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Local and Global productivity and their effects on value added in Mexico, (1993- 2015): The case of industrial manufacturing sub branches

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This paper analyses the effects originated by global and local productivity of 81 manufacturing sub branches in México for period (1993-2015) according to INEGI data base. The article shows the evolution of manufacturing sub branches productivity and
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  76 Article ECORFAN Journal December 2017 Vol.3 No.5 76-89  Local and Global productivity and their effects on value added in Mexico, (1993-2015): The case of industrial manufacturing sub branches RÍOS-  NEQUIS, Eric Israel *†, CONTRERAS -ÁLVAREZ, Isaí and BUSTOS-GUAJARDO, Ricardo Universidad Politécnica Metropolitana de Hidalgo, FIRA-Banco de México Received September 02, 2017; Accepted December 21, 2017   Abstract This paper analyses the effects srcinated by global and local productivity of 81 manufacturing sub branches in México for period (1993-2015) according to INEGI data base. The article shows the evolution of manufacturing sub branches productivity and their value in international trade. This article approach the value of global value chains in an international dimension. The information provide us that a high participation in global value chains is important because it explains that national competitiveness can create innovation and competitive advantages. The current work focus on the value of exportations gained in Mexican manufacturing sub branches and current trends indicate that liberalization has tried to improve economic growth trough exportations. Although national manufacturing exportations contains an important percentage of imported inputs. The obtained results from current research in a panel regression model indicates that whole value added is explained by global manufacturing productivity. In other words, l ocal productivity can’t generate significant value added in Mexico.  On the other hand, the complexity of productive chains is remarkable in a context of productive evaluation inside the global value chains and a high dependence of the national economy on Foreign Direct Investment. Productivity, exports, value added, competitiveness Citation:   RÍOS-NEQUIS, Eric Israel, CONTRERAS-ÁLVAREZ, Isaí and BUSTOS-GUAJARDO, Ricardo.   Local and Global productivity and their effects on value added in Mexico, (1993-2015): The case of industrial manufacturing sub branches. ECORFAN Journal-Republic of Paraguay. 2017, 3-5: 76-89. *Correspondence to Author (email:   erios@upmh.edu.mx) † Researcher contributing first author.   © ECORFAN Journal  –  Republic of Paraguay www.ecorfan.org/republicofparaguay  77 Article ECORFAN Journal December 2017 Vol.3 No.5 76-89   ROS-NEQUIS, Eric Israel, CONTRERAS-LVAREZ, Isaí and BUSTOS-GUAJARDO, Ricardo.   Local and Global productivity and their effects on value added in Mexico, (1993-2015): The case of industrial manufacturing sub branches. ECORFAN Journal-Republic of Paraguay. 2017.   ISSN-On line: 2414-4827 ECORFAN ® All rights reserved. Introduction In a context of free market and trade openness, economic growth via exports is fundamental to achieve competitive success and economic development. Therefore, it’s essential to analyze the added value that industries can generate in their productivity. In this scenario, the analysis of global value chains is fundamental to evaluate the economic dimension that can obtain the productive chains in the national industry. In this sense, it’s crucial to assess the impact generated by possible decisions made in relation to NAFTA and to explain a possible answer to a situation that is not yet realized but that is latent. On the other hand, competitiveness is a basic subject in the economic and administrative sciences to explain the degree of success that can have the national industry of a country. In this sense, Porter explains that the economic gains of a country is due to the competitiveness of the industrial sectors. Therefore, it is pertinent to evaluate the value added generated by the local industry in a comparative context with global productivity (global value chains) in order to establish a valid reflection on the subject. The first section of this article approaches the theorical framework and the explanation of a function that talks about the correlation between exportations and productivity from Kaldor´s perspective. The second section explains the development of the manufacturing industry in Mexico. Consequently this article shows the econometric analysis to test hypotheses. Finally the conclusions are presented to make a deep refexion about competitiveness in Mexico. The research has an objective that is to evaluate the effects generated by global and local manufacturing productivity on value added. In particular, the work will analyze if the amount of productivity represented in a monetary form is positively correlated to added value. The article pretend to test that value added in manufacturing industrial sector is explained by global manufacturing productivity. By the other hand, local manufacturing productivity can´t generate the same effects as the first one in Mexico. That phenomena is caused by productive chains and global value chains and lack of competitiveness in local manufacturing sectors. Theory framework The current section approaches two theories to support the idea of evaluate the added value in exports and the latest mentioned as a key factor of competitiveness and productivity. From the perspective of demand, the link between exports and economic growth is explained by the effect of the first in the components of global demand through two mechanisms, specifically: a) directly, since exports are a component of aggregated demand and. b) indirectly, by the multiplier effect of exports, which allows the expansion of other components of global demand. Under the same approach, Kaldor (1966) considers that demand is an element capable of boosting economic growth, in such a way that supply-side factors increase as it also does, this generates the growth of the economy in the long term. In this context, CEPAL (1998) notes that manufacturing exports are a source of real growth through the transmission channels of export growth, namely: 1) currency generator, since these are necessary to import the intermediate goods and inputs required in the production process, 2) a greater internal productive chaining of the exporting activities causes two important effects:  78 Article ECORFAN Journal December 2017 Vol.3 No.5 76-89   ROS-NEQUIS, Eric Israel, CONTRERAS-LVAREZ, Isaí and BUSTOS-GUAJARDO, Ricardo.   