George Abonyi David M.

Van Slyke Maxwell School of Syracuse University

Governing on the Edges: Globalization of Production and the Challenge to Public Administration in the Twenty-First Century

Part I: 2020: The Good, the Bad, and the Ugly

Globalization means many things for governments constraints on the ability of governments to develop, around the world in terms of governance. Questions that coordinate, and implement appropriate responses. are left unexplored in the public administration literature More fundamentally, they reect the limits of national are what changes in the globalization of production governments to understand and eectively manage mean for governments and their relationships with the dynamics of an increasingly interconnected and business and civil society, and what the implications complex global economy in which the boundaries are for public administration. The authors develop a between the public and private sectors are shifting conceptual framework that governments can use to shape and uncertain. This uncertainty extends beyond the their interactions with business in more strategically and complexity of global capital ows. mutually benecial ways. The data are derived from extensive Globalization in its many forms eldwork in the emerging denes the fundamental chalGlobalization in its many economies of Southeast Asia. Key lenge to the role of government forms denes the fundamental challenges to government include and public administration in challenge to the role of the importance of understanding the twenty-rst century. It is government and public global value chains, value shaping new types of interacadministration in the twentychain-related trade facilitation, tions and interdependence rst century. It is shaping investment in logistics, the among nations, economies, and strengthening of enterprise people, and, in the process, it new types of interactions clusters, eective education, skill is changing the basic role and and interdependence among development and training, and functions of government. The nations, economies, and the governance risks inherent in primary challenge to public people, and, in the process, it value chains and networks. The administration is one of governis changing the basic role and essay concludes with a discussion ing on the edges: connecting functions of government. of ve key considerations government to an increasfor public administration ingly complex, dynamic, and in thinking, planning, and acting strategically in networked global environment (Mintzberg 2004). relationships with the private sector regarding the This requires collaborating eectively with nongovglobalization of production. These considerations are ernmental enterprises, particularly the private sector, crucial for creating business environments that strengthen to shape policy and deliver services while maintaining economic development and manage societal concerns in public accountability. Globalization changes the basic ways that are aligned with public values. role of governance: it requires linking versus commanding, convincing versus controlling, and enabling he global economic crisis that was triggered by and partnering versus doing. What is involved goes the collapse of Lehman Brothers in Septembeyond institutional change to a cultural transformaber 2008 and the earlier Asian nancial crisis tion of public administrationhow civil servants and of the late 1990s, which spread beyond East Asia to citizens perceive their roles and relationships in the Russia and Brazil, both involved a crisis of national context of twenty-rst-century challenges to governand global governance in an increasingly interconment and governance. As Caine and Stier (2010) nected and networked world. The crises demonstrate note, In todays interconnected world this requires the limited capacity of national governments to building a new generation of leaders and workers with understand the size, nature, and interdependence of international experience, a global perspective, and the global capital, production, and trade ows and the skills to match.

George Abonyi is a visiting professor in the Department of Public Administration and Executive Education Program, Maxwell School, Syracuse University; and a senior advisor at the Fiscal Policy Research Institute, Ministry of Finance, Thailand. His current research examines how the changing nature of international business and competitiveness is presenting new challenges to public policy and the role of government, and to governmentbusiness relations, with a special focus on Asia. E-mail: gabonyi@gmail.com David M. Van Slyke is an associate professor in the Department of Public Administration, Maxwell School of Citizenship and Public Affairs, Syracuse University. His current research examines government contracting, publicprivate partnerships, governmentbusiness relationships, and strategic management. E-mail: vanslyke@maxwell.syr.edu

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Public administration as the linchpin between government and governance has too often been behind the wave of changes taking place within countries and across transnational boundaries. The eld of public administration has embraced a number of public management reforms, such as contracting and partnerships (Boyne 1998; Brown and Potoski 2005), strategy and strategic planning (Boyne and Walker 2004; Poister and Streib 2005), performance management (Behn 2006; Moynihan 2005; Pollitt 2006), public participation and citizen satisfaction (Bingham, Nabatchi, and OLeary 2005; Wichowsky and Moynihan 2008), and, in general, a range of New Public Management reforms (Hood and Peters 2004; Lynn, Heinrich, and Hill 2000; Roberts 2010). However, little systematic attention has been paid to the issue of governmentbusiness relations, particularly in the context of a changing international economic environment, beyond a focus on regulation (e.g., Carpenter 2009). More recent scholarship on collaborative governance (OLeary and Bingham 2009) has spoken of the need to connect government with other stakeholders, while other authors have also raised awareness about the need for government to more actively engage, develop, and play a role in multisectoral networks for the production and delivery of goods and services (Brown, Potoski, and Van Slyke 2006). According to a recent McKinsey Global Survey, the need for government and business to work together is an important and timely issue. In the survey, business executives reported that government is likelier to aect companies economic value than any other stakeholder except customers . . . even though many nd that dealing with government is often frustrating and consider government ocials to be uninformed about the economies of their industries (Dua, Heil, and Wilkins 2010, 1, 2).

by international institutions, such as the World Bank, Asian Development Bank, and various United Nations agencies (e.g., UN Conference on Trade and Development, UN Industrial Development Organization, UN Economic Commission for Europe, UN Economic and Social Commission for Asia and the Pacic). Although the issues discussed are general in nature, with lessons and examples drawn from comparative cases and experience in both emerging and developed economies, we have a particular interest and focus on the implications for emerging economies and small and medium-scale enterprises (SMEs). The paper is organized into six sections, with an accompanying appendix. In the following section, we discuss globalization, specically the globalization of production, and the implications of these issues for public administration, governance, and governments relationships with private sector organizations. We then develop our conceptual framework by discussing the drivers of change and the changing role of government. We identify key challenges to government derived from our data collection and analysis. These challenges include global value chains, value chain-related trade facilitation, investment in logistics, the strengthening of enterprise clusters, eective education, skill development and training, and the governance risks inherent in value chains and networks.

