Locating Global Advantage

Industry Dynamics in the International Economy

Stanford University Press

Copyright © 2004 Board of Trustees of the Leland Stanford Junior University
All right reserved.

ISBN: 978-0-8047-4758-5


Chapter One

Introduction

MARTIN KENNEY

Globalization is much more than simply moving employment and activities from developed nations into nations with lower-cost labor forces. Such a simple conclusion obscures the complicated skein of cross-border relationships that have evolved out of firm strategies seeking to balance a kaleidoscope of variables including labor and inventory costs, transportation, quality, concentration of valuable knowledge in clusters, and temporal proximity to customers. Understanding firm strategies at a single moment in time is complicated enough, but unfortunately these variables also fluctuate. For example, Singapore-at one time a low-cost environment with a weak infrastructure for hard disk drive manufacturing-over two decades evolved into a high-cost environment with a very sophisticated infrastructure. Today Singapore is a manufacturing, R&D, and logistics center. For firms, the global map is a gigantic, evolving chessboard upon which boundedly rational corporate strategists operating in internal and external political environments must not only situate production but also decide to make or buy. These decisions, though complicated, are not random; corporate managers are responding to real constraints and opportunities.

For most Americans, the closest interaction with the enormous number of nations in the United Nations occurs on visits to their local Wal-Mart, which, of course, means that the world is in our homes, a part of our everyday life. A stroll through Wal-Mart's aisles reveals national origin labeling on objects from Bangladesh, China, Haiti, Honduras, Indonesia, Korea, Mauritius, Mexico, Taiwan, and a myriad of other nations. But as the chapters in this book show, these labels are deceptive, because the product is an assemblage of physical and intellectual inputs from yet other nations. The goods we buy are the end result of an elaborately choreographed transnational odyssey. These objects are part of an economy whose tendrils reach ever further outward, linking, integrating, and transforming both far-flung and nearby places.

Firms and industries generate powerful economic forces shaping the lives of all human beings. Often industries are treated as black boxes, a perspective implying that economic shifts, technological change, and market dynamics will shape every industry similarly. Our chapters recognize that firms are remarkably different, and thus their repertoires for creating advantage are diverse. We are unified by an understanding that firms within industries are evolving, as are the locations in which they operate. Current configurations are responses to past conditions and prior firm strategies. History matters, insofar as previous decisions shape the contemporary landscape within which firms compete for future competitive advantage.

In the current conjuncture, firms scan the globe for favorable combinations of production factors and factor prices. And yet, as Paul Duguid in his foreword and Bruce Kogut in his concluding chapter remind us, cross-border trade has a long history. All of the parties to this trade have attempted to create power asymmetries to strengthen their bargaining positions versus those of their partners and rivals. The resulting configurations can lock in for extended periods. However, as Kogut points out in his chapter, multinational firms often also operate as highways for the diffusion of knowledge, thereby sowing the seeds of change. Firm strategies are important for creating regional economies and institutions.

Locating Global Advantage

This book is the result of an ongoing commitment by the Alfred P. Sloan Foundation to study how U.S. firms are both actors in and subjects of globalization. The foundation's tenet has been that the evolution of national economies and firm behavior can be understood only through intensive examination of firm actions within an industry context. All of the chapters focus on the organizational configuration and locational choices of U.S. firms. Although the decisions and actions of these firms can be critical to local economic development, the chapters were not meant to assess the economic development impacts of corporate actions. Nonetheless, this book will be useful for readers interested in international development, as the chapters elucidate the dynamics that frame corporate locational choices.

The contributors to this volume share certain common beliefs, both methodological and philosophical. Fieldwork (especially practitioners' interviews) is particularly important; it is only through factory visits and personal interviews that a researcher can grasp the dynamics within which corporate actors make decisions. We also are influenced by evolutionary economics (Nelson and Winter 1982) and share its perspective that firms and industries can be understood only in a historical context. Put succinctly, globalization is an evolutionary process.

Locating Global Advantage quite properly studies the spatial dimension. Each of the authors treats the spatial dimension as an organizational and operational outcome of an evolutionary set of decisions, and as such the meaning of various locations may not be so obvious. But, more important, our authors recognize the evolutionary and nonergodic character of spatial configurations (Arthur 1994; David 1986) and the evolution of places as knowledge-laden locations or learning regions (Florida 1995; Storper and Salais 1997). To rephrase Storper and Walker (1989), firms and industries build places, and this process is the source of clusters that benefit from both traded and untraded interdependencies.

