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8 The Global Economy: Organization,
Governance, and Development
Gary Gereffi

The global economy has changed in very signif- ropean Union and the North American Free Trade
icant ways during the past several decades, and Agreement. These regimes combine both rules
these changes are rooted in how the global econo- and resources, and hence they establish the broad-
my is organized and governed. These transfor- est parameters within which the global economy
mations affect not only the flows of goods and operates.
services across national borders, but also the impli- At the meso level, the key building blocks for the
cations of these processes for how countries move global economy are countries and firms. Those
up (or down) in the international system. The de- scholars who take countries as their main analytical
velopment strategies of countries today are affect- unit (as in the varieties-of-capitalism literature)
ed to an unprecedented degree by how industries provide an institutional perspective on the main,
are organized, and this is reflected in a shift in the- enduring features of national economies. The glob-
oretical frameworks from those centered around al economy is seen as the arena in which countries
the legacies and actors of nation-states to a greater compete in different product markets. An alterna-
concern with supranational institutions and trans- tive approach is to focus on firms and interfirm
national organizations. Policymakers, managers, networks as the central units of analysis, and ana-
workers, social activists, and many other stake- lyze these actors in a global industry or sectoral
holders in developed as well as developing nations framework (as in the global commodity chains or
need a firm understanding of how the contempo- industrial districts approaches). These scholars typ-
rary global economy works if they hope to improve ically take a more organizational approach. In
their position in it, or forestall an impending both the institutional and the organizational per-
decline. spectives on the global economy, we tend to get a
The topic of the global economy is inherently top-down focus on leading countries and firms as
interdisciplinary. No single academic field can en- drivers of change.
compass it, nor can any afford to ignore it. Be- Institutionalists like those in the varieties-of-
cause of its vast scope, those pundits who focus on capitalism school tend to focus on developed or in-
the global economy are likely to be classified as dustrialized countries. Alternatively, one can take a
academic interlopers; they run the risk of being development-oriented perspective with regard to
too simplistic if they advance forceful hypotheses countries, and ask how the economic prospects
and too eclectic if they try to capture the full of developing nations are shaped by their position
complexity of their topic. Scholars in this field in the global economy. These questions help to
thus have to master what economist Albert bridge the concerns of economic sociologists and
Hirschman has popularized as “the art of trespass- development specialists because the theories of in-
ing” (Hirschman 1981; Foxley, McPherson, and dustrial upgrading that have emerged in the last
O’Donnell 1986). couple of decades have been shaped very closely by
The global economy can be studied at different several of the organizational and institutional the-
levels of analysis. At the macro level are interna- ories mentioned above.
tional organizations and regimes that establish At a micro level, there is a growing literature
rules and norms for the global community. These on the resistance to globalization by consumer
include institutions like the World Bank, the Inter- groups, activists, and transnational social move-
national Monetary Fund, the World Trade Organi- ments (such as those dealing with labor issues and
zation, and the International Labor Organization, environmental abuses). This research is relevant to
as well as regional integration schemes like the Eu- a chapter titled “The Global Economy” because
 Global Economy 161

the very same perspectives used to understand how

the global economy is organized are being em- HOW NEW IS THE GLOBAL ECONOMY?
ployed by social and environmental activists to
challenge the existing order. Much of the globalization debate has been fu-
Many theories related to economic sociology eled by different conceptions of what is happening
incorporate the global economy in their frame- “out there” in the global economy, and whether it
works, but they differ in the degree to which it is really represents something new. We need to dis-
conceptualized as a system that shapes the behav- tinguish the process of internationalization, which
ior and motivation of actors inside it, or as an involves the mere extension or geographic spread
arena where nationally determined actors meet, of economic activities across national boundaries,
interact, and influence each other (Therborn from globalization, which is qualitatively distinct
2000). This chapter identifies how the global because it involves the functional integration of
economy has been constructed analytically by a internationally dispersed activities (Dicken 2003,
wide range of social scientists. The first task is to 12). How functional integration occurs is a topic
define what is really “new” about the global econ- that we will deal with in more detail below in terms
omy in the last half of the twentieth century, of the governance structures in the global econo-
which is the main temporal focus of this chapter. my. However, one of the key actors that distin-
The increasingly seamless web of international guishes the global economy of the latter half of the
production and trade networks that girdle the twentieth century from its predecessors is the
globe appears to be a distinctive feature of the last transnational corporation (TNC), which we will
several decades, and it requires a new kind of or- discuss in this section.1
ganizational perspective that has been growing The origins of a global economy can be traced
rapidly. The second section of this chapter takes a back to the expansion of long-distance trade dur-
closer look at how and why production and trade ing the period of 1450–1640, which Wallerstein
have been reorganized in the global economy in (1979) has labeled the “long sixteenth century.”
the contemporary era. Research by a diverse group From the fifteenth century onward, a number of
of scholars from economics, business schools, so- chartered trading companies emerged in Europe,
ciology, and economic geography, among other such as the East India Company and the Hudson’s
fields, has contributed to a reconceptualization of Bay Company, which created vast international
the key actors that make up the global economy, trading empires. Although their activities were
and to a realization that the integration of trade worldwide in scope, their main purpose was trade
and the disintegration of production on a global and exchange, rather than production. The devel-
scale are fundamentally altering our ideas about opment of a world trading system over a period of
what connects national economies, firms, places, several centuries helped to create the tripartite
and people. The third section reviews selected in- structure of core, semiperipheral, and peripheral
stitutional and organization perspectives on the economic areas. According to world-systems theo-
global economy. We will highlight the competing ry, the upward or downward mobility of nations in
and complementary claims of various approaches, the core, semiperiphery, and periphery is deter-
such as the varieties-of-capitalism literature, na- mined by a country’s mode of incorporation in the
tional business systems, and global commodity capitalist world-economy, and these shifts can only
chains. be accurately portrayed by an in-depth analysis of
The last two sections of the chapter offer “bot- the cycles of capitalist accumulation in the longue
tom up” perspectives on the global economy to durée of history (Wallerstein 1974, 1980, 1989;
complement the “top down” views on the reor- Arrighi 1994).
ganization of global industries. The fourth section The dynamics of the capitalist world-system laid
takes a country perspective, and asks how a focus the foundation for a process of industrialization
on global production networks allows us to under- and new international divisions of labor on a glob-
stand the process of industrial upgrading, whereby al scale. Originally, as defined by the eighteenth-
economic actors try to move to higher-value activ- century political economist Adam Smith ([1776]
ities in the global economy. The fifth and conclud- 1976), the “division of labor” referred simply to
ing section of the chapter examines several of the the specialization of workers in different parts of
emerging challenges and dilemmas for governance the production process, usually in a factory setting.
and development in the contemporary global Quite early in the evolution of industrial econo-
economy. mies, the division of labor also acquired a geo-
162 Gereffi
graphical dimension. Different areas began to spe- Washington Consensus) became established in the
cialize in particular types of economic activity. At 1980s (Gore 2000). GATT, a multilateral forum
the global scale, the “classic” international division for trade negotiations, became the primary inter-
of labor was between the industrial countries pro- national trade agency by default when the Interna-
ducing manufactured goods, and the nonindustri- tional Trade Organization, provided by the 1947
alized economies that supplied raw materials and Havana Charter, was abandoned by President Tru-
agricultural products to the industrial nations and man after it was staunchly opposed in the U.S.
that became a market for basic manufactures. This Congress. In 1995, the GATT was superseded by
relatively simple pattern no longer applies. During the much more powerful World Trade Organiza-
the decades following the Second World War, tion (WTO), which sought to reduce or eliminate
trade flows have become far more complex, and so a whole range of nontariff barriers and uneven
have the relationships between the developed and trading conditions between countries.
developing nations of the global economy.
The foundations of the contemporary economic
Distinctive Features of the Contemporary Global
order were established in the late 1940s by the sys-
Economy, 1960s to the Present
tem of financial and trade institutions that were set
up at an international conference in Bretton Woods, There is considerable controversy over how to
New Hampshire, in 1944. The principal institu- characterize the distinctive aspects of the global
tions that constitute the Bretton Woods system are economy in the postwar period. Wallerstein (2000,
the International Monetary Fund (IMF), the In- 250) argues that the period from 1945 to the pres-
ternational Bank for Reconstruction and Develop- ent corresponds to a typical Kondratieff cycle of
ment (later renamed the World Bank), and the the capitalist world-economy, which has an upward
General Agreement on Tariffs and Trade (GATT) and a downward swing: an A-phase of economic
(see Held et al. 1999, chaps. 3 and 4). Unlike the expansion from 1945 to 1967–73, and a B-phase
classical gold standard system, which collapsed of economic contraction from 1967–73 to the
during the First World War, the Bretton Woods fi- present day. While the evolution of the capitalist
nancial system required that every currency had a world-economy stretches from 1450 to the con-
fixed exchange rate vis-à-vis the U.S. dollar, with temporary era, in world-systems theory it is marked
the dollar’s value pegged to gold at $35 an ounce. by periods of genesis, normal development, and
In practice, Bretton Woods became a dollar system the current phase of “terminal crisis” (Wallerstein
because the United States was the leading econo- 2000, 2002).
my and the only major creditor nation in the first From a trade perspective, the level of economic
25 years following the Second World War. While integration in the latter half of the twentieth cen-
the rise of the Eurocurrency market in the 1960s tury is not historically unprecedented. The decades
placed increasing strain on the Bretton Woods fi- leading up to 1913 were considered a golden age
nancial order, its actual demise came on August of international trade and investment. This was
15, 1971, when President Nixon announced that ended by the First World War and the Great De-
the U.S. dollar was no longer freely convertible pression, when most of the world’s economies
into gold, effectively signaling the end of fixed ex- turned inward. Merchandise trade (imports and
change rates. exports) as a share of world output did not recov-
Notwithstanding these changes, the legacy of er its 1913 level until sometime in the mid-1970s
the Bretton Woods system remained powerful (Krugman 1995, 330–31).2 If we take 1960 as the
throughout the latter decades of the twentieth baseline, interconnectedness through trade has
century. The IMF has policed the rules of the in- vastly increased in recent decades, and furthermore
ternational financial order, and intervened in na- trade has grown consistently faster than output at
tional economies (especially in developing countries) the world level. Among the OECD3 nations (the
to impose stabilization programs when balance-of- 24 richest industrial economies), the ratio of ex-
payments crises were deemed structural rather ports to gross domestic product (GDP) roughly
than cyclical. Following the postwar reconstruc- doubled from 1960 to 1990, rising from 9.5 per-
tion of Europe and Japan, the World Bank increas- cent to 20.5 percent in this period, and world mer-
ingly became a development agency for third chandise trade grew at an average of one and a half
world nations (Ayres 1983). Its policy recommen- times the rate of growth of world GDP from 1965
dations were closely tied to those of the IMF, es- to 1990 (Wade 1996, 62).
pecially after the neoliberal agenda (dubbed the International trade, investment, and finance
 Global Economy 163

