central asian regional cooperation and global value chains (george abonyi, 2007)

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Glbal value chains are reshaping

internatinal business and ffersignificant pprtunities fr CAREC

ecnmies t expand trade and

supprt sustainable grwth by de-

velping nn-traditinal exprts.1

Invlvement in glbal value chains

culd prvide access t new mar-

kets as well as the technlgical,

managerial, and market-related

knw hw f leading internatinal

businesses. Hwever t enter these

value chains and benefit frm these

pprtunities CAREC enterprises

must meet a range f demanding

requirements. This pses new chal-

lenges t gvernments and firms,

bth large and small; and wuld re-

define the framewrk fr business-

gvernment relatins. This CAREC

Notes intrduces the glbal value

chain cncept and utlines sme f

the pprtunities and implicatins

fr CAREC enterprises.

Reaching International Markets A key challenge facing CAREC

ecnmies is hw t link dmestic

enterprises mre effectively t inter-

natinal markets in rder t achieve

sustainable grwth and develp-

ment. This is particularly imprtant

given the cntinuing dminance f a

Accessing Markets, Technlgy, Experience

Role of Global Value Chains

small number f primary cmmdi-

ties in CAREC exprts; limited tradein manufactures; the cncentratin

f trade in a small number f mstly

larger CAREC ecnmies; limited

success in attracting freign direct

investment utside f energy and

natural resurce sectrs; and the

unrealized ptential fr trade, par-

ticularly with neighbring Eurpe

and a rapidly grwing East Asia.2

Imprvements in transprt sys-

tems and in the trade envirnment

in CAREC ecnmies are necessary,

but will nt be sufficient t expand

and diversify linkages f CAREC

enterprises t internatinal markets.

Such linkages are als cnditined

by the cmpetitive structure f

glbal industries. The ability f

CAREC enterprises t expand ex-

prts f fresh fruit and vegetables

t key markets in Eurpe, Nrth

America, r Asia, fr example, will

depend nt nly n vercming

physical and nn-physical barri-

ers t trade within and beynd

the CAREC ecnmies. It als will

depend n the ability f CAREC en-

terprises t be cmpetitive suppliers

t glbal retailers, such as grcery

stre chains Carrefur and Tesc

that increasingly cntrl access t

NoTESwww.adb.org/carec

November 2007 Issue No. 1

About the AuthorGeorge Abonyi is a Senior Advisorto the CAREC Program; and Visiting

Professor, Department of Public Administration and Executive Education Programme, Maxwell School, SyracuseUniversity.



CAREC NOTES November 007 Issue No. 1

frming the glbal ecnmy with

imprtant implicatins fr the cm-

petitiveness f firms and the prs-

perity f natins. The prprtin

f gds and services cnceived,

prduced, and cnsumed entirely

within ne cuntry—r within nefirm—is rapidly shrinking. Techn-

lgical and managerial innvatins

and the remval f cnstraints n

the crss-brder flw f resurces,

gds, services, and capital have led

t the emergence f glbal value

chains (Figure 1). Glbal value

chains and assciated prductin

netwrks (Bx 1) invlve the frag-

mentatin, dispersal, crdinatin,

and re-integratin f prductin-

related activities amng firms ingegraphically dispersed lcatins

(Bx 2). They are emerging as the

rganizing framewrk fr prduc-

tin, investment, and trade in an

expanding range f prduct grups

such as garments, agr-industry,

furniture, autmbiles/aut-parts,

Textile companies Apparel manufacturers All retail outlets Retail outlets

North America

NaturalFibers

SyntheticFiber

Raw material networks Component networks Production networks Export networks Marketing networks

Cotton,wool, silk,etc.

Oil, naturalgas, etc.

Yarn (spinning)

Fabric(weaving,

knitting,finishing)

PetrochemicalsSyntheticfibers

U.S. garment factories(designing, cutting,sewing, buttonholing,ironing)

Domestic andMexican/Caribbeanbasic subcontractors

Asian garmentcontractors

Domestic and overseassubcontactors

Brand-namedapparelcompanies

Overseasbuyingoffices

Tradingcompanies

Departmentstores

Massmerchandisechains

Discountchains

Specialtystores

Off-price, factoryoutlet, mail order,others

Asia

internatinal markets within the

framewrk f glbal value chains.

