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Global value chains

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18
Global Value Chains
Jan- Otmar Hesse and Patrick Neveling
Introduction
In 2013, the United Nations for the first time dedicated its “World Investment Report” to
Global Value Chains (GVCs). As recent fast growth of global trade had been driven increasingly
by trade in semi- finished goods, the report illustrated that an incremental share of global trade
resulted from a global disintegration of production processes organized by large transnational
corporations, which operated as managers of GVC. A total of 80 percent of global trade – so the
spectacular figure of the report claims – were transfers of intermediates within GVCs. Since
these goods moved back and forth between the different national affiliations of one and the same
multinational enterprise (MNE) or its subcontractors, GVC- related trade also led to substantial
double- counting in trade statistics, which was estimated as 28 percent of the total (UNCTAD
2013: X). Thus, as the trade specialist Robert Feenstra (1998) suggested in a seminal article, the
significant integration of world markets by trade, globalization, is in part an effect and mirror-
image of the “disintegration of production.”
International economists have discussed this development intensively in recent years. Richard
Baldwin and Javier Lopez- Gonzalez have generated input–output tables from a newly released
database with trade statistics to account for the many production networks behind the trade
flows and discovered that these are regional production clusters rather than the long- distance
international production chains often featured in the media. They named three regional pro-
duction networks with Germany being the “headquarters economy” in the European cluster,
Japan in Asia, and the US in the Americas (Baldwin/Lopez- Gonzalez 2015). This trend started
in the “second unbundling” of the 1970s, when transportation and information costs declined
significantly and thereby enabled the global disintegration of production (Baldwin 2014:
212–219). Much more provocatively, the German economist Hans- Werner Sinn already in
2005 attacked the German “bazaar economy” for trading in goods rather than manufacturing
them and thereby abandoning the German economy’s traditional strength (Sinn 2005).
Yet, these are preliminary findings and provocations, curbed by the fact that national account-
ing is poorly equipped to make GVCs visible. Therefore, research has foremost focused on
analyzing the value chains of particular multinationals or industries and has left a gap in our
knowledge of their impact on global trade (Timmer et al. 2014: 99–118). This is where business
history comes into play.
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It is hard to imagine, from that discipline’s perspective, that transnational production pro-
cesses and transnational collaboration along the transformation of raw materials into finished
goods are novel in the history of capitalism. Instead, business historians have long provided evid-
ence that sourcing strategies and international cooperation have been common practice for
centuries. However, the field has not thus far contributed rich empirical material to the most
recent international debate. We therefore know little about the long- term transformation of
value- chain production and especially so about the driving forces behind that trajectory. Is the
disintegration of production a novel development, triggered by a sharp decline of transportation
and communication costs in the 1970s, as Baldwin states? Or do trade politics interfere in this
analysis? Can we find similar disintegration processes in other historical periods, in the “first
globalization wave,” for instance? This contribution elaborates whether long- term transforma-
tions of GVCs can explain changes and evolutions of global business. We start with a summary
of chain- approaches over the last 40 years – from Terence Hopkins and Immanuel Wallerstein’s
notion of “commodity chains” (Hopkins/Wallerstein 1986) to recent GVC approaches and
their relevance for business history. The second section shows how the changing nature of trade
statistics and actual trade policies shaped the evolution of GVCs. The third section offers selected
historical examples and the fourth section offers ideas for further research.
From “commodity chains” to “value chains” and “production networks”
There is a long tradition of thinking about (global) connections of production processes going
back to Karl Marx’ second volume of capital and Eugen Böhm-Bawerk’s notion of “round-
about production” (Böhm-Bawerk 1902: 87–121). For modern historical research, Immanuel
Wallerstein’s world systems approach was fundamental. Wallerstein was interested in the eco-
nomic exploitation of the world by expansive European capitalism and therefore aimed at
reconstructing ties between historically changing economic “centers,” “semiperipheries,” and
“peripheries” from the fourteenth century onward (Wallerstein 1974; Wallerstein/Hopkins
1982). In a seminal article, co- authored in 1986 with Terence Hopkins (1986: 159–160),
Wallerstein developed the idea of “commodity chains,” which the two authors identified as “a
network of labor and production processes whose end result is a finished commodity” to “show
the totality of the flows or movements that reveal the real division, and thus the integration, of
labor in complex production processes.” The pair explored in particular the flow of goods
linked to “plantation economies” across the Atlantic that fueled the triangular trade in slave
labor, tobacco, sugar, and cotton. The strong global connection of farmers, merchants, retailers,
and consumers in different parts of the world at the same time served as the underlying story for
Sidney Mintz’ (1986) path- breaking book on Sweetness and Power, which, similarly to the work
of another anthropologist, Eric Wolf (1982), emphasized that the industrial revolution was
fueled by the inflow of cheap calories from Caribbean sugar into Britain’s new urban industrial
centers.
