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International political economy has become an ever-increasingly important topic in the world today. The rise of multinational corporations and global value chains has created a complex system that directly impacts the world’s economy, politics, and culture. Through continued research and analysis of this phenomenon, we can better understand the implications of multinational corporations and global value chains and their effects on the global economy. By looking at the structure, strategies, and operations of multinational corporations and global value chains, we can better understand their influence on the international political economy. These insights can help us to comprehend | International political economy has become an ever-increasingly important topic in the world today. The rise of multinational corporations and global value chains has created a complex system that directly impacts the world’s economy, politics, and culture. Through continued research and analysis of this phenomenon, we can better understand the implications of multinational corporations and global value chains and their effects on the global economy. By looking at the structure, strategies, and operations of multinational corporations and global value chains, we can better understand their influence on the international political economy. These insights can help us to better comprehend the interconnectivity of international markets and the potential impacts of multinational corporations and global value chains on the global economy. | ||
= Defining Multinational corporation, Foreign direct investment & Global value chain = | = Defining Multinational corporation, Foreign direct investment & Global value chain = | ||
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During the late 19th and early 20th centuries, MNCs were primarily focused on extracting raw materials and establishing production facilities in developing countries. However, many MNCs also played a role in European powers' colonization of various parts of the world. | During the late 19th and early 20th centuries, MNCs were primarily focused on extracting raw materials and establishing production facilities in developing countries. However, many MNCs also played a role in European powers' colonization of various parts of the world. | ||
After World War II, MNCs began to play a more significant role in the global economy as barriers to international trade and investment began to decline. This period also saw the rise of the United States as a dominant economic power, with many American MNCs establishing operations | After World War II, MNCs began to play a more significant role in the global economy as barriers to international trade and investment began to decline. This period also saw the rise of the United States as a dominant economic power, with many American MNCs establishing operations around the world. | ||
In the late 20th and early 21st centuries, MNCs continued to expand their operations globally, often taking advantage of advances in transportation, communication, and information technology to facilitate the flow of goods, services, and capital worldwide. However, the activities of MNCs have also been the subject of controversy and criticism, with some arguing that they contribute to economic inequality and environmental degradation and undermine the sovereignty of host countries. | In the late 20th and early 21st centuries, MNCs continued to expand their operations globally, often taking advantage of advances in transportation, communication, and information technology to facilitate the flow of goods, services, and capital worldwide. However, the activities of MNCs have also been the subject of controversy and criticism, with some arguing that they contribute to economic inequality and environmental degradation and undermine the sovereignty of host countries. | ||
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During the first global economy period between 1880 and 1929, multinational corporations (MNCs) played a significant role in the global economy. Many MNCs were focused on extracting raw materials and establishing production facilities in developing countries, often with the support of colonial powers. MNCs also played a role in the globalization of financial markets as they sought to raise capital from international investors to fund their operations. | During the first global economy period between 1880 and 1929, multinational corporations (MNCs) played a significant role in the global economy. Many MNCs were focused on extracting raw materials and establishing production facilities in developing countries, often with the support of colonial powers. MNCs also played a role in the globalization of financial markets as they sought to raise capital from international investors to fund their operations. | ||
The rise of MNCs during this period was facilitated by advances in transportation, communication, and other technologies, which made it easier for companies to operate across national borders. MNCs also benefited from declining barriers to international trade and investment and | The rise of MNCs during this period was facilitated by advances in transportation, communication, and other technologies, which made it easier for companies to operate across national borders. MNCs also benefited from declining barriers to international trade and investment and favorable legal and regulatory frameworks in many countries. | ||
However, the activities of MNCs during this period were subject to controversy. MNCs were often accused of exploiting local resources and labour, contributing to environmental degradation, and undermining the sovereignty of host countries. These issues would continue to be a source of tension and debate in the following decades. | However, the activities of MNCs during this period were subject to controversy. MNCs were often accused of exploiting local resources and labour, contributing to environmental degradation, and undermining the sovereignty of host countries. These issues would continue to be a source of tension and debate in the following decades. | ||
