globalization & global value chains

globalization & global value chains

1. globalization

   • Globalisation is not new. The process of international economic integration has been underway for decades, facilitated by more open economic policies and trade liberalisation in a growing number of countries.
     • reason for rise in globalisation
       • Technical advances, notably in transport and communication, have lowered costs and also fostered globalisation. Trade and foreign direct investment (FDI) are still the key channels for international economic integration, with migration playing a more limited role. Information and communication technology (ICT) has made it possible to slice up the value chain and perform activities in any location that can help reduce costs.
       • This phenomenon has also been referred to in the literature as international production sharing and vertical integration of production and is closely linked to the growth of global production networks.

2. global value chains(GVC)

   • The value chain describes the full range of activities that firms and workers perform to bring a product from its conception to end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer. The activities that comprise a value chain can be contained within a single firm or divided among different firms (globalvaluechains.org, 2011).
   • how has globalisation affected GVC
     • But why?
       • The globalisation of value chains is motivated by a number of factors. One is the desire to increase efficiency, as growing competition in domestic and international markets forces firms to become more efficient and lower costs. One way of achieving that goal is to source inputs from more efficient producers, either domestically or internationally, and either within or outside the boundaries of the firm. Other important motivations are entry into new emerging markets and access to strategic assets that can help tap into foreign knowledge. Notwithstanding these anticipated benefits, engaging in global value chains also involves costs and risks for firms.
     • effects
       • outsourcing & offshoring
         • The fragmentation of the production process across various countries has given rise to considerable restructuring in firms including the outsourcing and offshoring of certain functions. Outsourcing typically involves the purchase of intermediate goods and services from outside specialist providers, while offshoring refers to purchases by firms of intermediate goods and services from foreign providers, or to the transfer of particular tasks within the firm to a foreign location (Figure 1). Offshoring thus includes both international outsourcing (where activities are contracted out to independent third parties abroad) and international in-sourcing (to foreign affiliates).
       • relocations of existing activities
         • The growth of international sourcing has also resulted in the relocation of activities overseas, sometimes implying the total or partial closure of the production in the home country while at the same time creating or expanding affiliates abroad producing the same goods and services as in the host country. More often, it is about the substitution of domestic stages of production by activities performed in foreign locations, with goods and services being exported from the host country to the home country. Relocation is not always interpreted in such a strict sense, and often encompasses different forms of internationalisation such as the opening of a new affiliate abroad to enhance market presence. While the different concepts may be easily defined, their measurement is more complex. Firms are sometimes reluctant to offer details on outsourcing and offshoring decisions, in particular on relocation. The lack of hard data has contributed to the great diversity in views on the s
       • Growing Trade in intermediates
         • Global value chains allow intermediate and final production to be outsourced abroad, leading to increased trade through exports and imports, and to a rapidly growing volume of intermediate inputs being exchanged between different countries.
       • domestic production increasingly relies on foreign inputs
         • As a result of the growing global linkages between countries, a decreasing share of production is created within national boundaries. A decline in the ‘production depth’ (value added over production) and a growing importance of intermediates can be observed in the OECD area. The growing international sourcing of intermediates within global value chains has resulted in manufacturing exports and imports of individual countries increasingly moving together and growing faster than production, indicating that international transactions between OECD countries are growing very rapidly. The globalisation of value chains has also resulted in increasing intra-industry trade (i.e. trade within the same industry, including the trade in intermediate goods at various stages of production). While these evolutions are observed in almost all countries, they become particularly clear in smaller OECD countries with large FDI inflows.

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