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 INDUSTRIAL PERFORMANCE 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, IDS Timothy 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:

Theoretical Underpinnings (starting point: industrial organization) 1. Transaction Costs Economics Key concept: Asset specificity Academic field: Institutional economics 2.Production Network Theory Key concepts: Trust, reputation, repeat transactions, social networks, geographic proximity, power Academic fields: Economic sociology, economic geography 3.Complementary Competencies Key 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

The Matrix

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 Low High Network org. forms

Materials Customers Suppliers Price End Use MarketModular Lead Firm Component and Material Suppliers Turn-key Supplier Relational Captive Suppliers Captive Lead Firm Component and Material Suppliers Value Chain Hierarchy Integrated Firm Low High Degree of Explicit Coordination Degree of Power Asymmetry Lead Firm Relational Supplier Full-package Supplier 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  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 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 Network organizational forms Hierarchy Market

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

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 MODULAR De-codification and reduced competence through technological change, new requirements, and new competitors

GVC Governance Types Links to Industrial Upgrading and Policy