Local and Global productivity and their effects on value added in Mexico, (1993-2015): The case of industrial manufacturing sub branches. ECORFAN Journal-Republic of Paraguay. 2017.   ISSN-On line: 2414-4827 ECORFAN ® All rights reserved. First, a greater multiplier effect on demand and therefore on production (due to direct and indirect impulse of exports to the product and to other sectors, respectively) and secondly, it generates a substitution process of imports, which in turn causes a decrease of the income elasticity of imports and a decrease in the demand of these as the product grows, 3) the positive externalities generated within an economy due to the character of competitiveness and innovation demanded by the exporting activities. A key concept for Kaldor is the process of interaction established between demand increases caused by increases in aggregate supply as a result of an increase in demand (Jesús Felipe, 1998). This process is known as the cumulative circular causation model , which is the result of the Kaldor's three laws, which are explained below. According to Mc Combie and Thirlwall (1994:164-166), the basic assumptions of the model are as follows: i) the faster the rate of growth of the manufacturing sector, the faster will be the rate of growth of GDP; ii) the faster the rate of growth of manufacturing outpu, the faster will be the rate of growth of labour productivity in manufacturing owing to static and dynamic economies of scale, or increasing returns in the widest sense; iii). The faster the rate of growth of the manufaturing output, the faster the rate of transference of labour from other sectors of the economy where there are either diminishing returns, or where no relationship exists between employment growth and output growth; iv) As the scope for transfering labour from diminishing returns activities dries up, or as output comes to depend on employment in all sectors of the economy, the degree of overall productivity growth induced by manufacturing growth is likely to diminish, with the overall growth rate correspondingly reduced; v). The growth of manufacturing output is not constrained by labour supply […] but is fundamentally determine by demand from agriculture in the early stages of development and the exports in the larger stages; vi) A fast rate of growth of exports and output will be tend to set up a cumulative process, or virtuous circle of growth, through the link between output grow and productivity growth”.  In relation to the presence of growing returns within the manufacturing sector, Kaldor emphasizes the Verdoorn’s law, which establishes a statistical relationship between labour productivity and production in terms of manufactures and industry (also includes manufacturing activities, in addition to construction and public services). This law is important because it constitutes the basis of the cumulative circular-cause model of economic growth and then, because it is an important component within the demand-oriented approach to economic growth (Mc Combie and Thirlwall, 1994), and is defined as: p = a + bq; (1) Where “p” and “q” are the exponential growth rates of productivity and product, while the slope coefficient "b" is defined as the Verdoorn’s coefficient. However, to develop these ideas, it's necessary to study the Kaldor’s three laws of that establish a link with the cumulative circular causation model, as shown below: a)  first law . It establishes that there’s a positive correlation between total GDP growth and manufacturing. The foregoing is explained by the following reasons, namely: in the face of an expansion in industrial production and the product, there is a transfer in labour resources from sectors characterized by underemployment and unemployment, which ensures that there is no decrease in the product in these and that, at the same time, the industrial sector experiences an increase in productivity.  79 Article ECORFAN Journal December 2017 Vol.3 No.5 76-89   ROS-NEQUIS, Eric Israel, CONTRERAS-LVAREZ, Isaí and BUSTOS-GUAJARDO, Ricardo.   Local and Global productivity and their effects on value added in Mexico, (1993-2015): The case of industrial manufacturing sub branches. ECORFAN Journal-Republic of Paraguay. 2017.   ISSN-On line: 2414-4827 ECORFAN ® All rights reserved. So, as the manufacturing sector grows, the rate of transfer of work from the sectors described above will be faster; b) second law   (also known as the Verdoorn’s law). It refers to the direct relationship between the growth of labour and product productivity in both the manufacturing sector and the industry level; c) third law . There’s a positive relationship between the growth of total productivity and the growth of employment in the manufacturing sector. While at the microeconomic level, the increase in productivity could be reflected in a displacement of physical capital by human, it’s considered that at an aggregate level (macroeconomic perspective), the jobs that are generated are greater with respect to those that are lost (De la Rosa, 2006). Once the causality is established, at least partially, from the growth of the product to the productivity of the work through the Verdoorn's Law (Thirlwall, 1975), it's necessary to establish that the link