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The ‘Smile Curve’: where Value is Added along Supply Chains

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  • Armando Rungi

    (IMT Lucca)

  • Davide Del Prete

    (IMT Lucca)

Abstract

In this paper we analyze where value is added along supply chains on a sample of more than 2 million of firms in the European Union. We detect a non-linear U-shaped relationship between the value added generated by firms and their position on a productive sequence, for which tasks at the top and at the bottom show higher value added. Our findings are in line with previous hypotheses on the existence of a so-called 'smile curve', resumed by both business and economic studies and discussed at length in international fora. Our results are robust to different empirical strategies for flexible functional forms. As far as we know, ours is the first firm-level successful attempt to test for value generation along supply chains. Further, we find empirical support for a phenomenon of domestic retention of value added by MNEs, which may prefer keeping at home the tasks at higher potential to safeguard present and future competitive advantages. By country, intermediate stages of production are at higher value when performed by foreign affiliates, whereas domestic producers retain higher value at the very top and at the very bottom of the supply chain, organized either as independent suppliers or as domestic affiliates. Although an economic theory is still missing for explaining how and why value generation is non-linear along a typical technological sequence, here we argue that a microfoundation with firm-level data is useful for understanding the growth potential of countries' specialization patterns along different segments of supply chains.

Suggested Citation

  • Armando Rungi & Davide Del Prete, 2017. "The ‘Smile Curve’: where Value is Added along Supply Chains," Development Working Papers 428, Centro Studi Luca d'Agliano, University of Milano.
  • Handle: RePEc:csl:devewp:428
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    References listed on IDEAS

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    Cited by:

    1. Jona-Lasinio, Cecilia & Manzocchi, Stefano & Meliciani, Valentina, 2019. "Knowledge based capital and value creation in global supply chains," Technological Forecasting and Social Change, Elsevier, vol. 148(C).
    2. Cecilia Jona Lasinio & Stefano Manzocchi & Valentina Meliciani, 2017. "Knowledge Based Capital and Value Creation in Global Supply Chains," Working Papers LuissLab 17134, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    3. Pérez-Sánchez, Laura & Velasco-Fernández, Raúl & Giampietro, Mario, 2021. "The international division of labor and embodied working time in trade for the US, the EU and China," Ecological Economics, Elsevier, vol. 180(C).
    4. Davide Del Prete & Giorgia Giovannetti & Enrico Marvasi, 2017. "Global value chains participation and productivity gains for North African firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(4), pages 675-701, November.
    5. Benoît Mahy & François Rycx & Guillaume Vermeylen & Mélanie Volral, 2018. "Productivity, wages and profits: Does firms’ position in the value chain matter?," Working Paper Research 358, National Bank of Belgium.
    6. Roman Stöllinger, 2019. "Functional Specialisation in Global Value Chains and the Middle-Income Trap," wiiw Research Reports 441, The Vienna Institute for International Economic Studies, wiiw.

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    More about this item

    Keywords

    global value chains; global supply chains; downstreamness; smile curve; downstreamness; value added; heterogeneous firms; multinational enterprises;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F15 - International Economics - - Trade - - - Economic Integration
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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