Global Markets Sustainability and Digitalization

ABC on
Globalization

Francesca Spigarelli (Full Professor of Applied Economics)

 Outline

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 Outline

1
 Globalization is the result of the growing connectedness and
interdependence among nations, individuals, and businesses worldwide

Economic "globalization" is a
historical process, the result of
human innovation and
technological progress. It refers to
the increasing integration of
economies around the world,
particularly through trade and
financial flows. The term sometimes
also refers to the movement of
people (labor) and knowledge
(technology) across international
borders.
See IMF (2000)
A new dilemma
 Globalization: critical stages

In the last few decades, a series of technological, institutional,

and political changes have transformed the organization of
production processes across countries.

1. First Globalization (1870-1914): invention of the steam

engine, applied to maritime and railroad transportation.
– transportation became more affordable  allowing
economical consumption in one country of goods
manufactured in another (geographical separation
between production and consumption)
– major increase in international trade flows
 Globalization: critical stages

2. Transportation Deregulation (late 1970s-early 1980s): a more

flexible and spatially dispersed mode of production had taken
hold.
– production was broken down into specific tasks, some shifted
around to foreign and often distant countries, out of the
boundary of the firm through external contracting  factories
separate geographically (offshoring).
– rise of global value chains (GVCs)
– increasing competition lowered consumer prices
 Globalization: critical stages

3. New Globalization (1990s) rapid spread of Information and

communication technology (ICT Revolution).
– advent of the internet enabled a new breed of logistics,
distribution, finance, and business services providers
• made the real-time management of business activities both
feasible and inexpensive (Global value Chains)
• further facilitated the global outsourcing and offshoring of
manufacturing activities

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 Globalization: contribution to trade

More favorable international trading environment

– Regulatory reforms in transport and infrastructure
• encouraged investment in roads and ports, improving
logistical efficiencies in many countries
– Tariffs and non-tariff trade barriers reduced
– Decreasing average international shipping costs
– Innovations in logistics
• expansion of shipping capacities through the adoption of
standardized containers
 Globalization: contribution to trade

– Improved feasibility and affordability of real-time trade

management
– Increase in manufacturing offshoring and international
outsourcing

Offshoring (affiliates) International outsourcing

• geographic dispersion of
labor-intensive stages of
production
• often  relocation from
industrialized economies
to low wage, labor
abundant developing
countries
(suppliers)
• hiring a third party (located in
another country), with no
equity links in the company,
to perform certain production
activities or services
 Outline

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 Mode of entry in foreign markets
1. EXPORTING 2. INTEGRATING

INDIRECT Non equity mode of entry

Export house Joint venture

Trading company Licencing

Franchising
Export consortium
Co production – supply agreeements
Buyers
Cooperation agreement (R&D,
DIRECT services, marketing, management)
Agent or Distributor FDI
Branch FDI in sole venture
Sellers of the firm FDI in joint venture
Mode of entry in foreign markets
 Foreign direct Investments

 The company maximizes the organizational efforts and financial

penetration abroad.
 The establishment of commercial or production subsidiaries allows
the company to delocalize/globalize certain activities, typically
related to specific stages of production (production delocalization or
expansion) or marketing/distribution.
 FDI can consist in the creation from scratch of an operating unit
(greenfield entry), or in the acquisition of a local firm (minority,
equal or control share - non-greenfield entry).

foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits
earned from overseas operations, and intra company loans". In a narrow sense, foreign direct investment
refers just to building new facility, and a lasting management interest (10 percent or more of voting stock) in
an enterprise operating in an economy other than that of the investor.
 Outline

3
 Globalization: drivers of GVCs

Previously Nowadays

Companies manufactured and sold Most finished products/services

products/services primarily in one
country, either individually or
through one-to-one supplier
relationships
result from
manufacturing/assembly in
multiple countries, through a
coordinated chain stretching across
complex firm networks

What made such a change possible?

