governing on the edges:globalization of production and the challenge to public administration in the...

8/4/2019 Governing on the Edges:Globalization of Production and the Challenge to Public Administration in the Twenty-First C

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S34 Public Administration Review December 2010 Special Issue

by international institutions, such as the World Bank, Asian Devel-opment Bank, and various United Nations agencies (e.g., UN Con-ference on rade and Development, UN Industrial DevelopmentOrganization, UN Economic Commission for Europe, UN Eco-nomic and Social Commission for Asia and the Pacific). Althoughthe issues discussed are general in nature, with lessons and examplesdrawn from comparative cases and experience in both emerging anddeveloped economies, we have a particular interest and focus on theimplications for emerging economies and small and medium-scaleenterprises (SMEs).

Te paper is organized into six sections, with an accompanyingappendix. In the following section, we discuss globalization, specifi-cally the globalization of production, and the implications of theseissues for public administration, governance, and governmentsrelationships with private sector organizations. We then developour conceptual framework by discussing the drivers of change andthe changing role of government. We identify key challenges togovernment derived from our data collection and analysis. Tesechallenges include global value chains, value chain-related tradefacilitation, investment in logistics, the strengthening of enterpriseclusters, effective education, skill development and training, and th

governance risks inherent in value chains and networks.

We conclude with a discussion of five key considerations for publicadministration in thinking, planning, and acting strategically inrelationships with the private sector with respect to the globalizationof production. Tose considerations include the use of multistake-holder partnerships, collaborative learning and mutual adjustment,institution building, facilitating networks and clusters, and manag-ing societal adjustment. Tese considerations will be crucial forcreating business environments that strengthen economic develop-

ment and manage societal issues in ways thatare aligned with public values.

The Basic Challenge of GlobalizationGlobalization is the product of political,economic, and technological forces that havebeen accelerating since the early 1980s. Inexploring its challenges to public adminis-tration, our interest here is economic glo-balization. Tis includes two interrelatedcomponents: the globalization of finance

and the globalization of production. Te globalization of financeinvolves cross-border flows of capital that, together with the increasing integration of national financial systems, are reshaping theinternational economy. Te opportunities and risks that this creates

for economiesand the challenges that it poses to governmentsare receiving a great deal of attention in the context of the presentglobal economic crisis, and will not be addressed here.1

Our focus is on theglobalization of production that is transforminginternational business, including the nature and geography of tradeand investment flows. It is rearranging the shape, structure, andrelationships of national and regional economies, including their

wealth-generating potential and performance.

Te globalization of production and the networked world that itcreates present fundamental challenges to the role and boundaries o

Public administration as the linchpin between government andgovernance has too often been behind the wave of changes takingplace within countries and across transnational boundaries. Te fieldof public administration has embraced a number of public manage-ment reforms, such as contracting and partnerships (Boyne 1998;Brown and Potoski 2005), strategy and strategic planning (Boyneand Walker 2004; Poister and Streib 2005), performance manage-ment (Behn 2006; Moynihan 2005; Pollitt 2006), public partici-pation and citizen satisfaction (Bingham, Nabatchi, and OLeary2005; Wichowsky and Moynihan 2008), and, in general, a range ofNew Public Management reforms (Hood and Peters 2004; Lynn,Heinrich, and Hill 2000; Roberts 2010).

However, little systematic attention has been paid to the issue ofgovernmentbusiness relations, particularly in the context of achanging international economic environment, beyond a focuson regulation (e.g., Carpenter 2009). More recent scholarship oncollaborative governance (OLeary and Bingham 2009) has spo-ken of the need to connect government with other stakeholders,

while other authors have also raised awareness about the need forgovernment to more actively engage, develop, and play a role inmultisectoral networks for the production and delivery of goods

and services (Brown, Potoski, and Van Slyke 2006). According toa recent McKinsey Global Survey, the need for government andbusiness to work together is an important and timely issue. In thesurvey, business executives reported that government is likelier toaffect companies economic value than any other stakeholder exceptcustomers . . . even though many find that dealing with governmentis often frustrating and consider government offi cials to be unin-formed about the economies of their industries (Dua, Heil, and

Wilkins 2010, 1, 2).

In this paper, we look at current policiesand practices as a precedent for the future ofgovernmentbusiness relationships againstthe backdrop of economic globalization. Asglobalization continues and nation-statesadjust to changing environments across allsectors of their economies, renewed atten-tion to governmentbusiness relationshipsis important to the future of effective publicadministration and governance. Te focus ofthis paper is developing a conceptual frame-

work that governments can use to shape their thinking and interac-tions with business in more strategically and mutually beneficial

ways. Tose interactions require public administrators to be betterinformed about the nature and challenges of the globalization of

production and its implications for the state of practice in govern-mentbusiness relations. Te framework also suggests directionsfor those institutions and actors engaged in governance to considerfor improving government performance in enabling business andeconomic development.