In this paper, we look at current policies and practices as a precedent for the future of In this governmentbusiness relationships against current policies and practices The Basic Challenge of Globalization the backdrop of economic globalization. As as a precedent for the future Globalization is the product of political, globalization continues and nation-states of governmentbusiness economic, and technological forces that have adjust to changing environments across all relationships against the been accelerating since the early 1980s. In sectors of their economies, renewed attenexploring its challenges to public administion to governmentbusiness relationships backdrop of economic tration, our interest here is economic glois important to the future of eective public globalization. balization. This includes two interrelated administration and governance. The focus of components: the globalization of nance this paper is developing a conceptual frameand the globalization of production. The globalization of nance work that governments can use to shape their thinking and interacinvolves cross-border ows of capital that, together with the increastions with business in more strategically and mutually benecial ing integration of national nancial systems, are reshaping the ways. Those interactions require public administrators to be better international economy. The opportunities and risks that this creates informed about the nature and challenges of the globalization of for economiesand the challenges that it poses to governments production and its implications for the state of practice in governare receiving a great deal of attention in the context of the present mentbusiness relations. The framework also suggests directions global economic crisis, and will not be addressed here.1 for those institutions and actors engaged in governance to consider for improving government performance in enabling business and Our focus is on the globalization of production that is transforming economic development. international business, including the nature and geography of trade and investment ows. It is rearranging the shape, structure, and The data for our framework derive from extensive eld work in the relationships of national and regional economies, including their emerging economies of Southeast Asia. More than 100 interviews wealth-generating potential and performance. were conducted with government, private sector, and civil society ocials in 15 countries. The data were collected from extensive case study research, analysis of interview data, and review of a substantial The globalization of production and the networked world that it creates present fundamental challenges to the role and boundaries of body of secondary documentation, including analysis of experience
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We conclude with a discussion of ve key considerations for public administration in thinking, planning, and acting strategically in relationships with the private sector with respect to the globalization of production. Those considerations include the use of multistakeholder partnerships, collaborative learning and mutual adjustment, institution building, facilitating networks and clusters, and managing societal adjustment. These considerations will be crucial for creating business environments that strengthen economic development and manage societal issues in ways that are aligned with public values. paper, we look at

government in the twenty-rst century, requiring basic adjustments in the functions and organization of government in both developed and developing economies. At the heart of the challenge to government is getting strategic collaboration with the private sector right in order to ensure gains and manage the risks from the transformation of the global economy. The private sector needs government to help address constraints and externalities associated with building capabilities so that it can compete eectively in an evolving international environment (Lall 2004). This requires critical public inputs in such areas as standards and certication, special purpose logistics systems, import and export procedures, and training and skill development. But governments also need to work closely with private enterprise in order to understand the specic and dierentiated constraints and opportunities being faced if it is to facilitate the performance of rms in desired directions. In the process, government must manage the potentially divisive impactssuch as economic and social dislocations and adjustments that accompany the transformation of industries and economies. In all this, it is the governments of emerging economies that face the most dicult task in helping enterprises and societies cope with the challenges of the globalization of production. At the same time, they are also developing innovative responses worthy of attention. The basic challenge to government lies less in asking what types of policies and programs to createfor example, what tax reforms are needed or what general education policies and programs to introduce. Instead, the more fundamental questions are as follows: (1) Does government have a shared conceptual framework and related institutions that will allow public administrators to engage eectively in ongoing discussions with a diverse private sector in a networked environment? (2) Do governments have the institutional capacity to respond selectively and eectively to opportunities and constraints that such ongoing dialogue identies? (Hausmann, Rodrik, and Sabel 2008). In this setting, strategic collaboration between government and the private sector is likely to be accepted as legitimate by the rest of society only if it is seen as furthering the public interest in terms of equitable and sustained economic growth and development. At one level, this requires public administrators to build a new conceptual map of the emerging international economy as a foundation for a wide range of policies, programs, and services. This new map is based on value chains, production networks, and enterprise clusters, which are the building blocks of an increasingly interconnected world (see the appendix for denitions and examples of these concepts). Operationally, this new approach implies changes in the role of government in such traditional areas as infrastructure investment, trade facilitation, and education and training, as well as in nontraditional areas such as cluster-based strategies for growing state economies that involve new functions and institutional relationships.2 Globalization of Production: The Transformation of International Business Globalization is transforming the nature and location of international production, trade, and investment (e.g., Baldwin 2006; Dicken 2007).3 In the process, it is changing the competitive environment for enterprises and bringing new opportunities and

