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Global value chains and


development
a
John Ravenhill
a
Balsillie School of International Affairs, University of
Waterloo, Canada
Published online: 13 Jan 2014.

To cite this article: John Ravenhill (2014) Global value chains and development, Review
of International Political Economy, 21:1, 264-274, DOI: 10.1080/09692290.2013.858366

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Review of International Political Economy, 2014
Vol. 21, No. 1, 264274, http://dx.doi.org/10.1080/09692290.2013.858366

COMMENTARY
Global value chains and development
John Ravenhill
Balsillie School of International Affairs, University of Waterloo, Canada
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ABSTRACT
The adoption of the Global Value Chains framework by Multilateral
Economic Institutions has led to the introduction of broader and more
heterodox views of development into official discourses. When it comes to
policy implications, however, the reports revert to an agenda that departs
little from the Washington Consensus. Trade and investment liberalization
are discussed in detail; complementary policies required to promote
upgrading receive scant mention. In particular, the reports neglect the role
that institutions can play in overcoming coordination problems and how
enhanced state capacity is required for enforcement of competition policies
and for effective participation in trade negotiations.

KEYWORDS
global value chains; international organizations; upgrading; development.

The economics profession was slow to appreciate the transformative


effects of global value chains (GVCs).1 The first major symposium on the
subject (Arndt and Kierzkowski, 2001) popularized the concept of
fragmentation. The editors were concerned to emphasize, however, that
despite the presence of GVCs, many of the insights of received trade the-
ory continue to hold (p. 5), even though they acknowledged the impor-
tance of imperfect competition in value chains and how ethnic links
sometimes shape the distribution of foreign direct investment. Only one
of the chapters in the volume referred to the contributions to the study of
GVCs made by economic geographers and sociologists such as Peter
Dicken and Gary Gereffi.
In marked contrast, in recent years, the study of GVCs has become the
flavour of the month among economists concerned with the relationship
between trade and development, especially those working in or associ-
ated with the multilateral economic institutions (MEIs). GVCs have fig-
ured prominently in official reports.2 The former Director-General of the

2014 Taylor & Francis


RAVE NHILL : GLOB AL VALUE C HA INS AND DEVELOPME NT

World Trade Organization (WTO), Pascal Lamy (2010), was fond of


reminding audiences that we live in an era in which more and more
products are made in the world. The various reports and the large num-
ber of background studies that were commissioned for them, whose
authors have included a number of prominent contributors to the GVC
debate from outside as well as within the economics profession, have
substantially deepened our understanding of the workings of GVCs
across various sectors and regions. Few would now question the argu-
ment that participation in GVCs has the potential to offer low- and mid-
dle-income economies an opportunity to increase their rates of economic
growth, a central theme of the 2013 World Investment Report of the United
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Nations Conference on Trade and Development (UNCTAD).


In the enthusiasm for encouraging participation in GVCs, however,
and in particular in the policy prescriptions that the reports and trade
policy economists have proffered, much of the subtlety of the analysis
has been lost. Little attempt has been made, for instance, to reconcile the
enthusiasm for GVCs with another recent preoccupation of the MEIs: the
challenges that Southeast Asian economies, which have grown relatively
slowly since the Asian financial crises, and even China face in escaping
the middle income trap (see, for instance, Yusuf and Nabeshima, 2009;
World Bank, 2012). And despite the repeated assertion that we now
inhabit a post-Washington Consensus (WC) world, the most prominent
policy prescriptions mimic those of the WC era: to gain access to GVCs,
countries should liberalize their trade and investment policies,
strengthen intellectual property rights, and forget about industrial policy.
Even if these policy prescriptions were desirable and I will suggest
that they at least need to be qualified they are unlikely to be
sufficient to generate the upgrading within GVCs that developing econo-
mies seek. To understand why, we need to return to the literature on
GVCs and the earlier, related literature on the challenges of industrial
upgrading.