Te data for our framework derive from extensive field work in theemerging economies of Southeast Asia. More than 100 interviews

were conducted with government, private sector, and civil societyoffi cials in 15 countries. Te data were collected from extensive casestudy research, analysis of interview data, and review of a substantialbody of secondary documentation, including analysis of experience

In this paper, we look at

current policies and practicesas a precedent for the future

of governmentbusinessrelationships against thebackdrop of economic

globalization.


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Governing on the Edges S3

challenges. o understand the globalization of production, wehighlight four key drivers of change that need to be understoodby public administrators. Te first ispolicy liberalization. Policyliberalization by governments is occurring at the borders, and isdirected at reducing import, export, and investment constraints.It is also occurring behind bordersfor example, through domes-tic regulatory reforms. New options for the geographic locationof production, and the integration and expansion of fragmentednational markets for both intermediate and final products, arebeing developed. As a result, regional and global opportunities aredeveloping for domestic firms.

Te second driver is accelerating technological changein transport,telecommunications, and information technology. Public invest-ment and government deregulation are playing key roles in thischange. Tis is supported by managerial innovation for coordina-tion in the production of both goods and services, such as leanmanufacturing and just-in-time production. Tis lowers costs,reduces distance and time, extends the reach of enterprises, andallows the simultaneous fragmentation, geographic dispersion, andcoordination of production.

Te third driver is increasing mobility of capital. Tis action isfacilitated by government policies, such as investment and capitalaccount liberalization, and by diversifying financing options forcompetitive local enterprises. Foreign direct investment can takeadvantage of cross-border differences in the cost of production fac-tors, such as labor and local supplies of technology and people, bothskilled and unskilled, and it provides new opportunities for domes-tic producers. At the same time, increasing capital flowsamplifiedby financial innovations in new institutions and productsarechanging the international financial landscape, for better and worseincluding loosening constraints on financing for potentially com-petitive domestic enterprises.4

Te fourth driver is the demands of increasing competition,which arecreating simultaneous pressures for lower cost, higher product andservice quality, shorter delivery time, and wider choice. It is impor-tant for public administrators to understand that in an increasinglyfragmented global production environment, competition is not justamong individual enterprises, but more often involves networksof linked firms that include both large and small enterprises. Oneexample is Nokia and its network of suppliers versus Motorola andits network versus Samsung and its network. In many cases, thesame supplier may participate in multiple such networks.5

Having identified and described the four key drivers of change, it

is important for public administrators to have an understandingof the context of the globalization of production. Internationalproduction, trade, and investment are increasingly organized

within the framework of global value chains and associated production networks (see the appendix for definitions and examples) inan expanding range of product groups, such as garments, agro-industry, furniture, automobiles and auto parts, consumer elec-tronics, telecommunications and information technology (I),and business and health services. Operationally, this involves thefragmentation, dispersal, coordination, and reintegration of pro-duction-related activities among firms in geographically dispersedlocations.

government in the twenty-first century, requiring basic adjustmentsin the functions and organization of government in both developedand developing economies. At the heart of the challenge to govern-ment isgetting strategic collaboration with the private sector rightinorder to ensure gains and manage the risks from the transformationof the global economy. Te private sector needs government to helpaddress constraints and externalities associated with building capa-bilities so that it can compete effectively in an evolving internationalenvironment (Lall 2004). Tis requires critical public inputs in suchareas as standards and certification, special purpose logistics systems,import and export procedures, and training and skill development.

But governments also need to work closely with private enterprisein order to understand the specific and differentiated constraintsand opportunities being faced if it is to facilitate the performance offirms in desired directions. In the process, government must man-age the potentially divisive impactssuch as economic and socialdislocations and adjustments that accompany the transformation ofindustries and economies. In all this, it is the governments of emerg-ing economies that face the most diffi cult task in helping enter-prises and societies cope with the challenges of the globalization ofproduction. At the same time, they are also developing innovative

responses worthy of attention.

Te basic challenge to government lies less in asking what types ofpolicies and programs to createfor example, what tax reformsare needed or what general education policies and programs tointroduce. Instead, the more fundamental questions are as follows:(1) Does government have a shared conceptual framework andrelated institutions that will allow public administrators to engageeffectively in ongoing discussions with a diverse private sector in anetworked environment? (2) Do governments have the institutionalcapacity to respond selectively and effectively to opportunities andconstraints that such ongoing dialogue identifies? (Hausmann,Rodrik, and Sabel 2008). In this setting, strategic collaborationbetween government and the private sector is likely to be acceptedas legitimate by the rest of society only if it is seen as furthering thepublic interest in terms of equitable and sustained economic growthand development.

