Multinational Corporations Shape Global Value Chain Development
products, given their complexity. MNCs contribute about 80 percent of exports in these sectors. Regional processing is the second most highly traded product group, and MNCs contribute about 70 percent of exports within it. Given the bulky or perishable nature of these products, most of the trade in this group happens in regional rather than global value chains. Labor-intensive goods have a much lower total trade value than knowledge-intensive goods because their unit prices tend to be very low, but MNCs still play a leading role in the GVCs of these goods, especially textile and apparel. The contribution of MNCs increases with tradability in the service sector. Among labor-intensive services, transportation and wholesale and retail are the most tradable: transportation directly moves goods and people across borders, and retail firms deliver goods to final consumers. MNCs account for about half of global exports in these sectors. For knowledge-intensive services, financial services, information technology, and telecommunications are the top three traded sectors. MNCs contribute about 70 percent of these sectors’ global exports. Publishing and broadcasting, professional services, and research activities are also highly tradable, and MNCs’ shares in these sectors are greater than 50 percent. Among all the service sectors, education, health and social services, and public administration are the least tradable and are almost entirely dominated by domestic, non-MNC firms.
Multinational corporations’ objectives and strategies in global value chains The business objectives and strategies of MNCs shape the development of GVCs. GVCs encompass a myriad of firm-to-firm relationships and the full range of activities required to bring a product or service from conception to its end use. These activities must be managed and coordinated. MNCs organize their international production networks via investment, trade, people, and information flows. Their production decisions have profound implications for the global economy and for the development of its subunits (Buckley 2009, 2010; Buckley, Driffield, and Kim, forthcoming; Buckley and Strange 2011). MNCs have three main objectives in organizing their global production: lowering production costs, mitigating risks, and enhancing market power (figure 2.6). These three objectives are rooted in the theory of firms, industrial organizations, and international trade and investment. The “make or buy” decisions of MNCs define the firms’ boundaries; their “where and how to make” decisions determine their geographic distribution (in the form of FDI or NEM); and their “where and how to buy” decisions link suppliers from multiple locations into their global production networks with varying coordination intensity. MNCs balance rewards and risks in all these decisions, and they leverage their market power to raise their markups or negotiate better terms of trade with suppliers. These three objectives, and MNCs’ business strategies, are inherently interconnected—MNCs often make purchasing, production, and selling decisions simultaneously. This chapter focuses on the purchasing and production decisions and strategies because these decisions are most relevant for GVCs.
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