When Suppliers Climb the Value Chain: A Theory of Value Distribution in Vertical Relationships

Forthcoming at Management Science

43 Pages Posted: 19 May 2014 Last revised: 25 Sep 2015

Zhixi Wan

University of Oregon - Department of Operations and Business Analytics

Brian Wu

University of Michigan, Stephen M. Ross School of Business

Date Written: July 13, 2015

Abstract

While offshore outsourcing has become an important strategy to lower production costs among Western firms, it gives rise to the phenomenon of value chain climbing – suppliers in emerging markets can develop capabilities by supplying, with aspirations to compete with the buyers in the product market. We build an analytical model to study the impact of value chain climbing on value distribution in vertical relationships. The analysis identifies a set of dominant relationships, characterizes how the buyer’s optimal choice among these relationships depends on firms’ relative competitiveness in the product market and the supplier’s speed of capability development, and shows how the optimal choice evolves with the dynamics of the supplier’s capability development. The results provide new insights into our understanding of value distribution in vertical relationships across different contexts and over time. By endogenizing the supplier’s entry into the product market, our study enriches the literatures on vertical relationships, market entry, and the management of global value chains.

Keywords: Value chain climbing, value chain, value distribution, capabilities, competition, market entry

Suggested Citation

Wan, Zhixi and Wu, Brian, When Suppliers Climb the Value Chain: A Theory of Value Distribution in Vertical Relationships (July 13, 2015). Forthcoming at Management Science. Available at SSRN: https://ssrn.com/abstract=2438489 or http://dx.doi.org/10.2139/ssrn.2438489

Zhixi Wan

University of Oregon - Department of Operations and Business Analytics ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

Brian Wu (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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