Yet, such discussions of “commodity chains” emphasized connections between historical
centers and peripheries without attention to systematically describe particular patterns of busi-
ness relations, trade, or types of production. A paramount interest in the evolution of capitalism
also prevented research on when and why commodity chains emerged and in which sectors. Via
the works of Stephen Topik, William Gervase Clarence- Smith, and others (Topik et al. 2006),
the approach entered the more recent field of “global history.” The focus on commodity chains
as markers of “global entanglements” and “transregional connectedness” remained, however,
with Sven Beckert’s Empire of Cotton (2014) as the most recent example. Thus, important
empirical issues remain unsolved in research on early and contemporary capitalist chains. Who
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Global value chains
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actually governed and organized historical commodity chains? And what factors induced change
over time?
While “world systems theory” became a stronghold of sociology rather than historical
research, business historians focused on the evolution of big business and multinational corpora-
tions. Following Alfred D. Chandler, these new organizational forms of global capitalism were
often seen as the result of mergers and “vertical integration” that culminated in national “big
businesses” or dominant MNEs (Wilkins 2008: 251–266). This perspective was challenged in
the 1980s when Charles Sabel and Jonathan Zeitlin’s article on “historical alternatives to mass
production” (1985: 133–176) pointed to the many examples of successful small and specialized
corporations that did not use economies of scale. While mass- production could be the proper
solution for the production of some goods, disintegrated and specialized production might be
more fitting for others. However, this brilliant contribution did not trigger research on the
transnational disintegration of production. Rather, it drew attention to national production
clusters in which different specialized small firms collaborated often on a regional basis. Gerry
Herrigel’s book (1996) on the south- west German machine industry cluster was eye- opening
because it explained why so many small and medium, often family- based firms, survived in a
technology- driven, internationalized economy. Possibly because of the difficulty to reconstruct
and measure the collaboration of companies beyond national boundaries, business history has
only recently begun to study the global extension and organization of the regional networks
studied in the footsteps of Herrigel. Yet, a paradigmatic approach for business history research is
missing until today.
This is, in our view, because the commodity- chain approach of the 1980s and its recent
application by “global historians” maintain three disadvantages that prevent them from gaining
a strong analytical position in economic and business history. First, there is the above- discussed
analytical focus on the emergence of capitalism and global exploitation. As this is mirrored in an
empirical focus on the commodity chains of luxury goods, the stories published so far highlight
the role of global production for European consumers and end in the late nineteenth century.
This, second, means that a crucial turning point in many chain histories is missing, namely the
changes in global trade and production that took place once raw- material scarce (Western) eco-
nomies succeeded in replacing imported luxury goods with new mass consumer products: cane
sugar with sugar beets, chemical dyestuff and fertilizer, and later the invention of synthetic
fibers, oil, and rubber. Such histories of major commodities of the twentieth century and their
chains are not only absent in research on the Trentes Glorieuses, but also for the interwar period,
which therefore too often is perceived as a time of “de- globalization.” Thus, in a long- term
perspective, “chain stories” and the analysis of GVCs disappear from the agenda once economic
and global historians turn from the nineteenth to the twentieth century. This, third, has an effect
in research on the “second globalization wave” of the 1970s and 1980s also, for which sociolo-
gists and also contemporary historians treat the emergence of commodity chains, GVCs, and
also the rise of global production networks as novel historical phenomena. Yet, a long- term
historical analysis of chains and GVCs should point us in the opposite direction. Not least from
the perspective of business history research on the interwar period we know that many corpora-
tions, and not the least the early MNEs of that period, found ways to continue global business
(Chandler/Mazlish 2005). The challenge for research would seem to help us better understand
their strategies and what these meant for the post- 1945 period.
Instead, economic geographer Peter Dicken (1986) prominently diagnosed a “global shift”
of manufacturing from advanced capitalist nations to the developing world since the 1970s and
other scholars criticized the offshoring and outsourcing strategies of large firms in Europe for
their economic impact on both deindustrializing regions in Europe and newly industrializing
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regions in the Third World (Fröbel et al. 1981). However, as for the case of MNE operations in
the interwar period and other business practices discussed above, also the shifting of manufac-
turing to foreign countries (i.e., offshoring) or the subcontracting of production processes to
partners (i.e., outsourcing) have a long history as business practices – though as historical busi-
ness practices they were named differently (e.g., “third party contracting”).
Business historians thus could make an important contribution to research that so far centers
on contemporary sourcing strategies of global multinationals. Of special relevance here is the
advanced GVC paradigm proposed by the contributors in an edited volume by Gary Gereffi,
John Humphrey, and Tim Sturgeon (2005), which calls for systematic research on the redis-
tribution of value- added along global production “chains.” Via a comparison of various indus-
tries – textiles, apparel, consumer electronics, and automobiles – they discovered that in some
cases GVCs are “governed” by the producers while in other cases the buyers are the more
powerful actors. More recent research identified production processes that are more like “snakes”
while others are like “spiders” (Baldwin/Venables 2013).
