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