challenges. To understand the globalization of production, we highlight four key drivers of change that need to be understood by public administrators. The rst is policy liberalization. Policy liberalization by governments is occurring at the borders, and is directed at reducing import, export, and investment constraints. It is also occurring behind bordersfor example, through domestic regulatory reforms. New options for the geographic location of production, and the integration and expansion of fragmented national markets for both intermediate and nal products, are being developed. As a result, regional and global opportunities are developing for domestic rms. The second driver is accelerating technological change in transport, telecommunications, and information technology. Public investment and government deregulation are playing key roles in this change. This is supported by managerial innovation for coordination in the production of both goods and services, such as lean manufacturing and just-in-time production. This lowers costs, reduces distance and time, extends the reach of enterprises, and allows the simultaneous fragmentation, geographic dispersion, and coordination of production. The third driver is increasing mobility of capital. This action is facilitated by government policies, such as investment and capital account liberalization, and by diversifying nancing options for competitive local enterprises. Foreign direct investment can take advantage of cross-border dierences in the cost of production factors, such as labor and local supplies of technology and people, both skilled and unskilled, and it provides new opportunities for domestic producers. At the same time, increasing capital owsamplied by nancial innovations in new institutions and productsare changing the international nancial landscape, for better and worse, including loosening constraints on nancing for potentially competitive domestic enterprises.4 The fourth driver is the demands of increasing competition, which are creating simultaneous pressures for lower cost, higher product and service quality, shorter delivery time, and wider choice. It is important for public administrators to understand that in an increasingly fragmented global production environment, competition is not just among individual enterprises, but more often involves networks of linked rms that include both large and small enterprises. One example is Nokia and its network of suppliers versus Motorola and its network versus Samsung and its network. In many cases, the same supplier may participate in multiple such networks.5 Having identied and described the four key drivers of change, it is important for public administrators to have an understanding of the context of the globalization of production. International production, trade, and investment are increasingly organized within the framework of global value chains and associated production networks (see the appendix for denitions and examples) in an expanding range of product groups, such as garments, agroindustry, furniture, automobiles and auto parts, consumer electronics, telecommunications and information technology (IT), and business and health services. Operationally, this involves the fragmentation, dispersal, coordination, and reintegration of production-related activities among rms in geographically dispersed locations.
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Although many large multinational enterprises continue to provide a variety of products and services in global markets (e.g., GE, Sony), they increasingly purchase inputs and components from smaller rms in widely dispersed locations that serve particular industry niches. Increasingly, global trade involves the import and export of parts, components, subassemblies, and services within the framework of global value chains (GVCs) and associated production networks. This has resulted in growing task-related specialization by rms in the production of goods and services and a corresponding acceleration of growth in intra-industry and intra-product trade, as compared with traditional trade in nal products. This changes the nature of international economic relations in fundamental ways (see, e.g., Athukorala and Yamashita 2009; Bridgman 2010; Escaith 2009; Grossman and Rossi-Hansberg 2006; UNCTAD 2004; World Trade Organization 2008). Although the global economic crisis of 20082009 has had a signicant impact on slowing international trade and investment, a variety of studies suggests that the increasing globalization of production and its role in the world economy is unlikely to change any time soon (see, e.g., Bnassy-Qur et al. 2009; Giovanni and Levchenko 2009; UNCTAD 2009; Yi 2009). As production systems become decentralized, fragmented, and more specialized, new market opportunities emerge for all types of rms, including SMEs in emerging economies, to enter global markets and upgrade to higher-value activities through specialization. Many rms, particularly smaller enterprises, are nding that success and creating value may be achieved through specialization in a limited set of activities, outputs, and market niches, if they are part of the sourcing structure in global value chains. For example, even simple components, such as radiator caps, can be produced for regional and global markets by a supplier in Toyotas or GMs production network (as in the case of Indias Sundram Fastener6). Specialized niche markets, such as organic fruit and vegetables, can be regional and even global in nature if the buyers are global retailers such as Walmart or Carrefour. Global sourcing has also allowed enterprises and economies to become competitive in a range of increasingly sophisticated product markets without developing local manufacturing capabilities. Therefore, enterprises from emerging economies can get into the low end of sophisticated activities and reap enormous export benets. At the same time, enterprises from developed economies can use global sourcing to stimulate innovation and technology development in new areas and create new product markets (see, e.g., OECD 2007). Apples iPod, one of the most successful consumer electronic products in history, is an example of a U.S.-based innovation leveraging international (largely Asian) production networks (Dedrick, Kraemer, and Linden 2008).

simple as Levis cargo shorts (see gure 2, appendix). The payos from participating in GVCs can be potentially high to enterprises and economies, but so are the requirements for entry and the challenges of moving up the value chain. Taking advantage of GVC-related opportunities requires that enterprises be capable of delivering specied products, in the right quantity, with the required quality and at the right time. They have to meet a variety of stringent global standards, which can deal with quality, labor conditions, and the environment. They also have to be ready to upgrade or innovate and add value over time. Some of these requirements are a function of a rms ability to upgrade its own internal capabilities, such as improving the eciency of particular production-related tasks. However, other opportunities involve public administrators taking action on behalf of government and rms to help achieve the most hospitable and sustainable business environment, while not detracting from the governance goals on behalf of citizens. This requires government action to be taken in some form, such as streamlining import-export procedures, providing ecient and dierentiated interrm logistics systems, or facilitating new forms of enterprise cooperation and partnerships, such as enterprise clusters. In addition, signicant risks to enterprises, economies, and societies associated with fragmented and networked forms of international production are becoming increasingly visible. These risks require government to play a proactive role in mitigating potential negative externalities, for example by ensuring product safety and labor conditions throughout a cross-border network. This may call for social adjustments to cope with production relocation, and avoiding the very real risk of lock in of local rms to the low-skill and lowvalue added parts of value chains.8 Addressing these challenges goes beyond the traditional roles of governments. It involves building new types of partnerships and redening the framework for governmentbusiness relations. The next section identies some of the key implications of the globalization of production for government, with examples of initiatives from around the world.

