Letter IEDI n. 897–Global Value Chains and Industrial Development: Lessons from Asian Experiences
The globalization of production and trade, which gave rise to global value chains (GVC), is a distinctive feature of the current world economy. In these chains, the production process is decomposed into several stages located in different parts of the world. There is a relative consensus that participation in GVCs has contributed to the industrial and economic development of various Asian countries. However, evidence is lacking on how integration into global chains has benefited these countries.
In order to fill this gap, the United Nations Industrial Development Organization’s (UNIDO) study "Global Value Chains and Industrial Development: Lessons from China, East Asia and South Asia" maps the geography of GVCs in Asia, identifying the main determinants of the participation and of the successful evolution of China, India and Vietnam into global and regional chains. The study concludes with policy recommendations for emerging countries.
The GVC phenomenon has been strongly associated with the liberalization of trade and investment and the reduction of costs of international trade. According to UNIDO, China's involvement in GVCs, for example, was clearly manifested following the reforms of 1978-9, which included an "open door" policy. The accession to the WTO in 2001 began a new stage that implied an improvement in the insertion of the Chinese companies in GVCs.
For Vietnam, participation in GVCs also became viable only after normalization of trade relations with the US in 1995 and its accession to the WTO in 2007. By contrast, a founding member of the WTO and part of the GATT since 1948, India has been slower to engage in such chains and does not show much signs of evolutionary change in its trade policy.
For UNIDO, however, liberalization and trade facilitation are not enough conditions for integration with GVCs. Several other factors may influence integration prospects, such as basic education and infrastructure levels and a favorable macroeconomic environment, with reasonable price and exchange rate stability.
In other words, to integrate into chains, countries need to do their homework and take actions that improve their production environment, ensuring competitiveness and productivity. These actions, as highlighted by UNIDO, are conditions for development, whether GVC led or not. The simple opening of the economy is not enough.
The authors of the paper acknowledge that a pre-existing competitive industrial sector may be an important requirement for participation in GVCs, although integration with the chains also improves industrial competitiveness through technology transfers and other types of learning
The paper finds that incentives for foreign direct investment (FDI) and the creation of special economic zones could lead to more rapid participation in GVCs. However, it emphasizes that multinational corporations’ investment decisions depend much more on factors such as good physical and institutional infrastructure, and cheap and skilled labor than necessarily on FDI attraction policies.
In addition, the evidence suggests that policymakers can not assume that participation in GVCs will automatically bring about a positive structural change. The result depends on the country-specific position within the GVC and within the product quality spectrum. The benefits are greater when countries participate in the high-quality exporting segment. Thus, opening up is not enough to integrate, nor is integration sufficient to advance in economic development.
According to UNIDO, a number of policy instruments can be used to support virtuous integration with GVCs. Among them, FDI attraction as well as the creation of domestic companies that can become suppliers both for subsidiaries located in the country and for exports.
The study also highlights the importance of developing countries' policymakers not to consider participation or modernization within GVCs as targets to be achieved at any cost. A balanced assessment should weigh the advantages and disadvantages. For instance, leading companies may be tempted to attract countries with weaker environmental standards to GVCs as suppliers of pollution-intensive activities. Such results may contribute to growth and industrial employment, at the cost of leaving host countries even further away from achieving important sustainable development goals.