The World Bank Economic Review, 00(0), 2020, 1–24

doi: 10.1093/wber/lhaa006
Article

Conceptual Aspects of Global Value Chains

Pol Antràs
Abstract
This article offers an overview of some key conceptual aspects associated with the rise of global value chains
(GVCs). It outlines a series of alternative interpretations and definitions of what the rise of GVCs entails, and
it traces the implications of these alternative conceptualizations for the measurement of the phenomenon, as
well as for elucidating the key determinants and implications of GVC participation, both at the country level
and at the firm level. In the process, it offers some speculative thoughts about the future of GVCs in light of the
advent of an array of new technologies.
JEL classification: D5, F1, F2, F4, F6

Keywords: global value chains, relational contracting, economic development, economic growth, inequality

1. Introduction
In the last few decades, a series of technological, institutional, and political developments have fueled a
significant globalization of production processes across countries.1 More and more firms now organize
production on a global scale and choose to offshore parts, components, or services to producers in foreign
and often distant countries. The typical “Made in” labels in manufactured goods have become archaic
symbols of an old era. These days, most goods are “Made in the World.”
Some aspects of this new wave of globalization are not particularly novel. Significant and sustained
increases in the trade-to-GDP ratio have been experienced in the past. The period 1870–1914, for in-
stance, witnessed a major increase in international trade flows, largely fueled by the invention of the
steamship, and that period is often referred to as the “First Globalization.” Similarly, international trade
in raw materials and intermediate inputs has been a prominent feature of world trade flows since time
immemorial. For example, Assyrian merchants who settled Kanesh (in modern-day Turkey) in the 19th
century BCE imported luxury fabrics and tin from Aššur, and they also traded copper and wool within
Anatolia (Barjamovic et al. 2019).
Pol Antràs is the Robert G. Ory Professor of Economics at Harvard University in Cambridge, MA, USA; his email address is
pantras@fas.harvard.edu. This article was written as a background paper for the 2020 World Development Report entitled
“Trading for Development in the Age of Global Value Chains.” As co-director of the 2020 World Development Report, the
author was a paid short-term consultant for the World Bank. The author is grateful to his fellow co-directors Caroline Freund
and Aaditya Mattoo, and to Penny Goldberg, Daria Taglioni, and the rest of the core World Development Report team for
helpful comments. All the figures and data used in this paper are available at the 2020 World Development Report website
https://www.worldbank.org/en/publication/wdr2020.
1 Three types of developments were particularly key: (a) the information and communication technology (ICT) revolution,
(b) an acceleration in the rate of reduction in man-made trade barriers, and (c) political developments that brought about
a remarkable increase in the share of world population participating in the capitalist system (see Antràs 2015 for more
details).

© The Author(s) 2020. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK.
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2 Antràs

Despite these precedents, there is a common-held view that the transformation of the world economy
since the 1980s has some distinctive features, and that interpreting the so-called rise of global value chains
(GVCs) as simply an intensification of trade integration across countries misses several key dimensions
of this phenomenon.
The aim of this paper is to offer a succinct overview of some key conceptual aspects associated with
the rise of GVCs. The paper will offer alternative interpretations and definitions of what the rise of GVCs
entails and it will later trace the implications of these alternative conceptualizations for the measurement
of the phenomenon, as well as for elucidating the key determinants and implications of GVC participation,
both at the country level and at the firm level. In the process, this paper will also offer some speculative
thoughts about the future of GVCs in light of the advent of an array of new technologies.
The paper is structured as follows. It will first present a broad conceptualization of the rise of GVCs,
one that interprets this phenomenon as an increase in the extent to which the goods and services transacted
across borders are intermediate inputs rather than final goods (as emphasized in traditional conceptual
frameworks of international trade). According to this broad definition, GVCs are tightly related to the use
of foreign value added (embodied in materials, intermediate inputs, or “tasks” ) in production, particularly
for exports. The unit of analysis in this broad approach is typically the country-industry, thus allowing
this body of work to connect with a recent empirical literature focused on computing and documenting
the observed growth in the extent to which foreign value added is used in production in specific countries
and industries.
Despite this literature’s overwhelming focus on country- and industry-level studies, it will be argued
that one can similarly apply this broad definition of GVCs to firm-level analyses of international trade.
At the theoretical level, the paper will highlight that it is fruitful to conceptualize GVC participation
at the firm level, particularly in environments in which firms have some market power and production
processes feature increasing returns to scale. In other words, GVC participation (even when interpreted in
a broad sense) is ultimately a firm-level phenomenon and hence much can be learned from conceptualizing
it in this manner. The measurement of GVC participation at the firm level is at an infant stage relative
to the much more mature literature measuring GVC participation at the country-industry level, but this
paper will argue that many of the measures that have been developed in world input–output analyses
can be fruitfully adopted at the firm level, thereby opening the door for empirical analyses of the causes
and consequences of GVC participation at the firm level. This incursion into the measurement of GVC
participation will also lead to a critical reevaluation of the merits and limitations of the most widely used
measures of GVC participation.
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
The World Bank Economic Review 3

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 data sets 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 Exporter Dynamics
Database. 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 empirical work on GVCs. First, it will delineate various key determinants of
GVC participation and will present a 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. Third, it will use the conceptual framework to speculate on the future of GVCs.
Table 1 offers a succinct summary of some of the key ideas in this paper.

2. A Broad View of Global Value Chains

In presenting the broad or traditional conceptualization of the rise of GVCs in recent decades, it is useful
to begin with a broad definition of a GVC and of GVC participation:

Definition: A global value chain or GVC consists of a series of stages involved in producing a product
or service that is sold to consumers, with each stage adding value, and with at least two stages being
produced in different countries. A firm participates in a GVC if it produces at least one stage in a GVC.

As is clear from these definitions, a GVC is defined as a production process that embodies value added
(e.g., labor services) from at least two countries. As such, this notion of GVCs naturally relates this
phenomenon to the increasing use of foreign value added in production, especially when that production
is destined for exports. The definition above is agnostic about the specific form in which foreign value
added is embodied in production, though it is often associated with either international trade in raw
materials (e.g., tin or aluminum), in intermediate inputs (e.g., car parts), or in tasks (e.g., back-office
services). Similarly, the above definition is consistent with various configurations of GVCs, including
simple “spider-like” structures—in which multiple parts and components converge to an assembly
plant—and “snake-like” structures—in which value is created sequentially in a series of stages (see
Baldwin and Venables [2013] or Antràs and de Gortari [2020]).
Regardless of the specific shape GVCs take, the possibility of fragmenting production across borders
gives rise to a finer international division of labor and greater gains from specialization. GVCs allow
resources to flow to their most productive use, not only across countries and sectors, but also within
sectors across stages of production. As a result, GVCs magnify the growth, employment, and distribu-
tional impacts of standard trade. Under this “hyper-specialization” interpretation of GVCs, traditional
determinants of international trade (such as factor endowments, geography, institutions, market size) are
naturally also relevant for the extent to which countries and industries get embedded in GVCs, though
4 Antràs

Table 1. An Overview of Some Key Concepts

Broad / Traditional Narrow / Relational

Definition Basic: Increased use of foreign Basic: Increased used of foreign

value added in production, value added in production,
especially in production especially in production
destined for exports destined for exports, but
focusing on inter-firm and
intra-firm transactions
involving customized inputs
and relational contracting
(distinct from anonymous, spot
trades in homogeneous goods)

Conceptual framework GVCs essentially entail a finer GVCs entail a finer inter-
international division of labor national division of labor,
(trade in parts and components, but also involve
tasks) – nontrivial matching
between importers and
exporters
– relationship-specific
investments by all parties
– inter-firm and intra-firm
flows of goods, technology,
and credit in environments
with limited contractual
security
– incomplete contract enforcement

Empirical measures – Country- and industry-level – Case studies

measures of foreign – Analyses of intra-firm trade
value added in production flows or global ownership
and in exports (related to patterns
backward and forward GVC – Empirical work on
participation indices) persistence in firm-level
– Analogous measures at the trading relationships
firm-level Measures based on Harmonized
System products (anonymous vs.
relational)

Source: Elaborated by author based on contents of article.