Implications for Government and Public Administration The traditional neoliberal approach views the legitimate role of government as providing the conditions for a stable macroeconomy with clear rules of the game, such as property rights, and enforcing regulations to achieve economic stability. Beyond this responsibility, there has been wide variation in expectations about what government should do, but in general, a widely accepted role for government has been to support programs and services in policy areas such as education, social protection, security, health, and infrastructure. Beyond those generally recognized and agreed upon policy areas of government involvement and funding, there has not been a basis In all this, the management of production networks requires for supporting other types of activities, technologies, or enterprises. signicant sophistication, coordination, and Such selective support has been associated cooperation among participating enterprises The globalization of production with what are seen as failed attempts at that goes well beyond the traditional concept changes the role of government. industrial strategy of picking winners. of simple outsourcing.7 This is true whether In this setting, strong local The globalization of production changes the it is for highly complex and technologically capabilities and eective crossrole of government. In this setting, strong advanced products such as the Boeing 777 or border linkages determine local capabilities and eective cross-border the iPod, for middle-level technology prodlinkages determine competitive success. Even ucts such as computer hard disks (see gure 3, competitive success. seemingly simple entry-level activities by appendix), or for something as seemingly
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rms, such as participation in food processing or apparel and clothing, require sophisticated management and technological capabilities if they are to compete in international markets. Therefore, sustained growth and economic transformation are dependent on learning, knowledge acquisition, information sharing and coordination, and capacity building. This involves how enterprises manage the process of identifying, mastering, adapting, and innovating the activities, skills, and technologies that are essential for competitive performance within the framework of specic value chains. The nature of this learning and capacity building varies by the complexity and scale of the activities, processes, and technologies involved. For example, becoming a competitive garment assembler (gure 2, appendix) is less demanding than becoming a hard disc component manufacturer (gure 3, appendix), which, in turn, is easier than developing the capabilities needed for biotechnology product innovations (Lall 2004). Learning and capacity building by enterprises involve externalities in various forms. Firms learn through interaction with other enterprises, including suppliers, buyers, competitors, researchers, and consultants. Capacity building generally requires a variety of inputs: new skills; information about technology, markets, and standards; and logistics systems appropriate to particular product markets. Often such inputs are not easily available to individual rms, particularly SMEs, which are the primary source of employment and income in most economies. Government, therefore, has an important role to play by investing in and facilitating learning and capacity building to allow enterprises to enter and compete eectively within the framework of global value chains. But government can play this role only in an eective partnership with the private sector. For example, the skills needed by electronics 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 the private sector, among public agencies, and with a variety of educational and training institutions. But the challenge for government is to adapt its facilitating role to the needs of enterprises in particular value chains. For that to happen, government will need to work with the private sector, and not just assume that it knows what to do. For example, helping to strengthen the capabilities of farmers to meet global standards for organic fruit and vegetables is very dierent from supporting auto parts manufacturers to upgrade skills needed for new types of hybrid fuel cars. We now turn to a discussion of some of the key challenges to government and public administrators. Examples of Key Challenges to Government
Understanding Global Value Chains

within and across borders in very dierent value chains, such as electronics, automotive parts, garments, and fresh fruit and vegetables, is dependent on ecient special purpose interrm logistics systems and appropriate import-export procedures. These are likely to dier signicantly among very dierent types of products. To implement a GVC mind-set, value chain mapping allows government and public administrators to engage with relevant stakeholders to analyze and understand the structure and performance of particular value chains in order to identify where improvements are necessary, the types of interventions needed, and by whom (see, e.g., FIAS 2007; GTZ 2007). This could involve particular policy or administrative reforms, including more eective interagency coordination. Examples would be to improve import-export procedures for competing in the global garment value chain (as in the case of Cambodia), to strengthen interrm logistics necessary for supplying a wide range of international buyers (as in the case of South Africa), or to help provide specialized training programs for local SMEs to become competitive producers for the global electronics/IT value chain (as in the example of Penang, Malaysia). Developing a GVC mind-set can then provide the foundations for an eective and focused government strategy, in collaboration with the private sector, for strengthening the participation of domestic enterprisesin particular value chains. The government of Ireland followed the successful development strategies of East Asian economies, and hence was dubbed the Celtic Tiger. Ireland used an understanding of global value chains as the basis for its successful strategy of attracting foreign direct investment that moved the economy up the value chain over time from manufacturing to R&D in electronics/IT, and to knowledge-based activities 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 eective institutional framework for governmentbusiness cooperation that was necessary for implementing a successful industry- and rm-based strategy for attracting foreign direct investment. A GVC mind-set also provided the exibility and capacity for the IDA to understand specic business needs of particular value chains and, therefore, to develop supporting complementary policies and programs, such as focused reform of the education system to provide required skills.9 Two successful examples are the chemical and pharmaceutical and computer gaming industries. In Cambodia, whose dominant manufacturing export industry is garments, a World Banksupported analysis of key value chains, such as denim jeans production, revealed that important improvements in import-export and customs procedures were needed in order for Cambodian rms to remain competitive suppliers in the apparel and garment global value chain. This led directly to a decision by the prime minister in March 2004 to establish an Inter-Ministerial Special Task Force for Investment Climate and Trade Facilitation, and resulted in the formulation of a comprehensive, multiagency reform strategy. Although signicant problems of implementation remain, this was an important step in Cambodias public administration reform process. The competitive performance of its critical garment industry was supported through initiatives aimed at reducing costs and time delays and eliminating unnecessary steps and duplication in customs procedures.10
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The rst and most basic challenge is for governments to develop an understanding of the changed environmenta GVC mind-set. The traditional rm-level focus on general policies and programs for strengthening enterprise-level productivity is not sucient for improving competitive performance within a GVC framework. It requires understanding specic value chainrelated linkages network ecienciesand related policy and institutional factors, as these condition the competitive performance of rms. For example, delivering products on time and with the required quality

