Week 2: Global Value Chains Flashcards
Understand Global Value Chains in relation to global and regional business (17 cards)
Emergence of Global Value Chains (GVCs)
Increasingly more products are being ‘made in the world‘. Came into existence because companies decided it was more profitable to outsource stages of the production process. Increasing trade in intermediate inputs accounts for a significant proportion of exports. Locus of manufacturing has shifted from developed to developing countries.
The emergence of Global Value Chains (GVCs) has significantly reshaped international business, allowing companies to source, produce, and distribute products across different countries. This transformation is driven by several key factors:
Technological Advancements: Innovations in communication, transportation, and logistics have made it easier and more cost-effective for businesses to coordinate operations across borders. These technologies facilitate the movement of goods, information, and capital, enabling companies to outsource specific stages of production to different countries.
Cost Efficiency and Specialization: Companies are increasingly able to focus on their core competencies and outsource other activities to countries where they can be done more efficiently or at lower costs. For example, manufacturing may be outsourced to countries with cheaper labor, while research and development (R&D) could remain in more developed economies.
Trade Liberalization and Globalization: International trade agreements, such as those promoted by the World Trade Organization (WTO) and regional agreements like the European Union (EU), have reduced trade barriers, making it easier to establish and expand global operations. This liberalization has encouraged businesses to spread their production processes across multiple countries.
Foreign Direct Investment (FDI): Companies are increasingly investing in other countries, establishing subsidiaries, joint ventures, or outsourcing production to local firms. This allows them to leverage local expertise, reduce costs, and access new markets.
Supply Chain Integration: The concept of GVCs highlights the integration of supply chains across multiple countries. A single product might go through various stages in different parts of the world, such as raw material extraction, component manufacturing, assembly, and marketing.
Global Competition: The ability to access resources, technologies, and talent from different parts of the world has increased competition. Companies must be agile, innovative, and efficient to remain competitive in the global marketplace.
Political and Economic Factors: Countries with stable political environments, favorable economic policies, and infrastructure development are more attractive for setting up parts of a GVC. For example, countries with low labor costs or high technological expertise might specialize in particular stages of production.
Impacts on International Business:
Increased Interdependence: GVCs have created a more interconnected global economy, where disruptions in one part of the chain (e.g., natural disasters, political instability) can have ripple effects across other countries.
Job Creation and Destruction: While GVCs can lead to job creation in some countries, they may also result in job losses in others due to outsourcing. The shift of low-skilled jobs to developing countries can lead to income inequality in developed nations.
Market Access: Companies benefit from access to new markets and customer bases. By having a presence in multiple countries, firms can more easily adapt to local market demands.
Innovation and Knowledge Transfer: GVCs encourage innovation through collaboration between countries with different strengths. Companies can share knowledge, technology, and expertise, enhancing productivity and fostering new ideas.
Overall, the rise of Global Value Chains is central to modern international business, driving economic growth, efficiency, and competition across the globe.
Four dimensions to GVCs
- Input-output structure (products, services, resources) 2. Governance dimension 3. Geographical dimension 4. Institutional context (governments, multilateral agencies, regulatory bodies).
- Input-Output Structure (Products, Services, Resources)
This dimension describes the flow of inputs (materials, components, labor, services) and outputs (finished products, services) throughout the value chain. It focuses on how resources and products are exchanged at each stage of production and the relationships between different producers in the chain.
Inputs: These could include raw materials, components, technologies, and services like logistics or marketing, which are required to produce the final product.
Outputs: The end product, which could be a physical good or a service, often travels through various stages, such as assembly, quality control, and packaging, across different countries.
Value Addition: The input-output structure helps to understand how value is added at each stage of the production process, from raw materials to the final consumer product.
- Governance Dimension
This dimension focuses on the ways in which the relationships between different firms in the value chain are managed and governed. It refers to the mechanisms and structures that determine how coordination, control, and collaboration are handled across the chain.
