International Economic Shocks and the Challenges of International Corporations

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1 RIETI Policy Symposium International Economic Shocks and the Challenges of International Corporations Ryuhei Wakasugi Research Counselor, RIETI Professor Kyoto University and Keio University R. Wakasugi 1

2 Global Recession after Financial Crisis: Asymmetric Effects on Economic Growth Widely spread to the world market Seriously negative effect on Japan and NIES 4 Positive economic growth in China and India World U.S EU United Kingdom Japan China NIES ASEAN India R. Wakasugi 2

3 Decrease of world imports: Sharp decline of US imports Large expansion of US import demand after 2001 Large decrease in 2008 年 Increase of US import from Japan and East Asia, followed by the increasing import from China $million China US imports by country Japan Korea ASEAN Other Asia and Pacific Europe Canada Central and South America R. Wakasugi :I 2000:II 2000:III 2000:IV 2001:I 2001:II 2001:III 2001:IV 2002:I 2002:II 2002:III 2002:IV 2003:I 2003:II 2003:III 2003:IV 2004:I 2004:II 2004:III 2004:IV 2005:I 2005:II 2005:III 2005:IV 2006:I 2006:II 2006:III 2006:IV 2007:I 2007:II 2007:III 2007:IV 2008:I 2008:II 2008:III 2008:IV/p/

4 Decreasing Demand of US after the Financial Crisis: Asymmetric Reduction of Imports Sharp reduction of US import in Automobiles and parts and capital goods Reduction of US imports from Japan and Canada 2008:I 2008:II 2008:III 2008:IV 2009:I/p/ All countries Europe Canada Mexico China Japan Petroleum and products Foods, feeds, and beverages Industrial supplies and materials Capital goods, except automotive Automotive vehicles, parts, and engines Consumer goods (nonfood) R. Wakasugi 4

5 Shocks on International Trade after Financial Crisis Dramatic change in world demand after the bubble before 2007 Widely spread to the world market through global sourcing Asymmetric effects on the industries and countries R. Wakasugi 5

6 Macroeconomic Imbalance: Increase of uneven distribution of I-S imbalance US current deficit vs Chinese current surplus Decreasing trade surplus of Japan 1000 $Billion Current Balance U.S. EU Japan China NIES-4 ASEAN-5 India R. Wakasugi 6 Year

7 Development of global sourcing and production Triad trade among US, China (+ East Asia), and Japan A decline of Japanese share in US import (-) A rise of Chinese share in US import (+) A rise of Japanese share in Chinese export and import (+) China Japan US NIES ASEAN R. Wakasugi 7

8 Outsourcing of Japanese MNCs in the world market Global sourcing and location, in China U.S.A. & Europe 11.5% ROW 2.2% Other Asia 11.6% China 52.8% ASEAN 21.9% R. Wakasugi 8

9 Amplifiers of the trade shocks after the financial crisis Development of multi-tier production network in East Asia supplying to US and EU as the final destinations Selection and concentration to the high-end products EU JAPAN US China NIES 4 ASEAN 5 R. Wakasugi 9

10 Macroeconomic conditions and the exports of Japanese firms Selection and concentration to the demand for high-end products in high-income countries High dependence of Japanese and East Asian products on US import demand Changes in trade structure to that with higher vulnerability to financial shock R. Wakasugi 10

11 Changes of macroeconomic condition and the exports of Japanese firms: Selection and Concentration The effects of changing macroeconomic conditions on the export structure after 1990 ( extensive and intensive margin) TV lntv = + i, t ln Ni, t ln N ln TV ln N i, t i, t N: number of products TV/N: average price of products = α + α ln( GDP ) + α ln( GDP ) + α ln( Ex + α WTO dummy + ε i, t 0 1 Japan 2 i 3 ) 4 = β + β ln( GDP ) + β ln( GDP ) + β ln( Ex + β WTO dummy + ε i, t 0 1 Japan 2 i 3 ) 4 TV ln N i i, t, t = γ + γ ln( GDP ) + γ ln( GDP ) + γ ln( Ex) + γ WTO dummy + ε 0 1 Japan 2 i 3 4 R. Wakasugi 11 11

