Global Value Chains, Innovation Systems and
DevelopmentCarlo Pietrobelli
https://www.merit.unu.edu/about-us/profile/?staff_id=1560
1
Campinas, 7 June 2018http://www.ige.unicamp.br/spec/
Outline
▪ GVCs a central component of the international organization of industry, have a potential to influence innovation and learning. Fulfilment is not automatic!
▪ GVC Governance plays a role: what is it? How can we measure it?
▪ GVCs need to interact with firm-level efforts
▪ GVCs interact with IS – a coevolution
▪ Some descriptive evidence
▪ What role for policies?
Value Chain is based on a simple idea:Design, production, marketing of a product imply a chain of activities carried out by different firms, in different places.
Each activity adds value
Functional integration withGeographical fragmentation
Components
Manufacturing
Plastics extrusion
& molding
Precision metal
works
Electronics
development
Software
Development
Weaving/Knittin
g Textiles
Assembly
Packaging
Sterilization
Assembly /
ProductionDistribution &
Marketing
Resin Metals
Chemicals Textiles
Input Suppliers
Disposables
US$575.5 millionInstruments
US$270.5 million
Capital Equip.
US$32.5 million
Therapeutics
US$301 million
Main Segments: Exports
Post-Sales
Services
Consulting
Maintenance,
Repair
Training
Research &
Product
Development
Regulatory
Approval
Process
Development
Sustaining
Engineering
Prototype
Local firms are mainly in packaging & support services (12 of 19) versus 4 in limited
role in plastics molding & metal finishing and 1 OEM with exports under $2 million.
Number of Firms
0 - 5
6 - 10
11 - 15
16 - 20
Costa Rica in the Medical Devices GVC
Wholesale
distributors
Individual Patients
Doctors & Nurses
Hospitals
(Public/Private)
Source: Ferrantino M. and Schmidt G., 2018, “Using Gross Trade Data to Map Archetypal GVCs”, World Bank Policy Research Working Paper 8296, JanuaryUses the MC‐GVC (Measuring Competitiveness in Global Value Chains) World Bank dataset to map intermediate and final goods in autos and parts, electronics and textiles, apparel and footwear. Complementary to other databases based on value‐added concepts
GVCs are a fact
1. Access to demanding and sophisticated markets
2. Access to knowledge, technology, organization,
3. Opportunities for learning and innovation
GVCs are not only a trade phenomenon
Why so much interest in GVCs?Why does it matter for development?
Why does it matter?......
GVC integration is associated to higher productivity
Montalbano P., Nenci S., Pietrobelli C., 2017, “Opening and Linking up: Firms, Global Value Chains and Productivity in Latin America”, Small Business Economics, July.
▪ the last wave of WBES firm-level data and the OECD–WTO TiVA data, at the firm-level, for 30 LAC countries
▪ firms integrated in GVCs are more productive. Some of the opportunities for learning and innovation opened by GVCs are at play in the countries we study in Latin America, as they often involve knowledge exchanges, deeper interactions, and “learning by supplying”.
▪ Moreover, firms operating in the industries exporting intermediates used in other countries’ exports (forward integration) tend to be more productive than firms operating in industries whose value-added comes primarily from imported inputs (downward integration).
GVCs may foster processes of upgrading in local firms –an example of Functional Upgrading
Upgrading in the Mexico-US blue jeans value chain.
Maquiladoras in Torreón, Mexico.
[email protected] © 11
[email protected] © 12
1. Resource-based industries
• Agro-industry: melon in Rio Grande do Norte, mangos in Petrolina and apples in Santa Catarina, BRAZIL
• Salmon cluster in Southern CHILE
• Milk and dairy cluster in Boaco and Chontales, NICARAGUA
2. Complex Product Systems’ industries
• Metalworking sector, State of Espirito Santo, BRAZIL
3. Traditional Manufacturing Industries
• Traditional furniture in Chipilo, Puebla, MEXICO
• Manufacturing Clusters in Mezzogiorno, ITALY
4. High Tech industries
• Software clusters in Guadalajara, Monterrey, D.F., Aguascalientes, MEXICO
5. An extensive survey on the existing literature
• 50 cases of clusters and value chains in Latin America
[email protected] © 13
Linking clusters to GVCs: Upgrading is possible within GVCs, but it depends on GVC governance)
▪ Participation in GVCs led by large buyers (buyer-driven chains) fosters the relationships with the international market.
