There is a good possibility that you are reading this article on a laptop or a smartphone.
Even if you are reading this in the print version of Dhaka Tribune, it is likely that at some point today you will be picking up a smart phone if not also opening a laptop.
Either of these devices have hundreds of parts in it or even if the final assembly of the device had happened in one country, there is a fair chance that the parts had come from several.
This is true not only for laptops and smartphones but for many other devices too.
This fact brings us to the concept of global value chains (GVCs.)
In the past, much of the value chain for a product would be in one or two countries.
Now these have become global.
A GVC consists of several stages with each involving the production of different parts of a good or service.
Each stage, except the very first, takes the products of the earlier stage as inputs and creates new products adding value in the process.
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The final product is assembled towards the end of the chain and then distributed to the ultimate consumer.
In a global value chain at least two stages, other than the final distribution stage, are in different countries.
In traditional international trade, transactions involve only two countries, one exporting and the other importing.
But in GVCs, goods cross border several times with value being added at each stage.
Consider, for example, the electronics and electrical products GVC.
Here, the first stage, i.e. the input stage, consists of the production of different raw materials, such as silicon, plastic, glass or various metals or chemicals that are used in the production of electronic and electrical products.
The second stage involves the production of electronic components such as resistors and transistors, which go into an electronic circuit, such as printed circuit boards.
The second stage also involves the making of electrical components that transmit and distribute electric power, such as switchgears and transformers.
The third stage involves the making of electronic subassemblies, which are essentially plastic or metal enclosures into which electronic components, such as printed circuit boards or light-emitting diodes (LEDs),are put.
There may be more than one such subassembly depending on the nature of the final product.
For example, a laptop will require memory, processing, and sound subassemblies, each of which contains many printed circuit boards.
The fourth stage is where the final product starts taking its shape.
In a laptop, for example, this is the stage where different subassemblies, such as the ones mentioned above, are put together in a central processing unit (CPU).
The CPU is then put inside the laptop case along with other parts.
The fifth and final stage of the laptop value-chain consists of the final distribution and sales channels that take the product to the final consumer.
These manufacturing activities are complemented by a host of research and development (R&D), and design activities that add value, separate from value added during the manufacturing process.
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Global value chains expanded rapidly in the 1990s as many companies, mostly multi-nationals, took advantage of reduced communication costs (due to the advance of ICT) to spread out the manufacture of their products across countries and reap the benefits of the comparative advantages of different countries.
Thus, labour-intensive parts went to countries with relatively cheaper labour while skill-intensive ones went to countries better endowed with the necessary skills.
Terms such as unbundling, outsourcing, and offshoring became part of common parlance.
The emergence of GVCs also had implications for the volume and composition of international trade.
Since different parts were being made in different countries and then shipped to the countries involved in the next stage of a GVC, trade between countries increased.
Moreover, the composition changed, with a larger volume of such intermediate products being traded.
And it is not just goods that crossed borders.
GVCs also involve cross-border flows of other factors of production such as finance, services, people, and knowledge.
The rise of global value chains has opened exciting opportunities for countries such as Bangladesh.
To make a breakthrough in international markets, Bangladeshi firms need not develop competence in making an entire product, such as a laptop or a smartphone.
All they need is to identify some parts used in such devices which they can make with good quality and at competitive prices and deliver fast to companies in the next stage of the chain, which may mean the assembler of the final product or someone in an earlier stage depending on what the Bangladeshi firms make.
Even a few niches like this may mean billions in dollars in export earnings for Bangladesh, not to speak of the skills that will be acquired by making such electronic parts which will allow the country to make further inroads into such global value chains.
But how can Bangladeshi firms make that breakthrough?
A recent World Bank report (World Bank Group: An Investment Perspective on Global Value Chains, 2021) tells the interesting story of how firms based in Malaysia made such a breakthrough in electronics GVCs.
Key was foreign direct investment (FDI.)
Like other Asian countries, such as Vietnam and Malaysia had a very proactive investment promotion strategy aimed at attracting FDI to the electrical and electronics industry, using it to facilitate Malaysia’s entry into electronics GVCs.
