Strategizing development in the context of the GVC system

The global value chains (GVCs) of multinational corporations dominate the world economy.  According to John West, a former senior consultant of the ADB Institute, the GVCs account for 80 percent of global trade. Most products traded globally are made “in the world,” with different parts and components produced or manufactured in factories and facilities in various countries around the globe. A good example of a GVC product is the iPhone, which is assembled in China by Taiwanese companies Foxconn and Pegatron based on high-tech components produced in Japan, Korea, Germany and the United States.  Apple directly employs 63,000 out of more than 750,000 people involved in the designing, assembling and selling the iPhone and other Apple products globally.

GVC products cover virtually all tradeable goods, from labor-intensive sewn garments to high-tech plane engines. They also include services that are now included in the discipline of the

World Trade Organization’s (WTO) General Agreement on Trade in Services, such as the call center/BPO services outsourced to the Philippines and India by US Fortune 500 companies and the big corporations from Europe.

In GVC industrial production, Asia has the densest network, mostly GVCs for electronics, automobiles, machinery and clothing.  The book of John West, Asian Century on a Knife-Edge (2018), describes the dynamics of GVC production as follows:

“Each country specializes in tasks according to their comparative advantages.  Hong Kong and Singapore tend to specialize in logistics and finance, and be home to corporate regional headquarters. Japan and Korea focus on branded product designs and high-tech components, and Malaysia and Thailand specialize in midrange manufacturing.  Thailand has become a regional manufacturing hub for the automobile industry in particular, being used by companies like Toyota, Mazda and Ford.  China specializes in product assembly and lower-skilled manufacturing, although it is now graduating to higher value-added activities.  Bangladesh and Cambodia are very active in clothing manufacture, while Indonesia and Mongolia are rich in natural resources.”

The GVC phenomenon in Asia has come to be known as “Factory Asia”.  On the other hand, China is often referred to as the “Factory of the World” because China has the most number of GVC-related production activities in Asia, which account for 45 percent, or almost half of China’s total trade.

Clearly, GVCs are instrumental in the rapid growth and industrial transformation of China in the last four decades.  However, China is not a passive recipient of GVC investments, mostly those made by the “lead companies” or multinationals from Japan, North America and Europe.  A country can get stuck or trapped at the lower end of the GVC process, with the lead companies appropriating a big percentage of the values because of their control over technology and market.

To climb upward in the GVC ladder and to develop its own GVC system, China, in 2015, launched a program called “Made in China 2025.”  The idea, in the words of John West, is to make China a “manufacturing power,” not just a giant assembler.  In support of this strategic move, China has adopted the following measures: 1) ramping up spending on R&D, now estimated to be 20 percent of global spending on R&D (compared to US’s share of 27 percent; 2) forcing MNCs or foreign investors to transfer or share technology under what West calls as “innovation mercantilism”; 3) acquiring high-tech companies of other countries, such as Haier, buying GE’s appliances unit or Tencent’s getting Finland’s Supercell, 4) pirating high-tech designs and technology of other countries, (which the American security establishment calls as the “great brain robbery”); and 5) promoting innovation-based “entrepreneurship” for the masses, using exemplary models like Jack Ma of Alibaba.

The problem is that other developing countries are not able to copy or even emulate what China has done and is still trying to do. This includes the Philippines, which seems to be stuck or trapped at the middle level of the GVC system for electronics and auto parts production.  ADB’s Norio Usui, in a 2012 book, lamented that the Philippines is not scaling up in the value chain and seems to be stuck at the lower or middle level of assembly work for electronics.  With support from the government, some Philippine electronic enterprises can become like Samsung, which was once upon a time only a component producer for Sanyo.

The point is that we cannot reach the  developed middle-class country goal under AmBisyon 2040 if we do not have a purposive program of climbing the value-chain skills and knowledge ladder, as well as developing our own GVCs for Philippine-made industries. For example, the Philippines, a big archipelagic country, should become a high-tech maritime industry player, not a mere assembler of ships for Japan and South Korea. The integration of the steel, petrochemical and other strategic industries, where the Philippines can develop both comparative and competitive advantages based on the country’s natural endowments and latest technological know-how, should also be speeded up.

Scaling up means revisiting the policy on how to relate to foreign investors. There should be a program on how to encourage foreign investors to scale up their investments in the country.  The departments of Trade and Industry, Science and Technology, and or  Agriculture; National Economic and Development Authority; and Commission on Higher Education of the Philippines should also act as one team in identifying and promoting job-creating industries which can conquer the domestic, as well as foreign markets.  And yes, the abysmal national spending on R&D, a fraction of 1 percent of the GDP, should go up to the percentage level equal to that of Japan and Singapore.

Turning Points 2018
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