Small and Medium Enterprises, Linkages and Globalization

1. Small and Medium Enterprises, Linkages and Globalization Fulvia Farinelli, UNCTAD/DITE fulvia.farinelli@unctad.org

2. Contents • The impact of globalization • How to become global players • TNC-SME linkages • Global Value Chains • Conclusions

3. Globalization: a threat or an opportunity for SMEs? ?

4. Twofold answer: • Opportunities: the expansion of market scale and scope combined with ITs is allowing the integration of a small minority of best performing SMEs into global production networks • Challenges: global competitors are threatening the survival of a vast majority of localized and often isolated domestic producers

5. Evidence shows that: • Overall, globalization is opening up to export expansion and growth for only 5-10% of SMEs

6. The main question: • What can be done to support SMEs’ upgrading and their integration into the global market?

7. Engines of globalization • Trade • Production • Investment • Companies • Culture • Politics

8. The role of TNCs is increasing • 60,000 TNCs • 800,000 foreign affiliates • TNCs account for some 2/3 of world exports • 1/3 of world trade is intra-firm • TNCs dominate world industrial R&D • FDI is the largest source of external finance for developing countries

9. Some TNCs are very bigValue added or GDP, USD billions

10. There are different ways for SMEs to become global players • Directly through exports • Indirectly TNC-SME linkages and Global Value Chains

11. TNC-SME Linkages

12. The potential benefit of TNC-SME linkages • TNCs can be a powerful sources of demand for the output of local suppliers and subcontractors. • They can raise the capabilities and quality to international level more effectively than links among domestic firms.

13. But: • Under import substitution regimes, many countries forced the pace of local content by imposing local performance requirements. • Today, local content provisions are under the purview of the WTO Agreements. • TNC-SME linkages are increasingly driven by pure cost and efficiency considerations.

14. Changing Corporate Strategies a Driving Forcereflecting changes in the global business environment • Trade and investment liberalization • Technological change • Increased competition • Economic slowdown Underlying factors • Focus on core activities/outsourcing • Specialization and internationalization • Search for ways to reduce costs and reap economies of scale TNC responses But: Expansion of efficiency-seeking FDI!

15. 1980’s >100 1990’s 36 2000’s 14 Local Regional Global Shifting Corporate Strategies:the Philips example (number of factories for healthcare products)

16. How to become Philips registered suppliers • Our Global Supplier Rating System (GSRS) gives us insight into our suppliers’ performance throughout Philips’ businesses. It allows us to identify ‘best fit’ suppliers who add the most value, using objective, measurable criteria. • Supplier Rating also provides a way for our suppliers to check their own performance, anywhere and at any time. Data and benchmarks are visible to both parties. • The system supports supplier relationship management, as well as supplier development and quality management. Philips and suppliers can work together effectively on problem solving and improvements based on objective performance measurement and feedback. • The GSRS is based on five main criteria: • Delivery • Quality • Cost • Responsiveness / Support • Innovation

17. Global Value Chains

18. GLOBAL VALUE CHAIN:THE AUTOMOTIVE INDUSTRY Interior & Electrics Engine Finance Glasses Transmission & Gearboxes Service Energy Aftermarket Parts Chassis Tyres Breaks and suspension UPSTREAM DOWNSTREAM

19. Example of a value chain management system in the software industry Source: UNCTAD’s case study on Microsoft in Egypt, 2006

20. GOVERNANCE STRUCTURES OF VALUE CHAINS Integrated Firm Lead Firm • Producer driven • Large firm or TNC controls production network • Upstream and downstream linkages • Capital and technology intensive industries (i.e. automobiles, aircraft) • Buyer driven • Decentralised production network • Labour intensive industries (large retailers and branded manufactureres, i.e. GAP, Nike) Buyers Buyers price Suppliers Suppliers Suppliers Lead firms coordinate the value chain : innovate, create brands, control the whole production process

21. Results of UNCTAD’s case studies on the automobile industry: • Most local suppliers in developing countries did not succeed to become global sourcing partners. • Developing countries SMEs have started to link up with first tier suppliers of large TNCs. • Large opportunities appear to have emerged in second-tier sourcing in Mexico and South Africa.

22. First and second tier suppliers of the Volkswagen plant in Puebla First-tier Second-tier Source: UNCTAD’s case study on Volkswagen in Mexico, 2006

23. UNCTAD’s case studies results on the software industry: • Leading software providers (such as Microsoft in Egypt or IBM in Vietnam) depend on local companies to adapt their products to the local market and to support local customers. • Rivalry among local companies is strong and is driving a constant upgrading process. • This, in turn, gives companies visibility and credibility not only in their domestic market but also in their region.

24. Example of suppliers upgrading in the IBM PartnerWorld system applied in Vietnam Source: UNCTAD’s case study on IBM in Vietnam, 2007

25. UNCTAD’s case studies results on the cinema industry: • TNCs dominate the most important production networks. Creative industries face structural changes triggered by technology, both at the production and the distribution side. • The issue of local preferences, culture, formats and language is still a determining factor in shaping the emergence of new value chains in creative industries. • This opens up new opportunities for new, specialized entrants, such as the Colombian 3-D animation producers and local movie producers in “Nollywood” (Nigeria).

26. E.g. Numbers on key players in the 3D-animation value-chain in Colombia Source: UNCTAD’s case study on Caracol in Colombia, 2006

27. Two main conclusions: 1. TNCs often take active steps to improve the capabilities of their suppliers, but they seldom progress beyond the first tier, thereby missing SME suppliers in most developing countries. Need for upgrading and linkages creation policies, in particular focusing on the integration of lower-tier SMEs in GVCs.

28. Additionally: 2. Developing countries SMEs can participate effectively in the global economy but have to achieve collective efficiency: • Either horizontally, through clusters • Or vertically, through TNC-SME linkages

29. What are Clusters?

30. A Cluster is defined as a spatial concentration of specialized firms • Firms located in clusters benefit from different forms of collective efficiency: • Together they generate external economies which spill-over to other firms (passive extenalities); • They also engage in deliberate joint actions(active externalities).

31. Competitiveness before Joint service Company A Company B Company C Company D • In the past companies reacted to increased global competition with collaborative initiatives: • sharing parts of their value chains (research, logistics,…) • developing common support services (training,…)

32. Competitiveness now Globalization is optimizing the value chain worldwide, leaving little room for individual clusters

33. E.g. CLUSTER DEVELOPMENT IN THAILAND • Automotive industry in Thailand • Cost competitiveness based on low factor input costs, which are raising now. • Challenge: improve productivity and lower costs or move up to the next tier within the GVC. • Opportunity: subregional coordinated strategy to involve neighboring countries to become lower tier suppliers. Source: Thailand Automotive Institute

34. THANK YOU!