The Lock-in Effect Of International Subcontracting And Its Surpassing Possibilities

In recent 30 years after the reform and opening-up, the export-oriented economic and industrial development mode at the essence of international subcontracting, has established 30-year continuous rapid growth of national economy called "the China Miracle". However, under the glorious halo of "Trade Giant" and "Economy Giant", there is an inevitable "trade paradox", that is, the lasting superspeed growth of Chinese manufacturing export and the unceasing expansion of economic scale have not logically brought about the improvement of term of trade and native industrial upgrading. This implies that under the global value chain (GVC) specialization, international subcontracting with its advantage on low-end production factors has a certain lock-in effect. Therefore, how to comprehend, grasp and surpass the lock-in effect is the logical starting point and fundamental path of breaking the Chinese trade paradox and finally causing the transformation of economic development mode.To begin with, using related statistics and cases, the paper summarizes and illustrates the stylized facts of Chinese export-oriented economy and the general "race to bottom" behaviors of Chinese subcontracting firms under the background of meager profit, which give macro and micro-reflection that Chinese subcontracting mode bears a certain lock-in effect. And then, by using the panel data of 27 Chinese manufacturing industries from 2001 to 2008, the study respectively tests the existence of lock-in effect in different factor-intensive industries under the international subcontracting mode. The results show that Chinese export-oriented economy strategy with international subcontracting mode, does not consequentially bring the industrial upgrading and economic transition; instead, it may form self-reinforcement and lock-in of comparative advantages and trade patterns through the lock-in effect in factors, market and value chain, and then the path dependence on international subcontracting mode comes into being. The conclusion also shows that the transformation of Chinese export-oriented economy development mode, to a great extent, relies on the development strategy of MNCs, the industrial factor intensity, the industrial technological level, the utilization way of production factors, and the external institutional environment.Next, based on the GVC theoretical framework, the paper makes a deep exploration of the micro-mechanism engendering lock-in effect by mathematics model, statistics and cases from different perspectives. Considering MNCs' powerful controlling force on market demand and their global brand strategy, the paper holds that the control on terminal market demand of MNCs and international big buyers is the root of Chinese manufacturing's lock-in subcontracting, and the endogenous upgrading based on GVC cannot but be confronted with "positional, block" by MNCs from developed countries, thus to be failure to surpass subcontracting. The main findings are as follows:MNCs make full use of their brand power and controlling force of market demand in sales terminals by scale economies effect, captive effect, labor squeeze effect, consumption restraint effect, and institutional effect, so that the motive and possibilities to surpass subcontracting of Chinese indigenous manufacturing firms are reduced and suppressed; MNCs would resort to their technological level and market demand condition, and build strong brand barriers by various strategies such as preemption of product space, brand expansion, singularity of brand category, demand lock-in, thus to occupy and control the global market. These conclusions infer that the brand barriers constructed by MNCs from developed countries may be the hardest to overpass for the enterprises from latecomer countries. Thus, the fact that Chinese manufacturing lacks self-owned brands and unavoidably locks in subcontracting for transnational brand firms is effectively explained.Furthermore, taking product market competition into consideration, the paper establishes game models to analyze the strategic conducts of transnational outsourcing firm and indigenous subcontractor, from two perspectives as disadvantage of backwardness under homogeneous product competition and differentiated product competition, and finds the surpassing condition of international subcontracting and its influential factors. The theoretical models and case studies conclude as follows. Firstly, the rising disadvantages of backwardness of subcontractor, the cheap labor and the indigenous advantages decide the possibilities of brand upgrading. Secondly, with only vertical differentiation between outsourcing firm and subcontractor, the rational subcontractor with brand disadvantage and producing cost advantage would insist in international subcontracting instead of creating self-owned brand. However, with the support by large market demand, the subcontractor who carries on the horizontal differentiation strategy and orients a different product location from that of the original outsourcing firm can achieve brand upgrading. The results suggest that, although China may not totally realize industrial upgrading through creating a large-scale of self-owned brands, some advanced firms may surpass international subcontracting via locating reasonable product markets and making full use of the home market advantages.Lastly, standing on the perspective of constructing the national value chain, the paper theoretically and empirically studies the possibilities of achieving industrial upgrading by exploring home market demand under the external shock. The results indicate that the characteristics of market demand in China, such as the large market scale, high-end market capacity, unbalanced regional development levels, will make for constructing the national value chain and transforming trade patterns; especially, the high-end market capacity is one of the most important influential factors in the transition and surpassing of Chinese international subcontracting mode. Moreover, the way of transition and surpassing will be comprehensively influenced by some external factors, such as international market environment, fluctuation of exchange rate, the technological competence and innovating intention of indigenous firms, and the opening strategies and policies of local governments.