A global value chain (GVC) refers to the full range of activities that economic actors engaged in to bring a product to market.
The global value chain does not only involve production processes, but preproduction (such as design) and postproduction processes (such as marketing and distribution).
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 (i.e. where different stages in the production and consumption of materials and products of value take place in different parts of the world) implies a global supply chain engaged in the movement of those materials and products on a global basis.
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
A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
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
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
in the ‘
East Asian Miracle’ report based on the East Asian ‘
Tigers
The tiger (''Panthera tigris'') is the largest living cat species and a member of the genus ''Panthera''. It is most recognisable for its dark vertical stripes on orange fur with a white underside. An apex predator, it primarily preys on un ...
’ 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
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
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 (
MNE) playing a key role in helping local firms through transfer of new technology, skills and knowledge.
Wider adoption of
open source hardware
Open-source hardware (OSH) consists of physical artifacts of technology designed and offered by the open-design movement. Both free and open-source software (FOSS) and open-source hardware are created by this open-source culture movement and ...
technology used for
digital fabrication Digital modeling and fabrication is a design and production process that combines 3D modeling or computing-aided design (CAD) with additive and subtractive manufacturing. Additive manufacturing is also known as 3D printing, while subtractive manuf ...
such as
3D printers
3D printing or additive manufacturing is the construction of a three-dimensional object from a CAD model or a digital 3D model. It can be done in a variety of processes in which material is deposited, joined or solidified under computer co ...
like the
RepRap
The RepRap project started in England in 2005 as a University of Bath initiative to develop a low-cost 3D printer that can print most of its own components, but it is now made up of hundreds of collaborators worldwide. RepRap is short for rep''li ...
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 (localization) 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 (Heckshcer-Ohlin-Samuelson model and
New trade theory
New trade theory (NTT) is a collection of economic models in international trade theory which focuses on the role of increasing returns to scale and network effects, which were originally developed in the late 1970s and early 1980s. The main mo ...
and
New new trade theory) 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 have been conducted mainly by sociologists like Gary Gereffi, and management science researchers. See for a genealogy Jennifer Bair (2009). Studies by means of global Input-Output Table is starting.
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” (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.
[Humphrey, J., and H. Schmitz. 2004. "Chain Governance and Upgrading: Taking Stock". in ''Local Enterprises in the Global Economy'', edited by H. Schmitz, 349–82. Cheltenham: Edward Elgar.]
Functional upgrading to high-value-added activities like design and branding is for developing country suppliers a key opportunity to achieve higher profits in GCV. Likewise, a 2017 review of the empirical literature highlighted that suppliers operating in unstable economies, like
Pakistan
Pakistan ( ur, ), officially the Islamic Republic of Pakistan ( ur, , label=none), is a country in South Asia. It is the world's fifth-most populous country, with a population of almost 243 million people, and has the world's second-lar ...
and
Bangladesh
Bangladesh (}, ), officially the People's Republic of Bangladesh, is a country in South Asia. It is the eighth-most populous country in the world, with a population exceeding 165 million people in an area of . Bangladesh is among the mos ...
, face high barriers to reach functional upgrading in high-value-added activities.
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 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.
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
South Asia is the southern subregion of Asia, which is defined in both geographical
Geography (from Greek: , ''geographia''. Combination of Greek words ‘Geo’ (The Earth) and ‘Graphien’ (to describe), literally "earth descr ...
. 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
Governance is the process of interactions through the laws, norms, power or language of an organized society over a social system ( family, tribe, formal or informal organization, a territory or across territories). It is done by the gove ...
. 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, five GVC governance patterns were identified:
* Hierarchical chains represent the fully internalized operations of
vertically integrated
In microeconomics, management and international political economy, vertical integration is a term that describes the arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the supply ...
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 market
A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investin ...
s.
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. Other study outlines the initiative to promote inclusive GVC, 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.
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.
Summary of Unctad report: global value chains and development
In 2013,
UNCTAD
The United Nations Conference on Trade and Development (UNCTAD) is an intergovernmental organization within the United Nations Secretariat that promotes the interests of developing countries in world trade. It was established in 1964 by the ...
published two reports on GVCs and their contribution to development. They concluded that:
* GVCs make a significant contribution to international development. Value-added trade contributes about 30% to the
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
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
A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
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.
Gender and global value chains
Gender plays a prominent role in global value chains, because it influences consumption patterns within the United States, and thus affects production on a larger scale. In turn, specific roles within the value chain are also determined by gender, making gender a key component in the process as well. The increase in global sourcing of production has created more and more work in the informal sector as labor intensive assembly work is being put out to homeworkers in the informal sector where women work as self employed traders and producers, casual workers, or sub contract workers.
Far more women than men are found in the informal sector, as self-employed workers or subcontractors, while specific jobs and broader fields of work differ between men and women. In more than 90 percent of Sub-Saharan African countries, 89 percent of Southern Asian countries, and 75 percent of Latin American countries, women are more exposed to informal work.
