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Global Value Chains and Development

Over the past half century globalization has transformed how nations, firms, and workers
compete in the international economy. The chapters in this book, authored by one of the
founders of the global value chains (GVC) approach, trace the emergence of the most
influential paradigm used to analyze globalization and its impact by academics and policy
makers alike. In the mid-1990s, Gary Gereffi introduced the notion that offshore production
was fuelled by buyer-driven and producer-driven supply chains, which highlighted the role of
giant retailers, global brands, and manufacturers to orchestrate complex networks of suppliers
in low-cost developing economies around the world. The GVC framework was built around
the twin pillars of ‘governance’ (how global supply chains are controlled and organized) and
‘upgrading’ (how countries and firms try to create, capture, and retain high-value niches in
GVCs). This book contains the seminal writings used to launch the GVC framework, along
with in-depth case studies that explain how Mexico, China, and other countries emerged as
prominent exporters in the world economy. As the social dimension of globalization became
more pronounced, Gereffi and colleagues elaborated the concept of ‘social upgrading’ and
a new paradigm of ‘synergistic governance’ based on the coordinated efforts of private, civil
society, and public-sector actors. During the 2000s, the rise of large emerging economies like
China, India, Brazil, and South Africa transformed the structure and dynamics of GVCs
in the direction of greater regionalization. Today new challenges are looming in resurgent
economic nationalism and populism. Large international organizations such as the WTO,
World Bank, and ILO, policymakers in national economies, development practitioners, and
academics continue to be guided by insights from the GVC approach.

Gary Gereffi is Professor of Sociology and Director of the Global Value Chains Center
at Duke University, Durham, USA. He has published numerous books and articles on
globalization, industrial upgrading, and social and economic development, and is one of the
originators of the GVC framework.

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Development Trajectories in Global Value Chains
Globalization is characterized by the outsourcing of production tasks and services across
borders, and the increasing organization of production and trade through global value chains
(GVCs), global commodity chains (GCCs), and global production networks (GPNs). With
a large and growing literature on GVCs, GCCs, and GPNs, this series is distinguished
by its focus on the implications of these new production systems for economic, social, and
regional development.
This series publishes a wide range of theoretical, methodological, and empirical
works, both research monographs and edited volumes, dealing with crucial issues of
transformation in the global economy. How do GVCs change the ways in which lead
firms and suppliers shape regional and international economies? How do they affect local
and regional development trajectories, and what implications do they have for workers and
their communities? How is the organization of value chains changing and how are these
emerging forms contested? How does the large-scale entry of women into value-chain
production impact gender relations? What opportunities and limits do GVCs create for
economic and social upgrading and innovation? In what ways are GVCs changing the
nature of work and the role of labor in the global economy? And how might the increasing
focus on logistics management, financialization, and social standards and compliance shape
the structure of regional economies?
This series includes contributions from all disciplines and interdisciplinary fields related
to GVC analysis and is particularly supportive of theoretically innovative and informed
works grounded in development research. Through their focus on changing organizational
forms, governance systems, and production relations, volumes in this series contribute to
on-going conversations about development theories and policy in the contemporary era
of globalization.

Series editors
Stephanie Barrientos is Professor of Global Development at the Global Development
Institute, University of Manchester.
Gary Gereffi is Professor of Sociology and Director of the Global Value Chains Center,
Duke University.
Dev Nathan is Visiting Professor at the Institute for Human Development, New Delhi, and
Visiting Research Fellow at the Global Value Chains Center, Duke University.
John Pickles is Earl N. Phillips Distinguished Professor of International Studies at the
University of North Carolina, Chapel Hill.

‘GVCs drive productivity growth, investment, technology transfer and job creation. For
more than 20 years, Gary Gereffi has led the world in understanding the governance,
upgrading and evolution of GVCs. In Global Value Chains and Development he brings
together his most relevant work while providing insights on the evolving trade and
technology landscape transforming GVCs. This is a must-read book for policy makers,
practitioners and academics committed to economic development.’
Anabel Gonzalez, Former Senior Director of the World Bank Global Practice on
Trade and Competitiveness and former Costa Rica Minister of Trade

‘Gary Gereffi explains the organization of the global economy better than anyone. This
book reaffirms his importance as the founder and still leading theorist of global value
chains, and is essential reading for all those who wish to understand the complexity of
manufacturing in the 21st century.’
Gary Hamilton, Professor Emeritus, University of Washington

‘Gary Gereffi is a pioneer in the analysis of global value chains and their implications
for economic development policy and governance. This volume brings together his
key contributions and is required reading for all students of trade and development.’
Bernard Hoekman, European University Institute, Florence

‘Gary Gereffi’s work over the past 25 years has changed how we understand capitalism.
This brilliant collection of essays shows that capitalism today can be understood in its
global form by an array of production networks that generate profits, employment and
wage income, and that economic development itself is deeply molded by these networks.
Gereffi’s analysis of global value changes has spearheaded a generation of scholars and
has influenced policy makers from around the world. He effectively defined the field
and then continued to move the thinking forward as the world evolved – with the
growth of services trade and telecommunications, with economic booms in East Asia
and busts in Latin America, and most recently with a riveting account of the shifting
politics of industrial policy and protectionism. Gereffi is the gold standard: the writing is
clear, data are illuminating and the analysis is sharp and relevant. This book is essential
reading for anyone seeking to understand globalization and economic development.’
William Milberg, Dean and Professor of Economics, New School for Social Research

Gary Gereffi

Cambridge University Press is part of the University of Cambridge.

It furthers the University’s mission by disseminating knowledge in the pursuit of
education, learning and research at the highest international levels of excellence.

www.cambridge.org
Information on this title: www.cambridge.org/9781108471947
© Gary Gereffi 2018
This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without the written
permission of Cambridge University Press.
First published 2018
Printed in India
A catalogue record for this publication is available from the British Library
ISBN 978-1-108-47194-7 Hardback
ISBN 978-1-108-45886-3 Paperback
Cambridge University Press has no responsibility for the persistence or accuracy
of URLs for external or third-party internet websites referred to in this publication,
and does not guarantee that any content on such websites is, or will remain,
accurate or appropriate.

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Contents

List of Tables xiii

List of Figures and Boxes xv
Foreword xvii
Acknowledgments xix
Sources xxi

1. The Emergence of Global Value Chains: Ideas, Institutions, and

Research Communities 1

Part I: Foundations of the Global Value Chain Framework

2. The Organization of Buyer-Driven Global Commodity Chains: 43
How US Retailers Shape Overseas Production Networks
3. International Trade and Industrial Upgrading in the Apparel 72
Commodity Chain
4. The Governance of Global Value Chains 108
(with John Humphrey and Timothy J. Sturgeon)

Part II: Expanding the Governance and Upgrading Dimensions in

Global Value Chains
5. The Global Economy: Organization, Governance, and Development 137
6. Local Clusters in Global Chains: The Causes and Consequences 176
of Export Dynamism in Torreon’s Blue Jeans Industry
(with Jennifer Bair)
7. Development Models and Industrial Upgrading in China and Mexico 205
8. Economic and Social Upgrading in Global Production Networks: 228
A New Paradigm for a Changing World
(with Stephanie Barrientos and Arianna Rossi)
9. Regulation and Economic Globalization: Prospects and Limits 253
of Private Governance
(with Frederick Mayer)

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xii Contents

10. Economic and Social Upgrading in Global Value Chains and Industrial
Clusters: Why Governance Matters 276
(with Joonkoo Lee)

Part III: Policy Issues and Challenges

11. Global Value Chain Analysis: A Primer (Second Edition) 305
(with Karina Fernandez-Stark)
12. Global Value Chains, Development, and Emerging Economies 343
13. Risks and Opportunities of Participation in Global Value Chains 381
(with Xubei Luo)
14. Global Value Chains in a Post-Washington Consensus World 400
15. Protectionism and Global Value Chains 429
Co-authors 453
Index 455

2.1 Sales of Leading US Retailers, 1987–1992 54

2.2 Net Income and Return on Revenues of Leading US Retailers,
1987–1991 55
2.3 Types of Retailers and Main Global Sourcing Areas 59
3.1 Trends in US Apparel Imports by Region and Country 84
3.2 The Triangle Sourcing Networks of the Top 10 US Retail Buying
Offices in Taiwan, 1992 98
3.3 Regional Trade Patterns in World Exports of Textiles and Clothing 100
4.1 Key Determinants of Global Value Chain Governance 117
4.2 Some Dynamics of Global Value Chain Governance 119
5.1 Comparison of Varieties of Capitalism and Global Production Networks 153
6.1 Apparel Industry Indicators for Torreon /La Laguna 183
6.2 Main Clients for Torreon Apparel Exports 187
6.3 Top 10 Apparel Manufacturers in Torreon, Mexico—July 2000 192
6.4 Interviews in Torreon, 1998 and 2000 204
7.1 Foreign Direct Investment in China and Mexico, 1995–2015 211
7.2 Mexico’s and China’s Competing Exports to the United States,
2000–2014 215
7.3 US Imports in Which Mexico and/or China Hold 40% or More
of the US Market, 2014 216
8.1 Key Drivers of Economic and Social Upgrading and Downgrading,
by Type of Work 241
10.1 Types of Governance in Clusters and Global Value Chains by
Scope and Actor 285
10.2 Key Drivers, Mechanisms, and Actors of Social Upgrading 293
11.1 Types of Work in Global Value Chains 325
11.2 Firms in Costa Rica’s Medical Devices Sector 333
12.1 Seven Selected Emerging Economies in Comparative Perspective, 2013 361
12.2 Export Profiles of Emerging Economies, 2000–2013 362
14.1 Use of Global Value Chain Analysis in Selected International
Organizations 415

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Figures and Boxes

Figures
2.1 The Organization of Producer-Driven and Buyer-Driven
Global Commodity Chains 45
2.2 Production Frontiers for Global Sourcing by US Retailers:
The Apparel Industry 60
3.1 The Organization of Producer-Driven and Buyer-Driven
Global Commodity Chains 76
3.2 Shifts in the Regional Structure of US Apparel Imports,
1986–1996 89
4.1 Five Global Value Chain Governance Types 118
5.1 Industrial Upgrading in the Asian Apparel Value Chain 158
6.1 Pre-NAFTA Maquila Networks in Torreon 188
6.2 Post-NAFTA Full-Package Networks in Torreon 189
6.3 US–Torreon Apparel Commodity Chain Activities and Location 190
7.1 Composition of Mexico’s Exports to the World Market, 1990–2014 213
7.2 Composition of China’s Exports to the World Market, 1990–2014 213
7.3 China’s Supply-Chain Cities in Apparel 220
8.1 Typology of Workforce Composition across Different GPNs 238
8.2 Possible Social Upgrading Trajectories 245
10.1 The Confluence of Actors in GVC and Cluster Governance 287
11.1 Six Dimensions of GVC Analysis 307
11.2 Fruit and Vegetables Global Value Chain Segments 308
11.3 Fruit and Vegetables Global Value Chain 309
11.4 Five Global Value Chain Governance Types 312
11.5 Upgrading Stages of Selected Countries in the Fruit and Vegetables
Value Chain 313
11.6 US–Torreon Apparel Value Chain: Activities and Location 314
11.7 Smile Curve of High-Value Activities in Global Value Chains 315
11.8 Model for Sustainable Smallholder Inclusion in High-Value
Agro-food Chains 317
11.9 Four Pillars Model for SME Participation in GVCs 318

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xvi Figures and Boxes

11.10 The Offshore Services Global Value Chain 321

11.11 Examples of Upgrading Trajectories in the Offshore
Services Value Chain 323
11.12 Workforce Composition Across Different GVCs 327
11.13 Examples of Workforce Development Initiatives in the Offshore
Services Value Chain 328
11.14 Costa Rica Medical Exports by Product Category, 1998–2011 332
11.15 Offshore Services Industry in Costa Rica: MNC Participation
by Segment, 2011 334
11.16 Offshore Services Industry in Costa Rica: US Exports and Number
of Employees by Segment, 2011 335
11.17 Policy Recommendations: Medical Devices and Offshore Services 336
12.1 Five Types of Global Value Chain Governance 348
12.2 Curve of Value-Added Stages in the Apparel Global Value Chain:
Nicaragua 354
13.1 Industry Groups, GVCs, and Economic Upgrading 390
13.2 Different Pathways to Social Upgrading 391
14.1 Five Types of Global Value Chain Governance 404
14.2 US Bilateral Trade Balance with China for One Unit of iPhone4 411
15.1 The Architecture of the Digital Economy 441

Box
13.1 From One Shock to Another: The 2011 Earthquake in Japan
Rattled the Auto Industry Worldwide 386

The themes covered in this book resonate with a distinction I made often between the
old world of trade and the new world of trade when I was Director–General of the
World Trade Organization. In the old world of trade, production was national, most
trade occurred within countries, and the job of trade negotiators was to remove obstacles
to trade that protected producers, such as tariffs and subsidies, so that international
trade could flourish. In the new world of trade, production of both goods and services
is transnational, organized in global supply chains where a product could be made in up
to 10 to 12 countries, and trade increased greatly as intermediate inputs crossed borders
many times in the process of making final products. This new world of trade involved
value addition at every stage of the chain, and the obstacles to trade were increasingly
about non-tariff barriers such as regulatory standards, consumer protection, intellectual
property and data privacy, the purpose of which is to protect consumers.
A big part of my job at the WTO was to try to get people who negotiate trade
agreements to make the transition from thinking about trade in traditional terms to
the new realities of global supply chains. After lots of discussion with business people
who were familiar with fully integrated systems of production where goods were largely
produced in Asia and sold in the West, I launched the WTO’s ‘Made in the World’
initiative, and shortly thereafter, we began to partner with the research unit at the OECD
to elaborate ways to measure ‘trade in value added’. This helped us drive home the point
that it was no longer the volume of trade per se that mattered, but rather whether and
how countries were connected to increasingly pervasive global value chains.
I first learned of Gary Gereffi’s pioneering work on this topic in the context of these
WTO efforts to create a new narrative on global trade and development. In a couple
of international conferences organized by the WTO in Geneva, such as the Global
Forum on Trade Statistics in February 2011 and the Fourth Global Review of Aid
for Trade on ‘Connecting to Value Chains’ in July 2013, Professor Gereffi made key
presentations that illustrated how the global economy was changing and why this was
relevant to policy makers. Then in the fall of 2014, Gary and his colleague Frederick
Mayer invited me to present a keynote address at the Global Value Chain Summit that
they were organizing at Duke University as a forum to promote high-level dialogue
between top international organizations who were using the value chain framework
and leading academics also working on these issues.

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xviii Foreword

The chapters in this book offer a panoramic perspective on the sweeping changes that
have transformed the global economy in recent decades. I would summarize the import
of this book in three overarching impressions. First is its historical sweep. The chapters
chart in admirable detail the shift from a nation-state-centered global economy in the
early postwar decades to the intricate division of labor and continuously evolving supply
chains that we see today. Early chapters in the book dealing with the apparel industry
in Asia and North America bring to life the old world of trade, in which production
and trade networks were adjusting to continuously shifting tariffs and quota systems.
Middle chapters of the book capture the impact of the rise of emerging economies as
well as the 2008 economic crisis on the international trading system, while the final
chapter on ‘Protectionism and Global Value Chains’ offers an up-to-date interpretation
of what’s old and what’s new in US President Trump’s trade disputes with his NAFTA
neighbors and China.
A second takeaway from the book is the clarity of the analysis, couched in a language
that is equally accessible to business leaders, development practitioners, policy makers,
and scholars. Although the book covers a very broad spectrum of industries, countries and
regions, its actor-centered approach provides a largely jargon-free discussion of national
development models, technology trends, industrial transformation, and policy options
for developing and developed economies. Multinational corporations and international
business networks are center stage in the global value chains framework laid out in this
book, but it is also clear that development goals encompass a much bigger agenda than
just trade and investment. The theme of governance is a particularly rich concept in this
book, since it embraces not just the organization of supply chains by lead firms and top
suppliers, but also the role of public authorities and civil society groups in promoting
various kinds of social, environmental, and economic upgrading at the country level.
A final reflection on this book stems from my conviction that we need a new narrative
that not only brings together the old and new worlds of trade, but also helps to bridge
the divides that threaten to fracture the international system of trade and development
into completing blocs with no common agenda or goals. Change is inevitable, and this
book analyzes dramatic shifts in the world economy that have altered the fortunes of
large and small, and industrial and agrarian economies alike. An open question is how
the international system that helped to establish and adjudicate the rules of the game
in the late 20th century will respond to these shifts in the early 21st century. Countries
are very heterogeneous in their collective preferences and development situations, but in
the search for common ground, we need inclusive frameworks that address the interests
of citizens, businesses and consumers, practitioners and policy makers, and other diverse
constituencies. This book has the breadth, quality and analytical tools to contribute to
this much-needed dialogue.
Pascal Lamy
Former Director-General of the World Trade Organization
June 6, 2018

This book brings together research that spans several decades and I have been fortunate
to be at Duke University for this entire period. Duke has been an ideal intellectual
and institutional base for my work because it embraced both international and
interdisciplinary scholarship, and it encouraged entrepreneurial teaching and research
programs. The Sociology Department was my faculty home, and it supported multiple
conferences and workshops I organized at Duke. The Center for Latin American and
Caribbean Studies and Duke’s Asian/Pacific Studies Institute contributed in multiple
ways to create a vibrant atmosphere for faculty and students alike who are working
within and across both regions.
I am particularly proud of the innovative, dedicated and policy-relevant scholarship
carried out at Duke’s Center for Globalization, Governance and Competitiveness that
I founded in 2005, which was renamed the Duke Global Value Chains Center in 2017.
The researchers and doctoral students associated with the Center have been amazingly
committed and talented development scholars, who applied and extended the ideas
and frameworks discussed in this book in virtually all regions of the world. Special
thanks go to Mike Hensen, the managing director of the Center since its early years,
and Tom Nechyba, director of the Social Science Research Institute, the Center’s main
institutional sponsor at Duke.
A number of the chapters in this book are co-authored, and I appreciate and value
the intellectual and collegial contributions of my co-authors, which in most cases go well
beyond the particular chapters that appear in the book. Within Duke, I have worked
especially closely with Fritz Mayer, a faculty colleague in the Sanford School of Public
Policy, on multiple projects related to global value chains and international development.
Fritz and Will Goldsmith, who completed his Ph.D in the History Department at Duke,
helped me document the history of the GVC approach and the role of international
organizations in promoting and disseminating the GVC framework. Some of these
ideas appear in Chapter 1.
Finally, a very deep sense of gratitude goes to my family. International research is
exceptionally demanding in terms of the amount of time required for traveling and
working abroad, and this has been true in my case as well. Fortunately, my wife, Pela,

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xx Acknowledgments

and my daughters, Emily and Karen, not only accepted these difficulties, but actually
shared in many of the international travels and experiences that made my scholarly
work around the world much more enjoyable and rewarding. For this reason and many
others, this book is dedicated to Pela.

Chapter 2 Gereffi, Gary. 1994. ‘The Organization of Buyer-Driven Global

Commodity Chains: How U.S. Retailers Shape Overseas Production
Networks.’ In Commodity Chains and Global Capitalism, edited by Gary
Gereffi and Miguel Korzeniewicz, 95–122. Westport, CT: Praeger.
Copyright © 1993, CCC Republication. Reprinted with permission.
Chapter 3 Gereffi, Gary. 1999. ‘International Trade and Industrial Upgrading in
the Apparel Commodity Chain.’ Journal of International Economics 48(1):
37–70. Copyright © 1999, Elsevier. Reprinted with permission.
Chapter 4 Gereffi, Gary, John Humphrey and Timothy J. Sturgeon. 2005. ‘The
Governance of Global Value Chains.’ Review of International Political
Economy 12(1): 78–104. www.tandfonline.com. Reprinted with permission.
Chapter 5 Gereffi, Gary. 2005. ‘The Global Economy: Organization, Governance,
and Development.’ In The Handbook of Economic Sociology, 2nd edition,
edited by Neil J. Smelser and Richard Swedberg, 160–182. Princeton,
NJ: Princeton University Press and Russell Sage Foundation. Copyright
© 2005 by Russell Sage Foundation. Reprinted with permission.
Chapter 6 Bair, Jennifer and Gary Gereffi. 2001. ‘Local Clusters in Global Chains:
The Causes and Consequences of Export Dynamism in Torreon’s Blue
Jeans Industry.’ World Development 29(11): 1885–1903. Copyright © 2001,
Elsevier. Reprinted with permission.
Chapter 7 Gereffi, Gary. 2009. ‘Development Models and Industrial Upgrading in
China and Mexico.’ European Sociological Review 25(1): 37–51. Reprinted
with permission.
Chapter 8 Barrientos, Stephanie, Gary Gereffi and Arianna Rossi. 2011. ‘Economic
and Social Upgrading in Global Production Networks: A New Paradigm
for a Changing World.’ International Labour Review 150(3–4): 319–340.
Copyright © The authors 2011 Journal compilation © International
Labour Organization 2011. Reprinted with permission.
Chapter 9 Mayer, Frederick and Gary Gereffi. 2010. ‘Regulation and Economic
Globalization: Prospects and Limits of Private Governance.’ Business and
Politics 12(3), Article 11. Copyright © V.K. Aggarwal 2010 and published
under exclusive license to Cambridge University Press.

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Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781108559423
xxii Sources

Chapter 10 Gereffi, Gary and Joonkoo Lee. 2016. ‘Economic and Social Upgrading
in Global Value Chains: Why Governance Matters.’ Journal of Business
Ethics 133(1): 25–38. Copyright © 2014, Springer Nature. Reprinted with
permission.
Chapter 11 Gereffi, Gary and Karina Fernandez-Stark. 2016. ‘Global Value Chain
Analysis: A Primer’ (Second Edition). Available at https://gvcc.duke.
edu/wp-content/uploads/Duke_CGGC_Global_Value_Chain_GVC_
Analysis_Primer_2nd_Ed_2016.pdf. Printed with permission.
Chapter 12 Gereffi, Gary. 2015. ‘Global Value Chains, Development and Emerging
Economies.’ UNIDO/UNU-MERIT Working Paper Series #2015-047.
Available at https://www.merit.unu.edu/publications/working-papers/
abstract/?id=5885. Printed with permission.
Chapter 13 Gereffi, Gary and Xubei Luo. 2015. ‘Risks and Opportunities of
Participation in Global Value Chains.’ Journal of Banking and Financial
Economics 2(4): 51–63. (Originally published as World Bank Policy
Research Working Paper 6847, April 2014.) Reprinted with permission.
Chapter 14 Gereffi, Gary. 2014. ‘Global Value Chains in a Post-Washington Consensus
World.’ Review of International Political Economy 21(1): 9–37. www.
tandfonline.com. Reprinted with permission.

1
t
The Emergence of Global Value Chains
Ideas, Institutions, and Research Communities

The chapters in this book were written during the past 25 years and the ideas
in them evolved over a considerably longer period. This era spans dramatic
changes in the global economy: the forging of the US-led Bretton Woods system
to rebuild the postwar international economy in the 1950s and 1960s; the rise
of offshore outsourcing and far-flung global supply chains in the 1970s and
1980s; the dismantling of the Soviet Union and the emergence of the BRICs1
in the 1990s; the surge of China as an export power following its admission to
the World Trade Organization (WTO) in 2001; the wrenching disruptions of
the global recession of 2008–2009; the waning influence of the ‘Washington
Consensus’ policy regime; and the surprising turn in the mid-2010s to a virulent
economic nationalism and xenophobic populism in the United States and Europe
that reject many of the principles of the post-World War II Pax Americana
(Buruma, 2016). How can we make sense of such fundamental transformations
in global capitalism? What are the determinants of this reorganization of the
international economy, and how do we link these global shifts to their national
and local consequences? Who are the winners and losers along the way? This
book addresses these questions.
By nature, the analytical task at hand is international, interdisciplinary and
also highly personal. Legions of scholars and pundits have addressed these topics
from varied perspectives and geographic vantage points. Providing a coherent
interpretation of the evolving events, however, reflects one’s unique intellectual
identity based on specific experiences and influences. In my case, I was trained in
graduate school at Yale University as a development and economic sociologist, and
I spent two years in Mexico doing interview-based field research for my doctoral
dissertation on the Mexican pharmaceutical industry. Although my background
at Yale was highly interdisciplinary involving coursework in sociology, political
science and economics, I had an even more intense exposure to the interplay of
academic and policy-engaged work during a three-and-a-half year stint at the
Center for International Affairs at Harvard University in the late 1970s. During

this period, I also did extensive consulting and contract research for the United
Nations Centre on Transnational Corporations in New York and the Pan American
Health Organization in Washington, DC. Through these and related institutional
experiences after I joined the Sociology Department at Duke University in
1980, my worldview reflects the imprint of multiple professional and research
communities. Thus, this introductory chapter includes elements of intellectual
autobiography, sociology of knowledge, and the institutional underpinnings of
the research communities that helped define the ideas and paradigms developed
in this book.
The structure of the chapter is as follows. First, I highlight several contending
perspectives on the international economy and development in the 1970s and
1980s that set the stage for the emergence of the global commodity chain (GCC)
and global value chain (GVC) approaches. Modernization theory, dependency
theory and world-systems theory were popular paradigms in academic circles that
had dramatically different prescriptions for national development in general, and
contrasting assessments of the role of multinational corporations (MNCs), the
main agent for economic globalization, in particular. Second, I will discuss four
building blocks that were instrumental to the emergence of the GVC framework
in the 2000s: (1) the centrality of power and MNC lead firms in the GCC and
GVC frameworks; (2) the analysis of ‘global industries’ as a complement to
development research at the national and local levels; (3) the role of the state and
contrasting regional development strategies in the global economy; and (4) the
institutionalization of the GVC research community. Third, and finally, I will
introduce each chapter of the book in terms of its core ideas and novel contributions
to the emerging field of GVC studies.

Contending Perspectives on the International Economy and

Development
In the early decades following the Second World War, modernization theory
and dependency theory offered diametrically opposed proposals for developing
economies and newly emergent post-colonial societies in the so-called Third
World. Modernization theorists explicitly modeled their prescriptions for
development on the historical legacy and institutional features of the advanced
industrial democracies of the West. One of the best-known economic books in
this genre was Walt W. Rostow’s The Stages of Economic Growth (1960), which
postulated that all countries pass through five stages of economic development 2
with identical content regardless of when these nations started out on the road
to industrialization. Notwithstanding the widely criticized Eurocentric bias of

the modernization approach (Bendix, 1967; Gusfield, 1967; Huntington, 1971;

Portes, 1973), a key recommendation was close economic, political and social ties
between developing economies and the Western capitalist democracies they were
encouraged to emulate.
Dependency theory, by contrast, highlighted the exploitative potential
of increased contact between the ‘core’ countries and the ‘periphery’ in the
international capitalist system. Andre Gunder Frank, one of the most widely
read Marxist dependency authors, claimed that asymmetric ties of economic
and political dependency between core and peripheral economies promote ‘the
development of underdevelopment’ (Frank, 1967), and citing evidence from Latin
America and Africa, dependency writers argued that links to the center were the
source of many of the Third World’s problems, rather than a solution (see also
Amin, 1973; Dos Santos, 1970). The dependency school, while unified in its
critique of the ahistorical and apolitical assumptions of modernization theory,
had significant internal differences in theoretical and research orientations with
varying prognoses for capitalist development in the periphery (see Gereffi, 1983,
chapter 1; Gereffi, 1994a).
Dependency theory altered its initial claims with a new wave of research in the
1970s and 1980s. Diverging sharply from the ‘stagnationist’ views of writers like
Frank, Dos Santos and Amin, which declared that dependency could only lead
to underdevelopment and socialist revolution, a number of authors promoted the
notion of ‘dependent development’ (Cardoso and Faletto, 1979), which asserted that
structural dependency on foreign capital and external markets might constrain and
distort but is not necessarily incompatible with capitalist economic development
in the more advanced countries of the Third World, such as Brazil (Evans, 1979),
Chile (Moran, 1974), Nigeria (Biersteker, 1978), Taiwan (Gold, 1981), South Korea
(Lim, 1985), India (Encarnation, 1989) and Kenya (Bradshaw, 1988).
A related and at the time novel research agenda was pursued by dependency
scholars who focused on industries rather than countries. This approach often
employed a ‘bargaining perspective’ that analyzed the interaction between the
state, MNCs and national business elites in shaping local outcomes in relatively
dynamic manufacturing industries. Sectors included in the initial set of studies
were pharmaceuticals (Gereffi, 1978; 1983), automobiles (Bennett and Sharpe,
1979; 1985), computers (Grieco, 1984), and the electrical, tractor, tire, and food-
processing industries (Newfarmer, 1985). This bargaining framework sparked a
vigorous debate about the limits of dependency, hypothesis testing, counterfactual
analysis and the possibilities for dependency reversal (Caporaso, 1978; Becker,
1983; Encarnation, 1989).

The research methodologies of these early country and especially industry case
studies of dependency are a clear forerunner of the GCC studies that emerged in
the mid-1990s (Gereffi and Korzeniewicz, 1994). Like the GCC and subsequent
GVC approach, dependency analysis involved extensive and detailed field research,
with the authors typically spending one to two years in their chosen countries
gathering relevant secondary materials and meeting local informants. These
studies relied heavily on in-depth or ‘strategic’ interviews3 with government
officials in charge of both macro and industry-specific policies, as well as firm-
level managers and other stakeholders for the industries in question. Multinational
corporations were a central actor in virtually all dependency research, whether of
the case-study variety or in quantitative, cross-national studies intended to ‘test
dependency theory.’4 The main issues analyzed in the country or industry studies
of dependency revolved around the kinds of power being exercised by MNCs at
the national level, the transnational structure and strategies of MNCs, and the
roles played by national governments, local firms, workers and other industry
actors in defending perceived national interests vis-à-vis the domestic and global
goals of MNCs.
Against this backdrop, world-systems theory had a very different intellectual
agenda. World-systems theory, which drew heavily on earlier critical perspectives
of imperialism and capitalist exploitation, has been closely associated with the
work of Immanuel Wallerstein (1974; 1979; 1980; 1989). This approach establishes
a hierarchy of core, semiperipheral and peripheral zones in which upward or
downward mobility is conditioned by the resources and obstacles associated with
a country’s mode of incorporation in the capitalist world-economy. Leaving one
structural position implies taking on a new role in the international division of
labor, rather than escaping from the system; thus, the possibilities for autonomous
paths of development are quite limited.
The semiperiphery, a main category in world-systems theory, identifies an
intermediate stratum between the core and peripheral zones that promotes the
stability and legitimacy of the three-tiered world-economy. The diverse countries
within the contemporary semiperipheral zone, such as South Korea and Taiwan
in East Asia, Mexico and Brazil in Latin America, India in South Asia, and
Nigeria and South Africa in Africa, purportedly have the capacity to resist
peripheralization, but not to move into the upper tier (Wallerstein, 1974; Arrighi
and Drangel, 1986). While world-systems theory takes a long-run historical view
of cycles of change in the capitalist world-economy that cuts across all regions,
it is not well suited to analyze the specific development trajectories of countries
and regions that are similarly situated in the hierarchical structure, but respond
differently to external economic challenges.5

For development scholars working on global industries, the general categories

of core, semiperipheral and peripheral zones in world-systems theory were viewed
as structural contexts in the world economy, shaped by both world-historic forces
and the technological features of key industries (Henderson, 1989; Doner, 1991)
as well as by the economic strategies of countries seeking to move toward higher-
value-added activities in GCCs (Gereffi and Korzeniewicz, 1990; 1994). While the
‘commodity chain’ concept was originally introduced as part of the world-systems
approach by Hopkins and Wallerstein (1977), and defined simply as ‘a network of
labor and production processes whose end result is a finished commodity’ (Hopkins
and Wallerstein, 1986: 159), it became the central theme of the co-edited volume
by Gereffi and Korzeniewicz (1994), Commodity Chains and Global Capitalism. For
reasons to be explored in greater detail below, this book actually marked a sharp
break between world-systems theory and the GCC approach, which sought to
link the macro-level issues related to the structure of the world-economy with the
meso-level characteristics of national development strategies, and the micro-level
emphasis on the inter-firm networks and related political and social consequences
of local embeddedness (Gereffi, 1994a: 214).

Building Blocks in the Emergence of the GVC Paradigm

Given this brief overview of the contending theoretical perspectives on the
international economy and development in the 1970s and 1980s, we turn to
several cross-cutting themes that cumulatively began to distinguish the GCC
and GVC research communities from their peers: (1) the centrality of MNCs
and power dynamics in development studies; (2) the analysis of ‘global industries’
as a complement to national case studies of dependency and the parallel work on
local industrial clusters; (3) reconceptualizing the role of the state and regional
development strategies in East Asia and Latin America; and (4) institutionalizing
the GVC research agenda through the support of foundations and university-
affiliated research centers.

MNCs and Power in the Global Economy

While there was a great deal of popular interest in the power and global reach of
MNCs in the 1970s (e.g., Barnet and Müller, 1974; Sampson, 1973; 1975), the
study of multinational enterprises was still a neophyte field from an academic
point of view. To the neoclassical economists of the 1950s and 1960s, the postwar
world economy was defined by international capital flows, which were viewed
at the country level as foreign direct investment (FDI). The United States was
the main source of outward FDI, and the first national studies of US FDI were

carried out by Dunning (1958) on the United Kingdom and Safarian (1966) on
Canada. Both of these authors were interested in the public policy question of
the contributions that US FDI had for a host economy (Rugman 1999), and thus
they did not really think about MNCs as an institutional actor.
The Multinational Enterprise Project at Harvard Business School, which began
in 1965 under the direction of Raymond Vernon and lasted for 12 years, tried to
remedy the relative neglect of MNCs. In his most popular book, Sovereignty at
Bay, Vernon (1971) posed the question: To what extent have MNCs supplanted the
national autonomy of governments? Despite being out of step with his academic
brethren in economics departments and business schools who were using general
equilibrium models and rational choice to study the properties of efficient markets,
Vernon’s approach emphasized the strategies and activities of MNCs as both a
political and economic force, rather than just another form of international capital
movement (Vernon, 1999). Furthermore, empirical studies of MNCs underscored
their large size, whether measured in sales or by more sophisticated calculations
of value added, which showcased the concentrated power of vertically integrated
MNCs that were bigger in economic terms than many countries.6
In applying to graduate programs in sociology, I was interested in international
development and preferred programs that encouraged interdisciplinary scholarship.
Yale fit the bill on both counts. I received a fellowship in a comparative sociology
project that focused on inequality systems in five nations, and Yale had strong area
studies programs in multiple regions with particular strengths in Latin America,
Africa and Europe.7 Among my sociology mentors, Louis Wolf Goodman worked
on MNCs in Chile and political scientist Alfred Stepan was a noted Brazilianist
who had close personal ties with Fernando Henrique Cardoso, one of the early
pioneers of dependency theory.8 In economics, there was also a very strong group
of Latin American scholars, including Carlos Diaz-Alejandro, Gus Ranis, and
Jorge Katz, among others. My exposure to dependency theory came largely through
courses with Stepan and Goodman, who co-chaired my dissertation committee.
I developed a proposal to work on MNCs in Mexico, and I received funding for
a two-year Foreign Area Fellowship from the Social Science Research Council
(SSRC) in New York.
While MNCs and dependency theory were both popular topics, there was
considerable controversy about how to combine them in a dissertation project.
In my case, I was fortunate that the SSRC took a pro-active stance in fostering
a research community to help address a number of theoretical and operational
challenges in this emergent field. In 1976, the SSRC created the ‘Continuing
Working Group on Multinational Corporations in Latin America’ that brought
junior and senior researchers together for periodic meetings in New York in the

late 1970s and early 1980s to discuss their projects, methods and preliminary
findings.9 All members of the working group were studying MNCs in different
countries and industries across Latin America, and exploring how dependency on
MNCs in particular sectors shaped national development outcomes. In the early
1980s, Richard Newfarmer joined the working group. Trained as an industrial
organization economist at the University of Wisconsin, Newfarmer helped to create
a much-needed structural perspective on how global industries were organized.
Using the tools of conventional industrial organization theory (such as Bain, 1968;
Scherer, 1980), Newfarmer edited a book with chapters from all members of the
working group that related the market power of MNCs in each industry to the
conduct and performance of overseas affiliates and domestic firms (Newfarmer,
1985).10 This model was a precursor to the governance structure dimension that
later appeared in GCC and GVC studies.
My own dissertation project focused on MNCs in the pharmaceutical industry
in Mexico (Gereffi, 1980). After two years of field research in Mexico (1975–
1976), Raymond Vernon invited me to write my dissertation at Harvard, where
I could interact with members of his Multinational Enterprise Project team as
well as scholars at Harvard’s Center for International Affairs, which Vernon was
directing. My stay at Harvard extended from January 1977 through June 1980,
and my work on MNCs evolved in several directions. In terms of my dissertation
research on Mexico, I developed my central arguments in an article (Gereffi,
1978) for a special issue of the journal International Organization on ‘Dependence
and Dependency in the Global System,’ (Caporaso, 1978). Although my analysis
was a single-country case study, I was pushed by Vernon and others to develop
falsifiable hypotheses related to dependency reversal, including a ‘counterfactual
analysis’ that extrapolated from the experience of relevant comparative cases how
national firms in Mexico might have performed better than MNCs in terms of
national welfare (defined as local industry growth) and global consumer welfare
(defined as identical products at lower prices).
Beyond my dissertation, I had the opportunity to initiate different kinds of
policy-related studies of MNCs in the global pharmaceutical industry: one project
involved the UN Centre on Transnational Corporations in New York, and a
second looked at the viability of ‘essential drugs’ programs in Latin America for
the Pan-American Health Organization (PAHO) in Washington, DC. In both
cases, I was asked to analyze the structure and strategies of top MNCs in the
global pharmaceutical industry, which was a key (and missing) complement to the
bottom-up perspective of my Mexican case study on the steroid hormone industry.
In retrospect, learning how to study a global industry from the perspective of
MNCs and link it to the experience of national economies was critical to framing

the governance structure and industrial upgrading pillars of the GCC and GVC
paradigms in subsequent decades. However, in the late 1970s and 1980s these
were uncharted waters.

Studying Global Industries

One of the major limitations of dependency theory was the absence of an
integrated global perspective on MNCs. Most of the historical-structural authors
in the dependency tradition assessed the development implications of peripheral
capitalism by focusing on the class structure in the peripheral country, the alliances
formed by local business and political elites with international capital, and the role
of the state in shaping and managing the national, foreign and class forces that
propel or constrain development within countries (Cardoso and Faletto, 1979;
Evans, 1979). For dependency theorists, not the whole country but only a selected
portion of it is integrated into the international economy (Sunkel, 1973), which
does not fit classic power-dependence models that view dependence as a dyadic
asymmetrical relationship between pairs of nation-states or other unitary actors
(Emerson, 1962; Duvall, 1978).
For those dependency scholars who focused on industries rather than countries
or regions, MNCs became a logical focal point for research because these companies
embodied the power asymmetries entailed by a peripheral economy’s integration
into the international capitalist system. However, in US academic circles, there
was a great deal of pressure to develop methodological strategies that would treat
dependency not merely as a holistic structural ‘situation’ but rather as a relational
‘variable’ that could be measured and tested in falsifiable propositions about MNCs
and other key actors (Caporaso, 1978; Gereffi, 1978; Moran, 1978; Bennett and
Sharpe, 1979).11 Notwithstanding this uptick of interest in analyzing MNCs
through an industry lens, dependency theory still looked at the world from the
bottom up, i.e., from the perspective of peripheral economies. There was little
systematic empirical information about international industries viewed from the
top down.
World-systems theory had the advantage of a more intrinsically global
perspective on the historical evolution of the capitalist system, but the broad
tripartite classification of core, semiperipheral and peripheral zones used in this
approach created an agency problem in terms of not clearly specifying the concrete
actors and mechanism of change in the system. In their influential study of the
semiperipheral zone in the world-economy, Arrighi and Drangel (1986: 11)
critiqued the dependent development literature for acknowledging ‘the possibility
that development in general and industrialization in particular might occur within
states while still reproducing a structure of dependence.’ Among the weaknesses

of dependent development from a world-systems stance is that national or regional

economies do not simply occupy an intermediate position between ‘center’ and
‘periphery’ in the world-economy; rather, a systemic view emphasizes the structural
significance of each stratum or group of states (core, semiperipheral, peripheral),
and not the rise or fall of individual economies. This three-tiered structure of the
world-economy is assumed to be ‘more or less constant throughout the history of
the capitalist world-economy’ and ‘to play a key role in promoting the legitimacy
and stability of the system’ (Arrighi and Drangel, 1986: 12–13).12
In world-systems theory, commodity-chain dynamics are closely linked to
world-system position. Core-periphery relations comprise ‘economic activities
structured in commodity chains that cut across state boundaries’: ‘core’ countries
are countries where ‘core’ activities are located, and ‘core activities are those
that command a larger share of the total surplus produced within a commodity
chain and peripheral activities are those that command little or no such surplus’
(Arrighi and Drangel, 1986: 11–12).13 In other words, there is something about
core status that enables firms (called ‘core capital’) to generate the highest returns
or secure the most rent. But world-systems theory does not specify what those
mechanisms are in any detail, so the formulation ends up being tautological.14 If
indeed commodity chains link all three tiers of the world-economy and are a key
to reproducing this hierarchical system, we need to know more about the kinds
of firms (state-owned, foreign and domestic) and industries that make up these
chains, and how state policy can shape their contribution to surplus generation in
zones like the semiperiphery (Gereffi and Evans, 1981).
These theoretical debates among dependency and world-systems scholars
reaffirmed the importance of a core-periphery system, but did little to address the
empirical question of how to analyze the global industries that actually make up
the world economy. This became a practical mandate for the newly formed UN
Centre on Transnational Corporations (UNCTC) in the late 1970s. Although
UNCTC is probably best known for its unfilled quest to draft a code of conduct to
govern the activities of transnational companies15 in the wake of political scandals
in the early 1970s,16 it also did important work in commissioning comprehensive
empirical studies of MNCs.
One of the initial priorities was a study of the global pharmaceutical industry,
which had received a lot of attention because of controversial practices related to
transfer pricing, differential drug labeling across countries, and the role of essential
drugs programs in the developing world (Lall, 1973; 1975; 1978). Given my
ongoing dissertation research on the pharmaceutical industry in Mexico (Gereffi,
1978; 1980), I was commissioned by UNCTC in 1977 to write a report on the
structure and strategies of the top 50 pharmaceutical MNCs worldwide. This was

followed by a second report on how the structure, conduct and performance of

these pharmaceutical MNCs was good or bad for economic and health outcomes in
developing countries, including various industry stakeholders such as consumers,
domestic drug firms and local innovation systems (UNCTC, 1979; 1981).
The scale of this project was unlike anything I had undertaken before. Even
more daunting, there were no guidelines offered by UNCTC staff because there
were no research models of what a report on MNCs in a global industry should
look like. Drawing on a wide variety of industry-specific source materials and
numerous consultations with academic and business experts on the sector, I drafted
the initial report focusing on the 50 largest pharmaceutical MNCs in the world.
After listing the biggest companies in terms of their annual sales, the MNCs
were classified by nationality and information was gathered on their position in
distinct ‘therapeutic markets’ within the pharmaceutical sector (e.g., antibiotics
and vaccines, cardiovascular, respiratory, autoimmune diseases, pain, etc.) in order
to establish the main competitors in each market segment. The global reach of
the top pharmaceutical firms was estimated by their sales distribution across
major geographic regions. While the methodological and empirical difficulties
in compiling such a report were formidable, the toughest hurdle was handling
the intense political scrutiny and stakeholder interests attached to a UN study
of pharmaceutical MNCs.17 The official report (UNCTC, 1979) was widely
circulated in UN circles and it became a reference point for how subsequent global
industry studies could be carried out.18
The UNCTC report on MNCs in the global pharmaceutical industry
complemented the national focus in my dissertation on the Mexican steroid
hormone industry (Gereffi, 1980). In my book on The Pharmaceutical Industry and
Dependency in the Third World (Gereffi, 1983), I added a couple of chapters that used
the UNCTC studies to put the Mexican case in a broader international perspective.
In the early 1980s, the Pan American Health Organization, the regional arm of
the World Health Organization, commissioned me to prepare a policy paper and
several national case studies evaluating the scope and effectiveness of ‘essential
drags’ programs in various Latin American countries, including Mexico, Brazil
and Peru (PAHO, 1984; Gereffi, 1988).
These early studies of global industries foreshadow several important themes
in the subsequent GCC and GVC literature. First, a focus on specific industries
has obvious policy relevance. Often, the demand for industry studies comes from
those most interested in designing or implementing effective regulation.19 Second,
the organization of global industries reflects the power dynamics of their leading
firms. This insight led directly to the concept of ‘governance structures,’ which
is a mainstay in the GCC and GVC frameworks.20 Third, the organization of

global industries shapes the potential ‘upgrading’ pathways available to developing

economies. The structures and strategies of MNCs present both opportunities
and obstacles for how countries can link up with the international economy
and build domestic industries.21 Fourth, a detailed understanding of the role of
MNCs in global industries allows us to ‘map the activities’ associated with efforts
to create, capture and retain value, which are essential to economic growth and
development.22

Development Strategies in Latin America and East Asia

East Asia has been the most dynamic region in the world since the 1990s and
it played a major role in the emergence of the GCC and GVC paradigms.
Dependency theory dealt primarily with developing economies in Latin America
and Africa, and neither it nor world-systems theory had the analytical tools nor
temporal focus to explain the impact of the rapid ascent of East Asia in the post-
World War II era. Scholars who worked on East Asia believed that dependency
theory had little, if any, relevance to their part of the world, where dynamic
economic growth and social progress occurred without a number of the drawbacks
typical of the Latin American experience (Amsden, 1979; Barrett and Whyte,
1982; Berger, 1986). Instead, East Asian political and economic elites managed
to use external economic linkages effectively and selectively to promote domestic
development.23
The import-substituting industrialization (ISI) model of growth had been well
established in Latin America, Eastern Europe and a few other areas since the 1950s,
and indeed, it was the preferred national development strategy recommended by
the UN Economic Commission for Latin America, directed by Raúl Prebisch. It
argued that industrialization could be the solution to Latin America’s economic
problems, which were rooted in both limited export markets due to the Great
Depression and declining terms of trade (whereby the prices of the region’s
agricultural goods exports fell more rapidly than manufactured imports). However,
this would require an active industrial policy by Latin American governments
willing to entice foreign investors to produce major consumer goods locally in
return for protected domestic markets (Love, 1980). Although the accuracy of
Prebisch’s empirical claims of declining terms of trade was challenged, the ISI
policy became widely adopted throughout most of Latin America from the 1950s
through the 1970s.
In East Asia, Japan and the newly industrializing economies of South Korea,
Taiwan, Hong Kong and Singapore were dubbed ‘miracle economies’ because of
their unparalleled accomplishments in the latter half of the twentieth century
(World Bank, 1993). They registered record economic growth rates not only during

the prosperous 1960s when international trade and investment were expanding
rapidly, but they sustained their dynamism through the 1970s and 1980s in the
face of several oil price hikes, a global recession, and rising protectionism in their
major export markets. In contrast to Latin America’s inward-oriented ISI policies,
the East Asian economies pursued a very different outward model known as
export-oriented industrialization (EOI). When one examines the details of East
Asia’s EOI, though, there is considerable disagreement over its generalizability
as a development model to other parts of the world.
The World Bank (1993) adopted a ‘market friendly’ view of East Asian success
that attributed its economic growth in large measure to functional intervention in
market ‘fundamentals’ such as stable macroeconomic policies, high investments
in human capital (especially education), secure financial systems, limited price
distortions, and openness to foreign technology and trade. A widely held
alternative ‘statist’ interpretation, however, criticized the World Bank’s adherence
to doctrinaire market fundamentalism, and emphasized instead pervasive state
intervention and the critical role played by selective industrial policies in promoting
the sustained and diversified patterns of export growth exhibited by these high-
performing Asian economies (Johnson, 1982; Amsden, 1989; Wade, 1990).
To better understand the relevance of the Latin American and East Asian
experiences to other newly industrializing countries, scholars elaborated cross-
regional comparisons of their development strategies (Gereffi and Wyman,
1990; Haggard, 1990; Deyo, 1987). One of the earliest studies in this vein was
Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia
(Gereffi and Wyman, 1990), which compared the development strategies of four
of the most successful newly industrializing economies: Mexico, Brazil, South
Korea and Taiwan. The core concept of Manufacturing Miracles was ‘development
strategies,’ defined as ‘sets of government policies that shape a country’s relationship
to the global economy and that affect the domestic allocation of resources among
industries and major social groups’ (Gereffi and Wyman, 1990: 23). This meso-
level approach, in contrast to the macro focus of world-systems theory or the micro
analysis of industrial clusters, highlighted the role of state policies in promoting
desired local development outcomes, and it made the inward- or outward-oriented
nature of industrial production a subject of both comparative and historical interest.
A central finding of Manufacturing Miracles was that, contrary to prevailing
stereotypes, the distinction typically made between Latin America and East Asia
as representing inward- and outward-oriented development models, respectively,
was oversimplified. Each of the regional pairs pursued both inward and outward
strategies of industrialization, although their timing and duration varied by region.
In the early phases of development, all four economies adopted commodity export

and ‘primary’ ISI strategies. The main divergence occurred after the initial ISI
phase: Mexico and Brazil followed a strategy of ISI deepening or ‘secondary’ ISI
(mid-1950s through the early 1980s), while Taiwan and South Korea shifted to
‘primary’ EOI (1960–1972) and then pursued ‘secondary’ ISI 24 (1973–1979) and
‘secondary’ EOI 25 (1980s onward) (Gereffi, 1989: 515–519).
One of the key messages from the cross-regional analysis of development
strategies was that regions like Latin America could not simply emulate the
East Asian experience, given significant differences in both historical patterns
of international economic and geopolitical engagement as well as domestic
institutions. East Asia, in particular, had unique circumstances associated with
regional conflicts (the Communist Chinese Revolution and the Korean War) and
subsequent Cold War tensions that led to very distinct patterns of international
economic engagement than found in Latin America. These differences sparked a
new view of global commodity chains and their governance structures in the 1990s.

The Emergence of the GCC and GVC Paradigms

To challenge widely held but misleading stereotypes of development patterns in
Latin America and East Asia, a new knowledge network willing to rethink the
commonalities and differences within and between the two regions was needed.
Often this is most readily carried out in a university context. The institutional
setting for the discussions and workshops that led to Manufacturing Miracles was
the University of California at San Diego (UCSD), which had strong programs
in both Latin America and Asia–Pacific Studies. I spent a one-year sabbatical
at UCSD’s Center for US–Mexican Studies in 1983–1984, and worked closely
with my colleague Donald L. Wyman 26 to organize two workshops on Latin
America and East Asia that led to our co-edited volume. The initial workshop
brought together experts on each region to define themes of greatest relevance for
the volume, and the second workshop discussed draft chapters where individual
authors or pairs of authors addressed the same topic in both regions to make the
bases for the comparative analysis more explicit and realistic.

Global Commodity Chains

The origins of the GCC framework are also linked to university-based research
communities, conferences and subsequent publications that reframed and expanded
earlier world-systems work on commodity chains. Immanuel Wallerstein founded
the Fernand Braudel Center at Binghamton, State University of New York in
1976, which became the intellectual hub for the development of world-systems
theory in the United States. Wallerstein sponsored an annual Political Economy

of the World-System (PEWS) conference series, which brought together scholars

around world-systems topics to present papers subsequently published in conference
volumes.27 The concept of commodity chains was first introduced by Hopkins and
Wallerstein (1977; 1986) as a heuristic to study the operation of global capitalism
and the reproduction of a stratified and hierarchical world-system beyond the
territorial confines of the nation-state. By contrast, the introduction of the ‘global’
commodity chain 28 perspective in the early 1990s focused on the organization of
contemporary global industries and how power asymmetries of MNC lead firms
affected the prospects for national development. This led to a split with traditional
world-systems theory (Bair, 2005; 2009).
The first publication that explicitly utilized the GCC framework was a study
of the footwear industry by Gereffi and Korzeniewicz (1990). The paper was
presented at one of the annual PEWS conferences on ‘Semiperipheral States
in the World-Economy,’ 29 and my co-author was Miguel Korzeniewicz, 30 a
doctoral student in the Sociology Department at Duke University. The research
question that motived our study was why Argentina, Miguel’s home country, had
very high-quality leather exports but lacked a strong footwear industry, while
neighboring Brazil had extensive shoe exports but limited leather inputs. Since
Brazil and Argentina were both in the semiperiphery of the current world-system,
the paper examined how export niches were created in the footwear commodity
chain during the initial phases of economic globalization (1967–1987). The rapid
growth of exports from the semiperiphery in footwear involved high levels of
specialization, which shaped patterns of upward and downward mobility among
the main footwear-exporting countries. 31 Creating export niches in the footwear
commodity chain was partly a story of how and why the previous industry leaders
allowed new capabilities for the emergent exporters, 32 and how intermediaries
(like trading agents) linked small producers to global markets. 33
The analysis of a contemporary global industry using the commodity chain
concept generated spirited controversy34 and a lot of interest among participants at
the 1989 PEWS conference. Wallerstein suggested to Miguel and me that Duke
University might like to host a subsequent PEWS conference on commodity chains,
looking at both historical and contemporary cases. We accepted the invitation. The
16th annual PEWS conference on ‘Commodity Chains and Global Capitalism’ was
held at Duke in April 1992, and it resulted in our edited volume on this topic35
(Gereffi and Korzeniewicz, 1994).
While building on the original definition provided by Hopkins and Wallerstein
(1986: 159), which views a commodity chain as ‘a network of labor and production
processes whose end result is a finished commodity,’ the Commodity Chains and
Global Capitalism book broke with several core precepts of world-systems analysis.

Whereas research on commodity chains from a world-systems perspective focused

on the reconstruction of industries during the long sixteenth century, most chapters
in our volume used the GCC concept to analyze contemporary industries. 36
The introductory chapter to the Commodity Chains volume describes the GCC
framework as ‘a nuanced analysis of world-economic spatial inequalities in terms
of differential access to markets and resources’ (Gereffi et al., 1994: 2). In addition,
a critical contention of the GCC approach was that the internationalization of
production in contemporary globalization reflected a novel process of economic
organization – i.e., ‘governance structures’ that could be characterized as ‘producer-
driven’ and ‘buyer-driven’ commodity chains (Gereffi, 1994b; 1996). This fueled
a debate about ‘whether globalization is better understood as a contemporary
phenomenon enabled by increasingly integrated production systems, or as a process
beginning with the emergence of capitalism in the long sixteenth century’ (Bair,
2005: 157).
This ‘developmentalist turn’ in commodity chain research shared with the
world-systems framework the notion that mobility is possible as individual
countries move up or down between different tiers of the world-economy. For
world-systems theorists, however, this is a zero-sum process; what is relevant
is the reproduction of a hierarchically structured global capitalist economy
(Wallerstein, 1974; Arrighi and Drangel, 1986). Hence, national development
as a generalized goal is not deemed possible; it is simply a ‘developmentalist
illusion’ (Arrighi, 1990).37 Actually, the GCC approach was open to the option
that commodity chains do not necessarily reproduce hierarchy and inequality in
every case, and it assumed power asymmetries are rooted in the organization of
global industries. Thus, commodity chain dynamics indeed are essential to the
prospects for upgrading or downgrading in the global economy.38 Notwithstanding
these controversies, the GCC approach gained considerable popularity because
of the detailed insights it provided in the analysis of contemporary industries and
upgrading/downgrading trajectories of countries and firms within them, and it
became a foundation for the elaboration of the closely related GVC framework.

The Global Value Chains Initiative

In September 1999, the Institute of Development Studies (IDS) at the University
of Sussex in Brighton, UK hosted a workshop on ‘Spreading the Gains from
Globalization.’39 Two broad research communities were invited. One set of scholars
focused primarily on the local dynamics of industrial clusters to understand how
small firms in both developed40 and developing41 economies could improve
their export competitiveness in the global economy. A second set of researchers
emphasized the changing organizational features of global industries,42 and how

new strategies by powerful lead firms were altering international and domestic
production networks and opportunities for upgrading by developing economies.43
The workshop’s goals were threefold: (1) to bring these disparate research
communities together for fruitful dialogue; (2) to establish direct communication
between the researchers and the policy-making and policy-implementing
communities; and (3) to promote a new research agenda that could identify
implementable policies to help reduce growing inequality within and between
countries and the impoverishing aspects of globalization.44
These two communities saw the challenges of economic globalization from
opposite vantage points. Industrial cluster researchers had a bottom-up, country-
level perspective, built around numerous small exporters that sought to leverage
local advantages to enter global markets. Global industry researchers, by contrast,
tended to adopt a top-down international perspective, where the drivers of change
were multinational manufacturers and global buyers (retailers and brands) whose
international production and sourcing networks imposed new rules of the game that
determined winners and losers in the globalization era. The core challenge posed
at the IDS workshop was to forge an integrated research framework that could link
the macro (global), meso (industry and country) and micro (firm and community)
levels of analysis, and generate novel findings and evidence-based policy proposals.
To achieve these goals, a new type of policy-oriented, multidisciplinary and
international research initiative was necessary, and it required an institutional
backer with a long-term vision and a shared agenda.
The Rockefeller Foundation, one of the participants at the IDS meeting, met
all these criteria. Rockefeller supported a five-year Global Value Chains Initiative
(2000–2005),45 which provided funding for a committed network of scholars to
create an integrated research paradigm to address both the knowledge gaps and
the policy gaps created by globalization. At the initial meeting in Bellagio in
September 2000,46 discussion centered around what to call the new framework.
This decision was complicated because a variety of overlapping terms had been used
to describe the network relationships that made up the global economy (Gereffi
et al., 2001: 3; Sturgeon, 2001). The GVC Initiative adopted the term ‘global
value chains’ 47 for various reasons, including: the association of ‘commodity’ with
undifferentiated primary products (such as agricultural commodities, crude oil or
unprocessed minerals), leaving out manufactured goods and services; potential
confusion with the world-systems theory usage of commodity chain; and the term
‘value’ aligned closely with the concept of ‘value-added,’ which focused attention
on the process of creating, capturing and sustaining value in global supply chains
(Sturgeon, 2009: 117).48
The proceedings of the first Bellagio meeting appeared in a special issue of
the IDS Bulletin on ‘The Value of Value Chains’ (Gereffi and Kaplinsky, 2001).

Core areas of concern like governance (Humphrey and Schmitz, 2001), upgrading
(Dolan and Tewari, 2001; Fleury and Fleury, 2001), gender (Barrientos, 2001)
and rents (Fitter and Kaplinsky, 2001) were introduced, and agriculture and
apparel were among the industry cases studied.49 In subsequent contributions,
Humphrey and Schmitz (2002) elaborated the contrast between cluster and
GVC approaches to governance and upgrading. Also, Gereffi, Humphrey and
Sturgeon (2005) expanded the initial governance structure of producer-driven and
buyer-driven chains used in the GCC approach (Gereffi, 1994b) into a fivefold
typology that included three forms of network governance (captive, relational
and modular) between the more conventional modes of markets and hierarchies
(vertically integrated firms).50 Along with annual meetings,51 which brought
together researchers, practitioners, members of the business community and policy
makers, and support for academic publications, another contribution of the GVC
Initiative was the creation of a public website to maintain an inventory of GVC-
related publications and researchers.52
The evolution of ideas and research communities that contributed to the GCC
and GVC paradigms provides a useful backdrop for the chapters that make up this
book. There is a continuity of concern with the changing contours of globalization
and the dynamic yet uneven nature of economic development in contemporary
capitalism. Various theoretical traditions have grappled with these questions,
including the modernization, dependency and world-systems authors and critics
discussed in this chapter. However, a history of ideas alone is not enough to
understand the communities of practice that underlie the conceptual advances
and novel findings needed to challenge extant paradigms.
Thus, I have also emphasized the institutional underpinnings of the research
communities that shaped and sustained the GCC and GVC frameworks.
Universities and foundations provide relatively stable and tangible sources of
support for these initiatives. Equally consequential are the more transitory
knowledge communities forged by edited volumes and special issues of academic
journals, as well as the conferences and workshops that often precede these
publications.

The Chapters in This Volume: Context and Content

There are three sections of this book: Part I – Chapters 2–4 provide the foundations
of the GVC framework; Part II – Chapters 5–10 examine the governance and
upgrading dimensions of GVC analysis; and Part III – Chapters 11–15 explore
specific policy issues associated with the GVC approach. For each chapter, I
will provide contextual background and then briefly note its main substantive
contributions.

Part I: Foundations of the Global Value Chain Framework

The three chapters in this section of the book are the most highly cited contributions
in the GCC/GVC literature.53 They introduce key concepts, typologies and
empirical findings that will be building blocks for later chapters in the book.

Chapter 2: The Organization of Buyer-Driven Global Commodity Chains: How

US Retailers Shape Overseas Production Networks
The book on Commodity Chains and Global Capitalism (Gereffi and Korzeniewicz,
1994) launched the GCC paradigm, and this chapter introduced the notion of
governance structures into the GCC literature with the distinction between
producer-driven and buyer-driven commodity chains. Governance structures
are defined in terms of the power exercised by different types of lead firms
(manufacturers, retailers and brands), and the apparel commodity chain is used
to illustrate the dynamics of buyer-driven chains. The concept of buyer-driven
chains has been extended to cover a wide range of labor-intensive, consumer-goods
industries linking developing country exporters and advanced industrial end markets
in the GVC literature. This chapter also discusses the role of state policies in GCCs,
and stresses the affinity between the ISI development strategy and producer-driven
chains, and the EOI development strategy and buyer-driven chains.

Chapter 3: International Trade and Industrial Upgrading in the Apparel

Commodity Chain
This chapter was included in a special issue of the Journal of International
Economics on ‘Business and Social Networks in International Trade’ co-edited
by Robert C. Feenstra and James E. Rauch, both prominent trade economists.
The chapter establishes a network-based concept of industrial upgrading that
has become widely used in the GCC and GVC literatures. Focusing on the
apparel industry in the newly industrializing economies of East Asia (Hong
Kong, Taiwan and South Korea), industrial upgrading is defined in terms of
several sequential stages: assembly; original equipment manufacturing (OEM);
original brand manufacturing (OBM); and original design manufacturing
(ODM). Organizational learning and triangle manufacturing are identified as
key mechanisms in the evolution of East Asia’s export roles.

Chapter 4: The Governance of Global Value Chains (co-authored with John

Humphrey and Timothy J. Sturgeon)
This has become the classic theoretical formulation of the GVC governance
paradigm, and it poses an alternative to the producer-driven and buyer-driven

governance typology introduced in Chapter 2.54 The chapter draws on three

streams of literature – transaction cost economics, production networks, and
technological capability and firm-level learning – to generate a theory of five
types of GVC governance: hierarchy, captive, relational, modular and market. It
highlights the dynamic nature of GVC governance with four brief industry case
studies, and indicates how changes in any of the three key variables in the theory
(complexity of information, codifiability of transactions, and capabilities in the
supply base) would alter GVC governance structures.

Part II: Expanding the Governance and Upgrading Dimensions in Global

Value Chains
Governance and upgrading are the two main analytical pillars of the GVC
framework: governance structures and the organization of global industries look
at the global economy from the top down (with a focus on international industries
and MNCs), while industrial upgrading looks at the global economy from the
bottom up (with a focus on countries, industrial clusters and local suppliers). The
chapters in Part II of the book differentiate and unpack these master concepts.

Chapter 5: The Global Economy: Organization, Governance, and Development

This chapter appeared in The Handbook of Economic Sociology, 2 nd edition
(Smelser and Swedberg, 2005), and it is one of the very few chapters dealing
with global topics in that influential volume.55 It offers a comprehensive review
of the conceptual frameworks used by scholars to analyze changes in the global
economy over the past several decades. Particular emphasis is given to the role
of transnational corporations and the emergence of global production networks
and GVCs in the reorganization of production and trade in the global economy.
Various governance perspectives are covered as well, including a comparison of
the varieties of capitalism and global production network paradigms. The concept
of industrial upgrading is defined and illustrated empirically.

Chapter 6: Local Clusters in Global Chains: The Causes and Consequences of Export
Dynamism in Torreon’s Blue Jeans Industry (co-authored with Jennifer Bair)
This chapter was one of the first to explicitly link the GCC framework with
the study of local industrial clusters. It highlights how the establishment of the
North American Free Trade Agreement (NAFTA) in 1994 allowed Torreon’s blue
jeans export industry to shift from a producer-driven chain led by US blue jeans
manufacturers to a buyer-driven chain supplying US retailers and brand marketers.

Thus, a policy variable (the initiation of NAFTA) prompted the change in GCC
governance structures, which in turn sparked an export surge in blue jeans from
Mexico to the United States. Cluster networks in Torreon tended to be hierarchical
and involved low trust, in contrast to the horizontal and cooperative networks
typical in much of the cluster literature. Nonetheless, Torreon’s boom cycle became
a bust with the slowdown in the US economy after 2000. This highlights the
likelihood of both downgrading and’ upgrading outcomes when cluster dynamics
are linked to the behavior of foreign buyers and external markets.56

Chapter 7: Development Models and Industrial Upgrading in China and Mexico

This chapter compares and contrasts the export-oriented economic development
strategies pursued by China and Mexico in the global economy. While Mexico
has been the paradigm for the neoliberal (‘Washington Consensus’) development
model associated with foreign direct investment, extensive privatization and open
markets, China has attained record levels of foreign capital inflows and export
growth utilizing a more strategic, statist approach to its development. One of the
keys to China’s success has been a unique form of industrial organization called
supply-chain cities, which has permitted it to achieve both economies of scale and
scope in GVCs. Because China and Mexico depend heavily on the US market for
their export growth, their development models are very susceptible to disruptions
caused by US economic downturns as well as rising protectionism.

Chapter 8: Economic and Social Upgrading in Global Production Networks: A

New Paradigm for a Changing World (co-authored with Stephanie Barrientos
and Arianna Rossi)
This chapter was part of a special feature on ‘Decent Work in Global Production
Networks’ in the International Labor Organization’s journal, International Labour
Review. A key challenge in promoting decent work worldwide is how to improve
the position of both firms and workers in value chains and global production
networks driven by lead firms. This chapter analyzes the linkages between the
economic upgrading of firms and the social upgrading of workers. Drawing on
studies that indicate firm upgrading does not necessarily lead to improvements
for workers, with a particular focus on the Moroccan garment industry, it outlines
different trajectories and scenarios of the tradeoffs involving economic and social
upgrading. The framework outlined in this chapter was the basis for a multiyear
international research program called ‘Capturing the Gains,’ which has been
one of the most productive collaborations emanating from the GVC approach.57

Chapter 9: Regulation and Economic Globalization: Prospects and Limits of

Private Governance (co-authored with Frederick Mayer)
Appearing in a special issue of Business and Politics on ‘Private Regulation in the
Global Economy’ edited by Tim Büthe, this chapter focuses on the corporate
codes of conduct, product certifications, process standards, and other voluntary,
non-governmental forms of private governance that have proliferated in recent
decades. Private governance has notable successes, but there are clear limits to
what it alone can accomplish. This chapter hypothesizes that the effectiveness
of private governance depends on four main factors: (1) the structure of the
particular GVC in which production takes place; (2) the extent to which demand
for a firm’s products relies on its brand identity; (3) the possibilities for collective
action by consumers, workers, or other activists to exert pressure on producers;
and 4) the extent to which commercial interests of lead firms align with social and
environmental concerns. Taken together, these hypotheses suggest that private
governance will flourish in only a limited set of circumstances.

Chapter 10: Economic and Social Upgrading in Global Value Chains: Why
Governance Matters (co-authored with Joonkoo Lee)
This chapter appeared in a special section of Journal of Business Ethics on ‘Industrial
Clusters and Corporate Social Responsibility in Developing Countries,’ co-edited
by Peter Lund-Thomsen, Adam Lindgreen, and Joelle Vanhamme. It examines
the role played by corporate social responsibility (CSR) in both industrial clusters
and GVCs. With geographic production and trade patterns in many industries
becoming concentrated in the global South, lead firms in GVCs have been under
growing pressure to link economic and social upgrading in more integrated
forms of CSR. A new paradigm of ‘synergistic governance’ is outlined based on
a confluence of private governance (corporate codes of conduct and monitoring),
social governance (civil society pressure on business from labor organizations and
non-governmental organizations), and public governance (governmental policies
to support gains by labor groups and environmental activists).

Part III: Policy Issues and Challenges

The GVC community has elaborated the policy implications of its work since its
inception, which reflects in part the role played by IDS researchers in the Global
Value Chains Initiative. In addition, the Duke University Global Value Chains
Center was created in 2005 to help institutionalize and extend the GVC perspective

as an outgrowth of the GVC Initiative. The chapters in this section highlight the
ongoing policy relevance of the GVC framework.

Chapter 11: Global Value Chain Analysis: A Primer (Second Edition)

(co-authored with Karina Fernandez-Stark)
This is the second edition of the popular GVC Primer, which was created at the
Duke GVC Center to introduce a range of policy actors (national governments,
non-governmental organizations, development banks, bilateral and multilateral
donors, etc.) to the key features of the GVC framework. This chapter provides a
conceptual and methodological primer for practitioners and policy makers, defining
and illustrating the core concepts in the GVC toolkit. It offers up-to-date examples
of how the GVC framework is being utilized, especially in studies carried out
by Duke University’s Global Value Chains Center, a premier university-based
research unit for GVC analysis.

Chapter 12: Global Value Chains, Development, and Emerging Economies

This chapter was a background paper for the United Nations Industrial
Development Organization’s Industrial Development Report 2016 (UNIDO,
2015). It highlights the significant and diverse roles that emerging economies are
playing in GVCs. During the 2000s, they were simultaneously major exporters of
intermediate and final manufactured goods (China, South Korea, and Mexico) and
primary products (Brazil, Russia, and South Africa). However, market growth in
emerging economies has also led to shifting end markets in GVCs (Staritz et al.,
2011) as more trade has occurred between developing economies (often referred
to as South–South trade in the literature), especially since the 2008–09 economic
recession (Cattaneo et al., 2010). China has been the focal point of both trends:
it is the world’s leading exporter of manufactured goods and the world’s largest
importer of many raw materials, thereby contributing to the primary product
export boom for selected commodities and regions. Emerging economies are at
the forefront of efforts to redefine their development models to incorporate their
large domestic economies more fully in their upgrading strategies (Gereffi and
Sturgeon, 2013).

Chapter 13: Risks and Opportunities of Participation in Global Value Chains

(co-authored with Xubei Luo)
The chapter highlights the risks and opportunities that firms and their workers face
in GVCs. It examines the risk-sharing mechanisms that firms provide from the

national and global perspectives; it assesses the new opportunities and challenges
both firms and individuals confront in the global arena; it discusses the role of
economic and social upgrading, and it evaluates how governments can help people
manage risks and reap the benefits of participating in GVCs.

Chapter 14: Global Value Chains in a Post-Washington Consensus World

This chapter appeared in a special issue of Review of International Political
Economy on ‘Global Value Chains and Global Production Networks in the
Changing International Political Economy,’ co-edited by Jeffrey Neilson, Bill
Pritchard and Henry Wai-chung Yeung. The chapter looks at GVCs in the
current post-Washington Consensus era, with an emphasis on several new
trends: the organizational streamlining of GVCs; the geographic consolidation
of GVCs, with particular attention to the emerging economies; new patterns of
strategic coordination among value chain actors; the rise of South–South trade
and the growing importance of new end markets; and the rapid uptake of the
GVC framework by international organizations. All of these trends are pushing
toward a reformulation of established development paradigms. The chapter also
highlights the key role played by international organizations in the diffusion of
the GVC paradigm.58

Chapter 15: Protectionism and Global Value Chains

This chapter is an original contribution to this volume. It provides an historical
perspective to analyze recent manifestations of economic nationalism and calls
for protectionism to curb the trade and investment imbalances associated with
GVCs. One instance of the current protectionist threat is President Trump’s
statements that he may install a border tax on US imports from Mexico and
substantially renegotiate or dismantle the North American Free Trade Agreement
between the United States, Mexico, and Canada. Evidence is presented to
show that since NAFTA went into effect in 1994, it has promoted a complex
ecosystem of regional trade and cross-border investment that significantly
benefits manufacturers, jobs and value-added trade on both sides of the US–
Mexico border. In terms of the even larger US trade dispute with China, the
chapter argues that this ref lects a much deeper strategic competition between
these two economic superpowers linked to the rise of the digital economy and
a technological revolution that will deeply affect the future of manufacturing,
jobs and innovation in the 21st century.

Conclusion
This chapter addresses the question: Where does the idea of global value chains
come from? As we have seen, it is not a simple or a linear story. In part, it has
roots in debates over development theory stretching back to the early formulations
of center and periphery in the modernization and dependency paradigms of the
1960s and 1970s. It also reflects the controversy over the nature of globalization,
and whether it should be traced back to the origins of capitalism in the long
sixteenth century, as world-systems theorists claim, or whether we should focus
on the novel features of contemporary globalization in the postwar era, especially
the genesis of international production networks in the 1970s and 1980s and
their rapid acceleration in the 1990s and beyond. Ideas about the global economy
struggled to keep pace with the startling changes facilitated by the ever greater
connectedness of the world and the geopolitical realignments brought by the end
of the Cold War.
Another vantage point is how the GVC framework has been shaped by the
many knowledge and research communities traced in this chapter. While ideas
tend to flow easily once established, paradigm shifts are much harder to explain.
Based on my own experience, the evolution of the GVC approach has drawn upon
diverse groups of scholars with institutional support from numerous universities,
foundations and professional associations. The account provided in this chapter is
far from exhaustive; it identifies multiple strands in the story and it suggests how
my views were influenced by the knowledge networks and research communities
I participated in. Often these communities were purposive and oriented to a
collective goal, such as the Global Value Chains Initiative supported by the
Rockefeller Foundation or SSRC’s Continuing Working Group on Multinational
Corporations in Latin America. In other instances, the supporting institutions had
more specific and instrumental objectives, such as the UNCTC’s commissioned
study on the top 50 pharmaceutical MNCs or the ‘Capturing the Gains’ research
network funded by DFID.
A final point worth highlighting is the role played by temporary research
communities, such as edited volumes and special issues of academic journals to
promote innovative and interdisciplinary scholarship. Financial support from
foundations and universities is a tangible and much appreciated contribution
to research communities. Even more pervasive are the opportunities provided
by collective publications to bring together scholars from diverse disciplinary
backgrounds and settings to generate knowledge around a particular theme,
and frequently for audiences that have not been exposed to these ideas before.59
Together, all the influences outlined in this chapter contributed in significant
ways to the emergence and dissemination of the GVC framework.

Notes
1. Brazil, Russia, India, and China.
2. Rostow’s five basic stages were: traditional society; transitional society; take-off; drive
to technological maturity; and high mass consumption.
3. For a brief description of strategic interviews in GCC studies, see Gereffi (1995: 51–53)
and Bair and Gereffi (2001), Appendix A.
4. These quantitative studies generally related indicators of dependency (operationalized
as foreign direct investment, foreign aid, and/or foreign trade) to separate indicators of
national development or well-being (usually measured by the rate of economic growth per
capita and/or the degree of inequality within countries). The measures of dependency are
treated as the independent variables in regression models, and development or national
welfare is the dependent variable (e.g., Chase-Dunn, 1975; Rubinson, 1976; Bornschier
et al., 1978). For a critique of this approach, see Cardoso (1977).
5. For other evaluations and critical discussions of Wallerstein and world-systems theory,
see Brenner (1977), Skocpol (1977), Chirot and Hall (1982) and Ragin and Chirot
(1984).
6. UNCTAD’s World Investment Report, 2002 contained a table of the 100 largest
‘economies’ in the world in 2000, using a value-added measure for firms deemed
comparable to the gross domestic product (GDP) calculation used for countries. There
were 29 MNCs in the top 100 entries on the combined list of countries and nonfinancial
corporations. The largest MNC was ExxonMobil, whose $63 billion of value added in
2000 ranked 45th on the country-company list, similar to the GDP of Chile or Pakistan
(UNCTAD, 2002: 90–91).
7. My personal experience resonated with many of these topics. Prior to graduate school,
I spent a year traveling with one of my college roommates (John C. Rudolf) through
Mexico, Central America, Switzerland, Spain and Africa. The highlight of our trip
was hitchhiking across the Sahara Desert from Algiers to Niamey, Niger. From Niger,
I made my way to Lagos, Nigeria, where I taught high school, and John ventured to
Kenya. In the fall of 1971, we both entered graduate programs in sociology; I went to
Yale and John to Columbia University.
8. Of course, Cardoso also had a notable political career, serving as president of Brazil
from 1995 to 2003.
9. The SSRC working group was co-chaired by Lou Goodman and Al Stepan from Yale
and Peter Evans at Brown University, whose Ph.D. thesis at Harvard had analyzed
Brazil from a dependency perspective (Evans, 1979). Regular members of the SSRC
working group included: Douglas C. Bennett, Gary Gereffi, Rhys Jenkins, David
Martin, David Moore, Richard Newfarmer, Kenneth Sharpe, Phillip Shepherd, Peter
West, and Van Whiting, Jr.
10. The industries covered in the book included: automobiles, tires, cigarettes, food-
processing, pharmaceuticals, iron and steel, tractors, and electric power.
11. The special issue of International Organization on ‘Dependence and Dependency in the
Global System’ (Caporaso, 1978) was a breakthrough publication because it contained
a number of articles that addressed both the theoretical and methodological challenges

highlighted by this debate. Albert Hirschman (1978) offered a broader historical

reflection based on his 1945 book, National Power and the Structure of Foreign Trade,
which he portrays as an intellectual harbinger of dependency theory and some of its
shortcomings. For a more detailed review of variations in dependency theory and their
empirical implications, see Gereffi (1980, chapters 2 and 3).
12. In Wallerstein’s own words: ‘Over time the loci of economic activities keep changing…
Hence some areas “progress” and others “regress.” But the fact that particular states
change their position in the world-economy, from semiperiphery to core say, or vice versa,
does not in itself change the nature of the system. These shifts will be registered for
individual states as “development” or “regression.” The key factor to note is that within
a capitalist world-economy, all states cannot “develop” simultaneously by definition,
since the system functions by virtue of having unequal core and peripheral regions’
(Wallerstein, 1979: 60–61; emphasis in the original).
13. Activities in commodity chains are defined in an abstract and functional way, with
little attention to the nature and strategies of firms that carry out these activities:
‘All states enclose within their boundaries both core and peripheral activities. Some
(core states) enclose predominantly core activities and some (peripheral states) enclose
predominantly peripheral activities. As a consequence, the former tend to be the locus of
world accumulation and power and the latter the locus of exploitation and powerlessness.
The legitimacy and stability of this highly unequal and polarizing system are buttressed
by the existence of semiperipheral states defined as those that enclose within their
boundaries a more or less even mix of core-peripheral activities. Precisely because of
the relatively even mix of core-peripheral activities that fall within their boundaries,
semiperipheral states are assumed to have the power to resist peripheralization, although
not sufficient power to overcome it altogether and move into the core’ (Arrighi and
Drangel, 1986: 12).
14. I am indebted to Jennifer Bair for this insight.
15. In this chapter, transnational corporations and MNCs are treated as synonyms.
16. UNCTC was created in New York in 1974 amidst rampant criticism in the wake of
the 1972 revelations that the International Telephone and Telegraph Company (ITT)
plotted with the US Central Intelligence Agency in 1970 to block the presidential
election of Salvador Allende in Chile (Sampson, 1973). For nearly two decades, from
1975 to 1992, the UNCTC struggled to fashion a code of conduct to govern MNC
activities and it ultimately failed to achieve consensus (Moran, 2009: 92–93; Bair,
2015). UN Secretary General Boutros-Boutros Ghali dismantled UNCTC, and in
1993 shifted the United Nations’ work on MNCs to the UN Conference on Trade and
Development (UNCTAD) in Geneva. Renamed the Division of Investment, Technology
and Enterprise Development, the unit was assigned responsibility for producing what
would become UNCTAD’s flagship publication, The World Investment Report.
17. Every three months, I went to New York for meetings with UNCTC staff and
representatives of the Pharmaceutical Manufacturers Association and the International
Federation of Pharmaceutical Manufacturers and Associations, where I was grilled on
all aspects of my research methodology and provisional findings. Drafts of the report
were reviewed, critiqued and defended line by line.

18. Given the favorable reception of my initial report on pharmaceutical MNCs (UNCTC,
1979), the UNCTC commissioned a second report highlighting the role of developing
countries in the global pharmaceutical industry (UNCTC, 1981).
19. In the case of the pharmaceutical industry, UNCTC had broad concerns over
controversial MNC practices in terms of the high prices of medicines, tax avoidance
through transfer pricing, misleading drug advertising, and the impact of patents on
local innovation, while PAHO wanted to evaluate and strengthen an important social
initiative, essential drugs programs in Latin America.
20. In addition to the general governance typologies like producer-driven and buyer-driven
chains (Gereffi, 1994b) and the fivefold typology of GVC governance in Gereffi et al.
(2005), most detailed empirical studies of GVCs identify the leading MNCs involved in
governing the chains they are analyzing. Industry examples include: apparel (Bair and
Gereffi, 2001; Gereffi and Memodovic, 2003); automotive (Humphrey and Memodovic,
2003; Sturgeon et al., 2009); electronics (Sturgeon, 2002; Sturgeon and Kawakami,
2011); offshore services (Fernandez-Stark et al., 2011); and cocoa (Fold, 2002).
21. There is a voluminous literature on this topic. For a few examples, see Gereffi (1999),
Schmitz (2004) and Staritz et al. (2011).
22. In contrast to the abstract treatment of core and peripheral activities in the world-
systems discussion of commodity chains (e.g., Arrighi and Drangel, 1986), ‘value
chain mapping’ involves a detailed analysis of specific activities carried out by MNCs
in different geographic locations and across diverse GVC segments. For examples, see
Gereffi and Fernandez-Stark (2016) and Frederick (forthcoming).
23. An assessment of four types of transnational economic linkages – foreign aid, foreign
trade, foreign direct investment and foreign loans—shows that historically FDI and
foreign loans were most important in Latin American newly industrializing economies,
while export trade and foreign aid have been the main forms of East Asian linkage
to the international economy (Gereffi, 1989: 519–522). Dependency is a particularly
thorny issue in Latin America in part because FDI tends to create more friction than
other types of foreign capital in Third World economies.
24. This was also known as ‘heavy and chemical industrialization’ in both cases, following
the Japanese path.
25. In the ‘commodity export’ phase, the output was usually unrefined or semi-processed
raw materials. In ‘primary’ ISI and EOI, firms were making basic consumer goods (e.g.,
textiles, clothing, footwear, food) for the domestic and export markets, respectively. In
‘secondary’ ISI and EOI, there was a focus on consumer durables (e.g., automobiles),
intermediate goods (e.g., petrochemicals and steel), and capital goods (e.g., heavy
machinery).
26. Wyman received his Ph.D. in history from Harvard University and specialized in
Mexican economic history and US policies toward Mexico. Don was associate director
of the Center for US-Mexican Studies since 1981, where he initiated a campus-wide
research program on the Pacific Basin. He became associate dean for the newly created
Graduate School of International Relations and Pacific Studies at UCSD in 1986, whose
founding director was Peter Gourevitch. Sadly, Don died prematurely in March 1987

following an extended illness before the collaborative project that we planned came to
fruition.
27. For a listing of the PEWS annual conference volumes, see http://asapews.org/annuals.
html.
28. In the GCC lexicon, the term ‘global’ does not necessarily refer to the geographic
scope of commodity chains since many commodity chains are regional and vary in
their geography over time. Rather, it builds on the distinction introduced by Dicken
(1992) between ‘internationalization’ and ‘globalization’: the former refers simply to the
spread of economic activities across international boundaries, while the latter requires
significant functional integration between these geographically dispersed activities
(Gereffi, 1994b: 96).
29. This was the 13th annual PEWS conference, organized at the University of Illinois in
Champagne-Urbana in April 1989.
30. Miguel’s elder brother, Roberto Patricio Korzeniewicz, was in the Ph.D. program in
sociology at SUNY/Binghamton at the time, and he helped spark Miguel’s interest
in world-systems theory. Since 1993, Roberto has been a member of the Sociology
Department at the University of Maryland.
31. During the late 1960s and early 1970s, Japan, Spain and Italy were the main exporters
of shoes to the US market, which was the largest in the world. In 1971, they accounted
for two-thirds of the $760 million in US footwear imports. By the late 1980s, these
three economies were displaced by Taiwan, South Korea and Brazil, which represented
two-thirds of American shoe imports totaling $7.6 billion in 1987, a tenfold increase in
the size of the US import market since 1971 (Gereffi and Korzeniewicz, 1990: 51, 53).
32. East Asian footwear exports in the mid-1960s originated in the decision of Mitsubishi
(the leading Japanese trading company dealing in footwear) to relocate plastic
sandals production for the US market from Kobe, Japan to Taiwan, and to move the
manufacture of rubber shoes to South Korea, given Korea’s prior experience in making
rubber shoes during the Japanese occupation. The Brazilian footwear export industry
took advantage of growing US demand for leather shoes in the early 1970s and the
inability of Italy and Spain to fully meet that demand (Gereffi and Korzeniewicz,
1990: 59–60).
33. Small export traders were particularly important for the Taiwanese and Brazilian
footwear industries. These trading agents played two main roles: (1) they parceled big
orders from large overseas buyers among many suppliers, therefore allowing exporters
to remain relatively small; and (2) they helped local producers adapt to fashion and
marketing changes in core footwear markets.
34. At the same PEWS conference where Miguel and I presented our paper on the footwear
commodity chain, Arrighi (1990) presented a paper on ‘The Developmentalist Illusion’
that argued against the ‘developmentalist turn’ in commodity chain research.
35. Miguel received his Ph.D. in sociology from Duke in 1990, and joined the Sociology
Department at the University of New Mexico. Shortly after the Duke commodity chains
conference, Miguel was involved in a severe automobile accident in August 1992 that
left him a quadriplegic. After battling his injuries for many years and continuing to
contribute to the GCC field, Miguel passed away in August 2002.

36. The only exceptions were the studies of the shipbuilding (Özveren, 1994) and grain
flour (Pelizzon, 1994) commodity chains, which covered the period 1590–1790. The
other industries in the volume included: apparel, athletic footwear, automobiles, fresh
fruit and vegetables, business services, and cocaine.
37. For a critique of Commodity Chains and Global Capitalism on these grounds, see Dunaway
and Clelland (1995); and for a rejoinder, Korzeniewicz et al. (1996). An effort to link
the GCC and world income inequalities literatures is provided by Brewer (2011), who
sees an ‘upgrading’ paradox in the discontinuity between the ‘sub-systemic’ unit of
commodity chains and the stable patterns of income inequality at the world-systemic
level. This purportedly creates an ‘adding up’ problem because GVC upgrading at
the national level cannot redress enduring global income inequality. However, GCC/
GVC scholars do not claim upgrading could eliminate global inequalities. Their
meso-level approach analyzes the linkages between GVC governance and upgrading
(or downgrading) at the sectoral level, and in this respect departs from the exclusive
macro focus of world-systems theory.
38. For a perceptive review of the world-system, GCC and GVC approaches to commodity
chains, see Bair (2009: 7–14).
39. IDS was established in 1966 as Britain’s first national institute of development studies.
The workshop was organized by senior IDS researchers, including Raphael Kaplinsky,
Hubert Schmitz and John Humphrey, among others. It was held on September 15–17,
1999 with around 60–70 participants. For more details on the IDS meeting, see http://
www.ids.ac.uk/ids/global/conf/globwks.html#sum.
40. Among developed economies, Italian ‘industrial districts’ were a cornerstone of Piore
and Sabel’s The Second Industrial Divide (1984), a pioneering work that translated the
experience of small firms in craft-based regions like the Third Italy into a new ‘flexible
specialization’ model that represented an alternative to the Fordist system of mass
production geared to making identical, inexpensive goods.
41. IDS researchers edited t wo special issues of World Development, a leading
multidisciplinary journal, which highlighted the key themes related to industrial clusters
and globalization, and indeed laid the groundwork for subsequent collaboration with
GVC scholars (see Humphrey, 1995; Nadvi and Schmitz, 1999). Similar topics were
addressed in the edited volume by Schmitz (2004).
42. This includes the work of GCC researchers discussed previously, such as Gereffi and
Korzeniewicz (1994). In addition, the Alfred P. Sloan Foundation in New York launched
its Industry Studies program in 1990 to foster a closer interaction between academia
and industry so that researchers could learn first-hand about the markets, firms and
institutions in the industries they sought to examine. The Sloan program grew to include
26 centers at US universities. For several years, the Sloan Foundation also established
a Globalization Workshop for Junior Scholars, with an emphasis on the globalization
of industries and its impact on employment. The first Sloan Junior Scholars workshop
was held at Duke University on April 24–25, 1998 and it was co-organized by Richard
Florida, Gary Gereffi and Martin Kenney. Participating scholars were: Yuko Aoyama,
Jennifer Bair, Edmund Egan, Eun Mie Lim, Greg Linden, Teresa Lynch, Layna Mosley,
Seán O’Riain, Mei-Lin Pan, Balaji Pathasarathy, John Richards, Jennifer Spencer, and
Tim Sturgeon.

43. This included scholars affiliated with the Berkeley Roundtable on the International
Economy (BRIE), which looked at ‘international production networks’ (e.g., Ernst and
Ravenhill, 1999; Borrus et al., 2000; Sturgeon, 2002).
44. The format of the three-day meeting was results oriented. The workshop began with
presentations by leaders from government, business, international organizations, and
civil society. On the second and third days, researchers and funders discussed how the
policy challenges and knowledge gaps laid out on the first day might translate into an
agenda that could integrate both the micro and macro research themes, and maintain
a close dialogue with policy makers.
45. Rockefeller later provided supplemental funding for 2006–2008.
46. The first GVC workshop in Bellagio took place on Sept. 25-Oct. 1, 2000. The
participants included: Catherine Dolan, Afonso Fleury, Gary Gereffi, Peter Gibbon,
John Humphrey, Raphael Kaplinsky, Ji-Ren Lee, Dorothy McCormick, Katherine
McFate (Rockefeller Foundation), Mike Morris, Florence Palpacuer, Hubert Schmitz,
Timothy J. Sturgeon, and Meenu Tewari (institutional affiliations are listed in Gereffi
and Kaplinsky, 2001: 8).
47. Although Michael Porter of Harvard Business School developed a value-chain
framework that he applied at the level of individual firms (Porter, 1985) and as one of
the bases for determining the competitive advantage of nations (Porter 1990), Porter
did not use it to highlight the changing organizational structure of global industries or
to address the impact of GVCs on the upgrading dynamics of developing economies
as GVC researchers did.
48. There was also discussion of whether to replace the chain metaphor with less linear terms
like networks or webs. Ultimately, the metaphor was retained because it embodied the
familiar input-output structure of a production network where value is added as goods
are transformed along a supply chain.
49. All of these topics are covered in the forthcoming Handbook on Global Value Chains,
co-edited by Gary Gereffi, Stefano Ponte and Gale Raj-Reichert, which provides an
excellent review of progress made over the past two decades, especially in core areas
like GVC governance (Ponte et al., forthcoming), economic upgrading (Gereffi,
forthcoming), and measurement (Sturgeon, forthcoming).
50. See Sturgeon (2009) for a more extensive analysis of the GCC and GVC approaches
to governance. As noted in Bair (2009: 13–14, 26–27), the shift from GCC to GVC
governance structures implies a conceptual reorientation from ‘drivenness’ to ‘coordination’
that remains relevant for researchers, in particular for those who want to retain the power
dimension of the GCC approach (e.g., Appelbaum and Gereffi, 1994).
51. While Rockefeller sponsored most of the events, a GVC Initiative workshop held at
Rockport, Massachusetts on ‘Globalization, Employment and Economic Development’
in June 2004 was supported by the Alfred P. Sloan Foundation – see http://www.soc.
duke.edu/sloan_2004/.
52. About 1,050 publications and 780 researchers appear on the Global Value Chains
Initiative website (https://globalvaluechains.org/publications) as of July 27, 2018. The
website is hosted and maintained by the Global Value Chains Center at Duke University
(see https://gvcc.duke.edu/).

53. The Google Scholar citation counts (as of October 6, 2018) are: Chapter 2 – 3,300
citations; Chapter 3 – 4,211 citations; and Chapter 4 – 6,220 citations (available at
https://scholar.google.com/citations?hl=en&user=2Kd61F0AAAAJ&view_op=list_
works).
54. There are various discussions of the relationship between the GCC and GVC governance
typologies presented in Chapters 2 and 4 (see Gibbon et al., 2008; Bair, 2009: 19–28;
Sturgeon, 2009). A particularly instructive formulation is the distinction between three
approaches to GVC governance: governance as ‘driving,’ ‘linking’ and ‘normalizing’
(Ponte and Sturgeon, 2014). The producer-driven versus buyer-driven formation
in Chapter 2 is ‘governance as driving’, while the fivefold typology in Chapter 4 is
governance as ‘linking’ or ‘coordinating’.
55. More generally, the new economic sociology popularized by a number of US scholars
pays very little attention to globalization (Hamilton and Gereffi, 2009: 140–143).
56. This was a central conclusion of Schmitz (1999), whose research on the Sinos Valley
footwear cluster in Brazil highlighted the limitations of focusing solely on the local
level and ignoring the behavior of foreign buyers.
57. The Capturing the Gains research program (2009–2012) focused on economic and
social upgrading in global production networks and it was funded primarily by the
UK’s Department for International Development (DFID) and the Swiss Agency for
Development and Cooperation. It was administered by Stephanie Barrientos and housed
at the Brooks World Poverty Institute at the University of Manchester, UK. The research
targeted the apparel, agro-food, mobile telecommunication, and tourism sectors with a
primary geographic focus on Sub-Saharan Africa. It assembled an international network
of experts from North and South to research and promote strategies for fairer trade
and decent work, and it culminated in a global summit in Cape Town, South Africa
on Dec. 3–5, 2012. For more information, see http://www.capturingthegains.org.
58. For a more detailed discussion of this topic, see Mayer and Gereffi (forthcoming).
59. There are many examples of this in relation to the GCC and GVC fields, including
special issues of International Organization, Journal of International Economics, Journal of
Business Ethics, and International Labour Review mentioned above. See also the article
on GVCs commissioned by the Journal of Supply Chain Management for its Discussion
Forum on Global Supply Chains (Gereffi and Lee, 2012).

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Part I
t

Foundations of the Global Value

Chain Framework

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The Organization of Buyer-Driven Global Commodity Chains 43

2
t
The Organization of Buyer-Driven
Global Commodity Chains
How US Retailers Shape Overseas Production Networks

Global industrialization is the result of an integrated system of production

and trade. Open international trade has encouraged nations to specialize in
different branches of manufacturing and even in different stages of production
within a specific industry. This process, fueled by the explosion of new products
and new technologies since World War II, has led to the emergence of a
global manufacturing system in which production capacity is dispersed to an
unprecedented number of developing as well as industrialized countries (Harris,
1987; Gereffi, 1989b). The revolution in transportation and communications
technology has permitted manufacturers and retailers alike to establish
international production and trade networks that cover vast geographical
distances. While considerable attention has been given to the involvement of
industrial capital in international contracting, the key role played by commercial
capital (i.e., large retailers and brand-named companies that buy but don’t make
the goods they sell) in the expansion of manufactured exports from developing
countries has been relatively ignored.
This chapter will show how these ‘big buyers’ have shaped the production
networks established in the world’s most dynamic exporting countries, especially
the newly industrialized countries (NICs) of East Asia. The argument proceeds
in several stages. First, a distinction is made between producer-driven and buyer-
driven commodity chains, which represent alternative modes of organizing
international industries. These commodity chains, though primarily controlled by
private economic agents, are also influenced by state policies in both the producing
(exporting) and consuming (importing) countries.
Second, the main organizational features of buyer-driven commodity chains
are identified, using the apparel industry as a case study. The apparel commodity
chain contains two very different segments. The companies that make and sell
standardized clothing have production patterns and sourcing strategies that
contrast with firms in the fashion segment of the industry, which has been the

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44 Global Value Chains and Development

most actively committed to global sourcing. Recent changes within the retail sector
of the United States are analyzed in this chapter to identify the emergence of new
types of big buyers and to show why they have distinct strategies of global sourcing.
Third, the locational patterns of global sourcing in apparel are charted, with
an emphasis on the production frontiers favored by different kinds of US buyers.
Several of the primary mechanisms used by big buyers to source products from
overseas are outlined in order to demonstrate how transnational production
systems are sustained and altered by American retailers and branded apparel
companies. Data sources include in-depth interviews with managers of overseas
buying offices, trading companies, manufacturers, and retailers in East Asia and
the United States, plus relevant secondary materials at the firm, industry, and
country levels.1

Producer-Driven versus Buyer-Driven Commodity Chains

Global commodity chains (GCCs) are rooted in production systems that give
rise to particular patterns of coordinated trade. A ‘production system’ links the
economic activities of firms to technological and organizational networks that
permit companies to develop, manufacture, and distribute specific commodities.
In the transnational production systems that characterize global capitalism,
economic activity is not only international in scope; it also is global in its
organization (Ross and Trachte, 1990; Dicken, 1992). While ‘internationalization’
refers simply to the geographical spread of economic activities across national
boundaries, ‘globalization’ implies a degree of functional integration between
these internationally dispersed activities. The requisite administrative coordination
is carried out by diverse corporate actors in centralized as well as decentralized
economic structures.
Large firms in globalized production systems simultaneously participate in
many different countries, not in an isolated or segmented fashion but as part
of their global production and distribution strategies. The GCC perspective
highlights the need to look not only at the geographical spread of transnational
production arrangements, but also at their organizational scope (i.e., the linkages
between various economic agents—raw material suppliers, factories, traders, and
retailers) in order to understand their sources of stability and change (see Gereffi
and Korzeniewicz, 1990).
Global commodity chains have three main dimensions: (1) an input-output
structure (i.e., a set of products and services linked together in a sequence of
value-adding economic activities); (2) a territoriality (i.e., spatial dispersion or
concentration of production and distribution networks, comprised of enterprises
of different sizes and types); and (3) a governance structure (i.e., authority and

power relationships that determine how financial, material, and human resources
are allocated and flow within a chain).
The governance structure of GCCs, which is essential to the coordination of
transnational production systems, has received relatively little attention in the
literature (an exception is Storper and Harrison, 1991). Two distinct types of
governance structures for GCCs have emerged in the past two decades, which for
the sake of simplicity, are called ‘producer-driven’ and ‘buyer-driven’ commodity
chains (see Figure 2.1).

Figure 2.1 The Organization of Producer-Driven and Buyer-Driven

Global Commodity Chains

*These design-oriented, national brand companies, such as Nike, Reebok, Liz Claiborne, and
Mattel Toys, typically own no factories. Some, like The Gap and The Limited, have their own
retail outlets that only sell private-label products.
Source: Author.
Note: Solid arrows are primary relationships; dashed arrows are secondary relationships.

Producer-driven commodity chains refer to those industries in which transnational

corporations (TNCs) or other large integrated industrial enterprises play the
central role in controlling the production system (including its backward and
forward linkages). This is most characteristic of capital- and technology-intensive
industries like automobiles, computers, aircraft, and electrical machinery. The
geographical spread of these industries is transnational, but the number of countries
in the commodity chain and their levels of development are varied. International
subcontracting of components is common, especially for the most labor-intensive
production processes, as are strategic alliances between international rivals. What
distinguishes ‘producer-driven’ production systems is the control exercised by the
administrative headquarters of the TNCs.
Hill (1989) analyzes a producer-driven commodity chain in his comparative
study of how Japanese and US car companies organize manufacturing in
multilayered production systems that involve thousands of firms (including
parents, subsidiaries, and subcontractors). Doner (1991) extended this framework
to highlight the complex forces that drive Japanese automakers to create regional
production schemes for the supply of auto parts in a half-dozen nations in East
and Southeast Asia. Henderson (1989), in his study of the internationalization
of the US semiconductor industry, also supports the notion that producer-driven
commodity chains have established an East Asian division of labor.
Buyer-driven commodity chains refer to those industries in which large retailers,
brand-named merchandisers, and trading companies play the pivotal role in
setting up decentralized production networks in a variety of exporting countries,
typically located in the Third World. This pattern of trade-led industrialization has
become common in labor-intensive, consumer-goods industries such as garments,
footwear, toys, consumer electronics, housewares, and a wide range of hand-crafted
items (e.g., furniture, ornaments). International contract manufacturing again is
prevalent, but production is generally carried out by independent Third World
factories that make finished goods (rather than components or parts) under original
equipment manufacturer (OEM) arrangements. The specifications are supplied
by the buyers and branded companies that design the goods.
One of the main characteristics of firms that fit the buyer-driven model,
including athletic footwear companies like Nike, Reebok, and L. A. Gear
(Donaghu and Barff, 1990) and fashion-oriented clothing companies like The
Limited, The Gap, and Liz Claiborne (Lardner, 1988), is that frequently these
businesses do not own any production facilities. They are not ‘manufacturers’
because they have no factories.2 Rather, these companies are ‘merchandisers’ that
design and/or market but do not make the branded products they sell. These
firms rely on complex tiered networks of contractors that perform almost all their
specialized tasks. Branded merchandisers may farm out part or all of their product

development activities, manufacturing, packaging, shipping, and even accounts

receivables to different agents around the world.
The main job of the core company in buyer-driven commodity chains is to
manage these production and trade networks and make sure all the pieces of the
business come together as an integrated whole. Profits in buyer-driven chains thus
derive not from scale economies and technological advances as in producer-driven
chains, but rather from unique combinations of high-value research, design, sales,
marketing, and financial services that allow the buyers and branded merchandisers
to act as strategic brokers in linking overseas factories and traders with evolving
product niches in their main consumer markets (see Rabach and Kim, 1994; also
Reich, 1991).
The distinction between producer-driven and buyer-driven commodity chains
bears on the debate concerning mass production and f lexible specialization
systems of industrial organization (Piore and Sabel, 1984). Mass production is
clearly a producer-driven model (in our terms), while flexible specialization has
been spawned, in part, by the growing importance of segmented demand and
more discriminating buyers in developed country markets. One of the main
differences between the GCC and flexible specialization perspectives is that
Piore and Sabel deal primarily with the organization of production in domestic
economies and local industrial districts, while the notion of producer-driven and
buyer-driven commodity chains focuses on the organizational properties of global
industries. Furthermore, a buyer-driven commodity chain approach would explain
the emergence of flexibly specialized forms of production in terms of changes
in the structure of retailing, which in turn reflect demographic shifts and new
organizational imperatives. Finally, while some of the early discussions of flexible
specialization implied that it is a ‘superior’ manufacturing system that might
eventually displace or subordinate mass production, buyer-driven and supplier-
driven commodity chains are viewed as contrasting (but not mutually exclusive)
poles in a spectrum of industrial organization possibilities.
Our analysis of buyer-driven commodity chains will focus on the main
companies that coordinate these economic networks: large US retailers. Whereas
in producer-driven forms of capitalist industrialization, production patterns shape
the character of demand, in buyer-driven commodity chains the organization
of consumption is a major determinant of where and how global manufacturing
takes place. However, the economic agents of supply and demand do not operate
in a political vacuum. They, in turn, respond to political pressures from the state.

The Role of State Policies in Global Commodity Chains

National development strategies play an important role in forging new production
relationships in the global manufacturing system (Gereffi and Wyman, 1990).

Conventional economic wisdom claims that Third World nations have followed
one of two alternative development strategies: (1) the relatively large, resource-rich
economies in Latin America (e.g., Brazil, Mexico, and Argentina), South Asia
(e.g., India and Bangladesh), and Eastern Europe have pursued import-substituting
industrialization (ISI) in which industrial production was geared to the needs
of sizable domestic markets; and (2) the smaller, resource-poor nations like the
East Asian NICs adopted the export-oriented industrialization (EOI) approach
that depends on global markets to stimulate the rapid growth of manufactured
exports. Although the historical analysis of these transitions tends to have been
oversimplified, today it is abundantly clear that most economies have opted for
an expansion of manufactured or non-traditional exports to earn needed foreign
exchange and raise local standards of living. The East Asian NICs best exemplify
the gains from this path of development.
An important affinity exists between the ISI and EOI strategies of national
development and the structure of commodity chains. Import substitution occurs
in the same kinds of capital- and technology-intensive industries represented
by producer-driven commodity chains (e.g., steel, aluminum, petrochemicals,
machinery, automobiles, and computers). In addition, the main economic
agents in both cases are TNCs and state-owned enterprises. Export-oriented
industrialization, on the other hand, is channeled through buyer-driven commodity
chains where production in labor-intensive industries is concentrated in small
to medium-sized, private domestic firms located mainly in the Third World.
Historically, the export-oriented development strategy of the East Asian NICs and
buyer-driven commodity chains emerged together in the early 1970s, suggesting a
close connection between the success of EOI and the development of new forms
of organizational integration in buyer-driven industrial networks.
State policy plays a major role in GCCs. In EOI, governments are primarily
facilitators; they are condition-creating and tend not to become directly involved
in production. Governments try to generate the infrastructural support needed
to make export-oriented industries work: modern transportation facilities and
communications networks; bonded areas like export-processing zones (including
China’s special economic zones); subsidies for raw materials; customs drawbacks for
imported inputs that are used in export production; adaptive financial institutions
and easy credit (e.g., to facilitate the obtaining of letters of credit by small firms);
etc. In ISI, on the other hand, governments play a much more interventionist
role. They use the full array of industrial policy instruments (such as local content
requirements, joint ventures with domestic partners, and export-promotion
schemes), while the state often gets involved in production activities, especially
in upstream industries.
In short, the role of the state at the point of production tends to be facilitative
in buyer-driven commodity chains and more interventionist in producer-driven

chains. However, there is an important caveat for buyer-driven chains. Since

these are export-oriented industries, state policies in the consuming or importing
countries (like the United States) are also highly significant. This is where the
impact of protectionist measures such as quotas, tariffs, and voluntary export
restraints comes in to shape the location of production in buyer-driven chains.
If one compares the global sourcing of apparel (where quotas are prevalent)
and footwear (no quotas), 3 one sees that far more countries are involved in the
production and export networks for clothes than for shoes. This is basically a quota
effect, whereby the array of Third World apparel export bases continually is being
expanded to bypass the import ceilings mandated by quotas against previously
successful apparel exporters. Therefore, the globalization of export production has
been fostered by two distinct sets of state policies: Third World efforts to promote
EOI, coupled with protectionism in developed country markets.

The Apparel Commodity Chain

The textile and apparel industries are the first stage in the industrialization
process of most countries. This fact, coupled with the prevalence of developed
country protectionist policies in this sector, has led to the unparalleled diversity
of garment exporters in the Third World. The apparel industry thus is an ideal
case for exploring the organization and dynamics of buyer-driven commodity
chains. The apparel commodity chain is bifurcated along two main dimensions: (1)
textile versus garment manufacturers and (2) standardized versus fashion-oriented
segments in the industry (see Taplin, 1994, for a diagram incorporating both of
these dimensions). A complete analysis must also take account of how backward
and forward linkages are utilized in the apparel commodity chain to protect the
profitability of leading firms.

Textile versus Garment Producers

Textile manufacturers and garment producers inhabit different economic worlds.
Textile companies are frequently large, capital-intensive firms with integrated
spinning and weaving facilities. The major textile manufacturers ‘finish’ woven
fabrics into a variety of end products, including sheets, towels, and pillowcases.
While the US fiber industry is composed of TNCs that make synthetic as well
as natural fibers, fabric producers are more diverse in size, including numerous
small businesses along with industrial giants like Burlington Mills.
The apparel industry, on the other hand, is the most fragmented part of the
textile complex, characterized by many small, labor-intensive factories. Two
primary determinants explain shifts in the geographical location and organization

of manufacturing in the apparel sector: the search for low-wage labor and the
pursuit of organizational flexibility. Although apparel manufacturing depends
on low wages to remain competitive, this fact alone cannot account for dynamic
trends in international competitiveness. Cheap labor is what Michael Porter calls
a ‘lower-order’ competitive advantage, since it is an inherently unstable basis on
which to build a global strategy. More significant factors for the international
competitiveness of firms are the ‘higher-order’ advantages such as proprietary
technology, product differentiation, brand reputation, customer relationships, and
constant industrial upgrading (Porter, 1990: 49–51). These assets allow enterprises
to exercise a greater degree of organizational flexibility and thus to create as well
as respond to new opportunities in the global economy.

