AIB Journals Webinar #2: Global Value Chains

Introduction to the Webinar

Overview of Speakers and Papers

• The webinar features speakers Liana Kano from the University of Calgary, Gabrielle Bonita from the Norwegian Business School, and Nicola Pisano from the University of Amsterdam.

• Three papers are presented:

• "Global Value Chains: A Review of Multiple Municipalities" co-authored by Leanna, Eric Tsang, and Henry White Seungyeon.

• "The Global Value Chain in Their Nationalization Theory" co-authored with Gabrielle, Ben Peterson, and Lawrence Welk's.

• "Accounting for Firm Heterogeneity in Global Value Chains" by Fabian Foot, Daghan Oncu Meow Oncok, and Nicola Pisano.

Purpose of the Papers

• The selected papers complement each other by transitioning from a literature review to established theory and empirical examination of global value chains (GVC).

Literature Review on Global Value Chains

Research Context

• The authors express honor in having their work included in this seminar series focused on GVC literature.

• Despite extensive study over two decades across various disciplines, there has been no systematic large-scale review specifically from an International Business (IB) perspective.

Conceptual Framework

• The paper employs comparative institutional analysis as its conceptual starting point influenced by transaction cost economics and internalization theory.

• Inspired by Oliver Williamson’s three-layer contractual schema; it aims to link micro-level insights with macro-level governance processes within GVC.

Micro Foundations of Global Value Chains

Key Insights on Micro-Level Research

• Micro foundations are identified as one of the least researched aspects despite being crucial since GVC configurations result from managerial decisions.

• Managers often misjudge costs and coordination abilities globally; they struggle to pinpoint where value is created within GVC.

Proposed Solutions

• Literature suggests fostering common identity/language in GVC operations and developing individual capabilities but acknowledges more research is needed in this area.

Governance Structures in Global Value Chains

Structural vs. Strategic Governance

• Structural governance involves decisions about network structure such as make-or-buy choices influenced primarily by firm-level strategy rather than location characteristics.

• Control over knowledge is increasingly vital compared to ownership of physical assets; orchestration capabilities play a significant role here.

Managerial Processes

• Strategic governance encompasses managerial routines related to resource orchestration, knowledge sharing, and value distribution within the chain.

• Strong technological capabilities are necessary for lead firms; however, global orchestration know-how is deemed even more critical for effective network guidance.

Global Value Chains: Insights and Future Research Directions

Challenges in Measuring Value Creation

• Lead firms struggle to accurately measure value creation within networks, which complicates their ability to use it as an orchestration tool. This highlights the need for deeper study into how lead firms can account for and distribute value effectively.

The Issue of Value Distribution

• Current research on value distribution in global value chains (GVCs) often assumes that reporting is conducted by elite firms, a premise that remains largely untested. This calls for more rigorous examination of behavioral assumptions at the macro level.

Dynamic Macro-Level Impacts

• As institutions evolve, supplier strategies also change, such as increased reliance on internal R&D. Additionally, advancements in digital technologies provide firms with new tools to either fragment or strengthen their GVC links. Understanding this dynamism is crucial for studying GVCs effectively.

Feedback Effects and Institutional Quality

• There is limited empirical research on how GVCs influence institutional quality in various countries, despite evidence suggesting they do have an impact. The mechanisms behind these changes remain poorly understood, indicating a significant gap in current literature.

Environmental and Societal Impact of GVCs

• The debate surrounding the positive or negative impacts of GVCs on environments and societies is ongoing; however, there is a notable lack of scholarly work addressing these effects within international business (IB) literature compared to other social sciences. This represents a grand challenge for future IB research.

Renewed Protectionism and Digitization

• The implications of renewed protectionism are particularly relevant today, alongside the effects of digitization on global trade dynamics—topics slated for further discussion in upcoming webinars but not elaborated upon here.

Performance Outcomes in Global Value Chains

• Most reviewed studies focus on developing topologies and mapping processes rather than directly addressing performance outcomes within GVC networks. Operationalizing network-level performance remains complex due to varying definitions of what constitutes superior performance across different contexts.

