#15_It’s all too complex – or is it? Global production networks and value chains revisited

In explaining the steep fall in production during the Covid19 pandemic, many observers have emphasized that it may just be too complex for large corporations to handle their global production operations, simply because of the sheer size of their supply chains. Today’s supply chains encompass a diverse set of subsidiaries, business partners, alliances and joint ventures as well as their suppliers, service providers and subcontractors (e.g. Braw, 2020; Choi, Rogers, & Vakil, 2020; Foster & Suwanti, 2020). Obviously, the Covid-19 collapse of many supply chains is largely the result of a catastrophic development, i.e. the pandemic, in which the general uncertainty of living materializes. And no doubt, complexity, uncertainty, and sudden disruptions are always difficult to manage. On a second look, however, the arguments put forward about the uncontrollability of complex systems sound familiar and resemble those explanations often given for the difficulties to stop violations of labour standards and workers’ rights in supply chains even in normal times. This raises some doubts about supply chain complexity used as catch-all justification for all sorts of crises and problems. And as such, general complexity and uncertainty can hardly satisfy as an excuse for everything, especially not for the human-made causes and consequences of disruptions (e.g. Foster & Suwanti, 2020).

Indeed, recent decades have seen the deepening of a technically and materially well-integrated, but organizationally fragmented global production which is highly vulnerable to exogenous shocks and low on sustainability in response to global challenges, at the same time. Even in what is regarded as “normal” times, global production is already plagued by chronic irresponsibility and may well be just “functioning” because the burden for shouldering adaptation has been shifted towards the weakest parts of the chain, instead of the strongest. Confronted with a disruption like Covid, such a structure then reveals how it is not well equipped to engage with deviations from the norm. This time, however, the pandemic also hits hard on the downstream side of a couple of value chains where lead firms cannot deliver an appropriate number of products manufactured somewhere down the chain (e.g. Gereffi, 2020; Choi, Rogers, & Vakil, 2020). This situation brings along painful questions for those enacting such structures in transnational business on an everyday basis in corporate headquarters, from strategy, accounting, and controlling to production managers, but also for those counselling, certifying, and examining the corporations and their supply chains. And of course, also the weaknesses of those regulating corporate activities in state agencies and international organizations become obvious.

Against this background, it seems justified to ask to what extent supply chain failures are the result of human agency, or agency’s unintended consequences, because it is well worth thinking about how responses to future crises and catastrophes can be improved and what structures might be better suited than others for avoiding failures in supply chains. Sadly enough, no easy answers are readily available for this question. Instead, here, the attempt is made to recapitulate what is known about “global production” to facilitate an understanding of the vulnerability of supply chains and inspire new practices to deal with its consequences (for an example on supplier management in pandemic times see Linton & Vakil, 2020). For that purpose, a sketch is given of the academic debate around understanding global production’s societal embeddedness and organizational connectedness at the same time.

Starting with the multinational corporation (MNC), the development of thought is summarized by discussing supply chain management (SCM), global commodity chains (GCC), global value chains (GVC), global production networks (GPN), and global value networks (GVN). Taken together, this literature shows a global production already building on an extremely high level of coordination, cooperation, and collaboration around resources, infrastructures, and technologies in practice. Characterized by all sorts of complementarities and interdependencies, global production requires inter-organizational information processing and knowledge creation as well as managing relations across borders even for the most mundane types of products (e.g. Gereffi, Humphrey & Sturgeon, 2005). At the same time, global production is marked by the parallel occurrence of a time-space compression in and through inter-firm networks, i.e. horizontally and vertically connected forms of economic organization, and the place- and history-boundedness of single units operating on global, national, and local scales in these networks (Bair, 2008). Here, from all this the conclusion is drawn, that a debate is needed about what production system is needed in the future and how cross-border, multi-agent collaboration and dialogue can contribute to start a change. For too long a time, the societal and political debate over the development of global production has been avoided by pointing to anonymous market forces, although many genuinely political issues are concomitant with the precise shape and functioning of supply chains. So, it’s high time to broaden the debate on how global production can be made more responsive to labour and environmental concerns; the current Covid19 may be unlikely to push the world beyond the edge of extinction, but the climate crisis may well do so.

