IBM: The Value Of Values (C)

Definition:

Networks are the link between consumer and supplier relationships within the industrial market sector. (Shamsavari, Ali 2011)

THE EMERGENCE OF NETWORK

Networks arise for a number of reasons and in a diverse set of circumstances.

Increasingly these networks assume an international dimension and are organised on a global scale. (Williamson 1971, 1983; Wil-liamson, Wachter, and Harris 1975; Teece 1980).

A global network is formed when the product expands beyond national borders, thereby giving rise to a value chain product, but this also results in international subcontracting which subsequently gives rise to global networks.

Purpose and Motivations

Network have an important role in contributing to firm performance industry evolution.

Motivations

External relations through networks provides access to crucial materials required for better performance such as e.g. raw materials , technology , markets.

Businesses may use networks to reduce costs, to enhance quality and value of the overall product (Tichy and Fombrun, 1979).

IBM: The Value Of Values (C)

Different scholars have defined industrial clusters as the following:

(Rosenfeld 1995) - A lose geographically bounded agglomeration of similar related firms that together are able to achieve synergy. Firms ‘self-select’ into clusters based on tier mutual interdependencies in order to increase economic activity and facilitate business transaction.

Porter (2003) - “geographically proximate group of interconnected companies, suppliers, service providers and associated institutions in a particular field, linked by externalities of various types. Clusters contain a mix of industries related by knowledge, skills, inputs, demand, and other linkages. Within regional clusters, firms and associated organizations (such as universities and local governments) can operate more efficiently and can share common technologies, infrastructure, pools of knowledge, supply and demand.”

The emergence of GVCs

The emergence of GVCs has created complex trade relationships. Involving trade in the following:

intellectual property rights (licenses and franchises),

international sourcing and outsourcing,

international management contracts for example Apple’s I-Phone

Reasons for Formation:

• Agglomeration economies
• The geographical area
• Knowledge revolution

Industrial clusters

Industrial clusters are geographical spaces where groups of interconnected suppliers and organisations are in close proximity to each other. For example; Hollywood, Detroit, Silicon Valley and Banglore.

Clusters contain a mix of industries related by knowledge, skills, inputs, demand, and other linkages.

Within regional clusters, firms and associated organizations e.g universities and local governments can operate more efficiently and can share common technologies, infrastructure, pools of knowledge, supply and demand.

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Evaluating the Emergence GVCs - Trade Creation

Industrial Clusters

Merchandise exports and imports in current US dollars by region, 2012

Spatial Configuration

“The term spatial configuration is used to refer to the structure of potential movement and co-presence as determined by the placement of boundaries in space and by the connections and disconnections between areas that results from the presence of boundaries”

Spatial configuration, allows TNCs to make rational spatial decisions about the relocation of their GVCs.

Contribution to growth of world trade through trade creation

Positive economic development from global prodution networks through TNCs have contributed to the growth of world trade through trade creation.

For example; ‘it is hard to ignore that in 2004 the UK gained £63.8 billion from their overseas development’ (Shuh A 2013 p.1)

‘Cases such as China TNCs are able to contribute to the industrial development and have relative positive impacts on their economies. Their presence alone can cause economies of scale in host countries, such as the automotive industry which has occurred in Brazil, creating a spiral of economic growth from FDI’ (Shuh A 2013 p.1)

Introduction

• Networks to alliances
• Structure and Development of Global Value Chains
• Different Frameworks Concerning GVCs
• Spatial Configuration
• Trade Strategies Encourage FDI
• Industrial Clusters
• Contribution to growth of world trade through trade creation
• Impact of TNCs to LDCs

The Governance Of Industrial Cluster

According to Mc Donald (2006), discourse surrounding industrial clusters is ambiguous.

Several scholars oppose the involvement of policymakers governing industrial clusters; due to the assumption that managers of local firms are better at evaluating the future economic potential of their specific region.

Policy makers have asymmetrical information about industrial cluster activity

They derive information from statistics and annual reports. The policymakers’ judgments regarding the future economic activity of industrial clusters would be based on arbitrary behavior thus leading to market failure.

