Beyond infant industries and trade liberalization: Productive development in a value chain and cluster context
Frank Hartwich and Gerardo Patacconi CONTENTS
Abstract...... 4
Introduction...... 5
1.. Structural change of industries and the role of value chains...... 8 2.. Policy instruments of value-chain-centred industry development...... 12 3. Common practice in value-chain-based industry policy...... 15 4.. Good practice in value-chain-centered industrial development: Lessons from UNIDO projects...... 19 4.1 Focus on holistic value chain development...... 19 4.2 Focus on private-sector-based pro-poor development of existing clusters...... 22 4.3 Focus on supplier development...... 22 4.4 Focus on expert promotion via consortia...... 23 4.5 Focus on firm networking for local capacity development...... 24 4.6 Focus on standards compliance infrastructure development...... 25 4.7 Focus on business agglomeration within industrial parks...... 26 4.8 Focus on regional/supranational integrated value chain development...... 27
Conclusions...... 29
Literature References...... 30
3 ABSTRACT INTRODUCTION
In the presence of global value chain dynamics, strategies for commodity development and industrial policies need Productive development involves producing new goods with new knowledge and technologies. But which are the to be revised: first, measures of infant industry protection do not work where industry knowledge and technology is right measures to foster productive development? This question has been at the heart of the discussions on provided through international input providers and buyers; second, measures of trade liberalization are ineffective industrial policies for developing countries for decades. The scholary debate has been particularly dominated by where global suppliers and buyers enable market access and dictate quality standards with which suppliers have to the dichotomy between protectionism and free trade, also leading to a divide in practical policy-making. For less comply. In this situation, developing countries need to define new policy tools and programme interventions that allow developed countries (with less developed industries), the debate often has centered around their willingness and their producers to capture a higher share of value in rapidly-evolving global value chains. ability to support and protect “infant industries”, that is underdeveloped industries that are not able to compete under free market conditions in the presence of first developers, i.e. countries which have already developed these This report argues that, in the presence of global value chain dynamics, developing countries need a revised strategy industries (Shafaeddin 2011a). In fact, almost all of today’s “rich” countries used tariff protection and subsidies to for productive and industry development. It discusses various options for policy instruments from a theoretical develop their industries (Chang 2003). point of view and in light of UNIDO-related experiences in a wide range of value chains. The report argues that underdeveloped industries in developing countries would benefit from in-depth value chain analysis and corresponding The infant industry argument suggests that newly-established industries come with high production costs as compared industry strategy development based as well as policy instruments focussing on private-sector-based pro-poor to established foreign industries and that they require time to become competitive. During this time, it would not pay development of existing clusters, supplier development, expert promotion via consortia, firm networking for local off for an entrepreneur to enter the industry. However, with protection and public support, dynamic factors would capacity development, standards compliance infrastructure development, business agglomeration within industrial come to play for increasing efficiency and eventually industry maturation (Krueger and Tuncer 1982). Protection parks as well as regional/supranational integrated value chain development. Further, systemic aspects of value and support from the state budget would be justified on the basis of future returns. In essence, in the presence of chain organization need to be taken into account so that supply, production and value addition activities are well- the infant industry argument, technological latecomer countries would want to pursue proactive industrial policies to functioning and interlinked. In essence, developing countries need to move away from a trade-based approach to compensate for disadvantages vis-à-vis industrially-advanced countries. industry development policies to innovation, knowledge and capacity development policies for inclusive and sustainable industrial development. Following this argument, since World War II, many developing countries have provided high level of protection for newly-established industries via import substitution policies. The policy measures targeting infant industry development included the intense use of tariff protection, import duties, quotas, exchange rate controls and financial as well as fiscal incentives and, in some countries, the use of state-owned companies to bridge production gaps in certain segments of the production chain. All these measures were meant to prevent international competitors from matching or beating the price of the infant industry while giving it time to develop and stabilize.
In antagonism to the infant industry development argument, developing countries have been pushed to open their markets through structural adjustment policies and bilateral trade agreements. The argument here is that, while the developing countries would end fiscal imbalances and allow free trade, positive development effects would unfold from concentrating on trade and competitive production where markets would take care of research and development, technological development, learning through trade and foreign direct investment.
