Governance Model and Rents Allocation in Asymmetrical Power Relations: The Case of Notebook Computer Industry

Transcription

1 Aociation for Information Sytem AIS Electronic Library (AISeL) WHICEB 2014 Proceeding Wuhan International Conference on e-buine Summer Governance Model and Rent Allocation in Aymmetrical Power Relation: The Cae of Notebook Computer Indutry Ying Xiong School of Economic and Management, China Univerity of Geocience, P.R.China Hai-yan Ma School of Economic and Management, China Univerity of Geocience, P.R.China Follow thi and additional work at: Recommended Citation Xiong, Ying and Ma, Hai-yan, "Governance Model and Rent Allocation in Aymmetrical Power Relation: The Cae of Notebook Computer Indutry" (2014). WHICEB 2014 Proceeding Thi material i brought to you by the Wuhan International Conference on e-buine at AIS Electronic Library (AISeL). It ha been accepted for incluion in WHICEB 2014 Proceeding by an authorized adminitrator of AIS Electronic Library (AISeL). For more information, pleae contact elibrary@ainet.org.

2 The Thirteenth Wuhan International Conference on E-Buine Innovation Management and IT Buine Value 547 Governance Model and Rent Allocation in Aymmetrical Power Relation: The Cae of Notebook Computer Indutry Xiong Ying, Ma Hai-yan School of Economic and Management, China Univerity of Geocience, P.R.China Abtract: International ubcontracting relationhip are often characterized by coniderable power aymmetrie. The actor in global value chain obtained different profit. Different governance dominant mode reflect different role of countrie and enterprie played in the global value chain and reult in different indutrial international competitivene in the end Through a relation model of uptream and downtream node and a cae tudy of notebook computer indutry, the paper identified the tatu of actor and the market tructure in different value node influence the rent ditribution among global value chain. The leader firm in the global value chain that poe tatu advantage and market power account for income growing gap between developed and developing countrie. Keyword: Governance Model, Rent Allocation, Aymmetrical Power Relation 1. INTRODUCTION International outourcing ha been identified a a trategic mean for U.S. and European-baed firm to elect world-cla upplier and effectively minimize cot (Kaufman, Wood, & Theyel, 2000; Mol, Pauwel, Matthyen, & Quinten, 2004). Lot of mall and middle ized firm in Pacific Rim countrie have been warming into the upplying army, which obviouly enhance the degree of competition among manufacture. A a reult, the formation of Global value chain reult in geographically and inter-organizationally eparation of organizational activitie and caue boundary of corporation and indutrie trancending national cope [1]. International diviion of labor baed on value chain i a new outcome of international diviion of labor and ha led to maive increae in international trade and invetment that extend indutrie beyond national border. The power of the large lead firm ha been growing fat a they capture more and more of the global market hare and exploit economie of cale at unprecedented level. International ubcontracting relationhip are often characterized by coniderable power aymmetrie. Governance i applied in the reearch literature of different tranaction to decribe authority to control, influence and configure the mode and rule of interaction (Balgobin, 2008).Compared to the governance of individual buine; governance in the backdrop of global value chain eem even more complex. In the Prior literature on thi topic, the relation between governance model and rent allocation ha attracted great attention, but for what and how doe the governance model influence the rent allocation in aymmetrical Power Relation need more empirical upport. 2. LITERATURE REVIEW 2.1 Governance model: from ingle dimenion to multi-dimenion The rule that participant hould obey are marked by the leader of the indutry in the Value-Chain, not decided by the free market, and in thi way the Value-Chain-Governance i put forward. Gereffi (1994) divided it into two type: producer-driven" value chain and buyer-driven value chain. Sterne (2002) come up with the national model of the governance of the value chain which i baed on the reearch of Lee and that i Japanee model, Germany model, Italian model, and American model. Thi model can vary from three kind:

3 548 The Thirteenth Wuhan International Conference on E-Buine Innovation Management and IT Buine Value leaderhip (Japan and Korea), relational (German and Italy), modular (America). Baed on the production network theory of Stern and Powell, Gereffi, etc. (2003), preented a relatively complete ytem of trict framework, with the combination of the value chain theory, tranaction cot economic, technological capability and enterprie learning theory. They ummed up five typical governance model of notebook computer, drawn the extent of the aymmetry between the external coordination and the right, among the value chain ubject,by a low to high order of priority for the market type, modular type, relational type,captive and hierarchy type. In the backdrop of globalization, maive governance deficit ha appeared (Gereffi and Mayer, 2007; Coe and He, 2008). Gereffi et al. tudied the matter of indutrial governance, propoing five type for the governance of global value chain [2].Different from the ingle dimenion of indutrial governance in hi tudy, Liu Lingqing, Tan Liwen and Ma Haiyan(2011) contruct the indutrial two-dimenional governance model of the developing countrie in the context of global value chain baed on the interaction between indutry governance and market governance, and alo preent five typical governance mode,uch a free to market dominant mode,public governance dominant mode, indutrial governance dominant mode,joint governance dominant mode and network governance dominant mode. Different governance dominant mode reflect different role of countrie and enterprie played in the global value chain and reult in different indutrial international competitivene in the end [3]. 2.2 Relation rent and network rent Global value chain in fact i an intricate production network coniting of plenty interacted firm, urging the involved actor to realize that it i nonenical to be an effective ole iland in an ineffective ocean without an integrated valid proce retructure; on the other hand, it i crucial to keep horizontal cooperation aiming to retain competitive advantage, pecifically, mall and middle ized firm reduce rik and cot by collaborated marketing and procurement, hared ervice etc. Therefore Lorenzoni & Lipparini(1999)advanced,firm` competitive advantage can be gained through effective relation management. Rent embedded in corporation group in global value chain can be ummarized into relational rent and network rent. Dyer & Singh(1998),Kale, Singh & Perlmutter (2000) figured that internal economic factor like incentive to complementary reource, external environmental factor uch a reource carcity and other non-economic factor are three kind of motive and determinant for collaborated relationhip among organization. Relational rent can be obtained then further tranforming into organizational competitive advantage through leveraging of inter-organizational relation [4]. Luomin&Luo Hongling(2007)pointed out that the mot evident character of relational rent i relationhip, not only uper profit [5]. Special cooperate relationhip after long term cooperation between organization i crucial reource to obtain competitive advantage. The crucial reource maybe pan firm boundary and embed to inter-firm routine and procedure which then give rie to relational rent. Additionally, long term cooperation produce intricate interconnectedne and create ource private and target carcity which will etablih imitation obtacle to relational rent. Rational rent emphaizing dyadic relationhip greatly enhance poibility for organization to get uper rent. The dyadic view i unlike the cognition from tranaction cot theory and reource-baed view on rational rent in nature. Rent i particular for manufacture in reource-baed view and i unique in trade from tranaction cot view, which both embrace a common hypothei that whatever the rent ource i, manufacture` collaborated profit will be affected. Relational rent tree it analyzing unit i dyadic relationhip and believe pecific allied relationhip after a long term ymbioi i a crucial reource for competitive advantage. Thi key reource may trancend firm boundary and embed into routine and convention in corporation then create relational rent. Additionally, the interconnectedne can build up

4 The Thirteenth Wuhan International Conference on E-Buine Innovation Management and IT Buine Value 549 ource proprietary and become imitation barrier [5]. There are obviou difference between fellowhip in GVC and in fair trade market. Fellowhip in fair trade market i feature with low pecific aet invetment, low information exchange, eparated technical function ytem, low tranact cot and lowet invetment in governance mechanim under which ituation buyer can change tranact fellow with low punihment and in nature, relation between trade two ide i competitive. GVC call for great collaboration among lace. Etablihing cloe relationhip among Firm inter-chain are not only driven by tranaction, but alo inpired by technology collaboration, co-purchae, information haring etc. Relation between firm need coordination beide competition. Therefore, fellowhip i capable of creating relational rent and competitive advantage. When one-to-one dyadic relationhip among individual develop into