have become the hallmarks of economic globaliza- forms in low-wage economies to a “new interna-
tion. Global interconnectedness through foreign tional division of labor” that used advanced trans-
direct investment grew even faster than trade dur- port and communication technologies to promote
ing the 1980s, and the most dynamic multination- the global segmentation of the production process.
alization of all has come in finance and in technol- The OECD coined the term newly industrializing
ogy. Flows of foreign direct investment grew three countries and reflected the concern of advanced
times faster than trade flows and almost four times capitalist nations that the expanding share of these
faster than output between 1983 and 1990 (Wade emergent industrializers in the production and ex-
1996, 63), and according to one estimate, TNCs port of manufactured goods was a threat to slump-
control one-third of the world’s private sector pro- ing Western industrial economies (OECD 1979).
ductive assets (UNCTAD 1993, 1). Globalization World-systems theorists argued that the gap be-
appears to have gone furthest in the area of fi- tween core and periphery in the world economy
nance. The stock of international bank lending had been narrowing since the 1950s, and by 1980
(cross-border lending plus domestic lending, de- the semiperiphery not only caught up with but also
nominated in foreign currency) rose from 4 per- overtook the core countries in their degree of in-
cent of the GDP of OECD countries in 1980 to an dustrialization (Arrighi and Drangel 1986, 54–55;
astonishing 44 percent in 1990, and foreign ex- Arrighi, Silver, and Brewer 2003).
change (or currency) trading was 30 times greater In retrospect, the assembly-oriented export pro-
than and quite independent of trade flows in the duction in the newly industrializing countries was
early 1990s (Wade 1996, 64). Global financial merely an early stage in the transformation of the
flows accelerated in considerable measure because global economy into “a highly complex, kaleido-
of the growing popularity in the 1980s and 1990s scopic structure involving the fragmentation of
of new financial instruments, such as international many production processes, and their geographical
bonds, international equities, derivatives trading relocation on a global scale in ways which slice
(futures, options, and swaps), and international through national boundaries” (Dicken 2003, 9).
money markets (Held et al. 1999, 205–9). Expanded niches for labor-intensive segments have
This quantitative assessment of the growth in in- been created by splitting the production of goods
ternational trade, investment, and financial flows is traditionally viewed as skill-, capital-, or technolo-
one side of the story, but it is challenged by the no- gy-intensive and putting the labor-intensive pieces
tion that the nature of global economic integration of the value chain in low-wage locations.
in the recent era is qualitatively different than in In Mexico, for example, the booming export-
the past. Before 1913, the world economy was oriented maquiladora program4 has engaged in
characterized by shallow integration manifested more sophisticated kinds of manufacturing op-
largely through trade in goods and services be- erations over time. First-generation maquiladoras
tween independent firms and through internation- were labor-intensive with limited technology, and
al movements of portfolio capital. Today, we live they assembled export products in industries like
in a world in which deep integration, organized apparel using imported inputs provided by U.S.
primarily by TNCs, is pervasive and involves the clients (Sklair 1993). In the late 1980s and early
production of goods and services in cross-border 1990s, researchers began to call attention to so-
value-adding activities that redefine the kind of called second- and third-generation maquiladoras.
production processes contained within national Second-generation plants are oriented less toward
boundaries (UNCTAD 1993, 113). There is little assembly and more toward manufacturing process-
consensus, however, over what kind of framework es that use automated and semiautomated ma-
to use in analyzing the contemporary global econ- chines and robots in the automobile, television,
omy because of the breadth and rapidity of change, and electrical appliance sectors. Third-generation
and the fact that countries, firms, workers, and maquiladoras are oriented to research, design, and
many other stakeholders in the global economy are development, and rely on highly skilled labor such
affected by these shifts. as specialized engineers and technicians. In each of
A global manufacturing system has emerged in these industries, the maquiladoras have matured
which production and export capabilities are dis- from assembly sites based on cheap labor to man-
persed to an unprecedented number of developing ufacturing centers whose competitiveness derives
as well as industrialized countries. Fröbel, Hein- from a combination of high productivity, good
richs, and Kreye (1980) likened the surge of man- quality, and wages far below those prevailing north
ufactured exports from labor-intensive export plat- of the border (Shaiken and Herzenberg 1987;
164 Gereffi
Carrillo and Hualde 1998; Bair and Gereffi 2001; standards not only for unskilled work and primary
Cañas and Coronado 2002). products, but increasingly for skilled work and in-
A cover story in the February 3, 2003, issue of dustrial products as well (Kaplinsky 2001, 56).
Business Week highlighted the impact of global out- The only way to counteract this process is to search
sourcing over the past several decades on the qual- for new sources of dynamic economic rents (i.e.,
ity and quantity of jobs in both developed and profitability in excess of the competitive norm),
developing countries (Engardio, Bernstein, and which are increasingly found in the intangible parts
Kripalani 2003). The first wave of outsourcing of the value chain where high-value, knowledge-
began in the 1960s and 1970s with the exodus to intensive activities like innovation, design, and
developing countries of jobs making shoes, clothes, marketing prevail (Kaplinsky 2000).
cheap electronics, and toys. After that, simple ser- These trends raise fundamental questions about
vice work, like processing credit-card receipts and winners and losers in the global economy, and also
airline reservations in back-office call centers, and about the forces and frameworks needed to under-
writing basic software code, went global. Today, stand why these changes are occurring, and what
driven by digitization, the Internet, and high- their impact is likely to be. In the next section of
speed data networks that circle the world, all kinds this chapter, we will review how and why new pat-
of “knowledge work” that can be done almost any- terns of international production and trade are
where are being outsourced. Global outsourcing emerging. In the subsequent section, we will ex-
reveals many of the key features of contemporary amine some of the major theoretical perspectives in
globalization: it deals with international competi- economic sociology and related fields that seek to
tiveness in a way that inherently links developed account for these institutional and organization
and developing countries; a huge part of the de- features of the global economy.
bate centers around jobs, wages, and skills in dif-
ferent parts of the world; and there is a focus on
value creation in different parts of the value chain.
THE REORGANIZATION OF PRODUCTION AND
There are enormous political as well as economic
TRADE IN THE GLOBAL ECONOMY
stakes in how global outsourcing evolves in the
coming years, particularly in well-endowed and
The Role of Transnational Corporations
strategically positioned economies like India,
China, the Philippines, Mexico, Costa Rica, Rus- While the postwar international economic order
sia, parts of eastern Europe, and South Africa— was defined and legitimized by the United States
that is, countries loaded with college grads who and the other core powers that supported it in
speak Western languages and can handle out- terms of the ideology of free trade, it was the way
sourced information-technology work. India seems in which TNCs linked the production of goods
particularly well positioned in this area. and services in cross-border, value-adding net-
However, these shifts reveal a sobering global- works that made the global economy in the last
ization paradox: the dramatic expansion of pro- half of the twentieth century qualitatively distinct
duction capabilities reflected in global outsourcing from what preceded it. Transnational corporations
across a wide range of industries does not neces- have become the primary movers and shakers of
sarily increase levels of development or reduce the global economy because they have the power
poverty in the exporting nations. As more and to coordinate and control supply chain operations
more countries have acquired the ability to make in more than one country, even if they do not own
complex as well as standard manufactured goods, them (Dicken 2003, 198). Although they first
barriers to entry have fallen and competitive emerged in the late nineteenth and early twentieth
processes at the production stage of value chains centuries in the natural resource (oil, mineral, and
have increased. This has resulted in a pattern that agricultural) sectors, TNCs did not play a central
Kaplinsky (2000, 120), following Bhagwati’s role in shaping a new global economic system until
(1958) original use of the term, has dubbed “im- after the Second World War.
miserizing growth,” in which economic activity in- To the neoclassical economists of the 1950s, the
creases in terms of output and employment, but postwar world economy was constituted by inter-
economic returns fall. The emergence of China national capital flows, which were viewed at the
and, to a lesser extent, India has expanded the country level as foreign direct investment (FDI).
global labor force so significantly that the likely The United States was the main source of outward
consequence of globalization is to bid down living FDI, and the first empirical studies of U.S. FDI at
 Global Economy 165

