Competitiveness and Upgrading in Clusters and Value Chains The Case of Latin America Carlo PIETROBELLI, Università di Roma III ( c. pietrobelli @uniroma3.it ) and Roberta RABELLOTTI, Università del Piemonte Orientale ( Roberta. Rabellotti @eco.no. unipmn .it ) THE DTI/UNIDO COMPETITIVENESS CONFERENCE An Institutional Approach to Competitiveness – The critical role of institutions at the national and regional level Pretoria, South Africa, 7-11 June 2004
In the final two decades of the century virtually all developing countries increasingly liberalised their markets and forced producers to operate on a global market.
Developing Countries’ Openness to International Markets has Increased
The key policy issue is not whether to partecipate in global markets, but how to do so in a way which provides for sustainable growth This is a particular problem for SMEs , many of whom lack the capabilities to partecipate effectively in global markets
There are two main paths of insertion in the global economy (Kaplinsky & Readman, 2001)
The low road is one of immiserizing growth, a trajectory in which producers face intense competition and are engaged in a “race to the bottom” . Examples: if export prices fall faster than export volumes increase (i.e. wodden furniture exports to E.U.) or if increased exports can only be paid for by lower wages (i.e. Synos Valley, Brazil).
The high road is one of increasing and improving participation in the global economy, realising sustained income growth.
What explains the difference between these two paths?
UPGRADING Upgrading is a necessary condition for a “ high road” path to competitiveness in the context of globalization i.e. increase and improve participation to the international economy, and ensure a sustainable growth of per capita incomes The present discussion of alternative “roads” to competitiveness refers to the macroeconomic implications of enterprise-level strategies
UPGRADING = innovation to increase value added Different forms of upgrading:
INNOVATION is crucial for upgrading innovation not defined as a breakthrough into a product or a process that is new to the world . It is rather a story of marginal, evolutionary improvements of products and processes, that are new to the firm , and that allow it to keep up with an international (moving) standard.
Process upgrading Firms can upgrade processes – transforming inputs into outputs more efficiently by re-organising the production system or introducing superior technology (i.e. footwear producers in the Synos Valley – Schmitz, 1999).
Product upgrading : Firms can upgrade by moving into more sophisticated product lines (which can be defined in terms of increased unit values). Example: the apparel commodity chain in Asia upgrading from discount chains to department stores (Gereffi, 1999).
Functional upgrading: Firms acquire new functions (or abandon existing function) so that they increase the overall skill content of their activities. They might complement production with design or marketing, or move out of low-value production activities. Example: Torreon’s blue jeans industry upgrading from maquila to “full-package” manufacturing (Bair & Gereffi, 2001).
Intersectoral upgrading : Firms may apply the competence acquired in a particular function to move into a new sector. For example, in Taiwan competence in producing TVs is used to make monitors and thus move into the computer sector (Humphrey & Schmitz, 2002, Guerrieri & Pietrobelli, 2004).
How can SMEs face the challenge of upgrading? Through (local) industrial organization in the form of: 1. Clusters 2. Value Chains
The analysis of industrial clusters is focused on the role of local linkages in generating competitive advantages in export industries.
The global value chain literature takes a very different approach emphasising cross-border linkages between firms in global production and distribution systems.
A Cluster is a geographical agglomeration of specialised enterprises
Firms (SMEs) localized within clusters benefit from collective efficiency :
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);
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.
