Upgrade by integrating into global value chain

The 2014 Asia-Pacific Economic Cooperation forum meeting held in November in Beijing put "promoting the APEC global value chain cooperation" as a focus of discussion.

In the subsequent G20 summit, held in Brisbane, Australia, President Xi Jinping called for an open world economy.

China is a champion of global free trade and the cultivation of a global market.

The two conferences delivered an important message: that Chinese leaders, as well as leaders of the major world economies, are actively promoting the GVC, through which economic globalization is advanced. The GVC has become a significant characteristic of the world economy. Chinese companies should integrate themselves into the GVC and at the same time create their own GVCs.

Since the 1990s, along with economic globalization, the GVC has become a significant feature of the world economy. The APEC strategic blueprint pointed out that "comprehensive economic and technical cooperation will play a key role in ensuring greater participation of developing economies in GVCs, and help them achieve their domestic economic objectives".

What is the GVC and how it is formed?

Early in the 1980s, Michael Porter, a leading strategic management thinker at Harvard Business School, proposed the concept of the "enterprise value chain". He said that an enterprise is an aggregation of research and development, design, production, sales and management activities. The value creation process can be decomposed into a series of different but interrelated value-added activities. These interrelated activities worked together to create profits, thus forming the value chain of enterprises.

Porter's theory revealed that the competition among modern enterprises is not competition at certain points, but on the whole value chain. The comprehensive competitiveness of the whole value chain determines the competitiveness of enterprises, and enterprises must optimize their whole value chain to achieve success.

In the 2000s, some scholars put forward the concept of the GVC, which generally refers to the worldwide, cross-enterprise network in connected production, sales and recycling process as enterprises seek commodity or service value.

In recent years, we studied the new trend of multinational corporations with regard to the evolution of MNCs into global corporations. The process was accompanied by MNCs' "enterprise value chains" extending to GVCs.

The global corporation formation process is precisely the process of the development of the GVC.

Global corporations foster a "global" development strategy, "global "governance structure and culture.

The first transition is to change the management from a transnational business operation to a global business operation. The companies set up global procurement centers, manufacturing assembly centers and R&D centers in the most suitable locations, or outsourced various sectors of the value chain, or conducted global mergers and acquisitions.

The second is from the "center radiation" style of management to decentralized, global network management and governance.

The third is the transition from the maximization of shareholder value to "global responsibility".

The responsibility of MNCs extends from shareholder value to social and environmental responsibility. Apart from the three changes, global corporations' "global index", which includes overseas assets, overseas sales and overseas employees (to total assets, sales and employees) surged. A lot of enterprises have a global index of more than 50 percent.

The greatest advantage of global corporations is that business model innovations are enabled through the global layout of each sector of the value chain. All parts of the enterprise value chain go beyond the traditional national boundaries and are aligned in the global layout, so enterprises can absorb and integrate the global optimal resources, including market resources, technical resources, energy and mineral resources, human resources and financial resources and so on.

The more an enterprises can absorb resources in the GVC and the bigger role an enterprise can play in the GVC, the quicker it can improve its competitiveness.

China as a low-cost processing and manufacturing base has benefited greatly from the GVC. But on the other hand, China remains at the low-end of the GVC. Many of China's export products are low-technology, low value-added ones.

Chinese enterprises' "going global" process is still in its infancy.

At present, the world economic paradigm is experiencing a profound shift, as the international division of labor becomes increasingly diverse, while global R&D becomes a salient trend. This is a rare opportunity.

From the macroeconomic point of view, the scale of China's trade in goods, foreign direct investment, foreign-exchange reserves and the household savings rate lay a solid foundation for China's global capital exports.

Chinese enterprises have developed a growing taste for "going global". In 2015, the scale of China's outbound direct investment is likely to exceed the scale of FDI.

To foster new competitive advantages in the GVC remodeling, the key is to enhance the capability of independent innovation. The lack of independent innovation ability is the main factor hindering the upgrading of the industrial structure and enhancing the role in the global division of labor.

However, there are several misunderstandings surrounding "independent innovation".

First, "independent innovation" does not equate to "innovation on one's own". The emergence of the GVC made it impossible to allocate all the three main sectors of the global value chain - R&D, manufacturing and assembling, and marketing service - within one country. If we overemphasize "innovation on one's own", instead of "innovation in the GVC", we exclude the chance of cooperating with leading international firms and the chance of cooperative innovations in an open environment.

Second, "Chinese brands" do not equal to "Chinese enterprises building brands from scratch". International brands were constructed in various ways. These include relying on one's own efforts to create one's own brand, cooperating with other enterprises to create a new brand or obtaining internationally famous brands through acquisitions.

Unfortunately, some people have narrowly interpreted the concept of "independent innovation". This in a way has delayed the buildup of "independent Chinese brands".

The two mistakes are at odds with the "laws" of the GVC. We should upgrade our value chains on the basis of integrating into the GVC and absorbing the best resources. So we must develop our enterprises and industries in accordance with the laws of the GVC as soon as possible.

The author is a senior researcher at the Chinese Academy of International Trade and Economic Cooperation.