Abstract
Global production networks have been an important feature of the world economy for several decades. They refer to the geographical location of stages of production (such as design, production, assembly, marketing, and service activities) in a cost-effective manner. Different production stages are increasingly located across different countries, linked by a complex web of trade in intermediate inputs and final goods. Multinational manufacturing firms and international buyers play a central coordinating role in guiding the geographical spread of production activities. Key decisions for a lead firm are which stages it keeps in-house, which it outsources to other firms and where it locates them. This type of sophisticated industrial organization is a far cry from the simple textbook notion of a single large vertically integrated factory situated in a country.
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- 1.
Baldwin and Gonzales (2014) use an example of car exports from Mexico to the United States to illustrate supply chain trade through the value added trade approach. They show that a $10 (million) car export from Mexico to the US may be made up of intermediates of iron and steel purchased abroad worth $3, intermediates of plastics and rubber bought in Mexico worth $2.5 and $4.5 of Mexican value added in the car industry.
- 2.
Dedrick, Kraemer, and Linden (2010) illustrate a production network for the assembly of the iPod from hundreds of parts and components across the planet. Apple (a multinational corporation based in the United States) leads such a network and conducts research and development, design, branding, marketing, and after-sales activities. Apple is estimated to realize profits worth between one third and one half of the iPod’s retail price. Toshiba (Japan) and Samsung (Republic of Korea), both from East Asia, realize an additional slice of profits by making high-value parts and components such as hard-disc drives, displays, and memory devices. Meanwhile, the final assembly stage of the iPod in the People’s Republic of China only sees as little as 2 % of profits.
- 3.
East Asia in this book refers to the ten member states of the Association of Southeast Asian Nations (ASEAN); the People’s Republic of China (PRC); Hong Kong, China; Japan; the Republic of Korea; and Taipei,China.
- 4.
However, the value added and profit accruing to the PRC may be relatively small as pointed out by Dedrick, Kraemer, and Linden (2010) in their insightful case study of the assembly of the iPod.
- 5.
Author’s estimates are based on the United Nations Comtrade database.
- 6.
Wignaraja (2015) undertakes a comparative, firm-level analysis of joining supply chain trade in five Southeast Asian economies to improve our understanding of fragmentation of manufacturing across borders. He finds that firm size (reflecting economies of scale to overcome entry costs) matters for joining supply chain trade with large firms playing the dominant role in Southeast Asian economies. However, firm size is not the whole story. Efficiency—particularly investment in building technological capabilities and skills—and access to commercial bank credit also influence joining supply chain trade.
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Wignaraja, G. (2016). Introduction. In: Wignaraja, G. (eds) Production Networks and Enterprises in East Asia. ADB Institute Series on Development Economics. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55498-1_1
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