Volume 46 Number 182,
July-September 2015
Global Value Chains:
Considerations from the Capital Cycle

Seyka Sandoval*

Date received: October 21, 2014. Date accepted: April 15, 2015

Abstract

The objective of this article is to analyze the value chain from the perspective of the capital cycle approach, an exercise that allows us to critically review the foundations upon which the value chain is based as a way to share in the global benefits of the production and circulation of commodities. This paper introduces the hypothesis that innovation is the fundamental cause behind the interdependence of capitals and the necessary precursor to the securitization process. In that sense, it would also be the ultimate cause of governance.

Keywords: Value chains, capital cycle, production and circulation of commodities, governance, innovation.

INTRODUCTION

It was only a short while ago1 that the study of value chains entered the academic discourse, with a particular focus on the spatial organization of capital in the production of goods or services, in a context of interdependent competition. Recently, this capital organization has been explained by the category of governance, which defines a structure, more or less horizontal or vertical, that explains the share of total profits produced by the capitals involved in the chain. Beginning with this proposal, some scholars have contended that the development strategy of capitals and countries should be viewed as a function of the governance of the chain or chains in which said capital and/or country desires to participate. In other words, the rules set by the leader of the chain constitute the conditions for competitiveness. In this context, the existence of governance is justified based on strategic assets that produce relative positions of monopoly/monopony.

All of this is important for two reasons. The first is that it considers new aspects in the study of development2 and the second is that these new proposals could influence the real management of economic strategies and policy.

International bodies such as the World Trade Organization (WTO), the United Nations Conference for Trade and Development (UNCTAD), the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), the World Bank (WB), the Global Economic Forum (GEF), banks, foundations, organizations, and some leading and developing economies, are researching, creating, and implementing in a decided fashion the policy manuals, indicators, and strategies related to the requirements with which companies and economies must comply so as to participate and advance in the value chain, the structure of globalization around which trade is increasingly organized.3

The implications of this are varied, but in general, can be summarized in the concern for the precision of a novel proposal that would seek to determine the course of the public and private policies of countries and companies. The wealth of research by academics and policymakers on the topic is still insufficient in light of the scope of the analytical framework under discussion.

This paper in particular will aim to analyze the value chain using the capital cycle approach, an exercise that will allow us to critically review the foundation upon which the value chain is based, as a way to share in the global benefits of the production and circulation of commodities.

The capital cycle approach was chosen because it allows for an abstract analysis of the value chain taken as a whole, beyond the mere articulation of autonomous activities around a use-value. Beginning with the cycle, it is possible to find the origin of the creation and distribution of value and profit in a system such as the value chain and examine the viability of policy proposals that aim to increase the profit share for the capitals involved.4

This paper therefore introduces the hypothesis that innovation is the fundamental cause of interdependence and a necessary condition for the process of valorization. In this sense, innovation is also the ultimate cause of governance.5

The first section describes the methodology using an analytic example, with the participation of three capitals, whose interplay is useful for a qualitative demonstration of the hypothesis suggested. The assertions of this paper are based on works by Karl Marx and J.A. Schumpeter. The idea was to establish an analytical structure to show readers the general concept of the division of labor and innovation, both the result of, on the first and second order, respectively, competition in the equalizing of the profit rate.6

The second section of the paper discusses the definition of governance and its implications, putting them to the test with a brief example that demonstrates some of its challenges. Then, through the lens of the methodology proposed in the first section, this paper presents its central argument in response to the aforementioned hypothesis.

Although the scope of this paper is rather general and introductory, its contribution to the conversation is to encourage readers to question central aspects of the concept of governance, justified by the existence of monopolistic sectors, which would seem to emerge without any explanation besides the ownership of specific assets. The hypothesis proposed here resolves this conundrum by introducing the factor of innovation. Finally, this paper also discusses the existence and validity of the requirements set by major companies/enterprises/corporations as the condition to participate in and climb up the value chain.

This paper operates on the assumptions of the critique of the political economy as a basic tool of analysis, not so as to be dogmatic, but rather for practical purposes. It is first necessary to establish the argument of the critique of the phenomenon of value chains, and to do so, it is essential to begin with the foundation this paper draws on as a model, in the hope that delving deeper into the topic will eventually lead to a more complex understanding of this foundation. Finally, this paper presents its conclusions.



THE CAPITAL CYCLE: THE METHODOLOGY

The explanatory exercise presented here is based on the capital cycle methodology set forth by Karl Marx (1876, Volume II, Section 1 and 2) and aspects related to profit and price formation (Volume III, Section 2), as well as some ideas contributed by J.A. Schumpeter regarding the topic of innovation in his works The Theory of Economic Development (1912) and Economic Cycles (1939). This section aims to qualitatively demonstrate the growing interdependence of the division of labor among capitals as the consequence of innovation.

The capital cycle is a process of metamorphosis that characterizes the production and circulation of goods and services, as the necessary precursor for the processes of valorization and realization, which explains the capital accumulation cycle as the motor of the economic system.7 Its general formula is.

M – L, MP …P…C' – M'

Where M is money, L is the labor power, MP refers to means of production, P is productive capital, C' is commodity-capital and M' is money-capital (Marx, 1976, Volume II, Section 1: 29-57).

We shall suppose, to begin with, a single capital cycle, that is, the production of a single commodity. Imagine an initial quantity of money, M0, and two economic actors, one of whom possesses M0, and the other of whom possesses his labor power and sells it freely, that is, M0 – L (purchase of labor power, which is at the same time L – M0, the sale of labor power; here we will have to assume for practical purposes that the laborer spends all of his income on consumption). Moreover, imagine that the owner of M0 has discovered a novel combination8 to produce the commodity C0, which we will call endogenous innovation,9 and which will be made concrete in MP. As a result, we have the cycle of M0 in the production and circulation of C0':

M0 – L, MP…P…C0' – M0' (1)

C0' is the result and synthesis of the valorization process of M0.10 Following the approach described here, C0' has a higher value than the sum of its parts given the peculiar nature of the L, which produces value when it is productively consumed. Let us suppose that upon being sold, C0' restores the value of its constituent parts (L and MP) plus the excess or surplus generated, and returns to its initial form in the cycle, no longer as money, but now as money-capital M0'. In this context, the sale of C0' must also dialectically entail its purchase. Let us suppose that this purchase is the transaction between the owner of C0' and the capitalists and laborers, who acquire it for their personal use; C0' concretely exits the sphere of circulation and is now realized. The result is that the cycle starts once again:

M0' – L, MP…P…C2 – M02 (1.1)

The primes have been replaced with natural numbers to indicate the iterations of the cycle, that is, the number of times the capital in question has reached realization.11 Let us now suppose that, on this second time around, MP, the endogenous innovation in the M0 cycle that has just been completed, is supplanted by an exogenous innovation,12 by another MP introduced in the third round of M0, a new innovation called C1’:

M02 – L, C1'…P…C03 – M03 (1.2)

C1’ has a dual function. It is the means of production in the cycle of M02, and the result of the process of valorization—commodity capital—in the M1 cycle, the investment made in innovation has replaced the MP in the M0 cycle, increasing the division of labor among capitals:13

M1 – L, MP…C1'– M1' (2)

The process of realization in M1, the sale (C1'– M1') is at the same time the purchase (M02 – C1'), and as such (M1’=.x M02), where .x is a percentage of M02, because x M02 was invested in L, C1', and in capitalist consumption. Here, the consumption of C1', unlike C0’ and C02, is productive, acting in a different cycle.

The cycles of M02 and M1 are now interdependent, meaning that in order for M02 to acquire C1' through purchase as an element of the valorization process, M1 must realize C1' through the sale. In this way, the purchase, the vehicle for the process of valorization, is simultaneously the sale, the act of realization.

If we repeat the assumption that an innovation is introduced, now in the M1 cycle, the formula looks like this:

M1' – L, C2'…P…C2 – M12 (2.1)

MP, the endogenous innovation in M1, has been replaced in the second round by C2', entailing a revolution in the form of producing C12. In other words, C1' and C12, as separate outcomes in time in the M1 cycle, are an expression of how the cycle evolves through innovation. In general, C1n is always the result of the valorization process of M1n; particularly, its concrete expression is modified depending on the changes that the innovation introduces in its production and circulation.

C2' would be the result of:

M2 – L, MP…P…C2’ – M2', so M2' = .xM1', or
M2' = .x(.x M02) = .x2 M02, because M1' = .x M02 (3)

M2 is here a new capital that joins the division of labor starting with the introduction of a new commodity C2', which is defined as exogenous innovation in M1'. The interdependence has been amplified in the sense that the result of the valorization process of M2, that is, C2', is simultaneously the means of production in the production process of the cycle M1' – L, C2'…P…C12 . In turn, the result of the valorization process of C12 is the means of production that would be used in the production process of the M03 cycle.

This journey through the conditions in their material form, which are interdependent processes of production and valorization, is justified in light of the growing division of labor, which is manifest in increasingly vast limitations on the space for reproduction and realization, thanks to the presence of innovation.

When production by means of wage-labour becomes universal, commodity production is bound to be the general form of production. This mode of production, once it is assumed to be general, carries in its work an ever increasing division of social labour, that is to say an ever growing differentiation of the articles which are produced in the form of commodities by a definite capitalist, ever greater division of complementary processes of production into independent processes (Marx, 1976, Volume II, Section 1: 42).

This interdependency, however, transcends the use-values technically articulated in the different capital cycles, tying the processes of realization together, which in the formula presented here is written as: M2' = .xM1', or rather, M2' = .x(.x M02) = .x2 M02.

The realization of M2, that is, the sale C2' – M2', is at the same time the purchase of M1' – C2', a part of M1' (.xM1') invested in the means of production C2', which is why the realization of M2 depends on the realization of M1, thus (M2' = .xM1'), and for M1 to be realized, another sale must occur, C1’ – M1’, which in turn is the purchase M02 – C1', and because it is not possible to make a purchase without something else being sold, the realization of M1 depends on the realization of M01 – C02 – M02, which is achieved through the consumption of capitalists and laborers. When this happens, the M02 cycle is renewed again, acquiring L and C1', in this way realizing M1' (C1' – M1'), while also permitting that the M1’ cycle begin again with the purchase of L and C2', thereby realizing M2 (C2' – M2'). This concatenation permits, schematically, M1' to be replaced by .x M02 in M2' = .xM1', because M1' = .x M02, so M2' = .x(.x M02) = .x>2 M02, proving the interdependency in the realization of value among the capitals involved.14

Up until this point, we have assumed that each capital that joins the cycle for the first time does so starting with an innovation that functions as the means of production in a new cycle; for example, C1' in M02 and C2' in M1’. We place these innovations solely in the synergy between L and MP, whose result is P, the productive capital, because pursuant to the methodology used here, it is only in this process of transformation that capital gains value. This assumption is important because it maintains coherence with the hypothesis that innovation is the precursor to the process of gaining value.15

The initial idea was that innovations are endogenous inventions known as MP, which are historically exhausted and replaced; as such, each time they are introduced, there is a qualitative leap in the production process throughout the determined time period. The justification for this replacement rests on two reasons: the physical wear and tear of the MP, which makes it necessary to renew it, and the pressure of competition when new means of production—innovations—emerge (Marx, 1976, Volume II, Section 2: 206). When MP is replaced as the consequence of the normal wear and tear of use, we speak of continuous improvement, but not innovation. In our model, it is only competition that can manage to supplant MP with Ci, that is, by introducing an innovation.

Returning to the model developed here, let us consider what happens when there are three capitals that each produce different commodities. The cycles M0, M1 and M2 are complementary parts of a global cycle, whose result is a commodity for final consumption.

Because the use-values of the commodities produced are different, each capital has a different composition of quantities and values of labor power—referred to as variable capital v—and the means of production—called constant capital c. This composition in its expression of the value c:v is defined as the organic composition of capital (OCC).16 If we recall that v has the feature of producing value when it is consumed productively, then we will recognize that the commodities produced have a value that exceeds that of their constituent parts, c and v; that is: Ci'=c + v + s17 , where s is the excess or surplus value.

To the capitalist, who not only advances v as part of his capital, but actually c + v, the source of the surplus is immaterial; as such, it is calculated under the notion of profit based on the advanced total capital p' = (s/C), where C = c + v (Marx, 1976, Volume III, Section 1: 49). The profit rate (p’) is the percentage of the profit obtained on a capital C put into use ( Idem).

