Clauster Book 2-15-06 M1.Indd

Chapter 1 Clusters and Value Chains in Latin America: In Search of an Integrated Approach Carlo Pietrobelli and Roberta Rabellotti oes enterprise participation in global markets ensure sustainable in- Dcome growth? Policies have often been designed in the belief that this is true, but competitiveness and participation in international markets may take very different forms, and developing countries do not always benefi t. This book explores how Latin American small and medium-sized enterprises (SMEs) may participate in global markets in ways that provide for sustainable income growth, the “high road” to competitiveness. In contrast, the “low road” is more typical of small fi rms from developing countries, which often compete by squeezing wages and profi t margins rather than by improving productivity, wages, and profi ts. The split between the high and low roads to competitiveness is often explained by the different capabilities of fi rms to upgrade (Humphrey and Schmitz, 2002a; Kaplinsky and Readman, 2001; Porter, 1990). Upgrading is usually defi ned as the ability to make better products, to make products more effi ciently, or to move into more skilled activities. In this book, we explicitly link the ability to upgrade to innovation, and defi ne upgrading as innovating to increase value added. This book provides new evidence on how SMEs, which often lack the internal capabilities to participate effectively and fruitfully in global markets (Peres and Stumpo, 2000, 2002), may nevertheless be sustained in their upgrading efforts to reach and advance on the high road to competitiveness, to realize sustainable income growth. Capitalizing on one of CClausterlauster bbookook 22-15-06-15-06 MM1.indd1.indd 1 22/15/06/15/06 77:11:21:11:21 PPMM 2 Carlo Pietrobelli and Roberta Rabellotti the most productive areas of the recent literature on SMEs, we focus our research on small enterprises located in clusters. Rich empirical evidence (Humphrey, 1995; Nadvi and Schmitz, 1999a; Rabellotti, 1997) shows that when small fi rms are located in clusters, in both developed and developing countries, they are often able to overcome some of the major constraints they usually face, including a lack of specialized skills and diffi culty of access to technology, inputs, market, information, credit, and external services. However, the literature on clusters focuses mainly on local sources of competitiveness from intracluster vertical and horizontal relationships that generate collective effi ciency (Schmitz, 1995) and often neglects the increasing importance of external linkages. Because of the spread of information technologies and recent changes in production systems, distribution channels, and fi nancial markets, enterprises and clusters are increasingly integrated into value chains that often operate across many different countries. The literature on global value chains (GVCs) (Gereffi , 1999; Gereffi and Kaplinsky, 2001) calls attention to the opportunities for local producers to learn from the global leaders of the chains, which may be buyers or producers. The internal governance of the value chain importantly affects local fi rms’ potential for upgrading (Humphrey and Schmitz, 2000). Evidence on Latin America presented in this book reveals that both the local and the global dimensions operate simultaneously and that fi rms often participate in clusters as well as in value chains. Both forms of organization offer opportunities to foster competitiveness via learning and upgrading. But fi rms also face constraints, such as limitations on upgrading in some forms of value chains, and limited infl uence on competitiveness for clusters with less developed external economies and joint actions. Analyses of both clusters and value chains were conceived and developed to overcome the sectoral dimension (i.e., differences across sectors) in the study of industrial organization and dynamism. Research on clusters, by focusing on agglomerations of fi rms specializing in different stages of the fi lière, moved beyond the traditional units of analysis of industrial economics, the fi rm and the sector. In the value chain literature, CClausterlauster bbookook 22-15-06-15-06 MM1.indd1.indd 2 22/15/06/15/06 77:11:26:11:26 PPMM Clusters and Value Chains in Latin America 3 the main distinction is between buyer-driven and producer-driven chains (Gereffi , 1994), and sectors usually fall into one of these two categories. Nevertheless, we fi nd that even with our focus on how SMEs that are both located in clusters and involved in value chains may undertake a process of learning and upgrading to increase and improve their participation in the global economy, characteristics of the particular industrial sector play an important role affecting the upgrading prospects of SMEs. Our original