In the end, the experience in developing countries has shown that neither of the two models provides a guarantee for success. Evidence seems to suggest that, depending on level of development, country-size, resource endowment, market access, human resource base and other factors, there seems to be no other option than raising certain levels of protection in support of industry development (Chang 2009). Evidence from China and the Asian “Tiger” countries support this argument (Amsden 1992). However, import-substitution industrialization (ISI) and protectionist policies fostering the development of infant industries have also led to inefficiencies in the organization of the sectors and, at the end, industries were only surviving at low levels of competitiveness and on the basis of high social costs.
Meanwhile, the inadequacies of the Washington Consensus reform packages for economic growth (and industry development) have been well documented. Stieglitz (2005), for example argues that a) the benefits of trade liberalization are questionable where workers move from low-productivity jobs to unemployment instead of moving to high-productivity jobs, b) capital market liberalization does not necessarily lead to faster growth and exposes the countries to higher risks and c) privatization leads to higher prices of utilities and adverse social consequences, among others.
Perverse effects of trade liberalization have been highlighted by various authors. For example Shaffaedin (2011a) have shown that developing countries can produce and export high value-added products but that they are constrained by unfair competitive pressure from imports as well as hampered by tariffs and arbitrary anti-dumping policies. Regarding infant industry development, one of the main arguments against trade liberalization is that it particularly helps those countries where industries are near the stage of maturity (Shafaeddin 2011b). In consequence, late industrializing (least developed) countries are going to suffer from trade liberalization if they do not counterbalance via infant-industry support measures.
4 5 The above illustrates how shaping industrial policies has been influenced in the past by the debate on liberalization policy today. Main areas of reorientation of industrial policies include the support of companies subject to global against protectionist policies. The debate, however, seems to have lost part of its relevance for present industrial player dominance, the introduction and further development of knowledge and technology via skills development policy development due to a number of conditions that have become apparent in today’s international production programmes and international exchange, the empowerment of companies to comply with standards, the and trade system. These include: development of coordination models that lead to improved organization of actors in value chains and clusters within countries and regions, and the development of innovative capacities that allow new industries to position 1. An increasing specialization in the production processes allowing for a segmentation of different functions themselves in existing and new markets with existing and new products that comply with consumer demands. and hence subcontracting and relocation of certain production segments in the value chain. Segmenting the production process within global value chains into a series of stages allows carrying out different tasks such as This report discusses the need for, and the elements of a revised industrial policy for under-developed industries product design and development, production, marketing and distribution in different countries (Grossman and in the presence of global value chain dynamics. With this, it aims at contributing to the renewed worldwide Rossi-Hansberg 2008). For example labor-intensive stages with low transport and communication costs can be debate on industrial policies. The report is structured as follows: Chapter 1 discusses, with special reference located in low-wage economies. For developing countries, this has often meant to become the cheap provider to structural change, how global value chains are increasingly influencing productive and industry development of either raw materials or labor-intensive products. Via segmentation, lead companies that look for markets to in developing countries. Chapter 2 discusses why industry development can be fostered via value chain-related sell their products and purchase supplies for their production come to less-industrialized countries and trigger policies introducing also the importance of cluster-development approaches that are relevant in most value chain engagement of local companies in the value chain and through this industry development. constellations. Chapter 3 revises common practices in value-chain-based industry policy from Latin America and Africa and reflects on existing gaps. Chapter 4 then introduces good practices on value chain development-relevant 2. The increasing concentration of production and trade in the hands of companies that act globally (global industrial policies, based on UNIDO experiences. In the conclusions, we then provide a set of recommendations on players) that operate across countries and sectors and exercise substantial supplier or buyer power (see Gereffi the orientation and elements of a modern industrial policy considering value chain organizational features. 1998). Buyers and suppliers dealing with global players need to comply with certain business rules and use as well as produce goods and services of type and quality imposed on them. In return, global players have also become instrumental in upgrading developing-industry companies - sometimes with considerable social benefits. Meanwhile, competitiveness is determined not on tariffs for manufactured goods but after adding-up all the tariffs from trading intermediate inputs across borders multiple times (OECD 2013).
3. Increasing volume of commodity trade for which standardized and liberalized markets exist, e.g. grains, edible oils, standardized chemical compounds, minerals, etc. part of which also becomes subject to investment and speculation. Such trade is again dominated by a limited number of global players.
