Global value chains (GVCs)

Global value chains refer to a method by which an industrial production project may be fragmented and divided between multiple countries or regions. It is essentially a modern, global-scaled version of the traditional concept of division of labor. A global value chain might, for instance, use natural resources from one country and components from a second country, use labor in a third country for assembly, and test and distribute goods in a fourth country. Many experts believe this process, when done responsibly, may create new economic opportunities for many workers, particularly those in developing countries.

Brief History

The idea of global value chains is relatively modern, since it relies on the globalization of industries and economies that only became possible due to technological and communication innovations of the twentieth and twenty-first centuries. However, the roots of the idea may be traced back much further, even to the earliest days of economic theorizing.

Hundreds of years ago, most products were very simple compared to those of modern times. One specialist or a few specialists working together in a certain area could create most goods valued in an economy. For example, through various related labors, a farmer could produce a bundle of wheat. A blacksmith could perform all the tasks involved in crafting a horseshoe out of a bar of iron. There was little call for bigger companies or more complex goods.

Over time, manufacturing became more complex and widespread. Many goods became more complicated in form and design. At the same time, consumers began demanding more and better goods, and companies began competing with one another for a strong standing in their market. Scottish economist Adam Smith and others developed theories about new ways for workers and companies to produce more and better goods at a faster pace and a lower cost.

Smith demonstrated some of his theories with the very specific example of pin production. In his ground-breaking 1776 book The Wealth of Nations, Smith described a pin factory that employed ten workers. Using traditional methods, with each worker performing every task related to the manufacturing of pins, each worker could make between one and twenty pins per day. That means that the total daily production of the factory, operating in a traditional fashion, was unlikely to exceed two hundred pins each day. Smith went on to describe an entirely new approach that he called the division of labor. In this system, each of the ten workers would be assigned one limited step in the pin-production process. For example, one worker might only cut wire into the needed lengths, while another worker might only grind points onto the cut wires, and so on. Since each worker only needs to perform one task, production tends to go much faster. Smith predicted that, using division of labor, the pin factory that once could create no more than two hundred pins per day would be capable of producing some forty-eight thousand pins per day—an extraordinary increase in productivity.

Overview

Global value chains may be seen as the modern version of the division of labor expanded to the global scale. In the twenty-first century, industries are far different than they were decades and centuries earlier. Many goods are highly complex and require specialized skills, machines, and materials to produce. Yet consumers still demand large selections of goods and affordable prices, and companies still face constant pressure from competitors in their marketplaces.

Using global value chains means fragmenting a particular production project over multiple countries or regions. Many goods produced in modern times through these systems may bring together parts made in various countries or require production tasks undertaken by workers in different countries. A product might require resources and components from one place, be partially assembled in a second place, have the assembly finalized in a third place, be tested and packaged in a fourth place, and be sold in a fifth place. At each of these steps in the process, companies and their workers are adding value to what will become the finished product.

Many economic experts believe that global value chains offer significant benefits to the globalized economy and consumers around the world. One reason is that workers and leaders in different areas can use and share their knowledge, skills, and resources. That means the final product has been put together with the combination of many people in many areas of expertise, theoretically making that product as high-quality as possible. Global value chains also increase employment at all stages of a project: making plans, designing new goods, gathering resources, processing materials, assembling products, testing products, marketing and packaging products, and distributing products.

The effectiveness of a global value chain depends on the people who plan and organize it, who must ensure that the product is gaining the biggest benefit at each stage. A good global value chain also benefits all the people involved. Many international organizations see these chains as ways for people in developing countries to become a crucial part of worldwide supply networks. This not only brings new jobs and more money into a country; it also brings in new ideas, fosters new skills, introduces new technologies, improves a country’s reputation, and promotes international cooperation.

Despite these potential benefits, many people have criticized global value chain plans or pointed out their possible flaws. Likely the most troubling weak point in the concept, and the one most difficult to overcome, is known as the core versus periphery pattern. Generally, this situation occurs when the duties of a global value chain are distributed unevenly: typically, difficult, dangerous, or low-profit tasks tend to fall to workers in developing nations, while companies in developed nations tend to reserve the safer and more profitable tasks for themselves. International organizations warn against such exploitative behavior and help countries plan carefully before getting involved in global value chains. Experts recommend that leaders in developing countries make the most of global value chain opportunities by building strong relationships between government and industry, welcoming outside investments, and boosting their infrastructure (such as by increasing investment in education or training) in ways that would help the effort be successful.

In addition to effectiveness, by the early twenty-first century many organizations had begun to consider ways to make their global value chains more sustainable to support efforts to combat climate change. In the early 2020s, the international company Unilever, which worked with around 52,000 suppliers in more than 150 countries, launched an initiative designed to support and maintain sustainable practices and reduce greenhouse gas emissions throughout their global value chain.

Bibliography

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“Global Value Chains.” World Trade Organization, www.wto.org/english/res‗e/statis‗e/miwi‗e/miwi‗e.htm. Accessed 2 Aug. 2024.

King, Daniel and Scott Lawley. Organizational Behaviour. 4th ed., Oxford UP, 2022.

Raei, Faezeh, et al. “Global Value Chains: What Are the Benefits and Why Do Countries Participate?” International Monetary Fund, 18 Jan. 2019, www.imf.org/en/Publications/WP/Issues/2019/01/18/Global-Value-Chains-What-are-the-Benefits-and-Why-Do-Countries-Participate-46505. Accessed 27 Apr. 2023.

Saladino, Giulia. "Scaling Up Our Climate Collaboration with Our Suppliers." Unilever, 6 Apr. 2023, www.unilever.com/news/news-search/2023/scaling-up-our-climate-collaboration-with-suppliers/. Accessed 2 Aug. 2024.

Seric, Adnan, and Yee Siong Tong. “What are Global Value Chains and Why Do They Matter?” Industrial Analytics Platform, Aug. 2019, iap.unido.org/articles/what-are-global-value-chains-and-why-do-they-matter. Accessed 27 Apr. 2023.