The Future of Global Value Chains According to a Sociologist
Insight on the transformation of global value chains and the growing importance of e-commerce and last-mile delivery. Learn about the impact of COVID-19, the future of global trade, and how developing countries can increase the domestic content of their exports.
Gary Gereffi, a renowned author and pioneer in the study of global value chains, discusses the transformation of global value chains in recent decades and highlights the growing importance of e-commerce and last-mile delivery. In this interview, he emphasizes the need for emerging economies to create their designs and brands to capture greater value within global chains.
The Rise of Global Factory Model
In the late 1970s, US multinationals and those of other countries started to segment their production processes and transfer their most labor-intensive phases to relatively less developed countries to reduce costs. This marked the beginning of a period of growing fragmentation of production and the rise of the global factory model. Under this model, the components and inputs of a final good are manufactured in certain countries and assembled and consumed in others.
Shift toward Full Package Production
After the 2008-2009 crisis, there was a change in the trajectory of productive fragmentation. The aim was to mitigate the risks inherent in a large and distant global production network by relocating some production sites and reducing the number of suppliers. Large companies such as Nike reduced their supply network from over 1,000 individual suppliers to only 35-40 factories strategically located according to their proximity to consumer markets.
Last-Mile Delivery and Production Units
The rise of e-commerce and the digital economy has become one of the most critical factors in the consolidation of value chains. The location of production units now depends on the crucial issue of "last-mile delivery." It is no longer just a matter of getting products from a distant manufacturer to the country of consumption but also to the consumer's own home. This emerging mode of trade and distribution is redefining the location of production units in terms of proximity to consumers.
Importance for Emerging Economies
Emerging economies initially started with the aim of reducing costs by transferring the most labor-intensive stages to relatively less developed countries. However, this model evolved into "full package production" in which retailers and well-known brands such as Walmart and Nike could also integrate their value chains. Alongside the value chains governed by producers, value chains governed by buyers began to take shape, shifting from assembly processes to "contracts by the specification." Countries must create their designs and brands to capture greater value within global chains.
Lessons from Costa Rica and Mexico
Costa Rica transformed its export profile by attracting Intel, which established a large testing and assembly plant in the country in the 1990s. However, Intel decided to close the plant and concentrate production in Vietnam due to scale dependency. The Costa Rican government identified the medical device industry as a new opportunity to build another success story. Mexico also bet on the medical device industry, but both countries must take the next step to create their designs and brands to capture greater value within global chains.
Reaction to Pandemic and Climate Change
The pandemic overlapped with the climate crisis, highlighting the urgency of promoting the sustainability of value chains. The need to move towards a productive arrangement that is more committed to environmental preservation has accelerated the emergence of new industries, such as electric cars. The ongoing technological revolution and the experience of the pandemic will lead to the compacting of production sites in the value chain to guarantee the supply of inputs and components, and to respond to the challenge posed by the massification of e-commerce.
Shared Production between Neighboring Countries
The digitalization and automation of production processes will not replace globalized production but rather favor shared production between neighboring countries. Automation and digitalization are important factors in shaping the current locations of global value chains. However, Gereffi notes that automation and bringing production closer to consumption can eliminate much of international trade. For example, shoe manufacturers like Adidas tried to set up automated factories in countries like Germany but found that there were no input suppliers left.
To guarantee the production of sports shoes, they had to reduce the number of components to such an extent that they were very simple and unattractive to consumers. That is why countries like China, Vietnam, and Indonesia remain the main suppliers of sports shoes since they have clusters specialized in the manufacture of components and inputs for this type of product. In this industry, long-distance trade will continue to be important, albeit with a smaller base of participating countries.
On the other hand, the interview also highlights the potential of knowledge-intensive services as a good alternative for developing countries to increase the domestic content of their exports. The manufacturing value chains go hand in hand with service value chains, which can become a new source of growth. The example of Costa Rica, which maintained an engineering services center with more than two thousand employees after Intel closed its plant, illustrates this point.
Finally, the interview concludes with Gereffi's thoughts on the current international conjuncture. Gereffi believes that the reconfiguration of the global economy, led by emerging economies like China and India, will lead to a reconfiguration of world trade and investment flows, which will by no means mean the end of globalization. The challenge is to make value chains more sustainable, inclusive, and with greater participation of small and medium-sized enterprises. E-commerce can play a key role in this precisely because it facilitates inclusion. In addition, the need for high-value services also benefits entrepreneurship in small, highly specialized firms.
Gereffi is optimistic about the future, as he believes that supply chains are perfectly capable of reconfiguring themselves to meet the new realities of the international and national concert with good leadership and an adequate response to the new political pressures. He emphasizes the need for a robust system of multilateral institutions to prevent the capture of global trade by a few multinationals focused on maximizing profits or by national governments with political interests. A strengthened United Nations system backed by an effective network of institutions is necessary to achieve this goal.