In spite of the substitution that the capitalist makes of s’ for p’, the differences in the makeup of the values c:v of the dissimilar commodities are maintained in our example. The cost-price is not modified if we consider the excess as the surplus or profit.

With that said, and before leaving the market, each capitalist must set his prices, and he does so considering his costs or cost-price (value of c + v) and expected profit. This profit is set based on what is defined as the average profit,18 which expresses the average excess as a function of total profits, which are produced by the three participating capitals and will be distributed among them. In this context, the prices set in each case will be equal to c + v + p*, where p* is average profit. The price derived in this fashion is known as the production price (pp), which expresses the quantity of money at which the capitalist can expect to sell his commodities. In our example, there would be three production prices: pp0, pp1, pp2.

When commodities are released into the market with the objective of being sold, production prices are forced to confront market prices,19 which may be lower or higher than the former. Market prices are prima facie defined by the ebb and flow of supply and demand.

If the production price is greater than the market price, the capitalist will not be able to realize the full value of his commodities; however, if, on the contrary the production price is lower than the market price, not only will the capitalist realize their value, but he will also obtain an extraordinary profit.

If we consider an individual capital that "operates with a higher than the average social productivity and produces commodities at a lower value than their average social value, thereby realizing an extra profit” ( Ibidem, p. 59), we can then expect that:

…if one produces more cheaply and can sell more goods, thus possessing himself of a greater place in the market by selling below the current market-price, or market-value, he will do so, and will thereby begin a movement which gradually compels the others to introduce the cheaper mode of production, and one which reduces the socially necessary labour to a new, and lower, level. If one side has the advantage, all belonging to it gain. It is as though they exerted their common monopoly. If one side is weaker, then one may try on his own hook to become the stronger (for instance, one who works with lower costs of production) (Ibidem, Section 2: 245).

In this context, the capitals aspire to participate in the market in which production prices are lower than market prices, trying to emulate the means of production that bring about these circumstances. Assuming that this is possible, the effect is an increase in the supply in the market in question, which will reduce market prices, bringing them closer to production prices, prompting the disappearance of extraordinary profits; if this trend continues on in this fashion, the average profit could even be reduced or done away with altogether, so long as market prices continue to decline.

In this scenario, the search for spaces in which production prices are lower than market prices drives innovation. This reduces the labor-time required and increases the surplus labor, ramping up the exploitation rate and productivity, which will temporarily produce extraordinary profits, once again.

I would like to conclude this section by contending that this interdependency is the result of the division of labor among capitals, characterized by the replacement of MP by Cn, and that the material basis of this division is the introduction of innovations based on the dynamics of competition. Concretely, this interdependency is present in the inter-cycle relationship (which could be inter-company, or intra-company, between departments) or inter-industry (between companies/firms of the same production branch or industry), expressing the mutual effects between the processes of valorization and realization, through the incorporation (Mn – Cn, L…P…Cn+1 – Mn+1) and production (Mi – L, MP…P…Cn – Mn) of innovation as the precursor for the existence of extraordinary profits.



GOVERNANCE AND DEVELOPMENT

The analytic example shown in the section above sought to introduce, briefly and generally, the process by which capitals produce, circulate and compete through innovation in the framework of the capital cycle. In the model described, the circuit flows without disturbances, allowing the motor of innovation, the generation of more productive means, to act as the only source of extraordinary profits and market leadership. In an environment of economic Darwinism, the capitals capable of producing "in the best conditions" will be the only ones earning surplus or extraordinary profits.

More concretely, we would have to introduce other assumptions, which, while they do not contradict the general argument regarding innovation, do interrupt the distribution of extraordinary profits. If we look at the equalization of the profit rate, as the product of the diffusion 20 of innovation, this process takes place faster when capital and labor power are more mobile. The contrary is true when the mobility of capital and labor power is reduced; profit rates become more unequal (Marx, 1976, Volume III, Section 2: 247). As such, capitals can only increase their share in the total profit,21 if the other capital that produces in better conditions reduces its monopolistic position, permitting the free flow of innovation through the competition. Said another way, the capitals that do not produce in the best conditions introduce innovations that allows them to do so, displacing the previous leaders. In this context, the value chain can be analyzed as the organizational structure of capital based on that leadership.22

The value chain is an analytical proposal introduced in the 1970s.23 The hallmark work of this movement was edited by Gary Gereffi and Miguel Korzeniewicz, entitled Commodity Chains and Global Capitalism, published in 1994. This text defined the organization of a series of networks in relation to the production of a commodity, involving a variety of economic and institutional entities (1994: 2); it was subsequently considered as "the whole range of activities involved in the design, production, and marketing of a product" (Gereffi, 2000: 58; 2001a: 1618; 2001: 14). The work focused primarily on “issues of industry (re)organization, coordination, governance, and power in the chain” (Gereffi et al., 2005a: 168).

One of the more noteworthy aspects of the proposal is the notion of governance 24 introduced in 2005 by Gereffi, Humphrey, and Sturgeon, which set forth a group of five analytical forms of control and coordination in the network,25 exercised by the lead firm, entailing an asymmetrical plane of power between the capitals involved in the production of a commodity or service. The objective of the paper was for the “theory of global value chain governance (...) to be useful for the crafting of effective policy tools related to industrial upgrading, economic development, employment creation, and poverty alleviation” (Gereffi et al., 2005: 79).

Understanding governance is the key to upgrading, defined as the “process by which economic actors—firms and workers—move from low-value to relatively high-value activities in global production networks” (Gereffi, 2005a: 171) and it functions by virtue of "close linkages with a diverse array of lead firms of the global industries" (Gereffi, 2001: 13).

Governance will be expressed in the competition between capitals and the unequal participation of each capital in the total of the profit produced. “What distinguishes lead firms from their followers or subordinates is that they control access to major resources…that generate the most profitable26 returns in the industry” (Gereffi, 2001: 20; 2001a: 1622).

In the version proposed by Gereffi et al. (2005), the foundation of governance is associated with the complexity of transactions, the codification of information, and the capacity of suppliers,27 in other words, the necessary transfer of information and knowledge to carry out a transaction, the extent to which this knowledge is coded and transmitted, and the capacity of current and potential suppliers to satisfy the requirements of the transaction (Gereffi, 2005: 85). These aspects are related to asset specificity and transaction costs.28 The model assumes that high asset specificity, that is, products with comprehensive or time-sensitive processes, increases the mundane transaction cost, which is defined as the cost of coordinating the value chain (Gereffi, 2005: 84).

