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Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
Dubai-UAE, 22-24 May, 2015 Paper ID: D526
1 www.globalbizresearch.org
The Effects of Global Value Chain (GVCs) on the Pattern of Trade
Heba Elsayed Tolba,
Faculty of Business Administration,
Assistant Lecturer in International Economics,
Canadian International Collage (CIC) in Cairo, Egypt.
E-mail: [email protected]
___________________________________________________________________________
Abstract
The aim of this study is to analysis the several effects of the Global value chain phenomenon
of (GVC) over the world, specially its important role in the developing countries which
participating through global value chains and go through deepening specialization with
Trade in tasks which increase rapidly productivity growth particularly in some developing
economies and for firms of various sizes and structures. GVCs also changed the nature of
international competition entail adjustment costs, as some activities grow and others decline,
and as activities are relocated across countries and a wide range of policies cutting across
the labour market, social and competition policies right through to investment in education,
skills, technology and strategic infrastructure will be needed to facilitate the adjustment
process to occur the benefits from participation in GVCs.
___________________________________________________________________________
Key words: Global Value Chain GVC, Trade in value added (Tiva)
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
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1. Introduction
A value chain describes the full range of activities through which a good or a service
passes from its conception to its distribution and beyond. This includes several activities such
as design, production, marketing, distribution and support to the final consumer. All these
activities can be contained within a single firm or divided among different enterprises; they
can be contained within a single geographical location or spread over wider areas which
including all activities which are divided among multiple firms in different geographical
locations.
GVCs cover a full range of interrelated production activities performed by firms in
different geographic locations to bring out a product or a service from conception to complete
production and delivery to final consumers (UNCTAD , 2006).
Global value chains (GVCs) also have become a dominant feature of the world economy
through International trade and Investment, Developing, emerging, and Developed
economies. The whole process of producing goods, from raw materials to finished products,
is increasingly carried out wherever the necessary skills and materials are available at
competitive advantage in cost and quality for each country which participating in the chains.
The geographical fragmentation of production over the world has created a new trade
pattern which referred to a Global value chains (GVC) or vertical specialization, this
fragmentation deepens the interdependency of trade relations. So it should be essential to
understand how Global value chains work in the international economy and the impacts on
Trade pattern , therefore how it affect on economic performance for helping developing
countries obtain benefits from their participation in global value chains.
The increasing fragmentation of value chains has led to an increase of trade flows in
intermediate goods, especially in the manufacturing sector. In 2009, trade in intermediate
goods was the most dynamic sector of international trade, representing more than 50 percent
of non-fuel world products trade. This trade in parts, components and accessories encourages
the specialization of different economies, leading to a “trade in tasks” that adds value along
the production chain.
Specialization is no longer based on the comparative advantage of countries in producing
a final good, but on the comparative advantage of “tasks” that these countries complete at a
specific step along the global value chain.
2. Literature Review
One of the pioneer studies in GVCs was conducted by “Michael Porter" in his book
"Competitive Advantage: Creating and sustaining superior Performance" (1985), which
explain and describe ‘The Value Chain’ as an all activities which the organization performs
and links them to the organizations competitive position.
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(ME15Dubai Conference) ISBN: 978-1-941505-26-7
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Porter distinguishes between primary activities and support activities. Primary activities are
directly concerned with the creation or delivery of a product or service. They can be grouped
into five main areas: inbound logistics, operations, outbound logistics, marketing and sales,
and service. Each of these primary activities is linked to support activities which help to
improve their effectiveness or efficiency, and he also determined four main areas of support
activities: procurement, technology development (including R&D), human resource, and
infrastructure (systems for planning, finance, quality, information Technology etc.).
Various studies have emerged under Global Value Chain and the most prominent is (WTO
study,2013) which explain the changes in pattern of trade specially in East-Asia zone , also
the study which conducted by( OECD,2012) study explain Global transfer from Trade in
goods & services to Trade in Tasks .
(Richard Baldwin and Rikard Forslid,2013 ) clarify the GVCs activities in East Asia as a
successful model for production Net-works and explain the benefits occurred from
participation in GVCs and its implications for international trade , investment ,development
and providing jobs opportunities .
(J0die Keane, A ‘New’ Approach to Global Value Chain Analysis, 2008), which explain
Global Value Chain (GVC) uses new trade/new growth theories to better contextualize
analysis of ‘traditional’ and ‘non-traditional’ agricultural trade & suggests that GVC
governance structures may limit or enhance the applicability of new trade/new growth
theories in terms of ‘learning by doing, and therefore the ability to value chain upgrade.
According to( World Economic Forum,2013) study " The Shifting Geography of Global
Value Chains: Implications for Developing Countries and Trade Policy" which explore that
the Generally intermediate imports appear to be more important for exports of manufactures
in several countries which examined in the study than those of services, particularly in
industries such as electronic and communications equipment, and electrical machinery and
instruments. In the United States and Japan, the import content of manufactures’ exports —
nearly 20percent — is four times that of services exports; in China, it is twice that of services
exports.
According to Humphrey study (2003), Due to the distribution of functions (R&D,
production and marketing) or roles among different producers and distributors, SME s &
MNCs from selected developing countries have managed to build up competitive advantages,
which enable them to compete successfully in global markets. The challenge for the Global
companies is to determine how and where to position its production activities to maximize
benefits of globalization.
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
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3. Methodology
This study analysis is conducted through purely inductive approach by exploring the
phenomenon of Global value chain using previous researches and studies which associated.
The main objective of this study is explain framework of Global Value Chain ephemeron ,
and explain effects for the global economy specially on the Developing countries , and how
can the developing countries make is participation in GVC works to achieve the development
objectives .
