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The Growth Of Global Value Chains Economics Essay

The Asian Development Bank describes the global value chain as the internationalization of a manufacturing process in which several countries participate in different stages of the manufacture of a specific good. The process is of considerable economic importance since it allows stages of production to be located where they can be undertaken most efficiently and at the lowest cost. Furthermore, if production sharing is increasing in relative importance this implies that countries are becoming more interdependent on each other. Over the years leading from the era of industrialization in the west we have seen major economic changes in the global economy and these changes have sought to change the way the entire industry works. With concepts like globalization, trade liberalization and the formation of trade blocks have acted as a catalyst where the global value chains are concerned. This paper would be dealing with the changes in the world economy that has led to the growth of the global value chains. It would also define strategies that a country can adopt to move up the global value chains.

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The way the world has been rapidly developing economically has changed the way the industries work today, from the times when an industry used to manufacture everything for itself has long passed, with the world economy becoming a more integrated block as a whole, the countries realizing Adam Smiths specialization and division of labor at an international level has led to an entire new approach towards industry. During the last years we have seen a rapid growth in the global value chains. With industries as diverse as clothing and automobiles have started dispersing their production facilities away from developed economies that have high labor costs and have exploited the developing countries which have less strict tax systems, cost-effective labor, cheap property and lose environmental controls. As far as the world economy and the changes in it are concerned the following have been the major contributors to the growth of the global value chains:

The late twentieth century has witnessed intense and extensive globalization not only of information but also of the economic activities. The international borders have opened up with cross-border investment and trade by the multinational organizations and banks. The global economy has become more integrated and more inter-dependent with the passage of time (Yeung 2003). It has been observed that the biggest contributors to the development of the coordinated global production and the introduction of the global value chain are the multinational organization that have exploited and opened up all international borders, changed the industrial organization and trade policies of the countries. The global level of the foreign direct investment rose to high levels in the 80s and 90s and this FDI contributed to the interdependence of the countries on each other. The transnational organizations have integrated their dispersed production units more closely within regional and global divisions of labor (Humphrey 2004). Globalization of the economy is a core reason for the growth of the global value chains. Over the years the global value chains have been growing as the countries and organizations rely for specific products on other countries and organizations. From the data available on United Nations Statistical Division’s Commodity Trade Statistics Database (known as UN COMTRADE) reveals that organizations make specific demands when it comes to industries other organizations for instance the import microwave ovens from the Republic of Korea, not white goods in general; computer monitors from Taiwan Province of China, not electronics in general show that value chains have been growing over time. (Gereffi et al., 1997)

As pointed out by (Monia et al., 2007)

“The globalization of markets, the globalization of production, and the globalization of capital flows as well as a new role of knowledge involve the restructuring of Companies, the restructuring of global value chains (or supply chains) and of course changes in work organization.”

We see that globalization has played an important part in the growth of the global value chains. Globalization itself is an inevitable phenomenon, with cheaper labor, better quality rare materials and subsidized production requirements available elsewhere the companies hardly ever see incentive to produce in their own regions. Thus the companies have moved out to explore better opportunities, with each region having its own advantage companies seem to operate all over the world with parts manufactured in different regions the over all cost of the product decreases which results in revenue maximization.

As pointed out earlier the other important reasons why the global value chains are growing at such a large extent is that companies have realized that in order to maximize their revenues they have to go out in the world where the production costs and labor are less. Producing the same product in a developed country and a developing country costs many fold over in some cases. Similarly, with stringent taxation policies in place the companies are bound to abide by them which takes the price of their products up, thus in order to evade these taxes these countries go to the less developed countries where the policies are not that strict, the investment gives higher returns. Similarly, if the labor costs higher in their own country they have a higher incentive to outsource production to regions where low-cost labor is available. For instance china and India are two countries where labor charges are very low thus many corporations target these countries for their production. Thus, as the developed countries become economically stronger they also become more stable politically and socially, with the labor demanding their rights, the governments introducing stringent policies and environment watch dogs monitoring the environmental degradation, the corporations are left with no option but to outsource production to the other regions of the world. These changes in the global economy have resulted in the growth of the global value chains.

This part of the paper would be discussing the strategies that companies and countries need to adopt in order to move up the global value chains. Here we would be looking at the strategies that can be used by the OECD countries and the non-OECD countries in order to move up in the global value chains. If the developed countries wish to remain competitive in the world economy then have to rely heavily on three things: knowledge, technology and intangible assets. Intangible assets have become a major character of the GVC phenomenon. Brand names and product identity have become very important in the current economic scenario companies like IBM, Apple and Alcatel outsource most of their products to the developing countries. If the developing countries are to compete with the developed countries in the GVC they have to shift towards higher-technology-intensive manufacturing industries and knowledge intensive market service. This would make them economically stringer and they would be able to compete on a global level. In order to move up the GVC the countries and corporations have to invest heavily in knowledge, they have to have the ability to go out in the world and explore what possibilities they have, where they should invest and investment in which region is going to maximize their revenues. Similarly having trade friendly policies allows other countries to invest in your country which helps in developing your own region. The countries have to become technologically sound, have the ability to install technologically sound industries in their countries. They should invite FDI which is the most important factor required to move up the GVC. According to the UNESCAP there are four ways for a firm to improve its position in order to create additional value through innovation and upgrading these have been mentioned below:

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Process innovation: the company must invest heavily in order to improve the production process. This can be done through the right use of technology and through the improvement in the labor productivity. The firms should introduce better methods.

Product innovation: the company should invest in developing their products. Developing their brands and making sure their products are properly marketed.

Functional innovation: the company should change the mix the value of value chain undertaken by the supplier, for example moving upstream from manufacturing to product design. The company should make sure the supply chain processes are smooth and the link between the consumers and the producers is well maintained.

Chain innovation: this basically means that the company should make sure that the existing processes of the company are properly managed and that the company shifts to more attractive value chains. For example the shift of some firms from producing microwave to higher value personal computers standards.

These are a few ways in which the companies can move up the global value chain. The countries must make sure that the policies that they are implementing play a part in the development of the GVC.

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