the country level were carried out by Dunning found no way to generate the foreign exchange
(1958) on the United Kingdom and Safarian needed to pay for increasingly costly imports, and
(1966) on Canada. Both of these studies were in- escalating debt service payments led to a net out-
terested in the public policy question of the bene- flow of foreign capital that crippled economic
fits that U.S. FDI had for a host economy (Rug- growth.6 Second, the “East Asian miracle,” based
man 1999), and thus they did not really think on the rapid economic advance of Japan and the
about transnational corporations as an institution- so-called East Asian tigers (South Korea, Hong
al actor. The Multinational Enterprise Project at Kong, Taiwan, and Singapore) since the 1960s,
Harvard Business School, which began in 1965 highlighted a contrasting development model: ex-
under the direction of Raymond Vernon and last- port-oriented industrialization. Buttressed by the
ed for 12 years, tried to remedy the economists’ neoliberal thrust of the Reagan and Thatcher gov-
relative neglect of the TNCs. Despite being out of ernments in the United States and the United
step with its academic brethren in economics de- Kingdom, respectively, export-oriented develop-
partments and business schools, who were using ment soon became the prevailing orthodoxy for
general equilibrium models and rational choice to developing economies around the world.7 Third,
study the properties of efficient markets, the Har- the transition from import-substituting to export-
vard Multinational Enterprise Project was distin- oriented development strategies during the 1980s
guished by its emphasis on the strategies and activ- in many industrializing countries was complement-
ities of TNCs at the micro level of the firm, rather ed by an equally profound reorientation in the
than as merely one more form of international cap- strategies of TNCs. The rapid expansion of indus-
ital movement (Vernon 1999). trial capabilities and export propensities in a di-
In the 1960s and 1970s, the key players in most verse array of newly industrializing economies in
international industries were large, vertically inte- Asia and Latin America allowed TNCs to acceler-
grated TNCs, whose use and abuse of power in the ate their own efforts to outsource relatively stan-
global economy were chronicled by numerous dardized activities to lower-cost production loca-
authors (e.g., Sampson 1973; Barnet and Müller tions worldwide.
1974). The overseas activities of these firms were One of the central questions that generated
primarily oriented toward three main objectives: great interest in TNCs was this: To what extent
the search for raw materials; finding new markets have TNCs supplanted national governments, and
for their products; and tapping offshore sources of in what areas? The attitude of many researchers
abundant and relatively low-cost labor (Vernon was that TNCs had the power, the resources, and
1971).5 In developing countries, which were at- the global reach to thwart the territorially based
tractive to TNCs for all three of these reasons, the objectives of national governments in both devel-
predominant model of growth since the 1950s was oped and developing countries (see Bergsten, Horst,
import-substituting industrialization. This devel- and Moran 1978; Barnet and Müller 1974). This
opment strategy used the tools of industrial policy, was a key tenet of dependency theory, one of the
such as local-content requirements, joint ventures, most popular approaches in the 1970s, which ar-
and export-promotion schemes, to induce foreign gued that TNCs undercut the ability of nation-
firms that had established local subsidiaries inside states to build domestic industries controlled by
their borders to transfer the capital, technology, locally owned firms (Sunkel 1973; Evans 1979;
and managerial experience needed to set up a host Gereffi 1983). Even the most balanced scholarly
of new industries. In return, TNCs could make approaches reflected the challenge to national au-
and sell their products in the relatively protected tonomy captured by the title of Raymond Ver-
domestic markets of Latin America, Asia, and Africa, non’s best-known book, Sovereignty at Bay (1971).
and even in the socialist bloc connected with the The large size of TNCs, whether measured in sales
former Soviet Union (see Bergsten, Horst, and or by more sophisticated calculations of value
Moran 1978; Newfarmer 1985). added, still leads to the conclusion that many
By the mid-1980s, several significant shifts were TNCs are bigger than countries.8 However, the
transforming the organization of the global econ- concentrated power of vertically integrated, indus-
omy. First, the oil shock of the late 1970s and the trial TNCs has been diminishing for the past cou-
severe debt crisis that followed it were the death ple of decades as a result of the tendency toward
knell for import-substituting industrialization in both the geographic and the organizational out-
many developing countries, especially in Latin sourcing of production. Thus, the original concern
America. The import-substitution approach had with how TNCs affect the sovereignty and effec-
166 Gereffi
tiveness of national governments needs to be ferent countries and often with different owner-
reframed in light of the current shift to a more ship structures to form cross-border production
network-centered global economy, which will be networks for parts and components. Specialized
discussed below. “production blocks” are coordinated through ser-
vice links, which include activities such as trans-
portation, insurance, telecommunications, quality
The Emergence of International Trade and
control, and management specifications. Yeats
Production Networks
(2001), analyzing detailed trade data for the ma-
The growth of world trade has probably re- chinery and transport equipment group (SITC
ceived the most attention in the globalization lit- 7),11 finds that trade in components made up 30
erature because of its direct relevance to employ- percent of total OECD exports in SITC 7 in 1995,
ment, wages, and the rising number of free trade and that trade in these goods was growing at a
agreements around the world. The most common faster pace than the overall SITC 7 total. Similarly,
causes usually given to explain expanding world Hummels, Rapaport, and Yi (1998, 80–81) argue
trade are technological (improvements in trans- that the “vertical specialization” of global trade,
portation and communication technologies) and which occurs when a country uses imported inter-
political (e.g., the removal of protectionist barriers, mediate parts to produce goods it later exports, ac-
such as tariffs, import quotas, and exchange con- counted for about 14.5 percent of all trade among
trols, which had restricted world markets from OECD countries in the early 1990s. Vertical spe-
1913 until the end of the Second World War).9 It cialization captures the idea that countries link se-
is also important to acknowledge that the volume quentially in production networks to produce a
of international trade depends to a considerable final good, although vertical trade itself does not
degree on how boundaries are drawn, both for dif- require the vertical integration of firms.
ferent geographies of production10 and according Feenstra (1998) takes this idea one step further,
to whether trade covers final products only or and explicitly connects the “integration of trade”
whether it also includes intermediate inputs. How- with the “disintegration of production” in the
ever, even though the share of trade in world out- global economy.12 The rising integration of world
put surpassed its 1913 peak in the 1980s and markets through trade has brought with it a disin-
1990s, the sheer volume of trade is probably not tegration of the production process of multina-
sufficient to argue for a qualitative break with the tional firms,13 since companies are finding it prof-
past. itable to outsource (domestically or abroad) an
Of far greater significance are several novel fea- increasing share of their noncore manufacturing
tures in the nature of international trade that do and service activities. This represents a breakdown
not have counterparts in previous eras. These sug- of the vertically integrated mode of production—
gest the need for a new framework to understand the so-called Fordist model, originally exemplified
both patterns of competition among international by the automobile industry—on which U.S. indus-
firms and the development prospects of countries trial prowess had been built for much of the twen-
that are trying to upgrade their position in diverse tieth century (Aglietta 1980). The success of the
global industries. The three new aspects of modern Japanese model of “lean production” in the glob-
world trade relevant here are (1) the rise of in- al economy since the 1980s, pioneered by Toyota
traindustry and intraproduct trade in intermediate in automobiles, reinforces the central importance
inputs; (2) the ability of producers to “slice up the of coordinating exceptionally complex interfirm
value chain,” in Krugman’s (1995) phrase, by trading networks of parts and components as a
breaking a production process into many geo- new source of competitive advantage in the global
graphically separated steps; and (3) the emergence economy (Womack, Jones, and Roos 1990; Stur-
of a global production networks framework that geon and Florida 2000).
highlights how these shifts have altered gover-
nance structures and the distribution of gains in Slicing Up the Value Chain
the global economy. The notion of a value-added chain has been a
useful tool for international business scholars who
Intraindustry Trade in Parts and Components have focused on the strategies of both firms and
Arndt and Kierzkowski (2001) use the term countries in the global economy. Bruce Kogut
fragmentation to describe the international divi- (1984, 151), a professor at the Wharton School of
sion of labor that allows producers located in dif- Business, University of Pennsylvania, was one of
 Global Economy 167

