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David L. Levy
University of Massachusetts, Boston
Hegemony in the Global Factory:
Power, Ideology, and Value in Global Production Networks
ABSTRACT
The recent wave of concern over offshore sourcing of services and highly skilled activities has been met by assurances from economists and management experts that this is a continuation of historical patterns of globalization, bringing growth and prosperity for all. This paper develops a more critical perspective on international management and production, developing a conceptual framework that draws from the literature on global commodity chains and global production networks (GPNs), as well as from neo-Gramscian approaches to international governance. The concept of hegemony in GPNs suggests the contingent stability and contestation within these networks, and highlights the importance of power relations rather than efficiency. GPNs are viewed as political arenas engaging a wide array of actors, and encompassing a more multi-dimensional and multi-level approach to power relations. The expansion of GPNs, along with the simplification and routinization of inter-organizational interfaces, can be interpreted as a form of international Taylorism.
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12617
Hegemony in the Global Factory:
Power, Ideology, and Value in Global Production Networks
Introduction
Over the past several decades, the United States and Europe have witnessed a severe decline in low-skilled labor-intense sectors such as shoes, apparel, but have also benefited from the growth of new skill- and capital-intense industries, such as software and aircraft manufacturing. In keeping with the precepts of theories of comparative advantage in international trade, the argument has frequently been made that industrialized countries, as well as developing countries, benefit from shifting to higher ‘value-added’ economic activities, despite transitional costs to particular sectors or groups of workers. The recent wave of media attention to “offshoring” has focused on a widespread concern that a new demon is haunting the advanced capitalist nations, threatening a wide range of jobs in Western industrialized economies (Bernstein, 2004; Swann, 2004).
The latest wave of offshoring appears to be unprecedented in relation to historical experience in a number of respects. It increasingly affects workers in service sectors as well as highly skilled professions such as software engineering. Hospitals are contracting with offshore technicians to read X-rays transmitted digitally over the internet, corporate information systems and transaction processing departments are relocating many operations to India, and university experiments with ‘distance-learning’ could easily be extended to encompass professors located overseas. As a result, the new offshoring threatens middle-class, professional and high-income workers in the way that earlier waves undermined blue-collar jobs in manufacturing. The core driver of this recent form of offshore sourcing is the increasing organizational and technological capacity of companies, particularly multinational corporations, to separate and coordinate a network of dispersed organizational units performing an linked set of activities. As Buckley and Ghauri (2004, p. 83) put it:
The managers of MNEs are increasingly able to segment their activities and to seek the optimal location for increasingly specialised slivers of activity. This ability to separate and relocate stages of production has led to a boom in manufacturing in China and service activities (e.g. call centres) in India. MNEs are also increasingly able to coordinate these activities by means of a wide variety of mechanisms from wholly owned FDI through licensing and subcontracting to market relationships. The more precise use of location and ownership strategies by MNEs is the very essence of increasing globalisation.
The emerging global telecommunications infrastructure affords a dramatic increase in capacity and function at sharply lower costs. If the declining cost of shipping in the past 150 years facilitated a massive expansion in trade in goods, cheap telecommunications allows for low-cost and instantaneous transmission of data that embed engineering, medical, legal, and accounting services. Moreover, it has reduced the transaction costs of coordinating far-flung operations. The new offshoring does not affect any sector in particular; rather, it affects specific tasks in a ‘value-chain’. It is leading to a micro-division of labor in which workers can be geographically separated from the production process (Carnoy & Castells, 2001). Arguably as a result, conventional sector-based theories of comparative advantage are losing their traction.
The response from most economists and management experts is to claim that offshoring represents an extension of existing forms of international production and trade rather than a more radical restructuring, and there is nothing to fear for those willing to pursue international strategies for greater scale, efficiency and cost reduction. The magazine The Economist has been in the forefront of discursively linking offshore sourcing to the broader ideology of free trade. In articles and editorials, it portrays globalization as a benign continuation of progressive trends embodying political and economic liberalism that promise prosperity, technological progress, and the alleviation of poverty in rich and poor countries alike (Starr, 2004). The New York Times journalist Thomas Friedman wrote a series of articles while visiting India in 2004 that, while raising some alarm at the extent to which professional and technical work is moving to low-wage countries, nevertheless expresses confidence in the fundamental tenet of free trade that continued innovation and skill development will ensure mutual gains and prosperity (e.g. Friedman, 2004).
This paper develops a more critical perspective on international management and production in order to interrogate the contemporary discourse surrounding offshore sourcing. A conceptual framework is developed that draws from the literature on global commodity chains and global production networks (GPNs), as well as from neo-Gramscian approaches to international governance. The paper proposes that GPNs can be conceived as geographically dispersed global factories, in which various actors struggle for influence and profits. The concept of hegemony in this global factory suggests the contingent stability that GPNs can achieve when economic, technological, discursive, and organizational elements are aligned. This approach emphasizes power relations rather than efficiency within production networks, and provides a framework for analyzing the linkages of these networks to broader institutions of power, such as multilateral financial and trade organizations and their associated neoliberal ideologies. Compared with existing analyses of production networks and value chains, the framework proposed here views GPNs as political arenas engaging a wider array of actors, and encompasses a more multi-dimensional and multi-level approach to power relations. From this perspective, the expansion of GPNs can be viewed as a process of Taylorisation at the international level, as outsourced activities are routinized and commoditized despite their growing sophistication and complexity.
