Netherlands Luxembourg New Zealand Ireland Denmark 1 Sweden Norway United Kingdom Austria Denmark1 France Austria Switzerland Belgium Belgium

-1.4 -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0 0 -0.4-0.2 -0.6 -0.8 -1.4-1.2-1.0

Note: Estimates for Australia, Greece, Korea, New Zealand and Note: Estimates for Greece, Iceland, Italy, Japan, Mexico and Switzerland are not included as their values are of no statistical United States are not included as their values are of no statistical significance. significance. 1. Estimates are significant at the 10% level. 1. Estimates are significant at the 10% level. 1 2 http://dx.doi.org/10.1787/841471650284 1 2 http://dx.doi.org/10.1787/841553876131

Figure C.11.3. Import elasticity of income, 1970-2006 Figure C.11.4. Export elasticity of income, 1970-2006

Norway Iceland Luxembourg Switzerland Korea Japan Ireland Belgium Australia Italy Finland Greece Belgium New Zealand Austria Norway Japan France Canada United Kingdom United Kingdom Austria United States Denmark France Australia Turkey Germany Portugal United States Denmark Finland Switzerland Portugal Germany Mexico Italy Luxembourg Spain Turkey Greece Ireland Mexico Korea

4.5 4.0 3.5 3.0 2.02.5 1.01.5 0.5 0 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

1 2 http://dx.doi.org/10.1787/841688436666 1 2 http://dx.doi.org/10.1787/841702180138

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 79 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.12. Intra-regional trade o r yl B n

■ Intra-regional trade has become more prominent countries – tend to have higher intra-regional trade O O e

D following the increase in regional integration shares, as shown by the European Unionda and NAFTA).l

agreements in some major areas (EU, NAFTA, ASEAN C u ■ E e e

and MERCOSUR). Nevertheless the share of intra- The share of intra-regional trade of the

O R s

EU15 declined from around 64% in the early 1990s to regional trade in world trade (which also depends on n

e the number of member countries and the trade size of less than 62% in 2000-03. TheA 2004 enlargementr tu the region) has not grown significantly in recent years. translated into an upward adjustmentL e c of this indicator, which remained quite stable around 66% in ■ Intra-regional trade among member countries of the following two years. The other three regions’ the European Union (EU27) represents more than 25% intra-regional trade shares show a more or less of world merchandise trade. This share has fluctuated pronounced upward trend in the 1990s, which has over 1999-2007, with a downward trend after 2003. only continued in the current decade for ASEAN. NAFTA’s intra-regional trade has declined NAFTA’s intra-regional trade share has fallen back to continuously since 2001 and amounted to less than its level of the early 1990s, due to the relatively slow 7% of world trade in 2007. The shares of intra-regional growth of its total trade and to the nominal impact of trade in ASEAN and MERCOSUR are very small but the dollar depreciation. In the case of MERCOSUR, the have followed an upward trend in the last few years, financial crises in Brazil and Argentina brought about reflecting, among other things, the more rapid growth a sharp fall in the intra-regional trade share. The of their member countries. upward trend has resumed since 2003.

■ The same picture emerges when analysing intra- regional trade shares, i.e. the share of intra-regional trade in the total trade of regions instead the total Source world (Other things being equal, larger regions – in •WTO, International Trade Statistics 2008, www.wto.org/ terms of total trade and/or number of member english/res_e/statis_e/its2008_e/its08_toc_e.htm.

Number of preferential trade agreements notified to the GATT/WTO

Many indicators can be used to measure the empirical relevance of regional integration processes, considering either the number of agreements, or the value of trade among their member countries. The WTO Secretariat keeps the count of the bilateral, plurilateral and regional preferential trade agreements in force, which have been notified by GATT/WTO member countries, in compliance with their obligations under GATT Article XXIV, the “Enabling Clause” and GATS Article V This count does not include agreements in force that are still to be notified, signed agreements that have not yet entered into force, agreements under negotiation or simply at the stage of proposal, and agreements among countries that are not members of the WTO.

Figure C.12.1. Preferential trade agreements notified to the GATT/WTO and in force, by date of entry into force, 1948-2008 Number of PTAs 250

200

150

100

0 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 1 2 http://dx.doi.org/10.1787/841722002678

80 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 C. INTERNATIONAL TRADE OF GOODS AND SERVICES

_it E d e it s io w n C.12.o Intra-regional trade r yl B n

Figure C.12.2. World trade shares of intra-regional trade, by region O O e

da l EU27 NAFTA ASEAN C MERCOSUR

% u

30 E e e

O R s

n e A r 25 u L e c t

0 1999 2000 2001 2002 2003 2004 2005 2006 2007

1 2 http://dx.doi.org/10.1787/841748477043

Figure C.12.3. Intra-regional trade shares, by region

1 % EU15-EU27 NAFTA ASEAN MERCOSUR 80

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1. EU15 for 1990-2003, EU27 for 2004-07. 1 2 http://dx.doi.org/10.1787/841755508461

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 81 _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r D. FOREIGN DIRECT INVESTMENT u L e c t

D.1. General foreign direct investment trends ...... 84

D.2. Foreign direct investment flows by type of financing . 86

D.3. Foreign direct investment stocks...... 88

D.4. Source and destination of foreign direct investment stocks...... 90

D.5. Foreign direct investment stocks in manufacturing industries ...... 92

D.6. Foreign direct investment stocks in service industries 94

D.7. Foreign direct investment income...... 96

D.8. Rate of return on direct investment ...... 98

D.9. Direct investment dividends ...... 100

D.10. Cross-border mergers and acquisitions ...... 102

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 83 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.1. General foreign direct investment trends o r yl B n

■ Foreign direct investment transactions inform and continued to be net exporters of FDI capital. O O e

D about inward and outward investments within a given Investments in non-OECD countriesda increased.l

period. Both inflows and outflows are estimated after Nonetheless, the overallC decline of FDI recorded in theu E e e

deducting disinvestments and reimbursement of fourth quarter of 2008 continued in 2009. Estimates O R s intercompany loans from new investments. The indicate that investments inn non-OECD countries will

e difference between inflows and outflows indicates be substantially lower. A r tu whether a country is a net exporter or importer of L e c ■ capital in the form of FDI; this is referred to as total The relative importance of FDI in countries which net flows. As shown in figure D.1.1, the OECD area is traditionally host special purpose entities is once traditionally an exporter of FDI capital as total FDI again significant in 2005-08 due mostly to funds in outflows from the region are higher than total inflows. transit on behalf of multinational companies. ■ ■ Investment flows over the past ten years or so have While inflows and outflows of the United States witnessed significant fluctuations. Preliminary data and the United Kingdom are very similar as a for 2008 indicate a 35% decrease of FDI inflows to the percentage of GDP, the shares of inward and outward OECD from 2007 (from USD 1 583 billion in 2007 to USD FDI differ for most countries. Some countries have a 1 021 billion in 2008). FDI outflows from the region more prominent position as investors abroad, such as decreased by 19% (from USD 2 024 billion in 2007 to Ireland, Norway, Spain, Germany, France, Sweden, USD 1 631 billion in 2008). This sharp decline of the Austria, Japan and Italy. Others are rather recipients of investment activity, due largely to financial crisis, is the FDI, such as the Czech Republic, the Slovak Republic, second sharp drop in less than ten years and is likely to Hungary, Poland, Turkey, New Zealand and Australia. continue significantly in 2009.

■ The FDI flows in 2007 represented an all-time high Source for OECD countries, even above the investment boom • OECD International Direct Investment database. of 1998-2000 which was due to large volumes of cross- border mergers and acquisitions. For further reading •OECD, OECD Benchmark Definition of Foreign Direct ■ In spite of the decline of FDI in 2008, inflows to the Investment: 3rd Edition (1995). OECD are only slightly below the 2000 peak and •IMF, Balance of Payments Manual: 5th edition (1995). outflows are still 30% higher than in 2000. OECD • OECD (2005), Measuring Globalisation – OECD Handbook on countries therefore maintained a significant level of Economic Globalisation Indicators, OECD, Paris. Available investment activity for the first three quarters of 2008 at: www.oecd.org/sti/measuring-globalisation.

Direct investment, direct investment enterprise and direct investor

Foreign Direct Investment (FDI) reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise. The direct or indirect ownership of 10% or more of the voting power of an enterprise resident in one economy by an investor resident in another economy is evidence of such a relationship. A direct investor is an entity (an institutional unit) resident in one economy that has acquired, either directly or indirectly, at least 10% of the voting power of a corporation (enterprise), or equivalent for an unincorporated enterprise, resident in another economy. A direct investor could be classified to any sector of the economy and could be an individual; a group of related individuals; an incorporated or unincorporated enterprise; a public or private enterprise; a group of related enterprises; a government body; an estate, trust or other societal organisation. A direct investment enterprise is an enterprise resident in one economy and in which an investor resident in another economy owns, either directly or indirectly, 10% or more of its voting power if it is incorporated or the equivalent for an unincorporated enterprise.

84 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.1. General foreign directo investment trends r yl B n

Figure D.1.1. Total FDI flows to and from OECD countries O O e

da l Total outflows Total inflows C Total net outflows

u USD billion E e e

2 500 O R s

n e A r 2 000 u L e c t

1 500

1 000

500

-500 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1 2 http://dx.doi.org/10.1787/http://dx.doi.org/10.1787/841758378185

Figure D.1.2. FDI outflows from OECD countries Figure D.1.3. FDI inflows to OECD countries as a percentage of GDP, average 2005-08 as a percentage of GDP, average 2005-081

22.4 Iceland Belgium 15.0 19.7 Luxembourg Iceland 14.0 15.6 Switzerland Czech Republic 6.0 13.8 Belgium United Kingdom 6.0 10.0 Netherlands Luxembourg 5.9 7.5 Sweden Sweden 5.7 6.7 Ireland Netherlands 5.7 6.6 Spain Switzerland 5.7 6.0 Denmark Hungary 5.6 6.0 Norway Slovak Republic 5.4 5.9 France Poland 4.4 5.9 Austria Canada 4.4 5.3 United Kingdom Austria 4.3 4.2 Germany France 3.6 3.8 Canada Spain 3.3 2.7 Italy Denmark 3.2 2.3 Hungary New Zealand 3.0 2.0 Finland Turkey 2.9 2.0 Portugal Portugal 2.6 1.8 United States Finland 2.4 1.6 Japan Mexico 2.3 1.4 Poland Australia 2.1 1.2 Greece United States 1.8 1.1 Korea Germany 1.5 0.8 Australia Italy 1.5 0.7 Czech Republic Norway 1.2 0.6 Mexico Greece 1.1 0.5 Slovak Republic Korea 0.4 0.4 New Zealand Japan 0.2 0.3 Turkey Ireland 2520 15 10 5 0 0152015205 % %

1 2 http://dx.doi.org/10.1787/841777732845 1. Ireland: average inflows are negative (–4.7 USD billion). 1 2 http://dx.doi.org/10.1787/841785142420

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 85 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.2. Foreign direct investment flows by type of financing o r yl B n

■ Foreign direct investment comprises three types of reinvestment of earnings became increasingly O O e

D transactions: equity finance, reinvestment of earnings important in recent years reaching,da on average,l

and intercompany loans. around 30% of OECD investmentsC in 2008. Historically,u E e e

OECD investors reinvest a higher share of their O R s

■ Equity finance relates to the ownership of shares earnings abroad as comparedn to reinvestment of

e representing more than 10% of the voting power, hence earnings by foreign investors inA resident enterprises.r tu providing the basic criteria for the establishment of a L e c direct investment relationship between the direct ■ The third component of FDI flows relates to investor and the direct investment enterprise. intercompany loans extended by the parent or between affiliated enterprises which constitute ■ On average, equity finance accounts for more than temporary financing that are subject to 50% of OECD investments. Over the past decade, the reimbursements to the lender for whom they usually share of equity finance in FDI inflows fluctuated generate interest income. between 54% in 1997 (USD 155 billion) to 77% in 2003 ■ (USD 363 billion) and it stood at 59% in 2007 Intercompany loans represent on average a (USD 994 billion). Equity investment represented 52% significant share of total inflows, e.g. more than 50% of investment outflows in 1997 (USD 209 billion) rising in several countries such as Australia, Canada and to 75% in 2000 (USD 772 billion) when FDI reached France, over the period 2005-2008. In contrast to unprecedented high levels due to the boom in cross- equity, they can feature substantial fluctuations due border mergers and acquisitions. This share went to reimbursements of loans and consequently impact down to 54% in 2007 (USD 1 119 billion). overall investment figures.

■ The data for the past four years indicate that for most OECD countries equity investment represents, Source on average, 50% to 75% of outflows. The share of • OECD International Direct Investment Database. equity financing in OECD investments fell to 51% in 2008 for inflows (USD 500 billion) and 41% for For further reading outflows (USD 650 billion). •OECD, OECD Benchmark Definition of Foreign Direct Investment: 3rd Edition (1995). ■ Earnings that are not distributed in the form of •IMF, Balance of Payments Manual: 5th edition (1995). dividends are reinvested in the direct investment • OECD (2005), Measuring Globalisation – OECD Handbook on enterprise which may be a negative value if dividends Economic Globalisation Indicators, OECD, Paris. Available distributed are higher than earnings. Their share of at: www.oecd.org/sti/measuring-globalisation.

Foreign direct investment transactions

Direct investment flows are cross-border transactions within a given period between affiliated enterprises that are in a direct investment relationship: i) outflows are investments by resident direct investors abroad; and ii) inflows are investments by non-resident direct investors in the reporting economy. Transactions between residents of the same economy are excluded. Direct investment financial flows are composed of equity capital, reinvestment of earnings (and undistributed branch profits) and other capital (inter-company loans). Equity capital comprises: i) equity in branches; ii) all shares in subsidiaries and associates (except non- participating preference shares; and iii) other capital contributions, including non-cash acquisitions of equity (such as through the provision of capital equipment). Ownership of equity is usually evidenced by shares, stocks, participations, depositary receipts or similar documents. Reinvestment of earnings (and undistributed branch profit)s comprise the earnings on equity accruing to direct investors less distributed earnings, proportionate to the percentage ownership of the equity owned by the direct investor(s). Reinvested earnings are also included in direct investment income because reinvested earnings are not actually distributed to the direct investor but rather increase the direct investor’s investment in its affiliate. Other capital: covers the borrowing or lending of funds between affiliated direct investment enterprises. The instruments covered include loans, debt securities, suppliers’ (trade) credits, financial leases, and non- participating preference shares which are treated as debt securities.

86 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.2. Foreign direct investment flowso by type of financing r yl B n

Figure D.2.1. FDI outflows by type of financing, Figure D.2.2. FDI inflows by type of financing, O O e

OECD average, 1997-2008 OECD average, 1997-2008da l

C u

Equity finance Reinvestment of earnings Equity finance E e Reinvestment of earningse

Intercompany loans Intercompany loansO R s

USD billion USD billion n e A r 80 80 u L e c t 70 70

60 60

50 50

40 40

30 30

20 20

10 10

0 0

-10 -10 1997 98 99 2000 01 02 03 04 05 06 07 2008 1997 98 99 2000 01 02 03 04 05 06 07 2008

1 2 http://dx.doi.org/10.1787/841787404883 1 2 http://dx.doi.org/10.1787/841802411156

Figure D.2.3. FDI outflows by type of financing, Figure D.2.4. FDI inflows by type of financing, average 2005-08 average 2005-08

Equity finance Reinvestment of earnings Equity finance Reinvestment of earnings Intercompany loans Intercompany loans

United States United States France United Kingdom United Kingdom Luxembourg Luxembourg France Germany Belgium Spain Canada Japan Spain Netherlands Germany Switzerland Netherlands Belgium Hungary Italy Austria Canada Italy Austria Sweden Hungary Switzerland Sweden Mexico Norway Australia Denmark Turkey Australia Poland Ireland Japan Other OECD Other OECD

250 200 150 100 50 0 -50 -500 50 100 150 200 250 USD billion USD billion

1 2 http://dx.doi.org/10.1787/841803685455 1 2 http://dx.doi.org/10.1787/841808254170

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 87 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.3. Foreign direct investment stocks o r yl B n

■ The underlying motivation of direct investment is ■ Outward investments of northern European O O e

D to establish a long-term relationship between the countries, Iceland, Denmark, Finland,da Norway andl

direct investor and the direct investment enterprise. Sweden were also relativelyC more important in 2007u E e e

FDI stocks provide the basis for structural analysis of than their inward investment stocks. O R s investments accumulated over time. Expressed as a n

e ■ A percentage of GDP, FDI stocks provide comparative In contrast, some smaller OECD economiesr are tu analysis across countries of the extent of the FDI primarily recipients of FDI. Their Lrankinge c by relative relationship between the direct investor and the importance as host of FDI, measured as a percentage direct investment enterprise. of GDP, is as follows: Hungary (72%), the Czech Republic (65%), the Slovak Republic (54%) Poland (41%) ■ Figure D.3.1 shows the relative importance of the and Turkey (24%). Their outward investments were position of OECD countries as home or host of direct relatively small, with the exception of Hungary (13%). investments in 2007 while Figures D.3.2 and D.3.3 ■ FDI positions of special purpose entities which provide the ranking of inward and outward FDI account largely for funds in transit are included in FDI positions by relative importance measured as statistics. The positions of economies which a percentage of their GDP. traditionally host SPEs, such as Belgium, the ■ In terms of real levels of investment stocks, the Netherlands or Switzerland, represent ratios which United States is the largest host and investor country are not fully comparable to the ratios calculated for representing around 25% of total OECD investments. other economies. Nevertheless, in comparison to the size of its economy, United States’ foreign investment from abroad represented only 18% of its GDP and its Source outward investments 24%. • OECD International Direct Investment Database.

■ All other G7 countries also exhibit relatively more For further reading important outward investments in 2007 than inward •OECD, OECD Benchmark Definition of Foreign Direct investments. For the United Kingdom, France, Japan Investment: 3rd Edition (1995). and Italy the difference between the relative size of •IMF, Balance of Payments Manual: 5th edition (1995). outward/inward investments was 20%, 13%, 9% and • OECD (2005), Measuring Globalisation – OECD Handbook on 7%, respectively. FDI stocks of Canada and Germany Economic Globalisation Indicators, OECD, Paris. Available represent more than 30% of their GDP. at: www.oecd.org/sti/measuring-globalisation.

Foreign direct investment positions (stocks)

Direct investment position data are stock data showing an economy’s direct investment assets and liabilities at a given point in time. For annual data, statistics may be based on calendar years or fiscal years when the latter is different from the calendar year. According to international standards, assets and liabilities should be valued at market prices prevailing on the date they are recorded in the statistics. Most OECD countries deviate from this recommendation and establish their FDI position statistics according to book values which represent values recorded in the balance sheets of direct investors. Depending on the type of book values applied, the results will vary significantly. Book values which are not based on revaluations but reflect for example historical costs are not in line with market valuation concepts. Data relating the positions of special purpose entities are included in FDI positions.

88 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.3. Foreign directo investment stocks r yl B n

Figure D.3.1. Inward and outward stocks of direct investment as a percentage of GDP, 2007 O O e

l 180 da Inward (%) C u

160 E eBEL LUX e

O R s

140 n e A r u 120 L e c t 100 NLD 80 CHE HUN IRL 60 CZE SWE ISL SVK NZL PRT DNK ESP AUT GBR 40 POL CAN AUS FRA TUR MEX NOR DEU FIN 20 GRC USA KOR ITA JPN Outward (%) 0 020406080100120140160

1 2 http://dx.doi.org/10.1787/841880418876

Figure D.3.2. Outward FDI position of OECD countries Figure D.3.3. Inward FDI position of OECD countries as a percentage of GDP, 2007 as a percentage of GDP, 2007

154.2 Switzerland Belgium 163.1 146.3 Luxembourg Luxembourg 160.8 136.6 Iceland Netherlands 93.3 129.4 Belgium Switzerland 79.1 113.0 Netherlands Ireland 74.2 72.2 Sweden Hungary 72.3 65.7 United Kingdom Czech Republic 64.6 58.0 Denmark Sweden 64.0 55.9 Ireland Iceland 60.0 49.8 France New Zealand 54.4 47.1 Finland Slovak Republic 54.2 42.1 Austria Portugal 51.6 41.1 Spain Denmark 50.9 37.7 Germany United Kingdom 45.1 36.8 Norway Austria 44.1 36.5 Canada Spain 42.1 30.6 Australia Poland 41.4 30.3 Portugal Finland 37.5 24.6 Italy France 36.6 24.3 United States Australia 36.1 12.7 Hungary Canada 34.8 12.4 Japan Norway 31.3 11.6 New Zealand Germany 30.2 10.1 Greece Mexico 26.3 7.7 Korea Turkey 24.0 4.9 Czech Republic United States 17.6 4.6 Poland Italy 17.3 4.4 Mexico Greece 17.0 2.1 Slovak Republic Korea 12.6 1.9 Turkey Japan 3.0 180160 140 120 100 80 60 40 20 0 01802040 60 80 100120 140 160 % %

1 2 http://dx.doi.org/10.1787/842005573425 1 2 http://dx.doi.org/10.1787/842013502433

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 89 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.4. Source and destination of foreign direct investment stockso r yl B n

■ The analysis by partner country indicates the USD 28 billion and USD 42 billion was invested in O O e

D interdependence of economies. OECD countries’ Brazil. However, these figures da are likely to bel

overseas investments are traditionally concentrated underestimated due to C statistical methodology whichu E e e

on investments in non-resident enterprises located does not take into account investments via financial O R s within the OECD area. Non-OECD countries attract centres which is common practicen for multinational

e only a smaller portion of OECD capital and their share enterprises. A r tu in the total outward investment position of OECD L e c ■ countries has grown more slowly than overall Germany accounts for around 9% of investment investments in the OECD area. stocks; its investments in other OECD countries represent 8.7% of OECD investments and 4.6% of ■ In consequence, direct investment enterprises investments in non-OECD countries. Italy and Spain residing in the OECD area are, to a very large extent, combined hold 8.5% of OECD outward investments financed by OECD countries while the share of which account for 9.6% of investment in OECD and 7% investments from non-OECD countries remain rather in non-OECD countries. limited. Taking into account funds in transfer, 35% ■ of investments in the OECD were held in the Some smaller economies are mostly hosts of FDI. Netherlands, Austria, Luxembourg, Belgium, When counted together, investments of the Czech Switzerland and Denmark. Republic, Iceland, Korea, New Zealand, Poland, Portugal, the Slovak Republic and Turkey account only ■ However, it is likely that the final destination is a for 1.3% of OECD’s outward stocks. Most of their non-OECD country. Once we exclude such funds, the investments are in non-OECD countries accounting share of non-OECD countries is 15%. By the end for 2.8% of the total. of 2007 the United States and the United Kingdom together accounted for the largest share of outward (39%) and inward (34%) direct investment stocks of Source OECD countries. • OECD International Direct Investment Database. ■ The combined investments of the United States, the United Kingdom and France accounted for 50% of For further reading OECD investments. •OECD, OECD Benchmark Definition of Foreign Direct Investment: 3rd Edition (1995). ■ In 2007, 55% of outward FDI stocks of the United •IMF, Balance of Payments Manual: 5th edition (1995). States were in the European Union followed by 26% in • OECD (2005), Measuring Globalisation – OECD Handbook on the American continent of which 12% was in Canada Economic Globalisation Indicators, OECD, Paris. Available and Mexico. Its investments in China stood at at: www.oecd.org/sti/measuring-globalisation.

Geographic allocation

Partner country statistics are not usually symmetrical when comparing bilateral data depending on the principles applied as well as the method for identification of the partner country. Geographic classification: The recommended methodology for direct investment position data should ideally be determined according to the debtor/creditor principle (as opposed to transactor principle). Country identification for direct investment positions are recorded primarily in respect of the immediate host or investing country. However, many analysts are also interested in the ultimate source and destination of investments excluding funds in transit. The debtor/creditor principle allocates transactions resulting from changes in the financial claims of the compiling economy to the country or residence of the non-resident debtor, and transactions resulting in changes in the financial liabilities of the compiling economy to the country of residence of the non-resident creditor, even if the amounts are paid to or received from a different country. The transactor principle allocates transactions resulting from changes in the financial claims and liabilities of the compiling economy to the country of residence of the non-resident party to the transaction (the transactor), even if this is not the country of residence of the direct investment enterprise or direct investor.

90 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.4. Source and destination of foreign directo investment stocks r yl B n

Figure D.4.1. Distribution of inward and outward stocks of direct investment as a percentage O O e

of total OECD investments, 2007 da l C u

20 E e e

Inward (%) EU27: Inward, 65%

18 O R Outward, 53%s

n e 16 A r tu 14 United States L e c 12

4 Japan America (excl. OECD) 2 Near and Middle East Asia (excl. OECD) Africa Outward (%) 0 02468101214161820

1 2 http://dx.doi.org/10.1787/842035081412

Figure D.4.2. OECD1 outward investment Figure D.4.3. OECD1 outward investment to OECD countries as a percentage of total to non-OECD countries as a percentage of total outward FDI stocks, 20072 outward FDI stocks, 20072

21.5 United States United States 28.3 13.9 United Kingdom United Kingdom 15.5 13.6 France Switzerland 9.4 8.7 Germany Japan 7.3 7.9 Netherlands France 5.7 4.9 Spain Canada 5.5 4.7 Italy Germany 4.6 4.3 Switzerland Spain 4.5 3.9 Canada Netherlands 4.3 3.7 Japan Italy 2.5 3.0 Sweden Australia 1.7 2.5 Australia Sweden 1.5 1.5 Denmark Norway 1.4 1.3 Ireland Austria 1.3 1.0 Finland Korea 1.3 0.9 Norway Denmark 1.2 0.8 Austria Portugal 0.9 0.5 Portugal Greece 0.9 0.3 Luxembourg Ireland 0.8 0.3 Iceland Finland 0.5 0.2 Korea Luxembourg 0.4 0.2 Poland Turkey 0.2 0.1 New Zealand Poland 0.2 0.1 Greece New Zealand 0.1 0.1 Turkey Czech Republic 0.1 0.0 Czech Republic Iceland 0.1 0.0 Slovak Republic Slovak Republic 0.0 3025 20 15 10 5 0 03052010 15 25 % %

1 2 http://dx.doi.org/10.1787/842035352500 1 2 http://dx.doi.org/10.1787/842051032120 1. Data are not available for Belgium and Hungary. 2. 2006 for Austria, Germany, Korea, Luxembourg and Norway.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 91 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.5. Foreign direct investment stocks in manufacturing industrieso r yl B n

■ Detailed foreign direct investment positions decrease of inward investments was observed in O O e

D classified by industry sectors are compiled by the Turkey (–24 per cent) and, to a lesserda extent, Icelandl

OECD. These series enable measures of the and Austria (–17 and C –16 per cent respectively).u A E e e

contribution of various sectors of individual countries decrease of outward investments is also observed for O R s to the global economy, as well as measures of the Tu r k ey a nd I ce l an d , b u t le ssn so than for the Slovak

e dependence of host economies on sectors of Republic (–19 per cent). A r tu investment from abroad. For the convenience of the L e c ■ present document, industries are aggregated into two While investments in manufacturing in the United main categories: a) manufacturing; and b) services States represented 34% of total inward investments (see next section). A sector not covered in the analysis at end-2007, resident investors’ holdings in is the primary sector. In addition, confidential data manufacturing subsidiaries abroad represented only which cannot be disclosed to the public are included 19% of the total. There is no single country where in category “unallocated”. inward investments in manufacturing industries accounted for more than 45%. The highest was the ■ As shown in figures D.5.1 and D.5.2, over the past Slovak Republic at 43%, followed by Canada at 39% two decades the stock of OECD investments in and Iceland and Japan at 37%. Although some absolute amounts were multiplied at end 2006 by four countries indicate higher share of manufacturing for from their 1990 level for outward investment (from outward investment, some country data may be in USD 645 billion in 1990 to USD 2 600 billion in 2006) parts relating to the industry of the direct investor and by more than four for inward investments (from rather than to that of the direct investment enterprise. USD 484 billion in 1990 to USD to over 2 000 billion in 2006). These increases in levels are in line with overall increases in investment. Source ■ Nevertheless, the relative importance of • OECD International Direct Investment Database. investments in manufacturing industries substantially diminished over the same period. The For further reading share of OECD investment in manufacturing •OECD, OECD Benchmark Definition of Foreign Direct Investment: 3rd Edition (1995). industries dropped from around 40% of investments in 1986, to 25% in 2000 and to 24% in 2007. •IMF, Balance of Payments Manual: 5th edition (1995). • OECD (2005), Measuring Globalisation – OECD Handbook on ■ With respect to the share of individual countries’ Economic Globalisation Indicators, OECD, Paris. Available investments in manufacturing, the most spectacular at: www.oecd.org/sti/measuring-globalisation.

Industrial classifications

Foreign direct investment should be allocated according to the industry of the direct investment enterprise: for inward investments the industry of the resident direct investment enterprise and for outward investment the industry of the non-resident direct investment enterprise. The allocation to an industry should represent the main economic activity of the enterprise. The industrial classification should be based at least on main sections identified by the United Nations International Standard Industrial Classification of All Economic Activity, 3rd revision (ISIC3). There are many deviations from this basic concept, in particular for outward investments. A number of OECD countries report their outward investments according to the industry of the resident direct investor which does not necessarily have the same principle economic activity as its non-resident affiliates. Although both presentations are of interest for different analytical purposes, deviation from the core recommendation increases the difficulties for bilateral comparisons.

92 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.5. Foreign direct investment stocks in manufacturingo industries r yl B n

Figure D.5.1. OECD manufacturing outward positions Figure D.5.2. OECD manufacturing inward positions O O e

da l Manufacturing outward stocks ManufacturingC inward stocks

u USD billion USD billion E e e

3 000 3 000 O R s

n e 2 585 A r 2 500 2 500 u L e c t 2 121 2 008 2 000 2 000 1 701

1 500 1 500 1 267 1 107

1 000 843 1 000 645 638 500 500 484

0 0 1990 1995 2000 2005 2006 1990 1995 2000 2005 2006

1 2 http://dx.doi.org/10.1787/842081440116 1 2 http://dx.doi.org/10.1787/842105781663

Figure D.5.3. Share of the manufacturing sector Figure D.5.4. Share of the manufacturing sector in the total outward FDI positions of OECD in the total inward FDI positions of OECD countries,1 countries,1 20072 20072 Per cent Per cent

61.2 Finland Slovak Republic 43.0 55.4 Japan Canada 38.6 51.3 Korea Iceland 37.8 50.2 Luxembourg Japan 37.7 44.2 Australia Czech Republic 36.7 40.9 Switzerland Italy 35.7 39.6 Netherlands United States 33.9 36.0 Norway Ireland 33.8 27.3 United Kingdom Poland 33.5 26.9 Italy Greece 33.2 24.9 Austria Netherlands 31.8 24.0 Slovak Republic Finland 31.4 20.8 Iceland Korea 29.5 20.1 Ireland Norway 26.3 19.5 Canada Turkey 24.4 19.0 United States Spain 22.2 18.0 Germany United Kingdom 19.7 18.0 Czech Republic Luxembourg 18.9 15.7 Sweden Australia 17.9 15.3 France Sweden 17.4 14.6 Turkey France 17.0 13.1 Denmark Switzerland 16.6 12.9 Greece Germany 11.6 10.9 Poland Denmark 11.6 8.6 Spain Austria 11.5 2.0 Portugal Portugal 9.1 70 60 50 40 30 20 10 0 07010 20 30 40 50 60 % %

1 2 http://dx.doi.org/10.1787/842147815706 1 2 http://dx.doi.org/10.1787/842172343322 1. The breakdown is not available for Belgium, Hungary, Mexico and New Zealand. 2. Or most recent available year.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 93 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.6. Foreign direct investment stocks in service industries o r yl B n

■ The relative decline in investments in sector have increased by more than 25% to reach O O e

D manufacturing industries (see previous section) was USD 1 720 billion, and USD 2 560 billion,da respectively.l

offset by increase of investments in services sector. This trend is observed C again in 2007 for the countriesu E e e

The share of investments became more pronounced for which data are available. Inward investments of O R s as from the mid 1990s, accounting for around 40% of countries which traditionallyn host SPEs are mostly in

e total OECD investment stocks (inward investments at the services sector, for exampleA representingr more tu USD 760 billion and outward investments at than 80% in Austria, Switzerland,L ande c Luxembourg USD 950 billion). and more than 60% in the Netherlands. For an economically meaningful analysis it is, therefore, ■ In line with the overall increase in cross-border preferable to consider FDI series excluding investments, absolute levels of FDI in services investments via Special Purpose entities. industries reached historically high levels for both inward and outward investments (to USD 4 670 billion and USD 5 400 billion, respectively). Between 1995 and 2006, the investment stock of OECD countries in Source services grew annually by 18% for inward investments • OECD International Direct Investment Database. and by 17% in average for outward investments. For further reading ■ It should be noted that financial and business •OECD, OECD Benchmark Definition of Foreign Direct services are boosted by their recourse to SPEs and Investment: 3rd Edition (1995). holding companies which are more and more •IMF, Balance of Payments Manual: 5th edition (1995). involved in the investment of multinational • OECD (2005), Measuring Globalisation – OECD Handbook on enterprises. Between 2005 and 2006, inward and Economic Globalisation Indicators, OECD, Paris. Available outward investments in the financial intermediation at: www.oecd.org/sti/measuring-globalisation.

