Towards a typology of repositioning strategies of GVC/GPN suppliers: the case of functional upgrading and downgrading Open Access

Abstract

This article examines various upgrading and downgrading repositioning firm strategies within global value chains (GVCs) or global production networks (GPNs). It builds upon recent evidence that the mode of governance could vary profoundly among firms engaged in the same GVC/GPN. Therefore, the relevance of particular types of upgrading that were originally derived from the ideal types of GVC/GPN governance will be reconsidered. It is argued that the existing dissonance in the literature over possibilities for functional upgrading can be attributed to the different modes of governance that can exist within a particular GVC/GPN and to the diverse nature of functional upgrading. Consequently, a typology of functional upgrading is outlined, and it is argued that these different types vary significantly according to their probability and potential risk-benefit ratios. The article also introduces passive, adaptive and strategic downgrading and outlines their potential negative and positive effects on firms.

1. Introduction

According to Gereffi and Fernandez-Stark, ‘The global economy is increasingly structured around global value chains (GVCs) that account for a rising share in international trade, global GDP and employment’ ( Gereffi and Fernandez-Stark, 2011 , 2). GVC analysis is a powerful tool for understanding the dynamics of international trade and economic globalization, as it argues that the global economy can be comprehended as a combination of discrete value chains rather than of liberalized markets ( Gibbon and Ponte, 2008 ). A significant amount of attention has been devoted by researchers to the investigation of possibilities for various types of upgrading within these GVCs. Humphrey and Schmitz (2002) argued that the scope for upgrading depends on the type of upgrading and the type of GVC governance. However, recent studies performed within the converging and interrelated GVC/global production network (GPN) framework ¹ ( Neilson et al., 2014 ; Ponte, 2014 ) revealed the considerable versatility of the modes of governance, even within a single chain or network ( Patel-Campillo, 2010 ; Horner, 2013 ; Ponte, 2014 ; Yeung and Coe, 2015 ). Consequently, there is a need to reconsider the relevance of particular types of upgrading that were originally derived from the ideal types of GVC governance introduced by Gereffi ( Gereffi, 1999 ; Gereffi et al., 2005 ) or Humphrey and Schmitz (2002) , as the variability and heterogeneity of the real configurations of power relationships go far beyond these ideal types.

Therefore, the aim of this article is to deepen the understanding of the multiplicity of possible repositioning strategies of firms engaged within these meta-structures and thus to underline their variegated and protean nature. This goal is achieved by conceptualizing several types of functional upgrading (arguably one of the most desirable types of upgrading strategies—see Humphrey and Schmitz, 2004 ) as well as functional downgrading, which has received only limited attention so far. Acknowledging different types of functional upgrading and downgrading would contribute to enhancing understanding of the multiplicity of strategies of suppliers integrated in GPNs, and in conjunction with recognizing the variegated and protean nature of modes of governance even within the same network or chain ( Gereffi and Lee, 2012 ) would open up space for the development of much more targeted policy interventions that might support desirable types of repositioning.

The article is structured as follows. First, recent theoretical developments within GVC/GPN research are outlined, and then attention is turned to repositioning strategies, introducing several types of functional upgrading and downgrading. Lastly, the conclusion summarizes the key arguments of the article, outlines some tentative policy implications and suggests avenues for future research.

2. The GVC/GPN perspective on the globalized economy

Over the last 25 years, a vigorous debate has been developing on the role of GVCs/GPNs in the current globalized economy ( Gereffi, 1999 ; Henderson et al., 2002 ; Humphrey and Schmitz, 2002 , 2004 ; Coe et al., 2004 , 2008 ; Sturgeon et al., 2008 ; Cattaneo et al., 2010 ; Barrientos et al., 2011 ; Coe and Yeung, 2015 ). Scholars have identified various mechanisms and processes integrating particular GPNs with particular regions, such as types of strategic coupling—respectively decoupling and recoupling ( Yeung, 2009 ; Bair and Werner, 2011 ; MacKinnon, 2012 ; Horner, 2013 ; Coe and Yeung, 2015 )—and they have analysed the interrelations of these economic meta-structures with a host of other actors such as governments, regulators, trade unions, NGOs, etc. ( Smith et al., 2002 ; Ponte and Gibbon, 2005 ; Ponte, 2014 ). Research has helped to unravel various modalities of governance in these networks or chains ( Humphrey and Schmitz, 2002 , 2004 ; Gereffi et al., 2005 ; Crang et al., 2013 ) and subsequently to comprehend interesting cases in their evolutionary dynamics ( Patel-Campillo, 2010 ; Ponte, 2014 ; Yang, 2014 ).

The GVC/GPN framework represents a powerful tool for understanding the changing economic geography of the world ( Gereffi, 1999 ) as well as the challenges facing companies integrated into these networks ( Humphrey and Schmitz, 2004 ; Humphrey, 2006 ). A key argument of this approach is that a sizeable part of the world’s production is, under the paradigm of vertical disintegration, organized by large enterprises that command networks of suppliers at different tiers providing various intermediate goods, and that these networks are governed by different modes of governance ( Humphrey and Schmitz, 2004 ). These lead firms are championing the market ‘in terms of their brand names, technology, products/services, and marketing capabilities’ ( Yeung, 2009 , 330) and, in some cases, are eventually leaving manufacturing ( Pietrobelli and Saliola, 2008 ), thus giving birth to ‘manufacturers without factories’ ( Gereffi, 1999 ). However, for managerial reasons, lead firms deal directly with only a limited number of first-tier suppliers that provide them with key inputs such as the most sophisticated (sub)systems, even though this is not a universal model of governance (see Humphrey and Schmitz, 2004 ). First-tier suppliers (often large transnational corporations) then command their own suppliers on second or third tiers. Obviously, in practice, various modalities of governance strategies can be found even in the same industry ( Sturgeon et al., 2008 ; Glogar, 2013 ).

