Understand the importance and characteristics of global production chains. Understand the political, economic, ethical and social issues raised by the existence of global production chains. Understand the nature of employment and labor rights in identified emerging economies.
What are Global Value Chains? (GVC)
Global value chains are the fragmented cross-border stages, people and activities required to bring a product from its origin to final consumer GVCs often led by a multinational enterprise (MNE) or transnational corporation (TNC).
In theory, each intermediate production stage occurs in its optimum location as determined by natural resources, low costs, skills, infrastructure, technological knowledge. The result in theory is economic efficiency, gains in scale or specialization, falling prices, and rising quality.
GVCs are stages of intermediate inputs in which value is added to a product, but value added and economic rewards vary enormously across a value chain.
GVCs in Economic Development
GVCs are important to development studies and emerging markets. Since the From 1990s, following the Asian ‘Miracle’, World Bank and other global institutions encouraged developing economies to engage in GVCs.
International production chains offer opportunities for economic upgrading, knowledge and technology transfer, organizational and entrepreneurial learning, adopting common global standards, and inward investment.
GVC activities can be located in industrial clusters or developed enclaves that form the advanced part of an emerging market’s economy.
Upgrading in technology, production, management and skills is not automatic, but influenced by the strategies of multinationals, government policies, institutional weaknesses, industry factors, and broad trends in the global economy.
GVCs producing for the local economy tend to have greater opportunities and leverage for upgrading. Those orientated to export markets, such as Mexico’s maquiladoras, have contentious economic, political and social consequences.
Buyer-driven chains have lead firms which are the final buyers, such as retail chains and branded product producers dealing in final consumer products.
Clothing, footwear and food are notable examples Large retailers, such as Wal-Mart, Uniqlo, Primark, or Carrefour, and brand marketers, such as Nike, Nutella (whose sources are shown opposite), and Louis Vetton, shape global production and distribution.
Innovation is mainly in design and marketing, not production or technology.
Retailers and branders tend not to own factories or suppliers, and control GVCs through contracts and specifications on quality and prices.
Producer-driven chains are controlled by the technological and managerial competences of lead firms, upstream in the chain.Examples include chains dominated by large manufacturing firms such as General Motors, IBM, Toyota, Samsung Electronics, or Apple.
Producer-driven chains tend to be capital, technology and production orientated, and multinationals seek strong links or captive suppliers to protect knowledge and investment.
Governance tends also to be more direct and hierarchical than buyer chains.
History of Economic Change and Control
Under the mercantile system, from the 16th century, European chartered companies were appointed as monopolies and government agencies to exploit overseas territories and colonies on behalf of their home nation.
Private trading firms gradually replaced the chartered companies in the 19th century, and by 1914 investment in developing territories accounted for nearly two-thirds of inward FDI and supplied the industries and consumers of Europe or North America.
Examples included Jardine Matheson; Mackinnon, Mackenzie, or the later Inchcape; Nederlandsche Handel-Maatchappij; Grace & Co.; and later Japanese rivals Mitsui and Mitsubishi.
Interestingly, European and US traders operated through international networks based on alliances, shared partnerships, contracts, and joint ventures rather than through ownership, all reminiscent of today’s global value chains.
UNCTAD Report 2013
The 2013 UNCTAD report on GVCs noted their contribution to development.
Value-added trade contributes about 30% to the GDP of developing countries.
Level of participation in GVCs is associated with stronger levels of GDP per capita growth and employment opportunities.
Governments policies need to assess local industrial capabilities and contribution of GVCs as part of overall development strategy, and use regulations and the upgrading of skills, knowledge and infrastructure to increase economic benefits and bargaining power with multinationals.
But the report notes potential downsides.
The contribution of GVCs may be limited if the work done in-country is relatively low value adding, that is adds only a small proportion of product’s final value.
There are no guarantees for diffusion of technology, skill-building and upgrading.
Emerging markets risk being locked into low value-added activities.
Potential negative impacts on the environment and social conditions, including workplace conditions, occupational safety.
Global capital mobility could also result in low job security.
iPods are manufactured in China, by a Taiwanese multinational supplier, and the expensive hard-drive by Toshiba in China and the Philippines. But Apple in the US captures most of the value.
Multi-layered tiers of suppliers and component makers mean that multinationals squeeze prices and value added down the production chain.
Capital is increasingly portable but labour is not.
Where high export orientation and international vertical integration, fewer opportunities for upgrading and spillovers.
