Global Value Chains and the Missing Links

Cases from Indian Industry

Saon Ray, Smita Miglani

• Publisher: Routledge India
• Year: 2018
• ISBN:
  9780429892004
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Global value chains (GVCs) are fraught with the phenomenon of fragmentation and dispersion of production across the world. India presents a unique example with its high potential in manufacturing capability but low integration in GVCs. This book examines the reasons why India has failed to integrate within GVCs so far and looks at key examples to understand the impediments in this process. The chapters bring together case studies from across the manufacturing industry – labour-intensive (garment, paper and diamond), capital-intensive (automobile and petrochemical), and knowledge-intensive (semi-conductor microchip, chemical and pharmaceutical) sectors. Together, they present stories of successful integration of some firms in GVCs as well as the difficulties faced by them. The volume also highlights the importance of GVCs in the context of developing countries in terms of benefits such as income and value generation, knowledge and technology collaborations, and advances in systems and processes.

This book will interest scholars and researchers in economics, international trade studies, development economics and business management as well as to practitioners, policymakers, government officials, and those in the corporate sector.

Part I

Concepts and framework

1 Introduction

One of the most enduring images of globalization is that of the Apple iPhone or iPod, with the tag line, “Designed by Apple in California, assembled in China.” This is an example of a global value chain, with part of the process being completed in one or more countries (Gereffi and Lee 2012). The phenomenon of production in global value chains (GVCs) has been called “vertical specialization” (Balassa 1967; Findlay 1978), as well as “slicing up of the value chain” (Krugman 1995). Others have called it “international fragmentation of production” (Arndt and Kierzkowski 2002) and “global production networks” (Ernst and Kim 2002) etc.¹

In economics, value chains refer to the full range of activities involved in value creation of a product from its conception to the end-use stage and beyond. In a globalized world, global value chains can be understood as the sequence of such activities involving more than one country. These chains operate through inter-firm trade networks and the process typically involves movement of intermediate goods² through a series of countries where, in each one, a new value is designed, coordinated, and implemented at a regional or global scale (UNESCAP 2015).³ More than 60% of global trade consists of trade in intermediate goods and services (UNCTAD 2013).⁴

Between 1995 and 2009, income from GVC-related trade increased sixfold for China and fivefold for India (OECD, WTO, and the World Bank Group 2014). Value-added⁵ or GVC trade accounts for the value-added of one country (directly and indirectly) contained in the final consumption of another country.⁶ The measurement involves two steps: first, computation of output from each country and sector needed to produce final goods absorbed in a given destination (Johnson and Noguera 2012); and second, from the sector-level production, measurement of the value of final goods purchased from each source country along with inputs is evaluated and the value-added contribution is computed along the production chain.

GVCs have arisen from the growing interconnectedness among economies worldwide, which is a result of technological advancements and liberalization of trade and demand-side factors.⁷ Another reason for their development is the reduction in trade costs, which includes the whole range of costs incurred by companies from the site of production to the final consumption. These include land transport and port costs, freight and insurance costs, tariffs and duties, costs associated with non-tariff measures, mark-ups of importers, wholesalers, and retailers. It is the tradeoff between transaction costs and production cost that determines the degree of fragmentation⁸ of the production process (Jones and Kierzkowski 2001). GVC formation for products happens while keeping in view the tradeoffs between production and transaction costs. These costs determine the extent to which fragmentation of production process takes place, making the GVC for every product different.

Producer-driven GVCs are more common in high technology industries such as semiconductor electronics, automotive, or the pharmaceuticals since research and development (R&D) plays a major role. GVCs enable a firm to utilize both economies of scale and economies of scope. Imports play an important part in generating exports. A large portion of the commodity being exported originates abroad due to the emergence of regional production hubs, especially in automotive and electronics industry (OECD 2014). In buyer-driven chains, usually found in garments and other labour-intensive products, decentralized production networks operate through independent suppliers in developing countries (Gereffi 1999). The lead firm⁹ in industries such as shoe manufacturing usually deals with the marketing and sourcing the product from different independent suppliers.

The GVC approach analyzes the global economy from two angles: top-down and bottom-up (Gereffi and Fernandez-Stark 2016). The concept underlying the top-down view is the “governance”¹⁰ of GVCs, which focuses on lead firms and organizations of international industries; the concept underlying the bottom-up perspective is “upgrading,” which focuses on strategies used by countries, regions, and other economic stakeholders to maintain or improve their position in the global economy.¹¹ A number of factors, both structural and policy related, can influence the degree and type of integration as well as upgrading in GVCs. Structural factors, such as geography, size of the market,¹² and level of development, are found to be key determinants of GVC participation.¹³ GVCs are embedded within local economic, social, and institutional dynamics. Economic conditions including availability and quality of inputs (of material and labour), infrastructure and access to other resources (such as finance), and social context (which govern the availability of labour and its skill level) are important (Gereffi and Fernandez-Stark 2016). Institutions including tax and labour regulation, subsidies, and education and innovation policy that promote or hinder industry growth and development all play a role. Also, policy decisions and corporate strategies in these areas play an active role in promoting engagement.

