THE LINEAR VALUE CHAIN

This page goes deeper into describing the dominant linear production and organisational systems existing today in developed/western countries; with short historical perspectives in the Blog entries at the bottom of the page.

The video above, is one of two videos that provides an overview of the Linear Value Chain. This first video, explains the key elements in the value chain and the micro-economy.

To the right, are tabs that contain more information on each of the main elements, explained in the video.

Lead Production Firm

Lead Production Firm: This refers to those production firms that manage and have the greatest influence in the upstream and, often but not exclusively, in the downstream supply chain. A value chain can also be highly controlled by Lead Retail firms (see the main text for more information), or Lead Transformation Firms (as in the coffee industry – roasting…), or in some cases, Lead Specialised Labour (i.e., where specialised labour is highly sort-after, but hard to find). In more coarse grained terms – one can ask the question: who extracts the most profits out of the total profits generated in the value chain? The answer then highlights the lead firm(s) in the value chain, and then speaks a lot about the context of that market and or industry, and it’s relationship to geographic and socioeconomic issues.

There are generally two main types of lead firm:

Integrated Firms: Are those firms that manage and do a large majority of the production activities in the value chain, from product strategy to assembly, and manufacturing of components. Retail is generally not included in an Integrated Firm’s activities, but it can be. Although, non-integration is the predominant trend, integration has re-become a bit of a ‘hot topic,’ with the likes of Tesla Motors, and their new battery manufacturing facility; and Solar City for example.

Non-Integrated Firms: like Integrated Firms, Non-Integrated Firms also initiate the flow of resources and information through the value chain, however, they focus more on ‘core activities,’ such as specific ‘high-value’ activities, such as R&D, design, and marketing for example; whilst outsourcing/contracting the other activities to external suppliers. This trend towards non-integration, has been increasing with specialisation.

Factors of Production

Factors of Production: Factors of Production are a taxonomy concept (a way to name and frame) developed in Classical Political Economy (the predecessor to modern economics). The concept still provides a useful way to discuss and think about some of the main essential elements that need to be brought together and organised to produce goods and services. Factors of Production are not consumed or physically embedded in the final goods.

Land Space:  New land can not be created – except for some reclaimed land from the sea – however, as the sea is really land covered in water, it is really a change in land use. Through the combination of the other factors of production, a farmer can attain a surplus of food and fibre from nature (which nature provides for free). All economic activities, beyond agriculture, and fishing (and forestry, foraging, and mining) need land, however, for manufacturing, infrastructure and housing, the concept of ‘land’ shifts towards ‘Space,’ and this is its’ usage in this model. When seen as Space or Area, new spaces can be created (underground, or up in the air) through buildings to cruise-liners for instance. Land in the terms of Space, is a clear distinction between a place to produce (at least) the basic elements to survive (i.e., food and clean water) – with its’ value linked to the fertility of the soil – and a place to produce goods and services and to live (and in most cases, without the access to soil). Land Space for production can be valued both as a place where an activity takes place, and as a commodity – a good that can be produced and sold for a profit. As a commodity it can be bought and held as an appreciating value asset, which can be rented, sold or used as collateral for a loan for instance. It’s economic value, is therefore determined both by its’ current value for use, and its speculated commodity value in the future – which in both cases is also linked to its’ geographic location (its’ relation to these factors in the rest of the economy).

Entrepreneurs or Management: Entrepreneurs are those willing to bear risk, innovate and develop strategies, manage and lead a business venture. Management, is what usually takes over from entrepreneurs when a company reaches a certain size – when the business is too complex, or the original owner has retired or sold the business for example. In general terms, small business managers can be seen as entrepreneurs, even if the business has been running a long time (so entrepreneurship is not always a link with the ‘new’), as they often need to be multi-skilled, and very active to maintain their businesses cash-flow (particularly as they are far from a monopoly, and usually truly live in a real market of constant competition).

Specialised Labour: Firms hire people either as a salary or wage worker, in exchange for their labour. Specialised labour is a slightly more defined description of ‘labour’, as today, there are virtually no jobs that do not require some form of basic training (which can also be referred to as ‘human capital’). An increasing division of labour developed throughout the industrial revolution to the modern-day, has lead to this ever increasing specialisation.

Capital Good & Technology Industries & Goods (The Means of Production): Refers to the firms that design and build those goods that support labour in the production of final goods in the future, such as machines (i.e. Trump GmbH + Co.KG), factories, offices (Real Estate example is Harwood International), computers (i.e. Lenovo Group Ltd), and software (i.e. Dassault Systèmes S.A.) for example; and the Capital Goods themselves. Capital goods, when purchased, are investments that are usually useful for more than one tax year, and so can not be deducted as a business expense – entirely: Rather, the tax is deducted over the number of useful years the capital good has in service, and this is called depreciation. It is also important to note that according to (Rosenberg, 1982) most of the technological advancement of the past two centuries has occurred within the capital goods industry – not in consumer goods.

…it constitutes certain kinds of knowledge that make it possible to produce (1) a greater volume of output or (2) a qualitatively superior output from a given amount of resources. (Rosenberg, 1982).

Technological innovations can be in products, processes (like a recipe), work organisation, finance and markets for example; and can be radical or incremental. Innovations can cross industrial sectors (like capital goods technologies), and can both create new industries and destroy others.

Raw Materials

Raw Materials: are those materials that have had virtually no transformation, but have been produced/gathered/extracted by a combination of the factors of production.

According to Giljum et al., (2009) there are five main categories of raw material input: biotic materials, abiotic materials, air, water and land area. However, in this map, there are four, as land area is not embedded in the final good; and for this reason it is a Factor of Production.

1) Biotic Materials: are the materials from Agriculture, Fishery, Forestry and Foraging (AFFF) activities, such as wood, linoleum, straw, humus, manure, bark, cotton, spider silk, chitin, fibrin, and bone.

2) Abiotic Materials: are the materials extracted through Mining activities, including “…minerals (metal ores, industrial and construction minerals) and fossil energy carriers (coal, oil, gas, peat).” (Giljum et al., 2009)

3) Air“…is a key resource input to combustion and other processes and serves as a balancing item to establish material balances e.g. for the use of fossil fuels, producing CO2 from O2 in the air and carbon in the fuels.” (Giljum et al., 2009) 

4) Water: is a major resource in all biotic and abiotic material production and extraction.

If an LCA (Life Cycle Analysis) was being made on a product and or process, then Land Area is included, because: “Taking a resource use perspective, land area is one of the most restrictive categories of resources since humanity only has one planet on which we have to arrange sustainable ways of meeting our demands on land…” (Giljum et al., 2009) 

These man-made flows of raw material production/extraction/gathering can affect, directly or indirectly, some natural material flows in the natural world (see biogeochemical flows above), such as adding additional green-house gases into the atmosphere, or deforestation that can change rain patterns and biological food webs for example.

About Commodities: When talking about raw materials, the term ‘commodity’ is often used, and so it is important to clarify what it means, as it has three main uses:

A) A commodity, can be defined (as by Marx for instance), as a product that has been produced purely for sale, it is not a surplus of production. For example, it is not the extra carrots grown on a farm, after those are taken for self-consumption by the farmer; instead it can be the cereals that have been grown by the farmer to sell, and not consumed at all on the farm itself – or a factory, building a motor-car for example – the manufacturer is not building the car for its’ own use, but instead for the exchange of money from customers.

