CREI, Università Roma Tre 1 Clusters, Value Chains and Technological Capabilities Building Carlo Pietrobelli Professor of Economics Director of CREI, University of Rome 3, Italy Brussels Rural Development Briefings Brussels, European Commission 23 September

CREI, Università Roma Tre 2 Competitive SMEs are necessary ! Micro, Small and Medium-sized Enterprises (MSME) play a key role in terms of employment and income generation in developing countries. … but their development and performance also contribute to poverty reduction. …The World Bank estimates that 80% of poverty reduction is due to economic growth the private sector drives the economic growth developing countries need.....companies offer people the chance to get a job and earn a living.... the private sector creates wealth and helps individuals and nations lift themselves out of poverty. The private sector does not just mean multinational companies. Small firms and enterprising individuals matter just as much. (DFID, 2009).

CREI, Università Roma Tre 3 All face a pressure to compete Pressure to compete in open markets Increasing globalization New knowledge-related barriers (e.g. technical, environmental, sanitary standards). Various ways of penetrating global markets –Clusters of SMEs together –Global Buyers driving the formation of globally dispersed and organizationally fragmented production and distribution networks (Value Chains) Remarkable consequences for firms performance and knowledge diffusion

CREI, Università Roma Tre 4 …But being competitive is not enoough….. Rents and barriers to entry All activities contribute to total value, but some add more value than others: crucial to identify which activities provide higher rents along the value chain; Rents arise in case of differential productivity of factors and barriers to entry (scarcity of factors and imperfect competition). Rents can depend on technological capabilities, organizational capabilities, skills and marketing capabilities (brand names); These differences among activities are relevant to understand the opportunities open to developing countries firms The relevant concept here is upgrading

CREI, Università Roma Tre 5 5 Part of a long trajectory of a research Started with Clusters and Value Chains in Latin America Opportunities for SMEs learning and upgrading Sectoral dimension Role of firm-level TCs and GVCs Measurement and impact of governance (Thailand) Networks and innovation in Chilean meat sector

CREI, Università Roma Tre 6 UPGRADING as a better deal for firms Process Product Functional Intersectoral/inter- chain Upgrading

CREI, Università Roma Tre 7 Process Upgrading Achieving a more efficient transformation of inputs into outputs by reorganizing the production system and introducing superior technology; Matching standards that are set by buyers (often a condition for market entry, but also a trigger for higher prices paid for a better products); Doing things more competently (matching strict logistics and lead times and delivering supplies reliably and homogeneously time after time);

CREI, Università Roma Tre 8 Product Upgrading Moving into more sophisticated products with increased unit value; Producing a large range of products with different specifications across the whole range of quality and/or origins (e.g. wine portfolios representing all major regions, varietals, and price points); It is sometimes difficult to distinguish product and process upgrading, especially in agro-food products, where new processes generate new categories of products (e.g. organics, sustainable products). Example: the apparel commodity chain in Asia upgrading from discount chains to department stores (Gereffi, 1999)

CREI, Università Roma Tre 9 Functional upgrading changing the mix of activities within the firm and acquiring new functions that increase the skill content of activities (for example from manufacturing to design). Example: Torreons blue jeans industry upgrading from maquila to full-package manufacturing (Bair & Gereffi, 2001).

CREI, Università Roma Tre 10 Intersectoral/inter/intra chain upgrading Applying competences acquired in one function of a chain and using them in a different sector/chain; Learning what is taking place in one strand of a value chain (e.g. the one oriented towards domestic consumption) and applying to another (e.g. the one oriented towards export). Example: in Taiwan competence in producing TVs later used to make monitors and thus move into the computer sector (Humphrey & Schmitz, 2002, Guerrieri & Pietrobelli, 2004).

CREI, Università Roma Tre 11 UNCTAD Oct Different forms of UPGRADING in a Value Chain

CREI, Università Roma Tre 12 How can SMEs face the challenge of upgrading? Exploiting the opportunities offered by the local forms of industrial organization: Combined with firm-level efforts to develop Clusters Value Chains Technological Capabilities

CREI, Università Roma Tre 13 The global value chain literature emphasises cross-border linkages between firms in global production and distribution systems. Clusters and Value Chains: Two different but complementary approaches The analysis of industrial clusters is focused on the role of local linkages in generating competitive advantages in export industries.

CREI, Università Roma Tre 14 A Cluster is a geographical agglomeration of specialized enterprises Firms (SMEs) localized within clusters benefit from collective efficiency (to improve their competitive advantages): Together, they generate external economies, that may affect (spillover) other firms (involuntary effects – passive – of participating in a cluster); They may carry out joint actions (conscious effects – active – of participating to a cluster);

CREI, Università Roma Tre 15 VALUE CHAIN is based on a simple idea: Design, production, marketing of a product, involve a chain of activities carried out by different enterprises, in different places. Each activity adds value.

CREI, Università Roma Tre 16 Why the concept of VC is useful: It acknowledges the 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; These external linkages are key channels of knowledge for LDCs firms; Upgrading (and/or innovation) of firms participating in a value chain depends on the nature of the relationships (governance and power asymmetries ).

CREI, Università Roma Tre 17 The Challenge of Upgrading: is the picture complete so far? Local and international linkages are essential Each offer different learning opportunities But together with in- house firm- level efforts to develop Technologica l Capabilities

CREI, Università Roma Tre 18 The Micro foundations of TCs and GVCs Few studies explicitly explore how firms learn through external linkages (i.e. the mechanics, the pre-conditions, the investments and behaviour required); In GVCs and clusters this is often taken for granted and firms learning processes and technological change are not analyzed; diffuse determinism in combining specific GVC arrangements to learning patterns; the extent and variety of technological efforts at firm level are rather neglected.

CREI, Università Roma Tre 19 Technological Capabilities (TCs) in developing countries TCs: Technical skills, technological knowledge, organizational structures needed to operate a technology efficiently and improve upon it; They are firm-specific: institutional knowledge - individual skills - experience accumulated over time; Technological change the result of purposeful activities undertaken by firms (Technological Efforts). Not exogenous/automatic; Pace and direction of technological efforts also depend on the features of knowledge and on internal vs. external sources of knowledge; GVCs or other forms of industrial organization may contribute to industrial development, but firm-level efforts are always essential.

CREI, Università Roma Tre 20 Some Ideas on Policies key principles: 1.key stakeholders, even if located far away, need to be involved in the policy support. 2.A proper understanding of a VC analysis may help identify points of leverage and the powerful interests within the VC 3.Knowledge flows within value chains play a central role, and they are themselves the object of a severe competition (and power). 4.Clusters and Value Chains often complementary for SMEs

CREI, Università Roma Tre 21 IN SUM: Policies to enhance SME integration into GVCs Improve LDCs capabilities to design and implement policies (a process) TA for quality, sanitary and environmental standards, Improve access to scientific knowledge and research in NR-based VCs Due to small size of local suppliers, horizontal cooperation at different stages of the VC should be promoted (e.g. Clusters as a tool to deliver policies). Open dialogue, transparency, accountability, constant evaluation, in the design/implementation of policies Dynamic and evolutionary approach to policies.

CREI, Università Roma Tre 22 Thank you !!!! Prof. Carlo Pietrobelli CREI, University of Rome 3, Italy