A small Latin American enterprise can only increase its competitiveness in international markets through two options: locate within a geographical business ‘cluster’ or develop relationships with suppliers, distributors, buyers and marketers in a ‘global value chain’. These are generally defined as the two most effective strategies for sustainable growth. But new research suggests that their success does vary – according to different learning processes for different sectors.

‘Clustering’ and ‘global value chains’ have recently become the trend within development scholarship concerning small and medium-sized enterprises (SMEs). If a firm wants to grow sustainably, it needs to improve productivity, wages and profits. It needs to upgrade – to make better products, make them more efficiently, or move into more skilled activities. It needs to innovate and increase added value.

Evidence suggests that participation in local clusters and global value chains helps firms overcome barriers to growth. Firstly, when businesses cluster together, a wide network of suppliers emerges. Agents appear. Specialised producer services are developed. A pool of skilled workers grows. Business associations form. Joint action creates collective efficiency. Secondly, participation in global networks of suppliers, distributors, marketers and buyers leads to access to global markets.

However a study funded by the Inter-American Development Bank now reveals that these opportunities vary substantially between business sectors – according to their unique learning processes. Drawing on original evidence from twelve clusters of SMEs in Latin America and from literature surveys on more than forty clusters, it identifies four main sectoral groups, each with unique patterns of knowledge:

• traditional manufacturing (textiles, footwear, tiles, furniture…)
• natural resource sectors (copper, marble, fruit…)
• complex products industries (automobile, aircraft, information and communications technology, consumer electronics…)
• specialised suppliers (software)

‘Tacit’ knowledge and technology (transmitted through practice and inter-personal contacts) is especially relevant in traditional manufacturing sectors. In sectors where knowledge is more ‘codified’ (can be written down), access to external knowledge sources such as research labs is more critical. Cooperation between local workers and local external economies (collective efficiency) promotes upgrading in some sectors. In others, relationships with buyers within (global) value chains matter a lot.

The study defines four distinct types of upgrading:

• process upgrading (reorganising production systems or introducing new technology)
• product upgrading (developing more sophisticated product lines)
• functional upgrading (acquiring new functions such as design or marketing)
• intersectoral upgrading (applying an existing competence to a new sector).

Analysis of clustered firms within each sector reveals a number of lessons for Latin American SMEs. These include observations and recommendations:

• In the traditional manufacturing sector, firms should invest in design, branding and marketing and increase collective initiatives if they wish to functionally upgrade.
• Public-private initiatives positively affect product and process upgrading in the natural resource sector.
• In the Complex Products sector, neither global value chains nor collective efficiency offer direct advantages; upgrading appears to be dependent on the market, i.e. on firms’ own initiatives and efforts.
• Collective efficiency enhances the ability of software firms to upgrade.

Clustering and collective efficiency are shown therefore to enable upgrading in only some sectors. The impact of buyers in global value chains also varies. In traditional manufacturing, they encourage product and process upgrading. In complex products, buyers only set the rules and the standards to comply with, and firms need to restructure and make substantial efforts to invest in learning and technological capabilities.

Source(s):
‘Upgrading in Global Value Chains: Lessons from Latin American Clusters,’ World Development 33:4 pp. 549-573 by Elisa Giuliani, Carlo Pietrobelli and Roberta Rabellotti, April 2005.
'Upgrading in Clusters and Value Chains in Latin America. The Role of Policies', Sustainable Development Department Best practices series; MSM-124, by Carlo Pietrobelli and Roberta Rabellotti, January 2004
'Upgrading in Clusters and Value Chains in Latin America. The Role of Policies' in Spanish, February 2005

Funded by: Inter-American Development Bank

id21 Research Highlight: 1 November 2005

Further Information:
Carlo Pietrobelli
University of Rome 3
Via Ostiense 161
00154 Rome
Italy

Tel: +39 0657067 476
Fax: +39 0657067 511
Contact the contributor: c.pietrobelli@uniroma3.it

Roberta Rabellotti
Università del Piemonte Orientale
Via Perrone 18
28100 Novara, Italy

Tel: +39 0321375317
Fax: +39 0321375305
Contact the contributor: rabellotti@eco.unipmn.it

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