value chain analysis case study (1000 words)

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timer Asked: Nov 11th, 2017

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1- Introduction and Objectives of the report >> Short introduction to the report setting out the aims and Objectives of the report are, what the report will cover and why . (100 words ) .

2- case analysis >> (700 words)

  • Case study analysis
    • Brief / summary of the case (100 words)
    • Write your view (agree or disagree) (200 words)
    • Give proper justification (with examples and arguments) (400 words)
    • Suggestions (if any)

3- Conclusion and learning derived >> the conclusion should briefly and clearly synthesize the key points of your analysis and what you learn . (100 words ) .

4- Recommendations (100 words ) .

5- References

* The total of assignment = 1000 words

JOURNAL OF ECONOMIC ISSUES Vol. LI No. 2 June 2017 DOI 10.1080/00213624.2017.1320916 Inequality and Income Distribution in Global Value Chains Carlos Aguiar de Medeiros and Nicholas Trebat Abstract: Global value chains (GVCs), led by transnational corporations (TNCs), have reshaped the world division of labor over the past two decades. GVCs are pervasive in low technology manufacturing, such as textile and apparel, as well as in more advanced industries like automobiles, electronics, and machines. This hierarchical division of labor generates wild competition at the lower value-added stages of production, where low wages and low profit margins prevail for workers and contract manufacturers in developing countries. At the top of the hierarchy another kind of competition prevails, centered on the ability to monitor and control intellectual property rights related to innovation, finance, and marketing. We argue that GVCs have had crucial effects on income inequality and the appropriation of rents in modern capitalism. Keywords: global value chains, inequality, intellectual property rights, rents JEL Classification Codes: O13, O40, E6 Global value chains (GVCs), led by transnational corporations (TNCs), have reshaped the world division of labor over the past two decades. The emergence of these vertical production networks was made possible by progress in information and communications technologies, extensive economic liberalization in developing countries, and geopolitical shifts that vastly increased the size of the capitalist labor force. GVCs are pervasive in low technology manufacturing, such as textile and apparel, as well as in more advanced industries like automobiles, electronics, and machines. This hierarchical division of labor generates wild competition at the lower valueadded stages of production, where low wages and profit margins prevail for workers and suppliers operating out of export processing zones in underdeveloped countries. At the top of the hierarchy another kind of competition prevails, which is centered on the ability to monitor and control intangible assets related to innovation, finance, and marketing. Carlos Aguiar de Medeiros is an associate professor in the Institute of Economics at the Federal University of Rio de Janeiro (IE-UFRJ). Nicholas Trebat is an assistant professor at the same institution. Carlos Aguiar de Medeiros gratefully acknowledges the financial support of Conselho Nacional de Pesquisa (CNPq). 401 ©2017, Journal of Economic Issues / Association for Evolutionary Economics Carlos Aguiar de Medeiros and Nicholas Trebat 402 Privatization, deregulation, and the enforcement of intellectual property rights have been major features of the world economy since 1980, enlarging the economic rents appropriated by financial interests, CEOs, and holders of patents and copyrights. These features were closely related, supported the expansion of global production networks, were commanded by TNCs from the advanced capitalist core, and required both a weaker regulatory environment with regard to trade, investment, and finance, and a stronger regulatory environment with regard to the protection of extraordinary profits. We organize this article into four sections. In the first section, we analyze different concepts of rent in classical political economy and use them to introduce key sources of rent in modern GVCs. In the next section, we discuss the rise of modern production networks and argue that increased outsourcing, together with the strengthening of IPR regimes worldwide, has enlarged rent appropriation for lead firms in GVCs. In the third section, we examine income distribution within GVCs and point to evidence suggesting that capital and high-skilled labor in wealthy countries reap increasingly large shares of value added in world