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November 2007 Issue No. 1
Accessing Markets, Technology, Experience
Role of Global Value Chains
Global value chains are reshaping small number of primary commodi-
international business and offer ties in CAREC exports; limited trade
significant opportunities for CAREC in manufactures; the concentration
economies to expand trade and of trade in a small number of mostly
support sustainable growth by de- larger CAREC economies; limited
veloping non-traditional exports.1 success in attracting foreign direct
Involvement in global value chains investment outside of energy and
could provide access to new mar- natural resource sectors; and the
kets as well as the technological, unrealized potential for trade, par-
managerial, and market-related ticularly with neighboring Europe
know how of leading international and a rapidly growing East Asia.2
businesses. However to enter these Improvements in transport sys-
value chains and benefit from these tems and in the trade environment
opportunities CAREC enterprises in CAREC economies are necessary,
must meet a range of demanding but will not be sufficient to expand
requirements. This poses new chal- and diversify linkages of CAREC
lenges to governments and firms, enterprises to international markets.
both large and small; and would re- Such linkages are also conditioned
define the framework for business- by the competitive structure of
government relations. This CAREC global industries. The ability of
Notes introduces the global value CAREC enterprises to expand ex-
chain concept and outlines some of ports of fresh fruit and vegetables
the opportunities and implications to key markets in Europe, North
for CAREC enterprises. America, or Asia, for example, will
depend not only on overcoming
Reaching International Markets physical and non-physical barri-
A key challenge facing CAREC ers to trade within and beyond
economies is how to link domestic the CAREC economies. It also will
enterprises more effectively to inter- depend on the ability of CAREC en- About the Author
George Abonyi is a Senior Advisor
national markets in order to achieve terprises to be competitive suppliers to the CAREC Program; and Visiting
sustainable growth and develop- to global retailers, such as grocery Professor, Department of Public
ment. This is particularly important store chains Carrefour and Tesco Administration and Executive Education
Programme, Maxwell School, Syracuse
given the continuing dominance of a that increasingly control access to University.
international markets within the forming the global economy with
framework of global value chains. important implications for the com-
Integrating into the international petitiveness of firms and the pros-
trading system increasingly means perity of nations. The proportion
participation in global value chains.3 of goods and services conceived,
This poses important opportuni- produced, and consumed entirely
ties and challenges to the CAREC within one country—or within one
economies, and to regional coop- firm—is rapidly shrinking. Techno-
eration. Global value chains pro- logical and managerial innovations
vide opportunities for enterprises, and the removal of constraints on
including small- and medium-scale the cross-border flow of resources,
enterprises, to build new com- goods, services, and capital have led
petitive capabilities and enter into to the emergence of global value
large-scale exports by focusing on chains (Figure 1). Global value
a few selected activities and out- chains and associated production
puts. But to do so, enterprises that networks (Box 1) involve the frag-
supply global value chains must mentation, dispersal, coordination,
meet a multiplicity of demanding and re-integration of production-
requirements related to quality, related activities among firms in
quantity, price, timely delivery, and geographically dispersed locations
flexibility. (Box 2). They are emerging as the
organizing framework for produc-
The Transformation of tion, investment, and trade in an
International Business expanding range of product groups
The reorganization and relocation such as garments, agro-industry,
of international business is trans- furniture, automobiles/auto-parts,
Chain
Figure 1. The Apparel Global ValueThe Apparel Global Value Chain
Figure 1.
Textile companies Apparel manufacturers All retail outlets Retail outlets
North America
Department
stores
U.S. garment factories
(designing, cutting,
sewing, buttonholing,
ironing) Brand-named Specialty
apparel stores
companies
Cotton, Fabric
Natural wool, silk, (weaving, Domestic and
Yarn (spinning) Mexican/Caribbean Mass
Fibers etc. knitting,
basic subcontractors merchandise
finishing)
chains
Overseas
Asia buying
offices
Asian garment Discount
Synthetic Oil, natural Synthetic contractors chains
Petrochemicals
Fiber gas, etc. fibers
Domestic and overseas Trading Off-price, factory
subcontactors companies outlet, mail order,
others
Raw material networks Component networks Production networks Export networks Marketing networks
Source: Figure 1, Gereffi, G. and o. Memedovic, The Global Apparel Value Chain, UNIDo, Vienna 2003.
