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Global Value Chains and MNC Subsidiaries

Dependencies can derive from different forms of economic transactions such as trade and investment flows or the development of diplomatic and other forms of political affairs. International economic and political transactions create in turn a complex grid of relationships among countries and in Van Rossem’s (1996) “role equivalence model of the world system” four distinctive country roles emerge around the dichotomy between core and peripheral countries. Core countries dominate in influencing relationships among the network. This very much relates with Hymer’s perception of how FDI transactions through hierarchical MNCs determine economic dependencies between a broad range of peripheral developing countries and a handful of core developed countries (home countries of MNCs) in a vertically functional supply chain. “Such a functional hierarchy in MNCs is then innately associated with the developmental stratification of the world economy” (Pearce and Papanastassiou 2006, p. 153).

In turn, Gereffi (1994, 1999a, p.1) links this geographically expanded “functional integration” with GCCs. GCCs are driven by “lead” firms and their suppliers. Their operations grow geographically and can be either “producer”- or “buyer”-driven. Traditional “producer”-driven GCCs are fully internalized and the “lead” firm controls its productive activities via strong vertical integration structures. On the other hand, in “buyer”-driven GCCs, the “lead” firms apply various modes of collaborations including NEMs. As Gereffi (1999a, p. 2) concludes, “[p]roducer- driven and buyer-driven chains are rooted in distinct industrial sectors, they are led by different types of transnational capital (industrial and commercial, respectively), and they vary in their core competencies (at the firm level) and their entry barriers (at the sectoral level).

Bair (2005) provides a thorough analysis of the evolution from GCCs to GVCs where she acknowledges that their intellectual roots lie in MNC and IB theory (respectively) and argues that once upgrading and value are included in the analysis of commodity chains it is important not only to understand how the value is distributed along the chain (sectorally, functionally and geographically) but also how local economies contribute to the creation of value.

Thus, the following four key dimensions of GVCs are highly significant (Sturgeon 2001): the organization scale, which distinguishes between value chains and production networks; the spatial scale, which ranges geographically from local to global, with domestic, international and regional in between them; productive actors, which include lead firms, affiliates, suppliers and others; and the governance style, which, as Sturgeon asserts, is the most important aspect that defines the production model pursued and thus the “quality” of profitability achieved.

The notion of governance essentially determines the sustainability and profitability of the value chain. Gereffi et al. (2005) discuss the impact of transaction costs and coordination in the choice of governance model and four basic parameters define governance in the value chain: product, production process, timing of production and quantity of production. The production process in particular “includes elements such as technology, quality, labour and environmental standards” (Humphrey and Schmitz 2002, p.8). Thus, governance refers to “the content and the management of these decisions across all suppliers and sub-suppliers, the strategies behind the decisions taken and management methods chosen to implement them, and the systems through which their outcomes are monitored and reacted on” (Gibbon et al. 2008, p.4).

MNCs in either “producer”- or “buyer”-driven GVCs have geographical presence, by definition, including in developing economies. Developing countries find themselves taking part in two types of MNC- generated GVCs. The first type reflects the traditional North-North and North-South international production paradigms reflecting market, efficiency and raw material-seeking motivations (Dunning 1993).

MNCs are then organized as network hierarchies (vertical integration) (Pearce and Papanastassiou 2009). In such an organizational structure MNCs’ subsidiaries play predetermined roles resulting in unsustainable economic linkages with the local environment (Papanastassiou and Pearce 1994). Such subsidiaries are located predominately in developing countries (Jenkins 1990). Their prescribed production profiles do not allow them to capitalize on the creative potential of their local economies compromising their efficiency and the sustainable growth of the host country. GCC and more updated GVC models assume that MNCs operate as network hierarchies and thus ignore the impact of subsidiaries by not accounting them in the governance models (Gereffi and Christian 2010). This omission results in a serious methodological gap in evaluating the sustainability of GVCs, understanding their impact on both host and home economies. This results in inefficient policy recommendations.

Relatively recent changes in the external environment, such as the intensification of global competition through further liberalization of trade and international investment, technological developments, economic integration efforts of the premises and the rise of developing countries resulted in impacting on such hierarchical organizational structures. At the heart of this organizational change are subsidiaries that have unique and innovative abilities, which in earlier structures were found only in the parent company (Pearce and Papanastassiou 2009).

The emergence of these strategic subsidiaries is a key feature of heterarchy (Hedlund 1986). Within a heterarchical structure we observe the coexistence of different subsidiaries and different strategic motivations. Thus, a second type of MNC-generated GVCs is emerging and a South- South and South-North international production paradigm arises based on knowledge sourced in the South by either developing/emerging home country MNCs, the subsidiaries of developed country MNCs or the subsidiaries of other developing/emerging country MNCs (Zhao et al. 2015). A number of authors (mostly from the field of strategic management and international management in particular) reported two factors that can dynamically shape the roles of subsidiaries: factors related to the external environment and factors related to the internal environment of the MNC (Birkinshaw et al. 1998; Birkinshaw et al. 2002). Bartlett and Ghoshal (1989) decisively pointed out that subsidiary roles are determined by the strategic importance of the local market in terms of both size and quality of inputs and other productive resources. Latest research on the notion of “embeddedness” also focuses on the characteristics of the external environment that hosts subsidiaries of MNCs (Hakanson and Nobel 2001). Consequently, there are several cases of subsidiaries that specialize in specific productive activities that are fully integrated in the respective production system of the receiving environment (evidence can be seen in Kuemmerle 1999) Dunning 1993) Jarillo and Martinez 1990). Benito et al. (2003, p. 445) state that there is a strong connection between the skill levels of subsidiaries and the quality of local character?istics and argue that FDI made in high value-added activities tend to be “sticky” emphasizing in this way the importance of integration (embeddedness). Thus, MNCs have the opportunity to strengthen their competitive advantages when taking into consideration the different features characterizing the host sites in which they operate and eventually arise from vertical hierarchies to diversified heterarchies.

Finally, industry plays a critical role in the structure and governance of GVCs. Consequently, generalizations that do not acknowledge the importance of industry in defining GVCs can produce misleading conclusions both for management and policy implications. Thus, it is important to address issues of sustainable governance in GVCs which are directly linked with the relationships of local and/or regional MNC subsidiaries developed with local host-country agents.

 
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