GETTING BACK TO FUNDAMENTALS


For all the differences in approach in the literature on GVCs, there is a
common starting point: GVCs came into existence because companies
decided that it was more profitable to outsource some stages of the pro-
duction process. This new business model, pioneered in the manufactur-
ing sector by Nike, allowed lead companies to save on capital
investments that they might otherwise have had to undertake, to take
advantage of the complementary capabilities of suppliers, and to gain
flexibility in supply chain management. In the 1990s, the model spread to
electronics, particularly when leading developers of consumer electron-
ics decided that their profitability would be enhanced by selling their

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REVIEW OF INTERNATIONAL POLITICAL EC ONOMY

manufacturing facilities to electronic contract manufacturers (ECMs)


(Ernst, 2004). Multiple studies have demonstrated that this fragmentation
of production was a potentially win-win situation. Lead firms often had
an interest in enhancing the capabilities of their suppliers so as to
improve both the quality and the cost-effectiveness of their operations
(many of the problems that beset the Korean auto industry in the 1990s,
for instance, originated principally in the quality of the components sup-
plied by lower-tier firms, rather than in the operations of the assemblers).
Lead companies not only provided blueprints, but also management and
engineering advice in the auto and electronics industries, frequently sec-
onding engineers to suppliers for extended periods.
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Relationships within GVCs are not zero-sum. Some suppliers have


substantially enhanced their capabilities and enjoyed phenomenal
growth not least the Taiwanese ECM, Hon Hai Precision as Yeung
(2014) documents in his contribution to this issue. Yet, relationships are
asymmetrical. The logic of the GVC business model is that lead firms
reserve for themselves those parts of the chain where entry barriers are
highest and profits are greatest. Suppliers often operate on razor-thin mar-
gins. Some are able to compensate for small margins through volume. In
2011, for instance, Hon Hais profits were only 3 per cent of its total reve-
nues (in contrast to Apples profit to revenue ratio of 22 per cent). None-
theless, Hon Hai in that year earned a return of 5.2 per cent on assets,
amounting to US$2.45 billion profit.3 Many others, in captive relation-
ships in the terminology of Gereffi et al. (2005), are more constrained. In
research on the automobile industry in East Asia, Doner et al. (forthcoming
2014) found that firms were required to open up their books to the lead
company if they wanted to gain access to the production network. With a
trading company affiliate of the assembler often providing the raw materi-
als, suppliers essentially operated on a cost plus basis, their margin being
dictated by the lead firm. It was not unusual for assemblers to demand 20
per cent cuts in supplier prices each year.4
These cases from the auto industry illustrate a well-known problem
for suppliers in GVCs: even if they enhance their capabilities and pro-
duce more efficiently, the lead companies that control key dimensions
of the value chain such as brand names, design or distribution chan-
nels nonetheless may capture the lions share of the gains. The supplier
is often left with little revenue to devote to upgrading capabilities. In a
world in which bargaining power rests on who needs whom most,
lead firms have every interest in keeping the relationship asymmetri-
cal. A recent illustration is Apples decision to source two-thirds of its
low-cost iPhone 5C model from Pegatron, another Taiwanese ECM,
rather than Hon Hai, which previously assembled nearly all iPhones
and iPads (and which was planning to reduce its dependence on
Apple responsible for between 40 per cent and 50 per cent of its total

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RAVE NHILL : GLOB AL VALUE C HA INS AND DEVELOPME NT

revenues by launching its own brand of cellphone using Mozilla


Firefoxs mobile operating system) (Luk and Efrati, 2013; Dou, 2013).
Suppliers, moreover, are often chasing a moving target: however effective
they may be in upgrading processes, technological change is not linear but
lumpy and it is of course the lead companies that typically have the
deep pockets required for the research and development (R&D) that
generates breakthroughs. Technological developments may also reduce
existing opportunities for suppliers. An example was the advent of modu-
larization in auto production, which substantially raised the entry barriers
to companies seeking to be first-tier suppliers to global assemblers
(Humphrey and Memedovic, 2003; Sturgeon and Lester, 2004).
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A very substantial literature on innovation has demonstrated that com-


