Firms' efficiency and global value chains: An empirical investigation on Italian industry
| Author | Emanuele Brancati,Anna Giunta,Mariarosaria Agostino,Domenico Scalera,Francesco Trivieri |
| Date | 01 April 2020 |
| Published date | 01 April 2020 |
| DOI | http://doi.org/10.1111/twec.12866 |
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wileyonlinelibrary.com/journal/twec World Econ. 2020;43:1000–1033.
© 2019 John Wiley & Sons Ltd
Received: 26 September 2018
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Revised: 23 July 2019
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Accepted: 30 August 2019
DOI: 10.1111/twec.12866
ORIGINAL ARTICLE
Firms' efficiency and global value chains: An
empirical investigation on Italian industry
MariarosariaAgostino1
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EmanueleBrancati2
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AnnaGiunta3
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DomenicoScalera4
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FrancescoTrivieri1
1University of Calabria, Arcavacata di Rende, Italy
2LUISS Guido Carli University, Roma, Italy
3Roma Tre University and Rossi‐Doria Centre, Roma, Italy
4University of Sannio, Benevento, Italy
KEYWORDS
efficiency, global value chains, Italian industry
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INTRODUCTION
The establishment and growth of global value chains1 (GVCs) are key features of the process of inter-
national integration of markets and vertical fragmentation of industries that has taken place in the last
25years. Several aspects of this phenomenon have been examined by the economic literature: some
studies have focused on macroeconomic consequences of the upsurge of GVCs and related policy is-
sues (Amador & di Mauro, 2015; De Backer & Miroudot, 2014; Grossman & Rossi‐Hansberg, 2006;
Koopman, Powers, Wang, & Wei, 2011; OECD, 2012; UNCTAD, 2013), while others have specifi-
cally analysed the effects of firms' participation in GVCs or other production network (Baldwin &
Venables, 2013; Costinot, Vogel, & Wang, 2013; Weisbuch & Battiston, 2007). In particular, the rela-
tionship between firms' involvement in GVCs and their performance has often been investigated
through productivity indicators (Agostino, Giunta, Nugent, Scalera, & Trivieri, 2015; Del Prete, Prete,
Giovannetti, & Marvasi, 2017; Giovannetti, Marvasi, & Sanfilippo, 2015; Veugelers, Barbiero, &
Blanga‐Gubbay, 2013), but rarely efficiency issues have been explicitly taken into account (Manello,
Calabrese, & Frigero, 2016).
Yet, there are several reasons to believe that efficiency gains may accrue to firms from participation
in GVCs, because of both productive and organisational rewards. The former are mainly linked to ver-
tical specialisation and externalities connected to entering GVCs. Vertical specialisation (Hummels,
Ishii, & Yi, 2001) allows firms to focus on specific activities and production stages within the chain,
and exploit comparative advantages realised across the phases of the production process. In fact, on
1 The term ‘Global Value Chain’ denotes the entire complex of operations and transactions within and between firms, through
which raw materials are transformed into intermediate products and then into final goods. For industrial products, the
transformation carried out along GVCs involves many stages, ranging from design, manufacturing and assembly to marketing
and distribution; these activities are frequently dispersed over a good number of different firms, regions and countries.
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the one hand, buyer/assembler or "final" firms (henceforth indicating firms selling to the end markets)
may offshore less‐rewarding stages of production, and import new, cheaper and higher‐quality vari-
eties of inputs so as to benefit from restructuring organisational processes thanks to a broader variety
and better quality of imported inputs (Castellani, Serti, & Tomasi, 2010). On the other hand, suppliers
(i.e., firms selling intermediate goods to other companies rather than to end customers) are given
a chance to access international markets, increase production and exploit economies of scale. The
international dimension of chains is particularly beneficial for small and medium‐sized enterprises
(SMEs), allowing them to be no longer locked into supplying national buyers and exposed to sunk
costs of specialising in a specific production (McLaren, 2000).
Concerning externalities, GVCs are recognised to be an environment where productivity spillovers
take place, especially favouring SMEs and suppliers. Indeed, trade relationships with large actors of
the chain (first of all, multinational enterprises, usually on the frontier of productivity, innovation and
technology) provide a valuable opportunity to increase SME's productivity and efficiency through
learning about technologies, and organisational and managerial practices (Saia, Andrews, & Albrizio,
2015). Lead firms stimulate suppliers by demanding better quality inputs, share knowledge and tech-
nology with them and encourage the adoption of new practices (Criscuolo, Timmis, & Johnstone,
2015). Especially when such interfirm relationships imply some involvement in the strategic stages of
production (mainly: product conception, R&D and design), SMEs and suppliers may enhance techni-
cal knowledge and managerial skills, exploit new channels of innovation and penetrate new markets,
thereby boosting their productivity and approaching the efficiency frontier (Gereffi, Humphrey, &
Sturgeon, 2005; Humphrey & Schmitz, 2002; Pietrobelli & Rabellotti, 2011).