1. COLLECTIVE EFFICIENCY (external economies and joint actions) foster the process of UPGRADING
CE has a positive effect on upgrading (e.g. Salmon cluster in Chile, mangoes cluster in PJ and apples in SC, Brazil);
CE reaches higher levels in clusters based on NR and in software clusters;
The development of a cluster takes time ;
External economies (passive) are more frequent : joint actions require specific investments, or responses to external challenges;
CE may be hindered by the domination of strong and hierarchical relations (e.g. Furniture cluster in Chipilo, Mex);
Collective efficiency varies across sectoral groups Table 1: Collective Efficiency acros s sectoral groups Index of collective efficiency: average EE JA CE Index* Traditional Manufacturing 7.6 5.23 6.31 NR - based 8.91 7,36 8,2 COPS 7.61 4.8 6.19 Specialised Suppliers 9.1 7.8 8.7 Source: Author’s database. * EE= external economies(averag e number and grade), JA = Joint actions (average number and grade), Collective Efficiency Index = 0,5*EE+0,5*JA
Collective Efficiency Enhances Upgrading - LOW - - - - Source: Authors’ database. *The table presents the average leve l of each form of upgrading for each groups of cluster classified on the basis of the degree of collective efficiency. Table 2. Correlation Between Collective Efficiency and Upgrading* Collective Efficiency Product Upgrading Process Upgrading Functional Upgrading Intersectoral Upgrading Traditional HIGH 2.5 2.5 1.25 - Manufacturing MEDIUM 2 2.5 1 - LOW 1,5 2.5 1 - HIGH 3 3 1 0.75 NR - based MEDIUM 2.5 2.33 0.33 - LOW 2 2 - 1 HIGH - - - - COPs MEDIUM 2.33 2.66 1 - LOW 2.66 2.66 0.83 - Software HIGH 3 3 2 - (Spec.Suppl.s) MEDIUM 3 3 2
2. The Model of Governance of the Value Chain Affects SMEs’ Upgrading
Participation to global value chains led by large buyers from advanced countries (buyer-driven chains) fosters the relationships with the international market .
Large foreign buyers (chain leaders) favour product and process upgrading in traditional manufacturing sectors;
However, functional upgrading is rarely achieved;
Several forms of value chains coexist in the same cluster, and may offer profitable alternatives ;
The governance of the value chain is a dynamic process, and it may evolve over time.
Process and product upgrading are necessary, and they are often related to the scientific base of the activity. This is due to the following characteristics of technology and scientific knowledge: high uncertainty, crucial constant innovation, results are public goods;
In buyer-driven chains global buyers facilitate the link with the international market by signaling the need (and the modes) of the necessary upgrading. However, they do not normally foster and support the SMEs’ upgrading process ;
Positive relationship between the degree of collective efficiency and upgrading (i.e. institutional network, research centers, Universities, international co-operation);
Technological accumulation and upgrading are generated by the design and development of parts & components of complex products;
Global value chains are dominated by large assemblers and their first-tier suppliers (producer-driven chains);
Local suppliers (which are second or third-tier) are required to attain high quality standards and certifications to be part of the subcontracting network but the lead firms have little understanding and sensitivity of the upgrading concerns of local firms;
Little collective efficiency, and upgrading is left to the market;
Spin-offs appear to be a way of diffusing capabilities;
Difficult perspectives for locally-owned second or third-tier suppliers
A viable strategy is to find a profitable niche by servicing large leading firms in the chain (e.g. metalworking cluster in Espirito Santo, Br.).
“ Supplier-dominated” as major process innovations are introduced by machinery and materials producers;
Upgrading may occur by incremental developments and imitation; large buyers often help as they depend on the skills of their local suppliers;
Integration into value chains is a two-edged sword:
On the one hand, it facilitates inclusion and rapid enhancement of product and process capabilities;
On the other hand, SMEs become tied into relationships that often prevent functional upgrading (e.g. Sinos Valley footwear cluster, Br.);
Collective efficiency favors local firms’ capabilities to process and product upgrade;
A leader-firm (and an innovative entrepreneur) may spur the creation of a cluster of successful firms:
The example set by the leader may be followed by others, who may benefit from the learning already acquired by the innovator (footwear cluster in Puebla, Mx. and sofa and shoe clusters in Puglia, Italy);
Nevertheless, a cluster takes time to develop and excessive dependence on few players may be risky (footwear cluster in Puebla)
Favourable macroeconomic conditions are essential.
