Global value chains

Also called: GVC, Interlinking of production, Global production networks · Topic: Globalisation and MNCs · NCERT: Class 10, Ch 4 "Globalisation and the Indian Economy"

Meaning

A global value chain (GVC) is a way of making a product in which production is split into stages spread across countries, and each stage adds value before the product reaches the final consumer.

• Value added = value of a firm's output − value of the inputs it bought.

GVCs matter because they drove the jump in world trade after 1990 [2]. They also let a country grow fast by doing one stage well, without first building a whole industry [2].

Explanation

How a GVC works

• The NCERT example (Class 10): an MNC (multinational corporation, a company that works in many countries) makes industrial equipment.
• It designs the product in research centres in the USA.
• It makes the parts in China.
• It assembles the product in Mexico and Eastern Europe.
• It sells worldwide and runs customer care from call centres in India.

• NCERT sums this up: production is "divided into small parts and spread out across the globe".

• Scale: the World Bank's World Development Report (WDR) 2020 says GVCs now make up almost half of all world trade [2].

• Rise and stall:
• The GVC share peaked around 2008 [2].

• After the 2008 global financial crisis, trade grew slowly and GVC growth stalled [2].

• Why GVCs help development:

• A poor country can join one stage, such as assembly, and start exporting.
• This helped poor countries catch up with rich ones faster than ever before [2].

Measuring GVC participation

GVC participation (how deeply a country is part of global chains) has two parts:

	Backward participation	Forward participation
Meaning	Foreign value added (FVA) in a country's own exports, i.e. the imported inputs inside them	The country's domestic value added used in other countries' exports
Place in the chain	Downstream: buys inputs, often does assembly	Upstream: supplies inputs
Example	India's smartphone exports that use imported chips and displays	Indian software or chemicals that go into another country's exports

• Formulas (as a share of gross exports):
• Backward share = FVA ÷ gross exports × 100
• Forward share = domestic value added sent on through partners' exports ÷ gross exports × 100

• Total GVC participation = backward share + forward share

• Data sources: OECD TiVA (Trade in Value Added database) and ADB MRIO (Asian Development Bank Multi-Regional Input-Output tables).

• TiVA defines the foreign value added content of gross exports as the value of imported intermediate goods and services built into a domestic industry's exports. This value may come from any foreign industry further back in the chain [3].

Worked example: why gross trade data misleads (illustrative numbers)

• Country A makes a chip worth $30 and exports it to B.
• B assembles a phone, adds $20 of its own value, and exports it to C for $50.
• Gross exports = 30 (A) + 50 (B) = $80.
• Actual value added = 30 (A) + 20 (B) = $50. So $30 is counted twice.
• B's backward participation = 30 ÷ 50 = 60%.
• Lesson: B looks like a $50 exporter, but it really earns only $20. Trade balances between two countries, when measured in gross terms, can make the assembling country look bigger than it is.

The smile curve: where the value sits

• Smile curve, an idea of Stan Shih, founder of Acer (Taiwan):
• Put the stages of the chain on the x-axis and value added on the y-axis. The line looks like a smile.
• High at the start: R&D, design, branding.
• Low in the middle: fabrication and assembly.

• High at the end: marketing, distribution, after-sales service.

• Why assembly earns little:

• Assembly needs common skills, so many countries can do it.
• Heavy competition keeps prices and wages low.

• Designs, brands and patents are hard to copy, so their owners keep most of the value.

• NCERT link (Class 10):

• Jeans made in India sell in the USA for US$145.
• Most of that price goes to the brand owner and the retailer. The garment worker gets very little.
• Sushila, the NCERT garment worker, lost her permanent job and now works on a temporary basis. Exporters cut labour costs to win orders from MNCs.

Types of GVC link, and what makes GVCs grow or shrink

• Relational GVCs:
• These are long-term, customised ties between a lead firm (the big brand that runs the chain) and its supplier.
• The two share designs and standards. Examples: autos, electronics.

• The supplier learns technology, so it is easier for it to move up the chain.

• Arm's-length GVCs:

• Standard goods are bought on price alone, and buyers switch suppliers easily.
• Examples: basic garments, commodities.

• Suppliers learn little and face constant pressure to cut prices.

• What helps GVCs grow: low tariffs on inputs, fast customs and ports, and open trade rules. Goods cross borders many times in a GVC, so every delay adds up.

• New threats (WDR 2020) [2]:
• Automation may bring production closer to consumers and reduce the need for labour.

• Conflicts between big countries may shrink or split GVCs.

• WDR 2020's view: GVCs can still raise growth, create better jobs and cut poverty, but only if developing countries make deeper reforms, rich countries follow open and predictable policies, and all countries revive multilateral cooperation, for example through the WTO [2].

In India

How India got here: protection, then opening, then GVCs

• 1950s–1980s: India followed import substitution (making goods at home instead of importing them).
• High tariffs and import quotas made imported inputs costly.

• So Indian firms could not easily become one stage in a foreign chain.