Standardized versus Fashion Segments

A second major divide in the apparel commodity chain is between the producers of
standardized and fashion-oriented garments. In the United States, the majority of
the 35,000 firms in the textile-apparel complex are small clothing manufacturers
(Mody and Wheeler, 1987). For standardized apparel (such as jeans, men’s
underwear, brassieres, and fleece outerwear), large firms using dedicated or single-
purpose machines have emerged. Companies that make standardized clothing
include the giants of the American apparel industry, like Levi Strauss and Sara
Lee (both $4 billion companies), VF Corporation (a $2.6 billion company with
popular brands such as Lee and Wrangler jeans and Jantzen sportswear), and
Fruit of the Loom (a $1.6 billion firm that is the largest domestic producer of
underwear for the US market). These big firms tend to be closely linked with US
textile suppliers, and they manufacture many of their clothes within the United
States or they ship US-made parts offshore for sewing.4
The fashion-oriented segment of the garment industry encompasses those
products that change according to retail buying seasons. Many of today’s leading
apparel firms like Liz Claiborne have six or more different buying seasons every
year (Lardner, 1988). These companies confront far greater demands for variation
in styling and materials, and they tend to utilize numerous overseas factories
because of their need for low wages and organizational flexibility in this labor-
intensive and volatile segment of the apparel industry.
It is the fashion-oriented segment of the apparel commodity chain that is
most actively involved in global sourcing. In 1990, imports accounted for 51% of
US consumer expenditures on apparel. Of the $75 billion spent on US apparel
imports (in a total US market of $148 billion), $25 billion corresponded to the
foreign-port value of imported clothing, $14 billion to landing, distribution, and
other costs, and $36 billion to the retailers’ average markup of 48% on imported

goods (AAMA, 1991: 3). The consumer’s retail price thus amounts to three times
the overseas factory cost for imported clothing. Meanwhile, the wholesale value
of domestic apparel production totaling $73 billion in 1990 was $39 billion, with
another $34 billion going to the retailers’ net markup of 46%. In other words, the
global sourcing of apparel by major retailers and brand-named companies is big
business in the United States and it is growing bigger every year. This is why the
organization of global sourcing merits close attention.

The Impact of Backward and Forward Linkages

The severe cost pressures endemic in the labor-intensive segments of the garment
industry highlight the interdependence between different economic agents in
buyer-driven commodity chains. Throughout the 1980s, US garment companies
were demanding lower prices and faster delivery from their overseas (principally
Asian) suppliers, as well as their largely immigrant core and secondary contractors
in New York City and Los Angeles, who in turn, squeezed their workers for longer
hours and lower wages (Rothstein, 1989). But the intensity of these pressures has
varied over time. Why do the garment manufacturers pressure their contractors
more at some times than at others? In a related vein, how can we explain differences
in the level and location of profits in this industry over time?
The answers to these questions lie in an analysis of the apparel industry’s
backward and forward linkages. Garment manufacturers are being squeezed from
both ends of the apparel commodity chain. Textile firms in the United States
have become larger and more concentrated as they turned to highly automated
production processes. This allowed them to place greater demands on the domestic
garment manufacturers for large orders, high prices for inputs, and favorable
payment schedules (Waldinger, 1986). One response has been for US garment
companies to find more competitive overseas suppliers of textiles and fabrics. Since
this option is constrained by quotas that limit the extent of US textile imports,
many apparel makers had little choice but to accede to the demands of their main
domestic textile suppliers.
At the other end of the apparel commodity chain, US retailers went through a
merger movement of their own (Bluestone et al., 1981). A number of prominent
retail companies have gone into bankruptcy, been bought out, or have faced
economic difficulties.5 Those ‘big buyers’ that remain are becoming larger, more
tightly integrated, organizationally and technologically, and frequently more
specialized. This has put increasing pressure on merchandise manufacturers to
lower their prices and improve their performance.6 The result is that garment
firms again are squeezed, with negative consequences (e.g., lower purchase prices,
increased uncertainty) for their domestic and overseas contractors and the affiliated
workers who actually make the clothes.

These illustrations show the importance of considering the full array of

backward and forward linkages in the production process, as the GCC framework
does, rather than limiting our notion of transnational production systems to
manufacturing alone. Industrial organization economics tells us that profitability
is greatest in the more concentrated segments of an industry characterized by
high barriers to the entry of new firms. Producer-driven commodity chains are
capital- and technology-intensive. Thus manufacturers making advanced products
like aircraft, automobiles, and computer systems are the key economic agents in
these chains not only in terms of their earnings, but also in their ability to exert
control over backward linkages with raw material and component suppliers, as
well as forward linkages into retailing.
Buyer-driven commodity chains, on the other hand, which characterize many
of today’s light consumer goods industries like garments, footwear, and toys, tend
to be labor-intensive at the manufacturing stage. This leads to very competitive
and globally decentralized factory systems. However, these same industries are also
design- and marketing-intensive, which means that there are high barriers to entry
at the level of brand-named companies and retailers that invest considerable sums
in product development, advertising, and computerized store networks to create
and sell these products. Therefore, whereas producer-driven commodity chains
are controlled by core firms at the point of production, control over buyer-driven
commodity chains is exercised at the point of consumption.
In summary, our GCC approach is historical since the relative strength of
different economic agents in the commodity chain (raw material and component
suppliers, manufacturers, traders, and retailers) changes over time; it is also
comparative because the structural arrangements of commodity chains vary
across industrial sectors as well as geographical areas. Finally, contemporary
GCCs have two very different kinds of governance structures: one imposed by
core manufacturers in producer-driven commodity chains, and the other provided
by major retailers and brand-named companies in the buyer-driven production
networks. These have distinct implications for national development strategies
and the consequences of different modes of incorporation into the world economy.

The Retail Revolution in the United States

In order to gain a better understanding of the dynamics of the governance structure
in buyer-driven commodity chains, we need to take a closer look at the US retail
sector, whose big buyers have fueled much of the growth in consumer goods exports
in the world economy. Changes in America’s consumption patterns are one of the
main factors that have given rise to flexible specialization in global manufacturing.

For the past two decades, a ‘retail revolution’ has been under way in the United
States that is changing the face of the American marketplace. A comprehensive
study of US department stores showed that the structure of the industry became
more oligopolistic during the 1960s and 1970s as giant department stores
swallowed up many once-prominent independent retailers (Bluestone et al., 1981).
The growth of large firms at the expense of small retail outlets was encouraged by
several forces, including economies of scale, the advanced technology7 and mass
advertising available to retail giants, government regulation, and the financial
backing of large corporate parent firms. Ironically, despite the department store
industry’s transformation into an oligopoly, the price competition between giant
retailers became more intense, not less (Bluestone et al., 1981: 2).8
In the 1980s, the department store in turn came under siege. In their heyday,
department stores were quintessential middle-class American institutions.9 These
retailers offered a broad selection of general merchandise for ‘family shopping’,
with ‘the mother as “generalist” buying for other family members’ (Legomsky,
1986: R62).10 While this format typically met the needs of the suburban married
couple with two children and one income, by 1990 less than 10% of American
households fit that description. Today the generalist strategy no longer works. The
one shopper of yesterday has become many different shoppers, with each member
of the family constituting a separate buying unit (Sack, 1989).
The breakup of the American mass market into distinct, if overlapping, retail
constituencies has created a competitive squeeze on the traditional department
stores and mass merchandisers,11 who are caught between a wide variety of specialty
stores, on the one hand, and large-volume discount chains, on the other.12 The
former, who tailor themselves to the upscale shopper, offer customers an engaging
ambience, strong fashion statements, and good service;13 the latter, who aim
for the lower-income buyer, emphasize low prices, convenience, and no-frills
merchandising.
Tables 2.1 and 2.2 show the varied performance levels of some of the major
US retail chains in the 1980s and 1990s. In 1990, both Wal-Mart and Kmart
surpassed Sears as the largest US retailers in terms of sales (see Table 2.1). Wal-
Mart, Kmart, and Target (a division of Dayton Hudson) now control over 70%
of the booming discount-store business in the United States. Wal-Mart and the
leading specialty stores also have far better earnings than the department stores and
mass merchandise chains. The 10-year compounded growth rates in net income
for Wal-Mart (34.5%) and the two leading specialty retailers in apparel, The Gap
(34.6%) and The Limited (33.5%),14 are the highest of any of the stores listed. In
addition, the specialty stores tend to have the top rate of return on revenues of
any US retailers between 1987 and 1991 (see Table 2.2).

Table 2.1 Sales of Leading US Retailers, 1987–1992

1987 1988 1989 1990 1991 1992

Discounters
Wal-Mart 16.0 20.6 25.8 32.6 43.9 55.5
Kmart 25.6 27.3 29.5 32.1 34.6 37.7
Mass Merchandisers
Sears 28.1 30.3 31.6 32.0 3L4 32.0
Dayton Hudson 10.7 12.2 l3.6 14.7 16.1 17.9
Woolworth 7.1 8.1 8.8 9.8 9.9 10.0
Department Stores
J. C. Penney 16.4 15.9 17.1 17.4 17.3 19.1
May Department Stores 10.3 8.4 9.4 10.1 10.6 11.2
Specialty Stores
Melville 5.9 6.8 7.6 8.7 9.9 10.4
The Limited 3.5 4.1 4.6 5.3 6.1 6.9
The Gap 1.1 1.3 1.6 1.9 2.5 3.0
Toys ‘R’ Us 3.3 4.0 4.8 5.5 6.1 7.2
Source: Standard and Poor’s Industry Surveys, ‘Retailing: Current Analysis’, April 20, 1989, R79;
May 2, 1991, R80; May 13, 1993, p. R80; and company annual reports.

Wal-Mart appears to be in a much stronger position for future growth than

its leading challenger, Kmart. In 1990, Wal-Mart cleared $2 billion before taxes
compared to Kmart’s $1 billion on basically the same volume of sales (Saporito,
1991: 54). The performance of companies like Kmart,15 J. C. Penney, and
Woolworth have been hindered by their major corporate restructurings over the
past several years. Although the specialty stores are considerably smaller than
other types of US retailers, the former have the highest ratio of sales per retail
square footage of any US retail establishments and they have a reputation for more
fashionable and higher quality merchandise.
Unlike the earlier ‘retail revolution’ when department stores became oligopolies,
the current surge of specialty and discount formats is less a function of the evolution
of retail institutions than of overriding demographic and life-style changes in
American society. ‘The fragmentation of the American marketplace … reflects
the expanding ranks of single-person households, the greater proportion of two-
income families, and the sharp rise in the number of working women’ (Legomsky,
1986: R62).16 Furthermore, there has been a widening of the gap between the
rich and the poor in the United States.17 The retail sector has mirrored this
dichotomy—stores have either gone upscale or low-price, with middle-income
consumers pulled in both directions.

Table 2.2 Net Income and Return on Revenues of Leading US Retailers, 1987–1991

Company Net Incomea (millions of Compound Return on

dollars) Growth Rate (%) Revenuesb (%)
1987 1988 1989 1990 1991 1- 5- 10- 1987 1989 1991
yr. yr. yr.
Discounters
Wal-Mart 628 837 1076 1291 1608 24.6 29.0 34.5 3.9 4.2 3.7
Kmart 692 803 323 756 859 13.6 8.5 14.6 2.7 1.1 2.5
Mass Merchandisers
Sears 1649 1032 1446 829 1279 43.4 -1.1 7.0 3.4 2.7 2.2
Dayton Hudsonc 228 287 410 410 301 -26.6 3.4 6.6 2.1 3.0 1.9
Woolworth 251 288 329 317 -53 NM NM NM 3.5 3.7 NM
Department Stores
J. C. Penney 608 807 802 577 264 -54.2 -13.0 -3.8 3.8 4.7 1.5
May Department 444 503 515 500 515 3.0 6.2 15.1 4.2 5.4 4.9
Storesd
Specialty Stores
Melvillee 285 354 398 385 347 -10.0 7.8 9.8 4.8 5.3 3.5
The Limitedf 235 245 347 398 403 1.2 12.1 33.5 6.7 7.3 6.4
The Gapf 70 74 98 144 230 59.1 27.5 34.6 6.6 6.2 9.1
Toys ‘R’ Usg 204 268 321 326 340 4.2 17.4 21.4 6.5 6.7 5.5

Source: Standard and Poor’s Industry Surveys, ‘Retailing: Comparative Company Analysis’, May
13, 1993: R104–Rl07.
Notes: a ‘Net income’ refers to profits derived from all sources after deduction of expenses, taxes, and
fixed charges, but before any discounted operations, extraordinary items, and dividend payments
(preferred and common).
b Net income divided by operating revenues.
c Dayton Hudson stores include: Target, Mervyn’s, Marshall Field’s, and Hudson.
d May Department Stores Company includes: Lord and Taylor, Filene’s, Hecht’s, Foley’s,

Kaufmann’s, Robinson-May, Famous-Barr, and Meier and Frank, among others. May also owns
the discount footwear chain of Payless ShoeSource stores.
e Shoes.
f Garments.
g Toys.

NM = not meaningful.

This segmentation of the American market creates numerous opportunities

for specialized retail formats. Just as the era of mass production is giving way to
flexible manufacturing in the productive sphere, the renowned American mass
market is becoming more customized and personalized. This has paved the way
for increased trans-Atlantic competition by European and other foreign-based
retailers, such as Benetton in Italy and Laura Ashley in the United Kingdom.

According to Lester Thurow, professor of economics and management at the

Massachusetts Institute of Technology, ‘The American economy died about 10
years ago, and has been replaced by a world economy … [American retailers] are
going to face an international challenge’ (Legomsky, 1986: R61).
Department stores and other mass merchandisers in the United States have
tried to develop effective counterstrategies to these trends. Some retailers like J. C.
Penney have sought to upgrade their status from mass merchandiser to department
store by adding higher-priced apparel, and to increase profitability by emphasizing
higher-margin merchandise that has a faster turn-around time (Sack, 1989:
R80). Other firms have begun to diversify their appeal by establishing their own
specialty retail outlets (like the Foot Locker stores, which are owned by Woolworth
Corporation).18 On the international front, retailers and manufacturers alike are
acquiring large importers to shore up their position in global sourcing networks,19
while unique organizational forms such as member-owned retail buying groups
are being used in overseas procurement.20
In summary, the transformation of the retail sector in the United States has
remained fast-paced throughout the 1980s and 1990s. This reflects not only the
changing demography and purchasing power of American society, but as we will
see in the next sections, it also proves to be a significant determinant of production
patterns within the global economy.

The Economic Agents in Buyer-Driven Commodity Chains

Big buyers are embedded in GCCs through the export and distribution networks
they establish with overseas factories and trading companies. In order to understand
the structure and dynamics of this relationship, we must first identify the economic
agents in buyer-driven commodity chains (retailers, traders, overseas buyers, and
factories), and then look at the impact of the main coordinating group (large
retailers) on global production patterns.

Retailers
The organization of consumption in the United States is stratified by retail
chains that target distinct income groups in the population. There are several
types of retailers: large-volume, low-priced discount stores; mass merchandisers;
department stores; and ‘fashion’ or upper-end specialized retailers that deal
exclusively with national brand-named products. These stores vary in their mixes
of nationally branded, store-branded, and unbranded products.21 The different
categories of retailers also establish distinctive relationships with importers and
overseas manufacturers. As one moves down this list of retailers, the quality

and price of the goods sold increase and the requirements for their international
contractors become more stringent.

Traders
Trading companies have evolved from the global juggernauts that spanned the
British, Dutch, and Japanese empires in centuries past to the highly specialized
organizations that exist today. As recently as 25 years ago, there were no direct
buying offices set up by US retailers in Asia.22 Originally, American retailers
bought from importers on a ‘landed’ basis, i.e., the importer cleared the goods
through US customs.23 In the late 1970s, importing began to be done on a ‘first-
cost’ basis. The buyer opened a letter of credit directly to the factory and paid the
importer (or buying agent) a commission to get the goods to the export port. The
buyer handled the shipping and distribution in the United States. Before retailers
established direct buying offices overseas, importers were the key intermediaries
between retailers and their foreign contractors. There still is a broad array of
specialized importers that deal in particular industries24 or even in specific product
niches within an industry.25 While the importers handle production logistics and
often help to develop new product lines, the leading apparel companies control the
marketing end of the apparel commodity chain through their exclusive designs
and brand-named products.26

Overseas Buyers
There is a symbiotic relationship between the overseas buying offices of major retail
chains and the role played by importers and exporters. The direct buying offices
of major retailers purchase a wide assortment of products, typically grouped into
‘soft goods’ (like garments and shoes) and ‘hard goods’ (such as lighting fixtures,
kitchenware, appliances, furniture, and toys). Obviously, it is difficult for these
buyers to develop an intimate knowledge of the supplier networks and product
characteristics of such a diverse array of items. As a result, retail chains depend
heavily on the specialized importers and trading companies that continuously
develop new product lines with the local manufacturers and that provide retailers
with valuable information about the hot items and sales trends of their competitors.
In general, the US-based buyers for American retailers tend to work with
importers and trading companies in the fashion-oriented and new-product end
of consumer-goods industries, while their overseas buying offices purchase the
more standardized, popular, or large-volume items directly from the factories in
order to eliminate the importer’s commission. Large retailers usually have their
own product development groups and buying offices in the United States for their
most popular or distinctive items.

Factories
The factories that produce the consumer products that flow through buyer-driven
commodity chains are involved in contract manufacturing relationships with the
buyers who place the orders. Contract manufacturing (or specification contracting)
refers to the production of finished consumer goods by local firms, where the output
is distributed and marketed abroad by trading companies, branded merchandisers,
retail chains, or their agents.27 This is the major export niche filled by the East
Asian NICs in the world economy.
In 1980, for example, Hong Kong, Taiwan, and South Korea accounted for
72% of all finished consumer goods exported by the Third World to OECD
countries, other Asian nations supplied another 19%, while just 7% came from
Latin America and the Caribbean. The United States was the leading market for
these consumer products with 46% of the total (Keesing, 1983: 338–339). East
Asian factories, which have handled the bulk of the specification contracting
orders from US retailers, tend to be locally owned and vary greatly in size—from
the giant plants in South Korea to the myriad small family firms that account for
a large proportion of the exports from Taiwan and Hong Kong.28

Locational Patterns of Global Sourcing

Big retailers and brand-named merchandisers have different strategies of global
sourcing, which in large part are dictated by the client bases they serve (see Table
2.3 and Figure 2.2). Fashion-oriented retailers that cater to an exclusive clientele
for ‘designer’ products get their expensive, nationally branded goods from an
inner ring of premium-quality, high-value-added exporting countries (e.g., Italy,
France, Japan). Department stores and specialty chains that emphasize ‘private
label’ (or store brand) products as well as national brands source from the most
established Third World exporters (such as the East Asian NICs, Brazil, Mexico,
and India), while the mass merchandisers that sell lower-priced store brands buy
from more remote tiers of medium- to low-cost, mid-quality exporters (low-end
producers in the NICs, plus China and the Southeast Asian countries of Thailand,
Malaysia, the Philippines, and Indonesia). Large-volume discount stores that sell
the most inexpensive products import from the outer rings of low-cost suppliers
of standardized goods (e.g., China, Indonesia, Bangladesh, Sri Lanka, Mauritius,
the Dominican Republic, Guatemala). Finally, smaller importers serve as industry
‘scouts’. They operate on the fringes of the international production frontier and
help develop potential new sources of supply for global commodity chains (e.g.,
Vietnam, Myanmar, Saipan).

Table 2.3 Types of Retailers and Main Global Sourcing Areas

Type of Retailer Representative Main Global Characteristics of Buyer’s Orders

Firms Sourcing Areasa
Fashion-oriented Armani, Donna First and second Expensive ‘designer’ products
companies Karan, Polo/ rings requiring high levels of
Ralph Lauren, craftsmanship; orders are in small
Hugo Boss, Gucci lots.
Department Bloomingdale’s, Second, third, Top quality, high-priced goods
stores, specialty Sales Fifth and fourth rings sold under a variety of national
stores, and brand- Avenue. Neiman- brands and private labels (i.e.,
named companies Marcus, Macy’s, store brands); medium to large-
Nordstrom, sized orders, often coordinated
The Gap, The by department-store buying
Limited, Liz groups (such as May Department
Claiborne, Calvin Stores Company and Federated
Klein Department Stores).
Mass Sears Roebuck, Second, third, Good quality, medium-priced
merchandisers Montgomery and fourth rings goods predominantly sold under
Ward, J. C. private labels; large orders.
Penney,
Woolworth
Discount chains Wal-Mart, Third, fourth, Low-priced, store-brand
Kmart, Target and fifth rings products; giant orders.
Small importers Fourth and fifth Pilot purchases and special
rings items; sourcing done for retailers
by small importers who act as
‘industry scouts’ in searching out
new sources of supply; orders are
relatively small at first, but have
the potential to grow rapidly if
the suppliers are reliable.
Source: Author.
Note: aFor the countries in each of these rings, see Figure 2.2.

Several qualifications need to be mentioned concerning the schematic,

purposefully oversimplified locational patterns identified in Table 2.3 and Figure
2.2. These production frontiers represent general trends that can vary by industry,
by specific products, and by time period. More detailed analyses that trace the
global sourcing of particular products over time are required to explore the factors
that lead to shifts in these linkages. Two examples will illustrate the complexity
of these arrangements.
The first example focuses on large-volume discount stores such as Kmart and
Wal-Mart. According to Table 2.3, they should source primarily from the three
outer rings of the production frontiers, but our direct research indicates that these
discounters also are prominent buyers in the second ring of East Asian NICs. Why?

The reason is twofold. Apparel factories in relatively high-wage countries like

Taiwan and South Korea work with anywhere from five to 20 clients (buyers) in
a year. Although Kmart and Wal-Mart pay much less than department stores and
specialty retailers like Macy’s or Liz Claiborne, the factories use these discounters’
large-volume orders to smooth out their production schedules so they don’t have
gaps or downtime. The other side of the equation is the discounter’s vantage point.
Kmart and Wal-Mart tend to source their most expensive, complicated items in
the second-ring countries (e.g., infant’s wear with a lot of embroidery). Thus, they
are using the more expensive and skilled workers in the NICs to produce relatively
high-quality merchandise.

Figure 2.2 Production Frontiers for Global Sourcing by US Retailers:

The Apparel Industry

Source: Author.

A second illustration deals with the upper-end retailers. Large apparel retailers
like The Limited and The Gap, and brand-named companies like Phillips-Van
Heusen and Levi Strauss, tend to source heavily in the second and third rings of
Figure 2.2, but they also buy from countries located in the fourth and even the
fifth rings. The reason they are positioned in the outer reaches of the production
frontiers is that these companies engage in ‘price averaging’ across their different
manufacturing sites. A company like Phillips-Van Heusen, the number-one seller
of men’s dress shirts in the United States, is confident that its quality control
procedures will allow it to produce identical dress shirts in its factories in the United
States, Taiwan, Sri Lanka, or El Salvador. This also permits these companies to
keep some of their production in, or close to, the United States for quick response
to unexpectedly high demand for popular items as well as to gain the goodwill of
the American consuming public.
Figure 2.2 highlights some methodological difficulties raised by the commodity
chains perspective. Nation-states are not the ideal unit of analysis for establishing
global sourcing patterns, since individual countries are tied to the world economy
through a variety of export roles (Gereffi, 1989a, 1992). Production actually takes
place in specific regions or industrial districts within countries that have very
different social and economic characteristics (Porter, 1990). Where commodity
chains ‘touch down’ in a country is an important determinant of the kind of
production relationships that are established with retailers. Thus there can be
several forms of international sourcing within a single nation.29
In the People’s Republic of China, for example, Guangdong Province has very
substantial investments from Hong Kong and Taiwan, while Fujian Province has
a natural geographical and cultural affinity for Taiwanese investors. These two
provinces in China are part of a Greater China Economic Region that includes
Hong Kong and Taiwan (see Chen, 1994). Thus China falls within both the third
and the fourth rings of Figure 2.2: the quality and price of the products made in
southern China (third ring) in affiliation with its East Asian NIC partners tend to
be higher than for the goods produced in the interior provinces of China (fourth
ring), where state enterprises are more prevalent.
Despite these qualifications, several generalizations can be made about the
production frontiers identified in Figure 2.2. As one moves from the inner to the
outer rings, the following changes are apparent: the cost of production decreases;
manufacturing sophistication decreases; and the lead time needed for deliveries
increases. Therefore, there is a strong tendency for the high-quality, multiple-
season ‘fashion’ companies, as well as the more upscale department stores and
specialty stores, to source their production from the three inner rings, while the
price-conscious mass merchandisers and discount chains are willing to tolerate
the lower quality and longer lead times that characterize production in the two

outer rings. The ‘industry scout’ role played by certain importers is particularly
important for this latter set of buyers, since these importers are willing to take
the time needed to bring the new, low-cost production sites located in the fourth
and fifth rings into global sourcing networks.

Triangle Manufacturing in Global Commodity Chains

How do the countries in the inner rings of our global sourcing chart deal with
the maturing of their export industries? What mechanisms are utilized to ensure
a smooth transition to higher-value-added activities? One of the most important
adjustment mechanisms for maturing export industries in East Asia is the process
of triangle manufacturing, which came into being in the 1970s and 1980s.
The essence of triangle manufacturing is that US (or other overseas) buyers
place their orders with the NIC manufacturers they have sourced from in the past
(e.g., Hong Kong or Taiwanese apparel firms), who in turn shift some or all of
the requested production to affiliated offshore factories in one or more low-wage
countries (e.g., China, Indonesia, or Vietnam). These offshore factories may or
may not have equity investments by the East Asian NIC manufacturers: they
can be wholly owned subsidiaries, joint-venture partners, or simply independent
overseas contractors. The triangle is completed when the finished goods are
shipped directly to the overseas buyer, under the import quotas issued to the
exporting nation. Payments to the non-NIC factory usually flow through the
NIC intermediary firm.30
Triangle manufacturing thus changes the status of the NIC manufacturer
from a primary production contractor for the US buyers to a ‘middleman’ in the
buyer-driven commodity chain. The key asset possessed by the East Asian NIC
manufacturers is their long-standing link to the foreign buyers, which is based
on the trust developed over the years in numerous successful export transactions.
Since the buyer has no direct production experience, he prefers to rely on the East
Asian NIC manufacturers he has done business with in the past to assure that the
buyer’s standards in terms of price, quality, and delivery schedules will be met by
new contractors in other Third World locales. As the volume of orders in new
production sites like China, Indonesia, or Sri Lanka increases, the pressure grows
for the US buyers to eventually bypass their East Asian NIC intermediaries and
deal directly with the factories that fill their large orders.
The process of third-party production began in Japan in the late 1960s, which
relocated numerous plants and foreign orders to the East Asian NICs (often
through Japanese trading companies or sogo shosha).31 Today, the East Asian NICs,
in turn, are transferring many of their factories and orders to China and a variety
of Southeast Asian countries. Initially, triangle manufacturing was the result

of US import quotas that were imposed on Hong Kong, Taiwan, South Korea,
and Singapore in the 1970s. These quotas led to the search for new quota-free
production sites in the region. Then in the late 1980s the move to other Asian and
eventually Caribbean factories occurred because of domestic changes—increased
labor costs, labor scarcity, and currency appreciations—in the East Asian NICs.
The shift toward triangle manufacturing has been responsible for bringing many
new countries into these production and export networks, including Sri Lanka,
Vietnam, Laos, Mauritius, small Pacific islands (like Saipan and Yap), Central
America, and Caribbean nations.
The importance of triangle manufacturing from a commodity chains perspective
is threefold. First, it indicates that there are repetitive cycles as the production
base for an industry moves from one part of the world to another. An important
hypothesis here is that the ‘window of opportunity’ for each new production base
(Japan – East Asian NICs – Southeast Asian countries – China – Vietnam – the
Caribbean) is growing progressively shorter as more new entrants are brought
into these global sourcing networks. The reasons include the fact that quotas on
new exporting countries in apparel are being applied more quickly by the United
States, 32 and technology transfer from the East Asian NICs is becoming more
efficient.
The second implication of triangle manufacturing is for social embeddedness.
Each of the East Asian NICs has a different set of preferred countries where they
set up their new factories. Hong Kong and Taiwan have been the main investors in
China (Hong Kong has taken a leading role in Chinese production of quota items
like apparel made from cotton and synthetic fibers, while Taiwan is a leader for
non-quota items like footwear, 33 as well as leather and silk apparel); South Korea
has been especially prominent in Indonesia, Guatemala, the Dominican Republic,
and now North Korea; and Singapore is a major investor in Southeast Asian sites
like Malaysia and Indonesia. These production networks are explained in part
by social and cultural networks (e.g., ethnic or familial ties, common language),
as well as by unique features of a country’s historical legacy (e.g., Hong Kong’s
British colonial ties gave it an inside track on investments in Jamaica).
A final implication of the GCC framework is that triangle manufacturing
has allowed the East Asian NICs to move beyond OEM production. Most of
the leading Hong Kong apparel manufacturers have embarked on an ambitious
program of forward integration from apparel manufacturing into retailing. Almost
all of the major Hong Kong apparel manufacturers now have their own brand
names and retail chains for the clothing they make. These retail outlets began
selling in the Hong Kong market, but now there are Hong Kong-owned stores
throughout East Asia (including China), North America, and Europe.34 These
cycles of change for East Asian manufacturers suggest the need for more elaborated
product life cycle theories of Third World industrial transformation.

Conclusion
The role of the main economic agents in buyer-driven commodity chains is far
from static. The sources of change are rooted in economic and political factors,
plus the shifting organizational patterns of the distinct segments of GCCs.
Several trends are particularly noteworthy. First, there has been an increased
concentration of buying power in the leading US retail chains. This has been
the result of spectacular growth strategies by a few companies (especially the
large-volume discount stores like Wal-Mart in the 1980s and Kmart in the
1970s), slumping performance by several established retail leaders (such as Sears
Roebuck and Montgomery Ward), and many bankruptcies in the small- and
large-firm retail sector.
Second, at the same time as there has been a consolidation in the buying
power of major retail chains, there has been a proliferation of overseas factories
(especially in Asia) in most consumer-goods industries. In several notable cases,
like garments and shoes, there is currently a substantial excess production capacity
worldwide that will lead to numerous plant closings or consolidations in major
exporting countries, such as the People’s Republic of China. This combination
of concentrated buying power in the retail/wholesale sector and excess capacity
in overseas factories has permitted the big buyers in GCCs to simultaneously
lower the prices they are paying for goods and dictate more stringent performance
standards for their vendors (e.g., more buying seasons, faster delivery times, and
better quality) in order to increase their profits.
Third, big buyers are acutely sensitive to political factors that can affect global
supply networks and they currently are in a position to alter overseas production
patterns accordingly. For example, during the recent debate in the United States
about renewing the People’s Republic of China’s most-favored-nation (MFN)
status, several large retailers and importers decided to diversify or curtail their
purchases from China. 35 This led overseas suppliers to scramble to set up
production facilities in nations perceived to relatively ‘safe’ in terms of domestic
political stability (such as Indonesia, Thailand, and Malaysia). In quota-restricted
industries like garments, retailers and importers also have taken the lead in
encouraging production in countries that have favorable quota arrangements with
their main export markets in North America and Europe. In other words, quotas
drive overseas investment decisions and thus help shape global commodity chains.
Fourth, the recent recession in the world economy has placed a premium
on low-priced goods in developed-country markets. This has strengthened the
position of the large-volume discount chains in the retail sector and led retailers
and manufacturers alike to look for new ways to cut costs. This further enhances
the impact of retailers on overseas production networks.

One trend we might look for in the future is the establishment of consolidated
factory groups (perhaps involving linkages between manufacturers and trading
companies) to counter the increased leverage of the large buying groups. These
could be coordinated by manufacturers in the East Asian NICs, who continue to
be the nexus for many of the orders placed by US big buyers. Exporters in the East
Asian nations have accounted for much of the technology transfer to lower-cost
production sites, they have access to export networks through their established
contacts with the US buyers, and they still handle much of the quality control,
financing, and shipping needed to get goods to their destination markets in a
timely fashion.
Finally, despite the fact that the East Asian NICs have managed to move
beyond OEM production through forward as well as backward integration in
the apparel commodity chain, the implications of triangle manufacturing for
downstream exporters in Southeast Asia, Latin America, and Africa are not so
promising. Genuine development in these countries is likely to be truncated by the
vulnerabilities implied by their export-processing role in global sourcing networks.
The main assets that Third World exporters possess in buyer-driven commodity
chains are low-cost labor and abundant quotas. These are notoriously unstable
sources of competitive advantage, however.
Few countries in the world have been able to generate the backward and forward
linkages, technological infrastructure, and high levels of local value added of the
East Asian NICs. Even the obvious job creation and foreign exchange benefits of
export-oriented industrialization for Third World nations can become liabilities
when foreign buyers or their East Asian intermediaries decide because of short-term
economic or political considerations to move elsewhere. Triangle manufacturing
is most advantageous to the overseas buyers and intermediaries in buyer-driven
commodity chains. The long-run benefits for Third World countries occur
only if exporting becomes the first step in a process of domestically integrated
development.

Notes
The research for this chapter was funded by grants from the Chiang Ching-Kuo Foundation
for International Scholarly Exchange (United States), based in Taiwan, as well as the University
Research Council at Duke University. I gratefully acknowledge these sources of support. I
also appreciate the research assistance of Jeffrey Weiss at Duke, and the detailed comments
provided by Phyllis Albertson, Bradford Barham, Miguel Korzeniewicz, Stephen Maire, and
Karen J. Sack on earlier drafts of this chapter.
1. The linkages between big buyers and their strategies of global sourcing were derived
from numerous interviews carried out by the author in East Asia and the United
States. A wide variety of trading companies, direct buying offices, and factories in

Taiwan, Hong Kong, South Korea, and the People’s Republic of China were visited in
August–October 1991 and September–December 1992. Interviews were also conducted
in the headquarters of major US retailers and apparel firms in New York City and Los
Angeles during the summers of 1991 and 1992.
2. The absence of factories also characterizes a growing number of US semiconductor houses
that order customized as well as standard chips from outside contractors (Weber, 1991).
3. Orderly marketing agreements were imposed by the United States on footwear exporters
in Taiwan and South Korea in 1977, but these were rescinded in 1981.
4. This used to be known as 807-production in the Caribbean and the Far East, and
maquiladora assembly in Mexico. Now there is a new US tariff classification system
called the Harmonized Tariff Schedule that replaces the 807 section with a 9802 tariff
code. The basic idea in this system is to allow a garment that has been assembled
offshore using US-made and -cut parts to be assessed a tariff only on the value added
by offshore labor.
5. The much-publicized bankruptcy of R. H. Macy & Company in 1992 is a recent example
of the competitive problems that have affected the traditional department store (Strom,
1992).
6. Garment manufacturers have been required to add more buying seasons, offer a greater
variety of clothes, agree to mandatory buy-back arrangements for unsold merchandise,
provide retailer advertising allowances, and so on.
7. These new technologies include: electronic data interchange (EDI), which is a system
for communicating to the retailer what is selling well and what needs to be replenished;
computerized point-of-service inventory control; merchandising processing systems
that monitor cash flows from order placement to shipping to billing and payment; and
electronic mail hook-ups for every online store in worldwide networks of retail outlets.
8. Enhanced price competition is compatible with oligopoly because the economies of scale
and scope of large-volume discount chains lead to high concentration levels in the retail
sector, at the same time as the discounters stimulate considerable price competition
because of their low-income customer base.
9. Many department stores carry familiar household names: Macy’s, Bloomingdale’s,
Jordan Marsh, Mervyn’s, Nordstrom, Dillard, Filene’s, Kaufmann’s, Saks Fifth Avenue.
Numerous American retail chains today are owned by holding companies, such as the
May Department Stores Company, Federated Department Stores, and Dayton Hudson.
In Europe, where consumers were more inclined to shuttle from store to store for their
individual apparel and accessory needs, the department store never developed into the
prominent retailing institution that it has in the mass market of the United States.
10. General merchandise retailers provide a broad selection of ‘soft goods’ (including apparel
and home furnishings) and ‘hard goods’ (appliances, hardware, auto, and garden supplies,
etc.).
11. The best-known mass merchandising chains are Sears Roebuck & Co., Montgomery
Ward, and Woolworth Corporation. These stores are a notch below the department
stores in the quality of their merchandise and their prices, but they offer more service
and brand-name variety than the large-volume discount retailers. In terms of their overall
position in American retailing, though, department stores and mass merchandisers face
similar competitive environments.

12. The three most prominent discount chains today are Wal-Mart, Kmart, and Target.
Discount chains may focus on a specific product, such as shoes (Payless ShoeSource, Pic
‘n Pay, and the 550-store Fayva Shoes retail chain owned by Morse Shoe). Historically,
discount retail chains differed from department stores because the former carried broader
assortments of hard goods (e.g., auto accessories, gardening equipment, housewares)
and they relied heavily on self-service.
13. Department stores have tried to simulate a specialty-store ambience through the creation
of ‘store-within-a-store’ boutiques, each accommodating a particular company (like Liz
Claiborne or Calvin Klein) or a distinct set of fashion tastes. Similarly, Woolworth
Corporation has shed its mass merchandising image by incorporating dozens of specialty
formats in its portfolio of 6,500 US stores, including Foot Locker, Champs Sports,
Afterthoughts accessories, and The San Francisco Music Box Co. Specialty stores now
account for about half of Woolworth’s annual revenue, up from 29% in 1983 (Miller,
1993).
14. The Gap, one of the most popular and profitable specialty clothing chains in American
retailing today, only sells clothes under its own private label. In 1991, The Gap surpassed
Liz Claiborne Inc. to become the second-largest clothes brand in the United States
after Levi Strauss (Mitchell, 1992). The Limited is another major force in specialty
apparel. It is regarded as the world’s largest retailer of women’s clothing. The Limited is
composed of 17 divisions (such as Victoria’s Secret, Lerner, Lane Bryant, and Structure),
more than 4,100 stores, 75,000 employees, and 1991 sales of $6.3 billion.
15. Kmart’s net income in 1990 recovered to $756 million, after its nosedive to $323 million
in 1989. One of the areas where Kmart has been lagging, however, is its electronic
data interchange (EDI) systems. In 1990 it embarked on a six-year store modernization
program. Kmart management hopes that point-of-sale systems, a satellite network, and
automated replenishment combined with just-in-time merchandise delivery will improve
the performance of its 2,400 general merchandise stores. Kmart also has 2,000 specialty
retail stores, including Waldenbooks, Payless Drug Stores, and PACE Membership
Warehouse.
16. At the end of 1985, nearly 60% of mothers with children under 18 were working,
according to Labor Department figures, up nearly 5% from one year earlier,
17. Between 1977 and 1989, the richest 1% of American families reaped 60% of the growth
in after-tax income of all families and an even heftier three-fourths of the gain in pre-
tax income, while the pre-tax income of the bottom 40% of American families declined
(Nasar, 1992). Similarly, a detailed study on family income prepared by the House Ways
and Means Committee of the US Congress found that from 1979 to 1987 the standard
of living for the poorest fifth of the American population fell by 9%, while the living
standard of the top fifth rose by 19% (Harrison and Bluestone, 1990: xi).
18. The 18-year-old Foot Locker chain, with 1,500 US stores and $1.6 billion in annual
sales, has generated an entire family of spin-offs, including Kids Foot Locker, Lady
Foot Locker, and now World Foot Locker. Woolworth, which already garners 40% of
its sales in foreign countries, plans to add 1,000 Foot Locker stores in Western Europe
by the end of the decade (Miller, 1993).
19. For example, Payless Shoe Source International, the largest US footwear importer, is
owned by May Department Stores; and Meldisco, a division of Melville Corporation,

handles the international purchasing of shoes for Kmart. Pagoda Trading Co., the
second biggest US shoe importer, was acquired three years ago by Brown Shoe Co.,
the largest US footwear manufacturer.
20. Associated Merchandising Corporation (AMC) is the world’s largest retail buying
group. It consolidates the overseas purchasing requirements of 40 member department
stores, and it sources products from nearly 70 countries through its extensive network
of buying offices in Asia, Europe, and Latin America.
21. Many brand-named companies like Liz Claiborne and Nike don’t allow their products to
be sold by discount stores or mass merchandisers, which has prompted the proliferation
of ‘private label’ merchandise (i.e., store brands).
22. Sears Roebuck, Montgomery Ward, and Macy’s were the first US companies to establish
direct buying offices in Hong Kong in the 1960s. However, the really big direct orders
came when Kmart and J. C. Penney set up their Hong Kong buying offices in 1970;
within the next couple of years, these sprawling merchandisers had additional offices
in Taiwan, South Korea, and Singapore. By the mid-1970s, many other retailers such
as May Department Stores, AMC, and Woolworth jumped on the direct buying
bandwagon in the Far East.
23. The early importers with offices in the Far East were Japanese and American companies
like Mitsubishi/CITC (a Japanese-US joint venture), C. Itoh, Manow, and Mercury.
24. For example, Payless ShoeSource International, Pagoda, and E. S. Originals are large
importers that deal exclusively in footwear.
25. There are different importers for women’s shoes versus men’s shoes, dress shoes versus
casual footwear, women’s dresses versus men’s suits, adult versus children’s clothes, and
so on.
26. Nike, Reebok, and L. A. Gear are the major brand-named companies in athletic
footwear, while Armani, Polo/Ralph Lauren, and Donna Karan are premium labels in
clothes. However, all of these companies have diversified their presence in the apparel
market and put their labels on a wide range of clothes, shoes, and accessories (handbags,
hats, scarves, belts, wallets, etc.).
27. ‘Contract manufacturing’ is more accurate than the commonly used terms ‘international
subcontracting’ or ‘commercial subcontracting’ (Holmes, 1986) to describe what the
East Asian NICs have excelled at. Contract manufacturing refers to the production of
finished goods according to full specifications issued by the buyer, while ‘subcontracting’
actually means the production of components or the carrying out of specific labor
processes (e.g., stitching) for a factory that makes the finished item. Asian contract
manufacturers (also known as contractors or vendors) have extended their production
networks to encompass domestic as well as international subcontractors.
28. Taiwan and Hong Kong have multilayered domestic subcontracting networks, including
large firms that produce key intermediate inputs (like plastics and textiles), medium-
sized factories that do final product assembly, and many small factories and household
enterprises that make a wide variety of components.
29. In Mexico, for instance, there is a vast difference between the maquilada export plants
along the Mexico-US border that are engaged in labor-intensive garment and electronics
assembly, and the new capital- and technology-intensive firms in the automobile and
computer industries that are located further inland in Mexico’s northern states. These

latter factories use relatively advanced technologies to produce high-quality exports,

including components and subassemblies like automotive engines. They pay better
wages, hire larger percentages of skilled male workers, and use more domestic inputs
than the traditional maquiladora plants that combine minimum wages with piecework
and hire mostly unskilled women (Gereffi, 1991).
30. Typically, this entails back-to-back letters of credit: the overseas buyer issues a letter
of credit to the NIC intermediary, who then addresses a second letter of credit to the
exporting factory.
31. The industries that Japan transferred to the East Asian NICs are popularly known as
the ‘three Ds’: dirty, difficult, and dangerous.
32. This may change if a new General Agreement on Tariffs and Trade is signed.
33. After controls were relaxed on Taiwanese investments in the People’s Republic of
China in the late 1980s, around 500 footwear factories were moved from Taiwan to
China in less than two years. Although China recently passed Taiwan as the leading
footwear exporter to the United States (in terms of pairs of shoes), it is estimated that
nearly one-half of China’s shoe exports come from Taiwanese owned or managed firms
recently transferred to the mainland (author interviews with footwear industry experts
in Taiwan).
34. A good example of this is the Fang Brothers, one of the principal suppliers for
Liz Claiborne, who now have several different private-label retail chains (Episode,
Excursion, Jessica, and Jean Pierre) in a variety of countries including the United States.
35. During an October 1991 interview in the Hong Kong office of one of the largest US
footwear importers, I was told that the American headquarters of the company ordered
25% of the importer’s purchases from the People’s Republic of China to be shifted to
Indonesia within one year to avoid the supply disruptions that would occur if China’s
MFN Status were denied.

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3
t
International Trade and Industrial Upgrading
in the Apparel Commodity Chain

Globalization has altered the competitive dynamics of nations, firms, and

industries. This is most clearly seen in changing patterns of international trade,
where the explosive growth of imports in developed countries indicates that the
center of gravity for the production and export of many manufactures has moved
to an ever expanding array of newly industrializing economies (NIEs) in the
Third World. This shift is central to the ‘East Asian Miracle’, which refers to the
handful of high-performing Asian economies that have attained lofty per capita
growth rates, relatively low income inequality, high educational attainment, record
levels of domestic saving and investment, and booming exports from the 1960s
to the mid-1990s (World Bank, 1993). Regardless of whether the growth is due
to productivity gains or to capital accumulation (Krugman, 1994; Young, 1994,
1995), their economic achievement is largely attributed to the adoption of export-
oriented industrialization as the region’s main development strategy.
This view of international trade as the fulcrum for sustained economic growth
in East Asia, while unassailable in its macroeconomic basics, nonetheless leaves
a number of critical questions unanswered in terms of the microinstitutional
foundations supporting East Asian development. Why were Japan and the East
Asian NIEs (South Korea, Taiwan, Hong Kong, and Singapore) so successful in
exporting to distant Western markets, given the formidable spatial and cultural
distances that had to be bridged? How were these East Asian nations able to
sustain their high rates of export-oriented growth over three to four decades, in
the face of a variety of adverse economic factors such as oil price hikes, rising wage
rates, labor shortages, currency appreciations, a global recession, and spreading
protectionism in their major export markets? Under what conditions can trade-
based growth become a vehicle for genuine industrial upgrading, given the frequent
criticisms made of low-wage, low-skill, assembly-oriented export activities? Do
Asia’s accomplishments in trade-led industrialization contain significant lessons
for other regions of the world?
This chapter will address these questions using a global commodity chains
framework. A commodity chain refers to the whole range of activities involved in

the design, production, and marketing of a product. A critical distinction in this

approach is between buyer-driven and producer-driven commodity chains. Japan in
the 1950s and 1960s, the East Asian NIEs during the 1970s and 1980s, and China
in the 1990s became world-class exporters primarily by mastering the dynamics
of buyer-driven commodity chains, which supply a wide range of labor-intensive
consumer products such as apparel, footwear, toys, and sporting goods. The key
to success in East Asia’s buyer-driven chains was to move from the mere assembly
of imported inputs (traditionally associated with export-processing zones) to a
more domestically integrated and higher value-added form of exporting known
alternatively as full-package supply or OEM (original equipment manufacturing)
production.1 Subsequently, Japan and some firms in the East Asian NIEs pushed
beyond the OEM export role to original brand-name manufacturing (OBM) by
joining their production expertise with the design and sale of their own branded
merchandise in domestic and overseas markets.
From a global commodity chains perspective, East Asia’s transition from
assembly to full-package supply derives in large measure from its ability to establish
close linkages with a diverse array of lead firms in buyer-driven chains. Lead firms
are the primary sources of material inputs, technology transfer, and knowledge in
these organizational networks. In the apparel commodity chain, different types
of lead firms use different networks and source in different parts of the world.
Retailers and marketers tend to rely on full-package sourcing networks, in which
they buy ready-made apparel primarily from Asia, where manufacturers in places
like Hong Kong, Taiwan, and South Korea have historically specialized in this
kind of production. As wage levels in those countries have gone up, East Asian
manufacturers have tended to develop multilayered global sourcing networks where
low-wage assembly can be done in other parts of Asia, Africa, and Latin America,
while the NIE manufacturers play a critical coordinating role in the full-package
production process. Branded manufacturers, by contrast, tend to create production
networks that focus on apparel assembly using imported inputs. Whereas full-
package sourcing networks are generally global, production networks established
by branded manufacturers are predominantly regional. US manufacturers go to
Mexico and the Caribbean Basin, European Union firms look to North Africa
and Eastern Europe, and Japan and the East Asian NIEs look to lower-wage
regions within Asia.
Industrial upgrading, from this perspective, involves organizational learning to
improve the position of firms or nations in international trade networks (Gereffi
and Tam, 1998). Participation in global commodity chains is a necessary step for
industrial upgrading because it puts firms and economies on potentially dynamic
learning curves. There are many obstacles, however, to moving up these chains
from labor-intensive activities like export-oriented assembly, to more integrated

forms of manufacturing like OEM and OBM production, to the most profitable
and/or skill-intensive economic activities such as breakthrough innovations in new
goods and services, design, marketing, and finance. Therefore, we need to address
not only why industrial upgrading occurs in global commodity chains, but also how
it occurs. A commodity chains framework that attempts to link international trade
and industrial upgrading must specify: the mechanisms by which organizational
learning occurs in trade networks; typical trajectories among export roles; and the
organizational conditions that facilitate industrial upgrading moves such as the shift
from assembly to full-package networks.
The economic theory of industrial upgrading is that as capital (both human and
physical) becomes more abundant relative to labor and the endowments of other
countries, nations develop comparative advantages in capital- and skill-intensive
industries (Porter, 1990). This chapter will show, however, that upgrading does
not occur to a random set of capital- or skill-intensive industries or activities,
but rather to products that are organizationally related through the lead firms in
global commodity chains.
The microfoundations of this upgrading pattern involve both forward
(marketing) and backward (sourcing) linkages from production, and the kind of
learning that occurs across these segments. With regard to marketing, countries
that are upgrading within commodity chains have already identified the buyers
for their products within the chains. The implication is that marketing outside
the chain is more difficult due to search costs and the fact that foreign buyers
provide access to information that assists local suppliers in their export and
marketing efforts (Rhee et al., 1984). For sourcing linkages, both technological
and tacit knowledge exists about how and where to establish new export capacity
for finished products. There is a clear pattern of organizational succession in
buyer-driven chains, however, whereby foreign buyers that occupy distinct
positions (or price points) in the retail sectors of their home markets source from
each of the major Asian exporting nations in distinctive cycles or sequences
(Gereffi, 1994). This succession mechanism drives the geographical expansion
of global sourcing networks, as buyers for less expensive goods are pushed into
lower-cost production sites, and it is also crucial for industrial upgrading because
the higher price points of fashionable retailers reflect more complicated products
and differentiated styles.
Our empirical focus will be the apparel industry, with an emphasis on Asia.
This selection is justified on multiple grounds. Apparel is one of the oldest and
largest export industries in the world. Most nations produce for the international
textile and apparel market (Dickerson, 1995: 6), making this one of the most
global of all industries. Apparel is the typical ‘starter’ industry for countries
engaged in export-oriented industrialization, and it played the leading role in

East Asia’s early export growth. The apparel industry is a prototypical buyer-
driven commodity chain because it generates a highly aggressive pattern of global
sourcing through a variety of organizational channels, including giant cost-driven
discount chains (Wal-Mart, Kmart, or Target), upscale branded marketers (Liz
Claiborne, Tommy Hilfiger, Nautica), apparel specialty stores (The Limited, The
Gap), and burgeoning private label programs among mass-merchandise retailers
(J. C. Penney, Sears). Finally, apparel embodies two contrasting production
systems characteristic of buyer-driven chains: the assembly and the OEM
models. Whereas the assembly model is a form of industrial subcontracting in
which manufacturers provide the parts for simple assembly to garment sewing
plants, the OEM model is a form of commercial subcontracting in which the
buyer–seller linkage between foreign merchants and domestic manufacturers
allows for a greater degree of local learning about the upstream and downstream
segments of the apparel chain.
The organization of the chapter is as follows. First, the global commodity chains
framework will be outlined, with an emphasis on the structure and dynamics of
buyer-driven chains. Second, the role of each of the big buyers (retailers, marketers
and manufacturers) in forging global sourcing networks in the apparel commodity
chain will be highlighted. Third, an industrial upgrading framework is introduced
to help account for the most significant trade shifts among global apparel exporters.
The organizational basis for upgrading is associated with different kinds of buyer-
seller links, and distinct patterns of organizational succession among foreign buyers
in exporting nations. Fourth, from a commodity chains perspective, industrial
upgrading is associated with the process of building, extending, coordinating and
completing integrated production and trade networks in Asia. These networks are
resilient forms of social capital that are a valuable competitive asset in the global
economy. Fifth, we will assess the implications of the Asian experience for the
sourcing of apparel in North America. The United States currently is importing
garments from Mexico and the Caribbean Basin countries that have been assembled
using US inputs. Our analysis of industrial upgrading in Asia suggests that Mexico
will have to move beyond assembly production and establish a full-package or OEM
model in order to promote an integrated North American commodity chain. If
full-package supply does succeed in Mexico, however, it will utilize very different
kinds of networks than those found in Asia because of inter-regional variations in
the industrial and spatial organization of the apparel commodity chain.

Producer-Driven and Buyer-Driven Global Commodity Chains

In global capitalism, economic activity is not only international in scope, it
is also global in organization. ‘Internationalization’ refers to the geographic

spread of economic activities across national boundaries. As such, it is not a new

phenomenon; indeed, it has been a prominent feature of the world economy since at
least the 17th century when colonial empires began to carve up the globe in search
of raw materials and new markets for their manufactured exports. ‘Globalization’
is much more recent than internationalization because it implies the functional
integration and coordination of internationally dispersed activities.
Industrial and commercial capital have promoted globalization by establishing
two distinct types of international economic networks: ‘producer-driven’ and
‘buyer-driven’ commodity chains (Figure 3.1). Producer-driven commodity chains
are those in which large, usually transnational, manufacturers play the central
roles in coordinating production networks (including their backward and forward

Figure 3.1 The Organization of Producer-Driven and Buyer-Driven

Global Commodity Chains

Source: Author.
Note: Solid arrow are primary relationship; dashed arrows are secondary relationships.

linkages). This is characteristic of capital- and technology-intensive industries

such as automobiles, aircraft, computers, semiconductors, and heavy machinery.
The automobile industry offers a classic illustration of a producer-driven chain,
with multilayered production systems that involve thousands of firms (including
parents, subsidiaries and subcontractors). The average Japanese automaker’s
production system, for example, comprises 170 first-tier, 4,700 second-tier, and
31,600 third-tier subcontractors (Hill, 1989: 466). Florida and Kenney (1991) have
found that Japanese automobile manufacturers actually reconstituted many aspects
of their home-country supplier networks in North America. Doner (1991) extends
this framework to highlight the complex forces that drive Japanese automakers
to create regional production schemes for the supply of auto parts in a half-dozen
nations in East and Southeast Asia. Henderson (1989) and Borrus (1997) also
support the notion that producer-driven commodity chains have established an
East Asian division of labor in their studies of the internationalization of the US
and Japanese semiconductor industries.
Buyer-driven commodity chains refer to those industries in which large retailers,
branded marketers, and branded manufacturers play the pivotal roles in setting up
decentralized production networks in a variety of exporting countries, typically
located in the Third World. This pattern of trade-led industrialization has become
common in labor-intensive, consumer goods industries such as garments, footwear,
toys, housewares, consumer electronics, and a variety of handicrafts. Production
is generally carried out by tiered networks of Third World contractors that make
finished goods to the specifications of foreign buyers.
Profitability is greatest in the relatively concentrated segments of global
commodity chains characterized by high barriers to the entry of new firms. In
producer-driven chains, manufacturers making advanced products like aircraft,
automobiles, and computers are the key economic agents not only in terms of their
earnings, but also in their ability to exert control over backward linkages with
raw material and component suppliers, and forward linkages into distribution and
retailing. The transnationals in producer-driven chains usually belong to global
oligopolies. Buyer-driven commodity chains, by contrast, are characterized by
highly competitive, locally owned, and globally dispersed production systems.
Profits in buyer-driven chains derive not from scale, volume, and technological
advances as in producer-driven chains, but rather from unique combinations of
high-value research, design, sales, marketing, and financial services that allow the
retailers, branded marketers, and branded manufacturers to act as strategic brokers
in linking overseas factories with evolving product niches in the main consumer
markets. Thus, whereas producer-driven commodity chains are controlled by
industrial firms at the point of production, the main leverage in buyer-driven
chains is exercised by retailers, marketers, and manufacturers through their ability

to shape mass consumption via strong brand names and their reliance on global
sourcing strategies to meet this demand.
The leading firms in producer-driven and buyer-driven commodity chains use
barriers to entry to generate different kinds of ‘rents’ (broadly defined as returns
from scarce assets) in global industries. These assets may be tangible (as with
machinery), intangible (brands), or intermediate (as in marketing skills). Adapting
and extending the typology of rents in Kaplinsky (1998), producer-driven chains
rely primarily on technology rents, which arise from asymmetrical access to key
product and process technologies; and organizational rents, which refer to a form of
intra-organizational process know-how that originated in Japan, and is particularly
significant in the transition from mass production to mass customization (or
flexible production), involving a cluster of new organizational techniques such
as just-in-time production, total quality control, modular production, preventive
maintenance, and continuous improvement.
Buyer-driven chains are most closely tied to relational rents, which refer to several
families of inter-firm relationships, including the techniques of supply-chain
management that link large assemblers with small and medium-size enterprises,
the construction of strategic alliances, and small firms clustering together in a
particular locality and manifesting elements of collective efficiency associated
with OEM production;2 trade-policy rents, understood as the scarcity value created
by protectionist trade policies like apparel quotas; and brand-name rents, which
refer to the returns from the product differentiation techniques used to establish
brand-name prominence in major world markets.
In the apparel commodity chain, entry barriers are low for most garment
factories, although progressively higher as one moves upstream to textiles and
fibers; brand names and stores are alternative competitive assets firms can use
to generate significant economic rents. The lavish advertising budgets and
promotional campaigns required to create and sustain global brands, and the
sophisticated and costly information technologies employed by today’s mega-
retailers to develop ‘quick response’ programs3 that increase revenues and lower
risks by getting suppliers to manage inventory, illustrate recent techniques that
have allowed retailers and marketers to displace traditional manufacturers as the
leaders in many consumer goods industries.

Big Buyers and Global Sourcing

A fundamental restructuring is underway in the retail sector in the United States
and other developed economies. The global retailing industry is dominated by large
organizations that are moving toward greater specialization by product (the rise of
specialty stores that sell only one item, such as clothes, shoes, or office supplies)

and price (the growth of high-volume, low-cost discount chains). Furthermore,

the process of filling the distribution pipeline is leading these retailers to develop
strong ties with global suppliers, particularly in low-cost countries (Management
Horizons, 1993). Nowhere are these changes more visible than in apparel, which
is the top merchandise category for most consumer goods retailers. Between 1987
and 1991, the five largest softgoods chains in the United States increased their
share of the national apparel market from 35% to 45% (Dickerson, 1995: 452). By
1995, the five largest US retailers—Wal-Mart, Sears, Kmart, Dayton Hudson,4
and J. C. Penney—accounted for 68% of all apparel sales in publicly held retail
outlets. The next top 24 retailers, all billion-dollar corporations, represented an
additional 30% of these sales (Finnie, 1996: 22). The two top discount giants,
Wal-Mart and Kmart, by themselves control one-quarter of all apparel (by unit
volume, not value) sold in the United States.
Although the degree of market power that is concentrated in large US retailers
may be extreme, owing to the recent spate of mergers and acquisitions in this sector,
a similar shift in power from manufacturers to retailers and marketers appears to
be underway in most developed nations. Retailing across the European Union has
been marked by substantial concentration in recent years. In Germany, the five
largest clothing retailers (C&A, Quelle, Metro/Kaufhof, Kardstadt, and Otto) in
1992 accounted for 28% of the EU’s largest national economy, while the United
Kingdom’s two top clothing retailers (Marks and Spencer and the Burton Group)
controlled over 25% of the UK market in 1994 (OETH, 1995: 11–13). Marks and
Spencer, Britain’s largest and most successful retailing firm with over 260 stores
in the United Kingdom plus stores in other parts of Europe and Canada, itself
buys about 20% of all the clothing made in Britain (Dickerson, 1995: 472). In
both France and Italy, the role of independent retailers in the clothing market
has declined since 1985, while the share of specialty chains, franchise networks,
and hypermarkets is rising rapidly. In Japan, the 1992 revision of the Large Retail
Store Law, which liberalized restrictions on the opening of new retail outlets,
has caused a rapid increase in the number of large-volume retailers and suburban
chain stores. The Japanese government predicts there will be 20% fewer retailers
in Japan in the year 2000 than in 1985, mainly due to attrition among the small
and medium retail stores ( Japan Textile News, 1996).
From the vantage point of buyer-driven commodity chains, the major
significance of growing retailer concentration is its tendency to augment global
sourcing. As each type of organizational buyer in the apparel commodity chain
has become more actively involved in offshore sourcing, the competition between
retailers, marketers, and manufacturers has intensified, leading to a blurring of
the traditional boundaries between these firms and a realignment of interests
within the chain.

Retailers
In the past, retailers were the apparel manufacturer’s main customers, but now
they are increasingly becoming their competitors. As consumers demand better
value, retailers have increasingly turned to imports. In 1975, only 12% of the
apparel sold by US retailers was imported; by 1984, retail stores had doubled their
use of imported garments (AAMA, 1984). According to unpublished data in the
US Customs Service’s Net Import File, retailers accounted for 48% of the total
value of imports of the top 100 US apparel importers in 1993 (who collectively
represent about one-quarter of all 1993 apparel imports); US apparel marketers,
which perform the design and marketing functions but contract out the actual
production of apparel to foreign or domestic sources, represented 22% of the value
of these imports; and domestic producers made up an additional 20% of the total 5
(Jones, 1995: 25–26). The picture in Europe is strikingly similar. European retailers
account for fully one-half of all apparel imports, and marketers or designers add
roughly another 20% (Scheffer, 1994: 11–12).
In the 1980s, many retailers began to compete directly with the national
brand names of apparel producers and marketers by expanding their sourcing of
‘private label’ (or store-brand) merchandise. This is sold more cheaply than the
national brands but it also is more profitable to the retailers since they eliminate
some of the middlemen in the chain. Private-label programs have led a growing
number of merchants to take on the entrepreneurial functions of normal apparel
manufacturers, such as product design, fabric selection and procurement, and
garment production or sourcing. Private label goods, which constituted about
25% of the total US apparel market in 1993 (Dickerson, 1995: 460), can curtail
the business of both manufacturers and well-known designer lines.
Take the case of J. C. Penney, which like Sears, has repositioned itself as
primarily a softgoods retailer, and within softgoods has traded up from the mass
merchandiser image to higher-cost product lines to lure the traditional department
store customer. Squeezed between discounters and fashionable specialty stores,
Penney initially tried to move upscale in the early 1980s, but it was snubbed by
well-known women’s brands like Liz Claiborne, Estée Lauder, and Elizabeth
Arden, who turned their noses up at Penney’s stodgy, middle-brow image. So
Penney concentrated on converting its own private labels—such as Hunt Club,
Worthington, Stafford, St. John’s Bay, Arizona jeans, and Jacqueline Ferrar—into
high-quality brand names, which began to pay considerable dividends at home
and abroad. Today, J. C. Penney’s private-label lines account for up to 60% of the
women’s apparel volume and they are the fastest growing portion of the chain’s
product mix (Dickerson, 1995: 460). Penney’s house brands now form the backbone
of its thriving overseas business, which includes J. C. Penney stores in Canada

and Mexico, sales of its private label apparel in 300 department stores owned by
Aoyama Trading, Japan’s largest retailer of men’s suits, plus licensing agreements
in Portugal, Greece, Singapore, Indonesia, Chile, and Middle East locations like
United Arab Emirates and Dubai (Ortega, 1994; Warfield et al., 1995: 46–47).

Branded Marketers
One of the most notable features of buyer-driven chains is the creation since the
mid-1970s of prominent marketers whose brands are extremely well known, but
that carry out no production whatsoever. These ‘manufacturers without factories’
include companies like Liz Claiborne, Nike, and Reebok, who literally were ‘born
global’ since their sourcing has always been done overseas. As pioneers in global
sourcing, branded marketers were instrumental in providing overseas suppliers with
knowledge that later allowed them to upgrade their position in the apparel chain.
The cumulative and diffused aspect of this learning is reflected in the remarks
of Jerome Chazen, one of the founders of Liz Claiborne, who comments on his
company’s early years in Asian apparel sourcing (Chazen, 1996: 42):

Sourcing overseas seems commonplace nowadays. When we started our company in

1976, nobody in our price category did any sourcing overseas … But the [overseas]
manufacturers with whom we dealt back then had little or no experience servicing
the United States market. Thus, we had to train and develop them by supplying
technical help, trim, findings, and virtually all components. While we counted
on them for their labor, we had to tell them exactly how to use the basic skills
of their people and we had to watch them carefully, every step of the way. Our
manufacturers learned quickly, however. We tested some products with the first
company we used in Taiwan, and we found we could deliver better products and
better fabric at a better price than the competition and make a respectable margin.
Everybody was happy … We were very much the leaders as importers of high-end
merchandise. We sailed in uncharted waters, made our share of mistakes, and
attained an enormous competitive advantage.
The competition (both retail and wholesale) that followed us started from a
different plateau. They demanded and received more from their manufacturers
who, by this time, were much improved. It is as if many of Liz Claiborne’s
competitiors ‘leapfrogged’ us.

In order to deal with the influx of new competition, branded marketers like Liz
Claiborne are adopting several strategic responses that will alter the content and
scope of their global sourcing networks: they are discontinuing certain support
functions (such as pattern grading, marker making, and sample making), and
reassigning them to contractors; they are instructing the contractors where to

obtain needed components, thus reducing their own purchase and redistribution
activities; they are shrinking their supply chains, using fewer but more capable
manufacturers; they are adopting more stringent vendor certification systems
to improve performance; and they are shifting the geography of their sourcing
configuration from Asia to the Western Hemisphere (see Chazen, 1996). In
essence, marketers now recognize that overseas contractors have the capability
to manage all aspects of the production process, which restricts the competitive
edge of marketers to design and brands.

Branded Apparel Manufacturers

Given that foreign production can often provide similar quantity, quality, and
service as domestic producers, but at lower prices, apparel manufacturers in
developed countries have been caught in a squeeze. They are responding in several
different ways. In the United States and Europe, an ‘If you can’t beat them, join
them’ attitude has evolved among many smaller and mid-sized apparel firms, who
feel they can not compete with the low cost of foreign-made goods and thus they
are defecting to the ranks of importers.
The decision of many larger manufacturers in developed countries, however,
is no longer whether to engage in foreign production, but how to organize and
manage it. These firms supply intermediate inputs (cut fabric, thread, buttons,
and other trim) to extensive networks of offshore suppliers, typically located
in neighboring countries with reciprocal trade agreements that allow goods
assembled offshore to be re-imported with a tariff charged only on the value
added by foreign labor. This kind of international subcontracting system exists
in every region of the world. It is called the 807/9802 program or ‘production
sharing’ in the United States (USITC, 1997), where the sourcing networks of
US manufacturers are predominantly located in Mexico, Central America, and
the Caribbean; in Europe, this is known as outward processing trade (OPT), and
the principal suppliers are located in North Africa and Eastern Europe (OETH,
1995); and in Asia, manufacturers from relatively high-wage economies like Hong
Kong have outward processing arrangements (OPA) with China and other low-
wage nations (Birnbaum, 1993).
A signif icant countertrend is emerging among established apparel
manufacturers, however, who are de-emphasizing their production activities in
favor of building up the marketing side of their operations by capitalizing on both
brand names and retail outlets. Sara Lee Corporation, one of the largest apparel
producers in the United States, whose stable of famous brand names includes
L’eggs hosiery, Hanes, Playtex, Wonderbras, Bali, and Coach leather products, to
name a few, recently announced its plans to ‘de-verticalize’ its consumer-products

divisions, a fundamental reshaping that would move it out of making the brand-
name goods it sells. ‘As the world opens up to do business,’ according to a Sara Lee
spokeswoman, ‘the operating model for today’s exemplary companies no longer
needs to include significant manufacturing assets … We’ve determined that we
no longer need to own all the assets needed in manufacturing the products we sell’
(Miller, 1997: A3). Other well-known apparel manufacturers like Phillips-Van
Heusen and Levi Strauss and Co. are also emphasizing the need to build global
brands, frequently through acquisitions of related consumer products lines, while
many of their production facilities are being closed or sold to offshore contractors.
The strengthening of brand names has led to a new focus on ‘concept stores’
that typically feature all the products offered by manufacturers and marketers,
such as Levi Strauss, Nike, Disney, and Warner Bros. These stores provide a
direct link between manufacturers and consumers, bypassing the traditional role
of retailers. Levi Strauss, the largest apparel company in the United States, had
126 Levi’s retail stores in 1993, all operated by a retail specialist, Designs Inc.
Over half of Levi Strauss’s profits in 1993 were generated from overseas operations,
which included about 900 franchised Levi’s shops in 30 countries in Europe, Asia,
and Latin America (Warfield et al., 1995: 80–81). Thus, a de-verticalization of
production co-exists with a re-verticalization of brands and stores.

rade Shifts and Industrial Upgrading in the Apparel Commodity Chain

T
in Asia
The world textile and apparel industry has undergone several migrations of
production since the 1950s and they all involve Asia. The first migration of the
industry took place from North America and Western Europe to Japan in the
1950s and early 1960s, when Western textile and clothing production was displaced
by a sharp rise in imports from Japan. The second supply shift was from Japan
to the ‘Big Three’ Asian apparel producers (Hong Kong, Taiwan, and South
Korea), which permitted the latter group to dominate global textile and clothing
exports in the 1970s and 1980s. During the past 10–15 years, there has been a
third migration of production—this time from the Asian Big Three to a number
of other developing economies. In the 1980s, the principal shift was to mainland
China, but it also encompassed several Southeast Asian nations and Sri Lanka.
In the 1990s, the proliferation of new suppliers included South Asian and Latin
American apparel exporters, with new entrants like Vietnam waiting in the wings
(Khanna, 1993; Gereffi, 1996).
This most recent shift is seen in sharp relief in Table 3.1, which looks at apparel
imports to the United States, the world’s largest market. In 1983, the Asian ‘Big
Three’ (Hong Kong, Taiwan, and South Korea), plus China, were responsible for

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Table 3.1 Trends in US Apparel Imports by Region and Country

Country source 1983 value 1986 value 1990 value 1993 value 1995 value 1997 value
US$ (%) US$ (%) US$ (%) US$ (%) US$ (%) US$ (%)
million million million million million million
Northeast Asia
China 759 1661 3439 6187 5895 7450
Hong Kong 2249 3392 3977 4019 4342 4028
Taiwan 1800 2621 2489 2332 2157 2166
South Korea 1685 2581 3342 2539 1841 1665
Macao 132 229 417 483 757 930
Total 6625 68 10483 60 13663 54 15558 46 14991 38 16239 33
Southeast Asia
Indonesia 75 269 645 1114 1359 1789
Philippines 319 473 1083 1361 1633 1650
Thailand 125 213 483 943 1172 1468
Malaysia 93 257 604 973 1199 1244
Singapore 193 386 621 517 424 290
Total 806 8 1598 9 3436 13 4907 14 5787 15 6440 13

Cont’d.
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Cont’d.
Country source 1983 value 1986 value 1990 value 1993 value 1995 value 1997 value
US$ (%) US$ (%) US$ (%) US$ (%) US$ (%) US$ (%)
million million million million million million
South Asia
India 220 344 636 1079 1263 1508
Bangladesh 7 154 422 740 1072 1442
Sri Lanka 126 257 426 834 970 1242
Pakistan 32 92 232 442 620 705
Total 385 4 847 5 1716 7 3094 9 3924 10 4897 10
Central America and the Caribbean
Dominican Republic 287 723 1443 1753 2234
Honduras 20 32 113 510 934 1688
El Salvador 7 11 54 251 583 1052
Guatemala 4 20 192 552 691 976
Costa Rica 64 142 384 653 757 851
Jamaica 13 99 235 388 531 471
Other CBI 142 207 284 218 239 392
Total 389 4 797 5 1985 8 4015 12 5486 14 7665 16
Mexico 199 2 331 2 709 3 1415 4 2876 7 5350 11
All other countries 1328 14 3283 19 4009 16 4914 14 6595 17 7664 16
Total apparel 9731 100 17341 100 25518 100 33904 100 39660 100 48492 100
Source: Compiled from official statistics of the US Department of Commerce, US imports for consumption, customs value. Data before 1989 are estimated.
86 Global Value Chains and Development

two-thirds of US apparel imports; by 1997, this share had dropped to one-third.

During the past 15 years, we see two main trends in US apparel imports: (1) a shift
within Asia from the ‘Big Three’ to the growing importance of successive waves
of exporters: first China, followed by capitalist Southeast Asia, South Asia, and
now socialist Southeast Asia (Vietnam, Laos, and Cambodia); and (2) a growth in
non-Asian sources of apparel supply, especially the importance of Central America
and the Caribbean as a region (which doubled its share of US apparel imports from
8% in 1990 to 16% in 1997) and, most notably, Mexico (which nearly quadrupled
its share of US apparel imports from 3% to 11% in the same period).
How can we explain these trade shifts in the apparel commodity chain? A
simple market explanation is that the most labor-intensive segments of the apparel
commodity chain will be located in countries with the lowest wages. This account
is supported by the sequential relocation of textile and apparel production from
the United States and Western Europe to Japan, the Asian Big Three, and China,
given that each new tier of entrants to the production hierarchy had significantly
lower wage rates than their predecessors. The cheap-labor argument does not hold
up as well, however, when we get to the proliferation of new Asian and Caribbean
suppliers, whose US market share expanded even though their wage rates are often
considerably higher than China’s. Furthermore, although the share of US apparel
exports represented by Hong Kong, South Korea, and Taiwan has declined during
the past decade, these NIEs still rank among Asia’s top apparel exporters to the
United States in 1997, despite having the highest apparel labor costs in the region,
excluding Japan (ILO, 1995: 35–36)
Exchange rates and trade policies help to explain some of these discrepancies.
A critical factor in the sharp decline of Taiwan’s and South Korea’s apparel exports
in the late 1980s was not only their rising wage rates, but the sharp appreciation
of their local currencies vis-à-vis the US dollar after the Plaza Agreement was
signed in 1985. Between 1985 and 1987, the Japanese yen was revalued by close
to 40%, the New Taiwan dollar by 28%, and from 1986 to 1988 the Korean won
appreciated by 17% (Bernard and Ravenhill, 1995: 180). The most important
policies that shape US apparel imports from Asia, the Caribbean, and elsewhere,
however, are quotas and preferential tariffs. Since the early 1970s, quotas on apparel
and textile items were regulated by the Multi-Fiber Arrangement (MFA). The
MFA has been used by the United States, Canada, and various European nations
to impose quantitative import limits in a wide variety of product categories.
Although the clear intent of these policies was to protect developed country
firms from a flood of low-cost imports that threatened to disrupt major domestic
industries, the result was exactly the opposite. Protectionism heightened the
competitive capabilities of developing country manufacturers, who learned to make
sophisticated products that were more profitable than simple ones. Protectionism

by the industrialized nations also diversified the scope of foreign competition, as

an ever widening circle of exporters was needed to meet booming North American
and European demand. In recent years, the creation of the European Union and
the North American Free Trade Agreement (NAFTA) has led to preferential
tariffs in these trade blocs, and promoted a growing consolidation of supply chains
within regions.
The ability of the East Asian NIEs to sustain their export success over
several decades, and to develop a multilayered sourcing hierarchy within Asia, is
only partially related to wage rates and state policies. From a commodity chain
perspective, East Asia must be viewed as part of an interrelated regional economy.
The apparel export boom in the less developed southern tier of Asia has been
driven to a significant extent by the industrial restructuring of the northern tier
East Asian NIEs. As Northeast Asian firms began moving their production
offshore, they devised ways to coordinate and control the sourcing networks they
created. Ultimately, they focused on the more profitable design and marketing
segments within the apparel commodity chain to sustain their competitive edge.
This transformation can be conceptualized as a process of industrial upgrading,
based in large measure on building various kinds of economic and social networks
between buyers and sellers.
Industrial upgrading is a process of improving the ability of a firm or an economy
to move to more profitable and/or technologically sophisticated capital- and
skill-intensive economic niches. Industrial upgrading operates at several different
levels of analysis: (1) within factories—upgrading involves moving from cheap to
expensive items, from simple to complex products, and from small to large orders;
(2) within inter-firm enterprise networks—upgrading involves moving from mass
production of standardized goods to the flexible production of differentiated
merchandise; (3) within local or national economies—upgrading involves moving
from simple assembly of imported inputs to more integrated forms of OEM and
OBM production, involving a greater use of forward and backward linkages at
the local or national level; and (4) within regions—upgrading involves shifting
from bilateral, asymmetrical, inter-regional trade flows to a more fully developed
intra-regional division of labor incorporating all phases of the commodity chain
from raw material supply, through production, distribution, and consumption.
While the national and international dimensions of industrial upgrading will
be analyzed in the following sections of this chapter, the organizational basis for
industrial upgrading within factories and enterprises will be outlined here. At
the organizational level, industrial upgrading in East Asia’s apparel commodity
chain was produced by the information flows and learning potential associated
with the buyer-seller links established by different types of lead firms (retailers,
marketers, and manufacturers), and also by a distinctive pattern of organizational

succession among these lead firms, who placed varied kinds of demands on their
overseas suppliers.
The retailers, marketers, and manufacturers involved in global sourcing play
similar structural roles as big buyers in the apparel commodity chain because they
are all major garment importers. What differs across the production and sourcing
networks they set up is not the role of these companies as organizational buyers,
but rather the kind of information that is transmitted and thus the kind of local
learning that can take place, given the position of each of the buyers in the chain.
Manufacturers engaged in production-sharing arrangements, for example, require
the lowest level of expertise from their apparel suppliers: the assembly of cut parts
into finished garments. The knowledge gained is relevant only to the production
segment of the commodity chain. Retailers and marketers, however, need suppliers
with the capability to make garments and the logistical know-how to find all the
parts needed in the finished product.6
Thus, they require more advanced full-package or OEM companies who,
in turn, may subcontract out parts of these orders to other local firms. Besides
learning how to organize production networks, full-package companies also learn
about the marketing side of the business. It is this learning that allows the Asian
suppliers to move from the OEM to the OBM export roles.
A second key mechanism for the industrial upgrading of apparel suppliers in
Asia is the pattern of organizational succession among different kinds of buyers,
who contribute in unique ways to the geographic expansion and industrial
upgrading of these buyer-driven chains. There is a clear status hierarchy among
US retailers that affects where and how they engage in global sourcing (Gereffi,
1994: 110–113). Fashion-oriented retailers that cater to an exclusive clientele
for ‘designer’ products get their expensive, nationally branded goods from a
small group of premium-quality apparel exporters (e.g., Italy, France, Japan).
Department stores and specialty chains that emphasize private-label products
source primarily from the East Asian NIEs and more established Third World
apparel exporters. The large-volume discount stores that sell the most inexpensive
products import from the lowest-cost suppliers, which frequently make relatively
simple or standardized goods.
Organizational succession in the apparel commodity chain refers to the fact
that different types of foreign buyers pass through each tier in the global sourcing
matrix (see Figure 3.2 for an illustration), as the countries in that tier develop their
export capability. Discount chains like Kmart and mass merchandisers like J. C.
Penney, for example, frequently were the first buyers to open up the capabilities for
volume production in new export sites in Asia. When department stores or specialty
stores willing to pay significantly more money for higher quality versions of the
same garments came along, the discounters and mass merchandisers were ‘pushed

out’ of these factories. They either had to move to less experienced factories in the
same country or to less expensive countries. The process was repeated as higher
status buyers came in and gained factory space for more expensive merchandise.
Generally some large-volume orders were retained, along with high-value but
smaller orders, so that factories could smooth out their production schedules.
This succession of foreign buyers thus permitted manufacturers to upgrade their
facilities as they met buyer demands for more sophisticated products.7

Figure 3.2 Shifts in the Regional Structure of US Apparel Imports, 1986–1996

Source: Compiled from official statistics of the US Department of Commerce, US imports for
consumption, customs value.
Note: 1The 1996 position corresponds to the ring where the country’s name is located; the 1986
position, if different, is indicated by a small circle. The arrow represents the magnitude and
direction of change over time.

Small trading companies operate as ‘industry scouts’ on the fringes of the

international production frontier in order to help develop potential new sources of
supply for the apparel commodity chain in places like Saipan, Yap, and Myanmar.
The difficult role of industry scouts is captured in the poignant remark of a
long-time Asian sourcing specialist: ‘Amateurs dream of traveling to the ends
of the earth to produce garments. Professionals have already been to the ends of
the earth, and they know the pressing there is not good’ (Birnbaum, 1993: 139).
With this conceptual backdrop to the organizational foundations of production
and trade networks in buyer-driven commodity chains, we can now look more
closely at the evolution of apparel trade patterns and industrial upgrading in Asia.

The Evolution of the Apparel Commodity Chain in Asia

Industrial upgrading within the apparel commodity chain in Asia involves the use
of networks to create new sources of national and regional competitive advantage.
We trace this process through four stages: the building of locally integrated
manufacturing and marketing networks, involving close ties with foreign buyers;
the internationalization of the apparel commodity chain to encompass new tiers of
low-cost suppliers in Asia, in response to a combination of supply-side constraints
and external pressures; the coordination of these buyer-driven chains through
different types of trade networks; and the completion or regionalization of the
apparel commodity chain within Asia. This industrial upgrading cycle in Asia
is locally rooted, but it has important repercussions on how the apparel industry
is organized in other regions of the world, such as North America and Europe.

Building Commodity Chains: OEM and OBM in East Asia

The East Asian NIEs are generally taken as the archetype for industrial upgrading
among developing countries. They made a rapid transition from the initial
assembly phase of export growth (typically utilizing export-processing zones
located near major ports) to a more generalized system of incentives that applied
to all export-oriented factories in their economies. The next stage for Taiwan,
South Korea, Hong Kong, and Singapore was OEM production. The OEM
model has the following features: the supplying firm makes a product according
to the design specified by the buyer; the product is sold under the buyer’s brand
name; the supplier and buyer are separate firms; and the supplier lacks control
over distribution. East Asian firms soon became full-range package suppliers for
foreign buyers, and thereby forged an innovative entrepreneurial capability that
involved the coordination of complex production, trade, and financial networks
(Gereffi, 1995).

The OEM export role has many advantages. It enhances the ability of local
entrepreneurs to learn the preferences of foreign buyers, including international
standards for the price, quality, and delivery of export merchandise. It also
generates substantial backward linkages in the domestic economy because OEM
contractors are expected to develop reliable sources of supply for many inputs.
Moreover, expertise in OEM production increases over time and it spreads across
different types of activities. The OEM supplier learns much about the downstream
and upstream segments of the apparel commodity chain from the buyer. This tacit
knowledge can later become a powerful competitive weapon.
Particular places such as the East Asian NIEs thus retain an enduring
competitive edge in export-oriented development. However, East Asian producers
confront intense competition from lower-cost exporters in various parts of the
Third World, and the price of their exports to Western nations has been further
elevated by sharp currency appreciations during the past decade. Under these
circumstances, it is advantageous to establish forward linkages to developed-
country markets, where the biggest profits are made in buyer-driven commodity
chains. Therefore, a number of firms in the East Asian NIEs that pioneered OEM
are now pushing beyond it to the original brand-name manufacturing (OBM)
role by integrating their manufacturing expertise with the design and sale of their
own branded merchandise.
South Korea is the most advanced of the East Asian NIEs in OBM production,
with Korean brands of automobiles (Hyundai), electronic products (Samsung), and
household appliances (Samsung and Goldstar), among other items, being sold in
North America, Europe, and Japan.8 Taiwanese companies have pursued OBM in
computers, bicycles, sporting equipment, and shoes, but not in apparel. In Hong
Kong, clothing companies have been the most successful in making the shift from
OEM to OBM. The women’s clothing chain Episode, controlled by Hong Kong’s
Fang Brothers Group, one of the foremost OEM suppliers for Liz Claiborne in
the 1970s and 1980s, has stores in 26 countries, only a third of which are in Asia.
Giordano, Hong Kong’s most famous clothing brand, has added to its initial base
of garment factories 200 stores in Hong Kong and China, and another 300 retail
outlets scattered across Southeast Asia and Korea. Hang Ten, a less-expensive
line, has 200 stores in Taiwan, making it the largest foreign-clothing franchise
on the island (Granitsas, 1998).
There have been significant reversals in the OBM experience, however. Mitac
Corporation, the main competitor to Acer in Taiwan’s personal computer market,
reduced its own-brand computers from 70% of its total sales in 1990 to 40% in 1993
(Selwyn, 1993). Daewoo, Korea’s third-largest appliance and consumer-electronics
company (after Samsung and Goldstar), moved from years of brand-building back
to the OEM game (Asiaweek, 1995).

Why has the OEM role proved so resilient? To a large degree, the answer lies
with core competencies and networks. C. S. Ho, the president of Mitac, says that
his firm was more profitable when it concentrated on its core competencies: ‘We
asked ourselves: What functions are we best at? Our strengths are in R&D, design
and manufacturing. We are now focusing on designing and supplying products
and key components for major OEM customers, whose brands are better-known
but which have withdrawn from fully integrated manufacture’ (Selwyn, 1993:
24). S. H. Bae, Chairman and Chief Executive Officer of Daewoo, says, ‘Our
strength is in manufacturing. If our margins are adequate, we don’t mind making
products for others’ (Asiaweek, 1995: 56). Bae expects a shakeout in appliances and
consumer electronics by the year 2000, and concludes that companies will have
to become dominant producers in core products.
To keep OEM profitable under conditions of intense wage competition
among developing countries and protectionism in Western markets, East Asian
NIE companies have set up elaborate offshore production networks. Daewoo,
for example, has 16 offshore plants in China, Vietnam, Central Asia, Europe
and Mexico. Through worker-training programs, Bae claims that ‘[Daewoo’s]
Vietnam plant is almost as efficient as local ones’ (Asiaweek, 1995: 57). Thus,
the key to profitability in OEM production for East Asian NIEs seems to
be manufacturing expertise (including substantial spending in research and
development), and learning how to f lexibly manage overseas production
networks. This can be seen in Hong Kong’s apparel manufacturers, Taiwan’s
footwear companies, and Singapore’s computer firms. Network f lexibility thus
has become one of the major organizational assets utilized by the NIEs in their
internationalization strategies.

Internationalizing Commodity Chains: Offshore Sourcing by the East Asian

NIEs
In each of the East Asian NIEs, a combination of domestic supply-side constraints
(labor shortages, high wages, and high land prices) and external pressures
(currency revaluation, tariffs, and quotas) led to the internationalization of the
textile and apparel complex by the late 1980s and early 1990s. Typically, the
internationalization of production was sparked first by quotas, but the process
was greatly accelerated as supply-side factors became adverse. Quotas determined
when the outward shift of production began, while preferential access to overseas
markets and social networks determined where the firms from the East Asian
NIEs went. In this international division of labor, skill-intensive activities were
retained in East Asia9 and labor-intensive activities were relocated.

Hong Kong
The internationalization of Hong Kong’s firms was triggered by textile import
restrictions imposed by the United Kingdom in 1964, which led Hong Kong
manufacturers in the late 1960s to shift production to Singapore, Taiwan,
and Macao. The Chinese population in these three countries had cultural and
linguistic affinities with Hong Kong investors. In addition, Macao benefited
from its proximity to Hong Kong, while Singapore qualified for Commonwealth
preferences for imports into the United Kingdom. In the early 1970s, Hong Kong
apparel firms targeted Malaysia, the Philippines, and Mauritius. This second
round of outward investments again was prompted by quota restrictions, coupled
with specific host-country inducements. For example, Mauritius established an
export-processing zone in an effort to lure Hong Kong investors, particularly
knitwear manufacturers who directed their exports to European markets that
offered preferential access in terms of low tariffs.
The greatest spur to the internationalization of Hong Kong’s textile and apparel
companies was the opening of the Chinese economy in 1978. At first, production
was subcontracted to state-owned factories, but eventually an elaborate outward
processing arrangement with China was set up that relied on a broad assortment
of manufacturing, financial, and commercial joint ventures. The relocation
of industry to the Chinese mainland led to a hollowing out of Hong Kong’s
manufacturing sector during the late 1980s and early 1990s. In 1991, 47,000
factories were employing 680,000 workers in Hong Kong, a figure 25% below
the peak of 907,000 manufacturing jobs recorded in 1980 (Khanna, 1993: 19).
The decline was particularly severe in textiles and apparel. Employment in the
Hong Kong textile industry fell from 67,000 in 1984 to 36,000 in 1994—a drop
of 47%. Meanwhile, Hong Kong’s clothing jobs plummeted from 300,000 in 1984
to 137,000 in 1994—a decrease of 56% in a single decade (De Coster, 1996a: 65).
While manufacturing declined, trading activities in Hong Kong grew to
encompass approximately 70,000 firms and 370,000 jobs in 1991, a fivefold increase
in the number of firms and a fourfold increase in the number of workers in the
trading sector compared to 1978 (Khanna, 1993: 19). Thus, trading companies to
a large extent have replaced factories as the key economic agent in Hong Kong’s
export-oriented growth.
In 1995, Hong Kong entrepreneurs operated more than 20,000 factories
employing an estimated 4.5–5 million workers in the Pearl River Delta alone in the
neighboring Chinese province of Guangdong (De Coster, 1996b: 96). Considering
that total employment in Hong Kong industry had shrunk to 386,000 in 1995, or
just over 15% of the Hong Kong workforce (Berger and Lester, 1997: 9), Hong
Kong manufacturers in effect increased their domestic labor force well over tenfold
through their outward processing arrangement with China.

This extreme reliance of Hong Kong apparel manufacturers on low-cost

Chinese labor has several sources of vulnerability that may undermine the viability
of this model in the future (Berger and Lester, 1997: 158–162). First, although
Guangdong province was once a zone of low wages and an abundant workforce,
both wages and land costs have been rising rapidly. As costs in Guangdong go
up, Hong Kong manufacturers who wish to retain this Chinese-based production
system will have to move their facilities deeper and deeper inland into China, where
they will once again encounter bad roads, inadequate water and power systems,
and lack of commercial infrastructure. Second, as production moves inland, it will
be increasingly difficult to maintain an adequate supply of Hong Kong managers.
Rather than trying to replicate the Pearl River Delta pattern on a large scale
further inland, it probably would be better to try to upgrade the operations in the
Guangdong plants. Third, new low-cost apparel exporting nations are emerging
in Asia—Indonesia, Sri Lanka, India, Myanmar, Vietnam, and others—while
Mexico and the Caribbean Basin economies loom as cheap production sites with
closer proximity to the large US market. Hong Kong has no special advantages
in many of these locations, which suggests that it should avoid being locked into
low-wage offshore manufacturing networks and instead take fuller advantage
of the global trend toward service-enhanced manufacturing where Hong Kong
retains a strong competitive edge.

South Korea
As in Hong Kong, the internationalization of South Korea’s and Taiwan’s apparel
producers began as a response to quota restrictions. Korean garment firms
lacking sufficient export quotas initially set up offshore production in quota-free
locations like Saipan, a US territory in the Mariana Islands. More recent waves
of internationalization have been motivated by the domestic constraints of rising
wages and worker shortages. The low-wage regions that have attracted the greatest
number of South Korean companies are Latin America, and Southeast and South
Asia. The preference of Korean firms for investment in Latin America (Guatemala,
Honduras, the Dominican Republic, etc.) is stimulated by its proximity to the
US market and easy quota access. The pull of Asian nations such as Indonesia,
Sri Lanka and Bangladesh comes mainly from their wage rates, which are among
the lowest in the world.

Taiwan
When Taiwanese firms moved offshore in the early 1980s, they also confronted
binding quotas. While Taiwan’s wages in the late 1970s and early 1980s were still

relatively low, quota rents were high. Firms had to buy quotas (whose value in
secondary markets fluctuated widely) in order to be able to expand exports, thereby
causing a decrease in profitability for firms without sufficient quota (Appelbaum
and Gereffi, 1994). This led to a growing emphasis on non-quota markets by
Taiwan’s textile and apparel exporters. Quota markets (the United States, the
European Community, and Canada) accounted for over 50% of Taiwan’s textile
and apparel exports in the mid-1980s, but this ratio declined to 43% in 1988 and
fell further to 35% in 1991. The United States, which had been Taiwan’s largest
export market for years, claimed one-quarter of Taiwan’s textile and apparel exports
in 1991; the European Community 8%; and Canada just 2%. The main non-
quota markets, which absorbed nearly two-thirds of Taiwan’s textile and apparel
exports in the early 1990s, were Hong Kong (30%), Japan (6%), and Singapore
(3%) (Khanna, 1993: 29–30). Hong Kong, now Taiwan’s leading export market,
is mainly a conduit for shipping yarns, fabrics, and clothing to China for further
processing and re-export.

Coordinating Commodity Chains: Triangle Manufacturing and Overseas

Buying Off ices
One of the most important mechanisms facilitating the geographical expansion and
the shift to higher value-added activities for mature export industries like apparel
in East Asia is the process of ‘triangle manufacturing’. The essence of triangle
manufacturing, which was initiated by the East Asian NIEs in the 1970s and
1980s, is that US buyers place their orders with the NIE manufacturers they have
sourced from in the past, who in turn shift some or all of the requested production
to affiliated offshore factories in low-wage countries (e.g., China, Indonesia, or
Vietnam). The triangle is completed when the finished goods are shipped directly
to the foreign buyer under the US quotas issued to the exporting nation. Triangle
manufacturing thus changes the status of NIE manufacturers from established
suppliers for US retailers and marketers to middlemen in buyer-driven commodity
chains that can include as many as 50–60 exporting countries (Gereffi, 1994).
Triangle manufacturing networks are historically and socially embedded. The
early traders in Asia established long-distance supply routes that relied heavily
on social ties between Asian producers and their export markets. The Japanese
sogo shosha were involved in transferring textile, apparel and footwear production
from Japan to Hong Kong, Taiwan, and Korea during the 1950s. They mainly
handled the logistics of providing machinery, intermediate goods, and working
capital to East Asian apparel and footwear exporters. The British merchant houses,
originally founded as intermediaries for trade between China and the West, were
instrumental in the transition of Hong Kong from an entrepôt to a manufacturing-

based economy. They gave Hong Kong’s industrial enterprises the knowledge
and logistical support needed for exports to distant countries, and they helped
to establish confidence and goodwill for Hong Kong products among foreign
buyers. But as markets for Hong Kong garments diversified following the Second
World War to include North American and other European countries, Chinese-
owned companies became an increasingly important channel of exports from the
mid-1950s onward. These Chinese merchants played a crucial intermediary role
because most of the first-generation Chinese manufacturers in Hong Kong did not
speak English and thus could not communicate effectively with foreign buyers or
merchants. Less well-known but also crucial for the early development of Hong
Kong’s garment industry were the Indian trading companies, who were part of
a network of Indian merchants scattered in Asia and Africa who specialized in
exports to the Middle East and Africa (Leung, 1997: Chapter 5).
Today, each of the East Asian NIEs has a different set of preferred countries
where they set up their new factories. Hong Kong and Taiwan have been the
main investors in China and Southeast Asia; South Korea has been especially
prominent in Indonesia, Guatemala, the Dominican Republic, and North
Korea; and Singapore is a leading force in nearby Malaysia and Indonesia. These
production networks are explained in part by social and cultural factors (e.g., ethnic
or familial ties, common language), as well as by unique features of a country’s
historical legacy (e.g., Hong Kong’s British colonial ties gave it an inside track on
investments in Mauritius and Jamaica). However, as the volume of orders expands
in new low-wage production sites, the pressure grows for the large US buyers
to eventually bypass their East Asian intermediaries and deal directly with the
factories that fill their orders.
The most direct link between US buyers and their Asian suppliers are the
overseas buying offices of the major US retailers, which join the seasonal orders10
coming from US headquarters with the output from their offshore supply networks
that include as many as 200–400 factories. The organizational capabilities of these
buying offices began to expand as retailers got more heavily involved in product
development to supply their growing collections of private-label merchandise. Prior
to the formation of offshore buying offices, importers were the main link between
US retailers and foreign factories. However, as the volume and range of imported
products began to grow, retailers decided to initiate direct purchases offshore not
only to save the commission paid to importers, but also to have a greater degree of
control over the quantity, quality, and timing of their orders. Sears, Montgomery
Ward, and Macy’s were the first American companies to establish buying offices
in Hong Kong in the 1960s, mainly to purchase hard goods (such as household
appliances, lighting fixtures, furniture, kitchenware, and toys). The really big
apparel orders came when Kmart and J. C. Penney set up their Hong Kong offices

in 1970, quickly followed by branch offices in Taiwan, Korea, and Singapore. By

the mid-1970s many other retailers, such as the May Department Stores Company,
Associated Merchandising Corporation (AMC), and Woolworth, had jumped on
the direct-buy bandwagon in the Far East (Gereffi and Pan, 1994).
Table 3.2 provides a detailed look at the top 10 US retailer buying offices in
Taiwan in 1992. Kmart and Wal-Mart, the two biggest US retailers, did the largest
volume of business in Taiwan, with annual orders in 1992 of $500 million and
$300 million, respectively. J. C. Penney, AMC (a member-owned group buying
office for 40 different US stores), Mast Industries (the major overseas sourcing
arm of The Limited), Montgomery Ward, and Woolworth all purchased between
$100 million and $200 million in merchandise through their Taiwan offices, while
Sears, May Department Stores, and Macy’s did $50 to $75 million in business.
Note that these amounts refer to the value of orders placed with the retail buying
offices in Taiwan by their US headquarters, not to the volume of shipments from
Taiwan. Generally, a substantial portion of the orders placed in Taiwan in the early
1990s were transferred to lower-cost countries by the Taiwanese manufacturers,
via the process of triangle manufacturing described above. Taiwan nonetheless
served as the logistical center for filling the orders that were moved offshore,
typically through the supply of fabric and other intermediate materials still made
in Taiwan,11 and the coordination of a variety of needed services, such as quality
control inspections, shipping, and the transfer of funds for letters of credit.
The proportion of apparel orders placed with the Taiwanese buying offices of
US retailers that were actually sourced domestically is also shown in Table 3.2.
There is wide variation in company strategies. Whereas three retail buying offices
(Kmart, Montgomery Ward, J. C. Penney) gave just 25–35% of their orders to local
factories, six others sourced 70% or more of their apparel orders in Taiwan, and
Mast Industries, the largest apparel sourcer from Taiwan, placed 100% of its orders
with Taiwanese factories. The reasons for these differences in company strategy
reflect a range of factors, including quota availability in Taiwan for the types of
products ordered, the retailer’s preference for low cost or high quality, and the
speed with which the order must be filled. Mast Industries, which specializes in
‘speed sourcing’ and is reputed to have the fastest turnaround time in the business
(30–40 days from order to shipment), filled all its orders in Taiwan because local
factories there were the only option that allowed Mast to meet its short lead times.
Finally, we see in Table 3.2 the main countries to which Taiwan’s US retail
buying offices transferred the offshore portion of their orders. In many of the
countries on this list, there is a sizable overseas Chinese business community that
supplies the Taiwanese firms with political contacts, a business infrastructure, and
the local knowledge necessary for lowering risks in an offshore operation. Thus,
social ties shape sourcing networks.

Table 3.2 The Triangle Sourcing Networks of the Top 10 US Retail Buying Offices in Taiwan, 1992
Company Value of orders Types of merchandise Sourcing channels for apparel Source of apparel shipmentsc
placed in Taiwan Softlinesa Hardlines Taiwanb Offshore (main countries)
(US$ millions) (%) (%) (%) (%)
Kmart 500 45 55 35 65 Indonesia, United Arab Emirates, Philippines,
plus ten additional countries
Wal-Martd 300 30 70 50 50 People’s Republic of China, Indonesia, Sri Lanka
J. C. Penney 200 50 50 25 75 Philippines, Indonesia, Thailand, Bangladesh
Associated Merchandising 180 65 35 70 30 Philippines, Singapore, Malaysia, Indonesia,
Corporation (AMC)e Thailand, People’s Republic of China
Mast Industriesf 140 100 0 100 0 None
Montgomery Ward 135 35 65 33 67 Indonesia, Thailand, Philippines, Chile
Woolworth 110 46 54 75 25 People’s Republic of China, Indonesia, Sri Lanka,
Bangladesh, Vietnam, Lesotho
Sears 75 40 60 92 8 Bangladesh, Philippines
May Department Stores 70 65 35 80 20 Indonesia, Singapore, Philippines
R. H. Macy and Company 50 73 27 85 15 Philippines, Indonesia
Source: Interviews in Taiwan by the author.
Notes: a The softlines percentages are exclusively apparel, with the following exceptions: Kmart—apparel, handbags, and home fashions; Wal-Mart—apparel
(70%) and footwear (30%); and Montgomery Ward—apparel and footwear (minimal).
b The Taiwan percentage refers to the proportion of each retail buying office’s orders that are made in and shipped from Taiwan.

c Offshore shipments refer to orders given by the retail buying offices to local manufacturers in Taiwan, who in turn transfer the orders to affiliated offshore factories

for production and export under the quota of the designated countries. Offshore sources are listed in their relative order of importance to Taiwan’s buying offices.
d Wal-Mart’s sole sourcing agent in Taiwan, and much of the rest of Asia as well, is Pacific Resources Export Limited (PREL). Although registered as a Hong

Kong trading company, PREL is owned by Indonesia’s Salim Group, one of the biggest industrial conglomerates in Asia.
e Associated Merchandising Corporation is a group buying office that serves about 40 different stores in the United States, including Dayton-Hudson, Federated

Department Stores, Target, and Bradlees.

f Mast industries is the main overseas sourcing arm and a wholly owned subsidiary of The Limited.
International Trade and Industrial Upgrading in the Apparel Commodity Chain 99

Completing Commodity Chains: From Export Platform to Branded

Marketing in Asia
Two trends—the shift from OEM to OBM, and the growing importance of non-
quota markets for the NIEs—point to an important fact: production and trade
networks in the apparel commodity chain are becoming increasingly concentrated
in Asia. There has been a sharp decline in Asian clothing exports to North America
(from 27% of the global total in 1984 to 16% in 1996), a drop in Asian apparel
exports to Western Europe (down to 11% of global trade), and a striking increase
in intra-Asian trade in apparel (from 4.3% in 1980 to 12.3% in 1996). This rise
in intra-Asian trade is even stronger in textiles, where it increases from 13% of
the world total in 1980 to nearly 28% in 1996 (see Table 3.3).
Asia’s growing prominence as a market for its own textile and apparel output,
and the continuing migration of production to low-cost supply sites around the
world, suggest a general restructuring may be underway that is leading to parallel
processes of regionalization of the apparel commodity chain within Asia, North
America, and Europe. The emerging supply relationships that are being fashioned
with nearby low-cost producers in each area (South Asia and Vietnam in Asia,
Central America and the Caribbean vis-à-vis North America, and North Africa
and Eastern Europe for the European Union) are likely to strengthen intra-
regional trade and production networks in the apparel chain, thereby giving rise
to new forms of economic coordination and competition among local as well as
global firms.

Implications of the Asian Experience for North America

Our analysis of the apparel commodity chain in Asia suggests two main hypotheses
for the future of the textile and apparel sector in North America. First, the relative
decline of finished apparel exports from the East Asian NIEs is producing a ‘supply
gap’ in the North American apparel commodity chain. This is partly due to the
greater geographical distances and logistical complexity involved in managing
Asia’s triangle manufacturing networks, as well as the tendency for more direct
marketing in Asia as local manufacturers shift from OEM to OBM. Second, since
Asian apparel supply to the United States has primarily been oriented to filling
the OEM orders of US retailers and branded marketers, apparel manufacturers
in North America will need to develop the capability to carry out full-package
supply. Previously this had only been done by the East Asia NIEs for the US
mass market, or in the fashion centers of Europe for high couture. An interpretive
sketch that offers a tentative response to these two hypotheses will be outlined in
the remainder of this chapter.

Table 3.3 Regional Trade Patterns in World Exports of Textiles and Clothing
1980 1984 1987 1990 1993 1996
Textiles
World (US$ billions) 55.6 53.9 80.2 104.8 115.4 150.2
World (percentages) 100.0 100.0 100.0 100.0 100.0 100.0
Intra-Western Europe 40.1 34.9 40.0 41.4 32.8 30.0
Intra-Asia 13.1 17.4 18.2 20.6 26.6 27.6
Asia to Western Europe 1.6 4.6 5.9 5.6 5.8 5.3
Western Europe to C. / E. Europe/ NA NA NA 2.3 3.1 4.4
Baltic States / CIS a
Asia to North America 2.9 5.4 4.9 3.6 4.3 3.5
Asia to the Middle East NA NA NA 2.2 3.0 2.8
Western Europe to Asia 1.6 2.4 2.0 3.0 2.6 3.1
Western Europe to North America 1.6 3.2 2.9 2.4 2.3 2.0
Other 39.1 32.1 26.1 18.9 19.5 21.3
Clothing
World (US$ billions) 41.8 48.2 81.9 106.4 133.0 163.3
World (percentages) 100.0 100.0 100.0 100.0 100.0 100.0
Intra-Western Europe 36.6 29.3 33.7 35.2 28.7 28.1
Asia to North America 14.8 26.8 22.5 19.5 19.6 15.8
Intra-Asia 4.3 6.2 6.0 8.8 10.5 12.3
Asia to Western Europe 14.4 11.0 13.2 12.9 13.6 11.0
Latin America to North America 1.7 2.1 2.3 2.4 3.9 5.1
C. / E. Europe / Baltic States / CIS a NA NA NA NA NA 4.1
to Western Europe
Africa to Western Europe 1.9 1.2 2.1 NA 3.0 NA
Other 26.3 23.4 20.2 21.1 20.7 23.6
Sources: GATT, International Trade, and WTO, Annual Report, various years.
Notes: a Includes
Central and Eastern Europe, the Baltic States, and the Confederation of
Independent States.
NA = Not available.

