# 1. Introduction

## 1.1 What are global value chains? Why are they important for development?

Global value chains (GVCs) are characterized by the division of the production process into stages, and the distribution of these stages across different countries. This process, variously known as “production fragmentation” (Arndt and Kierzkowski,2001), “processing trade” (Görg, 2000), “vertical specialization” (Hummels, Rapoport and Yi 1998), “slicing up the value chain” (Krugman, Cooper and Srinivasan 1995), or “the second unbundling” (Baldwin 2006), has been made possible by major changes in logistics and managerial organization that emerged during the last third of the 20<sup>th</sup> century. As a result, many products that were once produced in a large, centralized location are now produced in widely dispersed locations. Instead of producing an entire automobile from raw materials in a single location, as was once done at Ford’s River Rouge factory in the 1930s, we now live in a world where the assembly of a hard disk drive in Thailand utilizes components from 11 different countries (Hiratsuka 2011), and the disk drive itself is in turn a component of a laptop that may be assembled in China and shipped to consumers in the United States.

Thanks to GVCs, it is now possible for developing countries to participate in the gains from producing the world’s most complex and sophisticated products by specializing in tasks. Rather than having to develop the large domestic firms which were common in earlier waves of industrialization, firms in developing countries can specialize in a piece of the production process. Even for a complex structure like an automobile, for which branding and final assembly still tend to concentrate in rich countries, it is possible for certain components to be produced in a variety of locations. Ignition wiring sets for motor vehicles are now being exported from locations as diverse as Tunisia, Vietnam, Sri Lanka and Nicaragua. Small and medium‐sized firms in developing countries are thus able to join in the global networks of lead firms and access technology and markets that they would not be able to otherwise.

The expansion of GVCs into new geographic territories depends in part on the availability of qualified local suppliers. Lead firms in GVCs consider a number of factors when deciding to expand their production networks into new countries. They can either bring their traditional suppliers in with them as co‐investors, or seek out local firms as qualified local suppliers. In order to be qualified suppliers, local firms need to have reasonably high productivity, a capacity to absorb new technologies, and ideally experience with trading across borders. The lack of such firm‐level capabilities can inhibit the extension of GVCs to certain countries (see Farole and Winkler 2014 for the case of Africa). Even if the lead firm is local and the production part of the GVC is built mainly of local firms, productivity has to be reasonably high in order to successfully export.

## 1.2 A new dataset for the study of archetypal value chains

This paper introduces a new dataset for the study of several archetypal GVCs, building on traditional merchandise trade data.<sup>1</sup> This dataset, known as MC‐GVC (Measuring Competitiveness in Global Value Chains), allows study of the deeper structure of GVCs in autos and parts, electronics and textiles, apparel and footwear. It takes advantage of a unique mapping between intermediate and final goods in these

> 1  A description of how to access and use the database is available at <u>http://blogs.worldbank.org/trade/new‐tool‐ monitoring‐global‐value‐chains.</u>

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