Michael Potter suggests that cluster policy should aim to facilitate productivity and innovation by achieving the following:

• Eliminating inefficiencies
• Removing obstacles
• Relaxing constraints

Riau province

In Riau province Indonesia, palm oil plantation companies need to take into account the existing geographical settings

Key factors include plantation workers, smallholders, cooperatives, other palm oil related sectors and its distribution and consumption.

Benefits of Clusters

• Clusters offers an industry to expand in international markets
• Helps open other opportunities for other cluster members
• More effectiveness and efficiency
• ‘The spatial proximity of businesses stimulates and supports their innovativeness “(Marshall 1925, OECD 2000).
• “The development of clusters stimulates the formation of new businesses (Sternberg 2001),”
• The environment formed by clusters is favourable for the location of foreign investment
• Investments can play a leading role in a cluster as FDI is one of the most important factors stimulating economic growth.
• Foreign direct investment brings new and these make region more attractive for other investors and in fact it forms favourable conditions for development of clustering.

Spacial Configuration and Trade Strategies to Encourage FDI

Trade Strategies Encourage FDI

Trade strategies are concerned with the idea of global competitiveness. Host countries adopt a range of techniques to attract FDI from TNC through global production networks.

These include:

Relocating production lines

Subsidised loans and guaranteed loans

Privatisation

Trade Strategies To Encourage FDI

In the past 15 years the number of TNCs and foreign affiliates has doubled. TNCs have increased their relative importance over the past years and are significantly impacting the world economy.

Foreign Direct Investment (FDI) is a measure of TNC activity in host economies.

TNCS have made a global contribution to economic growth and national welfare through FDI.

As mentioned GVCs coordinated by TNCs account for 80% of global trade

Privatisation

TNCs are normally private companies that thrive in economic environments that are conducive to private sector activities. (Shamsavari A 2011)

Privatised industries are more de-regulated and offer businesses more platforms to compete

Privatisation improves the efficiency and quality of the industries involved

Development of a private sector acts as an incentive for FDI inflow

Definition

Value chains describe the full range of activities firms and workers do to bring a product from its conception, to its use and beyond (Globalvaluechains.org, 2013).

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Linkages

TNCs firms aid local firms in LDCs through its use of linkages

• Backward linkages
• Forward linkages (WIR, 2007, p140)

Impact varies according to the industry

• Extractive activity (WIR, 2007, p14)
• Coffee, floriculture and fishing (Uganda) (Nsonzi, 2009). (WIR, 2009,p154)

Impact of TNCs to LDCs

Attracted intense discussion in literature

A number of writers have attempted to identify the different approaches evaluating these impacts. (Jenkins, 1987,p.18)

• Neo – Classical View (Citeseerx, 1998)
• Neo-Fundamentalist View – additional/new local capital (Jenkins, R. 1987)
• Global Reach – efficiency/political power
• (Jenkins 1987,p.23) (Openarchive, 2013,p.17)
• Neo-Imperialist View (Sinkel, 1972) (Jenkins, R. 1987)

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Value Chains

Value chain activities can produce goods and services that can be contained within a single geographic location or can be spread over wider areas.

E.g Supply chains

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Structure of Value

Initially described and popularized by Michael E Porter

Most organizations, typically Transnational Companies (TNC’s) engage in hundreds, even thousands, of activities in the processing inputs to outputs.

Generally, these activities are classified as either primary or support activities that all businesses must undertake in some form.

Networks and Alliance

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Learning

TNCs is a crucial means of acquiring information (WIR, 2013)

Information needs to be combined with local technological capabilities (Morrison, Pietrobelli, Rabellotti, 2008)

Moving up the value ladder (Pietrobelli & Rabellotti, 2007).

Development of GVCs

The research has been conducted on the following manufacturing sectors:

Garments

Electronics

Agriculture

This framework has analysed beyond international trade. But has indeed investigated systems of governance that link firms together with a variety of sourcing and contracting arrangements.

(Gereffi, and Humphrey et al.) 2009, pp. 1 - 8).

