Tag: Economics

Global value chains helped many Asian economies industrialize, but where they sit in the chain now matters more than whether they’re in it at all.

In Asia and the Pacific, a proven strategy for development has been to integrate into global value chains (GVCs)—interconnected networks in which different stages of making a product occur in several locations, often worldwide.

Take electric vehicles, or EVs. Battery materials such as lithium may be mined in Australia; nickel in Indonesia; cobalt and graphite could be from the People’s Republic of China (PRC). After being processed and refined—possibly elsewhere—these may end up in batteries made in the Republic of Korea or Japan. Semiconductors and electronics come from a handful of specialized producers, such as Malaysia and Republic of Korea. Vehicle assembly happens in more places. The PRC, India, Indonesia, Malaysia, Thailand, and Viet Nam are considered the region’s major assemblers. India, Japan, and Singapore are seen as major hubs for research and development (R&D).

Entering global trade by specializing in specific production tasks within interlinked global manufacturing networks has in the past led to industrialization, productivity growth, and large reductions in poverty for many economies in the region. In recent decades, however, some have joined GVCs but remained concentrated in low-value activities, capturing little of the additional value being created along the production chain, even if they are making more of each item.

The EV chain depicts this. Mining, basic processing, and vehicle assembly tend to generate lower and more volatile returns. While R&D, manufacturing advanced components such as semiconductors, and system integration generate the highest returns. This entails unequal value capture among EV value chain participants.

Even resource-rich economies face this challenge. Having lithium or nickel provides an entry point to participate in EV production but is no guarantee of transitioning from a low-value to a high-value network. Moving from extraction into refining, then into battery components, and eventually into technology-intensive segments requires sustained investment, coordination, and learning. Indonesia, for example, has tried to accelerate this shift by restricting raw material exports and encouraging processing and battery production domestically. This strategy highlights how difficult upgrading is in practice. Without strong domestic capabilities and linkages, sustainable development remains elusive for those in lower-value tasks.

This also reflects how latecomers must overcome greater challenges to catch up. Once capabilities and production networks are established, they tend to reinforce themselves. Suppliers cluster around lead firms, while skills deepen and innovation builds on existing knowledge.

“Where an economy sits in a value chain matters more than whether it participates at all.”

 

GVCs build on pre-existing industrial and technological capabilities. Early and successful entrants tend to create strong first-mover advantages. Those with established strengths in electronics, chemicals, or auto manufacturing could extend and adapt these capabilities into EVs. They already had skilled workers, supplier networks, research capacity, and ability to scale—widening the gap from those who are still attempting to enter.

At the same time, the global environment is becoming less supportive of traditional upgrading paths, such as shifting from manufacturing low-end to high-end products. Automation is already reducing the role of low-cost labor in EV manufacturing. Intangible assets, including battery technology and software, account for the largest share of EV value. Geopolitical tensions are another key factor, with major economies seeking to secure control over critical minerals and other inputs.

So, what does this mean for development strategy?

First, the focus must shift from participation to positioning. Where an economy sits in a value chain matters more than whether it participates at all. In EVs, supplying critical inputs or advanced components offers greater potential than basic assembly. Identifying and targeting these positions—based on existing capabilities and realistic opportunities—is essential.

Second, upgrading must become the central objective from the outset. Upgrading requires deliberate and sustained effort. This includes improving production processes, moving into more sophisticated products, taking on new functions such as design or engineering, and applying capabilities across industries. In the EV chain, this might mean linking mineral extraction to domestic processing and cell manufacturing; building capabilities in key battery inputs such as cathode materials, anodes, and battery management systems; or developing specialized niches such as electric two‑wheelers or fleet vehicles.

Third, economies need to invest in capability ecosystems. The most successful GVC participants are those with strong skills, innovation systems, supplier networks, and institutions that support learning and coordination. These ecosystems allow firms to absorb new technologies, meet demanding standards, and gradually upgrade.

Finally, economies should focus on specific segments of a GVC, where entry barriers are manageable and upgrading is feasible. This involves partnerships with foreign firms, regional cooperation, or targeted industrial policies that support capability building.

Capturing a greater share of created value is imperative. To do so, joining production networks or global value chains is the necessary first step, but staying put is no longer enough.