This study also show the implementation models of GVCs in two different Economic
sectors ( software, automobile) and how could be enhanced and developed in the Developing
Economies, by focusing on two case studies for Automotive sector Electronics industry in
Asia , Toyota in South Africa ,and the Software sector (Microsoft in Egypt ),GVC in Apple
global Company (I phone).
Organization as a GVCs empirical model
3.1 Research questions
This research attempts to show the role of Global value chains GVCs in the pattern of
international trade which affect on the economies of Developing countries based on the above
problem can be asked the following question:
1. What is the role that Global value chains play through International Economy?
2. What are the effects of participation in Global Value Chains on the Developing Countries
Economics?
3. How could Global Value Chains mapping and redistribute the International Trade among
the Countries of the World?
4. The geography of value chains is likely to shift in the next decade or so due to changes in
the fundamental cost structures. What are these fundamental changes to GVCs and how
do we overcome them? & what are their implications for developing countries looking to
plug into value chain?
4. The Framework of Global value chain
According to the 2013 United Nations Conference on Trade and Development World
Investment Report, the value of global trade is currently estimated at US $20 trillion. Trade in
intermediate goods and services that are incorporated at various stages of production accounts
for two-thirds of global trade, the development activities-based production processes have
gradually led to a network of borderless, globalized production systems. These complex
networks (global or regional) are referred to as global value chains (GVCs)
Global value chain is the full range of activities that firms participate in to bring a product
to the market, from conception to final goods or services. Such activities range from ( design,
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
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production, marketing, logistics and distribution to support to the final consumer , GVCs
draw on some basic characteristics of the Global Economy:
a. The growing interconnectedness of economies. In GVCs economic activities are
fragmented across countries. Today, more than half of the world’s manufacturing imports
are intermediate goods (primary goods, parts and components, and semi-finished
products), and more than 70% of the world's services imports are intermediate services,
such as business services, trade in value added (Tiva) increasingly among the countries
include domestic value added which is led to increasing in gross exports.
b. Specialization of firms and countries in tasks and business functions. So, most goods and
a growing share of services are “made in the world”, with different firms and countries
specializing in the specific functions (stage of production) and tasks that collectively
constitute a GVC.
c. Networks of global buyers and producers. In GVCs firms control and co-ordinate
activities in networks of buyers and producers, and multinational enterprises (MNEs) play
a central role. Policy affects how these networks are formed and where their activities are
located.
d. New drivers of economic performance. In GVCs, trade and growth rely on the efficient
sourcing of inputs abroad, as well as on access to final producers and consumers abroad.
The fragmentation of production in GVCs is a means of increasing productivity and
competitiveness. GVCs also affect the labor market, mainly by affecting demand for
different skills groups.
Concepts the key idea of GVCs is that to produce a final good, countries link
sequentially. While there are probably many approaches to characterizing this linkage,
focusing on three conditions that we believe capture the, main aspects of the GVCs:
a. Good is produced in two or more sequential stages.
b. Two or more countries provide value-added during the production of the good.
c. At least one country must use imported inputs in its stage of the production process, and
some of the resulting output must be exported.
Over the last years various international organizations have elaborated several academic
researches and studies which aimed to explain GVCs and its various effects on the Global
Economy such as (OECD and WTO 2012, 2013, OECD 2013, UNCTAD 2013). The
theoretical proposal made by these organizations seems to rely on a few basic assumptions,
upon which highly
The success of GVCs effects on Economic development depended on following points:
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
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Globalization which has a positive impact on productivity due to efficiency improvement as
a result of international competition, better access to technology and new knowledge, and
greater room for specialization and economies of scale.
Participation in value chains could further increase productivity since it would facilitate
access to cheaper or higher quality intermediate inputs.
GVCs would also work as a path for developing countries to access international markets of
goods and services by focusing on certain activities and processes rather than by
establishing a complete value chain.
4.1 APPLE Global Value Chain (I Phone)
Several studies have illustrated the concept of value-added trade using Apple’s
emblematic devices; all of these hi-tech products are assembled in the People’s Republic of
China and so make a significant contribution to China’s exports. But Chinese value-added
represents only a small share of the value of these electronic devices that incorporate
components from Germany, Japan, Korea and other economies that manufacture intermediate
inputs. Based on estimates provided by iSuppli and Chip-works, the table below illustrates
this by identifying those countries that provide intermediate inputs (goods) into the iPhone 4
over the world.
Source: Xing and Detert (2010), iSuppli, Chipworks.
The table shows the value of the intermediate inputs produced by the firms but they
themselves will no doubt have used intermediate imports in their production or sourced
intermediate goods from domestic producers who in turn would have used intermediate
imports. Identifying these flows is equally important, particularly, in the context of the
example above, because some of those imports may have originated in China. Moreover,
while the country indicated is the country where the firms producing the components are
headquartered, these inputs are often produced in other countries. Infineon, for example, has
several factories in China. Chinese value-added may therefore not only be limited to the final
assembly costs.
Country Components Manufacturers Costs
Chinese Taipei Touch screen, camera Largan Precision, Wintek 20.75$
GermanyBaseband, power
management, transceiverDialog, Infineon 16.08$
KoreaApplications processor,
display, DRAM memory LG, Samsung 80.05$
United States
Audio codec, connectivity,
GPS, memory, touchscreen
controller
Broadcom, Cirrus Logic,
Intel, Skyworks, Texas
Instruments, TriQuint
22.88$
Other Other Misc. 47.75$
Total 187.51$
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
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The iPhone example also highlights that beyond trade flows, more information on other
income flows, particularly those related to the use of intellectual property, are required to
answer the question of what is the benefits from trade, which explained by increasing in
exports in ICT sector, plus the accumulated knowledge and skilled occurred from
manufacturing through Apple products & Technology transferred from Apple investments in
china as well.
