Upgrading in global value chains (GVC)

upgrading question mark

The structure of a global value chain is not necessarily static, given that companies in global chains have economic reasons (increase in profitability) and non-economic motivations (increase of competences) to perform greater quantity of tasks and/or more complex ones. Accordingly, the second key concept of GVC – upgrading -, deserves further analysis. Barrientos, Gereffi and Rossi (2011) define upgrading as:

“(Upgrading) is the movement towards productive activities with higher value, technology, knowledge and skills and increased profits derived from participation in global production chains” (Barrientos Gereffi, ROSSI, 2011)

However, as the definition of is upgrading is not enough, Gereffi and other authors define four possible types of it (Gereffi et al., 2001):

1. Product Upgrading: occurs when there is an increase in quality, features or value of products. Usually this kind of improvement requires increase in competences in order to allow the manufacturing of products with superior performance.

2. Process Upgrading: more efficient transformation of inputs into outputs through the use of superior technology or reorganization of production systems. For example, the production reorientation involved in the change of craft to mass production, and from there to lean production (or just-in-time).

3. Functional Upgrading (or within the chain): involves different types of opportunities to gain new functions within the chain, such as moving to design or marketing. There may be also movements “forward or backward” in the different stages of the chain, changing the production of final produtcts to intermediate goods or raw materials, and vice-versa (a movement called vertical integration). Many studies illustrate the path that begins with the process control (OEM, Original Equipment Manufacturing), then the product (ODM,  Own Design Manufacturing), and finally the brand (OBM, Own Brand Manufacturing).

4. Upgrading between Chains: occurs when firms apply the skills acquired in a specific function in one chain (e.g. competence in production or marketing) to a new value chain (generally more advanced). For example, a company or a cluster of companies specialized in the manufacturing of internal combustion engines for heavy vehicles could develop engines for tractors or bulldozers.

An overlooked issue is the limited opportunity for growth provided by GVC. On the one hand global chains offer development opportunities for less industrialized countries to gain access to new markets (mainly in industrialized countries), new technologies and skills. On the other hand entry in GVC specializes to companies to provide low-cost subsets; additionally, firms become conformed to remain at this level of activity. This is because the chain leader has positioning advantages that allow it to allocate production plans and command the distribution of value between the participants of the chain. What companies from emerging countries should do to overcome this situation and command more value from the chains they belong? The answer: competences. Humphrey and Schmitz (2000) and Bazan and Navas-Aleman (2004) make it clear that upgrading opportunities occur more often in chains of modular, relational and captive types, and especially product and process upgrading, while functional uograding seems to be almost impossible.

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Type of chain versus possibility of upgrading

The possibility of upgrading in GVC is dependent on the type of the chain. In the market and hierarchical types the probabilities of upgrading are lower than the ones in the intermediate chains (modular, relational and captive). Specifically for firms from emerging countries participants of the captive chains, the possibility of rapid upgrading is confined to products and processes. This is because this type of chain works under the leadership of major global producers, which provide parameters and obligations to their suppliers due to the following factors:

1. Product differentiation: As producers pursue the strategic option called “product differentiation” through design or branding, they need to provide precise specifications and monitor supplier´s compliance to these requirements.

2. Risk of failure of suppliers:The growth of competition based on factors such as quality, responsiveness and reliability, along with the increasing concerns about safety, make global buyers to become more vulnerable to deficiencies in the performance of their suppliers.

Thus, chain leaders transfer skills to the participants due to products with greater complexity and to risks. This sharing of knowledge helps suppliers because they benefit from the participation in environments that make upgrading possible. But, if on the one hand the leaders facilitate the development of new products and processes, on the other hand they do not allow their suppliers to migrate to other functions, i.e., there is no evidence on migration for functions such as design, branding and marketing. This occurs because of two types of obstacles: purchase power and necessity of resources.

  1. Purchase Power: the source of power in a supply chains is found in non-manufacturing activities such as branding, marketing, product development and coordination of relations between participants of the GVC. Leading firms concentrate in these activities because they are the firm´s main competences. Therefore it is not surprising that these companies do not share their competences with their suppliers. In some cases, leading firms even try to stop suppliers from acquiring such skills in order to avoid the rise of future competitors.
  2. Need for resources: Companies from developing countries seeking to develop their own global brands or to create marketing channels in most industrialized countries rarely succeed because they are not able to sustain these efforts due to the huge investment requirements, whether in tangible or in intangible assets.

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Is upgrading suited for everyone?

One aspect not totally discussed is whether upgrading is the most appropriate strategy over the long run for all firms because risks and competition are much higher in the upper segments of a GVC. In fact, some companies choose to stay in safer niches without even trying to upgrade. For a type of firms, keeping the status quo – their current position in the GVC – is their strategic option due to their own risk aversion and to the higher competition found in advanced segments of the value chain. According to Michael Porter (2008), the three generic competitive strategies (low cost, product differentiation and focus) tend to be mutually exclusive. This may explain why some companies are not successful with functional upgrading. An organization needs to develop competences in advance in case the firm moves to a new functional level. (Fleury, Fleury; 2008)

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What is missing in the GVC analysis?

The increasing complexity of global supply chains has led to formulation of several theories to understand the phenomenon of global dispersion of manufacturing. While the GVC focuses on the analysis of value creation and different capture of value among the firms, Global Production Network (GPN) analyzes not only the interactions between leading companies and their suppliers but also a wide spectrum of actors that influence the global production, such as institutional and social actors, national governments, multilateral organizations, business associations, non-governmental organizations and policy makers.

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