Source: Fig. 1, Gereffi, G. and O. Memedovic, The Global Apparel Value Chain, UNIDO, Vienna 2003
CAREC NOTES November 007 Issue No. 1
consumer electronics, telecommuni- and services within the framework
cations, IT, as well as business and of global value chains and associ-
health services.4 ated production networks. This has
Although many large multi- resulted in growing task-related spe-
national enterprises continue to cialization by firms in the production
provide a variety of products and of goods and services, and the cor-
services on global markets, they responding acceleration of growth
increasingly purchase inputs and in intra-industry and intra-product
components from smaller firms in trade, as compared with traditional
widely dispersed locations that serve trade in final products.5
particular industry niches. Global The transformation of inter-
trade increasingly involves exports national business through the
of parts, components, subassemblies, emergence of global value chains
Box 1: Key characteristics of Value Chains, Production Networks
A value chain describes the organization of production of particular products or services such as garments, automobiles,
or computers. It refers to the full range of value-added activities required to bring a product from its conception, through
design, sourcing raw materials and intermediate inputs, production, marketing, distribution and service support to final
consumers. Value chains become ‘global’ when their component activities are geographically dispersed across borders
to different countries.
A production network represents the set of linkages within an enterprise or among a group of firms in particular value
chains for producing specific products such as a particular type of computer, mobile phone, jeans, or car. This can take the
form of production relationships among subsidiaries or affiliates of a multinational enterprise. Alternatively and increas-
ingly they involve outsourcing and subcontracting to independent firms. As a result, competition within the framework
of global value chains is increasingly between networks of enterprises, rather than only individual firms.
Key characteristics of global value chains and associated production networks:
• Governance: Global value chains generally involve a key role for lead firms, often global brands such as Levi in gar-
ments, Carrefour in food retailing, Ford in automobiles, or Ericsson in telecommunications. These lead firms provide
product, market, and technical information with the expectation that lower-tier suppliers will maintain and improve
performance to meet global competitive standards. Lower-tier suppliers, in turn, invest in equipment, skills, and
specialization necessary for producing within the framework of a production network, with the expectation that lead
firms will continue to use their outputs—and over time, provide opportunity for upgrading.
• Standards: Global markets are governed by an increasing variety of stringent product and process standards that
suppliers must meet. Examples of the diversity of standards include general international standards such as ISO 9000
(quality) and ISO 14000 (environment); industry-specific standards, such as Hazard Analysis and Critical Control Point
(HACCP) in the food industry; region-specific standards, such as QS 9000 (quality in autos originating in the United
States); and firm-specific standards to ensure consistency, reliability, and differentiation of products.
• Global suppliers: Global brands and retailers are increasingly reliant on a small number of “first-tier” suppliers with
global reach such as Li & Fung for Levi in garments, Flextronics for Ericsson in electronics and telecommunications, and
Visteon for Ford in auto parts. These first-tier suppliers play a critical role in determining and organizing participation
by lower tier suppliers in value chains. They are increasingly driving global investment, production, and trade patterns
with significant influence on the export competitiveness of nations and the performance of local enterprises.
• Upgrading: Growing intensity of global competition, shortening of product life cycles, demanding buyers, and
falling barriers to entry in many industries are requiring continuous innovation and increased efficiency throughout
the value chain. Such upgrading by enterprises within value chains can take the form of increasing efficiencies in the
manufacturing process; improving existing products or developing new products; “adding value” by moving upstream
from manufacturing to product design; or using existing capabilities to move to a more attractive value chain.
Issue No.1 November 007 CAREC NOTES
Global value chains offer creates opportunities for new en- the right quantity, with the required
trants in the international economy. quality, at the right time, and meet
significant opportunities As production systems become an expanding range of increasingly
decentralized, fragmented, and stringent global standards on, for
for CAREC economies to more specialized, new market op- example, labor conditions and the
portunities emerge for all types of environment. The payoffs from par-
expand non-traditional firms, including small- and medium- ticipating in global value chains can
scale enterprises, to enter global be high, but so are the requirements
exports markets, and upgrade into higher for entry (Box 3).
