2.3. Vertical Linkages
Introduction
Vertical linkages between firms at different levels of the value chain are critical for moving a product or service to the end market. In addition, vertical linkages represent conduits for the transfer of learning, information and technical, financial and business services from one firm to another along the chain. The nature of the relationships and the efficiency of the transactions among firms that are vertically linked in a value chain affect the competitiveness of the entire industry.
| Review basic information on vertical linkages. |
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Recommended Good Practices
Market and social forces on their own may lead to the emergence of effective vertical linkages over time. However, development projects often play the role of facilitator and catalyst to transform or strengthen vertical linkages in order to increase value chain competitiveness and ensure a greater distribution of benefits to smaller firms. Some recommended good practices to enable the development of win-win relationships include:
- Understand the imperative for behavior change.
- Identify leverage points in vertical chains.
- Identify catalytic firms.
- Understand relationships.
- Foster trust.
- Demonstrate that collaboration is preferable to confrontation.
- Understand the role of traders and middlemen.
- Clarify the value addition of donor projects.
Lessons from the Field
Forging and sustaining effective vertical linkages is a challenging endeavor. The presence of vertical links does not automatically lead to increased benefits to MSEs since such linkages could have both predatory and symbiotic elements. Vertical linkages can however be configured to ensure a maximum flow of benefits to MSEs while facilitating improved value chain competitiveness. The following examples from the field contain lessons about developing mutually beneficial vertical linkages and the types of benefits that can result.
- Lead firms can sometimes drive change in value chains more quickly and effectively than outside catalysts.
- A lead firm may have the incentives to provide embedded services to MSEs to ensure a consistent supply higher quality and greater control over production.
- Suppliers of goods and services can be an important leverage point for increasing benefits to MSEs and the entire supply chain.
- Local traders or other intermediaries can be used to improve value chain efficiency and transparency.
- Trust is a major factor in the relationship between different firms but it takes time to develop.
- Win-win relationships in which value chain actors engage in behaviors that lead to mutual improvement in productivity and the adoption of innovation are fundamental to long-term competitiveness.