Governance Structures: These can vary, ranging from hierarchical governance (where one firm controls the entire value chain) to market-based governance (where firms operate independently but are linked by market transactions). Other forms include modular (specialized firms coordinate via standards) and relational (long-term, trust-based relationships).
Control Mechanisms: The governance dimension helps determine how firms manage risks, quality, intellectual property, and the flow of information, as well as how decisions are made regarding pricing, production, and logistics.
Power Dynamics: Some firms may hold significant bargaining power, shaping the overall structure of the GVC, while others may have limited influence over decision-making.
- Geographical Dimension
This dimension refers to the geographic distribution of the different activities involved in a value chain. GVCs often span multiple countries and regions, with various stages of production happening in different parts of the world.
Location of Activities: Certain parts of the value chain, such as manufacturing or assembly, may be outsourced to countries with low labor costs, while R&D and high-value services may remain in more developed economies.
Regional Specialization: Certain countries or regions may specialize in particular stages of the value chain due to local expertise, resources, or favorable conditions. For instance, Southeast Asia may be a hub for manufacturing, while Silicon Valley is a hub for innovation and technology development.
Global Supply Networks: The geographical dimension emphasizes the global nature of GVCs, where companies depend on suppliers and customers located all around the world.
- Institutional Context (Governments, Multilateral Agencies, Regulatory Bodies)
This dimension looks at the regulatory, political, and institutional environment within which GVCs operate. It focuses on how governments, international organizations, and regulatory bodies influence the structure and operation of global value chains.
Government Policies: National governments create policies that affect trade, investment, taxation, and labor, which can shape the attractiveness of certain countries for specific activities within the value chain. For example, a government may offer tax incentives to encourage foreign direct investment (FDI) or set labor standards that influence outsourcing decisions.
Multilateral Agencies: Organizations like the World Trade Organization (WTO), the International Monetary Fund (IMF), and the World Bank play roles in setting global trade rules, providing financing, and promoting economic development, which impacts how businesses organize their value chains.
Regulatory Bodies: National and international regulatory agencies influence the standards for safety, environmental protection, intellectual property rights, and labor conditions. These regulations can affect how products are manufactured, how suppliers interact, and how risks are managed within the value chain.
In Summary:
Input-Output Structure focuses on the flow of materials, products, and services throughout the value chain.
Governance Dimension addresses how the relationships between firms in the value chain are structured and controlled.
Geographical Dimension examines the global distribution of production activities.
Institutional Context considers the role of government policies, international agreements, and regulations in shaping GVCs.
Together, these four dimensions provide a comprehensive framework for understanding the complexities and dynamics of Global Value Chains, highlighting how various factors influence business decisions and the operation of global networks.
Buyer-driven chains
Governance of global production and distribution played by large retailers and highly successful branded merchandisers.
Buyer-driven chains refer to a type of governance structure within Global Value Chains (GVCs) where large retailers or brand-name companies (the buyers) have significant control over the production process, especially in terms of design, quality standards, and delivery. In these chains, the buyers typically dictate the terms of production, such as what products should be made, the specifications, and delivery schedules, while suppliers (often in developing countries) perform the actual manufacturing or assembly.
Here’s a deeper look into buyer-driven chains:
Key Characteristics of Buyer-Driven Chains:
Large Retailers and Brand Companies as Key Drivers:
In buyer-driven chains, large companies or retailers (such as Walmart, Nike, or Apple) are the primary drivers of the value chain. These companies usually have strong brand names and significant market power, which they use to coordinate and control production activities.
The buyers typically focus on aspects like marketing, brand management, and customer relationships, while leaving the production to other firms.
Outsourcing and Contracting:
Buyers often outsource manufacturing to specialized suppliers, particularly in developing countries, where labor costs are lower, and production capabilities are available. However, even though the actual production is outsourced, buyers retain control over the design, production standards, and timing.
These suppliers are often required to adhere to strict product specifications and quality standards set by the buyers.
Power and Control:
The buyers have substantial power in these chains, often because they represent the demand side of the market. This power allows them to dictate terms, including prices, delivery schedules, and production methods.
