The social enterprise in the company form

We apply the factor-content classification proposed by Lall (2000), which breaks down commodities depending on their level of processing and technological activities involved in their production into the following categories:

§ Primary products (PP), with little processing;

§ Resource-based products (RB), which tend to be either simple or labour-intensive, and the distinction is made between agro-based (RB1) and others (RB2);

§ Low-technology (LT) products include products, which use technologies embodied primarily in capital equipment, that tend to be undifferentiated, and where labour costs comprise a major share of total costs. The distinction is made between textiles and

footwear (LT1) and others (LT2), which include many iron and steel products, which are so important in Ukrainian production.

§ Medium-technology products (MT) are classified by Lall as products comprising the bulk of skill- and scale-intensive technologies in capital goods and intermediate products, and form an important part of industrial activity in mature economies. They have complex technologies, moderately high R&D and are usually linkage-intensive and harder to relocate. While high-technology products, described below, require a more mature, reliable but still highly flexible economic environment, for recovering transition economies increasing competitiveness in medium-technology products looks like a second-best option. A distinction is made between MT1, automotive products, MT2 – process industries (mainly chemicals and base metals), and MT3 – engineering products.

§ High-technology products (HT) are R&D intensive products that require complex technology infrastructures, supplier networks and interaction between firms and research establishments. Electronic HT products have become a subject for integrated production systems, with labour-intensive production stages being relocated to countries with lower labour costs, but economic environment still remains a crucial criterion for such relocation.

What follows next is the analysis of the structure of Ukrainian exports, with a view of revealing whether there are any signs of industrial upgrading that can lead to greater international competitiveness. Export flows to Russia are compared with export flows to the EU-27 by their factor content in the period from 1999 to 2008, as this is the earliest available period for trade with the EU-27 as a whole. While the previous section was based on Harmonised System commodity classification, factor content methodology is based on the SITC Rev.3 classification. The 3-digit level data was taken from UN Comtrade Online Database and each tariff line was classified according to one of the above categories. Table 9 below compares an aggregate factor-content composition of exports to the EU-27 and Russia, while Table 10 gives a more detailed picture.

Table 9. Factor content of exports to the EU-27 and Russia a) Factor-content of exports to the EU-27, percent of total

1999 2001 2003 2005 2008 % change

Primary products 18.6 24.2 18.2 13.6 21.4 +15%

Resource-based 35.3 35.8 36.8 31.7 24.4 -31%

Low-tech 22.8 21.7 19.9 19.3 16.4 -28%

Medium-tech 19.2 14.8 20.8 28.4 32.6 +70%

High-tech 3.5 3.1 3.5 3.0 4.3 +23%

Other 0.6 0.4 0.9 4.0 0.9 +50%

Total 100.0 100.0 100.0 100.0 100.0

b) Exports to Russia, percent of total

1999 2001 2003 2005 2008 % change

Primary products 12.2 9.0 9.6 6.1 5.5 -55%

Resource-based manuf. 30.0 28.6 27.6 29.3 24.1 -20%

Low-tech 16.2 18.4 17.2 21.9 20.4 +26%

Medium-tech 35.5 38.2 40.0 38.0 43.6 +23%

High-tech 5.2 5.7 5.6 4.7 6.2 +19%

Other 0.9 0.0 0.0 0.0 0.1 -89%

Total 100.0 100.0 100.0 100.0 100.0

Source: Author’s calculations based on UN Comtrade Online Database data

Primary products constitute a lower share of exports to Russia than to the EU – 5.5 percent versus to 21.4 percent in 2008 respectively. After an initial decline in 2005, PP exports to the EU rebounded in 2008. This gain can be explained by the growth in world grain prices and exports of wheat, as well as by increased exports of petroleum gases and oils, coal and aluminium.

Resource-based products are equally important in trade with both regions and account for about a quarter of all export flows, although in the case of the EU their share has fallen from about 35 percent registered in 1999, which to a large degree was due to the imposition of restrictions on export of ferrous and non-ferrous waste and scrap.