Note: Conceptual overview of the paper’s content.

the way in which these traditional determinants affect GVC flows is sometimes distinct from how they
affect traditional trade flows, as will be discussed below.
In sum, unlike in traditional conceptualizations of international trade, which focus on international
transactions that involve only two countries (an exporting country and an importing country), GVCs
entail production processes that often cross borders multiple times and that often involve more than two
countries. This leads to a rich set of determinants and consequences of GVC participation, but it also
creates important challenges for the measurement of GVC activity in the world. Before overviewing the
main determinants and consequences of GVC participation, it is useful to explain these measurement
challenges and how they have been surmounted in economic research.

2.1. Measurement
The main challenge facing the measurement of GVC arises from the fact that customs data, the standard
source for international trade flows, provide information on where the transacted good or service was
The World Bank Economic Review 5

Figure 1. The Structure of a World Input–Output Table

Source: Antràs and Chor (2018).

Note: Schematic version of a World-Input-Output Table.

produced, but not on how it was produced, i.e., which countries contributed value to it. Similarly, customs
data record where the transacted good is flowing to, but not how it will be used, i.e., whether it will be
fully consumed (absorbed) in the importing country, or whether it will be reexported after the importing
country adds value to it. With the goal of tracing value-added trade flows across countries, a body of work
has combined information from customs offices together with national input–output tables to construct
global input–output tables. The most widely used world input–output tables (or WIOTs, for short) are (a)
the World Input–Output Database (WIOD), a collaborative project led by researchers at the University of
Groningen; (b) the OECD TiVA database, and (c) the Eora Global Supply Chain Database, constructed
by a team of researchers at the University of Sydney. At a very broad level, these collaborative projects
can be thought of as a “scaled-up” version of product-level studies (such as Dedrick, Kraemer, and Linden
[2010]’s well-known case study of the iPod), attempting to break out the distribution of the financial value
embedded in a product across the many participants in its supply chain. Figure 1 provides a schematic
version of one such WIOT.2
With these global input–output tables at hand, it is then straightforward to devise alternative measures
to document the extent to which production process have become globalized in recent years, and the
extent to which various countries and sectors participate in GVCs. At the world level, Borin and Mancini
(2019) develop a natural measure of the importance of GVC trade in total international trade. Building
on global input–output tables, they identify the share of a country’s exports that flow through at least two
borders.3 It is important to emphasize that these exports encompass two broad types of GVC trade. On the
one hand, GVC trade includes transactions in which a country’s exports embody value added that it has
previously imported from abroad. This type of GVC participation is often referred to as backward GVC
participation. On the other hand, GVC trade also comprises transactions in which a country’s exports are
not fully absorbed in the importing country, and instead are embodied in the importing country’s exports
to third countries. The latter form of GVC participation is often dubbed forward GVC participation. As
fig. 2 indicates, according to this measure by Borin and Mancini (2019), the overall share of GVC trade

2 The WIOT in fig. 1 considers a world economy with J countries (indexed by i or j) and S sectors (indexed by r or s).
In its top left J × S by J × S block, the WIOT contains information on intermediate purchases by industry s in country
j from sector r in country i. In the table, these intermediate input flows are denoted by Zrs
i j . To the right of this block,
the WIOT contains an additional J × S by J block with information on the final-use expenditure in each country j on
goods originating from sector r in country i. These final consumption flows are denoted by Firj in the table. The sum of
the (J × S) + J terms in each row of a WIOT represents the total use of output of sector r from country i, and naturally
coincides with gross output in that sector and country (denoted by Yir ).
3 See also Wang, Wei, and Zhu (2013). Other important papers on the measurement of GVC participation include the
pioneering work of Hummels, Ishii, and Yi (2001), Johnson and Noguera (2012), and Koopman, Wang, and Wei (2014).
6 Antràs

Figure 2. The Importance of GVC Trade in World Trade

Source: World Development Report (World Bank 2020, Chapter 1).

Note: Based on the GVC (Global Value Chains) participation measure in Borin and Mancini (2019).

in total world trade grew very significantly in the 1990s and early 2000s, but it appears to have stagnated
or even declined in the last 10 years. Still, about one-half of world trade appears to be related to GVCs.
The two components of GVC participation, backward and forward, can also easily be computed at
the country and even country-sectoral level. When doing so, it becomes clear that the expansion of GVC
activity has occurred in an uneven way in the world. On the one hand, there are regions in the world (such
as Europe and East Asia) that are deeply involved in GVCs, while GVC participation is much smaller in
other parts of the world, most notably Latin America and Africa. On the other hand, even when countries
actively participate in GVCs, the sectoral compositions of these GVC flows are also quite diverse. Some
countries have largely specialized in agricultural GVCs (such as Ethiopia) or in the natural resource seg-
ments of GVCs (such as Chile and Norway). Other countries are largely involved in the manufacturing
segments of GVCs, with relatively less-developed economies (such as Tanzania) specializing in low-tech
(or limited) manufacturing, and more developed economies (such as Mexico, Slovakia, and China) partic-
ipating in high-tech (or advanced) manufacturing processes. In addition, it is useful to distinguish a subset
of countries (e.g., India) that have largely specialized in the services embodied in GVCs, and a small set
of very advanced economies (e.g., United States, Germany, and Japan) playing a significant role in the
provision of innovative goods and services. Figure 3 illustrates the extent to which GVC participation has
been uneven across countries.
Despite their widespread use in economic research, it is important to emphasize two key limitations of
global input–output tables. First, because they rely on fairly aggregated input–output data, the resulting
sectoral disaggregation of GVC flows is pretty coarse, and thus these data sources miss a significant
amount of GVC activity occurring within these broadly defined sectors. For instance, one can compute
the origin of “fabricated metal products” in the production of “motor vehicles” in the United States, but
where tires, car engines, or windshield wipers originate from cannot be inferred from these data sets.
A second key shortcoming of world input–output tables is that, in constructing them, researchers are
forced to impose strong assumptions to infer certain bilateral intermediate input trade flows that cannot
be readily read from either customs data or national input–output tables.
A different, more granular approach to measuring the degree to which production processes are frag-
mented across countries was first suggested by Yeats (1998) and consists of computing the share of trade
flows accounted for by industry categories that can be safely assumed to contain only intermediate inputs
The World Bank Economic Review 7

Figure 3. Uneven Sectoral Specialization in GVCs

Source: World Development Report (World Bank 2020, Chapter 1).

Note: Based on the GVC (Global Value Chains) taxonomy for 2015 developed in Box 1.3 of the World Development Report (World Bank 2020).

