BUSM4689 Assignment: Global Value Chain in the Food Industry Analysis

This report critically assesses the application of the global value chain (GVC) theory to the food industry. It begins with an introduction to the GVC theory, discussing its scholarly origins, differentiation from previous theories, and contemporary critiques. The report then delves into the food industry, detailing its structure, key firms (such as PepsiCo, Nestle, and Unilever), financing and ownership models, and the influence of governmental policies. The analysis incorporates the industry's evolution over time and identifies the drivers behind these changes. Finally, the report applies the GVC theory to the food industry, evaluating its strengths and limitations in the context of the industry's current landscape. The study emphasizes the importance of understanding GVCs due to their significant role in many national economies and highlights the rapid developments and governmental policy responses that encourage global supply chain development. The report also addresses issues of export of manufacturing value added goods and also discusses the problems of lower productivity and growth in the context of GVC.

Running head: THE MULTINATIONAL ENTERPRISE IN GLOBAL PRODUCTION AND
TRADE NETWORKS
POLITICAL ECONOMY OF INTERNATIONAL BUSINESS – BUSM4689
ASSESSMENT TASK 2
TUTOR’S NAME:
TUTORIAL DAY & TIME:
STUDENT NAME/S & ID #:
THEORY TO BE ANALYSED: GLOBAL VALUE CHAIN
INDUSTRY / FIRM ANALYSED: FOOD INDUSTRY

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Introduction:
The paper is developed for conducting a critical assessment of theory of international
business by its application to the specific industry. The chosen theory for the purpose of
analysis is global value chain theory and the chosen industry for analysis is food industry. In
this regard, the global value chain industry is discussed in terms of scholarly origins,
differentiation between the previous theories and any alternative or the contemporary critics
of the theory. Food industry is elaborately discussed to gain an insight by explaining the
structure of the industry, key firms operating in the industry, financing and ownership. In
addition to this, discussion also incorporates the behaviour of the firm by determining the
governmental influence and any changes in the food industry over time has been identified by
ascertaining the reasons behind such change. Lastly, the application of global value chain to
the food industry has been done by explaining the strength of the theory in the current nature
of food industry and its limitation to the application of food industry. It has been required to
carefully consider the global value chain because of the supply chain predominance in many
countries economies. There has been rapid evolvement in the global value chain and the
growth of global supply chain is encouraged to be developed by the change in government
policy response.
Overview of global value chain theory:
The way global economy that was introduced in year 1995 is looked at is challenged
by the international fragmentation of global value chain production that is driven by the
access to market and resources, technological progress and reforms in the trade policy. It is
important to gain an understanding of working of global value chain and how the
performance of the economic is impacted by the value chain. Global value chain (GVC)
forms the basis of investment, world trade and production and the activities involved in the

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value chain are all such activities which the firms has to perform for producing the product
and binging them into the market (Goger 2019). Such activities involve production,
designing, logistics, marketing and distribution for supporting the final consumers.
There are a varieties of intellectual origin forming the basis of the main characteristics
of global value chain that originated in year 1985. The term global value chain originated
from the mechanism value of distribution and the comprehensive study on structure and
drawing on the academic field analytical scopes (Termeer et al. 2019). The movement of
goods in the global value chain is facilitated by standardization, containerised shipping,
standardization and greater freight inter modality. Tradability of the goods and services have
increased due to rapid advancement of ICT (information and communication technology).
Extension of GVC has been identified beyond industrialized countries due to the
liberalization of investment in emerging economies and also due to the dispersion of
activities. Firms have been able to build efficient value chain because of the development that
has resulted in creating impact on the factor endowment and relative costs. Cost advantages is
gained by the firms due to sourcing of input from the efficient and low cost producers.
However, it is not the only efficiency and cost factor driving the global value chain. Access to
knowledge is another motivation that has resulted in spreading of value chain (Sako and
Zylberberg 2019). Furthermore, growth of GVC is also accelerated due to the physical
offshoring and closure of existing production in the advanced economies.
Developing countries by way of intensification during 2000s of the global economy
integration are able to diversify their exports. Global value chain has addressed the issues of
export of manufacturing value added goods. Traditionally, unprocessed raw materials is
exported by the developing countries and this resulted in leaping of the export of
manufacturing products and the requirement of full suite of complimentary industries makes
the process complicated. With the help of global value chain and without having to complete

