The virtues and limits of specialization in global value chains: analysis and policy implications

Abstract

A growing concern has emerged in both academic research and policy circles about the hidden risks that can arise from a narrow specialization of economies in a world characterized by the international fragmentation of production. In this work, we address the virtues and limits of specialization in light of the strong interdependencies between countries induced by the emergence and evolution of global value chains (GVCs). The need to shift the focus from the product level to the functional level is discussed from both a conceptual and empirical perspective. Moreover, several arguments are advanced in favour of functional diversification. It is argued that economies performing a relatively large range of value adding activities are in a better position to foster process and product innovation and increase the resilience of the productive structure in face of both domestic and external shocks. Accordingly, we provide a stronger conceptual basis for industrial policies aimed to address the vulnerability of GVCs in times of major disruptive events. We stress that responding to these shocks implies a careful definition of the geographical boundaries of international production networks, substantial investments in strategic activities at the national and macro-regional levels, as well as a more selective sourcing of inputs and knowledge assets on a global scale.

Global Value Chains, Functional Diversification and Within-Country Inequality: An Empirical Assessment

“…Third, we found that a greater functional diversification in FDI is robustly associated with lower levels of income disparities within countries. This result appears consistent with the hypothesis that a larger mix of value-adding activities an economy carries out allows to expand the learning opportunities and occupational choices for its workers and is conducive to a more inclusive development (Coveri & Zanfei, 2023) (Windmeijer, 2005). All explanatory variables, except the years of compulsory education and the KOF financial globalization index (de facto), are treated as endogenous.…”

“…However, the "slicing up" of GVCs has prompted a hyper-specialization of world economies in selected value chain functions of the GVCs of products, be they a Barbie doll or an iPhone (Tempest, 1996;Kaplan and Kaplinsky, 1999;Dedrick et al, 2010;Grossman & Rossi-Hansberg, 2008;Timmer et al, 2019). It follows that greater attention should be paid to the diversification of economies in terms of GVC functions rather than products (Sturgeon, 2008;Sturgeon & Gereffi, 2009;Coveri & Zanfei, 2023).…”

“…In other terms, by disaggregating product categories, one can derive no relevant information on what activities or value adding functions are being undertaken by countries to bring those products to market. By disregarding the functional level of analysis, one is likely to miss a fundamental feature of the international fragmentation of production, i.e., the different economic value that is associated with distinct GVC activities (for an expanded discussion on this, see Coveri & Zanfei, 2023). Accordingly, in this work we combine the described indicators of trade in GVC with variables based on FDI data, which allow us to obtain proxies of the value chains functions performed by economies along GVCs.…”

Supply chain myths in the resilience and deglobalization narrative: consequences for policy

“…We note a recent study which positions the efficiency-resilience trade-off at the national, rather than the firm level (Coveri & Zanfei, 2023). It argues that comparative advantage and functional specialization create vulnerability.…”

“…A narrative has emerged (Evenett, 2022) that implies that deglobalization is inevitable because international supply chains are inadequately resilient and trade partners hostile (Foroohar, 2022;Coveri & Zanfei, 2023;Witt et al, 2023). Terms like 'friend-shoring' have been introduced into the policy discourse, with some voices insisting that the virtues of regional supply chains exceed those of the global ones (O'Neil, 2022).…”