Synchronized Factories
 

Synchronized
Factories

The emergence of global value chains (GVC) is allowing nations to industrialize much more rapidly by joining international production networks rather than by building entire supply chains at home. Besides 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 proficiency in all of its stages of production. Despite these potential benefits, very few countries in Latin America and the Caribbean are taking advantage of these new trends in the international organization of production.

Using a combination of innovative datasets at the macro and micro levels this report presents a comprehensive picture of the participation of Latin America and the Caribbean in global value chains and describes the drivers of such participation. Based on this analysis, the report identifies policies that would allow countries in the region to improve their insertion in regional and global production networks.

  • A must-read for policy makers and scholars around the world but especially those concerned with the region’s economic development.

    Richard Baldwin
  • This is a fascinating and page-turner report…(it) highlights, through the lenses of GVC, the weak spots of the Latin American economies…

    Filippo di Mauro
  • The report while addressing Latin American issues appeals to a much broader audience, making it a must read for scholars and practitioners.

    Filippo di Mauro
  • This book…sets forth a policy agenda that the countries of the region should implement to improve their participation in these supra-national chains.

    Alejandro Foxley
  • The book takes a new and innovative approach, which will prove extremely useful for policy makers in Latin America today.

    Alejandro Foxley
  • This report marshals the best available evidence and makes sense of the rapidly evolving economic thinking on the issue.

    Richard Baldwin

What is the participation of LAC in Global Value Chains?

We employ a combination of innovative datasets to develop various measures of value-chain participation. 

Evidence from trade in value added, for example, shows that the typical LAC country has less backward and forward production linkages than the typical country in Asia or Europe. For example, the share of exports that is part of a multi-country production process is 13 percentage points lower in LAC than in Europe.

Many global value chains are created when a multinational company delegates part of the production process to an affiliate in another country, the so-called vertically linked affiliates. The figure shows the network of parents and their vertically linked affiliates around the world. The size of the circles indicates the total number of parent companies with vertically linked affiliates in other countries, and the thickness of the lines represents the number of bilateral vertical affiliates between each parent country and a corresponding host country.

Clearly, LAC remains pretty much on the sidelines when it comes to participating in production networks led by multinationals.  

 

Drivers of Global Value Chains

Transportation/logistics

Global value chains raise the stakes of addressing long-standing policy challenges, such as those related to transportation and logistics. If a country in LAC improves the quality of its ports, airports and telecommunication infrastructures to the average level in Europe, it will increase its FDI-related linkages in about 20%.

Economic integration

Maintaining low levels of protection and furthering integration in the region has become even more important, with the international fragmentation of production. Deep integration agreements provide more incentives for the formation of global supply chains than shallow agreements, because they tend to incorporate measures beyond the simple reduction of tariff rates, like investment rules or the harmonization of customs procedures.

Information failures

Access to global supply chains can also be seriously hampered by information deficiencies. Governments should promote environments that facilitate exchanges of information between players. Some information gaps can also be addressed by improving visibility through certifications. Governments could also promote collaboration or consolidation among firms to raise capabilities, address common barriers, or pay for the fixed costs of certain activities.

Local linkages

Some local firms, particularly many SMEs, will not be able to join GVCs by exporting directly. But they can still access GVCs by serving global firms located in their own countries. Successful programs aimed at fostering local linkages typically go beyond simply matchmaking services and provide complementary support to the suppliers, such as training.

Case Studies

Bombardier Querétaro

Logistics-related policies have facilitated the spread of global supply chains. During the 1970s, the world aeronautic industry was vertically integrated, with only about 20 percent of the typical aircraft manufacturer’s total value being outsourced. Today, that outsourced share is close to 80 percent. Mexico is taking advantage of this trend by spurring the development of an aeronautic cluster, mainly centered in the state of Querétaro. The aim is to attract global firms and support linkages between them and Mexican suppliers.

One of the foreign firms attracted to Querétaro was Bombardier, the Canadian aircraft manufacturer. Cost advantage, proximity to North America, and the free trade agreement among Mexico, Canada, and the US (NAFTA) were among the pull factors for Bombardier. But these incentives were complemented by a series of logistics developments, such as large investments in the Querétaro airport. With specialized warehouse services and one of the longest runways in the country, the airport sits at the convergence of Mexico’s road, rail, and telecommunications network, thereby facilitating multimodal operations and allowing Bombardier to ship parts to Wichita and Toronto for assembly much more quickly than if they had been produced in China. In fact, Bombardier’s plant is located within the perimeters of this airport.

