Multinationals, Global Value Chains and Governance

The Mechanics of Power in Inter-firm Relations

Peter Hertenstein

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429748929
• Edition: 1
• Topic: Ciencias sociales
• Subtopic: Estudios asiaticoamericanos

This book uses the examples of local supply firms in China and Brazil and their connections to the global automotive industry to explore the nature of current global value chains. It argues that lead firms make use of product architecture to globalize their procurement and supply chain management and that they effectively restructure the global supply base by internationalizing the most capable supply firms, thereby creating oligopolies controlled by the lead firm. The book goes on to contend that some firms have gained such powerful positions that they have gained a degree of control over other firms without the necessity of ownership – altering the mechanics of governance. Also, it shows how, although some supply firms from emerging markets have utilized their business ties with western assembly firms to upgrade themselves within the global value chain, most are squeezed out through increased global competition. Overall, the book makes a major new contribution to the economic theory of governance.

1
The dynamic process of globalization

The world economy has changed. The past three decades saw an unprecedented industrial restructuring worldwide, ushering in a new phase of globalization. The new phase of globalization through accelerated internationalization of firms, vertical disintegration, and dominance of large multinational corporations (MNCs) has changed the competitive landscape in the world economy (Cassis 1999; Chandler 1994; Dembinski 2009; Nolan 2001b). Enabled by technology advances in transportation and more importantly telecommunication, the firms’ refocused on their ‘core business.’ Through the subsequent outsourcing of manufacturing processes, the leading firms have triggered an unprecedented restructuring of global manufacturing (Dicken 2011; Milberg and Winkler 2013; Nolan, Zhang, and Chunhang 2007; Ruigrok and van Tulder 1995; Sturgeon, Van Biesebroeck, and Gereffi 2008; Womack, Jones, and Roos 1990). The large and focused firms that emerged as lead firms in their respective industries take on an orchestrating role for the extended value chain through new forms of governance. At center stage is the modern lead firm, a powerful and large multinational corporation, spanning across national borders and multiple continents, which governs and orchestrates trade and capital flows of entire industries in structured global value chains (GVC) (Dembinski 2008; OECD 2012). Less powerful firms participating in such global value chains are increasingly becoming dependent on the leading MNCs and have to follow the strategic direction set by the lead firm. Thus the boundaries of the firm become increasingly blurred (Cantwell 2013; Coase 1937). The globalization of entire industries is steered by the firm at the top. Globalization accelerates as the lead firms restructure their production network and value chains globally.

Despite the widespread discussions about globalization, there is no unified theory or understanding of its dynamic process, its mechanics, and its drivers. This chapter lays out the context for the book by exploring globalization through a simple mechanism: the reduction of existing barriers to the flow of information and physical objects. Globalization is thereby defined as the process of reducing the barriers to exchange information and objects between separated territorialities. Through the reduction of barriers, the ‘distance’ between formerly separated and isolated territorialities is reduced to make their particular set of resources, goods, markets, knowledge, culture, and social activity accessible to one another (Ghemawat 2001). Existing barriers are factors that increase the cost for or slow the process of the flow of information or objects. Such barriers range from national barriers and trade barriers, to natural obstacles such as mountain ranges, large streams, or oceans. Barriers can be reduced by lowering the cost and increasing the speed for exchange, often achieved by establishing an infrastructure to build networks that accelerate the exchange.

In the proposed model of globalization, the multi-faceted factors of globalization are dissected in two overarching processes: shaping processes and reactionary processes. The two processes in turn are made up of four different factors. The first two factors are (1) enabling factors, in particular innovations and politics that lower cost and increased speed of transportation, and (2) driving factors, in particular the economy. The latter two factors are part of the reactionary process, describing the impact globalization has: (3) increasing optionality, available at the connected territorialities, which (4) allows a new bundling of information and goods, which feeds back to the enabling factors (Figure 1.1).

Figure 1.1 The dynamic globalization process model

Source: Author’s own figure.

Enabling factors lay the foundation for a potential globalization but are not driving the process of globalization. For instance, lowering trade barriers enables globalization – but it is the increase of transnational economic trade that utilizes the enablers to drive globalization. Through the increased flow of information and goods, additional and new options become available at the connected territoriality, like resources, goods, information, cultural, or social activity. Through the new options, new information can be bundled and combined in new ways to create new knowledge that leads to innovations but also reactions on the changes in society.

By viewing the process of globalization as an interplay between shaping and reacting factors which feedback into the shaping factors, the overall process is not deterministic. This enables us to understand phases in which globalization is in retreat. After decades of social and economic integration and globalization since the 1960s, social movements started to empower governments in the 2010s that erected barriers rather than further reducing them. The model allows such developments through different results from the reactionary process. As research has shown, globalization does not benefit all individuals equally and can have a negative impact on individuals, societies, economics, or the environment in particular territorialities (Fisher 2009). This can lead to a reaction that influences the enabling factors to increase barriers rather than decrease them.

In the attempt to explore the economic globalization witnessed in the past decades, the shaping dimensions of the process are described (left side of the figure), together with some consequences of globalization that are clearly linked to economic globalization and the role of the firm in globalization. This limits the scope of this chapter to economic globalization, not regarding sociological or political aspects. While the broad impact of globalization is a fascinating topic worth studying, it would exceed the purpose of this chapter and is better explored by other social sciences.

Enablers of globalization

The core enablers of globalization are innovations that enable the transnational economic activity to be managed and operated effectively, and political enablers that reduce barriers. The innovations can be distinguished between (1) innovations that increase the degree of digitalization of information, i.e. the speed of information transportation, and lower the cost of information transportation; (2) innovations that lower the cost and accelerate the transportation of physical goods; and (3) innovations in the management capabilities as a moderating enabler, which expands the limits of the organizational size. The political enablers are the liberalization of trade and capital flows, the privatization of business, and historic catalysts accelerating the integration of national economies into the world economy.

