Driven by multinationals in the pursuit of increased efficiency, international production is increasingly organised within global value chains (GVCs) in which the production process spans several countries. The emergence of GVCs has challenged the traditional view of world trade and has required the European Union to adapt its trade and development policies, to ensure that they effectively address all of the interplaying issues in a world economy in which production has become increasingly fragmented internationally, while at the same time being tightly linked in global value chains.
So, what does this mean for development cooperation?
The contribution of GCVs to a country's economic development can potentially be very significant. The link between economic growth and poverty reduction is partly determined by Competitiveness, and integration into GVCs is an increasingly important factor when evaluating the competitiveness of a country's economy. What’s more, there is a positive correlation between participation in GVCs and per capita GDP growth rates. GVCs have a direct economic impact on jobs and income, and can be an important way for developing countries to build productive capacity, including as a result of technology dissemination and skill building.
GVCs can provide developing countries with an opportunity to integrate more easily into the global economy and, at later stages of development, upgrading to higher value-added tasks in GVCs can help to drive the development process. However, it can be a huge challenge for firms in developing countries to upgrade in GVCs, as more advanced economies try to retain higher-value segments of production. Consequently, this area is a focus for support such as, for example, investment in knowledge-based capital in developing countries.
There are a number of factors that determine an economy's participation in GVCs:
- a favourable business environment and low tariffs;
- openness to foreign direct investment (FDI);
- quality of infrastructure and institutions;
- market size;
- level of development;
- level of protection of Intellectual Property Rights;
- the Technical Standards in place;
- industrial structure;
- geographical location.
EU support in the areas of Trade Facilitation and Aid for Trade in general address some of these issues and can help overcome obstacles to GVC integration. Inclusion in Regional Trade Agreements can also facilitate developing countries’ engagement in GVCs.