(as reflected by the use of the words “Parts of” at the beginning of the product description). Yeats (1998)
found that intermediate input categories accounted for about 30 percent of OECD merchandise exports
of machinery and transport equipment in 1995, and that this share had steadily increased from its 26.1
percent value in 1978. Yeats’s classification has continued to be refined in recent years based on the Broad
Economic Categories (BEC) product classification made available by UNCTAD.4

2.2. Determinants of GVC Participation

In the workhorse conceptual frameworks developed to understand traditional trade flows, such as the
Heckscher–Ohlin model of trade, factor endowments are a key determinant of the structure of interna-
tional trade. Skilled-labor-abundant countries gain comparative advantage in producing skilled-intensive
goods, while they benefit from importing low-skill-labor-intensive goods from low-skill-labor-abundant
economies. Similarly, countries with a large availability of arable land or of natural resources (relative to
their endowment of other factors of production) are expected to specialize and export primary products.
In a world of GVCs, factor endowments play an analogous role in shaping specialization, but they also
affect the positioning of countries in GVCs. For instance, natural-resource-rich countries are expected to
feature high levels of forward GVC participation because their exports of natural resources are used in a
variety of downstream production processes that typically cross several borders. Similarly, and although
agricultural products are much closer to final consumption than natural resources are, tariff escalation
practices often leave less-developed countries specializing in the most upstream stages of agricultural
GVCs, that is, exporting raw products before processing (see McMillan, Welch, and Rodrik [2003] or
World Development Report, World Bank [2020, Chapter 7]).5
By the same logic, one would expect physical-capital-abundant countries or skilled-labor-abundant
countries to specialize upstream or downstream depending on the relative physical-capital intensity or

4 See https://unstats.un.org/unsd/tradekb/Knowledgebase/50090/Intermediate-Goods-in-Trade-Statistics.
5 Tariff escalation is the practice of setting higher import duties on semi-processed products than on raw materials, and
higher still on finished products (see WTO Glossary).
8 Antràs

relative skilled-labor intensity of upstream versus downstream stages. According to a widely used US-
based sectoral measure of upstreamness (see Antràs et al. 2012), upstream sectors in US manufacturing
appear to be more capital intensive and more skilled-labor intensive than downstream sectors. One might
then expect physical-capital-abundant and skilled-labor-abundant countries to feature relatively high lev-
els of forward GVC participation and relatively low levels of backward GVC participation. The empirical
analysis in the World Development Report (World Bank 2020, Chapter 2) finds support for the predicted
link between low-skilled-labor abundance and downstream GVC positioning, but this same chapter shows
that physical-capital-scarce countries tend to specialize upstream rather than downstream. Nevertheless,
the link between physical-capital abundance and GVC positioning is blurred by the fact that GVCs of-
ten come hand-in-hand with FDI capital inflows. To provide a specific example, Nigeria is a relatively
physical-capital-scarce country, and oil extraction is a relatively physical-capital-intensive process, but
large FDI inflows have conferred to Nigeria a comparative advantage in that relatively upstream produc-
tion stage. As a result, Nigeria features a large level of forward GVC participation relative to its backward
GVC participation level (over 1990–2015, the former’s average was 0.26, while the latter’s average was
0.09).
The international exchange of goods and services is subject to a large degree of contractual insecurity
(Antràs 2015). Weak contract enforcement is a significant deterrent for traditional trade flows, but its in-
cidence on GVC trade is likely to be disproportionately large. Part of the reason for this magnified effect
will be elucidated later, when discussing our relational conceptualization of GVCs. Yet, even when stick-
ing to the view of GVCs as mere engines of hyper-specialization, multi-stage production processes with
significant complementarities across production stages will tend to be particularly sensitive to contractual
institutions (see Acemoglu, Antràs, and Helpman 2007). In plain words, the performance of a GVC is
often severely impacted by the strength of its weakest link, and thus production delays or mishaps driven
by weak contract enforcement might be particularly harmful in GVCs. In sum, the quality of a country’s
institutions and its political stability are expected to be important determinants of GVC participation and
might affect GVC trade disproportionately more than traditional trade. The World Development Report
(World Bank 2020, Chapter 2) finds support for this hypothesis.
Empirical work in international trade emphasizes that trade costs have a significant negative effect on
trade flows. There are various possible sources of trade costs, ranging from geographical features (such
as remoteness), inefficient infrastructure, and regulatory barriers (e.g., tariffs and quotas), to delays in
clearing customs. There are at least two reasons to believe that trade costs might have a disproportionately
negative effect on the GVC component of trade flows. First, the “weakest-link” mechanism invoked in
the previous paragraph applies also to production delays associated with impediments to trade (such as
customs delays). Second, and relative to traditional trade, higher trade costs not only increase the prices at
which imported goods are consumed, as in traditional trade, but they also increase the cost of imported
intermediate inputs, which get passed down the value chain and translate into higher costs associated
with a country’s exports, thereby further depressing GVC participation.
Regional trade agreements, or trade agreements more broadly, are a particularly effective mechanism
to reduce trade barriers between the signing countries. Consequently, one would expect that GVCs are
particularly active among countries that have signed regional trade agreements. Indeed, GVC activity is
particularly intense among EU and ASEAN members, but it should be noted that other regional trade
agreements, such as Mercosur, appear to have been much less successful in generating GVC participation
among their members (see World Development Report, World Bank 2020, Chapter 2).
Trade costs not only affect the overall GVC participation of countries, but they might have a significant
effect in the positioning of countries in GVCs. In sequential (or snake-like) GVCs, trade costs compound
along the value chain and have a higher incidence on downstream stages than on upstream stages. As
Antràs and de Gortari (2020) demonstrate, this leads remote countries to specialize in upstream stages,
and more central countries to specialize in more downstream stages. An implication of this fact is that
The World Bank Economic Review 9

we might expect the effect of trade costs to be more significant for backward GVC participation indices
than for forward GVC participation indices.
Empirical work in international trade also emphasizes the role of market size in shaping bilateral trade
flows. Larger economies are expected to export more (since they produce more), and they are also expected
to import more (since their income is larger). An often-underappreciated aspect of the gravity model of
trade, the most successful empirical model of bilateral trade flows, is that it provides a straightforward
explanation for why the ratio of trade to output tends to be smaller for larger economies.6 Whether a
larger market size is associated with a higher or a lower level of GVC participation is, however, less clear.
On the one hand, with sequential multi-stage production processes, larger countries naturally tend to
attract a larger set of stages than small countries do. Furthermore, to minimize cross-hauling of semi-
processed goods, the set of stages that countries specialize in are often contiguous. As a result, larger
countries are less likely to use imported inputs in their exports and should, other things be equal, record
lower levels of backward GVC integration. On the other hand, by their sheer size, large countries are
likely to be geographically close to world demand for final goods, and thus their more “central” location
should make them more prone to specialize downstream (see Antràs and de Gortari 2020) and thus to
record higher backward GVC integration on account of their centrality.

2.3. Consequences of GVC Participation

How has the rise of GVCs affected the economies in which GVC participation has grown disproportion-
ately? How might a rise in protectionism, by undoing some of the forces in recent decades, affect those
same economies? Is protectionism costlier in the age of GVCs? These are the questions that will next
concern us.
A first important insight already anticipated above is that by a allowing a finer international division
of labor, the growth of GVCs is associated with greater income gains from trade than a commensurate
expansion of traditional trade. Intuitively, GVCs allow countries to benefit from the comparative advan-
tage of other countries not only at the sectoral level, but also at the stage level within sectors. As a result,
models of trade featuring global input–output links (such as Caliendo and Parro [2015] or Antràs and de
Gortari [2020]) typically deliver larger gains from trade than models without those links.7 Furthermore,
the resulting magnified costs of protectionism in a world of GVCs are exacerbated by environments in
which the multiple stages involved in production feature especially high levels of complementarity (see
Fally and Sayre [2018] or Baqaee and Farhi [2019]). As will be discussed more extensively in section 3,
when conceptualizing GVCs at the firm level, rather than at the country-sector level, it will also be clear
that part of the reason for these magnified real income gains stems from the fact that, by lowering input
costs and allowing an expansion of firm scale, GVCs tend to increase the productivity of firms.
It is well understood that the aggregate income implications of trade liberalization are also amplified
in environments in which, via enhanced technology diffusion, an economy’s growth rate might also be
positively affected by trade opening (see, for instance, Sampson 2015). If increased GVC participation
enhances technology diffusion across countries, it would thus seem plausible that the rise of GVCs has a
larger effect on growth rates than traditional trade does. It is fair to say, however, that the broad concep-
tualization of GVCs developed so far does not elucidate whether GVCs are a particularly effective vehicle
of technology diffusion. We will return to this point later in the paper.