4. Increasing engagement of consumers in monitoring the quality and sometimes also social and environmental sustainability of the products they buy. This has led to the introduction of a wide range of standards that enable consumers, via certification providers, to verify the quality of products and the processes through which they get produced and traded.
5. The use of new information and communication technologies that make production and trade more traceable and transparent. This has led to the development of sophisticated logistics and traceability systems but also to independent monitoring of adverse social and environmental effects of production.
6. Changing perception on the companies’ role to not only produce shareholder value for a few but also contribute to inclusive and sustainable development. This has brought back Governments investing public money in areas of social benefits such as the generation of income and employment of target populations (including poor strata of the society, women and other vulnerable groups), environmental protection and sustainable use of resources.
In essence, the international production and trade system has become subject to global value chain organization in whose presence late-industrializing countries need to redefine and strengthen their industrial policies. As Zarenda (2013) puts it: The framework of the ‘global value chain’ (GVC) has become pivotal to the analysis of industrial
6 7 1. STRUCTURAL CHANGE OF INDUSTRIES AND THE ROLE OF VALUE CHAINS
With increasing level of development, the structure of industries (that is the composition of manufacturing and value • Lead companies exercise buyer power in order to have local suppliers comply with standards of quality and addition sectors within the industry sector) change (see UNIDO’s Industrial Development Report 2013 for a detailed production. discussion on structural change in industries worldwide). Structural change therefore has important implications for industrial policies as well as for policy options for different stages of development and structure of industry. • Lead companies provide branding, marketing capacities and linkages to end-buyers necessary to sell larger One principal issue is whether developing countries should focus on their comparative advantage by promoting numbers of products. They can become marketing and branding agents for developing country suppliers. mostly resource- and labor-intensive products and services, or invest in higher-productivity industries, which may only become competitive in the longer term. Early scholars have suggested that economies can catch up with the world • Companies grow and decline in dependence of relationships of international suppliers and buyers rendering leading industrial nations through blocks of catching-up countries (flying-geese paradigm) where labour-intensive less effective government policies that foster development of sectors and allocation of industries. In a way, value production would continuously move from the more advanced countries to the less advanced (Akamatsu 1962). chain dynamics take over industry development and protection policies. In a more nuanced approach UNIDO (2013a) suggests that “industrial policy should seek to promote structural change: from agriculture to labor-intensive or resource-based manufacturing at an early stage of industrialization; In essence, engagement in global value chains can lead to technological and skill upgrading and expansion of through upgrading and diversification in manufacturing at a later stage; and through technological innovation at production. In consequence industrialization, via engaging with leading companies in global value chains, can be an advanced stage”. made “easier and faster”.
Indeed, at the initial stage of industrialization agriculture is still the largest sector, though often least productive, and Meanwhile industry development also depends on the appearance and performance of clusters that are often the development of manufacturing can trigger growth of the overall economy. In countries that are on the way to integrated into value chains and connected through value chains. Indeed, most value chains count with the presence reach middle-income levels, industrial policy should look at two strategies: a) increase efficiency and productivity in of clusters in some of their segments. As clusters we shall understand the geographic concentration of firms in labor-intensive and low-tech sectors to increase competitiveness; and b) diversify and upgrade economic structure related lines of business. Both value chains and clusters constitute network-like patterns of transaction (Meyer- towards more technologically-advanced sectors because otherwise competing on cost with low-income countries Stamer 2004). However, while the overarching subject of the value chain concept is the flow of products while value will become increasingly difficult. At advanced levels of development, many high-income countries cannot compete is added passing from one actor to the next, for clusters it is rather the flow of knowledge and information between in low-cost, mature segments of industry and should pursue differentiation (by raising quality) and innovation by actors with the purpose of joint learning, improved use of technologies, coordination and pooling of products. launching new products and services. Such a differentiation and innovation strategy requires countries to design policy measures that shift resources into promising new technological trajectories, which are desirable from a social The relevance of clusters in development has been introduced through the works of Piore and Sabel (1990) who (inclusive development) and sustainability (green industry) perspective. could show that growth and internationalization of business in Northern Italy was not induced through big industrial