Upgrading to Compete Global Value Chains, Clusters and SMEs in Latin America

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Upgrading to CompeteGlobal Value Chains,
Clusters and SMEs in Latin America

• Roberta Rabellotti
• SeMEQ Università del Piemonte Orientale
• rabellotti_at_eco.unipmn.it

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An IADB project on Latin American SMEs
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How can SMEs in developing countries be
competitive in global markets?

• To participate in global markets in a sustainable
  way - the high road to competitiveness - SMEs
  have to upgrade
• to make better products (product upgrading)
• to make products more efficiently (process
  upgrading)
• to move into more skilled activities (functional
  upgrading)
• to move into new sectors (intersectoral
  upgrading).

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Upgrading

• Upgrading is linked with innovation not defined
  as a breakthrough into a product or a process
  that is new to the world but rather marginal,
  incremental improvements of products and
  processes, that are new to the firm
• Upgrading is defined as innovating to increase
  value added.

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How can SMEs face the challenge of upgrading?
The role of
1. Clusters
2. Value Chains
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In industrial clusters the focus is on the role
of local linkages in generating competitive
advantages in local industries.
Two different approaches

• In global value chain the emphasis is on
  cross-border linkages between firms in global
  production and distribution systems.

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Clusters

• Sectoral and geographical agglomeration of SMEs
• Firms located in clusters benefit from collective
  efficiency defined as the competitive advantage
  derived from
• external economies which spillover to other firms
  (incidental passive effect of clustering)
• joint actions (consciously pursued active -
  effect of clustering).

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Some examples of external economiescommon in
clusters

• Availability of specialized skills
• Cheap and ready available supply of specialized
  inputs
• Easy access to specialized knowledge and rapid
  dissemination of information
• Improved market access the concentration
  attracts customers.

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Joint actions

• Joint projects with suppliers, traders and buyers
  (vertical linkages) and with other local
  producers or through business associations
  (horizontal linkages)
• Impact on specialization and complementarity
  among firms
• Shared solutions to common problems.

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Collective efficiency
External economies
Joint actions
Collective Efficiency
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Global Value Chains (1)

• International business scholars define a
  value-added chain as the process by which
  technology is combined with material and labor
  inputs and then processed inputs are assembled,
  marketed and distributed. A single firm may
  consist of only one link in this process, or it
  may be extensively vertically integrated
  (Kogut, 1985)
• The key issues are a) which activities and
  technologies a firm keeps in-house and which are
  outsourced to other firms and b) where the
  various activities are located
• Recently, Gereffi and others (Schmitz, Humphrey,
  Kaplinsky et al.) have developed a framework that
  tied the concept of the value-added chain
  directly to the globalization of industries with
  a focus on developing countries.

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Global Value Chains (2)

• Increasing importance of non-production
  activities (e.g. marketing design, sale) for the
  creation of value added
• It emphasises the growing importance of global
  buyers and producers as key drivers in the
  formation of globally dispersed and
  organizationally fragmented production and
  distribution networks
• For LDCs firms, these external linkages are
  considered as key channels of knowledge for
  learning and innovating
• Upgrading of firms participating in a value chain
  depends on the nature of the relationships
  (governance patterns and power asymmetries) among
  the various actors within the chain.

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Patterns of governance

• Arms-length market relations
• Network co-operation, firms with /- equal
  power
• Quasi-hierarchy involving subordination to the
  chains leaders
• Hierarchy when a firm is owned by an external
  firm.

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Sectoral Learning Patterns

• Upgrading (via learning and innovation) depends
  on technological regimes and specificity of
  sectoral groups
• Pavitt taxonomy revisited

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SECTORAL PATTERNS
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Methodology

• Analysis of 50 Empirical Case Studies of clusters
  in Latin America (11 original field-studies)
• Analysis and measurement of
• Collective Efficiency Likert scale from absent
  (0) to high (3) (external economies joint
  actions)
• Governance of the Value Chain Market, Network,
  Quasi-hierarchy, Hierarchy
• Forms of Upgrading Product, Process, Functional
  Intersectoral Upgrading 0-3 Likert scale.

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Patterns of Learning and Upgrading Across
Sectoral Groups
Traditional manufacturing Natural-Resource based
Relation between collective efficiency and Relation between collective efficiency and
Product upgrading
Process upgrading Neutral
Functional upgrading Neutral
The impact of global buyers/leaders operations on The impact of global buyers/leaders operations on
Product upgrading (but passive)
Process upgrading (but passive)
Functional upgrading - Neutral / -
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Upgrading in Traditional Manufacturing

• Positive relationship between product upgrading
  and the degree of collective efficiency
  (circulation of knowledge and infomation, role of
  vertical and multilateral joint action)
• Process and product upgrading are often
  facilitated by international large buyers
• information on products and processes cannot be
  easily codified in technical norms
• relying on the competencies of their local
  suppliers, global buyers are obliged to assist
  them in improving products and processes
• Functional upgrading is prevented by buyers
  power in quasi-hierarchical chains
• Functional upgrading can more easily take place
  in market-based value chains.

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Upgrading in NR-based industries

• In NR-based clusters, process and product
  upgrading are strongly tied to the advancement of
  science and technology in connected industries
• Public-private horizontal joint action is
  positively related with product and process
  upgrading (local institutional network, public
  support to local joint actions, research centres,
  universities, international co-operation)
• Foreign buyers facilitate the link with the
  international market by signalling the need and
  the modes of the necessary upgrading
• Nevertheless, given that the requirements of the
  international market are often codified by
  standards they do not normally support the SMEs
  upgrading process.

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Some examples of sectoral policies to sustain
SMEs upgrading in clusters and GVCs

• Traditional Manufacturing industries
• Promote access to new additional value chains
  (Sinos Valley)
• NR based industries
• Promote public-private collaboration in research
  and disseminate research to SMEs
• Promote the adoption of quality and sanitary
  standards, environmental regulations, and enforce
  quality inspections and controls.

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THANK YOU

• Giuliani E., Pietrobelli C., Rabellotti R., 2005,
  Upgrading in global value chains lessons from
  Latin America clusters, World Development, 33,
  4 549-73.
• Pietrobelli C., Rabellotti R., 2007,
  (eds.),Upgrading to Compete SMEs, Clusters and
  Value Chains in Latin America, Cambridge Mass.
  Harvard University Press.