The last two decades have seen unprecedented increases in the global fragmentation and dispersion of production and trade. This phenomenon is commonly referred to as global value chains (GVCs) and is largely driven by the actions of multinational enterprises (MNEs). It is widely accepted, both within academic and policy spheres, that rising GVCs accelerate the advancement of domestic firms in developing countries through new market access and knowledge transfer from MNEs. This research critically investigates the common assumption that this transfer of knowledge enables domestic firms to “upgrade” to generate higher value-added. To date, we have not measured or theorised upgrading in a meaningful way. As such, existing work has only emphasised superficial indicators of the effects of GVC participation.
Employing transaction cost economics (TCE) and power-dependence theory as a foundation, I refine our understanding regarding the impact of GVC participation on developing economy firms. I show that while GVC participation may lead to various upgrading trajectories, it can also produce mechanisms that enable asymmetric value-added appropriation by MNEs.
Using empirical insights from an in-depth embedded case study, I demonstrate that TCE’s core efficiency seeking assumption is overly static and only one of the motives driving an MNE’s choice of governance structure. In this sense, the contractual relationship that allows for transaction cost minimisation may not be the one that is pursued by the MNE. While prior research has investigated this assumption, the arguments put forward are justified from a constrained perspective. Such theorization positions suboptimal contractual relationships as an organisational decision of “last resort”. This thesis proposes a novel theoretical argument, one where MNEs may intentionally engage in relationships that conform to the notion of suboptimality. The analysis suggests that MNEs can strategically engage in suboptimal contracts in order to create the conditions needed to maintain a favourable long-term bargaining position.
Beyond this 1st tier theorization, I provide much needed insight into the implications of GVC participation on the lower tiers of the value chain. GVCs rarely comprise of value-adding processes that involve only the MNE and a single tier of producing firms. Instead, it is common for value-adding tiers to exist beyond MNE-1st tier relationships. Even so, GVC and linkage studies have focused on understanding the effects of interactions between the MNE and its immediate suppliers. The empirical analysis suggests that in the presence of 1st tier supplier lock-in, the MNE can extend its control beyond its direct contractual relationships.
