Global production networks, knowledge diffusion, and local capability formation

Abstract

This paper develops a conceptual framework that explores the linkage between the evolution of global production networks (GPN), the role of network flagships in transferring knowledge, and the formation of capabilities by local suppliers. GPN are a major innovation in the organization of international business. These networks combine concentrated dispersion of the value chain across the boundaries of the firm and national borders, with a parallel process of integrating hierarchical layers of network participants. The network flagships transfer both explicit and tacit knowledge to local suppliers through formal and informal mechanisms. This is necessary to upgrade the local suppliers’ technical and managerial skills, so that they can meet the flagships’ specifications. We also examine how GPN can act as mediators in the capability formation of local suppliers.