The World Commission on the Social Dimension of Globalization's excellent report focusses a lot on "global production systems".  And while they recognise their importance for economic development and poverty reduction, they are also concerned that they may be an instrument of exploitation!

These global production systems are most evident in East Asia with its regional supply chains that feed US and EU markets (East Asia is bytheway the world's most successful region when it comes to poverty reduction).  Another example could be the maquiladora plants on the Mexican border with the US.

The information and communications technology revolution, coupled with declining transport costs, have made the growth of far-flung, multi-country based production of goods and services both technically and economically feasible.  Production processes have been unbundled and located across the globe to exploit economic advantages arising from differences in costs, factor availabilities and the congenialty of the investment environment.  Components and parts can easily be trans-shipped across the world and assembled at will.  The communications revolution has made feasible the coordination and control of these dispersed production systems.

So, how does it work?  The World Commission distinguishes between a few different cases.  First, there are the labour-intensive consumer industries like textiles, garments and footwear.  Here multinational enterprises (MNEs) design the product, specify the product quality and so on, and then outsource its production to local firms in developing countries.  They also exercise control over the quality and timing of production, which is often subjected to changes in design and volume.  The driving force is the flexible and timely adjustments to changes in consumer demand with minimal inventory costs.  It is a global "just-in-time" production system.  The MNEs also control the marketing of the product.  Branding and logos are important sources of market power and, incidentally, of large fortunes.

A second case of global production systems is high-tech industries such as electronics and semi-conductors, etc.  The high-tech industries have experienced the fastest growth and now constitute the largest single component of the manufactured exports of developing countries.  In these industries, the production of parts and components is carried out by subsidiaries of MNEs located in developing countries.  Most of the R&D and other technoogically sophisticated functions are carried out in the industrialised countries.

A third case is also becoming significant in the service sector where technological advances have made it possible for services such as software development, financial services and call centres to be supplied from different countriea round the globe.

What this means is that trade and FDI have now become more closely intertwined.  Global production systems increasingly shape patterns of trade, especially through the rapid growth of intra-firm trade in components.  MNEs are now estimated to account for two-thirds of world trade, while intra-firm trade between MNEs and their affiliates accounts for one-third of world exports.  These qualitative changes in the structure of world trade -- specifically the increase in the trade in components and intermediate inputs -- are perhaps just as siginificant as the quantitative increase in trade.

The emergence of global production systems that has driven the increasing flows of FDI has created new opportunities for growth and industrialisation in developing countries.  Some 65,000 MNEs, with around 850,000 foreign affiiliates, are the key actors behind these global production systems.  They co-ordinate global supply chains which link firms across countries, including even sub-contractors who work outside the formal factory system and outsource to home workers.

Global production systems are now a significant source of employment growth for those developing countries that have managed to become part of them.  Although MNEs alone account for only a fraction of employment in most countries, outsourcing to domestic producers implies that these global systems have a considerable impact on labour markets in many parts of the world.

So where's the problem?  One element of global production systems has been the development of Export Processing Zones.  Persistent concerns have been expressed that EPZs are sometimes given exemptions from national labour laws, and that they engage countries in a competition for foreign investment that leads to damaging tax and subsidy policies.  There is widespread debate about whether there is a "race to the bottom" in labour and other standards.  Over 50 million workers are now employed in such zones worldwide.  Trade unions are concerned that the exploitation of women workers in EPZs has expanded dramatically.  This includes low wages, intimidation of workers trying to organise themselves, violence and sexual harassment.

Although some trade unions and NGOs might complain about these global production systems, the reality is that for many countries, this is virtually the only way to attract investment and increase technological capability.  In other words, it is the only way to develop and achieve poverty reduction!

If you want to see that reality, just look at the unhappy faces of those Chinese workers who have just been fired from their toy factories in Guangdong because of the financial crisis.  They would much prefer to be chained to their supply chains than going back to their farms in rural China.

The World Commission also notes that these global production systems have been built up without the parallel development of multilateral rules to govern its key element, FDI.  Sure, but if we still can't do Doha, we will never be able to develop a multilateral agreement on FDI!

Reference:

Report of the World Commission on the Social Dimension of Globalization, "A fair globalization: creating opportunities for all" -- www.ilo.org