Discuss about the Changing Economies of Asia.
Globalization is the process of spreading the people, ideas and goods across the world. It increases the connectivity and interaction between the different cultures, governments and economies in the world. Globalization is used mostly to denote the connectivity of economies in case of free trade, flow of capital, and labor markets in foreign used by corporate o maximize their returns[1]. From the last few years, numbers of MNC’s are increasing which result in increasing of globalization. MNC’s stands for multinational companies, which establish their production house in number of countries. Activities conducted by multinational organizations contribute in the increasing trend of economic globalization. In last 15 years economic integration process is developed at wide level. There is tremendous growth in the three aspects of economic globalization that is trade, foreign direct investment (FDI) and the international transfer of knowledge and technology. MNC’s set up their production houses in those countries where there is availability of cheap labor, liberal government policies are there, and where markets can be reached easily[2]. In this paper we discuss the impact of globalization on value chains, and also focus on the other topics which are closely related to this topic. In last we conclude the essay with the conclusion in which we describe the impact in concise way.
Before discussing the impact of globalization on value chain, it is necessary that we understand the term value chain, its features defined by porter, and difference between value chain and supply chain.
Value chain means activities conducted by corporate that creates value at every step. Process of value chain focuses on separating the useful activities from the waste activities. Activities which are value creating give many advantages to the corporate such as brand image, lower cost of manufacturing product and many more. The concept of value chain is defined by Michael Porter in his book launched in 1980 named as ‘competitive advantage’. According to porter value chain consists primary activities and support activities[3]. Primary activities and support activities are defined below:
There is misconception among the people that value chain and supply chain share similar concept, but there is a difference between supply chain and value chain. Supply chain is a process which interconnects all the activities, which means activities start from the manufacturing of product and ends when the product sold to the final consumer. Whereas, value chain is a process in which company conduct activities which add value to the product. Basically, these two concepts help in enhancing the quality of the products[6]. The basic differences between these two concepts are mention below:
|
BASIS FOR COMPARISON |
SUPPLY CHAIN |
VALUE CHAIN |
|
concept |
It focuses on the conveyance. |
It focuses on value addition to the product at every step. |
|
Objective |
Its main objective is to reach customer satisfaction |
Its aim is to gain competitive advantage. |
|
Origination of chain |
It is originated from management of operations. |
It is originated from business management. |
After discussing the definition and features of value chain, now we discuss how globalization has affected the value chains. A new concept was introduced that is global value chains. The economy at global level is structured around the Global Value Chain (GVC) which contributes in the increasing share of international trade, GDP, and employment. GVCs basically connect the companies, workers and consumers around the world, and also provide chance to companies and workers of developing countries to connect and stand in the global economy. For many countries which have low level of income it is important for their development that they adopt the concept of global value chains, and insert themselves in these chains. GVCs helps in competing in the global market, capture the gains in the terms of national economic development, and it also builds the capability to generate more and better jobs which result in reducing the poverty and unemployment[7].
Now, GVCs become the most important factor for the economic globalization which was supported by the new opportunities which are technical in nature, and advantages of economic specialization. However, it is clear that GVCs play an important role in the development of economies. Current Trade Rules are not supporting the concept of GVCs, therefore new trade rules are required for GVCs. GVCs connect the markets of goods and services, which facilitate the production of goods outside the final firm. These networks based on the unbundling of different steps of the production process. GVCs make the unbundling of task easier, for example electronics/ICT, automotive and garments[8].
Impact of globalization on value chains can be understand with the help of these two terms vertical disintegration and smile curve. Vertical disintegration means that procedure which was followed by one company to cover all the activities related to raw material, administration, production, and end product. The vertical disintegration in global value chain has two important factors in the global economy[9]. Globalization and vertical integration shares a relationship from many years. John McLaren explains that globalization and vertical disintegration is not that much supportive? The term vertical integration confer a externality which is negative in nature, which results in thinning the markets for inputs and destroy the opportunities in market[10]. On the other hand, the concept of smiling curve in relation o global value chain is used at the level of individual firms, but it was not much used on the level of industry and country. The concept of smile curve was introduced by the Stan Shih in 1992. He observed that if both the ends of value chain shows the value added to the product, and if this concept was presented in the graph in which Y-axis is denoted for value added and X-axis is denoted for value chain. This graph automatically shapes in smile[11].
In last, we discuss the role of MNCs in outsourcing, cross border trade and trade in intermediate goods. First we discuss the role of MNCs in outsourcing, Outsourcing by MNCs provide competitive advantage and cost benefit to the companies. There are many more benefits which companies grab from the outsourcing such as enhancing the quality of the product, restructuring of product cost, and many more. Many MNCs are used outsourcing as their global strategy because of these benefits. In last few years the concept of outsourcing was growing at large level and it becomes beneficial for developing countries like India, China, Malaysia, etc. but there is disadvantage also such as job losses of the people who are belong to home country of MNCs[12].
Second we discuss the role of MNCs in cross border trade, MNC is an organization that engaged in the foreign direct investment (FDI). MNCs also engaged and control the activities of value adding in number of countries. These companies can be public or private both, structure of these companies generally consists parent companies which was established in the home country and control the subsidiaries which are established in different countries across the world[13]. Usually, MNCs engaged in cross border trade to access the market of different countries and expand the operations of its business. They also make cross border trade to improve the efficiency of production and operations. Companies set their units for production in different countries where cheap labor is easily available[14]. In way of increasing the profits many MNCs adopts the concept of horizontal and vertical integration. For achieving their profitability MNCs set their production or distribution units in other countries. Usually, MNCs adopt three strategies to adopt the foreign market and facilitate cross border trade such as they sign agreement with the local units of that country to sell the products of MNCs, MNCs set subsidiaries in the foreign countries under the act of that country, and in last MNCs opens branches in the foreign country which is not legally independent business units[15][16].
In last we conclude, that global value chains contribute at wide level across the world. It plays an important role in the development of economy at global level.
Conclusion:
In this paper we discuss the impact of Globalization on the value chain, and other related topics such as definition and concept of value chain, and role of MNCs in the global economy. Value chain means activities conducted by corporate that creates value at every step, and value chain consists of two activities that is primary activity and support activity. In this we discuss the impact of globalization on value chain with help of two factors which are vertical disintegration and smile curve, and in last role of MNC which states that Activities conducted by multinational organizations contribute in the increasing trend of economic globalization. In last 15 years economic integration process is developed at wide level. There is tremendous growth in the three aspects of economic globalization that is trade, foreign direct investment (FDI) and the international transfer of knowledge and technology. This paper also states the role of MNCs in outsourcing, and cross border trade which give more emphasis on how MNCs grab the foreign market and increase their profitability.
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