corporations but through micro, small and medium-sized businesses. Since then a rich literature of academics and Value chain organization can influence the process of structural transformation and indeed the process of productive practitioners has provided much information on how clusters can be both subject to and motor for development. development, often it also leads to the development of manufacturing subsectors via chain organization. UNIDO Proximity in regional clusters leads to collective efficiency by way of close interaction between businesses, formal considers a value chain as a mechanism that allows producers, processors, buyers, and sellers — separated by time business interactions, informal communication, collective action in business associations, subcontracting to and space — to gradually add value to products and services as they pass from one link in the chain to the next till competitiors, joint sourcing of inputs (see Box 2) and collaborative marketing. Spatial proximity plays a very important reaching the final consumer (UNIDO, 2011). The notion of the “value chain” can be used as a heuristic device to explain role in stimulating learning-by-interacting and other forms of knowledge exchange and cumulative learning being able positively the actual mechanisms in place that allow the flow of the product through the chain. However, the term to counterbalance growth and competitiveness limitation of small businesses (OECD 1992, Cooke 1994). is also often used in a normative sense suggesting that some sort of value chain coordination should be exercised by actors in and/or outside the chain (including governments) in order for the chain to become “well-organized” or Development initiatives to foster enterprise clusters are now common in developed and developing regions, with both “managed”. Particularly the latter has led to confusion about the objectives of value chain development which can horizontal and selective approaches to industrial policy. Warwick (2013) points out that cluster policies usually cut generate benefits for different groups of people in the various segments of the value chain. For example, keeping a across several different policy domains, but particularly focus an access to land (e.g. enterprise zones and planning certain country or region engaged in the production in a certain segment of the chain may be less important than exemptions) and systemic support (e.g. cluster management companies and networking systems). the generation of income and employment in another segment of the chain. Clustering can occur in three generic ways: in primary production, in processing or in marketing and distribution of There is evidence that the influence of global value chains is rising. For example the trade in intermediate goods, a the products of the value chain (see Figure 1). Meanwhile it is possible that no cluster at all occurs in the value chain. widely used indicator of participation in global value chains, accounted for half of global trade in 2011, reflecting an For example, the banana value chain, in the past, was characterized by high levels of concentration in all segments of increase from 1970 to 2011 from around US$152 billion to US$6,922 billion, or nearly a 10 percent increase the value chain as companies such as the United Fruit Company have monopolized production on large estates and annually (UNIDO 2013, adapted from IDE-JETRO, WTO and UN). engaged in processing and marketing. However, nowadays production has become more subject to outsourcing to medium-scale plantation owners. A number of industry development dynamics come at play in presence of global value chain organization. In principal, through the segmentation and specialization process, production in the various segments of the value chain would move to where there are allocation advantages. A number of dynamics have the potential to shape the direction of value chain development:
• Lead companies introduce (import) advanced technology which the under-industrialized countries would not be able to develop and purchase (as fast) on their own. Sometimes they use the technology in their own production sites which they set up with foreign direct investment in the country; sometimes they would be handed to suppliers that lead companies expect to source from.
• Firms in developing countries can link to international production networks and gain, often supported by the lead companies, knowledge and skills so they can render local production more efficient and effective.
8 9 Figure 1: Generic examples of clustering across segments in the value chain Engagement of less-developed, less-industrialized countries in global value chains must not always be beneficial. Indeed, there is sufficient evidence that developing countries engagement in global value chains can also have
adverse consequences, for various reasons:
• While suppliers are becoming compliant with international standards, they face additional costs for buying new technology, adapting skills and engaging in new processes. At the end, profits per company and/or laborer do not increase.
• Suppliers of commodities and labor-intensive semi-products engage in a race to the bottom in terms of wages and low-wage segments of the value chain which leaves developing countries not being able to generate sufficient income per capita to get people out of poverty.
• Developing country producers are ill-prepared to absorb shocks from the world market or the reorganization of the value chain that global players are able to push down to them.
• Many developing country industries lack behind in their capacity to add value depriving them from higher Source: The authors revenues from their products and industries. Global value chains can be a threat to increasing value capture in developing countries, as this would challenge the revenues of global players.