Bombardier was attracted to the cluster by the massive transport infrastructure investments made by the state government. Nevertheless, a number of logistics issues also needed to be addressed to guarantee smooth operations of the company’s supply chain. For instance, when Bombardier started its operations in Mexico, the federal customs office was located in downtown Querétaro, not at the airport. The authorities initially insisted that every component be brought from the airport to downtown for customs clearance, and then shipped back to the airport, where the Bombardier factory is located. This extra step increased time and costs for customs clearance. Eventually, the federal government established a customs area at the airport.

Another soft policy measure was the signing of the Bilateral Aviation Safety Agreement with the US, which allows Mexico’s civil aviation authority to certify parts and components produced in Mexico. This development essentially eliminated one step in the supply chain, which considerably reduced costs and time because components and parts no longer had to be inspected in the US before being shipped off to the assembly locations.


Basso in Argentina

Since the 1990s, the automotive industry has become more global with the growing importance of FDI in developing countries during recent years. This shift in global production resulted from a significant organizational change in which the Ford model was replaced by the Toyota model, which prioritizes production flexibility, quality, and speed. Assemblers started delegating more design responsibilities to component suppliers, urging the latter to supply them with efficient technological solutions.

One of these component suppliers is Basso, a producer of combustion engine valves, located in Rafaela, Argentina. The firm makes valves for automakers (e.g., Peugeot, Ferrari, and Ford), motorcycle producers (Harley Davidson), and farm tractor producers (John Deere). Its clients also include engine builders in competition and high-performance markets and aftermarket engine rebuilders.

Basso has been able to compete globally due to its high-quality customization of products and a strict commitment to provide just-in-time delivery services, the demanding mode of production that became widespread with the emergence of the Toyota model. Logistics is key to the firm’s business, and its just-in-time delivery service—which coordinates storage, transport, and inventory—is one of the firm’s main distinguishing features.

Complying with just-in-time shipment commitments is not easy, however, particularly when about half of the company’s clients are located more than 8,000 km away. Basso orchestrates a logistical system that makes customers feel that such long distances are not relevant.

One change that was fundamental to the company’s ability to fulfill its delivery commitments was the creation of an Argentine customs office in the city of Rafaela, a move that resulted from joint action by businessmen and city officials. The new customs office enables Basso to clear every export and import operation in Rafaela without the need to do so at the Port of Buenos Aires. Since the valves that are shipped from Rafaela already have customs verification and approval, delivery is much more rapid.

Despite these advances, the company must still plan for possible logistics problems, such as roadblocks or strikes at the ports. For example, the firm maintains a permanent stock of goods on ships and in warehouses, a practice that increases its inventory costs. As such, while the firm benefits from facilitated customs clearance, it incurs other costs in dealing with uncertainty in logistics.

The examples of Bombardier and Basso illustrate that creating an adequate logistics system is not only about big physical infrastructure works, but also about the less visible but perhaps equally important soft policies related to logistics.


Strengthening Business Associations: Brazilian coffee growers and the Illy supply chain

For decades the worldwide coffee business was structured almost exclusively around the commodity model prevailing when coffee was regulated with a target price in the international market and an allocation of export quotas among producing countries. The collapse of the system in 1984 generated economic incentives for the development of a market in which coffee could be differentiated by quality or processes (e.g., organic).

The Italian firm Illy, a medium-sized roaster, went to Brazil, attracted by the high quality of the country’s coffee cherries. It quickly discovered that problems in processing the cherries into quality coffee were mainly due to the lack of incentives for producers to invest in high-quality production methods. Illy created an award for the best coffee beans and established a price differential to reward quality. But the company did not teach prospective producers the precise characteristics of superior coffee and how to identify these characteristics. Some of this knowledge is tacit, and its acquisition requires a great deal of practice and learning.