At one level, this requires public administrators to build a new con-ceptual map of the emerging international economy as a foundationfor a wide range of policies, programs, and services. Tis new mapis based on value chains, production networks, and enterpriseclusters, which are the building blocks of an increasingly intercon-nected world (see the appendix for definitions and examples ofthese concepts). Operationally, this new approach implies changes

in the role of government in such traditional areas as infrastructureinvestment, trade facilitation, and education and training, as well asin nontraditional areas such as cluster-based strategies for grow-ing state economies that involve new functions and institutionalrelationships.2

Globalization of Production: The Transformation ofInternational BusinessGlobalization is transforming the nature and location of inter-national production, trade, and investment (e.g., Baldwin 2006;Dicken 2007).3 In the process, it is changing the competitiveenvironment for enterprises and bringing new opportunities and


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within and across borders in very different value chains, such as electronics, automotive parts, garments, and fresh fruit and vegetables,is dependent on effi cient special purpose interfirm logistics systemsand appropriate import-export procedures. Tese are likely to differsignificantly among very different types of products.

o implement a GVC mind-set, value chain mapping allows gov-ernment and public administrators to engage with relevant stake-holders to analyze and understand the structure and performanceof particular value chains in order to identify where improvementsare necessary, the types of interventions needed, and by whom (see,e.g., FIAS 2007; GZ 2007). Tis could involve particular policy oadministrative reforms, including more effective interagency coor-dination. Examples would be to improve import-export proceduresfor competing in the global garment value chain (as in the case ofCambodia), to strengthen interfirm logistics necessary for supplyinga wide range of international buyers (as in the case of South Africa)or to help provide specialized training programs for local SMEs tobecome competitive producers for the global electronics/I valuechain (as in the example of Penang, Malaysia). Developing a GVCmind-set can then provide the foundations for an effective andfocused government strategy, in collaboration with the private sec-

tor, for strengthening the participation of domestic enterprisesinparticular value chains.

Te government of Ireland followed the successful developmentstrategies of East Asian economies, and hence was dubbed the Celticiger. Ireland used an understanding of global value chains as thebasis for its successful strategy of attracting foreign direct invest-ment that moved the economy up the value chain over time frommanufacturing to R&D in electronics/I, and to knowledge-basedactivities in new value chains such as chemicals and pharmaceuticals(Barboza 2010). A key factor in this success has been the unique,quasi-governmental nature of the Irish Development Agency (IDA),

which provided the basis for an effective institutional framework forgovernmentbusiness cooperation that was necessary for implement-ing a successful industry- and firm-based strategy for attracting for-eign direct investment. A GVC mind-set also provided the flexibilityand capacity for the IDA to understand specific business needs ofparticular value chains and, therefore, to develop supporting comple-mentary policies and programs, such as focused reform of the educa-tion system to provide required skills.9 wo successful examples arethe chemical and pharmaceutical and computer gaming industries.

In Cambodia, whose dominant manufacturing export industry isgarments, a World Banksupported analysis of key value chains,such as denim jeans production, revealed that important improve-

ments in import-export and customs procedures were needed inorder for Cambodian firms to remain competitive suppliers inthe apparel and garment global value chain. Tis led directly toa decision by the prime minister in March 2004 to establish anInter-Ministerial Special ask Force for Investment Climate andrade Facilitation, and resulted in the formulation of a comprehen-sive, multiagency reform strategy. Although significant problems ofimplementation remain, this was an important step in Cambodiaspublic administration reform process. Te competitive performanceof its critical garment industry was supported through initiativesaimed at reducing costs and time delays and eliminating unneces-sary steps and duplication in customs procedures.10

firms, such as participation in food processing or apparel and cloth-ing, require sophisticated management and technological capabili-ties if they are to compete in international markets. Terefore,sustained growth and economic transformation are dependent onlearning, knowledge acquisition, information sharing and coordina-tion, and capacity building. Tis involves how enterprises managethe process of identifying, mastering, adapting, and innovating theactivities, skills, and technologies that are essential for competitiveperformance within the framework of specific value chains. Tenature of this learning and capacity building varies by the complex-ity and scale of the activities, processes, and technologies involved.For example, becoming a competitive garment assembler (figure 2,appendix) is less demanding than becoming a hard disc componentmanufacturer (figure 3, appendix), which, in turn, is easier thandeveloping the capabilities needed for biotechnology product inno-vations (Lall 2004).

Learning and capacity building by enterprises involve externali-ties in various forms. Firms learn through interaction with otherenterprises, including suppliers, buyers, competitors, researchers,and consultants. Capacity building generally requires a variety ofinputs: new skills; information about technology, markets, and

standards; and logistics systems appropriate to particular productmarkets. Often such inputs are not easily available to individualfirms, particularly SMEs, which are the primary source of employ-ment and income in most economies. Government, therefore, hasan important role to play by investing in and facilitating learningand capacity building to allow enterprises to enter and competeeffectively within the framework of global value chains.

But government can play this role only in an effective partnershipwith the private sector. For example, the skills needed by electron-ics manufacturers may not be fully anticipated by government,educational institutions, and the market for education (Lall 2004).Rather, collaboration will be required between government and theprivate sector, among public agencies, and with a variety of educa-tional and training institutions. But the challenge for government isto adapt its facilitating role to the needs of enterprises in particularvalue chains. For that to happen, government will need to work

with the private sector, and not just assume that it knows what todo. For example, helping to strengthen the capabilities of farmersto meet global standards for organic fruit and vegetables is verydifferent from supporting auto parts manufacturers to upgrade skillsneeded for new types of hybrid fuel cars.

