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Global Value Chains
- liberatomilo
- May 5
- 3 min read
Introduction
Do you know where the cell phone you are now holding in your hand was made? The car you were riding in yesterday? The table you are having dinner at? I'm pretty sure you don't. And even if you tried to sketch an answer, chances are you could only identify the last place where the parts were assembled... that come from all over the world.
What are they?
We call “Value Chains” the sequence of activities that are part of a production process from the design of a good to its sale to the final consumer. At each stage (or link), it adds some part of the total value of the goods, hence its name. Since the last quarter of the 20th century, these processes have begun to internationalize exponentially, thanks to advances in technology, cheaper transportation and improvements in telecommunications. For this reason, processes that a century ago were developed entirely within a single country, today have productive stages in different countries. This is why economic theory has incorporated the notion of “Global Value Chains” to reflect this phenomenon.
It should be borne in mind that the activities included in Global Value Chains include not only the links referring to tangible production (inputs and components), but also, and in a relevant way, services and links that could be considered intangible: from the software used in the production machines to the marketing campaigns to win new markets. Obviously, these stages involve different budgets, responsibilities, inputs and capabilities, and therefore have different influences on the value of the chain.
Two key concepts for analyzing Global Value Chains are as follows
Governance: Who calls the shots in Global Value Chains?
The notion of governance seeks to shed light on which are the leading firms that control and how they influence value chain decisions. Governance can vary according to the product, the institutional context, and the characteristics of the leading and subordinate firms. In general, the ability to intervene with a scarce and difficult-to-replicate resource (technological, innovative, financial, design, marketing and commercialization capabilities, among others) is what makes chain leadership more likely. A typical classification of chains according to governance is between “buyer-driven” (often in low-skilled labor-intensive industries, where the brand is the main value of the chain) and “producer-driven” (more common in capital-intensive and high-tech industries).
Buyer-Driven example: Zara, Nike.
Producer-Driven example: Toyota, Apple.
Upgrading: How to move up in a GVC?
In simple terms, we can define “upgrading” as the possibility of moving within a chain towards higher-skill, more profitable and technologically sophisticated activities, in order to gain participation in total value added and occupy links with greater influence on decisions. The literature identifies four types of upgrading: a) process upgrading (for example, producing new machines); b) product upgrading (for example, producing more sophisticated product lines); c) functional upgrading (moving from assembly to design); d) cross-sectoral upgrading (moving from producing television sets to making PC monitors).
What can public policy do?
Several authors have emphasized the tasks and objectives that States can pursue in relation to Global Value Chains.
Historically, the most common way for nations to join a GVC is to promote benefits for Foreign Direct Investment. However, this policy may not necessarily spill the benefits of participating in the chain to the rest of society, especially when the imported link is the one with the lowest value added (transnational companies tend to foreignize the most labor-intensive or extractive stages, and not those linked to technology and knowledge).
Having familiarized ourselves with the concepts of “upgrading” and “governance”, we can imagine that a good public policy should take into account the possibilities of each country to participate in more sophisticated links in the chain, with greater value added. The tools for doing so can be found in the Industrial Policy section.
References:
Global Value Chains: a critical view on a new way of thinking economic development
Fernandez-Stark, K., & Gereffi, G. (2019). Global value chain analysis: a primer. In Handbook on Global Value Chains. Edward Elgar Publishing.
Humphrey, J., & Schmitz, H. (2002). How does insertion in global value chains affect upgrading in industrial clusters? Regional Studies, 36(9), 1017–1027. https://doi.org/10.1080/0034340022000022198
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