The Governance of the Global Factory

Recent years have witnessed major changes in the global location of economic activity, with the emerging economies assuming greater shares relative to the advanced economies. These developments have led many authors to refer to the idea of the global factory. For example, Gereffi (1989) used the term global factory to represent “the emergence of a global manufacturing system in which production capacity is dispersed to an unprecedented number of developing as well as industrialized countries”. In contrast, the Grunwald & Flamm (1985) conception of the global factory focused on the growth of foreign assembly facilities, drawing upon earlier theoretical ideas by Raymond Vernon (1966, 1979) on the product life cycle. A third possibility is that this offshoring of activities had been accompanied by an outsourcing (externalization) of some of the value chain activities to independent suppliers (Buckley & Ghauri, 2004). Such externalization involved not only a physical ‘slicing-up’ of the value chain, but also a change in its ownership.

Each of these three models of the global factory envisages a greater global dispersion of economic activity, but each makes different assumptions about who maintains control over these dispersed activities – or, to put it another way, each makes different assumptions about the governance of the global factory. These control/governance issues have profound implications for the capture of the profits/rents earned in global value chains (GVCs), and hence for the global distribution of income. On the one hand, if the shifts in the location of activity reflect the rise in the global importance of firms owned and controlled in emerging/developing economies, then it is likely that these economies will grow in absolute GDP terms, also relative to other economies, and in terms of living standards (GDP per capita). On the other hand, if the shifts in the location of activity reflect offshoring and/or outsourcing initiatives by firms from the advanced economies, then both the absolute and relative impacts upon GDP in the host economies will be smaller and there will be smaller rises in living standards.

The key questions addressed in this presentation are thus which of these three models of the global factory are most important in practice, and who has benefited (and, in particular who has benefited most) from the emergence of the global factory? We consider how the governance of the global factory affects the appropriation of the value-added within spatially-dispersed GVCs, and hence the distribution of income within the world income. Such income distribution issues are clearly important in their own right, but they are also a potential trigger for policy initiatives undertaken by governments eager to secure greater value capture from GVC participation and which, in turn, impact upon MNE strategies (UNCTAD, 2013).