Global value chains

Economia e gestione delle imprese

Corso avanzato

a.a. 2017/2018

Prof. Alberto Pezzi

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Global value chain

• Today’s global economy is characterized by global value chains

(GVCs), in which intermediate goods and services are traded in

fragmented and internationally dispersed production processes.

• GVCs are typically coordinated by Transnational companies (TNCs),

with cross-border trade of inputs and outputs taking place within their

networks of affiliates, contractual partners and arm’s-length suppliers.

• TNC-coordinated GVCs account for some 80 per cent of global trade.

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Global value chain (2)

• GVCs lead to a significant amount of double counting in global trade.

• Raw material extracted in one country may be exported first to an

affiliate in a second country for processing, then exported again to a

manufacturing plant in a third country, which may then export the

manufactured product to a fourth for final consumption.

• The value of the raw material counts only once as a GDP contribution

in the original country but is counted several times in world exports

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Global value chain (3)

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Most common indicators

• Foreign value added (foreign value added as a share of exports) indicates

what part of a country’s gross exports consists of inputs that have been

produced in other countries. It is the share of the country’s exports that is

not adding to its GDP,

• Domestic value added is the part of exports created in-country, i.e. the

part of exports that contributes to GDP. As a share of GDP, it measures

the extent to which trade contributes to the GDP of a country.

• The sum of foreign and domestic value added equates to gross exports.

• GVC participation indicates the share of a country’s exports that is part

of a multi-stage trade process, by adding to the foreign value added used

in a country’s own exports also the value added supplied to other

countries’ exports.

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Factors that influence the share of domestic

value added in exports

• Size of the economy. Large economies, such as the United States or

Japan, tend to have significant internal value chains and to rely less on

foreign inputs. There are important exceptions, including China,

Germany and the United Kingdom.

• Composition of exports and position in GVCs. Countries that have

significant shares of natural resources, oil or other commodities in their

exports, such as the Russian Federation and Saudi Arabia, tend to have

higher shares of domestic value added trade, as such exports are at the

“beginning” of GVCs and require few foreign inputs.

• Economic structure and export model. Countries with significant

shares of transshipment port trade, such as Hong Kong (China),

Singapore or the Netherlands, will have higher shares of foreign value

added. The same applies for countries with important processing trade

sectors.

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GVC governance and locational determinants

• A significant part of TNCs’ capabilities or assets in today’s GVCs are

related to how they manage, control and coordinate their global

networks.

• Consequently, TNCs design their corporate structures, management

processes, functional services and associated procedures and tools to

govern GVCs with a number of aims in mind:

1. the transmission of goals and requirements related to products,

processes and activities — along with relevant technologies,

skills, technical specifications, etc. – to affiliates, contract

partners and independent firms (for arm’s-length transactions);

2. to maintain and enhance, as much as possible, their power

balance over these same firms;

3. to maximize their appropriation of the total value added in the

GVC.

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GVC governance

• Supply chain management strategy is at the heart of TNC’s coordination of their

GVCs.

• The structures of supply chain strategies vary on the basis of contextual factors e.g.

demand variation, product life-cycles and managerial objectives.

IBM has moved

• Along the way, it has integrated over 30 supply chains into one and focuses particular

attention on areas such as risk management, visibility, cost containment and sustainability.

• This process, supported by ICT-based services has improved coordination, reduced costs and

boosted profitability. Egi ca 2017/2018

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From a structure defined by regional divisions in the 1960s and 1970s (with

product sales in 150 countries),

through a globally integrated firm in the 1980s and 1990s

to one in which “supply chain management analytics” within a network

structure are at the heart of how it operates today.

Boeing Dreamliner 787 GVC

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GVC governance

• Such expansive GVCs, in which TNCs must simultaneously manage

complex, fragmented, geographically dispersed production processes

and flows in trade and investment, have to be organized, orchestrated

and coordinated in line with companies’ strategic objectives

• GVC of Starbuck’s ????

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GVC Starbuck’s

1. based on one service (the sale of coffee),

2. requires the management of a value chain that spans all continents;

3. directly employs 150,000 people;

4. sources coffee from thousands of traders, agents and contract farmers

across the developing world;

5. manufactures coffee in over 30 plants, mostly in alliance with partner

firms, usually close to final market;

6. distributes the coffee to retail outlets through over 50 major central

and regional warehouses and distribution centres;

7. and operates some 17,000 retail stores in over 50 countries across the

globe

• The trade flows involved are immense, including the movement of

agricultural goods, manufactured produce, and technical and

managerial services.

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Locational determinants of GVC

• In addition to deciding how to orchestrate GVC activities, TNCs must

decide where to locate the value added activities (or segments)

comprised in a value chain.

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Locational determinants of GVC

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Locational determinants of GVC

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Locational determinants of GVC

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Development impact of GVCs

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Transfer pricing is the setting of prices for products and services that are traded between related

parties.

Where firms share equity ownership, opportunities exist to maximize joint profits by manipulating

the prices of products moving between them, i.e. through transfer price manipulation.

Development impact of GVCs

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Technology dissemination

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Development impact of GVCs

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