• The concept of Global Value Chain (GVC) is strictly related to

Globalization
– Motivated companies to restructure their operations
internationally
– Evolution of Globalization  impact on GVCs development
 GVCs before the pandemic
•Firms have leveraged
 advancements in transport/communication and trade
reforms
•to integrate their geographically dispersed strategic partners,
suppliers and customers
•into complex network structures, referred to as global value chains
(GVCs)
–governed centrally by lead firms that coordinate the activities of a
myriad of suppliers and sub-suppliers worldwide
•Intra-product specialization
–firms (or countries) are specialized in some but not all stages of the
production process
–So various tasks of a production process are physically separable and
tradable.
 Economic Impact of GVCs
• In current scenario  GVCs became major drivers
– of structural economic changes
– at the global, regional, national, industry, and firm levels.

Impact on Economic Development

Competitiveness
Shifted from national boundaries
of the “Made in” label,
to international production networks
of the “Made in the World”
Stimulate long-lasting productivity gains
through:
1) greater specialization in specific
activities within value chains
(offshoring tasks at which firms are
comparatively less efficient)
2) foreign inputs
3) technology spillovers
4) knowledge transfer
 Economic Impact of GVCs
Labor effects

• Developed economies
a.substitution effect (offshoring): replacing domestic labor with
foreign labor
b.improved labor productivity effect (outsourcing): specialization
reducing labor demand per output unit
c.scale effect (offshoring): less production costs, lower prices and
higher demand, increases demand for labor to produce higher
output.
 Economic Impact of GVCs
Labor effects

• Developing economies
– GVC participation creates more exporting opportunities (and
job growth) for firms in developing countries with large labor
surplus and low wages:
a.demand effect: increasing demand for skilled labor in the
local labor market
b.skill-upgrading effect: local labor receives trainings from
MNEs
c.spillover effect: local labor moves from MNEs to local firms,
bringing acquired skills and knowledge with them.
 Economic Impact of GVCs
Trade barriers

• Including border taxes and tariffs, transportation and insurance

costs, and un-harmonized regulatory measures.
– trade costs increase production costs by 18 percent, on
average, at each stage of the value chain.
• Asymmetrical nontariff measures (NTMs), such as regulations,
licensing requirement, contract and institutional weaknesses,
and consumer preferences
– account for 2/3 of compounded trade costs. These NTMs are
found to disproportionately burden developing countries.
 Foundations of GVCs
Value Chain Michael Porter (1985)
 Foundations of GVCs
Value Chain
Primary production activities Secondary/support activities
1. Inbound logistics • facilitate the efficiency of the primary ones
• receiving raw materials, warehousing, managing inventory 1. Procurement
2. Technology research
2. Operations
3. Product development
• converting raw materials into a finished product/service
4. Human resource management
• e.g. design, production, processing, assembly
5. Firm infrastructure building
3. Outbound logistics
• delivering the product/service to the final consumer

4. Marketing and sales

• incentivizing potential customers to purchase a
product/services
• e.g. distribution, advertising, pricing, finance
5. Post-sale services
• improving consumer experience
• e.g. customer services, repairs or maintenance services
• Each activity creates and adds value
to the product/service at every
stage
• A firm must understand its own
value chain to develop and sustain a
competitive advantage
 Foundations of GVCs
Supply Chain

• Defines the links between companies which interchange materials and

information in the logistics process
• from
– acquiring unprocessed raw materials
– to manufacturing
– and delivering finished goods/services to end users

• through a network of distributors and retailers

GVCs as international extension of these definitions

 Definition Global Value Chain

One common approach for developing countries to integrate into GVCs is by attracting foreign direct investment

Full range of production activities that multiple firms, located across different geographic spaces
(at least 2), carry out to bring a product or service from its design to its end use, and beyond

value added
• Each stage increases the product/service value, with at least two of them being deployed in
different countries
– use of foreign value added in production, especially if destined for exports

• Key distinguishing features of GVCs

– international, inter-firm flow of know-how (between lead firms, suppliers, distributors),
in addition to the trade of products
• imports matter as much as exports to successful GVCs
– consequence  finer international division of labor and greater gains from specialization
– allow resources to flow to their most productive use, across countries, sectors, within
sectors across stages of production
• GVCs magnify the growth, employment and distributional impacts of standard
trade

