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WT/COMTD/SE/W/30  
 
13 October 2014  
(14-5834)  Page: 1/4  
Committee on Trade and Development 
Dedicated Session    
 
 WORK PROGRAMME ON SMALL ECONOMIES  
 
OUTLINE OF PROPOSED RESEARCH ON THE CHALLENGES AND OPPORTUNITIES 
EXPERIENCED BY SMALL ECONOMIES WHEN LINKING INTO GLOBAL VALUE CHAINS IN 
GOODS AND SERVICES 
NOTE BY THE SECRETARIAT 
 The Ministerial Decision of 7 December 2013 on the Work Programme on Small Economies 
instructed the Secretariat to provide relevant information and factual analysis for discussion 
among Members in the CTD's Dedicated Session in the area identified in item (k) of paragraph 2 of 
the Work Programme on Small Economies and, in particular, the challenges and opportunities experienced by small economies when linking into Global Value Chains (GVCs) in trade in goods 
and services. In order to assist Members with th eir discussions, the Secretariat and the proponents 
of Small Economies have identified several areas of research considered to be relevant to small economies and their links to GVCs.
1  
 
OUTLINE  1    INTRODUCTION 
1.1.   The introduction will provide a broad defini tion of GVCs and briefly describe their origins and 
recent evolutions, concentrating on how reductions in cost and transportation times coupled with advances in information and communication technology (ICT) have been major drivers of GVCs. 
Attention will be given to identifying which sectors have dominated the spread of GVCs 
(electronics, automobile, aerospace, apparel, etc.),  and to what extent different sectors pose entry 
problems for firms from small, vulnerable economies (SVEs) wishing to access GVCs. This section 
w i l l  a l s o  e x p l o r e  w h y  s o  m a n y  S V E s  h a v e  n o t  b e e n  a b l e  t o  l i n k  i n  t o  G V C s .  I t  w i l l  o u t l i n e  t h e  
objectives of the paper, emphasizing how drivers of GVCs have affected international trade patterns and the economic development of smal l economies. It will also underline some 
characteristics of GVCs, for instance, that many GVCs are actually regional and not global, and 
that many GVCs have experienced changes in the relationship between lead firms and other 
participating firms.  
2   OPPORTUNITIES AND CHALLENGES FOR SMALL ECONOMIES JOINING GVCS   
2.1.   While GVCs open up some opportunities for small economies to enter into specific sectors of 
international trade, they may also help countries with their economic development, especially at the initial stages of industrialization and in terms of employment creation. However, they also pose 
challenges and several small economies have not been able to make use of GVCs to better 
integrate into the multilateral trading system and therefore have not been able to reap these benefits. For instance, not all SVEs are able to ta ke advantage of the increasing fragmentation of 
production in GVCs which allows countries to specialize in specific tasks or niches within value 
chains. This study will examine whether a lack of comparative advantage in the various stages of 
manufacturing activities may partly explain the difficulties some small economies have in benefitting from trade in GVCs or whether there are other causes. The latter may also increase the 
marginalization of SVEs from international trade; especially if GVCs lock small economies into raw 
                                               
1 At the CTD's 27th Dedicated Session on Small Economies, Members agreed that any substantive 
comments on this outline should  be communicated to the WTO Secretariat by 24 October 2014.  WT/COMTD/SE/W/30 
 
