Journal of Chinese Economic and Business Studies

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Reshaping of global supply chains will take place,

but it will not happen fast

Beata Javorcik

To cite this article: Beata Javorcik (2020) Reshaping of global supply chains will take place, but
it will not happen fast, Journal of Chinese Economic and Business Studies, 18:4, 321-325, DOI:
10.1080/14765284.2020.1855051

To link to this article: https://doi.org/10.1080/14765284.2020.1855051

Published online: 04 Jan 2021.

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JOURNAL OF CHINESE ECONOMIC AND BUSINESS STUDIES
2020, VOL. 18, NO. 4, 321–325
https://doi.org/10.1080/14765284.2020.1855051

ARTICLE

Reshaping of global supply chains will take place, but it will

not happen fast
Beata Javorcik
Office of the Chief Economist, European Bank for Reconstruction and Development, London, UK; University
of Oxford, Oxford, UK; CEPR, London, UK

ABSTRACT ARTICLE HISTORY

The COVID-19 pandemic has drawn attention to high dependence Received 20 November 2020
of industrialized countries on Chinese suppliers and led to calls for Accepted 20 November 2020
increasing resilience through diversification of supply sources. This KEYWORDS
article argues that geographic reshaping of global value chains will global value chains;
require substantial flows of foreign direct investment. As such flows international trade; COVID-19
are projected to remain subdued in the next few years, reshaping of
global value chains will not happen very fast.

The COVID-19 pandemic has drawn attention to how dependent industrialized countries
are on Chinese suppliers. It first became visible when temporary closures of factories in
the Chinese province of Hubei caused disruptions in production on many continents.
Although Hubei accounts for only 4.5% of Chinese GDP, it is a high-tech manufacturing
hub, home to local and foreign firms highly integrated in global supply chains in the
automotive, electronic and pharmaceutical industries. About a quarter of intermediate
inputs used in high technology exports (defined as pharmaceuticals and chemical pro­
ducts, machinery, motor vehicles and other transport equipment) in the US, Japan, Korea
and Mexico come from China (see Javorcik 2020).
Later, attention to dependence on imports from China increased as the demand for
personal protective equipment (PPE) surged and government started paying more attention
to the sources of medical supplies in general. China is a key supplier not just of PPE, but also of
important pharmaceutical components. For example, almost three quarters of blood thinners
imported by Italy come from China. This is also true for sixty percent of antibiotic components
imported by Japan and forty percent imported by Germany, Italy and France.
These realizations have led to calls urging firms and countries to diversify their sourcing
patterns in order to increase resilience to shocks in general and to rely less on Chinese
suppliers in particular. Discussions have often centered around the so-called China + 1
sourcing model with another country being used as a sourcing base in addition to China.
In a recent survey, 93% of global supply chain leaders reported planning to increase
resilience and 44% of executives reported being willing to increase resilience even if it
comes at expense of short-term savings (McKinsey 2020).

CONTACT Beata Javorcik beata.javorcik@economics.ox.ac.uk European Bank for Reconstruction and

Development, London, UK
© 2020 Informa UK Limited, trading as Taylor & Francis Group
322 B. JAVORCIK

The cost considerations will certainly dampen the enthusiasm for reshaping geography
of global value chains, particularly at the time of weak economic performance, so this
process is likely to take years rather than months. To think about how the reshaping of
global value chains may play out it is helpful to invoke Gereffi’s (1999) taxonomy of global
value chains. Gereffi distinguishes between two types of such chains: producer- and
buyer-driven global value chains.

Producer- vs buyer-driven global value chains

Producer-driven global value chains are centred on multinational firms producing
advanced products like aircraft, automobiles and electric machinery. Multinationals tend
to exert control over backward linkages with raw material and component suppliers, and
forward linkages into distribution and retailing. Multinationals in producer-driven chains
usually belong to global oligopolies and operate in industries characterized by high
barriers to the entry of new firms. Profits in producer-driven chains derive from scale,
volume, and technological superiority stemming from high R&D investments.
Buyer-driven global value chains can be found in industries where large retailers,
branded marketers, and branded manufacturers play the pivotal roles in setting up
decentralized production networks in a variety of exporting countries. They are common
in labour-intensive, consumer goods industries such as garments, footwear, toys, house­
wares and consumer electronics. Production is generally carried out by tiered networks of
contractors, located in emerging markets, producing final goods to the specifications of
foreign buyers. Buyer-driven chains are characterized by highly competitive, locally
owned, and globally dispersed production systems. Profits are due to unique combina­
tions of high-value research, design, sales, marketing and financial services that allow the
retailers, branded marketers and branded manufacturers to shape mass consumption
through their strong brand names and to act as strategic intermediaries linking overseas
factories with the main consumer markets.