6 Note that in a world without input trade, if exports between countries i and j are given by Xi j = YiY j /k, then k must

be equal to world GDP, and the trade share is j=i Xi j /Yi = 1 − (Yi /Yworld ).
7 Arkolakis, Costinot, and Rodríguez-Clare (2012) show that the costs of moving to autarky are shaped by the share of
imports in a country’s total spending. In their model of sequential GVCs, Antràs and de Gortari (2020) instead obtain
a formula in which the costs of moving to autarky depend on the share of spending in goods that embody any foreign
value (regardless of whether those goods themselves are imported or not).
10 Antràs

Although GVCs are expected, on average, to generate increases in aggregate income, they also generate
nontrivial effects along the income distribution. Much of the literature on the implications of production
fragmentation has in fact focused on studying how it shapes the distribution of income, and more specif-
ically, the distribution of wage income within countries. The Stolper–Samuelson theorem, one of the key
tenets of the canonical conceptualization of traditional international trade, indicates that deeper trade
integration is likely to increase wage inequality (the relative wage of skilled versus unskilled workers) in
relatively advanced, skilled-labor-abundant countries, while it is expected to decrease wage inequality in
less-developed, skilled-labor-scarce countries.
In a world of fragmentation, however, the validity of the Stolper–Samuelson theorem is undermined.
More specifically, it is widely accepted both theoretically and empirically that increased production frag-
mentation leads to increased wage inequality in both advanced and less-developed countries (see Goldberg
and Pavcnik 2007). There are at least three reasons for this.
First, when production is offshored to less-developed economies, the labor force in those economies
finds itself being employed in new production processes and tasks that might have been perceived to be
low-skilled-labor intensive in advanced countries, but that are instead skilled-labor intensive relative to
the outside opportunities of workers in less-developed countries (see Feenstra and Hanson 1996, 1997).
Hence, offshoring increases the relative demand for skilled workers in less-developed economies and puts
upward pressure on wage inequality.
A second related force toward increased wage inequality in less-developed economies stems from the
fact that GVCs are often more skilled-labor intensive than traditional trade flows because they tend to
produce goods that are destined for quality-sensitive consumers in rich countries (Verhoogen 2008), and
also because of the existence of high complementarities among the various stages of production carried
in different countries (Kremer and Maskin 2006; Antràs, Garicano, and Rossi-Hansberg 2006).8
A third force toward increased wage inequality in skilled-labor-scarce countries is related to the fact
that firms in GVCs tend to adopt more capital-intensive techniques than comparable domestic firms
(Bernard, Moxnes, and Ulltveit-Moe 2018). Deepening and upgrading of physical capital contributes
to the increase in the relative demand for skilled workers due to capital-skill complementarity, namely
the fact that physical capital (and capital equipment, in particular) is less substitutable with skilled labor
than it is with unskilled labor (Griliches 1969; Krusell et al. 2000).
Although GVCs may increase income inequality in less-developed economies, their impact on poverty
is much less clear cut. On the one hand, the high-quality sensitivity of GVCs often lead them to marginal-
ize the least-skilled agents in society, and the increased opportunities they provide for more-skilled agents
might further deteriorate the livelihood of the less well off (e.g., by bidding up the price of housing or
of other services). On the other hand, the positive effects of GVC participation on overall income and
income growth are likely to trickle down to everyone in society. Those directly favoring from GVC
integration will use their larger incomes to demand more local goods and services, which will generate
novel opportunities for other agents in society, even those with relatively few skills. Furthermore, higher
aggregate income can support a deeper welfare state that can ensure that the gains from integration are
more evenly spread. Finally, GVC integration in certain regions of a country can incentivize internal
migration within countries, which can be a powerful mechanism to reduce poverty. In practice, it appears
that GVCs have contributed to lifting millions of individuals out of poverty in some countries (such as
China), but they may have failed to do so in other less-developed countries. The World Development
Report (World Bank 2020, Chapter 3) presents evidence that in Vietnam, poverty reduction was greater
in locations with a higher presence of GVC activity.

8 Production fragmentation also qualifies the link between trade integration and wage inequality in advanced economies.
Grossman and Rossi-Hansberg (2008) argue that offshoring may increase wage inequality in advanced economies by
less than traditional trade would.
The World Bank Economic Review 11

For particularly underdeveloped countries, it is also often argued that GVCs may facilitate industrial-
ization by reducing the range of required “capabilities” that these countries must be endowed with to be
able to produce and export industrial goods. For example, in the auto industry, countries can participate
in GVCs even when they might not have any domestic car makers or any domestic provider of car en-
gines. On the other hand, more sophisticated tasks in value chains require skills and capabilities that many
underdeveloped countries lack. As a result, the rise of GVCs might lead less-developed economies to spe-
cialize in relatively low-value-added segments of production with little scope for upgrading. In addition,
tariff escalation practices by developed economies tend to reduce the value added that can be captured
by less-developed producers when attempting to remain competitive vis-à-vis other countries.9 In sum, it
may be simpler to “industrialize” in the age of GVCs, but the returns on doing so might not be as high as
they were in the past. Furthermore, these effects interact with the gradual increase in automation, as will
be discussed later in the paper.
The impact of trade liberalization on the environment also needs to be reevaluated in a world of
GVCs. The transportation of goods across long distances generates CO2 emissions that directly harm the
environment, but in GVCs the same value added is often shipped multiple times before reaching final
consumers. Thus, the volume of CO2 emissions generated in transporting goods in GVCs appears to be
associated with larger environmental harm than traditional trade. Similarly, the fact that GVCs foster
“hyper-specialization” would appear to indicate that the pollution haven hypothesis might apply partic-
ularly intensely to GVCs, as lead firms from large industrialized nations may locate “dirty” production
stages in countries where environmental norms are laxer, thus avoiding the cost of stringent environmental
regulations.
It is important to emphasize, however, that there are at least two reasons that suggest that environ-
mental concerns associated with globalization might instead be alleviated in the age of 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, if GVCs are indeed
effective vehicles of technology transfer, 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.
This section concludes with a very brief overview of some other macroeconomic consequences of GVCs
(these are explained in greater detail in the World Development Report, World Bank 2020, Chapter 4).
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 Tōhoku earthquake (see Carvalho et al. 2017 or Boehm, Flaaen, and Pandalai-Nayar 2019)—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 (see De Soyres and Gaillard 2019).10 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.

9 Consider the following example. A car assembler in a small, less-developed economy faces fixed foreign input costs of
$7,000 and a fixed sale price of $9,000 in rich countries. It can thus capture value added of $2,000 per car. Nevertheless,
if rich countries set a 20 percent import tariff on assembled cars, to remain competitive the car assembler will need to
reduce its export price to $7,500, and thus local value added is reduced to $500. Thus, a 20 percent import tariff on
final goods can reduce value added in less-developed economies by 75 percent.
10 In the presence of inventories, GVCs are also expected to generate differential volatility at different stages of the chain
(see Ferrari 2019).
12 Antràs

3. A Firm-Level Approach to Global Value Chains

A common feature of both the conceptual framework and the 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 of generating 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 20 years, one that has placed firm-level international strategies at
center stage. This intellectual revolution was fueled by the increased availability of longitudinal plant-
and firm-level data sets 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 the 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 to export to a given foreign market is shaped by a comparison of the potential
operating profit obtained in that foreign market with the fixed costs associated with distributing products
in that market.
Although the canonical model in this firm-level approach to international trade was written in a setting
in which international trade involves the exchange of only final goods, as in traditional conceptualizations
of trade, an active literature has adopted similar ideas to understand the rise of GVCs. In the presence
of fixed costs of engaging in global sourcing (i.e., of importing intermediate inputs), one would expect
that the use of imported inputs in production will demand that importers attain a minimum efficient
scale of production, with smaller and less-productive firms in an industry being excluded from GVC
participation (see Antràs and Helpman 2004; Gopinath and Neiman 2014; Halpern, Koren, and Szeidl
2015; Antràs, Fort, and Tintelnot 2017). The combination of scale economies and fixed costs of import-
ing and exporting also provides a natural explanation for the fact that firms that are large enough to be
able to amortize the fixed costs associated with importing will also tend to be large enough to find ex-
porting successful. Selection into importing thus naturally is associated with firms engaged in backward
GVC participation according to the definition developed in our broad conceptualization of GVCs (i.e.,
the use of foreign value added in exporting). Similarly, firms exporting intermediate inputs are likely to
engage in forward GVC participation, as the firms importing their products are likely to be exporters
themselves.
When adopting a firm-level approach one can also distinguish GVCs that are organized by a lead firm,
which incur the bulk of the fixed costs associated with setting up the network of producers in a given
production process, and GVCs that are more decentralized in nature, with individual producers incurring
costs to set up links upstream and downstream from them (see Bernard, Moxnes, and Ulltveit-Moe 2018;
Antràs and de Gortari 2020).