04/03/2021 Globalization, FDI, GVC - 18.03.2021 26

 Linkages
Countries can participate in GVCs by engaging in either backward or forward linkages

Backward Forward
linkages linkages

Country A uses (or sources) inputs from

Country B for domestic production
Sourcing foreign inputs:
useful if required production inputs are
– unavailable locally
– available but deficient in quantity, quality or price

Goods/services produced in foreign countries can be

• final products (local consumption and investment)
• intermediate products (inputs), then exported further
elsewhere
 Linkages
Countries can participate in GVCs by engaging in either backward or forward linkages

Backward Forward
linkages linkages

Country A supplies inputs that are used for production in

Country B
Supplying production inputs to firms in other countries: important
for
– developing countries
• seeking entry into new industries
• learning to produce for export markets
– industrialized economies
• supplying complex, specialized and high value inputs
• e.g. China 80 % of world production of ballpoint pens,
but has to import pen tips from Japan, Germany and
Switzerland
 GCV: global production sharing
3 different production configurations, affecting manufacturing locations and
interactions between firms

1. sequential snake-like
– goods moving in a sequence from
upstream to downstream, adding
value at each stage

2. simple spider-like
– multiple parts and components
converge to an assembly plant

3. hybrid “sniker” structure

– complex mix of 1. & 2.
– most production networks
 GVC governance
Set of organizational forms and practices for managing a specific division of
labor arising between firms in a GVC

Observation:
–GVCs are rarely coordinated spontaneously through market exchange
–They are rather governed through strategies and decision-making on how to manage
production, trade and access to final markets globally, regionally, nationally and locally
• implemented by specific actors, usually large (lead) firms
• Have to make choices regarding
– In-house making of parts/components or provision of services, or procuring
them on the market, or adopting hybrid longer-term outsourcing relationships
with suppliers
»if outsourced to suppliers, specify the characteristics (such as price and
volume) of the good or service, identify the qualifications or attributes that
suppliers should possess.
 GVC governance
• Other companies in the chain directly produce, transform, handle or trade products
and services
• Actors playing a key role in constructing and maintaining GVCs: states’ (and
international organizations’) interventions
– facilitative  intentional architects of GVCs
– regulatory  regulate (or deregulate) GVC functioning
– distributive  choose to redistribute (or not) the wealth enerated through GVCs
– make active choices (important direct actors in GVCs)  state-owned enterprises
and public procurement
• GVC governance is also shaped by indirect actors:
– civil society organizations, trade unions, consumer groups, networks of experts and
policymakers, industry groups and multistakeholder initiatives
 GVC: forms of inter-firm governance
1. Market
• central governance mechanism 
price, not lead firm
• little cooperation  suppliers
make products with minimal input
from buyers
• transactions are relatively simple
• cost of switching to new partners
is low

2. Modular
• suppliers make products to a
customer’s specifications 
complex buyer-supplier
interactions
• suppliers use generic machinery,
spreading investments across a
wide customer base  low
switching costs
 GVC: forms of inter-firm governance

3. Relational
• frequent interactions and
knowledge sharing
• buyers and sellers rely on
complex information that is not
easily transmitted or learned
(mutual dependence) 
require trust (regulated
through reputation etc.)
• lead firms specify what is
needed and exert some level of
control over suppliers
• switching costs and complexity
tend to be high (takes time to
build)
 GVC: forms of inter-firm governance
4. Captive
• small suppliers are dependent
on one or a few buyers setting
conditions  power
asymmetry
• high degree of monitoring and
control by the lead firm
• high switching costs

5. Hierarchy
• lead firms develop and
manufacture products in-house
(vertical integration and
managerial control)
• used when product
specifications cannot be
codified, products are complex,
or highly competent suppliers
cannot be found
• less common than in the past
 Recommended Reading
What Is Globalization?
And How Has the Global Economy Shaped the United States?

Key questions (read till “China Rise box”):

• Key effects of globalization
• How did globalization displaced some workers, while supporting high-skill jobs?