Coverage of service sectors

Statistics are based on the industrial classification identified by the United Nations International Standard Industrial Classification of All Economic Activity (ISIC) (see also Box on industry classification under C.5). The “services” sector in the present publication has a broad coverage which is the following: Electricity, gas and water Financial activities Construction Monetary institutions Trade and repairs Other financial institutions Hotels and restaurants Insurance and activities auxiliary to insurance Transport and communication Other financial institutions and insurance act. Land, sea and air transport Real estate and business activities Telecommunications Other services

94 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.6. Foreign direct investment stockso in service industries r yl B n

Figure D.6.1. OECD service sector outward positions Figure D.6.2. OECD service sector inward positions O O e

da l Service sector outward stocks ServiceC sector inward stocks

u USD billion USD billion E e e

6 000 6 000 O R s

5 397

n e A r 5 000 5 000 tu 4 514 L e c 4 673

4 000 4 000 3 595

3 000 3 000 2 439 2 027 2 000 2 000

950 1 000 1 000 761

0 0 1995 2000 2005 2006 1995 2000 2005 2006

1 2 http://dx.doi.org/10.1787/842206501105 1 2 http://dx.doi.org/10.1787/842268305841

Figure D.6.3. Share of the service sector in the total Figure D.6.4. Share of the service sector in the total outward FDI positions of OECD countries1 inward FDI positions of OECD countries1 Per cent, 20072 Per cent, 20072

95.3 Portugal Germany 88.2 87.8 Spain Austria 88.1 86.7 Greece Switzerland 83.4 Denmark 83.4 83.5 Turkey Portugal 81.8 81.6 Germany Luxembourg 80.9 80.4 France France 78.8 80.0 Czech Republic Turkey 74.2 79.3 Ireland Spain 72.3 78.9 Iceland Finland 67.1 75.6 United States Ireland 65.7 73.6 Austria Netherlands 64.6 72.5 Slovak Republic Greece 64.5 72.1 Sweden Poland 63.7 60.2 Italy Iceland 62.2 59.1 Switzerland United States 61.7 Czech Republic 60.2 57.7 Netherlands United Kingdom 59.5 53.1 United Kingdom Italy 59.5 49.5 Luxembourg Japan 57.1 46.0 Denmark Slovak Republic 55.4 40.5 Korea Australia 53.5 38.1 Japan Korea 50.2 23.3 Finland Sweden 49.7 22.8 Poland Norway 44.5 100 80 60 40 20 0 010020 40 60 80 % %

1 2 http://dx.doi.org/10.1787/842274671355 1 2 http://dx.doi.org/10.1787/842285063554 1. The breakdown is not available for Australia, Belgium, Canada, Hungary, Mexico, New Zealand and Norway. 2. Or most recent available year.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 95 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.7. Foreign direct investment income o r yl B n

■ Net direct investment income is measured after done in the region. On average reinvestment of O O e

D netting income of resident direct investment earnings was 43% of total direct investmentda incomel

enterprises (debits) and income of affiliates abroad and was 30% more thanC dividends distributed in 2007u E e e

(credits). Equity income forms the largest share of (USD 625 billion or 54% of total). In contrast, O R s direct investment income. reinvestment of earnings by n non-resident investors in

e OECD accounted for 25% onA average but ralmost ■ tu Earnings which are reinvested in the direct equalled dividends in 2007 (USDL 334e billion,c 41% of investment enterprise are calculated after deducting total). dividends (and distributed branch profits) distributed to shareholders. It is common to observe negative ■ Income on debt relates to interest paid or received values for reinvestment of earnings when dividends for intercompany loans which are also part of direct distributed to shareholders are larger than the investment income. Their share of direct investment earnings of the enterprise. It is to note that the income is generally much smaller than equity income. amount of dividends distributed is generally based on Over the past decade interest income from affiliates the decision of the management of the enterprise. abroad was on average 6.5% of overall direct These negative values are observed in numerous investment income. In contrast, income received by cases representing analytical difficulties due to the non-resident investors from resident direct investment methodology applied to the calculation of enterprises in the OECD was on average 17% reinvestment of earnings. (exceptionally in 2001 they accounted for 31%). The highest level of interest income abroad was ■ In dollar amounts, dividends distributed to USD 60 billion in 2007 (5% of total) and USD 104 billion shareholders of OECD’s affiliated direct investment the same year for inward investment. enterprises abroad were higher than those distributed in resident direct investment enterprises (USD 475 billion in 2007). This is in line with OECD’s position as net investor abroad. However, over the Source decade, their relative importance was on average 51% • OECD International Direct Investment Database. of direct investment income (40.9% in 2007). This is lower than dividends distributed in OECD countries For further reading hosting FDI, which were on average 58% •OECD, OECD Benchmark Definition of Foreign Direct Investment: 3rd Edition (1995). (USD 380 billion in 2007, representing 47% of total direct investment income). •IMF, Balance of Payments Manual: 5th edition (1995). • OECD (2005), Measuring Globalisation – OECD Handbook on ■ OECD investors have reinvested abroad their Economic Globalisation Indicators, OECD, Paris. Available earnings from FDI more than foreign investors have at: www.oecd.org/sti/measuring-globalisation.

Direct investment income

Direct investment income comprises income on equity and income on debt accruing to a direct investor resident in one economy from the ownership of direct investment capital in an enterprise in another economy. It is closely related to the concept of FDI stocks. Income on equity comprises: i) dividends and distributed branch profits; and ii) reinvested earnings and undistributed branch profits. Dividends are the distribution of earnings allocated to shares and other forms of participation in the equity of incorporated private enterprises, co-operatives, and public corporations. These can be recorded on the date they are payable, on the date they are paid, or at some other point in time and can be recorded either gross or net of withholding taxes. Reinvested earnings and undistributed branch profits comprise, in proportion to equity held, direct investors’ shares of i) earnings that foreign subsidiaries and associated enterprises do not distribute as dividends (reinvested earnings), and earnings that branches and other unincorporated enterprises do not remit to direct investors (undistributed branch profits). Income on debt (interest) consists of interest payable on inter-company debt to/from direct investors from/to associated enterprises abroad. It covers interest on the borrowing and lending of funds (including debt securities and suppliers’ credits) between direct investors and direct investment enterprises.

96 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.7. Foreign directo investment income r yl B n

Figure D.7.1. Distribution of earnings of FDI Figure D.7.2. Distribution of earnings of FDI O O e

enterprises abroad, OECD, 1997-2007 enterprises in reporting country, OECD,da 1997-2007l

C u

Dividends Reinvested earnings Interest Dividends E Reinvestede earnings Intereste

USD billion USD billion O R s

1 200 1 200 n e A r tu 1 000 1 000 L e c

800 800

600 600

400 400

200 200

0 0

-200 -200 1997 98 992000 01 02 03 04 05 062007 1997 98 992000 01 02 03 04 05 06 2007

1 2 http://dx.doi.org/10.1787/842302865540 1 2 http://dx.doi.org/10.1787/842303665434

Figure D.7.3. Income of OECD direct investment Figure D.7.4. Income of OECD resident direct enterprises abroad as a percentage of GDP,1 investment enterprises as a percentage of GDP,1 average 2004-07 average 2004-07

69.1 Luxembourg Luxembourg 85.4 13.3 Switzerland Ireland 19.8 8.7 Netherlands Hungary 7.7 8.0 Sweden Switzerland 7.0 6.6 Iceland Belgium 6.2 6.0 United Kingdom Czech Republic 6.1 4.9 Belgium Slovak Republic 6.1 4.8 Denmark Iceland 5.6 4.5 Ireland Netherlands 5.0 4.0 Finland Sweden 4.8 3.1 Norway New Zealand 4.3 2.8 Austria Norway 3.8 2.6 Hungary Denmark 3.8 2.3 United States Poland 3.8 2.2 France United Kingdom 3.1 2.2 Spain Australia 3.0 2.2 Germany Finland 3.0 2.0 Canada Austria 2.7 1.5 Portugal Portugal 2.6 1.5 Australia Canada 2.3 0.7 Japan Spain 1.8 0.4 Czech Republic Germany 1.4 0.4 Italy France 1.1 0.3 Greece United States 0.9 0.2 Slovak Republic Greece 0.6 0.2 New Zealand Italy 0.3 0.1 Poland Turkey 0.3 0.0 Turkey Japan 0.2 20 15 10 5 0 0205 10 15 % %

1 2 http://dx.doi.org/10.1787/842325762072 1 2 http://dx.doi.org/10.1787/842327546160 1. Excluding Korea and Mexico.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 97 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.8. Rate of return on direct investment o r yl B n

■ The rate of return on direct investment is 6.2% respectively). German and French investments O O e

D calculated as a ratio of direct investment income to abroad were also more profitableda than inwardl

direct investment positions at a given point in time. investments but differentialsC were not more than 1.5%.u E e e

This indicator contributes to the analysis of the

O R s

■ On the other hand, direct investment enterprises profitability of enterprises even though other n

e resident in Japan recorder higherA rates of returnr in 2007 information is necessary for a complete assessment. u (11.1%) as opposed to those of affiliatesL e abroad,c t at 8.3%. ■ Over the past decade the rate of return on OECD This was also the case in some other countries such as outward direct investment was on average 7.6% while Finland, Slovak Republic and Poland. it was 6.4% for inward investments. The highest rate was recorded in 2005 for both inward and outward investments (9.6% and 7.9%, respectively) implying the highest profitability rate of direct investment Source enterprises at home and host countries. Even though • OECD International Direct Investment database. these rates were lower in 2008 (9% for outward investment and 8% for inward investment), they For further reading remained above average rates. •OECD, OECD Benchmark Definition of Foreign Direct Investment: 3rd Edition (1995). ■ Foreign affiliates of Swedish and United States •IMF, Balance of Payments Manual: 5th edition (1995). investors had significantly higher returns (12.5% and • OECD (2005), Measuring Globalisation – OECD Handbook on 11.8%, respectively) as compared to resident direct Economic Globalisation Indicators, OECD, Paris. Available investment enterprises in these countries 8.2% and at: www.oecd.org/sti/measuring-globalisation.

Rate of return on direct investment

Rate of return on direct investment is an indicator which is based on FDI income and provides information on the profitability of direct investment enterprises. It is calculated as the ratio of direct investment income to direct investment position (stocks) in respect of both inward and outward investment (see also notes in the previous section). For example, when the rate of return of inward FDI [FDI equity income debits – i.e. debits for a) dividends and distributed branch profits, plus b) reinvested earnings and undistributed branch profits – as a per cent of total inward FDI positions] increases, it implies that the resident direct investment enterprises are more profitable and are more and more competitive for investors. However, observations based purely on the results of the statistical ratios are not sufficient to draw conclusions on the competitiveness of enterprises (or an economy). Many other factors should also be taken into account such as cyclical or structural factors, developments in that sector of economic activity as well as other factors related to the global strategy of the investing enterprise(s).

98 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.8. Rate of returno on direct investment r yl B n

Figure D.8.1. Rate of return on direct investment1 in OECD countries O O e

Per cent da l

C u

Outward Inward E e e

% O R s

12 n e A r u L c t 10 e

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1 2 http://dx.doi.org/10.1787/842334423141

Figure D.8.2. Rate of return on outward direct Figure D.8.3. Rate of return on inward direct investment1 in OECD countries, 20072 investment1 in OECD countries, 20072 Per cent Per cent

78.4 Luxembourg Luxembourg 74.9 12.5 United States Ireland 26.5 11.8 Sweden Norway 15.9 11.5 Czech Republic Switzerland 13.0 10.2 Austria Slovak Republic 11.2 9.7 United Kingdom Japan 11.1 9.6 Finland Czech Republic 11.1 9.2 Ireland Finland 10.8 8.8 Netherlands Poland 10.5 8.4 Iceland Australia 10.0 8.3 Japan Iceland 8.5 8.1 Denmark Hungary 8.4 8.0 Norway Austria 8.3 7.7 Slovak Republic Sweden 8.2 7.6 Switzerland Denmark 8.0 7.1 Germany United Kingdom 7.6 6.6 Canada New Zealand 7.4 6.4 Hungary Canada 7.1 6.0 Australia Netherlands 6.7 5.6 Spain United States 6.2 5.5 Portugal Portugal 6.2 4.6 France Germany 5.6 2.6 Greece Spain 4.6 2.1 Italy Greece 3.7 1.7 New Zealand France 3.1 0.9 Turkey Italy 1.9 0.2 Poland Turkey 1.4 2015 10 5 0 01520150 % %

1 2 http://dx.doi.org/10.1787/842347720172 1 2 http://dx.doi.org/10.1787/842356670402 1. Excluding Belgium, Korea and Mexico. 2. 2006 for Austria, Germany, New Zealand and Norway.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 99 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.9. Direct investment dividends o r yl B n

■ This indicator usually contributes to the assessment For instance, in the recent years, the ratio is within the O O e

D of the profitability of direct investment enterprises, range of 3% to 3.5%. da l

along with the analysis of reinvestment of earnings. It C u ■ E e e

is calculated: a) as a ratio of dividends paid by resident The rate of return on dividends is strikingly different

O R s

depending on whether a country attracts FDI rather enterprises to their non-resident direct investors n

e (debits) over inward FDI positions; and b as a ratio of than being an investor itself.A As demonstratedr in tu dividends received by resident investors from foreign Figures D.9.3 and D.9.4 the rate of returnL e c on dividends affiliates (credits) over outward FDI positions. Increases for direct investment enterprises resident in Ireland in the ratios generally imply improvements in the was 15% for the period 2004-07 while the return from profitability of enterprises. However, a complete foreign affiliates of Irish investors was only 0.2%. assessment of the profitability of enterprises cannot be ■ Amongst large OECD economies, the rate of return based solely on statistical observations but have to be on dividends of direct investment enterprises resident complemented by other factors. in the United States was 2.5% for the same period ■ Trends in distribution of dividends can be extremely while for affiliates abroad recorded 5.1%, boosted by volatile and do not generally follow trends in FDI the high rate of return in 2005 (11%). Likewise, foreign positions. The amount of dividends to be distributed affiliates of United Kingdom investors recorded higher results from the decision of the management taking rates of return (4.6%) as opposed to resident direct also into account factors which may not be directly investment enterprises (3.4%). Both France and linked to FDI trends. Germany exhibit similar rates of return but with smaller differences between dividends distributed to ■ Inward FDI stocks of OECD countries reached foreign affiliates and those received by resident direct USD 14 trillion at end-2007 (around 15% increase investment enterprises. In contrast, enterprises from 2006) while dividends distributed to shareholders resident in Canada recorded 3.9% while the rate of decreased by around 8%. This development contrasts return of foreign affiliates was 2.2%. with 2005 when both stock of inward investments and dividends distributed to foreign investors both increased by more than 50%. Likewise, outward investment stocks of OECD countries increased by 22% Source in 2006 when dividends received by OECD investors • OECD International Direct Investment Database. from their foreign affiliates decreased by 21%. This difference was less significant in 2007 when outward For further reading FDI grew by 24% and dividends increased only by 8%. •OECD, OECD Benchmark Definition of Foreign Direct Investment: 3rd Edition (1995). ■ The dividends distributed to direct investors in •IMF, Balance of Payments Manual: 5th edition (1995). OECD countries as a whole are higher for outward • OECD (2005), Measuring Globalisation – OECD Handbook on investments as compared to inward investments. Economic Globalisation Indicators, OECD, Paris. Available However, the difference is generally not very significant. at: www.oecd.org/sti/measuring-globalisation.

Dividends distributed to direct investors

Dividends are the distribution of earnings allocated to shares and other forms of participation in the equity of incorporated private enterprises, co-operatives, and public corporations. They are paid according to the discretionary decision of the incorporated enterprise. Dividends comprise all dividends that are declared payable to the direct investor within an accounting period less dividends declared payable by the direct investor to the direct investment enterprise. They can be recorded on the date they are payable, on the date they are paid, or at some other point in time and should be recorded gross of withholding taxes. When dividends and profits remitted by the direct investor are denominated in foreign currency, the amounts should be converted at the closing midmarket spot exchange rate on the day they are received.

100 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.9. Direct oinvestment dividends r yl B n

Figure D.9.1. Dividends received from foreign Figure D.9.2. Dividends paid to foreign investors O O e

D affiliates as a percentage of outward FDI position, as a percentage of inward FDI position,da 1997-2007,l

1997-2007, G7 countries G7C countries u

E e e

Canada France Germany Canada O FranceR Germany s

Italy Japan United Kingdom Italy Japann United Kingdome United States United States A r tu % % L e c 12 12

10 10

8 8 6 6 4 4 2

2 0

0 -2 1997 98 99 2000 01 02 03 04 05 06 07 1997 98 99 2000 01 02 03 04 05 06 07

1 2 http://dx.doi.org/10.1787/842370840061 1 2 http://dx.doi.org/10.1787/842372863737

Figure D.9.3. Dividends received from foreign Figure D.9.4. Dividends paid to foreign investors affiliates as a percentage of outward FDI position, as a percentage of inward FDI position, average 2004-07 average 2004-07

6.7 Sweden Ireland 14.9 6.6 Finland Norway 8.8 6.2 Czech Republic Switzerland 7.0 6.1 Switzerland Finland 6.4 Japan 5.8 Netherlands 6.4 Slovak Republic 6.3 5.4 Norway Denmark 5.8 5.1 United States Czech Republic 5.4 5.0 Denmark Poland 4.6 4.5 United Kingdom Hungary 4.6 4.0 Korea Sweden 4.1 4.0 Japan Canada 3.9 3.8 Hungary Portugal 3.9 3.7 Portugal Korea 3.7 3.2 Germany Netherlands 3.5 3.0 Spain New Zealand 3.4 2.7 Austria United Kingdom 3.4 2.5 Slovak Republic Australia 3.3 Austria 2.2 Canada 3.1 Spain 2.0 Luxembourg 2.9 Luxembourg 2.8 1.8 Turkey Germany 2.7 1.7 Belgium Belgium 2.6 1.3 France United States 2.5 1.1 Australia Greece 1.9 1.0 Greece Turkey 1.4 0.8 Italy Iceland 1.4 0.7 Poland Mexico 1.0 0.7 Iceland France 0.8 0.2 Ireland Italy 0.2 15 10 5 0 0155 10 % %

1 2 http://dx.doi.org/10.1787/842432516711 1 2 http://dx.doi.org/10.1787/842433812554

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 101 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.10. Cross-border mergers and acquisitions o r yl B n

■ Mergers and acquisitions (M&As) refer to the cross-border operations followed by Germany and O O e

D change of ownership in existing enterprises to achieve France. After the peak in 2007, M&Asda recorded sharpl

strategic and financial objectives. Enterprises engage declines, a trend whichC is also reflected in most recentu E e e

in cross-border M&As for several reasons: to FDI statistics. O R s strengthen their market position by expanding their n

e ■ A businesses to other opportunities on the global On average, the United States was the mainr target tu market; to obtain a critical size in the world market; to country in the period 2005-08 representingL e c almost exploit other firms’ complementary assets such as 25% of the OECD area followed by the United Kingdom innovations, technology, etc.; to access other accounting for 17%. Canada, Germany and the advantages such as company reputation, economies Netherlands come next, each accounting for 7% of of scale, brands or design; to diversify products and OECD total). Regarding M&As abroad, the United markets, etc. States and the United Kingdom also lead, accounting respectively for 19% and 15% of the OECD total on ■ Even though M&A statistics do not follow the same average over the period. France and Germany (on methodology as FDI statistics, they demonstrate average at 10% and 9% respectively) confirm the similar trends while M&As represent the most strong presence of continental European investors. common form of FDI. Both FDI flows and cross-border M&As reached their peaks in 2000 and 2007.

■ Over the period 1997-2008, the United States and Source the United Kingdom were the two leading countries in • Dealogic.

Cross-border mergers and acquisitions

A merger is an operation in which two or more companies decide to pool their assets to form a single company. In the process, one or more companies disappear completely. An acquisition does not constitute a merger if the acquired company does not disappear. Mergers are less frequent than acquisitions. Cross-border mergers and acquisitions can either be inward or outward. Inward cross-border mergers and acquisitions imply an inward capital movement through the sale of domestic firms to foreign investors, while outward cross-border mergers and acquisitions imply an outward capital movement through the purchase of all or parts of foreign firms. The data are taken from the Mergers and Acquisitions Global database (Dealogic). The definitions and methodology used for OECD’s FDI statistics and Dealogic’s M&A statistics are not compatible. Therefore direct comparison between FDI and M&A data used in the present document is not possible. However, M&A data provide meaningful indicators to project FDI. An analysis of mergers and acquisitions can be found in OECD(2001), New Patterns of Industrial Globalisation: Cross-border M&As and Alliances, OECD, Paris; and in Nam-Hoon Kang and Sara Johansson, “Cross-border Mergers and Acquisitions: Their Role in Industrial Globalisation”, STI Working Paper 2000/1, as well as in International Investment Perspectives, No. 1, OECD, 2002.

102 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 D. FOREIGN DIRECT INVESTMENT

_it E d e it s io w n D.10. Cross-border mergerso and acquisitions r yl B n

Figure D.10.1. Outward cross-border mergers Figure D.10.2. Inward cross-border mergers O O e

and acquisitions by OECD countries, 1997-2008 and acquisitions by OECD countries,da 1997-2008 l

C u

Outward investment Divestment Net Inward investmentE eDivestment eNet

USD billion USD billion O R s

1 500 1 500 n e A r u L e c t

1 000 1 000

500 500

0 0

-500 -500 1997 98 992000 01 02 03 04 05 06 07 2008 1997 98 992000 01 02 03 04 0506 07 2008

1 2 http://dx.doi.org/10.1787/842507100835 1 2 http://dx.doi.org/10.1787/842512875636

Figure D.10.3. Outward cross-border mergers Figure D.10.4. Inward cross-border mergers and acquisitions by OECD countries, and acquisitions by OECD countries, average 2005-08 average 2005-08

188.6 United States United States 146.4 United Kingdom United Kingdom 166.8 235.7 96.0 France Canada 72.1 83.7 Germany Germany 65.1 52.3 Spain Netherlands 62.4 52.0 Netherlands Spain 50.6 49.6 Italy France 38.6 47.8 Canada Italy 30.5 43.8 Switzerland Australia 30.4 43.1 Australia Japan 29.5 39.6 Japan Switzerland 28.4 26.8 Belgium Sweden 22.1 16.3 Sweden Turkey 15.4 13.6 Denmark Luxembourg 14.7 11.7 Norway Belgium 13.1 9.1 Ireland Norway 12.3 8.8 Mexico Mexico 8.4 8.3 Luxembourg Denmark 7.9 8.2 Austria Greece 7.0 7.7 Finland Ireland 7.0 5.8 Korea Poland 6.8 5.3 Iceland Finland 6.7 3.7 Portugal Austria 6.3 3.5 Greece Korea 6.0 2.8 New Zealand Czech Republic 5.4 1.5 Czech Republic Portugal 5.0 1.3 Turkey Hungary 4.7 1.3 Hungary New Zealand 2.6 1.0 Poland Slovak Republic 1.7 0.1 Slovak Republic Iceland 0.0 250 200150 100 50 0 025050 100150 200 % %

1 2 http://dx.doi.org/10.1787/842517277050 1 2 http://dx.doi.org/10.1787/842523080508

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 103 _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r E. PORTFOLIO INVESTMENT u L e c t

E.1. Portfolio investment holdings (stocks) ...... 106

E.2. Portfolio assets by type of instrument and by currency. 108

E.3. Portfolio holdings by issuing country ...... 110

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 105 E. PORTFOLIO INVESTMENT

_it E d e it s io w n E.1. Portfolio investment holdings (stocks) o r yl B n

■ This section relates to cross-border portfolio asset During the period 2004-07, on average, portfolio assets O O e

D holdings (stocks) but does not deal with liabilities. For held by the United States wasda USD 5 trillion,l

trends of portfolio investment flows see Section B.5. representing 21% of theC assets held by OECD countriesu E e e

(18% of world total). It is followed by the United

O R s

■ The stock of cross-border portfolio investments Kingdom (USD 2.8 trillion onn average or 10.5% of OECD

e holdings has marked more than 20% annual growth total) and France, Japan and LuxembourgA whichr have tu on average over the past decade. The most striking equal shares of total OECD investmentL e c (at around increase was in 2003 when the overall portfolio USD 2.2 trillion on average or more than 8.5%). holdings grew by 35% from the level of the previous year when they reached USD 19 trillion. Following a ■ However, the relative importance of portfolio asset slowdown in 2005, cross-border portfolio activity holdings measured as percentage of the GDP, provides picked up significantly in 2006 when the annual a different ranking of OECD countries. Overall, the growth marked 27% (reaching USD 33 trillion) and 21% importance of portfolio investment increased from 22% in 2007 (reaching USD 40 trillion). of OECD’s GDP in 1997 to 81% in 2007. Regarding individual countries, Luxembourg and Ireland take the ■ Historically, OECD countries are the main holders lead in 2007. The relative importance of their holdings, of portfolio assets. During the past decade more than which represent an unusually high proportion to the 80% of portfolio assets were held by OECD countries. GDP, indicates the special situation of these economies The increase of OECD holdings over a period of five regarding cross-border portfolio investment. years between 1997 and 2002 more than doubled to Switzerland which occupies the third position with USD 12 trillion while holdings over the second half of 248% is followed by the Netherlands (190%), Belgium the decade were multiplied by more than 2.5. The (180%), and Iceland (153%) (see also Figure E.1.4). amount of OECD cross-border portfolio assets at end- 2003 represented an annual growth of more than 35% when assets reached USD 16 trillion. This increase, in line with the overall growth of portfolio assets, Source reached USD 33 billion at end-2007 following an •IMF, Co-ordinated Portfolio Investment Survey, June 2009. increase of almost 30% in the previous year. For further reading ■ The United States is the primary issuer and holder •IMF, Co-ordinated Portfolio Investment Survey Guide, of cross-border portfolio investment instruments. 2nd edition, 2002.

Cross-border portfolio investment

Portfolio investment includes equity securities and long-term and short-term debt securities. Instruments included in foreign direct investment, reserve assets and financial derivatives are excluded from portfolio investment. Statistics used in this section are based on IMF’s Co-ordinated Portfolio Investment Survey (CPIS) which covers portfolio equity and debt securities issued by non-residents and owned by residents (assets of the reporting country). In line with the System of National Accounts, 1993 and Balance of Payments Manual 5th edition, the concept of residence used for geographical allocation is determined on the basis of economic territory and the centre of interest. To ensure the inclusion of special purpose entities (such as brass plate companies, shell companies, etc.) which may be significant vehicles for portfolio investment, the legal domicile is the preferred indicator of their residence. The present section reviews only portfolio assets while the CPIS is primarily an asset survey; liabilities are derived from assets reported by partner countries. Data can be collected by surveying: i)end-investors (such as banks, security dealers, pension funds, insurance companies, mutual funds, non-financial corporations, household); ii) custodians who hold or manage securities on behalf of others; or iii) combination of end-investor and custodian. They can be collected through a security-by- security approach (where the holder reports each individual holding) or an aggregated approach (aggregate reporting of holdings for each counterpart country).

106 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 E. PORTFOLIO INVESTMENT

_it E d e it s io w n E.1. Portfolio investmento holdings (stocks) r yl B n

Figure E.1.1. World total portfolio assets, 1997-20071 Figure E.1.2. OECD portfolio assets as a percentage O O e

of total world assets, 1997-2007da 1 l C u

World total OECD as a percentage of world total USD trillion % E e e

50 100 O R s

95 n e A r u 40 90 L e c t 85

30 80

20 70

10 60

0 50 1997 2001 2003 2005 2007 19972001 2003 2005 2007

1 2 http://dx.doi.org/10.1787/842527717767 1 2 http://dx.doi.org/10.1787/842601155172

Figure E.1.3. OECD portfolio asset, average 2004-07 Figure E.1.4. OECD portfolio assets as a percentage of GDP, 2007

5 380 United States Luxembourg 5 805 2 764 United Kingdom Ireland 755 2 271 France Switzerland 248 2 248 Japan Netherlands 191 2 193 Luxembourg Belgium 181 1 991 Germany Iceland 153 1 461 Ireland Norway 140 1 210 Netherlands United Kingdom 122 1 070 Italy France 116 856 Switzerland Austria 109 641 Belgium Sweden 108 628 Spain Finland 104 564 Canada Denmark 100 377 Norway Portugal 84 OECD total 81 365 Sweden Germany 80 327 Austria Italy 59 260 Australia Japan 58 234 Denmark Canada 54 193 Finland United States 52 152 Portugal Spain 52 85 Greece Australia 42 79 Korea Greece 41 30 New Zealand New Zealand 27 24 Czech Republic Czech Republic 20 16 Iceland Korea 16 13 Poland Slovak Republic 8 10 Mexico Hungary 7 5 Hungary Poland 5 4 Slovak Republic Mexico 1 2 Turkey Turkey 0 6 000 5 000 4 000 3 000 2 000 1 000 0 030050 100 150 200 250 USD billion %

1 2 http://dx.doi.org/10.1787/842601386312 1 2 http://dx.doi.org/10.1787/842642604755 1. The survey does not cover 1998, 1999 and 2000.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 107 E. PORTFOLIO INVESTMENT

_it E d e it s io w n E.2. Portfolio assets by type of instrument and by currency o r yl B n

■ Cross-border portfolio investments take the form of 5% of their total holdings in debt instruments. There O O e

D equity securities and debt securities which in turn are are, however, some exceptions. da In 2007, Poland’sl

classified by maturity as short-term or long-term holdings in debt securitiesC were equally divided intou E e e

instruments. short and long-term instruments. In the same year, O R s

short-term instruments accountedn for 36% of debt

e ■ A During the past decade, even if the share of debt securities held by Ireland, 18% by the Unitedr States, tu securities worldwide has been more prominent as 14% by Luxembourg and Switzerland,L e 11%c by Mexico compared to equity securities, differences in their and 10% by Greece. share of overall cross-border portfolio investments are generally not too significant. In year 2002 the share of ■ The analysis of securities by currency of debt securities was exceptionally high representing denomination also informs on the extent of 66% of total portfolio assets but dropped gradually to globalisation of portfolio investments. Nevertheless, 55% of total in 2007 when, in contrast, in absolute statistics on such breakdowns are not available for all amounts their value more than doubled reaching OECD countries as shown in Figures E.2.7 and E.2.8. USD 21.6 trillion. Assets on equity securities increased During the period 2003-06, portfolio assets of eight from USD 2.6 trillion in 1997 to USD 17.8 trillion in 2007. EU countries, Austria, Denmark, France, Greece, Hungary, Italy, Poland and Portugal were, for the most ■ During the period 2004-07, equity securities part, instruments denominated in Euro as opposed to accounted, on average, for 46% (USD 11.6 trillion) of the US dollar and other currencies. Portfolio holdings OECD portfolio assets. In eight OECD countries, equity of two other OECD countries, Japan and Korea, were securities accounted for more than 50% of their total mostly instruments denominated in US dollars. In assets: Canada (80%), Hungary (78%), New Zealand general, the share of the US dollar is more significant (77%), United States (72%), Iceland (71%), Australia in equity securities while a larger share of debt (67%), Sweden (66%), and Korea (53%). securities are denominated in euros. Switzerland has a rather singular position while both equity and debt ■ The share of debt securities represents, on average, holdings are proportionally distributed between more than 50% of portfolio assets of the remaining instruments denominated in US dollars, euros and twenty two OECD countries during the same period. In other currencies. only eight of them debt securities account for more than 70% of total portfolio assets: Turkey (94%), Greece (86%), Japan (79%), Portugal (78%), Austria and the Slovak Republic (77%), Spain (76%), and France (72%). Source •IMF, Co-ordinated Portfolio Investment Survey. ■ OECD countries’ debt security holdings are mostly long-term instruments while short-term instruments, For further reading on average, account for less than 10%. In many OECD • IMF Co-ordinated Portfolio Investment Survey Guide, countries short-term instruments represent less than 2nd edition, 2002

Portfolio investment: types of securities

Security: a financial instrument that is designed to be traded, i.e., it is characterised by its negotiability. Securities include: Equity securities comprise all instruments and records acknowledging, after the claims of all creditors have been met, claims on the residual values of incorporated enterprises. Shares, stocks, participations or similar documents (such as American Depositary Receipts) usually denote ownership of equity (see also B5). Long-term debt securities cover instruments such as bonds, debentures, and notes that usually give the holder the unconditional right to a fixed money income or contractually determined variable money income and have an original term to maturity of more than one year. Short-term debt securities cover treasury bills, commercial paper, and bankers’ acceptances that generally give the holder the unconditional right to a stated fixed sum of money on a specified date. These instruments are usually traded on organised markets at a discount and have an original term to maturity of one year or less.

108 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 E. PORTFOLIO INVESTMENT

_it E d e it s io w n E.2. Portfolio assets by type of instrumento and by currency r yl B n

Figure E.2.5. Share of equity and debt securities: Figure E.2.6. OECD portfolio assets by type O O e

in total portfolio assets, world-wide, 1997-20071 of instrument, 1997-2007da 1 l

C u

Equity securitiesE e Long-term debt securitiese

Debt securities Equity securities Short-term debt O securitiesR s

USD billion n e % A r 100 18 000 u L e c t 90 16 000

80 14 000 70 12 000 60 10 000 50 8 000 40 6 000 30 4 000 20

10 2 000

0 0 1997 2001 2003 2005 2007 19972001 2003 2005 2007

1 2 http://dx.doi.org/10.1787/842654045186 1 2 http://dx.doi.org/10.1787/842657062060

Figure E.2.7. OECD equity securities holdings Figure E.2.8. OECD debt securities holdings by currency of denomination, average 2003-06 by currency of denomination, average 2003-06

Dollars Euros Other Dollars Euros Other

Austria Austria

Denmark Denmark

France France

Greece Greece

Hungary Hungary

Italy Italy

Japan Japan

Korea Korea

Poland Poland

Portugal Portugal

Switzerland Switzerland

100 80 60 40 20 0 010020 40 60 80 % %

1 2 http://dx.doi.org/10.1787/842660641861 1 2 http://dx.doi.org/10.1787/842708500333 1. The survey does not cover 1998, 1999 and 2000.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 109 E. PORTFOLIO INVESTMENT

_it E d e it s io w n E.3. Portfolio holdings by issuing country o r yl B n

■ Cross-border portfolio investments refer to the decade but more moderately by around 1% to 9.4% O O e

D investment where the investor acquires ownership of and 8.1%, respectively. da l

securities which are issued in a different economy. C u ■ E e e

The diversification of countries issuing the securities This trend was offset by the increase in the share of

O R s

Luxembourg as issuer of portfolio investment held by a resident investor or a group of investors n

e contributes to the analysis of the extent of globalisation instruments which increased toA 6.2% of OECD holdingsr tu of portfolio investments. in 2007 (USD 2 trillion) from 2.9%L ine 1997.c Likewise, issues of entities resident in France increased from ■ OECD countries are not only major investors of 4.7% of OECD portfolio holdings in 1997 to 6.6% in 2007 portfolio securities but are also major issuers of cross- (USD 2.1 trillion). border equity and debt securities. ■ Among non-OECD countries issuing portfolio ■ Around 50% of portfolio investments by OECD instruments, a number of jurisdictions which member countries are traditionally in instruments traditionally host special purpose entities account for a issued by the European Union countries (USD 18 trillion significant share of OECD portfolio assets. The Cayman in 2007). Around 20% are issued by the United States and Islands which accounted for 2.1% of OECD holdings 5% by Japan (USD 1.3 trillion). The remaining 8.7% in 1997 increased to 4.8% of the holdings in 2007. (USD 8.7 trillion) are distributed across major emerging During 2004-07, it occupies the first position among economies. non-OECD countries issuing portfolio instruments, on average, at USD 902 billion. In the second place is ■ Five OECD countries, the United States, the United International Organisations at USD 304 billion followed Kingdom, Germany, France and Luxembourg, and one by Bermuda (USD 230 billion) and Jersey non-OECD country, the Cayman Islands, account for (USD 189 billion). 50% or more (USD 16 trillion) of the issues in various portfolio instruments.

■ In the course of the last decade, the share of the Source United States as issuer of portfolio instruments held •IMF, Co-ordinated Portfolio Investment Survey. by OECD countries increased from 18% in 1997 (USD 1 trillion) to 19% in 2001 but decreased to 15% at For further reading end-2007 (USD 5 trillion). The share of the United •IMF, Co-ordinated Portfolio Investment Survey Guide, Kingdom and of Germany also declined at the end of 2nd edition, 2002.