Essentially, each stratum of suppliers within GPNs/GVCs commands its own advantages, but also disadvantages and challenges. For example, the third-tier suppliers, which represent the most frequent type of suppliers in the regions outside the global economic cores ( Csank, 2013 ), have guaranteed demand (often in large volume) for standard goods produced with well-known technology, and obviously they do not have to bother with activities such as market research. On the other hand, due to their limited capabilities, third-tier suppliers are easily replaced and, therefore, exposed to tremendous cost pressure induced by the permanent threat of being replaced by even cheaper suppliers. Cost pressure is not unique to third-tier suppliers, but, according to Glogar (2013) , the specific situation of third-tier suppliers (often local SMEs) stems from the fact that they are frequently squeezed between large firms both from ‘above’ (i.e. from higher tier buyers) and from ‘below’ (i.e. from large companies that supply them with basic production materials such as metals, plastic granules, energy, etc.). Therefore, the bargaining power (and hence, the profit margin) of these lower tier suppliers is very limited.

Even more important is the fact that, due to their focus on the production of large quantities of standardized goods, these firms are not usually expected to come up with any sort of innovation except for cost-saving measures, i.e. process upgrading ( Lane, 2008 ). As a result, even if these third-tier suppliers are integrated into GPNs orchestrated by high- or medium-tech lead firms, and even if a nearby research institution (e.g. a university) is investigating a potentially relevant topic, the space for their mutual cooperation as envisaged by institutional theories such as triple helix or regional innovation systems is fairly limited (e.g. Tödtling and Trippl, 2005 ; Lengyel and Leydesdorff, 2011 ). Therefore, under these unfavourable structural features of economies dominated by lower tier suppliers, public policies aimed at stimulating socioeconomic development by supporting innovation for example via the promotion of cooperation between firms and academic R&D institutions are to a large extent misleading. Instead, given the narrow profit margins of lower tier suppliers, as well as their limited growth potential stemming from their modest capabilities and consequent low-road strategies of competitiveness, the concept of upgrading seems to be of vital relevance for these firms.

The existing research indicates that the options for upgrading are closely related to the modes of governance ( Lane, 2008 ). Generally speaking, the governance literature aims to explain why and how new opportunities have opened up for firms, localities and countries to participate in the global economy as suppliers, distributors, contractors, intermediaries and service providers ( Ponte and Sturgeon, 2014 ). The original dyadic distinction between producer- and buyer-driven chains introduced by Gereffi (1994) has been reformulated into a 5-fold governance typology by Gereffi et al. (2005) , based on complexity and codifiability of information that needs to be exchanged with suppliers and on the basis of supplier capability. This typology was, however, mostly based on the relative power of the lead firm over its first-tier suppliers ( Gibbon et al., 2008 ). Moreover, research has shown that the type of governance varies not only among different GPNs within the same industry (for example, Erkus-Öztürk and Terhorst, 2010 , on tourism; Glogar, 2013 , on automotive; Tiits and Kalvet, 2012 , on telecommunications), but even among particular firms integrated within the same GPN ( Isaksen and Kalsaas, 2009 ; Yang and Coe, 2009 ). Furthermore, Isaksen and Kalsaas (2009) have shown that the power asymmetry between the lead firm and its suppliers may change fundamentally during the production cycle of a given product. Namely, during the phase of product development, the relationship can be characterized as a network, but during the production phase, the governance shifts to quasi-hierarchy mode, when the lead firm inter alia insists upon an open-book approach disclosing a detailed cost structure by its suppliers ( Isaksen and Kalsaas, 2009 ). Therefore, recent research led Gereffi and Lee ( 2012 , 29) to acknowledge that ‘most global industries are made up of a mix of these governance structures in different parts of the global supply chain, and these structures change over time and across different regions and country settings’.

In addition, Ponte (2014) argued that, while much of the existing literature has conceived GPNs as unipolar governance systems (i.e. driven by lead firms) and few scholars employ a bipolar conceptualization of GPNs, their governance should be reconceptualized as a continuum between unipolarity and multipolarity. Thus, any notion of unidirectional ‘drivenness’ does not reflect the complexity of real GPN governance, and existing governance typologies may still oversimplify on-the-ground realities ( Yang and Coe, 2009 ). The multipolar conception of governance of GPNs has already proved helpful in explaining the evolutionary dynamics of GPNs and, especially, for accommodating strategic actions of powerful actors outside the network, such as governments, standard developers, international NGOs, certification agencies, labour unions and consumer associations ( Ponte, 2014 ). Moreover, it was recently demonstrated that the power asymmetry within the GPN can even be completely reversed by the joint action of firms and the regulator ( Patel-Campillo, 2010 , on the case of Dutch producers of cut flowers).

In recognition of variegated and shifting modes of relationships within GPNs, Coe (2014) recently coined the term ‘fluid governance’. Therefore, the typology of GPN governance (e.g. Gereffi et al., 2005 ) should not necessarily be applied at the level of the whole GVC/GPN, but instead it could represent a useful tool for comprehending modes of relationships of a particular company.

All these arguments show that the existing power relationships in which a particular supplier is engaged should not be considered as pre-given and everlasting, but rather as dynamic and protean. Thus, from a supplier’s perspective, its current position within the GPN power structure should not be taken as a sort of destiny, but rather as a point of departure. An important argument follows from these observations. In particular, building upon the Yeung and Coe (2015) triad of GPN causal drivers (optimizing cost–capability ratios, sustaining market development and financial discipline), it can be expected that if firms are able to enhance their cost–capabilities ratio and/or improve their market development competence and thus pursue a suitable repositioning strategy, and provided that companies are supported in their efforts by a suitable institutional framework ( Rodríguez-Pose, 2013 ), there is a reasonable chance that limitations associated with their unfavourable mode of integration into the GVC/GPN can be overcome. Hence, the modalities of repositioning strategies of suppliers come to the forefront.

