Power relationships along the value chain: multinational firms, global buyers and performance of local suppliers

Abstract

There is a growing literature exploring the role of international trade channels on economic growth, looking at the mechanisms through which import and export flows might affect productivity, technology diffusion and output growth. However, most of this literature appears to neglect an important part of the story, which is the form and the organisation of the relationships (the governance) among the various actors involved in these activities and their implications for development. The recent literature on global value chains and their governance takes this element explicitly into account, and we explore it empirically with a new dataset on Thailand. To this aim, we study global and domestic value chains in Thailand, and develop a quantitative measure of their governance, which takes into account different levels and types of buyer involvement with supplier activities. We then use this measure to explore econometrically its relationship with performance of suppliers. An important finding is that in value chains led by a multinational corporation, the relationships that the leaders have with their suppliers is multifold and generally more intense than for domestic value chains. Our estimates suggest that more intense buyer involvement with local suppliers, not only in the definition of product characteristics, design and quality, but also in technology dissemination and R&D, is generally associated with higher supplier productivity. This is consistent with other sources of evidence. However, the governance of the value chain appears to affect the productivity of suppliers in domestic value chains to a greater extent than for firms supplying multinational corporations or for exporters. We suggest that this result may be explained by the different nature of the information and knowledge being exchanged, and by the larger gaps in knowledge and capabilities between the domestic leader and its suppliers.

Global Value Chains Meet Innovation Systems: Are There Learning Opportunities for Developing Countries?

“…10 See Pietrobelli and Saliola (2008) for a recent attempt to develop a method to measure GVC governance.…”

Exploring Firm-Level Innovation and Productivity in Developing Countries: The Perspective of Caribbean Small States

“…Horizontal technology spillovers occur when foreign firms invest in domestic firms in the same industry in the same country through demonstration effects and the movement of trained labor (Caves, 1974;Fosfuri, Motta, and Ronde, 2001). Vertical technology spillovers occur through forward and backward linkages between foreign firms and local suppliers and customers within the value chain (Javorcik, 2004;Pietrobelli and Rabellotti, 2007;Pietrobelli and Saliola, 2008). These knowledge spillovers can be transferred through the supply chain (Saxenian, 1991;Breschi and Lissoni, 2001); joint ventures (Almeida and Fernandes, 2006;Lane, Salk, and Lyles, 2001); mobility of skilled labor (Cheung and Lin, 2004;Almeida and Kogut, 1999;Motta, Fosfuri, and Ronde, 1999;Kim, 1997;Greenaway, Upward, and Wright, 2002); demonstration effects (Blomstrom and Kokko, 1998;Cheung and Lin, 2004); innovation management (Aghion and Tirole, 1994;Bessant, Caffyn, and Gilbert, 1996;Cosh, Fu, and Hughes, 2004); and competitive pressure (Geroski, 1990;Dunning and Lundan, 2008;Aitken and Harrison, 1999;Fu, 2004Fu, , 2007Cohen and Levin, 1989;Symeonidis, 2001;Hu and Jefferson, 2002).…”

“…Trade openness also facilitates linkages and directs resources to the right sectors, creating a competitive and dynamic environment (Balasubramanyam et al, 1996;Aitken and Harrison, 1999). Lastly, foreign firms will not bring core technology into their subsidiaries or carry out innovation activities in countries with weak intellectual property protection (Pietrobelli and Saliola, 2008).…”

Supplier strategies to compensate for knowledge asymmetries in buyer-supplier relationships: implications for economic upgrading

“…With rising global competition and the ever-increasing power of reputable branded retailers, numerous suppliers compete to be part of the GVCs of these retailers. There exists an extreme power asymmetry between MNEs and their suppliers (Pietrobelli and Saliola, 2008;Ponte and Gibbon, 2005). This explains why MNEs can control operations through an informal promise of a repeat purchase without any legal obligation to deliver on that promise.…”