Integrating int the internatinal

trading system increasingly means

participatin in glbal value chains.3

This pses imprtant pprtuni-

ties and challenges t the CARECecnmies, and t reginal cp-

eratin. Glbal value chains pr-

vide pprtunities fr enterprises,

including small- and medium-scale

enterprises, t build new cm-

petitive capabilities and enter int

large-scale exprts by fcusing n

a few selected activities and ut-

puts. But t d s, enterprises that

supply glbal value chains must

meet a multiplicity f demanding

requirements related t quality,quantity, price, timely delivery, and

flexibility.

The Transformation of International BusinessThe rerganizatin and relcatin

f internatinal business is trans-

Figure 1. The Apparel Global Value Chain

Source: Figure 1, Gereffi, G. and o. Memedvic, The Global Apparel Value Chain, UNIDo, Vienna 2003.



Issue No.1 November 007 CAREC NOTES

cnsumer electrnics, telecmmuni-

catins, IT, as well as business and

health services.4

Althugh many large multi-

natinal enterprises cntinue t

prvide a variety f prducts and

services n glbal markets, they increasingly purchase inputs and

cmpnents frm smaller firms in

widely dispersed lcatins that serve

particular industry niches. Glbal

trade increasingly invlves exprts

f parts, cmpnents, subassemblies,

and services within the framewrk

f glbal value chains and assci-

ated prductin netwrks. This has

resulted in grwing task-related spe-

cializatin by firms in the prductin

f gds and services, and the cr-

respnding acceleratin f grwthin intra-industry and intra-prduct

trade, as cmpared with traditinal

trade in final prducts.5

The transfrmatin f inter-

natinal business thrugh the

emergence f glbal value chains

Box 1: Key characteristics of Value Chains, Production Networks

A value chain describes the organization o production o particular products or services such as garments, automobiles,

or computers. It reers to the ull range o value-added activities required to bring a product rom its conception, through

design, sourcing raw materials and intermediate inputs, production, marketing, distribution and service support to nal

consumers. Value chains become ‘global’ when their component activities are geographically dispersed across borders

to dierent countries.

A production network represents the set o linkages within an enterprise or among a group o rms in particular value

chains or producing specic products such as a particular type o computer, mobile phone, jeans, or car. This can take the

orm o production relationships among subsidiaries or aliates o a multinational enterprise. Alternatively and increas-

ingly they involve outsourcing and subcontracting to independent rms. As a result, competition within the ramework

o global value chains is increasingly between networks o enterprises, rather than only individual rms.

Key characteristics o global value chains and associated production networks:

• Governance: Global value chains generally involve a key role or lead rms, oten global brands such as Levi in gar-

ments, Carreour in ood retailing, Ford in automobiles, or Ericsson in telecommunications. These lead rms provide

product, market, and technical inormation with the expectation that lower-tier suppliers will maintain and improve

perormance to meet global competitive standards. Lower-tier suppliers, in turn, invest in equipment, skills, and

specialization necessary or producing within the ramework o a production network, with the expectation that lead

rms will continue to use their outputs—and over time, provide opportunity or upgrading.

• Standards: Global markets are governed by an increasing variety o stringent product and process standards that

suppliers must meet. Examples o the diversity o standards include general international standards such as ISO 9000

(quality) and ISO 14000 (environment); industry-specic standards, such as Hazard Analysis and Critical Control Point

(HACCP) in the ood industry; region-specic standards, such as QS 9000 (quality in autos originating in the United

States); and rm-specic standards to ensure consistency, reliability, and dierentiation o products.

• Global suppliers: Global brands and retailers are increasingly reliant on a small number o “rst-tier” suppliers with

global reach such as Li & Fung or Levi in garments, Flextronics or Ericsson in electronics and telecommunications, and

Visteon or Ford in auto parts. These rst-tier suppliers play a critical role in determining and organizing participationby lower tier suppliers in value chains. They are increasingly driving global investment, production, and trade patterns

with signicant infuence on the export competitiveness o nations and the perormance o local enterprises.