B) Another use of the term, commodity, is the large volume production (usually by more than one producer) of raw materials. In this case, these raw materials can be seen, from a market perspective (usually a global market perspective), as all the same (standard), and often, only compete on price; these materials usually compete in large markets, with high competition, and correspondingly low profits. The way in which the raw materials have been produced, may be different (i.e., more or less negative or positive externalities), and of different quality (i.e., more or less vitamins in the carrots). But as a commodity, it maybe, and often is the case that it is, difficult to transmit these differences in the market, to adjust the price to that which is given by the market (low price elasticity).

C) Within a global system, from coffee to cell phones (and so also products), all raw materials and products eventually mature towards (some faster than others) a form of commoditisation (they become a ‘commodity’). And so, unless companies can differentiate – i.e., though innovation and/or marketing, or market protection mechanisms, such as monopolisation, patents or state interventions, then all will eventually face the profit struggles of becoming a ‘commodity producer.’

Primary Industries

Primary Industries: Those industries that produce the raw materials – and often commodity [the term commodities is explained above in Raw Materials].

In the majority of global value chains, agriculture is clearly a primary producer for the rest of the global value chain. An increasing number of intermediate companies have positioned themselves between the farmer and the final consumer.

Agriculture, Forestry, Fishing & Foraging (AFFF): As agriculture has grown in scale, and output has reduced in diversity through a trend towards specialisation, and exportation, agriculture has increasingly become a primary producer – moving toward commoditisation.

However, beyond agriculture, there are still many different types of foods, or natural products that are foraged or hunted or gathered (including legal or illegal hunting) from the land and sea. Examples include natural pearls, seaweed, different types of wild flowers, berries, mushrooms, and wild deer. Fishing is still a form of hunting – although now with sophisticated search technology, the term ‘hunt’ is a little less clear, and fish ‘farms’ are increasingly part of the mix.

Mining: This is all the companies that extract minerals, or organic materials (long-chain carbon based materials) from the earth, or from an orebody, lode, vein, seam, or reef.

Intermediate Suppliers & Goods

These are also known as secondary factors of production, as they are created through the combination of the primary factors of production. Intermediate Suppliers also make up part of the Upstream Supply Chain.

Energy: Here, we refer to energy that is being used an Intermediate Good (see below) which can come from non-renewable or renewable sources.

Intermediate Goods: Those goods used as inputs for the production of final goods, manufactured by Integrated and Lead Firms, Subsidiaries, or Turnkey Suppliers for example. As with the rest of the value chain, there is some form of hierarchal order in this sector of activity. Many of the firms are vertically layered, with those above, contracting or sub-contracting inputs from those layers below. In most cases, the lower-end of the hierarchical chain is predominately, low-skilled, and low value (low profits), and is often based in developing countries.

Heavy & Light Transformation Industries & Goods: These suppliers transform raw materials, through refining and chemical processes, into all the modern materials we use today – glass, steel, cement, carbon fibre, paper and cotton thread for instance. Company examples include The Dow Chemical Co., BASF SE, or E. I. du Pont de Nemours and Company for chemicals; Pilkington Group Limited for Glass, and Lafarge S.A. for cement and concrete for example. These industries have been seen by many economists as key sectors in the development of a modern state.

Component Industries & Goods: These firms produce ‘discrete elements’, such as components, or sub-components, that become inputs for other component and sub-component manufacturers, or inputs for Turnkey Suppliers, or Lead or Integrated Firms and/or their Subsidiaries. Component Suppliers are also referred to as ‘lower-tier suppliers’, ‘specialised suppliers’, ‘sub-contractors’ or ‘commodity producers’; a large-scale example is Intel Corporation (micro-chips).

Outsourcing, Offshoring & Service Industries

Turn-key Suppliers: (Also called: System Suppliers, OEM suppliers, First-tier suppliers, Contract Manufacturers…). Examples include Dana, Delphi, Celestica, and Foxconn. 

Over the last 10 years or so, many lead firms have consolidated their base of suppliers, from sometimes a thousand to a few hundred. In this situation, the old suppliers are often still in the value chain, but now they are contracted via the turn-key supplier instead of the lead company. And so, Turn-Key Suppliers have positioned themselves in the supply chain, as a ‘single-source’ service, for both managing supply chains, and in some cases also assembling supply-chain parts from various sources, into more finished intermediate goods, or even final goods, for their upstream clients.

Subsidiaries: These are companies that are fully owned, or partly owned (more than 50% of the stock), by a parent company (in this case the Integrated Firm or Lead Firm). In the situation of full ownership, this can be brought about through the Acquisition of, or Merger with, another company; or the construction of a new office/plant in the same country or abroad (offshoring). And in the case of part ownership over 50% (known as ‘Controlling Interest’), this can be a purchase of stocks from an existing company, or as a partnership in the construction of a new office/plant (again, onshore or offshore).

Inter-firm Trade: Although this flow is not highlighted in the map, this is worth mentioning here. Inter-firm trade is when different production plants that are owned by the same company (within the same country or in different countries), are sending components or sub-components to be assembled in another plant within the same firm. It is estimated that between 30-50% of all international trade in manufactured goods is inter-firm trade (R. Lanz et al 2011). Basically the outputs from one production plant becomes the inputs of another. Although this may not seem so important to mention, when it is highlighted that these very high number of ‘trades’ are not in the market, and so prices are not dictated by the market, and they do not involve VAT.

Service Industries & Goods: Many, companies of all sizes are outsourcing parts of their business to service providers. Two main forms of service industry is described below:

Business Services: Includes ‘financial services‘ (global examples include Deloitte Touche Tohmatsu Limited, PwC, Ernst & Young, and KPMG for example), ‘communication services‘ (Cisco Systems, Inc. for example), ‘computer and information services’ (Infosys Limited for example), and ‘legal services’ (global examples include Dentons, and DLA Piper) for example. Particularly enabled by the internet, these specialised services can now also be outsourced to external 3rd party companies (based locally or worldwide) like Manufacturing activities can.

Logistics & Packaging: Logistics Providers are a key component in the modern-day globalised value chain. From boats, to planes, to lorries, to trains, to vans, these companies move everything (that is not able to be transported by pipes, wires and electromagnetic waves (radio for example)…) through the value chain. Examples of third party logistic providers (3PL), such as DHL Supply Chain & Global Forwarding, Kuehne + Nagel, DB Schenker Logistics, Nippon Express, and UPS Supply Chain Solutions. Closely linked to logistics is packaging, which is also a key part of the logistics network. Packaging has to protect the goods, whilst often being designed to be as light and compact as possible, and labelled to support tracking. One of the biggest innovations in logistics has been the ‘pallet’ and the ‘shipping container.’ Companies include Chep, Arrowhead Systems, Inc. for instance.

Ownership & Organisational Form

Ownership & Organisational Form: The ownership of the means of production, is not the same as the organisational form of the enterprise. Both a ‘traditional’ company and a cooperative company often organise themselves in similar ways (i.e., integrated, and vertically scaled, with management groups), but the form of ownership and distribution of income can be very different.

Different forms of ownership includes Sole Proprietorship, Limited Liability Companies (LLCs), Corporations, different forms of Partnerships, and Cooperatives for example.

In terms of organisational form, this includes such options as whether the company is integrated or non-integrated, uses conventional hierarchy, flattened hierarchy, matrix, divisionalised, or networked management forms, for example.

