What Policymakers Should Know About Global Value Chains

Definition and Tips

By Stacey Frederick

If you have a vested interest in economic, social and/or environmental development, then you need to understand how global value chains (GVCs) operate.

Complexity is here to stay. 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 GVCs 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.

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. It is therefore important for policymakers to understand how GVCs operate in a specific industry. This is particularly important 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

While economic upgrading is often the priority, GVC analysis can also be used to evaluate other areas of importance such as the impact of new technology on industrial development, or how to reduce the environmental impact of manufacturing while also promoting economic development and job growth.

Here are a few questions to ask if you want to begin delving into GVC analysis:

1. What is the structure of the GVC? Where are buyers and suppliers located geographically? Who are the key global players in terms of countries and firms? How concentrated is the market?

2. Where does power and value come from in the chain? Does it stem from the design and aesthetics of the product (i.e., apparel) or does it depend on functionality, technological innovation and/or the flawless interplay of complex systems to operate (i.e., airplane)?

3. As a policymaker or economic developer, what are your objectives? To increase exports? Provide more (or better) employment opportunities? Transfer knowledge to domestic firms? Understanding GVCs is critical for knowing when to attract foreign investment or support the growth of domestic firms.

4. Where does your country currently fit within this global and regional landscape? What are your options to improve positioning or create new opportunities in related industries (i.e., upgrading)?

GLOBAL VALUE CHAIN ANALYSIS IN ACTION

Researcher Penny Bamber presenting findings on Philippines’ participation in GVCs.

Using the GVC framework, the Duke University Center on Globalization, Governance & Competitiveness (Duke CGGC) has prepared several reports that identify opportunities for a country to enter and upgrade in GVCs for countries around the world. For example, the team prepared a series of reports for the Ministry of Foreign Trade in Costa Rica analyzing 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.

Stacey Frederick is a researcher at the Duke University Center on Globalization, Governance & Competitiveness. Learn more at www.gvcc.duke.edu.