The broad conceptualization of the rise of GVCs might suggest that there is nothing fundamentally new about this latest wave of globalization. It just entails more (or deeper) integration across countries, but it is shaped by the same factors as traditional trade flows and it carries largely the same implications. Although it will be highlighted that even this broad view of GVCs delivers many novel insights, this paper will also develop a narrower definition of GVCs that emphasizes several distinctive characteristics of the rise of GVCs. This narrower conceptualization of GVCs highlights that GVC participation is often (and increasingly) associated with transactions that are very different in nature from the type of anonymous, one-shot transactions that permeate traditional trade theory. The various firms and plants participating in a GVC often exchange highly customized inputs on a repeated basis, with the contracts governing these relationships being highly incomplete and hard to enforce. Furthermore, firms spend significant time and resources designing the organizational structure of these production networks (e.g., whether transactions occur within or across firm boundaries).

From this alternative relational conceptualization of GVCs emerges a richer analysis of GVCs, one that puts at the center stage the major actors (multinational firms, lead firms in GVCs, etc.) that play a leading role in shaping GVC activity and foreign direct investment (FDI) flows, and one that underscores the importance of institutional factors in shaping the location of global production. By explicitly modeling the mechanisms by which the division of the gains from specialization are divided across firms, this relational approach also delivers novel lessons regarding the implications of GVC participation for inequality and for development. Finally, this novel approach also provides a rich set of predictions regarding how an increase in automation or the adoption of digital technologies might affect the landscape of the international economy and affect different agents in society.

On the empirical front, this relational approach to GVC activity has largely focused on case studies and, in a few cases, on more representative datasets that provide some information on the ownership decisions of firms (see Antràs, 2015). A burgeoning literature is attempting to build more systematic measures of relational GVC activity, and later, this paper will build on this literature to suggest a measure of relational GVC participation based on transaction-level customs data from the World Bank’s Export Dynamics Database (EDD). It will also be discussed how one can build on transaction-level trade data to construct country- and industry-level narrow GVC participation measures analogous to those developed in the literature embracing the broad approach to GVC activity.

Beyond expositing these alternative conceptualizations of GVCs, this paper will put them to work to provide some guidance for the empirical work in various chapters of the 2020 World Development Report. First, it will delineate various key determinants of GVC participation and will present hypothesis regarding the relative importance of these determinants depending on the type of GVC activity (broad or relational) one focuses on. Second, it will also build on the conceptual framework to highlight several notable implications of GVC participation for economic performance at the firm level, but also for growth, poverty, inequality, and market structure at the country level.

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