Economic geographers have added to this the concept of global production networks (GPNs),
which identify the global organization of subcontracting, part- processing, and assembly of
complex products under the auspices of MNEs, ranging from laptops to Barbie dolls. The core
feature of both, GPN as well as GVC, is that their global chains lack formal integration and
organization of the different units; the central organization feature in the transfer of commod-
ities within global “networks” or “chains,” from raw materials until the consumption of the
finished good, is mostly the dependency of nodes in those networks on other nodes and not the
legal structure of the units as such. Such dependencies are not easily detected and connecting all
nodes to identify the GPN or GVC may be a major challenge. The power differentials among
the actors and business units involved in commodity chains, GVCs, and also GPNs are therefore
essential aspects of research, especially for identifying how the value- added is distributed among
the actors along the (global) value chain (Bair 2009: 1–35; 2016: 326–335).
Still, certain aspects of the GVCs concept must remain metaphorical because the notion of
“chains” suggests that research could clearly identify a transformation process from a raw material
to a finished consumer good across all the different global production steps. However, within a
given subcontracting business unit any given production step in one such chain might take place
in connection with other production processes entangled in entirely different chains. Therefore,
it is difficult in practice to identify that subcontractor’s contribution to one particular chain,
even if company audits and accounts were available to the researcher. The cargo of a ship, for
example, often includes different goods and thus such a vessel operates within more than only
one value chain at a time. For similar reasons, the fraction of value- added that is attributed to
one production activity along the value- chain of one good is difficult to detect in practice.
However, the very notion of GVCs pushes scholars to think about the individual production
steps as much as of the pre- and the post- production steps without which the production of a
finished manufacturing good would simply not happen. Taking this back to our earlier remarks
about the long (business) history of commodity chains and GVCs it is important to consider that
already in a very early stage of the industrial revolution many corporations actively researched
the different global supply options for a particular raw material and that the same and other com-
panies produced entirely for very distant markets. Information about sourcing possibilities or
export markets was often available via diplomatic channels or through family relations. When
no such flow of information existed specialized agents could be contracted to obtain it. Such
practices occurred even in very small businesses, which underlines that merchant activities and
manufacturing were much less separated than most of the literature in business history suggests.
Very small chinaware companies in a poor region in northern Bavaria sold their complete
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Global value chains
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production to the United States in the late nineteenth century via a network of specialized sales
agents (Kluge 2018). As Kluge shows, even though these companies were local businesses
without formal relationships to world markets initially, they could insert themselves successfully
in a GVC and thus become “global businesses.” Likewise, early nineteenth century cane- sugar
planters in small island colonies such as Mauritius associated in Chambers of Commerce and
Chambers of Agriculture and actively sourced information about their British export market
and their buyers via British–Mauritian joint venture companies, the local colonial administra-
tion, and also by inviting agents from the UK to advise them on the kind of packaging and
presentation that would make London buyers most happy with Mauritian cane- sugar supplies
(Neveling 2012). On the other side of that spectrum there were, of course, large multinationals
with significant power in global markets that set up GVCs for their own input or output, e.g.,
when direct integration of foreign pre- or post- production units was not possible for political or
economic reasons.
If archival and statistical material is available, the GVC approach gives business historians a
standard procedure to explore the nature and transformation of manufacturing, trade, market-
ing, and many more aspects in a long historical perspective via the following steps: isolate a
single production process starting from a finished good; follow the stream of materials and ser-
vices that are used for the composition of the good backwards to the raw material or source;
analyze to which extent the different production steps are in the hands of a single economic
actor (individuals or organizations); try to estimate the value- added in every single production
step; analyze how all these aspects have changed over time; find the driving forces behind par-
ticular transformations. In this, the driving forces are of particular relevance to identify how
local or national industries transformed into global businesses. Research so far has detected tech-
nology, market power received by branding or specialized knowledge, and state intervention,
especially trade policy, as the driving forces for this transformation. The following illustrates that
the last aspect in particular connects research on GVCs to business history research on the evo-
lution of global trade.
GVCs and international trade
In principle, value- chains and the disintegration of production also exist in national economies –
we mentioned the cases explored by Gary Herrigel above. Yet, here our interest is with global
sourcing and supply. The most simple such transaction is ordinary foreign trade, i.e., the purchase
of finished or semi- finished goods on international competitive markets, which is also what trade
statistics account for and trade theory elaborates on. Yet, the only possibility to discover whether
a global production process is behind trade integration is to observe the relative share of raw
material as opposed to semi- finished and finished goods in a given country’s overall trade statistics.
