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2. Global value chain analysis: a primer (second edition)* Karina Fernandez-Stark and Gary Gereffi

2.1 IMPORTANCE OF GLOBAL VALUE CHAINS

The global economy is increasingly structured around global value chains (GVCs) that account for a rising share of international trade, global gross domestic product, and employment. The evolution of GVCs in diverse sectors, such as resource-based commodi­ ties, apparel, electronics, tourism, and business serviceoutsourcing, has significant implica­ tions in terms of global trade. production, and employment, and how developing-country firms, producers, and workers integrate in the global economy. GVCs link firms, workers, and consumers around the world and often provide a stepping-stone for firms and workers in developing countries to participate in the global economy,. For many countries., especially low-income economies, the ability to effectively insert into GVCs is a vital condition for development. This supposes an ability to access GVCs, to compete successfully, and to 'capture the gains' in terms of national economic development, capability building and generating more and better jobs to reduce unemployment and poverty. Thus, it is not only a matter of whether to participate in the global economy, but how to do so gainfully.

The GVC framework allows one to understand how global industries are organized by examining the structure and dynamics of different actors involved in a given industry. In today's globalized economy wjth very complex industry interactions, the GVC methodol­ ogy is a useful tool to trace the shifting patterns of global production, link geographically dispersed activities and actors within a single industry, and determine the roles they play in developed and developing countries alike. The GVC framework focuses on the sequences of value added within an industry, from conception to production and end use. It examines the job descriptions, technologies, standards, regulations, products, processes, and markets in specific industries and places, thus providing a holistic view of global industries both from the top down and the bottom up.

The comprehensive nature of the framework allows policy makers to answer questions regarding development issues that have not been addressed by previous paradigms. Additionally, it provides a means to explain the changed global-local dynamics that have emerged within the past 20 years (Gereffi and Korzeniewicz, 1994). As policy makers and researchers alike have come to understand the pros and cons of the spread of globaliza­ tion, the GVC framework has gained importance in tackling new industry realities. These include the role of emerging economies like China, India, and Brazil as new drivers of global value chains, the importance of international product a.nd process certifications as preconditions of competitive success for export-oriented economies. the rise of demand­ driven workforce development initiatives as integral to dynamic economic upgrading, and the prolif era ti on of private regulations and standards (Lee, 20 IO; Mayer and Gereffi, 20 IO). GVC studies also prove useful in the examination of social and environmental

54

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2 of 23 Global value chain analysis: a primer 55

development concerns. Numerous institutions and governments have commissioned GVC studies to understand global industries and to guide the formulation of new programs and policies to promote economic development.

The chapter has three main sections. Section 2.2 presents the key concepts and tools of GVC analysis, Section 2.3 discusses the six dimensions of GVC analysis, and Section 2.4 illustrates with examples recent applications of the GVC methodology. Section 2.5 concludes.

2.2 WHAT ARE GLOBAL VALUE CHAINS?

The value chain describes the full range of activities that firms and workers perform to bring a product from its conception to end use and beyond. This includes activities such as research and development (R&D), design, production, marketing, distribution, and support to the final consumer. The activities that comprise a value chain can be contai•ned within a single firm or divided among different firms (Global Value Chains Initiative, 2017). fn the context of globalization, value chain activities have generally been carried out in iilterfirm networks on a global scale. By focusing on the sequences of tangible and intangible value-adding activities from conception and production to end use, GVC analy­ sis provides a holistic view of global industries - both from the top down (for example, examining how lead firms 'govern' their global-scale affiliate and supplier networks) and from the bottom up (for example, asking how these business decisions affect the trajectory of economic and social 'upgrading' or 'downgrading' in specific countries and regions).

There are six basic dimensions that GVC methodology explores, which are divided into global (top-down) and local (bottom-up) elements (Figure 2.1). The first three dimensiions refer to international elements, determined by the dynamics of the industry at a global level. They are: (I) an input-output structure, which describes the process of transforming raw materials into final products; (2) the geographic scope, which explains how the industry is globally dispersed and in what countries the different GVC activities are carried out; and (3) a governance structure. which explains how firms control the value

1. Input-Output Structure of a GVC

2. Geographic Scope

3. Governance Structure: Lead Firm• & lnduatry Organization

4. Upgrading

5. Local lnstltutlonal Context

6. lnduatry Stakeholders

Source: Fernandez-Stark. Bamber and Gereffi (2013).

Figure 2.1 Six dimensions of G VC analysis

GLOBAL

LOCAL

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56 Handbook on global value chains

chain. The second set of three dimensions explains how individual countries participate in GVCs. These local dimensions are: (4) upgrading, which describes the dynamic movement within the value chain by examining how producers shift between different stages of the chain (Gereffi, 1999; Humphrey and Schmitz, 2000); (5) an institutional context in which the industry value chain is embedded in local economic and social elements (Gereffi, 1995); and ( 6) industry stakeholders, which describe how the different local actors of the value chain interact to achieve industry upgrading.

The GVC approach analyzes the global economy from these two contrasting vantage points: ' top-down' or global and 'bottom-up' or local. 'Governance' of global value chains, a key concept of the top-down view, focuses mainly on lead firms and the organization of international industries. Upgrading, the main concept for the bottom-up perspective, focuses on the strategies used by countries, regions, and other economic stakeholders to maintain or improve their positions in the global economy.

The next section discusses these six dimensions in more detail as analytical tools for GVC analysis and research.