Goods and Services

There are many different definitions of goods and services, which can also overlap depending on the context – for example, one product can be classed as more than one type of good – a car can be a durable good, or a luxury good, or a private good.., and can also be a service, if it is rented for instance. Although not discussed in this section, as there is the concept of a ‘Good’ – those materials that are said to satisfy human wants and provide utility; there is also the concept of a ‘Bad,’ in economics too, which is anything with a negative value to the consumer, or a negative price in the marketplace, i.e., waste.

Tangible Goods:

Fast-Moving Consumer Goods (FMCG): Also known as ‘consumer packaged goods’ (CPG), are nondurable products that are consumed very quickly, and have a short shelf-life. Examples include soft-drinks, toiletries, some toys, and processed foods for example. Generally produced in large volumes.

Nondurables Goods: Also known as consumables goods or soft goods, these goods are ‘used up’ during use, like ink in printers, and paper and pens for example.

Durable Goods: Also known as hard goods, these goods are longer lasting, and can be used and reused many times over. Examples include washing-machines, fridges, cars, furniture, computers and mobile phones.

Intangible Goods: A good that can not be touched. For example, mobile apps, and virtual goods (digital books, music, movies and online games for example). Intangible goods can be included as services, but here they are defined separately. A service is often designed and made with a customer (a haircut for example), but an intangible good can be made without any direct contact with or actual consideration in some cases, for the customer. Another way to look at is, is that intangible goods can be owned, and reused (perhaps indefinitely).

Services: Are a form of contract between the supplier and the user. The user does not (generally) own the item(s) being paid for, instead they can hire/lease/rent the access to it’s use via a service provider or ‘Rentier’.  The Five I’s of Services include: Intangible, no Inventory (no stock)Inseparability (the service provider is a key part of service delivery), Inconsistency (Each service is unique), and Involvement (The customer is involved in the service delivery process).

Downstream Supply Chain

Marketing Firms: This includes all marketing companies that are responsible for the communication of a product, service or brand to customers (e.g. Wolff Olins) for clients such as Final Manufacturers or Sales Firms. These companies can also be involved in the Research and Development of new (or rebranded) products and services (e.g., ?Whatif!), and the collection of consumer trends (Mintel Group Ltd for example).

Wholesalers and Retailers: Also known as, Sales, Retailers, Distributors, Resellers, and Value-Added Resellers (VAR). In all value chains, nearly in all cases, the sales companies have the power to vary sales prices, promote one product over another, and have direct (physical or virtual – via the internet) contact with the final customer – a powerful part of the value chain. Examples include Darty plc and Groupe Fnac.

After-Sales-Services: This group includes all companies that are either independent, working outside the product warranty or product insurance (domestic appliance companies, independent car garages, bicycle repair companies, or general mobile home repair services for example), or all those companies that are contracted by firms responsible for the warranty/product insurance (e.g., final manufacturer or sales firm), during, or in some cases outside, the period stipulated. This can include the same independent firms listed above, or international companies that integrate the service within other specialised tasks such as UPS, Inc. for example.

Customers

Consumers:  Describes the more traditional method of people consuming goods: A consumer pays for a good, uses it and either sells it or disposes of it once the good is no longer required, is broken, or is technologically obsolete for example.

Waste

“…anything for which the generator or holder has no further use and which is discarded or is released to the environment.” (ISO 14021:1999(en))

There are many ways to classify different types of waste, and many of the classifications overlap. However, in this map, the main waste types are separated into three main types:

Pre-consumer Waste (Primary Sector Waste & Secondary Sector Waste)

Post-consumer Waste (shown as the brown arrows)

Gaseous, Liquid & Solid Pollution

Pre-consumer Waste: Pre-consumer Waste is the ‘scrap’ from resource inputs (Biotic Materials, Abiotic Materials, Air, Water, and Land Area), during the extraction, production and transportation of Energy, extraction, cleaning (if required) and transportation of Water, and during Mining, Agriculture (AFFF), and Industrial activities.

Post-consumer Waste: All waste, both hazardous and non-hazardous, coming from residential properties and commerce at the ‘end-of-pipe.’ Includes organic matter such as sewage (blackwater), waste water from different types of washing (greywater), food waste, and garden waste for example, and non-organic (packaging, and end-of-life products for example).

Gaseous, Liquid & Solid Pollution: All the waste that is not captured, and leaks into the environment; which becomes pollution.

Waste-to-Energy: This refers to domestic and industrial waste systems that incinerate, gasify, pyrolyse, or use plasma technology, to create electricity from wasted resource.

Landfill: The disposal of solid waste into the ground. This can be with or without pre-treatment, and the site can be ‘sealed’ or unsealed.

The video above, is the second of two videos giving an overview of the Linear Value Chain. This video shows the macro-economy. The macro-economy includes the institutions, infrastructures and policies that influence, and in most cases, make possible, the industrial value chain (the micro-economy). Although not discussed in detail here, the macro-economy also includes a state or regions relations - such as trade, finance, and politics - with other states or regions; and the impact and influence that these relationships have both on the rest of the macro-economy and the micro-economy.

To the right, are the tabs that contain more information on each of the main elements, explained in the video; and in the text below, there is further explanation in a more essay form.

Hard Infrastructure

Hard infrastructure: is the technology and structures that make the man-made stocks and flows physically possible. Hard infrastructure can be seen as the socialisation of the productivity of industry: the more efficient the hard infrastructure, the more efficient industry can be. And as a second benefit, much of the infrastructure can be used (and subsided) by the public for recreation and tourism for example. The, often large firms, that build large infrastructure, such as roads, and telephone lines, have often matured into large ‘natural’ monopolies, where large scale, centralised control, has been the predominant model.

Solid Waste Infrastructure: This includes the hard infrastructure for managing solid waste in landfills, waste-to-energy, industrial hazardous and non-hazardous waste, municipal domestic waste collection, and materials recovery for example. These are the companies and infrastructures that manage the waste system also discussed in the tab “Waste” in the section on micro-economics.

Fresh Water and Waste Water Infrastructure:  Fresh drinking water is usually sourced from rivers, lakes, reservoirs, aquifers (including fossil aquifers), or from the sea using different forms of desalination plants. The water is then pumped through a range of coagulation, sedimentation, disinfection and filtration processes, before it is transported to local storage tanks or reservoirs ready for domestic, industrial or agricultural use. This infrastructure also includes the management of waste water from industry, farms and homes for example.

Energy Infrastructure: Here, we refer to the generation of Electricity, and the refining of the Gas and Petroleum Products. In the case of electricity production, raw materials such as Coal, Biomass, Limestone (with Coal burning), Oil (which has a refining stage), Uranium, Biofuels and Gas, are transported to Traditional Energy Generation Plants. Here, these fuels produce heat, which boils water to make steam, turns a turbine, which then drives a generator to produce electricity. The electricity is then connected, firstly to a Transmission Network (High voltage, long distance network), and then the Distribution Network (Low voltage short distance network), where it is connected to homes, offices and factories. Non-traditional Energy Generation Plants also make up the energy generation mix, such as Wind-farms, various forms of Solar Capture and Hydro-electricity for example. The fossil fuels (and wood products) can also be transported to be burnt in domestic and professional locations to produce heat for different applications.

Earth Monitoring infrastructure: This group of hard infrastructure is not so visible, but it is an important part of our modern lives, including, Earth observation satellites, GPS, and Meteorological, Seismometer and tidal networks for example. This is often included in ‘communications’ (shown below), but it is not the same thing: this is uni-directional data collection and transmittance – an increasingly important part of environmental monitoring, and the ‘internet-of-things’ for instance.

