2.8.6. Ways to Facilitate Upgrading

Inter-firm Linkages

Efforts to facilitate upgrading frequently come from inter-firm linkages—where assistance is provided by lead firms via vertical relationships or through collective efficiencies realized through horizontal linkages. Furthermore, access to support services like information and communications technologies (ICT) can help MSEs strengthen these inter-firm relationships to improve their opportunities and incentives for upgrading.

Vertical Linkages

Vertical relationships can occur downstream in the chain to end markets and buyers or upstream to input suppliers—both can be important sources of information and technical assistance. Linkages between MSEs and lead firms (firms that play a key role in the chain due to their size, dominant position or influence) tend to be especially important for upgrading. Lead firms drive upgrading by offering incentives, creating favorable conditions and providing the information and technical assistance that enable MSEs to upgrade. These services often are embedded, i.e., packaged within commercial transactions between buyers and sellers.

However, lead firms only provide support where they define the product and where they perceive a risk of supplier failure. [1] [2] Lead firms are likely to facilitate the acquisition of capabilities in the lead firm’s interest, notably the production-related activities (product and process upgrading) geared to strengthening their existing position in the value chain. Assisting suppliers to acquire the capabilities the lead firms perceive to be the core competence of the firm (typically chain coordination, design, and/or marketing via functional upgrading) is less likely to occur. [3] The governance structure of the chain is particularly important to understanding the nature of vertical linkages.

Vertical Linkages & Transmission of Market Information. Shared learning in coffee grading, processing, and cupping has facilitated the Rwandan coffee producers’ knowledge of the coffee industry and has led to the emergence of a common language of quality and taste characteristics that ensures producers are able to better understand and respond to constantly changing market requirements. This created opportunities for Rwandan coffee producers to deal directly with buyers and introduced higher-value organic and fair trade certification protocols to these farmers (functional upgrading). [4]

Vertical Linkages & Access to Finance and Inputs. There is strong domestic demand for Mozambican sunflower and sesame oil, but processors operate below capacity due to inadequate supplies of seed. Opportunities to increase production are prompting smallholder producers to enter into contracts with buyers or processors to make specific quantities and quality of oilseeds at pre-arranged prices. The contracts stipulate that buyers will provide the needed inputs, credit, technical advice and market services on condition that the farmers sell exclusively to a particular buyer. These linkages can also be extended even further upstream. For example, large commercial farmers operating outgrower schemes may oblige smallholders to offer land and labor in return for inputs and extension services. [5]

Horizontal Linkages

Horizontal linkages can facilitate collective learning, which can drive innovation, increase demand and grow markets through product diversification, new product development, and movement into higher value products and markets. Organizations that support horizontal relationships (producer groups, associations, etc.) can increase MSE bargaining power, promote effective collaboration, and (particularly in remote rural areas) reduce MSE owners’ isolation. In some cases, horizontal linkages are needed before MSEs can create vertical linkages with lead firms due to diseconomies of scale from their small size.[6] Horizontal linkages may also be used to induce support and cooperation from the enabling environment and supporting markets to create a facilitative policy, legal and regulatory environment, or acquire provision of public goods, such as basic infrastructure, education and information services.

Horizontal Linkages & Access to Investment Capital. Small Macedonian apparel firms wanting to upgrade their design and production processes needed very expensive, high tech CAD/CAM equipment to access a niche market in Italy and take advantage of proximity to that country in competition with China. A USAID project facilitated purchase of the equipment by a third-party service provider and firms paid a fee to use it, an action that prevented the failure of several MSEs.

Footnotes

  1. ↑ Schmitz, H. (2007). Transitions and trajectories in the build-up of innovation capabilities: Insights from the global value chain approach. Asian Journal of Technology Innovation, 15(2), 151-160.
  2. ↑ Humphrey, J. (2004). Upgrading in global value chains (Working Paper No. 28). Geneva: International Labor Organization (ILO).
  3. ↑ Schmitz, H., & Strambach, S. (2008). The organizational decomposition of the innovation process: What does it mean for the global distribution of innovation activities? (IDS Working Paper No. 304). United Kingdom: Institute of Development Studies.
  4. ↑ McCarthy, S. (2008). Groups, associations and other horizontal linkages briefing paper (K&P II Briefing PaperACDI/VOCA).
  5. ↑ Kula, O., & Farmer, E. (2004). Mozambique rural financial services study (AMAP microCASE STUDY No.1). Washington, DC: ACDI/VOCA.
  6. ↑ Kula, Olaf; Choudhary, Vikas; and Batzdorff, Lisa (2005). Integrating Micro- and Small Scale Enterprises into Productive Markets. Washington, D.C.: ACDI/VOCA.