2.3 DIMENSIONS OF GVC ANALYSIS

2.3.l Input-Output Structure

a. Identify the main activities/segments in a global value chain A chain repr~sents the entire input-output process that brings a product or service from initial conception to the consumer's hands. The main segments in the chain vary by industry, but typically include: research and development, design, inputs, production, distribution and marketing, and sales, and in some cases the recycling of products after use. This input-output structure involves goods and services, as well as a range of sup­ porting industries. The input-output structure is typically represented as a set of value chain boxes connected by arrows that show the flows of tangible and intangible goods and services, which are critical to mapping the value added at different stages in the chain, and to layering in information of particular interest to the researcher (e.g. , jobs, wages, gender, and the firms participating at diverse stages of the chain).

In order to understand the entire chain, it is crucial to study the evolution of the indus­ try, the trends that have shaped it, and its organization. Based on general kno.wledgeabout the industry, segments of the chain can be identified and differentiated by the value they add to the product or service. The researcher further develops this chain using secondary data and interviews. The role of the researcher is to link these pieces of information and create a united and self-explanatory chain that includes the principal activities of the industry. The segments of the chain illustrate bow different value-adding processes contributed to the product or service.

Diagrams are extremely useful to illustrate the findings. For example, the fruit and vegetables global value chain comprises the different segments shown in Figure 2.2.

b~ Identify the dynamics and structure of companies under each segment of the value chain Each of the segments identified in the previous step has specific characteristics and dynamics, such as particular sourcing practices or preferred suppliers. For example, in

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Global value chain analysis: a primer 57

[ ) ~lstrtbutlon 6

ProcNalng .____M_•_rke_ t1n_ 11_.,,

Suurce: Fernandez-Stark. Bamber and Gereffi (201 le).

Figure 2.2 Fruit and vegetables global v.alue chain segments

the fruit and vegetables value chain, the inputs for the ' processing' segment may come from fruits intended for export that did not meet the quality controls or they may come from production grown exclusively for processing. It is important to identify the type of companies involved in the industry and their key characteristics: global or domestic; state-owned or private; large, medium, or small; and so on. Identifying the firms that participate in the chain will help to understand its governance structure (this djmension will be explained in Section 2.3.3 below).

For example, under the ' production' and 'distribution & marketing' segments, the main producers of fresh produce and the channels of distribution are listed in figure 2.3.

Inputs [ Pr~ng l ~-o_,._trt_b_u_tlo_"_"_ _ _ _ Marketing

-------------------------------------------------------- Seeds

Fet11h1.ers

Agrochemicals (Herb,clcJcs. Fungicides & Pesticides)

Farm Equipment

lrriga11on Equlpmont

Fa,ma: Fruit & VegetablN for ~ food

Fatma:Frultl Vegetables for

fNlh~

8mll F ...

Fanni ] RID

So11rce: Fernandez-Stark et al. (201 lc).

Residues

,. -~2-

·-,--,.~·--·;~_ -- 1· , ' .

L~

iff:--: .1- .~~,OJ~-:A~:: ~~ij

Figure 2.3 Fruit and vegetables global value chain

ProceMlng Companle1

[ Dried I Super.ma~ts

[ I F,ozen Food serviees

I Preserved ] ( Juices & Pulpe J Importers &

Wholesales

Small-scale ret~llers

]

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58 Handbook on global value chains

2.3.2 Geographic Scope

The globalization of industries has been facilitated by improvement in transportation

and telecommunications infrastructure and driven by demand for the most competitive

inputs in each segment of the value chain. Today, supply chains are globally dispersed

and different activities are usually carried out in different parts of the world. In the global

economy, countries participate in industries by leveraging their competitive advantages

in assets. Usually, developing countries offer low labor costs and raw materials, while rich

nations, with highly educated talent, are behind R&D and product design. As a result,

firms and workers in widely separated locations affect one another more than they have

in the past (Global Value Chains Initiative, 2017).

Geographical analysis is first based on the analysis of global supply and demand. This

is done by analyzing the trade flows at each stage of the value chain using international

trade statistics databases such as United Nations Comtrade and information compiled

using secondary sources of firm-level data, industry publications, and interviews with

industry experts. One of the main contributions of GVC analysis has been to map the shifts in the geo­

graphic scope of global industries. However, GVCs operate at different geographic scales

(local, national , regional, and global) and they continue to evolve. New evidence suggests

there may be a trend toward a regionalization of GVCs in response to a variety of fac­

tors, including the growing importance of large emerging economies and regional trade

agreements (Gereffi, 2014). In the Asian apparel value chain, the expanding geographic

scope of the industry is closely tied to functional upgrading among main economies tied

to the industry (Figure 2.4).

2.3.3 Governance

Governance analysis aUows one to understand how a chain is controlled and coordinated

when certain actors in the chain have more power than others. Gereffi ( 1994, p. 97) defined

governance as 'authority and power relationships that determine how financial, material

and human resources are allocated, and flow within a chain.' Initially in the global com­

modity chains framework, governance was described broadly in terms of 'buyer-driven'

or 'producer-driven' chains (Gereffi, 1994). Analysis of buyer-driven chains highlights the

powerful role of large retailers, such as Walmart and Tesco, and branded merchandisers,

such as Nike and Reebok, and dictates the way their supply chains operate by requiring

suppliers to meet certain standards and protocols. In contrast, producer-driven chains

are more vertically integrated along all segments of the supply chain and leverage the

technological or scale advantages of integrated suppliers. Understanding governance

and how a value chain is controlled facilitates firm entry and development within global

industries. In practice, governance analysis requires identification of the lead firms in

the sector, their location, how they interact with their supply base, and their source of

influence and power over suppliers (e.g., standards compliance).

A more elaborate typology of five governance structures has been identified in the

GVC literature: markets, modular, relational, captive, and hierarchy (see Figure 2.5).