• Upgrading: Growing intensity o global competition, shortening o product lie cycles, demanding buyers, and

alling barriers to entry in many industries are requiring continuous innovation and increased eciency throughout

the value chain. Such upgrading by enterprises within value chains can take the orm o increasing eciencies in the

manuacturing process; improving existing products or developing new products; “adding value” by moving upstream

rom manuacturing to product design; or using existing capabilities to move to a more attractive value chain.



4 CAREC NOTES November 007 Issue No. 1

creates pprtunities fr new en-

trants in the internatinal ecnmy.

As prductin systems becme

decentralized, fragmented, and

mre specialized, new market p-

prtunities emerge fr all types f

firms, including small- and medium-scale enterprises, t enter glbal

markets, and upgrade int higher

value exprt activities thrugh spe-

cializatin. Many firms, particularly

smaller enterprises, are finding that

success and “creating value” may be

achieved thrugh specializatin in

a limited set f activities, utputs,

and market niches. Fr example,

even simple cmpnents, such

as hubcaps, can be prduced fr

reginal and glbal markets by asupplier in Tyta’s r Frd’s pr-

ductin netwrk. Specialized niche

markets, such as rganic fruits and

vegetables, can be reginal and

even glbal in nature if the buyers

are glbal retailers such as Car-

refur r Tesc. Hwever, taking

advantage f such pprtunities

requires that enterprises be capable

f delivering specified prducts, in

the right quantity, with the required

quality, at the right time, and meet

an expanding range f increasingly

stringent glbal standards n, fr

example, labr cnditins and the

envirnment. The payffs frm par-

ticipating in glbal value chains canbe high, but s are the requirements

fr entry (Bx 3).

Implications for CARECEconomiesGlbal value chains ffer significant

pprtunities fr CAREC ecnmies

t expand nn-traditinal exprts.

They allw qualified CAREC en-

terprises t cncentrate n specific

cmpnents r activities in particular

value chains in which they enjy cmpetitive advantages, due fr

example t lw-cst, relatively

skilled labr. They can als prvide

the fundatins fr an effective

strategy fr the prcessing f raw

materials where CAREC ecnmies

are already cmpetitive. This culd

include prcessing lcal cttn int

textile yarn, fabrics, r clthing,

within the framewrk f the glbal

Global value chains oer

signifcant opportunities

or CAREC economies to

expand non-traditional

exports

Box 2. Producing Levi Jeans in the Apparel GlobalValue Chain

To produce a line o garments such as jeans, a global brand such as Levi

might purchase South Korean yarn; have it woven and dyed in Taiwan by a

subsidiary; send the abric to be cut in Bangladesh by a subcontractor; ship

the pieces or nal assembly to aliates in Cambodia and Thailand, where the

garments would be matched with Japanese zippers, and deliver the nished

product to geographically dispersed aliated retailers in North America and

Europe. In practice, global brands such as Levi increasingly do not manage

the production process o jeans themselves. These activities are likely to be

coordinated or Levi by a rst-tier global supplier, such as Hong Kong-basedLi & Fung. This particular set o rm-specic linkages, within the broader

ramework o the global apparel value chain constitutes a particular—in this

case Levi’s—international production network or jeans.

Source: Based on Magretta, J., “Fast, Global, and Entrepreneurial: Supply

Chain Management, Hong Kong Style”. Harvard Business Review, September-

October 1998.



Issue No.1 November 007 CAREC NOTES

activities and relatinships utside

the firm related t value chain link-

ages. Fr example, autmaker Frd

is dependent n first-tier suppliers,

which in turn depend n lwer-tier

cmpnent suppliers t perfrm t

required standards f quality andefficiency, as inter-firm lgistics and

imprt/exprt prcedures shape

critical delivery times. Cmpetitive

perfrmance is a functin f link-

ages amng enterprises within the

framewrk f an industry value

chain, rather than nly f individual

firms. Value chain analysis means

examining enterprises in a given

apparel value chain; r linking l-

cal agricultural prducers t agri-

business value chains. Within the

framewrk f glbal value chains

higher-tier buyers can prvide access

t technlgical, managerial, and

market-related knw hw, and t in-termediate inputs. But t cmpete in

the new wrld f internatinal busi-

ness, CAREC enterprises must meet

demanding requirements. This pses

new challenges t gvernments and

firms, and redefines the framewrk

fr business-gvernment relatins.

