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Global Value Chains
Article one
Global Value Chains: A review of the multidisciplinary literature
Global Value Chains in simple terms
- Global Value Chain refers to the organization of global industries that are created during the wave of outsourcing, offshoring in the 1970s and 80s. As companies from the USA and the EU decided to invest a
oad to make more of the productions that they were selling (i.e. outsourcing). GVC is also called Global Production Networks and Global Supply Chains and Business. The concept helped scholars understand how business really became organized around the ‘global factory’ concept, namely the production of different parts in different countries all being organized back to their home markets. GVC also helps understanding the organization or global production.
- The phenomenon of global value chains (GVCs) indicates a division of labor type production
structure in which tasks and business functions are distributed among several companies,
globally, or regionally.
- The critical features of GVCs are therefore the international dimension of the production process and the "contractualisation" of buyer and seller relationships, often across international borders.
Detailed definitions and arguments on Global Value Chains
The main interests of GVC studies are the exploration of:
1- the typology of local firms’ relationships with lead firms (i.e., GVC governance)
2- the relationships between GVC governance and the type of upgrading.
The literature analyzing GVCs usually defines upgrading in terms of increase in value-adding activities.
Gereffi, Humphrey, and Sturgeon XXXXXXXXXXargues:
1. The complexity of transactions is assumed that complexity of transaction is closely associated with transaction costs
2. The ability to codify transactions refers primarily to the ability to codify production systems
3. The capabilities in the supply base determine GVC governance which encompass crossboarder production and management processes.
- If transaction costs are high, the codification of the production system is difficult and local producers are incapable, thus, the lead firm internalizes production activities by setting up its own affiliates (i.e. FDI)
- label the above governance type (i.e. codification of production systems) as “hierarchy”. However, they do not discuss transactions between foreign affiliates and local firms, which is one of the key issues in FDI studies.
- On the other hand, if transaction costs are high, codification of the production system is going to be difficult, but local producers are going to be capable of management activities, the lead firm outsources its activities to local producers, seeking mutually dependent and beneficial relationships.
- The reputation and trust created by repeated transactions, with family and ethnic ties between the lead firm and the local producers can manage such relationships. It label this governance type as “relational”
- Conversely, if transaction costs are high, local producers will be incapable from one hand, but codification of the production system will remain easy. In addition, the lead firm will outsource its activities to local producers and tightly monitor and control them. In this case, local firms will passively receive materials and production instructions from the lead firm. It label this governance type as “captive”
- It is discussed the relationships between the types of GVC governance and the types of upgrading. These works define functional upgrading as a shift to higher value-adding activities within a given value chain. Product upgrading for instance, is the shift to more sophisticated product lines with higher unit values. Whereas process upgrading determines transforming inputs into outputs more efficiently by reorganizing the production system or introducing superior technology within a given type of output .
- Example: integration into value chains in which local firms have symmetrical relationships with lead firms (e.g., relational value chains) offers favorable opportunities for functional upgrading. Because local producers, which are capable of management activities and have relatively strong bargaining power vis-a-vis lead firms, can negotiate their assigned tasks in the value chains. On the other hand, the integration into value chains in which local firms are under captive relationships with MNEs offers no favorable conditions for such functional upgrading. This case confines the local producers to simple tasks and discourages them from engaging in value-adding activities, such as production design and marketing, because of the low level of management abilities.
- However, both relational and captive suppliers are interested in upgrading the quality of products and production processes through learning from production experience. It is likely that relational suppliers would be more successful at upgrading than captive suppliers would be because of their superior entrepreneurial abilities.
Most relevant global value chain studies
Based on the conceptual framework of GVC studies:
- It considers functional upgrading as widening of functional capabilities from production to management, for example, more active participation of local firms in pre-production activities, such as marketing research, technology choice and development, and production design, as well as in post-production activities, such as advertising and marketing.
- Lead firms usually discourage local firms from participating in value adding pre-and post-production activities, because these activities are considered the core competence of lead firms and are a major source of their profit In addition, tasks in pre-and post-production activities tend to generate higher value added than those in production activities per se, such as manufacturing and assembling.
- Thus, the insight of Sato and Fujita XXXXXXXXXXprovides an important mechanism of productivity improvements of local firms. In other words, once local firms obtain higher capabilities as suppliers to MNEs, they participate in relational value chains, instead of captive value chains. Such evolution of local firms’ relationships vis-à-vis MNEs extends the functions of local firms toward high-value generating tasks related to pre-and post-production activities.