• 1991: the New Economic Policy brought LPG: liberalisation (fewer controls), privatisation and globalisation. Barriers to trade and foreign investment were largely removed. India joined the WTO in 1995.

• Services joined GVCs first: outsourcing (a company buying a service from an outside firm, often in another country) grew fast. Examples are BPOs, call centres, IT services and accounting. This gave India strong forward links in services.

India's pattern today

• Overall, India's GVC integration is modest and services-heavy.
• Backward participation is rising:
• Foreign content in India's exports rose from 21.9% (2010) to 25.7% (2022) [3].
• This is above the G20 average of 19.8% [3].

• India is "somewhat backward-oriented": its FVA shares are slightly higher than its forward participation estimates [3].

• Sectors with high backward links:

• refined petroleum (runs on imported crude oil);
• gems and jewellery (runs on imported rough diamonds);

• electronics assembly (runs on imported chips and displays).

• Electronics is the most GVC-driven sector:

• About 75% of India's electronics exports come from GVCs [4].
• Electronics production nearly doubled, from US$48 billion (FY17) to US$101 billion (FY23) [4].
• Mobile phones were 43% of electronics production in FY23 [4].
• About 99% of smartphones used in India are made in India [4].
• In the last 11 years, India changed from a net importer to a net exporter of mobile phones. It is now the second-largest mobile manufacturing country in the world [5].

Policy levers

• Production Linked Incentive (PLI) schemes:
• The government pays firms a cash incentive linked to their extra (incremental) sales of goods made in India. The reward depends on actual output, not just on investment.
• The schemes cover 14 sectors (announced 2020-21), with an outlay of about ₹1.97 lakh crore.
• 755 applications have been approved. ₹1.23 lakh crore of investment was realised by March 2024, creating about 8 lakh jobs [6].

• Apple's partners, such as Foxconn, assemble iPhones in India for export.

• India Semiconductor Mission (ISM):

• Launched in December 2021 with ₹76,000 crore for fabs (chip factories) and assembly-and-test units (ATMP/OSAT).
• Under the Semicon India Programme, 10 projects have been approved, with investment commitments of about ₹1.6 lakh crore [7].
• 24 chip and SoC (system-on-chip) design projects have also been approved [7].

• This moves India from the bottom of the smile curve (assembly) towards the higher-value ends (chips and design).

• FTAs (free trade agreements): these give cheaper inputs and wider markets. Examples: India–UAE CEPA (2022) and India–Australia ECTA (2022).

Don't confuse with

• Backward vs forward participation: backward = foreign value added inside your exports (you buy inputs). Forward = your domestic value added inside other countries' exports (you supply inputs). Exam questions often swap the two.
• Gross exports vs value-added exports: gross exports count an input again each time it crosses a border. Value-added (TiVA) data counts each country's own contribution only once.
• Import substitution: this is the opposite strategy. A country makes the whole product at home behind high tariffs. In a GVC, a country does one stage and depends on imported inputs.
• Relational vs arm's-length GVCs: relational = long-term ties with shared designs, so suppliers can upgrade (autos, electronics). Arm's-length = buyers choose on price alone and switch easily (basic garments).

Prelims Hooks

• WDR 2020 ("Trading for Development in the Age of Global Value Chains") is published by the World Bank, not the IMF or WTO. It says GVCs are almost half of world trade [2].
• Backward participation = FVA ÷ gross exports × 100. Forward participation = domestic value added used in partners' exports ÷ gross exports × 100.
• OECD TiVA (Trade in Value Added) database removes the double counting found in gross trade data.
• Smile curve: proposed by Stan Shih (Acer). Value is lowest at assembly/fabrication and highest at R&D/design and marketing/after-sales.
• India's FVA share: 21.9% (2010) → 25.7% (2022), above the G20 average of 19.8% [3]. About 75% of electronics exports are GVC-linked (NITI Aayog) [4].
• PLI: 14 sectors, about ₹1.97 lakh crore, incentive linked to incremental sales. ISM: December 2021, ₹76,000 crore.

Mains Points

• Volume vs value:
• Electronics production grew from US$48 bn to US$101 bn (FY17–FY23) [4], mostly through assembly, the bottom of the smile curve.
• Rising foreign content (25.7%, 2022) [3] shows that domestic value addition is still thin.

• Way forward: shift support from assembly-PLI towards components, chip design and R&D (ISM, design projects).

• Tariff paradox and resilience:

• High tariffs on inputs, left over from the protection era, act as a tax on India's own exporters.
• Deeper GVC entry needs low input tariffs, trade facilitation and FTAs, balanced with Atmanirbhar Bharat goals.

• Heavy dependence on China for electronic components, APIs (active pharmaceutical ingredients) and solar cells is a supply risk. "China+1" is an opening, but automation and reshoring may narrow India's window [2].

• Equity (GS-III):

• As the NCERT examples of the US$145 jeans and Sushila show, GVC gains flow mainly to brand owners.
• Workers in arm's-length chains get flexible, insecure jobs.
• Labour codes, skilling and moving into relational chains are needed so the gains reach more people.

Related concepts

• GVC participation

Read more

• Global value chains