Lecture 6 Gpn06


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Lecture 6 Gpn06

  1. 1. III. Global Strategy and Entrepreneurship Lecture 6: Global Production Network <ul><li>A case </li></ul><ul><li>Global commodity chain </li></ul><ul><li>New enterprises </li></ul>
  2. 2. i. Globalization: It's Not Just Wages By Louis Uchitelle, New York Times, 6/17/05 <ul><li>Who is the biggest exporter of German-made washing machines to the United States? </li></ul><ul><li>Not Bosch-Siemens, or any other German manufacturer. </li></ul><ul><li>It is the American appliance maker, Whirlpool , the company proudly reports. </li></ul>
  3. 3. 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
  4. 4. Globalization: It's Not Just Wages <ul><li>Globalization is often viewed as a rootless process of constantly moving jobs to low-wage countries. </li></ul><ul><ul><li>But the issue is more complex, as illustrated by Whirlpool's worldwide operations. </li></ul></ul><ul><li>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. </li></ul>
  5. 5. 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
  6. 6. Whirlpool's global network <ul><li>Diana Farrell, director of the Global Institute at McKinsey & Company: </li></ul><ul><li>&quot; 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 .&quot; </li></ul>
  7. 7. The advantage of Whirlpool's global network <ul><li>1. To the company : putting the earnings of overseas affiliates to their best use anywhere in the world ->↑ competitiveness </li></ul><ul><li>2. To the macroeconomy : parent companies invest in new technologies and business opportunities that will eventually create new jobs at home and abroad. </li></ul>
  8. 8. Why Global Production Network (GPN)? <ul><li>Will low foreign wages , particularly in China and elsewhere in Asia, combined with generous subsidies from those countries, keep the global production networks mobile? </li></ul><ul><li>To stay or to move, that is a question! </li></ul><ul><ul><li>As manpower required to make Whirlpool's appliances is declining, diluting the drawing power of lower wages. </li></ul></ul><ul><ul><li>Also consider the shipping costs and the investment it would take to build a new factory in Mexico or a new factory in China </li></ul></ul>
  9. 9. Why Global Production Network (GPN)? <ul><li>Parts suppliers play a big role in determining where new factories are put, or existing ones are expanded. </li></ul><ul><li>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. </li></ul><ul><ul><li>microwave ovens made in southern China </li></ul></ul><ul><ul><li>less-costly front-loading washing machine made in northern Mexico, Monterrey. </li></ul></ul><ul><li>Location wage, transport cost, investment cost, parts suppliers… </li></ul>
  10. 10. Globalization: It's Not Just Wages <ul><li>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! </li></ul><ul><li>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↑ </li></ul>
  11. 11. ii. Global Commodity Chains <ul><li>“ A commodity chain refers to the whole range of activities involved in the design, production, and marketing of a product….” (Gereffi, 2002, page 1) </li></ul>
  12. 12. Producer-driven commodity chains <ul><li>Large, usually transnational, manufacturers play the central roles in coordinating production networks (including their backward and forward linkages). </li></ul><ul><li>This is characteristic of capital and technology intensive industries such as automobiles, aircraft, computers, semiconductors, and heavy machinery . </li></ul>
  13. 13. 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
  14. 14. Buyer-driven commodity chains <ul><li>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. </li></ul><ul><li>This pattern of trade led industrialization has become common in labor intensive, consumer goods industries such as garments, footwear, toys, handicrafts, and consumer electronics. </li></ul>
  15. 15. 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)
  16. 16. Buyer-driven commodity chains <ul><li>Manufacturers without factories </li></ul><ul><li>footwear production (e.g. Gereffi and Korzeniewicz, 1990) </li></ul><ul><li>apparel industry (e.g. Gereffi 1999a, Bair and Gereffi, 2001) </li></ul><ul><ul><li>responsible for product specification, purchase orders and marketing, </li></ul></ul><ul><ul><li>production is dispersed to independent companies who operate as ‘original equipment manufacturers’, OEM, often with their own networks of suppliers and subcontractors. </li></ul></ul><ul><li>The value is added not in the production stages, but at the stages of ‘branding’ and marketing. </li></ul>
  17. 17. Economists’ Views: Slicing value chain/ Outsourcing <ul><li>The value chain has become global; increasing ‘disintegration of production’ </li></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>The international organization of production leads to the observed increase in trade in intermediate goods and in foreign direct investment. </li></ul></ul><ul><li>(Feenstra, 1998) </li></ul>
  18. 18. Corporate Reorganization <ul><li>Breaking up of the conglomerate </li></ul><ul><li>Markets have been intolerant towards conglomerates and forced firms to sell pieces which do not naturally belong to their core activity. </li></ul><ul><li>The emergence of the “human capital firm”: flatter hierarchies inside firms </li></ul><ul><li>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. </li></ul>(Holmstrom and Kaplan, 2001)
  19. 19. Globalization and the ‘New Enterprise’ <ul><li>New assets of the firm: human capital and talent </li></ul><ul><li>In the past it was specialized in inanimate assets (its machines) what made the firm unique and gave its owner power in the firm. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>(Marin and Verdier, 2003)
  20. 20. References <ul><li>Feenstra, R.C. 1998. “Integration of trade and disintegration of production in the global economy”, Journal of Economic Perspectives 12: 31-50. </li></ul><ul><li>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 </li></ul><ul><li>Henderson, J. 1998. “Danger and Opportunity in the Asia-Pacific” in G. Thompson (ed.), Economic Dynamism in the Asia-Pacific . London, Routledge: 356-84. </li></ul><ul><li>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. </li></ul><ul><li>Marin D. and  T. Verdier, 2003. “Globalization and New Enterprise”, Journal of the European Economic Association , Volume 1, Numbers 2-3, pp. 337-344. </li></ul>