3.1. Measurement
Firm-level data sets containing information on the import and export transactions of firms can be fruitfully
used to construct measures of GVC participation similar in nature to those discussed above based on the
country- industry information in global input–output tables. More specifically, transaction-level customs
data sets of the type available from the World Bank’s Export Dynamics Database can be used to identify
the set of firms in a country that participate in trade, further distinguishing firms that export, firms that
The World Bank Economic Review 13

import, and firms that both export and import. When a given firm in a given country both imports and
exports, it is natural to conclude that this firm participates in GVCs.
To map this definition more precisely to the definition of backward GVC participation developed in
country-industry studies, one would ideally also resort to product-level information to verify that the
goods imported by an exporting firm are indeed intermediate inputs (rather than final goods), so that
one can more comfortably conclude that this firm is indeed using foreign value added in their production
destined for exports. Without linking customs-level data across countries, it is much harder to come
up with analogous firm-level measures of forward GVC participation. The reason for this is that even
when a firm is identified as an exporter of intermediate inputs (rather than of final goods), it is virtually
impossible to establish whether those inputs are fully absorbed in the importing country, or whether they
are reexported to third markets by the importing firms after having added value to them. We envision a
future in which researchers will be able to conduct more satisfactory analyses with linked customs-data
data sets from a variety of countries, but this future is not yet here.
It should be stressed that the above firm-level measures only identify the extensive margin of GVC
participation, while industry-level measures based on global input–output tables also capture the intensity
of GVC participation. Computing intensive measures of GVC participation with firm-level data is however
challenging, particularly in situations in which complementary census-level information is not available.
The reason for this is that customs-level data have no information on firms’ domestic purchases of inputs
and on firms’ domestic sales of goods. As a result, it is difficult to infer the ratio of foreign inputs used in
production, and it is even more challenging to disentangle the foreign-input content of exports from the
foreign-content of overall production (see Kee and Tang [2016] for an attempt using processing trade in
China, and also Bems and Kikkawa [2020] for a more recent attempt using Belgian data).
Firm-level information on importing and exporting can also be used to shed light on the extent to which
global input–output tables provide an accurate description of value-added trade flows across countries.
Even when the entries of these tables provide an accurate account of the origin of inputs in a country’s
industrial production, the standard methods used to compute bilateral value-added trade flows from these
tables assume that the same combination of inputs is used in production regardless of the destination of
sales of a country and industry’s output. As demonstrated by de Gortari (2018) with firm-level evidence
from Mexico, in practice, firms selling output to different markets use very different combinations of
sources of inputs, and this has significant implications for the type of bilateral value-added trade flows
one infers from global input–output tables. For instance, because Mexican exports to the United States
embody a disproportionate amount of US value added relative to Mexican exports to other countries, de
Gortari estimates that the share of US value in US-imported Mexican manufactures is 30 percent, rather
than the 17 percent one would infer from standard techniques applied to global input–output tables.11
We now turn to elucidate the determinants and consequences of GVC participation through the lens
of this firm-level approach to GVCs. To be clear, many of the forces outlined in the initial traditional
conceptualization of GVCs continue to hold under this novel approach, so the focus will be on outlining
distinct implications that arise in the present context.

3.2. Determinants of GVC Participation

Firm-level GVC participation is shaped by many of the same forces that shape GVC participation at the
country-industry level. Firms in countries with large endowments of factors that are used intensively in
certain segments of GVCs will be more prone to participate in GVCs, while trade costs and institutional

11 Apart from qualifying the type of implications that one can draw from aggregated input–output tables, firm-level data
can also be fruitfully used to test more systematically the validity of the “proportionality” assumptions that go into the
construction of those data.
14 Antràs

quality continue to play a key role in shaping the likelihood that GVCs flow across a given country. The
firm-level perspective, however, carries at least two important new lessons.
First, for some of the determinants of GVC activity, the relevant endowments might be better measured
at the firm level than at the country level. For instance, even in countries with relatively low levels of
educational attainment, some firms might be able to participate in relatively skilled-labor-intensive value
chains if certain firms in that country manage to attract a critical mass of skilled workers to work for
them. On the other hand, it is much harder for individual firms to surmount the obstacles posed by an
unfavorable geography, by deficient infrastructure, or by weak contract enforcement (see, however, our
discussion of relational GVC below). Similarly, market size certainly matters for whether firms participate
or not in GVCs, but often what is relevant is that firm size is sufficiently high, both to be able to amortize
the fixed costs associated with GVC participation, and also to be able to fulfill large-volume orders from
comparably large importers in other countries.
The second key lesson arising from a firm-level conceptualization of GVCs is that to better understand
the extensive margin of participation, it is fruitful to separate determinants that are likely to affect the
fixed cost of participation from determinants that are likely to impact GVC profitability conditional on
participating.12 This is because the relative magnitude of these effects is likely to shape the characteristics
(size, productivity, etc.) of firms participating in GVCs in a given country.

3.3. Consequences of GVC Participation

The consequences of GVC participation also become significantly richer when adopting a firm-level ap-
proach to GVCs. Such a focus makes it clear that participation in GVCs generates aggregate income gains
partly by increasing the productivity of firms. There are in turn two forces that shape these productiv-
ity improvements. On the one hand, there is a direct effect coming from the fact that the use of foreign
value added in production is associated with firms being able to secure inputs from abroad at lower cost
than they would from domestic suppliers. On the other hand, this reduction in costs coupled with the
exporting associated with GVCs tends to increase the scale of operation of firms engaged in GVCs, and
this tends to reduce their average costs in the presence of scale economies. In sum, GVC participation
enhances firm-level productivity, a fact that has been confirmed empirically by Amiti and Konings (2007),
Goldberg et al. (2010), and De Loecker et al. (2016), among many others.
These productivity effects imply that import competition shocks can carry significantly richer impli-
cations when they entail surges in imports of final goods (as in traditional trade) and when they partly
entail an increase in imports of intermediate inputs. In the latter case, the positive productivity effects
at the firm level can lead to unexpected implications for scale and employment at the firm level. For in-
stance, Antràs, Fort, and Tintelnot (2017) show that US firms that started importing from China after
this country’s accession to the WTO also increased their sourcing from domestic suppliers in the United
States.
Envisioning GVC participation as a firm-level phenomenon also helps conceptualize why GVCs might
be a particularly powerful vehicle of technology transfer. The reason for this is that unlike in formulations
of traditional trade, in which firms from different countries compete against each other, GVCs constitute
networks of firms with common goals, such as minimizing production costs or maximizing profits asso-
ciated with the production chain. Surely, the incentives of agents in GVCs are not always aligned, and the
division of the gains generated by GVCs naturally generates distributional conflict, but downstream firms
typically gain from productivity enhancements of upstream producers in their chains, and vice versa. A
direct implication of this simple observation is that firms from advanced countries importing or exporting
12 Antràs, Fort, and Tintelnot (2017) identify a significant divergence between the extent to which foreign countries generate
cost savings for US firms offshoring in those countries and the fixed costs associated with sourcing from these countries.
For instance, China is estimated to offer significant cost savings, but the initial set-up cost to be able to source from that
country appears to be especially high.
The World Bank Economic Review 15

