4 - Lead Firm Strategy and Global Value Chain Structure

Summary

In Chapter 3, we saw that a reconsideration of the forces of international capital mobility, technological change and social institutions requires a change in traditional thinking on the determinants of trade. In this chapter, we use the global value chain (GVC) as the unit of analysis of international trade. The gains from offshoring are based on the increase in profits and wages and the creation of jobs. Key is the distribution of value added across producers within the value chain and the resulting potential for “dynamic gains.” These gains come especially from the reinvestment of the profits that emerge from successful GVC management. Lead firms in GVCs raise cost markups and profitability by focusing on core competence and otherwise reducing operations, especially in the domestic market.

GVC management has been an important part of corporate strategy to retain oligopoly power and the rents that go with it. The cost and ease of international communication has fallen, the supply of available labor and productive capacity globally has greatly expanded, and the quality of production and logistical capability of developing country firms has grown. The globalization of production along these lines creates an asymmetry of market structures within the GVC with oligopoly lead firms and competition among suppliers. Expansion of offshoring can also support a financialization of the non-financial corporate sector.