Upgrading strategies of disadvantaged suppliers

What is it about?

Suppliers in developing countries face significant entry barriers to operate in the most profitable functions of global value chains (GVCs). Securing highly profitable functions in GVCs (also known as functional upgrading) is particularly challenging for small-size suppliers who are disadvantaged due to limited resource endowment and their exposure to an adverse external environment. A review of forty-four empirical studies reveals three possible strategies that allow disadvantaged suppliers to capture higher profits in GVCs by other means than functional upgrading or in addition to it. First, disadvantaged suppliers successfully increase their profit margins within the function they already occupy through the establishment of legitimacy in the eyes of their foreign buyers. Second, disadvantaged suppliers’ reduce their dependency on a single GVC and diversify to wider ranges and types of GVCs. Third, disadvantaged suppliers handle external pressures and quickly adapt to changing competitive demands and stabilize profit margins.

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Photo by Blake Sherman on Unsplash

Photo by Blake Sherman on Unsplash

Why is it important?

The findings point to the understanding and importance of a more contextually shaped and agency-oriented view of upgrading, in which suppliers actively design and implement strategies to capture higher profits in GVCs. These strategies help to understand the conditions under which disadvantaged suppliers can cope with their limited resources, adverse institutions and competitive pressures to transform their operations profitably.

Perspectives