Value Chain-Related Trade Facilitation

Global value chains require assured and timely imports of inputs, components, and subassemblies, as well as exports of intermediate products to the next nodes in the network. Therefore, domestic trade regimes and import-export systems and customs procedures must facilitate such intra-industry trade if rms in the economy are to participate eectively in international markets through such chains and networks. Another example of a new type of governmentbusiness cooperation in trade facilitation is Intels $1 billion investment in an assembly plant in Vietnam. Intel, a leading electronics/IT supplier, manufactures and ships parts and components globally from geographically distributed locations. It cannot aord delays with shipping, particularly given the time sensitivities of its high-value products and clients. Therefore, it is working closely with Vietnams customs authority to introduce an e-customs platform, operating 24 hours a day, seven days a week, with potentially important benets to other enterprises and the economy far beyond Intel (see Freeman, Abonyi, and Supapol 2010).
Investment in Logistics Systems

As trade increasingly involves components and seminished goods rather than nished products, ecient logistics systems are essential for participation in international production. Delivering a product in the right quality and quantity and on time is a critical requirement within the framework of global value chains. In this context, basic transport infrastructure is no longer sucient. Although some emerging economies need to concentrate on building basic infrastructure, such as airports, highways, ports, and telecommunications and information communication technology systems, it is crucial for all governments to begin to focus simultaneously on the less visible requirements of improving the ow of goods, including across borders (see Dobberstein, Neumann, and Zils 2005). In order for rms to be competitive at home and in international markets, they require not only low transport costs, but also a host of increasingly sophisticated logistics needs: short transit times, reliable delivery schedules, careful handling of goods, certication of product quality, and security from theft and damage. An ecient logistics system is characterized by a number of factors: economical, multimodal transport infrastructure; competitive carriers; competent transport intermediaries; fast, ecient, and transparent cross-border procedures; and modern information and communication technology. This is particularly important for smaller enterprises that have to rely on externally provided logistics services and require systems that can handle the distinctive needs of small producers. Thus, governments are wise to consider the development of a logistics strategy perspective, including eective organizational arrangements 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 eective strategic and organizational framework for interagency coordination and for governmentbusiness cooperation can signicantly limit the contribution of infrastructure investments to logistics services. What is important for government to understand is how interconnected and interdependent business systems are with political and bureaucratic systems and processes (for a discussion of the challenges to government, see Powell 2001).
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South Africa provides an example of a logistics strategy perspective by government in partnership with the private sector. The South African government identied logistics as a key priority for strengthening the competitive performance of rms in international markets in which cross-border value chains play a key role. Extensive stakeholder engagement (government agencies, state-owned enterprises, the private sector, research institutions) led to the preparation of the National Freight Logistics Strategy. This strategy places particular emphasis on publicprivate partnerships in its implementation, and stresses institutional reforms and interagency coordination (Department of Transport 2005). The priority placed on logistics and the sophistication of the discussion between the stakeholders are reected in the annual State of Logistics Surveys for South Africa, which stress the role of global value chains and their implications for South African rms. The surveys look at the interconnected roles that logistics plays from a macroeconomic perspective, an industrylevel perspective (reecting, for example, logistics practices and the health and maturity of South African industry supply chains), and a small business development perspective (see Ittmann et al. 2005). The explicit emphasis by government on the role of logistics has helped make South Africa the top-rated upper-middle-income country in the World Banks logistics performance index. It was rated twenty-fourth among the 150 countries surveyed, ahead of many of the high-growth Asian economies (Arvis et al. 2007).12
Strengthening Enterprise Clusters

Firms, particularly SMEs, may face signicant constraints in responding to sourcing opportunities provided by global value chains. Government-facilitated vertical and horizontal cooperation through enterprise clusters can provide a potentially eective mechanism to support the participation of local rms in global value chains. Vertical linkages are relationships among rms at dierent levels in the value chainfor example, between suppliers of inputs and components, assemblers, and distributors to nal markets. These linkages can improve enterprise access to new markets, skills, technology, information, and knowledge. Horizontal linkages among rms at the same level within a value chain can allow for volume purchasing of key inputs, including equipment, raw materials, nance, and business services. These linkages can expand joint production capacity for meeting large orders on a regular basis and facilitate specialization in production. Enterprise clusters, or cooperative groups of rms in the same or related industry value chains, can therefore play a key role in linking domestic enterprises to international markets through GVCs.13 Membership in clusters can enhance the productivity, innovation potential, and competitive performance of rms. This membership can allow small enterprises to combine the advantages of smallness (exibility) with the benets of size (economies of scale and scope). The existence of supplier clusters in particular industries can also provide locational advantages for attracting GVC-related foreign direct investment. In the United States in 2007, the National Governors Association suggested clusters as a basis for growing state economies, explicitly recognizing the implications of a new role for government, and for cluster-based government-business cooperation. Singapore has been using a cluster-based strategy, most recently with a focus on developing a creative industries cluster that demonstrates the multiagency and collaborative nature of such initiatives. It is led by the Ministry of Information, Communication and the Arts, in

close coordination and partnership with the Ministry of Trade and Industry, the Ministry of Manpower, other government agencies, and private sector associations.14 The surgical instruments cluster in Sialkot, Pakistan, also provides an example of how local clusters can be linked to global value chains, as well as the nature of cluster-related governmentbusiness partnershipfor example, in helping rms (SMEs) in this cluster adjust to new import standards mandated by the United States and the European Union (see Nadvi and Halder 2002).
Preparing Local Suppliers: Skill Development and Training

