Governing Global Production

Resource Networks in the Asia-Pacific Steel Industry

J. Wilson

• Publisher: Palgrave Macmillan
• Year: 2013
• Print ISBN: 9781137023186
• eBook ISBN: 9781137023193
• Topic: Politics & International Relations
• Subtopic: Environment & Energy Policy
• Index: Politics & International Relations

Northeast Asian steel industries have developed global production networks, but by spanning multiple national spaces, these networks unite many national economies while belonging exclusively to none. Who, therefore, is in control? Jeffrey D. Wilson examines how states and firms coordinate their activities to govern global production.

1

Introduction

Resource interdependence has been a major factor contributing to economic integration in the Asia-Pacific region during the post-war period. First driven by Japan’s high-speed growth of the 1960s, and then followed by the industrialisation of other Northeast Asian economies (Korea, Taiwan and China), the demand for mineral resources from the region’s industrial centres – in particular their steel sectors – has been steadily growing. But unlike the experience of western nations earlier in the century, an almost total lack of local reserves of minerals and energy forced these Northeast Asian economies to look to foreign sources of mineral resources from the outset of their industrialisation programmes. Such outward dependence for mineral resources fostered new mining industries in a number of countries on the Pacific Rim – namely Australia, Brazil and Canada – which were specifically developed to service demand for coal and iron ore from Northeast Asia’s growing steel industries. As a result of their mutual interdependence, the fates of these two industries became intertwined, coming to form a set of functionally-integrated global production networks (GPNs) that connect Asia’s mining and steel industries through resource trade and investment ties. These resource production networks have since played a major role in the economic development of all the involved countries – with steel underpinning the heavy industrialisation associated with high-speed growth in Northeast Asia, and mining acting as the leading export earner for regional mineral supplier economies. They have also acted as a driver of regional economic integration, by building inter-state and inter-firm links between the industrialising economies of Northeast Asia and their resource suppliers on the Pacific Rim.

Similar to the many other industries in which global production networks have formed, the resource networks in the Asia-Pacific steel industry are distinctly transnational in character. By spanning multiple national spaces, these resource networks unite many national economies while belonging exclusively to none. This raises several questions about how such networks are governed. First, many states are involved as public sources of governance, with the governments of both the steel and mining centres influencing the nature of the networks through their investment, trade and industrial policy regimes. Second, steel and mining firms are also critically important as private contributors to production network governance, through the complex inter-firm relationships that regulate patterns of trade and investment between the involved enterprises. Who, therefore, is in control? How do the involved state and firms coordinate their activities within these functionally integrated resource networks, and how are the economic gains distributed between the players? In short, what are the state and firm contributions to the governance arrangements for this globalised industry, and what explains their form?

This book investigates the role of states and firms in the governance of the resource networks in the Asia-Pacific steel industry. Empirically, the book traces the evolution of these resource networks – from their creation in the 1960s when Japanese steel firms developed production networks in Australia to supply needed mineral resources, through their expansion to bring new participants in Brazil, Canada and Korea in the 1980s, until the disruptive involvement of Chinese steel firms during the 2000s. By presenting the evolution of these production networks historically, this book traces how patterns of state-state, state-firm and firm-firm bargaining have produced governance arrangements for resource interdependence in the Asia-Pacific region. Success in these bargaining processes has allowed certain states and/or firms to construct governance arrangements in their favour, and thus capture a larger share of the economic gains from participation in these production networks.

