Global supply chains

1. 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.

2. 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.

3. 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

4. GSC Shaping: Distance still matters a lot!

5. 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.

6. 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

7. Smiley Face – Balance of Power

8. 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.

9. 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)

10. 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

11. 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.