Power and Export Sophistication in Buyer-Supplier Relationships: Insights from Colombian Customs Data

Abstract

This paper investigates the association between buyer-supplier international trade relationships and supplier’s product upgrading. We proxy the suppliers’ upgrading with a measure of product sophistication. We first propose a measure of power in the trade relationship, combining the dependence of each firm on the trading partner and their market shares. Using transaction data from Colombia, we next estimate if the measure of power relationship predicts a supplier’s export sophistication, the probability of adding a new product in the trading relationship, and that of increasing export sophistication. We find that suppliers that are highly dependent on buyer’s imports are more likely to fall into a specialisation trap in low sophistication products. Buyers with large market shares trade in sophisticated products, therefore with little margin for upgrading; suppliers with large market shares are more likely to introduce new products, but trade pairs where the buyer depends on the supplier are more likely to upgrade. We further test whether these relationships hold across different destination countries, finding in particular that buyers dominating the market in the US tend to import low-sophistication products and make it harder for suppliers to upgrade. We contribute to the recent literature on buyer-supplier relationships by explicitly including a measure of power into our analysis. In doing this, we also offer further support and complement the qualitative evidence put forward by the literature on governance in global value chains (GVCs).