Communications & Data Storage Infrastructure: This includes the infrastructure that has transformed how information and data is spread across the world at incredible speeds (near the speed of light in many cases). Examples include, one of the oldest: the Postal Service, which is still innovating with concepts around drones…; Telephone Networks and Exchanges; Cable Television and Distribution Networks; The Internet, including the Core Routers, Data-Server Farms (stocks), Wireless data transfer, such as Wi-fi (and more recently Li-Fi), and software for example; and Communication Satellites and Cables (including undersea).

Transport Infrastructure: This includes much of the large visible infrastructure that we see all around us in the built environment. Such as roads and the road structures (tunnels and bridges…), airports, seaports, railways, mass transit systems, canals, and ferries. Many of this structures require huge investments, and in some cases are funded by sovereign wealth funds: states that have a budget surplus such as many oil-producing nations in the Persian Gulf, China, Singapore and Norway for example.

Buildings

Buildings: All the structures we build, to live-in, work-in, play-in…

Construction: This is not a primary industry, however it is very closely linked. Construction is the process of preparing for and forming buildings and groups of building and the necessary connected infrastructure. Construction starts with planning, design, and financing and continues until the structure is ready for occupancy. Construction companies build the physical soft-infrastructure and the hard-infrastructure, as well as residential structures.

Real Estate Developers: They often manage construction development projects, can be involved in buying land, raising finance for projects, and design the vision for the project for example.

Soft Infrastructure

Soft Infrastructure: Includes policies and institutions, which are the mechanisms (rules for example) and structures (physical places with specific designs and technologies) that have been developed to govern and support a group of individuals within a community. The term soft infrastructure is being used here, as the definition between ‘policies’ and ‘institutions’ is not always clear, and the term ‘institution’ is also commonly used to describe both (often long-term) customs and behaviours, and formal organisations of government for example. Soft Infrastructure does not include the service sector of the economy.

There is a tier of soft-infrastructure further to the imaginary left in this diagram, called Global-National Organisations, which includes Global Economic Organisations, Informal Summits, Military Alliances, Non-intergovernmental Organisations, Regional Organisations (E.U. for example), and Cultural, Linguistic, Ethnic, Religious and Historical Organisations. They are not shown for clarity reasons, though clearly this tier is an influential part of the system.

Tier 0: The E.U. is a Regional Organisation (RO), a form of Global-National Organisation, which could equally be exchanged for another, like OAS, SAARC, CARICOM, UNSAR, ASEAN or ALBA for example. The E.U. is basically a collective of states, that has come together to create a new larger collective geopolitical boundary, with the focus on fostering (and maintaining) economic and political integration and cooperation.

Tier 1A: This includes the main elements of the Nation State; The Governance Infrastructure, The Social Infrastructure, The Economic Infrastructure, and Cultural, Sports & Recreation Infrastructure.

Tier 1B: This is a more detailed breakdown of the main elements of the Nation state. Governance Infrastructure includes the Executive System, the Judiciary System, the Legislation System, the Tax System, the Emergency Services, and the Military Infrastructure. Social Infrastructure includes the National Health System, the Welfare State, and the Education system. The Economic Infrastructure includes, the Financial System, the Manufacturing Infrastructure, and the Agricultural, Forestry and Fisheries Infrastructure (this last one is not shown). The Cultural, Sports & Recreation Infrastructure includes, Tourism Infrastructure, Cultural Infrastructure (libraries, museums, theatres…), and Sports and Recreation Infrastructure (sports facilities, parks etc).  This last element has no Tier 1B definition on the map, as they are not a priority in reference to the story of remanufacturing (as yet!).

Tier 1C: As in Tier 1B, only those elements relating directly to the remanufacturing story have been included:

Principles/Standards/Guidelines: Go to this link for a detailed overview of what these are: Principles, Standards and Guidelines

Development Policy: In this example we are focusing on industrial development policy. And this refers to policies that can be specifically refined or defined, with the objective to encourage economic development.

Parks & Zones: This includes two, sometimes linked, industrial development strategies. The first are industrial parks (IE) (also known as industrial estates or trading estates), which are zones that have been planned for the development of industry. The second are special economic zones (SEZ), which also includes (FTZ), EPZ (Export Processing Zones), FZ/FEZ or BLP for example.

R&D Labs: This includes de-centralised labs that can be both private and public (or a mix of the two), that are outside of the linear value chain itself, but are key in the development of long-term science and technology, that directly, and indirectly, help manufacturing R&D labs develop new innovations in the market. M. Mazzucato (2013) highlights that most of the innovations for the iPhone for example – such as the touch screen interface, the internet, GPS, and Siri were all developed in government funded labs.

Financial Institutions: This includes different types of institutions that deal with Deposits (Banks, Building societies, Trusts…), Contracts (Insurance and pensions), and Investments (Investment banks, Underwriters…).

Higher Education: Also known as tertiary education, this is the optional stage of education after secondary education.  It includes universities, colleges and vocational schools, trade schools, and institutes of technology for example.

Knowledge Networks: In this case, relates to formal knowledge networks that are supported by a group, company and/or technological service; to help the spread of specific knowledge to a specific group of actors (the ‘connect‘ network in the UK for example), or general knowledge to humanity in general (wikipedia for example). The knowledge networks can be paid or free, and can be fully open, or open to members only.

Action Groups

Action Groups: This includes individuals, groups or a network of groups and individuals, involved and tasked in the activity of change on some part of the system as whole.

One well known form of Action Group are Clusters.

Flows

Financial Capital & Trade Flows: These are in fact two different flows, but have been grouped for simplicity. Trade flows, refers to the national and international trade routes (historic and geographic in many cases). Financial Capital refers to flows of investments and payments that invariably flow down the linear value chain.

Technology Flow: Technology as a flow, is the flow of Technological knowledge and progress between people, which “…constitutes certain kinds of knowledge that make it possible to produce (1) a greater volume of output or (2) a qualitatively superior output from a given amount of resources.” (Rosenberg, 1982).

Information & Expertise Flows: This links strongly to a definition of culture “[the] transmission of learning via language and symbols” given by Göran Therborn (Therborn, 2011). The Flow of information through the system, as different forms of media, entertainment and art, and models and values for example. Expertise, refers to those people that have experience in a field and share that knowledge with others, or apply knowledge and experience to a particular task. Information and Expertise can flow up or down the value chain – although it is often controlled and managed; particularly by those leading the value chain.

Workforce Flows: This includes those people already in employment or searching employment. And here it refers to the flow of people though the system, both as an employee (filling new positions or leaving old ones, commuting to and from work, and work related travel for example), and as a person emigrating, immigrating, or migrating from their homes to another state or country, or from the countryside to the city, for work, for example.

Social-Ecological Systems

Society: This is a rather large topic for one icon! This refers to the waves of globalisation during human history, our different modes of livelihoods, population ecologies, and ethnic and religious dynamics and cultures for example.

Households: Refers to the work, leisure activities, and social dynamics of the household; and those actors involved in those activities. The household actors include those not directly part of the market economy: such as those involved in domestic production and/or consumption work within the household, domestic workers, the retired, those in education, and those with disabilities. And the household also includes those that are also directly part of the market economy: the market economy workforce itself (including the self-employed), the unemployed, and volunteers for example.

The Environment: This describes the biogeochemical cycling through both plants and animals (the biosphere), and through rocks, soils, (the lithosphere), through water and ice (the hydrosphere), and through the air (the atmosphere).  All elements go through cycle pathways, as stocks or flows. It also describes, geography, and ecology: The Earth and the energy coming into the Earth from Gravity and the Sun.

