Global Value Chains, Resilience and Strategic Behaviour

Abstract

In addressing risks to value chains, the choice of policy instrument matters and depends on institutional context. The role of fiscal policy in strengthening supply chain resilience has received increasing attention in recent years. We present empirical insights from India by estimating the extent of (critical) import dependencies for sectors like electrical machinery and equipment; machinery and mechanical appliances; organic chemicals; inorganic chemicals among others. In response to disruption risks affecting value chains, fiscal instruments could support resilience in multiple ways.  In this paper we develop a game theoretic model to capture the industrial policy choices of the Government and firm’s production decision when cross-border supply chain disruption risk is a reality. The model internalises the social cost of import dependence through Government’s action that competitive markets fail to internalise. The government may use production-linked subsidy that supports output or an infrastructure-type subsidy that expands domestic productive capacity in situation of disruption of external origin. Since, such disruptions are increasingly a reality with varying probabilities, the model establishes that industrial policies should ideally involve both instruments.