Production Chain

Production chain is an analytical tool to understand the nature of the production process (including production of both goods and services) and its transformations. The production process is understood as a chain of linked functions. It is a sequence of productive activities leading to end use. Each stage adds value to the production sequence. Hence, production chains are often called “value added” or “value” chains. The stages in the chain are connected through a set of transactions. The organizational and geographical structure of the transactions characterize the nature of production.

The concepts of production chain and production network are often used interchangeably. However, at least on the analytical level, it is possible to distinguish between production chain as a characterization of a production process in general, involving various activities within the production system that may be performed by various organizations, and production network as a network of relationships within and between firms.

The structure of the chain may vary between two extremes, which can be characterized along two dimensions. The first refers to the degree of coordination or control over production chain (tight/loose), the [Page 751]second to the geographical location of functions (local/global). Thus, at one ideal-typical extreme, all operations of the chain may be concentrated in a single firm in one place. Here, transactions are organized hierarchically through a firm's organization structure. At the other extreme, each function of the chain may be performed by independent, geographically dispersed firms. In this case, the transactions are organized through the market.

The technological change and liberalization of trade have enabled radical reorganization of the production process in the last couple of decades. They have made possible specialization in each segment of the production process. Once concentrated in one country, the production chain can be parceled out and distributed around the globe. This has led to increases in trade relative to domestic production. Intrafirm trade now accounts for between one-quarter and one-third of total trade. This has sharply raised the proportion of imported inputs in the production processes. Thus, the national economies have become more dependent on trade for domestic production. For instance, the United States has transformed from a virtual self-sufficient economy to an importdependent one.

The increasing ability to “slice up” the value chain has increased trade between industrialized and developing countries, reinforcing the shift toward a new international division of labor. Whereas in the past, advanced industrial processes tended to be concentrated in developed economies, companies now locate segments of the production process in lower-wage countries or subcontract to local companies in Asia or Latin America.