Exploring the relationship between upgrading and capturing profits from GVC participation for disadvantaged suppliers in developing countries

• Author: Umair Shafi Choksy,Noemi Sinkovics,Rudolf R. Sinkovics
• Date: 01 December 2017
• Published date: 01 December 2017
• DOI: http://doi.org/10.1002/cjas.1455

Exploring the relationship between upgrading and

capturing profits from GVC participation for

disadvantaged suppliers in developing countries

Umair Shafi Choksy

University of Kent, Kent Business School

Noemi Sinkovics

The University of Manchester, Alliance Manchester Business

School; Temple University, Fox School of Business

Rudolf R. Sinkovics*

The University of Manchester, Alliance Manchester Business

School; Lappeenranta University of Technology; Temple

University, Fox School of Business

Abstract

The existing literature on global value chains (GVCs) sug-

gests that functional upgrading is a key determinant of

whether suppliers are able to capture higher prof‌its in

GVCs. However, it is unclear whether the same argument

holds for disadvantaged suppliers who face high barriers

to achieving functional upgrading. Through a review of

existing empirical studies, the present paper aims to explore

how disadvantaged suppliers in developing countries in-

crease their prof‌its in the face of barriers to functional

upgrading. The f‌indings from the literature analysis suggest

that the ability of disadvantaged suppliers to benef‌itfrom

GVC participation depends on the extent of their managerial

agency and their ability to leverage multiple

upgrading/downgrading trajectories (whether product, pro-

cess, or functional) and transform them into prof‌itable out-

comes. Copyright © 2017 ASAC. Published by John Wiley

& Sons, Ltd.

Keywords: upgrading, functional upgrading, position,

global value chains, prof‌it margins

Résumé

Pour les auteurs des travaux existants sur les chaînes de

valeur mondiales (GVC), c’est la modernisation

fonctionnelle qui détermine si les fournisseurs sont en

mesure de réaliser des prof‌its importants dans le cadre des

GVC. Mais ces auteurs n’indiquent pas si ce postulat

s’applique également aux fournisseurs défavorisés qui, pour

réaliser leur modernisation fonctionnelle, doivent faire face

à des obstacles majeurs. Dans le présent article, nous

explorons, grâce à une revue des travaux empiriques

existants, la manière dont les fournisseurs défavorisés des

pays en voie de développement augmentent leurs prof‌its en

dépit des obstacles qui entravent leur modernisation

fonctionnelle. Nos résultats révèlent que la capacité des

fournisseurs défavorisés à tirer prof‌it de leur participation

aux GVC dépend de la taille de leur organisme managérial

et de leur aptitude à transformer les multiples mouvements

de modernisation/dégradation (des produits, des processus

ou des fonctions) en revenus. Copyright © 2017 ASAC. Pub-

lished by John Wiley & Sons, Ltd.

Mots-clés: modernisation, modernisation fonctionnelle, po-

sition, chaînes de valeur mondiales, marges de prof‌it

Participation in global value chains (GVCs) is consid-

ered an effective way for developing country suppliers to ac-

cess global markets and improve their prospects of earning

prof‌its (Gereff‌i, 1999; Humphrey & Schmitz, 2002). How-

ever, high competitive pressures may erode the potential

benef‌its of GVC participation. As a consequence, prof‌it-

yielding activities tend to lie outside of the production func-

tion (Kaplinsky, 2000; Mudambi, 2013). Therefore, the

ability to capture more value may depend on the suppliers’

ability to engage in functional upgrading (cf. Shin, Kraemer,

& Dedrick, 2012). This type of upgrading is def‌ined as a

Acknowledgements: We gratefully acknowledge insightful comments re-

ceived from Mo Yamin, Khalid Nadvi, Rory Horner, Matthew Alford and

seminars at The University of Manchester, Alliance Manchester Business

School. Financial support from the Economic and Social Research Council

(ESRC), UK, who funded part of Rudolf Sinkovics’time [grant number

ES/J013234/1], is gratefully acknowledged.

*Please address correspondence to: Rudolf Sinkovics, The University of

Manchester, Alliance Manchester Business School, Booth Street West,

Manchester M15 6PB, United Kingdom. Email: rudolf.sinkovics

@manchester.ac.uk

Contract/grant sponsor: Economic and Social Research Council; contract/

grant number: ES/J013234/1.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, pro-

vided the original work is properly cited.

Can J Adm Sci

34(4), 356–386 (2017)© 2017 The Authors. Canadian Journal of Administrative Sciences 356

published by John Wiley & Sons, Ltd on behalf of ASAC.

Canadian Journal of Administrative Sciences

Revue canadienne des sciences de l’administration

34: 356–386 (2017)

Published online 2 November 2017 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/CJAS.1455

shift away from low-value-added functions such as assembly

and production towards higher-value-added functions such

as design and branding (Gereff‌i, 1999; Mudambi, 2008;

Pietrobelli & Rabellotti, 2006). Functional upgrading can

thus be expected to be a key driver of developing country

suppliers’ability to capture higher prof‌its in GVCs (Barnes

& Kaplinsky, 2000; Kumaraswamy, Mudambi, Saranga, &

Tripathy, 2012; Shin et al., 2012).

