Research by ING has revealed for the first time the true nature of global value chain connections between companies in Western Europe (WE) and Central and Eastern Europe (CEE) and highlighted the increasing importance of CEE in the provision of services linked to global value chains. Historically, analysis of value chains has focused solely on the supply chain of goods. However, a new report, ‘Valuing a Close Connection Part II’ offers a more accurate picture of corporate relationships by including services.
The report draws on work done on the World Input Output Database by a team from the University of Groningen Faculty of Economics and Business to assess the entire value chain for companies that operate in WE and CEE. “In a sector such as transport equipment, a major part of the value chain is pre- and post-production services, such as research and development (R&D), or after sales services,” explains Mohammed Nassiri, economist at ING and co-author of the report. “However, these services are not captured in traditional analysis.”
By including a broader range of data than previous analysis, ING has been able to show that CEE is not – as is widely assumed – simply a location for low-skill, low-cost manufacturing jobs
according to Rob Ruhl, head of business economics at ING and co-author of the report. “Instead, the connection between WE and CEE is increasingly favouring the development of services in CEE. These are high-skill jobs that pay relatively high wages. Their growth highlights the transformation of the relationship between these two parts of Europe.”
Focus on tightly integrated supply chains
ING’s analysis is selective and focuses only on global value chains involving WE and CEE rather than considering the entire output of both regions’ economies. However, in the manufacturing sector, 68% of the value added ends up in global value chains. The report also focuses specifically on connections between companies in the transport equipment sector. “We chose this sector because it has the highest level of foreign production and the greatest supply chain integration,” says Ruhl. “Where this sector has led, we expect others to follow, although possibly not to the same extent, as not all sectors are so well suited for extensive production fragmentation.”
Moreover, the increasing importance of service jobs linked to manufacturing is vividly displayed in the automotive supply chain. “There was once an assumption that design in the auto sector was solely done in WE and production in CEE,” says Ruhl. “But Dacia, which has a WE parent company [Renault], has a design studio in CEE that draws on its proximity to local markets to produce successful vehicles. CEE has proven that it has the skill base to move into value-added roles.”
Change should benefit both regions
The expansion of CEE’s role to include services may prompt fears that WE might face an exodus of highly-skilled jobs. “We think that’s unlikely to be the case,” says Nassiri. “By becoming part of the same value chain, WE and CEE created almost 1 million jobs in total from 1995 to 2012: both regions benefitted. Moreover, Germany outsources more activity to CEE than any other WE country but has created additional German transport equipment jobs because its competitiveness has been boosted by integrating CEE into its supply chain.”
Ultimately, existing trends will likely result in the distinction between WE and CEE disappearing. “Skills and innovation will determine the location of the different parts of integrated supply chains,” says Ruhl. “The special capabilities of countries in certain areas of technology will become important. Both WE and CEE countries need to focus on high quality education and innovation if they are to retain their existing roles.” Already, CEE countries are establishing industrial clusters based around universities. By developing their workforce’s skills – and increasing the involvement of universities in industry – CEE should be able to capture a larger share of the high skilled-jobs that will increasingly define sectors such as automotive production in the future.