3. Functional upgrading and downgrading—the repositioning dynamics within GVCs/GPNs

In this section, an effort is made to enrich the discussion about repositioning (both upgrading and downgrading) strategies of suppliers enrolled in GVCs/GPNs. This discussion emphasizes the multiplicity of potential strategies of firms engaged in production networks, which extends well beyond retaining the status quo or unidirectional upgrading moves of companies (see, for example, Smith et al., 2014 ).

Upgrading has recently been defined as a shift ‘to higher value added activities in production, to improve technology, knowledge and skills, and to increase the benefits or profits deriving from participation in GPNs’ ( Barrientos et al., 2011 , 323). Four basic types of upgrading (product, process, functional and inter-sectoral) introduced by Humphrey and Schmitz (2002) have been widely accepted in the literature ( Ponte and Ewert, 2009 ). However, while process and product upgrading have been documented as ‘frequent’ by research (e.g. Pavlínek and Ženka, 2011 ), there is less agreement in the literature on the prevalence of functional upgrading, as it might be constrained by buyers eager to protect their core competence as well as by resource requirements and associated risks ( Humphrey and Schmitz, 2004 ). By contrast, inter-sectoral upgrading, defined as a supplier using knowledge acquired during the production process for a given chain for a shift into new sectors, has already been documented by the authors of this 4-fold typology in the case of Taiwanese firms that were able to move into skill-intensive sectors ( Humphrey and Schmitz, 2002 ).

Nevertheless, Ponte and Ewert (2009) showed that this typology suffers from several problems. To start with, especially in the case of agro-food products, it is difficult to distinguish process and product upgrading, as the introduction of new processes can generate new categories of products (e.g. ‘organics’). Moreover, in some GVCs, the ability to supply a whole range of products differing according to quality and/or origin can represent an important aspect of upgrading, but this does not fit into any of the four basic types of upgrading. In addition, Ponte and Ewert (2009) argued that while the first three types of upgrading describe the aspect of production that is being upgraded, inter-sectoral upgrading actually relates to a trajectory of upgrading. Moreover, Ponte and Ewert (2009) underlined that conceptualization of inter-sectoral upgrading remains unclear. Whereas the original definition of inter-sectoral upgrading by Humphrey and Schmitz (2002) placed the emphasis upon horizontal moves of suppliers into new sectors, in some instances they can also be combined with vertical shifts. Therefore, in practice, inter-sectoral upgrading can be combined with other types of upgrading (in this case, with functional upgrading). However minor these differences between various forms of inter-sectoral upgrading (i.e. horizontal move only versus horizontal move combined with vertical shift) might seem to be, these cases represent trajectories with profoundly differing risks and rewards and require different capabilities from the company in question. These observations led Ponte and Ewert (2009) to consider upgrading more broadly as ‘reaching a better deal’ for a given company (1637), with a need for a careful consideration of the rewards and risks that various upgrading and downgrading strategies entail.

Moreover, several other types of upgrading have been identified, even though they were not unanimously accepted by researchers ( Table 1 ). In particular, two differing types of organizational successions have been documented. The first strategy (inter-chain upgrading) represents a shift of supplies by a given producer to another GPN that serves an upmarket segment. Thus, instead of (or in addition to) low-value supplies to buyers engaged in a GPN specialized in serving lower market segments, the producer might succeed in supplying a GPN that enjoys a more favourable position in the market.

The second type of organizational succession (chain upgrading) occurs when the whole GVC/GPN moves towards more demanding segments. An example of this type of chain upgrading would be the case of the Škoda car manufacturer, which, over the last 20 years, has succeeded in moving from a low-end market segment to a mid-range market ( Pavlínek and Ženka, 2011 ). Again, these two types of organizational succession represent vastly different cases for the suppliers concerned as, for example, organizational succession of the whole chain (i.e. chain upgrading) requires strong control by the lead firm and by its first-tier suppliers, and, consequently, mutual learning along the chain is encouraged and can be very intensive ( Pavlínek and Ženka, 2011 ).

A special form of upgrading strategy can comprise strategic coupling or even strategic decoupling and subsequent recoupling in case the detrimental effects of engagement in the GPN outweigh the contribution to value-creation ( MacKinnon, 2012 ; Horner, 2013 ). In latter case, strategic decoupling can be considered as ‘a temporary and sequential strategy to improve value creation, enhancement and capture for development objectives, and may be followed by recoupling with the same or, usually, other GPNs’ ( Horner, 2013 , 5–6). Therefore, the state or regional actors and institutions may pursue higher order developmental goals and intentionally break away from the current mode of strategic coupling, which implies that strategic couplings are embedded within the broader politics of development in regions and countries that go beyond direct engagement with GPNs ( Coe and Yeung, 2015 ). Therefore, from a conceptual point of view, the notions of strategic coupling, decoupling and recoupling open a much broader scope for dynamism, contingency, time-place specificity and intentionality of actors (especially of firms) than would follow from the existing conceptualizations of upgrading and governance and the mutual relationship between the two (cf. Coe and Yeung, 2015 ).

