[email protected] CREI, Università Roma Tre 1 Clusters, Value Chains and Technological Capabilities Building Carlo Pietrobelli Professor of Economics

[email protected], Università Roma Tre

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Clusters, Value Chains and Clusters, Value Chains and Technological Capabilities Technological Capabilities

BuildingBuilding

Carlo PietrobelliCarlo Pietrobelli

Professor of Economics Director of CREI, University of Rome 3, Italy

[email protected] www.pietrobelli.tk

Brussels Rural Development BriefingsBrussels, European Commission

23 September 2009http://brusselsbriefings.net


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A summary in 3 statements A summary in 3 statements


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Competitive SMEs are necessary !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).


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All face a “pressure” to compete 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


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…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””


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Part of a long trajectory of a Part of a long trajectory of a researchresearch

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


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UPGRADINGUPGRADING as a ‘‘better deal” for firmsas a ‘‘better deal” for firms

Process Product Functional Intersectoral/inter- chain

Upgrading


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Process UpgradingProcess 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);


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Product UpgradingProduct 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)


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Functional upgradingFunctional 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: Torreon’s blue jeans industry upgrading from maquila to “full-package” manufacturing (Bair & Gereffi, 2001).


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Intersectoral/inter/intra chain Intersectoral/inter/intra chain upgradingupgrading

• 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).


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Different forms of UPGRADING in a Value ChainDifferent forms of UPGRADING in a Value Chain

A A’ A’’

C

B

C’’C’

B’’B’

IIII II

Product/ProcessUpgrading

FunctionalUpgradingUpgrading into

other Chain


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How can SMEs face the challenge of How can SMEs face the challenge of upgrading?upgrading?

Exploiting the opportunities offered by the local forms of industrial organization:

Combined with firm-level efforts to develop

Clusters

Value Chains

Technological Capabilities


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The global value chain literature emphasises cross-border linkages

between firms in global production and distribution systems.

Clusters and Value Chains: Two different but Clusters and Value Chains: Two different but complementary approachescomplementary approaches

The analysis of industrial clusters is focused on the role of local linkages in generating competitive advantages in

export industries.


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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);


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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.


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Why the concept of VC is useful: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 ).


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The Challenge of Upgrading:The Challenge of Upgrading:is the picture complete so far?is the picture complete so far?


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The Micro foundations of TCs and GVCsThe 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.


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Technological Capabilities (TCs) in developing Technological Capabilities (TCs) in developing countriescountries

• 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.


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Some Ideas on PoliciesSome 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


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IN SUM: IN SUM: Policies to enhance SME integration into Policies to enhance SME integration into

GVCsGVCs 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.


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Thank you !!!!Thank you !!!!Prof. Carlo PietrobelliProf. Carlo Pietrobelli

CREI, University of Rome 3, ItalyCREI, University of Rome 3, Italy

[email protected]@uniroma3.itwww.pietrobelli.tkwww.pietrobelli.tk


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Policies 1/6: Capabilities for Policy-makingPolicies 1/6: Capabilities for Policy-making

1.Improve capabilities for strategic policy design, formulation, implementation in LDCs – and explore and develop avenues for private-public collaboration.

• Content of effective policies cannot be defined ex-ante, an ongoing process through continuous and pragmatic assessments and experiments (Pietrobelli, 2006).

• Examples: Public-Private Collaboration in Innovation: Fundación Chile

• Examples: Public-private sector collaboration in innovation. Instituto Nacional de Investigación Agropecuaria and the rice sector in Uruguay


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Policies 2/6: StandardsPolicies 2/6: Standards2. Technical assistance to support quality, sanitary,

environmental, industrial standards - administered at the cluster level, through collective institutions and joint actions. Examples of Policy actions:

• Awareness raising campaigns directed to small producers;• TA to help local SMEs fulfil international standards requirements;• TA to strengthen local regulatory institutions, and institutions

setting environmental and sanitary standards for local producers;

• Conditioning of the access to loans and grants on the effective implementation and maintenance of quality and sanitary standards.

Examples: from SIDA and NORAD promoting African exports through quality and product safety.

