The importance of global value chains

Economic theory suggests that more open countries should grow faster and have higher income levels than less open ones. International trade enables firms to specialise in goods and services that can be most efficiently produced in the home country to sell to larger markets, hence exploiting economies of scale and to benefit from higher quality and variety of inputs as well as technological spillovers and knowledge exchange. Trade also puts pressure on prices for final goods and intermediate inputs and facilitates international fragmentation of production processes, further reducing costs. Firms exposed to international competition ought to innovate continuously in order to succeed.