2.3.1. Recommended Good Practices for Strengthening Vertical Linkages
- Understand the imperative for behavior change. The underlying rationale for inducing change should be clearly understood by project proponents before designing any intervention. In some cases, vertical linkages are already established and functioning well; interventions in such cases might risk damaging the existing relationships rather than strengthening them. A detailed objective analysis of existing vertical linkages and commercial and social relationships between firms should be conducted and the imperatives for change, if any, should be clearly understood. Once the nature of incentive and punitive systems is clear, strategies for MSEs upgrading and mechanisms for increasing the flow of benefits to MSEs can be developed.
- Identify leverage points in vertical chains. Development interventions are often targeted directly at the MSE level to ensure benefits to this segment of the value chain. However, some of the most effective interventions are those that focus on a broader range of actors in the chain or target a constraint at a different level of the chain. There may be places in the chain—called leverage points—where a minimal intervention can create broader or more sustainable change. Appropriate leverage points and players that can facilitate a greater flow of benefits to the MSEs should be identified during the design phase. Targeting interventions at these leverage points will often yield much more favorable outcomes and an easier exit for the facilitator than focusing solely on the MSEs level.
- Identify catalytic firms. In any given value chain, a large range of actors—input suppliers, traders, middlemen, retailers, etc.—are typically engaged in commercial transactions with MSEs. Some of those actors have a supportive attitude towards MSEs and recognize incentives to expand the breadth and depth of embedded services. These actors can act as catalysts to enable MSEs to upgrade and become more competitive.
- Understand relationships. Commercial as well as social relationships constitute the foundation of vertical linkages. The implications of these relationships on program interventions should be clearly understood before intervening and continuously analyzed during the course of an intervention. New relationships are not easy to form and sustain. At the same time, old relationships are intertwined with the economic and social fabric of an industry and may take a long time to alter. All relationships are essentially dynamic and in a process of perpetual change. Donor projects should understand the dynamics of these relationships, and the potential trade-offs and conflicts between social and commercial incentives, in order to facilitate changes that lead to increased benefits for MSEs.
- Foster trust. Trust is an integral element of vertical linkages. It may take years to build trust, and a single mistaken transaction may be enough to break it. Donor projects should be patient when they try to foster new vertical linkages since it will take time to build confidence and mutual trust between MSEs and catalytic or lead firms. Clear lines of communication, understanding of the roles and responsibilities of different parties, and a commitment to fulfilling the terms of agreements are vital for building trust. Donor projects should invest in trust-building activities that lead to increased confidence and openness between market actors.
- Demonstrate that collaboration is preferable to confrontation. Before creating new vertical linkages in the value chain, the possibility of collaborative action through existing vertical links should be explored since bypassing existing vertical linkages can be a risky strategy. Often even a very small collaborative initiative that yields a tangible benefit can create an opportunity to change confrontational or inefficient vertical linkages.
- Understand the role of traders and middlemen. Traders and middlemen often represent very important market access and information conduits for MSEs. Development practitioners and MSEs, however, often have a negative perception of these market intermediaries. Donor projects should try to avoid falling into the trap of stereotyping middlemen and traders as exploiters since their relationship with MSEs may be mutually beneficial. Contextual understanding of the functions that traders or other middlemen perform in a given value chain can be critical to project success.
- Clarify the value addition of donor projects. The purpose and value of a donor project and its activities should be clearly understood and communicated to all stakeholders. Donors should avoid intervening in a value chain if there is no clear value to be added by doing so since this is likely to lead to market distortion and a disruption of existing vertical links. Projects should analyze their core competencies and restrict their role to facilitation activities. In particular, projects should resist the common temptation to insert themselves into vertical linkages and assume responsibility for conducting or guaranteeing market functions in order to achieve quick results. Such direct involvement in the value chain is inherently unsustainable and could damage the chain’s competitiveness. It also puts the project at risk of being held responsible should there be transaction failures.