Towards a dynamic model of the industrial upgrading with global value chains

Abstract

This research constructs a simple dynamic model to illustrate the micro‐mechanism of industrial upgrading along the global value chains. Our model predicts that as firms move up from downstream to upstream stages, (a) there is higher profitability if and only if the following three conditions are satisfied. First, the increasing rate of sunk cost (including R&D expenditure) over sequential stages of production cannot be sufficiently large (endogenous sunk cost effect). Second, the decreasing rate of change of intermediate input demand with respect to the price set by firms at a production stage cannot be sufficiently high (intermediate input price effect). Third, the decreasing rate of change of intermediate input demand with respect to the pricing dynamics over the sequential stages of production cannot be sufficiently large (sequential pricing uncertainty effect); (b) total cost is lower if and only if the decreasing rate of change of input demand with respect to the price is sufficiently large; (c) output is higher if and only if and the decreasing rate of change of input demand with respect to the price is not sufficiently large; and (d) the price decreases. We show that the empirical patterns revealed in China are consistent with our model's predictions.

Profit sharing, industrial upgrading, and global supply chains: Theory and evidence

“…In contrast to previous research on industrial upgrading strategies for firms specializing along GSCs, this paper does not consider the intra‐supply‐chain upgrading mechanism, which is more conventional and widely discussed in the current literature (Shen, Zhang, Lee, & Zhang, 2021b; Deng, Ma, & Zhu, 2022; Wan & Wu, 2016). Alternatively, one of the key innovative contributions made by this paper with respect to the industrial upgrading along GSCs, which largely fills the gap in the related literature, is that we introduce new supply‐chain industrial upgrading strategies in which the curve does not flatten out to the same extent, and the exclusion of the intra‐supply‐chain upgrading enables our research to only confine its focus within the cases of the upward parallel shift for the whole U‐shaped smile curve, which we refer to as “smile‐curve‐driven supply‐chain upgrading.” The smile‐curve‐driven supply‐chain upgrading induces the occurrence of an upward parallel shift of the original smile curve, making the firms remain within the same production stage, but the higher profitability level is captured for all firms irrespective of locating at high or low value‐added stages.…”

Productivity and wage effects of firm‐level upstreamness: Evidence from Belgian linked panel data

“…A final channel is related to the fact that more upstream firms are generally more R&D and capital-intensive. Indeed, as highlighted by Shen et al (2021), this could further improve their growth prospects and give them more opportunities to outsource some of the non-core operations that offer lower value added and, thereby, to increase their supply base capabilities.…”

The Impact of Agricultural Global Value Chain Participation on Agricultural Total Factor Productivity

“…Upper-middle-income countries may have easier access to technology spillovers and market competition effects, leading to improvement in agricultural TFP. Relying on the advantages of low-cost labor and sufficient agricultural resources to participate in agricultural GVCs [88], lower-middle-income countries can access a rich variety of intermediate goods abroad, promote the transformation of production technology in the downstream sector, increase labor productivity and produce more diversified end products [89,90], and then promote the improvement in agricultural TFP. Therefore, the improvement in agricultural TFP in lower-middle-income countries is mainly through the backward agricultural GVC participation.…”