In other words ownership also matters: Foxconn, the company that assembles iPhones in
China is a Chinese Taipei owned firm. However, part of the value-added generated and
recorded in Mainland China will be repatriated to Chinese Taipei. There are various ways in
which input-output based models could be refined to capture these flows and the OECD
intends to explore these as part of its medium term work programme.
5. The Gains of Developing Countries from Participating in GVCs
Trade in intermediate goods has been growing over the past decade and now represent as
a substantial part of trade in the world. When recent changes have occurred in world
production to vertical specialization, outsourcing, trade in intermediate goods has become an
important means of integrating the world’s economies in both developing and developed
countries. For developing countries, trade in intermediate goods provides them access to the
world markets quickly. Developed countries can profit from the potential gains from trading
intermediate goods through GVCs from its competitive advantage as a low wages levels on a
large scale and abundance of endowments (row materials).
Comparative advantages exist in widely locations around the world and knowledgeable
entrepreneurs are seeking that out and taking advantage of these lower cost opportunities.
This trend shifts production from traditional locations with established infrastructure and
labor forces where alternative employment is achievable, like the U.S.to developing countries,
such as China and Malaysia, where few high value opportunities eventually exist. Here we
begin the attempt to understand this important economic phenomenon which can be isolated
and can originate in multiple countries. With the information generated we hope producers
can anticipate and adjust for inevitable economic shocks and thus reduce volatility and
prevent production disruptions while maintaining profitability.
While developed countries have a strong foothold in GVCs, developing countries are now
increasingly participating in these networks, value chains appear to create opportunities for
faster economic growth, so the share of developing countries in global value added trade
increased from 20 per cent in 1990 to over 40 per cent in 2012. However, many African
countries are still at the initial stages of gaining access to GVCs beyond natural resource
exports and successfully joining global production networks. As a result, Africa still accounts
for a limited share of world income generated from GVC, highlighting the need for new
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
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strategies to enable better access to value chains. The dominance of extractive industries
contributes to a large part of Africa’s exports, averaging at 72 per cent between 2010 and
2012. However, the underdevelopment of the processing end of extractive industries
continues to place Africa at the bottom of GVC. Thus, Africa accounts for only 14 per cent of
value added from exports compared with 27 per cent in Asia and 31 per cent in developed
economies.
Over the past decades, many developing countries have increasingly participated in
international trade. Some emerging economies, in particular in Asia region, have become
more important players, both as exporters and as importers in the Global Chains. The
differences between countries have increased rapidly according to its participation in the
GVCs which affected on the exportation share in the International Trade.
There are several new approaches to measuring trade flows have emerged lately. A recent
example is that the OECD and the WTO have compiled a database called TiVA (Trade in
Value Added) covering OECD members, BRICs, and a few other countries. Using detailed
information on international trade and national accounts, the database allows calculations
regarding where value is created in the countries which participating in GVCs.
Figure 1
This figure illustrates that the Developing countries participation in GVC is 52% with
growth rate 6.1 % which is more than the growth rate of Developed countries, and the East &
South-East Asia zone had a great participation in GVCs with 56%.
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
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Figure 2
Source: UNCTAD-Eora GVC Database.
Note: The GVC participation rate indicates the share of a country’s exports that is part of
a multi-stage trade process; it is the foreign value added used in a country’s exports (upstream
perspective) plus the value added supplied to other countries’ exports (downstream
perspective), divided by total exports.
For example, the United States and Mexico have near identical GVC participation rates,
but Mexican exports include a significant amount of processing trade, with high foreign value
added inputs, whereas United States exports are used more downstream in value chains, as
intermediate inputs in the exports of other countries.
Many emerging economies have successfully used export processing zones to become
involved in GVCs. Such zones can provide the appropriate conditions for foreign investors at
a small scale, which is often easier for governments to implement. Estimates suggest that 3
500 such zones were in operation in 2007 across 130 countries, providing jobs for 68 million
people. Foreign Investments are attracted to export processing zones because the advantage of
low costs and easiness of importing and exporting; low or zero tariff barriers and minimum
administrative requirements allow companies to source intermediates efficiently from abroad.
Much of the success of these zones depends on the quality of infrastructure and logistics,
however, rather than on low labour costs. Export processing zones are estimated to account
for almost half of China's exports and 40% of Mexico's. However, as these zones tend to rely
heavily on imported intermediates, they do not necessarily create much value added for the
Proceedings of the Second Middle East Conference on Global Business, Economics, Finance and Banking
(ME15Dubai Conference) ISBN: 978-1-941505-26-7
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host country. Moreover, they have mainly been successful in assembly and low-cost
manufacturing.
The experience of China, Costa Rica, the Czech Republic, Mexico and Thailand
demonstrates that participation in GVCs can offer a fast track to development and
industrialization. Indeed, the value added that some emerging economies have created in
manufacturing GVCs has increased steadily over time. Motivated by these successes, other
developing and emerging economies are seeking to become more integrated in international
production networks. In countries as different as Samoa and Cambodia, specialization in
specific tasks has allowed participation in value chains in ways that would have been
impossible just a decade ago. A first step for developing economies is therefore to consider
how they can enter existing GVCs. Opening their economies to foreign trade and investment,
strengthening trade facilitating measures and reforming the business environment are among
the key actions required.
While integration in GVCs has provided emerging economies with access to investment,
knowledge and technology, it often takes place through affiliates of foreign MNEs in export
processing zones. This may entail risks for host economies, given the increasingly footloose
character of MNE activities. Once wages and costs in the host country increase above a
certain threshold, these activities may move to an economy that offers lower costs. The risk is
particularly acute for small emerging and developing economies where access to the domestic
market or local knowledge is of limited importance to MNCs location decisions. Responding
to this risk requires combining integration in GVCs with strengthening domestic capabilities
to enhance productivity and innovation and diversifying the country’s participation in GVCs.