July, 2015

Value Chains


Written by Tom Snow

The value chain concept was first described and popularised by Michael Porter (1985). A value chain is "the sequence of productive (i.e., value-added) activities leading to and supporting end use" (Sturgeon 2001); in other words, each actor in the sequence adds value, often in it's own market, and therefore, obtains profits/rents for their work - including particular types of customers. The linear sequence of events can be broken down into five main stages: inputs (extraction), make (production), outputs (goods/services and distribution), consume (use or buy/rent), and waste (throw-away).

Modern value chains are often complex, global supply and demand networks, that are usually initiated by national, trans-national, or multi-national Lead Manufacturing Firms (e.g. Caterpillar Inc.), or Lead Sales Firms (e.g. retailers in the apparel industry like Zara España S.A., or Decathlon Group), or a hybrid of the two (e.g. Apple Inc.); all of which are predominately based in industrialised countries. There are also firms like Cisco Systems, Inc., for example (shown in the map as a 'Service Inputs' firm), which are Lead Firms within their upstream supply chain, but are not a Lead within the downstream of the value chain of the industries they serve. The main focus of the map above is on the Lead Manufacturing Firm, although it can equally be used to describe the other types of Lead Firms.

The word 'chain' in a 'supply or value chain' - creates a mental description (like the photo above) of a linear view of a system.

In ecology, the different predator-prey relationships in an ecosystem can be described as food-chains - a linear view. However, although the concept of food-chains still exists (usually to explain simple interactions, as that one shown above), it has also co-evolved with the more modern concept of 'food-webs,' which describes much better the complex, non-linear, relationships between all the different forms of life in a community. As should become more apparent in the web-pages to follow, value chains are evolving both conceptually and physically from chains to webs (also known as networks and systems).

November, 2015

Inputs: The two main groups


Written by Tom Snow

The Lead Manufacturing Firm has two forms of inputs: A) Factors of Production B) Supply Chain.

In the image above, can you identify the different elements described below, that are required for producing the meal (a product or service)? See the answers at the end of this section.

A) Factors of Production

The first form of inputs, the ‘left leg’ in the main map at the top of the page, are the Factors of Production:

  • Land Space
  • Entrepreneurship & Management
  • Specialised Labour
  • Capital Goods & Technology

These inputs are not consumed within the direct process of manufacturing and delivery of the final good. All businesses need all four of these factors of production to create and run a business to provide products and services. It is often asked "where is 'money' - isn't that a minimum factor for a business?" The answer is no: Money is a means of facilitating trade, it is not in itself a productive resource (like all the rest) - you can't use money to hammer in a nail for example; and it is possible to produce services and products without money (i.e., in the commons), but it is not possible without these four factors of production. See more about this in the blue bar to the upper right entitled 'Factors of Production.’

Every company and start-up has to be able to bring these four fundamental elements together to deliver a product or service to it’s customers. And just as start-ups often focus on the minimum viable product, that they can get to the market to start making revenues, here the factors of production also highlights a company’s need to also manage a minimum viable space, minimum viable entrepreneur, minimum viable team and or labour, and minimum viable technology (which can also include a process or ‘recipe’).

B) Supply Chain

The second form of inputs, the 'right leg’ in the main map at the top of the page, is the Supply Chain, which consists of two main subgroups, Raw Materials and Intermediate Goods:

Raw Materials (shown as the green icon):

  • Biotic Materials
  • Abiotic Materials
  • Air
  • Water

Intermediate Goods (the three black icons):

  • Energy
  • Transformed Materials
  • Components

These inputs are consumed during the production and delivery of the final product. This 'leg' is an organised network of contracted, and sub-contracted suppliers (B-to-B companies).

Answer to question at the top of this section: The Land Space is the kitchen, and more specifically can be the kitchen work-surface area; the Entrepreneur & Management and the Specialised Labour can be both of the people - unless one of them is the boss (a professional environment or a teacher for instance); the Capital Goods & Technology is the frying pan, the oven, the cooking hob, knives… and the recipe; the Raw Materials includes the vegetables (biotic), the salt (abiotic), air to breath and to take away odours and steam, and water for boiling, washing, and drinking; the Intermediate Goods are the electricity or gas used to power the cooking and lighting equipment for instance (Energy), the wine (Transformed Materials), and the Components are not so obvious in the photo, but this could include a pasta sauce for instance.

January, 2016

Raw Materials: Where do they come from?


Written by Tom Snow

The material outputs from mining activities are not only inputs for the manufacturing value chain, but are also inputs for hard infrastructure and modern agriculture. And like modern Agriculture, both are also enabled by hard infrastructure, making them very much inter-dependent actors within the economy’s technical foundation. Raw materials are the critical inputs to the value chain: without raw material inputs coming from mining and from AFFF - Agriculture, Forestry, Fishing and Foraging (and in some cases coming via hard infrastructure), modern manufacturing industry grinds to a halt.

Today, industrialised countries increasingly depend on raw materials from countries with high natural (both abiotic and biotic) endowments (U.S, Australia, Argentina, Brazil, African Countries, and Russia for example). According to (Bairoch 1993) in:

...1973 30% of the commercial energy used by the Western developed countries came from the Third World; for Western Europe this share was as high as 58%… and …[i]n the case of some metals the developed Western countries obtained as much as 90% of their supplies from Third World countries.

Contrary to common opinion, however, this is actually a relatively modern phenomenon. Again according to Bairoch, the developed countries were almost self-sufficient (collectively) in energy, as late as the period after WWII. In 1913, the UK was a net exporter of coal - “6% of world production” (Bairoch, 1993), and it was only after the changes in the Middle East, following WWII, that consumption patterns in energy really shifted. Bairoch also argues that this was a very similar story for all major minerals, except perhaps for textile fibres, though dependency was limited.

The Mining Industry (mainly for metals) consists of three main activities: Mine ProductionSmelter Production and Refinery Production. And as with the rest of the supply chain, Mining Industry activities also have a form of hierarchy:

While mining has moved from developed to emerging economies, smelter and refinery production remains located mainly in developed countries, although this balance has already started to change with the quick growth of Chinese production of refined copper and aluminium. (ICM October 2012)

In Lester Browns book ‘Plan B 4.0’ (Brown, 2009), he highlights this vastly increased dependence on other countries natural resources, and the changing forms of fixing imports. One of the most extreme being the more affluent countries buying or long-term leasing of large Land Areas in other countries. Examples include Libya:

After more than a year of negotiations it [Libya] reached an agreement to farm 100,000 hectares (250,000 acres) of land in the Ukraine to grow wheat for its own people. Another example is China firm ZTE International that has secured the rights to 2.8 million hectares… in the Democratic Republic of the Congo on which to produce palm oil… (Brown, 2009)

...which was used for cooking or biodiesel fuel. Other countries that are also following this strategy are Saudi Arabia, South Korea, Kuwait,  India, Egypt, Jordan, the United Arab Emirates and Qatar.

 

July, 2016

Production: A Vertical Spintering of Industry


Written by Tom Snow

Capital goods suppliers, such as the machining-tool industry, produce industrial equipment such as milling machines, grinders and lathes, that are bought by mass-manufacturing firms. It is the capital goods, combined with particular production technologies, such as interchangeable parts and the production-line system (as-well as organisational innovations) that have transformed production into mass-production. According to (Rosenberg, 1982) most of the technological innovation of the past two centuries have occurred within the capital goods industry.