Governing Risks in Chains and Networks

It is well understood that policies and programs aimed at raising the technical and managerial skills of enterprises can increase their prospects to be competitive suppliers in GVCs and to upgrade within networks. A wide variety of government initiatives may be found throughout the world. These involve training plans and support for special purpose courses in local training institutions, as well as information campaigns about the benets of increased training, skill development, and tax breaks for implementing those initiatives. These campaigns are primarily directed to SMEs. More often than not, such general business development services tend to be of limited success (see, e.g., Abonyi 2007a, section IV). However, training programs focused on the specic skills and knowledge needed for suppliers in particular value chains have been especially eective when they have involved collaboration between domestic industry, governmentparticularly local governmentand international buyers. One of the most successful examples of such focused collaboration is the Penang Skills Development Centre in Malaysia. Forging deliberate links with the worlds leading electronics and IT rms, such as Intel and Motorola, was an explicit strategy of the Penang state government from the early 1970s. The Penang electronics cluster advanced with the evolution of these lead rms. To ensure that the necessary skills were in place in the electronics/IT cluster that would enable local rms to upgrade their skills consistent with the evolution of the global industry, governmentbusiness collaboration led to the establishment of the Penang Skills Development Centre in 1989. It is a nonprot institution, involving a partnership between industry (domestic and international), local and central government, and academia. Its mission is to promote shared learning among SMEs in the electronics cluster in order to strengthen their participation in the electronics and IT global value chain. Its services are demand driven, responsive to the needs of local rms and 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, in order to prepare local rms for partnerships with such enterprises. In 2004, it launched a new SME supplier development program without direct linkage to or support from multinational enterprises. This program reects the emerging challenges to government in the globalization of production, where international buyers are less and less interested in assisting in the development of local supplier capabilities, but are increasingly looking to source from suppliers with the required capacity already in place.15 This change also represents the type of strategic investments that governments need to make if rms in their countries are to be competitive in global markets.

In 2007, Mattel recalled toys decorated with toxic leadbased paint, and more than 18 million toys were deemed dangerous because they contained small magnets that could come loose and be swallowed by children. All were produced by subcontractors in China. In the same year, Nokia warned that some of its mobile phone batteries could dangerously overheat. These batteries were also produced in China, but by a subcontractor aliated with Matsushita, a leading Japanese company (The Economist 2007). Around the same time, Nike stopped sourcing from Sialkot, Pakistan, because of concerns about child labor conditions in their suppliers factoriesa decision that may have aected the livelihoods of as many as 20,000 Sialkot families (Montero 2006). As these examples illustrate, the globalization of production fundamentally changes how risks and responsibilities are apportioned between the private sector and society, with signicant challenges for the role of government. Global value chains, by their very nature, involve ceding direct control over signicant parts of operations to a vast and complex international network of independent suppliers, shippers, and enterprises. Highly visible brands familiar to consumers, such as Mattel, Nokia, and Nike, have limited control over these chains, and their products are sold by global retailers such as Walmart and Carrefour that have enormous market reach. This raises the basic issue of where the risks and associated responsibilities lie in the cross-border production and distribution system. A variety of risks associated with the production of goods and services need to be managed eectively in the public interest. Product risk involves the quality, reliability, and safety of products and servicesas in the case of Mattel and Nokia. Production process risk relates to issues such as labor and environmental standards that may not have a direct eect on the quality of the product, but impact the quality of life in communities, as in the case of Nike in Sialkot. And supply risk stems from increased specialization and concentration of suppliers of critical componentsfor example, an earthquake disrupting the operations of just two Taiwanese semiconductor rms in a single industrial park could severely aect the supply of toys for Christmas, as well as the global aerospace industry (Lynn 2005). The fragmentation of production changes how and where risks and responsibilities are allocatedor not allocatedamong enterprises, between enterprises and consumers, and more generally between business and society. Firms are attempting to address this enormous challenge individually, as in Ikeas Way of Purchasing Home Furnishing Products (IWAY); collectively, through initiatives such as the International Chamber of Commerces ICC Guide to Responsible Sourcing: Integrating Social and Environmental Considerations in the Supply Chain (2008); and multilaterally, as reected in the OECDs Guidelines for Multinational Enterprises (see OECD Watch 2004 for a discussion of the OECD guidelines in the context of global value chains). National governments are trying to sort out their role, as reected in Canadas proposed Consumer Product Safety Act passed by the House of Commons in June 2009 and now awaiting Senate approvaland the U.S. Consumer Product Safety Improvement Act of 2008, which puts an emphasis on childrens products, and is aimed at tracing the source of problems across borders and ensuring compliance by foreign suppliers. An example of governments beginning to cooperate to manage risks in global value chains
Governing on the Edges S39

