It was during the mid 1990’s that the very concept of Global Value Chains (GVCs) came into existence and in fact quickly gained popularity in development economics, especially to encourage growth in middle income countries and help them move towards better technology, skills and knowledge transfer (Crescenzi et al., 2018). In this policy article, we will be exploring how the main arguments of the endogenous growth theory align and complement the aims of GVCs which have not only gained significant importance in regional development but also helped aid growth in developed as well as less economically developed regions via contribution of capital, innovation and knowledge transfer.
The article begins by defining what is meant by Endogenous growth theory and Global Value Chain (GVC) before we delve into analysing why GVCs matter and the ways in which they have contributed to regional development whilst incorporating examples from various regions. Towards the end, we will be providing a final evaluation of the extent to which GVCs have played a crucial role in regional development and how diversity is crucial for their success. Through the transformative lens of Corporate Social Responsibility, this article shows how inclusive governance is the magical key to unlocking the doors of regional development in GVCs.
Endogenous Growth theory and Global Value Chains (GVCs):
According to academic literature, Endogenous growth theory is a theory in the field of economics which states that it is not external forces but rather the internal forces such as capital, innovation, technology and more efficient means of production, within an economy which generate economic growth (UNCTAD, 2018). Whilst, according to Gereffi and Fernandez-Stark (2011) the notion of GVCs in new economic geography is defined as; a full range of activities that are carried out and involved in the various stages of designing, producing, marketing, supplying and distributing a commodity in various countries around the globe (Gereffi et al, 2001).
A simple example of GVCs can be the production process of a bicycle, bikes today are heavily traded and approximately 163 countries contribute in the trade, of providing components that are needed to build these bicycles (recent figures show about US $20bn cycles in 2018). This extended production process of a commodity connects different regions through ‘global pipelines’ which not only permits exchange of knowledge but also allows them to form intra and extra-regional networks. As a result of these networks, there is an increased inflow of capital, technology and innovation which in the long term contributes to the growth of an economy (Crescenzi et al., 2018).
Therefore, after defining both these ideologies we can come to the conclusion that the assumptions of the endogenous growth theory align with the aims the GVCs try to achieve to contribute to regional development of economies.
GVCs and their importance to Regional Development:
Before we further analyse GVCs and their importance to regional development, it is crucial to understand the concept of regional development. In simple terms, it is mostly the provision of aid as well as assistance to those regions which are comparatively less economically developed. According to OECD (2013), it is a general effort to reduce economic disparities by supporting activities such as employment and wealth generation in regions. Thus, GVCs are in fact perfect for helping generate economic growth and reducing disparities in regions (Crescenzi et al., 2018).
To understand the concept of GVCs and regional development better, we take a look at the example of the automobile industry where French automobile manufacturer ‘Renault’ has built its new electric car ‘Zoe’ in France, where most of the engineering work took place in Paris. Similarly, while the key components such as tyres, windscreen etc. were manufactured in France, the other parts of the car came from all around the world; electric battery from Korea, engine components from Germany and a satellite navigation system from Netherlands. Thus, this process explains that even though the car rolling off the assembly line has been created in France, notably the production process itself created jobs and value in countries worldwide (OECD, 2013).
In addition to that, the example of Renault also highlights how there was a ‘two-way global nature of knowledge flow’ (Bathelt et al., 2004) between all of the regions involved in the manufacturing of Zoe. France will offer FDI (Foreign Direct Investment) outflows to Korea, Germany or Netherlands and in return will result in a knowledge transfer between France and the other regions leading to an outflow of capital and labour resources from France and an inflow of capital and labour resources in Korea, Germany and Netherlands which will lead to an increase in transfer of knowledge and create job opportunities in those regions (Crescenzi et al., 2014).
Furthermore, tasks in the GVC will move from being less sophisticated to more sophisticated; when tasks become more sophisticated better capital is employed which will encourage capital inflows and technologies within existing sectors. In addition to that, ‘value- adding’ in the last stage of production of the GVC similar to the one the Renault group did for ‘Zoe’ in France, will increase the domestic value of products as it will contribute to GDP (Gross Domestic Product) of developing countries, more than it does for developed countries. GVCs directly affect the economy’s employment, income and create opportunities for the development of a country’s economy (Bathelt et al., 2004).
Subsequently, it can be noted that the aims of GVCs; inflow of capital, better technology and skills, the concept of value-adding, improved employment, income and job opportunities, are all assumptions that take root from the very foundation of the Endogenous Growth theory framework and play an important role in regional development in helping tackle the problem of reducing regional disparities.