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  material exporting sectors or low value-added manufacturing activities where upgrading 
opportunities are limited and which often pay low wages and limit domestic managerial talent.  
2.2.   Still too many developing countries and especially SVEs are facing difficulties when trying to 
connect to or upgrade within GVCs. Issues such as technological development, absorptive 
capacity, cost structures, appropriateness of labour skills, infrastructure and competitiveness will 
be examined in order to establish whether these may be the root causes for not achieving linkages to GVCs. Attention will also be turned to standa rds, intellectual property rights (IPRs), rules of 
origin, access to finance, transport infrastructure or customs procedures which often constitute 
significant obstacles for developing country and SVE firms to enter GVCs. Other obstacles involve technology transfer and the creation of domestic linkages. Industrial and trade policy interventions 
are required to overcome these kinds of obstacles. It is, therefore, a challenge for many SVE 
governments to optimize their limited policy space an d capacity to tap into a part of a GVC. Such 
efforts could also come at the expense of furthering such national objectives as economic diversification and productivity upgrading. 
2.3.   This section will describe i) the opport unities and challenges small economies face when 
trying to integrate into GVCs and ii) difficulties they have with increasing their domestic value-added within specific GVCs. It will discuss the results of relevant questionnaires such as those used 
for the 4
th Global Review of Aid for Trade in 2013. Recent research and analysis of the operation of 
GVCs by academic institutions, inter-governmental organizations and think tanks, in particular those from developing countries, will be included and discussed in the paper. 
3   EVIDENCE OF THE INTEGRATIO N OF SMALL ECONOMIES IN GVCS 
3.1.   Today's value creation and international trade through GVCs is captured through a number 
of different types of data. One way to assess countries' participation in primary and manufacturing value chains is through the analysis of trade in intermediate goods. Besides standard trade data, 
new databases in the form of international input-output tables have become available to describe 
GVC participation in terms of import content of exports or other indicators based on trade in value added. Such data, however, are often not ava ilable for small economies and related estimates 
should be interpreted with great care.
2 To assess economic impacts going beyond trade expansion, 
data on taxes and IPR-royalties transfer will be analysed based on work done by UNCTAD, the IMF and the World Bank. Where international input-output  tables are not available for small economies, 
the study will seek to find other alternatives appropriate to small economies.  
3.2.    In contrast to trade in goods, no distinction exists between trade in final and intermediate 
services.  The analysis of services trade typically focuses on specific sectors or on proxies for IT 
and business process outsourcing. This section will, therefore, assess the actual and possible 
integration of small economies into GVCs for different sectors of major importance for small 
economies using goods and services trade data and case stories. In this regard, it is important to also analyse the domestic impact of services liberalization conducted by SVEs which often 
accompany attempts to attract GVC activities. 
4   THE ROLE OF FOREIGN DIRECT INVESTMENT IN GVCS 4.1.   Using the latest research from UNCTAD, th is section will analyse the importance of foreign 
direct investment (FDI) for small economies in the context of GVCs by analysing regional FDI 
trends and how these relate to domestic investment . The study will evaluate to what extent small 
size influences access to FDI. Multinational enterprises (MNEs) are drivers of GVCs in terms of production, organization and innovation. They are the ones which decide to outsource production 
to independent suppliers or to produce in-house. Furthermore, MNEs also decide about offshoring, 
or where to locate the production of the various, particular stages found in a value chain. These outsourcing and offshoring decisions are often inte r-linked and are important determinants of the 
investment and trade patterns of GVCs. As a consequence, many developing countries and small 
economies aim to attract MNE investment and join GVCs in the hopes that they will help spur their economic development through more investment and the creation of jobs. They also hope to achieve technology spill-overs or establish better linkages to local suppliers. The study will, 
therefore, examine how small economies can position themselves to attract MNEs. By analysing as 
                                               
2 Examples for data bases relying on input-output  tables are OECD/WTO, Trade in Value Added Data 
base or the UNCTAD-EORA GVC data base. WT/COMTD/SE/W/30 
 
