Demystifying the Global Supply Chain - A Smiling Curve Perspective

This paper explores a theoretical framework about mechanism of benefit distribution and technology upgrading of the global supply chain by a partial equilibrium model on the hypothesis of the “smiling curve”. It is found that the U-shaped form for global supply chain that illustrates the average profit for value-added at different production stages involving in the chain mainly depends on two coefficients; One is the average product of labor and the other is the relative ratio of output elasticity of capital to output elasticity of labor under the assumption of constant return of scale. This paper also argues that the premise of the mathematical expression of the smiling curve could be verified has to satisfy the assumption of contestable market structure in each production stage. This paper also proposes a new concept of upgrading mechanism so called “inter-supply chain upgrading” and concludes that advancement of technological level of the whole chain as well as the increased level of factor intensity are two essential conditions for the inter-supply chain upgrading.