The new logic of global production
Until the 1970s the design, manufacture and marketing of industrial goods took place in vertically integrated firms operating within national boundaries. When multinational firms invested abroad they recreated this form of vertically integrated production. Since then, however, the phenomenon of globalization has involved a substantial increase in the amount of trade and foreign direct investment and new ways of organizing production. This has brought about the following intra-firm and inter-firm changes:
Large firms have been responding to the increased competition that accompanies globalization by transforming their hierarchical, vertically integrated structures into networks or chains of production. This enables them to react more quickly to changes in demand with new products at the right price and quality. Each unit or link in the production chain performs a specific function, its core competency, providing the network with a highly specialized and flexible production capability. Each link in the production chain represents a different level of value added activity with distinct types of investment, technology, human resources and organization of work. The key functions, and the most valuable, are those of research and development, design, finance, marketing and coordination. The manufacture and assembly functions, on the other hand, can be performed by decentralized units spread all over the world. Increasingly those units are no longer part of the same company or ownership structure but part of a new governance structure in which lead firms organize production in global chains. De-verticalization is accelerating and enlarging the phenomenon of foreign investment without factories, in which major transnationals produce all over the world but own no factories.
The potential contribution of foreign direct investment (FDI) to national development varies according to the host country's level in the global production chain. Zone-operating countries, enterprises and workers' organizations need to understand those production chains in order to:
Production chains are not static. They evolve and the position of zone-operating countries and enterprises within those chains will change over time. It is important to understand the forces driving those changes in order to respond appropriately with policy reforms and institutional interventions. Zone-operating countries and enterprises may also wish to influence the evolution of production chains through proactive measures to promote more beneficial types of investment and enterprise performance.
Production chains may be reorganized because of:
The evolution of technology and the resulting changes in the organization of work also have important implications for the structure of production chains and the position of zone-operating countries and enterprises within them. Changes in technology and work can dramatically alter the production process in industries which are heavily represented in zones and could:
Such developments obviously have serious implications for zone-operating countries, which could find themselves at a competitive and social disadvantage as a result of changes in production chains or technology. Enterprises may migrate, leaving thousands of workers jobless and zones no longer viable. Changes in production chains are clearly beyond the control of a zone-operating country and its social partners, but if the forces driving such changes can be understood and anticipated the zone-operating country could make the necessary policy interventions in a timely manner to ensure their continued relevance as an investment destination and production platform. The steps which the Government and the social partners should consider taking include: