Fragmentation is the relocation of different trade activities across countries to benefit from specialisation and cost savings. It has broad implications for the developing world, although most countries, particularly the least-developed ones have not benefited, so far.

Research from the International Development Centre at the University of Oxford, UK, compares the automotive and electronics industries in East Asia and Latin America. Fragmentation is an important feature of the international industrial scene. The research asks why fragmentation occurs, explores the different fragmentation patterns in East Asia and Latin America and finally draws conclusions on how other developing regions could benefit from it.

Fragmentation differs by industry depending on four factors: the extent to which the production activities at each stage can be separated and located at different sites; the intensity of each production activity or process - for example, labour-intensive processes would cost less at low-wage sites; the complexity of each production process - it is easier to relocate simpler production activities; and the weight of the product relative to its value: light, high-value products can be shipped long distances if the gains from cost differences are substantial.

These factors contribute to the expansion of Global Production Networks (GPNs) which are put in place to optimise production efficiency across the production sites in different countries. GPNs tend to locate in medium-wage rather than low-wage economies which generally lack the necessary skills and infrastructure. GPNs also avoid countries with weak institutions, restrictive labour laws and unfavourable technology import policies.

The report also found that:

• The global electronics industry is fragmenting more rapidly than the automotive industry.
• High-value electronics products have fragmented more than low-value products.
• GPNs are highly concentrated within the developing world: electronics is concentrated in East Asia and automotives in Latin America and the Caribbean.
• Electronics industry GPNs are more advanced in East Asia mainly due to strategies to build local skills, technology and capabilities, and target investment.
• Automotive industry GPNs are more advanced in Latin America and the Caribbean because of logistical factors and trade agreements.
• GPNs will not spread much further to other countries of the developing world due to a limitation of skills and infrastructure in these areas.

The report outlines a number of issues for policymakers in fostering fragmentation in their countries:

• Although trade policies matter, it is mainly the technological aspects of each activity and process that determine the features of fragmentation.
• Countries must build strong industrial capabilities, such as efficient trade procedures, strong institutions and competitive infrastructure.
• Liberalisation and competitive pressures on multi-national corporations should lead to the spread of GPNs.
• More research is needed to better understand the nature and dimensions of fragmentation.

Source(s):
‘Mapping Fragmentation: Electronics and Automobiles in East Asia and Latin America’, Oxford Development Studies, Vol 32, No 3, by Sanjaya Lall, Manuel Albaladejo and Jinkang Zhang, September 2004, Full document.

Funded by: International Development Centre, Oxford

id21 Research Highlight: 16 September 2005

Further Information:
Manuel Albaladejo
c/Trinquet, 7 atico, drcha
03202 Elche (Alicante)
Spain

Contact the contributor: mj_albaladejo@yahoo.es

Queen Elizabeth House, University of Oxford, UK

Other related links:
'Foreign direct investment in Latin America: Good news for inequality and poverty?'

'Can industrial clusters alleviate poverty?'

'Nigeria’s software industry requires strategic investment'

'Determinants and Policies to Foster the Competitiveness of SME Clusters: Evidence from Latin America. QEH working paper'

'Global Production Networks in Europe and East Asia: The automobile components industries, SED Manchester Working Paper'