Introduction

More and more developing countries have been directly or indirectly integrated into global production networks. Despite being at the low end of global value chains (GVCs) and exposed to the risk of being replaced by other countries with lower production costs, it is believed that these developing countries are capable of industrial upgradation (Gereffi, 1999, 49–55). For developing countries, the model of upgrading from being an original equipment manufacturer (OEM) to becoming an original brand manufacturer (OBM) is considered to be a practical one (Gereffi, 1999, 55–57; Leonard-Barton, 1995; Hobday, 1995). As far as the four types of economic upgrading (Gereffi, 1999, 2005, 171; Barrientos, Gereffi and Rossi, 2011, 323–24) are concerned, developing countries generally encounter far less difficulty in process and product upgrading than in functional and chain upgrading (Humphrey and Schmitz, 2002, 1023).

However, in other literature on this issue, it is argued that integration into the GVC contributes little to industrial upgrading for developing countries, not only because over-dependence on trade with a couple of multinational companies (MNCs) would hinder the process of upgrading and transformation for a firm in less developed economies, but also because MNCs tend to prevent their suppliers in developing countries from catching up with them (Humphrey and Schmitz, 2002, 1024). Besides the reluctance to undertake the risk of upgrading (Barrientos et al., 2011, 333–34), there are still other difficulties for OEM firms in developing countries seeking to fill the gap between the requirements for being an OEM and an OBM, such as the lack of sales channels, and very limited knowledge spillover from MNCs which occupied the high end of the value chains (Schmitz and Knorringa, 2000). Conversely, companies with successful experiences of upgrading in developing countries are domestic-market oriented or export their products to other less developed economies (Bazan and Navas-Aleman, 2001), by manufacturing cheaper products with inclusive innovation to occupy the subsistence marketplaces and build up their brand value (Weidner, Rosa and Viswanathan, 2009).

Introduction

This chapter is an attempt to answer the ‘so what?’ question. After all the experience and analyses of global value chains (GVCs), what does it mean for development policy? The chapter starts by first looking at whether GVCs are just the flavour of the year (or the decade?) or they represent a form of firm restructuring that will not go away anytime soon. After summarizing what was pre-GVC development policy, the chapter looks at the benefits for developing countries of entering into GVCs, even at the very lowest level of low-value labour-intensive production.

Having established the rationale for and benefits from being in a GVC, the chapter then looks at the first steps of upgrading in GVCs – of functional upgrading leading to the earning of process rents. Policies to support such functional upgrading are outlined, rejecting the market fundamentalist (or Washington Consensus) approach of letting the market alone hold sway. In the attempt to earn such rents, the obstacles placed by the Prebisch-Singer thesis, applied to GVC upgrading by Raphael Kaplinsky (2005), are discussed; monopsonistic market structures allow lead firms from high income countries to capture the benefits of productivity increases in the supplier firms from developing countries. But it is pointed out that the growth of supplier economies and the growing market itself are factors that mitigate the dissipation of rents that would otherwise hold sway.

This is followed by discussion of GVC-specific industrial policy, based on vertically specialized industrialization (Milberg and Winker 2013) or concentration on GVC segments rather than entire sectors or products, the development of capabilities in adjoining tasks, reverse engineering and the reorganization of labour as important in moving firms from just earning competitive profits to securing some rents, and for developing countries from low-income to middle-income status.

Having managed catch-up industrialization (Nayyar, 2015), many economies have experienced the well-known ‘middle-income trap’. What policies are needed to overcome the middle-income trap?

This book is in many ways a follow-up to our earlier edited book (Nathan, Tewari and Sarkar, 2016). While that book dealt with labour conditions and labour issues in global value chains (GVCs) in Asia, this book deals with the manner in which upgrading and innovation have taken/can take place in GVCs; once again, with a focus on the Asian experience.

This ‘Introduction’ starts out by listing the various dimensions of a GVC; within this, emphasis is placed on the GVC as embodying a division, albeit a changing division, of knowledge and capabilities across geographies. After this, we define the ways in which firms may or may not strategically interact with GVCs. This is followed by listing the different types of upgrading, commonly discussed in the GVC literature. However, different types of upgrading enable the capture of rents, whether process or product rents, which are discussed in the next section. This passage through different types of rents itself depends on the manner in which knowledge is developed, both within and around value chains.

Thus, this introduction stresses upon a scheme where knowledge (which results in both process and product innovations and their corresponding rents) is crucial to development within and around value chains. There are many analyses of innovation, and in the context of many countries having made it from low-income to middle-income status, there is much discussion of the ‘middle-income trap’. Some books on the challenges of China's current economic development explicitly place it in the context of overcoming the middle-income trap (for example, Woo et al., 2012; David Shambaugh, 2016; Lewin, Kenney and Murmann, 2016).

Through case studies in Asian countries such as China, India, the Philippines, South Korea, and Sri Lanka, with an examination of diverse industries (electronics, telecom equipment, mobile phones, pharmaceuticals, automobiles, and even garments) this book looks at facets of the processes of industrial catch-up (Nayyar, 2013) and life after catch-up in the context of GVCs. How do firms and economies upgrade and innovate and move from being suppliers to becoming headquarter economies (Baldwin, 2016) or, in GVC-terms, how do firms in these economies becoming lead firms?

Introduction

South Korea has been known for its successful economic development in the post-World War II world economy. In 1960, the country's gross domestic production (GDP) per capita was just US$156, lower than Ghana's. However, it has rapidly grown since then, reaching $25,977 in 2013. In 1996, South Korea joined the Organisation for Economic Cooperation and Development (OECD) and become only the second Asian member of this rich countries’ club, after Japan. South Korea's economic development was mainly driven by exporting manufacturing goods. The country's exports rose from $122 million in 1960 to $703 billion in 2013, with manufacturing accounting for more than 80 per cent of the exports. It has become one of the ten largest trading economies in the world. The rapid expansion of exports was largely attributable to the constant upgrading of export product composition to higher value-added, more technologically sophisticated products, which coincided with upgrading the country's industry structure to focus on high-tech sectors, such as electronics and information technology (IT). In this regard, South Korea is an example of successful ‘economic upgrading’, defined as moving up to higher value-added activities with improved technology, knowledge and skills (Gereffi, 2005).

In explaining South Korea's economic growth, two opposite explanations have been presented. A market-based perspective highlights export-push strategies, openness to foreign investment and technology transfer as the key factors of the growth (World Bank, 1993). In contrast, state-centred views emphasize the key role of the state's active industrial policy in prodding local firms to upgrade and compete in global markets (Amsden, 1989; Chang, 1993; Evans, 1995). The debate following the economic crisis of the late 1990s centred on the development state was eclipsed by a ‘neoliberal turn’, or its strength was maintained with newly mandated roles (Chu, 2009; Kalinowski, 2008; Pirie, 2008). Missing in these explanations, however, is the role of global–local linkages in economic development (Hamilton and Gereffi, 2009). Economic development and industrial upgrading take place in a global economic context and through the interaction of global and local actors. Furthermore, just focusing on macro-economic settings or the role of the state fails to explain commonalities and differences in the patterns and trajectories of upgrading across different sectors and time periods.