The suppliers, often smaller firms, have less bargaining power and must comply with the buyer’s demands, making them dependent on the buyer for orders and market access.
Global Reach and Standardization:
Buyer-driven chains are typically global, with products being sourced from various countries. The buyers set the terms, often requiring a high level of standardization across different suppliers to ensure consistency in quality and branding.
A key aspect is that buyers standardize product specifications and demand compliance with international norms (e.g., environmental standards, safety regulations, labor practices).
Examples of Buyer-Driven Chains:
Apparel Industry: Large global retailers (e.g., H&M, Zara, or Nike) design clothing and shoes but rely on manufacturers in countries like China, Bangladesh, or Vietnam to produce them. These buyers have tight control over product designs, production schedules, and quality standards, while the manufacturers in these countries focus on production.
Retail Industry: Large retail chains like Walmart and Target dictate the sourcing, pricing, and quality of goods from suppliers, whether in consumer electronics, food products, or home goods. The suppliers (manufacturers) must align with these buyer requirements to be considered as suppliers.
Advantages of Buyer-Driven Chains:
Cost Efficiency: Buyers can take advantage of low-cost production in developing countries, allowing them to maintain competitive prices in their markets.
Flexibility and Scalability: Suppliers can scale their production capacity to meet the buyer’s demand, allowing for rapid adjustments to production volumes based on changing market conditions.
Access to Global Markets: By acting as suppliers to powerful buyers, smaller firms can gain access to global markets that they might not be able to reach independently.
Disadvantages of Buyer-Driven Chains:
Supplier Dependency: Suppliers become heavily dependent on buyers for orders, which can leave them vulnerable if buyers switch to other suppliers or change their purchasing practices.
Low Profit Margins for Suppliers: Suppliers often work under tight margins because buyers have significant bargaining power and push for low prices.
Limited Control for Suppliers: Suppliers have limited control over the design and branding of the products, as these are dictated by the buyer. As a result, suppliers may not be able to differentiate themselves or capture additional value through innovation or branding.
Conclusion:
In buyer-driven chains, the key players are the buyers—large, often multinational companies that control the design, marketing, and distribution of the products, while outsourcing the production to suppliers. This type of governance structure places significant power in the hands of the buyer, which can shape the entire value chain, from product development to the manufacturing process, often resulting in low-cost, mass-produced goods that meet the buyer’s specifications.
Example: Top 10 Global Apparel Brands 2024.
Producer-driven chains
Dominated by large manufacturing firms. Production occurs within house.
Producer-driven chains refer to a type of governance structure within Global Value Chains (GVCs) where the producers (i.e., the manufacturers or firms in charge of production) have significant control over the value chain, especially in terms of design, technology, and the organization of production. In these chains, the producers (often large multinational corporations) dictate the terms of production, set the technological standards, and often integrate different stages of production into their operations.
Here’s an in-depth look at producer-driven chains:
Key Characteristics of Producer-Driven Chains:
Firms with Significant Control Over Production:
In producer-driven chains, large manufacturers or firms dominate the production process. These firms not only handle manufacturing but may also control critical stages of the value chain, such as research and development (R&D), design, and marketing.
The firms leading producer-driven chains tend to be highly integrated and use their technological expertise and scale to control various stages of the value chain, sometimes even owning key suppliers or production plants.
Vertical Integration:
Producer-driven chains are often characterized by vertical integration, where companies own or closely control various stages of production, from raw material extraction to final product assembly and marketing. This can include owning the supply of raw materials, manufacturing plants, and distribution networks.
This integration enables firms to manage costs, control quality, and ensure consistency across different stages of the value chain.
Technological and Capital-Intensive Production:
Producer-driven chains often involve high-tech industries such as automobiles, electronics, and machinery, where technological expertise, innovation, and capital investment are crucial.
Companies within these chains control the production technologies, design processes, and standards, often pushing the boundaries of innovation and setting new industry standards.