Long-Term Sustainability Considerations

• For GVCs to be sustainable over time, they must demonstrate greater efficiency compared to alternative governance options; thus, long-term sustainability could be viewed as the ultimate measure of performance within these networks—a topic emerging from recent discussions among co-authors but not included in prior papers.

Resilience Against External Shocks

• A critical area for future research involves understanding how GVCs can maintain resilience amid external shocks like global pandemics while adapting to changing risk environments over extended periods—a vital consideration moving forward in this field of study.

Introduction to Global Value Chain Internationalization Theory

Overview by Gabrielle Bonito

• Gabrielle Bonito introduces his paper focused on internationalization theory related to global value chains (GVC), aiming to build upon previous discussions while providing targeted insights into specific aspects of the topic alongside co-authors Ben Peterson and Lawrence Yuvaraj.

Contextual Framework

• The paper serves as both a commentary and counterpoint to another article published concurrently; it emphasizes the importance of understanding activity separation across geographical boundaries within organizational frameworks when analyzing GVC dynamics.

Internalization Theory Relevance

• Internalization theory plays a pivotal role as it provides a general framework for economic organization relevant to international business studies; this perspective will guide their analysis throughout the paper's exploration.

Understanding Global Value Chains and Internalization Theory

Comparison of Theories

• The discussion contrasts internalization theory with the global value chain (GVC) approach, focusing on how each explains strategic choices in governance and production.

• Emphasis is placed on the differences between static phenomena (internalization theory) and dynamic phenomena (GVC), highlighting their implications for decision-making.

Governance Choices

• Internalization theory primarily addresses governance choices, including production location, while recognizing interdependencies among these decisions.

• GVC is viewed as an aggregation of discrete decisions regarding governance and production locations, emphasizing the importance of making correct governance decisions for efficiency.

Systemic Approach

• The GVC approach acknowledges not only efficiency but also power dynamics that influence how local value chains are structured.

• It recognizes interdependencies within systems and the need for continuous adjustments to adapt to changing conditions.

Coordination Mechanisms

• Internalization theory assumes coordination through directed mechanisms or market-like relations, whereas GVC incorporates a broader range of coordination methods, including social norms and power considerations.

• Trust is highlighted as a crucial element in effective coordination, particularly in societies with strong institutional backing.

Implications for Future Value Chains

• Speculative conjectures suggest that future global value chains may become shorter and more resilient due to macro-level factors like nationalism and protectionism.

• Expectations include less geographical dispersion of operations and a preference for known actors, potentially leading to less efficient but more flexible global value chains.

Global Value Chains: Insights and Methodologies

Complexity in Global Value Chains

• The discussion highlights that while alternative locations for operations can be beneficial, they also increase complexity, which is a cost factor. This complexity may lead to more custom requirements and necessitate changes in global balance integrations.

• There is an ongoing quest for efficiency that results in frequent reconfigurations of value chains; however, the foundational debate on achieving this efficiency remains unresolved.

• Underinvestment in collective actions such as innovation and operational capabilities is noted as a significant issue affecting global value chains, suggesting a myopic view if only internationalization theory is considered.

New Perspectives on Global Value Chains

• The speaker introduces Nicola Pazhani from the University of Amsterdam, who will present insights from his recent paper focusing on firm heterogeneity within global value chains.

Methodological Innovations

• Nicola expresses gratitude for the opportunity to present research conducted with co-authors at OECD and emphasizes the need for better measurement methods regarding newly formed global value chains.

• The paper presents a new methodology developed at OECD that integrates existing research tools to provide deeper insights into how specific firm characteristics influence global value chain configurations.

Research Tools Overview

• Three primary research tools have been identified:

• Firm-level surveys highlight micro dynamics but are limited by sample size.

• International trade statistics show macro-level interconnections but lack granularity.

• Inter-country input-output models illustrate inter-industry linkages but do not address intra-industry formats effectively.

Comprehensive Analysis Approach

• The proposed methodology combines firm-level microdata with inter-country IO models, allowing researchers to conduct detailed analyses by disaggregating IO tables based on firm characteristics.

• An illustrative application focuses on firm ownership types—specifically multinational enterprises versus domestic firms—to analyze their engagement in global value chains across various countries and industries.