Identifying the issuer of portfolio investment

The issuer of a security could be a government agency, a public or private corporation (including financial institutions), or a branch or subsidiary of a public or private corporation (including a financial institution). Determining the country of residence of the non-resident issuer may be difficult. To ensure consistency across countries, it is recommended that to indentify securities compilers should use coding systems of the securities industry whereby each security has its own unique identifier. These codes also allow for equity securities to identify the country of issues. To issue securities, in particular debt securities, multinational enterprises may use special purpose entities (SPEs) which are domiciled and registered in another country even if they have no physical presence in that economy. In such instances, securities are allocated to the country in which the issuing entity is legally incorporated rather than to the country of the parent company.

110 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 E. PORTFOLIO INVESTMENT

_it E d e it s io w n E.3. Portfolio holdingso by issuing country r yl B n

Figure E.3.1. OECD portfolio assets by issuer Figure E.3.2. OECD portfolio assets by issuer – O O e

D 1997-20071 Major issuing countriesda l

1997-2007C 1 u

E e e

Other Japan United States UnitedO KingdomR Germany s

United States EU27 France Luxembourgn Cayman Islandse A r % % tu 100 60 L e c

90 50 80 19.2 16.3 70 15.0 40 18.2 60

50 30 10.7 9.7 9.4 40 10.0 9.1 8.1 20 9.4 30 9.1 6.6 20 7.0 10 6.7 6.2 10 4.7 4.7 5.4 2.9 3.5 4.2 4.8 0 0 2.1 1997 2001 2002 2003 2004 2005 2006 2007 1997 2001 2004 2007

1 2 http://dx.doi.org/10.1787/842724383224 1 2 http://dx.doi.org/10.1787/842757234678

Figure E.3.3. OECD holdings by issuer – Figure E.3.4. OECD holdings by issuer – OECD countries, average 2004-07 Non-OECD countries, average 2004-07

3 439 United States Cayman Islands 902 2 063 United Kingdom International Organisations 304 1 815 Germany Bermuda 230 1 446 France Jersey 169 1 229 Netherlands Brazil 145 1 171 Luxembourg Hong Kong, China 132 1 170 Italy Netherlands Antilles 116 968 Japan Chinese Taipei 92 742 Spain Russian Federation 85 569 Ireland Singapore 73 549 Canada China 72 417 Switzerland India 65 348 Australia South Africa 60 306 Sweden Israel 48 281 Belgium Guernsey 41 247 Austria Malaysia 30 195 Greece Virgin Islands, British 28 193 Finland Thailand 24 177 Korea Philippines 19 153 Denmark Indonesia 18 134 Portugal Venezuela 15 122 Mexico Chile 15 122 Norway Bahamas, The 13 54 Poland Colombia 10 45 Hungary Peru 8 42 Turkey Cyprus 8 28 New Zealand Egypt 7 25 Iceland Liberia 7 13 Czech Republic Croatia 7 5 Slovak Republic Ukraine 6 4 000 3 000 2 000 1 000 0 0 200 400 600800 1 000 USD billion USD billion

1 2 http://dx.doi.org/10.1787/842763426723 1 2 http://dx.doi.org/10.1787/842776400025 1. The survey does not cover 1998, 1999 and 2000.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 111 _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r PART III u L e c t

Globalisation of Technology and Knowledge

F. Internationalisation of Science and Technology ...... 115 G. Internationalisation of Highly Skilled Human Capital ...... 135 H. Internationalisation of Environmental Technology...... 145

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 113 _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r F. INTERNATIONALISATION OF SCIENCEu L e c t AND TECHNOLOGY

F.1. R&D in OECD and non-OECD economies ...... 116

F.2. Sources of R&D funding from abroad ...... 118

F.3. R&D investments and multinationals ...... 120

F.4. Triadic patent families ...... 122

F.5. International co-operation in S&T ...... 124

F.6. International co-operation in science...... 126

F.7. Technology balance of payments ...... 128

F.8. Technology balance of payments and domestic R&D activity ...... 130

F.9. Trade in knowledge-intensive goods ...... 132

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 115 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.1. R&D in OECD and non-OECD economies o r yl B n

■ The landscape for technology and knowledge has China, at an annual average rate of 22.1% for 2000-07, O O e

D become increasingly global. While research and up from 20.9% over the preceding fiveda years. China hasl

development (R&D) investments are still heavily set a target of raising itsC R&D intensity to 2% by 2010u E e e

concentrated in OECD countries, non-OECD and to 2.5% or above by 2020. This ambitious target O R s economies account for a growing share of the world’s implicitly means that R&D expendituren will need to

e R&D. In 2007, non-OECD countries for which data are continue to increase by at leastA 10-15% annually.r tu available (see box) accounted for almost 16% of the L e c business sector R&D expenditure (expressed in current USD purchasing power parity [PPP]) of OECD and non-OECD economies combined. Sources ■ China made by far the largest contribution, •OECD, Main Science and Technology Indicators Database, accounting for 54% of the non-OECD share. It ranked December 2009 and national sources. third worldwide, behind the United States and Japan, • Eurostat, New Cronos Database. but ahead of individual EU member states. Israel had the world’s highest R&D intensity in the business For further reading sector, spending 3.7% of gross domestic product (GDP) • OECD (2002), Frascati Manual 2002: Proposed Standard on civil industrial R&D, twice the OECD average. Practice for Surveys on Research and Experimental Development, OECD, Paris, ■ In most of the non-OECD economies covered, www.oecd.org/sti/frascatimanual. growth rates were well above the OECD average. R&D • OECD (2010), Main Science and Technology Indicators 2009/2, expenditures have grown particularly impressively in OECD, Paris.

Measuring R&D in non-OECD economies

R&D data for Argentina, China, Israel, Romania, the Russian Federation, Singapore, South Africa, Slovenia and Chinese Taipei are included in the OECD’s R&D database and are published in the OECD’s Main Science and Technology Indicators (MSTI). Data for Brazil, Hong Kong (China) and India are from national S&T ministries (or equivalent) or the central statistical office. The R&D data for non-OECD countries that are included in the MSTI Database largely comply with the recommended methodology of the Frascati Manual. Data for the other countries included here may not be completely in accordance with the Frascati Manual guidelines. When examining the data, the following should be kept in mind. • In Brazil, data for the business enterprise sector are collected through innovation surveys, which were held in 2000, 2003 and 2005. Data for other years are estimated. In 2000 and 2003, only mining and quarrying and manufacturing were covered. In 2005, in addition, telecommunications, computer activities and the R&D sector were covered. Therefore there is a break in series between 2004 and 2005. • In India, the small-scale industry sector is only partially covered. Data for 2004-05 were estimated by applying sector-wise growth rates for the period 1998-99 to 2002-03. • In Israel, defence R&D is not covered. • In Romania and the Russian Federation, much R&D is traditionally performed by public enterprises, which are classified in the business enterprise sector. • Owing to the lack of a comprehensive business register for South Africa, R&D expenditure may be underestimated by 10% to 15%.

116 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.1. R&D in OECD and onon-OECD economies r yl B n

Figure F.1.1. Gross expenditure on R&D (GERD) in OECD and non-OECD areas, 2007 O O e

As a percentage of GDP, in billions of current USD PPP and researchers per 1 000 persons employedda 2 l C u

Researchers per 1 000 employment E e e

12 O R s

148 Japann e A r 10 United States 398 u L e c t 8 EU27 264 6 Russian Federation 23

4 China 102 2 Brazil 14 South Africa 4 R&D expenditures in billions of current PPP1 India 24 0 01234 GERD as % of GDP

1. The size of the bubble represents R&D expenditure in billions of current USD in PPP; data for the Russian Federation and for the United States are for 2008, data for Brazil and South Africa are for 2006 and data for India are for 2004. 2. For researchers per 1 000 persons employed: data for the United States are for 2006, data for India are for 2000. 1 2 http://dx.doi.org/10.1787/842786737584

Figure F.1.2. Business enterprise R&D (BERD) in OECD and non-OECD economies 2008 Average annual growth rate, 2000-08

289 United States China (2000-07) 115 Japan (2007) Portugal 74 China (2007) Turkey (2000-07) Germany Australia (2000-06) Korea (2007) Singapore (2000-07) France Mexico (2000-07) United Kingdom New Zealand (1999-2007) Russian Federation South Africa (2001-06) Canada Korea (2000-07) Chinese Taipei (2007) Brazil (2000-06) Italy Chinese Taipei (2000-07) Spain Hungary (2000-07) Sweden Spain Brazil (2006) Slovenia Australia (2006) Argentina (2000-07) Israel India (2000-2004) Netherlands (2007) Austria (1998-2007) Austria (2007) Czech Republic Switzerland (2004) Ireland Belgium Israel Finland Greece (2000-07) Singapore (2007) Denmark (1999-2008) Denmark Japan (2000-07) India (2004) Russian Federation Turkey (2007) Norway (1999-2008) Mexico (2007) Switzerland (2000-04) Norway Finland Czech Republic Iceland South Africa (2006) Sweden (1999-2008) Portugal United Kingdom Ireland Italy Poland United States Hungary (2007) Germany Argentina (2007) Luxembourg Slovenia Romania New Zealand (2007) Poland Luxembourg France Romania Belgium Greece (2007) Netherlands (2000-07) Slovak Republic Canada Iceland Slovak Republic 55 50 45 40 35 30 25 20 15 10 50 -5 0 5 10 15 20 25 Billion PPP USD %

1 2 http://dx.doi.org/10.1787/842807561645

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 117 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.2. Sources of R&D funding from abroad o r yl B n

■ Business research and development (R&D) is this case the European Union). Spain was the only O O e

D financed by funds provided from within a country and country reporting almost 10% of financeda originatingl

from abroad. Foreign sources include other businesses, from other governmentsC and foreign higher educationu E e e

public institutions (government agencies or institutions O R s universities) or international organisations. According n

e ■ A to the Frascati Manual, foreign-funded R&D includes, for Again for the countries with available data, rfunding tu example, R&D performed by foreign affiliates when from other businesses comes largelyL e cfrom internal funded by the parent company (located abroad), but it corporate transfers (from the parent company to its excludes R&D that is funded domestically. affiliates abroad). This form of funding accounted for over 85% of the total in Denmark, the Slovak Republic ■ Foreign sources play a substantial role in the and Finland, and for over 50% in France, Austria and funding of business-sector R&D. Funds from abroad Norway. accounted for at least 15% of aggregate business R&D funding in 2007 in Austria, the United Kingdom, the Slovak Republic, Hungary, Canada and the Source Netherlands. In Turkey, Chile, Japan, Korea and Israel, • OECD (2009), OECD Science, Technology and Industry they accounted for less than 1% of the total. Scoreboard, OECD, Paris.

■ In most countries, the main providers of foreign For further reading funding are other businesses. Among the 16 countries • OECD (2002), Frascati Manual: Proposed Standard Practice for which data were available, Greece and Portugal for Surveys on Research and Experimental Development, were the only ones reporting over 50% of foreign OECD, Paris, www.oecd.org/sti/frascatimanual. funding supplied by international organisations (in

Measuring flows of R&D funds

R&D involves significant transfers of resources between units, organisations and sectors. In order to better measure and evaluate innovation policies and globalisation, it is important to trace the flow of R&D funds. According to the Frascati Manual, these transfers may be measured in two ways. One is performer-based reporting of the sums which one unit, organisation or sector has received or will receive from another unit, organisation or sector for the performance of intramural R&D during a specific period. The second is source-based reporting of extramural expenditures. These are the sums a unit, organisation or sector reports having paid or committed itself to pay to another unit, organisation or sector for the performance of R&D during a specific period. The first of these approaches is strongly recommended. For such a flow of funds to be correctly identified, two criteria must be fulfilled: • There must be a direct transfer of resources. • The transfer must be both intended and used for the performance of R&D. For further details on the identification of these criteria, see the Frascati Manual.

118 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.2. Sources of R&Do funding from abroad r yl B n

Figure F.2.1. Funds from abroad, 2007 O O e

D As a percentage of business enterprise R&D da l

% C u

25 E e e

O R s

20 n e A r u 15 L e c t 10

Italy China JapanKorea Iceland FinlandPoland Turkey HungaryCanada Norway Sweden (2006) Estonia Slovenia EU27 Spain New(2006) Zealand Chile (2004) Israel (2005) Austria (2006) IrelandFrance (2006)Greece (2006) (2005) Czech Republic Mexico (2005) UnitedSlovak Kingdom Republic Denmark (2005) Belgium (2006) Portugal (2005)Germany (2006) Australia (2006) NetherlandsSouth Africa(2003) (2005) Russian FederationSwitzerland (2004) Luxembourg (2005)

1 2 http://dx.doi.org/10.1787/842838411208 Figure F.2.2. Business enterprise R&D funded from abroad by source, 2007

% Business enterprises Government and higher education International organisations n.e.c. 100

Korea Finland Norway Sweden Italy (2006) Spain (2006) Austria (2006) France (2006) Turkey (2006) Greece (2005) Denmark (2005) Slovak Republic Belgium (2006)Czech Republic Slovenia (2006) Portugal (2005) Netherlands (2003)

1 2 http://dx.doi.org/10.1787/842855306071 Figure F.2.3. Funding from foreign enterprises, 2007 As a percentage of funds from abroad

% Enterprises within the same group Other business enterprises 100

Korea Finland Norway Sweden Italy (2006) Spain (2006) Austria (2006) France (2006) Denmark (2005) Slovak Republic Belgium (2006) Czech Republic Slovenia (2006) Portugal (2005) 1 2 http://dx.doi.org/10.1787/842856531164

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 119 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.3. R&D investments and multinationals o r yl B n

■ Multinational firms play an important role in investments of all individual countries except the O O e

D investments in research and development (R&D) United States and Japan. da l

across the world. While they fund a large share of C u E e e

cross-border investments and are as such important O R s

Sources vehicles for the international transfer of technology, n

e they are themselves important investors in R&D. • 2009 EU R&D Scoreboard. A r tu •OECD, Main Science and Technology IndicatorsL e c Database ■ R&D budgets of the largest multinational companies (MSTI), January 2010. are larger than the R&D investments of several For further reading countries. The largest investor in R&D worldwide is the • OECD (2005), Measuring Globalisation: OECD Handbook on Japanese company Toyota with an R&D budget of Economic Globalisation Indicators, OECD, Paris, USD 11 million, this places it among the top ten www.oecd.org/sti/measuring-globalisation. countries investing in R&D. • OECD (2008), Recent Trends in the Internationalisation of R&D in the Enterprise Sector, OECD, Paris. ■ Aggregate spending by the world’s top eight • OECD (2008), The Internationalisation of Business R&D: multinational groups in 2008 was larger than the R&D Evidence, Impacts and Implications, OECD, Paris.

R&D data by enterprise group at the world level

This is R&D performed by a group of business enterprises located in different countries and over which majority control is exercised either directly or indirectly by a company that is controlled by no other firm (ultimate control). Such group data have three main limitations: they are consolidated at the global level and are not broken down by country; in some cases the main activity accounts for a low percentage of aggregate turnover; and R&D data are not exhaustive.

120 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.3. R&D investmentso and multinationals r yl B n

Figure F.3.1. Comparison between industrial R&D expenditures (BERD) of OECD countries and those O O e

D of the eight largest multinational groups, 2008 da l

USD million C u

E e e

O R s

80 000 289 105131 690 n e A r u L e c t

60 000

40 000

20 000

0 1 Italy Japan Spain France Canada Austria Finland NorwayIreland TurkeyPoland Iceland Germany Sweden BelgiumDenmark Portugal Hungary Netherlands United States Korea (2007) Luxembourg Czech RepublicMexico (2007) Greece (2007) 8 largest groups United Kingdom Australia (2006) Slovak Republic Switzerland (2004) New Zealand (2007)

14 000

12 000

10 000

8 000

6 000

4 000

2 000

Ford IBM Sony Intel Toyota Roche Pfizer Nokia Honda Novartis Daimler Microsoft Siemens Volkswagen RobertBosch Sanofi-Aventis General Motors GlaxoSmithKline Matsushita Electric Johnson and Johnson

1. Toyota, Microsoft, Volkswagen, Roche, General Motors, Pfizer, Johnson and Johnson, Nokia. 1 2 http://dx.doi.org/10.1787/842871104357

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 121 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F. 4 . Tr i ad i c pate n t fa m i l ie s o r yl B n

■ The internationalisation of knowledge and ■ Relative to total population, however, the O O e

D technology is also reflected in the increasing number of importance of emerging countries isda less clear. Chinal

triadic patent families. In 2007, about 52 000 were filed for example has less C than 0.5 patent families peru E e e

worldwide compared to something less than 42 000 ten million population. O R s years earlier. n

■ e Switzerland, Japan, Sweden,A Germany andr Israel appear as the five most innovative countriestu in 2007, ■ L e c The United States accounted for 31% of triadic patent with the highest values recorded in Switzerland (118) families, with nearly 16 000. Japan and the European and Japan (115). Ratios for the Netherlands, Finland, Union were the other two regions responsible for the Denmark, the United States, Austria and Korea are majority of triadic patent families. also above the OECD average (42).

■ The surge in innovative activities in Asia is clearly reflected in growing country shares, although in Source absolute numbers the distance from the leaders •OECD, Patent Database, December 2009, remains considerable. Korea and China were among www.oecd.org/sti/ipr-statistics. the top 12 countries in 2007, and India has also climbed up in the rankings. In absolute number, For further reading emerging countries like the Russian Federation and • Dernis, H. and M. Khan (2004), “Triadic Patent Families Brazil also have a considerable number of triadic Methodology”, STI Working Paper 2004/2, OECD, Paris. patent families. • OECD (2009), OECD Patent Statistics Manual, OECD, Paris.

Triadic patent families

The globalisation of technological activities can be quantified with patent data. Patents have a distinctive feature which makes them very attractive as an indicator of global S&T activities. Patent statistics are commonly constructed on the basis of information from a single patent office. While patents filed at a given patent office represent a rich source of data, these data have certain weaknesses. The “home” advantage bias is one of them, since, proportionate to their inventive activity, domestic applicants tend to file more patents in their home country than non-resident applicants. Furthermore, indicators based on a single patent office are influenced by factors other than technology, such as patenting procedures, trade flows, proximity, etc. In addition, the value distribution of patents within a single patent office is skewed: many patents are of low value and few are of extremely high value. Simple patent counts would therefore give equal weight to all patent applications. The OECD has developed the concept of triadic patent families in order to reduce the major weaknesses of the traditional patent indicators described above. Triadic patent families are defined at the OECD as a set of patents taken at the European Patent Office (EPO), the Japan Patent Office (JPO) and US Patent and Trademark Office (USPTO) that protect a same invention. In terms of statistical analysis, they improve the international comparability of patent-based indicators, as only patents applied for in the same set of countries are included in the family: home advantage and influence of geographical location are therefore eliminated. Second, patents included in the family are typically of higher value: patentees only take on the additional costs and delays of extending protection to other countries if they deem it worthwhile. The criteria for counting triadic patent families are the earliest priority date (first application of the patent worldwide), the inventor’s country of residence, and fractional counts. Owing to time lag between the priority date and the availability of information, 1999 is the latest year for which triadic patent family data are almost completely available. Data from 1999 onwards are OECD estimates based on more recent patent series (“nowcasting”).

122 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.4. Triadico patent families r yl B n

Figure F.4.1. Triadic patents families,1 absolute Figure F.4.2. Triadic patents, families,1 per million O O e

numbers, 2007 population, 2007da l C u

United States Switzerland E e e

EU27 Japan Japan Sweden O R s

Germany Germany

n e France Israel A r Korea Netherlands tu United Kingdom Finland L e c Netherlands Denmark Magnified Switzerland United States Sweden Austria China 2 Italy Korea Israel Canada OECD total Belgium China Luxembourg Austria Israel Belgium Australia Belgium France Denmark Austria United Kingdom Finland Australia Spain Norway India Denmark Canada Norway Finland Ireland Ireland Spain Australia Russian Federation India Iceland Brazil Norway Italy New Zealand Ireland New Zealand Hungary Russian Federation Slovenia Turkey Brazil Spain Poland New Zealand Hungary Luxembourg Hungary Estonia Czech Republic Turkey Czech Republic Slovenia Poland Greece Mexico Luxembourg Portugal Greece Czech Republic Slovak Republic Portugal Slovenia Poland Chile Mexico Russian Federation Iceland Greece China Estonia Portugal Brazil Slovak Republic Chile Turkey 600 500 400 300 200 100 0 Iceland Chile Estonia India Slovak Republic Mexico 16 00012 000 8 000 4 000 0 0255075100125

1 2 http://dx.doi.org/10.1787/843033848386 1 2 http://dx.doi.org/10.1787/843074661108 Note: Patent counts are based on the earliest priority date, the inventor's country of residence and fractional counts. The data mainly derive from the European Patent Office (EPO) Worldwide Statistical Patent Database (September 2009). 1. Patents filed at the EPO, the US Patent and Trademark Office (USPTO) and the Japan Patent Office (JPO) which protect the same invention. Data from 1999 onwards are OECD estimates.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 123 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.5. International co-operation in S&T o r yl

■ The technological activities of (multinational) firms ■ Collaboration on innovationB with foreignn partners have become increasingly internationalised. In the is another important source of knowledge O inflows ande

D search for new technological competences, better can take a variety of forms with differentda levels ofl

adaptation to markets and lower research and interaction ranging fromC simple one-way informationu E e e

development costs, companies are moving research flows to highly interactive and formal arrangements. O R s

activities overseas more intensively. The information Collaboration with foreign customers and/or suppliers

n e contained in patents makes it possible to trace the helps firms develop new products,A processes ror other u internationalisation of technological activities and innovations. L e c t the circulation of knowledge among countries. In ■ The share of EU firms collaborating on innovation addition, collaboration with foreign partners with partners across Europe ranges from less than 2% in increasingly plays an important role as firms gain Spain and Turkey to over 13% in Finland, Luxembourg access to a broader pool of resources and knowledge and Slovenia. Collaboration with partners outside at lower cost and are able to share risks with partners. Europe is much less frequent and concerns between 1% ■ Cross-border ownership of inventions/patents and 5% of firms in most European countries. Overall, clearly reflects the internationalisation of science and innovating firms from the Nordic countries and some technology activities. On average, 15% of all inventions small European economies (Belgium, Luxembourg and were owned or co-owned by a foreign resident in 2005- Slovenia) tend to collaborate more frequently with 07, but the differences are substantial across countries. partners abroad. In Argentina, nearly 89% of domestic inventions belong to foreign residents, while Korea and Japan report the lowest shares of foreign ownership in 2005-07 (3.9% Sources and 4%, respectively). The United Kingdom is an •OECD, Patent Database, December 2009, exception among large countries, with around 37% of www.oecd.org/sti/ipr-statistics. domestic inventions owned by foreign residents, • OECD (2009), OECD Science, Technology and Industry compared to 30% in the mid-1990s. Scoreboard 2009, OECD, Paris. ■ Patents filed under the PCT (Patent Co-operation For further reading Treaty) show that domestic ownership of inventions • Guellec, D. and B. Van Pottelsberghe de la Potterie made abroad is particularly high in small open (2001), “The internationalisation of technology economies. In Luxembourg more than 80% of analysed with patent data”, Research Policy, 2001, Vol. 30, inventions owned were made with inventors abroad Issue 8, pp. 1253-1266. and more than 30% in Switzerland, Chinese Taipei, Ireland, Belgium, the Netherlands, Sweden and • OECD and Eurostat (2005), Oslo Manual: Guidelines for Finland. Turkey, Japan, Korea, India, Brazil and South Collecting and Interpreting Innovation Data, 3rd edition, Africa report the lowest share of inventions made OECD, Paris, www.oecd.org/sti/oslomanual. abroad (less than 6%). • OECD (2009), OECD Patent Statistics Manual, OECD, Paris.

Cross-border ownership of inventions Patent documents report the inventor(s) and the applicant(s) – the owner of the patent at the time of application – along with their addresses and countries of residence. A difference between the owners’ and inventors’ country of residence points to cross-border ownership of inventions. In most cases, cross-border ownership of inventions is mainly the result of activities of multinationals: the applicant is an international conglomerate and the inventors are employees of a foreign subsidiary. Foreign ownership of domestic inventions is one of the measures of globalisation of technological activities. It refers to the number of patents invented domestically and owned by non-residents in the total number of domestic inventions. It measures the extent to which foreign firms control domestic inventions. Obviously, what is considered foreign ownership in one inventor country implies a domestically owned invention abroad by firms in another country. Foreign ownership includes inventions in which the inventor country shares ownership (co-owned inventions), but this share is frequently a small part of the total of cross-border inventions. Domestic ownership of inventions made abroad measures the extent to which domestic firms control inventions made by residents of other countries. It refers to patents that are the property of a country, but have at least one inventor located in a foreign country. The use of patent indicators to measure globalisation of technology is not without shortcomings. Most of the caveats are related to the identification of companies’ country of origin. The first concerns the financial context of the cross-border ownership. A patent invented abroad may mean an acquisition or merger rather than the setting up of a R&D laboratory. Patent databases do not register such changes in the ownership of patents. A second problem concerns the origin of subsidiaries. In some cases, the owner country reported may be not the country in which the company’s headquarters are located but that of the subsidiary in charge of management of international intellectual property. In other cases, the company owing the invention may be the subsidiary and the address reported that of the host country (and not that of the headquarters).

124 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.5. Internationalo co-operation in S&T r yl B n

Figure F.5.1. Foreign ownership of domestic Figure F.5.2. Domestic ownership of inventions O O e

inventions,1 2005-07 made abroad,2 2005-07da l C u Argentina Luxembourg

Chinese Taipei Switzerland E e e

Belgium Chinese Taipei O R s

Hungary Ireland

Austria Belgium n e Portugal Netherlands A r Poland Sweden tu Czech Republic Finland L e c India Singapore Ireland Austria United Kingdom France Singapore Canada Russian Federation Portugal Canada Denmark Greece United Kingdom Switzerland Germany Slovenia Norway Mexico OECD4 France World total3 Netherlands Czech Republic Norway United States Brazil Slovenia Spain Poland Israel Greece Italy EU275 Denmark Australia New Zealand New Zealand China Mexico Sweden Hungary Germany Israel Australia Russian Federation World total3 Spain OECD4 China South Africa Italy EU275 South Africa Finland Brazil United States India Turkey Korea Japan Japan Korea Turkey 10080 60 40 20 0 020406080100 % % 1 2 http://dx.doi.org/10.1787/843178252268 1 2 http://dx.doi.org/10.1787/843184628375

Figure F.5.3. Firms in Europe with foreign collaboration on innovation, 2004-06 As a percentage of all firms

% Within Europe Outside Europe Abroad 18 16 14 12 10 8 6 4 2 0

Spain Finland Estonia Austria Greece Poland Norway Turkey Slovenia Belgium Sweden Denmark Portugal Hungary Luxembourg Netherlands New Zealand Czech Republic Slovak Republic

1 2 http://dx.doi.org/10.1787/843215663712 Note: Patent counts are based on patent applications filed under the Patent Co-operation Treaty (PCT), at international phase, by the priority date and the inventor’s (respectively applicant’s) country of residence. 1. Share of PCT patent applications owned by foreign residents in total patents invented domestically. Coverage: countries/economies with more than 200 PCT filings over the period. 2. Share of PCT patent applications invented abroad in total patents owned by country residents. Coverage: countries/economies with more than 200 PCT filings over the period. 3. All patents that involve international co-operation. 4. Patents of OECD residents that involve international co-operation. 5. The EU is treated as one country; intra-EU co-operation is excluded.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 125 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.6. International co-operation in science o r yl B n

■ The co-authorship of research publications ■ International co-authorship has been growing as O O e

D provides a direct measure of collaboration in science. fast as domestic co-authorship. da In 2007, 21.9% ofl

Indicators of co-authorship help to understand how scientific articles involvedC international co-authorship,u E e e

knowledge is created among researchers and how a figure three times higher than in 1985. Increases in O R s collaboration in science is changing. Co-authorship domestic and international co-authorshipn point to the

e may involve researchers in the same institution, in crucial role of interaction amongA researchers asr a way tu the same country, or in two or more countries. to diversify their sources of knowledge.L e c

■ Co-authorship, both domestic and international, has ■ The degree of international collaboration varies. grown in importance over the past decade. As a general Large countries tend to engage less in international trend, scientific knowledge production is shifting from collaboration. Large European countries (France, individual to group, from single to multiple institutions, Germany and the United Kingdom) conduct more and from national to international. Researchers collaborative work than the United States and Asian are increasingly networked across national and countries. organisation borders.

■ Collaboration among researchers in a single institution was the major form of collaborative research until the end of the 1990s. However, the Source percentage of single-institution co-authorship has • OECD (2009), OECD Science, Technology and Industry been decreasing over the last two decades. Scoreboard, OECD, Paris. ■ Domestic co-authorship, i.e. collaboration by For further reading researchers of different institutions in the same • Igami, M. and A. Saka (2007), “Capturing the Evolving country, has been increasing rapidly. It surpassed the Nature of Science, the Development of New Scientific share of single institution co-authorship in 1998 and Indicators and the Mapping of Science”, OECD Science, has since been the most common form of scientific Technology and Industry Working Papers 2007/1, OECD, collaboration. Paris, www.oecd.org/sti/working-papers.

Measures of co-authorship

Four types of authorship of scientific articles are analysed: single authorship, single-institution co-authorship, domestic co-authorship and international co-authorship. The analysis is based on the Science Citation Index on CD-ROM (1981-2007) provided by Thomson Scientific and analysed by the National Institute of Science and Technology Policy in Japan. Single authorship measures scientific papers with a single author. Single-institution co-authorship measures scientific papers with two or more authors of the same institution. Domestic co-authorship measures scientific articles with two or more authors from different institutions in the same country. International co-authorship measures scientific articles with two or more authors from different countries. The boundary between single- institution co-authorship and domestic co-authorship is not always clear, as for example, when co-authors belong to different departments of same university. Here, the classification is based upon the number of addresses listed in each article. Indicators of co-authorship draw attention to language barriers and geographical factors. However, these obstacles have diminished as English has become the language most commonly used internationally among researchers. Furthermore physical distance between researchers is likely to have some correlation with the ratio of co-authorship, although the effect of information and communication technology on knowledge flows has undoubtedly facilitated distance collaboration.

126 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.6. International co-operationo in science r yl B n

Figure F.6.1. Trends in co-operation in science, Figure F.6.2. Share of co-authored scientific articles, O O e

D 1985-2007 1982-87, 1992-97, 2002-07da l

As a percentageC of total u Domestic co-authorship E e e

Single-institution co-authorship Single author O R s

International co-authorship Single-institution co-authorship

Single author n e Domestic co-authorship A r Thousands International co-authorship c tu 300 L e 50

250

40 200

30 150

100 20

50 10

0 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 1982-87 1992-97 2002-07

1 2 http://dx.doi.org/10.1787/843218522541 1 2 http://dx.doi.org/10.1787/843228526812

Figure F.6.3. Share of internationally co-authored scientific articles, 2007 As a percentage of total articles

% 60

Italy France Japan China Canada World Germany United States United Kingdom Russian Federation

1 2 http://dx.doi.org/10.1787/843267317327 Note: Data are based on research articles in natural and medical sciences and engineering.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 127 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.7. Technology balance of payments o r yl B n

■ The internationalisation of technology is also technology transactions were in deficit. In 2008, these O O e

D reflected in the technology balance of payments, since transactions showed a very large surplus,da even if thel

payments and receipts reflect to some extent cross- latter decreased from 2007.C u E e e

border trade in research and development (R&D)

O R s

■ In 2008, countries displaying a large surplus on outcomes. The technology balance of payments n

e measures disembodied international technology their technology balance of paymentsA as a percentager tu transfers: licence fees, patents, purchases and royalties of gross domestic product (GDP)L e werec Sweden, paid, know-how, research and technical assistance. Austria, Norway, the United Kingdom, Finland, the Unlike R&D expenditures, these are payments for United States, Denmark, the Netherlands and Japan. production-ready technologies. On the other hand, Hungary Switzerland, Belgium and Luxembourg imported the most technology. ■ In most OECD countries, technology receipts and ■ payments increased strongly between 2000 and 2008. The magnitude of Ireland’s technology flows is Overall, the OECD area maintained its position as a mainly due to the strong presence of foreign affiliates net technology exporter vis-à-vis the rest of the world. (particularly US and UK firms). The figures may also be affected by intra-firm transactions and transfer ■ The European Union, which recorded a deficit in pricing. the technology balance of payments until 2001, became a net exporter of technology in 2008. Results, along with the volume of transactions, must however Source be interpreted with care insofar as intra-EU flows •OECD, Technology Balance of Payments Database and OECD cannot be set apart on the basis of available data. estimates, December 2009.

■ The most spectacular change in the technology For further reading balance of payments occurred in Japan. During • OECD (2005), Measuring Globalisation: OECD Handbook on the 1980s and 1990s, only new contracts for technology Economic Globalisation Indicators, OECD, Paris, transactions showed a positive trade balance, while total www.oecd.org/sti/measuring-globalisation.

Technology balance of payments

Technology receipts and payments constitute the main form of disembodied technology diffusion. Trade in technology comprises four main categories: • transfer of techniques (through patents and licences, disclosure of know-how); • transfer (sale, licensing, franchising) of designs, trademarks and patterns; • services with a technical content, including technical and engineering studies, as well as technical assistance, • industrial R&D. Although the balance reflects a country’s ability to sell its technology abroad and its use of foreign technologies, a deficit does not necessarily indicate low competitiveness. In some cases, it results from increased imports of foreign technology; in others, it is due to declining receipts. Likewise, if the balance is in surplus, this may be due to a high degree of technological autonomy, a low level of technology imports or a lack of capacity to assimilate foreign technologies. Most transactions also correspond to operations between parent companies and affiliates. Thus, it is important to have additional qualitative and quantitative information to analyse correctly a country’s deficit or surplus position in a given year. There is also the difficulty of dissociating the technological from the non-technological content of trade in services, which falls under the heading of pure industrial property. Thus, trade in services may be underestimated when a significant portion does not give rise to financial payments or when payments are not in the form of technology payments.

