# **Box 2. A typology** **<u>of GVC governance structures</u>**

A more elaborate typology of five governance structures has been identified in the GVC literature: markets, modular, relational, captive, and hierarchy (see Figure 25). These structures are measured and determined by three variables: the complexity of the information between actors in the chain; how the information for production can be codified; and the level of supplier competence (Frederick and Gereffi, 2009; Gereffi, Humphrey and Sturgeon, 2005).

␣ **Market:** Market governance involves transactions that are relatively simple. Information on product specifications is easily transmitted, and suppliers can make products with minimal input from buyers. These arms-length exchanges require little or no formal cooperation between actors and the cost of switching to new partners is low for both producers and buyers. The central governance mechanism is price rather than a powerful lead firm.

␣ **Modular:** Modular governance occurs when complex transactions are relatively easy to codify. Typically, suppliers in modular chains make products to a customer’s specifications and take full responsibility for process technology using generic machinery that spreads investments across a wide customer base. This keeps switching costs low and limits transaction-specific investments, even though buyer-supplier interactions can be very complex. Linkages (or relationships) are more substantial than in simple markets because of the high volume of information flowing across the inter-firm link. Information technology and standards for exchanging information are both key to the functioning of modular governance.

␣ **Relational** : Relational governance occurs when buyers and sellers rely on complex information that is not easily transmitted or learned. This results in frequent interactions and knowledge sharing between parties. Such linkages require trust and generate mutual reliance, which are regulated through reputation, social and spatial proximity, family and ethnic ties, and the like. Despite mutual dependence, lead firms still specify what is needed, and thus have the ability to exert some level of control over suppliers. Producers in relational chains are more likely to supply differentiated products based on quality, geographic origin or other unique characteristics. Relational linkages take time to build, so the costs and difficulties required to switch to a new partner tend to be high.

␣ **Captive:** In these chains, small suppliers are dependent on one or a few buyers that often wield a great deal of power. Such networks feature a high degree of monitoring and control by the lead firm. The power asymmetry in captive networks forces suppliers to link to their buyer under conditions set by, and often specific to, that particular buyer, leading to thick ties and high switching costs for both parties. Since the core competence of the lead firms tends to be in areas outside of production, helping their suppliers upgrade their production capabilities does not encroach on this core competency, but benefits the lead firm by increasing the efficiency of its supply chain. Ethical leadership is important to ensure suppliers receive fair treatment and an equitable share of the market price.

␣ **Hierarchy:** Hierarchical governance describes chains characterized by vertical integration and managerial control within lead firms that develop and manufacture products in-house. This usually occurs when product specifications cannot be codified, products are complex, or highly competent suppliers cannot be found. While less common than in the past, this sort of vertical integration is still an important feature of the global economy.

The form of governance can change as an industry evolves and matures, and governance patterns within an industry can vary from one stage or level of the chain to another.

<!-- Start of picture text --> Market Modular Relational Captive Hierarchy<br>End Use<br>Customers Lead Lead<br>Integrated<br>Firm Firm<br>Lead Firm<br>Firm<br>Price Full-package Relational<br>Supplier Supplier<br>Component and Component and<br>Suppliers Material Material Captive Suppliers<br>Materials Suppliers Suppliers<br>Degree of Explicit Coordination<br>Low High<br>Degree of Power Asymmetry<br>Value Chain<br><!-- End of picture text -->

**Figure 25: Five Types of GVC Governance Structures**

Source: Gereffi and Fernandez-Stark, 2011 A number of factors will affect the balance of opportunities and risks. The governance structure of GVCs is particularly important, defined as the “authority and power relationships that determine 34