Knowledge Economy Forum VII - Ancona - JUne Upgrading to Compete Global Value Chains, Clusters and SMEs in Latin America Roberta Rabellotti SeMEQ – Università del Piemonte Orientale

Knowledge Economy Forum VII - Ancona - JUne An IADB project on Latin American SMEs

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

Knowledge Economy Forum VII - Ancona - JUne In industrial clusters the focus is on the role of local linkages in generating competitive advantages in local industries. In global value chain the emphasis is on cross- border linkages between firms in global production and distribution systems. Two different approaches

7 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).

Knowledge Economy Forum VII - Ancona - JUne Some examples of external economies common 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.

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.

Knowledge Economy Forum VII - Ancona - JUne Collective efficiency External economies Joint actions Collective Efficiency

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.

Knowledge Economy Forum VII - Ancona - JUne 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.

13 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.

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

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16 SMEs UPGRADING COLLECTIVE EFFICIENCY (CLUSTERS) PATTERNS OF GOVERNANCE (GVCs) } SECTORAL PATTERNS

Knowledge Economy Forum VII - Ancona - JUne 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].

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

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.

Knowledge Economy Forum VII - Ancona - JUne 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.

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.

Knowledge Economy Forum VII - Ancona - JUne THANK YOU Giuliani E., Pietrobelli C., Rabellotti R., 2005, Upgrading in global value chains: lessons from Latin America clusters, World Development, 33, 4: Pietrobelli C., Rabellotti R., 2007, (eds.),Upgrading to Compete: SMEs, Clusters and Value Chains in Latin America, Cambridge Mass.: Harvard University Press.