value export activities through spe-
cialization. Many firms, particularly Implications for CAREC
smaller enterprises, are finding that Economies
success and “creating value” may be Global value chains offer significant
achieved through specialization in opportunities for CAREC economies
a limited set of activities, outputs, to expand non-traditional exports.
and market niches. For example, They allow qualified CAREC en-
even simple components, such terprises to concentrate on specific
as hubcaps, can be produced for components or activities in particular
regional and global markets by a value chains in which they enjoy
supplier in Toyota’s or Ford’s pro- competitive advantages, due for
duction network. Specialized niche example to low-cost, relatively
markets, such as organic fruits and skilled labor. They can also provide
vegetables, can be regional and the foundations for an effective
even global in nature if the buyers strategy for the processing of raw
are global retailers such as Car- materials where CAREC economies
refour or Tesco. However, taking are already competitive. This could
advantage of such opportunities include processing local cotton into
requires that enterprises be capable textile yarn, fabrics, or clothing,
of delivering specified products, in within the framework of the global
Box 2. Producing Levi Jeans in the Apparel Global
Value Chain
To produce a line of garments such as jeans, a global brand such as Levi
might purchase South Korean yarn; have it woven and dyed in Taiwan by a
subsidiary; send the fabric to be cut in Bangladesh by a subcontractor; ship
the pieces for final assembly to affiliates in Cambodia and Thailand, where the
garments would be matched with Japanese zippers, and deliver the finished
product to geographically dispersed affiliated retailers in North America and
Europe. In practice, global brands such as Levi increasingly do not manage
the production process of jeans themselves. These activities are likely to be
coordinated for Levi by a first-tier global supplier, such as Hong Kong-based
Li & Fung. This particular set of firm-specific linkages, within the broader
framework of the global apparel value chain constitutes a particular—in this
case Levi’s—international production network for jeans.
Source: Based on Magretta, J., “Fast, Global, and Entrepreneurial: Supply
Chain Management, Hong Kong Style”. Harvard Business Review, September-
October 1998.
4 CAREC NOTES November 007 Issue No. 1
apparel value chain; or linking lo- activities and relationships outside
cal agricultural producers to agri- the firm related to value chain link-
business value chains. Within the ages. For example, automaker Ford
framework of global value chains is dependent on first-tier suppliers,
higher-tier buyers can provide access which in turn depend on lower-tier
to technological, managerial, and component suppliers to perform to
market-related know how, and to in- required standards of quality and
termediate inputs. But to compete in efficiency, as inter-firm logistics and
the new world of international busi- import/export procedures shape
ness, CAREC enterprises must meet critical delivery times. Competitive
demanding requirements. This poses performance is a function of link-
new challenges to governments and ages among enterprises within the
firms, and redefines the framework framework of an industry value
for business-government relations. chain, rather than only of individual
General policy-related implications firms. Value chain analysis means
of global value chains include the examining enterprises in a given
following.
Establishing a Global Value Chain
Box 3. Fresh Fruit and Vegetable Industry Global
mindset: A fundamental challenge Value Chain
for effective participation in global
The fresh fruit and vegetable industry is one of the most vibrant in international
value chains is for CAREC govern-
trade. It is characterized by increasing concentration through global retailers/
ments and enterprises to develop
supermarkets such as Carrefour and Tesco in leading markets such as North
a ‘GVC mindset’ as the basis for
America, Europe, and increasingly Asia. As they have expanded in size, global
achieving systemic efficiencies in
retailers are exercising growing influence on the industry value chain, often
value chains, rather than focusing
at the expense of traditional global food producers such as Nestle, Unilever,
only on improving individual firm-
and Kellogg. These global retailers, although usually not directly involved in
level performance. In the traditional
production, are exerting increasing control over product, production process,
concept of exporting, an enterprise
and suppliers through strictly enforced market and firm-specific standards.
makes a product for the domestic
Along the way, they are increasingly using a smaller number of large-volume
market then finds foreign buyers.
first-tier suppliers, which in turn are consolidating and rearranging lower-tier
Consistent with this, the firm has
suppliers within their production network.
been the basic unit of analysis in
Firms wishing to enter the fresh fruit and vegetable global value chain
looking for ways to improve export
must be able to provide the necessary scale, control (traceability), quality,
performance. But supplying interna-
price, reliability of delivery, and innovation capability before being considered
tional markets increasingly involves
a potential supplier. This requires efficient logistics systems and import/export
making parts of products or services
procedures to be in place in given countries; along with business develop-
to specifications given by or defined
ment services that support the acquisition of key information and skills by
jointly with global buyers. This pro-
local producers.
vides opportunities for enterprises to
As a consequence, both potential payoffs and barriers to entry have
specialize, but requires value chain-
increased significantly in the fresh fruit and vegetable industry value chain.
related coordination among firms.
