In the next chapter, Smith examines in more detail the globalization of production in terms of outsourcing by transnational corporations since the 1960s. It was not only the large distribution companies that resorted to textile production and other goods in the less developed countries, but it was electronics companies such as Cisco, Sun Microsystems, and others that outsourced their production, driven by competition with Japanese companies. Outsourcing production to Taiwan and South Korea helped U.S. electronics firms lower production costs and gave a powerful boost to export-oriented industrialization in the so-called „emerging economies.“ Electronics and other high-tech industries were at the forefront of the outsourcing wave that picked up after the 2007 financial crisis.
Smith mentions at this point that capital flight from developed countries and immigration must be treated in context. While the mobile parts of Western corporations have fled to low-wage countries partly in response to the class struggles of metropolitan workers in the 1970s, less mobile parts of Western capital have integrated migrant labor to cheapen the production process and lower the cost of reproducing labor in their countries. This, in turn, has implications for working populations in imperialist countries. Indeed, outsourcing allows Western companies to replace higher-paid domestic labor with low-wage labor from the South, or exposes workers in imperialist nations to direct competition with similarly skilled but much lower-paid workers in Southern countries. Falling prices for clothing, food, and other items of mass consumption protect consumption levels in imperialist countries from falling wages and have the indirect effect of raising wages. The reduction in costs through outsourcing are shared by Western firms with workers in imperialist countries.
For the U.S., Smith shows that while the expansion of trade with low-wage countries leads to a decline in relative wages for low-skilled labor, it also leads precisely to a decline in the prices of goods that are heavily consumed by the poor. This positive price effect can more than offset the negative relative wage effect. In this context, outsourcing cannot be reduced only to international trade between intermediate goods, but must include precisely the export of finished goods from low-wage countries to the firms and consumers of imperialist countries. Statistics would have to include both intermediate and finished goods, noting that business relationships between northern firms and their southern suppliers, which are independent, are becoming increasingly important. Nevertheless, imports by subsidiaries of large companies accounted for 27% of total U.S. imports from Korea in 1992, and 11% of total U.S. imports from China. By 2005, these figures had increased to 58% and 26%, respectively.
Manufactured imports by imperialist countries from low-wage countries contains a composition of diverse outsourcing and offshoring relationships that manifest themselves in various types of global „value chains.“ These have skyrocketed since 1980, more than tripling in size. in a study published by UNCTAD in 2013, it is shown that 67% of all value added in global value chains is generated by firms in rich countries.
In this context, transnational corporations, which have their headquarters in imperialist countries, are the strongest drivers of the globalization of production. Their structuring of production processes in low-wage countries takes two basic forms: First, the „in-house“ relationship between the parent company and its foreign subsidiary, and second, an „arm’s-length“ relationship with formally independent suppliers. Despite the difficulty of data, UNCTAD estimates that in 2013 about 80% of world trade (in terms of gross exports) was linked to the international production networks of transnational corporations.
Smith summarizes at this point that the South-North export of manufactured goods can be read not so much as trade but as an expression of the globalization of production, and this in turn should be seen not only as a technical transformation of machinery and other means of production but as the development of a social relationship, namely that between capital and labor. International competition between companies to increase profits, market share, and shareholder value proceeds in cyclical spurts. An important feature of the neoliberal globalization of production is the outsourcing of individual segments and links of production processes, the fragmentation of production or the „fragmentation of the value chain“ (Paul Krugman). Thus, the old notion of a North-South trade of merely raw materials for finished goods has long since become obsolete.
The development of export processing zones can now be found in more than 130 countries, with industrial development unevenly distributed in the global South, but nevertheless very widespread. According to the World Bank, an export processing zone is „an industrial area, usually a fenced area of 10 to 300 hectares, specialized in production for export. It offers firms free trade conditions and a liberal regulatory environment.“ At issue are duty-free imports of raw materials, intermediate goods and capital equipment, flexible labor laws, long-term tax incentives and infrastructure that is more developed than in other parts of the country. Smith cites figures showing that in 2006, such zones were responsible for 75% of export earnings in Kenya, Malaysia, Madagascar, Vietnam, Dominican Republic and Bangladesh, while the Philippines, Mexico, Haiti and Morocco generated 50% to 60% of exports in these zones. Asia’s 900-plus zones employed 53 million, including 40 million in China and 3.25 million in Bangladesh.
