Subsidiary upgrading and global value chain governance in the multinational enterprise

• Date: 01 August 2020
• Published date: 01 August 2020
• DOI: http://doi.org/10.1002/gsj.1387
• Author: Giulio Buciuni,Majella Giblin,Paul Ryan,Ulf Andersson

SPECIAL ISSUE ARTICLE

Subsidiary upgrading and global value chain

governance in the multinational enterprise

Paul Ryan

1

| Giulio Buciuni

1

| Majella Giblin

2

|

Ulf Andersson

3,4

1

Trinity Business School, Trinity College

Dublin, The University of Dublin,

Dublin, Ireland

2

J.E. Cairnes School of Business and

Economics, National University of

Ireland, Galway, Ireland

3

School of Business, Society and

Engineering, Malardalen University,

Vasteras, Sweden

4

Department of Strategy and

Entrepreneurship, BI Norwegian

Business School, Oslo, Norway

Correspondence

Paul Ryan, Trinity Business School,

Trinity College Dublin, The University of

Dublin, Dublin, Ireland.

Email: paul.ryan@tcd.ie

Abstract

Research Summary: Upgrading and governance in

global value chains (GVCs) have been understood

mainly through studying the buyer–supplier transac-

tion, 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 sub-

sidiary 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 Summary: The 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 sub-

sidiary can reach. Innovation is in fact a necessary con-

dition for a strategic role for the coordination of a

GVC. A subsidiary's management team can deliberately

Received: 24 February 2018 Revised: 28 January 2020 Accepted: 10 March 2020

DOI: 10.1002/gsj.1387

496 © 2020 Strategic Management Society Global Strategy Journal. 2020;10:496–519.wileyonlinelibrary.com/journal/gsj

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.

KEYWORDS

coordination, evolution, governance, GVC, hierarchy, MNE

subsidiary, subsidiary, upgrading

1|INTRODUCTION

A key competitive advantage of the modern multinational enterprise (MNE) resides in the

capacity to locate its value chain activities in dispersed global sites where conditions are particu-

larly salient (Andersson, Dasi, Mudambi, & Pedersen, 2016; Contractor, Kumar, Kundu, &

Pedersen, 2010; Gereffi, 1999; Kano, 2018; Mudambi, 2008). In standard global value chain

(GVC) theory, MNEs, commonly from advanced economies, are responsible for higher order

activities such as R&D and marketing, while the more standardized activities of production are

shifted to lower cost producers, usually via subcontractors located in emerging economies

(Buciuni & Finotto, 2016; Contractor et al., 2010; Pananond, 2013). As a result, the motive of

much GVC analysis is to shed light on these external buyer–supplier relationships, where the

actors involved in the transaction are generally two independent firms.

In some circumstances however, subcontracting activities can leave the MNE vulnerable

to knowledge leakage (Berry, 2017; Contractor, 2019; Sofka, de Faria, & Shehu, 2018).

This is the case for many high-tech MNEs faced with a tension between the benefits of

global outsourcing of production and product innovation and the need for sustained capa-

bilities and IP protection (de Faria & Sofka, 2010; Monteiro, Mol, & Birkinshaw, 2017;

Perri, Andersson, Nell, & Santangelo, 2013). Governance of the GVC must account for any

trade-off between knowledge sourcing opportunities and spillover risks. Knowledge sourc-

ing may involve external relations with attractive local partners such as universities

(Cantwell & Mudambi, 2011). If the protection imperative is greater, since IP or capabili-

ties loss to current or potential new competitors would harm the MNE, then the efficiency

and cost benefits of global outsourcing to subcontractors are outweighed by the risks. The

resultant strategy remains GVC disaggregation, but in-house offshore across global subsidi-

aries. While significantly advancing the understanding of the globa lization of production

activities, GVC theory has fallen somewhat short of providing an effective framework for

the upgrading and governance processes occurring in GVCs situated within an MNE. As a

result, existing studies in GVC have neglected to take account of a set of mechanisms that

the IB discipline would naturally focus on, such as the mechanisms underlying changes in

the coordination patterns of intra-MNE GVC governance and the upgrading of global sub-

sidiariesacrosstimeandspace.

RYAN ET AL.497