Growth of Global Value Chain and Strategies the Value Chain - Case Study Example

Growth of global value chain and strategies r to 'move up' the value chain The value chain describes the full range of activities that firms andworkers do to bring a product from its conception to its end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer. The activities that comprise a value chain can be contained within a single firm or divided among different firms. Value chain activities can produce goods or services, and can be contained within a single geographical location or spread over wider areas. Studies from a range of disciplines show that global value chains have become much more prevalent and elaborate in the past 10 to 15 years.' Global value chains now contain activities that are tightly integrated and often managed on a day-to-day basis. The globalisation of value chains is motivated by a number of factors. Increase efficiency Continuous growth of competition in domestic and international markets forces firms to become more efficient and lower costs. One way of achieving that goal is to source inputs from more efficient producers, either domestically or internationally, and either within or outside the boundaries of the firm. New emerging markets Emergence of new markets and access to strategic assets that can help tap into foreign knowledge is one of the important motivations of global value chain. Notwithstanding these anticipated benefits, engaging in global value chains also involves costs and risks for firms. Liberalization of trade Increasing liberalisation of trade and decreasing costs of transport and communication have made it possible for enterprises to split up production processes into more complex parts spread to an increasing degree across national borders. The result is often that each enterprise specialises in a core area of production while other activities are outsourced to suppliers. This leads to a fragmentation of the production process, which is counterbalanced by closer integration between the enterprise and its trading partners http://www.oecd.org/dataoecd/24/35/38558080.pdf (Feenstra, 1998). Trade in intermediates Global value chains allow intermediate and final production to be outsourced abroad, leading to increased trade through exports and imports, and to a rapidly growing volume of intermediate inputs being exchanged between different countries. In 2003, 54% of world manufactured imports were classified as intermediate goods which include primary goods, parts and components and semi-finished goods. Relocations of existing activities Relocation of activities overseas is also a factor of growth of international sourcing. Sometimes implying the total or partial closure of the production in the home country while at the same time creating or expanding affiliates abroad producing the same goods and services as in the host country. More often, it is about the substitution of domestic stages of production by activities performed in foreign locations, with goods and services being exported from the host country to the home country. The basic purpose of relocation of activities is to gain higher product quality, efficient assets utilization with lower cost. Outsourcing and off shoring Global value chain made possible fragmentation of the production process across various countries, which have given rise to considerable restructuring in firms including the outsourcing and off shoring of certain functions. Outsourcing typically involves the purchase of intermediate goods and services from outside specialist providers, while off shoring refers to purchases by firms of intermediate goods and services from foreign providers, or to the transfer of particular tasks within the firm to a foreign location (Figure 1). Off shoring thus includes both international outsourcing where activities are contracted out to independent third parties abroad and international in-sourcing to foreign affiliates. http://www.oecd.org/dataoecd/24/35/38558080.pdf Figure.1: Off shoring & Outsourcing Sources: OECD (2005g, 2006f). Strategies to Move up Value Chain The globalisation of value chains raises major policy challenges for companies and countries, as globalisation confronts countries economies with new opportunities and challenges. One challenge for countries and companies is how to continue moving economic activity further up the value chain to ensure that countries economies can continue to compete and prosper in the global environment. Moving up the value chain implies a continuous process of change, innovation and productivity growth. To foster and support the innovation process, several policy areas could be considered: Cluster policies and efforts at the local/regional level Local and regional strengths are an important asset for economic policy. International and local firms may be attracted to very specific activities and skills that only exist in some regions and locations. These may be linked to scientific or educational institutions, historical heritages, natural resources, geographical location and so on. Policies aimed at the development of clusters, poles of excellence as well as regional policies may help capitalise on these strengths. Innovative Policies Innovative policies can increase the level of knowledge and technology embodied in production and exports, which would make competition from lower income countries less likely in the relevant markets. Policies aimed at strengthening creativity in business, or at developing intangible assets as sources of value creation are closely related to these policies. Enhance attractiveness Implement policies that make a country an attractive location for economic activities can help attract foreign direct investment and foster new areas of economic