GlobalValueChainsandDevelopment

RobertaRabellottiUniversityofPavia&AalborgUniversity

roberta.rabellotti@unipv.it

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MYCVinbrief• DegreeinEconomicsUniversità Bocconi inMilan;MScinDevelopmentEconomicsUniversityofOxford;PhDInstituteofDevelopmentStudies,UniversityofSussex;

• Mainresearchinterests:Clusters,GlobalValueChains,Innovationindevelopingcountries;Emergingmarketmultinationalsandtheirinnovationstrategy;

• Checkrobertarabellotti.it toknowmore.

Agenda1st day• WhatisaGlobalValueChain(GVC)?• EconomicUpgradinginGVCs;2nd day• GVCGovernancepatterns;• Socialupgrading;• ChinainGVCs;• MappingGVCs;3rd day• Discussionofcasestudies.

Whatisaglobalvaluechain?

https://www.youtube.com/watch?v=5UAnYcqQTR4&t=185s

Recentgrowthoftradehasbeendrivenbyintermediategoods

• Intermediategoodsaccountforabout65%(USD11billion)ofallimportsin2012,upfrom57%andjustUSD2.8billionin1995;

• TheshareofOECDcountriesinglobalimportsofintermediatesdroppedfrom75%to60%whilethatofnon-OECDcountriespickedupaccordingly;

• SimilarlytheshareofOECDcountriesinglobalmanufacturingvalueaddeddroppedfrom80%to60%.

Sharesofglobalintermediateimportsreflecttheriseofemergingmarketsasproductionhubs

Source:UNCOMTRADE

The Nutella GVC

Whatisaglobalvaluechain?ThecocoaGVC

https://www.youtube.com/watch?v=5UAnYcqQTR4&t=185s

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DefinitionofValueChain• Avaluechainisthefull

rangeofactivitiesthatfirmsengageintobringaproducttothemarket,fromconceptiontofinaluse;

• Suchactivitiesrangefromdesign,production,marketing,logisticsanddistributiontosupporttothefinalcustomer;

• Theymaybeperformedbythesamefirmorsharedamongseveralfirms.

National,regionalandglobalvaluechains

• Valuechainscaninvolvefirmslocated– inthesamecountry(domesticvaluechain);– Inthesameregion(regionalvaluechain)– Worlwide (globalvaluechain).

ThedriversofGVCrise• Tradecostshavedecreasedsignificantly:thecontainerrevolution;

• RapidadvancinginICTs:cheaperandmorereliableTLCsandincreasingpowerfulPCshavefacilitatedco-ordinationandmonitoringofactivitiesatlargedistance;

• Liberalization:fallingbarrierstotradeandinvestments;

• Largegapsinskilledandunskilledwages.

Declineintradeandcommunicationcosts

Moore’s Law as Seen in Intel Microprocessors –how the availability of a global technology ..

.. has driven down the price of computers, hence the cost of information and communication processing

Fallingtradebarriers

Wagedifferences

GVChasdeepenedtheprocessofglobalization

• Geographically:moredevelopingcountriesinvolved;

• Sectorially:manufacturingbutalsoservices;• Functionally:productionanddistributionbutalsoR&Dandinnovation.

WhyisstudyingGVCuseful?

GVCis“whatyoudo”

• Countriescanenterintheglobalmarketspecializinginoneorfewstagesofthevaluechain(thewholechainisnotneeded:TheGoldenOpportunity).

ValueAddedalongtheGVC:TheSmilingCurve

• AlongtheGVCthereareactivitiesthataremorelucrativethanothers:

• Mostvaluecreationisgenerallyfoundin:a)upstreamactivities (design,productdevelopment,R&Dandmanufacturingofkeypartsandcomponents)andb) downstreamactivities (marketing,brandingandcustomerservice);

• Assembly, oftenoffshored,toLDCS,representsonlyasmallpartofvaluegeneration.

GVCsindevelopingcountries• TheparticipationinGVCsisakeyopportunityforfirmsindevelopingcountriestoreachinternationalmarkets;

• Countriescanspecializeinoneorfewtasks,phasesoftheGVC;

• Leadfirms(e.g.Gap,Ferrero,Apple)organizetheGVCandplayakeyroleinfosteringandsupportingtheupgradingprocesswithinGVC;

• Upgrading dependsonthegovernancepatternsandonthepowerrelationscharacterizingtheGVC;

• GVCanalysisfocusontherelationshipsbetweengloballeadfirmsandlocalproducerstoinvestigatetheopportunitiesandconstraintsthatresultfromenteringsuchrelationships.

Who are the key players inGVC?

• Buyer-driven value chain• Producer-driven value chain

Buyer-driven value chains• Retailers, brand-name merchandisers and trading

companies play a pivotal role:– The consumer goods industry provides some of

the best examples for these types of chains but also food value chains dominated by large food conglomerates show signs of buyer-driven value chains;

– Global agribusiness chains are often buyer-driven because in many cases they are governed by the wholesalers, retailers and brand-name companies that are closer to final customers.

