Global Production Networks and Location Strategies

Source: Adapted from Knox and Agnew (1998) The Geography of the World Economy, Third Edition, London: Arnold.

Global production networks can be structured into two categories; multidomestic and globally integrated structures:

Multidomestic. Concerns operations where each market is serviced independently. Can relate to simple products that are easy to replicate but costly to transport over long distances. Production can be integrated globally, while the marketing is multidomestic, reflecting cultural and consumer preferences differences. The goal is therefore to better answer the needs of every market. This implies an independency in productivity, meaning that the efficiencies and productivities achieved in each market are unrelated to those taking place in other markets.
Globally integrated. Systems of production located in several countries and commonly involving complex products. Logistics activities are highly important as production and distribution capabilities need to be effectively reconciled. This implies an interdependency in productivity, as each component of the supply chain directly impacts the cost and the quality of the final product.

Four major locational strategies for Global Production Networks can be identified:

Centralized global production. The entire production occurs within only one nation (or region) and is exported thereafter on the global market. This is particularly the case for activities that are difficult to relocate, such as goods linked to the location of resources, difficult to reproduce (e.g. luxury and craft) or depending on massive economies of scale.
Regional production. Takes place within each region that manufactures a good with the size of the production system related to the size of the regional market. This system depends more on a regional accessibility than on economies of scale. It particularly applies to well known manufacturing technologies and/or to products having high distribution costs (e.g. soft drinks).
Regional specialization. This global production network involves a spatial division of the production based on comparative advantages. Each region specializes in the production of a specific good and imports from other regions what it requires.
Vertical transnational integration. This global production network is another variant of specialization. Different stages of the production occur at locations offering the best comparative advantages. Raw materials are extracted from locations where they are the most accessible, while assembly is performed in regions having low labor costs or high skill levels depending on the type of product or the stage in its manufacturing.

Each production sectors has a different production network. The automotive and electronics sectors are good examples of vertical integration. For instance, the manufacture of a television generally implies stages of research and development in the United States and Japan (as well as being important markets). Several nations, such as England, South Korea and Germany provide components. The assembly takes place in low wages countries such as China, Mexico and Thailand. Labor costs are a key element of this system, but also the required level of know how.