70% of international trade involves GVC

In today’s global economy, 70% of international trade involves global value chains (GVC), according to a publication released by the World Trade Organization (WTO).

The GVC trade is characterized by services, raw materials and parts and components that cross borders, often many times, to be incorporated into final products that are then shipped to consumers around the world.

Although countries traded raw materials and components before the advent of global value chains, the scale was nothing like it is today.

According to the publication, entitled Beyond Production, this complex network of interactions between companies from different countries is the reason why global value chain trade offers more opportunities for productivity growth than trade in final goods and services.

The document states that, by outsourcing parts of production to international suppliers, leading companies obtain efficiency gains in the form of lower costs or higher quality and, therefore, increase productivity.

When a foreign company and a local supplier are part of the same supply chain, they need to interact and coordinate to ensure that the chain runs smoothly.

Such face-to-face communication facilitates the transfer of tacit knowledge and increases national innovative capacities.

GVC

Foreign outsourcing companies have an incentive to transfer the knowledge and technology necessary for the efficient production of outsourced inputs because they will eventually be the consumers of those inputs.

This idea that national suppliers access new knowledge and resources from foreign markets and buyers is consistent with the so-called learning-by-exporting hypothesis.

That said, the analysis adds, it is also plausible that only the most productive companies have the resources to integrate into GVCs, which is known as the self-selection hypothesis.

In fact, selling to foreign markets involves several costs, including a significant initial investment to customize products and adapt them to the standards and requirements of foreign buyers; transportation, distribution and marketing costs; and the cost of hiring people with the skills to manage export networks.

Recent empirical evidence shows that foreign investors carefully target the largest and most productive local companies to invest and exploit their export networks – in other words, select the options.

Therefore, superior productivity performance by companies integrated in GVCs could be attributed, at least in part, to the self-selection of companies originally productive in GVCs, and the findings on research and development (R&D) and knowledge dissemination. in large private companies they may not apply to other companies, industries or the economy.