panies aspiring to upgrade that is, to shift to higher value-added prod-
ucts and production stages through the creation of forward and
backward linkages face formidable challenges (on the East Asian expe-
rience, for instance, see Hobday, 1995). Companies and governments
face multiple collective action problems (the need to create complemen-
tary competencies simultaneously) in situations characterized by com-
plex and dynamic externalities. The recent spate of reports on GVCs has
reflected these concerns in noting that:

 learning is not costless (UNCTAD, 2013: 161);


 the build-up of technological capabilities and productive capacities
through GVCs is not automatic (UNCTAD, 2013: 174); and
 engaging in GVCs has benefited many economies at the lower end of
the development ladder but economies approaching middle-income
levels increasingly need to upgrade their activities and move up the
value chain. Moreover, emerging economies wanting to catch up and
move to higher-value-added activities (e.g. R&D and innovation) typi-
cally chase a moving target as (newly) developed economies invest
heavily in the same areas (Organisation for Economic Cooperation
and Development, 2013: 162, 163).

Making oneself an attractive partner for lead firms in GVCs through lib-
eralization of trade and investment policies in itself will not go far
towards addressing these challenges. The various reports note the need
for complementary policies to promote upgrading, but these receive rel-
atively little attention in comparison with the emphasis on trade liberal-
ization and facilitation.

GVCS AND POLICIES FOR UPGRADING


Let us first consider trade policies. The emphasis in recent reports from
MEIs is on the damage that countries can do to their interests in a world

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REVIEW OF INTERNATIONAL POLITICAL EC ONOMY

of GVCs by maintaining protection especially in that the effects of tar-


iffs can be cumulative when goods cross national frontiers on multiple
occasions. In itself, this is a reasonable enough proposition. But there is
little evidence that tariff barriers have been a significant impediment to
the management of supply chains. Even where applied tariffs of a signifi-
cant magnitude exist (and this is an increasingly rare phenomenon),5
countries that have sought to participate in GVCs have introduced
export-processing zones and duty-drawback arrangements that facili-
tated the duty-free import of components.
Moreover, tariffs are not the central focus of contemporary trade nego-
tiations. Once one moves beyond traditional border barriers, what a
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global economy driven by value chains means concretely for trade policy
is not yet clear, to quote the OECD (2013: 88). Some economists are less
reticent in drawing conclusions. Richard Baldwin, who has done much
in the economics community to highlight the contemporary significance
of GVCs, makes the bold assertion that they have rendered the WTO
increasingly irrelevant: the locus of trade policy-making has moved to
regional trade arrangements (RTAs), where the rules necessary for the
smooth operation of supply chains are being written. The new discipline
in RTAs helps developing nations credibly commit to policies that are
good for them (Baldwin, 2012: 20).
Not so fast, however. If the cost of admission to GVCs is signing on to
RTAs with industrialized countries, this may be a high price to pay
(Shadlen, 2005). Power asymmetries come to the fore in RTAs, particu-
larly in bilateral agreements between industrialized and developing
economies. The outcomes of the negotiations reflect these asymmetries: a
substantial number of studies document how developing economies
(and, indeed, smaller industrial economies) have had to make more con-
cessions than their partners to secure agreements (Helleiner, 1996;
Freund, 2003). The largest traders, the US and the European Union (EU),
typically use templates for their preferential trade agreements that afford
partners little scope for negotiation. The provisions of these agreements
may constrain the efforts of developing economy firms to upgrade. Of
particular note are regulations relating to the extension of intellectual
property rights that many economists as well as governments of partner
countries perceive as offering excessive protection to patent holders.
Also of concern are the rules of origin in RTAs that frequently privilege
imports from the partner countries. The most notorious example is the
US yarn-forward rule, which requires that textiles and clothing must be
made from materials sourced from the parties to the agreement. Such
rules may prevent local producers from gaining access to lowest-cost
inputs and impede their competitiveness in third-country markets.
Negotiations on such issues within the framework of RTAs are not neces-
sarily win-win situations. Furthermore, RTAs may or may not be

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RAVE NHILL : GLOB AL VALUE C HA INS AND DEVELOPME NT

co-extensive with value chains this is an empirical question. Until the


noodle bowl of bilateral RTAs is multilateralized, however, it is unlikely
that in East Asia at least (the situation is different in Europe, where the
EU acts as a single entity, and in the Americas), RTAs will be co-extensive
with GVCs.

