Global Value Chains Linking Local Producers from Developing Countries to

International Markets

Bandung Parahyangan University 16-4-15

Meine Pieter van Dijk, economist, prof. of entrepreneurship at MSM, em. prof. at UNESCO-IHE and

at IHS & ISS of Erasmus University Rotterdam, the Netherlands

GVC = Complex network of activities between local producers and final consumers

The book analyzes the impact of these value chains at the local, national & international level

It provides a theoretical and scientific framework

The value is demonstrated by analyzing case studies such as beer brewing in Ghana, bio industry in Namibia, semi-conductors in China and Malaysia and tourism in Tanzania

DBA -ENG. HB NJUGUNA 3

Building Construction Value Chain: Structure

Clie

nts- G

ovt/P

rivate Se

ctor

General Contractors

Specialist Contractors

Consultants

Retail Trade

Concrete Pipes Hollow Blocks Concrete Tiles

Metal Hardware (Production/ Import

/Wholesale)

Sanitary Ware Electricals

Paints&Lacquer

Marble Production

Metalworks & Furniture

Cement Industry

Sand, Earth & Gravel

Mining (Limestone,

Gravel stones, Marble)

Forestry Logging Sawmills

Timber Furniture

Transport Services, Energy & Water

Equipment & Spare Parts

Banking,Financial & Business Services,

What is unique about the book?

1. A uniform theoretical framework

2. Original empirical material on sustainable global value chains

3. Agricultural activities, but not the old ‘filieres connues’, but bio fuels, beer, etc.

4. A focus on upgrading experiences

5. Also semi-conductors and tourism chains

6. Emphasis on Africa & efforts to visualize

Value chains: shaping patterns of chain governance

The book presents seven case studies of global value chains. It deals with the following issues:

• Impact of global value chains on local upgrading strategies

• Role of governance structures in shaping global value chains

• Role of buyers in creating, monitoring & enforcing of commodity specifications & international standards

Agricultural production

Local value chain

Global value chain

Urban consumer

market

Clusters

Feedback loop

Industrial production

Original empirical material on issues which are important concerning the interface between global

value chains, clusters & producer organizations:

• What determines the dynamics of the global value chain (Morrison et al., 2008)?

• What determines the dynamics of producer organizations or clusters (Guiliani et al. eds, 2005)?

• How do the two interact (Van Dijk, 2006)?

• Governance of the chain: the lead organization for developing and implementing a value chain and a producer organization or cluster upgrading strategy (Humphrey and Schmitz, 2000)?

• What would be a sustainable value chain upgrading strategy, incorporating elements of CSR (Neilson, 2008)?

A uniform theoretical framework

Interface of vertical value chain and horizontal producer cooperation

Horizontal relations

Between producers: business models, clusters, etc.

Vertical relations

in value chains

And factors

influencing it

Interface

Global value chains, theoretical perspectives and empirical cases, M. P. van Dijk & J. Trienekens eds., 2011 Amsterdam: AUP

Table of content

M. P. van Dijk Factors determining competition within & between global value chains D. de Boer, Tuninga and Van der Linden: Value chains and BOP J. Trienekens Some recent theoretical developments in the literature on agricultural value chains in developing countries M. Brüntrup, R. Herrmann Institutional Challenges of Bioenergy Value Chains for Rural Development: the case of bush-to-energy in Namibia Match Makers The Banana sub sector in Arusha Municipality and Arumeru District, With emphasis on Banana Beverages Gloria Otieno and Peter Knorringa Localising Global Standards: Illustrative Examples from Kenya’s Horticulture Sector M. P. van Dijk Using partnerships to stimulate sustainable development in the palm oil value chain J. van Wijk and Herma Kwakkenbos Beer multinationals supporting Africa’s development? Partnerships in sorghum-based beer value chains M. P. van Dijk and P. Goes Global competition, a study of Malaysian and Chinese semiconductor industries D. de Boer Tourism in Tanzania J. Trienekens Conclusions and the issue of value chain upgrading

The book looks at :

• Role of different actors: governments, donors & civil society influencing value chains (Governance issues)

• The role of innovation & knowledge acquisition in upgrading

• The importance of local & global subcontracting

• Impact of ICT on global value chain governance

• The experiences with developing sustainable value chains

• The importance of partnerships as mechanisms for value chain upgrading (Malaysia palm oil & East African flower exports)

Kaplinsky and Morris (2000) provide a definition of the value chain:

“The description of the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use.”

