The Effects of Global Value Chain (GVCs) on the Pattern of …globalbizresearch.org/Dubai_Conference2015_May_2/...Proceedings of the Second Middle East Conference on Global Business,

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

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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)

mailto:[email protected]





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.





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.





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,





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:





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$





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





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%.





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





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).





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





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





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.





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.





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





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.





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





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





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.





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.





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.





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





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





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





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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Documents

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