Global Value Chains
A global value chain provides an innovation system bounded by a sector, also referred to as a
sectoral innovation sytem (Malerba 2011). Global value chains describe the full range of activities
which are required to bring a product or service from conception, through different phases of
production (involving a combination of physical transformation and inputs of various producer
services), delivery to final customers, and final disposal after use (Kaplinsky and Morris 2000). All
Local innovation system
Global value chains
Absorptive capacity InnovationIHS Working Paper 27. 2013. Innovation in SMEs. The case of home accessories in Yogyakarta, Indonesia 3
firms within a global value chain share cognitive proximity: they share a deep and specialized
understanding of a sector, including its technological regime and market specificities. They also
operate within the same governance structure of the sector. The same industrial standards and
industrial trade agreements apply. Being embedded within a global value chain thus provides
access to specific and relevant knowledge, which enables firms to innovate. The opportunities of
firms to innovate however depend on the strategies of global buyers and mode of governance of
value chains (Gereffi 2005). There are five different modes of governance. The first is arm’s
length relationships. This offers limited opportunities to innovate, as buyers and suppliers
transact but do not interact. Suppliers have access to codified knowledge, but cannot bank on
their contacts to acquire additional tacit knowledge. A second mode is captive value chains. These
also provide limited opportunity to innovate, as powerful global buyers control brands, designs,
marketing and/or market relations. It depends on the strategies of global buyers which activities
suppliers will and will not perform. This severely limits opportunities of suppliers to innovate. As
suppliers don’t conduct allactivities themselves, it is expensive and risky for them to switch
buyers. They are ‘captive’ (Gereffi 2005: 84, Humphrey and Schmidt 2002). Relational value
chains, a third mode, provide more opportunity to innovate, as suppliers conduct more activities
themselves, have more buyers and can switch buyers at lower cost. Suppliers and buyers develop
deep and wide interactions, allowing a flow of tacit knowledge. However, strategies of global
buyers may still limit opportunities of suppliers to innovate, because a large number of suppliers
depend on a small number of buyers. Buyers may therefore still monopolize specific activities in
order to retain a larger share of the cake. In a modular global value chain, suppliers have even
more opportunity to innovate. Modular suppliers are specialized in components of final products
(modules), which they sell to more buyers. Due to the specificity of their products, they are able
to develop deep interactions with buyers on a more equal footing. Finally, in vertical integration
possibilities to innovate are highest. When a multinational owns a supplier, it will fully support its
innovation processes. Therefore, though all firms benefit from access to specific knowledge in
global value chains, opportunities to realize innovations depend on the mode of governance and
strategies of global buyers