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2.8.2. Trajectories of Upgrading

The obstacles to process and then product upgrading tend to be the lowest. These forms of upgrading are the easiest to accomplish and thus represent the first upgrading strategies firms pursue. They do not require a firm to take on new tasks in the chain or to acquire additional knowledge (they simply involve doing the same task, but more efficiently or differently within the factory). Whereas these types of upgrading do require access to capital and equipment, these are easier to obtain through vertical linkages with lead firms or horizontal linkages with like-suppliers, than knowledge-based skills needed to move out of the manufacturing stages in the value chain.

Functional upgrading is more difficult, and at the same time more desirable to attain. In functional upgrading, firms move from manufacturing capabilities to more “intangible” activities, such as chain coordination, design or branding. Due to the higher barriers to entry into these skill sets, the market is more concentrated, thus providing higher returns and more enduring and sustainable competitiveness to successful firms. Because profits are highest from these functions, MSEs often face substantial barriers to entry within the value chain [1].

Channel upgrading is unique in that it does not require a firm to change at all, per se. Rather the firm maintains the same position in the current value chain, but takes on an additional role in another value chain by introducing its product to a new geographic or demographic market. Channel upgrading can be used to acquire new functional skills, and can therefore serve as a transitional form of upgrading for a less demanding end market. For example, while maintaining exports for US buyers, Brazilian footwear companies also manufactured, designed and branded footwear products for the domestic market. Their relationships with the local buyers were much more evenly balanced, allowing local producers to improve their functional capabilities in design and branding. Furthermore, in the Brazilian market, where vertical linkages did not provide upgrading assistance, the local business and enabling environment provided local producers with the knowledge and opportunities to acquire the skills necessary to design, market and brand products [2].

Intersectoral upgrading is typically seen as the last stage of upgrading because it requires diverse product and market knowledge. It is generally proximate in the sense that the new products or services the firm moves into share technological, input or organizational similarities to the existing products produced.

As a rule, the costs, risks and benefits at the firm level usually increase from process through intersectoral upgrading, yet this does not imply that upgrading always occurs in this sequence, nor does it imply that attaining one level of upgrading is always required to obtain the next.

The various types of upgrading are frequently connected. For example, product upgrading may be a requirement for entering a new market channel. Similarly, product and functional upgrading are linked in that the creation of direct relationships between producers and exporters facilitates the flow of information about the type and quality of products demanded in end markets.[3] Product upgrading can open the door for firms to apply their new product to other value chains (intersectoral upgrading) or “move up” the value chain vertically to new functions (functional upgrading), such as marketing and branding based on the unique, sophisticated attributes of the product offering. Channel upgrading into local or national markets can be used to acquire new functional skills because there is less physical and social distance between suppliers and buyers, buyers tend to have less control over the chain, and suppliers have more knowledge of the local end markets. Furthermore, intersectoral upgrading usually comes as a result of combining multiple upgrading strategies to enter a new value chain.

For more information on trajectories, see: [4] [5] [6] [7] [8]

Footnotes

  1. Pietrobelli, C., & Rabellotti, R. (2006). Upgrading to compete: Global value chains, clusters, and SMEs in Latin America. Washington, DC: Inter-American Development Bank.
  2. Navas-Aleman, L. (2006). Opportunities and obstacles for industrial upgrading of Brazilian footwear and furniture firms: A comparison of global and national value chains'. (Doctoral thesis, IDS: University of Sussex).
  3. Dunn, Elizabeth; Sebstad, Jennefer; Batzdorff, Lisa; Parsons, Holly. 2006. Lessons Learned on MSE Upgrading in Value Chains. USAID
  4. Gereffi, G. (1999). International trade and industrial upgrading in the apparel commodity chain. Journal of International Economics, 48(1), 37-70
  5. Farfan, O. (2005). Understanding and escaping commodity-dependency: A global value chain perspective. Prepared for the Investment Climate Unit, International Finance Corporation/The World Bank Group.
  6. Kaplinsky, R., & Morris, M. (2001). A handbook for value chain research. http://asiandrivers.open.ac.uk/documents/Value_chain_Handbook_RKMM_Nov_2001.pdf
  7. Kaplinsky, R. (2000). Globalisation and unequalisation: What can be learned from value chain analysis. Journal of Development Studies, 37(2), 117.
  8. Humphrey, J., & Schmitz, H. (2004). Chain governance and upgrading: Taking stock. In H. Schmitz (Ed.), Local enterprises in the global economy: Issues of governance and upgrading (pp. 349-381). UK: Edward Elgar Publishing Limited.