128 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.7. Technologyo balance of payments r yl B n

Figure F.7.1. Trends in technology flows1 Figure F.7.2. Changes in the technology balance of O O e

as a percentage of GDP by geographical area payments as a percentageda of GDP l C u

2 2, 3

EU15 OECD E e e United States Japan 1998O R 2008 s

% %

0.5 n e 1.4 A r tu 1.2 0.4 L e c

1.0 0.3 0.8 0.2 0.6 0.1 0.4 0 0.2

0 -0.1 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 United States Japan EU152 OECD2, 3 1. Average of technological payments and receipts. 1 2 http://dx.doi.org/10.1787/843281100104 2. Including intra-area flows. Excluding Denmark. Data partially estimated. 3. Excluding Iceland and Turkey. 1 2 http://dx.doi.org/10.1787/843278056436 Figure F.7.3. Technology flows (average of receipts Figure F.7.4. Technology balance of payments and payments) as a percentage of GDP, 2008 (receipts – payments) as a percentage of GDP, 2008

Receipts Payments Sweden Austria 13.6 Ireland 13.9 Norway Finland United Kingdom Sweden Finland Switzerland (2007) United States Luxembourg Denmark Hungary Belgium Netherlands Denmark Japan Netherlands Germany Austria France (2003) Germany Czech Republic Norway Italy Czech Republic Canada United Kingdom Portugal Canada Spain Poland Australia Slovak Republic Greece Portugal Slovak Republic New Zealand Mexico (2005) Spain Ireland United States Korea (2007) Australia Korea (2007) Poland Greece New Zealand Japan Luxembourg France (2003) Belgium Italy Hungary Mexico (2005) Switzerland (2007) 4.0 3.0 2.0 1.0 0 -1.5 -1.0 -0.5 010.5 1.0 .5 % %

1 2 http://dx.doi.org/10.1787/843310156878 1 2 http://dx.doi.org/10.1787/843332174708

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 129 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.8. Technology balance of payments and domestic R&D activityo r yl B n

■ A country’s technological development can reflect ■ Conclusions directly drawn from the comparison of O O e

D the choice between domestic production of “national” R&D investments andda the technologyl

technology/inventions [via a high national research balance of payments needC to be interpreted with care.u E e e

and development (R&D) effort] or absorption of foreign Major difficulties arise when collecting data on the O R s technology (via the acquisition of foreign technologies technology balance of paymentsn (see box).

e A r and the payment of licensing fees and royalties). u L e c t ■ Even though the R&D effort and the purchase of Sources foreign technology are not linked, in some countries •OECD, Technology Balance of Payments Database. – particularly Ireland, Poland, Hungary, the •OECD, Main Science and Technology Indicators Database, Netherlands, Switzerland, Belgium and Luxembourg – December 2009. expenditure for foreign technology (technological payments) is greater than expenditure for domestic For further reading business enterprise R&D. This is clearly related to • OECD (2005), Measuring Globalisation: OECD Handbook on the major activities of (domestic and foreign) Economic Globalisation Indicators, OECD, Paris, multinationals in these countries. www.oecd.org/sti/measuring-globalisation.

Technology balance of payments: limitations

First, some technological transfers that do not imply a financial counterpart are not included logically in the technology balance of payments (TBP). Certain technology transfers by multinational firms to affiliates do not explicitly take the form of licence or know-how transmission contracts. In this situation, part of the profits remitted to the parent company can be regarded as representing remuneration for the technology made available but they are not incorporated in the TBP statistics. Second, TBP statistics include both unaffiliated and affiliated transfers of disembodied technology, but these two categories of transfers are not disaggregated. Third, TBP data include transactions in which ownership of the technology is transferred, as well as other transactions in which ownership is retained by the licensor. While the former typically involve lump-sum payments, the latter typically generate variable payments over several periods. Since the proportion of each type of transaction is unknown, the stock of acquired technology variable is expected to be a better measure for the imported technology available to a given country in a specific period than the flow variable. Fourth, measurement errors may result in both the underestimation and overestimation of technology transfers. Licensing contracts provide many payment channels other than technology payments, and payment/receipt flows recorded as such may be only part of the total price paid and received. Alternatively, national tax and control regulations on technology payments and receipts may bias TBP data, particularly the international transfers of multinational enterprises. If royalties are less taxable than profits, royalties may be preferred to other profit transfer channels and therefore exceed the value of technology transferred. On the contrary if control limitations are imposed on the royalty remittances, some part of repatriated profits will represent remuneration of technology transfer.

130 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.8. Technology balance of payments and odomestic R&D activity r yl B n

Figure F.8.1. Technological payments and business enterprise R&D expenditure, 2008 O O e

Main R&D performers da

C u

Technological payments Business enterpriseE R&D expendituree e USD million O R s

289 105 131 690

70 000 n e A r u L e c t 60 000

50 000

40 000

30 000

20 000

10 000

Italy Japan Canada Germany Sweden

United States Korea (2007) France (2003) United Kingdom

Other countries Technological payments Business enterprise R&D expenditure USD million 37 734 14 000

12 000

10 000

8 000

6 000

4 000

2 000

Spain Austria Finland Norway Ireland Poland Belgium Denmark Portugal Hungary Netherlands Luxembourg Mexico (2005) Greece (2007) Australia (2006) Czech Republic Slovak Republic Switzerland (2004) New Zealand (2007)

1 2 http://dx.doi.org/10.1787/843338225060

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 131 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.9. Trade in knowledge-intensive goods o r yl B n

■ Knowledge-intensive goods have been among the ■ Trade in medium-low-technology manufactures O O e

D most dynamic components of international trade over accounted for 20% of total manufacturingda trade in 2007l

the last decade. A country’s ability to compete in high- in the OECD area. C Trade in high-technologyu E e e

technology markets is therefore important to its manufactures and medium-high-technology O R s overall competitiveness in the world economy. manufactures accounted for 23%n and 39%, respectively.

e A r u ■ In 2007, exports were particularly orientedc t towards ■ OECD trade in manufacturing has been mostly driven L e high- and medium-high-technology manufactures in by high-technology industries over the second half of Ireland, Japan, Hungary, Switzerland, Mexico and the the 1990s and up to the beginning of 2005. The value of United States. China’s exports were significantly trade in high-technology manufactures then started to higher than the OECD average, with high- and slow and in 2007 it stood at broadly the same level as medium-high-technology exports accounting for medium-high-technology manufactures. Over the same about 60% of its total manufacturing exports. period, trade in medium-low-technology manufactures rose sharply. The notable increase in the value of trade in medium-low-technology manufactures was due in part to the recent significant increases in commodity Source prices for oil, petroleum products and basic metals, • OECD (2009), OECD Science, Technology and Industry particularly the metals required for the manufacture of Scoreboard 2009, OECD, Paris. ICT goods. For further reading • Hatzichronoglou, T. (1997), “Revision of the High ■ In individual OECD countries, high-technology Technology Sector and Product Classification”, OECD exports generally grew substantially faster than Science, Technology and Industry Working Papers 1997/2, medium-high-technology exports between 1997 OECD, Paris. and 2007; in the Slovak Republic, Iceland and the Czech • OECD (2005), Measuring Globalisation: OECD Handbook on Republic they represented about 1.5 times the value of Economic Globalisation Indicators, OECD, Paris. medium-high-technology exports. They grew at • Pilat, D. et al. (2006), “The Changing Nature of somewhat under 30% in China and by about 15% in Manufacturing in OECD Countries”, OECD Science, Brazil. Export growth of high-technology goods Technology and Industry Working Papers 2006/9, OECD, outstripped growth in total manufacturing except in Paris. most OECD accession countries (Chile, Estonia, Israel, • OECD (2007), Staying Competitive in the Global Economy: Russian Federation, Slovenia), Sweden and Japan. Moving Up the Value Chain, OECD, Paris.

Trade by technology intensity

OECD methodological work classifies manufacturing industries in four categories of technological intensity: high, medium-high, medium-low and low technology. This classification is based on indicators of (direct as well as indirect) technological intensity which reflect to some degree “technology-producer” or “technology-user” aspects. To analyse international trade flows by technological intensity requires attributing each product to a specific industry. However, products which belong to a high-technology industry do not necessarily have only high- technology content. Likewise, some products in industries of lower technological intensity may incorporate a high degree of technological sophistication. No detailed data are available for services at present. Therefore the indicators presented here only relate to manufacturing industries.

132 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 F. INTERNATIONALISATION OF SCIENCE AND TECHNOLOGY

_it E d e it s io w n F.9. Trade in knowledge-intensiveo goods r yl B n

Figure F.9.1. OECD manufacturing trade1 by technology intensity2 O O e

D Index 1997 = 100 da l

290 C u E e e

270 Medium-low-technology accounted for 20% of total manufacturing trade in 2007 O R s

250

n e A r 230 u L e c t 210

190 Medium-high-technology, 39% 170

150 High-technology, 23% Total manufacturing 130 110 Low-technology, 18% 90 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1 2 http://dx.doi.org/10.1787/843365734077 Figure F.9.2. Growth of high- and medium-high-technology exports, 1997-20072 Average annual growth rate, percentage

% Medium-high-technology industries Total manufacturing High-technology industries 35

Italy China India Brazil Chile Korea Spain EU19 OECD Israel Japan Poland GreeceTurkey Austria Mexico Ireland Finland France Iceland BRIICS Belgium Slovenia Norway Estonia Canada Sweden Hungary PortugalGermany Denmark AustraliaIndonesia Switzerland Netherlands New Zealand South Africa LuxembourgUnited States Slovak RepublicCzech Republic United Kingdom Russian Federation Accession countries 1 2 http://dx.doi.org/10.1787/843377412437 Figure F.9.3. Share of high- and medium-high-technology in manufacturing exports, 20072 Percentage

% High-technology manufactures Medium-high-technology manufactures 100

Italy Japan KoreaOECD EU19 ChinaSpain Israel Brazil India Chile Ireland Mexico France Austria FinlandPoland Turkey Greece Iceland Belgium SwedenSlovenia Canada BRIICS Estonia Norway Hungary Germany Denmark Portugal IndonesiaAustralia Switzerland Netherlands United States South AfricaLuxembourg New Zealand United KingdomCzech RepublicSlovak Republic Accession countriesRussian Federation 1. Average value of total OECD exports and imports of goods. 1 2 http://dx.doi.org/10.1787/843441506560 2. The OECD and EU aggregates exclude Luxembourg for which data are only available from 1999.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 133 _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r G. INTERNATIONALISATION OF HIGHLYu L e c t SKILLED HUMAN CAPITAL

G.1. Internationalisation of higher education ...... 136

G.2. International mobility of doctoral students...... 138

G.3. S&E doctorates awarded and postdoctoral appointments to foreign citizens in the United States ...... 140

G.4. Foreign scholars in the United States ...... 142

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 135 G. INTERNATIONALISATION OF HIGHLY SKILLED HUMAN CAPITAL

_it E d e it s io w n G.1. Internationalisation of higher education o r yl B n

■ Various forms of cross-border education have been 5 percentage points since 2000 while those of O O e

D developed in recent decades (e.g. mobility of Australia, France, Japan, New Zealandda and Southl

educational programmes and institutions across Africa have been growing.C u E e e

borders) and contribute to the internationalisation of

O R s

■ As a proportion of total tertiary-level enrolments, the higher education system. Student mobility in n

e Australia (19.5%), the UnitedA Kingdom (14.9%),r tertiary education is an important illustration of this. u Switzerland (14.0%), New Zealand L(13.6%)e c tand Austria ■ The number of students enrolled outside their (12.4%) have attracted the highest percentages of country of citizenship has risen dramatically international students. Women represent the since1975 from 0.8million worldwide to 3million majority of international students in 9 of the in 2007, a nearly four-fold increase. In 2007, 20 countries for which data are available and at least 2.5 million tertiary-level students were enrolled 45% in the others. outside their country of citizenship in the OECD area, an increase of 59.3% since 2000 for an average annual growth rate of 6.9%. Source ■ In 2007, one out of two foreign students went to the •OECD, Education Database, January 2010. four countries that host the majority of foreign students enrolled outside their country of citizenship: For further reading the United States received 19.7% of all foreign • OECD (2004), Internationalisation and Trade in Higher students worldwide, followed by the United Kingdom Education: Challenges and Opportunities, OECD, Paris. (11.6%), Germany (8.6%) and France (8.2%). The market • OECD (2009), Education at a Glance 2009: OECD Indicators, share of the United States has decreased by OECD, Paris, www.oecd.org/edu/eag2009.

Foreign and international students

The data are from the UNESCO/OECD/Eurostat data collection and the OECD Education Database. Additional data from the UNESCO Institute for Statistics are also used. Tertiary-level students are defined as those enrolled in programmes at levels 5 and 6 of the 1997 International Standard Classification of Education (ISCED 1997). ISCED level 5 corresponds to programmes at the first stage of tertiary education and are subdivided into programmes which are theoretically based, preparatory to research or give access to professions with high skills requirements (ISCED 5A) and programmes which are practical/technical/occupation-specific (ISCED 5B). ISCED level 6 corresponds to programmes at the second stage of tertiary education which lead to an advanced research qualification equivalent to a doctorate. Data on international and foreign students are obtained from tertiary enrolments in their country of destination. The data therefore relate to incoming students rather than to students going abroad. Students are classified as international students if they left their country of origin and moved to another country for the purpose of study. International students may be defined as students who are not permanent or usual residents of their country of study or alternatively as students who obtained their prior education in a different country. Students are classified as foreign students if they are not citizens of the country in which the data are collected. While pragmatic and operational, this classification is inappropriate for capturing student mobility because of differing national policies regarding naturalisation of immigrants. It is used as a proxy when data on international students are not available.

136 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 G. INTERNATIONALISATION OF HIGHLY SKILLED HUMAN CAPITAL

_it E d e it s io w n G.1. Internationalisationo of higher education r yl B n

Figure G.1.1. Student mobility in tertiary education, Figure G.1.2. International education market shares, O O e

D 2007 2000 and 2007 da l

Percentage of international students in tertiary enrolments Percentage of all foreign tertiaryC students enrolled, by destinationu

E e e

45.8 Australia OECD countriesO R Partners countriess

2007n 2007e 47.7 United Kingdom A r 2000 tu2000 48.0 Switzerland L e c

1 49.3 New Zealand United States United Kingdom1 53.6 Austria Germany 59.7 Ireland France 44.2 Canada Australia1 60.8 Belgium Canada2 49.3 Czech Republic Japan

59.5 Denmark New Zealand Russian Federation 47.1 Sweden Spain 57.1 Netherlands Italy 43.2 Finland South Africa n.a. United States Austria 46.7 Hungary Sweden

49.1 Japan China Belgium 55.7 Percentage of women Norway Switzerland 56.2 Spain Netherlands 52.6 Estonia Korea 57.3 Slovenia Other OECD countries 48.6 Slovak Republic Other partner countries

222018 16 14 12 10 8 6 4 2 0 0255 10 15 20 % Market share (%)

1 2 http://dx.doi.org/10.1787/843460465321 1 2 http://dx.doi.org/10.1787/843470328321

Figure G.1.3. Distribution of foreign students in tertiary education, by country of destination, 2007 Percentage of foreign tertiary students enrolled in each country of destination as reported to the OECD

France 8.2% Australia¹ 7.0% Canada² 4.4%

Germany 8.6% Japan 4.2% New Zealand 2.1% Russian Federation 2.0% Spain 2.0% United Kingdom¹ 11.6% Italy 1.9% Other 18.0% South Africa 1.8% Austria 1.4% Sweden 1.4% China 1.4% Belgium 1.4% Switzerland 1.4% Other OECD Netherlands 1.2% United States¹ 19.7% countries 6.3%

Other partner countries 11.3%

1. Data relate to international students defined on the basis of their country of residence. 2. Reference year 2006. 1 2 http://dx.doi.org/10.1787/843483553853

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 137 G. INTERNATIONALISATION OF HIGHLY SKILLED HUMAN CAPITAL

_it E d e it s io w n G.2. International mobility of doctoral students o r yl B n

■ International mobility of doctoral students can be cultural and historical links, the existence of O O e

D used as an indicator of the internationalisation of the exchange programs (e.g. Erasmus) orda scholarships, asl

higher education sector as well as of the research well as immigrationC policies. Asian studentsu E e e

system. It also highlights the attractiveness of (particularly from China, India, Korea and Chinese O R s advanced research programmes and in some cases Taipei) represent the bulk of n foreign doctoral students

e the existence of career opportunities for junior in the United States, whereas A European universitiesr tu researchers in the host country. Previous research has enrol large shares of doctoral studentsL e c from other shown that doctoral students contribute to the European countries. advancement of research in the host country during ■ their studies and afterwards. When returning home, International mobility of doctoral students has they bring back new competences and connections increased over the past nine years, most notably in with international research networks. Canada and New Zealand, as well as in Norway and in Spain. The share of foreign students enrolled in ■ The share of foreign doctoral students in total advanced research programmes rose in most enrolments differs widely across countries. Non- countries between 1998 and 2007. Belgium, one of the citizens represent more than 40% of the doctoral main European host countries, is an exception. population in Switzerland, New Zealand and the ■ Men still account for the majority of foreign United Kingdom, but less than 6% in Italy and Korea. doctoral students, but women are catching up. They Shares of foreign and international doctoral students represent at least 43% of international students in half range between 25% and 40% in Canada, France, of the countries for which data are available. Belgium, Australia and the United States.

■ In absolute numbers, the United States hosted the largest foreign doctoral population, with more than Source 93 000 students in 2007 from abroad, followed by the •OECD, Education Database, January 2010. United Kingdom (41 000) and France (28 000). For further reading ■ Language plays a role in the choice of destination, • OECD (2004), Internationalisation and Trade in Higher notably for English-speaking countries or for Spain Education, Challenges and Opportunities, OECD, Paris. (students from Central and South America). However, • OECD (2008), Education at a Glance 2009: OECD Indicators, other factors also matter: geographical proximity, OECD, Paris, www.oecd.org/edu/eag2009.

Foreign and international doctoral students

The data are from the Indicators for Education Systems (INES) project conducted jointly by the OECD, the UNESCO Institute for Statistics (UIS) and Eurostat. Doctoral students are defined according to the International Classification of Education developed by UNESCO (ISCED 1997). ISCED level 6 corresponds to programmes that lead to an advanced research qualification, equivalent to a doctorate. The term “international students” refers to students who have crossed borders expressly with the intention to study. The UNESCO Institute for Statistics, OECD and Eurostat define as international students those who are not residents of their country of study or those who received their prior education in another country. Overall, the country of prior education is considered a better criterion for EU countries in order to take account of intra-EU student mobility. The residence criterion is usually a good proxy in countries that require a student visa to enter the country. Since not all countries are yet able to report data on international students, data for “foreign students” are presented here. However, it should be borne in mind that not all “foreign students” have come to the country with the intention to study.

138 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 G. INTERNATIONALISATION OF HIGHLY SKILLED HUMAN CAPITAL

_it E d e it s io w n G.2. International mobilityo of doctoral students r yl B n

Figure G.2.1. Share of foreign doctoral students,1 Figure G.2.2. Number of international doctoral O O e

D 1998 and 20072 students,3 2007 da l

As a percentage of total doctoral enrolments in host country By hostC country u

E e e

1998 2007 O R s

United States n 93 766e n.a. 42.1 United Kingdom A r United Kingdom tu 41.3 26.6 New Zealand L e c 45.0 Switzerland France (2005) 45.1 21.2 Canada Japan 40.5 34.4 France Australia 42.0 20.8 Australia 20.5 Belgium Switzerland 43.2 United States (2001) 23.7 Canada Percentage of women 35.0 4.8 Norway 48.9 9.9 Spain Spain 5.9 Sweden Austria 44.7 Magnified 15.1 Austria 44.2 Finland Finland 6.6 Denmark 43.6 16.1 Japan Czech Republic Czech Republic 11.9 Iceland New Zealand New Zealand 47.5 n.a. Chile Belgium Belgium 55.5 n.a. Portugal Sweden 40.3 7.2 Czech Republic Sweden 7.8 Finland Brazil (2005) Brazil (2005) n.a. 7.0 Slovenia Hungary Hungary 47.3 6.7 Hungary Greece (2006) n.a. Italy Greece (2006) n.a. Denmark n.a. Korea Denmark 39.3 Norway 3.3 Estonia Norway 37.9 n.a. Percentage of international students Poland Slovak Republic n.a. Turkey Slovak Republic Slovenia 41.1 n.a. Greece (2006) Slovenia Estonia 53.4 n.a. Mexico (2002) Estonia Iceland 42.3 0.8 Slovak Republic Iceland 0 500 1 000 1 500 2 000 37.5 504540 35 30 25 20 15 10 5 0 % 0 10 000 20 000 30 000 40 000

1 2 http://dx.doi.org/10.1787/843566368032 1 2 http://dx.doi.org/10.1787/843570404564 1. Including foreign students from non-OECD countries. 2. 1999 instead of 1998 for Belgium, Mexico, the Slovak Republic and Turkey; 2000 for Iceland and Portugal. In the United States, data refer to 2001 for foreign students and to 2007 for international students. In France, data for international students refer to 2005. 3. International students are defined as non-resident students of reporting countries for all countries except Finland, Iceland and Switzerland which define them as students with prior education outside the reporting country.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 139 G. INTERNATIONALISATION OF HIGHLY SKILLED HUMAN CAPITAL

_it E d e it s io w n G.3. S&E doctorates awarded and postdoctoral appointments too foreign citizens in the United States r yl

B n O O e

■ ■ D

The United States, like France and the United l

Several fields reached new da peaks in 2006:

Kingdom, educates large numbers of foreign students. engineering (7 191), C biological sciences (6 631),u

Of the 45 600 doctorates awarded in 2006, two-thirds physical sciences (3 925),E computere sciences (1 452)e

were in science and engineering (S&E) and 38% of new and mathematics (1 327). O R s

graduates in these fields were foreign citizens with n e ■ Foreign doctoral graduates oftenA stay in ther United u temporary visas. Over the past decade, the US higher States after completing their Lstudies.e c t In 2006, education system has granted an average of 9 500 new US universities awarded around 28 000 S&E S&E doctorates to foreign citizens each year; the postdoctoral positions to temporary visa holders, number exceeded 12 700 in 2006. compared to 21 000 to US-born or resident graduates. The number of appointments for foreigners grew ■ Asians accounted for more than 70% of new non- markedly over the decade but changed little for US doctorates. Chinese students accounted for 26%, citizens and residents. Koreans for 10% and students from Chinese Taipei for ■ The propensity of new doctorate recipients to almost 5%. Other foreign students came from a wide remain in the United States varies according to diversity of countries. European students were more country of origin but has increased for all citizenships numerous than in the past. since the beginning of the 1990s. Over 60% of Indian and Chinese recipients of S&E doctorates and over ■ For students from Korea and Chinese Taipei, as well half of European recipients receive a postdoctoral as from Argentina, Chile, Greece and Turkey, appointment or job in the United States after US universities award about one S&E doctorate for graduation. The number of those from Japan, Korea or every three or four granted in their home country. US- Chinese Taipei, who were traditionally less likely to earned doctorates by Chinese citizens represent stay, has also increased. Leaving the issue of length of almost one-fifth of those granted in China. The stay aside, the ability of the United States to retain proportion of doctorates granted to Europeans in the researchers in relevant S&E fields following United States remains very small. completion of their studies is evident. ■ In 2006, the number of S&E doctorates awarded by US universities peaked at 29 850 surpassing for the Source second year in a row the previous high of 1998. This is • National Science Foundation (2008), Science and the result of a four-year increase in S&E doctorate Engineering Indicators 2008, Arlington, Virginia, awards (academic years 2002-06), following a four- www.nsf.gov/sbe/srs/seind08/start.htm. year decrease (1998-2002). This suggests that there • National Science Foundation (2009), Science and has in fact been no decline in the number of S&E Engineering Doctorate Awards: 2006, Arlington, Virginia, doctorates granted to non-US citizens. Indeed, most of www.nsf.gov/statistics/survey.cfm and www.nsf.gov/ the recent growth is due to non-US citizens. statistics/survey.cfm.

National Science Foundation (NSF) data on US doctorates and postdoctorates

The Survey of Earned Doctorates (SED) is a census of all individuals receiving a research doctorate from a US institution in the academic year. The results are used to assess characteristics and trends in doctoral education and degrees. The data are published annually since 1958. The definition of postdoctorates differs among academic disciplines, universities and sectors. For the US NSF, postdoctorates include “individuals with science and engineering Ph.D.’s, M.D.’s, D.D.S.’s, or D.V.M.’s (including foreign degrees equivalent to US doctorates) who devote their primary effort to their own research training through research activities or study in the department under temporary appointments carrying no academic rank”. Postdoctorates may contribute to the academic programme through seminars, lectures or working with graduate students. They may have different titles at different institutions, e.g. Postdoctoral Scholar, Research Associate, Postdoctoral Fellow, or Postgraduate Researcher. S&E fields include the natural sciences (e.g. physical, biological, Earth, atmospheric and ocean sciences), mathematics/ computer sciences, agricultural sciences, social/behavioural sciences, engineering, medical/other life sciences. New graduates who intend to stay are measured by those who accept a postdoctoral research appointment or academic, industrial or other firm employment in the United States following receipt of the doctorate. This gives an indicator of how much the United States relies on inflows of doctorate holders and of whether working in the United States is an attractive option for foreign students who obtain US doctorates.

140 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 G. INTERNATIONALISATION OF HIGHLY SKILLED HUMAN CAPITAL

_it E d e it s io w n G.3. S&E doctorates awarded and postdoctoral appointmentso to foreign citizens in r the Unitedyl States B n

Figure G.3.1. S&E doctorates awarded to foreign citizens in the United States, by citizenship or origin O O e

D Total number, 2006 Changes by main geographicada l area, 1997-2006 l

7 000 C u E East Asia e e

Chinese Taipei 3 biggest European

O R s

Africa 431 (Germany, France, UK) 6 000

Korea n

Europe 437 400 e 1 219 A r (excl. 3 biggest) 5 000 tu 1 367 South America L e c (excl. Brazil), 396 4 000 Canada, 363 3 000 West Asia West Asia Turkey, 357 (excl. Turkey) Other 2 500 2 259 2 382 Japan, 222 Thailand, 199 2 000 Other East Asia, 195 1 500 Europe Mexico, 183 Pacific/Australasia Pacific-Australasia, 182 1 000 Africa South America Brazil, 139 North/Central America Other countries, 146 500 China 12 775 S&E doctorates awarded to foreign 4 280 0 students in 2006 in the United States 199798 99 0001 02 0304 05 2006

1 2 http://dx.doi.org/10.1787/843628800380 1 2 http://dx.doi.org/10.1787/843630364224

Figure G.3.2. S&E doctorates and postdoctoral Figure G.3.3. Foreign S&E doctorate recipients who appointments in the United States, by citizenship intend to stay in the United States, 2002-05 and type of visa, 1997-2006 As a percentage of total foreign S&E doctorate recipients Total number 1994-97 … to foreign citizens with permanent visas India 12.2 … to foreign citizens with temporary visas China 19.4 S&E doctorates awarded to US citizens United Kingdom 1.2 Iran 12.6 S&E postdocs appointment to foreign citizens Argentina 24.9 with temporary visas EU1 2.3 … to foreign citizens with permanent visas Israel 10.5 or to US citizens Germany 25.7 Australia 1.5 30 000 Canada 17.5 Italy 5.3 New Zealand n.a. 25 000 Greece 25.7 France 1.6 Peru n.a. 20 000 Korea 29.9 Nigeria n.a. Spain 2.2 15 000 Turkey 26.9 Japan 2.8 Egypt Number of S&E n.a. Chinese Taipei doctorates earned 32.1 10 000 in the United States South Africa per 100 S&E doctorates n.a. awarded at home, 20042 Colombia n.a. Indonesia n.a. 5 000 Mexico 13.0 Brazil 2.3 Chile 27.2 0 09015 30 45 60 75 1997 98 99 00 01 02 03 04 05 2006 % 1 2 http://dx.doi.org/10.1787/843634263318 1 2 http://dx.doi.org/10.1787/843634263318 1. Includes all European countries. 2. OECD estimates based on National Science Foundation data. The ratio compares the number of new foreign citizens graduating at doctoral level in S&E fields in the United States to the number of earned S&E doctoral degrees in the country of origin. New S&E doctorates refer to 2005 for Germany, Japan and Chinese Taipei, 2003 for Argentina and Brazil, 2001 for Greece, Italy and Spain.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 141 G. INTERNATIONALISATION OF HIGHLY SKILLED HUMAN CAPITAL

_it E d e it s io w n G.4. Foreign scholars in the United States o r yl B n

■ The presence of foreign scholars in US higher following the post-September 11 security-related O O e

D education institutions is an indicator of the international change in visa policy, the numbers da have grown againl

attractiveness of the country’s universities and of since 2004 and in 2007-08C they increased by 8% fromu E e e

opportunities for researchers in the United States. the previous year.

O R s

n e ■ In 2007-08, US higher education institutions hosted ■ Expansion of the populationA of foreign scholarsr has u 106 000 foreign scholars. They conducted research or been driven by a massive and sustainedL e arrivalc t of Asian teaching activities. Most were engaged in research academics. Although many Asian academics worked in and two-thirds were in the life, biological, health or US universities in the mid-1990s, the number of physical sciences and in engineering. scholars from Korea, India and China has kept growing at average annual rates of 8% to 9%. Growth in ■ Just 20 countries account for 80% of foreign scholars academic mobility from Turkey (7%), Chinese Taipei in the United States. China is the leading country of (6%) and Italy (6%) has also been rapid. The increase in origin and Asia the most important region. More than mobility from most European countries has been 22% were Chinese, around 9% were Korean or Indian, moderate (around 2% a year on average). and 5% Japanese. France, Germany, Italy, Spain and the United Kingdom each provided between 2% and 5% of ■ Although most foreign scholars are still men, foreign academic staff. Canada accounted for 4.5% of the women are more numerous than in the past; in 2007-08 total. female academics accounted for 34% of all foreign scholars in the United States. ■ Mobility of scholars, compared to the size of the local academic population, varies across countries. For most OECD countries, one to three scholars have positions in US universities per 100 working at home. Academic Source mobility is most significant from Korea (14 per 100), the • OECD, based on data from the Institute of International Netherlands (8), the Russian Federation (6) and from Education (IIE), June 2008. Canada, Iceland, Ireland, Italy and Mexico (4 each). For further reading ■ The population of foreign scholars working in the • Institute of International Education (2008), Open United States has steadily increased over the past Doors 2008: Report on International Educational Exchange, 14 years compared to the 60 000 hosted in 1993-94. New York, http://opendoors.iienetwork.org/page/ After a decline during the two academic years OpendDoors2008.

Open Doors data

The Institute of International Education (IIE) is a non-profit international organisation for educational and cultural exchange. The IIE conducts an annual statistical survey of the internationally mobile student population in the United States. Open Doors is a long-standing, comprehensive information resource on international students in the United States and on US students studying abroad. It highlights key facts and trends in international flows of scholars to the United States. International scholars are defined as non-immigrant, non-student academics (teachers and/or researchers, and administrators). Scholars may also be affiliated with US institutions for activities such as conferences, colloquia, observation, consultations or other short-term professional development activities. The survey is limited to doctoral degree-granting institutions.

142 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 G. INTERNATIONALISATION OF HIGHLY SKILLED HUMAN CAPITAL

_it E d e it s io w n G.4. Foreign scholarso in the United States r yl B n

Figure G.4.1. Top 20 places of origin of foreign Figure G.4.2. Growth in foreign scholars, by country O O e

D scholars in the United States, 2007/08 of origin, 1997-2008da l

Headcounts Average annualC growth rate u

Brazil, 2 071 E e e

United Kingdom Russian AverageO annualR growth rate, 1997-2008 s

France 2 823 Federation, Number of n scholars in the United Statese A r 3 802 Spain 1 945 (per 100 university researchers inu country Italy 2 320 Israel, of origin) c t Canada Chinese Taipei L e 4 758 3 273 1 698 2 185 India Germany Turkey, 5 269 1 539 Ireland (1997-2004) Japan Mexico, China 5 692 1 396 Slovak Republic (1997-2004) Australia, Korea Korea Other, 1 163 14.1 9 888 Portugal (1997-2004) 32 374 Netherlands, Other, 19 923 1 018 Turkey Poland, 840 Chinese Taipei India Italy 9 959 Argentina, 781 Canada Indonesia (1997-2004) China 106 123 foreign scholars working 23 779 Mexico in the United States higher education Brazil sector in 2007/08 World

Israel 1 2 http://dx.doi.org/10.1787/843674058008 Greece (1997-2004) Argentina Figure G.4.3. Growth of foreign scholars in the United France States, by gender and activity, 1993/94-2007/08 Spain Headcounts and as a percentage of total foreign US scholars Belgium (1997-2004) Total OECD (1997-2004) Male Female Australia Research and teaching Research New Zealand (1997-2004) Teaching Other South Africa (1997-2004) EU15 (1997-2004) Share of foreign scholars EU25 (1997-2004) by primary function (%) Total number of foreign scholars 110 000 Sweden (1997-2005) Germany 100 100 000 Czech Republic (1997-2004) Luxembourg (1997-2004) 30.6 90 90 000 Japan Poland 80 80 000 United Kingdom Netherlands 70 70 000 Iceland (1997-2004) Denmark (1997-2004) 60 60 000 Austria (1997-2004) Switzerland (1997-2005) 50 50 000 Estonia (1997-2004) 40 40 000 Hungary (1997-2004) Russian Federation 30 30 000 Finland (1997-2004) Norway (1997-2004) 20 20 000 Slovenia (1997-2004) -6-1 4 9 10 10 000 % 0 0 1 2 http://dx.doi.org/10.1787/843688416710

1993/941994/951995/961996/971997/981998/991999/002000/012001/022002/032003/042004/052005/062006/072007/08

1 2 http://dx.doi.org/10.1787/843730725354 1. 2007 for Argentina and the Russian Federation; 2006 for France, Germany, Italy, Japan, Korea, Poland, Spain, Chinese Taipei and Turkey; 2002 for Austria, Finland and Switzerland; 2003 for other countries.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 143 _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r H. INTERNATIONALISATION OF u L e c t ENVIRONMENTAL TECHNOLOGY

H.1. The changing geography of environmental innovation. 146

H.2. Transfer of environmental technologies ...... 148

H.3. Trade in environmental goods ...... 150

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 145 H. INTERNATIONALISATION OF ENVIRONMENTAL TECHNOLOGY

_it E d e it s io w n H.1. The changing geography of environmental innovation o r yl B n

■ Most innovation in “environmental” technologies Korea) are the most important sources of innovation, O O e

D takes place in OECD economies. From 1978 to 2006, Chinese Taipei, China, the Russian Federationda and Israell

almost 98% of all patents pertaining to air and water figure among the top 20C innovating countries. Moreover,u E e e

pollution control technologies were deposited by in terms of specialisation, non-OECD countries such as O R s inventors from OECD countries. Japan, Germany, the Belarus, Ukraine and Venezuelan are particularly

e United States, France and the United Kingdom were intensive generators of environmentalA technologies.r tu the most active. Korea has also become remarkably L e c active in recent years.

■ In recent years some non-OECD countries have started Source to become more important innovators. Comparing •OECD, Patent Database, April 2009. inventive activity in general environmental technologies (air, water, waste) in OECD countries with those of For further reading enhanced engagement and accession countries clearly • OECD Project on Environmental Policy and shows that the latter have become very active in this Technological Innovation, www.oecd.org/environment/ innovation. area. • OECD (2010), The Invention and Transfer of Environmental ■ The same observation applies for patent applications Technologies, OECD, Paris. deposited for technologies for electric and hybrid • OECD (2008), Environmental Policy, Technological Innovation vehicles from 2001 to 2004. While the G7 countries (and and Patents, OECD, Paris.

