January 29, 2008

Globalization, alliances and networking: A strategy for competitiveness and productivity (Part 4)

Globalization, alliances and networking: A strategy for competitiveness and productivityBy Joseph Prokopenko (From:Enterprise and Management Development Working Paper - EMD/21/E, International Labour Organization).....Part 4

5. Globalization and development strategies

Technological changes and the continuous fall in communication and transport costs have been a major factor behind global integration, and most countries are reversing import-substitution policies designed to prevent the need for trade. Governments are increasingly seeking to improve the international competitiveness of their economy rather than shield it behind protective walls. Developing countries have made tremendous progress in education and steady improvements in physical capital and infrastructure, thus boosting their productive capacity and enabling them to compete in world markets. This shift in development strategy has been reinforced by communication technologies which have made the world easier to navigate. Goods, capital, people and ideas travel faster and cheaper today then ever before.

Developing countries have much to gain by expanding their participation in global export networks. Autarchy is not a viable option in an interdependent world where for most countries delinking means marginalization. This fate is often considered worse than incorporation under temporary conditions of dependency.

5.1 Features of globalization
Among the most important channels of global integration are international trade and capital flows. The movement of goods and services across borders has grown tremendously in recent years accounting for over 45 per cent of world GDP in 1990 - up from 25 per cent in 1970. There was also a rapid shift to higher value-added activities: the export share of manufactures in developing countries tripled between 1970 and 1990 from 20 to 60 per cent.(15)

The dynamic effects on economic growth is more visible when open trade is coupled with heavy imports of capital and technology. It is only natural that capital has also become increasingly mobile in search of the best returns. Gross capital flows (inflows and outflows) rose from 5 to 10 per cent of GDP in low- and middle-income countries during the past two decades. Capital moves more readily into successful countries and out of countries where risk-return relations are unfavourable.

Strong cross-border capital flows have been a major phenomenon in the new global economy as more and more countries embrace free markets and undertake trade and investment liberalization. Foreign direct investment (FDI) has strengthened the integration of individual national markets and has been a driving force in world trade and economic growth.

As emerging economies started to liberalize their financial sectors, remove exchange and capital controls, and develop their domestic capital markets, private financial flows grew rapidly. FDI flows surpassed other types of financial flows as the predominant form of investment in developing countries and by 1995 accounted for more then a third of total global FDI flows.
While recent FDI in industrial countries has been mainly driven by cross-border mergers and acquisitions, the surge of FDI in emerging markets has been caused largely by privatization deals, joint-ventures and other business network arrangements in the infrastructure and manufacturing sectors. In 1996, East Asia continued to host more than half of all FDIs in developing countries. Latin America also received significant FDI flows, followed by Eastern Europe and central Asia. By contrast, FDI flows to Africa were insignificant.

Remaining trade barriers, including tariffs, quotas, threat of trade sanctions and other import-substitution policies (taxes and subsidies), may induce multinational corporations to locate production directly in a foreign country rather then export to that country.

Countries that are eager to attract FDI may offer a variety of preferential treatments for foreign investors, including tax holidays, subsidies and credit support. The Global Competitiveness Report (1997) lists the following five most important factors for determining foreign direct investments:(16)
  • size of national market of target country;
  • expected growth in market size of target country;
  • ability to repatriate capital and remit profit;
  • productivity and work habits of workers;
  • and infrastructure.

The important message here is that governments should concentrate on reforms that improve institutions and economic policies, thus creating an environment conducive to private investments and economic growth. For example, public investments into education and infrastructure can raise the productivity of private capital and the workforce and will therefore help attract FDI flows.

FDI responds to profit opportunities and costs within specific sectors in target countries and, therefore, the business environment there plays a very large role in FDI decisions. One central issue to the analysis of FDI is whether the investor is planning to serve the market in which the FDI will be located, or whether the subsidiary will be used mainly to export to foreign markets. Market servers and exporters have different criteria and standards in comparing investment sites.

Market servers, for example, are typically more willing to compromise on some country characteristics such as strength of contract enforcement, investment incentives, and labour costs, in order to get access to a large market such as China, Brazil, India or Russia. Exporters, however, are typically less willing to compromise. If building a plant in one country means facing a high risk of having a trademark or industrial process stolen, there are plenty of other countries that would welcome the investment and have stronger investor protection.

One of the most remarkable trends regarding FDI since the mid-1980s is that countries around the world are reforming their investment laws, opening sectors to foreigners, eliminating screening procedures and dropping performance requirements. This change of regime is one important explanation why countries that do not rank highly in competitiveness nonetheless get high levels of FDI. Hungary, for example, has not only changed economic systems but has adopted a very liberal investment regime for FDI.