activities. Understanding what determines national attractiveness, building on national strengths and addressing weaknesses to the extent possible can help in drawing greater benefits from the global value chain process. Upgrade the human resource Highly skilled workers or a different mix of skills are required for more innovative and Productive economy. Standard production tasks can increasingly be carried out outside the country where labour costs are often considerably lower. Upgrading the workforce can support a shift of economic activity towards more high value-added areas that might remain in country. Addressing this through education and training policy requires a growing focus on life-long learning. Foster entrepreneurship and new areas of economic activity There should Policies that aim at creating new areas of economic activity, in stimulating new firm creation and Entrepreneurship, or in stimulating innovation and technology in new areas, e.g. through public procurement. New firms are of great importance to innovation, particularly in areas where radical changes to existing markets and production processes are feasible. More approaches to moving up value chain There is need and desirability of more government action, based on the success of some countries in strengthening comparative advantages in certain areas. Policies improving the functioning of labour, products and financial markets are necessary but may be no longer sufficient for successfully moving up the value chain, since market failures and externalities exist especially in new activities that are risky and require large-scale investments. Spreading the benefits of globalisation Spreading the benefits of globalisation worldwide is necessary. Concerns have risen that some world regions, notably Africa, seem in particular danger of being left behind in the globalisation process. Other concerns related to globalisation are linked to the potential environmental impacts of continued globalization in developing countries. Further trade liberalisation in sectors where poorer countries have a comparative advantage complemented by capacity-building and development policies, may help to spread the benefits of globalisation to a wider range of countries. Global environmental challenges such as climate change, is also needed to make globalisation be regarded as an opportunity, rather than a threat. Balance perspective of globalization Due to short-term job losses that may occur in specific regions and industries, and that often particularly affect low-skilled workers have made public perceptions of globalisation not always positive. The challenge is that although globalisation benefits economies as a whole, the gains are unevenly distributed and the costs in terms of employment loss and wage decline are often more visible than the wider benefits to consumers generally. Providing a balanced perspective on the benefits and costs of globalisation can help. A promising avenue may be to address more directly the costs of globalisation, by compensating those who may suffer a short-tem decline in income. http://www.oecd.org/dataoecd/24/35/38558080.pdf Countries around the world specialize in different parts of the global value chain Here I take example of diamonds to show how global value chain works and the benefits that countries and firm gain from global value chain. The locations where diamonds are found and mined are not necessarily where they are ultimately sorted, cut, and polished. In fact, very few countries are vertically integrated. Instead, diamonds are often mined in one place, exported to another to be cut and polished, then to another to be manufactured, and finally to another for retail and consumption. Many diamond producing countries are trying to move up the global value chain to engage in higher value-added activities. Exploration African countries have had a long history of diamond exploration and subsequent exploitation of its diamond mines. 31% of all exploration investment was dedicated to Africa in 2002, whereas in 2003 it was only 22% due to exploration ventures in other countries. DeBeers exploration in Africa constitutes 32% of its exploration investments. Canada is the newest country in exploration investment. 36% of exploration investment was dedicated to Canada in 2002, and this number rose to 51% in 2003. DeBeers devotes about 40% of its exploration investment to finding kimberlite pipes in Canada. Production In 2003 world production of diamonds was 140 million carats, producing $8.9 million up from $7.7 million the prior year. This was largely due to worldwide increases in production in Canada, and Africa. African countries constitute a majority of global diamond production. In 2002, 36% of Botswana's GDP was from diamond production, and 82% of its value of exports was from diamonds. Over the past decade, Botswana has attempted to upgrade to higher levels of the global value chain. While it has succeeded in terminating some unfair contracts, it appears that Botswana, like many African countries, does not have the infrastructure to maintain higher-level diamond industry activities. In 2003, the Democratic Republic of Congo held 17.9% of world mass diamond production. Because of its production valuation began to rise, and in 2005, the DRC had an 8% world market share. South Africa, which had been a major diamond producer because of DeBeers, continues to have Kimberley Process a stronghold in production. Its value in 2003 was $950 million, producing 9.1% of the mass of diamonds, and in 2005 it held 10% of the production market share. Angola is another country that relies on the diamond industry for industrial growth. The average income from the industry from 2000 to 2004 was $700 million per year. Angola had 9% of