Role of Corporate Governance and Institutionalised Social Dialogue: Coordinated VS Liberal Market Economies
GVCs have become a driving force in the world economy, connecting regions, countries, and industries. GVCs involve a complex web of activities spanning production, design, marketing, and distribution, all of which can have a profound impact on regional development. However, the extent to which GVC participation benefits regions largely depends on inclusive governance and diverse policies. Inclusive governance can mitigate the negative social impacts of GVCs, such as labour rights violations and environmental degradation. Higher labour standards constitute facets such as protection of wages, respect for fundamental human rights, equal pay, health and safety regulations, employment security (through fixed- term contracts), industrial relations (collective bargaining), and better working-time standards.
In Coordinated Market Economies (CMEs), there is a wide range of collective bargaining and training among the companies within the same industry. Due to the existence of regulated labour markets, more stringent rules, and strong unions, CMEs are thus perceived to be a more conducive environment for Corporate Social Responsibility (CSR) development. According to Streeck (1995), within the German market, there is an increased level of cooperation among competitors as well as bargaining among organised groups through the presence of associations. CMEs, like Germany, are characterised by institutionalised social dialogue, making them pacesetters within international CSR programs (Gjolberg 2009b). Moreover, Bair & Palpacuer (2012) argued how CMEs have labour-inclusive Multi- Stakeholder Initiatives (MSIs). Thus, the social dialogue model in CMEs further proves how they are better equipped in dealing with issues of setting industry standards and measures for quality control.
It is imperative to look at the characteristics of corporate governance as well as financial markets in an economy since it plays a crucial role in decision-making related to any type of business activity. Clarke (2009) distinguished between US corporate governance (an example of Liberal Market Economy) with that of German (Coordinated Market Economy) on the basis of the decision-making power of shareholders and the workforce. In CMEs, most of the decisions are taken by the specific members of management appointed by the supervisory board. This has deep implications for the strategic development of the firm itself as the company management is more likely to focus on long- term development. Since the company management in CMEs is equipped with more relevant practical knowledge, they tend to make better decisions for labour welfare.
While in Liberal Market Economies (LMEs), the majority of decision-making power is exercised by shareholders of the firms, and immediate benefits guide their preferences. Under the greed for dividends, labour standards tend to get neglected. Therefore, decision-making powers are observed to be better in firms headquartered in CMEs. Additionally, the responsiveness to stakeholders, for example, relational contracting with suppliers; worker representatives on boards; institutionalised relationships with unions (social partnership or corporatism) all lead to higher labour standards in CMEs. Here, social partnership could be looked at as a voluntary engagement with stakeholder groups in CMEs. According to Campbell (2007), companies become more susceptible to voluntary engagement with stakeholder groups because of social partnership. This, in turn, leads to a more loyal and longer-serving workforce with industry- specific skills.
Regions with strong governance structures that prioritise social well-being can ensure that the benefits of GVC participation are more equitably distributed. For instance, Germany, within the European Union, has one of the highest minimum wages. Moreover, in June 2022, German lawmakers increased the minimum wage to 12 Euros from October 2022. German companies like Siemens and Bosch Rexroth have flexible workforce agreements which lead to better management-worker relationships. In Germany, unions remain influential in shaping social policy and practising collective bargaining. It is not just a fundamental right to pay workers for their hard work, but also a matter of dignity and respect. Thus, the importance of regulatory mechanisms and ethical standards in GVCs cannot be undermined.
Unlocking Regional Development through Inclusive Governance, Culture and Diversity in Policy:
The contemporary era of globalisation has expanded to encompass the interconnected production of manufactured components across the world, presenting substantial prospects for developing countries and regions. However, in parallel, the globalisation phenomenon has also exhibited its downside. This includes a noticeable trend towards escalating inequality both within nations and on a global scale, accompanied by a rise in absolute poverty levels, impacting not only less affluent nations.
It is crucial to recognise that while GVCs can offer opportunities for regional development, there is a pressing need for inclusive governance mechanisms that can address the associated challenges of inequality and poverty, ensuring that the benefits of global value chains are distributed more equitably and that marginalised groups and regions are not left behind. According to Kaplinsky & Morris (2000), development policies tailored to the diverse characteristics and needs of each region can attract GVC-related investments. For instance, policies in skills development, infrastructure investment, and cluster development would enable regions to leverage their specific strengths and opportunities to maximise the impact of GVCs.
With stronger labour regulations, inclusive governance can catalyse a profound transformation in corporate conduct. In this regard, Stephan Manning's research shines a spotlight on a pivotal aspect: Corporate Social Responsibility (in the above section we highlighted how CMEs offer a more conducive environment for CSR). These findings resound with a powerful message: when governments and stakeholders are active participants in the decision-making processes of GVCs, the ripple effects on regions are positive (Manning, S. et al, 2012). What emerges is a tapestry of social and economic prosperity, painted by responsible corporate behaviour.
