Toward a Dynamic Model of the Industrial Upgrading Micro-mechanism under Global Value Chains

61 Pages Posted: 2 Feb 2019 Last revised: 2 Jul 2020

See all articles by Jim Huangnan Shen

Jim Huangnan Shen

University of London, School of Oriental and African Studies (SOAS), Economics; Center for International Development, Harvard Kennedy School, Harvard University

Chien-Chiang Lee

Nanchang University

Jun Zhang

Fudan University - China Center for Economic Studies (CCES)

Luyao Zhang

Duke Kunshan University

Leilei Shen

Kansas State University - Department of Economics

Date Written: January 27, 2019

Abstract

This research constructs a simple dynamic model to illustrate the micro-mechanism of industrial upgrading along the global value chains. Our model demonstrates the following results. (1) Firms in the value chains manage to upgrade from downstream to upstream stages by acquiring higher profitability if and only if the following 3 conditions are satisfied. First, the increasing rate of sunk cost (including R&D expenditure) over sequential stages of production cannot be sufficiently large (endogenous sunk cost effect). Second, the decreasing rate of change of intermediate input demand with respect to the price set by firms at a production stage cannot be sufficiently high (intermediate input price effect). Third, the decreasing rate of change of intermediate input demand with respect to the pricing dynamics over the sequential stages of production cannot be sufficiently large (sequential pricing uncertainty effect). (2) The level of total cost islower when firms climb from downstream stages to relatively more upstream stages in the value chains if and only if the decreasing rate of change of input demand with respect to the price set by firms at a production stage is sufficiently large. (3) The output level is higher when the downstream firms move towards relatively more upstream stages if and only if the decreasing rate of change of input demand with respect to the price set by firms at a production stage is not sufficiently high. (4) The price level decreases when a firm at a production stage moves from downstream to relatively more upstream stages. At the end of this paper, we also apply our theoretical framework into the current debate on the rise of the unbundling production pattern as well as a nation’s industrial development during this era of an increasingly globalized world with reference to some empirical evidence focusing on China.

Keywords: micro-mechanism; industrial upgrading; downstream stages; upstream stages; profitability; total cost

JEL Classification: F1, D2, D4

Suggested Citation

Shen, Jim Huangnan and Lee, Chien-Chiang and Zhang, Jun and Zhang, Luyao and Shen, Leilei, Toward a Dynamic Model of the Industrial Upgrading Micro-mechanism under Global Value Chains (January 27, 2019). Available at SSRN: https://ssrn.com/abstract=3323699 or http://dx.doi.org/10.2139/ssrn.3323699

Jim Huangnan Shen (Contact Author)

University of London, School of Oriental and African Studies (SOAS), Economics ( email )

London, WC1E 7HU
United Kingdom

Center for International Development, Harvard Kennedy School, Harvard University ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Chien-Chiang Lee

Nanchang University ( email )

999 Xuefu Avenue
Hong Gu Tan New District
Nanchang, Jiangxi 330031
China
330031 (Fax)

Jun Zhang

Fudan University - China Center for Economic Studies (CCES) ( email )

China

Luyao Zhang

Duke Kunshan University ( email )

No. 8 Duke Avenue
Kunshan, Jiangsu 215316
China

HOME PAGE: http://scholars.duke.edu/person/luyao.zhang

Leilei Shen

Kansas State University - Department of Economics ( email )

Manhattan, KS 66506-4001
United States

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