To explain the role of states and firms in these resource networks, this book proposes a new framework for analysing the governance of global production. Drawing on debates in international political economy (IPE) scholarship over the transformation of economic governance under conditions of globalisation, it is argued that specific advantages, interest mutuality and institutional features explain the contributions of states and firms to production network governance. Specific advantages refer to tangible and intangible resources that empower states and firms, which enable the actors that possess them to minimise the influence of competing actors (and their interests) when determining production network governance arrangements. The degree of interest mutuality between state and firms in turn accounts for how negotiation over governance arrangements between the parties is conducted, which can take the form of either conflictual bargaining or the development of cooperative state-firm partnerships. However, it is further argued that such specific advantages and patterns of interest mutuality are not natural, but instead derive from the institutional features of the firms and states in question. The balance of these advantages also changes over time, which in the Asia-Pacific steel industry has manifested itself as a pattern of repeating shifts in control as states and firms draw on their resources to bargain for the construction (and reconstruction) of resource network governance arrangements. In short, this book argues that production networks are fundamentally politically contested structures, within which states and firms compete with one another to achieve governance arrangements most conducive to their particular interests.

Why examine the governance of global production networks?

Questions regarding economic governance under conditions of globalisation are a central yet controversial debate in IPE scholarship. During the post-war period, transnational flows of goods, capital and technology have increased both in absolute volume and as a relative share of world economic activity, implying growing interconnectedness between hitherto nationally-contained economies. Originally framed as a process of interdependence between national economies, the contemporary approach in IPE is to view these transnationals flows as an emerging process of globalisation, which is engendering a spatial reorganisation of economic activity from the national to the transnational levels (Perraton et al. 1997; Scholte 1997). This spatial shift is considered important because of two changes it is claimed to cause in patterns of economic governance. A first is that view that nationally based, public sources of governance (i.e. the state) become less able to perform governance functions, as economic processes increasingly extend across and beyond national borders (Strange 1996; Cerny 2000). A second is the argument that transnationally based and private sources of governance (i.e. firms) acquire increasingly important roles, given their greater capacity to manage transnational economic processes (Strange 1997; Cutler 2002). This shift from a public-national to private-transnational base has been labelled a ‘massive shake-out’ of economic governance, and is argued to be a historically unique feature of the contemporary global economy (Held et al. 1999: 7).

Economic globalisation has proceeded in many domains, such as finance, investment, trade, and technology, and takes varied forms in each. But in the case of production, globalisation has received sustained attention because it is argued to have led to the formation of global production networks – new, globally-based manufacturing systems that are qualitatively differentiated from the nationally-based systems which they are replacing (Gereffi 1992). In these networks, the various stages of production of a final product are spatially fragmented and spread across multiple geographic sites, in a manner that ‘disintegrates’ national industries. However, these disparate production processes are also functionally integrated, and complex inter-firm networks have emerged to manage the trade and investment links between geographically dispersed but interconnected firms (Gereffi 2005). The governance structures of these production networks – the arrangements and relationships that manage the functional integration between firms – are considered a critical object for analysis. They determine where production is undertaken, by whom, for whom, and how value is distributed within globalised industries (Kaplinsky 2000). As a result, since the mid-1990s a body of global production networks theory has emerged as a new subfield in IPE, aimed at understanding the relationships that govern the operation of global production networks, and how these governance forms shape the international distribution of economic activities.

However, rival theoretical frameworks for production networks analysis have been forwarded, which make competing claims regarding the sources of production network governance. By the mid-2000s, two frameworks dominated the field: the global value chains (GVC) framework, concerned principally with describing and explaining the inter-firm relationships within global industries; and the global production networks (GPN) framework, which aims to investigate the relationship between inter-firm governance arrangements and the institutional environments that production networks span.¹ While successful in spawning rich bodies of empirical studies, both frameworks have come under criticism for difficulties associated with their respective theoretical claims. The explanatory account offered by the GVC framework has been considered too narrow because of an exclusion of all non-firm actors – particularly states – as potential sources of production network governance. While the competing GPN framework includes such non-firm actors, its utility has similarly been questioned due to a lack of theoretical grounding necessary to move its analysis from description to an explanation of governance forms. An unresolved issue between these competing frameworks thus remains over the question of how we can explain the role of public-national (state) and private-transnational (firm) actors as sources of production network governance – to what degree does each contribute, and what are the causal factors behind these patterns?

