The Role of Suppliers in Global Value Chains

IDE Research Bulletin

March 2020

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Background and Aim of the Project

The global value chain (GVC) research developed in the context of the emergence of new drivers of globalization, and in particular retailers and brand-name companies – which (Gereffi 1999: 46) referred to as “manufacturers without factories”. These lead firms created new global supply bases, emerging as powerful actors shaping the value chains by performing tasks such as defining product characteristics, distributing tasks along the chain, influencing the distribution of risks and rewards along the chain, and choosing suppliers and monitoring their performance (Dolan, Humphrey, and Harris-Pascal 1999: 18-21; Ponte and Gibbon 2005: 3). Given that the focus of the GVC research has primarily been on the exercise of power by lead firms over other actors and its consequences, relatively limited attention has been directed to suppliers. Suppliers were regarded largely as passive and subordinate actors that act within the constraints determined by the lead firms and accumulate capabilities in accordance with the requirements and assistance by the lead firms. This is reflected in the theory of GVC governance provided in the seminal paper by Gereffi, Humphrey, and Sturgeon (2005).

However, recent literature suggests the emergence of suppliers who are much more active and powerful players than the conventional GVC research assumed. First, suppliers may exercise agency through their choice of markets and customers (which, where, and how many) and through taking strategic decisions to acquire capabilities and reposition themselves within value chains – albeit within the constraints imposed by lead firms and other actors in GVCs and institutional settings (Kawakami 2011; T. J. Sturgeon and Linden 2011; Sako and Zylberberg 2019).Second, supplier agency and reconfiguration of global industries has led to accumulation of supplier capabilities (Sturgeon, Humphrey, and Gereffi 2011). This, combined with the rise of emerging country lead firms across numerous sectors (Sako and Zylberberg 2019), has resulted in situations where even developing country suppliers possess capabilities equal to or greater than those of their customers (see, for example, (Hsieh 2015; Fujita 2013). Third, the more recent literature on the role of platforms and platform leadership (Gawer and Cusumano 2002; Hagiu and Wright 2015) emphasizes the key role played by “suppliers” (companies not selling directly to final consumers) in shaping markets and providing leadership.

The literature discussed above is crucial in showing that suppliers may, within constraints imposed by lead firms, other actors or institutional settings, exercise agency in reconfiguring value chains. However, the literature suffers a number of shortcomings. First, the discussion has been based primarily on a limited number of very large transnational suppliers. These suppliers, typically found in electronics, automobile and apparel industries, originate in either developed countries or the Tiger economies in East Asia. By supporting the manufacturing needs of developed country lead firms in Asia and around the world, these large suppliers not only maintain close relationships with their clients but are also in a position to negotiate better terms of transactions with them (Sturgeon and Lester 2003; Appelbaum 2008; Sturgeon, Humphrey, and Gereffi 2011). However, these transnational suppliers are best seen as exceptional cases. In the meantime, the question of whether and how smaller firms, which in fact are the majority, might exercise agency in global value chains remains under-explored.

Second, there have been limited systematic analyses as to what the available strategic options are for suppliers and how they work in practice. To start with, previous discussion has focused overwhelmingly on a particular type of suppliers’ strategy, i.e., functional upgrading or acquiring new functions in the chain to increase the overall skill content of activities (Schmitz, 2004: 8). Because moving into higher-margin and difficult-to-replicate activities is vital for developing enduring and solid competitiveness, this type of upgrading has been regarded as particularly crucial for suppliers (Navas-Alemán, 2011; Giuliani, Pietrobelli, & Rabellotti, 2005). However, functional upgrading is not the only route for suppliers to exercise agency in value chains. Sturgeon & Lester (2003), for instance, identify a variety of routes for suppliers to enhance value creation and to protect their share of the market against competitors, which include specialization in process-specific technologies that enable the firm to provide high-quality, low-priced manufacturing and manufacturing-related services. More recently, Sako and Zylberberg (2019), drawing on management theories, developed a framework that articulates ways in which supplier strategy enables them to redefine the nature of their relationships with buyers. The framework highlights the importance of three types of suppliers’ strategies: diversifying buyer portfolios, upgrading in the context of strong regimes of appropriability, and upgrading while in control of critical and appreciating specialized complementary assets.

Despite the recent progress, research on how suppliers exercise agency in value chains is still at inception. The range of strategic options for suppliers, such as those discussed above, has been extracted primarily from the experience of large transnational suppliers that are exceptionally successful. Some strategies are mutually exclusive, e.g., integrating high-value-adding functions versus staying process specialists. Apparently, a strategy would work well for specific types of suppliers and under specific sets of circumstances but necessarily for other types of suppliers or in other contexts. Further research is needed to comprehensively identify the range of strategic options available to different types of suppliers in different contexts, and systematically analyze how each of them works in practice.

Third, previous discussion has focused mainly on the suppliers’ relationships with their main customers, leaving the question of whether and how other types of transactional or non-transactional relationships might influence the scope for suppliers to exercise agency in value chains largely under-explored. However, as emphasized by Sako and Zylberberg (2019), diversification of customer portfolio beyond the main customer is vital for suppliers seeking to increase returns and reposition themselves in value chains. Suppliers may also benefit from linkages with actors that they do not have direct transactions with (Hsieh 2015). Recent literature on platforms also highlighted how actors without direct transactional relationships might influence options available to other actors (Humphrey 2018). More comprehensive examination of suppliers’ relationships, including those with customers other than main existing customers or those that do not involve direct business transactions is needed.

This project is an attempt to further develop both empirical and theoretical work on the role of suppliers in value chains. On the empirical front, the aim is to understand the variety of approaches and strategies adopted by suppliers to improve their performance, reposition themselves in value chains, and/or even influence value chain governance. The analyses in particular focus on small- and medium-scale suppliers in machinery-related industries from developed, emerging and developing countries in East and Southeast Asia, which earlier studies have largely recognized as passive and subordinate actors in chains governed by powerful lead firms. On the theoretical front, the project explores how the GVC theory might be extended to take better account of the roles, strategies, and/or agency of suppliers in GVCs. The project in particular considers the variety of ways in which suppliers acquire and exploit capabilities that help them strengthen their positions and their theoretical implications.