Reshaping of producer- vs buyer-driven global value chains

In the context of producer-driven global value chains implementation of China + 1
sourcing strategy will be most often linked to investment decisions of multinational
firms. When evaluating locations for future production sites or making decisions about
major expansions of existing facilities, executives are likely to explicitly take into account
how each of the possible sites contributes to the overall resilience of the firm. However,
given that global FDI flows are projected to remain low in 2021 and 2022 (UNCTAD 2020),
major restructuring of global value chains in the near future is unlikely. There may be
some adjustment at the margin linked to utilization of existing capacity or limited
expansions of existing facilities, but major reshaping of producer-driver global value
chains is unlikely before the recovery of global FDI flows.
Faster changes may take place in the context of buyer-driver global value chains,
particularly with respect to countries which are already participating in them. Chinese
suppliers may be replaced with Eastern European or Mexican and suppliers in the
European Union and the United States, respectively. Take the example of Poland, which
has comparative advantage in many products, for which Germany is heavily reliant on
 JOURNAL OF CHINESE ECONOMIC AND BUSINESS STUDIES 323

imports from China. These include such diverse goods as monitors and projectors (of
which Poland exported 5,4 billion US$ in 2018), furniture and furniture parts (5,4 billion US
$), video games and table games (1,6 billion US$), washing machines (1,3 billion US$),
copper tubes (0,2 billion US$), baby carriages (0,1 billion US$) and others.
The promise of larger contracts may encourage suppliers in these countries to invest in
larger production capacity and automate part of their production process to compensate
for their higher labour costs relative to China. The attractiveness of these countries as
a supply base will be reinforced by two other forces. In the context of US buyers, stable
trading relationship with Mexico will remain particularly attractive in the face of uncer­
tainty caused by the US–China trade war. In the context of the European Union, it will be
its target of ambitious reduction in greenhouse gas (GHG) emissions by 2030 and its
target of zero net emissions by 2050. This transition will not be achieved without charging
a substantial price on all GHG emissions in order to incentive producers and consumers to
switch to less emitting technologies and products. To avoid putting domestic producers
at a disadvantage relative to foreign producers, the European Union will need to intro­
duce border carbon adjustment tax. As implementation of such a system poses many
challenges, uncertainty about the implementation details may further induce firms to shift
production to eastern European member states.
Another possibility in the context of buyer-driver global value chains is sourcing from
locations previously not used to supply a given product. This is a much more complex
process as it will often require local firms to export for the first time or start exporting
a product they have not previously exported. The literature documents difficulties asso­
ciated with engaging in such ‘export discoveries’.
As shown theoretically by Hausmann and Rodrik (2003), an entrepreneur who attempts
to produce a good for the first time in an emerging market setting faces uncertainty about
the underlying cost structure of the economy. If the project is successful, other entrepre­
neurs learn that the product in question can be profitably produced and follow the
incumbent’s footsteps. In this way, the returns to the pioneer investor’s cost discovery
become socialized. If the incumbent fails, the losses remain private. This knowledge
externality means that investment levels in cost discovery are suboptimal unless the
industry or the government finds some way in which the externality can be internalized.
In such a setting, the range of goods that an economy produces and exports is deter­
mined not just by the fundamentals but also by the number of entrepreneurs engaging in
cost discovery. The larger this number is, the closer the economy can get to its produc­
tivity frontier. When there is more cost discovery, the productivity of the resulting set of
activities is higher in expectational terms.1
Therefore, it is not surprising that export discoveries tend to be made by very large
firms, which are often multinationals (see Freund and Pierola 2015). In fact, Freund and
Pierola conclude that revealed comparative advantage in a sector can be created by
a single firm. This observation is also in line with recent contributions stressing the leading
role of large firms in affecting the evolution of macro-aggregates (Gabaix 2011; Di
Giovanni and Levchenko 2012). Further, case studies of Malaysia, Costa Rica, and
Morocco lead Freund and Moran (2017) to conclude that ‘the objective of generating
exports – in particular, exports in novel sectors – is more likely to come about by overcoming
market failures and other obstacles that hinder multinational investment than by promoting
domestic entrepreneurship.’
324 B. JAVORCIK