High Barriers to Entry:
Due to the capital investment required, high technological expertise, and integration of supply chains, it is often difficult for smaller firms or developing countries to compete in producer-driven chains. New entrants may struggle to gain a foothold without significant investment in technology or access to large-scale production facilities.
Producers control the production process and can set high standards, which limits the number of suppliers capable of meeting their needs.
Strong Supplier Relationships:
While the focus is on the producer, these chains often involve close and long-term relationships with suppliers, especially in industries like automotive or high-tech manufacturing. Producers may enter into strategic partnerships with suppliers to ensure high-quality inputs, ensure supply reliability, and sometimes engage in joint product development.
Suppliers may have to meet stringent quality and technological standards set by the leading producer.
Examples of Producer-Driven Chains:
Automobile Industry: Companies like Toyota, Volkswagen, and General Motors control significant portions of the automotive value chain. They not only design and market cars but also manage the manufacturing of key components (such as engines, transmissions) and often have their own plants in various countries to assemble the vehicles.
These companies dictate technological standards (e.g., engine types, safety features), and suppliers must meet the precise specifications required by the automakers.
Electronics Industry: Firms like Intel, Samsung, or Apple also operate within producer-driven chains. These companies design and develop products (such as microchips, smartphones, or laptops) and often have extensive control over the supply chain, from sourcing raw materials to overseeing manufacturing operations in other countries (such as assembly in China).
Producers drive innovation and technological advancements, which smaller suppliers must follow in order to remain competitive.
Advantages of Producer-Driven Chains:
Efficiency and Control: The producer’s ability to control multiple stages of the production process allows for greater coordination, cost reduction, and quality control across the entire value chain.
Innovation: The dominant role of producers in setting the technological standards within their industry encourages significant innovation, as these firms invest heavily in R&D and new product development.
Higher Profit Margins: Since the producer controls most of the value chain, it can capture a larger share of the profit generated by the final product, compared to buyer-driven chains where the buyers typically dominate pricing power.
Disadvantages of Producer-Driven Chains:
Barriers to Entry for Small Firms: Smaller firms and firms in developing countries face difficulties entering these chains due to the significant capital, technology, and expertise required. This can result in concentration within certain industries, where only a few large firms control the market.
Limited Flexibility for Suppliers: Suppliers in producer-driven chains are often dependent on the lead firm, and while they may have long-term relationships, they may have limited ability to negotiate terms or innovate independently.
Higher Operational Costs: The capital-intensive nature of producer-driven chains often means that firms must invest heavily in infrastructure, technology, and integration. This can lead to high operational costs.
Conclusion:
In producer-driven chains, the key players are the producers—large, technologically advanced companies that dominate the value chain through vertical integration and control over production technologies. These firms not only produce but also design and innovate, often leading the market in technological advancements. Supplier firms are typically smaller and must comply with stringent standards set by the leading producer. This type of value chain structure is common in capital-intensive industries such as automobiles, electronics, and machinery, where technology and expertise are central to success.
Examples include automobiles and electronics.
Forms of GVC Governance
Arms-length transaction (market), Modular governance, Relational networks (strategic alliances), Captive governance (small scale producers), Hierarchical mode (ownership).
The forms of Global Value Chain (GVC) governance describe how relationships between firms in a value chain are structured—specifically, how coordination, control, and power are distributed among the actors. The typology most commonly used comes from Gereffi, Humphrey, and Sturgeon (2005), and it identifies five main forms of GVC governance based on factors like complexity of transactions, codifiability of information, and capabilities of suppliers.
Here are the five forms of GVC governance:
- Market (Arm’s Length) Governance
Definition: Relationships are governed mainly by price, with little to no long-term commitment between firms.
Key Features:
Low complexity of transactions.
Highly standardized products or services.
Easy-to-transfer information (codifiable).
Suppliers can produce with little buyer intervention.
Example: Purchasing generic parts or commodities like screws, wires, or raw agricultural products from open-market suppliers.
Power Relation: Weak. Buyers and sellers can easily switch partners.
- Modular Governance
Definition: Suppliers make products or components to a customer’s specifications using their own capabilities, based on clearly defined standards.