Tribal relationhip between group, everal ocial relation in network organization have een a new perpective to tudy, which i network rent. Called network rent i a poitive urplu after general profit created by all member in network organization having counterbalanced their um of ingle profit. In tranaction cot theory, trade can be harmonized by three kind government ytem, called market, hierarchy and mix pattern and network governance theory hould be regarded one kind ocial ytem, in which trut mechanim, reputation mechanim and collected trade mechanim will reduce tranaction cot [6]. Network i not only beneficial to reduce tranaction cot, but alo facilitate to create rent [7]. Beide relational rent, network i regarded a locu of innovation. Actor in network organization with variou background and capabilitie are capable to expand technical option through upgrading knowledge aggregation [8]. Concluding preent paper, we can find that effect created by network rent mainly how in complementary effect in network reource, exterior effect in knowledge learning and innovation, external cale effect and amplification effect of marketing control power [9]. Therefore, taking tranaction cot aving in mind, network organization poe production and innovation function non-ubtitute by market or individual firm. Thi i unique character of network organization break out individual limited in abilitie. Indutry cluter which i a bet embodiment for network rent in GVC. Indutry cluter i one important form of global ditribution of GVC whoe nature i a kind of network form. Enright(2001) regard firm in cluter can create uper profit through collaboration and can perform better than firm outide cluter. Competitive advantage of cluter i preented by collective efficiency, pecifically expreed in external economic, combined action and ytem effect. 3. MODEL ANALYSIS: GOVERNANCE MODEL AND RENTS DISTRIBUTION Network, a trategic reource, can bring rent to firm which are key reource for firm competitive advantage. A relative quetion come up naturally: how i rent allocated? Only for relational rent, many empirical tudy prove that it not average allocation between collaborated firm. Then, how to get more percentage in rent allocation? The paper divide product into the firt order and econd order according to Lu Feng (2004). Product of the firt order refer to the product can bring certain conumer and product function into play independently [10]. Product of the econd order, having no independent conumption and production, can be pecific component itelf of after tranformation through aembling or proceing procedure. Actor in global value chain have being portrait collaboration of uptream and downtream indutry tache. The collaboration between uptream and downtream enterprie can be realized through product of the econd order, which become the determinant of the coordinated relation. Multinational corporation of developed countrie have played critical role in global value chain. To

5 550 The Thirteenth Wuhan International Conference on E-Buine Innovation Management and IT Buine Value implify our model, we uppoe that production divided into uptream and downtream tage and uptream enterprie provide the econd product which then i affected by market tructure of both two tream. Combined model of Hay and Morri (1991), we aumed uptream enterprie product and ale a ort of the econd order product S, an input of production proce of downtream enterprie. Downtream enterprie yield product of the firt order X. one unit of the two order product are correponding to each other, i.e. a unit S produce one unit X. There are m enterprie of the firt order product and n enterprie of the econd order product. The output are homogeneity without cahoot [11]. For product of the firt order in downtream market, anti-demand function i p χ = f ( Q), Q = m qχ, qχ how quantity of every enterprie producing the firt order product. c χ i variable cot excluding the econd order product; Fχ i fixed cot; o profit function of downtream enterprie i π χ = πχ qχ π qχ cχ qχ Fχ (1) Baed on the firt derivative condition of profit optimization, when profit i optimized dπ χ q χ dπχ = πχ 1 + π cχ = 0 dqχ πχ dqχ (2) Orderε χ a demand flexibility of the firt order product and aggregate profit optimization condition of m enterprie. 