Subsidiary upgrading and global value chain governance in the multinational enterprise

Abstract

AbstractResearch SummaryUpgrading and governance in global value chains (GVCs) have been understood mainly through studying the buyer–supplier transaction, where the supplier is typically an independent contractor from a developing economy. Little is known about how subsidiaries of multinational enterprises (MNEs) can upgrade in a GVC, whose core activities are coordinated through the “hierarchy” governance model. Using an in‐depth longitudinal single case study in the medical devices industry, we explain how a subsidiary can accomplish upgrading in an intra‐MNE GVC and, over time, increase its control of this GVC reaching a joint coordinator role for its governance. Our findings show that partaking in innovation may not be the final stage of a subsidiary's upgrading but can represent the start of a new phase that culminates with joint coordination of the GVC.Managerial SummaryThe competitiveness of a global subsidiary is determined by its capacity to upgrade in a GVC and engage in higher value‐adding activities. Moving from production to innovation is generally viewed as the pinnacle for subsidiaries in the accomplishment of upgrading within a GVC, thereby ensuring long‐term survival. We show however that specializing in innovation is not the highest peak a subsidiary can reach. Innovation is in fact a necessary condition for a strategic role for the coordination of a GVC. A subsidiary's management team can deliberately strategize to ascend to such a position in the multi‐business MNE as a GVC joint coordinator for a product category. It can achieve this prominent position by leveraging its innovation capabilities to assume a greater proportion of control over the business's GVC governance. This position of greater prominence for the subsidiary within the MNE advances its internal advantage and strengthens its survival prospects.