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The role of Developing Countries
in the value chain
Upgrading and Earning Opportunities in Export Manufacturing
Upgrading should be understood in the context of this paper as
moving to activities, which offer higher returns. Higher returns
can be obtained either by shifting production towards higher priced
products or by acquiring new functions in the value chain such
as participating in design and marketing. Gereffi (1999) defines
and differentiates industrial upgrading as a process of improving
the ability of a firm to more profitable and /or technologically
sophisticated and capital-intensive economic niches and lists
four levels of upgrading. Gerefii’s discussion refers to the apparel
commodity chain, but we believe it is also applicable to the footwear
chain.
Table - Industrial Upgrading
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Level
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Description
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1. Within factories
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Moving from cheap to expensive items. From simple to complex
products and from small to large orders
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2. Within inter -firm enterprise networks
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Moving from mass production of standardised products to
the flexible production of differentiated merchandise
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3. Within local or national economies
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Moving from simple assembly of imported inputs to more
integrated forms of OEM and OBM production, having more
forward and backward linkages at the local or national level.
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4. Within regions (Supply Chain)
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Shifting from bilateral, asymmetrical, interregional trade
flows to a more fully developed intra-regional division
of labour, incorporating all phases of the commodity chain
from the supply of raw material through production, distribution
and consumption
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Source: G.Gereffi, “International Trade and Upgrading
in the Apparel Commodity Chain”, Journal of International Economics
48 (1999) 37-70.
The opportunities for upgrading depend on the quality of information
that is provided to the manufacturer, and as a consequence the
type and amount of learning that the local producer receives from
the marketers. In the simplest form of outsourcing, the information
received by the local producer is relevant only to the production
segment of the commodity chain where he is placed.
But marketers and retailers need also to upgrade their suppliers,
they need producers with the capability to find all the parts
needed for the finished product. That means that they require
more advanced, “Full Package” or OEM companies. These companies
may sub-contract production of parts with local firms to fulfill
orders. OEM companies learn then how to organize production networks
and about the marketing aspects of the business. It is this learning
that permits Asian suppliers to move from OEM to OBM. East Asian
Newly Industrializing Economies (NIEs) are usually considered
the models of upgrading among developing countries. OEM and OBM
companies are discussed in the forthcoming section.
Upgrading to OEM (original equipment manufacturing) and OBM
(original brand manufacturing).
Gereffi (1999) indicates that the success of East Asia's buyer-driven
chains can be explained by their upgrading, moving up in the chain
from stage one, assembling of imported inputs to more locally
integrated manufacturing activities to export with higher value
added: OEM and OBM. In OEM manufacturing producers must have the
capability to find all the components needed for the finished
product. These are called “Full Package” or OEM companies that
subcontract the production of parts with local firms to be able
to comply with orders in time and quantities.
Gereffi highlights the advantages that OEM export role in upgrading
as follows: -
- “It enhances the ability of local entrepreneurs to learn the
preferences of foreign buyers, including international standards
for the price, quality and delivery of export merchandise.
- It also generates substantial backward linkages in the domestic
economy because OEM contractors are expected to develop reliable
sources of supply for many inputs
- Expertise in OEM production increases over time and it spreads
across different types of activities.
- The OEM supplier learns much about the downstream and upstream
segments of the apparel commodity chain from the buyer”. ´
Mechanisms that make possible the upgrading of firms to full
package supply are very much related to the ability of producers
to connect with diverse firms that operate in buyer-driven chains.
The best opportunities for upgrading may be found in quality-driven
market segments where there is a low concentration of buyers operating.
OBM or original brand manufacturing is then an upgrade from OEM
undertaken by OEM operators, as a strategy to be able to compete
with production coming from lower-cost exporters from other developing
regions. The OEM manufacturers become OBM manufacturers by establishing
forward linkages to developed country markets where the largest
profits are made in the buyer- driven commodity chains. The original
OEM combines its production with the design and sale of their
own brand names and turns into an OBM operator. This has been
the case for Japanese firms and for some companies in the NIES
managing their OBM operations for export, and local markets and
for some firms belonging to the Sinos Valley footwear cluster
in Brazil.
Triangle manufacturing
Triangle manufacturing is the mechanism used by countries operating
in buyer-driven commodity chains for three purposes:
1. to deal with the competition
from lower-cost suppliers and
2. to move from declining sectors
into higher value added activities;
3. to facilitate geographical expansion
of their operations.
Triangle manufacturing is considered as one of the most important
adjustment mechanisms for maturing export industries in East Asia.
It is a combined operation in which the agent acts as a manufacturer,
a purchaser and a subcontractor to third parties. Gereffi (1995)
describes the mechanism, for the case of garments, in the following
manner: US. buyers place their orders with the NIC manufacturers
from whom they have sourced in the past (e.g., Hong Kong, Taiwanese,
or Korean apparel firms), who in turn shift some or all of the
requested production to affiliated offshore factories in low -wage
countries (e.g., China, Indonesia, or Guatemala). These offshore
factories may or may not have equity investments by the EANIC
manufacturers; they can be wholly owned subsidiaries, joint-venture
partners, or independent overseas contractors. The triangle is
completed when the finished goods are shipped directly to the
overseas buyer under the U.S. import quotas issued to the exporting
nation”. Examples are Hong Kong and Taiwan footwear manufacture’s
massive investments in China.
Gereffi observes that triangle manufacturing changes the role
of NIEC manufacturers from established suppliers for US retailers
and marketers to middlemen in buyer-driven commodity chains that
can include as many as 50-60 exporting countries(Gereffi 1999).
Triangle manufacturing has important implications for developing
countries for in the globalised economy exporters have shorter
periods in which to exploit their competitive advantages. In footwear,
for example, while an export industry took more than 20 years
to develop in Japan and about 15 years in Taiwan and South Korea,
China's footwear sector did it in less than 10 years (Gereffi
1995). Competition grows fast in regions and in the world, demand
fluctuates and export possibilities for developing countries face
the problems of “boom-and-bust". Product life cycles are
shortened phases of economic growth tied to fluctuating external
demand and intense regional competition.
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