Commodity Chains

Commodity Chains: An Introduction

The production of any commodity, whether it be a manufactured product or a service, involves an intricate articulation of individual activities and transactions across space and time. Such production networks – the nexus of interconnected functions and operations through which goods and services are produced and distributed – have become not only organizationally more complex but also increasingly global in their geographical extent. They not only integrate firms (and parts of firms) into structures that blur traditional organizational boundaries, through the development of diverse forms of equity and nonequity relationships, but also integrate national economies (or parts of such economies) in ways that have enormous implications for national economic development. At the same time, the precise nature and articulation of such firm centered networks are deeply influenced by the concrete sociopolitical, institutional, and cultural contexts within which they are embedded, produced, and reproduced. The process is especially complex because while the latter are essentially territorially specific (primarily, though not exclusively at the level of the nation state), the production networks themselves are not. They ‘slice through’ state boundaries in highly differentiated ways, influenced in part by regulatory and nonregulatory barriers and local sociocultural conditions, to create structures that are ‘discontinuously territorial’. At the same time, the geographical scale at which production networks are being configured continues to widen.

Central to any network concept is, therefore, the cross national segmentation and separation of all economic actors and processes surrounding the production and consumption of a specific product. Within this context, several approaches and traditions of theorizing and conceptualizing ‘chains’ in the production process are found in differing terminologies and disciplinary contexts. In particular, the debate on (global) commodity chains or, more recently, on (global) value chains has produced a comprehensive contribution to this conceptual development. Much of the debate on commodity chains, the focus of this article, is derived initially from Wallersteinian world system theory. Both approaches apply a global perspective to conceptualize the integration of nations at different stages of economic development into the global economy. However, while world system theory is predominantly state centric, the commodity chain debate focuses on production as the main unit of analysis. A commodity chain has been broadly defined as ‘‘a network of labour and production processes whose end result is a finished commodity’’ (Hopkins and Wallerstein, 1986: 156). This article outlines the initial key arguments on which the subsequent commodity chain debate was based and on which a large body of literature has evolved. Furthermore, it provides a brief summary on how this concept has been applied to agro commodities.

Commodity Chains: A Conceptualization

The starting point of commodity chain analysis is to focus on the dynamics of contemporary changes within individual industrial sectors and their corporate strategies. It aims to link structural changes at the global, macroeconomic level with contemporary firm specific, microeconomic organizations of production and distribution and goes beyond the sole examination of the spatial extension of the commodity flow. The commodity chain analysis intends to answer questions of how the various economic agents of individual countries are linked to the global economy. This includes a perspective on the forces and systems of localization in the world economy in raising questions where the commodity chain geographically ‘touches down’ in the local economy and how it is connected to firms and households within. This also includes aspects of the realization and extraction of the economic surplus and the labor relations and composition. Commodity chains are:

…sets of interorganizational networks clustered around one commodity or product linking households, enterprises and states to one another within the world economy. These networks are situationally specific, socially constructed, and locally integrated, underscoring the social embeddedness of economic organization. (Gereffi et al., 1994: 2)

Initially, it was claimed that the novelty about commodity chains is not the theorizing of the fact that economic activities cross national boundaries, but the inclusion of the role of strategic decisions within the internationalization process of production and trade. Economic actors tend to develop variations in the organization and coordination of economic activities based on the ownership of property rights, and the way these are obtained and exchanged. These variations in economic activities affect the governance of interrelationships and could be dominated by highly cooperative transactions or by a rather adversarial competition. Indeed, the commodity chain perspective stresses the variations and organizational scope of linkages between economic agents to unpack and understand their sources of stability and changes. This includes the extent to which economic actors are influenced by the institutional framework of the locational setting of their transactions, since production and trade have to coincide with the national and international regulations they are embedded within.

In traditional microeconomic terms, production is defined as a combination of inputs to produce an output as a finished product. However, chain concepts implement a more dynamic approach whereby production takes place in time and space and consists of subsequent and interconnected processes. Production is a series of functions, such as design and product development, raw material procurement, assembly and manufacture, and marketing and distribution. It is a chain of activities and exchanges in which inputs move forward as money moves back. Furthermore, the traditional definition of discrete industries in economics is becoming less useful in analyzing the contemporary interconnected relationships of firms. The issues of defining specifically what is an industry and which production processes belong to which industry leave many open questions and loose ends in traditional approaches. Indeed, contemporary interindustry input–output relations, in particular, demand a concept that is centered around production taking place within and between firms.

Instead of looking at a specific industry, a chain concept offers the advantage of investigating the production processes, rather than focusing on manufacturing alone. This is based on the general definition of the capitalist firm, in which production is a result of adding value to materials/ inputs to produce a specific product/ output. Within this context, four distinct analytical dimensions to any commodity chain have been identified: (1) input–output structure, (2) territoriality, (3) governance structure, and (4) institutional framework. The input–output structure of the commodity chain approach emphasizes the embeddedness of economic agents such as raw material suppliers, factories, traders, and retailers within wider sets of inter and intrasectoral networks. In other words, the economic activities of firms, by their very nature, add value to a specific product and are therefore generally embedded within larger networks of market participants defining their backward and forward linkages. They are involved in production processes that generate services and/or produce physical commodities, which locate them within specific commodity chains of extensive social and organizational relations.

The commodity chain literature refers to these production processes as ‘nodes’, which identify specific processes of the chain and are embedded within larger networks of economic agents. Each node has a set of structural components, which include acquisition and/or organization of inputs, employment policies, transport, distribution, and finally, consumption. In other words, each node transforms supplied raw materials with a specific labor force and technical endowment into a product that is logistically submitted to a successive node of consumption. However, consumption does not necessarily represent a consumer market and could also be a node of further processing. In consequence, the commodity chain concept allows an investigation of the backward and forward linkages of individual firms from the very early stages of raw material production to final consumption of the finished commodity. The nodal concept of commodity chains allows a division of the entire production process of a single product or commodity into its individual sequences, whereby each individual node’s social and organizational construction can be analyzed. Every single node is clearly defined and can be consequently redefined. Technological innovations and/or changes in the organizational structures of business corporations affect the (re)definition of these nodes.

A key argument of the commodity chain framework is that the nodes are the locus of profit and surplus rather than the national economies. In this context, the dualism between core and peripheral nodes is a development of the argument of core and peripheral states within world-system theory. The analytical distinction between core and periphery in relation to the nodes evolved on the basis that commodity chains consist of a set and hierarchy of processes of various complexity and sophistication. The hierarchical affiliation of the node toward core or periphery is largely defined by the value added within, whereby core activities are those where the principal profit accrues.

It is argued that the higher the value added within a node, the higher is the competitiveness of the firm. Furthermore, firms operating in high value niches/core nodes aim to protect their competitiveness by creating barriers of entry for competitors. These barriers could be based on innovative process technologies, superior product qualities, or brand reputations as a result of cumulative marketing efforts. Competitive advantage is often created within a highly localized cluster of economic actors to guarantee spatial proximity to research centers, superior component suppliers, and competing firms. In contrast, low value processes/peripheral nodes are characterized by a large number of competing firms. Within peripheral nodes the involved processes show a lower complexity and are largely based on cost advantages generated by cheap labor resources, raw materials, and economies of scale. The geography of these nodes tends to be highly dispersed since the foundations of the competitive advantages can be easily replicated by other firms around the globe. Furthermore, semiperipheral nodes have been identified as an intermediary stage. They demand some form of organizational and industrial capabilities and integrate processes of relatively advanced manufacturing and low end services such as quality control and component sourcing. Semiperipheral nodes often represent the organizational linkages between core and peripheral processes.

