Drivers and measures of global value chains

What is it about?

In the last decades, global value chains (GVCs) emerged as the paradigm for the international organisation of production. Nowadays, most production processes are vertically fragmented worldwide, i.e., goods and services are produced in separate stages located in different countries and are assembled either sequentially along the supply chain or in a final location. The rise of GVCs interlinks with the strong expansion of international trade, especially of parts and components, and foreign direct investment flows, mostly by multinational corporations, which are the key players in the operation of these networks. As a consequence, GVCs produced a deep and lasting impact on the world economy, affecting competitiveness and macroeconomic developments and strongly increasing the economic interdependence between countries. GVCs cannot be perfectly understood under the classical concept of comparative advantages applied to countries and broad sectors. Instead, GVCs are mostly about combining value-added from different sources. Their effects span over multiple dimensions, namely trade flows, productivity and labour market developments. GVCs also have significant policy implications, changing the way policy-makers interpret trade policies, exchange rate fluctuations and external competitiveness. Reaping the benefits from international trade in this environment implies adjusting the productive structure to this changing reality and, hence, capacity to reallocate inputs between industries and to attract and sustain the operations of multinational firms. The correct understanding of GVCs is crucial to predict shifts in their future dynamics, which, in turn, are important to forecast macroeconomic developments and to assess the role, if any, that policy can play in shaping GVCs.

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Why is it important?

Global value chains (GVCs) gave rise to a significant new strand of both theoretical and empirical research in international trade. This paper surveys part of the vast empirical literature on this topic, focusing on its main drivers and empirical measures. The paper starts with a broad discussion of the major driving forces of GVCs, highlighting the contributions of technological progress, reduction of transport and communication costs and removal of political and economic barriers. Next, it surveys the different methodologies used in the literature to map and measure GVCs, accounting for their different scopes and required datasets. Given the nature of the phenomenon, the scale at which GVCs' mapping and measuring is made is very diverse. Mapping ranges from specific case studies to worldwide analysis and measuring ranges from broad measures to those capturing just specific processing trade activities. All in all, the paper provides a guide on the different ways of mapping and measuring GVCs found in the literature.