between exports and growth is given by the growth of productivity and price competitiveness within an international context (see figure 1). Starting analysis from exports (  x ), then it has to be located within a context of competition, manufacturing exports compete for the price side ( d   p ), so they are based on the relationship of internal/external prices and the income of the rest of the world. In such a way that the lower the domestic price, the greater the volume of exports, thus the growth of these will drive the aggregate demand, which will allow to achieve a certain level of growth, denoted as " ̇ ". Then, because of the growth of the product, there will be an increase in productivity ( δ ) through the Verdoorn's law. However, through increased productivity it's possible to improve the domestic price ( d   p ), which allows a better positioning in the international market, achieving with it a sustained growth of exports. Finally, it should be noted that this system will tend to balance because the expansive effects on exports and products are becoming smaller. Figure 1 Cumulative circular causation   Source: De la Rosa, Juan Ramiro (2006). Dos enfoques teóricos sobre el proceso de crecimiento con énfasis en las exportaciones manufactureras. Análisis Económico, vol.  XXI, núm. 48    The classic theory of international trade explains the success of nations as a natural consequence of the endowment of factors that count: natural resources, labor and capital; Countries specialize in those sectors where they have a more intensive use of some factor. However, for Porter (1999:170) classical theory has been eclipsed in advanced countries and industrial sectors and by the globalization of the competition and technological development. As we analized previously, the classical international trade theory explains the success of the nations as natural consequences of the natural factors dotations with each is counted: natural resources, labor and capital; the countries specializes in those sectors where them have an intense use of a factor.  80 Article ECORFAN Journal December 2017 Vol.3 No.5 76-89   ROS-NEQUIS, Eric Israel, CONTRERAS-LVAREZ, Isaí and BUSTOS-GUAJARDO, Ricardo.   Local and Global productivity and their effects on value added in Mexico, (1993-2015): The case of industrial manufacturing sub branches. ECORFAN Journal-Republic of Paraguay. 2017.   ISSN-On line: 2414-4827 ECORFAN ® All rights reserved. However, for Porter (1999:170) the classical theory has been eclipsed in the sectors and advanced countries for the competition globalization and the technological development. Based on a study realized in ten countries that distinguish in the foreign trade in the 1980’s, Michael Porter made a national competitivity theory based in the productivity causes, because this is the only variable that explains the competitivity of a nation, instead of what it explains the classical theory (traditional competitive advantages); there is an important quote from this theory “the national prosperity is not hereditary, it’s created by the opportunities that a country gives to their enterprises, because they are the only in charge of creating a competitive advantage through innovation. For this author, once the enterprise achieves the competitive advantage, it can only be maintained by a constant improve, wich it has to renew or die, otherwise, competitors will overtake any enterprise that quits innovation. What generates competitive advantage? Competitive advantage is created and maintained by a highly located process, even the most developed countries are not competitive in every sector, that´s why nations succed in specific sectors because the national environment is the most progressive, dynamic and stimulating (Porter, 1999:163). This competitive environment, as stated by Porter, is reached through four competitive factors that individually and as a system define the competitive environment in wich, enterprises learn and develop their competitiveness, this model known as “Diamond´s Model” (1990), conformed by four awns, defines the next competitive factors: Factor’s  Conditions  Talks about the specialized factors creation (specialize workforce, infrastructure creation, etc.) needed for making a competitive nation, because the key of the competitiveness is not constituted by the natural factors dotation, it’s the ability of how there are processed for making an efficient production. Aversely as it’s known,  providing a wide specialized workforce don’t represent any advantage, because it´s needed a specialized workforce in specific enterprises necessities, as well as counting with investigation centers specialized in innovation, development, assimilation and application of the science and technology knowledge, because this factors are limited and hardly to imitate for the national and foreign competitors, and it’s needed a sustained investment for creating them. Demand conditions we can belive that globalization has been reducing the intern demand importance, that the international competition and the external demand are more important to develop nation’s competitive capabilities but it is not true at all becau se from Porter’s point of view the composition and character of the internal market often has a disproportionate effect on the way companies perceive, interpret and respond to the needs of buyers. Companies start production close to the observed market, ie the conditions of domestic demand help create competitive advantage when a particular segment of the sector is larger or more visible in the domestic market than in foreign markets (Porter, 1999:182). If consumers in an economy are demanding and well informed, the pressure they put on business will be greater and will force them to constantly improve their competitiveness; Companies will benefit from these demanding consumers because they will open their eyes to the new needs of markets; 3) related sectors.
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