Measuring the generation of “environmental” technology

Patent data are used as a measure of technological innovation because they focus on outputs of the inventive process. Moreover, the application-based nature of the patent classification system allows for a rich characterisation of relevant technologies for environmental concerns. Consequently, this section uses patent classifications rather than industrial or sectoral classifications. Relevant patents were identified using the International Patent Classification (IPC) system. Because IPC classes may be too broad for many areas of “environmental” technology, two possible types of error may arise when searching for relevant patents: inclusion of irrelevant patents within the classes selected, and exclusion of relevant patents from the classes not selected. Therefore, combinations of classes were used in some cases to identify relevant patents. On this basis, measures of innovative activity in different fields are developed, based upon a “count” of patent applications. The fields covered include a wide variety of technologies related to abatement of air and water pollution, solid waste management and recycling, climate change mitigation, renewable energy, alternative-fuelled vehicles, etc. The list of relevant classes can be found at www.oecd.org/environment/innovation.

Figure H.1.1. Environmental innovation in enhanced engagement and accession countries Number of patent applications, claimed priorities, worldwide, 3-year moving average

OECD (left scale) EE and accession (right scale) 2 500 60

50 2 000

40 1 500

1 000 20

500 10

0 0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

1 2 http://dx.doi.org/10.1787/843740571085

146 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 H. INTERNATIONALISATION OF ENVIRONMENTAL TECHNOLOGY

_it E d e it s io w n H.1. The changing geography of environmentalo innovation r yl B n

Figure H.1.2. Innovation in hybrid and electric vehicle technologies, 2001-04 O O e

Number of patent applications, claimed priorities, worldwid da l

C u

E e e

Korea O R s

n e Germany A Czech Republic r China u Spain c t Austria L e New Zealand Netherlands France Hungary Finland United Kingdom Norway Canada Australia India Romania Chinese Taipei Israel Other Poland Switzerland Brazil

Italy

United States Sweden

Japan

1 2 http://dx.doi.org/10.1787/843801811015

Figure H.1.3. Proportion of patenting in general “environmental” technologies in overall patenting Percentage of air + water + waste in total patenting, 1990-2005

Air Water Waste

Czech Republic

Slovak Republic

Belarus

Ukraine

Poland

Luxembourg

Venezuela

Russian Federation

Portugal

Iran

Indonesia

012345678 %

1 2 http://dx.doi.org/10.1787/843813626085

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 147 H. INTERNATIONALISATION OF ENVIRONMENTAL TECHNOLOGY

_it E d e it s io w n H.2. Transfer of environmental technologies o r yl B n

■ Environmental technologies that mitigate cross- appeal and allow “importers” to adopt the most O O e

l border (i.e. SO2) or global pollutants (i.e. CO2) benefit all appropriate technologies on the market.da

countries. However, since much relevant innovation C u ■ E e e

occurs in OECD countries, some transfer from Nevertheless, the biggest role seems to be played by

O R s

domestic absorptive capacity, since countries with high developed to developing countries will be required to n

e domestic technological capabilityA importr more address environmental problems worldwide. u environmental technologies from overseas.L e c t Analysis of ■ This is particularly true for climate change the most important non-OECD wind power innovators mitigation, and technology transfer will certainly be a shows that imports of foreign technologies and key element of any post-Kyoto agreement. Knowledge domestic knowledge stocks relating to wind power are transfer (measured in terms of duplicate patent highly correlated. applications) takes place from Annex 1 to non-Annex 1 countries for two key technologies: wind power and solar photovoltaics. Detailed data show the growing Source importance of this knowledge transfer to China for •OECD, Patent Database, April 2009. some technology-exporting countries. For further reading ■ Close economic ties between pairs of countries • OECD Project on Environmental Policy and positively influence the transfer of environmental Technological Innovation, www.oecd.org/environment/ technologies. International environmental co-operation, innovation. e.g. the Clean Development Mechanism, also plays an • OECD (2010), The Invention and Transfer of Environmental important role. Flexible domestic policy regimes also Technologies, OECD, Paris. encourage technology transfer, since they encourage • OECD (2008), Environmental Policy, Technological Innovation “exporters” to develop technologies with wide market and Patents, OECD, Paris

Measuring “environmental” technology transfer

The idea of using patent data to measure international technology transfers arises from the fact that patterns of patenting will carry a partial trace of the three principal channels of market transfer (international trade, foreign direct investment and licensing) since a single invention may be patented in a number of countries. If there is any potential for reverse engineering, exporters, investors and licensors will each have an incentive to protect their intellectual property when it goes overseas. Although patent data cannot capture the full extent of the transfers which eventually take place, they can provide robust indicators of trends in the direction and the extent of international transfer. A patent only gives the applicant protection from potential imitators. It does not reflect actual transfer of technologies. If applying for protection did not cost anything, inventors might patent widely and indiscriminately. However, patenting is costly in terms both of the costs of preparing the application and the administrative costs and fees associated with the approval procedure. As such, inventors are unlikely to apply for patent protection in a second (or duplicate) country unless they are relatively certain of the potential market in that country for the technology involved. On this basis it is possible to assess how widely innovations are diffused in the global economy and see which countries are the sources and recipients of such innovations.

148 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 H. INTERNATIONALISATION OF ENVIRONMENTAL TECHNOLOGY

_it E d e it s io w n H.2. Transfer of environmentalo technologies r yl B n

Figure H.2.1. Transfer of wind (left) and solar photovoltaic (right) technologies, 1990-2006 O O e

Transfers from Annex I to non-Annex I countries, measured using duplicate patent applicationsda l

C u

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Note: Parties to the United Nations Framework Convention on Climate Change are classified as Annex I countries if they are industrialized countries or economies in transition. Annex I countries which have ratified the Protocol have committed to reduce their emission levels of greenhouse gases to targets that are mainly set below their 1990 levels. Figure H.2.2. Transfer of solar power technologies to China Proportion of transfer to China in total transfers

% 1980s 1990s 2000s 8 7 6 5 4 3 2 1 0 Australia Germany Japan Korea United States 1 2 http://dx.doi.org/10.1787/843847880832 Figure H.2.3. Relation between absorptive capacity and wind power technology transfers, 1998-2007 Absorptive capacity measured as domestic knowledge stock, at log scale Ln (technology transfer) 7

6 China

5 Brazil Mexico Korea 4 South Africa Morocco Argentina 3 Hong Kong, China Chinese Taipei Israel 2

Cuba 0 23456789101112 Ln (absorptive capacity) 1 2 http://dx.doi.org/10.1787/843876376221

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 149 H. INTERNATIONALISATION OF ENVIRONMENTAL TECHNOLOGY

_it E d e it s io w n H.3. Trade in environmental goods o r yl ■ Exports of environmental goods in the OECD area Germany, the United KingdomB and the Netherlands.n The

reached USD 370 billion in 2006, or 1% of its gross main recipients of China’s exports are the O United States,e D

domestic product (GDP) and nearly 6% of its Japan (and other Asian countries suchda as Korea, Indial

C u merchandise exports. In the same year, the BRICS and Indonesia), and GermanyE (followed in Europe by the

e e

(Brazil, the Russian Federation, India, China and South United Kingdom, Spain andO Italy).R s

Africa) exported USD 43 billion, which accounted for ■ The environmental goodsn exported varye from A r almost 1% of their GDP and 2.7% of their total u country to country, but in generalL emorec t than one- merchandise exports. Over the last four years, trade in quarter are equipment for wastewater treatment. This environmental goods has grown dynamically, increasing is also the fastest growing market segment, followed faster than total merchandise trade, particularly in the by air pollution control, waste management and BRICS, where exports have grown at an annual average environmental monitoring equipment. rate of 35%. ■ The leading world exporters of environmental goods are Germany, the United States, Japan and Source China which together account for more than half of •OECD, International Trade by Commodity Statistics the total exports of environmental goods from OECD Database, April 2008. countries and the BRICS. These countries also benefit from the highest levels of public R&D budgets for For further reading environmental protection. • OECD (1999), The Environmental Goods and Services ■ Nearly 60% of Germany’s exports of environmental Industry: Manual for Data Collection and Analysis, OECD, goods go to the EU27. Other countries have more diverse Paris. export profiles and cover a wider spectrum of recipients. • OECD (2001), Environmental Goods and Services: The The United States exports mainly to Canada and Mexico Benefits of Further Global Trade Liberalisation, OECD, Paris. (36%), to Asia (Japan, China, and Korea) and Europe • OECD (2005), Trade that Benefits Environment and (Germany, the United Kingdom and France). Most Development. Opening Markets for Environmental Goods and Japanese exports of environmental goods are directed to Services. OECD, Paris. Asia (50% to China, Korea, Thailand and Singapore), • OECD (2006), Environmental and Energy Products: The then to the United States (almost 20%), followed by Benefits of Liberalising Trade, OECD, Paris.

OECD classification of environmental goods The notion of “environmental goods and services” was introduced at international level in the context of the joint work of the OECD/Eurostat Informal Working Group on the Environment Industry, which developed a manual (OECD, 1999) providing a common framework for the definition and classification of environmental industry activities. The manual identified three broad “environmental segments”, each of which includes a large range of business activities: • Pollution management, including goods that help control air pollution; manage wastewater and solid waste; clean up soil, surface water and groundwater; reduce noise and vibrations; and facilitate environmental monitoring, analysis and assessment. • Cleaner technologies and products including goods that are intrinsically cleaner or more resource-efficient than available alternatives. For example, a solar photovoltaic power plant is cleaner than a coal-fired one. • Resource management, including goods used to control indoor pollution, supply water, or to help manage farms, forests or fisheries sustainably. Included are also goods used to conserve energy and goods that help prevent or reduce the environmental impact of natural disasters, such as fire-fighting equipment. At about the same time, the OECD developed an illustrative list of environmental goods (OECD, 2001). This list, which was used here as a basis for estimating trade in environmental goods, was the first attempt to match the industrial classification of the environment industry – according to the groups established in the manual – with the Harmonised Commodity Description and Coding Systems (HS) of the World Customs Organization. The OECD illustrative list has since informed discussions on environmental goods and services at the World Trade Organization (WTO), in the context of the Doha Round of multilateral trade negotiations. The Doha Ministerial Declaration calls for the liberalisation of environmental goods (and services) and there have been lengthy but inconclusive discussions on how to define those goods. Reaching a broad, international agreement on the definition of environmental goods is difficult because many candidate goods have a range of uses besides environmental protection. Moreover, environmental goods are constantly evolving. It has been estimated that half of the current environmental technologies will be replaced with new and different ones within 15years. That suggests, at the very least, that any selection of goods targeted for accelerated tariff reduction has to be a “living list” which is updated frequently.

150 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 H. INTERNATIONALISATION OF ENVIRONMENTAL TECHNOLOGY

_it E d e it s io w n H.3. Trade ino environmental goods r yl B n

Figure H.3.1. Trends in export market shares of Figure H.3.2. Exports of environmental goods,1 2006 O O e

D environmental goods1 da l

Germany C u OECD merchandise exports E United States e e

OECD EG exports Japan O R s

BRICS merchandise exports China

Italy n e BRICS EG exports France A r United Kingdom tu Index 2002 = 100 Mexico L e c 400 Korea Canada Netherlands Belgium 350 Switzerland Austria Spain Sweden Denmark 300 Brazil Czech Republic Poland Hungary 250 South Africa Finland Russian Federation India Norway 200 Portugal Ireland Australia Slovak Republic 150 Turkey Luxembourg New Zealand Greece 100 Iceland 2002 2003 2004 2005 2006 01002040 60 80 USD billion 1 2 http://dx.doi.org/10.1787/843887343128 1 2 http://dx.doi.org/10.1787/844035312320 Figure H.3.3. Top four exporters of environmental goods, percentage share of main destinations,1 2006

Canada Mexico United States China Japan China Korea Chinese Taipei Korea Germany Other Asia Thailand % Chinese Taipei United Kingdom % Germany Hong Kong, China 100 100 United States Japan 80 80

60 60

40 40

20 20

0 0

EU27 United States United States Japan Hong Kong, China Germany China Switzerland Korea United Kingdom % Russian Federation % Spain Italy Other Asia 100 100 Germany China 80 80

60 60

40 40

20 20

0 0

1 2 http://dx.doi.org/10.1787/844052288601 1. The six-digit HS codes used to measure trade in “environmental goods” is based on previous OECD analytical work (OECD, 2001); its scope is in no way intended to reflect national or group positions in the WTO negotiations on the coverage of such a category. Definitions of “environmental goods” vary across countries, and will give different volumes of trade. Trends in traded environmental goods may not diverge so much.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 151 _it E d e it s io w n o r yl

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n e A r PART IV u L e c t Multinational Enterprises and Globalisation

I. The Importance of Multinational Enterprises ...... 155 J. The Characteristics of Multinational Enterprises ...... 171 K. Multinational Enterprises and R&D ...... 189

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 153 _it E d e it s io w n o r yl

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n e A r I. THE IMPORTANCE OF MULTINATIONALu L e c t ENTERPRISES

I.1. Inward activity: share of foreign affiliates in employment, turnover and value added ...... 156

I.2. Inward activity: employment growth of foreign affiliates in manufacturing...... 158

I.3. Inward activity: employment growth of foreign affiliates in services...... 160

I.4. Inward activity: share of turnover of foreign affiliates in selected manufacturing industries...... 162

I.5. Inward activity: share of turnover of foreign affiliates in selected service industries...... 164

I.6. Headquarters: share of parent companies in turnover and employment ...... 166

I.7. Outward activity: employment and turnover of affiliates abroad ...... 168

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 155 I. THE IMPORTANCE OF MULTINATIONAL ENTERPRISES

_it E d e it s io w n I.1. Inward activity: share of foreign affiliates in employment, turnovero and value added r yl B

■ In 2007, the share of foreign-controlled affiliates in companies, or from other firms in the samen group, to sell O O e total manufacturing turnover ranged from nearly 80% them untransformed inD the domestic market.

da l in Ireland to 3% in Japan. Among G7 countries, foreign C ■ In the services sector, the share of turnover u of

presence in manufacturing was strongest in Canada affiliates under foreign E control eis over 45% in Irelande O R s

and the United Kingdom, followed by France, Germany, and 35% in the Czech Republic. These affiliates are

the United States and Italy. The percentage in Japan n e less important in terms of employmentA than inr terms was the lowest of any OECD country for which data u of their share of turnover in all countries.L e c tIn 2006, the were available. share ranged from 25% in Ireland to less than 5% in ■ Employment in foreign-controlled affiliates tends the United States. to follow the same trend as turnover, but the foreign- ■ Overall, foreign presence in services is smaller than controlled share of employment is smaller than that in manufacturing although in a few countries, the of turnover in all countries except Finland. This is turnover and number of employees of the affiliates probably because turnover overestimates the relative under foreign control are of the same magnitude. share of foreign affiliates in host countries (see box), because a majority of foreign-controlled affiliates operate in industries that are more capital- than Source labour-intensive. •OECD, AFA Database and FATS Database, January 2010. ■ In most countries, the share of foreign-controlled affiliates in manufacturing value added corresponds to For further reading their share of the sector’s turnover. Foreign shares in • OECD (1994), The Performance of Foreign Affiliates in OECD value added are however higher in Israel, Finland, France Countries, OECD, Paris. and Ireland. The difference between shares in turnover • OECD (2005), Measuring Globalisation: OECD Handbook on and value added reflects the fact that some foreign- Economic Globalisation Indicators, OECD, Paris, controlled affiliates import goods from their parent www.oecd.org/sti/measuring-globalisation.

Share of foreign affiliates in turnover Output differs from turnover because it includes changes in stocks of finished goods and work in progress, and because of differences in the measurement of activities involving trade or financial intermediation. Turnover covers gross operating revenues less rebates, discounts and returns. It should be measured exclusive of consumption and turnover (sales) taxes on consumers and value-added taxes. The turnover variable generally presents fewer collection difficulties and thus is likely to be more widely available than value added. However, in contrast to value added, sales and turnover are variables that can overestimate the share of foreign-controlled affiliates in host country activity. First, until now local sales have in most countries not been separated from sales abroad, which are included in the export variable. Second, local sales also encompass sales to other foreign-controlled affiliates, while a significant share of sales abroad are to the parent company or to other affiliates belonging to the same group. Share of foreign affiliates in employment Employment in foreign affiliates should normally be measured as the number of persons on the payrolls of affiliates under foreign control. Employment data are sometimes converted to a full-time equivalent (FTE), with part-time workers counted according to time worked. Employment data can be used to determine the share of affiliates under foreign control in host country employment or to help determine the extent to which employment by affiliates under foreign control complements or substitutes for domestic (home country) employment by parent companies or other domestic firms. The share of affiliates under foreign control in host country employment may reflect the importance of foreign direct investment in maintaining or creating employment in a compiling country. However, this information does not allow for evaluating net job creation due to foreign investment in the compiling countries. Share of foreign-controlled affiliates in value added Value added – the portion of an enterprise’s output that originates within the enterprise itself – is perhaps the most comprehensive measure of economic activity to be derived from data on the activities of multinationals. It is particularly useful for analysing globalisation. The System of National Accounts (SNA) defines the gross value added of an establishment, enterprise, industry or sector as the amount by which the value of the outputs produced exceeds that of the intermediate inputs consumed. Gross value added can provide information about the contribution of affiliates under foreign control to host country gross domestic product (GDP), both in the aggregate and in specific industries. Value added, when it concerns all the components of a country’s economy, is equal to the sum of its GDP, the most widely available aggregate measure of the size of an economy and its growth. Thus, the shares of foreign- controlled affiliates in total GDP and in the relevant industrial sector are a useful measure of the extent to which an economy has become globalised.

156 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 I. THE IMPORTANCE OF MULTINATIONAL ENTERPRISES

_it E d e it s io w n I.1. Inward activity: share of foreign affiliates in employment, turnovero and value added r yl B n

Figure I.1.1. Share of foreign-controlled affiliates in manufacturing employment, turnover1 and value added, O O e

2007 da l

C u Employment Value added TurnoverE

% e e

80 O R s

n e A r 70 u L e c t 60

Spain Italy Japan Ireland Poland France Norway Finland Sweden Austria SloveniaDenmark Czech Rep. SwitzerlandUnited States Israel (2005) Hungary Belgium(2006) (2006)Estonia (2006)Canada (2006) United Kingdom Germany (2006) Portugal (2006) Slovak Rep. (2006) Luxembourg (2005) Netherlands (2005)

1 2 http://dx.doi.org/10.1787/844073623604

Figure I.1.2. Share of foreign-controlled affiliates in services employment, turnover and value added, 2006

2 3 3 % Employment Value added Turnover 50

Italy Spain Japan Ireland Sweden Poland Norway France Belgium Portugal Germany

Finland (2005) Austria (2003) Czech Republic Slovak Republic Hungary (2005) Netherlands (2005) United States Switzerland (2002) (2007) United Kingdom (2005) 1 2 http://dx.doi.org/10.1787/844078426735 1. Production instead of turnover for Israel. 2. Financial intermediation (ISIC 65 to 67) excluded completely or in part for all countries except Belgium, the Czech Republic, France, Italy, Poland, the Slovak Republic and Switzerland. Community, social and personal services (ISIC 80 to 93) excluded for Austria, France, Germany, Hungary, the Netherlands, Norway, Portugal, Spain and Switzerland. 3. Financial intermediation (ISIC 65 to 67) excluded completely or in part for all countries except the Czech Republic, France, Poland and the Slovak Republic; Community, social and personal services (ISIC 80 to 93) excluded for Austria, Finland, France, Germany, the Netherlands, Norway, Portugal, Spain and the United Kingdom.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 157 I. THE IMPORTANCE OF MULTINATIONAL ENTERPRISES

_it E d e it s io w n I.2. Inward activity: employment growth of foreign affiliates ino manufacturing r yl B n

■ Between 1999 and 2007, aggregate employment in Ireland, Italy and Norway, employment decreased in O O e

D the manufacturing sector dropped sharply in most both categories of firms. da l

countries. This trend significantly changes the C u ■ E e e

business sector, with services gaining in importance With regard to the geographic origin of employment

O R s

by foreign-controlled affiliates, in the European Union, compared to manufacturing. n

e the proportion of jobs at US andA Japanese affiliatesr u declined, while the share of employmentc tby affiliates ■ L e The de-industrialisation that is characteristic of most controlled by other European companies expanded. In OECD countries has several sources. First, productivity the United States, the overall decrease in persons growth is typically greater in manufacturing than in employed by foreign-controlled affiliates was services, which directly results in lowering employment attributable mainly to European affiliates, while in in manufacturing. Second, the outsourcing of many Japan it was essentially affiliates of European service activities (originally done in-house) in companies that increased their workforces. manufacturing to external service providers (e.g. cleaning, IT support, etc.) is increasing. Third, offshoring of manufacturing activities to (lower-wage) countries has also increased in the last decade, although Source service activities have also increasingly been offshored. •OECD, AFA Database and FATS Database, January 2010. For further reading ■ When distinguishing between foreign affiliates and • OECD (1994), The Performance of Foreign Affiliates in OECD domestic firms, the picture is less clear. The number Countries, OECD, Paris. of employees increased at foreign-controlled affiliates • OECD (2005), Measuring Globalisation: OECD Handbook on over the period but not at firms under national control Economic Globalisation Indicators, OECD, Paris, in several countries. However in the United States, www.oecd.org/sti/measuring-globalisation.

158 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 I. THE IMPORTANCE OF MULTINATIONAL ENTERPRISES

_it E d e it s io w n I.2. Inward activity: employment growth of foreign affiliateso in manufacturing r yl B n

Figure I.2.1. Trends in employment by foreign-controlled affiliates and national firms in the manufacturing O O e

sector between 1999 and 2007 da l

C u Affiliates under foreign control Firms controlled by theE compiling countries

% e e

100 O R s

n e A r 80 u L e c t 60

-20

-40

-60

Spain France Poland Sweden Denmark Finland Ireland (2000-07) (2000-07) (1999-2005) Netherlands(1999-2005) Luxembourg United-States Czech Republic United Kingdom Italy (2001-07) Norway (2000-07) 1 2 http://dx.doi.org/10.1787/844108602264 Figure I.2.2. Geographic origin of employment by foreign-controlled affiliates in the manufacturing sector, 1997 and 2007

% EU1 – 1997 % United States – 1997 % Japan – 1997 70 70 70

60 60 60

50 50 50

40 40 40

30 30 30

20 20 20

10 10 10

0 0 0 United States Japan Other Japan Europe Other United States Europe Other (excluding EU)

% EU1 –2007 % United States – 2007 % Japan – 2007 70 70 70

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40 40 40

30 30 30

20 20 20

10 10 10

0 0 0 United States Japan Other Japan Europe Other United States Europe Other (excluding EU)

1. EU: Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. Data partially estimated. 1 2 http://dx.doi.org/10.1787/844227627407

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 159 I. THE IMPORTANCE OF MULTINATIONAL ENTERPRISES

_it E d e it s io w n I.3. Inward activity: employment growth of foreign affiliates ino services r yl B n

■ In contrast to the manufacturing sector, employment ■ In the domestic Japanese market, the weight of O O e

D has grown strongly in the services sector during 2000-06. US affiliates fell significantly betweenda 1997 and 2006 l to

In all countries except Finland and the Netherlands, the benefit of European C and Asian, in particular Korean,u E e e

employment grew significantly in foreign affiliates as affiliates. However, these changes are not very O R s well as in national firms. Remarkably, employment grew significant as they reflectn a low level of foreign

e more for foreign affiliates than for national firms. investment. A r c tu ■ Employment in foreign affiliates in services is found L e essentially in business services, wholesale trade and transport. However, there is also a large foreign presence in financial intermediation, especially in the United Sources States. •OECD, FATS Database, December 2009. ■ Between 1997 and 2006, the importance of foreign- • Eurostat, NewCronos Database. controlled affiliates of European origin in Europe rose from 59% to approximately 65%. This suggests that in For further reading Europe, other European countries created affiliates or • OECD (1994), The Performance of Foreign Affiliates in OECD acquired existing enterprises. The presence of US and Countries, OECD, Paris. Japanese affiliates decreased. • OECD (2005), Measuring Globalisation: OECD Handbook on ■ In the United States, European affiliates have grown Economic Globalisation Indicators, OECD, Paris, strongly at the expense of Japan and Canada. www.oecd.org/sti/measuring-globalisation.

Number of foreign affiliate employees in the services sector The number of employees in foreign-controlled enterprises is defined as the total number of persons working in these enterprises. Included in this category are workers on short leave but not workers on leave for an unlimited period. Also included are part-time workers together with seasonal workers, apprentices and family workers. Employees seconded to other firms are excluded. Employment data are usually converted to a full-time equivalent (FTE) basis. Part-time workers are counted according to the time worked: thus, two workers on half-time schedules count the same as one full-time worker. Used in combination with data on compensation of employees, the employment variable may be used to examine the compensation practices of foreign affiliates relative to those of domestically owned enterprises. Identifying the foreign controlling country For services as for manufacturing, the country controlling a foreign affiliate in a host country is the country in which the enterprise or unit of ultimate control is located. The enterprise of unit of ultimate control is the element of a chain of companies which directly or indirectly controls all the other companies and is not controlled by another enterprise or institution. In cases where the control over other companies is indirect, the company of ultimate control may not hold the majority of shares giving the right to vote on the governing board. The problems of identifying the unit of ultimate control of a foreign affiliate are discussed in OECD (2005), Chapter 3, Section 3.3.3.

160 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 I. THE IMPORTANCE OF MULTINATIONAL ENTERPRISES

_it E d e it s io w n I.3. Inward activity: employment growth of foreigno affiliates in services r yl B n

Figure I.3.1. Trends in employment by foreign-controlled affiliates and national firms in the services sector, O O e

average annual growth rate 2000-06 da l

C u Affiliates under foreign control Firms controlled by theE compiling country

% e e

16 O R s

n e 14 A r tu 12 L e c

-2

-4

Sweden Norway (2003-06)

Slovak Republic Czech Republic Italy (2001-06) Spain (2002-06) France (2003-06) Poland (2001-06) Ireland (2001-06) Finland (2000-05) Germany (2002-06) Portugal (2003-06) Austria (1998-2003) Belgium (2002-2006) Netherlands (2000-05) Switzerland (2003-07) United States (2002-07) United Kingdom (2003-06)

1 2 http://dx.doi.org/10.1787/844235166734

Figure I.3.2. Geographic origin of employment by foreign-controlled affiliates in the services sector

% Europe1 – 1997/98 % United States – 1998 % Japan – 1997 70 70 70

60 60 60

50 50 50

40 40 40

30 30 30

20 20 20

10 10 10

0 0 0 United States EuropeJapan Other Japan Canada Europe Other United States Europe Other

% Europe1 – 2006 % United States – 2006 % Japan – 2006 80 80 80

70 70 70

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50 50 50

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1. Data based on available countries. 1 2 http://dx.doi.org/10.1787/844301875515

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 161 I. THE IMPORTANCE OF MULTINATIONAL ENTERPRISES

_it E d e it s io w n I.4. Inward activity: share of turnover of foreign affiliates in selectedo manufacturing industries r yl

B n O O e

■ Foreign presence on the industry level illustrates countries. As such, these companiesda are able to sourcel

C u some major differences across industries (high, medium foreign production factorsE and are also near large and

e e

and low technology) and countries. growing markets for automobiles.O R s

n e ■ Foreign presence seems to be more important in ■ The pharmaceutical industryA is also characterisedr by tu higher-technology industries, thus reflecting the a large foreign presence in most countries.L e c In Ireland importance of proprietary knowledge and technology and Sweden turnover in this industry is almost for the competitiveness of companies in these completely realised by foreign affiliates. In Ireland this is industries. The foreign share in turnover is higher in especially due to US multinationals which located in medium- and high-technology industries than in lower- Ireland to serve the European market. technology industries.

■ In the food and beverages industry, classified as low- technology, the share of turnover ranges from 40% to Source 50%. The foreign share is somewhat smaller in Italy, •OECD, AFA Database, January 2010. Spain and France, countries with strong indigenous companies in this industry. For further reading • OECD (1994), The Performance of Foreign Affiliates in OECD ■ The automobile industry is characterised by a very Countries, OECD, Paris. large presence of foreign affiliates. This global industry • OECD (2005), Measuring Globalisation: OECD Handbook on is dominated by a limited number of large assemblers Economic Globalisation Indicators, OECD, Paris, which have located affiliates across a large number of www.oecd.org/sti/measuring-globalisation.

162 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 I. THE IMPORTANCE OF MULTINATIONAL ENTERPRISES

_it E d e it s io w n I.4. Inward activity: share of turnover of foreign affiliates in selectedo manufacturing r industriesyl B n

Figure I.4.1. Food, beverages and tobacco (ISIC 15 to 16), 2007 O O e

l % da

100 C u E e e

90 O R s

n e 70 A r tu 60 L e c 50 40 30 20 10 0

Italy Spain Israel Japan (2005)Estonia(2006) Ireland PolandCanada(2005) (2006) (2005) France (2006) (2006)Finland Norway (2005) (2002) Hungary Sweden Germany Portugal Netherlands United States Slovak RepublicCzech Republic United Kingdom 1 2 http://dx.doi.org/10.1787/844312167411 Figure I.4.2. Motor vehicles (ISIC 34), 2007 % 100 90 80 70 60 50 40 30 20 10 0

Italy Spain (2006) (2006) Poland Canada(2005) (2005) (2005) Austria(2003) (2004) Finland (2002) Norway (2006) (2005) France Hungary Portugal Slovenia Sweden Germany Netherlands United States Slovak Republic Czech Republic United Kingdom

1 2 http://dx.doi.org/10.1787/844320010102 Figure I.4.3. Pharmaceuticals (ISIC 2423), 2007 % 100 90 80 70 60 50 40 30 20 10 0

Italy Spain Ireland Canada(2005) Poland (2005) (2002) (2006) France Finland (2002) Sweden Germany Netherlands United States United Kingdom

1 2 http://dx.doi.org/10.1787/844321642440

Information on data for Israel: http://dx.doi.org/10.1787/888932315602. OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 163 I. THE IMPORTANCE OF MULTINATIONAL ENTERPRISES

_it E d e it s io w n I.5. Inward activity: share of turnover of foreign affiliates in selectedo service industries r yl

B n O O e

■ Foreign presence is somewhat less strong in the ■ The business activities serviceda sector l is

C u services sector than in manufacturing. Again, there are characterised by a lower E level of foreign presence. This

e e

important differences between individual industries is due to the presence ofO a largeR number of smallers

and countries. domestic companies active inn this sector. e A r tu ■ The financial sector has the largest foreign presence. L e c In some eastern European countries, a large share of turnover is realised by foreign affiliates of the many western European banks which built their positions after these countries joined the European Union. Source •OECD, FATS Database, December 2009. ■ In the wholesale and retail sector, differences across countries seem to be smaller. However, this industry is For further reading undergoing a rapid process of internationalisation with • OECD (1994), The Performance of Foreign Affiliates in OECD large groups developing positions in different countries. Countries, OECD, Paris. International takeovers of local, typically smaller • OECD (2005), Measuring Globalisation: OECD Handbook on companies are a crucial aspect of the internationalisation Economic Globalisation Indicators, OECD, Paris, strategies of companies in this sector. www.oecd.org/sti/measuring-globalisation.

_it E d e it s io w n I.5. Inward activity: share of turnover of foreign affiliateso in selected service r industriesyl B n

Figure I.5.1. Wholesale and retail trade (ISIC 50 to 52), 2006 O O e

l % da

100 C u E e e

90 O R s

n e A r 70 tu 60 L e c 50 40 30 20 10 0

Italy Spain Japan Ireland (2005) Poland Norway (2005)Finland (2005)Austria(2003) France (2002) Sweden Belgium Hungary Germany Portugal Netherlands United States Czech Republic United KingdomSlovak Republic

1 2 http://dx.doi.org/10.1787/844376227131 Figure I.5.2. Financial intermediation and insurance (ISIC 65 to 67), 2006

% 100 90 80 70 60 50 40 30 20 10 0

Poland Belgium

Austria (2003) France (2002) Slovak Republic Czech Republic Hungary (2005)

1 2 http://dx.doi.org/10.1787/844408486722 Figure I.5.3. Business activities (ISIC 72 to 74), 2006

% 100 90 80 70 60 50 40 30 20 10 0

Italy Spain Poland Norway France Finland (2005) (2005) (2005) (2005) Austria (2003) (2002) Sweden Portugal Belgium Hungary Germany Netherlands United States Czech Republic United Kingdom Slovak Republic

1 2 http://dx.doi.org/10.1787/844416440386

_it E d e it s io w n I.6. Headquarters: share of parent companies in turnover and employmento r yl B n

■ Data on the activity of parent companies have only ■ Parent companies appear to play a lesser role in O O e

D recently been requested as part of OECD surveys, and services than in manufacturing. Availableda data forl a

few member countries have been able to provide the couple of countries showC a share of turnover belowu E e e

information so far. One reason for the differences 30%. As in manufacturing, the share of employment O R s observed between countries may be the method used of parent companies in the servicesn sector is smaller

e to consolidate data for enterprise groups. than the share of turnover. InA addition to ther larger tu size and capital intensity of multinationalL e c companies, ■ The shares of parent companies in countries’ this is also related to the headquarters and support manufacturing turnover and employment are extremely activities of parent companies. large in the United States and Finland but may be significantly lower elsewhere (e.g. Luxembourg). The high shares of parent companies in manufacturing turnover and employment in some countries may be Sources due the fact that many medium-sized firms are •OECD, AFA Database, December 2009. included in the data since they are under the direct or •OECD, FATS Database, December 2009. indirect control of the domestic parent group. For further reading ■ The share of parent companies in manufacturing • OECD (1994), The Performance of Foreign Affiliates in OECD turnover seems to be higher than their share in Countries, OECD, Paris. manufacturing employment. The scale and capital- • OECD (2005), Measuring Globalisation: OECD Handbook on intensive character of multinational enterprises Economic Globalisation Indicators, OECD, Paris, partially explains this. www.oecd.org/sti/measuring-globalisation.

Parent company of a compiling country

“Parent company”, in the context of a compiling country, refers to the parent consolidated enterprise or parent enterprise group in the compiling country. This includes the headquarters of the group (which in many cases is not controlled by any other company or individual) plus the domestic firms which the headquarters controls directly or indirectly (see OECD, 2005, Box 3.7 and § 319-331 for the definition of parent company and § 306-310 for the definition of direct and indirect control). By definition, all parent companies have affiliates abroad. With respect to the compiling country, the parent company is in principle located in the country. There are two possible situations: i) when the parent company is located in the compiling country and is controlled by the residents of the compiling country; and ii) when the parent company located in the compiling country is under foreign control. In the first case, the headquarters of the company is also the unit of ultimate control while, in the second case, the headquarters and the unit of ultimate control are different entities and located in different countries. Since the parent company under foreign control is also an affiliate under foreign control, OECD (2005) recommends, in order to avoid possible double counting, taking separately into account (at least as far as the total is concerned) parent companies under foreign control and other foreign affiliates.

