Global yet green? How governance influences upgrading opportunities

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By Valentina De Marchi.

The fragmentation of production and integration of trade creates important opportunities for firms and territories, especially if located in emerging economies, to grow and learn. Yet not all the global relationships are conducive of economic, social or environmental upgrading.

Upgrading in Global Value Chains

As a result of globalization, value chains are increasingly fragmented and have spread worldwide – a new era of international competition that is reshaping global production and trade and changing the organization of industries has emerged. The Global Value Chain (GVC) framework is particularly useful in understanding global dynamics because it relates the nature of relationships between firms (governance) to the possibilities for firms to move toward higher value-added activities in order to increase the benefits of participations in GVCs (upgrading)[i]. Two main insights can be gained from the extensive literature that, taking especially the POV of emerging countries’ firms and regions, discussed on upgrading:

  1. participating in GVCs represents an important learning opportunity, to acquire crucial knowledge about global markets, advanced processes and global standards;
  2. this opportunity is not always taking place.

When does upgrading take place?

Two major reasons might explain why upgrading does not always occur – and indeed downgrading might even take place. First, learning from the global buyers and lead firms is an opportunity better gained by firms that have the capacity to absorb, master and adapt knowledge that global firms potentially can transfer to them, i.e. have invested in R&D and in the capabilities of their employees, and do interact with local industry associations, universities, research centers to improve innovation capabilities[ii]. Second, that specific path of upgrading and the extent firms can benefit (learn) from GVC participation is heavily influenced by the governance structure that characterize the GVC the firms belong too.

Governance and environmental, social and economic upgrading

A recent quantitative analysis[iii] provides empirical evidence to suggest that a ‘hands-on’ relationship with the key customers (i.e. a relational or captive governance) are conducive of economic upgrading opportunities, yet interesting differences exist if fine-graining to consider product, process or functional upgrading. As far as social upgrading is considered – i.e. the improvement of workers’ rights and work life quality – this is the case also if considering the supplier side of the global network. Interestingly enough, environmental upgrading, instead, is taking place just in the case of relational governance with customers – i.e. in power balanced relationships – and captive with suppliers – i.e. when companies are dependent of few suppliers.

Entering a GVC poses many challenges, but it does represent an opportunity to learn from lead firms and to upgrade. However, every country, community, or company should consider what influence the successful exploitation of the efforts towards economic, social and environmental upgrading has.

About the Author

Valentina De Marchi is Assistant Professor at the Department of Economics and Management ‘Marco Fanno’ at the University of Padova, Italy, and Governing Responsible Business Research Environment (GRB) research fellow at Copenhagen Business School. Interested in circular economy and industry 4.0s and environmental upgrading in GVCs. Valentina has a website and twitter presence.

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References

[i] Gereffi G, Fernandez-Stark K (2016) Global Value Chain analysis: a primer. https://gvcc.duke.edu/cggclisting/global-value-chain-analysis-a-primer-2nd-edition/

[ii] De Marchi V, Giuliani E, Rabellotti R (2017) Do Global Value Chains Offer Developing Countries Learning and Innovation Opportunities? Eur. J. Dev. Res. 1–19 https://www.researchgate.net/publication/321695039_Do_Global_Value_Chains_Offer_Developing_Countries_Learning_and_Innovation_Opportunities

[iii] Golini R, De Marchi V, Boffelli A, Kalchschmidt M (2018) Which governance structures drive economic, environmental, and social upgrading? A quantitative analysis in the assembly industries. Int J Prod Econ 203:13–23. https://doi.org/10.1016/j.ijpe.2018.05.021


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Photo by Andrew Buchanan on Unsplash.

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