OP-ED CONTRIBUTOR
By Geoffrey See
We are often hostage to old ways of thinking, even when times are changing. And the world might be in such a time. Think of trade barriers and trade interests. What comes to mind? Countries stratified by economic status or industry interests. The developing economies align with other developing economies and the agricultural economies align with other agricultural economies. But what if the global trade map is drawn differently? Perhaps in a different world, the extended production network of a multinational can comprise a common trade interest.
This thought experiment is useful because it helps us look at trade barriers in new ways, as well as in ways that are particularly relevant to how multinational corporations view trade. Companies look at trade from the perspective of their supply chain: how do they combine their production networks across borders and what are the barriers in their way? This perspective is important as production has changed in fundamentally in the past twenty years. We are transitioning to a ‘global cluster’ mode of production.
The global cluster is defined by products that can only be provided by a global production network, or would otherwise be dramatically more expensive if produced in a single country. Boeing’s Dreamliner project reflects this network. Boeing chose to rely on suppliers from all around the world not just for the delivery of selected parts of its new flagship aircraft, but also for research and development collaboration and the production of entire subsystems of the plane. It is financially and technically impossible for any one country to develop the Dreamliner by itself.[1]
This development of global clusters is driven by improvements in technology and the narrowing of ‘institutional distance.’ Because of cheaper and better communication technologies and increasingly similar institutional environments, advanced organizational structures that facilitate cross-economy collaboration can develop. Production can be increasingly fragmented with smaller and smaller parts out-sourced further and further away.
At the same time, Boeing’s woes in delivering these aircraft on time reflect the difficulties in managing such a network. These difficulties reflect how the Flat World that Thomas Friedman predicted is more of a possibility than an undeniable reality. Unlike communication technologies, institutional distance – the difference in institutions between a company’s home and the country it invests in – can shrink just as it can increase. Examples of institutional distances include different regulatory regimes, legal frameworks or culture. All of these increase the difficulty of coordinating across borders. In the last few years, this distance has increased. Companies operating globally need to adjust to the institutional environment of the economies it operates in and this adjustment is costly.
Institutional distance sways with the prevailing policy winds. This implies that whether the global cluster can exist is in part dependent on whether governments can take determined actions to close institutional distances. This is where APEC can play its part as a network connecting senior government leaders with business leaders in dialogue. APEC can redefine its mission to promote trade by focusing on how it can close the institutional distance between economies to allow the global cluster to develop and flourish in Asia Pacific.
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Geoffrey Kokheng See is a University Fellow at Yale University and a graduate of the Wharton School, University of Pennsylvania. His research interests focuses on business strategy in emerging markets and business-state relations.
His full paper, awarded the top prize by APEC, can be found at http://www.apec.org/apec/news___media/media_releases/20091012_student.html
Footnotes: [1] Prof. Stephen Kobrin of the Wharton School in particular has done significant research on this production system and this essay draws extensively from his ideas.
