2.8.5. The Effects of Value Chain Structure on Upgrading
The value chain structure has the following effects on upgrading:
- End markets are the main drivers of process, product and channel upgrading.
- Changes in buyer and consumer preferences provide the impetus for product upgrading.
- Cost-cutting competition for market share provides the impetus for process upgrading.
- Dynamism in end markets, combined with risk management responses of MSE owners, provides the impetus for channel upgrading. Local markets can be an important source of income that can offset and mitigate the risk of participating in more demanding export markets.
- Vertical linkages are the primary channel through which information and incentives for upgrading reach MSEs.
- The firms that link MSEs to end markets can facilitate process and product upgrading by providing market and product information, technical assistance and embedded services that improve risk-adjusted returns to MSE upgrading. A USAID project in Mexico demonstrated the importance of establishing partnerships between lead firms, coffee farmer cooperatives and traders/processors to enable the provision of market information and upgrading services. The incentive for these partnerships came from the willingness of Starbucks to buy from growers who adopted environmental standards and met quality requirements.
- Horizontal linkages facilitate upgrading by helping MSE owners overcome limitations associated with the small scale of their operations.
- Horizontal linkages help MSEs achieve the scale they need to attract large buyers; spread the costs of upgrading support, assistance and investment; and assume new functions in association with functional upgrading.
- Supporting markets for MSE upgrading are generally weak; lead firms often step into the gap and provide embedded services.
- In general, weak financial markets for MSE investment capital represent a critical constraint to MSE upgrading.
- When supporting markets are weak and end market demand for product upgrading is strong, lead firms have an incentive to provide embedded services to encourage MSE upgrading.
- In the business and enabling environment some major impediments to MSE upgrading come from social, educational and geographic boundaries.
- MSEs operating in areas where transportation and communication infrastructure are poor generally pay more for inputs and services and realize lower returns from upgrading. They also contain less potential for meaningful participation in national and international production networks.
- Illiteracy is an impediment to upgrading because it stands in the way of learning and the acquisition of new skills that are needed for upgrading.