Culture, commonly defined as the ‘social construction of reality’, must be incorporated into governance policies. Whilst some scholars, such as Douglass North, have incorporated it in their theories (North, 2005), others hint at a role for culture in business systems. For instance, Hall and Soskice (2001) suggested that institutional configurations are based on ‘shared understandings’ for explaining corporate governance structures. Thus, culture and diversity are the compasses that guide companies toward ethical commitments, steering them on a course that not only profits their bottom line but enriches the very regions in which they operate.
The intersection of human rights and CSR is essential for the future of work, wherein industrial clusters must comply with international CSR policies and codes of conducts. It underscores the undeniable significance of diversity in policy to ensure that benefits of GVC participation are distributed equitably and that marginalised regions are not left behind. For instance, Giuliani (2016) examined how governance structures and policies affect GVC engagement and its impact on regional development. As regions continue to integrate into the global economy through GVCs, developing countries need to leverage them for economic growth. Whilst highlighting the critical role of policy diversity in GVCs, Witt and Redding (2013) explored business networks, particularly in the context of Asia. Effective governance can enhance the connectivity and integration of Asian economies into GVCs, thereby fostering regional development. Thus, inclusive governance emerges as the unsung hero and diversity is the driving force behind a new age of responsible business practices.
Addressing Socioeconomic Disparities in GVCs through Inclusive Governance:
Inclusive governance actively involves all stakeholders, including government bodies, industry players, and civil society, in the decision-making processes related to GVC participation. Gary Gereffi's work shed light on the critical interplay between inclusive governance and the effectiveness of GVCs in reducing regional disparities. He emphasised the need for governance structures that actively involved all stakeholders since regions where these stakeholders worked collaboratively in decision-making processes tend to achieve more balanced resource allocation, transparency, and accountability (Gereffi et al, 2001).
By actively involving regional and local representatives in decision-making, it becomes less likely that all resources and benefits concentrate in a few economically advantaged areas. Inclusive governance practices would promote transparency and accountability in the management of GVC-related activities. This can help prevent corruption and mismanagement that can hinder regional development. Moreover, it allows for a more comprehensive understanding of regional disparities and enables policymakers to tailor interventions to address specific needs and challenges in different regions. Thus, local expertise utilisation leads to more effective policies and strategies for development.
To enhance regional development, policymakers need to strategically craft policies related to GVC participation. First, different regions may require distinct incentives to attract GVC-related investments. Hence, policymakers should customise incentive packages to match the strengths and needs of each region. Second, diversity in policy should include a focus on education and skills development that would align with the evolving demands of GVCs. This would ensure that the local workforce is equipped to participate effectively in global production networks. Third, these diverse policies should target infrastructure development that supports GVC activities. This would again vary in different regions since some may require investing in transportation and logistics, while for others, it may involve digital infrastructure and connectivity. Lastly, policymakers should encourage the holistic development and growth of industry clusters that are part of GVCs to ensure that the economic benefits are spread equitably.
Conclusion:
Conclusively, it is important to note that even though GVCs are seen in almost every sector, not every country plays the same role or carries the same weight in GVCs as we have seen with the aforementioned examples. Presently, there is a wave where even CMEs resemble the functioning of LMEs. However, to give an example of how LMEs failed to adhere to higher labour standards, one can simply look at how the Global Financial Crisis of 2008 initially started in the US and then expanded to other countries. It indicates the critical shortcomings of a liberal market economy, wherein labour was not given importance and firms engaged in profit maximisation at an individual level.
Due to the existence of various industry associations and organisations above the firm level, there is better coordination of industrial relations in CMEs. They say history repeats itself. However, we simply do not want to repeat another financial crisis, wherein businesses are not adhering to industrial norms and promoting lower labour standards. It is true that firms in LMEs are characterised by radical innovations, which help them in sustaining their market share. For instance, the majority of global leaders in technology, like Apple (a US-based company), are situated in LMEs. Such breakthroughs in innovation can help firms gain a competitive advantage and become leaders in their respective markets both locally and globally. Whereas in CMEs, there is less incentive for firms to be highly innovative. However, this does not imply that innovation does not exist in firms in CMEs. In such regulated economies, firms could also gain a competitive advantage in the marketplace by focusing more on individualism and gradual innovative practices.
Therefore, no matter how little or crucial the role of GVCs may be, they have significant effect on the regional development of an area and aid in reducing regional disparities such as unemployment. The successful integration of GVCs into regional development strategies relies not only on the presence of GVCs themselves in CMEs or LMEs, but also on the quality of governance and the diversity of policies. Inclusive governance ensures that all stakeholders have a voice in shaping GVC-related activities, and diverse policies are essential to accommodate the unique characteristics of each region. By addressing these aspects, governments can harness the full potential of GVCs to drive regional development and reduce widespread economic disparities.