When a country imports all raw materials and only exports finished goods, we may assume that
the national economy processes a significant share of the raw materials imported into the consumer
product and exploits the value- added from the production. When raw material imports decline
and semi- finished products are increasingly imported, we assume that a country “moved up the
value chain,” i.e., it specialized in the more valuable manufacturing processes.
Therefore foreign trade statistics can, to some extent, reveal structural adjustment processes
in a national economy. For good reason, no systematic, global overview over the evolution of
the composition of trade in this respect exists so far, as the required input–output tables are not
available for most of the twentieth century in most national statistics. In fact, even an advanced
industrial nation such as the Federal Republic of Germany (FRG) only began to release input–
output tables on a regular basis in the 1960s and without such tables it is difficult to distinguish,
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for example, whether a decline in raw material imports was the effect of a decline in domestic
manufacturing or the effect of manufacturing “moving up the value chain” – possibly extended
backward along the chain by the fact that initial processing of raw materials now occurred in the
same country that previously supplied the raw materials. Without input–output tables it is thus
impossible to gain reliable information from trade statistics on the actual changes in the structure
of production in a given national economy.
This gap could be closed in part by combining trade statistics with information on foreign
direct investment (FDI). Yet, similar to input–output tables, most countries began reporting
FDI flows comparatively late. FDI in most cases results from an increase in the frequency of
trade flows between two ends of a GVC. If these flows become more regular and costlier, it
might pay for the company on one end of the chain to buy the manufacturing facility on the
other end. John Dunning (1982) systematized the three main advantages of such purchases in his
eclectic paradigm; these are ownership, location, and internalization. There exist several other
historical examples of cross- border integration of production processes, such as the “free stand-
ing company” detailed by Mira Wilkins (1988). Yet, there are also numerous historical instances
when, for political, legal, or also economic reasons, it did not make sense for global businesses
to integrate across borders. This leaves us with historical GVC connections that do not show up
either in trade statistics or in FDI statistics or in foreign portfolio statistics. GVCs therefore rest
on relations of dependency between formally independent organizations across borders and
their importance today is marked by the fact that European and Amer ican corporations invest
significant sums to gain full control over their “global supply chains” and by the fact that global
supply chain management is now a genuine field of training in management and business schools
(Alfalla- Luque/Medina- López 2009).
The scholars who published the 2013 UN report mentioned in the introduction above
identify a “correlation” between trade volume and GVCs, i.e., an increase in trade usually is
driven, at least in part, by a disintegration of production. Yet, this again refers to the most recent
evolution of world trade and we doubt if this correlation is valid in a long- term historical per-
spective. Instead, on the one hand, we can assume that during the “first globalization wave” of
the late nineteenth century and again during the “second wave” since the 1970s not only trade-
to-GDP ratio increased worldwide but also new GVCs emerged in each period (Findlay/O’Rourke
2007). On the other hand, and as mentioned above, we further need to account for the interwar
period: this is counter- intuitive to the many studies in business history. Though trade in many
regions decreased, we observe still high FDI activity, but more so new forms of the organization
of GVCs. Zurich and Amsterdam appeared as new financial centers in those decades, partly as a
result of the transfer of assets from Germany during that nation’s increasing hyperinflation years
(Cassis 2006).
“Cloaking” played a large role during the war and the interwar period. Former direct links
between foreign and domestic subsidiaries had to be disconnected, mainly for political reasons.
The result was in many cases the replacement of trade with foreign production that was not
legally attached to the former multinational (Aalders/Wiebes 1985; Jones/Lubinski 2012). There
was thus a collapse of global trade especially during the Great Depression, but does this indicate
a parallel collapse of the global economy and global business? Or did global business simply
apply different and new forms of transactions that led to an increase of more subtle connections?
And, if so, could we study the latter by using the concept of GVCs? The bilateral trade agree-
ments and also international cartels that emerged in the times of crises might appear as aspects of
the transformations of GVCs rather than a sign of “de- globalization.”
The period after World War II was driven by the return to trade liberalization. The General
Agreement on Tariffs and Trade (GATT) of 1947 reduced tariffs and other trade barriers and
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Global value chains
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thereby successfully promoted a rapid increase in global trade. At the same time, however, the
GATT also had many exemption clauses and “emergency” paragraphs that have been used in
the years since 1947 to effectively protect national industries from global competition (Irwin
1995: 127–150; Bown/Irwin 2015). These Janus- headed provisions of the GATT have led trade
scholars to use contradictory labels like “liberal protectionism” or “selective protectionism” to
refer to the inconsistent trade policies of many nations (Aggarwal 1985; Wiemann 1983).