Global Value Chains (GVCs)

• The GVC concept emphasize that there may be a huge distance between local producers of a good or service and its global consumer (Bair, 2005)

• We emphasize the importance of linking to GVCs

• The advantage of the GVC concept is that the development of economic activities is put in an international context of resources & markets, of individual entrepreneurs & clusters of producers competing in local, regional or international markets (Bair & Gerefi, 2001)

Global Value Chain literature focuses on:

• Export oriented (agro-) industries, which are usually privately owned and managed and may have a governance structure enforcing compliance with international standards (Humphrey and Schmitz, 2004).

• This approach takes the down and upstream activities into account!

• It leads to identifying a number of bottlenecks or challenges!

DBA -ENG. HB NJUGUNA 14

General Contractors

General Contractors

General Contractors

CONTRACTOR PROGRESSION PATH

CLIEN

TS C

LIENTS

CLIEN

TS

Small Contractors At local level

Medium Contractors At National level

Large Contractors At International level

Subcontractors

Specialist Contractors

Subcontractors

Specialist Contractors

Specialist Contractors

Subcontractors

Consultants

Consultants

Consultants

Often agricultural activities, but not the old GVCS but bio fuels, beer, banana beverages & horticulture

Standards

• Is production according to standards prescribed by MNCs or Western retailers?

• How do these standards impact on production and distribution processes?

Value chain governance

• How are inter-company relationships in the value chain organized (e.g. contract-based and/or trust-based)?

• What is the impact of government or semi-government regulations?

• Is there a role for NGOs or other public parties to establish cooperation of smallholders or other links in the value chain?

Issues (challenges) discussed:

• Competitiveness & parallel value chains

• Governance of Global value chains

• The influence of standards & Certification

• Distributional issues in the chain

• Formal or informal

• Sustainable value chains

• Value chain upgrading & use of Partnerships

Competitiveness GVC

• Within one chain

• Between chains

Factors influencing it

1. Demand (taste, income & price elasticities)

2. Technological developments

3. Availability & publicity

4. Quality & cooperation

5. The rise of China as manufacturing country

Figure 7 Competitive dimensions

0.00

20.00

40.00

60.00

80.00

100.00

1. The number of patents granted per

1.000.000 residents

2. Innovation Capability Index

3. Presence of National Innovation System

4. Country’s R&D spending

5. Legislative environment for investors

6. The level of literacy and health

7. Adequacy of legal environment

8. Effective Intellectual Property protection

9. Promotion of free and fair-trade policies

10. Quality of human resources

11. Strength of internal market: total spending

capacity

12. Proximity to local customer base

Malaysia China

Competitiveness has to do with:

Competitive advantage at the enterprise level is the capacity of a firm to gain, maintain and expand its share in markets for final products

• Using export markets & foreign partners • Improving technology & innovation • Improving quality and design • Using foreign capital & skills to the maximum This leads to the issue of upgrading clusters and

value chains, summarized in the last slides of this presentation

Parallel value chains • We like to draw the attention to a special

phenomenon: the case of parallel value chains

• For example bio fuels is a hot topic, but there are many types of bio fuels and the future for these competing products (palm oil, sugar, maize, etc.) is uncertain

• It depends how other (parallel) chains develop themselves & the price of crude (petroleum)

Value chain governance

• Governance is not just the power to control what is happening in a value chain, but also the rules that determine how the game is played

• These rules tend to take the form of regulation, the rules of the game!

• Governance is broader than just the government; it deals with cooperation between all the stakeholders

Stakeholders in the value chain

• Producers (including small farmers & small enterprises)

• Traders and transport companies

• Governments at different levels

• Chambers of commerce

• NGOs & Round tables started by them

• United Nations

• Consumers

• Arbitration mechanisms

Organizations influencing what happens in GVCs

• The lead firms

• Trade unions

• Producers organizations

• Consumers organizations

• Cooperatives

• Associations

• Organizations of the United nations

Organizations influencing what happens in GVCs

• The lead firms

• Trade unions

• Producers organizations

• Consumers organizations

• Cooperatives

• Associations

• Organizations of the United Nations (FAO, UNIDO, UNCTAD, etc.)