the first to argue that value chains are a key ele- to decide how to spread the activities in the value
ment in the new framework of competitive analysis chain among countries.17 A very different set of
that is needed because of the globalization of scholars, studying the political economy of ad-
world markets: “The formulation of strategy can vanced industrial societies, highlighted the transfor-
be fruitfully viewed as placing bets on certain mation from “organized capitalism” to “disorga-
markets and on certain links of the value-added nized” or “competitive” capitalism. This approach is
chain. . . . The challenge of global strategy formu- based on dramatic shifts in the strategic and institu-
lation is to differentiate between the various kinds tional contexts of the global economy in the 1980s
of economies, to specify which link and which fac- toward deregulated national markets and unham-
tor captures the firm’s advantage, and to deter- pered international exchanges (Offe 1985; Lash and
mine where the value-added chain would be bro- Urry 1987). According to Schmitter (1990, 12),
ken across borders.” In a subsequent paper, Kogut sectors or industries are the key unit for comparative
(1985) elaborates the central role of the value- analysis in this setting because they represent a meso
added chain14 in the design of international busi- level where a number of changes in technology, mar-
ness strategies, which are based upon the interplay ket structure, and public policy converge.
between the comparative advantage of countries Our review of the contemporary global econo-
and the competitive advantage of firms. While the my thus far has highlighted two distinctive shifts:
logic of comparative advantage helps to determine the unparalleled fragmentation and reintegration
where the value-added chain should be broken of global production and trade patterns since the
across national borders, competitive (or firm-spe- 1970s; and the recognition by Kogut and Porter,
cific) advantage influences the decision on what ac- among others,18 of the power of value-chain or in-
tivities and technologies along the value-added dustry analysis as a basis for formulating global
chain a firm should concentrate its resources in.15 strategies that can integrate comparative (location-
Michael Porter of Harvard Business School also specific) advantage and competitive (firm-specific)
developed a value-chain framework that he applied advantage. However, the third transformation in
both at the level of individual firms (Porter 1985) the global economy that needs to be addressed as
and as one of the bases for determining the com- a precursor to the global value chain perspective is
petitive advantage of nations (Porter 1990). At the the remarkable growth of manufactured exports
firm level, a value chain refers to a collection of dis- from low-wage to high-wage nations in the past
crete activities performed to do business, such as several decades. This phenomenon has produced a
the physical creation of a product or service, its de- range of reactions—from anxiety by producers in
livery and marketing to the buyer, and its support developed countries who believe they cannot com-
after sale.16 On the basis of these discrete activities, pete with the flood of low-cost imports, to hope
firms can establish two main types of competitive among economies in the South that they can catch
advantage: low relative cost (a firm’s ability to up with their neighbors in the North by moving
carry out the activities in its value chain at lower up the ladder of skill-intensive activities, to despair
cost than its competitors); or differentiation (per- that global inequality and absolute levels of pover-
forming in a unique way relative to competitors). ty have remained resistant to change despite the
While competitive advantage is determined at the rapid progress of a relative handful of developing
level of a firm’s value chain, Porter argues, “The nations.
appropriate unit of analysis in setting international
strategy is the industry because the industry is the Production Networks in the Global Economy
arena in which competitive advantage is won or In the 1990s, a new framework, called global
lost” (1987, 29). commodity chains (GCC), tied the concept of the
The pattern of competition differs markedly value-added chain directly to the global organiza-
across industries: at one extreme are “multidomes- tion of industries (see Gereffi and Korzeniewicz
tic” industries, in which competition in each coun- 1994; Gereffi 1999, 2001). This work was based
try is basically independent of competition in other on an insight into the growing importance of
countries; and at the other end of the spectrum are global buyers (mainly retailers and brand com-
“global industries,” in which a firm’s competitive panies, or “manufacturers without factories”) as
position in one country is significantly impacted by key drivers in the formation of globally dispersed
its position in other countries. Since international production and distribution networks. Gereffi
competition is becoming the norm, Porter believes (1994a) contrasted these buyer-driven chains to
that firms must adopt “global strategies” in order what he termed producer-driven chains. The latter
168 Gereffi
are the production systems created by vertically in- activities and end products (goods and services),
tegrated transnational manufacturers, while the and because it avoids the limiting connotations of
former term recognizes the role of global buyers, the word commodity, which to some implies the
highlighting the significance of design and market- production of undifferentiated goods with low
ing in initiating the activities of global production barriers to entry. Like the GCC framework, global
systems.19 The GCC approach drew attention to value chain (GVC) analysis accepts many of the ob-
the variety of actors that could exercise power servations made previously on geographical frag-
within global production and distribution systems. mentation, and it focuses primarily on the issues of
It was the field-based methodology of GCC re- industry (re)organization, coordination, gover-
search, in particular, that provided new insights nance, and power in the chain (Humphrey and
into the statistics showing an increase in trade in- Schmitz 2001). Its concern is to understand the
volving components and other intermediate in- nature and consequences of organizational frag-
puts. The trade data alone mask important organi- mentation in global industries. The GVC approach
zational shifts because they differentiate neither offers the possibility of understanding how firms
between intrafirm and interfirm trade nor between are linked in the global economy, but also ac-
the various ways in which global outsourcing rela- knowledges the broader institutional context of
tionships were being constructed. these linkages, including trade policy, regulation,
A variety of overlapping terms has been used to and standards.20 More generally, the global pro-
describe the complex network relationships that duction networks paradigm has been used to join
make up the global economy. Each of the con- scholarly research on globalization with the con-
tending concepts, however, has particular emphases cerns of both policymakers and social activists, who
that are important to recognize for a chain analysis are trying to harness the potential gains of global-
of the global economy: ization to the pragmatic concerns of specific coun-
tries and social constituencies that feel increasingly
Supply chains. A generic label for an input-output
marginalized in the international economic arena.21
structure of value-adding activities, beginning with
The next section of this chapter looks at differ-
raw materials and ending with a finished product
ent perspectives on governance at the meso level of
International production networks. A focus on the in-
the global economy, and it will be followed by a
ternational production networks in which TNCs act
discussion of industrial upgrading, which analyzes
as “global network flagships” (Borrus, Ernst, and
the trajectories by which countries seek to upgrade
Haggard 2000)
their positions in the global economy.
Global commodity chains. An emphasis on the internal
governance structure of supply chains (especially the
producer-driven vs. buyer-driven distinction) and on
GOVERNANCE IN THE GLOBAL ECONOMY:
the role of diverse lead firms in setting up global pro-
INSTITUTIONAL AND ORGANIZATIONAL
duction and sourcing networks (Gereffi and Korze-
PERSPECTIVES
niewicz 1994)
French “filière” approach. A loosely knit set of studies
Scholars who study the global economy at the
that used the filière (i.e., channel or network) of ac-
meso level form distinct camps in terms of their
tivities as a method to study primarily agricultural
units of analysis, theoretical orientations, and
export commodities such as rubber, cotton, coffee,
methodological preferences. The two main units
and cocoa (Raikes, Jensen, and Ponte 2000)
of analysis at the meso level are countries and
Global value chains. Emphasis on the relative value of
firms. In the 1970s and 1980s, political economy
those economic activities that are required to bring
perspectives dealing with nations and TNCs in the
a good or service from conception, through the dif-
global economy tended to predominate, fueled by
ferent phases of production (involving a combina-
dependency theory (Cardoso and Faletto [1969]
tion of physical transformation and the input of var-
1979; Evans 1979), world-systems theory (Waller-
ious producer services), delivery to final consumers,
stein 1974, 1980, 1989), and statist approaches
and final disposal after use (Kaplinsky 2000; Gereffi
(Amsden 1989; Wade 1990; Evans 1995), among
and Kaplinsky 2001)
others. During the last decade, however, research
The “value chain” concept has recently gained on the global economy has shifted toward institu-
popularity as an overarching label for this body of tional and organizational theories. The choice of
research because it focuses on value creation and countries or firms as empirical units has a striking
value capture across the full range of possible chain affinity with the researcher’s primary theoretical
 Global Economy 169

Table 1. Comparison of Varieties of Capitalism and Global Production Networks

Dimension Varieties of Capitalism Global Production Networks
Theoretical orientation Institutional analysis Organizational analysis
Unit of analysis Countries Interfirm networks
Empirical focus Advanced industrial economies/ Linkages between developed and developing
capitalist democracies countries
Methodological Rational actor; Comparative/historical analysis across
preference multivariate analysis industries, firms, and countries
Research style Quantitative, cross-national; International, industry-based field research;
country case studies political economy interpretations
Ideal types Liberal and coordinated Producer-driven and buyer-driven
market economies commodity chains
Main challenges/ Coordination problems in Industrial upgrading in developing
collective action developed countries countries
problems
Key concepts Institutional complementarities Lead firms; economic rents;
learning through networks

