Paper short abstract:

GVC can accelerate development. Yet this development can create glass ceilings at different per capita income levels. Supply and demand factors can play a role for this. This paper analyzed the middle income trap and effects of GVC on it as well as policy recommendation for escaping from the trap.

Paper long abstract:

The second unbundling form the 1980s onward due to revolution in communication and transport industry as well as globalization and neoliberal policies added to industrialization of developing countries. Yet being part of MNCs's global value chain (GVC) did for only a very small number of countries, for example South Korea or Taiwan, a catching up with high-income courtiers. Supply as well as demand factors can play a role for a lack of development.

Outsourcing low value-adding production stages to developing countries for cost reduction motives became the main feature of the second unbundling and changed the structure of global trade in a very radical way. Neoliberal policies, the revolution in information technology and reductions in transportation costs encouraged MNCs to outsource their fabrication stages to developing countries and focus more on their core competencies (the upstream and downstream end of value chains) that also create the highest value-added through value chain.

MNCs have the full control over GVC and market power in monopsonistic markets. This constellation can prevent climbing up further the technological and skill ladder of development. In this paper the first focus is the analysis of the relation between leading firms and local firms in developing countries via GVC. It is asked whether this relation leads to industrial upgrading of local firms or it sets a ceiling for further development. A second focus is the too high income inequality in the typical developing country which causes negative supply and demand effects which also slow down economic dynamic.