The bargaining power, value capture, and export performance of Vietnamese manufacturers in global value chains

https://doi.org/10.1016/j.ibusrev.2021.101829Get rights and content

Highlights

  • This study examines the payoff of upgrade and negotiation process initiatives taken by export manufacturers from emerging economies.

  • The study uses a structural equational modelling approach to analyse the data collected from 354 Vietnamese export manufacturers.

  • The study finds that all initiatives, except after-sales services, strengthen the manufacturers’ bargaining power and export performance.

  • The study is the first to identify two sources of bargaining power of emerging economy firms: negotiating process and functional upgrade.

  • This is the first large-scale empirical study investigating the bargaining power of emerging economy firms inserting in global value chains.

Abstract

This study examines the payoff of various initiatives taken by Vietnamese manufacturers to increase their bargaining power relative to global buyers and capture a larger share of the value generated in global value chains. The study focuses on functional upgrade initiatives (i.e., product development, after-sales services, distribution, and promotion) and negotiation process initiatives (i.e., market intelligence and improvement of negotiation skills). A structural equation modelling method is used to analyse the data collected in 2017 from 354 Vietnamese manufacturers inserted in global value chains. The study finds that all initiatives, except after-sales services, significantly strengthen the manufacturers' bargaining power, which, in turn, enhances their export performance.

Introduction

To derive economic rents, a firm must not only create value for its customers, but also be able to capture an equitable share of that value relative to its suppliers, distributors, and end users (Ghemawat, 1991; Teece, 1998). Based on the concepts discussed in the seminal work (Bowman & Ambrosini, 2000; Brandenburger & Stuart, 1996; Woodruff, 1997), this paper defines customer value as the price end users are willing to pay at the point of sale, value creation as the activities that increase the amount of customer value, and value capture as the activities that seize a certain amount of the value created.1

Most researchers agree that manufacturers from developing and emerging economies inserted in global value chains (GVCs) capture a relatively small portion of the value created across the chain (e.g., Mudambi, 2008; Garcia‐Castro & Aguilera, 2015). Other business entities in the global value chain, such as suppliers of inputs (e.g., machines, software, components), transportation firms, or retailers, may claim disproportionately high shares of the value creation.

The extant literature identifies several intertwined causes of the weak bargaining position of emerging-economy manufacturers: fierce price competition in commoditised markets with relatively low barriers to entry (Kadarusman & Nadvi, 2013; Maskell & Malmberg, 1999; Porter, 1980), monopolistic buyers (Fitter & Kaplinsky, 2001; Gereffi, Humphrey, Kaplinsky, & Sturgeon, 2001; The Economist, 2019), and a value chain characterised by little transparency with regard to the real market value of the various inputs (Bolwig, Riisgaard, Gibbon, & Ponte, 2013; Lamming, Caldwell, Harrison, & Phillips, 2001; Parikh, Patel, & Schwartzman, 2007). Given these challenges, conceptual studies have pointed to various ways in which manufacturers may escape their weak and unattractive position in the GVC. First, manufacturers may avoid commoditised and price-sensitive markets by "moving up the value chain" (Giuliani, Pietrobelli, & Rabellotti, 2005). They can do so by improving or adding new features to existing products (product upgrading), or by adding auxiliary services to a physical product such as a promotion or after-sales services (functional upgrading) (Gereffi, 1999). Second, manufacturers can try to establish independent distribution channels (functional upgrading) that go around monopolistic, global buyers (Gibbon & Ponte, 2008), although such a “dual strategy” entails the risk that these buyers will retaliate (Arruñada & Vázquez, 2006; Humphrey & Schmitz, 2004; UNCTAD, 2013). Third, manufacturers may increase the level of transparency regarding the real market value of their products by conducting their own market-intelligence activities (Raynolds, 2008). Fourth, manufacturers may improve their negotiation skills to obtain more favourable contract' terms and conditions (Barnhizer, 2005; Fisher & Ury, 1981). We label the first two initiatives "functional upgrade initiatives" and the latter two "negotiating process initiatives" for simplicity.

In this study, we focus on understanding how these initiatives of GVC-inserted manufacturers enhance value capture. The antecedent of value capture is “bargaining power,” which is defined as the ability of one party to influence the terms and conditions of a contract in its own favour (Argyres & Liebeskind, 1999; Brandenburger & Stuart, 1996; Crook & Combs, 2007; Emerson, 1962; Yan & Gray, 1994). Accordingly, we zoom in the potential positive effects of these initiatives on value capture, mediated by increased bargaining power. Our study is motivated by the dearth of empirical studies addressing this issue.

To fill this gap in the GVC literature, we examine the following research question: Do the negotiating process initiatives and/or upgrade initiatives of GVC-inserted manufacturers strengthen their bargaining power and, in turn, enhance their export performance? We aim to answer this question by examining the effects of the negotiating process initiatives (i.e. market intelligence and negotiation skills) as well as functional upgrade initiatives (i.e., after-sales services, distribution, and promotion) on the bargaining power and export performance of a sample of Vietnamese manufacturers inserted in GVCs. We find that all initiatives, except after-sales services, enhance the manufacturers’ export performance, mediated by a strengthening of their bargaining power relative to global buyers.