These structures are measured and determined by three variables: the complexity of the

information shared between actors in the chain; to what extent this information can be

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Countries

Japan

iS Hong Kong

l South Korea 0 Taiwan j ~ China ._ 0 Indonesia

"ii Thailand

~ India Pakistan

Bang.ladesh Cambodia Vietnam

Global value chain ana(vsis: a primer 59

Segments of Apparel Supply Chain

Garment$ · ·······» Textiles •···· · ··➔ Fibers •··· ·~ Macl,inery (spinning, weaving,

cutting. sewing)

I 950s-early I 960s 1960s 1970s

Garments ········» Textiles · · •··· ··➔ Fibers

Late I %Os-early 1980s Late 1980s & 1990s

Garments ········» Textiles

Late I 980s--early 1990s 1990s

GartMnts J Mid-I 990s-early 2000s

Low Value-Added High

Note: Dotted arrows refer to the sequence of production and export capabilities within economies. Solid

arrows refer to the direction of trade flows between economies. Dates refer to a country's entry years for

exports of specific products.

Smiru : Gereffi (2005a, p. 172).

Figure 2. 4 Regional expansion and industrial upgrading in the Asian apparel value chain

codified; and the level of supplier competence to fulfill or meet production specifications

(Frederick and Gereffi, 2009; Gereffi, Humphrey and Sturgeon, 2005):

• Market: market governance involves transactions that are relatively simple.

Information on product specifications is easily transmitted, and suppliers can

make products with minimaJ or no input from buyers. These arm's-length exchanges

require little or no formal cooperation between actors and the cost of switching

to new partners is low for both producers and buyers. The central governance

mechanism is price rather than a powerful lead firm.

• Modular: modular governance ocours when complex transactions are relatively easy

to codify. Typically, suppliers in modular chains are highly capable, make products

to a customer's specifications, and take fuJl responsibility for process technology

using generic machinery that spreads investments across a wide customer base.

This keeps switching costs low and limits transaction-specific investments. Linkages

(or relationships) are more substantial than in simple markets because of the high

volume of information flowing across the interfirm link. Information technology

and standards for exchanging information are both key to the functioning of

modular governance.

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Countries

Japan

ci Hong Kong

I S-outh Korea 0 Taiwan j ~ China .... 0 lndonesia 'ii Thailand .5 India

Pakistan

Bangladesh Cambodia Vietnam

Global value chain analysis: a primer 59

Segments of Apparel Supply Chain

Garments ····· ···~ Textiles •·······► Fibers ·····~ Machinery (spinning. weaving.

cutting. sewing)

I 950H:arly I 960s 1960s 1970s

Garments ········~ Textiles ········➔ Fibers

Late I 960s-early 1980s Late 1980s & 1990s

Garments ········~ Ttxtiles

Late I 980s- early 1990s I 990s

Garments J Mid•l990H:arly 2000s

Low Value-Added High

Nme: Dotted arrows refer to the sequence of production and export capabilities within economies. Solid

arrows refer to the direction of trade nows between economies. Dates refer to a country's entry years for exports of specific products.

Saur('e: Gerem (2005a. p. 172).

Figure 2.4 Regional expansion and industrial upgrading in the Asian apparel value chain

codified; and the level of supplier competence to fulfill or meet production specifications

(Frederick and Gereffi, 2009; Gereffi, Humphrey and Sturgeon, 2005):

• Market: market governance involves transactions that are relatively simple.

Information on product specifications is easily transmitted, and suppliers can

make products with minimal or no input from buyers. These a rm's-length exchanges

require little or no formal cooperation between actors and the cost of switching

to new partners is low for both producers and buyers. The central governance

mechanism is price rather than a powerful lead firm.

• Modular: modular governance occurs when complex transactions are relatively easy

to codify. Typically, suppliers in modula r chains are highly capable, make products

to a customer's specifications, and take full responsibility for process technology

using generic machinery that spreads investments across a wide customer base.

This keeps switching costs low and limits transaction-specific investments. Linkages

(or relationships) are more substantial than in simple markets because of the high

volume of information flowing across the interfirm link. Information technology

and standards for exchanging information a re both key to the functioning of

modula r governance.

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60 Handbook on global value chains

Market

End Use OUS1omor1

Materials Suppllcrw

Modular

Lead Firm

Turnkey Supplier"

ComJ)Onont and Material Suppliers

Relational

Lead Firm

Relational Supplier

Component and M11tl?rial Suppliers

Degr~'C of Explicit Coordination

Captive

Lead Firm

Captive Suppliotll

Hierarchy

Integrated Firm

Low+------------------------ High Degree of P<lWcr Asymmetry

Note: A turnkey supplier is a contract manufacturer that builds and distributes a product or service that is fully complete and ready to operate or use to the specifications of a buyer.

Source: Gerem et al. (2005, p. 89).

Figure 2.5 Five global val"'e chain governance types

• Relational: Relational governance occurs when buyers and sellers rely on complex information that is not easily codified and transmitted or learned. This results .in frequent interactions and knowledge sharing between parties. Such linkages require trust and generate mutual reliance, which are regulated through reputation, social, and spatial proximity, family and ethnic ties, and the like. Despite mutual depend­ ence, lead firms still specify what is needed, and thus have the ability to exert some level of control and power over suppliers, despite their high degree of competence. Producers in relational chains are more likely to supply differentiated products based on quality, geographic origin, or other unique characteristics. Relational linkages take time to build. so the costs and difficulties required to switch to a new partner tend to be high.