trade. In the final section, we offer our conclusions. Old and New Sources of Economic Rent Classical political economy examined two basic forms of economic rent, understood as the fraction of surplus appropriated by landowners. The first, emphasized by Adam Smith and Karl Marx, originated from the power of landowners to charge producers for the use of their land, resulting in prices that exceed production cost (which includes the normal rate of profit). The second, associated with David Ricardo, arises when two different productive techniques are simultaneously in use, but the normal price is governed by the inferior technique. Both forms of rent originate from a market price that exceeds production cost, but only the first — absolute rent, as Marx (1991, 895) called it — is an independent source of price. It is a kind of monopoly price,1 emerging when scarcity, natural or created through anti-competitive practices, gives owners the power to fix price above production cost. Marx (1982, 1991) regarded the search for extraordinary profits as the main source of technical progress in capitalism. Although analytically similar to differential rent, in Marx’s view, extraordinary profits were temporary phenomena that were systematically destroyed by capitalist competition. Absolute rent, on the other hand, is not a temporary phenomenon, and, unlike profits, served no technological or productive purpose. It exists simply because owners of certain kinds of assets — land, 1 “The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give” (Smith 1976, 161). “The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion, indeed, but for any considerable time together. The one is upon every occasion the highest which can be squeezed out of the buyers, or which, it is supposed, they will consent to give. The other is the lowest which the sellers can commonly afford to take, and at the same time continue their business” (Smith 1976, 78). Inequality and Income Distribution in Global Value Chains 403 technology, finance, and CEO pay, for example — have the power to charge a price above production cost. This kind of unearned income, Thorstein Veblen (1919, 76) noted, “has some analogy with the phenomena of blackmail, ransom, and any similar enterprise that aims to get something for nothing.” The distribution of surplus to what Veblen called the “vested interests” of shareholders, monopolists, and rentiers is a central feature of modern capitalism. Oligopolistic practices do not prevent competition, but real competition among giant firms includes business strategies and institutions to exploit rents through patents and copyrights, licenses, and proprietary technology. In general, these firms seek to extend the commodity space and time length for the appropriation of extraordinary profits and rents.2 This includes not only traditional forms of rent like land, but also rents obtained through the provision of services in computing, software, and finance. Two sources of rents associated with services, finance, and intellectual property rights (IPR), are particularly relevant to our analysis and we will discuss them in more detail below. They did not emerge to stimulate innovation or solve productive necessities, but to enlarge the value appropriated by transnational corporations (TNCs) in an era of slower economic growth. Globalization and Corporate Control of Economic Rents Modern production is “splintered” into stages and tasks performed by international networks of affiliates and independent suppliers (Nathan and Sarkar 2011). Among other consequences, the intense division of labor, characterizing production within GVCs, has reduced the bargaining power of labor in advanced capitalist nations. One reason for this is greater competition from low wage workers in poorer countries like China. Another has to do with subcontracting. Modern network firms rely on their ability to outsource, one of the great advantages of which (from the perspective of these firms) is that it allows them to more efficiently segment the labor market. A drawback of the large integrated firms of the postwar era was that — although they had substantial monopoly power — their employees could demand relatively high wages. As direct employees, these workers could claim a share of the firm’s rents or extraordinary profits. Borrowing from Michal Kalecki’s discussion of the effect of monopoly power on wages, Dev Nathan and Sandip Sarkar (2011, 54) note that the rent “earned by the integrated monopoly firm is likely to have an effect on wages in the firm as a whole,” from assembly line workers to those with advanced degrees doing R&D. Rather than integrated firms, TNCs today are more often commanders of supply chains focused on specific tasks like marketing and design, outsourcing most other activities to independent suppliers. The key to this arrangement (and one of the main sources of higher rents) is that the suppliers — usually contract manufacturers in 2 As Veblen recognized, innovation is a collective endeavor. Rather than a “creative achievement” of self-sufficient individuals or firms, technical progress is a “joint possession of the community” (Veblen 1919, 57). This observation maintains relevance today, not least in the US, where new technologies are largely the result of state funding and planning (Mazzucato 2014). 