Introduction to Exporting - Part 2

Chapter 2

Joining a Global Value Chain

 

Introduction to Globalization

Economic globalization refers to the rapid expansion of international trade and capital flows that has been occurring since the early 1990s and to the increase in foreign direct investment (FDI) that has accompanied this expansion. As a result, the economies of the world’s countries have become much more closely integrated than ever before.

That’s the abstract way of looking at globalization. In concrete terms, globalization has caused myriads of businesses to divide their products or services into components.

Then, instead of producing the components themselves or obtaining them from domestic suppliers, they outsource certain aspects of the work and acquire these goods or services from suppliers, partners or affiliates in other countries. These components, together with the activities that create them, make up the links of what economists call a global value chain.

 

Understanding Global Value Chains

A value chain whether global or not consists of the full range of activities that are required to bring a good or service 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, and can be a single geographic location or spread over wider areas.

Global trade has been shifting away from the traditional export model, in which companies manufacture products in one country and sell them in another. It is also departing from the branch-plant approach, wherein a business produces its goods in a foreign market and sells them almost exclusively in that market. Instead, international trade is now increasingly characterized by the movement of intermediate inputs (for both goods and services) along a global value chain whose links may be anywhere in the world.

 

The Growth of Global Value Chains

• Declining Costs of Transportation

As transportation costs fall, companies can move their goods and services across greater distances without losing competitiveness in their target markets. Unless time concerns dictate otherwise, there is thus no particular need for a company to locate its facilities close to its suppliers or consumers, so it can establish them in locations that offer the best competitive advantages.

• Improved Information and Communication Technologies

More flexible, adaptable and cheaper information and communication technologies (ICT) mean that companies are much less limited by distance when operating in foreign markets. Advances in ICT have also made it possible to trade in services that depend on the very rapid movement of large volumes of data (such as software development or financial services) or real-time communications (such as online medical diagnosis or teleconferencing).

• Reduced Barriers to Trade and Investment

The number of bilateral trade and investment treaties has been increasing quickly during the past 20 years. Global tariff rates have been falling steadily over the same period, and developing markets such as India and China have been liberalizing their economies at a rapid pace. This lowering of barriers to trade and investment has accelerated the growth of global value chains as companies gain access to markets that were formerly closed to them.

 

Global Value Chains and Exporters

Global value chains take advantage of open borders and economic liberalization so that each link of the chain can specialize in what it does best. This leads to greater efficiency, increased productivity and lower consumer prices for higher-quality goods and services. At the same time, this trade environment stimulates intense global competition that encourages innovation all along the value chain.

As global value chains have evolved, companies worldwide have had to adapt to the new realities they present. In one common strategy, a firm can create its own global value chain by outsourcing some of its non-core activities; it might, for example, shift its product-assembly operations to suppliers, partners or affiliates in countries with lower labor costs or other competitive advantages. An alternative approach, especially for small and medium-sized enterprises (SMEs) is to supply goods or services to a global value chain that has already been established by another company, including a foreign multinational; by doing so, the SME can make itself part of that particular value chain.

 

Global Value Chains and Your Business

You have a considerable range of strategies for benefiting from global value chains. The following are among the most common; you can use them by themselves or combine them, depending on your needs.

• Provide an Intermediate Input for an Existing Value Chain

If your product is something that another company (either local or foreign company) uses as an intermediate input for its own activities within a global value chain, you may be able to link into that chain by becoming a supplier to the company. This is a very common approach and certainly the simplest, since it closely approximates the traditional model of production and/or exporting. For SMEs, especially for those with niche technologies or specializations, new opportunities are emerging to sell to multinationals or their suppliers, especially as these firms outsource activities that were previously carried out internally.

• Develop Your Own Global Value Chain through Outsourcing

If your company manufactures either finished products or intermediate inputs for other companies, you can use outsourcing to set up your own global value chain. This means that you acquire your own intermediate inputs, such as raw materials, components, subsystems and other goods and services, from foreign suppliers, and use them to manufacture your finished product or intermediate input in your country (or in another country, for that matter).

• Use Foreign Direct Investment to Connect to or Establish a Global Value Chain

By investing abroad you can gain immediate access to a foreign market, allowing you to expand your sales and promote your company’s growth. There is a broad spectrum of investment approaches, ranging from the passive to the active.

You might, for example, become part of a global value chain simply by investing in a foreign company while taking little or no part in its operations. Purchasing a foreign firm, or setting up a joint venture or partnership with a foreign company, might also work for you; either of these strategies lets you take advantage of the other firm’s assets and experience, which will both increase your competitiveness in the local market and give you better control of local production and distribution networks. This approach can be very cost-effective if you obtain existing production and distribution capabilities though the investment and don’t need to build them from the ground up.

At the active end of the spectrum, you could become a full participant in a foreign market by establishing a wholly-owned subsidiary there. This investment strategy presents a range of advantages that can help you drive and benefit from the global value chains of which your company is a part. Perhaps the most important of these advantages is that you aren’t dependent on a partner, so you control the direction your subsidiary will take. You also have direct contact with your end users, which is good for developing new products and for building solid customer relationships. Your company and its role in the value chain are likely to become better known, since your identity isn’t obscured by the presence of a partner. Finally, your overseas staff answers only to you, and all data related to your foreign operation is at your sole disposal.

• Focus on Service Sectors

The service sector is opening up all over the world and provides many opportunities in the financial, educational, consulting, environmental, engineering and architectural sectors, to name just a few. Even if you’re primarily a manufacturer, you may be able to move up the value chain by branching into value-added services related to your sector, such as design, distribution, marketing and logistics.

Secondary industries related to your sector may provide additional opportunities. Companies are demanding an increasing variety of services to facilitate trade—such as financial, information processing, telecommunications, logistics, and legal services—and your company may have specialized expertise that is directly applicable to such activities.