Global value chain
A global value chain refers to the full range of activities that economic actors engage in to bring a product to market. It plays a critical role in the modern economy, bridging thousands of different markets, technologies, and ideas. The global value chain does not only involve production processes, but preproduction and postproduction processes.
GVC is similar to Industry Level Value Chain but encompasses operations at the global level. GVC is similar to the concept of a supply chain, but the latter focuses on conveyance of materials and products between locations, often including change of ownership of those materials and products. The existence of a global value chain implies a global supply chain engaged in the movement of those materials and products on a global basis. By outsourcing to various economic actors, firms can efficiently and effectively design, manufacture, and distribute products globally. However, these benefits come at a cost, with distinct winners and losers within the GVC.
As states become increasingly vulnerable to economic interdependence, fewer are relying on global value chains and instead are pushing for protectionist policies. This has led to uncertainty over the future of global value chains and whether it will become less critical to the international political economy.
In development
The first references to the concept of a global value chain date from the mid-1990s. Early references were enthusiastic about the upgrading prospects for developing countries that joined them. In his early work based on research on East Asian garment firms, Gary Gereffi, the pioneer in value chain analysis, describes a process of almost 'natural' learning and upgrading for the firms which participated in GVCs. This echoed the 'export-led' discourse of the World Bank in the 'East Asian Miracle' report based on the East Asian 'Tigers' success. In economics, GVC was first formalized in a paper by Hummels, Ishii and Yi in 2001. They defined GVC as the foreign component of imported intermediate inputs used to produce output, and some fraction of output is subsequently exported. Allowing for such a framework, Kei-Mu Yi showed in a 2003 paper that the growth of world trade can be explained with moderate changes in the trade costs and named this phenomenon "vertical specialization".This encouraged the World Bank and other leading institutions to encourage developing firms to develop their indigenous capabilities through a process of upgrading technical capabilities to meet global standards with leading multinational enterprises playing a key role in helping local firms through transfer of new technology, skills and knowledge.
Wider adoption of open source hardware technology used for digital fabrication such as 3D printers like the RepRap has the potential to partially reverse the trend towards global specialization of production systems into elements that may be geographically dispersed and closer to the end users and thus disrupt global value chains.
Analytical framework
Global value chains are a network 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 are only concerned with final goods. It needs a New new new trade theory. 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. Shiozawa argued that global value chains can be treated by the new theory of international values, because it is a general theory of input trade with many-country, many-product economy. He contends that global value chains are a new transforming general purpose technology.The lack of appropriate tool of analysis, the studies of GVCs were initially conducted mainly by sociologists like Gary Gereffi, and management science researchers. See for a genealogy Jennifer Bair. This is changing, with more studies by means of global Input-Output Table starting by economists, and economic geographers outlining the case for proactive sub-national public policy on the engagement of GVCs.
Development and upgrading
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.GVC analysis views “upgrading” as a continuum starting with “process upgrading”, 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, 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. Subsequently, the process of upgrading might also cover inter-sectoral upgrading.
Functional upgrading to high-value-added activities like design and branding is for developing country suppliers a key opportunity to achieve higher profits in GVC. Likewise, a 2017 review of the empirical literature highlighted that suppliers operating in unstable economies, like Pakistan and Bangladesh, face high barriers to reach functional upgrading in high-value-added activities. In general, lower-income countries typically have fewer specialized and skilled labor and less capital to invest in the technology and infrastructure necessary for functional upgrading.
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 due to the asymmetrical relationship between buyers and suppliers. Lead firms have structural power relative to supplier firms, meaning they can control the involvement of other firms with the supply chain. For example, firms can choose to maintain control over higher-valued activities, such as design, marketing, and branding, and have no interest in transferring these core skills to their suppliers. Thus, smaller firms in developing countries are forced to focus on lower-valued activities, like manufacturing, reducing their ability to upgrade and access global markets.
Other authors point to the benefits of considering upgrading at a regional, or sub-national level. This focus enhances the possibility that less-developed regions capture the gains from GVC insertion.
Current research on governance and its impact from a development perspective
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.In his 1994 paper, Gereffi identified two major types of governance. The first were buyer-driven supply chains, where the lead firms are final buyers such as retail chains and branded product producers such as non-durable final consumer products. Rather than produce the product themselves, these firms rely on a tier of suppliers to manufacture the finished goods. Most suppliers reside in developing countries and seek to change their position in the global supply chain, moving from a lower-tier supplier to a higher-tier one. These desires create heightened competition among developing countries, which final buyers leverage by demanding goods at certain prices and qualities. Suppliers are pressured to comply with these rules out of fear that another supplier will replace them if they fail to do so. The second governance type identified by Gereffi were producer-driven supply chains, typically led by advanced manufacturers, with control over raw materials and distribution. Here the technological competences of the lead firms 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, five GVC governance patterns were identified:
- Hierarchical chains represent the fully internalized operations of vertically integrated firms.
- Quasi-hierarchical 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.
- 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 can operate independently of the lead firm.
- Market chains represent the classic arms length relationships found in many commodity markets.
The theoretical concepts often considered firms as operating in a single value chain. Whilst this was often the case in quasi-hierarchical chains it has become apparent that some firms operate in multiple value chains and serve both national and international markets and that this plays a role in the development of firm capabilities. 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.