Who’s smiling now?

Case studies of specific products, particularly in the electronics industry, show that value creation along a global value chain tends to be unevenly distributed among activities. The highest value creation is found in upstream activities, such as the development of a new concept, research and development (R&D) and the manufacturing of key components. But it is also found in downstream activities, such as marketing, branding and customer service.

In between, value-added is low in activities such as product assembly, which is frequently offshored to emerging and developing economies. This is the basic idea behind the so-called “smiling curve”, originally used in 1992 by Acer’s founder Stan Shih to illustrate the problems of information technology (IT) manufacturers in Chinese Taipei, which found itself along the bottom of the curve.

Some argue that there has been a tendency in OECD countries for the smiling curve to deepen, moving from relatively flat–meaning value evenly spread all along the chain–to U-shaped, with fabrication and assembly accounting for a much lower share of value. added. The offshoring of labour-intensive manufacturing and assembly to low-wage economies has, in fact, decreased the cost of these stages. Rising up the value chain has become a goal of many policy makers, particularly in emerging economies, where large manufacturing activities may not capture as much value from producing goods for the global market as was originally thought.

See www.oecd.org/sti/ind/global-value-chains.htm