Global value chain

The term global value chain was first used in the mid-1990s. It treats as one chain the whole set of activities that go into a product, not only production but the design before it and the marketing and distribution after it. It is close to the idea of a supply chain, but where a supply chain concentrates on the movement of materials and goods and their change of ownership, a value chain describes a structure in which the stages of production and consumption take place in different parts of the world. By handing work to firms in many countries, companies could design, make and sell products efficiently, but the gains were not shared evenly along the chain.

The sociologist Gary Gereffi, the pioneer of value chain analysis, drew on research into East Asian garment firms and in a 1994 paper distinguished two types of governance. One is the buyer-driven chain, led by final buyers such as retail chains and brand owners. They do not make the clothing, footwear or food themselves but rely on suppliers, most of them in developing countries, and play the suppliers off against each other to demand set prices and quality. The suppliers comply for fear of being replaced by another. The other is the producer-driven chain, led by advanced manufacturers that control raw materials and distribution, where the technological competence of the lead firm decides the chain's competitiveness. Later research distinguished five forms of governance: hierarchical, quasi-hierarchical (captive), relational, modular and market chains.

In economics the phenomenon was first formalised by Hummels, Ishii and Yi in a 2001 paper. They defined the value chain as the foreign content of imported intermediate inputs used to produce output that is then partly exported, and in 2003 Kei-Mu Yi showed that moderate falls in trade costs could explain a large growth of world trade, calling this "vertical specialization". UNCTAD reported in 2013 that value-added trade contributed about 30 percent of the GDP of developing countries, much more than in developed countries (18 percent), and that participation in value chains was associated with faster growth of GDP per head. The World Bank's World Development Report 2020 likewise credited value chains with the surge of trade after 1990 and with poor countries' rapid catching up.

Early studies expected developing-country firms that joined a value chain to learn and move up almost "naturally". This "upgrading" was seen as running from process upgrading, using better technology to work more efficiently, to product upgrading, making better products, and functional upgrading, designing one's own products and building one's own brand. Other researchers objected that because the relationship between buyers and suppliers is asymmetrical, joining a value chain does not of itself lead to upgrading. Lead firms keep high-value activities such as design, marketing and branding in their own hands and have no interest in passing these core skills to suppliers, while small firms in developing countries are held to low-value work such as manufacturing. UNCTAD too noted that the contribution to growth is small if the work done in the country adds little value, that there is no automatic process guaranteeing the spread of technology and upgrading, and that developing countries risk being stuck in low value-added activities for good. It also counted as a risk the ease with which lead firms can move production to cheaper countries.

This unevenness is often drawn as the "smiling curve" that Stan Shih, the founder of Taiwan's Acer, put forward around 1992. In the personal computer industry the two ends of the value chain, conception and marketing, add more value than the middle, manufacturing, so that a graph with the stages of production on the horizontal axis and value added on the vertical one looks like a smile. Critical researchers look at the same facts from the side of labour. Until around 1970 the underdeveloped regions were drawn into the world economy mainly as suppliers of minerals and farm produce; in the "new international division of labour" that followed, labour-intensive manufacturing and assembly moved to Asia, Mexico and Central America, where costs were far lower. Capital moves to places with cheap labour, lower taxes and fewer environmental rules and sells what it makes there back to the original markets, which is called "global labor arbitrage". In the Marxist tradition, Arghiri Emmanuel and Samir Amin argued in their theory of "unequal exchange" that wage differences between core and periphery transfer value through trade from the periphery to the core, and Jason Hickel and his co-authors hold that the power of Northern firms, through patents and control of market access, keeps the labour and resources of the South cheap.

A world bound together by value chains is correspondingly vulnerable. Demand swings are hard to predict, and production and transport over long distances are hard to manage. When supply chains paused during the COVID-19 pandemic, the exchange of raw materials and finished goods broke down, and worries about economic interdependence and vulnerability then led more firms to reshore or nearshore production. Interest in protectionist policies had already been growing since the 2008 financial crisis, and the Russian invasion of Ukraine spread losses to grain-importing countries and to the textile and food-processing industries, adding to the trend. The World Bank warned that since 2008 the growth of trade had been sluggish and the expansion of value chains had stalled, and that conflicts among large countries could lead to their retrenchment or segmentation. Most forecasts, however, hold that value chains are unlikely to disappear, since critical resources have to be sourced from many parts of the world, though reliance on them may decrease.