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International Business

A Global Value Chain Approach to Emerging Market Catch-up

Prof. Ram Mudambi, Fox School of Business, Temple University, USA

18th Apr 2012  12:00 pm - Room 11, Darlington Centre

Abstract: Value chain analysis is an innovative tool that views economy in terms of activities instead of its constituent industries and firms (Mudambi, 2008). The value chain approach analyses, at the sector level, each link in the 'chain of activity' - from the ideation of the product or service to its post-use disposal.1 A value chain for any product or service consists of a number of inter-linked activities extending from upstream R&D, to raw materials and component supply, production, through delivery to international buyers, and often beyond that to disposal and recycling. Modern value chain analysis enables us to pinpoint the relative contributions to value creation associated with each activity, from basic raw materials to final demand. This approach helps us to understand that as far as a geographic location is concerned, success in terms of creating prosperity is based on the local activities performed rather than the identity of local firms or industries. GVCs are part and parcel of international trade and have existed as long as there have been trade relations between countries. However, two fundamental trends have arisen over the last few decades that have changed the characteristics of GVCs in fundamental ways. First, the advance of technology, especially information technology has enabled firms to re-configure themselves in very basic ways so that they can now outsource activities deep in the heart of the firm with surgical precision and focus on activities where they have superior competencies. It is now routine for firms to outsource functions involving sensitive information like payroll, pensions and accounts receivable (Metters, 2008). The robustness of modern information technologies allows firms a great deal of latitude in terms of the geographic location to which these outsourced activities re-located (Mithas and Whitaker, 2007). Some of these activities are knowledgeintensive and create a great deal of value for the location where they are eventually undertaken. Second, the number of locations where such activities can be undertaken has risen dramatically over the last two decades with the increasing sophistication of infrastructure and other resources in a wide range of emerging markets from China and India to Mexico and Turkey. GVCs today are truly global within industries ranging from apparel (Gereffi, 1999; Smakman, 2003) and shoes (Pyndt and Pedersen, 2006), to electronics

The importance of fragmented production and intermediates trade has been widely documented in academic research (e.g., Baldwin, 2006). When trade is disaggregated and geographically dispersed across national borders, a global value chain (GVC) exists. GVCs incorporate all the activities related to producing a good or service and delivering the product or service to the end user. This type of trade is especially important in China and other emerging economies due to the great importance of GVCs in their economywide catch-up processes. In some emerging markets such as China, the percentage of high technology exports in total exports (or high technology output in GDP) has been increasing at unprecedented rates. Na??ve interpretation of this data would suggest that technological catch up and convergence are well advanced. However, these traditional output-based measures are undertaken as the industry level, thus facing two important shortcomings:

  • The measures fail to take into account that different stages of the same GVC (e.g. specialized versus standardized activities) can have distinct value added levels.
  • The measures often capture gross output and not value added. As a result, they not only capture the activities that have taken place in a country, but also the value of upstream activities that are used as inputs. Example of the Apple iPhone (Linden et al., 2009). In this paper we apply GVC analysis to Chinese data to examine the extent of economywide catch-up. Using this approach we find that catch-up is significantly less advanced than simple output-based measures indicate.

Speaker: Ram Mudambi is professor and Perelman Senior Research Fellow in General and Strategic Management at the Fox School of Business and Management at Temple University.[1][2] He has published over fifty refereed journal articles and six books on the multinational strategies of entrepreneurial firms; the location and research and development strategies of multinational firms, and the politics of international business. Mudambi serves on the Editorial Boards of the Journal of International Business Studies, the Asia Pacific Journal of Management and the Journal of International Management.

Prior to joining Temple University, Mudambi taught at Case Western Reserve University in Cleveland, Ohio and the University of North Carolina at Chapel Hill. He taught in Europe for seven years at the University of Reading and the University of Buckingham. He retains a Readership at the University of Reading Business School [3] and is a Fellow of the Academy of the University of Messina in Italy. He completed his Masters degree at the London School of Economics in the United Kingdom and his Ph.D. at Cornell University.