Role of each organization

• Lead firm wants low prices & good quality • Trade unions respect for labour conditions • Producers organizations: defend their interests • Consumers organizations : defend their interests • Cooperatives : defend interests of farmers • Associations COC: defend interests of companies • Organizations of the United Nations: create

conditions for international development • International environmental organizations: eco

development, human & animal rights

Promoting governance in GVCs means

• Create structures where stakeholders can meet

• Bring them actually together, for example IT companies in Nanjing or palm oil chain in RSPO

• Allow participation also of weaker stakeholders, to create inclusive GVCs

• Force respect for labour & environmental and other standards

• There are producer, consumer (fashion) and producer driven chains (mining)

Standards & certification

• Standards concern the quality of the product, the quantity to be delivered & continuity

• Is production according to standards prescribed by MNCs or Western retailers?

• How do these standards impact on quality, the production and distribution processes?

• Examples: supermarkets, flowers, sustainable palm oil, organic coffee & cotton, etc.

Distributional issues in the chain: the example of cacao

• Farmers would get only 6% of the final price of chocolate & 1% premium for certified cacao

• Chocolate is too expensive to make it sustainable!

• Distribution is linked to cutting up of the process in global value chains

• Production is rarely 100% in 1 country

• If that is true, local content requirement is not useful & international governance needed

• Bananas 18%, chili 40%, cacao 6%,

The margins: who gets what?

• Analyzing value chains the question needs to be asked each time: how are the benefits distributed in the chain?

• Where is the value added achieved? • This requires data collection on the margins of

different actors and ideally calculations at the micro level, which would indicate how the profitability of one type of bio fuel affects other bio fuels (Van Dijk, 2010)

• Think about your Iphone which brings 80$ to China!

Examples certification

• Palm oil

• Hardwood

• Round Table soy beans

Conditions:

• No virgin forest

• No use of fertilizer or pesticides & insecticides

• Sustainable processing & storing

• Sustainable trading & transport

Formal or informal: does it matter?

• First agree informal according to which criterion: wage, registration, paying tax, etc.

• Does not make a big difference, except that informal producers are less well organized

• Formal or informal may change due to regulation, standards or certification: those who do not qualify are all of sudden informal!

• Informal operators tend not to be recognized as stakeholders in the value chain!

Sectoral differences • There are big sectoral differences:

• A value chain for apples is very differently organized than an iron ore chain

• International chains, for example require high quality goods, financing constructions & insurance

• An global automobile chain (parts from 168 countries) is difficult to compare with the production of staple foods, but they are all Global Value Chains and can be analyzed in a similar way

Problems standardisation/certification

Organizational problems

• Who agree on the standards?

• Who promote implementation of them?

• Who monitors the effects?

Real life problems

• There are sometimes more organizations, using different criteria

• Not always implementation & monitoring

• Not everybody trusts every certificate

Finally on certification

Not always the same name & the same approach:

• Organic cotton

• Sustainable palm oil

• Green building

• Halal meat

• Responsible production

• Certified hard wood

Sustainability what does it mean?

We do not want:

1. All kind of chemical products in our food

2. The growing of palm oil to go at the expense of the environment

3. Deforestation

4. Palm oil to be grown under adverse labour conditions

5. Palm oil to be manufactured causing pollution or CO2 emissions

6. Lower standards when investing in palm oil abroad

What can be done:

1. Mind the use of pesticides, insecticides and fertilizers

2. Keep up bio-diversity and opportunities for orang-utans

3. Limit deforestation and replant trees

4. No child or forced labour, minimum wages and freedom to organize themselves

5. Reduce CO2 emissions and limit different types of pollution

6. Apply rigorously the same standards in Indonesia or Africa as in Malaysia

Challenges for palm oil policy makers • Environmental challenges • Doubts about the quality • Changes in health consequences • Availability of cheaper substitutes, or use for bio

fuel • Competing countries • Technological developments, for example high

yielding varieties • Trade limitations • Higher cost of transportation

How to deal with these major challenges • Limit environmental consequences

• Quality problems could lead to restricting imports

• Health issues: groundnut oil became less popular when it proved less healthy

• Cheaper substitutes: less demand

• Used as bio fuel: higher prices

• Competition: African producers may be cheaper

• Technological developments: competitive advantage may change to new producers

• Trade limitations: export would be more difficult

• Cost of transportation^->higher prices& less demand

Some barriers to upgrading 1. Quality standards in developed countries like

in the EU

2. No access to skilled worker, or to credit

3. Local regulation

4. Lack of infrastructure, it makes export more difficult, more expensive, but no possibility to finance the necessary investments

5. Too much paperwork increasing the cost of production

Partnerships to improve sustainability in GVC palm oil

One Public sector initiated partnership: Malaysia, Netherlands & Indonesia

Two Private sector initiated partnerships in Mal.:

1. RSPO and the GreenPalm certificates trading scheme

2. Trading companies with vertically integrated companies: oil is traceable, a guaranteed delivery of segregated sustainable oil

What is a partnership?

A partnership is a form of cooperation between parties with similar objectives but different (complementary) qualities, which each contribute resources and share in the investment risks

Basic characteristics • Common objective • Some legal or informal arrangement • Joint activity • Shared resources • Sharing of risks

Three partnerships

• The government initiated partnership involved representatives of the three governments involved, the private sector and non-governmental organizations (NGO) in the three countries concerned

• The RSPO is a partnership initiated by the private (commercial and non-commercial) sector

• Finally, the third partnership is between two big companies, one of which assures the sustainability for the first part of the chain

Have PPPs contributed to sustainable development of the palm oil sector?

• The question is whether PPPs in Malaysia have contributed to sustainability by defining & respecting standards concerning the achievement of sustainable production, transport, manufacturing & distribution of palm oil

• OECD (2002) defines evaluation as “an assessment, as systematic and objective as possible, of an on-going or completed project, programme or policy, its design, implementation and results”

• The concepts of relevance, impact, efficiency and effectiveness are used to assess to the dynamics of the partnership process

What determines the dynamics of the GVCs?

• Look at how China did it! For example Lenovo buying IBM PCs

• Free trade arrangements

• Access to international capital

• Innovation, observe Microsoft buying small companies which developed interesting products!

• Policies to improve the competitiveness of GVC

• Upgrading activities

Value chain upgrading

A focus on value chain upgrading & the role of partnerships:

• Which upgrading options are considered: product, process, marketing, organisational?

• Are we focusing on upgrading partnerships between actors of the value chain?, or

• Do we look at multiple public-private partnerships to achieve upgrading?

Value chain upgrading is important

• Value chain upgrading could take place via a partnership between the public and the private sector or it works out differently for global value chains or for local (parallel) chains

• A GVC may run into market access problems if a receiving country introduces more strict health and environmental conditions, which may limit its exports: it needs a parternship to solve the problem

Upgrading strategies

• Through an increase of value added, for example by promoting innovation

• By improving market access

• Through better governance structures

• Through partnerships

• By developing local clusters

• Helping local enterprises to export, for example in the framework of ASEAN or the Asian Economic Community (AEC), starting at the end of 2015!

Policies to develop clusters:

Five cluster-specific policies (Van Winden):

1. Starters policies

2. Infrastructure policies

3. ICT adoption policies

4. Inward investment policies

5. The development of business locations for new-economy activities

Conclusions

1. Environmental issues are very important

2. Value chain governance is an issue

3. Competing value chains at the global scale

4. Who gets what in the value chain, think of iPhones being produced in China!

5. A need for more empirical research on value chain development & upgrading!

Developing a GVC analysis

• Learned to analyze a GVC by paying attention to the major issues and knowing the major concepts

• A more quantitative analysis would look at competitive advantage & factors influencing the market share

• A more qualitative analysis focuses on power in the GVC and ways to negotiate improvements

Questions?

Thank You!