The decade to 2030 is likely to prove a period of transformation for global value chains (GVCs), which will have significant implications for the global trade and investment landscape and multinational enterprises’ (MNEs) modes of operation.
The change will be driven by five major forces: economic governance realignment, the new industrial revolution, the sustainability endeavour, corporate accountability and resilience-oriented restructuring. All of this will present challenges and opportunities for companies and states alike, leading to an investment-development paradigm shift.
In light of these five driving forces that will change the locational determinants and MNEs’ strategic choice for modes of operation, ten broad trends in the future GVC transformation and reconfiguration of the global investment landscape can be projected in the coming decade.
1. More regional and less global value chains
The predominant configuration of future value chains will be more regional than global. The regionalisation of value chains can be the result of a pullback from GVCs, with MNEs restructuring their global production networks into multiple regional and sub-regional production centres (relocation of value chain segments). The development of regional value chains can also be the result of the indigenous growth of international production in a region, with MNEs building new value chains at the regional and sub-regional levels (replication of value chains).
2. Less fragmented manufacturing GVCs and more concentrated value added
The main direction of GVCs in modern manufacturing points towards simplification and localisation, leading towards shorter and less fragmented value chains within an industry. The value added will tend to become more concentrated.
Distributed manufacturing will also lead to shorter value chains and a re-bundling of production stages with more geographically distributed activities but more concentrated value added. Digitalisation of supply chains will enable a wider distribution of economic activities but potentially with more concentrated value added in individual locations. Reshoring may also lead to reconfiguring some GVC segments, resulting in shorter, less fragmented value chains and a higher geographical concentration of value added.
3. More platform-driven governance and asset-light value chains
Digitally enhanced GVCs will strengthen the role of large digital MNEs providing the enabling digital infrastructure. These large digital MNEs tend to provide digital platforms concentrated in few economies and exhibit a distinctively ‘light’ international footprint. Unlike traditional MNEs, digital MNEs possess fewer tangible foreign assets, indicating a reduced international physical footprint even though they generate a significant portion of their sales abroad.
The number of asset-light technology MNEs in UNCTAD’s 100 largest MNEs has increased, while manufacturing investment has declined. At the same time, the value of greenfield cross-border investment projects in manufacturing industries was structurally lower (by 20–25%) than in the previous decade.
4. Growing services share in value chains and offshoring
The broad application of enhanced digital technologies will seriously affect service industries, particularly higher value-added services such as white-collar services, ranging from professional and business services to finance, engineering and marketing activities. The enhanced digital technologies could make service industries the new frontier of offshoring, driven by labour cost arbitrage. High and medium value-added services, traditionally highly centralised, will be increasingly delivered offshore through teleworking.
Expansion of services GVCs will also be boosted by the unbundling of manufacturing-related activities into services, a process known as servicification of manufacturing.
5. Resilience and national security-driven GVC diversification
One trajectory to build resilience in GVCs is diversification and redundancy. As the perceived over-concentration of production and supply chain dependence are of primary concern to many governments, companies and states may find that diversifying internationally can be more effective than reshoring (and de facto re-concentrating domestically). This means giving up some economies of scale by involving more locations and suppliers in the value chain. Digitalisation of the supply chain is pivotal to the process of diversification, as much as automation is the technological trigger of reshoring.
The mix of control over the supply chain, enhanced marketing and flexible processes enabled by a smart integration of digital technologies allows companies to prevent, or at least manage, the kind of supply, demand and operational shocks that were so dramatically showcased by the Covid-19 pandemic.
6. Decline in global efficiency-seeking FDI and increase in regional market-seeking FDI
The impact of digitalisation and automation on labour cost differentials will exert downward pressure on global efficiency-seeking foreign direct investment (FDI). Distributed manufacturing enabled by the internet of things and 3D printing potentially favours an increase in market-seeking FDI. Like robotics, 3D printing reduces the labour component in production and the competitive advantage generated by labour cost differentials. The transition from efficiency-seeking, vertically specialised value chains to distributed market-seeking manufacturing is also favoured by relatively limited capital cost differentials across countries. Overall, the weight of factor cost differentials in internationalisation decisions becomes smaller.
7. Downward pressure on trade in intermediate goods, less on trade in final products
As GVCs in manufacturing become more local, shorter and less fragmented, physical concentration of the production process will decrease cross-border trade in intermediate inputs and components. While reduction in intermediate trade is already happening and it is likely to accelerate in the future, the prospects for trade in final goods are less obvious.
Transformation of some industries will also reduce the production and trade in intermediate goods. The transformation of the auto industry from combustion engine to electrical vehicle manufacturing is a good example. Due to platform sharing and the shift to electrical vehicles with far fewer components, the value chain will become shorter and the value added more concentrated. Consequently, electric vehicle supply chains will involve far fewer suppliers and much less trade in intermediate goods.
8. A shift from mass production to mass customisation
Advanced manufacturing points to a reconfiguration of international production characterised by small-scale, localised production, close to the point of consumption. It is also supported by the application of new production technology such as 3D printing. 3D printing changes the traditional patterns of international production by the effects of re-bundling through technological inseparability.
Distributed manufacturing enables the shift from mass production and economies of scale to mass customisation. The focus and source of value switches then from economies of scale to economies of scope. The servitisation of manufacturing to seek economies of scope can also lead to the transformation to customisation. Services lead to higher value creation and are part of a shift towards more productive and more customer-centric production models where value can be seen as being co-created with consumers.
Supported by increasing Big Data and the internet of things, servitisation of manufacturing will exert a far-reaching impact on future trade and investment by MNEs.
9. Growing FDI in infrastructure and public services
Large amounts of capital are now looking for investment opportunities for value-creating projects in infrastructure, agriculture and public services. Some services that have always been predominantly domestic are internationalising, such as healthcare, education and digital infrastructure, just as traditional international production industries are retreating or restructuring. That creates new opportunities for promoting investment in new areas. In the short to medium term, the development of infrastructure may support domestic recovery by boosting the local economy and employment. In the medium to long term, investment in infrastructure enables the building of more resilient local and regional ecosystems, physically and digitally integrated, as well as supporting sustainable growth.
10. A boost for FDI in green and blue economies
Driven by the global sustainability imperative, promoting the green economy and the blue economy (for example, renewable energy, land and water management, sustainable maritime sector, climate change mitigation and adaptation) presents great potential for international investment. MNEs will increasingly align their investment decisions, production processes and products and services with the sustainable development agenda. The harmonisation of ESG standards and strengthening of corporate accountability will exert further pressure on MNEs and their global supply networks to deliver sustainable impact through investment. As the green and blue economies gain priority on the political agenda, they will benefit from massive policy support, including through the mainstreaming of the UN’s Sustainable Development Goals (SDGs) into investment policymaking and the reorientation of investment promotion and facilitation strategies towards the SDGs.
As the transformation is unfolding, underpinned by these ten trends, it is time to chart the way forward in research and policy analysis to address tomorrow’s investment development challenges and opportunities.
This article is an extract from ‘GVC transformation and a new investment landscape in the 2020s: Driving forces, directions, and a forward-looking research and policy agenda’, published in the Journal of International Business Policy (2021).
See also: Five driving forces for global value chain transformation by James Zhan.