Financialisation of global value chains

Global value chains (GVCs) have been the carriers of international trade since the 1990s. These chains describe the international disintegration of production, where different stages of manufacturing, marketing and distributing a product materialise across multiple countries. These chains are dominated by lead firms which are based in advanced countries while suppliers are dispersed across developing countries. In the jargon, the lead firms are located in the Global North and the suppliers are based in the Global South. Most of the writings on GVCs pay attention to governance, where the lead firms control the suppliers located in developing countries and mainly discuss the prospects of upgrading for the suppliers. A few writings describe the process of value creation, where the lead firms call the shots and capture the value from the suppliers in the chain. Few studies discuss the process of financialisation of GVCs. The financialisation of GVCs starts with the objectives followed by the lead firms. Since the lead firms are listed on stock exchanges, they have been increasing dividend payouts to shareholders since early 2000. They have also increased share buybacks by using surplus cash. US-based lead firms are more financialised than those of Europe. The US tax structure incentivises firms to distribute cash to shareholders. On the other hand, the European firms distribute less cash to shareholders. Thus, the surplus cash is used by the lead firms to meet financial objectives. Lead firms have also financialised their operations as they tighten their grip on the suppliers from developing countries. They have increased the number of payment days for the suppliers since 2000. In addition, they have reduced the number of collection days from their customers. This is how they have boosted their cash position. Hence, the lead firms strengthen their cash position at the cost of suppliers. Lead firms have reduced their sourcing cost as the number of suppliers from developing countries sprang up since early 2000. In addition, these suppliers have to meet tight deadlines. In this way, the lead firms have increased their profit margins. Macro environment also provides financial options to the lead firms. Policy rates have been low since early 2000 across the world. Lead firms, tempted by these low policy rates, raised cash through bond issuance. They did not raise capital from stock markets since bonds remained attractive for them. This shows that the lead firms preferred bonds to raise capital. Lead firms have been following financial goals since early 2000. These firms have been involved in financial activities. They set short-term goals where downsizing is a norm. Downsizing immediately raises the profitability of firms. Such profits are then distributed to shareholders. This is known as downsize and distribute. Before financial globalisation, the firms used to set long-term goals. They spent on research and development (R&D) to discover new processes, products and technologies. In addition, these firms trained workers who were required to steer R&D. Capital outlays were done to upgrade physical assets with a lasting value. These long-term goals used to kindle industrial capitalism. In short, the financialisation of GVCs has brought a change in the strategic orientation of the lead firms. These firms extract value from their GVCs and distribute it among shareholders. Lead firms are in pursuit of short-term financial gains while long-term goals have been set aside. Last but not the least, the financialisaton of GVCs has created more challenges than opportunities for the suppliers of developing countries. The writer is an independent economist and authored a book: Pakistan's Structural Economic Problems in the era of Financial Globalisation