As Adam Smith explains, in the Wealth of Nations, with his famous example of the pin factory, there has been a continuous, progressive division of labour during and since the industrial revolution. Division of labour is essentially, breaking-down the manufacturing process into its' component parts, and applying machinery (Capital Goods) - mechanisation, and logistical management, to assist in the productivity of each process.

Through the division of labour, there is another dynamic which occurs, which is specialisation. Specialisation increases, as a worker develops greater knowledge of their particular job, as they spend more time doing it. Today, specialisation has evolved from ‘learning by doing and using' within the factory, to also much of the higher-education and vocational training system external to industry; and so now a majority of people entering the workplace have a minimum of specific skills in specific disciplines, such as marketing, accounting, computer literacy, or production management for example.

It is exactly the development in the division of labour and specialisation that has been the underpinning for the development of the modern supply chain. As each process becomes more and more specialised, entrepreneurs have taken the opportunity to specialise in specific parts of an industrial process or good - making metal springs for example; that they can then offer as a product or service as an independent company, to different companies, across different industries, in the case of the metal spring. They can then increase their productivity through ever increasing specialisation and through the introduction of mass-production technologies, and combined with the dynamic returns-to-scale (as they have a larger potential market), these companies can now produce the specific part within the supply chain at a fraction of the cost that the original company could just for itself. This process has spread from intermediate components, to services such as accounting, and IT for example.

This process has been described as: 

…a vertical splintering of industry [leading to] each [sequential] layer produc[ing] an intermediate product which becomes an input to the next stage in the production process. (Argyrous, 2011).

In essence, there are now a vast array and number of 'vertically specialised' companies that are positioned between the lead company and the raw materials. And it is this trade along the upstream supply chain that dominants international trade, and it is estimated that "about 50 percent of the value of international trade in goods and services is in intermediate rather than in final goods and services" (Milberg et al, 2013).

As manufacturing industries have increased in their 'vertically splintering' during the last 20 years or so, the types of firms and their scope of activity within the value chain has changed.

The 'original' mass-production firm was predominately an Integrated Firm. Now, often referred to as the old style of manufacturing (or even a 'dinosaur'), many of these firms went through a process of selling, spinning-off, or closing, some of their vertical activities (such as component manufacturing divisions and/or subsidiaries, and business services like IT for example), and then, contracting or subcontracting these from suppliers.

These Integrated Firms are then transformed into what is called a Lead Firm, which is described in a moment. Examples of Integrated Firms include “old” Ford Motor Company, “old” IBM Corporation, perhaps still Koninklijke Philips N.V, and (at least in 2011) a Chinese company like BYD Auto Co., Ltd for example, that manufacturers/ed nearly all its own components (Day, 2011). Tesla Energy’s ‘Gigafactory’, a battery factory (cell production estimated for commencement in 2017), is a modern-day example of an integrated firm both in a developed country and in the growing area of electric energy storage (linked to growth - and projected growth - in electric transport, mobile technologies, renewable energies). This latest example actual shows a potential reverse in the trend.

Mass-production firms go through (and in many case, continue to go through) this process, for a few reasons: perhaps the sourced good or service is cheaper and/or higher quality than they can make it themselves, or it is a way to free-up cash for investment it in other things. The way in which these contracted companies can make things cheaper, through specialisation, and economies-of-scale is briefly mentioned above, but this only focuses on the micro level. At the macro level, many of these contracted companies potentially also have access to cheaper input costs (access to a large skilled, or cheap low-skilled, labour force for example - as in China and India for example) and cheaper credit, through a difference in domestic laws and norms, and government policy (including, in some cases exchange rates). And this is, in part, made possible by the revolutions in the internet and digital communications, supporting the management of downstream supply chain logistics and the monitoring of inventory for instance;  and a global financial system with global financial standards.

This mass-production 'group' of actors are now vertically integrated and specialised in the value chain. And the head of the downstream supply chain, like the Integrated Firm, is the Lead Firm. Also similar to Integrated Firms, Lead Firms also initiate the flow of resources and information through the value chain with the direction of production, and marketing of final goods. They differ, however, from Integrated Firms in that they focus on their ‘core competences’ and 'high value added functions', such as branding, marketing, finance, product strategy and definition, design, assembly of sourced components, and even sales (like Apple Inc. and Dell Inc. for example). And in some cases like Dell, these lead firms have become FABless - they do virtually no manufacturing or assembling themselves anymore.

Increasingly, over the last 10 years, many lead firms have consolidated this vast base of sourced intermediate good suppliers, with examples of lead firms reducing supplier numbers from a thousand to a few hundred (Harrison 2008). In this situation, the old suppliers (i.e. component manufacturers) often remain in the value chain, but now they are contracted via a new group of specialised firms called Turn-key Suppliers, examples include Dana, Delphi, Celestica, and Foxconn; huge companies, relatively unheard of by final consumers/users. And these Suppliers are in some cases ‘single-source’ strategies, in the case of Foxconn, that are contracted by Apple Inc, to assembly it's iPhone. In this example, Foxconn manages all the logistics of the downstream supply chain for the iPhone (Milberg, 2013).

Below the Turn-Key Supplier in the map, are the intermediate goods manufacturers. Again, this often has some hierarchal structure, as component manufacturers have in many cases, also 'vertically splintered', and outsourced parts of the production process can be contracted somewhere else cheaper. And so this hierarchy often goes down, to the companies that are producing the simplest 'widget', at the cheapest possible price. Important to note that the bottom of this hierarchy is, unsurprisingly, predominantly manufacturers in developing countries.

August, 2016

Private and State-Owned Enterprises


Written by Tom Snow

After the Second World War, many European governments transformed particular enterprises into state-owned enterprises (SOEs) or created new ones (with complete or partial ownership), making them, by far, the largest single employer in the domestic economy. These state-owned enterprises make up a large part of the modern-day hard and soft infrastructure, and are often formed where there are natural monopolies, or where the enterprises are politically sensitive or strategic.

Natural resource extraction, energy production and/or distribution, transport networks, the military, broadcasting, and healthcare are just some of the typical examples of SOEs within infrastructure. These government activities also extend, in some cases, into the value chain, with full or partial state ownership of strategic industries - such as automobile companies ('Integrated Firms' or 'Lead Firms'), and steel works (‘Chemical & Material Suppliers'): - Strategic in the sense that the goods and technologies produced from these sectors can bring many accumulative benefits across industry as a whole, and/or potential payback may be too long or too risky for the private sector to take the initiative for instance.

In other cases, government often bears financial responsibility in some enterprises that are classed as 'public goods' (i.e., lighthouses, flood defences, bridges, roads, and emergency services); in-which the usage/access can not be restricted just to those people who have paid for it (i.e., blocking the light from the lighthouse for those who didn't pay and contribute to its construction and running costs), and so for a private enterprise, it can be difficult to finance. Here, government's normally tax (socialise the cost to) all users (generally everyone in the economy), and use the income to provide the service or pay someone else to provide it.

Transport or communications SOEs and public good SOEs, in particular (i.e., roads, high-speed Internet...), can both increase productivity of industry, increase public services, and create jobs during construction and through their management. Except for the majority of public goods, these enterprises, briefly mentioned above, can be state-owned or run privately; it is really a political choice; hence the many difference stances taken by countries, states, political parties, academics and the public.

