Overview of the global value chain

In the wake of globalisation, international production trade and transactions are interconnected to each other. Therefore the companies take advantage of different geographical locations for economic benefits and hence each stages of production are done in different parts of the country. This is referred to as the global value chain where the production of different stages is carried out in different parts of the world. Now the question is whether this global value chain only impacts the operation of the businesses or does it have an impact on developing countries too. The businesses try to optimise their production by carrying out the production in different countries and hence reduce the cost of operation. The objective of this paper is to discuss the impact of the global value chain on the economies of the developing countries.

The global value chain is the full spectrum of economic activities carried out in different countries of the world to bring goods or services in the market. The GVC is not limited to the production of the goods and the services but it also includes the post production and other services as well. The operation of the GVC is at global level and hence each part of the production process is carried out in different parts of the world (Fukyama, 2018). The concept of global value chain is similar to the concept of supply chain and the only difference is that in supply chain the ownership of the goods or the services changes from one location to the other. The multination businesses work on the supply chain where the goods and the services change the ownership as it moves to the other country of the world.

One of the major examples of global value chain can be seen from the operations of Apple inc. Apple inc. is one of the largest producers of technology products including mobile phones. The production process of Apple Inc is a great example of GVC as different parts of the production of their mobile phone is undertaken in different parts of the world. For example, the production of the microchip takes place in the country of Japan which is known to be one of the largest producers of microchip. The microchip produced here then passed on to China which is the manufacturing hub of the world (Milanovic, 2019). China assembles and produces the body of the phone using the raw materials coming from other parts of the world. Subsequently, the packaging and labelling of the product then takes place in Bangladesh where the products are put into the box and made ready for the market.

Case of global value chain

The current world structure is close to the example of capitalism and hence the main objective of the organisations is to maximise their profit. In each of the stages the objective of the Apple inc management is to earn surplus from the production process. For example, since Japan is the largest manufacturer of microchip, acquiring this product from Japan becomes cheaper since Japan produces this product using economy of scale. In addition to that manufacturing and assembling the product in China also ensures cost cutting for the country (Gereffi et al. 2005). China is one of the largest manufacturing sectors of the world where the labour rate is cheaper than most of the other countries of the world.

One of the major incentives for both the source country and the manufacturing country to participate in the GVC is the upgrading. Each of the countries and the organisations weight in benefits and the cost of participating in the GVC. The organisations have the vision that participating in the GVC will allow them to use cheap resources from around the world. On the other hand, the manufacturing countries has the vision that participating in the GVC will create more jobs for the people of the country and hence the living standard will improve (Johnson, 2018). The countries also encourage participating in the GVC as it creates clustering among the manufacturing units of the country. One of the major pieces of evidence in favour of this statement is the development of the manufacturing sector of China. Since the start of the practices in line with GVC the manufacturing sector of China has developed. Since 1980, the size of the manufacturing sector of China has increased by around 41%.

The theory also suggests that due to the operation of the organisations under GVC, the growth limitations are also abolished that further help the companies operate in distant markets. Due to the participation in the Global Value Chain, China has experienced a huge increase in the orders (Gibbon et al. 2008). Therefore, a clustering has developed in the Chinese economy manufacturing sector. Therefore, different stages of the production are done within close geographical proximity and hence this saves on the cost of transportation. While the company gains from the lower cost of production, the manufacturing sector or any resource supplier around the world gains through the development of the economy and the creation of the jobs.

Despite the exemplary performance of the Chinese economy there are some negative points of the GVC which shows that upgrading in its true sense is not possible. Antràs (2020) states that the development of the manufacturing sector of China is controversial. While the development of the Chinese manufacturing sector has created a lot of jobs for the Chinese people, the quality of the jobs is not up to the mark. While the wage rate is a grave concern the security provided to the workers is also a major concern for the international policymakers. The violation of the human rights is common in the Chinese manufacturing industry and hence raises a great question against the upgrading feature of the GVC.