Our focus on software (client-driven to develop or adapt software packages to the specific requirements of local clients);
Technological accumulation from corporate R&D labs and Universities ;
Low b arriers to entry, start-ups near major clients;
Software houses perform incremental product and process improvements. F unctional upgrading is easier ( i.e. when software firms engage in design and commercialisation of their activities) .
The relationships with clients is usually of a market/network type;
L ocal firms perform low value added activities, but the presence of a leading firm may facilitate access to markets and sustain the formation of skilled labour force, but without direct knowledge transfer
Spin-offs are a mean of diffusion of knowledge and generate start-ups.
What Policy Implications? How to promote competitiveness and upgrading in SMEs’ localised in clusters and that participate in global value chains?
Policy Approach prevailing in Latin America in the 1980s and 1990s
An effective model to design business support policies had to be based on the principles of :
Neutrality (ex-ante definition of universal rules, separation of support institutions from lobbies)
Horizontality : rules apply to all, independent on size, location, sector;
Demand orientation : all support initiatives must respond to an explicit demand from the enterprise sector – often required to co-finance them-)
It was often lacking an integrated and consistent vision of local SMEs competitiveness and upgrading
What can be done to assist SMEs located in resource-based clusters to upgrade?
Facilitate the entry of SMEs
Promote/support programs and projects that explicitly benefit production by SMEs alongside larger growers in cases where a) the participation by SMEs is economically viable and technically feasible and b) SMEs have already proven that they can compete in the sector;
Possible Actions: allocation of lots in public projects for SMEs and larger growers, availability of working and investment capital by development banks, access to appropriate storage facilities at ports, support to participate in national and international trade fairs;
Promote public-private collaboration in research and in particular SMEs involvement;
Disseminate research to SMEs;
Promote the adoption of quality standards and enforce quality inspection and control:
Loans conditioned on implementation + maintenance of quality standards;
Support the improvement of the regulatory framework (environmental controls, health standards, etc.).
What can be done to assist SMEs which are part of COPs to upgrade?
Promote/support the active and dynamic role of actors acting as network-brokers ( articuladores) of the cluster (“anchor” firms and small suppliers);
Financial support for initiatives to build up firms’ consciousness of the utility of inter-firm cooperation and of their potential as local suppliers (joint training programs, joint purchases, …);
Set up an incentive framework aimed at inducing large firms to source locally their intermediate inputs and services and to support their suppliers’ upgrading strategies;
Assist second and third-tier suppliers to accumulate financial and managerial expertise needed to internationalize when they have the opportunity to follow sourcing (services and parties are supplied by the same company in different locations).
What can be done to assist SMEs located in traditional clusters to upgrade?
Maintain macro conditions under control;
Sustain collective efficiency in the cluster (vertical and horizontal joint actions, firms’ sensitiveness to co-operation..) Examples:
Strengthen local institutional network (Business Development Services Centers, Universities, Business Associations, Training Institutes, etc.);
Set up of a participatory process of enhancement of the local context involving a coalition of local public and private actors (e.g. “Patti Territoriali” implemented in many Southern Italian clusters);
Provide the financial means, in co-operation with the private sector, to implement the collective entrepreneurial and infrastructural projects, identified through the process of participatory decision;
Build a specialised workforce. Actions could include:
Qualify people for employment and establish cluster skill centers;
Form partnerships between educational institutions and clusters;
Promote clusters to find alternative markets to the main value chains in which they are integrated. Actions could include:
Support marketing and branding of the cluster (e.g. “Made in Brazil” project in the Synos Valley shoe cluster);
Form export networks;
Sustain collective participation in international trade fairs.
What can be done to assist SMEs located in high-tech clusters to upgrade?
Invest in cluster R&D;
Develop advanced technical education;
Provide infrastructural support to start-ups ;
Give incentives or set aside funds for multi-firm projects;
Promote institutional networks involving private actors, Universities, local governments.