Thus, the extent of geographical dispersion of these nodes, which comprise the pivotal point of production, defines the territoriality of the commodity chain. This includes the aspects of the geographical location of the nodes as well as the geographical structure of the firm’s internal and external linkages. In consequence, the territoriality of chains has a spectrum of possibilities that range from geographical dispersion to high geographical concentration, from the global scale to the local scale. The geographical configuration of the chain is influenced to a large extent by the technologies of transport and communication. Thus, the innovation processes within these key technologies to integrate the spatial dimension of economic activities result in a continuous geographical extension of chains. These processes shape and reshape international economic activities into more complex and tightly connected production networks. However, in addition to the continuous spatial fragmentation and dispersion of global production networks, there has been an increasing geographical concentration and integration of economic activities at various regional scales. These regional network coordinations are largely a result of heterogeneous regional clusters of national economies. They operate on the basis of the same principles as the networks stretching over the global economy following the hierarchy of nodes.

Within this context the territoriality of production can also be conceptualized on the basis of the economic development process. The trajectory of world market integration sees economic development largely as a result of close interrelationships with transnational corporations (TNCs) from developed countries in which technology and knowledge transfers occur. At the starting point of world market integration, people and firms learn how to manufacture products to the specifications of local and foreign buyers in terms of quality, price, and delivery specifications. However, when initial exports are threatened by new competitors operating with lower costs or by protected and saturated export markets, local producers adjust their strategic behavior to the new conditions to maintain a position within these industries. This trajectory is structured into the stages of (1) primary commodity exports, (2) export processing assembly operations, (3) component supply subcontracting, (4) original equipment manufacturing (OEM), and (5) original brand name manufacturing (OBM), whereby each successive stage demands a higher degree of industrial capabilities. However, instead of defining the territoriality of production as a sum of nation states, commodity chain analysis claims to identify the fundamental structures of global capitalism, in which national boundaries are insignificant. This follows the argument that the world economy is organized through horizontal and vertical linkages of an international division of labor in which the modes of integration and geographical scopes vary over time.

To identify the form of integration in the global economy and the power relations between each economic actor, the commodity chain concept has placed a strong analytical emphasis on the governance of economic action. The governance structure of each commodity chain is influenced to a large extent through the various forms of intra and interorganizational relationships. Distinct combinations of business relationships are created by firms of all kinds of organizational scales and scopes operating within an economy – transnational and domestic, large and small, and public and private. Despite this heterogeneous structure of the economic system, it is increasingly the TNC that shapes and coordinates the structure of the commodity chain. International capital flows are a basis of this global shift of economic activities, however, they do not lead necessarily to direct investments in production facilities. Looser forms of business relations, such as subcontracting and licensing, do not demand the relatively strong commitment of foreign direct investment while generating a certain power and control of production in external facilities. In consequence, the ownership of productive assets is not essential to empower the TNC with the control mechanisms over these assets. Furthermore, large retailers and brand name companies have the distinctive power to decide and control the products they buy, but without any direct involvement in the manufacturing processes.

Therefore, Gereffi argued that industrial and commercial capital has a central role in creating commodity chains of distinctive governance structures that are either ‘producer driven’ or ‘buyer-driven’. He bases his dual distinction on the debate emerging from Piore and Sabel’s work on industrial organization. Producer driven models are concerned with mass production, while buyer-driven models are production units concerned with flexible specialization, based on the growing importance of segmented demands in developed country markets. This is also based on the assumption that patterns of production shape the character of demand in producer driven commodity chains, whereas in buyer-driven commodity chains it is consumption that determines where and how global manufacturing takes place.

According to Gereffi, producer driven commodity chains are vertical networks of large TNCs predominantly operating in capital and technology intensive industry sectors, such as heavy machinery, automobiles, aircrafts, and computers. TNCs in producer driven commodity chains are characterized by the ability to control their backward linkages to raw material and component suppliers, and their forward linkages into distribution. Producer driven commodity chains are controlled by firms at the point of production. However, the subcontracting of components and strategic alliances among rivals are common features of this type of commodity chains. They usually belong to global oligopolies, whereby the geographical scope of these networks varies according to the number of countries included in the commodity chain, as well as to their development stage.