▪ Foreign chain leaders buyers favour product and process upgrading in traditional manufacturing sectors;
▪ However, functional upgrading is rarely achieved;
▪ Several forms of GVC governance coexist in the same cluster, and may offer profitable alternatives;
▪ GVCs with network and less hierarchical governance offer greater opportunities.
14
Forms of organization and Governance of VCs
Adapted from: Gereffi-Humphrey-Sturgeon, RIPE 2005, and Pietrobelli-Rabellotti, WD [email protected] ©
▪ Study the determinants of performance and the link between different types of GVC governance and upgrading by local suppliers. Different governance structures imply different levels of coordination and power relationships.
▪ Data: Productivity and the Investment Climate Private Enterprise survey (PICS) conducted by World Bank with Thai manufacturing firms in 2001 and 2003.
▪ Governance structures and leadership patterns in GVCs, through:
✓ type of client - multinationals (MNCs), domestic firms or foreign buyers (exporting)
✓ aspects related to buyer-supplier relationships of Thai firms, e.g. customization of sales, imposition of quality standards or design specifications, engagement in joint R&D, exchange of technical personnel, etc.
▪ Three dimensions to characterize GVC governance: ✓ the level of product customization;
✓ the existence of requirements in design and quality;
✓ technical cooperation and R&D involvement with buyers.
Measuring GVC Governance? (Pietrobelli & Saliola, 2008 CJE)
[email protected] © 15
Is Governance the only explanation of upgrading in GVCs?
NO
[email protected] © 16
The building-up of Technological Capabilities (Morrison, Pietrobelli, Rabellotti, 2008, ODS, following Lall, Bell, Pavitt, Katz, Figueiredo, ….)
Technological efforts at the
firm-level
The learning mechanisms therein
The development of institutions
The Innovation
System
Innovation Systems framework:
• Focus on how interactions among enterprises, institutions, research bodies and policy making agencies contribute to learning and innovation within firms;
• Limitation: little attention to external linkages in the generation and diffusion of knowledge and innovation;
Global Value Chain framework:
• Focus on the role of leading firms and inter-firm networks in firms upgrading;
• Limitation: little attention on the understanding of the upgrading itself. How is knowledge accessed? How can firms in GVCs learn and innovate? Do lead firms hinder/foster suppliers’ learning?
Upgrading depends also on the interactions between GVCs and the Innovation System
[email protected] © 17
18
The bridge between GVCs and IS occursthrough the role of learning within GVCs
How do different learning mechanisms operate in different types of GVCs?
• In which chains are lead firms promoting learning only through increased pressure (‘competition effect)?
• In which ones are lead firms supporting innovationthrough deliberate knowledge transfer and direct involvement in the learning and innovation process?
• In which type of chains is learning resulting from unintended knowledge spillovers?
How do different innovation systems affect the determinants of GVC governance and through this, the opportunities for enterprise learning and upgrading?
[email protected] © 19
Governance Type Learning mechanisms within GVC
Market ▪ Knowledge spillovers ▪ Imitation
Modular
▪ Learning through pressure to accomplish international standards.
▪ Transfer of knowledge embodied in standards, codes, technical definitions
Relational Mutual learning from face-to-face interactions
Captive Learning via deliberate knowledge transfer from lead firms confined to a narrow range of tasks – e.g. simple assembly.
Hierarchy
▪ Imitation ▪ Turnover of skilled managers and workers ▪ Training by foreign leader/owner ▪ Knowledge spillovers
GVCs and Learning Mechanisms Role of IS is stronger
here: MUTUAL
INFLUENCE
20
Illustrative trajectories of GVC-IS Coevolution(Lema, Rabellotti, Pietrobelli, 2018)
Gradual Electronics,
auto, space in India and China, salmon in Chile
▪ Firm capabilities gradually & cumulatively strengthened
▪ IS sufficiently strong and strengthened by GVC ▪ GVC strengthened with more rewarding and
learning-intensive roles
In-Out-In South Korea
and Brazil examples
▪ Firm capabilities strengthened in jumps; GVC & IS as alternate sources of knowledge and capabilities
▪ IS sufficiently strong to support GVC development ▪ GVC fail to provide learning opportunities; ▪ interrupted value chain development; sequencing
of local and global value chains
Aborted Acquaculture
chains in Bangladesh
▪ Firm capabilities unchanged/developed marginally ▪ IS fragmented and unable to support GVC; ▪ limited absorptive capacity ▪ GVC participation stagnant; limited learning
Retrograding
Cassava in Thai, timber in
Gabon
▪ Firms’ capabilities weakened. ▪ Very weak IS unable to support GVC development ▪ Negative influence of lead firms ▪ Influence of China’s entry, product downgrading
21
IN-OUT-IN (Lee, Szapiro and Mao, 2018 EJDR)
Perils and potential of GVCs
▪ The in-out-in Trajectory may unfold if IS is relatively well developed,
▪ It is necessary due to the risk of losing ground to cheaper locations.
