Fluent Essays

2 PAGES double spaces MLARead all readingsDo not write a summary, write what you think after you read it.Part 1Read 3 reading (Start with L3) for part 1Part 2Read 2 reading(Start with L4) for Part 2Guidelines for ResponsesYou are assessed on your thoughtfulengagement with the material. Please do not post a summary.Your response should bring up substantive comments and questions with regard to thereading at hand and the broader themes in the class.You may choose to relate what you read to some part of your daily life, current events, orsome other situation, policy debate, etc..Responses can be speculative, propose applications, or pose critiques l3_2_gereffi_2005_governance_gvc.pdf l3_2_dicken_2015_global_shift_ch5.pdf l3_2_brown_1992_emergence_of_the_economy.pdf l4_2_block_2001_introduction_to_polan.pdf l4_2_polanyi_1944_great_transformation_6_11.pdf Unformatted Attachment Preview Review of International Political Economy 12:1 February 2005: 78–104 The governance of global value chains Gary Gereffi Duke University John Humphrey Institute of Development Studies and Timothy Sturgeon Massachusetts Institute of Technology ABSTRACT This article builds a theoretical framework to help explain governance patterns in global value chains. It draws on three streams of literature – transaction costs economics, production networks, and technological capability and firm-level learning – to identify three variables that play a large role in determining how global value chains are governed and change. These are: (1) the complexity of transactions, (2) the ability to codify transactions, and (3) the capabilities in the supply-base. The theory generates five types of global value chain governance – hierarchy, captive, relational, modular, and market – which range from high to low levels of explicit coordination and power asymmetry. The article highlights the dynamic and overlapping nature of global value chain governance through four brief industry case studies: bicycles, apparel, horticulture and electronics. KEYWORDS Global value chains; governance; networks; transaction costs; value chain modularity. The world economy has changed in significant ways during the past several decades, especially in the areas of international trade and industrial organization. Two of the most important new features of the contemporary economy are the globalization of production and trade,1 which have fueled Review of International Political Economy C 2005 Taylor & Francis Ltd ISSN 0969-2290 print/ISSN 1466-4526 online
http://www.tandf.co.uk DOI: 10.1080/09692290500049805 G E R E F F I E T A L . : G L O B A L VA L U E C H A I N S the growth of industrial capabilities in a wide range of developing countries, and the vertical disintegration of transnational corporations, which are redefining their core competencies to focus on innovation and product strategy, marketing, and the highest value-added segments of manufacturing and services, while reducing their direct ownership over ‘non-core’ functions such as generic services and volume production. Together, these two shifts have laid the groundwork for a variety of network forms of governance situated between arm’s length markets, on the one hand, and large vertically integrated corporations, on the other. The purpose of this article is to generate a theoretical framework for better understanding the shifting governance structures in sectors producing for global markets, structures we refer to as ‘global value chains’. Our intent is to bring some order to the variety of network forms that have been observed in the field.2 The 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. Global value chain research and policy work examine the different ways in which global production and distribution systems are integrated, and the possibilities for firms in developing countries to enhance their position in global markets. One of our hopes is that the theory of global value chain governance that we develop here will be useful for the crafting of effective policy tools related to industrial upgrading, economic development, employment creation, and poverty alleviation. 1 . F R A GM E N TAT I O N , C O O R D I N AT I O N , A N D N E T W O RK S I N T H E G L O B A L E C O N O M Y For us, the starting point for understanding the changing nature of international trade and industrial organization is contained in the notion of a value-added chain, as developed by international business scholars who have focused on the strategies of both firms and countries in the global economy. In its most basic form, a value-added chain is ‘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). The key issues in this literature are which activities and technologies a firm keeps in-house and which should be outsourced to other firms, and where the various activities should be located. Trade economists are also concerned with how global production is organized. Arndt and Kierzkowski (2001) use the term ‘fragmentation’ to describe the physical separation of different parts of a production process, arguing that the international dimension of this separation is new. Fragmentation allows production in different countries to be formed into 79 R E V I E W O F I N T E R N AT I O N A L P O L I T I C A L E C O N O M Y cross-border production networks that can be within or between firms. Feenstra (1998) takes this idea one step further by explicitly connecting the ‘integration of trade’ with the ‘disintegration of production’ in the global economy. The rising integration of world markets through trade has brought with it a disintegration of multinational firms, since companies are finding it advantageous to ‘outsource’ an increasing share of their noncore manufacturing and service activities both domestically and abroad. This has led to a growing proportion of international trade occurring in components and other intermediate goods (Yeats, 2001).3 If production is increasingly fragmented across geographic space and between firms, then how are these fragmented activities coordinated? For Arndt and Kierzkowski, the options are clear: ‘Separability of ownership is an important determinant of the organizational structure of cross-border production sharing. Where separation of ownership is not feasible, multinational corporations and foreign direct investment are likely to play a dominant role. Where it is feasible, arm’s-length relationships are possible and foreign direct investment is less important’ (Arndt and Kierzkowski, 2001: 4). This binary view of how global production might be organized, either through markets or within transnational firms, is explained by transaction costs economics in terms of the complexity of inter-firm relationships and