Chapter 6: The Global Production Structure
Introduction:
DiMicco: “A country that doesn’t create or make or build things is a country doomed to mediocrity.
Manufacturing, and the innovation that comes with it, is indispensable to the vitality of a great
nation.”
After WW2 US dominated global production but by the 1970’s the following caught up, up until the
1980’s: Europe, Japan, South Korea, China.
Global production
Transnational corporations (TNCs):
- Played massive role in shifting global production around the world
- Because of foreign direct investment (FDI) TNCs expanded outside their own home
countries. Most FDI flows were concentrated among developed countries like the US and EU.
Surprisingly Japan was left out even though 3rd largest economy. Countries like Japan and
India are because of their mercantilist regulations disadvantaged in the FDI competition. Key
drivers to the growing foreign investments are:
1. Economic liberalization
2. Technological change
- Outsourcing: Process widely used by TNCs of contracting other companies overseas for
goods and services. This creates “intermediate goods” which are inputs, parts, and
components used in production of finished goods.
- Sensitive to foreign exchange rates because their costs and revenues are denominated in
different currencies. An unexpected change can reduce revenues and raise the costs.
Reasons for overseas investing:
- Manufacturers and service providers want to be close to their customers.
- Global North want to exploit the low wages or cheap natural resources of the Global South.
- Unintentional reason: result of mercantilist policies designed to keep out foreign products.
Example: A foreign firm can get around the countries tariff barrier by installing a factory
there.
- When their home country’s currency is overvalued, it is more attractive to invest overseas as
well.
- Be able to directly access natural resources like minerals so they choose to invest in location-
specific advantages.
- SUMMARIZED: gain competitive advantage, be closer to customers, get around trade
barriers, mitigate currency risks, take advantage of special production environments.
Mercantilist concerns about global production
- Production is first of all highly charged political issue because it affects national security,
trade, employment, and income.
- Offshoring: corporations move their manufacturing or certain business function overseas.
Positive: global efficiency and cheaper prices for costumers. Negative: destroying homeland
manufacturing and driving down wages of blue-collar workers.
- Outsourcing: When you let other companies and factories make your military items you are
to dependent to that country and this weakens your country’s national security. Because
, when calculating a country’s war-fighting capabilities, it matters greatly who produces the
semiconductors and where.
- Scaling: which means turning new ideas into mass produced products. For example batteries
that abandon today’s commodity in manufacturing and can lock you out of tomorrow’s
emerging industry.
- Greatest concern: transfer abroad of valuable production technology. In the long term, the
balance of power between countries can be altered by the globalization of production of
advanced technology goods such as semiconductors.
- Insourcing (as counter idea): bring some of the manufacturing back to the home country.
Large transnational corporations and competition
Transnational corporations (TNCs) Part 2:
- Also called multinational corporations (MNCs)
- Controversial: because they operate cross borders it is hard for nation-states to control.
1. Can be listed by the value of foreign assets when you want to stress the size of their
foreign investments.
2. TNCs are huge and are mostly listed by the size of their market capitalization = the total
value of all their shares on public stock markets. This way of listing you see that the
Digital revolution was important for the world because 5 of top 6 are technology
companies (Apple, Microsoft, Alibaba). They focus on software, electronics, e-commerce.
3. You can also list them based on the size of the companies’ assets, market value, profits,
and revenues. These show that 4 of the worlds 10 biggest companies were Chinese
banks.
- Whatever way of listing: US, EU, Japan, and China dominate by far the top 50.
Neoliberalist view: Globalization is said to be a process that increases competition for the benefit of
all consumers. BUT even though neoliberalist reforms increased competition decreased.
- CAUSE: large firms wanted to increase their power by buying up smaller ones.
- CAUSE 2: global strengthening of intellectual property rights. Market consolidation allows
large corporations to abuse their market position and flex their political power vis-á-vis
governments. (structuralists are not surprised by this development.
Heterodox liberal Joseph Stiglitz: Oligopolistic markets like the pharmaceuticals and health
insurances, contribute to rising inequality. AND also led to higher prices.
Governance of TNCs
TNCs want a stable, liberal international order.
Production and economic activities can be “governed” by these mechanisms:
1. Governance can result from the strategic decisions of thousands of networked private
companies in global value chains.
2. Governance can be based on international investment agreements that are the result of
state-to-state negotiations.
Global value chains (GVCs) = “the full range of activities that firms and workers perform to bring a
product from its conception to end use and beyond. “.
, - Vertically integrated: Situation before GVCs when large companies owned most of their
supply chain, from the production of materials to manufacturing to wholesale distribution.
- Every GVC is governed by a lead TNC that organises the complex supply chain.
- Final market for products from GVCs are developed countries. Although some countries are
growing fat.
- The head TNC generally has the decisive influence on the GVC but this raises a question
which firms are responsible for governing the working conditions and business practices
within the GVC. Officially TNCs are not legally accountable for their suppliers’ actions but it is
expected that they sometimes do need to be responsible for their action within other firms
or with costumers. And need to be legitimate to their negotiations with other actors and act
to a corporate social conduct.
- Contributed to rising inequality in developed countries: they concentrated benefits into the
hands of large firms that have cut blue-collar jobs in developed countries and shifted
production to contractors in developing countries.
- Corporate social responsibility (CSR): Because it is clear TNCs have significant influence on
the living standards and working conditions of their workers through GVCs they are expected
to adopt this code whereby they address key social and environmental issues in their
business practices.
- Developing nations that want to industrialise nowadays just jump into a supply chain instead
of building a single-nation industry from scratch. Of course they want to climb up the latter
later on but that is difficult.
Organisation for Economic Co-operation and Development (OECD)
- Goal was to create a regime to govern the FDI like the WTO governs international trade : But
this failed.
- Attempt: to assure TNCs of “national treatment” which meant that the moment a firm
invested within a border of that country it will be treated as it is part of the country. So no
discrimination even if this means tax preferences and subsidies.
- Believe: recognition of this principle would make FDI more efficient and less vulnerable to
political forces.
Investor-state dispute settlement (ISDS) = Under ISDS, TNCs can take their disputes directly to
independent international arbitration bodies that issue binding rulings that can sometimes compel
states to award damages to foreign investors. Many states agreed to this because it reassures TNCs
and may encourage more FDI.
- Criticism: ISDS give corporations the right to potentially overturn government regulations
designed to protect the environment, workers’ rights, and public health. And when this
happens the people that are hurt do not have arbitration bodies to go to because only states
and corporations can bring matter to them.
Relations between states and TNCs
Expansion of TNCs caused a decisive shift in the balance of power in the global political economy.
Different views on their relation:
- Some view states as exercising significant control over TNCs, including through their ability to
tax and regulate corporate producers. Moreover states use TNCs to advance their foreign
policy interests.