They suggest that:
a. in the Preliminary Development stage GVC participation is necessary to acquire foreign knowledge and production skills, OEM
b. In Intermediate stage separation and independence from existing foreign-dominated GVCs is required for functional upgrading. ODM and OBM. This requires building capabilities in design, R&D, marketing, and an IS.
c. In the Maturity stage latecomer firms and economies build their own GVCs, after facing rising domestic wages
New technologies - short cycle technologies - which rely less on existing knowledge stocks, offer better opportunities for latecomers.
22
IN-OUT-IN Case-studies (Lee, Szapiro and Mao, 2018 EJDR)
South Korea (Lee and Mathews, 2012, Lee, 2013). From OEM to ODM to OBM: Aurora World, Shimro Musical Instruments, HJC Helmets, Hyundai Motors.
▪ Clear strategic and risky decision is required. E.g. Hyundai’s choice to break up with Ford, and then with Mitsubishi, after they refused to teach about engine technologies.
Brazil, footwear in Rio Grande do Sul (Vargas and Alievi, 2003, Humphrey and Schmitz, 2002,
Navas-Aleman, 2011)
1970s-mid-80s growth through GVC integration, then decline in mid-2000s, with China entering the market.
▪ One group remained with low price products, passive learning, low interactions with other actors: only product upgrading
▪ Another group (Arezzo, Alpargatas, Grendene) targeted high-end markets, developed local learning mechanisms, R&D, professional designers, patents, created their own GVCs.
Policies changed but firm-level strategies proved [email protected] ©
IN-OUT-IN (Lee, Szapiro and Mao, 2018 EJDR)
Trends in FVA – Foreign Value Added: Inter- and Intra-sectoral upgrading, with fall in FVA and simultaneous increase in local VA. This did not happen in LA.
[email protected] © 23
This coincided with the degree of localization of knowledge, measured by patents self-citation, i.e the development of a NIS
- 24 -
Important to consider both:
1. Integration into GVCs
2. Capturing value within GVCs
✓ challenge to enter segments of higher value added,
✓ ….with larger opportunities for learning and innovation (capacity to attract knowledge, intangibles)
✓ Help develop local technological capabilities
How do Development Policies Change with GVCs?
25
How do Development Policies Change with GVCs?
1. Trade Policy: Import protection may hinder capacity to produce/export.
2. Investment Attraction: needs to be selective and consistent with the country’s characteristics and its production capacity (potential for linkages, local procurement, development of local suppliers, ….).
3. Innovation system needs to be consistent with GVCs and FDI – mutual interactions between GVCs and IS to mutually strengthen.
4. Education and Training Policy needs to be consistent.
5. Migration policy also consistent, talents attraction.
6. ………..
A Typology of GVC and Innovation-related Policy Interventions -examples
Streamline FDI and lead-firm procedures.
R&D subsidies
FDI and lead-firm attraction e.g. training
center for S&E center for standards
Temporary exemptions to new local providers
Horizontal Vertical
Public Inputs • Monitor opportunities
for selective attraction
• Streamline procedures for FDI and lead-firm (e.g. One-stop shops).
• FDI and lead-firm attraction:
✓ Skills training center
✓Quality, Standards, Certification Organizations
Market Interventions
• R&D&i subsidies for local providers’ capabilities
• Matching grants for collaborative R&D
• “Force” externalities:
✓ training commitments
✓ local suppliers’ development, ….
• Temporary tax exemptions to new local providers
• Selective R&D&I subsidies/grants
The missing link in the value chain: sterilization of medical
devices in Costa Rica
27
•BP
•IM
•BP
•IM
•H •V
IP
IM
VH
▪ The GVC potential for enterprise innovation and upgrading is neither automatic not guaranteed, but needs to be sought after
▪ GVC governance plays a role
▪ GVCs need to interact with firm-level efforts
▪ GVCs interact with IS – a coevolution
▪ New role for policies
Concluding:
Thank you!Carlo Pietrobelli
https://www.merit.unu.edu/about-us/profile/?staff_id=156
28
