Through
global production networks, transnational companies develop a transnational organization of production and distribution within and among firms instead of through markets.
Global production networks are now evident across most manufacturing sectors and various service industries are also becoming organized in a similar international form.
(adapted from Jones, A.,
Dictionary of Globalization, Cambridge: Polity, 2006, p.105)
The essentially linear structures of production chains are enmeshed in the broader production networks of inter-firm relationships. Dicken identifies three dimensions of production networks: governance (how they are coordinated and regulated); spatiality (how they are configured geographically) and territorial embeddedness (the extent to which they are connected into particular bounded political, institutional and social settings).
Governance
Transnational corporations (TNCs) play a key role in coordinating production networks. TNCs not only own internationally based assets, but are also typically involved in a spiderweb of collaborative relationships with other legally independent firms across the globe.
Within the production network, each function may be performed by a different firm. In this case, the link consists of a series of externalized transactions, organized through the market. However, the whole network may also be operationalized within a single firm as a vertically integrated system.
The boundary between internalization and externalization is continually shifting as firms make decisions about which functions to perform in-house and which to outsource to other firms.
Dicken uses Gereffi's typology to distinguish between two types of production networks:
- Producer-driven production networks are characteristic of those industries in which transnational corporations (TNCs) or other large integrated enterprises play the central role in controlling the production system. This is most characteristic of capital- and technology-intensive industries such as the automobile, computer, aircraft, and electrical machinery industries. What distinguishes "producer-driven" production systems is the control exercised by the administrative headquarters of the TNCs.
- Buyer-driven production networks tend to occur in those industries in which large retailers, brand-named merchandisers, and trading companies play the pivotal role in setting up decentralized production networks in a variety of exporting countries.
Spatiality
According to Dicken, every production network has
spatiality – the particular geographical configuration and extent of its component elements and the links between them.
This configuration can take place on a local, national, regional or, as is increasingly the case, global scale. A widely accepted view is that the geographical extensiveness of virtually all production networks has increased – in other words, we are witnessing the emergence of
global production networks. Global and regional production networks not only integrate firms into structures that blur traditional organizational boundaries but also integrate national and local economies in ways which have enormous implications for their economic development and well-being.
Territorial Embeddedness
Production networks do not just float freely in a spaceless/placeless world. Every component in the production network – every firm, every economic function – is, quite literally, ‘grounded' in specific locations. All production networks have to operate within multi-scalar regulatory systems. They are, therefore, subject to a multiplicity of geographically differentiated political, social and cultural influences.
Connecting the Global Production Network: Relationships between Customers and Suppliers
In procuring inputs of materials, intermediate products and services for its operations, a firm has three choices:
- It can produce these inputs for itself: the "make" alternative.
- It can purchase the inputs from independent suppliers through conventional market transactions: the "buy" alternative.
- It can procure the inputs through a longer-term collaborative relationship with suppliers: the "network" alternative.
In practice, companies blend in-house supply, market transactions, and embedded relations grounded in networks. Dicken distinguishes three types of inter-firm relationships: subcontracting relationships, strategic alliances, flexible business relationships.
Subcontracting Relationships
Possibly between 50 and 70 per cent of manufacturing costs are spent on purchased inputs and this proportion appears to be increasing. The general trend is for a greater proportion of inputs to be outsourced to supplier firms. Some of these purchases will be "off-the-shelf" sourcing from independent suppliers. However, an increasingly significant proportion of such purchases are made on the basis of longer-term relationships whereby a customer firm subcontracts certain tasks to independent firms.
Firms that rely on a network of suppliers, who outsource many of their tasks, are sometimes called network-firms.
One undoubted development is the tendency for many firms to move towards
closer functional relationships with their suppliers. There is a strong move towards the nomination of
preferred suppliers with whom very close relationships are developed. Such suppliers are increasingly being given greater responsibility for the quality of their outputs and, indeed, are playing a more direct role in the design of products. The result, in many cases, is the development of a system of
tiered suppliers. In tiered production, the buying company deals primarily with the top-tier suppliers, while lower-tier suppliers are managed by those above them in the pyramid. A tiered production system reduces the need for a single company to manage the entire supply chain.
Strategic Alliances
The development of preferred supplier relationships is parallel to one of the most significant developments in the global economy in recent years: the growth and spread of
strategic alliances between firms on an international scale. These alliances, such as joint ventures, have become central to the global strategies of many firms. Most strikingly, the overwhelming majority of strategic alliances are between competitors. Many companies are forming not just single alliances but networks of alliances, in which relationships are multilateral. They create new constellations of economic power, through collective competition.
Strategic alliances are formal agreements between firms to pursue a specific objective. They involve the sharing of risks, rewards, and decision-making. Alliances are not the same as mergers, in which the identities of the merging companies are completely subsumed.
Flexible Business Networks
Dicken suggests that, parallel to subcontracting relationships and strategic alliances, a new organizational form is emerging, the flexible business network, in which
all functions in the production chain are contracted to independent firms, but in which the final product is marketed under the lead company's brand name (Nike). The participants are all separate firms with no common ownership.
(Dicken, P.,
Global Shift: Reshaping the Global Economic Map in the 21st Century, 4th ed., New York: Guilford Press, 2003, pp. 16-21; pp. 252-262)