VOX.com has an interesting piece by Marcel Timmer, Bart Los, Robert Stehrer, Gaaitzen de Vries in which they highlight the need for new ways of thinking about how value is created by today’s global corporations and, therefore, how to think about the classic notion of comparative advantage.

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The piece, entitled “Rethinking competitiveness: The global value chain revolution,” starts out by the stating the challenge as follows:

The rise of global value chains (GVCs) is posing new challenges to analyses of countries’ competitiveness. Commonly used measures such as gross exports and revealed comparative advantage are becoming obsolete. This column presents a new measure called ‘global-value-chain income’ that is based on the value added by countries along the international production chain. It shows how this measure can be derived from existing industry-level data and how it changes our view on a country’s competitive strengths.

I often make the point with clients and students that the complexity of the supply chain models in place today necessitate a serious evolution in the way corporations think about the financial and economic aspects of their value  chains. Indeed, I have written about how supply chain management has entered a “Third Wave” (following both the “physics” and “IT” waves of the 20th Century), in which optimizing financial performance is the next frontier of the SCM discipline. The same challenge holds for economists, who are in some ways behind the curve, with respect to calculating how today’s corporations shift economic value and risk around the globe.

As the authors note:

…international production fragmentation greatly reduces the usefulness of traditional comparative advantage analysis based on exports as a policy guide. Moreover, sectors are becoming the wrong operational unit when framing policies and evaluating performance. The emphasis in trade and industrial policies should therefore not be sector-specific but rather focus on the type of activities carried out along international production chains. 

The authors are on the right track with their aim to rethink the calculation of value and advantage, and this is a topic that I hope more researchers will take up in response to the very real changes taking place around the world.

Read the VOX piece here: http://www.voxeu.org/article/rethinking-competitiveness-global-value-chain-revolution

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Posted by Carlos Alvarenga

Carlos Alvarenga is the Executive Director of World 50 ThinkLabs and an Adjunct Professor at the University of Maryland's Smith School of Business.

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