Costa Rica and the Global Value Chain

Costa Rica and the Global Value Chain

June 8, 2021


What do we mean when we say Nearshoring?

In its most chemically pure version, NEARSHORING refers to the decision of a company to bring outsourced production close to home.

To locate or relocate a part of a production process or element of a supply chain in an environment that not only feels close, but literally has conditions that make it reachable and accessible with very little friction.

Being closer is a very relative term. Closer to the country of origin of the manufacturing? Closer to the point of destination of the goods or services? Closer to where the required supplies are sourced from? Two out of three?

How about all of the above?

In a growing number of processes, the A to Z is no longer concentrated in a single point or location. More and more, different parts of the ensemble are crafted and built in the place or places where it makes more sense. The quest for efficiency has taken manufacturing to countries that can provide more for less, and sometimes, even make it better.

In Costa Rica, it has become part of the new-economy culture, to not only pursue efficient processes, but to promote the creation of value solutions.

Enter the flavor of the month concept: Global Value Chains

Global value chains (GVCs) refer to international production sharing, a phenomenon where production is broken into activities and tasks carried out in different countries. They can be thought of as a large-scale extension of division of labour dating back decades.

GVC’s are greatly boosting the productivity and incomes in both developed and developing countries, according to studies from sources as broad and diverse as the World Bank's World Development Report, to McKinsey and BCG in their most recent new-economy evaluation papers.

Costa Rica’s recent incorporation to the OECD (Organization for Economic Cooperation and Development) is one more step into the assimilation process of this Nearshore Little-Giant.

Per the OECD: International production, trade and investments are increasingly organised within global value chains (GVCs) where the different stages of the production process are located across different countries. Globalisation motivates companies to restructure their operations internationally through outsourcing and offshoring of activities.

Firms try to optimise their production processes by locating the various stages across different sites. The past decades have witnessed a strong trend towards the international dispersion of value chain activities such as design, production, marketing, distribution, etc.

This emergence of GVCs challenges conventional wisdom on how we look at economic globalisation and in particular, the policies that we develop around it.

For further insight on the OECD’s view of the Covid-19 impact over GVC’s:

https://www.oecd.org/coronavirus/policy-responses/global-value-chains-efficiency-and-risks-in-the-context-of-covid-19-67c75fdc/

The need for nearshoring has been accentuated by the Pandemic.

Global supply chains have been interrupted and the demand for agile resiliency in manufacturing and compound solutions has surged several fold.

From OECD: “The policy debate on whether the gains from international specialisation in global value chains (GVCs) outweigh the associated risks of transmission of shocks has intensified in the aftermath of the COVID-19 outbreak and the resulting disruptions in supply chains of some manufacturing and medical products. Questions are even being asked whether governments should use policy tools to “re-localise” GVCs.”

The “China effect” caused by the Pandemic interruption on the flow of goods, was felt worl-wide.

Supply chain solutions no longer “only need better cost structures”, they need more reliable and flexible, less risky or vulnerable to large world conditions, more agile, nimble, and the shortest possible Time-To-Market.

Ready to talk a little more in depth about GVC? And looking for ALL OF THE ABOVE… Costa Rica.

Let’s get a further one-on-one conversation going. We are ITEK and we are ready for more, contact us here

On our next feature: We will address how companies are looking at nearshoring as a way to reduce their carbon footprint.