The international division of labor is undergoing reorganization as economic globalization gathers pace. The question that arises for China is how it can take the initiative in this process.

 

Song Hong, a researcher at the World Economics and Politics Institute under the Chinese Academy of Social Sciences, expressed his view on this matter during a recent interview with the online edition of People's Daily.

 

He said in this new context, increasing intensiveness is the hallmark of the productive activities by international production networks.

 

Such "international production networks" refer to the webs formed by enterprises from different countries on the basis of the division of labor and cooperation in producing a specific product or providing certain kind of services.

 

By playing a key role in these networks, multinational corporations break down the manufacturing process or the provision of services into different components and assign these components to different factories or firms across the world for production or processing, taking into full account variations in regional costs, resources, logistics and markets.

 

This process is aimed at achieving optimum regional efficiency and, in turn, the maximum possible profits.

 

This kind of division of labor is one that takes place in different links along the value-adding chain in the manufacturing of the same product, something which sets it apart from traditional types of division of labor such as among different industries or that taking place within the same industry.

 

Some multinationals, mostly originating from developed countries, go to the extent that they transfer all of the operations involved in producing some items to other countries and make sure that they only control the brand names and marketing channels.

 

Other multinationals focus exclusively on research and development (R&D), contracting all manufacturing and managerial functions out to other firms.

 

The deepening of international division-of-labor networks finds an expression in three aspects, according to Song

 

First, these production networks are expanding rapidly.

 

Second, the outsourcing of high added-value services is becoming increasingly active. High-tech multinationals are shifting high-income and high added-value posts overseas, particularly those involving integrated-circuit design, consultative services, statistical analysis, auto design, pharmacy and nanotechnology.

 

Third, wage differentials between researchers and developers in different parts of the world have triggered a new round of division of labor in newly emerging industries such as micro-electronics, biotechnology, fine chemistry and software.

 

In Song's opinion, all of this offers China opportunities to get further involved in the international division of labor.

 

First of all, the rapid expansion of such labor-division-based networks would help largely facilitate China's industrial-structure realignment and push the mode of economic growth in a technology-intensive direction, if the country takes an active part in this new round of international division of labor.

 

Going hand in hand with the transfer of international manufacturing are high added-value opportunities in the manufacturing, service and R&D fields.

 

Second, not all countries are lucky enough to enjoy such opportunities. These opportunities are volatile in nature because international division-of-labor networks are vulnerable to major events and crises. Besides, some developing countries, not content with merely being engaged in labor-intensive production, are eager to climb one rung up to the capital-intensive or technology-intensive sectors. This poses multinationals with a major challenge.

 

With regard to this, China should jump at these golden opportunities, which may slip through our fingers if we are not prepared.

 

Third, some advanced technologies, which are hard to be obtained through the traditional method of know-how transfer, will be smoothly introduced to China with the entry of multinationals.

 

However, over-reliance on international production networks based on the division of labor is by no means the best choice for the country.

 

To begin with, dislocations in the course of industry transfer easily cause fluctuations in the development of local industries.

 

For example, rising local production costs in many cases make multinationals shift their operations to locations where the costs are lower, which would bring an abrupt halt to local economic development.

 

Second, R&D does not necessarily go hand in hand with the shift of production activities on the part of the multinationals. So in some cases, technical innovations and breakthroughs are rarely seen where the transnational firms have transferred their productive operations.

 

Therefore, it follows that we should promote the development of domestic enterprises and industries. This involves managerial innovation, technical upgrades, perfection of market mechanisms, and the promotion of high-tech and sophisticated products with government procurement as the leverage.

 

The integration of purely Chinese industries and the manufacturing muscle of multinational corporations offers the key to raising China's economic and technology progress onto a higher footing.

 

(China Daily February 10, 2006)