Smith then briefly describes Marx` theory of value and surplus value, the relationship between productive and unproductive labor, industrial production and services. It is worth noting here that if an industrial firm outsources the provision of services to a firm that uses cheap labor in another country, the apparent productivity gains of the industrial firm are greater because the labor has not only been outsourced but also reduced in price. When an industrial firm contracts for labor-intensive services such as cleaning, catering, and outsources the services, the productivity of the remaining workers increases according to the conventional and most widely used measure of productivity. The unchanged output of the business is now distributed among a smaller workforce. Services offshoring is significantly underestimated and accounts for a surprisingly large share of recent growth in multifactor productivity in Western manufacturing. Productivity improvements resulting from offshoring are largely cost savings, not improvements per hour worked by Western workers.
In the next chapter, Smith explores more forcefully the distinction between two forms of offshoring already mentioned. On the one hand, foreign direct investment, in which the production process is moved abroad but remains in-house, and on the other hand, companies that outsource part or all of the production process to an independent supplier, independent in the sense that the lead company owns nothing of it, even though it controls the activities in production in many ways.
In many cases today, direct in-house relationships with a subsidiary are transformed into business relationships with independent suppliers, simply by signing some legal documents or opening a new bank account, without making any changes to working conditions or labor processes, to the prices of inputs, or to the profits that accrue when the output is sold.
In direct investment, on the other hand, a Western firm buys machinery and passes it on as a capital contribution to a local firm in emerging markets, where the machinery is installed. The local firm can use the machinery as collateral to get a local bank loan and bring money out of the country. This is not the only way that financial overrides can transform production relationships, with transferred profits being reinvested in financial assets, for example.
Moreover, the states that have the largest volumes of direct investment, trade turnover, foreign credit and foreign assets are integrated into the economic policies of the debtor countries, and they by no means leave the management of the national deficits of the underdeveloped countries to the responsible governments; on the contrary, they are prepared to exchange financial aid only for access rights to the state property and to the national disposal mass of the capital of the economically weakly developed country. Thus, strictly hierarchical power relations are created between the leading world economic powers and the many weak countries that notoriously lose out on the world market.
Overall, it can be said again at this point: transnational firms of imperialist countries remain at the top, mergers and acquisitions increase monopolization, firms from imperialist countries have the largest price premiums, and rising market power is accompanied by a decline in corporate dynamism.
Smith describes four types of direct investment, (a) the efficiency-seeking formation, which implies a reduction in costs, especially labor costs, (b) the market-based investment, which takes place mainly between the imperialist countries themselves, and urges the proximity of production facilities to consumers, (c) the resource-seeking direct investment in the extractive (fossil) industries. (The shift from intra-firm to inter-firm production arrangements is less common in extractive industries because the taking of rents from rich ore or oil deposits is much easier to protect when the leading firm directly owns the resources and the means to extract them.), and (d) direct investment, almost exclusively between imperialist countries, based on transfers of technology.
Smith disputes the statement of John Milios and other Marxists who claim that to date the flow of direct investment is mainly between the developed countries themselves. For Smith, the massive increase in outsourcing to low-wage countries even before the 2007 crisis, a trend that has only been exacerbated by the global crisis, has finally shattered this view. In 2013, for example, direct investment to developing countries exceeded that between developed countries for the first time. In doing so, Smith assumes, which is of course highly dubious, that direct investment in finance and M&A, most of which takes place between imperialist countries, should all be considered unproductive.
Some of the direct investment between imperialist countries is in fact investment in firms that have moved some or all of their production processes to low-wage countries. Smith cites the restructuring of the world’s second largest oil company in 2005 as an illustration. Royal Dutch Shell increased foreign direct investment in the U.K. by $100 billion at the time. But wherever they booked their sales and profits, the vast majority of the 98 countries where Shell has subsidiaries are in Latin America, Africa, Central Asia and the Middle East.
The overwhelming weight of M&As in the flows of direct investment among imperialist countries in the years leading up to the outbreak of the Great Depression represents a process of concentration and monopolization among transnational corporations, in the financial sector and in all industrial sectors, that paralleled the relocation of production processes manufacturing processes to low-wage countries. These different phenomena are summarized in the statistics under the term direct investment. It combines three very different trends: the concentration of imperialist banks and finance capital; the concentration of companies in value chains in which the actual production of workers takes place in faraway southern suppliers; and finally, a process of disintegration of production processes and their relocation to southern countries in search of super-exploitable labor.
And when, for example, foreign subcontracting firms supply parts for a product that is assembled in final production on the factory floors of a corporation located in a developed industrialized country, the corporation does not have direct access rights to the subcontracting firms, but in particular, when they are located in low-wage countries, they remain entirely tied to the production cycles of rich-country companies (see Foxconn). John Smith assumes, on the basis of UNCTAD data, that today about 80% of world trade is conducted through the production and distribution networks of internationally operating companies, and that it would therefore be wrong to focus in the analysis of world market relations and global value chains only on the data available on foreign direct investment.