customizing products) which would obtain a much-depressed return were GVC links to be broken. The need to customize inputs, coupled with quality sensitivity considerations, renders the above matching between buyers and sellers particularly important. If a firm suddenly faces an increase in the demand for their goods, it cannot easily scale up by buying more foreign inputs from some centralized market. There are typically only a handful of suppliers worldwide that can provide the additional necessary customized inputs necessary to scale up.

Third, firms participating in GVCs do not only engage in trade in tangible goods with other members of their value chains. GVCs often involve large flows of intangibles, such as technology, intellectual property and credit. The exchange of these intangibles is significantly more complex than that of simple goods or services.

Fourth, the prevalence of lock-in effects and flows of intangibles within GVCs is made particularly relevant by the limited contractual security governing transactions within these chains. GVC often involve transactions for which a strong legal environment is particularly important to bind producers together and to preclude technological leakage. And yet, GVC are often conducted in situations in which this strong legal environment is missing because cross-border exchange of goods cannot generally be governed by the same contractual safeguards that typically accompany similar exchanges occurring within borders. As a result, GVC participants are left to employ repeated interactions among them to build a governance that provides implicit contract enforcement. As in the case of matching frictions and relationship-specificity, this force contributes to the “stickiness” of GVC relationships.

In sum, these considerations lead to a novel, relational conceptualization of GVCs in which the focus is shifted away from the mere allocation of value added across countries resulting from anonymous, spot exchanges of goods and services. Instead, a new paradigm emerges in which the identity of the specific agents participating in a GVC is crucial. Within these GVCs, contracting is often relational in nature, and thus more likely to exhibit persistence than in transactions involving raw materials and homogeneous inputs. An extreme version of this type of relational contracting arises when parties involved in a GVC altogether by-pass the market mechanism and decide to transact within firm boundaries, by having the buyer vertically integrate the seller or vice versa. The prevalence of intrafirm trade flows in world trade flows exemplifies the importance of relational aspects in the growth of GVCs. For instance, U.S. customs data suggest that, in recent years, close to one-half of U.S. imports involve related-party transactions (see Antràs, 2003). At the global level, intrafirm trade has been estimated to account for about one-third of world trade Nevertheless, the internalization of transactions in a GVC is just one of the many organizational responses to the contractual vagaries associated with cross-border transactions. In an influential study, Gereffi , Humphrey, and Sturgeon (2005) elaborate a much more extensive taxonomy of potential governance forms within GVCs, and various researchers have built on their work to shed light on the relative prevalence of these governance forms through a number of interesting case studies.

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