On the Geography of Global Value Chains

This paper studies the optimal location of production for the different stages in a sequential global value chain. We develop a general-equilibrium model featuring a proximity-concentration tradeoff: slicing global value chains across countries allows to better exploit agglomeration economies, but such fragmentation comes at the cost of increased transportation costs. We show that, other things equal, it is optimal to locate relatively downstream stages of production in relatively central or well-connected locations, while upstream stages of production are optimally assigned to more remote locations. We illustrate this result by working out the optimal location of production for a few basic topologies featuring a low number of countries and stages. Exact solutions to the problem for a larger number of countries and stages are computationally complex, but can be obtained using combinatorial optimization tools. We apply the model to study the optimal specialization within chains in eleven countries in Factory Asia.