Global Value Chains

Happy New Year to our listeners. This is the first episode of the year, and I had a conversation with Oliver Harman about global value chains (GVCs), foreign direct investment (FDI), and regional governance in economic development. Oliver and I discussed how GVCs have evolved, the crucial role of multinational enterprises in knowledge transfer, and why regional governments—rather than national ones—are often better positioned to shape policies that maximize benefits from global trade. The conversation highlights the importance of GVC-sensitive policies, investment promotion agencies, and upgrading strategies to help economies move up the value chain and develop their economy. Oliver Harman is an economist. He specialises in spatial economics and economic geography. He is a Senior Policy Economist for the International Growth Centre at the London School of Economics and Political Science. He is also a Research Associate at the Blavatnik School of Government, University of Oxford. His book with Ricardo Crescenzi, which was the subject of this podcast, can be found here.

Transcript

Introduction

Tobi:Welcome, Oliver, to Ideas Untrapped Podcast. It's wonderful to have you here. I have to say that your work, along with Riccardo Crescenzi, is one of the most refreshing things I've read in the last couple of years on global value chains. It's a wonderful book. I'll put up links to how people can access it in the show notes, and I think everyone should read it.

I want to start with the basics. The phrase global value chain is frequently used in economic discourse, particularly in discussions about geopolitics. But what exactly are global value chains? How would you describe them?

What are Global Value Chains?

Oliver:Thank you for having me, Tobi, and for your kind words on the book—it is much appreciated. I can provide you with an open-access overview of the book for your listeners who may not be ready to purchase the e-book but want a taste of its content.

To answer your question, global value chains (GVCs) have gained prominence academically since the 2000s. Before then, there was little academic literature on them, and even less in policy discussions. This book emerged from that gap.

A useful way to conceptualize GVCs is through an evolution of economic thought. Traditionally, economists described trade in terms of final goods—like the classic example of England producing cloth and France producing wine, and then trading them. GVCs, however, break down final goods into intermediate parts.

Take the bicycle as an example. Many think of it as a single product, but a Canadian photographer once disassembled one and found 571 intermediate components, all researched, designed, produced, packaged, and marketed in different regions across the world. The same applies to more complex products like smartphones, where an iPhone or Samsung device contains thousands of parts sourced globally.

GVCs have completely reshaped how we think about trade—moving beyond final goods to the intricate networks of intermediate goods and services that contribute to production.

Evolution of Global Value Chains

Tobi:How have global value chains evolved over time? What key events have shaped their trajectory over the past 20 to 30 years?

Oliver:That’s a great question. GVCs have gone through different stages of transformation.

* 1990s-2000s Boom: Trade became more fragmented, and participation in GVCs surged. Nearly every industry saw increased participation, with 40-50% of trade occurring through GVCs.

* Post-2008 Financial Crisis: GVC expansion plateaued. The crisis led to economic restructuring, stabilizing GVC participation at previous levels.

* Recent Trends (COVID-19 and Beyond): The pandemic disrupted global supply chains, causing temporary shocks. While GVCs held steady, they are now evolving in response to technological advancements and geopolitical changes.

This makes it more critical for economies to find the right GVC for their development, rather than just benefiting from an overall expansion of trade.

Multinational Enterprises and Governance in GVCs

Tobi:Your book highlights three key aspects of GVCs:

* Multinational Enterprises (MNEs)

* Foreign Direct Investment (FDI)

* Regional Governance

As a Nigerian, I’m particularly interested in MNEs. We've seen many multinationals exit the country in the past six or seven years. Some policymakers argue that local investors can replace them, so it's not a big deal. But can you elaborate on the governance role that MNEs play in GVCs?

Oliver:Absolutely. Multinationals are the governing arm of GVCs. They control and structure value chains by determining how production and trade flow across different regions.

For regional policymakers, engaging with MNEs is crucial. They are at the frontier of technology and knowledge, and when properly integrated, they can transfer expertise to local firms. This is particularly important for emerging economies—it allows them to leapfrog to higher-value production.

However, MNEs can also be extractive if not managed properly. So, it’s important for governments to structure policies that maximize benefits while minimizing exploitative practices.

Governance Policies for Maximizing Benefits from GVCs

Tobi:How can governments and policymakers structure governance around MNEs to ensure they enhance local economic growth?

Oliver:We argue for Global Value Chain-Sensitive Policies, which explicitly consider how policies interact with GVCs. Some examples:

* Investment Promotion Agencies (IPAs):

* These agencies attract the right investors suited for the local economy.

* Evidence shows that subnational IPAs (e.g., at the state level) are often more effective than national ones.

* Skills Development Aligned with GVCs:

* Training programs should be customized based on industry needs.

* Example: The Penang Skills Development Centre in Indonesia worked with MNEs to align workforce skills with global industry demands, leading to economic transformation.

Foreign Direct Investment (FDI) and Upgrading in GVCs

Tobi:Some countries like Vietnam, Poland, and Malaysia have effectively used FDI to upgrade their economies. What are the general lessons from their success?

Oliver:The key takeaway is that quality of FDI matters more than quantity.

* Traditional Thinking: Measure FDI by the sheer amount of money coming in.

* More Effective Thinking: Assess what type of FDI is being attracted.

For example:

* $100 million in basic assembly work adds less value than

* $10 million in high-tech R&D investment, which has long-term benefits.

Upgrading within GVCs involves moving from low-value tasks (e.g., assembling phones) to higher-value tasks (e.g., designing microchips). This is the essence of economic transformation.

Regional Governments and GVC Policy

Tobi:You emphasize regional (subnational) governments as key players in GVC policy. Why focus on regional rather than national governments?

Oliver:There are two reasons:

* Granularity of Data:

* National policies aggregate data, ignoring local variations.

* For instance, a port city has different needs from an inland capital city.

* Local Expertise:

* The people of Lagos understand their economic strengths better than the national government in Abuja.

Empowering subnational governments allows for more tailored, effective policies.

Challenges in GVC Data Collection

Tobi:How can regional governments access reliable data to guide policy?

Oliver:Data is crucial but often lacking in emerging markets. Solutions include:

* GVC Mapping Exercises: Identify key industries and their global connections.

* Global Datasets:

* Inter-Country Input-Output Tables

* OECD’s Trade in Value Added (TiVA) database

* Firm-to-firm transaction data

Final Question: One Idea Worth Spreading

Tobi:What is one idea you’d like to see widely adopted?

Oliver:The value of global trade and specialization.

Many policymakers today are pushing for economic nationalism—wanting everything made domestically. But different regions have comparative advantages, and trade creates mutual benefits.

We must resist mercantilist policies and embrace efficient global cooperation.

Closing Remarks

Tobi:That’s a fantastic idea. Hopefully, we move past the current mercantilist mindset. Thank you, Oliver, for being on Ideas Untrapped.

Oliver:Thank you, Tobi. I appreciate the opportunity to discuss these ideas with you and your listeners