Globalisation and de-industrialisation in Belgium: on the role of imports and international sourcing.
Kristien Coucke
EHSAL Brussels and CatholicUniversity of Leuven
JEL Classification: F1, F23, L2
Keywords:
Sourcing, Manufacturing, Import
Correspondence:Kristien Coucke
EHSAL Stormstraat 2
B-1000 Brussel Belgium
E-mail:
I am grateful to Leo Sleuwaegen for the many suggestions.
Abstract
As an open economy with a strong dependence on trade and activities of multinational firms, Belgium is one of the countries most sensitive to the economic globalisation process. We show how imports of intermediate products have risen strongly, especially in those industries where local manufacturing activities are strongly dependent on the presence of multinational firms. We make a distinction between ‘relocating’ sectors where growing imports go hand in hand with a decrease in value added to output ratio, and ‘upgrading’ sectors where rising imports go together with an increase in the value added to output ratio. In terms of industry dynamics, we find that upgrading sectors are showing strong expansion of output and employment, while relocating sectors show strong declines in employment. In particular, our paper highlights the finding that if upgrading is possible, foreign sourcing can help to expand activities in Belgium and improve the competitiveness of the Belgian economy.
1. Introduction
This paper analyses how increased sourcing activities of multinational firms within their spatial networks have an impact on the evolution of Belgian manufacturing. The term “international sourcing “ or briefly “sourcing” is used here to denote intra-firm trade or trade between affiliates across different countries that belong to the same multinational network. The last two decades, sourcing is enhanced by lower trade costs and improvements in communication technologies (Grossman and Helpman, 2002; Grossman and Helpman, 2003). The improvements in communication technologies lower the cost of governing and operating a multinational network. Sourcing is stimulated by exploiting lower production costs in a foreign country relative to the country of origin. Especially during the last decade, with the opening up of the Eastern European and the Chinese market, the global economy has created huge potentials for gains from such trade.
With more than 80% of its output traded abroad, the Belgian economy is one of the most open economies. Moreover, manufacturing activities in Belgium are strongly dependent on the presence of foreign firms, which control more than 60% of all value added in Belgian manufacturing. These two characteristics make Belgian manufacturing an interesting case to study the effects of global sourcing. We find that over the period 1995-2002, imports of intermediate products have risen strongly, especially in those industries where local manufacturing activities are strongly dependent on the presence of foreign firms. Most of those foreign firms are part of an international network and export-oriented. Our findings highlight a less understood trade phenomenon: export-oriented FDI enhances import growth in host countries.
To uncover the relation between increased imports and industry evolution in more detail, we use a 3-digit NACE industry classification of the Belgian manufacturing. We find in general a negative correlation between the evolution of the ratio of value added over output volume and import growth. This negative correlation reflects how import growth has changed the nature of manufacturing activities in Belgium and supports the hypothesis that increased imports follow increased sourcing behaviour of multinational firms, similar to the findings of Feenstra and Hanson (2003). At the same time, output of multinational firms increased at the cost of the market share of domestic firms in most manufacturing industries. Those results reflect that multinational firms gained market share over domestic competitors, not through an increase in their local production activities in Belgium but through increased international sourcing behaviour that follows from their (re)location decisions. Kogut and Kulatilaka (1994) stressed the competitive advantage of multinational firms in the process of globalisation as a result of their operating flexibility.
However, we find that if upgrading of manufacturing activities is possible in some industries, rising imports go together with an increase in the value added to output ratio, suggesting that firms in these sectors have been able to expand activities in Belgium that add substantial value added to the product. At the same time, we find that upgrading sectors are showing strong expansion of output and employment. As such, imports through foreign sourcing can help to improve the competitiveness of the Belgian economy and generate growth in manufacturing sectors.
The remainder of the paper is organised as follows. In section 2 we outline the evolution of Belgian manufacturing in relation to the process of de-industrialisation and globalisation. In section 3 we highlight the increased imports of intermediate products since 1996. Section 4 links import growth to industry evolution. In section 5 we analyse differences between import growth and employment across industries using a 3-digit NACE industry classification[1] of the Belgian manufacturing over the same period. Section 6 summarises the findings and concludes.