The Higher knowledge accumulation in the developed countries provides them with a
comparative advantage in knowledge-intensive/higher productivity products. so the
developing Countries that participating in GVCs with developed partners and import
products from the them where they have a comparative advantage, therefore, derive benefits
from the knowledge spillover which helping developing countries to improve the productivity
and achieve long-run growth .
6. New Pattern of Trade: Reshaping Geography of world Trade
Global value chains had Fundamental changes in the international trade geography. In the
next decade the underlying cost structures driving their location could change dramatically.
At least four drivers are evident:
1. As new players from emerging markets secure access to resources for input into
production processes, competition will increase and cost of production are likely to rise
(competitive advantage).
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2. China is at the centre of global value chains in manufacturing, particularly in labour-
intensive sectors. But as China shifts its growth model away from reliance on exports
towards domestic consumption, wage costs could rise and the currency continue its
appreciation. Other domestic costs, such as land, are also rising. However, while the
‘China cost’ increases Chinese productivity growth is huge. Thus some caution is
appropriate in predicting sharp changes.
3. Information technology costs are likely to be driven lower through intense technological
competition. This opens up opportunities for countries wishing to grab a slice of the value
chains action.
4. Southern markets will continue to grow in relative importance, while Europe is likely to
remain structurally repressed for the foreseeable future. This is likely to drive value chain
reorientation and relocation, in unpredictable ways.
Therefore the geography of value chain location is likely to shift within the next decade,
with major implications that will play out differently in different contexts: developed
countries are concerned about retaining jobs; developing countries are either looking to retain
their existing value chain niches or others is looking to plug into them.
A recent report by the World Economic Forum’s Global Agenda Council on Trade
explores these issues, and their implications for trade policy (World Economic Forum 2012).
We consider the political economy of value chains in different country and regional contexts;
the forces promoting the ‘unbundling’ of production; how two countries in different
manufacturing sectors are reacting to them; the role of services in manufacturing value chains
and the emergence of services value chains in their own right; and the broader dynamics
centering on growing trade in intermediate goods and sercices.
So the intermediate goods leads the world trade in 2009, world exports of intermediate
goods exceeded the cumulated amounts recorded for consumption and capital goods (as
shown in the figure below) and represented 51 per cent of non-fuel merchandise exports.
World exports of intermediate goods nearly doubled between 1995 and 2009, from around
US$ 2,774 to US$ 5,373 billion (see Figure 3), an annual average growth rate of 4.8 percent.
Figure 3
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A feature of world trade in intermediate goods is that its share of total trade has remained
quite stable over the past 15 years. As a matter of fact, world exports in the three categories of
goods – capital, consumption and intermediates – evolved at similar speeds between 1995 and
2009, in line with the overall growth of total merchandise trade. Intermediate goods are
embedded in final goods and the values generated within the different intermediate trade
flows are reflected in the subsequent flows of the final (consumer or capital) goods, hence the
stability of shares and growth between the three categories.
Economies are not all equally engaged in GVCs, just as they are not equally engaged in
international trade. Economies which participate in GVCs both as users of foreign inputs and
as producers of intermediate goods and services that can be used in other economies’ exports .
An indicator that reflects both these elements – the so-called participation index – is shown in
Figure above.
Figure 4
Source: OECD 2013
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Intermediate goods constitute more than 60 per cent of Asia’s total imports. Asia is the
world’s key player in international production sharing, mainly in the processing and
assembling of manufactured goods. However, the share of exports in intermediates is around
50 per cent as Asia tends to transform imported intermediate goods into final goods for
export.
6.1 Europe and Asia lead Trade in intermediate goods
In 2009, the production and export of intermediate inputs have been mainly concentrated
in Europe, Asia and North America. Unlike those of Europe and North America, Asian
exports of intermediate goods grew much faster (7.2 per cent) than the world average (4.8 per
cent) between 1995 and 2009. Exports of intermediate goods from a few developing regions
(Central and South America, Africa) and the Commonwealth of Independent States (CIS)
economies grew much faster than those from Western economies (as shown in the Figure
below ). The volume of trade in intermediate goods gives an indication of the level of
integration of a region in production sharing. Although the overall value is still very low
compared with Western economies, developing economies tend to join global supply chains
at a sustained pace since it is a clear opportunity for them to enter international trade through
production sharing.
Figure 5
The shares of North American and European exports of intermediate goods in world trade
declined notably between 1995 and 2009 (as shown in the Figure above ), whereas Asia’s
increased by almost 10 percentage points, reaching 35 per cent of world exports of
intermediate inputs in 2009. While North American and European economies tend to further
diversify their trade in intermediates towards services, new international production capacity
and related trade in manufacturing intermediates are increasingly originating in Asia as a
result of industrial fragmentation in this region.
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Intermediate goods constitute more than 60 per cent of Asia’s total imports. Asia is the
world’s key player in international production sharing, mainly in the processing and
assembling of manufactured goods. However, the share of exports in intermediates is around
50 per cent as Asia tends to transform imported intermediate goods into final goods for
export.
6.2 Bilateral trade in intermediate goods between China, Japan and the United States
In both 1995 and 2009, US exports to China consisted mainly of intermediate goods,
while its imports were principally final goods, highlighting China’s role as a manufacturer for
the United States (as shown in the Figure below ). A shift within final goods from
consumption towards capital goods can be observed in the import structure of the United
States, vis-à-vis China. It is also noticeable for Japan.
Figure 6
Source: WTO Report
At the same time, the share of capital goods in US exports to China decreased markedly
(a phenomenon that is also due to the increasing use of offshoring by US MNEs), although in
value terms they grew at an average 8 per cent per year. The situation between 1995 and 2009
is quite similar for bilateral Japan-China trade. The structure of trade between Japan and the
United States remained quite stable for Japan’s imports from the United States, while the
share of capital goods in Japanese exports to the United States decreased between 1995 and
2009.