 

December, 2016

Soft-Infrastructure Strategies


Written by Tom Snow

Governments and Regions have access to many tools that they can use to influence (i.e., provoke, support or restrict) certain developments in the economy. This section focuses on a few of the key ones. This is a slightly more technical section, aimed more at policy or economic development actors.

Principles, Standards & Guidelines (Some Rules)

This is a very powerful motivator and regulator of markets: dictating what can and can't be sold in a particular market, and in many cases it can dictate much of the products design (material selection, size, weight, volume, power consumption, and pollution levels in its production, use and waste, for example), which is linked to its unit cost, and its distribution cost in foreign markets for example.

Principles, Standards and Guidelines can be used to protect domestic markets (and consumers), as some countries have different standards in different areas of the economy. Finally, how products and the processes within different stages of the supply chain are classified can strongly influence the economics of different business models and forms of value creation. Many institutions helping to develop changes to the environmental impact of industry, work hard in this area; from setting up groups in Brussels to help lobby to ‘change the rules’; or the education and development of tools for eco-design and ISO quality standards for instance.

Economic Industrial Policy

Governments and their economic agencies can influence strategic actions within industry through the coordination of different policies, to deliberately catalyse private-sector growth. These policies can help industry, mainly, in their access to the 'factors-of-production' and in productivity. How this is done, and where the starting line is drawn and projected from, is where varying economic schools of thought differ.

Development Strategy Toolbox

Much of the debate around industrial development tends to revolve around the theory of comparative advantage:

…if a government does not ‘distort’ trade, a country will specialise in the production and export of those goods for which it is best suited, given its endowments of land, labour and capital. A country has a comparative advantage in an industry if its relative performance in that industry (i.e. its performance as compared with other countries) is better than its relative performance in other industries. (Chang, 2004)  

In an attempt to simplify the debate, on the one side there are those that believe that a country should ‘stick’ to it’s comparative advantage, and those that believe that a country should ‘break some of the rules’, by considering it, but also pushing beyond it. The differences in theoretical viewpoint, have clear repercussions on policy, and in general, those that believe in comparative advantage, often prescribe different forms of A) General Industrial Policy and those that advise countries to go beyond their comparative advantage, often suggest different forms of B) Selective Industry Policy and/or a focus on Competitive Advantage.

It should be stated that the boundaries between ‘General’ and ‘Selective’ Industrial Policy are not always so clear. For example, any choice in a subsidy (i.e. subsidising high-tech industry or the steel industry), or construction of a particular form of infrastructure (i.e an airport or a bridge), or subsidies for different types of educational courses (i.e. electronic or chemical engineering) will inevitably favour some firms or industries over others. The question can be, by how much?; and how much is part of a larger strategy?

Which ever the theoretical viewpoint/starting point, Nobel laureate, Arthur Lewis (1995) underlined that:

…no country has made economic progress without positive stimulus from intelligent governments. 

Although he also warned of the “mischief done to economic life by governments”. And Justin Yifu Lin, Chief Economist and Senior Vice-President of the World Bank states that:

[There are] high risk of government failures, but fear of poor governance does not absolve us of responsibility for trying to design effective strategies for facilitating development. (Lin. (Lin and Chang 2009))

A) General Industrial Policies

These are those general or functional industrial policies concentrating on areas of the economy that can (potentially) benefit all industry equally, but is currently undersupplied by the market.

Subsidising programs. Encouraging first-mover disadvantage (as followers or imitators can learn something from the failures or successes of the first-mover, who did not have to bear the innovation costs). The important work of government here, is to keep it temporary, and based on clear targets, so not to be supporting businesses that can not (at the right time) ‘stand on their own two feet’, and do not become focused more on subsidy seeking, rather than innovating and creating value.

Indirect subsidising programs. Government can also support some of the critical soft and hard infrastructure agents, such as: higher education institutions developing new training/courses; capital goods companies developing new technologies for manufacture; new legal or normative guidelines; and knowledge transfer networks for sharing knowledge of successes and failures of different actors in the system, for example.

Introduce change and co-ordination programs. In many cases, individual firms cannot internalise all the costs involved in ‘industrial upgrading.’ Some potential costs include, human capital (new knowledge – education, and learning by doing and using), improved infrastructure, capital goods investments, increasingly complex technologies, and the potential need for co-ordination of many different firms to achieve the changes, for example.

Upgrading the industrial structure requires first upgrading the endowment structure [relative abundance of labour and skills, capital, and natural resources], or else the resulting industrial structure will become a drag on development. Therefore, the government’s role is to make sure that the economy is well launched on this endogenous [has an internal cause or origin] process of upgrading. (Lin. (Lin and Chang, 2009)).

These particular set of programs are less ‘neutral’ than the others.

EOI (Export-Orientated Industrialisation) is a trade and economic policy that can be said to have superseded ISI (see below), particularly from the 1970s, and increasing in the 1980s. It is a strategy aimed to accelerate industrial development of a nation-state, through the advocation of the exportation of goods, and particularly manufactured goods. Promoted by international financial institutions and mostly focusing on developing countries, the ‘policy toolbox’ can include changes to/or development of new, tariffs, quotas, health and administration regulations, and the subsidisation of overseas sales through lower company tax on export income and export subsidies for example. These are often linked to trade agreements with foreign countries, to make it easier/cheaper for domestic countries to access foreign markets, and in return, making it easier for the same foreign state producers to access the domestic markets (lowering import tariffs for example).

To put it bluntly, economic development is impossible without good export performance. Economic development requires importation of advanced technologies, in the form of either machines [capital goods] or technology licensing, which need to [be] paid for with foreign currencies. (Chang, 2009).

The state can also help exporters with international marketing, providing information on export markets, by sharing the risks (i.e. supporting with insurance for payment defaults, and loan guarantees) in trying to attain the potentially higher quality standards in the export markets, and indirectly, through financial and legal support for transversal services and inputs, such as R&D, export marketing, processing facilities, and transport facilities for example (Chang, 2009).

Upgrading refers to a strategy to move up the value chain or supply chain of a particular commodity, or set of commodities, into activities that generate higher added value, and as a form of possible ‘co-evolution’ of the entire value chain to produce better or more efficient products.

This has become, increasingly, a dominant strategy in developing and developed countries, as value chains have increasingly ‘vertically splintered’, particularly upstream; and a form of hierarchy has developed within many value chains (some more extreme than others) where the firms higher in the upstream value chain, often earn a greater percentage of the value added than those lower-down. In global markets, this splintering, according to Milberg et al. (2013), often tends to be high value added in developed countries, and low value added in developing countries; lower value added work often has low entry barriers, resulting in the potential for intense competition, very low profit margins, and intensive downward pressure on wages and labour conditions. This can become a trap for these firms/countries, as low profit margins, means low access to financial capital to reinvest in the activity to move up the value chain as this strategy aims to do. Arguable the strategy of specialisation in what you know in this case can be to specialise in being/remaining poor…

B) Selective Industrial Policy

Selective Industrial Policy refers to policies that favour the development of certain industries or sectors over others with a view to enhancing national economic welfare in the long run. (Chang, 1994: ch3)

In effect, selective-industrial policy is saying that the state can ‘beat the market’; where the state goes against market signals, or corrects “capital market failures”, by supporting certain industries or firms through specific actions.

ISI (Import Substitution Industrialisation) is a form of trade and economic program (once popular in the global South), which encourages the domestic production of foreign imports. Made popular in the 1960s and 1970s the ‘policy toolbox’ of options included the encouraged development of a vertically integrated infant industry (see below), using tariff protection, public investment, currency over-valuation, and government’s part or full ownership of domestic energy sector production and distribution. Although, not a clear government strategy anymore, it is still part of the discourse for some companies searching new product, innovations – particularly those that try to be fast-followers, or are following other competitive advantage strategies for example.

