Objetivos Específicos

As can be seen from the above, upgrading is a complex process and MSMEs do not always solely depend on themselves in it, especially in value chains governed by lead firms. Since areas that allow for substantial rent appropriation are mostly domains that are highly protected by large and powerful global buyers, it can be difficult for MSMEs to access these activities (Kaplinsky 2000a). Both the absorptive and productive capacities of MSMEs are strongly dependent on interactions with firms’ environment. The negotiating power of MSMEs and the related challenges vary substantially, depending on their position and specialisation within the chain. Therefore, firms’ abilities to achieve the various forms of upgrading depend in part on their position within the chain and the governance system that applies to them, since these factors help to shape the incentives that firms face.

Key attributes of value chains that may influence MSE growth include:117

o nature of the demand, which may include the following issues:

• not only the volume of the end market demand (whether local, regional or international), but also the type of goods demanded, is important;

• the existence of sophisticated or demanding consumers in local markets as an indicators to predict whether a firm is likely to access higher margins and value-added functions associated with international high-end market segments;

117 _{This enumeration build on Nichter/Goldmark 2009: 1458. Some of these factors have already been discussed in}

98 • pathways to growth may be blocked in cases when MSEs do not interact directly with

developed country firms, but rather act as subcontractors to large developing country manufacturers, which is quite common (see Nadvi 1995 and Carr/Chen 2004);

o sectoral and industry characteristics that bode well for MSE participation in value chains are

seasonal activities, low capital requirements, relative labour intensiveness, non-repetitive processes, small production volumes;

o governance structure and power relationships: the organisation of the value chain and

especially the inter-firm relationships and power dynamics, the substitutability of partners, the integration of the firm in relationships that promote collective learning processes and that enable the firm to tap assets (such as technological know-how and advisory services) that it cannot produce itself (see Stamm 2004, Pietrobelli/Rabellotti 2004, Gereffi et al. 2005). Humphrey and Schmitz compare the literature on global value chains and clusters, coming to the result that they suggest quite distinct upgrading opportunities and trajectories for firms in developing countries, although both emphasise the importance of upgrading to sustain incomes in the face of increasing competition in global markets. The table below provides a summary.

Table 8: A comparison of governance and upgrading in clusters and value chains

Clusters Value Chains

Governance within the locality

Strong local governance characterised by close inter-firm cooperation and active private and public institutions.

Not discussed. Local inter-firm cooperation and government policy largely ignored.

Relations with the external world

External relations not theorised or assumed (by default) to be based on arm’s length transactions.

Strong governance within the chain. International trade increasingly managed through inter-firm networks.

Upgrading

Emphasis on incremental upgrading (learning by doing) and the spread of innovations through interactions within the cluster. For major upgrading initiatives, local innovation centres play an important role.

Incremental upgrading made possible through learning by doing and the allocation of new tasks by the chain’s lead firm. Discontinuous upgrading made possible by “organisational succession” allowing entry into more complex value chains.

Key competitive challenge

Promoting collective efficiency through

interactions within the cluster. Gaining access to chains and developing linkages with major customers. Source: Humphrey/Schmitz 2002: 22.

The cluster literature emphasises the importance of local-level governance and the role of incremental upgrading through inter-firm interaction and cooperation and local institutions. Even the resources for product and functional upgrading are seen mainly to come from within the locality. Links with the external world are frequently acknowledged, but weekly theorised, presenting competitive challenges that must be met through improved organisation and effort within the cluster (Humphrey/Schmitz 2002: 23).

The value chain literature emphasises cross-border linkages between firms in global production and distribution systems rather than local linkages (Gereffi/Korzeniewicz 1994, Humphrey/Schmitz 2002). It highlights that local producers learn from global buyers how to improve their production processes, attain consistent and high quality and increase the speed of

99 response: this upgrading effect is thought to be particularly significant for local producers new to the global market. Gereffi attributes product upgrading to “organisational succession”, a process by which manufacturers start producing for buyers catering for the low end of the market and then move up to buyers targeting more sophisticated market segments (Gereffi 1999, Humphrey/Schmitz 2002: 21). There are different views about functional upgrading in value chains, though: the most optimistic view is that of Gereffi, based on his research in the garment chain, concluding that producers have good prospects for upgrading within production and subsequently into design, marketing and branding as a consequence of a combination of “learning by exporting” and “organisational succession”; while other researchers, such as Bell, are more pessimistic, agreeing that the move from assembling imported products to taking care of the entire production process including the sourcing of inputs is possible, but saying that then moving to design of products sold under brands of other firms and finally to the sale of their own merchandise in internal and external markets is not to be taken for granted (Humphrey/Schmitz 2002: 22). Research on the global footwear industry suggests that power relations may inhibit upgrading and limit knowledge flows within the chain, with global buyers discouraging, if not obstructing, design, marketing and branding by local producers, the buyers’ core competence (Schmitz/Knorringa 2000). Overall, upgrading occurs as a result of learning by exporting, buyer promotion of the capabilities of developing country producers or by entering value chains with more demanding customers: the knowledge required for upgrading flows down the chain and customers are the most important source of knowledge about processes and standards (Humphrey/Schmitz 2002: 23).