The information the growers needed was ultimately provided by an intermediary: the Brazilian Specialty Coffee Association (BSCA), which received the support of the Brazilian Trade and Investment Promotion Agency. BSCA developed a special classification system, a certification scheme, and a technical training program that enabled many growers to learn how to identify the characteristics of a high-quality coffee. This eventually enabled some of the growers to reach Illy’s standards and join its supply chain.


Authors

Juan S. Blyde (Coordinator) is currently a Lead Economist at the Integration and Trade Sector of the Inter-American Development Bank. Juan’s areas of research have focused on trade and firm productivity, trade and transport costs, and international value chains. Juan received his PhD in economics from the University of Colorado at Boulder in 1998, and a BS in economics from Universidad Católica Andrés Bello (Venezuela) in 1992. He joined the IDB in 2000. Juan’s research has been published in various academic journals such as the Journal of International Economics, Review of International Economics, International Economic Journal, and Review of World Economics, among others. 

JUAN S. BLYDE

Christian Volpe Martincus is currently Lead Economist at the Integration and Trade Sector of the Inter-American Development Bank (IDB). Christian has expertise in international trade, regional integration, and economic geography. At the IDB he has been working on the impact of integration on specialization patterns, the role of export promotion in shaping countries’ export diversification profiles, the effect of certifications on firms’ export performance, the interplay between innovation and exports, the effect of transport costs on trade flows, and other international trade issues. 

Christian holds a PhD in economics from the University of Bonn and a Master in economics from the National University of La Plata (Argentina). He has presented in numerous international academic and policy workshops and conferences and has published on international trade and economic geography in several international professional journals.

CHRISTIAN VOLPE MARTINCUS

Danielken Molina is a Trade Specialist at the Integration and Trade Sector of the Inter-American Development Bank (IDB). He holds a PhD in economics from the University of California, San Diego, and a BA and MS in economics from Universidad del Rosario in Bogotá, Colombia. 

His research has focused on the factors affecting a firm’s decision to export and a firm’s export outcomes. Recent working papers include a firm level analysis focusing on the workforce preparation prior to export, and firm level estimates used to assess how a country’s improvement in infrastructure or logistics affects its export outcomes. 

DANIELKEN MOLINA RODRIGUEZ

Blurbs

The internationalization of production processes – the so-called global value chain (GVC) revolution – has opened a new pathway to industrial development. Nations initially join GVCs to become competitive internationally, and then go on to industrialize by intensifying their participation in the networks. To date, however, few Latin American nations have joined the GVC revolution; this needs to change. The brutal fact is that Latin America cannot industrialize the old way in a time when China and other nations are doing so the new way – by combining advanced know-how available in GVCs with cost effective labor to produce goods at unbeatable quality-price ratios. This report marshals the best available evidence and makes sense of the rapidly evolving economic thinking on the issue. It then applies this analysis to today’s policy challenges in the Latin American context.  That’s why this report is a must-read for policy makers and scholars around the world but especially those concerned with the region’s economic development.

Richard Baldwin
Professor of International Economics, Graduate Institute, Geneva

This is a fascinating and page-turner report. While providing a comprehensive assessment of the indicators aimed at measuring GVC-related issues, from degree of integration to impacts, it remains focused on the implications for policy. The report highlights, through the lenses of GVC, the weak spots of the Latin American economies - from dependency to primary exports to weak infrastructure. It points that the region’s most logical response to its shortcomings is to forge ahead to achieve true globalization of its economies, rather than focus on strengthening regionalism; a message that has a critical value particularly for Europe. In this way, the report while addressing Latin American issues appeals to a much broader audience, making it a must read for scholars and practitioners.

Filippo di Mauro
Senior Adviser, European Central Bank

This IDB report fills a void in the discussion on future development strategies in Latin America highlighting the growing importance of global value chains (GVCs) as a powerful mechanism in the global economy. It shows how GVCs enable participating countries and firms to achieve significant gains in productivity, diversification of production, and ultimately, greater economic growth. 

This book not only explains the reasons for the low participation of Latin America in GVCs, but more importantly sets forth a policy agenda that the countries of the region should implement to improve their participation in these supra-national chains.  In doing so, the book takes a new and innovative approach, which will prove extremely useful for policy makers in Latin America today. 

Alejandro Foxley
President of CIEPLAN. Former Minister of Finance and former Foreign Minister of Chile

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