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Emerging markets, including many countries in East Asia, have experienced strong economic growth in recent years, and this has contributed to an increase in demand for goods and services from these countries. As a result, many multinational corporations (MNCs) have sought to establish or expand operations in these markets to take advantage of the growing opportunities. | Emerging markets, including many countries in East Asia, have experienced strong economic growth in recent years, and this has contributed to an increase in demand for goods and services from these countries. As a result, many multinational corporations (MNCs) have sought to establish or expand operations in these markets to take advantage of the growing opportunities. | ||
Developing countries in East Asia have also become more important players in GVCs, as they have increasingly specialized in producing intermediate goods and services used to produce final goods. This has contributed to the global economy's integration and facilitated the flow of goods, services, and capital | Developing countries in East Asia have also become more important players in GVCs, as they have increasingly specialized in producing intermediate goods and services used to produce final goods. This has contributed to the global economy's integration and facilitated the flow of goods, services, and capital around the world. | ||
The distribution of foreign direct investment (FDI) among different regions has changed significantly over the past several decades. According to some estimates, the United States, Europe, and Japan represented around 90% of global FDI flows in the 1980s. This share declined to around 80% between 1990 and 2009 and decreased to around 60% between 2010 and 2016. | The distribution of foreign direct investment (FDI) among different regions has changed significantly over the past several decades. According to some estimates, the United States, Europe, and Japan represented around 90% of global FDI flows in the 1980s. This share declined to around 80% between 1990 and 2009 and decreased to around 60% between 2010 and 2016. | ||
This shift reflects | This shift reflects a number of factors, including the rise of Asian multinational corporations (MNCs) as important foreign investors and the increasing economic importance of developing countries in the global economy. Many Asian MNCs have sought to expand their operations abroad and become major global value chains (GVCs) players. This has contributed to the growing importance of developing countries in the global economy and has led to a shift in the balance of economic power towards these regions. | ||
The changing distribution of FDI among different regions of the world has had important implications for MNCs and other economic actors. It reflects the increasing interdependence of the global economy. | The changing distribution of FDI among different regions of the world has had important implications for MNCs and other economic actors. It reflects the increasing interdependence of the global economy. | ||
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Regional multinationals, also known as "multilocal" or "regionalized" multinationals, are companies that operate on a global scale but focus on a particular region or geographic area. These companies often have a decentralized organizational structure, with operations and decision-making power being delegated to local subsidiaries in each region. This allows them to tailor their products and services to the specific needs and preferences of the local market while still leveraging the resources and expertise of the global organization. Regional multinationals can be contrasted with "global" multinationals, which have a more centralized organizational structure and tend to standardize their products and operations across different regions. | Regional multinationals, also known as "multilocal" or "regionalized" multinationals, are companies that operate on a global scale but focus on a particular region or geographic area. These companies often have a decentralized organizational structure, with operations and decision-making power being delegated to local subsidiaries in each region. This allows them to tailor their products and services to the specific needs and preferences of the local market while still leveraging the resources and expertise of the global organization. Regional multinationals can be contrasted with "global" multinationals, which have a more centralized organizational structure and tend to standardize their products and operations across different regions. | ||
Alan Rugman's theory of regional multinationals is based on the idea that | Alan Rugman's theory of regional multinationals is based on the idea that the majority of multinational corporations (MNCs) are actually regional in scope, rather than truly global. According to Rugman, most MNCs operate in a limited number of regions or countries, focusing on serving the specific needs of those markets rather than trying to standardize their operations across the globe. | ||
In his research, Rugman analyzed firm-level data from the 2011 Fortune Global 500 list and found that 320 out of the 380 companies on the list could be classified as regional MNCs, while only 9 out of the 380 companies could be classified as "global" MNCs. This suggests that most MNCs have a more decentralized, regionally-focused organizational structure and operate in a limited number of regions or countries. | In his research, Rugman analyzed firm-level data from the 2011 Fortune Global 500 list and found that 320 out of the 380 companies on the list could be classified as regional MNCs, while only 9 out of the 380 companies could be classified as "global" MNCs. This suggests that most MNCs have a more decentralized, regionally-focused organizational structure and operate in a limited number of regions or countries. | ||
The majority of multinational corporations (MNCs) had a regional focus, with 80% of MNCs classified as regional and only 4% classified as global. Additionally, the average score for regional sales and assets for these MNCs was 70% for sales and 72% for assets during the period from 1999-2008. | |||
