GVCs. First, as argued above, GVCs have the potential to accelerate growth in the economies that participate in them actively, and it is well understood that the demand for environmental regulation tends to increase when income rises (or, in economic jargon, environmental quality is a normal good). Second, GVCs are often an effective vehicle of technology transfer, so it seems plausible that they will also constitute an effective vehicle of clean technology transfer. In order to better elucidate this mechanism, however, it will be necessary to develop richer conceptual frameworks of GVCs, a task to which this paper will shortly turn to.

This section concludes with a very brief overview of some other macroeconomic consequences of GVCs (these are explained in greater detail in Chapter 4 of the 2020 World Development Report). Relative to traditional trade, in which producers compete head-to-head to service foreign markets, GVCs are associated with a higher degree of complementarity in production across countries, as productivity and demand shocks travel upstream and downstream along value chains. This translates into a faster and more intense transmission of shocks across countries (as exemplified by natural disasters such as the 2011 Tohoku earthquake), and at a more aggregate level, it also leads to higher co-movement of output and prices across countries (i.e., larger business-cycle synchronization and inflation spillovers).<sup>10</sup> GVCs also weaken the effects of movements in exchange rates on the trade balance. For instance, the positive effect of depreciations on the competitiveness of exports, is stymied by the increased cost of the foreign value added used in production.

# 3 A Firm-Level Approach to Global Value Chains

A common feature of both the conceptual framework and empirical measures described so far is that they advocate an analysis at the country level or, at best, at the country-industry level. Indeed, in neoclassical frameworks in which production technologies feature constant returns to scale, there is little hope to generate predictions at a more granular level (i.e., at the firm or plant level). Furthermore, Input-Output tables and publicly available international trade statistics are reported at the industry- (or product-level) rather than at the firm level.

In the real world, however, it is not countries or industries that participate in international trade, but rather firms. In line with this simple observation, economic research in international trade has undergone a dramatic transformation in the last twenty years, one that has placed firmlevel international strategies at the center stage. This intellectual revolution was fueled by the increased availability of longitudinal plant and firm-level datasets that permitted researchers to unveil a series of new facts that challenged the validity of existing models (see Bernard and Jensen, 1995). At the theoretical level, the seminal paper in the literature is that of Melitz (2003), which focuses on the exporting decisions of heterogeneous firms within an industry. In Melitz’framework, firms are assumed to produce differentiated products under technologies featuring increasing returns to scale. Product differentiation confers market power to firms, while scale economies are associated with firms facing fixed cost of production and of distribution. The decision of a firm on whether

> 10 In the presence of inventories, GVCs are also expected to generate differential volatility at different stages of the chain (see Ferrari, 2019).

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