Step-by-Step Guide to Exporting – Step 2 – Globalization: linking to global value chains
Table of Contents
2.1 About globalization
The term "economic globalization" refers to the rapid expansion of international trade and capital flows since the 1990s. The world's economies have become even more closely integrated than ever.
Globalization has caused many businesses to divide their products or services into components. Instead of producing the components themselves or obtaining them from domestic suppliers, businesses outsource certain aspects of the work to other countries. Economists call this co-dependency a Global Value Chain (GVC).
2.2 Understanding global value chains
A value chain (whether global or not) consists of activities that bring a good or service from its conception to its end use and beyond. This includes design, production, marketing, distribution and support to the final consumer. The activities that comprise a value chain can be contained within a single firm or divided among different firms. When those activities are no longer contained within a single geographic location, such as a country, we have a GVC.
Global value chains aren't new. Trade and investment were becoming broadly internationalized in the late 19th and early 20th centuries. But due to the outbreak of the First World War, followed by the Great Depression and the Second World War, globalization didn't really move to the forefront until the last quarter of the 20th century.
International trade has evolved from companies that once manufactured products in one country and sold them in another. It is also departing from the branch–plant approach, wherein a business produced its goods in a foreign market and sold them almost exclusively in that market. Instead, international trade is now increasingly characterized by intermediate inputs (for both goods and services) who may be found anywhere in the world.
For more information, visit Global Affairs Canada’s Office of the Chief Economist.
2.3 Growth of global value chains
There are three major forces driving the growth of GVCs, according to the Office of the Chief Economist:
- Declining costs of transportation
Unless time concerns dictate otherwise, companies can afford to move their goods production and services provisions to locations that offer the best competitive advantages.
- Improved information and communication technologies
Advances in information and communication technologies (ICT) mean that companies are much less limited by distance when operating in foreign markets.
- Reduced barriers to trade and investment
New bilateral trade and investment treaties, lower global tariffs and liberalized economies in developing markets, such as China and India, have allowed companies to gain access to markets that were formerly closed to them.
2.4 GVCs and Canadian exporters
Global value chains allow each link of the export chain to specialize in what it does best. This leads to greater efficiency, increased productivity and lower consumer prices for higher-quality goods and services. At the same time, this trade environment stimulates the intense global competition that encourages innovation.
Companies worldwide have had to adapt to the evolution of GVCs. For example, non-core activities may be outsourced to suppliers, partners or affiliates in countries with lower labour costs or other competitive advantages. Alternatively, SMEs may supply goods or services to a GVC established by another company, including a foreign multinational.
In general, Canada has been reasonably successful at adapting. Our excellent R&D environment and highly skilled workforce, together with our long experience as a trading nation, have underpinned this success. However, Canada now has to meet the challenge of supporting a technologically advanced and diversified economy. Canadian businesses can do this by creating GVCs for their industry sector, by participating in existing chains, by merging with larger firms or by acquiring other companies.
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Canadian businesses AND TCS working together – With the right advice from TCS, this digital health software company has been able to turn heads among industry giants around the world.
2.5 GVCs and your business
You have a considerable range of strategies for benefiting from GVCs. The following are among the most common.
2.5.1 Provide intermediate input for existing value chain
If your product is something that another company (either Canadian or foreign) uses as an intermediate input, you may be able to link into their GVC by becoming a supplier. This is a very common approach and certainly the simplest. For SMEs, especially those with niche technologies or specializations, new opportunities are constantly emerging to sell to multinationals or their suppliers.
2.5.2 Develop your own GVC through outsourcing
If your company manufactures either finished products or intermediate inputs, you can set up your own GVC. Acquiring intermediate inputs—such as raw materials, components, subsystems and other goods and services—from foreign suppliers can help you manufacture your own products at either lower cost or greater responsiveness to market forces.
2.5.3 Make investments abroad to connect to or establish a global value chain
By investing abroad you can gain immediate access to a foreign market and expand your company's sales and promote its growth. There is a broad spectrum of investment approaches, ranging from the passive to the active.
You might, for example, join a GVC simply by investing in a foreign company while taking little or no part in its operations. Purchasing a foreign firm, or setting up a joint venture or partnership, is another way to increase your competitiveness in the local market. This approach can be very cost-effective if you obtain existing production and distribution capabilities through the investment, so you don't need to build them from the ground up.
At the active end of the spectrum, you could establish a wholly owned subsidiary in a foreign market. This can help you drive and benefit from the GVCs of which your company is a part. The most important advantage is that you aren't dependent on a partner, so you can control the direction your subsidiary will take. You will also have direct contact with your end users, allowing you to build solid customer relationships and helping to ensure that your identity isn't obscured by the presence of a partner. Finally, your overseas staff will answer only to you, and all data related to your foreign operation will be at your sole disposal.
2.5.4 Focus on service sectors
For more information, see the TCS's Linking in to Global Value Chains: A Guide for Small and Medium-Sized Enterprises
The demand for service exports is growing all over the world. Even if you're primarily a manufacturer, you may be able to move up the value chain by branching into value-added services related to your sector, such as design, distribution, marketing and logistics.
Secondary industries may provide additional opportunities. Companies are demanding an increasing variety of services to facilitate trade, such as financial, information processing, telecommunications, logistics and legal services. Your company may have specialized expertise that is directly applicable to such activities.
2.5.5 Consider supplier diversity
Corporate supplier diversity initiatives facilitate inclusive sourcing of goods and services from groups that have been traditionally underrepresented in supply chains. Diverse suppliers include businesses owned by women, minorities, indigenous peoples or someone who identifies as LGBT. If your business is more than 51% owned and operated by members of designated groups, there may be opportunities for your business through corporate supplier diversity initiatives. For example, these initiatives are present in most Fortune 500 corporations. Some organizations require that your business be certified in order to qualify as a diverse supplier. Canadian certifiers include WEConnect International in Canada (women-owned businesses), WBE Canada (women-owned businesses), the Canadian Aboriginal and Minority Supplier Council and The Canadian Gay and Lesbian Chamber of Commerce.
Looking to source from diverse suppliers? The Business Women in International Trade program leads women-focused trade missions drawing together Fortune 500 corporations, government agencies and non-profit organizations.
Certain corporations and governments only buy from companies that are on their preferred supplier lists (PSLs).
To learn more about how to qualify as a preferred supplier and the opportunities it can create for your business read the Trade Commissioner Service’s (TCS) Spotlight on Global Value Chains.
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