Multinational Corporation (MNCs). Multinational Corporations (MNCs) – or Transnational Corporations (TNCs) – are often regarded as the drivers and core units of global production. Whereas some authors require these organizations to have foreign-direct investments, i.e. own locations abroad, as well as an active management of these locations (e.g. Bartlett et al. 2002: 2-3), others also include other means of influencing cross border value-creation activities into their definition such as contracts (e.g. Cantwell, Dunning, & Lundan, 2010). Whereas the history of cross-border economic activities traces the emergence of global entities back to the colonial enterprises established in the 17th and 18th century (e.g. Hopkins & Wallerstein, 1994), only after the WWII the current era of the global expansion of large firms began. Going beyond comparative production costs in classic trade theory, early explanations of the modern variety of the phenomenon concentrated on foreign direct investment (FDI) and how these investments resulted from monopolistic advantages of large firms originating in technological knowledge and economies of scale, coupled with inter-industry oligopolistic competition (e.g. Hymer, 1968). Later location-specific resource endowments and arbitrage as well as organizational advantages of internalizing coordination across subsidiaries were added (e.g. Dunning, 2000). At about the same time, management theory started to view internationalization as a process of relation building and maintenance (Johanson & Vahlne, 1990). Meanwhile, transnational business activity has proliferated involving all sorts of organizations at various stages of their development while industrial capabilities have proliferated across a heterogeneous set of countries and large conglomerates have been split up by subcontracting, outsourcing, and offshoring (e.g. Gereffi, Humphrey, & Sturgeon, 2005: 79). Rather than being structured into the clear hierarchies of the MNC, large parts of global production resemble more often a network of multiple firms directed by a core of firms and their intra- and interorganizational network partitions.

Global supply chain management. A managerial approach to understand the interconnected nature of global production is supply chain management (e.g. Choi et al., 2020). The supply chain can be defined as “a network of manufacturers and service providers that work together to create products or services needed by end users. These manufacturers and service providers are linked together through physical flows, information flows, and monetary flows. (…) Supply chains link together the operations functions of many different organizations to provide real value to customers” (Bozarth & Handfield, 2019, p. 23). Then, a global value chain implies sourcing, distributing, and retailing across borders. Managing these supply chains can be regarded as the foundational stone of a strategic management intending to increase the exchange value from a customer’s view while designing the supply chain for competitive advantage either through cost leadership or diversifying the product portfolio; a view of strategic supply chain management which has been popularized especially through the work of Michael Porter (1985). Often such a strategy process entails the outsourcing of intermediate goods and services previously provided internally. However, a strategic management of a supply chain also checks for opportunities to (re-)integrate upstream and downstream activities based on their expected value contribution.

Global Commodity chains (GCC). Hopkins & Wallerstein (1994) define a GCC as ‘a network of labor and production processes whose result is a finished commodity’ ([1986], 17). The global commodity chains (GCC) view shares with the global supply chain view a thinking in a sequential cross-border production process in which several value-adding units represent a step or link in the value chain of a single good or service. Hence, each node within a commodity chain requires the input of natural resources or semi-finished products as well as labour power for manufacturing, distribution, and consumption (Gereffi, Korzeniewicz & Korzeniewicz, 1994). Also, both views share a departure from the traditional view of international trade by emphasizing the organized character of the global production process which is thought of being structured into a GCC or supply chain. However, while the global supply chains view starts from a focal firm’s perspective, the GCC approach is rooted in social theory and wants to understand a system of world production. Acknowledging the socially constructed character of commodity production embedded in institutional and societal structures, the GCC is aware of the set of relationships linking various activities in each step of the chain to the wider societal systems of production, distribution, and exchange (Gereffi, Korzeniewicz & Korzeniewicz, 1994; Bair, 2008). This also implies that there isn’t just one interorganizational network for one commodity, but a variety and plurality of these connecting consumers, firms, and nation states with each other across multiple scales (e.g. Peck & Theodore, 2007). Thereby, GCC get a specific “territoriality” situating each node of the network in its concrete local surroundings despite their overall position within the totality of the network. As a result, GCC are not powerless entities, but are shaped by political governance structures influencing the distribution of resources across the network or chain (Gereffi, 1994: 97). One example is the distinction between producer-driven and buyer-driven commodity chains. In the former, manufacturers of capital-intensive finished goods have a leading role in shaping the GCC (e.g. car manufacturing), whereas in the latter retailers and distributors lead in the mass-produced commodities (e.g. garments or food).