We now turn to a discussion of some of the key challenges to gov-ernment and public administrators.

Examples of Key Challenges to GovernmentUnderstanding Global Value Chains

Te first and most basic challenge is for governments to develop anunderstanding of the changed environmenta GVC mind-set.Te traditional firm-level focus on general policies and programsfor strengthening enterprise-level productivity is not suffi cient forimproving competitive performance within a GVC framework.It requires understanding specific value chainrelated linkagesnetwork effi cienciesand related policy and institutional fac-tors, as these condition the competitive performance of firms. Forexample, delivering products on time and with the required quality


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South Africa provides an example of a logistics strategy perspectiveby government in partnership with the private sector. Te South

African government identified logistics as a key priority for strengthening the competitive performance of firms in international marketin which cross-border value chains play a key role. Extensive stake-holder engagement (government agencies, state-owned enterprises,the private sector, research institutions) led to the preparation of theNational Freight Logistics Strategy. Tis strategy places particularemphasis on publicprivate partnerships in its implementation,and stresses institutional reforms and interagency coordination(Department of ransport 2005). Te priority placed on logisticsand the sophistication of the discussion between the stakeholders arreflected in the annual State of Logistics Surveys for South Africa,

which stress the role of global value chains and their implicationsfor South African firms. Te surveys look at the interconnected rolethat logistics plays from a macroeconomic perspective, an industry-level perspective (reflecting, for example, logistics practices andthe health and maturity of South African industry supply chains),and a small business development perspective (see Ittmann et al.2005). Te explicit emphasis by government on the role of logisticshas helped make South Africa the top-rated upper-middle-incomecountry in the World Banks logistics performance index. It was

rated twenty-fourth among the 150 countries surveyed, ahead ofmany of the high-growth Asian economies (Arvis et al. 2007).12

Strengthening Enterprise Clusters

Firms, particularly SMEs, may face significant constraints inresponding to sourcing opportunities provided by global valuechains. Government-facilitated vertical and horizontal coopera-tion through enterprise clusters can provide a potentially effectivemechanism to support the participation of local firms in globalvalue chains. Vertical linkages are relationships among firms atdifferent levels in the value chainfor example, between suppliersof inputs and components, assemblers, and distributors to final markets. Tese linkages can improve enterprise access to new markets,skills, technology, information, and knowledge. Horizontal link-ages among firms at the same level within a value chain can allowfor volume purchasing of key inputs, including equipment, rawmaterials, finance, and business services. Tese linkages can expand

joint production capacity for meeting large orders on a regular basisand facilitate specialization in production. Enterprise clusters, orcooperative groups of firms in the same or related industry valuechains, can therefore play a key role in linking domestic enterprisesto international markets through GVCs.13Membership in clusterscan enhance the productivity, innovation potential, and competitiveperformance of firms. Tis membership can allow small enterprisesto combine the advantages of smallness (flexibility) with the benefit

of size (economies of scale and scope). Te existence of supplierclusters in particular industries can also provide locational advan-tages for attracting GVC-related foreign direct investment.

In the United States in 2007, the National Governors Associationsuggested clusters as a basis for growing state economies, explic-itly recognizing the implications of a new role for government,and for cluster-based government-business cooperation. Singaporehas been using a cluster-based strategy, most recently with a focuson developing a creative industries cluster that demonstrates themultiagency and collaborative nature of such initiatives. It is ledby the Ministry of Information, Communication and the Arts, in

Value Chain-Related Trade Facilitation

Global value chains require assured and timely imports of inputs,components, and subassemblies, as well as exports of intermedi-ate products to the next nodes in the network. Terefore, domestictrade regimes and import-export systems and customs proceduresmust facilitate such intra-industry trade if firms in the economyare to participate effectively in international markets through suchchains and networks.

Another example of a new type of governmentbusiness cooperationin trade facilitation is Intels $1 billion investment in an assemblyplant in Vietnam. Intel, a leading electronics/I supplier, manu-factures and ships parts and components globally from geographi-cally distributed locations. It cannot afford delays with shipping,particularly given the time sensitivities of its high-value productsand clients. Terefore, it is working closely with Vietnams customsauthority to introduce an e-customs platform, operating 24 hours aday, seven days a week, with potentially important benefits to otherenterprises and the economy far beyond Intel (see Freeman, Abonyi,and Supapol 2010).

Investment in Logistics Systems

As trade increasingly involves components and semifinished goodsrather than finished products, effi cient logistics systems are essentialfor participation in international production. Delivering a productin the right quality and quantity and on time is a critical require-ment within the framework of global value chains. In this context,basic transport infrastructure is no longer suffi cient. Although someemerging economies need to concentrate on building basic infra-structure, such as airports, highways, ports, and telecommunicationsand information communication technology systems, it is crucialfor all governments to begin to focus simultaneously on the less vis-ible requirements of improving the flow of goods, including acrossborders (see Dobberstein, Neumann, and Zils 2005). In order forfirms to be competitive at home and in international markets, they

require not only low transport costs, but also a host of increasinglysophisticated logistics needs: short transit times, reliable deliveryschedules, careful handling of goods, certification of product quality,and security from theft and damage. An effi cient logistics systemis characterized by a number of factors: economical, multimodaltransport infrastructure; competitive carriers; competent transportintermediaries; fast, effi cient, and transparent cross-border proce-dures; and modern information and communication technology.Tis is particularly important for smaller enterprises that have torely on externally provided logistics services and require systems thatcan handle the distinctive needs of small producers.