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7. Value Chains as a Path toward Development
Motivated by the success of emerging economies within value chains, increasing numbers
of developing countries are also aiming to become more integrated into international
production networks.1 Value chains as a new form of globalization allow these countries to
integrate more rapidly into the global economy. But despite their large advantages in terms of
for example low absolute labour costs, developing countries are disadvantaged in other
respects, such as high trade costs resulting from a broad range of factors including tariff- and
non-tariff barriers, logistics and transportation costs, but also from geographical distances and
cultural differences. As shown by a new global dataset of bilateral trade costs, developing
economies face higher trade costs and larger connectivity constraints, which directly raise the
costs of offshoring to these countries.2 According to a recent study, reducing supply chain
barriers, which are especially detrimental to small and medium -sized enterprises (SMEs),
could increase world GDP six times more than the increase that would result from eliminating
all tariffs (WEF, et al., 2013). The same study reveals that if every country improved its
border administration, as well as its transport and communication infrastructure, even halfway
towards world best practices, global GDP could increase by 4.7 percent and exports by 14.5
percent. Consequently, the authors argue that, given the significance of supply chain barriers,
the international community should urgently address these barriers. The Inter-American
Development Bank (IDB, 2013) concurs with this assessment. It also highlights the vital role
transportation networks and efficient logistics play in reducing trade costs and improving
competitiveness.
Trade costs play a larger role in vertical trade within value chains compared to regular
trade, as vertical specialization leads to goods crossing national borders more times before
reaching the final consumer (Yi, 2003; Ma and Van Assche, 2010). Tariffs, for example, can
add up to a significant level by the time the finished good reaches customers, stifling demand
and affecting production and investment at all stages of the value chain. Protection against
imports of intermediate goods and services increases the cost of production and reduce a
country’s ability to compete in export markets: tariff and other barriers on imports are in
effect a tax on exports. Policies that restrict access to foreign intermediate goods and services
also have a detrimental impact on a country’s position in regional and global supply chains.
Integration into value chains depends to a large extent on the ease and costs of
international flows of goods, services, capital, knowledge and people, etc. Effective policies
at the border, as well as behind-the-border, are necessary to increase engagement in value
chains. The reduction of trade barriers has strongly favored the shift from import substitution
to export promotion policies and has, for example, greatly promoted the economic integration
of East Asia. Trade barriers depend on the level of tariffs and the existence of non-tariff
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barriers; the efficiency of border processes and customs practices are also an important
determinant of the costs and time to export and import. Furthermore, domestic regulations and
trade-related bureaucracy are significant cost factors for companies that have to operate in a
competitive and timely manner within value chains.
7.1 Electronics industry in Asia
Electronics industry in China in the perspective of global value chains in that area. Within
the global IT industry, Asia has clearly emerged as a hub. Major production clusters are
present in China, Malaysia, and Thailand, and regional headquarters along with some smaller
production facilities are present in Hong Kong, China; Singapore; Chinese Taipei; and Japan.
The years since 1990s have seen the emergence of contract manufacturers as a central pillar
of the global electronics goods production network.
These firms tend to be large and global in scope, providing a full range of manufacturing
services to leading consumer goods clients like Apple. They provide services such as product
engineering, assembly of printed circuit boards, final assembly, and configuration of final
goods for consumers. Other firms engage in components purchasing, distribution logistics,
and repair services. According to the researches the manufacturers for around 15%-20% of
global value added in the IT manufacturing sector. Although the field is dominated by a small
number of large companies, they continue to coexist with much smaller component
manufacturers and assemblers, who act as subcontractors.
This great participation in GVCs as we show in figure 1 relatively to the labour market
for these relatively highly-skilled workers, which would be consistent with the payment of
wage premiums. By contrast, relatively unskilled workers are often drawn from the vast pool
of un-and underemployed persons in rural China, which tends to drive wages down.
7.2 Auto motive sector
The automotive components sector is shaped by the development of GVCs. Several TN C
car manufacturers use SME s in developing countries as sources for automotive components.
As TNC car manufacturers gain access to new markets, existing SME producers in
developing countries will need to adapt to the demands of the international large
manufacturers. The overall trend in automotive Manufacturing is one of consolidation. TN C
car manufacturers have significantly reduced the number of producers in order to improve
their competitiveness. They increasingly rely on a limited number of first-tier producers who
are able to provide auto components on a global scale at “original equipment Manufacturing”
(OEM) standards (UNCTAD, 2001). As this sourcing trend continues, first- tier producers
increase in scale and become TN Cs in their own right (Jurgens, 2003). This change has
created a new dynamic in the industry and smaller local producers are forced to adapt.
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Figure 7: Inter-Firm Linkages between China and Japan in the Automotive Industry
Source: Source: Japan Automobile Manufacturers Association 2013. Data as of March 31, 2013.
Note that the Japan Automobile Manufacturers Association states as follows with regard
to this information: “In principle, the tie-ups shown above cover only technical cooperation
related to motor vehicle production and exclude sales tie-ups.” Note: Japanese companies are
red, while Chinese counterparts are blue. The arrows indicate ownership or other forms of
control.
In this figure, the linkages between Mazda, the fifth largest Japanese car manufacturer in
terms of production volumes, and China’s FAW Car Group (FAW) illustrate the complex
nature of vertical competition. While Mazda outsources the production of the Mazda 6 and 8
to FAW, the latter is also a competitor of the former. FAW produces other models, under
different brands, using technology from Mazda‘s competitors, including Toyota, Daihatsu and
Volkswagen, and has its own line of luxury cars that directly competes with models from the
above-mentioned lead firms.