To examine the globalization of industries, the authors recognize that often the production and marketing of a commodity are segmented into juridically separate organizations or, as Winter (1987) termed them, "units of accrual." While recognizing that the intellectual roots of the social division of labor (Sayer and Walker 1993) can be traced at least as far back as Adam Smith, we draw most directly upon Michael Porter's (1990, 1986) concept of value chains, Kogut's (1985) concept of value-added chains, and Hopkins's and Wallerstein's (1986) concept of commodity chains, which was further developed by Gereffi (1994, 1999). The chapter authors more frequently use the term value chain because it explicitly recognizes the significance of less commodified activities such as R&D and marketing.

There are difficulties with the "chain" metaphor, which is probably more appropriate for thinking about the internal activities of the firm but can create a misleading image when considering the production of an assembled product. The other metaphor that has long been used to describe these interfirm ties is, of course, "networks" (Bartlett and Ghoshal 1989). More recently, the use of networks to describe social and economic relationships has become ubiquitous. Despite some felicitous aspects of networks as a metaphor for the way a production system might be modeled, there are also difficulties. For example, in the network conceptualization there is no sense of a relatively unidirectional motion of goods toward the consumer (though obviously information and money flow in the other direction). If a metaphor is necessary, then we believe a more appropriate metaphor would be the one used often in industry-namely, that of a dendritic river basin that drains into the sea, which is the final consumer. However, the authors in this book, for the sake of ease and uniformity, adopt the chain metaphor.

We are interested in how and why the various processes involved in value creation are distributed among different firms. For example, as Leachman and Leachman show, the producers of DRAMs (dynamic random access memories) and microprocessors for personal computers integrate a larger portion of the value chain than do firms involved in the custom logic chip chain. For custom chips an interorganizational division of labor between chip design firms and silicon foundries has evolved. Even within industries there is often an astonishing richness in the way interorganizational linkages are structured. This is very often overlooked by those who have not studied the firms and industries closely. Individual industries have their own logic, so globalization and vertical disintegration should be expressed differently in each industry (for an excellent overview, see Dicken 1998).

Our book complements research in international trade economics that recognizes that differing industries have distinct profiles in how they organize their praxis and create advantage (Feenstra 1998). Still, for methodological reasons, economists generally view globalization in terms of trade statistics disaggregated at the three- or four-digit Standard Industrial Category (SIC) code. While helpful, these studies sometimes suffer from a lack of specificity and thus ignore firm strategy. They also find it difficult to explain the reasons for changing patterns of trade. For example, SIC Code 3344 contains all semiconductors including DRAMs, microprocessors, and other logic chips, but the difficulty with this aggregation, as Leachman and Leachman indicate, is that corporate strategies, spatial and organizational configurations, and evolutionary dynamics in each category differ. This is not easily captured in the statistics but can obscure some of the underlying firm choices shaping the global economy and America's place in that economy. For example, is a semiconductor designed and marketed by a Silicon Valley firm, but fabricated in Taiwan, a Taiwanese semiconductor, an American semiconductor, or what? The chapters provide the thick description that excavates below numbers and statistics to expose the difficult, complicated world of business in a global economy.

Five Cross-cutting Dynamics

The richness of these industry studies provides insight into five dynamics that are propelling globalization and appear in different guises in nearly every chapter. The first dynamic concerns the technological and organizational advances in the fields of transportation and communication that operate in the background of each industry. The second dynamic is the multifaceted drive for greater speed, in terms of speed-to-market, more rapid product design, and more rapid inventory turnover-all meant to reduce various cycle times. Unrelenting cost pressure that continually commodifies existing products forcing businesses to lower costs is the third dynamic. In situ knowledge creation, whereby deep experience and capabilities are concentrated in certain locations or industries, is the fourth dynamic. Finally, the fifth dynamic concerns management's decisions regarding where to site the various corporate functions in relationship to their customers. These dynamics pressure firms to continually consider the location for various activities. Like a kaleidoscope for which each twist of the cylinder creates a different picture, in each industry and even industrial subsector, these dynamics create different patterns.