Institutions for upgrading


Henry Wai-chung Yeung is surely correct in arguing in his contribution
to this special issue that we need to move beyond the state vs. firm
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dichotomy that characterized much of the debate about the developmen-


tal state in Asia (Yeung, 2014). Arguing, however, that the success of Hon
Hai came about even though the government of Taiwan did not promote
the company as a national champion tends to downplay the contributions
to the foundations for success in the electronics industry that the state had
earlier made. To be sure, the role of the state continues to evolve in a world
of GVCs. But effective state intervention can address some of the challenges
posed by upgrading, not least in overcoming collective action problems.
Three areas are of particular note: education, infrastructure and indus-
try-specific institutes. One of the most significant bottlenecks in countries
confronting a middle income trap is shortage of personnel with the req-
uisite technical skills. In Malaysia and Thailand, for instance, technical
institutes and universities still fail to produce enough graduates to meet
the demand for specialized skills in the key areas of local manufacturing
electronics and automotive despite such deficiencies having been the
subject of debate for more than two decades. Good infrastructure is a
defining characteristic of the developing countries that have been most
successful in joining GVCs. The reason why your iPhone is currently
made in China, rather than Indonesia, rests in part on the statistic that it
takes nearly twice as long to ship a container from a factory in Indonesia
to the US West Coast than it does for one from China. Industry-specific
institutes may play an important role in undertaking basic research that
benefits various firms across an industry, and/or providing facilities,
such as testing for safety, compliance with international standards, etc.,
that are crucial for bringing products to international markets. In our
study of the auto industry in East Asia (Doner et al., forthcoming 2014),
we found that the countries that had most successfully promoted
upgrading (China, Korea and Taiwan) were the ones that had well-
resourced auto industry research institutes. In contrast, in Indonesia,
Malaysia, Philippines and Thailand, such institutes were entirely lacking
or poorly resourced.
As Doner (2009) demonstrates in his discussion of development across
several sectors in Thailand, different levels of development require

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REVIEW OF INTERNATIONAL POLITICAL EC ONOMY

goodness of fit between institutional capacity and the nature of the tasks
involved. Similarly, the type of institutional capacity required will vary
according to how states seek to engage with GVCs. If the aspiration is
simply, in Baldwins (2012: 20) terminology, to participate in a bargain in
which Ill offshore my factories and technologies if you assure my tangi-
ble and intangible assets are protected, an approach promoting what
Doner et al. (forthcoming 2014) refer to as extensive development, then
the institutional capacity needed, for example, to provide infrastructure,
will be different from that required when a state desires to promote the
upgrading of locally-owned companies.
Extensive development ramping up the scale of production in
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subsidiaries of multinational corporations can bring about increased


exports and manufacturing employment. But such enterprises may
remain an enclave, whose links with the local economy do little to
upgrade the capabilities of domestically-owned firms. This we see as a
weakness of the auto industry in Thailand. Baldwin (2011), on the other
hand, judges the story of the Thai industry to be a great success in con-
trast to the failed strategy of Malaysia in promoting a national champion
in Proton. He argues that this comparison illustrates the wisdom of seek-
ing to join a global supply chain, rather than attempting to build one
domestically. While few commentators would regard Protons unhappy
history as the foundation for a convincing argument about the virtues of
promoting national firms, the story and its implications are rather more
complex than a simple comparison suggests. Proton failed not just
because it received, unlike its counterparts in Korea, unconditional pro-
tection, but also because the government failed to put in place supportive
institutions that would nurture local firms. Consequently, the company
remained excessively dependent on imported technology and capabili-
ties. What parts of the supply chain governments should aspire to con-
struct locally remains an empirical question. In sophisticated
manufacturing industries such as autos, it is inevitable that assemblers
will rely substantially on major global suppliers (as is the case for Chinas
domestic auto companies, such as Geely and Chery). But building a local
brand and the associated industrial deepening that accompanies this
may generate significant gains.
State capacity is also important in other dimensions. Even though
Trade-Related Investment Measures (TRIMs) are formally outlawed,
states still have some opportunity to act as gatekeepers in encouraging
foreign enterprises to share technology, etc., and, more generally, as Lee
et al. (2014) illustrate in their contribution to this special issue, to bargain
about the terms under which these companies enter the local economy.
Of course, this discussion takes us back to issues of relative bargaining
strength and how countries with larger economies and more complemen-
tary local assets are best placed. But, as has long been argued in the