The Impact of Transnational Corporations on Less Developed Countries

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Alliances and Global Network

A network can develop into an alliance, this is when two or more companies synergise to accomplish a common objective such as cost cutting and quality improvement.

Global networks are formed through the need of outsourcing and leads to the development of independent activity of companies within the host countries.

Less Developed Countries (LDCs) may require greater level of transfer of technology however, the transfer would of a lower price. An example is the Research and Development centre of Siemens in India.

Structure and Development of Global Value Chains

Different Frameworks Concerning GVCs

There are three main types of frameworks involved in the discourse of GVCs include:

The Global Commodity Chain - GCC

The Global Value Chain - GVC

Global Production Networks - GPN

Industrial Structure

Exit of small scale producers (Biersteker, 1978; Evans, 1979;).

Settle into the market along with other domestic competitors (Lall, 1978,a.)

Control a greater share of international investment

E.g. TNCs may take part in numerous practices (Hood and Young, 1979)

Transfer Pricing and OECDs arms length standard (WIR, 2013)

The Role of Global Value Chains

Today’s world economy is characterised by GVCs where intermediate goods and services are in fragmented and internationally dispersed productions

(World Investment Report, 2013)

GVCs are typically governed and organised by TNC’s with cross border trades of inputs and outputs taking place within their networks of affiliates, contractual partners and arm’s length suppliers

(World Investment Report, 2013)

Employment

Capital intensive (Ghana mining industry 1995-2005 – loss of over 7,000 jobs)

Labour intensive industries employment generation has been significant (Kenya, floral industry - 55,000 jobs) (WIR, 2009)

Openness to trade is associated with better working conditions (OECD, 2013) 

Export led employment is generally more unstable(Caves, 1982) 

Cost pressures may result in insecure employment (WIR, 2013)

The Global Value Chain (GVC)

Developed by researchers at the institute of Development Studies at the university of Sussex.

GVC investigates the governance structures in different global industries.

According to (O Cattaneo, GGereffi, and C Staritz, 2010) GVC analysis provides a holistic view of global industries from the following knowledge characteristics:

Top-Down: Examining how lead firms govern their global-scale affiliate and supplier network.

Bottom-up: How these businesses attract the trajectory of economic and social upgrading in specific countries and regions. (Cattaneo and Gereffi et al., 2010, pp1)

Capital Inflows, Investment

Access to enormous financial resources and external capital markets

In Ghana, $5 billion worth investment in new gold-mining projects since 1986. (WIR, 2007, p131)

Capital flows and the balance of payments

Worldwide, in 2010, 60% of total FDI income was repatriated (Unctad, 2013)

Higher TNC activity also correlates to reinvestment of profits (Unctad, 2013)

Not in all cases, further reinvestment by TNCs yields positive results

The Global Commodity Chain (GCC)

Elaborated and edited by Gerrefi and Korzeniewiers in 1994

Stemming from a structualist perspective of the world.

Concerned with identifying the actors that are involved in the production and distribution of particular goods and services. Then mapping the types of relationships that exist between them.

(Yeung and Dicken et al., 2001)

Global Production Networks

Initially developed by researchers in Manchester; the main collaborators included: Peter Dicken and Jeffery Henderson.

This framework combines GCC and GVC with ideas derived from Actor-Network Theory – ANT and varieties of capitalism and business literature. (Journal of Economic Geography, 2013, pp. 267-269.)

ANT is a sociological theory developed by Bruno Latour et al.

ANT claims that any actor – person, object or software have an equal contribution and importance to a social network

(Carbon.ucdenver.edu, 2013)

It attempts to connect with understanding the subnational regional development and clustering dynamics. (Journal of Economic Geography, 2013, pp. 267-269.)

The disintegration of production leads to more trade as intermediate inputs cross borders several times during manufacturing (Yeung and Dicken et al., 2001)

Conclusion

As demonstrated throughout the presentation, GVCs have significantly impacted the world economy.

Undertaking this project we faced many challenges but we also learnt many vital skills…

Such as:

Thank You for Listening!

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Yemisi, Aiste, Caroline,

Mohamed, Mahmud, George

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