The assumption underlying the above argument is that

f‌irms possessing unique and/or sophisticated resources and

capabilities will be able to negotiate more central positions

in value chains and thus improve their f‌inancial performance

(Gereff‌i, Humphrey, & Sturgeon, 2005). However, if this as-

sumption is accepted, the question that arises is how devel-

oping country suppliers, which often face high barriers to

functional upgrading (cf. Buckley, 2009; Buckley &

Strange, 2015), can overcome these barriers and improve

their prof‌itability in GVCs. Furthermore, in addition to

highlighting the general challenges faced by developing

country suppliers in the course of their GVC participation,

it is important to take into account differences between

groups of suppliers within and across developing countries.

For example, suppliers operating in precarious institu-

tional environments such as those of Pakistan or

Bangladesh generally f‌ind it more diff‌icult to develop capa-

bilities in high-value-added functions than do suppliers oper-

ating in more stable economies such as those of Taiwan or

China (Hoque, Sinkovics, & Sinkovics, 2016; Khan, Lew,

& Sinkovics, 2015; Yeung, 2007). However, even under gen-

erally challenging conditions some suppliers may be able to

respond to and bypass barriers more effectively due to their

existing greater f‌irm-specif‌ic resources, larger size, signif‌i-

cant industry position (Bair & Gereff‌i, 2003; Dolan &

Humphrey, 2000, 2004; Pickles, Smith, Bucek, Roukova, &

Begg, 2006), and/or the more benef‌icial nature and extent of

government support they receive (Xue & Chan, 2013). In this

paper, the term “privileged”is applied to developing country

suppliers who f‌it the previous description. On the other hand,

we use the term “disadvantaged”in conjunction with sup-

pliers if they face signif‌icant barriers within a GVC due to

their small size, poorer industry position, poorer GVC posi-

tion, less supportive home country context, and/or suffer from

high competitive pressures from foreign-owned suppliers.

To this end, the current paper seeks to review the extant

literature to explore whether—and if so, then how—disad-

vantaged suppliers in developing countries can capture bene-

f‌its from GVC participation. While we also make some

comparisons to privileged suppliers, the main focus of this

paper is on their disadvantaged counterparts. A review of 44

empirical studies on supplier upgrading across the GVC, rela-

tional economic geography (REG), and international busi-

ness (IB) literatures (see Table 1) provides three key

f‌indings. Firstly, functional upgrading is more likely to occur

in the case of more privileged suppliers than disadvantaged

suppliers (e.g. Bair & Gereff‌i, 2003; Dolan & Humphrey,

2004; Dolan & Tewari, 2001). Secondly, the majority of dis-

advantaged suppliers in GVCs have rarely been able to

achieve functional upgrading. Thirdly, there is an emerging

body of empirical literature indicating that disadvantaged

suppliers can improve their prof‌it margins without necessar-

ily engaging in functional upgrading in GVCs (see Table 2).

The rest of the paper consists of three sections. The next

section discusses theoretical approaches and propositions re-

lated to upgrading drawn from the GVC, IB, and REG liter-

atures. The subsequent section discusses the selection

criteria for the empirical articles reviewed in this paper,

followed by an exploration of the relationship between de-

veloping country suppliers’upgrading (or lack thereof) and

their prof‌it margins with a special focus on disadvantaged

suppliers. The paper concludes with a discussion on the the-

oretical implications of the f‌indings for IB research.

A General Review of the Concept of Upgrading in Three

Bodies of Literature

Here we brief‌ly review how the concept of upgrading

has been applied in the GVC, IB, and REG literatures. Such

a review is necessary for two reasons. Firstly, while the no-

tion of upgrading is widely used across all three bodies of lit-

erature, the concept itself and its applications are often rather

fuzzy (cf. Morrison, Pietrobelli, & Rabellotti, 2008). Sec-

ondly, each research stream makes specif‌ic assumptions

about upgrading and its impact on suppliers’prof‌it margins

in GVCs. This is arguably a consequence of prevalent ambi-

guities in the conceptualization of the idea.

Global Value Chain Literature

Gereff‌iand Fernandez-Stark (2011 p. 4) def‌ined value

chains as a “full range of activities that f‌irms and workers per-

form to bring a product from its conception to end use and be-

yond. In the context of globalization, the activities that

constitute a value chain have generally been carried out in in-

terf‌irm networks on a global scale”. Upgrading is generally

described as a shift in a supplier’s role in a GVC that increases

the value-added of its sourcing activities (cf. Gereff‌i, 1999).

One strand of the upgrading literature focuses on the power

of large multinational enterprises (MNEs), their governance

strategies, and the implications for developing country sup-

pliers (Dolan & Humphrey, 2000). The fundamental question

this body of literature seeks to answer is how the governance

of GVCs affects the developmental outcomes for developing

country suppliers. Positive developmental outcomes are gen-

erally considered “upgrading.”Humphrey and Schmitz

(2002, p. 1021) differentiated four different types of

upgrading possibilities:

•Process upgrading refers to carrying out tasks more eff‌i-

ciently by restructuring existing or initiating new produc-

tion methods;

Can J Adm Sci

34(4), 356–386 (2017)© 2017 The Authors. Canadian Journal of Administrative Sciences 357

published by John Wiley & Sons, Ltd on behalf of ASAC.

EXPLORING FUNCTIONAL UPGRADING CHOKSY ET AL.