Wednesday 24 September 2014

Asian firms and the restructuring of global value chains

By Shamel Azmeh and Khalid Nadvi

image by hyena reality/
In their article on Asian firms and the restructuring of global value chains published in International Business Review, Shamel Azmeh and Khalid Nadvi analyse the roles of transnational Asian garment firms in shaping the global apparel industry. This post summarises some of their findings.

Global clothing brands such as Levi's, H&M, Marks & Spencer or JC Penney are well known players in the apparel industry. They have been shown to coordinate complex global value chains with supplier firms located in various countries. Less known are the strategic and pivotal roles that Asian transnational garment firms take on as first-tier suppliers to these brands. These new players, though largely unknown to most people, are crucial because they are increasingly able to reshape geographies and organizational processes within global value chains.

Who are these 'strategic and pivotal' Asian firms and how do they function? 
Many of these first-tier suppliers come from Greater China, e.g. Hong Kong or Taiwan, and South Asia. While their headquarters are based in these home countries, they have evolved from simple producers supplying to Western brands into truly transnational companies, with subsidiaries and suppliers around the globe, including in Asia, Africa and Central America. Asian transnational garment firms now take on more and more functions in the apparel industry, such as logistics or research and design for the brands that buy from them. For example, some Asian firms use forecasting software that is directly fed with data on current sales in the stores of global brands, which allows them to predict demand and respond quickly with changes in production and delivery. While some of them are developing their own brands, many do not see this as a priority for their business.

Can they actually change the structure of global value chains in the apparel industry?
These Asian transnational garment firms have highly developed organisational capacities, which allow them to coordinate flows of products, but also flows of labour and capital, across various locations. In doing so, they not only need to engage with different cultural, political and regulatory contexts, but also monitor changes in trade rules or regulations that may affect garment production in a particular location. In fact, they are extremely flexible in reacting to such changes. They tend to avoid being too closely embedded in any particular country context, ready to leave when preferential trade rules are discontinued or when labour costs rise. This contributes to a very flexible model of globalisation, and the Asian 'strategic and pivotal' firms are the key players driving the decisions to change production locations.

The example of Jordan
Jordan illustrates these dynamics and the crucial roles of Asian firms. Without much history of a textile and apparel industry, and with high labour costs, Jordan did not appear to be a likely location for FDI in the sector in the early 1990s. However, in 1997 Jordan and the United States signed a preferential trade agreement, giving firms producing in a 'Qualifying Industrial Zone'(QIZ) in Jordan duty and quota free access to the US market. A condition was the use a minimum share of inputs from Israel, in an effort to promote the Middle East peace process. In addition to the preferential trade rules, a special labour regime was implemented in these zones allowing firms to bring migrant workers to their factories and also excluding these zones from the legal minimum wage in Jordan in recent years.

These two policies acted as a catalyst, attracting Asian multinational garment firms. Investment from these firms was the key driver for Jordan to become a garment exporting country. Within a few years, these Asian firms set up an almost entirely new industry in Jordan and integrated the country into the global value chain for apparel. As a result, exports to the US rose from USD 3 million in 1997 to USD 1.25 billion in 2006.

However, as described above, Asian firms did not embed deeply into the Jordanian economy. Flexible rules of origin attached to the preferential trade rules made the arrangement attractive for these firms, because they could use their existing supplier networks in third countries to source inputs such as yarn. In addition, the flexible labour regime allowed firms to bring in migrant workers from Asia, which make up 75-80% of workers in the garment factories in Jordan. Fitting with the trend of global locational flexibility, interviews with firms indicate that they are ready to go elsewhere, if either the trade preferences or the labour regulations should change.

For more details, please refer to: 
Azmeh, S. & Nadvi, K.(2014.) Asian firms and the restructuring of global value chainsInternational Business Review, 23(4), 708-717.

Friday 5 September 2014

Low carbon standards made in China?