All these examples pervasively show the evolutionary dynamism of GPNs. However, while upgrading usually implies some sort of technological or organizational improvement, it can also be accompanied by unfavourable impacts such as labour-shedding or a higher intensity of work ( Palpacuer, 2008 ; Pickles and Smith, 2011 ; Smith et al., 2014 ). Therefore, multi-faceted impacts of various sorts of upgrading represent a fundamental, yet under-explored issue ( Pickles and Smith, 2011 ). Consequently, Coe and Yeung (2015) recently argued that upgrading is often conceived too narrowly and might easily lead to confusion between the means of upgrading (such as strategies for functional upgrading) and the ends (the capture of larger value-added, cf. also Brewer, 2011 ) and, therefore, they proposed a more broadly designed concept of the ‘value-capture trajectories’ of individual firms embedded within GPNs. According to these authors, the value-capture trajectories are much more varied, contingent and multi-directional than existing typologies of upgrading could suggest ( Brewer, 2011 ). Therefore, the typology of functional up- and downgrading below outlined should be considered as a subset of a much broader spectrum of value-capture trajectories.

3.1. Towards a typology of functional upgrading

Functional upgrading is considered to be particularly appealing, yet—especially in quasi-hierarchical GVCs/GPNs—one of the most challenging types of upgrading ( Humphrey and Schmitz, 2004 ; Isaksen and Kalsaas, 2009 ). Obviously, the scope for functional upgrading is conditioned by a multiplicity of factors, such as the type of governance, capabilities and ambition of the supplier concerned ( Ponte and Ewert, 2009 ) and the quality of the national and regional innovation systems in which a particular company is embedded ( Humphrey and Schmitz, 2002 ; Glogar, 2013 ). Nevertheless, one of the key arguments of this article is that the discussion on functional upgrading can be further enhanced by a more nuanced approach towards this particular type of upgrading. Consequently, in addition to existing types of upgrading ( Table 1 ), several types of functional upgrading should be distinguished ( Table 2 ). Importantly, each of these upgrading strategies differs according to its potential risk–benefit ratio, which is also likely to translate into differing probability. The typology of functional upgrading and functional downgrading has been derived on the basis of relevant literature combined with long-standing cooperation with a number of business-sector practitioners (especially managers of the Berman Group, the South Moravian Innovation Centre and the executive director of the Czech Automotive Cluster). Therefore, the examples provided relate to industries that are frequently studied (especially the agriculture and forestry, electronics, apparel and automotive industries).

Five main types of functional upgrading can be identified. The first type can be defined as penetration by lower tier suppliers among higher tier suppliers. An interesting example of this type of upgrading, which is exceptional in nature, was provided by Tokatli and Kizilgün (2004) . These authors elaborated the fascinating case study of Erak Clothing, a former Turkish clothing supplier, which successfully repositioned itself as an original brand-name manufacturer and retailer, making this case particularly noteworthy. By contrast, the literature has held for a long time that while various forms of product- and process upgrading are supported or even required by lead firms and/or by higher tier buyers from their suppliers, a move of suppliers into higher value-added activities, such as into design, brand-name manufacturing, marketing and retailing, is often discouraged, as such a shift would encroach upon the core business activities of their buyers ( Humphrey and Schmitz, 2002 ; Giuliani et al., 2005 ). Therefore, such a type of functional upgrading was expected only in high-performing economies such as South Korea, Taiwan, Hong Kong and Singapore ( Tokatli and Kizilgün, 2004 ).

Although the Erak case represents an exceptional repositioning strategy, it is not totally unique. For example, Plank and Staritz (2015) have reported functional upgrading to design and especially to branding as a strategy employed by numerous Romanian apparel firms. Another example of this type of functional upgrading, this time in the electronics industry, was recently analysed by Yeung (2014) in the case of Taiwan’s Hon Hai Precision, which started in 1974 as a third-tier family-owned producer supplying simple plastic parts such as channel-changing knobs for TVs, but in 2000 was able to establish its China-based company Foxconn International, which is now the world’s largest provider of electronic manufacturing services. It should be acknowledged that this type of functional upgrading has already been documented in numerous industries such as apparel, electronics and automotive by Gereffi (1999) .

This type of upgrading might also occur due to other factors such as a sudden increase in global demand, the expansion of a lead firm into new markets, efforts of key buyers to moderate the risk inherent in relying upon a single supplier by engaging two or more suppliers of the same product or the inability of an existing higher tier supplier to satisfy the requirements of its key customer(s) ( Glogar, 2013 ). Moreover, Palpacuer et al. (2004) quote the UK manager of a large clothing retailer who argued that new suppliers ‘had to bring something new to the table’ in the form of design ideas or reduced prices, because ‘taking on a new supplier usually means dropping an existing one’ (420). This quote illustrates well the entrance-and-exit dynamics existing within contemporary GVCs/GPNs, which has been called the ‘upgrading paradox’ by Brewer (2011) , thus underlining the protean character of these networks on the one hand, and the sustained inequalities in the distribution of rewards on the other ( Tokatli, 2013 ).

The second type of functional upgrading occurs when a firm abandons its low value-added activities and concentrates upon its core business competence. This type of upgrading trajectory has been documented in the literature relatively frequently (e.g. Gibbon, 2001 , in the case of cotton and fish producers; Palpacuer et al., 2004 , on clothing firms), and recently by Plank and Staritz (2015) in the case of Romanian apparel companies. According to these authors, Romanian firms tend to relinquish low-value production and to subcontract it to remote and poorer regions within Romania or in neighbouring non-EU countries to reduce costs but also to deal with labour shortages. Interestingly, such a shift could be either temporary or permanent in nature. In the former case, firms tend to subcontract activities with lower value-added to meet a strong demand that exceeds the firm’s production capacity. This sort of temporary functional upgrading epitomizes yet another example of dynamism and flexibility in relationships among suppliers in production networks, contingent upon a plethora of factors including the intensity of market demand, the benefits and risks involved with subcontracting, the existence of capable firms ready to supply the required products, etc. Therefore, companies are permanently reconsidering which functions should be performed in-house and which functions outsourced.

