Production Networks Notes

Production Networks

INTRODUCTION

• Globalization has given rise to an explosion of trade in intermediate goods, and subsequently, the international fragmentation of value-added tasks in the production process – e.g. design, raw material sourcing, inputs, marketing, after-sales service, etc.

• Fostered by the search for cost minimization and economies of scale which arise through expanding markets.

• Production network (IPN) – an international division of labour in which each function or discrete stage of a value chain is:

• Geographically relocated to the most efficient site.

• Integrated and governed ‘at-a-distance’ by MNCs or local firms to regulate buyer-supplier relations

• Vertical specialization – the degree to which exports rely on imported inputs.

• Value chain participation – the value added embodied in exports both looking backward and forward from a reference country…

1. Backward – foreign value added embodied in exports assembled.

2. Forward – domestic value added embodied in inputs supplied to an assembler.

• Signifies a shift in how ‘development’ is conceptualized. Less to do with establishing a self-sufficient industrial base domestically, not with nurturing vertically-integrated firms as ‘national champions’. More to do with which ‘node’ firms choose to engage with in a pre-existing supply chain, and the distinctive opportunities/constraints for participation and value capture that arise as a result.

MAPPING PARTICIPATION IN ASIA: ‘FACTORY ASIA’

Reasons for the expansion of EA production networks: (see: 1.1 ‘REGIONALISM VS. GLOBALIZATION’)

1. New regionalism* + lower service-link costs due to geographical proximity makes intra-regional offshoring more attractive to investors.

2. Development gap leads countries to position themselves in different market niches/GVC nodes.

3. The 1985 Plaza Accord* and rapid appreciation of the Yen compelled Japanese MNCs to offset volatility and increase returns by offshoring their peripheral manufacturing tiers to other EA economies (e.g. South Korea and Taiwan).

• This kickstarted the phenomenon of intra-regional recycling of comparative advantage in labour-intensive manufacturing via FDI and offshoring to low-income countries.

Distinguishing features of EA IPN participation

• Significance – IPNs are a major driving force for development and regional economic integration.

• Extensiveness – East Asian IPNs encompass a large number of countries at various developmental stages:

• GVC participation is unevenly spread

In 2013, 38% of global GVC-intermediate exports went into the Asia-Pacific, 90% of which were located in just 10 AP countries, including 7 EA countries: China, Japan, South Korea, Indonesia, Malaysia, Singapore and Thailand.

• Sophistication – regional value chains (RVCs) consist of sophisticated combinations of inter-/intra-firm transactions.

• Locational complementation and industry specialization of EA countries (i.e. ‘industrial clusters’)

• Benefit from regional integration agreements. (see: ‘EA REGIONAL COOPERATION’)

HOW CAN SEA STAY COMPETITIVE IN GLOBAL VALUE CHAINS?

• Competitive advantage – ‘the capacity to entice firms, both local and foreign, to use the company as a platform from which to conduct business’ [Porter, 2002]

• Useful to add: ‘at the expense of other countries’

• Porter also introduced the ‘diamond of national advantage’ to describe 4 interrelated determinants of competitive advantage:

1. The existence of resources & soft infrastructure – e.g. human resources ( skilled workforce), research/information infrastructure, etc.;

2. A business environment that invests in innovation (R&D);

3. A demanding local market;

4. The presence of supporting/supplier industries.

Economic upgrading

‘The process by which economic actors move from low-value to relatively high-value activities in production; to increase the benefits/profits deriving from participation in GPNs’ [Gereffi, 2005].

There are 4 types of economic upgrading, each with different implications for skill development and jobs:

1. Process upgrading – where firms increase the efficiency of production through better organization of the production process...

Buy the full version of these notes or essay plans and more in our East Asian Transformations (Political Economy) Notes.