Global Value Chains and Development - Presentation at Nazarbayev University in Kazakhstan

1. GLOBAL VALUE CHAINS AND DEVELOPMENT 1 Gary Gereffi Duke University October 17, 2016 Nazarbayev University Astana, Kazakhstan

2. AGENDA 1. The New Global Economy 2. Clarifying GVC Concepts & Methods  Value Chain Mapping  Value Chain Governance  Value Chain Upgrading 3. Kazakhstan: The Challenge of Industrial Diversification

3. © 2016 Duke CGGC The New Global Economy Old World of Trade (pre-1980) • Countries trade finished goods • Build national industries (ISI) New World of Trade • Countries trade intermediate goods; imports needed to export • Join global industries (EOI) Trends – GVCs  80% of world trade (UNCTAD, WIR 2013) – Rise of intermediate goods trade (import content of exports): 20% in 1990; 40% in 2010; 60% in 2030 (P. Lamy, WTO) – Consolidation within GVCs in fewer, larger suppliers – Concentration of production and consumption in relatively few large emerging economies

5. © 2016 Duke CGGC TYPES OF CHAINS: Inter-Firm Networks in the Global Economy • Global Supply Chains: LOGISTICS (1970s & 1980s) – Logistics (transportation focus: reduce time + costs) – Trade Facilitation (lower barriers at the border) • Global Commodity Chains: LEAD FIRMS (1990s) – Producer-driven chains: Trade + FDI (e.g., aircraft, autos, mining, oil) – Buyer-driven chains: Trade w/o FDI (retailers, global brands, manufacturers without factories) • Global Value Chains: CREATING & CAPTURING VALUE- ADDED (2000s) – Create, capture & sustain domestic value added • Regional Value Chains: EMERGING ECONOMIES (2010s) – Growing in importance, esp. since 2008-09 and in emerging economies. 5

7. © 2014 Duke CGGC GOVERNANCE & UPGRADING 7 Global value chain analysis provides both conceptual and methodological tools for examining the global economy • Top-down: a focus on lead firms and inter-firm networks, using varied typologies of industrial “governance” • Bottom-up: a focus on countries and regions, which are analyzed in terms of various trajectories of economic, social and environmental “upgrading” (or “downgrading”)

9. © 2014 Duke CGGC FRUIT & VEGETABLES VALUE CHAIN (SIMPLIFIED) Analyzing the position of different countries in the value chain can allow you to identify countries that have successfully upgrading & then examine the policies and changes they implemented to successfully achieve that functional upgrading. 9

10. © 2014 Duke CGGC EXAMPLE 1: GEOGRAPHY OF THE ELECTRONICS GVC Contract manufacturersGlobal brand leaders Product designers Components & AssemblyDesignR&D & marketing What role, if any, do African countries participate in the electronics GVC? 10

14. © 2014 Duke CGGC GVC LEAD FIRMS & THEIR SUPPLY CHAINS 14 Giant Retailers: Wal-Mart  Largest retailer in the world directs the biggest supply chain  > 60,000 suppliers worldwide and over 80% are in China Global Brands: Nike  Nike, the largest sportswear company in the world, does not own any factories.  Nike products made in 930 factories (subcontractors) in 50 countries  >1 million workers in supply chain, but just 38,000 direct employees in U.S. Manufacturers w/o Factories: Apple  Apple, the top smartphone company in the world, designs and markets its products but owns no factories  Foxconn, the largest electronics contract manufacturer in the world, makes Apple products and employs >1 million workers in mainland China

16. © 2014 Duke CGGC TRIPLE BOTTOM LINE: Diversified, Inclusive and Green Growth Economic Upgrading Social Upgrading Environmental Upgrading Sustainable Growth Development Outcomes: • Job creation • Exports • Income generation • Added value • Better use of resources • Backward linkages Development Outcomes: • Inclusion of vulnerable groups • Job creation • Improve working conditions • Higher wages • Skills acquisition Development Outcomes: • Soil preservation and improvement • Water conservation • Wildlife conservation • Pollution and waste reduction

19. © 2014 Duke CGGC 19 Composition of China’s Exports to the World Market, 1990-2014 Source: UN Comtrade. 62 72 85 92 121 149 151 183 184 195 249 266 326 438 593 762 969 1.2T 1.4T 1.2T 1.6T 1.9T 2.0T 2.2T 2.3T 0 10 20 30 40 50 60 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 %ExportMarket Primary Products Resource Based Manufactures Low Tech Manufactures Medium Tech Manufactures High Tech Manufactures Total Exports US $B

