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Developing countries join cross-border production networks called global value chains to drive their economic growth and encourage job creation. But the gains from global value chain participation aren’t guaranteed, do not happen automatically, and vary widely. In this blog article, ISS PhD graduate and visiting researcher Gina Ledda discusses the heterogeneity or diversity in the global value chain experience of developing countries and highlights the importance of taking stock and assessing key factors of participation. The new analytical tool Constant Value Added Share Analysis (CVAS) facilitates the measurement and analysis of global value chain participation.
Developing and advanced countries participate in the cross-border, multi-staged production of goods and services called global value chains. Policy makers generally view global value chains as opportunities for developing countries to participate in international trade and reap advantages such as increased employment, higher incomes, and a boost in economic growth. The problem, however, is that the evidence of beneficial effects to joining global value chains is mixed. This blog article argues for a more nuanced perspective and a first step to evaluate participation.
Global value chains or international production networks started in the manufacturing industries when firms from advanced countries, mainly multinationals, began offshoring some segments of their production process. In the 1980s, the initial movement to locate production activities elsewhere was mainly to take advantage of lower labor costs in developing countries. This fragmentation model of production proved successful and was replicated in other manufacturing and service sectors – more recently to digital services like video games – such that many goods and services consumed locally are practically made in the world.
While involvement in global value chains could potentially foster growth in developing countries, heterogeneous or varied global value chain participation poses a formidable hurdle (Ledda 2023). Even though developing and advanced countries are involved in the same global value chain, their roles are dissimilar. Large multinationals initiate the global value chain, select the firms that join, and assign tasks. This asymmetry of power, the focus of global value chain governance, can hamper the movement of a developing country from low to higher value tasks known as upgrading. Upgrading through product, process or functional improvements is usually needed to sustain growth within global value chains but can be difficult to achieve. Lead firms are not keen to transfer the core technology and skills that define their roles and supplier firms may struggle to absorb and build on these higher-value inputs. The typical global value chain model seen in Figure 1 shows developing countries mostly in the lower-value production segment and advanced countries in higher-value tasks in the pre-production (product design, R&D, and branding) and post-production (distribution, retail, and marketing) segments.
Another important consideration is that reaping advantages from global value chain participation depends on a complex interplay of internal factors including resource endowments, geographical location, institutions, market, innovation and absorptive capacity for technology, inter-country agreements, and trade and investment regulation. A country’s ability and flexibility to adjust these drivers impact on the effectivity of its participation and present a challenge for government policy coordination and development strategies. The resulting diversity in country responses to these challenges contributes further to the mixed scorecard of beneficial outcomes.
With all these dynamics to consider, how does a developing country benefit from global value chain participation? We argue that the first step is to take stock and assess participation through quantitative and qualitative methods. Our article, Van Bergeijk and Ledda 2024 introduces Constant Value Added Share (CVAS) analysis which is a novel reinterpretation of constant market share analysis, a well-known tool that examines the underlying reasons for a country’s export performance. We use the latest trade in value added data (OECD TiVA 2023) for the years 1995-2020 to measure the value added by each country in global value chains. Applying CVAS analysis to the Philippines, we identified a loss of competitiveness in the computer and electronics sector and emerging sectoral strength in technology-related business services, results that are unclear using the traditional approach and aggregated gross export data. We argue that Constant Value Added Share analysis is useful for assessing the global value chain involvement of other developing countries and can help identify where adjustments can be made towards more gainful participation.
To be fair, a number of developing countries have experienced benefits from global value chain participation. However, global value chains are not static and are changing especially in this post-pandemic era. It remains true that global value chain engagement can be unequally advantageous for participants. An assessment of current participation is a solid first step to ensure that integration into the global economy through value chains supports the pursuit of a country’s sustainable development goals.
References
Ledda, Gina M. 2023. Heterogeneous Participation of Developing Countries in Global Value Chains. Ph.D. thesis, International Institute of Social Studies, Erasmus University Rotterdam, The Hague, The Netherlands.
van Bergeijk, Peter A.G., and Gina M. Ledda. 2024. “Constant Value Added Share Analysis: A Novel Trade Decomposition Technique with an Application to the Philippines” Economies 12, no. 7: 173. https://doi.org/10.3390/economies12070173
WTO (2021). Global value chain development report 2021: Beyond production. Geneva, Switzerland: World Trade Organization. https://www.wto.org/english/res_e/booksp_e/00_gvc_dev_report_2021_e.pdf
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About the author:
Gina Ledda has a PhD in development economics from the International Institute of Social Studies (ISS), Erasmus University Rotterdam. She conducts research on global supply chains, digital services and technologies, international trade and competitiveness, and sustainable development. She has worked in a policy research think tank, consulted for government, taught economics at the master’s and undergraduate levels, and is currently a visiting researcher at the ISS.
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