The dynamics of the exercise of governance can be summarized in the successive rise and fall of coordination costs. This cost increases when new demands, organizational processes, product differentiation, etc. are introduced, and declines when techniques and standards are implemented that make the flow of information more efficient—such as codification and the capacity of producers (Gereffi, 2005: 84-85). The combination of these aspects defines the verticality or horizontality of the value chain.

By introducing governance on top of the foundation of the efficient flow of information and knowledge, as a function of asset specificity, which leads to either higher or lower transaction costs, Gereffi et al. (2005) locate the phenomenon of upgrading in the organizational plan, through control over new and highly differentiated assets and processes. Leadership is exercised based on a configuration of control and coordination, more or less vertical or horizontal, which obeys the reduction in coordination costs and maximizes the profits of the leader. The opportunity for non-lead firms to upgrade typically resides in reducing these transaction/coordination costs through efficient responses to the information of the leader, in exchange for a share in the value that will always be less than that obtained by the firm exercising the governance.29

The global value chain is organized around the ownership of differentiated assets that grant control over the “most profitable segments of industry” and permit a relative monopoly from which competition with other capitals emerges to carry out complementary activities. This is a competition in which these capitals must meet the criteria of providing the highest efficiency at the lowest cost, as a condition for reducing the limiting effect of the coordination cost in the chain. In this scenario, the capitals involved must devise strategies for integration and development.

This idea would seem to have limitations with respect to the attainment of upgrading. If the position of the leader is a function of his monopoly over the most profitable segments, the assumption is that the leader will use all means possible to maintain that position, and as such, the spread of that which permits higher profitability will be "protected" from the competition of other capitals, inhibiting their participation in the total profits.

Second, if the upgrade comes about by virtue of linkages with the network leader, in light of the aforementioned monopolization that impedes direct competition, these linkages can only be established through complementary activities, which imply coordination costs regulated by techniques and standards as a condition for competitiveness. In conclusion, the potential for these follower capitals to develop is directly tied to the fulfillment of these requirements.

From that perspective, we might expect that linkages with more developed, ergo more profitable, firms, would bring follower capitals up to “higher” standards that would prompt better productivity, profits, investment flows, and wages; however, despite the advantages that linkages entail, they generate disparities between integrated and non-integrated capitals, affecting the economic space that is home to the follower capital in terms of competition, labor, and social welfare (Sturgeon and Memedovic, 2011: 2-4). The solution to this is influenced by the policies undertaken to spread around the benefits of integration.

Let us suppose then that a capital i is integrated into a value chain that produces commodity x. In this chain, the lead capital holds a monopolistic position that allows it to capture30 51% of total profits generated31 in the chain. Capital i, meeting the standards required, obtains a portion of the total value. But the objective is, of course, to increase that percentage. How can this be done?

If 51% of the value is protected by a position of monopoly, the follower can only increase its share by jockeying with the rest of the follower firms for the 49% leftover. It has been found that an upgrade can be achieved by meeting the standards set as the condition for reducing the coordination cost of the chain; thus, the capital that satisfies that criteria at the lowest cost will manage to increase its profit share. If all firms have the same objective, the search to reduce costs will drive mechanisms that enhance the flow of information, its decodification, and compliance, which will speed up turnover along the entire chain.32

If we consider that capital i introduces a mechanism that allows it to achieve the standards of the leader at a lower cost than its competitors, and we remember that only the lead segment is monopolistic, the competition will ensure that the advantage of capital i is rapidly diluted to the extent that it spreads, equalizing the position of all follower firms and making it necessary to come up with a new mechanism to reduce once again the costs of coordination, which, in turn, will spread, compelling this process to repeat in a downward spiral, and leading the follower capitals to systematically constrain their transaction costs as a condition for competitiveness, and their prices through competition, making it analytically impossible to make the leap as long as the most profitable segment continues to be monopolized. In this scenario, it would be contradictory to call the value chain a driver of development, because the very aspects that promise development are the same that inhibit it.

According to Sturgeon and Memedovic (2011), the integration of followers in the value chain can unleash bipolar scenarios, as a result of the differentiation of standards within and outside of the chain, not to mention it would impose barriers on learning, which would lead to unequal development; on the other hand, there is considerable evidence that income is increasingly absorbed by lead firms, especially those located in the production of core technologies and controlling brands and design (Chesbrough, 2001; Gawer and Cusumano, 2002; Linden and Somaya, 2003 in Sturgeon and Memedovic, 2011: 4).

Follower earn less, have lower wages, and are more sensitive to the economic cycle due to the scale of production and fixed capital; moreover, when these firms tend to dominate a single country or region, they run the risk of having a profound impact on the business system for long time periods that can tie firms or countries in a specific space to low-value activities in the network (Kawakami, 2011; Schmitz, 2004; Kawakami and Sturgeon, 2011 in Sturgeon and Memedovic, 2011: 4).

The general suggestion in this context is thus to recognize the differences, asymmetries, and opportunities afforded by the growing atomization of the production of commodities and services, and construct an integration strategy based on the provision of functional commodities and services in the articulation of the network, which in a positive scenario, will produce learning and development that will promote an increased share of total profits.

The challenge to following these recommendations consists of the unequal patterns of competition among leaders—monopolistic and oligopolistic markets—and followers—open or semi-open markets—through the imposition of techniques and standards as the condition for competitiveness.

According to the methodology described in the first part of this text, innovation is the material cause behind the valorization process and the interdependency of capitals. If we hold this to be true, and revisit the assumption that the access to innovation is limited by ownership rights, then the capitals involved in the competition, in the value chain, will have unequal profit rates explained by the different and varied concrete conditions of production. The lead capital or firm produces in the best conditions thanks to ownership and/or control over innovation. What we would expect in the long term is that profit rates would equalize as innovations are propagated, through competition, as described at the end of the last section.

What happens, concretely, is that this diffusion is disturbed by “entry barriers” that slow it down, but do not eliminate it. In this way, the patterns of competition in the equalization of the profit rate are affected by a sort of extra-economic inertia.33 The capital that produces in the best conditions protects its property through various institutional tools that impede its diffusion, thus delaying progress.34 In this scenario, in the search for the equalization of profits, there are various patterns of competition that explain the distribution of profits and the lack of equalization.

