Global Value ChainsāA New Paradigm for Global Trade
The current wave of Globalization has created a new paradigm for global trade: Global Value Chains, or GVCs. GVCs are production networks in which goods like a smartphone, ski jacket, or harmonic filter crisscross the globe between stations of transformation. This has had a profound impact on national economies and how their businesses are run. The automobile industry, arguably the original form of integrated (Fordist) production, illustrates the transformation from a national industry into Global Value Chains. For example, Volkswagenās glass windshields are produced in France , the leather for its seats in South Africa, brake-locking systems in Germany , electronic components in Japan, all of which, depending upon the model and market, converge for final assembly in Germany, the Czech Republic , China , and Mexico. Each of these suppliers will have their own network of sub-suppliers, creating an n-tiered system of global production which is a GVC. Because instructions and specifications, customs, payments, and any other paperwork can be transmitted electronically in real time, the owners and governance of these supplier firms can be located anywhere in the world. Finished goods ranging from automobiles to electronics and apparel have typically traversed the globe before arriving at their final consumer. On that journey, the product design may have been completed by a firm in one country before being passed on to contract manufacturers for assembly, then distributed and serviced by entities in entirely other locations (Rivoli 2005). The new Globalizationās division of labor inspires many metaphors: āsplinteringā (Bhagwati 1984), āFragmentationā (Jones and Kierzkowski 1990), the ādisintegrationā of production (Feenstra 1998), āvertical specializationā (Hummels et al. 1998), the āde-compositionā of the corporate core (Billington and Kuper 2003), āfine sliceā (Buckley 2004, 2009), āslicing up the value chainā (Dicken 2015). This terminology emphasizes that the production function is no longer a black box (as economists conceptualize it), but now a sequence of value-adding tasks which can be distributed (outsourced or offshored) to specialists around in the world.
Although global trade is not new, specializing and modularizing work at this degree of resolution is unprecedented. It was made possible by the liberalization of world markets after the Second World War, combined with technological breakthroughs like information and communications technology and containerization. The cost of moving goods , information, money, and people has never been lower (Baldwin 2017). There is a consensus among stakeholders that the new way of doing business has the makings of another industrial revolution: economists like Baldwin claim that comparative advantage has been denationalized (Baldwin 2014; Baldwin and Lopez-Gonzales 2015). Supply-Chain scholars declared a new era of network competition, in which it is not national industries like automaking or aerospace, which are going head to head. It is not even firm versus firm competing in international markets, but supply chain versus supply chain (Christopher 2011). At the same time, as more and more tasks are traded around the globe, Porter argues that competitive advantage remains a national attribute, within the influence of good policy and national factors (Porter 1990), which the WEF endorses with national indicators within its annual scorecard for competitiveness.
To date, some of the most significant contributions to GVC research have been made by sociologists, geographers, and economists who ask how outsourcing, offshoring, and growing inequality impact developmental outcomes and what policy should do about it. The tightly coordinated networks which make up a GVC came to the attention of economists when they observed a spike of export activity without a corresponding increase in GDP . World trade volume grew at a rate of 6% between the years 1970 and 2005 and manufacturing output quadrupled between 1962 and 1999. At that time, the real growth rate of world GDP hovered at around 3.5% (Amador and Cabral 2014). Neither the increase in trade nor in manufacturing could be explained by the standard economic trade model, which measured the impact of (at the time, relatively small), tariff reductions. Examining the mystery, the economist Yi (2003) concluded that the spike in trade was attributable to āan increasingly prevalent phenomenonā¦ vertical specialization ā¦[which] occurs when countries specialize in particular stages of a goodās production sequence, rather than the entire goodā (Yi 2003). In other words, if GVCs were shipping ever higher volumes of semifinished goods (or intermediates), to the next station in their value-adding journey, measuring exports to compute GDP growth would lead to double-counting (Koopman et al. 2010).
The decomposition of a formerly integrated, local production function reveals new dynamics of location and rents, or value capture. The GVC methodology developed by Gereffi, a sociologist, strives to characterize the regional impact of the international division of labor. This produces a map of tasks, in which four criteria must be addressed: its input-output structure, its territorialization, its governance structure, and institutions in which each segment of the GVC is embedded (Gereffi 1995). By emphasizing the forces of transformation (or value-added), location, and control, this analytical framework is a departure from classical definitions of a production function subject to invisible market forces.
The unequal the distribution of rents, or value capture, within a GVC was acknowledged by a management scholar, Ram Mudambi, as well as a business leader from an emerging market, Stan Shih, CEO of Acer (Shih 1996; Mudambi 2008). When graphed against the sequence of tasks, value is captured in the shape of a āsmileā curve, in which the highest rents go to the knowledge-based activities (like product design and service), at its extremities. Smile curve economics revealed that the repetitive manual labor of traditional factory work is actually the worst paid in the chain (Mudambi 2008; Baldwin 2014).
This not only contradicts the economic equivalence of factories with production, and production with growth (Kraemer et al. 2011), it begs the question of how firms and regions can upgrade within the GVC. Economic geographers have observed four different strategies for firms to move up the smile curve into higher value-adding tasks: the first is Process upgrading in which inputs are more efficiently transformed into outputs. The second is Product upgrading, in which firms diversify into more sophisticated product lines. The third is Functional upgrading, which moves up the skill ladder. The fourth and final strategy is Inter-sectoral or chain upgrading in which the supplier shifts to a more technologically advanced network altogether, which usually involves entering or creating new industries and markets (Humphrey and Schmitz 2002; Dicken 2015).
Opportunities for IB Scholarship
Because GVCs have created entirely new business models (like Li and Fungās asset-free control tower), strategies, and breeds of firm (like contract manufacturers, original design manufacturers, location service providers, and more), the relevance for International Business research is hard to overstate. To date, the principle focus of IB scholars has been the Multinational Enterprise, or MNE. A review of 50 years of IB theory-building acknowledges the evolution of three units of analysis within this focus. The first stream of studies is at the country level, using national statistics on trade and FDI. The second stream proceeded to study the firm-specific behaviors of the Multinational Enterprise (MNE)ās parent company. The third stream takes the foreign subsidiary as the unit of analysis to examine its role in the international network of the MNE (Rugman et al. 2011).
Building on this legacy, IB research simply expanded its focus to study the role of MNEs within GVCs, which in turn generated two points of view. The first examines how MNEs manage their production function in the form of a Global Factory, discussing the strategies for internalization and externalization (Buckley and Casson 2009). The second point of view taken is that of Regional Economic Geography or REG, which builds upon the work of the Manchester School led by Dicken (2015). The economic geographers take āfundamentally a deeply relational view of the worldā (Coe et al. 2008), interested in how global production networks connect to their regional and institutional context. Their research addresses four sets of relationships: intra-firm, inter-firm, firm-place, and place-place. Like the economic geographers, both the Global Fac...