Those producers able to upgrade production and management systems and
The basic shift in perspective for both
meet requirements can access expanding international markets, realizing
governments and enterprises is to
growth in scale and revenues, and opportunities for upgrading. For example,
see firm performance in the context
the trend to product differentiation such as organic produce is creating
of particular value chains.
significant opportunities for qualified producers to serve niche markets that
are regional or even global in nature. However, suppliers unable to meet the
Value chain analysis: Performance
necessary requirements increasingly find themselves in stagnant, uncertain,
is determined not only by what
unprofitable segments of the business.
happens within a firm, but also by
Issue No.1 November 007 CAREC NOTES
Vertical and horizontal chain and linkages among them creation exist anywhere along the
to see how and where they can be industry value chain—in any indus-
cooperation through strengthened to gain production and try—through specialization and up-
marketing efficiencies; or to enable a grading. Enterprise-level upgrading
enterprise clusters can more effective vertical and horizon- requires access to information, tech-
tal flow of information, innovation, nology, and finance; and is closely
support the participation inputs, and resources. Focus is also tied to incentives that encourage or
on more general factors influenc- discourage learning by lower-tier
of CAREC enterprises ing performance in particular value suppliers within value chains.
chains, including the related legal,
in global value chains regulatory, and policy environment; “Match the best, or outsource to
and the availability and quality of the best”: To be competitive, enter-
support services such as financing, prises—both small and large—have
equipment, training, and informa- to continuously match their perfor-
tion technology. This analysis can mance to the “best-in-class” for each
reveal constraints on value chain- activity, function or output such as
related performance that may re- manufacturing, design, logistics, or
quire attention such as inter-firm marketing. Unless they are able to
logistics, particular import-export “match the best” they are unlikely
procedures, or more effective firm- to compete effectively on interna-
level cooperation through enterprise tional markets as suppliers in global
clusters. value chains given sourcing options
available to global buyers in most
Opportunities for new entrants: industries.
In an increasingly wide range of
industries it is now possible for en- Cooperate to compete: Individual
terprises, however small, to become small- and medium-scale enterprises
internationally competitive based may face significant constraints in
on a single function or a small num- responding to sourcing opportuni-
ber of functions/activities as suppli- ties provided by global value chains.
ers in global value chains. Similarly, However, vertical and horizontal co-
it is possible through participation operation through enterprise clusters
in global value chains to achieve can provide a potentially effective
large-scale exports of specialized mechanism to achieve collective ef-
outputs, such as organic fruits and ficiencies through joint action, and
vegetables, in niche markets that are support the participation of CAREC
regional or even global in scale. enterprises in global value chains.
Vertical linkages are relationships
Opportunities for value creation: among firms at different levels in the
In a world of global value chains value chain, for example between
it is not the industry or sector that suppliers of inputs and components,
is most important, but a firm’s assemblers, and distributors to final
core capabilities in a particular markets. Linkages among vertically
industry value chain. For example, related firms can improve enterprise
a competitive supplier of hubcaps access to new markets, skills, tech-
or fan belts or zippers can achieve nology, information, and knowledge.
significant success in regional or Horizontal linkages among firms at
even global markets. Value creation the same level within a value chain
is not linked only to final products can allow for volume purchasing
and brands: opportunities for value of key inputs including equipment,
CAREC NOTES November 007 Issue No. 1
raw materials, finance, and busi- creasingly critical element of global Endnotes
ness services. It can also expand value chains, delivering products 1
This paper draws from, Abonyi,
joint production capacity for meet- in the right quality and quantity, George, Linking Greater Mekong
ing large orders on a regular basis and on time. Basic transport infra- Subregion Enterprises to Internation-
through joint economies of scale; faci- structure is no longer sufficient for al Markets: The Role of Global Value
litate specialization in production; competitive success. Firms in global Chains, International Production
Networks, and Enterprise Clusters.
