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AN INVESTMENT PERSPECTIVE ON GLOBAL VALUE CHAINS
FIGURE 2.6 Multinational corporations’ three objectives in organizing their global production Production costs • Outsourcing and offshoring • Modes of foreign involvement (equity, nonequity modes, arm’s length trade)
Supply chain management • Supply management • Supply chain coordination • Logistics management
Transaction cost and incomplete contracts • Contractual frictions • Level of control • Commitment of proprietary resources
Risks • External and Internal risks • Robustness vs. resilience Market contestability • Product differentiation • Influence price markups • Firm entry and exit
Market power • Research and development • Branding • Standards
Source: World Bank.
Lowering production costs MNCs spread their production networks across the globe to benefit from factor cost arbitrage and economies of scale. To lower their production costs, MNCs segment their stages of production and assign each stage to the internal or external units that can perform it most cost-effectively. This process is characterized by the “smile curve” of GVCs, in which the two ends of the value chain, typically conception and marketing, add more value to the product than the middle—manufacturing—part of the chain (figure 2.7). From R&D and product design to marketing and sales, the MNCled high-value-adding activities mostly concern intangibles, such as technology and branding, which constitute the core proprietary resources that enabled the MNC’s growth and global expansion in the first place. Labor-intensive production is usually offshored to lower-cost locations. Production segmentation, outsourcing, and offshoring are the most important distinguishing features of contemporary globalization (Arndt and Kierzkowski 2001). Production segmentation is usually the precondition for outsourcing. Both outsourcing and offshoring can increase production length, defined in this report as the number of firms (including cross-border intrafirm trade) a product or service must go through before reaching its final customer (Fally 2012; Wang et al. 2017). Production length captures the degree of specialization and complexity involved in the production process (Antràs et al. 2012; Wang et al. 2017). Offshoring and outsourcing define not only a firm’s boundary but also its geographic footprint. Offshoring lengthens production through cross-border intrafirm or interfirm trade, whereas outsourcing lengthens production through domestic or international interfirm trade (table 2.1). MNCs can set up their own subsidiaries or