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the final goods, such countries are able to slot themselves into the production chain part
(Mayer and Gereffi 2019).
Problems addressed by Global value chain:
Skills policies and sound labour market helps in mitigating the cost of adjustment and
such transformation is introduced by enhancing living standard and productivity in both rich
and poor countries by way of participation in GVC. Allocation of resources are done to more
productive activities compared to less productive activities is entailed by the growth induced
by value chain (De Marchi et al. 2019).
The issue of creation of opportunities for the small firms in the emerging and
developing economies has been solved as the small firms are able to enter the market due to
the product fragmentation. Small and medium enterprises are able to exploit their flexibility
and speed by the continuous emergence of the supply of the novel product and services. New
entrepreneurial possibilities have been created in combination with the ongoing
fragmentation of the product and information and communication technology development.
Problems of lower productivity and growth is addressed by some important impacts of
global value chain. One of the important driver for the productivity and growth is the
openness to the international trade facilitated by the GVC. However, the impacts that results
in enhancement of productivity are conditional the domestic policies and the economic
condition. Facilitation of access to higher quality and cheaper intermediate inputs by way of
participation in value chain has assisted in enhancing the overall productivity (Acquier et al.
2017).

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Difference between GVC and its prior theories:
Existence of variety of intellectual origins is the main feature of paradigm of global
value chain. Increased observations of intermediate trade has been followed by the initial
theory of fragmentation of production introduced in 1980s. Such theory further elaborated the
concepts such as trade in task and unbundling. In sociology, there was advancement of
framework of methodology in parallel. Global value chain resulted from the comprehensive
study which was undertaken on the mechanism of value distribution and structure amongst
the countries. The GVC study empirical aspect is newer and the metrics of the value chain
theory was designed using the input and output databases of multi country and such input
output analysis helps in complementing the value added analysis that is based on the business
record of the firms (Louche et al. 2018).
Critics and alternatives of GVC:
Global value chain has been increasingly characterising the international trade and
global economy dynamics. For the economic policy, important challenges and implications
have been brought by the GVC. The participation in GVC has become inevitable due to the
technological revolution and at the same time, such involvement has also accentuated both
opportunities and risks. Many enterprises are shielded by the boundaries of market are
exposed to the risk and also results in increasing the information asymmetry scale. It is after
1989, the rising larger emerging economies are making the value chain more consolidated
(Fanzo 2017). The total number of suppliers have been shrunk by the rationalization of
supply chain because of the most advanced economies experiencing decline in the
consumption after the global economic recession of 2008-2009. Another critiques involves
rising conflict of interest between the enterprises and customers as they move further up the
chain and the resultant integration of the enterprise by the GVC also results in downgrading

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their capabilities (Adhikari 2019). In addition to this, lower value is added in the outward
arrangements of processing by the activities that is performed by the enterprises.
Lower cost of production offered to transnational companies because of the rivalry
amongst the developing countries apparel producer’s results in some illegal practices such as
disregarding environmental and labour regulations and thereby avoid taxation. In this regard,
there also exist a race for lowest wages and consequently lowers the living standard at local
and without making any improvement in the productivity (Fortanier et al. 2019).
Key firms of the food industry:
A rapid transformation is surrounding the global food industry and the dramatic
changes have been brought by the replacement of local distribution channel and traditional
agriculture by the modern retailing and agriculture. The future of global food industry seems
to be promising due to the existence of opportunities in dairy, beverage, meat and poultry,
vegetables and fruits, snacks and convenience food and seafood industries. Some major
drivers increasing the growth opportunities of the food industry includes changing lifestyle,
foods products that are ready to eat, working women, increasing nuclear families and
changing lifestyle. Industry dynamics is directly impacted by the emerging trends such as
food processing technologies development that lowers the detrimental change in the products
and nutritional value maintenance (Hur 2019). Some of the major processed food
manufacturers are PepsiCo, Nestle, Cargill Food, Bunge, George Weston, Sysco Corporation,
Unilever and Archer Daniel Midland. The market of food industry comprised of unorganized
and organized sectors and highest growth is expected to be witnessed by the organized sector
and this is attributable to the considerable increase in the number of standalone eateries, chain
outlets and restaurants. Over the period of forecast, region of Asia pacific would remain