In contrast, buyer-driven commodity chains are trade-based horizontal networks coordinated by retailers, trading houses, and brand name companies. Firms coordinating buyer-driven chains deal predominantly with labour intensive, manufactured consumer goods, such as clothing, footwear, toys, housewear, and consumer electronics. The geographical separation of the production process from design, research and development (R&D), and marketing is the key characteristic of this type of commodity chain. Gereffi argues that core companies or buyers embedded within this type of commodity chains are ‘merchandisers’ rather than ‘manufacturers’. These firms specialize in design and marketing activities without actually owning and operating internalized production facilities. This allows buyers to focus on final consumer markets to respond with strategic decisions on changes of consumption. They own brands and maintain these by designing appropriate products and creating extensive marketing campaigns in their target markets.

The highest barriers to entry in buyer-driven commodity chains exist in marketing, design, and product innovation. Output of these nodes is directed at gaining competitive advantage in the marketplace. Companies located in core niches of this type of commodity chain are able to exert oligopolistic power because of their knowledge of markets, immense bargaining power, and retail outlets. In consequence, the accumulation of knowledge and power in high value research, design, sales, marketing, and financial services define the profitability of core companies. The exclusion of production as a core business obviates the need for economies of scale to achieve profitability, and instead allows a focus on economies of scope as a business strategy. This enables quick responses to market changes and the service of different market spaces to their own requirements with a unique branded product. Therefore, core profits are realized in design, retailing, and marketing, based on property rights such as brand names and trademarks, rather than manufacturing.

The distinction between producer driven and buyer-driven commodity chains highlights the inter and intrasectoral variations of global capitalism. The firm has been described as a major force in developing these variations in the structural and organizational composition of the chain. Although the institutional framework is identified as the fourth dimension in this concept because ‘‘state policy plays a major role in GCCs’’ (Gereffi, 1994: 100), the driving forces within the commodity chain itself are identified as the main causes for global change and firm specific behavior. This follows largely from the argument of convergence in which the globalization process will result in rather homogeneous structures and strategies of TNCs. Gereffi argues that the institutional framework has an increasingly diminishing impact on the organizational scopes of firms.

This conceptualization of the commodity chain framework has also attracted some criticisms. One area of criticism, for example, was the fact that it oversimplifies the economic realities by a sole dual distinction between buyer and producer driven chain (this dualism has now been replaced by a more nuanced governance conceptualization within the value chain debate). Further more, it has been argued that the institutional framework plays a far more relevant role in defining globalization and economic processes than the initial commodity chain literature would stress.

Commodity Chains: An Application

Despite these points of criticism, the commodity chain concept has been widely accepted and used for empirical analysis of structures and dynamics within the global economy. For economic geographers, one of the main concerns within commodity chain analysis has been the examination of ‘‘the spaces through which consumers are connected to producers’’ (Hughes and Reimer, 2004: 1). In terms of sectors in which commodity chain research has been conducted, a rather strong focus on buyer-driven sectors, such as clothing, has been identified. However, the concept has analytical potential for a wide range of economic/industrial sectors and the way consumers and producers are interlinked (see Figure 1).

One area in which economic geographers have also widely applied the commodity chain concept is the agrofood production system, from farm to final consumer. Indeed, it has a strong potential to investigate the interrelationship of consumption with production and vice versa.

As such, agrofood systems have potentials for highly heterogeneous commodity chain coordinations. These coordinations are dependent not only on the type of the investigated produce but also on the way it is supplied to final consumers. The type of produce has an influential factor on the way production is organized, while the degree of processing has an influential factor on the actors included within the chain. It could be argued that the more processed the food is, the more industrialized becomes an agrofood system and the more actors are included within a production system.

Sectors and actors in the commodity chain system.

