Profit sharing, industrial upgrading, and global supply chains: Theory and evidence

• Published in: Review of development economics Vol. 26; no. 4; pp. 2454 - 2493
• Main Authors: Liu, Xiao Jie, Liu, Haiyue, Liu, Shi Yi, Shen, Jim Huangnan, Lee, Chien‐Chiang
• Format: Journal Article
• Language: English
• Published: Oxford Blackwell Publishing Ltd 01.11.2022
• Subjects: average product of labor; factor intensity; global supply chain (GSC); profit sharing mechanism; Profit sharing plans; Profitability; Robustness; smile curve; smile‐curve‐driven supply‐chain upgrading; Supply
• ISSN: 1363-6669; 1467-9361
• DOI: 10.1111/rode.12906

This research constructs a simple model to illustrate the global supply‐chain (GSC) profit sharing and industrial upgrading mechanism, finding that the average profitability distribution in the different supply‐chain stages is determined by three main conditions: (1) the average product of the labor in the firms at each production stage; (2) the production complexity level of each production stage in the chain; and (3) the ratio of the output elasticity of capital to the output elasticity of labor in each stage. This study also proposes a new industrial upgrading mechanism, the “smile‐curve‐driven supply‐chain upgrading,” for supply‐chain firms. Increases in production complexity and level of factor intensity in each production stage are found to be the two essential conditions for the smile‐curve‐driven supply‐chain upgrading. Our static and dynamic panel empirical models, including robustness checks, are both broadly consistent with the theoretical predictions of this paper.