The above, however, does not suppress the mechanism described in the methodology of this paper. Innovation cannot be confined indefinitely. Through diverse strategies, including copying, imitation, and adaptation, to name a few, the monopolized segment gradually opens up and innovation spreads, paving the way for new opportunities for new capitals, expanding/shrinking the value chain in this way. From this perspective, the cause behind the development of complementary capitals is initially their capacity to compete by imitating the leader or innovating to displace it. The difficulties of doing so depend on the strength of the institutional instruments that protect the monopoly.

In this approach, meeting the standards is not defined as a precondition for development, but rather as a policy instrument, either private or public, the result of competition between capitals in a context of unequal profit rates; these rules of the game are, ultimately, mechanisms to sustain the monopolistic position of leader and/or transmitters of information between leaders and followers. Complying with them is not a necessary condition for development. However, they have come to represent a condition for competitiveness beyond the logic of the accumulation process.

Only that which permits a follower to imitate or surpass the best conditions of production will lead to an increased share of the profit earned pursuant to the theory discussed here. Governance in the value chain is thus an expression of the capacity to inhibit the diffusion of an innovation by that entity which possesses it.

The value chain, in this sense, is the organizational configuration of the expansion and autonomization of capital, and not the cause. The resulting competition between capitals in value chains is therefore the outcome of the development prompted by innovation as a driver of development, from which the space for capital reproduction expands and becomes specialized.



CONCLUSIONS

The analytical framework for global value chains introduced in this paper is a significant contribution to the academic dialogue in the sense that—thanks to a wealth of empirical analysis— it sheds light on new forms adopted by the organization of capital, now both regional and global, as an expression of competition beginning with the historical changes precipitated by the information and telecommunications revolution.

One of the initial concerns of the value chain framework was, and continues to be, the need to “map” the process of production and circulation in order to measure international trade—global and interdependent—with new tools, as the real data is obscured by the obsolete statistical categories of exports and imports.35 Efforts to do so have focused on differentiating these categories by type of commodity and flow, within-firm or inter-firm.

In an environment of highly integrated and hyper-specialized global competition, the potential consequences of the contagion of disturbances are increasingly pressing, while information flows are multiplying, despite the fact that we do not yet have the tools we need to track and measure them. Being competitive in this new reality entails, initially, looking attractive to the global capital oriented towards world trade. The strategies to achieve this can have positive effects on individual capitals if we view the situation from the perspective of a firm, but the situation looks quite different if we look at the phenomena as a whole, because what is “good” for individual capital is not necessarily so for capital as a whole. It is to this last point that I wish to call the reader’s attention.

Many of the general assertions made about the value chain framework are lessons that have emerged from various case studies that have produced “regularities,” which have been outlined into concepts such as governance or industrial upgrading (Gereffi et al., 2005). The collection of these experiences has been interpreted as a general diagnosis, making the sum of its parts equivalent to the whole, and prompting considerations that can be condensed into one grand integration and upgrading strategy as the foundation upon which to discuss development.

If we return to the logic of the methodology in this paper, the development of capitalism is only possible insofar as the accumulation process through the capital cycle is extended and intensified, producing through ever-more productive means. If in this context we assume that the upgrade is a function of the subordination of some capitals to others, we are inverting the entire logic of the system, confusing the symptoms with the causes, because this subordination is the consequence of the competition, on the basis of diverse methods of production with diverse productivities.

Setting this point aside, what the value chain framework does is engender the public and private policy tools that make this subordination function, temporarily exacerbating it, while delaying the process of the equalization of the profit distribution that can only be achieved through the growing mobility of capital and labor-power, that is, through the liberalization of capital and labor markets thanks to progressively more productive means.

In theory, this liberalization allows information flows to move freely and spread more rapidly, equalizing the profit rate36 and accelerating economic evolution. This thesis assumes, however, “the complete freedom of trade…the removal of all monopolies…the development of the credit system…the subordination of the various spheres of production to the control of capitalists…great density of population…the abolition of all laws preventing the labourers from transferring from one sphere of production to another…the indifference of the labourer to the nature of his labour…”.37 The gap between these conditions and the economic reality is a clear sign that any disturbance to these assumptions constitutes a step backwards for capitalist development.

The value chain, as an expression of competition and the historical leap in capital mobility, is presented as a symptom of the now regional and global accumulation process. To consider it as a platform for development would be a methodological error that could generate misconceived notions regarding the path of the set of capitals. In this sense, heeding these policy suggestions indiscriminately could mean that the benefits yielded on the individual level are reversed on the broader level.

An economic understanding of the motor of accumulation in value chains positions innovation as the central variable in the development debate. However, in light of the fact that the conditions of the model described above are not being met, the institutional aspects that encourage or discourage their development are relevant. In other words, coming back to the original argument, the various indicators, manuals, and policies suggested by the value chain framework could be valid, but if and only if, they stimulate the liberalization of capital and labor in the long term, expanding the space for reproduction, which, in the shorter term, could run counter to social welfare considerations.

There are many aspects still to be ironed out, especially regarding the concrete elements of case studies. The hope is that the exercise presented in this paper will contribute to enriching the discussion and inspire other breakthroughs in the future.



BIBLIOGRAPHY

Bair, Jennifer (2005), Global Capitalism and Commodity Chains: Looking Back, going Forward, Competition & Change, vol. 9 issue 2, pp.153-180.

Gereffi, Gary (2001), “Las cadenas productivas como marco analítico para la globalización”, Problemas del Desarrollo, vol. 32, no 125, Mexico, IIECUNAM, April-June, pp. 9-37.

______ (2001a), “Shifting Governance Structures in Global Commodity Chains, with Special Reference to the Internet”, American Behavioral Scientist, vol. 44, no. 10, June, pp. 1616-1637.

______ (2005a), “The Global Economy: Organization, Governance, and Development, in Neil J. Smelser and Richard Swedberg (eds.), The handbook of economic sociology, Ed. Princeton University, pp.160-182, New York.

Gereffi, Gary, John Humphrey and Timothy Sturgeon (2005), “The Governance of Global Value Chains”, Review of International Political Economy, vol. 12, no. 1, February, pp. 78-104.

Gereffi, Gary and Miguel Korzeniewicz (1994), Commodity Chains and Global Capitalism, London, Ed. PRAEGER.