The global trend for a more open investment climate is also contributing to the growth of global alliances, joint-ventures and business networks.

Today the most modern and dynamic industries are transnational in scope since they are the result of an integrated system of global trade and production. Therefore, the development options for many developing countries depend, to a significant degree, on the kind of export roles they assume in the global economy and their ability to proceed to more sophisticated, high-value industrial niches.

  • The contemporary era of global economies has five central characteristics:
  • intensified global competition and the emergence of new centres of production;
  • an exceptionally innovative technological environment;
  • the proliferation, spread, and restructuring of transnational corporations (TNCs);
    a diversified global financial system;
  • and important changes in the state's role in domestic and global economic affairs.

A new global division of labour has changed the pattern of geographical specialization between countries. As developed economies shift towards services, vigorous industrialization has become the hallmark of the periphery. Industry outstripped agriculture as a source of economic growth in all regions of the Third World. From 1965 to 1990, industry's share of GDP grew by 13 per cent in East and Southeast Asia, by 10 per cent in Sub-Saharan Africa, 5 per cent in South Asia and 3 per cent in Latin America. Agriculture's share of regional GDP, on the other hand, fell by 16 per cent in East and Southeast Asia, 11 per cent in South Asia, 8 per cent in sub-Saharan Africa, and 6 per cent in Latin America.(17) Manufacturing has been the cornerstone of development in East and Southeast Asia as well as in Latin America.

Another important feature is that export-oriented industrialization has become more and more diversified and sophisticated. World trade expanded nearly thirty-fold in three decades since 1960. Manufactured goods as a percentage of total world exports increased from 55 per cent in 1980 to 75 per cent in 1990. The share of the newly industrialized countries (NICs) manufactured exports that can be classified as "high tech" soared from 2 per cent in 1964 to 25 per cent in 1985. Export accounted for 22 per cent of GDP in East and Southeast Asia, 11 per cent for South Asia and 10 per cent for Latin America.(18)

The maturity or sophistication of a country's industrial structure can be measured by complexity of the products it exports. The fact that the export of textiles and clothing in the East Asian NICs shrank as a proportion of total export highlights the working of the product life cycle and industrial upgrading in the Asian region. While the diversification of the NICs export toward non-traditional manufactured items is a clear trend, less well recognized is the tendency of the NICs to develop sharply focused export niches (South Korea - athletic footwear, Taiwan - plastic shoes, Brazil - low priced women`s leather shoes).

How can countries assure that they enter the most attractive export niches in which they have competitive advantage? To what extent is a country's position in the global manufacturing system structurally determined by the availability of local capital, domestic infrastructure, and a skilled workforce? Let us discuss some of these strategies below.

5.2 Export roles in economic strategies

The development options for many developing countries depend to a significant degree on the kind of export roles they assume in the global economy and their ability to proceed to more sophisticated, high-value industrial niches. International trade benefits most people as it brings workers immediate gains through cheaper imports and enables most to become more productive as the goods they produce increase in value. During the past two decades real wages rose at an average annual rate of 3 per cent in developing countries where the growth of trade (export to GNP) was above the median, but stagnated in the countries where trade expanded least.

Global markets allow workers and companies to specialize in what they do best and to upgrade into the production of more valuable products at the speed at which their skills and capacities improve rather than at the speed at which these goods may come to be demanded at home. The newly industrialized countries financed their imports with fast-growing exports, first of primary products, later of low-tech manufactures, and now of increasingly sophisticated industrial products and services. Therefore, countries are linked to GCCs through the goods and services they supply in the world economy. These linkages can be viewed as a set of five major export roles:

  • primary commodity export;
  • export-processing (or in bond) assembly;
  • component-supply subcontracting;
  • original equipment manufacturing (OEM);
  • andoriginal brand name manufacturing (OBM).

Each type of manufactured exporting is progressively more difficult to establish because it implies a higher degree of domestic integration and local entrepreneurship.

Therefore, industrial development is enhanced as countries move from the first to the fifth options (see table 1).
Virtually all countries begin their exporting experience with primary commodities and then turn to consumer items. At this juncture countries can go in two directions: they can augment the sophistication and local value-added of their production capability by filling the original equipment manufacturing (OEM) orders of foreign buyers, or they can make component parts or subassemblies that will be exported for finished-goods assembly abroad (component-supply subcontracting). Either of these two export roles can be stepping stones to the export of local brands of finished goods - original brand manufacturing (OBM).

(To be con't)


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