When, for example, the textile and clothing industries of the United States and Western
Europe came under pressure in the 1950s, the GATT framework was used to delay rather than
promote trade liberalization in these sectors. Using article XIX about “emergency action” in
cases when increased imports would “threaten serious injury on domestic producers,” Western
countries restricted textile imports, especially from Japan. The GATT article XIX allows for the
introduction of import quotas and other protectionist measures for a limited time period when
consultations with export nations have failed and a national economy is threatened. This article
was invoked 132 times between 1950 and 1986 and foremost by the United States, Canada,
Australia, and European Economic Community (EEC) member- states (Sykes 1991). With ref-
erence to that article the US government pushed Japan into a “voluntary self restraint” arrange-
ment in 1957, which meant limiting Japan’s textile exports to the United States (Sugihara 2004:
527; Rivoli 2009: 193). European countries negotiated bilateral trade agreements in a similar
spirit since the late 1950s. Though Japan became a member of the GATT in 1957, West
Germany kept its import restrictions toward Japan with special permission by the GATT secre-
tariat in 1959 and only later, under the aegis of the EEC in 1970, joined the prolongation of the
“Long- term Arrangement in Cotton Textiles” (LTA) that was originally signed in 1962 (Minister
of Economics, 1969; see also: Rivoli 2009: 193–196) and that, by the early 1970s, had already
grown into a multilateral system of “self- restraint” arrangements encompassing more than 20
countries. Finally, the LTA was transformed into the well- known, often criticized “Multi- Fibre
Arrangement” (MFA) of 1974 (Wiemann 1983: 122–127), which, under the surface of the
GATT, consolidated a system of national and regional protectionist policies that ultimately
sought to shield textiles and apparel manufacturing as well as other sensitive industries of the
Western world from the exports of developing nations.
The example of textile and apparel industry
In textile and apparel manufacturing, protectionism triggered an astonishing “global hopping” of
production, as described in Pietra Rivoli’s seminal contribution. As soon as the textile industry
discovered a country without restrictive export quotas to the United States and the EEC, it shifted
its production facilities. Once the MFA quota system was extended to the new country, the indus-
try moved on. Thus, the textile and apparel industry that made Hong Kong one of the leading
textile producers worldwide in the 1960s was not a “new” industry, but to a large extent Japanese
industries that relocated or subcontracted to Hong Kong partners in order to circumvent quota
ceilings for Japan. In the 1970s, the dynamic reached its peak with the MFA signed among 50
countries, which extended the system of “voluntary self restraints” to synthetic fibers. From then
on, 75 percent of US textile imports were “voluntarily” restricted by the export nations (Rivoli
2009: 193–207). The MFA, as well as its successor arrangements in the following decades, was
preceded by a series of consultations and arrangements that provisioned for a step- by-step phasing
out of the MFA toward a free world market without quotas. Only because of such promises the
GATT tolerated protective arrangements, but, in fact, the successor arrangements to the MFA in
particular included ever lower import quotas and therefore effectively increased protectionism in
a time when Western nations struggled with high unemployment and economic crises after the
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oil- price shock (Rivoli 2009: 193–207; Wiemann 1983: 125–126). Since then, the liberalization
of global trade in textiles has been consistently moderated in the negotiations of new fiber arrange-
ments that often saw tiny increases in export quotas to Western markets for developing nations,
among which the PR China took the most powerful position during the 1990s. With the estab-
lishment of the World Trade Organization in 1995, quotas did not fall, but the MFA system was
replaced with another regulatory framework, the Agreement on Textiles and Clothing, that main-
tained the MFA’s institutional structure for roughly another decade. Only as of 2005, did China
and other rapidly expanding developing nations such as Bangladesh, Vietnam, and Cambodia
obtain more or less free access to European and Amer ican markets.
Similar dynamics have existed in other industries for decades, especially so in electronics
where investment in fixed capital is low and labor costs account for the lion’s share in produc-
tion costs, similar to the textile and garment sector, and where the level of political regulation is
equally significant. In these sectors, the global spread of export processing zones (EPZ) and
special economic zones has been most proliferated as the zones offer attractive conditions for
global businesses and their permanent need for relocation. Puerto Rico offered the first EPZ-
style investment incentives package with turnkey factories, tax and customs waivers, and quota-
free access to the mainland US market in the late 1940s. Initial relocations from US mainland
firms saw these move to the Philippines and Mexico in search of cheaper labor in the late 1950s
whereas Puerto Rico and many other EPZs, such as Hong Kong in the 1960s, later Taiwan, and
from the late 1970s onward coastal cities with zones in the PR China also attracted corporations
from the United States, Asia, and Europe to shift or subcontract their production in search of
cheaper labor and increasingly in search for quotas to Western markets (Neveling 2017: 23–40).
While trade unions in the developed and developing countries fought against the rise of
“runaway shops” and a downward spiral in global wages since the 1970s, tax waivers and state
subsidies lured corporations into the industrial estates of ever new zones or countries without
necessarily shifting capital or integrating production processes. While textile and apparel might
remain the most prominent case in this respect, similar changes in GVCs took place in consumer
electronics, car manufacturing, and more recently also in steel industries, pharmaceuticals, IT
and call centers, and in agriculture.
