Power relationships along the value chain: multinational firms, global buyers and performance of local suppliers

Abstract

There is a growing literature exploring the role of international trade channels on economic growth, looking at the mechanisms through which import and export flows might affect productivity, technology diffusion and output growth. However, most of this literature appears to neglect an important part of the story, which is the form and the organisation of the relationships (the governance) among the various actors involved in these activities and their implications for development. The recent literature on global value chains and their governance takes this element explicitly into account, and we explore it empirically with a new dataset on Thailand. To this aim, we study global and domestic value chains in Thailand, and develop a quantitative measure of their governance, which takes into account different levels and types of buyer involvement with supplier activities. We then use this measure to explore econometrically its relationship with performance of suppliers. An important finding is that in value chains led by a multinational corporation, the relationships that the leaders have with their suppliers is multifold and generally more intense than for domestic value chains. Our estimates suggest that more intense buyer involvement with local suppliers, not only in the definition of product characteristics, design and quality, but also in technology dissemination and R&D, is generally associated with higher supplier productivity. This is consistent with other sources of evidence. However, the governance of the value chain appears to affect the productivity of suppliers in domestic value chains to a greater extent than for firms supplying multinational corporations or for exporters. We suggest that this result may be explained by the different nature of the information and knowledge being exchanged, and by the larger gaps in knowledge and capabilities between the domestic leader and its suppliers.