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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Abigail Greene ([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. 343 October 31, 2022
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Global value chains (GVCs) have taken the policy world by storm, with many policymakers viewing them as a potent tool to boost economic development through industrial upgrading. Yet, despite the huge interest in GVCs, there remains substantial ambiguity about the policies that governments should adopt to generate such GVC upgrading, and how these differ from international business policies of the past. In this Perspective, we argue that zooming in on the roles of tasks, linkages and firms in GVCs helps clarify the novelty of GVC-oriented policies.[1]
A first originality of GVC theories is the disaggregation of industries into a set of highly heterogeneous tasks. It is now widely acknowledged that GVCs allow countries, and firms, to functionally specialize in fine-grained value-chain stages instead of entire industries. This functional specialization is beneficial for many developing countries as it allows them to fast-track industrialization even if they lack the capabilities to support entire industries. It also helps developed countries to more efficiently allocate their domestic resources to those tasks in which they have a comparative advantage. At the same time, the disproportionately large and growing value-added that is generated in the extremities of the “smile curve of value creation”—intangible tasks such as headquarters services, R&D and marketing—has created an international competition for dominance in these activities. In developed countries, many policymakers have reacted to the externalities related to the production of intangibles by adopting a mix of task-based industrial policies, including information and communications technology (ICT) infrastructure investments and R&D tax credits, to attract and retain the most promising intangible-intensive tasks.[2] In developing countries, governments have generated their own set of task-based industrial policies to attempt to address market and coordination failures and move their local industrial activities up the smile curve. For example, the Malaysian government has invested heavily in technology centers like the National Applied R&D Centre that houses labs offering a wide range of instruments and infrastructures for advanced ICT testing services, accessible to GVC suppliers at subsidized rates.
Second, GVC theories emphasize the role of linkages between tasks. GVCs link domestic and foreign tasks, and there is a wide recognition that these linkages influence GVC upgrading. On the positive side, foreign linkages can act as a powerful conduit for accessing foreign knowledge and resources that can be leveraged to improve local technological and operational capabilities. For this reason, governments around the globe have developed policies to improve the knowledge spillovers related to GVC linkages. For example, the Chilean government has for many years promoted networks of suppliers to enhance inter-firm collaborations and to reduce the knowledge gap between lead firms and their input providers. On the negative side, foreign linkages increase domestic activities’ dependence on foreign resources, raising questions about economic resiliency. A focal concern of policymakers is thus how to develop global connectedness policies that properly regulate and strengthen GVC linkages so that they can promote local value capture while guaranteeing economic resilience.
Third, GVC theories put the spotlight on firms that orchestrate GVCs. Lead firms in GVCs have the power to select where, when and by whom tasks are performed and to determine which type of knowledge is transferred through linkages. Policymakers recognize that properly harnessing these lead firms’ orchestration choices through firm-centric policies can help boost local companies’ participation and upgrading in GVCs. In 2016, for example, Export Development Canada adopted a pull financing strategy where it strategically provides large loans to lead firms abroad with the aim of incentivizing their procurement from suppliers located in Canada.
Each of these GVC-oriented policy responses are carefully crafted to address market or coordination failures that are present in GVCs. The task-based industrial policies aim to promote functional specialization in intangible-intensive activities whose production is non-rival and only partially excludable. Global connectedness policies intend to optimize the positive externalities related to foreign linkages. Firm-centric policies aim to put non-market pressures on lead firms to increase their value creation domestically. Overall, they all call for a mix of interventionist measures that go beyond traditional trade and foreign investment policies built around the Washington Consensus.
Taken together, GVC theories have on the one hand, reinforced several traditional international business policy elements. On the other hand, their accentuation of the role of tasks, linkages and firms have in other areas forced a fundamental redesign in policy thinking. The interventionist flavor of this new policy thinking is profoundly different from the traditional neoliberal stance on international business policy—so different that the set of GVC-oriented policies focusing on the task-linkage-firm trifecta is becoming a different policy narrative. The ubiquity of GVCs in current policy debates may help explain the emergence of significantly more interventionist international business policy stances across the globe.
[*]Ari Van Assche ([log in to unmask]) is Full Professor of International at HEC Montréal; Carlo Pietrobelli ([log in to unmask]) is Professor and Dean of Economics at the University Roma Tre and UNESCO Chair at United Nations University UNU-MERIT in Maastricht; Roberta Rabellotti ([log in to unmask]) is Full Professor of Economics at the Università di Pavia. The authors wish to thank Alvaro Cuervo-Cazurra, Stephen J. Kobrin and Markus Thill for their helpful peer reviews.
[2] Ari Van Assche, “Trade, investment and intangibles: The ABCs of global value chain-oriented policies”, OECD Trade Policy Papers (Paris: OECD, 2020).
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Carlo Pietrobelli, Roberta Rabellotti and Ari Van Assche, ‘How are global value chains altering policy narratives?’ Columbia FDI Perspectives No. 343, October 31, 2022. Reprinted with permission from the Columbia Center on Sustainable Investment (http://ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
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For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Abigail Greene, [log in to unmask].
Most recent Columbia FDI Perspectives
- No. 342, Wolfgang Alschner, “Why omitting general public policy exceptions from investment treaties is a setback for the right to regulate,” Columbia FDI Perspectives, October 17, 2022
- No. 341, Vanessa Tsang, “Strengthening international negotiation assistance for developing host countries,” Columbia FDI Perspectives, October 3, 2022
- No. 340, Brian Chang and Daniel Kang, “Advancing alternatives: Promoting mediation and conciliation in investor-state dispute settlement,” Columbia FDI Perspectives, September 20, 2022
All previous FDI Perspectives are available at https://ccsi.columbia.edu/content/columbia-fdi-perspectives.
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- On November 16, CCSI's annual International Investment Law and Policy Speaker Series continues with a panel on “Interpretation of Treaties.” Visit our website for more details and to register.
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Karl P. Sauvant, Ph.D.
Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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