Research Methodology for Global Business Clusters & Global Value Chain Networks Dr. Emanuela Todeva Director of Research Centre for Business Clusters, Networks and Economic Development University of Surrey

Multilateralism & Global Integration ‘The world has become a Hum of Interconnected voices and a Hive of interlinked lives.’ Christine Lagarde, 4/2/2014 In 1950 – the emerging markets and developing economies accounted for hardly 25% of the Global GDP – now it is 50%, and in 2020 it is likely to be 2/3 More then half of manufacturing output are intermediate products More then 70% of integrated services (imports) are intermediate services MNCs control 2/3 of global trade 12 MNCs 31 Global cities sit among the top 100 global bodies in terms of size

The Value Chain Describes the Full Range of Activities That Firms and Workers Do to Bring a Product From its Conception to its End Use

Network Approach to Value Management co-creation value measurement diffusion value-in- context exchange creation value extraction © Todeva, 2014

GVC – Interconnected Input-Output Markets for - resources (supply networks & trade of intermediate products) - skills (outsourcing networks) - capital (shareholder networks) - production technology (R&D alliances) GVC – Organisation & Coordination of production and value added activities across borders and firm boundaries GVC – Interconnected Organised Production Capabilities and Country Resources Agents boundaries Location boundaries Activities Costs Value added Transfers, transactions Value Chains

Value Added Along the GVC (OECD, 2013)

apparel supply chain: Forstater, 2010

Methodology as a Step-by-Step Approach Cluster Mapping Cluster Development (enhancement of capabilities) Cluster Internationalisation Revealing actors & activities Revealing linkages Visualising / Mapping linkages Developing linkages Upgrading linkages & Position

UPGRADING through innovation to increase value added Different forms of upgrading: of processes of products functional inter-sectoral

Process Upgrading Firms can upgrade processes – transforming inputs into outputs more efficiently by re-organising the production system or introducing superior technology (i.e. footwear producers in the Synos Valley – Schmitz, 1999).

Product Upgrading Firms can upgrade by moving into more sophisticated product lines (which can be defined in terms of increased unit values). Example: the apparel commodity chain in Asia upgrading from discount chains to department stores (Gereffi, 1999).

Functional Upgrading Firms acquire new functions (or abandon existing functions) so that they increase the overall skill content of their activities. They might complement production with design or marketing, or move out of low-value production activities. Example: Torreon’s blue jeans industry upgrading from maquila to “full-package” manufacturing (Bair & Gereffi, 2001).

Upgrading Product & Process Upgrading Functional Upgrading Upgrading refers to the acquisition of technological capabilities and market linkages that enable firms to improve their competitiveness and move into higher-value activities. Analyses of upgrading from a value chain perspective pay particular attention to the ways in which value chain linkages facilitate or obstruct upgrading. Product & Process Upgrading Functional Upgrading Inter-Chain Upgrading Explanation of different types of upgrading Show example of Mexico, how this developing country has been able to upgrade their activities in the apparel industry. Show that this upgrading process has been in a very short time. This upgrading has been possible due to increasing trade

Intersectoral Upgrading Firms may apply the competence acquired in a particular function to move into a new sector. For example, in Taiwan competence in producing TVs is used to make monitors and thus move into the computer sector (Humphrey & Schmitz, 2002, Guerrieri & Pietrobelli, 2004).

The Value Chain Describes the Full Range of Activities That Firms and Workers Do to Bring a Product From its Conception to its End Use

Bio-Medical & Health, Greater South East, 2008 The Use of complementary databases comprising of the entire population of firms and funded research projects Developed a Multi-Stage Cluster Methodology for Cluster mapping and analysis Investigating Brokerage, Intermediation, & Information sharing across firm / regional / country boundaries Database Firms ‘Concentration of firms in the Value Chain in the Region’ Greater South East, UK Bio-Medical & Health, Greater South East, 2008 Amadeus 2008 Diagnostics 240 Medical Care 4902 Social Care 3208 Support Services 1154 Technical Support 265 Dental Practice 478 Telecare 63 Drug Development 376 Bio-pharma R&D 387 Integrated Pharma & Biotech 115 Health products & cosmetics 677 Medical Devices 719 Bio-Pharma Manufacturing 286 Bio-Pharma Support 496 Trade Pharmaceutical & bio-products 611 Pharmacies & Drug Stores 1161 Fitness & Wellbeing 309 Medical & Optical Products 813 Universities / centres of excellence in research 61 © Todeva, 2008 Amadeus 2008 Diagnostics 240 Medical Care 4902 Social Care 3208 Support Services 1154 Technical Support 265 Dental Practice 478 Telecare 63 Drug Development 376 Bio-pharma R&D 387 Integrated Pharma & Biotech 115 Health products & cosmetics 677 Medical Devices 719 Bio-Pharma Manufacturing 286 Bio-Pharma Support 496 Trade Pharmaceutical & bio-products 611 Pharmacies & Drug Stores 1161 Fitness & Wellbeing 309 Medical & Optical Products 813 Universities / centres of excellence in research 61 © Todeva, 2008 Activities & Transactions

198 firms 87% in 4 core industries Cluster Value Chain: SURGICAL & MEDICAL INSTRUMENTS MANUFACTURING (198 firms, ties between firms based on 5 or more shared industry codes) (87% of firms have the core industry codes: 334510 Electro-medical and Electrotherapeutic Apparatus Manufacturing; 334517 Irradiation Apparatus Manufacturing; 39112 Surgical and Medical Instrument Manufacturing; 339113 Surgical Appliance and Supplies Manufacturing) Holding companies All other personal care stores Wholesale Misc. metal products Electro-medical, electro-therapeutic, irradiation apparatus; surgical & medical instruments; surgical supplies manufacturing R&D Plastic products 198 firms 87% in 4 core industries Misc electrical equip & component manuf. © Todeva (2007)

