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                          Letter IEDI n. 989–Digitalization and Global Value Chains

                          Publicado em: 09/04/2020

                          Today's Letter IEDI deals with the implications of digitalization, associated with industry 4.0, following the discussions proposed in the paper “The 'lightness' of Industry 4.0 lead firms: implications for global value chains”, authored by Duke University professors Lukas Brun and Gerry Gereffi, and by James Zhan, Director of the Investment and Enterprise Division at  Unctad.

                          In the article, which is part of the book “Transforming Industrial Policy for the Digital Age: Production, Territory and Structural Change”, the researchers show that by enabling the expansion of digital technology multinational enterprises (MNEs) into the manufacturing and services sectors, digitalization is changing how global value chains (GVCs) work.

                          Digital MNEs operate with fewer physical assets abroad than traditional MNEs, a sign of a competitive strategy that values lighter forms of internationally produced assets.

                          For the authors, the trend towards digitalization is the most recent of the four main forces changing the dynamics of GVCs since the global financial crisis of 2008–09. The others are rationalization (reduction in the number of suppliers), regionalization (with growing south-south trade flows) and resilience (via geographic diversification and higher inventories).

                          It is possible that some of these factors, especially digitalization and resilience, will gain additional strength after the covid-19 crisis, which interrupted the flow of goods in many global chains.

                          The trend towards digitalization is the result of advances in industry 4.0, which, in the definition used in the study, is a set of enhanced technologies and resources that, when combined, are expected to change the way products and services are created, produced and delivered. Its main enablers are big data, advanced analytics, human-machine interface and digital-to-physical transfer, such as advanced robotics and 3D printing.

                          Digitalization is leading to three major changes in GVCs, according to the authors:

                            • The first is the disintermediation of supply chains, since digitalization allows goods and services suppliers to produce and deliver their products directly to end users, bypassing supply, distribution and sales networks.

                            • The second change is the rise in the role of services as a business model for GVCs, a trend known as “servicification”. The capture of production and product use data is an increasingly common form of “servicification”.

                            • The third effect of digitalization on supply chains is the capital substitution of labor due to automation. As investment in automation and robotics rises, the capital intensity of production increases, changing the type and quantity of activities performed by human labor.

                          In the assessment of Brun, Gereffi and Zhan, digital multinational enterprises are the actors leading the forces of disruption and disintermediation that characterize the change in industrial and service GVCs resulting from the adoption of industry 4.0 technologies.

                          Digital MNEs include “pure” digital companies, which rely entirely on the Internet to conduct business, as well as “mixed” players, such as e-commerce and digital content companies that have a prominent online presence but retain part of their business in non-digital forms.

                          A distinguishing feature of digital MNEs is the fact that they operate internationally with a higher rate of “lightness” than MNEs in traditional sectors, as they achieve high foreign sales with fewer physical assets held abroad.

                          The study points out that the advance of digitalization in GVCs can result in changes in foreign trade and in the behavior of MNEs foreign investment, especially if business models with “light” foreign assets become prevalent. This is because the incentives to invest in production-related assets abroad decrease as companies are able to competitively produce closer to final demand markets, still widely located in the developed world.

                          The authors explore three scenarios of how lead GVC companies' governance can change due to digitalization:

                            • Complementary: In this scenario, digital economy MNEs create significant new added value in the global economy, generating employment and investment across industries, but do not replace existing lead companies.

                            • Displacement: In this scenario, the digital economy MNCs disturb the existing sectors, challenging the business models of the main existing companies, with rapid or gradual displacement.

                            • Adaptation: In this scenario, industry 4.0 technologies are successfully adopted by existing lead companies to improve production efficiency and achieve higher levels of competitiveness.

                          According to the authors, the scenario that will emerge as dominant is currently uncertain, mainly because there is evidence to support all three possibilities.

                          In summary, the authors believe that, in addition to influencing the decision of where and how goods and services are produced in the world economy, digitalization is allowing new high-capacity digital technology multinational companies to enter manufacturing and services sectors. These companies are unique in that they operate in foreign markets with fewer physical assets and employees, a “lightness” that has implications for foreign trade, investment and regional development.

                          Companies with a “heavier” presence abroad provide, according to the authors, a greater set of macroeconomic benefits for host countries than firms with “lighter” business models. As digitalization increases the “lightness” of other sectors of the economy, the impact on workers, regions and governments can be significant and even disruptive.

                           

                          The full text is available in Portuguese.

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                          © Copyright 2017 Instituto de Estudos para o Desenvolvimento Industrial. Todos os direitos reservados.

                          © Copyright 2017 Instituto de Estudos para o Desenvolvimento Industrial.
                          Todos os direitos reservados.