Tus, governments are wise to consider the development of a logis-tics strategy perspective, including effective organizational arrange-ments to ensure interagency cooperation, and close partnership

with the private sector.11 For example, the separation of ministries,uncertain infrastructure funding allocations, and a lack of effectivestrategic and organizational framework for interagency coordinationand for governmentbusiness cooperation can significantly limit thecontribution of infrastructure investments to logistics services. Whatis important for government to understand is how interconnectedand interdependent business systems are with political and bureau-cratic systems and processes (for a discussion of the challenges togovernment, see Powell 2001).


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Governing Risks in Chains and Networks

In 2007, Mattel recalled toys decorated with toxic leadbased paintand more than 18 million toys were deemed dangerous because thecontained small magnets that could come loose and be swallowedby children. All were produced by subcontractors in China. In thesame year, Nokia warned that some of its mobile phone batteriescould dangerously overheat. Tese batteries were also produced inChina, but by a subcontractor affi liated with Matsushita, a leading

Japanese company (Te Economist2007). Around the same time,Nike stopped sourcing from Sialkot, Pakistan, because of concernsabout child labor conditions in their suppliers factoriesa decisionthat may have affected the livelihoods of as many as 20,000 Sialkotfamilies (Montero2006).

As these examples illustrate, the globalization of production fun-damentally changes how risks and responsibilities are apportionedbetween the private sector and society, with significant challengesfor the role of government. Global value chains, by their verynature, involve ceding direct control over significant parts of opera-tions to a vast and complex international network of independentsuppliers, shippers, and enterprises. Highly visible brands familiarto consumers, such as Mattel, Nokia, and Nike, have limited contro

over these chains, and their products are sold by global retailers suchas Walmart and Carrefour that have enormous market reach. Tisraises the basic issue of where the risks and associated responsibilitielie in the cross-border production and distribution system.

A variety of risks associated with the production of goods and ser-vices need to be managed effectively in the public interest. Productriskinvolves the quality, reliability, and safety of products andservicesas in the case of Mattel and Nokia. Production process riskrelates to issues such as labor and environmental standards that maynot have a direct effect on the quality of the product, but impact thquality of life in communities, as in the case of Nike in Sialkot. Andsupply riskstems from increased specialization and concentration

of suppliers of critical componentsfor example, an earthquakedisrupting the operations of just two aiwanese semiconductor firmin a single industrial park could severely affect the supply of toys forChristmas, as well as the global aerospace industry (Lynn 2005).

Te fragmentation of production changes how and where risks andresponsibilities are allocatedor not allocatedamong enterprises,between enterprises and consumers, and more generally betweenbusiness and society. Firms are attempting to address this enor-mous challenge individually, as in Ikeas Way of Purchasing HomeFurnishing Products (IWAY); collectively, through initiatives such athe International Chamber of Commerces ICC Guide to Responsible

Sourcing: Integrating Social and Environmental Considerations in theSupply Chain (2008); and multilaterally, as reflected in the OECDsGuidelines for Multinational Enterprises (see OECD Watch 2004for a discussion of the OECD guidelines in the context of globalvalue chains). National governments are trying to sort out their roleas reflected in Canadas proposed Consumer Product Safety Actpassed by the House of Commons in June 2009 and now awaitingSenate approvaland the U.S. Consumer Product Safety Improve-ment Act of 2008, which puts an emphasis on childrens products,and is aimed at tracing the source of problems across borders andensuring compliance by foreign suppliers. An example of govern-ments beginning to cooperate to manage risks in global value chain

close coordination and partnership with the Ministry of rade andIndustry, the Ministry of Manpower, other government agencies,and private sector associations.14 Te surgical instruments clusterin Sialkot, Pakistan, also provides an example of how local clus-ters can be linked to global value chains, as well as the nature ofcluster-related governmentbusiness partnershipfor example, inhelping firms (SMEs) in this cluster adjust to new import standardsmandated by the United States and the European Union (see Nadviand Halder 2002).

Preparing Local Suppliers: Skill Development and Training

It is well understood that policies and programs aimed at raisingthe technical and managerial skills of enterprises can increase theirprospects to be competitive suppliers in GVCs and to upgrade

within networks. A wide variety of government initiatives may befound throughout the world. Tese involve training plans and sup-port for special purpose courses in local training institutions, as wellas information campaigns about the benefits of increased training,skill development, and tax breaks for implementing those initiatives.Tese campaigns are primarily directed to SMEs. More often thannot, such general business development services tend to be of limitedsuccess (see, e.g., Abonyi 2007a, section IV). However, training

programs focused on the specific skills and knowledge needed forsuppliers in particular value chains have been especially effective

when they have involved collaboration between domestic industry,governmentparticularly local governmentand internationalbuyers.