Most multinational corporations (MNCs) from 1999-2008 had a regional focus, with most of their sales and assets concentrated in specific regions or geographic areas. This suggests that these MNCs were primarily focused on serving the needs of local markets rather than trying to standardize their products and operations across the globe. | Most multinational corporations (MNCs) from 1999-2008 had a regional focus, with most of their sales and assets concentrated in specific regions or geographic areas. This suggests that these MNCs were primarily focused on serving the needs of local markets rather than trying to standardize their products and operations across the globe. | ||
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Multinational corporations (MNCs) exist for a variety of reasons. Some of the primary reasons why MNCs are created and operate include: | Multinational corporations (MNCs) exist for a variety of reasons. Some of the primary reasons why MNCs are created and operate include: | ||
# To access new markets: MNCs may expand into new markets to access new customers and sources of revenue. | # To access new markets: MNCs may expand into new markets in order to access new customers and sources of revenue. | ||
# To take advantage of economies of scale: MNCs can often produce goods and services more efficiently due to their larger scale of operation and may expand into new markets to take advantage of these economies of scale. | # To take advantage of economies of scale: MNCs can often produce goods and services more efficiently due to their larger scale of operation and may expand into new markets to take advantage of these economies of scale. | ||
# To access new sources of raw materials or labour: MNCs may expand into new regions or countries to access cheaper sources of raw materials or labour, which can help reduce their production costs. | # To access new sources of raw materials or labour: MNCs may expand into new regions or countries to access cheaper sources of raw materials or labour, which can help reduce their production costs. | ||
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One approach that has been widely used to explain the motivations and activities of MNCs is John Dunning's "eclectic theory of international production," which identifies four sets of locational advantages that can drive international expansion: | One approach that has been widely used to explain the motivations and activities of MNCs is John Dunning's "eclectic theory of international production," which identifies four sets of locational advantages that can drive international expansion: | ||
# Natural-resource seeking: MNCs may expand into new markets to access natural resources, such as oil, minerals, or timber, that are not available in their home country. | # Natural-resource seeking: MNCs may expand into new markets in order to access natural resources, such as oil, minerals, or timber, that are not available in their home country. | ||
# Market-seeking: MNCs may expand into new markets to access new customers and sources of revenue. | # Market-seeking: MNCs may expand into new markets to access new customers and sources of revenue. | ||
# Efficiency-seeking: MNCs may expand into new markets to take advantage of lower production costs or other efficiency advantages available in those markets. | # Efficiency-seeking: MNCs may expand into new markets to take advantage of lower production costs or other efficiency advantages available in those markets. | ||
# Strategic-asset seeking: MNCs may expand into new markets to acquire strategic assets, such as technology, intellectual property, or local firms, that can help them improve their competitive position. | # Strategic-asset seeking: MNCs may expand into new markets in order to acquire strategic assets, such as technology, intellectual property, or local firms, that can help them improve their competitive position. | ||
These sets of locational advantages can often overlap and interact with each other, and MNCs may be motivated by multiple factors when making decisions about international expansion. | These sets of locational advantages can often overlap and interact with each other, and MNCs may be motivated by multiple factors when making decisions about international expansion. | ||
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Another set of alternative explanations for why multinational corporations (MNCs) expand into new markets and engage in cross-border transactions is based on the idea that market imperfections can create incentives for MNCs to expand internationally. These market imperfections can include: | Another set of alternative explanations for why multinational corporations (MNCs) expand into new markets and engage in cross-border transactions is based on the idea that market imperfections can create incentives for MNCs to expand internationally. These market imperfections can include: | ||
# Horizontal integration: MNCs may expand internationally to integrate their operations horizontally, meaning that they can produce a wider range of goods or services in different locations, which can help them capture economies of scale and reduce costs. | # Horizontal integration: MNCs may expand internationally in order to integrate their operations horizontally, meaning that they can produce a wider range of goods or services in different locations, which can help them capture economies of scale and reduce costs. | ||
# Intangible assets: MNCs may have intangible assets, such as brand recognition, intellectual property, or technology, that give them a competitive advantage in certain markets. Expanding internationally can help them leverage these assets and capture additional value. | # Intangible assets: MNCs may have intangible assets, such as brand recognition, intellectual property, or technology, that give them a competitive advantage in certain markets. Expanding internationally can help them leverage these assets and capture additional value. | ||
# Vertical integration: MNCs may expand internationally to integrate their operations vertically, meaning they can control different stages of the production process in different locations. This can help them reduce costs and