2.8.3. Opportunities for Upgrading

A number of factors affect the opportunities for upgrading. These include the following:

Access to investment capital and inputs can be a serious constraint to upgrading that requires durable equipment or complex systems; developing or facilitating access to financial markets can improve this. Investments in irrigation and processing equipment would improve small producer productivity in Mozambique’s oilseeds industry, but most are unable to access funds to purchase it.

Physical and social distance can hinder upgrading. As the distance from markets increases, the costs of inputs, transport and training rise and profits realized from upgrading fall. Moving products or cash over long distances may expose MSE owners to higher market and security risks, while socio-cultural segmentation based on gender, caste, class or ethnicity also can impede upgrading. Therefore it is important to identify any social, cultural and historical limitations to upgrading. To illustrate, in Uganda, when internally displaced cotton farmers living in camps faced security risks in transporting their crop, a large international processor offered to collect the bulk crop from the camps. The arrangement provided farmers a secure market for their cotton, assured their safety and facilitated economies of scale.^[1]

Trust between firms in a value chain is a critical element of any upgrading strategy—without trust, industry competitiveness suffers. To illustrate, efforts to support the grading of cashew nuts in Brazil stalled due to mistrust between producers and processors and a lack of clarity about where value-added would accrue if nuts were graded domestically. This led to neither side supporting the necessary regulatory and technological investments needed to upgrade the industry. These constraints resulted in processing firms outside Brazil profiting from grading the nuts and minimal benefits for Brazil’s cashew industry.

Transmission of market information on end-market opportunities and characteristics—it is important to strengthen vertical information flows and to ensure MSEs receive price premiums for higher quality products. MSEs need to receive timely information about consumer preferences in end markets.

The nature and dynamics of the relationships between parts of the value chain structure, or governance, is particularly important for the generation, transfer, and diffusion of knowledge leading to innovation, which enables firms to improve their performance and sustain competitive advantage^[2]. Knowing by whom and how the chain is governed provides insight into the types of upgrading most likely to occur given the current situation, and leverage points that can be tapped to instigate change that will provide a more conducive environment for upgrading.^[3]^[4]

The power dynamics between firms – as evidenced by the ways in which, firms exchange information and learn from one another – affect how and if firms upgrade. Power asymmetries affect the distribution of profits and risk, both of which play a major role in MSE calculations of expected returns from upgrading. Many of the power asymmetries in value chains are due to high transaction costs and diseconomies of scale associated with contracting with MSEs. ^[5]

Gender influences behaviors related to upgrading, especially money management, business practices and value chain relationships. Reseach conducted under the FIELD project applied a behavior change perspective to understand how the factors affecting these behaviors differ for men and women in Ghana and Kenya. A framework and toolkit produced by this research can help practitioners understand these factors and design gender-sensitive interventions to encourage value chain upgrading.^[6]

Footnotes