Moving Up the Global Value Chain

Syllabus: GS3/Economy

Context

• A major policy shift outlined in India’s Economic Survey 2025–26 focuses on ‘strategic indispensability’ in Global Value Chains (GVCs), reframing how India should approach industrial growth in a rapidly changing global economy.

About the Global Value Chains (GVCs)

• GVCs refer to the international fragmentation of production processes, where different stages of producing a good or service are carried out across multiple countries.
• Instead of one country making a product from start to finish, tasks such as design, component manufacturing, assembly, logistics, marketing, and after-sales services are distributed globally.
• For Example: A smartphone may be designed in the United States, use chips from Taiwan or South Korea, contain components from Japan and Germany, assembled in India or Vietnam, and sold worldwide.
  • Each country contributes a specific task within the larger production network.

Why do GVCs Matter?

• Participation in GVCs allows countries to access global markets, attract foreign investment, transfer technology and skills, create employment, and achieve scale economies.
• For developing economies, GVC integration has often been the fastest route to industrialization.

Evolution of Growth Strategies in Emerging Economies

• Import Substitution (Early Gains, Structural Limits): In the post-war decades, emerging economies such as Brazil, India, and Mexico pursued import-substituting industrialization (ISI).
  • They built initial industrial capacity, by protecting domestic industries from foreign competition.
• Global Integration and GVC Participation: From the late twentieth century, a new consensus emerged, to attract foreign direct investment (FDI), integrate into global value chains (GVCs), and leverage learning spillovers.
• Impact of Globalization: The globalization has unfolded in waves:
  • First unbundling: Production separated from consumption.
  • Second unbundling: Stages of production dispersed across borders.
  • Current phase: Tasks, not industries, are fragmented globally.

Key Concerns & Issues in GVCs

• Unequal Value Distribution: Not all stages of production generate equal value. High-value activities (R&D, design, branding, IP) capture the largest share of profits.
  • Low-value activities (assembly, basic processing) generate thin margins.
  • Many developing countries remain stuck in low-value segments, limiting income growth and technological upgrading.
• Limited Upgrading Opportunities: Participation does not automatically lead to technological advancement. Common barriers to upgrading include intellectual property restrictions, dependence on foreign firms, limited domestic supplier ecosystems and weak R&D capabilities.
  • Without deliberate capability building, countries risk long-term dependence on low-complexity tasks.
• Supply Chain Vulnerabilities: Recent global shocks have exposed fragility in GVCs like COVID-19 disruptions, semiconductor shortages, geopolitical tensions (US–China trade conflict), and wars affecting energy and logistics.
  • Over-reliance on concentrated production hubs increases systemic risk. Resilience has become as important as efficiency.
• Geopolitical Fragmentation: Technology controls, export restrictions, and strategic decoupling are reshaping GVCs.
  • Emerging concerns include technology bans and sanctions, strategic reshoring and friend-shoring, and weaponization of interdependence.
• Weak Domestic Linkages: In many developing economies:
  • Imported intermediates dominate export production;
  • Domestic supplier networks remain shallow;
  • Backward linkages are weak;
    • It limits spillover benefits to local firms and reduces domestic value addition.
• Labour Market Disruptions: GVC integration affects labour markets unevenly:
  • Low-skill assembly jobs are vulnerable to automation;
  • AI and robotics reduce labour intensity;
  • Informal workers may be excluded from formal supply chains;
  • The AI–manufacturing convergence may amplify displacement risks if reskilling systems are weak.
• Environmental and Social Concerns: Global production fragmentation often shifts environmental burdens to developing countries. Key issues include carbon-intensive manufacturing, poor labour standards, resource depletion and waste management challenges.
  • Sustainability pressures are increasing due to ESG standards and carbon border adjustment mechanisms.
• Trade Imbalances and External Dependence: Deep GVC integration may lead to persistent trade deficits, currency vulnerability, and external debt accumulation.
  • Heavy dependence on imported inputs can expose economies to exchange rate and global price shocks.
• Policy Coordination Challenges: GVC participation requires alignment across trade policy, industrial policy, infrastructure planning, skill development, regulatory frameworks.
  • Fragmented policymaking can reduce competitiveness and delay upgrading.

Case Study: Apple’s Supply Chain

• Apple’s global production network spanning 748 manufacturing locations, 28 countries, and 188 supplier firms.
• In 2013, India was absent from this network. By 2023, it had over 10 operational facilities, and more than 20 additional facilities in the pipeline.
• It was driven by firm-level strategic diversification, geopolitical realignment, and policy intent.

Road Ahead: Five Pillars for Moving Up the Value Chain

• Task-Focused Industrial Policy: Traditional industrial policy targets sectors. But in a world of fragmented production, policy must target tasks.
  • Value now resides in systems integration, intellectual property, critical components, and technological choke points.
  • Policy tools should include export incentives, capability-linked procurement, standards that drive learning, and conditional support tied to internalizing complex tasks.
• Deepening Backward GVC Participation: India’s modest share in global manufacturing value reflects weak backward linkages, particularly limited integration into intermediate imports for export production.
• Cluster-Led Scale and Ecosystem Development: Knowledge-intensive production thrives on proximity.
  • Successful examples, from China’s Greater Bay Area to Vietnam’s key economic zones demonstrate that industrial success depends on geographic concentration, infrastructure connectivity, and dense supplier ecosystems.
  • In India, clusters need to evolve beyond isolated industrial estates. They require housing and urban planning, transport networks, healthcare and education, and coordinated regional governance.
• AI–Services–Manufacturing Convergence: Modern manufacturing is inseparable from services like design and engineering, logistics, finance, software and data systems.
  • Upgrading requires integrating services as a core pillar of industrial strategy.
• Economic Statecraft and Institutional Capacity: Reducing the cost of capital depends on productivity growth, export performance, and surplus generation.
  • It requires regulatory coherence, trade facilitation, logistics efficiency, sustained investment in R&D and skills.
  • Industrial policy needs to be continuous problem-solving—anchored in adaptive state capacity, not a one-time intervention.

Conclusion

• In a global economy where production is sliced into tasks and value accrues unevenly, power lies with those who control critical functions.
• For India, the challenge is not merely to produce more, but to produce the right things, and then produce them better and smarter.
• Moving up the value chain is neither automatic nor guaranteed. It requires strategic task selection, deep integration, cluster-based scaling, AI-enabled convergence, and institutional strength.

Source: BL