Professional Documents
Culture Documents
The Global Value Chain Development
The Global Value Chain Development
By (Name)
Course
Professor
University
Date
Global Value Chain 2
Introduction
Since times immemorial the producers are implementing several alterations and new
ideas in the process of production to ensure efficient, low-cost production and thus a higher
margin of profit. The term “value chain” means a business model inclusive of a complete set of
activities that are required for product and service provision. The value chain includes every
process from product development to product distribution in the market. The global value chain
comprises breaking the stages in the production process and scattering them across various firms
and workers in different nations. Lately, many industries all over the globe are embracing GVC
because integrating GVC into their industries' development has been noticed. Countries and
industrial firms that have embraced GVCs have profited greatly since GVCs are driven by cost
efficiencies, technological progress, trade reforms, and access to the resource market. For third-
world countries and developing countries, GVCs have reduced the costs of both imports and
exports by integrating deeply with the global markets (Tardi 2020). The firms connecting to
GVCs aim to perform sophisticated and complex tasks to move up the value chain by use of
sophisticated knowledge and technologies to perform activities that add value more than before.
This paper argues more in favor of upgrading into higher activities in a GVC. This paper focuses
on the automotive industry of various industries around the globe and observes how these firms
Liberalization and globalization have played an active role in erasing borders among countries to
Transnational Corporations (TNCs) which are composed of entities situated in two or more
countries that either share a common owner or these companies can exercise substantial mutual
Global Value Chain 3
control. Ideally, GVCs encourage the countries to open up by removing barriers to foreign trade
and investment much like other cross-border production activities one distinguishing feature is
that the production activities under GVCs are increasingly undertaken by third parties that have
no links to the TNCs (Seric & SiongTong 2019). Fragmentation of production within the GVC
has always been driven by multinational enterprises. One of the characteristics of GVC is the
different firms. Value chains have been used much in this case and they have been used to
analyze international trade in global value chains. There are two ways in which value chains can
Outsourcing comprises value chain activities that are conducted outside the firm whereas
offshoring entails the value chain activities that are conducted outside the home country. There
are two types of GVCs namely, producer-driven and buyer-driven. Although the line
distinguishing these two categories is blurred, producer-driven GVCs lead firms are the
driven GVCs whereas clothing and agriculture are buyer-driven industries where lead firms
The automotive industry is very different from other industries. First and foremost, the industry
has limited lead firms capable of managing supplier co-location at all levels. Secondly, the lack
of robust industry-wide standards and codification schemes can limit the value chain modularity.
The automaking firms can lure suppliers from across the world to set up local engineering
capabilities after setting up their local technical centers (GVCC 2017). Through this, an entire
cluster develops and the firms grow big enough to attract foreign investment and succeed. The
production process of centrally designed vehicles is sliced and scattered to different lucrative
Global Value Chain 4
regions. The integration into the GVC has helped the buyer-supplier relationship in the
automotive industry to reach new horizons. The automotive industry comprises heavy and
models specific parts of production located close to the assembly department to ensure speedy
production and delivery. The light production parts are manufactured in regions with low labor
costs.
The automotive industry is becoming highly integrated with the global markets as the suppliers
are taking over the designer roles. This thus helps automotive firms to set up design centers in
regions that guarantee easy collaboration with customers. Several reasons have influenced
automobile makers to implement GVC. The political challenges within a nation can influence the
establishment of assembly units in other countries with huge markets. Developing countries such
as China and India have low operating costs lure many automotive firms to take advantage of
scale economies (Ray and Miglani 2018). Integration into the GVC helps in the creation of jobs
and the establishment of strong industrial clusters dedicated to a specific aspect like vehicle
GVCs, the local automotive firms in the developing countries get the opportunity to upgrade and
Firms and industries in developing countries benefit from GVC by upgrading to higher-value
activities within the value chain. The small firms in developing countries help the larger players
in the market as they get to explore their specialties and thus learn which specific niche product
category they should focus on. The firms in the middle of the global value chain curve are
engaged in low value-added activities. Middle firms face high price competition due to low
barriers to entry. The firms try to upgrade their position by performing more complex activities
which add more value and thus relocate themselves to areas where competition is less and firms
Global Value Chain 5
receive high firm protection. The firms in the middle of the global value chain curve can upgrade
in four to five ways. First, process upgrading entails increasing the efficiency of the production
process to improve the firm’s productivity. Efficient production is met and ensured by
Secondly, the firms are in a position to upgrade their products to ones with higher values.
