MNCs and Global Value Chains Making Traditional Economic & Financial Models Obsolete

NEW YORK - July 27, 2015 - PRLog -- With global economy still operating below its pre-2008 growth potential, the clear understanding of various economic & financial market mechanisms is crucial. One of the major issues facing the policy-makers as well as decision-makers at big corporations is the making sense of the complexity of ever increasing linkages between the countries, people and companies. Empirical Foresights, a research and advisory firm, has been working towards tackling that problem.

"It is a typical tragedy of commons problem. It should be possible to estimate the impact of a significant shock in one sector in a country to any sector or any big company in another country. But to do so would require the companies and countries to look at the data beyond their boundaries and then model the dependencies." says Abhay Gupta, Chief Economist at the firm. "The companies think that it is government's job to respond to the shocks and thus do not change their allocate their resources optimally. Governments think they are only responsible for output in their countries and fail to account for the role of emergence of global value chains."

By merging a large number of datasets along common dimensions, Empirical Foresights has developed methods to estimate the regional and industry level linkages. Using advances in data analytics techniques, the firm aims to estimate the elasticities and multipliers with respect to a set of socio-economic & market indicators and policy variables. For example, one could find out the impact of 1% drop in oil prices on employment in auto manufacturing sector in India.

Regarding the company's plan for the future, Dr. Gupta adds "We have the infrastructure and capabilities to expand this analytical framework to the company level. But that data is harder to find for many emerging economies. Our ultimate goal is to have the data-driven models in place that could determine the impact of 10% revenue growth in LVMH in France on revenue growth in Google in US."

The data-driven models which try to capture behavioural aspects have one criticism to deal with. The historical data may not always capture the current forces at work. But the firm is working hard to ensure that it can be as close to the reality as possible. There are plans to use indicators like Google Trends, Twitter sentiment analysis, monitoring consumer behaviour, spending patterns as well as rely on trends in more persistent variables like demographics.

It is an ambitious project and Empirical Foresights is actively looking to collaborate with various companies, research institutes and government departments.