20. © 2014 Duke CGGC China assembles all iPods, but it only gets about $4 per unit – or just over 1% of the US retail price of $300 451 parts that go into the iPod The retail value of the 30-gigabyte video iPod that the authors examined was $299 in June, 2007 The bulk of the iPod’s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain. Apple figured out how to combine 451 mostly generic parts into a valuable product. Hard Drive by Toshiba  Japanese company, most of its hard drives made in the Philippines and China; it costs about $73 - $54 in parts and labor -- so the value that Toshiba added to the hard drive was $19 plus its own direct labor costs Video/multimedia processor chip by Broadcom American company with manufactures facilities in Taiwan. This component costs $8. Controller chip by Portal Player American company with manufactures .This component costs $5 . -Final assembly done in China, costs only about $4 a unit The unaccounted-for parts and labor costs involved in making the iPod came to about $110 The largest share of the value added in the iPod goes to enterprises in the United States $163 of the iPod’s $299 retail value in the United States was captured by American companies and workers, breaking it down to $75 for distribution and retail costs, $80 to Apple, and $8 to various domestic component makers. Source: Varian, Hal R. The New York Times, June 28, 2007. An iPod Has Global Value. Ask the (Many) Countries That Make It.

21. © 2014 Duke CGGC U.S. Trade Balance with China for iPhone 4 (US$, 1 unit) 21 Source: G. Gereffi and J. Lee, “Why the world suddenly cares about global supply chains,” Journal of Supply Chain Management (2012).

23. © 2014 Duke CGGC KAZAKHSTAN’S INDUSTRIAL POLICIES IN THE 2000s • Kazakhstan 2030 Strategy  Initial push toward industry-focused diversification • Strategy of Industrial Innovation Development (2003- 2015)  Sets official targets for various sectors • Accelerated Industrial Innovation Development (2010- 2014)  16 different sectors in 4 areas (traditional, domestic-demand, high export potential & “economy of the future”) / GOALS: productivity & value added • Kazakhstan Strategy 2050  Shifts resources away from SOEs toward entrepreneurs & SMEs 23

24. © 2014 Duke CGGC Kazakhstan: A Failing Quest for Economic Diversification • Growth in the last decade has been impressive (Felipe and Rhee 2013) – 10% annual GDP growth between 2000 and 2007 – Per capita income reached the World Bank threshold for high-income countries ($12,000), in 2012 • However, Kazakhstan’s growth remains exposed to volatile global commodity prices • 8.7% of Kazakhstan's exports in 1995 were in crude/refined petroleum and natural gas. By 2010, the figure had reached 70% • Apart from oil and gas, Kazakhstan remains dependent on primary commodities such as iron, copper, gold, uranium and silver among others Kazakhstan Export Value 1995-2010: Focus on Mineral Products Crude and Refined Petroleum, Natural Gas and other Mineral Products Details: Trade data presented in Harmonized System (HS) 4-digit classification Source: MIT’s Observatory of Economic Complexity

25. © 2014 Duke CGGC Major Export Industries in Hungary, Romania, Latvia, Russia and Kazakhstan, 2000 25 (% of total export in current USD) Resource- Capital- Capital and Labor- based intensive basic skill-intensive intensive industries manufacturing complex manufacturing manufacturing Hungary 14 9 50 24 Romania 25 16 15 42 Latvia 53 12 9 25 Russia 60 14 6 3 Kazakhstan 81 15 2 1

26. © 2014 Duke CGGC Kazakhstan’s Oil & Gas Value Chain: Pyramid of Supporting Industries 26 Source: Gereffi & Rodriguez, World Bank Mission Report, Sept. 2003 Global competition Local competition Labor intensiv e Capital & knowledge

28. © 2014 Duke CGGC VALUE CHAIN UPGRADING AND LOCAL DEVELOPMENT POLICIES The GVC framework suggests ways to enhance the competitiveness of local economic clusters: • Focus on quality and high-value activities in order to move up global value chains • Target MNCs that will strengthen country’s GVCs and create dynamic local linkages • Strengthen the role of domestic suppliers and use TNCs as learning platforms • Workforce development – skills for upgrading • Regional integration – for productive upgrading 28

Global Value Chains and Development - Presentation at Nazarbayev University in Kazakhstan

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