The third type of functional upgrading occurs in cases where a lead firm or higher tier supplier voluntarily transfers some higher value-added functions to its lower tier supplier as a result of changing organizational models of production ( Humphrey and Memedovic, 2003 ). For example, according to Özatağan (2011) , first-tier suppliers are increasingly charged by auto-assemblers (who are exposed to fierce international competition) with responsibility for the design and product development of increasingly complex systems, while first-tier suppliers in turn require new functions such as design expertise from their second-tier suppliers. Thus, second-tier suppliers have also experienced a strong push from their buyers to innovate, and, as a consequence, tendencies to relinquish some higher level functions are not limited to the higher level of the ladder, but are being replicated at the lower level ( Özatağan, 2011 ). The same ‘cascade effect’ of the diffusion of higher functions was identified in the Italian automotive industry by Follis and Enrietti (2001) , who argued that a drastic reduction in the number of first-tier suppliers had been an important stimulus driving this trend globally, with those remaining being required to supply more and more complex components. This trend was intensified by the 2008–12 recession, as lead firms rationalized their supply chains to focus on fewer, larger and more capable suppliers ( Gereffi, 2014 ), which might inter alia decrease the need for lead firms to maintain tight control over such suppliers, leading towards a modular governance structure (Özatağan, 2011).

Evidence from the existing studies shows that the shift of functions down the chain is not confined to the automotive industry. For example, Plank and Staritz (2015) found that lead firms in the Romanian apparel industry prefer to work with suppliers that can take on new functions such as finishing (especially washing, labelling, packaging and bar-coding), input-sourcing and some design/product development. Therefore, this type of functional upgrading seems to be a promising pathway for highly capable and efficient lower tier suppliers. Moreover, according to Palpacuer et al. (2004) , buyers are likely to behave in a less ‘footloose’ way to such empowered core suppliers as their change would incur increased transaction costs (see also Herrigel, 2004 ). By contrast, suppliers who lack the financial resources and human skills to perform these functions are relegated in importance or eliminated completely from the chain ( Palpacuer et al., 2004 ).

In addition to the above-mentioned organizational changes, five other motives for such a transfer should be distinguished. First, the major impetus for such a voluntary transfer of higher level functions could be a need to augment the technical capacities of lead firms or higher tier suppliers to cope with a shortened production cycle induced by fierce global competition ( Duchêne et al., 2013 ). Such pressures may force a higher tier supplier to focus its R&D capacities on the development of core technology and to transfer the development of linked technical (sub)systems to its most capable and cost-efficient suppliers.

Secondly, voluntary transfer of some higher level functions can be induced by the movement of a higher tier supplier to a still higher position within a GPN (e.g. to become a Tier 0.5 supplier—see Pavlínek and Žížalová, 2014 ) or even the establishment of its own brand (original brand manufacturing - OBM) and the consequent move to high value-added downstream activities such as branding, marketing and customer services ( Rabellotti, 2014 ). The third motive for such a voluntary transfer represents cost considerations, as the new supplier could offer lower prices, especially if it were located in a less-developed region with lower price levels. Fourthly, the voluntary transfer of some higher level functions can be tempted by cultural differences between the country of origin of a lead firm and the network of its suppliers located, for example, on a different continent (see Gereffi, 1999 , for a case involving the transfer of responsibility for the management of an East Asian supply chain from US garment buyers to Taiwanese firms). Finally, transfer of some functions to suppliers might be induced by a shifting managerial paradigm towards ‘shareholder value’, leading to the externalization of non-core competence and downsizing through cutting jobs ( Palpacuer et al., 2004 ). However, the differences in types of ownership of lead firms and higher tier suppliers and in their managerial cultures imply that a single coherent supply-chain strategy of any kind is unlikely (Palapcuer et al., 2004).

According to an analysis of functional upgrading achieved by Turkish automotive companies, voluntary transfer of higher functions seems to be a realistic option, provided that the lower tier suppliers develop sufficient capabilities and capacities at reasonable cost, and, ideally, are embedded within a supportive innovation system (Özatağan, 2011). This type of functional upgrading might be highly beneficial for the company concerned, as it could result in improvements in its production and its technological capabilities (see Pavlínek and Žížalová, 2014 ). On the other hand, voluntary transfer of some higher value-added functions also entails transfer of associated costs and risks, which, at least in certain cases, can lead rather to re-configuration of responsibilities within the chain rather than to actual functional upgrading ( Tokatli, 2013 ). Therefore, according to Tokatli, the decision to enter into these activities requires serious scrutiny and acknowledgement that even seemingly similar higher value-added activities such as design, branding, marketing and retailing in reality represent entirely different activities that require different competencies and different business climates ( Tokatli, 2013 ).

The fourth type of functional upgrading arises when a lower-tier supplier is able to develop a new, previously non-existing, product and persuade a higher tier buyer or the lead firm of its merit (see Gereffi, 1999 ). Thus, a new market develops for an intermediate good. The example of this type of functional upgrading provided Glogar (2013) with regard to the Czech automotive firm Brano that developed a new product by incorporating parking cameras into car locks, which led to the creation of a new market segment, where this firm enjoys a dominant position. However, this type of functional upgrading is likely to be infrequent, as the number of lower tier suppliers capable of making such a breakthrough is bound to be limited.

