Bringing it together: Global value chain archetypes and multinational corporations’ business strategies

The previous section of this chapter introduces a general framework for MNCs’ objectives and business strategies; this section explores how these strategies interact with the characteristics of different GVC archetypes (table 2.4). Note that sectors within a given archetype still have very different characteristics—this table covers only the most common characteristics and MNCs’ business strategies.

Structural characteristics of global value chains across six archetypes

This report classifies sectors into six archetypes. This section elaborates on the structural characteristics of each of the six GVC archetypes and how these characteristics influence the business strategies of MNCs. There is still vast heterogeneity across sectors, segments, and tasks within each GVC archetype; this section focuses on the most salient features of each archetype and explains how sectors within an archetype can differ.

Commodities are natural resources, such as agricultural products, energy, or metals, that have a global market. Commodity markets are characterized by nearly homogeneous products and high fungibility. Still, different types of commodity producers have distinct characteristics and can vary vastly in production organization, supply chain management, and market power. For agricultural commodities, MNCs’ level of control is very low, their production length is short, and their suppliers are extremely diversified. As the most ancient industry, agriculture has very low barriers to entry and remains the only source of livelihood in many low-income areas. The four major agricultural commodity traders, Archer Daniels Midland, Bunge, Cargill, and Louis Dreyfus, collectively known as the “ABCD” companies, share a significant presence in many agricultural commodities; for example, they control as much as 90 percent of the global grain trade (Murphy, Burch, and Clapp 2012). Their main suppliers are numerous farmers, together with seed, fertilizer, agrochemical, and agricultural machinery companies. They sell agricultural products to all sorts of downstream buyers and final consumers. Despite their high market share, the lead firms have relatively low market power. The gross margin for the ABCD firms averages about 6 percent, and their average EBIT margin was only 2.3 percent in 2018.

In contrast to agricultural commodities, energy and metal GVCs are capital and knowledge intensive but do not create as many jobs. MNCs tend to have higher levels of control in these sectors, and equity investment is the most common mode by which they enter foreign markets. Production length is relatively short, and lead firms enjoy high market power and profitability because of the nonrenewable nature of the commodities and the high barriers to enter the market (for example, high sunk costs). Most commodities have inelastic supply in the short term: tiny changes in demand result in huge price fluctuations (Caldara, Cavallo, and Iacoviello 2016). Inelastic demand and supply often subject both commodity exporters and major commodity importers to magnified shocks.

Labor-intensive services encompass a hodgepodge of activities that have absorbed most unskilled labor in recent years. These industries include retail, wholesale,