GAR 2013 Main Report

mies and the inability to reduce the vulnerability of their building stock may also have increased earthquake mortality risk.

In countries that are not competitive and have been unsuccessful in attracting investment, economic loss risk, in absolute terms, has not risen in the same way. This is not because their produced capital is not vulnerable but because the density of hazardexposed capital is far lower.

These trends have clear implications for business investment. Although vulnerability may be lower in high-income countries, as the value of produced capital increases, disaster risk also increases simply as a result of increased exposure. However, businesses that invest in low and middle-income countries may face increased disaster risk, not only as a result of increasing exposure but because these countries have not yet developed the capacities to reduce their vulnerabilities. If businesses do not factor these vulnerabilities into their investment decisions, they may be assuming risks and liabilities that will only become apparent when hazard events occur.

2.4

The globalisation of risk:

vulnerable supply chains

Today’s globalised production systems and supply chains have created new vulnerabilities. While increasing efficiency and saving costs for businesses, global supply chains may contain hidden disaster risks with potentially devastating consequences, including for investors and markets.

Economic globalisation has increased sharply the value of produced capital exposed to hazards in countries challenged to reduce their vulnerabilities; it has also provided changes to the structure of supply chains. These changes magnify and transmit disaster risk to other countries and regions not directly exposed.

As different business functions have been outsourced and decentralised, the global economy has become structured around an integrated web of supply chains. ^iv For example, faced with growing competition, the Japanese automobile industry decentralised production to other countries. As Figure 2.5 highlights, this led to a doubling in the export of automobile parts, from about 1.3 million manufactured parts in 1999 to about 3.2 million in 2010. The industries supply chain has thus become increasingly globalised.

To become successful, businesses not only procure materials and parts from overseas suppliers, but also outsource functions, such as product design and logistics. Productivity therefore increases because each business in the supply chain can strategically allocate resources to those activities where it has a comparative advantage. The supply chain thus becomes a web involving multi-tier suppliers and service providers.

Various trends have characterised global supply chain evolution: the production process has been split into separate nodes in different locations, linked by multi-modal distribution facilities; supplier consolidation has emerged to increase economies of scale and reduced transaction costs; production agglomeration in areas with low transport costs (such as coastal areas and river basins) has facilitated knowledge spill-over, labour market pooling, input sharing, lower product shipping costs and logistics consolidation, increasing the dependence of supply chains on international distribution facilities such as major ports and airports (Ye and Abe, 2012

Ye, L. and Abe, M. 2012.,The Impacts of Natural Disasters on Global Supply Chains., Asia-Pacific Research and Training Network on Trade. ARTNeT Working Paper Series N°.115 / June 2012. ESCAP., Bangkok,Thailand.. .

Although globalisation of supply chains may have increased productivity, it has also globalised risk; when business at a critical node in a supply chain is affected by a disaster, the effects quickly ripple throughout the entire supply chain.

As highlighted above, as supply chains have evolved, production has been clustered in areas that may provide businesses with low transport costs but are