In “The Global Economy: Organization, Governance, and Development”, author Gary Gereffi argues that while globalization of economic markets is a process that has been developing for centuries, today’s international trade has three aspects which represent a dramatic change in the nature of international trade.
The first new development is what Gereffi calls “Intraindustry trade in parts and components”. Across geographical boundaries, corporations have production networks. Gereffi uses Hummels, Rapaport, and Yi’s term “vertical specialization”, which means countries import parts of goods (or services) still in the development stages of production in order to export the final product. Much of today’s international trade deals in these unfinished goods in order to take ad
vantage of every possible profit opportunity. This contrasts with the vertical integration mode of production, also known as the Fordist method, which keeps production within a corporation. However, the immense success of intraindustry trade in parts of goods has resulted in the decline of the vertical integration method. Gereffi argues that this decline highlights the “importance of coordinating exceptionally complex interfirm trading networks of parts and components as a new source of competitive advantage in the global economy.”
The second change in international trade is the emergence of a physically, geographically separated global value chain (GVC). The GVC is closely related to the global commodity chain (GCC, explained in greater detail in the post below), but the GVC takes into account policy’s effect on the relative value of separate steps of the GCC in political organizations. The GVC allows companies to make exact competitive analysis of their GCCs. Gereffi quotes Bill Kogut, who argues that “the challenge of global strategy formulation is to differentiate between the various kinds of economies, to specify which link and which factor captures the firm’s advantage, and to determine where the value-added chain would be broken across borders.” The GVCs , then, not only help companies determine what activities will capture more profit, but also where, as policies of different governments or political organizations can result in a competitive advantage in physically different locations. Thus, through applying the GVCs, companies can create the comparative advantage of low cost and/or product differentiation. This is why multidomestic industries, corporations which act as separate companies across political boundaries, are losing ground to global industries, which successfully use GVC to obtain a comparative advantage.
Finally, the production networks themselves have changed. In this section, Gereffi emphasizes a few key terms which apply to the “complex network relationships that make up the global economy”. The first is supply chain, which refers to the “input-output structure of value-adding activities”. In other words, a supply chain is the basic structure of events which begin with the raw materials and end with the final product. A GVC examines the supply chain in order to find areas to improve profitability at each step in production. International Production Networks is a term which Gereffi uses to describe the process which occurs when trans-national corporations (TNCs) lead the initiative in investments across political boundaries, which are then followed by countries themselves. Global Commodity Chains, or GCCs, is a way of looking at the supply chain, especially the internal structure of a corporation’s chain. Gereffi splits GCCs into producer- and buyer- driven chains. Analysis with GCCs comes with the setting up of international production networks. Finally, Global Value Chains, or GVCs, “emphasize the relative value of those economic activities which are required to bring a good or service from conception…to delivery to final consumers, and final disposal after use”. The GVC is so important because it takes into account all possibilities and their profit value for the corporation.
The first new development is what Gereffi calls “Intraindustry trade in parts and components”. Across geographical boundaries, corporations have production networks. Gereffi uses Hummels, Rapaport, and Yi’s term “vertical specialization”, which means countries import parts of goods (or services) still in the development stages of production in order to export the final product. Much of today’s international trade deals in these unfinished goods in order to take ad
vantage of every possible profit opportunity. This contrasts with the vertical integration mode of production, also known as the Fordist method, which keeps production within a corporation. However, the immense success of intraindustry trade in parts of goods has resulted in the decline of the vertical integration method. Gereffi argues that this decline highlights the “importance of coordinating exceptionally complex interfirm trading networks of parts and components as a new source of competitive advantage in the global economy.”The second change in international trade is the emergence of a physically, geographically separated global value chain (GVC). The GVC is closely related to the global commodity chain (GCC, explained in greater detail in the post below), but the GVC takes into account policy’s effect on the relative value of separate steps of the GCC in political organizations. The GVC allows companies to make exact competitive analysis of their GCCs. Gereffi quotes Bill Kogut, who argues that “the challenge of global strategy formulation is to differentiate between the various kinds of economies, to specify which link and which factor captures the firm’s advantage, and to determine where the value-added chain would be broken across borders.” The GVCs , then, not only help companies determine what activities will capture more profit, but also where, as policies of different governments or political organizations can result in a competitive advantage in physically different locations. Thus, through applying the GVCs, companies can create the comparative advantage of low cost and/or product differentiation. This is why multidomestic industries, corporations which act as separate companies across political boundaries, are losing ground to global industries, which successfully use GVC to obtain a comparative advantage.
Finally, the production networks themselves have changed. In this section, Gereffi emphasizes a few key terms which apply to the “complex network relationships that make up the global economy”. The first is supply chain, which refers to the “input-output structure of value-adding activities”. In other words, a supply chain is the basic structure of events which begin with the raw materials and end with the final product. A GVC examines the supply chain in order to find areas to improve profitability at each step in production. International Production Networks is a term which Gereffi uses to describe the process which occurs when trans-national corporations (TNCs) lead the initiative in investments across political boundaries, which are then followed by countries themselves. Global Commodity Chains, or GCCs, is a way of looking at the supply chain, especially the internal structure of a corporation’s chain. Gereffi splits GCCs into producer- and buyer- driven chains. Analysis with GCCs comes with the setting up of international production networks. Finally, Global Value Chains, or GVCs, “emphasize the relative value of those economic activities which are required to bring a good or service from conception…to delivery to final consumers, and final disposal after use”. The GVC is so important because it takes into account all possibilities and their profit value for the corporation.
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