This book seeks to address a question currently at the centre of the analysis of global production networks – what are the respective roles of state and firms as sources of governance for production networks, and what explains their roles? To do this, the book develops a new political economy framework for production network analysis, which turns attention toward three interrelated sources of governance to explain the role of state and firms in global industries. The first is the role of firms, which considers the factors that enable certain firms to acquire salient roles in production network governance arrangements. The second is the role of states, which addresses the extent to which states are able to act as a source of production network governance, and the factors that enable and constrain states in exercising such influence. The third is nature of the interaction between states and firms, which evaluates the form of their relationship and how, as competing governance sources, their roles combine to produce overall governance outcomes for global production.

The political economy framework advanced in this book argues that the respective role of states and firms in production network governance crucially depends on three explanatory factors. First, it is argued that the ability of states and firms to influence production network governance depends on their possession of specific advantages – assets that empower the actors vis-à-vis others. For firms, these take the form of firm-specific advantages (such as capital, technology, control of markets, and/or spatial mobility), which allow possessing firms to resist the priorities of competing firms and states. For states, these manifest as location specific-advantages (such as natural resources, important local markets, and/or desirable institutional environments) which favour certain locations as places to situate production, and enable states to demand certain behaviour from firms in exchange for access to the national space. Second, it is argued that the interaction between states and firms when bargaining over governance arrangements depends on the interest mutuality between the parties. In instances where states and firms have divergent goals from participation in global production networks conflictual bargaining will result, and will be resolved in favour of the party relatively less dependent upon the specific advantages of the other. Conversely, in situations where the actors have high levels of mutual interests cooperative state-firm relations can be expected, leading to the development of adaptive state-firm partnerships. Taken together, these two factors explain the assets that empower states and firms, and the way in which they interact to produce overall governance arrangements for global production networks.

However, this political economy framework also argues that accounting for the factors enabling state and firm roles in production networks does little to tell us about the governance outcomes they produce. Not all states and firms are alike, and when participating in production networks the actors come from varied political-economic contexts, have different goals, and pursue their goals in different ways. To this end, the framework seeks to open the black-box of both the state and the firm, by suggesting that their contributions to production network governance are conditioned by a third factor – their institutional features. These features – which include nationally-distinct business practices, regulatory structures and political environments – define the context and characteristics of states and firms, and explain the goals they prioritise and the means by which they pursue their interests. Moreover, their importance also suggests that far from being natural, the specific advantages and interest mutuality of states and firms can actually derive from their institutional contexts, change over time, and be manufactured by the purposive action of the participants. This latter possibility in turn indicates that production network governance is inherently politically contested, and arises from patterns of conflict, compromise and negotiation between states and firms seeking to achieve arrangements most conducive to their particular economic interests.

Thus, the central theoretical argument forwarded in this book is that governance of global production arises from combination of both state and firm sources, and that their respective contributions depend on the specific advantages, interest mutuality and institutional features of these actors. To sustain this argument empirically, the book provides an examination of an important set of production networks – the evolution of governance structures in the resource networks in the Asia-Pacific steel industry, from their creation in the 1960s to the present.

Why examine resource networks in the Asia-Pacific steel industry?

Resource networks in the Asia-Pacific steel industry have been selected as the empirical focus of this study because they provide a useful case in which state and firm contributions to production network governance can be examined. The steel industry has historically held a central place in the development of all modern industrial economies, through its role as an input into a range of heavy industrial sectors (such as construction, machinery, and automobiles), as well as calling forth the development of large-scale mining in the coal and iron ore industries that supply its mineral inputs. Despite being a technologically mature industry by contemporary standards, its importance to capitalist economic development has not waned in the latter half of the twentieth century. In the immediate post-war period, the steel industry entered a phase of rapid growth and technological development associated with the long boom of the western capitalist sphere. Such was its industrial centrality that steel proved a major concern occupying US and Japanese post-war industrial policy (Yonekura 1994; Hogan 1971), and played a catalytic role in the process of European integration as the basis for the formation of the European Coal and Steel Community in 1951 (Lister 1960). During the 1960s and 1970s, steel’s industrial and political importance was also reinforced outside the west through its inclusion as a central plank of import-substitution industrialisation strategies in the developing world (particularly Brazil, India, Korea, and Taiwan). More recently, steel has again become a global growth industry during the 2000s due to the rapid growth of the Chinese steel industry, associated with China’s recent shift from light- to heavy-industrialisation.

