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WTO - Supply Chain Perspectives and Issues: A Literature Review

WTO - Supply Chain Perspectives and Issues: A Literature Review

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Global value chains (GVCs) have become ubiquitous. The literature that attempts to understand and explain GVCs is vast, multi-disciplinary and no less complex than the phenomenon itself. This volume is an ambitious attempt at a fairly comprehensive review of literature on the subject

The many manifestations of international production sharing have become the organizing theme for practically any discussion on production, trade, investment, development and international economic cooperation more generally. GVCs are at the economic heart of globalization. Policies of governments are central to outcomes, influencing the establishment, configuration and operation of GVCs in numerous ways. Technological possibilities and firm behaviour are also crucial determinants of what happens in the supply chain world.

Co-published with the Fung Global Institute.
Global value chains (GVCs) have become ubiquitous. The literature that attempts to understand and explain GVCs is vast, multi-disciplinary and no less complex than the phenomenon itself. This volume is an ambitious attempt at a fairly comprehensive review of literature on the subject

The many manifestations of international production sharing have become the organizing theme for practically any discussion on production, trade, investment, development and international economic cooperation more generally. GVCs are at the economic heart of globalization. Policies of governments are central to outcomes, influencing the establishment, configuration and operation of GVCs in numerous ways. Technological possibilities and firm behaviour are also crucial determinants of what happens in the supply chain world.

Co-published with the Fung Global Institute.

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05/03/2014

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Gereff (1999) and Lee and Chen (2000) suggest a trajectory for upgrading, in which frms

begin with process upgrading and then proceed to product, functional and fnally chain

upgrading. This is based on their observations of East Asian frms transitioning through

Figure 4.2 Example trajectories of upgrading (Kaplinsky and Morris 2002)

Process

Original
equipment
assembly
(OEA)

Original
design
manufacture

Disembodied content of value added increases progressively

Original
brand
manufacture

Moving chains
- e.g. from
black and
white TV tubes
to computer
monitors

Original
equipment
manufacture
(OEM)

Trajectory

Examples

Degree of
disembodied
activities

Product

Functional

Chain

85

Supply Chain Perspectives and Issues

their roles as original equipment assemblers (OEAs) to original equipment manufacturers

(OEMs), own design manufacturers (ODMs), and fnally own brand manufacturers (OBMs)

(Kaplinsky and Readman 2001; Kaplinsky and Morris 2002) (Figure 4.2).

Figure 4.2: Example trajectories of upgrading

Source: Kaplinsky and Morris (2002)

This trajectory of upgrading has encountered criticism as rather optimistic in portraying

an automatic conveyor process up the value ladder (Schmitz 2004; Morrison, Pietrobelli,

and Rabellotti 2008; Giuliani, Pietrobelli, and Rabellotti 2005).

Humphrey and Schmitz (Humphrey and Schmitz 2000, 2002; Schmitz 2004) address this

by investigating how chain governance can affect the prospects for the posited trajectory

of upgrading. They utilised a predecessor to Gereff’s 2005 typology of value chain

governance, which consisted of four types instead of fve. Modular and relational types

were grouped into a “balanced” category at that time, but the other types remain the same.

Their studies focused on the captive and balanced types of governance.

For captive, their results show clear indications that captive chain linkages fostered rapid

process and product upgrading, but hinder functional upgrading. In these situations,

buyers are extremely demanding of low capability suppliers, but invest a signifcant

amount of time monitoring and instructing suppliers as a result. This allows the supplier

to progress rapidly through process and product improvements. However, barriers

seem to appear when the frm approaches functional upgrading efforts. The frst barrier

posited is due to the buyer’s self-interest in preserving their core competencies in the

non-manufacturing segments of the value chain, which tend to impart higher value and

more governance power. These non-manufacturing segments include design, branding,

and marketing. Simply put, the buyers have no interest in helping their suppliers become

Figure 4.2 Example trajectories of upgrading (Kaplinsky and Morris 2002)

Process

Original
equipment
assembly
(OEA)

Original
design
manufacture

Disembodied content of value added increases progressively

Original
brand
manufacture

Moving chains
- e.g. from
black and
white TV tubes
to computer
monitors

Original
equipment
manufacture
(OEM)

Trajectory

Examples

Degree of
disembodied
activities

Product

Functional

Chain

Supply chains, upgrading and development

86Supply Chain Perspectives and Issues

competitors. The second barrier is the immense investment of capital, time, and effort

required for a supplier to independently develop their own brands or set up marketing

channels in the same value chain.

The rapid upgrading through production and slow upgrading in non-production segments

of captive global value chains is offset by the example of substantial functional upgrading

but slow process and product upgrading found in domestic value chains. Cases in

India and Brazil show that domestic-focused frms are more likely to acquire functional

capabilities and then expand into neighbouring markets, and reveal potential limits to

export-driven economic growth.

Balanced linkages offer the ideal upgrading conditions, as power and commitment is

shared between frms. This is conducive to focusing on value creation through new

product and process development, and is commonly documented in the literature on

innovation networks in developed countries. A prerequisite for this type of buyer-supplier

relationship, however, is a high level of competencies already held by the supplier

– something that is diffcult to fnd in developing country frms. However, research on

modular production networks (Sturgeon 2002) point to the ability of developing country

frms to form highly complementary clusters that are together able to form balanced type

relationships with their respective buyers. Examples include the computer cluster in

Chinese Taipei and the Brazilian shoe cluster.

More recently, Morrison, Pietrobelli, and Rabellotti (2008) point out an alternative and

largely disregarded source of growth: Deepening frm capabilities at any segment of the

value chain instead of rigidly looking at expansion along the value chain as the only source

of growth. For example, climbing up the value chain ladder in the horticulture industry

might imply upgrading from growing fowers to packaging, distributing, branding, and

retailing them. However, there is signifcant growth to be found in each one of those stages,

such as in the development of new fower varieties or in developing new packaging that

embeds highly valued characteristics.

These efforts present both clear and immediate utility to both the business person and

the policy maker in understanding the various sources of growth and the feasibility of

capturing them.

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