7.3 South Africa
Toyota has been South Africa’s largest vehicle producer for some time, enjoying
preferential access to local consumers thanks to the existence of high import tariffs. After
South Africa’s trade liberalization programme, which accelerated in 1994, a more open policy
environment sought to encourage exports. However, Toyota South Africa (TSA) only recently
began to explore export opportunities and joined Toyota Manufacturing Corporation’s global
sourcing system. This shift has allowed TSA to substantially increase its production. TSA
established a plant to manufacture two models, Hilux and Corolla.
7.4 Software Sector in Egyptian Market
Software encompasses a vast range of products and applications. Many software products
have a very low weight-to value ratio, which allows the relatively easy global relocation of
segments of the production chain in different locations. In addition, control over technical
standards is a critical factor that drives the development of GVCs. Leading firms can set
standards which can lock in customers to their product lines. Software is also closely linked
with telecommunication services, particularly with mobile phones and wireless. The software
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sector is made up of many SME s with a few big players. These SME s, particularly start-ups,
typically employ less than 50 workers. The key factors for attracting foreign direct investment
(FDI) in the software sector are the size of the domestic market, the availability and
scalability of the pool of skilled workers, and the types of existing software clusters.
In Egypt, the software industry has specialized in two areas:
(a) Firms that translate standard software products of leading brands into Arabic, including
adapting the user interface
(b) Firms that offer a comprehensive support package to users of standard software in the
region.
This includes not only introducing and maintaining new software generations but also
running call centers that support users of standard software, in particular the Microsoft
product range. Egypt has many advantages as an offshore destination in this sector. The
country is in the same time zone as Europe and boasts fibre-optic telecommunications with
easy access to a very large telecommunications bandwidth that is needed for outsourcing
while Skills are available and labour costs are competitive.
In addition, the software development market in the Middle East is growing very fast. The
market is large enough to warrant custom applications and Arabic versions of major
international software packages for users in Egypt and most of the Middle East.
Egypt dominates the regional market with more than 80 per cent of software development in
the Middle East is performed by Egyptians either from Egypt or based in the Gulf. The
Competition among local companies is strong and drives a constant upgrading process, which
has ultimately allowed some companies to attain the highest level of Microsoft’s system
accreditation.
The case study shows that Egyptian partners have benefited from their association with
Microsoft and they have leveraged that partnership to enter the Gulf market. Egyptian support
partners are also serving Microsoft globally. However, many Egyptian firms require the
maturity to compete globally.
Continued progress in software technology has also raised complex public policy issues such
as access to information, national rules and security, law enforcement and protection of the
private sphere. In addition, the interviews highlighted the need to:
a. Establish a strong education system accompanied by ongoing vocational training in the
private sector
b. Initiate the build-up of clusters through science and technology parks with competitive tax
and financial benefits for all firms, large and small alike.
c. Create strong, formal linkages between national innovation and education
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7.5 Capturing the Gains along GVCs
Connecting to value chains is a first step towards economic development, but the
principal objective of partner countries remains to capture more of the value-added in each
chain. Indeed, the link between participation in value chains and development still is
questioned (OECD, 2013) and while participation in value chains can bring benefits, it also
presents risks. Maximizing the benefits not all value chains
Increase the transfers of skill and technology from lead firms to local producers in
developing countries.
According to Staritz, et al. (2011) analyzes the role of value chains in socio-economic
upgrading and observed that the literature often focused on the economic rather than social
dimensions of upgrading (i.e. improved working conditions, higher-skilled and better paid
jobs). Although the economic and social dimensions of upgrading are often intertwined, one
does not necessarily lead to the other.
Winkler (2013) also analyzed more comprehensively the spill-over effects of foreign
investment in value chains, using survey data on direct supplier-lead firm linkages in Chile,
Ghana, Kenya, Lesotho, Mozambique, Swaziland and Viet Nam.
Based on a literature review,which suggests that the spillover effects depend on the
foreign investor characteristics (e.g. degree and structure of foreign ownership, length of
foreign presence, technology intensity, the foreign investor’s home country, sourcing strategy
and motivations behind FDI), the recipient country’s absorptive capacity (e.g. technology gap,
R&D, skill level, firm size, exporting and location), and transmission channels (e.g. demand
effect, assistance effect, diffusion effect, availability and quality effects). Accordingly,
investment promotion alone is not sufficient to benefit from FDI spill-over. Instead, the most
studies emphasized the importance of embedding foreign investments in the local economy to
increase the amount and quality of linkages, and therefore the potential for FDI spill-over in
the long-term.
To enable developing countries to capture more of the benefits along the production
chain, it is necessary to strengthen backward linkages to the local economy. Poorly designed
policies could, however, create new barriers to interconnectivity, undermine a country’s
participation in value chains, and leave it open to challenges under WTO rules (notably those
relating to the Agreement on Trade-related Investment Measures - TRIMs). This is the case,
for example, with national content rules that aim at capturing more of the value-added by
reserving some activities to national firms or establishing a preference for domestic rather
than imported inputs.
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Therefore, it is essential for governments to identify those policies that are compatible
with value chain participation, such as schemes to reward local sourcing, or policies to build
local capacities that respond to the needs of lead firms.
Aid-for-trade programs, such as support for upgrading the supply capacities of local
SMEs or helping them to meet international standards, are already helping developing
countries to achieve these objectives.3 Moreover, lead firms are providing support to local
producers with potentially important spill-over effects. For example, employees who are
trained by lead firms could diversify their sales, e.g. by supplying other intermediate products,
lead firm buyers in different markets and other lead firms in the same value chain; or the
acquisition of new technologies could help to create a local production cluster. These public
and private transfers and their spill-over effects contribute to enhancing local supply-side
capacities and to capturing more of the gains of value chain participation.
