MOVING UP THE VALUE CHAIN

What is a value chain?•

The value chain describes the full range of activities that firms and workers do to bring a product from its conception to its 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. Value chain activities can produce goods or services, and can be contained within a single geographical location or spread over wider areas.

• The GVC Initiative is particularly interested in understanding value chains that are divided among multiple firms and spread across wide swaths of geographic space, hence the term "global value chain."

GLOBAL COMMODITY CHAIN

There are 2 forms of global commodity chains• Buyer driven commodity chainRelevant for sectors like toys, leather articles,

clothing e.t.c.• Producer driven commodity chain Relevant for capital intensive sectors like

automobiles, information technology e.t.c.

• Producer-driven commodity chains arethose in which large, usually transnational, manufacturers play the central roles incoordinating production networks (including their backward and forward linkages).

• This is characteristic of capital- and technology-intensive industries such asautomobiles, aircraft, computers, semiconductors and heavy machinery

• Buyer-driven commodity chains refer to those industries in which large retailers, branded marketers, and branded manufacturers play the pivotal roles in setting up decentralized production networks in a variety of exporting countries, typically located in the Third World.

• This pattern of trade-led industrialization has become common in labor-intensive, consumer goods industries such as garments, footwear,

toys, housewares, consumer electronics, and a variety of handicrafts.

• Production is• generally carried out by tiered networks of Third World contractors

that make• finished goods to the specifications of foreign

Hierarchical chains represent the fully internalised operations of vertically integrated firms.Quasi-hierarchical (or captive chains) involve suppliers or intermediate customers with low levels of capabilities, who require high levels of support and are the subject of well-developed supply chain management from lead firms (often called the chain governor).Relational and modular chain governance exhibit durable relations between lead firms and their suppliers and customers in the chain, but with low levels of chain governance often because the main suppliers in the chain possess their own unique competences (and/or infrastructure) and can operate independently of the lead firm.Market chains represent the classic arms length relationships found in many commodity markets

Gereffi’s Global Value Chain

• It draws on three streams of literature – transaction costs economics, production networks, and technological capability and firm-level learning – to identify three variables that play a large rolein determining how global value chains are governed and change. These are: (1) the complexity of transactions, (2) the ability to codify transactions,(3) the capabilities in the supply-base. The theory generates five types of global value chain governance – hierarchy, captive, relational, modular, and market –

which range from high to low levels of explicit coordination and power asymmetry.

1. Markets. Markets are the simplest form of GVC governance. •GVCs governed by markets contain firms and individuals that buy and sell products to one another with little interaction beyond exchanging goods and services for money. •The central governance mechanism is price.•The linkages between value chain activities are not very "thick" because the information that needs to be exchanged and knowledge that needs to be shared is relatively straightforward

• Modular value chains. This is the most market-like of three network-style GVC governance patterns. Typically, suppliers in modular value chains make products or provide services to a customer's specifications.

• Suppliers in modular value chains tend to take full responsibility for process technology and often use generic machinery that spreads investments across a wide customer base. This keeps switching costs low and limits transaction-specific investments, even though buyer-supplier interactions can be very complex.

• Linkages are necessarily thicker than in simple markets because of the high volume of information flowing across the inter-firm link, but at the same time codification schemes and the internalization of coherent realms of knowledge in value chain "modules," such as design or production, can keep interactions between value chain partners from becoming highly dense and idiosyncratic

• Relational value chains. In this network-style GVC governance pattern we see mutual dependence regulated through reputation, social and spatial proximity, family and ethnic ties, and the like.

• The most obvious examples of such networks are in specific communities, or “industrial districts,” but trust and reputational effects can operate in spatially dispersed networks as well. Since trust and mutual dependence in relational GVCs take a long time to build up, and since the effects of spatial and social proximity are, by definition, limited to a relatively small set of co-located firms, the costs of switching to new partners tends to be high.

• Dense interactions and knowledge sharing are supported by the deep understanding value chain partners have of one another, but unlike the codification schemes that enable modular networks, these "short-cuts" tend to be idiosyncratic and thus difficult and time-consuming to re-establish with new value chain partners

• Captive value chains. In this network-style GVC governance pattern, small suppliers tend to be dependent on larger, dominant buyers. Depending on a dominant lead firm raises switching costs for suppliers, which are "captive.“

• Such networks are frequently characterized by a high degree of monitoring and control by the lead firm. The asymmetric power relationships in captive networks force suppliers to link to their customer in ways that are specified by, and often specific to a particular customer, leading to thick, idiosyncratic linkages and high switching costs all round.

• Hierarchy. This governance pattern is characterized by vertical integration (i.e."transactions" take place inside a single firm). The dominant form of governance is managerial control.

• Much of the literature that seeks to categorize cross-border economic activity emphasizes only two options: market or hierarchy. Firms either invest offshore directly or buy goods and services from foreign firms.

• A smaller body of literature has noted the prevalence of network forms of organization where there is some form of "explicit coordination" beyond simple market transactions but which fall short of vertical integration. While this is a useful insight, there is convincing evidence that not all networks are the same.

• The GVC framework specifies three types of network governance (modular, relational, and captive) along with the two traditional modes of economic governance (markets and hierarchies).

• “Where do you think that your iPhone was made?

• In reality, the iPhone is produced through a “global value chain” (GVC) which starts with its conception and design in California.

• High tech components come from Japan, Korea, Germany and the US, with Japanese components contributing fully one-third of the value of the iPhone.

• The iPhone is then assembled in China, while California manages the marketing and branding.

• The result of this supply “fragmentation” is that Apple directly employs only 63,000 of the more than 750,000 people globally involved in designing, selling, manufacturing and assembling its products.

Export-Oriented Growth and Industrial Upgrading:Lessons from the Mexican Apparel Case1

A case study of Global Value Chain analysis• Maquiladoras are factories that assemble products for export from

imported components that enter the country duty-free. • Proponents of the maquiladoras assert that it is a valuable source

of export revenue and job creation for Mexico. • However, the program’s critics see it as the ultimate example of a

“new international division of labor” that traps developing countries into the dead end role of providing cheap labor for low value-added assembly operations.

Because the vast majority of inputs assembled into final products in the maquilas are imported,2 the maquilas do not stimulate growth in the rest of the economy

Is this an example of true Industrial Upgradation ?????????

Global Branding

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