Thirdly, the middle firms in the global value chain curve can upgrade their functionality by
entering into a new GVC segment; i.e., from manufacturing to research and development.
Finally, these firms can upgrade by entering into new value chains (Baldwin 2012). During the
upgrading process, there are some challenges that the firms in the middle global value chain
curve can face. To access the benefits of upgrading the firms require more complex and
sophisticated knowledge and technology. Moreover, the firms in the middle of the GVC curve
need to be exposed to a new market to create forward and backward linkages. Unfortunately, it
becomes hard for small and middle chain curve industries in developing countries to meet these
requirements
In developed countries such as China and India upgrading of automotive industries has been
witnessed. In China, the automotive industry has contributed to the massive growth of the
country. For a long time, the automotive industry in China has operated in the middle of the
GVC curve. The industry took investments from firms in the west which took advantage of
China’s cheap factors of production and labor (Ylomaki 2016). The firms were used for the basic
production process and never took part in the design process and other engineering expertise of
the vehicle. Upgrading was necessary for the firms to participate fully in the GVC. Recently the
engineering, and even crucial production process. The rapid movement up the GVC can be
Global Value Chain 6
attributed to the recent economic crisis which encouraged the firms in the Chinese automotive
industry to acquire technological knowledge involving vehicle design and system integration as
these were available at prices lower than ever. Two viewpoints helped the Chinese automotive
industry to upgrade (Ylomaki 2016). These viewpoints are the external linkages (Els) and
internal technological innovation capacity (ITIC). The ITIC considers the internal accumulation
Complex knowledge and technologies help the automotive industry to train the workers with
better equipment and hence ensure better and more efficient high-quality production than before.
The second viewpoint the external linkages of the industries both local and global give it a great
chance to upgrade by exposing the industry to foreign technology through technology transfer
and spillover. The contribution of the two viewpoints to upgrading varies from stage to stage.
Although both the ITICs and Els have played a role in the rising and the dominance of the
Chinese automotive industry currently the role of ITIC is more important. The automotive
industry of China has been exposed to advanced technology for a long time to a point now China
can develop its technology and designs along with creating a strong R&D base to increase its
internal technological innovation capacity. The strong R&D base has enabled China to depend
less on external linkages when it's time to upgrade. The Chinese automotive industry now has
moved up the GVC transforming itself into an industry operating at each stage of the automotive
value chain. Some of the famous automotive Chinese industries include the SAIC motor, BYD,
India is a country with a middle-class population and faces a great demand for vehicles. The high
demand makes it one of the world’s leading producers of vehicles. Automotive industrialization
started way back in 1981 when Suzuki with the domestic company Maruti created Maruti Suzuki
Global Value Chain 7
India Limited (MSIL). Foreign acquisitions by companies such as Tata Motors and Mahindra
gave the country’s automotive industry a new dimension. The unique firm strategies used helped
built the technological capabilities. The industry's integration with GVC resulted in the
establishment of new plants and inflow of FDI from global manufacturers like Hyundai Motor
Company, Honda Motor Company, Suzuki Motor Company, and many others. During this time
India became one of the most important export centers for small vehicles because India had a
low cost of labor and scale economies. Having attained the complex knowledge soon India
started upgrading its’ automotive industry (Sturgeon and Biesebroeck 2011). To ensure process
upgrading, companies like Maruti trained their workers for multiple operations. Training centers
such as Dojo were soon set up to ensure quality and premium supply of labor.
To improve the quality of the vehicles the industries produced, older parts were replaced with
new ones. The production process was also improved by popularizing platform sharing for non-
consumer product parts. To ensure product upgrading the industry kept on innovating to provide
the customers with improved features also the industry worked to abide by the government
enactments. Ideally, functional upgrading was also met through unique designing, marketing,
and new branding strategies. A great example of functional upgrading is the launch of Hyundai’s
Santro which captured a huge market owing to its unique design. Finally, the industrial firms in
India used their pre-acquired experience in their sector to move to a new one. Starting as a
merely closed industry with one foreign firm the Indian automotive industry is among the top 20
leading global automotive industries (Lu et al. 2015). This was possible through its participation
in the GVC and undertaking the step to upgrade itself in every way possible.