Conventional Perspectives on International Production and Management
In the field of international management, the conventional approach to understanding offshore sourcing revolves around Michael Porter’s conception of the ‘value chain’ as a linked set of economic activities that ‘add value’ at every stage of production, from component manufacturing and assembly to marketing and retailing (Porter, 1986; Porter, 1990). The task for managers of firms, usually multinational corporations (MNCs) is to configure the value chain so that activities are dispersed to appropriate locations in terms of proximity to markets and resource cost and availability. At the same time, value chain configuration needs to enable the coordination and integration of its components, in order to take advantage of scale economies, learning curve opportunities, and the benefits of integrated logistics using just-in-time methods to reduce inventories. The central challenge of international business is seen as balancing the sometimes conflicting pressures for local access and responsiveness on the one hand, and for global integration and coordination on the other (Bartlett & Ghoshal, 1989; Prahalad & Doz, 1987). Theories to explain foreign direct investment by MNCs incorporate a consideration of transaction costs to account for ownership as well as location (Buckley & Casson, 1998; Dunning, 1988). Building from this tradition, a number of more popular guides on how firms can take advantage of intensive offshore sourcing are beginning to appear (e.g. Sahay, Nicholson, & Krishna, 2004).
Conventional theories thus view MNCs as efficiency-enhancing agents, realizing the promise of prosperity within a global liberalized trade and investment regime. MNCs are the organizational incarnations of more abstract economic forces and structures; indeed, MNCs are frequently conceived as overcoming barriers to trade through their ability to coordinate flows of goods, money, information, and people around the globe. The legitimacy of MNCs, and of the field of international business more broadly, is thus closely tied to the broader ideology of free trade and neoliberal discourse promoting the benefits of privatization and globalization.
Emblematic of this approach is a recent series of articles published in the influential journal of the management consulting firm McKinsey and Company. Agrawal and Farrell (2003) argue in their widely-cited article in The McKinsey Quarterly that “companies move their business services offshore because they can make more money—which means that wealth is created for the United States as well as for the country receiving the jobs.” The McKinsey article exemplifies the discourse surrounding offshoring, free trade, and globalization more generally. Wealth transfer is equated with wealth creation, corporate interests are conflated with those of society as a whole, and the process is portrayed as natural and inevitable, leading to prosperity for industrialized and developing countries alike.
This simple equation of corporate profits and national wealth is misplaced even on narrow economic grounds, and is profoundly ideological in its universalization of corporate interests. According to Agrawal and Farrell’s analysis, “For every dollar of spending on business services that moves offshore, US companies save 58 cents, mainly in wages” and these lower costs constitute “by far the greatest source of value creation for the US economy.” One does not need advanced training in economics to understand that reducing wages, by itself, does not ‘create value’ or increase national income; it simply transfers income from workers to shareholders, creating wealth for a fortunate few. If US workers volunteered to take a 90% pay cut, the same shareholder ‘wealth creation’ would result.
A second source of wealth creation in the McKinsey analysis flows from increased demand for US goods from developing countries where offshoring raises incomes. Friedman (2004) enthusiastically pursues this theme in reporting a visit to a Bangalore call center and seeing a host of US-branded products, from air-conditioners to computers. Friedman’s observation is superficial in the literal sense, as beneath the brand names, much of the assembly of these products is also ‘offshored’. The profits from the call center flow back to American shareholders, who own 90% of the company’s stock.
Of course, real income in industrialized countries would increase if those displaced by offshoring are able to shift to more productive employment. As Agrawal and Farrell put it, the third source of wealth creation arises from “opportunities to train labor and invest capital to generate opportunities in higher-value-added occupations such as research and design”. This argument makes clear the connection between the offshore sourcing and the notion that trade enables industrialized countries to specialize in highly skilled well-paying activities. The data, however, are mixed at best. In an extensive study of workers displaced by imports, Kletzer (2001, p. 2) concluded that “the earnings losses following job dislocation are large and persist over time.” She found that only 63.4% of workers displaced from 1979-1999 were reemployed, with an average weekly earnings loss of about 13%. Overall, 86% were worse off after displacement, 56% greatly so. It is indicative of the ideological nature of offshoring discourse that this study was cited by Agrawal and Farrell in support of their claims.
Toward a critical analysis of international production
Here we develop a framework for understanding international production that enables a more critical perspective on how offshore sourcing shifts relationships of power and engages with particular ideological constructions. An essential starting point is Stephen Hymer’s groundbreaking theoretical work on foreign investment and MNCs, which posited that such firms possess unique firm-specific assets that they exploit in international markets (Hymer, 1972, 1976). Building on the insight that firm-specific assets afford MNCs significant market power in oligopolistic industries, Hymer developed a radical perspective on the global political economy, in which inequality in the international division of labor was related to monopolistic corporate control of key technologies, brands, and distribution networks (Hymer, 1979). This emphasis on market failure and the power rather than efficiency of MNCs undergirded more critical macro-perspectives on trade and investment in international political economy, particularly the dependency school, which viewed relations between industrial and developing countries as fundamentally exploitative and conditioned on unequal terms of trade (Amin, 1976; Evans, 1979), world systems theory (Chase-Dunn & Grimes, 1995; Wallerstein), and neo-colonialist analyses (Banerjee & Linstead, 2001).
