Globalisation and The Emergence of EICC

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Introduction

A diagnostic characteristic of contemporary globalization is that the component parts of the world economy are increasingly interconnected in qualitatively different ways from the past. Another way of saying this is that the world economy consists of tangled webs of production circuits and networks that cut through, and across, all geographical scales, including the bounded territory of the state.

It is too simple to just define the global production networks, that involving a process of production, distribution and consumption of commodities, goods and services, as technical-economic mechanisms (Coe, Dicken and Hess, 2008). More than this oversimplified conceptual framework, Levy (2008) argues GPN as ‘simultaneously economic and political phenomena . . . organizational fields in which actors struggle over the construction of economic relationships, governance structures, institutional rules and norms, and discursive frames . . . GPNs thus exist within the ‘‘transnational space’’ that is constituted and structured by transnational elites, institutions, and ideologies’. In Levy’s theory, we can find out that more than a economic process of productions, GPNs is also a ‘social’ and ‘cultural’ phenomena in which the geographically differentiated political and social cultural circumstance are also shaped (Coe, Dicken and Hess, 2008).

Considering the consumer electronic industry in particular, what we can see now is that numerous branded firms has evolved as the leading force, such as Apple, Microsoft and HP. Meanwhile, amount of emerging economies became to participate into this industry more and more, therefore turning GPNs into a more complex concept in current globalisation. Since then, there are increasing considerations and discussion related to governance of GPNs, trying to uncovering the opportunities and threat for both global lead firms and contract manufacturers or local suppliers. This paper provides a conceptual framework for such concerns and gives practical evidence from the increasing GPNs within consumer electronic industry. Theoretical frameworks include the discussion about governance of global value chain and governance of global production networks with the emergence of Electronic Industry Code of Conduct (EICC). Academic concepts of industrial upgrading and ‘networks of networks’ with discussion about Asian suppliers’ role that plays in current GPNs are also given.

Emergence of EICC

The EICC, which contains governance over labour, environment health and safety, was created by a group of branded electronic firms and large powerful contract manufactures (CMs) in 2004, after the initiatives in sectors such as the apparel, agriculture, forestry and chemical industries (Raj-Reichert, 2011). It is aimed to integrate differential standards required from massive consumers and then make a common code for suppliers in current GPNs. There is a target that such constrains for suppliers’ entry can be reduced and lower-tier suppliers in the electronic industry in global supply chain (GSC) can be managed or governed uniformly in world wide.

In order to understand how this EICC are implemented by global lead firms to reach their supply chain in GPNs, the following discussion will emphasize on explaining the governance framework for global value chain (GVC) and GPN, which are inter-related.

GVC Governance Framework in Electronic Industry

Looking into Gereffi, Humphrey and Sturgeon’s work on GVC concept (2005), the GVC was defined as ‘inter-firm coordination of internationally fragmented industrial activities to bring a product to market’. Discussion about the branded firms’ actions in governance or coordination in relation to suppliers can be founded in a great amount of literatures. The most important one is the GVC typology from Gereffi et al. (2005), describing the lead firms’ coordinated activities over suppliers as ‘capative’, relational’ or ‘modular’. There are three main aspects determining the coordination forms – the complexity of knowledge transactions, capability to codify massive information and suppliers’ ability to meet branded firms’ requirement (Raj-Reichert, 2011). The relationships between these three aspects and governance forms can be summarised as bellow. The high ability to codify the transactional knowledge is required to achieve the captive governance form. Besides, suppliers’ ability to meet lead firms requirement again is under control and supervised by the branded firms. To gain the relational governance, lead firms have to face the challenge of high complexity within product specialization and own thus codifying that complexity is difficult (Gereffi et al, 2005). Since then we can conclude that the power asymmetry between the global lead firms and supplier can be balance by the high-tier suppliers within this GVC typology of governance. However, because it is capable to codify the complex transactional knowledge to obtain modular governance form, there is still power asymmetry between lead firms and low-tier suppliers.

