An Inquiry into the Division of Gains in Global High-Tech Supply Chains: Theory and Evidence

Abstract

This paper examines the mechanisms underlying the division of gains in high-tech global supply chains using a partial equilibrium version of the hierarchy-assignment modeling approach. Motivated by the widely discussed empirical observation known as the “smile curve” in international business literature, this study demonstrates through a theoretical model that the validity of the U-shaped profit-sharing pattern along high-tech supply chains hinges on the interplay between two competing effects. The first effect is termed the market power gap effect, while the second is the entry cost gap effect. The paper illustrates that if both two effects for upstream and downstream firms dominate those for midstream firms, the U-shaped division of gains in high-tech supply chains holds true. To test our theoretical predictions, we utilize theWorld Input-Output Database (WIOD) at the industry level and find that the empirical results align broadly with the proposed theories. Additionally, our findings remain robust when applying firm-level data from the US to further validate our theoretical predictions. The theoretical insights presented have significant implications for industrial development, particularly in discussions surrounding capability upgrading and innovation in high -tech industries along global value chains.

Keywords: High-tech global supply chains, Smile curve, Market power gap effect, Entry cost gap effect.