By the late-1970s, astute observers called attention to a new trend, the separation and geographic dispersion of manufacturing activities within a particular sector, which was termed ‘The New International Division of Labor’ by Frobel, Heinrichs, and Kreye (1977). Gereffi (1985) emphasized the role played by MNCs in perpetuating dependent forms of development, on account of the market power they wielded over host country governments due to their possession of valuable technologies, brand names, and global distribution systems. Gereffi’s contribution, which was framed as a rejoinder to the ‘obsolescing bargain’ approach to MNC–host country relations (Kobrin, 1987; Vernon, 1971), served as a critical bridge to the development of Gereffi’s more recent work on Global Commodity Chains.
Gereffi has characterized global commodity chains (GCCs) as "sets of interorganizational networks clustered around one commodity or product, linking households, enterprises, and states to one another within the world-economy” (Gereffi & Korzeniewicz, 1994, p. 2). Researchers who use the GCC framework examine a number of dimensions of international production, including the structure of inputs and outputs, the locational configuration of associated activities, the institutional context, and the governance structures that regulate, coordinate, and integrate dispersed operations (Bair & Gereffi, 2003). GCC analysis builds on Michael Porter’s discussion of value chain configuration and coordination as well as his classic ‘5-forces’ approach to strategic analysis, which attributes industry and firm level profitability to sector-specific sources of market power such as barriers to entry (Porter, 1980, 1985). It also incorporates insights from the more recent ‘resource based view’ and ‘dynamic capabilities’ approaches to strategy, in that firms enjoy superior returns based on their possession of unique resources and capabilities (Barney, 1991), and their skill in developing and configuring arrays of such capabilities in response to changing environments (Eisenhardt & Martin, 2000; Teece, Pisano, & Shuen, 1997). In keeping with the tradition of Stephen Hymer, GCC analysis recovers the latent critical potential in the field of strategic management in its emphasis on the close relationship between market power, ‘value added’, and economic rent.
GCC analysis has provided a series of rich case studies of the dynamics by which firms attempt to build and defend such capabilities and market barriers in the face of relentless pressures from competitors to erode market power and commoditize products and services (Bair et al., 2003; Kaplinsky, 2000). These dynamics are located in the context of the spatial structure of the production activities and the power relations among the constituent actors. Following the tradition of the dependency school, these studies often point toward the constraints, as well as opportunities, facing developing countries as they engage with processes of economic globalization (Kaplinsky, 2000).
A number of economic geographers have extended the GCC framework and relabeled it ‘Global Production Networks’ (GPN). The term ‘network’ implies multiple relational forms and directions and avoids the linear connotations of ‘chains’, while ‘production’ is intended to convey a broad range of activities, including “the social processes involved in producing goods and services and reproducing knowledge, capital and labour power” (Henderson, Dicken, Hess, Coe, & Wai-Chung Yeung, 2002, p. 444). The GPN framework is intended to address several limitations perceived in GCC analysis. It examines the linkages that GPNs create not just across economic space, but also across social and institutional contexts, at national, regional, and sometimes sub-national levels. It attempts to address the dynamics and path-dependencies of production networks, such as those deriving from the institutionalization of power arrangements. It also pays more attention to the strategic autonomy of firms in creating innovative forms and thus reshaping production networks. Overall, GPN methodology attempts to characterize:
the networks of firms involved in R&D, design, production and marketing of a given product, and how these are organized globally and regionally; the distribution of corporate power within those networks, and changes therein; the significance of labour and the processes of value creation and transfer; the institutions – particularly government agencies, but also in some cases trade unions, employer associations and NGOs – that influence firm strategy in the particular locations absorbed into the production chain ; and the implications of all of these for technological upgrading, value-adding and capturing, economic prosperity etc. for the various firms and societies absorbed into the chains. (Henderson et al., 2002, p. 447).
The GPN framework holds great promise for exploring shifting relations of power at various levels. As Buckley and Ghauri (2004, p. 83) contend in their review of economic geography and the internationalization of production, “The process of globalisation is thus not only reorganizing power at world level but also at national and subnational levels.” The studies spawned by the GPN framework to date, however, are in practice very similar to those generated using GCC analysis. Much of the discussion concerns market power exercised by firms, and consequent rents earned, due to their technological and marketing expertise, and their skills in coordinating complex production networks. Little attention is paid to the broader political and discursive structures in which production networks are embedded. As a result, relationships between actors in GPNs and international institutions, such as the World Trade Organization, tend to be neglected. Moreover, the ideologies that constitute and legitimate particular forms of governance, patterns of production and income distribution receive little attention.