Become a link in the Global Value Chain, say experts

Economic growth is about more than just trade of goods and services. Global Value Chains, say experts, are key to balanced economic growth and represent a wealth of opportunity for both developed and developing economies.

To position the region for new growth, APEC economies, industry experts and academics have been considering the potential of cross-border production networks at a workshop in Hiroshima.

"Global value chains are about value-creation from conception to consumption," explains Dr. Timothy Sturgeon of the Massachusetts Institute of Technology. Companies need to think about how they can add value at discrete stages of a production process, and how to insert themselves into global production chains. For example, says Sturgeon, the ability to conceive of a product and to convince others of its value is often much more valuable than the product itself.

He draws on technological innovation as an example: "Apple's ability to create products that people want allows them to extract a huge chunk of the pie." On the other hand, the manufacturers that Apple hires to make its products often realise a very small proportion of its returns.

Governments recognise that apart from facilitating trade, business environments must also encourage innovation. In fact, say APEC Leaders, for growth to be inclusive, balanced and sustainable, it should be knowledge-based.

Global Value Chains can help to level the playing field: to be the innovator in a global value chain, a company doesn't have to be the biggest, or even based in an industrialised economy. Value-adding emphasises uniqueness - the conception or creation of something that cannot be easily replicated by others - and so, theoretically, is an opportunity for everyone.

At the same time, the transition from conventional manufacturing to innovation is no mean feat:

"The problem for the manufacturer," says Sturgeon, "is that he may find himself stuck. He is unlikely to have any distribution networks or marketing savvy, so he remains a manufacturer of products that other people conceive."

Not everyone is going to be Steve Jobs. But, in order for growth among economies to be balanced, each economy should contribute both some of the innovations and some of the manufacture. Each economy needs a Steve or two.

According to Koen De Backer, Senior Economist at the Organisation for Economic Cooperation and Development, there is a very good argument that the existence of global value chains actually contributed to the apparent brevity of the recent economic crisis:

"During the crisis, the drop in import/export was not as big as could have been expected and now we see evidence of recovery. The success of global value chains depends on a network that takes time to develop. The initiating or "lead" company does not want to lose his first and second tier suppliers, because they help his company deliver the value he creates. Without the "supply-base", the whole system falls apart! So the global value chain may scale back but the structure remains and, once the worst of the crisis has passed, it is positioned for quick recovery and rapid growth."

Some suggest that a Darwinian effect will separate those economies willing to adapt to the knowledge-based economy from the ones that are not. Developing ideas is not a luxury of the rich and idle - it is essential to future growth and even to stability. Value can be added at many points from conception to product delivery, and involving more players at each stage of the chain means that the benefits are shared more widely - if not evenly.

Shared interests mean that international relationships will naturally be enhanced. "It's hard to imagine large-scale conflict among deeply interdependent trading partners; as global value chains spread across the entire globe? you'd be cutting off your own arm!" says Sturgeon.

Just how do governments ensure that there are enough ideas generated in their own economies?

"That's the million dollar question," smiles De Backer.

There is no formula. In fact, he insists, "there is no one-size fits all. It is not just one factor that will make the difference. It will be a combination of many different factors and the combination that works for one economy will not necessarily work for another."

Nonetheless, certain recurring ideas can be identified:

• Recognise that innovation and manufacturing are separate concepts and that they can be successfully carried out by different players in different locations. Invest in research and development.

• Protect intellectual property.

• Develop transportation, information and communications infrastructure.

• Create a business and innovation-friendly environment; reduce international trade tariffs and ensure the availability of skilled labour.

The most important thing, says De Backer, is for developing economies to get into the global value chain and then move along that chain. "Value chains are dynamic: they change from day to day, throughout the years."

APEC is a long-term contributor to the knowledge-based economy, supporting projects in education, intellectual property protection and ICT infrastructure. Free and liberalised trade is APEC's overarching objective and member economies have reduced tariffs from an average of 16 percent in 1989 to around 5 percent at present. The Global Value Chain Workshop is an initiative of the APEC Electronic Commerce Steering Group and was coordinated by Canada.