The international fragmentation of production in global value chains (GVCs) challenges the way we look at the global economy. It is essential to understand how GVCs work, how they affect economic performance, and what policies help to derive greater benefits from them. This publication sets out the main evidence and policy implications of the OECD's work on GVCs, including trade policy, investment policies, innovation policies, and framework and structural policies that affect how, and to what extent, countries, including emerging and developing economies, can benefit from participation in GVCs.

Today, “what you do” (the activities a firm or country is involved in) matters more for growth and employment than “what you sell” (the final product). Global value chains (GVCs) allow firms and economies to “do” the part of the process they are best at, using intermediate goods and services from elsewhere without having to develop a whole industry. They affect countries’ competitiveness and patterns of trade and investment, offer potential for development in less developed countries, but also imply risks.

Companies increasingly divide up their production processes and locate productive activities in many countries. The resulting global value chains (GVCs) are dramatically changing the nature of economic globalisation. Lower trade and investment barriers, falling transport costs and advances in information and communication technologies have made it easier to fragment the production of goods and services and to offshore certain activities and tasks to other countries. Recent evidence documents the rapid emergence of GVCs, the participation and position of individual countries, and the role played by large and small companies. To fully capture the benefits of GVCs and minimise potential adjustment costs, GVCs call for a rethinking of government policies on economic globalisation.

The increasing international fragmentation of production that has occurred in recent decades has challenged the conventional perception and interpretation of trade. Traditional measures of trade record gross flows of goods and services every time they cross borders. In a world characterised by global value chains (GVCs), this leads to what many describe as “multiple” counting of trade, which may in turn lead to misguided policy measures. The OECD-WTO estimates of trade in value added (TiVA) can better interpret trade in a world of GVCs. The TiVA Database can also act as an impetus for the production of national statistics that better reflect global interdependencies.

This chapter describes the challenges that global value chains (GVCs) present for traditional trade policy and the main trade policy implications of the increased fragmentation of production. It aims to clarify concepts, offer new policy insights, and help policy makers to see new issues that require special attention in a context of global production networks.

International investment is one of the building blocks of global value chains (GVCs). Multinational enterprises continuously shift resources across borders and restructure their activities geographically through international investments and divestments. During the past decades there has been a trend towards a closer focus on core activities in business investment. In addition, governments have become increasingly important actors in international investment in GVCs. These structural changes in international investment have raised a number of (new) policy issues, including the design of appropriate investment policies.

Emerging economies, and the People’s Republic of China in particular, play a growing role in today’s global economy. This is partly due to global value chains (GVCs), which have allowed countries to integrate the global economy faster than in the past. The search for cost savings and cheap labour as well as market size/growth have led companies to relocate large parts of their value chains to emerging markets. The increasing global engagement of emerging economies has contributed to rapid growth in exports, employment and economic growth in these countries. Integration in GVCs is only one, albeit an important, stepping stone for economic development. Given their specialisation in labour-intensive and low-cost activities, emerging and developing countries increasingly seek to move up the value chain.

As companies and countries become embedded in international networks of production the global value chains (GVCs) they create challenge prevailing policy thinking about competitiveness. The growing upstream and downstream interconnections in GVCs increase the interdependence of countries’ competitiveness policies and limit the effectiveness of national policies. Yet there have been calls for “new” industrial policies in many countries, often to support specific industries, in particular manufacturing. Defensive policies to protect domestic industries or firms are increasingly ineffective in a world of GVCs, however, whereas outsourcing and offshoring enhance the export competitiveness of countries by providing access to cheaper, more differentiated, and better quality inputs.

Knowledge-based capital has become a driver of success in global value chains (GVCs). The value created by a GVC is unevenly distributed and depends on the ability of participants to supply sophisticated and hard-to-imitate products and services. Increasingly, such products or services stem from forms of knowledge-based capital such as brands, basic R&D, design and the complex integration of software with organisational structures. Knowledge-based capital also allows companies to shape the architecture of a GVC in order to capture a larger share of the value created. Policy makers in OECD countries and in many emerging economies therefore increasingly focus on investments in knowledge-based capital so as to upgrade to higher-value segments of GVCs and improve their position in the value chain.

Globalisation has made it easier for local risks to become global risks. Global value chains (GVCs) have recently acted as important channels of contagion, because of their global network character. Local demand and supply shocks that start in one part of the global economy can spread rapidly to the entire world. Global disruptions such as the 2008 financial crisis and the 2011 Japanese earthquake have brought the potential global systemic risks to the attention of policy makers. While firms are the first in line to manage the risks of GVCs, governments also have an important role, since disruptions in GVCs can have major political, economic and security implications for national economies. A multi-stakeholder approach on an international scale will increase the speed and effectiveness of pre-disruption planning and of post-disruption responses.