1 pχ 1 = p + cχ mε χ (3) After ettled, cauing demand curve from the firt order function to the econd product S i: 1 p ( Q ) = pχ ( Q ) 1 cχ = MR χ ( m) cχ mε χ (4) In the product of econd order, anti-demand function i p = f ( Q), Q = n q, q i the quantity of every enterprie of the econd order product. c i variable cot and F i fixed cot input by uptream enterprie; o profit function of uptream enterprie i π MR ( m) q c q cq F = c c (5) According to the firt derivative condition of profit optimization for the econd order product, when profit i optimized dπ 1 = MRχ ( m) 1 -c cχ = 0 dq εmr (6) Through aggregating profit optimization condition of every product of the econd product enterprie, equilibrium condition of the econd order product market can be found: 1 MMR ( n) = MRχ ( m) 1 = c + cχ nεmr (7) MMR ( n) i marginal curve of anti-demand function of the firt order product. The econd order P product anti-demand function of the econd order enterprie i ( Q ) = MRχ ( m) cχ,so the marginal income function of the econd order enterprie i MMR ( n) c, when MR=MC, i.e. MMR ( n ) c = c c (8) From above, quantity Q* and equilibrium price p* of the econd product can be achieved. In addition, the marginal cot of firt order product in downtream i p*+cx. According to the firt derivative condition of profit optimization MR=MC, o,

6 The Thirteenth Wuhan International Conference on E-Buine Innovation Management and IT Buine Value 551 ( m) = p + cχ MRχ (9) The quantity Q* and equilibrium price p of the econd product can be obtained. The model howed that the mooth production proce in uptream and downtream production depend on the demand equilibrium [12]. The profit of actor in global value chain i mainly determined by market tructure of the two order product that i the quantity of m and n. Aymmetry of leader power in GVC in fact have reacted aymmetry in relational rent allocation. Higher in leader power, higher allocation quotient of relational rent firm will get. That i to ay, aymmetry of leader power i one of important factor account for income growing gap between developed and developing countrie. On the other hand, we find that GVC i dynamic and the governance kind i alo dynamic. With improvement in tandard, technology kill and upplier ability, modularization i becoming a mainly kind in nowaday. 4 GOVERNANCE MODEL AND RENTS ALLOCAITON IN NOTEBOOK COMPUTER IDNUSTRY 4.1 Methodology In thi article we preent an exploratory reearch proce uing a cae tudy approach (e.g. Merriam, 1998; Yin, 1989).We elected the notebook computer indutry a the empirical bae for our aymmetrical power relation reearch for everal reaon. Firtly, after more than ten year of development, production of notebook computer ha formed global co-production, the product of the international diviion of labor within the indutry model. Secondly, on the whole, indutry of notebook computer ha ignificant characteritic of the "producer-driven" commodity chain and claical aymmetrical relation among actor in global value chain. 4.2 Formation and evolvement of governance model in notebook computer indutry Microoft, Intel and other U.S. companie are in the center part, Microoft' Window operating ytem (Window) and Intel' central proceing unit (CPU) team, forming a notebook computer oftware and hardware indutry tandard, that ha the characteritic of trong technology-intenive. Technical architecture tandard propoed by they ha become a "baton" to guide indutrial development, Manufacturer of notebook computer component and peripheral mut deign product in accordance with thee indutry tandard, o that Microoft and Intel are in the center poition in the coordination of the commodity chain network, control of raw material and part upplier forward, cloe contact with the ditributor retailer backward.in indutry of notebook computer part upply network, the key component uch a CPU, computer chip, dynamic random acce memory, etc, thee high-tech product gathered in the United State, Japan, South Korea and China Taiwan, the general component uch a motherboard, video card, moue, etc produced mainly by the Chinee mainland, China Taiwan and o on. Taiwan ha become the world larget manufacturer of notebook computer ince In 2012, almot 65 percent of the notebook computer old under the international brand were deigned and manufactured by Taiwanee firm under OEM arrangement. The indutry of value chain of notebook computer cloer to the hybrid value chain. In indutry of value chain of notebook computer, the mot critical participant are the brand-led buine and firt-cla upplier. In ale terminal, brand-led company ha a trong brand and global ale network brand have a lot of power in the value chain governance and income ditribution, a certain extent, their order determine the urvival and profitability of manufacturer, the value chain tend to brand-driven value chain; In production, the firt cla upplier directly accept order from brand-led companie, R & D product rely advantage of their technical capabilitie, and organize production uing the production

