Subsidies and Spillovers in a Value Chain World: New Rules Required?

The use of subsidy instruments, broadly defined to include fiscal measures and investment incentives, has been a constant feature of government policy in both high-income and emerging economies. This takes different forms in different countries, depending in part on fiscal and administrative capacity. A common feature is that it is often non-transparent. Motivations underlying efforts to promote certain types of economic activity in a jurisdiction include a desire to foster employment creation, and to support certain types of investment that are deemed desirable from a future economic growth and development perspective. These often include “high-tech” and “green-tech”-oriented activities, and more generally a desire to “move up” the value chain (VC) by encouraging investment in activities that generate higher productivity jobs. This paper briefly discusses the emergence of international production networks and VCs, and the associated increase in the share of trade in intermediate products and services. It also provides a snapshot of available data on the use of various kinds of subsidies by governments.