# Source: Porter, 1985

Annex 1 provides a snapshot of GVCs in some of the sectors of most relevance to developing countries, including agri-food (fruits and vegetables), manufacturing (textiles and clothing, automobiles, chemicals), and services (offshoring, tourism).

# _The emergence of a concept_

The international segmentation of production is not a new phenomenon. However, it has taken a fully new dimension and importance in recent years: initially regional (e.g., suppliers of auto parts in Mexico, Eastern Europe, or Spain for original car manufacturers in the US, Germany and France, respectively), the phenomenon has become truly global due to technological progress and reduced costs of transport and telecommunication. The increasing importance of services in original manufacturers’ output has led to a further delocalization of production, including of some services inputs in the value chain that once could not be traded across borders. The concept “Made in Country X” is becoming obsolete. Today almost 60% of trade in goods is in intermediates and the average import content of exports is around 40% (Lamy, 2013) According to Baldwin (2006, 2012), a first “unbundling” took place in the second half of the 19<sup>th</sup> century (1850-1914) and from 1960s onwards, corresponding to the separation of production and consumption. In the “second unbundling” that started in the mid-1980s, the production process itself is split across countries both geographically (offshoring) and organizationally (outsourcing). From a firm perspective, the dramatic growth of digitization and increasing public policy liberalization, has unlocked the possibility to diversify sourcing strategies, including the choice of opting for different organizational and geographic integration and/or separation of production stages. As described in Figure 2, there are four possible combinations of organizational and geographical structure of production. Operations can take place inside the firm and domestically. In this case we talk about domestic in-house production. Alternatively, productions stages can all take place inside the firm but with some of them operated in a foreign location, i.e., through offshore production via vertical foreign direct investment (FDI). Third, firms can outsource activities to independent contractors and suppliers, with whom they maintain a relationship of arm’s length trade. Suppliers can be based in the domestic country (domestic outsourcing) or operate in a foreign location (offshore outsourcing). Similarly, assembly of the final products can be outsourced, off-shored or both. These new sourcing strategies result in greater FDI and intra-firm trade as well as vertical arm’s length trade with independent suppliers.

# **Figure 2. New Sourcing Strategies**

<!-- Start of picture text --> Offshoring (producing abroad)<br><!-- End of picture text --> <!-- Start of picture text --> Insourcing/outsourcing activities from within the firm vs. a supplier<br><!-- End of picture text --> <!-- Start of picture text --> Sourcing within the firm<br><!-- End of picture text --> <!-- Start of picture text --> Independent supplier<br><!-- End of picture text --> <!-- Start of picture text --> Producing<br>at home<br><!-- End of picture text --> <!-- Start of picture text --> Domestic<br>outsourcing<br><!-- End of picture text --> <!-- Start of picture text --> Domestic in-house<br>production<br><!-- End of picture text --> <!-- Start of picture text --> Vertical<br>foreign<br>direct<br>investment<br><!-- End of picture text --> <!-- Start of picture text --> Vertical integration<br>via foreign direct<br>investment<br><!-- End of picture text --> <!-- Start of picture text --> Sourcing inputs from a<br>foreign suppliers or<br>outsourcing assembly of<br>final products<br><!-- End of picture text --> Source: Antràs and Helpman, 2004 3