Therefore, the analysis of agrofood commodity chains provides case studies of coordinations of highly localized spatial dimensions (e.g., farmers market) up to the very global scale (e.g., Ghana cocoa or Ethiopia coffee for consumption in Europe). In addition, they provide cases of very narrow producer–consumer organizational coordinations (e.g., again raw vegetables at a local farmers market traded directly to consumers) up to highly complex organizational network coordinations (e.g., from cocoa farmer to a final Mars bar or the conventional meat production). In particular, coordinations that stretch across the globe and integrate developing countries into the global economy have further analytical dimensions. They provide case studies of trade dependencies of developing countries from developed countries.

As Gibbon (2001:60–68) states, ‘‘agro commodities remain a main strand linking the world’s rural poor with global product markets.’’ Cash crops, such as coffee, tobacco, cotton, sugar, rubber, tea, and cocoa, still represent a main source of income and foreign exchange for developing countries. In the late 1990s, these main tropical agro commodities still generated more than 60% of total agricultural exports of all LDCs. These agro commodities are still largely supplied to global markets as primary goods and not further processed. The secondary processing of primary agro commodities, such as the roasting of coffee or the grinding of cocoa, is still usually based in developed countries. There are two main reasons why these processes are usually not conducted at locations of plantation. This is in particular (1) the lack of the necessary knowledge of consumer tastes at target markets and (2) to obtain a rich flavor, processing has often to be conducted within short time before end consumption. Therefore, upgrading into secondary processing of agro commodities, such as coffee and cocoa, within developing countries is basically done only for consumption on the domestic market.

As the cases of coffee and cocoa demonstrate, the way developing country producers are integrated into the global economy depends to a large degree not only on the produce they grow, but also on the way it is consumed. This is also the case for other agro commodities. In the case of horticulture commodity chains, consumption also has a crucial role in the way farmers are integrated into the wider economic system. Although local or regional production systems have received increasing importance, in particular within the growth of demand of organic food, however, the bulk of conventional food is traveling larger distances. This is, in particular, the case during the winter time of the large consumer markets, which are primarily located on the Northern Hemisphere. Farmers and growers on the Southern Hemisphere supply supermarkets in Europe and North America with fresh produce. As a result of the market consolidation within retailing, these supermarketsare also endowed with a strong market power in relation to their agro commodity suppliers.

The horticultural y [commodity] chain linking UK consumers and supermarkets with export firms and farmers in Africa has been directly affected by this process of retail concentration. Whereas imported horticultural produce was previously channelled primarily through wholesale markets, the largest UK retailers now control 70 90% of fresh produce imports from Africa. There are signs of similar trends in other parts of Europe. (Dolan et al., 1999: 7)

In consequence, this results in some form of buyer-driven chain, as in the case of manufactured industrial products, such as clothing. Figure 2 illustrates the specific actors and nodes within a food commodity chain linking UK supermarkets with African producers. From harvest to supermarket shelves, the produce is channeled through four stages. After the harvest on the fields of a plantation or the land of a smallholder, the produce is processed by an African exporter. This exporter is responsible for packaging, storage, and transport to the UK. Once the food is in the UK, it is taken over by an importer, which has usually exclusive, country specific contracts with exporters. Again, the importer is responsible for the quality control, storage, and transport of the goods to the warehouses of the supermarket chains. However, the organizational standards within these trade networks as well as the product prices are largely defined through the market power of the retailers.

Flows of produce in African food (commodity) chains

The awareness of final consumers of these asymmetrical power relationships and dependencies of developing country farmers from buyers in the developed world also resulted in initiatives and pressure groups for ethical trading. These campaigns aim to influence through consumer choice the code of practice of transnational manufacturing corporations and retailer organizations. Environmental protection and improved social standards are the main goals of these initiatives. They aim to improve the circumstances of production under which, for example, agro commodities are grown and produced and the livelihood for the people involved. Ethical trade campaigns have been started for a number of commodities, such as clothing and horticulture produce.

In fact, since research on environmental issues has a strong tradition within geography as a discipline, future commodity chain research could place an even stronger focus on environmental sustainability, in combination with the social sustainability of agro production systems.