Figure 3.2 reveals significant shifts in the regional patterns of US apparel

sourcing between 1986 and 1996. During this 10-year period, US apparel imports
rose from $17.3 to $41.7 billion. The five rings correspond to different levels of
importance by the supplying nations: those in the central circle each account for
10% or more of the total value of clothing imports in 1995, while each of those
in the outer ring makes up only 1.0–1.9% of total imports. In other words, as we

move from the inner rings to the outer ones in this sourcing chart, the relative
importance of the clothing suppliers decreases.
Several key aspects of the direction and magnitude of change in US apparel
sourcing are revealed in Figure 3.2. First, there are striking regional differences in
the pattern of US apparel imports. West European suppliers, as well as the NIEs
in Northeast Asia, are becoming less important in US apparel sourcing, while
Southeast Asia, South Asia, Central America and the Caribbean, and Mexico are
all becoming more significant. Second, despite considerable mobility within the
past decade, there is a strong core–periphery pattern that dominates the geography
of export activity in the US apparel sourcing matrix.12 Only four economies (Hong
Kong, Taiwan, South Korea, and China) were core US suppliers (i.e., a US apparel
import share of 10% or greater) during the past decade, and only China currently
holds that distinction. There is a wide dispersion of apparel suppliers in the outer
two rings (indicating 1–4% shares of the US apparel market). Only six nations are
in the inner three rings. Third, while for most countries (19 of 27) the degree of
change from 1986 to 1996 has been relatively modest (they changed their position
by one ring or not at all), other nations have shown more substantial degrees of
advancement (Mexico, the Dominican Republic, Honduras, and Bangladesh)
or decline (South Korea, Taiwan, Japan, and Singapore). Nonetheless, inward
shifts of even one ring may be quite significant for smaller economies, given the
substantial overall growth of US apparel imports in the past ten years.
Two other very important features of US apparel sourcing are not revealed by
this chart, however. First, there are two contending production systems reflected
in US apparel sourcing: export-processing assembly (production sharing) and
full-package supply (OEM production). The countries that have penetrated the
US apparel market most deeply either have been experts at OEM supply (Hong
Kong, Taiwan, and South Korea) or they are currently trying to develop full-
package capabilities (China and Mexico). All of the other countries on this list are
relegated to production sharing. Second, different kinds of networks are involved
in these export success stories, and these networks link the countries on this chart
in different ways. We have already discussed the triangle manufacturing scheme
in East Asia, but we still need to consider the networks relevant to the North
American sourcing mix.
If one envisions the complete apparel commodity chain as encompassing raw
materials, yarn and synthetic fibers, textiles, apparel, and the distribution of
apparel to retailers (Appelbaum and Gereffi, 1994), then the Mexican and US
commodity chains are quite distinct. Mexico has several large, reasonably successful
synthetic fiber companies, a multitude of maquiladora firms that export apparel
products to the United States, and an emergent retail sector that is fashioning a
number of strategic alliances with their US counterparts. The weakest link in

the Mexican production chain, by far, is the textile segment. The vast majority
of Mexico’s textile companies are undercapitalized, technologically backward and
inefficient, and they produce goods of poor quality. By contrast, the United States
is very strong in synthetic fibers, textiles and retailing, but limited in its garment
production capability, especially for women’s and children’s apparel. The Mexican
apparel chain thus appears to be strongest where the US chain is relatively weak:
garment production.13
This picture becomes more complex when we consider the differentiated nature
of apparel production systems, and if we expand the borders of North America to
include Central America and the Caribbean.14 Export-oriented assembly in Latin
America is centered in Mexico and the Caribbean Basin because of this area’s low
wages and proximity to the US market, where over 90% of their exports are sold.
The maquiladora sector has benefitted most dramatically from Mexico’s opening
to trade in 1988. Between 1990 and 1997, total US imports of apparel assembled
from US parts (under the 807/9802 production sharing program) rose from $2.4
billion to $11.7 billion. Mexico has been the star performer in the 1990s. Its
apparel exports to the United States from Mexican maquiladora plants increased
sevenfold from just over $600 million in 1990 to $4.4 billion in 1997. Assembly
trade predominates in the North American garment sector, accounting in 1997
for 82% of US apparel imports from Mexico and 84% of those from the Caribbean
and Central America (Gereffi and Bair, 1998: 28).
From a regional perspective, Mexico competes for the US market most directly
with the Caribbean Basin Initiative (CBI) countries. In 1997, the total apparel
exports (maquila and non-maquila trade combined) from CBI countries were almost
50% higher than Mexico’s total ($7.7 billion vs. $5.4 billion, respectively). The
leading CBI apparel exporter was the Dominican Republic ($2.2 billion), which
actually had a higher level of garment exports than Mexico in the early 1990s before
Mexico pulled ahead in 1994. The other leading CBI apparel exporters in 1997
are: Honduras ($1.7 billion), El Salvador ($1.1 billion), Guatemala ($980 million),
Costa Rica ($850 million), and Jamaica ($470 million) (see Table 3.1). However, the
lack of NAFTA parity for the Caribbean Basin has severely truncated the growth
of export-oriented apparel assembly in these smaller economies. In 1995 and 1996,
more than 150 apparel plants closed in the Caribbean and 123,000 jobs have been
lost ‘as a direct result of trade and investment diversion to Mexico’, according to
the Caribbean and Apparel Institute in Kingston, Jamaica (Rohter, 1997).
Given the power shifts that are occurring among North American textile,
apparel and retail firms, the key question is: Who will be the main ‘organizing
agents’ in modernizing Mexico’s apparel commodity chain? The notion of
organizing agents is used here to refer to those firms, foreign and domestic, that
could enhance the competitiveness of the apparel commodity chain in Mexico

through backward or forward linkages with major producers and retailers. Potential
organizing agents, located in every segment of the commodity chain, have already
begun to undertake major investments in Mexico: fibers (Celanese Mexicana,
Cydsa, DuPont); textiles (Burlington Industries, Guilford Mills, Cone Mills,
Grupo Kalach, Grupo Saba); apparel (Sara Lee, VF Corporation, Levi Strauss);
and retailers (J. C. Penney, Sears, Kmart-Liverpool, Wal-Mart-Cifra). There are
substantial differences in the scope and content of these varied attempts at vertical
and horizontal integration in the Mexican economy (Gereffi and Bair, 1998).
The creation of new production and trade networks between the United States
and Mexico in textiles and apparel is linking the US South and the northern and
central regions of Mexico ever more tightly together. The US South is in a position
to become the coordinating hub of the North American apparel commodity chain.
North Carolina and Texas are the nerve centers of the manufacturer-centered
US-Mexico networks. North Carolina is of central importance because it is the
headquarters for most of the big US textile plants, many of which are making new
investments in Mexico. When NAFTA becomes fully implemented, US textile
companies expect to be able to supply Mexican apparel plants duty free from textile
production centers located inside Mexico.
The lead firms in these manufacturer-centered and retailer-centered networks
in the North American apparel commodity chain are in a position to play a direct
role in upgrading Mexican domestic industry. US textile manufacturers are
entering into production joint ventures with Mexican counterparts to build large
textile complexes in northern and central Mexico to supply local apparel plants.
US apparel manufacturers can provide both the technology and incentives for their
Mexican affiliates to meet international competition. The next step would be for
the US retailers that are going into Mexico to play a similar role in upgrading
local supplier networks.
In contrast to the evolution of the apparel commodity chain in Asia,
which utilized East Asian NIE apparel manufacturers as the hubs of triangle
manufacturing networks that knit together suppliers from countries at different
levels of development throughout the region, the coordinating agents in the North
American apparel commodity chain are likely to be large US firms located in each
of the main segments of the chain (fibers, textiles, apparel production, marketing,
and retailing). The main reasons for such a different outcome are various. First,
Mexico and the CBI countries are both geographically and culturally closer to the
United States than are Asian suppliers. This allows US firms to play a far more
dominant role in the North American chain. Second, the role of trade policies is
an important factor here. The NAFTA pact provides Mexico at least a temporary
edge over CBI suppliers, who thus far have not been granted NAFTA parity
with Mexico. Even if parity is granted, Mexico has a big edge in developing a

full-package supply capability because textile production in Central America and

the Caribbean is virtually nonexistent. Finally, we would predict that sourcing
intermediaries will emerge in Mexico to perform the same kind of ‘full package’
services that trading companies and integrated manufacturers provided in East
Asia. Although the apparel commodity chain in North America remains buyer-
driven, suppliers are likely to form rival networks across supply-chain segments
to compete for large orders.

Notes
1. Throughout this chapter, OEM production will be used as a synonymous term for
relational contracting, specification contracting, and full-package supply.
2. Although organizational and relational rents are closely related, they differ in that
the former is intra-organizational, and the latter is inter-plant, inter-firm, and inter-
institutional (e.g., research institutes or training programs with public-private sector
support). The rent element arises from the fact that all these organizational features
are tacit, cumulative and systemic. Adoption is a matter of degree. Some economies
and firms are better at utilizing these techniques than others, giving rise to uneven
diffusion and consequently to scarcity and rent (Kaplinsky, 1998).
3. An estimated 72% of a sample of large US apparel and textile manufacturers had quick
response (QR) programs with their customers in 1995, up from 60% the year before
(Jones, 1995: 26). These QR programs can reduce the typical production cycle of fashion
merchandise from as much as nine months to a few weeks, although the apparel firms
that lead in QR adoption tend to have strong brand-name identification and consumer
loyalty, and the retailers initiating these programs are quite big.
4. Dayton Hudson Corporation owns Target, Mervyn’s, Dayton’s, Hudson’s, and Marshall
Field.
5. These figures do not include the production-sharing activities of US apparel firms
in Mexico and in the Caribbean Basin, which also have been expanding very rapidly
(USITC, 1997).
6. Some large retailers or designers, like The Limited or Liz Claiborne, also purchase
fabric for their overseas contractors and participate in the quality control inspections for
finished goods. However, they typically leave all other aspects of the sourcing process
to the offshore garment makers.
7. This pattern of upgrading is well illustrated in the following quote about Thailand from
a 25-year veteran of Asian apparel sourcing: ‘Thailand has evolved the way of Korea,
Taiwan and Hong Kong, in that manufacturers only cater to high quality, high price
branded product. In prior days, I bought merchandise there to sell to the mass market
retailers. Today, this is almost impossible to do. I visited the factory of a close friend of
mine who has a completely vertical operation. He knits, dyes and sews knit tops. Before,
he only did promotional shirts for mass market discounters. Today, he only manufactures
for brands such as Polo, Tommy Hilfiger, and Donna Karan, and makes the same amount
of units he did 20 years ago, except he has more than doubled his making charges. This
is the true reality of manufacturing in Thailand today’ (Bresky, 1997).

8. In a survey of approximately 100 South Korean export firms carried out in 1976, more
than two-thirds reported that some or all of their exports to foreign markets consisted
of their own brand name products (Rhee et al., 1984: 123).
9. In the apparel sector, the activities associated with OEM production that tended to
remain in the NIEs were jobs such as product design, sample making, quality control,
packing, warehousing, transportation, quota transactions, and local financing through
letters of credit. These provided relatively high gross margins or profits.
10. Nowadays the fashion year is split up into at least six to eight seasons.
11. Between 1985 and 1996, Taiwan’s exports of clothing declined from 56% to 20% of its
textile and apparel total, while the share represented by intermediate goods (textile fibers,
yarn, and fabrics) rose from 44% to 80% (Gereffi and Pan, 1994: 130, supplemented
by more recent data from the Taiwan Textile Federation).
12. Borrowing from Krugman (1991: Chapter 1), the core–periphery pattern resulting
from geographic concentration in US apparel imports can be related to the demand
externalities and dynamics of imperfect competition in buyer-driven commodity chains.
13. Empirical support for this argument is provided in OTA (1992: Chapter 9) and Gereffi
(1997).
14. Canada is at best a niche player in the North American apparel sector. Canada’s
considerable textile strengths are oriented to the home furnishings market (upholstery,
rugs and curtains). Within apparel, Canada’s main export niche to the United States is
wool suits.

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4
t
The Governance of Global Value Chains

Gary Gereffi, John Humphrey, and Timothy J. Sturgeon

The world economy has changed in significant ways during the past several
decades, especially in the areas of international trade and industrial organization.
Two of the most important new features of the contemporary economy are the
globalization of production and trade,1 which have fueled the growth of industrial
capabilities in a wide range of developing countries, and the vertical disintegration
of transnational corporations, which are redefining their core competencies to
focus on innovation and product strategy, marketing, and the highest value-added
segments of manufacturing and services, while reducing their direct ownership
over ‘non-core’ functions such as generic services and volume production. Together,
these two shifts have laid the groundwork for a variety of network forms of
governance situated between arm’s length markets, on the one hand, and large
vertically integrated corporations, on the other. The purpose of this chapter is to
generate a theoretical framework for better understanding the shifting governance
structures in sectors producing for global markets, structures we refer to as ‘global
value chains’. Our intent is to bring some order to the variety of network forms
that have been observed in the field.2
The evolution of global-scale industrial organization affects not only the
fortunes of firms and the structure of industries, but also how and why countries
advance—or fail to advance—in the global economy. Global value chain research
and policy work examine the different ways in which global production and
distribution systems are integrated, and the possibilities for firms in developing
countries to enhance their position in global markets. We hope that the theory of
global value chain governance that we develop here will be useful for the crafting
of effective policy tools related to industrial upgrading, economic development,
employment creation, and poverty alleviation.

Fragmentation, Coordination, and Networks in the Global Economy

For us, the starting point for understanding the changing nature of international
trade and industrial organization is contained in the notion of a value-added chain,

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The Governance of Global Value Chains 109

as developed by international business scholars who have focused on the strategies

of both firms and countries in the global economy. In its most basic form, a value-
added chain is ‘the process by which technology is combined with material and
labor inputs, and then processed inputs are assembled, marketed, and distributed.
A single firm may consist of only one link in this process, or it may be extensively
vertically integrated …’ (Kogut, 1985: 15). The key issues in this literature are
which activities and technologies a firm keeps in-house and which should be
outsourced to other firms, and where the various activities should be located.
Trade economists are also concerned with how global production is organized.
Arndt and Kierzkowski (2001) use the term ‘fragmentation’ to describe the physical
separation of different parts of a production process, arguing that the international
dimension of this separation is new. Fragmentation allows production in different
countries to be formed into cross-border production networks that can be within
or between firms. Feenstra (1998) takes this idea one step further by explicitly
connecting the ‘integration of trade’ with the ‘disintegration of production’ in the
global economy. The rising integration of world markets through trade has brought
with it a disintegration of multinational firms, since companies are finding it
advantageous to ‘outsource’ an increasing share of their non-core manufacturing
and service activities—both domestically and abroad. This has led to a growing
proportion of international trade occurring in components and other intermediate
goods (Yeats, 2001).3
If production is increasingly fragmented across geographic space and between
firms, then how are these fragmented activities coordinated? For Arndt and
Kierzkowski, the options are clear: ‘Separability of ownership is an important
determinant of the organizational structure of cross-border production sharing.
Where separation of ownership is not feasible, multinational corporations and
foreign direct investment are likely to play a dominant role. Where it is feasible,
arm’s length relationships are possible and foreign direct investment is less
important’ (Arndt and Kierzkowski, 2001: 4).
This binary view of how global production might be organized, either through
markets or within transnational firms, is explained by transaction costs economics
in terms of the complexity of inter-firm relationships and the extent to which
they involve investments specific to a particular transaction—asset specificity
(Williamson, 1975). Arm’s-length market relations work well for standard
products because they are easily described and valued. Coordination problems
are reduced not only because their ease of description makes contracts simple to
write, but also because standard products can be produced for stock and supplied
as needed. At the same time, because standard products are made by a variety
of suppliers and bought by a variety of customers, problems arising from asset
specificity are low.

Conversely, the transaction costs approach offers various reasons why firms
will bring certain activities in-house. First, the more customized the product
or service, the more likely it is to involve transaction-specific investments. This
raises the risk of opportunism, which either rules out out-sourcing altogether,
or makes it more costly because safeguards have to be put in place. Second, even
without opportunism, transaction costs increase when inter-firm relationships
require greater coordination. For example, non-standard inputs and integrated
product design architectures involve more complex transfers of design information
and therefore intense interactions across enterprise boundaries. Integral product
architectures are more likely to require non-standard inputs, and changes in the
design of particular parts tend to precipitate design changes in other areas of the
system (Fine, 1998; Langlois and Robertson, 1995). Similarly, coordination costs
increase for parts whose supply is time-sensitive, as separate processes have to be
better coordinated in order to synchronize the flow of inputs through the chain.
Nevertheless, recognizing the importance of transaction costs need not lead
to the conclusion that complex and tightly coordinated production systems
always result in vertical integration. Rather, asset specificity, opportunism, and
coordination costs can be managed at the inter-firm level through a variety of
methods. Network actors in many instances control opportunism through the
effects of repeat transactions, reputation, and social norms that are embedded in
particular geographic locations or social groups. Network theorists (e.g., Jarillo,
1988; Lorenz, 1988; Powell, 1990; Thorelli, 1986) argue that trust, reputation,
and mutual dependence dampen opportunistic behavior, and in so doing they
make possible more complex inter-firm divisions of labor and interdependence
than would be predicted by transaction costs theory.
Furthermore, the literature on firm capabilities and learning, which has its
roots in the resource view of the firm pioneered by Penrose (1959), provides other
reasons why firms are prepared to buy key inputs in the face of asset specificity,
and therefore, construct relatively complex inter-firm relationships. According
to Penrose, how and whether firms can capture value depends, in part, on the
generation and retention of competencies (that is, resources) that are difficult for
competitors to replicate. In practice, even the most vertically integrated firms rarely
internalize all the technological and management capabilities that are required to
bring a product or service to market. Transaction cost economics acknowledges this
fact by employing the variable of frequency. If an input, even an important one, is
required infrequently, then it will likely be acquired externally. This is essentially an
argument about scale economies. The literature on firm capabilities and learning,
by contrast, argues that the learning required to effectively develop the capability
to engage in certain value chain activities may be difficult, time-consuming, and
effectively impossible for some firms to acquire, regardless of frequency or scale

economies. Thus, firms must in certain instances depend on external resources.

The doctrine of ‘core competence’ takes this a step further, arguing that firms
which rely on the complementary competencies of other firms and focus more
intensively on their own areas of competence will perform better than firms that
are vertically integrated or incoherently diversified (Prahalad and Hamel, 1990).
These issues, while often discussed at the local or national level, or in the context
of ‘a dense network of social relations’ (Granovetter, 1985: 507), can equally be
applied to the structuring of global-scale production and distribution. The recent
work of geographers such as Hughes (2000), Henderson et al. (2002), and Dicken
et al. (2001) has emphasized the complexity of inter-firm relationships in the
global economy. The key insight is that coordination and control of global-scale
production systems, despite their complexity, can be achieved without direct
ownership.
The theories of industrial organization discussed here, when considered
cumulatively, suggest that different ways of dealing with the problem of asset
specificity, and different motivations for constructing complex firm-to-firm
relationships in the face of asset specificity, result in three modes of industrial
organization: market, hierarchy, and network. But empirical observation tells us
that not all networks are alike. In the next section, we develop a theory that can
help to specify and explain this variation.

Types of Governance in Global Value Chains

If a theory of global value chain governance is to be useful to policy makers,
it should be parsimonious. It has to simplify and abstract from an extremely
heterogeneous body of evidence, identifying the variables that play a large role in
determining patterns of value chain governance while holding others at bay, at least
initially. Clearly, history, institutions, geographic and social contexts, the evolving
rules of the game, and path dependence matter; and many factors will influence
how firms and groups of firms are linked in the global economy. Nevertheless, a
simple framework is useful because it isolates key variables and provides a clear
view of fundamental forces underlying specific empirical situations that might
otherwise be overlooked. Our intention is to create the simplest framework that
generates results relevant to real-world outcomes.
In the 1990s, Gereffi and others developed a framework, called ‘global
commodity chains’, that tied the concept of the value-added chain directly to the
global organization of industries (see Gereffi and Korzeniewicz, 1994). This work
not only highlighted the importance of coordination across firm boundaries, but
also the growing importance of new global buyers (mainly retailers and brand
marketers) as key drivers in the formation of globally dispersed and organizationally

fragmented production and distribution networks. Gereffi (1994) used the term
‘buyer-driven global commodity chain’ to denote how global buyers used explicit
coordination4 to help create a highly competent supply-base upon which global-
scale production and distribution systems could be built without direct ownership.
By highlighting explicit coordination in dis-integrated chains and contrasting
them to the relationships contained within vertically integrated, or ‘producer-
driven’ chains, the global commodity chains framework drew attention to the role
of networks in driving the co-evolution of cross-border industrial organization.
However, the global commodity chains framework did not adequately specify the
variety of network forms that more recent field research has uncovered. While
research on the horticulture industry (Dolan and Humphrey, 2000) and the
footwear industry (Schmitz and Knorringa, 2000) reinforced Gereffi’s notion
that global buyers (retailers, marketers, and traders) can and do exert a high
degree of control over spatially dispersed value chains even when they do not own
production, transport, or processing facilities, recent research on global production
has highlighted other important forms of coordination.
Work on the electronics industry and contract manufacturing by Sturgeon
(2002) and by Sturgeon and Lee (2001) contrasted three types of supply
relationships, based on the degree of standardization of product and process: (1)
the ‘commodity supplier’ that provides standard products through arm’s length
market relationships, (2) the ‘captive supplier’ that makes non-standard products
using machinery dedicated to the buyer’s needs, and (3) the ‘turn-key supplier’
that produces customized products for buyers and uses flexible machinery to
pool capacity for different customers. This analysis emphasized the complexity
of information exchanged between firms and the degree of asset specificity in
production equipment. Sturgeon (2002) referred to production systems that rely
on turn-key suppliers as ‘modular production networks’ because highly competent
suppliers could be added and subtracted from the global production arrangements
on an as-needed basis. Around the same time, Humphrey and Schmitz (2000,
2002) distinguished between suppliers in quasi-hierarchical relationships with
buyers, whose situation corresponds to ‘captive suppliers’, and network relationships
between firms that cooperate because they possess complementary competences.5
Humphrey and Schmitz emphasized the role of supplier competence in determining
the extent of subordination of suppliers to buyers. If global buyers needed to invest
in supplier competence, they would need both to specify the product and process
parameters to be followed by suppliers and to guard this investment in the supplier
by remaining the dominant, if not exclusive, customer.6
Using the approaches outlined above and empirical reference points taken from
many studies of global value chains,7 we propose a more complete typology of
value-chain governance. We acknowledge, as do most other frameworks that seek

to explain industry organization—from transactions costs to global commodity

chains to organizational theory—that market-based relationships among firms
and vertically integrated firms (hierarchies) make up opposite ends of a spectrum
of explicit coordination, and that network relationships comprise an intermediate
mode of value chain governance. What we add to this conceptualization is an
extension of the network category into three distinct types: modular, relational, and
captive. Thus, our typology identifies five basic types of value chain governance.
These are analytical, not empirical, although they have been in part derived from
empirical observation. They are:
1. Markets: Market linkages do not have to be completely transitory,
as is typical of spot markets; they can persist over time, with repeat
transactions. The essential point is that the costs of switching to new
partners are low for both parties.
2. Modular value chains: Typically, suppliers in modular value chains make
products to a customer’s specifications, which may be more or less
detailed. However, when providing ‘turn-key services’, suppliers take
full responsibility for competencies surrounding process technology, use
generic machinery that limits transaction-specific investments, and make
capital outlays for components and materials on behalf of customers.
3. Relational value chains: In these networks, we see complex interactions
between buyers and sellers, which often create mutual dependence and
high levels of asset specificity. This may be managed through reputation,
or family and ethnic ties. Many authors have highlighted the role of
spatial proximity in supporting relational value chain linkages, but trust
and reputation might well function in spatially dispersed networks where
relationships are built up over time, or are based on dispersed family and
social groups (see for example, Menkhoff, 1992).
4. Captive value chains: In these networks, small suppliers are transactionally
dependent on much larger buyers. Suppliers face significant switching
costs and are, therefore, ‘captive’. Such networks are frequently
characterized by a high degree of monitoring and control by lead firms.
5. Hierarchy: This governance form is characterized by vertical integration.
The dominant form of governance is managerial control, flowing from
managers to subordinates, or from headquarters to subsidiaries and
affiliates.

A Theory of Value Chain Governance

Having laid out this typology, our next step is to develop an operational theory of
global value chain governance. Under which conditions would we expect market,

modular, relational, captive, or vertically integrated global value chain governance

to arise? Building on the work cited above, we will identify and discuss three
key determinants of value chain governance patterns: complexity of transactions;
codifiability of information; and capability of suppliers. In so doing, we acknowledge
the problem of asset specificity as identified by transaction cost economics, but also
give emphasis to what have been termed ‘mundane’ transaction costs—the costs
involved in coordinating activities along the chain. It has been argued that these
coordination, or mundane, transaction costs rise when value chains are producing
non-standard products, products with integral product architectures, and products
whose output is time sensitive (Baldwin and Clark, 2000).
Lead firms increase complexity when they place new demands on the value
chain, such as when they seek just-in-time supply and when they increase product
differentiation. However, lead firms also adopt strategies to reduce the complexity
of these transactions. One important way of doing this is through the development
of technical and process standards. The complexity of information transmitted
between firms can be reduced through the adoption of technical standards that
codify information and allow clean hand-offs between trading partners. Where
in the flow of activities these standards apply goes a long way toward determining
the organizational break points in the value chain. When standards for the hand-
off of codified specifications are widely known, the value chain gains many of
the advantages that have been identified in the realm of modular product design,
especially the conservation of human effort through the re-use of system elements,
or modules, as new products are brought on-stream (Langlois and Robertson,
1995; Schilling and Steensma, 2001; Sturgeon, 2002). In the realm of value chain
modularity, suppliers and customers can be easily linked and de-linked, resulting
in a very fluid and flexible network structure. While the dynamics are market-
like, the system remains qualitatively different because of the large volumes of
non-price information flowing across the inter-firm boundary, albeit in codified
form. Furthermore, a high-level of product differentiation can be accommodated
with limited information exchange as long as differentiation is defined by a set of
unambiguous and widely accepted parameters. Institutions, both public and private,
can both define grades and standards, and (in some cases) certify that products
comply with them.8 The development of process standards and certification in
relation to quality, labor, and environmental outcomes perform similar functions.9
At the same time, the integration of new suppliers into global value chains also
increases coordination challenges. Keesing and Lall (1992) argue that producers
in developing countries are expected to meet requirements that frequently do not
(yet) apply to their domestic markets. This creates a gap between the capabilities
required for the domestic market and those required for the export market, which
raises the degree of monitoring and control required by buyers.

These considerations lead us to construct a theory of value chain governance

based on three factors:
A. The complexity of information and knowledge transfer required to sustain
a particular transaction, particularly with respect to product and process
specifications;
B. The extent to which this information and knowledge can be codified
and, therefore, transmitted efficiently and without transaction-specific
investment between the parties to the transaction; and
C. The capabilities of actual and potential suppliers in relation to the
requirements of the transaction.
If these three factors are allowed only two values—high or low—then there
are eight possible combinations, of which five are actually found.10
1. Markets: When transactions are easily codified, product specifications are
relatively simple, and suppliers have the capability to make the products
in question with little input from buyers, asset specificity will fail to
accumulate and market governance can be expected. In market exchange,
buyers respond to specifications and prices set by sellers. Because the
complexity of information exchanged is relatively low, transactions can
be governed with little explicit coordination.
2. Modular value chains: When the ability to codify specifications extends
to complex products, value chain modularity can arise. This can come
about when product architecture is modular11 and technical standards
simplify interactions by reducing component variation and by unifying
component, product, and process specifications, and also when suppliers
have the competence to supply full packages and modules, which
internalizes hard to codify (tacit) information, reduces asset specificity
and therefore a buyer’s need for direct monitoring and control. Linkages
based on codified knowledge provide many of the benefits of arm’s-length
market linkages—speed, flexibility, and access to low-cost inputs—but
are not the same as classic market exchanges based on price. When a
computerized design file is transferred from a lead firm to a supplier,
for example, there is much more flowing across the inter-firm link than
information about prices. Because of codification, complex information
can be exchanged with little explicit coordination, and so, like simple
market exchange, the cost of switching to new partners remains low.
3. Relational value chains: When product specifications cannot be codified,
transactions are complex, and supplier capabilities are high, relational
value chain governance can be expected. This is because tacit knowledge
must be exchanged between buyers and sellers, and because highly

competent suppliers provide a strong motivation for lead firms to

outsource to gain access to complementary competencies. The mutual
dependence that then arises may be regulated through reputation,
social and spatial proximity, family and ethnic ties, and the like. It can
also be handled through mechanisms that impose costs on the party
that breaks a contract, as discussed in Williamson’s analysis of credible
commitments and hostages (Williamson, 1983). The exchange of
complex tacit information is most often accomplished by frequent face-
to-face interaction and governed by high levels of explicit coordination,
which makes the costs of switching to new partners high.
4. Captive value chains: When the ability to codify—in the form of detailed
instructions—and the complexity of product specifications are both
high but supplier capabilities are low, then value chain governance will
tend toward the captive type. This is because low supplier competence
in the face of complex products and specifications requires a great deal
of intervention and control on the part of the lead firm, encouraging
the build-up of transactional dependence as lead firms seek to lock in
suppliers in order to exclude others from reaping the benefits of their
efforts. Therefore, the suppliers face significant switching costs and are
‘captive’. Captive suppliers are frequently confined to a narrow range
of tasks—for example, mainly engaged in simple assembly—and are
dependent on the lead firm for complementary activities such as design,
logistics, component purchasing, and process-technology upgrading.
Captive inter-firm linkages control opportunism through the dominance
of lead firms, while at the same time providing enough resources and
market access to the subordinate firms to make exit an unattractive
option.
5. Hierarchy: When product specifications cannot be codified, products
are complex, and highly competent suppliers cannot be found, then
lead firms will be forced to develop and manufacture products in-house.
This governance form is usually driven by the need to exchange tacit
knowledge between value chain activities as well as the need to effectively
manage complex webs of inputs and outputs and to control resources,
especially intellectual property.
The five global value chain governance types, along with the values of the three
variables that determine them, are listed in Table 4.1. These five types of global value
chain governance arise from ascribing different values to the three key variables:
(1) complexity of inter-firm transactions; (2) the degree to which this complexity
can be mitigated through codification; and (3) the extent to which suppliers have
the necessary capabilities to meet the buyers’ requirements. Each governance type

provides a different trade-off between the benefits and risks of outsourcing. As

shown in the last column of Table 4.1, the governance types comprise a spectrum
running from low levels of explicit coordination and power asymmetry between
buyers and suppliers, in the case of markets, to high levels of explicit coordination
and power asymmetry between buyers and suppliers, in the case of hierarchy.

Table 4.1 Key Determinants of Global Value Chain Governance

Governance type Complexity of Ability to codify Capabilities in Degree of explicit
transactions transactions the supply-base coordination and
power asymmetry
Market Low High High Low
Modular High High High
Relational High Low High
Captive High High Low
Hierarchy High Low Low High
Source: Authors.
Note: There are eight possible combinations of the three variables. Five of them generate global
value chain types. The combination of low complexity of transactions and low ability to codify is
unlikely to occur. This excludes two combinations. Further, if the complexity of the transaction
is low and the ability to codify is high, then low supplier capability would lead to exclusion from
the value chain. While this is an important outcome, it does not generate a governance type per se.

The fact that the governance types developed here can be used to illuminate how
power operates in global value chains merits elaboration. In captive global value
chains, power is exerted directly by lead firms on suppliers, which is analogous to
the direct administrative control that top management at headquarters might exert
over subordinates in an offshore subsidiary or affiliate of a vertically integrated firm
(or ‘hierarchy’ in our framework). Such direct control suggests a high degree of
explicit coordination and a large measure of power asymmetry with the lead firm (or
top management) being the dominant party. In relational global value chains, the
power balance between the firms is more symmetrical, given that both contribute
key competences. There is a great deal of explicit coordination in relational global
value chains, but it is achieved through a close dialogue between more or less equal
partners, as opposed to the more unidirectional flow of information and control
between unequal partners as in captive global value chains and within hierarchies.
In modular global value chains, as in markets, switching customers and suppliers
is relatively easy. Power asymmetries remain relatively low because both suppliers
and buyers work with multiple partners.
Figure 4.1 illustrates much of the above discussion in graphic form, showing
the five global value chain types arrayed along the dual spectrums of explicit
coordination and power asymmetry. The small line arrows represent exchange

based on price while the larger block arrows represent thicker flows of information
and control, regulated through explicit coordination. This includes instructions
coming from a more powerful buyer (or manager) to a less powerful supplier (or
subordinate), as in captive global value chains or within the confines of a hierarchy,
as well as social sanctions regulating the behavior of more or less equal partners, as
in relational global value chains. In the case of modular global value chains, thick
information flows are narrowed down to a codified hand-off at the inter-firm link,
leaving each partner to manage tacit information within its own firm boundaries,
or perhaps by combining some other form of global value chain governance, such
as captive or market-based, for part of the chain. While relationships between
the relational and modular suppliers and the firms providing their material inputs
and components are displayed as market-based in the figure, they could equally
take other forms.

Figure 4.1 Five Global Value Chain Governance Types

Source: Authors.

Dynamic Value Chain Analysis: Sectoral Cases

Identifying the main types of global value chain governance, and providing a
theoretical explanation for why they arise, are important steps and hopefully this
work will lead us to a better understanding of the contemporary world economy.
Nonetheless, to make it a useful tool for policy, a theory of global value chain
governance should allow us to do more than just generate different forms of inter-

firm coordination; we must try to anticipate change in global value chains. Case
studies, in particular, clearly show us how governance structures evolve over time.
In the following section, we highlight how global value chain governance structures
have evolved in four distinct industries: bicycles, apparel, fresh vegetables, and
electronics. Some trajectories of change are identified on Table 4.2, and we refer
to these trajectories as we discuss each of the cases.

Table 4.2 Some Dynamics of Global Value Chain Governance

Governance type Complexity of Ability to codify Capabilities in the
transactions transactions supply-base
Market Low High High
Modular High High High
Relational High Low High
Captive High High Low
Hierarchy High Low Low
Source: Authors.
Note: Dynamics of changes in governance:
Increasing complexity of transactions also reduces supplier competence in relation to new demands.
Decreasing complexity of transactions and greater ease of codification.
Better codification of transactions.
De-codification of transactions.
Increasing supplier competence.
Decreasing supplier competence.

The Bicycle Industry: From Hierarchy to Market-Based Coordination

The evolution of the bicycle industry in the twentieth century provides a good
example of how hierarchies can evolve toward inter-firm governance that relies
primarily on market mechanisms.12 It shows how market governance is enabled
not only by low transaction costs—particularly costs associated with coordination
of component design with final product design—and the economies of scale and
production enabled by the rise of industry standards, but also by the development of
specialist competencies among suppliers (trajectories numbers 3 and 5 in Table 4.2).
In the early years of the bicycle industry (the 1890s), vertically integrated
firms manufactured bicycles, but production soon became fragmented. Today,
there are large firms within each segment of the value chain, such as Shimano
in drive-train components and several large branded bicycle manufacturers, but
very few firms that span more than one segment (Galvin and Morkel, 2001: 40).
The different bicycle components require different competencies, which limits
economies of scope. An integrated bicycle manufacturer would require many
different technological competences, or would need to explicitly coordinate

the activities of many different firms. After the initial stage of the industry’s
development, specialist firms became more competitive than vertically integrated
companies that made complete bicycles. Well-defined interfaces between various
components mean that specialist manufacturers have the advantages of scale
through demand pooling. To the extent that economies of scale occur upstream
in the value chain, there are strong incentives for market coordination and the
development of the institutional mechanisms to make this possible. The specialist
knowledge of the suppliers also gives them a greater capacity to innovate within
their specific product ranges, as long as this does not require changes in other
components. Where these specialists dominate a market segment (for example,
Shimano in drive systems), they can innovate within this area more successfully
than others, and if extremely successful, may establish a new de facto standard
applicable across the industry.
The industry standards required to make such specialization and divisions of
labor work can arise in a variety of ways. They can be imposed by a dominant
firm, as in the case of Shimano in bicycles and IBM in personal computers;
they can arise informally through inter-firm networks, as with the emergence of
regional standards in the early days of the bicycle industry; they can be managed
by industry associations; or they can be regulated by international agencies and
negotiations, as in the case of the development of new standards for mobile phones.
The establishment of standards is often contentious and part of the competitive
positioning of firms.

The Apparel Industry: From Captive to Relational Value Chains

The apparel industry has been characterized by global production and trade
networks since at least the middle of the twentieth century, and the expansion and
growing capabilities of its global supply-base have permitted it to move rapidly from
captive to more complex relational value chains over the span of just a few decades.
The epicenter of export-oriented apparel production has been East Asia, as Japan
in the 1950s and 1960s, Hong Kong, South Korea, and Taiwan during the 1970s
and 1980s, and China in the 1990s emerged sequentially as world-class textile and
apparel exporters (Bonacich et al., 1994). The key to East Asia’s success was to move
from captive value chains—i.e., the mere assembly of imported inputs, typically
in export-processing zones—to a more domestically integrated and higher value-
added form of exporting broadly known in the industry as full-package supply.13
Whereas the assembly-oriented captive model required explicit coordination in the
form of cut fabric and detailed instructions, full-package production involved the
more complex forms of coordination, knowledge exchange, and supplier autonomy
typical of relational value chains.

Unlike captive networks, in which foreign firms take responsibility for supplying
all the component parts used by local contractors, full-package production requires
offshore contractors to develop the capability to interpret designs, make samples,
source the needed inputs, monitor product quality, meet the buyer’s price, and
guarantee on-time delivery. From a development perspective, the main advantage
of the full-package export role, compared to simple assembly, is that it allows
local firms to learn how to make internationally competitive consumer goods
and generates substantial backward linkages to the domestic economy. Increasing
supplier competence has been the main driver behind the shift from captive to
relational value chains in the apparel industry (trajectory number 5 in Table 4.2).
The establishment of overseas buying offices and frequent international travel
supported the intense interaction required for exchanging tacit information and
building personal relationships between buyers and suppliers.
Trade rules have had an important impact on global value chain governance in
the apparel industry, and this provides just one example of how variables, other
than the three we have identified, work to shape the architecture of cross-border
economic activity. US import quotas established by the Multi-Fiber Arrangement
fueled the spread of global production networks in apparel beginning in the early
1970s.The existence of quotas prompted the rise of value-chain intermediaries,
including East Asian trading companies such as Hong Kong’s Li and Fung and
manufacturers such as the Fang Brothers, to coordinate the flow of orders from
US and European buyers to a large numbers of apparel factories established around
the world in places with available quota (Gereffi, 1999: 60–63; Magretta, 1998).
When the MFA is mostly phased out in 2005 in accordance with the World Trade
Organization’s Agreement on Textiles and Clothing, global apparel production
is likely to become far more concentrated among the most capable firms in a
handful of low-cost production sites, including China, India, Indonesia, Mexico,
and Turkey (Gereffi and Memodovic, 2003: 12). Such concentration could
well undermine the position of intermediary firms. Still, the variables we have
highlighted in this chapter continue to be important. To the extent that the ability
to codify transactions is increased by this concentration process, and supplier
capabilities continue to improve, we would expect the relational value chains in
apparel to become more modular (trajectory number 3 in Table 4.2).

Fresh Vegetables: From Market Coordination to Explicit Coordination

The changing nature of fresh vegetables trade between Kenya and the United
Kingdom highlights a shift from market-based global value chain governance
to more explicit coordination, and it reveals the importance of the competitive
strategies of UK supermarkets in driving this change.14 Beginning in the mid-1980s

UK supermarkets began to use the quality and variety of their produce offerings
as a main source of competitive differentiation, and in doing so generated several
distinct forms of governance at different stages in the chain.
Until the mid-1980s, the fresh vegetables trade was handled through a series of
arm’s-length market relationships. Traders in Kenya bought produce in wholesale
markets or at the farm gate and exported it to the United Kingdom, where it
was sold in wholesale markets. However, as supermarket chains in the United
Kingdom gradually took an increasing share of fresh food sales and therefore
became more powerful actors, they began to introduce more explicit coordination
in the chain. Supermarkets saw fresh produce (fruit and vegetables) as strategic
because it was one of the few product lines that could persuade consumers to
shift from one supermarket chain to another. In order to attract customers, the
supermarkets introduced new items, emphasized quality, provided consistent year-
round supply, and increased the processing of products to provide fresh produce
that required little or no preparation prior to cooking or eating. At the same time,
the supermarkets were forced to respond to an increasingly complex regulatory
environment related to food safety, particularly pesticide residues and conditions
for post-harvest processing, as well as environmental and labor standards.
Supermarkets pursued these strategic goals by increasing explicit coordination in
the value chain. Instead of purchasing through wholesale markets, they developed
closer relationships with UK importers and African exporters, and moved to
renewable annual contracts with suppliers whose capabilities and systems were
subject to regular monitoring and audit. Supermarkets began to inspect suppliers
prior to incorporation in the chain, and made regular spot checks at all points in
the chain, right down to the field. The interaction of the firms in the chain also
became more complex and relational. Suppliers and buyers worked together on
product development, logistics, quality, and the like. This created new value chain
relationships and competencies. Over time, relationships between supermarkets
and UK importers took new forms, with the recent trend moving value chain
governance in the direction of modularity. The supermarkets have reduced the
number of UK suppliers/importers for each product range and given the remaining
suppliers greater responsibility for supply chain management, product development,
and consumer research. These importers work for a range of UK supermarkets
and food retailers, although the three largest supermarket chains (Tesco, Asda,
and Sainsbury) do try to avoid using the same suppliers.
Further back along the chain, organizational fragmentation has decreased and
inter-organizational relationships have become relational. The risks of this have
been contained by the development of exclusive bilateral relationships. A Kenyan
exporter will only deal with one UK importer, although it may sell to other markets
through other channels, and a UK importer will only have one Kenyan supplier.

There has even been some forward and backward integration between African
exporters and UK importers, with outright ownership or equity participation.
This bilateral dependence of African exporters and UK importers has not created
captive relationships. First, importers and exporters do change partners from time
to time. Second, there is a situation of mutual dependence and power symmetry.
Exporters need an outlet to the UK market, but importers also need an assured
supply of produce. Third, the exporters have become increasingly sophisticated
and competent, as additional processing functions were transferred to Africa where
costs are lower (trajectory number 5 in Table 4.2). In Kenya, the industry has
become much more concentrated as the investment costs of processing have risen.
Within Kenya, the largest exporter of fresh vegetables from Africa to the United
Kingdom, increasing requirements have led leading exporters to increase own-
farm production at the expense of purchasing vegetables from both smallholders
and large contract farmers. This can be seen as a case of increasing complexity
leading to vertical integration when it is not accompanied by either codification
or higher supplier competence.

The US Electronics Industry: From Hierarchy to Modular Value Chains

and Beyond
For most of the twentieth century, the electronics industry in the United States
has been dominated by large, vertically integrated firms, first in the telephone
industry (ATT) and then the radio industry (RCA), out of which grew other
consumer electronics sectors such as television and eventually, computers (e.g.,
IBM). In the 1960s and 1970s, with the push for better semiconductors for military
and aerospace applications, an independent, or ‘merchant’, components industry
(e.g., Texas Instruments) gathered steam with the Air Force and the National
Aeronautics and Space Administration playing the role of ‘lead firm’. In the
1980s, as the civilian electronics industry began to grow rapidly with the personal
computer, a range of other value chain functions were outsourced, beginning
with production equipment for both semiconductor fabrication and circuit-board
assembly, and then spreading to specialized sub-components such as disk drives
and monitors, and most recently to the manufacturing process itself in a practice
called ‘contract manufacturing’.15
During the 1990s, nearly all major North American product-level electronics
firms, and several important European companies as well, made the decision to
get out of manufacturing. Plants were closed or sold off to contract manufacturers,
driving a significant share of the world’s electronics production capacity into
a handful of huge globally operating contract manufacturers. The contract
manufacturer Solectron, for example, grew from a single Silicon Valley location

with 3,500 employees and $256 million in revenues in 1988 to a global powerhouse
with more than 80,000 employees in 50 locations and close to $20 billion in
revenues in 2000. During the same period, Solectron extended its service offerings
beyond circuit-board assembly to include, among other things, product (re)design-
for-manufacturability, component purchasing and inventory management, test
routine development, final product assembly, global logistics, distribution, and
after-sales service and repair. Global contract manufacturers such as Solectron
introduce a high degree of modularity into value chain governance because the large
scale and scope of their operations create comprehensive bundles, or modules, of
generic value chain activities that can be accessed by a wide variety of lead firms.
Standardized protocols for handing-off computerized design files and highly
automated and standardized process technologies made it easy for lead firms to
switch and share contractors, and inhibited the build-up of specific assets.
Today, as contractors seek new sources of revenue by providing additional
inputs to lead-firm design and business processes, and new circuit-board
assembly technologies appear on the scene, such as those for boards with optical
components, the hand-off of design specifications is becoming more complex and
less standardized, making it harder for lead firms to switch and share suppliers.
Closer collaboration in the realm of product design requires contractors to receive
fully blown computer-aided-design files for their customer’s new products;
files that can contain core intellectual property. As contractors take over more
distribution functions, lead firms must reveal critical knowledge about end-
customer requirements and pricing. All of these interactions are being embedded
in elaborate information technology systems that span the organizations of
lead firms and their key contractors, creating new areas of risk for lead firms
in the areas of intellectual property leakage and buyer-supplier lock-in. Shared
information technology systems are evolving in two directions simultaneously:
toward proprietary systems that increase asset specificity and lock-in, but better
protect key intellectual property; and toward open standards (e.g., RosettaNet) and/
or third-party systems that better support value chain modularity but that leave
the door open for intellectual property leakage. The question of which direction
the industry will take—toward proprietary systems and relational value chains,
or toward commonly used standards and modular value chains—is still open,
and its answer will help to determine the future shape of the electronics industry.
The electronics case shows value chain modularity is enabled by the codification
of complex information (for example, through computerized product design and
automated process technologies) because codification simplifies the hand-off at
the inter-firm link. But the case also shows that modularity can be undermined by
‘de-codification’ (trajectory number 4 in Table 4.2), spurred either by technological
change, as in the case of the emergence of optical circuit-board assembly

technology, or by the bundling of supplier activities in such a way that suppliers

reach across the codified link to assist with lead firm activities that remain tacit
or are highly proprietary, or both, such as product design and customer contact.

The Dynamics of Global Value Chains

The case studies presented in this section are meant to highlight the dynamic and
overlapping nature of global value chains. Value chain governance patterns are not
static or strictly associated with particular industries. They depend on the details
of how interactions between value chain actors are managed, and how technologies
are applied to design, production and the governance of the value chain itself. Nor
are value chain governance patterns monolithic. Even in a particular industry in
a particular place and time, governance patterns may vary from one stage of the
chain to another. While we believe that this dynamism and variation can largely
be accounted for by the three explanatory variables presented in this chapter,
more work will be needed to fully understand their dynamic characteristics. How
and why do the complexity of information, the ability to codify information, and
supplier competence change?
We can at this stage offer only a partial answer. First, information complexity
changes as lead firms seek to obtain more complex outputs and services from their
supply-base. This can reduce the effective level of supplier capabilities as existing
capabilities may not meet the new requirements (trajectory number 1 in Table 4.2).
Alternatively, reduced complexity may increase the ability to codify transactions
(trajectory 2 in Table 4.2). Second, within industries there is a continuing tension
between codification and innovation (trajectories numbers 3 and 4 in Table 4.2).
As Storper (1995) and David (1995) have both pointed out, new technologies can
restart the clock on the process of codification. Third, supplier competence changes
over time: increasing as suppliers learn, but falling again as buyers introduce new
suppliers into value chains, as new technologies come on-stream, or as lead firms
increase the requirements for existing suppliers (trajectories numbers 5 and 6 in
Table 4.2).
When we look broadly at the evidence provided by global value chain research
across a variety of industries and time periods, it is tempting to make generalizations
about trends in the global economy. In all of the case studies presented here, and
many other industries as well, increasing capabilities in the supply-base have
helped to push the architecture of global value chains away from hierarchy and
captive networks and toward the relational, modular, and market types. Value
chain modularity seems to be especially likely when suppliers offer lead firms
greater levels of value chain bundling (e.g., turn-key and full-package services),
which has the advantages of internalizing tacit knowledge and pooling capacity

utilization for greater economies of scale. However, organizational fragmentation

will not lead to value chain modularity if codification is extremely difficult.
For example, a strong shift toward fragmentation in the organization of the US
motor vehicle industry beginning in the mid-1980s has resulted in value chains
with strong relational elements. This can be partly explained by the difficulty of
codifying complex mechanical systems (Fine, 1998), which has inhibited the rise
of industry-wide standards and kept the complexity of the transactions between
lead firms and suppliers high even as the capabilities of suppliers, driven in part
by the consolidation of first tier suppliers, has increased dramatically (Humphrey,
2003; Sturgeon and Florida, 2004).
As standards, information technology, and the capabilities of suppliers improve,
the modular form appears to be playing an increasingly central role in the global
economy.16 Again, the general shift toward value chain fragmentation has been
driven by the cost and risk advantages of outsourcing (assuming that a solution
to the problem of asset specificity can be developed). When we take relational
networks as our starting point, however, a shift to modular—and perhaps
eventually to market—forms can be expected as standards and codification schemes
improve because more fluid value chains offer additional decreases in cost and risk.
Still, we resist the overly simplistic notion that global value chains are evolving
along a single trajectory. First, the standards that enable the codification of
product and process specifications are different across industries and are constantly
evolving. Second, standards for codifying product and process specifications can
become obsolete as technologies change or when there is a drive to bundle value
chain activities in new ways. This can drive market and modular relationships, as
we may be seeing in the case of the electronics industry today, back toward relational
governance, and if the problem of asset specificity becomes severe enough, the
hierarchical form. Third, knowing the standard and adopting the protocol may
not be straightforward, inexpensive, or immediately possible for all actors in an
industry, and there may be competing standards in use that make choosing and
investing difficult and risky. Since standards and protocols are dynamic, major
advantages accrue to those actors that actively participate in the rule-setting
process, which favors established actors and locations (Sturgeon, 2003). Finally,
there is clearly no single best way to organize global value chains. In some product
categories, where integral product architecture makes it difficult to break the value
chain, vertical integration may be the most competitive approach to value chain
governance. Sony and Samsung’s success in consumer electronics has come despite,
or perhaps, because of high levels of vertical integration. In the garment industry,
Zara’s success with extremely rapid product cycles—bi-weekly in some cases—has
been supported by the company’s in-house textile manufacturing subsidiary and
captive sewing workshops (Bonnen, 2002).

Conclusion
In this chapter we have developed a typology of global value chain governance
and presented some theoretical justifications for why these patterns might occur.
We argue that the structure of global value chains depends critically upon three
variables: the complexity of transactions, the ability to codify transactions, and
the capabilities in the supply-base. These variables are sometimes determined
by the technological characteristics of products and processes (some transactions
are inherently more complex and difficult to codify than others, for example) and
they often depend on the effectiveness of industry actors and the social processes
surrounding the development, dissemination, and adoption of standards and other
codification schemes. It is the latter set of determinants, in particular, that opens
the door for policy interventions and corporate strategy.
The global value chains framework focuses on the nature and content of the
inter-firm linkages, and the power that regulates value chain coordination, mainly
between buyers and the first few tiers of suppliers. However, it is important not to
ignore the actors at both ends of the value chain. On the upstream end, component
and equipment suppliers can wield a great deal of power. For example, in the
personal computer industry two firms, Intel and Microsoft, set parameters that
most other value chain actors must adjust to. The power of such ‘parameter-setting’
firms, such as Shimano in bicycles and Applied Materials in semiconductors, is
not exerted through explicit coordination, but through their market dominance in
key components and technologies. On the downstream end of the chain, highly
knowledgeable users can play a significant role in determining the attributes and
innovative trajectory of the products and services that global value chains churn
out, as they do in many complex service industries such as enterprise computing.
Even average consumers are far from passive, as Leslie and Reimer (1999) point
out. Consumer culture, whether it emerges from the home, street, school, or park,
can subvert the original intention of producers by altering and ascribing meaning
to products in ways that designers and marketers never intended.
Our primary concern in this chapter is with organizational structures that span
international borders and particularly those that have a global reach. Nonetheless,
local and national structures and institutions also matter. Geographers and
planners have provided us with insights into how the spatial and social propinquity
of local industrial agglomerations work to buoy organizationally disaggregated,
and often highly innovative, economic activities (e.g., Storper and Scott,
1988; Storper and Walker, 1989). This work has usefully stressed the spatial
embeddedness of tacit knowledge and the importance of tight interdependencies
between geographically clustered firms (Maskell and Malmberg, 1999; Storper,
1995). We acknowledge these points, and have argued elsewhere that such

agglomerations are the places where the most relational portions of global value
chains might be found (Sturgeon, 2003). The varieties of capitalism literature,
coming largely from political science (e.g., Berger and Dore, 1996; Soskice, 1999;
Streeck, 1992), similarly argues that national-level rules and institutions (e.g., in
finance, corporate governance, and education and training) profoundly affect the
character of industries. Other studies (Borrus et al., 2000; Florida and Kenney,
1993; Lynch, 1998) show that many geographically rooted characteristics are
carried abroad, as foreign direct investment projects local and national models
onto the global stage. These variations can and do have profound effects on value
chain governance. For example, even when the underlying conditions for emergent
organizational forms such as value chain modularity are well established, as they
are in the Japanese personal computer industry, large-scale outsourcing might
be antithetical to long-standing corporate strategies and institutions, such as
lifetime employment in large firms, which make radical industry reorganization
extremely difficult and slow.
It is also clear that global-scale regulations, the ‘rules of the game’ as it were, have
a profound effect on the shape and direction of change in global value chains. In a
wide range of industries, from electronics to apparel to household goods, selective
exemptions for duties on value added in particular locations, such as section 807
and most-favored-nation status for the United States and outward processing
arrangements for Europe, have encouraged the geographical fragmentation of
global value chains, as we have seen in the apparel case study. Yet political pressures
in both developed and developing nations to retain (or gain) apparel jobs, and
managerial desires to spread risk through geographical diversification, are likely
to keep the apparel value chain more fragmented than it would be if production
decisions were based on economic criteria alone.
While there is a multitude of factors that affect the evolution of the global
economy, we feel confident that the variables internal to our model influence the
shape and governance of global value chains in important ways, regardless of the
institutional context within which they are situated. The governance framework
that we propose takes us part of the way toward a more systematic understanding
of global value chains, but much remains to be done.17 One of the most pressing
areas is the development of policy tools for industrial upgrading that are consistent
with the framework. One of the key findings of value chain studies is that access
to developed country markets has become increasingly dependent on participating
in global production networks led by firms based in developed countries. Thus,
the governance of global value chains is essential for understanding how firms in
developing countries can gain access to global markets, what the benefits of access
and the risks of exclusion might be, and how the net gains from participation in
global value chains might be increased. While the search for paths of sustainable

development in the global economy is an inherently difficult and elusive objective,

our task is greatly facilitated by having a clearer sense of the various ways in
which global value chains are governed, and the key determinants that shape
these outcomes.

Acknowledgments
The authors wish to thank the Rockefeller Foundation for its generous support
of the Global Value Chains Initiative (see http://www. globalvaluechains.org).
In preparing this chapter, we have drawn upon discussions at workshops on
value chains held in Bellagio, Italy, in September 2000 and April 2003 and in
Rockport, Massachusetts, in April 2002. However, any errors or shortcomings
remain our own.

Notes
1. While ‘internationalization’ refers to the geographic spread of economic activities across
national boundaries, ‘globalization’ implies the functional integration and coordination
of these internationally dispersed activities (Dicken, 2003: 12).
2. We do not suggest that the theory developed in this chapter can explain all governance
patterns observed in global value chains. The theory should be used as a complement
to, not a substitute for, the rich detail and complexity that can be observed in global
value chains, especially their historical, geographical, and sectoral specificity.
3. Similarly, Hummels et al. (1998: 80–81) use the term ‘vertical-specialization-based-trade’
to refer to the amount of imported inputs embodied in goods that are exported. ‘Vertical
specialization’ of global trade occurs when a country uses imported intermediate parts
to produce goods it later exports.
4. ‘Explicit coordination’ is a term used by Clemons et al. (1993) to refer to non-market
forms of coordination of economic activity.
5. This work drew on the analysis of Palpacuer (2000) on core and complementary
competences in value chains.
6. Work on the apparel industry (Gereffi, 1999) and on commodity exports from Africa
(Gibbon, 2001) also showed a variety of contracting arrangements.
7. An indication of the range of studies is provided by the collection edited by Gereffi
and Kaplinsky (2001).
8. For a discussion of grades and standards in the food industry, see Reardon et al. (2001).
For a more general discussion of modular product architectures and its implications for
industry structure, see Baldwin and Clark (2000).
9. The development of product and process standards and their implications for value
chain governance are discussed by Nadvi and Wältring (2002).
10. Low informational complexity without codification generates two combinations that
are unlikely to occur regardless of supplier competence, high or low. Furthermore, if
there is low complexity and a high possibility for codification, and suppliers still do

not have the capabilities to meet the requirements of buyers, then it is likely that they
will be excluded from the chain. While this does not generate a global value chain
type, per se, it is a situation that is quite common, and with requirements for suppliers
increasing, perhaps increasingly likely to occur (Sturgeon and Lester, 2004). This case is
important insofar as it opens up a discussion of the problems facing developing country
suppliers and policies for industrial upgrading.
11. Product architectures generally vary from integral to modular. In integral product
architectures, the functional elements of a product are tightly linked and optimised for
a particular configuration. In modular product architectures, by contrast, the physical
building blocks (or sub-systems) of a product are loosely coupled and designed to be
relatively independent of one another because of standardized interfaces and visible
design rules, which permit some components and sub-systems to be disaggregated and
recombined into a large number of product variations (see Baldwin and Clark, 2000;
Schilling and Steensma, 2001; Ulrich, 1995).
12. This discussion is based on Galvin and Morkel (2001).
13. In the Asian context, the full-package model was also known as original equipment
manufacturing (OEM).
14. Kenya is the largest exporter of fresh peas and beans from Africa to the European
Union and by far the most important supplier to the UK market. This section is based
on the work of Dolan and Humphrey (2000, 2004).
15. This discussion is based on Sturgeon (2002).
16. This process is not driven solely by the efforts of suppliers. Value chain actors clearly
co-evolve. Lead firm strategies to simultaneously increase outsourcing and consolidate
their supply-chains have created a set of highly capable suppliers that, in turn, make
outsourcing more attractive for lead firms that have yet to take the outsourcing plunge
(Sturgeon and Lee, 2001). Similarly, the evolution of global value chains emanating
from one national or local context, especially if successful, provides an example that
often generates a reaction in value chains rooted in other places.
17. A high priority for the future will be the development of methods for measuring the
key variables in the model. Effective proxies for transactional complexity, level of
codification, and supplier competence must be identified and tested in the field.

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Expanding the Governance and

Upgrading Dimensions in GVCs

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The Global Economy 137

5
t
The Global Economy
Organization, Governance, and Development

The global economy has changed in significant ways during the past several
decades, and these changes are rooted in how the global economy is organized
and governed. These transformations affect not only the flows of goods and
services across national borders, but also the implications of these processes for
how countries move up (or down) in the international system. The development
strategies of countries today are affected to an unprecedented degree by how
industries are organized, and this is reflected in a shift in theoretical frameworks
from those centered around the legacies and actors of nation-states to a greater
concern with supranational institutions and transnational organizations.
Policy makers, managers, workers, social activists, and many other stakeholders
in developed as well as developing nations need a firm understanding of how the
contemporary global economy works if they hope to improve their position in it,
or forestall an impending decline.
The topic of the global economy is inherently interdisciplinary. No single
academic field can encompass it or afford to ignore it. Because of its vast scope,
pundits who focus on the global economy are likely to be classified as academic
interlopers; they run the risk of being too simplistic if they advance forceful
hypotheses and too eclectic if they try to capture the full complexity of their topic.
Scholars in this field thus have to master what economist Albert Hirschman has
popularized as ‘the art of trespassing’ (Hirschman, 1981; Foxley et al., 1986).
The global economy can be studied at different levels of analysis. At the
macro level are international organizations and regimes that establish rules and
norms for the global community. These include institutions like the World
Bank, the International Monetary Fund, the World Trade Organization, and
the International Labor Organization, as well as regional integration schemes
like the European Union and the North American Free Trade Agreement. These
regimes combine both rules and resources, and hence they establish the broadest
parameters within which the global economy operates.

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138 Global Value Chains and Development

At the meso level, the key building blocks for the global economy are countries
and firms. Those scholars who take countries as their main analytical unit (as in the
varieties of capitalism literature) provide an institutional perspective on the main,
enduring features of national economies. The global economy is seen as the arena
in which countries compete in different product markets. An alternative approach
is to focus on firms and interfirm networks as the central units of analysis, and
analyze these actors in a global industry or sectoral framework (as in the global
commodity chains or industrial districts approaches). These scholars typically take
a more organizational approach. In both the institutional and the organizational
perspectives on the global economy, we tend to get a top-down focus on leading
countries and firms as drivers of change.
Institutionalists like those in the varieties of capitalism school tend to focus on
developed or industrialized countries. Alternatively, one can take a development-
oriented perspective with regard to countries, and ask how the economic prospects
of developing nations are shaped by their position in the global economy. These
questions help to bridge the concerns of economic sociologists and development
specialists because the theories of industrial upgrading that have emerged in the
last couple of decades have been shaped very closely by several of the organizational
and institutional theories mentioned above.
At a micro level, there is a growing literature on the resistance to globalization
by consumer groups, activists, and transnational social movements (such as those
dealing with labor issues and environmental abuses). This research is relevant to
a chapter titled ‘The Global Economy’ because the very same perspectives used
to understand how the global economy is organized are being employed by social
and environmental activists to challenge the existing order.
Many theories related to economic sociology incorporate the global economy
in their frameworks, but they differ in the degree to which it is conceptualized
as a system that shapes the behavior and motivation of actors inside it, or as an
arena where nationally determined actors meet, interact, and influence each other
(Therborn, 2000). This chapter identifies how the global economy has been
constructed analytically by a wide range of social scientists. The first task is to
define what is really ‘new’ about the global economy in the last half of the twentieth
century, which is the main temporal focus of this chapter. The increasingly
seamless web of international production and trade networks that girdle the globe
appears to be a distinctive feature of the last several decades, and it requires a new
kind of organizational perspective that has been growing rapidly. The second
section of this chapter takes a closer look at how and why production and trade
have been reorganized in the global economy in the contemporary era. Research
by a diverse group of scholars from economics, business schools, sociology, and
economic geography, among other fields, has contributed to a reconceptualization

of the key actors that make up the global economy, and to a realization that
the integration of trade and the disintegration of production on a global scale
are fundamentally altering our ideas about what connects national economies,
firms, places, and people. The third section reviews selected institutional and
organization perspectives on the global economy. We will highlight the competing
and complementary claims of various approaches, such as the varieties of capitalism
literature, national business systems, and global commodity chains.
The last two sections of the chapter offer ‘bottom-up’ perspectives on the global
economy to complement the ‘top-down’ views on the reorganization of global
industries. The fourth section takes a country perspective, and asks how a focus
on global production networks allows us to understand the process of industrial
upgrading, whereby economic actors try to move to higher-value activities in the
global economy. The fifth and concluding section of the chapter examines several
of the emerging challenges and dilemmas for governance and development in the
contemporary global economy.

How New Is the Global Economy?

Much of the globalization debate has been fueled by different conceptions of what
is happening ‘out there’ in the global economy, and whether it really represents
something new. We need to distinguish the process of internationalization, which
involves the mere extension or geographic spread of economic activities across
national boundaries, from globalization, which is qualitatively distinct because it
involves the functional integration of internationally dispersed activities (Dicken,
2003: 12). How functional integration occurs is a topic that we will deal with in
more detail below in terms of the governance structures in the global economy.
However, one of the key actors that distinguishes the global economy of the latter
half of the twentieth century from its predecessors is the transnational corporation
(TNC), which we will discuss in this section.1
The origins of a global economy can be traced back to the expansion of long-
distance trade during the period of 1450–1640, which Wallerstein (1979) has
labeled as the ‘long sixteenth century’. From the fifteenth century onward, a
number of chartered trading companies emerged in Europe, such as the East
India Company and the Hudson’s Bay Company, which created vast international
trading empires. Although their activities were worldwide in scope, their main
purpose was trade and exchange, rather than production. The development of a
world trading system over a period of several centuries helped to create the tripartite
structure of core, semiperipheral, and peripheral economic areas. According to
world-systems theory, the upward or downward mobility of nations in the core,
semiperiphery, and periphery is determined by a country’s mode of incorporation

in the capitalist world-economy, and these shifts can only be accurately portrayed
by an in-depth analysis of the cycles of capitalist accumulation in the longue durée
of history (Wallerstein, 1974, 1980, 1989; Arrighi, 1994).
The dynamics of the capitalist world-system laid the foundation for a process
of industrialization and new international divisions of labor on a global scale.
Originally, as defined by the eighteenth-century political economist Adam Smith
([1776] 1976), ‘division of labor’ referred simply to the specialization of workers
in different parts of the production process, usually in a factory setting. Quite
early in the evolution of industrial economies, the division of labor also acquired a
geographical dimension. Different areas began to specialize in particular types of
economic activity. At the global scale, the ‘classic’ international division of labor
was between the industrial countries producing manufactured goods, and the non-
industrialized economies that supplied raw materials and agricultural products
to the industrial nations and that became a market for basic manufactures. This
relatively simple pattern no longer applies. During the decades following the
Second World War, trade flows have become far more complex, and so have
the relationships between the developed and developing nations of the global
economy.
The foundations of the contemporary economic order were established in
the late 1940s by the system of financial and trade institutions that were set up
at an international conference in Bretton Woods, New Hampshire, in 1944.
The principal institutions that constitute the Bretton Woods system are the
International Monetary Fund (IMF), the International Bank for Reconstruction
and Development (later renamed the World Bank), and the General Agreement
on Tariffs and Trade (GATT) (see Held et al., 1999: chapters 3 and 4). Unlike
the classical gold standard system, which collapsed during the First World War,
the Bretton Woods financial system required that every currency had a fixed
exchange rate vis-à-vis the US dollar, with the dollar’s value pegged to gold at $35
an ounce. In practice, Bretton Woods became a dollar system because the United
States was the leading economy and the only major creditor nation in the first 25
years following the Second World War. While the rise of the Eurocurrency market
in the 1960s placed increasing strain on the Bretton Woods financial order, its
actual demise came on August 15, 1971, when President Nixon announced that
the US dollar was no longer freely convertible into gold, effectively signaling the
end of fixed exchange rates.
Notwithstanding these changes, the legacy of the Bretton Woods system
remained powerful throughout the latter decades of the twentieth century. The
IMF has policed the rules of the international financial order, and intervened in
national economies (especially in developing countries) to impose stabilization
programs when balance-of-payments crises were deemed structural rather

than cyclical. Following the post-war reconstruction of Europe and Japan, the
World Bank increasingly became a development agency for third world nations
(Ayres, 1983). Its policy recommendations were closely tied to those of the IMF,
especially after the neoliberal agenda (dubbed the Washington Consensus) became
established in the 1980s (Gore, 2000). GATT, a multilateral forum for trade
negotiations, became the primary international trade agency by default when
the International Trade Organization, provided by the 1947 Havana Charter,
was abandoned by President Truman after it was staunchly opposed in the US
Congress. In 1995, the GATT was superseded by the much more powerful World
Trade Organization (WTO), which sought to reduce or eliminate a whole range
of non-tariff barriers and uneven trading conditions between countries.

Distinctive Features of the Contemporary Global Economy, 1960s to the

Present
There is considerable controversy over how to characterize the distinctive aspects
of the global economy in the postwar period. Wallerstein (2000: 250) argues that
the period from 1945 to the present corresponds to a typical Kondratieff cycle
of the capitalist world-economy, which has an upward and a downward swing:
an A-phase of economic expansion from 1945 to 1967–1973, and a B-phase of
economic contraction from 1967–1973 to the present day. While the evolution
of the capitalist world-economy stretches from 1450 to the contemporary era, in
world-systems theory it is marked by periods of genesis, normal development, and
the current phase of ‘terminal crisis’ (Wallerstein, 2000, 2002).
From a trade perspective, the level of economic integration in the latter half
of the twentieth century is not historically unprecedented. The decades leading
up to 1913 were considered a golden age of international trade and investment.
This was ended by the First World War and the Great Depression, when most
of the world’s economies turned inward. Merchandise trade (imports and
exports) as a share of world output did not recover its 1913 level until sometime
in the mid-1970s (Krugman, 1995: 330–331). 2 If we take 1960 as the baseline,
interconnectedness through trade has vastly increased in recent decades, and
furthermore trade has grown consistently faster than output at the world level.
Among the OECD3 nations (the 24 richest industrial economies), the ratio of
exports to gross domestic product (GDP) roughly doubled from 1960 to 1990,
rising from 9.5% to 20.5% in this period, and world merchandise trade grew at
an average of one and a half times the rate of growth of world GDP from 1965
to 1990 (Wade, 1996: 62).
International trade, investment, and finance have become the hallmarks
of economic globalization. Global interconnectedness through foreign direct

investment grew even faster than trade during the 1980s, and the most dynamic
multinationalization of all has come in finance and in technology. Flows of foreign
direct investment grew three times faster than trade flows and almost four times
faster than output between 1983 and 1990 (Wade, 1996: 63), and according to
one estimate, TNCs control one-third of the world’s private sector productive
assets (UNCTAD, 1993: 1). Globalization appears to have gone furthest in the
area of finance. The stock of international bank lending (cross-border lending plus
domestic lending, denominated in foreign currency) rose from 4% of the GDP of
OECD countries in 1980 to an astonishing 44% in 1990, and foreign exchange
(or currency) trading was 30 times greater than and quite independent of trade
flows in the early 1990s (Wade, 1996: 64). Global financial flows accelerated in
considerable measure because of the growing popularity in the 1980s and 1990s
of new financial instruments, such as international bonds, international equities,
derivatives trading (futures, options, and swaps), and international money markets
(Held et al., 1999: 205–209).
This quantitative assessment of the growth in international trade, investment,
and financial flows is one side of the story, but it is challenged by the notion
that the nature of global economic integration in the recent era is qualitatively
different than in the past. Before 1913, the world economy was characterized by
shallow integration manifested largely through trade in goods and services between
independent firms and through international movements of portfolio capital.
Today, we live in a world in which deep integration, organized primarily by TNCs,
is pervasive and involves the production of goods and services in cross-border,
value-adding activities that redefine the kind of production processes contained
within national boundaries (UNCTAD, 1993: 113). There is little consensus,
however, over what kind of framework to use in analyzing the contemporary
global economy because of the breadth and rapidity of change, and the fact that
countries, firms, workers, and many other stakeholders in the global economy
are affected by these shifts.
A global manufacturing system has emerged in which production and export
capabilities are dispersed to an unprecedented number of developing as well as
industrialized countries. Fröbel et al. (1980) likened the surge of manufactured
exports from labor-intensive export platforms in low-wage economies to a ‘new
international division of labor’ that used advanced transport and communication
technologies to promote the global segmentation of the production process.
The OECD coined the term newly industrializing countries and reflected the
concern of advanced capitalist nations that the expanding share of these emergent
industrializers in the production and export of manufactured goods was a threat to
slumping Western industrial economies (OECD, 1979). World-systems theorists
argued that the gap between core and periphery in the world economy had been

narrowing since the 1950s, and by 1980 the semiperiphery not only caught up with
but also overtook the core countries in their degree of industrialization (Arrighi
and Drangel, 1986: 54–55; Arrighi et al., 2003).
In retrospect, the assembly-oriented export production in the newly
industrializing countries was merely an early stage in the transformation of the
global economy into ‘a highly complex, kaleidoscopic structure involving the
fragmentation of many production processes, and their geographical relocation on a
global scale in ways which slice through national boundaries’ (Dicken, 2003: 9).
Expanded niches for labor-intensive segments have been created by splitting the
production of goods traditionally viewed as skill-, capital-, or technology-intensive
and putting the labor-intensive pieces of the value chain in low-wage locations.
In Mexico, for example, the booming export-oriented maquiladora program4
has engaged in more sophisticated kinds of manufacturing operations over time.
First-generation maquiladoras were labor-intensive with limited technology, and
they assembled export products in industries like apparel using imported inputs
provided by US clients (Sklair, 1993). In the late 1980s and early 1990s, researchers
began to call attention to so called second- and third-generation maquiladoras.
Second-generation plants are oriented less toward assembly and more toward
manufacturing processes that use automated and semi-automated machines
and robots in the automobile, television, and electrical appliance sectors. Third-
generation maquiladoras are oriented to research, design, and development, and
rely on highly skilled labor such as specialized engineers and technicians. In each of
these industries, the maquiladoras have matured from assembly sites based on cheap
labor to manufacturing centers whose competitiveness derives from a combination
of high productivity, good quality, and wages far below those prevailing north of
the border (Shaiken and Herzenberg, 1987; Carrillo and Hualde, 1998; Bair and
Gereffi, 2001; Cañas and Coronado, 2002).
A cover story in the February 3, 2003, issue of Business Week highlighted the
impact of global outsourcing over the past several decades on the quality and
quantity of jobs in both developed and developing countries (Engardio et al.,
2003). The first wave of outsourcing began in the 1960s and 1970s with the
exodus to developing countries of jobs making shoes, clothes, cheap electronics,
and toys. After that, simple service work, like processing credit-card receipts and
airline reservations in back-office call centers, and writing basic software code,
went global. Today, driven by digitization, the Internet, and high-speed data
networks that circle the world, all kinds of ‘knowledge work’ that can be done
almost anywhere are being outsourced.
Global outsourcing reveals many of the key features of contemporary
globalization: it deals with international competitiveness in a way that inherently
links developed and developing countries; a huge part of the debate centers around

jobs, wages, and skills in different parts of the world; and there is a focus on value
creation in different parts of the value chain. There are enormous political as
well as economic stakes in how global outsourcing evolves in the coming years,
particularly in well-endowed and strategically positioned economies like India,
China, the Philippines, Mexico, Costa Rica, Russia, parts of eastern Europe, and
South Africa—that is, countries loaded with college grads who speak Western
languages and can handle outsourced information-technology work. India seems
particularly well positioned in this area.
However, these shifts reveal a sobering globalization paradox: the dramatic
expansion of production capabilities reflected in global outsourcing across a wide
range of industries does not necessarily increase levels of development or reduce
poverty in the exporting nations. As more and more countries have acquired
the ability to make complex as well as standard manufactured goods, barriers
to entry have fallen and competitive processes at the production stage of value
chains have increased. This has resulted in a pattern that Kaplinsky (2000: 120),
following Bhagwati’s (1958) original use of the term, has dubbed ‘immiserizing
growth,’ in which economic activity increases in terms of output and employment,
but economic returns fall. The emergence of China and, to a lesser extent, India
has expanded the global labor force so significantly that the likely consequence
of globalization is to bid down living standards not only for unskilled work and
primary products, but increasingly for skilled work and industrial products as well
(Kaplinsky, 2001: 56). The only way to counteract this process is to search for new
sources of dynamic economic rents (i.e., profitability in excess of the competitive
norm), which are increasingly found in the intangible parts of the value chain
where high-value, knowledge-intensive activities like innovation, design, and
marketing prevail (Kaplinsky, 2000).
These trends raise fundamental questions about winners and losers in the global
economy, and also about the forces and frameworks needed to understand why
these changes are occurring, and what their impact is likely to be. In the next
section of this chapter, we will review how and why new patterns of international
production and trade are emerging. In the subsequent section, we will examine
some of the major theoretical perspectives in economic sociology and related
fields that seek to account for these institutional and organization features of
the global economy.

The Reorganization of Production and Trade in the Global Economy

The Role of Transnational Corporations
While the post-war international economic order was defined and legitimized
by the United States and the other core powers that supported it in terms of the

ideology of free trade, it was the way in which TNCs linked the production of
goods and services in cross-border, value-adding networks that made the global
economy in the last half of the twentieth century qualitatively distinct from what
preceded it. Transnational corporations have become the primary movers and
shakers of the global economy because they have the power to coordinate and
control supply-chain operations in more than one country, even if they do not own
them (Dicken, 2003: 198). Although they first emerged in the late nineteenth and
early twentieth centuries in the natural resource (oil, mineral, and agricultural)
sectors, TNCs did not play a central role in shaping a new global economic system
until after the Second World War.
To the neoclassical economists of the 1950s, the post-war world economy was
constituted by international capital flows, which were viewed at the country level
as foreign direct investment (FDI). The United States was the main source of
outward FDI, and the first empirical studies of US FDI at the country level were
carried out by Dunning (1958) on the United Kingdom and Safarian (1966) on
Canada. Both of these studies were interested in the public policy question of the
benefits that US FDI had for a host economy (Rugman, 1999), and thus they did
not really think about transnational corporations as an institutional actor. The
Multinational Enterprise Project at Harvard Business School, which began in
1965 under the direction of Raymond Vernon and lasted for 12 years, tried to
remedy the economists’ relative neglect of TNCs. Despite being out of step with
its academic brethren in economics departments and business schools, who were
using general equilibrium models and rational choice to study the properties of
efficient markets, the Harvard Multinational Enterprise Project was distinguished
by its emphasis on the strategies and activities of TNCs at the micro level of the
firm, rather than as merely one more form of international capital movement
(Vernon, 1999).
In the 1960s and 1970s, the key players in most international industries were
large, vertically integrated TNCs, whose use and abuse of power in the global
economy were chronicled by numerous authors (e.g., Sampson, 1973; Barnet and
Müller, 1974). The overseas activities of these firms were primarily oriented toward
three main objectives: the search for raw materials; finding new markets for their
products; and tapping offshore sources of abundant and relatively low-cost labor
(Vernon, 1971).5 In developing countries, which were attractive to TNCs for all
three of these reasons, the predominant model of growth since the 1950s was
import-substituting industrialization. This development strategy used the tools of
industrial policy, such as local-content requirements, joint ventures, and export-
promotion schemes, to induce foreign firms that had established local subsidiaries
inside their borders to transfer the capital, technology, and managerial experience
needed to set up a host of new industries. In return, TNCs could make and sell

their products in the relatively protected domestic markets of Latin America,

Asia, and Africa, and even in the socialist bloc connected with the former Soviet
Union (Bergsten et al., 1978; Newfarmer, 1985).
By the mid-1980s, several significant shifts were transforming the organization
of the global economy. First, the oil shock of the late 1970s and the severe debt crisis
that followed it were the death knell for import-substituting industrialization in
many developing countries, especially in Latin America. The import-substitution
approach had found no way to generate the foreign exchange needed to pay for
increasingly costly imports, and escalating debt service payments led to a net
outflow of foreign capital that crippled economic growth.6 Second, the ‘East Asian
Miracle’, based on the rapid economic advance of Japan and the so-called East
Asian tigers (South Korea, Hong Kong, Taiwan, and Singapore) since the 1960s,
highlighted a contrasting development model: export-oriented industrialization.
Buttressed by the neoliberal thrust of the Reagan and Thatcher governments in the
United States and the United Kingdom, respectively, export-oriented development
soon became the prevailing orthodoxy for developing economies around the world.7
Third, the transition from import-substituting to export-oriented development
strategies during the 1980s in many industrializing countries was complemented
by an equally profound reorientation in the strategies of TNCs. The rapid
expansion of industrial capabilities and export propensities in a diverse array of
newly industrializing economies in Asia and Latin America allowed TNCs to
accelerate their own efforts to outsource relatively standardized activities to lower-
cost production locations worldwide.
One of the central questions that generated great interest in TNCs was this: To
what extent have TNCs supplanted national governments, and in what areas? The
attitude of many researchers was that TNCs had the power, the resources, and the
global reach to thwart the territorially based objectives of national governments
in both developed and developing countries (see Bergsten et al., 1978; Barnet
and Müller, 1974). This was a key tenet of dependency theory, one of the most
popular approaches in the 1970s, which argued that TNCs undercut the ability
of nation-states to build domestic industries controlled by locally owned firms
(Sunkel, 1973; Evans, 1979; Gereffi, 1983). Even the most balanced scholarly
approaches reflected the challenge to national autonomy captured by the title of
Raymond Vernon’s best-known book, Sovereignty at Bay (1971). The large size of
TNCs, whether measured in sales or by more sophisticated calculations of value
added, still leads to the conclusion that many TNCs are bigger than countries.8
However, the concentrated power of vertically integrated, industrial TNCs has
been diminishing for the past couple of decades as a result of the tendency toward
both the geographic and the organizational outsourcing of production. Thus,
the original concern with how TNCs affect the sovereignty and effectiveness of

national governments needs to be reframed in light of the current shift to a more

network-centered global economy, which will be discussed below.

The Emergence of International Trade and Production Networks

The growth of world trade has probably received the most attention in the
globalization literature because of its direct relevance to employment, wages,
and the rising number of free trade agreements around the world. The most
common causes usually given to explain expanding world trade are technological
(improvements in transportation and communication technologies) and political
(e.g., the removal of protectionist barriers, such as tariffs, import quotas, and
exchange controls, which had restricted world markets from 1913 until the end
of the Second World War).9 It is also important to acknowledge that the volume
of international trade depends to a considerable degree on how boundaries are
drawn, both for different geographies of production10 and according to whether
trade covers final products only or whether it also includes intermediate inputs.
However, even though the share of trade in world output surpassed its 1913 peak
in the 1980s and 1990s, the sheer volume of trade is probably not sufficient to
argue for a qualitative break with the past.
Of far greater significance are several novel features in the nature of international
trade that do not have counterparts in previous eras. These suggest the need for a
new framework to understand both patterns of competition among international
firms and the development prospects of countries that are trying to upgrade
their position in diverse global industries. The three new aspects of modern
world trade relevant here are: (1) the rise of intra-industry and intra-product
trade in intermediate inputs; (2) the ability of producers to ‘slice up the value
chain,’ in Krugman’s (1995) phrase, by breaking a production process into many
geographically separated steps; and (3) the emergence of a global production
networks framework that highlights how these shifts have altered governance
structures and the distribution of gains in the global economy.

Intraindustry Trade in Parts and Components

Arndt and Kierzkowski (2001) use the term fragmentation to describe the
international division of labor that allows producers located in different countries
and often with different ownership structures to form cross-border production
networks for parts and components. Specialized ‘production blocks’ are coordinated
through service links, which include activities such as transportation, insurance,
telecommunications, quality control, and management specifications. Yeats (2001),
analyzing detailed trade data for the machinery and transport equipment group

(SITC 7),11 finds that trade in components made up 30% of total OECD exports
in SITC 7 in 1995, and that trade in these goods was growing at a faster pace
than the overall SITC 7 total. Similarly, Hummels et al. (1998: 80–81) argue
that the ‘vertical specialization’ of global trade, which occurs when a country
uses imported intermediate parts to produce goods it later exports, accounted
for about 14.5% of all trade among OECD countries in the early 1990s. Vertical
specialization captures the idea that countries link sequentially in production
networks to produce a final good, although vertical trade itself does not require
the vertical integration of firms.
Feenstra (1998) takes this idea one step further, and explicitly connects
the ‘integration of trade’ with the ‘disintegration of production’ in the global
economy.12 The rising integration of world markets through trade has brought
with it a disintegration of the production process of multinational firms,13 since
companies are finding it profitable to outsource (domestically or abroad) an
increasing share of their non-core manufacturing and service activities. This
represents a breakdown of the vertically integrated mode of production—the
so-called Fordist model, originally exemplified by the automobile industry—on
which US industrial prowess had been built for much of the twentieth century
(Aglietta, 1980). The success of the Japanese model of ‘lean production’ in the
global economy since the 1980s, pioneered by Toyota in automobiles, reinforces
the central importance of coordinating exceptionally complex interfirm trading
networks of parts and components as a new source of competitive advantage in
the global economy (Womack et al., 1990; Sturgeon and Florida, 2000).

Slicing Up the Value Chain

The notion of a value-added chain has been a useful tool for international business
scholars who have focused on the strategies of both firms and countries in the
global economy. Bruce Kogut (1984: 151), a professor at the Wharton School
of Business, University of Pennsylvania, was one of the first to argue that value
chains are a key element in the new framework of competitive analysis that is
needed because of the globalization of world markets: ‘The formulation of strategy
can be fruitfully viewed as placing bets on certain markets and on certain links
of the value-added chain … . The challenge of global strategy formulation is to
differentiate between the various kinds of economies, to specify which link and
which factor captures the firm’s advantage, and to determine where the value-
added chain would be broken across borders.’ In a subsequent paper, Kogut (1985)
elaborates the central role of the value-added chain14 in the design of international
business strategies, which are based upon the interplay between the comparative
advantage of countries and the competitive advantage of firms. While the logic of

comparative advantage helps to determine where the value-added chain should be

broken across national borders, competitive (or firm-specific) advantage influences
the decision on what activities and technologies along the value-added chain a
firm should concentrate its resources in.15
Michael Porter of Harvard Business School also developed a value-chain
framework that he applied both at the level of individual firms (Porter, 1985) and
as one of the bases for determining the competitive advantage of nations (Porter,
1990). At the firm level, a value chain refers to a collection of discrete activities
performed to do business, such as the physical creation of a product or service,
its delivery and marketing to the buyer, and its support after sale.16 On the basis
of these discrete activities, firms can establish two main types of competitive
advantage: low relative cost (a firm’s ability to carry out the activities in its value
chain at lower cost than its competitors); or differentiation (performing in a unique
way relative to competitors). While competitive advantage is determined at the
level of a firm’s value chain, Porter argues, ‘The appropriate unit of analysis in
setting international strategy is the industry because the industry is the arena in
which competitive advantage is won or lost’ (1987: 29).
The pattern of competition differs markedly across industries: at one extreme
are ‘multidomestic’ industries, in which competition in each country is basically
independent of competition in other countries; and at the other end of the spectrum
are ‘global industries,’ in which a firm’s competitive position in one country is
significantly impacted by its position in other countries. Since international
competition is becoming the norm, Porter believes that firms must adopt ‘global
strategies’ in order to decide how to spread the activities in the value chain among
countries.17 A very different set of scholars, studying the political economy of
advanced industrial societies, highlighted the transformation from ‘organized
capitalism’ to ‘disorganized’ or ‘competitive’ capitalism. This approach is based on
dramatic shifts in the strategic and institutional contexts of the global economy
in the 1980s toward deregulated national markets and unhampered international
exchanges (Offe, 1985; Lash and Urry, 1987). According to Schmitter (1990:
12), sectors or industries are the key unit for comparative analysis in this setting
because they represent a meso level where a number of changes in technology,
market structure, and public policy converge.
Our review of the contemporary global economy thus far has highlighted two
distinctive shifts: the unparalleled fragmentation and reintegration of global
production and trade patterns since the 1970s; and the recognition by Kogut
and Porter, among others,18 of the power of value-chain or industry analysis as a
basis for formulating global strategies that can integrate comparative (location-
specific) advantage and competitive (firm-specific) advantage. However, the third
transformation in the global economy that needs to be addressed as a precursor
to the global value chain perspective is the remarkable growth of manufactured

exports from low-wage to high-wage nations in the past several decades. This
phenomenon has produced a range of reactions—from anxiety by producers in
developed countries who believe they cannot compete with the flood of low-
cost imports, to hope among economies in the South that they can catch up
with their neighbors in the North by moving up the ladder of skill-intensive
activities, to despair that global inequality and absolute levels of poverty have
remained resistant to change despite the rapid progress of a relative handful of
developing nations.

Production Networks in the Global Economy

In the 1990s, a new framework, called global commodity chains (GCC), tied the
concept of the value-added chain directly to the global organization of industries
(see Gereffi and Korzeniewicz, 1994; Gereffi, 1999, 2001). This work was based
on an insight into the growing importance of global buyers (mainly retailers
and brand companies, or ‘manufacturers without factories’) as key drivers in the
formation of globally dispersed production and distribution networks. Gereffi
(1994a) contrasted these buyer-driven chains to what he termed producer-driven
chains. The latter are the production systems created by vertically integrated
transnational manufacturers, while the former term recognizes the role of global
buyers, highlighting the significance of design and marketing in initiating the
activities of global production systems.19 The GCC approach drew attention
to the variety of actors that could exercise power within global production and
distribution systems. It was the field-based methodology of GCC research, in
particular, that provided new insights into the statistics showing an increase in
trade involving components and other intermediate inputs. The trade data alone
mask important organizational shifts because they differentiate neither between
intra-firm and inter-firm trade nor between the various ways in which global
outsourcing relationships were being constructed.
A variety of overlapping terms has been used to describe the complex network
relationships that make up the global economy. Each of the contending concepts,
however, has particular emphasis that are important to recognize for a chain
analysis of the global economy:
• Supply chains: A generic label for an input-output structure of value-
adding activities, beginning with raw materials and ending with a
finished product.
• International production networks: A focus on the international production
networks in which TNCs act as ‘global network flagships’ (Borrus et
al., 2000).
• Global commodity chains: An emphasis on the internal governance
structure of supply chains (especially the producer-driven vs. buyer-driven

distinction) and on the role of diverse lead firms in setting up global

production and sourcing networks (Gereffi and Korzeniewicz, 1994).
• French ‘ filière’ approach: A loosely knit set of studies that used the filière
(i.e., channel or network) of activities as a method to study primarily
agricultural export commodities such as rubber, cotton, coffee, and cocoa
(Raikes et al., 2000).
• Global value chains: Emphasis on the relative value of those economic
activities that are required to bring a good or service from conception,
through the different phases of production (involving a combination
of physical transformation and the input of various producer services),
delivery to final consumers, and final disposal after use (Kaplinsky,
2000; Gereffi and Kaplinsky, 2001).
The ‘value chain’ concept has recently gained popularity as an overarching label
for this body of research because it focuses on value creation and value capture
across the full range of possible chain activities and end products (goods and
services), and because it avoids the limiting connotations of the word commodity,
which to some implies the production of undifferentiated goods with low barriers to
entry. Like the GCC framework, global value chain (GVC) analysis accepts many
of the observations made previously on geographical fragmentation, and it focuses
primarily on the issues of industry (re)organization, coordination, governance, and
power in the chain (Humphrey and Schmitz, 2001). Its concern is to understand
the nature and consequences of organizational fragmentation in global industries.
The GVC approach offers the possibility of understanding how firms are linked
in the global economy, but also acknowledges the broader institutional context of
these linkages, including trade policy, regulation, and standards.20 More generally,
the global production networks paradigm has been used to join scholarly research
on globalization with the concerns of both policy makers and social activists, who
are trying to harness the potential gains of globalization to the pragmatic concerns
of specific countries and social constituencies that feel increasingly marginalized
in the international economic arena.21
The next section of this chapter looks at different perspectives on governance
at the meso level of the global economy, and it will be followed by a discussion of
industrial upgrading, which analyzes the trajectories by which countries seek to
upgrade their positions in the global economy.

Governance in the Global Economy: Institutional and Organizational

Perspectives
Scholars who study the global economy at the meso level form distinct camps
in terms of their units of analysis, theoretical orientations, and methodological

preferences. The two main units of analysis at the meso level are countries and
firms. In the 1970s and 1980s, political economy perspectives dealing with
nations and TNCs in the global economy tended to predominate, fueled by
dependency theory (Cardoso and Faletto, 1979; Evans, 1979), world-systems
theory (Wallerstein, 1974, 1980, 1989), and statist approaches (Amsden, 1989;
Wade, 1990; Evans, 1995), among others. During the last decade, however,
research on the global economy has shifted toward institutional and organizational
theories. The choice of countries or firms as empirical units has a striking affinity
with the researcher’s primary theoretical orientation: those who study countries
tend to adopt institutional perspectives, while those who work with firms favor
organizational frameworks.22
This paradigm divide at the meso level of the global economy is revealed by
looking at two broad literatures, which we label ‘varieties of capitalism’ and ‘global
production networks’. The former is closely associated with institutional analysis,
and the latter with diverse organizational perspectives. Both approaches tend to
focus on governance structures in the global economy, but the scope and content
of what is being governed differ greatly. The varieties of capitalism literature looks
primarily at coordination problems and institutional complementarities in advanced
industrial economies, where the nation-state is the explicit unit of analysis. This
research is comparative, but not transnational, in orientation. By contrast, the
research on global production networks highlights the linkages between developed
and developing countries created by TNCs and interfirm networks. Governance
in this context is typically exercised by lead firms in global industries, and one
of the key challenges addressed is industrial upgrading—that is, how developing
countries try to improve their position in the global economy, which is characterized
both by power asymmetries and by opportunities for learning through networks.
International and industry-based field research is a requisite in the study of global
production networks because publicly available and detailed information at the
level of firms is generally lacking. The main dimensions of this comparison are
outlined in Table 5.1.
The institutionalist paradigm encompasses several related approaches that deal
with the governance of modern capitalist economies, including regulation theory
(Aglietta, 1980; Boyer, 1989), national systems of innovation (Lundvall, 1992;
Nelson, 1993), social systems of production (Campbell et al., 1991; Hollingsworth
et al., 1994; Hollingsworth and Boyer, 1997), and varieties of capitalism (Berger
and Dore, 1996; Kitschelt et al., 1999; Hall and Soskice, 2001). All of the authors
in this field focus on the ‘institutional foundations of comparative advantage’ in
the advanced capitalist democracies, with an emphasis on topics like business-
government relations, labor markets and collective bargaining, the welfare state,
the internationalization of capital, and innovation systems.

A key unifying concept is institutional complementarity, which rests on

‘multilateral reinforcement mechanisms between institutional arrangements: each
one, by its existence, permits, or facilitates the existence of the others’ (Amable,
2000: 656). Complementary institutions and other forms of path dependency lead
most scholars in the varieties of capitalism genre to argue vociferously against
convergence, given their belief that unique and valued institutions will sustain
national diversities despite the withering pressures of international competition
in an increasingly open global economy. Actually, the paradigm does allow for
a limited form of convergence in the sense that advanced market economies
are organized into three broad types: liberal market economies, which adopt
laissez-faire, pro-business policies (United States, United Kingdom, Canada,
and Australia); and coordinated market economies, with their corporatist (strong
state—Germany and Japan) and welfare state (strong trade unions—Scandinavian
and northern European) variants. However, there is no serious effort to extend this
paradigm to address the varieties of capitalism in the vast majority of countries
that are in the developing world. 23

Table 5.1 Comparison of Varieties of Capitalism and Global Production Networks

Dimension Varieties of Capitalism Global Production Networks
Theoretical orientation Institutional analysis Organizational analysis
Unit of analysis Countries Interfirm networks
Empirical focus Advanced industrial Linkages between developed
economies/ capitalist and developing countries
democracies
Methodological preference Rational actor; multivariate Comparative/historical
analysis analysis across industries,
firms, and countries
Research style Quantitative, cross-national; International, industry-
country case studies based field research; political
economy interpretations
Ideal types Liberal and coordinated Producer-driven and buyer-
market economies driven commodity chains
Main challenges/collective Coordination problems in Industrial upgrading in
action problems developed countries developing countries
Key concepts Institutional Lead firms; economic rents;
complementarities learning through networks
Source: Authors.

The global production networks paradigm provides a very different perspective

on the global economy because its organizational lens focuses on transnational
linkages between developed and developing nations. The central questions deal
with the kinds of governance structures that characterize global industries, how

these governance arrangements change, and what consequences these shifts have
for development opportunities in rich and poor countries alike. International
institutionals, such as trade and intellectual property regimes, clearly shape inclusion
and exclusion of countries and firms in global production networks, but this
approach tends to focus on the strategies and behavior of the players (firms), while
the rules of the game (regulatory institutions) are taken as an exogenous variable.
Notwithstanding the potential complementarities between institutional and
organizational perspectives on the global economy, there has been virtually no
dialogue between these two literatures. They do not cite one another’s research or
engage in collaborative projects, despite the fact that both are concerned with the
international forces shaping countries and firms in the global economy.
There are several hybrid approaches that seek to bridge this gap between
organizational and institutional frameworks. One of these is the business systems
perspective, pioneered by Whitley (1992a, 1992b). As defined by (Whitley, 1996:
412).

Business systems are particular forms of economic organization that have become
established and reproduced in certain institutional contexts—local, regional,
national, or international. They are distinctive ways of coordinating and controlling
economic activities which developed interdependently with key institutions which
constitute particular kinds of political, financial, labor, and cultural systems. The
more integrated and mutually reinforcing are such institutional systems over a
particular territory or population, the more cohesive and distinctive will be its
business system.

While firms presumably are central to business systems, Whitley’s framework

shares the institutionalist paradigm’s emphasis on institutional complementarities
and cohesion, and national or culturally proximate regions. However, the business
systems approach seems relatively ill-equipped to deal with the question, ‘How
do US, European, or Asian business systems respond to globalization?’ While the
business systems logic would lead us to expect that firms of the same nationality
maintain their distinctive features in the face of international competition, findings
from research on global production networks indicate that the competition among
firms from different business systems in overseas markets tends to diminish the
influence of national origins on firms’ behavior (Gereffi, 1996: 433).24
Sociologists have looked at a range of other actors in the global economy.
‘Business groups,’ defined as a collection of firms bound together in persistent
formal or informal ways, are a pervasive phenomenon in Asia, Europe, Latin
America, and elsewhere (Granovetter, 1994; 2005). Business groups may encompass
kinship networks, but they are not delimited by family boundaries because the goals
of families can conflict with the principles of profit maximization that characterize

firms in these groups. Business groups play a role in the global economy through
their impact on national market structures, and on product variety and product
quality in international trade (Feenstra et al., 1999). Transnational business
networks based on family or ethnic ties are another form of economic organization
that shapes global production and trade (Hamilton et al., 1989; Yeung, 2000).
Japanese sogo shosha, British trading companies, and Chinese and Indian merchants
laid the social groundwork for the long-distance supply routes between Asian
producers and their export markets (Gereffi, 1999: 60–61). For Castells (1996), the
universality of network society in the information age is a defining feature of the
modern era. Others argue that the global system is now ruled by a transnational
capitalist class, which is more interested in building hegemony than in domination
and control (Sklair, 2001; Carroll and Fennema, 2002).
At a more micro level, phenomena within nation-states can also ref lect
globalization processes. Meyer (2000) defines modern actors on the global stage
as entities with rights and interests that create and consult collective rules, that
often enhance their legitimacy by adopting common forms, and that exercise
agency through moral action. From Meyer’s ‘world society’ perspective, the
modern world is stateless; it is based on shared rules and models, and made up
of strong, culturally constituted actors. Sassen (2000) also detaches sovereignty
from the national state. She emphasizes the role of global cities as strategic sites
for the production of specialized functions to run and coordinate the global
economy, and posits that financial and investment deregulation are driving the
geographic location of strategic institutions related to globalization deep inside
national territories.

Industrial Upgrading and Global Production Networks

Major changes in global business organization during the last several decades of
the twentieth century have had a significant impact on the upgrading possibilities
of developing countries. This section will illustrate how the reorganization of
international trade and production networks affects the capability of developing
countries in different regions of the world to improve their positions in the value
chains of diverse industries.
Industrial upgrading refers to the process by which economic actors—nations,
firms, and workers—move from low-value to relatively high-value activities in
global production networks. Different mixes of government policies, institutions,
corporate strategies, technologies, and worker skills are associated with upgrading
success. However, we can think about upgrading in a concrete way as linked to
a series of economic roles associated with production and export activities, such
as assembly, original equipment manufacturing (OEM), original brand name

manufacturing (OBM), and original design manufacturing (ODM) (Gereffi,

1994b: 222–224). This sequence of economic roles involves an expanding set
of capabilities that developing countries must attain in pursuing an upgrading
trajectory in diverse industries. In the remainder of this section, we will look at
evidence from several sectors to see how global production networks have facilitated
or constrained upgrading in developing nations.

Apparel
The global apparel industry contains many examples of industrial upgrading by
developing countries.25 The lead firms in this buyer-driven chain are retailers (giant
discount stores like Walmart and Target, department stores like J. C. Penney and
Marks and Spencer, specialty retailers like The Limited and The Gap), marketers
(who control major apparel brands, such as Liz Claiborne, Tommy Hilfiger, Polo/
Ralph Lauren, Nike), and brand-name manufacturers (e.g., Wrangler, Phillips-
van Heusen). These lead firms all have extensive global sourcing networks, which
typically encompass 300 to 500 factories in various regions of the world. Because
apparel production is quite labor-intensive, manufacturing is typically carried out
in countries with very low labor costs.
The main stages for firms in developing countries are first, to be included as
a supplier (i.e., exporter) in the global apparel value chain; and then to upgrade
from assembly to OEM and OBM export roles within the chain. Because of the
Multi Fiber Arrangement (MFA) associated with the GATT, which used quotas
to regulate import shares for the United States, Canada, and much of Europe, at
least 50 to 60 different developing countries have been significant apparel exporters
since the 1970s, many just assembling apparel from imported inputs using low-
wage labor in local export-processing zones.
The shift from assembly to the OEM export role has been the main upgrading
challenge in the apparel value chain. It requires the ability to fill orders from
global buyers, which includes making samples, procuring or manufacturing the
needed inputs for the garment, meeting international standards in terms of price,
quality, and delivery, and assuming responsibility for packing and shipping the
finished item. Since fabric supply is the most important input in the apparel chain,
virtually all countries that want to develop OEM capabilities need to develop a
strong textile industry. The OBM export role is a more advanced stage because
it involves assuming the design and marketing responsibilities associated with
developing a company’s own brands.
East Asian newly industrializing economies (NIEs) of Hong Kong, Taiwan,
South Korea, and Singapore, which are generally taken as the archetype for
industrial upgrading among developing countries, made a rapid transition from

assembly to OEM production in the 1970s. Hong Kong clothing companies

were the most successful in making the shift from OEM to OBM production in
apparel, and Korean and Taiwanese firms pursued OBM in other consumer goods
industries like appliances, sporting goods, and electronics.26 After mastering the
OEM role, leading apparel export firms in Hong Kong, Taiwan, and South Korea
began to set up their own international production networks in the 1980s, using
the mechanism of ‘triangle manufacturing’ whereby orders were received in the
East Asian NIEs, apparel production was carried out in lower-wage countries in
Asia and elsewhere (using textiles from the NIEs), and the finished product was
shipped to the United States or other overseas buyers using the quotas assigned
to the exporting nation (Gereffi, 1999).
Thus, international production networks facilitated the upgrading of East
Asian apparel firms in two ways: first, they were the main source of learning
from US and European buyers about how to make the transition from assembly
to OEM and OBM; and second, the East Asian NIEs established their own
international production networks when faced with rising production costs and
quota restrictions at home, and in order to take advantage of lower labor costs
and a growing supply base in their region. Asian apparel manufacturers thus
made the coordination of the apparel supply chain into one of their own core
competences for export success.
Figure 5.1 presents a stylized model of industrial upgrading in the Asian
apparel value chain. The main segments of the apparel chain—garments, textiles,
fibers, and machinery—are arranged along the horizontal axis from low to high
levels of relative value added in the production process. Countries are grouped
on the vertical axis by their relative level of development, with Japan at the top
and the least-developed exporters like Bangladesh, Sri Lanka, and Vietnam at
the bottom.
Figure 5.1 reveals several important dynamics about the apparel value chain in
Asia, and the GVC approach more generally. First, individual countries progress
from low- to high-value-added segments of the chain in a sequential fashion over
time. This reinforces the importance in GVC research of looking at the entire
constellation of value-added steps in the supply chain (raw materials, components,
finished goods, related services, and machinery), rather than just the end product,
as traditional industry studies are wont to do. Second, there is a regional division
of labor in the apparel value chain, whereby countries at very different levels of
development form a multitiered production hierarchy with a variety of export
roles (e.g., the United States generates the designs and large orders, Japan
provides the sewing machines, the East Asian NIEs supply fabric, and low-wage
Asian economies like China, Indonesia, or Vietnam sew the apparel). Industrial
upgrading occurs when countries change their roles in these export hierarchies. 27

Finally, advanced economies like Japan and the East Asian NIEs do not exit the
industry when the finished products in the chain become mature, as the ‘product
cycle’ model (Vernon, 1966, 1971, chapter 3) implies, but rather they capitalize on
their knowledge of production and distribution networks in the industry and thus
move to higher value-added stages in the apparel chain. This strategic approach to
upgrading requires that close attention be paid to competition within and between
firms occupying all segments of global value chains.

Figure 5.1 Industrial Upgrading in the Asian Apparel Value Chain

Source: Authors.
Note: Dates refer to a country’s peak years for exports of specific products.

It is important to note, in closing this section, the key role played by international
regulation in the organization of the apparel value chain. The MFA and its apparel
quotas will be eliminated in 2005 as a result of the Agreement on Textiles and
Clothing in the WTO, and many of the smaller apparel exporters that only do
assembly will probably be forced out of the world export market. This should
greatly increase export concentration in the global apparel industry, with China
likely to be the major winner, along with other large countries such as Mexico,

India, Turkey, Romania, and Vietnam that have developed considerable expertise
in OEM production. Mexico’s rapid move in the 1990s to the top of list as the
leading apparel exporter to the United States owes a great deal to the passage
of NAFTA in 1994, which allowed the creation of textile production and other
backward linkages in Mexico, and thereby facilitated the entry of the US retailers
and apparel marketers that previously shunned Mexico in order to import apparel
from Asia. In addition, employment in the apparel export industry increased in
Mexico from 73,000 in 1994 to nearly 300,000 in 2000, mainly because Mexico
coupled its relatively low wage rates with its recently acquired ability to carry out
‘full-package’ (or OEM) production (Bair and Gereffi, 2001; Gereffi et al., 2002).
However, China regained the lead from Mexico in 2001 and 2002, as Mexico
has been unable to match the volume and low price of Chinese apparel exports,
and because of the intense competition from new suppliers that continue to enter
the US market.28

Electronics
Global production networks have been a central feature in the development and
upgrading of Asia’s large, dynamic electronics sector. In the case of electronics,
there have been competing cross-border production networks set up by US,
Japanese, and European firms, led by TNCs that span the entire value chain in
various industries. For high-tech industries like electronics, these producer-driven
chains must combine cost competitiveness with product differentiation and speed
to market. Cross-border networks not only allow firms to combine these very
different market demands effectively, but they also permit the integration of Asia’s
four distinct development tiers: Japan occupies the first tier; the East Asian NIEs
are in the second tier; the major Southeast Asian countries of Malaysia, Thailand,
the Philippines, and Indonesia are in the third tier; and the fourth tier contains
China and late-late developers such as Vietnam. While the economic crisis of 1997
called East Asia’s economic miracle into question, it appears that the structural
changes associated with recovery from the crisis will reinforce and increase the
opportunities for networked production, as the process of corporate restructuring
leads firms to focus on core activities and supplement these with the increasingly
specialized technology, skills, and know-how that are located in different parts
of Asia (Borrus et al., 2000).
The diverse upgrading dynamics in Asian electronics can best be seen by
contrasting the US and Japanese production networks. In the mid-1990s, US
networks were considered to be relatively open and conducive to local development
in host countries, while Japanese networks were perceived as closed and hierarchical
with activities confined within affiliates that were tightly controlled by the parent

company (Borrus, 1997). US electronics multinationals typically set up Asian

networks based on a complementary division of labor: US firms specialized in ‘soft’
competencies (the definition of standards, designs, and product architecture); and
the Taiwanese, Korean, and Singaporean firms specialized in ‘hard’ competencies
(the provision of components and basic manufacturing stages). The Asian affiliates
of US firms in turn developed extensive subcontracting relationships with local
manufacturers, who became increasingly skilled suppliers of components, sub-
assemblies, and even entire electronics systems. Japanese networks, by contrast,
were characterized by market segmentation: electronics firms in Japan made high-
value, high-end products, while their offshore subsidiaries in Asia continued to
make low-value, low-end products.
In terms of Asian upgrading, the US production networks were definitely
superior: US networks maximized the contributions from their Asian affiliates,
and Japanese networks minimized the value added by their regional suppliers.
Although there is some evidence that Japanese firms tried to open up their
production networks in the late 1990s, at best there has been partial convergence,
with persistent diversity (Ernst and Ravenhill, 2000).
Taiwan’s achievements in electronics are especially notable for several reasons.
During the 1990s, Taiwan established itself as the world’s largest supplier of
computer monitors, main boards, mouse devices, keyboards, scanners, and
notebook personal computers (PCs), among other items. About 70% of the
notebook PCs sold under OEM arrangements to American and Japanese computer
companies, which resell them under their own logos, have been designed by
Taiwanese firms. Acer, Taiwan’s leading computer maker, is successful at both
OEM and OBM production. Progress has been equally remarkable in the field of
electronic components, and Taiwan also boasts one of the world’s leading silicon
foundry companies, the Taiwan Semiconductor Manufacturing Corporation
(Ernst, 2000). What is especially impressive about these accomplishments is that
small and medium enterprises have played a central role as a source of flexibility
in Taiwan’s production networks.
The role of small and medium enterprises as engines of growth and industrial
transformation sets Taiwan apart from South Korea, which has relied extensively
on huge, diversified conglomerates (chaebol) as the cornerstone of its electronics
sector. The Taiwanese model in the computer industry draws on a combination of
several factors: government policies that facilitated market entry and upgrading;
strong linkages with large Taiwanese firms and business groups; and organizational
innovations, such as the shift from relatively simple, production-based OEM to
more complex ‘turn-key production’ arrangements that encompass a wide variety of
high-end support services, including design and global supply chain management
(Poon, 2002).