Infant Industry Protection. Is the protection of some new domestic industries from international competition. These industries can be protected by the state placing targeted tariffs on imports of competing foreign products; Chang (2004) recommends that they should be in the range of 5-10%, never exceeding 20%, and for no more than 5 to 8 years (until they are internationally competitive). Tariffs can also have a cascading structure designed to minimise charges on imports of both raw-materials, and non-competitive capital goods, general goods and components, as was the case in Japan during its growth in the 1970s according to Toner, P. et al (2009). Other policies can include restrictions on the export of raw materials used by these industries, directed quotas and certain types of subsidies, licenses, the management of credit and capital allocation, investment and prices, and “Temporary monopolies/patents/protection given to targeted activities in a certain geographical area.” Reinhart (2007).

A short-run cost of infant industry protection, is that the goods being imported from abroad will rise in cost, and leave all consumers of the particular goods with less disposable income. This can be amplified if the protected industry has a small domestic market, which does not have the benefits of scale to lower unit cost prices, therefore the goods become more expensive from both the local and the foreign producers. In this case the state should promote exports from the protected industries, which also has the benefits of exposing the firms to higher international quality standards, and helps the country with foreign currency earnings, enabling the purchase of new capital good technologies. To aid with scale, the state can also help co-ordinate merges and acquisitions. Chang (2004) underlines that “[t]he exact form of protection pursued should depend on country size and existing industrial capacities.” (Change, 2004) – therefore taking into account its ‘comparative advantage’…

The government can also provide support in terms of infrastructure, education, incentives for productivity investments by the firms, and compensation plans for those industries, individuals or social groups that may loose-out in the short-term. And, linked to potential losers, selective industry protection can also be used to reduce specific industrial activities, such as in Japan, where: 

Low tariffs were also set on industries deemed to have limited prospects for future development or, from the 1970s, on heavily polluting and energy-intensive industries which government sought to move offshore. (Toner, P. et al. 2009)

Export subsidies are no longer allowed by the WTO (World Trade Organisation) except for the poorest countries, but other forms of support can be made, such as tariff rebates on the inputs consumed in the production of goods for export for example. Indirect subsidies can include the creation of industrial parks (see below for more details), export-processing zones (EPZ) (again, see below for more details) to encourage specific Trans-national-Companies into the area, and regional development subsidies for example.

And finally, another strategy, this time from Korea was “[i]n addition, the government worked hard to make sure that Korean manufacturers could access intermediate inputs at world prices, for example through duty-drawback and exemption schemes and export-processing zones.” (Chang. Lin and Chang 2009)

Big Push Theory. This is similar to ‘Introduce changes and help co-ordinate programs’ (see above), except, instead of being general, policies are selective – targeted to maximise backward and forward linkages along the supply and value chains. Beyond those previously mentioned, the state can also implement complementary indicative investment planning, where the government clearly communicates where it is willing to invest, this then can also encourage private investors to enter directly, and indirectly into complimentary areas, and then firms have the choice to transition their activities towards the government goal, and benefit from these credit and/or subsidy opportunities. The government, with its unique view across the entire state, can also help “[identify] the interdependence of investment decisions and sequencing the investments… the state can ensure that risk is reduced as a barrier to investment and that increasing returns are exploited.” (Toner, P. et al. 2009). The state can also help coordinate and regulate industrial investment, and provide R&D and training support, both specifically and in general.

Chang (2004) states that selective policies need to have clear accountability, performance review, and oversight, which can be linked to rewards and penalties, to increase chances of success. Evidently, selective policies demand a capable and effective government, and here Chang (2009) counter’s well the common dismissal of the government’s role in industrial development:

…we do not need the assumption that government officials are omniscient or even that they are cleverer than capitalists in order to advocate industrial policy. The point is that many (although not all) of the “superior” decisions made by the state were made not because the government officials were omniscient or cleverer than businessmen but because they could look at things from a national and long-term point of view, rather than a sectional, short-term point of view. 

However, Chang (2009) also highlights that governments may not want to state too transparently a selective strategy (even if it has one), as it will highlight those who will benefit, and therefore potentially, those who will not; breaking down a position that a government might want to maintain – one of impartiality.

Parks and Zones

This includes two, sometimes linked, industrial development strategies.

Industrial Parks (IE). Also known as industrial estates or trading estates, are zones that have been planned for the development of industry. The parks can reduce hard infrastructure costs, borne by the individual businesses, such as internet and high-power electricity supply for example. Site 'symbiosis' can be possible, in the case that some business are customers for other businesses in the park - reducing logistics costs for example. And industrial parks can be easier to manage environmental controls of one large site, rather than many individual industries spread across a large area.

Special Economic zones (SEZ). Also includes (FTZ), EPZ (Export Processing Zones), FZ/FEZ or BLP for example. Within these designated zones, typical incentives (Milberg, 2013) can include exemption or reduction in some of the following: import duties on raw materials and/or intermediate goods, export taxes, local and property taxes, VAT on domestic purchases, provision of streamlined administrative services - particularly for imports and exports, and enhanced hard infrastructure for example. Soft infrastructure benefits can include (controversially) reduced labour rights and standards, and different regulations for leasing or purchasing land for example. SEZs can apply to a single factory, a “fenced-in” geographic area, or an entire province.

SEZs are generally created to attract foreign firms in the case that certain local industries are not able to export (to be internationally competitive), and so to generate foreign exchange. For some governments intent to promote exports and create jobs, and foreign firms such as TNCs (Trans-National Companies) looking for financially viable production conditions, SEZs have seemed to reconcile these two objectives. For SEZ’s to contribute to sustained domestic economic development, they need linkages with the rest of the economy - which by their very nature is not a given, and so focus must be given.

Action groups

Within the soft infrastructure, and directly acting and influencing the way in which the value chain forms and develops are ‘Action Groups.’ This includes groups, or a network of groups and individuals, involved and tasked in the activity of change on some part of the system as a whole. It is important to highlight this group specifically from the other institutions and groups (although inter-dependent), as this group is often made up of a mix of different types of stake-holders from different parts of the ecosystem. The responsible(s) of these groups are often tasked with the facilitation of the actors themselves: structuring the meetings, sharing knowledge, being a broker-of-trust, developing the network of stakeholders involved; facilitating the development of research and strategy; and implementing directly or indirectly, in the system - either as policy proposal, or as a real project within a company for example.

Michael Porter popularised different sources of 'competitive advantage,’ and one of those being 'industrial clusters' (see the 'soft infrastructure' tab). Clusters are an important form of action group. Clusters are "an alternative way of organizing the value chain... A cluster of independent and informally linked companies and institutions represents a robust organisational form that offers advantages in efficiency, effectiveness, and flexibility.” (Porter, 1998). Porter (1998) also uses an example based on a wood product cluster, which showed that "[s]ubstantial improvement in productivity was possible, but only if several parts of the cluster changed simultaneously." Highlighting that clusters can also be useful tools in facilitating changes across an entire value chain level.

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Value Chains

July, 2015 Value Chains Written by Tom Snow The value chain concept was first described and popularised by Michael Porter (1985). A value chain is “the sequence of productive (i.e., value-added) activities leading to and supporting end use” (Sturgeon 2001); in other words, each actor in the sequence adds value, often in it’s own market, and […]

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