- For Example, the distinction between captive and relational contracts is similar to the distinction between contracts with “supplied designs” and “approved designs” in the automobile industry in Japan. In the former case, suppliers manufacture parts according to the designs that core firms supply, whereas in the latter case, suppliers manufacture parts according to drawings or blue prints that suppliers provide and that the core firm approves.
- According to Asanuma (1989), the “approved designs” (i.e. or “drawings supplied”) have become more common over time, replacing “drawings supplied.” Thus, we consider this process as the evolution from captive to relational contracts.
- How local producers transform themselves from captive to relational suppliers is a major development issue. It is worth noting that this argument is consistent with the recent findings in the field of development economics that emphasize the role of management practices and managerial human capital in improving the performances of manufacturing firms in developing countries.
- In a study on the productivity improvements of acquired plants in Indonesia from 1983 to 2001, Arnold and Javorcik XXXXXXXXXXsuggest that foreign firms employ organizational and managerial systems make the production process more efficient.
Limits of global value chain research
- All the extent arguments on GVC closely relate to the inter-industry spillover effects of FDI through the supply of parts and components to MNEs (backward linkages), analysis of the productivity dynamic improvements of local parts-supplying firms. However, it is not the main concern of GVC studies. This is because the main interests of seminal GVC works, such as some researchers lie in the static categorization of GVC governance and upgrading, rather than the evolution of enterprises from captive to relational type.
- Another important reason for the neglect of the evolutionary process of local industry is that GVC studies, especially the early works, such as Gereffi and Korzeniewicz (1994), consider lead firms as global buyers located in developed countries (e.g., large supermarkets), whose main role is to control or coordinate the GVC without directly engaging in production activities.
- The literature assumes foreign affiliates engage in independent production without procuring any inputs from local firms in GVC studies. In addition, the empirical foundations for the arguments of these studies are weak.
- The original studies undertook only conceptual analyses regarding the choice of governance systems, but not analyses of their quantitative impacts on the productivity of local firms, which is a main issue for FDI studies. Subsequently, researchers ca
ied out empirical studies on local firms’ productivity and types of GVC governance, but these works are not rigorous in econometric methodology. For example, Pietrobelli and Saliola XXXXXXXXXXempirically analyzed the impacts of the various types of GVC governance on local firms’ productivity in Thailand from 2001 to 2003. However, it is not certain to what extent their categorization is based on the original concepts of Gereffi, Humphrey, and Sturgeon XXXXXXXXXXMoreover, although the types of GVC governance are endogenous with respect to firms’ productivity, the authors do not deal with the issue of endogeneity.
Article 2
Accounting for firm heterogeneity in Global Value Chains
Premise of the research
- This research explores a GVCs’ method of measurement, meaning input–output models. The method uses intra-industry firm heterogeneity, which goes beyond the industry level of analysis.
Supporting ideas
- Intra-industry trades refer to trade means within industries, which could be inside the same market or internationally.
- A country that exclusively exports (or imports) a certain good X, will have a particular score index (i.e. in the case of Grubel-Lloyd index it’s 0). Whereas a country that imports as much as it imports a good X will have another score (GL index = 100)
- Developed markets (i.e. highly industrialized economies) tend to engage in more intra-industry trade. The reason is because they have the necessary capabilities to produce many different types of products (e.g. specialization). Thus, MNEs are highly specialized and tend themselves to both externalize some of their less technical capabilities and import raw materials and semi-developed materials for processing and assembly. This is where GVC comes into the image.
- On the other hand, resource-rich developing countries tend to have less intra-industry trade due to their less developed operations and know-how. Assets of lower importance (such as older technologies) are instead just handed over through licensing agreements or other non-equity investments. Technical cooperation and arm’s-length trade signal looser forms of collaboration. With the dramatic growth of outsourcing practices, competition between companies has shifted from horizontal (with firms competing in the same sector for the same customer base) to vertical (with firms in the same value chain competing to perform specific and specialized tasks). Lead firms compete with first-tier and lower-tier suppliers.
- On the firm level, the study explains that the production in a certain country (i.e. aggregate productivity growth) can be significantly improved by a better capital and labor allocation across its firms. In simpler terms, firm heterogeneity explores questions such as: are all firms identical within a county? Do all firms export? Are exporters smaller or larger than other firms? Are exporters more productive? Do firms tend to export to the same destinations? Does trade affect firms symmetrically?
- The facts on firm heterogeneity is that within a country, firms widely differ. Not all firms are specialized in exporting since there is