RB1, agro-based products, are more significant in trade with Russia than with the EU – 19 percent vs. 8 percent of total exports respectively. In trade with Russia there has been some reorientation within this category: whereas in 1999 a major share belonged to products of lower level of processing – sugars, wheat flour and cereal preparations, vegetable and fats and oils, rubber tyres and paperboard, in 2005 sugars have declined almost ten-fold, while in food products a bigger role in 2005 was played by products of higher level of processing – cheeses, fruit and vegetable preparations, alcoholic and non-alcoholic beverages, etc. However the

bans that Russia imposed on imports of Ukrainian cheese, meat and other products in 2005 and 2006 reduced the share of the products again. In trade with the EU this group is mainly characterised by increased competitiveness of vegetable fats and oils, which have increased ten-fold (from US$2mln to US$20mln), chocolate and fruit preparations (over 10 times increase), and wood manufactures, the latter category coming from Western Ukraine and mainly driven by foreign direct investment or outward processing schemes. In the future wood manufacturing industry presents opportunities for shifting up the value chain towards furniture and other higher-value added products.

Non-agro-based (RB2) products in trade with the EU are mainly represented by coke, refined petroleum exports, as well as other hydrocarbons, iron ores and electric current. The lion’s share has traditionally been accounted for by petroleum and petroleum related products, produced from the crude oil sourced from Russia.

Relative share of low-technology exports, which include LT1 – textiles and footwear, and LT2 – mainly steel and chemicals, has declined in trade with the EU-27, whereas that to Russia is on the rise. This is explained by slower than average growth in exports of textiles to the EU (which play almost no role in trade with Russia), an increase in anti-dumping investigations against Ukrainian steel and chemical producers on the one hand, and on the other hand higher growth of exports of several iron and steel lines to Russia.

The fact that medium-technology manufactures have been the most dynamic group in trade with the EU (their share increasing by 70 percent between 1999 and 2008) and the dominant group in trade with Russia, as seen from Table 9, reflects a marginal, but an important improvement in Ukraine’s role in the global economy, and reflects, as Lall argues, a shift towards products representing a bulk of production in industrial countries. Although this group, as well as all others, is heavily biased towards iron and steel products and more complex chemicals, its growth also reflects upgrading of the level of processing of steel. This is happening partially as a way to overcome EU quotas⁶⁷ on iron and steel of low level of processing, and partially due to an increased demand for higher quality Ukrainian steel for automotive industry on the world markets, encouraging producers to reorient away from production of cheap carbon steel predominant in previous years (Doing Business in Ukraine, 2005).

67 In place until 2008, when Ukraine joined the WTO. Quantitative quotas cannot be applied to WTO members.

In value terms, as shown inTable 10, in trade with the EU the bulk of growth was accounted for by MT2 (process) and MT3 (engineering) product groups, which grew on average by 116 and 115 percent per annum between 1999 and 2008. Process manufacturing exports are roughly of equal importance in trade with both regions, accounting for around a quarter of total exports to Russia and the EU in 2008. In trade with the EU it is mainly comprised of pig iron (over US$1.6bn in 2005), tubes and pipes, various chemicals and fertilisers, and trailers and semi-trailers. Despite some foreign direct investment and ‘infant industry protection’

strategy of the Ukrainian government, the share of automotive products, MT1, is almost negligible in exports to both the EU and Russia (0.2 percent and, for most of 2000s, 2 percent, respectively). More recently, however, between 2005 and 2008, this group grew more than six-fold in trade with Russia, its share increasing from 2 to 5 percent.⁶⁸ This finding is corroborated in Figure 12 on p.59, which shows that automotive products have been the most dynamically growing product group in Ukrainian trade.

In terms of growth rates, group MT3 (engineering manufactures), follows MT2 as the second most dynamic group in trade with the EU (Table 10, 115 percent compound annual growth rate). The best performers are electric distribution equipment (almost a 30-fold increase), ship structures (7-fold), internal combustion engines (five-fold), domestic electronic and non-electronic equipment (almost 4-fold). However, these growth rates are from a very low base and Table 11 contrasts the (un)competitiveness of Ukrainian engineering products on the EU market with the importance of this group in trade with Russia (5.3 percent vs. 14.6 percent respectively), although it seems to be losing positions (compared to 2002-2003) even on the Russian market.