Kaplinsky, Raphael (1998), Globalisation, Industrialisation and Sustainable Growth: The Pursuit of the Nth Rent” Discussion Paper, no. 365, Brighton, Institute of Development Studies, University of Sussex.

Marx, Carlos (1976 [1894]), El capital. El proceso global de la producción capitalista, book III vol. 6, Mexico, Siglo XXI Editores, pp. 431.

______ (1976 [1894]), El capital. El proceso de circulación de capital, Book II, Vol. 4, Mexico, Siglo XXI Editores, pp. 428.

______ (1976 [1894]), El capital. El proceso de producción del capital, Book I, Vol. 1, Mexico, Siglo XXI Editores, pp. 381.

Oliver E. Williamson (1981), “The Economics of Organization: The Transaction Cost Approach”, The American Journal of Sociology, no. 87, vol. 3, November, pp. 548-575.

Pérez, Carlota (2004), Revoluciones tecnológicas y capital financiero, la dinámica de las grandes burbujas financieras y las épocas de bonanza, Mexico, Siglo XXI Editores.

Sandoval, Seyka (2013), La cadena global de hortalizas. La estrategia de ascenso de los productores sinaloenses, Mexico, IIEC, UNAM.

Schumpeter, Joseph A. (1997 [1912]), Teoría del desenvolvimiento económico, Mexico, Fondo de Cultura Económica, pp. 255.

______ (2002 [1939]), Ciclos económicos. Análisis teórico, histórico y estadístico del proceso capitalista, Zaragoza, Prensas Universitarias de Zaragoza, Kindle Edition.

Sturgeon, T. and C. Memedovic (2011), Mapping Global Value Chains: Intermediate Goods Trade and Structural Change in the World Economy, Working Paper 05/2010.



ELECTRONIC REFERENCES

Center on Globalization, Governance & Competitiveness. Projects (2015) (consulted April 10, 2015) Available at: en http://www.cggc.duke. edu/projects.php

______ Research Reports, Publications and Presentations: 2009-2014 (2015) (consulted April 10, 2015) available at: http://www.cggc.duke. edu/pdfs/CGGC-Reports-Pubs-Presentations.pdf

IMF Trade Interconnectedness: The World With Global Value Chains (2013) (consulted April 10, 2015) http://www.imf.org/external/np/pp/ eng/2013/082613.pdf

OECD, What is Trade in Value added? Why is it Important? (2015) (consulted April 10, 2015) available at: http://www.oecd.org/sti/ind/ global-value-chains.htm

UNCTAD, Search (2015) (consulted April 10, 2015) http://unctad.org/SearchCenter/Pages/Results.aspx?k=global%20value%20chains,

World Trade Organization, “Made in the World” (2015) (consulted April 10, 2015) available at: https://www.wto.org/english/res_e/statis_e/ miwi_e/miwi_e.htm

* Post-doctoral fellow at the Institute of Economic Research, UNAM, Mexico. E-mail address: scsv9@hotmail.com.

1 “The term ‘commodity chain’ dates from a 1977 article by Terrence Hopkins and Immanuel Wallerstein which appeared in Review, a journal published by the Fernando Braudel Center” (Bair, 2005: 154). Along these same lines, 1994 saw the publication of “ Commodity Chains and Global Capitalism. Edited by Gary Gereffi and Miguel Korzeniewicz, this volume contained a number of papers that had been presented at the 16th annual conference on the Political Economy of the World-System, which took place at Duke University in April 1992” ( Ibidem). Michael Porter (1986) introduced the tool related to the value chain, drawing on the theory of international competitiveness. A variety of interpretations of value/and or commodities chains have been published to date (www.globalvaluechains.org), but this paper will look at the evolution of the analytical framework developed by the Duke School, led by Gary Gereffi. This is not only because he is the most-cited author on the topic, but also because this academic proposal has had a decisive influence on strategic bodies in managing economic policy (http://www.cggc.duke.edu/projects.php, http://www.cggc.duke.edu/pdfs/CGGC-Reports-Pubs-Presentations.pdf).

2 Development is understood as the accumulation of capital in a context of the distribution of profits that stimulate economies of scale, which contributes to extending and intensifying the process of accumulation (Marx, 1976; Pérez, 2004).

3 https://www.wto.org/english/res_e/statis_e/miwi_e/miwi_e.htm, http://www.oecd.org/sti/ind/ global-value-chains.htm, http://unctad.org/SearchCenter/Pages/Results.aspx?k=global%20 value%20chains, http://www.imf.org/external/np/pp/eng/2013/082613.pdf

4 This paper does not aim to construct a Marxist category of the value chain. The objective and contribution of this text is rather to use the Marxist concept of the capital cycle as a tool to analyze the object of study, which in this case, is the value chain. The paper proposes to foster discussion and dialogue between the various theoretical approaches that help elucidate the now global phenomenon of the production and distribution of goods and services.

5 Innovation is considered here as any new combination (Schumpeter, 1912, 1977) that prompts an increase in productivity such that it leads the capital in question to produce in the best conditions, in this way permitting the appropriation of a growing market share—in a position of relative monopoly/monopsony. This innovation will, given the current institutional context, be protected by ownership rights, from which linkages—of dependency, competition, or complementarity—emerge, thereby determining governance structures (Gereffi, Humphrey, Sturgeon, 2005). In light of this, innovation is considered to be the ultimate cause of governance.

6 If we look at the value chain concretely, in terms of its use-value, the complementarity of concrete activities in the production of a commodity as the objective of the chain could be interpreted as the absence of competition. Although true at first glance, in the specific nature of production, this is revealed to be a misconceived statement when we use the capital cycle in its money-form, in the general form. Complementary capitals compete in the process to distribute the profits produced throughout the chain in question.

7 The general overview containing the methodology used here reiterates the idea that it is the appropriation of surplus that motivates the actions of capitalists. “The capitalist does not produce a commodity for its own sake, nor for the sake of its use-value, or his personal consumption. The product in which the capitalist is really interested is not the palpable product itself, but the excess value of the product over the value of the capital consumed by it” (Marx, 1976, Volume III, Section 1: 47). The “money-capital cycle… expresses furthermore that exchange-value, not use-value, is the determining aim of this movement…The process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money-making" ( Ibidem, Volume II, Section 1: 64).

