Value Chain Governance and local innovations.

This paper `The influence of value‐chain governance on innovation performance: A study of Italian suppliers Emanuele Brancati, Carlo Pietrobelli and Caio Torres Mazzi' explores how value-chain governance affects the innovation performance of suppliers of intermediate products.

When the complexity of the relationship becomes too high, GVC linkages tend to depart from arms-length market transactions and firms have to rely on coordination mechanisms other than the mere setting of prices and quantities traditionally studied in economics. In ‘relational’ value chains, for example, complex transactions are managed through a high level of explicit coordination between buyers and suppliers, which tends to involve more enduring relationships and important exchanges of tacit knowledge across firms. On the other hand, companies in ‘modular’ value chains rely on technical standards and codification to exchange complex information, which provides them with higher flexibility and reduces switching costs, as well as the level of explicit coordination needed between buyers and suppliers.

They conclude that supplying intermediates is associated more strongly with innovativeness when the governance of the value chain is similar to a modular governance. 

INDIA BETTING BIG ON PRODUCTION INCENTIVES TO ATTRACT GLOBAL VALUE CHAIN- Part 1

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)