Topic 7: Heterogeneous Firms, Melitz Model, GVCs and the Smile Curve

Question 1

– Countries can participate in GVCs in two ways:
* Buying inputs from other firms participating in the GVC
(……….. participation).
* Selling inputs to other firms participating in the GVC
(……….. participation)

Answer 1

backward/forward

Question 2

Biggest obstacle for developing countries for participating in GVCs are high ………….. costs

Answer 2

transportation

Question 3

It’s easier to participate in GVCs via specializing in ………, which can be supplied via information and communication technologies (ICT)

Answer 3

services

Question 4

GVC participation exposes countries to trade and FDI, which can result
in knowledge and ………… spillovers

Answer 4

technology

Question 5

GVC participation can lead to vulnerability to …………. in global demand and supply.
– Risk can be reduced by participating in multiple supply chains.

Answer 5

fluctuations

Question 6

Gains in GVCs tend to be distributed ………. . Lead firms tend to have more bargaining power and capture most of the gains because their capabilities are:
– more rare
– more complex
– harder to codify

Answer 6

unevenly

Question 7

GVC participation requires that countries produce at a minimum acceptable quality level, which is not easy.
– Countries typically start in tasks for which required capabilities are low.
– Competition in these tasks is intense and the risk of losing to a competitor is high.
* To remain competitive, firms need to upgrade
within the GVC (‘climbing up the smile curve’)