improve coordination between different parts of the supply chain. | # Vertical integration: MNCs may expand internationally to integrate their operations vertically, meaning they can control different stages of the production process in different locations. This can help them reduce costs and improve coordination between different parts of the supply chain. | ||
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The global value chain (GVC) concept is a way to understand how international production is organized and how value is added in different locations around the world. It is often used in the context of globalization and the fourth stage of capitalism, characterized by the increasing integration of national economies into the global economy through trade, investment, and other forms of economic exchange. | The global value chain (GVC) concept is a way to understand how international production is organized and how value is added in different locations around the world. It is often used in the context of globalization and the fourth stage of capitalism, characterized by the increasing integration of national economies into the global economy through trade, investment, and other forms of economic exchange. | ||
In the GVC framework, value is created through a series of activities spread across different locations. For example, a product might be designed in one country, manufactured in another, and assembled in a third. Each of these activities represents a different stage in the value chain, and the value of the final product is the sum of the value added at each stage. | In the GVC framework, value is created through a series of activities that are spread out across different locations. For example, a product might be designed in one country, manufactured in another, and assembled in a third. Each of these activities represents a different stage in the value chain, and the value of the final product is the sum of the value added at each stage. | ||
The GVC concept helps to explain how international production is organized and how value is created in the global economy. It also highlights the importance of understanding the relationships between firms and their suppliers and the role of intermediaries such as logistics providers and trade finance institutions. | The GVC concept helps to explain how international production is organized and how value is created in the global economy. It also highlights the importance of understanding the relationships between firms and their suppliers and the role of intermediaries such as logistics providers and trade finance institutions. | ||
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According to Jennifer Bair, an expert on global value chains (GVCs), the intellectual genealogy of the GVC concept can be traced back to several different sources. These include: | According to Jennifer Bair, an expert on global value chains (GVCs), the intellectual genealogy of the GVC concept can be traced back to several different sources. These include: | ||
# The classical theories of international trade focused on the role of comparative advantage in determining the trade patterns between countries. | # The classical theories of international trade, focused on the role of comparative advantage in determining the trade patterns between countries. | ||
# The work of economist Alfred D. Chandler, Jr., who wrote about the evolution of the multinational corporation (MNC) and the firm's role in organizing international production. | # The work of economist Alfred D. Chandler, Jr., who wrote about the evolution of the multinational corporation (MNC) and the firm's role in organizing international production. | ||
# The world system theories looked at the relationships between core, periphery, and semi-periphery countries and the role of global economic structures in shaping economic development. | # The world system theories looked at the relationships between core, periphery, and semi-periphery countries and the role of global economic structures in shaping economic development. | ||
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# The work of economists Gary Gereffi and Miguel Korzeniewicz, who developed the concept of GVCs as a way to understand the organization of international production in the global economy. | # The work of economists Gary Gereffi and Miguel Korzeniewicz, who developed the concept of GVCs as a way to understand the organization of international production in the global economy. | ||
The GVC concept has evolved over time, drawing on a range of intellectual traditions and disciplines to provide a comprehensive framework for understanding the global economy. | The GVC concept has evolved over time, drawing on a range of intellectual traditions and disciplines in order to provide a comprehensive framework for understanding the global economy. | ||
The world-system tradition is a framework for analyzing the global division of labour and the patterns of trade and production that have emerged since the emergence of capitalism. This tradition is characterized by a focus on macro-level and long-range historical analysis, and it has influenced our understanding of the organization of the global economy. | The world-system tradition is a framework for analyzing the global division of labour and the patterns of trade and production that have emerged since the emergence of capitalism. This tradition is characterized by a focus on macro-level and long-range historical analysis, and it has influenced our understanding of the organization of the global economy. | ||
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The world-system tradition has also been influential in developing the concept of commodity chains, which describe the networks of production, trade, and distribution that link together different countries and regions worldwide. The global division of labour, which refers to the way that different countries specialize in different stages of the production process, is a key feature of commodity chains and has been a central focus of research within the world-system tradition. | The world-system tradition has also been influential in developing the concept of commodity chains, which describe the networks of production, trade, and distribution that link together different countries and regions worldwide. The global division of labour, which refers to the way that different countries specialize in different stages of the production process, is a key feature of commodity chains and has been a central focus of research within the world-system tradition. | ||