the extent to which they involve investments specific to a particular transaction – asset specificity (Williamson, 1975). Arm’s-length market relations work well for standard products because they are easily described and valued. Coordination problems are reduced not only because their ease of description makes contracts simple to write, but also because standard products can be produced for stock and supplied as needed. At the same time, because standard products are made by a variety of suppliers and bought by a variety of customers, problems arising from asset specificity are low. Conversely, the transaction costs approach offers various reasons why firms will bring certain activities in-house. First, the more customized the product or service, the more likely it is to involve transaction-specific investments. This raises the risk of opportunism, which either rules out outsourcing altogether, or makes it more costly because safeguards have to be put in place. Second, even without opportunism, transaction costs increase when inter-firm relationships require greater coordination. For example, non-standard inputs and integrated product design architectures involve more complex transfers of design information and therefore intense interactions across enterprise boundaries. Integral product architectures are more likely to require non-standard inputs, and changes in the design of particular parts tend to precipitate design changes in other areas of the system (Fine, 1998; Langlois and Robertson, 1995). Similarly, coordination costs increase for parts whose supply is time-sensitive, as separate 80 G E R E F F I E T A L . : G L O B A L VA L U E C H A I N S processes have to be better coordinated in order to synchronize the flow of inputs through the chain. Nevertheless, recognizing the importance of transaction costs need not lead to the conclusion that complex and tightly coordinated production systems always result in vertical integration. Rather, asset specificity, opportunism, and coordination costs can be managed at the inter-firm level through a variety of methods. Network actors in many instances control opportunism through the effects of repeat transactions, reputation, and social norms that are embedded in particular geographic locations or social groups. Network theorists (e.g., Jarillo, 1988; Lorenz, 1988; Powell, 1990; Thorelli, 1986) argue that trust, reputation, and mutual dependence dampen opportunistic behavior, and in so doing they make possible more complex inter-firm divisions of labor and interdependence than would be predicted by transaction costs theory. Furthermore, the literature on firm capabilities and learning, which has its roots in the resource view of the firm pioneered by Penrose (1959), provides other reasons why firms are prepared to buy key inputs in the face of asset specificity and therefore construct relatively complex inter-firm relationships. According to Penrose, how and whether firms can capture value depends in part on the generation and retention of competencies (that is, resources) that are difficult for competitors to replicate. In practice, even the most vertically integrated firms rarely internalize all the technological and management capabilities that are required to bring a product or service to market. Transaction cost economics acknowledges this fact by employing the variable of frequency. If an input, even an important one, is required infrequently, then it will likely be acquired externally. This is essentially an argument about scale economies. The literature on firm capabilities and learning, by contrast, argues that the learning required to effectively develop the capability to engage in certain value chain activities may be difficult, time-consuming, and effectively impossible for some firms to acquire, regardless of frequency or scale economies. Thus, firms must in certain instances depend on external resources. The doctrine of ‘core competence’ takes this a step further, arguing that firms which rely on the complementary competencies of other firms and focus more intensively on their own areas of competence will perform better than firms that are vertically integrated or incoherently diversified (Prahalad and Hamel, 1990). These issues, while often discussed at the local or national level, or in the context of ‘a dense network of social relations’ (Granovetter, 1985: 507), can equally be applied to the structuring of global-scale production and distribution. The recent work of geographers such as Hughes (2000), Henderson et al. (2002) and Dicken et al. (2001) has emphasized the complexity of inter-firm relationships in the global economy. The key insight is that coordination and control of global-scale production systems, despite their complexity, can be achieved without direct ownership. 81 R E V I E W O F I N T E R N AT I O N A L P O L I T I C A L E C O N O M Y The theories of industrial organization discussed here, when considered cumulatively, suggest that different ways of dealing with the problem of asset specificity, and different motivations for constructing complex firmto-firm relationships in the face of asset specificity, result in three modes of industrial organization: market, hierarchy, and network. But empirical observation tells us that not all networks are alike. In the next section we develop a theory that can help to specify and explain this variation. 2 . T Y P E S O F GOV E R NA N C E I N G L O B A L VA L U E C H A I N S If a theory of global value chain governance is to be useful to policymakers, it should be parsimonious. It has to simplify and abstract from an extremely heterogeneous body of evidence, identifying the variables that play a large role in determining patterns of value chain governance while holding others at bay, at least initially. Clearly, history, institutions, geographic and social contexts, the evolving rules of the game, and path dependence matter; and many factors will influence how firms and groups of firms are linked in the global economy. Nevertheless, a simple framework is useful because it isolates key variables and provides a clear view of fundamental forces underlying specific empirical situations that might otherwise be overlooked. Our intention is to create the simplest framework that generates results relevant to real-world outcomes. In the 1990s Gereffi and others developed a framework, called ‘global commodity chains’, that tied the concept of the value-added chain directly to the global organization of industries (see Gereffi and Korzeniewicz, 1994). This work not only highlighted the importance of coordination across firm boundaries, but also the growing importance of new global buyers (mainly retailers and brand