8 “The carrying out of new combinations, therefore, simply [means] the different employment of the economic system’s existing supplies of productive means” (Schumpeter, 1997: 78). “In short, any 'doing things differently' in the realm of economic life—all these are examples of what we shall refer to by the term Innovation” (Schumpeter, 2002: Kindle).

9 I will define as endogenous innovation the new combination of MP that is introduced into the accumulation process through the same capital that employed it as the means of production…"In the first place it is not essential to the matter—although it may happen—that the new combinations should be carried out by the same people who control the productive or commercial process which is to be displaced by the new. On the contrary, new combinations are, as a rule, embodied, as it were, in new firms which generally do not arise out of the old ones but start producing beside them" (Schumpeter, 1997: 77). The (generic or specific) innovation that permits producing in better conditions grants to whosoever controls it—ownership rights—the capacity to relatively monopolize strategic segments in the production of profit, thereby appropriating a "greater" portion of this profit in the distribution process, delaying the equalizing of the profit rate through competition.

10 “Commodities become commodity-capital as a functional form of existence stemming directly from the production process itself, of capital-value that has already produced surplus-value…all commodities would be elements of commodity-capital from the outset” (Marx, 1976, Volume II, Section 1: 45). “C’ expresses a value-relation, the relation of the value of the commodities produced to that of the capital spent on their production, in other words, expresses the fact that its value is composed of capital-value and surplus-value" ( Ibidem, p. 47).

11 “We have seen that the entire time of rotation of a given capital is equal to the sum of its time of circulation plus its time of production. It is the period of time from the moment of the advance of capital-value in a definite form to the return of the rotating capital-value in the same form” (Marx, 1976: Volume II, Section 2: 183).

12 Exogenous innovation is the new combination introduced through a capital different from that used as means of production. In the interaction between two or more capitals, the definition of exogenous and endogenous innovations is relative. In our model, it is endogenous for the capital that introduces it and uses it as a means of production, and exogenous for that which only employs it as a means of production, because it has been introduced by a different capital. But if we take a step back and separate the generation of innovations from the task of the owner of Mi, this would be an exogenous process in terms of the invention and endogenous as an element of the cyclical process of capital accumulation. “Although entrepreneurs of course may be inventors just as they may be capitalists, they are inventors not by nature of their function but by coincidence and vice versa. Besides, the innovations which it is the function of entrepreneurs to carry out need not necessarily be any inventions at all...[the entrepreneurial leadership] leads the means of production to new channels” (Schumpeter, 1997: 98).

13 “MP and L differ here only in this respect, that MP may be C', hence capital, in the hands of its seller, if MP is the commodity-form of this capital, while L is always nothing else but a commodity for the labourer and becomes capital only in the hands of its purchaser as a constitute part of P” (Marx, 1976, Volume II, Section 1: 103).

14 The careful reader might notice that our scheme begins with a cycle where the destination of the product is the personal consumption of capitalists and laborers, and that this consumption is ultimately what allows the sum of interactions to take place in the realization of the capitals involved. This has implications worthy of mention. At first glance, we might feel compelled to assert that the ultimate and mobile objective of the economic system is to satisfy wants, insofar as this determines the renewal of the economic cycle. However, consumer satisfaction is only a vehicle in the process of realization, in which the concrete aspect lacks importance, as has been established in the methodology used here. In addition, in light of our hypothesis of the periodic introduction of innovations, it is clear that it is the needs of the valorization-realization process (replacement of MP by Cin) which stimulate the economic evolution expressed in innovation, which appears as a novel element outside of the sphere of particular wants: “these disturbances of the centre of equilibrium appear in the sphere of industrial and commercial life, not in the sphere of the wants of the consumers of final products…It is, however, the producer who as a rule initiates economic change, and consumers are educated by him if necessary; they are, as it were, taught to want new things, or things which differ in some respect or other from those which they have been in the habit of using” (Schumpeter, 1997: 75-76). Clarifying this point is important because otherwise we might end up at the erroneous conclusion that only the expansion of solvent social wants could sustain the turnover of the capital cycle, which would not be in concordance with the methodology used here.

15 This does not mean that there are no innovations that could exist in the sphere of circulation, accelerating the turnover of the cycle and indirectly impacting the processes of valorization and accumulation.

16 “…by composition of capital we mean the proportion of its active and passive components, i.e., of variable and constant capital…The value-composition of capital, inasmuch as it is determined by, and reflects, its technical composition, is called the organic composition of capital (Marx, 1976, Volume III, Section 2: 182-184). See technical composition of capital and its relationship to the organic composition of capital in ( Ibidem, p. 183).

17 “The value of every commodity produced in the capitalist way is represented in the formula: C = c + v + s. If we subtract surplus-values from this value of the product, there remains a bare equivalent or a substitute value in goods, for the capital-value c + v expended in the elements of production...this portion of the value of the commodity, which replaces the price of the consumed means of production and labour-power, only replaces what the commodity costs the capitalist himself. For him, it therefore represents the cost-price of the commodity" ( Ibidem, section 1: 30), "the excess over the cost-price, or the surplus-value" ( Ibidem, p. 37). “The consumption of labour-power is at one and the same time the production of commodities and of surplus-value” ( Ibidem, Volume I, Section 2). For more on the concept of surplus-value, see Ibidem, Sections 3, 4, and 5.

18 “These different rates of profit are equalized by competition to a single general rate of profit, which is the average of all these different rates of profit. The profit accruing in accordance with this general rate of profit to any capital of a given magnitude, whatever its organic composition, is called the average profit. The price of a commodity, which is equal to this cost-price plus the share of the annual average profit on the total capital invested (not merely consumed) in its production that falls to it in accordance with the conditions of turnover, is called its price of production" (Ibidem, Volume III, Section 2: 199).

19 “Whatever be the ways in which the prices of different commodities are first established or fixed in relation to one another, the Law of Value governs their movement. When the labor-time required for their production falls [increased labor exploitation, higher productivity as the consequence of the rise of more productive methods or innovations], prices fall" (Ibidem, p. 224). In this context, the sale price is the price at which the commodity is exchanged on the market, and this price is above the cost of production (Ibidem, Section 1: 51). Even so, "Although the excess value of a commodity over its cost-price is shaped in the immediate process of production, it is realised only in the process of circulation, and appears all the more readily to have arisen from the process of circulation, since in reality, under competition, in the actual market, it depends on market conditions whether or not and to what extent this surplus is realized” (Ibidem, Section 1: 50). Once situated in the sphere of circulation, “the two limits of his selling price are: on the one hand, the price of production of the commodities, over which he has no control; on the other hand, the average rate of profit, over which he has just as little control" (Ibidem, Section 4: 392).

