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

1. Upgrading to CompeteGlobal Value Chains, Clusters and SMEs in Latin America Roberta Rabellotti SeMEQ – Università del Piemonte Orientale rabellotti@eco.unipmn.it Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

2. An IADB project on Latin American SMEs Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

3. 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). Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

4. 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. Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

5. How can SMEs face the challenge of upgrading? The role of: 1. Clusters 2. Value Chains Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

6. 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. Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

7. Clusters • Sectoral and geographical agglomeration of SMEs; • Firms located in clusters benefit from collective efficiencydefined 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).

8. 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. Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

9. 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.

10. Collective efficiency External economies Joint actions Collective Efficiency Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

11. 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.

12. 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. Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

13. Patterns of governance • Arm’s-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.

14. Sectoral Learning Patterns • Upgrading (via learning and innovation) depends on technological regimes and specificity of sectoral groups; • Pavitt taxonomy revisited Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

16. } SECTORAL PATTERNS

17. 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]. Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

18. Patterns of Learning and Upgrading Across Sectoral Groups

19. 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.

20. 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. Knowledge Economy Forum VII - Ancona - JUne 17-19 2008

21. 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.

22. 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. Knowledge Economy Forum VII - Ancona - JUne 17-19 2008