About global value chains
Globalization has caused companies worldwide to divide their products or services into components and, instead of obtaining those components domestically, acquire them from
other countries though international trade. This business model comprises all the linked activities needed to bring a product or service from conception to consumer, and is called a global
value chain (GVC).
Whether you export or not, your company has very likely been affected by the three major forces driving the growth of GVCs. The first is transportation; as logistics costs fall, a firm can
move its goods and services over greater distances without losing competitiveness. If you’ve relocated some of your production abroad, thus moving it farther from your Canadian customers, you’ve become part of a global value chain.
The second driver of GVC growth has been the advent of more flexible, adaptable and cheaper information and communication technologies (ICT). If distance has become less of a constraint on your foreign operations, it’s likely that better ICT has been partly responsible. Advances in ICT have also made it possible to trade in services that depend on the rapid movement of large volumes of data (such as software development or financial services) or real-time communications (such as online medical diagnosis or teleconferencing).
The third GVC driver is that the world’s countries have been reducing barriers to international trade while establishing more and more free trade agreements. If you export to the U.S.,
the North American Free Trade Agreement has probably made it easier for you to do business there.
Benefiting from global value chains
It’s quite possible that your company is part of a global value chain even if you’re not an exporter – if your customers are all in Canada but you acquire some of your production inputs
from a foreign country that has labour-cost advantages, you’re linked to a GVC. This is a very simple and basic way of benefiting from a GVC, but there are several other ways to take advantage of them.
Provide an intermediate input for an existing value chain
If your product is something that another company (either Canadian or foreign) uses as an intermediate input for its own activities within a GVC, you may be able to link into that
chain by becoming a supplier to the company. This is a very common approach and certainly the simplest, since it closely approximates the traditional model of production and/or exporting. For SMEs, particularly those with niche technologies or specializations, GVCs provide new opportunities for selling to multinationals and their suppliers, especially as these firms
outsource activities that were previously carried out internally.
Develop your own global value chain through outsourcing
If your company manufactures either finished products or intermediate inputs for other companies, you can use outsourcing to set up your own GVC. This means that you acquire your own intermediate inputs, such as raw materials, components, subsystems and other goods and services, from foreign suppliers, and use them to manufacture your finished product or intermediate input in Canada (or in another country, for that matter).
Use FDI to connect to or establish a global value chain
By investing abroad you can gain immediate access to a foreign market, allowing you to expand your sales and promote your company’s growth. There is a considerable spectrum of investment approaches, ranging from the passive to the active. You might, for example, become part of a GVC in a passive manner, simply by investing in a foreign company while taking little or no part in its operations. Purchasing a foreign firm, or setting up a joint venture or partnership with a foreign company, might also work for you; either of these strategies lets you take advantage of the other firm’s assets and experience, which will increase your competitiveness in the local market and give you better control of local production and distribution networks. This approach can be very cost-effective if you obtain existing production and distribution capabilities through the investment and don’t need to build them from the ground up.
At the active end of the spectrum, you could become a full participant in a foreign market by establishing a wholly-owned subsidiary there. This investment strategy presents a range of
advantages that can help you benefit from the GVCs of which your company is already a part. Perhaps the most important of these advantages is that you aren’t dependent on a partner, so
you control the direction your subsidiary will take. You also have direct contact with your end users, which is good for developing new products and for building solid customer relationships.
Focus on service sectors
The service sector provides many opportunities in the financial, educational, consulting, environmental, engineering and architectural sectors, to name just a few. Even if you’re primarily a manufacturer, you may be able to move up the value chain by branching into value-added services related to your sector, such as design, distribution, marketing and logistics.
Author: Milusha Petrica: Discover New Markets---EDC.
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