and strengthen bargaining power. value chains require not only low
Studies in Trade and Investment 59,
Enterprise clusters, or cooperative transport costs, but also a host of
United Nations Economic and Social
groups of firms in the same or related increasingly sophisticated logistics Commission for Asia and the Pacific
industry value chains, can therefore needs: short transit times, reliable (UNESCAP), Bangkok, 2007.
play a key role in linking small- and delivery schedules, careful handling 2
See Central Asia: Increasing Gains
medium-scale enterprises to interna- of goods, certification of product from Trade Through Regional Coopera
tional markets through global value quality, and security from theft and tion in Trade Policy, Transport, and
chains. damage. Similarly, trade regimes Customs Transit. Asian Development
and procedures must facilitate intra- Bank, Manila, 2006.
New challenges for development product flows in particular value
3
See for example USAID, “Trade, Mi-
strategy: Previously, development chains. If there are cumbersome cro, and Small Enterprises, and Global
strategy targeted foreign direct import/export procedures—rules, Value Chains”, United States Agency
for International Development, micro
investment by multinational enter- regulations, delays; and high import
Report, No. 25, February 2005; Unit-
prises—particularly global brands clearance charges on key inputs or
ed Nations Industrial Development
such as Toyota, Ericsson, or Motor- high export clearance charges on organization, Inserting Local Indus
ola—as a key means for developing outputs, it will be difficult for local tries Into Global Value Chains and
export capabilities. By investing in firms to become suppliers in global Global Production Networks (Vienna,
local subsidiaries and joint ventures, value chains. The challenge to coop- UNIDo, 2004).
multinationals served as an impor- eration among CAREC economies is 4
See for example United Nations
tant means for technology and skill to move toward a more integrated Conference for Trade and Develop-
transfer, and for accessing interna- approach to transport, trade, and ment, World Investment Report 2002.
tional markets. The challenge to transit—within the framework of (Geneva, UNCTAD, 2002)
firms and governments within the market-oriented and relatively open
5
The fragmentation of production
framework of global value chains, trade policy regimes—focused on and corresponding firm specializa-
tion in tasks is leading toward the
however, is that local producers specific industry value chains of
development of a new paradigm for
must increasingly already have shared regional interest. ■
international trade. See for example
required capabilities to be even con- A.S. Blinder, “offshoring: The next
sidered by first-tier global suppliers, industrial revolution?”, Foreign Af
or lead firms such as Carrefour or fairs, Volume 85, No. 2, March/April
Nissan. This includes both firm- 2006.
level capabilities, and competitive
support systems such as inter-firm
logistics services.
Regional Cooperation: Addressing
the opportunities and challenges
presented by global value chains can
provide new directions for CAREC,
building on the existing focus on
infrastructure and trade. As trade
within the framework of global
value chains increasingly involves
components and semi-finished
goods, logistics systems are an in-
Issue No.1 November 007 CAREC NOTES 7
About CAREC The CAREC Program includes Contact
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nomic Cooperation (CAREC) Pro- Republic of China (focusing on 20A Kazibek bi Street
gram is a robust development Xinjiang Uygur Autonomous Re- Arai Building, 4th Floor
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Mongolia, Tajikistan, and Uzbeki- Tel +7 727 291 8513/291 8527
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Fax +7 727 291 8670
ing to achieve a common purpose. stan. CAREC is also and alliance of
The Program’s overarching goal is multilateral and other international
CAREC Secretariat
development through cooperation, agencies active in promoting eco- Asian Development Bank
leading to accelerated economic nomic cooperation in Central Asia, 6 ADB Avenue
growth and poverty reduction. By namely the Asian Development Mandaluyong City
promoting and facilitating regional Bank (ADB), European Bank for 1550 Metro Manila, Philippines
cooperation in transport, trade, en- Reconstruction and Development, Tel +63 2 632 4444
ergy, and other key areas of mutual International Monetary Fund, Is- Fax +63 2 636 2444
interest, the CAREC Program helps lamic Development Bank, United
the countries of greater Central Asia Nations Development Programme, For more information,
realize their immense potential in and World Bank. ADB serves as the visit www.adb.org/carec
an increasingly integrated Eurasia. CAREC Secretariat.
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November 2007 Issue No. 1
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