Review of International Political Economy 12:1 February 2005: 78-104
Objectives
- Build simplest theoretical framework to explain governance patterns in global value chains that generates results relevant to real-world outcomes
* by bringing order to variety of network forms without accounting for rich detail and complexity brought about by historical, geographical and sectoral specificity
* that has ability to anticipate change in global value chains
Methods and Approach
The authors used an in-depth and fairly broad literature review to establish their theory of Global Value Chain (GVC) governance and then “tested” this theory by discussing in the context of 4 brief case studies:
*bicycles- hierarchy to market-based coordination
*apparel- captive to relational value chains
*horticulture- market coordination to explicit coordination
*electronics- hierarchy to modular value chains and beyond
Here is an outline of the theoretical framework used:
- like transaction cost, global commodity chain and organizational theory frameworks, opposite ends of value chain spectrum are capped by markets and vertically integrated firms => middle of spectrum comprised of network relationships which can be broken into 1) modular, 2) relational and 3) captive
- Theory of value chain governance developed by examining conditions for market, modular, relational, captive or vertically integrated global value chains
* 3 key determinants of value chain governance patterns:
1) complexity of inter-firm transactions (transaction costs economics) = knowledge transfer required to sustain a transaction with respect to product and process specifications
2) ability to codify transactions (production networks) = efficient transmission of knowledge (referred to in 1) without transaction-specific investment between parties in transaction
3) capabilities in the supply-base (technological capability and firm-level learning) = of actual and potential suppliers in relation to requirements of transaction
- different ways of handling asset specificity lead to different motivations for constructing complex firm-to-firm relationships that result in 3 types of industrial organization: 1) market, 2) hierarchy and 3) network
* 3 key determinants of value chain governance patterns:
1) complexity of inter-firm transactions (transaction costs economics) = knowledge transfer required to sustain a transaction with respect to product and process specifications
2) ability to codify transactions (production networks) = efficient transmission of knowledge (referred to in 1) without transaction-specific investment between parties in transaction
3) capabilities in the supply-base (technological capability and firm-level learning) = of actual and potential suppliers in relation to requirements of transaction
- different ways of handling asset specificity lead to different motivations for constructing complex firm-to-firm relationships that result in 3 types of industrial organization: 1) market, 2) hierarchy and 3) network
- 5 types of global value chain governance (listed highest to lowest regarding explicit coordination and power asymmetry):
1) hierarchy = governance is managerial control, flowing from managers to subordinates or from headquarters to subsidiaries and affiliates
2) captive = small suppliers are transactionally dependent on much larger buyers, suppliers face high switching costs, making them 'captive'; high degree of monitoring and control by lead firms (supplier firms that investment money in transaction-specific capital influenced by lead firm)
3) relational = mutual dependence and high levels of asset specificity managed through reputation, family and ethnic ties (Guanxi or Xinyong according to Menkoff, T., 1992)
4) modular = supplier takes full responsibility for competencies surrounding process technology, use generic machinery that limits transaction-specific investments and make capital outlays for components and materials on behalf of customers
5) market = cost of switching to new partners is low for both parties
1) hierarchy = governance is managerial control, flowing from managers to subordinates or from headquarters to subsidiaries and affiliates
2) captive = small suppliers are transactionally dependent on much larger buyers, suppliers face high switching costs, making them 'captive'; high degree of monitoring and control by lead firms (supplier firms that investment money in transaction-specific capital influenced by lead firm)
3) relational = mutual dependence and high levels of asset specificity managed through reputation, family and ethnic ties (Guanxi or Xinyong according to Menkoff, T., 1992)
4) modular = supplier takes full responsibility for competencies surrounding process technology, use generic machinery that limits transaction-specific investments and make capital outlays for components and materials on behalf of customers
5) market = cost of switching to new partners is low for both parties
Important Results and Conclusions
- information complexity changes as lead firms seek to obtain more complex outputs and services from supply-base (reduce supplier capability or reduced complexity may increase ability to codify transactions)
- new technologies can restart the clock on process codification (on-going tension between codification and innovation) (Storper, 1995 and Davd , 1995)
- supplier competence changes over time (increase as suppliers learn, but fall as buyers demand more or different specifications)
- increasing supplier capability moves GVC away from hierarchy and captive networks toward relational modular and market types
- actors that actively participate in rule-setting process (favors established actors and locations) have a major advantage
- some firms set parameters that value chain actors must adjust to (i.e. Intel or Microsoft), on the other hand, users can subvert original intention of producers (demand-driven innovation, i.e. mountain bike)
Limitations
- new technologies can restart the clock on process codification (on-going tension between codification and innovation) (Storper, 1995 and Davd , 1995)
- supplier competence changes over time (increase as suppliers learn, but fall as buyers demand more or different specifications)
