Global value chain

Global value chains are networks of production and trade across countries. The study of global value chains requires inevitably a trade theory that can treat input trade. However, mainstream trade theories (Heckshcer-Ohlin-Samuelson model and New trade theory and New new trade theory) are only concerned with final goods. It needs a New new new trade theory.[5] Escaith and Miroudot estimates that the Ricardian trade model in its extended form has "the advantage" of being better suited to the analysis of global value chains.[6]

The lack of appropriate tool of analysis, the studies of GVCs have been conducted mainly by sociologists like Gary Gereffi [7] and management science researchers.[8] See for a genealogy Jennifer Bair (2009).[9] Studies by means of global Input-Output Table is starting.[10][11]

GVCs become a major topic in development economics especially for middle-income countries, because the "upgrading" within GVCs became the crucial condition for the sustained growth of those countries.[12][13]

GVC analysis views “upgrading” as a continuum starting with “process upgrading” (e.g. a producer adopts better technology to improve efficiency), then moves on to “product upgrading” where the quality or functionality of the product is upgraded by using higher quality material or a better quality management system (QMS), and then on to “functional upgrading” in which the firm begins to design its own product and develops marketing and branding capabilities and begins to supply to end markets/customers directly - often by targeting geographies or customers (which are not served by its existing multinational clients). Subsequently, the process of upgrading might also cover inter-sectoral upgrading.[14]

This upgrading process in GVCs has been challenged by other researchers – some of whom argue that insertion in global value chains does not always lead to upgrading. Some authors[15] argue that the expected upgrading process might not hold for all types of upgrading. Specifically they argue upgrading into design, marketing and branding might be hindered by exporting under certain conditions because MNEs have no interest in transferring these core skills to their suppliers thus preventing them from accessing global markets (except as a supplier) for first world customer.

There are motivations behind renewed interest in global value chains and the opportunities that they may present for countries in South Asia. A 2013 report found that looking at the production chain, rather than the individual stages of production, is more helpful. Individual donors with their own priorities and expertise cannot be expected to provide comprehensive response to the needs identified, not to mention the legal responsibilities of many specialist agencies. The research suggests they adjust their priorities and modalities to the way production chains operate, and to coordinate with other donors to cover all trade needs. It calls for donors and governments to work together to assess how aid flows may affect power relationships.[16]

In his 1994 paper, Gereffi identified two major types of governance. The first were buyer-driven chains, where the lead firms are final buyers such as retail chains and branded product producers such as non-durable final consumer products (e.g., clothing, footwear and food). The second governance type identified by Gereffi were producer-driven chains. Here the technological competences of the lead firms (generally upstream in the chain) defined the chain's competitiveness.

Current research suggests that GVCs exhibit a variety of characteristics and impact communities in a variety of ways. In a paper that emerged from the deliberations of the GVC Initiative,[17] five GVC governance patterns were identified:

• Hierarchical chains represent the fully internalised operations of vertically integrated firms.
• Quasi-hierarchical (or captive chains) involve suppliers or intermediate customers with low levels of capabilities, who require high levels of support and are the subject of well-developed supply chain management from lead firms (often called the chain governor).
• Relational and modular chain governance exhibit durable relations between lead firms and their suppliers and customers in the chain, but with low levels of chain governance often because the main suppliers in the chain possess their own unique competences (and/or infrastructure) and can operate independently of the lead firm.
• Market chains represent the classic arms length relationships found in many commodity markets.

As capabilities in many low- and middle-income economies have grown, chain governance has tended to move away from quasi-hierarchical models toward modular type as this form of governance reduces the costs of supply chain management and allows chain governors to maintain a healthy level of competition in their supply chains. However, whilst it maintains short-term competition in the supply chain, it has allowed some leading intermediaries to develop considerable functional competences (e.g., design and branding). In the long term these have the potential to emerge as competitors to their original chain governor (Kaplinski, 2010).[18] Other study outlines the initiative to promote inclusive GVC,[19] three GVC patterns were identified:

The theoretical concepts often considered firms as operating in a single value chain (with a single customer). Whilst this was often the case in quasi-hierarchical chains (with considerable customer power) it has become apparent that some firms operate in multiple value chains (subject to multiple forms of governance) and serve both national and international markets and that this plays a role in the development of firm capabilities (Navas-Aleman, 2011;[20] UNCTAD, 2013).[21] The recent trend in GVC research shows exploration of issue emerging from the interaction of different stakeholders from within and outside the GVC structures and their effects on the sustainability of the GVCs. For examples, the local governance institutions and production firms.[22]

In 2013, UNCTAD published two reports on GVCs and their contribution to development. They concluded [21] that:

• GVCs make a significant contribution to international development. Value-added trade contributes about 30% to the GDP of developing countries, significantly more than it does in developed countries (18%) furthermore the level of participation in GVCs is associated with stronger levels of GDP per capita growth. GVCs thus have a direct impact on the economy, employment and income and create opportunities for development. They can also be an important mechanism for developing countries to enhance productive capacity, by increasing the rate of adoption of technology and through workforce skill development, thus building the foundations for long-term industrial upgrading.
• However, there are limitations to the GVC approach. Their contribution to the growth may be limited if the work done in-country is relatively low value adding (i.e. contributes only a small part of the total value added for the product or service). In addition there is no automatic process that guarantees diffusion of technology, skill-building and upgrading. Developing countries thus face the risk of operating in permanently low value-added activities. Finally, there are potential negative impacts on the environment and social conditions, including: poor workplace conditions, occupational safety and health, and job security. The relative ease with which the Value Chain Governors can relocate their production (often to lower cost countries) also create additional risks.
• Countries need to carefully assess the pros and cons of GVC participation and the costs and benefits of proactive policies to promote GVCs or GVC-led development strategies. Promoting GVC participation implies targeting specific GVC segments and GVC participation can only form one part of a country's overall development strategy.
• Before promoting GVC participation, policymakers should evaluate their countries’ trade profiles and industrial capabilities in order to select strategic GVC development paths. Achieving upgrading opportunities through CVCs requires a structured approach that includes:
  • embedding GVCs in industrial development policies (e.g. targeting GVC tasks and activities);
  • enabling GVC growth by providing the right framework conditions for trade and FDI and by putting in place the needed infrastructure; and
  • developing firm capabilities and training the local workforce.

Within the global value chains, it is often women who work in the weakest or most disadvantaged chains.[24][25][26][27]

Carr et al. argue that “the vast majority of subcontract workers or industrial homeworkers, who earn some of the lowest wages worldwide, are women.”