20 We will understand diffusion as the process through which the competition spreads the most productive means. In Marx, we observe this in the equalization of the profit rate. In Schumpeter, we find a similar process in terms of the ever-more frequent appearance of the entrepreneur, where "the more familiar the process of development becomes and a mere matter of calculation to all concerned, and the weaker the obstacles grow in the course of time, the less the 'leadership' needed to call forth innovations" (1997: 229-230).

21 If we consider the methodology proposed in the first section, the total profit is the sum of the surplus-value produced throughout the entire capital cycle process, that is, the difference between M and M'. In the Marxist perspective, to the extent that only the synergy between L and MP can produce new value, this surplus expressed in profit originates only in the production process. In the framework of the value chain, the total profit is considered to be the sum of the added value throughout the chain (Sturgeony Memedovic, 2011). The assumption is that each activity adds value to the commodity or service in question, regardless of whether these activities are found in the production process or take place in the circulation of commodities and services. What this paper explores is an analysis of the value chain and the distribution of profits produced within them, based on the spread of innovation as the foundation of governance, which constitutes the cornerstone of the hypothesis. This assumption includes, in both analytical frameworks, the creation of value only in the productive process, as a bridge condition for the academic dialogue. Innovation in this sense should only be considered in the production process in terms of the discussion developed here.

22 Value chains are one of the corollaries of the process of historical change that began in the 1970s—crisis, information revolution, and neoliberalism—and are a structural form of the globalization through which global enterprises are acquiring a new role, assigning economic activities in different spaces by virtue of the comparative and competitive advantages offered by these spaces. The network that results from this process expresses the entire capital cycle of different commodities and services, in which diverse economic and institutional actors interact. The value chains are a concrete expression of the new international division of labor, in each of the goods and services produced around the world. The functionality of these networks in the accumulation process is expressed in the elimination of barriers that used to constrain the free mobility of capital.

23 For a deeper exploration of the topic, due to the space limitations of this paper, I recommend: Gereffi (2001), Kaplinksy (1998), Bair (2005), and Sandoval (2012).

24 The term governability or governance refers to the different forms of control/coordination exercised by the lead firms in a specific chain. The basis for this label involves three theoretical ideas: transaction costs (Williamson, 1975, cited in Gereffi, Humphrey and Sturgeon, 2005: 80), asset specificity, capacities, network production (Arndt and Kierzkowski, 2001 and Fenestra, 1998, cited in Gereffi, Humphrey and Sturgeon, 2005: 79-80)—trade integration, coordination of the dispersion of activities, and the technology capacity and level of learning of the company (Jarillo, 1988; Lorenz, 1988; Powell, 1990; and Thorelli, 1986, all cited in Gereffi, Humphrey and Sturgeon, 2005: 80). “Thus, our typology identifies five basic types of value chain governance. These are analytical, not empirical, types, although they have been in part derived from empirical observation” (Gereffi, Humphrey and Sturgeon, 2005: 83-84).

25 The five types are: market, modular, relational, captive, and hierarchy. Each defines a specific type of governance, where the market-type is the most horizontal, and the hierarchy-type is the most vertical. The degree of verticality in the chain is directly associated with the leader’s desire for coordination (Gereffi et al., 2005: 83-84). Before this classification, it had been said that chains could be buyer or seller-directed, alluding to the major retailers or technology-intensive producers as leaders in the value chain (Gereffi, 1994, 2001).

26 Profitability is a concept similar to that of profit. The capitalist obtains his profitability or profit rate calculating the surplus over the cost of the means of production and the labor power, regardless of the specific origin of that surplus. However, by virtue of the methodology used here, it should be clarified, for future studies on the topic, that an activity can be profitable without producing value. Such is the case of some activities related to the circulation of commodities, which capture value through the charge incurred by the cost of circulation in the realization of the surplus.

27 These ideas are based on Arndt and Kierzkowski, 2001; Fenestra, 1998 in Gereffi et al., 2005.

28 This perspective draws on the works of the Nobel Prize Winner Oliver Williamson, viewing the transaction is an economic unit of analysis. These works define a transaction as something that takes place when a good or service is transferred through a technologically separable interface (Williamson, 1981). A principal dimension of this theory is the specificity of assets, in direct relation to cost levels, which drive decisions made about the activities that will be externalized or internalized, in this way defining the organization of the firm. This notion is a central aspect of the proposal of governance described in Gereffi et al., 2005, based in large part on the works by Williamson (1975, 1983). In this sense, transaction costs and coordination costs are used indistinguishably.

29 “The establishment of standards is often contentious and part of the competitive positioning of firms” (Gereffi et al., 2005: 91).

30 Capturing is different from producing, and is rather related to the profit distribution, regardless of the origin of the profits.

31 Here it would be useful to clarify that the lead firm can capture more capital than it generates, whether or not it is the owner of the innovation.

32 Lower transaction costs permit a flow with fewer disturbances in the capital cycle, to the benefit of turnover and speeding up the accumulation process, and therefore the amount of profit earned in a given time.

33 Except the case of the natural monopoly.

34 Capitalist progress is the tendency to historically overcome the material conditions of production that permit the growing accumulation of capital.

35 “The goods and services we buy are composed of inputs from various countries around the world. However, the flows of goods and services within these global production chains are not always re-flected in conventional measures of international trade...Conventional measures therefore may create a risk of protectionist responses that target those countries at the end of global value chains, on the basis of an inaccurate perception of the origin of trade imbalances. Indeed ‘beggar thy neighbour’ strategies can turn out to be ‘beggar thyself ’ miscalculations—in other words, if a Country C exports goods worth $90 to another Country A, which in turn uses them to produce $100 of exports to Country B, which then uses them to produce $110 of final goods for export to C, then any policies initiated by C in response to a deficit with B, would have their greatest impact on the sector in C producing intermediate goods for A”. http://www.oecd.org/sti/ind/whatistradeinvalueadded.htm.

36 If we consider the value chain as a unit of analysis, we would be speaking of the profit rate derived from the value produced throughout the network in question.

37 Marx, 1976, Volume III, Section 2: 248.

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