One of the most striking features of the electronics industry in recent years
has been the rise of global contract manufacturers (Sturgeon, 2002). A significant
share of the world’s electronics manufacturing capacity is now contained in
a handful of huge contractors, such as Solectron, Flextronics, and Celestica.
These firms are pure manufacturers. They sell no products under their own
brand names and instead focus on providing global manufacturing services to
a diverse set of lead firms, such as Hewlett-Packard, Nortel, and Ericsson. All
have operations that are truly global in scope, and all have grown dramatically
since the early 1990s. Solectron, the largest contractor, expanded from a single
Silicon Valley location with 3,500 employees and $256 million in revenues in
1988 to a global powerhouse with more than 80,000 employees in 50 locations
and nearly $20 billion in revenues in 2000. Although they have global reach, all
of the largest contract manufacturers are based in North America. Except for
the personal computer industry, Asian and European contract manufacturers
have not developed, and the few that did were acquired by North American
contractors during their buying spree fueled by the inflated stock prices of the
1990s. Global contract manufacturers introduce a high degree of modularity
into value chain governance because the large scale and scope of their operations
create comprehensive bundles of standardized value chain activities that can be
accessed by a variety of lead firms through modular networks.

Fresh Vegetables
A final example of the role of global production networks in promoting industrial
upgrading involves the production of fresh vegetables in Kenya and Zimbabwe for
export to UK supermarkets.29 Africa has very few success stories in the realm of
export-oriented development, but some countries of sub-Saharan Africa seem to
have found a niche in the fresh vegetables market. Several factors tie this case to
our previous examples. First, fresh vegetables are a buyer-driven value chain, albeit
in the agricultural sector. As with apparel, there is a high level of concentration at
the retail end of the chain. The largest UK supermarkets and other food retailers
control 70% to 90% of fresh produce imports from Africa. These retailers have
avoided direct involvement in production; they just specialize in marketing and
in the coordination of their supply chains.
Second, a major stimulus for local upgrading in Africa comes from UK retailers
ratcheting up the standards that exporters must meet. UK supermarkets have
moved beyond compliance with product quality and legislative (or due diligence)
requirements for how produce is grown, processed, and transported. They now
are focusing on broader standards that exporters must meet, such as integrated
crop management, environmental protection, and human rights. In addition,

retailers are beginning to use third-party auditors paid for by producers to ensure
compliance with these standards.
Third, more stringent UK requirements have led to a decline in the market share
of smallholder production and small export firms, which have been excluded from
the supermarket supply chain. The horticulture industry in sub-Saharan Africa
is dominated by a few large exporters that source predominantly from large-scale
production units. In both Kenya and Zimbabwe, the top five exporters controlled
over three-quarters of all fresh vegetable exports in the late 1990s.30
Fourth, as in apparel and electronics, market power in the horticultural chain
has shifted from those activities that lower production costs to those that add
value in the chain. In fresh vegetables, the latter include investing in post-harvest
facilities, such as cold storage; barcoding products packed in trays to differentiate
varieties, countries, and suppliers; moving into high-value-added items such as
ready-prepared vegetables and salads; and treating logistics as a core competence
in the chain in order to reduce the time between harvesting, packing, and delivery.
Pushing back these functions into Africa can reduce the cost for UK supermarkets
because adding value to vegetables is labor-intensive and African labor is relatively
cheap, but taken together these high-end services can become a new source of
competitiveness and an opportunity to add value in Africa.

The Globalization Backlash: Dilemmas of Governance and

Development
In recent decades, a strong anti-globalization movement has emerged. As markets
have gone global, many people sense that globalization means greater vulnerability
to unfamiliar and unpredictable forces that can bring economic instability and
social dislocation, as well as a flattening of culture in the face of well-financed
global marketing machines and ‘brand bullies’ (Rodrik, 1997; Klein, 2000; Ritzer,
2000). The so-called Battle of Seattle, the massive protest against WTO trade talks
in late 1999, was triggered not only by a lack of accountability and transparency
in the deliberations of dominant global economic institutions like the WTO and
the IMF, but also by a sense of outrage that corporate-sponsored international
liberalization was moving full steam ahead, while the social safety nets and
adjustment assistance traditionally provided by national governments were being
removed. The historic compromise of ‘embedded liberalism’, characterized by the
New Deal in the United States and social democracy in Europe, whereby economic
liberalization was rooted in social community, was being undone (Ruggie, 2002a).
A major problem is that the purported benefits of globalization are distributed
highly unequally. The IMF’s Managing Director, Horst Köhler, has conceded
that ‘the disparities between the world’s richest and poorest nations are wider than

ever’.31 Of the world’s 6 billion people, almost half (2.8 billion) live on less than
two dollars a day, and a fifth (1.2 billion) live on less than one dollar a day, with
44% of them living in South Asia. In East Asia the number of people living on
less than one dollar a day fell from 420 million to 280 million between 1987 and
1998, largely because of improvements in China. Yet the numbers of poor people
continue to rise in Latin America, South Asia, and sub-Saharan Africa (World
Bank, 2001: 3). What forces might be able to ameliorate these problems in both
governance and development in the global economy?
In the 1990s, there was a sharp escalation in social expectations about the role
of corporations in society, both in developed and developing nations (Ruggie,
2002b). One reason is that individual companies have made themselves, and in
some cases entire industries, targets by engaging in abusive or exploitative behavior.
As a result, trust in the corporate sector has been eroded. In addition, there is a
growing imbalance in global rule-making: on the one hand, the rules favoring
market expansion have become stronger and more enforceable (such as intellectual
property rights for software and pharmaceutical companies, or the restrictions
on local-content provisions and export-performance requirements in the WTO);
on the other hand, rules that favor other valid social objectives, such as human
rights, labor standards, environmental sustainability, or poverty reduction, are
lagging behind. These perceived problems and others have provided the fuel for
anti-corporate campaigns worldwide.
Government policy alone is inadequate to handle these grievances: they
are transnational in scope, and they deal with social demands in areas where
regulations are weak, ill-defined, or simply absent. A variety of new ‘private
governance’ responses or certification institutions are emerging (Gereffi et al.,
2001), such as individual corporate codes of conduct; sectoral certification schemes
involving non-governmental organizations (NGOs), firms, labor, and other
industry stakeholders; third-party auditing systems, such as SA 8000 for labor
standards or the Forest Stewardship Council (FSC) certification for sustainable
forestry practices; and the United Nations Global Compact, an initiative that
encourages the private sector to work with the United Nations, in partnership
with international labor and civil society organizations, to move toward ‘good
practices’ in human rights, labor standards, and environmental sustainability in
the global public domain. While skeptics claim there is little evidence to show
that these codes have significant impact on corporate behavior (Hilowitz, 1996;
Seidman, 2003), proponents generally argue that new systems of certification,
enforced either by global consumers or by institutional actors such as the United
Nations, can provide the basis for improved regulatory frameworks (Fung et al.,
2001; Williams, 2000).
Although there is enormous variation in the character and purpose of different
voluntary regulatory schemes—with some schemes created by activists in response

to global concerns, and others implemented by corporations as a preemptive effort

to ward off activist pressure—certification institutions have gained a foothold in
both Europe and North America. In the apparel industry, a variety of certification
and monitoring initiatives were established in the latter half of the 1990s.
• Clean Clothes Campaign (CCC), a consumer coalition in Europe that
aims to improve working conditions in the worldwide garment industry.
• Social Accountability 8000 (or SA 8000), a code of conduct verification
and factory certification program launched in October 1997 by the New
York–based Council on Economic Priorities.
• Fair Labor Association (FLA), which includes major brand merchandisers
such as Nike, Reebok, and Liz Claiborne.
• Worldwide Responsible Apparel Production (WRAP), an industry-
initiated certification program designed as an alternative to the FLA
and representing the large US apparel manufacturers that produce for
the discount retail market.
• Workers Rights Consortium (WRC), developed by the United Students
Against Sweatshops in cooperation with apparel unions, universities,
and a number of human rights, religious, and labor NGOs (see Maquila
Solidarity Network, 2002).
In Mexico, the FLA and WRC collaborated in settling a strike and gaining
recognition for the workers’ union in the Korean-owned Kukdong factory, which
made Nike and Reebok sweatshirts for the lucrative US collegiate apparel market
(Gereffi et al., 2001: 62–64). In the coffee sector, the Fair Trade movement has
worked with small coffee growers in Costa Rica and elsewhere to get above-market
prices for their organic and shade-grown coffees distributed by Starbucks and
other specialty retailers (Fitter and Kaplinsky, 2001; Ponte, 2002).
Private governance in multistakeholder arrangements seeks to strengthen
oversight in global supply chains by charting a course that goes beyond conventional
top-down regulation based on uniform standards, on the one hand, and reliance
on voluntary initiatives taken by corporations in response to social protest, on the
other. Some argue that a continuous-improvement model based on ‘ratcheting
labor standards’ upward would work well in a highly competitive, brand-driven
industry such as apparel (Fung et al., 2001). Others propose a ‘compliance-plus’
model that pushes beyond the basic floor of minimum standards set by most
codes, and seeks an ‘inside-out’ approach to ethical sourcing based on training
and empowerment initiatives that address the needs and interests of factory-based
stakeholders (Allen, 2002). In either instance, sustainable and meaningful change
requires a shift in organizational cultures and expectations regarding improvement
of social and environmental conditions.

Governance has become a central theoretical issue in the global economy.

Institutional paradigms and local or regional frameworks centered on the
nation-state are being superseded by approaches that emphasize transnational
governance structures, with an emphasis on power, networks, and the uneven
distribution of gains from globalization. Much still needs to be done in this area.
The inability of the neoliberal agenda to redress the most serious development
problems in the world is leading to fresh thinking on the role of the state and civil
society institutions in developing nations (Wolfensohn, 1998; IDB, 1998, 2000;
Garretón et al., 2003). Transnational corporations are being pressured to comply
with a broad range of social objectives in multistakeholder institutions of private
governance that can have an impact on public policies in the developed as well as
the developing world. The challenge in research on the global economy is to create
theory and carry out insightful empirical studies that provide tools to understand
the constantly changing reality we seek to apprehend and change.

Notes
I am grateful to Giovanni Arrighi, Fred Block, Frank Dobbin, Mark Granovetter, Evelyne
Huber, Larry King, Victor Nee, Gay Seidman, Neil Smelser, and Richard Swedberg for their
helpful comments on an earlier draft of this chapter.
1. Another key actor in the contemporary global economy is the state. While the role of
the state is an important aspect in many of the institutional perspectives we will review,
a more comprehensive discussion of this topic can be found in Block and Evans (2005).
2. Because the services component of GDP in industrial countries has grown substantially
relative to ‘merchandise’ trade like manufacturing, mining, and agriculture, the
merchandise component of GDP is shrinking. Thus Feenstra (1998: 33–35) uses the
ratio of merchandise trade to merchandise value-added to measure the significance of
trade for industrial economies between 1890 and 1990. He finds that this ratio doubled
for France, Germany, Italy, and Sweden between 1913 and 1990, and nearly tripled for
the United States.
3. Organization for Economic Co-operation and Development.
4. The maquiladora program in Mexico, initially called the Border Industrialization
Program, was created in 1965 after the United States terminated the bracero program,
whose main objective had been to bring in Mexican workers to fulfil the demand for
agricultural labor. The end of the bracero program left thousands of unemployed farm-
workers in Mexican border cities, and the maquiladora program was set up to alleviate
the resultant unemployment and growing poverty. The growth of the maquiladora
program has been spectacular, especially in the 1990s. In 1991, Mexico’s maquiladora
industry generated $15.8 billion in exports and employed 466,000 Mexicans; by 2000,
it had grown to $79.5 billion in exports with nearly 1.3 million employees. Around
15% of Mexico’s GDP corresponded to maquiladora exports in 2001, and the main
destination for these products is the United States (Cañas and Coronado, 2002).

5. These three motives for investing abroad subsequently became popularized as distinct
forms of foreign direct investment: resource-seeking FDI, market-seeking FDI, and
efficiency-seeking FDI (Beviglia Zampetti and Fredriksson, 2003: 406).
6. The debt crisis hit all of Latin America very hard. The high external debt burden
required the allocation of 25% to 30% of the region’s foreign-exchange proceeds merely
to cover interest payments, which prompted scholars to refer to the 1980s as Latin
America’s ‘lost development decade’ (Urquidi, 1991).
7. The World Bank’s (1993) overview of the East Asian development experience attributes
the region’s sustained international competitiveness largely to the application of market-
friendly policies, including stable macroeconomic management, high investments in
human capital (especially education), and openness to foreign trade and technology.
For a critique of this ‘Washington Consensus’ model, see Gore, 2000. For a detailed
comparison of the import-substituting and export-oriented development strategies in
Latin America and East Asia, see Gereffi and Wyman (1990).
8. UNCTAD’s World Investment Report, 2002 contains a table of the largest 100 ‘economies’
in the world in 2000, using a value-added measure for firms that is conceptually
comparable to the GDP calculation used for countries. There were 29 TNCs in the top
100 entities on this combined list of countries and nonfinancial companies. The world’s
largest TNC was ExxonMobil, with an estimated $63 billion in value added in 2000;
it ranked 45th on the country-company list, making the company approximately equal
in size to the economies of Chile or Pakistan (UNCTAD, 2002a: 90–91).
9. For OECD countries, falling tariffs were twice as important as falling transport costs
in explaining the growth of trade relative to income between 1958 and 1988 (Feenstra,
1998: 34).
10. The European Union is a case in point. Taken individually, European Union economies
are very open, with an average trade share of 28% in 1990, but more than 60% of their
trade is with each other. Taken as a unit, the European Union’s merchandise trade with
the rest of the world is only 9% of GDP, which is similar to that of the United States
(Krugman, 1995: 340).
11. SITC refers to Standard International Trade Classification, which is the United Nations’
system of trade categories. One-digit product groups, such as SITC 7, are the most
general. Components are reported at the level of three-, four- and five-digit product
groups.
12. Feenstra’s focus on linkages between the integration of trade and the disintegration of
production in the current trade-based era calls to mind a similar duality in Osvaldo
Sunkel’s classic article ‘Transnational Capitalism and National Disintegration in
Latin America.’ Writing 25 years before Feenstra in a TNC-based world economy,
Sunkel (1973) argued that vertically integrated TNCs were generating international
polarisation as they used direct foreign investment (rather than trade) to integrate the
global economy and simultaneously disintegrate national and regional economies. Thus,
we have a curiously reversed image of TNCs moving from being highly integrated to
disintegrated actors in the last quarter of the twentieth century, while the economic
context shifts from transnational capitalism (based on closed domestic economies) in
the 1970s to global value chains (based on specialized economic activities in relatively
open economies) in the 1990s.

13. Actually, the disintegration of production through outsourcing of specific activities

by large corporations itself leads to more trade, as intermediate inputs cross borders
several times during the manufacturing process. This is part of the boundary problem
in measuring international trade noted by Krugman (1995).
14. Kogut (1985: 15) defines the value-added chain as ‘the process by which technology
is combined with material and labor inputs, and then processed inputs are assembled,
marketed, and distributed. A single firm may consist of only one link in this process,
or it may be extensively vertically integrated.’
15. The main sources of a firm’s competitive advantage that can be transferred globally
are several economies that exist along and between value-added chains: economies of
scale (related to an increase in market size); economies of scope (related to an increase
in product lines supporting the fixed costs of logistics, control, or downstream links of
the value-added chain); and learning (based on proprietary knowledge or experience).
‘When these economies exist, industries are global in the sense that firms must compete
in world markets in order to survive’ (Kogut, 1985: 26).
16. A firm’s value chain is nested in a larger stream of activities Porter calls a ‘value system,’
which includes the separate value chains of suppliers, distributors, and retailers (Porter,
1990: 40–43).
17. There are two distinct dimensions in how a firm competes internationally: the
configuration of a firm’s activities worldwide, which range from concentrated (performing
an activity, such as research and development, in one location and serving the world
from it) to dispersed (performing every activity in each country); and the coordination of
value chain activities, which range from tight to loose structures (Porter, 1987: 34–38).
18. Reich (1991) says that core corporations in the United States at the end of the twentieth
century have moved from high-volume production of standard commodities to high-
value activities that serve the unique needs of particular customers. This requires an
organizational shift from vertical coordination (represented as pyramids of power,
with strong chief executives presiding over ever-widening layers of managers, atop an
even larger group of hourly workers) to horizontal coordination (represented as webs
of high-value activities connected by networks of firms).
19. The GCC approach adopted what Dicken et al. (2001: 93) call ‘a network methodology
for understanding the global economy.’ The objective is ‘to identify the actors in these
networks, their power and capacities, and the ways through which they exercise their
power through association with networks of relationships.’
20. One of the key findings of value chain studies is that access to developed country markets
has become increasingly dependent on participating in global production networks
led by firms based in developed countries. Therefore, how value chains function is
essential for understanding how firms in developing countries can gain access to global
markets, what the benefits from such access might be, and how these benefits might
be increased. A GVC research network has formed to study these issues. See http://
www.globalvaluechains.org.
21. Several international organizations have featured the global production networks
perspective in recent reports, including UNIDO (2002, chapter 6), UNCTAD (2002a,
chapter 5; 2002b, chapter 3), the World Bank (2003: 55–66), and the International
Labour Organization’s program ‘Global Production and Local Jobs’ (see the April 2003
issue of Global Networks for several articles from this project).

22. These distinctions are not ironclad. Often they reflect primary versus secondary research
orientations. The scholars who adopt an institutional perspective at the national level
can still look at the diversity of firm strategies within national contexts (e.g., Morgan
et al., 2001). Similarly, those who use organizational perspectives to understand the
evolution of firm strategies and inter-firm networks within global industries may ground
their generalizations in diverse institutional contexts at the regional, national, and local
levels of analysis (e.g., Bair and Gereffi, 2001; Gereffi et al., 2002).
23. Guillén (2001) offers a very insightful sociological perspective on the limits of
convergence in his systematic comparison of organizational change in Argentina, South
Korea, and Spain since 1950. Guillén uses a comparative institutional approach to
show that ‘the emergence of a specific combination of organizational forms in a given
country enables it to be successful in the global economy at certain activities but not
others’ (2001: 16).
24. Indeed, companies from the same national business system may show contradictory
patterns as they confront global markets. A careful study of seven German transnational
companies in three of Germany’s core industries— Hoechst, Bayer, and BASF in the
chemical/pharmaceutical industries; Volkswagen, Mercedes-Benz, and BMW in the
automobile industry; and Siemens in electrical/electronic engineering—reveals that
strikingly different strategies exist within and between these industries, resulting from
a mixture of traditional German ways of doing business and bold global moves (Lane,
2001). This departs markedly from Whitley’s classification of firms in the German
business system as ‘collaborative hierarchies.’
25. This analysis of industrial upgrading in apparel draws mainly from Gereffi (1999) and
Gereffi and Memodovic (2003).
26. However, a number of OBM companies have returned to OEM because it capitalises on
East Asia’s core competence in manufacturing expertise. Some East Asian companies
pursue a dual strategy of doing OBM for the domestic and other developing country
markets, and OEM production for the United States and other industrial country markets.
27. By contrast, the popular ‘f lying geese’ model of Asian development assumes that
countries industrialize in a clear follow-the-leader pattern (Akamatsu, 1961), and no
attention is paid to the kind of international production networks that may emerge
between the lead economies and their followers.
28. A prime example is sub-Saharan Africa, which, under the African Growth of Opportunity
Act of October 2000, has been granted quota-free and duty-free access to the US market
for products that meet specified rules of origin.
29. See Dolan and Humphrey (2000) for the facts relevant to this case.
30. The one exception to this high level of concentration is organic produce, for which
there is both a price premium and a significant unmet market demand in the United
Kingdom because local production is very fragmented. Smaller African exporters still
have an opportunity to penetrate this market because organics do not presently require
the scale and investment of more exotic forms of produce.
31. ‘Working for a Better Globalization,’ remarks by Horst Köhler at the Conference on
Humanizing the Global Economy, Washington, DC, 28 January 2002. Cited in Ruggie
2002a: 3.

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6
t
Local Clusters in Global Chains
The Causes and Consequences of Export
Dynamism in Torreon’s Blue Jeans Industry

Jennifer Bair and Gary Gereffi

Introduction
The decade of the 1980s witnessed the widespread adoption of export-led growth
strategies and neoliberal policies prescribing open markets and privatization
programs in much of the developing world. Development research in the 1990s
focused primarily on the implications of these trends for the industrializing
countries that are increasingly integrated into global markets. The abandonment
of import-substituting strategies, which were influenced by the neo-marxist and
dependency theories of the 1960s and 1970s, and the implementation of far-
reaching reforms corresponding to a new economic model have led to a watershed
in development studies. Researchers and policy makers alike confront the challenge
of how to analyze the link between the global and the local. Latin America is a
case in point. Spirited debates have arisen about the local development outcomes
associated with the adoption of neoliberal reforms in the region and what theories
and paradigms can best explain these outcomes (Dussel Peters, 2000; Reinhardt
and Peres, 2000).
Our chapter contributes to this debate by focusing on one dynamic exporting
cluster in Mexico, a country that has undergone a rapid and radical economic
restructuring over the past decade. Across a wide variety of sectors, Mexico’s
exports have been booming since the implementation of the North American
Free Trade Agreement (NAFTA) in 1994, increasing from $51.8 billion in 1993
to $166.4 billion in 2000 (SECOFI, 2001). Aside from impressive export growth,
Mexico has also managed to achieve many of the other objectives associated with
Latin America’s new economic model: a stable currency, modest inflation, and
plentiful direct foreign investment. Perhaps most important, the presidential

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Local Clusters in Global Chains 177

election of July 2000, which saw the historic victory of opposition candidate
Vicente Fox, provided evidence that Mexico’s decades long transition to genuine
democracy from one-party rule has been consolidated.
Despite the seeming abundance of good news, there is a growing sense that all is
not well in Mexico. While the liberalization strategy that Mexico enthusiastically
embraced in the 1990s has been successful in its own terms, critics have pointed
out that Mexico’s shift from an import-substituting industrialization strategy to
an export-led growth model has been associated with a more unequal income
distribution and falling real wages for the majority of the country’s workers
(De la Garza, 1994; Dussel Peters, 2000; Robinson, 1998–99).
The most dynamic sector of the Mexican economy in terms of exports and
job creation is the maquila industry of in-bond plants, while small and medium
enterprises have been hard hit by the country’s rapid liberalization. NAFTA
skeptics claim that the trade agreement, and the export-led growth model it
represents, are leading to the ‘maquilization of Mexico’, with the entire country
becoming converted into an export-processing zone for low-value-added activities
benefiting large corporations on both sides of the border. This position contends
that the economic growth associated with the post-NAFTA era does not represent
positive development outcomes for the majority of Mexican workers or firms.
In this chapter, we report on one of the most vibrant sectors within Mexico—
the export-oriented apparel industry—and one of the most rapidly growing
production centers within that industry, the region surrounding the city of
Torreon in northern Mexico. In Section 2, we lay out the theoretical debates
involving two main paradigms in developmental studies—the industrial districts
and global commodity chains (GCC) perspectives—and we indicate how they
frame our case. Section 3 explains why we have chosen Torreon as our empirical
focus and addresses the relevance of the maquila sector for our study. Section 4
discusses our methodology and Section 5 analyzes our findings, focusing on the
emergence of post-NAFTA, full-package networks for apparel production that
link local manufacturers in Torreon to a new set of US customers. In Section 6,
we examine the local developmental outcomes associated with the emergence of
full-package networks in Torreon. In the final section, we reassess the industrial
districts and GCC approaches in light of the data presented in this chapter. The
industrial districts literature, which emphasizes the importance of local institutions
and dynamics in promoting competitiveness, has been influential in shaping
research on clusters in developing country contexts. We argue that studies of
such clusters should be supplemented by a GCC perspective that privileges the
dynamics of global industries and the role of foreign buyers in linking local firms
into crossborder networks.

Clusters and Chains: Competing or Complementary Approaches to

Understanding Development?
Throughout the late 1980s and 1990s, the industrial districts model generated
significant enthusiasm in development circles. Using a Weberian ideal type based
primarily on the experiences of small and medium enterprises in the Emilia-
Romagna region of the so-called Third Italy, the industrial districts literature
sought to explain how geographically bounded and sectorally specialized clusters
of firms combined successful export performance of primarily labor-intensive, light
manufacturing goods, such as footwear and apparel, with relatively high wages
paid to a skilled work force (Sengenberger and Pyke, 1991). Although it emerged
from a distinct social, cultural, and economic context, researchers wondered if the
industrial districts model might provide clusters of firms in developing countries
a ‘high-road’ to development as well.
A special issue of World Development (Humphrey, 1995a) was dedicated to this
question. The focus on industrial districts was accompanied by a review of recent
literature on Japanese manufacturing methods and the lean production model
most closely associated with Toyota. The various contributors to the special issue
examined the applicability of these two models—industrial districts and lean
production—in developing-country contexts. What makes both models distinctive
is their focus on inter-firm networks. While lean production involves reorganizing
vertical inter-firm relationships along the supply chain, the industrial districts
model emphasizes the importance of horizontal networks between firms located
within the cluster:

The crucial characteristic of an industrial district is its organization… . It is the

firm as part of, and depending on, a collective network which perhaps more
than anything else incapsulates the essence of the district’s character (Pyke and
Sengenberger, 1992: 1).

A second special issue of World Development (Schmitz and Nadvi, 1999a)

devoted to the topic of industrial clusters in developing countries sought to
‘specify the circumstances in which clustering boosts industrial growth and
competitiveness’ (Schmitz and Nadvi, 1999b: 1503). In the 1999 special issue, the
earlier discussion of lean production as a phenomenon associated with Japanese
manufacturing methods, such as Just-in-Time and Total Quality Management,
was not reintroduced.1 Similarly, there was a move away from the terminology and
specificity of the industrial districts model in favor of a more inclusive and flexible
approach to the study of clusters.2 The strongest research finding to emerge from
this second group of studies was the need to focus on linkages external to the
cluster. While early formulations of the industrial districts model emphasized the
importance of intra-cluster networks, the empirical work on clusters, particularly

in developing countries, suggests that the way in which firms in clusters are linked
to external actors has significant implications for the cluster’s performance and
local development.
Like several contributions to the second issue dealing with the impact of trade
liberalization on developing-country clusters, Rabellotti (1999) examined the
impact of Mexico’s economic opening on one shoe cluster in Guadalajara. Focusing
on the cooperative behavior of local firms, Rabellotti found that trade liberalization
produced greater cooperation and increased horizontal and vertical linkages, and
that this increased cooperation had a positive effect on firm performance. She also
found that liberalization increased the heterogeneity within the cluster, and that
exporting firms were favored by local suppliers. While only large manufacturers
were able to develop direct links with US brokers because of the production volumes
they require, the export dynamism generated by a few firms implied externalities
for the cluster because production for export requires rapid access to quality
inputs. This upgrading of the local supply-base, although it disproportionately
benefited the large exporting firms that initiated it, was a positive consequence
of liberalization. Rabellotti concluded that trade liberalization produces positive
externalities for the cluster, while also increasing heterogeneity within it, mainly
due to the bifurcation of market channels between firms serving the domestic
market and a few large exporters.
Hubert Schmitz’s analysis of the footwear cluster in Brazil’s Sinos Valley showed
how the arrival of foreign buyers that handled the higher value-added activities
of product development, marketing, and quality control introduced new price
pressures within the cluster. He notes that while the industrial districts model
provided a useful framework for his study, it is weak in two areas: ‘it emphasizes
specialization, i.e., differentiation by size; [and] it is strong on linkages internal
to the cluster but weak on external linkages’ (Schmitz, 1995: 23). The importance
of external linkages is sharply underscored in Schmitz’s sequel to the Sinos Valley
footwear case. His follow-up study showed that ‘an ambitious upgrading project
failed mainly because some of the leading and most influential entrepreneurs
identified more with their main overseas customer than with their local colleagues’
(Schmitz, 1999: 1647). This connection between local producers and global buyers
is viewed as a central research question (Schmitz, 2000).
These two special issues of World Development examined the value, first, of the
lean production and industrial districts models in industrializing countries, and
second, the role of clusters more generally in developing country contexts. Several
key conclusions emerge from this research trajectory:
• The initial formulation of the industrial districts model was too stagnant
and culture-bound to capture the variety and heterogeneity of developing
country experiences;

• clusters in developing countries generally have a pronounced mix of

small and large enterprises, and the larger firms are likely to yield
disproportionate influence in the cluster;
• particularly in the context of trade liberalization in industrializing
countries, vertical cooperation is high or growing within clusters;
• despite the emphasis placed on cooperative competition in the early
industrial districts literature, bilateral horizontal cooperation is low or
decreasing; and
• growth trajectories, firm performance, and local development outcomes
are all to some extent dependent on the external links that connect
enterprises in the cluster to foreign companies and/or markets.
The importance of external linkages, and the limited empirical attention given
to these linkages to date, are often noted in the literature on clusters in developing
countries. A useful antidote to this problem is the work on global commodity
chains (Gereffi and Korzeniewicz, 1994). The GCC perspective starts from
the premise that analyzing the dynamics and structure of global industries is a
useful way to understand the local consequences of globalization for firms and
workers. Commodity chains are composed of links that represent discrete, though
interrelated, activities involved in the production and distribution of goods and
services. In the case of the apparel industry, which is the empirical focus of our
chapter, the chain extends from raw materials (e.g., cotton or petrochemicals), to the
production of natural or synthetic fibers and textiles, then to the design, cutting,
assembly, laundering, and finishing of apparel, and, finally, to the distribution,
marketing and retailing of garments (Appelbaum and Gereffi, 1994).
While the industrial districts approach tends to focus on the role of institutions
in shaping local development outcomes, the commodity chains approach when
applied to clusters focuses instead on firms, both in terms of foreign buyers and
local producers. Each commodity chain is driven by lead firms that coordinate and
control the organization of the production process. One of the key hypotheses of the
commodity chains literature is that the type of lead firms that drive a commodity
chain, and therefore the type of governance structure that characterizes it, will shape
local development outcomes in those areas where the chains touch down (Gereffi,
1999). Thus, the extent to which export-oriented clusters in industrializing countries
can achieve industrial upgrading objectives and positive developmental outcomes
will depend on the way in which firms in these clusters become incorporated into
global chains, who has power in particular chains, and how that power is exercised.
The value of the commodity chains framework to the research on clusters
was identified by Humphrey, who called in the 1995 special issue of World
Development for greater attention to the relationship between global chains and
local development:

Whether or not insertions into a commodity chain will create development

potential for a cluster will depend on both its position in the chain and the capacity
of firms and institutions to make use of or create sources of competitive advantage
and opportunities for upgrading (Humphrey, 1995b: 158).

The utility of the commodity chains framework was also underscored in a recent
paper by Schmitz and Knorringa, who note that the GCC approach is useful in
orienting studies of developing country clusters

because it identifies the key feature of the context in which export manufacturers
from developing countries tend to operate: they feed into chains which are
organized by lead firms that source globally. However, this approach needs to
be developed further in order to specify where local upgrading is facilitated or
hindered by these global buyers (Schmitz and Knorringa, 1999: 23).

In this chapter, we use the commodity chains framework to analyze the firm
strategies, upgrading opportunities, and development outcomes associated with
the Torreon blue jeans cluster. Ours is a two-part analysis. In the first part, we
show how the arrival of new lead firms, in particular US retailers and marketers,
has changed the organization of the local industry in Torreon by developing
full-package networks with several of the most advanced and innovative apparel
manufacturers in the cluster. This part of the Torreon story, in which the US
buyers serve as a catalyst for the emergence of full-package networks, shows the
importance of external links in changing the organizational dynamics of a cluster.
The second part of our analysis examines how these full-package networks,
now the independent variable, shape firm performance, intra-cluster dynamics,
and local development outcomes in Torreon. The difference between pre-
NAFTA maquila networks and post-NAFTA full-package networks in terms of
development outcomes is underscored. We explain what kinds of local linkages and
industrial upgrading opportunities full-package networks provide in Torreon, as
well as how the full-package shift affects firms and workers. In short, our analysis
shows: (a) how the arrival of a new set of foreign lead firms affects the organization
of the Torreon cluster and allows for the emergence of full-package networks; and
(b) how these networks shape intra-cluster dynamics and development outcomes.

The New Blue Jeans Capital of the World: More Than Maquilas?
Torreon is a dynamic industrial cluster of 500,000 people in the northern
Mexican state of Coahuila, about four hours by car from the Texas portion of the
US border. It is located in the heart of the Laguna region, which is well known
for its cotton and dairy products. The apparel industry in Torreon straddles the

nearby municipalities of Gomez Palacio and Lerdo in the neighboring state of

Durango. Following an economic recession in the early 1990s, Torreon has been
one of the main beneficiaries of Mexico’s recent export boom. Although the area
is also home to other export-oriented manufacturing sectors, such as autoparts and
machinery, the apparel industry has been the most dynamic in terms of exports
and job creation.
Torreon is one of several rapidly growing post-NAFTA apparel production
clusters in Mexico, reflecting the increased importance of this industry to the
country’s overall export profile in recent years. Mexico has emerged as a world-
class player among global textile and apparel exporters during the second half
of the 1990s. In 1991, Mexico was the seventh largest exporter of apparel to the
United States. By the decade’s close, Mexico toppled China to gain the number
one spot, with the value of Mexican apparel exports increasing from $1.2 billion
in 1990 to $8.8 billion in 1999 (SECOFI, 2001).
While overall apparel exports from Mexico have increased dramatically over
the past five years, we focus on the leading item in Mexico’s garment export
repertoire: blue jeans. In 1999, the United States imported more than $2.6
billion of trousers from Mexico, accounting for 34% of total apparel imports
from its southern neighbor (USITC, 2001). Torreon specializes in denim blue
jeans, which account for the lion’s share of cotton trousers. In 2000, firms in the
Torreon area were producing an average of six million garments a week, of which
90% were exported. Jeans accounted for 75% of the exported apparel, and thus
the region made over four million pairs of jeans each week. In contrast, El Paso,
Texas–Torreon’s predecessor as the blue jeans capital of the world and a major
manufacturing center for Levi Strauss and Co. before the company closed its last
factories there in 1999—produced two million pairs of jeans a week at its peak in
the early 1980s. To keep pace with this dramatic increase in output, employment
in Torreon’s 360 apparel factories has grown considerably from 12,000 jobs in
1993 to an estimated 75,000 in 2000. In addition, the proportion of Mexican
denim used in Torreon’s exported blue jeans increased from a negligible 1-2% in
1993 to 15% in 2000, and the piece rates paid to firms for blue jean assembly rose
two- to threefold (see Table 6.1).
We have chosen Torreon as the empirical focus of our paper because it is a
leading apparel production cluster in Mexico, and the dynamism of Mexico’s
apparel exports in recent years suggests that it has been one of the industries
most strongly affected by NAFTA. Some of the earliest research in the now
vast maquiladora literature examined in-bond sewing plants along the border
as exemplars of two characteristics that would become closely associated with
the maquilas: a young, predominantly female workforce with low education and
skill levels; and a highly routinized, low-value-added manufacturing process that

involved simple assembly of imported inputs.3 Apparel plants outnumber all other
maquila establishments and they employ more workers than any other maquila
sector except electronics. In 1993, the year prior to NAFTA’s implementation,
there were 392 apparel maquilas with 64,000 workers. By 2000, there were 1,058
registered maquila plants in the apparel industry throughout Mexico, employing
a total of 270,000 workers4 (SECOFI, 2001).

Table 6.1 Apparel Industry Indicators for Torreon /La Lagunaa

Variables 1993 1998 2000

Total output (garments per week) 500,000 4.0 million 6.0 million
Output per company (garments per week) Max. 50,000 Max. 230,000 Max. 480,000
Mexican denim in export production 1–2% 5% 15%
Assembly price per piece US$0.90–1.10 US$1.20–2.05 US$1.60–3.00
Employment 12,000 65,000 75,000
Source: Authors based on interviews carried out in Torreon (see Table 6.4).
Note: a Torreon is the center of La Laguna, a highly integrated economic region formed by two
additional cities (Gomez Palacio and Lerdo) and several rural communities. Although each city
is a distinct political entity, they form an integrated production zone.

If the industrial districts model provides a ‘high road’ to competitiveness,

the maquiladora industry has long been associated with a ‘low road’ based on
exploiting substantial wage differences between the United States and Mexico. The
maquiladoras are in-bond factories that produce goods primarily from imported
US inputs.5 These goods are then re-exported for sale in the US market, with
only a minimal duty paid on the value-added in Mexico. While proponents of
the maquiladora regime assert that it is a valuable source of export revenue and
job creation for Mexico, the program’s critics claim that the maquila sector offers
nothing but dead-end jobs, and traps developing countries into providing cheap
labor for low value-added assembly operations. Because the vast majority of inputs
are imported, it has been argued that the maquilas do not stimulate growth in
the rest of the economy (Sklair, 1993). Furthermore, early work on the maquilas
documented abusive or poor working conditions and suppression of workers’ efforts
to organize (Fernandez-Kelly, 1983; Iglesias Prieto, 1985).
The profile of the maquila sector has changed dramatically since it was
established by the Border Industrialization Program in 1965. Although the
maquilas were initially confined to the northern border, this geographical
restriction was later relaxed and maquila plants now exist throughout the country.
Recent studies contend that the maquiladoras have evolved from low-value-
added assembly plants to factories capable of more sophisticated manufacturing
operations. This revisionist perspective emerged in the late 1980s and early

1990s, when researchers began to call attention to so-called second- and even
third-generation maquilas.
Although local inputs to the production process remain low, the mix of activities
being performed by Mexican workers in the maquilas has become more diverse,
expanding beyond the simple assembly operations associated with earlier plants.
The sectoral focus of recent research includes autoparts production in northern
Mexico, televisions and other electronics in Tijuana, and computers in Guadalajara.
In each of these industries, the maquilas have matured from assembly sites based
on cheap labor to manufacturing centers whose competitiveness derives from
a combination of high productivity, good quality, and wages far below those
prevailing north of the border (Carrillo, 1998; Gereffi, 1996, 2000; Shaiken and
Herzenberg, 1987).
While the maquilas existed for almost three full decades prior to NAFTA,
this in-bond sector of the Mexican economy has grown rapidly since NAFTA’s
passage. Over 400,000 maquila jobs were created during 1994–1998, the first four
years after the implementation of NAFTA (Buitelaar and Padilla, 2000). Growth
in the maquila sector was accelerated by the devaluation of the Mexican peso in
December 1994. The devaluation had the effect of making Mexican labor even
cheaper for US firms and it has resulted in a major export boom since 1995. The
rapid growth of the maquila sector has generated widespread debate in Mexico,
which reflects not only the importance of this sector of the economy, but also the
concern generated by Mexico’s shift to an export-led development strategy in the
context of trade liberalization and regional integration.
Our study of Torreon provides an opportunity to contribute to this debate about
Mexico’s prospects for development in the NAFTA era, as well as to the literature
on industrial clusters in developing countries. Does clustering and specialization
in Torreon’s apparel industry provide a ‘high road’ to development, where firms
can compete on non-price factors such as quality and flexibility and the local
workforce enjoys relatively high wages? Or does Torreon more closely resemble
the old-style maquila model, where local production for export is confined to low-
value-added assembly activities, there are minimal backward linkages to suppliers,
few horizontal networks connect firms, companies compete only on the basis of
price, and unskilled workers receive low wages? Our research suggests that there
has been a significant shift beyond the traditional model of maquila production
in the region, but the outcomes for local firms and workers are mixed.

Methodology
Our on-site research in Torreon was conducted during two trips, each of about
two weeks in duration, in July 1998 and July 2000.6 Supplemental fieldwork

during this two-year period consisted of interviews with US textile and apparel
manufacturers in the United States that provided us with information about their
global and North American strategies. Most of these companies are located in
the Piedmont region of North Carolina, one of the major textile manufacturing
centers in the United States.7 These interviews, carried out as part of an on-going,
larger research project examining the restructuring of the North American apparel
industry, provided an initial set of contacts in the Torreon region. The primary
method of data collection consisted of open-ended strategic interviews with
Mexican, US, and joint-venture firms, industry associations, and local government
organizations, coupled with plant visits and factory tours. We also used secondary
materials, including production and trade data and articles in local newspapers,
to document recent changes in the industry. (For additional discussion of the
strategic interviews we conducted, see Appendix A.)
Our 1998 sample included nine apparel companies and two textile mills. Of
these 11 firms, two were subsidiaries of US multinational corporations, three
were joint ventures between US and Mexican companies, and six were wholly-
owned Mexican manufacturers. In our second visit to Torreon, we interviewed
10 apparel companies, including follow-up interviews with the six largest firms
we talked with in 1998. This sample consisted of three subsidiaries of US apparel
companies, one joint venture, and six wholly-owned Mexican companies. In
both 1998 and 2000, we also interviewed the local branch of the national apparel
industry association as well as officials in the local office of the federal government
ministry concerned with commerce and industry. Given the disproportionate role
played by foreign firms in the sector and our interest in understanding the power
dynamics that exist in the industry, our study focused on the 10 largest apparel
manufacturers in Torreon. Although about 360 different garment firms operate
in the Laguna region, the 10 biggest companies in our sample in 2000 directly
produced or coordinated about one-third of the total apparel output of the region.
(See Appendix B for a list of the authors’ interviews in Torreon.)
Interviews were conducted primarily in Spanish with the company’s plant
manager, director of foreign operations, or owner, and they lasted an average
of two hours. The interviews were usually followed by a tour of the production
facilities. In Torreon, these included the traditional sewing factory, textile mills,
laundries, finishing plants (where the garments are pressed, inspected for quality,
and packed), and a distribution center. In addition to providing an opportunity
to evaluate the working conditions and industrial relations (as suggested by plant
floor interactions between the workers and managerial staff), these tours also
permitted us to speak with additional informants, such as production trainers
and line supervisors, whose perspectives on the operation complement the data
collected in the initial interview.

Torreon’s NAFTA-Era Networks: The Arrival of New Lead Firms

The Laguna region where Torreon is located has long been a center for textile
and apparel production. The presence in the region of one of the oldest textile
companies in the country, Compañía Industrial de Parras, established the area
early on as an important source of cotton-based textiles and apparel for the national
market. From the beginning, firms in Torreon specialized in denim trousers,
first as workwear for the area’s growing industrial labor force and later as fashion
apparel when blue jeans became a mainstream clothing staple. The early period
of the cluster’s development in the 1940s and 1950s coincided with an import-
substituting industrialization strategy, protecting national companies in virtually
every sector from foreign competition and essentially guaranteeing healthy profits
to firms in the closed domestic market.
The opening of Mexico’s economy with the country’s accession to the General
Agreement on Tariffs and Trade in 1986, along with major devaluations of the
peso in 1982, 1985, and 1988, contributed to an extremely difficult period for
apparel firms in Torreon and throughout the country. As the purchasing power
of Mexican consumers decreased, they also faced a wide array of new and cost-
competitive imported apparel products. Together these factors resulted in declining
employment and output in Mexico’s apparel and textile industries, with small and
medium firms especially hard hit. While the domestic industry faced a period
of crisis throughout the 1980s, the maquila sector of in-bond plants flourished,
primarily along the border. Many of the local firms that had survived the leanest
years in places like Torreon recognized that exporting was the only viable option
for national producers, and so they too focused their attention on producing blue
jeans for the US market.
The transition of many firms from domestic manufacturer to export producer
transformed the Torreon cluster. While several local companies had developed
and marketed their own lines of jeans in the Mexican market, they quickly
discovered that they could not meet the quality or quantity standards demanded
by US buyers. Thus, they exported through the only mechanism that was available
to them: they became maquiladora plants assembling jeans for the US market.
The implementation of NAFTA in 1994 coincided with a sharp devaluation of
the Mexican peso in December of the same year, from 3.4 to 6.8 pesos to one
dollar. The immediate effect of the devaluation was to lower the relative cost of
Mexican labor, expand manufactured exports, and thereby boost the country’s
maquiladora sector.
As a result of NAFTA, the Torreon apparel cluster has experienced a qualitative
change in the type of networks connecting local firms to export markets. This
transition is associated with the arrival of a new set of foreign buyers whose

sourcing needs are different than those of the apparel manufacturers that used to
dominate the region’s export-oriented apparel production. Table 6.2 highlights the
magnitude of this shift. In 1993, the major US customers for the blue jeans made
in Torreon were four large manufacturers: Levi Strauss, Wrangler, Farah, and
Sun Apparel. By 2000, these companies were joined by the top US retail chains
(J. C. Penney, Sears, Kmart, Wal-Mart, and Target), the two leading specialty
retailers for apparel (Gap and Limited), and the marketers who sell a wide range
of fashionable brands (such as Liz Claiborne, Donna Karan, Tommy Hilfiger,
Calvin Klein, and Polo/Ralph Lauren).

Table 6.2 Main Clients for Torreon Apparel Exportsa

Type of clients 1993 2000
Manufacturers Farah (M) Sun Apparel-Jones of NY (M)
Sun Apparel (M) Aalfs (M)
Kentucky Apparel (M)
Grupo Libra (M)
Siete Leguas (M)
Red Kap (M)
Brand marketers Levi’s (BM, M) Levi’s (BM, M)
Wrangler (BM, M) Wrangler (BM, M)
Action West (BM, M)
Polo (BM)
Calvin Klein (BM)
Liz Claiborne (BM)
Old Navy (BM)
Tommy Hilfiger (BM)
Donna Karan (BM)
Guess (BM)
Chaps (BM)
Retailers Gap (BM, R)
The Limited (BM, R)
K-Mart (R)
Wal-Mart (R)
J. C. Penney (R)
Sears (R)
Target (R)
Source: Authors based on interviews carried out in Torreon (see Table 6.4).
Note: aM: Manufacturers; BM: Brand Marketers; R: Retailers.

The contrast between manufacturers and other big buyers (retailers and
marketers) in their capabilities and needs gives rise to the difference between
assembly and full-package networks. Figure 6.1 shows the typical manufacturer-
dominated assembly network, which was prevalent in Torreon from the mid-1980s

to the mid-1990s. The assembly plants on the Mexican side of the border received
cut parts from US manufacturers or brokers. In turn, these assembly plants
often subcontracted out a portion of their production to smaller firms known as
submaquilas. These cut parts were to be sewn into garments and then re-exported
to the United States under the maquila/807 regime. The profile of foreign lead
firms in Torreon at this time was undifferentiated—US manufacturers, most of
whom had some production in their own plants north of the border—and there
was no variation in the type of assembly networks these manufacturers established
in the region.

Figure 6.1 Pre-NAFTA Maquila Networks in Torreon

Source: Authors.

In Figure 6.2, the assembly networks typical of the maquila phase have
diversified to include the full-package networks characteristic of buyer-driven
commodity chains. In this full-package model, a local manufacturer receives
detailed specifications for garments from the buyer and the supplier is responsible
for acquiring the inputs and coordinating all parts of the production process: the
purchase of textiles, cutting, garment assembly, laundry and finishing, packaging,
and distribution.
Prior to NAFTA, the lead firms in the apparel commodity chain (retailers,
marketers, and branded manufacturers) sourced primarily from East Asia because
countries such as Hong Kong, South Korea, and Taiwan were home to contract

manufacturers that could produce orders for finished apparel according to these
buyers’ specifications8 (Gereffi, 1999). After NAFTA, retailers and marketers
became eager to transfer as much of this business to Mexico as possible because
NAFTA’s rules of origin give apparel produced under full-package arrangements
the same preferential access to the US market as apparel exported under the
maquila/807 regime, as long as it is manufactured from North American textile
inputs (Gereffi and Bair, 1998). Buyers placing orders for full-package apparel in
Mexico generally do not have to worry about tariffs or quotas, as they do when
importing from other apparel exporting countries.

Figure 6.2 Post-NAFTA Full-Package Networks in Torreon

Source: Authors.

Upgrading Through Networks: Torreon’s Success and Its Limitations

The arrival of a new set of foreign buyers changed the nature of Torreon’s role
in the apparel commodity chain: pure assembly networks typical of the maquila
sector were replaced with a mix of assembly and full-package networks. In this
section, we explain the relevance of these networks for local development outcomes,
focusing on four areas: upgrading at the level of the industry; upgrading at the
level of the firm; the hierarchical organization of Torreon’s inter-firm networks;
and the implications for labor.

Upgrading at the Industry Level

Upgrading is clearly occurring at the industry level in Torreon as a result of full-
package networks established by new lead firms. Prior to NAFTA, the only link
in the apparel commodity chain that was strong in Torreon’s export-oriented blue
jeans cluster was assembly, since this was the activity that the maquila/807 regime
encouraged. As more US buyers began to change their sourcing and production
networks to take advantage of new activities gradually liberalized under NAFTA’s
phase-in schedule, other activities in the chain began to touch down in the region.
Figure 6.3 shows the expansion of the apparel commodity chain in Torreon over
1993–2000. In 1993, the only link on the Mexican side was assembly; by 1996,
textile production as well as the post-assembly stage of laundering and finishing,
one of the first production processes liberalized under NAFTA, were added. In
2000, the full range of production activities was taking place in Torreon. The
other links of the chain that have been transferred to Torreon mean that more
backward linkages and value are being added in the region beyond the assembly
activities that were dominant prior to the emergence of full-package networks.

Figure 6.3 US–Torreon Apparel Commodity Chain Activities and Location

Source: Authors.

Figure 6.3 shows that three links in the apparel commodity chain—design and
product development, marketing, and retail—have remained predominantly in the
United States. These are the highest value-added activities in the chain, and they
are also the ones with significant barriers to entry closely guarded by the foreign
firms that control them. US lead firms—whether manufacturers, marketers, or
retailers—view these links of the commodity chain as core competencies, and
they see design and product development in particular as critical in terms of
differentiating their fashions and styles from competitors. A number of the full-
package manufacturers in Torreon that we interviewed have begun to work more
closely with their clients on product development, but this is generally confined
to translating the buyer’s specifications into practical knowledge that is necessary
for production.9
No manufacturer in Torreon markets its own apparel brands in the United
States, although some companies still have a presence in the domestic market,
and no Torreon producer of a US brand is able to sell its branded output directly
in Mexico (everything is exported to the United States). One company that we
interviewed planned in the future to launch its own line of apparel in the US
market, but the amount of capital necessary to promote and market a new brand
makes such endeavors risky. Strategies that local firms are considering in order
to reduce these risks include marketing their products specifically to Mexican-
American or Mexican consumers in the United States (whose fashion preferences
are presumably closer to their own), and targeting regional retail chains and
boutiques, which have lower volume needs and are less likely to choose their
suppliers based solely on price.

Upgrading at the Firm Level

Upgrading is also occurring at the firm level in Torreon, although here the picture
is more complex. A significant portion of full-package orders in Torreon is being
handled by a small number of first-tier manufacturers with the capabilities and
capital needed to coordinate full-package networks. Table 6.3 lists the top 10
firms in Torreon according to their production volume and the type of activities
they perform. Four of these 10 firms are ‘full-package’ manufacturers, meaning
that they receive an order from a client and deliver a finished product. Four more
are what may be termed ‘half-package’ producers, meaning that they carry out
all the production activities (cut, sew, and launder), but do not buy the fabric.
The difference between full-package and half-package is indicated in Table 6.3,
where the capabilities of some firms include an ‘F’ denoting that they purchase
the fabric for the orders they fill, while others have only C, S, and W listed for
cut, sew, and wash, respectively.

All four of these full-package manufacturers—Kentucky-Lajat, Libra, Siete

Leguas, and Pafer Huichita—are Mexican-owned companies. The emergence
of local full-package companies competing alongside a US-owned contractor
like Maquilas Pami (the sixth-largest manufacturer in Torreon and a subsidiary
of Jones Apparel of New York) is significant. Having gained experience through
maquila production for US clients and having earned the trust of foreign buyers,
Mexican firms are now developing direct links to export markets. These full-
package firms are upgrading by eliminating middlemen like brokers or trading
companies, which allows them to enjoy the higher profits full-package production
offers as compared to maquila orders.

Table 6.3 Top 10 Apparel Manufacturers in Torreon, Mexico—July 2000

Rank Firm Capacitya Employment Capabilityb Ownership
1 Wrangler 480,000 1,900 C, S, W US subsidiaryc
2 Kentucky-Lajat 400,000 5,500 F, C, S,W Mexicand
3 Libra 400,000 5,000 F, C, S, W Mexican
4 Siete Leguas 250,000 3,200 F, C, S,W Mexican
5 Grupo Denim 245,000 3,300 C, S, W Mexican
6 Maquilas Pami 240,000 3,800 C, S, W US subsidiarye
7 Red Kap (RKI) 156,000 1,430 S US subsidiaryf
8 Pafer Huichita 150,000 2,450 F, C, S, W Mexican
9 Grupo Impeccable 150,000 1,500 C, S, Mexican
10 Original Mexican 135,000 3,000 C, S, W Joint ventureg
Jeans Co. (OMJC)
Total 2,606,000 31,080
Source: Authors based on interviews carried out in Torreon (see Table 6.4).
Notes:
a Pairs of jeans per week.
b Capabilities: F: fabric, C: cutting, S: sewing, W: washing and finishing.
c Wrangler’s parent company is the VF Corporation.
d Kentucky-Lajat was set up in 1995 as a joint venture between Kentucky Apparel, a US-based jeans

manufacturer, and the Lajat Group in Mexico, but Lajat bought out its US partner in July 1999.
e
Maquilas Pami is owned by Sun Apparel, which was purchased by Jones Apparel of New York
in 1998.
f Red Kap is a division of VF Workwear, Inc.
g OMJC is a joint venture between Aalfs, a US-based jeans manufacturer, and the Martín Group

in Mexico.

Vertical Network Structure and Hierarchical Organization of the Industry

While upgrading is occurring in Torreon, both at the level of the industry and
for some specific firms, we are not sanguine about all the outcomes associated
with the emergence of full-package networks in the region. Due to increasing

concentration on both sides of the border, more orders are in the hands of fewer
foreign buyers and they are being given to a relatively small number of Mexican
suppliers. The social foundation of this concentration is revealed by the fact that
six of the 10 firms listed in Table 6.3 are owned by family members related by
blood or marriage.10 This is particularly striking considering that three of the
remaining four firms are subsidiaries of US corporations. Thus, the development of
full-package networks in Torreon is primarily benefiting a wealthy domestic elite
whose control over the local industry is being further strengthened by its exclusive
access to the US customers placing orders in the region. While these orders are
received by a few large, full-package manufacturers in Torreon, they are actually
being filled by a burgeoning array of contractors and subcontractors organized
into tiers of hierarchical networks controlled by the dominant firms in the cluster.
This hierarchical organization of the industry applies two sorts of pressures
on local firms. First, the US buyers are benchmarking Mexican full-package
manufacturers against other global suppliers. Consequently, these manufacturers
are under pressure to reduce their production costs to a minimum in order to offer a
competitive price. Second, these first-tier manufacturers then exert pressure on their
subcontractors as they try to procure assembly services for the lowest possible price
per piece. The end result of this vertical competitive dynamic is significant downward
pressure on the manufacturers’ profit margins, and consequently on workers’ wages.
As noted in the previous section, several Mexican companies have emerged
as leading full-package manufacturers in Torreon. To the extent that this puts
ownership and control in local hands, it is a positive developmental outcome. But,
these Mexican firms exert the same kinds of pressure and control on their local
subcontractors as US-owned companies impose on them. From the perspective of
the second- and third-tier suppliers in Torreon’s assembly networks, the difference
between receiving an order from a Mexican intermediary or a US buyer is probably
negligible. To avoid being squeezed by the local full-package manufacturers,
the obvious upgrading path for these subcontractors is to become full-package
producers themselves, but this transition is difficult to make for two reasons. First,
full-package business requires significant amounts of working capital to purchase
piece goods (i.e., fabric), and credit is both scare and expensive in Mexico. Second,
full-package manufacturers need direct links to US clients who are looking for
their services, and access to this customer base is jealously guarded by the US and
Mexican companies in Torreon that already have it.

Implications for Labor

How has the arrival of full-package networks coordinated by new US buyers
affected workers in Torreon? We examined five main issues relating to the

implications of this process for labor: (i) employment growth; (ii) skills upgrading
of the local labor force; (iii) working conditions; (iv) unionization; and (v) wages.
Dramatic employment growth in the apparel industry is the most obvious impact
of Torreon’s export boom on the local labor market. Apparel and textiles have
become the major source of employment in the region. During 1993–98, apparel
jobs increased 300%, while during the same period employment in commerce and
services only grew 3%, construction 80%, and the auto industry 100%. In 1993,
the area employed 12,000 workers in the apparel and textile industries; by 2000,
the number had grown to 75,000 (see Table 6.1). It is equally important to note
that activities associated with the deepening of the supply chain—such as textile
production, laundering, and cutting—are bringing new types of jobs to the region
to complement the growing number of sewing workers.
The development of full-package networks in the cluster has resulted in some
upgrading of the local skills base, as jobs in Torreon’s cutting rooms and laundries
entail more training and better pay than is offered to the average sewing machine
operator. The different levels of investment that firms make in the human capital
of workers reveal not just the varying complexity of specific jobs, but also the
way in which gender stratifies the local labor market. During our fieldwork in
Torreon, we saw only men working in the laundries and cutting rooms. While
management would attribute this to the physically strenuous nature of the work,
sex segregation also reflects the reluctance of companies to invest in enhancing
the skills of female employees. Women workers are expected to remain in the
workforce only until they begin families, typically withdrawing from the labor
market in their mid-20s.
Despite the fact that the ratio of male to female sewing machine operators in
several of Torreon’s larger plants is approaching 50%, the internal labor market
within the factories continues to be stratified by gender in subtle ways. Male sewers
are far more likely than female sewers to be promoted to higher-wage jobs in the
cutting rooms or laundries, and often even the most difficult and best paying
assembly line jobs, such as sewing the inseam in a jean, are given to men because
supervisors believe they are more easily able to handle the heavy denim fabric.
Due to the tightness of the local labor market, turnover is high across every job
category in Torreon’s apparel industry. The average turnover rate in many of the
sewing factories in Torreon was estimated at 10% per week. Thus, firms have little
incentive to invest in training their workers. While there are more opportunities
for skill upgrading than there would be in the absence of full-package networks,
the boom in Torreon’s apparel exports is characterized by very uneven development
of the local labor force.
Our evidence from Torreon suggests that there has been an improvement in
working conditions in the region associated with the arrival of US buyers that are

sourcing their brand-name apparel locally. The presence in the region of widely
recognized clients with upscale labels (such as Calvin Klein, Polo, and Tommy
Hilfiger) has prompted an improvement in working conditions. Large retailers and
marketers do not want their brands associated with the exploitation of workers or
with unsafe working conditions. Companies such as Gap and J. C. Penney have
issued Codes of Conduct related not only to the final quality of the product, but
also to the work process itself. Any plant or company that fails to fulfill these
requirements, including compliance with local labor laws, safety practices, and even
the conditions of the bathrooms, is in danger of losing its contracts. In addition,
since most factories have been constructed since 1994, they were designed with
modern standards to provide a relatively safe working environment with proper
ventilation, lighting, ergonomic equipment, etc. In general, the working conditions
of many of these new Mexican plants are not only better than those offered by local
competitors, but frequently better than those in comparable US apparel factories.
Currently the topic of sweatshops is receiving a great deal of attention in both
the academic and popular press, thanks to a number of publicity campaigns
sponsored by various consumer organizations, student groups, and organized labor
(National Interfaith Committee for Worker Justice, 1998; Ross and Kernaghan,
2000). Activists have called attention to the abusive working conditions that
prevail in many sewing factories, both in the United States and abroad, and they
challenge leading companies in the industry to do a better job of ensuring their
apparel is produced in a sweatfree environment. A commodity chains approach
has been implicit in many of these campaigns, as activists demand that US firms
take responsibility for the working conditions prevailing in any plant where
apparel bearing their label is produced, including subcontractors in developing
countries. Blatant sweatshop conditions were not evident in any of the large
plants we visited. Most of the factories appeared clean, well lit and ventilated,
and reasonably efficient. They had Codes of Conduct from their clients displayed
where workers could see them, although in at least one case they were displayed
in English. The visibility of these Codes in the plants that we visited increased
between 1998 (when it was uncommon to see them posted in a factory) and 2000
(when posting them had become a standard practice).
Because we primarily studied large firms, additional research is necessary to
evaluate working conditions in the numerous smaller contractors and sub-maquilas
in the Torreon region. Limited evidence from Torreon and fieldwork conducted
elsewhere in Mexico suggest that small, lower-tier subcontractors generally have
worse working conditions and lower wages (Bair, 2000, 2001).
While the arrival of new buyers has created jobs in Torreon and appears to
have improved working conditions in some factories, the evidence in terms of
wages and industrial relations is disturbing. The status of organized labor in the

Torreon apparel industry mirrors the situation throughout Mexico. In tandem with
the liberalization of the economy and in pursuit of the labor flexibility so prized
by foreign firms, the Mexican government has reduced the power of unions to a
minimum (Carrillo, 1994; De la Garza, 1994). The role of unions in the apparel
industry in the Torreon region has been limited in many cases to helping the firms
and their managers ‘deal’ with the workers. Effective representation and collective
bargaining have virtually disappeared and here, as elsewhere in Mexico, ‘protection
contracts’ (i.e., collective contracts signed with ‘company-friendly unions,’ often
without the knowledge of workers, designed to prevent the entrance of a genuine
union) are the norm. In the absence of effective representation, workers exercise
their limited power by moving from one company to another fairly often. They
use their mobility as a source of bargaining to obtain small wage increases and
nonmonetary benefits, such as transportation, free lunch, classes, raffles, and
prizes. This is a benefit contingent, however, upon a continued high demand for
labor.
In terms of wages, the evidence is more mixed. Workers in the apparel industry
are paid according to a piece-rate system whereby they receive a base wage, which is
typically a multiple of the local minimum wage, plus additional earnings ‘per piece’
when they achieve certain productivity levels or fulfill set production quotas. It is
widely agreed that Mexico’s minimum wage, which varies by geographic region,
is not a living wage, and consequently many companies pay a multiple of it, such
as 1.5 times or two times the legally allowed minimum. When we completed our
initial fieldwork in Torreon in July 1998, the local minimum wage was 182 pesos
per week (US$21.00). Base wages in the companies we interviewed generally
ranged between 220 and 280 pesos a week, but most workers earned more due to
the piece-rate system. Maximum average salaries ranged from 500 pesos (US$
57.50) to 750 pesos (US$86.20) a week.
By July 2000, average sewing wages had risen in Torreon to around 650 pesos
(US$68.40) a week.11 Several of the firms interviewed reported that good sewers
with high productivity were earning as much as 800–1,000 pesos (US$84.20 to
$105.30) a week.12 Companies repeatedly told us that in Torreon’s tight labor
market no one works for ‘minimum wage’ and many of the sewers in the region’s
factories were earning well in excess of two times the legal minimum. Apparel
wage increases in Torreon have generally been running ahead of inflation, which
was about 12% in 1999. But real wages are only now returning to the levels reached
prior to the 1994 devaluation, which has led some analysts to conclude that many
Mexican workers have actually experienced a decline in their standard of living
over the past five years (The Economist, 2000).
Although the high turnover and tight labor market in Torreon have been
driving wages up in the region’s apparel plants, this trend has not gone unnoticed

by the factory’s owners. High and persistent turnover was repeatedly cited in our
interviews as the most pressing problem employers face. In the summer of 1998, the
employers initiated discussions among themselves in an effort to find a ‘solution’
to the problem of rising wages as a result of Torreon’s increasingly tight labor
market. The employers particularly were concerned with the practice of companies
pirating away each other’s workers with wage increases. By July 2000, their efforts
in this regard had not been successful. Some entrepreneurs in the local industry
expressed resentment towards the foreign firms that arrived in Torreon after the
passage of NAFTA. They complain that because foreign firms can afford to pay
higher wages than their Mexican counterparts, they often hire away the better
and more experienced workers whose skills the local companies have developed.

Lessons from Torreon: The Value of a Commodity-Chains Perspective

for Research on Clusters
Our analysis of the blue jeans industry in Torreon shows how the types of links
that connect local firms to global chains shape development outcomes in export-
oriented manufacturing. Recent literature on manufacturing clusters in developing
countries has argued that the local-global link, and in particular the role of foreign
buyers, is not well understood. Our study is intended to help fill this gap. The
global commodity chains framework that we applied to the case of Torreon allows
us to explore how the structure of competition within a global industry affects the
experiences of local firms and workers in specific production locales.
Many of the factors that the industrial districts literature would expect to be
important in explaining local outcomes in clusters were not evident in Torreon. For
example, we found that networks in Torreon tended to be hierarchical and vertical
as opposed to cooperative and horizontal. During the course of our conversations
with owners and managers, we learned that trust and collaboration between
companies in Torreon is very uncommon. One of our informants described the
networks between local firms as a ‘cadena de disconfianza’ or a chain of distrust:
‘Information here is not shared. If you want to know how many jeans are being
made across the street, you have to bribe someone.’ Relations between companies
often appear distant or even strained, not close and collaborative, despite the fact
that several of the major firms are owned by relatives.
Several decades ago, researchers influenced by dependency theory claimed
that transnational corporations had negative implications for local development
in Latin America. They would not have been surprised by the low levels of trust,
weak horizontal ties, and hierarchical networks that characterize Torreon’s apparel
exporting cluster. It is not accurate, however, to suggest that all foreign firms
establish vertical networks that are uncooperative in nature, nor that all local

companies build horizontal networks that promote collaboration and trust. The
climate of distrust also affects relations among Mexican-owned firms. In fact, some
of our informants spoke more favorably of the foreign clients they did business
with on a regular basis than the local entrepreneurs with whom they competed
for orders and workers. More research is needed to understand the boundaries
of solidarity in clusters like Torreon, but it is clear that they are not determined
solely by foreign versus domestic ownership, nor are they inevitably fostered by
the existence of family ties.
Supporting institutions, such as trade associations and industry-specific
educational/ training programs, apparently, have not played an important role
in Torreon’s emergence as a major blue jeans cluster. In the case of the local
apparel industry association, its growth seems to have been more a response to
Torreon’s export boom than a cause of it. In short, the institutional environment
characterizing the Torreon cluster is radically different from the stylized profile
(e.g., trust and effective sanctions, strong socio-cultural ties) found in the industrial
districts model. In his valuable discussion of upgrading in exporting clusters,
Schmitz notes, ‘Strategic response to global competitive pressures cannot just
rely on private joint action but require public agencies as catalysts or mediators’
(Schmitz, 2000: 15).
Our research in Torreon yielded little evidence of private collaboration in the
form of joint action among local firms, and even less evidence to suggest that the
cluster benefits from the support of public agencies capable of mediating relations
between the companies that comprise it. We have argued that the arrival of new
buyers in Torreon has resulted in upgrading, both at the industry and at the firm
level. But the absence of an institutional environment that would help further
diffuse the benefits of Torreon’s export boom beyond the first tier of full-package
firms means that there are limits to this process of upgrading, and they may have
already been reached.
Recent events in Torreon indicate that links to the global economy can
produce disruption as well as growth. A slowdown in the US economy has had
a dampening effect on the export boom in Torreon at the end of 2000, and the
effects have continued through the first half of 2001. Conversations with industry
representatives in May 2001 revealed that 8,000 apparel jobs had been lost since
October 2000, and production was down 20% as compared with the same period
last year. A commodity chains approach would lead us to expect that job losses
and plant closings will be concentrated among the small subcontractors located
at the bottom tiers of the chain. Furthermore, we would expect that companies
possessing the additional capabilities associated with full-package production
are less negatively affected than the assembly-oriented maquilas. Evidence from
Torreon confirms that the companies that have suffered most to date are smaller,
locally owned subcontractors. The negative implications of the slowdown could

spread beyond this group of firms, however, and the absence of institutional
support mechanisms in Torreon means that the adjustment to a sustained economic
downturn will be harder to manage given the heavy reliance on the US market
as the source of export growth.
Both the commodity chains and industrial districts approaches address the issue
of development, conceived largely as a process of industrial upgrading, and both can
be used to draw policy implications about the best way to achieve local development
and upgrading goals. The literature on clusters has shown that under a particular set
of conditions, it is possible to use industrial policy and local institutions to promote
the creation of industrial districts as a ‘high road’ to development.
In many developing countries, however, these conditions are not present. This is
likely to be even more true in an era marked by the increasing (if contested) hegemony
of the World Trade Organization and institutions such as the International
Monetary Fund, which privilege the adoption of neoliberal programs that promote
open trade and discourage industrial policy. It is in this environment, characterized
by hyercompetition between industrializing countries pursuing export-led growth
strategies, that the specter of competitive devaluations and immiserizing growth
haunts poorer countries’ dreams of development (Kaplinsky, 1999).
Given that the governments of industrializing countries have limited power
to ‘get the institutions right,’ the question becomes how firms can use their
participation in global commodity chains to pursue developmental goals. In the
case of Torreon, foreign buyers have provided local firms with a full-package
link to the US market that gives them better upgrading prospects. In the context
of Mexico’s export-oriented growth strategy, figuring out how local firms can
improve their position within global industries is a preeminent topic for producers
and policy makers alike.

Notes
1. More generally, there has been considerable research contributing to our understanding
of the lean production model and its critique. See, for example, Harrison (1994), Boyer
(1998), and Freyssenet (1998).
2. The need to adopt a more flexible approach to industrial districts was already recognized
in Pyke and Sengenberger (1992). See, for example, Zeitlin’s concluding chapter, which
calls for ‘a ‘thin,’ ‘open’ model capable of generating a variety of empirically observable
forms’ (Zeitlin, 1992: 285).
3. The word ‘maquiladora’ is used to refer to any factory in Mexico, owned by international
or local capital, that has a permit from the Mexican government to import and export
products under a special tariff and income tax regime. The term often evokes images
typical of the first generation of maquiladoras—very large plants along the northern
border owned by multinational companies. But, there is tremendous diversity within
the maquila sector, ranging from giant, wholly owned subsidiaries of multinational
corporations to small firms that export only a portion of their production under the
maquila regime to supplement sales on the domestic market.

4. While this growth in the maquila sector is impressive, official statistics actually
understate export-oriented apparel production and employment in Mexico since they
reflect only those establishments that have registered as maquiladoras with the Mexican
government. Traditionally, registering as a maquila provided a number of incentives, the
most important being the ability to import duty-free foreign-made inputs. But, NAFTA
changed the rules of the game for this kind of cross-border production sharing by
introducing free trade between the three signatory countries. Materials can flow freely
between Canada, the United States, and Mexico without duties as long as they meet
the North American rules of origin established by NAFTA. Consequently, companies
with cross-border production networks that are using North American inputs no longer
have as strong of an incentive to register Mexican assembly plants as maquilas.
5. In the United States the analog of the maquila regime is the 807 program, so-named
for the clause of US trade law that describes the status of goods assembled in export-
processing factories like Mexico’s maquilas. The relevant clause was later changed to
9802, so this type of production sharing is often referred to as 807/9802.
6. Martha A. Martínez, a graduate student in the Sociology Department at Duke
University, collaborated on the first phase of our fieldwork in Torreon.
7. Major textile and apparel corporations headquartered in the Piedmont region of North
Carolina include: Burlington Industries, Cone Mills Corporation, Sara Lee (which
owns Hanes and several other well-known apparel brands), and VF Corporation (which
manufactures and markets several lines of jeans, including Lee and Wrangler).
8. Although traditionally retailers have sold garments made by apparel companies, most
retailers now have their own store brands called private labels. Examples of private label
jeans include J. C. Penney’s Arizona brand and Sears’ Canyon River Blues line.
9. Schmitz and Knorringa (1999: 20) reported a similar finding from their interviews with
global footwear buyers, who seemed more willing to assist their suppliers in acquiring the
skills needed to ‘translate designs into technical specifications’ than with helping them
develop new and innovative designs. Our analysis points to the same conclusion that these
authors reached: buyer-supplier relationships can help developing country manufacturers
upgrade their production activities, but they rarely offer manufacturers the opportunity to
develop skills, such as design and marketing capabilities, that would elevate them from
the status of supplier to potential competitors. Schmitz (2000) concludes that foreign
buyers may assist local firms in process and product upgrading, but they do not encourage
functional upgrading that involves moving into new stages of the value chain.
10. The owners of Libra and Grupo Impeccable are brothers, and cousins of the two
brothers that own Siete Leguas and Grupo Denim. The families that own Kentucky
Lajat and OMJC are also related by marriage. A full discussion of the family networks
that crisscross the Torreon apparel cluster is beyond the scope of this chapter, but will
be explored in future analyses.
11. The US$ exchange rate in Mexico increased from 8.7 pesos in 1998 to 9.5 pesos in 2000.
12. Wages in the apparel industry, and in the maquiladoras more generally, vary dramatically
across Mexico. In Guanajuato, where growth in the maquila sector was dramatic under
then-governor, now president, Vicente Fox, average weekly salaries ranged from 300
to 450 pesos (US$31.60 to US$47.40) in July 2000 (Martínez, 2000). In addition to
abundant coverage in the Mexican press, the country’s booming maquiladora program
has been the subject of several recent articles in US newspapers. Examples include
Thompson (2001), Dillon (2001) and Jordan (2000).

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1503–1514.
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Economic Regeneration.’ Labour and Society 6(1): 1–25.
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United States.’ La Jolla, CA: Center for US-Mexican Studies, University of California,
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Appendix A
Strategic Interviews
Strategic interviews were carried out with corporate managers and other
knowledgeable informants in the textile and apparel sector in the United States and
Mexico in order to understand the diverse factors contributing to the restructuring
of the North American apparel industry in the 1990s. These interviews include a
mix of standard and open-ended questions, and thus they depart from traditional
survey instruments that only ask a pre-determined set of closed questions and seek
fixed responses. For our fieldwork in Torreon, we used a semi-structured protocol
that listed key questions to ensure that critical issues were addressed with each
respondent. Respondents were asked to provide a historical description of their
firm (e.g., In what year was it founded? Did it serve the national market, and if
so through what channels and with what products?), as well as a current profile
(number of employees, number of customers, production volume, main clients,
main suppliers). Our interviews typically lasted an average of two hours in length,
and included questions regarding:
• The kind of link (direct or indirect, and if indirect, through what kind of
intermediary) connecting the exporting firm to foreign markets;
• the type of production networks characterizing the f irm and its relationship
with clients and suppliers (e.g., maquila versus full-package relationships);
• the existence and nature of vertical and/or horizontal relationships with
local firms and the role of local institutions, such as industry associations,
in promoting the cluster;
• how the Torreon region and the experiences of local firms have changed
since both Mexico’s initial trade liberalization of the mid-1980s and the
implementation of NAFTA; and
• a set of issues addressing industrial and human relations (average wage,
turnover rate, training procedures, union presence in the plant), as well as

characteristics of the workforce (age, gender, marital status, previous work

experience, educational background).

Appendix B
Interviews in Torreon, 1998 and 2000
In cases of multiple interviews per firm, the number is indicated in parentheses
(see Table 6.4).

Table 6.4 Interviews in Torreon, 1998 and 2000

Firmsa Ownership 1998 2000
Original Mexican Jean Joint venture X (3) X (4)
Company (OMJC)
Maquilas Pami US subsidiary X (2) X (2)
Wrangler US subsidiary X X
Kentucky-Lajatb Joint venture (1998); X X
Mexican (2000)
Libra Mexican X X
Siete Leguas Mexican X X
Grupo Denim Mexican X (2)
Grupo Impecable Mexican X
Pafer Huichita Mexican X
Red Kap International US subsidiary X
Parras Conec Joint venture X
Creaciones Lobo Mexican X
Dustin Mexican X
Fabricas de Ropa Manjai Mexican X
Viesca 2000 Mexican X
Total number of firm interviews 14 15
Other interviews
Camara Nacional de la Industria del Vestido (CNIV) X X
(Laguna branch)d
Secretaría de Comercio y Fomento Industrial X X
(SECOFI)e
Fomento Económico de Laguna de Coahuila X X
(FOMEC)f
Source: Authors.
Notes:
a Additional information regarding the first 10 firms is provided in Table 6.3.
b In July 1998, Kentucky–Lajat was a US–Mexican joint venture that produced denim fabric as well

as apparel. In December 1998, Kentucky–Lajat sold its denim mill to Parras, a Mexican textile firm.
Then in July 1999, the Mexican Lajat Group bought out its US partner, Kentucky Apparel, and
later that year expanded its operations to include apparel design as well as production in Mexico.
c
Produces denim fabric only.
d The local branch of the national apparel industry association.
e The local office of the federal ministry of commerce and industrial promotion.
f A local development company in the Laguna region.

7
t
Development Models and Industrial
Upgrading in China and Mexico*

Introduction
There are fundamental changes afoot in the global economy, and no simple answers
for countries that want to improve or even maintain their levels of development.
In recent decades, national and regional development models have come under
increasing scrutiny, and countries are trying to determine what kinds of policies
and institutions provide the best opportunities for long-term growth and prosperity.
This chapter will explore these issues through a comparative analysis that focuses
on how international trade and foreign direct investment (FDI) have shaped the
development trajectories of China and Mexico, two of the most dynamic emerging
economies in the world. The first section provides a broad comparison of the
development models in Latin America and China, with an emphasis on how each
has changed in recent decades. The second section uses international trade data to
examine industrial upgrading patterns in Mexico and China, with an emphasis on
their competitive niches in the US market and why China is taking the lead in a
number of different industries. The third and final section looks more closely at a
new feature of China’s industrial upgrading pattern known as supply chain cities.
China’s unique model of economic development is fascinating in its own right, but
China’s escalating importance as a supplier, a market, and recently as a source of
outward direct investment makes many countries and regions in the world highly
dependent on China’s future economic performance.

Comparative Development Models

Since the mid-1980s, globalization has been associated with a neoliberal model of
development that has produced rapid economic growth and improving standards
of living in some parts of the world, most notably East Asia. In other regions,

* The data in Figures 7.1 and 7.2, Tables 7.1, 7.2, and 7.3 and corresponding text have been
updated to 2014–2015 from the original article published in the European Sociological Review
(February 2009).

like Latin America, neoliberalism has been marked by slow economic growth,
large-scale unemployment, social deterioration, and political protest. Development
models in both Latin America and East Asia, however, have evolved considerably
during this period.
Within these regions, China and Mexico present particularly interesting cases
because of notable contrasts as well as similarities in their development policies
and economic trajectories. Mexico is the most diversified and export-oriented
economy in Latin America, with an emphasis on manufactured exports to the
United States. China is one of the world’s fastest growing economies, with
extensive diversification and growing exports to the world. Mexico and China
compete head-to-head in many product categories in the US market. This section
of the chapter will review the main features of the Latin American and Chinese
development experiences, as prelude to a more detailed analysis of industrial
upgrading trajectories in both Mexico and China.

The Latin American Development Model

The idea of a common Latin American development model is misleading for
two main reasons. First, Latin America as a region is extremely diverse in terms
of its geography, demographics, infrastructure, and culture, and its individual
economies have diverged in the post-war era. Countries like Mexico have been at
the forefront of the region’s development, while others have lagged considerably.
Second, Latin American development remains a topic of fierce debate within the
region, leading to clashing opinions regarding its future development trajectory
(IADB, 2006). Despite these differences, some clear trends in the history of Latin
American development policy can be identified.

Import-Substituting Industrialization (ISI)

From World War II through the early 1980s, most Latin American countries
pursued the import-substitution model, a set of policies that favored state-led
industrialization and the protection of domestic industry, using a combination of
support for publicly owned enterprises and extensive inflows of foreign investment
(Thorp and Lowden, 1996). This approach was fueled by a conviction that certain
Latin American characteristics—including its cultural values and institutional
structure—made market-led mechanisms ineffective in the region, as well as a
belief that the market would place further control over the economy in foreign
hands.
Under ISI, the state played a central role in controlling the economy. Government
made economic self-sufficiency and the development of domestic industry as its

top priorities. Latin American governments valued industrial development over

the region’s traditional agricultural and primary-resource trade patterns, and many
believed that the gradual accumulation of industrial capacity that ISI encouraged
would enhance Latin America’s position in the world economy.
As ISI policies advanced in the 1950s and 1960s, they displayed a set of
common features: high tariff barriers against foreign goods, especially industrial
items; overvalued currencies; and, after the 1950s, increasing provisions for the
attraction of foreign capital. In the 1960s and 1970s, the leading Latin American
economies moved from a phase of primary ISI, which focused on basic consumer
goods (such as textiles, clothing, footwear, and food processing), to secondary
ISI, which involved using domestic production to substitute for imports in a
variety of more advanced products, such as consumer durables (e.g., automobiles),
intermediate goods (e.g., petrochemicals and steel), and capital goods (e.g., heavy
machinery) (Gereffi, 1994).
Like its Latin American counterparts, Mexico’s ISI experience included a
system of high tariff barriers, the formation of government-run monopolies in
industries like petroleum and electricity, and government intermediation in
the financing of Mexican businesses. The sustainability of these policies was
aided by Mexico’s political landscape, which was dominated by the Institutional
Revolutionary Party (PRI). Under PRI leadership, Mexico posted solid growth
from the 1950s to the 1970s, averaging about 6% per year while maintaining
low levels of inf lation (Portes, 1997; Fourcade-Gourinchas and Babb, 2002).
Latin America became heavily dependent upon international capital markets
in the 1970s to finance its burgeoning state sector, and this debt bubble eventually
burst. By the 1980s, ISI was in trouble throughout the region. Mexico’s public
announcement in August 1982 that it was unable to meet its debt requirements
was the first in a series of government defaults, putting an end to ISI and leading
to major changes in the region’s economic structure.

Neoliberalism
In the 1980s, a series of economic issues—low growth, widening economic
inequality, government balance-of-payments crises, and periodic hyperinflation—
led to a more market-oriented approach, dubbed in the United States as the
‘Washington Consensus’ (Gore, 2000). This was facilitated by the rise of right-
wing dictatorships in countries like Chile, Uruguay, and Brazil. Initially, neoliberal
policies focused on reforming current and capital account flows, and controlling
volatile inflation rates in the region. Later, reform spread to addressing and
reshaping the role of the state in the economy (Weyland, 2004; Huber and Solt,
2004).

In Mexico, these reforms proceeded in stages. The first stage, lasting from 1982
to 1985, was directly linked to Mexico’s negotiations with international monetary
authorities after its debt crisis, and brought new controls on monetary and fiscal
policy, including much lower state expenditures. The second stage, which began
in 1985, saw more drastic changes, including widespread privatization, lowering of
trade barriers, and liberalization of the regulations governing foreign investment.
The third stage began in 1994 with the passage of the North American Free
Trade Agreement (NAFTA), and has resulted in further structural reforms and
the continued lowering of trade and investment barriers (Fourcade-Gourinchas
and Babb, 2002).
The most important policies of economic neoliberalism in Latin America can
be summarized in seven major actions (Portes, 1997: 238):
• opening to foreign trade
• privatizing state enterprises
• deregulating goods, services, and labor markets
• liberalizing capital markets, including privatized pension funds
• promoting f iscal discipline, based on deep cuts in public expenditures
• dismantling and downsizing state-supported social programs
• ending ISI-style industrial policy
Neoliberal reforms spread through Central and South America at different
speeds. In nearly every country, however, reformers stressed an increased use of
market mechanisms. In addition, national governments sought to adjust their
currency valuations and dramatically lower both barriers to free trade (tariffs)
and controls on foreign private capital (FDI restrictions). Under the neoliberal
model, Latin America showed moderate economic growth in the early 1990s. Yet
slower growth in the late 1990s and early 2000s generated renewed criticism of
Latin America’s development model, a controversy that continues today (Dussel
Peters, 2000; Lora et al., 2004).

Current Situation
The general debate over Latin American development stems from the simple
fact that the region’s economic performance under neoliberalism was less than
hoped for, and far less than promised. Although ‘equitable economic growth’ and
‘economic justice’ are priorities for most Latin Americans, economic inequality
has grown markedly since 1990 and growth has lagged (Thorp and Lowden,
1996; Dussel Peters, 2000; Ellner, 2006). Many have criticized their governments’
neoliberal policies as a front for the economic elite to get rich at the expense of the
entire population, claiming—as Vargas Llosa (2005: 23) does—that:

Countries replaced inflation with new taxes on the poor, high tariffs with regional
trading blocs, and, especially, state monopolies with government-sanctioned private
monopolies. The courts were subjected to the whims of those in power, widening
the divide between official institutions and ordinary people…

In academic and policy circles, there has been an ongoing controversy regarding
the success—or failure—of the neoliberal model. Weyland (2004) chronicles the
debate in academic circles, noting that Huber and Solt (2004) blame neoliberal
reform itself for Latin America’s economic problems, while Walton (2004) argues
that shortcomings have been due to an inadequate implementation of reforms and
deficiencies in the surrounding institutional framework. Within the government
arena, the agenda ranges from adjusting present policies to proposing new
paradigms for regional development (IADB, 2006).
Politically, the trends are clearer. Latin America has shifted sharply to the left
in the last few years, with a more radical cohort of leaders elected in Argentina,
Uruguay, Venezuela, Chile, Bolivia, and Brazil. Yet as many authors note, this
‘leftward’ shift is hardly uniform. Chile, for example, under socialists Ricardo
Lagos and Michelle Bachelet, has retained an emphasis on free-market policies,
despite being liberal on social issues. Argentina’s Nestor Kirchner, in contrast, is
far more critical of the international financial system and the policies of economic
neoliberalism (Carlsen, 2004; Shifter, 2005; Vargas Llosa, 2005)
In recent years, the economic tide has been rising. Latin America’s exports to
the world increased by 11% in 2007, marking the fifth consecutive year of growth,
and Latin America’s intra-regional trade as a share of its total trade with the world
reached 17.3% (IADB, 2007). The region’s strong economic performance in recent
years has been driven by two main factors: a robust US economy and exceptional
demand from China for Latin America’s primary product exports. While concerns
about a slump in US economic activity are mounting (EIU, 2008), demand from
China in the near future is expected to remain strong.

China’s Development Model

China’s reform efforts began in 1978 with the Third Plenum of the 11th National
Party Congress, and reforms accelerated after Deng Xiaoping’s 1992 ‘Southern
Trip’ and again after China’s 2001 accession to the World Trade Organization
(WTO) (Wang and Meng, 2004; Branstetter and Lardy, 2005). These changes
have taken place amidst a second wave of economic globalization in which billions
of people have joined the global economy, and in the midst of a broad dialogue
among economists, politicians, and activists about the role of the market and how
to utilize its power to promote healthy development.

Bai Gao (2006) highlights a number of key characteristics of the Chinese

development model:
• government relies on the market as the driving mechanism behind
economic growth
• government aggressively seeks to attract foreign capital
• government opens its domestic market to the outside world
• government uses low-cost labor to participate in the global economy
• government stresses harmony in the local economy, placing more
emphasis on ‘soft’ supervision rather than inspection and control
• government values economic growth and upgrading, even at the expense
of social stability.
China’s economy has expanded at a phenomenal pace since 1978. Average
annual gross domestic product has increased by 9% a year; exports grew by 12.4%
annually in the 1990s and by more than 20% a year since 2000 (IADB, 2005).
China’s development model is premised on leveraging its domestic advantages,
including the size of its potential market and the low cost of its factor inputs—
chiefly labor, but also the cost of land, electricity, and raw materials. Over time,
China has sought to add to these advantages by seeking to minimize its weaknesses
(bureaucratic red tape, low quality of labor), upgrade its logistics capabilities, and
move up the technology value chain.
However, the Chinese development model is also associated with its impressive
ability to attract FDI. The annual FDI flows in China jumped from an average of
$76 billion in 2005–2007 to $128 billion in 2014 and $136 billion in 2015. The
total stock of FDI in China more than quadrupled from $272 billion in 2005 to
$1,085 billion in 2014 and $1,221 billion in 2015, which vastly exceeded Mexico’s
FDI stock of $210 billion in 2005 and around $500 billion in 2014 and 2015
However, Mexico’s reliance on FDI is far higher than China’s as a share of gross
domestic product (44.2% for Mexico versus 10.9% for China in 2015) and gross
fixed capital formation (12.8% versus 2.8%, respectively) (see Table 7.1). FDI has
brought both capital goods and high technology into the country, and helped to
move China’s export mix from ‘unskilled’ to ‘skilled’ labor-intensive activities,
and has boosted China’s exports in the capital- and technology-intensive sectors
(Brandt and Rawski, 2005: 23).
From an upgrading perspective, China’s openness is beginning to pay off. China
has become a top destination for research and development (R&D), due to its crop
of high-quality, low-cost engineers and to the size of its potential market (Hu and
Jefferson, 2004). China’s growth of R&D centers has been especially dramatic:
whereas in 1997 China registered less than 50 multinational R&D centers, by
2004 the Chinese government registered over 600 multinational R&D facilities in
the country, many from large US multinational corporations (MNCs) (Freeman,

2005: 8). In just one year, from June 2003 to June 2004, MNCs established 200
R&D centers in China (Asia Times Online, 2005).

Table 7.1 Foreign Direct Investment in China and Mexico, 1995–2015

FDI Flows (billions of US dollars) 2005–2007 2014 2015
(annual average)
China 76.2 128.5 135.6
Mexico 26.5 27.5 33.2
FDI Flows (as a percentage of gross fixed 2005–2007 2014 2015
capital formation) (annual average)
China 6.7 2.7 2.8
Mexico 12.7 10.1 12.8
FDI stock (billions of US dollars) 1995 2000 2005 2014 2015
China 101 193 272 1,085 1,221
Mexico 41 97 209 487 509
FDI stocks (as a percentage of gross 1995 2000 2005 2014 2015
domestic product)
China 13.7 17.9 13.7 10.3 10.9
Mexico 12.0 16.7 27.3 37.5 44.2
Source: UNCTAD, World Investment Report 2017 and earlier years.

This reliance on FDI and private property is generating an intense ideological

debate within China over the merits of socialism versus capitalism and the future
direction of the Chinese development model (Kahn, 2006). Criticisms of the
current Chinese model highlight rampant corruption, widening income inequality,
geographic polarization, the plight of rural migrants, and environmental issues as
evidence that neoliberalism and openness have tarnished China’s recent economic
growth (Nolan, 2005). There are also concerns that foreign firms are dominating
the Chinese market, especially in certain key products like automobiles, leaving
less room for Chinese firms to compete and profit. Others, however, argue that
the answers to these problems lie in further reform and a vigorous implementation
of existing reforms. They blame market rigidities and entrenched political elites
for many of China’s vexing social issues, and claim that abandoning reform would
be a mistake (Huang, 2006). Despite this defense of current policies, the voices of
critics are growing increasingly loud and the debate is becoming more acrimonious.
Observers of India, Asia’s other emerging economic powerhouse, point out that
India’s economic growth relies on home-grown entrepreneurs, while China may be
tying its export-led manufacturing boom too closely to FDI, since foreign-invested
firms account for over 60% of China’s exports (Huang and Khanna, 2003). Given

the ‘external contradictions’ of the Chinese development model, there are calls for
a new ‘domestic demand-led development strategy’ (Palley, 2006).
Any comparative assessment of the development paths taken by Latin America
and China rests heavily on institutional and historical factors. How have these
models performed in practice? Has export-oriented development in countries like
Mexico and China led to industrial upgrading in these countries over the past
two decades? In the next section, we will use international trade data to explore
these questions.

Industrial Upgrading in Mexico and China—An International Trade

Perspective
Industrial upgrading is defined as ‘the process by which economic actors—nations,
firms, and workers—move from low-value to relatively high-value activities in
global production networks’ (Gereffi, 2005: 171). One of the ways that we can
assess industrial upgrading for export-oriented economies like China and Mexico
is to look at shifts in the technology content of their exports over time. We divide
each country’s exports into five product groupings, which are listed in ascending
levels of technological content: primary products, resource-based manufactures,
and low-, medium-, and high-technology manufactures.1
In Figure 7.1, we see that in 1990, nearly 50% of Mexico’s total exports to
the US market were primary products, the most important of which was oil. By
1993, one year prior to the establishment of NAFTA, both medium-technology
manufactures (mainly automotive products) and high-tech manufactures (largely
electronics items) moved ahead of raw materials in Mexico’s export mix. In 2014,
about two-thirds of Mexico’s exports of $398 billion to the US market were in the
high-technology (44%) and medium-technology (22%) product categories, followed
by primary products (14%) and low-technology manufactures (such as textiles,
apparel, and footwear) (9.4%). Thus, in 25 years, Mexico’s export structure was
transformed from one based on raw materials to one dominated by medium- and
high-technology manufactured items.
In Figure 7.2, we see the composition of China’s exports to the US market
during the 1990–2014 period. Unlike Mexico, the leading product category in
China’s exports to the US market during the 1990s and early 2000s was low-
technology manufactured goods. These were primarily made up of a wide variety
of light consumer goods—apparel, footwear, toys, sporting goods, house wares,
and so on. These products accounted for over one-half of China’s overall exports to
the United States in the early 1990s. By 2004, however, high-technology exports
from China had pulled even with low-technology products at 32% of China’s
overall exports to the US market, and they passed low-tech exports for the top

spot in China’s export mix until 2014, when they again converged and accounted
for just under two-thirds of China’s total exports.

Figure 7.1 Composition of Mexico’s Exports to the World Market, 1990–2014

Source: UN Comtrade (http://comtrade.un.org/db/dqBasicQuery.aspx).

Figure 7.2 Composition of China’s Exports to the World Market, 1990–2014

Source: UN Comtrade (http://comtrade.un.org/db/dqBasicQuery.aspx).

Thus, Mexico and China have a number of commonalities in their export

trajectories to the US market during the past two decades. Both are diversified
economies, with a range of different types of export products. In both cases,
manufactured exports are more important than primary product or resource-
based exports; within manufacturing, high- and medium-technology exports are
displacing low-technology goods. While these export data have limitations as
indicators of industrial upgrading, 2 both economies appear to be increasing the
sophistication of their export structures.
A more detailed look at the international trade data, however, shows that since
2000, China has surpassed Mexico in head-to-head competition in the US market.
Table 7.2 identifies six of the leading manufactured products in which China and
Mexico are significant US suppliers. In five of these products, Mexico’s share of
the US market was greater than China’s in 2000; by 2007, China had wrested the
lead from Mexico in all but one of these items, and China increased its US market
share in four of these five product categories by 2014. In automatic data processing
machines (SITC 752), for example, China’s share of US imports increased nearly
sixfold from 11.3% in 2000 to 65.7% in 2014. In telecommunications equipment
(SITC 764), China’s market share again jumped by a factor of six from 10.3%
to 58%; and in electrical machinery (SITC 778), it tripled from 11.9% to 33.2%.
Only in auto parts and accessories (SITC 784) did Mexico maintain its substantial
lead in the US market over China.
Table 7.3 shows the top US imports in which either Mexico or China accounted
for 40% or more of the US import market in 2014. Mexico had five products that
met this criterion in 2014, whereas China had 17 such items. For example, nearly
two-thirds of all footwear imported to the United States comes from China,
while China also accounts for 82% of toys, games and sporting goods, over 65%
of imported office machines and automatic data processing machines, and more
than half of US imports of textiles and apparel.
Why has China gained US market share over Mexico so rapidly and decisively?
There are several factors. First, China has significantly lower labor costs than
Mexico. In 2002, the US Bureau of Labor Statistics calculated China’s average
manufacturing compensation at $0.64 an hour,3 compared with Mexico’s US$2.48
(Business Week, 2004). It remains to be seen if this gap will widen, shrink, or be
maintained in coming years. Persistent labor shortages are now being reported
at hundreds of Chinese factories, a trend that is pushing up wages and leading a
number of manufacturers to consider moving their factories to lower-cost countries
like Vietnam (Goodman, 2005; Barboza, 2006).
Second, China has sought to leverage its huge economies of scale, and it has
made major investments in infrastructure and logistics to lower transportation
costs and to speed time to market for their export products. The growth of

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Table 7.2 Mexico’s and China’s Competing Exports to the United States, 2000–2014
SITC Product 2000 2007 2014 Change Change
Category Value Share of US Value Share of US Value Share of US in market in market
(billions) market (billions) market (billions) market share share
2000–2007 2007–2014
752 Automatic Mexico 6.4 11.5 5.6 9. 6 13.5 16.6 -1.9 7.0
Data China 6.3 11.3 28.6 49.3 53.3 65.7 38.0 16.4
Processing
Machines US Total 55.9 57.9 81.1
764 Telecom Mexico 9.1 20.6 10.8 13.6 12.1 10.2 -7.0 -3.4
Equipment China 4.6 10.3 29.6 37.3 68.7 58.0 26.9 20.8
US Total 44.3 79.5 118.4
778 Electrical Mexico 3.1 18.3 5.0 21.8 7.2 21.4 3.5 -0.4
Machinery China 2.0 11.9 6.1 26.6 11.2 33.2 14.7 6.6
US Total 17.1 23.1 33.7
784 Auto Parts Mexico 4.6 16.3 10.2 22.2 19.1 30.4 5.8 8.2
China 0.4 1.5 3.6 7. 8 8.3 13.2 6.2 5.4
US Total 28.4 46.2 62.9
821 Furniture Mexico 3.2 16.9 4.6 13.6 7.6 18.3 -3.3 4.7
China 4.5 23.6 16.2 47.7 19.2 46.3 24.1 -1.4
US Total 18.9 33.9 41.5
84 Apparel and Mexico 8.7 13.6 4.7 5. 8 4.0 4.4 -7.8 -1.4
Clothing China 8.5 13.2 27.1 33.4 34.2 37.9 20.2 4.5
US Total 64.3 81.2 90.2
Source: US Department of Commerce (http://dataweb.us itc.gov). Downloaded on August 26, 2015.
Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781108559423.008
Downloaded from https://www.cambridge.org/core. Indian Institute of Management Kozhikode, on 10 Feb 2022 at 05:18:53, subject to the

Table 7.3 US Imports in Which Mexico and/or China Hold 40% or More of the US Market, 20141
Mexico China
Product (SITC categories) Import % Absolute Product (SITC categories) Import % Absolute
value market change value market change
(US share in % (US share in %
billions) in market billions) in market
USA share, USA share,
2000– 2000–
2014 2014
783 Road motor vehicles, N.E.S. 6,858 89.5 75.5 894 Baby carriages, toys, games and 23,444 81.9 17.3
sporting goods
782 Motor vehicles for the transport of 19,005 81.0 49.4 697 Household equipment of base metal, 4,608 67.2 31.5
goods and special purpose motor N.E.S.
vehicles
54 Vegetables, fresh, chilled, frozen or 5,126 62.0 1.1 831 Trunks, suitcases, vanity cases, 7,274 66.2 16.3
simply preserved; roots, tubers and binocular and camera cases, handbags,
other edible vegetable products, wallets, etc. of leather, etc.; Travel sets
N.E.S., fresh or dried for personal toilet, sewing, etc.
773 Equipment for distributing 9,522 49.6 -11.1 752 Automatic data processing machines 53,339 65.8 54.5
electricity, N.E.S. and units thereof; magnetic or optical
readers; machines transcribing coded
media and processing such data
761 TV receivers (including video 11,974 44.4 -19.0 851 Footwear 17,064 65.6 3.7
monitors and projectors)
813 Lighting fixtures and fittings, 6,104 64.3 6.0
N.E.S.

Cont’d.
Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781108559423.008
Downloaded from https://www.cambridge.org/core. Indian Institute of Management Kozhikode, on 10 Feb 2022 at 05:18:53, subject to the

Cont’d.
Mexico China
Product (SITC categories) Import % Absolute Product (SITC categories) Import % Absolute
value market change value market change
(US share in % (US share in %
billions) in market billions) in market
USA share, USA share,
2000– 2000–
2014 2014
759 Parts and accessories suitable 10,842 60.7 49.2
for use solely or principally with
office machines or automatic data
processing machines
764 Telecommunications equipment, 68,724 58.1 47.7
N.E.S.; and parts, N.E.S., and
accessories of apparatus falling within
telecommunications, etc.
775 Household type electrical and 9,778 54.9 17.7
nonelectrical equipment, N.E.S.
658 Made-up articles, wholly or chiefly of 7,006 53.6 29.5
textile materials, N.E.S.
848 Articles of apparel and clothing 3,689 51.5 6.7
accessories of other than textile
fabrics; headgear of all materials
751 Office machines 9,182 48.4 19.2
893 Articles, N.E.S. of plastics 10,218 48.1 17.2
Cont’d.
Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781108559423.008
Downloaded from https://www.cambridge.org/core. Indian Institute of Management Kozhikode, on 10 Feb 2022 at 05:18:53, subject to the

Cont’d.
Mexico China
Product (SITC categories) Import % Absolute Product (SITC categories) Import % Absolute
value market change value market change
(US share in % (US share in %
billions) in market billions) in market
USA share, USA share,
2000– 2000–
2014 2014
821 Furniture and parts thereof; bedding, 19,213 46.3 22.7
mattresses,
842 Women’s or girls’ coats, capes, 6,539 43.9 28.1
jackets, suits, trousers, dresses, skirts,
underwear, etc. of woven textiles
(except swimwear and coated etc.
apparel)
761 TV receivers (including video 11,593 43.0 40.5
monitors and projectors)
771 Electric power machinery (other 5,577 40.2 18.4
than rotating electric plant of power
generating machinery) and parts
thereof
Source: US International Trade Commission and US Department of Commerce (http://dataweb.usitc.gov). Downloaded on August 26, 2015.
1. Criteria: over $3 billion in US imports from China or Mexico in 2014.
Note: N.E.S. means ‘not elsewhere specified.’
Development Models and Industrial Upgrading in China and Mexico 219

China’s ‘supply-chain cities’—led by FDI-driven clusters in Guangdong (including

Dongguan and Humen) and single-product clusters in Zhejiang (such as Anji and
Datang)—is a perfect illustration of how China’s governments and entrepreneurs
are turning scale-driven specialization into a persistent competitive advantage for
the country (Wang and Tong, 2002; Sonobe et al., 2002; Zhang et al., 2004).
Third, China has a coherent and multidimensional upgrading strategy to
diversify its industrial mix and to add high-value activities. In their careful study
of China’s export performance, Lall and Albaladejo (2004) argue that China and
its East Asian neighbors are developing high-technology exports in a regionally
integrated fashion, based on complex networks of export production that link
leading electronics MNCs and their first-tier suppliers and global contract
manufacturers (Gereffi, 1996; Sturgeon and Lee, 2005; Gereffi et al., 2005).
The export patterns for high-tech products reveal complementarity rather than
confrontation between China and its mature East Asian partners (Japan, South
Korea, Taiwan, and Singapore). China’s role as a motor of export growth for
the region, however, could change as China itself moves up the value chain and
takes over activities currently carried out by its regional neighbors. Rodrik (2006)
suggests that China is already exporting a wide range of highly sophisticated
products, and he calculates that China’s export bundle is similar to that of a
country whose per capita income is three times higher than China’s current level.
Fourth, China is using FDI to promote ‘fast learning’ in new industries and
knowledge spillovers in its domestic market (Zhang and Felmingham, 2002; Wang
and Meng, 2004). Despite restrictions imposed by the WTO against domestic
performance requirements for MNCs, China’s local market is sufficiently attractive
for multinational manufacturers that they are willing to comply with the wishes of
local, regional, and national government authorities, despite stringent technology
transfer requirements.

A Note on China’s Supply Chain Cities and Industrial Upgrading

The concept of ‘supply chain cities’ has been used in media reports and academic
literature to highlight the growth of large-scale production in China and the
agglomeration of multiple stages of the value chain in particular locales within
China as a key to its upgrading success. Barboza (2004), for example, lays out
in Figure 7.3 the incredible specialization and scale that characterizes China’s
diversified export success in the apparel industry, even before the phase-out of the
Multi-Fibre Arrangement and apparel quotas by the WTO on 1 January 2005.
The term ‘supply-chain cities’ encompasses two distinct, but related, phenomena
in China. The first usage refers to giant, vertically integrated firm factories.
Appelbaum (2008), as well as a variety of textile journals and large textile/apparel

Source: Barboza, 2004.

companies like Luen Thai (2004), use ‘supply chain city’ to indicate a new breed
of ‘super-factory’ that firms are constructing in China and in other parts of
Asia (Kahn, 2004; Pang, 2004). These factories are company-specific, and are
designed to bring together multiple parts of the firm’s supply chain—designers,
suppliers, and manufacturers—so as to minimize transaction costs, take advantage
of economies of scale, and foster more flexible supply chain management. Luen
Thai’s factories in Guangdong Province (in Dongguan, Qingyuan, and Panyu)
are the poster children for this approach.4 Many of the firms actively establishing
these giant factories are from Hong Kong and Taiwan.
A second usage of this term refers to so-called cluster cities. Barboza (2004) and
others use ‘supply-chain cities’ when discussing the growing number of single-
product industrial clusters that have sprung up in China’s coastal regions. These
areas have dramatically increased production of one specific product, and are
churning out massive volumes, but are not limited simply to manufacturing firms.
As these clusters have grown, they have attracted related and supporting businesses,
including yarn dealers, sewers, pressers, packagers, and freight forwarders. These
clusters also feature large sprawling factories, with factory buildings, dormitories,
and limited amenities for workers, but the focus here is on the overall cluster of
firms. Illustrative examples include Datang (socks) and Shengzhou (neckties)
(Wang and Tong, 2002; Zhang et al., 2004; Wang et al., 2005; Kusterbeck, 2005).
What forces drive the formation of China’s supply-chain cities? In addressing
this question, bottom-up versus top-down metaphors offer a misleading dichotomy
for China, simply because both characterizations are oversimplified. ‘Top-down’
implies that development patterns are directed closely by the central government,
while ‘bottom-up’ implies that development patterns are determined purely by
market forces. The reality in China lies somewhere in the middle.
(a) ‘Supply-chain city’ super-factories appear to be more bottom-up than
top-down, since they result from individual sourcing decisions by private
firms and are not directed by central government policy. The location of
many of these factories is tied to existing manufacturing activities and
the low cost of factor inputs (land, electricity, and labor), though local
and provincial government has played a key role in providing a beneficial
policy environment (tax incentives, streamlining bureaucratic red tape,
etc.).
(b) As for the formation of clusters, this story is more complicated, and
involves regional, technological, and industry factors. There is a growing
body of scholarship—mostly in Chinese—on this topic, addressing
the economic, policy, cultural, and historical reasons behind cluster
formation.5 At the risk of over-generalizing China’s current situation,

the major analytical divide in these clusters seems to be between clusters

whose formation was driven initially by foreign capital, and those whose
formation was initiated by domestic entrepreneurship.
The foreign-led clusters were founded first in the 1970s and 1980s as export-
oriented production platforms, mainly in South China (Guangdong, Fujian).
These began in low-cost manufacturing industries, including textiles and
apparel, and have now expanded to include newer industries like electronics.
Foreign investment was particularly important, with large investments coming
from Hong Kong, Taiwan, and Macao; thus the central government’s role in
determining FDI policy was important. These clusters were founded in South
China due to its low-cost labor and its relative proximity to both investors and
major transportation centers. Guangdong (close to Hong Kong) and Fujian
(across from Taiwan) were pioneers of this type of cluster, with larger cities in
the Yangtze River Delta (Shaoxing, Hangzhou) developing at a later date (Zhang
et al., 2004; Wang and Tong, 2005).
The Chinese-led clusters are mainly in Zhejiang and Jiangsu provinces, and began
to grow more rapidly in the 1990s. These clusters are based on so-called town
and village enterprises (TVEs) that were a major part of the government’s push
for economic development in the 1980s and 1990s, and are often in traditionally
rural areas. In Zhejiang, many of these clusters were founded by chance—with a
confluence of historical knowledge, individual entrepreneurship, networking, and
pure luck—but continued to grow because of conscious local government policy.
Thus, private entrepreneurship is critical, but the government had an important
facilitative role (Sonobe et al., 2002; Zhang et al., 2004: 7–8; Wang et al., 2005: 12).
An additional question is whether these clusters are seeking to upgrade and
move up the value chain. Again, it is helpful to separate our clusters into two
groups.
• South China: The foreign-led cluster cities in Guangdong and Fujian seem
to be further along in terms of fostering new, higher-tech industries,
building firms with international brands, and feature a broader export
mix in traditional industries. The growth of the electronics industry is
a good example (Lüthje, 2004).
• East China: These cities lie at an earlier point on the development
trajectory, and Chinese authors like Jici Wang have commented that these
areas are still producing at the low end of the technology value chain.
Even here, firms and government officials are increasingly conscious of
their need to find new competitive advantages, especially in the face of
rising labor costs and growing competition from other locations (Wang
and Tong, 2002; Wang et al., 2005).