marketers) as key drivers in the formation of globally dispersed and organizationally fragmented production and distribution networks. Gereffi (1994) used the term ‘buyer-driven global commodity chain’ to denote how global buyers used explicit coordination4 to help create a highly competent supply-base upon which global-scale production and distribution systems could be built without direct ownership. By highlighting explicit coordination in dis-integrated chains and contrasting them to the relationships contained within vertically integrated, or ‘producer driven’ chains, the global commodity chains framework drew attention to the role of networks in driving the co-evolution of cross-border industrial organization. However, the global commodity chains framework did not adequately specify the variety of network forms that more recent field research has uncovered. While, research on the horticulture industry (Dolan and Humphrey, 2000) and the footwear industry (Schmitz and Knorringa, 2000) reinforced Gereffi’s notion that global buyers (retailers, marketers, and traders) can and do exert a high degree of control over spatially dispersed value chains even when they do not own production, 82 G E R E F F I E T A L . : G L O B A L VA L U E C H A I N S transport or processing facilities, recent research on global production has highlighted other important forms of coordination. Work on the electronics industry and contract manufacturing by Sturgeon (2002) and by Sturgeon and Lee (2001) contrasted three types of supply relationships, based on the degree of standardization of product and process: (1) the ‘commodity supplier’ that provides standard products through arm’s length market relationships, (2) the ‘captive supplier’ that makes non-standard products using machinery dedicated to the buyer’s needs, and (3) the ‘turn-key supplier’ that produces customized products for buyers and uses flexible machinery to pool capacity for different customers. This analysis emphasized the complexity of information exchanged between firms and the degree of asset specificity in production equipment. Sturgeon (2002) referred to production systems that rely on turn-key suppliers as ‘modular production networks’ because highly competent suppliers could be added and subtracted from the global production arrangements on as as-needed basis. Around the same time, Humphrey and Schmitz (2000, 2002) distinguished between suppliers in quasi-hierarchical relationships with buyers, whose situation corresponds to ‘captive suppliers’, and network relationships between firms that cooperate because they possess complementary competences.5 Humphrey and Schmitz emphasized the role of supplier competence in determining the extent of subordination of suppliers to buyers. If global buyers needed to invest in supplier competence, they would need both to specify the product and process parameters to be followed by suppliers and to guard this investment in the supplier by remaining the dominant, if not exclusive, customer.6 Using the approaches outlined above and empirical reference points taken from many studies of global value chains,7 we propose a more complete typology of value-chain governance. We acknowledge, as do most other frameworks that seek to explain industry organization – from transactions costs to global commodity chains to organizational theory – that market-based relationships among firms and vertically integrated firms (hierarchies) make up opposite ends of a spectrum of explicit coordination, and that network relationships comprise an intermediate mode of value chain governance. What we add to this conceptualization is an extension of the network category into three distinct types: modular, relational, and captive. Thus, our typology identifies five basic types of value chain governance. These are analytical, not empirical, types, although they have been in part derived from empirical observation. They are: 1. Markets. Market linkages do not have to be completely transitory, as is typical of spot markets; they can persist over time, with repeat transactions. The essential point is that the costs of switching to new partners are low for both parties. 83 R E V I E W O F I N T E R N AT I O N A L P O L I T I C A L E C O N O M Y 2. Modular value chains. Typically, suppliers in modular value chains make products to a customer’s specifications, which may be more or less detailed. However, when providing ‘turn-key services’ suppliers take 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. 3. Relational value chains. In these networks we see complex interactions between buyers and sellers, which often creates mutual dependence and high levels of asset specificity. This may be managed through reputation, or family and ethnic ties. Many authors have highlighted the role of spatial proximity in supporting relational value chain linkages, but trust and reputation might well function in spatially dispersed networks where relationships are built-up over time or are based on dispersed family and social groups (see for example, Menkhoff, 1992). 4. Captive value chains. In these networks, small suppliers are transactionally dependent on much larger buyers. Suppliers face significant switching costs and are, therefore, ‘captive’. Such networks are frequently characterized by a high degree of monitoring and control by lead firms. 5. Hierarchy. This governance form is characterized by vertical integration. The dominant form of governance is managerial control, flowing from managers to subordinates, or from headquarters to subsidiaries and affiliates. 3 . A T H E O RY O F VA L U E C H A I N G O V E R N A N C E Having laid out this typology, our next step is to develop an operational theory of global value chain governance. Under which conditions would we expect market, modular, relational, captive, or vertically integrated global value chain governance to arise? Building on the work cited above, we will identify and discuss three key determinants of value chain governance patterns: complexity of transactions; codifiability of information; and capability of suppliers. In so doing, we acknowledge the problem of asset specificity as identified by transaction cost economics, but also give emphasis to what have been termed ‘mundane’ transaction costs – the costs involved in coordinating activities along the chain. It has been argued that these coordination, or mundane, transaction costs rise when value chains are producing non-standard products, products with integral product architectures, and products whose output is time sensitive (Baldwin and Clark, 2000). Lead firms increase complexity when they place new demands on the value chain, s ... Purchase answer to see full attachment