The Emergence of Global Value Chains: What Do They Mean for Business?

 

‌Remarks by Angel Gurría, OECD Secretary-General at the G20 Trade and Investment Promotion Summit

Mexico City, Monday, 5 November 2012

(As prepared for delivery)

Ladies and Gentlemen,

We all know that an open trading and investment system is vital for prosperity. Trade and investment allows countries to increase productivity, and fuel competition, innovation and economies of scale. As a consequence of its liberalisation, consumers have enjoyed lower prices and increased choice, while competitive producers have gained access to better inputs and larger markets.

The changing landscape of international trade and investment

Since the late nineties, international trade and investment have undergone accelerated changes with the emergence of global value chains (GVCs), which have had important consequences for enterprises and governments, as well as a bearing on the activities of trade and investment promotion agencies.

Enterprises now locate different stages and activities across the globe. The process of research and development, design, assembly, production of parts, marketing and branding are no longer concentrated in one location, but are instead increasingly located across different countries.

These GVCs help explain why China has become the largest manufacturer in the world over the past decade.  Factories in Asia are growing rapidly with China in particular importing parts and components – mainly from East Asia, but also from other countries across the globe for assembly into final products.

But Asia is not the only part of the world where GVCs are growing in importance. Mexico, for instance, has also become an important location for final assembly. In the electronics and automotive industries, parts and components are imported mainly from the United States and assembled into final products which are then exported back to the United States. As a consequence, Mexico’s exports and imports have increased by more than 700% between 1990 and 2010, reaching almost USD 700 billion in 2011. Costa Rica is another country in Latin America that has become integrated in GVCs, and other economies around the world are following suit.

Global Value Chains: Opportunities, Risks and Responsibilities for Enterprises

GVCs offer opportunities for enterprises to enhance efficiency and source inputs globally, investing in specific activities where the location factors are optimal for profit. Typically, labour-intensive activities such as assembly are offshored to countries characterized by skilled but comparatively cheap labour (e.g. China and Mexico).  Conversely, activities such as research will often be located in countries with strong universities and a large pool of scientists and engineers.

While international sourcing can bring increased efficiency and productivity, it also entails risks. GVCs can break down as we saw recently with the Great Eastern Japan earthquake or the floods in Thailand. Confronted with such disruptions, some enterprises have started to change strategies by diversifying their suppliers, developing alternative supply chains and bringing some production closer to home.

In many cases, GVCs are developed by multinational enterprises (MNEs) through international investment, which can bring additional benefits to the countries where they are located. However, this process of international investment also brings responsibilities. The OECD Guidelines for Multinational Enterprises make recommendations on responsible participation of MNEs in value chains by addressing such issues as respect of labour and human rights, protection of the environment and the fight against corruption. Forty-four OECD and non-OECD countries have adhered to these Guidelines and put in place mechanisms to promote their observance.

Implications of Global Value Chains for Trade and Investment Promotion Agencies

GVCs have also implications for trade and investment promotion. The scope of trade promotion initiatives, for example, is no longer limited to exports, but includes more than ever before, imports. Investment promotion policies will also have to take into account the new reality of GVCs: attracting foreign investors is more and more focused on specific activities like distribution, production, research and development and location, rather than on whole industries or sectors. And just as trade is about exports and imports, so is international investment about inward and outward investment. For many MNEs, investment abroad, including the establishment of affiliates, is critical to ensure the survival of the remaining activities at home.

Policy implications of Global Value Chains: The role of governments in creating a conducive policy environment

GVCs not only have an impact on the strategies of firms, but also have far-reaching policy implications. Governments have a key role to play in establishing a policy environment that will enable firms to make the most of the opportunities associated with GVCs.

First of all, GVCs encourage us to have a more ambitious trade and investment agenda. Success in international markets now depends as much on the capacity to import efficient inputs as on the capacity to export. Export performance suffers when countries levy tariffs on imported intermediates or restrict access to imports. This illustrates again the self-defeating force of protectionism. More open markets, not protectionist policies, are essential to create jobs.  And this is not just about open trade for manufacturing goods. Services are part and parcel of global value chains; in fact, the value added by business services in a value chain is often larger than that provided by manufacturers.

GVCs should also encourage us to think about a host of other and complementary policies that will require adjustment in the interconnected world we live in today. We need to consider how economies and citizens can better benefit from this new period of economic globalisation.

While Mexico’s exports have skyrocketed since its integration in GVCs, much of that growth has been driven by products with high import content that generate relatively little value added or jobs in Mexico. Enhancing the benefits of value chains for domestic economies will require effective policies to strengthen innovation, enhance skills, upgrade the capabilities of domestic suppliers and down the line climb up these value-chains.

Many governments are taking action to help small and medium enterprises (SMEs) benefit from value chains by promoting their capacity to innovate, raising awareness of the opportunities associated with value chains or facilitating the adoption of product standards. They should equally provide incentives for large MNEs to partner with SMEs so as to facilitate latter’s integration in GVCs.

Understanding and reaping the benefits of Global Value Chains: The OECD’s contribution

To help governments implement well-informed policies, the OECD is at the forefront of developing new and better data on GVCs and analysing their policy implications.

It is clear that some of our conventional wisdom on economic globalisation has become outdated. For example, we can no longer base policy analysis and decisions on conventional trade statistics that report the gross value of products and services each time they cross borders, irrespective of whether they are used as intermediate inputs or final outputs. I already made this point at the first G20 meeting of Trade ministers in Puerto Vallarta last April. To further our committment on this issue, the OECD is working, together with the WTO, on producing new measures of international trade expressed in value added terms.  The first results of this work will be launched in December 2012.

While we have made progress, we have much more to do. Stay assured that the OECD will continue to contribute to the global dialogue, and we look forward to working with all of you.

Thank you.

For more information on Global Value Chains, read more here.