Competitiveness and Technological Upgrading in Global Value Chains: Evidence from the Indonesian Electronics and Garment Sectors

Abstract

Indonesia is a rapidly growing and internationally competitive economy that is well integrated into globalized production systems. The global value chain (GVC) model has proven to be a popular analytical framework to explain how global lead firms structure and organize global production through dispersed global suppliers. Indonesia's leading export sectors, garments and electronics, are well integrated into GVCs. Engagement in GVCs, often led by leading global brands, is seen as a basis for local producers to become globally competitive and to grow. It also comes with challenges—local producers must meet the demanding pressures from lead firms on prices, on-time delivery, product quality, and social, environmental and labour standards. The possibilities for local producers to learn, acquire new capabilities and upgrade to enhance their competitiveness are often conditioned by the nature of ties that they have with their global lead firms. Yet, this paper argues, the GVC model fails to recognize agency on the part of local firms in this learning process. Moreover, particular forms of governance arrangements within GVC ties can restrict the prospects for local producers to enhance capabilities and upgrade. Drawing on selected case study evidence from the Indonesian garments and electronics sectors, the paper explores the relationship between distinct types of GVC engagements and firm-level learning and upgrading, and considers how some GVC ties may restrict upgrading.

Notes

For more details on the primary survey, see Kadarusman (2010).

See Bair (2005) for an excellent overview of the use of the GCC, GVC and GPN concepts. On global production sharing, see Feenstra (1998).

Initially the investment policy allowed 95% foreign ownership for export-oriented firms exporting at least 85% of their products. In 1992, full foreign ownership was allowed for investments greater than US$50 million and for those located in Eastern Indonesia and in bonded zones. In addition, to encourage small- and medium-sized foreign investments in electronic components and parts, full foreign ownership was extended to investments with a minimum investment of US$2 million in 1993. Finally, in 1994, full foreign ownership was allowed for most sectors and the divestment requirements were abolished (Pangestu, 1997).

EPE status exempts firms from customs or pay tariffs on imported inputs. Moreover, a firm can obtain this status without being located in existing bonded zones. The firm can also sell up to 25% of its products to the domestic market after paying tariffs on the inputs and the value-added tax on the product (Pangestu, 1997).