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  much data as possible, it is important to identify  how many tasks have either been outsourced or 
offshored and determine the level of value-added for SVEs as well as the technological component of this outsourcing/offshoring. 
5   CHALLENGES AND OPPORTUNITIES FOR SMALL AND MEDIUM-SIZED ENTERPRISES  
5.1.   Similar to other developing countries, small economies typically do not host headquarters of 
MNEs but participate in GVCs through either MN E affiliates or through small and medium-sized 
enterprises (SMEs). Due to their small size and related characteristics, SMEs face different 
challenges with integrating into GVCs compared to larger firms. For instance, heightened 
competition and access to finance and information about foreign markets and trading partners can pose particular difficulties for SMEs. At the same time, the rise of GVCs has also opened up opportunities to SMEs. For instance, SMEs can act as suppliers to local or foreign firms in GVCs 
and/or specialize in product niches. The stud y will examine how micro enterprises in small 
economies could use SMEs to connect to GVCs and to MNEs. 
5.2.   Challenges and opportunities for SMEs and micro-enterprises in small economies to integrate 
into GVCs and upgrade within them will be presen ted. Besides reviewing the literature, the section 
will illustrate challenges and opportunities through case stories of SMEs and related development initiatives. It will draw on related Aid-for-Trade work and seek inputs from the International Trade 
Centre and other international organizations. It will be useful to include case studies of both the 
successful and the attempted, but unsuccessf ul, participation of SMEs in GVCs.   
5.3.   The section will also compare small economies with other developing countries and 
emphasize their shared or divergent experiences with gaining access to specific stages of 
production that are offshored. It will look at those economic sectors where employment has been 
created, technology transfer achieved and domest ic linkages fostered. Evidence on the size and 
duration of either positive or negative spill-over effects from MNEs in the context of GVCs will be 
collected and assessed. Small economies will be encouraged to supplement this research with 
national case stories.    
6   THE ROLE OF LOGISTICS AND TRADE FACILITATION  
6.1.   While the emergence of GVCs may have mitigated size-related difficulties for small 
economies, the fact that many small economies are islands or remote from major markets still represents a major challenge, especially as concerns costs linked to transportation. Many value chains in manufacturing take the form of regional networks or hub-and-spoke structures. 
Examples include electronics in Asia, the automotive industry in the European Union or Mexican 
manufacturing for the United States. Furthermore, in value chains characterised by demand fluctuations (e.g. fashion), perishability of prod ucts (e.g. agriculture and food), just-in-time 
production (e.g. automotive) or rapid technologica l change (e.g. electronics), time-related trade 
costs are of particular relevance. Hence, capacity building, technological development and adequate infrastructure are important when it comes to accessing GVCs, but so are factors 
affecting transportation costs such as shipment and ICT infrastructure, logistics services and 
customs procedures.  
6.2.   This section will describe the role of logistics and trade facilitation for the functioning of 
GVCs and discuss relevant evidence and policy issues for small economies, including in terms of 
trade flows outside GVCs. 
7   IMPLICATION FOR TRADE POLICY  (HOLISTIC APPROACH TO GVCS) 
7.1.   To integrate into and benefit from GVCs, a broad set of policies are required along with more 
targeted policy interventions consistent with the vertical specialization structure of GVCs. For 
example, besides trade policy, policies related to education, innovation and industrial development 
(in particular technology transfer and linkage crea tion) are considered critically important. This 
section will discuss trade policy issues including Aid for Trade and necessary regulatory changes 
that facilitate both entry and upgrading in the context of GVCs. For instance, some recent regional trade agreements include so-called "deep" provisions in areas such as competition policy, investment, behind-the-border regulations and no n-tariff measures which add to the level of 
compliance required by small economies. This section will examine the impact of such provisions WT/COMTD/SE/W/30 
 
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  on developing countries, and especially on small ec onomies. Furthermore, the blurring of linkages 
between goods and services in GVCs may require a holistic approach to trade policy and data collection and an examination of the implications of this for trade policy. This helps ensure that that such linkages support the creation of domestic value-added and encourage access to the 
wider economy. This can facilitate the building of  productive capacities in domestic firms.  
7.2.   This section will also identify different policy priorities for small, landlocked states as 
compared to small island states and explore how certain Regional Trade Agreements have 
encouraged regional value chains to grow. It will discuss trade and industrial policy issues arising 
from GVCs and their implications for the national development strategy of small economies. It will 
focus on how such policies affect small economies, discuss the policy implications of GVCs for the WTO and its current and future agreements and examine their links to non GVC-related issues. 
Given the economic and financial limitations of SVEs, discussion will also include the challenges 
SVEs face in finding the right policy and with bala ncing development and infrastructure objectives 
with those related to moving up the global value chain. The analysis will include policy options and 
specific interventions which successful SVEs have used in the past to participate in GVCs. 
7.3.   The role of government will also be discussed, especially as it relates to dealing with 
challenges in the area of competition policy and me asures needed to redress the activities of lead 
firms operating in a given market with little or no competition. The section will highlight what 
governments could do to assist domestic enterprises to counter such market imbalances. 
8   CONCLUSION  8.1.   The concluding section of the paper will summarise the main findings and highlight, for 
possible discussion, policy issues and some possible recommendations relevant for the economic 
development of small economies. 
 
 
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