orientation: those who study countries tend to ally lacking. The main dimensions of this compar-
adopt institutional perspectives, while those who ison are outlined in table 1.
work with firms favor organizational frameworks.22 The institutionalist paradigm encompasses sev-
This paradigm divide at the meso level of the eral related approaches that deal with the gover-
global economy is revealed by looking at two nance of modern capitalist economies, including
broad literatures, which we label “varieties of cap- regulation theory (Aglietta 1980; Boyer 1989),
italism” and “global production networks.” The national systems of innovation (Lundvall 1992;
former is closely associated with institutional analy- Nelson 1993), social systems of production (Camp-
sis, and the latter with diverse organizational per- bell, Hollingsworth, and Lindberg 1991; Holl-
spectives. Both approaches tend to focus on gov- ingsworth, Schmitter, and Streeck 1994; Hollings-
ernance structures in the global economy, but the worth and Boyer 1997), and varieties of capitalism
scope and content of what is being governed differ (Berger and Dore 1996; Kitschelt et al. 1999; Hall
greatly. The varieties-of-capitalism literature looks and Soskice 2001). All of the authors in this field
primarily at coordination problems and institu- focus on the “institutional foundations of compar-
tional complementarities in advanced industrial ative advantage” in the advanced capitalist democ-
economies, where the nation-state is the explicit racies, with an emphasis on topics like business-
unit of analysis. This research is comparative, but government relations, labor markets and collective
not transnational, in orientation. By contrast, the bargaining, the welfare state, the internationaliza-
research on global production networks highlights tion of capital, and innovation systems. A key uni-
the linkages between developed and developing fying concept is institutional complementarity,
countries created by TNCs and interfirm net- which rests on “multilateral reinforcement mecha-
works. Governance in this context is typically exer- nisms between institutional arrangements: each
cised by lead firms in global industries, and one one, by its existence, permits or facilitates the exis-
of the key challenges addressed is industrial tence of the others” (Amable 2000, 656). Com-
upgrading—that is, how developing countries try plementary institutions and other forms of path
to improve their position in the global economy, dependency lead most scholars in the varieties-of-
which is characterized both by power asymmetries capitalism genre to argue vociferously against con-
and by opportunities for learning through net- vergence, given their belief that unique and valued
works. International and industry-based field re- institutions will sustain national diversities despite
search is a requisite in the study of global pro- the withering pressures of international competi-
duction networks because publicly available and tion in an increasingly open global economy. Ac-
detailed information at the level of firms is gener- tually, the paradigm does allow for a limited form
170 Gereffi
of convergence in the sense that advanced market presumably are central to business systems, Whit-
economies are organized into three broad types: ley’s framework shares the institutionalist para-
liberal market economies, which adopt laissez- digm’s emphasis on institutional complemen-
faire, probusiness policies (United States, United tarities and cohesion, and national or culturally
Kingdom, Canada, and Australia); and coordinated proximate regions. However, the business systems
market economies, with their corporatist (strong approach seems relatively ill equipped to deal with
state—Germany and Japan) and welfare state the question, How do U.S., European, or Asian
(strong trade unions—Scandinavian and northern business systems respond to globalization? While
European) variants. However, there is no serious the business systems logic would lead us to expect
effort to extend this paradigm to address the vari- that firms of the same nationality maintain their
eties of capitalism in the vast majority of countries distinctive features in the face of international
that are in the developing world.23 competition, findings from research on global pro-
The global production networks paradigm pro- duction networks indicate that the competition
vides a very different perspective on the global among firms from different business systems in
economy because its organizational lens focuses on overseas markets tends to diminish the influence of
transnational linkages between developed and de- national origins on firms’ behavior (Gereffi 1996,
veloping nations. The central questions deal with 433).24
the kinds of governance structures that characterize Sociologists have looked at a range of other ac-
global industries, how these governance arrange- tors in the global economy. “Business groups,” de-
ments change, and what consequences these shifts fined as a collection of firms bound together in
have for development opportunities in rich and persistent formal or informal ways, are a pervasive
poor countries alike. International institutionals, phenomenon in Asia, Europe, Latin America, and
such as trade and intellectual property regimes, elsewhere (Granovetter 1994; “Business Groups
clearly shape inclusion and exclusion of countries and Social Organization,” this volume). Business
and firms in global production networks, but this groups may encompass kinship networks, but they
approach tends to focus on the strategies and be- are not delimited by family boundaries because the
havior of the players (firms), while the rules of the goals of families can conflict with the principles of
game (regulatory institutions) are taken as an ex- profit maximization that characterize firms in these
ogenous variable. groups. Business groups play a role in the global
Notwithstanding the potential complementari- economy through their impact on national market
ties between institutional and organizational per- structures, and on product variety and product
spectives on the global economy, there has been quality in international trade (Feenstra, Yang, and
virtually no dialogue between these two literatures. Hamilton 1999). Transnational business networks
They do not cite one another’s research or engage based on family or ethnic ties are another form of
in collaborative projects, despite the fact that both economic organization that shapes global produc-
are concerned with the international forces shap- tion and trade (Hamilton, Zeile, and Kim 1989;
ing countries and firms in the global economy. Yeung 2000). Japanese sogo shosha, British trading
There are several hybrid approaches that seek to companies, and Chinese and Indian merchants laid
bridge this gap between organizational and institu- the social groundwork for the long-distance supply
tional frameworks. One of these is the business routes between Asian producers and their export
systems perspective, pioneered by Whitley (1992a, markets (Gereffi 1999, 60–61). For Castells (1996),
1992b). As defined by Whitley (1996, 412), “Busi- the universality of network society in the informa-
ness systems are particular forms of economic or- tion age is a defining feature of the modern era.
ganization that have become established and re- Others argue that the global system is now ruled
produced in certain institutional contexts—local, by a transnational capitalist class, which is more in-
regional, national or international. They are dis- terested in building hegemony than in domination
tinctive ways of coordinating and controlling eco- and control (Sklair 2001; Carroll and Fennema
nomic activities which developed interdependently 2002).
with key institutions which constitute particular At a more micro level, phenomena within
kinds of political, financial, labor and cultural sys- nation-states can also reflect globalization process-
tems. The more integrated and mutually reinforc- es. Meyer (2000) defines modern actors on the
ing are such institutional systems over a particular global stage as entities with rights and interests
territory or population, the more cohesive and dis- that create and consult collective rules, that often
tinctive will be its business system.” While firms enhance their legitimacy by adopting common
 Global Economy 171

forms, and that exercise agency through moral ac- mart and Target, department stores like J.C. Pen-
tion. From Meyer’s “world society” perspective, ney and Marks & Spencer, specialty retailers like
the modern world is stateless; it is based on shared The Limited and Gap), marketers (who control
rules and models, and made up of strong, cultural- major apparel brands, such as Liz Claiborne,
ly constituted actors. Sassen (2000) also detaches Tommy Hilfiger, Polo/Ralph Lauren, Nike), and
sovereignty from the national state. She emphasizes brand name manufacturers (e.g., Wrangler, Phillips–
the role of global cities as strategic sites for the pro- van Heusen). These lead firms all have extensive
duction of specialized functions to run and coordi- global sourcing networks, which typically encom-
nate the global economy, and posits that financial pass 300 to 500 factories in various regions of the
and investment deregulation are driving the geo- world. Because apparel production is quite labor
graphic location of strategic institutions related to intensive, manufacturing is typically carried out in
globalization deep inside national territories. countries with very low labor costs.
The main stages for firms in developing coun-
tries are first, to be included as a supplier (i.e., ex-
INDUSTRIAL UPGRADING AND GLOBAL porter) in the global apparel value chain; and then
PRODUCTION NETWORKS to upgrade from assembly to OEM and OBM ex-
port roles within the chain. Because of the Multi-
Major changes in global business organization Fiber Arrangement (MFA) associated with the
during the last several decades of the twentieth GATT, which used quotas to regulate import
century have had a significant impact on the up- shares for the United States, Canada, and much of
grading possibilities of developing countries. This Europe, at least 50 to 60 different developing
section will illustrate how the reorganization of in- countries have been significant apparel exporters
ternational trade and production networks affects since the 1970s, many just assembling apparel
the capability of developing countries in different from imported inputs using low-wage labor in
regions of the world to improve their positions in local export-processing zones.
the value chains of diverse industries. The shift from assembly to the OEM export role
Industrial upgrading refers to the process has been the main upgrading challenge in the ap-
by which economic actors—nations, firms, and parel value chain. It requires the ability to fill or-
workers—move from low-value to relatively high- ders from global buyers, which includes making
value activities in global production networks. Dif- samples, procuring or manufacturing the needed
ferent mixes of government policies, institutions, inputs for the garment, meeting international stan-
corporate strategies, technologies, and worker dards in terms of price, quality, and delivery, and
skills are associated with upgrading success. How- assuming responsibility for packing and shipping
ever, we can think about upgrading in a concrete the finished item. Since fabric supply is the most
way as linked to a series of economic roles associ- important input in the apparel chain, virtually all
ated with production and export activities, such countries that want to develop OEM capabilities
as assembly, original equipment manufacturing need to develop a strong textile industry. The
(OEM), original brand name manufacturing OBM export role is a more advanced stage because
(OBM), and original design manufacturing (ODM) it involves assuming the design and marketing re-
(Gereffi 1994b, 222–24). This sequence of eco- sponsibilities associated with developing a compa-
nomic roles involves an expanding set of capabili- ny’s own brands.
ties that developing countries must attain in pur- East Asian newly industrializing economies (NIEs)
suing an upgrading trajectory in diverse industries. of Hong Kong, Taiwan, South Korea, and Singa-
In the remainder of this section, we will look at ev- pore, which are generally taken as the archetype for
idence from several sectors to see how global pro- industrial upgrading among developing countries,
duction networks have facilitated or constrained made a rapid transition from assembly to OEM
upgrading in developing nations. production in the 1970s. Hong Kong clothing
companies were the most successful in making the
shift from OEM to OBM production in apparel,
Apparel
and Korean and Taiwanese firms pursued OBM in
The global apparel industry contains many ex- other consumer goods industries like appliances,
amples of industrial upgrading by developing sporting goods, and electronics.26 After mastering
countries.25 The lead firms in this buyer-driven the OEM role, leading apparel export firms in
chain are retailers (giant discount stores like Wal- Hong Kong, Taiwan, and South Korea began to
172 Gereffi
Countries Segments of Apparel Value Chain
Japan Garments Textiles Fibers Machinery
(spinning, weaving,
cutting, sewing)
1950s & 1960s onward 1970s onward
early 1960s
Level of Development