Key Features:
Medium-to-high complexity in products.
Codified standards and technical specifications provided by the buyer.
Suppliers have strong capabilities to meet those specs without intense oversight.
Example: Electronics firms supplying modular parts like circuit boards or displays to an OEM (Original Equipment Manufacturer) like Apple or Dell.
Power Relation: Moderate. Buyers still set the specs but rely on the supplier’s expertise.
- Relational Governance
Definition: Relationships are built on trust, mutual dependence, and frequent interaction, often involving the exchange of tacit knowledge.
Key Features:
High complexity of transactions.
Tacit knowledge (not easily codified) is important.
Long-term, collaborative relationships.
Suppliers may co-develop products with buyers.
Example: Automotive suppliers working closely with carmakers on custom parts; Japanese keiretsu-type networks.
Power Relation: Balanced, often built on mutual trust and repeated interaction.
- Captive Governance
Definition: Small suppliers are highly dependent on one or a few large buyers, often under strict control.
Key Features:
High complexity of production.
Supplier has limited capabilities.
The buyer provides intensive monitoring and support.
Suppliers have little power or independence.
Example: Apparel firms in developing countries producing under detailed instructions from large Western brands like H&M or Walmart.
Power Relation: Strongly asymmetrical; the buyer holds most power.
- Hierarchical Governance
Definition: A vertically integrated firm controls most or all stages of production internally (in-house).
Key Features:
Transactions are managed within a single firm.
High complexity, low codifiability, and low supplier capabilities justify internal control.
Formal management systems and command structures.
Example: Toyota owning and operating its own factories, design centers, and logistics in-house.
Power Relation: Centralized and hierarchical—one firm owns and controls the whole value chain.
Upgrading in GVCs
Main way developing country firms can increase competition. Refers to firms moving from low-value to high-value activities.
Upgrading in Global Value Chains (GVCs) refers to the process by which firms, sectors, or countries move to higher-value activities within or across value chains. The goal of upgrading is to improve competitiveness, increase value capture, and escape low-margin, low-skill activities that often trap suppliers in developing economies.
Types of upgrading in GVCs
Economic upgrading, Social upgrading, Environmental upgrading.
🔹 1. Economic Upgrading
Definition:
Moving into higher-value activities within a value chain to improve productivity, profitability, and competitiveness.
Types of Economic Upgrading (as covered earlier):
Process upgrading – more efficient production.
Product upgrading – better quality or more complex products.
Functional upgrading – taking on higher-value tasks like design or branding.
Inter-sectoral upgrading – moving into new, more profitable sectors.
Goal:
To enhance a firm’s or country’s ability to compete globally and increase its share of value added.
Example:
A Bangladeshi garment factory moves from basic T-shirts to producing fashion designs under its own label.
🔹 2. Social Upgrading
Definition:
The process of improving the rights and conditions of workers involved in global value chains, including better wages, job security, health and safety, and access to social protections.
Two Dimensions:
Measurable standards:
Wages
Working hours
Contracts and job stability
Safety and health protections
Enabling rights:
Right to unionize
Freedom of association
Collective bargaining
Goal:
To ensure that economic upgrading leads to better outcomes for workers, especially in developing countries.
Example:
A factory adopts better labor standards due to pressure from an international brand, leading to safer workplaces and higher wages for workers.
🔹 3. Environmental Upgrading
Definition:
Improving environmental practices and reducing the ecological footprint of production within GVCs.
Key Actions:
Reducing carbon emissions
Minimizing waste and pollution
Efficient use of energy and water
Switching to sustainable or recycled inputs
Meeting environmental standards and certifications (e.g., ISO 14001, FSC, organic)
Goal:
To make production more sustainable and reduce harm to the environment, often while complying with regulations or meeting consumer demand for green products.
Example:
A leather tannery in India switches to water-saving and non-toxic chemical processes to meet environmental standards set by European buyers.
