Global supply chains
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Global supply chains. Definition: Global supply chains (GSCs) are the connective tissue that allows fractionalized and dispersed stages of production to operate as a harmonious whole. Business model based on highly competitive settings. Cost min – Profit max

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Global supply chains

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Global supply chains

Definition:

  • Global supply chains (GSCs) are the connective tissue that allows fractionalized and dispersed stages of production to operate as a harmonious whole. Business model based on highly competitive settings. Cost min – Profit max

    Win-Win. Advantageous for everybody participating, but for some more than others. Not participating may not be an option anymore.

    Two main implications for developing countries:

  • GSCs allow poor nations to join supply chains rather than investing decades in building up their own industrialization.

  • GSC offshoring of labor-intensive manufacturing stages brought with it technical and managerial know-how. Some of which is inevitably transferred to local firms.


GSCs – Why increasingly important?

Main cause of production fragmentation was Lower Trade Costs, now is:TECHNOLOGY

…someone figured out that combining high technology with low labor cost was a profitable strategy!

Technology is become far more mobile internationally.

Technology has become more mobile due to:

  • Lower ITcosts

  • Still, know-how can be retained by firms (Patents):

    Technology/know-how is one of the most valuable advantages of GSCs and thus GSCs actively protect their technology.


Key Factors in Shaping Value Chain Decision

GSC relocation processes driven by: cost-minimization of all production processes (from idea to consumers)

GSC Cost function depends on:

  • Human Capital

    • Productivity - Labor Costs

  • Infrastructure

    • IT, Transport, Energy, Reliability of trade routes

  • Policy Environment

    • Rule of Law, Intellectual property rights

    • Favorable business environment, Trade related policies

  • Operational Costs

    • Labor costs – Taxes/Incentives

  • Local Market

    • Local demand (large market), Local suppliers (clusters)

  • Risk Management

    • Diversification of suppliers


GSC Shaping: Distance still matters a lot!


Policy implications for Developing Countries

The rise of GSCs affect DEVELOPMENT STRATEGIES:

  • …Past: economic development need an industrial base

    • Developed throught export led growth… a lengthy process!

      • Developed an industrial base thru Industrial policy (Import substitution)

    • Industrialization = sophisticated exports = value added = development

      • Countries slowly developed and owned “industrialization skill”

      • Profits (Value added) stays within the country…

  • …Present: is industrialization enough?

    • Industrialization is much easier and faster (technology is imported!).

      • Sophisticated exports do not need a deep nor broad industrial base

    • but no free lunch! Exports sophistication not = development

      • Many countries do not own “industrialization skill” (it is imported!)

      • Profits are linked to the technological skills, so they may not stay within the country.


Advantages of participating in GSCs?

Laborincreases employment

  • …but not necessarily better employment. Higher wages(?)

    Value Added …Profit sharing

  • …Apple’s story tells how it works. Suppliers do notprofit much.

  • …Why work for Apple? endorsement of manufacturing quality.

    Know-how…knowledge transfer

  • …but GSCs wants to retain know-how. Technology lending

  • … still “Incentives” to innovate, Who gains? (Wal-Mart)

    Externalities…spillovers to local economy

  • …GSCs help establishing industrial clusters

  • …GSCs related infrastructure development


Smiley Face – Balance of Power


Moving up the value chain?

  • Very difficult to rise along the supply chain

    • Requires large investments

    • Requires the acquisition of technology

    • Requires competitive edge in the segment.

  • Moving up / creating another supply chain

    • Samsung supplies Apple

    • Samsung leads its own supply chain.

  • Different profit sharing depending on the chain.

    • Supplying leading companies: low profit but signal firm efficiency

      • Gets more favorable terms with other firms.


Some Policy Implications

  • Export led growth still viable strategy… but GSC export sectors need to produce spillovers to the domestic economy.

  • Industrial policy may no longer be viable… Import substitution strategy is not cost minimizing. GSC need lowest cost suppliers.

  • Export diversification is a bad indicator of development…

    diversification does not really matter if you don’t own the skills.

  • Trade costs are still important (Trade Policy / Trade Facilitations).

    • NTM, tariffs on intermediates (Imports are also exports)

    • Market segmentation (preferences, standards)


Negotiating Issues

  • Global vs Regional Trade Negotiations

    • GSCs are regional, Regional Policy is key

      • Market segmentations

  • Importance of Intellectual Property Rights

    • Guarantee leading firms

    • Allow for some transfers

  • Trade Policy: Market access is only part of the story, liberal policies on intermediates inputs are key.

    • Export Processing Zones

    • Smaller economies need more access to low cost input


Summary: Key points

  • GSC participation does not imply development

  • Rising along the value chain is difficult, moving up in lower level chain is easier.

  • Most GSCs are regional -> regional policies are prominent

  • Trade costs remain important, but not low trade costs are not sufficient as GSC have multiple and diverse costs sources.

  • Low labor cost is not enough, and competing on labor cost is not a viable development strategy.


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