Key Findings from Analysis

• A significant finding labeled as the "M&E effect" indicates that multinational enterprises contribute less to value-added exports than traditional trade statistics suggest.

• On average, foreign control affiliates account for about 45% of gross exports; however, their contribution to value-added exports drops significantly to around 30%, highlighting sourcing implications.

Multinational Enterprises and Local Backward Linkages

Key Findings on Multinational Enterprises (MNEs) and Exports

• MNEs have a higher foreign value-added content in exports compared to domestic firms, indicating their significant role in global trade.

• Multinational subsidiaries tend to import more goods, which are then incorporated into their exports, suggesting a reliance on international supply chains.

• Despite the higher import content of exports by MNEs, they generate local backward linkages similar to those created by domestic firms, challenging previous assumptions about their impact on host economies.

Analysis of Local Backward Linkages

• The study reveals no consistent pattern across countries regarding the generation of local backward linkages by MNEs versus domestic firms; it appears highly country-specific.

• In many instances, MNEs create more local backward linkages than domestic firms, contradicting earlier beliefs that they contribute less to local economies.

Methodology and Implications for Future Research

• The research employs a new methodology to analyze global value chains, highlighting its potential for advancing international business scholarship.

• The findings suggest that while MNEs have higher import content in exports, they do not necessarily establish fewer local backward linkages than domestic counterparts due to their specialized production processes.

Data Availability and Future Directions

• The paper discusses the increasing availability of data from national statistics agencies that can enhance future research on global value chains.

• This new methodology allows for deeper insights into the role of MNEs within global value chains and could reshape understanding in this field.

Impact of Protectionism on Global Value Chains

Discussion Points Raised During Q&A

• Questions arise regarding the relationship between global value chains and protectionism, particularly how recent trends may affect multinational operations.

• There is an inquiry into whether multinationals provide sufficient value to warrant open trade policies amidst rising protectionist sentiments globally.

Literature Review Insights

• Current literature has not fully addressed the impacts of renewed protectionism; however, it is recognized as an important area for future research.

Reshoring and Global Value Chains: Challenges and Opportunities

The Complexity of Reshoring

• Reshoring value chains may lead to shorter, more localized production but can sacrifice efficiency. Strategic reasons often drive reshoring decisions, as highlighted by literature reviewed, including a study by An Quraían.

• Repatriating production from countries like China is challenging due to the need for specialized skills and large-scale manufacturing capabilities that currently no other country can match.

Technological Innovations Supporting Localization

• Technologies such as 3D printing are enabling shorter and more localized value chains, suggesting a potential shift in how production is organized in the future.

• Despite concerns about reduced joint innovation due to protectionist tendencies post-pandemic, there has been notable collaboration in developing COVID-19 vaccines among pharmaceutical companies.

Data Limitations and Future Insights

• Current data on protectionism is limited; however, access will improve over time as impacts unfold. National statistics agencies take time to harmonize firm-level data with national trends.

• The analysis relies on older data (2014), which complicates understanding short-term consequences of policy changes. Newer data will emerge but may take time to be fully analyzed.

Political Sensitivity and Cross-Border Activities

• Changes in trade patterns are expected to vary across politically sensitive industries compared to others where interconnectivity remains advantageous.

• Digital flows of information are increasing alongside traditional trade, indicating alternative forms of interconnectedness among individuals, firms, and countries.

The Role of Global Value Chains Amidst Infrastructure Concerns

• While global value chains have gained importance, most value creation still occurs domestically. This perspective helps contextualize anticipated changes in global trade dynamics.

• Concerns exist regarding the legal and political infrastructure supporting global value chains. A reliance on well-functioning multilateral frameworks is crucial for their operation amidst current geopolitical tensions.

Global Value Chains and Performance Metrics

Understanding Global Value Chains

• The discussion revolves around performance in global value chains, highlighting a recent corporate webinar on spontaneous supply systems that adapt quickly to changes.

• A speaker introduced the concept of agnostic supply systems, which operate independently of specific products, demonstrating adaptability during crises like the Coke crisis.

Performance Measurement Challenges

• There is a lack of clear performance metrics for evaluating global value chains; discussions often overlook this critical aspect.