🔄 Interaction Between the Three Forms
Positive Synergies:
Economic upgrading can enable social and environmental upgrading by increasing profits that can be reinvested in workers or sustainability.
Firms that improve environmental and social practices may gain better market access, higher brand value, or compliance with trade regulations.
Trade-Offs:
Economic upgrading does not always lead to social upgrading (e.g., automation might increase efficiency but reduce jobs).
Environmental upgrading might raise short-term costs, discouraging firms with tight margins from adopting it.
Economic upgrading - types
- Product upgrading (sophisticated products) 2. Process upgrading (efficient transformation) 3. Functional upgrading (new functions in the chain) 4. Inter-sectional/chain upgrading (moving to new sectors).
Economic upgrading in Global Value Chains (GVCs) refers to how firms or countries move into higher-value activities to increase income, improve skills, and strengthen competitiveness. According to GVC theory, there are four main types of economic upgrading:
🔹 1. Process Upgrading
Definition:
Making production more efficient—reducing cost, improving speed, or increasing quality—without changing the final product.
How it’s done:
Adopting better machinery or technology
Lean manufacturing
Improving workflows or training workers
Example:
A textile factory introduces automation to speed up cutting and reduce fabric waste.
🔹 2. Product Upgrading
Definition:
Moving into more sophisticated, higher-quality, or more complex products that carry higher profit margins.
How it’s done:
Product innovation
Improving materials or design
Meeting international quality standards
Example:
A furniture company moves from making basic plywood tables to designing and producing custom, high-end hardwood furniture.
🔹 3. Functional Upgrading
Definition:
Taking on more valuable functions in the value chain beyond basic production—like design, branding, logistics, or R&D.
How it’s done:
Building internal capabilities
Investing in knowledge-based roles
Moving up from contract manufacturing to brand ownership
Example:
An electronics manufacturer starts developing its own brand and manages marketing and retail instead of only assembling devices for other companies.
🔹 4. Inter-Sectoral (or Chain) Upgrading
Definition:
Shifting from one industry or value chain to another that offers greater value-added opportunities, using transferable skills or technologies.
How it’s done:
Applying capabilities developed in one sector to a new, more profitable sector
Leveraging cross-sector learning
Example:
A factory making car parts uses its precision metalworking skills to enter the medical devices industry.
Social upgrading
Improving the rights and entitlements of workers based on the ILO’s Decent Work Agenda (measurable standards and enabling rights).
Environmental upgrading
(The sources discuss tensions between profit and environmental protection. You may want to research the forms and reasons for environmental upgrading independently based on this context).
Factors determining participation in GVCs
(This is a question posed in the source, the answer is not explicitly provided. Consider factors like a country’s resources, infrastructure, institutions, and trade policies).
Participation in Global Value Chains (GVCs) depends on a variety of economic, institutional, infrastructural, and political factors. These factors influence a country’s or firm’s ability to enter, remain in, and upgrade within global production networks.
Here are the key factors that determine participation in GVCs:
🔹 1. Infrastructure Quality
Transport (roads, ports, airports)
Communication (internet, telecom)
Energy supply
Why it matters:
Efficient infrastructure reduces trade costs, ensures timely delivery, and attracts foreign investors.
Example:
Vietnam’s investment in port logistics helped attract global electronics firms.
🔹 2. Trade Openness & Policy Environment
Low tariffs and non-tariff barriers
Free trade agreements
Business-friendly regulations
Why it matters:
Open trade regimes facilitate integration into global markets and reduce costs for foreign firms operating locally.
Example:
Mexico’s participation in NAFTA (now USMCA) increased its role in North American value chains.
🔹 3. Labor Costs and Skills
Competitive wages
Availability of semi-skilled and skilled labor
Technical and vocational training systems
Why it matters:
Lead firms look for low-cost but capable labor to keep production costs down without compromising quality.
Example:
Bangladesh’s low labor costs enabled it to become a major player in garment GVCs.
🔹 4. Investment Climate & FDI Attraction
Stable macroeconomic policies
Protection of property rights
Ease of doing business
Incentives for foreign direct investment (FDI)
Why it matters:
FDI brings capital, technology, and linkages to global firms.