Another strategy was discovered by the industry in the extensive use of “outward processing”
(OP) starting in the mid- 1960s. Again the textile and apparel industry serves as an example for
a practice that myriad businesses widely used. OP refers to a particular practice of saving duties
for businesses that need to process a certain product abroad, e.g., for reasons of quality improve-
ment or refinement. If tariffs apply between the two countries, the businesses would have been
charged twice: when exporting a good to the foreign country and again when importing the
processed good back to the home country. Governments have therefore often waived the addi-
tional duty and agreed only to claim a duty for the value- added that was “re- imported” from
the foreign country. Since businesses had to report this value- added to governments, we have
figures on the volume of OP trade in statistics, though companies might exceed the volume of
tax- reduced trade (Fröbel et al. 1981: 116–120). We find the same procedure, that was here
exemplified for Germany, under different names in other countries. In the United States the
practice was named “international subcontracting” in contemporary language (Sharpston 1976:
333–337).
Industry used OP especially when FDI was insecure or impossible, but quality control and
information flow could be achieved. In the German textile and apparel industry, for example,
OP was an option for economic relations with Eastern Europe, in particular. When the political
tensions of the Cold War relaxed in the 1960s, the West German government increasingly pro-
moted economic relations with the East (Rudolph 2004). The government actively supported
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OP in the textile and apparel industry to improve the productivity of the domestic industry with
its high labor costs. At least since 1965, the changing ministers of economics used OP as a
strategy to improve the productivity of the German textile and apparel industry (Minister of
Economics, 1965; see also: Gertschen 2013: 192). For political reasons, the FRG government
treated the German Democratic Republic (GDR) as part of the FRG territory in customs so OP
regulation did not apply there (Fäßler 2006: 263–268). OP was, however, extensively applied
to all other Eastern European countries, because FDI was restricted or prohibited and political
circumstances meant that FDI would have been insecure.
Eight percent of the value of all fabrics exported from West Germany in 1974 went to
Eastern Europe (Soviet Union, Poland, Czechoslovakia, Hungary, Romania, Bulgaria) and 8.2
percent of import in cloths derived from there. The most important country in that year was
Yugoslavia, which alone received 7.1 percent of West German export fabrics and accounted for
7.9 percent of all German imports of cloths (Fröbel et al. 1981: 252). The country became a
manufacturing center of the German textile and apparel industry. In the years after 1945, Yugo-
slavia had switched back and forth between the Eastern and the Western economic and political
systems, which caused difficult economic relations with the FRG in the 1950s. When Yugo-
slavia turned to “market socialism” in 1965, private business activity, FDI, and trade with the
Western World followed (Kukić 2018: 8). West Germany ranked as Yugoslavia’s second- largest
trading partner behind Italy. A total of 92 percent of apparel imports to West Germany were
conducted as OP (Fröbel et al. 1981: 116–122). German economic policy used OP both to
enable Eastern European countries to earn foreign currency to buy expensive German manu-
factures as well to incentivize productive manufacturers in textiles and apparel to further improve
their competitiveness. Therefore, when Karl Schiller negotiated an extension of import quotas
for textiles from Eastern Europe in March 1969, he suggested increasing both the quota for
regular imports by 20 percent and the tax- free proportion of OP traffic by 33 percent (Federal
Chancellery 1969b). For trade with Yugoslavia, unrestricted imports from outward processing
was considered. But the plan was cancelled after protests from those in the West- German textile
and apparel industry that did not profit from this activity (Federal Chancellery 1969a). Unfor-
tunately more detailed research on the East European side of the chain is rare if not absent and
usually focuses on the post- 1989 period (Smith 2003).
On the European level too, there was constant debate about the share of revenue that OP
was allowed to generate. Apparently, German textile and apparel companies could engage in
OP more easily than French, Italian, and British firms. The member countries of the EEC
therefore restricted OP activities at the Eastern border. Only 30 percent of total revenue was
allowed in the 1970s, increasing to 50 percent in the 1990s. While French revenue in outward
processing reached 200 million euro, and British 41 million euro, West German revenue reached
1.2 billion euro in 1988 (European Commission 2006: 260; Lane/Probert 2005). The German
textile and apparel industry apparently relied on OP to confront market pressures much more
than their European competitors.