• Captive: In these chains. small suppliers are dependent on one or a few buyers th~t often wield a great deal of power. Such networks feature a high degree of monitoring and control by the lead firm. The power asymmetry in captive networks forces suppliers to link to their buyer under conditions set by, and often specific to, that particular buyer, leading to thick ties and high switching costs for both parties. Since the core competence of the lead firms tends to be in areas outside of production, helping their suppliers upgrade their production capabilities does not encroach on this core competency; but benefits the lead firm by increasing the

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Global value chain analysis: a primer 61

efficiency of its supply chain. Ethical leadership is important to ensure suppliers receive fair treatment and an equitable share of the market price.

• Hierarchy: Hierarchical governance describes chains characterized by vertical integration and managerial control within lead firms that develop and manufacture products in-house (it ca:n be operationalized through subsidiary plants in foreign countries). This can occur, for example, when product specifications cannot be codified, products are complex, or highly competent suppliers cannot be found, amongst other business conditions and reasons.

The form of governance in GVCs can change as an industry evolves and matures, and governance patterns within an industry can vary from one stage or level of the chain to another. ln addition, recent research bas shown that many GVCs are characterized by multiple and interacting governance structures, and these affect opportunities and challenges for economic and social upgrading (Dolan and Humphrey, 2004; Gereffi, Lee and Christian, 2009).

2.3.4 Upgrading (and Downgrading)

Economic upgrading within GVCs is defined as firms, countries, or regions that move to higher-value activities in order to increase the benefits (e.g., security, profits, value-added, capabilities) frotn participating in global production (Gereffi, 2005a, p. 17 l ; see Gereffi, Chapter 14 this volume, for a discussion of economic upgrading and downgrading in GVCs. and Rossi, Chapter 16 this volume, on social upgrading and downgrading) .

Diverse mixes of government policies, institutions, corporate strategies, technologies, and worker skills are associated with upgrading success. Within the OVC framework, Humphrey and Schmitz (2002) identified four types of upgrading at the firm level:

• Process upgrading, which transforms inputs into outputs more efficiently by reorganizing the production system or introducing superior technology (e.g., automation that increases productivity and reduces factory lead times).

• Product upgrading, or moving into more sophisticated product lines (e.g .• produc­ tion of higher value items, such as organic fruits and vegetables).

• Functional upgrading, which entails acquiring new functions (or abandoning exist­ ing functions) to increase the overall skill and value-added content of the activities (e.g., in the mining sector, processing the mineral in addition to extraction).

• Chain or intersectoral upgrading, where firms move into new but often related industries (e.g., television set manufacturers start producing computer screens).

Furthermore, Fernandez-Stark, Bamber and Geretii (2014) identified several additional types of upgrading. These add to Humphrey and Schmitz (2002) by also considering upgrading beyond the firms that already participate in GVCs:

• Entry in the value chain, where firms participate for the first time in national, regional, or global value chains. This is the first and one of the most challenging upgrading trajectories.

• .Backward linkages upgrading, where local firms (domestic or foreign) begin to

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62 Handbook 011 global value·chains

Chile

,---------A-----------., Kenya & Morocco

-------~A,_ _____ __ ( Jord·an &

Honduras ,_ ___ __,! _____ _____ (

[_, -__..tr = l S,>urce: Fernandez-Stark et al. (201 le).

Packing&, ColclStorage

DlatrlbU,tlona Marutlng

Figute 2.6 Upgrading stages of selected countries in the fruit and vegetables value chain

supply tradable inputs and/or services to companies that previously used imported inputs.

• End-market upgrading, where firms already in the chain move into more sophisticated product or geographic markets that require compliance with new, more rigorous standards or call for production on a larger scale at accessible prices.

Upgrading patterns differ by both industry and country based on the input- output structure of the value chain and the institutional context of each country. Certain indus­ tries require linear upgrading and countries must gain expertise in one segment of the value chain before upgrading into the next segment, as shown in Figure 2.6 for countries involved in the horticulture value chain.

The apparel industry is a classic case used to illustrate different upgrading and downgrading trajectories, since a large number of countries have been significant apparel exporters from the 1970s until the present (Gereffi, 1999; Gereffi and Frederick, 2010). Apparel suppliers in Torreon, Mexico initially entered the blue jeans industry at the beginning of the 1990s1 in the assembly stage of the value chain, but they quickly devel­ oped expertise in providing trim and labels, and distinct washes and finishes. By 2000, operations based in Torreon had also developed expertise in distribution by shipping their product directly to the point of sale. Upgrading thus occurred at the firm level in Torreon, in conjunction with the increasing demands of US buyers for full-package production. Figure 2.7 illustrates the region's upgrading trajectory into new higher value-added seg­ ments of the apparel value chain between 1993 and 2000.

In 1993, only four US manufacturers - Farah, Sun Apparel, Wrangler, and Levi Strauss & Co. - had a. significant presence in Torreon. By 2000, the number of export customers grew to more than two dozen. In the early 1990s, the assembly plants on the Mexican side of the border received cut parts from US manufacturers or brokers. These cut parts were sewn into garments and then re-exported to the United States under the 'h1aquila' regime, which allowed tariff-free inputs to be sent from the United States to Mexico as long as they were included in Mexican production for re-export to the United States,. Brand marketers

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Global value chain analysis: a primer 63

us{ BBEJB~BBR TORRE6N,

MEXICO

1993

1996

2000

Sowce: Bair and Gereffi (200.1, p. 1894).

Figure 2. 7 US- Torreon apparel value chain: artivities and locaNon

and retailers 'pulled' Mexican firms to increase their production volumes and the range of activities performed.