General plicy-related implicatins

f glbal value chains include the

fllwing.

Establishing a Global Value Chainmindset: A fundamental challenge

fr effective participatin in glbal

value chains is fr CAREC gvern-

ments and enterprises t develp

a ‘GVC mindset’ as the basis fr

achieving systemic efficiencies in

value chains, rather than fcusing

nly n imprving individual firm-

level perfrmance. In the traditinal

cncept f exprting, an enterprise

makes a prduct fr the dmestic

market then finds freign buyers.Cnsistent with this, the firm has

been the basic unit f analysis in

lking fr ways t imprve exprt

perfrmance. But supplying interna-

tinal markets increasingly invlves

making parts f prducts r services

t specificatins given by r defined

jintly with glbal buyers. This pr-

vides pprtunities fr enterprises t

specialize, but requires value chain-

related crdinatin amng firms.

The basic shift in perspective fr bth

gvernments and enterprises is t

see firm perfrmance in the cntext

f particular value chains.

Value chain analysis: Perfrmance

is determined nt nly by what

happens within a firm, but als by

Box 3. Fresh Fruit and Vegetable Industry GlobalValue Chain

The resh ruit and vegetable industry is one o the most vibrant in international

trade. It is characterized by increasing concentration through global retailers/

supermarkets such as Carreour and Tesco in leading markets such as North

America, Europe, and increasingly Asia. As they have expanded in size, global

retailers are exercising growing infuence on the industry value chain, oten

at the expense o traditional global ood producers such as Nestle, Unilever,

and Kellogg. These global retailers, although usually not directly involved in

production, are exerting increasing control over product, production process,

and suppliers through strictly enorced market and rm-specic standards.

Along the way, they are increasingly using a smaller number o large-volumerst-tier suppliers, which in turn are consolidating and rearranging lower-tier

suppliers within their production network.

Firms wishing to enter the resh ruit and vegetable global value chain

must be able to provide the necessary scale, control (traceability), quality,

price, reliability o delivery, and innovation capability beore being considered

a potential supplier. This requires ecient logistics systems and import/export

procedures to be in place in given countries; along with business develop-

ment services that support the acquisition o key inormation and skills by

local producers.

As a consequence, both potential payos and barriers to entry have

increased signicantly in the resh ruit and vegetable industry value chain.

Those producers able to upgrade production and management systems andmeet requirements can access expanding international markets, realizing

growth in scale and revenues, and opportunities or upgrading. For example,

the trend to product dierentiation such as organic produce is creating

signicant opportunities or qualied producers to serve niche markets that

are regional or even global in nature. However, suppliers unable to meet the

necessary requirements increasingly nd themselves in stagnant, uncertain,

unprotable segments o the business.



CAREC NOTES November 007 Issue No. 1

chain and linkages amng them

t see hw and where they can be

strengthened t gain prductin and

marketing efficiencies; r t enable a

mre effective vertical and hrizn-

tal flw f infrmatin, innvatin,

inputs, and resurces. Fcus is alsn mre general factrs influenc-

ing perfrmance in particular value

chains, including the related legal,

regulatry, and plicy envirnment;

and the availability and quality f

supprt services such as financing,

equipment, training, and infrma-

tin technlgy. This analysis can

reveal cnstraints n value chain-

related perfrmance that may re-

quire attentin such as inter-firm

lgistics, particular imprt-exprtprcedures, r mre effective firm-

level cperatin thrugh enterprise

clusters.

Opportunities for new entrants:

In an increasingly wide range f

industries it is nw pssible fr en-

terprises, hwever small, t becme

internatinally cmpetitive based

n a single functin r a small num-

ber f functins/activities as suppli-

ers in glbal value chains. Similarly,it is pssible thrugh participatin

in glbal value chains t achieve

large-scale exprts f specialized

utputs, such as rganic fruits and

vegetables, in niche markets that are

reginal r even glbal in scale.

