An Investment Perspective on Global Value Chains

Key findings • In the past decades, there have been many cases in which governments have played key roles in promoting global value chain (GVC) participation. Sound macroeconomic policy, infrastructure building, an enabling regulatory environment, and human capital development constitute a set of necessary minimum conditions for any country to be considered an attractive investment destination and to participate in GVCs. • In some cases, governments have played a more direct role in solving specific sectors’ market failures caused by externalities, imperfect information, and coordination problems, in what some describe as “soft” or “light-handed” industrial policies.

• To attract and link multinational corporations (MNCs), investment policies may help reduce regulatory or procedural burdens for foreign investors, provide public goods within special economic zones, or use investment incentives to tilt MNCs’ decisions to locate to a new country. In other cases, investment promotion agencies can showcase a country’s comparative advantages and help facilitate entry.

• Policy makers can also help domestic firms internationalize and integrate into GVCs by supporting their engagement with MNCs through investment, partnerships, or trade.

Successful support programs tend to combine information provision (to increase exposure), matchmaking (to overcome coordination failures), and temporary subsidies (to compensate for expected social benefits from these interactions).

• There is no “blueprint” for strengthening GVC participation. Reforms should be implemented as coherent packages rather than as individual, one-off policies that are likely to have only a marginal effect. A successful reform package requires a sustained, coordinated, and long-term approach based on the design of incentive mechanisms that are tailored to the specific needs of countries, revealed and latent comparative advantages of firms, and value chains in question.

• The best approaches help to improve firm performance without “picking winners.” Through GVCs, firms in developing countries enter foreign markets at lower costs, benefit from specialization in niche tasks, and gain access to larger markets for their output. Such specialization is often the result of a country’s long-term involvement in a specific sector that takes advantage of and builds on the country’s unique combination of factor endowments and firm capacity.