Externalities in global value chains: Firm solutions for regulation challenges

Abstract

Negative externalities in global value chains (GVCs) create challenges for regulation. We establish conditions under which firms are more likely to adapt their GVCs to rectify negative externalities that occur at global scale. Firms in GVCs vary in relation to their active involvement in attending to negative externalities in a predictable way, according to their awareness (A) of these externalities, motivation (M) to address them, and the capability (C) to do so. Firms in GVCs can self-correct imperfections by strategy changes, or new firms can be recruited into the GVC with the awareness, motivation, and the capability to attend to negative externalities. National governments may find these externalities to be a significant policy challenge, particularly when they extend across national jurisdictions. Managerial summary: Private mechanisms, through firm strategy or new entrants into an industry, can address negative externalities created in GVCs. The agency of GVC members is crucial in self-correction via awareness, driven by GVC integration; motivation to act, driven by GVC accountability; and the capability to implement the necessary changes, driven by GVC leadership. GVCs with more exchanges of knowledge and information among members will be more aware of the costs they generate on third parties. GVCs with

Responsibility boundaries and the governance of global value chains: The interplay of efficiency, ethical, and institutional pressures in global strategy

“…Following insights from Buckley and Liesch (2023), the decision for firms within a GVC to address negative externalities depends upon their awareness, motivation, and capabilities (A-M-C) to do so. Importantly, they also emphasize how public policy interventions can affect the extent of a firm's awareness, motivation, and capability to act.…”

“…Importantly, they also emphasize how public policy interventions can affect the extent of a firm's awareness, motivation, and capability to act. Implicit in the A‐M‐C framework is the importance of the across‐time dimension; indeed, as Buckley and Liesch (2023, p. 433) explain, “[t]he components of A‐M‐C possibly influence each other through time, such that awareness may lead to subsequent investment in capabilities.” Accordingly, my investigation of the strategic responses of individual firms to negative externalities in the GVC involves considering the dynamic processes by which various external pressures, including the institutionalization of responsibility boundaries through public policy, can interact to change a firm's (and the wider industry's) awareness, motivation, and capabilities in ways that lead to strategic changes in GVC governance.…”

“…Recent scholarly efforts to integrate the GVC and global strategy literatures argue for a more careful consideration of the interplay between a firm's position in the GVC and its development and implementation of global strategies (Pananond et al, 2020). Additionally, whether firms take the initiative, apart from regulatory requirements, to make strategic changes to address negative externalities in the value chain has been explored as a function of their awareness, motivation, and capability (Buckley & Liesch, 2023). Missing from prior research are studies that consider these multiple dynamics in their totality, to systematically observe how commonly experienced manifestations of efficiency, ethical, and institutional pressures affect firms' decisions about the strategic governance of their GVC.…”

“…Attempts to balance these countervailing pressures for both efficient and ethical GVC governance have focused on preserving the efficiency of de‐integrated GVCs through a “cascading compliance model,” whereby lead firms use codes of conduct and monitoring to extend their boundaries of control over suppliers without altering their boundaries of ownership—that is, through quasi‐ internalization rather than internalization (Narula, 2019; Van Assche & Narula, 2023). Moreover, negative externalities within GVCs can sometimes result in public policy changes that institutionalize these expanded responsibility boundaries when firms do not possess adequate awareness, motivation, and/or capabilities to address these externalities themselves (Buckley & Liesch, 2023).…”

“…Accordingly, in addition to exploring how firm global strategy and GVC structure are related (i.e., Pananond et al, 2020) and specifically identifying how GVC structures can inhibit "cascading compliance" and, therefore, demand strategic value chain restructuring through internalization, these findings build on Buckley and Liesch (2023) by highlighting how the introduction of public policy influences the decisions of individual firms to implement strategic initiatives to address negative externalities in the GVC. The expansion of responsibility boundaries institutionalized through a change in public policy created a collective action problem that opened up a space for individual firms to create and capture transactional value through increasing value chain integration.…”