Humphrey/Schmitz use the different types of governance to describe the power dynamics

between those who govern the chain and less powerful participants:118

o quasi-hierarchical value chains enable developing country firms to upgrade their products and

processes, but offer little opportunity for functional upgrading;

o in chains characterised by market-based relationships product and process upgrading tends to

be slower (not fostered by global buyers), but the road to functional upgrading is more open;

o chains characterised by even networks offer ideal upgrading conditions but are the least likely

for developing country producers because of the high level of (complementary) competences required.

A central proposition of global value chain analysis is that the development prospects for local producers vary with the way chains are organised, i.e. chain governance (Schmitz 2006: 548). The integration in global captive chains is often a double-edged sword: on the one hand it facilitates inclusion and rapid enhancement of product and process capabilities and enables developing country firms to export into markets which would otherwise be difficult to penetrate; on the other hand it can lead to producers being tied into relationships that prevent functional upgrading and leave them dependent on a small number of powerful customers that provide assistance when they perceive a risk of supplier failure (Schmitz 2006: 566). This need not last,

118 _{These are understood as a continuum from market-based transactions to vertical integration. See}

100 however, since chain governance is a dynamic process and power is relational, i.e. the exercise of power by one party depends on the powerlessness of other parties in the chain: where investment is made by producers to acquire new capabilities, there can be a way of breaking the captive relationship by using the knowledge acquired in supplying the main global buyer for supplying other (probably smaller) markets in which relationships with customers are more symmetrical (Schmitz 2006: 566).

In market-based chains,119 where products are standard and the buyers are design “takers”,

producers experience neither support nor blockages to upgrading. Advances in functional upgrading seem to be facilitated by dealing with smaller rather than large customers. However, local producers do not necessarily make the investment required for functional upgrading, something that value chain analysis cannot explain why it happens in some cases and not in others. In market-based relationships, firms are unlikely to be locked into the production function, a “freedom” that comes at a cost: the producers themselves need to invest in design, branding and marketing, and the sums involved are often bigger than for process and product upgrading. Large firms can make the leap on their own, small firms find this much more difficult and often rely on collective initiatives.

Progress in product and process upgrading is relatively fast in the framework of global value chains, while progress in non-production activities is rather slow. Schmitz highlights that comparisons with national value chains shows a surprising finding: studies from India and Brazil show that firms specialising in the national market are more likely to develop their own designs, brands and marketing channels; having acquired these capabilities in the national market, they then begin to break into markets of neighbouring countries and other parts of the world (Schmitz 2006: 568). The lesson from these cases is not clear, however: is the key difference between national and global value chains or between captive and even relationships? In national markets, captive relationships have been less common, giving local producers more space to develop their own products rather than produce to somebody else’s specification. But is this changing? Perhaps captive chains are becoming more common within developing countries given that retailing is becoming more concentrated. An interesting question arises from this: are the patterns of chain governance observed globally beginning to be reproduced within developing countries and are the upgrading implications similar to those observed in global value chains? (Schmitz 2006: 568)

Which form the relationship (or the future/new relationship in the case of upgrading) takes and how far the process of functional upgrading can go depends on the type of buyer and the ability of producers to make (individually or collectively) the required investment (Humphrey/Schmitz 2002: 31). In the innovation literature, the investment requirements in the sphere of production, especially related to technical change, are often emphasised. Often these are indeed very high, however, in labour-intensive products typically exported by developing countries, the biggest entry barriers are in the sphere of marketing and branding. It is reasonable to assume that the greater the leap in upgrading, the less likely it is that firms can use knowledge acquired in

101 linkages. Therefore they will have to rely to a greater extent on local and national sources of innovation. In particular inter-sectoral upgrading, which involves the switch of firms from one sector to another, would seem to depend heavily on local and national systems of innovation (Humphrey/Schmitz 2002: 31).

One of the consequences of the emphasis on relationships between firms and/or institutions in the debates on industrial clusters, innovation systems and value chains is that it crowds out the concern with what goes on inside the firm (Humphrey/Schmitz 2002: 30). There is an assumption that firms/managers have the capabilities and competencies of adapting to changing situations and serving different markets or value chains. This is an argument in support of ODA, and especially in the form of technical assistance, needs to come in to support micro-enterprises and SMEs in developing countries in building their capabilities and competencies.

However, some development agencies define “upgrading” in a very broad sense:

o the GTZ manual “Value Links” for example reads: “upgrading denotes the development path

of a value chain”120_;

o UNIDO using the term upgrading to refer to both the enterprise and industry levels: “It is a

continuous process designed to prepare and adapt enterprises and their environment to the requirements of free trade. For industries and enterprises it involves two goals: competitiveness in terms of price, quality and innovation; ability to follow and assimilate the

development of technologies and markets.”121

Such broad definitions do not contribute to clarity in terms of what the “value chain approach” actually entails, since terms and concepts are broadened and applied to arbitrary categories and levels.

It is noted, however, that, whenever public and donor institutions are involved in the promotion of value chains, reference is usually made to the support of upgrading strategies of private companies that (should) at the same time generate public benefit.