Over the last two decades, world trade and production have become increasingly organized around Global Value Chains (GVC). The Global Value Chain (GVC) describes the people and activities involved in the production of a good or service and its supply, distribution, and post-sales activities (also known as the Supply Chain) when activities must be coordinated across geographies.
The difference between a Value Chain and a GVC is that a Value Chain can operate within a single geographic location or even a single company (think about a product that is grown, packaged, sold and consumed within one country). GVC is similar to Industry Level Value Chain but encompasses operations at the global level.
Global value chains are networks of production and trade across countries. Globalization motivates companies to restructure their operations internationally through outsourcing and offshoring of activities.
GVC related trade, rather than conventional trade, has a positive impact on income per capita and productivity; however, there is notable heterogeneity, and the gains appear more significant for upper-middle and high-income countries.
Firms try to optimize their production processes by locating the various stages across different sites. The past decades have witnessed a strong trend towards the global dispersion of value chain activities such as design, production, marketing and distribution.
This emergence of GVCs challenges conventional wisdom on how we look at economic globalization and in particular, the policies that we develop around it.
A global value chain, on the other hand, operates among multiple firms and geographic spaces. For example, a computer uses labor and materials from various suppliers in different countries, is assembled in another country, and was designed and will ultimately be sold in other places. The GVC Initiative is particularly interested in understanding value chains that are divided among multiple firms and spread across several locations, hence the term “global value chain.”
GVCs are spatially extensive, organizationally fragmented, and highly dynamic, making it difficult to determine one’s position and prospects. Therefore economic actors, firms, workers and policymakers need to understand how GVCs function in specific cases and to have tools to help predict how they might change over time. For example, a small firm in a developing country, a manager within that firm, and local policymakers focused on sustainable economic upgrading will all benefit from thinking about their competencies relative to other actors, both local and global, in the chains they participate in, or hope to join in.
Global value chains (GVCs) have become the central mechanism for trade and investment in the world economy today. According to recent estimates, production today is unprecedentedly fragmented and conducted within GVCs, which accounted for more than 85% of total global trade.
Studies have tended to assume that lead firms generally have positive impacts on other firms that participate in GVCs in terms of enabling them to upgrade and supply products and services to global markets. Recent GVC analyses have argued that value chains could present a rare option for local firms and suppliers not only to access new markets but also to access new technologies.