The Global Information Sector, 2002

The Emergence /Recognition of GVCs and Major Paradigm Changes (Cattaneo et al 2013) Change of relevant strategic framework, from countries to firms and GVCs. A country cannot develop a competitive offer of goods or services in isolation. Imports are a means for firms to access the most efficient inputs and free resources to focus on core competences. Following business practices, policy should treat trade and FDI, both inward and outward, in an integrated framework. Change of the relevant economic framework, from industries to tasks and business functions. The objective is not to develop domestic industries that would capture all the segments of production or the whole value chain, but to develop value added services and inputs for the GVC Acknowledge that an efficient manufacturing sector requires efficient and competitive services as well as a skilled workforce and continuous innovation in products, processes and business models. Services such as financial intermediation, R&D, logistics, and marketing are necessary to produce higher value added manufactures.

The Global Value Chain (GVC) Outward-looking development model driven by trade and competitiveness. Countries / Regions / Firms do not need to develop vertically integrated industries to participate in global trade; it is enough to develop capacities in specific segments (stages of production, tasks or business functions) of the value chain. (Cattaneo et al., 2013) Trade in Value-Added (TiVA) indicators (OECD/WTO, 2013) Focus on the estimation of the source(s) of value (domestic vs. foreign and/or by country and industry) that is added in producing goods and services for export. Still involves misleading classifications such as in the chemical sector in the TiVA tables can combine both base chemicals and pharmaceutical products. These subsectors differ in their use of intermediate products as well as their skill intensity. The GVC Participation Index The higher the foreign value-added embodied in gross exports and the higher the value of inputs exported to third countries and used in their exports, the higher the participation of a given country in the value chain.

Louis Brennan , 2014

Moving Up the Value Chain (1) Upgrading Process upgrading Product upgrading Functional upgrading Chain or inter-sectoral upgrading (2) Task bundling (3) Workforce development and innovation (4) Ensuring cost competitiveness (5) Improving the connectivity with international markets (6) Improving business and investment climates (7) Fostering innovation and building capacity

Composition of Mexico’s Exports to the World Market, 1986-2006 Source: UN Comtrade. 28

Composition of China’s Exports to the World Market, 1987-2006 Source: UN Comtrade.

Africa’s Share of World Exports Has Been Declining

Source: USITC http://dataweb.usitc.gov downloaded Feb 22, 2008

Source: USITC http://dataweb.usitc.gov downloaded Feb 22, 2008

Source: USITC http://dataweb.usitc.gov downloaded Feb 22, 2008

Source: USITC http://dataweb.usitc.gov downloaded Feb 22, 2008

MNC R&D Centers in China, How are engineers being used? What kinds of work are Chinese, Indian, and American engineers actually doing? Answer: Not just product adaptation, but cutting-edge research & commercialization China: More than 1,000 MNC R&D Centers GE’s China Technology Center: Advanced research in energy storage, environmental management Microsoft Research Asia: Cutting-edge graphics & multimedia research

Global Value Chains The focus of analysis of global value chains is on the relationships among the different actors that are part of the chain. The concept of ‘governance’ ( = coordination) is fundamental to understand such relationships; Governance may occur thorugh: Market relations (Arm’s-length) Network relations, that is cooperation among firms with the same level of power; Quasi-hierarchy, with relations among enterprises that are legally independent, but one is hierarchically subordinate to the other; Hierarchy, when a firm is owned by another (external) firm.

R&D expenditures by business, government, higher education, and private non-profit organizations Source of funds for R&D, by type of costs, by type of economic activity (NACE), by enterprise size class, by type of R&D (basic, applied, and experimental research) (Timothy J. Sturgeon, May 2013) Schmitz (1995) - ‘‘collective efficiency’’ (CE) - defined as the competitive advantage derived from local external economies and joint action Ricardo’s static concept of ‘‘Comparative Advantage’’ (CA) - registers ex-post gaps in relative productivity which determine international trade flows success in firm-level upgrading enables the dynamic acquisition of competitiveness in new market niches, sectors, or phases of the productive chain (Pietrobelli, 1997;Lall, 2001;). From innovation, to upgrading, to the acquisition of firm-level competitiveness (i.e., competitive advantage).

R&D Alliance Networks MNC Competing products Competing technologies Scientific and knowledge fields Research laboratory Government innovation policy agencies MNC International Standardisation agency Scientific Association Competing technologies subcontractor standardisation RESEARCH CONSORTIUM © Todeva, 2005

The Network Diamond RELATIONSHIPS STRUCTURE ACTORS cultural approach relational structural Emanuela Todeva (2006) Business Networks: Strategy and Structure, New York: Taylor & Francis.

Conclusions – Supporting Cluster Development & Its Integration into Global Value Chains Through Intermediation & Facilitation prioritising and balancing between competition and cooperation bridging to enhance information transparency of suppliers and contracts creating effective institutions and intermediation practices New policy framework that provides incentives for networking & decision support Contract management support (platform governance & legal representation / protection) Strategic alliance management Market access management Intermediation theory Types of Intermediaries Institutional Activities / Practices Financial Services Channels Mechanisms e.todeva@surrey.ac.uk