Quantifying Governance: Assessing the Relationship Between Local Suppliers and Final Markets in the Kenya Leather Value Chain

Drawing on disaggregated export transaction data over a 10-years period (2006-2015), this paper analyses the relationship between market trajectories, governance, and upgrading among Kenyan suppliers at all levels of the leather value chain. This study represents a first attempt at quantifying governance relationships by assessing the dyadic stability of buyer-supplier exchanges. Using unit values as an indicator of product upgrading and HS coding as an indicator of functional upgrading, the correlation between market trajectories and upgrading is further assessed. Methodologically, this is achieved by means of a linear probability model combining between- and within-firm analysis through pooled OLS and Fixed Effect (FE) models. The impact of industrial policy on upgrading is further established through the adoption of a FE difference-in-differences model. The paper analyses both aspects of vertical governance within GVCs as well as external governance in the form of regulations and policies. Moreover, by comparing lead firms across a South-South and South-North divide, it further evaluates aspects of regulatory governance characterising developed and developing markets – e.g. process and product standards, social and environmental regulations, and labour costs (Cattaneo et al. 2011; Kaplinsky & Farooki 2010; Navas-Alemán 2011; Horner 2015; Nadvi 2014; Aykut & Goldstein 2006). Provisional results show how lead firms across the South and the North adopt similar forms of relational interaction in governing their relationships with local suppliers. This casts doubts on the GVC literature on governance to the extent that a certain degree of integration cannot be explained by information complexity alone. Qualitative analysis comparing sourcing practices, regulations, stability, trust, and quality conventions across different market trajectories allows for a better understanding of how similar forms of buyer-supplier integration characterise both southern price-driven- and northern quality-driven markets. The analysis further contradicts the notion that more relational forms of governance prevent functional upgrading. Conversely, the use of difference-in-differences along with a qualitative comparison between up- and downgraders across the chain sheds light on the impact of state regulation on firms’ upgrading dynamics.