One of the most successful examples of such focused collabora-tion is the Penang Skills Development Centre in Malaysia. Forgingdeliberate links with the worlds leading electronics and I firms,such as Intel and Motorola, was an explicit strategy of the Penangstate government from the early 1970s. Te Penang electronicscluster advanced with the evolution of these lead firms. o ensurethat the necessary skills were in place in the electronics/I clusterthat would enable local firms to upgrade their skills consistent withthe evolution of the global industry, governmentbusiness collabo-ration led to the establishment of the Penang Skills DevelopmentCentre in 1989. It is a nonprofit institution, involving a partnershipbetween industry (domestic and international), local and centralgovernment, and academia. Its mission is to promote shared learn-ing among SMEs in the electronics cluster in order to strengthentheir participation in the electronics and I global value chain. Itsservices are demand driven, responsive to the needs of local firmsand multinational enterprises operating in Penang.

In March 2000, the Penang Skills Development Centre, together

with a number of multinational enterprises and the government,launched the Global Supplier Program for Malaysian SMEs, inorder to prepare local firms for partnerships with such enterprises.In 2004, it launched a new SME supplier development program

without direct linkage to or support from multinational enterprises.Tis program reflects the emerging challenges to government in theglobalization of production, where international buyers are less andless interested in assisting in the development of local supplier capa-bilities, but are increasingly looking to source from suppliers withthe required capacity already in place.15 Tis change also representsthe type of strategic investments that governments need to make iffirms in their countries are to be competitive in global markets.


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Collaborative learning and mutual adjustment.Second, a changein mind-set about how governance happens and how governmentengages with business is to accept that strategic thinking is a req-uisite antecedent to strategic planning. Tis should include a shiftfrom directing and informing the policy-making process to engag-ing in collaborative learning and mutual adjustment. Tis process

will require government, business, and civil society to blend theirdifferent perspectives on complex issues. For example, applyingvalue chain analysis in Cambodia to the process of producing denim

jeans for export required that the import-export system and customprocedures be streamlined. Tis involved multistakeholder outreach to different ministries andprivate sector actors, both foreign and domestic(investor, buyer, suppliers), and working withinternational customers to understand marketexpectations. But this process of partnershipand thinking, planning, and acting strategicallyalso required businesses to better understandthe types of investments and changes needed

with respect to working conditions and train-ing to support competitive performance. Tisinvolved, in turn, cooperation with unions

and nongovernmental organizations. Mutualengagement, breaking down boundaries toinformation exchange, and coordination wererequired of all parties. In general, the process opartnering is just that: a process. It takes time,

resources, and a willingness to listen, think, find areas of agreementand accommodate the different perspectives and expectations ofdiverse stakeholders.

Institution building. Tird, the basic challenge to government, asnoted, is less a focus on what types of policies and programs to cre-ate, such as what tax reforms are needed or what general educationpolicies to introduce. Te more fundamental question relates to creating and/or strengthening institutions and organizationsprivate,public, and hybridthat are essential for effective ongoing publicprivate sector dialogue and collaboration within the frameworkof particular value chains. Te Singapore creative industry cluster,Malaysias Penang Skills Development Centre, and the South Africalogistics strategy are but a few examples of how governments investments in building institutional capacity, both public and private,can lead to such goal alignment, successful collaboration, and jointlearning, and therefore winwin outcomes.

Facilitating networks and clusters.Fourth, governments focus onindividual firms will need to evolve toward greater attention to the

role of networks and clusters. Tis will require government to movefrom a comfortable position of commanding to a more active roleof linking and facilitating broad partnership opportunities withinparticular clusters and networks. Tis means that government needto understand that competition in global industries is increasinglyamong cross-border networks of enterprisesnot just individualfirms. Tis can certainly be seen in the automotive industry withoyota and its supplier network. Tese networks are arenas in whichgovernment and public administration have an active role to play infacilitating new business opportunities. For example, they can helpstrengthen interfirm linkages in such core areas as logistics systemsfor particular value chains (e.g., agribusiness). Clusters provide a

is the ChinaU.S. agreement to work together on consumer productsafety (Agence France-Presse 2009).16

Conclusions: Demands on Public AdministrationIn this paper, we have discussed the new challenges of globalizationof production that governments, particularly in emerging econo-mies, will have to address to effectively enable domestic enterprises,especially SMEs, to benefit from globalization and manage theirrisks. Tese challenges go beyond the traditional roles of governmentand require that new types of partnerships be built. In this way, gov-ernments redefine their own frames of refer-ence, particularly in their relationships withbusiness. We have presented a conceptualframework by which government may thinkmore strategically about its relationships withprivate firms. Tis can afford public adminis-trators the opportunity to provide leadershipon the governance processes and activitiesnecessary for managing globalization of pro-duction issues. Our framework includes theneed for government to understand globalvalue chains, engage in value chainrelated

trade facilitation, invest in logistics systems,strengthen enterprise clusters, and under-stand and effectively govern the risks inher-ent in global value chains and networks, as

well as to lead efforts to invest in and fostereducational capacity, skill development, and training.