Our study contributes to the GVC literature in several ways. It offers the first large-scale empirical study to investigate the bargaining power of GVC-inserted emerging-economy firms.2 Although a significant number of qualitative studies examine how firms from developing and emerging economies move up the value chain, large-N survey studies are in short supply, and none of them analyses both the sources and the effects of bargaining power relative to global buyers. Second, our study complements numerous studies on functional upgrading owing to its focus on the bargaining power implications of these upgrade initiatives for the GVC supplier-buyer relationship. This bargaining-power focus differs from the more common and more general approach in which researchers examine whether suppliers’ functional-upgrade activities are correlated with better performance. We propose that a bargaining-power focus is relevant because there might be situations in which suppliers engage in high-value-added activities, but monopolistic global buyers appropriate the value created by those suppliers. We examine whether this holds true or whether the functional upgrading of suppliers—in this case, GVC-inserted Vietnamese manufacturers—actually enable them to capture more value, say in terms of price. Third, we identify two sources of bargaining power among emerging economy firms: negotiating process initiatives and functional upgrade initiatives. Whereas functional upgrade initiatives are well known from the literature, the negotiating process initiatives of market intelligence and negotiation skills represent new features in the GVC literature. Our claim of gaps in the extant literature is supported by the recent and comprehensive reviews of the GVC literature by De Marchi, Di Maria, Golini, and Perri (2020) and Giuliani, De Marchi, and Rabellotti (2018).

Given this background, the paper proceeds as follows. In Section 2, we review the extant literature and consult previous studies dealing with GVCs, GVC power structures, the distribution of gains throughout GVCs, and the redistribution of those gains through either manufacturers' upgrading or the strengthening of their bargaining positions. In the following Section 3, we develop a conceptual model and a set of hypotheses to be tested on the sample of GVC-inserted Vietnamese manufacturers. In Section 4, we present our data and method. The results are reported in Section 5. In Section 6, we discuss the findings and the limitations of our study. Section 7 includes our concluding remarks, highlights managerial implications, and suggests avenues for future research.

Section snippets

Literature review

Our study draws on two literature streams: research on GVCs from a development economics perspective and marketing literature that deals with export performance.

Development of hypotheses and research model

In this study, we envisage two mechanisms through which manufacturers inserted in buyer-driven GVCs (Gereffi, 1994) can increase the added value accruing to them through bargaining power. First, a manufacturer can improve its bargaining position without changing its portfolio of product and services. In this scenario, the global buyer initially possesses a critical resource (Drees & Heugens, 2013; Hillman et al., 2009) in the form of knowledge about end-users and their preferences. The

Research design

The population was defined as GVC-inserted manufacturers in emerging economies (i.e., manufacturers exporting at least some portion their output via global buyers). The emerging economy of Vietnam was chosen as the empirical setting for the study. One reason for choosing Vietnam was that the country emerged as a global production base after it joined the WTO in 2007. The low-cost base enables Vietnamese firms to compete on price and, consequently, to export goods to the world market. In recent

Results

The results of path analysis using SEM are reported in Table 5. The overall fit indices suggest a good fit for the measurement model (χ2 = 3792.975; DF = 427, p < .001; CFI = 0.934, TLI = 0.945, RMSEA = 0.058). The indices have acceptable thresholds, as suggested by Hair et al. (2005, p. 753) for a model having more than 250 observations and between 12 and 30 reflective variables, as was the case in our model.

As can be seen from Table 5, our findings support all hypotheses except H3d (

Discussion

Our empirical study of Vietnamese manufacturing exporters suggests that the share of the value generated in the value chain acquired by GVC-inserted manufacturers can be increased by improving value-capture initiatives (i.e., conducting market-intelligence activities and enhancing negotiation skills) and by performing more added-value activities (i.e., product development, promotion, distribution). These initiatives lead to improved export performance via increased bargaining power. Three of

Conclusions and recommendations for managers and policymakers

In an attempt to improve our understanding of the impact on value-creation and value-capture initiatives, this study has examined export product development, export promotion, export distribution, after-sales services, negotiation skills, and market intelligence as predictors of bargaining power. Drawing from a sample of 354 GVC-inserted manufacturers from Vietnam, we find that some value-creation initiatives (i.e., export product development, export promotion, export distribution) and two

Dr Hanh Pham is a senior lecturer in International Business and Economics at Sheffield Business School, the UK. She was awarded MSc degree in International Economics at the University of Birmingham in the UK and PhD degree in International Business at Copenhagen Business School in Denmark. She has published in several highly ranked international peer-reviewed journals such as Journal of Business Research, Journal of Development Studies, International Marketing Review, Asia Pacific Management

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