Finally, the fifth type represents functional upgrading achieved through mergers and acquisitions (M&As), for example, via the acquisition of a technology firm, higher-tier supplier or even lead firm (see Hansen et al., 2016 for a detailed discussion of barriers to knowledge transfer and the related risks and benefits entailed by M&As). Obviously, various forms of upgrading involve diverse risks and challenges and also offer different potential benefits for the firms and employees concerned, which are likely to be multifaceted (see Barrientos et al., 2011 ). Importantly, the potential risk–benefit ratio and, henceforth, the probability of particular types of upgrading are likely to be closely related to the position of a firm within the GPN hierarchy, as its position is closely interlinked with firms’ capabilities. Moreover, according to Glogar (2013) , an important factor underpinning the scope for upgrading is the ability of firms’ managers to establish relationships of trust with managers of first-tier suppliers or even of lead firms. This observation accords with the argument of Birch and Cumbers (2010) , who underlined the critical role of trust in the functioning of global networks, especially those in knowledge-intensive industries. Consequently, the role of informal institutions such as the level of trust among managers of particular firms underscores even further the variegated nature of governance in particular segments of GPNs. Moreover, Glogar (2013) argued that generally the scope for upgrading is determined, along with internal factors such as the development of a firm’s cost–capability ratio and the leadership capabilities of a company’s managers, by the nature of a given GPN and by a complex of influences that are external to a given production network, such as the overall quality of respective national and regional innovation systems, including policy frameworks covering taxes, support policies, political stability, the legal system, the quality of education, etc.

Importantly, Tokatli (2013) , on the basis of her study of firms in the apparel industry (especially the case of the high-value garments producer Mithat), showed that firms’ trajectories are not unidirectional, such as moving into higher value-added activities while leaving lower value-added ones, but instead that firms are branching in several directions without leaving their other profitable activities, thus giving rise to more and more complex production networks. Therefore, in practice, overlaps, multiplicity and myriads of combinations of repositioning trajectories are common. Moreover, upgrading activities can differ vastly in scale and nature (e.g. introduction of incremental versus radical changes) and, consequently, there is much more continuity than the categories used in GVC/GPN research might suggest ( Tokatli, 2013 ). Likewise, many firms are not only offering multiple products and services, but are also often operating across several GPNs simultaneously and, therefore, adopting multiple roles and strategies accordingly ( Coe and Yeung, 2015 ). From these observations, it also follows that the traditional categorization of companies into third-, second-, first-tier suppliers and even as lead firms can be even more blurred then conventionally acknowledged.

Moreover, Ponte and Ewert (2009) showed that functional upgrading might be expensive and risky with unclear rewards and, consequently, they argued that normative views of upgrading conceived as moving up the value chain might be misleading. This point was endorsed by Tokatli (2013) , who underlined that while upgrading efforts can result in ‘a redistribution of competencies, risks and responsibilities among firms, regions, and countries both in terms of their content and geographies, the distribution of rewards that are related to upgrading may not be significantly changing’ (994). Consequently, she emphasized the dangers of fetishizing the upgrading concept, especially in the sphere of policy advice, as it is unrealistic to advise all suppliers everywhere to upgrade into high value-added activities, which would be similar to advising every actor in the film industry to move into directing and producing ( Tokatli, 2013 ).

3.2. Downgrading—condemnation or blessing?

In contrast to upgrading, the concept of downgrading has received much less attention and remains rather underdeveloped (for exceptions, see: Gibbon, 2001 ; Ponte and Ewert, 2009 ; Cattaneo et al., 2010 ; Barrientos et al., 2011 ; Rabellotti, 2014 ; Smith et al., 2014 ). This is unfortunate. First, the number of cases of downgrading in practice can be surprisingly high and, second, in contrast to upgrading, which is broadly referred to in the literature with a positive connotation (though multi-dimensionality of the concept of upgrading has recently been underlined, see: Barrientos et al., 2011 ; Pickles and Smith, 2011 ; Smith et al., 2014 ), the impacts of various downgrading shifts can differ fundamentally. Moreover, cases of downgrading enforced by a misuse of market power against powerless lower tier suppliers from developing countries have been documented ( Kaplinsky et al., 2010 ), thus contributing to the negative connotation associated with downgrading. In the following text, it is argued that several different types of functional downgrading should be distinguished, as downgrading encompasses a diverse set of trajectories. A suitable point of departure towards a typology of functional downgrading is to elaborate motives for particular downgrading moves. Therefore, the following text introduces several types of downgrading based on the varying motivations for these types of repositioning, and the pros and cons for the supplier in question are outlined (see also Table 3 ).

The first type of functional downgrading—passive downgrading—represents an involuntary move by a company towards the production of simpler goods as a result of a decision (i.e. change of the nature of demand) by a higher tier buyer. The most obvious motive for passive downgrading seems to be dissatisfaction of the key buyer with the cost or the quality of the product supplied or with its delivery. However, this shift might also be induced by a change of strategy by a buyer (i.e. higher tier supplier), such as the development of its own capacities for manufacturing a given product, in order to tighten control over production or due to various cost considerations. In these cases, the higher tier customer would not require the production of intermediate goods from its supplier anymore, but just the supply of raw materials (see Kaplinsky et al., 2010 for the example of the Chinese import of logs instead of processed timber from Gabonese wood mills). The same authors documented a similar case of involuntary downgrading related to the Thai cassava crop ( Kaplinsky et al., 2011 ). They show how changing EU common agricultural policy regulation in the early 1990s led to near collapse of exports by Thai firms into the EU, which prompted the Thai exporters of cassava to search for new markets in China. However, Chinese importers demanded mere cassava chips rather than pellets. Chip production is labour intensive, consisting of cutting raw cassava, sun-drying and then aggregation and export in bulk ( Kaplinsky et al., 2011 ). More technologically complex pellet production builds on chip production, enhancing value by grounding, steaming and moulding chips into pellets. Therefore, a shift of Thai cassava growers from the production of pellets, which had been previously required by the EU customers, towards the export of cassava chips demanded by importers from China represented a move down the technological chain. Consequently, in both these cases, voluminous, but low-standard Chinese demand forced producers into low-technology and low-skill niches in their chains. This research by Kaplinsky et al. (2011) led Yang (2014) to a broader and important observation, namely, that the global market shift from North to South will also profoundly impinge upon GPN governance, which she sees as an emerging phenomenon deserving systematic exploration in future.

