Global Value Chains and Least Developed Countries in Asia: Cost and Capability Considerations in Cambodia and Nepal

Abstract

In today's world, global trade increasingly involves spreading the production of a final good over firms located in several countries, with each undertaking a task in the overall process. Powerful new trade opportunities have thus arisen, including for least developed countries (LDCs) in Asia. Although such countries may otherwise lack the capabilities to export goods from modern sectors, they can obtain these through engagement with global value chains (GVCs), characterized by the vertical fragmentation of production. These tend to be led by foreign direct investment (FDI) and have more hierarchical governance structures. Tensions exist between the comparative costs that create the incentive to unbundle and the colocation or agglomeration forces that may bind some parts of a process together. Risks for LDCs also exist; for example, producers may be locked into low stages of production and be unable to upgrade their functional position over time. Cambodia has benefited from the expansion of formal employment opportunities through FDI-led GVC integration, but it continues to struggle with functional upgrading. Nepal, on the other hand, is in the initial stages of engaging with GVCs as well as upgrading within them. Both case studies also exhibit different economic geography considerations that influence the cost and capability of GVC integration. In both, governance capability issues regarding the ability to effectively design and implement industrial policy exist, and powerful new trade opportunities represented by GVCs could be more effectively and realistically harnessed.