However, the full-package model did not guarantee long-term success. Blue jean exports from Torreon s1umped with the decline in US export demand after 2000, and apparel employment in Torreon. which rose from 12000 jobs in 1993 to an estimated 75 000 jobs in 2000, declined to 40000 in 2004. Maintaining a role in the US market in the f~ce of stiff competiti~n from China and other international suppliers required Torre6n's blue jeans cluster to continue to upgrade beyond manufacturing stages (OEM)2 of the value chain through the development of local brands, regional market­ ing directly to US buyers, and the establishment of a local design center in the region (Gereffi, 2005b).

The challenge of economic upgrading in GVCs is to identify the conditions under which developing and developed countries and firms can 'climb the value chain' from basic assembly activities using low-cost and unskilled labor to more advanced forms of 'full-package' supply and integrated manufacturing. However, increasingly, many of the highest vaJue activities are located in pre- and post- production manufacturing services, which challenge host countries to adopt appropriate workforce development strategies to supply these services locally. As seen in Figure 2.8, developed countries usually have a presence in high value-added activities, while developing countries concentrate in lower value-added activities.

This chapter only analyzes economic upgrading in detail; however, in order to reach sustainable development, it is essential to meet social and environmental upgrading as well (see Ponte, Chapter 13, Rossi, Chapter 16, and Neilson, Chapter 18 this volume). Over the past two decades, there has been an implicit presumption that economic improvements would lead to social gains through the improvement of the well-being of workers in the chains. Yet, recent evidence from around the world suggests that economk upgrading is not automatically accompanied by social upgrading.

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64 Handbook on global value chains

Developed countries

Devel oping countries

Base Price

Pre~roduction Intangible

Production: Tangible Activities

Post-production Intangible

Value-adding Activitie.s

Source: Authors' based on Baldwin, Ito and Sato (2014); Shih (n.d.).

Figure 2.8 Smile curve of high-value activities in global value chains

2.3.5 Local Institutional Context

The local institutional framework identifies how local, national, .and international conditions and policies shape a country's participation in each stage of the value chain (Gereffi, 1995). GVCs are embedded within local economic, social, and institutional dynamics. Insertion in GVCs depends significantly on these local conditions. Economic conditions include the availability of key inputs: labor costs, available infrastructure; and access to other resources such as finance. Social context governs the availability 0f labor and its skill level, such as female participation in the labor force and access to education. Finally, institutions include tax and labor regulation, subsidies, and education and innovation policies that can promote or hinder industry growth and development.

Because global value chains touch down in many·different parts of the world, the use of this framework allows one to carry out more systematic comparative (cross-national and cross-regional) analysis to identify the impact of different features of the institutional context on relevant economic and social outcomes.

Key factors affecting developing country competitiveness in GVCs include:

• productive capacity: human capital, standards and certifications. and national innovation systems;

• infrastructure and services: transportation, ICT, energy and water; • business environment: macroeconomic stability and public governance;

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Global value chain analysis: a primer 65

• trade and investment policy: market access, import tariffs, export-import proce­ dures, border transit times and industry-specific policies;

• institutionalization.: industry maturity and coordination? and public and private collaboration and coordination.

2.3.6 Stakeholder Analysis

Analysis of the local dynamics of a value chain requires examination of the stakeholders involved. All the industry actors are mapped in the value chain and their main role in the chain is explained. The most common stakeholders in the value chain are: companies, industry associations, workers, educational institutions, government agencies including export promotion and investment attraction departments, ministries of foreign trade, economy, and education, amongst others. In addition, it is important to consider how relations between these actors are governed at the local level and which institutions are in a position to drive change. Thus, this type of analysis is critical to identify the key players in the v-alue chain. It became especially relevant for industry upgrading recommendations and the development of an industry growth strategy in which each stakeholder plays a role to contribute in the development of the sector.

2.4 RECENT APPLICATIONS OF GLOBAL VALUE CHAIN ANALYSIS

Originally, GVC analysis was limited to research on competitiveness in manufacturing industries. Today analysis has expanded in several directions to encompass emergent indus­ tries such as offshore services, to inform industrial policy, to guide opportunities to insert small and medium enterprises (SMEs) in regional and global value chains, and to embrace the links between economic and social upgrading such as workforce development. This section includes several examples of the increasingly diverse application of GVC analysis.3

2.4.1 SME Participation in Regional and Global Value Chains in Agro-industries4

The insertion of small- and medium-sized producers in national, regi0nal, and global high-value agriculture value chains can have important consequences for poverty alle­ viation in rural areas of developing countries due to their potential to increase incomes and create employment (Weinberger and Lumpkin, 2007). However, smallholders in developing countries face a series of constraints that often limit their ability to participate competitively in these chains, and there has been considerable concern that these produc­ ers are being excluded from important growth opportunities.

Ill~strating the importance of the institutional context of GVC analysis, a model out­ lined by the Duke Global Value Chain Center (Duke GVCC)5 addresses the international development community's understanding of how interventions can be more effectively designed to ensure sustainable inclusion of these small- and medium-sized producers in the sector. Based on extensive primary andl secondary research, with a focus on Inter­ American Development Bank Multilateral Investment Fund (108-MIF) initiatives in Latin America, four major constraints were identified that limit the competitiveness of

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66 Handbook on global value chains

r 1

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Source: Fernandez-Stark et al. (2012).

Figure 2. 9 Model for sustainable smallholder inclusion in high-value agrofood chains

small- and medium-sized producers and their sustainable entry into value chains. Duke GVCC proposes a holistic model to address these constraints: ( l) access to market; (2) access to training; (3) collaboration and cooperation building; and (4) access to finance. Amore detailed report (Fernandez-Stark et al., 2012) explains how project interventions can improve competitiveness factors and ensure that producers' inclusion in the value chain is based on a viable business case. Figure 2.9 summarizes a 'holistic' model for the inclusion of SMEs in GVCs.