Hong Kong Garments Textiles Fibers

South Korea
Taiwan Late 1960s, Late 1980s & 1990s
1970s &
early 1980s

China Garments Textiles

Indonesia
Late 1980s 1990s
Thailand Figure 1. Industrial up-
India grading in the Asian appar-
Pakistan el value chain. Dotted ar-
rows refer to the sequence
Bangladesh Garments
Sri Lanka
of production and export
Mid-1990s capabilities within econo-
Vietnam
to early 2000s mies. Solid arrows refer to
the direction of trade flows
Low Value-Added High
between economies. Dates
Sequence of production and export capabilities within economies refer to a country’s peak
Direction of trade flows between economies years for exports of specific
Dates refer to a country’s peak years for exports of specific products products.

set up their own international production net- tive value added in the production process. Coun-
works in the 1980s, using the mechanism of tries are grouped on the vertical axis by their rela-
“triangle manufacturing” whereby orders were re- tive level of development, with Japan at the top
ceived in the East Asian NIEs, apparel production and the least-developed exporters like Bangladesh,
was carried out in lower-wage countries in Asia and Sri Lanka, and Vietnam at the bottom.
elsewhere (using textiles from the NIEs), and the Figure 1 reveals several important dynamics
finished product was shipped to the United States about the apparel value chain in Asia, and the GVC
or other overseas buyers using the quotas assigned approach more generally. First, individual coun-
to the exporting nation (Gereffi 1999). tries progress from low- to high-value-added seg-
Thus, international production networks facili- ments of the chain in a sequential fashion over
tated the upgrading of East Asian apparel firms in time. This reinforces the importance in GVC re-
two ways: first, they were the main source of learn- search of looking at the entire constellation of
ing from U.S. and European buyers about how to value-added steps in the supply chain (raw materi-
make the transition from assembly to OEM and als, components, finished goods, related services,
OBM; and second, the East Asian NIEs estab- and machinery), rather than just the end product,
lished their own international production net- as traditional industry studies are wont to do. Sec-
works when faced with rising production costs and ond, there is a regional division of labor in the ap-
quota restrictions at home, and in order to take ad- parel value chain, whereby countries at very dif-
vantage of lower labor costs and a growing supply ferent levels of development form a multitiered
base in their region. Asian apparel manufacturers production hierarchy with a variety of export roles
thus made the coordination of the apparel supply (e.g., the United States generates the designs and
chain into one of their own core competences for large orders, Japan provides the sewing machines,
export success. the East Asian NIEs supply fabric, and low-wage
Figure 1 presents a stylized model of industrial Asian economies like China, Indonesia, or Viet-
upgrading in the Asian apparel value chain. The nam sew the apparel). Industrial upgrading occurs
main segments of the apparel chain—garments, when countries change their roles in these export
textiles, fibers, and machinery—are arranged along hierarchies.27 Finally, advanced economies like
the horizontal axis from low to high levels of rela- Japan and the East Asian NIEs do not exit the in-
 Global Economy 173

dustry when the finished products in the chain be- chains must combine cost competitiveness with
come mature, as the “product cycle” model (Ver- product differentiation and speed to market.
non 1966; 1971, chap. 3) implies, but rather they Cross-border networks not only allow firms to
capitalize on their knowledge of production and combine these very different market demands ef-
distribution networks in the industry and thus fectively, but they also permit the integration of
move to higher-value-added stages in the apparel Asia’s four distinct development tiers: Japan occu-
chain. This strategic approach to upgrading re- pies the first tier; the East Asian NIEs are in the
quires that close attention be paid to competition second tier; the major Southeast Asian countries of
within and between firms occupying all segments Malaysia, Thailand, the Philippines, and Indonesia
of global value chains. are in the third tier; and the fourth tier contains
It is important to note, in closing this section, China and late-late developers such as Vietnam.
the key role played by international regulation in While the economic crisis of 1997 called East
the organization of the apparel value chain. The Asia’s economic miracle into question, it appears
MFA and its apparel quotas will be eliminated in that the structural changes associated with recov-
2005 as a result of the Agreement on Textiles and ery from the crisis will reinforce and increase the
Clothing in the WTO, and many of the smaller ap- opportunities for networked production, as the
parel exporters that only do assembly will probably process of corporate restructuring leads firms to
be forced out of the world export market. This focus on core activities and supplement these with
should greatly increase export concentration in the the increasingly specialized technology, skills, and
global apparel industry, with China likely to be the know-how that are located in different parts of
major winner, along with other large countries such Asia (Borrus, Ernst, and Haggard 2000).
as Mexico, India, Turkey, Romania, and Vietnam The diverse upgrading dynamics in Asian elec-
that have developed considerable expertise in OEM tronics can best be seen by contrasting the U.S.
production. Mexico’s rapid move in the 1990s to and Japanese production networks. In the mid-
the top of list as the leading apparel exporter to the 1990s, U.S. networks were considered to be rela-
United States owes a great deal to the passage of tively open and conducive to local development in
NAFTA in 1994, which allowed the creation of host countries, while Japanese networks were per-
textile production and other backward linkages in ceived as closed and hierarchical with activities
Mexico, and thereby facilitated the entry of the confined within affiliates that were tightly con-
U.S. retailers and apparel marketers that previously trolled by the parent company (Borrus 1997).
shunned Mexico in order to import apparel from U.S. electronics multinationals typically set up
Asia. In addition, employment in the apparel ex- Asian networks based on a complementary division
port industry increased in Mexico from 73,000 in of labor: U.S. firms specialized in “soft” compe-
1994 to nearly 300,000 in 2000, mainly because tencies (the definition of standards, designs, and
Mexico coupled its relatively low wage rates with its product architecture), and the Taiwanese, Korean,
recently acquired ability to carry out “full-package” and Singaporean firms specialized in “hard” com-
(or OEM) production (Bair and Gereffi 2001; petencies (the provision of components and basic
Gereffi, Spener, and Bair 2002). However, China manufacturing stages). The Asian affiliates of U.S.
regained the lead from Mexico in 2001 and 2002, firms in turn developed extensive subcontracting
as Mexico has been unable to match the volume relationships with local manufacturers, who be-
and low price of Chinese apparel exports, and be- came increasingly skilled suppliers of components,
cause of the intense competition from new suppli- subassemblies, and even entire electronics systems.
ers that continue to enter the U.S. market.28 Japanese networks, by contrast, were characterized
by market segmentation: electronics firms in Japan
made high-value, high-end products, while their
Electronics
offshore subsidiaries in Asia continued to make
Global production networks have been a central low-value, low-end products. In terms of Asian up-
feature in the development and upgrading of Asia’s grading, the U.S. production networks were defi-
large, dynamic electronics sector. In the case of nitely superior: U.S. networks maximized the con-
electronics, there have been competing cross-bor- tributions from their Asian affiliates, and Japanese
der production networks set up by U.S., Japanese, networks minimized the value added by their re-
and European firms, led by TNCs that span the en- gional suppliers. Although there is some evidence
tire value chain in various industries. For high-tech that Japanese firms tried to open up their produc-
industries like electronics, these producer-driven tion networks in the late 1990s, at best there has
174 Gereffi
been partial convergence, with persistent diversity powerhouse with more than 80,000 employees in
(Ernst and Ravenhill 2000). 50 locations and nearly $20 billion in revenues in
Taiwan’s achievements in electronics are espe- 2000. Although they have global reach, all of the
cially notable for several reasons. During the 1990s, largest contract manufacturers are based in North
Taiwan established itself as the world’s largest sup- America. Except for the personal computer indus-
plier of computer monitors, main boards, mouse try, Asian and European contract manufacturers
devices, keyboards, scanners, and notebook per- have not developed, and the few that did were
sonal computers (PCs), among other items. About acquired by North American contractors during
70 percent of the notebook PCs sold under OEM their buying spree fueled by the inflated stock
arrangements to American and Japanese computer prices of the 1990s. Global contract manufacturers
companies, which resell them under their own introduce a high degree of modularity into value
logos, have been designed by Taiwanese firms. chain governance because the large scale and scope
Acer, Taiwan’s leading computer maker, is success- of their operations create comprehensive bundles
ful at both OEM and OBM production. Progress of standardized value chain activities that can be
has been equally remarkable in the field of elec- accessed by a variety of lead firms through modu-
tronic components, and Taiwan also boasts one of lar networks.
the world’s leading silicon foundry companies, the
Taiwan Semiconductor Manufacturing Corpora-
Fresh Vegetables
tion (Ernst 2000). What is especially impressive
about these accomplishments is that small and A final example of the role of global production
medium enterprises have played a central role as a networks in promoting industrial upgrading in-
source of flexibility in Taiwan’s production net- volves the production of fresh vegetables in Kenya
works. The role of small and medium enterprises as and Zimbabwe for export to U.K. supermarkets.29
engines of growth and industrial transformation Africa has very few success stories in the realm of
sets Taiwan apart from South Korea, which has re- export-oriented development, but some countries
lied extensively on huge, diversified conglomerates of sub-Saharan Africa seem to have found a niche
(chaebol) as the cornerstone of its electronics sec- in the fresh vegetables market. Several factors tie
tor. The Taiwanese model in the computer indus- this case to our previous examples. First, fresh veg-
try draws on a combination of several factors: gov- etables are a buyer-driven value chain, albeit in the
ernment policies that facilitated market entry and agricultural sector. As with apparel, there is a high
upgrading; strong linkages with large Taiwanese level of concentration at the retail end of the chain.
firms and business groups; and organizational in- The largest U.K. supermarkets and other food re-
novations, such as the shift from relatively simple, tailers control 70 to 90 percent of fresh produce
production-based OEM to more complex “turn- imports from Africa. These retailers have avoided
key production” arrangements that encompass a direct involvement in production; they just special-
wide variety of high-end support services, includ- ize in marketing and in the coordination of their
ing design and global supply chain management supply chains.
(Poon 2002). Second, a major stimulus for local upgrading in
One of the most striking features of the elec- Africa comes from U.K. retailers ratcheting up the
tronics industry in recent years has been the rise of standards that exporters must meet. U.K. super-
global contract manufacturers (Sturgeon 2002). A markets have moved beyond compliance with prod-
significant share of the world’s electronics manu- uct quality and legislative (or due diligence) re-
facturing capacity is now contained in a handful of quirements for how produce is grown, processed,
huge contractors, such as Solectron, Flextronics, and transported. They now are focusing on broader
and Celestica. These firms are pure manufacturers. standards that exporters must meet, such as inte-
They sell no products under their own brand grated crop management, environmental protection,
names and instead focus on providing global man- and human rights. In addition, retailers are begin-
ufacturing services to a diverse set of lead firms, ning to use third-party auditors paid for by produc-
such as Hewlett Packard, Nortel, and Ericsson. All ers to ensure compliance with these standards.
have operations that are truly global in scope, and Third, more stringent U.K. requirements have
all have grown dramatically since the early 1990s. led to a decline in the market share of smallholder
Solectron, the largest contractor, expanded from a production and small export firms, which have
single Silicon Valley location with 3,500 employees been excluded from the supermarket supply chain.
and $256 million in revenues in 1988 to a global The horticulture industry in sub-Saharan Africa is
 Global Economy 175