Collaborative learning and mutual adjustment. Second, a change in mind-set about how governance happens and how government engages with business is to accept that strategic thinking is a reqConclusions: Demands on Public Administration uisite antecedent to strategic planning. This should include a shift In this paper, we have discussed the new challenges of globalization from directing and informing the policy-making process to engagof production that governments, particularly in emerging econoing in collaborative learning and mutual adjustment. This process mies, will have to address to eectively enable domestic enterprises, will require government, business, and civil society to blend their especially SMEs, to benet from globalization and manage their dierent perspectives on complex issues. For example, applying risks. These challenges go beyond the traditional roles of government value chain analysis in Cambodia to the process of producing denim and require that new types of partnerships be built. In this way, gov- jeans for export required that the import-export system and customs ernments redene their own frames of referprocedures be streamlined. This involved multience, particularly in their relationships with stakeholder outreach to dierent ministries and [This paper presents] a business. We have presented a conceptual private sector actors, both foreign and domestic conceptual framework by framework by which government may think (investor, buyer, suppliers), and working with which government may think more strategically about its relationships with international customers to understand market private rms. This can aord public adminisexpectations. But this process of partnership more strategically about its trators the opportunity to provide leadership and thinking, planning, and acting strategically relationships with private on the governance processes and activities also required businesses to better understand rms. This can aord public necessary for managing globalization of prothe types of investments and changes needed administrators the opportunity duction issues. Our framework includes the with respect to working conditions and trainto provide leadership on need for government to understand global ing to support competitive performance. This the governance processes value chains, engage in value chainrelated involved, in turn, cooperation with unions trade facilitation, invest in logistics systems, and nongovernmental organizations. Mutual and activities necessary for strengthen enterprise clusters, and underengagement, breaking down boundaries to managing globalization of stand and eectively govern the risks inherinformation exchange, and coordination were production issues. ent in global value chains and networks, as required of all parties. In general, the process of well as to lead eorts to invest in and foster partnering is just that: a process. It takes time, educational capacity, skill development, and training. resources, and a willingness to listen, think, nd areas of agreement, and accommodate the dierent perspectives and expectations of From this perspective, we identify ve key considerations for public diverse stakeholders. administrators to consider in their eorts to think, plan, and act more strategically. This begins with a fundamental rethinking of Institution building. Third, the basic challenge to government, as their roles, responsibilities, and relationships and strategically engag- noted, is less a focus on what types of policies and programs to creing private and nongovernmental partners. ate, such as what tax reforms are needed or what general education policies to introduce. The more fundamental question relates to creMultistakeholder partnerships. Globalization has implications for ating and/or strengthening institutions and organizationsprivate, how governance is enacted. The role of government is changing. public, and hybridthat are essential for eective ongoing public Government is no longer in as dominant a position as in the past private sector dialogue and collaboration within the framework to drive development and economic performance through the use of particular value chains. The Singapore creative industry cluster, of its authority and traditional hierarchical relations (e.g., through Malaysias Penang Skills Development Centre, and the South Africa directive policies and regulations). Governments and their public logistics strategy are but a few examples of how governments investadministrators need to actively engage in multistakeholder partnerments in building institutional capacity, both public and private, ships to align national and regional governance goals with those of can lead to such goal alignment, successful collaboration, and joint enterprises in order to benet from participation in an increasingly learning, and therefore winwin outcomes. interconnected and networked world economy. But they must do so in ways that do not compromise core governmentalor broader Facilitating networks and clusters. Fourth, governments focus on societalvalues and goals. This requires a governmental mind-set individual rms will need to evolve toward greater attention to the that embraces strategic thinking, partnership involvement, and role of networks and clusters. This will require government to move collaboration in new ways. As discussed, collaboration between from a comfortable position of commanding to a more active role government and business can be seen in diverse areas of governance, of linking and facilitating broad partnership opportunities within such as trade facilitation, logistics, skill development and training, particular clusters and networks. This means that government needs and risk management. The partnership activities of government can to understand that competition in global industries is increasingly take the shape of reforming regulatory processes and rules and mak- among cross-border networks of enterprisesnot just individual ing investments in infrastructure projects that can support national rms. This can certainly be seen in the automotive industry with goals, as well as business needs, such as the integration of informaToyota and its supplier network. These networks are arenas in which tion technology to support interrm logistics. The government of government and public administration have an active role to play in Vietnams collaboration with Intel in reforming the trade facilitation facilitating new business opportunities. For example, they can help system is an example of a new form of government engagement strengthen interrm linkages in such core areas as logistics systems with business. for particular value chains (e.g., agribusiness). Clusters provide a is the ChinaU.S. agreement to work together on consumer product safety (Agence France-Presse 2009).16
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key framework for strengthening the competitive performance of domestic enterprises in global value chains, including in partnership with foreign investors. Singapores creative industries cluster strategy, and the focus of the U.S. National Governors Association on clusters as a basis for growing state economies, are examples of the shift in the role of government. Managing societal adjustment. Fifth, governments must manage the dislocation and adjustment costs of domestic economies that accompany the globalization of production if their economies are to benet from the innovation, productivity growth, and creation of new jobs made possible by globalization (OECD 2007). This is likely to include compensating those experiencing losses of jobs and 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. This, in turn, requires close and continuing collaboration with the private sector. However, as noted, unless cooperation between government and the private sector is seen by the larger society as serving the public interest, governments will not be able to maintain the fundamental legitimacy necessary for facilitating needed adjustments at the level of enterprises, industries, and economies. Therefore, the challenge of globalization of production is also at its core a challenge of public accountability and legitimacy for the new role of government. Globalization and interconnectedness, as seen in global value chains and enterprise clusters, are demanding that government rethink its roles and responsibilities when it comes to helping to shape the microfoundations of an economys macro performance. In this context, the ve key considerations we outline are interdependent and

collectively build toward this strategic mind-set. The future of public administration is one where government and its leaders play active roles in partnership creation, system reform, and the generation of new opportunities. Such change will take place only with a change in mind-set about governmentbusinesscivil society relationships, essential for success in the emerging networked global setting. Appendix: Key Characteristics of Value Chains and Production Networks A value chain describes the organization of the production of particular products or services, such as garments, computers, or automobiles. It refers to the full range of value-added activities required to bring a product or service from conception, through design, sourcing inputs, manufacturing process, marketing, distribution, and followup support to nal consumers. Value chains become global when activities are geographically dispersed across borders (see gure 1). A production network represents the set of linkages within or among a certain group of rms, in particular value chains for producing specic products such as a particular type of pants, computer, mobile phone, or car. This can take the form of production relationships among subsidiaries or aliates of a multinational enterprise. Alternatively, they may involve outsourcing and subcontracting to independent rms, often in geographically distributed locations. As a result, competition within the framework of global value chains is increasingly between networks of enterprises rather than individual rms (e.g., in mobile phones, Nokia and its suppliers versus SonyEricsson and its suppliers versus Samsung and its suppliers), and in many cases, the same suppliers may be part of more than one such network (see gures 2 and 3).