Increased international sourcing was of course paralleled by a domestic decline of textile and
apparel manufacturing. A total of 23,000 employees of the German textile and apparel industry
worked abroad in 1966, while domestic employment declined from 1.2 million in 1958 to only
950,000 in the mid- 1960s. By 1970, domestic employment had dropped further and sank below
half a million in 1990; international employment had doubled between 1966 and 1970 (Gert-
schen 2013: 190). While the international workforce equaled 6 percent of the total domestic
employees in textiles and apparel, that proportion reached 19 percent in 1983. The number of
foreign subsidiaries reached 174 in textiles and 139 in clothing in 1983, mainly located in the
EEC and European Free Trade Association (EFTA) countries or Asia, while OP dominated the
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Eastern bloc countries (Mühleck 1992: 222; Lindner 2001: 168). According to the official
figures from the German apparel industry, in 1976, 25 percent of the total import of clothes
resulted from OP (Beese/Schneider 2001: 116). As early as 1964, the Ministry of Economics
had estimated that 30 percent of imports from Hong Kong, which had been highly criticized by
the textile and clothing industry as “unfair competition,” actually was re- imported from the
industry’s OP (Gertschen 2013: 192). In 1978, 9 percent of the total revenue in the textiles
sector and 18 percent in the clothing sector resulted from outward processing, as well as 17
percent from the import value in textiles and 28 percent in apparel. This only reflects the public
figures (Mühleck 1992: 224; Fröbel et al. 1981: 116). Most authors however suggest that the
actual volume of OP was higher as the corporations might have exceeded the tariff- free volume
in some categories.
So far, we can only identify few corporations that have engaged in OP and that could thus
serve as case studies of global businesses that followed the GVC organization. This is partly due
to restricted access to company archives and partly because historical research has yet to engage
in detail the historical transformation of GVCs. A more generic reading of reports on textile
company activities in newspapers provides first examples, however. The brand “Triumph,” a
lingerie manufacturer from south- western Germany, built its first factory outside Europe in
Hong Kong as early as 1962 (Beese/Schneider 2001: 75). The company had opened its first
foreign sales office in Switzerland in 1933. By the late 1970s, domestic employment decreased
from 18,000 to 3,000, while manufacturing abroad grew. The company sold directly from
Hong Kong to Japan and overseas markets so that foreign revenues increased while domestic
revenues declined in overall company earnings (Schnaus 2017). Though the corporation relo-
cated its headquarters to Switzerland in 1977 for tax reasons, it kept facilities in Germany, where
its market share peaked at around 50 percent and where it has remained until today (Triumph
2018).
Sportswear became another successful field for German apparel manufacturers. Brands like
Trigema and Gerry Weber, which was founded in 1973, profited from the tennis boom in
Germany and specialized in clothes and equipment. Even more successful was the sports shoe
manufacturer Adidas, which also expanded into apparel manufacturing in the 1970s. As GVCs
for its shoe business were already established, setting up global production structures for tricot
and sportswear manufacturing was easy for Adidas. One of the best- known brands of the surviv-
ing German apparel industry, by 2000 Adidas controlled a network of 1,082 contract partners
in 65 different countries that supplied 97 percent of the textile and 76 percent of the apparel
input for the company’s exports from Germany (Ferenschild 2007: 46).
Among the successful brands from the apparel sector are also German producers of mens-
wear, like the shirt manufacturer Seidensticker or the suit manufacturer Hugo Boss (Köster
2011; 2016). Less well known, though much larger, was the Steilmann- Group, which became
one of the largest apparel producers in West Germany in the 1980s. It employed almost 8,000
workers domestically and another 18,000 in 43 foreign companies with 82 production facilities
(Beese/Schneider 2001: 127–136, 189–194). The company was one of the most important
contract partners for large fashion labels like Karl Lagerfeld but also sold to large department
stores such as the German Karstadt AG and to fashion retailers like C&A. Retailers like Karstadt,
Kaufhof, and Hertie had revenues of more than four billion dollars and ranked as the largest
retailers for textiles and cloth in Europe in 1979 (Clairmonte/Cavanagh 1982: 212). Yet, the
Steilmann Group and others were the actual drivers of this powerful position. In the UK, Marks
& Spencer became an important organizer of GVCs in textiles and apparel (Clairmonte/Cavanagh
1982: 212; Toms/Zhang 2016: 9). C&A chain stores gained a similarly powerful position in
European markets. Since the company archive does not hold any material for the time period
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after 1961 (Spoerer 2016: 12), an analysis of C&A’s business practices is difficult. In contrast to
M&S, the Brenninkmeijer family that founded and ran C&A used the suppliers of the Steilmann
Group rather than individual manufacturers.
Though most examples of successful adjustment to global markets derive from the West
German apparel industry, examples in the textiles industry exist too. Even capital- intensive parts
of the production process like spinning or weaving were off- shored by companies like Kümper,
a cotton spinner near Münster that bought a company in Greece in 1976. Some of the cotton
manufacturers completely gave up their domestic business and became specialized traders in
yarn or fabrics, e.g., the Beyerlein company in Bayreuth (Lindner 2001: 166–171). A shift to
specialized fabrics that were patented in Germany but produced globally helped many of the
textile manufacturers keep their company on track. Some of the producers reached agreements
with the auto industry, others found niches, e.g., the production of fireproof textiles by Webatex
AG. The leading company among the textile manufacturers became the Freudenberg company
in Weinheim, which specialized in synthetic fibers that were used for everything from cleaning
(“vileda”) to industrial use, and later diversified into other branches, including floor- covering
and gasket production. The company expanded abroad with production plants in the USA and
Japan in the 1950s (Lindner 2001: 171). While most of German textile manufacturing dis-
appeared or transformed into chemicals industry we can find examples of businesses moving up
the value chain even in this sector.