2 De-industrialisation, FDI and changes in the trade pattern
Since the seventies, a process of de-industrialisation has resulted in declining industrial employment in most of the European countries. Over the period 1970-2002, Belgium experienced one of the strongest declines in Europe. Total employment in the Belgian manufacturing in 2002 decreased to almost one half of the employment level in 1970. The strong de-industrialisation which is defined here as a loss of employment in the manufacturing sector of Belgium, is mainly the result of capital-labour substitution stimulated by the rise of global competition. Within this process foreign firms operating in Belgium have played a key role. At the same time, the central location of Belgium in Europe and its excellent infrastructure have indeed attracted many foreign firms to invest in the country. Figure 1 (next page) shows that especially since the mid-1980s, the growth rate of foreign investment flows into Belgium has increased more than the growth rate of GDP. Belgian manufacturing activities are strongly dependent on the presence of foreign firms[2]. In 1990, foreign firms were responsible for 45% of manufacturing employment and 53% of value added realised in manufacturing industries in Belgium. In 2000 the share of manufacturing employment in foreign firms rose to more than 50 % and the share of value added rose to 60 %.
Figure 1: Evolution of employment in Belgian manufacturing, import intensity and FDI inward stock as percentage of GDP (1970-2002).
Source: Federal Planning Bureau, Eurostat, NBB
Together with the strong presence of foreign firms, the specific characteristics of the manufacturing industries in Belgium have drastically changed over the period 1970-2002. The technologies used by foreign firms have contributed significantly to the increase in overall labour productivity, capital intensity and average scale in Belgium (Debacker and Sleuwaegen, 2001) such that the industrial structure of Belgium shifted towards capital intensive and scale intensive industries. Belgian firms were driven in the same direction and closely followed this evolution. The strong capital-labour substitution over the period 1980-1995 resulted in a strong decline of employment in the Belgian manufacturing sector.
As foreign firms were primarily interested in the European market instead of the Belgian market, foreign firms exported a large part of their local production in order to attain the minimum efficient scale. Over the same period 1980-1995 trade intensity, defined as the sum of exports and imports over production, increased with more than 50% where exports accounted for the most important part. Foreign firms located in Belgium, still account for 80% of Belgium’s export performance. Almost 60% of the exports are oriented towards neighbouring countries.
However, since the mid-1990s the increase in Belgian imports from Asia and New European Member countries (= 3NEM including Poland, Czech Republic and Hungary) have risen strongly over the period 1995-2002 (Figure 2). Over the period 1995-2002, the growth in imports[3] from Asia and the three new EU-members was significantly stronger than the growth in exports. Interestingly, Belgian intra-industry trade with Poland, Czech Republic and Hungary has also significantly risen over the period 1995-2002. Total Belgian intra-industry trade with those three new member states, measured by the Grubel and Lloyd (1975) index[4], rose from 80 to 85. A higher index means an increase in bilateral exchanges of goods produced in the same industry. An increase in bilateral exchanges of goods produced in the same industry reflects increased product differentiation and/or an increase in the international fragmentation of the different stages of the production process of those goods. The latter trend can be coupled with an increase in imports of intermediate products.
Figure 2: Belgian export- and import growth in manufacturing, measured as the relative increase in export- and import values in millions of € over the period 1995-2002
Source: NBB , UN-Comtrade
3 Imports of intermediate products
Imports and particularly imports of intermediate products have risen strongly during the last ten years. Overall, imported intermediate products accounted for 42% of the total manufacturing production in 1995. This share of imported intermediate products into Belgian manufacturing rose to almost 50% of total manufacturing production in 2000. Figure 3 shows the share of imported intermediate products as a percentage of the production across 2-digit level NACE industries (black shaded area). To show how those imports go together with FDI, the figure also shows the presence of foreign firms (white shaded area) in the different manufacturing sectors. The presence of foreign firms is measured as the share of total value added in the industry accounted for by those firms.
Figure 3: Foreign firm presence and the share of imported intermediate products as % of the production in the different manufacturing industries in Belgium (2000).
