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Upgrade by integrating into global value chain

By WANG ZHILE (China Daily) Updated: 2015-01-06 10:47

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.

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