Can We Still Understand Power in the Digital Economy Through Global Value Chains Theory?

The concept of global value chains describes how goods are produced and distributed across places and countries through linkages between firms. For instance, the relations involved for a raw coffee bean to be grown, harvested, exported, imported, processed, roasted, brewed and consumed. This framework has been used by development and international businesses scholars studying the structure and outcomes of globalised economic activity. 

In particular, global value chains theory has produced critical insights into how power operates in global business. Research in this field by authors such as Gereffi et al. (2005) has shown how powerful firms (called “lead firms”) exert control and influence (or “governance”) over other firms in their supply chains. These governance relations influence how profits are distributed amongst actors in the chain.

For instance, if a lead firm is able to exert high levels of governance over their suppliers – by instituting relations of dependence, and setting standards or rules about how goods are produced – they are likely to capture a greater share of the value being created in the chain. Starbucks, for example, is a well-known lead firm in the coffee value chain with extensive power over a large network of suppliers and intermediaries.

Understanding the nature of governance in different value chains is important to international development because it demonstrates how value is often extracted from firms and workers in low- and middle-income countries and captured by lead firms in high-income countries. In this way overall structures of marginalisation and dependency are perpetuated.

Critically and conversely, it offers insights into how developing countries might retain or “upgrade” their share of value in global value chains, including by extending control over more functions and processes in the value chain (for example, by processing coffee domestically rather than exporting it in raw form).

However, roles and relationships in global trade have been getting more and more complicated. The phenomenon of digitalisation, in particular, poses a challenge to the ability of global value chain frameworks to explain our contemporary global economy. This was the key focus of a workshop that took place from 14 to 16 September at the Weizenbaum Institut in Berlin, Germany. It brought together 23 researchers from around the world, including myself, who are working at the intersection of global value chains and digitalisation.

Digitalisation is affecting global value chains in myriad complex ways. Digital infrastructures and tools, including data, algorithms, the Internet of Things (IoT), and platforms, are increasingly central to value chain governance. For example, they might be used to monitor suppliers, mediate transactions, and manage logistics, possibly contributing to the governance capabilities – or power – of lead firms. Alternatively, they might reduce barriers and costs, and offer opportunities for new firms to enter or lead value chains, including firms from low- and middle-income countries.

Moreover, data as well as digital goods, services and systems like artificial intelligence entail their own value chains, or protracted linkages between actors and firms who perform different functions in the process of product and value creation. These new data and digital value chains are having profound impacts on labour relations and conditions, including for a growing pool of digital platform workers. From a development perspective, this raises the question of how Global South workers and firms are incorporated into these value chains, and how they may be advantaged or disadvantaged in these relationships.

Policymakers in low- and middle-income regions frequently base strategies on the hope that their countries can gain a comparative advantage in the production and trade of digital goods and services in order to “catch up” to more industrialised economies. However, it can be more difficult to understand value chains for intangible goods like data as opposed to tangible commodities which can be easily traced as they change hands across geographies over their lifecycle. So far, there is little evidence to suggest that these have reduced inequality and unevenness compared to traditional value chains.

Perhaps the most complicated question for global value chains scholars confronting the impact of digitalisation is the role of platforms. Platforms have emerged as defining economic actors in the digital age. There are many different types of platforms, including social media giants like Facebook, e-commerce platforms like eBay, digital labour platforms like Uber, and platforms that fall into two or more such categories, like Amazon.

Platforms have a fundamentally different business model to traditional lead firms in global value chains. Rather than simply producing or selling a product, they are more likely to make money by intermediating transactions between two parties, controlling flows of data or information, or selling users’ attention to advertisers. These business models rely on network effects, meaning they are only effective at scale if platforms are able to enrol a very large number of users relative to their competitors. As such, platforms are likely to prioritise market dominance and monopoly over immediate returns.

In the workshop we discussed at length whether and how we should conceptualise platforms as lead firms in global value chains. This was also the subject of a paper I authored last year with several colleagues. On the one hand, platforms exert enormous power over economic activities in order to accumulate value (including valuable data). This has important ramifications for global inequality and development because, according to the United Nations Conference on Trade and Development, platform ownership and power are highly concentrated in two countries – the United States and China – with other regions largely left behind. Key concepts from value chains theory, such as governance, might help us to better understand how platforms use digital tools to achieve influence over other economic actors, and how policy might be able to challenge this concentration of power and value.

On the other hand, platforms defy traditional global value chain frameworks, blurring the boundaries between firms and labour, inputs and outputs, and value forms, and exhibiting different imperatives and tendencies to traditional lead firms. To greater or lesser extents, these difficulties also arise in applying global value chain theories to all industrial ecosystems characterised by digital transformation, even those with traditional lead firms.

Are global value chains still relevant in a digitalised world then? Following a rich workshop where I had the opportunity to learn from the expertise of many experienced researchers, my sense is that we should keep asking the questions at the heart of global value chains research when we approach the global digitalised economy – who is creating the value, and who is capturing it? How are power and control exercised across firm boundaries? How does the trade of digital products, or digitalised trade processes, reduce or perpetuate inequalities between and within countries?

By asking these questions, we can evolve global value chains as a heuristic framework while retaining a research agenda focused on helping to inform policy responses for equality, inclusion and a fair distribution of gains in the digital economy.