Interdisciplinary Theory-building in an Age of Globalization:

The Global Value Chains Framework and Its Limits

TIMOTHY J. STURGEON, Ph.D.Senior Research Affiliate, Industrial Performance Center, Massachusetts Institute of Technology

ITEC Research Fellow, Doshisha University, Kyoto Japan

Global Production Networks: Debates and Challenges. Geographical Political Economy Research Group, University of Manchester

Manchester, UK January 24-25

INDUSTRIALPERFORMANCE

CENTER

Industry studies are important, but not sufficient

• Distribution of industrial capabilities vary by industry

• Labor/skill requirements, costs, and availability vary by industry

• Product characteristics vary (size and weight, last-minute configuration)

• Technologies for design, production, and supply-chain coordination vary

• Regulations differ by product and industry

• Distinct business cultures

• Institutional factors vary (rules, regulations, certifications, insurance, etc.)

“Industry studies,” firm level research, including qualitative research Problem: how to compare industries, aggregate findings, and set policies.

Cross-cutting trends

• Increased outsourcing• Computerization of product design• Computerization of process technology• Formalization and segmentation of work tasks (e.g., services offshoring)• Increasing market volatility and industry clock-speed (Fine)• Increasing geographic scope of production systems• Better integration of geographically dispersed production systems• Increasing services trade• The rise of a new, global-scale supply-base• Rising affiliated trade (but may be global suppliers…)

The global value chains framework is an overarching rubric that can help to tie these trends together

New features are global suppliers, global buyers, and value chain modularity, which eases coordination between the two.

Structure of the Presentation

1. The global value chains framework

2. Comparison with other frameworks

3. So what?

PART I: The governance of global value chains: an analytic framework

Based on a paper by:Gary Gereffi, Duke University

John Humphrey, IDSTimothy Sturgeon, MIT

Published in:Review of International Political Economy, 12(1) 2005

Summary of approach with related literature can be found at the Global Value Chains Initiative website:

www.globalvaluechains.org

Theoretical Underpinnings(starting point: industrial organization)

1. Transaction Costs EconomicsKey concept: Asset specificityAcademic field: Institutional economics

2. Production Network Theory Key concepts: Trust, reputation, repeat transactions, social networks,

geographic proximity, powerAcademic fields: Economic sociology, economic geography

3. Complementary CompetenciesKey concepts: Resource view of the firm, learning, core competence,

co-evolution (bi-lateral and industry levels)Academic fields: Strategic management, operations management,

evolutionary economics

Three Variables

1. Complexity of information required for a transaction

2. Extent to which this information can be codified

3. Supplier capabilities in relation to a transaction’s requirements

• Three variables

• Two options for each - High or Low

• Eight possible outcomes

Complexity oftransactions

Ability tocodify

transactions

Capabilitiesin the

supply-base

Outcome:ValueChain

GovernanceLow Low Low

Low Low High

Low High Low

Low High High

High High High

High Low High

High High Low

High Low Low

The Matrix

Complexity of transactions

Ability to codify transactions

Capabilities in the supply-base

Outcome: Value Chain Governance

Low High Low Suppliers excluded from chain

Low Low

Low Low Low or High Unlikely to occur

Discard Three Combinations

While this combination does not yield a governance type, per se, it is an extremely important outcome because it is the reality for the vast majority of suppliers in developing countries.

Five GVC Governance Types

GovernanceType

Complexity oftransactions

Ability to codifytransactions

Capabilities inthe supply-base

Degree ofexplicit

coordination andpower

asymmetry

Market Low High High

Modular High High High

Relational High Low High

Captive High High Low

Hierarchy High Low Low

Low

High

Network org.

forms

Materials

Customers

Suppliers

Price

End Use

Market Modular

LeadFirm

Component and Material

Suppliers

Turn-keySupplier

Relational

Captive Suppliers

Captive

LeadFirm

Component and Material

Suppliers

Val

ue

Cha

inHierarchy

IntegratedFirm

Low HighDegree of Explicit Coordination

Degree of Power Asymmetry

LeadFirm

RelationalSupplier

Full-packageSupplier

Five GVC Governance Types

Global value chain dynamics:Opposing forces

• Codification vs. innovation

• Increasing supplier competence vs new suppliers and new requirements

• Stable value chain roles (process upgrading) vs. competitive bundling and re-bundling (functional upgrading)

Some Dynamics in Global Value Chain Governance

GovernanceType

Complexity oftransactions

Ability to codifytransactions

Capabilities in thesupply-base

Market Low High High

Modular Å High Ç High Ñ

High

Relational High É Low Ö High Ü

Captive High High Low

Hierarchy High Low Low

increasing complexity of transactions (harder to codify transactions, effective decrease in supplier competence) decreasing complexity of transactions (easier to codify transactions effective decrease in supplier competence) better codification of transactions (open or de facto standards, computerization, digitization) de-codification of transactions (technological change, new products, new processes) increasing supplier competence (decreased complexity, better codification, learning) decreasing supplier competence (increased complexity, new technologies, new entrants)

New product introduction in electronics manufacturing

Product Firm Contract Manufacturer

Industrial design Electronic design Circuit board layout

IC Design House Foundry

(Gerber file)

Electronic design Circuit geometry

(GDS2 file)

SMT placement Solder Re-flow Test Final Assembly

Lithography Deposition Test Dicing

Design for performance (size, weight, speed, power consumption)

“Pinch point” in the flow of activities (Baldwin and Clark)

Codified, standardized hand-off at the inter-firm link

New product introduction in electronics manufacturing

Product Firm Contract Manufacturer

Industrial design Electronic design Circuit board layout

(re)DFx•Design for manufacturability (yield)

•Design for cost reduction•Design for test

•Design for reliability (quality) and repair•Design for supply chain availability