GVCs as organizational form
GVCs are not an institution or an organizational form as economic sociology would define the
latter. The chains neither have a uniform hierarchy nor do they manifest as a coherent legal
relationship. In fact, GVCs are not necessarily markers of capital connections. However, their
existence reflects historical and contemporary patterns of dependencies that connect business
units and institutions in different countries and possibly across different sectors and such depend-
encies enable one unit or institution to govern an entire GVC. It is because of the conjunction
of these features that we suggest treating GVCs as a particular form of global business – a form
that has, however, traveled below the radar of trade economics and history during most of its
existence.
However, such dependencies have effects that not only create new global connections and
reflect changing international trade regulations, they can also create significant poverty and
misery, as is evidenced by the most recent political outrage over the killings of thousands of
Bangladeshi garment workers in the Rana- Plaza building in 2013. That accident drew public
and also academic attention to the many hidden dependencies and linkages in GVCs, where
seemingly governing Western high street retailers have long lost sight of subcontracting net-
works, unwittingly and possibly also wittingly, and thus were not even able to say whether their
garments were sewn by Rana Plaza workers and anxiously waited whether one of their labels
would appear among the rubble and the dead bodies of exploited workers. This questions how
we can guarantee the responsibility for death and damages caused by global profit- maximizing
in the absence of legal connections (Donaghey/Reinecke 2018). And, yet, from a business
history perspective we should also consider the long- term historical implications of the alleged
novelty of Rana Plaza and other manifestations of GVC dependencies and governance: What
are the similarities and what are the differences between the similarly devastating and globally
debated Triangle Shirt Waist Factory Fire on New York’s Lower East Side in 1911? Are we
observing an entirely novel organizational form of global business in GVCs or can we find fore-
runners? How did these structures evolve over time? Where did they originate and what are the
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driving forces for their evolution? Who are the governors of GVCs and why did they come to
govern? How did they gain the “power” to force distant organizations into a structure of global
dependence?
This chapter has focused on the historical example of the German textile and apparel
industry to highlight the explanatory power of the GVC approach. However, the approach is
not restricted to that sector alone. High- end consumer electronics such as TV sets have been
assembled in Western Europe and in the United States using parts supplied by global chains
starting since the 1960s already (Teupe 2016). Thus, we see GVCs in many other branches,
from consumer electronics and IT to the automobile industry and further into agriculture
(Gereffi et al. 2005: 78–104). Historical research on the twentieth- century transformations of
GVCs is still rare, but there are pioneering studies like Andrew Godley and Bridget Williams’
(2009: 47–61) exploration of the supply chain of “industrial chicken” in the UK, Teresa da
Silva Lopes (2003: 592–598) has examined the “branding” strategies of alcoholic beverages
that also encompassed GVCs, and Pierre- Yves Donzé (2015: 295–310) wrote on the GVC for
watches, to name just a few.
If we discovered that GVCs are not only mechanisms for the exploitation of wage differences
but a more general organizational form of global production, it may be feasible to apply the
concept to other branches, such as the service sector and to banking in particular. Finance
always plays a role in GVCs as raising capital for FDI, for insuring risks to property, and for
securing the risks of currency volatility in payments for imports and exports or simply of unreli-
able buyers. In fact, financial services may have taken on the organizational form of a GVC in
their own right: the complexities and specifics of the Eurodollar- Market might be more accu-
rately captured, for example, once we addressed its value- chain-like structure. Such money,
accumulated in predominantly British accounts during the 1950s, was subsequently transformed
into sovereign debt as it was “sold” to states in Latin America mainly by US banks initially and
then extended by the inflow of Petro- Dollars during the 1970s (Rischbieter 2015: 465–493;
Devlin 1993; Underhill 1997: 101–123).
However, in order to expand the GVC research agenda into services and banking, business
history first needs to research and analyze the transitions and transformations of the well-
researched colonial and imperial commodity chains of the nineteenth century to during the
twentieth century, and especially so with a view to the globalization patterns of the interwar
period. Likewise, the subsequent emergence of a seemingly bipolar global economy during the
Cold War decades and the second globalization wave since the 1970s could appear in new light
once business historians scrutinize the emergence and transformation of GVCs during those
decades. Thus, the concept of GVCs is – from our perspective – perfectly fitting to support a
wide range of novel research.
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