the global production market share in value in 2005. Canada is the newest player in the diamond production link of the value chain. In 2005, Canada rose to 12% of the market value. Russia is another major country in diamond production, in 2005, Russia had 19% of the market share of production in terms of value. Cutting, Polishing, and Manufacturing Cutting and polishing occurs in other countries including Antwerp, Mumbai, New York City, China, Thailand, and Johannesburg.22% of industry cutting and polishing happens in India, with 96% of the overall industry workforce. However, many countries that produce diamonds are attempting to upgrade to add value locally. For example, South Africa is trying to upgrade through cutting, polishing and later manufacturing, instead of outsourcing these higher value added services to London. Russia has already upgraded, via companies like Leviev, enabling it to be vertically integrated with each stage of the global value chain able to occur within its borders. Retail and Consumption Diamond jewelry is highly valued in developed countries. In 2003 diamond jewelry sales increased 6.7%, with the U.S consumption up by 6.1% and growth in other markets such as Japan, United Kingdom, and China. Currently the diamond jewelry market shares are as follows: US (55%), Japan (15%), Europe (10%), Asia Pacific (5%), and Asia Arabic (5%), other (10%). Major Firms in the Global Value Chain http://www.duke.edu/web/soc142/team7/Major%20Countries%20in%20the%20Global%20Value%20Chain.htm The diamond industry is dominated by a few large firms, most of which are involved in various capacities throughout each link of the global value chain. DeBeers has dominated the industry historically, but other more recent players are making a name for them and represent a formidable threat. Some of the firms focus on diamond mining and production, and others mine and work with a wide range of materials. As with the countries, many firms upgrade and expand into different parts of the global value chain. I have described each of the top firms and their competitive advantage in terms of the global value chain. DeBeers Kimberley, South Africa based holding company, with its hand in many aspects of the global value chain, it has proved itself as a successful company. DeBeers is seeing a gradual decrease in its market share. Much of this loss can be attributed to production surges in locales where De Beers does not have a stronghold, including Australia, Canada, and Russia. It engages in production joint ventures with local governments and other companies, in Africa. Beers is relying too much on its historical dominance and needs to adapt to changes in the industry. This includes investing in mining in Australia and Canada, which should help regain some of its lost market share. Alrosa Alrosa, a Russian state-owned diamond company, produces nearly 100% of Russia's rough diamonds and more than 20% of the world's rough diamonds, makes it the second largest producer. By pursuing its own diamond marketing company, Alrosa will be able to cut the middle man and market its diamonds directly. This bodes extremely well for Alrosa's future ability to maintain competitiveness in global markets. Rio Tinto Rio Tinto is a major Australian player in diamond mining. . It is gaining strongholds in places like Canada and Australia, and should seek to strengthen them by moving up in global value chain over the next few years. If Rio Tinto continues to expand, it runs the risk of being overly distributed and failing to be a market leader anywhere. BHP Billiton Australian diamond mining firm, and is the largest world resources company. It plays a fairly large role in the diamond industry, with 6% of world production. The company sells about 10% of rough diamonds to Canadian manufacturers and sells polished diamonds, made via contract polishing arrangements through its Canada Mark' and AURIAS ' brands. BHP Billiton is in a good position because it has it subsidiaries doing most of the work for it. However, unless BHP expands into direct retailing, it is doubtful that will again any substantial market share. Aber Aber is a successful Canadian firm in the diamond global value chain. Like DeBeers, Aber is involved in multiple parts of the value chain, with production, polishing and jewellery retail activities. Aber mostly supplies its diamonds to cutting and manufacturing companies located in Israel, the United States, Belgium, and India. Leviev Leviev a Russian company is the largest cutter and polisher of diamonds in the world. Leviev is the first and only vertically integrated diamond producer in the world. Company provides stones for itself as well to other cutters, polishers, and manufacturers worldwide. Leviev competes with DeBeers, and has taken business away from DeBeers in Angola and Russia. Leviev currently owns 100% of Ruis, a previous joint venture with Alrosa, which cuts $140 million worth of diamonds a year. The company has factories in Ukraine, Israel, Namibia, China, Armenia, and South Africa and has potential for increase market share. Sources OECD. (2007). staying competitive in the global economy, including the rise of outsourcing/off shoring. Organisation for Economic Co-operation and Development, Source, OECD (Online service). OECD Publishing Dipak Mazumdar, Sandip Sarkar.2008. Globalization, Labor Markets and Inequality in India. IDRC. A 'new' approach to global value chain analysis - ODI Working Paper. www.odi.org.uk/go'where=nl0809-pub-wp293 Introduction to value chain development. www.microlinks.org/ev02.php'ID=9652_201&ID2=DO_TOPIC A HANDBOOK FOR VALUE CHAIN RESEARCH. www.globalvaluechains.org/docs/VchNov01.pdf Diamond Global Value Chain. www.duke.edu/web/soc142/team7/Diamond Global Value Chain.htm Read More