Transportation, Communications, and Globalization

The decreasing cost and increasing speed and capabilities in transportation and communication networks are the foundations for the expanding reach of global value chains. Technical improvements allow firms to pursue innovative approaches to operating the value chain. Multimodal transportation systems based on standardized cargo containers for land-sea shipping and sophisticated air freight systems have shortened the elapsed time and increased reliability. These innovations and others are loosening some earlier locational constraints. Transportation improvements lag compared with the even more dramatic decline of information transmission prices. The result has been an electronic data interchange web connecting an ever greater number of the nodes in the value chain, thereby increasing information sharing. Decreasing costs of communication are only one benefit, as significant as the far greater flexibility and transmission bandwidth created by developments such as the graphical nature and open protocols of the Internet (Cohen et al. 2001).

This is not the first time that new transportation and communication technologies have affected the organization of capitalism. Chandler (1977) credited the railroad and telegraph as critical technologies in enabling the creation of the multidivisional firm. In the last decade, there has been a metamorphosis of transportation providers into logistics firms capable of handling both the movements of bits of information and atoms of product. Increasingly, communications networks permitting the tracking of an artifact's progress from inception to the final consumer are interlinking a value chain's disparate activities. The impacts of these advances are stunning. By one account, in 1980 U.S. logistics spending was 17.2 percent of total GDP, and of that 9 percent of total GDP was inventory investment. By 1995 this had dropped to 10.8 percent and 4.3 percent, respectively (Lappin 1996). Today, transport costs constitute only approximately 1 percent of the final price of consumer goods (Taggart 1999). From the rapid replenishment system described by Abernathy et al. for garments to Dell's build-to-order PC production system described by Curry and Kenney, the transportation and communications advances are providing firms with more efficient and transparent logistics systems.

Logistics specialists such as UPS or Federal Express not only handle deliveries on a global scale but are also capable of undertaking some measure of final assembly: packaging, inventory management, and distribution. Retailers, assemblers, suppliers, and logistics firms responsible for moving the physical goods are having their software systems woven into an integrated global web. What began as a just-in-time (JIT) system that required close proximity between assemblers and suppliers is evolving into a JIT system spanning national boundaries and oceans as firms strive to access widely dispersed production factors even while reducing inventory costs and depreciation risks by keeping goods continuously flowing downstream toward the final consumer. Logistics firms experience continuous pressure to further shorten transit times, improve delivery predictability, and lower costs. As the recent West Coast dock lockout showed, there is also heightened vulnerability caused by the constantly swelling tide of goods in motion. For example, the number of freight containers handled by the world's ports increased from 6.3 million in 1972 to 163.7 million in 1997, while prices on the Asia-U.S. route dropped by an inflation-adjusted 65 percent during the same time period (Taggart 1999).

Although shipping costs have dropped significantly, communication and data processing costs have fallen far more precipitously, while international (and national) bandwidth has grown dramatically. For example, the annual cost of leasing an E-1 telecommunications circuit from New York to London dropped from $125,000 in October 1998 to approximately $10,000 in February 2002, an annual decrease of 50 percent per year (Telegeography 2002). Put differently, the investment cost per minute decreased from $2.443 per minute in 1956 to $0.001 in 2001 (Blake and Lande 2001). The decreasing cost of communications permits the transmission of ever greater amounts of information in real time, thereby keeping upstream participants in the value chain better informed, allowing them to make more timely decisions, thus decreasing uncertainty. The Internet has created even more opportunities to use communications systems to rationalize the value chain (see, for example, Hammond and Kohler 2001; Kenney and Curry 2001; Fields 2003).

Users can take advantage of the availability of low-cost communications bandwidth to develop innovative solutions to production and distribution bottlenecks, thereby minimizing the impediments to the flow of goods. For example, new information systems make it possible to pack garments into shipping containers in Hong Kong properly ordered so that they can be unloaded directly into U.S. retail stores. This eliminates the need to unload the container en route, thereby saving time and money (Taggart 1999). As another example, Leachman and Leachman show that these communication networks permit real-time monitoring by Silicon Valley chip designers of the progress of their orders in Taiwanese fabrication facilities.

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