Efficiency gains may also arise from organisational changes induced by involvement in GVCs. The
relationship between firm's organisation and performance has been object of a broad literature, mainly
referring to highly influential theories on transaction costs and property rights. On that basis, several
possible advantages of vertical integration have been pointed out, in terms of reduction of transaction
costs (Klein, Crawford, & Alchian, 1978; Williamson, 1971, 1975), improved multitasking incentives
(Holmström & Milgrom, 1991), alignment of control and incentives (Grossman & Hart, 1986; Hart &
Moore, 1990) and better coordination (Hart & Holmström, 2010). On the other hand, vertical integra-
tion is also costly and thus requires appropriate financial commitment (Acemoglu, Johnson, & Mitton,
2009); in addition, it tends to give managers weaker incentives to profit maximisation and imply
higher bureaucratic costs (Grossman & Hart, 1986; Klein, 2005).2
By contrast, other scholars pointed out possible advantages of "hybrid organizational forms such
as long‐term contracts, partial ownership agreements, franchises, networks, alliances, and firms with
highly decentralized assignments of decision rights […] attempting to achieve some level of central
coordination and protection for specific investments while retaining the high‐powered incentives of
market relations" (Klein, 2005, p. 438).
The issue of hybrid organisational forms has been revived by the development of GVCs, which
emphasises the potential benefits of firms' relationships, by relying on a wide and dense web of firms'
transactions. Indeed, as pointed out by a recent strand of the literature (Gereffi et al., 2005; Humphrey
& Schmitz, 2002; Pietrobelli & Rabellotti, 2011), GVCs can reduce the costs of uncertainty, incom-
plete contracts and potential opportunistic behaviour by hinging on repeated collaboration, reputation
and careful "selection of players." On the other hand, thanks to the developments of ICT, possible
organisational diseconomies of long supply chains are controlled by the use of information and data
sharing technologies (Park & King, 2007).
2 For an empirical assessment of the effects of vertical integration on efficiency and the distance from the frontier, see for
instance Månsson (2004) and Pieri and Zaninotto (2013).
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But neither all firms' transactions are alike, nor the benefits equally shared by all the firms involved
in the chain. The type of transaction, the firm positioning (Agostino, Giunta, Scalera, & Trivieri,
2016) and the GVC governance modes are factors heavily affecting the firms' performance (Brancati,
Brancati, & Maresca, 2017). Leveraging the literature on transaction costs, "a typology can be elabo-
rated that highlights multiple ways in which the relationship between firms in GVCs could be coordi-
nated" (De Marchi, Maria, & Gereffi, 2017, p. 5). Such a typology poses market‐based relationships
among firms and vertically integrated companies at opposite ends of the spectrum, and classifies as
intermediate types of value chains those characterised by modular, captive and relational modes of
governance (Gereffi et al., 2005). In a "modular" chain, orders to suppliers are relatively easy to be
codified, generic machinery is used, switching costs on both sides are relatively low; in a "captive"
chain small suppliers are heavily dependent on a few lead firms, and their tasks are confined to a lim-
ited range; finally, a GVC is characterised by a "relational" governance when participation implies
knowledge sharing, complex information, specific investments for both buyers and suppliers, and high
switching costs.3
This paper aims at contributing to the firm‐level empirical literature on GVCs on several under-
investigated aspects. First of all, we detect possible effects of participation in GVCs on firms' ability
to locate closer to the efficiency frontier. To our knowledge, this is the first study analysing the link
between GVC involvement and firms' efficiency. In fact, the impact of participation in GVCs on firms'
efficiency has been formerly investigated only by Manello et al. (2016) on the Italian automotive sec-
tor, whereas our paper deals with the entire Italian industry, thus providing results with a higher level
of generalisation.
A relevant strand of the extant literature focused on partial measures of firms' productivity, such as
labour productivity, or total factor productivity (TFP). However, interfirm differences or time changes
in TFP can be driven by different factors, such as individual improvements in technical efficiency
(moving closer to the production frontier), overall shifts of the technology frontier (due for example to
technological progress), as well as movements along the frontier connected to changes in operational
scale. The efficiency analysis performed in this paper explicitly focuses on pure technical efficiency,
defined as firms' ability to maximise output for given resources and technology. By excluding sources
of productivity changes due to technology progress and changes in scale, we aim at investigating to
what extent improvements in a firm's pure technical efficiency can be ascribed to the participation in
GVCs.
Furthermore, we explore heterogeneity across different forms of GVC governance. Our research
hypothesis is that the impact of GVCs on firms' efficiency is especially beneficial when relational
modes of participation are in place, so that through interfirm relationships within GVCs, SMEs can
get involved in strategic stages of production and find incentives and opportunities to raise their effi-
ciency. To allow for differential efficiency gains deriving from each specific mode of participation, we
explicitly analyse the role of GVC governance by defining a "relational mode" as the one occurring
when firms take part in product conception, R&D and design.
In addition, we also highlight other dimensions of heterogeneity, linked to firms' positioning in the
GVC (suppliers vs. final firms) and time length of participation in the GVC. In this way, we can assess
and compare the impact of participation in GVCs for final and supplier firms, and evaluate whether
the effects of joining or leaving a chain on firms' efficiency take place immediately or need a longer
time to emerge.
3 In accordance with this theoretical framework, in what follows we will distinguish between relational, conventional and
broad‐sense participation in GVCs, where "conventional" is the participation in GVCs characterised by "modular" or
"captive" governance and "broad‐sense" is participation in any kind of GVCs.
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