TNCs tend to pay wages that higher than local rates where directly involved in firms, but evidence further down supply chain more mixed.
In Malaysia and Thailand’s electronics industry, evidence of significant training by government and (Japanese) multinationals in regional production networks, raising skills of labour, management and technical staff.
Electronics industry is high tech and reliant on human skills, and so evidence of training and upgrading in Mexico’s factories too, if more limited.
Skill upgrading is less evident in the GVCs that critical to the Costa Rica economy.
See UNCTAD reports.
Working conditions and labour rights in global supply chains and emerging economies have come under increased scrutiny for being sub-standard.
Public scrutiny has led to MNEs adopting codes of conduct (CoCs).
Primark and other clothing brands have used suppliers in South Asia with low wages, poor labour standards and fatal safety standards.
Research into apparel suppliers in Vietnam and Cambodia show low labour standards and child labour, especially where supply manufacturers deal with agents of multinationals and not directly with lead firms.
From 1964, Mexican government addressed unemployment with Border Industrialization or Maquiladora Program.
Maquilodora (bonded) factories operate duty and tariff free, importing raw material for exports, and utilizing cheap labour and low costs.
System extended by 1994 North American Free Trade Agreement, the number of maquiladora plants doubling each year latter 1990s.
Textiles remain important but electronics and automotive are the two main sectors in terms of employment and number of plants.
Maquiladoras best represented assembly intensive industries.
Mexico’s workforce is growing and improving technical skills to manufacture quality products.
But US multinationals are motivated by cheap labour, with wages rates 6-20 times cheaper, 2007-18.
Yet maquiladora wages are higher than in other industries in Mexico, and so turnover is lower than in minimum-wage jobs in the U.S.
Mexico manufacturing wages tend to be lower than those paid in most Asian countries.
In 2006, less than 5% of inputs from local firms and most of low value.
Maquiladoras accounted for 45 percent of Mexico’s exports.
Economy of Costa Rica has been transformed by open trading policies introduced in the 1980s. High tech manufacturing policy is assisted by intellectual property rights protection. Infrastructure investment however seen as a deficiency.
Improving infrastructure that facilitates international trade is crucial, requiring investment in transport and logistics.
Costa Rica has diversified its exports, dominated until the 1960s by a few agricultural goods. Developed high- and medium-high-tech goods, including electronics, medical devices, automotive, aerospace and aeronautics, and film and broadcasting devices.
Subsidiaries and local firms in Costa Rica
Intel’s decision to establish production facilities in Costa Rica in 1998 seen as a turning point.
Beginning of the development of export-oriented sector producing high-technology manufactures and services.
Electronics was first sector to develop external links, and medical devices have emerged more recently.
Camtronics is an electronic manufacturing supplier (EMS) that makes products to customer’s specifications.
Firm uses its own technology and procedures.
Camtronics is a fully Costa Rican company, founded in 1985 by an Americanentrepreneur who sold to its present local owner in 1993.
Malaysia, labour Skills and Low Wages
Many electronics workers in Malaysia are now employed directly by third-party employment agents, rather than the company owning their factory. Labour intermediaries manage recruitment, hiring, deployment, management and repatriation on behalf of client companies.
These workers more vulnerable to forced labour conditions, as are foreign imported workers. Some 4m foreign workers (25-30% of Malaysia’s total work force), with half coming from Indonesia.
Malaysian government aspires to climb the global value chain, and break out of “middle income trap“. Their aim is to move semiconductor industry beyond assembly, testing and packaging; but competitiveness is derived from low labour wages, rather than high skills.
High tech and high value added production stages occur elsewhere within multinationals, many being Japanese.
Textiles and Apparel
Clothing is mainly manufactured in China, Bangladesh, Vietnam, and Cambodia. For a jacket sold in US, its manufacturing in China represents only 9% of the total sales value (see Fung Global Institute).
November 2013 and April 2013 saw terrible disasters in Bangladesh’s textile industry. Economic and ethical considerations are complex. International brand owner & local authorities ar eoften blamed
Value added mostly in intellectual property, and in services like retail, logistics, banking, and consumer marketing.
Bangladesh is one of Asia’s very poorest countries, and ranked one of the most corrupt by Transparency International. But economic growth has averaged 5%+ since 1990. GVCs in ready made garments (RMGs), with free EU access, provide 80%+ of exports and 10%+ of GDP. Industry employs 4.2 million people, of whom 80% women. Sustainability Compact with EU, US and ILO committed Bangladesh government to respect labour and union rights, and occupational safety.
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