Global value chains (GVC). In extending the differentiation between buyer-driven and producer-driven commodity chains Gereffi, Humphrey and Sturgeon (2005) built on the observation that GCC require explicit coordination, cooperation and collaboration but how these are governed depends on the type of relationships formed between the various nodes in the value chain. By introducing governance, the global value chains (GVC) approach moves a bit closer to a managerial view of supply chains. Building upon considerations borrowed from institutional economics such as asset specifity, uncertainty, and transaction costs, Gerrefi, Humphrey, & Sturgeon (2005) use the contracting properties in buyer-supplier relations to explain relational power structures in GVCs. Between market and hierarchy, they identify three relational modes of buyer-supplier-relations, i.e. captive networks, relational networks and modular networks (Gereffi, Humphrey and Sturgeon, 2005: 82-83). The decisive criteria for distinguishing between these modes are the complexity of information and knowledge transfer related to products and production processes, the codifiability and dissemination of information and knowledge as well as the capabilities of the suppliers with regards to the requirements of production (Gereffi, Humphrey and Sturgeon 2005: 85). Market and hierarchical relations carry the usual properties: For markets, these are low transaction-specific investments like in spot contracts and low switching costs; for hierarchies, bureaucratic coordination and managerial control apply. Leaning towards hierarchy, in captive relationships the GVC is governed by relationships that are more asymmetrical as lead firms exert more power over suppliers, because they invest in developing the skills of their suppliers and try to lock them into the business relationship (“captive”). By contrast, leaning more towards the market, in modular value chains, suppliers retain some power as they make products to a customer’s requirements, but retain control over production technology and know-how limiting transaction-specific investments (especially so called ‘turn-key’ suppliers, Gereffi, Humphrey and Sturgeon, 2005). Relational networks are likely to be found when firms need to exchange complex information that cannot be codified, thus requiring frequent, face-to-face interaction in which interpersonal relations are important. Here, mutual dependence and high levels of asset specificity characterize the business relationship, supported by reputation in strong social ties and personal relationships (Bair, 2005; Gereffi, Humphrey and Sturgeon, 2005). Within the GVC framework, these types of buyer-supplier relations are key for how value is distributed along the chain. Accordingly, within the GVC framework strategic options for upgrading are discussed, i.e. whether and how some units operating within the value chain might achieve a better position in the network, for example by acquiring production skills altering the buyer-supplier relationship (for examples, see Gereffi & Lee, 2012).