Example:
Singapore’s strong legal and investment frameworks make it a GVC hub in logistics and electronics.
🔹 5. Geographic Location
Proximity to major markets or supply hubs (e.g., US, EU, China)
Time zone advantages for services
Why it matters:
Being close to large consumer or industrial markets lowers shipping time and costs.
Example:
Eastern Europe benefits from being close to EU markets.
🔹 6. Technology & Innovation Capabilities
Access to technology
R&D institutions and collaboration
Digital readiness
Why it matters:
Technological capabilities allow firms to participate in higher-value activities, such as design and engineering.
Example:
Taiwan’s strength in electronics R&D helped it move up the value chain.
🔹 7. Institutional and Governance Factors
Rule of law
Anti-corruption measures
Regulatory quality
Why it matters:
Strong institutions build trust and reduce the risks for international buyers and investors.
🔹 8. Network and Clustering Effects
Presence of industry clusters (e.g., special economic zones)
Local supplier networks
Knowledge spillovers
Why it matters:
Firms benefit from proximity to other suppliers, service providers, and support institutions.
Example:
The Pearl River Delta in China is a dense electronics and manufacturing cluster.
What governments can do to improve domestic firms’ position in GVCs
(This is a question posed in the source, the answer is not explicitly provided. Think about policies related to education, technology, infrastructure development, and trade facilitation).
Governments play a crucial role in helping domestic firms improve their position in Global Value Chains (GVCs)—not just to participate, but to upgrade and capture more value. This involves building competitiveness, enabling access to global markets, and supporting firms as they move into higher-value activities.
Here are the key actions governments can take:
🔹 1. Invest in Infrastructure
Transport: Roads, ports, railways, airports.
Digital: Broadband internet, telecom networks.
Energy: Reliable and affordable electricity.
Why?
Better infrastructure lowers production and shipping costs, making domestic firms more attractive to global buyers.
🔹 2. Improve Skills and Education
Technical and vocational training (TVET)
STEM education
Industry-academia partnerships
Why?
A skilled workforce enables firms to perform more complex tasks (product or functional upgrading).
🔹 3. Enhance Access to Finance
Provide credit, grants, and guarantees for SMEs.
Support for technology upgrading and exporting.
Why?
Firms need capital to invest in new equipment, meet international standards, or scale up operations.
🔹 4. Promote Innovation and Technology Adoption
Support R&D centers and incubators.
Offer tax incentives for innovation and digitalization.
Facilitate technology transfer from multinationals to local firms.
Why?
Technology is key to moving up the value chain and gaining competitive advantage.
🔹 5. Simplify Trade and Business Regulations
Streamline customs procedures
Reduce red tape for exporting and importing
Improve ease of doing business
Why?
Reduces time and cost for firms to engage in international trade and comply with standards.
🔹 6. Support Clustering and Industrial Zones
Develop special economic zones (SEZs) and industrial parks
Encourage supplier networks and business linkages
Why?
Clusters promote economies of scale, innovation, and stronger connections between domestic and global firms.
🔹 7. Foster Linkages Between Domestic and Foreign Firms
Encourage multinationals to source locally
Support supplier development programs
Use local content requirements wisely
Why?
Linkages create opportunities for domestic firms to learn, grow, and eventually move up the chain.
🔹 8. Ensure High Standards of Governance and Policy Stability
Anti-corruption measures
Consistent and transparent regulations
Respect for intellectual property rights
Why?
Builds trust with global investors and buyers, reducing risks in long-term partnerships.
🔹 9. Promote Environmental and Social Standards
Encourage green production and ethical labor practices
Provide support to meet international certifications (e.g., ISO, Fair Trade)
Why?
Global buyers increasingly demand sustainable and socially responsible sourcing.
🔹 10. Strengthen Trade Diplomacy and Agreements
Negotiate free trade agreements (FTAs)
Participate in regional value chains
Promote export diversification
Why?