Upgrading in GVC

According to Timmer et al. (2014) GVC transfers the benefits to the developing countries of the world through value creation and job creation that further results in improvement in the living standard. However, the evidences show something different from the claims of the protagonists of the global value chain. Bangladesh for example has not gained much from the GVC despite increase in the economic activities of the multinational organisations. One of the major reasons for Bangladesh for not gaining from the GVC is the micro business owners in the country. These business owners assign workers to be a part of the global value chain at a wage rate which is even lower than the market wage rate of that country. Since the unemployment rate of the country is already very high many of the workers participate in the process even though the wage rate for the labour is low (Antràs, 2020). Therefore, the gains from the value chain are being enjoyed by the small number of business owners while the living standard of the poor workers remained the same.

From the case of China and Bangladesh we see that upgrading through the process of GVC is a controversial issue. However there has been a few instances where countries have benefited from their participation in the global value chain. One of the major examples for this is the case of Japan. As discussed above, Japan is one of the largest producers of semiconductors and microchips in the world. Japan has gained significantly from the rise of the multinational companies in different parts of the world (Banga, 2013). Due to the increase in the median income of the consumers in the developing countries, the demand for the goods and the services has increased over the years. Apple Inc has also gained from this phenomenon and demand for the phones has increased significantly in different parts of the world. Therefore, the size of the production has increased and hence demand for the semiconductors has increased as well. In addition to that, another country that has gained significantly from process of GVC is Taiwan. Taiwan manufactures different parts of the semiconductors and is an important player in the value chain of the mobile phone industry. Taiwan has seen a huge development in the semiconductor manufacturing industry of the country along with the wage of the workers (Nadvi, 2020). The wage of the workers in the country is high compared to the other neighbouring countries. The median wage of the country has increased 37% since the 2005. The infrastructure has improved over the years and the market has grown since then as well.

Argument against the upgrading feature of GVC

Therefore, there are some factors which plays its role in determining the successful upgrading in the process of global value chain. There are some countries which are doing better under the GVC and some of the countries are not doing good under GVC. One of the major factors that is political willingness of the government (Kano et al. 2020). The role of the government in Taiwan and Bangladesh has been a lot different over the years. The government of Bangladesh did not put in place mandatory regulations for the working conditions of the labours working in the packaging department. In many of the cases it has been reported that workers are made to work more than 12 hours a day at a meagre wage of $6 a day. Therefore, these workers fail to make changes in the living standards and hence there are no positive impact of the global value chain. Furthermore, the tax rates on the manufacturing sectors in Bangladesh is very high at 30% (Johnson, 2018). Therefore, a significant amount of the gains is transferred to the government of the country. That would have been okay if the government had the right political vision to further invest the money in the country. However, the level of corruption is very high in the country and hence the general people does not get the benefits in any way.

However, on the other hand Taiwan shows and example of good governance form the side of the authority where labour rights are implemented. There are minimum wages set by the government and hence working condition needs to be as per the regulation. Therefore, the wages and the working conditions are good for the workers in Taiwan and hence the gains from participating in GVC is huge. In addition to that the willingness of the government is also better as the corruption index of the country is lower. Therefore, the gains are easily divided among the people of the country and hence the people are benefited from the GVC. The education is another factor that plays a role in gaining advantage from the process of GVC. The level of education is better in case of Taiwan compared to Bangladesh and hence workers in Taiwan are aware about the working rights and hence has more bargaining power in case of wage setting (Antràs, 2020). On the other hand, most of the workers in Bangladesh are illiterate and hence they are mostly exploited by the business owners and hence does not get their share of benefits from the GVC.

Conclusion

Therefore, global value chain is a process where businesses carry out their operations in different parts of the world in line with the vision of profit maximisation. The businesses look to maximise their gains using the low resource prices in all parts of the world. However, the main question of the essay was whether the impacts of the GVC are transferred to the developing countries of the world. The paper shows that most of the developing countries of the world supply resources in the current structure of global value chain. However, there are some of the countries which has significantly got benefited due to the GVC while some of the countries has failed to do so. The paper also discusses the factors and the differences between a country has experienced the upgrade and a country that has not been able to experience the upgrade. The study concludes that it is possible to transfer the benefits to the developing countries however there are some of the factors which needs to be present and taken care of by the government in order to be able to gain from the global value chain.

References

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Johnson, R.C., 2018. Measuring global value chains. Annual Review of Economics, 10, pp.207-236.

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