Profit Sharing, Industrial Upgrading, and Global Supply Chains: Theory and Evidence

CID Research Fellow and Graduate Student Working Paper No. 123

XiaoJi Liu, Haiyue Liu, ShiYi Liu, Jim H. Shen, Chien-Chiang Lee
February 2020, Revised May 2020


This paper constructed a simple model to illustrate the global supply chain profit sharing and industrial upgrading mechanism, from which it was found that the average profitability distribution in the different supply chain stages was determined by two main factors: (1) the average product of the labor in the firms at each production stage; and (2) the ratio of the output elasticity of capital to the output elasticity of labor in each stage. This paper also proposed a new industrial upgrading mechanism, the ‘inter-supply chain upgrading’, for supply chain firms. Rises in production complexity and increased factor intensity in each production stage were found to be the two essential conditions for the inter-supply chain upgrading. The empirical study results were found to be broadly consistent with the proposed theories.

Keywords: global supply chain, smile curve, profit sharing mechanism, upgrading mechanism, average product of labor, inter-supply chain upgrading, factor intensity
JEL Classification: F1, D2, D4
Affiliated Research Program: Growth Lab