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OECD Secretary-General

G20 Turkish Presidency/OECD Stocktaking Seminar on Global Value Chains

 

Opening remarks by Angel Gurría

Secretary-General, OECD

Paris, 2 June 2015

(As prepared for delivery)

 

Ambassador Sinirlioğlu, dear Ayse,  

Dear Ministers, G20 Sherpas, Excellencies,

Ladies and gentlemen,

 

Good morning. It is a pleasure to welcome you to the third annual stocktaking seminar on global value chains, jointly organised by the Turkish Presidency of the G20 and the OECD.

 

This seminar is taking place in a still shaky global economic environment: while OECD’s Economic Outlook – to be released tomorrow – will show global GDP accelerating to close to 4% in 2016, a number of major economies have slowed or are growing sluggishly. With growth in the first quarter of this year likely to come in at the slowest rate since the crisis, it is too early to declare victory and a strong policy response is still badly needed. In this context, the Turkish three “I's” – implementation, investment, and inclusiveness – constitute an extremely relevant policy trilogy, that the OECD is actively supporting because it captures the central policy requirements of the moment. But, with your permission Madam the Ambassador, I would respectfully add a fourth “I” to this triptych: “I” for integration, I mean enhanced global market integration through a new impetus given to global trade and cross-border investment - which would in turn offer a free stimulus to global growth. This is what your discussions this morning are all about. 

 

But for global trade to be fully inclusive, global value chains should not only be a source of opportunities for big multinational corporations from the US, Europe, Japan, or from the emerging markets, but also for the small and medium-sized businesses. The G20 Presidency’s focus on SMEs participation in GVCs is therefore very welcome and extremely relevant, especially as the picture is mixed on that score.

 

On the one hand, the fragmentation of production has created new potential opportunities for relatively small firms – including in developing and emerging economies – to enter global markets as components or services suppliers, without having to build a product’s entire value chain. New niches for the supply of novel products and services continuously emerge and may allow SMEs to exploit their flexibility and speed. Certainly, the on-going fragmentation of production combined with the development of ICTs has created new entrepreneurial possibilities for SMEs. ICTs – in particular broadband – have eased access to markets beyond national borders and have enabled a new category of micro-multinationals; in other words, small firms that develop global activities from their inception. Access to ICT networks can also enable small firms to engage in e-commerce, which can be a low-cost way for firms to engage in trade, either to buy or sell. In Korea, for example, small firms derived almost 30% of their turnover from e-commerce in 2012.

 

Removing barriers and facilitating access to global markets for SMEs as exporters is however only part of the story. Global value chains provide niches that SMEs can exploit as upstream suppliers to larger exporting firms within the same economy. Conventional measures of integration that focus only on those SMEs engaged in direct exports under-estimate the real scale of their integration in GVCs, and the real exposure they have to foreign markets. New analysis being undertaken by the OECD, which builds on our ground-breaking TiVA work, shows that this indirect upstream contribution is sizable in many OECD countries, particularly in the services sector where entry costs are lower.

 

In 2007 for example, SMEs in the United States accounted for 28% of US direct exports, but because they also sold to larger firms that export – and are thus engaged in indirect exporting – they actually accounted for 41% of US value-added through exporting. Such indirect exporting alone supported an estimated 2.1 million jobs.  Gabriela, our G20 sherpa, has already told you about it in more details.

 

The insertion of SMEs into GVCs is especially important in the developing world, where these firms represent approximately 80 to 90% of total employment. In ASEAN for example, the share of SMEs participating in global production networks, both as direct and indirect exporters, varies from 6% in Indonesia to 46% in neighbouring Malaysia. The ability of SMEs to participate in GVCs can yield substantial benefits, including spill-overs of production technology and managerial know-how. SME development policies, including supplier-development programs and other forms of collaboration with foreign-invested firms, can promote such positive linkages.

 

On the other hand, SMEs participation and upgrading in GVCs – in particular in developing economies – is far from automatic. While the opportunities for SMEs can be large, so too are the barriers that they must overcome. And our analysis reveals significant differences across countries in the degree of integration of their SMEs – as I suggested with the example of ASEAN. 

 

Regardless of a firm’s position in the value chain, quality, cost, and reliability requirements must be consistently met as buyers’ sourcing strategies are constantly revised to improve these elements of their supply chains.

 

The ability of SMEs to swiftly adopt new technologies, to learn by doing, to innovate, and to optimize their production is constrained by their small scale, limiting their ability to engage with GVCs. To help young SMEs scale up quickly and better integrate in GVCs, it is important to lower entry barriers to the entry (such as administrative burdens), barriers to growth (for example, access to finance), and barriers for the exit of firms (such as bankruptcy laws that overly penalise failure), as the latter may end up trapping resources in unproductive firms. Ensuring a level playing field for new SMEs is particularly important; in many countries, policies still favour incumbents over new firms, reducing the potential impact of these challengers on growth, productivity and exports.

 

The growing evidence on the degree of integration of firms and countries in GVCs, as well as the obstacles to the participation of some categories of businesses, highlights both the importance of having a liberal trade and investment regime as well as the need for complementary policies – education, skills development, infrastructure investment, access to finance, innovation, etc. - that enable firms – small and large, countries – advanced and developing – and people – highly-qualified as well as those who need to be trained or re-trained – to be active players in international trade, upgrade in GVCs and, in due course, make the most of globalisation.

 

The increasing number of countries that engage in our Policy Dialogue on GVCs, Production Transformation and Development is a testament to the need for collective action in this field, and serves the purpose of exchanging good practices. Following a plenary meeting hosted by Malaysia last October, Chile will host the plenary meeting this fall, followed by Mexico in 2016 and Thailand (UNESCAP) in 2017.

 

Today’s seminar provides us with an opportunity to take a deeper dive into the analysis and the policy lessons that are emerging from our collective work on GVCs – especially as relates to the challenges and opportunities for small and medium-sized enterprises, and low income countries. Our discussions today will inform a report to G20 Trade Ministers in Istanbul this October – SMEs in GVCs: Challenges and Options for Policies in Trade and Complementary Areas – which we are jointly preparing with our colleagues from the World Bank Group.

 

I sincerely hope that our work on GVCs and our discussions here today will make a useful contribution as G20 countries continue to work towards meeting their ambitious growth objectives over the next five years, and beyond.

 

Thank you.