Expands market access and reduces dependence on a single buyer or region.
Impact of political tensions on GVCs (example of Russia-Ukraine war)
Can lead to divestment dilemmas, difficulties in exiting markets, companies seeking to circumvent sanctions through various means (online platforms, other countries, economic unions, parallel imports), and significant financial losses for divesting companies.
Political tensions—such as trade wars, diplomatic conflicts, sanctions, or geopolitical rivalries—can have serious negative impacts on Global Value Chains (GVCs). These tensions disrupt the smooth flow of goods, services, capital, and knowledge across borders, and often force firms to rethink where and how they source, produce, and sell.
Here’s a breakdown of the main impacts of political tensions on GVCs:
🔹 1. Disruption of Trade Flows
Tariffs, sanctions, and export bans can make inputs more expensive or unavailable.
Countries may retaliate with restrictions, creating uncertainty for businesses.
Example:
The US-China trade war led to tariffs on hundreds of billions of dollars’ worth of goods, forcing firms to shift sourcing and production to other countries.
🔹 2. Reconfiguration of Supply Chains
Firms may “decouple” or “reshore” operations to reduce dependence on politically unstable regions.
This can lead to the relocation of production to politically neutral or friendlier countries.
Example:
Some companies moved production from China to Vietnam or India due to rising US-China tensions.
🔹 3. Increased Uncertainty and Investment Risk
Political instability reduces business confidence and delays long-term investment decisions.
Multinationals may hold back from investing in or sourcing from countries seen as politically risky.
🔹 4. Technology and Knowledge Transfer Restrictions
Governments may restrict tech exports or block foreign firms from accessing sensitive industries.
Cybersecurity and data laws become stricter in politically tense environments.
Example:
The US restricted Chinese companies like Huawei from accessing US technologies, affecting global telecom supply chains.
🔹 5. Fragmentation of Global Markets
Political tensions can lead to the creation of rival economic blocs or trade spheres.
Instead of one global value chain, we may see regionalized or “friend-shored” chains.
Example:
Countries like the US promote “friendshoring” – shifting production to politically aligned countries (e.g., Mexico, India).
🔹 6. Costs and Delays
Trade tensions often lead to higher input costs, delays in shipping, and the need to diversify suppliers—which can be costly and time-consuming.
🔹 7. Impact on Developing Countries
Smaller economies that rely on exports to larger countries can suffer collateral damage if caught in political disputes.
They may lose market access or investment even if they are not directly involved in the conflict.
Real-World Examples:
Russia–Ukraine war disrupted energy, grain, and fertilizer supply chains globally.
China–Taiwan tensions raise fears about the stability of the global semiconductor supply.
Brexit introduced customs and regulatory barriers between the UK and EU.
- OEM – Original Equipment Manufacturing
Definition: The manufacturer produces products based on the buyer’s specifications and brand.
Brand Ownership: Client
Design Ownership: Client
Production: Manufacturer
Value Chain Role: Low-end manufacturing (assembly, production only)
Example: Foxconn manufactures iPhones for Apple.
ODM – Original Design Manufacturing
Definition: The manufacturer designs and produces products which are sold under the buyer’s brand.
Brand Ownership: Client
Design Ownership: Manufacturer
Production: Manufacturer
Value Chain Role: Higher than OEM — includes design and engineering.
Example: A laptop manufacturer that designs and builds a model that Dell or HP rebrands and sells.
- OBM – Original Brand Manufacturing
Definition: The company designs, manufactures, and sells the product under its own brand.
Brand Ownership: Manufacturer
Design Ownership: Manufacturer
Production: Manufacturer
Value Chain Role: High — full control of product, brand, and customer interface.
Example: Lenovo selling laptops under its own name.
- Original Ownership Manufacturing (Not Standard)
This term, “Original Ownership Manufacturing,” is not a commonly recognized term in international business or GVC literature. It may be a misstatement or confusion with one of the three above. If used, it might refer vaguely to owning production assets, but it’s not standardized like OEM/ODM/OBM