7.6 Minimizing the risks in GVCs
Global value chains have contributed to increasing developing countries’ exposure to
external economic shocks through higher trade elasticity. For example, the difficulties of the
automotive industry in the United States were immediately transmitted through the value
chain, affecting the income of rubber tappers in Liberia who were supplying raw materials for
tires. In general, trade flows have become more unstable, changes in business strategies and
practices can result in rapid shifts in demand and reconfiguration of the value chain. For
example, during the Global Economic crises 2008-09 resulted in the consolidation or
reduction of the length of several value chains (i.e. the shortening of the segmentation of the
chain or even the exclusion of some countries from the chain).
Global Value chains are sometimes criticized for the predatory behavior of some lead
firms that tap into developing countries’ human and natural resources in an irresponsible or
unsustainable way, or do not share enough of the profits with local producers. This is
probably more an issue for non-extractive (production) activities, which exist only because of
global value chains, as foreign direct investment in mining and oil pre-date by decades, if not
centuries, the emergence of GVCs.
Actually, the existence of factory-less firms, which rely mainly on their brand and
reputation with the consumer, are providing new channels, such as codes of conduct and
corporate social responsibility (CSR), for dealing with the issue. It is therefore important to
carefully monitor the growing arrangement of corporate and social responsibility for the
organization, and create incentives for lead firms to comply with major principles for
responsible investment and business which sustain the economic development, such as the
UN Principles for Responsible Investment or the UN Global Compact.
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The OECD has also developed Guidelines for Multinational Enterprises. Beyond
responsible investment, vertical relations in value chains may raise competition issues.
Governments need to develop adequate competition frameworks to avoid captive
relationships and the loss of economic freedom in the value chains which have negative
effects on its economies.
8. The Importance of Open Border Policies
Through The positive impacts of open trade and investment on economic growth and
prosperity have been discussed since decades. This is even more so in GVCs because of the
growing intertwined character of imports and export; as such, tariffs and other barriers to
imports have effectively become a tax on exports. Measures against imports of intermediate
products directly increase the costs of production and reduce a country’s ability to compete in
export markets.
Therefore, policies that restrict access to foreign intermediate goods and services also
have a detrimental impact on a country’s position in the regional or global supply chain.
Likewise, trade facilitation by addressing border bottlenecks and avoiding unnecessary
restrictions becomes highly beneficial in GVCs; new OECD evidence shows that there is
scope to reduce trade costs by about 10% in OECD countries.
As goods cross borders many times in GVCs, first as inputs and then as final products,
fast and efficient customs and port procedures are essential to the smooth operation of supply
chains. In addition, streamlining administrative procedures at the border (e.g. simplification of
procedures through single windows, pre-arrival processing and advance rulings on goods
classification and applicable duties) helps countries reap the full benefits of GVCs. The
convergence of standards and certification requirements and mutual recognition agreements
can go a long way towards alleviating the burden of compliance and enhancing the
competitiveness of small-scale exporters.
As global value chains change the patterns and structure of international trade, reaping the
full benefits will require adjustments that go beyond trade policy to include policies aimed at
promoting competitiveness, efficiency, attractiveness to investment as well as development
and sustainability. Multilateral and regional trade and investment rules and disciplines will
also need to reflect the fact that goods and services are now often from “everywhere”, rather
than, as they are generally considered today, from “somewhere”, given the important role
MNEs play in creating GVCs, lowering investment barriers is among the most efficient ways
for a country to become more deeply integrated in GVCs. By the same token, by inhibiting
the creation or the efficient functioning of GVCs, impediments to cross-border investment can
have negative welfare impacts beyond the home and host country.
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8.1 A Broad Need for a Different Policy Thinking
The fragmentation of production across countries is not a completely new phenomenon,
but GVCs have become these days a defining feature of modern globalization during the past
decades. GVCs have been significantly changing the rules of the game and increasingly call
for a rethinking of government policies in economic globalization but also more broadly. The
OECD (2013) publication ‘Interconnected Economies: Benefiting from Global Value Chains’
discusses in more detail a number of policy challenges. For example, the international
division of labour and the corresponding global reallocation of resources through GVCs are
no longer taking place at the level of industries, but rather at the level of stages, activities and
tasks. Winners and losers of globalization have traditionally been described in terms of
industries or skill groups, but GVCs and trade in tasks might affect individuals and firms
within the same industry or skill group differently. Some organizations could suffer from
globalization if their activities are relocated within GVCs, while others might prosper.
Government policies to ease the adjustment costs of globalization may find it increasingly
difficult to differentiate according to simple categories of workers.
By linking GVCs to economic development, the traditional approach of building a
complete value chain is neither optimal nor possible in a world of GVCs. Instead of fostering
industrialization through the development of vertically integrated industries (and producing
both intermediates and final products), countries can now become export-competitive by
specializing in specific activities and tasks. The experience of EU member states like
Hungary, the Czech Republic and the Slovak Republic demonstrates that participation in
GVCs can offer a fast track to development and industrialization. Once countries are
integrated in GVCs, firms and countries will be challenged to move to other segments of the
value chain and/or upgrade their existing position. But the increased connectivity brought
about by GVCs has made economies also more interdependent and increased the likelihood
that a local disruption will lead to a system-wide failure. Because production is organized in a
series of stages in different countries by specialized producers who ship the goods produced
further down the chain, adverse shocks run very rapidly through the value chain.
Disruptions in GVCs can seriously damage national economies, and governments will
benefit from more systematic insights on the position of their country in GVCs.
A major problem is that current statistics largely reflect the ‘old’ policy thinking where
the measurement of economic globalization is largely restricted to the economy and (sub-)
industry level. Internationally comparable data at a more granular level are much more
limited which complicates the measurement and analysis of GVCs. Policy makers are
increasingly looking for better evidence to analyze the effects of GVCs on their national
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economies. The OECD/WTO work on ‘Trade in Value Added’ is providing data on GVCs
that can underpin the design of better informed policies.
