A critical appraisal of the GVCs-led industrialization model

In light of the discussion and evidence presented in the paragraphs above, when evaluating the potential opportunities associated with GVC integration, six main arguments must be critically taken into account (Andreoni, 2018b).

Firstly, TNCs’ leading regional and global value chains are extremely powerful organizations, whose economic size can be comparable to the GDP of many developing countries. Their power relies on the creation of entry barriers in the forms of patents, quality standards, copyrights and trademarks. As in the cases of the Jalisco’s IT cluster or the Central Eastern European electronics one, the produced value might be concentrated and retained by TNCs, with little scope for positive knowledge spillovers across the domestic economy.

Secondly, the sectoral value chains LDCs tend to be integrated with (or the GVC stages they perform) are not those with high value opportunities or margins for

manufacturing development. Within the African context, for example, GVC integration has mainly involved upstream resource-based sectors. While there are some encouraging cases of successful integration in sectoral value chains – such as the flower and leather industry in Ethiopia, fruit industry in South Africa (Cramer and Sander 2015; Andreoni and Tregenna 2018) – without developing a number of key manufacturing industries delivering production technologies for the other sectoral value chains, these will not be able to transform these economies and trigger cumulative processes of intersectoral learning (Andreoni 2011, 2014).

Thirdly, from a learning perspective, the risk of committing scarce resources in specific assets to perform relatively unsophisticated activities (basic processing or assembling) can lead to a situation of “production lock-in” or “value-chain de-link”

in case of unmet technology and quality standard requirements or emerging competitors, respectively (Kaplinsky and Morris, 2015). As a result of these processes, industrial systems in developing economies in the early stages of economic transformation are generally characterized by foreign-owned companies that establish few backward and forward linkages with local suppliers and processors generally lacking the capabilities to perform activities other than basic assembling. Existing small enterprises lack the scale and skills to provide reliable intermediate products, as well as the resources to invest in technological upgrading.

Particularly problematic, therefore, is the lack of medium-sized manufacturing firms that can do those things – the so-called “missing middle” phenomenon. The few domestic companies engaged in large-scale production face the same constraints and rely on imports of semi-processed raw materials and capital goods, as well as on the re-export of assembled products, rather than being successful in creating backward and forward linkages.

Partly because of the risk of “production lock-in” or “value-chain de-link” mentioned above, care is needed in interpreting upgrading trajectories with respect to the well-known “smile curve”, originally developed by Acer’s CEO Stan Shih to describe the position of Taiwan Province of China in the electronics value chain (Shih, 1996). The smile curve, indeed, illustrates the decomposition of value of a given product into the underlying stages (tasks) of production. According to the traditional, partly simplistic, interpretation of the smile curve theory, in order to upgrade their position, firms and countries should seek to move to tasks at the extreme ends of the curve, typically those that extract a higher share of the overall value. However, this view ignores that multidimensional upgrading (such as functional, process, product and intersectoral) goes beyond existing firms specializing only in a limited and isolated sets of tasks. In order to capture “high value niche” opportunities along the value

chain via tasks specialization, companies often have to develop multiple sets of complementary production capabilities, cutting across multiple stages of the value chain. This is especially true in the case of complex high-tech high-value products or components (Andreoni, 2018a). For example, the task specialization in design often requires the direct access (often in the same location) of specific production capabilities for prototyping and manufacturing to scale-up products and processes.

Task specialization requires the identification of complementary sets of capabilities, which constitute the technology platform underpinning the task or set of related tasks (Andreoni, 2014, 2018a). The specialization only in limited and isolated sets of tasks/capabilities will lead to reduced learning and diversification opportunities for firms and countries. In today’s advanced economies’ industrial districts, such as the Boston route (Best 1990, 2001) and the Emilia Romagna region (Andreoni et al., 2017; Andreoni 2018a), these complementary capabilities have been developed along different cycles of industrial transformation and renewal of vertically integrated firms, supported by a dense network of local specialized suppliers and contractors.

Furthermore, discussions on GVC integration narrowly focus on “vertical linkages”

along value chains, while missing the important role of cross-sectoral “horizontal linkages” among different firms at each node of the value chain. As shown by the Republic of Korea firms’ experience, leveraging a bigger piece of the pie from global profit critically requires building and upgrading local chains for value and knowledge creation (Lee et al., 2017). More in general, export-led industrialization and successful GVC integration in several East Asian countries has advanced hand in hand with the development of horizontal cross-sectoral linkages in the domestic economy and the resulting incremental domestic value addition in trade (Chang, 2010). Another related notable example is the emergence in the 2000s of globally competitive but domestically owned Indian automotive companies, such as Tata and Mahindra that, supported by the presence of competitive local components producers, were able to export Indian branded cars (Khan, 2015). The successful transfer of technological and organizational capabilities transforming the competitiveness of the Indian automobile sector has been made possible by an agreement signed by Maruti Udyog Ltd. and Suzuki in 1982. The Indian Government decided to open up the protected domestic market, ensuring significant rents, to a foreign investor, if the latter committed itself to making a substantial investment in transferring capabilities. The resulting incentive convergence between the State and Suzuki allowed the Indian Government, not yet constrained by World Trade Organization (WTO) rules, to insist on significant domestic content. The joint venture agreement with Suzuki, indeed, provided for the 70 per cent non-company value addition, of which at least 60 per cent was to be locally procured (Khan, 2015).

Finally, when considering opportunities and risks associated with GVCs’ integration, it is crucial to address context-specific political economy dynamics. Firms in countries across LDCs tend to be adversely affected by the existing distribution of organizational power in both the public and private sectors – namely, the countries’

“political settlement” (Khan, 2010, 2018; Whitfield et al., 2015; Khan et al., 2016;

Behuria et al., 2017). Given a certain political economy context, participation in GVCs might lead to entrenching power even more upstream and consolidate an incentive structure biased towards importers more than producers.

B. Local production systems: Vertical integration and horizontal supply chain