3.1 Global value chain participation and internationalization

FIGURE 3.1 Global value chain participation and internationalization

Internationalization pathways to GVC participation

Supplier linkages with international firms

Aim: Learn about global product standards, markets Prerequisites: Minimum quality, quantity, competitive price GVC upgrading

Domestic firm

Strategic alliances with MNCs (coproduction)

Aim: Access essential foreign know-how, technology, markets Prerequisites: Complementary skills, knowledge, assets to MNC

Direct exporting

Aim: Expand sales abroad Prerequisites: Minimum productivity, market knowledge

Outward foreign direct investment

Aim: Acquire foreign technology, market entry Prerequisites: Large size, financially solvent, organizational capacity Learning process Competitiveness

Develop production (capabilities)

Acquire foreign market knowledge Firm products (type, complexity)

Firm performance (sales, exporting, productivity)

Source: World Bank elaboration of the literature. Note: GVC = global value chain; MNC = multinational corporation.

Companies generally internationalize in a cautious, stepwise process involving strategic planning and risk minimization. In general, companies will choose the pathways that appear more familiar and less risky and will gradually move into deeper levels of participation as they gain experience and confidence in their production capabilities and foreign market knowledge (de Caldas Lima 2008).

Participation in a GVC can offer important learning opportunities to domestic firms. A wide set of literature, ranging from international economics to business to development, has emphasized the benefits that participation in GVCs can have on the performance of firms in emerging market economies (Alcacer and Oxley 2014; Gereffi et al. 2001; Gereffi, Humphrey, and Sturgeon 2005; Meyer and Sinani 2009). A key reason for these benefits is that GVC participation opens up firms to new levels of competition. International buyers typically have stronger preferences for product quality than domestic ones, which forces GVC firms to upgrade their production and managerial practices to satisfy client demands (Atkin et al. 2017; Khandelwal and Teachout 2016; Newman et al. 2016). To remain competitive, firms need to learn two types of skills and knowledge. The first is essential production capabilities. Firms need to prepare themselves to compete technologically, to meet the necessary quality standards for the products they produce, and to be productive enough to compete internationally (Pedersen and Petersen 1998). The second is foreign market knowledge. Firms need to learn the specific details of the overseas markets they enter, such as their business climates, cultural patterns, market structures, and consumer characteristics (Johanson and Vahlne 1977).