Ukraine does not yet have a pronounced specialisation in high-technology exports, either with Russia, or with the EU. Although the share of HT1 (electric and electronic products) in trade with Russia is higher than that with the EU (5.8 percent vs. 3.5 percent respectively), the growth rates have been more dynamic in trade with the EU (130 percent p.a. vs. 99 percent).

The bulk of exports to the EU consist of telecommunication equipment parts (70 percent of total exports in group HT1). In trade with Russia HT exports are mainly represented by parts of electric power machinery (40 percent of total HT1 exports in 2008), electric machinery and apparatus (34 percent) and transmission shafts (19 percent).

68 Due to the dynamic growth of automobile exports to Russia, as described in more detail in footnote 58.

Table 10. Factor-content of exports to the EU-25 and to Russia, 1999 and 2008, thous.

US$

Exports to EU-25 Exports to Russia

1999 2008 CAGR % 1999 2008 CAGR %

Primary products 593,114 4,157,848 78% 308,399 889,193 32%

RB1: Agro-based 180,528 1,558,905 96% 485,659 2,068,848 47%

RB2: Other resource-based 943,859 3,188,021 38% 274,110 1,825,786 74%

LT1: Textile and footwear 436,887 827,731 21% 40,351 164,084 45%

LT2. Other low-tech 290,832 2,357,704 90% 368,565 3,128,137 94%

MT1: Automotive 10,027 46,519 52% 45,622 789,836 192%

MT2: Process 500,198 5,243,448 116% 429,973 3,896,313 101%

MT3: engineering 100,039 1,036,950 115% 421,630 2,359,434 62%

HT1: Electronic and

electrical 57,423 671,786 130% 104,834 933,277 99%

HT2: Other high-tech 52,998 166,079 35% 27,623 74,370 30%

Other 20,260 170,229 93% 21,590 11,997 6%

Total 3,186,165 19,425,220 68% 2,528,356 16,141,274 71%

Source: author’s calculations based on UN Comtrade Online Database

The above has been a Ukraine-centred analysis, looking at trends in Ukrainian exports only. It has shown some positive trends in the commodity structure of exports to the EU, which have not been revealed in the more general analysis in CHAPTER 3.

While important, this analysis does not take into account the dynamics on the world markets in general and does not allow assessment of how Ukraine keeps up with these trends and maintains its positions on the EU and Russian markets. The next section attempts to answer this question.

83

Table 11. Factor content of Ukrainian exports to Russia and the EU-27, 1999-2008, % Exports to Russia 19992000200120022003200420052008 HT1 – electronic and electrical 4.13.94.14.54.04.03.85.8 HT2 – other high-technology1.11.41.61.61.61.00.90.5 LT1 - textiles and footwear 1.62.31.61.01.01.01.11.0 LT2 - other, incl steel 14.616.216.814.216.219.520.919.4 MT1 – automotive1.82.52.82.21.71.51.64.9 MT2 – process 17.019.118.517.620.823.422.124.1 MT3 – engineering16.716.916.920.217.514.914.314.6 Other 0.90.50.00.00.00.00.00.1 PP12.210.49.010.19.67.86.15.5 RB1 - agro-based19.216.417.818.920.218.819.012.8 RB2 - other, incl steel and chemicals10.810.410.99.77.38.110.311.3 Total 100.0100.0100.0100.0100.0100.0100.0100.0 Exports to the EU-27 19992000200120022003200420052008 HT1 – electronic and electrical 1.81.91.71.32.41.81.93.5 HT2 – other high-tech1.71.91.41.21.11.71.10.9 LT1 – textiles and footwear 13.712.912.110.710.99.07.94.3 LT2 - other, incl steel 9.19.29.68.78.910.611.412.1 MT1 – automotive0.30.30.20.20.20.10.20.2 MT2 – process15.712.612.311.017.023.123.627.0 MT3 – engineering3.13.02.32.73.63.64.65.3 Other 0.60.50.40.70.93.84.00.9 PP18.620.024.227.818.215.313.621.4 RB1 - agro-based5.75.85.87.49.57.57.88.0 RB2 - other, incl steel and chemicals29.632.129.928.527.323.523.816.4 Total 100.0100.0100.0100.0100.0100.0100.0100.0 Source: author’s calculations based on UN Comtrade Online Database.