Monopoly Profits (P2) - Institute for Human Development


The Spatiality of Knowledge:

Do GPNs Make A Difference?

Dev Nathan

Institute for Human Development, New Delhi and

Duke University, USA

Core – Periphery Models

The advanced economies (The West/North) as the producers of knowledge and technology

The developing economies (The East/South) as the users of this technology, modified only to the extent of being ‘pared down’ versions of the original

Is this division of knowledge changed by the existence of GPNs?

Major questions

1. Is there more to out-sourcing than labour arbitrage?

2. Does the division of labour in GVCs create an unchanging knowledge structure?

3. Specialization and the middle income trap

4. GPNs and innovation

5. Income, location and frugal engineering

GPN and Standard Trade Models

Commodity trade – wheat vs. wine or cloth

Knowledge in production of one commodity may not have much in common knowledge of the other

Arms-length transactions

GPN – trade in tasks

Interaction between suppliers and buyers

Learning and upgrading possibilities

Labour arbtrage: or, why does Airtel outsource to IBM?

Out-sourcing and the gains from specialization

Economies of scale

Economies of scope

Specialization and knowledge gain

GVC – GPN Distribution of Tasks and


Competitive Profits


Monopoly Profits


Wages above

Market Rates (W2)


Monopoly lost, legacy high wages

P 1, W 2

Wages at Market

Rates (W1)



Lewis-type wages

P 1, W 1


Monopoly: Design and marketing, high wages

P 2, W 2


Full package supply, legacy low wages

P 2, W 1

Learning and the Workforce

The extremes (A and C) are end points of a continuum

The necessary interaction between different GVC segments (e.g. CMT with design; software coding with installation and then design) make for learning in the lower segments

Development of ‘full package supply’ as partly the result of GVC interaction

Learning and the Workforce

Possibilities of and pre-requisites for moving up the value chain

Changing the division of labour between ‘Inhouse’ and ‘Out-source’

GVCs are not static – learning plus skill augmentation make for functional upgrading up to ‘full package’

GVCs and Knowledge Nodes

Are knowledge-intensive activities more prone to agglomeration effects and thus resistant to geographical dispersion?

But manufacture needs cross-functional, knowledge-intensive support – which migrates with production

E.g. electronics and auto components, software

Role of GPNs in changing knowledge geography

For higher value services, a greater degree of interaction is required between the two: relational vs hierarchical (Startiz and Gereffi,


Knowledge migrates with production nodes

Shift from ‘knowledge using’ to ‘knowledge changing’ capabilities

Beyond Access…

But mere access to knowledge through the

GVC is not enough

The economy must have the scientific, engineering and managerial capacity to absorb and utilize the knowledge - a national scientific and engineering system

And a firm-level business model that requires functional upgrading

Catch-up Industrialization

These processes of functional upgrading work well in an industry where basic technology is relatively stable

They enable developing country firms to reach the technological frontier

Reverse engineering

They also entail a low-level of task specialization – full package supply

This is also the ‘middle income’ trap

Specialization in Knowledge-intensive and High-end Segments

Moving out of middle income trap – from competitive to monopoly profits

Specialize in knowledge-intensive segments which enable a capture of monopoly profits – through proprietary technology

Design and marketing also enable a capture of monopoly profits – e.g. Apple or Nike

GPNs and Innovation

Separation of manufacture from design, enables the lead firm to not have to invest in manufacturing

This makes the lead firm much more innovative – does not have to take account of amortization of fixed costs

Adjacent Possible

Set of actually existing technologies – B

Set of all possible technologies with existing knowledge – A

B is a sub- set of A

[A-B] = [C] is analogous to what Kaufmann called ‘the adjacent possible’

The area into which evolution would take place

Standard Innovation Model

Firms in high income countries develop high value products

These products adapted, pared down for lowincome markets

Linear relationship between products and base of scientific knowledge

Changes to LM

Role of ‘lead users’ in innovation

Technology pushed and demand pulled innovation

Frugal Engineering Model

Rising economies – high volume, but low unit value

Require frugal engineering to meet demand

Frugal engineering as reverse innovation

New processes, not products, developed in and for low-income markets, then go back to highincome markets

Location of Frugal Engineering

Are firms in rising/developing economies better located for frugal engineering?

Is knowledge of frugal engineering requirements local and ‘sticky’?

It may be done by local firms or by local branches of developed economy firms

E.g. Tata’s Nano; GEC’s low-cost, hand-held ECG machine and ultra-sound

Limits of frugal engineering

Can work in ‘well-defined products’, e.g. cars

Less likely in products that are in early stage of product cycle


GPN knowledge structures are not spatially fixed for all time – or, until revolution comes

Involving interaction there is an evolution involved

The firm-level knowledge gained through interaction has to be induced by a business model that requires knowledge upgrading

This has to be backed up by a national scientific and engineering system