_it E d e it s io w n I.6. Headquarters: share of parent companies in turnovero and employment r yl B n

Figure I.6.1. Parent companies’ share of manufacturing turnover and employment, 2007 O O e

da l Employment TurnoverC

% u

80 E e e

O R s

70 n e A r u L e c t 60

Sweden Germany Switzerland Japan (2005) Israel (2005) United States Finland (2005) Belgium (2005) Australia (2002) Luxembourg (2005)

1 2 http://dx.doi.org/10.1787/844433667551

Figure I.6.2. Parent companies’ share of services turnover and employment, 2006

% Employment Turnover 40

Belgium Sweden Germany Finland (2005) France (2002) Switzerland (2007)

1 2 http://dx.doi.org/10.1787/844442216717

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

_it E d e it s io w n I.7. Outward activity: employment and turnover of affiliates abroado r yl B n

■ The ratio of the turnover of affiliates abroad to the United States, and the rest in Asia and in other O O e

D turnover of parent companies at home can be used as European countries. da l

an indicator of globalisation. This indicator should C u ■ E e e

however be interpreted with care, since employment In the services sector also, the importance of

O R s

foreign affiliates relative to the parent company is and turnover created abroad does not come at the n

e expense of the home country. On the contrary, foreign especially significant in smallerA countries. rAmong tu activities often benefit home country activities and countries for which data are available,L e c German reinforce the global competitiveness of the multinational service-sector affiliates abroad generate more company. turnover than their parent companies. In other countries, including the United States, the parent ■ Smaller countries with a large presence of own companies accounts for more turnover than their multinationals such as Switzerland, Sweden and affiliates abroad. Finland show higher values on this indicator. In these countries, affiliates abroad generate significantly more sales and create large employment. For example, Swiss Sources affiliates abroad employ over a million people, whereas •OECD, AFA Database, December 2009. foreign-controlled affiliates in Switzerland provide •OECD, FATS Database, December 2009. fewer than 150 000 jobs. For further reading ■ German manufacturing multinationals are also • OECD (1994), The Performance of Foreign Affiliates in OECD highly internationalised, since the sales of German Countries, OECD, Paris. offshore affiliates are equivalent to 80% of their parent • OECD (2005), Measuring Globalisation: OECD Handbook on companies’ sales in Germany. Half of their affiliates’ Economic Globalisation Indicators, OECD, Paris, sales are derived in the European Union, 30% in the www.oecd.org/sti/measuring-globalisation.

The activities of multinationals abroad

The activities of multinationals abroad involve affiliates of parent companies in the compiling countries that are, first, under the direct control of their parent companies. Data on the activities of these affiliates are broken down by industry and by country in which they are located. OECD (2005) recommends that offshore affiliates over which parent companies exercise indirect control should be included as well, insofar as these firms theoretically belong to the same group. Consequently, the data provided by a country on the turnover or workforce of its affiliates abroad theoretically include all affiliates that are controlled either directly or indirectly by their parent companies. Data from the United States depart from this rule, inasmuch as the only affiliates included are those in which US parent companies hold a majority interest. From this standpoint, US data, as compared with those of other countries, underestimate the scope of activity of their affiliates abroad.

_it E d e it s io w n I.7. Outward activity: employment and turnovero of affiliates abroad r yl B n

Figure I.7.1. Share of affiliates abroad in the manufacturing turnover and employment of parent companies O O e

located in the domestic economy, 2007 da l

C u Employment TurnoverE

% e e

400 O R s

n e A r u 350 L e c t

300

250

200

150

100

Sweden Germany Switzerland Israel (2005) Japan (2005) Finland (2005) United States Australia (2002) Belgium (2006)

1 2 http://dx.doi.org/10.1787/844573824580

Figure I.7.2. Share of affiliates abroad in the turnover and employment of parent companies located in the domestic economy, in the services sector, 2006

% Employment Turnover 250

200

150

100

Belgium Sweden Germany France (2002) Finland (2005) United States Australia (2002) Switzerland (2007)

1 2 http://dx.doi.org/10.1787/844625104074

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r J. THE CHARACTERISTICS OF u L e c t MULTINATIONAL ENTERPRISES

J.1. Firm size: employment per enterprise ...... 172

J.2. Average labour productivity: value added per employee. 174

J.3. Average wage: employee compensation per employee . . 176

J.4. Profitability: gross operating surplus as a share of turnover ...... 178

J.5. Export and import propensity of foreign affiliates . . . . 180

J.6. Intra-firm trade in selected OECD countries ...... 182

J.7. Intra-firm trade and impact on the trade balance: United States manufacturing sector ...... 184

J.8. Intra-firm trade and impact on the trade balance: Japan manufacturing sector ...... 186

_it E d e it s io w n J.1. Firm size: employment per enterprise o r yl B n

■ A comparison of the average employment of ■ Even abstracting from differences in the sector mix O O e

D foreign affiliates and firms under national control between foreign affiliates and firmsda under nationall

shows that foreign affiliates are significantly larger control, foreign affiliatesC still have on average a largeru E e e

than national firms. This is true for all countries. size within industries. Previous research has O R s

demonstrated that the productionn technology of

■ The difference is especially large in manufacturing. e A r multinational companies is typically characterisedu by The average employment of foreign affiliates is a L c t multiple of that of firms under national control, even a high degree of scale economies. e in large countries such as Germany and the United States which have large domestic firms. A large group of small and medium-sized enterprises (SMEs) likely decreases the average size of the group of firms under national control. Sources •OECD, AFA Database, January 2010. ■ In services, foreign affiliates are also larger than •OECD, FATS Database, January 2010. national firms, although the differences seem smaller than in manufacturing in certain countries. For further reading ■ The larger average size of foreign affiliates is • OECD (1994), The Performance of Foreign Affiliates in OECD explained in the first place by a sector composition Countries, OECD, Paris. effect. Foreign affiliates are typically more often in • OECD (2005), Measuring Globalisation: OECD Handbook on scale industries in which scale and thus size are Economic Globalisation Indicators, OECD, Paris, important drivers of competitiveness. www.oecd.org/sti/measuring-globalisation.

Measuring the average size of foreign-controlled affiliates

The size of foreign-controlled affiliates should normally be factored into analytical work on the basis of survey results. Even though this information should theoretically be available for a great many countries, the OECD has not yet requested it as part of its international surveys on the activity of multinational firms, so as not to raise the administrative cost of member country responses and, above all, to avoid the numerous cases of statistical confidentiality to which such data could give rise. Nevertheless, it is acknowledged that firm size has a significant influence on certain economic variables, such as wages, R&D expenditure, exports and profit. Moreover, a breakdown by size of all firms located within a given compiling country would facilitate identification of the degree of internationalisation of small and medium-sized enterprises in terms of exports and outward foreign direct investment. As proxies for actual survey data on firm size, the following approximate average metrics are used: • average turnover by firm; •average employees by firm.

_it E d e it s io w n J.1. Firm size: employmento per enterprise r yl B n

Figure J.1.1. Number of employees by enterprise of foreign affiliates and national firms in manufacturing, 2007 O O e

da l Affiliates under foreign control Firms controlled byC the compiling countries

400 E e e

O R s

n e 350 A r u L e c t 300

250

200

150

100

Italy Spain Poland Ireland France Austria Finland Norway Denmark Slovenia Sweden

Estonia (2006) Czech Republic Germany (2006)Hungary (2006) United Kingdom Portugal (2006) Netherlands (2005) Luxembourg (2005) United States (2002) Slovak Republic (2006)

1 2 http://dx.doi.org/10.1787/844637758325

Figure J.1.2. Number of employees by enterprise of foreign affiliates and national firms in services, 2006

Affiliates under foreign control Firms controlled by the compiling countries 400

350

300

250

200

150

100

0 1 Italy Spain Ireland Poland France Norway Germany Portugal Sweden

Austria (2003) Finland (2005) United Kingdom Hungary (2005) Slovak Republic Czech Republic Netherlands (2005) United States (2002)

1. Enterprises with 20 employees or more. 1 2 http://dx.doi.org/10.1787/844644005212

_it E d e it s io w n J.2. Average labour productivity: value added per employee o r yl B n

■ In addition to being larger on average than firms ■ Within industries as well, foreign affiliates display O O e

D under national control, foreign affiliates also display higher labour productivity levels da than firms underl

higher levels of (apparent) labour productivity. Without national control. The factC that foreign affiliates are onu E e e

exception, foreign affiliates have higher productivity average more capital-intensive contributes directly to O R s than firms under national control. The differences their higher labour productivity.n

e between the two types of firms are especially large in A r tu Ireland and Hungary. L e c ■ In manufacturing as well as in the services sector, value added per employee in foreign affiliates is higher than in firms under national control. On average, Sources apparent labour productivity is higher in manufacturing •OECD, AFA Database, January 2010. industries than in services, owing to the higher capital •OECD, FATS Database, January 2010. intensity of manufacturing. ■ Differences in the sector composition of foreign For further reading affiliates and of firms under national control are an • OECD (1994), The Performance of Foreign Affiliates in OECD important reason for this. The fact that foreign Countries, OECD, Paris. affiliates are more often active in scale and in capital- • OECD (2005), Measuring Globalisation: OECD Handbook on intensive industries partially explains the difference Economic Globalisation Indicators, OECD, Paris, in aggregate labour productivity. www.oecd.org/sti/measuring-globalisation.

Measuring apparent labour productivity

Productivity is commonly defined as the ratio between output volume and volume of inputs and measures how efficiently production inputs, such as labour and capital, are used to produce a given level of output. Productivity is considered a key source of economic growth and competitiveness and, as such, is basic statistical information for many international comparisons and for assessments of country, industry and company performance. Apparent labour productivity is defined as the ratio of value added to number of employees and gives an idea of the productivity of the production factor labour. Despite the progress made, the measurement of productivity still suffers from a number of statistical problems. Countries use different concepts and basic statistical sources, and this can hinder international comparability. Differences may exist in the measurement of value added (factor prices, market prices, etc.). In terms of labour input, differences in workers’ educational attainment, skills and experience can also bias results. Productivity indicators in general and the indicator of apparent labour productivity should therefore be interpreted with care.

_it E d e it s io w n J.2. Average labour productivity: valueo added per employee r yl B n

Figure J.2.1. Value added per employee of foreign affiliates and national firms in manufacturing, 2007 O O e

da l Affiliates under foreign control Firms controlled byC the compiling countries

u USD thousand E e e

300 O R s

n e A r u 250 L e c t

200

150

100

Italy Spain Ireland Austria Finland France Norway Sweden Slovenia Israel (2005) Czech Republic Estonia (2006) United Kingdom Germany (2006) Denmark (2002)Portugal (2006) Hungary (2006) Netherlands (2005) United States (2002) Slovak Republic (2006)

1 2 http://dx.doi.org/10.1787/844673702158

Figure J.2.2. Value added per employee of foreign affiliates and national firms in services, 2006

Affiliates under foreign control Firms controlled by the compiling countries USD thousand 150

100

0 1 Italy France Spain Ireland Norway Sweden Portugal

Finland (2005) Austria (2003) Hungary (2005) Czech RepublicSlovak RepublicAustralia (2000) Netherlands (2005) United Kingdom (2005)

1 2 http://dx.doi.org/10.1787/844718541773 1. Enterprises with 20 employees or more.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

_it E d e it s io w n J.3. Average wage: employee compensation per employee o r yl B n

■ In all countries for which data are available, average ■ The differences may also be due to other factors as O O e

D compensation per employee is higher for foreign- well, such as differences in skillsda between the twol

controlled affiliates than for national firms both in types of firms. Other reasonsC might be differences u in E e e

manufacturing and services industries. Average wages the number of hours worked, the organisation of the O R s are higher in the manufacturing sector than in the labour market and average firmn size.

e A r services sector. u L e c t ■ Differences in average wage between industries and types of companies are directly related to differences in (apparent) labour productivity. Value added per employee is higher in manufacturing than in services; Sources this partially explains the higher average compensation •OECD, AFA Database, January 2010. per employee in manufacturing. •OECD, FATS Database, January 2010.

■ Along the same lines, apparent labour productivity For further reading is higher in foreign affiliates than in firms under • OECD (1994), The Performance of Foreign Affiliates in OECD national control. This results in higher average wages Countries, OECD, Paris. because foreign affiliates are largely in more labour- • OECD (2005), Measuring Globalisation: OECD Handbook on productive and higher capital-intensive industries Economic Globalisation Indicators, OECD, Paris, and typically use more capital-intensive technologies. www.oecd.org/sti/measuring-globalisation.

Employee compensation

Employee compensation is defined as the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period. Compensation of employees has two main components: • Wages and salaries payable in cash or in kind. • The value of the social contributions payable by employers; these may be actual social contributions payable by employers to social security schemes or to privately funded social insurance schemes to secure social benefits for their employees; or imputed social contributions by employers providing unfunded social benefits. (SNA 1993, § 7.21 and 7.31) “Social security costs for the employer include the employer’s social security contributions to schemes for retirement pensions, sickness, maternity, disability, unemployment, occupational accidents and diseases, and family allowances as well other schemes. Optional social benefits are also a cost for the employer.” (Definition of Economic Variables, Code 13330, Eurostat.)

_it E d e it s io w n J.3. Average wage: employee compensationo per employee r yl B n

Figure J.3.1. Compensation per employee of foreign affiliates and national firms in manufacturing, 2007 O O e

da l Affiliates under foreign control Firms controlled byC the compiling countries

u USD thousand E e e

100 O R s

n e 90 A r c tu 80 L e

Italy Spain Austria Finland France Ireland Norway Sweden Slovenia

Czech Republic Estonia (2006) United Kingdom Germany (2006) Denmark (2002)Portugal (2006) Hungary (2006) Slovak Republic Netherlands (2005) United States (2002)

1 2 http://dx.doi.org/10.1787/844728521770

Figure J.3.2. Compensation per employee of foreign affiliates and national firms in services, 2006

Affiliates under foreign control Firms controlled by the compiling countries USD thousand 90

0 1 Italy France Spain Sweden Norway Ireland Portugal

Finland (2005) Austria (2003) United Kingdom Hungary (2005) Czech RepublicSlovak Republic Netherlands (2005)

1. Enterprises with 20 employees or more. 1 2 http://dx.doi.org/10.1787/844758182662

_it E d e it s io w n J.4. Profitability: gross operating surplus as a share of turnovero r yl B n

■ The share of gross operating surplus (profit) in the outcome may suggest that offshoring in central O O e

D turnover of foreign-controlled affiliates could be used Europe is motivated not only by lowda labour costs, butl

as one indicator of the profitability of foreign-owned by expectations of highC profitability as well. However,u E e e

investments in host countries. However, comparisons interpretations of differences based on this rather O R s of the profitability of foreign affiliates should be simple indicator should be drawnn carefully.

e interpreted with care, given differences in regulatory A r tu environments, tax rules, etc., in different countries. L e c Previous research has shown the importance of transfer pricing in the observed profitability of affiliates of multinational companies in different countries. Source •OECD, AFA Database, January 2010. ■ In some countries, foreign affiliates are more “profitable” than firms under national control, but For further reading this observation is not valid for all countries. • OECD (1994), The Performance of Foreign Affiliates in OECD Countries, OECD, Paris. ■ Investments in Slovenia, Hungary and the Czech • OECD (2005), Measuring Globalisation: OECD Handbook on Republic yield profits that are higher in relation to Economic Globalisation Indicators, OECD, Paris, turnover than investments in other countries. This www.oecd.org/sti/measuring-globalisation.

Gross operating surplus

Gross operating surplus (GOS) is defined as: – gross value added (VA); • minus compensation payable to employees (W); • minus taxes on production payable (T); • plus subsidies receivable (S) (SNA 1993, §7.80). Value added corresponds to the value of the output that a firm produces for itself, reduced by the value of intermediate consumption. Employee compensation encompasses wages and salaries plus social security contributions payable by employers. Taxes on production include taxes payable by foreign affiliates in the affiliates’ host countries but not those paid by the parent company in the country of origin in respect of income received or distributed by the affiliate. Subsidies are payments without consideration that general government makes to business enterprises on the basis of the level of their production activities. Thus, GOS = VA – W – T + S. Gross operating surplus can take on negative values if VA < W + T – S. In addition, the ratio (GOS + W + T – S) / VA = 1.

_it E d e it s io w n J.4. Profitability: gross operating surplus oas a share of turnover r yl B n

Figure J.4.1. Gross operating surplus as a share of turnover of foreign affiliates and national firms in O O e

manufacturing, 2007 da l

C u

Affiliates under foreign control Firms controlled byE the compilinge countries e

O R s

Slovenia (2004) n e A r tu Hungary (2006) L e c

Czech Republic

Spain (2006)

United Kingdom

Sweden

Austria (2003)

Estonia (2006)

Netherlands (2005)

Portugal (2006)

Finland

Slovak Republic (2006)

Italy (2005)

France

Canada (2005)

0246810121416 %

1 2 http://dx.doi.org/10.1787/844765218547

_it E d e it s io w n J.5. Export and import propensity of foreign affiliates o r yl B n

■ Affiliates under foreign control engage not only in lower than their export propensity. However, in the O O e

D serving local markets in the host country but often services sector, all affiliates underda foreign controll

also serve other (neighbouring) markets. In addition, have significantly greaterC propensities to import thanu E e e

they produce inputs for other affiliates in the to export. O R s multinational network. This intra-firm trade involves n

e ■ A the export and import of nearly finished goods Export propensities in services are significantlyr tu destined for affiliate firms that are mainly involved in smaller than in manufacturing industries.L e c This seems marketing and distribution but engage in little to suggest that the local market is more important for additional manufacturing processing. services activities. Services are typically more difficult to export than goods, although the international ■ Another and growing part of intra-firm trade transferability of services has increased lasting recent concerns exports and imports by foreign affiliates that years. manufacture intermediate products destined for other affiliates. This is directly related to the globalisation of value chains. Sources ■ As a result, the export and import propensities of •OECD, AFA Database, December 2009. foreign affiliates are in many cases greater than those of •OECD, FATS Database, December 2009. the average domestic firm, especially in manufacturing. In Ireland, for example, over 90% of the manufacturing For further reading output of foreign affiliates is exported. In Estonia, Israel, • OECD (1994), The Performance of Foreign Affiliates in OECD Finland, Sweden and Poland, the proportion is over 50%. Countries, OECD, Paris. • OECD (2005), Measuring Globalisation: OECD Handbook on ■ In the majority of countries, the import propensity Economic Globalisation Indicators, OECD, Paris, of affiliates under foreign control in manufacturing is www.oecd.org/sti/measuring-globalisation.

_it E d e it s io w n J.5. Export and import propensityo of foreign affiliates r yl B n

Figure J.5.1. Export and import propensity1 of foreign affiliates in manufacturing, 2007 O O e

da l

Export propensity ImportC propensity

E e e

Ireland O R s

n e A r u Estonia (2006) L e c t

Israel (2005)

Finland

Sweden

Poland

France

Italy

Japan

United States

020406080100 %

1 2 http://dx.doi.org/10.1787/844773477758

Figure J.5.2. Export and import propensity1 of foreign affiliates in services, 2006

Export propensity Import propensity

France

Sweden

Japan

Poland

Spain

United States (2004)

Italy

015105202530 %

1 2 http://dx.doi.org/10.1787/844845211314 1. Exports and imports as a percentage of turnover. For the United States, Japan, Italy, Sweden, Israel and Italy, trade in goods only.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

_it E d e it s io w n J.6. Intra-firm trade in selected OECD countries o r yl B n

■ Since part of foreign affiliates’ production is used ■ During the 2000s, the share of intra-firm imports in O O e

D as intermediate inputs by parent firms and other total imports of affiliates under foreignda control in thel

affiliates within the multinational network, intra-firm United States and in JapanC was significantly higheru E e e

trade has taken on greater importance. Over 2000-07, than the share of intra-firm exports in total exports. O R s the share of intra-firm exports in total exports of The share remained stable inn the United States (almost

e manufacturing affiliates under foreign control ranged 80%) but declined in Japan (fromA 70% to less thanr 50%). tu between 15% and 50% in several of the countries for L e c which relevant data are available.

■ Throughout the present decade, the proportion of exports has held steady at around 50% in the United States and 20% in Japan. In other words, half of the Source exports of affiliates under foreign control in the •OECD, AFA Database, December 2009. United States were destined to non-affiliates; in Japan the proportion was 80%. For further reading • OECD (1994), The Performance of Foreign Affiliates in OECD ■ Between 2004 and 2007 intra-firm exports of Countries, OECD, Paris. manufacturing affiliates under foreign control in Poland • OECD (2005), Measuring Globalisation: OECD Handbook on increased from 20% to 47%, in line with the increase in Economic Globalisation Indicators, OECD, Paris, the activities of foreign affiliates in that country. www.oecd.org/sti/measuring-globalisation.

Measuring intra-firm trade

Intra-firm trade refers to trade between enterprises belonging to the same group that are located in different countries. The ratio of intra-firm trade to the total trade of countries publishing the relevant data is quite high. Once foreign investments have been made, these transactions reflect centralised decisions that are part of a group’s global strategy. A significant portion of intra-firm trade may reflect affiliates’ better understanding of local market demand. Parent corporations and other firms in the group often prefer to export to their own affiliates, which then sell the goods they receive to local consumers. In fact, parent corporations could sell these products directly to local distributors, without involving affiliates. It is difficult to determine whether there would be fewer transactions if they did not pass through affiliates. Four basic indicators are proposed: two for inward investment and two for outward investment. intra intra Inward investment: Exports (XF ) and imports (MF ) by the foreign-controlled affiliates in compiling countries with parent companies and other affiliates located abroad to total exports (X) and imports (M) of the compiling countries: intra intra XF /X, MF /M intra intra Outward investment: Exports (Xout ) and imports (Mout ) by parent companies in the compiling country with their affiliates abroad to total exports and imports: intra intra Xout /X, Mout /M These indicators might also be calculated in terms of total exports and imports by these firms, and by industrial sector and by country of origin and destination. In the case of imports by affiliates under foreign control in host countries and by parent companies controlled by residents of compiling countries, it would also be very useful to distinguish between imports destined for use in their own production, those resold as same-state goods on the domestic market, and those re-exported, either in the same state or after further processing.

_it E d e it s io w n J.6. Intra-firm trade in selectedo OECD countries r yl B n

Figure J.6.1. Share of intra-firm exports in total exports of affiliates under foreign control, 1997-2007 O O e

da l United States Italy Japan Netherlands Israel C Poland Sweden

% u

90 E e e

O R s

n e 80 A r u L e c t 70

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1 2 http://dx.doi.org/10.1787/845010775635

Figure J.6.2. Share of intra-firm imports in total imports of affiliates under foreign control, 1997-2007

% United States Italy Japan Netherlands Israel Poland 90

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1 2 http://dx.doi.org/10.1787/845020621284 Note: Data for Poland and Israel refer to the manufacturing sector only.

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

_it E d e it s io w n J.7. Intra-firm trade and impact on the trade balance: United Stateso manufacturing sector r yl

B n O O e

■ Data for 2007 show that the deficit on the US trade of total imports from China. Over 59%da of imports froml

C u balance was mainly the result of the activities of firms US affiliates in China E concerned computers and

e e

under national control. Affiliates under foreign control electronic products. In otherO words,R the majority ofs the

in the manufacturing sector only contributed 13% to US high-technology importsn from China comee from A r the global trade deficit of the United States compared Chinese firms or from other foreign affiliates.tu to 87% for firms under US control. L e c

■ Generally the most important intra-firm trade of US parent companies was with its NAFTA trade Sources partners, Canada and Mexico. In 2007, intra-firm trade •OECD, AFA Database and Bilateral Trade Database, with Canada was even greater than intra-firm trade January 2010. with the countries of Europe. •OECD, AFA Database and International Trade in ■ About 48% of US imports from American affiliates in Commodities Statistics Database, December 2009. Canada and 60% from Mexico were from the automobile industry. From their affiliates in the European Union For further reading (EU27), 31.4% involved wholesale trade, 12.8% chemicals • OECD (1994), The Performance of Foreign Affiliates in OECD and 12.3% transport equipment. Countries, OECD, Paris. • OECD (2005), Measuring Globalisation: OECD Handbook on ■ In 2007, US imports from affiliates in China Economic Globalisation Indicators, OECD, Paris, represented USD 6 billion, which corresponded to 1.8% www.oecd.org/sti/measuring-globalisation.

_it E d e it s io w n J.7. Intra-firm trade and impact on the trade balance: Unitedo States manufacturing r yl sector B n

Figure J.7.1. Trade balance of the US manufacturing sector O O e

da l Affiliates under foreign control All firms C Firms controlled by the US

u USD billion E e e

0 O R s

n e A r -100 u L e c t -200

-300

-400

-500

-600

-700 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1 2 http://dx.doi.org/10.1787/845038140152

Figure J.7.2. Intra-firm exports of goods from US Figure J.7.3. Intra-firm imports of goods to US parent parent companies to affiliates abroad by partner companies from affiliates abroad by partner economy, 2007 economy, 2007

23.7% Canada Canada 26.5% 20.1% Europe Europe 16.5% 19.3% EU27 EU27 17.1% Asia and Pacific 21.4% Mexico 8.0% Asia and Pacific (non-OECD) 14.6% (non-OECD) Mexico 19.6% 26.3% United Kingdom Ireland 67.4% 47.7% Singapore Malaysia 47.8% 32.7% Netherlands United Kingdom 21.9% 17.1% Japan Singapore 49.5% 50.3% Switzerland France 14.9% 11.5% South America China 1.8% 14.0% Germany Germany 6.0% 22.9% Hong Kong, China Switzerland 37.1% 23.4% Australia Hong Kong, China 65.9% 16.0% France Sweden 35.3% 14.4% Share in total exports Belgium Netherlands 19.5% 14.8% of goods to partner Brazil Thailand Share in total imports 15.1% economy 4.7% China South America of goods from partner 3.0% economy 33.3% Ireland Belgium 19.6% 10.9% Chinese Taipei Korea 5.2% 21.2% Malaysia Africa 2.3% 6.1% Korea Italy 6.1% 14.8% Italy Chinese Taipei 5.1% 13.3% Venezuela Brazil 7.3% 16.5% Philippines Middle East 2.5% 28.2% Panama Costa Rica 41.1% 7060 50 40 30 20 10 0 02030405060708010 90 USD billion USD billion

1 2 http://dx.doi.org/10.1787/845061588268 1 2 http://dx.doi.org/10.1787/845067870153

_it E d e it s io w n J.8. Intra-firm trade and impact on the trade balance: Japan manufacturingo sector r yl B n

■ The share of foreign affiliates amounted to about 7% ■ The sectoral distribution of intra-firm trade of O O e

D of exports from Japan and 13% of imports to Japan. foreign affiliates shows that the electricalda machineryl

Thus, trade of foreign affiliates in Japan seemed to play industry represented 76%C of exports in 2007. In theu E e e

a rather limited role in Japan’s international trade. case of imports, electrical machinery and basic metals O R s

played an important role. n

e ■ The trade balance of foreign affiliates in the A r u manufacturing sector was in deficit until 1998, but L e c t has since recorded a surplus. Sources ■ In 2007, more than 80% of the intra-firm exports of •OECD, AFA Database and Bilateral Trade Database, foreign affiliates in the manufacturing sector were January 2010. destined to the United States, which was also the origin of 60% of their imports. Among US affiliates in Japan, For further reading more than 80% of exports were destined to their parent • OECD (1994), The Performance of Foreign Affiliates in OECD group abroad, while the share of European affiliates’ Countries, OECD, Paris. exports to their parent group was less than 10% and • OECD (2005), Measuring Globalisation: OECD Handbook on their imports were more than 18%. The main countries Economic Globalisation Indicators, OECD, Paris, involved were Germany and Switzerland. www.oecd.org/sti/measuring-globalisation.

_it E d e it s io w n J.8. Intra-firm trade and impact on the trade balance: Japano manufacturing sector r yl B n

Figure J.8.1. Trade balance of the Japanese manufacturing sector O O e

da l Affiliates under foreign control All firms C Firms controlled by Japan

u USD billion E e e

280 O R s

n e 240 A r u L e c t 200

160

120

-40 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1 2 http://dx.doi.org/10.1787/845122065082

Figure J.8.2. Intra-firm exports of affiliates under Figure J.8.3. Intra-firm imports of affiliates under foreign control in Japan by industry, 2007 foreign control in Japan by industry, 2007

Electrical Electrical machinery machinery

Basic metals

Motor vehicles Chemicals (excl. pharmaceuticals) Chemicals (excl. Pharmaceuticals pharmaceuticals)

8060 40 20 0 0 10 20 30 40 50 60 % %

1 2 http://dx.doi.org/10.1787/845136223607 1 2 http://dx.doi.org/10.1787/845218082764

Figure J.8.4. Intra-firm exports of affiliates under Figure J.8.5. Intra-firm imports of affiliates under foreign control in Japan by country of origin in the foreign control in Japan by country of origin in the manufacturing sector, 2007 manufacturing sector, 2007

United States United States

Germany Germany

Switzerland Asia (non-OECD)

9080 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 % %

1 2 http://dx.doi.org/10.1787/845228705432 1 2 http://dx.doi.org/10.1787/845238446444

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r K. MULTINATIONAL ENTERPRISES ANDu R&D L e c t

K.1. Inward investments in R&D ...... 190

K.2. Inward activity: importance of foreign affiliates in host countries’ R&D ...... 192

K.3. Inward activity: importance of foreign affiliates in host countries’ researchers ...... 194

K.4. Inward activity: sectoral dimension of R&D expenditure of foreign affiliates ...... 196

K.5. Inward activity: sectoral dimension of R&D expenditure of foreign affiliates (cont.) ...... 198

K.6. Inward activity: geographical dimension of R&D expenditure by foreign affiliates ...... 200

K.7. Outward activity: R&D by affiliates abroad ...... 202

_it E d e it s io w n K.1. Inward investments in R&D o r yl B n

■ Between 1997 and 2007, research and development ■ Except in Canada, increases in R&D investments by O O e

D (R&D) investments by foreign affiliates in the foreign affiliates were larger thanda the increasesl

OECD area increased in value by USD 53 billion in recorded by firms underC national control. u E e e

purchasing power parity (PPP). Increases were observed

■ However, in order to assessO R the real trend in foreigns in all major countries: the United States attracted n

e affiliates’ contribution to the aggregateA R&D effort of a USD 22.6 billion, Germany USD 8.9 billion, the United r country’s business sector, it is necessarytu to Kingdom USD 3.7 billion, Japan USD 5.1 billion, France L e c distinguish between new R&D outlays of foreign USD 2.3 billion and Canada USD 1.9 billion. affiliates and the spending by laboratories of national firms that have become foreign-controlled. However ■ Countries’ relative shares in aggregate R&D the data available do not allow for such a distinction. expenditure by foreign affiliates have significantly changed in the OECD area. Germany and Japan increased their share at the expense of the United States, the United Kingdom, France and Canada. Source •OECD, AFA Database and OECD estimates, January 2010. ■ Despite the relative decline in the US share, the For further reading United States continued to attract almost 45% of the • OECD (2005), Measuring Globalisation: OECD Handbook on area’s foreign R&D investment in 2007. Economic Globalisation Indicators, OECD, Paris, www.oecd.org/sti/measuring-globalisation. ■ The growth of foreign R&D investment in Japan was • OECD (2008), Recent Trends in the Internationalisation of attributable essentially to the motor vehicle industry R&D in the Enterprise Sector, OECD, Paris. and stemmed mainly from the alliance between • OECD (2008), The Internationalisation of Business R&D: Renault and Nissan. Evidence, Impacts and Implications, OECD, Paris.

Defining R&D expenditure

R&D expenditure covers all expenditures for activities undertaken for the purpose of discovering or developing new products (goods and services), including improved versions of existing products, or discovering or developing new or more efficient production processes. Here, these expenditures relate exclusively to the enterprise sector, in which are included “all firms, organisations and institutions whose primary activity is the market production of goods and services for sale to the general public at an economically significant price…” (Frascati Manual, § 163). R&D expenditure comprises current costs and capital expenditure. Current costs are composed of labour costs, which are the largest component of current costs, and other current costs, which comprise non-capital purchases of materials, supplies and equipment to support R&D in a given year. Capital expenditure is the annual gross expenditure on fixed assets used in R&D programmes. It should be reported in full for the period when it took place and should not be registered as an element of depreciation (Frascati Manual, § 359, 360, 374). Capital expenditure is composed of expenditure on: • land and building; • investment and equipment; • computer software. The role of R&D in the activity of multinationals (parent companies and their affiliates), the main reference indicators and a description of all the associated variables are presented in OECD (2005), Chapter 4, “Internationalisation of Technology”.

_it E d e it s io w n K.1. Inwardo investments in R&D r yl B n

Figure K.1.1. Trends in the share of R&D expenditure under foreign control Selected OECD countries O O e

between 1997 and 2007 da l C u

Billion USD PPP E e e

100

O R s

USD 89.3 billionn (PPP) e 90 A r u L e c t 80

70 United States

44.6% 60

50 Germany 14.7% 40 USD 36.7 billion (PPP) United Kingdom 9.6% 30 46.9% Japan 6.6% France 20 Canada 11.5% 5.9% 13.5% 5.0% 10 2.2% 1 8.0% Other OECD 6.8% 13.7% 11.0% 0 1997 2007

1 2 http://dx.doi.org/10.1787/845242104500

Figure K.1.2. Growth of R&D expenditure of affiliates under foreign control and firms under domestic control Selected OECD countries between 1997 and 20072 In constant PPP dollars (2000)

Affiliates under foreign control Firms controlled by the compiling country % 350 708 472

300

250

200

150

100

0 Canada France Germany Japan United United Ireland Sweden Finland Portugal Kingdom States

1 2 http://dx.doi.org/10.1787/845247086625 1. Consists of the Czech Republic, Finland, Hungary, Ireland, the Netherlands, Poland, Spain and Sweden. 2. Finland: 1997-2006; Portugal: 1999-2007.

_it E d e it s io w n K.2. Inward activity: importance of foreign affiliates in host countries’o R&D r yl B n

■ The importance of foreign affiliates in national knowledge. Often, foreign affiliates are concentrated in a O O e

D research and development (R&D) investments differs few higher-technology sectors (e.g.da motor vehicles inl

considerably across countries. In 2007, the share of Japan and Sweden, chemicalsC and aerospace in France).u E e e

foreign affiliates in business-sector R&D expenditure These sectors have considerably increased their R&D O R s ranged from 5% in Japan to over 70% in Ireland. In spending, in contrast to firmsn under national control,

e Hungary, Belgium, the Czech Republic and Austria, which operate in all sectors of activity.A r tu which have many foreign multinationals, foreign L e c ■ affiliates were responsible for over half of the R&D While differences in R&D intensities between investments. foreign affiliates and firms under national control are considerable in some countries, they are much more ■ In other countries, the contribution of foreign limited in others. affiliates was more limited. This is due first to the lesser importance of foreign affiliates in such countries, but the presence of strong “indigenous” Source multinationals (as in Sweden) also helps explain this, •OECD, AFA Database and OECD estimates, January 2010. since R&D activities are still often located close to the company headquarters. For further reading • OECD (2005), Measuring Globalisation: OECD Handbook on ■ In the majority of countries, foreign affiliates are Economic Globalisation Indicators, OECD, Paris, characterised by higher R&D intensities than firms www.oecd.org/sti/measuring-globalisation. under national control, i.e. foreign affiliates devote a • OECD (2008), Recent Trends in the Internationalisation of larger share of their turnover to R&D. This is because the R&D in the Enterprise Sector, OECD, Paris. activity of foreign affiliates in higher-technology • OECD (2008), The Internationalisation of Business R&D: industries is typically directly related to their proprietary Evidence, Impacts and Implications, OECD, Paris.

