An Investment Perspective on Global Value Chains

Key findings • Participation in global value chains (GVCs) can bring considerable benefits to domestic firms because they can learn from multinational corporations through investment, partnerships, or trade. The knowledge they gain can raise their productivity and help them obtain the necessary production capabilities and foreign market knowledge to directly compete in international markets and to upgrade their roles in GVCs. • By assimilating offshore supply chain links, firms can specialize in specific tasks and functions to support niches or segments of GVCs led and organized by firms in other countries. Local firms no longer have to wait for the emergence of an in-country industrial base or the upstream capabilities formerly required to compete internationally.

• The acceleration effect from GVC participation provides a powerful case for l­ooking into internationalization and upgrading among domestic firms. Stimulating firms to begin ­participating in GVCs or to upgrade their participation in them can ultimately have ­considerable macroeconomic effects by helping developing countries industrialize more rapidly.

• Domestic firms can internationalize and participate in GVCs through four main pathways: supplier linkages with international firms, strategic alliances with international firms, direct exporting, and outward foreign direct investment. The most powerful engine of capacity building lies in firm-to-firm interactions.

• Opportunities for GVC participation do not present themselves equally to all firms. It can be a difficult and risky experience, at least initially, for firms to shift their production focus or sales from domestic to international markets. There are a number of firm-level prerequisites for GVC participation. There is also a relationship between a given GVC’s characteristics and the likely pathways by which firms will enter it.

• Although foreign firms can stimulate productivity spillovers to domestic firms, it is important to remember that, where technological development and upgrading do occur, domestic firms are often their main instigators, responding to opportunities that they identify in the GVCs in which they participate. Thus, domestic firms need to constantly adapt their operations (strategy, structure, and resources) and strengthen their capabilities to better suit global production networks.