Needless to say, this type of downgrading is bound to be unwelcome by the affected supplier, as passive downgrading is likely to undermine its technological capacities and to squeeze the profit margin even more, and ultimately to expose the firm and its employees to severe consequences.

Another case of passive downgrading occurs in situations when the existing supplier is excluded from the production network either partially or even completely due to a drop in demand for one or more of its products by a higher tier buyer or due to a change in the organizational model, such as the rationalization of the supply chain (e.g. Gibbon, 2001 ; Follis and Enrietti, 2001 ). These cases in fact represent a sort of enforced decoupling, i.e. decoupling imposed by key buyer(s), which contrasts with cases of intentional decoupling undertaken by suppliers themselves (cf. MacKinnon, 2012 , or Coe and Yeung, 2015 ). If such a case of passive downgrading occurs, the supplier is forced to refocus rapidly onto the production of alternative goods, and one of the easiest options is to manufacture less sophisticated and perhaps also less specialised products for a broader market. This type of downgrading is arguably rather frequent, as it is— inter alia —the result of a well-documented recent tendency of lead firms in the automotive industry and beyond to consolidate the supply base by narrowing the extent of the production network, including a reduction in the number of first-tier suppliers ( Sturgeon et al., 2008 ; Cattaneo et al., 2010 ; Pavlínek and Žížalová, 2014 ). This type of passive downgrading is bound to be the most challenging, especially for lower tier suppliers, as eviction from the GPN might easily endanger their very existence, unless they quickly find alternative business models. By contrast, excluded first-tier suppliers, which often possess relatively high capabilities, are more likely to succeed in speedy attempts either to penetrate other markets or to slip into the position of second-tier suppliers ( Follis and Enrietti, 2001 ).

The second type of functional downgrading—adaptive downgrading—is not induced by the decision of a key customer as in the previous case, but follows from the decision of a firm’s own managers recognizing that the firm is unable to sustain the competitive pressure within its current market. If such a situation occurs, managers are likely to refocus either on lower or smaller market segments or on the production of components instead of the product for the end-market. An example of this type of functional downgrading has already been provided by Gereffi (1999) with the case of the electronics producer Daewoo, which moved from years of brand-building back to the original equipment manufacturer (OEM). Adaptive downgrading was also relatively common in Central and Eastern European countries after their re-integration into the global economy after the fall of the Iron Curtain. Since the reintroduction of the market economy in these countries, many of the former state-owned companies found themselves suddenly uncompetitive, and one of the options readily available was to specialize in the production of components for which the firm possessed know-how and technology and, fundamentally, was quickly able to secure demand (for the case of Czech automotive suppliers, see Pavlínek, 2008 ). This type of adaptive downgrading has been documented in detail by Plank and Staritz (2015) for the Romanian apparel sector, where the integration of Romanian producers into West-European GPNs resulted in functional downgrading from full-package production to assembly manufacturing. Importantly, according to Plank and Staritz (2015) , this downgrading shift was accompanied by process and product upgrading. This observation illustrates well the multifaceted nature of various repositioning strategies. Another example of adaptive downgrading was identified by Ponte and Ewert (2009) , in their investigation of repositioning trajectories of South African wine producers, who documented that a shift by some firms to making lower value products sold in larger amounts may be the most profitable strategy, at least in the short term. This is an important observation also from the temporal dimension, as short-term gains generated by seemingly successful repositioning strategies might, in the long run, diminish or even disappear ( Brewer, 2011 ; Coe and Yeung, 2015 ).

Adaptive downgrading represents a mixed blessing for the firms concerned. On the one hand, a firm is forced to retreat from its current market; on the other hand, increased specialization in a specific market segment or component creates scope for the concentration of the firm’s human and financial resources on corresponding products, and thus the company secures a better position within this new—even though more confined and perhaps even more fragile—market.

The third type of functional downgrading, strategic downgrading, might arise as a result of a change of business strategy by a highly capable supplier or even by a lead firm dissatisfied with its current profit margin or with its share of the market. As a consequence, such a company might—along with a number of other options—opt for strategic downgrading by refocusing on a component or a market segment where the firm could make the best use of its core competence and thus raise its profitability even higher. This type of intentional strategic downgrading has been documented by Herrigel (2004) with regard to the case of the German automotive supplier Keiper. According to Herrigel, Keiper abandoned the production of the complete seat-module and focused exclusively on manufacturing internal frames for these seats. In Herrigel’s words, the firm ‘very self-consciously adopted a second-tier strategy of specialized component production’ ( Herrigel, 2004 , 50). This strategy also has its fundamental pros and cons. First, it is quite likely that, if a highly capable firm decides to concentrate upon the provision of lower value-added services or the production of some key components of a hitherto manufactured product, it can take advantage of its supremacy in the market or technological capabilities and achieve a better position in the market. Second, however, the major danger associated with this type of downgrading comprises the difficulty or even impossibility of finding a way back if the strategy fails.

The downgrading typology outlined above shows why the impacts of these particular forms of downgrading upon the company concerned would to a large extent depend upon the rationale for such a repositioning, which in turn is inevitably related not only to the nature of relationships within which the supplier is embedded in the GPN, but also to internal capabilities and conditions as well as the external socioeconomic context and policy framework. Finally, it should be underlined that in practice the evolutionary trajectory of particular firms might consist of zigzag moves encompassing both downgrading and upgrading shifts. For example, the Czech aircraft producer Aero was forced by market pressure in the late 1990s to retreat from its former lead position to become a second-tier producer (i.e. adaptive downgrading), but it later succeeded in penetrating among first-tier suppliers of various GVCs/GPNs, including those governed by global leaders such as Airbus or Boeing. Plank and Staritz drew similar conclusions, arguing that upgrading moves by Romanian apparel firms have been divergent as apparel firms reacted in various ways leading to different and simultaneous upgrading paths—some pursued as active strategies while others were forced onto suppliers ( Plank and Staritz, 2015 ; cf. Pickles et al, 2006 ). These examples accord with the argument of Tokatli (2013) , who contended that firms upgrade, downgrade, backslide and do whatever else is necessary, in the process following these trajectories or combinations of these trajectories in their quest for strategic optimality.

