By Chinmay Deshmukh

I. INTRODUCTION: WHAT IS GLOBAL SUPPLY CHAIN?

The pattern of world trade has witnessed remarkable changes over the last three decades owing to the reductions in transport costs, revolution in the information technology, and liberalisation of economic policies across the world. Today, the entire process of production does not take place in one country alone. Intermediate inputs are acquired from across borders, and different production processes – from the design of the product and manufacturing of components to assembly and marketing – shift to the most efficient locations. An average car today has thousands of parts produced by hundreds of suppliers from dozens of countries. This is because production facilities are built in a place where business conditions, including labour, raw material procurement, distribution, customs and tax regulations are more favourable. De-localization of production processes comprises not only manufacturing processes but also services (UNCTAD, 2013). Such internationalisation of production has led to complex cross-border flows of goods, know-how, investment, services and people (Baldwin, 2012), popularly known as “Global Supply Chains” (GSCs).

From an economic standpoint, GSCs represents the concept of comparative advantage indicating the efforts by the corporations to maintain their competitiveness by enhancing productivity and minimizing costs. This type of production is a major reason why the global trade has grown so fast. The volume of world trade today is twenty-seven times larger than it was in 1950 (WTO, 2013).

For developing countries and their companies, supply chain translates into increasing opportunity to manufacture goods for the global market. Such supply chain trade inevitably involves crucial technology transfer, including modern management know-how as well as information on quality standards (WEF, 2012; Dean, 2012), presenting a well-situated window of opportunity for firms in developing countries to become more competitive in the era of globalisation. Participation in GSCs could also create economy-wide externalities for developing countries, such as more employment, improvement in technology and skills, productive capacity upgrading and export diversification into more value added products. In turn, those externalities would increase their attractiveness for more foreign direct investment (UNCTAD, 2013). Integration into GSCs, therefore, is assuming a central role in developing countries’ policies for export-led development.

However, as there are many benefits to supply chains, joining the highly complex GSCs also brings along a whole new set of challenges for these countries.

II. GSCs FROM A DEVELOPING COUNTRY’S PERSPECTIVE: CHALLENGES AND LIMITATIONS

A. GSCs Not Really Global: Essentially Regional Operation of GSCs

Global Supply Chains have principally concentrated in the US, EU and East Asia, and this phenomenon is still negligible in other regions of the world, particularly Africa. Numerous factors are responsible for the emergence of such a structure, including transportation costs, distance, communication and the quality of infrastructure. Moreover, a large part of the explanation for the current pattern of GSCs may be attributed to the existence of regional trade agreements negotiated with major trading entities and the preferential rules of origin that they entail which strongly influence investment flows and production sharing (Stephenson, 2013). Such ‘Rules of Origin’ create significant limitations for developing nations outside of a given trading block.

B. Challenges Encountered by Small and Medium Enterprises (SMEs) from Developing Countries

Often, most of the firms that participate in GSCs from developing countries are SMEs which are drawn into GSCs through providing intermediate inputs. However, division of benefits from GSCs is not equal between more advanced MNCs from the developed countries and SMEs based in developing countries. SMEs face different and more complex types of barriers than do larger firms, including limited access to trade financing; difficulties in identifying partners for GSC operations; and difficulty in payment processing (Aldonas, 2013), which makes their involvement in GSCs even more challenging.

C. Problems of Infrastructure, Border Administration, Market Access and Business Environment

Essentially, GSCs are a commercial strategy of MNCs, driven by their business interests. Low labour cost in itself is not an adequate reason for them to relocate a part of their production process into another country. GSCs also rely on sophisticated and competitive networks of goods and information flow. Participating and upgrading along the chains requires not only manufacturing skills, but also a sound business environment – elements which are often lacking in developing countries (UNCTAD, 2013).

Further, GSCs can only function effectively if the trade and commerce environment they operate within allows them to do so. In this context, transport costs and cost-effective border operations assume central role. The distance between suppliers of inputs and the markets is a crucial factor for any firm while deciding its business strategy and this distance factor can only be overcome if the operation of port and airport facilities, and accompanying services such as ICT services, customs clearance procedures, and low inventory cost systems can offset the greater distance with greater effectiveness. These include all aspects of border management: speed, automation in clearance procedures through customs, efficient port operations and cargo handlers, as well as the trade-related infrastructure in place and quality of transport services (Stephenson, 2013). Developing countries often have inefficient logistics infrastructure and operation; and therefore, firms in such countries do not get called upon to participate in GSCs.

III. NAVIGATING THE ROAD AHEAD: THE URGENT NEED TO RESOLVE THE ISSUES OF INTEGRATION

In an era of integrated investment, production and trade networks, GSCs will continue to grow in prominence and will determine the global trading framework of the 21st century. However, many developing countries fear that this agenda is driven by OECD countries to try and make the world “safe” for the operation of their MNCs and ask what value they can derive (Stephenson, 2013). Thus, it is important to ensure that both developed and developing countries participate and derive benefits from GSCs. This will necessitate both governments and corporations to revise their policy stance on one hand and their participation on the other.

In this networked world, enabling local firms’ participation in Global Supply Chains will require a focus on improving both an economy’s “hard infrastructure,” such as transportation and communications infrastructure as well as its “soft infrastructure” including its institutional arrangements, quality and safety standards, and improvements in customs procedures.

That implies a greater need to focus on liberalizing restraints on investment, adopting measures to facilitate access to finance, adopting rules that encourage innovation and the exchange of ideas, and institutions that foster the development of human capital. All of which suggests the need for a broader focus for trade policy – one informed by the need to create an environment that facilitates participation in such value chains (Aldonas, 2013).

Chinmay Deshmukh is a fourth year student at the National Law University, Jodhpur. He is pursuing B.P.Sc. (Hons.) LL.B. (International Trade and Investment Law Hons.) in the University. He is an associate editor at NLUJ Law Review. After completing the LL.B., he plans to pursue Masters of Public Policy. His interests includes International Trade and Investment Law, International Relations, Public Policy and Economics. He can be reached at chinmaydeshmukh1@gmail.com.

 

Posted by The Indian Economist | For the Curious Mind