Producer-driven value chains• Lead by MNCs or vertically integrated enterprises

that control the production system and allocate the production on the basis of comparative costsadvantages: – Examples of these value chains can be found

in the capital and technology intensive industries such as the car and automotiveindustries, the electronics or the pharmaindustry.

EconomicUpgradinginGVC• Economicupgradingismovingupthevaluechainthrough:

• Therearefourtypesofupgrading:①Processupgrading;②Productupgrading;③Functionalupgrading;④Inter-sectoral/inter-chainupgrading.

ProcessandProductUpgrading①Processupgradingimpliesreductionincosts,

productivityandflexibilityincreasesbyreorganizingtheproductionsystemorinvestinginneworbetterequipment/technology;

②Productupgradinginvolvesashifttomoresophisticated,complex,betterqualityproductsaswellasproducingalargerrangeofproducts.

③ Functional upgrading

• Changing the mix of activities and acquiring new skill intensive functions (i.e. from manufacturing to design);

Functional upgrading in Mexico

④ Intersectoral/inter-chainupgrading

• Applying competences acquired in one function of a chain and using them in a different sector/chain;

• Sinos Valley shoe producers (Brazil) have functionally upgraded (moving up to design, branding and retailing) in the domestic/regional value chain:– Leveraging their production capabilities acquired

in the US value chain;– ‘Made in Brazil’ program promoted by the local

business association to create a local design capability and a brand.

UpgradinginGVCisconditionedbygovernance

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Five GVC Governance Types

Governance Type

Complexity of transactions

Ability to codify

transactions

Capabilities in the supply-

base

Degree of explicit

coordination and power asymmetry

Market Low High High

Modular High High High

Relational High Low High

Captive High High Low

Hierarchy High Low Low

Low

High

Networkorg.forms

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Keygovernancepatterns

• Modular:whencomplextransactionsarerelativelyeasytocodify.Typically,suppliersinmodularchainsmakeproductstoacustomer’sspecificationsandtakefullresponsibilityforprocesstechnology(commoninagro-food,electronics,auto);

• Relational:whenbuyersandsellersrelyoncomplexinformationthatisnoteasilytransmittedorlearned(commoninclothing,footwear);

• Captive:whensmallsuppliersaredependentononeorafewbuyersthatoftenwieldagreatdealofpower.Suchnetworksfeatureahighdegreeofmonitoringandcontrolbytheleadfirm.

EconomicandSocialUpgrading

• ItisoftenimplicitlyassumedthateconomicupgradinginGVCswillautomaticallytranslateintosocialupgradingthroughbetterwagesandworkingconditions.

• However,casestudiesprovideamoremixedpicture.

• Whilethiscanbetheoutcome,thereisnoevidencethatthisnecessarilyfollowsiftheworkgeneratedishighlyinsecureandexploitative.

SocialupgradinginGVC• Socialupgradingistheprocessofimprovementintherightsand

entitlementsofworkersassocialactorsandenhancementofthequalityoftheiremployment;

• Thisincludesaccesstobetterwork,whichmightresultfromeconomicupgrading(forexample,aworkerthathasacquiredskillsinonejobisabletomoveabetterjobelsewhereinaGVC);

• Butitalsoinvolvesenhancingworkingconditions,protectionandrights;

• Improvingthewell-beingofworkerscanalsohelptheirdependentsandcommunities;

• Theconceptofsocialupgradingisconstitutedbyfourpillars:– Employment,– Standardsandrightsatwork,– Socialprotection;– Socialdialogue.

• TrajectoryA:whenworkersremainwithinhome-basedproductionbutarestillabletoimprovetheirworkingconditions(betterwage,moresecurecontracts);

• TrajectoryB:forinstancefromsubsistenceagriculturetowageemploymentintheclothingindustry;

• TrajectoryC:whenworkersmovetobetterpaidjobsassociatedwithsocialupgrading(e.g.skilledjobsinITsectorinChinaorIndia).

Chinaprocessupgrading:fromsimplecontractassemblyto“full-package”

manufacturing

Functionalupgrading

• Fromassemblertopartsprovider:China’sshareinworldexportshasincreasednotonlyinfinalproductsbutalsoinpartsandcomponents;

• From1995to2007,China’sshareinworldexportsofpartsandcomponentsincreasedby9.2%,whilethoseofJapanandtheUnitedStatesdroppedby7.1%and6.3%.

Anewroleintheknowledge-intensivesegmentsofGVCs?

• Chinaisnowtheworld’ssecondlargestspenderonR&DaftertheUnitedStates;

• PatentsheldbyChineseresidentsincreasedatanaverageannualrateof29%between1999and2009.

