The global economy is structured around global value chains (GVCs). If you have a vested interest in economic, social and/or environmental development, it is important to understand how GVCs operate.
Firms in widely separate locations affect one another more than they have in the past. While some effects are straightforward, others are quite nuanced. GVCs are a driving force of globalization and affect how all countries participate in the chain. For a developing country, it impacts opportunities to enter the global economy, increase employment, produce new products, and expand exports. Understanding GVC dynamics is equally important for developed economies tasked with identifying new industries that will capitalize on existing assets or more skill-intensive jobs in established ones. Policymakers need to understand how GVCs operate in specific industries to reap these benefits.
GVCs link firms, workers, and buyers around the world and are often a stepping-stone for developing countries’ participation in the global economy. For many countries the ability to effectively enter GVCs is a vital aspect of development. This supposes an ability to access GVCs, to compete successfully and to capture gains in terms of national economic development, capacity-building and generating more and better jobs to reduce unemployment and poverty. It is not only a matter of whether to participate in the global economy, but how to do so gainfully.
GLOBAL VALUE CHAINS 101
A global value chain includes the full range of interrelated activities required to bring a product from its conception to its end use and beyond. GVCs entail goods or services crossing economic territories, requiring a degree of coordination among buyers and suppliers. Here are some of the distinct aspects of GVCs.
Fact 1: A value chain spans the entire range of products and firms involved in this process.
This is a cross of the traditional boundaries used by policymakers and economists to define sectors or industries. For example, the apparel manufacturing industry is just the cutting and sewing of fabric to make clothes. The apparel value chain begins with the production of fibers (part of the agriculture or chemical industry). The textile industry then transforms these fibers into yarn and then fabric. Apparel manufacturers are involved in the assembly, which is then distributed by intermediaries in the wholesale sector, and ultimately sold to consumers by the retail industry.
Fact 2: A value chain incorporates service activities such as design and marketing.
This is much more extensive than a supply chain, which emphasizes the manufacturing and distribution-related steps. This distinction is important because higher-value, service-related activities are often performed by different firms based in different countries than those engaged in producing the final product and its components. The ability to access these lead firms can be a critical entry barrier.
Fact 3: A global value chain is divided among multiple firms and geographies.
This requires a degree of coordination among actors. Consider a smartphone. It is composed of components made by multiple suppliers in different countries, which are shipped to another country to be assembled into a final product, and are ultimately sold in other places. Meanwhile, the firms providing the design, coordinating the flow of materials, and marketing the product to final consumers are in other countries. This varies quite a bit from a value chain in which is contained within a single country or even a single firm (think about a fruit that is grown, packaged, sold and consumed within one country).
Fact 4: A GVC is industry or product-specific.
The types of jobs, technologies, standards, regulations, products, and processes are all unique. So too are the ways in which buyers and suppliers interact. The importance of each element varies by stage within the chain. Policymakers therefore need to understand how GVCs operate in a specific industry. This is particularly imperative when selecting industries to target and developing policies that will enhance competitiveness, ideally in a way that provides economic, social, and environmental benefits.
QUESTIONS POLICYMAKERS AND PRACTITIONERS SHOULD CONSIDER
Here are a few questions to ask if you want to begin delving into GVC analysis:
A range of institutions and governments have commissioned GVC studies to improve understanding of global industries and guide the creation of new programs and policies for economic development.
The GVC framework allows one to understand how global industries are organized by examining the structure and dynamics of different actors in a given industry. In the very complex industry interactions of today’s globalized economy, the GVC methodology is a useful tool to trace the shifting patterns of global production, link geographically dispersed activities and actors within a single industry, and determine the roles they play in developed and developing countries alike. The GVC framework focuses on the sequences of value added activities within an industry, from conception to production, end use and beyond. It examines the job descriptions, technologies, standards, regulations, products, processes, and markets in specific industries and places, thus providing a holistic view of global industries from the top down and the bottom up.
The comprehensive nature of the GVC framework allows policymakers to answer questions regarding development issues not addressed by previous paradigms. Additionally, it provides a means to explain the changed global-local dynamics that have emerged over the past 30 years. As policymakers and researchers alike have come to understand the pros and cons of the spread of globalization, the framework has gained importance in tackling new realities. This includes topics such as the role of emerging economies like China and India as new drivers of value chains, the importance of international product and process certifications as preconditions of participation, the proliferation of private regulations and standards, the need for new workforce development initiatives, and examination of social and environmental development concerns.
GLOBAL VALUE CHAIN ANALYSIS IN ACTION
The GVC framework is often used to identify opportunities for a country to enter and upgrade in GVCs. For example, a series of reports for the Ministry of Foreign Trade in Costa Rica analyzed the country’s participation in four diverse GVCs, each at a different stage of development in the country. The electronic components and medical device sectors were both established and accounted for over a third of the country’s exports, while aerospace was relatively nascent. In the former, the focus was on maintaining and expanding competitiveness while in aerospace it was on identifying existing competencies to enter the chain. In each case, a GVC lens was used to identify development opportunities given each industry’s unique global dynamics and Costa Rica’s capabilities. Other project examples include the Philippines, Peru, and various countries in Africa.
While economic upgrading is often the priority, GVC analysis is also used to understand other focus areas important to policymakers such as inclusive development (i.e., ensuring representation among groups that might have an unequal voice due to their size or cultural norms, such as small and medium-sized enterprises or women). Other areas are the impact of new technology on industrial development, or how to improve the environmental impact of manufacturing while also promoting economic development and job growth.
See Frederick, S. (2017). Why Policymakers Should Care About Global Value Chains on Medium.