The virtues and limits of specialization in global value chains: analysis and policy implications

A growing concern has emerged in both academic research and policy circles about the hidden risks that can arise from a narrow specialization of economies in a world characterized by the international fragmentation of production. In this work, we address the virtues and limits of specialization in light of the strong interdependencies between countries induced by the emergence and evolution of global value chains (GVCs). The need to shift the focus from the product level to the functional level is discussed from both a conceptual and empirical perspective. Moreover, several arguments are advanced in favour of functional diversification. It is argued that economies performing a relatively large range of value adding activities are in a better position to foster process and product innovation and increase the resilience of the productive structure in face of both domestic and external shocks. Accordingly, we provide a stronger conceptual basis for industrial policies aimed to address the vulnerability of GVCs in times of major disruptive events. We stress that responding to these shocks implies a careful definition of the geographical boundaries of international production networks, substantial investments in strategic activities at the national and macro-regional levels, as well as a more selective sourcing of inputs and knowledge assets on a global scale.