4. Conclusion

The aim of this article was to discuss dynamic, multiple and multi-directional repositioning firm strategies in order to underline the variegated and protean nature of GVCs/GPNs. It builds upon recent evidence that the mode of governance could vary profoundly among firms engaged in the same network, and that it is prone to change over time depending on a variety of factors that are internal as well as external to the firm. Therefore, existing typologies of ideal modes of governance should not necessarily be applied at the level of the whole GPN, but might be used as a useful point of departure for understanding the nature of relationships of a particular company. Moreover, it was argued that the existing dissonance in the literature over the possibilities for and rewards from functional upgrading (see Humphrey and Schmitz, 2004 ; Ponte and Ewert, 2009 ; Tokatli, 2013 ) can be attributed firstly to more variegated and versatile modes of governance existing even within a single GPN, and secondly to the fact that functional upgrading represents a diverse category in reality.

Therefore, the following types of functional upgrading were identified: (i) penetration among existing higher tier suppliers; (ii) abandoning some lower value-added activities; (iii) voluntary transfer of some higher level functions from a higher tier supplier; (iv) development of a new, previously non-existent product giving rise to a new market; and (v) upgrading through acquisition of technological firm or higher-tier supplier. Importantly, each of these types of functional upgrading requires different capabilities, but also involves particular risks and cost–benefit ratios, which finally translate into sharply differing probabilities for particular firms to embark upon a specific type of upgrading.

Moreover, this article contended that the concept of downgrading has been considered insufficiently so far as the impacts of various downgrading shifts can differ fundamentally. It has been argued that, in order to enhance the understanding of downgrading, the most useful starting point is to analyse the intentions behind such moves. The analysis revealed that some types of functional downgrading represent well-considered strategies. By contrast, cases of involuntary (passive) downgrading performed by a company as a result of a decision taken by its higher tier buyer might have major negative impacts on the company. Therefore, several types of functional downgrading based on the varying motivations for such repositioning trajectories were introduced (i.e. passive, adaptive and strategic downgrading), and their negative and/or positive effects upon the company in question were outlined. It should be underlined that the type of motivation is also of fundamental relevance in the instance of a supplier’s decision to embark upon a particular type of functional upgrading. However, no clear-cut relationship between the types of motivation (i.e. strategic intent, adaptive approach or passive adjustment) and the 5-fold typology of functional upgrading could be identified. In particular, while in all five types of functional upgrading the strategic intent of the companies in question can be considered as indispensable, elements of an adaptive approach can also be traced.

Moreover, available evidence showed that firms’ trajectories are not necessarily unidirectional, such as moving into higher value-added activities while abandoning lower value-added ones, but instead that firms often branch in several directions without leaving their other profitable activities ( Tokatli, 2013 ). This gives rise to even more complex production networks, with considerable overlaps in terms of different modes of governance as well as overlaps among different types of upgrading and repositioning strategies. From this observation, it also follows that the traditional categorization of firms into first-, second-, and third-tier suppliers can be even more blurred than conventionally acknowledged. Consequently, in reality one can observe considerable variety, multiplicity, overlaps and dynamism of actors and of their strategies; accordingly, all typologies should be considered merely as starting points for further research.

In this context, it should be underlined that the GVC/GPN perspective provides yet another argument against the one-size-fits-all approach to innovation strategies, in which practices and instruments are copied from other regions or countries where firms are exposed to different challenges and opportunities ( Tödtling and Trippl, 2005 ). This leads us to underline a profound gap in the current understanding of challenges for regions dotted with lower tier suppliers. Namely, there is only limited knowledge on the extent and type of integration of suppliers in particular regional economies into GPNs. Without greater knowledge, strategies and policies are running a substantial risk of being misguided.

Recent research has paved the way towards setting the GVC/GPN approach within a broader framework that recognizes the embeddedness of firm and sectoral changes within the context of political economies as well as state and non-state institutional actions ( Smith et al., 2014 ). Likewise, Coe and Yeung (2015) , have recently argued for integrating the predominant study of the vertical dimension of GPNs with the horizontal dimension, namely, with the ‘on-the-ground places and territories that constitute the interconnected global economy’ (195), as the intersection of vertical and horizontal forces drives economic development. Ultimately, such a research pathway might build a bridge between the GVC/GPN approach and the alternative theoretical stream currently flourishing within regional and innovation studies, namely the institutional theories of regional innovation systems and related concepts ( Cooke, 2004 ; Asheim et al., 2011 ). Clearly, the repositioning strategies of firms rest not only upon a firm’s internal capabilities and its path dependency, but also upon the nature of the GVC/GPN in question as well as upon the broader context within which the particular firms are embedded, such as national and regional innovation systems (see e.g. Tokatli, 2007 ; Ponte and Sturgeon, 2014 ).

Acknowledgements

The author would like to thank the editor and three reviewers for their valuable feedback. I am very grateful to Kevin Morgan, Björn Asheim, Michaela Trippl, Adrian Healy, John Goddard, Petr Pavlínek, Ladislav Glogar, Jan Vozáb, Pavel Csank, David Uhlíř, Petr Chládek, Jindřich Weiss, Radim Kocourek and Ladislav Musil for their encouragement and insights.

Funding

Financial support of FP7 project Smart Specialisation For Regional Innovation (no. 320131) is greatly acknowledged.

References