3. Support the development of national standards infrastructures, especially for certification and testing to facilitate integration into GVCs

– Example: GTZ program for AfriCert to promote Local Certification Capability in Africa

• Estimated that Argentina loses on average up to US$ 1 billion every year due to sanitary problems that force exporters to accept lower prices (UNIDO, 2005).


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Policies 3/6: Research and natural Policies 3/6: Research and natural resourcesresources

• In NR-based GVCs, support to access to scientific knowledge.

o Research is concentrated in the leader, o SMEs do not easily get access to it, o public, local organizations should carry out research,

disseminate findings, assist SMEs to adapt and internalize research advancements.

• Policy programs to help disseminate research to SMEs (Gomes, 2007 on Brazil), engage SMEs in collaborations with research institutions, help guide the research priorities in directions that are useful to SMEs.

• Strengthen skills and abilities in the backward production stages along the chain to help interact with global buyers.


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Policies 4/6: Cluster-level for policiesPolicies 4/6: Cluster-level for policies

Several stylized facts (especially in agriculture):– insufficient size of many local suppliers – increasing buyer-drivenness – compelling demands on local suppliers – all point to the need to grow in size and capabilities.

Horizontal cooperation at various stages of the value chain to exploit economies of scale in service delivery and in local systems to address standards.

In this sense, the cluster-level is often appropriate to design and implement many policies.

Examples: promotion of cooperatives (for coordination and pooling of production, efficient delivery of TA), out-grower schemes linking small farmers and large buyers (Humphrey, 2005)


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Policies 5+6/6: Policies 5+6/6: Dialogue, Evaluation, DynamismDialogue, Evaluation, Dynamism

5. in the design and implementation of policies Open dialogue transparency accountability and constant evaluation

To minimize corruption and private individuals’ (and firms) capturing the whole benefits of policies

6. Policies need to adopt a dynamic approach and evolve over time. Example: The Chilean salmon cluster, where policy requirements and realizations have evolved over time.


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On Dynamic Policies: the Chilean Salmon On Dynamic Policies: the Chilean Salmon ClusterCluster

From 0 to 25% of world salmon farming

Exports: 1985 US$ 1 mill., 2002 US$ 1,000 mill.

Policies have evolved over time

1978-85 “Initial learning”: regulation, technology transfer, investment in pre-competitive research

1986-95 “Maturing”: physical infrastructure, export promotion and marketing, innovation and development of suppliers (cages, nets, food)

1996-today: “Globalization”: productivity increase and technology transfer, environmental management, biotechnology (diseases and genetic handling)


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Pieces of Evidence: Pieces of Evidence: Pietrobelli and Rabellotti 2007Pietrobelli and Rabellotti 2007

Analysis of 50 empirical cases of clusters in LA (11 original)

Selection criteria: Agglomeration; Value Chains; Upgrading; Policy lessons;

Analysis and measurement of:1. Collective Efficiency [0-3] (external economies + joint

actions)

2. Governance of the value chains

3. Models of Upgrading: of products, processes, functional, intersectoral [0-3]


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The case studiesThe case studies1. Resource-based industries

– Agro-industry: melon in Rio Grande do Norte, mangos in Petrolina and apples in Santa Catarina, BRAZIL (R. Gomes, MIT, Boston)

– Salmon cluster in Southern CHILE (C. Maggi, Fondo de Innovación Tecnológica, Bío Bío)

– Milk and dairy cluster in Boaco and Chontales, NICARAGUA (N. Artola, Nitlapán, Universidad Centroamericana, Managua, and D. Parrilli, Università di Ferrara)

2. Complex Product Systems’ industries – Metalworking sector, State of Espirito Santo, BRAZIL (J. Cassiolato, Universidade

Federal de Rio de Janeiro and A. Villaschi, Universidade Federal do Espirito Santo)

3. Traditional Manufacturing Industries– Traditional furniture in Chipilo, Puebla, MEXICO (E. Zepeda, UAM, Mexico);– Manufacturing Clusters in Mezzogiorno, ITALY (G. Viesti, Università di Bari and

D.Cersosimo, Università della Calabria)

4. High Tech industries– Software clusters in Guadalajara, Monterrey, D.F., Aguascalientes, MEXICO

(C. Ruiz Duran, UNAM)

5. An extensive survey on the existing literature – 50 cases of clusters and value chains in Latin America (E. Giuliani, Università di

Pisa)


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RESULTS on the Mode of Governance and RESULTS on the Mode of Governance and UpgradingUpgrading

Participation to global buyer-driven chains fosters the relationships with the international market.