It is often the clusters engaging in primary production and processing that are relevant to developing countries’ • Certain developing countries industries neither have an appropriate business structure nor do they have the industry development. The rationale is that developing country clusters are to be made fit to work with buyers and necessary capacities and networks to enter into global value chains. Building all these would be too costly to suppliers in Global Value Chains (GVCs). Figure 2 illustrates the flow of products from clusters to international buyers attract foreign investment and/or justify the spending of public money. (buyer-driven value chains) and from international suppliers to clusters (supplier-driven value chains). These business relationships would enable the actors in the developing-country clusters to use knowledge and technology provided by global players. The role of public policy then would be to deal with complementary aspects of cluster development such as enterprise setup, business agglomeration and investment promotion. In order to be able to build on the opportunities of global value chains while counterbalancing its adverse effects as described above, nuanced industrial policy measures are required that shall be illustrated and discussed in the remainder of this report. Figure 2: Development constellations in global value chains
Source: The authors
10 11 2. POLICY INSTRUMENTS OF VALUE-CHAIN- CENTRED INDUSTRY DEVELOPMENT
While debates continue being held over the merits of industrial policy in the presence of market and government 3. Economic incentives: These include instruments related to finance such as loans, credit schemes, state equity failure (e.g. Pack and Saggi 2006) as well as unfair competition and trade liberalization (e.g. Chang 2009), assistance, state guarantees, etc. some of which are available across sectors and industries and others increasing evidence exists that a certain level of policy interventions is required for developing countries to perform targeted to certain segments and industries. Further there are specific subsidies, e.g. via price fixation, direct well in productive and industry development. The point for industry policy is being made, among others, in view of payments and other means, that are of benefit to certain segments of the industry. the 2008-09 economic and financial crisis, increasing doubts about the functioning of market mechanism and 4. Leaning and improving capabilities and enabling exchange of and access to knowledge and information: in particular the flow of finance to the “right sectors”, continuing structural imbalances in developing country This refers to support to training and capacity building exercises on various aspects of business development economies regarding demand and distribution of sectors and subsectors, and successes of fast growing countries such as technical production and processing skills, business administration, accounting, business planning, such as China that have applied strong industrial policy measures (Rodrik 2007,Warwick 2013). In addition there entrepreneurship, loan application, product development, creativity, and marketing. It also refers to all measures are growing concerns about non-industrialization (countries move from agricultural-based societies directly into ensuring actors in the industry getting access to crucial information, e.g. via market and price information the service sectors) and de-industrialization (declining share of manufacturing) in many middle income countries systems, investment promotion to provide information on investment opportunities, matchmaking exercises and its negative effects on growth. which bring together buyers and suppliers, and business and supplier inventories. More indirectly the support to In consequence the discussion has moved towards the “how to” design and implement industrial policies. research institutes and universities, R&D grants and loans and science councils ensures that the industry has However, in the “how to” discussion less emphasis has been put on how these policy measures should look like access to relevant knowledge and technology. The Government can also support the knowledge and information in presence of global value chain dynamics. Eventually the industrial development models “protection of infant exchange with and import from other countries which may be more advanced. industries” and “preferential market access and trade” have to be substituted, in parts, by a model in which a 5. Organizational support: Support actors in the industry to organize and coordinate in a certain way, e.g. via good share of the measures unfold within the value chain in collaboration with value chain actors. A nuanced committees, regular meetings, demonstration days, fairs etc. In more coordinated environments this can industrial policy could, for example, aim at developing capacities in the later stages of the chain that allow also include the development of joint strategies and sector and industry specific development plans. In case for capturing more value within the country in addition to maintaining cost-efficiency-based production in the this function is not taken by global players the focus on organizational support also emphasizes improving primary stages of the chain, a process that is known as functional upgrading (Gereffi 1999). connectivity and business linkages (formal and informal contracts) between production, processing, marketing and service provision. Finally the area of organizational support also covers the wide area of activities that Policies can be considered a combination of several policy instruments; some authors therefore also refer support cluster development, which, among others, can lead to information exchange, learning and capacity to the term “policy mix” (e.g. Howlett and Rayner 2007, O’Sullivan et al. 2013). Often the policy mix is also building and the support to productive agglomerations such as science and industry parks, economic corridors, considered to include the processes by which such instruments emerge and interact (Flanagan et al. 2011). and tax free zones. Pelkman (2006) in an overview on EU-based industrial policies distinguishes between five main policy categories: 1) policies NOT for industry but affecting industry such as policies on macro-economics, redistribution, wages, agriculture, services, taxes, land-use, infrastructure, energy, etc., 2) non-industrial policy measures directly affecting industry such as regional planning, price controls, export promotion, specific environmental policies, etc. and then a range of industrial policies addressing 3) industrial policies addressing framework aspects, 4) horizontal industrial development policies across sectors and 5) sector specific development policies. Pelkman’s systematization points to the way the state directly becomes engaged or indirectly regulates the behavior of actors in industries. More precisely, one can find that the state can act as a regulator, a financier, a producer or a consumer (UNIDO 2013). Building on the work of Cimoli et al. (2009) distinguishing ways of state engagement in industry development we will use further below the following five policy domains:
1. Regulation: This includes al laws, property rights, prohibition of practices, performance standards that actors in the industry have to comply with. Environmental regulations are also becoming increasingly important. While most of these measures are prohibitive in nature they also can protect actors in industries which have already depreciated the cost of compliance. 2. Tariffs and Taxation: These are economic instruments that apply to trade and export but can also refer to operations and processes. They can be applied positively as instruments that oblige actors in the industry to pay or they can come as exemptions of economy-wide instruments in which case the act as an incentive.
