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CanadExport is the official source of news and advice on trade and investment opportunities around the world, for Canadian entrepreneurs who want to compete, partner and prosper in the global marketplace.						CanadExport Vol. 25, No. 2 (PDF)

Trade News

February 19, 2007

Exporters should think about the global value chain

With so many headlines these days devoted to companies going offshore or outsourcing their operations, CanadExport takes a look at these modern business practices and the concept of the global value chain.

To some the mere mention of offshoring or outsourcing sounds like a losing proposition. But the changing face of international business means that these are realities exporters need to face.

While the terms are often used interchangeably, they actually have different meanings.

In outsourcing, a firm shuts down a segment of its production process and instead obtains the desired input from another company within the same country. Offshoring refers to the same shift of production, but in this case to a company outside of the country.

Offshoring can also be either done by an independent company located abroad or by a company abroad owned by the original firm.

While offshoring is a useful concept, it somewhat distorts the reality of international trade because it overemphasizes the aspect of loss—a common example, in the popular press, is the movement of jobs overseas.

A broader perspective, however, sees offshoring as part of the global value chain for a particular industry or sector, a chain that includes the movement of work, investment and knowledge both into and out of Canada.

Why have global value chains evolved?

While libraries have been written on this subject, a handful of influences are at the root of it. Companies have always identified parts of their operations as either high-productivity and capital-intensive, or low-productivity and labour-intensive.

Recently, the removal of trade and investment barriers, swift advances in information and communications technology, and lower transportation costs have allowed low-productivity, labour-intensive operations to be shifted to places where labour is cheaper.

This evolution has made it much easier for companies to shift segments of their business to different parts of the world, that is, to different points on the value chain. As a result, large volumes of products and services that once stayed in their countries of origin are now being consumed abroad, and world trade statistics back this up. While global gross domestic product grew by 246% from 1982 to 2004, global exports grew by 413% during the same period.

So what’s going where?

These shifts have happened in almost every service and industrial sector, and there’s no sign of a slowdown. While Canada’s auto manufacturers have traditionally obtained vehicle components from North American partners, for example, they are now establishing cheaper procurement chains elsewhere in the world.

General Motors currently buys $120 million worth of auto parts from India every year, and intends to raise that to $1 billion annually by 2015.

The telecommunications sector also demonstrates how companies are distributing their business along the global value chains.

Nortel, Canada’s biggest telecom firm, no longer manufactures its own hardware. Instead, it has focussed on its core value-added operations, primarily research, design and development, and has sold its manufacturing operations to Flextronics, a multinational based in Singapore.

Recently, the offshoring of Canadian information and communications technology services has also attracted considerable press. While the actual volume of these services that is moving abroad is uncertain, the key point to be drawn here is that work may not be leaving Canada, but rather that knowledge-intensive services like ICT have become much more mobile than they used to be.

The list goes on. Canadian apparel companies, furniture businesses and textile manufacturers are just a few of the other sectors adjusting to the new realities of the global value chain.

Challenges of the chain

Canada’s businesses, however, aren’t moving as quickly in this direction as are firms in other countries, and experts say failing to catch up could threaten our competitiveness, standard of living, social programs and productivity.

However, it is also important to note that shifting production to a foreign location isn’t a magic elixir for success. A low-wage country, for instance, isn’t necessarily a low-cost place to manufacture a product or provide a service. The decision to move operation can’t be based solely on the presence of cheap labour.

Due diligence requires that a company also consider a host of other factors, such as the business and legal environment, trade barriers and local regulatory issues the quality of the country’s infrastructure and shipping costs. Other things to bear in mind are political risks and buyer financing risks, corruption levels, tax issues, cultural differences and issues of contractor performance.

For a Canadian entrepreneur, any one of these factors can turn the expected net gain of an offshoring initiative into a net loss.

Linking up with opportunities

Shifting production or services along the value chain can, if managed properly, help a company raise share values, improve service and product quality, enhance customer satisfaction, expand market share and increase profits.

Moreover, not all the opportunities are abroad since Canada itself is an offshoring location for many foreign companies.

Multinationals are often happy to move high-value activities to a country with the right economic, social and policy mixes, and Canada qualifies as such a location. We have a first-class education system, a highly qualified workforce, excellent infrastructure, very low political risks and a known reputation for market transparency.

Ultimately, no one disputes that trade is good both for the world’s countries and for the world economy as a whole. Offshoring, with its focus on using the global value chain to locate production where it can be done most efficiently and effectively, can contribute a great deal to Canada and to the well-being and prosperity of all Canadians.

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