Conclusion
In the past several decades, China and Latin America have pursued very different
economic trajectories. China’s development model appears to have served it well,
delivering steady levels of growth since 1978 and facilitating China’s rise to
economic prominence on the world stage. Latin America, in contrast, has displayed
a far more uneven pattern of growth, and political observers have noted the shift
to more radical leaders and leftist rhetoric. In both cases, however, international
trade and FDI have played major roles in promoting industrial upgrading.
Yet, these two regions have much to learn from each other. Both China and
Mexico currently face a host of new social and economic problems—corruption,
environmental degradation, and income inequality—and are actively questioning
the merits of a neoliberal, export-led growth model (Nolan, 2005). Each region
faces criticism that previous paradigms of development have left parts of the
economy vulnerable to foreign control or foreign pressure. In each case, reformers
are calling for new social welfare programs to address their concerns, and they
confront those who argue that only a fuller implementation of neoliberalism can
address the problems of development.
In addition, China’s growing economic links with Mexico and Latin America
make this study a valuable one. Latin America has become an important source
of raw material exports to China in the last decade, and a foreign policy priority
as well, marked by major visits to the region by President Hu Jintao and Vice
President Zeng Qinghong in recent years. In addition, Mexico and China are
competing for US markets in a widening array of product lines, ranging from
textiles/ apparel and furniture, to automotive and electronic products.
To understand China’s development model and industrial upgrading experience,
one must situate China within emerging intra-regional trade and production
networks in East Asia, as well as to examine China’s broader role in the global
economy. Foreign direct investment has facilitated China’s export diversification,
but China is also pioneering new forms of domestic industrial organization in the
form of supply-chain cities. The Chinese model is predicated on a clear value-
chain strategy of giving high-value activities the most attention, and thus there is a
growing emphasis on R&D, design, science and engineering education, and brands.
Both China and Mexico are trying to move beyond a simple cost-based approach
to competitiveness (Farrell et al., 2005). Increasingly, the stakes are defined not as a
race to the bottom, but as a quest to push the upgrading model beyond comparative
advantages in raw materials, cheap labor, and manufacturing production to high-
value niches in a broad range of global industries. China’s current edge is its huge
domestic market and its voracious appetite for raw materials and intermediate
inputs from abroad to feed its soaring industrial growth. However, massive

rural to urban migration, poor working conditions, acute labor shortages, and
a deteriorating environment threaten to undermine the Chinese model if these
problems are not ameliorated. While China and Mexico have made remarkable
economic progress in recent decades, their development challenges continue to
grow at least as fast as their accomplishments.

Notes
1. Sanjaya Lall (2000) developed this technological classification of exports based on
3-digit Standard International Trade Classification (SITC) categories. His article
provides the detailed list of products under each category.
2. The main problem with these export data is that they are not sufficiently detailed to
tell us about the process by which these products are made. Auto parts or electronic
components, for example, could still be made in labor-intensive ways by relatively
unskilled workers. Thus, industrial upgrading cannot be assured just by moving in the
direction of medium- or high-technology finished products. However, it is probably
true that the relative proportion of high-value activities goes up as we move from low-
technology to medium- and high-technology export categories.
3. China’s 30 million urban manufacturing workers on whom data could be found earned
an average of US$1.06 an hour, while 71 million suburban and rural manufacturing
workers earned 45 cents an hour, for a blended average of 64 cents (Business Week, 2004).
4. In Dongguan, in southern China, apparel maker Luen Thai Holdings Ltd boasts of
a ‘supply-chain city’ that is a two-million square foot facility that includes a factory,
dormitories for 4,000 workers, and a 300-room hotel (Kahn, 2004). Appelbaum (2008:
73–75) describes Hong Kong-based Yue Yuen—the world’s largest footwear supplier—as
a company that made nearly 160 million pairs of shoes for export in 2003, one-sixth
of the world total of branded athletic and casual footwear. One of its four Dongguan
factories employs as many as 70,000 workers.
5. My appreciation goes to Ryan Ong for his insights on this literature.

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8
t
Economic and Social Upgrading in Global
Production Networks
A New Paradigm for a Changing World

Stephanie Barrientos, Gary Gereffi, and Arianna Rossi

A significant proportion of trade now takes place through coordinated value chains
in which lead firms play a dominant role globally and locally. The outsourcing
of production by Northern buyers has stimulated the growth of manufacturing,
agriculture, and service industries in the South. It has promoted regional and
global production networks (GPNs) that have opened up supply opportunities in
new and expanding markets, including China, India, and Brazil. Firms engaged
in GPNs have opportunities for economic upgrading through engaging in higher
value production or repositioning themselves within value chains. However, they
also face challenges meeting buyers’ commercial demands and quality standards,
which smaller and less efficient producers find hard to satisfy.
The expansion of global production in labor-intensive industries has been an
important source of employment generation. Many of the new jobs have been
filled by women and migrant workers who previously had difficulty accessing
this type of wage employment, and they have provided new sources of income
for poorer households (Raworth, 2004; Barrientos et al., 2003). Where such
employment is regular and generates better rights and protection for workers, it
can promote social upgrading and decent work. The demand for higher quality
standards often requires skilling of at least some workers and provision of better
employment conditions. But for many workers, this is not the outcome. Much
GPN employment is insecure and unprotected, and ensuring decent work for more
vulnerable workers poses significant problems.
Indeed, a key challenge is how to improve the position of both firms and
workers within GPNs. This is particularly important in developing countries,
where firms and workers are increasingly integrated into regional or global
production systems involving many locations. Accordingly, this chapter explores

the obstacles and opportunities for promoting decent work through economic and
social upgrading in the context of GPNs. It draws on previous empirical studies
in which we examined each type of upgrading/downgrading separately. Based on
these insights, it aims to advance a more integrated analytical framework linking
economic and social upgrading/downgrading. Rossi’s (2011) case study of the
Moroccan garment industry provides an early application of this framework, which
can inform much-needed future research on the linkages between economic and
social upgrading. This research indicates that firms’ economic upgrading can,
but does not necessarily, lead to improvements for workers. Therefore, the central
question considered here is: under what circumstances can both firms and workers
gain from a process of upgrading?
The remainder of this chapter is organized into five sections. The first examines
the literatures on global value chains, production networks, and labor economics.
It addresses the separation between the firm and worker levels of analysis in the
context of GPNs, where production and employment decisions are influenced not
only by local markets, but also by foreign buyers and their agents. The second
section introduces the concepts of economic and social upgrading as means of
assessing improvements for firms and workers engaged in GPNs. The third section
develops a framework for assessing the linkages between economic and social
upgrading based on type of value chain and type of work. It then examines some
of the opportunities and challenges those linkages present, given that regular and
irregular workers have very different levels of access to employer-based channels for
promoting their rights, protection, and voice. The fourth section considers some
of the trajectories (and mixed outcomes) that can be pursued through economic
and social upgrading or downgrading. The fifth offers concluding remarks.

Changing Patterns of Trade, Production, and Employment

The rise of international outsourcing through global and regional production
networks requires a shift in our analytical approach. Nowadays, expanded
networks of firms and workers in Africa, Asia and Latin America are linked
to the global economy. These range from large commercial factories and farms,
through subcontractors and outgrowers, to smallholders and homeworkers. Global
production and services account for a growing number of workers recruited into
export-oriented industries in developing countries, such as apparel, footwear, and
agriculture (Gereffi, 1999, 2006). These changing structures of trade, production,
and employment have been defined in different ways, which should be addressed
from the outset.
Global value chain (GVC) analysis initially focused on the commercial
dynamics between firms in different segments of the production chain. A

seminal distinction was made between producer-driven and buyer-driven

commodity chains (Gereffi, 1994). In producer-driven chains, production was
controlled by integrated transnational manufacturers in capital- and technology-
intensive industries, such as automobiles and advanced electronics. Buyer-driven
chains evolved as developed country firms set up global sourcing networks to
procure labor-intensive consumer goods from low-cost suppliers in Asia, Latin
America, and Africa. A novel feature of buyer-driven chains was that their
lead firms were large retailers (such as Walmart and Tesco) and global brands
or marketers (such as Nike and The Gap). They had no direct ownership of
factories, but increasing control over production through their ability to set
prices, product specifications, process standards and delivery schedules in their
supply chains (Dolan and Humphrey, 2000, 2004). They also contributed to the
institutionalization of demand-responsive economies with lead firms or agents
based in developing countries, such as the Republic of Korea and Taiwan (China)
(Hamilton and Gereffi, 2009). The expansion of GVCs has encompassed not
only the agricultural and manufacturing sectors, but also global services, such as
tourism, logistics, finance, and business process outsourcing located in diverse
socio-economic contexts across countries (Gereffi et al., 2005; Staritz et al., 2011).
The growing complexity and pervasiveness of global production and trade
led to diverse formulations. GVC analysis drew attention to the role of value
creation, value differentiation, and value capture in a coordinated process of
production, distribution and retail (Lee, 2010; Bair, 2009; Gereffi, 2005; Gereffi
and Kaplinsky, 2001). A parallel literature around GPNs placed more emphasis
on the institutional or social context of interconnected commercial operations
(Henderson et al., 2002). GPN analysis examined not only the interaction
between lead firms and suppliers, but also the whole range of actors that contribute
to influencing and shaping global production, such as national governments,
multilateral organizations, and international trade unions and nongovernmental
organizations (NGOs) (Bair, 2009: 4; Hess and Yeung, 2006). A GPN approach
also emphasizes the social and institutional embeddedness of production, and
power relations between actors, which vary as sourcing is spread across multiple
developing countries.
Consideration of workers in GPNs has so far been limited, particularly in
academic studies (Pegler and Knorringa, 2007; Barrientos et al., 2003; Cumbers
et al., 2008; Coe and Jordhus-Lier, 2011; Rossi, 2011). In the early GVC/GPN
literature, the focus was on the firm, with labor treated primarily as an endogenous
factor of production. Analysis of labor in value chains has largely been restricted to
the aggregate number of workers at different nodes of the chain, with an occasional
breakdown of employment by job category, skill, or sex. The exceptions have
mainly been case studies examining conditions of employment, protection and the

rights of workers in GPNs. These have included the study of female workers (Hale
and Wills, 2005), homeworkers (McCormick and Schmitz, 2002), smallholders
(ETI, 2005), social protection of informal workers (Barrientos and Barrientos,
2002) and trade unions (Miller et al., 2011; Cumbers et al., 2008). NGOs have
also engaged in research on poor working conditions and lack of employment
rights among workers in value chains as a basis for campaigns and advocacy in
relation to high-profile global buyers and their suppliers (Raworth, 2004; Oxfam
International, 2010; Action Aid International, 2005; Wilde and de Hann, 2006;
CIVIDEP-India/SOMO, 2009; Clean Clothes Campaign, 2009; Raworth and
Kidder, 2009). However, there has been a disjuncture in the literature between a
‘firm focus’ that treats labor as a factor of production, and a ‘rights focus’ on the
conditions and entitlements of workers.
To bridge this divide between the economic and social analysis of labor, we seek
to integrate workers as productive and social agents into the changing dynamics of
GPNs in developing countries. Our aim is to gain a better understanding of how
economic and social upgrading play out for firms and workers, and how strategies
for upgrading that benefit both firms and workers can be enhanced. In order to
capture the different dimensions of labor, we approach the analysis of labor in
the context of GPNs from two perspectives. The first sees labor as a productive
factor. Conventional economic theory views labor as a factor of production, based
on the marginal productivity of labor and labor costs within individual firms
or labor markets. An important assumption here is that firms need to produce
at the lowest possible marginal cost to remain competitive. However, this does
not fully take into account the role of labor within the context of GVCs/GPNs,
where an important commercial driver is the need to meet both cost pressures
and quality standards (Barrientos and Kritzinger, 2004). This affects the work
intensity and skill levels of the labor required at different nodes within GPNs.
In addition to the need to meet the requirements of lead firms and buyers, this is
also determined by local labor market conditions (availability of different types
of workers).
The second perspective sees labor as socially embedded. Viewing workers as
social agents looks beyond their role as factors of production, highlighting them
as human beings with capabilities and entitlements (Sen, 1999, 2000). Workers
have rights under national legislation and international conventions, such as the
core Conventions of the ILO. Wage laborers are indeed largely dependent on
access to rights that enhance their well-being, and such access, in turn, can be
affected either positively or negatively by participation in GPNs. Beyond the
workplace, the well-being of workers and their dependants is affected by formal
and informal social protection networks and strategies sustained by governments
and communities.

The analysis of GPNs allows for examination of both the narrower commercial
dimension of labor used within value chains and the broader, socially embedded
dimension of work (often as a gendered process) in the globalization of production
and services. However, the GPN context brings a number of challenges for the
analysis of upgrading. First, the quantity and type of employment by individual
supplier firms are affected not only by national labor market conditions, but also
by requirements dictated by foreign agents or buyers (in relation to product quality,
price, and delivery schedules). Second, the quality of employment is mediated not
only by the national framework of labor legislation, inspection, and industrial
relations, but also by the codes of conduct of large global buyers and a private
system of monitoring and auditing.
In this context, the relationship between the quantity and quality of employment
is poorly understood.1 An important question is whether it is possible simultaneously
to improve both the quantity and quality of employment in GPNs. And if so, under
what circumstances might this occur, and what strategies could promote this? To
examine further the linkages between the two, we now explore the concepts of
economic and social upgrading and how they can contribute to a broader strategy
of development.

Defining Economic and Social Upgrading

Upgrading has been identified as a move to higher value added activities in
production, to improve technology, knowledge and skills, and to increase the benefits
or profits deriving from participation in GPNs (Gereffi, 2005: 171–175). Initially,
the GVC literature focused on labor-intensive manufacturing, such as garments,
footwear, and toys. These industries exemplified the outsourcing of labor-intensive
segments of production to low-wage countries; and their study used the concept of
‘industrial upgrading’ (Gereffi, 1999; Bair and Gereffi, 2001). However, GPNs have
more recently widened beyond manufacturing to include sectors such as agro-food
and services—e.g., call centers, tourism, and business-process outsourcing—where
the term ‘industrial upgrading’ is less appropriate. The more generic concept used
here is that of economic upgrading which applies across sectors.
There are four types of economic upgrading, each with different implications
for skill development and jobs:
• Process upgrading involves changes in the production process with the
objective of making it more efficient; this can be achieved by substituting
capital for labor—i.e., higher productivity through automation—and
thereby reducing skilled or unskilled work.
• Product upgrading occurs where more advanced product types are
introduced, which often requires more skilled jobs to make an item with
enhanced features.

• Functional upgrading occurs where firms change the mix of activities they
perform towards higher-value-added tasks. In the apparel industry, for
example, the inclusion of finishing, packaging, logistics, and transport
can be done in at least two distinct ways: via vertical integration,
which adds novel capabilities to a firm or an economic cluster; or via
specialization, which substitutes one set of activities for another (e.g.
an apparel firm that moves out of production and into brand marketing
and design). In electronics, this can happen when firms move from
simple assembly to contract manufacturing by engaging in full-package
production or to original design manufacturing by developing their own
design. Both involve new workforce skill sets linked to expanded firm
capabilities.
• Chain upgrading—i.e., shifting to a more technologically advanced
production chain—involves moving into new industries or product
markets, which often utilize different marketing channels and
manufacturing technologies. This may also require a different workforce
or innovations that allow existing manufacturers to enter new industries
as end markets (such as textile firms shifting from traditional fabrics,
like denim for apparel, to specialty nanofibers and strong lightweight
materials that can be used in the medical, defense or aircraft industries).
Each type of economic upgrading embodies a capital dimension and a labor
dimension. The capital dimension refers to the use of new machinery or advanced
technology. The labor dimension refers to skill development or to increased dexterity
and productivity on the part of workers. In this formulation, labor is considered
primarily as a productive factor determining the quantity and type of employment.
Social upgrading, by contrast, is the process of improvement in the rights
and entitlements of workers as social actors, which enhances the quality of their
employment (Rossi, 2011; Sen, 1999, 2000). This includes access to better work,
which might result from economic upgrading (e.g., a worker who has acquired
skills in one job is able to move to a better job elsewhere in a GPN). But it also
involves enhancing working conditions, protection and rights. Improving the
well-being of workers can also help their dependants and communities. The
concept of social upgrading is framed by the ILO’s Decent Work Agenda, which
encompasses employment, standards and rights at work, social protection and
social dialogue. This package promotes work performed under conditions of
freedom, equity, security, and human dignity, in which rights are protected and
adequate remuneration and social coverage are provided (ILO, 1999). Economists
have long established methods for quantifying the upgrading of labor through
measures of labor productivity and skill, but not all aspects of social upgrading
are as easily quantifiable.

Social upgrading can be subdivided into two components: measurable standards

and enabling rights (Elliott and Freeman, 2003; Barrientos and Smith, 2007).
Measurable standards are those aspects of worker well-being that are more easily
observable and quantifiable, including type of employment (regular or irregular),
wage level, social protection, and working hours. They can also include data on sex
and unionization, such as the percentage of female supervisors or the percentage
of union members in the workforce. However, measurable standards are often
the outcome of complex bargaining processes, framed by the enabling rights of
workers. These are less easily quantified, such as freedom of association, the right
to collective bargaining, non-discrimination, voice and empowerment. Lack of
access to enabling rights undermines the ability of workers—or specific groups of
workers, such as women or migrants—to negotiate improvements in their working
conditions that can enhance their well-being.
It is often implicitly assumed that economic upgrading in value chains
automatically translates into social upgrading through better wages and working
conditions (Knorringa and Pegler, 2006). However, case studies provide a mixed
picture. While social upgrading can be the outcome, it may be thwarted if the
employment created is highly insecure and exploitative. A vivid but tragic example
where apparent economic upgrading failed to translate into comparable social
upgrading is that of the Foxconn factory in China, which became associated with
multiple worker suicides. Since 2005, China has become the world’s largest exporter
and producer of mobile phones. Supplying Apple, Nokia, and other prominent
global electronics brands, Foxconn, a Taiwanese contract manufacturer, has
emerged as the largest private employer in China, with over one million workers
across more than a dozen factories. The availability of jobs, however, has not
necessarily led to social upgrading for Foxconn’s workers. Excessive working hours,
involuntary and often unpaid overtime work, lack of adequate safety measures,
and military-style management practices led to growing discontent among young
migrant workers, culminating in a series of suicide attempts that claimed 17
workers’ lives during the first eight months of 2011 (SACOM, 2010). However,
the links between economic and social upgrading/downgrading are often complex,
with different workers experiencing different outcomes on the same production
site, as shown by the example from the Moroccan garment industry reported below.

Framework for Linking Economic and Social Upgrading in GPNs

A number of factors can affect the economic and social upgrading (or downgrading)
of firms and workers. These include their position within the value chain, the type
of work performed, and the status of workers within a given category of work. This
section provides a framework for identifying different types of work across GPNs,

highlighting key elements of economic and social upgrading for each category.
This schema will be used to analyze possible trajectories of economic and social
upgrading in the next section.

Typology of Work in Agro-Food, Apparel, IT, and Services GPNs

When discussing upgrading from a GPN perspective, it is important to emphasize
that the unit of analysis is not the individual country, firm or worker, but the
value chain (linking primary production, processing, distribution and retail)
within which firms and workers are located. GPNs are constituted by a mix of
activities that require combinations of labor-intensive, low-skilled activities with
knowledge- and technology-intensive higher-skilled activities. Different types
of GPNs are likely to be composed of different ratios of both low-skill and high-
skill production, therefore requiring a comprehensive typology of work. Here we
outline different types of work performed within GPNs.

Small-Scale Household and Home-Based Work

Small-scale, household-based work is found in many GPNs with operations in
developing countries. This type of work is typically performed by small-scale
producers or outgrowers involved in agricultural production, and homeworkers in
more labor-intensive or artisanal types of manufacturing. These workers usually
have access to their own assets and means of subsistence, and are often (but not
always) located in poorer countries and regions. Production takes place in or around
the household residence, with limited separation between commercial productive
activity (producing saleable goods) and unpaid reproductive activity (e.g., household
subsistence and childcare). Small-scale production and home-based work involve
both paid and unpaid family labor, often including child labor. Homeworkers
and small-scale producers are linked into GPNs through very different types of
commercial arrangements. In small-firm economies like Taiwan’s, homeworking
was often the initial stage in the development of what later became factory-
based export production in buyer-driven commodity chains for consumer goods
industries, such as garments, toys and, sporting goods (Hamilton and Gereffi,
2009; Feenstra and Hamilton, 2006; McCormick and Schmitz, 2002).

Low-Skilled Labor-Intensive Work

Labor-intensive production involving the use of wage labor in a formal factory
setting is clearly distinct from household-based production. It involves a
relationship based on wage employment between an employer (who may be the

producer or an agent) and a worker (normally paid in cash, but sometimes in kind).
Global brands and retailers have been able to reduce costs and spread their market
reach through outsourcing to lower-cost developing countries. This stimulated
the expansion of production and employment linked to GPNs. In manufacturing,
since the first offshoring wave in the 1960s and 1970s, the nature of outsourced
work has evolved. Whereas the first-generation maquila jobs based on the assembly
of garments in Mexico were quite labor-intensive, subsequent generations oriented
to the assembly of automotive parts and advanced electronics have often involved
substantial automation. As one moves from apparel to auto-parts to electronics,
the very nature of assembly work changes to second- and third-generation maquila
work. This explains why workers in a given industrial district—e.g., Torreon,
Tijuana or Ciudad Juarez in Mexico—often earn higher wages when they move
from apparel to auto-parts to electronics (Bair and Gereffi, 2001; Carrillo, 1998).
China’s phenomenal export success during the past two decades can also
be linked to a variety of labor-intensive production arrangements—e.g.,
government-created Special Economic Zones and more locally rooted but
highly specialized industrial districts—which have quite different implications
for both economic and social upgrading. Recently, China has begun to adopt
explicit policies to improve wages and working conditions in response to worker
protests and growing uncertainty about the economic prospects for the country’s
huge migrant workforce, which could create a strong political mandate for
linking economic and social upgrading (Zeng, 2010; Gereffi, 2009; Barboza
and Tabuchi, 2010).

Medium-Skilled Mixed Production Technologies Work

This type of work is associated with full-package production, driven by the rise
of global buyers whose preferred suppliers are required to coordinate all of the
operations leading to the delivery of the final good, including design, inputs,
production, pre-pricing, packaging and presentation (Gereffi, 1994, 2005; Dolan
and Humphrey, 2000). While global buyers control the orders for full-package
production, developing country suppliers coordinate the supply of inputs, make
the final product and send it to the buyer. For developing country firms to fill
full-package orders from global buyers, they need access to varied production
technologies and skilled workers capable not only of making key components
and finished products, but also of performing production-related service jobs
like product design, quality control, packing, and logistics, which require a broad
range of skills.

High-Skilled Technology-Intensive Work

High-skilled, technology-intensive work emerged in the 1980s and 1990s from a
different set of offshore activities as lead firms in capital- and technology-intensive
industries, such as automobiles and electronics, set up international production
networks not only to assemble their finished goods, but also to develop a supply-
base for key intermediate items and sub-assemblies. This form of production is
reflected in the rise of global contract manufacturers in the electronics industry
and ‘mega suppliers’ in the automotive industry. A dramatic but not atypical
example from electronics is Celestica, which spun off from IBM in 1996. From
two initial production locations in Canada and the United States, Celestica grew
to nearly 50 factories across Asia, Europe, and the Americas by 2001 (largely via
acquisitions), increasing its sales from $2 billion to $10 billion during this period
(Sturgeon and Lester, 2004: 47–49). At the uppermost tiers of these production
networks, the suppliers tend to be very large and technologically sophisticated,
and they concentrate ‘good’ jobs in relatively few locations. However, as shown
in the case of Foxconn above, global contract manufacturers may also hire large
numbers of workers in highly labor-intensive jobs

Knowledge-Intensive Work
Knowledge-intensive work in GPNs is being driven by a new wave of offshoring in
services (Gereffi and Fernandez-Stark, 2010). Although white-collar outsourcing
started with simple service jobs like call centers and telemarketing, it now includes
more advanced business services such as finance, accounting, software, medical
services, and engineering. Knowledge-intensive service jobs are increasingly seen
as an opportunity for developing economies to reap both economic and social
benefits from technological learning, knowledge spillovers, and higher incomes.
On average, however, the volume of employment in this work category is relatively
small on account of its requirements for high skills and advanced degrees, mainly in
science and engineering. Accordingly, the unskilled or less well-educated majority
in many countries is excluded from the very desirable employment opportunities
provided by knowledge-intensive work.
Based on a simplified typology identifying five GPNs that combine labor-
intensive, low-tech manufacture, medium-tech manufacture, technology-intensive
and knowledge-intensive activities, Figure 8.1 shows how different GPNs
incorporate different types of work and skill levels. While all five types of work
are represented in each GPN, there are significant differences in the proportions
of each type of work across these sectors. Agro-food involves a relatively large
proportion of small-scale and low-skill labor-intensive production, particularly

at the farm level. Within manufacturing, if we compare industries that can be

classified as relatively low-tech (apparel), medium-tech (automotive), and high-tech
(electronics), the proportion of low-skilled and household-based types of work
decreases, and the relative importance of knowledge-intensive and high-skilled
work increases. This progression in the nature of the work involved is associated
with economic upgrading: as we move to more technology- and knowledge-
intensive GPNs, such as IT, labor-intensive production does not disappear but
becomes relatively less prominent. However, there is no systematic connection
between the proportion of labor-intensive work and social upgrading.

Figure 8.1 Typology of Workforce Composition Across Different GPNs

Source: Authors.

Status of Workers
The type of work undertaken at any point within a GPN has to be further unpacked.
Here we draw on Rossi’s (2011) case study of economic and social upgrading in the
Moroccan garment industry to show that the status of workers can have important
implications for their ability to benefit from or participate in economic and social
upgrading. Empirical data collected through semi-structured manager interviews
and focus group discussions with workers show that the workforce in supplier
factories participating in garment GPNs is far from homogeneous.2

In response to lead-firm requirements in terms of low cost, short lead times,

flexibility for last-minute changes in orders, and high quality, which characterize
the fast-fashion buyers sourcing from Morocco,3 supplier firms resort to employing
two different categories of workers. The first consists of regular workers, who
are senior and experienced, thereby guaranteeing high skills and good quality.
They are usually employed on permanent contracts (albeit often oral contracts
based on trust), and they are paid a premium over the minimum wage. The
second category consists of irregular workers who are employed in the unskilled
segments of the production chain, typically the most time-sensitive, such as
packaging and loading trucks. These unskilled workers are usually young women,
often internal migrants, who are frequently discriminated against, not covered
by any formal contract, paid below the minimum wage, and not covered by any
type of social protection.
These two categories of workers face very different opportunities for social
upgrading. Regular workers with strong employer attachment can more easily
access statutory employment protection and benefit from measurable labor
standards. Their greater security of employment may increase their ability to
participate in workplace-based trade union organizations and reduce their fear of
reprisals, thus enhancing their enabling rights. Irregular workers, with their weak
employer attachment, are less able to avail themselves of employer-based protection
or measurable standards. Since irregular workers are over-represented among
women and ethnic and migrant groups, they often face double discrimination on
account of both their social and their employment status. Irregular workers in
any type of job are therefore more likely to suffer a ‘decent work deficit’, which
denies them access to enabling rights and undermines their relative ability to reap
the benefits of economic and social upgrading.
A related but under-researched issue is the role of third-party labor contractors
as a channel for recruiting and employing irregular workers in global production.
Research by Barrientos (2011) on the garment industry in India and horticulture
in South Africa and the United Kingdom indicates that such contracting is
increasingly prevalent in the labor-intensive nodes of GPNs involving footloose or
seasonal production, such as agro-food and apparel. Labor contracting can involve
multiple types of relationship between the producing firm, the contractor, and
the worker (e.g., payment by the number of workers where the contractor takes a
percentage, or payment by task, such as clearing a field). Contractors move groups
of workers between sites and locations depending on the season and shifts in
demand for labor. They play an increasingly important role in matching ‘the right
type’ of workers to tasks, in coordinating labor supply to firms on a ‘just-in-time’
basis (Rogaly, 2008), and in channelling migrant labor (internal and international)
to production locations (Martin, 2006).

Labor contracting also allows firms to offset production or market risks and
minimize labor costs (as well as associated human resource management needs).
Such contracting can help workers enhance their continuity of employment
between different producers and provide some form of protection in sectors where
there are seasonality or ‘just-in-time’ pressures. But it can also open up space for
unscrupulous agents who expose workers to high levels of exploitation both on and
off site, thereby undermining decent work conditions (Barrientos and Kritzinger,
2004; Kuptsch, 2006; Theron and Godfrey, 2000; Theron et al., 2004). Barrientos
(2011) finds that this can include new forms of bonded and forced labor at the
heart of global production. Thus the role of labor contractors can significantly
affect the relationship between economic and social upgrading, and their workers
can be vulnerable to extreme forms of exploitation.

Factors Contributing to Economic and Social Upgrading or Downgrading

The different types of work and status of employment provide the context for social
upgrading, highlighting the interplay between economic and social upgrading.
Table 8.1 provides an initial overview of how the two are related in these different
contexts. Social upgrading is mainly represented by measurable standards, although
future work in this area should also utilize research tools to assess the existence and
effectiveness of enabling rights. Case study evidence suggests that certain aspects
of social upgrading/downgrading, such as flexibility, vulnerability, discrimination,
voice, and empowerment, cut across the types of work and thus characterize
household-based work and knowledge-intensive work alike.
A number of early case studies highlighted problems of poor working conditions
and lack of access to decent work (Smith et al., 2004; Collins, 2003; Hale and
Wills, 2005; Raworth, 2004). Conditions vary by sector and product, but mainly
in relation to whether employment is regular or irregular. Labor conditions are
consistently found to be better among permanent workers than among temporary
and casual workers. Gender bias has also been found to play an important role:
women are preferred by many employers for their perceived dexterity and ‘nimble
fingers’ (Elson and Pearson, 1981). However, they tend to perform the insecure
and low-paid work, often in temporary or seasonal employment arrangements
(Barrientos and Kritzinger, 2004), while men typically occupy the better-paid and
more skilled jobs. The position of workers in different nodes of GPNs also plays
a role in their overall labor conditions. In manufacturing, for example, conditions
are likely to be better in the factory of a preferred supplier that is regularly audited
than in a subcontracted firm further down the chain that goes unmonitored
(Locke et al., 2007).

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Table 8.1 Key Drivers of Economic and Social Upgrading and Downgrading, by Type of Work
Small-scale, household-based Low-skilled, labor-intensive Medium-skilled, mixed High-skilled, technology- Knowledge-intensive
production technologies intensive
(+) Allows poor workers and (+) Good for ramping up output, (+) Integrated production (+) Higher capital- and (+) Better income and export
producers to engage in GPNs exports, and foreign exchange and control in final technology-investment prospects
Economic upgrading/downgrading

(+) Provides access to niche (+) Helps to attract foreign production, key inputs, even inflows (+) Technology learning and
produce and labor skills, investors and to meet in finance, logistics, product (+) Increasing modularity knowledge spillovers
such as high plateau teas or international quality standards development (+) Technology learning (+) Upgrading from simple
handsewn embroidery (–) Highly dependent on global (+) A process of buyer- and knowledge spillovers— service jobs (e.g., call centers)
(+/–) High dependence buyers in control of inputs and oriented upgrading ‘supplier upgrading’ to more advanced business
on intermediaries who can orders (+) Stronger forward and (+) Emerging ‘global firms’, services (software, medical
support or exploit (–) Minimal local linkages to backward linkages e.g. in China and India services, engineering)
(–) Difficulty meeting host economy/local firms (+) Higher value added (–) High entry barriers (+) Newest area: offshoring of
standards, hence exclusion (–) Low value added (–) More stringent for local firms in lucrative design and innovation
from GPNs (–) Vulnerable to buyers’ performance standards and segments and know-how (R&D centers in developing
(–) Often low value-capture purchasing decisions reduced margins procured by countries)
within chain (–) Few opportunities for skill global buyers (–) Entry barriers in lucrative
improvement segments and know-how
(+) High quantity of jobs, (+) High quantity of jobs, (+) Fair quantity of jobs (–) Relatively small volume (–) Small number of jobs
especially for female workers especially for female workers (+) Relatively higher wages of employment (+) High wages and benefits by
Social upgrading/downgrading

(+) Women can balance (–) Low quality, low wages; than assembly jobs (+) High-quality jobs domestic standards
productive and reproductive ‘footloose’ jobs (+/ –) Relatively high (higher wage than other (+) Continuous skill improvement
work (–) Operation of labor relations job security in vertically manufacturing industries) (+) Flexible work arrangements
(–) Likelihood of unpaid predominantly on a flexible, integrated firms, but (+) Relatively high job security not making employees vulnerable
family labor, including child casual basis increased use of flexible (–) Flexible work (+) Greater possibility of
labor (–) Absence of fixed working employment arrangements on the rise genderneutral work
(–) Lack of contracts or security hours (+) Layers of skills and jobs (–) Concentration of ‘good (–) High entry barriers, e.g.,
(–) Long or insecure working (–) Lack of employment security down the supply chain make jobs’ in advanced countries education, English language
hours and poor conditions and other benefits it possible to retain core (+) Opportunity for skill –’not inclusive’
(–) Lack of social protection (–) No skill improvement skills and outsource others to improvement (+/–) High individualization
and rights (repetitive, scrappy work) peripheral workers of work
Source: Adapted from Gereffi and Güler, 2008, 2010.
242 Global Value Chains and Development

Social upgrading may occur for some workers but not for others working in
the same factory. Evidence from Morocco’s garment industry shows that high-
skilled workers—even those employed in factories in the cut-make-trim segment
of the apparel GPN—may have opportunities for social upgrading, especially in
terms of measurable standards, when lead firms are preoccupied with their brand
reputation and require compliance with labor standards in their supplier factories.
At the same time, unskilled workers may be largely excluded from social upgrading
in order for the factory to remain cost-competitive and flexible in terms of last-
minute changes in orders. The challenges of social upgrading remain significant
for irregular workers even as factories shift their production towards higher value
added items. Indeed, the new activities taken on by the factory as a result may
well lead to social upgrading for regular workers—through the development of
more skills and training for new capabilities—but irregular workers continue to
be needed in order to respond to buyers’ requirements in terms of low cost, short
lead times, and high flexibility; their very status impedes their social upgrading.

Trajectories in Economic and Social Upgrading

As indicated previously, economic upgrading does not necessarily lead to social
upgrading (Brown, 2007; Locke et al., 2007). Research (often by civil society
organizations) has highlighted the adverse role company purchasing practices
can play, with negative outcomes for the workers engaged in GPNs (Insight
Investment/Acona, 2004; Raworth, 2004; Oxfam International, 2010; CAFOD,
2004; Barrientos and Kritzinger, 2004). However, this needs to be investigated
further by exploring the conditions under which economic upgrading may lead
to social upgrading or downgrading.
There are competing pressures for each of these two outcomes within GPNs
as suppliers balance higher quality with lower cost. For example, if economic
upgrading requires high and consistent quality standards that are best provided by
a stable, skilled, and formalized labor force, then economic and social upgrading
may be positively correlated, especially when they increase worker productivity.
This is particularly true of process upgrading, which refers to improved efficiency
of the production process, and is therefore closely linked to an efficient use of
labor as a human resource. At the same time, pressures to reduce costs and
increase flexibility might lead employers to combine economic upgrading with
social downgrading (for example, by outsourcing employment to an exploitative
labor contractor), although this raises questions about commercial sustainability
if quality is to be assured.
Rossi’s (2011) case study of GPN garment factories in Morocco led by fast-
fashion buyers shows that functional upgrading brings about social upgrading and

downgrading simultaneously, for regular and irregular workers, respectively. On

the one hand, factories supplying a finished product and overseeing packaging,
storage, and logistics for their buyers offer stable contracts and better social
protection to their high-skilled workers to ensure a continuous relationship as well
as full compliance with buyers’ codes of conduct. On the other hand, in order to
be able to respond quickly to buyers’ frequently changing orders and to operate on
short lead times, they simultaneously employ irregular workers on casual contracts,
especially in the final segments of the production chain (such as packaging and
loading), often imposing excessive overtime as well as discriminating against them
on the basis of wages and treatment (Rossi, 2011).
To maintain or advance their position in GPNs, suppliers have to engage in
a balancing act between maximizing quality (to meet buyers’ standards) and
minimizing costs/prices (to remain competitive to buyers). This has important
implications for labor and the potential for social upgrading. In response to
commercial pressures, suppliers’ labor strategies can take a ‘low road’ involving
economic and social downgrading, a ‘high road’ involving economic and social
upgrading, or a mixed approach (see Milberg and Winckler, 2011). Those taking a
low-road approach, based on worsening labor conditions, risk losing out on quality.
Those taking a high-road approach, by improving wages and labor conditions,
risk losing out on price competitiveness. Many producers, therefore, adopt a
mixed approach of high-quality and low-cost employment which facilitates both
standards and cost flexibility. This is reflected in the simultaneous use of regular
and irregular workers on any given site.
Analyzing economic and social upgrading trajectories involves understanding
that economic upgrading is not always the most appropriate strategy for long-
term sustainability. Such strategic decision-making depends largely on the
characteristics of the actors. One identified path of upgrading from integrated
or ‘full-package’ production activities—also known as original equipment
manufacturing (OEM)—to original design manufacturing (ODM) and original
brand name manufacturing (OBM) has been very beneficial for some firms in
GPNs, including a number of East Asian apparel companies (Gereffi, 1999).
However, it cannot work for everyone because risk and competition are much
higher in the more advanced segments of GPNs. Some firms choose to remain
in their more secure niche of OEM without attempting to upgrade further. For
these firms, economic ‘downgrading’ becomes a business strategy. In the computer
industry of Taiwan (China), Acer decided it could upgrade by developing its own
brand of computers, and was successful in doing so; its competitor, Mitac, initially
opted to pursue an OBM strategy as well, but soon returned to OEM where the
profits were lower, but more secure (Gereffi, 1995: 131–132).
Another example of tactical downgrading occurs in the highly competitive
South African wine value chain, where some wine makers were shown to prefer a

lower position on the price and quality pyramid for wines exported to the European
market. Indeed, some strategies of product and functional ‘downgrading’—such as
selling higher volumes of basic quality or bulk wines rather than premium wines,
vertical disintegration by moving away from the high fixed costs of grape growing,
and reduced emphasis on premium brands—have enabled firms to maintain stable
market shares and margins for mid-range or basic wines, especially during the
economic crisis when cost cutting was necessary for survival in some segments of
the industry (Ponte and Ewert, 2009). While these strategies have been associated
with certain forms of social downgrading, such as reduced lead times and the
increased casualization of labor, tactical downgrading in selected areas of the
value chain can permit forms of upgrading when economic conditions improve.
In short, suppliers in developing economies can adopt mixed strategies of moving
up and down the value chain according to domestic and international conditions.
The garment industry in Eastern and Central Europe (ECE) provides an
excellent example of how upgrading and downgrading trajectories have been
intertwined. In the early 1980s, some of the ECE economies began to carry out
outward-processing trade (OPT) for markets in western Europe, primarily with
German buyers and contractors. Given their legacy of established industrialization,
the emphasis on apparel exports might be considered economic downgrading.
Within the apparel industry, more advanced economies like Slovakia’s were able to
move more quickly from OPT to full-package export production, and eventually
to ODM and OBM, while less developed economies such as Bulgaria’s had far
more difficulty moving beyond basic OPT contracting. In the ECE economies,
however, it was often easier to develop ODM and OBM upgrading strategies for
the domestic retail market, than for the more discriminating fast-fashion markets
of western Europe (Pickles et al., 2006; Evgeniev and Gereffi, 2008).
With regard to social upgrading, certain choices might be considered social
‘downgrading’ for some actors, but not for others. For example, in agriculture the
choice to move from a smallholder job to wage employment in a farm might be
regarded as an example of social downgrading, due to loss of independence and
access to land. However, if the person making this choice is a woman who used
to be an unpaid family worker, the move to wage employment can represent an
improvement in terms of access to wages. Research on Senegal’s horticultural
industry found that some small-scale producers were able to comply with European
supermarket standards, and that both they and wage workers on large estates
received better incomes than small-scale producers unable to enter the supply chains
(Maertens and Swinnen, 2009). In order to fully understand economic and social
upgrading trajectories, it is important to keep in mind the social context and profile
of the different actors involved, which can vary between countries and sectors.

Figure 8.2 illustrates implications for decent work by portraying three possible
trajectories. The horizontal axis sets out the different types of work, from small-
scale household-based production, through low- and medium-skilled jobs to high-
skilled technology- and knowledge-intensive work. The vertical axis represents
social upgrading, according to the measurable standards discussed above. Enabling
rights are, by their very nature, not quantifiable in a chart of this form. Recognizing
the limitations of Figure 8.2, being located below zero (the horizontal axis) in
the diagram constitutes a ‘decent work deficit’ for any given type of work, while
being above zero represents levels of ‘decent work attainment’ for any given type
of work: the further above zero, the greater the social upgrading gains achieved.

Figure 8.2 Possible Social Upgrading Trajectories

Source: Authors.

The social upgrading trajectories presented in Figure 8.2 depict a range of

possible situations:
• Small-scale worker upgrading (trajectory A) occurs where workers remain
within home-based production (agriculture or manufacturing), but
are still able to enjoy improvements in their working conditions. For
example, it is possible for improvements to occur for those working in
small-scale horticulture in Africa, through the establishment of producer
organizations and provision of more secure contracts, better pay and
personal health and safety equipment.

• Labor-intensive upgrading (trajectory B) occurs where workers move to

better types of labor-intensive work where they can also obtain better
working conditions. In Bangladesh or Sri Lanka, for example, women
who have migrated from subsistence farming to wage employment in
the garment industry may be able to obtain jobs in factories that have
implemented buyers’ codes of labor practice.
• Higher-skill upgrading (trajectory C) occurs where workers move towards
better types of paid employment associated with progressive social
upgrading. For example, workers in India or China who have gained
sufficient education and training can move from low-paid, low-skilled
work into the IT sector and, at the same time, obtain higher-paid
employment in firms where labor standards are improving.
Case study evidence suggests that a shift from lower- to higher-skilled types
of work may directly lead to social upgrading, but not always. The challenge,
therefore, is how to pursue strategies that will enhance labor standards for all
workers in all types of work.
Research to date, including the findings from the garment industry in Morocco
presented in this chapter, indicates that the main improvements generated by
GPNs in terms of measurable standards and enabling rights tend to be limited to
regular workers, i.e., those in stable, usually permanent jobs with a high degree of
attachment to their employers. However, extending such improvements to irregular
workers, such as casual, migrant and contract workers, poses serious challenges.
There are indications that the underlying constraints are structurally embedded,
as suppliers use a mix of labor categories to achieve both quality and flexibility of
output as required by their buyers: employing regular workers to secure quality and
consistency of production and irregular workers to cope with fluctuating orders
and downward price/cost pressures.

Concluding Remarks
This chapter has sought to develop a more systematic framework for analyzing
economic and social upgrading in GPNs, taking into account the different levels
of integration of firms and workers that can exist across industries. Drawing on
case studies in a variety of sectors has helped to highlight the issues, but their
limitation is that they separately examine either economic or social upgrading/
downgrading. Rossi’s (2011) case study of the garment industry in Morocco sets
out to address this gap by applying a framework for integrated analysis of economic
and social upgrading in GPNs. Our approach reveals different economic and social
upgrading opportunities, and downgrading risks. By analyzing the relationship
between economic and social upgrading/downgrading more systematically, we

hope to have laid the foundations for future research that incorporates both firms
and workers as productive actors as well as social agents with rights.
An important aim is to better understand how and why economic upgrading
does not automatically lead to social upgrading, thereby providing a more informed
basis for designing and promoting interventions that will promote both (the so-
called ‘win-win’ scenario). Such interventions—reviewed briefly in Barrientos et
al. (2011) and Mayer and Pickles (2010)—can occur at different levels, including:
independent trade union representation of workers; company-level initiatives
(including buyer and multistakeholder codes of labor practice); government
legislation; and multilateral initiatives (such as ILO and OECD guidelines). A
key topic for future GPN research is how to design cross-border interventions that
yield benefits for poor workers and firms linked through their involvement in the
same GPN, but located in different countries.

Notes
1. On this point, see Milberg and Winkler (2011).
2. Interviews and focus group discussions were carried out in a sample of 19 factories in
Casablanca, Rabat, Fez, and Tangiers in 2008 (Rossi, 2010, 2011).
3. The fast-fashion segment of the apparel GPN was pioneered by the Spanish brand
Zara (which belongs to the Inditex group). The business strategy associated with fast
fashion is based on extremely flexible production which follows the latest fashion
trends. A garment is produced within two weeks of its design in Spain. Thanks to its
proximity to Spain, Morocco has emerged as a key sourcing platform for Zara (Plank
et al., 2011).

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9
t
Regulation and Economic Globalization
Prospects and Limits of Private Governance

Frederick Mayer and Gary Gereffi

Introduction
The last two decades have witnessed a remarkable burst of innovation in ‘private
governance’, i.e., non-governmental institutions that ‘govern—that is they enable
and constrain—a broad range of economic activities in the world economy’.1 These
institutions serve functions that have historically been the task of governments,
most notably that of regulating the negative externalities of economic activity.2
Private governance takes many forms: standards governing a vast array of
environmental, labor, health, product safety, and other matters; codes of conduct
promulgated by corporations, industry associations, and non-governmental
organizations (NGOs); labels that rely on consumer demand for ‘green’ and ‘fair
trade’ products; and even self-regulation by corporations under the banner of
corporate social responsibility (CSR).3
The move towards private governance is best seen as a response to societal
pressures spawned by economic globalization and by the inadequacy of public
governance institutions in addressing them. As firms, production networks,
and markets transcended national boundaries, public (governmental) systems
of economic governance built on the unit of the nation-state proved inadequate
for regulating an increasingly fragmented and footloose global economy. In the
language of Polanyi, markets became ‘dis-embedded’ from societal and state
institutions (Polanyi, 1944. See also Evans, 1985; Ruggie, 1982). Logically,
economic globalization demands global regulation, but at the international level
regulatory standards are generally weak and there is little capacity to enforce them.
In the developing world, where production is increasingly concentrated, many
states lack the capacities of law, monitoring, and enforcement needed to regulate
industry, even when they have strongly worded legislation on the books. The failure

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254 Global Value Chains and Development

of public governance institutions to keep pace with economic globalization has,

therefore, created a global ‘governance deficit’.4
As Polanyi would predict, workers, environmentalists, human rights activists,
and others in civil society have mobilized to demand new forms of governance.
Part of this response focused on attempting to alter public policies—i.e., pushing
back against neoliberal economic prescriptions or demanding that market opening
be accompanied by regulatory measures. Frustrated with the perceived inability
of governmental institutions to respond to the governance challenge, however,
many social activists and labor groups also turned to pressure campaigns targeted
at corporations and to other strategies designed to use market pressure to regulate
the behavior of producers.
That such developments have had an impact is not in question. Fair Trade
coffee, ‘sweatshop free’ collegiate apparel, and Forest Stewardship Council-
certified lumber have all altered specific production practices. Even Walmart,
the poster child of corporate malfeasance in the eyes of many activists, is now
beginning to respond to social pressures for reform by stocking energy-efficient
light bulbs, using environment-friendly packing materials, and so on (Gereffi
and Christian, 2009). But the questions are: How far will this go? To what
extent can private governance address the global governance deficit? Will private
governance require complementary forms of public regulation, and where might
this public regulation come from?
Much is happening, but there is no good overall assessment of whether these
myriad private governance initiatives are anywhere close to sufficient to address
the full range of labor, environmental, and other social concerns. Most research
to date has been largely descriptive and anecdotal. Clearly, more is needed if we
are to understand the impact of private regulatory governance. A necessary first
step is to develop clearer theoretical propositions about the conditions under which
various forms of private government are likely to succeed and, just as importantly,
where they are unlikely to do so.
In this chapter, we offer six hypotheses about the conditions under which private
governance is most likely to arise and to be effective, as well as for thinking about
the interaction between private and public governance. Before turning to those
hypotheses, it is necessary to consider the forces that underlie the move towards
private governance, particularly those changes in the global economy that both
created demand for new governance and also enabled its supply. Although we
are largely concerned in this chapter with private governance, public and private
governance interact. Indeed, it was a failure of public governance that led private
modes of governance to emerge and proliferate. Ultimately, as we will argue, the

limits of purely private governance will likely spur renewed attention to public
governance and to new forms of public and private governance interaction.

The Demand for Governance: Economic Globalization and the Public

Governance Deficit
Private governance arose in particular historical circumstances. In the world before
globalization, although there was economic interdependence among advanced
industrial countries (Keohane and Nye, 1977), large regions of the globe were not
connected to the global market. In the mid-1980s, the Soviet Union, China, and
Eastern and Central Europe still had centrally planned economies; high levels of
protection and state ownership characterized most of Latin America; and boycotts
isolated South Africa while the rest of sub-Saharan Africa barely registered. The
last 25 years have witnessed a dramatic restructuring of economic activity around
the globe, in large part because of changes in the policy environment. The collapse
of communism in Europe and its transformation in China, the abandonment of
import-substitution policies in Latin America and elsewhere (driven in no small
measure by the International Monetary Fund (IMF)), and the expansion and
deepening of the international trading rules in the World Trade Organization
(WTO) and in ever more numerous regional and bilateral agreements, dramatically
transformed the environment for global commerce.
The global economy that has emerged since the 1980s has two distinctive
features with profound implications for public governance. First, a substantial
portion of global manufacturing production—and increasingly of services as
well—has shifted from the developed to the developing world (Dicken, 2007).
Once largely outside the global production system, China, India, Brazil, Mexico,
South Africa, and other big developing countries are now host to a very significant
and rapidly growing portion of international manufacturing output. By 2000, half
of all manufacturing production was in the developing world, and 60% of exports
from developing countries to the industrialized world were no longer raw materials
but manufactured goods (Held and McGrew, 2002).
Second, and equally important for governance, the organization of global
production has changed dramatically. Historically, the vast majority of
manufacturing production was carried out either by national companies and
their suppliers within single countries or by multinational corporations (MNCs)
based in developed economies that typically owned all or most of their foreign
factories (Kaplinsky, 2005; Ocampo, 2010: 1–12). Today, the global economy
is increasingly organized around international production networks in which
large lead firms, often located in developed economies, control to a significant
extent the production of suppliers, who are typically smaller and likely to be

located in developing countries (Dicken, 2007). Variously referred to as global

commodity chains (Bair, 2009), global value chains (Gereffi and Kaplinsky,
2001), and global production networks (Henderson et al., 2002), this new form of
international industrial organization has allowed for production to be coordinated
on transnational scales but with far greater flexibility than the older MNC model
of direct ownership (Gereffi, 2005).
Key to understanding the implications of global production systems is the role
of lead firms in these networks and chains. Producer-driven chains dominate
capital- and technology-intensive industries such as automobiles, aircraft, and
computers. Buyer-driven chains have become the new model of global sourcing
in labor-intensive manufacturing industries like apparel, footwear, and toys, a
development led by large US retailers, marketers, and ‘manufacturers without
factories’ (Gereffi, 1999; Gereffi and Korzeniewicz, 1994). More recent studies
point to the emergence of new drivers, such as large supermarkets and concentrated
food processors (Dolan and Humphrey, 2004; Gereffi et al., 2009; Fuchs and
Kalfagianni, 2010). In all of these cases, lead firms enjoy some measure of market
power over suppliers and some ability, therefore, to affect their behavior.
Changes in the global economy have profound implications for public and
private governance. On the one hand, they undermine public governance. When
production largely involved national firms or vertically integrated MNCs based
in developed countries, regulation—whether labor, environmental, health, or
other—was undertaken by individual nation-states (roughly coordinated in a
system characterized as ‘embedded liberalism’) (Ruggie, 1982). The shift to
offshore outsourcing over the past several decades meant that much of global
production was now beyond the reach of national governance institutions in
the advanced industrial states, and extended beyond the international system
of embedded liberalism that was largely confined to the industrialized world.
Governments in those developing countries where production increasingly took
place lacked the ability, and to some extent the will, to regulate production in
their jurisdictions. The formerly centralized economies of China and Eastern
Europe had no tradition of market governance, the newly opened economies of
Latin America had little regulatory capacity, and most of sub-Saharan Africa had
weak public governance of any form.
Moreover, initially at least, the interests of most developing countries lay in
attracting investment, which meant that they tended to give relatively short shrift to
regulatory concerns, and at the international level, public regulation remained very
weak. International organizations such as the International Labor Organization
(ILO), the United Nations Environmental Program (UNEP), and the United
Nations Development Program (UNDP) have extremely limited powers, and are

certainly less well developed than are market-facilitative organizations such as

the WTO, the IMF, and the World Intellectual Property Organization (WIPO).
Indeed, the relative strength of these facilitative forms of international public
governance may well have inhibited certain forms of regulation and exacerbated
unequal income distribution at the global level (Ocampo, 2010).
Changes in the international economy, therefore, can be seen as creating a
vacuum or deficit of public regulation. But it is important to recognize that new
patterns of industrial organization, notably the concentration of power in lead
firms within global production networks, also created possibilities for private
governance.

Social Responses and the Rise of Private Governance

As Polanyi would predict, the disembedding of markets from governance provoked
a social response. Initially, the targets of social activism were international
organizations associated with globalization—the IMF, the World Bank, and the
WTO—but progress from the standpoint of the activists was extremely limited.5
Frustrated by the lack of governmental response, many social activists began to
shift to direct pressure on corporations to change their behavior (Vogel, 2010).
Beginning in the early 1990s, demand for corporate codes of conduct, perhaps
the most visible and widespread form of private governance, became the opening
wedge in a 15-year campaign to bring some elements of social responsibility to
international subcontracting networks (Gereffi et al., 2001). The genius of this
approach was in recognizing that the industrial governance structures established
by lead firms to manage their global supply chains could also be leveraged to
achieve social and environmental objectives.
Many innovations in private governance began in the apparel sector, which
was a forerunner of globalization in other manufacturing industries because of
its labor-intensive production and relatively low barriers to entry. Levi Strauss,
the American jeans maker, was one of the first MNCs to tout its own corporate
code of conduct in 1991, using provisions against employing forced labor and
child labor to justify its unwillingness to source from China (unlike many of its
competitors, who already were making clothes there). Other multinationals in
the apparel industry such as Liz Claiborne, Nike, Reebok, and The Gap soon
followed suit, but these first-party codes had little external credibility because
individual firms proclaimed and monitored their own rules.6 While first-party
codes became commonplace in certain industries, second-party codes of conduct
were developed by trade associations to apply to their industry members (such as
Responsible Care in the chemical industry) (Gereffi et al., 2001).

Second-party codes were soon followed by third-party certif ication

arrangements, whereby an external group (often an NGO) monitored provisions
adopted by particular firms or industries. While many argued that the early codes
had no teeth and built-in conflicts of interest, these newer codes of conduct had
stricter provisions and, most importantly, an independent monitoring mechanism
that was not controlled by the firms whose behavior was being scrutinized (Kolk
and van Tulder, 2004; Locke et al., 2007; Locke and Romis, 2007). This allowed
domestic and international NGOs to play a significant role not only in detecting
exploitative labor practices in global supply chains, but also to use well-coordinated
campaigns to force leading multinationals with highly visible brands, such as Nike,
Disney, and Starbucks, to improve working conditions in their global network
of suppliers and to participate in equity-oriented programs like the Fair Trade
movement (Esbenshade, 2004; Klein, 2000).
By the mid-2000s, a large number of multinational firms were publishing
annual Corporate Social Responsibility reports (for example, Gap Inc., 2004)
Furthermore, under pressure from a wide range of NGOs and labor groups,
private governance regimes were becoming more pervasive: industry-wide codes
of conduct proliferated and became more transparent (Kolk and van Tulder, 2005).
The monitoring reports and complete lists of suppliers for well-known brands
like Nike were made public, and instead of abandoning suppliers that violated
the corporate codes, MNCs were pressured to get domestic suppliers to comply
with the global codes.
Private governance has continued to evolve. The list of agricultural, craft,
and other products in the Fair Trade line is expanding, as are organic and green-
labeled goods. Examples abound of various types of socially responsible corporate
practices. McDonald’s recently tightened its procurement guidelines in response
to the clear-cutting practices of Amazon soy producers and cattle ranchers who
supplied the industry. Cadbury champions its commitment to the communities
that grow its cocoa. Walmart has mandated energy savings throughout its supply
chain. And in many sectors there are now jointly agreed upon codes and standards
for such things as greenhouse gas emissions accounting (Green, 2010), sustainable
timbering practices (Bartley, 2010), labor practices in apparel and footwear (Gereffi
et al., 2001), electrical product safety standards (Büthe, 2010b), and many others.
Notwithstanding the impressive dynamism of private governance, however,
it remains far from filling the public governance vacuum. For one thing, there
is great variation in coverage. In some well-known sectors, private governance
appears reasonably robust—apparel, for example—but even within that sector
much production remains outside the private governance regime. Moreover, even
when there are rules and standards in place, there is often less than meets the eye.
The existence of a code does not guarantee that it will be observed or enforced.

Although there is a large and growing literature describing trends in private

governance, to date there have been few attempts to develop propositions that would
enable us both to explain the observed pattern of private regulation, and to predict
its likely trajectory. Notable exceptions are Vogel (2008) and Mattli and Woods
(2009a, 2009b), whose conceptualization of private governance as arising from the
interplay of demand and supply factors provides a very useful starting point for
further theorizing. Central to their thinking, and ours, is the interaction between
private and public governance. Developments in each realm have implications
for the other. Indeed, as Whytock (2010) convincingly demonstrates, it is often
impossible to disentangle the two.

Six Hypotheses
Based on our review of the extant literature and our ongoing research on numerous
supply chains, as well as our assessment of the evolving dynamic between public
and private governance, we propose six hypotheses about when and where private
governance is most likely to succeed. The first four hypotheses can be thought
of as predicting the domain in which we expect to see the most established and
effective forms of private governance. Hypotheses five and six deal more explicitly
with the relationship between public and private governance and are more forward
looking. Our primary objective in this chapter is the development of a coherent
set of hypotheses rather than theory testing per se. Nevertheless, for each of our
hypotheses, we provide not only the theoretical rationale but also offer illustrative
examples in support of their plausibility.

Hypothesis 1: The more economic leverage large lead f irms have over smaller
suppliers in their value chains, the greater is the potential impact and scope
of private governance.
The existence of lead-firm leverage magnifies the importance of private
governance to smaller firms in its chain, although the impact of this leverage
will depend on the specificity of the relationship (as outlined in Hypotheses 2–4
below) rather than the relative size of the actors per se. To a great extent, this
is a matter of market concentration: firms with large market shares, whether
marketers, retailers, or producers, usually have the option to source from many
smaller suppliers, each of which may have few options other than doing business
with the lead firm. As Fuchs and Kalfagianni (2010) observe in the case of private
governance in food retail, ‘the dominance of a few corporations fosters their ability
to limit the choices available to other actors, specifically suppliers and labor,
who desire entry’. Of course, it is possible that even a very large buyer might

have little leverage if it is dependent on supply from a small but unique supplier,
but this is less common. Given that they have a wider range of alternatives than
their suppliers, lead firms tend to have considerable power in their supply chains.
The same leverage that can be used to demand lower prices and better quality
from suppliers can also be used to press for better labor practices or greener
production methods. This leverage is not simply a function of the lead firm’s
market share. Influence over supplier behavior may be limited by the relative
transparency of practices, for instance. An implication of Auld et al.’s article on
technological innovations is that some supplier practices are easier to monitor than
others, and should be easier for lead firms to govern (Auld et al., 2010). Moreover,
the larger the supplier, the more options it, too, is likely to have (to sell to other
retailers or producers, for example), which limits the power a lead firm has in
its chain. As Locke has pointed out in the apparel sector, for example, suppliers
often have more options and lead firms less power than they might think. ‘For
most apparel suppliers, individual global brands constitute but a small fraction
of their total business. In this context, it is not at all clear that global buyers have
the ability/leverage (let alone credibility) to pressure these suppliers’ (Locke et
al., 2009: 12). It is no accident, therefore, that many of the most prominent cases
of private regulatory governance involve very large lead firms with more-or-less
captive suppliers. The success of the ‘classic’ forms of private governance in the
apparel industry—codes of conduct adopted by lead firms such as Levi Strauss,
Nike, and The Gap and imposed on their suppliers—depended on the power of
those lead firms in their global value chains.
More recently, we have seen the adoption of private governance by a broader
range of retailers. Walmart is perhaps the best publicized example. In the past
few years, Walmart has launched a Sustainability Consortium through which
it can use its considerable market power to demand certain environmental
improvements by its suppliers (GreenBiz, 2010). Global supermarket chains have
promoted new private standards for food quality and safety, including product
and process specifications with labor and environmental implications (Memodovic
and Sheperd, 2009). Many supermarkets have also established their own supply
chains in cut flowers, which has created an opening for labor groups to press for
better working conditions among suppliers (Dolan and Humphrey, 2004; Hughes,
2000; Reardon and Hopkins, 2006; Riisgaard, 2009; Riisgaard and Hammer,
2011). Powerful lead firms have also been important in pushing the adoption of
new industry standards promoted by NGOs. For example, the decision by Home
Depot and Lowes, the two largest home improvement retailers, to recognize
the standards of the Forest Stewardship Council in the mid-1990s, led its major
suppliers to adopt them as well (Bartley, 2010; Gereffi et al., 2001).

Hypothesis 2: Private governance is most likely for highly branded products

and f irms.
When demand for a product is less a function of observable utility than of
constructed brand identity, firms are more vulnerable to societal pressure. (Also, of
course, being a highly recognized brand makes a firm an easily identifiable target
for groups demanding regulation; a point to which we will return with our next
hypothesis.) It is for this reason that many of the first lead firms to promote private
governance regimes in their value chains were highly visible consumer brands such
as Nike and Starbucks, whose market niche depends more on marketing than on
the intrinsic qualities of their product. A comparison with other large lead firms,
less vulnerable to attack on their brand, is instructive. For example, ADM and
Cargill have enormous leverage in their agricultural chains, but because they
have almost no brand identity with consumers, they are less vulnerable to societal
pressure (Gereffi and Christian, 2010). Similarly, Flextronics—a very large supplier
in the electronics industry—shapes supplier standards in its chains, but it faces
little social pressure to drive private governance (Sturgeon and Lester, 2004).
Increasingly, firms who once competed solely on price and product have begun
to see themselves as vulnerable as well. Walmart, for example, historically used its
considerable power in its supply chains primarily to drive prices down, sometimes
to the detriment of workers and the environment. But in the last few years, even
Walmart has concluded that it needs to protect its reputation from social critiques
(Gereffi and Christian, 2009). Large firms in every sector are now taking steps
to reduce risks to their brand. McDonald’s, for example, faced with criticism
about damage to Brazilian rainforests from clear-cutting for feed grains and cattle
ranches, has compelled its suppliers to participate in a ‘Sustainable Cattle Working
Group’ (Downie, 2007; McDonald’s Corporation, 2009: 18).
Defensive considerations appear to have been the biggest factor in these cases,
but firms may also be pro-active with respect to their brand identity. So far, this
appears to be most common with smaller niche firms. For instance, the Body
Shop promotes itself as a socially responsible company, featuring its ‘Values and
Campaigns’ prominently on its webpage, and Patagonia’s ‘Footprint Chronicles’
portray a positive image in terms of environmental sustainability in the making
and sourcing of its products. Social labeling is a special case in which products are
differentiated by their impact on workers or the environment, but follows a very
similar logic. The increase in consumer demand for goods produced in socially
responsible ways has made this new form of branding possible, as illustrated by
the now-established market for ‘fair trade’ coffee, Forest Stewardship Council
certified lumber, and the like.

It is important to recognize how hypotheses 1 and 2 interact. In chains with

both powerful lead firm drivers and high brand vulnerability, we would expect,
and indeed see, the greatest advances in private governance. The success of the
classic forms of private governance in the apparel industry—codes of conduct
adopted by lead firms such as Levi Strauss, Nike, and The Gap and imposed on
their suppliers—depended on the market power of those lead firms in their global
value chains, as well as these lead firms’ vulnerability that resulted from being a
highly recognized brand.
It is also useful to distinguish between firm-specific standards and those that
are jointly adopted by several firms in the same sector in order to see how the
former might evolve into the latter. In the apparel sector, once a critical mass of
lead firms found it in their individual interests to adopt private codes, those firms
had a collective interest in convergence on common standards—in part to minimize
the compliance costs of suppliers who sold into more than one chain and in part
because common standards allowed greater monitoring efficiency. The logic of
this progression is very similar to that suggested by Büthe (2010a, 2010b) for the
rise of the International Electrotechnical Commission and by Green (2010) in her
discussion of the Greenhouse Gas Protocol, both instances in which industry-wide
standards became focal points for coordinating the shared interests of firms in
some common approach. Furthermore, once a common standard is established,
first movers have a strong stake in persuading other competitors to adopt the
standard, a dynamic that can also be observed in the apparel case.

Hypothesis 3: Effective private governance is most likely in the face of effective

societal pressure, which, in turn, depends on the relative ease of mobilizing
collective action.
Implicit in both Hypothesis 1 and Hypothesis 2 is the assumption that the ultimate
driver of private governance is some form of external social pressure. Social
pressure is necessary both in demanding new institutions of private governance—
codes of conduct, for example—and, equally importantly, for ensuring that such
regulations are actually observed (Vogel, 2010). Bartley’s analysis of differences in
the on-the-ground effectiveness of certification regimes for sustainably harvested
timber and factory work conditions in Indonesia suggests the importance of
sustained national and international pressure from civil society (Bartley, 2010).
Such pressure, however, is far from inevitable, depending as it does on collective
action, whether by individual citizens or organized groups such as NGOs and labor
unions. Even when there is agreement about the desirability of some collective
good, such as better labor conditions or environmental protection, to the extent

that the accomplishment of that goal requires the coordinated efforts of many and
the enjoyment of the good cannot be restricted to those who acted to procure it,
the temptation to free ride creates a major obstacle to mobilizing collective action
(Olson, 1965).
One determinant of successful collective action is the extent of prior
organization relevant to an issue. The existence of environmental organizations
and labor unions, for instance, significantly lowers the cost of collective action
for their members.7 When such organizations are present, we would expect to see
greater social pressure on those issues on which they focus. Starobin and Weinthal’s
discussion of kosher food standards demonstrate the way in which existing social
structures lower costs of collective action by reducing monitoring costs (Starobin
and Weinthal, 2010). A related point made by Auld et al. (2010) is that technology
may lower the costs of collective action.
A second factor in determining collective action might be called the inherent
dramatic potential of the issue. As Bartley (2010) discusses with respect to the rise
of private governance in Indonesia, public controversy regarding forest degradation
and workplace conditions in footwear and apparel factories was essential. Drama
may be related to the actual magnitude of a problem, but is far from identical to it.
Some issues—abuses of children or the death of large marine mammals—are more
emotive than others, and carry with them greater potential for both becoming an
issue (because they are newsworthy) and spurring individuals to action.
The pattern of successful activism for private governance, as well as its absence
when appropriate conditions are not met, appears to bear out our hypothesis. We
see most mobilization when there are opportunity structures that lower the cost
of cooperation and/or where the issue was successfully dramatized. The case of
dolphin-safe tuna fishing methods illustrates the point. The death of dolphins
at the hands of tuna fishermen became a cause célèbre in the late 1980s, in no
small part because dolphins are such appealing animals. The prior existence
of numerous environmental groups with memberships and communication
channels, poised to seize upon the issue, also made a significant difference.
Activism spawned by outrage over the practice has, over time, led to a ‘dolphin
safe’ labeling regime and to decisions by large food retailers (including Walmart)
to adopt the standard for their supply chains. Raising similar levels of awareness
among activists and consumers for less easily dramatized practices has proven
more difficult. Private governance has made only modest inroads in protecting
other less glamorous fish.8
The ‘anti-sweatshop’ movement related to collegiate apparel also demonstrates
the importance of drama in mobilizing social pressure. In this case, collective
action was necessary on two levels: to organize students at multiple campuses

and to coordinate a collective response by the universities. Well-publicized and

extreme cases of exploitation provided a rallying point for college students, who
were then able to pressure a consortium of universities to license only ‘sweatshop
free’ collegiate apparel (Mandle, 2000).
In the case of activist campaigns, it may not be necessary to actually mount an
attack if the threat is sufficiently credible. Regulation results from avoidance of
possible activist campaigns targeted at embarrassing disclosures of poor practices.
Many forms of private regulation are a form of risk management by skittish
executives. The actions taken by McDonald’s to address clear cutting of the
Amazon forests by suppliers in its chain, for example, looks like a case in which
the existence of environmental groups already actively working on deforestation,
as well as a latent group of people ready to mobilize, created a very credible threat
to McDonald’s corporate image.
Before turning to our next hypothesis, it is useful to consider a related problem
for collective action, that of failure in the market for information. The problem
is that those who would demand accountability by corporations, whether in their
role as consumers or as activists, cannot directly observe business practices. Such
information is costly to obtain, and because it is a collective good, it is likely to be
under-provided (Downs, 1957). Certification, as Starobin and Weinthal explore at
some depth, is intended to solve the problem by providing an inexpressive signal,
but the effectiveness of certification depends on the credibility of that signal. How,
then, to certify the certifiers? In their analysis of kosher-food certification, the
key is existing institutions. ‘The success of kosher at a global scale derives from its
continued reliance on the pre-existing social capital share among these tight-knit
communities and the active participation of a vigilant consumer base in ongoing
oversight’ (Starobin and Weinthal, 2010).

Hypothesis 4: Private governance is most likely to be adopted when commercial

interests align with social or environmental concerns.
It should not be surprising that the willingness of firms to adopt private regulatory
measures, whether by lead firms driving their suppliers or adoption by the suppliers
themselves, will depend in part on the cost of such measures. To the extent that
standards can be met without incurring significant costs, or better yet, when they
actually are cost-saving, they are much more likely to be adopted. Moreover, such
measures will, in the long run, be most sustainable if there is a ‘business model’
for them, because they establish or protect consumer demand for the brand, hedge
against risks of becoming a target of activism, or reduce production costs (Vogel,
2008).

There is some reason to believe that, for instance, improvements in

environmental practices—‘greening the value chain’ in the current parlance—are
more likely to be aligned with financial interests of firms than are upgrades in labor
conditions. To some extent this may be a function of differences between the cost
of compliance for environmental rather than labor provisions. Walmart’s recent
well-published efforts to replace lights in its stores with LED lighting illustrates
the point. These actions are good for the environment, but they are also, in the
long run, a cost-saving measure.
To summarize before turning to our last two hypotheses: pressure for private
governance should be greatest when there is a powerful lead firm in a stable
value chain, when that firm is highly branded and therefore vulnerable to shifts
in consumer preferences, when there is potential for mobilizing social pressure,
and when private governance is most consistent with commercial interests. These
propositions are consistent with Vogel’s assessment of the rise and potential for
‘civil regulation’, particularly his emphasis on the role of societal pressures that
create demand for it. And, like Vogel, we distinguish between the existence of
rules and their effectiveness. To a greater extent than Vogel, though, we emphasize
the implications of industrial structure for the supply of private governance, and
the factors that affect collective action on the demand side.
Notwithstanding the successes of private governance that we have been
describing, our four hypotheses also suggest the limits to what it can accomplish.
A great deal of global production does not meet one or more of our conditions.
Much production takes place in chains and networks with no clear drivers. For
every highly branded product vulnerable to consumer pressure, there are many
unbranded products. And there remain considerable obstacles to collective action
needed to mobilize and sustain social pressure on business. Moreover, when
private regulation is costly and does not fit a firm’s business model, firms are
quite capable of resisting. Even in the best of cases, as Locke et al. (2007) have
shown, the ability of suppliers to evade costly measures remains quite high (as is,
perhaps, the willingness of lead firms to appear to be doing more than they are).
So far, our hypotheses have not addressed directly the relationship between
public and private governance, although implicit throughout has been the
assumption of a deficit or vacuum of public governance. But the trajectory of private
governance cannot be addressed without simultaneously considering the trajectories
of public governance. We suggest, therefore, two final hypotheses about the future
direction of private governance that reflect more explicitly the interplay between
private and public governance. These two hypotheses are somewhat different in
character than the first four, in that they seek less to explain the current pattern
than to predict the way in which private and public governance might co-evolve
in the future.

Hypothesis 5: The more production becomes concentrated in the larger

emerging economies, the more we should expect public governance in these
countries to strengthen.
A recent World Bank study, Global Value Chains in a Postcrisis World, argues
that the global crisis of 2008-2009 has not reversed globalization, but rather
accelerated two long-term trends in the global economy: the consolidation of
global value chains at both country and firm levels, and the growing salience
of developing economies in the South as end markets for global production
(Cattaneo et al., 2010). The consolidation of production in supply chains opens
the door for a renewed emphasis on public governance. In an effort to reduce
transaction costs and spread risk, lead firms are promoting rationalization of
their global supply chains—with an emphasis on a smaller number of larger,
more capable suppliers—in a handful of strategically selected countries. This
can be seen in industries as diverse as apparel (Gereffi and Frederick, 2010),
automobiles (Sturgeon et al., 2009), and electronics (Sturgeon and Kawakami,
2010; Sturgeon and Lester, 2004). In addition, some lead firms are returning
to strategies of vertical integration, a reversal of the efficiency arguments that
fostered the outsourcing and specialization of global supply chains in previous
decades (Worthen et al., 2009).
As a result of these trends, production is increasingly consolidated a relatively
small number of countries, most notably the large emerging economies of China,
Brazil, and India. In the apparel industry, for example, China more than doubled
its share of global apparel exports from 15.2% to 33.2% between 1995 and 2008;
Turkey, Bangladesh, and India, the next three largest developing country apparel
exporters, slightly improved their collective global market share from 8.9% to 9.8%
between 2000 and 2008, while Mexico fell sharply from 4.4% of global apparel
exports in 2000 to 1.4% in 2008 (Gereffi and Frederick, 2010: 8). Similarly, India
has become a global leader in offshore services, with a peak 45% market share in
2008 (Gereffi and Fernandez-Stark, 2010: 20). Notwithstanding this growing
concentration of production among a number of large emerging economies,
most notably China and India, we also see continued outsourcing of production
from large emerging economies to other lower-cost countries, such as Vietnam,
Cambodia, and Bangladesh, as Chinese and Indian producers seek to climb the
value chain to higher value and more skill-intensive activities.
Recall that private governance emerged to fill the void of public governance
created by the diffusion of production across multiple governmental jurisdictions.
To the extent that we now see consolidation of production in larger suppliers

located in a handful of emerging economies, the ability of these governments to

exercise control over production practices in their jurisdiction could be enhanced.
Moreover, as China, India, Brazil, and other emerging economies grow, standards
of living are more likely to rise, and with them societal expectations about labor,
environment, health and safety standards (Inglehart, 1981, 2000). Unless actively
checked by the state, those expectations may take the form of political pressure
on the state to regulate such matters. Demand for greater public governance
may also come from firms. This dynamic is evident in apparel value chains, for
example, where Nike, The Gap, and other more socially conscious producers
have an incentive to support government regulations that force their non-branded
competitors to adopt similar practices in their supply chains.
There is growing evidence for a trend towards stronger public regulation in
the large emerging economies. Most prominent, perhaps, have been the actions of
the Chinese government, largely in response to growing pressure from domestic
groups. On the labor front, for example, growing dissatisfaction with labor practices
led in 2008 to passage of a new Chinese Contract Labor Law, which strengthened
a variety of worker rights and gave greater standing to Chinese labor unions.
By creating new contractual rights and a forum for presenting grievances, the
Chinese labor law has enabled further activism. According to The Economist, by
July 2010, more than 280,000 labor disputes had been handled by Chinese courts
(The Economist, 2010). And in environmental policy, China has made significant
strides in strengthening its policies and enforcement capacities.9
Similarly, Brazil has been moving in the direction of an increasingly mature
public regulatory regime for some time. On labor, the government has pushed for
increased formalization of work, improved its labor inspection capabilities, and
raised minimum wages, among other policies (de Andrade Baltar et al., 2010).
On the environment, as Hochstetler and Keck (2007) document, the rise of
environmental activism in Brazil has translated into stronger state policy.
This trend towards greater public governance capacity is not limited to
the large emerging economies. Bangladesh, which remains an extremely poor
country, has recently adopted stronger labor regulations for its apparel sector,
including a very large increase in the minimum wage, largely as a response to
pressures from workers groups (AFP, 2010). Whether the new regulations will
be observed is unclear, but notably, the changes were supported by many of the
largest apparel buyers, including Walmart, Tesco, H&M, Zara, Carrefour, The
Gap, Metro, J. C. Penney, Marks and Spencer, Kohl’s, Levi Strauss, and Tommy
Hilfiger, commitments that may give workers and their advocates a vehicle to
hold employers accountable ( Just-Style, 2010).

Hypothesis 6: Stronger public regulation in developing countries will reinforce

rather than replace private governance, and will promote multi-stakeholder
initiatives involving both public and private actors.
The rise of state governance does not imply the abandonment of private governance
for various reasons. First, for the foreseeable future, the global economy will
remain characterized by distributed production that spans national borders.
National governments, therefore, will continue to face difficulties in regulating
actors outside their jurisdictions. Second, states can use private governance to their
ends. By relying on the power of lead firms, countries can condition access to their
markets on lead-firm participation in monitoring their suppliers rather than rely
on direct state regulation. Third, states and international organizations may find
it expedient to reinforce certain types of private governance (see, in particular:
Vogel, 2005). States can help overcome information market failures by providing
information directly or by standardizing labeling practices, for example, as has
been the case with organic foods.
Given these considerations, rather than a simple return of the state, we
envision the emergence of multi-stakeholder governance in which public and
private modes of governance interact and reinforce each other. Synergies between
public and private governance are possible, not only at the national level but also
internationally. International organizations such as the ILO and the International
Finance Corporation are interested in promoting such ventures. For example, the
ILO’s Better Work program seeks to improve work conditions of textile workers
in export-processing zones in Cambodia, Haiti, Jordan, Lesotho, and Vietnam,
through a multi-stakeholder approach involving NGOs, labor groups, firms,
and national governments (Lukas et al., 2010). And the United Nations Global
Compact among firms, NGOs, and other entities in the United Nations system,
has helped to give impetus to corporate social responsibility (Ruggie, 2002).

Bringing the State Back In: The Evolving Pattern of Public and Private
Governance
Looking to the future, it is reasonable to expect some maturation of private
governance regimes. Notwithstanding the impressive momentum of the private
governance movement, however, there are significant limits to what we should
expect from codes of conduct, corporate self-regulation, social labeling, and
other such initiatives. Although there have been comprehensive efforts to extend
and evaluate private governance schemes (Locke et al., 2009, 2007; Locke
and Romis, 2007), there are also significant limits to what can be achieved
by any non-governmental regime. In the highly competitive global economic

environment, unless there is a sustainable competitive advantage associated with

socially responsible behavior, it will be hard to sustain meaningful corporate self-
regulation (Orsato, 2009). Most of the progress in this arena to date has come as
a response to (or in anticipation of) social pressure. But sustaining social pressure
poses a significant collective action problem for labor, environmental, and other
social activists.
In addition to the theoretical reasons for limited expectations, the empirical
record should also give pause to private governance enthusiasts. For example,
those who have looked more closely at the actual effectiveness of codes and other
forms of corporate social responsibility generally come away somewhat skeptical
(Locke et al., 2009, 2007). Codes adopted by corporations are generally quite
vague. Those promulgated by NGOs or international organizations are tougher
but rarely complied with (Kolk and van Tulder, 2005). Similarly, effective labeling
campaigns are rare and even the most successful have had limited impact to date.
Despite the use of Fair Trade coffee as an exemplar of such campaigns, world
market penetration of Fair Trade coffee remains very low (by one estimate just
1% in 2008 (Pay, 2009)) and the world’s largest roasters remain resistant to the
campaign (TransFair USA, 2005).
In our view, unless private governance is supplemented and reinforced by public
institutions of governance, it cannot provide adequate governance capacity for
the global economy. Differences of interest among advanced, developing, and
least-developed nations, as well as continued resistance by states to limitations
on their sovereignty, will likely continue to prevent stronger international rules
and enforcement capacity. Greater progress is likely to come from building
greater capacity in developing-country governments. As we have discussed, the
consolidation of production in the larger emerging economies and the maturation of
those societies create both opportunity and demand for greater public governance in
those countries. In the end, as Ruggie (2008) and others have argued, international
coordination may be less in the form of formal agreement than in an enlarged
version of ‘embedded liberalism’ in which international commerce takes place
among countries with comparable systems of national governance.
This shift back to public governance is to be welcomed for several reasons.
First, many corporate codes of conduct merely commit corporations and their
suppliers to adhere to local law. Obviously, having strong national laws becomes the
crucial determinant in the stringency of such CSR regimes. Second, only national
governments can enforce these laws. Since the monitoring and enforcement of
codes is costly to corporations, which have limited incentive to enforce them, and
NGOs have limited monitoring and no enforcement capacity, only governments
have sufficient clout to ensure that codes are followed. Third, corporations lack

incentives to include workers in the formulation and implementation of codes.

Only governments can ensure that workers are adequately represented. Fourth,
in more competitive industries, where producers have an incentive to avoid
compliance, governments are best positioned to ensure that all producers adhere
to common standards.
Moreover, it is not clear that we should want to substitute private governance for
public, even if we could do it. In addition to basic questions about the legitimacy
of governance systems controlled by institutions not accountable to the public,
private governance regimes are frequently driven by Northern interests, i.e.,
by corporations, non-profits, and consumers in the developed world. Büthe’s
account of the evolution of the International Electrotechnical Commission, for
example, demonstrates that ‘the material costs of participation clearly created a
bias in favor of commercially successful stakeholders from rich countries’ (Büthe,
2010b). Similarly, Fuchs and Kalfagianni note that, in the food sector, the power
and legitimacy of retailers as rule setters ‘results primarily from the dominant
ideational structures in developed countries and the political and economic
elites of developing countries’ (Fuchs and Kalfagianni, 2010). Although private
regulation may be an important element of economic governance, it cannot and
should not stand alone.
To a great extent, private governance is a second-best and partial solution to
the governance challenge posed by globalization. Because cooperation at the
international level has been so difficult, and because national governments in
developing countries were initially slow to adapt, the social pressures triggered
by globalization have focused more on private governance solutions than they
otherwise would. As globalization progresses, particularly as the larger developing
country economies mature, it is both likely and desirable that some significant
part of the private governance innovations be institutionalized within the national
governments of those countries. In the longer run, this would provide more
effective, stable, and representative governance for the global economy.

Notes
1. Our use of ‘private governance’ is essentially synonymous with ‘private regulation’
as Büthe (2010a, 2010b) defines it, but we draw on a broader governance literature
throughout this chapter.
2. Private governance may also serve functions other than regulation of externalities,
including facilitating the formation and efficient functioning of markets and redressing
the distributive consequences of market activities, but regulation has been the primary
purpose of most private governance. The taxonomy of facilitative, regulatory and
compensatory modes of market governance is addressed more fully in Gereffi and
Mayer (2006).

3. Cafaggi and Janczuk (2010) do not include self-regulation in their definition of private
regulation. We include it here on the grounds that corporations (or more precisely the
people who run them) can internalize norms of appropriate corporate behavior that
alter their behavior.
4. The phrase was first used by Peter Newell (Vogel, 2010). This line of argument is
developed more fully in Gereffi and Mayer (2006).
5. In the North American Free Trade Agreement (NAFTA) negotiations, public opposition
forced the Clinton Administration to add supplemental agreements on labor and
environment (Mayer, 1998), and many bi-lateral and regional trade agreements have
at least weak social clauses, but efforts to incorporate similar provisions at the global
level have not been successful.
6. See Starobin and Weinthal (2010) for a discussion of the credibility problem in
certification regimes.
7. In social movement theory, ‘opportunity structures’ are those institutions that facilitate
collective action by lowering the costs of cooperation (see Tarrow, 1998).
8. The Monterey Bay Aquarium has, for example, led an effort to persuade restaurants
and consumers to serve and buy only fish on its ‘green’ list and to shun those it lists as
‘red,’ categories that reflect its evaluation of the extent to which they are sustainably
harvested. Whole Foods, the large organic food retailer, has now pledged to stop selling
fish on the red list, but the major supermarkets have not adopted the standard and
consumer awareness remains quite low.
9. See, for example, You and Huang (2009). It is also true that the number of reports of
problems has increased, but it is much more likely that this increase reflects greater
willingness to report than it does any increase in actual abuses.

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10
t
Economic and Social Upgrading in Global
Value Chains and Industrial Clusters
Why Governance Matters

Gary Gereffi and Joonkoo Lee

Introduction
Upgrading through global value chains (GVCs), or moving to higher value
activities, has become important for economic development and job creation in the
global economy, where competition remains intense and production has become
fragmented and geographically dispersed (Cattaneo et al., 2013). Linking lead
firms in GVCs with small and medium suppliers in diverse local contexts is a
major business challenge in different types of industries, whether characterized
by producer-driven chains like automobiles, electronics, or shipbuilding for whom
finding and nurturing technically capable local suppliers is a requisite of global
supply chain management for manufacturers who play a leading role in determining
what and how to produce (Contreras et al., 2012; Sturgeon, 2003; Sturgeon et
al., 2008), or in buyer-driven chains like apparel and footwear, where low cost is
a major driver and retail buyers govern how the chains work (Bair and Gereffi
2001; Schmitz, 2004, 2006), or fresh produce and food products, where safety
and quality standards are of utmost concern for supermarkets and their customers
(Humphrey and Memedovic, 2006).
In order to maintain good supplier relationships in all of these settings, GVC
lead firms have developed more active strategies of corporate social responsibility
(CSR) (van Tulder, 2009). While CSR is a multifaceted notion, it generally
refers to ‘the responsibility of enterprises for their impacts on society’ (European
Commission, 2011). It encompasses a wide range of efforts through which firms
seek to integrate social, environmental, ethical, and human rights as well as
consumer concerns into their core business practices. The goal is to maximize
the benefit of shared value for a broad set of stakeholders, including owners,

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Economic and Social Upgrading: Why Governance Matters 277

shareholders, and the wider society, while reducing potential negative impacts of
corporate business practices to a minimum.
There is a growing concern, however, that economic upgrading—countries
and firms moving to higher value activities in GVCs with improved technology,
knowledge, and skills1 (Gereffi, 2005: 161)—is no longer sufficient for sustainable
CSR in global supply chains, given accumulating evidence and recent exposés
about child labor, vulnerable workers, and abysmal working conditions in many
export-oriented clusters located in developing countries (see Lund-Thomsen and
Lindgreen, 2014; Lund-Thomsen and Nadvi, 2010a). Improving both economic
and social conditions for workers and communities linked to GVCs is a vexing
development problem, and it has attracted considerable attention by researchers,
policy makers, and donor communities. Indeed, this was the central theme of
the Capturing the Gains research program 2 carried out over a three-year period
by a large group of development scholars: Under what conditions can economic
and social upgrading be combined in GVCs? Social upgrading is defined as the
process of improving the rights and entitlements of workers as social actors and
enhancing the quality of their employment (Barrientos et al., 2011).
In the GVC framework, a key determinant of upgrading outcomes is the
governance structure of global value chains. Governance structures are complex,
and they include international as well as national regulations, and both public,
private, and social forms of governance (Gereffi and Fernandez-Stark, 2011; Mayer
and Gereffi, 2010). GVC scholars tend to focus on how external conditions and
pressures, particularly by global buyers and through a variety of public and private
governance processes, facilitate the diffusion of global standards and affect economic
and social upgrading in developing countries (Gereffi et al., 2005); cluster scholars,
by contrast, focus more on the social and cultural bonds and inter-firm learning and
cluster institutions in local areas, which are considered critical for cluster upgrading
(Lund-Thomsen and Pillay, 2012; Schmitz, 1995; Schmitz and Nadvi, 1999).
Notwithstanding an ongoing dialog between the GVC and cluster literatures
(Bair and Gereffi, 2001; Chiarvesio et al., 2010; Humphrey and Schmitz, 2002;
Schmitz, 2004), there is still a gap in understanding how GVCs and industrial
clusters interact in terms of economic and social upgrading in developing countries.
This chapter will review these literatures to identify the most fruitful bases for
an integrated framework to better understand the governance conditions that
allow economic and social upgrading in GVCs and clusters to be combined in
a sustainable manner. This integrated framework has important implications
for CSR, which is under pressure to move from transitory, ethical consumer-
oriented public relations campaigns to ‘sustainable development’ concerns that
involve a wide range of actors across GVCs and clusters, including not only global
lead firms and cluster firms but also civil society actors like non-governmental

organizations (NGOs), national and local governments, labor unions, and

international organizations such as the International Labor Organization (ILO),
and multilateral donors like the World Bank and regional development banks
(Lund-Thomsen and Lindgreen, 2014).
This chapter aims to contribute to the existing industrial cluster and GVC
literature by highlighting the following points: (1) economic and social upgrading
in developing countries are affected by the interaction of both GVC and cluster
actors, and the role of social and public actors has grown as more attention is paid
to social upgrading; (2) the typologies of GVC and cluster governance need to
be expanded to take into account both vertical and horizontal relationships and
the complex interactions—tensions, conflicts, displacement, complementarity,
and synergy—between public, social, and private forms of governance; and (3)
depending on which types of governance and actors are involved, multiple paths
for social upgrading are plausible. Six key trajectories are discussed: market, CSR,
multi-stakeholder initiatives, labor, cluster, and governments. We focus more on
social upgrading and different pathways that can accommodate it because social
upgrading has lagged behind economic upgrading in most cases. Also, social
gains are not necessarily accompanied by economic gains (Barrientos et al., 2011).
The organization of our chapter is as follows. The second and third sections
review recent trends in the literature on industrial clusters and GVCs, respectively,
and the fourth section explores how these approaches relate to economic and social
upgrading. The fifth section proposes an integrated framework that shows how
the increasingly diverse governance structures of GVCs and clusters are linked to
different trajectories for social upgrading. The concluding section summarizes the
implications for CSR of our integrated framework for industrial clusters and GVCs.

Industrial Clusters and Globalization

An industrial cluster consists of firms and related organizations within well-
defined spatial boundaries engaging in similar sectorial activities (Porter, 1998;
Pyke et al., 1990). Originating in Alfred Marshall’s classical concept of industrial
districts, the notion was popularized by Italian small- and medium-sized
enterprises (SMEs) in industrial districts that were able to successfully compete
in global industries (Piore and Sabel, 1984). The success was attributed to several
key characteristics of industrial districts, i.e., geographic proximity and close-knit
social relations, which helped to reduce transaction costs and nurture trust, and
informal networks, which facilitate the flow of information, knowledge, and
skills. While clusters are somewhat broader in scope than industrial districts (De
Marchi and Grandinetti, 2014), the two are similar in that they are diversified
production structures confined to local geographic spaces.

Since the early 1990s, the role of industrial clusters and SMEs in economic
development has drawn a great deal of scholarly and policy interest in the context
of developing economies (Altenburg and Meyer-Stamer, 1999; Ketels and
Memedovic, 2008; Schmitz and Nadvi, 1999; see Lund-Thomsen and Lindgreen,
2014; Lund-Thomsen and Pillay, 2012 for reviews). The literature suggests that
clusters matter for economic upgrading because, first, the agglomeration of
productive activities generates economies of scale and scope external to individual
firms but internal to the cluster, and second, it facilitates local joint actions by cluster
firms and institutions to address common problems based on their interdependence.
These benefits, or so-called ‘collective efficiency’ (Schmitz, 1995), are critical
because SMEs in developing countries are typically too small in size and limited
in resources to compete in global industries. Geographic proximity and dense social
relations enable SMEs to develop a close network of suppliers and share a pool of
skilled workers, information, and knowledge as well as the infrastructure necessary
to collectively improve the efficiency of production activities (Sturgeon, 2003).
Furthermore, cluster actors engage in joint actions to address common problems
(Lund-Thomsen and Pillay, 2012). While cooperation among cluster firms is not
easy because they often compete intensely with each other, it can be rewarding when
they confront common upgrading challenges together. In organizing joint actions,
the role of local cluster actors (e.g., industry associations) and institutions (e.g.,
trade fairs) is highlighted (Doner and Schneider, 2000; Schmitz and Nadvi, 1999).
In short, the industrial cluster literature highlights the importance of cluster
governance operating horizontally between cluster firms and institutions in local
contexts, be it learning and innovation for economic upgrading or implementing
CSR measures for social upgrading. This horizontal governance can be contrasted
with the vertical governance in GVCs that links global lead firms to both first-tier
and local suppliers in international production networks (see below).
Cluster firms in developing economies often find themselves confronted by
conflicting demands from global buyers, which seek lower labor costs while
simultaneously requiring suppliers to comply with higher quality or social standards
that would incur additional expenditures (Barrientos and Smith, 2007; Lund-
Thomsen and Pillay, 2012). The fear of global buyers being ‘foot-loose’ can keep
cluster actors from making sustained investments in infrastructure or workforce
development, thereby hindering local joint action. Such anxiety has grown in the
face of global economic recessions (Ruwanpura and Wrigley, 2011).
Clusters will have divergent responses to these challenges, depending not only
on the characteristics and effectiveness of local institutions but also the form of
global-local linkage and the nature of GVC governance regimes they have (Khara
and Lund-Thomsen, 2012; Lund-Thomsen, and Nadvi, 2010a). Active upgrading
efforts in industrial clusters increase the demand for high-skilled and better-paid

workers as well as investment in advanced training and new skills such as product
development and design (Posthuma, 2008). Yet, such upgrading may increase
segmentation among cluster firms between mostly larger firms that have upgraded
and smaller ones that fell behind (Suresh, 2010). The growing disparities can
not only reduce the possibility of joint action and potential collective efficiency,
but also differentiate social upgrading outcomes among the firms depending on
their positions within the cluster as well as in GVCs and the end markets they are
linked to (Nadvi and Barrientos, 2004). In the next section, we discuss the key
recent trends in GVCs that affect global-local linkage and upgrading conditions
for industrial clusters in developing countries.

Global Value Chains and Upgrading

The GVC framework was created to better understand how value is created,
captured, sustained, and leveraged within all types of industries. The GVC
approach provides a holistic view of global industries from two vantage points:
governance and upgrading. The governance of GVCs focuses mainly on lead firms
and the way they organize their supply chains on a global scale, while upgrading
involves the strategies used by countries, regions, firms, and other economic
stakeholders to maintain or improve their positions in the global economy (Gereffi,
2005). Both concepts have evolved considerably in recent years.
Governance is a centerpiece of GVC analysis. It shows how corporate power
exercised by global lead firms actively shapes the distribution of profits and risks
in an industry, and how this alters the upgrading prospects of firms in developed
and developing economies that are included as well as excluded from the supply
chains that constitute each industry (Gereffi and Lee, 2012). The role played by
lead firms is highlighted in various typologies of GVC governance. The initial
distinction between producer-driven and buyer-driven commodity chains was
introduced to call attention to the rise of global buyers in the 1970s and 1980s.
Unlike producer-driven chains where large manufacturers control much of the
production process through direct ownership, retailers and brand marketers in
buyer-driven chains began to set up international sourcing networks to procure
consumer goods directly from offshore suppliers, mainly in East Asia (Gereffi,
1994, 1999).
However, the dichotomous categories of buyer-driven and producer-driven
chains were too broad to capture the full complexity of GVC governance structures
that were emerging in the world. To address this challenge, Gereffi et al. (2005)
elaborated a fivefold typology of GVC governance structures, which sought both
to describe and explain in a parsimonious way the main differences among various
types of production networks. Between the two extremes of classic markets and

hierarchies (i.e., vertical integration), three network forms of governance were

identified: modular, relational, and captive (Gereffi et al., 2005; Sturgeon, 2009).
In these network forms of GVC governance, the lead firm exercises varying degrees
of power through the coordination of suppliers without any direct ownership of
the firms.
Whereas the initial distinction between producer-driven and buyer-driven
commodity chains conceptualizes governance as ‘driving’ and the more
differentiated fivefold typology sees governance as ‘coordinating’, Ponte and
Sturgeon (2014) introduce a third dimension: governance as ‘normalizing’.
Following Gibbon et al. (2008), their view of normalizing draws from convention
theory, and means realigning a given practice to be compatible with a standard or
a norm. In all of these conceptions of GVC governance, lead firms play a crucial
role by defining the terms of supply chain membership, by incorporating or
excluding other actors, and by shaping how, where, when, and by whom value is
added. Thus, governing in global industries requires both buyer power (e.g., setting
product specifications, standards, logistics, price, etc.) as well as normative power
(e.g., shaping expectations of how businesses should be organized, how quality
should be assessed, or the guidelines to be followed with respect to worker rights
and factory conditions) (De Marchi et al., 2014).3
Several of the recent trends in GVCs have important implications for the role
of local suppliers and the likelihood of economic and social upgrading in industrial
clusters (Cattaneo et al., 2013; Gereffi, 2014): (1) organizational rationalization—
the lead firms in these chains seek a much smaller number of big, technologically
capable and strategically located suppliers (Gereffi, 2014: 15); (2) geographic
consolidation—the production hubs of these supply chains are concentrating in
large emerging economies, both because of their abundant supply of workers and
local firms with manufacturing expertise and also because of expanding domestic
markets (Gereffi and Sturgeon, 2013); and (3) a growth in South–South trade—
this has surged especially since the 2008–2009 global economic recession, which
dramatically slowed exports to advanced industrial markets.
Organizational rationalization tends to reinforce market dynamics and make it
much harder for SMEs in industrial clusters to play a significant role in economic
or social upgrading because they do not have the scale or scope to occupy the
upper rungs of global supply chains. Geographic consolidation and the growth
in South–South trade, on the other hand, both have the potential to support
several of the trajectories of social upgrading for small firms and industrial
clusters identified by Puppim de Oliveira (2008a). Geographic consolidation of
production in sizeable emerging economies like China, Indonesia, Brazil, and
South Africa has led to a revitalization of industrial policy (Gereffi and Sturgeon,
2013), which supports the role of public governance since national governments

now have greater bargaining power to pressure foreign companies for changes
to benefit local interests. When combined with multi-stakeholder initiatives,
including labor unions and worker activism, along with the reputational pressure
placed on GVC lead firms by CSR regimes, such as corporate codes of conduct
and monitoring, sustainable improvements in working conditions in developing
countries become far more likely.4
The shift in global demand from the North to the South, especially after the
2008–2009 recession, and the resultant growth of South–South trade have both
positive and negative consequences for industrial clusters in developing economies
(Kaplinsky et al., 2011). On the positive side, lower entry barriers and less stringent
product and process standards in emerging markets can facilitate the participation of
developing country firms in global supply chains. They can engage in higher value-
added activities, such as product development and design, which they would have
less chance to do in global chains. On the other hand, solely focusing on low-income
markets could lock suppliers into slimmer margins and cut-throat competition.
The inf luence of GVCs on the upgrading of local clusters in developing
countries has renewed an interest in institutions and their interaction with GVC
governance. Quality conventions and standards as a governing device of GVCs
play an increasing role in shaping upgrading opportunities for local clusters (Ponte
and Gibbon, 2005). However, most of those measures are only applied to a selected
group of firms inserted into GVCs and their regular employees, while a large
majority of SMEs and temporary and migrant workers, who are more vulnerable,
are frequently marginalized or excluded from these benefits of the measures
(Lund-Thomsen and Lindgreen, 2014; Neilson and Pritchard, 2010). This has led
to calls for a better understanding of place-based social and institutional contexts
and their interaction with diversified, co-existing local production systems as well
as with multiple forms of GVC governance (Palpacuer, 2008).

Economic and Social Upgrading in GVCs and Industrial Clusters

In order to more effectively link the GVC and cluster literatures to upgrading and
the role of CSR, the definition of upgrading should be expanded to encompass
both its economic and social dimensions. Economic upgrading is defined as a move
to higher-value activities in production, to improved technology, knowledge and
skills, and to increased benefits or profits deriving from participation in GVCs
(Gereffi, 2005: 171). Within the GVC framework, four types of upgrading have
been identified (Humphrey and Schmitz, 2002):
• product upgrading, or moving into more sophisticated product lines;
• process upgrading, which transforms inputs into outputs more efficiently by
reorganizing the production system or introducing superior technology;

• functional upgrading, which entails acquiring new functions (or

abandoning existing functions) to increase the overall skill content of
the activities; and
• chain upgrading, where firms move into new but often related industries.
Social upgrading is defined as the process of improvement in the rights and
entitlements of workers as social actors and the enhancement of the quality of
their employment (Barrientos et al., 2011). The concept is anchored in the ILO
Decent Work framework, which encompasses employment, standards and rights at
work, social protection, and social dialog (ILO, 1999). Social upgrading not only
includes access to better work, which might result from economic upgrading (for
example, a worker that has acquired skills in one job is able to move a better job
elsewhere in a GVC), but it also involves enhancing working conditions, protection
and rights, thereby improving the overall well-being of workers as well as their
dependents and communities.5
The social upgrading concept is related to, but more encompassing than,
CSR. In recent decades, CSR initiatives by global lead firms were promoted as
an effective way to improve labor conditions in GVCs that were predominantly
buyer-driven (Jenkins et al., 2002). Leveraging their purchasing power vis-à-vis
suppliers, global buyers tried to enforce codes of conduct within their supply chains
in the hope that by complying with the codes, suppliers would address social and
environmental concerns in their factories (Locke et al., 2009; van Tulder, 2009).
Despite some progress, it has become clear that the CSR compliance model alone
is woefully inadequate to fully address labor issues in global supply chains (Locke,
2013; Lund-Thomsen and Lindgreen, 2014), let alone encompassing broader
concerns about sustainable development.6 Also, while CSR compliance incurs
significant costs to suppliers, the model generally does not allow suppliers and
workers in developing countries to provide meaningful input although they are
supposed to benefit from it (De Neve, 2014; Dolan and Opondo, 2005).
Social upgrading expands the scope of CSR by focusing not only on efforts
by global companies to ameliorate labor conditions, but also other non-corporate
measures initiated by NGOs and governments. It is less concerned about whether
or not any specific CSR measure is effective, and shifts the question to ‘under
what conditions’ social upgrading is more likely to occur, and how that relates to
economic upgrading (Barrientos et al., 2011). It suggests that there may be several
distinct, yet similarly effective, ways to achieve improvement, as we discuss below.
The existing literature on clusters and GVCs often implicitly assumes that
economic upgrading will automatically translate into social upgrading through
better wages and working conditions (Knorringa and Pegler, 2007; Puppim
de Oliveira, 2008b). Case studies, however, provide a more variegated picture

(Bernhardt and Milberg, 2011; Nadvi and Barrientos, 2004; Posthuma and Nathan,
2010; Puppim de Oliveira, 2008a). Social upgrading can be affected by the type
of economic upgrading that is pursued. When upgrading relies mainly on the ‘low
road’ strategy of cutting labor costs, as illustrated in Indian leather clusters, the
jobs created are often low-paid, informal ones with undesirable working conditions
(Damodaran, 2010). Labor conditions are consistently found to be better among
permanent workers in the cluster context, while temporary and casual workers are
excluded from social upgrading and play a ‘buffering’ role for the factory to remain
cost competitive and flexible in terms of last minute changes in orders, resulting in
segmented social upgrading even within the same cluster (Suresh, 2010).
Gender bias has also been found to play an important role in industrial clusters
and GVCs. Women workers tend to be engaged in insecure and low-paid work,
often in temporary and seasonal employment arrangements (Barrientos and
Kritzinger, 2004; Mezzadri, 2014). As clusters upgrade to the activities requiring
a more highly skilled workforce, women and unskilled workers are often left out
from social upgrading and become increasingly marginalized (Carr and Chen,
2004). Indeed, the CSR measures of global buyers are often only effective within a
small pocket of ‘regulatory enclaves’ in their own supply chains (Posthuma, 2010),
and smaller firms and marginal workers remain highly vulnerable (Suresh, 2010).

An Integrated Framework to Link Industrial Clusters to Governance

and Upgrading
To understand how different forms of governance can affect economic and social
upgrading, Table 10.1 outlines two distinct forms of governance in industrial
clusters and GVCs. Horizontal (cluster) governance refers to locality-based
coordination of the economic and social relations between cluster firms as well as
institutions within and beyond the cluster. Vertical (GVC) governance operates along
the value chain, linking a series of buyers and suppliers in different countries, each
of which adds values toward the final product. GVC scholars generally focus on
the vertical, cross-national dimension of governance and cluster researchers tend
to stress the role of the horizontal, place-based form of governance. However, we
need to take into account both types of governance and their interaction in order
to fully understand the functioning of a global industry and its consequences to
economic and social upgrading in industrial clusters (Lund-Thomsen and Nadvi,
2010a; Neilson and Pritchard, 2009).
Governance also differs by the kinds of actors involved, leading to discrete
dimensions of private, public, and social governance. As more attention is paid to
social upgrading, the role of public and social governance and relevant actors has

grown. In clusters, private governance involves regulating economic transactions

among cluster firms and with their external partners. In the cluster context, private
governance is generally based on trust and mutual dependence among cluster
firms and managers built around repetitive transactions and close interpersonal
ties embedded in social relations within the cluster (Schmitz and Nadvi, 1999).
It aims to achieve collective efficiency in order for cluster firms to overcome the
constraints of their smallness and share resources with one another, often mediated
by institutions like cluster associations or chambers of commerce (Schmitz, 1995).
Joint action also could lower compliance costs for cluster firms while increasing
compliance through collective monitoring and sanctions (Lund-Thomsen and
Nadvi, 2010b).

Table 10.1 Types of Governance in Clusters and Global Value Chains by

Scope and Actor
Actor Scope
Horizontal (cluster) governance Vertical (GVC) governance
Private governance Collective efficiency (e.g., GVC lead-firm governance (e.g.,
industrial associations, global buyers’ voluntary codes of
cooperatives) conduct)
Social governance Local civil society pressure (e.g., Global civil society pressure on
workers, labor unions, NGOs lead firms and major suppliers
for civil society, workers, and (e.g., Fair Labor Association)
environmental rights; gender- and multi-stakeholder initiatives
equity advocates) (e.g., Ethical Trading Initiative)
Public governance Local, regional, and national International organizations
government regulations (e.g., (e.g., the ILO, WTO) and
labor laws and environmental international trade agreements
legislation) (e.g., NAFTA, AGOA)
Source: Authors.