This model is applicable to all levels of development. SMEs with low capability levels will need longer interventions and usually all four pillars must be included in the interven­ tion. SMEs with higher levels of expertise may need support only in two of these are.is as they already have managed to overcome constraints related to the other two areas. A summary of the four pillars model is presented in Figure 2.10. This model was developed for the agricultural value chain; however, it can be used in other industries since SMEs in different sectors face similar challenges.

2.4.2 Globalizing Service Sectors in the World Economy: Offshore Services6

The global value chain methodology has proven quite useful in the analysis of services (see Low, Chapter 15 this volume). While the actual sequence of events fro111 production to c9nsumption of a service is short, GVC analysis allows for the incorporation of all the

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Global value chain analysis: a primer 67

Access to Tr,11111r1cJ

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Figure 2. IO Four pillars mode/for SME participation in GVCs

services supplied within an industry, ranging from very simple tasks to highly sophisti­

cated interactions in one chain. The example of offshore services illustrates how the GVC

framework provides insight into a complex industry and serves as a guide for potential

upgrading trajectories.

Offshore services Structural changes in the world economy during the past decade facilitated the global

outsourcing of multinational corporations (MNCs), thereby creating the offshore

services industry, a new and rapidly growing sector in developing countries (Gereffi and

Fernandez-Stark, 20l0b, p. 335). Information technology On now allows for quick and

easy information transfers. Companies looking to improve their efficiency, reduce costs,

and increase flexibility often unbundle their corporate functions, such as human resource

management, customer support, accounting and finance, and procurement operations,

and 'offshore' these activities (Gospel and Sako, 2008; Sako, 2006). This reduces the

burden of support activities and allows firms to focus on their core business. The increas­

ing participation of developing countries in this new industry of offshore service exports

highlights the growing capabilities of the Global South, not only at the production level

but also in creating the knowledge behind products. For example, Chile exports engineer­

ing services related to mining, India exports pharmaceutical R&D to lead MNCs, and

Uruguay exports sophisticated expertise on cattle traceability.

Duke GVCC has analyzed skill level and work experience as a proxy to create an off shore

services value chain, presented in Figure 2.11. The first categorization refers to three

broad types of off shore services that can be provided across all industries (general business

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Global value chain analysis: a primer 69

services): information technology outsourcing (ITO), business process outsourcing (BPO), and knowledge process outsourcing (KPO). The second categorization refers to services that are industry specific. Firms providing general business services tend to be process oriented, while those in the vertical chains must have industry-specific expertise and their services may have limited applicability in other industries. For general business services, all activities are related to supporting generic business functions, such as network management, application _integration, payroll, call centers, accounting, and human resources. In addition, they include higher-value services, such as market intelligence, business analytics, and legal services (referred to as KPO). Within these services, ITO contains a full spectrum of low-, middle­ and high-value activities of the off shore services value chain; BPO activities are in the low and middle segments; while KPO activities.are in the highest-value segment of the chain.

Within the GVC framework, adapting this s.cheme to our case evidence, five principal upgrading trajectories can.be identified from the ten country case studies: entry into the value chain; upgrading within the BPO segment; offering full-package services; the expan­ sion of IT firms into KPO services; and the specialization. of firms in vertical industries. These five upgrading trajectories are presented in Figure 2.12.

2.4.3 Workforce Development and Global Value Chains

Another illustration of new applications of the GVC analysis is the topic of workforce development. The International Labour Organization used the GVC framework to understand the dimensions of production and employment during its 2016 International Labour Conference (ILO, 2016). Duke GVCC introduced the skills dimension into GVC analysis in the multi-industry study 'Skills for Upgrading. 17

The participation of workers in GVCs can be viewed through the lens of job categories defined by skill level in order to understa,nd the conditions of the workers in these chains and the challenges they face. Each skill level can be loosely associated with stages of the value chain (Gereffi, Fernandez-Stark and Psilos, 2011). Table 2.1 distinguishes five main types of jobs. 8

Figure 2.13 shows graphically how these five types of work and skill levels are distrib­ uted acros.s different GVCs. The composition of a country's workforce in GVCs changes as it undergoes economic upgrading. Two dimensions of economic upgrading can be highlighted: traditional development paradigms that stress 'structural transformation' from primary projects to manufacturing and service jobs in the economy (shifting from left to right on the figure); and the new 'GVC paradigm' of upgrading to higher-value activities within any specific industry (moving from the bottom to top of each column) (Gereffi et al., 2011; Taglioni and Winkler, 2016).

In recent years, Duke GVCC has been working to understand workforce development issues using the GVC methodology. This undertaking incorporated a multi-industry and multi-country analysis of upgrading trajectories and workforce initiatives that helped to drive these shifts. The sectors and countries selected in a pioneer study conducted by Duke GVCC (Gereffi et al., 2011) were: (1) fruit and vegetables (Chile, Kenya, Morocco, Jordan, ~nd Honduras); (2) apparel (Turkey, Sri Lanka, Bangladesh, Nicaragua, and Lesotho); (3) tourism (Costa Rica, Vietnam, and Jordan); and (4) offshore services (lndia, the Philippines, Chile, and Central American countries). In each segment of these value-chains, Duke GVCCfound that workers required specific skills that frequently are

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70 Handbook on global value chains

Type Diagram G-.1........, Acthlda I 1n,,.1ry.