• However,Chinesefirms’patents,especiallyintheUnitedStates,arelargelyheldbyahandfulofexportoriented firmsincomputer,communicationandconsumerelectronicsindustries,suchasFoxconn,HuaweiandZTE;

• China’sexportsofcommercialknowledge-intensiveservices(business,financialandcommunicationservices)havealsoexpanded.

ThefutureofChina’supgrading

• Itslargeandfast-growingdomesticmarketfacilitatestheupgradingofGVCactivities:ChinesefirmsabsorbadvancedknowledgebyparticipatinginforeignMNEs’GVCs,theycanusethisknowledgetodevelopnewcapabilitiesandnewproductsforthedomesticmarket;

• Chinawasabletoleverageitslargemarkettoattractforeigninvestmentsembodyingthelatesttechnology.ThisallowedChinesefirmstoimprovetheircapabilitiesandkeepupwiththeworld’stechnologicalfrontier;

• CompetitionwithMNEsinthedomesticmarketgivesChinesefirmsincentivestoinvestintechnologyandotherknowledge-basedassets.

Butbeware…

• Hightechexportsdoesn’tmeanhighvalueaddedproduction:seetheiPodcase;

• Exportdependencehasrisksforeconomicandemploymentgrowth;

• Economicupgrading≠Socialupgrading

TheIpod GVC

WhocapturesValueinApple’siPod?

• Apple captures the most of thevalue;

• Suppliers of key inputs also gain a good share of value;

• Trade statistics may lead to wrongconclusion (is a made in China IPOD a chinese or a US product?).

MappingGVC

https://www.youtube.com/watch?v=KMkJu8S8ztE

OutsourcingandOffshoring

• Outsourcing:purchaseofintermediategoodsandservicesfromoutsidespecialistproviders;

• Offshoring:purchaseofintermediategoodsandservicesfromforeign specialistproviders.

Outsourcing(=shareofexternallysourcedintermediatesinproductionor“verticaldis-integration”):rathercommontoallcountries

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Offshoring (=imports ofintermediategoods andservices as %oftotal intermediateinputs):decreasing withcountrysize

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Tradeinvalueadded

• Tradestatisticsrecordgrossflowsofgoodsandserviceseverytimetheycrossborders;

• TIVA(TradeinValueAdded)databaseaddressestheproblemofdoublecounting,measuringthevalueaddedbyacountryintheproductionofanygoodorserviceexported.

GVCandtradestatistics• Globalexports=210;• ValueAdded=110;• IntradestatisticsChas

adeficitof110withB;• Infact,Chasatrade

deficitof10withBandof100withA;

• AdependsonthedemandinC;

• BdependsonAforintermediateparts.

VAinglobaltrade• 28%ofglobalexportsisdoublecountedintradestatistics.

Foreignvalueaddedbycountry

• Economicsizeofcountries:– smallereconomieshavehighersharesofforeignvalueaddedembodiedintheirexports;

• Specializationofcountries:– countrieswithsubstantialnaturalresourceshavelowerratioofforeignvalueaddedintheirexportsasminingactivitiesrequirefewerintermediategoodsintheproductionprocess.

Foreignvalueaddedbyindustry• ThefragmentationofproductioninGVCsislinkedtothetechnicalcharacteristicsofproductsanditisfarmoredevelopedinmanufacturingthaninservices;

• Foreignvalueaddedisverylargeinbasicindustriesthatmakeheavyuseofimportedprimarygoodssuchascokeandrefinedpetroleum,basicmetals,chemicals,andrubberandplastics;

• Fragmentationisalsosignificantformodularproductsinhightechnology industries:partsandcomponentsareoftenproducedinonecountryandexportedtoanotherinwhichtheyareassembled;

• Thisinternationaldivisionoflabour isdeepinelectricalmachinery,radio/televisionandcommunicationequipment,office,accountingandcomputingmachinery,butalsomotorvehicles.

Foreignvalueaddedbygeographicregions

• InmostEuropeancountries,between60%and70%oftheforeignvaluecontentofexportscomesfromotherEuropeancountries;

• WithintheNAFTAregion,CanadaandMexicoareheavilyorientedtowardstheotherNAFTAcountries,inparticulartheUnitedStates:almosthalfoftheimportedintermediatesembodiedintheirexportsoriginatesintheNAFTAzone;

• InAsia,themajorityoftheintermediatesembodiedinexportsaresourcedfromwithintheregion,reflectingtheimportanceofFactoryAsiawhere(advanced)partsandcomponentsareoftenproducedbydevelopedeconomiessuchasJapanandKoreaandthenexportedtoemergingeconomiessuchasChinaandincreasinglyVietnamandCambodiawheretheintermediatesareassembledintofinishedproducts.

Chinatradebalance

• China’stradesurpluswiththeUSAissmaller;

• ChinaassemblesintermediatepartscomingfromKoreaandJapan(FactoryAsia);

• Thereisapressureforrebalancingtradedeficitswhichcaninduceariseinprotectionism..

Wowinsandwholoses?