In GVCs, private governance is driven by lead firms like global buyers, and
often through private standards that dictate what products are to be made by
whom and how (Lee et al., 2012). The key to GVC private governance lies in
maximizing economic efficiency in making products whose quantity and quality
are determined by lead firms in a decentralized production system. While private
governance mainly pertains to economic transactions between firms in both cluster
and GVC contexts, it can also involve social and environmental dimensions, such
as working conditions or child labor (Khara and Lund-Thomsen, 2012; Nathan
and Sarkar, 2011).
Public governance differs from private governance in that it is exercised by
public actors, which include governments at various levels within nation-states,

and supranational organizations. Public governance in the cluster context involves

formal rules and regulations set by governments at local, regional, and national
levels. They can facilitate or hinder social and economic upgrading, directly
and indirectly. National labor laws, for instance, directly impact the conditions
of workers in the cluster by regulating various aspects of labor conditions and
standards. Other public governance measures, such as industrial policy, trade,
and investment regulations or competition policy, do not intend to address labor
concerns but can indirectly affect social upgrading outcomes, while they directly
impact economic upgrading. Public governance in GVCs can also be exercised
through bilateral or multilateral trade agreements, such as the North American
Free Trade Agreement (NAFTA) and the African Growth and Opportunity
Act (AGOA). For example, social clauses are integrated into trade agreements
with an aim to apply core labor standards to international trade, which can have
a significant impact on smaller firms and their workers in local clusters (Polaski,
2003). Relative to private standards which are voluntary, public governance,
particularly government regulations, are mandatory and have a stronger legal basis.
However, it is often incomplete in design and plagued by ineffective enforcement
in many developing countries.
Finally, social governance is driven by civil society actors, such as NGOs and
labor unions. It provides a more explicit means of regulating workers’ rights and
labor conditions. These include codes of conducts initiated by NGOs, and multi-
stakeholder initiatives, such as the Ethical Trade Initiative (ETI) (Barrientos and
Smith, 2007). In both GVCs and clusters, social governance can entail various
forms of activism, such as boycotting, petitions, and protests (Selwyn, 2013). This
form of governance is rarely mandatory, and generally relies on the action of private
firms or governments that have direct power to enforce such codes or regulations.
Partly for this reason, social governance often takes a multi-stakeholder form in
which public, private, and civil society actors pursue their common goals through
joint action (Dolan and Opondo, 2005; O’Rourke, 2006). This form of joint
governance, as noted above, can be more effective than private, public, or social
governance alone in achieving sustainable improvements of working conditions
in developing countries (Locke, 2013; Mayer, 2014).
However, it may not always be feasible since collective action problems often
arise. Who should bear the costs of compliance with respect to labor standards
has been a contentious issue between global buyers and their suppliers, as well as
among buyers, as illustrated in the recent tragic building collapse involving scores
of Bangladesh garment factories (Greenhouse, 2013). The literature also points
to the potential for free-rider problems as some firms in industrial clusters may
not want to join or pay for collective actions, yet still benefit from them (Lund-

Thomsen and Pillay, 2012). Different interests and views among cluster firms can
affect collective action outcomes, as seen in the Jalandhar cluster where football
producers and the manufacturers of other sports equipment were divided by their
own interests and perspectives regarding the child labor issue (Lund-Thomsen
and Nadvi, 2010b).
Figure 10.1 illustrates the key actors in vertical and horizontal governance,
and how different types of governance operate along the vertical and horizontal
dimensions. As cluster firms are integrated to GVCs, they are positioned
simultaneously on both dimensions, subject to governance pressure for social
upgrading from vertical (GVC) or horizontal (cluster) dimensions.

Figure 10.1 The Confluence of Actors in GVC and Cluster Governance

Source: Authors.

GVC and cluster governance can be in conflict, creating various kinds of

tensions (Neilson and Pritchard, 2009). Child labor is an example. While many
international NGOs, trade unions, and global buyers focus on abolishing child
labor, their opposition to this practice confronts a very different viewpoint among
some local firms and workers. They consider child labor as a form of job training for
children who also can support their family’s livelihood through work, particularly
if formal schooling is not a viable option and other family members are not in a
situation to get employed (Ruwanpura and Roncolato, 2006).

The GVC (vertical) and cluster (horizontal) forms of governance, however,

can work together to generate upgrading outcomes. For example, confronting
allegations of labor rights abuses, Kenyan producers and industry organizations
set up a local program, called the Horticultural and Ethical Business Initiative
(HEBI), which formulated its own social codes and trained auditors. These efforts
were supported by vertical governance actors, notably the Ethical Trading Initiative
(ETI), whose members included major retail buyers like Tesco (Dolan and Opondo,
2005). In the Cambodian garment sector, the Cambodian government and the
Cambodian Garment Manufacturers Association (CGMA) worked with the ILO
and the US government to improve labor conditions in the sector, while at the same
time ensuring the access of the local producers in the US market (Polaski, 2006).
Such complementarity is found in other forms of vertical and horizontal
governance. Many corporate codes of conduct (vertical private governance) require
their suppliers to abide by national laws (horizontal public governance) (Kolk
and van Tulder, 2004). The Better Work Program (vertical public governance),
a partnership between the ILO and the International Financial Corporation,
premises its ‘conditionality’ on compliance with local labor standards (local public
governance).7 In Cambodia, ILO’s evaluation reports on firm compliance were
used by private firms in making their sourcing decisions (Polaski, 2006).
In Table 10.2, we identify six potential trajectories of social upgrading in
industrial clusters and GVCs, building upon and expanding Puppim de Oliveira’s
(2008a) distinctions. Each of these six paths is driven by the key actors and
mechanisms that distinguish it from the other paths. These paths are not mutually
exclusive and social upgrading is typically achieved through the engagement of
multiple actors (O’Rourke, 2006). Yet, we seek to highlight different governance
situations in which distinctive driving forces and leverage points play a critical
role in advancing labor conditions and workers’ rights.
1. Market-driven path: This refers to the situation in which market demand
for goods produced with high social standards forces cluster firms to
improve labor conditions in their factories or farms. The key driving
force for this type of upgrading is cluster firms building up their market
competiveness through product and process differentiation. Such efforts
can be facilitated by mutual learning of market preferences by cluster
firms, which may be supported by their national, regional, or global
buyers (Schmitz and Knorringa, 2000). The key challenge in pursuing
this trajectory is that market incentives do not always function well;
the market frequently fails to reward firms that provide good working
conditions and punish those who are exploitative to workers (Lund-
Thomsen and Lindgreen, 2014; Ruwanpura and Wrigley, 2011).
Furthermore, market incentives may be insufficient for cluster firms to

improve labor conditions if consumers they serve are unconcerned with

social causes. This is likely to be the case in domestic markets, which
many developing country clusters cater to (Kaplinsky and Farooki, 2010),
although it is still unclear to what extent Southern consumers adhere
less strongly to labor concerns relative to their Northern counterparts
(Knorringa, 2011; Nadvi, 2014). Alternatively, market conditions
may work to downgrade labor conditions. For example, the changing
international demand for footballs involved a major reorganization of
the Jalandhar football cluster in India, which had detrimental impacts
on its competitiveness and the ability of women to participate in the
workforce (Khara and Lund-Thomsen, 2012).
2. CSR-driven path: Cluster firms can improve the treatment of their
workers to comply with global buyers’ social codes of conduct (Lund-
Thomsen and Nadvi, 2010a, 2010b; Puppim de Oliveira, 2008a). This
path is driven by global buyers’ explicit commitment to CSR, and
corresponds to what is called the ‘compliance’ paradigm (Locke et al.,
2009). While leading global brands need to avoid reputational damage
that might be caused by the public disclosure of labor wrongdoings in
their supply chains, cluster firms linked to the chains have the incentive
to comply with the buyers’ codes of conduct if it ensures access to global
markets and differentiates them from other suppliers. Severe or repeated
instances of non-compliance or violations of the codes could jeopardize
such access (Lund-Thomsen and Nadvi, 2010b). Notwithstanding
some success in certain areas of social upgrading, such as forced labor
and health and safety, the compliance model confronts considerable
limitations in further advancing social upgrading (Locke, 2013). The
demands of the buyers often seem contradictory—e.g., they are forced
to squeeze costs while simultaneously complying with the buyers’ labor
codes that provide little or no support for compliance costs (Barrientos,
2013). Furthermore, many clusters in developing countries serve the
needs of domestic markets, or are linked to ‘less visible’ chains. In such
clusters, CSR pressures may be weak and not adequately address the
specific needs of the more disadvantaged actors (Neilson and Pritchard,
2010). Compliance pressures may come not only from vertical governance
but also from diverse sets of local actors, including national media and
local NGOs (Lund-Thomsen and Nadvi, 2010b), opening up other
possible upgrading paths.
3. Multi-stakeholder path: The key momentum of this path comes from
a multi-stakeholder initiative (MSI) to improve working conditions
in SMEs in developing countries in a specific sector (e.g., Clean

Cloth Campaign in apparel) or across sectors (e.g., SA8000, the ETI)

(Barrientos and Smith, 2007; O’Rourke, 2006). This model is distinctive
from the CSR-driven compliance model. First, it is based on the
cooperation of multiple (private and non-private) stakeholders, including
national governments, cluster institutions, and local firms. Diversity
and multivocality are the key to the model (Dolan and Opondo, 2005).
Second, it combines compliance-monitoring with capability-building so
that clusters can learn how to address labor issues on their own (Locke
et al., 2009). The key driver is a broad-based coalition of various types
of global and local actors—global lead brands, international and local
NGOs, trade unions, cluster firms and industry associations—that
cooperate in standard-setting, monitoring and sanctions, as well as
capability-building. While the MSI model uses standardized codes of
conduct and third-party accreditation (O’Rourke, 2006), local industries
and clusters can generate collective responses, such as their own base
codes and methodologies for audits, as Kenyan cut flower producers
did (Dolan and Opondo, 2005). While local cluster firms and industry
associations generally play a prominent role in ‘less visible’ chains, they
can significantly contribute to social upgrading even in a ‘highly visible’
chain by organizing collective actions and enhancing the effectiveness
and embeddedness of such activities in the local context (Lund-Thomsen
and Nadvi, 2010b). Several challenges, however, are cited for the MSI
model. For instance, stakeholders have different degrees of power, which
affects how individual initiatives unfold (Dolan and Opondo, 2005).
Also, the participation of Southern actors in MSI generally remains
constrained (O’Rourke, 2006). Finally, capability-building may be
limited to a few large cluster firms, not being spread across and beyond
the cluster, as more hazardous jobs shift further down the supply chains
or into the informal sectors (Lund-Thomsen and Lindgreen, 2014).
4. Labor-centered path: In some cases, the role of workers and labor unions
is at least as significant as that of global buyers in promoting upgrading.
Workers have increasingly been asserting their rights even in the places
like China, where labor unions have traditionally been less effective
(Gallagher, 2014). The advocates of this path criticize both CSR and
MSI models for regarding workers as a passive subject with little agency
(Carswell and De Neve, 2013; De Neve, 2014). Indeed, workers and
trade unions are often active change agents in improving their own
social conditions. Workers themselves can be the best monitors on the
ground (O’Rourke, 2006). And in a tightly scheduled production system,
workers’ power to disrupt the supply chains with strikes or threats to do

so can be critical in their bargaining with employers. This is also the

case for skilled workers where quality is emphasized in production, as
in the horticulture sectors in Brazil and sub-Saharan Africa (Barrientos
and Visser, 2012; Selwyn, 2013). One of the challenges for the labor-
driven path is that in a segmented workplace, upgrading for one group
of workers, for example, regular employees, often comes at the expense
of other groups of workers, like women, migrant, casual, or temporary
workers as well as those in the informal sectors. Employers can try to
make up for their concession to one group with gains from others and
use the latter as a buffer for their flexibility (Posthuma, 2010; Selwyn,
2013).
5. Cluster-driven path: This bottom-up path is initiated by cluster firms to
improve working conditions within the cluster. Similar to workers, cluster
actors tend to be portrayed as ‘standard-takers’ rather than ‘standard-
setters.’ However, implementing externally driven labor codes often
involves various kinds of tensions and conflicts with local institutions and
practices (Lund-Thomsen and Nadvi, 2010a). Cluster-based initiatives,
by contrast, take into account local contexts and perspectives. They also
consider potential economic gains for cluster firms, which are often not
the central concern in global buyers’ CSR initiatives. The key mechanism
of this model is cluster-based collective actions toward the improvement
of labor conditions, facilitated by trust and mutual dependence between
closely knit firms. Cluster institutions, such as business associations,
chambers of commerce and cooperatives, play a key role by providing
training and information on quality and social standards in external
markets (Doner and Schneider, 2000; Puppim de Oliveira, 2008b).
Even in the cases where cluster initiatives are prompted by pressures
from global lead firms or international NGOs, local governance at
the cluster level can play an important role by facilitating the effective
implementation of collective actions (Lund-Thomsen and Nadvi, 2010b).
These collective actions can lower compliance costs, promote the local
ownership of social codes, improve the effectiveness of compliance-
monitoring, and embed social goals in cluster norms and practices. The
potential weakness of the model, however, is that local initiatives can be
delayed or downscaled without sustained external pressures from global
brands and independent scrutiny from NGOs, as often the case in ‘less
visible’ chains (Lund-Thomsen and Nadvi, 2010b). For example, locally
controlled child labor monitoring in Jalandhar, Pakistan was found
weaker compared to a similar system in Sialkot, where well-known
global brands are present (Lund-Thomsen and Nadvi, 2010a).

6. Public-governance path: Public regulations are important because they

can make the most far-reaching impact on improving labor conditions
involving all the suppliers under their jurisdiction, regardless of whether
they are inside or out of a GVC or a cluster (Mayer and Gereffi, 2010).
The role of the state is particularly important in ‘enforcing the law’
(Puppim de Oliveira, 2008a), preventing defections by individual firms,
and resolving collective action problems among various stakeholders
(Amengual, 2010). State power comes from various levels, including
government ministries (Tewari and Pillai, 2005) and Supreme Courts
(Crow and Batz, 2006) at a national level to labor inspectors at a local
level (Coslovsky, 2014). The state’s actions are prompted by workers’
grievances and public discomfort with undesirable labor conditions as well
as transnational campaigns demanding a stricter enforcement of labor
laws and policing of labor abuses. Scholars have recently suggested that
the state can go beyond its traditional deterrence-based regulations to
take more innovative and experimental approaches by collaborating with
private and civil actors, providing incentives such as technical assistance,
supporting local capability-building initiatives, and closing off ‘low-road’
options8 (Locke, 2013). The question, however, is whether national or
local governments have the will to act to promote social upgrading in
the face of business pressures not to drive away foreign investors. It is
also unclear how much the state is capable of mediating the competing
interests of different stakeholders. Despite some evidence of a proactive
role of the state, it is unknown whether such models are applicable to a
wide range of countries, different levels of government, and all sectors.
Table 10.2 summarizes key drivers, mechanisms, and actors involved in
each of these social upgrading paths. In reality, social upgrading tends to be
achieved through the engagement of multiple actors with distinctive capabilities
and limitations (O’Rourke, 2006). For example, global standards are rarely
implemented in a cluster without interacting with local contexts, creating various
kinds of conflicts and tensions with existing local norms and institutions (Neilson
and Pritchard, 2009). Consequently, what actually emerges is a form of governance
‘co-produced’ by global and local manifestations of public, social and private actors
(Lund-Thomsen and Nadvi, 2010a).
When different types of governance coexist and interact, one possible outcome
is displacement—i.e., one type of governance can pre-empt, displace, or crowd
out other forms. Private governance like CSR, for instance, may replace public
governance and weaken other forms of governance, such as local labor institutions
or labor unions (Justice, 2005; O’Rourke, 2003). In criticizing fair and ethical
trade initiatives for their limited scope, Neilson and Pritchard (2010) argue that

the initiatives tend to ‘supplant traditional regulatory formations anchored in the

national state’ (p. 1847). Bartley (2005) not only finds some empirical support for
the displacement hypothesis in his study of the apparel sector, but also highlights
that the rise of private labor regulations was highly contested and, as a result, the
outcome is more complex than simple displacement.
Another possibility is that different forms of governance can complement
each other (Amengual, 2010; Polaski, 2006) and, in some cases, lead to a
‘hybrid system of regulation’ (Amengual, 2010), or ‘synergistic governance’
(Mayer, 2014). Private and public governance can have comparative strengths
and weaknesses that make them complementary (Rodríguez-Garavito, 2005).9
Private auditing, for example, did not replace but rather complemented state
regulations in the Dominican Republic’s export processing zones by freeing
up scarce government resources for monitoring and directing them to ‘less
visible’ firms in the informal sector (Amengual, 2010). Furthermore, scholars
are recently beginning to identify sets of conditions in GVCs and industrial
clusters under which economic and social upgrading in global supply chains can
come together and be mutually reinforcing (Barrientos et al., 2011; Mayer and
Gereffi, 2010; Puppim de Oliveira, 2008b).

Table 10.2 Key Drivers, Mechanisms, and Actors of Social Upgrading

Key drivers Main mechanisms Major actors
Market- Market competitiveness Market supply and Buyers; consumers;
driven path demand suppliers
CSR-driven Global buyer’s Compliance to buyers Global buyers
path reputation and codes; social audits
purchasing power
Multi- A broad-based coalition Multiple, standardized, International NGOs;
stakeholder for standard- social standards; global buyers; local
path setting, monitoring, capability-building actors
capability-building and cooperation
and sanctions
Labor- Workers’ grievances; Collective bargaining; Workers; labor unions
centered exercise of bargaining strikes; sabotages
path power
Cluster- External CSR pressure; Collective Cluster firms; industrial
centered collective efficiency standard-setting, associations;
path implementation, cooperatives
support
Public- Public pressure; Strong labor law; law National, regional, and
governance experimentalist enforcement local governments
path approach to improve
workers well-being
Source: Authors.

Although private governance alone may not bring about sustainable changes in
labor or environmental conditions, private voluntary standards appear to be most
effective when they are layered on and blended with public mandatory regulations
(Locke, 2013). Like corporate codes of conduct, CSR regimes may also have the
greatest chance to succeed if they are combined with favorable market conditions,
multi-stakeholder coalitions, government willingness and capacity to act, and
sustained pressure from organized workers and other civic activists.

Conclusion
Global value chains and industrial clusters have been changing in significant
ways in recent years. While the researchers who study these phenomena tend
to focus on different levels of analysis—global and local, respectively—there is
a need for more integrated frameworks that show how GVCs and clusters are
connected through a variety of globalization processes, such as those outlined
in this chapter. The linking of GVCs and clusters also offers some constructive
recommendations for CSR, since GVC lead firms are under pressure to move
beyond narrow cost-based models of competition in order to promote more
sustainable development. This requires a shift from inactive or reactive CSR
strategies, in which supply chain relationships are considered to be a liability
of supply chain management, to more active and proactive CSR strategies,
which highlight broader societal responsibilities related to local suppliers and
communities (van Tulder, 2009).
This chapter proposes several building blocks for a more integrated CSR
framework. First, economic and social upgrading should be linked in our GVC and
cluster models, and we need to pursue research agendas that seek to identify the
conditions under which economic and social upgrading can be mutually supportive
(Barrientos et al., 2011, 2012, and the Capturing the Gains project highlighted in
endnote 2). Second, we need to expand and integrate our typologies of GVC and
cluster governance, which tend to focus on vertical and horizontal relationships,
respectively, in order to take account of the different actors that are linked to
private, public, and social forms of governance. Third, while we have highlighted
six different pathways for social upgrading, we have suggested the importance of
‘synergistic governance’ as a way to advance more comprehensive and sustainable
forms of upgrading, both economically and socially. Synergistic governance is not
easy to achieve, but it offers a promising pathway to bringing together corporate,
governmental, and civil society actors in a global setting to achieve joint objectives,
where active collaboration among GVC and industrial cluster actors is required
in order to simultaneously achieve economic and social gains.

Future research should make more explicit under what conditions

complementary and synergistic forms of governance (or alliances among
different governance actors) are likely to emerge, and what enables joint forms of
governance to become institutionalized in the cluster (Amengual, 2010; Mayer
and Gereffi, 2010). We also need to know how different paths or trajectories
could accelerate social and economic upgrading in developing country clusters.
To answer these questions, research projects that more explicitly link the cluster
and GVC paradigms are needed.

Acknowledgments
The authors would like to thank Peter Lund-Thomsen and two anonymous
reviewers for valuable feedback on earlier versions of this chapter. Lee’s work
was supported by the research fund of Hanyang University (HY-2012-2430).
All errors of fact and interpretation are our responsibility.

Notes
1. There is an extensive discussion in the GVC literature that we review below about
different ways to measure economic upgrading that involves a focus on both higher
value products (e.g., product upgrading, often measured with unit values of exports)
and various ways of contributing to higher value-added production, including greater
levels of domestic content in exports.
2. Capturing the Gains was funded by the UK’s Department for International Development
(DFID) between 2010 and 2013, and the project’s publications, working papers, policy
briefs, and other activities are listed on the Capturing the Gains website, http://www.
capturingthegains.org/.
3. This normative dimension is particularly important in place-based industrial clusters,
where underlying phenomena like the communitarian ethos, a distinctive trait of the
Marshallian industrial districts, facilitate mutual trust between people and the transfer
and co-production of knowledge (De Marchi and Grandinetti, 2014).
4. This may be emerging not only in the Bangladesh garment industry, with its
unprecedented multi-stakeholder coalition of global retailers and brands that have
pressured both the Bangladesh government and local factory owners to change legislation
and business practices that have led to dangerous and degrading workplace conditions,
but also in manufacturing powerhouses like China, where synergistic governance also
forced changes by Foxconn and Apple in the electronics sector (Mayer, 2014).
5. Social upgrading can be subdivided into two components (Barrientos and Smith, 2007;
Elliott and Freeman, 2003): measurable standards, which include the type of employment
(regular or irregular), wage level, social protection, and working hours; and enabling
rights, or less quantifiable aspects of social upgrading, such as freedom of association,
the right to collective bargaining, non-discrimination, voice, and empowerment.

6. While not directly addressed in this chapter, we view environmental upgrading as an

important corollary of economic and social upgrading in the expanded GVC research
agenda we discuss here.
7. See more on the Better Work program at its website, http://betterwork.org/global.
8. In one such example in Brazil, labor inspectors not only enforced the labor law but
also actively engaged in devising local arrangements such as employers’ consortia and
prompted producers to make their work practices safer (Coslovsky, 2014: 210). Similarly,
labor inspectors in the Dominican Republic, in addition to their conventional role of law
enforcement, took a proactive approach to labor regulation and engaged in educating
workers about their rights and reconciling disputes between employers and workers
(Amengual, 2010).
9. As Coslovsky and Locke (2013) point out, such complementarity may not require
explicit communication and coordination between private and public governance actors
to make each other’s actors effective (see also Amengual, 2010).

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Policy Issues and Challenges

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Global Value Chain Analysis: A Primer 305

11
t
Global Value Chain Analysis
A Primer Second Edition1

Gary Gereffi and Karina Fernandez-Stark

I. Importance of Global Value Chains

The global economy is increasingly structured around global value chains (GVCs)
that account for a rising share of international trade, global gross domestic product,
and employment. The evolution of GVCs in diverse sectors, such as commodities,
apparel, electronics, tourism, and business service outsourcing, has significant
implications in terms of global trade, production and employment, and how
developing country firms, producers and workers integrate in the global economy.
GVCs link firms, workers, and consumers around the world and often provide a
stepping-stone for firms and workers in developing countries to participate in the
global economy. For many countries, especially low-income countries, the ability to
effectively insert into GVCs is a vital condition for development. This supposes an
ability to access GVCs, to compete successfully and to ‘capture the gains’ in terms
of national economic development, capability building and generating more and
better jobs to reduce unemployment and poverty. Thus, it is not only a matter of
whether to participate in the global economy, but how to do so gainfully.
The GVC framework allows one to understand how global industries are
organized by examining the structure and dynamics of different actors involved
in a given industry. In today’s globalized economy with very complex industry
interactions, the GVC methodology is a useful tool to trace the shifting patterns
of global production, link geographically dispersed activities and actors within
a single industry, and determine the roles they play in developed and developing
countries alike. The GVC framework focuses on the sequences of value added
within an industry, from conception to production and end use. It examines the
job descriptions, technologies, standards, regulations, products, processes, and
markets in specific industries and places, thus providing a holistic view of global
industries both from the top-down and the bottom-up.

The comprehensive nature of the framework allows policy makers to answer

questions regarding development issues that have not been addressed by previous
paradigms. Additionally, it provides a means to explain the changed global-local
dynamics that have emerged within the past 20 years (Gereffi and Korzeniewicz,
1994). As policy makers and researchers alike have come to understand the
pros and cons of the spread of globalization, the GVC framework has gained
importance in tack ling new industry realities such as the role of emerging
economies like China, India, and Brazil as new drivers of global value chains, the
importance of international product and process certifications as preconditions
of competitive success for export-oriented economies, the rise of demand-driven
workforce development initiatives as integral to dynamic economic upgrading,
and the proliferation of private regulations and standards (Lee, 2010; Mayer
and Gereffi, 2010), while also proving useful in the examination of social and
environmental development concerns. A range of institutions and governments
have commissioned GVC studies to understand global industries and to guide
the formulation of new programs and policies to promote economic development.

II. What Are Global Value Chains?

The value chain describes the full range of activities that firms and workers perform
to bring a product from its conception to end use and beyond. This includes
activities such as research and development (R&D), design, production, marketing,
distribution, and support to the final consumer. The activities that comprise a
value chain can be contained within a single firm or divided among different
firms (Global Value Chains Initiative, 2011). In the context of globalization, the
activities that constitute a value chain have generally been carried out in inter-
firm networks on a global scale. By focusing on the sequences of tangible and
intangible value-adding activities, from conception and production to end use,
GVC analysis provides a holistic view of global industries—both from the top-
down (for example, examining how lead firms ‘govern’ their global-scale affiliate
and supplier networks) and from the bottom-up (for example, asking how these
business decisions affect the trajectory of economic and social ‘upgrading’ or
‘downgrading’ in specific countries and regions).
There are six basic dimensions that GVC methodology explores that are divided
in global (top-down) and local (bottom-up) elements (see Figure 11.1). The first set
of dimensions refers to international elements, determined by the dynamics of the
industry at a global level. The second set of dimensions explains how individual
countries participate in GVCs. These six dimensions are: (1) an input-output
structure, which describes the process of transforming raw materials into final
products; (2) the geographic scope, which explains how the industry is globally

dispersed and in what countries the different GVC activities are carried out; and (3)
a governance structure, which explains how the value chain is controlled by firms.
The local dimensions are: (4) upgrading, which describes the dynamic movement
within the value chain by examining how producers shift between different stages
of the chain (Gereffi, 1999; Humphrey and Schmitz, 2000); (5) an institutional
context in which the industry value chain is embedded in local economic and social
elements (Gereffi, 1995); and (6) industry stakeholders, which describe how the
different local actors of the value chain interact to achieve industry upgrading.

Figure 11.1 Six Dimensions of GVC Analysis

Source: Fernandez-Stark et al., 2013.

The GVC approach analyzes the global economy from these two contrasting
vantage points: ‘top-down’ or global and ‘bottom-up’ or local. ‘Governance’ of
global value chains, a key concept of the top-down view, focuses mainly on lead
firms and the organization of international industries. Upgrading, the main
concept for the bottom-up perspective, focuses on the strategies used by countries,
regions, and other economic stakeholders to maintain or improve their positions
in the global economy.

III. Dimensions of GVC Analysis

Six dimensions constitute global value chain analysis. They are discussed below
from the researcher’s perspective.

1. Input–Output Structure
a. Identify the Main Activities/Segments in a Global Value Chain
A chain represents the entire input-output process that brings a product or service
from initial conception to the consumer’s hands. The main segments in the chain

vary by industry, but typically include: research and development, design, inputs,
production, distribution and marketing, and sales, and in some cases the recycling
of products after use. This input-output structure involves goods and services, as
well as a range of supporting industries. The input-output structure is typically
represented as a set of value chain boxes connected by arrows that show the f
lows of tangible and intangible goods and services, which are critical to mapping
the value added at different stages in the chain, and to layering in information
of particular interest to the researcher (e.g., jobs, wages, gender, and the firms
participating at diverse stages of the chain).
In order to understand the entire chain, it is crucial to study the evolution
of the industry, the trends that have shaped it, and its organization. Based on
general knowledge about the industry, segments of the chain can be identified
and differentiated by the value they add to the product or service. The researcher
further develops this chain using secondary data and interviews. The role of
the researcher is to link these pieces of information and create a united and
self-explanatory chain that includes the principal activities of the industry. The
segments of the chain illustrate how different value-adding processes contributed
to the product or service, and in turn, the differing returns netted for the chain
actors behind them.
Diagrams are extremely useful to illustrate the findings. For example, the fruit
and vegetables global value chain is comprised of the following segments:

Figure 11.2 Fruit and Vegetables Global Value Chain Segments

Source: Fernandez-Stark et al., 2011d.

b. Identify the Dynamics and Structure of Companies Under Each Segment of

the Value Chain
Each of the segments identified in the previous step has specific characteristics
and dynamics, such as particular sourcing practices or preferred suppliers. For
example, in the fruits and vegetable value chain, the inputs for the ‘processing’
segment may come from fruits that were intended for export but did not meet the
quality controls or it may come from production grown exclusively for processing.
It is important to identify the type of companies involved in the industry and their
key characteristics: global or domestic; state-owned or private; large, medium, or
small; etc. Identifying the firms that participate in the chain will help to understand
its governance structure (this dimension will be explained later).

Under the production, distribution and marketing segments, the main producers
of fresh produce and the final buyers in the chain are listed in Figure 11.3.

Figure 11.3 Fruit and Vegetables Global Value Chain

Source: Fernandez-Stark et al., 2011d.

2. Geographic Scope
The globalization of industries has been facilitated by improvement in
transportation and telecommunications infrastructure and driven by demand for
the most competitive inputs in each segment of the value chain. Today, supply
chains are globally dispersed and different activities are usually carried out in
different parts of the world. In the global economy, countries participate in
industries by leveraging their competitive advantages in assets. Usually developing
countries offer low labor costs and raw materials, while rich nations, with highly
educated talent, are behind R&D and product design. As a result, firms and
workers in widely separated locations affect one another more than they have in
the past (Global Value Chains Initiative, 2011).
Geographical analysis is first based on the analysis of global supply and
demand. This is done by analyzing the trade f lows at each stage of the value chain
using international trade statistics databases such as United Nations Comtrade

and information compiled using secondary sources of firm-level data, industry

publications and interviews with industry experts.
One of the main contributions of GVC analysis has been to map the shifts in
the geographic scope of global industries. However, GVCs operate at different
geographic scales (local, national, regional, and global) and they continue to evolve.
New evidence suggests there may be a trend toward a regionalization of GVCs in
response to a variety of factors, including the growing importance of large emerging
economies and regional trade agreements (Gereffi, 2014).

3. Governance
Governance analysis allows one to understand how a chain is controlled and
coordinated when certain actors in the chain have more power than others.
Gereffi (1994: 97) defined governance as ‘authority and power relationships that
determine how financial, material and human resources are allocated, and f low
within a chain’. Initially in the global commodity chains framework, governance
was described broadly in terms of ‘ buyer-driven’ or ‘producer-driven’ chains
(Gereffi, 1994). Analysis of buyer-driven chains highlights the powerful role of
large retailers, such as Walmart and Tesco, as well as highly successfully branded
merchandisers (e.g., Nike, Reebok), in dictating the way the chains operate by
requiring suppliers to meet certain standards and protocols, despite limited or no
production capabilities. In contrast, producer-driven chains are more vertically
integrated along all segments of the supply chain and leverage the technological
or scale advantages of integrated suppliers. Understanding governance and how
a value chain is controlled facilitates firm entry and development within global
industries. In practice, governance analysis requires identification of the lead
firms in the sector, their location, how they interact with their supply-base, and
their source of inf luence and power over suppliers (e.g. standards compliance).
A more elaborate typology of five governance structures has been identified
in the GVC literature: markets, modular, relational, captive, and hierarchy (see
Figure 11.4). These structures are measured and determined by three variables:
the complexity of the information shared between actors in the chain; how the
information for production can be codified; and the level of supplier competence
(Frederick and Gereffi, 2009; Gereffi et al., 2005).
Market: Market governance involves transactions that are relatively simple.
Information on product specifications is easily transmitted, and suppliers can
make products with minimal input from buyers. These arm’s-length exchanges
require little or no formal cooperation between actors and the cost of switching
to new partners is low for both producers and buyers. The central governance
mechanism is price rather than a powerful lead firm.

Modular: Modular governance occurs when complex transactions are relatively easy
to codify. Typically, suppliers in modular chains make products to a customer’s
specifications and take full responsibility for process technology using generic
machinery that spreads investments across a wide customer base. This keeps
switching costs low and limits transaction-specific investments, even though
buyer-supplier interactions can be very complex. Linkages (or relationships) are
more substantial than in simple markets because of the high volume of information
f lowing across the inter-firm link. Information technology and standards for
exchanging information are both key to the functioning of modular governance.
Relational: Relational governance occurs when buyers and sellers rely on complex
information that is not easily transmitted or learned. This results in frequent
interactions and knowledge sharing between parties. Such linkages require trust
and generate mutual reliance, which are regulated through reputation, social and
spatial proximity, family and ethnic ties, and the like. Despite mutual dependence,
lead firms still specify what is needed, and thus have the ability to exert some
level of control over suppliers. Producers in relational chains are more likely to
supply differentiated products based on quality, geographic origin, or other unique
characteristics. Relational linkages take time to build, so the costs and difficulties
required to switch to a new partner tend to be high.
Captive: In these chains, small suppliers are dependent on one or a few buyers
that often wield a great deal of power. Such networks feature a high degree of
monitoring and control by the lead firm. The power asymmetry in captive networks
forces suppliers to link to their buyer under conditions set by, and often specific
to, that particular buyer, leading to thick ties and high switching costs for both
parties. Since the core competence of the lead firms tends to be in areas outside
of production, helping their suppliers upgrade their production capabilities does
not encroach on this core competency, but benefits the lead firm by increasing the
efficiency of its supply chain. Ethical leadership is important to ensure suppliers
receive fair treatment and an equitable share of the market price.
Hierarchy: Hierarchical governance describes chains characterized by vertical
integration and managerial control within lead firms that develop and manufacture
products in-house. This usually occurs when product specifications cannot be
codified, products are complex, or highly competent suppliers cannot be found.
While less common than in the past, this sort of vertical integration remains an
important feature of the global economy.
The form of governance can change as an industry evolves and matures, and
governance patterns within an industry can vary from one stage or level of the
chain to another. In addition, recent research has shown that many GVCs are

characterized by multiple and interacting governance structures, and these affect

opportunities and challenges for economic and social upgrading (Dolan and
Humphrey, 2004; Gereffi et al., 2009).

Figure 11.4 Five Global Value Chain Governance Types

Source: Gereffi et al., 2005: 89.

4. Upgrading
Economic upgrading is defined as firms, countries, or regions move to higher-value
activities in GVCs in order to increase the benefits (e.g., security, profits, value-
added, capabilities) from participating in global production (Gereffi, 2005a: 171).
Diverse mixes of government policies, institutions, corporate strategies,
technologies, and worker skills are associated with upgrading success. Within
the GVC framework, Humphrey and Schmitz (2002) identified four types of
upgrading:
• process upgrading, which transforms inputs into outputs more efficiently by
reorganizing the production system or introducing superior technology;
• product upgrading, or moving into more sophisticated product lines;
• functional upgrading, which entails acquiring new functions (or
abandoning existing functions) to increase the overall skill content of
the activities; and

• chain or inter-sectoral upgrading, where firms move into new but often
related industries.
Furthermore, Fernandez-Stark et al. (2014) identified several additional types
of upgrading:
• entry in the value chain, where firms participate for the first time in
national, regional, or global value chains. This is the first and one of
the most challenging upgrading trajectories;
• backward linkages upgrading, where local firms (domestic or foreign)
in one industry begin to supply tradable inputs and/or services to
companies—usually multinational corporations (MNCs) that are located
in the country and are already inserted in a separate GVC; and
• end-market upgrading, which can include moving into more sophisticated
markets that require compliance with new, more rigorous standards or
into larger markets that call for production on a larger scale and price
accessibility.
Upgrading patterns differ by both industry and country based on the input-
output structure of the value chain and the institutional context of each country.
Certain industries require linear upgrading and countries must gain expertise in
one segment of the value chain before upgrading into the next segment, as shown
below for countries involved in the horticulture value chain (see Figure 11.5).

Figure 11.5 Upgrading Stages of Selected Countries in the Fruit and

Vegetables Value Chain

Source: Fernandez-Stark et al., 2011d.

The apparel industry is a classic case that has been used to illustrate different
upgrading and downgrading trajectories, since a large number of countries have
been significant apparel exporters from the 1970s until the present (Gereffi, 1999;
Gereffi and Frederick, 2010). Apparel suppliers in Torreon, Mexico initially
entered the blue jeans industry2 in the assembly stage of the value chain, but they
quickly developed expertise in providing trim and labels, and distinct washes and
finishes. By 2000, operations based in Torreon had also developed expertise in

distribution by shipping their product directly to the point of sale. Figure 11.6
illustrates the region’s upgrading trajectory into new higher value added segments
of the apparel value chain between 1993 and 2000.

Figure 11.6 US–Torreon Apparel Value Chain: Activities and Location

Source: Bair and Gereffi, 2001: 1894.

In 1993, only four US manufacturers—Farah, Sun Apparel, Wrangler, and Levi

Strauss and Co.—had a significant presence in Torreon. By 2000, the number of
export customers grew to more than two dozen. In the early 1990s, the assembly
plants on the Mexican side of the border received cut parts from US manufacturers or
brokers. These cut parts were sewn into garments and then re-exported to the United
States under the ‘maquila’ regime, which allowed tariff-free inputs to be sent from
the United States to Mexico as long as they were included in Mexican production
for re-export to the United States. Brand marketers and retailers ‘pulled’ Mexican
firms to increase their production volumes and the range of activities performed.
Upgrading thus occurred at the firm level in Torreon, in conjunction with
the increasing demands of US buyers for full-package production. However, the
full-package model did not guarantee long-term success. Blue jean exports from
Torreon slumped with the decline in US export demand after 2000, and apparel
employment in Torreon, which rose from 12,000 jobs in 1993 to an estimated
75,000 jobs in 2000, declined to 40,000 in 2004. Maintaining a role in the US
market in the face of stiff competition from China and other international suppliers
required Torreon’s blue jeans cluster to continue to upgrade beyond OEM to the
OBM and ODM3 stages of the value chain through the development of local
brands, regional marketing directly to US buyers, and the establishment of a local
design center in the region (Gereffi, 2005b).
The challenge of economic upgrading in GVCs is to identify the conditions
under which developing and developed countries and firms can ‘climb the value
chain’ from basic assembly activities using low-cost and unskilled labor to more

advanced forms of ‘full package’ supply and integrated manufacturing. However,

increasingly many of the highest value activities are located in pre- and post-
production manufacturing services, which challenge host countries to adopt
appropriate workforce development strategies to supply these services locally. As
seen in Figure 11.7, developed countries usually have a presence in high value added
activities, while developing countries concentrate in lower value added activities.

Figure 11.7 Smile Curve of High-Value Activities in Global Value Chains

Source: Authors based on Baldwin et al., 2014; Shih, n.d.

5. Local Institutional Context

The local institutional framework identifies how local, national and international
conditions and policies shape a country’s participation in each stage of the value
chain (Gereffi, 1995). GVCs are embedded within local economic, social, and
institutional dynamics. Insertion in GVCs depends significantly on these local
conditions. Economic conditions include the availability of key inputs: labor costs,
available infrastructure, and access to other resources such as finance; social context
governs the availability of labor and its skill level, such as female participation in
the labor force and access to education; and finally institutions include tax and
labor regulation, subsidies, and education and innovation policies that can promote
or hinder industry growth and development.
Because global value chains touch down in many different parts of the world,
the use of this framework allows one to carry out more systematic comparative
(cross-national and cross-regional) analysis to identify the impact of different
features of the institutional context on relevant economic and social outcomes.

6. Stakeholder Analysis
Analysis of the local dynamics in which a value chain is embedded requires
examination of the stakeholders involved. All the industry actors are mapped in
the value chain and their main role in the chain is explained. The most common
stakeholders in the value chain are: companies, industry associations, workers,
educational institutions, government agencies including export promotion and
investment attraction departments, ministries of foreign trade, economy and
education amongst others. In addition, it is important to consider how relations
between these actors are governed at the local level and which institutions are in
a position to drive change. Thus, this type of analysis is critical to identify the key
players in the value chain. It became especially relevant for industry upgrading
recommendations and the development of an industry growth strategy in which
each stakeholder plays a role to contribute in the development of the sector.

IV. Recent Applications of Global Value Chain Analysis

Originally GVC analysis was limited to research on competitiveness in
manufacturing industries. Nowadays, this analysis has expanded in several
directions to encompass emergent industries such as offshore services, inform
industrial policy, guide opportunities to insert small and medium enterprises
(SMEs) in the regional and global value chains, and embrace the links between
economic and social upgrading such as workforce development. This section
includes several examples of the increasingly diverse application of GVC analysis.4

1. SME Participation in Regional and Global Value Chains in Agro Industries5

The insertion of small- and medium-sized producers in national, regional, and
global high-value agriculture value chains has important consequences for poverty
alleviation in rural areas of developing countries due to their potential to increase
incomes and create employment (Weinberger and Lumpkin, 2007). However,
smallholders in developing countries face a series of constraints that often limit
their ability to participate competitively in these chains, and there has been
considerable concern that these producers are being excluded from important
growth opportunities.
The model outlined by the Duke Global Value Chain Center (Duke
GVCC) is intended to contribute to the international development community’s
understanding of how interventions can be more effectively designed to ensure
sustainable inclusion of these small- and medium-size producers in the sector.
Based on extensive primary and secondary research, with a focus on Inter-American
Development Bank Multilateral Investment Fund (IDB-MIF) initiatives in Latin

America, four major constraints were identified that limit the competitiveness
of small- and medium-sized producers and their sustainable entry into value
chains. A more detailed report (Fernandez-Stark et al., 2012) explains how project
interventions can improve competitiveness factors and ensure that producers’
inclusion in the value chain is based on a viable business case, rather than corporate
social responsibility. Figure 11.8 summarizes a ‘holistic’ model for inclusion that
every intervention should consider.

Figure 11.8 Model for Sustainable Smallholder Inclusion in High-Value

Agro-food Chains

Source: Fernandez-Stark et al., 2012.

Four-Pillars Model for Sustainable Inclusion of Small- and Medium-Sized

Producers in the Value Chain
Based on a global value chain analysis, Duke GVCC proposes a holistic model
that includes four key ‘pillars’ that address the major constraints that small- and
medium-sized producers face: (1) Access to market; (2) access to training; (3)
collaboration and cooperation building; and (4) access to finance.
This model is applicable to all levels of development. Beneficiaries with low
capability levels will need longer interventions and usually all four pillars must
be included in the intervention. Beneficiaries with higher levels of expertise may
need support only in two of these areas as they already have managed to overcome
constraints related to the other two areas. A summary of the four pillars model is
presented in Figure 11.9. This model was developed for agricultural value chain;

however it can be used in other industries since SMEs in different sectors face
similar challenges.

Figure 11.9 Four Pillars Model for SME Participation in GVCs

Source: Fernandez-Stark et al., 2012.

a. Access to Market
Access to market is broadly relevant to inclusion in value chains. In the context of
this model, it refers specifically to the presence of value chain linkages between
producers and buyers and how they can be established. Traditionally, spot markets
in agro-food sectors meant that no direct relationship was required between the
producer and the buyer, and the producer sold his/her harvest to the highest
bidder. However, the transformation of these sectors and the emphasis on food
safety has heightened the need for specific product characteristics, control over
production and traceability. Governance of the sector shifted from an arm’s length
interaction to a much closer relationship with the buyer dictating exactly what
product is produced and under what conditions (Lee et al., 2012). The first stage
of an intervention therefore requires establishing the link between producers
and buyers. This connection requires educating buyers or lead firms regarding
the business potential of sourcing from small producers, as well as facilitating
interactions until the small producers are in a position to sustainably manage the
relationship independently.

b. Access to Training
While many small producers may have worked in agriculture their entire lives,
specific training is often required to improve productivity and product quality,
introduce new technologies and plant varieties, and comply with food safety and

other certification requirements that govern entry into the national, regional and
international value chains. Agro-food value chains today are very sophisticated
and crops grown with traditional methods often do not meet the international
market requirements. Skills development in agro-food value chains, however,
has been generally underestimated in the past and the focus on training at the
commercial level has only recently emerged. Rural education levels in many
developing countries are low and technical assistance run by the government are
often understaffed and inadequately prepared to cater to the needs of increasingly
demanding buyers (Fernandez-Stark et al., 2011a).

c. Coordination and Collaboration Building

Coordination and collaboration building should occur at two levels. First,
horizontal coordination amongst producers facilitates the formation of producer
groups or associations, not only to reach needed economies of scale but also to
provide opportunities to add value to their products (upgrading). Second, vertical
coordination and collaboration involves interactions with other actors of the chain
to establish linkages, find synergies, and share information in order to improve
the performance of the chain as a whole. Sustainable inclusion in value chains for
small producers thus requires some form of organization in an ongoing way to
achieve economies of scale.

Horizontal Coordination
Small- and medium-sized producers need economies of scale in order to compete
in the marketplace. By definition, they lack the scale required to produce large
quantities of any crop. The transaction costs of dealing with individual producers
are high and it is not cost-effective or profitable for the buyer to work with producers
on an individual basis. Self-organization is a difficult task to achieve for small- and
medium-sized producers. Producers’ commitment remains critical to successful
engagement in a cooperative. Thus they often need the encouragement and support
of external actors to understand and appreciate the payoffs of collective action and
to establish themselves as formal, legal organizations.

Vertical Coordination
Coordination and collaboration amongst the chain stakeholders is crucial for
chain performance and upgrading (Gereffi et al., 2011a). Chain stakeholders
include all the actors that play a role in the development of the industry, including:
producers, input providers, intermediaries, buyers, industry associations, training
institutions, industry services providers, finance institutions, government agencies

focused on the industry development, export promoting agencies, and regulatory

institutions. Promoting dialogue and public and private alliances have been very
beneficial not only for resolving information asymmetries for smallholders, but
also for industry advancement at local and country levels. These alliances provide
insight into challenges and opportunities faced by the sector with the ultimate goal
of coordinating and defining a common industry development strategy.

d. Access to Finance
Entry into the value chain requires certain investments to cover infrastructure,
equipment and obtaining certifications. Small producers, however, often face
liquidity and credit constraints and have no access to formal finance channels,
both of which limit their potential to make the required investments. Credit
for small producers is constrained for a number of reasons, including high risk,
asymmetrical information, lack of guarantees, dispersion in rural areas, and
unfavorable economic policies. These credit constraints prevent small producers
from investing in necessary equipment, such as irrigation systems, greenhouses or
cold storage, to achieve productivity improvements, to develop unused portions of
their land or to upgrade into higher value products, thereby limiting their potential
to participate in coordinated value chains. Interventions can facilitate access to
finance through various models.

2. Globalizing Service Sectors in the World Economy: Offshore Services6

The global value chain methodology has proven quite useful in the analysis of
services. While the actual sequence of events from production to consumption of
a service is short, GVC analysis allows for the incorporation of all of the services
supplied within an industry, ranging from very simple tasks to highly sophisticated
interactions in one chain. The example of offshore services illustrates how the
GVC framework provides insight into a complex industry and serves as a guide
for potential upgrading trajectories.

Offshore Services
Structural changes in the world economy during the past decade facilitated the
global outsourcing of MNCs, thereby creating the offshore services industry, a
new and rapidly growing sector in developing countries (Gereffi and Fernandez-
Stark, 2010b: 1). Information technology (IT) now allows for quick and easy
information transfers. Companies looking to improve their efficiency, reduce
costs and increase flexibility often unbundle their corporate functions, such as

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Figure 11.10 The Offshore Services Global Value Chain

Source: Gereffi and Fernandez-Stark, 2010a.

Notes: a. Industry specific: Each industry has its own value chain. Within each of these chains, there are associated services that can be offshored. This diagram
captures the industries with the highest demand for offshore services.
b. This graphical depiction of industry-specific services does not imply value levels. Each industry may include ITO, BPO, and advanced activities.
322 Global Value Chains and Development

human resource management, customer support, accounting and finance, and

procurement operations, and ‘offshore’ these activities (Gospel and Sako, 2008;
Sako, 2006). This reduces the burden of support activities and allows firms to
focus on their core business. The increasing participation of developing countries
in this new industry highlights the growing capabilities of the global South, not
only at the production level but also in creating the knowledge behind products.
For example, Chile exports engineering services related to mining, India exports
pharmaceutical R&D to lead MNCs, and Uruguay exports sophisticated expertise
on cattle traceability.
Duke GVCC has analyzed skill level and work experience to create an offshore
services value chain, presented in Figure 11.10. The first categorization refers to
three broad types of offshore services that can be provided across all industries
(general business services): information-technology outsourcing (ITO), business-
process outsourcing (BPO), and knowledge-process outsourcing (KPO). The
second categorization refers to services that are industry specific. Firms providing
general business services tend to be process-oriented, while those in the vertical
chains must have industry-specific expertise and their services may have limited
applicability in other industries. For general business services, all activities are
related to supporting generic business functions, such as network management,
application integration, payroll, call centers, accounting, and human resources. In
addition, they include higher-value services, such as market intelligence, business
analytics, and legal services (referred to as KPO). Within these services, ITO
contains a full spectrum of low-, middle- and high-value activities of the offshore
services chain; BPO activities are in the low and middle segments, while KPO
activities are in the highest-value segment of the chain.
Within the GVC framework, adapting this scheme to our case evidence, five
principal upgrading trajectories can be identified from the 10 country case studies:
entry into the value chain; upgrading within the BPO segment; offering full package
services; the expansion of IT firms into KPO services; and the specialization of firms
in vertical industries. These five upgrading trajectories are presented in Figure 11.11.
These upgrading trajectories show different country strategies to move into
higher value-added activities. These trajectories are not mutually exclusive and
several of them can happen at the same time. The first trajectory shows how
countries have typically entered the value chain, in particular in Latin America,
where a common strategy has been to begin offering call center services. The
second trajectory refers to countries that are able to offer more sophisticated
business operations beyond call and contact centers. In trajectory three, providers
move into the provision of knowledge activities that require a considerable degree
of analysis. These analytical services demand a more qualified labor force. The
fourth upgrading trajectory usually occurs when large operations are set up in

a country and are able to offer a broad spectrum of services ranging from low
value-added to high value services. These operations offer a ‘one-stop shop’ for
clients and reduce overall transaction costs, but depend on the availability and cost-
competitiveness of a large number of workers to serve different stages of the chain.
Finally, the industrial specialization upgrading trajectory shows the movement
to niche activities for specific industries. This expertise reduces vulnerability to
competition from other low-cost locations.

Figure 11.11 Examples of Upgrading Trajectories in

the Offshore Services Value Chain
• Common way to enter the offshore
services value chain is through the
Entry into the Value Chain

establishment of call center operations.

• Opportunity for low-income countries to
enter into the knowledge economy.
Recent examples of countries entering the value
chain through call centers include El Salvador
(Dell, Sykes and Teleperformance), Nicaragua
(Sitel), Panama (HP and Caterpillar) and
Guatemala (Exxon Mobil, ACS and 24/7
Customer) (Gereffi, Castillo & Fernandez-
Stark, 2009).
• Companies expand their BPO services
Upgrading within the

within the segment.

• Improving and expanding call centers
BPO Segment

operations or specialization in certain areas.

South Africa has been an important destination
for BPO services currently employing around
87,000 people and growing at 33% per year.
South Africa is actively working in expanding
their BPO activities.

• Companies positioned in the ITO and

KPO segments may opt to provide a
more comprehensive range of activities
Broad-Spectrum Services
(Functional Upgrading)

and include BPO services.

• Acquisitions of smaller BPO firms and/
or creating a new business unit within the
company.
India has seen a number of firms in the IT
and consulting (KPO) segment expand to the
BPO sector. This is true for both big domestic
firms like Infosys, Wipro and also foreign
firms located in India like IBM and Accenture
among others.

Cont’d.

Cont’d.
• IT service firms include KPO activities in
(Functional Upgrading)
Upgrading from ITO

their portfolio.
to KPO functions

• IT companies engage customers to find

solutions for unsolved business problems.
For example, between 2002 and 2005, Indian
firms Infosys, Wipro, TCS and WNS,
amongst others, developed and launched
business consulting services practices.

• Companies offering some ITO, BPO

and KPO services for a wide range of
Industry Specialization

industries start specializating and focus

(Intersectoral)

on key industries to develop expertise.

The Czech Republic, which entered into
the offshore services industry through the
establishment of BPO shared services activities,
has quickly upgraded into R&D segments
of vertical industries, particularly in the
automotive, aerospace and IT areas.
Source: Fernandez-Stark et al., 2011c.

3. Workforce Development and Global Value Chains

Another illustration of new applications of the GVC analysis is the topic of workforce
development. The International Labor Organization used the GVC framework
to understand the dimensions of production and employment during their 2016
convention (ILO, 2016). Duke GVCC has been a pioneer introducing the skills
dimension into GVC analysis in the multi-industry study ‘Skills for Upgrading’.7
The participation of workers in GVCs can be viewed through the lens of
job categories defined by skill level in order to understand the conditions of the
workers in these chains and the challenges they face. Each skill level can be loosely
associated with stages of the value chain (Gereffi et al., 2011b).
Table 11.1 distinguishes five main types of jobs:8

a. Informal Small and Micro-Enterprise or Household-Based Work

Work in informal small and micro-enterprises or households can be found in many
GVCs in developing countries and particularly in agriculture and light industries
such as apparel. Production takes place in or around the household, with limited
separation between commercial productive activity (i.e., making saleable goods)
and unpaid reproductive activity (e.g., household subsistence and childcare).
Income derived from these activities is generally low, and production involves
both paid and unpaid family labor, often including child labor. Education levels
vary, but often are very low. Long working hours or health and safety conditions

can be precarious. In addition, fragmentation of the labor force across a large

number of small firms weakens the potential for any collective activity (Bamber
and Fernandez-Stark, 2013).

Table 11.1 Types of Work in Global Value Chains

Job Category Examples of Education Level Examples
Conditions of Work
Informal SME or May or may not be Low; often less than Small producers in
household work compensated; primary education agricultural supply
precarious chains
conditions;
unregulated work
hours
Low skilled labor- Formal; job insecurity, Low; often primary Workers on apparel or
intensive work low wages, weak education or less electronic assembly
organization due to lines
subcontracting
Moderate skilled Formal; increased job Completed Procurement and
work security, potentially secondary logistics handling
poor working education jobs in apparel and
hours automobile chains
High skilled Formal; high job Post-secondary Specialized component
technology- security, higher technical production and
intensive work paid work, education assembly in
working hours and aerospace and
work-life balance medical devices
challenges chains
Knowledge-intensive Formal; potentially Completed university Accounting,
work freelance, higher education, engineering and
paid work, including design jobs
working hours and advanced degrees
work-life balance
challenges
Source: Gereffi et al., 2016.

b. Low-Skilled Labor-Intensive Work

Labor-intensive production uses waged labor in a formal setting. It involves a
relationship between an employer (who may be the producer or an agent) and a
worker, based on a wage. This relationship may be temporary or permanent based
on a work contract. In this type of work, it is not uncommon for a core workforce
to be on permanent contracts, complemented by temporary workers (often women
and migrants) who are hired according to fluctuations in demand (Barrientos et
al., 2011; Lee and Gereffi, 2015). The engagement of temporary workers through
sub-contracting arrangements in part fragments this group of workers, making

organization of labor difficult (Barrientos, 2013). Workers engaged in these stages

of value chains typically have up to six years of education. Access to low-cost labor
for labor-intensive production was one of the primary drivers of early offshoring,
and accounts for a very large share of global employment in value chains.

c. Moderate-Skilled Work
Moderate-skilled work is associated with production that requires specific technical
knowledge, such as machine operators and pattern makers, often in capital- and
technology-intensive supply chains, such as automobiles and electronics. Work is
typically formal in nature, and these workers usually have completed secondary
education. Depending on skills supply in the specific labor market, these workers
may hold permanent contracts due to investment that must be made by the firm
in training on specific equipment required to perform core operations. A skills
shortage can lead to long working hours. Unionization and other collective action
are dependent on the local institutional context.

d. High-Skilled Technology-Intensive Work

The offshoring of high-skilled, technology-intensive work emerged in the 1980s
and 1990s. Lead firms in capital- and technology-intensive sectors, such as
automobiles and electronics, set up international production networks not only to
assemble their finished goods, but also to develop a supply-base for key intermediate
items and sub-assemblies. Due to the capital- and technology-intensive nature
of this work, it accounts for a smaller share of employment in GVCs. At the
uppermost tiers of these production networks, the suppliers tend to concentrate
‘good’ jobs in relatively few locations. Skill scarcity can contribute to improved
wages and employment terms, but may also involve long working hours and poor
work-life balance. Workers in these activities generally have completed at least
post-secondary technical education.

e. Knowledge-Intensive Work
Knowledge-intensive work opportunities have been created by a new wave of
offshoring in services (Gereffi and Fernandez-Stark, 2010). Knowledge-intensive
service jobs include advanced business services, such as finance, accounting,
software, medical services and engineering, and are increasingly seen as an
opportunity for developing economies to attain both economic and social benefits,
with technological learning, knowledge spillovers and higher income. Workers in
this category may choose freelance work over permanent contracts to provide them
with flexibility, but with lower levels of social protection. On average, the size of
employment in this work category is relatively small considering the requirements

for high skills and advanced degrees. Skills surplus in this category in developing
countries can lead to loss of motivation at work and ‘brain drain’ (OECD, 2013).
Figure 11.12 shows graphically how these five types of work and skill levels
are distributed across different GVCs.

Figure 11.12 Workforce Composition Across Different GVCs

Source: Adapted from Barrientos et al., 2011: 328.

The composition of a country’s workforce in GVCs changes as it undergoes

economic upgrading. Two dimensions of economic upgrading can be highlighted:
traditional development paradigms that stress ‘structural transformation’ from
primary projects to manufacturing and service jobs in the economy (shifting from
left to right on the figure); and the new ‘GVC paradigm’ of upgrading to higher
value activities within any specific industry (moving from the bottom to top of
each column) (Gereffi et al., 2011; Taglioni and Winkler, 2016).
In the past five years, Duke GVCC has been working to understand workforce
development issues using the GVC methodology. This undertaking incorporated a
multi-industry and multi-country analysis of upgrading trajectories and workforce
initiatives that helped to drive these shifts. The sectors and countries selected
in a pioneer study conducted by Duke GVCC were: (1) fruit and vegetables
(Chile, Kenya, Morocco, Jordan, and Honduras); (2) apparel (Turkey, Sri Lanka,
Bangladesh, Nicaragua, and Lesotho); (3) offshore services (India, the Philippines,

Chile, and Central American countries); and (4) tourism (Costa Rica, Vietnam,
and Jordan) (Gereffi et al., 2011b).
In each segment of these value chains, Duke GVCC found that workers
required specific skills that frequently are regulated by global rather than local
actors. As an illustration, Figure 11.13 below summarizes workforce development
implications in the offshore services value chain. Developing countries in offshore
services are engaging in market-driven development—acquiring capabilities to
upgrade services (providing better services, expanding the number of services,
or/and offering higher value-added services)—through significant investments
in workforce training and managerial capabilities, provided initially by private
offshore service providers but now increasingly supported by an expanded range
of public, private, and multi-sector initiatives. Far from a race to the bottom,
involvement in the offshore services industry has provided developing country
workers, firms, and governments with an attractive opportunity to build the
skill-based competencies required to meet the demands of global service markets.

Figure 11.13 Examples of Workforce Development Initiatives in the

Offshore Services Value Chain
• Call centers hire people with high school
diplomas or bachelor’s degrees.
• Further skills training is provided by the
company.
Entry into the
Value Chain

In Guatemala, inter-institutional alliances were

created to promote call center and BPO skills
training. Intecap, a technical training institution
funded through a 1% levy on salaries, has been
central to these initiatives (ECLAC, 2009).
Type of skills Institutions involved
preparation • Private sector
• Short training • Government

• Skills development is carried out by the

private sector, either through in-house or
Upgrading within the BPO Segment

contracted training programs.

• Educational institutions and governments
(Functional Upgrading)

help to develop course content and provide

scholarships.
In South Africa, the government created the
BPO Support Program to generate more jobs.
The program includes training for 35,000 direct
jobs and 4,000 in middle management.
Type of skills Institutions involved
preparation • Private sector
• Short Training • Government
• Formal education • Tertiary education
(degree required)
Cont’d.

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Global Value Chain Analysis: A Primer 329
Contd.
• Expansive hiring process targets candidates
with high school diploma and/or colleges
graduates to work in this industry.
• New hires must f irst complete BPO training
programs to guarantee quality services. This
(Functional Expansion)

refers to the same training offered in the

Full-Package Services

‘Upgrading within the BPO segment.’

In the early 2000s in India, there was a
significant push into the BPO segment by
ITO and KPO firms. Recruiting was the
central aspect to this expansion, and firms
focused particularly on hiring women from
middle class background.
Type of skills Institutions involved
preparation • Private sector
• Short training • Government
• Formal education
(degree required)
• Personnel with higher education quali
fications recruited. Typically MBA gradu
Upgrading from ITO to KPO
Functions (Chain Upgrading)

ates and workers with business experience.

These workers must have sharp analytical
skills.
Legal Process Outsourcing requires qualified
lawyers. By 2015, LPO will employee 17,000
professionals. These lawyers undergo similar
training as in the US.
Type of skills Institutions involved
preparation • Tertiary educational
• Formal education institutions
(degree required)
• Companies hire area experts to sustain their
competitive advantage in specific areas.
• For example, a BPO company providing
medical trainscrption services must hire
nurses and doctors to ensure accurate
service provision.
Vertical Specialization

In the Czech Republic, the government has

(Chain Upgrading)

been incentivizing advanced degress suchs as

Masters and PhD degrees. Masters students
accounted for 40% of the university student
population. Today there are more than 73,000
technical university students engaged in
R&D in different areas.
Type of skills Institutions involved
preparation • Tertiary educational
• Formal education institutions
(degree required)
• Usually MA and
PhD degrees Cont’d.

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330 Global Value Chains and Development
Contd.
• Companies undertake process improve
ments to upgrade their global capabilities.
For example, Siemens has specific strategies
for organizational training on CMMI (one
of the most popular process improvement
Process Upgrading

certification in this industry). The strategy

consists in defining the job skills necessary,
assess who need the training, train workers
with skill gaps, record progress and monitor
new skill gaps.
Type of skills Institutions involved
preparation • Private sector
• Internal training • Certif ication
institutes (on-site or
online)
Source: Fernandez-Stark et al., 2011d.

4. Assisting Governments to Design Industrial Policies

Global value chain analysis has proven to be an effective tool to advise country
governments on economic development and specific policies for industry
upgrading regarding productive capacity, infrastructure and services, business
environment, trade and investment policies, and industry institutionalization.
This methodology is widely used by nations in all regions of the globe to identify
the various local factors that affected the capacity of developing countries to meet
GVC requirements (Bamber et al., 2013).
Duke GVCC has conducted a number of GVC studies commissioned by
country governments in all major regions of the world. For example, the Costa
Rica government commissioned a GVC study with the objective to provide a set
of recommendations to the country to enhance the participation and upgrading
in selected industries: medical devices (Bamber and Gereffi, 2013b), electronics
(Frederick and Gereffi, 2013), aerospace (Bamber and Gereffi, 2013a) and offshore
services (Fernandez-Stark et al., 2013).9 To that end, the GVC framework is used to
understand the changing dynamics of these industries at a global level, to identify
Costa Rica’s position in these chains, and to highlight potential competitiveness
opportunities.
Understanding how GVCs operate is essential for a country such as Costa Rica,
which relies significantly on export-oriented foreign direct investment (FDI) for
economic growth. The evolution of these GVCs has significant implications in
terms of global trade, production and employment, and how developing countries
integrate into the global economy. By gaining access to developed country markets,
participation in GVCs offers emerging economies an opportunity to add value

to their local industries. Insertion and sustained participation in GVCs can

be paramount for economic growth, particularly in developing nations, due to
accompanying job creation potential, inflow of foreign currency, contributions to
poverty reduction, and more recently, access to the global knowledge economy.
Understanding these chains is critical for attracting foreign investment and also
supporting the competitive growth of local firms. These firms must compete
with a growing number of foreign firms not only for the local market, but also
for international clients and thus are forced to improve the efficiency and quality
of their operations. Below we present a summary of two industries analyzed in
the Costa Rica study: medical devices and offshore services.

a. Costa Rica and the Medical Devices Global Value Chain10

As part of Costa Rica’s economic diversification efforts, the medical devices
cluster is arguably the most successful industry that has been developed in the
country under this FDI-driven, high-tech export strategy. The Costa Rican
medical devices industry dates to 1985, when the first device company established
operations in the country. By 2014, exports had reached US$1.4 billion.
Accounting for 12% of the country’s total exports, medical devices became the
largest export industry in the country (UN Comtrade, 2015). In 2015, more than
50 firms were participating in the medical device supply chain in Costa Rica, with
an additional 16 companies providing packaging and support services. Over half
(60%) of these firms were from the United States and less than 30% were Costa
Rican. Companies in the sector are concentrated in the production segments of
the value chain, with 70% of them manufacturing components or assembling
final goods (Bamber and Gereffi, 2013b).
The growth of the medical devices sector created approximately 17,500 jobs
in manufacturing between 2000 and 2015, with approximately 2,000 jobs being
added each year since 2012. This job creation has provided opportunities for both
men and women; 45.6% of the workforce is male and 54.4% female (CINDE,
2012b). The medical devices industry relies on a highly skilled workforce. By
2012, 10%–20% of the workforce was comprised of engineers and 10%–15%
technicians. The remaining 60% –80% of direct production workers initially
drew from the unskilled labor pool that had served the apparel sector (Bamber
and Gereffi, 2013b).
Costa Rica’s export performance in medical devices between 1998 and 2011
shows a very steady and significant growth in the overall quantity of exports
from just under US$400 million in 2002 to nearly $1.2 billion in 2011 (Figure
11.14). In terms of upgrading dynamics, the country has undertaken functional

upgrading and developed backward linkages. However, the most intriguing story is
about product upgrading, shifting the composition of Costa Rica’s medical device
exports in terms of their technological content. In 2002, about 90% of Costa
Rica’s medical device exports were in the low-tech disposables category, but by
2011, the other three higher tech medical device categories accounted for more
than half of the country’s exports. Its main product segments vary considerably
in technological complexity:
• Disposables: single use-products, such as bandages, catheters, and surgical
gloves, which are cost-driven.
• Medical Instruments: multi-use products like forceps and surgical scissors
that are sterilized between uses with different patients.
• Therapeutic Devices: highly diverse products that may be implanted in
the human body (e.g., orthopedic implants, pacemakers, hearing aids,
etc.), which are subject to very high levels of international health and
safety regulation and quality standards.
• Capital Equipment: large, long-term investments for complex, single-
purchase machines that can be used repeatedly over the years, such as
magnetic resonance imaging (MRI) equipment.

Figure 11.14 Costa Rica Medical Exports by Product Category, 1998–2011

Source: Bamber and Gereffi, 2013.

As the technological content of exports evolved, the MNCs that have established
operations in the country have also changed. Table 11.2 disaggregates the firms that

entered Costa Rica’s medical devices sector into four waves: pre-2000, 2001–2004,
2005–2008, and 2009–2012.11 A very clear pattern of FDI succession emerges:
the companies that invested in Costa Rica pre-2000 were predominantly in the
low-tech, cost-driven disposables product category. In each successive time period,
companies with higher-level technology entered Costa Rica. When companies
were asked during interviews why they came to Costa Rica, two factors were
repeatedly mentioned: (a) latecomers were encouraged by the positive experiences
of the earlier investors; and (b) the capabilities of Costa Rican managers, as well as
skills upgrading by Costa Rican employees and local suppliers, made the country
increasingly attractive to high-technology firms.

Table 11.2 Firms in Costa Rica’s Medical Devices Sector

Entry Year Firm Main Product Core Market Product Select
Characteristics Export Segments Examples Firms
Category
Up to 2000 4 OEMs Disposables Drug delivery; Intravenous Hospira;
24 firms: 8 Components Women’s health tubing (I) Baxter;
8 US 1 Input Mastectomy Amoena;
15 CR distributor bra (I) Corbel
1 German 7 Packaging
1 Finishing
3 Support
services
2001–2004 3 OEMS Instruments Endoscopic Biopsy forceps Arthrocare;
13 firms: 6 Components surgery (II) Boston
9 US 1 Finishing Scientific;
3 CR 1 Logistics Oberg
1 Colombian provider Industries
2 Support
services
2005–2008 2 OEM Therapeutics Cosmetic Breast implants Allergan;
8 firms: 4 Components surgery; (III) Minimally Tegra Medical;
7 US 1 Packaging Women’s health invasive devices Specialty
1 Puerto Rico 1 Finishing and urology for uterine Coating
surgery (II) Systems
2009–2012 5 OEMS Therapeutics Cardiovascular Heart valves Abbott
21 firms: 7 Components Disposables Drug delivery (III) Dialysis Vascular; St.
16 US 2 Non-OEM Instruments catheters Jude Medical;
1 CR assemblers (III) Guide Covidien;
1 Ireland 1 Input wires (III) Moog;
1 Japan distributor Compression Synergy
2 Joint 2 Sterilization socks (I) Health;
ventures 2 Packaging Volcano Corp.
(US-CR)
Source: Bamber and Gereffi, 2013.
Note: Roman numerals refer to FDA regulatory categories of products.

b. Costa Rica in the Offshore Services Global Value Chain

Costa Rica is a pioneer in attracting offshore services to Latin America. Since the
mid-1990s the country has been a preferred location for MNCs looking to reduce
costs and take advantage of the country’s unique combination of draws, including its
location in the US Central Time Zone, largely bilingual population, and relatively
safe and stable security environment. MNCs have set up both captive centers and
third-party service providers in Costa Rica, with the latter allowing companies to
use the country as a platform to export competitively priced services. Costa Rica
entered the industry ahead of other countries in Latin America. This strategy gave
the country an important ‘first mover advantage’, allowing it to position itself as
a key reference for offshore services in Latin America. As can be seen in Figure
11.15 below, selected companies with presence in Costa Rica are mapped in the
offshore services GVC.

Figure 11.15 Offshore Services Industry in Costa Rica:

MNC Participation by Segment, 2011

Source: Fernandez-Stark et al., 2013.

In 2005, there were 33 MNCs firms employing 10,802 people and exporting
around US$387 million. These figures tripled by 2011, when there were close to

100 offshore services MNCs operating in the country, employing 33,170 workers
and exporting US$1,390 million12 (CINDE, 2012a). Since its entry into the
offshore GVCs in the late 1990s, Costa Rica has both expanded its participation
and upgraded through the value chain, providing increasingly sophisticated
services. Figure 11.16 below shows exports and number of employees in the
different segments of the offshore services global value chain.

Figure 11.16 Offshore Services Industry in Costa Rica: US Exports and Number of
Employees by Segment, 2011

Source: Fernandez-Stark et al., 2013.

c. Industrial Policy Recommendations

After the industry analysis, the Duke GVCC team provided a set of
recommendations per sector analyzed and also transversal recommendations for
the country. Some of the general recommendations are listed in Figure 11.17.
Through this analysis, several common factors requiring policy interventions
were identified across these industries. A transversal policy approach can be
implemented to address these factors and to facilitate growth in all sectors analyzed.
These themes align with the working groups in Costa Rica’s Presidential Council
for Competitiveness, and task groups could provide leadership in the following
areas:

• Industry institutionalization
• Attraction of foreign direct investments
• Development of local firms
• Human capital development
• Improvements to the business environment
• Infrastructure upgrading
This set of recommendations was also complemented by country comparisons in
which best practices were highlighted. These country cases illustrated examples of
key policies to support industry upgrading. Best practices for this type of analysis
are typically selected from countries that face related challenges and are in a similar
stage of economic development.

Figure 11.17 Policy Recommendations: Medical Devices and Offshore Services

Sources: Fernandez-Stark et al., 2013; Bamber and Gereffi, 2013.

Conclusion
Globalization has given rise to a new era of international competition that is
best understood by looking at the global organization of industries and how
countries rise and fall within these industries. The GVC framework has evolved
from its academic origins to become a major paradigm used by a wide range of
country governments and international organizations, including the World Bank,

the International Labor Organization, the UK Department for International

Development, and the US Agency for International Development. Global value
chain analysis highlights how new patterns of international trade, production, and
employment shape the prospects for development and competitiveness, using core
concepts like ‘governance’ and ‘upgrading’.
On the governance side, GVC are becoming more consolidated (Cattaneo et al.,
2010). Large multinational manufacturers, retailers, and marketers who manage
global sourcing networks are proclaiming that they want fewer, larger and more
capable suppliers, and they will operate in a reduced number of strategic locations
around the world. This is likely to promote a higher degree of regional sourcing,
with suppliers located close to the major consumer markets in North America,
Western Europe, and East Asia. In terms of upgrading, this offers some hope for
small regional suppliers, but organizing efficient and sustainable value chains at
the regional level remains challenging.
Today we are at a historic juncture. Decision-makers concerned with the role
that GVCs play in promoting development face diff iculties in adjusting to a
world in which the primary drivers in global production and trade are emerging
economies. Until recently, trade integration and growth in many developing
countries were fueled by the insertion of local producers in GVCs feeding into
high-income markets, in particular North America, Europe and Japan, and in
chains led by firms from high-income economies. Recently, however, low growth
or stagnation in the historically dominant Northern economies, along with
sustained growth in emerging countries, in particular China and India, have
spurred a shift in the primary trade and growth drivers with crucial implications
for global demand, structures of production and innovation. In some cases, the
shift in global demand to emerging economies has forced developing country
suppliers to sell final goods at cheaper prices and lower level of processing than
in the past, which amounts to downgrading in terms of their participation in the
global economy (Kaplinsky and Farooki, 2011).
These new developments represent a potential change in the center of gravity
for economic growth, with significant implications for GVCs, employment and
innovation, and the strategy of governments and firms in developing countries.
Globalization’s benefits will continue to be unevenly distributed, with its gains
going to those with more education, skills, wealth, and power. However, the
inclusion of large emerging economies like China, India, Brazil, and Mexico
among those who are benefitting, at least in part, is a qualitative shift in the
process. But it does not necessarily improve the chances for smaller countries in
the global economy unless they devise policies to enhance their own capabilities
to foster development.

Notes
1. The first edition of the GVC Primer was released in May 2011. This is the second
edition of the GVC Primer that was released online on July 2016 and contains totally
new material.
2. For more details see Bair and Gereffi (2001).
3. OEM: Original Equipment Manufacturer; OBM: Original Brand Manufacturer; and
ODM: Original Design Manufacturer.
4. For a broader mix of industries, see projects listed on the Duke GVCC website: https://
gvcc.duke.edu/overview-of-work/.
5. To obtain more information see: Fernandez-Stark and Bamber, 2012a, 2012b;
Fernandez-Stark et al., 2012 or the following link https://gvcc.duke.edu/cggcproject/
inclusive-development/.
6. For more information see Fernandez-Stark et al., 2011b. Additional information can be
found on the CGGC website: https://gvcc.duke.edu/cggcproject/offshore-services-2/.
7. Skills for Upgrading. Available at https://gvcc.duke.edu/cggcproject/skills-for-upgrading/.
8. This scheme is based on Barrientos et al. (2011) and Gereffi, Fernandez-Stark et al.
(2011). This classification scheme is not intended to refer to all jobs in the global
economy; rather, it only applies to jobs linked to the offshore production of goods and
services.
9. Costa Rica GVC studies can be found at https://gvcc.duke.edu/cggcproject/comex-
costa-rica/. For other studies see the Duke GVCC website. Some recent reports
include Peruvian GVCs analysis: Table grapes (Fernandez-Stark et al., 2016b), mining
equipment (Bamber et al., 2016) and high quality cotton textiles and apparel (Fernandez-
Stark et al., 2016a).
10. The study ‘Costa Rica in the Medical Devices Global Value Chain’, can be found at
https://g vcc.duke.edu/wp-content/uploads/2013-08-20_Ch2 _Medical_Devices.pdf.
This study was also highlighted in a World Free Zones Organization bulletin (Gereffi,
2016).
11. This data was gathered from an analysis of FTZ statistics in Costa Rica and firm-level
interviews by the authors of the Duke GVCC study.
12. This information is from MNCs operating in a free trade zone (FTZ) regime that
represents around 80% of the total companies. According to CINDE, the Costa Rican
Central Bank estimates that in 2011 the offshore services industry employed 37,049
and exported almost US$1.6 billion. In this report we use the data from companies
operating under the FTZ regime due to the data availability

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12
t
Global Value Chains, Development, and
Emerging Economies

Global Value Chains and International Competition

Globalization has given rise to a new era of international competition that is best
understood by looking at the global organization of industries and the ways in
which countries rise and fall within these industries (Gereffi, 2011). Using core
concepts like ‘governance’ and ‘upgrading’, global value chains (GVCs) highlight
the ways in which new patterns of international trade, production, and employment
shape prospects for development and competitiveness. GVC analysis documents
the international expansion and geographic fragmentation of contemporary
production networks and focuses primarily on the issues of industry (re)organization,
coordination, governance, and power in the chain (Gereffi and Lee, 2012). Its
concern is to understand the causes and consequences of the organizational
reconfiguration taking place in global industries.1 The GVC approach also explores
the broader institutional context of these linkages, including trade policy, regulation,
and standards.
In the past two decades, profound changes in the structure of the global economy
have reshaped global production and trade and have altered the organization of
industries and national economies (Gereffi, 2014). As supply chains became global
in scope, more intermediate goods were traded across borders, and more imported
parts and components were integrated into exports (Krugman, 1995; Feenstra,
1998). In 2009, world exports of intermediate goods exceeded the combined export
values of final and capital goods for the first time, representing 51% of non-fuel
merchandise exports (WTO and IDE- JETRO, 2011: 81). Because of the unique
ability of the GVC framework to show how international supply chains link
economic activities at global, regional, national, and local levels within particular
industries, international organizations such as the United Nations Conference
on Trade and Development (UNCTAD), the Organisation for Economic Co-
operation and Development (OECD), the World Bank, and the World Economic
Forum are utilizing the GVC approach to structure new donor initiatives and data

collection programs on global trade and development (UNCTAD, 2013; OECD,

2013; Cattaneo et al., 2010; World Economic Forum, 2013).
Emerging economies are playing significant and diverse roles in GVCs
(Gereffi and Sturgeon, 2013). During the 2000s, they became major exporters
of intermediate and final manufactured goods (China, South Korea, and Mexico)
and primary products (Brazil, Russia, and South Africa). However, market growth
in emerging economies has also led to shifting end markets in GVCs, as more
trade has occurred between developing economies (often referred to as South-
South trade in the literature), especially since the 2008–2009 economic recession
(Staritz et al., 2011: 1–12). China has been the focal point of both trends: it is the
world’s leading exporter of manufactured goods and the world’s largest importer
of many raw materials, thereby contributing to the primary product export boom.

The Rise of GVCs

In the 1970s and 1980s, US retailers and global brands joined manufacturers in
the search for offshore suppliers of most categories of consumer goods. This led
to a fundamental shift from what had been ‘producer-driven’ commodity chains,
which include capital- and technology-intensive industries like automobiles and
electronics, to ‘buyer-driven’ chains, which include a broad range of consumer
products like apparel, footwear, toys, and sporting goods (Gereffi, 1994a).
The geography of these chains expanded from regional production-sharing
arrangements to full-fledged global supply chains, with a growing emphasis on
East Asia (Gereffi, 1996). In the 1960s and 1970s, large, vertically integrated
transnational corporations dominated the landscape in most international
industries (Vernon, 1971), and the prevailing development strategy was import-
substituting industrialization (ISI). Well established in Latin America, Eastern
Europe, and parts of Asia since the 1950s, ISI was a state-led effort to build
domestic industries by requiring foreign manufacturers to replace imports with
locally made products, beginning with the assembly of final goods and working
back to key components, in return for guaranteed market access (Gereffi, 1994b).
These domestic industrial policies were intended to nurture a set of full-blown
national industries in key sectors that could significantly reduce, if not fully
eliminate, imports from the industrialized nations (Baldwin, 2011).
The death knell for ISI, especially in Latin America, came from the oil shock of
the late 1970s and the severe debt crisis that followed it (Urquidi, 1991). The ISI
approach was creating large and persistent trade deficits because the manufacturing
sectors in ISI countries were simply importing intermediate goods rather than
reducing imports altogether, and escalating debt service payments led to a net
outflow of foreign capital that crippled economic growth in the 1980s.

Under pressure from the International Monetary Fund (IMF) and the World
Bank, many developing countries made the transition from ISI to export-oriented
industrialization (EOI) during the 1980s (Gereffi and Wyman, 1990; Haggard,
1990). This new outward-oriented development model focused on exports to the
global market by local firms, and it removed the state requirement that foreign
firms had to produce for protected domestic markets, which mainly benefitted
larger developing economies. There was an equally profound reorientation in
the strategies of transnational corporations (Grunwald and Flamm, 1985). The
rapid expansion of industrial capabilities and export propensities in a diverse
array of newly industrializing economies in Asia and Latin America encouraged
transnational companies to accelerate their own efforts to outsource relatively
standardized activities to lower-cost production locations worldwide. Precisely
this change in the strategies of transnational companies enabled the transition
from ISI to EOI in developing economies, and it corresponds with the shift from
producer-driven to buyer-driven commodity chains at the level of global industries
(Gereffi, 1994a: 97–100).
The rise of GVCs occurred in a period of falling trade barriers, the emergence
of the World Trade Organization (WTO), and the policy prescriptions associated
with the ‘Washington Consensus’—i.e., that governments had only to provide
a strong set of ‘horizontal’ policies (such as education, infrastructure, and
macroeconomic stability) and be open to trade in order to succeed (Gore, 2000).
Of course, many observers noted that the dynamic emerging economies did much
more than establish a set of economy-wide enabling institutions for growth. They
frequently also targeted key domestic industries for support, under either ISI or
EOI policies that tended to alternate over time in both Latin American and East
Asian nations (Gereffi and Wyman, 1990; Haggard, 1990).
Today, industrial policy is on the upswing (OECD Development Centre, 2013;
Crespi et al., 2014; Salazar-Xirinachs et al., 2014). WTO accession often comes
with allowances for selective industrial policies (e.g., trade promotion, local content
rules, taxes, tariffs, and more indirect programs that drive local production) to
remain in force for specified periods. Bilateral trade agreements can supersede
such allowances under WTO rules, and a handful of relatively large and advanced
emerging economies (such as those in the G-20) that have more clout in the
institutions of global governance are using them to create policy space to design
and implement activist industrial policies.
The organization of global industries into GVCs in which production and trade
networks are spread across many countries and regions has reinvigorated industrial
policy debates (Baldwin, 2011). There is not likely to be a return to the ISI and EOI
policies of old, however. Domestic industries in both industrialized and developing
countries no longer stand alone, competing mainly through arm’s-length trade.
Instead, they have become deeply intertwined through complex, overlapping

business networks created through recurrent waves of foreign direct investment and
global sourcing. Companies, localities, and entire countries have come to occupy
specialized niches within GVCs. Because of this, today’s industrial policies have
a different character and generate different outcomes than before. Intentionally
or not, governments currently engage in GVC-oriented industrialization when
targeting key sectors for growth (Gereffi and Sturgeon, 2013).
New governance structures reinforce the organizational consolidation occurring
within GVCs and the geographic concentration associated with the growing
prominence of emerging economies as key economic and political actors (Gereffi,
2014: 15–17). After 1989, the breakup of the Soviet Union, the opening of China
to international investment and trade, and the liberalization of India brought a
number of very large economies onto the global stage, known initially as BRICs
(Brazil, Russia, India, and China).2 This resulted in what Richard Freeman called
‘the great doubling’ of the global labor pool from about 1.5 billion workers to 3
billion workers (Freeman, 2008). The rise of the BRICs spurred the globalization
process, as GVCs began to focus their investment and sourcing operations in big
and dynamic emerging economies that offered abundant raw materials, large
pools of low-wage workers, highly capable manufacturers, and rapidly growing
domestic markets.
Faced with slow growth at home, large transnational lead firms in GVCs rushed
to set up operations in BRIC countries, especially China, in an effort to carve
out brand recognition and market share in rapidly expanding consumer markets
and to cut costs on goods produced for export back to home markets (Naughton,
1997; Ross, 2006). In producer-driven chains, the lead firms that to a large degree
defined the structure of these industries were largely global manufacturers like
General Motors, Ford, IBM, and HP. In buyer-driven chains, the lead firms were
a mix of retailers (like Walmart, J. C. Penney, and Carrefour), global marketers
(such as Nike, Liz Claiborne, and Polo/Ralph Lauren), and supermarkets and
food multinationals (like Tesco, Sainsbury’s, Kraft Foods and Nestlé) (Gereffi,
1994a). The lead firms in buyer-driven chains were particularly influential in the
globalization process because they accelerated the process of ‘global sourcing’ based
on orders from developed countries, which relied almost entirely on production
carried out in developing economies (Gereffi, 1999; Dicken, 2011).
As retailers and branded manufacturers in wealthy countries became
more experienced with global sourcing, developing countries enhanced their
infrastructure, and suppliers in those countries upgraded their capabilities in
response to larger orders for more complex goods.3 In the 1990s, many US- and
Europe-based manufacturers quickly became huge global players, with facilities in
scores of locations around the world (e.g., Siemens, Valeo, Flextronics) (Sturgeon,
2002; Sturgeon and Lester, 2004). A handful of elite East Asian suppliers (e.g.,

Pou Chen, Quanta, Foxconn) and trading companies (e.g., Li and Fung4) also took
on more tasks for multinational affiliates and global buyers (Appelbaum, 2008).
These firms expanded production throughout Asia and more recently in Africa,
Eastern Europe, and Latin America (Morris et al., 2011; Pickles and Smith, 2011;
Smith et al., 2014; Hernández et al., 2014).
Lead firms themselves are getting bigger and increasing their global market
shares through mergers, acquisitions, and the decline of many rivals (Gereffi,
2014: 16). This has been coupled with a growing recognition of the strategic
vulnerabilities of global supply chains, linked to the risk of single-source
relationships and the danger of lead firms losing access to critical inputs and raw
material supplies (Lynn, 2005). This is particularly apparent in the agrifoods
sector, in which consumer goods firms such as Cadbury, Coca-Cola, and Unilever
are expanding their direct involvement in the procurement and sustainability of
the raw material sides of their value chains, such as those involving cocoa, coffee,
and sugar (Barrientos and Asenso-Okyere, 2008; Oxfam, 2011). This is also
evident in the automobile and electronics industries, in which concern about the
availability of raw materials such as lithium and coltan (Nathan and Sarkar, 2011),
respectively, are spurring greater engagement between GVC lead firms and host
country suppliers and governments (Sturgeon and Van Biesebroeck, 2011; Sturgeon
and Kawakami, 2011). These examples suggest that a number of GVCs, especially
in natural resource-based industries, are giving greater attention to strategic
collaboration as a counterweight to the long-term trend toward specialization and
fragmentation of supply chains.

Governance and Upgrading in GVCs

The GVC framework focuses on globally expanding supply chains and how
value is created and captured therein (Gereffi and Lee, 2012). By analyzing the
full range of activities that firms and workers perform to bring a specific product
from its conception to its end use and beyond, the GVC approach provides a
holistic view of global industries from two contrasting vantage points: top-down
and bottom-up (Gereffi and Fernandez-Stark, 2011). The key concept for the
top-down view is the ‘governance’ of global value chains, which focuses mainly
on lead firms and the organization of global industries; and the main concept for
the bottom-up perspective is ‘upgrading’, which focuses on the strategies used by
countries, regions, and other economic stakeholders to maintain or improve their
positions in the global economy (Gereffi, 2011: 39–40).
The concept of governance is the centerpiece of GVC analysis. It examines the
ways in which corporate power can actively shape the distribution of profits and
risk in an industry and the actors who exercise such power through their activities.

Power in GVCs is exerted by lead firms. In the governance typology outlined in

Figure 12.1, the market and hierarchy poles of the GVC governance continuum
are driven by price and ownership within vertically integrated firms, respectively.
The remaining three categories are stable forms of network governance (modular,
relational, and captive), in which different kinds of GVC lead firms control to a
large degree the ways in which global supply chains operate and the main winners
and losers within these chains (Gereffi et al., 2005).

Figure 12.1 Five Types of Global Value Chain Governance

Source: Gereffi et al., 2005: 89.

While governance issues have attracted a good deal of attention among GVC
scholars, the research on economic upgrading has been at least as important because
many of the people who use the GVC framework have a very strong development
focus. ‘Economic upgrading’ is defined as the process by which economic actors—
firms and workers—move from low-value to relatively high-value activities in
GVCs (Gereffi, 2005: 171). The challenge of economic upgrading in GVCs is
to identify the conditions under which developing and developed countries and
firms can ‘climb the value chain’ from basic assembly activities using low-cost and
unskilled labor to more advanced forms of ‘full package’ supply and integrated
manufacturing.

Connecting GVCs to Economic Development

GVCs matter for economic development in several ways, since the ability of
countries to prosper depends on their participation in the global economy, which
is largely a story about their role in GVCs (Gereffi and Lee, 2012). Connecting
countries to GVCs involves both investment and trade, which rely heavily on
efficient global supply chains in order to contribute to growth.5 A key factor in
such efficiency is infrastructure development, which enables global trade though
the construction and improvement of the physical facilities that link national
economies: ports and canals, airports, roads, and a wide range of information
and communication technologies (Dicken, 2011: 400–406; WTO and IDE-
JETRO, 2011: 28, 30). Improving trade flows at the border can be enhanced
by infrastructure investments inside the border (i.e., in roads and facilities that
connect rural regions and small firms to larger domestic markets), and also by
investments beyond the border, especially in infrastructure facilities that connect
a country to its nearby neighbors in regional supply chains (Mayer and Milberg,
2013). These regional markets are often unappreciated because of the importance
given to developed country markets in the 1990s and early 2000s, but in the current
era, regional value chains are becoming a new focus for investment planning by
development banks and international organizations (Gereffi and Lee, 2012: 28–29).
GVC studies are pervasive in academic publications that examine a wide range
of global industries.6 The framework has also been adopted by many of the most
important international organizations concerned with economic development, such
as the WTO, UNCTAD, the OECD, the World Bank, and the World Economic
Forum.7 The international institutions that have provided the underpinning for
the Washington Consensus (such as the World Bank, the IMF, and the WTO)
and major bilateral donors (such as the US Agency for International Development
(USAID) and the UK’s Department for International Development (DFID) have
embraced new models of development thinking, with an emphasis on sectoral
analysis that links macro issues such as international trade and investment more
closely with the micro development issues of employment, gender dynamics, and
sustainable livelihoods (M4P, 2008; Staritz and Reis, 2013; Milberg and Winkler,
2013). In addition, new alliances have emerged among diverse UN and other
international agencies (such as the World Bank and the ILO) to promote joint
research agendas that explore the links between economic and social upgrading,
explicitly using the GVC framework (Cattaneo et al., 2010; Barrientos et al.,
2011; Rossi et al., 2014).
This is an area in which GVC analysis and supply chain management research
can be mutually beneficial. Sophisticated value chain data disaggregated by
business functions can complement existing country-level trade statistics and

industry-level input-output data, providing a clear picture of who is gaining and

losing in GVCs (Sturgeon and Gereffi, 2009). When combined with data on
employment, they will greatly advance our understanding of both economic and
social development opportunities in the global economy.
Today virtually all major bilateral and multilateral donor agencies use value
chain analysis as an instrument of private-sector development (Gereffi, 2014).
According to Altenburg (2007), there are two principal reasons for the increasing
popularity of the GVC approach within the international donor community since
the end of the 1990s: first, the accumulating evidence of a link between economic
growth driven by the private sector and poverty reduction; and second, the fact
that global integration of trade and production through GVCs transmits the
pressures of global competition to domestic markets in developing economies,
leaving less space for local firms to design, produce, and market on their own.
Given the pervasiveness of GVCs, the question for many is not if, but how, to
integrate into value chains in a balanced way that addresses both competitiveness
and equity issues and that allows for the incorporation of a growing proportion
of the workforce while increasing productivity and output.
There is no simple way to connect GVC analysis to private-sector development,
given that the firms in a value chain range from transnational corporations to
micro-enterprises, and the institutional context and geographic scope of value
chains vary enormously. Generally, however, donor interventions have four
objectives: strengthening the weakest link to address potential bottlenecks;
improving flows of knowledge and resources to make all firms in the chain more
productive; working on specific links between firms to improve efficiency; and
creating new or alternate links in the chain to promote diversified outcomes
(Humphrey and Navas-Alemán, 2010).
Much of this research and theoretical work has focused on how lead firms
in specific GVCs have driven this process in various ways. Decisions about
outsourcing and offshoring are, after all, strategic decisions made by managers. But
such decisions are not made in a vacuum. The policies and programs of countries
and multilateral institutions set the context for corporate decision-making, and
there has been an evolution in the form and effects of industrial policy along with
the evolution of the business networks that comprise GVCs.
Today, the organization of the global economy is entering a new phase—what
some have referred to as a ‘major inflection point’ (Fung, 2011)—that could
have dramatic implications for firms and workers in emerging and industrialized
countries. As world trade rebounds from the 2008–2009 economic crisis, emerging
economies have become a major engine of growth.

Developing Economies in GVCS: Upgrading Experiences in Diverse

Sectors
Many examples could be provided to illustrate how developing countries are
participating in GVCs. For purposes of this chapter, we will focus on three
aspects of GVCs particularly relevant to economic upgrading and inclusive
development goals: (1) building export capabilities—the cases of coffee, apparel,
and automobiles; (2) leveraging services to build knowledge capabilities and move
to high-value niches in GVCs—the cases of a traceability system for the cattle
industry in Uruguay and environmental services in Costa Rica; and (3) the role of
public-private partnerships to narrow the human capital gap in India and Latin
America, and to develop the aerospace industry in Mexico.

Promoting Growth and Upgrading in Export-Oriented GVCs

The Coffee Value Chain in Central America and East Africa
The world coffee market is large, with retail sales of US$70 billion and demand
growing steadily at about 2.5% annually.8 The biggest global producers are Brazil
and Vietnam, followed by Colombia and Indonesia. The United States is the
largest consumer market, spending an estimated $30 billion in 2009. Within the
coffee GVC, there are important quality distinctions that translate into significant
price variations for coffee producers as well as distinct market segments for large
branded manufacturers in the coffee sector. The two main varieties of coffee
are arabica (higher quality) and robusta (lower quality). These correspond to
segmentation at the retail end of the GVC: there is a commercial grade segment
(e.g., Folgers), which sells large volumes at relatively low prices; and a specialty or
high/quality gourmet segment (e.g., Starbucks, Illy coffee), which sells in niche
markets and commands premium prices. Within the United States, the specialty
coffee market has grown rapidly, with a number of boutique and super high grade
coffees, and this offers great potential for growth by developing country coffee
producers (Ponte, 2002).
Central America is recognized as one of the world’s leading specialty coffee
producers. In most countries of the region, over half of their production is classified
as premium coffee (i.e., above commercial grade). Guatemala and Honduras are
perhaps the best established Central America coffee suppliers in global markets,
with Nicaragua and Panama rapidly gaining market share in the specialty coffee
segment. In 2010, Guatemala’s coffee exports were valued at $718 million,
involving more than 171,000 producers; Nicaragua exported $351 million of
coffee produced by nearly 90,000 growers (World Bank, 2012: 19). Whereas

specialty coffee accounted for just 20% of Guatemala’s coffee exports in 1980s, it
now accounts for over 80%.
Most specialty coffee in Central America comes from small producers, and
the challenge is how to provide them with a sustainable niche in the specialty
coffee GVC. The potential economic, social, and environmental upgrading gains
of specialty coffee are not in question. Smallholders growing for the specialty
market can sell their coffee at premiums significantly higher than certified coffee
and receive a larger share of the retail price. For example, compared to the 2014
minimum price established for fair trade, organic certified coffee, $1.90 per pound,
the average price specialty coffee growers received during the first nine months
of 2014 was $2.72, and as high as $3.60 (Farmers to 40, 2014). Consumers tend
to prefer single-origin coffee with an emphasis on new and unique varietals9 and
source authenticity (like premium wine), and there is a high value attached to
socially and environmentally sustainably grown coffee as well.
There are various difficulties, however, in capturing these price premiums
within Central America. The specialty coffee value chain is typically dominated by
a few large exporters, along with roasters who are located near the final consumers
in North America, Europe, and increasingly East Asia. Infrastructure investments
are required to build the wet processing plants to assure the quality of premium
coffee. For smallholders, it is usually not economical to have washing stations on
the farm, and thus they are built at the cooperative level or by private firms.10
Given infrastructure needs and the relatively high cost of inputs (e.g., fertilizer),
inadequate short-term financing for Central American smallholders is a major
obstacle in the specialty coffee segment. In addition, given the importance of
quality control, branding and coordination across the chain, the creation of strong
national or regional coffee associations could provide a major boost to export
producers in Central America.
The coffee value chain is considered an important sector for economic upgrading
of smallholder farmers in other regions of the world, including South America,
Asia, and sub-Saharan Africa (Talbot, 2004; Daviron and Ponte, 2005). Within
East Africa, coffee represents a significant share of agricultural exports in Ethiopia,
Kenya, Uganda, Rwanda, Tanzania, and Burundi. Despite nearly ideal growing
conditions for the arabica coffee needed to produce specialty coffee, production
in the Rwandan coffee sector declined sharply in the 2000s. Struggling to regain
its economic growth after the 1994 Rwandan genocide, many of Rwanda’s
smallholders had abandoned coffee production, leaving about 400,000 still
committed to the sector in 2002 (Abdulsamad et al., 2015: 31).
In 2000, USAID initiated several projects to help smallholder coffer growers
in Rwanda to improve the quality of their coffee to meet specialty status, which
substantially increased shareholder revenues. To ensure the sustainability of these

gains, USAID implemented a development alliance made up of US and Rwandan

universities, enterprises, and non-governmental organizations, which over a 10-
year period proved highly successful.11 The positive outcomes for smallholders
required the establishment of cooperatives and coffee washing stations to create
a local processing infrastructure that permitted smallholders to partner with
specialty roasters in the coffee value chain.12 This established some balance of
power between smallholders and large international coffee buyers, and allowed
specialty roasters to introduce the prestigious Cup of Excellence coffee competition
to Rwanda in 2008, the first such competition ever held in Africa (Abdulsamad
et al., 2015: 36). As in Central America, Rwandan smallholders growing coffee
for the specialty market sold their coffee at higher price premiums than certified
coffee and for a larger share of the retail price, without having to pursue a costly
certification process (Abdulsamad et al., 2015: 39–40).

Nicaragua, Lesotho, and Swaziland in the Apparel Manufacturing Global Value

Chain
The Nicaraguan apparel industry’s exports nearly doubled from US$716 million
in 2005 to $1.36 billion in 2011 (Bair and Gereffi, 2014: 256). Nicaragua mainly
participates in the low-value ‘cut-make-trim’ stage of the apparel value chain (see
Figure 12.2). Leveraging the country’s competitive wage advantage (Portocarrero
Lacayo, 2010), the industry employed more than 51,300 people in 2010 (ILO
and IFC, 2010).13 In 2009, 89% of Nicaraguan apparel exports were destined for
the United States. The country is still considered a small regional supplier, but
since 2004 it has steadily gained US market share in certain segments, such as
woven pants and cotton shirts, as a result of its preferential trade status within the
Dominican Republic-Central American Free Trade Agreement (Bair and Gereffi,
2014). Apparel manufacturers in Nicaragua focus on trousers, mainly denim jeans
and twill pants, as well as t-shirts.
The industry consists of a large proportion of foreign-owned firms, with very
few locally owned companies. Among the foreign firms, Korean and US ownership
dominates, with the remainder coming from El Salvador, Honduras, Mexico,
and Taiwan. A significant proportion of these firms are part of larger global or
regional networks; particularly in Central America, this structure allows global
firms to provide full-package services for their clients by leveraging the interactions
of multiple country operations. Knit-based firms sell to buyers such as Walmart,
Target, and Polo/Ralph Lauren. Woven apparel firms are more regionally focused,
with operations in neighboring countries such as Guatemala, Honduras, and
Mexico, and leading buyers include Levi Strauss, Cintas, and Kohl’s.

Figure 12.2 Curve of Value-Added Stages in the Apparel Global Value Chain:
Nicaragua

Source: Author.

Between 2005 and 2010, the volume of Nicaragua’s apparel exports grew by
8.6%, but despite this increase, Nicaragua has had limited success in moving up
the apparel value chain and mainly competes through low-cost apparel assembly.
The country’s apparel exporters have not achieved significant product upgrading;
the value of exports only increased by 4.5% (PRONicaragua, 2010). Rather, this
period was characterized by an increase in the production of t-shirts and knitwear,
which are low-value-added product segments. Prior to the economic crisis, the
country had seen increases in the value of its exports in woven trousers, but due
to the economic slowdown in the United States, 2009 exports fell back to their
2006 levels.
Nicaragua remains vulnerable in terms of economic upgrading because its
apparel exports are dependent on US trade policy (specifically, the Tariff Preference
Level or TPL exception offered to Nicaragua that allowed it to import textiles from
East Asia). However, the country has shown advances in social upgrading, due in
large part to the efforts of the tripartite National Free Trade Zones Commission
to join the interests of workers, the private sector, and government. It also has
become part of the Better Work program by the International Labor Organization
(Bair and Gereffi, 2014).
The trade-policy dependency of Nicaragua and other Central America Free
Trade Agreement (CAFTA) countries on the US market is paralleled by the
similar dynamics found in sub-Saharan Africa’s apparel-exporting economies
that are covered by the African Growth and Opportunity Act (AGOA), such as
Lesotho and Swaziland (Morris et al., 2011). As with Nicaragua, apparel exports
by Lesotho and Swaziland are concentrated on the US market, which absorbs

over 98% of clothing exports from both countries. However, the phase out of
the Multi-Fibre Arrangement (MFA) in 2004, which ended the apparel quota
system, and the 2008–2009 global economic crisis prompted a sharp drop in
clothing exports by both countries to the United States. Many of the Taiwanese
firms that concentrated on supplying the US market left in the wake of the crisis.
However, sub-Saharan Africa had a different dynamic that buffered Lesotho
and Swaziland from the global economic recession. A new type of investor—
South African clothing manufacturers—moved into Lesotho and Swaziland not
as a production base to take advantage of AGOA preferences for access to the
US market, but rather because of their lower labor costs in comparison to South
Africa as a new export market. The South African Customs Union provides duty-
free access for apparel produced in member countries (which include Lesotho
and Swaziland), which allows South African retailers to maintain low prices and
a growing market share (Morris et al., 2011: 98). Furthermore, South African-
owned firms are far more likely than their Taiwanese counterparts to utilize
local production, supervisory and management skills in their apparel operations
in Lesotho and Swaziland, thus promoting additional upgrading prospects in
these countries. Sustaining these advantages, however, would require more active
government policies to incentivize added skill development within local clothing
manufacturers in both countries (Morris et al., 2011: 115–117).

Automobiles in Mexico and Brazil

The automobile industry typifies the sharp contrast in patterns of GVC
participation found within Latin America’s manufacturing sector.14 Beginning
in the 1980s and accelerated by Mexico’s entry into the North American Free
Trade Agreement (NAFTA) in 1994, Mexico shifted from an import-substitution
strategy to an export-oriented model in its automotive sector, which relied on
low-cost Mexican workers and extensive foreign direct investment (FDI) from the
United States, Europe, and Japan, interested in establishing a strong network of
carmakers and autoparts suppliers that could turn Mexico into a world-class export
hub, focused on sales to the US market. On the basis of its strategic proximity to
the United States and its trade agreements with over 40 countries, Mexico has
become one of the top automotive export countries in the world. While this has
created significant job opportunities, the relatively low level of wages has not kept
pace with Mexico’s growing productivity, and the industry still has relatively weak
linkages with local suppliers.
The model of GVC participation in Brazil’s automotive sector is quite different.
The Brazilian strategy is to emphasize sales to its large internal market and

regional connections with its Mercosur partners (mainly Argentina, but also
Paraguay, Uruguay, and Venezuela), using high tariffs on automotive products
imported from outside of Mercosur to increase the technological capabilities
of Brazilian affiliates of foreign carmakers. In addition, Brazil has introduced
various incentives for exports, higher levels of local content, and investment in
new plants in the country.
Both Brazil and Mexico attract significant amounts of FDI into the automotive
sector.15 However, the role played by transnational corporations (TNCs) is different.
In Brazil the exports are lower, but local suppliers are more fully integrated into
the operations of the TNCs, with higher levels of local innovation and research
and development (R&D) capabilities. In Mexico, the range of activities in the
automotive value chain is more diverse, since it supplies the needs of Japanese,
German, and American automakers, in both Mexico and the US market. The
automotive GVC has created more jobs in Mexico, but higher skill levels and
technological capabilities in Brazil. The current development policies in each
country related to autos are intended to fill in the gaps left by their current strategies.

Leveraging Local Knowledge to Add Value in Resource-Based GVCs

Creating Knowledge: A Traceability System for the Cattle Industry in Uruguay
With over 12 million head of cattle in Uruguay, cows outnumber people by four
to one and beef is Uruguay’s leading export. In 2010, Uruguay exported U$1.1
billion in bovine beef products (UN Comtrade, 2012). The global beef industry,
however, is extremely vulnerable to health and food safety problems. Uruguay has
not been immune to these difficulties; a 2000 outbreak of foot-and-mouth disease
led to a multi-year ban on exports to the United States and the European Union,
as well as numerous other countries including Chile, Israel, and South Korea. In
order to mitigate the impact of these challenges on key export revenues, Uruguay
embarked on the development of a sophisticated bovine traceability system, which
would allow the country to quickly and efficiently track the source of and contain
potential problems, and maintain consumer and regulatory confidence of their
products in the developed world.
The livestock traceability system was developed through a collaborative multi-
stakeholder initiative bringing together producers, local governments, transport
personnel, the private sector, information technology companies, and the central
government (the Ministry of Agriculture, in particular). Today, this is the only
system in the world with real-time monitoring of 100% of the national cattle herd.
A chip implanted in each cow’s ear at birth allows the system to keep centralized
and accurate information regarding the animal from birth through to sales and

distribution points. Approximately 2.5 million new animals are registered on an

annual basis (Crescionini, 2012; SONDA, 2012).
Uruguay has a great opportunity to capitalize on its knowledge and
experiences, exporting these services to other countries that face similar issues.
Indeed, Colombia has already begun to roll out this information system for its
cattle herd. This means that Uruguay can participate in different segments of
the cattle value chain. In addition to continued beef exports, Uruguay now has
the potential to export advanced services not only for the beef industry, but
the broader livestock sector as well. In the face of rising concerns in meeting
increasingly strict global food safety standards, this is a tremendous competitive
advantage for the country.

Environmental Services Offshoring: An Opportunity for Costa Rica

Costa Rica is recognized worldwide for its unique approach to environmental
protection and is a leader in the field among both developing and developed
countries alike. As a result of conservation incentives put in place in the 1980s,
today tropical forest covers more than half of the country. Illegal farming is down
to just 15% and farmers are paid to manage and protect their natural surroundings
(Conservation International, 2012). To date, however, this know-how has been
used principally to support domestic priorities. Experts work for national non-
governmental organizations (NGOs) and foundations, and the country has not
yet seized the opportunity to commercialize the significant expertise it has built
over many years. With the rising prominence of climate change on the global
development agenda, there is significant demand for services in these areas.
Due to its critical mass of qualified human capital to sustain this niche
(Chassot, 2012; Rodriguez, 2012), Costa Rica is in an excellent position to export
high-demand environmental services, such as natural resources management,
environmental impact studies, threatened and endangered species assessments,
protected areas evaluations, and environmental education and training, among
many others. More than 18 other countries, including China, have consulted Costa
Rica to learn about its conservation policies (Conservation International, 2012). As
with many developing countries, however, limited knowledge of potential markets
and undeveloped entrepreneurship skills undermine the potential for translating
these consulting opportunities into profitable service exports (Chassot, 2012) The
promotion of this industry will require the internationalization of local firms, on
one hand, and the attraction of foreign environmental firms, on the other, to use
Costa Rica as a platform to export environmental services. Linking these two
types of firms will be critical for the development of this niche activity.

