Recent decades have seen the emergence of global value chain (GVC) production arrangements in
which firms fine-slice production processes and disperse activities over multiple countries. Most
international trade no longer involves exchanging finished goods but rather intermediate inputs, which
firms increasingly use to produce their own exports. Many firms only concentrate a sliver of the value
chain in their home country, not the production of entire goods. Furthermore, they connect more and
more with foreign value chain partners to make final goods and services. As a result, trade in
intermediate inputs – those goods and services which are used in the production process to produce
other goods or services rather than for final consumption – now accounts for roughly two-thirds of all
international trade.
Firms can connect with foreign value chain partners in two directions to produce goods and services:
upstream and downstream. Upstream, they can import intermediate inputs from their foreign value
chain partners which they then use for the production and export of their own goods. This is called
backward participation in GVCs. Downstream, firms can export intermediate goods to their foreign
value chain partners which in turn use them to make their own exports. Starting with Hummels et al.,
scholars have used the foreign value added share embodied in gross exports as an indicator of a
country’s backward participation in GVCs, since it indicates how heavily a country relies on imported
inputs to produce its exports. To capture a country’s forward participation in GVCs, the TiVA data set
allows a further decomposition of a country’s domestic value added into two subcategories: (1)
domestic value added consumed in the destination country and (2) domestic value added embodied in
foreign countries’ exports. The latter term captures a country’s forward participation in GVCs.
The main actors in GVCs are not countries but firms. One way of illustrating GVC participation is by
looking at the number and share of firms that both import and export. These “GVC” firms account for
only about 15 percent of all trading firms on average , yet they capture almost 80 percent of total trade .
These are the “superstar” firms, many of them multinational, that drive countries’ trade performance.
Foreign investment by these firms is a key driver of GVC participation.
Readings:
Global value chains and the fragmentation of trade policy coalitions
(https://unctad.org/system/files/official-document/diaeia2019d1a2_en.pdf)
World Development Report 2020 Trading for Development in the Age of Global Value Chains
(http://pubdocs.worldbank.org/en/124681548175938170/World-Development-Report-2020-Draft-
Report.pdf)
