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Chapter 7

PSCI 2602 Chapter Notes - Chapter 7: Economic Globalization, Economic Liberalism, General Agreement On Tariffs And Trade


Department
Political Science
Course Code
PSCI 2602
Professor
Supanai Sookmark
Chapter
7

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Week 7 Chapter 7 The Globalization of Production
Introduction
Multinational Corporations (MNCs)
o Firms that have operations in two or more countries
o Source of hope and promise power of economic globalization for purposes of
development
o A source of fear and opposition who view globalization as a threat to national
sovereignty (174)
o Are ot aoyous uyers ad sellers egaged i ar’s-length trade.
o Through FDI they own assets and employ people in foreign countries. (175)
Global Value chains
o Important determinants of who gets what, when, and how in the global
economy.
o Two sides to the global production coin:
The perspective of home countries
Where the headquarters of multinational firms are located
What will be left behind when production moves abroad?
The perspective of host countries
The destinations of FDI and outsourcing
Whether they will be able to capture the high value-added
activities, or whether they will be trapped into a dependent
relationship with multinational firms in which they are limited to
low value-added activities. (175)
Numbers and trends
How can we measure the growth of Global of global production?
o The rapid increase in FDI prior to the global economic crisis that began in 2008.
(176)
o The rising importance of developing countries in these flows. (176)
FDI only measures global production that takes place under foreign ownership, and
neglects outsourcing of production. (177)
Outsourcing is the reallocation of a particular task from within one firm to another, and
the two are usually separated by having different ownership. (177)
Example:
o An American firm that uses a Korean manufacturer located in China is both
outsourcing (from the perspective of the US firm) and reliant on FDI (from the
perspective of the Korean firm) (177)
o It points to the wide variety of governance forms in global value chains.
Why now?
The liberalization of trade (177)
The fragmentation of value chains requires low tariff barriers. (177)
The trend of increased economic liberalism continued with each successive round of the
General Agreement on Tariffs and Trade (GATT). (178)
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A general trend towards market-based policies this expanded the range of options for
global production. (178)
Governments in the developing world used the expansion of global trade as an engine of
growth. (178)
Firms from high-wage economies began to break apart their value chains and locate the
manufacturing of each component according to competitive advantage.
Technology was extending the geographical reach of business, making possible new
forms of business organization.
These changes led to the fragmentation of the value chain
o New forms of transportation
o The introduction of standardized shipping containers
Containers reduced the friction of transportation in global economy.
(178)
o The digital revolution and the shift to modularity made it possible to separate
the activities of the value chain and scatter them across the globe. (179)
o The ability to codify design information in digital form, when combined with new
forms of telecommunication to transmit this information (179)
o The design firm transmits the design specifications electronically to the
production facility, and as long as the production facility meets the appropriate
standards, it can be located anywhere.
o The ability to codify design information does not inevitably lead to the
fragmentation of the value chain. (179)
o Firms may decide that it makes sense to co-locate distinct parts of the value
chain but it does create a wider variety of possibilities than existed previously.
(180)
Globally integrated enterprise
o A company that fashions its strategy, its management, and its operations in
pursuit of a new goal: the integration of production and value delivery
worldwide.’ (180)
Global Value chains: Governance and Location
Governance
Governance any means of coordinating interdependent activities
Governance options for global value chains along a spectrum
o At one end of the spectrum are pure market relations with foreign firms.
o At the other end is hierarchical control of foreign operations
o Between these two endpoints are various forms of networks. (181)
Vertical integration and Hierarchical coordination
The costs of some market transactions are higher than others.
Hierarchical coordination retaining all activities within the organization (181)
A firm will create operations abroad when the net costs of an internal market
hierarhial oordiatio are lower tha the ew ost of usig ar’s-length market
relationships.
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