Understanding GVC trade is important since bilateral gross exports (and imports) include double counting as inputs cross borders several times in today’s world.¹⁴ The point here is that participating in international value chains does not necessarily mean directly trading goods or services across borders, but rather being linked to such activities through the process of value creation. The framework enables an understanding of the organization of global industries by examining the structure and dynamics of participating firms (Gereffi and Fernandez-Stark 2016). The comprehensive nature of the framework allows policymakers to answer questions regarding development issues not addressed by previous paradigms; and it also helps explain the changed global-local trade dynamics that have emerged within the past 20 years (Gereffi 1999). The GVC approach is also a useful tool to trace the shifting patterns of global production, link geographically dispersed activities and firms of a single industry, and determine the roles they play in developed and developing countries (Gereffi and Fernandez-Stark 2016).

The emergence of value chains has major policy implications for economic growth in developing countries. GVC trade accounts for 30% of the gross domestic product (GDP) of developing countries (UNCTAD 2013). As GVCs link firms, workers, and consumers around the world, they in fact provide a stepping stone for firms and workers in developing countries to integrate into the global economy. Additionally, they are important as they encourage learning¹⁵ and upgrading¹⁶ of production processes. Some argue that GVCs have created new opportunities for developing countries to enter global markets as components or services suppliers, without having to build the entire value chain (Taglioni and Winkler 2016). By providing access to networks, global markets, capital, knowledge, and technology, integration in an existing value chain can provide a first step to economic development – a path that is often easier to follow than building a complete value chain (Elms and Low 2013).

Participation in GVCs can facilitate economic growth, as it is quicker and less expensive to generate exports by joining existing GVCs (it might be difficult for some countries to build vertically integrated industries). The performance of countries such as China, Costa Rica, the Czech Republic, Mexico, and Thailand is proof of the fact that participation in GVCs can lead to fast development, industrialization, and access to investment, knowledge, and technology. GVCs can help the economy as they support the spread of responsible business conduct. They act as a channel for ideas which take the form of new knowledge and innovations; the growth of GVCs is driven by cost efficiency and by improved access to foreign markets and knowledge. Integration into GVCs does not seem to have much effect on the employment figures of a country, but it appears to change the composition of the workforce. For instance, in the US, integration into GVCs decreased the number of medium-skilled jobs and increased low-skilled ones. GVCs did push wages down but improved working conditions in the US (OECD 2013).

Multinational enterprises (MNEs) as well as small and medium enterprises are involved in GVCs. However, the multinational enterprises that facilitate these beneficial changes may move out to other countries as wages and costs in the host country cross a threshold. These MNEs may also capture most of the value. Small firms are flexible and can tap quickly into new opportunities. SMEs also play a major role in supplying intermediates to exporting firms but face challenges as they lack the capital to invest in R&D, train personnel, or meet international standards.

The critical question for the developing countries then is how to facilitate GVC-related trade and hence integrate into GVCs across the world. This has emerged as a basic development challenge pertaining not only to the percentage share of value-added on supply chains, but also to the quality of participation in terms of capacity and opportunity to diversify into other activities (Elms and Low 2013).

Motivation for the book

Various studies have analyzed the conditions under which varied patterns for countries occur for entering or upgrading in GVCs. While there are numerous examples of successful insertion of firms and countries into GVCs, there are fewer studies of the difficulties faced by firms in inserting into GVCs, especially in the Indian context. India is a unique example of manufacturing capability in most sectors, but low integration into GVCs (Baldwin 2011; Athukorala 2013). The evidence is available through its low GVC participation index measure,¹⁷ not only when compared with other developed economies but also with developing ones. This provides the rationale for examining cases from India with the aim of understanding the level and type of engagement, as well as why and how integration may be impeded.

Examples of why India has largely lagged with respect to integration into GVCs are provided in this book. There are two questions that are of relevance here: first, are domestically owned Indian firms well integrated into GVCs? Second, for firms that are integrated, what are the prospects for upgrading? This book attempts to examine these questions through case studies in the manufacturing sector. As far as upgrading is concerned, the tacitness¹⁸ of knowledge determines learning outcomes and transfer of manufacturing practices. The case studies provide a wide variety of experience, throwing light on the process of knowledge dissemination and manufacturing practices in various sectors. The bargaining powers of suppliers also play an important role in the entire process. The case studies also illustrate how the governance structure affects the dissemination of knowledge. In this sense, it looks at the ways in which learning and upgrading are taking place through GVC trade in the country.

The questions that motivate this book are: First, what is the evidence of India’s lagging in GVC trade? We present evidence from the literature and data using the Broad Economic Categories (BEC).¹⁹ Second, what are plausible explanations for India’s lagging in GVC trade? This question is answered by examining the role of lead firms, governance structures in value chains, and diffusion of technology in each chain. The final question that is asked relates to the impediments to India’s engagement in GVCs and how can India overcome these barriers? In each case study, barriers in that sector in the Indian context are discussed. Barriers faced in other countries are discussed in Chapter 3. This also provides an opportunity to examine the regulations in each sector and how they should be modified to overcome the problems faced by firms.

Organization of the book

The book is divided into four parts. Part I contains an introduction that motiva...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Acknowledgements
• List of abbreviations
• Part I Concepts and framework
• Part II Evidence of India’s integration
• Part III Integration across sectors
• Part IV Conclusion and policy implications
• Index