Vol. 6 Num. 1 - GCG: Revista de GlobalizaciÃ³n, Competitividad y ...

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Edy Wongdemand-side factors in the fashioning of a successful value chain. Lead firms in any valuechain are usually those who have proven their skills in reconciling supply- and demand-sideconsiderations in satisfying the needs of a particular market demand or consumer segment.A successful value chain is more than a supply chain that produces goods at a competitivecost, but one that delivers these goods with the design, quality, distribution channels, andafter-sale service required by the consumers. As the product line becomes more sophisticated,product customization and differentiation will become increasingly important in maintainingits market competitiveness. A successful value chain is one in which the forces ofproduction are organized in an effective and competitive manner to meet the needs of themarket. The high margin value chain activities such as marketing, brand development, productdesign, and customer service will increase in significance as a firm moves up the valuechain. Unfortunately, expertise in these high margin activities is generally lacking in manydeveloping countries. Suppliers in these countries may also find it difficult to enter foreignconsumer markets without the requisite cultural and market familiarity, should they decideto create their own value chain. This accounts for why most international value chains arequasi-hierarchies led by multinationals from Western countries.147For China to successfully move up the value chain, it must therefore overcome constraintson both the supply and demand sides. Our analytical framework is thus built on the interplayof supply and demand factors.5.1. Supply-Side ElementsA necessary, though not sufficient, condition for value chain upgrade is an improvement inChina’s productive capability. It must become more technology- and skill-intensive irrespectiveof the type of upgrading it aims to achieve. Indeed, all four types of value chain upgradepreviously discussed have been identified as desirable for Chinese firms. These firms areencouraged to capture a greater share of production up the value chain, produce with bettertechnologies and quality, and enter new industries and markets. Any strategy that wouldexpand China’s productive and technological capabilities would enhance its supply-sidereadiness for value chain upgrade. China’s success in upgrading its value chain position willthus depend partially on its success in improving its productive resources.Notwithstanding recent advances, China is said to suffer from a variety of deficiencies thatwill act as barriers to upgrading its value chain activities. As these deficiencies are widely discussed,it suffices to report that they include inadequate human resources and competency9 , inefficacious management systems and capability, limited innovativeness, lack of crossculturaland international expertise, poor international product image, etc. Not all critics areoptimistic that China is equipped to overcome these weaknesses in short order. It is China’suneven business performance and lack of experience in activities further up the value chainthat have caused many to express doubts about its attempt to move up the value chain.In particular, China’s relative lack of professional skills in modern management, marketing,product design, and innovation is seen as a major barrier to its value chain upgrade efforts.The above deficiencies are nevertheless surmountable barriers for process and product9. These would include technical, cultural, and linguistic skills.GCG GEORGETOWN UNIVERSITY - UNIVERSIA ENERO-ABRIL 2012 VOL. 6 NUM. 1 ISSN: 1988-7116pp: 136-155
China’s Move up the Value Chain. A Framework for Analysis148 upgrading and movements up the supply chain. Better technology and processes can beadopted to produce more sophisticated products to capture more value in the supply chain.Indeed, recent changes in China’s trade structure have suggested significant improvementsin these areas. However, it is these deficiencies’ impact on functional and inter-sectoralupgrading that needs to be addressed. Consequently, recent government policies in Chinahave enlarged its focus on enhancing its productive and innovative capabilities. Policiesto encourage high technology investment and acquisition, scientific research, and humanresource development are clearly intended to bolster China’s supply-side ability to moveup the value chain. China’s records in industrial policy and economic development seem toaugur well for its efforts to enhance its productive or suppl- side capabilities.However, improved productive capabilities and competency are not sufficient for a valuechain upgrade. One must also recognize the dampening effect demand-side determinantsmay have on China’s attempts to upgrade its value chain functions and compete in newglobal sectors or markets. Specifically, China’s inability to influence consumer perceptionand create its own value chain is not correctable by domestic government policies. Theabsence of global brand recognition and China’s reliance on multinationals for access toforeign markets are key barriers to Chinese firms altering their functions in the value chain orestablishing their own value chains 10 . This suggests that China’s prospects for process andproduct upgrading are much better than for functional and inter-sectoral upgrading.5.2. Demand-Side ConsiderationsChina’s efforts to upgrade its value chain must go beyond the realm of productive capabilitiesto include market and demand-side considerations. Demand-side in the current contextdenotes not only consumer preferences and demands but also market conditions faced byChinese firms in the global market. Specifically, market structure and value chain relationsthat would influence international demands for Chinese goods are also classified as part ofthe demand-side equation. China’s ability to produce must be reconciled with internationaldemands and market conditions in order to properly assess China’s strategy of altering itsvalue chain position.While demand-side factors are relevant to all four types of value chain upgrade, our currentdiscussion will focus on functional and inter-sectoral upgrades. These two types of upgradewould challenge and disrupt existing value chain relations and require a fundamental transformationof China’s value chain capabilities. Specifically, both of these upgrade categoriesimply development of new product value chains that would require higher value chainfunctions such as product differentiation, design and innovations, brand development andmarketing, and customer relations; these functions are not known to be strengths of Chinesefirms. To succeed at functional and inter-sectoral upgrade, Chinese firms must becomecompetitive with existing global value chain leaders with their own brands and distributionchannels. They must build a high degree of consumer confidence and product image for the“made in China” label. Enhanced productive capability alone will not suffice. Chinese productsmust become accepted by foreign consumers as comparable to Western products in10. See (Miller 2006).GCG GEORGETOWN UNIVERSITY - UNIVERSIA ENERO-ABRIL 2012 VOL. 6 NUM. 1 ISSN: 1988-7116pp: 136-155
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CARTA DEL EDITOR IN CHIEFEditor in
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StaffDe la Torre, José, Dean, Chap
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Staff2. MULTINACIONALES, INVERSIÓN
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SELECCIÓN PROCEDURE PROCEDIMENTOIN
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Instrucciones para Autores y Proced
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INDEXACIÓN INDEXING INDEXAÇÃOInd
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Economic Relationships between Lati
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Miguel A. MontoyaThe rest of the pa
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International Joint Ventures among
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36Japanese Foreign Direct Investmen
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Japanese Foreign Direct Investment
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561. IntroductionClusters and indus
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Entrepreneurial Clusters in China a
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921. Introduction: Mexico and China
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Why isn’t Mexico on China’s Gro
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Page 138 and 139: Edy WongTable One: Compositions of
Page 140 and 141: Edy WongTable 2: China’s R & D Ex
Page 142 and 143: Edy Wongon ‘new economic geograph
Page 144 and 145: Edy WongIn today’s global market,
Page 148 and 149: Edy Wongterms of quality, reliabili
Page 150 and 151: Edy Wongindustry. Second, value cha
Page 152 and 153: Edy Wongconsumption of Western luxu
Page 154: Edy WongReferences155Child, J.; Rod
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Vol. 6 Num. 1 - GCG: Revista de GlobalizaciÃ³n, Competitividad y ...

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