dominated by a few large exporters that source conceded that “the disparities between the world’s
predominantly from large-scale production units. richest and poorest nations are wider than ever.”31
In both Kenya and Zimbabwe, the top five ex- Of the world’s 6 billion people, almost half (2.8
porters controlled over three-quarters of all fresh billion) live on less than two dollars a day, and a
vegetable exports in the late 1990s.30 fifth (1.2 billion) live on less than one dollar a day,
Fourth, as in apparel and electronics, market with 44 percent of them living in South Asia. In
power in the horticultural chain has shifted from East Asia the number of people living on less than
those activities that lower production costs to one dollar a day fell from 420 million to 280 mil-
those that add value in the chain. In fresh vegeta- lion between 1987 and 1998, largely because of
bles, the latter include investing in postharvest fa- improvements in China. Yet the numbers of poor
cilities, such as cold storage; barcoding products people continue to rise in Latin America, South
packed in trays to differentiate varieties, countries, Asia, and sub-Saharan Africa (World Bank 2001,
and suppliers; moving into high-value-added items 3). What forces might be able to ameliorate these
such as ready-prepared vegetables and salads; and problems in both governance and development in
treating logistics as a core competence in the chain the global economy?
in order to reduce the time between harvesting, In the 1990s, there was a sharp escalation in so-
packing, and delivery. Pushing back these func- cial expectations about the role of corporations in
tions into Africa can reduce the cost for U.K. su- society, both in developed and developing nations
permarkets because adding value to vegetables is (Ruggie 2002b). One reason is that individual com-
labor-intensive and African labor is relatively cheap, panies have made themselves, and in some cases
but taken together these high-end services can be- entire industries, targets by engaging in abusive or
come a new source of competitiveness and an op- exploitative behavior. As a result, trust in the cor-
portunity to add value in Africa. porate sector has been eroded. In addition, there is
a growing imbalance in global rule-making: on the
one hand, the rules favoring market expansion
THE GLOBALIZATION BACKLASH: DILEMMAS OF have become stronger and more enforceable (such
GOVERNANCE AND DEVELOPMENT as intellectual property rights for software and
pharmaceutical companies, or the restrictions on
In recent decades, a strong antiglobalization local content provisions and export performance
movement has emerged. As markets have gone requirements in the WTO); on the other hand,
global, many people sense that globalization means rules that favor other valid social objectives, such as
greater vulnerability to unfamiliar and unpre- human rights, labor standards, environmental sus-
dictable forces that can bring economic instability tainability, or poverty reduction, are lagging be-
and social dislocation, as well as a flattening of cul- hind. These perceived problems and others have
ture in the face of well-financed global marketing provided the fuel for anticorporate campaigns
machines and “brand bullies” (Rodrik 1997; Klein worldwide.
2000; Ritzer 2000). The so-called Battle of Seat- Government policy alone is inadequate to han-
tle, the massive protest against WTO trade talks in dle these grievances: they are transnational in scope,
late 1999, was triggered not only by a lack of ac- and they deal with social demands in areas where
countability and transparency in the deliberations regulations are weak, ill defined, or simply absent.
of dominant global economic institutions like the A variety of new “private governance” responses or
WTO and the IMF, but also by a sense of outrage certification institutions are emerging (Gereffi,
that corporate-sponsored international liberaliza- Garcia-Johnson, and Sasser 2001), such as individ-
tion was moving full steam ahead, while the social ual corporate codes of conduct; sectoral certifica-
safety nets and adjustment assistance traditionally tion schemes involving nongovernmental organi-
provided by national governments were being re- zations (NGOs), firms, labor, and other industry
moved. The historic compromise of “embedded stakeholders; third-party auditing systems, such as
liberalism,” characterized by the New Deal in the SA 8000 for labor standards or the Forest Stew-
United States and social democracy in Europe, ardship Council (FSC) certification for sustainable
whereby economic liberalization was rooted in so- forestry practices; and the United Nations’ Global
cial community, was being undone (Ruggie 2002a). Compact, an initiative that encourages the private
A major problem is that the purported benefits sector to work with the United Nations, in part-
of globalization are distributed highly unequally. nership with international labor and civil society
The IMF’s managing director, Horst Köhler, has organizations, to move toward “good practices” in
176 Gereffi
human rights, labor standards, and environmental Private governance in multistakeholder arrange-
sustainability in the global public domain. While ments seeks to strengthen oversight in global sup-
skeptics claim there is little evidence to show that ply chains by charting a course that goes beyond
these codes have significant impact on corporate conventional top-down regulation based on uni-
behavior (Hilowitz 1996; Seidman 2003), propo- form standards, on the one hand, and reliance on
nents generally argue that new systems of certifica- voluntary initiatives taken by corporations in re-
tion, enforced either by global consumers or by in- sponse to social protest, on the other. Some argue
stitutional actors such as the United Nations, can that a continuous improvement model based on
provide the basis for improved regulatory frame- “ratcheting labor standards” upward would work
works (Fung, O’Rourke, and Sabel 2001; Williams well in a highly competitive, brand-driven industry
2000). such as apparel (Fung, O’Rourke, and Sabel 2001).
Although there is enormous variation in the Others propose a “compliance plus” model that
character and purpose of different voluntary regu- pushes beyond the basic floor of minimum stan-
latory schemes—with some schemes created by ac- dards set by most codes, and seeks an “inside-out”
tivists in response to global concerns, and others approach to ethical sourcing based on training and
implemented by corporations as a preemptive ef- empowerment initiatives that address the needs
fort to ward off activist pressure—certification in- and interests of factory-based stakeholders (Allen
stitutions have gained a foothold in both Europe 2002). In either instance, sustainable and mean-
and North America. In the apparel industry, a va- ingful change requires a shift in organizational cul-
riety of certification and monitoring initiatives tures and expectations regarding improvement of
were established in the latter half of the 1990s. social and environmental conditions.
Governance has become a central theoretical
Clean Clothes Campaign (CCC), a consumer coalition
issue in the global economy. Institutional para-
in Europe that aims to improve working conditions
digms and local or regional frameworks centered
in the worldwide garment industry
on the nation-state are being superseded by ap-
Social Accountability 8000 (or SA 8000), a code of
proaches that emphasize transnational governance
conduct verification and factory certification pro-
structures, with an emphasis on power, networks,
gram launched in October 1997 by the New
and the uneven distribution of gains from global-
York–based Council on Economic Priorities
ization. Much still needs to be done in this area.
Fair Labor Association (FLA), which includes major
The inability of the neoliberal agenda to redress
brand merchandisers such as Nike, Reebok, and Liz
the most serious development problems in the
Claiborne
world is leading to fresh thinking on the role of the
Worldwide Responsible Apparel Production (WRAP),
state and civil society institutions in developing na-
an industry-initiated certification program designed
tions (Wolfensohn 1998; IDB 1998, 2000; Gar-
as an alternative to the FLA and representing the
retón et al. 2003). Transnational corporations are
large U.S. apparel manufacturers that produce for
being pressured to comply with a broad range of
the discount retail market
social objectives in multistakeholder institutions of
Workers Rights Consortium (WRC), developed by the
private governance that can have an impact on
United Students Against Sweatshops in cooperation
public policies in the developed as well as the de-
with apparel unions, universities, and a number of
veloping world. The challenge in research on the
human rights, religious, and labor NGOs (see
global economy is to create theory and carry out
Maquila Solidarity Network 2002)
insightful empirical studies that provide tools to
In Mexico, the FLA and WRC collaborated in understand the constantly changing reality we seek
settling a strike and gaining recognition for the to apprehend and change.
workers’ union in the Korean-owned Kukdong
factory, which made Nike and Reebok sweatshirts
for the lucrative U.S. collegiate apparel market NOTES
(Gereffi, Garcia-Johnson, and Sasser 2001, 62–
64). In the coffee sector, the Fair Trade movement I am grateful to Giovanni Arrighi, Fred Block, Frank
has worked with small coffee growers in Costa Dobbin, Mark Granovetter, Evelyne Huber, Larry King,
Rica and elsewhere to get above-market prices for Victor Nee, Gay Seidman, Neil Smelser, and Richard Swed-
berg for their helpful comments on an earlier draft of this
their organic and shade-grown coffees distributed chapter.
by Starbucks and other specialty retailers (Fitter 1. Another key actor in the contemporary global econo-
and Kaplinsky 2001; Ponte 2002). my is the state. While the role of the state is an important as-
 Global Economy 177