Education levels, legal barriers, and social norms, are all factors that contribute to women being largely concentrated in informal work across global value chains.
Work in the informal sector is primarily held by low-skill workers with little to no education. Because labor in the informal sector requires low levels of skill, individuals who are looking for work but lack a strong education frequently find work in the informal sector.
Women tend to receive less education than men, in sub-Saharan Africa, women only receive 70 percent of the schooling that men do.
Women's concentration in the informal sector is also influenced by social norms. Social norms place high burdens on women because expectations for unpaid care-labor and household duties fall on women. In Senegal, women spend six times as much time as men caring for their families and completing household chores.
The time spend in unpaid care labor puts constraints on women's ability to find formal work within a global value chain. Women seeking jobs in the formal sector face extra challenges due to legal barriers.
Many Sub-Saharan African countries, for example, prohibit women from signing work contracts or opening bank accounts without their husband's permission.
Within global value chains, the distribution of returns between firms in the formal sector and women in the informal sector is disproportionate. In Zimbabwe's non-traditional agricultural exports value chains (NTAE), women accounted for only 12% of total costs while exporters accounted for 30% importers for 12% and retailers for 46% of costs.
Sustainability and global value chains
Sustainability is an increasingly important factor in global value chains, and there is a growing need to evaluate their performance based on social and environmental impact, as well as economic. Initiatives such as The
United Nations
The United Nations (UN) is an intergovernmental organization whose stated purposes are to maintain international peace and security, develop friendly relations among nations, achieve international cooperation, and be a centre for harmoniz ...
Sustainable Development Goals encourage sustainable practices through its 17-goal blueprint, but there are few enforced policies which address sustainability with the urgency required to protect natural resources and reduce the impacts of
climate change
In common usage, climate change describes global warming—the ongoing increase in global average temperature—and its effects on Earth's climate system. Climate change in a broader sense also includes previous long-term changes to ...
on a global scale. Sustainability efforts in global value chains are often voluntary steps taken in the private sector, such as the use of
sustainability standards and certification
Sustainability standards and certifications are voluntary guidelines used by producers, manufacturers, traders, retailers, and service providers to demonstrate their commitment to good environmental, social, ethical, and food safety practices. Th ...
s, and
ecolabels, but they can sometimes lack evidence of measurable sustainable impacts. For example, some ecolabels seek to address issues such as poverty. Yet in some cases, even if producers meet ecolabel standards, the burden of certification costs can end up reducing the overall income for these producers. The measurement of sustainability in global value chains requires a multifaceted assessment which includes environmental, social and economic impacts, and it must also be standardized enough to be compared in order to generate sufficient learning and for
scalability
Scalability is the property of a system to handle a growing amount of work by adding resources to the system.
In an economic context, a scalable business model implies that a company can increase sales given increased resources. For example, a ...
. Technologies that make these types of measurements are becoming both more available and essential for the public and private sector sustainability efforts. Besides, the recent finding shows that the local realities like governance system and institutions also play a significant role in economic sustainability of the global value chains.
Implementation of sustainability policies at the global level demands the greening of supply chains in their entirety, as well as their comprehensive technological modernization to accommodate advancing trends such as
digitization,
artificial intelligence
Artificial intelligence (AI) is intelligence—perceiving, synthesizing, and inferring information—demonstrated by machines, as opposed to intelligence displayed by animals and humans. Example tasks in which this is done include speech r ...
(AI), and
big data.
Negative impacts of global value chains
Global supply chain management is facing the increasing difficulty in predicting demand variability in different areas. In addition, managing the production and transportation of goods over large distances to meet the peak demand represents another challenge.
Integrating global value chains requires all actors to adapt to technological changes, which is capital-intensive. Therefore, it is safe to say that this trend significantly benefits developed countries rather than developing countries.
Shifting of production base by the lead firm raises the challenges of sustainability for the local firms (economy) and the labor (society).
Data and Software
OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
maintains Inter-Country Input-Output (ICIO) tables, the most recent update was November 2021. An earlier project started at the
University of Groningen
The University of Groningen (abbreviated as UG; nl, Rijksuniversiteit Groningen, abbreviated as RUG) is a public research university of more than 30,000 students in the city of Groningen in the Netherlands. Founded in 1614, the university is th ...
.
GTAP
GTAP (the Global Trade Analysis Project) is a global network of researchers (mostly from universities, international organizations, and economic and climate/resource ministries of governments) who conduct quantitative analysis of international e ...
maintains a software program with an included trade database. Open-source software in R includes the decompr and gvc packages.
See also
*
Agricultural value chain
Agricultural value chain is the integrated range of goods and services (value chain) necessary for an agricultural product to move from the producer to the final consumer. The concept has been used since the beginning of the millennium, primarily b ...
*
Global commodity chain
References
{{Reflist
External links
Global Value Chain Data Visualization
Development studies
Value proposition