goods from or to less-developed economies might find it beneficial to share process and product innova-
tions with their GVC co-participants in those less-advanced economies. In sum, technology transfer is
likely to be particularly fluid within GVCs. It is fair to admit, however, that the evidence for this hypothe-
sis is somewhat scant (see World Development Report, World Bank [2020, Chapter 3] for some anecdotal
evidence).
As emphasized in our broad conceptualization of GVCs, a country’s participation in GVCs can
also constitute a significant source of increased income inequality. More specifically, the growth
in aggregate income stemming from countries joining GVCs is often coupled with nontrivial in-
creases in wage inequality. The firm-level approach to GVCs provides a more fleshed-out version
of this mechanism, as the type of large firm often participating in GVCs (especially in manufactur-
ing) tends to be larger, more skilled intensive, and more capital intensive than other types of firms
(Bernard, Redding, and Schott 2007).
A study of GVC activity at the firm level further introduces novel dimensions associated with the
distributional consequences of trade integration. For instance, in the presence of scale economies and
fixed costs of participation, large firms will tend to benefit disproportionately from GVC participation
due to the cost savings associated with importing and the expansion in scale afforded by exporting. As
a result, the size distribution of firms is likely to be significantly more skewed in a world of GVCs than
in a world without them. This suggests the intriguing hypothesis that the rise of “superstar” firms in the
United States and other advanced economies (see Autor et al. 2017) might be partly associated with the
rise of GVCs.
Furthermore, it is a well-established fact that large firms tend to face lower price elasticities of demand
than smaller firms, and that cost reductions are often only partially passed on to prices, and particularly
so by large companies. As a result, the growth of GVC activity appears to be a potential contributor to
the recently documented widespread rise in average markups and in the dispersion of these markups (see
De Loecker, Eeckhout, and Unger 2019). In fact, De Loecker et al. (2016) provide direct evidence from
India showing that input trade liberalization was associated with an increase in the markups charged by
Indian firms importing inputs from abroad. The World Development Report (World Bank 2020, Chapter
3) also provides preliminary evidence that increasing GVC participation appears to be associated with
rising markups in developed countries but with falling markups in developing countries (see also Li and
Miao 2020). The latter fact suggests that the relative bargaining power of agents in GVCs might be key
for the distribution of the gains from GVC activity, an issue to which we will return in section 4.
A rise in markups associated with GVCs is likely to reflect more than the necessary increase in price-
cost margins required to cover the increased fixed costs associated with a more complex sourcing or
exporting strategy. As a result, GVC participation is also likely to increase the profit rate of these com-
panies, thereby generating a force toward a lower share of an economy’s income being paid to labor.
Similarly, lead firms in GVCs often transfer their relatively capital-intensive production techniques and
automation practices to their foreign production facilities in less-developed economies, which might re-
sult in further shifts in the distribution of income away from labor and on to capital. There are of
course many possible explanations for the observed global decline in the labor share (see Karabarbounis
and Neiman 2013), but the rise in GVC activity appears to be a candidate contributor to this
trend.
In terms of other macroeconomic implications of the rise of GVCs, the fact that firms participat-
ing in GVCs tend to be large and tend to engage in both importing and exporting provides a natural
explanation for the fact that following large depreciations, import growth often tracks export growth
closely, thus reducing the effectiveness of depreciations in reducing trade imbalances, as emphasized by
Blaum (2018).
16 Antràs

4. A Relational View of Global Value Chains

Although research adopting the broad approach to GVCs has provided valuable novel insights, modeling
global production sharing as simply an increase in the extent to which foreign inputs (or foreign value
added) is used in production misses important distinctive characteristics of the recent rise of GVCs. In
other words, the definition of GVCs adopted so far may be too broad to do full justice to the novel
landscape that has emerged in the world economy in the last 30 years. The rise of GVCs entails much
more than the intensification of the type of trade in raw materials and homogeneous intermediate inputs
that has existed since the Bronze Age. It is also much more than firms “importing to export” or transacting
with each other in world markets. The expansion of GVCs entails a finer international division of labor
but it also involves a number of additional features. Four of these distinctive features are particularly
important.
First, the process by which agents co-participating in GVCs match with each other is not frictionless.
Fixed costs of exporting and importing partly reflect the costs of finding suitable suppliers of parts and
components or suitable buyers of one’s products. For this reason, these fixed costs are better understood
as sunk costs, which naturally create a “stickiness” among participants in a GVC.
A second source of lock-in in GVC relationships is related to the fact that GVC participants often
undertake numerous relationship-specific investments (such as purchasing specialized equipment or cus-
tomizing 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. GVCs often involve
transactions for which a strong legal environment is particularly important to bind producers together and
to preclude technological leakage. And yet, GVCs 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 al-
together bypass the market mechanism and decide to transact within firm boundaries by having the
buyer vertically integrate the seller or vice versa. The prevalence of intra-firm trade flows in world trade
flows exemplifies the importance of relational aspects in the growth of GVCs. For instance, US customs
data suggest that, in recent years, close to one-half of US imports involve related-party transactions (see
The World Bank Economic Review 17

Antràs 2003). At the global level, intra-firm trade has been estimated to account for about one-third of
world trade flows.
Nevertheless, the internalization of transactions in a GVC is just one of the many organizational re-
sponses to the contractual vagaries associated with cross-border transactions. In an influential study,
Gereffi, Humphrey, and Sturgeon (2005) elaborate on a much more extensive taxonomy of potential gov-
ernance 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.
Although the relational approach to the study of GVCs is concerned with the same phenomena as
the more traditional approach discussed earlier in this paper, these literatures have largely evolved in
isolation. These separate paths are partly explained by the significantly different sources of data used in
these different literatures, as discussed next.

4.1. Measurement
Measuring participation of firms in relational GVCs is notoriously difficult. First of all, because relational
GVC activity entails firm-to-firm links, it presents the same difficulties outlined in section 3 regarding
measuring participation at the firm level. But more importantly, the distinctive characteristics of relational
GVCs call for a narrower empirical definition of this type of GVC, one that excludes firm-level GVC
participation associated with the exchange of fairly homogeneous goods in spot transaction.
Given these difficulties it is no surprise that progress in this area has been rather scant. The most
influential work on the relational nature of GVCs tends to focus on particular case studies of specific
sectors and countries, which allows the researcher to paint a more colorful and realistic picture of the
web of relationship-sustaining global production in that sector. The extensive and influential Gary Gereffi
provides a good example of this (see, for instance, Gereffi [1999] on the apparel industry; Sturgeon, Van
Biesebroeck, and Gereffi [2008] on the automobile industry; or Bamber and Gereffi [2013] on the medical
device industry in Costa Rica). More recently, Rocco Macchiavello and Ameet Morjaria have studied in
detail the relational nature of contracting in various agricultural markets in less-developed economies,
such as their work on the flower industry in Kenya (see Macchiavello and Morjaria 2015) or their work
on the coffee value chain in Rwanda (Macchiavello and Morjaria 2017).
One of the initial goals of the 2020 World Development Report was to attempt to provide a bridge
between this case-study-based literature and the broader empirical literature on GVC participation. The
idea was to develop firm-level and product-level measures of the extent to which the GVC participation
of firms is relational in nature and the extent to which international transactions associated with a given
product tend to be relational in nature. More specifically, the aim was to exploit the panel nature of some
of the data sets available from the World Bank’s Exporter Dynamics Database to construct measures of
the observed persistence of firm-to-firm transactions, perhaps partialling out various natural determinants
of persistence (such as exchange rate volatility). This is very much in line with the measure of “relationship
stickiness” proposed by Martin, Méjean, and Parenti (2018), which they compute using detailed firm-to-
firm export data from France. The hope was to “scale up” this approach and apply it to various countries,
with the initial goal of verifying whether there was a significant positive rank-correlation in product-level
stickiness across countries. Such a finding would indicate that there is a significant product-level dimension
to stickiness that is likely to render GVC participation in certain goods particularly prone to be relational
in nature. With such a finding at hand, one could use standard industry concordances to construct a global
input–output table that separates trade flows associated with traditional versus relational transactions,
thereby allowing one to construct broad industry-level measures of relational GVC participation for the
comprehensive set of countries in the Eora Global Supply Chain Database. Due to time constraints, such
an analysis was not conducted in time for the 2020 World Development Report, but hopefully it will be
carried out in future work.
18 Antràs