- increasing supplier capability moves GVC away from hierarchy and captive networks toward relational modular and market types
- actors that actively participate in rule-setting process (favors established actors and locations) have a major advantage
- some firms set parameters that value chain actors must adjust to (i.e. Intel or Microsoft), on the other hand, users can subvert original intention of producers (demand-driven innovation, i.e. mountain bike)
Limitations
- cannot oversimplify GVC evolution because:
1) standards that enable codification of product and process are different across industries and constantly evolving
2) standards for codifying product and process specifications become obsolete as technologies change or when there is a drive to bundle value chain activities in new ways
3) knowing standard and adopting protocol may not be straightforward, inexpensive or immediately possible for all actors in an industry, in addition competing standards can make choosing and investing difficult and risky
4) no single best way to organize GVC
- without accounting for rich detail and complexity brought about by historical, geographical and sectoral specificity
1) standards that enable codification of product and process are different across industries and constantly evolving
2) standards for codifying product and process specifications become obsolete as technologies change or when there is a drive to bundle value chain activities in new ways
3) knowing standard and adopting protocol may not be straightforward, inexpensive or immediately possible for all actors in an industry, in addition competing standards can make choosing and investing difficult and risky
4) no single best way to organize GVC
- without accounting for rich detail and complexity brought about by historical, geographical and sectoral specificity
Assumptions
This paper assumes it goes beyond traditional transaction cost economics by emphasizing ‘mundane’ transaction costs which according to Baldwin and Clark, 2000 are costs involved in coordinating activities along the chain which arise when: *products are non-standard
*have integral product architectures
*have time sensitive output
It also assumes that network value chains have been brought about by 1) globalization of production and trade into developing countries and 2) vertical disintegration of transnational corporations. I wonder if #2 has arisen in a response to re-strengthen local networks. This may bring about specialization within geographical regions.
Opinion
This paper insinuates that global value chain research will inform policy that will improve possibilities for developing countries to enhance the position in the global market. However, that would not be beneficial if it does not improve their local conditions. I think global value chain research can improve local conditions if the focus were shifted to local conditions and not so much global position. On page 79 it states, "evolution of global-scale industrial organization affects not only the fortunes of firms and the structure of industries, but also how and why countries advance - or fail to advance - in the global economy'” is another example of the position that globalization is the answer to solving local poverty, which is not necessarily the case. Ultimate they state they say, "the search for paths of sustainable development in global economy is an inherently difficult and elusive objective, ...," so perhaps they are not completely for globalization answering the world’s problems. I have the inkling that sustainable development requires a local focus. My research has yet to prove this.
This paper insinuates that global value chain research will inform policy that will improve possibilities for developing countries to enhance the position in the global market. However, that would not be beneficial if it does not improve their local conditions. I think global value chain research can improve local conditions if the focus were shifted to local conditions and not so much global position. On page 79 it states, "evolution of global-scale industrial organization affects not only the fortunes of firms and the structure of industries, but also how and why countries advance - or fail to advance - in the global economy'” is another example of the position that globalization is the answer to solving local poverty, which is not necessarily the case. Ultimate they state they say, "the search for paths of sustainable development in global economy is an inherently difficult and elusive objective, ...," so perhaps they are not completely for globalization answering the world’s problems. I have the inkling that sustainable development requires a local focus. My research has yet to prove this.
This paper has been cited 200 times according to Web of Science and 360 times according to Google Scholar since 2005. This paper lends itself to reference since it provides a solid framework from which to build off of. Whether it is entirely useful for crafting policy related to industrial upgrading, economic development, employment creation and poverty alleviation as it set out to do is a different story. At best it is good for predicting or explaining industries, and maybe a better strategizing tool than policy tool.
Impact on field of food distribution environmental or nutritional impacts
There are two conclusions that can be helpful for advancing local food. The first is that increasing supplier capability moves GVCs away from hierarchy and captive networks toward relational modular and market types. So, essentially empowering local suppliers or developing countries will move to a chain with less power asymmetry. The second conclusion is that actors that actively participate in the rule-setting process (favors established actors and locations) have a major advantage. This idea is very apparent in agriculture given the lobbying power of ADM, Monsanto and other corporate agricultural production firms. Although these firms are not always producing food, they have great influence on the fate of the food industry.
Stated Knowledge Gaps
- How and why do the complexity of information, ability to codify information and supplier competence change?