404 Carlos Aguiar de Medeiros and Nicholas Trebat developing countries — operate in much more competitive environments than the lead firms themselves. The latter control intangible assets related to innovation and branding, and are thus able to capture the lion’s share of rents. Network production, however, also involves risks for TNCs: namely, technological diffusion and competition from suppliers seeking to move up the value chain. To combat these risks and increase rent appropriation, TNCs have sought to strengthen and universalize patent and copyrights laws. In pharmaceuticals, computers, and other high-tech industries, the “accumulation of private property rights over intangible knowledge” (Pagano and Rossi 2011, 10) became a dominant strategy after 1990. These industries took the lead in pressuring governments to put IPR at the center of trade negotiations. The TRIPS agreement, signed in 1994, established for the first time in modern history a set of enforceable, international IPR standards, which included twenty-year patents in various technology fields and fiftyyear copyrights for most copyrightable material. The strengthening of IPR laws increased rents in fields like entertainment, pharmaceuticals, computer software, and high-tech industry in general. With regard to pharmaceuticals, Dean Baker (2015) notes: “Drugs are an extreme case where the patent monopoly rent is largely the price of the product.” Other notable sectors are chemicals, biotechnology, and medical equipment. Finance is another important source of rents in today’s global economy. Of particular relevance to the discussion at hand is the proliferation of tax-avoidance schemes, which is a direct result of financial deregulation, particularly the elimination of capital controls worldwide. Firms like Apple and Boeing, aided by banks and consulting firms, employ elaborate transfer pricing and debt financing schemes to hide income in offshore tax havens and skirt tax obligations. Rather than repatriate income held abroad, they use their immense “foreign” cash holdings to borrow cheaply in financial markets, rewarding stockholders through share buybacks. The United Nations Conference on Trade and Development (UNCTAD) (2015a) notes a marked increase in the use of special purpose entities and offshore financial centers (such as the British Virgin Islands) to shift profits from regions where production actually takes place to low-tax jurisdictions. By the end of 2010, roughly 30 percent of world cross-border investment flows had been routed through offshore hubs, up from less than 20 percent at the start of the decade. Citing the case of Google, which paid a tax rate of only 2.4 percent on its profits outside of the United States in 2009, UNCTAD (2015a, 200) argues that transfer pricing and debt financing schemes are widespread and result in fantastic gains for TNCs. These tactics “artificially deflat[e] the average rate of return of foreign investments,” thus reducing or entirely eliminating tax obligations in the firm’s country of origin. Developing countries, which participate in GVCs, are particularly vulnerable to such tax avoidance schemes. UNCTAD (2015a, 203) estimates that $450 billion in profits is shifted yearly from developing countries to offshore entities, leading to revenue losses on the order of 10 percent of total tax payments made by foreign affiliates in developing countries. Illegal flows, involving abusive transfer prices and non-existent foreign loans, were particularly large out of Mexico and Costa Rica — two Inequality and Income Distribution in Global Value Chains 405 of Latin America’s most active participants in GVCs. “In the cases of Costa Rica and Mexico,” the UNCTAD study notes, “the large scale of illicit financial outflows is related to these countries’ participation in global value chains.”3 Veblen’s concept of “goodwill” offers an interesting perspective on the technological and financial rents, mentioned above. Veblen (1904) included in his definition of goodwill “trademarks, brands, patent rights, copyrights,” as well as intangible assets held by banks and financial interests. “All these items,” Giorgos Argitis (2016, 841) notes, “provide a differential advantage to their owners, but they are of no aggregate advantage to the community. They constitute wealth to the individuals concerned (differential wealth), but they form no part in the wealth of nations.” The implications of this institutional evolution in mature capitalism for developing economies (discussed in the next section) are vast. Historically, backward economies nationalized and exerted control of economic rents in land, technology, and finance for developmental or distributive purposes. In developmental states, these rents were appropriated by domestic firms in industrial activities or were transferred to social groups by public policies.4 Deregulation and privatization led to the dissolution of these protectionist rents and their appropriation by transnational corporations through market forces. The emergence of global, rules-based organizations like the WTO and the internationalization of IPR law make technological catch-up costlier and more difficult for developing countries. This is a crucial development because — as Celso Furtado (1978, 152) noted decades ago — “technological control is the bedrock of the international power structure. Reduced to its ultimate consequences, the fight against dependence is an effort to nullify the effects of the monopoly of this resource” by the advanced capitalist nations. The new division of labor in global manufacturing, backed by an institutional structure that reinforces the technological and financial power of large TNCs, generates an uneven value distribution between activities (mainly in services) in which economic rents are pervasive and activities (mainly in manufacturing) in which competition is fierce. Although power asymmetries within GVCs are widely recognized (Gereffi 2014; Milberg and Winkler 2013), current estimates of value appropriation within GVCs cover only part of this process. As we argue in the next section, hidden incomes in GVCs are pervasive. Winners and Losers in GVCs The world network trade is dominated by TNCs based in wealthy countries and characterized by regional blocks centered on the US, Japan, Germany, and 3 Analyzing illegal trade invoicing in Latin America, United Nations Economic Commission for Latin America and the Caribbean (UNECLAC) (2016, 125) observes: “[I]illicit financial flows have increased sharply in the last decade, with outflows from trade misinvoicing rising by an average of some 9% a year.” 4 Raphael Kaplinsky (1998) deals with competitive advantages, emerging from several sources of economic rents that he examines (resource rents, policy rents, human resources rents, organizational rents, relational rents, product and marketing rents, infrastructural rents, and finance rents). 406 Carlos Aguiar de Medeiros and Nicholas Trebat (increasingly) China. Describing the “technological asymmetry” within GVCs, Richard Baldwin and Javier Lopez-Gonzalez (2013) argue that global production is essentially divided into “headquarter” economies located in Japan and the west, and “factory” economies located in Asia and Eastern Europe. While “firms in the headquarter economies ... arrange the production networks; factory economies provide the labor” (Baldwin and Lopez-Gonzalez 2013, 1696). GVCs expanded rapidly after the year 2000, and this coincided with an increase in the technological sophistication of developing countries’ exports. However, as UNCTAD researchers pointed out in the early 2000s, this increasing sophistication was largely a “statistical mirage” as it involved heavy reliance on imported inputs. In most developing countries, “exports have increased substantially without having led to comparable increases in DVA, therefore weakening the production-linked gains commonly expected with export-led growth” (UNCTAD 2015b, 30).5 Wealthy countries retain much larger shares of their gross exports in the form of domestic value added than the poorer “factory” economies. In 2011, the foreign value-added (FVA) share in gross exports for the United States, United Kingdom, Germany, Japan, and France ranged between 15 and 25 percent, compared to 35-45 percent in Eastern Europe and Southeast Asia.6 Given these trends, it is perhaps not surprising that GVC income since the mid-1990s has been increasingly skewed in favor of capital and high-wage earners in wealthy countries.7 Marcel Timmer et al. (2014, 104-110) find that the share of value added accruing to capital increased between 1995 and 2011 in almost two-thirds of the over 500 value chains covered in their