Source: Input-Output tables of the Federal Planning Bureau
More than 90% of the foreign firms active in Belgian manufacturing are part of an international network. A clear positive association is found between the importance of multinational activities and the share of imported intermediate products in the production process. This positive relation together with the strong rise in intra-firm and intra-industry trade of intermediate products, reflect the increased foreign sourcing by multinational firms (Feenstra, 1996; Feenstra and Hanson, 2001; Hild, 2004; Sinn, 2004). Multinational firms spread parts of their intermediate production chains across the world and increasingly source goods from affiliates abroad, thereby creating global vertical production networks (Feenstra and Hanson, 2003). Multinational firms use their operating flexibility within their international network to increase cost efficiency. In Belgium, most often labour-intensive upstream activities are moved abroad as a result of the high labour costs in the country. Observing that the same multinational firms account for almost 80% of Belgium’s export performance, an interesting phenomenon shows up: export-oriented FDI enhances import penetration.
4 Imports and industry evolution
While imports are traditionally considered as substituting for local production, in the previous section it was made clear that a very significant share of those imports constitutes foreign sourcing of semi-finished goods. If such sourcing reflects the fragmentation of production within global supply chains of firms, and supports important value adding activities, this may help firms to upgrade and expand their activities in Belgium and stimulate exports destined for global markets. Given these considerations, there should not necessarily be a negative link between import growth and local production for all firms and industries in Belgium, or the direct impact of imports on local production may be much weaker as initially expected (see also Boulhol and Fontagné, 2006, for a cross-country study measuring the impact of imports from low- wage countries)
Using import figures on a NACE-3 digit industry level, we are able to analyse the relation between import growth and the evolution on Belgian manufacturing activities for the period 1996-2000. The relation between industry employment and import growth is represented in Figure 4. One may observe substantial variation within the diagram.
Figure 4; The growth rate of employment (vertical axis), plotted against the growth rate of imports (horizontal axis), both measured over the period 1996-2000
Source: NBB and VIO-data for Belgian manufacturing
In order to uncover more of the association between import growth and employment evolution, Figure 5 maps the change in the value added to output value against the relative growth in imports for the 103 different manufacturing industries.
Figure 5: The growth rate of value added over output (vertical axis), plotted against the growth rate of imports (horizontal axis), both measured over the period 1996-2000
Source: NBB and VIO-data for Belgian manufacturing
In addition to substitution of final goods production by imports, Figure 5 illustrates how imports of semi-finished goods may have stimulated a hollowing out of local production activities. Figure 5 shows indeed a negative correlation line between the evolution of the ratio of value added over output and import growth, suggesting that increased imports go together with a decrease of local production activities in Belgium.
5 Differences across industries
Using Figure 5, we further classify industries into three different groups. Group I contains those industries where import growth has been negative, group II those where import growth has been moderate (import growth between 0% and 15%[5] over the period 1996-2000) and group III those industries with a significant import growth rate (more than 15%). Figure 6 shows the three groups of industries. Most industries in Figure 6 belong to group III. Group III contains more than 80% of all manufacturing industries. This large group of industries where import growth has been substantial, will be the focus of our attention, but we first start with a short description of the characteristics and evolution of the industries in group I and group II.
Figure 6: Classification of industries
Source: NBB and VIO-data for Belgian manufacturing
The different industry evolutions within the three groups are studied following the set of variables listed below; (1) industry growth, (2) the change in the ratio of total value added over total output in an industry, (3) the change in imports into an industry, (4) the change in the total number of employees in an industry employed in domestic firms and (5) the change in the total number of employees in an industry employed in multinational firms.
Table 1: Evolution of the different industries over the period 1996-2000.
Variable / DescriptionIndustry growth / INDgr / the growth of total output in an industry. Output is defined as the total value of production.
Value added over output / VA/O / the change in the ratio of total value added over total value of output in an industry: the change in this ratio determines the position of industries above or under the horizontal axis in Figure 6.
Import growth / IMPgr / the growth in imports into an industry which determines the classification of industries into the three different groups
Employment in domestic firms / DOM
DOM% / the change in the absolute number of employees in an industry employed in domestic firms
the relative change of employment in domestic firms.
