*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])

*The Columbia FDI Perspectives are a forum for public debate. The views
expressed by the authors do not reflect the opinions of CCSI or our
partners and supporters.*

No. 328   April 4, 2022
*The future of global value chains: Key issues*
Roger Strange* <#m_-1925176591472604815__edn1>

The COVID-19 pandemic has heightened concerns about the future of
globalization and the viability of MNEs organizing activities in global
value chains (GVCs). The pandemic’s short-term effects are now well
recognized and involve a combination of supply- and demand-side effects due
to changed consumption patterns and disruptions to GVCs following
restrictions to cross-border movements of many products and people.[1]

However, globalization was already under threat before the pandemic, and
many commentators have referred to “slowbalization” or “deglobalization”.
Four new realities are particularly relevant: the growth of populism and
economic nationalism; greater awareness of climate change and sustainable
development; the deployment of new digital technologies; and changing power
relationships between MNEs and host governments.[2]
<#m_-1925176591472604815__edn3> These new realities pre-date the pandemic,
are ongoing and are likely to outlast it. The pandemic has exacerbated the
effects of these new realities. The key issues are thus whether and how
firms should reconfigure their GVCs, and what policy responses should
governments adopt.

The new landscape has called into question MNEs’ cost-efficiency business
model underlying the offshoring and/or outsourcing key GVC activities.
Should firms reconfigure their GVCs and put more emphasis on robustness and
resilience[3] <#m_-1925176591472604815__edn4> and hence re-shore and/or
back-source (internalize) GVC activities?

The arguments for reshoring are that supply chains are shortened and less
vulnerable to restrictions on cross-border movements of products and
people. But such a strategy foregoes the cost advantages from offshoring
and the risk-reduction benefits from the international diversification of
supplies, whilst re-shored activities may still require essential raw
materials and inputs that can only be sourced from overseas[4]
<#m_-1925176591472604815__edn5>. The arguments for greater internalization
are that supplies are more assured, coordination is improved, and
opportunistic re-contracting is reduced. But back-sourcing foregoes the
benefits of externalization, including firms economizing on their scarce
financial and managerial resources, greater flexibility in response to
volatile output demand and access to cheaper and/or better-quality inputs
from outside suppliers, and the potential to leverage power asymmetries
over GVC partners.[5] <#m_-1925176591472604815__edn6>

In short, it is not obvious that reshoring and/or back-sourcing are
necessarily appropriate strategic responses for MNEs, and their
advisability may well vary across sectors. GVC configurations are often
product-specific and, therefore, over-generalization is risky. For
instance, re-shoring and back-sourcing may be feasible strategic responses
for some basic products, but less so for sophisticated products with more
extensive networks of specialist suppliers.

What policy measures should governments adopt? In the short-term, many
governments have responded to the pandemic by reassessing their reliance on
international trade and investment, tightening their vetting of inward FDI
on grounds of national security and fostering indigenous production
capacity. Such introspective beggar-thy-neighbor policies are mistaken, as
it is as vital to maintain export markets for outputs, as it is to secure
supplies of necessary inputs. This is best achieved if all governments work
together to preserve an open international system.[6]

In the longer-term, all governments will need to learn appropriate lessons
from COVID-19, notably that firms cannot build GVC resilience alone, given
the global and contagious (in both the public health and economic senses)
nature of the pandemic. Governments should engage in concerted public
health initiatives to deter and mitigate future pandemics. At the same
time, governments clearly have a major role both in promoting the global
sustainable development agenda and encouraging the necessary changes to
firm (and individual) behavior through a judicious combination of
regulation, taxes/subsidies, information provision, and the supply of
suitable infrastructure. Comparable policy tools may also be used to
encourage firms to deploy new digital technologies insofar as they are
expected to bring widespread social benefits. But these policies—both
individually and collectively—will have dramatic and far-reaching
distributional impacts.

Some firms will grow ever more powerful, and this will exacerbate tensions
that are already apparent between MNEs and national governments.
Furthermore, some firms (and individuals) will inevitably lose out, even if
there are aggregate societal benefits. These distributional asymmetries are
the root cause of the contemporary growth of populism and economic
nationalism. Perhaps the most crucial policy imperative for governments
will be to manage effectively these distributional tensions and allow the
losers to participate in the wider societal benefits.
* <#m_-1925176591472604815__ednref1> Roger Strange ([log in to unmask])
is Professor of International Business at the University of Sussex Business
School and the Editor-in-Chief of *International Business Review*. This
*Perspective* draws on a presentation by the author to the World Bank
webinar (April 4, 2021) on the “Impact of COVID-19 on Multinational
Enterprises”. The author wishes to thank Farok Contractor, Gary Gereffi and
an anonymous peer reviewer for their helpful peer reviews.
[1] <#m_-1925176591472604815__ednref2> Roger Strange, “The 2020 Covid-19
pandemic and global value chains,” *Journal of Industrial and Business
Economics*, vol. 47 (2020),
pp. 457-458.
[2] <#m_-1925176591472604815__ednref3> Pervez Ghauri et al., “Research on
international business: the new realities,” *International Business Review*,
vol. 30 (2021)
pp. 1-2.
[3] <#m_-1925176591472604815__ednref4> Resilience has different meaning for
firms, GVCs and countries. See Gary Gereffi, Written Testimony to the
United States on Legislative Hearing on “Implementing Supply Chain
Resiliency” (July 12, 2020)
p. 4.
[4] <#m_-1925176591472604815__ednref5> See, e.g, the 2020 EU Action plan on
critical raw materials
and the June 2021 White House report on building resilient supply chains,
revitalizing American manufacturing, and fostering broad-based growth
[5] <#m_-1925176591472604815__ednref6> Roger Strange, “Do we need a theory
of externalization?” in Ödül Bozkurt and Mike Geppert, eds., *A Research
Agenda for International Business and Management *(Cheltenham: Elgar,
2021), pp. 23-42.
[6] <#m_-1925176591472604815__ednref7> See, Farok Contractor, “The world
economy will need even more globalization in the post-pandemic 2021
decade,” *JIBS* (online publication, Feb. 1, 2021
p. 6.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Roger Strange, ‘The future of global value
chains: Key issues,’ Columbia FDI Perspectives No. 328, April 4, 2022.
Reprinted with permission from the Columbia Center on Sustainable
Investment (***
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
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*Most recent Columbia FDI Perspectives*

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*All previous FDI Perspectives are available at

*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
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