12 13 3. COMMON PRACTICE IN VALUE-CHAIN- BASED INDUSTRY POLICY
The above policy domains cannot always be sharply separated but there are overlaps and synergies. The degree to Now that we have defined how value-chain-relevant industry policy instruments could look like the question is which which policy instruments cut across the entire economy or allow for selection of certain firms, industries, regions is of these get actually applied in current practice. For this we apply a notion of value chain development in its broadest another dimension cutting through all the above domains (O’Sullivan et al. 2013) while the selection process itself sense considering it a complex development problem requiring a wide range of systematic interventions in various is also integrated part of the policy. Reflecting a distinction between pre-production, production and post-production segments and dimensions simultaneously. This notion of value chain development surpasses approaches that look (Gereffi 2010, cited in Warwick 2013) we further include a dimension on value chain support measures leading at issues of supply chains, logistics, production processes, technology, standard compliance, marketing, finance, etc. us to Figure 3. This “value-chain-oriented industry policy matrix” now shall help us in the further discussion on policy in isolation. instruments addressing industry development challenges and opportunities related to global value chain dynamics. While many countries in Africa and Latin America currently revisit their industrial policies (Di Maio 2010, Altenburg Figure 3: Policy instruments for value chain development 2011,) it is not evident that they consider challenges and opportunities of international production sharing, that is the dynamic development of global value chain. For example, while a country like Brazil – known as a proponent of Level of Intervention R&D Product Inputs and Production Processing Marketing protective industry policies in the past - is now fostering concrete measures of value chain development (see box 1) a Design supplies country like Colombia – more liberalization-oriented in the past and with a strong industrial value chain coordination Macro-level tissues effectively operating – is losing few words in on how to face international production sharing challenges and Regulation Industry/cluster level opportunities in its industrial policy documents. Firm level
Macro-level Box 1: The role of value chain development in Brazil’s industrial policy
Tariffs and Industry/cluster level taxation Up to the 1970s Brazil had a well-defined industrial policy fostering import substitution combining a favorable Firm level macroeconomic framework, intense use of tariff protection, financial incentives and fiscal incentives, and the
Macro-level use of state-owned companies to solve typical coordination problems in the catching up process. Many analysts have considered this policy a success. Positive were in particular the introduction of new technologies (in aviation Economic Industry/cluster level incentives industry, IT, etc.), the resurrection of new sectors such as petrochemicals (structural change) and overall Firm level income and employment effects in the economy. Less well evaluated were the regulations of existing sectors
Macro-level and overall systemic competitiveness in comparison to technological leaders. After this industry development has disappeared from the policy agenda due to macro-economic difficulties and ideological reorientation only Leaning and Industry/cluster level information to be reintroduced in the years 2000 but with less fiscal support and without effective coordination solutions. Firm level The new industrial policy framework under the first legislation period of president Lula focused on industrial, Macro-level technological and trade policy, then moved in the second legislation to productive development policy focusing on innovation and investment to sustain growth. Under the current legislation the emphasis of industrial policy Organizational Industry/cluster level support in the context of the Greater Brazil plan is to build and strengthen competencies and expand domestic and Firm level external markets and ensure socially inclusive and environmentally sustainable growth. Typical tools that are Source: The authors now being reused for industrial policy are tax relief in general and on exports, financial supports for investments and innovation, strengthening the legal framework for innovations, trade promotion, financial support and One could assume that the shift of industrial policies towards value chain development relevant instruments (in guarantees for exports, and Government procuring from strategic industry entities. With regard to support to comparison to traditional industry-development policies), eventually, would imply to move away from the interventionist value chain development the policy has as one of its objectives the enhancement of productivity and technology regulation and tariff-based policy dimensions (the weight of respective policy dimensions in the policy mix is depicted density within value chains. through the triangle in Figure 1). We will see if this assumption holds true in current industry policy practices. Source: Kupfer, D. (2012): Case Studies of Successful and Unsuccessful Industrial Policies: The Case of Brazil. IEA-WB, Washington DC
So where do developing countries in Africa, Asia and Latin America stand regarding their industrial development policies. For that purpose we have reviewed a current industry policy practices across a number of Latin American countries (see Figure 4) and compared them with analyses of current practices in Asia and Africa.