contribution to the literature lies in taking into account all these factors at once. Thus we investigate the hypothesis that enterprise upgrading is simultaneously affected by fi rm-specifi c efforts and actions and by the environment in which fi rms operate. The fi rm’s environment is crucially shaped by three characteristics: (1) the collective effi ciency of the cluster in which SMEs operate, (2) the pattern of governance of the value chain in which SMEs participate, and (3) the peculiar features that characterize learning and upgrading patterns in specifi c sectors. In this introductory chapter we discuss the state of the literatures on clusters and global value chains, focusing on their areas of overlap and complementarity. Then we introduce the notion of upgrading and explain why sectoral differences crucially affect the upgrading prospects of fi rms and clusters. In order to take into account sectoral characteristics and their effects on a fi rm’s pattern of innovation and learning, we introduce a new taxonomy of sectors, based on the concepts underlying the Pavitt taxonomy and applied to the industrial reality of Latin America. The chapter ends with a presentation of the methodology of the study and with a fi nal section that outlines the content of the book. Clusters and Value Chains This research builds on two major branches in economic analysis: institutional economics, which acknowledges the central role that institutions play in determining economic agents’ behavior and performance (for example, Nelson and Sampat, 2001; Putnam, 1993; Williamson, 2000), and evolutionary economics, which focuses on the evolutionary nature CClausterlauster bbookook 22-15-06-15-06 MM1.indd1.indd 3 22/15/06/15/06 77:11:26:11:26 PPMM 4 Carlo Pietrobelli and Roberta Rabellotti of technological change (for example, Nelson and Winter, 1982; Dosi et al., 1988). For our purposes, it is useful to explore briefl y different con- ceptions of organizations and institutions. Organizations are consciously created formal structures with an explicit purpose. The organizations with which fi rms interact may be other fi rms, including suppliers, customers, and competitors, or nonfi rm organizations, such as universities, research institutes, standard-setting agencies, fi nancial institutions, technical schools, government agencies, and business organizations (Edquist, 2002). Firms that are pursuing technological innovation, learning and upgrading, crucially interact—more or less closely—with other fi rms and nonfi rm organizations. Of particular importance for innovation and upgrading are interactions that go beyond arm’s-length market transactions and that involve more than information about prices and quantities. Laws, regu- lations, social rules and norms, technical standards, and cultural habits constitute the institutional context within which fi rms and organizations interact. Such institutions may importantly foster or hinder the interactive learning processes that are essential conditions for upgrading. Importantly, all these relationships have a fundamental dynamic nature, as fi rms, market structures, and institutions co-evolve over time (Nelson, 1998). Within this general theoretical background, this book focuses on how enterprise upgrading is affected simultaneously by clusters’ collective effi ciency, value chains’ pattern of governance, and the sectoral features that affect learning and innovation. In the rest of this section we explore, in turn, clusters and collective effi ciency, and value chains and their governance structures. In the following section, we turn to types of upgrading and present our new taxonomy of sectors, linking upgrading with sectoral characteristics. Clusters During the 1990s, a new approach to small-scale industry in developing countries has been stimulated by the successful performance of the industrial districts in the developed world, particularly in Italy. The ability of CClausterlauster bbookook 22-15-06-15-06 MM1.indd1.indd 4 22/15/06/15/06 77:11:26:11:26 PPMM Clusters and Value Chains in Latin America 5 clustered fi rms to be economically viable and to contribute strongly to the growth process in industrial districts has attracted a great deal of interest in development studies (see, for example, Schmitz, 1995; Rabellotti, 1997; Humphrey, 1995; Nadvi and Schmitz, 1999). The literature on industrial districts is broad, and the numerous scholars across disciplines and regions of the world who have contributed to this debate have used a variety of defi nitions (see Paniccia, 2002, for a recent review). In this study, we refer to industrial districts of the Marshal- lian type, as fi rst defi ned by Becattini (1987). Among the characteristics of industrial districts, sectoral specializa- tion

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