Opportunities for value creation:

In a wrld f glbal value chains

it is nt the industry r sectr that

is mst imprtant, but a firm’s

cre capabilities in a particular

industry value chain. Fr example,

a cmpetitive supplier f hubcaps

r fan belts r zippers can achieve

significant success in reginal r

even glbal markets. Value creatin

is nt linked nly t final prducts

and brands: pprtunities fr value

creatin exist anywhere alng the

industry value chain—in any indus-

try—thrugh specializatin and up-

grading. Enterprise-level upgrading

requires access t infrmatin, tech-

nlgy, and finance; and is clsely

tied t incentives that encurage rdiscurage learning by lwer-tier

suppliers within value chains.

“Match the best, or outsource to

the best”: T be cmpetitive, enter-

prises—bth small and large—have

t cntinuusly match their perfr-

mance t the “best-in-class” fr each

activity, functin r utput such as

manufacturing, design, lgistics, r

marketing. Unless they are able t

“match the best” they are unlikely t cmpete effectively n interna-

tinal markets as suppliers in glbal

value chains given surcing ptins

available t glbal buyers in mst

industries.

Cooperate to compete: Individual

small- and medium-scale enterprises

may face significant cnstraints in

respnding t surcing pprtuni-

ties prvided by glbal value chains.

Hwever, vertical and hrizntal c-peratin thrugh enterprise clusters

can prvide a ptentially effective

mechanism t achieve cllective ef-

ficiencies thrugh jint actin, and

supprt the participatin f CAREC

enterprises in glbal value chains.

Vertical linkages are relatinships

amng firms at different levels in the

value chain, fr example between

suppliers f inputs and cmpnents,

assemblers, and distributrs t final

markets. Linkages amng vertically

related firms can imprve enterprise

access t new markets, skills, tech-

nlgy, infrmatin, and knwledge.

Hrizntal linkages amng firms at

the same level within a value chain

can allw fr vlume purchasing

f key inputs including equipment,

Vertical and horizontal

cooperation through

enterprise clusters can

support the participation

o CAREC enterprises

in global value chains



Issue No.1 November 007 CAREC NOTES 7

raw materials, finance, and busi-

ness services. It can als expand

jint prductin capacity fr meet-

ing large rders n a regular basis

thrugh jint ecnmies f scale; faci-

litate specializatin in prductin;

and strengthen bargaining pwer.Enterprise clusters, r cperative

grups f firms in the same r related

industry value chains, can therefre

play a key rle in linking small- and

medium-scale enterprises t interna-

tinal markets thrugh glbal value

chains.

New challenges for development

strategy: Previusly, develpment

strategy targeted freign direct

investment by multinatinal enter-prises—particularly glbal brands

such as Tyta, Ericssn, r Mtr-

la—as a key means fr develping

exprt capabilities. By investing in

lcal subsidiaries and jint ventures,

multinatinals served as an impr-

tant means fr technlgy and skill

transfer, and fr accessing interna-

tinal markets. The challenge t

firms and gvernments within the

framewrk f glbal value chains,

hwever, is that lcal prducersmust increasingly already have

required capabilities t be even cn-

sidered by first-tier glbal suppliers,

r lead firms such as Carrefur r

Nissan. This includes bth firm-

level capabilities, and cmpetitive

supprt systems such as inter-firm

lgistics services.