12 US economic growth and the changes of Japanese exports: reduction of variety increase of average price Export value Number of goods Average price GDP of US GDP of Japan Exchnage rate (\/$) Estimated by Wakasugi and Iida (2009) R. Wakasugi 12

13 Reduction of number of the exported goods to US (Extensive margin) Actual Extensive margin (US) Predicted R. Wakasugi 13 Estimated by Wakasugi and Iida (2009)

14 Actual Increase of the average price sudden drop (Intensive margin) Intensive margin (US) Predicted R. Wakasugi 14 Estimated by Wakasugi and Iida (2009) 14

15 Economic growth of China and Japanese export Export value Number of goods Estimated by Wakasugi and Iida (2009) Average price GDP of China GDP of Japan Exchnage rate (\/$) Dummy for WTO R. Wakasugi 15 15

16 Increasing number of exported goods to China: (extensive margin) Extensive margin (China) Actual Predicted R. Wakasugi 16 Estimated by Wakasugi and Iida (2009) 16

17 Increasing average price (Intensive margin) Intensive margin (China) Actual Predicted Estimated by Wakasugi and Iida (2009) 2008 R. Wakasugi 17 17

18 Changes of Japanese export structure Selection and concentration Concentration to the high-end products for US market Response to the high-income consumers Global sourcing and location Expansion of exports in intermediate and capital goods, and eventually the development of product range R. Wakasugi 18

19 New Paradigm after the financial crisis Changes of demand structure in the world market Changes to higher globalization of production mode Higher qualification of market system in the world Response of corporate strategy R. Wakasugi 19

20 Structural change of world demand From one black hole of high-income region to multiple absorbers in high- and middleincome regions R. Wakasugi 20

21 Growing market size in high income countries Growing population in meddle income countries GDP Population Per capita GDP , ,000 2, ,000 5, ,000 10, ,000 20, ,000 30, , R. Wakasugi 21

22 1996 GDP Population Per capita GDP , ,000 2, ,000 5, ,000 10, ,000 20, ,000 30, , Shere Per capta GDP and Distribution of Population nad Income (1996) CDF (GDP, 1996) CDF (Population, 1996) R. Wakasugi 人当たり GDP

23 GDP Population Per capita GDP , ,000 2, ,000 5, ,000 10, ,000 20, ,000 30, , Per capta GDP and Distribution of Population nad Income (2006) CDF CDF (GDP, 2006) CDF (Population, 2006) R. Wakasugi 人当たりGDP

24 Market expansion in high income countries 1.0 CDF (Income) Per capita GDP and Distribution od Income R. Wakasugi 24 1 人当たり GDP

25 Multiple markets $2,000 $5,000 $30,000 CDF (Population) 1.0 Per capita GDP and Distribution of Population 人当たりGDP R. Wakasugi 25

26 Equalization of income in middle income countries GDP share 1.0 Distribution of Population and Income Population share R. Wakasugi 26

27 Diversification of market size: High income market High income and middle income markets Share Per capita GDP and Distribution of Population and Income GDP, 1996 GDP, 2006 Pop Pop ,000 1,000 2,000 2,000 5,000 5,000 10,000 10,000 20,000 20,000 30,000 30,000 Per capita GDP R. Wakasugi 27

28 Growth model responding to the changing demand in the world Changes of demand structure in the world market Recovery of IS balance in US and the stagnant demand in high income countries Diversification of growing demand: Expansionary demand in the middle income countries including Asia (China, India) and BRICs Growth model with East Asia as a core of production and consumption Two polar model with production network in East Asia and high demand in developed countries to Multiple polar model with production and demand in East Asia R. Wakasugi 28

29 Qualified market: responding to the changing world market Realization of higher market quality in the world market Liberalization of trade and investment: acceleration of WTO new round Market rules to realize the consumer s benefit Enforcement of contractibility in the market transaction: establishment of domestic judicial system Prevention against the rising protectionism in the world market: R. Wakasugi 29

30 MNCs strategy to the changing world market Multiple production system responding to a variety type of demand with dispersive income Supply system for a variety of goods and service responding to high and middle income consumers Innovation and creation of new goods and services, responding to the fast catch-up Product strategy and corporate organization responding to the global market Lower competitiveness of language (Japanese) intensive goods and services R. Wakasugi 30