The global commodity chains (GCC) framework was developed by Gary Gereffi, a sociologist and economist, in the mid-1990s. It is a blend of organizational sociology and comparative development studies. It is designed to provide a comprehensive framework for understanding the organization of international production and the global division of | The global commodity chains (GCC) framework was developed by Gary Gereffi, a sociologist and economist, in the mid-1990s. It is a blend of organizational sociology and comparative development studies. It is designed to provide a comprehensive framework for understanding the organization of international production and the global division of labor. | ||
The GCC framework is based on global value chains (GVCs), which describe the production, trade, and distribution networks that link together countries and regions worldwide. According to Gereffi, GVCs are characterized by a series of activities, such as design, production, and distribution, that are spread out across different locations and that add value to a final product. | The GCC framework is based on global value chains (GVCs), which describe the production, trade, and distribution networks that link together countries and regions worldwide. According to Gereffi, GVCs are characterized by a series of activities, such as design, production, and distribution, that are spread out across different locations and that add value to a final product. | ||
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== Typology == | == Typology == | ||
The global commodity chain framework analyses the global economy's production, distribution, and consumption of goods and services. It highlights the various stages of production that a commodity goes through, from raw materials to final consumption, and the complex network of economic, social, and political relationships that link these stages. The framework examines the various actors involved in the global economy, including multinational corporations, states, labour unions, and other organizations, and how they interact to produce, distribute, and consume goods and services. The global commodity chain framework can analyze | The global commodity chain framework analyses the global economy's production, distribution, and consumption of goods and services. It highlights the various stages of production that a commodity goes through, from raw materials to final consumption, and the complex network of economic, social, and political relationships that link these stages. The framework examines the various actors involved in the global economy, including multinational corporations, states, labour unions, and other organizations, and how they interact to produce, distribute, and consume goods and services. The global commodity chain framework can analyze a wide range of commodities, including manufactured goods, agricultural products, and natural resources, and examine globalisation's impacts on economic development, labour markets, and the environment. | ||
The global commodity chain (GCC) framework, developed by economist Gary Gereffi, analyses the global economy's production, distribution, and consumption of goods and services. It emphasizes the role of firms and their activities in producing goods and services rather than the overall dynamics of capitalism. Gereffi argues that the GCC framework is a more useful way of understanding the global economy than the world-systems perspective, which focuses on the overall dynamics of capitalism and the interactions between core, semi-peripheral, and peripheral regions. | The global commodity chain (GCC) framework, developed by economist Gary Gereffi, analyses the global economy's production, distribution, and consumption of goods and services. It emphasizes the role of firms and their activities in producing goods and services rather than the overall dynamics of capitalism. Gereffi argues that the GCC framework is a more useful way of understanding the global economy than the world-systems perspective, which focuses on the overall dynamics of capitalism and the interactions between core, semi-peripheral, and peripheral regions. | ||
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Buyer-driven commodity chains (BDCCs) are more common in consumer goods industries and retail, where the firms at the end of the chain have a strong bargaining position due to their ability to specify the requirements of the products and their access to technology and capital. In addition, in these industries, the firms at the end of the chain are often able to exert a high level of control over the production process and the terms of trade due to their ability to set the standards and specifications for the products being produced and their access to consumer markets. | Buyer-driven commodity chains (BDCCs) are more common in consumer goods industries and retail, where the firms at the end of the chain have a strong bargaining position due to their ability to specify the requirements of the products and their access to technology and capital. In addition, in these industries, the firms at the end of the chain are often able to exert a high level of control over the production process and the terms of trade due to their ability to set the standards and specifications for the products being produced and their access to consumer markets. | ||