Innovations in transportation of goods

Key innovations to lower the barriers for the transportation of physical objects were made in the past decades through continuous innovations for large transport ships that revolutionized sea transportation and economized transcontinental transportation of physical goods. The cost of sea transportation dropped by more than half from 1974 to 2004 (Bank 2009). A key innovation was the standardization of containers in the 1960s that decreased the lead-times for transition between vessels and between sea, rail, and road transportation. For air transportation, innovations were made in the aircraft industry, most notably the invention of the jet engine to allow flying long distances and at high altitude to be independent from weather conditions. Through the continuous building of infrastructure, the inventions mentioned earlier are utilized to decrease the barriers of transportation of goods. By building new roads, rails, ports, or airports, or by expanding existing canals, crucial links between countries are built, the distance between countries and continents are bridged, and globalization of trade is enabled.

Innovations in transportation of information

The transportation of (digitized) information has been transformed most radically in the past decades. Since the invention of transmitters in 1947 and the integrated circuit in 1958, the rise of the semiconductor industry has transformed the world economy. Through innovations like personal computers, the internet, and mobile devices, the technology for fast transportation of information was created. Communication and information exchange has vastly improved and become faster and more cost-efficient. The revolution in the telecommunications sector has facilitated a revolution in the globalized financial system and capital markets, in the marketing strategies and development of globally recognized brands, and in the organization of research and development (R&D) and product design (Nolan 2001b).

Equally important were key innovations that helped to codify information so that the information can be digitized and thereby become detached from physical objects and be transmitted through the communications network. Through broadband internet, advanced sensors, or camera systems, additional information can be digitized, such as gestures or facial expressions during long-distance conversations using IP video phones. Through further inventions, such as precise capturing and digitizing of movements and the re-production of these, a deeper spectrum of information can be transported.

Innovations in the organization and management of increasingly complex systems

While the innovations in transportation of goods and information mentioned earlier lay the groundwork for globalization, the increase in transnational operations increased the complexity for organizing and managing the complex systems. Innovations in the management capabilities enabled the globalization of operations. Key innovations include the reorganization of work, the focusing on core business activities, innovations in the management of complex systems, and the establishment of systems integrators.

Reorganization of work and the fine-slicing of activities

The most profound organizational change that occurred was the fine-slicing of activities that enabled business to focus on their core activities and outsource much of the non-core activities previously performed in-house (Chandler 1977; Milberg and Winkler 2013; Ruigrok and van Tulder 1995). The specialization and division of tasks decreases complexity and enables simple, repetitive tasks to be performed in a shorter time span (Pavitt 2003). In the early 1900s, the automotive industry revolutionized manufacturing processes through the organized division of tasks into a value chain in what later became known as ‘Fordism.’ However, the process required a high degree of product standardization and led to the simplification of products towards few options for the customer. In the 1980s, the automotive industry again revolutionized manufacturing processes, this time in Japan in what has been coined ‘Toyotism.’ The lean manufacturing principles allowed companies to increase the handling of complexity to allow more product variety. While the core change in Fordism was the change towards strictly divided tasks, ‘Toyotism’ is the move from strictly divided tasks towards a more flexible specialization (Ruigrok and van Tulder 1995).

Refocusing on core business activities

In the post-Fordism era, the theatre for the fine-slicing of tasks changed. In the Fordism-era, the division of labor occurred within in the factory. In the past decades, the process of dividing tasks has been elevated to a new level, from tasks performed by individuals to dividing tasks performed by organizations or businesses (Gereffi and Korzeniewicz 1994; Milberg and Winkler 2013; Nolan 2001b; UNCTAD 2013). Vertically integrated firms started disintegration in order to focus on their ‘core business.’ The global economy therefore witnessed a “widespread narrowing of the range of business activity undertaken by the individual large firm” after the 1970s (Nolan 2001b: 33f), as large firms sold their assets in ‘non-core’ business segments. The separation of tasks allowed the firms to specialize in their core activities, decreasing the overall complexity to compensate for the increase of complexity from globalized operations (Ruigrok and van Tulder 1995; Womack et al. 1990). Increasingly, the restructuring of the value chain happens at a global level (Nolan 2001b; Nolan et al. 2007). In the ongoing restructuring of activities, firms globalized their value chains (Kaplinsky 2004; OECD 2013; WTO 2013) and outsourced many of their activities to new countries (Chandler 1977; Milberg and Winkler 2013).

Innovation in management systems

Linked to the reorganization of activities are innovations in management capabilities and manufacturing systems. The evolution of manufacturing systems, like the introduction of lean manufacturing principles such as zero stock, just-in-time and just-in-sequence delivery, enabled the lead firms to orchestrate the growingly complex network of economic activities within and outside the boundaries of the firm (Womack et al. 1990). Innovations in management capabilities and manufacturing systems are thereby a key element to enable globalization (Fujimoto 2012; Hill 1989; Sturgeon 2002; Womack et al. 1990). Some of the key innovations of the ...

Table of contents

• Cover
• Half Title
• Series Page
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• Author biography
• Preface
• List of abbreviations
• 1 The dynamic process of globalization
• 2 Global value chains
• 3 Volkswagen – lead firm and orchestrator
• 4 Participants from the advanced markets
• 5 Participants from Brazil and China
• 6 Towards a theory of network orchestration
• 7 Globalization and the challenge for development
• Index