An Inquiry into the Division of the Gains in High-Tech Global Supply Chains - Theory and Evidence

This paper studies the mechanism of the division of the gains in high-tech global supply chains. Motivated by the empirical observation which is widely discussed in international business literature so called “smile curve”, this paper demonstrates in a theoretical model that whether or not the U-shaped pattern (smile curve) of profit sharing along the high-tech supply chains is valid or not depends on the competing forces between two effects. The first effect is called market power gap effect and the other one is called entry cost gap effect. It is shown in this paper that if both effects for upstream (downstream) firms dominate the counterpart effects for midstream firms, then the U-shaped division of the gains in high-tech supply chains is valid. We employ the WIOD data industry level to test our theoretical predictions and we found that the empirical results are broadly consistent with the theories proposed in the paper. The empirical results in the end are also robust when we apply to US-firm level data