j' lp,clllt

ITO '-=,,.= :=· 0==-1-

{"_.. .___ Actlvkltt I ITO KPO Ji

- 1 ·1

J

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uo ==== II Actlrillo

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_j~ c ....... , ..... A<tlvltlH

nu l -~

Description

Comm~ way to en.ta Jbe ofl'sbore ~ vahre ~ \hrougtLthe establishment of call center operations Oppo~ for low-income countri~ to enter into the knowledge cco,iomy

Recent examples of count.ries entering the-value chain through call centers include El Salvador (Dell. Sykes and Teleperformance). Nicaragua (Sitel), Panama (HP and Caterpillar) and Guatemala (Exxon Mobil. ACS and 24/7 Customer) (Gereffi, Castillo, et al., 2009)

Companies expand their BPO services·within. the segment Improving and expanding call centers' ope,itx>~ or specialization in cenain areas

South Africa has been an important destination for BPO services currently employing around 87 000 people and growing at 33% per year. South Africa is aciively working to expand its BPO activities

Companies politioneclin the. no and KPO segments may opt to pil>vidc· a more comprehenal.vuange of activities and l,iclude. BPO ~ AcquisitioM of smaller BPO firms and/or creating a new business llDit withhl ~e company

India has seen a number offinns·in the IT and consulting (KPO) segment expand to lhe BPO sector. This is true for both big domestic firms like Infosys, Wipro and also foreign firms located in India like IBM and Accenture among others

rr service firms indude KPO activities in.their ~ JT companies. eopge cuatbmers to find solutions for unsolved: business problems·

For example, between 2002 and 2005, Indian firms Infosys, Wipro, TCS and WNS.amongst others developed and launched business consulting services practices

Companies ofl'eti'ng spme rro, BPO and KPO services for a wide .range of mdUJti.cs start speciali:iating and foc:us on key industries to develop expertise

The Czech Repub.lic•, which entered into lhe offshore services industry through the establi$_hmcnt of BP.O shared services activities. has quickly upgraded into R&D segments of vertical industries. particularly in the automotive. aerospa,ce and J:f area)i

Source: Fernandez-Stark, Bamber and Gereffi (201 lb).

Figure 2.12 Examples of upgrading trajectories in the offshore services value chain

regulated by global rather than local actors. For example, produce buyers from developed countries (e.g., Tesco in the UK, Walmart) set strict standards that need to be met by workers in developing countries in order to supply these supermarkets.

As an illustration, Figure 2.14 summarizes workforce development miplications in the

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Global value chain analysis: a primer 71

Table 2.1 Types of work in global value chains

Job Category Examples of Conditions of

Work

Informal SM E May or may not be compen-

or household sated; precarious conditions;

work unregulated work hours

Low skilled Formal; job insecurity, low

labor- wages, weak organization due

intensive work to subcontracting

Moderate Formal; increased job security,

skilled work potentially poor working

hours

High skilled technology­ intensive work

Formal; high job security,

higher paid work, working hours & work- life balance challenges

Knowledge­ intensive work

Formal; potentially freelance,

higher paid work, working hours & work- life balance challenges

Source: Gereffi. Bamber and Fernandez-Stark (2016).

Type of work I Agriculture I I Apparel I ■ Knowledge-

I.,) intensive

j t ~ □ High-skilled.

I technology- :a intensive .. .. t <II 0..

t z 0 Medium-skilled.

r mixed production

:a tech.nologies

tc t 1:1. ~ .Si! ■ Low-skilled, El labour-intensive

j t ■ Small-scale,

household-based

Education Level

Low; often less than primary education

Low; often primary education or less

Completed secondary education

Post-secondary technical education

Completed university education, including advanced degrees

Examples

Small producers in agricultural supply

chains

Workers on apparel or electronic assembly lines

Procurement and logistics handl.ing jobs in apparel and automobile chains

Speciali.zed component

production and assembly in aerospace and medical devices chains

Accounting, engineering and design jobs

I har!:are I

Ecooomk Upgrading: Old Paradigm For Development

Source: Adapted from Barrientos et al . (2011. p. 328).

Figure 2. 13 Typology of workforce composition across different GVCs

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12 Handbook on global value chains

Type

Source:

Diarm

c.....1-A,- 1....,,..,, l:J>O I -Ilk

- -;o

Fernandez-Stark:et al. (201 lc).

Workforce Dcvdopmcnt Initiatives

Call centers hire. people with high school diplomas or bachelor's degrees Further slcills training is provided by the company

In Guatemala, Inter-institutional alliances ",:re created to promote call Cffltcr and BPO skills training. lntccap, a t«hnical tr.tining institution funded through a 1% levy on salaries, has been central to these initiatives (EC LAC. 2009)

Type of skills preparation: Institutions involved: Short training Private s«tor

Govemmcnt

Skills development is carried ou1 by the private s«tor, either through in-house or contracted training programs Educa1ional institutions and.gove,-nmcn1s. help to \level op course content and provide scholarships

In South Africa. the government created lhe BPO Support Programme 10 genera1e more jobs. The program includes training for 35000 direct jobs and 4000 in mi<tdle management

Type of sk.ills prepar.11ion: Short training Formal education (degree required)

l11sti1utio11s involved: Privatfl<:etor Government Tertiary educational institutions

Expansive hiring process targe1s candidates with high school diploma and/or college graduacr, 10 work in chis indLis1ry New hires mwc fu,c complete BPO training programs 10 guarantee quality services. This refers 10 the ,iame·training olfercdin the ·Upgrading whhi,n the BPO segment'

In the early 2000s in Jndia, there wa.sa significant push into the BPO segment by ITO and KPO firms. Recruiting was the central aspect 10 this expansion. and firms focused particularly on hiring women from middle-class backgrounds