From the screening of industrial policies in Latin America summarized in Table 4 we can confirm Peres’s (2013) argument that common design elements include: (i) emphasis on increasing international trade competitiveness, (ii) support for SMEs, (iii) promotion of innovation and technology aiming at knowledge based-economies and (iV) focus on local sectors by targeting strategic value chains and/or export oriented clusters. However, only few of these (as for the case of Brazil and Mexico) are explicitly targeted to address value chain dynamics.
However, according to the various documents for the IDB Working Paper series reviewed (see authors in Table 4) implementation of most of the policies in Latin America has not led to the expected results yet and in some cases failure seems to be apparent. Some of the reasons for this seem to be parallel institutions dealing with different policy dimension in an uncoordinated way. This is consistent with Altenburg (2013) who for the case of Asia and Africa finds that countries that need industrial policies most are typically the ones that are least effective in implementing
14 15 them. One of the reasons for limited industrial policy success in Africa may be the uneven access to industry For small economies and less developed countries in Asia Brunner (2013) could show that regional economic development instruments favoring rather larger medium and large and politically connected firms (Altenburg 2011). integration in fact can provide the necessary incentives for integration of the regional portions of GVCs to the global This is also confirmed by di Maio (2010) who screened industrial development policies in Africa and argues that in portions of GVCs. Brunner then suggests main strategies such as 1) diversifying trade in terms of sectors and view of their structural disparities, African countries must go further to adopt suitable industrial policy mixes that markets by branching out into new products in close proximity in product space(horizontal integration), 2) move combine trade, education and innovation, sectoral and competition policies, that correspond more accurately to into higher value-added market segments within established sectors with increasing labor costs, as in the case their economic characteristics. Page (2013) suggests that industrial policies in Africa must go further to promote with India, 3) move into niche markets, possibly with higher value-added, and to make use of subcontracting (vertical export oriented industrial clusters, improve the investment climate, close infrastructure gaps, create new skills integration) in cases of proximity to larger markets such as India (particularly relevant for landlocked LDCs) and 4) and encourage regional integration. As a policy option, Page further suggests that African countries, rather than push processing activities down the value chain, in order to allow greater differentiation in product characteristics processing agricultural products can add value to products in packaging, transportation and distribution of fresh closer to the customer, and offering greater flexibility in serving small orders. All of this requires, he argues, would consumable products responding to standards and product requirements compliance in global value chains. require investment in capacity building in functioning GVCs, together with the necessary logistics and infrastructure investment.