•Design for environmental compliance and recycling

IC Design House Foundry

(Gerber file)

Electronic design Circuit geometry

(GDS2 file)

SMT placement Solder Re-flow Test Final Assembly

Lithography Deposition Test Dicing

Design for performance (size, weight, speed, power consumption)

PART II: Comparison with other frameworks

• Gereffi: Global commodity chains• Williamson, Powell, Ouchi, and Adler: Hybrid

organizational forms (networks) located between markets and hierarchies

• Herrigel and Wittke: Sustained contingent collaboration

• Dicken et al: Actor-network theory

Why we felt we needed to move beyond the GCC framework (other than confusion over the connotations of the word “commodity”):

convergence in global value chain structure toward external networks demanded more network types than Buyer Driven

Buyer Driven(Labor Intensive)

Retailers Retailers

Contract Manufacturers

Contract Manufacturers

Product Strategy, System Architecture and Detailed Design

Producer Driven -> Captive, Relational, and Modular(Technology and Capital Intensive)

Branded Technology Firms

Retailers

Producer Driven(Technology and Capital Intensive)

Vertically Integrated Transnational

Manufacturing Firms

The GCC typology was based on a static view of technology and barriers to network entry, but both are dynamic because of technological change and learning.

Comparison with other industrial organization frameworks

Coase, Williamson

Powell, Adler

Gereffi, 1994

Global Value Chains

Herrigel and Wittke

Market

Market/price

[Assumed]

Market

Arm’s-

length/spot market

Modular

Contract mfg.

Relational

Collaborative mfg.

Network/ community/

trust

Buyer-driven

Captive

Autocratic or captive

Hierarchy

Hierarchy/ authority

Producer-driven

Hierarchy

[Assumed]

Variation in organizational

form

Vertical integration

Static variation

Static variation

Massive

coordination of

differentiated networks

(simultaneous variation)

Sustained contingent

collaboration (variation over

time)

Network organizational

forms

Hierarchy

Market

Comparison with actor-network theory (as discussed in Dicken et al, 2001)

Global Value Chains

Actor-Network Theory

Independent

Variable

Structures

Processes,

actions, and “performances”

Dependent variables

Parsimonious (complexity,

codifiability, and firm competency)

Inclusive (many different things are important at different times

and places)

Theoretical function

Operational

(partially explain and predict

change)

Richly descriptive

Outcomes

Five governance types (hierarchy,

captive, relational. modular, and

market)

Infinite variation

Framework strengths• Industry-independent

– Began with research on electronics, autos, and apparel, but has worked well with research on horticulture and services

– Highlights industry differences within a unified framework

• Focus on roles played by firms in the chain– Fragmentation and functional specialization– Bundling and re-bundling of functions

• Focus on power in the chain– Market power– Coordination power, fishbone (captive) vs. web (relational)

• Operational model– Predicts outcomes based on variable characteristics

• Interdisciplinary approach– Has theoretical elements recognizable to economists, sociologists, geographers, and management– Builds on inter-disciplinary debate over modularity, which includes engineers and business

historians as well

• Simple framework with a manageable number of variables– Appealing to policymakers and activists seeking to understand and improve the position of specific

firms, industries, and locations in the global economy.– Works within with a defined set of variables and outcomes that help to define research questions

Framework limitations• Firm-level analysis “leaves out” workers, gender, race, ethnicity, place

• Institutional context and path dependence matter– Local, national, regional

• Corporate strategy and culture matter– “Open pathways” at the firm level (Berger, 2005)– Firm’s can and do choose governance forms

• International regulations matter– National, bi-lateral, multi-lateral; agreements between states and multi-lateral institutions can influence

global value chain patterns

• Underdeveloped view of consumption (productionist approach)– Advanced users have power in the chain– Consumer cultures and geographies can bring new meaning to products and services

• Multiple, overlapping, and dynamic value chain governance forms are the norm– Pragmatic collaboration (Helper, MacDuffie, and Sabel)– Sustained contingent collaboration (Herrigel and Wittke)– Hybrid collaboration (MacDuffie and Helper)– Massive coordination (Murtha et al)

Part III: So What?

• Upgrading (or not) in global value chains

• Consolidation, modularity, and growing knowledge intensity in GVCs affects inclusion and exclusion for late entrants

• Increased geographic flexibility poses new challenges for adjustment in advanced economies

Supplier Upgrading (and Downgrading) in Global Value Chains

More customers•Product upgrading

•Inter-sectoral upgrading

•Base process focus

More capabilities•Process upgrading

•Functional upgrading

•Functional bundling

Many customers

Many capabilities

Few customers

Few capabilities

CAPTIVE

FULL PACKAGE SUPPLIER

RELATIONAL

MODULARDe-codification and reduced competence

through technological change, new requirements, and new competitors

GVC Governance TypesLinks to Industrial Upgrading and Policy

Governance Type Linkage mechanism Firm roles and competencies

Policy emphasis

Market Arms-length exports Branded exporter and importer of standardized

goods and services

Brand and product development, market research and access, import substitution

and export promotion

Modular Buyer-supplier complimentary

specialization in cross-border value chains

“Deverticalized” lead firms and full package suppliers with generic, base process competencies, and a global

footprint

Knowledge of global standards, process- and information technology upgrading

Relational Collaboration with co-location or in cross-border value chains with lots of air

travel

Clusters of specialists buyers and suppliers with process

and/or domain-specific competencies

Competence building, support of clusters and districts, focus on building tacit

domain knowledge

Captive Foreign direct investment, equity ties

Dependent supplier, customer-specific

competencies

Recruitment of MNC affiliates and suppliers, local content rules

Hierarchy Foreign direct investment Lower tier supplier Recruitment of MNC affiliates, education and training, infrastructure development,

local content rules