One example of a firm that is often cited as having a significant role in shaping a BDCC is Walmart. As one of the world's largest retailers, Walmart can specify the requirements for the products it sells and negotiate directly with suppliers to ensure that these requirements are met. This gives it a strong bargaining position in the commodity chain and allows it to exert a high level of control over the production process and the terms of trade. However, it is important to note that not all consumer goods industries or retail firms will necessarily have a BDCC structure, and various factors can influence the specific structure of a commodity chain. | One example of a firm that is often cited as having a significant role in shaping a BDCC is Walmart. As one of the world's largest retailers, Walmart can specify the requirements for the products it sells and negotiate directly with suppliers to ensure that these requirements are met. This gives it a strong bargaining position in the commodity chain, and allows it to exert a high level of control over the production process and the terms of trade. However, it is important to note that not all consumer goods industries or retail firms will necessarily have a BDCC structure, and various factors can influence the specific structure of a commodity chain. | ||
The binary typology of producer-driven versus buyer-driven commodity chains (PDCCs and BDCCs) has been criticized for oversimplifying the complex governance structures within a commodity chain. While the typology is useful for highlighting the different power dynamics within a commodity chain, it can also obscure some of the more nuanced and diverse governance structures that may be present. | The binary typology of producer-driven versus buyer-driven commodity chains (PDCCs and BDCCs) has been criticized for oversimplifying the complex governance structures within a commodity chain. While the typology is useful for highlighting the different power dynamics within a commodity chain, it can also obscure some of the more nuanced and diverse governance structures that may be present. | ||
One criticism of the typology is that it tends to emphasize the role of firms at the beginning and end of the chain while downplaying the importance of other actors such as labour unions, states, and civil society organizations. These actors can have a significant influence on the governance of a commodity chain and may be able to challenge or mitigate the power of firms at the beginning or end of the chain. | One criticism of the typology is that it tends to emphasize the role of firms at the beginning and end of the chain while downplaying the importance of other actors such as labour unions, states, and civil society organizations. These actors can have a significant influence on the governance of a commodity chain, and may be able to challenge or mitigate the power of firms at the beginning or end of the chain. | ||
Another criticism of the typology is that it tends to be static, focusing on the governance structure at a single point rather than considering how it may change over time. However, the governance structure of a commodity chain can be influenced by various factors, including technological change, shifts in the global economy, and the actions of various actors. Over time, a commodity chain can change from producer-driven to buyer-driven (or vice versa). | Another criticism of the typology is that it tends to be static, focusing on the governance structure at a single point rather than considering how it may change over time. However, the governance structure of a commodity chain can be influenced by various factors, including technological change, shifts in the global economy, and the actions of various actors. Over time, a commodity chain can change from producer-driven to buyer-driven (or vice versa). | ||
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In their 2005 paper, "The Governance of Global Value Chains," economists Gary Gereffi, John Humphrey, and Timothy Sturgeon proposed a typology of network governance structures based on the degree of integration and coordination between firms. They identified five types of governance structures: | In their 2005 paper, "The Governance of Global Value Chains," economists Gary Gereffi, John Humphrey, and Timothy Sturgeon proposed a typology of network governance structures based on the degree of integration and coordination between firms. They identified five types of governance structures: | ||
# Market: This is the most decentralized form of governance, in which firms rely on arm's-length markets to coordinate their activities. There is little integration or coordination between firms, and they operate independently. The transactions in this market are easy to codify, meaning that they can be easily recorded and tracked. The products or services offered in this market have simple specifications, making it easy for buyers and sellers to understand and agree | # Market: This is the most decentralized form of governance, in which firms rely on arm's-length markets to coordinate their activities. There is little integration or coordination between firms, and they operate independently. The transactions in this market are easy to codify, meaning that they can be easily recorded and tracked. The products or services offered in this market have simple specifications, making it easy for buyers and sellers to understand and agree on the terms of a transaction. Additionally, this market has low levels of asset specificity, which means that the assets used in production are not highly specialized and can be used in other industries. There is also low levels of opportunism and coordination costs, indicating that the market is relatively stable and efficient. | ||
# Captive: This is a more centralized form of governance in which one firm (typically a buyer) has a high level of control over the production process and can dictate the terms of trade. The other firms in the value chain are captive to the dominant firm and must follow its instructions. Captive value chains refer to the organization of production processes in which the transactions, product specifications and supplier capabilities are highly complex and cannot be easily codified or standardized. These value chains are characterized by a dominant firm, known as the lead firm, that exerts tight control over the production process and relies on a limited number of suppliers that have limited capabilities. In these value chains, the lead firm is responsible for the product's design, development, and production, and the suppliers play a more limited role. The lead firm is often highly specialized and deeply understands the