Employment in multinational firms / MNE
MNE% / the change in the absolute number of employees in an industry employed in multinational firms. Those firms are foreign firms or multinational firms of Belgian origin.
the relative change in Belgian employment in this group of firms.
5.1 Industries showing a negative growth of imports
Table 2: Evolution of characteristics of industries in group I (negative growth of imports), 1996-2000:
Nace / Industries / INDgr. / VA./O / IMPgr. / DOM / DOM% / MNE / MNE%N176 / Man. of knitted and crocheted fabrics / -17% / 18% / -15% / -112 / -16% / 0 / 0%
N183 / Man. of articles of fur / -70% / -29% / -32% / -12 / -17% / 0 / 0%
N191 / Tanning and dressing of leather / -29% / -32% / -21% / -231 / -46% / 0 / 0%
N205 / Man. of other products of wood, articles of cork / -14% / 11% / -9% / -19 / -2% / -45 / -19%
Total group I / - 374 / - 45
Source: VIO-data for Belgian manufacturing.
The first group of industries is a small group of industries with a decline in imports over the period 1996-2000. At the same time, total output in those industries has declined. Employment in multinational firms is negligible in those industries and almost no evolution of employment in multinational firms is observed. Only a few domestic firms are still active in those industries[6] over the observation period. Therefore, the total loss of employment over the period 1996-2000 in domestic firms is very small and amounts to only a loss of 374 jobs. The strong decline of employment in those industries took place before the observation period. For industries classified in group I, the decline in imports reflects the further decline (and disappearing) of those Belgian industries where most multinational firms have already relocated their production activities before 1996.
5.2 Industries showing a small growth of imports
The second group consists of industries with no growth or only a limited[7] growth of imports. Most of those industries reflect a strong international competitive position of Belgian domestic firms. Employment is mainly created in domestic firms and Belgian multinational firms[8]. Almost all metal products industries are present in Table 3 (NACE code starting with 28). The industries in Table 3 are more dependent on export than import[9] activities. In most industries of group II, a relative strong increase in output over the period 1996-2000 is observed. At the same time, there has been a strong increase in employment in most industries, especially in domestic firms and Belgian subsidiaries of multinational firms.
Table 3: Evolution of characteristics of industries in group II (import growth less than 15%)
Nace / Industries / INDgr. / VA./O / IMPgr. / DOM / DOM% / MNE / MNE%N155 / Man. of dairy products / 12% / -5% / 6% / 328 / 16% / 66 / 1%
N172 / Weaving of textiles / 53% / -14% / 3% / 331 / 12% / 256 / 6%
N203 / Man. of builders' carpentry and joinery / 27% / -3% / 9% / 283 / 13% / 16 / 9%
N212 / Man. of articles of paper and paperboard / 74% / -6% / 0% / 1327 / 44% / -179 / -5%
N223 / Reproduction of recorded media / 59% / 10% / 0% / 110 / 180% / -10 / -33%
N247 / Plastics in primary forms and synthetic rubber / 3% / 5% / 4% / 33 / 2% / 54 / 10%
N263 / Man. of refractory ceramic products / 51% / -16% / 5% / 63 / 121% / 0 / 0%
N281 / Man. of structural metal products / 33% / -1% / 13% / 902 / 7% / 79 / 1%
N282 / Man. of tanks, reservoirs, containers of metal / 5% / 3% / 9% / 0 / 0% / 323 / 10%
N284 / Forging, pressing of metal; powder metall. / 49% / 11% / 1% / 308 / 23% / 237 / 32%
N285 / Treatment of metals; mechanical engineering / 58% / 10% / 1% / 1320 / 16% / 653 / 40%
N371 / Recycling of metal waste and scrap / 48% / 3% / 0% / 10 / 1% / 4 / 2%
N372 / Recycling of non-metal waste and scrap / 41% / 2% / 0% / 54 / 4% / 15 / 2%
Total group II / 5.069 / 1.514
Source: VIO-data for Belgian manufacturing.