Functional upgrading, Bargaining Power and Value Appropriation of Emerging Economy Producers

In order to accrue economic rent a firm not only has to create value for its customers, it must also be capable of appropriating this value. Without possessing value appropriation capabilities the firm is at risk of passing on the created value to its suppliers, customers or competitors. There is ample evidence that emerging economy firms inserted in global value chains generally have difficulties in appropriating the added value they create - either due to a very competitive industry structure with low entry barriers and numerous suppliers, or because buyers are controlling critical resources, such as strategic information about, and access to, end-users. This study explores two basic initiatives emerging economy firm may take to achieve higher value appropriation. One initiative is to appropriate more value from existing activities - typically assembly manufacturing - by acquiring more market knowledge and better negotiation skills. In this way bargaining power improves vis-a-vis buyers and emerging economy firms achieve more equal gains from the global value chain. Another initiative of emerging economy firms is to embark on functional upgrading, i.e. engage in new business activities that are less exposed to fierce price competition and therefore more lucrative. We test to what extent the two basic value appropriation initiatives have a positive effect on export performance of Vietnamese wood furniture manufacturers inserted in global value chains. 302 manufacturing companies were asked about functional upgrading in terms of the extent to which they had engaged in export-related down-stream activities (i.e. export marketing and sales) and export market intelligence. The companies also reported their negotiation skills (self-assessment) and export performance. The results of a path analysis (AMOS, SPSS) suggest that both of the two value appropriation initiatives have positive pay-offs in as much as they improve export performance significantly, though with bargaining power improving measures as the more rewarding initiative. Furthermore, the two initiatives are to some extent mutual supportive in achieving higher value appropriation.