By implementation of several policies such as trade policy, as the emergence of GVCs
calls for a reassessment of a range of trade policies, but also investment policies, innovation
policies, and framework and structural policies that affect how, and to what extent, countries,
including emerging and developing economies, can benefit from participation in global value
chains GVCs also is a powerful driver of growth and productivity and support job creation
and offshored.
9. Global value chains involve different types of Firm
Given the important role of MNEs in GVCs, and lowering investment barriers is an
efficient way for a country to become integrated in GVCs, Increasingly, companies are
offshoring not only manufacturing but also parts of their business functions such as
accounting or similar activities. Multinational companies are often the driving force behind
this trend, which is reflected in a shift in FDI flows from the so-called secondary (mainly
construction and manufacturing) to the tertiary (services) sector, A large part of FDI flows to
China, Malaysia, Thailand and Viet Nam still go to the secondary sector, By inhibiting the
efficient performance of GVCs, impediments to cross-border investment can have negative
welfare impacts beyond the home and host country, So many low-income countries remain
outstanding from GVCs, due to a lack of natural resources to facilitate insertion in GVCs,
lack of the necessary infrastructure, or a business environment that does not provide some of
the necessary preconditions for investment. In some cases, these constraints can be overcome
through capacity building.
This may be difficult for the poorest developing economies, which would benefit from
donor support through “aid for trade” initiatives.
Small and medium-sized enterprises (SMEs) play an important role in GVCs
performance and contribute indirectly to the exports of larger firms. Governments can support
the participation of SMEs in GVCs by encouraging the development of interconnections with
international firms, development their supply capacity and ability to innovate, and facilitating
the adoption of product standards.
MNEs and their affiliates abroad as well as independent producers, including small and
medium-sized enterprises (SMEs), in both domestic and foreign markets. Transactions in
GVCs include arm’s-length transactions between companies and independent producers in
several countries as well as intra-firm transactions. Some chains are “buyer-driven” and have
developed around large retailers such as Wal-Mart or highly successful brands such as Nike.
Products in such chains are often relatively simple, e.g. apparel, house-wares and toys;
manufacturing such products requires relatively little capital and few skilled workers. Lead
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firms in these GVCs focus almost exclusively on marketing and sales. They have a limited
number of factories of their own and source products from a large network of independent
producers.
Producer-driven GVCs are typically found in high-technology sectors such as the
semiconductor, electronics, automotive or pharmaceuticals industry. Because these industries
rely on technology and R&D, large manufacturing firms such as GM, Sony and Apple control
the design of products as well as most of the assembly, which is dispersed among different
countries. Technology (including design, etc.) and production expertise are core competencies
and are often developed by lead firms or captive producers that can be prevented from sharing
technology with competitors. MNEs play a major role in these networks, including through
their control of foreign affiliates.
SMEs also play an important role in domestic value chains since they supply
intermediates to exporting firms in their country. For example, surveys show that in 2010 the
US parent enterprise of a typical US MNE bought more than USD 3 billion in inputs from
more than 6 000 US SMEs (and this represented almost 25% of its total input purchases).
10. Conclusion
With the growth of global value chains (GVCs), economies became more interconnected,
and they are increasingly specialized in specific activities and stages of value chains rather
than in industries. Trade in GVCs therefore involves widespread flows of intermediate goods
and services across countries, so Participating in and moving up GVCs will be important for
economic development especially for developing countries, It will help to generate productive
activities, which in turn will contribute to increasing the domestic income GDP and
employment.
It could also lead to dynamic benefits such as increasing investment and upgrading of
productive capacity, backward linkages leading to broad-based economic growth, and
knowledge creation through allocate the knowledge and technologies to which accumulated
through the chain in each participated country, that helps increase skills and technical
knowledge, so the effective industrial policy will be critical in increasing the competitiveness
of an economy to participate in GVCs.
The emergence of value chains has major policy implications for economic growth in
developing countries. For many industries, the global spread of integrated production
segments across countries has lowered the costs of production of associated final goods, and
increased the productivity of associated labour and capital. As Baldwin (2011) points out, this
has two consequences for developing countries. Firstly, it has created an avenue through
which countries can industrialise at a much earlier stage of development as producing firms
choose to off-shore fragments of the production value chain to countries where labour is
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cheaper, or where other locational advantages confer a competitive cost advantage on the
whole value chain. Such participation in value chains grants considerable benefits. It may
allow producers to meet standards and regulations that permit them to access rich country
markets; it may allow imports under privileged tariff treatment for intra-firm trade; it may
permit the utilisation of network technology that would not otherwise be available; and
finally, it may open up new sources of capital. However, the second consequence of a world
in which production can be allocated to locations with the lowest cost is that countries trying
to industrialize through import substitution policies, such as those prevalent in the pre-1990
period, are unlikely ever to reduce their costs to the point of being competitive on global
markets. Stated differently, value chains raise the penalties for countries that seek to expand
their exports through using their policy space to build competing domestic production
networks; high border and regulatory barriers will only result in high-cost local production
and poor connectivity to the global market.
Also Global value chains appear to create opportunities for faster economic growth, but
they also raise the penalties for maintaining inefficient border procedures, high tariffs, non-
tariff barriers that unnecessarily constrain goods or services trade, restrictions on the flow of
information, impediments to FDI, and restrictions on the movement of people. Participants in
value chains share a political interest in reducing policy-induced delays and inefficiencies in
the value chain – and in that sense can be powerful allies for reducing trading costs,
Improvement in trade facilitation and logistics was a key factor behind the success of global
value chains (GVCs) in East Asia and the emergence of “Factory Asia” ,Brazil & India .
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