7 552 The Thirteenth Wuhan International Conference on E-Buine Innovation Management and IT Buine Value network having been formed. Since the firt cla upplier technological capabilitie in reearch and development, ub-upplier needed to produce the correponding part ancillary product baed on their deign, form technology-driven value chain between the firt cla upplier and ub-upplier. And rapid technological advance hortened product life cycle, requiring fater product replacement; brand-led companie face large time preure in the promotion of product, which in turn require form the reciprocity cloe relationhip between the brand-led buinee and all level of upplier to meet market need and flexible production. Product deign R&D Manufacture Sale and Service Conceptual deign: analyi of market demand, creating concept, etablih a brand image Deign review: Modeling, electronic experimentation, deign verification Small cale production: proce deign, production verification Advertaiing Brand maintain Figure 1. Notebook computer indutry value chain 4.3 The tatu of firm, market tructure and rent allocation in notebook computer indutry In indutry of notebook computer part upply network, the key component uch a CPU, computer chip, dynamic random acce memory, etc, thee high-tech product gathered in the United State, Japan, South Korea and China Taiwan, the general component uch a motherboard, video card, moue, etc produced mainly by the Chinee mainland, China Taiwan and o on (ee Table 1). Table 1. Notebook computer global fragmentation of Production ytem Country or Region Enterprie Major diviion United State Microoft, Intel Control of the PC market, the main product monopolitic United State, Japan, China Taiwan Dell, HP, Tohiba, Acer, etc. Brand, marketing, channel China Taiwan TSMC, UMC, Inventec, Mitac, Tatung ODM / OEM manufacturing, global logitic Japan, Korea, China Taiwan NEC, Hitachi, Tohiba, Samung, Hyundai, BenQ Key part LCD, CRT, DRAM China, China Taiwan Lite, Delta, Hongji, hould have, Fu Hua Shell, moue, keyboard, battery, connector Reouce:According to Foter etc. (2006), Zhang Ji (2006) collation In the production network notebook computer indutry, mot other manufacturer entrut China Taiwan contract maker producing the notebook computer, in addition to Japanee manufacturer till init on producing ome of notebook computer by themelve. The CM and ODM companie linked to the upplier of part and peripheral in order to meet requirement for product brand, thu becoming the ticking point of indutry production operation. In 2012, quantity of notebook computer OEM in Taiwan i 94% the world' total quantity of notebook computer OEM (Shui Qing Mu Hua Reearch Center, 2012). Thee headquarter and R & D center of Taiwan ODM companie generally located in Taipei, in order to protect intellectual property and improve competitive advantage, large enterprie expand R & D intitution actively in Taipei, and in order to reduce cot, mot of the production facilitie are located in China Changjiang River Delta (Shanghai, Kunhan, Suzhou), many notebook computer manufacturer ettled in Chongqing in 2010, the Chinee mainland ha become the world' larget production bae of notebook computer. 94% of global notebook computer computer are aembled by Taiwanee vendor, motly ODM intead of OEM. The notebook computer production tranferred to wetern China. Although all notebook

8 The Thirteenth Wuhan International Conference on E-Buine Innovation Management and IT Buine Value 553 computer ODM are from Taiwan, their production bae are located in Mainland China. China' notebook computer output wa 244 million in 2011, of which 230 million one were exported. In 2010, notebook computer manufacturer acceed to Chongqing ucceively. Their production bae put into production in 2011 when 24,073,900 notebook computer were produced in Chongqing, up 25.4-fold. Quanta powerfully regained the No.1 poition from Compal in 2010 ince Acer, the larget client of Compal, performed poorly in quarter 4 with grave inventory. Witron alo failed to meet the hipment objective in 2010, Inventec invariably hovered at the low level and rejected the low-price order of HP. Hon Hai perevered in developing the notebook computer contract manufacture, but it trictly controlled the contract cale, increaingly difficult to obtain profit. Notebook computer OEM field i characterized by fierce competition and the gro margin of the OEM i uually between 3%-5%(ee Table 2). Table 2. Shipment of major notebook computer ODM in the World, (Unit: mln) Compan/ year Major Client Quanta HP, Dell, Lenovo, Tohiba, Au Compal Acer, Dell, Lenovo, HP, Tohiba Witorn Acer, Dell, Lenovo Inventec HP, Tohiba Hon Hai HP, Au Global value chain of notebook computer evolve from a ingle market to the global market, from the whole production to the production of global integration with upply chain in the mode of production, which not only lower cot of production, ale and other cot, alo the level of ervice extend from OEM to ODM, and it provide direction for notebook computer enterprie to enhance their core competitivene. The formation of the global value chain of notebook computer make