production process and the customer's specific needs. Because the product specifications and production process are highly complex, the lead firm may need to exert tight control over the suppliers to ensure that the product is produced to the required specifications. An example of this is in the aerospace and | # Captive: This is a more centralized form of governance in which one firm (typically a buyer) has a high level of control over the production process and can dictate the terms of trade. The other firms in the value chain are captive to the dominant firm and must follow its instructions. Captive value chains refer to the organization of production processes in which the transactions, product specifications and supplier capabilities are highly complex and cannot be easily codified or standardized. These value chains are characterized by a dominant firm, known as the lead firm, that exerts tight control over the production process and relies on a limited number of suppliers that have limited capabilities. In these value chains, the lead firm is responsible for the product's design, development, and production, and the suppliers play a more limited role. The lead firm is often highly specialized and deeply understands the production process and the customer's specific needs. Because the product specifications and production process are highly complex, the lead firm may need to exert tight control over the suppliers to ensure that the product is produced to the required specifications. An example of this is in the aerospace and defense industry where the products are highly complex and require a high degree of specialization. The lead firm in this industry, such as Boeing or Airbus, exert tight control over the suppliers responsible for producing the components and subsystems. This tight control is necessary to ensure that the components and subsystems are produced to the required specifications and meet the safety and reliability requirements of the final product. This model is efficient in quality control, but it also creates a dependency on the lead firm, which can reduce supplier bargaining power, limit innovation and raise transaction costs. It also can increase risks associated with supply chain disruption. | ||
# Relational: This is a more cooperative form of governance in which firms develop long-term relationships and work together to coordinate their activities. There is a high degree of trust and mutual dependence between firms, and they may share risks and rewards. Relational value chains refer to the organization of production processes in which the transactions and product specifications are complex and not easily codified or standardized. In these value chains, suppliers play a critical role, and the coordination of production activities | # Relational: This is a more cooperative form of governance in which firms develop long-term relationships and work together to coordinate their activities. There is a high degree of trust and mutual dependence between firms, and they may share risks and rewards. Relational value chains refer to the organization of production processes in which the transactions and product specifications are complex and not easily codified or standardized. In these value chains, suppliers play a critical role, and the coordination of production activities is dependent on close relationships and trust between the different actors. An example of this is in the apparel industry, where garments' design, development, and production are highly dependent on close relationships between designers, manufacturers, and suppliers. The design of a garment is often based on the designer's creative input, and the final product is often customized to meet the customer's specific needs. Product specifications may need to be more easily codified, and the production process is often highly dependent on the skills and expertise of the suppliers. The close relationships and trust between the different actors in the value chain allow for more efficient communication, more effective problem-solving, and better coordination of production activities. Additionally, it also allows for fast product development, innovation, and adaptation to customers' changing needs. Trust-based relationships can also offer supplier-buyer collaboration in product design, development, and production, leading to a more efficient, effective, and sustainable supply chain. However, the downside of this model is that it may limit the number of suppliers and make it difficult to enter the market, and in case of any breach of trust it can lead to supply chain disruptions. | ||
# Modular: This is a more flexible form of governance in which firms specialize in specific tasks and work in a modular fashion, using just-in-time production and other forms of coordination. The firms in the value chain have a high degree of interdependence, but there is also a high degree of competition. Modular value chains refer to the organization of production processes in which the specifications of complex products and components can be easily codified and standardized. This allows for | # Modular: This is a more flexible form of governance in which firms specialize in specific tasks and work in a modular fashion, using just-in-time production and other forms of coordination. The firms in the value chain have a high degree of interdependence, but there is also a high degree of competition. Modular value chains refer to the organization of production processes in which the specifications of complex products and components can be easily codified and standardized. This allows for the separation of the design, development, and production of different parts or modules of a product. These modules can then be easily combined to create a wide variety of end products. An example of this is in the consumer electronics industry, where companies design and produce modular components such as CPUs, RAM, displays, and cameras that can be used in various devices such as smartphones, laptops, and tablets. This allows for a high degree of standardization and interchangeability among the components and makes it relatively easy for companies to enter and exit the market. This also allows for faster