With an overwhelming portion of workers being exploited globally, we need more active labour policies and regulations to address the decent work deficit in GVCs. Ultimately, for firms to make a positive impact in social policy-making, the potential diffusion mechanism for CSR focused on labour standards must be considered and situated within the relevant social and political context. The future of work not only has to be more local, but also more humane. Thus, humanity needs to be viewed as an edge, and not a handicap by adequately protecting the fundamental rights of all!
BIBLIOGRAPHY
Bair, J., & Palpacuer, F. (2012). From varieties of capitalism to varieties of activism: The anti- sweatshop movement in comparative perspective. Social Problems, 59(4), 522-543.
Bathelt, H., Malmberg, A., and Maskell, P. (2004). Clusters and knowledge: local buzz, global pipelines and the process of knowledge creation. Progress in human geography, 28(1), 31-56.
Campbell, J.L. (2007). Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Academy of Management Review, 32, 3: 946-967.
Clarke, T. (2009). European Corporate Governance: Readings and Perspectives, Taylor & Francis
Crescenzi, R., Carlo Pietrobelli, C., Rabellotti., R. (2014). Innovation drivers, value chains and the geography of multinational corporations in Europe. Journal of Economic Geography, 14(6), 1053– 1086.
Creszenzi, R., O. Harman and D. Arnold. (2018). “Move On Up! Building, Embedding and Reshaping Global Value Chains Through Investment Flows: Insights for Regional Innovation Policies”, Background paper for an OECD/EC Workshop on 21 September 2018 within the workshop series “Broadening innovation policy: New insights for regions and cities”, Paris.
Gereffi, G. (2001). Beyond the Producer-driven/Buyer-driven Dichotomy: The Evolution of Global Value Chains in the Internet Era. IDS bulletin, 32(3), 30-40.
Gereffi, G., Fernandez-Stark, K., and Psilos, P. (2011). Skills for Upgrading: Workforce Development and Global Value Chains in Developing Countries. Durham: Duke University Center on Globalization Governance & Competitiveness.
Giuliani E. (2016). Human Rights and Corporate Social Responsibility in Developing Countries’ Industrial Clusters, Journal of Business Ethics, 133 (1): 39-54.
Gjølberg, M. (2009). Measuring the immeasurable?: Constructing an index of CSR practices and CSR performance in 20 countries. Scandinavian journal of management, 25, 1: 10-22.
Hall, P. A. and Soskice, D. (2001). ‘An Introduction to Varieties of Capitalism’. In Hall, P. A. and Soskice, D. (eds) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford, UK, Oxford University Press, pp. 1–68.
Kaplinsky, R., & Morris, M. (2000). A Handbook for Value Chain Research (Vol. 113). University of Sussex, Institute of Development Studies.
Manning, S., Boons, F., von Hagen, O. and Reinecke, J. (2012). National Contexts Matter: The Co- Evolution of Sustainability Standards in Global Value Chains, Ecological Economics, Vol. 83, pp. 197-209, 2012.
North, D. C. (2005). Understanding the Process of Economic Change, Princeton, NJ, Princeton University Press
OECD (2013). Regional Development Policy. Available at: https://www.oecd.org/regional/regional-policy/regionaldevelopment.htm\
Streeck, W. (1995). German Capitalism: Does it Exist? Can it Survive? MPIFG Discussion Paper
Witt, M. A. and Redding, G. (2013). ‘Asian business systems: institutional comparison, clusters and implications for varieties of capitalism and business systems theory’, Socio-Economic Review 11, 265-300.
UNCTAD. (2018) World Investment Report 2018: Investment and New Industrial Policies Available at: http://unctad.org/en/PublicationsLibrary/wir2018_en.pdf
About the Guest Authors:
SIMRAN MASSEY
Simran Massey pursued an MSc. in International Social and Public Policy (Development specialism) from the London School of Economics (LSE 2022), and holds a Master’s in Public Policy from St. Xavier’s College, Bombay (MPP 2020) and a BA (Honours) in Economics from St. Stephen’s College, Delhi (2018). With accolades including a scholarship from the Swiss Government and a year-long UK Parliamentary internship, she is currently a UK Civil Servant at the Department for Transport, informing policy strategies to tackle unprecedented challenges.
Contact Details- +44 7949233323
Email- simranmassey21@gmail.com
MAHNOOR SAJID
Mahnoor Sajid previously completed her Bachelor of Education (BEd in Economics & Politics) from SOAS University of London and then an MSc. in Local Economic Development at the London School of Economics and Political Science (LSE 2022). Whilst currently working at Sunny Flour Mills as a Strategy Consultant, her academic endeavours have played a critical role in developing her capability around the intricate nexus between economics and sustainability.
Contact Details- +44 7480744156
Email- sajidmahnoor585@gmail.com
Comments