4.2. Determinants of GVC Participation

In a world of relational GVCs, the effect of factor endowments on GVC participation is largely anal-
ogous to the one developed above for the broad notion of GVCs (at both the country-industry and
the firm levels). A key novel aspect, however, is that as mentioned above, the relational approach to
GVCs provides a straightforward explanation for why GVC activity and FDI flows go hand in hand.
When tight control over foreign production processes is necessary (perhaps because the legal environ-
ment does not suffice to discipline the behavior of suppliers or to avoid the leakage of intellectual prop-
erty), lead firms might decide to rely on integrated suppliers and assemblers in foreign countries. This
results in intra-firm trade and FDI flows. For this same reason, countries that put in place policies that
are FDI friendly (such as establishing credible mechanisms to reduce the risk of expropriation or of-
fering tax breaks for new investments by foreign companies) are more likely to be able to participate
in GVCs.
The stickiness of relational GVCs also makes them particularly vulnerable to supply-chain disruptions.
For this reason, firms participating in relational GVCs are likely to be particularly sensitive to the avail-
ability of skilled labor in the economies in which they operate. Furthermore, in relational GVCs, informa-
tional flows and communication are particularly important, which suggests that language skills (such as
a good command of English as a second language) might be particularly relevant for GVC participation.
The relational nature of GVCs also considerably reinforces the role of institutional quality as a sig-
nificant determinant of GVC participation. Having said this, institutional quality and relational GVCs
interact in subtle ways. On the one hand, the emphasis this approach places on contractual insecurity nat-
urally implies that production processes involving high degrees of customization (i.e., more relationship-
specific investments), and for which a thick “secondary” market is missing, are likely to be located in
countries with strong institutional quality (Levchenko 2007; Nunn 2007). The reason for this is that
in those countries, lead firms are in a better position to discipline the behavior of producers and avoid
costly production delays or quality debasements. Nevertheless, and as argued above, the same forces
that make relational GVCs rely intensively on institutional quality also make GVC links particularly
sticky, which fosters the emergence of reputational mechanisms of cooperation that might partly substi-
tute for the absence of formal contracting. In addition, under some circumstances, vertical integration
may serve as a direct (albeit imperfect) substitute for strong contract enforcement in countries hosting
GVCs. Because relational GVCs feature significant flows of credit and intellectual property, a coun-
try’s financial institutions and IPR protection policies also constitute important determinants of GVC
participation.
The effects of trade costs on GVC participation need also to be qualified when GVCs are relational in
nature. As reiterated above, supply-chain disruptions are particularly costly when firms participating in
these chains cannot easily resort to alternative producers when some of the links in the chain fail to provide
components or services in time or under prespecified terms. With that in mind, trade delays associated
with inefficient or corrupt customs offices might act as a particularly large deterrent for relational GVCs
requiring coordination and in-time delivery. Furthermore, in the presence of weak contract enforcement,
the emergence of cooperation among producers in GVCs is fostered by repeated interactions among the
several agents participating in the chain, interactions that may be severely curtailed by remoteness or
insufficient air connectivity.
The lock-in effects associated with costly search and relationship-specific investments also have impli-
cations for the role of market size in attracting GVC activity. Beyond the factors identified by the above
broad conceptualization of GVCs, in settings with relational GVCs a large market might serve the role of
reducing search frictions (Grossman and Helpman 2005) and may also facilitate resorting to alternative
suppliers in the presence of production disruptions.
The World Bank Economic Review 19

4.3. Consequences of GVC Participation

How will economies be impacted by participating in relational GVCs? Many of the effects discussed under
the broad conceptualization of GVCs continue to apply, but one can identify three particularly distinctive
aspects of relational GVCs that have significant ramifications for understanding the consequences of
GVCs.
First, the relational approach clarifies the role of GVCs as vehicles of technology transfer. GVC par-
ticipation is not just about using foreign value added in production or about engaging in importing and
exporting. A GVC is made up of inter-firm and intra-firm relationships which govern the transfer of
tangible goods, but also the transfer of information and technology involved in making a product or
providing a service. The scope for absorbing foreign technology is thus particularly large in relational
GVCs. Furthermore, the sticky nature of relational GVCs makes them particularly prone to benefits from
learning-by-importing and learning-by-exporting via repeated interactions with highly productive firms in
advanced economies. Similarly, the transfer of clean environmental standards to less-developed economies
might be most efficiently carried out via relational GVCs.
A second key consideration is that the combination of incomplete contract enforcement and the lock-
in effects stemming from search frictions and relationship-specific investments in relational GVCs give
rise to transaction prices between buyers and sellers that tend to be bilaterally negotiated and that are
thus not fully disciplined by market-clearing conditions. This observation has a number of implications
for the consequences of relational GVCs. Countries should concern themselves not only with fostering
the participation of their local firms in GVCs, but should also be mindful of the bargaining power that
their firms will have vis-à-vis large foreign firms. The implications of GVCs for the emergence of superstar
firms with huge scale, high market power, and large profit rates are exacerbated by the disproportionate
bargaining power that these large firms might have vis-à-vis their suppliers. More specifically, large lead
firms might be able to buy parts and components at relatively lower prices (via volume discounts, playing
suppliers against each other, etc.), while also being able to sell at higher prices (if they are themselves key
suppliers to downstream producers). This strong bargaining power enhances the profitability of large firms
engaged in relational GVCs, but might come at the cost of a lower “share of the pie” accruing to smaller
and less-powerful firms in less-developed economies. These effects might be compounded in countries
with unfavorable geographical features or weak institutions, as large firms might react to the risk of facing
production disruptions in those countries by setting up “back-up” suppliers elsewhere, thereby further
eroding the bargaining power of suppliers in distant or weak contracting countries. Indeed, as mentioned
above, the World Development Report (World Bank 2020, Chapter 3) reports evidence suggesting that
increasing GVC participation appears to be associated with falling markups in developing countries.
Beyond distributional concerns, Antràs and Staiger (2012) also show that the fact that international prices
are often bilaterally negotiated carries important implications for the role of design of international trade
agreements.
A third set of novel mechanisms by which relational GVCs might affect inequality relates to the dispro-
portionate importance of the matching between buyers and sellers. Because the identity of these producers
matters, especially in situations in which sensitivity to quality is high, relational GVCs may set off a “war
for talent” in which the price of particularly attractive producers, or the wage of particularly skilled indi-
viduals might be disproportionately bid up relative to a world without relational GVCs. This constitutes
another mechanism by which GVCs might exacerbate inequality in the distribution of income.