the international diviion of labor more and more detailed in notebook computer indutry, the governance model i particularly important among brand owner, contract maker and upplier. From a governance perpective, notebook computer enterprie that pecialized diviion of labor will form different relationhip in the value chain: a it often require exchange information on the product conceptual deign and product development between leading brand enterprie and tier one upplier, but the information can be encoded degree i lower at thi tage of the value chain, value chain governance i mainly relational value chain; When the product ha been put into production through development trial, the degree of information can be encoded increae, the value chain model i cloer to the modular value chain between tier one upplier and ub-upplier. Brand-led firm: Dell, HP, Sony, etc Tier one upplier: Quanta, Compal, Inventec, Witron, etc. Sub upplier: Chai, battery, diplay, keyboard, connector, radiator, etc. The third tier upplier: Boxe, crew, platic component, capacitor Relational Model Modular Model Captive Model Indutrial governance dominant mode Figure 2. Different governance model in notebook computer indutry

9 554 The Thirteenth Wuhan International Conference on E-Buine Innovation Management and IT Buine Value 3. CONCLUSIONS AND DISCUSSION Not every link of the global value chain that involve numerou firm from different countrie create value. The tatu of actor and the market tructure in different value node influence the rent ditribution among global value chain. Lead firm control trategic link and poe the power to coordinate and manage global value chain, while upplier are led by them. Notebook computer enterprie have formed multiple governance relation in the value chain. With the uneven of profit ditribution and rent ditribution, Chinee notebook computer firm are in low value-added location, it ha brought many predicament to enterprie upgrading. Chinee notebook computer indutry range from imple aembly component along the indutry chain gradually, intermediate product and R&D and other more advanced tage of development. By attracting foreign invetment, it reduce the gap of the mainland enterprie technology capability, o that production and export tructure ha been ignificantly improved. But local buinee are till in the underlying network of production. With the riing cot of factor of production, labor cot advantage comparative to other mainland Aian or South American countrie are alo reduced, which make upgrading the key iue whether local companie can growth healthily. To break the plight of indutrial upgrading to obtain the benefit of joining the global value chain need the upport of the macro-environment and micro bae guarantee. ACKNOWLEDGEMENT Thi reearch wa upported by the National Natural Science Foundation of China under Grant and the Fundamental Reearch Found for National Univerity, China Univerity of Geocience(Wuhan) MAIN REFERENCES [1] Liu Linqing, Tan Li-wen.(2006).The Double Dimenional Evaluation of the Indutrial International Competitivene in the Context of Global Value Chain. China Indutrial Economy, (12): (in Chinee) [2] Gereffi, G. and F. Mayer. (2006). Globalization and the demand for governance. In: The new offering of job and global development. Geneva, Switzerland: International Labor Organization, [3] Liu Lingqing, Tan Li-wen, Ma Haiyan.(2011).Two-dimenional governance and indutrial international competitivene: A view from global value chain. Nankai Buine Review International,10(3): [4] Dyer,J,H.Singh,H. (1998).The relational view: Cooperative trategy and ource of inter-organizational competitive advantage..academy of Management Journal, 23 (4): [5] Luo Ming, Zeng Tao, Zhou Si-wei. (2005).Buine Model Innovation: Baed on the Explanation for Rent. China indutry jounal, (1):73-81 (in Chinee). [6] Jone,C. Heterly,W. Borgatti,S. (1997). A general theory of network governance: exchange condition and ocial mechanim.academy of Management Review,22(4) : [7] Gulati,R. Nohria,N. Zaheer,A. (2000)Strategic Network.Strategic Management Journal, 21: [8] Powell,W. Koput,K.W. Smith-Doerr,L.(1996). Inter-organizational Collaboration and the Locu of Innovation: Network of Learning in Biotechnology. Adminitrative Science Quarterly, 41(1): [9] Lu Fucai, Hu Pingbo, An Analyi of Network rent and It Formative Mechanim,Chinee Indutry economy, 2006,(6), pp. 84~90 (in Chinee) [10] Lu Feng.(2004). Diviion in intra-product: an analyi framework.work Paper from Chinee Economy Intitute of Beking Univerity (in Chinee). [11] Hay D., Morri D.(1991). Indutrial Economic and Organization. Oxford Univerity Pre:90. [12] Zhang Ji, (2006). Profit allocation in intra-product international pecialization: on the analyi of notebook commodity chain, China Indutrial Economy,7:36-440(in Chinee)