Global Value Chain 8
Conclusion
Upgrading into higher-value activities in a global value chain is possible. This has been proven
by the automotive industries of China and India. The automotive industries of these two
countries were weak in the beginning. Once the industries in these countries embraced GVC
remarkable change was noted. The industries in India and China moved from a position in the
middle of the global value chain curve to going above by performing complex high value-added
activities. There are four different ways of upgrading. In a country like China, the automotive
industry focused more on process upgrading India on the other hand used all the four means to
upgrade itself. These developing countries have to face certain challenges while they upgrade
themselves but they have proved to overcome them by reaching great heights. Catering to the
peaking demand of the huge middle-class population the Chinese and Indian automotive industry
has been a huge pillar supporting their respective economies. All the above instances have
proven that firms and industries in developing countries can upgrade and benefit from the global
value chain.
Global Value Chain 9
Reference List
Baldwin, R E 2012, Global Supply Chains: Why They Emerged, Why They Matter and Where
They are Going, viewed 4 May 2021, < https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=2153484>
Chen, Y, Lawell, C Y C L & Wang, Y 2020, ‘The Chinese automobile industry and government
policy’, Research in Transportation Economics, 84, p.100849.
Johnson R C 2018, ‘Measuring Global Value Chains’, Annual Review of Economics, vol. 10, pp.
207-236.
Kaplinsky, R & Morris, M 2001, A Handbook for Value Chain Research, IDRC, Ottawa,
Canada.
Lorentzen, J, & Barnes, J 2004, ‘Learning, Upgrading, and Innovation in the South African
Automotive Industry’, The European Journal of Development Research, vol. 16, no. 3, pp. 465–
498.
Lu, F, Wei, H, Cheng, Y, Chen, S, Ning, L & Mei, X 2015, ‘Exploring and Upgrading of
Chinese
Global Value Chain 10
Automotive Manufacturing Industry in the Global Value Chain: An Empirical Study Based on
Panel Data’, Sustainability, vol. 7, pp. 6189-6211.
OECD 2013, Capturing the benefits of Global Value Chain, viewed 3 May 2021, <
https://www.oecd.org/industry/capturing-the-benefits-of-global-value-chains.htm#:~:text=They
%20can%20provide%20access%20to,building%20a%20complete%20value%20chain.>
pan daily 2020, The 10 Most Valuable Automobile Companies in China in 2020, viewed 4 May
2020, https://pandaily.com/the-10-most-valuable-automobile-companies-in-china-2020/
Pietrobelli, C & Rabelloti, R 2011, ‘Global value chains meet innovation systems: Are these
learning opportunities for developing countries?’, World Development, vol. 39, pp. 1261-1269.
Ray, S & Miglani, S 2018, Upgrading in the Indian automobile sector: The role of lead firms,
viewed 4 May 2021, < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3204258>
Robinson A J 2001, An overview of the South African Automotive Industry, viewed 3 May
2021,
<htts://www.just-auto.com/analysis/an-overview-of-the-south-african-
automotiveindustry_id86764.aspx>
Sampath, G & Vallejo 2018, ‘Trade, Global Value Chains and Upgrading’, The European
Journal of Development Research, vol. 35, no. 3, pp. 481-504.
Seric, A and SiongTong, Y 2019, What are global value chains and why do they matter, viewed
4
May 2021, < https://iap.unido.org/articles/what-are-global-value-chains-and-why-do-
theymatter>
Sturgeon T J & Biesebroeck J V 2011, ‘Global value chains in the automotive industry: an
enhanced role for developing countries?’, International Journal for Technological Learning,
Innovation and Development, vol. 4, no. 1/2/3, pp. 181-205.
Wilkins, S 2021, ‘The political economy of production 1: Global value chains and global
production networks’ Power point slides, BUSM4689, RMIT University, Melbourne
Ylömäki, T 2016, Global value chain upgrading (No. 36), ETLA Working Papers.