Global production sharing: Exploring Australia's competitive edge

• DOI: http://doi.org/10.1111/twec.12495
• Published date: 01 October 2017
• Author: Omer Majeed,Tala Talgaswatta,Prema‐chandra Athukorala
• Date: 01 October 2017

ORIGINAL ARTICLE

Global production sharing: Exploring Australia’s

competitive edge

Prema-chandra Athukorala

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Tala Talgaswatta

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Omer Majeed

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Arndt-Corden Department of Economics, Crawford School of Public Policy, College of Asia and the Pacific,

Australian National University, Canberra, ACT, Australia

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Economic and Analytical Services Division, Department of Industry, Innovation and Science, Canberra, ACT,

Australia

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INTRODUCTION

Cross-border dispersion of production processes within vertically integrated global industries, which

we label “global production sharing”in this paper,

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has been an increasingly important structural fea-

ture of economic globalisation in recent decades. This process of international divisionof labour opens

up opportunities for countries to specialise in different slices (tasks) of the production process in line

with their relative cost advantages. As the production processes are finely sliced across a wide range

of industries, new opportunities for specialisation within global production networks (GPNs) are cre-

ated. Given this structural shift in global production, the conventional approach to analysing trade pat-

terns, which treats international trade as an exchange of goods produced from beginning to end in a

given trading partner, is rapidly losing its relevance (Helpman, 2011; Jones & Kierzkowski, 2004).

The 787 Dreamliner “produced”by the Boeing Corporation, USA, has become an eye-catching

illustrative case of how countries are engaging in an intricate web of production-sharing arrangements

(Grapper, 2007). Offshore production accounts for 70% of the many thousands of parts used in assem-

bling the jet. Boeing itself is responsible for only about 10% by value of the aircraft, tail fin and final

assembly, but holds rights to the 787 technology. There are 43 parts and component suppliers spread

over 135 production sites around the world. The wings are produced in Japan, the engines in the Uni-

ted Kingdom and the United States, the flaps and ailerons in Australia and Canada, the fuselage in

Japan, Italy and the United States, the horizontal stabiliser in Italy, the landing gear in France and the

doors in Sweden and France. This pattern of outsourced production around the world is in sharp con-

trast to the Boeing’s parochial emphasis on procuring components domestically: only about 1% of the

Boeing 707 was built outside the USA in the 1950s. Boeing is now focusing on its own specific

advantages—design, supply chain management, marketing and branding—rather than on areas where

others are bound to make inroads. Airbus, Boeing’s competitor, followed Boeing’s lead for its A350

jet. It has closed down some component-producing plants in Europe and is outsourcing work to China

and elsewhere in producing this wide-body jet, which is positioned to compete with Boeing 787.

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The alternative terms include “international production fragmentation,”“intraprocess trade,”“vertical specialisation”and

“offshoring”.

DOI: 10.1111/twec.12495

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©2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2017;40:2172–2192.

The purpose of this paper is to examine the patterns and determinants of global production

sharing with an emphasis on the implications for the performance and structural change in Aus-

tralian manufacturing. The study is motivated by the growing emphasis in the contemporary policy

debate in Australia on the country’s manufacturing future in the aftermaths of the cessation of the

commodity boom (ACOLA 2015, CEDA 2014, PC 2014; Withers, Gupta, Curtis, & Larkins,

2015). Notwithstanding this policy emphasis, the implications of the ongoing process of global

production sharing for effective integration of domestic manufacturing into global manufacturing

networks and the related policy issues have not been systematically explored. Given this informa-

tion gap, the Australian mindset has not changed to accommodate current and emerging global

trends in manufacturing. For instance, according to a survey of 450 top business executives and

700 public servants conducted by the Australian Council of Learned Academies (ACOLA), neither

business leaders nor public servants identified global production sharing as an issue of strategic

importance for Australia (Withers et al., 2015). The data from the Annual Survey of Busines s

Characteristics conducted by the Australian Bureau of Statistics (ABS 2015) are consistent with

this findings: only 1.8% of all manufacturing firms on average were engaged in integrated supply

chains during the period from 2005–06 to 2013–14 (ABS 2015).

The paper is structured as follows: Section 2 provides a stage-setting overview of the process

of global production sharing and emerging opportunities for countries to specialise in line with

their relative cost advantage. The procedure followed in separating data on trade taking place

within global production networks (“GPN trade”) from the standard trade data are discussed in

Section 3. Section 4 provides a comparative analysis of Australia’s engagement in global produc-

tion sharing. An econometric analysis is undertaken in Section 4 using the standard gravity mod-

elling framework to examine the determinants of intercountry differences in the degree of

involvement in global production sharing. Section 5 summarises the key findings and draws policy

inferences.

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GLOBAL PRODUCTION SHARING

Global production sharing is not a new phenomenon. There is ample anecdotal evidence of evolv-

ing trade in parts and components within the branch networks of multinational enterprises (MNEs)

dating back to the early twentieth century (Wilkins, 1970). What is unprecedented about the con-

temporary process of global production sharing is its wider and ever increasing product coverag e,

and its rapid spread from mature industrial countries to developing countries. Over the past four

decades, production networks have gradually evolved encompassing many countries and spreading

to many industries such as sport footwear, automobile, televisions and radio receivers, sewing

machines, office equipment, electrical machinery, machine tools, cameras, watches, light emitting

diodes, solar panels and surgical and medical devices.

The expansion of global production sharing has been driven by three mutually reinforcing

developments (Helpman, 2011; Jones & Kierzkowski, 2004; Yi, 2003). First, rapid advancements

in production technology have enabled the industry to slice up the value chain into finer, “porta-

ble”components. Second, technological innovations in communication and transportation have

shrunk the distance that once separated the world’s nations, and improved speed, efficiency and

economy of coordinating geographically dispersed production processes. This has facilitated, and

reduced the cost of, establishing “service links”needed to combine various fragments of the pro-

duction process across countries in a timely and cost-efficient manner. Third, liberalisat ion policy

reforms across the world over the past four decades have considerably removed barriers to trade

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