Measuring the R&D intensity of foreign affiliates

In order to assess the R&D effort of foreign affiliates as compared with that of firms under national control, or to make comparisons between countries, so-called “R&D intensities” are generally calculated. These correspond to the following ratios: • R&D expenditure of foreign affiliates/Turnover of those affiliates; • R&D expenditure of foreign affiliates/Value added of those affiliates; • Number of researchers at foreign affiliates/Total staff of those affiliates; • R&D staff at foreign affiliates/Total staff of those affiliates. In most cases, the first ratio, which uses turnover, is used as turnover is available for more countries than the other variables. However, all ratios that measure R&D intensities have the same limitations as the ratio that is widely used on the national level, which corresponds to a country’s R&D expenditures as a percentage of its GDP. Among the main limitations is the fact that, in a majority of cases, data for the numerators of these fractions correspond only to firms that perform R&D, whereas the denominators encompass all firms. Consequently, these ratios are fairly sensitive to the structure of a country’s industry (e.g. presence of a large number of multinationals or of SMEs, establishment of affiliates in a limited number of innovative sectors and high sectoral dispersion of the R&D of national firms, greater or lesser offshoring of production with no equivalent offshoring of R&D centres, etc.).

_it E d e it s io w n K.2. Inward activity: importance of foreign affiliates ino host countries’ R&D r yl B n

Figure K.2.1. The share of foreign-controlled affiliates in total business sector R&D expenditure, 2007 O O e

da l Hungary C u

Belgium E e e O R s

Czech Republic

n e Austria A r tu United Kingdom L e c Slovak Republic Sweden Canada Poland Norway Italy Spain (2005) Germany Portugal France Finland (2006) United States Japan

010203040506070 %

1 2 http://dx.doi.org/10.1787/845275067345

Figure K.2.2. R&D intensities1 of foreign affiliates and national firms in the business sector,2 2007

Affiliates under foreign control Firms controlled by the compiling countries

Japan Germany (2005) Sweden Austria United States Finland (2006) Belgium (2005) Spain (2005) Portugal (2005) Ireland (2005) United Kingdom Canada (2006) France Italy Norway Czech Republic Hungary (2006) Estonia (2006) Poland Slovak Republic (2006) 0.0 0.5 1.0 1.5 2.0 2.5 %

1. R&D intensity = R&D expenditures as a percentage of turnover. 2. Manufacturing sector only for Germany, Hungary, Ireland, Portugal, Spain and the Slovak Republic. 1 2 http://dx.doi.org/10.1787/845367713136

_it E d e it s io w n K.3. Inward activity: importance of foreign affiliates in host countries’o researchers r yl B n

■ The share of foreign-controlled affiliates in the total foreign affiliates and national firms devote only a small O O e

D number of manufacturing-sector researchers tends to percentage of their turnover to R&D.da l

be slightly smaller than the corresponding ratio for C u ■ E e e

research and development (R&D) expenditures. In Germany, the number of R&D staff (and not just

O R s

researchers) per thousand employees is twice as large in Information on the number of researchers working for n

e foreign affiliates in the services sector has not so far foreign affiliates as in nationalA firms. In ther United tu been available. States, this comparison is more difficultL e toc make insofar as data on foreign affiliates cover all R&D staff, whereas ■ In Austria, the Slovak Republic, the Czech Republic, the figures for national firms cover researchers alone. Portugal and Hungary, more than half of all researchers worked for foreign-controlled affiliates. In Sweden and Estonia, researchers at foreign affiliates accounted for over 40% of all researchers in the manufacturing Source industry. •OECD, AFA Database, January 2010.

■ The number of researchers per thousand employees For further reading in 2007 was significantly higher in foreign affiliates in • OECD (2002), Frascati Manual: Proposed Standard Practice the manufacturing sector than in firms under national for Surveys on Research and Experimental Development, control in all countries except Finland, France, Estonia OECD, Paris, www.oecd.org/sti/frascatimanual. and Poland. In Finland, this outcome is compatible • OECD (2005), Measuring Globalisation: OECD Handbook on with the R&D intensity of foreign affiliates, which is Economic Globalisation Indicators, OECD, Paris, lower than that of national firms. In Poland, both www.oecd.org/sti/measuring-globalisation.

Number of researchers

According to Frascati Manual definitions, “researchers are professionals engaged in the conception or creation of new knowledge, products, processes, methods and systems and also in the management of the projects concerned” (Frascati Manual, 2002 edition, § 301). “Managers and administrators engaged in the planning and management of the scientific and technical aspects of a researcher’s work also fall into this category” (§ 303). “Postgraduate students at the PhD level engaged in R&D should be considered as researchers” (§ 305). “As for the other categories of data on the number of persons in employment, the number of researchers should be calculated in ‘full-time equivalents’”. Other R&D personnel The other categories of R&D personnel according to the Frascati Manual are “Technicians and equivalent staff” and “Other supporting staff”. Technicians and equivalent staff are persons whose main tasks require technical knowledge and experience in one or more fields of engineering, physical and life sciences or social sciences and humanities. They participate in R&D by performing scientific and technical tasks involving the application of concepts and operational methods, normally under the supervision of researchers. Equivalent staff performs the corresponding R&D tasks under the supervision of researchers in the social sciences and humanities. Other supporting staff includes skilled and unskilled craftsmen, secretarial and clerical staff participating in R&D projects or directly associated with such projects.

_it E d e it s io w n K.3. Inward activity: importance of foreign affiliates in host ocountries’ researchers r yl B n

Figure K.3.1. Share of the number of researchers1 in foreign-controlled affiliates in the manufacturing sector, O O e

2007 da l

C u

Austria E e e

Slovak Republic O R s

n e Czech Republic A r tu Portugal L e c Hungary (2006) Sweden Estonia (2006) Canada (2002) Germany Norway France Finland (2006) Poland (2004) United States Turkey (2002)

010203040506070 % 1 2 http://dx.doi.org/10.1787/845375141666

Figure K.3.2. Researchers1 per thousand employees in foreign affiliates and national firms in the manufacturing sector, 2007

Affiliates under foreign control Firms controlled by the compiling countries % 70

0 Germany United Belgium Finland Sweden NorwayFrance Hungary Portugal Czech Estonia Slovak Poland (2005) States (2005) (2006) (2006) (2005) Republic (2005) Republic (2004) (2006)

1 2 http://dx.doi.org/10.1787/845431088033 1. United States, Germany, Hungary and Estonia: total R&D personnel rather than researchers.

_it E d e it s io w n K.4. Inward activity: sectoral dimension of R&D expenditure ofo foreign affiliates r yl B n

■ The sectoral breakdown of the research and last sector is one of those whose share in aggregate O O e

D development (R&D) expenditure of foreign affiliates OECD-area R&D declined betweenda 1997 and 2007,l

shows that in most countries the bulk of research is probably because someC R&D activities moved outsideu E e e

performed in the manufacturing sector. This is directly the OECD area. The trend might be different if services O R s related to the fact that foreign affiliates are more active relating to this sector, such asn software creation, were

e A r in manufacturing industries. included. u L e c t ■ Even in countries where foreign affiliates’ R&D in services is more substantial (Italy, Poland, Finland, Source Canada), it still accounted for only 30% to 40% of •OECD, AFA Database and OECD estimates, January 2010. aggregate business-sector R&D. In Norway and Portugal, however, half of the R&D expenditure of foreign For further reading affiliates is performed in the services sector. • OECD (2005), Measuring Globalisation: OECD Handbook on Economic Globalisation Indicators, OECD, Paris, ■ Foreign affiliates in the pharmaceutical industry www.oecd.org/sti/measuring-globalisation. seem to make the largest contribution to national R&D • OECD (2008), Recent Trends in the Internationalisation of investments. Other sectors characterised by a high share R&D in the Enterprise Sector, OECD, Paris. of foreign affiliates are motor vehicles and the • OECD (2008), The Internationalisation of Business R&D: electronics and communication equipment sector. This Evidence, Impacts and Implications, OECD, Paris.

Measuring the internationalisation of a sector's R&D

The most relevant indicator for measuring the internationalisation of a sector’s R&D would be the ratio of R&D performed abroad to aggregate R&D performed within the reference country. The major stumbling block for compiling such an indicator is that data on R&D activity by affiliates abroad are not available. An alternative measure would be to compute the share of each sector’s R&D that is under foreign control throughout the entire OECD area. The main drawback to that option is that it would limit the notion of internationalisation to the OECD area. To better understand what is meant by the internationalisation of a sector’s R&D, it is necessary to ascertain the extent of the geographic decentralisation of the R&D laboratories of multinational firms throughout the world and their geographic concentration. For a compiling country, decentralisation within the OECD area could be based on reporting by the host countries. The choice of the exchange rate to be used to divide R&D expenditures among countries is another point that ought to be raised. Inasmuch as R&D expenditures consist essentially of salaries and the value of capital equipment, the major factor is their purchasing power. As these are not transactions involving repatriation of profits, the proper exchange rate should be based on purchasing power parities. A distinction should also be made between research activity and the marketing of its results. This takes on even greater importance in reference to firms. For instance, Microsoft’s R&D is split up between a small number of countries, while the company’s products are among the most highly internationalised.

_it E d e it s io w n K.4. Inward activity: sectoral dimension of R&D expenditureo of foreign affiliates r yl B n

Figure K.4.1. Sectoral distribution of R&D expenditures of foreign affiliates, 2007 O O e

1 da

Services Manufacturing C Other sectors

u E e e

Norway

O R s

Portugal n e A r Poland c tu Finland (2006) L e Italy (2006) Canada Ireland (2005) Czech Republic United States (2006) United Kingdom Sweden Belgium Austria (2004) Slovak Republic Germany France (2006) Japan

0102030405060708090100 %

1 2 http://dx.doi.org/10.1787/845465217721

Figure K.4.2. Share of R&D under foreign control by main manufacturing sectors, total OECD2

1997 2007 % 40

0 Pharmaceuticals Motor vehicles Ratio, TV and Non-electrical Chemical Scientific communication machinery products (excl. instruments equipment pharmaceuticals)

1 2 http://dx.doi.org/10.1787/845471371023 1. Austria and Finland: Mining included. 2. Countries included: Canada, Czech Republic, Ireland, United States, France, Japan, Netherlands, Spain, Sweden and the United Kingdom. Canada and Netherlands: 2004 data, Ireland and Spain: 2005 data.

_it E d e it s io w n K.5. Inward activity: sectoral dimension of R&D expenditure ofo foreign affiliates (cont.) r yl

B n O O e

■ A closer look at the sectoral dimension of research ■ The foreign share of R&D seems da somewhat smallerl

C u and development (R&D) investments by foreign in the information andE communication technology

e e

affiliates shows a particularly high share of foreign (ICT) industry. The presenceO R of a large numbers of

affiliates in R&D investments in smaller host countries. smaller firms (under nationaln control) limits somewhate A r the importance of foreign affiliates. Data concernu the ■ t In pharmaceuticals, foreign affiliates were ICT manufacturing industry only Line somec countries responsible for over 75% of national R&D investments and need to be interpreted and compared with care. in Sweden, Ireland, the Slovak Republic, the Czech Republic, Belgium and Austria. In larger countries, foreign affiliates’ share is smaller and ranges between 20% and 30%.

■ In the motor vehicles sector, foreign affiliates Source account for almost all R&D investments in some •OECD, AFA Database and OECD estimates, January 2010. smaller countries (Hungary, the Czech Republic, Ireland and Belgium). But because of the dominance of a small For further reading number of large auto assemblers, foreign affiliates in • OECD (2005), Measuring Globalisation: OECD Handbook on larger countries like Poland and the United Kingdom Economic Globalisation Indicators, OECD, Paris, also account for a large share of R&D. Larger countries www.oecd.org/sti/measuring-globalisation. with national companies among these dominant car • OECD (2008), Recent Trends in the Internationalisation of assembly companies have a much smaller share of R&D in the Enterprise Sector, OECD, Paris. R&D abroad, as their major R&D investments are still • OECD (2008), The Internationalisation of Business R&D: often located close to headquarters. Evidence, Impacts and Implications, OECD, Paris.

_it E d e it s io w n K.5. Inward activity: sectoral dimension of R&D expenditureo of foreign affiliates r yl (cont.) B n

Figure K.5.1. Pharmaceuticals (ISIC 2423), 2007 O O e

l % da

100 C u E e e

O R s

80 n e A r 70 tu 60 L e c 50 40 30 20 10 0

Japan (2005) Ireland(2005) Austria(2004) Finland(2006) (2006) France Sweden Belgium Germany Portugal United States Slovak Republic Czech Republic United Kingdom

1 2 http://dx.doi.org/10.1787/845474323526 Figure K.5.2. Motor vehicles (ISIC 34), 2007 % 100 90 80 70 60 50 40 30 20 10 0

Japan (2006) Ireland(2005) Poland(2006) Austria(2004) Norway Finland(2006) (2006) France Hungary Belgium Portugal Sweden Germany United States Czech RepublicUnited Kingdom

1 2 http://dx.doi.org/10.1787/845476674335 Figure K.5.3. ICT1 sector, 2007 % 100 90 80 70 60 50 40 30 20 10 0

Japan (2006) Ireland(2005) Norway France Canada(2004) Poland (2004) (2004) Hungary Portugal Belgium Germany Sweden United States Czech Republic United Kingdom

1. Manufacturing ICT only for Belgium, Germany, Hungary, Norway, Poland, Portugal and Sweden. 1 2 http://dx.doi.org/10.1787/845514823474

_it E d e it s io w n K.6. Inward activity: geographical dimension of R&D expenditureo by foreign affiliates r yl B n

■ European investment in the United States in 2007 foreign R&D as a result of the association between O O e

D accounted for over three-quarters of aggregate foreign Renault and Nissan. da l

research and development (R&D) investment. The C u ■ E e e

leading R&D investing country in the United States was At the sectoral level, it can be seen that in the United

O R s

States and the European Union, the largest share of the United Kingdom, with 26% of the R&D investment n

e of foreign-controlled affiliates, followed by Switzerland foreign R&D investment wasA in pharmaceuticals,r tu (15%), Germany (14%), France (13%) and Japan (10%). followed by the motor vehicle industry.L e c

■ Between 1997 and 2007, the share of US-controlled affiliates in industrial R&D in the European Union Source declined from 75% to 71%. However, the United States •OECD, AFA Database and OECD estimates, January 2010. continued to be the leading R&D investor in the major European countries, including the United Kingdom For further reading (50%), Sweden (38%), Germany (36%) and France (34%). • OECD (2005), Measuring Globalisation: OECD Handbook on Economic Globalisation Indicators, OECD, Paris, ■ During the last decade, Japan has attracted a large www.oecd.org/sti/measuring-globalisation. number of R&D investments. The European Union’s • OECD (2008), Recent Trends in the Internationalisation of share in Japan nearly tripled between 1997 and 2006, R&D in the Enterprise Sector, OECD, Paris. essentially at the expense of the United States. To a great • OECD (2008), The Internationalisation of Business R&D: extent, however, this trend reflects the bolstering of Evidence, Impacts and Implications, OECD, Paris.

Figure K.6.1. Geographic origin of R&D expenditure by foreign-controlled affiliates, 1997 and 2007

% EU1 – 1997 % United States – 1997 % Japan – 1997 80 80 80

70 70 70

60 60 60

50 50 50

40 40 40

30 30 30

20 20 20

10 10 10

0 0 0 United States Japan Other Japan Europe Other United States EU15 Other (excluding EU)

% EU1 – 2007 % United States – 2007 % Japan – 2006 90 90 90 80 80 80 70 70 70 60 60 60 50 50 50 40 40 40 30 30 30 20 20 20 10 10 10 0 0 0 United States Japan Other Japan Europe Other United States EU15 Other (excluding EU) 1. EU: Finland, France, Germany, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. Data partially estimated. 1 2 http://dx.doi.org/10.1787/845525248547

_it E d e it s io w n K.6. Inward activity: geographical dimension of R&D expenditureo by foreign affiliates r yl B n

Figure K.6.2. R&D expenditures of affiliates under foreign control by main industrial sectors, 2007 O O e

Million PPP USD and percentages of total da l C u

United States Japan (2006)

E e e

O R s

14 859 Pharmaceuticals Motor vehicles n e A 3 804r u L e c t 5 497 Transport equipment Pharmaceuticals 1 060

Radio, TV and communication 3 389 equipment Office, accounting 177 and computing machinery

1 929 Non-electrical machinery Chemicals 175 less pharmaceuticals Chemicals less 1 401 pharmaceuticals

Electrical machinery 150 1 174 Scientific R&D services

Computer services 37 829 Publishing industries

799 Scientific instruments Non-electrical machinery 26

5040 30 20 10 0 0 10 20 30 40 50 60 70 80 % %

EU1

Pharmaceuticals 8 481

Motor vehicles 5 898

Radio, TV and communication 3 970 equipment

Non-electrical machinery 3 373

Aircraft and spacecraft 3 346

Chemicals less pharmaceuticals 2 555

Scientific instruments 1 846

0 5 10 15 20 25 %

1. Austria, Belgium, France, Germany, Ireland, Netherlands, Spain, Sweden and the United Kingdom. Data partially estimated. 1 2 http://dx.doi.org/10.1787/845534651225

_it E d e it s io w n K.7. Outward activity: R&D by affiliates abroad o r yl

■ Comparing the research and development (R&D) ■ The main trends inB the geographic breakdownn of O O e investments of a country’s affiliates abroad with those of outward R&D investmentD by the United States are the

foreign-controlled affiliates in that country gives a first, decline of the European Union as da a destination and

C u

albeit incomplete, picture of R&D flows across countries. the rising share of the Asia-PacificE e region and of Chinae

The contribution of multinational enterprises’ affiliates in particular. Despite its relativeO R decline, Europe sstill

to R&D investments in home and host countries is very attracts over 60% of then R&D investmente of A r complex and cannot be grasped in simple comparisons. US multinationals. u L e c t ■ ■ For countries for which information is available, and US R&D investment in China recorded sharp with the exception of Sweden and Belgium, foreign- growth (of over 60% a year) between 1997 and 2007 but controlled affiliates spent more on R&D than the host is still relatively modest in absolute value. It reached countries’ affiliates spent abroad. In the United States, USD 1.1 billion in 2007, roughly the same amount as it given the method for measuring activities that are invested in R&D in Belgium or in Ireland. controlled indirectly (see box), it is likely that the R&D expenditure of US affiliates abroad and that of foreign- controlled affiliates in the United States were more Source evenly balanced than the statistics indicate. •OECD, AFA Database and OECD estimates, January 2010.

■ The United States is still the top destination country For further reading for R&D investments, although Japanese R&D • OECD (2005), Measuring Globalisation: OECD Handbook on investments in the United States have declined Economic Globalisation Indicators, OECD, Paris, recently. In 2007, Germany invested USD 5.6 billion in www.oecd.org/sti/measuring-globalisation. R&D in the United States, and the United States • OECD (2008), Recent Trends in the Internationalisation of invested the same amount in Germany. The United R&D in the Enterprise Sector, OECD, Paris. Kingdom invested USD 10.4 billion in R&D in the • OECD (2008), The Internationalisation of Business R&D: United States, and France invested USD 5.3 billion. Evidence, Impacts and Implications, OECD, Paris.

Defining the R&D expenditure of offshore affiliates of parent companies in a compiling country

A compiling country’s offshore affiliates comprise the foreign-based affiliates of all of that country’s parent companies. The activities of those affiliates, including their research and development, should be broken down by sector and by country of location, according to the recommendations of OECD (2005). For these affiliates’ activities abroad, the Handbook stipulates that all affiliates controlled either directly or indirectly by parent companies in the compiling country should be included. A parent company may exercise indirect control over an affiliate without holding a majority interest in the affiliate’s equity. For the US data, however, a different principle is adopted for all variables, including those involving R&D: in contrast to the other OECD countries, the United States includes an indirectly controlled firm only if the parent company or company wielding ultimate control has a direct majority stake in the affiliate’s equity. From this standpoint, it may be concluded that the activities of American affiliates abroad are underestimated as compared with those of other countries. Moreover, to calculate the activity of offshore affiliates for a set of countries belonging to a given area such as the European Union or the OECD, and to avoid double counting, the only activity that should be included is that of affiliates controlled directly by parent companies in the compiling country (OECD, 2005, Chapter 3, §§ 390-391). Measuring a country’s outward R&D investment Measuring a country’s outward R&D investment raises a number of difficulties. The most important of these stems from the fact that a great many countries lack surveys on the activities of their own affiliates abroad, in particular as regards R&D. Identifying the countries in which multinationals establish research laboratories entails making estimates on the basis of figures reported by host countries. Such reporting has two limitations: first, it cannot be used for non- OECD countries, since such countries are not compiling countries in OECD surveys; and second, there may be a lack of symmetry between the figures reported by investing countries and host countries. Data reconstitution assumes that asymmetries, if any, are small. At present, the countries that compile data on the R&D activity of their affiliates abroad, broken down by destination country, are the United States, Japan, Sweden, Italy and Belgium.

_it E d e it s io w n K.7. Outward activity: R&Do by affiliates abroad r yl B n

Figure K.7.1. R&D expenditures by foreign-controlled affiliates and by affiliates abroad O O e

of the compiling country, 2007 da l

C u

Affiliates abroad Affiliates under foreignE control e e

Million PPP USD O R s

14 000 n e 35 019 39 806 A r tu 12 000 L e c

10 000

8 000

6 000

4 000

2 000

0 United States Germany Japan Sweden Belgium Italy (2003)

1 2 http://dx.doi.org/10.1787/845535882563

Table K.7.1. R&D expenditure of affiliates abroad by country of destination, 2007 Billions of current USD PPP

Country of origin

United States Japan Germany France United Kingdom

United States – 1 627 5 638 5377 10 469 Japan 4252 – 336 3383 159 n Germany 5638 185 – 1549 1 711

n atio France 5377 61 869 – 354 United Kingdom 10 469 249 528 1037 – Italy 359 45 275 202 225 y of d esti y of r Belgium 291 108 168 410 483 un t

Co Finland 333 21 28 9 65 Norway – – 27 33 39 Sweden 314 34 119 60 949 1 2 http://dx.doi.org/10.1787/845551323303

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r PART V u L e c t Global Value Chains as a New Form of Globalisation

L. Global Value Chains ...... 207

B n O O e

da l

C u

E e e

O R s

n e A r u L e c t _it E d e it s io w n o r yl

B n O O e

da l

C u

E e e

O R s

n e A r L. GLOBAL VALUE CHAINS u L e c t

L.1. Production depth and export share of production . . . . 208

L.2. Intra-industry trade...... 210

L.3. Trade in intermediate goods ...... 212

L.4. Trade in intermediate goods: geographical distribution . 214

L.5. Trade in intermediate goods: producer and user industries ...... 216

L.6. Offshoring/outsourcing abroad ...... 218

L.7. Offshoring/outsourcing abroad: manufacturing and services ...... 220

L.8. Offshoring/outsourcing abroad by technology level . . . 222

L.9. Vertical specialisation: import content of exports . . . . 224

L.10. Import content of exports by partner countries ...... 226

_it E d e it s io w n L.1. Production depth and export share of production o r yl B n

■ The globalisation of value chains is central to international production sharing, (parts of) products O O e

D today’s globalisation process. It is linked to the growth are manufactured in one country andda then exported lto

of global production networks in which multinational (imported by) other countriesC as inputs in the nextu E e e

companies play an important role and has resulted in production steps. Very high growth in exports and O R s the physical fragmentation of production with an imports were recorded betweenn 1980 and 2008,

e optimal location of the various stages. It has thus especially in smaller countriesA with a significantr tu given rise to significant firm restructuring to include presence of multinational companies.L eThec high export- outsourcing and offshoring. to-production ratios of Belgium, Luxembourg and the Netherlands may be biased to some extent by re- ■ Some aggregate measures clearly show the exports. increasing importance of global value chains. First, there is a general trend towards a decline in “production ■ Third, much manufacturing trade occurs within depth” in most OECD countries. The decreasing share of the same industry or even within a firm, owing to the value added in production reflects greater use of integration of manufacturing production throughout intermediate inputs in the production process. It may be the value chain. These simultaneous exports and due to domestic or international outsourcing. imports within the same industry are generally labelled as intra-industry trade (see next section). ■ Second, manufacturing exports and imports of individual countries are increasingly moving together and are growing much faster than production, a sign that trade interactions between countries are growing Source rapidly. As a result of growing vertical integration and • OECD STAN Indicators Database, January 2010.

Exports, value added and production: production depth and export share of production

Production depth relates to one important aspect of the production structure in a national economy. The indicator reflects the share of national production that is created in the country itself. The indicator is calculated as the value added share of production: (Value added/Production) × 100. The export share of production reflects the export effort of an economy and is calculated as: (Exports/Production) × 100. With exports relating to the exports of goods and production relating to the manufacturing industry.

_it E d e it s io w n L.1. Production depth and exporto share of production r yl B n

Figure L.1.1. Value added as a percentage of production, 19901 and 20082 O O e

da l 2008 1990 C

% u

60 E e e

O R s

n e A r 50 u L e c t

Italy Japan Spain Korea Greece Norway Canada France Austria Finland Iceland Poland Germany Denmark SwedenPortugal BelgiumHungary Switzerland Netherlands United States New Zealand Luxembourg United Kingdom Slovak Republic Czech Republic

1. 1991 for Hungary, 1993 for the Czech Republic and the Slovak Republic, 1994 for Poland, 1995 for Belgium and Greece. 2. 2007 for Greece, Hungary, Iceland, Korea, Luxembourg, Switzerland and the United States, 2006 for Japan, Portugal, Spain, Sweden and the United Kingdom, 2005 for Canada and 2004 for New Zealand. 1 2 http://dx.doi.org/10.1787/845565344881

Figure L.1.2. Exports of goods as a percentage of manufacturing production, 19901 and 20082

% 2008 1990 140

120

100

Italy Korea Spain Japan Austria Iceland Canada Finland Poland France Norway Greece Belgium HungaryDenmark SwedenGermany Portugal Netherlands Switzerland Luxembourg New Zealand United States Slovak Republic Czech Republic United Kingdom

1 2 http://dx.doi.org/10.1787/845654410688 1. 1992 for Hungary, 1993 for the Czech Republic, 1994 for Korea and Poland, 1997 for the Slovak Republic and 1999 for Luxembourg. 2. 2007 for Greece, Hungary, Iceland, Luxembourg, Spain, Switzerland and the United States, 2006 for Japan, Portugal, Sweden and the United Kingdom, 2005 for Canada and 2004 for New Zealand.

_it E d e it s io w n L.2. Intra-industry trade o r yl B n

■ Simultaneous exports and imports within the same ■ The relatively high growth rates of India and O O e

D industry are generally labelled as intra-industry trade. Indonesia (3.2% and 2.4%, respectively)da confirm theirl

They typically occur among rich countries with a increasing productionC and trade of intermediateu E e e

similar economic structure and level of development goods. China’s economy is well integrated and its O R s that are geographically close. Intra-industry trade intra-industry trade in manufacturesn has grown at the

e often accompanies foreign direct investment, as rate of 0.4% on average, over theA seven past years.r tu multinational companies locate affiliates in different L e c ■ countries and trade goods and services between the In some Central and Eastern European countries, affiliates and the parent company. the high level and fast growth of intra-industry trade in manufactures likely stems from the large volume of ■ From 1997 to 2008, the average index of intra- direct investment, notably from Germany. industry trade in manufactures was relatively high (over 70%) in many OECD countries, as well as in Estonia and in Slovenia. Since 2001, growth in intra- industry trade in manufactures has been strong in Source Iceland, Turkey, Poland, Portugal, Finland and the • OECD STAN Indicators database, January 2010. Slovak Republic. In several other OECD countries, intra-industry trade in manufacturing remains fairly For further reading vibrant but has not increased significantly over the • OECD (2005), Measuring Globalisation: OECD Handbook on past five years. Economic Globalisation Indicators, OECD, Paris.

The measurement of intra-industry trade

Intra-industry trade flows are conventionally defined as the two-way exchange of goods within standard industrial classifications. The extent of intra-industry trade is commonly measured by Grubel-Lloyd indexes based on commodity group transactions. Thus, for any particular product class i, an index of the extent of intra- industry trade in the product class i between countries A and B is given by the following ratio: ()+ MXMX IIT = iiii • 100 .i AB () [1] + MX ii This index takes the minimum value of zero when there are no products in the same class that are both imported and exported, and the maximum value of 100 when all trade is intra-industry (in this case Xi is equal to Mi). Bilateral indices of intra-industry trade in the product class i between country A and all its trading partners are obtained as a weighted average of the bilateral indices [1] for each partner country B, using as weights the share of total trade of A accounted for by trade with B. Bilateral indices of intra-industry trade between country A and country B for total manufacturing are the weighted average of the indexes in [1] for all product classes i, with weights given by the share of total trade of i over total manufacturing trade: (X + M ) X M i i i i ()X i + M IIT • i • 100 [2] AB ()X + M X + M i i i ( i i ) i A degree of caution must be used when comparing and interpreting intra-industry indices because their measurement crucially depends on the level of disaggregation chosen for the analysis. In assessing the importance of the division of the production process across countries, it should be recognised that, as well as measuring trade in intermediate goods at various stages of production, much intra-industry trade is trade in similar, but often highly differentiated, finished products. The limitations of the intra-industry trade indicators are presented in OECD (2005), Chapter 5, Section 5.3.5.

_it E d e it s io w n L.2.o Intra-industry trade r yl B n

Figure L.2.1. Index of intra-industry trade in manufactures, average 1997-20081 O O e

l 100 da

OECD countries C OECD OECD u E e e

90 accession enhanced

O countriesR engagements

80 n programe A r tu 70 L e c

Italy Spain Korea Japan Israel ChileChina Brazil India FranceAustria Mexico Poland Finland IrelandTurkey Greece Iceland Belgium Hungary CanadaSweden Norway SloveniaEstonia Germany Denmark Portugal Australia Indonesia Netherlands Switzerland United States Luxembourg New Zealand South Africa United Kingdom CzechSlovak Republic Republic Russian Federation

1. 2000-08 for South Africa. 1 2 http://dx.doi.org/10.1787/845820714132

Figure L.2.2. Index of intra-industry trade in manufactures, average annual change 2001-08

% 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7

Italy Chile Israel Spain Korea China Japan Brazil India Ireland Greece Austria Norway France Canada Mexico FinlandEstonia Poland TurkeyIceland Russian Australia Germany Slovenia Belgium Denmark SwedenHungary Portugal Federation Indonesia NetherlandsSwitzerland LuxembourgSouth Africa New Zealand United States United Kingdom Czech Republic Slovak Republic

1 2 http://dx.doi.org/10.1787/845862481526

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

_it E d e it s io w n L.3. Trade in intermediate goods o r yl B n

■ Due to the increasing importance of international owing to greater use of international sourcing of inputs. O O e

D production sharing and global value chains, trade in Because of their limited size, smallerda countries arel

intermediate inputs has been steadily growing. Previous typically more internationallyC oriented and tend u to E e e

research has shown that multinational companies are import more intermediates from abroad. In Ireland for O R s more dependent on international sourcing than example, domestic and internationaln sourcing is equally

e “domestic” firms. Intra-firm trade among affiliates and important, i.e. equal amountsA of intermediatesr are tu the parent company within the multinational network sourced internationally and nationallyL e (ci.e. within the has resulted in higher trade flows of intermediate inputs Irish economy). and a higher ratio of use of foreign inputs over domestic inputs.

■ Between 1995 and 2006 trade in intermediate inputs grew at an average annual rate of 6.2% for goods and 7% Sources for services (in volume terms). In 2006 intermediate •OECD, Input-Output Database, January 2010. inputs represented 56% of goods trade and 73% of •OECD, Bilateral Trade Database, September 2009. services trade. This suggests that trade flows are dominated by products that are not consumed but used For further reading in the production of other goods and services. The share • Lanz, R., S. Miroudot and A. Ragoussis (2009), “Trade in of intermediates in total trade has, perhaps surprisingly, intermediate goods and services”, OECD Trade Policy remained fairly constant because trade in final goods Working Paper No. 93, www.oecd.org/trade. and capital goods have grown at the same pace. • De Backer, K. and N. Yamano (2007), “The measurement of globalisation using international input-output ■ The ratio of imported to domestic inputs increased tables”, Science, Technology and Industry Working significantly between 1995 and 2005 in most countries, Paper 2007/8, www.oecd.org/sti/working-papers.

Trade in intermediate goods

An intermediate good is broadly defined as an input to the production process that has itself been produced and, unlike capital, is used up in production. The measurement of trade in intermediates is not straightforward, especially in the case of services. Trade in intermediate goods can be assessed using the United Nation’s Broad Economic Categories (BEC) classification. This classification groups commodities according to their main end use into capital goods, intermediate goods and consumption goods, the three basic classes of goods in the System of National Accounts (SNA). The traded commodities themselves are defined in terms of the Standard International Trade Classification, Revision 3 (SITC Rev. 3). Hence, BEC assigns SITC Rev. 3 commodities to 19 basic categories of goods, eight of which are categories of intermediate goods. One major drawback of the BEC classification is that the allocation of commodities according to their main use is based on expert judgment, which is by nature subjective. Many goods might be either final or intermediate depending on the context. Another shortcoming is that the BEC classification does not allow for a similar classification of trade in services because of the high level of aggregation in services trade data. Input/Output tables are another source of information on the value of intermediate goods and services that have been imported from outside the country. Country I-O tables are presented in matrix format and show how much of the output of one industry is used as an input by another. Furthermore, I-O tables generally consist of a domestic and an import table which indicate the use of domestic and imported inputs respectively. A key advantage of I/O tables is that they classify goods according to their use (as an input into another sector’s production or as final demand) instead of as intermediate and other categories based on their descriptive characteristics. I/O tables also include information on (domestic and international) inputs of/in services sectors which allows for monitoring the fast-growing sourcing of services activities. The ratio of imported to domestic sourcing of inputs is based on I/O tables and calculated as:

( x ij )/( x ij ) ijm ijd

ij ij where xd and xm are respectively the domestic and imported transactions of intermediates from sector i to sector j.