Skills for Upgrading

Public–Private Partnerships to Narrow the Human Capital Gap in India and
Latin America
National ‘finishing schools’ represent a promising tool to narrow the gap between
the human capital needs of GVCs and the skills supplied by national education
systems. The finishing school model has been tested in India and the Philippines,
and recently applied in Latin America with the support of the Inter-American
Development Bank (IDB). These schools help recent graduates and workers
develop high-demand skills, making them more employable. In turn, by increasing
workforce employability, finishing schools can help a country improve its position
in the value chain.
Finishing schools build upon the fundamental skills acquired in academic
institutions, filling in specific gaps in knowledge and soft skills. These gaps are
determined by the skill sets needed by a particular industry, as compared with
the workforce’s current skills. In India, the most effective finishing schools were
those that collaborated with companies to identify the desired skill sets, and match
trainings to these gaps (Tholons, 2012). In the global services industry, these
skills often include technical (IT) skills, English abilities, and soft skills such as
relational skills, confidence, and presentation skills. Programs at finishing schools
that train workers for careers in IT services can run from five weeks to up to one
year in duration (Tholons, 2012: 14). Often, these schools target youths who have
recently graduated from high school or university, but they can also play a role in
re-training adult workers (IDB, 2012).
Public–private partnerships are central to creating effective financing and
governance mechanisms to support finishing school programs in developing
countries. Although in India, finishing schools may be run by either the
government or a private institution, in Latin America there is increasing
recognition that collaborative policies and institutions provide the most effective
support to finishing school initiatives.16
The public–private model offers two key advantages: (1) such partnerships
create opportunities for co-financing, reducing the cost burden borne by any
one sector; and (2) the content of the programs is determined by the employers
themselves, ensuring that the skills developed match industry needs (IDB, 2012).
Thus, the finishing school model recognizes the role of all stakeholders, ‘the State,
the academe, and industry—in shaping the capabilities of the labor pool towards
in delivering information technology and business process outsourcing services’
(Tholons, 2012: 14).

The Aerospace Industry in Querétaro, Mexico17

The aerospace industry in Querétaro has grown rapidly. Bombardier—one of
the leading companies in the sector, based in Canada—arrived to the area in
2006, marking the entry of Querétaro into the aerospace GVC. The French
group Safran and Spanish airframe manufacturer Aernnova quickly followed
suit, establishing operations in 2007. Under the leadership of the Secretariat for
Sustainable Development, Querétaro’s aerospace cluster has since become one of
the four leading locations in Mexico. By 2012, there were over 30 foreign firms
operating in the state, with projected employment of over 6,000, about 20% of the
country’s aerospace workforce. Mexico’s exports in the sector had reached US$4.5
billion by 2011, up from US$1.3 billion in 2004.
Growth was supported by a clear commitment to the development of the
industry by the state government, including the creation of the National
Aeronautics University of Querétaro (UNAQ ) in 2007, which housed several
technical programs developed in public-private initiatives and created the first
aerospace engineering program in the country. State investments in UNAQ
amounted to US$21 million by 2009. In addition to training teaching staff in both
Canada and Spain, UNAQ drew teachers from aerospace firms working in the
region. By 2012, there were 488 technical and professional students at UNAQ.
UNAQ’s contributions to human capital development in the state added to an
already strong engineering training base. In 2009, engineering graduates accounted
for 41% of undergraduate degrees, while 65% of master’s degree programs available
in the state were in engineering fields (Casalet et al., 2011).
Additionally, in 2007 an aircraft maintenance program was established in
Querétaro by the National Mexican Technical Training Institute, which graduates
90 technicians annually. This has supported the ongoing development of the
state’s maintenance and repair operations capacity, and helped capture large
investments, including the 2012 Delta-Aeromexico deal to establish a US$50
million maintenance, repair and overhaul (MRO) facility in Querétaro with seven
production lines to serve both airlines.

The Heterogeneity of Emerging Economies and Their Export Profiles

Focusing on a set of seven contemporary emerging economies—China, India,
Brazil, Mexico, Russia, South Korea, and South Africa—will give a broader sense
of the role of GVCs and development policies in the developing world. They are
all centrally involved in distinct types of GVCs in agriculture, extractive industries
(mining, oil, and gas), manufacturing, and services (Gereffi and Sturgeon,
2013). Together, these seven emerging economies account for 45% of the world’s

population, 25% of global exports, and 24% of gross domestic product (GDP) in
2013, and their GDP growth rates are substantially higher than the world average
(3.2% versus 2.2%) (see Table 12.1). The economic and social characteristics of
these countries are quite diverse, however. The specific roles of these countries
in the global economy vary according to their openness to trade and foreign
investment; their endowments of natural, human, and technological resources;
their geopolitical relationships to the world’s most powerful countries; and the
characteristics of their immediate neighbors.
As GVCs have expanded in scope and complexity, emerging economies have
clearly benefitted, surging ahead of the advanced industrial countries in terms of
export performance. Between 1995 and 2007, the global export market shares
of the United States and Japan fell by 3.8% and 3.7%, respectively, while China
more than doubled its market share from 4% in 1995 to 10.1% in 2007, making
it the world’s export leader (ahead of Germany, the United States, and Japan).
South Korea, Mexico, Turkey, South Africa, and the former transition countries
in central Europe also increased their export market shares during this period.
Even more surprising, emerging economies made their most significant gains in
high and medium-technology industries, which previously were the stronghold
of OECD countries. This phenomenon was mainly driven by processing exports
from China, whose share of high technology exports soared by 13.5% in the period
1995–2007, moving it ahead of the United States as the world’s largest exporter
of electronics (Beltramello et al., 2012: 9–10).
Although collectively these seven nations have considerable economic clout,
China is the global pacesetter of the group. While China and India are the
most populous countries in the world, with 1.36 and 1.25 billion inhabitants,
respectively, China is the undisputed export leader, with $2.2 trillion in exports
in 2013. China’s export total is greater than that of Russia, South Korea, India,
Brazil, Mexico, and South Africa combined ($2.14 trillion), and its GDP has grown
by over 9% per year for over 30 years. It is now the second-largest economy in the
world (after only the United States) and has overtaken Germany as the world’s
largest exporter (Beltramello et al., 2012: 9). Notwithstanding its rapid economic
growth, however, its GDP per capita in US dollars was the third-lowest among
these emerging economies in 2013 ($6,807), well ahead of India ($1,498) and a
little larger than South Africa ($6,618), but only 60% that of Brazil ($11,208), less
than half the per capita income of Russia ($14,611), and just over one-quarter that
of South Korea ($25,977). On average, the GDP per capita of these seven emerging
economies was about 18% above the world average in 2013, using purchasing
power parity (PPP) indicators.
The export profiles of these emerging economies indicate the roles that they play
in GVCs. Using a classification scheme that categorizes traded goods according

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Table 12.1 Seven Selected Emerging Economies in Comparative Perspective, 2013

Country Population Exports GDP GDP/capita GDP/capita GDP growth % of GDP³

(Millions)¹ ($Billions)² ($Billions)¹ (USD)¹ (PPP)¹ YoY (%)¹
Agriculture Industry Services
China 1,357 $2,209 $9,240 $6,807 $11,906 7.7 10 44 46
South Korea 50 $560 $1,305 $25,977 $33,140 3.0 3 39 58
Russia 143 $527 $2,096 $14,611 $24,114 1.3 4 38 58
Mexico 122 $380 $1,261 $10,307 $16,463 1.1 4 36 60
India 1,252 $337 $1,877 $1,498 $5,412 5.0 17 26 57
Brazil 200 $242 $2,246 $11,208 $15,038 2.5 6 26 68
South Africa 53 $95 $351 $6,618 $12,507 1.9 3 29 68
Total or Avg. 3,177 $4,350 $18,376 $11,004 $16,940 3.2 7 34 59
World Total 7,125 $17,635 $75,593 $10,610 $14,397 2.2
% of World Total 45% 25% 24% 104% 118% 146%
Sources:
1. World Bank, World Development Indicators: http://data.worldbank.org.
2. UN Comtrade, International Trade Center: http://comtrade.un.org/.
3. CIA World Factbook, Country Profiles: https://www.cia.gov/library/publications/the-world-factbook/.
Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781108559423.013
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Table 12.2 Export Profiles of Emerging Economies, 2000–2013

Share of exports by sector in 2013* Total Change in percentage point change in

Export total export share of exports by sector, 2000–2013
Value value,
Primary Resource Low- Medium- High- ($Billions) 2000–2013 Primary Resource Low- Medium- High-
Products Based Tech Tech Tech Products Based Tech Tech Tech
China 3% 8% 32% 23% 34% 2,209 786% -4 0 -10 4 11
South Korea 2% 17% 9% 43% 28% 560 226% 0 6 -8 10 -8
Russia 55% 29% 2% 8% 2% 527 412% 6 10 -3 -3 -2
Mexico 16% 8% 9% 42% 22% 380 129% 3 3 -6 4 -6
India 14% 38% 20% 18% 8% 337 702% 0 9 -19 7 3
Brazil 33% 33% 5% 21% 4% 242 340% 13 6 -7 -4 -8

South Africa 25% 31% 6% 27% 3% 95 265% 8 1 -3 1 -1

*Exports totals do not include uncategorized exports, and therefore they may not equal 100%. Legend: x ≤ -6 -5 ≤ x < 0 0≤x≤9 x ≥ 10
Sources: United Nations Comtrade, SITC Rev. 2.
Global Value Chains, Development, and Emerging Economies 363

to primary products plus four types of manufactured exports (resource-based,

low-tech, medium-tech, and high-tech) (Lall, 2000), Table 12.2 highlights some
of the differences between the export profiles of these countries in 2013. Three of
the emerging economies are heavily oriented toward primary product or resource-
based exports: Russia (84%), Brazil (66%), and South Africa (56%). Over half of
India’s exports are resource oriented, and another 20% are low-tech (primarily
apparel products) manufactured goods.18 China, South Korea, and Mexico, by
contrast, are heavily involved in manufacturing GVCs. About 90% of China’s
exports are manufactured goods, while a preponderance of the exports of South
Korea (71%) and Mexico (64%) are medium-tech (automotive, machinery) and
high-tech (mainly electronics) exports.
China’s export success has been a particular challenge for Latin America’s two
largest economies, Brazil and Mexico. In 2010, China was Brazil’s largest trading
partner, accounting for about 15% of Brazil’s exports and imports. Between 2000
and 2010, Brazil’s exports to China increased almost thirty-fold, and since 2002,
imports have grown sixteen fold. Although the Lula administration in Brazil was
keen to develop a strong economic partnership with China, concern has arisen
due to both the composition of Brazil’s exports to China (the ‘primarization’
of Brazilian exports), and their concentration in a relatively small number of
products and exporting firms. About 70% of Brazil’s global exports in 2011
were primary products or resource-based manufactures. Furthermore, these two
categories accounted for just over 60% of Brazilian exports to countries other
than China in 2009, compared to almost 90% to China (Sturgeon et al., 2013:
29-30). Brazil’s exports to China are concentrated in a very limited number of
products, with iron ore and soybeans alone accounting for over two-thirds of
the total in 2009.19
What is particularly notable about Brazil’s trading relationship with China
is that it is skewed to the export of products (both primary commodities and
manufactured goods) with a very low level of processing, while imports tend to
be technology-intensive components and machinery. The soybean value chain is
a good example of the former. About 95% of Brazil’s soybean exports to China
in 2009 were unprocessed beans. In contrast, there were virtually no exports of
soybean meal, flour or oil to China. In order to pursue its strategy of promoting
the Chinese soybean processing industry, China imposed a tariff of 9% on soybean
oil imports, while the tariff on unprocessed soybean imports was only 3%. More
processed imported soybean products also paid a higher value-added tax rate in
China than unprocessed beans. This same protectionist policy of tariff and non-
tariff barriers imposed by the Chinese government to protect its domestic producers
was applied to a range of other primary and processed intermediate products from
Brazil, including leather, iron and steel, and pulp and paper (Jenkins, 2012: 28–29).

On the import side, Brazil has also been influenced by China’s structure of
international trade. In 1996, low-technology products accounted for 40% of
Brazil’s imports from China, while high-technology products accounted for 25%.
By 2009, the pattern was nearly reversed: high-technology products were 41.4%
of the total, and low-technology products were 20.8%. If we look at this trend in
terms of the end use of imports, consumer-goods imports from China to Brazil fell
from 44% to 16% between 1996 and 2009, while the imports of capital goods and
their parts doubled (Jenkins, 2012: 29–31). Thus, Brazil has been subordinated
to occupy the lowest rungs of the value-added ladder in its trade with China in
recent decades, which poses long-term structural imbalances for Brazil if the
situation doesn’t change.
From a GVC perspective, which focuses on the location of value added in global
production systems, high-technology imports from mainland China are most often
driven by the products and strategies of firms based in OECD countries, along
with their business partners (e.g., trading companies, contract manufacturers, and
component producers) based elsewhere in the world, especially Taiwan, Hong
Kong, and Singapore. Thus, the historic reliance of Brazil on the ‘global North’ for
technology-intensive products has in essence remained, even as China’s importance
as a trading partner has risen. In other words, China has become a major conduit
for technology from the global North.
Notwithstanding the unprecedented momentum of China’s rise in the global
economy, these competitiveness problems for Brazil can be ameliorated or even
reversed. Mexico, which is Latin America’s second-largest economy, appears to be
in the midst of a remarkable turnaround, based on a little publicized manufacturing
revolution that is allowing the country to become a credible competitor to China,
after losing US market share to China for more than a decade (Gereffi, 2009).
Mexico currently exports more manufactured products than the rest of Latin
America combined, and it has begun to diversify its export profile, with exports
to the United States falling from 90% of total exports a decade ago to less than
80% today.
The main elements of Mexico’s success include a very high degree of trade
openness—it has free trade agreements with 44 countries, which is more than
twice as many as China and four times more than Brazil. Rising wages and
fuel prices have made it increasingly expensive to export from China to the US
market. Mexico’s wages, which used to be nearly four times higher than China’s a
decade ago, are just 29% higher today. Also, while Mexico still has an abundance
of cheap labor (more than half of its population of 112 million is under 29), its
workers are also becoming more skilled, with growing proportions of graduates in
engineering, architecture, and other professions (Thomson, 2012). Furthermore,
Mexico’s geographical proximity to the United States allows shorter supply chains,

lower transport costs for bulky items, and quicker delivery times in the context of
increasingly popular ‘fast fashion’, ‘just in time’, and other ‘rapid response’ business
models. However, this turn-around is not based on the success of domestic firms.
As with China, Mexico is a platform for multinational enterprises seeking to locate
labor-intensive aspects of GVCs (including both manual and knowledge work)
in a country that is both low-cost and close to the huge United States market.

The Role of Industrial Policies in GVCs

Industrial policies that take the new realities of GVCs into account include
traditional measures to regulate links to the global economy, especially the
regulation of trade, foreign direct investment, and the exchange rates used in
ISI and EOI policies that sought to elevate the position of ‘national champions’
(Salazar-Xirinachs et al., 2014). Today, GVC-oriented industrial policy focuses
to a greater extent than in the past on the intersection of global and local actors,
and it takes the interests, power, and reach of lead firms and global suppliers into
account, accepts international (and increasingly regional) business networks as
the appropriate field of play, and responds to pressures from international NGOs
(OECD Development Center, 2013; Crespi et al., 2014).
There are three distinguishable types of industrial policies: ‘horizontal’ policies
that affect the entire national economy; ‘selective’ (or ‘vertical’) industrial policies
targeted at particular industries or sectors; and GVC-oriented industrial policies
that leverage international supply chain linkages or dynamics to improve a country’s
role in global or regional value chains (Gereffi and Sturgeon, 2013: 342–343).
‘Horizontal’ policies focus on the basic building blocks of competitive national
economies, such as education, health, infrastructure, and R&D expenditures.
Although these areas all provide attractive opportunities for private investors,
the public sector typically plays a role in providing widespread access to these
factors as public goods. Domestic industrial policies tend to be ‘selective’ or
‘vertical’ because they are associated with prioritizing particular industries or
activities at the national level. GVC-oriented industrial policies go beyond the
domestic economic focus of ISI-style policy regimes, which try to recreate entire
supply chains within a national territory. Given the expansion of international
production networks associated with GVCs, this new type of industrial policy
explicitly utilizes extraterritorial linkages that affect a country’s positioning in
global or regional value chains.
Several major features highlight the distinctive nature of GVC-oriented
industrial policies (Gereffi and Sturgeon, 2013: 353–354). One is the role of global
suppliers. GVC-oriented industrial policies require an increasingly sophisticated
understanding of the global-scale patterns of industrial organization that have

come to the fore in GVCs since at least the 1990s. Lead firms are relying on
global suppliers and intermediaries for an array of processes, specialized inputs,
and services, and demanding that their most important suppliers have a global
presence. Hence suppliers, not lead firms, are making many of the new investments
that developing countries are seeking to capture. In many cases, suppliers generate
the bulk of exports as well. The capability to serve multiple customers also takes
on heightened importance.20 Thus, it is no accident that Brazil sought investments
from Foxconn, rather than Apple, in its desire for iPhones and iPads to be produced
in the country for domestic consumption and export elsewhere in Latin America.
A second feature of industrial policies in the GVC era is global sourcing and
value chain specialization. Policies that promote linkages to GVCs have very
different aims than traditional industrial policies that intend to build full-blown,
vertically integrated domestic industries (Baldwin, 2011).
Policies can target specialized niches in GVCs. These can be higher-value niches
suited to existing capabilities, or they can be generic capabilities pooled across
foreign investors. Either of these can serve both domestic and export markets. This
sort of value chain specialization assumes an ongoing dependence on imported
inputs and services. Global sourcing means that the entire value chain may never
be captured, but it also assures ongoing involvement in leading-edge technologies,
standards, and industry best practices.
Third, firms in emerging economies like China and Brazil are seeking to move
to the head of GVCs, regionally if not globally. Encouraging global suppliers to
establish facilities within a country has long-term advantages. Local lead firms
can rely on global suppliers in their midst and on broader GVCs for a wide range
of inputs and services, from design to production to logistics to marketing and
distribution. This can lower risk and barriers to entry for local firms, provide
access to capabilities and scale that far outstrip what is available domestically, and
ensure that products and services are up to date.
The use of industrial policies by emerging economy policy makers should not
come as a big surprise. Both developed and developing countries have deployed
these policies in the past, often with considerable sophistication, as in the case of
East Asian economies such as Japan, South Korea, Singapore, Taiwan, and now
China. Looking towards the future, the traditional rulemaking and finance-
oriented international organizations of the Washington Consensus era, such as the
WTO, the International Monetary Fund, and the World Bank, face the challenge
of constructing a new global economic order that aligns with the shifting roles of
both the emerging and developed economies. A stable foundation for sustainable
development will require both bold vision and a flexible pragmatism to guide a
new generation of inclusive growth policies and institutional arrangements within
the global economy.

Conclusions and Policy Implications

Economic globalization is a byproduct of international production and trade
networks organized by transnational firms, and it is embedded in various kinds
of regulation, including rules of the game established by international institutions,
national government policies, and various forms of private governance that non-
state actors use to manage activities in GVCs (Mayer and Gereffi, 2010). Public
governance will likely ‘be called upon to play a stronger role in supplementing and
reinforcing corporate codes of conduct, product certifications, process standards,
and other voluntary, non-governmental types of private governance that have
proliferated in the last two decades, and multi-stakeholder initiatives involving
both public and private actors will arise to deal with collective action problems’
(Gereffi, 2014: 29).
The challenge is to link economic and social upgrading of both material work
conditions and the quantity and quality of jobs created in contemporary GVCs
(Barrientos et al., 2011). For developing countries, the trade, investment, and
knowledge flows that underpin GVCs provide mechanisms for rapid learning,
innovation, and industrial upgrading (Staritz et al., 2011). GVCs can provide
local firms with better access to information, open up new markets, and create
opportunities for fast technological learning and skill acquisition. Because
transactions and investments associated with GVCs typically come with quality
control systems and prevailing global business standards that exceed those in
developing countries, enterprises and individuals in developing countries can
acquire new competencies and skills by participating in GVCs.
Still, GVCs are not a panacea for development. Very rapid or ‘compressed’
GVC-driven development can create a host of new economic and social policy
challenges in areas such as health care and education (Whittaker et al., 2010).
GVCs can create barriers to learning and drive uneven development over time,
even as they trigger rapid industrial upgrading, because of the geographic and
organizational disjunctures that often exist between innovation and production.
There is considerable evidence that greater profits accrue to those ‘lead firms’ in
the value chain that control branding and product conception (e.g., Apple) and
to the ‘platform leaders’ that provide core technologies and advanced components
(e.g., Intel). At the same time, contract manufacturers and business process
outsourcing service providers (e.g., call centers) tend to earn slim profits and may
never develop the autonomy or capabilities needed to develop and market their
own branded products. Typically, firms that provide routine assembly tasks and
other simple services within GVCs earn less, pay their workers less, and are more
vulnerable to business cycles, not least because they are required to support large-
scale employment and fixed capital (Lüthje, 2002).

As developing economies have become key players in GVCs, a new set of issues
has emerged regarding how countries can maximize their upgrading opportunities
in the global economy. Central to this challenge is how countries can move up the
value chain by engaging local firms, assimilating new knowledge, and improving
employment conditions, with appropriate policies and institutions to facilitate
economic, social, and environmental upgrading. The various examples of GVC
participation reviewed in this chapter highlight a variety of options that countries
would be wise to consider in trying to improve their international competitiveness.
Several targeted recommendations are provided below that highlight what
developing countries can do to improve their positions in GVCs.
Infrastructure: Large-scale infrastructure development projects involving roads,
shipping terminals, and airports are a major focus of development banks and
national governments in their efforts to modernize economies and improve their
access to global markets. Increasingly, China and other emerging economies
are stepping in to fill what they perceive as a significant infrastructure gap for
developing economies.21 However, our GVC case studies reveal that more specific
forms of infrastructure can be highly beneficial to upgrading local economies. As
the coffee cases in Central America and East Africa illustrated, sector-specific
infrastructure like coffee washing stations that permit wet milling are essential
for smallholder farmers to attain the quality needed for specialty coffee exports.
For many of the higher value services, world-class information technology
infrastructure is essential, which increases connectivity for small and large users
alike.
Trade Policy: A prominent feature of the global economy in the last several decades
has been the rapid growth of regional trade agreements (e.g., NAFTA, CAFTA-
DR and Mercosur in Latin America, AGOA in sub-Saharan Africa, and ASEAN
in Asia), and the proliferation of bilateral trade agreements as well (e.g., Mexico
has over 40 such agreements and Chile more than 20). While these policies have
greatly facilitated the access of developing economies to world-class imports and
key export markets, regional agreements can also have a restrictive impact in
terms of their country-of-origin requirements. In Nicaragua’s apparel industry,
for example, the country was able to negotiate a 10-year TPL agreement with
the United States to give them access to non-US fabrics (mainly from Asia) for
their apparel exports. However, the expiration of the TPLs in 2014 has created
considerable uncertainty among foreign investors, and could lead to an outflow
of FDI that could cripple the country’s apparel exports (Frederick et al., 2014).
Developing countries should be wary of building up their competitive
advantage in GVCs on the basis of short-term trade policy advantages. Many of
the preferential trade agreements have market access aspects that are of limited

duration. Countries should view these as ‘windows of opportunity’ that permit the
development of capabilities that could lead to more sustainable niches in specific
GVCs. Often this involves the creation of backward or forward linkages, like
textiles in apparel and cold-storage facilities in the fresh fruit value chain. Global
buyers in GVCs prefer ‘one-stop shopping’. If these capabilities cannot be built at
a national level in terms of scale or cost constraints, then another option would
be to develop the capabilities that could permit functional upgrading in the GVC
with nearby countries in the region.
Industrial Policy: There has been a long history of industrial policy in developing
economies, built around the ISI strategy of the 1950s to 1970s, especially in Latin
America and East Asia (Gereffi and Wyman, 1990). From the 1980s through
the early 2000s, state-led industrial policy fell out of favor, and the ‘Washington
Consensus’ championed by the World Bank and the IMF advocated export-
oriented industrialization based on the East Asian model. Due to a variety of
factors, including the global economic recession of 2008–2009 and the rise of
large emerging economies such as China, India, and Brazil, the Washington
Consensus is now in disarray and industrial policy is back (Gereffi, 2014). However,
as a result of economic globalization and the predominance of GVCs, a return to
traditional ISI industrial policy based on protected domestic markets, local content
requirements, mandatory joint ventures, and other measures from the ISI toolkit
is unlikely to be effective.
Industrial policy in the GVC era needs to recognize that many of the MNCs that
act as lead firms in GVCs are streamlining their supply chains from hundreds or
even thousands of suppliers spread across dozens of countries in every continent of
the world, 22 to a much smaller number (perhaps just 20–30) of larger, more capable
and strategically located manufacturers. In addition, there is also considerable
geographic concentration, in which a few countries are controlling larger shares of
global output in each industry (Gereffi, 2014). These shifts imply a much greater
concentration of industrial production within the global South, higher levels of
South-South trade, and the rise of emerging economy TNCs that play a far more
significant role in GVCs.
In this context, there are several key features of GVC-oriented industrial
policy that are likely to become more significant in developing economies (Gereffi
and Sturgeon, 2013): (1) GVC-oriented industrial policies may want to target
global suppliers or contract manufacturers that make significant investments in
developing economies, rather than the branded lead firms in GVCs;23 (2) value-
chain specialization heightens the importance of joining rather than building
GVCs (Baldwin, 2012; Cattaneo et al., 2013), and the policies that promote
linkages to GVCs are very different from those intended to build vertically

integrated domestic industries; (3) industrial policies should seek to identify

GVC lead firms and global contractors that have an interest in partnering with
and developing the capabilities of local firms; and (4) in a GVC-oriented world,
the industrial policies among emerging economies are increasingly likely to be
in conflict, with China often finding itself in the middle of these controversies.
Workforce Development: A skilled workforce is an essential ingredient of GVC
upgrading, especially for high-value services, which case studies show can add
value to virtually every kind of industry: extractive, agricultural, manufacturing,
professional services and even tourism. In the context of GVCs, however, the skills
required for upgrading must be oriented to highly dynamic global demand, as
defined by key private sector actors. Therefore, workforce development programs
should involve a combination of basic education and more specialized training,
with private companies supplementing the role played by public agencies (Gereffi
et al., 2011; Wadhwa et al., 2008).
Standards and Certifications: Global production must meet very high international
standards for quality and safety, especially for industries related to food, health,
and with a potentially big environmental impact (like oil and mining). A dizzying
array of industry standards and product certifications are linked to GVCs. While
there are often significant price premiums for producers of qualifying products,
acquiring appropriate certifications can be costly and complex, especially for small
firms. Financing to support certifications is likely to facilitate entry by small and
medium enterprises (SMEs) into GVCs, but the gains from certification aren’t
guaranteed unless the global demand and prices for these products continue to
be high.24 Therefore, complying with standards and certifications is best seen as
a necessary but not sufficient condition for economic upgrading, which is most
likely to affect SMEs.
Public–Private Partnerships: Given the key role played by the private sector in
GVCs, international donors and development agencies have shown a great deal
of interest in supporting public-private partnerships in developing countries
(UNGC, 2011; Bella et al., 2013; USAID, 2014). Since private capital and
trade flows in the global economy dwarf official donor assistance, these global
flows in GVCs have heightened concerns over how to make sure that positive
development trajectories are related not only to economic but also social and
environmental objectives. Thus, multilateral and bilateral donors have engaged
the private sector to take on a variety of pro-poor development roles. While public-
private partnerships can positively impact growth at the industry level through
increased investment, output, exports, and employment, the economic gains do
not automatically translate to smallholders, SMEs and local households due to the

power asymmetries that are embedded in many GVC relationships (Mayer and
Milberg, 2013). Therefore, the wide variety of ‘Aid for Trade’ schemes and other
forms of public-private partnerships should seek to assure that SMEs and other
targeted beneficiaries of inclusive development projects acquire the productive
capabilities needed to respond to dynamic markets through appropriate financing
of required infrastructure, affordable certification, technical assistance, improved
information flows, and mechanisms to enhance bargaining power to protect worker
rights and community development objectives.
There is no magic bullet to improve international competitiveness in GVCs,
given the great diversity of experiences and interests within Latin America.
However, by acknowledging and addressing the new realities of the global
economy, countries in the region can improve their ability to define manageable
goals and capture a greater share of the gains in GVCs.

Notes
1. The seminal publication is Commodity Chains and Global Capitalism, which applied
the global commodity chain (GCC) concept for the first time to a broad range of
contemporary industries (Gereffi and Korzeniewicz, 1994). In the early 2000s, the
GCC research agenda helped spawn the closely related GVC and global production
network approaches (for comprehensive literature reviews, see Bair, 2005; 2009, chapter.
1; Lee, 2010; Gereffi, 1994b, 2005).
2. Jim O’Neill (2011), the Goldman Sachs executive who coined the term BRICs in the
early 1990s, now argues that there are a much larger number of ‘growth economies’
(BRICs plus 11) that fall into this category, including South Korea, Mexico, Turkey,
and Indonesia, among others.
3. See Hamilton and Gereffi (2009: 153–159), who describe how US, European, and
Japanese buyers worked with suppliers in South Korea and Taiwan to create the necessary
conditions for expanding and diversifying exports of a broad array of consumer goods
in both economies.
4. Li & Fung, the largest trading company in the world, has about 30,000 suppliers
globally and operates in 40 countries (Fung, 2011).
5. According to a recent study, reducing supply chain barriers to trade could increase gross
domestic product up to six times more than could removing tariffs (World Economic
Forum, 2013: 13).
6. Nearly 1,100 GVC publications and more than 780 researchers are listed on the Global
Value Chains website (https://globalvaluechains.org/publications), which is maintained
at Duke University, as of July 27, 2018.
7. Illustrative publications include: Cattaneo et al., 2010; OECD, 2013; UNCTAD,
2013; World Bank-IDE-JETRO, 2011; World Economic Forum, 2013. Many more
publications and interviews with members of international organizations that have
utilized the GVC framework are available at the website for the Duke Global Summit
(see https://dukegvcsummit.org/). This conference was held at Duke University on

October 29-November 1, 2014 and brought together 30 organizations and more than
three dozen academic and practitioner participants who are actively involved in GVC
programs and research. They explored topics related to development, economic and
social upgrading in GVCs, advances in GVC metrics related to value creation and value
capture, and the future of global governance.
8. The material for this section is drawn primarily from the World Bank (2012: 19–32).
9. Guatemala alone produces seven distinct varietals of specialty coffee due to its diverse
geography.
10. In Guatemala, estimates for larger producers show the following distribution of costs
across the coffee value chain: 15% for producers with wet mills (who buy from small
farmers who do not possess wet mills, which reduces their share of the value chain),
13% for traders, and 72% for the roasters (World Bank, 2012: 25).
11. For a detailed analysis of the varied public-private partnerships in Rwanda’s coffee
sector, see Abdulsamad et al. (2015).
12. Between 2000 and 2010, the number of coffee washing stations in Rwanda increased
from 2 to 187, and the fully washed coffee value chain grew from exporting 32 tons of
coffee in 2002 and 5,800 tons in 2010 (Oehmke at al., 2011). An audit conducted in 2010
estimated that these partnership projects delivered 82% higher incomes for beneficiaries,
as well as a 17% lower incidence of poverty by 2010 (Abdulsamad, 2015: 37).
13. The industry reached a peak in employment in 2007 with 88,700 employees. However,
pressures from the economic crisis forced layoffs and closures during 2008 and 2009.
14. This section draws on the discussion of these two industries in UNCTAD (2014:
67–69).
15. In Brazil, FDI to the automobile industry (assembly and auto parts) soared from an
annual average of $116 million in 2007–2010 to $1.6 billion in 2011–2012 (UNCTAD,
2013: 61). Between 2007 and 2012, the automotive industry in Mexico had an influx
of $3.6 billion in announced FDI (PwC Mexico, 2013.)
16. The IDB replicated the public-private partnership models developed in India to its first
pilot projects in Uruguay and Colombia.
17. The description of this case is drawn from Fernandez-Stark et al. (2014).
18. Lall’s categories only cover goods, however, and India is also the world leader in exports
of offshore services with 45% of the global total. See Fernandez-Stark et al. (2011),
which defines and analyzes recent trends in the offshore services industry using a GVC
approach.
19. This is reflected in Brazil’s top 10 exports in 2011, where the top seven items are
primary products or processed intermediates (Sturgeon et al., 2013; Table 3).
20. Multiple customers provide global suppliers with sufficient business to justify capital-
intensive investments that may have high minimum-scale requirements, such as
electronic displays and automated production lines.
21. China has taken the lead in launching a new Asian Infrastructure Investment Bank,
with appears to be winning the support of US allies not just in Asia (such as Australia,
New Zealand, South Korea, Singapore, and Thailand) but in Europe as well (Britain,
France, Germany, and Italy have all expressed interest in joining the bank as founding
shareholders). China is also a central player in the new ‘BRICS’ Development Bank

(with Brazil, Russia, India, and South Africa), and a proposed Silk Road development
fund to boost connectivity with its neighbors in Central Asia (The Economist, 2015).
22. In 2011, for example, Nike’s products were made in 930 factories in 50 countries,
employing more than one million workers. However, Nike itself had just 38,000 direct
employees, most of whom work in the United States. All of the other workers in Nike’s
global supply chain were employed by subcontractors based in developing economies
(Locke, 2013: 48). Over 80% of Wal-Mart’s more than 60,000 suppliers are located in
China alone (Gereffi and Christian, 2009: 579).
23. Foxconn Technology Group, the largest electronics contract manufacturer in the world,
has its home office in Taiwan, but its production and exports for leading brand name
multinationals like Apple are concentrated in mainland China, where it employs more
than one million workers, making it by far the largest private employer in the country.
Li & Fung, the largest trading company in the world, is headquartered in Hong Kong
but does most of its sourcing from China, and it has extensive operations in the Americas
(Fung, 2011).
24. As we saw in the coffee case, the price for specialty coffee could be double that for
certified organic or fair trade coffee.

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13
t
Risks and Opportunities of Participation
in Global Value Chains

Gary Gereffi and Xubei Luo

Introduction
For millennia, the ancient agrarian cycle based on crops and livestock controlled
the fortunes of the world. Then came the Industrial Revolution in the mid-
19th century. ‘For the first time in history, the living standards of the masses of
ordinary people have begun to undergo sustained growth’, notes Nobel laureate
and economist Robert E. Lucas, Jr. ‘Nothing remotely like this economic behavior
has happened before’ (Lucas, 2002: 109–110). More recently, in the context of
integration and modernization, waves of technology improvement since the
first industrial revolution have been changing the boundary of production and
redefining the spectrum of the role of state. Participation in global value chains
(GVCs), which highlight the ways in which new patterns of international trade,
production, and employment shape prospects for development and competitiveness,
creates opportunities and risks to enterprises. On the one hand, it creates new
opportunities for profits and expands the market horizon; and on the other hand,
it exposes the enterprise sector to risks previously shielded from market boundaries
and geographic distance, and increases the degree of potential information
asymmetry. Various forces interact in different directions, exacerbating or
mitigating the dynamics of risks.
Risk implies the possibility of loss. The upside of risk, or the possibility of gain,
is opportunity. Risk (or opportunity) can be imposed from outside or taken on
voluntarily in the pursuit of opportunities. Enterprises are facing a wide range of
risks on a day-to-day basis. Due to continual changes in technology, production
frontiers are pushing outwards and higher efficiency becomes the norm for survival
(for example, personal computers). Demand changes as new tastes and preferences
create niches for new products, and the higher profit mark-up from innovation
becomes an engine of growth (for example, the iPad). There are also catastrophic
risks from unexpected events such as global economic crises and natural disasters.

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382 Global Value Chains and Development

The information and communication technology revolution has not only sharply
increased productivity, but also reinterpreted the function of time and distance.
Billions of activities are linked with ‘one-click’ and new demands become effective
with ‘just-in-time’ delivery. The world is increasingly interconnected. The largely
unforeseen changes in the global arena—from the collapse of the dot.com boom
in the early 2000s, to the burst of housing bubbles in 2008, and to the ongoing
Euro-zone turmoil—have had systemic implication on the survival and growth
of firms in different corners of the world, even before reactions were taken to try
to disentangle the links. Shocks in access to financing and to commodities were
magnified at an unprecedented scale.
To a considerable extent, participating and competing in GVCs have become
inevitable. Even if a firm is not export-oriented, it will be competing against
imports made in the global economy unless there are protectionist barriers against
imports. This chapter looks at the risks and opportunities firms and their workers
face in GVCs. First, it examines the risk-sharing mechanisms that firms provide
from the national and global perspectives; second, it takes a closer look at the new
opportunities and challenges for firms and individuals in the global arena; third,
it discusses the role of economic upgrading and social upgrading; and finally it
sheds light on how the government can help people manage risks and reap the
benefits of participation in GVCs.
This chapter draws from an extensive literature on GVCs, much of which has
been based on country- and industry-specific field studies by interdisciplinary
researchers. The GVC studies reviewed here span a wide range of extractive,
agricultural, manufacturing, and service sectors, with an emphasis on trends during
the past 10–15 years. Our objective is to reframe the findings from this literature
on the global economy to useful generalizations about risks and opportunities of
participating in GVCs.

Firms as a Vehicle of Risk Sharing

Nobel laureate Ronald Coase has argued that firms emerged as a form of social
institution to overcome the constraint of transaction costs inherent in direct
exchanges: the costs associated with searching for, communicating, and bargaining
with possible trading partners (Coase, 1937). Through efficient resource allocation,
firms are capable of generating higher income than households alone can do by
providing self-produced goods and services directly to the market. Sharing with
another party the burden of loss or the benefit of gain from a risk is a common
measure of risk management. Importantly, multi-person firms provide the
mechanism of risk sharing among workers, firm owners, and between workers
and firm owners:

• When risk is shared among workers, if a worker falls sick, others can
share the workload to keep the firm going. Also, the risk-sharing
mechanism that multi-person firms make possible allows workers to
specialize and increase productivity together. Investing in specialized
skills is a risky undertaking. By sharing the costs of training or increasing
the expected returns of acquiring skills, the enterprise sector can shift
the skill distribution in the workforce toward specialization (Acemoglu
and Pischke, 1999; Lam and Liu, 1986).
• When risk is shared among owners of capital, for example, with limited
liability, investors can take on more creative risk with a given level of
expected risk through diversifying their portfolio. As the Economist
magazine noted in its millennium issue, ‘The modern world is built
on two centuries of industrialization. Much of that was built by equity
finance which is built on limited liability’ (The Economist, 1999).’
With the required legal and institutional frameworks, the contractual
arrangements of limited liability limit the down-side risk of investments,
allowing investors to separate personal liability from the debt of the
production unit. It also enables them to own small pieces of many
firms and diversify their investment portfolio, which reduces risk if
some of their investments drop in value. Limited liability also led
to the development of the stock market, facilitated corporate capital
accumulation, and enabled the exploitation of economies of scale.
• When risk is shared between workers and owners of capital, for example,
through labor contracts, firms can provide insurance to workers who
accept a lower wage in exchange for stable income. Firms can provide a
steadier stream of wage income to labor owners by isolating some risks
related to production. Through labor contracts, workers can relocate risks
in the production process to firms and limit excessive fluctuations in
employment and income to maximize welfare. To maximize profit, firms
try to minimize the cost of labor as well as the cost of other inputs. To
maximize welfare, workers prefer jobs not only with higher but also more
stable income. Firms, which are less risk-averse than workers, care more
about the average labor cost than its volatility, and thus can offer labor
contracts with less volatility in pay (for example, a fixed wage) to compete
for workers in exchange for a lower average level of remuneration. By
leveraging the two aspects explicitly or implicitly contained in labor
contracts—the level and the volatility of the remuneration—both firms
and workers could be better off through risk sharing. On the other hand,

workers can offer a form of insurance to firms in which they agree to

reductions in wages or cutback in work hours during temporary shocks
in exchange for higher wages in normal times.
Risk sharing and diversification have encouraged risk taking and increased
productivity on a massive scale. Higher income allows individuals to increase
savings, purchase market insurance, improve access to finance, invest in nutrition
and health, and obtain more knowledge from educational investment. Take savings,
for example. If individuals are struggling to meet their current needs, saving for
the future will be a slow process. Around the world, as income levels rise, savings
rates also rise (Schmidt-Hebbel et al., 1992). In developing countries, a doubling
of income per capita is estimated to raise the long-run private savings rate by 10
percentage points of disposable income (Loayza et al., 2000).
However, with the division of labor and diversification of ownership of firms,
new risks also emerge. The ways the enterprise sector functions and manages
risk affect the risks people face and the risk-management measures they employ.
Firms may take risk irresponsibly at the brink of bankruptcy, creating negative
externalities for society. The management of the firm, which is often in the hands
of professionals who have special managerial skills, may have different interests
than its owners.
If the enterprise sector fails to function smoothly or if it shifts its own risks
to people, it can be a source of risks to households, communities, and even the
financial sector and national government. When business shrinks or technology
becomes obsolete, the enterprise sector may generate income-related risks
(channeled through loss of jobs and loss of capital returns) and asset-related risks
(channeled through loss of investments). Both can further translate into risks
related to social inclusion, ranging from loss of insurance and other benefits
provided through employment (such as health insurance and pension), to loss of
connection with the professional community, loss of social status and involuntary
changes in life styles. Regulation and incentive systems need to be in place to
ensure that the interests of various stakeholders are protected.
In a globalized world, characterized by lower transport and transaction costs,
the interconnectedness across firms or sectors linked through supply networks or
financial linkages multiply and intensify. Global value chains include two main
types of firms: ‘lead firms’, which are typically transnational corporations (TNCs)
headquartered in the advanced industrial countries, who control and define the
main activities in terms of price, delivery, and performance in both producer-driven
and buyer-driven GVCs; and the supplier companies who produce the goods and
services in GVCs, generally located in developing countries. Thus, the GVC
‘enterprise sector’ links both developed and developing countries into a common
global supply chain (Gereffi and Sturgeon, 2013).

From the GVC point of view, enterprise sectors in national economies are part
of the supply-base for lead firms in GVCs. This has two concrete implications: (1)
external actors (specifically, GVC lead firms) are a potentially significant form of
‘external risk’ in national enterprise sectors; and (2) national enterprise sectors are
nested within larger regional and global enterprise sectors, which are connected to
GVCs. The global enterprise sector, as a series or set of industry-specific GVCs,
has the potential to affect people’s risk management through the same risk-
sharing mechanisms that are operating at a larger scale. It can be advantageous
or detrimental to national enterprise sectors and affect firms differently according
to their size and industries.

Opportunities and Challenges in the Global Arena

Firms face new opportunities and challenges in the global market. They have the
opportunities of supplying much larger global demand, which eliminates the scale
and purchasing power limitations of the domestic market in developing economies.
There also are many more upgrading opportunities because the quality and price
parameters have wider variation, allowing for more extensive product and process
upgrading options. There is higher risk as well because international standards
for price, quality, and delivery schedules are much less forgiving. Firms typically
need a relatively large scale of production to participate in global markets, or have
a special technological edge to enter global market niches. There is also a risk
from intensified competitive pressures, as everyone can compete with exporters
in terms of lower prices or higher quality, so only the best can succeed in GVCs.
The presence of scale economies favors the concentration of production, which
tends to minimize costs, leading to higher profits for enterprises and possibly
lower prices for consumers. The higher concentration of production yields benefits
of large-scale clustering and agglomeration, but also generates new risks for the
economy. Shocks in one location can easily spread to the rest of the network,
generating cascade effects. If the supply network is highly interconnected, low
productivity in one sector can potentially affect the entire economy, as downstream
sectors will also suffer (Acemoglu et al., 2010).
The effects of the 2011 earthquake in Japan on the automobile industry
worldwide demonstrate the vulnerability of the system to shock (Box 13.1).
However, greater openness to international trade and capital can also have a large
impact on macroeconomic volatility. When an economy is highly concentrated
in certain productive activities, such as Nokia (whose worldwide sales in 2003
represented over one-quarter of Finland’s GDP) and Samsung (which accounted
for 23% of the Republic of Korea’s exports and 14% of its GDP), firm-specific
idiosyncratic shocks can generate significant shocks that affect GDP (Di Giovanni

and Levchenko, 2009). In the United States, the largest and most diversified
economy in the world, a one-time increase in the dividend of one company
(Microsoft, for $32 billion) boosted growth in personal income from 0.6% to 3.7%
in December 2004 (Bureau of Economic Analysis, 2005).
While firms are exposed to new challenges in an increasingly integrated world,
international trade and financial linkages, remittances, and diaspora communities
have the potential to serve as safety nets for individuals, families, and communities
to absorb and cope with risks to shocks that are not global in nature.
Foreign direct investment can affect the volatility of enterprise performance in
times of crisis in different ways. The ability of multinationals to shift production
across countries can increase volatility, and market diversification can lend stronger
stability to local subsidiaries. For instance, after the recent global financial crisis,
multinational subsidiaries linked to parents with strong vertical production and
financial linkages fared better on average than local counterparts. The demand
from parent firms can help absorb the negative demand shock in the host country,
while the performance of subsidiaries linked horizontally with parent firms might
become more volatile as the multinationals shifts more production back home
(Alfaro and Chen, 2011).

Box 13.1 From One Shock to Another: The 2011 Earthquake in Japan
Rattled the Auto Industry Worldwide

Supply chain management, backed by tight vertical connections among enterprises, has
resulted in a high level of competitiveness for the automobile industry. Car makers at the
top of a chain can procure meticulously customized, high-quality components from firms
further down the chain (resulting in differentiated, high-quality cars), collect information
to continuously predict the appropriate amount of outputs, and minimize inventory and
associated costs.
The high degree of customization and just-in-time production practice, two key drivers
of success, also expose the automobile industry to worldwide shocks (Canis, 2011). In March
2011, an earthquake struck eastern Japan. The disruption of production of automotive parts
generated immediate impacts. Since automotive parts are highly customized, replacement
from other suppliers is almost impossible. In April 2011, Nissan closed plants in Mexico for
five days and plants in the United States for six days..Output at eight of Honda’s Canadian,
Indian, UK, and US plants was cut by half. The US car maker, General Motors, closed its
assembly plant in Louisiana because of a shortage of vehicle parts, which in turn led to short
layoffs at its New York plant, where the engines are made. Ford closed assembly plants in
Belgium and the United States for one week, and plants in China, the Philippines, Taiwan,
China, and South Africa for two weeks.

Source: Bunkley, 2011.

The internal capital markets and investment flows in TNCs from parents to
subsidiaries can lower subsidiaries’ dependence on host-country credit conditions
and hence lower their performance volatility when host countries experience credit
crunches (Antras et al., 2009). In Poland, for example, during the recent global
economic crisis, foreign ownership appears to have provided a higher degree of
resilience to affiliates facing external credit constraints through intra-group lending
mechanisms (Kolasa et al., 2010).
For individuals, communities, and national economies, remittances of foreign
earnings tend to be stable and often counter-cyclical. Migrants are likely to send
home more resources to help their families when the home country has experienced
an economic downturn or crisis. For example, during the financial crises in Mexico
in 1995 and in Indonesia and Thailand in 1998, remittances increased sharply,
which not only helped households smooth consumption, but also provided the
needed resources to overcome credit constraints for local entrepreneurs, alleviating
their risks (World Bank, 2005). Beyond remittances, diasporas can provide
assistance in normal times by assisting in philanthropic activities, fostering the
exchange of knowledge, and increasing trade links; in time of stress, they are
more likely than average investors to finance infrastructure, housing, health, and
education projects in their countries of origin. Diaspora bonds have raised over
$35 billion in India and Israel, including periods when the home country was
suffering a liquidity crisis (Ratha, 2010).
In terms of GVCs, the ‘rationalization’ that has been going on in terms of
shrinking the size of supply chains was accelerated as a result of the 2008–2009
global economic recession. As consumption declined in most advanced industrial
countries, which were the main markets for GVCs, the size of GVC supply chains
sharply contracted as a result of the recession. Recent studies have highlighted
significant new trends in how GVCs are organized in the current period, which
alter the nature of risks that national enterprise sectors will confront (see Gereffi,
2014, for a summary of these changes):
• GVCs are becoming geographically more consolidated, which ref lects
the rise of large emerging economies after 1989. Known initially as
BRICs (Brazil, Russia, India, and China), the emerging economies now
include a diverse array of ‘growth economies’ such as Mexico, South
Korea, Turkey, Indonesia, the Philippines, and Vietnam, which offer
seemingly inexhaustible pools of relatively low-wage workers, highly
capable export-oriented manufacturers, abundant raw materials, and
sizeable domestic markets (O’Neill, 2011). Emerging economies are
now major production centers worldwide, although their specific roles in
GVCs vary according to their openness to trade and foreign investment,
and other strategic considerations.

• GVCs are also organizationally more concentrated, as the transnational

lead firms in GVCs seek to shrink their global supply chains from 500–
1,000 suppliers in the heyday of economic globalization in the 1990s and
early 2000s to 25–30 key suppliers (or less) in the current era. These new
supplier firms are expected to be bigger, more capable (technologically as
well as in modern models of supply-chain management), and strategically
located to access large regional and national markets. Coupled together,
the trends of GVCs toward geographic consolidation and organizational
concentration place greater competitive pressures and economic risks
on the majority of countries and firms in the global economy that don’t
have the scale, size, strategic location, or skills to rise to the top in
contemporary GVCs.
The global economic recession of 2008–2009 has reinforced some of the pre-
existing trends in GVCs, but also introduced new patterns in the global economy
that affect the distribution of risk and vulnerability in national enterprise sectors.
A study by the World Bank concludes that GVCs have proven resilient in the
face of the recent economic crisis, which has accelerated two long-term structural
trends in the global economy: the aforementioned consolidation of GVCs, and the
growing salience of markets in the developing world (Cattaneo et al., 2010: 6).
As world trade is bouncing back from the 2008–2009 global recession, emerging
economies are becoming a main engine of world economic recovery. Given stagnant
consumer demand in the developed world, GVCs are shifting to supply new
end markets in the developing world, which include a renewed emphasis on the
domestic markets of large emerging economies and the regionalization of what
were previously global supply chains (Staritz et al., 2011).
In the case of the global apparel industry, China’s share of global apparel exports
increased from 22% to 41%, between 1995 and 2009, and export sales increased
from US$32.9 billion to $122.4 billion. Countries whose market shares declined
most abruptly during this period, which included the phase out of the Multi-Fiber
Arrangement (MFA) in 2005 that guaranteed export quotas for many smaller
countries in US and European Union markets, were Mexico, Central America
and the Dominican Republic, Thailand, the Philippines, Romania, and Poland
(Frederick and Gereffi, 2011). However, even in China, a clear winner in aggregate
terms, thousands of apparel factories were shuttered and millions of workers in
apparel plants lost their jobs as the industry was streamlined in the late 1990s and
early 2000s (when many state-owned apparel firms were closed), and then again
in the late 2000s as the recession further reduced export-oriented sales.
In short, the economic crisis has not reversed globalization; international
production and consumption have remained central features of the global economy.
The role of the developing world compared with that of the developed countries

has grown, but inequalities among developing countries in terms of how they are
positioned in GVCs are rising as well. In producer-driven chains, the lead firms
that to a large degree defined the structure of these industries were mainly global
manufacturers like General Motors, Ford, IBM, and HP. In buyer-driven chains,
the lead firms were a mix of retailers (like Walmart, J. C. Penney, and Carrefour),
global marketers (such as Nike, Liz Claiborne, and Polo/Ralph Lauren), and
supermarkets and food multinationals (like Tesco, Sainsbury’s, Kraft Foods, and
Nestlé) (Gereffi, 1994). The lead firms in buyer-driven chains were particularly
influential in the globalization process because they accelerated the process of
‘global sourcing’ based on orders from developed countries, which relied almost
entirely on production carried out in developing economies (Gereffi, 1999; Dicken,
2011). The dominant role of the lead firms (largely from the developed world)
could generate additional sources of inequality and potential crises in the future.

Economic Upgrading and Social Upgrading

The distribution of risks and opportunities is closely related to the positioning of
an enterprise within a value chain and to the nature of this value chain. Figure
13.1 illustrates this proposition for value chains associated, respectively, with five
different industry groups. Economic and social upgrading (or downgrading) of
firms and workers can take place in multiple trajectories (Barrientos et al., 2011).
The concept of social upgrading refers to improvements within a specific
enterprise (or associated group of enterprises) in the terms of employment,
remuneration, worker rights, and workplace safety and employee insurance
arrangements (Barrientos et al., 2011). Social upgrading is central to this
examination of household risks and enterprises within value chains. Social
upgrading by enterprises helps reduce risks for worker households and removes
some of the volatility they would otherwise face. The extent and type of social
upgrading that is possible are usually related to (but not solely determined by) the
economic upgrading in place, which highlights improvements in various aspects
of economic performance within GVCs. Other institutional factors and actors,
including the extent and nature of worker organization, civil society actions,
government legislation and its enforcement, can also make a difference.
Each GVC in Figure 13.1 is represented as a vertical silo, with lower segments
signifying the approximate share of less-skilled types of work carried out within
the value chain. All value chains include economic activities that span a broad
range of skill levels. Consider agriculture, for example. At the lowest level—the
farm, typically—this value chain involves a relatively large proportion of small
scale and low-skill labor. Higher in the value chain, particularly at the points of
processing and marketing, the skill level of workers rises progressively. The same

is true for each of the other four GVCs. Skill levels rise as one moves from lower
to higher value activities in the chain; the proportion of highly skilled workers at
the top of each value chain, who carry out knowledge-intensive activities, vary
according to the type of GVC we are examining. In agriculture, for example, this
segment tends to be relatively small, while in business services, the proportion of
knowledge workers is relatively large The likelihood of enforceable standards also
rises as one moves up value chains toward more formal and skill-intensive work.
It is not enough merely to specify decent work standards; they must be capable of
enforcement at low cost, in the ideal situation being self-enforcing. The prospects
of having measurable and enforceable standards typically rise as skill levels and
technology increase within value chains.

Figure 13.1 Industry Groups, GVCs, and Economic Upgrading

Source: Adapted from Barrientos et al., 2011: 328.

Social upgrading can be achieved through various means, involving different

combinations of: (a) economic upgrading: as enterprises move up value chains,
the share of skilled workers typically increases; and (b) deliberate actions to
introduce enforceable standards—minimum wages, paid time off, workplace safety,
insurance, and so on—for those workers whose skill levels remain low, who are

more easily replaced, and who for these reasons may be badly treated. The scope
for such actions widens considerably as the array of actors is expanded in GVCs.
Using illustrative examples of successful social upgrading, we develop an analytical
framework to assess possibilities for action.
Alternative pathways for social upgrading are available, as Figure 13.2 shows
with the help of three examples. The first example, Pathway A, depicts a situation
in which no significant economic upgrading has occurred. Instead, risks to workers
were reduced because of deliberate actions that introduced enforceable standards.
This could be the situation, for instance, of an enterprise that produced t-shirts
branded with the logo of some US university. Actions by concerned student groups
resulted in a slew of reforms: doing away with child labor, reducing the length of
the work day, improved lighting and other work conditions, and so on.

Figure 13.2 Different Pathways to Social Upgrading

Source: Adapted from Barrientos et al., 2011: 335.

Alternatively, social upgrading can occur along Pathway C, where almost the
entire burden is borne by economic upgrading. In this case, risks for workers
are reduced as small-scale household work gets turned over into high-tech and
knowledge-intensive work, for instance, as in the case when a weaver of traditional
rugs takes to computerized design and manufacturing. In the intermediate case of
Pathway B, social upgrading within labor-intensive industries like apparel can be
achieved with lower risks to workers if outside institutions like the Better Work

program run by the International Labor Organization are involved to help certify
standards (Rossi et al., 2014).
When the enterprise sector gravitates toward more technology- or knowledge-
intensive industries—for example from agriculture to apparel, and to business
services—the share of skilled workers typically increases. As a result, labor
productivity grows and more jobs of higher quality are created. However, economic
upgrading does not always lead to social upgrading in the form of better wage
and working conditions. On the one hand, unskilled workers in many developing
countries can be excluded from the desirable job opportunities provided by
technology-intensive or knowledge-intensive work, which tends to concentrate
in more developed countries. On the other hand, workers in the same enterprises
can face very different opportunities for social upgrading; regular workers can
have better statutory employment protection and benefit from labor standards,
while irregular workers, often over-represented among women, youth, minority,
and other vulnerable groups, can suffer discrimination.
In many enterprises in the developing world, hiring irregular workers directly
or through third-party contractors to perform the most time-sensitive task in
the low (unskilled) segment of the production chain, is often a way for firms to
reduce costs in response to last-minute orders from outsourcing companies. While
this creates new employment opportunities for many low-skilled workers, it also
allows firms to shift the risks of production related to fluctuations in demand to
workers. Regulations need to be in place to protect workers.
To a considerable extent, as we contend below, reducing risk for workers/
households is associated with social and economic upgrading at the enterprise (or
industry) level. Since a significant proportion of international production and trade
now takes place through coordinated value chains in which lead firms globally and
locally play a dominant role, possibilities for upgrading are increasingly defined
by firms’ locations within these chains.
Firms in GVCs have opportunities for economic upgrading through engaging
in higher value production within value chains. However, they also face challenges
meeting the commercial demands and quality standards required by buyers, which
smaller and less efficient producers find hard to meet (Gereffi and Lee, 2012;
Gereffi, 2014). The GVC approach focuses heavily on this notion of inter-firm
networks, which exist within corporate supply chains, and international trade
and production networks. Adopting a GVC approach to a considerable extent
changes the focus of our analysis: instead of looking at individual, self-contained
enterprises, we need to examine how firms are positioned within chains having
different structures.
Adopting a GVC analytical framework opens the door, therefore, to an
additional cast of economic actors and stakeholders who can act as agents of

change. In addition to governments and enterprise management, national industry

associations, and trade unions, positive change in working conditions can be
brought about at the initiatives also of buyers’ associations, consumer groups,
and international certification and inspection agencies, increasingly employed by
buyers wary of their international human rights image (Mayer and Gereffi, 2010).
The expansion of global production, especially in labor-intensive industries,
has been an important source of employment generation. Many jobs have been
filled by women and migrant workers who previously had difficulty accessing
this type of waged work, and they have provided new income sources for poorer
households (Oxfam International, 2004; Barrientos et al., 2003). Where this is
regular employment that generates better rights and protection for workers, it can
enhance social upgrading and decent work. The demand for rising standards often
requires the skilling of at least some workers and provision of better employment
conditions.
But for many workers, this is not the outcome. Much employment is insecure
and unprotected, and there are significant challenges to ensuring decent work
for more vulnerable workers. Irregular and low-skilled jobs—which are also low
paying, thereby representing limited prospects for upward mobility—are as easily
eliminated as brought into being. New risks are introduced, even as some old ones
abate. Along with the risk of dismissal (or work reduction) that especially lower-
skilled workers (and suppliers) of enterprises face, another significant downside
risk accompanying these engagements involves the enhanced probability of
injury and illness. Unsafe and unsanitary work conditions are often associated
with low-skilled work in the enterprise sector. Labor safety regulations are
non-existent or they are routinely f louted, more so at some points within GVCs
(Rossi et al., 2014).
Poorer individuals’ engagements with the enterprise sector thus produce
situations that can be, and often are, volatile. A simple logic for why volatility
can be greatest for the worst off in these relationships is provided by Barrientos
et al. (2011: 332):

challenges … remain significant for irregular workers … New activities taken on

by the factory may well … lead to social upgrading for regular workers—through
the development of more skills and training for new capabilities—but irregular
workers continue to be needed in order to respond to buyers’ requirements in
terms of low cost, short lead times and high flexibility; their very status impedes
their social upgrading.

Not all developing countries face similar options in the context of these changes.
The shift to Southern markets and the growth in South-South trade have created
more possibilities for entry and upgrading in GVCs, but they also present new

challenges, particularly for the least-developed countries. GVC consolidation poses

opportunities as well, especially for countries and firms with rising capabilities.
However, it too threatens to leave many countries and firms that don’t possess
the required advantages on the periphery of GVCs.
In a more promising vein, the GVC literature shows that value chains oriented
to different end markets entail distinct upgrading opportunities (Staritz et al.,
2011; Gereffi, 2014). For example, the demand in lower-income countries for less
sophisticated products with regard to quality and styles may confront lower entry
barriers and less stringent product and process standards, which can facilitate
participation and make it easier for developing-country firms to engage in higher
value-added GVC activities (such as product development, design, and branding)
(Kaplinsky et al., 2011). With more intimate knowledge of local and regional
markets than multinational firms, they can generate ‘frugal’ innovations that are
suitable to resource-poor environments (Clark et al., 2009). On the other hand,
relying exclusively on low-income markets can lock suppliers into slimmer margins
and cut-throat competition, which heightens economic risks.
Rossi’s (2011) case study of garment factories in Morocco led by fast-fashion
buyers shows that functional upgrading in GVCs can bring about social upgrading
and downgrading simultaneously, for regular and irregular workers, respectively.
On the one hand, factories supplying a finished product and overseeing packaging,
storage and logistics for their buyers offer stable contracts and better social
protection to their high-skilled workers to ensure a continuous relationship as well
as full compliance with buyers’ codes of conduct. On the other hand, in order to
be able to respond quickly to buyers’ frequently changing orders and to operate on
short lead times, they simultaneously employ irregular workers on casual contracts,
especially in the final segments of the production chain (such as packaging and
loading), often imposing excessive overtime as well as discriminating against them
on the basis of wages and treatment (Rossi, 2011).
In agri-food GVCs, private quality standards set by highly concentrated
European and US supermarkets and food manufacturers have a direct impact
on risks faced by consumers as well as farmers, with conflicting implications for
safety and upgrading (Lee et al., 2012). On the one hand, stringent food safety
and quality standards imposed by large food retailers and manufacturers, which
generally have extensive global sourcing networks, protect consumers against
social and environmental risks. However, these tend to marginalize small farmers
unable to comply because of high costs and a lack of required skills and facilities
(e.g., cold chains to store, distribute, and ship fresh produce). On the other hand,
higher standards can be a catalyst for participation in high-value-added chains,
such as the role played by smallholders who successfully supply niche markets for
organic or Fair Trade-certified products (Gereffi and Lee, 2012: 28).

In both developed and developing countries, the economic gains of participating

in global supply chains do not necessarily translate into good jobs or stable
employment and, in the worst case, economic upgrading typified by a number of
successful export economies, especially in low-income countries, may be linked to a
significant deterioration of labor conditions and other forms of social downgrading
(Rossi et al., 2014).
A recently concluded three-year research program funded by the United
Kingdom’s Department for International Development, called ‘Capturing the
Gains’ (UK DFID, 2013), has a website containing many of the research findings
in working papers and policy briefs. One of the main conclusions of this project
is that GVCs can be a key policy tool for sustained poverty reduction. However,
facilitating the upgrading of workers and smallholders also requires public-private-
civil society partnerships, as well as regional partnerships involving countries
and firms that lead international production networks based in Asia, Africa, and
Latin America, which are key to future upgrading of the South (Lee et al., 2011).
These partnerships reflect novel forms of risk sharing and strategic collaboration
among key value chain actors to address the challenge of promoting widespread
and sustainable development.
Various examples of novel partnerships for risk sharing, innovation and
upgrading are identified in the Summit Briefings for the Cape Town, South
Africa meeting of ‘Capturing the Gains’ held in December, 2012. A few of these
are found in Barrientos et al. (2012: 3–4). For example, over recent decades,
the cocoa-chocolate value chain has undergone concentration in processing and
manufacturing. Cocoa farmers have received limited support, often have low
yields and are poorly remunerated. Media attention has highlighted issues of
child labor, and many younger innovative farmers are leaving the sector for better
options elsewhere. Consumption of chocolate has grown steadily, especially in
emerging economies, with predictions of future cocoa shortages. Leading chocolate
manufacturers are working with civil society, donors, and governments to support
farmers and their communities. Social upgrading is now recognized as critical to
economic upgrading—and ensuring the future resilience of the cocoa-chocolate
value chain.

Policy Implications
Overall, the government can provide a critical supportive environment in terms
of infrastructure to help exporters, local communities, and small producers trying
to access national and international markets, education and training to build a
skilled labor force, and sensible regulations to lower the uncertainties.
Firms benefit most from participation in GVCs if they are relatively large,
technologically advanced, professionally managed, and have diversified export

markets (both in terms of products and countries). Suppliers also benefit from
relatively close relationships with their buyers, which can facilitate learning how
to upgrade to meet the standards of global markets. These findings accommodate
current GVC trends, since TNCs seek to reduce transaction costs by requiring
‘one-stop shops’ with larger and more capable suppliers. Contract manufacturers
and business process outsourcing service providers, and firms that provide routine
assembly tasks and other simple services within GVCs, earn slimmer profit and
provide less to their workers (Lüthje, 2002).
Workers benefit most from participation in GVCs if their conditions of work
are relatively formalized (e.g., wages, length of work day and work week, defined
benefits) and if they have higher skills (closely correlated with more advanced
education) that allow them to carry out better remunerated tasks. The government
can play a key role to address the downside risks for workers—dismissal, debt,
injury, illness—and assist in enhancing the upward mobility simultaneously.
Enforcing sound regulations dealing with labor conditions is crucial to protect
the vulnerable segment of the labor force.
Global buyers (retailers, brands, supermarkets) typically don’t pay suppliers to
undertake the upgrading required to remain competitive in GVCs. Therefore,
supportive government policies are an asset (e.g., helping firms to meet
international standards and certification requirements, or providing loans or access
to finance capital required for purchasing new or better equipment).
The policy implications for upgrading in terms of different end markets are
not clear cut. Facilitating access for export producers to multiple end markets
through preferential trade agreements (multilateral or bilateral) would increase the
flexibility for suppliers in developing countries to engage in upgrading. However,
this will also expose them to greater competitive pressures through low-cost
imports. More fundamentally, government policy makers don’t know enough about
the intricacies of global industries to spur specific forms of innovation in GVCs.
There is no magic bullet to improve international competitiveness in GVCs.
What government policy can do is to facilitate the development of human capital,
including collaborations with universities and private firms to ensure demand-
responsive forms of workforce development. In addition, government can foster
global collaboration by making it easier for small- and medium-sized firms to gain
the information they need about global markets, and to sponsor local trade fairs
or external trade missions to encourage global match-making.

Acknowledgments
This chapter was prepared as a background paper of the World Development
Report 2014: Risk and Opportunity. The findings, interpretations, and conclusions

expressed here are entirely those of the authors. They do not necessarily represent
the views of their affiliated organizations. The authors would like to thank
Anirudh Krishna for valuable discussions and comments.

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14
t
Global Value Chains in a Post-Washington
Consensus World

Viewing the Global Economy Through a Value-Chain Lens

Globalization has given rise to a new era of international competition that is
reshaping global production and trade and altering the organization of industries
(Gereffi, 2011). Since the 1960s, international companies have been slicing up their
supply chains in search of low-cost and capable suppliers offshore. The literature
on ‘the new international division of labor ’ traced the surge of manufactured
exports from the Third World to the establishment of labor-intensive export
platforms set up by multinational firms in low-wage areas (Fröbel et al., 1981).
This was typified by the American production-sharing or ‘twin plant’ program
with Mexico and the German export-processing zones for apparel assembly in
Central and Eastern Europe. The pace of offshore production soon accelerated
dramatically and took new organizational forms (Dicken, 2011). In the 1970s
and 1980s, US retailers and brand-name companies joined manufacturers in the
search for offshore suppliers of most categories of consumer goods, which led to
a fundamental shift from what had been ‘producer-driven’ commodity chains to
‘buyer-driven’ chains. The geography of these chains expanded from regional
production-sharing arrangements to full-fledged global supply chains, with a
growing emphasis on East Asia (Gereffi, 1994, 1996).
In the 1990s and 2000s, the industries and activities encompassed by global
supply chains grew exponentially, covering not only finished goods, but also
components and sub-assemblies, and affecting not just manufacturing industries,
but also energy, food production, and all kinds of services, from call centers and
accounting to medical procedures and research and development (R&D) activities
of the world’s leading transnational corporations (Engardio et al., 2003; Engardio
and Einhorn, 2005; Wadhwa et al., 2008). Since the early 2000s, the global value
chain (GVC) and global production network (GPN) concepts gained popularity
as ways to analyze the international expansion and geographical fragmentation of
contemporary supply chains (Gereffi et al., 2001; Dicken et al., 2001; Henderson
et al., 2002; Gereffi, 2005).

There are numerous reviews of the distinctive features of the global commodity
chain (GCC) and the GVC and GPN approaches to analyzing global supply
chains.1 In general, they all characterize the global economy as consisting of
complex and dynamic economic networks made up of inter-firm and intra-firm
relationships. However, it is equally true that there are national and international
political underpinnings to the shifts in global supply chains that have taken
place over the past four decades. In the 1960s and 1970s, the key players in most
international industries were large, vertically integrated transnational corporations
(Vernon, 1971) and their link to the growing markets of developing countries was
primarily via the import-substituting industrialization (ISI) model of growth that
had been well established in Latin America, Eastern Europe, and parts of Asia
since the 1950s. The ‘East Asian Miracle’ (World Bank, 1993), based on the rapid
economic advance of Japan and the so-called East Asian tigers (South Korea,
Taiwan, Hong Kong, and Singapore) since the 1960s, highlighted a contrasting
development model: export-oriented industrialization (EOI) (Gereffi and Wyman,
1990). Buttressed by the neoliberal thrust of the Reagan and Thatcher governments
in the US and the UK, respectively, export-oriented development became the
prevailing orthodoxy for developing economies around the world. This model
came to be known as the ‘Washington Consensus,’ and EOI was lauded for giving
many small economies in the developing world the opportunity to benefit from
scale economies and to learn from exporting to much larger trade partners, thereby
overcoming the bias of the ISI model toward the limited number of developing
countries with large domestic markets.
The death knell for ISI, especially in Latin America, came from the oil shock
of the late 1970s and the severe debt crisis that followed it (Urquidi, 1991). The
ISI approach had devised no way to generate the foreign exchange needed to pay
for increasingly costly imports, and escalating debt service payments led to a net
outflow of foreign capital that crippled economic growth. When many developing
countries, under pressure from the IMF and the World Bank, made the transition
from ISI to EOI during the 1980s (Gereffi and Wyman, 1990), there was an equally
profound reorientation in the strategies of transnational corporations. The rapid
expansion of industrial capabilities and export propensities in a diverse array of
newly industrializing economies in Asia and Latin America allowed transnational
corporations to accelerate their own efforts to outsource relatively standardized
activities to lower-cost production locations worldwide. It is precisely this change
in the strategies of transnational companies that enabled the shift from ISI to EOI
in developing economies, and it corresponds to the shift from producer-driven
to buyer-driven commodity chains at the level of global industries (Gereffi and
Korzeniewicz, 1994).2

However, the development story for East Asia and other newly industrializing
economies cannot be captured solely through a contrast of the ISI and EOI models,
since the shift from ISI to EOI was not total or uncontested in either East Asia or
Latin America. Indeed, elements of both strategies were intertwined since countries
tended to move from relatively easy to more difficult phases of both ISI and EOI
over time (Gereffi and Wyman, 1990). In addition, the growth of GPNs has been
linked to rising levels of income inequality, within and between countries, which
can be explained in large measure by the dynamics of rents in GVCs, which are
increasingly determined by intangible assets (such as copyrights, brand names,
and design) as more tangible barriers to entry in manufacturing have tended to
fall (Kaplinsky, 2000). In the wake of the 2008–2009 global economic crisis, the
rapid growth of productive capabilities in China, India, and other large emerging
economies has created a profound shift in global demand, for both finished
goods and intermediates from North to South, with both positive and negative
implications for developing country exporters (Kaplinsky and Farooki, 2011).
Today, the organization of the global economy is entering a new phase, or
what some have referred to as a ‘major inflection point’ (Fung, 2011), which could
have dramatic implications for economic and social upgrading and downgrading
among countries, firms, and workers. The role of the ‘Washington Consensus’ as a
paradigm for developing countries has been severely weakened (Gore, 2000) and no
alternative development strategy has taken its place. Thus, our analysis of GVCs in
this post-Washington Consensus world must not only take account of changes in the
organization of production and trade on a global scale, but also examine the role of
emerging economies as new sources of demand and production competencies in the
global economy. The increasing importance of GVCs in the current era challenges
the traditional way of measuring countries’ export performance and international
competitiveness, and it suggests that the post-crisis futures of advanced industrial
and developing economies are interdependent to a hitherto unprecedented degree.
The remaining sections of this chapter are organized as follows. First, recent
trends in GVC governance reveal a growing consolidation in the supply-base
among both countries and firms, and we argue that geographic consolidation
is facilitating the co-evolution of more concentrated lead firms, suppliers, and
intermediaries in GVCs. Second, the evolution of GVCs has altered our basic
notion of how and where economic development occurs, which is illustrated by
the growing importance of value-added trade and shifting end markets for GVCs,
which are giving rise to new patterns of regionalization in the global economy.
Third, the GVC framework has become increasingly prominent in the development
agendas of a diverse array of bilateral and multilateral donor organizations, which
is leading to a greater focus on showing how vertically coordinated trade and
investment patterns in the global economy can be linked to employment outcomes

and a renewed concern with social upgrading. Conclusions will be drawn about
how these interrelated changes are likely to shape economic and social welfare in
emerging models of global development.

Governance Structures and Increasing Concentration in Global Value

Chains
The GVC framework focuses on globally expanding supply chains and how value
is created and captured therein. By analyzing the full range of activities that firms
and workers perform to bring a specific product from its conception to its end use
and beyond, the GVC approach provides a holistic view of global industries from
two contrasting vantage points: top-down and bottom-up. The key concept for
the top-down view is the ‘governance’ of GVCs, which focuses mainly on lead
firms and the organization of global industries; the main concept for the bottom-
up perspective is ‘upgrading,’ which focuses on the strategies used by countries,
regions, and other economic stakeholders to maintain or improve their positions
in the global economy (Gereffi and Fernandez-Stark, 2011). Recent trends related
to GVC governance will be discussed in this section of the chapter, and the links
between economic and social upgrading and new forms of value-added trade and
shifting end markets in GVCs will be the focus of the next section.
Governance is a centerpiece of GVC analysis. It shows how corporate power can
actively shape the distribution of profits and risks in an industry, and it identifies
the actors who exercise such power. Within the chain, power at the firm level can
be exerted by lead firms or suppliers. In ‘producer-driven’ chains, power is held
by final-product manufacturers and is characteristic of capital-, technology- or
skill-intensive industries. In ‘buyer-driven’ chains, retailers and marketers of final
products exert the most power through their ability to shape mass consumption
via dominant market shares and strong brand names.3 They source their products
from a global network of suppliers in cost-effective locations to make their goods.
The most notable form of ‘supplier power ’ comes via platform leadership (e.g.,
firms that exhibit marketing or technological dominance, which allows them
to set standards and get higher returns for their products), although, supplier
power typically is not associated with the explicit coordination of buyers or other
downstream value chain actors (Frederick and Gereffi, 2009; Sturgeon, 2009).
The role played by lead firms is highlighted in various typologies of GVC
governance. The initial distinction between producer-driven and buyer-driven
commodity chains was introduced in the mid-1990s in order to mark the rise of
global buyers in the 1970s and 1980s as retailers and brand marketers began to
set up international sourcing networks to procure consumer goods directly from
offshore suppliers, mainly in East Asia (Gereffi, 1994, 1999). These ‘full-package’

production networks based on local suppliers supplanted many of the assembly-

oriented production networks initially set up by multinational manufacturers
based in the developed economies (Bair and Gereffi, 2001). However, as the case
studies of GVCs proliferated, and more industries and countries were incorporated
into the analysis, it was clear that the dichotomous categories of buyer-driven and
producer-driven commodity chains were too broad to capture the full complexity
of the GVC governance structures that were emerging in the world.
In addressing this challenge, a new typology of GVC governance structures
was elaborated, which sought both to describe and explain in a parsimonious way
the significant differences between various types of value chains. Between the
two extremes of classic markets and hierarchies (i.e., vertical integration), three
network forms of governance were identified: modular, relational, and captive
(Gereffi et al., 2005). In these network forms of GVC governance, the lead firm
exercises varying degrees of power through the coordination of suppliers without
any direct ownership of the firms (Figure 14.1).

Figure 14.1 Five Types of Global Value Chain Governance

Source: Gereffi et al., 2005: 89.

The fivefold typology of GVC governance published by Gereffi et al.

(2005) has been very widely utilized and extensively cited, and it has become
a mainstay of our conceptual toolkit on GVC governance. One of the reasons
for the popularity of this approach is that it allows us to show quite easily how

the form of governance can change as an industry evolves and matures, and
indeed how governance patterns within an industry can vary from one stage or
level of the chain to another. For example, in the offshore services value chain,
all five types of GVC governance structures identified in the typology coexist,
but their role in upgrading varies according to the characteristics of suppliers in
developing countries, the requirements of lead firms, and the kinds of international
professional standards utilized in these chains (Fernandez-Stark et al., 2011).
The impact of multiple and shifting forms of GVC governance on the ability of
local producers to upgrade within global chains has been particularly notable in
the agrifood sector (Dolan and Humphrey, 2004; Gereffi et al., 2009; Lee et al.,
2012), although the phenomenon exists in other industries as well (Gereffi and
Fernandez-Stark, 2011; Gereffi et al., 2011).
Today, we are entering a very different era. By the mid-2000s, the Washington
Consensus development model was already beginning to unravel. US hegemony
was eroding and the large emerging economies, led by China and India, were
altering the organization of production and how rules were made that affected
the global economy. Consolidation was growing at both the country and supply-
chain levels in a number of hallmark global industries, such as apparel (Frederick
and Gereffi, 2011; Staritz and Frederick, 2012), automobiles (Sturgeon et al.,
2008; Sturgeon and Van Biesebroeck, 2011), and electronics (Sturgeon and
Kawakami, 2011; Brandt and Thun, 2011). When the global economic recession
hit in 2008–2009, this ended all prospects of a return to the old order. As the
consumption of advanced industrial economies was curtailed, developing countries
around the world began to look for alternatives to declining or stagnant northern
markets. Large emerging economies turned inward and redirected production
to their domestic markets and regional neighbors, and industrial policy became
more prominent.
In this context, the governance structures of GVCs are changing as well.
The problem is no longer one of coordinating far-f lung, fragmented, and
highly specialized global supply chains through triangular production networks
orchestrated by East Asian intermediaries (Gereffi, 1999). The question
increasingly posed by the transnational lead firms of GVCs is, ‘How can we
“rationalize” our supply chains from 300–500 suppliers to 25–30 suppliers?’ The
new suppliers are expected to be bigger, more capable, and strategically located
to access large markets. In this new environment, the extreme asymmetries of
power in favor of lead firms that characterized the buyer-driven and producer-
driven chains are shifting in many cases toward the top manufacturers located in
emerging economies such as China, India, Brazil, and Turkey. These countries
have well-organized domestic supply-bases and they have moved up the value
chain to incorporate key input suppliers, as well as pre-production (design, R&D
and purchasing) and post-production (logistics, marketing, and branding) services.

Even in this post-Washington Consensus world, the established GVC

governance structures from prior decades still exist and they will continue to play
an important role in shaping development agendas. However, new governance
structures are being created that reflect the realities of GVCs today. This can
be seen in the links between the organizational consolidation occurring within
GVCs and the geographic concentration associated with the growing prominence
of emerging economies as key economic and political actors.
After 1989, the breakup of the Soviet Union, the opening of China to
international investment and trade and the liberalization of India brought a number
of very large economies onto the global stage initially known as BRICs (Brazil,
Russia, India, and China).4 This influenced the globalization process as GVCs
began to concentrate in these giant countries that offered seemingly inexhaustible
pools of low-wage workers, capable manufacturers, abundant raw materials, and
sizeable domestic markets. Thus, China became the ‘factory of the world’, India the
world’s ‘back office’, Brazil had a wealth of agricultural commodities, and Russia
possessed enormous reserves of natural resources plus the military technologies
linked to its role as a Cold War superpower. These emerging economies became
major production centers worldwide, although their specific role in GVCs varied
according to their openness to trade and foreign investment, and other strategic
considerations.
Since 2000, the shift in production from North to South in the global
economy has accelerated and an expanding number of high-growth economies
are playing prominent roles in a wide variety of industries as exporters and also
new markets (Staritz et al., 2011). This reflects multiple factors, including the
growing significance of emerging economies, the decline in export orders due to
the global economic crisis of 2008–2009, and the explicit efforts of GVC lead
firms to rationalize their supply chains in order to deal with smaller numbers of
highly capable and strategically located suppliers.
One noteworthy consequence of global consolidation is the growth of big GVC
producers and intermediaries, which tend to offset to some degree the power of
global buyers. China became the world’s dominant supplier of apparel, footwear
and consumer electronics products, especially after the termination of the Multi-
Fibre Arrangement (MFA) for apparel in 2005, and giant contract manufacturers
and traders (such as Foxconn in electronics, Yue Yuen in footwear, and Li and
Fung in apparel) have considerable clout. India and Brazil have also generated
their own manufacturing multinationals such as Tata and Embraer.
Lead firms themselves are getting bigger through mergers, acquisitions and the
decline of many rivals and, thereby, they are also increasing their global market
shares.5 At the same time, there is growing awareness of the strategic vulnerabilities
of global supply chains in terms of the access of lead firms to critical raw material

supplies (Lynn, 2005). This is particularly apparent in the agrifoods sector, where
consumer goods firms such as Cadbury, Coca-Cola, Unilever and others are
expanding their direct involvement in the procurement and sustainability of the
raw material sides of their value chains, such as cocoa, coffee and sugar. This is
also evident in autos and electronics, where concern over the availability of raw
materials, such as lithium and coltan (Nathan and Sarkar, 2011), respectively,
are introducing greater engagement between GVC lead firms and host-country
suppliers and governments. Thus, the long-term trend toward specialization and
fragmentation in GVCs is being supplanted by a greater emphasis on strategic
collaboration.
In summary, concentration is growing across different segments of GVCs, and
this co-evolution of concentrated actors appears to have two main implications for
GVC governance: in at least some cases, a shift of bargaining power toward large
domestic producers vis-à-vis global buyers; and an affinity between geographic
concentration in large emerging economies, such as China and India, and
organizational consolidation in GVCs. Novel patterns of industrial organization
in emerging economies seem to fit this pattern, including China’s supply chain
cities, which integrate all aspects of GVCs from input suppliers to final goods
manufacturers, and design centers to showrooms, for global buyers within
specialized production locations (Gereffi, 2009); India’s pioneering workforce
development strategies to train local engineers and information technology
specialists for global R&D hubs (Wadhwa et al., 2008); and Brazil’s ‘industrial
condominium’ and ‘modular consortium’ concepts for automobile production that
recruit GVC lead firms and their top suppliers to set up coordinated manufacturing
facilities in the same factory complex, such as Volkswagen’s truck and bus chassis
plant in Resende (Neto and Pires, 2010).

Economic Upgrading and the New Geography of Global Production

and Trade
While governance issues have attracted a good deal of attention among GVC
scholars, the research on economic upgrading has been at least as important because
many of the people who use the GVC framework have a very strong development
focus. The GVC paradigm links scholarly research on globalization with the
concerns of international organizations, policy makers and social activists who
are trying to harness the potential gains of globalization to the pragmatic goals of
economic growth, including more and better jobs and improved competitiveness
for numerous regions, countries, and social groups that feel increasingly vulnerable
in the global economy. In both developed and developing countries, there is
growing concern that the economic gains of participating in global supply chains

do not necessarily translate into good jobs or stable employment and, in the worst
case, economic upgrading may be linked to a significant deterioration of labor
conditions and other forms of social downgrading. A key research question is:
Under what conditions can participation in GVCs contribute to both economic
and social upgrading in developing countries? (Barrientos et al., 2011a, 2011b;
Lee et al., 2011).
The emergence of GVCs has redefined how we conceptualize economic
development. For most early industrializers, including the US, Germany, and
Japan, industrialization meant building relatively complete supply chains at home.
The core idea was that no nation could become globally competitive without a
broad and deep industrial base, and thus considerable effort was dedicated to bring
together the capital, technology, and labor needed to create new industries. The ISI
model of development, as previously noted, attempted to replicate the feat of these
initial industrializers by enlisting transnational corporations in producer-driven
GVCs to build modern industries in relatively big developing countries, step by
step, working from final products back to key components and sub-assemblies (such
as engines in cars) under the watchful eye of interventionist developmental states.
The current era of export-oriented industrialization, which is sometimes called
‘globalization’s second unbundling’ (Baldwin, 2011), has opened up a radically
new development path. Today, nations seek to industrialize by simply joining a
supply chain to assemble final goods or make specialized inputs; they no longer
try to build single-nation supply chains from scratch. For Baldwin, globalization’s
first unbundling was that railroads and steamships made it feasible to spatially
separate production and consumption, and once the separation was feasible, scale
economies and comparative advantage made it inevitable. The second unbundling
was linked to the information and communication technology revolution, which
allowed production stages that were previously performed in close proximity to
be geographically dispersed in order to reduce production costs. The spatial scale
of the second unbundling is not fixed, however; it could be regional or global,
and thus the geographical configuration of GVCs can and does change over time.
In short, while industrialization under the EOI model became easier and
faster (countries could just ‘join’ supply chains by performing specialized tasks,
rather than ‘build’ them), it may also be less meaningful. If countries are only
engaged in the simplest forms of EOI, such as assembling imported parts for
overseas markets in export-processing zones, then they would develop neither
the institutions, nor the know-how, nor the consumer markets needed to create
and sustain entire industries. Indeed, for many of the small and least developed
countries in the global economy, the gains associated with traditional forms of
industrialization in terms of high-income jobs, forward and backward linkages,
and wealth creation and innovation have been limited and uneven at best under

the EOI model. Furthermore, there is growing concern that the extensive global
outsourcing associated with globalization’s second unbundling may have alarming
implications for innovation and the international competitiveness of even the
advanced industrial economies.6
The challenge of economic upgrading in GVCs, therefore, is precisely to
identify the conditions under which developing as well as developed countries
and firms can ‘climb the value chain’ from basic assembly activities using low-
cost and unskilled labor to more advanced forms of ‘full package’ supply and
integrated manufacturing. ‘Economic upgrading’ is defined as the process by
which economic actors—firms and workers—move from low-value to relatively
high-value activities in GVCs (Gereffi, 2005: 171). Within the GVC framework,
four types of upgrading have been identified (Humphrey and Schmitz, 2002):
• Product upgrading, or moving into more sophisticated product lines;
• Process upgrading, which transforms inputs into outputs more efficiently
by reorganizing the production system or introducing superior
technology;
• Functional upgrading, which entails acquiring new functions (or
abandoning existing functions) to increase the overall skill content of
the activities; and
• Chain upgrading, in which firms move into new but often related
industries.
The ability or inability of countries and firms to upgrade in these various ways
has been the focal point of numerous GVC studies, but novel aspects related to the
upgrading process have been introduced in the post-Washington Consensus era.
First, there has been growing interest by the World Trade Organization (WTO),
the Organisation for Economic Co-operation and Development (OECD) and
other international organizations to establish new metrics of value-added trade that
will clarify the extent to which successful export-oriented economies use domestic
or imported inputs to fuel their growth. Second, in the wake of the 2008–2009
global economic crisis, economic diversification through shifting end markets
appears to be reconfiguring the growth opportunities for GVCs in ways that may
shift their orientation toward the domestic markets of large emerging economies
and toward more regionally oriented, rather than global, supply-chains. We will
consider each topic below.

A New Metric for GVC Analysis: Value-Added Trade

In a world characterized by a predominance of GVCs, exports of final products
are increasingly composed of imports of intermediate inputs. As supply chains go
global, therefore, more intermediate goods are traded across borders, and more

parts and components are imported for use in exports (Feenstra, 1998). In 2009,
world exports of intermediate goods exceeded the combined export values of final
and capital goods, representing 51% of non-fuel merchandise exports (WTO and
IDE-JETRO, 2011: 81). Governments and international organizations are taking
notice of this emerging pattern of global trade, which is called a shift from ‘trade in
goods’ to ‘trade in value added’, ‘trade in tasks’ and ‘trade in capabilities’ 7 (OECD,
2011; WTO and IDE-JETRO, 2011).
Emerging economies have clearly improved their position in GVCs, surging
ahead of the advanced industrial countries in terms of export performance. Between
1995 and 2007, the global export market shares of the US and Japan fell by 3.8
and 3.7 percentage points, respectively, while China more than doubled its market
share from 4% in 1995 to 10.1% in 2007, making it the world export leader (ahead
of Germany, the US, and Japan). South Korea, Mexico, Turkey, South Africa,
and the former transition countries in central Europe also increased their export
market shares during this period (Beltramello et al., 2012: 9–10). Potentially more
impressive is the fact that emerging economies made their most significant gains
in high- and medium-technology industries, which were previously the stronghold
of OECD countries.8 This phenomenon was mainly driven by China, whose share
of exports of goods in high-tech industries soared by 13.5 percentage points during
the period of 1995–2007, moving it ahead of the US as the world’s largest exporter
of high-tech products (Beltramello et al., 2012: 10).
While most intermediate goods are still traded within large regional economic
blocks, such as the European Union, rather than across them (OECD, 2011),
Asia’s linkages to the European Union and North America represented the two
highest inter-regional import flows of intermediate goods in 2008. Asia imported
more intermediate goods than it exported, indicating the region’s high level of
integration within global supply chains (WTO and IDE-JETRO, 2011: 83–85).
The geographical concentration of supply chains is also obvious at the country
level. In 2000–2008, China accounted for 67% of the world’s processing exports,9
followed by Mexico with 18% (WTO and IDE-JETRO, 2011: 21).
China has benefited greatly from this form of participation in global supply
chains. One-third of China’s imports are destined for export-processing zones,
which account for almost half of the country’s exports (WTO and IDE-JETRO,
2011: 21). China’s ‘supply chain cities’ are a perfect illustration of how China is
turning scale-driven specialization into a persistent competitive advantage for
the country. From foreign direct investment-driven clusters in Guangdong to
single-product clusters in Zhejiang, China’s sheer size has allowed it to set up
broad manufacturing clusters at the regional level. These specialized clusters are
linked, on the one hand, to East Asian suppliers of key parts and components
and, on the other hand, to global buyers to bring Chinese products to the world
market (Gereffi, 2009).

Paradoxically, China does not create or capture most of the value generated
through its value chain exports. In fact, as more types of intermediate goods are
traded within global supply chains, the discrepancy is growing between where final
goods are produced and exported and where value is created and captured. For
example, Apple’s iPhones are entirely assembled in China by a Taiwanese contract
manufacturer (Foxconn) and exported to the US. When a traditional measure is
used, which assigns the gross export value of the product to the exporting country,
the unit export value of iPhones from China is $194.04. Of this, only $24.63 is
imported content from the US, meaning that every iPhone imported into the US
results in a US balance-of-payments deficit of $169.41 (Figure 14.2). However,
this does not mean that China benefits from a trade surplus of $169.41 for each
iPhone it exports, since the value added in China is only $6.54 per phone. The
balance of China’s iPhone production costs is made up of imports from South
Korea ($80.05), Germany ($16.08), and diverse other countries.10

Figure 14.2 US Bilateral Trade Balance with China for One Unit of iPhone4 (US$)

US Trade China S. Korea Germany France Japan ROW World

Balance with
Gross –169.41 0 0 0 0 0 –169.41
Value added –6.54 –80.05 –16.08 –3.25 –0.7 –62.79 –169.41
Source: OECD, 2011: 40.

These advances in GVC metrics related to value creation and value capture are
a propitious development for policy-oriented research (OECD, 2011; WTO and
IDE-JETRO, 2011; UNCTAD, 2013). As showcased by the iPhone study, existing
trade statistics are unable to grasp the changing patterns of global production
and trade. This is an area where GVC analysis and supply chain management
research can be mutually beneficial.11 Sophisticated value chain data disaggregated

by business functions can complement existing country-level trade statistics and

industry-level input-output data, providing a clear picture of who is gaining and
losing in GVCs (Sturgeon and Gereffi, 2009). When combined with data on
employment, they will greatly advance our understanding of both economic and
social development opportunities in the global economy.

Shifting End Markets and the Regionalization of GVCs

As world trade bounces back from the 2008–2009 economic crises, emerging
economies are becoming a main engine of world economic recovery. Tepid growth
in the global North since the mid-1980s was slowed even further by the latest
crisis, whereas demand is quickly growing in the global South, particularly in
large emerging economies such as China, India, and Brazil (Staritz et al., 2011).
Over the period of 2005–2010, the merchandise imports of the European Union
and the US increased by 27% and 14%, respectively, while emerging economies
expanded their merchandise imports much faster: Brazil (147%), India (129%),
China (111%), and South Africa (51%). In 2010, 52% of Asia’s manufactured
exports were destined for developing countries (WTO, 2011), indicating shifting
end markets in the global economy.
The dramatic decline of world merchandise trade as a result of the economic
crisis of 2008–2009 has been described as ‘the great trade collapse’ (Baldwin, 2009).
After more than six years of positive trade growth, all OECD countries registered
a decline in exports and imports exceeding 10% between 2008 and 2009, reaching
a record negative growth of -37% in April 2009 (Beltramello et al., 2012: 27).
The trade collapse was much larger in intermediates than in final consumption
goods, which underscores the existence of a ‘bullwhip’ effect in GVCs—namely,
lower demand for final consumption goods (downstream) is amplified in more
dramatic demand reductions for intermediates that are upstream in the value chain
(Altomonte et al., 2012).
The ‘great trade collapse’ accelerated the shift in end markets from the North
to the South in GVCs (Kaplinsky and Farooki, 2011) and it also encouraged lead
firms from developing countries to regionalize their supply chains. In sub-Saharan
Africa, for instance, the recent entry of South African clothing manufacturers
in neighboring countries such as Lesotho and Swaziland has led to the rise of
regional value chains driven by South African retailers. Compared to the US buyer-
driven chain, these regional chains focus on shorter production runs and quick
response with higher fashion content, and are based on direct relationships to large
South African clothing retailers (Morris et al., 2011). Similarly, South African
supermarkets are expanding via regional supply chains and spearheading the rise
of supermarkets across sub-Saharan Africa (Weatherspoon and Reardon, 2003).

The GVC literature shows that value chains oriented to different end markets
often entail distinct upgrading opportunities (Palpacuer et al., 2005; Gibbon,
2008). For example, the demand in lower-income countries for less sophisticated
products with regard to quality and variety can have major upgrading implications
(Kaplinsky et al., 2011). On the one hand, lower entry barriers and less stringent
product and process standards in emerging markets can facilitate the participation
of developing-country firms in global supply chains. They can engage in higher
value-added activities, such as product development and design, which they would
have little chance to do in the global chains. With more intimate knowledge of
local and regional markets vis-à-vis multinational firms, they can generate ‘frugal’
innovations that are suitable to resource-poor environments (Clark et al., 2009). On
the other hand, solely focusing on low-income markets could lock suppliers into
slimmer margins and cut-throat competition. Their knowledge advantage in local
markets often evaporates quickly when multinational firms catch up in learning the
markets, as found in the Chinese mobile phone industry (Brandt and Thun, 2011).

The Impact of GVC Analysis on the Development Agendas of

International Donors
GVC studies are pervasive in academic publications that examine a wide range
of global industries,12 and the framework has been adopted by many of the major
international donors and peak organizations concerned with economic development,
including the World Bank (Webber and Labaste, 2009; Cattaneo et al., 2010), the
WTO (WTO and IDE-JETRO, 2011), the OECD (OECD, 2011; Beltramello
et al., 2012), the International Labor Organization (ILO) (Gereffi, 2006), the US
Agency for International Development (USAID, 2012), the US International Trade
Commission (USITC, 2011), the World Economic Forum (WEF, 2012), and the
UN Conference on Trade and Development (UNCTAD, 2013).
The international institutions that have provided the underpinning for the
Washington Consensus, such as the World Bank, the IMF, and the WTO,
along with major bilateral donors, such as USAID and the UK’s Department for
International Development (DFID),13 have embraced new heterodox models of
development thinking, with an emphasis on sectoral analysis that allows macro
issues such as international trade and investment to be linked more closely with
the micro development issues of employment, gender dynamics, and sustainable
livelihoods (M4P, 2008). In addition, new alliances have emerged among diverse
UN and other international agencies (such as the World Bank and the ILO) to
promote joint research agendas that explore the links between economic and
social upgrading, explicitly using the GVC framework (Cattaneo et al., 2010;
Barrientos et al., 2011a).

Unlike most social science theories and paradigms, which have only a limited
impact on specific international organizations and development policy settings,
the GVC framework is unusual in that it has diffused very rapidly during the
past decade and been adopted by a wide range of economic, social, and cultural
organizations, as well as action-oriented non-governmental organizations (NGOs)
in the labor and environmental arenas. Table 14.1 identifies some of these
international donor organizations and recent projects or studies that are informed
by the GVC approach.
While this topic merits a far more detailed discussion, two aspects of the use of
GVC analysis in these organizations will be touched on below. First, what are the
similarities and differences in how GVC analysis is used in these organizations?
For example, most of these international donors have development programs that
emphasize pro-poor growth, the protection of small and medium enterprises and
local stakeholders, and a private sector-oriented, market-led model. However, they
differ in other respects, such as the weight given to economic growth in relation to
poverty reduction as well as geographic regions and sectors of particular interest.
Second, what are the other development models or frameworks that are being used
in each organization and to what degree are these complementary or antagonistic
with the GVC approach? One of the key reasons for the turn to GVC and GPN
approaches may be that their emphasis on global industries offers a meso-level,
sectoral and actor-oriented approach to the global economy, which provides multi-
scalar options to link global and local levels of analysis, in contrast to macro models,
which focus on general economic trends and broad policy prescriptions, or the
micro and localized approach of clusters, which aren’t connected to the broader
structures at the national, regional or global levels.
Value chain analysis is used widely today as an instrument of private-sector
development by virtually all major bilateral and multilateral donor agencies.
Altenburg (2007) highlights two main reasons for the increasing popularity of
the GVC approach within the international donor community since the end of
the 1990s: first, the accumulating evidence of a link between economic growth
driven by the private sector and poverty reduction; and second, the fact that global
integration of trade and production through GVCs transmits the pressures of
global competition to domestic markets in developing economies, leaving less
space for local firms to design, produce, and market on their own. As Altenburg
(2007: 4) puts it, ‘The question is thus not if , but how to integrate in value chains
in a way that allows for incorporation of a growing number of the workforce and
increasing levels of productivity and outcomes. This calls for a balanced approach
which takes both competitiveness and equity issues into account’.
There is no simple way to connect GVC analysis to private sector development,
since the firms in a value chain range from transnational corporations to micro-

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Table 14.1 Use of Global Value Chain Analysis in Selected International Organizations
Organization Illustrative GVC Content Description 2012
Publications GVC LED Clusters PSD TVET Poverty Micro
World Bank Cattaneo et al. This book uses a GVC perspective to analyze the x x x x x
(2010) impact of the global financial crisis of 2008-2009
on global trade, production and demand in several
sectors. Particular attention is paid to opportunities for
developing countries to enter into GVCs post-crisis.
IDB Flores and This paper compares the upgrading performance x x x x x x
Vaillant (2011) of Latin American countries in terms of export
sophistication in a variety of industries.
DFID Capturing the This three-year research project brings together an x x x x
Gains (2012) international network of experts to gain information
on the employment and well-being of workers and
small producers in GVCs.
USAID Value Chain This website gathers information from various projects x x x x x
Development and draws on research conducted under USAID’s
Wiki (2012) Microenterprise Development Team to codify good
practice in value chain development, with an eye to
linking SMEs into global, national and local value
chains.
GTZ/GIZ Will (2011) This manual considers information from GTZ-funded x x x x x
pilot projects in developing countries in order to
draw lessons about the various processes by which
smallholders can receive GLOBALGAP certification,
which is required by many European food retailers.

Cont’d.
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Cont’d.
Organization Illustrative GVC Content Description 2012
Publications GVC LED Clusters PSD TVET Poverty Micro
WTO WTO (2011) This publication uses a GVC framework to consider x
changing trade patterns in East Asia. It proposes a new
trade statistic—trade in value added—to complement
traditional trade statistics.
OECD OECD (2011) This report to the OECD Working Party on Globalization x x x
of Industry and the Committee on Innovation, Industry
and Entrepreneurship uses the GVC framework to
provide policy advice to OECD countries with a focus
on maintaining competitiveness and identifying new
sources of growth.
ILO Herr and Muzira This guide for development practitioners, governments x x x x
(2009) and private actors outlines strategies for upgrading
within value chains while maintaining or improving
labor standards for workers.
Source: Author.
Notes:
GVC: The Global Value Chain framework focuses on the placement of firms and localities within the global organization of trade and production within
particular sectors or industries.
LED: The Local Economic Development framework focuses on initiatives geared towards the local or sub-national public sector as an enabler or instigator of
economic development.
Clusters: The Cluster framework focuses on initiatives geared towards the local or sub-national private sector.
PSD: Private Sector Development strategies focus on the concept of ‘making markets work.’
TVET: Technical and Vocational Education and Training strategies focus on improving the quality and quantity of workers’ marketable skills through vocational
training initiatives.
Poverty: Poverty Alleviation programs are those that seek the reduction, alleviation or eradication of poverty.
Micro: Microfinance programs make very small ‘microloans’ to entrepreneurs or households that are otherwise unable to access financial markets under favorable terms.
Global Value Chains in a Post-Washington Consensus World 417

enterprises, and the institutional context and geographic scope of value chains
vary enormously. In order to provide some guidance for interventions by donors,
Humphrey and Navas-Alemán (2010) distinguish four different objectives of donor
interventions: strengthening the weakest link to address potential bottlenecks;
improving flows of knowledge and resources to make all firms in the chain more
productive; working on specific links between firms to improve efficiency; and
creating new or alternate links in the chain to promote diversified outcomes.
An alternative to this bottom-up approach to value chain development is
targeting lead firms rather than local suppliers—i.e., working with the strongest
link in the chain, rather than the weakest. This lead-firm-centered, top-down
GVC approach has been used effectively for very different purposes, whether it
be the World Bank’s revitalized ‘Aid for Trade’ initiative, which sees the private
sector as the engine that powers global trade and urges GVC lead firms to play a
greater role in building trade capacity in developing countries (World Bank, 2011),
or the confrontational stance of NGOs such as Oxfam (2004), which mobilizes
international campaigns against lead firms to improve the conditions of women
workers in global supply chains.
The reality is that most bilateral and multilateral donors use GVC analysis in
combination with other diagnostic tools they have tried in the past (Table 14.1)
to address a variety of broad development goals, including poverty reduction,
economic growth, employment creation and income generation, enterprise
development, and environmental stability and cleaner production (UNIDO, 2011).
One of the most comprehensive reviews of the approaches of seven UN agencies to
value chain development concludes, however, that there is considerable ‘fuzziness’
about how the concept is adopted:

… [value chain]-related activities sometimes seem to be rather the outcome of

‘re-labelling’ former private sector development interventions. In other cases,
activities that could clearly be subsumed under the value chain approach are not
labeled accordingly … . These observed shortcomings in knowledge management,
transparency and the lack of defined unique selling positions make inter-agency
cooperation in [value chain] promotion difficult (Stamm and von Drachenfels,
2011: 30).

In short, much of the literature that uses the GVC moniker misses the point and
doesn’t apply the framework consistently.
The widespread adoption of the GVC framework by international donors during
the past decade represents a remarkable convergence around a single paradigm,
notwithstanding the differing emphases across UN and bilateral agencies. Skeptics
might argue that the neoliberal fundamentals of the Washington Consensus model
of development remain entrenched in many of these organizations (Neilsen, 2014),

even if GVC analysis is rooted in assumptions that are highly critical of the neoliberal
paradigm (see Gereffi and Korzeniewicz, 1994; Kaplinsky, 2005; Bair, 2009;
Hamilton and Gereffi, 2009; Sturgeon, 2009; Lee, 2010). The counterargument
made throughout this chapter is that the GVC perspective highlights the power
dynamics in global industries, embodied in the role of lead firms and the institutions
that underpin the global economic order, and this introduces broader and more
heterodox views of development that challenge the mainstream.
During the past decade, the global economy has seen a transfer of production,
technological capabilities, growth potential, consumption and political clout from
the North to the South. One of the major reasons for the popularity of the GVC
framework is that it allows us to analyze many of these shifts with greater precision
than prior paradigms. While interpretations of the direction and impact of these
trends will vary, the contributions of GVC analysis should not be discounted
because the donor organizations have multiple and sometimes discordant agendas.
Furthermore, as more international organizations employ the GVC paradigm, its
methodological rigor and policy relevance are likely to increase.

Conclusion
What will replace the globalization model? This is the question posed in a recent
newspaper article, which contends: ‘The globalization model of the past 30 years
is cracking up. And there appears to be no new model to replace it’ (Smick,
2012). While we concur that globalization as we know it is undergoing a series of
fundamental shifts, many elements of the future system are there for us to see. The
international competitiveness of advanced industrial economies has gradually been
eroded, at least in terms of traditional measures of export performance. Emerging
economies now play a more prominent role in international trade, and they have
expanded their export market shares of high-technology and medium-technology
products, with China playing a particularly prominent role (Beltramello et al.,
2012). The emergence of GVCs cautions against an overreliance on simple export
measures of competitiveness, however, and this chapter has sought to unpack
various insights from the GVC perspective to better understand some of the new
features of the post-Washington Consensus global economy.
The Washington Consensus model of development, which held sway from the
mid-1980s through the mid-2000s, is a nation-state-centered view of the global
economy, in which countries are the primary units of analysis in international
production and trade. The main topics of debate involved the extent to which
economic policies were ‘market-friendly’ or overly interventionist (World Bank,
1993), and the nature of the stabilization programs and market access agreements

that would be imposed on recalcitrant developing economies by the IMF, the

World Bank and other international financial and trade institutions to bring them
in line with the dominant model.
The GVC framework fundamentally challenges this view of the global economy
and it provides a different interpretation of the key drivers of change over the past
four decades. The sector-based approach of the GVC perspective is premised
on the structural diversity of global industries, which are major entry points for
developing nations in the global economy. The major analytical categories used
to examine global value chains include:
• The role of lead firms in setting performance requirements and standards
that condition entry and mobility within GVCs
• The evolving nature of production and trade networks that link large and
small suppliers to the global economy as well as to domestic economies
• Trajectories of social and economic upgrading and downgrading, and
patterns of access and exclusion, which help describe the connections
between the development of firms and countries within the international
system
• Multiple governance structures (international and domestic; public and
private; chain-based and civic) that link different components of the
system together
• The shift from trade in goods to trade in value added, tasks and business
functions in looking at key economic activities related to upgrading and
competitiveness and
• Interventions and pressure points that allow for change in this system
Economic globalization is a byproduct of international production and trade
networks organized by transnational firms and it is embedded in various kinds of
regulation, including rules of the game established by international institutions,
national government policies, and varied forms of private governance used by
non-state actors to manage activities in GVCs (Mayer and Gereffi, 2010). One
potential outcome of the current situation is that public governance will be called
upon to play a stronger role in supplementing and reinforcing corporate codes
of conduct, product certifications, process standards and other voluntary, non-
governmental types of private governance that have proliferated in the last two
decades, and that multi-stakeholder initiatives involving both public and private
actors will arise to deal with collective action problems.
While the contours of a new international economic order are still in flux,
several features are already having an impact on development agendas. The most
dynamic growth poles in the global economy are constituted by an expanding
number of rising powers that combine relatively large domestic markets, skilled
workforces, capable producers, and a push toward indigenous innovation. These

include the original BRIC countries as well as South Korea, Mexico, Turkey, and
Indonesia, among others (O’Neill, 2011). As the EOI development strategy is
replaced by more inward-looking approaches focusing on domestic and regional
markets, industrial policy in the leading economies of the South is likely to become
more significant. While policy priorities at the macro level of the global economy
seek new ways to channel trade and investment patterns toward more robust
employment outcomes (OECD, 2012), the challenge will be to link economic
upgrading and social upgrading in terms of both material conditions of work and
the quantity and quality of jobs created in contemporary GVCs (Barrientos et
al., 2011a, 2011b).

Acknowledgments
The author would like to thank Andrew Guinn, Rebecca Schultz, and Jackie Xu
for their research assistance on this chapter.

