The world economy has changed in significant ways during the past several decades, especially in the areas of international trade and industrial organization. Two of the most important new features of the contemporary economy are the globalization of production and trade, which have fueled the growth of industrial capabilities in a wide range of developing countries, and the vertical disintegration of transnational corporations, which are redefining their core competencies to focus on innovation and product strategy, marketing, and the highest value-added segments of manufacturing and services, while reducing their direct ownership over ‘non-core’ functions such as generic services and volume production. Together, these two shifts have laid the groundwork for a variety of network forms of governance situated between arm's length markets, on the one hand, and large vertically integrated corporations, on the other. The purpose of this chapter is to generate a theoretical framework for better understanding the shifting governance structures in sectors producing for global markets, structures we refer to as ‘global value chains’. Our intent is to bring some order to the variety of network forms that have been observed in the field.

The evolution of global-scale industrial organization affects not only the fortunes of firms and the structure of industries, but also how and why countries advance—or fail to advance—in the global economy. Global value chain research and policy work examine the different ways in which global production and distribution systems are integrated, and the possibilities for firms in developing countries to enhance their position in global markets. We hope that the theory of global value chain governance that we develop here will be useful for the crafting of effective policy tools related to industrial upgrading, economic development, employment creation, and poverty alleviation.

Fragmentation, Coordination, and Networks in the Global Economy

For us, the starting point for understanding the changing nature of international trade and industrial organization is contained in the notion of a value-added chain, as developed by international business scholars who have focused on the strategies of both firms and countries in the global economy. In its most basic form, a value-added chain is ‘the process by which technology is combined with material and labor inputs, and then processed inputs are assembled, marketed, and distributed.