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Study on Multi-national Competitive Strategies of CME in Global Value Chain from Evolutionary Game Theory LI Zhihong, LIANG Dong Business School, Jianghan University, Wuhan, Hubei, P.R.China, 430056 [email protected] Abstract: The insufficiency of the self-innovative capacities and the lack of the social organizational resources to the Chinese manufacturing industry lead to a long stay in the low section of the global value chain, which gravely curbs its profit-sharing level in the chain. A long-term squeeze during the profit distribution in the global value chain is finally shifted to the Chinese labor, the natural resources and the environment in China. The shift has made China labor forces cheap; worsened natural resources and environment, which is a massive challenge to the Chinese Manufacturing Enterprises (CME). So this paper has made a study on how to face and manage the above challenge for the Chinese manufacturing enterprises. Based on the analysis on the cases of the Chang Jiang Triangle Plain, the paper has analyzed the competitive strategy in the conditions of the global value chain in the angle of the evolutionary game theory and expounded that the Chinese manufacturing enterprises are obliged to transfer their competitive strategy to the multi-national competitive one as soon as possible , make a full use of the advantages of the global value chain to develop and upgrade the global productive service sector in order to achieve the shift from the low section to the high of the global value chain. In the end, it explores the foundation and the main approach to carry out this shift. Keywords: Global value chain, Competitive strategy, Evolutionary game theory 1 Introduction The situation is not so optimistic for the manufacturing industry of the Chang Jiang Triangle Plain though it is developing fast, for the local enterprises are low in the self-innovative capacities and the economy of the region is still wandering in the low end of the global value chain. According to some statistic documents to this area, 70% of the enterprises produce the final products. And lots of firms attempt to obtain the opportunities of upgrading their technology and business by inserting the global value chain. That’s to say, they hope to upgrade the industry by the spilling-over of the technology of the foreign investment. But in fact, this path has proved to be a failure. Take Zhejiang province for example, it has almost a thousand manufacturing clusters while the R&D expenses of the enterprises with certain scale account for only 0.45% of the sale revenues, which is lower than the national average level (0.61% ) of the manufacturing industry. Let alone 3% of the developed countries. As for the production means, an inquiry from Fu Dan University and Hong Kong University shows that the enterprises with pure OEM are only 22.3% and only 18.3% with ODM. In the meanwhile, the modern service sector in this region is rather lagging behind, compared with its economic development, which leads to high transaction costs that gravely curb the further development of the area. In the light of the statistic data, the 3rd sector of sixteen cities in this region in 2006 only occupies 41.1% of GDP and the production services are much wanted. Based on the case of the Chang Jiang Triangle Region, this paper makes a study that Chinese manufacturing businesses are obliged to change such situations through the strategic adjustment to the development idea. 2 Choice of the Competitive Strategy in the Manufacturing Industry Based on the Global Value Chain in the Background of the Economic Globalization 2.1 Economic Globalization Economic Globalization means that the world goes into the epoch of the global manufacturing and the international industrial transferring becomes a fact. The optimistic arrangement of the world 193 manufacturing industry has broken through the firm-society-country boundaries. The world economy is more integrated and more dependent with each other. The economic globalization includes both market and production. The former refers to a process joining the scattered markets in various countries together and the latter to a trend to search for the product and services in the different places of the world by way of the difference of the productive elements as labor forces, energy and capital, etc. 2.2. Global Value Chain The theory of the value chain is first put forward by Michael Porter. In this theory, he divides the value-created activities into the basic and the support. The former concerns the production, sale, logistics, delivery and the after-sale services while the latter refers to the staffing, finance, planning, R&D and purchase, etc. The basic and the support comprise a value chain of a firm. Also, he points out that not all the sections of the chain can create value and that only certain activities can bring value to the firm. Now, this theory is widely used and deepened. With the progress of the economic globalization, of the socialization and internationalization of the service sources, technology and service has become independent commodity. The R&D, production and sale that were realized within the single enterprise in the past are now finished by different firms. The outsourcing of the productive and service activities is more and more remarkable. The globalization and specialization of the value chain and the transferring of the value creation activities from the productive section to the service one have enriched the theory of Porter’s value chain. 2.3. Comparison of Competitive Strategies In the light of the cost reduction and of the satisfaction to the demand of the local market, the global strategy includes four states, namely international strategy, the trans-national one, the global one and the multi-national ones. These four strategies have their own advantages and disadvantages. (See Table 1) Strategy Global International Table 1 Comparison of the Global Competitive Strategies Advantages Disadvantages Able to get the experience curve effects Able to make use of the regional economy advantages Able to transfer core competitiveness to the market abroad Lack the satisfaction to the local demands Lack the satisfaction to the local demands Unable to realize the regional economy Unable to get the experience curve effects multi-national Supply products and sales according to the local demands Unable to realize the regional economy Unable to get the experience curve effects Unable to transfer core competitiveness to the market abroad trans-national Able to get the experience curve effects Able to make use of the regional economy advantages Supply products and sales according to the local demands Able to get the profits from the global learning 3 Choice of the Global Competitive Strategy 194 Quite difficult to adjust the organizational structure Different firms have their