Notes
1. For recent reviews of GCC and GVC literature, see Bair (2009), Lee (2010), and Gereffi
and Lee (2012).
2. In the original 1994 article that introduced the concepts of producer-driven and buyer-
driven GCCs, there is a section on ‘The Role of State Policies in Global Commodity
Chains,’ which makes the link between GCCs and development strategies very clear:
An important affinity exists between the ISI and EOI strategies of national
development and the structure of commodity chains. Import substitution occurs
in the same kinds of capital and technology-intensive industries represented by
producer-driven commodity chains […] In addition, the main economic agents
in both cases are [transnational corporations] and state-owned enterprises.
Export-oriented industrialization, on the other hand, is channelled through
buyer-driven commodity chains where production in labor-intensive industries is
concentrated in small to medium-sized private domestic firms located mainly in
the Third World. Historically, the export-oriented development strategy of the
East Asian [newly industrializing countries] and buyer-driven commodity chains
emerged together in the early 1970s, suggesting a close connection between the
success of EOI and the development of new forms of organizational integration
in buyer-driven industrial networks (Gereffi, 1994: 100).
3. Knowing if the lead firm in a chain is a buyer or a producer can help to determine the
most likely upgrading opportunities for suppliers. For example, buyer-driven chains tend
to provide more opportunities to their suppliers in product and functional upgrading
because the core competence of the buyers is in marketing and branding, not production;
whereas lead firms in producer-driven chains often require varied forms of process
upgrading and international certifications among their suppliers due to strict quality
and performance standards that affect the entire chain.

4. Jim O’Neill (2011), the Goldman Sachs executive who coined the catchy acronym BRIC
in 2001 to refer to Brazil, Russia, India, and China, now argues that there is a much
larger number of ‘growth economies’ (BRICs plus 11) that fall into this category. These
include the MIST nations (Mexico, Indonesia, South Korea, and Turkey), and other
periodic high-performers such as Bangladesh, Egypt, Pakistan, the Philippines, and
Vietnam (Martin, 2012). The original BRIC classification was extended to BRICS with
the addition of South Africa in 2010. For purposes of this chapter, the origin of these
acronyms is less important than the collective effect of this set of so-called emerging
economies, which are reshaping both supply and demand in many GVCs.
5. Li & Fung, the largest trading company in the world, has around 30,000 suppliers
globally and operates in 40 countries (Fung, 2011).
6. Pisano and Shih (2009), for example, argue that the US is in danger of losing its
‘industrial commons,’ which includes not just suppliers of advanced materials, production
equipment, and components, but also R&D know-how, engineering and processing
skills, and a wide range of other manufacturing competencies. Because manufacturing
is closely tied to the capacity for innovation, offshore manufacturing can undermine the
capabilities of the US economy to remain competitive in existing high-tech industries,
which often depend in critical ways on the industrial commons of mature sectors, and
also impede its ability to move into new industries. This helps explain why Apple does
not manufacture its iPhone in the US. While labor costs are obviously much lower and
a certain class of skilled workers more abundant in China where all US-sold iPhones are
assembled, perhaps the biggest limitation is that the vast majority of suppliers needed
to make the hundreds of parts that go into every iPhone are located in East Asia, and
not North America. This could hinder the ability of US companies to remain innovative
(see Duhigg and Bradsher, 2012; Pisano and Shih, 2012; Shih, 2009).
7. There are conceptual difficulties, however, in using individual tasks or capabilities as a
unit of analysis in determining how easy it is to fragment and relocate work in GVCs.
It is more likely that larger sets of activities associated with ‘business functions’ will be
outsourced, rather than individual jobs and capabilities (Sturgeon and Gereffi, 2009).
8. Since these figures refer to gross exports, we need more detailed information about the
degree of domestic or foreign value added to assess the extent to which these numbers
reflect the local assembly of high-tech imports or significant national technology content.
9. Processing exports refer to exports that use duty-free imports for subsequent processing
and re-exports.
10. This is not an uncommon pattern in China. Domestic content accounts for only about
half of China’s manufacturing exports and it is even smaller (18%) in its processing
exports, mostly done by foreign-owned firms (Koopman et al., 2008).
11. Note that the iPhone study and other similar studies (Dedrick et al., 2010; Linden
et al., 2009) are based on tear-down analysis generated by supply chain management
consultancies such as iSuppli.
12. Nearly 1,100 publications and more than 780 authors were listed on the Global Value
Chains website (https://globalvaluechains.org/publications) as of July 27, 2018.
13. DFID changed the name of its bilateral economic aid program to the UK Agency for
International Development (UK Aid) in 2012.

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15
t
Protectionism and Global Value Chains

These are extremely unsettled times in the global economy. In a referendum on

June 23, 2016, the British electorate voted to leave the European Union (Brexit),
and on November 8, 2016, Donald Trump won the US presidential election
on the basis of an ‘America First’ doctrine that could potentially undermine a
broad range of economic, political, and military partnerships that previous US
administrations have been building since the end of the Second World War. Taken
together, Brexit and the election of Donald Trump portend to some ‘the end of the
Anglo-American order’ (Buruma, 2016), a grand alliance that presumed that a Pax
Americana, along with a unified Europe, would keep the democratic world safe
and capitalist economies prosperous. Instead of the triumph of Anglo-American
exceptionalism, the current ‘taking back our country’ mantra of both English and
American nationalists signals a retreat from the world that Anglo-Americans
envisioned after 1945.
Meanwhile, just a few days before the inauguration of newly elected US
president Trump, China’s President Xi Jinping was at the World Economic Forum’s
annual meeting in Davos, Switzerland, proclaiming himself the new champion of
free trade and globalization. Klaus Schwab, the founder of the World Economic
Forum, endorsed China’s willingness to take over this mantle from an apparently
faltering US in introducing President Xi: ‘In a world marked by great uncertainty
and volatility, the international community is looking to China’ (Mishra, 2018).
China’s spectacular ascent from a relatively isolated, agrarian economy at the end
of the 1970s to the world’s leading exporter and second-largest economy (after the
US) today is a complex story of globalization with Chinese characteristics. Xi’s
state-controlled market economy has almost none of the openness associated with
classic notions of free trade. Instead, China has embraced a style of ‘nationalistic
mercantilism’ that shares many similarities with earlier East Asian success stories
like Japan, South Korea, and Singapore (Prestowitz, 2017). But China’s unique
claim to fame may have been its ability to shift from a labor-intensive, low-cost
export strategy (‘a race to the bottom’) to a high-tech, innovation-driven strategy
(‘a race to the top’) at an unprecedented speed and scale that disrupted the hitherto
dominant economies in the West.

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430 Global Value Chains and Development

To understand the current protectionist moment in the global economy, and

indeed, the rapidly evolving development strategies of both the US and China,
one needs to examine not only the interplay between interventionist and market
forces, but also the shifting patterns of organization in the global economy. This
analysis involves several intertwined narratives. The first narrative outlines the
institutional origins of the contemporary trade-oriented global value chain (GVC)
economy. Although the postwar Anglo-American system espouses the principles
of free trade, the shift to an export model of industrialization following the debt
crisis of the 1980s also involved activist states and assorted protectionist policies.
The second narrative highlights the roles of leading international organizations
in the United Nations (UN) development regime, particularly the World Trade
Organization (WTO) and the World Bank, in accelerating the adoption of the
GVC approach to counter the perceived protectionist threat stemming from the
2008–2009 global economic crisis. Finally, the third narrative focuses on the new
era of economic nationalism and protectionism associated with phenomena such
as Brexit and the presidency of Donald Trump. In fact, the escalating competition
between the world’s two economic superpowers, the US and China, goes far
beyond tariff disputes. Rather, it involves a strategic battle over who will control
the digital economy and the advanced technologies associated with it. This contest
features a new generation of corporate and political actors utilizing cutting-edge
technologies and yet to be finalized rules of the game that are redefining the
future of manufacturing, the nature of work, and where and how value is being
created and captured in the global economy.

Emergence of the GVC Economy

The roots of contemporary economic globalization go back to the end of the Second
World War and a distinctive Anglo-American vision of an open international
economy. The regime set up at the end of World War II has been characterized
as ‘embedded liberalism’ (Ruggie, 1982), where US hegemony took the form of
a multilateralism that buffered the US and its main allies against the socially
disruptive domestic adjustment costs of the new international order centered around
global trade and investment. The pillars of this postwar regime were three Bretton
Woods institutions that anchored the US-led system: the General Agreement on
Tariffs and Trade (GATT), set up in 1947 to promote multilateralism in trade; the
International Monetary Fund (IMF), designed to manage international balance
of payments using fixed exchange rates pegged to the US dollar (which in turn
was pegged to gold); and the World Bank, established in 1944 with the mission
of financing the reconstruction of European nations devastated by World War
II, but whose mandate was subsequently expanded to foster economic growth

and eradicate poverty in less developed countries. These three organizations

undergirded a postwar capitalist system in which foreign direct investment by
transnational corporations (TNCs) and international trade thrived in the Cold
War era.
In the late 1960s and 1970s, the center of gravity for the global manufacturing
system set up by TNCs began to shift to the developing world. Fröbel et al. (1980)
likened the surge of manufactured exports from labor-intensive export platforms
in low-wage economies to a ‘new international division of labor’ that used modern
transport and communication technologies to establish a global segmentation of
production. Initially, these offshore processing programs were regional in nature
and set up with neighboring countries, typified in the 1960s by the US production-
sharing or ‘twin plant’ program with Mexico (Grunwald and Flamm, 1985), as well
as German export-processing zones for apparel assembly in Central and Eastern
Europe (Fröbel et al., 1980). But with the proliferation of free trade agreements
in the 1980s and 1990s, the fall of the Berlin Wall in 1989, subsequent market
openings in Eastern Europe, and China’s decision to join the WTO in 2001 and
prioritize export promotion, offshoring became a pervasive global phenomenon.
In retrospect, the assembly-oriented export production in the newly
industrializing countries was merely an early stage in the transformation of the
global economy into ‘a highly complex, kaleidoscopic structure involving the
fragmentation of many production processes, and their geographical relocation on a
global scale in ways which slice through national boundaries’ (Dicken, 2003: 9).
In the 1990s and 2000s, the industries and activities encompassed by global supply
chains grew exponentially, covering not only finished goods but also components
and subassemblies, and affecting not just manufacturing industries (Engardio et al.,
2003), but also agriculture and food production (Fold and Pritchard, 2004) as well
as a broad range of simple (back-office) and complex (knowledge-oriented) services
(Engardio and Einhorn, 2005; Wadhwa et al., 2008; Fernandez-Stark et al., 2011).
The GVC economy is structurally different from its predecessors. Whereas in
earlier periods international trade was largely in finished goods, today almost 60%
of world trade consists of intermediate goods and services that are incorporated
in GVCs (UNCTAD, 2013: 122). A consequence is that the import content of
exports has grown dramatically in a GVC world: in 1990, the import content of
exports was 20%; by 2010, it was 40%; and in 2030, it is expected to be about
60% (Lamy, 2013). Moreover, the developing-country share in global value-added
trade doubled from 20% to 40% between 1990 and 2010 (UNCTAD, 2013:
133–135). Two decades ago, 60% of world trade was between developed countries
(North–North), 30% involved developed and developing nations (North–South),
and just 10% was South–South. By 2020, these three patterns of global trade are
likely to be split equally.

Economic Crises and the Neoliberal Turn

Investment and trade in the global economy expanded rapidly in the postwar era
until a spike in oil prices in 1973 and again in the late 1970s led to a debt crisis for
developing countries that engaged in heightened borrowing, lured by low-interest
loans offered by private banks with an influx of funds from oil-rich countries that
believed sovereign debt was a safe investment. Latin America was particularly hard
hit, and the debt crisis of 19821 was the most severe in the region’s history, resulting
in what some have called the ‘lost decade’ in Latin American development. In
order to avoid default on their loans, debtor countries accepted the intervention of
the IMF, but restructuring came at a steep price: the IMF forced Latin American
and other debtor nations to adopt fiscal austerity programs and deep structural
adjustment reforms that favored free-market capitalism but aggravated poverty
and social inequalities (Felix, 1990).
The debt crisis of the 1980s ushered in a marked turn away from state-centered
approaches such as the import-substitution industrialization (ISI) model popular in
Latin America and elsewhere in the developing world (Gereffi and Wyman, 1990)
to the market-oriented ‘neoliberal’ policies of privatization, deregulation, and free
trade known as the ‘Washington Consensus’ (Williamson, 1990). This neoliberal
turn in the early 1980s, associated most vividly with President Ronald Reagan
in the US and Prime Minister Margaret Thatcher in the United Kingdom, gave
rise to a ‘market fundamentalism’ that delegitimized the interventionist policies
of development economics and the ISI model in the 1950s and 1960s (Krugman,
2006). It became fashionable to dismiss any effort by the government to pursue
structural transformation of the economy, and ‘industrial policy took a backseat
to Washington Consensus policies’ (Stiglitz et al., 2013: 6).2
This ideological and policy shift thrust the Bretton Woods organizations
squarely into the development arena. There was an unprecedented centralization
of authority and restriction of development policy space by the World Bank and
the IMF, which engaged in coordinated lending programs3 that underpinned the
policy prescriptions and conditionality endorsed by the Washington Consensus
(Babb, 2013). Yet, even at its most dominant, the Washington Consensus met
resistance from developing countries frustrated with their lack of ‘policy space’
(Wade, 2003). There was a growing chorus of civil society opposition, and even
within the WTO, emerging economies of the South—most notably China, India,
and Brazil, but also middle powers such as Indonesia, South Africa, and the
Philippines—demanded trade policies more aligned to their circumstances. The
opportunities for ‘strategic compliance’ (Chorev, 2013) in combating the external
pressures of neoliberalism actually were enhanced by the spread of GVCs linking
TNC lead firms with legions of developing country suppliers (Gereffi, 2014).

The financial crisis that began in late 2007 with the catastrophe of the subprime
mortgage market in the US metastasized into a full-blown international banking
crisis with the collapse of the investment bank Lehman Brothers on September
15, 2008. Excessive risk-taking by banks such as Lehman Brothers magnified the
impact of the crisis globally and led to massive bail-outs of financial institutions
to prevent a possible crash of the world financial system. The financial crisis
prompted a global economic downturn, the Great Recession of 2008-2009, which
precipitated ‘the great trade collapse’: between the third quarter of 2008 and the
second quarter of 2009, world trade experienced the steepest fall in recorded history
and the deepest since the Great Depression (Baldwin, 2009). The interconnected
nature of global supply chains amplified the sudden, severe and synchronized drop
in trade since almost every nation’s imports and exports fell at the same time. Even
though world trade bounced back relatively quickly after its dramatic decline in
2008–2009, for many the crisis revealed the end of the neoliberal moment. UK
Prime Minister Gordon Brown famously declared an ‘end to the Washington
Consensus’ at the 2009 G20 meeting (Babb, 2013: 285).

Adoption of GVC Analysis by WTO and the World Bank

For the WTO, the economic crisis of 2008 presented something of an existential
threat.4 Spurred by criticism from developing nations that the Uruguay Round of
multilateral trade negotiations that led to the creation of the WTO in 1995 was
tilted toward the wealthier countries, the WTO in 2001 orchestrated an enormous
global negotiation dubbed the ‘Doha Development Agenda’ (launched in Doha,
Qatar). The talks dragged on for seven years, but by the summer of 2008 there
was great optimism around the WTO’s Geneva headquarters that the round
could be concluded later that year. It was not to be. When the economic crisis hit,
already skittish nations balked. For the advanced industrial economies, the rapid
rise in unemployment made the domestic politics of supporting trade agreements
impossible. For developing countries, free trade as an engine of development
suddenly looked like an empty promise.
The concern in Geneva was not only that the Doha talks could fail, but also
that many countries would be tempted to adopt protectionist measures that would
undo years of progress towards freer global trade. The Economist (2008) summed up
the mood, ‘Rich countries collectively face the severest recession since the Second
World War … This news is bad enough in itself; but it also poses the biggest threat
to open markets in the modern era of globalization. There is a risk that in their
discomfort governments turn to an old, but false, friend: protectionism’. With
the erosion of confidence in the nostrums of neoliberalism, free trade advocates
needed a fresh framework with new language to make the case for trade.

Pascal Lamy, who was Director-General of the WTO from 2005 to 2013,
had served as the European Union’s chief trade negotiator for the first years of
the Doha negotiation. He witnessed the rocky start to the negotiations, knew all
the main players, and arrived confident that he could bring the negotiations to
a successful conclusion. When the negotiations broke down in the fall of 2008,
however, Lamy was forced to reassess. As the financial abyss deepened and the
specter of protectionism grew, Lamy searched for a novel way to demonstrate the
importance of maintaining open markets. ‘The WTO needed to provide a different
narrative, which was a consequence of the 2008 failure,’ he remembered (Lamy,
2014). Almost overnight, Lamy became a champion of the GVC concept, seeing
in it a way to explain why it was imperative to maintain free trade. ‘If you are
importing over 50% of your exports, then imposing measures to protect producers
is decreasingly logical,’ he later explained (Lamy, 2014). If you raised trade barriers
to limit imports, you were just making yourself less competitive.
The WTO’s embrace of GVC analysis under Lamy’s leadership is illustrated by
the recasting of its ‘Aid for Trade’ initiative, a partnership with the Organization
for Economic Cooperation and Development (OECD) intended to foster trade
among developing, and particularly least-developed, countries. Prior to the
financial debacle, there was little attention to GVCs in the discourse on Aid for
Trade at either OECD or the WTO. As stated in the introduction to the first
biennial Aid for Trade report in 2007, the goal of aid for trade was to ‘better
harness trade for development,’ but there was not a single reference to value chains
(WTO/OECD, 2007). The 2011 biennial report referenced GVCs 15 times and
reported that GVCs had become a growing priority for countries responding to the
survey, and we see the first indication of value chains as part of national strategies
(WTO/OECD, 2011: 32). By 2013, GVCs were the central focus of the biennial
review (WTO, 2013). A huge banner at the WTO’s headquarters in Geneva
announced the theme of the meeting: ‘Aid for Trade in Review: Connecting to
Global Value Chains.’
By the summer of 2013, the language of GVCs was central to the discourse
about Aid for Trade at the OECD and the WTO. Less clear, however, is whether
the actual pattern of aid had changed as much as the rhetoric. Mayer and Milberg
(2013) found that a substantial portion of Aid for Trade was essentially ‘old wine
in new bottles’ and that only a small portion of aid truly used GVC analysis to
help connect firms to GVCs.
The story of the World Bank’s uptake of the GVC approach parallels that of the
WTO and OECD. The World Bank largely ignored GVCs prior to the onset of
the financial crisis; the Great Recession spurred demand for a new way of thinking
about the nexus of trade and development, and the GVC framework met this
need. But in other ways, the World Bank story is quite distinct. This is perhaps

not surprising given the much larger scale of the Bank, its sprawling organization
and its more complex mission. Whereas at the WTO top leaders embraced GVCs
in the immediate aftermath of the global economic recession of 2008–09 and
launched major initiatives that drove change within those organizations, at the
World Bank, the story is more bottom-up than top-down—a story that begins with
a handful of policy entrepreneurs located in a sub-unit within the organization who
first recognized the significance of GVCs as a useful analytic tool for promoting
development through trade.
Prior to the crisis, value chains do not figure in any of the reports issued
by the World Bank’s International Trade Unit, part of the Poverty Reduction
and Economic Management (PREM) division that provided policy advice and
technical assistance to developing countries. When the 2008 financial crisis hit,
the first reaction of top economists in the trade unit was along the same lines as
those at WTO and the OECD: fear of rising protectionism. The titles of two
publications raced out in the first year of the financial crisis illustrate the point:
The Fateful Allure of Protectionism: Taking Stock for the G8 (Evenett et al., 2009a) and
Effective Crisis Response and Openness: Implications for the Trading System (Evenett et
al., 2009b). Both sought to make the case for continuing on the path towards global
free trade and warned that a protectionist response would make matters worse.
But the financial crisis also created an opening for a non-traditional way of
thinking, both because the old rationale for free trade had less credence than before
and, curiously, because within a year the pressures for protectionism were a great
deal less than expected. In 2010, the World Bank’s public adoption of the GVC
approach was heralded in a new book, Global Value Chains in a Postcrisis World: A
Development Perspective (Cattaneo et al., 2010). This publication, which featured
a number of leading GVC researchers, highlighted the resilience of a global
economy organized around GVCs due in large part to the growing importance
of supply chains linking producers and markets in South-South trade, as well as
more traditional North–South trade and investment.

The Protectionist Threat Redux: Trump and NAFTA

After the 2008–2009 global economic slump, fears of a sustained trade slowdown
abated, buoyed by the strong growth performance of the major emerging economies,
especially China. Large-scale negotiations centered around two mega-regional
trade agreements: the Trans-Pacific Partnership (TPP) and the Transatlantic Trade
and Investment Partnership (TTIP). Beyond simply increasing trade ties, mega-
regional deals are deep integration partnerships that seek to improve regulatory
compatibility and provide a rules-based framework for ironing out differences in
investment and business climates. The significance of TPP and TTIP was their

size and scope: they aimed to achieve extensive liberalization of both goods and
services encompassing at least a quarter of world trade (TPP: 26.3%; TTIP: 43.6%)
and augment foreign direct investment as well (World Economic Forum, 2014).
Fulfilling one of his signature campaign pledges, President Trump’s initial
executive order in his first full day in office on January 23, 2017 was to withdraw
from TPP negotiations, the sweeping 12-nation trade deal accounting for 40% of
global gross domestic product that Trump railed against as a US jobs killer (Aleem,
2017). Although Trump’s fulminations to junk TTIP, the European counterpart of
the TPP, have thus far not been realized, talks between the US and the European
Union remain stalled since Trump’s election (Bravo and Chatterley, 2018). US and
Mexico talks on the North American Free Trade Agreement (NAFTA), however,
have been much more active and contentious.
On April 27, 2017, after panicked calls from Canadian Prime Minister Justin
Trudeau and Mexican President Enrique Peña Nieto, President Trump backed
away from his threat to issue an executive order withdrawing from NAFTA. ‘I
was all set to terminate,’ said Trump, ‘I looked forward to terminating. I was
going to do it’ (Parker et al., 2017).5 The calls might have helped. But apparently
what really changed his mind was a map that showed the parts of the country that
would be hurt badly if the US withdrew. In 2016, the US exported $2.7 billion
worth of maize to Mexico and Canada. More than a quarter of American maize
exports go to Mexico, also one of the leading importers of US soybeans. American
farmers would be hit hard if the US dismantled NAFTA and Trump knew it.
Actually, US manufacturers also stood to absorb significant losses because of
the intertwined nature of North American supply chains: If you make it harder
for the US to import parts, it becomes more difficult for US manufacturers to
export finished and intermediate goods that include these imported inputs. The
North American automotive industry is a striking example. US exports of cars
and components total about $100 billion; in 2015, Canada was the largest export
market for US automotive parts ($22 billion) and Mexico was a close second
($20.2 billion). A large share of US parts exports return to the US as imports in
finished vehicles and sub-assemblies (e.g., wiring harnesses or brake systems) from
our NAFTA neighbors. Thus, US automotive imports from Mexico contain 40%
US content, and imports from Canada are 25% US content by value. By contrast,
for goods imported from China, only 4% of their value is US-made (Center for
Automotive Research, 2017: 2, 9). Thus, US suppliers are far more likely to be
hurt by a protectionist response to NAFTA partners than to China. In sum, not
all imports are created equal in terms of their potential impact on US producers,
workers, and consumers.
Much has changed since the signing of NAFTA more than two decades
ago. Today a nationalistic approach to trade may have unintended consequences

that serve neither global nor national interests. To see why, let’s take a look at
the main reasons the Trump administration has proposed for rethinking trade
relations: bringing jobs back, reducing trade deficits, and punishing nations who
don’t play fair.

Bringing Jobs Back

The US administration is considering measures to ‘bring jobs back to America’
by cutting corporate taxes and eliminating regulations, but also by raising tariffs
and trade barriers. These proposals are a response to the decision of many
US companies, especially in consumer goods industries, to move part of their
production abroad to reduce costs. It happened first to simple products like apparel,
footwear, and toys. Later it happened to automobiles, ships, aircraft, and electronics
(Engardio et al., 2003; Engardio and Einhorn, 2005).
When these industries moved offshore, they generally transferred the relatively
labor-intensive stages of production. Some of those industries may return to the
US—either in response to new US policies or, more likely, because production
technology has become more automated. This is the case for smartphones and
electronics, and even consumer appliances like refrigerators and microwave ovens
(Immelt, 2012). But even if the same companies that left the US now return,
they will bring back far fewer jobs than when the work was first done in the US.
Besides, the new jobs will not help most of the people who lost them.
A well-known and relatively dramatic example is the Apple iPhone. Apple Inc.,
the world’s largest information technology firm by revenue and the top company
in terms of market capitalization (over $800 billion in 2017),6 manufactures
virtually all of its products overseas. The vast majority are made in China by
Taiwanese manufacturing giant Foxconn, the world’s biggest electronics contract
manufacturer. In 2012 Apple had about 43,000 employees in the US; Foxconn
employed over one million people in China alone in factory complexes like
Foxconn City (near Shenzhen) where the iPhone is assembled, which has 230,000
employees, many working six days a week for up to 12 hours a day (Duhigg and
Bradsher, 2012). Another Foxconn ‘factory city’ is located in Zhengzhou in central
China, which can employ up to 350,000 workers, many of whom earn about $1.90
an hour doing final assembly, testing and packaging of iPhones, among other
products. About half of all iPhones are now made in the huge Zhengzhou hub,
which can produce 500,000 iPhones a day (roughly 350 a minute) in an assembly
process of about 400 steps to make an iPhone (Barboza, 2016).
It is instructive to compare Foxconn’s operations for Apple in China with a
new plant that it plans to set up in the US. On July 26, 2017, President Trump
announced that Foxconn will build a $10 billion flat-screen TV manufacturing

facility in Wisconsin. Foxconn officials claim this investment will create up to

13,000 new jobs in Wisconsin, but the deal is being criticized for the $3 billion in
taxpayer-funded incentives the company will receive and various environmental
concessions offered to Foxconn. In addition, there is evidence that previous Foxconn
commitments to construct new facilities in Pennsylvania, Brazil, and elsewhere
have fizzled or fallen short of expectations (Barboza, 2017). While the jury is
still out on whether Foxconn will actually make more of its products in the US,
Foxconn is indeed shifting large-scale production operations beyond China, with
recent factories in India, Vietnam, Brazil, Mexico, the Czech Republic, Hungary,
and Slovakia. However, Foxconn’s newer plants are increasingly automated,7
suggesting that job creation may be an elusive goal (Glaser, 2017).

Hurting Trade Partners—and National Interests

Since the mid-1960s, the US had encouraged developing countries to adopt export-
oriented industrialization. Most of its allies did just that. South Korea, Taiwan,
Mexico, and other countries opened their doors to foreign direct investment and
began to export to the US and other developed economies (Gereffi and Wyman,
1990). Now the Trump administration is proposing to tax these imports, which
would hurt these export nations’ major sources of growth. The same was true for
poorer, later reformers like Cambodia, China, and Vietnam.
Americans may not consider some of these countries allies, but protectionist
policies would not necessarily help US companies or workers. Many of the medium-
and high-tech US manufacturing companies have set up regional and global
supply chains to make finished products using imported parts. This is obvious
for automobiles, but it is also true for medical devices, electronics, and aircraft. If
tariffs are raised on imported parts, the companies that make the final products
in global supply chains become less competitive. They would have to either raise
their prices on final products, or buy all the needed parts from domestic sources—a
virtual impossibility in today’s cross-border supply-chain world.

Relying on Regional Value Chains

Trump has labeled China a currency manipulator and accused friends and foes alike
of unfair trade practices. In some cases, these charges are being dialed down. We
should try talking with our trade partners across the world who have benefited from
access to US markets. We have done this before. But the negotiators would do well
to remember that success in such talks would generally lead to more trade, not less.
During the early 1980s, the US dealt with trade imbalances with Japan through
voluntary export restraints (VERs). In 1981, for example, VERs limited Japanese

auto imports to 1.7 million cars (Benjamin, 1999). VERs remained in place until
the mid-1990s. This policy had the effect of requiring many of the Japanese
automakers (later also European and Korean companies) to build plants in the
US. It also revitalized US automotive supply chains. US protectionist policies
encouraged inward foreign direct investment in higher technology industries;
this created US jobs as well.8
Today, international competition is based on region competing with region,
not simply country competing with country. Again, take the US automobile
industry. It is really a North American industrial complex spread across Canada,
the US, and Mexico (Sturgeon et al., 2008). The same is true of the European
automobile industry or the consumer electronics sector in East Asia. China’s
success in electronics is the consequence of an intricately organized East Asian
electronics ecosystem. China’s final goods exports rely on imported components
from Japan, South Korea, Taiwan, Singapore, and other East Asian neighbors
(Grimes and Sun, 2016; Sun and Grimes, 2016; 2018). In much the same way,
many US exports rely on components made in Canada and Mexico, and other
Central and South American neighbors.
In all of these cases, regional value chains are competing with each other. North
America is competing with Europe and East Asia, rather than the US competing
with Germany and China. The national approach is an outdated framework from
the economic standpoint (Baldwin, 2011). Regional and global supply chains
require a new calculus of winners and losers involving workers and companies, as
well as consumers9 (Gereffi and Lee, 2012). If one thinks about trade this way,
the US should be figuring out ways to expand NAFTA, not a plan to end it.

The United States and China: It Looks a Lot Like a Trade War
In March and April of 2018, the US administration initiated a new round of
import tariffs, but with a more specific focus on China, the country deemed to
pose the biggest threat to US jobs and industries. On March 8, President Trump
imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports, with
exemptions for Canada and Mexico, ostensibly to protect US national security
(Baker and Swanson, 2018; US Department of Commerce, 2018). In early April,
Trump ratcheted up the trade war rhetoric with China, listing more than 1,300
imported goods from China that would face a 25% US tariff. These products,
worth about $50 billion, included flat-screen televisions, medical devices, and
aircraft parts. China immediately struck back at the US with its own tariffs,
also worth $50 billion, on 106 types of American goods with a heavy focus on
agricultural products, including soybeans, corn, cotton, beef, frozen orange juice,
tobacco, and whiskey, which come largely from Republican-dominated states that
form Trump’s core political base in the US (Bradsher and Myers, 2018).

What is going on here? Is this confrontation likely to lead to an all-out trade

war between the US and China, whose bilateral trade was valued at $650 billion
in 2016? That seems unlikely.
The current trade dispute between the US and China is actually the harbinger
of a much deeper strategic competition between the world’s two largest and
most dynamic economies at the outset of the 21st century. The focus of this
competition is not primarily trade in manufactured and agricultural goods, bilateral
trade balances, or even the number of US jobs affected by trade. It is about the
technologies of the future and the contending development strategies in the US
and China used to bolster each country’s national, regional and global interests.
Clashes between the US and China must be interpreted with a foreward-
looking perspective. The link between US trade policies and broader national
interests is clearly articulated by Peter Navarro, Director of the Office of Trade
and Manufacturing Policy in the Trump administration:

Basically what we have here is a situation where every American understands that
China is stealing our intellectual property. They are forcing the transfer of our
technology when companies go to China, and by doing that they steal jobs from
America, they steal factories from America, and we run an unprecedented $370
billion a year trade deficit in goods. This is an unsustainable situation…What
is at stake here are the industries of the future: artificial intelligence, robotics,
quantum computing. And what is at stake is not just our economic prosperity;
it’s also our national security because many of these industries of the future have
profound military implications (NBC News, 2018).

In instituting his latest round of tariffs against China, President Trump cited
Beijing’s government-driven efforts to retool its economy by building up high-
tech industries through the country’s ambitious ‘Made in China 2025’ program
(Perlez et al., 2017). Unveiled in 2015, Beijing’s ‘Made in China 2025’ is a national
industrial policy that aims to pioneer state-of-the-art technologies for industries
like aerospace, maritime and rail transport, power and agricultural equipment,
new-energy vehicles, and biopharma products. Many US and European companies
fear the program will sponsor state-supported competitors, and it extends long-
standing Chinese policies that require foreign companies to hand over technology
or take on domestic joint-venture partners as the price for doing business in China.
This strategic battle is still in its early stages. However, the tools of GVC analysis
remain central to understand how the technological revolution connected to the
emerging digital economy is structured, where the lead companies are located,
and how value creation and innovation will take place. A preliminary sketch of
a few of these issues is provided below with a focus on the two world leaders in
this arena, the US and China.

Beyond Protectionism: GVCs and Innovation in the Digital Economy

The rise of the digital economy and its potential impact on trade, productivity and
jobs in both developed and developing countries is a hot topic. From the perspective
of GVCs, there is strong interest in identifying the companies that are most active
in the digital economy, including their business models and internationalization
strategies, as well as likely changes in the organization and governance of GVCs.
Other concerns include the implications of the digital economy for advanced
manufacturing, the future of work, and how the nature of innovation might alter
who creates and captures value in the global economy.

Digital Economy Lead Firms in the US and China

New firms are leading the charge in the digital economy. The 2017 World
Investment Report on the digital economy published by UNCTAD (2017) lays
out what it calls ‘the architecture of the digital economy’ in its classification of six
types of digital and ICT multinational enterprises (MNEs)10 (see Figure 15.1).

Figure 15.1 The Architecture of the Digital Economy

Source: UNCTAD, 2017: 167.

• In the digital MNE group, characterized by the central role of the internet
in their operating and delivery model, are four types of companies:
(a) internet platforms (e.g., Google, Baidu, Facebook and eBay); (b)

digital solutions (e.g., PayPal); (c) E-commerce (e.g., Amazon, Alibaba,

Expedia); and (d) digital content (e.g., Tencent, Time Warner, Netflix).
• In the ICT MNE group are the IT companies selling hardware and
software, as well as telecom firms that provide the infrastructure that
makes the internet accessible to individuals and businesses: (e) IT MNEs
(e.g., Apple, Samsung, Foxconn, Intel, Microsoft, SAP, Wipro); and (f)
telecom MNEs (e.g., AT&T, China Mobile).
A different set of business models in the digital economy is provided in a book
called The Network Imperative (Libert et al., 2016: 14-15). Instead of outlining
the full digital economy ecosystem, as UNCTAD does, the typology offered by
Libert et al. highlights different roles that shape the strategies of companies in
the digital economy: (a) asset builders deliver value through the use of physical
goods (physical capital); (b) service providers deliver value through skilled people
(human capital); (c) technology creators deliver value through ideas (intellectual
capital); and (d) network orchestrators deliver value through their connectivity
(network capital).
A more fundamental concept that underpins many digital-economy firms is
the rise of ‘the platform economy’ where the application of big data, powerful
algorithms and cloud computing change the nature of work and basic supply-
chain relationships in the economy (Kenney and Zysman, 2016). These platform-
based markets are built on an infrastructure enabled by the internet and related
information-technology services, which permit online companies like Amazon,
Alibaba, Etsy, Facebook, Google, Uber, and Airbnb to thrive. The propensity
of ‘platform companies’ to use digital technologies to remain asset light but
create enormous returns to scale through their ubiquitous supply-chain presence
helps to explain the remarkable fact that the top five US companies by market
capitalization are all internet-based firms: Apple ($807 billion); Alphabet/Google
($677 billion); Microsoft ($608 billion); Facebook ($497 billion); and Amazon
($467 billion) (CNBC, 2017).
Companies located in the US and China are key drivers in the digital economy.
US and Chinese firms are particularly well positioned in the most dynamic digital-
economy markets:
• Google and Baidu—the world’s largest online search companies
• Amazon and Alibaba—the world’s largest internet retailers
• Facebook and Tencent—the world’s largest social network providers
In addition, of the world’s 262 global ‘unicorns’ (defined as startups valued
at $1 billion or above), many of which are linked to the digital economy, nearly
one-half (47%) are located in the US, one in three (34%) are in China, and one
in five (19%) in the rest of the world (MGI, 2017: 2).

China has built a unique digital ecosystem around its giant BAT internet
companies (as Baidu, Alibaba, and Tencent are collectively known). Baidu accounts
for over 80% of the online search-engine market share in China and is shifting
its strategic focus to mobile services and artificial intelligence, with commercial
applications in various sectors like autonomous vehicle technology. Tencent’s social
media services include WeChat, a messaging app first released in 2011 that has
more than 900 million active users in 2017 (MGI, 2017: 9).
For the Alibaba Group, Wu (2018) found that over the course of its history in
China, Alibaba actually encompasses all four types of digital MNEs mentioned
in UNCTAD’s World Investment Report (2017: 165–168): (1) the Alibaba
group itself, created in 1999, is listed as China’s largest e-commerce firm; (2)
the launching of Taobao.com in 2003 helped push eBay out the China market,
and eBay is listed by UNCTAD as an ‘internet platform’ company; (3) the
creation of Alipay in 2004, like PayPal, would be a ‘digital solutions’ company
in UNCTAD’s scheme; and (4) the creation of Alibaba Cloud, which was set
up in 2009 and is involved in data mining and analytics, exemplifies a ‘digital
content’ company. Thus, the evolving business strategy of an internet lead firm
like Alibaba requires us to combine many of the categories used by UNCTAD
to describe the digital economy.
In their discussion of the BAT companies in China’s ICT sector, Sun and
Grimes (2018: 116–120) show that all of these internet giants are aggressively
diversifying their business portfolios in China and beyond from their initial
monopolized position in search engines (Baidu), instant messaging (Tencent) and
e-commerce (Alibaba): Tencent and Baidu are seeking to enter the e-commerce
field; Alibaba wants to enter the social network and entertainment sectors; and
Baidu is forging inroads into the social networking arena.11
A similar pattern can be observed for competition between leading US digital-
economy firms like Amazon, and traditional legacy retailers like Walmart.
Amazon’s decision to buy the high-end grocery chain Whole Foods as well as
physical bookstores signifies a shift from ‘network orchestrator’ to ‘asset builder’,
while Walmart is moving in the opposite direction by strengthening its online
ordering channels (Irwin, 2017). This hybridization of business models between
e-commerce and traditional physical retailers suggests that it is a mistake to
simply pit the old (goods-oriented) economy versus the new (digital) economy.
Instead the internet can be used by established leaders in both producer-driven
and buyer-driven GVCs to increase productivity, and create a durable edge for
large companies that can use sophisticated supply-chain management and new
technologies to keep prices lower than niche players and entrench their competitive
advantage (Gereffi, 2001a).

How Will the Digital Economy Affect the Governance of GVCs?

The increasing digitization of supply chains and the emergence of dynamic
internet-based lead firms signals a new era in the global economy. The question
from a GVC governance standpoint is whether digital-economy MNEs will
complement or displace incumbent lead firms (Gereffi, 2001a; 2001b; Rehnberg
and Ponte, 2017). Three scenarios are possible (Brun et al., 2017).
The first option is a complementarity scenario in which digital-economy MNEs
add dramatically to value creation in the global economy, enhancing existing levels
of employment and investment across industries, but they do not replace established
lead firms. In this situation, the digital firms create products, employment
and investment that augment the existing structure of trade, investment and
development alongside the traditional lead firms in physical goods-based GVCs.
Second, a displacement scenario could occur in which digital-economy MNEs
disrupt existing industries and challenge established lead-firm business models.
Displacement could be rapid or gradual. In the rapid-displacement version,
technology change alters the traditional firm’s business model to such an extent
that it does not have time to undergo the organizational changes needed to
adapt. In the gradual displacement version, digital MNEs become increasingly
powerful connection points or ‘digital hubs’ between the customer, manufacturer
and supplier due to their ability to use Industry 4.0 technologies to synchronize
purchasing, manufacturing, and delivery. Due to their ability to achieve global
sales with reduced foreign assets, digital MNEs in this scenario eventually displace
the ‘heavier’ asset-based lead firms.
Finally, a hybridization scenario could occur in which Industry 4.0 technologies
are successfully adopted by the existing lead firms to improve their efficiency and
competitiveness. This appears to be a likely outcome in many industries for two
reasons. First, social media and online services now touch nearly every aspect of
consumers’ lives, and established manufacturers and retailers either incorporate
these services or they lose business. Second, some of the largest digital companies
like Amazon, Google and Microsoft are making significant investments in
infrastructure, like cloud computing services and physical distribution outlets, or
they develop applications for their new technologies in physical goods industries
like transportation or food services. Therefore, hybridization can be a win-win
scenario for leading firms in both real-economy and digital-based supply chains.

For Innovation, Manufacturing Still Matters

Notwithstanding the advantages of the GVC economy in lowering costs, reaching
new markets and tapping into global talent pools, the outsourcing of manufacturing

capabilities can be deleterious to innovation. Pisano and Shih (2009) document

the loss of US manufacturing capacity for many high-tech products, including
semiconductors, electronic displays, energy storage, clean-energy production,
computing and telecommunications equipment, and advanced materials used in
sporting goods, aerospace and wind-energy applications.
The case of Amazon’s Kindle 2 e-reader is fairly typical. The controller board,
lithium-polymer battery and highly polished injection-molded case are made
in China, the wireless card comes from South Korea, and the screen utilizing
‘electronic ink’ (the tiny microcapsule beads used in its electrophoretic display)
comes from Taiwan. Although Amazon designed the Kindle in California, some
of its key components were also originally developed and manufactured in the
US, like the ‘ink’ made by E Ink, a company based in Cambridge, Massachusetts.
However, the special silicon-coated glass used to turn the beads black or white
when a voltage is applied was only made in Asia because US companies failed to
keep up in the LCD flat-panel-display industry. As a result, the US company E
Ink was sold to its Taiwanese rival, which further consolidated Kindle’s supply
base in Asia.
To deal with the ongoing loss of US competitive advantage in a wide variety
of industries, Pisano and Shih (2009, 2012) stress the importance of rebuilding
the country’s ‘industrial commons’ – the collective research and development
(R&D), engineering and manufacturing capabilities that sustain innovation. This
is a joint responsibility of both business and government. Collaborative R&D
initiatives, as well as large-scale infrastructure investments, require significant
government support to tackle society’s big problems. And companies must revisit
and overhaul the management practices and internal and external governance
structures that have contributed to the exodus of manufacturing from the US.
Destructive outsourcing and faltering investments in research and infrastructure
will threaten the ability of US firms to innovate the high-tech goods and services
essential to compete globally, unless making and developing these new products
can be co-located with R&D, design and marketing activities locally.

Conclusion
In the postwar era, the overall expansion of global trade and investment has
been punctuated by recurrent economic crises and bouts of protectionism. These
cycles resulted in part from shifting balances of power between developed and
developing economies, as different blocs sought to leverage their position in the
system for financial and political gains. The oil price shocks of the 1970s led
by the Organization of Petroleum Exporting Countries precipitated the debt
crisis of the 1980s in Latin America and elsewhere. In turn, the debt crisis was

exploited by the IMF and the World Bank to impose strict conditionality over
debtor countries, whereby new loans were conditioned on structural adjustment
programs that mandated fiscal austerity, privatization and deregulation in the
domestic economy, and the reduction of external trade barriers. This Washington
Consensus model emphasized export-oriented industrialization as a recipe for
large and small economies alike.
The financial crisis of 2007 triggered the Great Recession of 2008–2009 and
a dramatic slump in world trade that prompted fears of protectionism that could
put the entire global economic order at risk. While international trade eventually
rebounded, confidence in the Washington Consensus model was shattered, and
large emerging economies such as China, Brazil and South Africa began to
fashion alternative development strategies that focused more on their domestic
economies, industrial policies to build the capabilities of local firms, indigenous
innovation, South-South trade and investment, and regional value chains (Gereffi
and Sturgeon, 2013).
The current protectionist episode differs from the others in a few respects.
First, the architects of the Anglo-American postwar economic system seem
to be leading the charge. US President Trump has been particularly acerbic in
denouncing the folly of American efforts to prop up the multilateral system of
alliances, trade agreements and treaties previous US administrations worked so
assiduously to create.
Second, the populist and nativist rhetoric of President Trump seems particularly
ill suited to the times. In a GVC world driven by interconnected economies,
advanced manufacturing, digitization and the search for global talent, Trump’s
emphasis on America First, preserving industries of the past, tethering American
TNCs to national borders, and restrictions on high-skilled immigrants who could
contribute most to the burgeoning knowledge economy appears self-defeating.
Third, China poses a unique threat as a global economic competitor. It not
only has an abundance of natural and human resources that make it a formidable
challenger in terms of its comparative economic advantages; China also has an
institutional advantage in its ability to devise and carry out extremely ambitious
national plans. On the domestic front, ‘Made in China 2025’ is a blueprint to
transform the country into a high-tech powerhouse that will dominate cutting-
edge industries like robotics, artificial intelligence, clean energy, and electric
cars. On the international front, China’s ‘Belt and Road Initiative’ is a massive
infrastructure program proposed by the Chinese government in late 2013 that will
encompass over 65 countries along several land corridors and the maritime silk
road primarily in Asia and Europe, but also including Oceania and East Africa,
at a total cost estimated at $4 to $6 trillion (The Economist, 2017; Brînză, 2018).

In this context, President Trump might be using the bluster of protectionism as

a bargaining chip with China and other nations, rather than as a determined US
strategy. This could be consistent with the goal of achieving more ‘balanced trade’
to moderate the ballooning US trade deficits (Prestowitz, 2017), but it would not
address the strategic challenges posed by the need to harness the potential of the
digital economy and Industry 4.0. Trump gave some credence to protectionism as
a form of ‘deal making’ when he dangled the possibility that the US might rejoin
TPP in response to the China-US trade disputes (Swanson, 2018), but he continues
to reiterate his preference for bilateral deals where the US retains greater leverage.
A final issue to consider are the implications of protectionism and the weakening
of the Anglo-American order on the ability of international organizations to
maintain stable forms of global governance. In the words of Richard Baldwin,
Professor of International Economics at the Graduate Institute of International
and Development Studies in Geneva, Switzerland:

If regional trade agreements and their power asymmetries take over, there is a risk
that the WTO would go down in future history books as a 70-year experiment
where world trade was rules-based instead of power-based. It would, at least for
a few more years, be a world where rich nations write the new rules of the road in
settings marked by vast power asymmetries. This trend should worry all world
leaders (cited in World Economic Forum, 2014).

The international community is at a critical juncture in leadership within the

global economy. Traditionally UN agencies assumed responsibility for making
and implementing rules that guided not only the most powerful nations, but also
gave poorer and marginal countries a stake in the system. The need for global
governance is a collective challenge and responsibility, and a rules-based system
probably offers the best chance for sustainable and inclusive development for large
and small economies alike.

Notes
1. After August 1982, when Mexico’s Finance Minister Silva Herzog declared that Mexico
would no longer be able to service its debt, most commercial banks significantly reduced
or halted new lending to Latin America.
2. Debates over the role of states versus markets in the global economy are in full display
in discussions of the World Bank’s East Asia Miracle report (1993). The success of the
high-performing Asian economies, such as Japan and the ‘four tigers’ (South Korea,
Taiwan, Hong Kong, and Singapore), elicited divergent explanations: the ‘neoclassical’
view attributed East Asian success to limited government intervention and an export-
oriented trade strategy; the ‘revisionist’ view argued that East Asian governments actively
‘led the market’ in critical ways via industrial policy; and the ‘market-friendly’ view

eventually advocated by the Bank acknowledged the significance of selective government

interventions that did not contravene market fundamentals (see Gereffi, 1995).
3. The IMF had engaged in policy leverage since the 1950s in terms of ‘macroeconomic’
issues (e.g., cutting government spending and raising interest rates). However, this
shifted to a new level in the 1980s when the IMF required its borrowers to engage in
‘structural’ reforms such as privatizing state-owned enterprises and lifting trade barriers
(Babb and Chorev, 2016: 89).
4. This section draws from Mayer and Gereffi (forthcoming).
5. This section draws from Gereffi (2017).
6. As of October 24, 2017, Apple’s market capitalization was $807 billion (CNBC, 2017).
7. Foxconn boasted in 2016 that it replaced 60,000 workers with robots at a single plant
in China (Glaser, 2017).
8. The apparel industry is another case where the US-supported imposition of production
quotas through the Multi-Fiber Arrangement (MFA) led to a rapid expansion of US
apparel imports via an ever-growing set of developing country exporters from the 1970s
until the termination of the MFA system in 2005 (Gereffi, 1999).
9. In his classic article ‘Who Is Us?’, Robert Reich (1990) made this same point in the
early 1990s.
10. In UNCTAD’s ‘Technical Annex: The Top 100 Digital MNEs’, data are provided on
the total sales, total assets and the foreign-asset ‘lightness ratio’ (i.e., ratio between the
share of foreign assets and the share of foreign sales) for the top 100 digital MNEs and
the top 100 ICT MNEs in the world.
11. For additional company examples in China’s ICT sector, see Sun and Grimes (2016);
Grimes and Sun (2016).

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Co-authors
Jennifer Bair is Associate Professor of Sociology at the University of Virginia. Her
research interests in global political economy include labor standards in global value
chains. She is the editor of Frontiers of Commodity Chains Research (Stanford, 2009),
and has published in numerous journals including World Development, Economy and
Society, and Signs.
Stephanie Barrientos is Professor of Global Development at the University of
Manchester. She has published widely on gender, employment, agribusiness and
ethical trade in global value chains. She has advised companies, NGOs, government
and international organizations.
Karina Fernandez-Stark is Senior Research Analyst at the Duke University Global
Value Chains Center. She has led numerous research projects related to economic
development and competitiveness in Latin America and other regions of the world,
providing recommendations to country governments.
John Humphrey is Honorary Professor at the Department of Business and
Management at Sussex University. He has researched and published extensively
on global value chains, contributing both theoretical and empirical papers, with a
particular focus on food production retailing and private food safety standards.
Joonkoo Lee is Assistant Professor of Organization Studies at the School of Business
at Hanyang University, Seoul, South Korea. His research interests include globalization
and development, global value chains, political economy in Asia, and cultural and
creative industries.
Xubei Luo is Senior Economist at the World Bank Group. She has published over 40
articles on poverty, growth, labor market, spatial economy, global value chains, business
environment, and results chains. She holds a Ph.D. in Economics from International
Development Research Center, University of Auvergne, France.
Frederick Mayer is Professor of Public Policy, Political Science, and Environment
and Associate Dean for Strategy and Innovation at Duke University’s Sanford
School of Public Policy. He teaches courses on the political economy of public policy,
globalization and governance, political analysis, and leadership. He is the director
of POLIS: The Center for Political Leadership, Innovation and Service.
Arianna Rossi is Senior Research and Policy Specialist for the ILO-IFC Better Work
Programme. Her work covers policy research, impact assessment, and gender equality.
She holds a PhD from the Institute of Development Studies at Sussex University, an
MSc from the London School of Economics and a degree in Economics from the
University of Ferrara, Italy.
Timothy J. Sturgeon is Senior Researcher at the Industrial Performance Center at
Massachusetts Institute of Technology. He has made significant contributions to global
value chain theory, and is working to improve the metrics and methods available for
globalization research.

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Index 455

Index

Subject Index
accessibility trade shifts and industrial upgrading in,
to finance, 320, 382, 384 83–90
to labor, 326 apparel industry, 120–121, 313
to market, 15, 92, 116, 128, 189, 268, 318, from captive to relational value chains,
344, 355, 368, 388, 396, 405, 418 120–121
to training, 318–319 global production networks, 156–159
Acer, 91, 160, 243 wages in Mexico, 200n12
African Growth and Opportunity Act Apple, 295n4, 367
(AGOA), 286, 354–355 Apple’s iPhones, 366, 411, 421n6, 437
agriculture value chains market capitalization, 442, 448n6
private quality standards, 394 Armani, 68n26
SME participation in, 316–317 Asda, 122
Alibaba, 442–443 Asian apparel sourcing, 81, 104n7
Amazon (the firm), 442–444 Asian apparel value chain, 157–158
Amazon’s Kindle, 445 Asian Infrastructure Investment Bank,
‘America First’ doctrine, 429 372n21
Anglo-American exceptionalism, 429 assembly-oriented production model, 75, 120
anti-globalization movement, 162–165 Associated Merchandising Corporation
anti-sweatshop movement, 263–264 (AMC), 68n20, 68n22, 97
Aoyama Trading, 81 Australia, 153, 372n21
apparel commodity chain, 18–19, 49–52 automobile industry, 355–356, 439
backward and forward linkages in 2011 earthquake in Japan, effect of,
production process, 51–52, 65
385–386
entry barriers, 78
‘industrial condominium’ and ‘modular
evolution in Asia, 90–99
consortium’ concepts for
‘higher-order’ advantages, 50
automobile production, 407
‘lower-order’ competitive advantage, 50
North American, 99, 101–103 Baidu, 441–443
organizational succession in, 88–89 Bangladesh, 48, 58, 94, 101, 157, 246, 266–
standardized and fashion-oriented 267, 328, 421n4
garments, 50–51 Bangladesh garment industry, 286, 295n4
textile manufacturers and garment Battle of Seattle, 162
producers, 49–50 Benetton, 55

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456 Index

Berkeley Roundtable on the International Cambodian Garment Manufacturers

Economy (BRIE), 30n43 Association (CGMA), 288
bicycle industry, 119–120 Canada, 6, 24, 79–80, 86, 95, 105n14, 145,
‘Big Three’ Asian apparel producers, 83, 86 153, 156, 200n4, 237, 436
Bombardier, 359 aerospace, 359
branded apparel manufacturers, 82–83 automotive, 439
branded marketers, 81–82. See also captive value chains, 113, 117–118, 121
manufacturers without factories Capturing the Gains research program, 21,
Brazil, 3–4, 10, 12–14, 23, 26n9, 32n56, 48, 32n57
58, 179, 207, 209, 255, 261, 266–267, Carrefour, 267, 346, 389
281, 291, 296n8, 337, 344, 346, 351, cattle industry, Uruguay, 356–357
366, 372n15, 372n19, 373n21, 387, Celestica, 161, 237
405–407, 412, 421n4, 432, 438, 446 Central America Free Trade Agreement
automobile industry, 355–356, 407 (CAFTA), 353–354
export profile, 359–365 child labor, 235, 277, 287, 291, 395
trading relationship with China, 363–364 Chile, 3, 6, 26n6, 27n16, 81, 166n8, 207, 209,
Bretton Woods system, 1, 140, 432 322, 328, 356, 368
BRICs, 1, 406, 420 China , 1, 58, 61–62, 64, 92, 157, 182, 429–
Burundi, 352 430, 439–440
business groups, 154–155 Chinese Contract Labor Law, 267
business process outsourcing (BPO), 322 cluster cities, 222
Czech Republic, 324, 330 digital economy, 441–443
Guatemala, 329 exports to United States, 2000–2014,
India, 323–324, 329 214–218
South Africa, 323, 329 exports to world market, 1990–2014,
business systems, 154, 168n24 212–213
buyer-driven global commodity chains, export profile, 359–365
18–20, 52, 73, 90, 112, 230, 280–281, industrial organization in, 20
420n3 iPhone production, 411
definition, 46, 77 labor costs, 213
economic agents, 56–58 MFN status, 64, 69n35
flexible specialization perspectives, 47 special economic zones, 48
global sourcing strategies, 58–62 supply chain cities, 219–222, 407, 410
organizational features of, 43–44 third-party production in, 62
original equipment manufacturer (OEM) trading relationship with Brazil, 363
arrangements, 46 China’s development model, 20, 209–212
producer-driven commodity chains vs, annual FDI flows in, 210–211
44–47, 75–78 growth of R&D centers, 210
profitability, 47, 77 reliance on FDI and private property, 211
retail revolution, 52–56 Chinese-led clusters, 222
buying offices, 96–97 Clean Clothes Campaign (CCC), 164
Cadbury, 407 cluster-driven path (of social upgrading), 291
Calvin Klein, 67n13, 187, 195 cluster firms, in developing economies, 279
Cambodia, 86, 266, 268, 288, 438 cluster governance, 287

Coca-Cola, 347, 407 de-verticalization of production, 82–83

codification of information, 124–126 digital economy, 441–445
coffee value chain, Central America and East impact of GVC governance, 444
Africa, 351–353 strategies of companies in, 442
Cold War, 13, 24, 431 discount retail chains, 53, 67n12
collective efficiency, 78, 279, 285 Disney, 83, 258
Colombia, 351, 357, 372n16 doctrinaire market fundamentalism, 12, 432
commercial subcontracting. See original Dominican Republic, 58, 63, 94, 96, 101–102,
equipment manufacturing (OEM) 293, 296n8, 388
commodity-chain dynamics, 9, 72–73 Dominican Republic-Central America
developmentalist turn, 15 Free Trade Agreement, 353
internationalization of production, 92–95 Donna Karan, 68n26, 104n7, 187
triangle manufacturing, 95–97 Dubai, 81
concept stores, 83 Duke University Global Value Chain Center
contract manufacturing, 58, 68n27, 112, 123 (Duke GVCC), 22, 316, 322, 328
coordinated market economies, 153
coordination and collaboration building, East Asia
319–320 industrial growth and development
corporate social responsibility (CSR), 22, 253, strategies in, 11–13
269, 276–277, 279, 282–284 East Asian Miracle, 72, 146, 159, 401, 447n2
CSR-driven path (of social upgrading), East Asian NICs. See newly industrialized
289 countries (NICs) of East Asia
Costa Rica, 102, 144, 164, 328 Eastern Europe
environmental services offshoring, 357 industrial growth, 11
export performance in medical devices, economic globalization, 141, 209, 253,
1998–2011, 332 255–257, 419
GVCs in, 328–331, 338n9 economic neoliberalism in Latin America,
industrial policy recommendations, 207–209
335–336 Egypt, 421n4
medical devices industry, 331–333 El Salvador, 61, 102, 353
offshore services GVC, 334–335 electronic data interchange (EDI), 66n7,
Presidential Council for Competitiveness, 67n15
335 electronics sector
Czech Republic, 438 impact of GVC governance, 123–125
global production networks and, 159–161
Daewoo, 91–92
embedded liberalism, 162, 256, 269, 430
Dayton Hudson, 53, 66n9, 79, 104n4
Embraer, 406
dependency theory, 2–3, 11, 152
emerging economies, export profile of,
developing economies and, 11
limitations of, 8 359–365
measures of dependency, 25n4 environmental services offshoring, 357
development models Episode, 69n34, 91
in Latin America, 206–209 ‘essential drugs’ programs, 10
in China, 209–212 Ethical Trading Initiative (ETI), 288
development strategies, 11–13 Ethiopia, 352

Europe, 1, 6, 63–64, 66n9, 68n20, 80, 82–83, ‘flying geese’ model of Asian development,
90–92, 99, 128, 139, 141, 154, 156, 168n27
237, 337, 352, 355, 372n21, 439, 446 Foot Locker chain, 56, 67n13, 67n18
Central Europe, 244, 255, 360, 400, 410, footwear cluster, Brazil’s Sinos Valley, 179
431 footwear industry
certification institutions in Europe, 164 athletic footwear companies, 46
collapse of communism in Europe, 255 East Asian footwear exports, 29n32–33
Eastern Europe, 48, 73, 82, 99, 144, 244, footwear commodity chain, 14
255–256, 344, 347, 400–401, 431 footwear-exporting countries, 14, 29n31
European Community, 95 US footwear imports, 29n31
European Union, 79. 87, 99, 130n14, 137, foreign-led clusters, 222
166n10, 356, 410, 412, 429, 434, Forest Stewardship Council (FSC)
436 certification, 163, 254, 260–261
social democracy in Europe, 162 Ford, 346, 389
Western Europe, 67n18, 83, 86, 99, 244, four-pillars model for sustainable SMEs,
337 317–318
explicit coordination, 121–123, 127 Foxconn, 234, 237, 295n4, 347, 366, 406, 411,
export-oriented industrialization (EOI), 442, 448n7
12–13, 28n25, 48, 401–402, 408–409 Foxconn’s factory cities, 437
proposed manufacturing facility in
Facebook, 441–442
Wisconsin, 437–438
Fair Labor Association (FLA), 164
Foxconn Technology Group, 373n23
Fair Trade movement, 164, 258
France, 58, 79, 88, 165n2, 372n21
Fair Trade coffee, 254, 261, 269, 352,
Fruit of the Loom, 50
373n24
fresh vegetables trade
Fang Brothers Group, 69n34, 91, 121
impact of GVC governance, 121–123
Farah, 187, 314
global production networks and, 161–162
fashion-oriented segment of apparel
global value chain, 308–309
commodity chain, 50–51
full-package production, 73–75, 88, 101,
fashion-oriented clothing companies, 46
104n1, 120–121, 130n13, 159, 203,
fashion-oriented retailers, 58, 88
233, 236, 243–244, 403–404. See also
wholesale value of domestic apparel
OEM production
production, 51
in Torreon’s blue-jeans cluster, 181, 187–
Fayva Shoes, 67n12
194, 198–199, 314
Federated Department Stores, 66n9
filière approach, 151 The Gap, 46, 53, 61, 67n14, 75, 156, 230, 257,
finishing school model, 358 260, 262, 267
firms gender bias, 240, 284
opportunities in global market, 385–389 General Agreement on Tariffs and Trade
policy implications, 395–396 (GATT), 140–141
role in risk sharing, 382–385 General Motors, 346, 386, 389
flexible specialization perspectives/flexibly Germany, 79, 153, 165n2, 168n24, 360,
specialized forms of production, 372n21, 408, 410–411, 439
30n40, 47, 52 German export-processing zones in
Flextronics, 161, 283, 346 Central and Eastern Europe, 431

Giordano, 91 comparison of varieties of capitalism and,

global commodity chain (GCC), 2, 13–15, 153
111, 150–151, 177, 180 economic and social analysis of labor,
activities in, 26n13 231–232
core-peripheral activities, 26n13 global apparel industry, 156–159
governance structure of, 45 high-skilled, technology-intensive work
ISI and EOI strategies of national in, 237
development, 48 knowledge-intensive work in, 237–238
main dimensions of, 44–45 low-skilled, labor-intensive work in,
producer-driven and buyer-driven. See 235–236
buyer-driven global commodity medium-skilled, mixed production
chains; producer-driven technologies work in, 236
commodity chains small-scale, household-based work in, 235
role of state policies in, 47–49 workers in, 230–231
triangle manufacturing in, 19, 62–63, 65, global sourcing strategies, 58–62, 78–83
global value chain governance, 108, 111–113.
95–97.See also newly industrialized
See also governance in clusters and
countries (NICs) of East Asia
GVCs
global economy, 137–138, 266, 309
apparel industry, 120–121
chain analysis of, 150–151
bicycle industry, 119–120
contenporary, 141–144
dynamics, 119, 125–126
fragmentation, coordination, and
fresh vegetables trade, 121–123
networks in, 108–111
key determinants of, 117
governance in, 151–155
key variables, 116
international trade and production
operational theory of, 113–118
networks, 147–151 US electronics industry, 123–125
macro level, 137 global value chains (GVCs), 2, 15–18, 151,
meso level, 138 229–230, 276. See also global value
micro level, 138 chain governance
‘neoliberal’ policies and, 432–433 application of, 316–336
origin of, 139–140 basic dimensions of, 306–316
pattern of competition, 149 building blocks, 5–13
reorganization of production and trade in, in developing countries, 351–359
144–151 development and emerging economies,
value-chain perspective, 400–403 22–23
global ‘governance deficit,’ 254 for economic development, 349–350
global industries, 8–11 GVC economy, 430–431
globalization, 139, 142–144, 147–148, 151, geographical analysis, 309–310
155 geographic consolidation of production
backlash, 162–165 in, 281–282
industrial clusters and, 278–280 governance and upgrading in, 19, 27n20,
global pharmaceutical industry, 9–10 280–282, 310–315, 347–348,
global production networks (GPNs), 21, 228, 403–405
400–401 industrial clusters and, 278–280
changing patterns of trade, production industrial policies, role of, 365–366,
and employment, 229–232 369–370

infrastructure development, 368 high-value agro-food chains, 317

input-output structure, 307–309 Honduras, 94, 101–102, 328, 351, 353
international competition and, 343–344 Hong Kong, 12, 61–63, 68n22, 68n28, 72–73,
international donors and peak 82–83, 86, 101, 146, 364, 401, 447n2
organizations, impact on, 413–418 clothing companies, 91
leveraging local knowledge in, 356–357 establishing giant factories and foreign-
local institutional context, 315 led clusters in China, 221–222
post-Washington Consensus era, 23 internationalization of textile and apparel
recommendations for developing companies, 93–94
countries, 368–371 OBM production, 91, 157
regionalization of, 412–413 OEM production, 90–92
reorganization of production and trade transition from an entrepôt to a
in, 20 manufacturing-based economy,
rise of, 344–347 95–96
risks and opportunities of participation in horizontal (cluster) governance, 284
, 23, 382–396
horizontal coordination and collaboration
SME participation in, 316–318
building, 319
stakeholders, 316
Horticultural and Ethical Business Initiative
standards and certifications, 370
(HEBI), 288
trade policies, role of, 368
human capital gap, in Latin America and
value-added trade, 409–412
India, 358
workforce development, 324–328, 370
Hungary, 438
Goldstar, 91
Hyundai, 91
Google, 441–442, 444
governance , in clusters and global value IBM, 120, 123, 237, 346, 389
chains (GVCs), 284–294, 307, import-substituting industrialization (ISI),
310–312, 402–407, 419, 441, 444–447. 11, 13, 28n25, 48, 401–402, 432
See also private governance, public India, 3–4, 48, 58, 94, 121, 228, 246, 255,
governance, social governance, 266–267, 306, 337, 346, 351, 358–363,
synergistic governance 369, 387, 402, 405–406
captive governance, 116–118, 311–312 business process outsourcing (BPO),
hierarchical governance, 116–118, 323–324, 329
311–312 garment industry in, 239
horizontal (cluster) governance, 284 Jalandhar football cluster, 287, 289
modular governance, 116–118, 311–312
trading companies, 96
relational governance, 116–118, 311–312
Indonesia, 58, 62–64, 69n35, 81, 94–96, 121,
Greece, 81
157, 159, 262–263, 281, 351, 371n2,
Guatemala, 58, 63, 94, 96, 102, 351–353,
387, 420, 421n4, 432
372n9, 372n10
industrial clusters in developing countries,
Haiti, 268 178–181
Hang Ten, 91 industrial commons, 421n6
Hewlett-Packard (HP), 161, 346, 389 industrial districts, 178, 180
high-skilled, technology-intensive work, 237, industrial policies, role in GVCs, 365–366,
326 369–370

horizontal, 365 international subcontracting, 68n27, 82, 257

vertical, 365 Israel, 356, 387
industrial upgrading, 73–75, 83–90, 280–282. Italy, 29n31, 29n32, 30n40, 55, 58, 79, 88,
See also upgrading 165n2, 178, 372,n21
apparel suppliers in Asia, 83–90
J. C. Penney, 54, 56, 68n22, 75, 79, 88, 96,
chain upgrading, 233, 283, 313, 409
267, 389
functional upgrading, 233, 283, 312, 409
J. C. Penney’s private-label lines, 80–81
global production networks and, 155–162
in China, 212–219 Jamaica, 63, 96, 102
in Mexico, 189–192, 212–219 Japan, 29n31, 58, 63, 69n31, 72–73, 78, 88,
in the Asian apparel value chain, 157–158 91, 95, 101, 120, 141, 146, 153, 219,
levels of analysis, 87 337, 355, 360, 366, 385–386, 401, 408,
organizational learning, 73–74, 87–88 410, 429, 439, 447n2
organizational succession, 74–75, 88–89 economic growth rate, 12
process upgrading, 232 in the Asian apparel value chain, 157–158
product upgrading, 232 in the electronics value chain, 159–160
skills for upgrading, 358–359 Japanese automotive production system,
types of, 312–313 46, 77
industry ‘scouts,’ 58, 62, 90 Japanese model of ‘lean production’, 148,
informal small and micro-enterprises or 178
household-based work, 324–325 Large Retail Store Law, 79
information technology outsourcing (ITO), migration of textile and apparel
322 production to Japan, 83, 86
Intel, 127, 367, 442 revaluation of the yen, 86
Inter-American Development Bank (IDB), sogo shosha, 62, 95, 155
358 third-party production in, 62
Inter-American Development Bank voluntary export restraints in, 438–439
Multilateral Investment Fund (IDB- Jordan, 268, 328
MIF) initiatives in Latin America, just-in-time production, 78, 178
316
international competition in GVCs, 343–344 Kenya, 3, 121–123, 130n14, 161–162, 288,
international economy and development, 290, 328, 352
perspectives, 2–5 Kmart, 53–54, 59–60, 64, 67n12, 67n15,
International Labor Organization (ILO), 67n19, 68n22, 75, 79, 88, 96–97, 187
137, 231, 256, 278, 288, 324, 337, 413 Kmart-Liverpool, 103
adoption of the GVC framework, 349, knowledge-intensive work, 237–238,
413 326–328
ILO’s Better Work program, 268, 288, knowledge process outsourcing (KPO), 322
354, 391–392 Kraft Foods, 346, 389
ILO’s Decent Work Agenda, 233, 283
L. A. Gear, 46, 68n26
International Monetary Fund (IMF), 137,
labor, economic and social analysis of, 231
140–141, 162, 199, 255, 257, 345, 366,
369, 401, 413, 419, 430 labor-centered path (of social upgrading),
restructuring of Latin American debt 290–291
crisis, 432, 446, 448n1 Laos, 63, 86

Latin America, 432 mass merchandising chains, 53, 66n11

‘essential drugs’ programs in, 10 Mast Industries, 97
export-oriented assembly in, 102 Mauritius, 58, 63, 93, 96
human capital gap in, 358 May Department Stores, 66n9, 67n19,
industrial growth and development 68n22, 97
strategies in, 11–13 medium-skilled, mixed production
Latin American development model technologies work, 236
import-substituting industrialization Mexico, 1, 4, 6–7, 12–13, 23–24, 48, 58, 73, 75,
(ISI), 206–207 81–82, 86, 92, 94, 121, 144, 255, 266,
neoliberalism, 207–209, 432–433 344, 371n2, 386, 388, 410, 420, 421n4.
Laura Ashley, 55 See also Torreon blue jeans cluster
legal process outsourcing (LPO), 324, 330 aerospace industry, 359
Lehman Brothers collapse, 433 apparel commodity chain of, 101–104
Lesotho, 268, 328, 354–355, 412 automobile industry, 355–356, 372n15,
Levi Strauss and Co. , 50, 61, 67n14, 83, 260, 439
267, 314, 353 bilateral trade agreements, 368
Li and Fung, 121, 347, 371n4, 373n23, 406, exports to United States, 2000–2014,
421n5 214–218
liberal market economies, 153 exports to world market, 1990–2014,
The Limited, 46, 53, 61, 67n14, 75, 97, 104n6, 212–213
156 export profile, 359–365
livestock traceability system, 356 financial crises, 387, 447n1
Liz Claiborne, 46, 50, 60, 67n13, 67n14, foreign direct investment in, (1995–2015),
68n21, 69n34, 75, 80, 91, 104n6, 156, 211
164, 187, 257, 346, 389 industrial upgrading in, 212–219
early years in Asian apparel sourcing, 81 Korean-owned Kukdong factory, 164
low-skilled, labor-intensive work, 235–236, maquilada sector, 66n4, 68n29, 102, 143,
325–326 165n4, 184, 199n3, 236
Macao, 93, 222 NAFTA impact, 20, 24, 159
Macy’s, 60, 66n5, 68n22, 96–97 OEM production, 158
Malaysia, 58, 63–64, 93, 96, 159 pharmaceutical industry in, 10
manufacturers without factories, 81, 150, 256. production sharing with US (also called
See also branded marketers ‘twin plant’ program), 82, 104n5,
manufacturing miracles, concept of, 12–13 400, 431
maquiladora program (Border talks with US President Trump, 436, 438
Industrialization Program), 165n4. See US apparel sourcing, 101–103
also Mexico, maquiladora sector Mexico’s development model, 20, 209–212
market-based global value chain governance, Microsoft, 127, 386, 442, 444
115, 118 Mitac Corporation, 91–92, 243
fresh vegetables trade, 121–123 Mitsubishi, 29n32, 68n23
market-driven path (of social upgrading), moderate-skilled work, 326
288–289 modernization theory, 2–3
market governance, 310, 312 modular product architectures, 78, 112, 114,
Marks and Spencer, 79, 156, 267 130n11

modular value chains, 115, 117–118, 125–126 Nokia, 234, 385

Montgomery Ward, 64, 66 n11, 68n22, 96–97 North American Free Trade Agreement
Morocco, 328, 394 (NAFTA), 20, 24, 87, 103, 137,
Moroccan garment industry, 21, 229, 159, 176–177, 184, 208, 271n5, 286,
238–239, 242, 246, 247n3 435–439
Multi-Fiber Arrangement (MFA), 86, 121, maquila networks, 181, 199n3, 200n4
158, 355, 388, 406 North Korea, 63
multinational corporations (MNCs), 2, 313, offshore services value chain, 320–323, 328
333. See also transnational corporations Organisation for Economic Co-operation
(TNCs) and Development (OECD), 343
pharmaceutical industry, 7, 10 organizational features of global industries,
power and global reach of, 5–8 16, 43–44
Multinational Enterprise Project, Harvard original brand manufacturing (OBM), 19,
Business School, 6–7, 145 73–74, 88, 155–156
multi-stakeholder initiative (MSI), 289–290 in East Asia, 90–92
multi-stakeholder path (of social upgrading), reversals in experience, 91–92
289–290 original design manufacturing (ODM), 19,
Myanmar, 58, 90, 94 155–156
original equipment manufacturing (OEM),
neoliberalism, economic, 207–209, 211, 223,
19, 63, 65, 73–75, 88, 155–156
432–433 in East Asia, 90–92
Nestlé, 346, 389 outward processing arrangements (OPA), 82,
New Zealand, 372n21 93, 128
newly industrialized countries (NICs) of outward processing trade (OPT), 82, 244
East Asia, 43, 48, 58, 61, 65, 72–73, overseas buying offices (of US retailers), 57,
87–88, 96 96–98
apparel industry, 99–104
Pagoda Trading Company, 68n19, 68n23
non-quota markets for, 99
Pakistan, 26n6, 166n8, 291, 421n4
northern tier, 87
Pan-American Health Organization
OBM production, 90–92, 157
(PAHO), 7, 10
OEM production, 90–92, 157
Panama, 351
offshore sourcing by, 92–95
Payless ShoeSource, 67n12, 67n19, 68n24
preferred countries for new factories, 96
pharmaceutical industry
third-party production, 62
in Mexico, 7
three Ds, 69n31
UNCTC report, 10
triangle manufacturing, 62–63, 95, 157 . the Philippines, 58
See also global commodity chain Phillips-Van Heusen, 61, 83
(GCC) Plaza Agreement, 86
Nicaragua, 328, 351, 353–354, 368 Polo/Ralph Lauren, 68n26, 156, 187, 346,
Nicaraguan apparel industry, 353–355 353, 389
Nigeria, 3–4, 26n7 Polo, 104n7, 195
Nike, 46, 68n21, 68n26, 81, 83, 156, 164, Portugal, 81
230, 257–258, 260–262, 267, 310, 346, private governance, 21–22, 163, 268–270,
373n22, 389 285, 292

branded products, impact on, 261–262 US import quotas established by the

demand for, 255–257 MFA, 121, 156, 388, 448n8
effective, 262–264
RCA, 123
evolving pattern of, 268–270
Reebok, 46, 68n26, 81, 164, 257, 310
functions of, 270n2
regional value chains, 438–439
innovations in, 253
relational value chains, 113, 118, 121
interaction between public governance
apparel industry, 120–121
and, 254
rents, 78, 104n2, 144, 402
potential impact and scope, 259–260
types of (brand name, organizational,
six hypotheses about, 259–268
relational, technology, trade
social or environmental concerns,
policy), 78
264–265
retailers, 56–57, 80–81
social responses and, 257–259
across European Union, 79
private-label (or store-brand) programs, 58,
and global sourcing strategies, 58–62
67n14, 68n21, 69n34, 75, 80–81, 88,
private-label programs, 80–81
96, 200n8
scope for ‘family shopping,’ 53
process upgrading, 282, 312, 409
retail sector in the United States, 52–56
producer-driven commodity chains, 18–20,
re-verticalization of brands and stores, 83
73, 112, 230, 280–281, 420n3 risk sharing, firms’ role in, 382–385
buyer-driven commodity chains vs, Romania, 159, 388
44–47, 75–78 Russia, 23, 144, 344, 346, 359–363, 387, 406,
capital- and technology-intensive, 52 421n4
definition, 46, 76 Rwanda, coffee sector, 352–353, 372n11,
East Asian division of labor, 46 372n12
Japanese and US car companies, 46
mass production, 47 Sainsbury’s, 122, 346, 389
profitability, 77 Saipan, 58, 63
production networks in global economy, Samsung, 91, 126, 385, 442
147–151 Sara Lee Corporation, 50, 82–83, 103, 200n7
product upgrading, 282, 312, 409 Sears Roebuck, 53, 64, 66n11, 68n22, 75,
protectionism and global value chains 79, 96
(GVCs), 24, 49, 86–87, 429–430, Shimano, 119–120, 127
433–435, 437–438 Singapore, 12, 63, 68n22, 72, 81, 95–97, 101,
public governance, 22, 266–267, 269–270, 146, 156, 219, 364, 366, 372n21, 401,
284–286 429, 439, 447n2
public-governance path (of social upgrading), OEM production, 90–92
292 Slovakia, 244, 438
public-private partnerships, 358, 370–371 small and medium enterprises (SMEs),
316–318
quasi-hierarchical relationships, 112 small-scale, household-based work, 235
quotas, 49, 51, 64–65, 86, 147 Social Accountability 8000 (or SA 8000),
in triangle manufacturing, 62–63 163–164
in East Asia’s apparel commodity chain, social governance, 22, 284–286
92–95, 157–158 Solectron, 123–124, 161
non-quota markets, 95, 99 Sony, 126

South Africa, 4, 23, 32n57, 144, 239, 243, internationalization of textile and apparel
281, 344, 359–363, 373n21, 386, 395, firms, 94–95
410, 412, 421n4, 432, 446 investments in the PRC, 69n33
boycotts, 255 OBM production, 91, 157
South African clothing manufacturers OEM production, 90–92
and retailers, 355, 412 orderly marketing agreements in footwear,
South Korea, 3–4, 12–13, 60, 63, 68n28, 83, 66n3
86, 101, 146, 356, 366, 372n21, 401, quota markets, 94–95
429, 438–439, 447n2 US retail buying offices, 97–98
apparel exports, 86 Tanzania, 352
finished consumer goods exports, 58 Target, 53, 67n12, 75, 104n4, 156, 187, 353
in the electronics value chain, 160 Tata, 406
internationalization of textile and apparel Tencent, 442–443
firms, 94 Tesco, 122, 230, 267, 288, 310, 346, 389
orderly marketing agreements in footwear, Texas Instruments, 123
66n3 Thailand, 58, 64, 104n7, 372n21
OBM production, 91, 157 third-party labor contractors, 239
OEM production, 90–92 Third World, 2–3, 48–49, 91, 400, 420n2
Spain, 29n31, 29n32, 168n23, 247n3, 359 Tommy Hilfiger, 75, 104n7, 156, 187, 195,
Sri Lanka, 58, 61–63, 83, 94, 157, 246, 328 267
SSRC working group, 6–7, 26n9 Torreon blue jeans cluster, 20, 181–184,
Standard International Trade Classification 313–314
(SITC), 166n11, 224n1 apparel industry indicators for, 183
Starbucks, 164, 258, 261, 351 commodity-chains perspective, 197–199
state policies, role in global commodity chain full-package networks, 189
(GCC), 47–49 labor market, 193–197
store-within-a-store boutiques, 67n13 main clients of, 187
strategic interviews, 4, 25n3, 185, 203–204 NAFTA-era networks, 186–189
Sun Apparel, 314 on-site research in, methodology, 184–
supermarkets, 121–122, 161–162, 256, 260, 185, 203–204
276, 346, 389, 394, 412 success and limitations, 189–197
supply chain cities, 219–222 top 10 apparel manufacturers in, 192
supply chain management, 122, 160, 221, upgrading of industry, 189–192
276, 294, 349, 386, 411, 443 value of a commodity-chains perspective,
Swaziland, 354–355, 412 197–199
Sweden, 165n2 vertical network structure and hierarchical
synergistic governance, 22, 293 organization, 192–193
Taiwan, 3–4, 12–13, 60–61, 63, 68n28, 83, 86, total quality management, 178
101, 146, 353, 364, 366, 401, 438–439, trade liberalization, 179
447n2 trading companies, 57
apparel exports, 86, 105n11 Transatlantic Trade and Investment
establishing giant factories and foreign- Partnership (TTIP), 435–436
led clusters in China, 221–222 transnational business networks, 155
finished consumer goods exports, 58 transnational corporations (TNCs), 46, 139,
in the electronics value chain, 160 144–147, 165, 166n12, 356, 396.

239–240, 242, 247, 277, 279–280, Cafaggi, Fabrizio, 271

283–284, 286, 290–291, 293–295, Campbell, John L., 152
326–327, 338, 347, 349, 367, 389–391, Cañas, Jesus, 143, 165
393, 408, 413, 420 Canis, Bill, 386
Bartley, Tim, 258, 260, 262–263, 293 Caporaso, James, 3, 7–8, 25–26
Batz, Michael B., 292 Cardoso, Fernando Henrique, 3, 8, 152
Becker, David, 3 Carlsen, Laura, 209
Bella, Jose Di, 370 Carr, Marilyn, 284
Beltramello, Andrea, 360, 410, 418 Carrillo, Jorge, 143, 184, 196, 236
Bendix, Reinhard, 3 Carroll, William K., 155
Benjamin, Daniel K., 439 Carswell, Grace, 290
Bennett, Douglas C., 3, 8, 26 Casalet, Mónica, 359
Berger, Peter L., 11 Castells, Manuel, 155
Berger, Suzanne, 93–94, 128, 152 Cattaneo, Olivier, 23, 266, 276, 281, 337, 344,
Bergsten, C. Fred, 146 349, 369, 388, 413, 435
Bernard, Mitchell, 86 Chase-Dunn, Christopher, 25
Bernhardt, Thomas, 284 Chassot, Olivier, 355
Beviglia Zampetti, Americo, 166 Chatterley, Julia, 436
Bhagwati, Jagdish, 144 Chazen, Jerome A., 81–82
Biersteker, Thomas J., 3 Chen, Maggie, 386
Birnbaum, David, 82, 90 Chen, Martha, 284
Block, Fred, 165 Chen, Xiangming, 61
Chiarvesio, Maria, 277
Bluestone, Barry, 51, 53, 67
Chirot, Daniel, 25
Bonacich, Edna, 120
Chorev, Nitsan, 432, 448
Bonnen, Arturo R., 126
Christian, Michelle, 254, 261, 373
Bornschier, Volker, 25
Clark, Kim B., 114, 129–130
Borrus, Michael, 30, 77, 128, 159–160
Clark, Norman, 394, 413
Boyer, Robert, 152, 199
Clelland, Donald A., 29
Bradshaw, York W., 3
Clemons, Eric K., 129
Bradsher, Keith, 421, 437, 439
Coase, Ronald, 382
Brandt, Loren, 210, 405, 413
Coe, Neil, 230
Branstetter, Lee, 209
Collins, Jane Lou, 240
Bravo, Richard, 436
Contreras, Oscar F., 276
Brenner, Robert, 25
Coronado, Roberto, 143, 165
Bresky, Bart, 104
Coslovsky, Salo V., 292, 296
Brewer, Benjamin D., 29
Crescionini, Eduardo, 357
Brînzã, Andreea, 446
Crespi, Gustavo, 365
Brown, Drusilla K., 242
Crow, Michael, 292
Brun, Lukas, 444
Cumbers, Andy, 230–231
Buitelaar, Rudolf M., 184
Bunkley, Nick, 386 Damodaran, Sumangala, 284
Buruma, Ian, 1, 429 David, Paul A., 125
Büthe, Tim, 21, 258, 262, 270 Daviron, Benoit, 352

de Andrade Baltar, Paulo Eduardo, 267 Faletto, Enzo, 3, 8, 152

De Coster, Jozef, 93 Farooki, Masuma, 289, 337, 402, 412
Dedrick, Jason, 421 Farrell, Diana, 223
De la Garza, Enrique, 177, 196 Feenstra, Robert C., 19, 109, 148, 155, 165–
De Marchi, Valentina, 278, 281, 295 166, 235, 343, 410
De Neve, Geert, 283, 290 Felix, David, 432
de Oliveira, Puppim, 281, 283–284, 288–289, Felmingham, Bruce, 219
291–293 Fennema, Meindert, 155
Deyo, Frederic C., 12 Fernandez-Kelly, Patricia, 183
Diaz-Alejandro, Carlos, 6 Fernandez-Stark, Karina, 27–28, 237, 266,
Dicken, Peter, 28, 44, 111, 129, 139, 143, 145, 277, 309, 313, 317–321, 324–326, 328,
167, 255–256, 346, 349, 400, 431 330, 334–336, 338, 347, 372, 403, 405,
Dickerson, Kitty G., 74, 79–80 431
Dillon, Sam, 200 Fine, Charles H., 110, 126
Dobbin, Frank, 165 Finnie, Trevor A., 79
Dolan, Catherine S., 17, 30, 112, 130, 168, Fitter, Robert, 17, 164
230, 236, 256, 260, 283, 286, 288, 290, Flamm, Kenneth, 345, 431
312 Fleury, Afonso, 17, 30
Donaghu, Michael T., 46 Fleury, Maria Tereza, 17
Doner, Richard F., 5, 46, 77, 279, 291 Florida, Richard, 77, 126, 128, 148
Dore, Ronald, 128, 152 Fold, Niels, 27, 431
Dos Santos, Theotonio, 3 Fourcade-Gourinchas, Marion, 207–208
Downie, Andrew, 261 Frank, Andre Gunder, 3
Downs, Anthony, 264 Frederick, Stacey, 28, 266, 310, 313, 368, 388,
Drangel, Jessica, 4, 9, 15, 27–28, 143 403, 405
Duhigg, Charles, 421, 437 Fredriksson, Torbjörn, 166
Dunaway, Wilma A., 29 Freeman, Richard B., 210, 234, 295, 346
Dunning, John H., 6, 145 Freyssenet, Michel, 199
Dussel Peters, Enrique, 176–177, 208 Fröbel, Folker, 142, 400, 431
Duvall, Raymond D., 8 Fuchs, Doris, 256, 259, 270
Fung, Archon, 163–164
Egan, Edmund, 30
Fung, Victor K., 350, 373, 421
Einhorn, Bruce, 400, 431, 437
Elliott, Kimberley A., 234, 295 Galvin, Peter, 119, 130
Ellner, Steve, 208 Gao, Bai, 210
Elson, Diane, 240 Garretón, Manuel Antonio, 163
Emerson, Richard M., 8 Gereffi, Gary, 3–5, 7–10, 12–17, 23, 25–32,
Encarnation, Dennis, 3 43–44, 47, 61, 69, 73–74, 83, 88, 90,
Engardio, Peter, 143, 400, 431, 437 95, 97, 101–103, 105, 111–112, 121,
Ernst, Dieter, 30, 160 129, 143, 146, 150–151, 154–157, 159,
Esbenshade, Jill, 258 163–164, 166, 168, 180, 184, 189, 207,
Evans, Peter B., 3, 8–9, 26, 146, 152, 165, 253 212, 219, 229–230, 232, 235–236, 241,
Evenett, Simon, 435 243–244, 254, 256–257, 260–261, 266,
Evgeniev, Evgeni, 244 270–271, 276–277, 280–281, 292–293,
Ewert, Joachim, 244 295, 306–307, 310, 312–314, 319–321,

324–328, 331–333, 336, 338, 343, Hopkins, Terence K., 5, 14–15

345–350, 353–354, 359, 364–365, 367, Hu, Albert G. Z., 210
369, 371, 373, 384, 387–389, 392–393, Hualde, Alfredo, 143
400–404, 407, 410, 413, 418–420, 432, Huang, Fuping, 211
438–439, 443–444, 446, 448 Huang, Yasheng, 211
Gibbon, Peter, 30, 129, 281–282, 413 Huber, Evelyne, 165, 207, 209
Glaser, Amy, 438, 448Godfrey, Shane, 240 Hughes, Alexandra, 111, 260
Gold, Thomas B., 3 Hummels, David, 129, 148
Goodman, Louis Wolf, 6 Humphrey, John, 17, 27, 30, 112, 126, 130,
Goodman, Peter S., 214 151, 168, 178, 181, 230, 236, 256, 260,
Gore, Charles, 141, 207, 345, 402 276–277, 282, 307, 312, 350, 409, 417
Gospel, Howard, 322 Humphrey, Peter, 30
Gourevitch, Peter, 28 Huntington, Samuel P., 3
Grandinetti, Roberto, 278, 295 Iglesias Prieto, Norma, 183
Granitsas, Alkman, 91
Inglehart, Ronald, 267
Granovetter, Mark, 111, 154, 165
Irwin, Neil, 443
Green, Jessica F., 258, 262
Greenhouse, Steven, 286 Janczuk, Agnieszka, 271
Grieco, Joseph, 3 Jarillo, Carlos J., 110
Grimes, Seamus, 439, 443, 448 Jefferson, Gary H., 210
Grunwald, Joseph, 345, 431 Jenkins, Rhys O., 26, 283, 363–364
Guillén, Mauro F., 168 Johnson, Chalmers, 12
Güler, Esra, 241 Jones, Jackie, 80, 104
Gusfield, Joseph R., 3 Jordan, Mary, 200
Jordhus-Lier, David C., 230
Haggard, Stephan, 12, 345
Justice, Dwight W., 292
Hale, Angela, 231, 240
Hall, Peter A., 152 Kahn, Gabriel, 221, 224
Hall, Thomas D., 25 Kahn, Joseph, 211
Hamel, Gary, 111 Kalfagianni, Agni, 256, 259, 270
Hamilton, Gary G., 31, 155, 235, 371, 418 Kaplinsky, Raphael, 17, 30, 78, 104, 129, 144,
Hammer, Nikolaus, 260 151, 164, 199, 230, 255, 282, 289, 337,
Harris, Nigel, 43 394, 402, 412–413, 418
Harrison, Bennett, 45, 67, 199 Katz, Jorge, 6
Held, David, 140, 142, 255 Kawakami, Momoko, 27, 266, 347, 405
Henderson, Jeffrey, 5, 46, 77, 111, 230, 400 Keck, Margaret E., 267
Hernández, René A., 347 Keesing, Donald B., 114
Herzenberg, Stephen, 143, 184 Kenney, Martin, 77, 128, 442
Hess, Martin, 230 Keohane, Robert, 255
Hill, Richard C., 46, 77 Ketels, Christian H., 279
Hilowitz, Janet, 163 Khanna, Sri Ram, 83, 93, 95
Hochstetler, Kathryn, 267 Khanna, Tarun, 211
Hollingsworth, Joseph R., 152 Khara, Navjote, 279, 285, 289
Holmes, John, 68 Kidder, Thalia, 231
Hopkins, Rose, 260 Kierzkowski, Henryk, 109, 147

Kim, Eun Mee, 47 Loayza, Norman, 384

King, Larry, 165 Locke, Richard M., 240, 242, 258, 260, 265,
Kitschelt, Herbert, 152 268–269, 283, 286, 289, 292, 294, 296,
Klein, Naomi, 162, 258 373
Knorringa, Peter, 112, 200, 230, 234, 283, Lora, Eduardo, 208
288–289 Lorenz, Edward H., 110
Kogut, Bruce, 109, 148–149, 167 Love, Joseph L., 11
Köhler, Horst, 168 Lowden, Pamela, 206, 208
Kolasa, Marcin, 387 Lucas, Jr., Robert E., 381
Kolk, Ans, 258, 269 Luen Thai, 221
Koopman, Robert, 421 Lukas, Karin, 268
Korzeniewicz, Miguel E., 4–5, 14, 18, 29–30, Lumpkin, Thomas A., 316
44, 111, 150–151, 180, 256, 306, 371, Lund-Thomsen, Peter, 22, 277–279, 282–292
401, 418 Lundvall, Bengt-Ake, 152
Korzeniewicz, Roberto Patricio, 28 Lüthje, Boy, 222, 367, 396
Kritzinger, Andrienetta, 231, 240, 242, 284 Lynch, Teresa, 30, 128
Krugman, Paul, 72, 105, 141, 147, 166–167, Lynn, Barry C., 347, 407
343
Maertens, Miet, 244
Kuptsch, Christiane, 240
Magretta, Joan, 121
Kusterbeck, Staci, 221
Malmberg, Anders, 127
Labaste, Patrick, 413 Mandle, Jay R., 264
Lall, Sanjaya, 9, 114, 219, 224, 363 Martin, David, 26
Lam, Kit-Chun, 383 Martin, Eric, 421
Lamy, Pascal, 431, 434 Martin, Philip, 239
Langlois, Richard N., 110, 114 Maskell, Peter, 127
Lardner, James, 46, 50 Mattli, Walter, 259
Lardy, Nicholas, 209 Mayer, Frederick W., 247, 270–271, 277, 286,
Lash, Scott, 149 292–293, 295, 306, 349, 367, 371, 393,
Lee, Ji-Ren, 30, 112, 130, 219 419, 434, 448
Lee, Joonkoo, 32, 280, 285, 306, 318, 326, McCormick, Dorothy, 30, 231, 235
343, 347, 349, 392, 394–395, 408, 418, McFate, Katherine, 30
420, 439 McGrew, Anthony, 255
Legomsky, Joanne, 53–54, 56 Memedovic, Olga, 27, 121, 168, 260, 276, 279
Leslie, Deborah, 127 Meng, Xiaochen, 209, 219
Lester, Richard K., 93–94, 130, 237, 261, 266, Menkhoff, Thomas, 113
346 Meyer, John W., 155
Leung, Hon-Chu, 96 Meyer-Stamer, Jorg, 279
Libert, Barry, 442 Mezzadri, Alessandra, 284
Lim, Eun Mie, 30 Milberg, William, 243, 247, 284, 349, 371,
Lim, Hyun-Chin, 3 434
Linden, Greg, 30, 421 Miller, Annetta, 67
Lindgreen, Adam, 22, 277–278, 282–283, Miller, Doug, 231
288, 290 Miller, James P., 83
Liu, Pak-Wai, 383 Mishra, Pankav, 429

Mitchell, Russell, 67 Pegler, Lee J., 230, 234, 283

Mody, Ashoka, 50 Pelizzon, Sheila, 29
Moore, David, 26 Penrose, Edith, 110
Moran, Theodore H., 3, 8 Peres, Wilson, 176
Morgan, Glenn, 168 Pérez, Ramón Padilla, 184
Morkel, Andre, 119, 130 Perlez, Jane, 440
Morris, Mike, 30, 347, 354–355, 412 Pickles, John, 244, 247, 347
Mosley, Layna, 30 Pillai, Poonam, 292
Müller, Ronald E., 5, 145–146 Pillay, Renginee G., 277, 279, 286–287
Myers, Steven L., 439 Piore, Michael J., 47, 278
Pires, Silvio R. I., 407
Nadvi, Khalid, 30, 129, 178, 277, 279–280,
Pisano, Gary P., 421, 445
284–285, 287, 289–292
Pischke, Jorn-Steffen, 383
Nasar, Sylvia, 67
Plank, Leonhard, 247
Nathan, Dev, 284–285, 347, 407
Polanyi, Karl, 253–254
Naughton, Barry, 346
Polaski, Sandra, 286, 288, 293
Navarro, Peter, 440
Ponte, Stefano, 31, 164, 244, 281–282,
Navas-Alemán, Lizbeth, 350, 417
351–352, 444
Nee, Victor, 165
Poon, Teresa Shuk-Ching, 160
Neilson, Jeffrey, 282, 284, 287, 289, 292, 417
Porter, Michael, 31, 50, 61, 74, 149, 167, 278
Nelson, Richard R., 152
Portes, Alejandro, 3, 207–208
Neto, Mario S., 407
Portocarrero Lacayo, Ana Victoria, 353
Newfarmer, Richard, 3, 7, 26, 146
Posthuma, Anne, 280, 284, 291
Nolan, Peter H., 211, 223
Powell, Walter W., 110
Nye, Joseph, 255
Prahalad, Coimbatore K., 111
Ocampo, Jose A., 255, 257 Prebisch, Raúl, 11
Oehmke, James F., 372 Prestowitz, Clyde, 429, 447
Offe, Claus, 149 Pritchard, Bill, 282, 284, 287, 289, 292, 431
Olson, Mancur, 263 Pyke, Frank, 178, 199, 278
O’Neill, Jim, 371, 387, 420–421
Rabach, Eileen, 47
Opondo, Maggie, 283, 286, 288, 290
Rabellotti, Roberta, 179
O’Riain, Seán, 30
Ragin, Charles, 25
O’Rourke, Dara, 286, 288, 290, 292
Raikes, Philip, 151
Orsato, Renato J., 269
Raj-Reichert, Gale, 31
Ortega, Bob, 81
Ranis, Gus, 6
Özveren, Eyüp, 29
Ratha, Dilip, 387
Palley, Thomas I., 212 Rauch, James E., 19
Palpacuer, Florence, 30, 129, 282, 413 Ravenhill, John, 30, 86, 160
Pan, Mei-Lin, 30, 97, 105 Raworth, Kate, 228, 231, 240, 242
Pang, Carmen, 221 Rawski, Thomas G., 210
Parker, Ashley, 436 Reardon, Thomas, 260, 412
Pathasarathy, Balaji, 30 Reich, Robert B., 47, 167
Pay, Ellen, 269 Reimer, Suzzane, 127
Pearson, Ruth, 240 Reinhardt, Nora, 176

Reis, José Guilherme, 349 Scott, Allen J., 127

Rhee, Yung W., 74, 105 Seidman, Gay, 163, 165
Richards, John, 30 Selwyn, Ben, 286, 291
Riisgaard, Lone, 260 Selwyn, Michael , 91–92
Ritzer, George, 162 Sen, Amartya, 231, 233
Robertson, Paul L., 110, 114 Sengenberger, Werner, 178, 199
Robinson, William I., 177 Shaiken, Harley, 143, 184
Rodríguez-Garavito, César A., 293 Sharpe, Kenneth E., 3, 8, 26
Rodriguez, Carlos Manuel, 355 Sheperd, Andrew, 260
Rodrik, Dani, 162, 219 Shepherd, Phillip, 26
Rogaly, Ben, 239 Shifter, Michael, 209
Rohter, Larry, 102 Shih, Stan, 315
Romis, Monica, 258, 268 Shih, Willy C., 421, 445
Roncolato, Leanne, 287 Sklair, Leslie, 143, 155, 183
Ross, Andrew, 346 Skocpol, Theda, 25
Ross, Robert J. S., 44 Smelser, Neil J., 19, 165
Rossi, Arianna, 229–230, 233, 238, 242–243, Smick, David M., 418
246–247, 349, 392, 394–395 Smith, Adam, 140
Rostow, Walt W., 2 Smith, Adrian, 347
Rothstein, Richard, 51 Smith, Sally, 234, 240, 279, 286, 290, 295
Rubinson, Richard, 25 Solt, Fred, 207, 209
Rudolf, John C., 26 Sonobe, Tetsuki, 219, 222
Ruggie, John G., 162–163, 253, 256, 268– Soskice, David, 128, 152
269, 430 Spencer, Jennifer, 30
Rugman, Alan M., 6, 145 Staritz, Cornelia, 23, 27, 230, 344, 349, 388,
Ruwanpura, Kanchana N., 279, 287–288 405–406, 412
Starobin, Shana, 263–264, 271
Sabel, Charles F., 47, 278
Steensma, H. Kevin, 114, 130
Sack, Karen J., 53, 56
Stiglitz, Joseph E., 432
Safarian, A. Edward, 6, 145
Storper, Michael, 45, 125, 127
Sako, Mari, 322
Streeck, Wolfgang, 128
Salazar-Xirinachs, José M., 345, 365
Strom, Stephanie, 66
Sampson, Anthony, 5, 27, 145
Sturgeon, Timothy J., 16–17, 23, 27, 30–31,
Saporito, Bill, 54
112, 114, 126, 128, 130, 148, 161, 219,
Sarkar, Sandip, 285, 347, 407
237, 261, 266, 276, 279, 281, 346–347,
Sassen, Saskia, 155
350, 359, 363, 365, 372, 384, 403, 405,
Scheffer, Michael, 80
418, 439, 446
Scherer, Frederic M., 7
Sun, Yutao, 439, 443, 448
Schilling, Melissa A., 114, 130
Sunkel, Osvaldo, 8, 146, 166
Schmidt-Hebbel, Klaus, 384
Suresh, T. G., 280, 284
Schmitter, Philippe C., 149
Swanson, Ana, 439, 447
Schmitz, Hubert, 17, 27, 30, 32, 112, 151,
Swedberg, Richard, 19, 165
178–179, 198, 200, 231, 235, 276–277,
Swinnen, Joe, 244
279, 282, 285, 288, 307, 312, 409
Schneider, Ben R., 279, 291 Tabuchi, Hiroko, 236

Taglioni, Daria, 327 Warfield, Carol, 81, 83

Talbot, John M., 352 Weatherspoon, Dave. D, 412
Tam, Tony, 73 Webber, C. Martin, 413
Taplin, Ian M., 49 Weber, Samuel, 66
Tarrow, Sidney, 271 Weinberger, Katinka, 316
Tewari, Meenu, 17, 31, 292 Weinthal, Erika, 263–264, 271
Theron, Jan, 240 West, Peter, 26
Tholons, 358 Weyland, Kurt, 207, 209
Thompson, Ginger, 200 Wheeler, David, 50
Thomson, Adam, 364 Whiting, Jr., Van, 26
Thorelli, Hans, 110 Whitley, Richard, 154
Thorp, Rosemary, 206, 208 Whittaker, D. Hugh, 367
Thun, Eric, 405, 413 Whyte, Martin King, 11
Tong, Xin, 219, 221–222 Whytock, Christopher A., 259
Trachte, Kent C., 44 Williams, Oliver F., 163
Williamson, John, 432
Ulrich, Karl, 130
Williamson, Oliver E., 109, 116
Urquidi, Victor L., 166, 344, 401
Wills, Jane, 231, 240
Urry, John, 149
Winkler, Deborah, 243, 247, 327, 349
Van Biesebroeck, Johannes, 347, 405 Wolfensohn, James D., 165
Vanhamme, Joelle, 22 Womack, James P., 148
van Tulder, Rob, 258, 269, 276, 283 Woods, Ngaire, 259
Vargas Llosa, Alvaro, 208–209 Worthen, Ben, 266
Vernon, Raymond, 6–7, 145, 158, 344, 401 Wrigley, Neil, 279, 288
Visser, Margareet, 291 Wu, Xinyi, 443
Vogel, David J., 257, 259, 262, 264–265, 268, Wyman, Donald L., 12–13, 28, 47, 166, 345,
271 369, 401–402, 432, 438

Wade, Robert H., 12, 141–142, 152, 432 Yeats, Alexander J., 109, 147
Wadhwa, Vivek, 370, 400, 407, 431 Yeung, Henry Wai-chung, 155, 230
Waldinger, Roger, 51 Young, Alwyn, 72
Walker, Richard, 127
Zeitlin, Jonathan, 199
Wallerstein, Immanuel, 4–5, 14–15, 26,
Zeng, Douglas Zhihua, 236
139–141, 152
Zhang, Qing, 219
Wältring, Frank, 129
Zhang, Zhiming, 219, 221–222
Wang, Jici, 219, 221–222
Zysman, John, 442
Wang, Mark Y., 209, 219

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Global Value Chains and Development

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Global Value Chains and Development

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Global Value Chains and Development

Cambridge University Press is part of the University of Cambridge.

List of Tables xiii

1. The Emergence of Global Value Chains: Ideas, Institutions, and

Part I: Foundations of the Global Value Chain Framework

Part II: Expanding the Governance and Upgrading Dimensions in

Part III: Policy Issues and Challenges

2.1 Sales of Leading US Retailers, 1987–1992 54

11.10 The Offshore Services Global Value Chain 321

Chapter 2 Gereffi, Gary. 1994. ‘The Organization of Buyer-Driven Global

Contending Perspectives on the International Economy and

the modernization approach (Bendix, 1967; Gusfield, 1967; Huntington, 1971;

For development scholars working on global industries, the general categories

Building Blocks in the Emergence of the GVC Paradigm

MNCs and Power in the Global Economy

Studying Global Industries

of dependent development from a world-systems stance is that national or regional

followed by a second report on how the structure, conduct and performance of

global industries shapes the potential ‘upgrading’ pathways available to developing

Development Strategies in Latin America and East Asia

The Emergence of the GCC and GVC Paradigms

Global Commodity Chains

of the World-System (PEWS) conference series, which brought together scholars

Whereas research on commodity chains from a world-systems perspective focused

The Global Value Chains Initiative

The Chapters in This Volume: Context and Content

Part I: Foundations of the Global Value Chain Framework

Chapter 2: The Organization of Buyer-Driven Global Commodity Chains: How

Chapter 3: International Trade and Industrial Upgrading in the Apparel

Chapter 4: The Governance of Global Value Chains (co-authored with John

governance typology introduced in Chapter 2.54 The chapter draws on three

Part II: Expanding the Governance and Upgrading Dimensions in Global

Chapter 5: The Global Economy: Organization, Governance, and Development

Chapter 7: Development Models and Industrial Upgrading in China and Mexico

Chapter 8: Economic and Social Upgrading in Global Production Networks: A

Chapter 9: Regulation and Economic Globalization: Prospects and Limits of

Part III: Policy Issues and Challenges

Chapter 11: Global Value Chain Analysis: A Primer (Second Edition)

Chapter 12: Global Value Chains, Development, and Emerging Economies

Chapter 13: Risks and Opportunities of Participation in Global Value Chains

Chapter 14: Global Value Chains in a Post-Washington Consensus World

Chapter 15: Protectionism and Global Value Chains

highlighted by this debate. Albert Hirschman (1978) offered a broader historical

Brenner, Robert. 1977. ‘The Origins of Capitalist Development: A Critique of Neo-Smithian

. Forthcoming. ‘Economic Upgrading in Global Value Chains.’ In Handbook of

Mayer, Frederick and Gary Gereffi. Forthcoming. ‘International Development Organizations

Safarian, A. Edward. 1966. Foreign Ownership of Canadian Industry. Toronto: McGraw-Hill.

. 1981. Transnational Corporations and the Pharmaceutical Industry in Developing

Foundations of the Global Value

Global industrialization is the result of an integrated system of production

Producer-Driven versus Buyer-Driven Commodity Chains

Figure 2.1 The Organization of Producer-Driven and Buyer-Driven

Producer-driven commodity chains refer to those industries in which transnational

development activities, manufacturing, packaging, shipping, and even accounts

The Role of State Policies in Global Commodity Chains

chains. However, there is an important caveat for buyer-driven chains. Since

The Apparel Commodity Chain

Textile versus Garment Producers

Standardized versus Fashion Segments

The Impact of Backward and Forward Linkages

These illustrations show the importance of considering the full array of

The Retail Revolution in the United States

Table 2.1 Sales of Leading US Retailers, 1987–1992

1987 1988 1989 1990 1991 1992

Wal-Mart appears to be in a much stronger position for future growth than

Company Net Incomea (millions of Compound Return on

This segmentation of the American market creates numerous opportunities

According to Lester Thurow, professor of economics and management at the

The Economic Agents in Buyer-Driven Commodity Chains

Locational Patterns of Global Sourcing

Table 2.3 Types of Retailers and Main Global Sourcing Areas

Type of Retailer Representative Main Global Characteristics of Buyer’s Orders

Several qualifications need to be mentioned concerning the schematic,

The reason is twofold. Apparel factories in relatively high-wage countries like

Figure 2.2 Production Frontiers for Global Sourcing by US Retailers:

Triangle Manufacturing in Global Commodity Chains

Part II: Expanding the Governance and Upgrading Dimensions in

rade Shifts and Industrial Upgrading in the Apparel Commodity Chain