The role of FDI flows in shaping comparative advantage of countries has been con­
firmed by Harding, Javorcik, and Maggioni (2019). As there is a two-way relationship
between exports and FDI flows (countries successful at exporting in particular industries
are also attractive to FDI inflows in that industry, and many foreign affiliates tend to be
exporters), the authors use information on investment promotion policies. In particular,
they focus on sector-specific FDI promotion efforts undertaken by 77 developing coun­
tries during 1984–2006. They find that products belonging to sectors targeted by invest­
ment promotion efforts experience an increase in exports and revealed comparative
advantage. This effect increases with the time targeting is in place and is larger for capital-
intensive products and products requiring relationship-specific investments. Their find­
ings are robust to controlling for arbitrary country-sector-specific shocks that might have
affected the choice of a particular priority sector by a given country in a given year.
However, UNCTAD (2020) expects global FDI flows to decrease by up to 40% in 2020,
from their 2019 value of 1.54 USD trillion. This would lead to global FDI flows staying
below 1 USD trillion for the first time since 2005. For 2021, UNCTAD projects FDI to
decrease by a further 5 to 10%. The projected fall is anticipated to be worse than the one
experienced in the two years following the global financial crisis. In 2009 when FDI flows
reached their lowest level ($1.2 trillion), they were some 300 USD billion higher than the
bottom of the 2020 forecast. Moreover, the downturn caused by the pandemic is taking
place after several years of negative or stagnant growth and thus it compounds a longer-
term declining trend. The expected level of global FDI flows in 2021 would represent
a 60% decline since 2015, from 2 USD trillion to less than 900 USD billion.

Conclusions
Even though the forces, described in this article, increase the attractiveness of sourcing
from locations outside of China, seizing this opportunity will not be easy as long as global
FDI flows remain subdued. Emerging economies aspiring to increase their share in global
export markets will need to step up their investment promotion efforts. They will need to
inform potential investors about business opportunities on offer, showcase their commit­
ment to good business climate and signal their welcoming attitude to FDI. The right
strategy is not about fiscal incentives or other give aways, it is about real commitment to
fair treatment, stable and transparent rules and investor-friendly attitude. Investment
promotion is surprisingly cheap and effective (Harding and Javorcik 2011), but it will
not work without the support of political leadership at the very top and a high quality of
national investment promotion agency (Harding and Javorcik 2013).
The bottom line is that even if there are compelling reasons for reshaping geography
of global value chains, it will not happen very fast. It will be a matter of years, not months.

Note
1. Using Mexican data, Iacovone and Javorcik (2010) show that export discoveries, i.e., products
not previously exported from Mexico, constitute a relatively low share of new export varieties
(i.e., product-country combinations) added by exporters. However, the footsteps of
a producer introducing an export discovery are followed by other exporters within a short
period of time. For approximately half of the new export discoveries, an additional firm starts
 JOURNAL OF CHINESE ECONOMIC AND BUSINESS STUDIES 325

exporting the same product in the following year. The same happens one year later.

Disclosure statement
No potential conflict of interest was reported by the author.

Notes on contributor
Beata Javorcik is Chief Economist of the European Bank for Reconstruction and Development
(EBRD) in London. She is on leave from the University of Oxford, where she is Professor of
Economics and Professorial Fellow at All Souls College. She is a member of the Royal Economic
Society’s Executive Committee and a Director of the International Trade Programme at the Centre
for Economic Policy Research in London. Before taking up her position at Oxford, she worked at the
World Bank in Washington DC. She holds a Ph.D. in Economics from Yale and a B.A. in Economics
(Summa cum Laude) from the University of Rochester.

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