Trade Video
Understanding Global Value Chains
CanadExport's Michael Mancini interviews Dr. George Yip, Dean of the Rotterdam School of Management at Erasmus University.
Rotterdam, September 3, 2008
Duration: 3:07 minutes
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Transcript
Understanding Global Value Chains
Michael Mancini: So as you know, we're here to talk about global value chains, what they are and why they matter. First of all, what exactly are global value chains?
Dr. George Yip: Well, before we get to the global part, let me just talk about what a value chain is. A value chain is the chain of activities that a business undertakes in order to produce and sell a product or a service. So typically a value chain would start at the very front end with research, which then leads to development of a product design, which then might lead to the purchasing of the materials you need to make it, the processing of the raw materials, sub-assembly, final assembly, then distribution, marketing and selling, and after-sales service. So that's a typical chain. Now, with globalization, it simply means instead of doing everything in just one country, typically the home country, you move some of the activities overseas. So of course the big trend over the last 20 years has been the move of some parts of assembly or production to lower-cost countries such as China or India. But it's not just that activity. Some companies might move research so that they can access better scientists. So a lot of research now takes place in Singapore, or they might go to Russia, which has some very good scientists and not so expensive either. Or in another interesting example, a few years ago Sony moved the head office of its finance function, which is also part of the value chain in a sense, to New York because New York at that time was the capital of global finance—was the global capital of finance.
Michael Mancini: So why are global value chains important, then? What exactly are companies looking for by off shoring, or out sourcing, or tapping into these value chains?
Dr. George Yip: Well, in the end, companies are looking for competitive advantage and higher profits. So for example, you can go somewhere to get lower costs—that's a very important source of competitive advantage—and higher profits as well. But you can also go abroad to get better quality. I mean, there are many activities now where you… for example, where you need very sort of dextrous manual labour, hard working, as in electronics, where you probably actually get better quality in China than you might get in Canada or the United States. So there's an opportunity to improve… to lower costs, opportunity to improve quality. A good example's the company that most of us are familiar with, which is BMW. And BMW would have different activities… BMW has different activities in different countries. The… the final assembly is still done in Germany, but significant parts of various activities are in joint ventures in places like China, which will make parts of its components for it, and then it gets shipped back to Germany for final assembly.