T)'.pc of sir.ills preparation: Short tr.tining Formal education (degree required)

Institutions involved: Private s«tor Government

Pcrsonnd with higher education qualificruioM recruited. Typically MBA graduates a nd workcn with business experience. Thcst workers muse have sharp anltlytical skills

Ugal process outsourcing requires qualified lawyers, By 2015. LPO will employ 17 000 prof<$$ionals. These lawyers undergo ~imilar training as in the US

Type of skills preparation: lnsdtutions .invoh·cd: Formal education (degree required) Tertiary educational institutions

Companies hire area experu to sustain their competitive advan.tage in specific areas For example, a ·eP6 company providing medical trunscription services n1us1 hire nurses and doctors to ensure accurate service provision

In the C~h Republic. the government hu been inecntivizing ad vanced degrees IIJ(h as Master';i and PhD degrees. Mas~r·s students accounted for 40% of the university s1uden1 population. Today ibere are more lhan 73 000 technical.university students engaged in R&O in ditfcri:nt areas

Type of skill, preparacioru Formal educa~ion (degree required) Usually MA and PhD degrees

l'niti1u1ioru1 involved: Tcniary cducmio_nal 111sti1utions

Companies undertake proccss improvements co upgrade their global capabilities

For example. Siemens. has specific stratc·g,cs for organizational Ir.tining oh CMMI (one or the most popula, .. proccs.s improvement certifications in this industry). The Strate&}' consist.s of d'efining lhc jobs s~Jils ncec.ssary, asScC5sing who news the training, training workcr5 wilh skill gaps. cecording progress and monitoring new $kills gaps

Type or skills preparation: .Internal trainins.

ln.ithucions involvt<I: Privaic sector Certil!cation institutes. (on-site or online)

Figure 2. 14 Examples of workforce development initiatives in the offshore services value chain

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Global v(lltJe chain analysis: a primer 73

offshore services value chain. Developing countries in offshore services are engaging in market-driven development - acquiring capabilities to upgrade services (providing better services, expanding the number of services, or/and offering higher value-added services) - through_ significant investments in workforce training and managerial capabilitie5i provided initially by private offshore service providers but now increasingly supported by an expanded range of public, private, and multi-sector initiatives. Involvement in the offshore services industry has provided developing country workers, firm5i and govern­ ments with an attractive opportunity to build the skill-based competencies requi.red to meet the demands of global service markets.

2.5 CONCLUSION

Globalization has given rise to a new era of international competition that is best under­ stood by looking at the global organization of industries and how countries rise and fall within these industries. The GVC framework has also served another purpose beyond its academic origins and research to become a major paradigm used by a wide range of country governments and international organizations, including the Wodd Bank, the International Labour Organization, the UK Department for International Development, and US Agency for International Development, amongst others (see Mayer and Gereffi, Chapter 35 this volume). Global value chain analysis highlights how new patterns of international trade, production, and employment shape the prospects for development and competitivenesS; using.core concepts like ·governance' and 'upgrading.'

The GVC framework analyzes the global and local dynamics of international indus­ tries. The six dimensions of the GVC methodology provide useful insights to understand a country's position in the chain and where it can be in the future. The first three dimensions focus on global issues, including identifying the segments of the chain, the geographic scope of the industry, and its governance structure. The lo.cal dimensions highlight the concept of upgrading, analyzing how the country acquires vaJue added, the loeal insti­ tutionalcontext in which the industry is embedded, and, finally, the role of the national stakeholders in the GVC participation.

These tools provide useful information to policy makers to help design sound recom­ mendations for industry upgrading. As highlighted in this chapter, GVC analysis can be applied to a wide range of industries including extractive sectors, agriculture, manufac­ turing, and services. In addition, it offers specific prescriptions for topics such as SME inclusion in the global economy and workforce development requirements to participate in international trade.

NOTES

* The first edition of the GVC Primer was released in May 201 I. This second edition of'the G VC Primer was released online OD July 20l6 and contains new material. See hnps://gvcc.duke.edu/wp-content/uploads/ Duke_CGGC_Global_ Value_Cbain_GVC_Analysis- Primer_2nd_Ed_2016.pdf; last accessed 30 April 2019.

I. For more details, see Bair and Gereffi (200 I). 2. OEM: original equipment manufacturer.

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14 Handbook on global value drains

3. For a broader mix of industries. see projects listed on the Duke Global Value Chain Center website: https:/1 gvcc.duke.edufoverview-of-work/: accessed 30 April 2019. 4. To obtain more information see: Fernandez-Stark and Bamber (2012a.2012b) or Fernandez-Stark, Bamber and Gereffi (2012). 5. In 2005, the Center on Globalization. Governance & Competitiveness (CGGC) was founded at Duke University by Gary Gereffi as a university-based research center that worked with national and local governments, international development organizations. and a wide range of non-gove~nmental gro_ups to analyze the opportunities and challenges faced by developing and developed economies that part1c1pate in global value chains. ln 2017, the center's name was changed to the Duke Global Value Chains Center. All research carried out by Duke GVCC is available on its website. https://gvcc.duke.edu/: accessed I May 2019. 6. For more information see Fernandez-Stark et al. (201 la). Additional information ca.n be found on the CGGC website: https://gvcc.duke.edu/cggcproject/offshore-services-2/; accessed 30 April 2019. 7. See https://gvcc.duke.edu/cggcproject/skills-for-upgrading/: accessed I May 2019. 8. This scheme is based on Barrientos, Gereffi and Rossi (20 11 ) and Gerelfi et al. (20 11 ). This classification is not intended to refer to all jobs in the global economy: rather, it only applies to jobs linked to the offshore production of goods and services.

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