Large foreign buyers (chain leaders) favour product and process upgrading in traditional manufacturing sectors;

Upgrading in COPS needs local institutions and network-brokers negotiating with chain leaders;

In all cases functional upgrading is not enhanced by the presence of foreign buyers and chain leaders;

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.


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RESULTS of the Field Studies


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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);


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2. The Model of Governance of the Value Chain Affects SMEs’ Upgrading

Participation in 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.


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3. The sectoral dimension is essential

In NR-based clusters: CE together with participation in value chains matter a lot!! (e.g. Fresh fruit clusters in SC and PJ, Bra, salmon in Chile, sugar in Valle del Cauca, Col);

In traditional manufacturing clusters: integration in value chains help product and process upgrading, but hinders functional upgrading (p.ej. Shoe cluster in Sinos Valley, Bra);

In Complex Systems Products (COPS): local CE do not matter much: chain leaders follow a global strategy and demand high quality standards and certification;

Software clusters: CE is an important factor of upgrading; opportunities for the development of niche markets close to clients (e.g. in Mex).


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4. The macroeconomic context matters

Unfavourable Macroeconomic Conditions may rapidly revert success into failure (e.g. furniture cluster in Chipilo, Mex);

Competitive factors do not stay forever, are dynamic and change;


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Resource-based industries

• 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);


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Complex Product Systems’ Industries

• 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.).


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Traditional Manufacturing Industries• “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);

• 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, and sofa & shoe clusters in Puglia);

• Nevertheless, a cluster takes time to develop and excessive dependence on few players may be risky (footwear in Puebla)

• Favourable macroeconomic conditions are essential.


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High Tech industries• 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 barriers to entry, start-ups near major clients;

• Software houses perform incremental product and process improvements. Functional 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;

• Local 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.


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We also explored the sectoral dimension….We also explored the sectoral dimension….

Traditional Manufacturing industries:• Promote linkages between firms;• Promote access to new additional value chains;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;

COPs:• Promote/support “network brokers” (‘articulators’);• Set up an incentive framework aimed at inducing large firms to

source locally and to support their suppliers’ upgrading strategies;Specialised suppliers (Software):• Invest in Highly Skilled Professional.


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External economies

• The availability of a pool of specialized skills;• Cheap and ready available supply of

specialized inputs;• Easy access to specialized trade and technical

knowledge and rapid dissemination of information;

• Improved market access: the concentration attracts customers.

• Relationships based on mutual trust and shared values (social capital)


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Joint actions (Nadvi, 1999):

• Joint action within vertical linkages:backward with suppliers and forward with traders and buyers;

• Joint action within horizontal linkages between two or more local producers: joint purchasing of inputs, selling under a collective label;

• Joint action within horizontal multilateral linkages among a large number of local producers: co-operation in trade associations, joint participation in trade fairs, collective provision of business development services.


UNCTAD Oct.2007 45

Examples of Collective Actions (IADB-M.Dini)

PROYECTOS RESULTADOS

Red de Cabriteros, Proyecto Córdoba

Reducción de costos por concepto de compra en conjunto de materia prima

Red de Curtiembres, Guanajuato México

Reducción de costos de comercialización

Red de productores de Uva Isabella

Establecimiento de una relación comercial con agroindustrias

Definición de una norma del producto Uva Isabella

Red Electrónicas, Córdoba

Reducción de costo en la compra de un equipo automático de producción

Red Software Córdoba

Ahorro del 2/3 en el costo de una consultoría para la certificación CMM

Programa de formación para competencia para 1.200 profesionales (post universidad)

Ley para el fomento del sector

Vinos Finos de Exportación, Uruguay

Aumento del número de clientes internacionales

Reducción del costo de comercialización de los vinos finos de exportación de Uruguay

Documents

[email protected] CREI, Università Roma Tre 1 Clusters, Value Chains and Technological Capabilities Building Carlo Pietrobelli Professor of Economics