- development of methods for measuring key variables in the model, effective proxies for transactional complexity, level of codification and supplier
competence must be identified and test in the field
-account for rich detail and complexity brought about by historical, geographical and sectoral specificity
There are two conclusions that can be helpful for advancing local food. The first is that increasing supplier capability moves GVCs away from hierarchy and captive networks toward relational modular and market types. So, essentially empowering local suppliers or developing countries will move to a chain with less power asymmetry. The second conclusion is that actors that actively participate in the rule-setting process (favors established actors and locations) have a major advantage. This idea is very apparent in agriculture given the lobbying power of ADM, Monsanto and other corporate agricultural production firms. Although these firms are not always producing food, they have great influence on the fate of the food industry.
Stated Knowledge Gaps
- How and why do the complexity of information, ability to codify information and supplier competence change?
- development of methods for measuring key variables in the model, effective proxies for transactional complexity, level of codification and supplier
competence must be identified and test in the field
-account for rich detail and complexity brought about by historical, geographical and sectoral specificity
Useful References
Gereffi, G. and Korzeniewicz, M. (eds) (1994) Commodity Chains and Global Capitalism, Westport: Praeger (esp., Gereffi, G. 'The Organization of Buyer-Driven Global Commodity Chains: How U.S. Retailers Shape Overseas Production Networks')
Gereffi, G. and Kaplinsky, R. (eds) (2001) 'The Value of Value Chains', IDS Bulletin, 32(3), special issue
Reardon, T. Cordon, J-M Busch, L. Lingen, J. and Harris, C. (2001) 'Global Change in Agrifood Grades and Standards: Agribusiness Strategic Responses in Developing Countries', International Food and Agribusiness Management Review, 2(3): 421-35.
Nadvi, K. and Waltring, F. (2002) 'Making Sense of Global Standards', INEF Report 58, Duisburg: Institut Fur Entwicklung und Frieden, Gerhard-Mercator University.
Dolan, C. and Humphrey, J. (2000) 'Governance and Trade in Fresh Vegetables: The Impact of UK Supermarkets on the African Horticulture Industry', Journal of Development Studies, 37(2): 147-76
Storper, M. and Scott, A. (1988) 'The Geographical Foundations and Social Regulation of Flexible Production Complexes', in J. Wolch, and M. Dear (eds), The Power of Geography, Boston: Allen and Unwin, pp. 21-40.
Maskell, P. and Malmberg, A. (1999) 'Localised Learning and Industrial Competitiveness', Cambridge Journal of Economics, 23(2): 167-85.
Leslie, D. and Reimer, S. (1999) 'Spatializing Commodity Chains', Progress in Human Geography, 23(3): 401-20.
Hughes, A. (2000) 'Retailers, Knowledges and Changing commodity Networks: The Case of the Cut Flower Trade', Geoforum, 31: 175-90
David, P.A. (1995) 'Standardization Policies for Network Technologies: The Flux between Freedom and Order Revisited', in R. Hawkins, R. Mansell, and J, Skea (eds) , 'Standards, innovation and Competitiveness: The Politics and Economics of Standards in National and Technical Environments, Aldershot, UK: Edward Elgar, pp. 15-35.
Clemons, E. Reddi, S. and Row, M. (1993) 'The Impact of Information Technology on the Organization of Economic Activity: The 'Move to the Middle' Hypothesis', Journal of Management Information Systems, 10(2): 9-35.
Williamson, O, (1983) 'Credible Commitments: Using Hostages to Support Exchange', American Economic Review, 73(4): 519-40
Streeck, W. (1992) Social Institutions and Economic Performance, London: Sage.
Penrose, E. (1959) The Theory of the Growth of the Firm, Oxford: Basil Blackwell.
Sturgeon, T. (2003) 'What Really Goes on in Silicon Valley? Spatial Clustering Dispersal in Modular Production Networks', Journal of Economic Geography 3: 199-225.
Key Concepts
- Value-added chain = 'the process by which technology is combined with material and labor inputs, and then processed inputs are assembled, marketed and distributed. A single firm may consist of only one link in this process, or it may be extensively vertically integrated...' (Kogut, 1985: 15)
- Fragmentation
* physical separation of different parts of production process (Arndt and Kerzkowski, 2001, argue that internationally separating the two is a
contemporary development) perhaps due to cheap labor in developing countries
* 'integration of trade' and 'disintegration of production' (Feenstra, 1998)) => disintegration of multinational firm, more outsourcing => more trade
happening in components and intermediate goods (Yeats, 2001)
- Explicit Coordination = non-market forms of coordination of economic activity (Clemons et al.,1993)
- 3 types of supply relationships (based on degree of standardization of product and process): 1) commodity supplier = standard products through arm's length market relationships
2) captive supplier = makes non-standard products using machinery dedicated to the buyer's needs
3) turn-key supplier = produces customized products for buyers and uses flexible machinery to pool capacity for different customers
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