Governance, innovation networks, and climbing the upgrading ladder: The case of Philippine and Thai manufacturers in global value chains

Abstract

This paper argues that the economic upgrading of suppliers in global value chains (GVCs) is influenced by the prevailing governance structures in supplier-lead firm relationships. Using a novel governance index for Philippine and Thai manufacturers, this paper tests if tight effective control received by suppliers can be detrimental to higher-order GVC upgrading. The unique 2012 Survey on Adjustments of Establishments to Globalization was used to calculate the index for Philippine manufacturers, while the World Bank’s Productivity and Investment Climate Study 2006–2007 was used for Thailand. The econometric results confirm that tight governance negatively affects upgrading in both countries. Specifically, the Philippine estimates show that tight governance has no impact on process upgrading given that: (1) all GVCs benefit from efficient suppliers, regardless of governance structures; and (2) process upgrading has relatively simpler technological requirements than higher-order upgrading. Tight governance significantly reduces the probability of achieving more sophisticated product, functional, and intersectoral upgrading, especially when this encroaches on the lead firm’s core functions. But since governance and control are necessary for efficient GVC operations, suppliers must conscientiously build capabilities and networks to move up the upgrading ladder. For weak-capability suppliers, innovation networks are important external sources of technology and knowledge spillovers.