Lesson 2: Concepts and the importance of the GVC

In this lesson, we will explore the concept of Global Value Chains (GVCs) and their significance in today’s global economy.

The concept of Global Value Chains was introduced by Michael Porter in his 1985 book “Competitive Advantage.”
GVCs are sets of activities that a firm performs to deliver valuable products or services to the market.
A GVC consists of five primary activities:
- Inbound logistics: Receiving raw materials, warehousing, and inventory management.
- Operations: Converting raw materials into finished products or services.
- Outbound logistics: Delivering the final product or service to the end user.
- Marketing and sales: Strategies to incentivize customers to purchase, including advertising and pricing.
- Post-sale services: Activities aimed at enhancing consumer experiences, such as customer services and maintenance.

GVCs can include secondary or support activities that enhance the efficiency of primary activities.
These support activities encompass procurement, technology research, product development, human resource management, and firm infrastructure building.
Each activity contributes to creating and adding value at different stages of the value chain.

Initially, discussions on supply chains were logistics-focused.
Since the mid-1990s, global manufacturing networks have become increasingly integrated and interdependent.
Supply chains now encompass broader business functions and processes both within and across companies.

The Council of Supply Chain Management Professionals (CSCMP) defines a supply chain as the links between companies that exchange materials and information.
It spans from acquiring raw materials to delivering finished goods to end users.
Key functions include material supply, manufacturing, and distribution.

Global Value Chains (GVCs) or Global Supply Chains (GSCs) extend the concept internationally.
GVCs respond to the global production fragmentation, where various entities in different countries perform functions along a value chain.
GVC-related international transactions are crucial in cross-border trade and drive structural changes in the world economy.

Decreasing trade costs, including tariff reductions and improved logistics, have fueled GVC expansion.
Regulatory reforms in transport and infrastructure sectors have enhanced logistical efficiencies.

The GVC model consists of four key components: value-adding activities, supply chain, end markets, and the supporting environment.
Value-adding activities involve research, design, manufacturing, logistics, marketing, sales, and services.
The supply chain includes stages like materials/inputs, components/intermediates, final products, and distribution/sales.
End markets represent product-specific characteristics and buyer demographics.
The supporting environment encompasses factors that facilitate value creation, such as regulations, standards, and infrastructure.

GVCs play a vital role in today’s global economy, contributing to a significant share of international trade, global GDP, and employment.
They link firms, workers, and consumers worldwide, often providing opportunities for developing countries to integrate into the global economy.
The GVC framework offers a holistic view of global industries and helps policymakers address development challenges.
It allows the examination of various aspects, from emerging economies’ roles to environmental concerns and private regulations.

Conclusion

Understanding the concept and importance of Global Value Chains is crucial in navigating today’s interconnected global economy.
GVCs shape industries, trade, production, and employment, making them a central focus for policymakers, researchers, and businesses.
They offer opportunities for countries to participate in the global economy effectively and promote economic development and job creation.

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