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This chapter explains how the traditional nexus between foreign direct investment (FDI) and multinational enterprises (MNEs) has paved the way for the emergence of global value chains (GVCs), and how the new nexus among FDIs-MNEs-GVCs and the resultant internationalization of production, investment, and trade have been transforming global economy in the twenty-first century. This chapter provides the conceptual and theoretical context of the GVC phenomenon, examines methodologies of measuring interconnectedness and interdependence of global production and trade under GVCs, and sheds light on the drivers and directions of GVCs in contemporary world economy.
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The concept of ‘competitiveness’ refers to inter-firm or intra-sector differences—from microeconomic factors related to market imperfections, information asymmetries, firm-specific capabilities, and so on. By acquiring such competitiveness, countries and firms can achieve dynamic or kaleidoscopic comparative advantage in sectors different from those in which they enjoy static comparative advantage as envisaged by the Ricardian principle of comparative advantage (Krugman 1991; Pietrobelli and Rabellotti 2006).
The G7 countries, an IMF-designated group of advanced developed countries, consist of Canada, France, Germany, Italy, Japan, the UK, and the US.
A recent report, attributed to UNCTAD, indicates that China’s share in global exports rose to 13.8 percent in 2015, from 12.3 percent in 2014 ( http://www.reuters.com/article/us-china-exports-idUSKCN0XJ097). Another report, attributed to IMF data, suggests that China’s share in global exports climbed to 14.6 percent in 2015 from 12.9 percent in 2014—the highest proportion of world exports since 1980 ( https://www.bloomberg.com/news/articles/2016-09-06/china-export-machine-defying-gravity-grabs-global-market-share). The World Bank data indicates that the share of Chinese exports in its GDP increased from 4.3 percent in 1960 to 22.1 percent in 2015, while the world’s exports increased from 12 percent to 29.5 percent during the same period ( http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS). All these sources were accessed on February 11, 2017.
Outsourcing typically involves the purchase of intermediate goods and services from outside providers, which can be domestic or foreign, while offshoring refers to purchases by firms of intermediate goods and services from foreign providers, or transfer of some tasks within the firm to a foreign location. Offshoring thus includes both international outsourcing when activities are contracted out to independent third parties abroad, and international in-sourcing, when activities are contracted out to foreign affiliates.
For Baldwin ( 2012), the first unbundling of globalization began in the nineteenth century when production activities were separated from consumption, which resulted in industrialization of North (Europe, North America, and Japan) and deindustrialization of South (especially India and China), as innovation, scale or production, and specialization gave Northern industry a powerful cost advantage over the industry in the South, and international trade in goods and labor migration exploded due to rapidly falling trade and transportation costs, tariff liberalization, containerization of transportation, and coordination of complex production processes. In the pre-globalization world, on the other hand, poor transportation technology tied production and consumption together.
For the papers and proceedings of the conference see Review of International Political Economy (2014), Vol. 21, No. 1. https://doi.org/10.1080/09692290.2013.873369.
As discussed in Chapter 4, in 2015, Walmart’s annual revenue was larger than GDP of countries like Israel, Poland, Greece; General Motors’ annual revenue was larger than Denmark’s GDP; Toyota annual revenue was bigger than Norway’s GDP; Ford’s annual revenue was larger than South Africa; and ExxonMobil’s annual revenue was bigger than the GDP of countries such as Hungary, New Zealand, and Pakistan.
As discussed in Chapter 4, over 70 percent of the largest MNEs in the world are headquartered in developed industrial economies and they have affiliates around the world. The Swiss electrical engineering giant ABB, for example, has facilities in 140 nations; Royal Dutch/Shell explores oil in 50 countries, refines in 34, and markets in 100; US-based H.J. Heinz’s food processing operations expand over six continents; the largest grain company of the US, Cargill, operates in 54 countries; and Britain’s ICI has manufacturing operations in 40 nations and sales affiliates in 150 countries.
Before the advent of recent methodologies, there had been a widely used methodology called the Broad Economic Classification (BEC) developed by the United Nations. Based on the Standard International Trade Classification System (SITCS), the BEC methodology provides a three-digit classification of international merchandize data by categorizing commodities as primary goods or processed goods, or parts and accessories, and so on, depending on the nature and main use of the products. The BEC methodology, introduced in the early 1970s, was last updated in 1988, but it still depends on descriptive and subjective characteristics, which makes it less useful for measuring international fragmentation of production being evidenced in the twenty-first century.
For details on the 2016 version of TiVA database, see https://www.wto.org/english/news_e/news16_e/stat_28jan16_e.htm.
The GTAP is based at the Center for Global Trade Analysis of Purdue University. For further details see https://www.gtap.agecon.purdue.edu/databases/v9/default.asp, accessed on Feb. 17, 2017.
See WTO’s Global Value Chains: “Trade in value-added and global value chains: statistical profiles” ( https://www.wto.org/english/res_e/statis_e/miwi_e/countryprofiles_e.htm, accessed on February 25, 2017).
The OECD-WTO joint project has recently released the 2016 edition of the TiVA database covering indicators of 63 countries including OECD, EU28, G20, most East and South East Asian economies, and a selection of South American countries, and covering 34 industrial sectors, including 16 manufacturing and 14 service sectors. For further details see http://www.oecd.org/industry/ind/measuringtradeinvalue-addedanoecd-wtojointinitiative.htm.
However, this percentage does not eliminate the problem of double accounting or overlapping completely as domestically produced inputs may incorporate some of foreign inputs (Backer and Miroudot 2013).
This section draws widely on the econometric analysis of Backer and Miroudot ( 2013), based on the 2012 release of the OECD-ICIO database.
Backer and Miroudot ( 2013), however, found very tenuous correlation between the distance to final demand and the rate of GVC participation during the 1995–2008 period. The countries located at the lower left corner of the correlation graph should be closer to the final production stage with relatively lower participation rate, while countries located at the top right of the graph should show opposite attributes. But they found that China and Indonesia were located at top left, Russia was located at top right, the Philippines was located at bottom right, and Argentina was located at bottom left—thus no country fitted into the pattern. Moreover, scores of the EU countries, such as Italy, Spain, the UK, and Germany, with large markets and central positions in Europe’s supply chains, were located at the middle of both scales—indicating strong correlation between distance to demand and GVC participation. At the same time, some Asian countries, such as China, Thailand, and Korea, located at the high end of the distance index, indicating increased specialization in intermediate inputs and longer distance to final demand.
The forces of dispersion may, however, also lead to horizontal specialization. For example, in the production of automobile air conditioners, the Japanese company Denso and the French company Valeo dominate their markets through excellence, not by low wages. While lead firms could in principle make their own auto air conditioners, scale economies imply that it is cheaper for Swedish and German auto firms to source them from France. Given the growing role of scale economies and fractionalized supply chains, ‘horizontal’ internationalization of supply chains has been emerging among high-wage nations.
As explained in the next chapter, the largest automobile suppliers in the world were still based in North America—the largest regional market.
The manufacturing plants covered by this study included electronic components and accessories (367); miscellaneous plastic products (308); motor vehicles and motor vehicle equipment (371); general industrial machinery and equipment (356); laboratory apparatus and analytical, optical, measuring, and controlling instruments (382); drugs (283); metalworking machinery and equipment (354); construction, mining, and materials handling (353); and special industry machinery except metalworking (355).
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- The New Nexus of Foreign Investment, Multinationals, and Global Value Chains
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