Two changes to the geographic organisation of steel production during the post-war period make it a useful case to examine the governance of global production. One has been dispersion in the spatial location of world steel production. From an initial domination by Western countries, the rise of the Japanese, Korean and Chinese steel industries has gradually shifted world steel production from Europe to Asia, and from the developed to the developing world.² Second, there has been spatial fragmentation within the steel industry, through the geographic splitting of steel manufacturing from the production of its main mineral inputs (iron ore and metallurgical coal), and the rise of seaborne trade in these steelmaking raw materials. This spatial fragmentation has seen patterns of national specialisation emerge in the Asia-Pacific region – evident in the rise of resource import-dependent steel industries in Japan, Korea, Taiwan and China, alongside the concomitant emergence of export-oriented mining industries in Australia, Brazil and Canada dedicated to supplying them with resource inputs.

These changes in the geography of world steel production have prompted the emergence of production networks in the Asia-Pacific steel industry, which have developed to regulate the inter-firm relationships along the mining-steel value chain. These resource networks involve complex patterns of inter-firm relations that connect Asia’s steel mills to regional mining firms, and have been characterised by three integrative devices – minority ownership ties between steel and mining firms, long-term contracts regulating supply patterns, and annual price negotiations to determined mineral export prices. The creation of these inter-firm resource networks in the Asia-Pacific was initially catalysed by the post-war rise of the Japanese steel industry, which was forced to look abroad for the supply of minerals due to Japan’s almost total lack of indigenous raw materials. Initially constructed between Australian mining and Japanese steel firms during the 1960s, the membership of these resource networks rapidly expanded from the 1970s as new steel producers emerged in Korea and Taiwan, and new minerals exporters developed in Brazil and Canada. Over the last decade, the rapid rise of the Chinese steel industry and its need to import large quantities of iron ore has further expanded both the membership and size of the Asia-Pacific resource networks, which now account for just over half of world steel, iron ore and metallurgical coal production.³

These resource networks have been of critical economic importance to all of the countries involved in them. For the economies of Northeast Asia, steel has played a major role in their respective industrialisation processes during the post-war period, and was made a central plank of national industrialisation in Japan during the 1950s, Korea and Taiwan during the 1970s, and China since the late 1980s. Their comparative lack of domestic mineral reserves has also meant that to develop their steel industries, these economies have had to rely on foreign mineral suppliers, making resource production networking a developmental necessity. For resource-rich countries in the region, mineral exports to fast growing Northeast Asian economies have also been one of the main drivers of economic growth. Since the 1960s, the mining industry has consistently been one of Australia’s major export earners, and export-oriented iron ore and coal industries became a key component in the development strategies of Brazil and Canada respectively from the late 1970s. Moreover, the economic interdependence resulting from these countries’ participation in resource networks has acted as a driver of economic integration within the region, and has catalysed the development of both inter-firm and inter-state links between the major economies in the Asia-Pacific.

However, while resour...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Tables and Figures
• Preface and Acknowledgements
• List of Abbreviations
• Chapter 1 Introduction
• Chapter 2 Theorising States and Firms in Global Production Networks
• Chapter 3 The Coordinated Rise of the Japanese Steel Industry
• Chapter 4 Negotiating Resource Networks in Australia
• Chapter 5 Resource Nationalism and Australian State Intervention
• Chapter 6 Broadening Membership and the Struggle for Control
• Chapter 7 The State-led Rise of the Chinese Steel Industry
• Chapter 8 China and the Iron Ore War
• Chapter 9 Governing Global Production
• Notes
• Bibliography
• Index