According to the considerable research on the electronics industry based on the GVC framework, the electronics industry involves a high degree of manufacturing outsourcing by branded firms (Raj-Reichert, 2011). The suppliers who have provided a significant amount of the outsourced production within the electronic industry’s GVC was described as contract manufacturers (CMs). They have broad and generic capability to mainly conduct ‘highly sophisticated production activities, post-production services and some design work for their branded customers’ (Raj-Reichert, 2011). Rather than following the instructions from their branded customers, CMs have their own manufacturing processes, purchase their own supplies and have autonomous financing mechanisms.

Industrial Upgrading for Contract Manufacturing (with Case of East Asia)

Firms in developing countries, that have been deeply integrating tin to global production networks, are under pressure of increasing competition in global markets. It requires them to increase the skill content of their activities and enter into the markets that have entry barriers in order to be insulated within the GPNs (Humphrey and Schmitz, 2002). These kind of improving activities have been called upgrading.

Moreover, Humphrey and Schmitz (2002) has pointed out four main types of industrial upgrading – processing upgrading, product upgrading, functional upgrading and inter-sectoral upgrading. Processing upgrading is talking about how contract manufacturing can transform inputs into outputs more efficiently by ‘reorganizing the production system or introducing superior technology’. Product upgrading refers to CMs’ movement into more sophisticated product line for the increased unit values. Functional upgrading involves the discovering of new functions for increasing overall skill content of activities. The last type is relative to the movement of firms into new production sectors based on the existing technology skills and information (Humphrey and Schimz, 2002).

According to Hirschman (1958), in order to gain the long-term development, there is need for Asian electronic industries’ emphasis on the improvements in specialization, productivity and linkages. In addition, those improvements has been found being based on above four essential types of industrial upgrading (Ernst, 2002).

There is another important consideration for the process of achieving competitiveness through upgrading – local governance, which has been seen as a source of competitiveness (Humphrey and Schimz, 2002). The most well-known practical application of local governance are regional science and innovation studies (Porter, 1998). Brusco (1990) introduced a new model of local or regional industrial policy, which is resulted from the ‘Third Italy’ and other developing European experiences during the late 1980s and early 1990s. This model includes four main elements and they are ‘emphasis on delegation of functions to a diverse range of governmental and non-governmental institutions, operations through institutions closed to the enterprise, extensions of consideration with entrepreneurship from the private to the public sector, and stresses on self-help through business associations and producer consortia’ (Brusco, 1990).

Networks of Networks

Looking into the Asian suppliers in consumer electronic industries, the most serious competitive threat is the rise of American model of industry – contract manufacturing, which was resulted from the long-term trend toward vertical specialization in the electronic industry (Lakenan, Boyd and Frey, 2001). Rather than highlighting the Asian suppliers’ threshold participation in GPNs due to the requirements from powerful lead firms in developed countries, Ernst (2002) has stressed how Asian suppliers can exploit linkage with the American model of CMs for their upgrading purpose. In another words, since there has been an increasingly complex and multi-tier ‘networks of networks’ created by CMs, Ernst (2002) decided to explore the potential upgrading opportunities for Asian suppliers.

It must be noticed that Asian suppliers (most typical CMs in developing countries) have dramatically participate in GPNs as global CMs more than just the US industrial model of CM. Because Asian electronic firms have accumulated experience, such as the Taiwan’s Acer group who has played dual roles as high-tier and low-tier suppliers between flagship and just local suppliers (Ernst, 2002). In addition, they are now seeking new opportunities by promoting changes in policies and support from domestic institutions. There are too oversimplifying to name them as US-style CM, since there three main limitation of US industrial model of CMs (Ernst, 2002). The first one is the original equipment manufacturing has been suggested as the only driver forcing the GPNs, however when considering the emerging economies in current globalisation, it is more complex than the one with single financial consideration (Coe, Dicken and Hess, 2008). The second one is such literature that says CMs having limited share of contract manufacturing in worldwide electronic production (Lakenan, Boyd and Frey, 2001). The last one is that the American style CM model did not expose the difference role that Asian CMs playing in the US and Europe (Ernst, 2002).

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