study. The value-added share of high-skilled workers, which includes managers and CEOs, increased in 92 percent of the chains, while the low-skilled labor share fell in an astounding 91 percent of the chains. In terms of gains by factor groups, high-skilled laborers in wealthy countries were the biggest winners, with a positive increase of 5.0 percent. The biggest losers were low-skilled workers in developing countries, whose share in value added fell by 6.3 percent, the largest variation (positive or negative) among all factor groups analyzed. Over half (55 percent) of value added generated within GVCs accrues to just twenty-one high-income countries: the United States, Japan, South Korea, Taiwan, Australia, Canada, and the fifteen pre-2004 members of the European Union (Timmer et al. 2014, 110). Although significant, this result is below estimates based on data supplied by the Organization for Economic Cooperation and Development (OECD), and well below Rashmi Banga’s (2014, 278) estimate of 67 percent accruing to OECD countries. 5 In the 1970s, South Korea’s export share of GDP was similar to that of Malaysia and Thailand today, but the domestic value-added (DVA) share of its gross exports was well over 75 percent, much higher than any Southeast Asian country today. Between 1995 and 2011, the domestic value added (DVA) share of gross exports fell in every Asian country, except the Philippines and Indonesia. 6 Results based on our analysis of the OECD-WTO’s database on Trade in Value Added (OECDTiVA). 7 The World Input-Output Database project (WIOD), funded by the European Commission, along with the OECD-WTO’s database on Trade in Value Added (OECD-TiVA), are the main sources of data value added in GVCs. Other databases exist, but are either not publicly available, or provide data for a limited set of countries. Inequality and Income Distribution in Global Value Chains 407 Timmer et al.’s calculations, however, likely underestimate the share of GVC income appropriated by wealthy countries. First, the study is restricted to manufactured goods, and thus does not analyze income distribution within value chains for services or agricultural commodities like coffee and chocolate, in which retailers from wealthy countries earn most of the value added. Second, the national accounts data used to estimate GVC income only tracks payments for produced assets, ignoring certain types of income related to the use of intellectual property. Third, value-added trade data use basic or ex-factory gate prices for final products in manufacturing, excluding distribution and retail margins. The problem with this is that much of the income earned within GVCs surfaces only in the retail stage of the value chain, where lead firms often exercise strict control and obtain large premiums on sales to consumers. For brands like Apple, profits reflect control over intangible assets related to product design and technology, and “the use of these intangibles is typically not compensated for by a direct money flow from the users” (Timmer et al. 2015, 593). Finally, and perhaps most importantly, value-added trade data are compiled on a domestic rather than national basis, meaning that if a French multinational operating in Vietnam exports a machine to Japan, the capital income is credited entirely to Vietnam, not France. Given that foreign direct investment (FDI) stocks and income are overwhelmingly from high-income countries, estimates of value -added trade on a domestic basis will inflate the developing world’s share.8 Measures to improve data collection, such as including estimates for FDI income, will not necessarily solve these problems. As we noted above, TNCs often hide foreign income for tax purposes and avoid repatriation to their countries of origin. These hidden incomes will not appear in FDI data, obscuring the extent to which the gains from global trade are lopsided in favor of wealthy countries. Conclusion The ability of big business to extract technological and financial rents — to “get something for nothing,” as Veblen put it — explains much of the social and economic polarization of modern capitalism. The rise of GVCs, led by a select group of powerful corporations, has created a vast and unequal international division of labor that divides the world into “headquarter” economies located in Japan and the west and “factory” economies located in Southeast Asia, Eastern Europe, and Latin America (Baldwin and Lopez-Gonzalez 2013). Tangible activity (mostly in manufacturing and assembly) takes place in developing countries, while intangible intellectual work (mainly in services, such as R&D, design, finance, and marketing) is concentrated in wealthy countries. The “core business” of every TNC, irrespective of its particular branch, is to control and capitalize on these intangible assets. 