Regional Cooperation: Addressing

the pprtunities and challenges

presented by glbal value chains can

prvide new directins fr CAREC,

building n the existing fcus n

infrastructure and trade. As trade

within the framewrk f glbal

value chains increasingly invlves

cmpnents and semi-finished

gds, lgistics systems are an in-

creasingly critical element f glbal

value chains, delivering prducts

in the right quality and quantity,

and n time. Basic transprt infra-

structure is n lnger sufficient fr

cmpetitive success. Firms in glbal

value chains require nt nly lwtransprt csts, but als a hst f

increasingly sphisticated lgistics

needs: shrt transit times, reliable

delivery schedules, careful handling

f gds, certificatin f prduct

quality, and security frm theft and

damage. Similarly, trade regimes

and prcedures must facilitate intra-

prduct flws in particular value

chains. If there are cumbersme

imprt/exprt prcedures—rules,

regulatins, delays; and high imprtclearance charges n key inputs r

high exprt clearance charges n

utputs, it will be difficult fr lcal

firms t becme suppliers in glbal

value chains. The challenge t cp-

eratin amng CAREC ecnmies is

t mve tward a mre integrated

apprach t transprt, trade, and

transit—within the framewrk f

market-riented and relatively pen

trade plicy regimes—fcused n

specific industry value chains f shared reginal interest. ■

Endnotes1 This paper draws frm, Abnyi,

Gerge, Linking Greater Mekng

Subregin Enterprises t Internatin-

al Markets: The Rle f Glbal Value

Chains, Internatinal Prductin

Netwrks, and Enterprise Clusters.

Studies in Trade and Investment 59,

United Natins Ecnmic and Scial

Cmmissin fr Asia and the Pacific

(UNESCAP), Bangkk, 2007.2 See Central Asia: Increasing Gains

from Trade Through Regional Coopera

tion in Trade Policy, Transport, and

Customs Transit. Asian Develpment

Bank, Manila, 2006.3 See fr example USAID, “Trade, Mi-

cr, and Small Enterprises, and Glbal

Value Chains”, United States Agency

fr Internatinal Develpment,micro

Report, N. 25, February 2005; Unit-

ed Natins Industrial Develpment

organizatin, Inserting Local Indus

tries Into Global Value Chains and

Global Production Networks (Vienna,

UNIDo, 2004).4 See fr example United Natins

Cnference fr Trade and Develp-

ment, World Investment Report 2002.

(Geneva, UNCTAD, 2002)5 The fragmentatin f prductin

and crrespnding firm specializa-

tin in tasks is leading tward thedevelpment f a new paradigm fr

internatinal trade. See fr example

A.S. Blinder, “offshring: The next

industrial revlutin?”, Foreign Af

fairs, Vlume 85, N. 2, March/April

2006.



NoTES www.adb.org/carec

November 2007 Issue No. 1

CAREC Secretariat

Asian Development Bank

ADB Avenue, Mandaluyong City

10 Metro Manila, Philippines

The CAREC Prgram includes

Afghanistan, Azerbaijan, Peple’s

Republic f China (fcusing n

Xinjiang Uygur Autnmus Re-

gin), Kazakhstan, Kyrgyz Republic,

Mnglia, Tajikistan, and Uzbeki-

stan. CAREC is als and alliance f multilateral and ther internatinal

agencies active in prmting ec-

nmic cperatin in Central Asia,

namely the Asian Develpment

Bank (ADB), Eurpean Bank fr

Recnstructin and Develpment,

Internatinal Mnetary Fund, Is-

lamic Develpment Bank, United

Natins Develpment Prgramme,

and Wrld Bank. ADB serves as the

CAREC Secretariat.

About CAREC

The Central Asia Reginal Ec-

nmic Cperatin (CAREC) Pr-

gram is a rbust develpment

partnership; a cncrete example f

cuntries and institutins cperat-

ing t achieve a cmmn purpse.The Prgram’s verarching gal is

develpment thrugh cperatin,

leading t accelerated ecnmic

grwth and pverty reductin. By

prmting and facilitating reginal

cperatin in transprt, trade, en-

ergy, and ther key areas f mutual

interest, the CAREC Prgram helps

the cuntries f greater Central Asia

realize their immense ptential in

an increasingly integrated Eurasia.

Contact

CAREC Field office

20A Kazibek bi Street

Arai Building, 4 th Flr

Almaty 050010, Kazakhstan

Tel +7 727 291 8513/291 8527

Fax +7 727 291 8670

CAREC Secretariat

Asian Develpment Bank

6 ADB Avenue

Mandaluyng City

1550 Metr Manila, Philippines

Tel +63 2 632 4444

Fax +63 2 636 2444

For more inormation,visit www.adb.org/carec

central asian regional cooperation and global value chains (george abonyi, 2007)

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