product development and innovation, as different components can be developed in parallel and then integrated to create new and improved products. Modularity can also increase the supply chain's flexibility and adaptability, improve the production process's efficiency and effectiveness, and reduce the risks and costs associated with product development and innovation. | ||
# Hierarchy: This is the most centralized form of governance, in which one firm (typically a producer) has a high level of control over the production process and can dictate the terms of trade. The other firms in the value chain are integrated into the dominant firm's operations and operate as subsidiaries. Hierarchical value chains refer to the organization of production processes in which the transactions, product specifications and supplier capabilities are highly complex and cannot be easily codified or standardized. These value chains are characterized by a dominant firm, known as the lead firm, that internalizes the production of the product rather than relying on external suppliers. In these value chains, the lead firm is responsible for the product's design, development, and production and does not rely on external suppliers to produce the product. The lead firm is highly specialized, has a deep understanding of the production process and the customer's specific needs, and has the necessary capabilities to produce the product internally. Because the product specifications and production process are highly complex, the lead firm may need help finding competent external suppliers to produce the product to the required specifications. An example of this is in the aerospace and | # Hierarchy: This is the most centralized form of governance, in which one firm (typically a producer) has a high level of control over the production process and can dictate the terms of trade. The other firms in the value chain are integrated into the dominant firm's operations and operate as subsidiaries. Hierarchical value chains refer to the organization of production processes in which the transactions, product specifications and supplier capabilities are highly complex and cannot be easily codified or standardized. These value chains are characterized by a dominant firm, known as the lead firm, that internalizes the production of the product rather than relying on external suppliers. In these value chains, the lead firm is responsible for the product's design, development, and production and does not rely on external suppliers to produce the product. The lead firm is highly specialized, has a deep understanding of the production process and the customer's specific needs, and has the necessary capabilities to produce the product internally. Because the product specifications and production process are highly complex, the lead firm may need help finding competent external suppliers to produce the product to the required specifications. An example of this is in the aerospace and defense industry where the products are highly complex and require a high degree of specialization. As a result, lead firms in this industry, such as Boeing or Airbus, internalize the production of most components and subsystems rather than relying on external suppliers. This internalization is necessary to ensure that the products are produced to the required specifications and meet the safety and reliability requirements of the final product. This model is efficient in terms of quality control and minimizes risks associated with supply chain disruptions. Still, it may lead to high costs, and a lack of flexibility and innovation. It also limits the number of suppliers and makes it difficult to enter the market. | ||
This typology highlights the diversity of governance structures within a global value chain and how they can vary regarding their degree of integration and coordination. | This typology highlights the diversity of governance structures within a global value chain and how they can vary regarding their degree of integration and coordination. | ||
=== Two general observations === | === Two general observations === | ||
Value chains have become increasingly globalized in recent years, | Value chains have become increasingly globalized in recent years, giving rise to a phenomenon known as Global Value Chains (GVCs). There are two general observations about GVCs that are worth mentioning. | ||
There has been a general trend in recent years of increasing supplier capabilities in developing countries due to economic upgrading and development. This trend has led to a shift in the organization of Global Value Chains (GVCs) away from hierarchical and captive networks and towards more relational, modular, and market forms. | There has been a general trend in recent years of increasing supplier capabilities in developing countries due to economic upgrading and development. This trend has led to a shift in the organization of Global Value Chains (GVCs) away from hierarchical and captive networks and towards more relational, modular, and market forms. | ||
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As a result, the modular form of value chains is becoming increasingly prevalent in the global economy, particularly in consumer electronics, automobiles, and machinery, where product design and development can be separated from production. This increased prevalence of modular value chains allows for more efficient and effective production processes and can also lead to more rapid product development and innovation. However, as with all forms of global value chains, it can also bring sustainability, fair trade and labour rights challenges. | As a result, the modular form of value chains is becoming increasingly prevalent in the global economy, particularly in consumer electronics, automobiles, and machinery, where product design and development can be separated from production. This increased prevalence of modular value chains allows for more efficient and effective production processes and can also lead to more rapid product development and innovation. However, as with all forms of global value chains, it can also bring sustainability, fair trade and labour rights challenges. | ||
= Annexes = | = Annexes = |