Global Value Chain Policy Series Regulatory Coherence
- 2018-10-17 17:18:38
In a world economy characterized by the fragmentation of
production processes across different countries through
global value chains (GVCs), misaligned or redundant
regulations can become a key source of transaction costs.
For supply chains to work efficiently, inputs need to be
sourced expediently and reliably across multiple markets.
Any delays or frictions from diverse domestic standards
or inspection processes can generate disruptions that
reverberate across an entire regional or global production
network. This results in accumulated transactions costs. It
adversely affects not only the parent company but a range
of other businesses in upstream and downstream activities,
particularly small and medium-sized enterprises (SMEs).
Ultimately, the costs also affect consumers through higher
prices for final goods, reducing real purchasing power and
overall living standards.
In addition to and interlinked with trade, the operation of
supply chains invariably entails foreign direct investment
(FDI) by multinational enterprises (MNEs) across the various
countries where the different segments of an integrated
production process are located. Since investment is by
definition a behind-the-border transaction, the quality
and predictability of domestic regulations greatly affect
investment decisions and overall market access. Given
that MNEs establish manufacturing affiliates across
multiple markets and regions, the convergence of
regulatory processes across countries reduces search
and transaction costs, increasing efficiency. Improving
regulatory frameworks can therefore help countries become
more competitive in attracting “foreign factories” linked to
GVCs, bringing important employment opportunities and
associated spillover effects.
Overall, the increased awareness of the interdependency
between trade and FDI brought about by GVCs implies
that transaction costs for divergent or opaque regulatory
measures do not just affect trade flows but have important
effects on investment as well, particularly FDI linked
to GVCs. In this context, GVCs heighten the importance
of reducing transaction costs from domestic regulations,
without compromising the achievement of legitimate public
policy goals. Generally, trade and FDI costs from domestic
regulation stem from two factors: how restrictive regulations
are and the extent to which they differ across the markets
in question. This paper focuses on the latter, discussing the
benefits of and avenues for promoting regulatory convergence
from a GVC lens.