Figure 1 The Apparel Global Value Chain

Governing on the Edges S41

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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Key characteristics of global value chains and associated production networks include the following: Governance: Global value chains generally involve a key role for lead rms, often global brands such as Levis in garments, Ford in automobiles, Nokia in mobile phones, and Carrefour in food retailing. These lead rms provide product, market, and technical information with the expectation that lower-tier suppliers will maintain and improve performance to meet global competitive standards. Lower-tier suppliers, in turn, invest in equipment, skills, and specialization necessary for producing within the framework of a production network, with the expectation that lead rms will continue to use their outputs and, over time, provide opportunities for upgrading within value chains. Standards: Global markets are governed by an increasing variety of stringent product and process standards that suppliers must meet. Examples of the diversity of standards include general international standards, such as ISO 9000 (quality), ISO 14000 (environment), and SA 8000 (labor). They include industry-specic standards, such G3 for cellular phones and Hazard Analysis and Critical Control Point in the food industry. They include region-specic standards, such as QS 9000 (quality in autos originating in the United States), and rm-specic standards to ensure consistency, reliability, and dierentiation of products supporting brand names, such as Carrefours Quality Line and IKEAs IWAY Code of Conduct. Global suppliers: Global brands and retailers are increasingly reliant on a small number of rst-tier suppliers with global reach, such as Li and Fung for Levis in garments, Flextronics for Sony-Ericsson in electronics and telecommunications, and Visteon for Ford in auto parts. These rst-tier suppliers play a critical role in determining and organizing participation by lower-tier suppliers in value chains, including integrating production across borders. They are increasingly driving global investment, production, and trade patterns with signicant inuence on the export competitiveness of nations and the performance of local enterprises. Upgrading and innovation: Growing intensity of global competition, shortening of product life cycles, demanding buyers, and falling barriers to entry in many industries are requiring continuous innovation and increased eciency throughout the value chain. Such upgrading by enterprises within value chains can take the form of increasing eciencies in the manufacturing process, improving existing products or developing new products, adding value by moving upstream from manufacturing to product design, or using existing capabilities to move to a more attractive value chain. Notes
1. See Sheng (2009) for an insightful analysis of global nancial ows linking the Asian nancial crisis and the present global crisis. 2. This is the title of a recent collaborative eort by the U.S. National Governors Association and the Council on Competitiveness (2007) to rethink the foundations of economic development at the state level, the Governors Guide to Cluster-Based Strategies for Growing State Economies. 3. See Abonyi (2007a) for a discussion of key concepts and issues in the globalization of production, particularly those related to small- and medium-scale enterprises; see also Freeman, Abonyi, and Supapol (2009). 4. The risks of the increasing mobility of capital and the instability of the growing 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. These risks are now equally clear globally, as the international economy is presently

5. 6.

7.

8.

9.

10.

11. 12.

13. 14.

15. 16.

experiencing an ongoing nancial crisis triggered by the U.S. subprime lending meltdown. The crisis has signicantly constrained the availability of global credit, driven by the sharp retrenchment in interbank lending, with serious impacts on trade ows and production. However, the long-term structural impact on the global nancial system is as yet unclear. For example, Indias Sundram Fastener is a key supplier of radiator caps to almost every major auto brand. 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. See Fung, Fung, and Wind (2008) on the sophisticated and complex requirements of coordinating apparel and garment production networks that are geographically dispersed across borders. 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. A key document setting out the Irish governments new development strategy is the Enterprise Strategy Groups Ahead of the Curve: Irelands Place in the Global Economy (2004). In another interesting example, in Thailand, value chain analysis 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 strengths in auto parts and assembly for selected competitive rms to become suppliers for urban mass transit systems (see Abonyi 2007b). 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 inuential minister of commerce, H. E. Cham Prasidh: The value chain analysis is an alarm bell . . . we need an emergency response. The only way for us to be competitive beyond our borders is to be competitive within our borders. See, e.g., UNCTAD (2008) on linking logistics and global value chains and the related new role of government and of publicprivate partnerships. Taiwans Global Logistics Development Plan is another example of a government strategy, in collaboration with the private sector, focusing on developing logistics capabilities to strengthen its enterprises competitive advantage in a global context. See the Global Logistics Development Plan on the website of Taiwans Council for Economic Planning and Development: http://www.cepd.gov.tw/ encontent/m1.aspx?sNo=0002842 (accessed August 20, 2010). For further discussion of clusters see Abonyi (2007a), Alvarez (2005), Anderson et al. (2004) and Das (2008). 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). See Rung (2006). The Penang Skills Development Centre website can be found at http://www.psdc.com.my (accessed August 20, 2010). The U.S. Consumer Product Safety Commission and Chinas General Administration of Quality Supervision, Inspection and Quarantine have agreed to cooperate to increase consumer product safety. They issued a joint statement that [a] systematic improvement of practices in the supply and distribution chain will be the most eective means of enhancing product safety (Agence France-Presse 2009).

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