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FDI Lecture 2 Sum

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10 views2 pages

FDI Lecture 2 Sum

Uploaded by

s.delgado.1
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© © All Rights Reserved
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Lecture 2: Global value chains

Value chain: the series of activities within or around a firm that together create a valuable product or service
Backward participation: Buying inputs from other firms participating in the GVC
Forward participation: Selling inputs to other firms participating in the GVC

Gains in GVCs tend to be distributed unevenly.


Lead firms tend to have more bargaining power and capture most of the gains because their capabilities are:
● more rare
● more complex
● harder to codify

Emerging economies are more in the middle stage → they do not have capabilities for R&D, advanced marketing
strategies etc. → it is easier to participate in the middle stage of the production stage

It is also cheaper to produce in developed countries so advanced economies are outsourcing the production stage
more and more to developed countries because it is cheaper to produce there

Baldwin (2011).
Idea: A country will be a competitive supplier in a GVC if it can export a good to a foreign country at a cost lower than
the cost of making the good in the foreign country (pw).

Four sources of costs:


● Marginal cost of producing (MC)
● Transport cost (T).
● Tariff (τ).
● Coordination cost (χ).

Cost factors are multiplicative ( → think of cost terms measured in %!) → you multiply not add

The cost of producing at home and exporting is then (export):

The cost of importing from abroad is (import):

The country will produce and export intermediates if:

The country will import intermediates if:

The country will produce and sell intermediate locally (no exports and no imports) if:

Benefits GVC participation Costs/ risks participation


● Exposes countries to trade and FDI, which can ● Vulnerability to fluctuations in global demand
result in knowledge and technology spillovers. and supply.
● Access to larger markets creates incentives to ○ Economic dependence on one task or
improve existing capabilities and build new one multinational
ones. Yields productivity gains, competitive ○ Risk can be reduced by participating in
advantages. multiple supply chains.
● GVC participation can generate positive ● GVCs are mobile. Even small changes in
reputation effects, which facilitates establishing production, transport and communications
new business relationships. costs can trigger a relocation of a country’s core
● GVC participation triggers structural activities to another country.
transformation (from agriculture to ○ Fiscal losses for the government, fall in
manufacturing and services) which generates investment and employment.
growth and productivity gains ○ Any changes in policy can affect the
decisions of MNEs which can affect the
economy
● GVC participation requires creating an attractive
business environment to secure foreign
contracts and investments.
○ Risk of ‘race to the bottom’ regarding
labor or environmental standards.
● Offshoring tasks changes the relative demand
for different types of workers.
○ Increased income inequality between
high-skilled and low-skilled workers in
developed countries.

Upgrading can be achieved in multiple ways:

1. Product upgrading: Improvements in product quality


2. Process upgrading: Improvements in production processes (process upgrading).
3. Functional upgrading: Moving to production stages with higher value added and less competition
4. Deepening GVC integration and inter-sectoral upgrading by:
○ Integrating other domestic firms in the value chain via backward linkages.
○ Transferring capabilities to new products/activities.

Policies affecting GVCs


● Improving public infrastructure (especially transportation, ICT, electricity.)
● Improving worker skills (education).
● Creating a sound business environment (tax incentives, low corruption, strong legal system, efficient
bureaucracy, capital mobility, property rights protection).
● Reduction/elimination of tariff and non-tariff barriers to trade of parts and components.
○ In GVCs, intermediate goods cross borders multiple times. Hence, trade barriers are particularly
harmful.

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