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Upgrading and Value Capture in Global Value Chains in Hungary: More Complex than What the Smile Curve Suggests

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Foreign Direct Investment in Central and Eastern Europe

Part of the book series: Studies in Economic Transition ((SET))

Abstract

This chapter presents a conceptual model to explain why the upgrading of MNCs’ manufacturing subsidiaries fails to translate into additional value capture for upgraded actors. The model, a dynamic version of Mudambi’s (J Econ Geogr 8(5): 699–725, 2008) smile curve, integrates the concept of value capture. It is shown that over time, the shape of the original smile curve transforms. The curve shifts downwards, which represents the shrinking margins of actors. This effect can be countered through upgrading. The bottom part of the curve becomes flatter: this represents the commoditisation of business functions undertaken by upgraded subsidiaries. The sides become steeper as a result of changes in the specialisation of actors at the sides of the curve. The smile is transformed into a “bathtub.”

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Notes

  1. 1.

    See for example OECD (2013), and the recently revived discussion about the middle-income trap (Eichengreen et al. 2013; Kharas 2011).

  2. 2.

    Pavlínek (2015), however, provides a more nuanced view on factors that moderate the impact of the crisis in peripheral regions, such as Central and Eastern Europe.

  3. 3.

    Upgrading can take several forms. According to Humphrey and Schmitz’s (2002) taxonomy, upgrading may take place in the field of the products manufactured by the given company. In this case, upgrading refers to the company’s shift to higher-than-before unit-value products. Upgrading may be manifested in the efficiency improvement of the production processes (process upgrading), in the take-up of additional (more knowledge-intensive and higher value generating) business functions by companies specialised previously only on production (functional upgrading). Finally, upgrading may be intersectoral, when the accumulated competencies are applied in new sectors that promise larger rents and beneficial externalities.

  4. 4.

    Cattaneo et al. (2010) documented the rising pace of consumption growth in the so-called emerging, large markets of the global South. They assert that the rapid growth of otherwise large domestic markets prompts foreign and domestic producers to make further investments, which leads to a virtuous circle of growth and innovation. Rapid growth of host country markets enhances foreign investors’ local commitment and facilitates the upgrading of local subsidiaries, as it was demonstrated among others by Luo (2007).

  5. 5.

    Total income retained after covering costs.

  6. 6.

    Interviews were carried out over the period of three years, between 2011 and 2013. The project, entitled “Measuring the upgrading performance of MNCs’ Hungarian subsidiaries”, was funded by the Hungarian National Scientific and Research Fund (grant number K83982). Interview results have been presented and analysed in companion papers (Szalavetz 2012, 2013, 2015).

  7. 7.

    There was an outlier in the sample, where practically all employees were white-collar, non-production ones. Data of this firm were not included in this average.

  8. 8.

    The average index of sales volume was 2.65 in 2013 (2008 = 1).

  9. 9.

    In Arrighi and Dranghel’s wording (1986, 11): “Core activities are those that conquer a large share of the total surplus produced within a commodity chain, and peripheral activities are those that command little or no such surplus.” Accordingly, and drawing on Mudambi’s conceptualisation of GVCs as a “smile curve”, we refer to production activities as peripheral activities.

  10. 10.

    Mode 3 upgrading (a shift to more advanced activities, such as design or R&D, instead of production) is not discussed here.

  11. 11.

    See Borghi et al. (2013) about the profitability of financial management.

  12. 12.

    In Farkas’ (2011, 31) wording: “…the [present] form of labour division may become permanent between the economies of the old and the new, post-communist member states, which could make the present asymmetrical interdependency long-lasting. However, this makes the convergence of the NMS illusory in the long run.”

  13. 13.

    Scrutinising CEE economies’ potential to benefit from FDI spillovers, Szent-Iványi and Vigvári (2012) constructed a composite indicator (the Spillover Potential Index, SPI) and found that although each CEE economy could, to some extent, improve its SPI in the mid-2000s, there are substantial differences among them, with the Czech Republic being the clear leader with respect to all components of the composite index.

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  1. Centre of Economic and Regional Studies of the Hungarian Academy of Sciences (MTA KRTK), Budapest, Hungary

    Andrea Szalavetz

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  1. Aston Centre for Europe, Aston University, Birmingham, United Kingdom

    Balázs Szent-Iványi

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Szalavetz, A. (2017). Upgrading and Value Capture in Global Value Chains in Hungary: More Complex than What the Smile Curve Suggests. In: Szent-Iványi, B. (eds) Foreign Direct Investment in Central and Eastern Europe. Studies in Economic Transition. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-40496-7_6

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