From this perspective, we identify five key considerations for publicadministrators to consider in their efforts to think, plan, and actmore strategically. Tis begins with a fundamental rethinking oftheir roles, responsibilities, and relationships and strategically engag-ing private and nongovernmental partners.

Multistakeholder partnerships.Globalization has implications forhow governance is enacted. Te role of government is changing.Government is no longer in as dominant a position as in the pastto drive development and economic performance through the useof its authority and traditional hierarchical relations (e.g., throughdirective policies and regulations). Governments and their publicadministrators need to actively engage in multistakeholder partner-ships to align national and regional governance goals with those ofenterprises in order to benefit from participation in an increasinglyinterconnected and networked world economy. But they must doso in ways that do not compromise core governmentalor broadersocietalvalues and goals. Tis requires a governmental mind-set

that embraces strategic thinking, partnership involvement, andcollaboration in new ways. As discussed, collaboration betweengovernment and business can be seen in diverse areas of governance,such as trade facilitation, logistics, skill development and training,and risk management. Te partnership activities of government cantake the shape of reforming regulatory processes and rules and mak-ing investments in infrastructure projects that can support nationalgoals, as well as business needs, such as the integration of informa-tion technology to support interfirm logistics. Te government ofVietnams collaboration with Intel in reforming the trade facilitationsystem is an example of a new form of government engagement

with business.

[Tis paper presents] aconceptual framework by

which government may thinkmore strategically about itsrelationships with private

firms. Tis can afford publicadministrators the opportunity

to provide leadership onthe governance processes

and activities necessary formanaging globalization of

production issues.


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collectively build toward this strategic mind-set. Te future of publiadministration is one where government and its leaders play activeroles in partnership creation, system reform, and the generation ofnew opportunities. Such change will take place only with a changein mind-set about governmentbusinesscivil society relationships,essential for success in the emerging networked global setting.

Appendix: Key Characteristics of Value Chains andProduction Networks

Avalue chain describes the organization of the production of particular products or services, such as garments, computers, or automo-biles. It refers to the full range of value-added activities required tobring a product or service from conception, through design, sourcininputs, manufacturing process, marketing, distribution, and follow-up support to final consumers. Value chains become global whenactivities are geographically dispersed across borders (see figure 1).

Aproduction networkrepresents the set of linkages within or amonga certain group of firms, in particular value chains for produc-ing specific products such as a particular type of pants, computer,mobile phone, or car. Tis can take the form of production relationships among subsidiaries or affi liates of a multinational enterprise.

Alternatively, they may involve outsourcing and subcontracting toindependent firms, often in geographically distributed locations. Asa result, competition within the framework of global value chains isincreasingly between networks of enterprises rather than individualfirms (e.g., in mobile phones, Nokia and its suppliers versus Sony-Ericsson and its suppliers versus Samsung and its suppliers), and inmany cases, the same suppliers may be part of more than one suchnetwork (see figures 2 and 3).

key framework for strengthening the competitive performance ofdomestic enterprises in global value chains, including in partner-ship with foreign investors. Singapores creative industries clusterstrategy, and the focus of the U.S. National Governors Associationon clusters as a basis for growing state economies, are examples ofthe shift in the role of government.

Managing societal adjustment. Fifth, governments must managethe dislocation and adjustment costs of domestic economies thataccompany the globalization of production if their economies areto benefit from the innovation, productivity growth, and creationof new jobs made possible by globalization (OECD 2007). Tisis likely to include compensating those experiencing losses of jobsand declines in incomes. It will require creating programs that help

workers gain the necessary skills to adjust to new economic patterns,industries, activities, and locations. Tis, in turn, requires close andcontinuing collaboration with the private sector. However, as noted,unless cooperation between government and the private sector isseen by the larger society as serving the public interest, governments

will not be able to maintain the fundamental legitimacy neces-sary for facilitating needed adjustments at the level of enterprises,industries, and economies. Terefore, the challenge of globalization

of production is also at its core a challenge of public accountabilityand legitimacy for the new role of government.

Globalization and interconnectedness, as seen in global value chainsand enterprise clusters, are demanding that government rethinkits roles and responsibilities when it comes to helping to shape themicrofoundations of an economys macro performance. In this con-text, the five key considerations we outline are interdependent and

Figure 1 The Apparel Global Value Chain


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Source: Fung, Fung, and Wind (2008, 10).

Figure 2 Production Network for Levi Cargo Shorts

Source: Hiratsuka, Daisuke (2006). Vertical Intra-Regional Production Networks in East Asia: Case of the Hard Disc 3 Drive

Industry in East Asia, in Hiratsuka, D. ed.,East Asias De Facto Economic Integration, Chapter 6, London: Palgrave Macmillan.