8 Jason Dedrick, Kenneth L. Kraemer, and Greg Linden (2010) take the opposite (and arguably more realistic) approach in their well-known study of the iPod and iPhone supply chains (crediting income to the country of origin of multinational firms), leading them to conclude that China retains almost none of the value added created in these chains, even though Chinese workers provide almost all of the labor. 408 Carlos Aguiar de Medeiros and Nicholas Trebat The legislative and institutional changes, associated with globalized trade and finance, have increased corporate mobility in two key ways. First, they have made it easier for firms to outsource activities and relocate facilities to lower-wage areas, putting downward pressure on wages in their countries of origin. Second, they have made it easier for firms to transfer funds around the world and shift accounting profits to low-tax jurisdictions. This increased mobility has enlarged rents for large firms and helped redistribute income along the value chain from productive workers to shareholders and salaried executives. References Argitis, Giorgos. “Thorstein Veblen’s Financial Macroeconomics.” Journal of Economic Issues 50, 3 (2016): 834-850. Baldwin, Richard and Javier Lopez-Gonzalez. “Supply-Chain Trade: A Portrait of Global Patterns and Several Testable Hypotheses.” National Bureau of Economic Research (NBER) Working Paper No. 18957. NBER, April 2013. Baker, Dean. “The Upward Redistribution of Income: Are Rents the Story?” Center for Economic and Policy Research (CEPR) Working Paper. CEPR, December 2015. Banga, Rashmi. “Linking into Global Value Chains Is Not Sufficient: Do You Export Domestic Value Added Contents?” Journal of Economic Integration 29, 2 (2014): 267-297. Dedrick, Jason, Kenneth L. Kraemer and Greg Linden. “Who Profits from Innovation in Global Value Chains? A Study of the iPod and Notebook PCs.” Industrial and Corporate Change 19, 1 (2010): 81116. Furtado, Celso. Criatividade e Dependência na Civlização Industrial. Rio de Janeiro, Brazil: Paz e Terra, 1978. Gereffi, Gary. “Global Value Chains in a Post-Washington Consensus World.” Review of International Political Economy 21, 1 (2014): 9-37. Kaplinsky, Raphael. “Globalization, Industrialization and Sustainable Growth? The Pursuit of the Nth Rent.” Institute of Development Studies (IDS) Discussion Paper No. 365. IDS, 1998. Mazzucato, Mariana. The Entrepreneurial State: Debunking Public vs. Private Sector Myths. London, UK: Anthem Press, 2014. Marx, Karl. Capital: A Critique of Political Economy. Volume I. London, UK: Penguin Books, 1982. ———. Capital: A Critique of Political Economy. Volume III. London, UK: Penguin Books, 1991. Milberg, William and Deborah Winkler. Outsourcing Economics: Global Value Chains in Capitalist Development. Cambridge, UK: Cambridge University Press, 2013. Nathan, Dev and Sandip Sarkar. “A Note on Profits, Rents and Wages in Global Production Networks.” Economic and Political Weekly 66, 36 (2011): 53-57. Pagano, Ugo and Maria Alessandra Rossi. “Property Rights in the Knowledge Economy: An Explanation of the Crisis.” In The Global Economic Crisis: New Perspectives on the Critique of Economic Theory and Policy, edited by Emiliano Brancaccio and Giuseppe Fontana, pp. 284-298. New York, NY: Routledge, 2011. Smith, Adam. The Glasgow Edition of the Works and Correspondence of Adam Smith. Oxford, UK: Clarendon Press, 1976. Timmer, Marcel, Abdul Azeez Erumban, Bart Los, Robert Stehrer and Gaaitzen de Vries. “Slicing Up Global Value Chains.” Journal of Economic Perspectives 28, 2 (2014): 99-118. United Nations Conference on Trade and Development (UNCTAD). World Investment Report 2015: Reforming International Investment Governance. Geneva, Switzerland: UNCTAD, 2015a. ———. Global Value Chains and South-South Trade: Economic Cooperation and Integration Among Developing Countries. Geneva, Switzerland: UNCTAD, 2015b. United Nations Economic Commission for Latin America and the Caribbean (UNECLAC). Economic Survey of Latin America and the Caribbean: The 2030 Agenda for Sustainable Development and the Challenges of Financing for Development. Santiago, Chile: UN ECLAC, 2016. Veblen, Thorstein. The Theory of Business Enterprise. New York, NY: Scriber’s Sons, 1904. ———. The Vested Interests and the Common Man. New York, NY: B.W. Huebsch, 1919. Copyright of Journal of Economic Issues (Taylor & Francis Ltd) is the property of Taylor & Francis Ltd and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.

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