own advantages and disadvantages. Which strategy should be chosen depends on their features. Generally speaking, the following standards can be referred to in choosing the competitive strategy (See Figure 1). (1)When the cost pressure is great and that of satisfying the local demands small, the global competitive strategy can be chosen. (2) When the cost pressure and that of satisfying the local demands are both small, the international competitive strategy can be chosen. (3) When the cost pressure and that of satisfying the local demands are both great, the trans-national competitive strategy can be chosen. (4) When the cost pressure is small and that of satisfying the local demands great, the multi-national competitive strategy can be chosen. high Trans-national Global Cost pressure International Multi-national low low Pressure satisfying local demands high Figure 1 Choice of the Global Competitive Strategy 4 Analysis of the Competitive Position in the Global Value Chain to Chinese Manufacturing Industry in the Angle of the Evolutionary Game Theory 4.1. Points of View of the Evolutionary Game Theory The Evolutionary Game Theory is a kind of new approach that combines game theory and dynamic evolution process. It exposes that gaming is a long-time process, during which the participants and the game object can all change that will lead to the alteration of the game system. It is originated in the game study about the conflict-cooperate conducts of the animals and the plants by Fisher Hamilton and Trivers. In 1973, Smith and Price first put forward the Evolutionary Stable Strategy, its basic concept, which marked the birth of the Evolutionary Game Theory. In 1978, Taylor and Jonker proposed replicator dynamic, which is a second breakthrough of the Evolutionary Game Theory. This concept expounds a dynamic convergent process about the ecological evolution to the stable state. In the light of the theory, if most of the individuals in a group have chosen Evolutionary Stable Strategy (ESS), a few individuals will be unable to change this group. The conduct result of a single game individual depends not only on the game rules, but also on the relative frequency of the particular rules of the other game individuals. These particular rules are supposed to be able to be inherited and their inheritors will carry on these conduct rules. When these rules surpass the weighted average levels of the group, their frequency and adaptation will rise. Otherwise, drop. When these rules are equal to the average weighted level of the group, their frequency and adaptation will be stabilized at a fixed point. Unless a powerful shock from the outside invades into this group, its system will not deviate from the existent stable , 195 locked state. 4.2. Exploration of the Position in the Global Value Chain of the Chinese Manufacturing Industry Based on the Evolutionary Game Theory To make use of the above points of view in the study of the Chinese manufacturing industry, we can see that since the 90s of the 20th century, the global manufacturing based on the value chain has altered the structure of the world economy and China has become “world factory”. According to the value chain theory, the Chinese manufacturing enterprises are limited in the production and services relative to the product inside the enterprises and lie in the low section of the chain, where profits are lean. These firms are squeezed in getting the profits to the result that this cost is finally transferred to the labor, natural resources and environment. Explained with the points of view of the evolutionary game theory, this situation lying in the low end of the chain has been locked in the evolutionary stable state of the value chain system, which can not be broken through unless a strong outside shock strikes. Concretely speaking, the Chinese manufacturing industry is obliged to make use of the development trend of the global manufacturing industry at present and to change the development track of the present global value chain so as to make a breakthrough in some point in the chain. Now the development trend of the global manufacturing industry is shown like this: the productive services including finance, human resources and R&D, etc. have become newly-born sectors. China has stepped into the service economy from the product one. Developing productive services is the breakthrough that the Chinese manufacturing enterprises reverse their situation lying in the low end of the global value chain. This is feasible in theory. Analyzed from ESS, the Chinese manufacturing enterprises belong to the group of the global value chain. Their conduct rules are constrained both by their own group and by their rivals. In the global value chain, the Chinese manufacturing enterprises can’t be pushed onto the high section of the chain by the other groups. They must take the following measures before they reach the high section: continuously strengthen their own conduct rules is able to affect the conduct rules of the other groups so as to make the frequency of their own conduct rules surpass the existent average level of the group rules and break through the group stable state. In the end, a new stable state that the Chinese manufacturing enterprises dominate the high section of the chain will be established. Therefore, at present, the task of the Chinese manufacturing enterprises is to make a full use of the drastically changing global value chain, integrate the existent resources, set up the productive service network and reduce the transaction cost in order to raise the competitive position in the global value chain of the Chinese manufacturing enterprises and to realize a transfer from the low section to the high section of the global value chain. Many cases that the developing countries or regions successfully join in the process of globalization in the world before becoming developed ones have proved the study of this paper. 5. Conclusion In the light of the evolutionary game theory and the proof of the cases of the developed countries or places, it is possible for the Chinese manufacturing enterprises in the developing countries or places to be transferred from the low end to the high end of the global value chain if they fully integrate the social resources, raise the capacities of the social organization and of the network level of the productive service sector in the chain and keep strengthening the influence to the global value chain of their own conduct rules. To reach this aim, the choice of the competitive strategy is the chief step. Of the multiple competitive strategies, the multi-national one should be the main alternative for the Chinese manufacturing enterprises. Acknowledgments: This paper is supported by the MOE Project of Key Research Institute of Humanities and Social Science in Jiang Han University 196 References [1]. 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