Figure 3 Production Network for a Made in Thailand Hard Disc Drive


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experiencing an ongoing financial crisis triggered by the U.S. subprime lending

meltdown. Te crisis has significantly constrained the availability of global cred

driven by the sharp retrenchment in interbank lending, with serious impacts on

trade flows and production. However, the long-term structural impact on the

global financial system is as yet unclear.

5. For example, Indias Sundram Fastener is a key supplier of radiator caps to

almost every major auto brand.

6. Sundram Fastener Ltd., based in Chennai, India, transformed itself from a

domestic company to a leading multi-billion-dollar global supplier of radiator

caps as a result of General Motors outsourcing the production of radiator caps.

7. See Fung, Fung, and Wind (2008) on the sophisticated and complex require-

ments of coordinating apparel and garment production networks that are

geographically dispersed across borders.

8. See, e.g., Lynn (2005) on the general risks of the network structure of global

production, and Oxfam International (2004) on the threat to labor rights at the

lower end of value chains.

9. A key document setting out the Irish governments new development strategy is

the Enterprise Strategy GroupsAhead of the Curve: Irelands Place in the Global

Economy(2004). In another interesting example, in Tailand, value chain analy

sis by the government, with support from the Asian Development Bank, in the

context of planned extensive publicprivate investment in urban transportation

revealed potential opportunities for building on the economys existing strength

in auto parts and assembly for selected competitive firms to become suppliers fourban mass transit systems (see Abonyi 2007b).

10. For the original value chain analysis, see Global Development Solutions (2003)

For a report on the impact of this work on the government, see Amin (2004),

who quotes Cambodias influential minister of commerce, H. E. Cham Prasidh

Te value chain analysis is an alarm bell . . . we need an emergency response.

Te only way for us to be competitive beyond our borders is to be competitive

within our borders.

11. See, e.g., UNCAD (2008) on linking logistics and global value chains and the

related new role of government and of publicprivate partnerships.

12. aiwans Global Logistics Development Plan is another example of a governmen

strategy, in collaboration with the private sector, focusing on developing logistic

capabilities to strengthen its enterprises competitive advantage in a global

context. See the Global Logistics Development Plan on the website of aiwans

Council for Economic Planning and Development: http://www.cepd.gov.tw/

encontent/m1.aspx?sNo=0002842 (accessed August 20, 2010).

13. For further discussion of clusters see Abonyi (2007a), Alvarez (2005), Anderson

et al. (2004) and Das (2008).

14. For a discussion of the Singapore experience, in particular the recent focus on

developing a biomedical cluster, see Parayil (2005). For Singapores recent focus

on developing a creative industries cluster involving a range of institutions,

see the Creative Industries Singapore website at http://www.ci.sg/strategy.html

(accessed August 20, 2010).

15. See Ruffi ng (2006). Te Penang Skills Development Centre website can be

found at http://www.psdc.com.my (accessed August 20, 2010).

16. Te U.S. Consumer Product Safety Commission and Chinas General Administrtion of Quality Supervision, Inspection and Quarantine have agreed to cooperate

to increase consumer product safety. Tey issued a joint statement that [a] sys-

tematic improvement of practices in the supply and distribution chain will be the

most effective means of enhancing product safety (Agence France-Presse 2009).

ReferencesAbonyi, George. 2007a. Linking Greater Mekong Subregion (GMS) Enterprises to

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indpub2439.pdf [accessed August 20, 2010].

Key characteristics of global value chains and associated productionnetworks include the following:

Governance: Global value chains generally involve a key rolefor lead firms, often global brands such as Levis in garments,Ford in automobiles, Nokia in mobile phones, and Carrefourin food retailing. Tese lead firms provide product, market, andtechnical information with the expectation that lower-tier sup-pliers will maintain and improve performance to meet globalcompetitive standards. Lower-tier suppliers, in turn, invest inequipment, skills, and specialization necessary for producing

within the framework of a production network, with the expecta-tion that lead firms will continue to use their outputs and, overtime, provide opportunities for upgrading within value chains. Standards: Global markets are governed by an increasing varietyof stringent product and process standards that suppliers must meet.Examples of the diversity of standards include general internationalstandards, such as ISO 9000 (quality), ISO 14000 (environment),and SA 8000 (labor). Tey include industry-specific standards, suchG3 for cellular phones and Hazard Analysis and Critical ControlPoint in the food industry. Tey include region-specific standards,such as QS 9000 (quality in autos originating in the United

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Notes1. See Sheng (2009) for an insightful analysis of global financial flows linking the

Asian financial crisis and the present global crisis.2. Tis is the title of a recent collaborative effort by the U.S. National Governors

Association and the Council on Competitiveness (2007) to rethink the founda-

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Cluster-Based Strategies for Growing State Economies.

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integration of liberalized capital markets are well understood in an Asia that still

remembers vividly the experience of the Asian crisis of the late 1990s. Tese

risks are now equally clear globally, as the international economy is presently


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