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largest resulting from increasing working professionals and increasing demand for ready to
eat foods (Gereffi and Lee 2016).
Industry structure:
Structure of any industry such as food industry is determined by the various
characteristics and the entire value chain is not controlled by one firm, however, integration
of the firms in the industry can be done horizontally or vertically. Horizontal integration can
be done by either increasing the capacity or buying up the competing firms and vertical
integration is done by buying the facilities. Firms decide to integrate vertically by buying the
firms coming earlier or later in the value chain. On other hand, horizontal integration is done
for expanding the growth opportunities by utilizing the economies of scale (Amendolagine et
al. 2019).
Ownership and financing:
Food industry is a crucial for various establishments such as restaurants and for
consumers as well. For the seamless running of the operations, it is important to have
adequate capital. Various changes throughout the food industry has been witnessing
increasing demand and the growth has been steady. The investment portfolio of the food
industry ranges from local to international and the organizations operating in the industry are
funded at local and international level. Investors of the food system are provided with several
financial instruments such as equity, loan guarantees, loans, leases and mezzanine financing.
One of the widely used system of financing in the food industry is loan and secured loans
from the commercial banks, foundations and farm credit east are often used as investment
tool. Loan guarantees is another source of funding that helps in expanding and facilitating the
lending activities that helps in supporting the development food system. Food companies also
uses equity investment and they are entitled to the ownership stake in the business by way of

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capital investment. Mezzanine financing is another source of financing used in the food
industry that incorporates the profit sharing and revenue sharing models (Choi et al. 2019).
Such source is considered as the structural investment which is the form of debt capital where
the lender is provided the right to convert the loan into equity interest.
Identifying influence of government of the firm’s behaviour:
Government impacts the food industry by intervening the market by bringing about
structural and legislative changes. Intervention by government in several forms considerably
influence the behaviour of the firms. Government offers incentive to procure low cost
materials and procure the products that are relatively sustainable and maintain quality
standards. In various countries, the intervention of government for imposing a standard or
limitation on sodium and trans fat has made the firms to maintain quality control checks and
adopt stringent measures for meeting such requirements. Various forms of marketing
standard such as limitation of advertising to food and beverages children not cloying with the
basic nutrition. Local food environment of countries remained the main focus of the policy
makers and the firms take measures accordingly for aligning with the requirement imposed
by the governmental legislations (Piñero et al. 2019).
Identifying the changes over time in the food industry:
There is continuous evolvement in the global food industry since year 1922, due to
increasing awareness of sustainability and health issues and changing preferences of
consumers. Great potential is enjoyed by the firms for expansion in the global market.
Vulnerability to the food market of the country is caused by the fluctuations in the prices and
global food supply. It was in the middle of nineteenth century, companies are required to
explore food and agricultural technologies for increasing the food volume with less
environmental footprints and fewer resources. The reputation of company in terms of

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maintaining food quality and safety has contributed to encouraging steady growth of food
industry. The industry is required to adapt and address the needs of the heightened awareness
of the consumers on the biodegradable packaging and increasing demand for healthier
options. Therefore, heavy responsibility is placed on the food industry due to rising demand
for healthy food. Singaporean food companies are witnessing innovation in the form of
creating social value and adding to the business. Evolving consumer preferences and health
priorities are some of the growing trends that have added to the pressure of the firms and by
year 2050, there would be increase in the global food production. Alchemy Foodtech is one
example that has taken some measures to address the growing needs by adding low glycemic
index to the conventional carbohydrates such as noodle, bread and rice (Lim 2016).
Therefore, the agenda of food innovation is being done by the firms and this established
Singapore as the leading nutrition and food hub of Asia.
Application of theory to the food industry:
Strength of the theory in understanding the current nature of food industry:
There has been change in the trade of agriculture and other food products due to the
increase in the contribution of the global food system. Producers are connected to the
consumers across the world with the help of global value chain that helps in delivering of the
stable supplies of textiles and food and the consumers are provided with greater choices.
GVC helps in creating wide range of opportunities for the agro food and this also makes the
producers and government interested in how to position the food and agricultural sector. The
nature of the products produced heavily influences the manner of the participation of the
producers in the value chain. Through direct and indirect effects, GVC plays an important
role in the food security and productivity growth. The opportunity to create rural income can
be driven by the high value agri food chains development.