• The relationship between global value chains and innovation is emphasized, suggesting that knowledge flows within these systems are crucial for understanding their dynamics.

Dimensions of Performance

• Questions arise about defining performance in global value chains; Michael Moore critiques the tautological nature of efficiency as a measure of superiority.

• Cillian clarifies that sustainability in global value chains hinges on their efficiency compared to alternatives, emphasizing superior economizing properties.

Flexibility and Governance

• Flexibility is identified as a key dimension of performance, with Peter Buckley's work illustrating how decisions regarding location and control can be made swiftly within a flexible system.

• Current literature reveals no consensus on measuring performance across firms in global value chains; future research should focus on how lead firms define network performance.

Institutional Limitations and Survival Metrics

• The reliance on transaction cost economics highlights weaknesses in comparative institutional setups; inefficiencies may persist due to resistance to change.

• Observing survival alone does not adequately reflect system performance since it overlooks constant changes within the system's actors.

Future Directions for Research

• It’s suggested that different levels of analysis are needed when assessing performance—considering both lead firm survival and supplier dynamics.

• Nicola agrees with previous points made about the need for improved measurement methods regarding performance in global value chains.

Sustainability and Global Value Chains

The Role of Multilateral Institutions

• Acknowledgment of sustainability concerns in global value chains, emphasizing the importance of multilateral institutions like the WTO.

• The WTO's current disengagement from technology discussions is seen as a barrier to addressing Sustainable Development Goals (SDGs).

• Strong multilateral organizations are essential for ensuring that global value chains align with SDGs, especially in light of current challenges.

• Concerns about the WTO's capacity to handle disputes due to insufficient judges highlight the need for robust multilateral frameworks.

Post-COVID Governance and Power Dynamics

• Discussion on how COVID-19 impacts governance within global value chains, focusing on power distribution among firms.

• Emphasis on examining how lead firms can sustain relationships with small and medium-sized suppliers post-pandemic.

• Notable case study: IKEA’s long-term partnerships with suppliers as a model for maintaining supplier relationships during crises.

Future Challenges in Global Value Chains

• Inquiry into whether lead firms will continue nurturing relationships with both large and small partners after COVID-19.

• Concerns regarding the decline of established collateral systems that have supported global value chains for decades.

Regional Optimism vs. Global Challenges

• Positive developments at a regional level, particularly in Europe, may foster future prosperity despite global issues.

• Recognition that health-related factors from the pandemic will significantly influence global value chain dynamics moving forward.

Political Implications and Future Scenarios

• The evolution of political powers post-COVID will shape international trade relations and interconnections among nations.

• Potential emergence of decoupled or alternative global value chains could drastically alter existing structures and operations.

Impact of COVID-19 on Global Value Chains and Policy Responses

Challenges in Response to COVID-19

• The speaker emphasizes the difficulty in predicting outcomes related to health and political responses during the pandemic, expressing hope for positive developments.

• A strong unified response at the European level is deemed essential for societal improvement, highlighting the importance of collaboration among EU members.

Summary of Discussions and Audience Engagement

• Thanks are extended to all speakers and co-authors, with a note that slides and an edited video will be available on YouTube for further reference.

• The audience's questions are acknowledged as valuable contributions that may lead to future reactions or discussions.

Insights on Firm-Level Phenomena and Policy Implications

• Klaus notes a recurring theme in discussions about firm-level phenomena linking them to broader policy issues, indicating a need for understanding these connections.

Effects of Nationalist Policies on Global Value Chains

• Two distinct effects of COVID-19 on global value chains are identified: increased transaction costs due to movement restrictions and pressures from nationalist policies aiming to localize supply chains.

• It is argued that while localization may temporarily address supply chain robustness, it ultimately weakens economic resilience by limiting firms' ability to adapt through global networks.

Future Discussions on Digitalization in International Business

• Upcoming discussions will focus on international business and digitalization, which intersects with global value chains by enabling more detailed control over operations through real-time data sharing.

• The next webinar will feature three speakers discussing recent papers published within the year, alongside future research opportunities linked to a special issue deadline set for September.