_it E d e it s io w n L.3. Trade oin intermediate goods r yl B n

Figure L.3.1. Share of intermediate trade in total trade, OECD1 O O e

da l Intermediate to total trade – Goods Intermediate to totalC trade – Services

% u

100 E e e

O R s

90 n e A r u 80 L e c t 70

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1. 20 countries for services. 1 2 http://dx.doi.org/10.1787/845870267428

Figure L.3.2. Imported intermediates/domestic intermediates, by country

% 1995 2005 70

Italy Korea Chile Spain Israel China IndiaJapanBrazil Ireland Estonia Austria MexicoGreeceFinland CanadaNorway Poland France Turkey Hungary SloveniaBelgium Denmark Sweden Portugal Germany Australia Netherlands Luxembourg SouthNew Africa Zealand United States Slovak Republic Czech Republic United Kingdom Russia Federation

1 2 http://dx.doi.org/10.1787/845883053582

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

A corrigendum has been issued for this page. See: http://www.oecd.org/dataoecd/0/2/46101158.pdf

_it E d e it s io w n L.4. Trade in intermediate goods: geographical distribution o r yl B n

■ The geographical distribution of intermediate ■ Asian countries seem to trade relatively more O O e

D imports of goods and services shows that in value the manufacturing intermediates. Asia da is a net exporter lof

largest transactions are within and among three regions: intermediate goods to EuropeC and North America. u E e e

Europe, North America and Asia. In the OECD area most

O R s

■ North America and Europe trade more services inputs are sourced from within the OECD area; when n

e accession countries and enhanced engagement inputs than Asia and are also importantA exportersr and tu economies are added, about 85% of trade flows are importers of intermediate goods. BetweenL e c Europe and accounted for. North America, the pattern is the opposite for goods and services. Europe imports more intermediate services ■ Intra-regional imports are generally higher than from North America but exports more intermediate inter-regional imports. Europe has the most intra- goods. regional trade in value. The results include all trade flows between EU countries, which significantly increases the value of Europe’s intra-industry trade. Large intra-regional trade is also found for Asia and North America. Sources •OECD, Input-Output Database, January 2010. ■ The largest inter-regional flow of intermediate •OECD, Bilateral Trade Database, September 2009. goods is exports from the Middle East and North Africa to Asia, and includes primary resources such as oil or For further reading gas. Nevertheless, overall trade in intermediate inputs • Lanz, R., S. Miroudot and A. Ragoussis (2009), “Trade in is mostly between developed countries; flows with intermediate goods and services”, OECD Trade Policy regions with developing economies are very small. Working Paper No. 93, www.oecd.org/trade.

_it E d e it s io w n L.4. Trade in intermediate goods: geographicalo distribution r yl B n

Figure L.4.1. Intra- and inter-regional imports of intermediate goods, by region O O e

Billion USD, 2005 da l

C u

E e e

O R s

n e A r u L e c t

Figure L.4.2. Intra- and inter-regional imports of intermediate services, by region Billion USD, 2005

_it E d e it s io w n L.5. Trade in intermediate goods: producer and user industrieso r yl B n

■ Industries that produce imported intermediates are sourcing have increasingly become alternatives in the O O e

D more or less the industries that “traditionally” produce search for intermediates of the right da quality at the rightl

inputs for other domestic industries: mining and price. All this suggests C the importance of global valueu E e e

quarrying, chemicals, metal products, transport and chains in today’s global economy. Within these O R s storage, and motor vehicles. international production networks,n intermediates are

e sourced from abroad through arm’sA length relationshipsr ■ tu Some industries that are large producers of imported or through multinational companies’L networks.e c intermediates are also large users of imported intermediates. Clear examples are motor vehicles, chemicals, metal products, and transport and storage. These industries are large users not only of imported but Sources also of domestic intermediates as the domestic •OECD, Input-Output Database, January 2010. transaction flows between industries reveal. •OECD, Bilateral Trade Database, September 2009

■ The user industries source a significant share of their For further reading imported intermediates from the same industries • Lanz, R., S. Miroudot and A. Ragoussis (2009), “Trade in abroad, although differences exist across industries and intermediate goods and services”, OECD Trade Policy countries. Domestic and international intra-industry Working Paper No. 93, www.oecd.org/trade.

Trade in intermediate goods: distribution by producer and user industry

In order to calculate imported intermediates by user industry, trade statistics were combined with Input/Output tables. This requires first converting the trade statistics from their product classifications to the industry classification of I-O tables. These tables are classified according to industrial activity in terms of the International Standard Industrial Classification, Revision 3 (ISIC Rev. 3), while trade data are compiled according to product classifications, i.e. Standard International Trade Classification Revision 3 (SITC Rev. 3) for goods and the Extended Balance of Payments Services Classification (EBOPS) for services. Therefore, approach is slightly different for goods and services. Bilateral imports of intermediates from trade data are combined with the information on the usage of intermediate imports found in I-O tables, which makes it possible to add the dimension of the user industry to trade flows of intermediate goods and services. As a result, obtained import flows have five dimensions: importer i, exporter j, industry of origin (intermediate input) p, using industry k and year t. In the case of goods, the imports of intermediate input p from country j by user industry k in country i is calculated as:

Iijpkt = ipkt.mijpt

where ipkt is the share of imported inputs p by user industry k in overall imported inputs p of country i (as calculated from I-O tables) and mijpt are the imports of input p of country i from country j (as measured by trade data using the BEC classification). This allocation of bilateral intermediate imports across user industries assumes that import coefficients are the same for all trade partners. For services trade data, no classification distinguishes final and intermediate services, but an additional assumption makes it possible to calculate trade in intermediate services. In the case of services imports, ipkt is the share of imported service inputs p used by industry k in total imports of p (both final and intermediate) of country i. Besides the assumption that all trading partners have the same distribution of intermediate imports p across using industries k, the share of intermediate services in overall bilateral services imports of country i must be the same across all partner countries j.

_it E d e it s io w n L.5. Trade in intermediate goods: producero and user industries r yl B n

Figure L.5.1. Share of industries in total imports of intermediates, producing industry, 2005 O O e

0.20 da C u

0.18 E e e

O R s

0.16 n e A r tu 0.14 L e c

0.12

0.10

0.08

0.06

0.04

0.02

Mining Finance

Construction and quarryingMetal products Motor vehicles Food products Other services Trade and repairs Chemical products Computer activities Other manufacturing Mechanical products Rubber and plastics Transport and storageHotels and restaurants Agriculture and fishing Scientific instruments Other business activities Coke, refined petroleum Electricity, gas and water Other transport equipment Research and development Textiles and wearing apparel Wood, publishing and printing Post and telecommunications Office machinery and computers Radio, TV and communic. equipment Renting of machinery and equipment 1 2 http://dx.doi.org/10.1787/846033633802 Figure L.5.2. Share of industries in total imports of intermediates, using industry, 2005

0.14

0.12

0.10

0.08

0.06

0.04

0.02

Finance petroleum Real estate Coke, refined Construction Other servicesMotor vehiclesMetal products Food products Trade and repairs Chemical products Rubber and plastics Computer activities Other manufacturing Mechanical products Mining and quarrying Transport and storage Agriculture and fishingHotels and restaurantsScientific instruments Electricity, gas and water Other business activities Other transport equipment Research and development Textiles and wearing apparel Wood, publishing and printing Post and telecommunications Office machinery and computers Radio, TV and communic. equipment Renting of machinery and equipment

Note: Total imports of intermediates of 34 countries amounted to USD 5 309 140 million in 2005. For some countries trade flows are missing for certain industries, especially services industries. For these industries the shares of the industry of origin will be underestimated. 1 2 http://dx.doi.org/10.1787/846061526804

_it E d e it s io w n L.6. Offshoring/outsourcing abroad o r yl B n

■ In line with the increasing importance of imported and various effects have to be taken into account. O O e

D intermediates, offshoring or outsourcing abroad has Offshoring (including relocation) mayda lead in a firstl

increased in almost all countries over 1995-2005. In phase to short-term employmentC losses if certainu E e e

Luxembourg, Ireland, Hungary, the Slovak Republic and activities are moved offshore or decline in importance. O R s

Estonia, the sourcing of intermediates abroad has However, there may be positiven impacts on productivity,

e A r increased significantly. thereby reducing costs and prices both in theu activity L c t ■ Smaller countries, notably Luxembourg, Ireland and that is directly affected and in other activitiese that use Hungary, typically report higher offshoring indicators. the products of this activity downstream. Two large OECD countries, Japan (10%) and the United States (11%) offshore relatively little compared to other OECD countries. Although the level in large non- Sources member countries such as Brazil, India, Argentina and •OECD, Input-Output Database, January 2010. China remains below the OECD average, the offshoring of intermediates has also increased in importance in •OECD, Bilateral Trade Database, January 2010 these countries. For further reading ■ The offshoring of business activities has gained much • De Backer, K. and N. Yamano (2007), “The Measurement policy attention in recent years because of its supposed of Globalisation Using International Input-Output adverse effects on national employment. However, the Tables”, OECD, Science, Technology and Industry Working link between offshoring and employment is complex, Paper 2007/8, www.oecd.org/sti/working-papers.

Index of offshoring/outsourcing abroad

The index of outsourcing abroad (OIi) is constructed as follows:

For a sector i and for a set of goods and services j, the index of outsourcing (OIi) is: purchases of inputs byj industry i M OI = • j i inputstotal used by industry i D i j

where Mj are the imports of goods or services j

Dj is the domestic demand for goods or services j

where Dj = Yj – Xj + Mj

with: Yj is the production of goods or services j

Xj are the exports of goods or services j In other words, the more imports of goods or services j are purchased by industry i as input for its production, the more the outsourcing of industry i is important. These indices make it possible, at an aggregate level (but also at the sectoral level), for a compiling country to measure the extent of outsourcing abroad of its manufacturing industry with respect to both goods and services, as well as the extent of outsourcing abroad of services with respect to both goods and services. Calculations are typically made from Input-Output tables and trade data. The latest set of OECD Input-Output tables covers 42 countries with data for 1995, 2000 and 2005. The 5-year time interval is appropriate because I-O tables describe the structure of national economies and coefficients are therefore not subject to large fluctuations. OECD Input-Output tables cover 48 industries, but many countries actually report fewer industries. In order to ensure country comparability, some industries are aggregated.

_it E d e it s io w n L.6. Offshoring/outsourcingo abroad r yl B n

Figure L.6.1. Index of outsourcing abroad by country, 2005 O O e

% da C u

E e e

O R s

n e 50 A r u L e c t 40

Italy Korea Chile Spain OECD China IndiaJapanBrazil Ireland Austria MexicoGreeceFinland Poland France Turkey HungaryEstonia SloveniaBelgium Sweden CanadaNorway Denmark Portugal Germany Indonesia Australia Netherlands Luxembourg South Africa United States Slovak Republic Czech Republic United Kingdom

1 2 http://dx.doi.org/10.1787/846145113445

Figure L.6.2. Change in offshoring, by country, 1995-2005

% 16

-2

-4

Italy ChinaJapan OECD Brazil Korea Spain India Chile Poland FinlandGreece Austria France Turkey Ireland Hungary Sweden EstoniaBelgium Norway Canada Denmark Germany PortugalIndonesia Australia Slovak Rep. Czech Rep. Netherlands Luxembourg United StatesSouth Africa United Kingdom

1 2 http://dx.doi.org/10.1787/846183013775

_it E d e it s io w n L.7. Offshoring/outsourcing abroad: manufacturing and serviceso r yl B n

■ The offshoring indicator calculated separately for value chains increasingly encompasses services O O e

D manufacturing and services shows that except for sectors. Nonetheless, the level of da offshoring is stilll

Luxembourg and Ireland, international sourcing of much lower in marketC services than in the total uof E e e

intermediates is on average more important in manufacturing industries. O R s manufacturing. The specific cases of Luxembourg and n

e Ireland are likely to be due to the significant presence A r tu of financial and call centre activities in these countries. L e c

■ Over 1995-2005, the level of offshoring in Sources manufacturing generally increased relatively little • OECD Input-Output Database, January 2010. except in eastern European countries. Following their • OECD Bilateral Trade Database, January 2010. adhesion to the European Union, these countries attracted a large number of (western European) For further reading multinational companies. As a result of the • De Backer. K. and N. Yamano (2007), “The Measurement international sourcing strategies of these companies, of Globalisation using International Input-Output offshoring in these countries increased. Tables”, OECD, Science, Technology and Industry Working Paper 2007/8. ■ In contrast, the level of offshoring increased • Feenstra, R.C. and G.H. Hanson (1996), “Globalisation, significantly in the services sector. The sourcing of Outsourcing and Wage Inequality”, American Economic intermediates abroad has increased in almost all Review, Vol. 86(2), pp. 240-245. countries in market services. These results suggest • Feenstra, R.C. and G.H. Hanson (1999), “The Impact of that while offshoring of intermediates, like the trade of Outsourcing and High-Technology Capital on Wages: final products, has traditionally taken place in Estimates for the United States, 1979-1990”, Quarterly manufacturing industries, the emergence of global Journal of Economics, Vol. 114(3).

Index of offshoring/outsourcing abroad (2)

There is some confusion about the definition of offshoring and outsourcing. The index of offshoring/international outsourcing presented here is based on the indicator proposed by Feenstra and Hanson (1996, 1999) who have presented it as an indicator of outsourcing. Offshoring is generally defined as companies’ purchases of intermediate goods and services from foreign providers at arm’s length or the transfer of particular tasks within the firm to a foreign location, i.e. to foreign affiliates. Outsourcing refers to the purchasing of intermediate goods and services from outside specialist providers at arm’s length either nationally or internationally. The cross-border aspect is the distinguishing feature of offshoring, i.e. whether goods and services are sourced abroad as opposed to the domestic economy, not whether they are sourced from within the same firm or from external suppliers.

Location lanoitaN lanoitanretnI

Domestic outsourcing International outsourcing Offshoring Outsourced

Control

Domestic supply International insourcing Insourced

_it E d e it s io w n L.7. Offshoring/outsourcing abroad: manufacturingo and services r yl B n

Figure L.7.1. Offshoring of manufacturing, by country O O e

da l 1995 2005 C

% u

40 E e e

O R s

n e 35 A r u L e c t 30

Italy OECD Korea SpainIsrael Chile China IndiaBrazilJapan Mexico AustriaIreland Finland Poland Greece France Turkey HungaryEstoniaSlovenia Belgium Sweden Canada Norway Portugal Denmark Germany Indonesia Australia Netherlands New ZealandSouth AfricaLuxembourgUnited States SlovakCzech Republic Republic United Kingdom Russian Federation

1 2 http://dx.doi.org/10.1787/846187758814

Figure L.7.2. Offshoring of services, by country

% 1995 2005 60

Italy Chile Korea IsraelSpain OECDBrazilChina Japan India Ireland AustriaGreece Finland France PolandTurkeyMexico EstoniaBelgiumNorwayHungarySweden Slovenia Canada Denmark Indonesia Germany Portugal Australia Netherlands Luxembourg South AfricaNew Zealand United States Slovak Republic Czech Republic United Kingdom Russian Federation

1 2 http://dx.doi.org/10.1787/846200606741

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

_it E d e it s io w n L.8. Offshoring/outsourcing abroad by technology level o r yl B n

■ The sourcing of intermediates abroad appears to be lower-technology industries); in addition, the level of O O e

D more important in higher-technology than in lower- offshoring increased in almost allda countries overl

technology industries (higher-technology industries 1995-2005. The OECD C average increased from 38%u E e e

are defined as high- and medium-high-technology in 1995 to 64% in 2005. O R s industries, ISIC Rev. 3: 24, 29-33, 35; lower-technology n

e industries are defined as medium-low- and low- A r tu technology industries, ISIC Rev. 3: 15-23, 25-28, 34, L e c Sources 36-37). In most countries the offshoring indicator is • OECD Input-Output Database, January 2010. higher for higher-technology industries than for lower- technology industries, owing to the generally greater • OECD Bilateral Trade Database, January 2010. complexity of technology-intensive goods which typically require a broad range of inputs. For further reading • Criscuolo C. and M. Leaver (2005), “Offshore ■ Smaller countries source relatively more Outsourcing and Productivity”, mimeo. internationally, especially those with a significant • De Backer, K. and N. Yamano (2007), “The Measurement presence of multinational firms. This observation is of Globalisation using International Input-Output consistent with earlier reported results. Tables”, OECD Science, Technology and Industry Working Paper 2007/8, www.oecd.org/sti/working-papers. ■ The level of offshoring has increased in the majority • Egger, H. and P. Egger (2001), “International Outsourcing of countries, both in the higher-technology and the and the Productivity of Low-skilled Labour in the EU”, lower-technology manufacturing industries. Sourcing WIFO Working Paper, No. 152 (Economic Inquiry, Vol. 44, of intermediates abroad seems to have grown more Issue 1, 2006). strongly in higher-technology industries in most OECD • Girma, S. and H. Görg (2004), “Outsourcing, Foreign countries. Ownership, and Productivity: Evidence from UK Establishment-level Data”, Review of International ■ The level of offshoring is especially high in the ICT Economics, Vol. 12, Issue 15. manufacturing industries, even above that of the • Görg, H., A. Hanley and E. Strobl (2004), “Outsourcing, broader group of higher-technology industries. For this Foreign Ownership, Exporting and Productivity: An group of industries the differences in offshoring are Empirical Investigation with Plant Level Data”, Research smaller across countries (compared to higher-and Paper 08, University of Nottingham.

Index of offshoring/outsourcing abroad (3)

While the Feenstra and Hanson measure (see Section L.7) has often been used, there is no consensus that it is the most appropriate measure. Girma and Görg (2004) argue that it is too wide, especially for analyses on the firm level; instead they prefer a measure which includes only the contracting out of machine maintenance services, engineering and drafting services, accounting services and computer services. Egger and Egger (2001) also use a narrower measure which restricts outsourcing to outward processing. Others, such as Görg et al. (2004) and Criscuolo and Leaver (2005), have more direct data on intermediate inputs, including raw materials and components, and services inputs as well as the proportion of these sources abroad.

_it E d e it s io w n L.8. Offshoring/outsourcing abroado by technology level r yl B n

Figure L.8.1. Offshoring, higher-technology manufacturing industry, by country O O e

1995 2005 da

% C u

100 E e e

90 O R s

80 n e A r 70 tu 60 L e c 50 40 30 20 10 0

Italy Chile Spain Israel OECD Korea ChinaBrazilIndiaJapan Ireland Greece Mexico Austria FinlandPoland France Turkey EstoniaHungary Slovenia Belgium Sweden Canada Norway Portugal Denmark Australia Indonesia Germany Netherlands Luxembourg New Zealand SouthUnited Africa States Czech Republic Slovak Republic United Kingdom Russian Federation

1 2 http://dx.doi.org/10.1787/846242632506 Figure L.8.2. Offshoring, lower-technology manufacturing industry, by country

% 1995 2005 70

Italy Israel Chile Spain OECD Korea IndiaJapanChinaBrazil Ireland Austria Mexico GreecePoland FinlandFrance Turkey Estonia HungarySlovenia Belgium Sweden NorwayCanada Denmark Portugal Germany Australia Indonesia Netherlands Luxembourg New Zealand United StatesSouth Africa Slovak Republic Czech Republic United Kingdom Russian Federation 1 2 http://dx.doi.org/10.1787/846246841776 Figure L.8.3. Offshoring, ICT manufacturing industry, by country

% 1995 2005 100 90 80 70 60 50 40 30 20 10 0

Italy Spain IsraelBrazil OECD ChinaKorea IndiaJapan Mexico Ireland Greece Poland Finland Turkey Austria France EstoniaHungary CanadaSlovenia Belgium Norway Sweden Portugal Denmark Australia GermanyIndonesia Netherlands South Africa New Zealand Luxembourg United States Czech Republic Slovak Republic United Kingdom 1 2 http://dx.doi.org/10.1787/846263150065

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

_it E d e it s io w n L.9. Vertical specialisation: import content of exports o r yl B n

■ With the emergence of global value chains, imports specialisation is most evident in countries with a strong O O e

D and exports increasingly move together since presence of multinationals. Foreign affiliatesda in differentl

companies’ production processes are increasingly host countries produceC intermediates which are thenu E e e

characterised by sequential production and movements exported to final consumers but also to other affiliates O R s back and forth. This vertical trade is made up of intra- and to the headquarters of then multinational company.

e firm trade within multinational companies as well as A r ■ tu arm’s length relations between independent companies. The import content of exports is Lparticularlye c large in more basic industries which are heavy users of primary ■ Exports are increasingly composed of intermediate goods such as coke and refined petroleum, basic inputs imported from abroad; the import content of metals, chemicals, and rubber and plastics. A second exports (also called “vertical specialisation in trade”) group of industries that display a rather high import represented on average 23% of total trade among OECD content of exports are the more technology-intensive countries in 2005. industries that produce modular products. Parts and components are often produced in one country before ■ In Luxembourg, Hungary, Ireland and Estonia, the being exported to another in which they are import content of exports exceeded 50% in 2005. The assembled. This international division of labour is United States, the Russian Federation, Australia, found in electrical machinery, radio/television and Brazil and India import relatively less through vertical communication equipment, office, accounting and trade than other countries because of their size. computing machinery but also motor vehicles. ■ Between 1995 and 2005, the import dependency of exports increased in almost all countries. The increase was particularly strong in Luxembourg, Poland, the Slovak Republic, China and Greece. While imports may Sources originate from affiliates of the parent group abroad or • OECD Input-Output Database, January 2010. from non-affiliated firms, the increase in vertical • OECD Bilateral Trade Database, January 2010.

Import content of exports

An important aspect of globalisation is the link between a country's exports and imports. This link may be complex if a number of countries are producing parts of the same final goods and services. For example, if a motor car manufacturer imports certain components (e.g. the chassis) the direct import contribution will be the ratio of the value of the chassis to the total value of the car. And if the car manufacturer purchases other components from domestic manufacturers, who in turn use imports in their production process, those imports must be included in the car's value. These indirect imports should be included in any statistic that attempts to measure the contribution of imports to the production of motor cars for export. Hummels et al. (1998, 2001) introduced the term “vertical specialisation” in calculating the direct and indirect imported inputs that are included in a country’s exports. As a result of global value chains and the corresponding geographical fragmentation of activities, countries become vertically specialised within the production process for some good or service, as companies tend to concentrate different production stages for a single good in each country. The vertical specialisation measures try to reflect the process by which different countries become part of a single production chain, linking the imported inputs required by one country with its exports. The import content of exports can be calculated as the foreign value added embodied in exports: = Imported intermediates x (exports/gross output)

= u * Am * (I-Ad)-1 * X/Xk where Am and Ad contain the input-output coefficient for imported and domestic transactions respectively; u denotes an 1x nvector each of whose components is unity, the matrix X is an nx1vector of exports and Xk is total country exports. The calculation is based on bilateral trade data and Input-Output tables. I-O tables measure the relations between the producers of goods and services (including imports) within an economy and the users of the same goods and services (including exports). As such, they can be used to estimate the contribution that imports make in the production of any good or service for export. An import content of exports of 20% for example means that 20% of the exports are directly and indirectly based on intermediates that have been imported.

_it E d e it s io w n L.9. Vertical specialisation: importo content of exports r yl B n

Figure L.9.1. Import content of exports, by country O O e

da l 1995 2005 C

% u

70 E e e

O R s

n e 60 A r u L e c t 50

Italy Korea Spain China OECD Chile Israel Japan Brazil India Ireland Mexico Finland Austria Poland Greece France Turkey Hungary Estonia Slovenia Belgium Denmark Sweden Canada Norway Portugal Romania Germany Indonesia Australia Luxembourg Netherlands New Zealand South Africa United States Slovak Czech Republic Republic United Kingdom Russian Federation

1 2 http://dx.doi.org/10.1787/846282515538

Figure L.9.2. Import content of exports, by industry

% OECD average 1995 OECD average 2005 70

Coke, Utility Chemicals Basic metals Construction Radio, TV and Motor vehicles refined petroleum Manufacturing nec Rubber and plastics Mining and quarrying Real estate activities communication equip. Scientific instruments Hotels and restaurantsTransport and storage Finance and insurance Electrical machinery nec Wood and wood products Other business activities Fabricated metal products Other transport equipment Research and development Wholesale and retail trade Textiles, leather and footwear Food, beverages and tobaccoPost and telecommunications Machinery and equipment, necPaper, printingNon-metallic and publishing Computermineral products and related activities Office machinery and computers Agriculture, forestry and fishing Renting of machinery and equipment

1 2 http://dx.doi.org/10.1787/846312557232

Information on data for Israel: http://dx.doi.org/10.1787/888932315602.

_it E d e it s io w n L.10. Import content of exports by partner countries o r yl B n

■ The distribution of the vertical specialisation within the region. Previous research has revealed a O O e

D measures by partner countries/zones shows the triangular trade pattern in this region,da with parts andl

importance of distance and trade costs for vertical trade. components produced C by the more developed Japan,u E e e

Countries tend to source intermediates particularly Chinese Taipei and Korea and then exported to O R s from neighbouring countries and incorporate them in emerging economies such as n China, where the different

e A r their exports. intermediates are assembled into finished products.u L e c t ■ The import content of exports of European countries ■ The assembled final products and intermediates are is largely from other European countries. In most then exported from China to these economies because countries around three-quarters of the intermediates Asian firms re-import a growing part of the production embodied in exports are sourced from Europe. The they relocate. Assembled products from China are also situation of Ireland is somewhat different owing to exported to other developed countries/regions such as relatively high sourcing from NAFTA countries; the Europe and the United States where they may undergo significant presence of US multinational companies in some minor changes (packaging, marketing, etc.) and particular is likely the reason. hence appear in the vertical trade of these countries. The case of Apple’s iPod clearly illustrates this: ■ Within the NAFTA region, Canada and Mexico are components for this product are produced in Japan, heavily oriented towards other NAFTA countries: more Korea and the United States, assembled in China and than 50% of the imported intermediates embodied in then exported to the United States. their exports originate in the NAFTA zone. For the United States, the two other NAFTA countries have less importance owing to the relatively large share of East Asian countries (Korea, Japan, China and Chinese Taipei). Sources ■ In Japan, China and Korea, the majority of • OECD Input-Output Database, January 2010. intermediates embodied in exports are sourced from • OECD Bilateral Trade Database, January 2010.

Import content of exports: shortcomings

A first shortcoming of the indicator of vertical specialisation relates to its calculation, which is based on input- output information and some implicit assumptions. For example, it is typically assumed that the same input- output requirements apply for the goods and services that are exported and those that are destined for final demand. The calculations are also based on the assumption that countries’ imports originate entirely from foreign sources, which is not necessarily the case. However, it is very difficult to measure the domestic content of countries’ imports owing to the lack of an input-output table that applies to the rest of the world. Second, the level of sector aggregation in the Input-Output tables can lead to biases in computing the “true” level of country and sector vertical specialisation. At the sector level, whenever there is a positive (negative) correlation between exports and the imported inputs to gross output ratio, the calculated vertical specialisation values will be downward (upward) biased. Third, the import content of exports or vertical specialisation indicator captures the importance of global value chains and international fragmentation. It does not allow for identifying the “actors” that shape these international value chains. Since the indicator is computed at aggregate industry and/or economy levels, it does not allow for distinguishing between the share of vertical trade that is realised by multinational firms and the share that takes place through arm’s length relations. As such, this indicator should be interpreted with care in policy discussions. An increase in the foreign content of exports does not necessarily indicate that a country is losing competitiveness. It may even be gaining if it succeeds in becoming part of the global value chains of high-growth industries. The import content of exports is above all an indicator which describes the (changing) structure and dynamics of countries that, together with other appropriate indicators, can be used in discussing countries’ competitiveness.

_it E d e it s io w n L.10. Import content of exportso by partner countries r yl B n

Figure L.10.1. Import content of exports with partner countries, European countries O O e

da l From Europe From NAFTA From East Asia From otherC Asia From RoW

% u

70 E e e

O R s

n e 60 A r u L e c t 50

Italy Spain Ireland Estonia Finland Austria Poland Greece France Norway Hungary Slovenia Belgium Portugal Denmark Sweden Germany Luxembourg Netherlands Slovak RepublicCzech Republic United Kingdom

1 2 http://dx.doi.org/10.1787/846346143080

Figure L.10.2. Import content of exports with partner countries, other countries

% From Europe From NAFTA From East Asia From other Asia From RoW 45

Chile Korea China Japan Brazil India Mexico Canada Turkey Indonesia Australia United States South Africa

1 2 http://dx.doi.org/10.1787/846348821313

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Main OECD Databases Used

Databases of the OECD’s Directorate for Science, Technology and Industry AFA: The Activities of Foreign Affiliates Database presents detailed data on the performance of foreign affiliates in the manufacturing industry of OECD countries (inward and outward activity of multinationals). The data indicate the increasing importance of foreign affiliates in the economies of host countries, particularly in production, employment, value added, research and development, exports, wages and salaries. AFA contains 16 variables broken down by country of origin (inward investment) or location (outward investment) and by industrial sector (based on ISIC Revision 3) for 25 OECD countries and three OECD Accession countries (Estonia, Israel and Slovenia). Publication: OECD, Measuring Globalisation: Activities of Multinationals, 2007 Edition. Vol. I: Manufacturing. Also available on CD-ROM and on line via SourceOECD (www.sourceoecd.org). FATS: This database gives detailed data on the activities of foreign affiliates in the services sector of OECD countries (inward and outward activity of multinationals). The data indicate the increasing importance of foreign affiliates in the economies of host countries and of affiliates of national firms implanted abroad. FATS contains 14 variables broken down by country of origin (inward investment) or destination (outward investment) and by industrial sector (based on ISIC Revision 3) for 24 OECD countries. Publication: OECD, Measuring Globalisation: Activities of Multinationals, 2007 Edition. Vol. II: Services. STAN – Industry: The STAN Database for Industrial Analysis includes annual measures of output, labour input, investment and international trade by economic activity, which allow users to construct a wide range of indicators focused on areas such as productivity growth, competitiveness and general structural change. The industry list provides sufficient details to enable users to highlight high-technology sectors and is compatible with those used in related OECD databases in the “STAN” family (see below). STAN-Industry is primarily based on member countries’ annual National Accounts by activity tables and uses data from other sources, such as national industrial surveys/ censuses, to estimate any missing detail. Since many of the data points in STAN are estimated, they do not represent the official member country submissions. See: www.oecd.org/sti/stan. Publication: STAN-industry is available on line via SourceOECD (www.sourceoecd.org where it is regularly updated (new tables are made available as soon as they are ready). A “snapshot” of STAN-industry is also available on CD-ROM together with the latest

OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 229 ANNEX: MAIN OECD DATABASES USED _it E d e it s io versions of STAN – R&D (ANBERD), STAN – Bilateral Trade and a setw of derived STAN n o Indicators. See www.oecd.org/sti/stan/indicators. r yl B n

STAN – Bilateral Trade (BTD): This database presents detailed trade flows by O O e

D manufacturing industry between OECD and several non-OECD declaring countriesda and a l

selection of 70 partner countries or zones. The data are derivedC from the OECD’s u

E e e

International Trade by Commodity Statistics (ITCS) Database and are convertedO R from product s

classification schemes to an activity classification scheme based on the n ISIC Revision 3. e A r u BTD’s industry list is compatible with those used in the OECD’s STAN-Industry,L e Input-c t Output tables and ANBERD Databases. Data are presented in thousands of USD at current prices, and cover the period 1988-2008. See: www.oecd.org/sti/btd. Publication: OECD (2007), Bilateral Trade Database, 2007. BTD is available on line via SourceOECD (under the STAN heading) as well as on the STAN family CD-ROM. STAN – I-O: The latest set of OECD Input-Output tables consists of matrices of inter- industrial flows of transaction of goods and services (domestically produced and imported) in current prices for all OECD countries except Iceland and 13 non-member economies (OECD Accession and Enhanced Engagement countries plus Argentina, Chinese Taipei and Romania) covering the years 1995, 2000 and 2005 or nearest years. The tables are based on ISIC Revision 3 and can be accessed via OECD’s data dissemination service OECD.Stat and as a suite of Excel files. See: www.oecd.org/sti/inputoutput. R&D: The R&D Database contains the full results of the OECD surveys on R&D expenditure and personnel. This database serves, inter alia, as raw material for the MSTI Database. Publication: OECD (2010), Research and Development Statistics: 2009 Edition. Also available on line via SourceOECD and on CD-ROM with the latest edition of Main Science and Technology Indicators as OECD Science, Technology and R&D Statistics. MSTI: The Main Science and Technology Indicators Database provides a selection of the most frequently used annual data on the scientific and technological performance of OECD member countries and nine non-member economies (Argentina, China, Israel, Romania, the Russian Federation, Singapore, Slovenia, South Africa, Chinese Taipei). The indicators, expressed in the form of ratios, percentages, growth rates, cover resources devoted to R&D, patent families, technology balance of payments and international trade in highly R&D- intensive industries. Publication: OECD (2010), Main Science and Technology Indicators 2009/2. Biannual. Also available on line via SourceOECD and on CD-ROM (see above). Patent Database: This database covers data on patent applications to the European Patent Office (EPO), the US Patent and Trademark Office (USPTO), patent applications filed under the Patent Co-operation Treaty (PCT) that designate the EPO, as well as Triadic Patent Families. Data mainly derives from the EPO’s Worldwide Patent Statistical Database (PATSTAT) which provides a harmonised and comparable set of information on patent applications taken in patent offices worldwide. See: www.oecd.org/sti/ipr-statistics. The series are published on a regular basis in OECD, Main Science and Technology Indicators and are available via OECD’s data dissemination service OECD.Stat. TBP: The TBP Database presents information on the technology balance of payments. The database serves, inter alia, as raw material for the MSTI Database and publications.

230 OECD ECONOMIC GLOBALISATION INDICATORS © OECD 2010 ANNEX: MAIN OECD DATABASES USED _it E d e it s io Other OECD databases w n o r Foreign Direct Investment: yl B n

● International Direct Investment Database (Directorate for Financial and Enterprise Affairs) O O e

da l

National Accounts: C u E e e

● Annual National Accounts of OECD Countries (Statistics Directorate)

O R s

● OECD Quarterly National Accounts Database (Statistics Directorate) n e A r u Education: L e c t Education Database (Directorate for Education) Trade: ● International Trade by Commodity Statistics Database (Statistics Directorate) ● Monthly Statistics on International Trade Database (Statistics Directorate) ● Database on Trade in Services by Partner Country (Statistics Directorate) ● OECD Trade Indicators (Statistics Directorate) Economic Indicators: ● Main Economic Indicators Database (Statistics Directorate) Further details on OECD statistics are available at: www.oecd.org/statistics.

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OECD PUBLISHING, 2, rue André-Pascal, 75775 PARIS CEDEX 16 PRINTED IN FRANCE (92 2010 03 1P) ISBN 978-92-64-08435-3 – No. 57355 2010 2010 Measuring Globalisation Measuring Economic OECD Indicators Globalisation

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