This op-ed is part of AASYP’s Digital Dialogues 2021, which is a programme that aims to provide a platform and forum for future leaders from across the region to contribute to the policymaking and diplomacy sphere by engaging in issues relating to Gender and Diversity, Green Recovery, and Emerging Economies.
According to the World Development Report (2020), Global Value Chains (GVCs) which reallocate production processes in different countries can potentially contribute to growth. GVCs are positively associated with growth of export, productivity, income, and job creation. Since GVCs reallocate production activities to the developing world, GVCs give an opportunity to developing countries to catch up with developed countries (Kuroiwa, 2016). For example, Cambodia as a developing country has leaped into GVCs of light manufacturing, resulting in industrial development and export growth over time. Hence, this report mainly aims to study the concept and evolution of GVCs and analyse a case of Cambodia joining GVC of bicycles.
According to Baldwin (2013), until the 1830s, production and consumption was concentrated within a territory (a country) due to high transportation costs. Between the 1830s and 1990s, a decline in transportation cost derived from the transport (steam engines) revolution led to a rise of spatial separation of production and consumption, also known as the first unbundling period. Production activities were based in developed countries while developing countries constituted the consumption markets.
Since the 1990s, technology and information revolution has driven an emergence of the second unbundling period in which some production activities have been reallocated to developing countries. The reallocation of production activities serves two main reasons: i) large production cost per production activity can be saved; and ii) costs of service links that connect unbundled production activities in different countries are low (Jones and Kierzkowski, 1990; and Kimura and Obashi, 2011). Fragmentation or unbundling of production activities of a particular product for cost efficiency creates a so-called Global Value Chain (GVC) of that product (World Development Report, 2020).
In the context of globalisation, Cambodia has participated in GVCs of a number of manufacturing products, including the bicycle. The figure below illustrates parts of a bicycle, such as the saddle, frame, brake, wheel, and pedal and crank. Each part is produced by a niche production process, and the whole value chain is no longer concentrated in a single location, but fragmented in different locations. As can be seen in the figure, saddles are produced in China, Italy, and Spain; frames in China, Vietnam, and Italy; brakes in Japan, Singapore, and Malaysia; and so on. As such, where does Cambodia fit into this process and how can it participate in the GVC for bicycles?
Source: World Development Report, 2020
Besides manufacturing those parts, assembling is also the most important production process in the GVC. Thus, Cambodia has leaped in the assembling production block. Cambodia’s participation in this is driven by both internal and external forces. Regarding internal forces, Cambodia has comparative advantage in abundant and cheap labor endowment despite limited supply base and technology. In addition, the government’s efforts in institutional reform, infrastructure development, economic liberalisation, attractive investment scheme, tariff reduction, development of Special Economic Zones (SEZs), etc. have led to a significant reduction in service link costs. Regarding external forces, a rise of wage in Vietnam and China and EU’s anti-dumping duties applied on Vietnam’s bicycle sector has encouraged firms, mostly Chinese firms, to move their bicycle-assembling factories to Cambodia, especially border areas (Cambodia Trade Integration Strategy, 2019-23). As a result, Cambodia’s bicycles export to the world, mostly EU, reached USD446 million in 2018 (4.9% share of global exports), making Cambodia the fifth global exporter of bicycles (ITC’s Trade Map).
This article was written by Maria Yang, edited by Dhini Hardiyanti, and reviewed by the AASYP Publications Team.
Note: The views and opinions expressed in this op-ed are solely those of the writer and in no way represent nor reflect the position of AASYP and members of the AASYP Publications Team. The AASYP Horizons Blog provides a platform for the free expression of opinions and intellectual discourse.