What is Global Value Chain (GVC)?

A global value chain (GVC) refers to a series of stages involved in the production and sale of products and services that add value to products, of which at least two stages are completed in different countries. According to this definition, a country, sector or company is involved in a GVC if it is involved in (at least) one phase of the GVC.

The Global Value Chain (GVC) can be understood as a globalized production-business chain, in which the key players in each stage of the chain are the Enterprises in different countries participate in the value chain in different stages such as product research and development, input material supply, product design, production, and distribution.

Global value chain classification

a. Producer driven global value chain

In the global value chain dominated by producers, large and prestigious corporations and companies such as TNCs and MNCs play a key role in connecting and coordinating all activities in the production network (including both upstream and downstream development).

The outstanding feature of a value chain dominated by producers is its extensive production network (with many factories, many branches in many countries around the world), a network of distributors and retailers. , a diversified market researcher, spreading beyond a single country.

b. Buyer driven global value chain

The common feature of the buyer-dominated value chain model is that the manufacturers do not have a factory, the products and materials they create are designs.

In the buyer-driven value chain, designers, retailers, and market researchers play an important role as strategists creating linkages, relationships with manufacturers, merchants and factories around the world to produce the products they need and then distribute those products to consumers.

Conditions for the formation and development of global value chains

The scientific and technological revolutions, the liberalization of investment and trade, the integration of the international economy and the production spreading globally are the trends of multinational and transnational companies. are the necessary conditions to lead to the explosion of the global value chain, turning the global value chain model into a typical structure of the world economy in the context of globalization.

Besides, it must also be mentioned that the advantages of enterprises have special comparative advantages compared to other competitors. There, businesses have two types of privileges (advantages), which can be mentioned as:

Intrinsic privileges created by companies: These include factors of technology, factors of high-quality labour, factors of organizational structure, production, and outstanding product characteristics.

External privileges acquired on a natural basis either by a group of companies, or by an external partner of the company: Includes geographic location, rights and access to natural resources policies are favourable to the multinationals themselves, transnationals from the countries receiving the investment.

What are the different links in the global value chain?

The global value chain can be divided into three major links:

1. The upstream technical link. Including research and development, creative design, technology, technical training etc…

2. The production link in the middle reaches. Including procurement, system production, terminal processing, testing, quality control, packaging and inventory management.

3. Downstream marketing links. Including sales logistics, wholesale and retail, brand promotion and after-sales service etc..

Since these links or activities are essentially value creation processes, their orderly succession relationship can also be expressed in the form of a value chain.

Different links in the value chain create different added value, such as R&D, design, marketing, branding, etc., which create higher added value in the value chain. A country’s competitive advantage is not only reflected in a specific industry or a specific product, but also in each link or process in the value chain of the same industry and the same product.

Multinational companies are the protagonists of the division of labour in the global value chain. In order to gain a competitive advantage, multinational companies start from global strategies and distribute product design, production, assembly and sales in different countries and regions according to the characteristics of different regions. Optimize the configuration of various elements, establish a global production and sales network, so as to maximize profits.

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In the global value chain system, although those involved in the creation of product value and its profit distribution are no longer a matter within one or several countries, but have begun to become a global phenomenon, their status in the process of value creation is very different, there are leaders who dominate the process of value creation and distribution, and there are participants who obey the value arrangement and distribution. There is an obvious hierarchical relationship between them.

The formation of global value chains is the product of the further deepening of the division of labour, and the degree of its formation depends on the comparison between marginal costs and marginal benefits in the process of fragmentation of value links and spatial restructuring.

Technological progress and institutional changes have an important impact on the shift of its marginal cost curve; comparative advantage, economies of scale and specialization are the sources that affect the shift of its marginal revenue curve.

The movement of the marginal cost curve and the marginal revenue curve jointly determines the degree of fragmentation and spatial reorganization of value links, that is, the degree of formation of the global value chain. In the contemporary world economic system, global value chains have become more centralized, and global value chains are usually concentrated in a few countries, especially those with huge domestic markets and strong supplier bases.

As emerging economies develop, there are opportunities for some local suppliers to play a larger role in global value chains. But in reality, not all companies have such competitiveness, and opportunities and risks in the global value chain system are interdependent.

GVC participation is an important indicator

GVC participation is an important indicator used to study the value-added by products in global trade. GVC participation measures the proportion of a country’s exports that flow through the border between the two countries and is calculated as the proportion of GVC exports to total global exports, where GVC exports include both the value of imports contained in a country’s exports (GVC backward participation), but also the value of the country’s exports that is ultimately used for export by the importing country (GVC forward participation).

Data on GVC engagement over the past three decades describe the evolution of global trade and the role GVCs have played in these changes, and data on GVC expansion across regions, countries, and sectors can better illustrate GVC development and change.

What is Global Value Chain (GVC)?