pect in many of the institutional perspectives we will review, portant as falling transport costs in explaining the growth of
a more comprehensive discussion of this topic can be found trade relative to income between 1958 and 1988 (Feenstra
in the chapter “The State and the Economy” by Fred Block 1998, 34).
and Peter Evans (this volume). 10. The European Union is a case in point. Taken indi-
2. Because the services component of GDP in industrial vidually, European Union economies are very open, with an
countries has grown substantially relative to “merchandise” average trade share of 28 percent in 1990, but more than 60
trade like manufacturing, mining, and agriculture, the mer- percent of their trade is with each other. Taken as a unit, the
chandise component of GDP is shrinking. Thus Feenstra European Union’s merchandise trade with the rest of the
(1998, 33–35) uses the ratio of merchandise trade to mer- world is only 9 percent of GDP, which is similar to that of
chandise value-added to measure the significance of trade the United States (Krugman 1995, 340).
for industrial economies between 1890 and 1990. He finds 11. SITC refers to Standard International Trade Classifi-
that this ratio doubled for France, Germany, Italy, and Swe- cation, which is the United Nations’ system of trade cate-
den between 1913 and 1990, and nearly tripled for the gories. One-digit product groups, such as SITC 7, are the
United States. most general. Components are reported at the level of
3. Organization for Economic Co-operation and Devel- three-, four-, and five-digit product groups.
opment. 12. Feenstra’s focus on linkages between the integration
4. The maquiladora program in Mexico, initially called of trade and the disintegration of production in the current
the Border Industrialization Program, was created in 1965 trade-based era calls to mind a similar duality in Osvaldo
after the United States terminated the bracero program, Sunkel’s classic article “Transnational Capitalism and Na-
whose main objective had been to bring in Mexican workers tional Disintegration in Latin America.” Writing 25 years
to fulfill the demand for agricultural labor. The end of the before Feenstra in a TNC-based world economy, Sunkel
bracero program left thousands of unemployed farmworkers (1973) argued that vertically integrated TNCs were gener-
in Mexican border cities, and the maquiladora program was ating international polarization as they used direct foreign
set up to alleviate the resultant unemployment and growing investment (rather than trade) to integrate the global econ-
poverty. The growth of the maquiladora program has been omy and simultaneously disintegrate national and regional
spectacular, especially in the 1990s. In 1991, Mexico’s economies. Thus, we have a curiously reversed image of
maquiladora industry generated $15.8 billion in exports and TNCs moving from being highly integrated to disintegrated
employed 466,000 Mexicans; by 2000, it had grown to actors in the last quarter of the twentieth century, while the
$79.5 billion in exports with nearly 1.3 million employees. economic context shifts from transnational capitalism (based
Around 15 percent of Mexico’s GDP corresponded to on closed domestic economies) in the 1970s to global value
maquiladora exports in 2001, and the main destination for chains (based on specialized economic activities in relatively
these products is the United States (Cañas and Coronado open economies) in the 1990s.
2002). 13. Actually, the disintegration of production through
5. These three motives for investing abroad subsequently outsourcing of specific activities by large corporations itself
became popularized as distinct forms of foreign direct in- leads to more trade, as intermediate inputs cross borders
vestment: resource-seeking FDI, market-seeking FDI, and several times during the manufacturing process. This is part
efficiency-seeking FDI (Beviglia Zampetti and Fredriksson of the boundary problem in measuring international trade
2003, 406). noted by Krugman (1995).
6. The debt crisis hit all of Latin America very hard. The 14. Kogut (1985, 15) defines the value-added chain as
high external debt burden required the allocation of 25 per- “the process by which technology is combined with materi-
cent to 30 percent of the region’s foreign exchange proceeds al and labor inputs, and then processed inputs are assem-
merely to cover interest payments, which prompted scholars bled, marketed, and distributed. A single firm may consist of
to refer to the 1980s as Latin America’s “lost development only one link in this process, or it may be extensively verti-
decade” (Urquidi 1991). cally integrated.”
7. The World Bank’s (1993) overview of the East Asian 15. The main sources of a firm’s competitive advantage
development experience attributes the region’s sustained in- that can be transferred globally are several economies that
ternational competitiveness largely to the application of mar- exist along and between value-added chains: economies of
ket-friendly policies, including stable macroeconomic man- scale (related to an increase in market size); economies of
agement, high investments in human capital (especially scope (related to an increase in product lines supporting the
education), and openness to foreign trade and technology. fixed costs of logistics, control, or downstream links of the
For a critique of this “Washington consensus” model, see value-added chain); and learning (based on proprietary
Gore 2000. For a detailed comparison of the import-substi- knowledge or experience). “When these economies exist, in-
tuting and export-oriented development strategies in Latin dustries are global in the sense that firms must compete in
America and East Asia, see Gereffi and Wyman 1990. world markets in order to survive” (Kogut 1985, 26).
8. UNCTAD’s World Investment Report, 2002 contains a 16. A firm’s value chain is nested in a larger stream of ac-
table of the largest 100 “economies” in the world in 2000, tivities Porter calls a “value system,” which include the sep-
using a value-added measure for firms that is conceptually arate value chains of suppliers, distributors, and retailers
comparable to the GDP calculation used for countries. (Porter 1990, 40–43).
There were 29 TNCs in the top 100 entities on this com- 17. There are two distinct dimensions in how a firm com-
bined list of countries and nonfinancial companies. The petes internationally: the configuration of a firm’s activities
world’s largest TNC was ExxonMobil, with an estimated worldwide, which range from concentrated (performing an
$63 billion in value added in 2000; it ranked forty-fifth on activity, such as research and development, in one location
the country-company list, making the company approxi- and serving the world from it) to dispersed (performing
mately equal in size to the economies of Chile or Pakistan every activity in each country); and the coordination of value
(UNCTAD 2002a, 90–91). chain activities, which range from tight to loose structures
9. For OECD countries, falling tariffs were twice as im- (Porter 1987, 34–38).
178 Gereffi
18. Reich (1991) says that core corporations in the Unit- mainly from Gereffi (1999) and Gereffi and Memodovic
ed States at the end of the twentieth century have moved (2003).
from high-volume production of standard commodities to 26. However, a number of OBM companies have re-
high-value activities that serve the unique needs of particu- turned to OEM because it capitalizes on East Asia’s core
lar customers. This requires an organizational shift from ver- competence in manufacturing expertise. Some East Asian
tical coordination (represented as pyramids of power, with companies pursue a dual strategy of doing OBM for the do-
strong chief executives presiding over ever-widening layers mestic and other developing country markets, and OEM
of managers, atop an even larger group of hourly workers) production for the United States and other industrial coun-
to horizontal coordination (represented as webs of high- try markets.
value activities connected by networks of firms). 27. By contrast, the popular “flying geese” model of
19. The GCC approach adopted what Dicken et al. Asian development assumes that countries industrialize in a
(2001, 93) call “a network methodology for understanding clear follow-the-leader pattern (Akamatsu 1961), and no at-
the global economy.” The objective is “to identify the actors tention is paid to the kind of international production net-
in these networks, their power and capacities, and the ways works that may emerge between the lead economies and
through which they exercise their power through association their followers.
with networks of relationships.” 28. A prime example is sub-Saharan Africa, which, under
20. One of the key findings of value chain studies is that the African Growth of Opportunity Act of October 2000,
access to developed country markets has become increasing- has been granted quota-free and duty-free access to the U.S.
ly dependent on participating in global production networks market for products that meet specified rules of origin (see
led by firms based in developed countries. Therefore, how http://www.agoa.gov).
value chains function is essential for understanding how 29. See Dolan and Humphrey 2000 for the facts relevant
firms in developing countries can gain access to global to this case.
markets, what the benefits from such access might be, and 30. The one exception to this high level of concentration
how these benefits might be increased. A GVC research is organic produce, for which there is both a price premium
network has formed to study these issues (see http://www and a significant unmet market demand in the United King-
.globalvaluechains.org). dom because local production is very fragmented. Smaller
21. Several international organizations have featured the African exporters still have an opportunity to penetrate this
global production networks perspective in recent reports, in- market because organics do not presently require the scale
cluding UNIDO (2002, chap. 6), UNCTAD (2002a, chap. and investment of more exotic forms of produce.
5; 2002b, chap. 3), the World Bank (2003, 55–66), and the 31. “Working for a Better Globalization,” remarks by
International Labor Organization’s program “Global Pro- Horst Köhler at the Conference on Humanizing the Global
duction and Local Jobs” (see the April 2003 issue of Global Economy, Washington, D.C., January 28, 2002. Cited in
Networks for several articles from this project). Ruggie 2002a, 3.
22. These distinctions are not ironclad. Often they reflect
primary versus secondary research orientations. The scholars
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