Lecture 6 Gpn06
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    Lecture 6 Gpn06 Lecture 6 Gpn06 Presentation Transcript

    • III. Global Strategy and Entrepreneurship Lecture 6: Global Production Network
      • A case
      • Global commodity chain
      • New enterprises
    • i. Globalization: It's Not Just Wages By Louis Uchitelle, New York Times, 6/17/05
      • Who is the biggest exporter of German-made washing machines to the United States?
      • Not Bosch-Siemens, or any other German manufacturer.
      • It is the American appliance maker, Whirlpool , the company proudly reports.
    • Whirlpool WHR (NYSE) Data as of 11-04-2005 03:20 PM CT 612,400 0.42 (-0.52%) $80.17 Volume Day Change Price
    • Globalization: It's Not Just Wages
      • Globalization is often viewed as a rootless process of constantly moving jobs to low-wage countries.
        • But the issue is more complex, as illustrated by Whirlpool's worldwide operations.
      • What attracts Whirlpool is a relatively new form of globalization that emphasizes first-rate centers of production and design in various countries - including the United States.
    • Whirlpool's global network Microwave ovens Refrigerators Washers Engineered- Sweden Made in China Designed (made) America (Tulsa, Okla) Stoves Assembled Brazil American consumers Front - loading Top - loading German- made Export: Mexico Made in Clyde, Ohio Export: Europe
    • Whirlpool's global network
      • Diana Farrell, director of the Global Institute at McKinsey & Company:
      • " The really sophisticated multinationals are taking advantage of the different locations in their global networks without worrying about whether they also sell in the countries where they produce ."
    • The advantage of Whirlpool's global network
      • 1. To the company : putting the earnings of overseas affiliates to their best use anywhere in the world ->↑ competitiveness
      • 2. To the macroeconomy : parent companies invest in new technologies and business opportunities that will eventually create new jobs at home and abroad.
    • Why Global Production Network (GPN)?
      • Will low foreign wages , particularly in China and elsewhere in Asia, combined with generous subsidies from those countries, keep the global production networks mobile?
      • To stay or to move, that is a question!
        • As manpower required to make Whirlpool's appliances is declining, diluting the drawing power of lower wages.
        • Also consider the shipping costs and the investment it would take to build a new factory in Mexico or a new factory in China
    • Why Global Production Network (GPN)?
      • Parts suppliers play a big role in determining where new factories are put, or existing ones are expanded.
      • In the last 15 years, suppliers have set up shop in growing numbers near the new production centers in China, India, Southeast Asia and Latin America.
        • microwave ovens made in southern China
        • less-costly front-loading washing machine made in northern Mexico, Monterrey.
      • Location wage, transport cost, investment cost, parts suppliers…
    • Globalization: It's Not Just Wages
      • Whirlpool's total of 23,000 employees in this country has not changed in a decade, while the overseas work force has tripled, to 45,000. US Jobs have not been reduced!
      • Yet, American consumers, not foreigners, account for two-thirds of Whirlpool's annual revenue, which was $13.2 billion last year, up from $10.3 billion in 2000. Profits↑
    • ii. Global Commodity Chains
      • “ A commodity chain refers to the whole range of activities involved in the design, production, and marketing of a product….” (Gereffi, 2002, page 1)
    • Producer-driven commodity chains
      • Large, usually transnational, manufacturers play the central roles in coordinating production networks (including their backward and forward linkages).
      • This is characteristic of capital and technology intensive industries such as automobiles, aircraft, computers, semiconductors, and heavy machinery .
    • Producer-driven commodity chains Host A MNE HQ Host B Host C Host D control technology capital expertise commodity flows between subsidiaries inputs from ‘host’ economy (Source: Henderson, 1998: 369) value Finland: Nokia Design in London Finish in China Parts in Taiwan Market /Distribute in US
    • Buyer-driven commodity chains
      • Those industries in which large retailers, marketers, and branded manufacturers play the pivotal roles in setting up decentralized production networks in a variety of exporting countries, typically located in the third world.
      • This pattern of trade led industrialization has become common in labor intensive, consumer goods industries such as garments, footwear, toys, handicrafts, and consumer electronics.
    • Buyer-driven commodity chains Brazil US India China Malaysia Taiwan Nike Developing economy A Developing economy B Developing economy C Core economy/major markets raw materials manufacturer B (basic production) manufacturer C (organizes production, finishing etc.) buyer (marketing, brand name) value Flows of capital, expertise, designs, materials etc. where relevant (Source: Henderson, 1998: 370)
    • Buyer-driven commodity chains
      • Manufacturers without factories
      • footwear production (e.g. Gereffi and Korzeniewicz, 1990)
      • apparel industry (e.g. Gereffi 1999a, Bair and Gereffi, 2001)
        • responsible for product specification, purchase orders and marketing,
        • production is dispersed to independent companies who operate as ‘original equipment manufacturers’, OEM, often with their own networks of suppliers and subcontractors.
      • The value is added not in the production stages, but at the stages of ‘branding’ and marketing.
    • Economists’ Views: Slicing value chain/ Outsourcing
      • The value chain has become global; increasing ‘disintegration of production’
        • The global firm produces one stage of production in one location and exports the input for refinement to a second location. The refined input gets further refinement in a third location. During this refinement process intermediate goods are traded from one location to the next.
        • The international organization of production leads to the observed increase in trade in intermediate goods and in foreign direct investment.
      • (Feenstra, 1998)
    • Corporate Reorganization
      • Breaking up of the conglomerate
      • Markets have been intolerant towards conglomerates and forced firms to sell pieces which do not naturally belong to their core activity.
      • The emergence of the “human capital firm”: flatter hierarchies inside firms
      • Firms eliminated layers of middle management by introducing more decentralized decision making inside the corporation and by empowering workers at lower levels of the corporate hierarchy.
      (Holmstrom and Kaplan, 2001)
    • Globalization and the ‘New Enterprise’
      • New assets of the firm: human capital and talent
      • In the past it was specialized in inanimate assets (its machines) what made the firm unique and gave its owner power in the firm.
      • But with the development of financial capital markets financial capital became widespread available and with it the capital intensity of the firm has stopped to be the critical asset.
      • As human capital cannot be owned by the firm the central focus of corporate governance today is how to provide incentives for talent to prevent it from leaving the firm.
      (Marin and Verdier, 2003)
    • References
      • Feenstra, R.C. 1998. “Integration of trade and disintegration of production in the global economy”, Journal of Economic Perspectives 12: 31-50.
      • Gereffi, G. 2002. “Outsourcing and Changing Patterns of International Competition in the Apparel Commodity Chain”, background paper for UNIDO’s World Industrial Development Report 2001 http://www.colorado.edu/ibs/PEC/gadconf/papers/gereffi.html
      • Henderson, J. 1998. “Danger and Opportunity in the Asia-Pacific” in G. Thompson (ed.), Economic Dynamism in the Asia-Pacific . London, Routledge: 356-84.
      • Holmstrom, Bengt and Steve N. Kaplan. 2001. “Corporate Governance and Merger Activity in the United States”, Journal of Economic Perspectives . 15: 2, pp. 121-144.
      • Marin D. and  T. Verdier, 2003. “Globalization and New Enterprise”, Journal of the European Economic Association , Volume 1, Numbers 2-3, pp. 337-344.