Global Value Chains

Link to CONCEPT AND TOOLS for Global Chain Value

The Global Value Chain Revolution and Trade Policy

Richard Baldwin, professor of international economics at the Graduate Institute, Geneva, discusses the global value chain revolution and trade policy at the Peterson Institute for International Economics (PIIE) on June 14, 2016. Anabel Gonzalez, senior director of the World Bank Group Global Practice on Trade and Competitiveness, and J. Bradford Jensen, senior fellow at PIIE, share their commentary on Baldwin’s analysis.

WHY SOME COUNTRIES ARE POOR AND OTHERS RICH

The reason why some countries are rich and others poor depends on many things, including the quality of their institutions, the culture they have, the natural resources they find and what latitude they're on.

In general, a value chain is defined as “the full range of activities which are required to bring a product or service from conception, through the intermediary phases of production, delivery to final consumers, and final disposal after use” (Kaplinsky and Morris, 2001, p. 4). When a value chain is operated on a regional scale, it often involves sequential activities from companies in different countries, regions or global networks, as such it is named GVC (Lim and Kimura, 2009).

A GVC is usually controlled by a lead firm. This lead firm’s services or production inputs are often supplied by several contracting firms, which are in turn supplied by other firms, forming a tier structure (Abonyi, 2005). The higher a firm is in the tier structure, and hence the closer it is to the lead firm, the more sophisticated tasks the contracting firms have to carry out, resulting in higher value-added. Firms in the lower ranks only perform simple functions that add little value to the final product/service and therefore can be more easily replaced (UNESCAP, 2009). Notably, the highest value creation takes place in the two spectrums of production, namely R&D, marketing and branding. It is no surprise that these tasks are often performed by the lead firms themselves. Production, manufacturing and assembly produce the lowest value-added works of the value chain, but require a high employment rate (Humphrey and Schmitz, 2000). These stages are often outsourced to firms in developing countries, who lack technical sophistication but have a plentiful supply of low-cost labour (Kano, 2018).

Participating in GVC does not guarantee high value creation. In the early stages of economic development, because of constraints in investment, technology or manufacturing capability, taking on the low-level, low value-added activities in GVC is an acceptable first step for firms in developing countries. Consequently, as economies grow, they develop competencies to handle more sophisticated tasks that simultaneously produce more value-added in the final product and retain more profits. However, that process is not automatic. As Herr et al. (2016) highlighted, GVCs are characterized by rent-seeking of lead firms and brutal competition between suppliers at the lower end.

Developing economies can easily be stuck in the low part of the chain, or worse, be sucked into a race to the bottom (Humphrey, 2004). Giuliani et al. (2005) contend that this race is the “low road” to competitiveness, where rather than finding ways to improve efficiency, firms compete by squeezing wages and profit margins. Upgrading must be the ultimate goal for contracting firms when joining the GVC. The notion of upgrading emphasises the ability to make better products, to make products more efficiently, or to move into more skilled activities (Pietrobelli and Rabellotti, 2006). It arises from the idea that a country’s overall economic development is less about its level of industrialization, but more about the type of activities it involves in. In other words, the challenge for developing countries should not only be about participation, but also moving up the GVC as it affords more sustainable growth (Ponte and Ewert, 2009).

GVC Development Report 2017

World Bank

001. GVC development report 2017 World Bank 1.pdf

The integration of Vietnam in the global economy and its effects for Vietnamese economic development 2016

International Labor Office

08. 2016. The integration of Vietnam in the global economy.pdf

Intergrating SMEs into Global Value Chains 2015

ADB Institutes

64. 2015. Integrating SME's into Global Value Chains.pdf

Reference

ABONYI, G. 2005. Integrating SMEs into global and regional value chains: implications for subregional cooperation in the Greater Mekong Sub region. Bangkok: UNESCAP.

GIULIANI, E., PIETROBELLI, C. & RABELLOTTI, R. 2005. Upgrading in global value chains: Lessons from Latin American clusters. World development, 33, 549-573.

HERR, H., SCHWEISSHELM, E. & TRUONG, M. H. V. 2016. The integration of Vietnam in the global economy and its effects for Vietnamese economic development. Global Labour University Working Paper

HUMPHREY, J. 2004. Upgrading in global value chains. Working Paper No. 28. Geneva: Policy Integration Department. World Commission on the Social Dimension of Globalization. International Labour Office.

HUMPHREY, J. & SCHMITZ, H. 2000. Governance and upgrading: linking industrial cluster and global value chain research, Institute of Development Studies Brighton.

KANO, L. 2018. Global value chain governance: A relational perspective. Journal of International Business Studies, 49, 684-705.

KAPLINSKY, R. & MORRIS, M. 2001. A handbook for value chain research, Idrc Ottawa.

LIM, H. & KIMURA, F. 2009. The internationalisation of SMEs in regional and global value chains. Inter-American Development Bank.

PIETROBELLI, C. & RABELLOTTI, R. 2006. Upgrading to compete. Global Value Chains, Clusters, and SMEs in Latin America. Washington, DC: Inter-American Development Bank.

PONTE, S. & EWERT, J. 2009. Which Way is ‘‘Up" in Upgrading? Trajectories of Change in the Value Chain for South African Wine. World Development, 37, 1637–1650.

UNESCAP 2009. Globalization of Production and the Competitiveness of Small and Medium-sized Enterprises in Asia and the Pacific: Trends and Prospects. Thailand: United Nations.

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