5. The Future of GVCs

This paper has so far focused on overviewing some key conceptual aspects related to GVCs and has
attempted to develop a set of predictions regarding the key determinants and implications of the rise of
GVCs observed in the last 30 years. In this concluding section, this chapter will leave the comfort zone of
20 Antràs

predicting the past, and will venture into the much more treacherous terrain of attempting to predict the
future.13
Although the current political environment would be rife for a discussion of how a continuing esca-
lation of trade tensions between the United States and other countries might affect the future geography
of global production, this concluding section will instead focus on speculating on the future of GVCs in
light of the advent of an array of new technologies, such as digital platforms, blockchain, automation,
and 3D printing. Some readers will be disappointed by this focus, but there are at least two reasons for
it. First, new technologies are here to stay, while the current trade “strifes” between the United States and
its major trading partners are very much in flux and, as of the time of writing (February 2020), it is not
clear that they will develop into an all out “trade war”. Second, if an increase in trade barriers indeed
materializes for a significant amount of time, the effects it would generate would largely be the mirror
image of those following the decline in trade barriers in the last thirty years, as already hinted in section
2.3. Instead, the effects of new technologies are quite distinct in nature and deserve a separate discussion.
How will the future of GVCs be shaped by new technologies? Will the recent (post-2008) slowdown
and retrenchment in GVC participation continue in the next few decades? Or are we perhaps on the cusp
of a new wave of globalization? And how will new technologies reshape the role of GVCs as possible
engines of development? This final section will apply the conceptual framework developed in previous
sections to offer some tentative answers to these questions.

5.1. Digital Technologies

Consider first the case of digital technologies. It is clear that GVCs are rapidly changing under the pressure
of digital innovation. First and foremost, digital technologies encourage GVC participation by reducing
many of the barriers that firms face when attempting to join GVCs. For instance, digital platforms (such
as Amazon, Alibaba, or Mercado Libre) facilitate the matching of buyers and sellers, thus reducing
the initial fixed costs associated with GVC participation.14 Extending access to high-speed internet
and expanding e-commerce thus has the potential to greatly facilitate increased GVC participation by
relatively small firms, and also for firms in countries with bad infrastructure (which now gain the ability
to specialize in segments of GVCs that specialize in the provision of services via digital technologies
rather than the provision of physical goods via transport infrastructure). These same technologies also
enhance the management of inventories, and of logistics more broadly, thereby improving participation
even in manufacturing segments of GVCs (see Fort 2017).
Furthermore, digital platforms (via rating systems) and open distributed ledgers (such as blockchain)
enhance verification and monitoring, thus reducing informational frictions and opening the door for
countries with weak institutions to bypass a key factor limiting their participation in GVCs. Similarly,
in situations in which language barriers remain significant (e.g., in the provision of certain services), the
application of big data and machine-learning techniques has the potential to provide much more efficient
translation services (see Brynjolfsson, Hui, and Liu 2019). In sum, one would expect the unstoppable ad-
vance of digital technologies to provide a new tailwind to ensure the continuing growth in GVC activity
worldwide.
Apart from these effects on the efficiency of GVCs, it is also important to acknowledge some poten-
tial distributional effects originating specifically from these novel technologies. For instance, the same
reputation mechanisms that GVCs rely on to verify seller and buyer quality may foster concentration,
thus making it harder for entrants to compete. Within existing relational firm-to-firm GVC activity, novel
technologies might also have implications for the relative bargaining power of the different participants
in GVCs. For instance, digital platforms might allow large buyers in rich countries to gain information on

13 As Niels Bohr famously put it,“Prediction is very difficult, especially if it’s about the future.”
14 Note that many digital-platform companies offer parallel business-to-consumers and business-to-business platforms.
The World Bank Economic Review 21

a larger number of potential suppliers, thus enhancing their ability to have these suppliers compete with
each other. This in turn may lead to better terms of trade for lead firms in rich countries, at the expense of
a lower share of the gains from GVCs accruing to producers in less-developed economies. Furthermore,
digital platforms themselves have been accumulating vast amounts of information on the users of their
platforms, and this certainly enhances their ability to use this information to their advantage, either by
locking in buyers with particularly well-tailored recommendations, or by price discriminating in particu-
larly effective ways. As a result, digital-platform firms also pose new challenges for regulators seeking to
ensure fair competition and prevent abuse of market power.
The specific features of relational GVCs emphasized in section 4 suggest that the efficiency and distribu-
tional consequences following from the increasing adoption of digital technologies might not be orthogo-
nal to each other. More specifically, because verification and monitoring together serve as a substitute for
implicit contract enforcement, they may lead to an erosion of the “stickiness” of GVC relationships. This
in turn may well generate negative effects on the productivity of firm-to-firm transactions. Indeed, recent
work by Macchiavello and Morjaria (2019) suggests that in coffee value chains in Rwanda, increased
competition was associated with a lower use of relational contracts between mills and farmers, and this
breakdown in relational contracts lowered the efficiency and output quality of the mills.

5.2. Automation and 3D Printing

Although new technologies have the potential to raise productivity, they sometimes can prove to be quite
disruptive, especially when they lead to a reduction in the demand for workers. The example of industrial
automation and robotics is a case in point. At first glance, automation constitutes an alternative to off-
shoring for firms in rich countries seeking to lower their labor costs. Because automation and offshoring
appear to be substitutes, one would then expect improvements in automation to lead to an increasing
amount of reshoring over time. This fact might be particularly concerning to less-developed economies,
which might view automation as a threat to their ability to leverage their cheap labor to get a foot in the
door of GVCs. These fears might be compounded by the fact that large multinational companies typically
design their production processes with their home market factor prices in mind, and might then impose
these same production processes, possibly involving large amounts of automation, in their host countries
(see Rodrik 2018). In other words, participation in GVCs might lead to the diffusion of automation to
less-developed economies, thereby aggravating the reduction in demand for labor caused by automation
in less-developed economies.
The substitutability between automation and offshoring is, however, much less clear cut in prac-
tice. Automation by firms in developed countries tends to decrease their costs, enhance their productiv-
ity, and thereby increase their demand for intermediate inputs, many of which continue to be sourced
from less-developed economies. Whether automation increases or reduces the extent to which firms
in less-developed economies participate in GVCs is thus an empirical matter. Building on recent work
by Artuc, Bastos, and Rijkers (2018), the World Development Report (World Bank 2020, Chapter 6)
presents preliminary evidence suggesting that automation in industrial countries appears, in fact, to
have boosted imports from developing countries, although the effect is heterogeneous across sectors and
countries.
Even when automation might not have a negative impact on GVC participation, it is important to
emphasize that it is likely to aggravate the effects of increased GVC participation on inequality. The
mechanism here is closely related to the capital-skill complementarity effect already mentioned in section
2.3. Similarly to physical capital investments, automation typically complements skilled labor while sub-
stituting unskilled labor, thereby exerting upward pressure on the relative demand for skilled workers, and
thus on wage inequality. As a result, even when the effects on employment might be attenuated by produc-
tivity effects, automation is likely to be associated with a decreasing share of workers in less-developed
economies directly gaining from GVCs flowing through their economies.
22 Antràs

Automation is often associated with industrial robots, but there has recently been some debate about
the role of 3D printing on the future of GVCs. Will 3D printing lead to large volumes of reshoring,
therefore depressing GVC participation and trade flows? In answering this question, the mechanisms at
play are very similar to those applying to automation more broadly. The trade-reducing effects of 3D
printing are obvious, but one should also take into account their positive effect on productivity and input
demand, and the fact that 3D printers do not print goods out of thin air. In addition, by making consumer
goods produced by 3D printers cheaper, the demand for these same goods is increased, and as long as
3D printers are not available everywhere they may generate a short-run spur to trade flows. Indeed, this
is consistent with the findings of Freund, Mulabdic, and Ruta (2018), who show that the dramatic shift
of production of hearing aids via 3D printing actually increased international trade in hearing aids by
roughly 60 percent.

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