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The approach of GVC is centred upon the dimensions such as territoriality, output-
input structure, institutional framework and structure of governance. It is identified in one of
the survey conducted that the well capitalized and large buyers mainly dominates the value
chain of the product in the agri-food industry and the subordinates firms are left with the
opportunities that causes minimal upgrading. The consumption pattern and the global food is
being critically shaped by the international value chain. There has been significant
evolvement in the nature, scale and geographical aspect of the global value chain. Firms are
able to coordinate their distribution and production network across various locations due to
the technological innovations in the ICT and lowering the cost of transportation. Emerging
economies are viewed as the spot of investment by the corporate players due to the growing
urban population demands and rapid change in diet patterns. In all the stages of food value
chain, ranging from production to retailing, there has been occurrence of consolidation. The
growing emphasis on the welfare of animals and environmental performance has also caused
a shift in the food system from the demand end consumers.
Production at global level is significantly titled towards the other parts of developing
countries and China. Stakeholder collaboration in the value chain has become important than
ever before and the interdependencies encompasses the stakeholders anywhere in the network
of value chain. In the recent times, traceability and food safety has become a major concern
due to the number of high profiles global food recalls and global food supply chain. The most
successful collaboration within the supply chain is identified and is expanding across the
borders such as Milklink and Arlafood merger in year 2012. The collaboration of the
producers in the global value chain is intended to achieve production efficiency, scale and
risk management. Firms under such scenario and with such arrangement brought by the value
chain would be able to capture the huge benefits.

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In farming, risk management has become integral and the operational risks are
mitigated by the producers by way of farming across various oil types, weather region,
spreading of crops, using the commodity market for hedging the movement of price and long
term customer contracts. The ability of farmers to obtain the financing of working capital has
been enhanced due to the long term contracts with the customers in the value chain (Eckhardt
and Poletti 2016).
Exploring the interplay between the organization of cross border in the production and
consumption and the mechanism of value distribution is the main goal of GVC. Quantitative
description of GVC can be ascertained from the particular business records of the firm. The
analysis of the qualitative aspect of the GVC can be done from the approach of product level
such as technological mode for the transfer between the parties and the arrangement of
governance. Change in demand patterns, technological innovation and the climatic conditions
is posing a challenge to the food industry at the global level. Manifestation of such forces are
being done throughout the value chain by complexity, scrutiny and increased volatility. The
framework of GVC helps in understanding the dynamics and nature of the food industry as
the analysis helps in tracing the shift in the pattern of the production at the global level. Any
issues regarding the development can be answered by the policymakers using the
comprehensive nature of the framework of GVC.
Limitation of the global value chain theory to the application of food industry:
The global value chain of the food industry is challenged by the rapid technological
innovation, changes in the climatic conditions, access to the information and new biofuels
demand. Improvement in the productivity is another challenge faced by the producers of food
due to the continuous expansion of global population. For the value chain to be successive, it
is required by the chain to become remarkably adaptive to the preferences of the consumers

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and changing demographics. Challenges would be faced in terms of collaboration of different
streams of the food value chain.
It is important to have in depth understanding of the geographies, specific crops and
the complexity of the value chain for ascertaining the right opportunities of investment in the
food industry. The performance of the various parts of value chain forms an important basis
of the profitability of the investors investing in the food industry and existence of any
investment opportunities.
Limitation can be identified in terms of the workers social welfare in the global value
chain of the food industry. In one of the cases, it has been ascertained that the global value
chain results in social upgrading and at the same time, it results in downgrading of the
labourers of the industry. In order to fully comply with the buyers code of conduct and
continuity of the relationship, better social protection and stable contracts are being offered
by the factories that supplies storage, packaging, logistics and finished goods for the
suppliers. On other hand, irregular workers are hired on the casual contracts by the buyer for
promptly responding to the changing orders of the buyers so that they can operate on the
short lead times. This result in the discrimination of the workers in terms of treatment and
wages and also imposing excessive overtime. The participation in the GVC would benefits
workers only if there is a relative formalization of the working conditions or they must
possess relatively higher skills of performing remunerated tasks. In order to capture the gains
from GVC, it is important to have strategic collaboration and possess good institutions and
policies (Goger 2019).
The situation of value chain governance has been the concentration of formation of
theory and it did not focus much on promoting the competition so that the fairer distribution
can be assured. In the global value chain, a food processor can play a crucial and distinctive