Table Of ContentSpecial Report on Integration and Trade
Juan S. Blyde Editor
Synchronized
Factories
Latin America and the Caribbean
in the Era of Global Value Chains
Synchronized Factories
Juan S. Blyde
Editor
Synchronized Factories
Latin America and the Caribbean
in the Era of Global Value Chains
Editor
Juan S. Blyde
Integration and Trade Sector
Inter-American Development Bank
Washington , DC , USA
ISBN 978-3-319-09990-3 ISBN 978-3-319-09991-0 (eBook)
DOI 10.1007/978-3-319-09991-0
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Prol ogue
Until recently, most international trade between industrialized nations and developing
countries—the so-called North-South trade—consisted of an exchange of Northern
manufactures for Southern raw material and primary goods. Meanwhile, most trade
between industrialized nations consisted of exchanges of different manufacturing
goods or of similar goods with different qualities or varieties. This scenario changed
dramatically when the production of manufactures in the North became fractional-
ized into various stages and geographically dispersed to plants across the globe.
Today many countries, including several developing countries, are manufacturing
and trading fragments of goods that they did not produce before. In the last three
decades, this fragmentation of production has been one of the main factors behind the
current unprecedented level of world trade as a share of world GDP.
B esides providing opportunities to diversify production and trade, participation
in global value chains allows countries to capture some of the rents associated with
the good manufactured in the chain without having to develop profi ciency in all of
its stages of production. There is a general perception, however, that most countries
in Latin American and the Caribbean have not been able to capitalize on these new
trends in production fragmentation.
In this report we undertake an extensive analysis of the prospects of Latin
America and the Caribbean to participate in global value chains. The study is part
of a broader research effort at the Inter-American Development Bank to examine
the region’s trade agenda beyond traditional trade barriers. The report fi rst presents
a comprehensive picture of the extent to which the region’s countries participate in
global value chains vis-à-vis other regions. Second, it examines the main factors
behind the rates of participation observed. The analysis concludes with a series of
policy prescriptions.
T he report shows that with the emergence of global value chains, countries must
address a series of challenges, some of which are already well known by policymak-
ers, and others that have been relatively overlooked.
Antoni Estevadeordal
Manager, Integration and Trade Sector, IDB
v
Purpose of the Report
Production processes have grown increasingly fragmented worldwide. Many goods
are now made in a multi-country process in which different production stages are
carried out in plants in different parts of the world, in industries as diverse as elec-
tronics, transport equipment, garments, and food products. Frequently cited exam-
ples are the iPod and iPhone. Less technologically intensive, but still involving
multiple countries, is the production of the Barbie doll.
T he new patterns of international organization of production have attracted the
attention of researchers, businessmen, and policymakers, who have invented a
whole new lexicon to describe them: international fragmentation of production,
global value chains, offshoring, international production networks, slicing the value
added chain (Krugman, 1995), disintegration of production (Feenstra, 1998), delo-
calization (Leamer, 1996), globalization of production and trade (Gereffi , Humphrey,
& Sturgeon, 2005), and the great unbundling (Baldwin, 2006), among others.
For fi rms in developing countries, the international fragmentation of production
presents opportunities to participate in activities that formerly were virtually closed
to them. Without international production networks, emerging economies would
have to master entire production processes to effectively compete in world markets.
By joining global supply chains, however, fi rms in developing countries can partici-
pate in one or a few phases involved in the production of a fi nal good. Such partici-
pation provides countries with new opportunities to diversify trade and production,
an issue of particular importance for countries in Latin America and the Caribbean
whose export base is highly concentrated in a few industries, and particularly in
natural resource-intensive sectors. In addition to providing market outlets, global
value chains can also open access to knowledge and technology. Participation in
international supply chains has been frequently associated with rapid learning, tech-
nology transfers, and knowledge spillovers.
B efore continuing further it is worth pausing to ask whether there is anything
really new about the emergence of global supply chains that deserves a fresh look,
particularly as regards policy issues. Despite the sometimes sumptuous terminol-
ogy, are we merely witnessing the continuing trajectory of an ever more integrated
world that can be examined through the lenses of conventional trade models?
vii
viii Purpose of the Report
As such, are the relevant policy implications already well established? As the
following pages will show, today’s global supply chains are indeed new. A quick
look at the issues suggests that the increasing hype might be justifi ed at least on two
grounds, one theoretical, the other practical.