The pioneering initiative came from the state government of Penang in the late 1960s.
Officials from the state’s investment promotion body, Penang Development Corporation, went abroad to proactively reach out to leading global firms in the industry and persuade them to come to Malaysia.
Their efforts were successful.
By the early 1970s, eight such firms, dubbed the “Eight Samurai” decided to invest in the electronics and electrical industry in Malaysia.
Among them were top names such as Intel, Hewlett Packard, and Advanced Micro Devices (AMD).
The government provided the usual menu of incentives, such as land in free trade zones, tax holidays, investment tax credits and export incentives.
But it also did one other thing.
It made sure the investors who had come were happy.
Not only did the government respond fast to any concerns raised by the investors, but it also proactively reached out to them on a regular basis to check whether they were having any issues.
In Bangladesh, we have a word for such treatment. It is called Jamai ador.
The Malaysians showered Jamai ador on the foreign investors, who reciprocated by not only remaining but also reinvesting in the country!
The first phase in the rise of Malaysia’s electronics and electrical industry lasted for about two decades, from the early 1970s to the late 1980s.
During this phase, the focus was on the labor-intensive, low-value-added parts of the global value chain.
These included production of components that did not require much skill and assembly of parts for certain products such as printed circuit boards.
Almost all inputs were imported and almost all output was exported. But the presence of the big-name foreign investors put Malaysia on the electronics GVC map.
Over time, more foreign investors came and, by 1981, 80% of the companies in the industry were owned by foreign investors.
The second phase of the industry, from the late 1980s to the early 2000s, saw substantial upgrading in the industry.
A second wave of FDI started coming in the late 1980s, mainly from East Asian countries such as Japan, Korea, Taiwan, and China.
The foreign companies gradually shifted into higher-value-added activities, for example moving from simple assembly to automated assembly, and into process and product design.
They entered the computer products market and expanded share in the consumer product market.
Several domestic companies emerged, many of them supplying to the multinationals operating in the country.
Multinationals also set up their own backward linkage companies in Malaysia.
Government invested in developing a skilled workforce and providing training for local suppliers so that they could meet the exacting quality requirements of the foreign companies.
The Penang Skills Development Centre established in 1989 exemplifies what a partnership between the private sector, government, and academia can do to help develop a globally competitive industry.
This phase also saw the largest growth in the industry with Malaysian exports of electronics and electrical products crossing $60 billion in 2000.
The growth rate slowed after 2000 mainly due to the emergence of competitors such as China and Vietnam.
The share of the industry in total Malaysian exports fell from a peak of 60% in 2000 to about 40% in 2009 and has remained between 40-50% since then.
Nonetheless, this third phase, i.e., from the early 2000s to now, has seen a move towards even more complex products, such as a shift from personal computers and parts to semiconductors.
There has also been a significant increase in exports of industrial equipment and medical device components.
Integrated circuit design and R&D activities have also moved to Malaysia.
In a previous article I had discussed what Bangladesh can learn from Vietnam.
Clearly there is much to learn from Malaysia too.
Like the Vietnamese, they had been proactive in attracting and nurturing big name foreign investors whose track record then attracted others.
It is also important to note the strategic approach of always focusing on doing things that are consistent with the country’s comparative advantage while at the same time relentlessly trying to enhance competencies and expand comparative advantage.
Bangladesh already has some capability in making electronic and electrical products, some of which are exported abroad.
Some companies have also enhanced their capabilities over time.
Such companies can take stock of what capabilities they have in relation to what is required to enter parts of the global value chain of the industry.
Where they already have the skills, they should reach out to important players in the chain and market their capabilities.
Where they do not,they should see what they can do to acquire these.
While there is much that Bangladeshi companies can do, the experience of Malaysia and Vietnam shows the critical importance of attracting foreign investment.
And that puts a lot of the onus on the government which needs to learn what these countries have done to attract and retain such FDI.
Bangladesh needs to create a bold vision and act strategically.
If we can do that, there is a fair chance that in a few years, many electronic products in the global market will be powered by parts made in Bangladesh.
The author is an economist, previously with an international development agency