By Clara Brandi
image by domdeen/
In a recent article on Low-Carbon Standards and Labels in China, published in Oxford Development Studies, Clara Brandi asks how Chinese actors respond to the proliferation of environmental sustainability standards and what this will mean for global sustainability. This post summarises some of the findings.

Environmental sustainability standards are increasingly used by multinational companies, and could be an important tool to address global challenges such as climate change. An example are low carbon standards and labels that measure the 'carbon footprint' of a product. In the UK, Tesco was using carbon labels on 500 of its products in 2012, informing customers about the amount of greenhouse gas emissions caused throughout different stages of producing, transporting and storing the product on its way to the final consumer.

How will actors in Rising Power countries, such as China, engage with these new standards? Considering the share of emerging economies in the global economy and in global carbon emissions, this question is crucial to understand whether low carbon standards will actually make a difference on climate change. China is a particularly interesting case, as a major emitter of greenhouse gases, as home to emerging multinationals, and as 'factory of the world' supplying Western multinationals. Emerging Chinese multinationals face pressures to comply with low carbon standards in countries abroad and from financial markets. Suppliers to Western multinationals are under pressure to measure their carbon emissions so that these lead firms are able to calculate the full carbon footprint of a product throughout the supply chain.

Basically, as proposed by Simon Zadek and his colleagues, Chinese firms and the Chinese government have four options how to respond to these international sustainability standards: a) ignore them (not do anything, as long as they do not affect the competitiveness of Chinese firms), b) mitigate them (try to minimize the harm caused to the competitiveness of Chinese firms), c) promote an existing standard (if this standard can be shaped in a way to give Chinese firms a competitive advantage) or d) leverage a new standard (if this would create a competitive advantage for Chinese firms).

Ignoring or minimizing the impact of carbon standards and labels will be difficult: So far, relatively few Chinese companies use carbon standards, but requirements to move to low carbon production processes filter directly down the supply chain as international buyers become more environmentally conscious. So doing nothing may hurt the international competitiveness of Chinese firms, which tend to have relatively high carbon emissions at present.

In terms of promoting existing standards, large Chinese companies have started reporting on their greenhouse gas emissions (70% out of the largest 100 listed companies do so). Examples of companies actively engaging with their carbon footprints are China Mobile signing a Green Action Plan to reduce emissions in its supplier firms, and Lenovo setting reduction targets for emissions in its supply chain. Nevertheless, it is too early to tell if this signals a general move towards adoption of international carbon standards in China. In particular, firms producing for the domestic market may prefer to use a new low-carbon product labelling scheme that is being developed by the Chinese Ministry of Environmental Protection, which will be cheaper than paying for certification under international labels.

Leveraging new low carbon standards appears the most promising option for Chinese actors. These could be standards developed in China, or standards that Chinese actors have shaped through their engagement in international standard-setting processes. China has been developing its own sustainability standards in a range of sectors, and is currently preparing a low-carbon product labelling scheme. The first voluntary low carbon labelling standard was released by the Ministry of Environmental Protection in 2010, and it differs from international standards by certifying a product as 'low carbon' if it meets certain emissions criteria, rather than indicating its quantitative carbon footprint. Recently, the first products have been certified. Chinese actors have also been actively involved in design of the ISO 26000 social responsibility guidelines, in contrast to their earlier reluctance to engage in international standard-setting fora. This shows a trend towards becoming standard-setter rather than standard-taker internationally.

Overall, dynamics around low carbon labels in China show that Rising Powers do not necessarily cause a race to the bottom on global sustainability standards. Rather, Chinese firms engage with international low carbon standards more widely than is often assumed. Chinese actors are also creating new domestic standards around carbon labelling, and are becoming increasingly active in international standard-setting processes. So low carbon standards are likely to be changed by Rising Powers such as China, but do not seem to become any less important in the future.

For more details, please refer to:
Brandi, C. (2014) Low-Carbon Standards and Labels in China, Oxford Development Studies, 42(2), pp. 172-189.