Reflection of a building.
Reflection of a building. (Image: Robert Keane via Unsplash)

The future of global value chains in the post-pandemic world

Countries must rethink innovation and investment policy measures to enable long-term sustainability.

By Adnan Seric, Svenja Falk and Ana Ruiz Hernanz

Global megatrends were already at work in 2020, shaping global value chains (GVCs). The outbreak of the COVID-19 pandemic did not so much change the course of history as it shined a light on it. In some cases, the crisis exacerbated or accelerated existing trajectories, in others it simply made them more visible. Either way, the pandemic has created a new imperative to respond to megatrends. Firm-level data, together with country-level data, reveal how the micro level (supply chain relationships) and macro level (trade, investment and employment patterns) are connected. Although the most recent data pre-date the pandemic, reading the trends may provide a crucial indication of future directions.

New geographical clusters

A shift in economic activity to new geographic clusters has taken place in recent years, especially as more of the world’s manufacturing moves to China and other east Asian countries. These countries are increasingly relying on regional value chains, thereby boosting productivity and trade in the Asia-Pacific (APAC) region, yet pushing out traditional supply chain participants in the process. The figure below shows that APAC’s share of suppliers for companies in the Forbes “Global 2000” list doubled between 2013 and 2020 – from 11 per cent to 22 per cent for industrialized economies (IEs), and from 3 per cent to 8 per cent for developing and emerging industrial economies (DEIEs). Correspondingly, the share of suppliers located in IEs in other regions dropped by 20 percentage points. At the same time, the share of China’s supply chain originating outside the APAC region dropped markedly from 47 per cent to 20 per cent, as shown in the figure below.

Suppliers by region of origin

Source: Accenture Research based on FactSet financial data and analytics

This development has positive implications for APAC countries, which are taking advantage of the new economic opportunities this eastward shift has opened up. Regional trade agreements, such as the Association of Southeast Asian Nations (ASEAN), are certainly part of this success story, but such a strategy can only be successful if it is centred around an economic powerhouse such as China. Other regionalized economies will have to continue to rely on global GVCs in industries with a broader geographical footprint to achieve growth.

Geographic aggregation can influence the balance of political as well as of economic power, with implications for the digital realm. As data and advanced digitalization become more closely integrated into the means of production, intellectual property, data protection and privacy, global standards and interoperability will become the new competitive frontiers.

Digital transformation

Advancements in digitalization are changing the way we do business and how value is created, opening new windows of opportunity but also intensifying the relevance of investment in digital infrastructure and skills. Multinational corporations are now seeking production sites with high-quality infrastructure to establish the core of their supply chains1. Investment in digital infrastructure is therefore a key enabler of future participation in GVCs, critically supported by a skilled workforce.

The figure below, which illustrates Asia’s exceptional growth in per-person value added, underscores that investment in human resources is a key component of APAC’s productivity story. Moreover, Asia’s productivity surge is also apparent in the agriculture sector, suggesting the possibility of positive spillovers from investments in skills and (digital) infrastructure, from manufacturing into other areas of the economy.

Development of skills in manufacturing and agriculture, by region, 1990-2018

Source: GGDC/UNU-WIDER Economic Transformation Database

Both large and small- and medium-sized enterprises (SMEs) across multiple regions cite skills development as one of the biggest obstacles to firm performance. Education and workforce development, alongside infrastructure, are therefore a focal point for industrial policies and public investment.

The sustainability imperative

The third megatrend with salience for value chains is the inexorable rise of environmental regulations along with changing incentives and consumer sentiments. The triple planetary crisis of climate change, pollution and biodiversity loss and the growing demand for sustainable production, has engendered a new policy landscape and calls for new ways of doing business. An increasing number of countries is introducing mandatory disclosure requirements for companies to report on their pollution, carbon emissions, and other environmental impacts. Policies such as the European Union’s proposed Carbon Border Adjustment Mechanism (CBAM) requires external parties to disclose their environmental impacts to access global markets.

The chart below indicates that environmental performance tends to improve as it moves downstream, suggesting that consumer visibility may be driving more sustainable business practices. On the positive side, this implies that higher environmental standards can be more profitable. On the other hand, the invisibility of upstream products and processes can obscure the true environmental costs and even underpin deliberate “greenwashing”. This highlights the urgent need for better accounting and disclosure of impacts along the entire value chain.

Environmental Index scores along the auto OEM, semiconductor and apparel GVCs - 2020

Source: Accenture Research based on FactSet financial data and analytics and Arabesque S-Ray®, 2021

Priorities for industrial policy

The trends and GVC developments addressed above have specific implications for industrial policy. The rise and regionalization of Asia means that emerging economies in other regions will need to rethink their comparative advantage. Competitive labour costs will no longer be sufficient to access global markets. Environmental and accounting systems will need to be developed and strengthened as a pre-condition of future GVC participation, for example. Some economies will need to focus on investment facilitation, support for domestic industries in agri-business and local (especially digital) infrastructure. Across the board, however, investment in skills and digitalization, a robust intellectual property regime and a transparent system of environmental accounting should become priorities for industrial policy.

This piece is part of the IAP IDR2022 series, based on UNIDO's flagship Industrial Development Report (IDR) 2022 and its background papers

  • Adnan Seric is Innovation Lab Manager at the United Nations Industrial Development Organization (UNIDO).
  • Svenja Falk is Managing Director in Accenture.
  • Ana Ruiz Hernanz is Research Manager at Accenture. 

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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