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literature on development, effective bargaining also rests on state capac-


ity, in particular the knowledge that state agencies have about an indus-
trial sector and the capability not just to set performance requirements,
but to monitor compliance with them a contrast often drawn between
Singapore and Malaysia (Felker and Jomo, 2007).
Finally, two other dimensions of state capacity are pertinent to the dis-
cussion of GVCs. Effective competition policies are required if rent-seek-
ing behaviour by large firms is to be discouraged. And, even more
demanding, states need sophisticated policies on monitoring transfer
pricing if they are to constrain firms capacity, discussed in the compan-
ion piece by Seabrooke and Wigan, to manipulate their wealth chains to
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minimize their local tax obligations.

CONCLUSION
In his contribution to this special issue, Gereffi (2014: 19) makes the
persuasive argument that the adoption of the GVC framework by MEIs
has led to the introduction of broader and more heterodox views of
development. The reports referenced in this article certainly attest to a
greater openness on the part of MEIs to perspectives on GVCs that
come from a variety of disciplinary and methodological approaches.
The reports, like all such documents from international agencies, how-
ever, are the products of multiple authors and the emphases in the
individual chapters vary markedly. Most significantly, when it comes to
policy implications, the reports revert to an agenda that departs little
from the Washington Consensus. Trade and investment liberalization
are discussed in detail; the complementary policies required to pro-
mote upgrading receive scant mention. And when it comes to the
actions that the international community might take to promote upgrad-
ing, the reports simply lack imagination and rarely go beyond the aid
for trade facilitation agenda.

NOTES
1 I use this terminology as shorthand simply because global value chains has
become the preferred phraseology of the multilateral economic institutions.
2 To the already impressive list of studies in Appendix A of Neilson (2014) can
be added UNCTADs flagship World Investment Report (UNCTAD, 2013); the
OECDs Interconnected Economies (Organisation for Economic Cooperation and
Development, 2013); and the WTOs Global Value Chains in a Changing World
(Elms and Low, 2013). In addition, the OECD, the WTO and UNCTAD made a
submission to the Group of 20 (G-20) St Petersburg summit on the benefits of
participating in GVCs (OECD, WTO and UNCTAD, 2013). Connecting to
Value Chains was the subject of the WTOs Fourth Global Review of Aid for
Trade in 2013; the WTO jointly commissioned studies with the OECD of how

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aid for trade might be applied to value chains in five sectors: transport and
logistics; information and communication technology; textiles and apparel;
tourism; and agrifood (WTO, 810 July 2013). Meanwhile, in an effort to reduce
the friction arising from bilateral trade imbalances, the WTO and OECD
have jointly developed a database to measure trade in value-added
(http://stats.oecd.org/Index.aspx?DataSetCode TIVA_OECD_WTO). (accessed
23 September 2013).
3 Data from Fortune Global 500 CNN Money (2012 Cable News Network),
http://money.cnn.com/magazines/fortune/global500/2011/full_list/101_
200.html (accessed 14 June 2012).
4 Requiring suppliers to share financial information is now widespread in the
auto industry (Sedgwick, 2013)
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5 The WTO (WTO, 2011: 124) estimated that, in 2008, over 70 per cent of global
trade occurred at an Most Favoured Nation (MFN) tariff of below 5 per cent;
the average tariff rate on manufactures among WTO members in 2010 was 2.6
per cent (OECD, 2013: 89).

NOTES ON CONTRIBUTOR
John Ravenhill is Director of the Balsillie School of International Affairs and Pro-
fessor in the Political Science Department of the University of Waterloo.

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