Embracing global value chains

Written by Chandrajit Banerjee | Chandrajit Banerjee | Updated: Jan 21 2014, 11:12am hrs
The year 2008 marked the advent of the global financial crisis. This was a crisis that forced the world to change in more ways than one. As nations and businesses began the long process of restructuring to adapt to the changed scenario, it also began a change in the way global value chains (GVCs) have been structured.

It was not too long ago that one could assume that production took place in the East and consumption in the West. However, with the growth of the middle class in countries like India and implementation of policies that support demand, this paradigm is now changing. The driver of growth is now coming from the developing world rather than the developed world.

This has forced many companies to rethink their business strategies. For the first time in history, developing countries received more FDI than developed ones. In 1990, developing countries had a 20% share in global trade. Today, that figure is more than 40%.

GVCs define the new age production process prevalent in the contemporary world. Production of goods and services is increasingly fragmented and spread out across the global village to reap the benefits of specialisation. This has been possible due to steady decline in the cost of transportation, electronic communications and technology since the 1980s. These global production networks have led to the creation of GVCs.

Interestingly, the concept of GVC is not new; what is new is their recognition. Conceptually, they were present and practised by large MNCs. Developing and low-income countries were either locked-in at the bottom of GVCs or locked-out. But with the gradual liberalisation of world trade and reduction of trade costs, coupled with technological advancement, emerging economies like China utilised GVCs to transform their trade paradigm. China has now become the largest trading power in the world in just over a decades time.

India and the developing world can emulate Chinas example by participating in existing GVCs and building newer ones, and in the process emerging as major contributors to global economic growth. In this regard, India must consider the following steps:

*Industrial policy should create policy environment for SMEs to participate in GVCs. SMEs have to be introduced to global standards and trained for targeting GVCs. The government can encourage MNCs to develop key vendor capabilities to help the vendors move up the value chain and reduce transaction costs. The government can also create funds for facilitating R&D among SMEs and facilitate the ease of doing business.

In addition, India should work with developed countries to tap the potential of the SME sector to create jobs, increase investments and spur economic growth. This would have the effect of increasing Indias engagement with its traditional trading partners.

* Bolster and diversify service sector to lend adequate support to the manufacturing growth. The growing importance of services in manufacturing demands greater efforts towards reforms in the domestic services sector and, in due course, diversify Indias services exports, which are heavily concentrated. In fact, services are also a critical component of GVCs. By facilitating the transit of intermediate goods along a supply chain and making communication and coordination between its respective productive units possible, services provide the conveyor belt that keeps supply chains moving. In addition, domestic manufacturing industries that are first- or second-tier suppliers to international supply chains purchase services from local providers, be they utility, logistics or business services.

* Promote the role of standards in Indian industry. Tariff barriers are gradually fading to irrelevance in global trade with the proliferation of RTAs and the MFN tariff regime maintained by WTO member countries. Instead, technical regulations in international trade are increasingly becoming a source of non-tariff barriers (NTBs) across the world. These regulations consist of sanitary and phytosanitary (SPS), and technical barriers to trade (TBT) regulations. Often, industry members are unaware about the details of these laws and their implications to their business. Also, these regulations are dynamic in nature and countries either revise or come up with newer regulations from time to time. India should develop mechanisms that can disseminate information on standards and technical regulations to the industry members. This would help Indian companies to proactively design strategies to counter any rejection of their export consignments in the world market. Also, this would create an environment where companies would concentrate on quality and benchmark their products with the global standards.

* Promote the development of infrastructure in India. While India has achieved a lot in terms of infrastructure, the country still has a long way to go for achieving an infrastructure environment that enables competitiveness and is world-class. Infrastructure challenges that present hurdles for industry in India are primarily focused on supply-side constraints. For example, power supply is a challenge, as is the high cost of capital. Cooperation at the international level to generate investments for infrastructure financing would only supplement Indias efforts to develop state-of-the-art infrastructure, comparable to the best in the world.

* Rejuvenate South-South engagement and create new value chains. The traditional North-South trade equation is being increasingly complemented by a dynamic trade and investment relationship between developing countries and this is becoming a major source of economic growth and employment generation. There is a huge scope for intensifying these linkages and developing deeper South-South trading relationships. The India-Africa partnership in building sustainable value-chains across various sectors would only consolidate this South-South commercial relation.

To study how best India can plug into GVC, the CII is organising The Partnership Summit 2014: Emerging Global Value Chains: Building Partnerships from January 27-29 in Bangalore with the ministry of commerce and industry. With the participation of over 1,000 leaders from governments, businesses and academia from over 35 countries, we expect many new opportunities for Indian industry to be highlighted.

The author is director general, Confederation of Indian Industry