Global Value Chain | What is GVC?

What is Global Value Chain?

Global Value Chain is the organizational structure created by spreading the production processes to various countries in order to provide sustainable competitive advantage. 

How does the GVC process work?

Businesses in developed countries that have strong currency, have relatively higher operating and employment costs compared to businesses in underdeveloped and developing countries. Besides, imported inputs also create an additional cost if they are far from raw materials they need in their production. In order to optimize these costs, companies tend to turn to a global formation and reshape their organizations in line with their needs. 

The first option is that; through diligent study, calculations and planning, if it’s found necessary, the production and/or assembly facility is moved to another country which is cheaper in terms of labour, production and proximity to resources. 

As a second option; the production strategy is changed. Instead of manufacturing all the parts in-house or procuring in the home country, they are mostly imported from other countries at cheaper prices. A close cooperation with the manufacturers who will contribute to the company by supplying parts in this new production scheme provides many benefits both to the manufacturer and to the country.

The images show us how bicycle and aircraft brands are integrated into the global value chain.

Impacts of the Global Value Chain on cheap markets

With the development of technology, logistics, information and communication technologies and the world becoming more global, GVC has brought developing countries closer to the economic level of developed countries. Free trade, low tariff and non-tariff barriers, low exchange rates, and cheap labor costs contributed to the development of developed economies by shifting their production to these countries. As a result of the achievements of the developing countries, a kind of culture of division of labor has emerged among the companies. However, we should also note that in recent years we have seen a slowdown in the trade and GVC due to Covid-19 related global hindrances, trade wars and global decline of economic welfare.

A division of labor was formed in order to supply raw materials to one country, to manufacture semi-finished products in one country, to produce spare parts in one country, and to do assembly work in another country. As a result of this division of labor; 

  • Production costs have become cheaper
  • Production skills improved
  • Specializations increased

More than one country benefitted;

  • Manufacturers brought foreign currency to their countries, 
  • They contributed to the development of the logistics sector
  • Contributed to employment
  • Contributed to the development of regions

On the other hand;

When we look at the development of GVC to date; we have seen that these countries, which earn foreign exchange inflow, did not care about humane working conditions and occupational health and safety as they should have, nor did they pay due attention to the environment. After they acquired capabilities, they did not respect the patents and intellectual property of original products. After enjoying the taste of making money, a more brutal work culture prevailed. Governments did not give this welfare to the people; instead, they preferred the policy of further growth, more production, more work, and did not improve the living conditions of the people.

In short, the wealth and growth created by the global value chain brought along the exploitation of natural resources, the environment and workers.

The effect of the global crisis on the positive conditions created by GVC

Just as technology contributed to development in developing and underdeveloped countries before 2008, the same technology works against these countries today. Capitalism, by its nature, demands lower costs and more profit, and it does not think about the ethical part of it. For example, automation systems strip many workers of their jobs. Digitization and other tremendous advances in technology have increased the demand and population of highly skilled people while reducing the demand for people in ordinary jobs. 

On the other hand, while developed countries defended free trade and underdeveloped countries defended conservative economic policies before, the opposite is happening today. Developed countries are now following more protectionist policies. This puts underdeveloped countries whose economies depend on exports to a difficult situation. On top of that, with the pandemic we are going through, the introversion accelerated even more.

Considering the trade wars and the container crisis, I can say that companies that would make foreign direct investments suspended their investment plans until the uncertainty disappeared. They have even turned their investments inwards, which are supported by their governments.

Will GVC Continue to Grow?

The global value chain will continue to expand in the world if technological advances continue rapidly and the trade policies of developed countries are regulated in a way that is predictable, transparent and in the interest of developing countries.

Moreover, it will cover more and more countries. It will add capability along with intellectual, cultural and financial richness.

However, in order for this to spread in the desired way, governments should provide support to their companies and companies should make an effort to improve themselves. Otherwise, well-equipped companies will establish their own factories in these countries, benefit from the advantages, enrich themselves without contributing much to the locals and take their earnings back to their own countries. What the poor countries gain will be only a little employment and tax revenue. To prevent this, governments should both have strong relations with each other and strive to be a link of GVC by signing long-term strategic plans with businesses.

It is certain that countries following more protectionist policies will have a negative impact on the development of GVC. Trade wars between countries affect not only themselves but also other countries in some way. In addition, the unpredictability of trade policies hinders the investments to be made in this field. Then we can say: GVC will continue to expand if countries’ trade policies become more balanced and predictable in the long run. Otherwise, uncertainty will prevail in GVC as in all financial areas, and as a result, GVC will likely keep slowing down.