T ake, for instance, the conventional trade models in which international trade
fl ows are explained in theory by differences in factors endowments. These models
were based on the notion that international competition occurred between sectors in
different countries, which made it easy to predict which sectors and which factors
of production would gain or lose after trade was liberalized. But in today’s fragmen-
tation of production, competition from abroad now occurs at a more disaggregated
level—like a bundle of tasks—making it more diffi cult to measure the general equi-
librium effects of increased international competition. Assume that two of the four
tasks that a worker performs in a factory are moved offshore. The overall demand
for her job falls, and thus, in principle, her wage. But now the worker is focusing on
the tasks that she can do better, and since her compensation is associated with her
productivity, her wage must rise in accordance with her higher average productivity.
These opposite forces make it harder to predict the impacts of opening to trade
when offshoring is allowed.1 In fact, the new trade models with offshoring fre-
quently highlight the notion that relocating fragments of production abroad is analo-
gous to technological progress in which productivity gains might be shared by all
sectors of the economy (Grossman and Rossi-Hansberg, 2008).
F rom the practical point of view, the emergence of international production net-
works also warrants a fresh look at policy issues. For example, many trade fl ows are
purely market transactions that take place among unrelated parties or at arm’s
length. However, the trade of specifi c inputs often associated with global supply
chains increasingly occurs under contractual relationships. This is because suppliers
may need to customize their production to the specifi cations of particular buyers,
and the parameters governing such specifi cations are typically established in con-
tractual agreements. So, even if trade is liberalized, fi rms in developing countries
might not automatically gain access to some international production networks, for
instance, if they are governed by a few buyers who require very particular contrac-
tual guarantees.
Therefore, from the outset, it seems that the evolving trends we are witnessing
warrant a closer look at how fi rms and countries participate in international produc-
tion networks. This is the objective of this report. In particular, the report examines
the extent to which countries in Latin America and the Caribbean participate in
global production networks and describes the drivers of such participation. The aim
is to identify policies that would allow countries to improve their insertion in
regional and global production networks.
T he report consists of fi ve chapters. The fi rst chapter describes international pro-
duction networks, including why fi rms engage in cross-border production sharing,
how this process has evolved over time, the different strategies fi rms use to fragment
1 This result does not imply that trade in tasks does not follow factor price differences across countries.
Purpose of the Report ix
production internationally, and the consequences that joining global supply chains
have on a country’s development.
In Chap. 2 we present a series of measures that establish the region’s status in
terms of global value chain participation. While there is a general notion that Latin
American and Caribbean countries participate less in international production net-
works than those of other regions, there is a lack of systematic evidence supporting
this perception. The main reason for this information defi cit is the diffi culty of mea-
suring participation in global supply chains. For instance, global production net-
works were initially built through what is known as vertical foreign direct investment
(FDI), the creation of linkages between affi liates providing inputs to parent compa-
nies in other countries. But FDI data do not normally differentiate whether affi liates
are vertically linked to parent companies or whether they are merely producing the
same good abroad, which is known as horizontal FDI. Likewise, trade data by them-
selves do not convey enough information to precisely measure the extent to which a
country is participating in international supply chains. To overcome these shortcom-
ings, new methodologies have been developed in recent years to proxy participation
in production networks. Chapter 2 presents various indicators, including aggregated
measures of value added in trade fl ows based on international input-output tables
and measures that employ more disaggregated datasets. The chapter’s aim is to
present a battery of indicators that provides a broad picture of the extent to which
Latin America and the Caribbean participates in global supply chains and how this
participation compares to that of other regions.
In Chap. 3 we turn to the drivers of global value chain (GVC) participation: the
factors that explain the differences in GVC participation between Latin America
and the Caribbean and other regions. While the list of potential factors can be quite
extensive, we look at areas that seem most relevant due to the availability of theo-
retical and analytical work, and also because of the potential for policy action. First,
we look into the role of transportation and logistics services, including communica-
tion and information technology. Then, we examine the impact of trade agreements
and of trade policy in general. The issues of contracting institutions and contract
enforcements are analyzed as regards fi rms’ offshoring strategies. While most of the
chapter is devoted to international fragmentation related to the production of goods,
the last section presents empirical exercises that look at the drivers behind the off-
shoring of services.
While Chap. 3 is mostly based on analyses that compare data across countries
and industries, Chap. 4 moves the discussion closer to the ground to examine micro-
level data on the experiences of fi rms participating in production networks. This
micro approach allows us to study additional aspects of global supply chain partici-
pation that are diffi cult to analyze with cross-country regressions. The core of the
discussion in this chapter is on the capabilities fi rms must acquire to access global
supply chains. First, we employ fi rm-level data to compare the performance of fi rms
in international production networks with the performance of other fi rms. The anal-
ysis shows that fi rms participating in GVCs typically have superior skills and capa-
bilities. We then move even closer to the ground, using insights derived from case
studies to highlight a set of empirical regularities among the fi rms participating in