Global production networks (GPN). The GCC and GVC approaches have met with criticism which basically concentrates on the white spots in understanding the societal and political causes and consequences of global production (e.g. Bair, 2005, Henderson, Dicken, Hess, Coe, & Yeung, 2002; Smith et al., 2002). Gereffi, Humphrey and Sturgeon (2005) explicitly concede these shortcomings themselves by arguing that historical, institutional, geographic, and societal contexts are important, but neglected in their GVC approach for the sake of an universal and parsimonious theorization of the most dominant forms of governance. Hence, the critique engages with bringing these contexts back in by going beyond understanding the types of relational coordination and power relations in global production solely on the ground of transaction specificity and contracting arrangements. Rather, the global production network (GPN) emphasizes “a global production network as an organizational arrangement, comprising interconnected economic and non-economic actors, coordinated by a lead firm, and producing goods or services across multiple geographical locations for worldwide markets.” (Coe & Yeung, 2015: 1f.). In such a reading, global production is more than a trade in production jobs and offshoring, because it is also considered explicitly how “such networks are constructed, managed, and sustained” (Coe & Yeung, 2015: 1f.). Such a structuring of GPN in turn contains a double movement to include societal and spatial embeddedness horizontally, i.e. the influence of societal groups such as CSOs, unions, but also local cultures, as well as a focus on strategy coming close to the supply chain management literature, however with a wider idea of who is strategizing by including international organizations, nation states, and local authorities as regulators of global production. As a result, production is thought of as being “(..) the collective participation in value-adding activity by a variety of actors in different sectors, industries, and locations to create finished goods or services. These actors can be business firms and extra-firm institutions that are brought together by intermediaries connecting multiple actors in global production systems.” (Coe & Yeung, 2015: 34) In addition to firms (i.e. lead manufacturing firms, brands, suppliers, service providers, etc.) representing the essential nodes in the commodity chain, various extra-firm agents and intermediaries are distinguished in forming a GPN: state agencies, CSOs, international organizations, labour unions, consumers, and intermediaries (i.e. providers of financial resources, logistics, or standard-setting agencies). Obviously, then, acknowledging the strategies of these actors also requires inclusion of a wider set of goals with relation to value activities ranging from value creation through production, to value enhancement by complementing goods and services as well as value capture or value extraction (e.g. Coe & Yeung, 2019).

Global Value Networks (GVN). Moving commodity chain analysis a step further into (re-)using social network analysis as a tool, Glueckler and Panitz (2016) suggest to use the term value networks. Starting from considerations about broadening the debate around upgrading, they authors embrace a more general view on network dynamics including upgrading, but also other changes in the position within the global division of labour which may not necessarily include some sort of improvement such as downgrading or backsliding. Glueckler & Panitz (2016) define a global value network (GVN) “(..) as the combination of (all) the individual value chains, i.e., the totality of firms and inter-firm business relations that constitute the global market of a specific sector or industry.” (1165). Thereby the authors aim for reducing a linear conception of a single chain dominated by a single lead firm or brand. Instead, they emphasize the plurality of interconnected single chains as firms often are part of more than one commodity chain (Glückler & Panitz, 2016). Furthermore, they analyze whole inter-firm network configuration (using the case of the stock photography industry) using structural network analysis for contractual relations (joint distributing of visual content) and distinguish between five types of relational market positions within such a GVN: isolates, peripheral, satellite, integrated and core of the network (Glückler & Panitz, 2016: 1167).

Of course, this short tour de force through the most recent advances in understanding global production cannot do justice to all linkages between the different approaches and much more engagement with relative factor endowments, technology, and institutions would be necessary to get an even deeper understanding of global production. However, from these considerations it seems entirely possible to systematically identify those points in the current structures of global production which can be changed, because they are human made. Weaving in various strands of social theory from monopolistic competition to social embeddedness, from social network analysis to institutional thinking of various sorts, this literature has come a long way to understand the networked and collaborative nature of global production. Nevertheless, although it seems not too complex to understand what is going on in international production in theory, there are still a lot of paradoxes, trade-offs, and uncertainties around in devising how to alter the practices in global production collaboratively and who is going to enact change with what consequences. And, as always, gaps and disputes remain in this literature as well, because it is complicated to give a precise explanation of the dominant qualities and types of global production as well as the agency led dynamics and their outcomes. In particular, this holds for labour standards and sustainability. For example, how could power reversals be accomplished that shift network dynamics in value chains towards a more sustainable and socially responsible positioning. Also, what changes in lead firms, brands, suppliers, and intermediaries by whom might be necessary to spark a sustainability-driven supply chain that values workers’ rights and labour standards also in the periphery of production networks. Last, but not least, the possibilities of state intervention, through labour inspection and otherwise, are a huge area for further investigation. All this requires further attention and real efforts to escape the bleak prospects of an unfolding dystopia of a “catastrophe capitalism” (Foster & Suwanti, 2020) by more collaboration and social dialogue.

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