Overall industry policy formulation in Africa seems to be lacking behind the movement in Latin America with Asia Figure 4. Industrial policies in the LAC region in relation to value chain and cluster development presenting a more ambiguous environment. For example, Altenburg (2013) argues that few countries in Africa and Asia have a clearly defined national industrial policy. For example while Tunisia has a clear focus on trade integration Country Main focus of industrial policy Policy elements linked to value chain and cluster with Europe plus an industrial upgrading programme, Vietnam has no clear strategy for going beyond first-stage development industry development based on labor-intensive businesses where it has been rather successful (e.g. coffee, shrimp, Argentina (Sanchez et Strong support to SMEs, to increase GDI, Promotion of cluster formation, mostly through )al 2011 fish). Namibia seems to even have no strategy at all while Mozambique’s focus is donor-driven focusing on industries investment, exports, technological innovation, jobs market interventions such as cashew nuts. For Latin America Peres (2013) argues that under the influence of the global value chains .creation and diminishing of imports and international trade Latin American countries successful policies nowadays combine new and old objectives and Brazil Build and strengthen competencies, expand Enhancing productivity and technology density instruments, such as cluster development and structural change, with technology funds and state procurement. domestic and external markets and ensure social .within value chains Ingtec USP Research Group( )2013 inclusiveness and environmentally sustainable Comparison of industrial policies across countries and regions is difficult but one common feature seems to be that growth. Support for innovation and technological value chain development supporting policies are often dealt with step motherly. This refers to the depth with which .infrastructure, grants and tax incentives value chain dynamics and the options for insertion in the global value chains are analyzed and the assumptions on Colombia Economical reactivation and increase Although no explicit mention to value chain development impacts of certain policy measures. For example, often the development of industrial parks is marked competiveness and investment, promotion of “world development in policy, it is identified that public/ )Melendez and Perry 2010( as a policy measure without further analysis how the firms to be allocated there would enter in value chains. However, .class” sector value private alliances are needed to support emerging indeed our assumption in section 2 holds true, most policy instruments relate to organizational issues such as clusters, solve coordination problems and cluster development and setting up of industrial parks as well as the upgrading of knowledge and technology. .overcome bottlenecks Chile Correction of market failures and heavily promoting Orientation of innovation policy towards selected So what’s missing and what is wrong in the current practice of industrial policies aiming at value chain development? innovation centered on the application of knowledge export oriented clusters and value chains to Apparently a policy shift towards more value chain development oriented industrial policies is already unfolding but .)Agosin et al 2010( to production. Export growth strategies for selected .foster productivity enhancement some countries still seem to try to make sense of it while others are certainly lacking behind. In the following we .chains provide a gap analysis and discussion of common problems and issues in value chain-development-relevant policies: Guatemala Seeks to resolve traditional market failures Promote productive associations along the value relying on fiscal incentives, targeted support for chain through partnerships with training centers • Insertion in the value chain per-se is not of benefit to developing country firms if it is not paired with increasing sales )Cuevas et al 2010( micro, SMEs, cluster promotion, and export and and associations between local producers and/or improved levels of productivity resulting in higher profits. However, in the absence of any other demand, .investment promotion and exporters, specifically in activities relating developing country firms may want to stay engaged in production and therefore will continue to value sales options to business process outsourcing and contact with international buyers. In other words, engagement in global value chains may be enough for a few individual .centers firms but it may not be beneficial for an industry of a developing country at large. Therefore industrial policies shall Mexico Focus on increasing competitiveness by supporting Strategy focused on cluster development, be designed that aim at more substantial profit generation for local firms. This would include helping firms to raise SMEs as well as innovation activities through insertion into supply and global value chains (e.g. their profits via cost reduction, productivity increase and expansion of production, and it would go beyond the simply )Baz et al 2010( higher investment in research and development; automobile industry) and promotion in trade fairs. enabling local firms to sell. emphasis on specific sectors based on their weight in economic terms or their potential to increase • There is a strong dependence of developing country producers on knowledge and technology provided by global value added. players. This can lead to locking them in certain technology trajectories, makes them vulnerable to market shocks Panamá Promoting competiveness through market Technical assistance to clusters export oriented and links them to the business fate of certain buyers. While knowledge and technology provision through lead- access and free trade; encouraging the export and regional value/supply chains integration, buyers should be maintained countries should also make efforts to generate their own knowledge and technology )Fernández 2011( infrastructure, fiscal incentives, foreign investment mainly through Free Trade Zones /Agreements. and exchange experiences with other countries. Therefore policy interventions that help local producers to acquire with high added value, technical and financial knowledge and technology for the production they become currently and in the future involved in. support for SMEs, regional integration. • The knowledge and technology provided by lead buyers does only focus on supplier technology and does not allow Source: The authors firms in developing countries to engage in other segments of the value chain (functional upgrading) where more value added can be accrued. Therefore policy instruments should be applied that help firms engage in new and different segments of the value chain.
16 17 4. GOOD PRACTICE IN VALUE-CHAIN-CENTERED INDUSTRIAL DEVELOPMENT: LESSONS FROM UNIDO PROJECTS
• Cluster-development dynamics are often neglected in the presence of agglomeration programs, enterprise set-up UNIDO, given its mandate on sustainable and inclusive industrial development, has accumulated substantial experience schemes, and investments from global buyers. The focus seems to be on having firms being set up and allocated on industrial policy instruments and actions, many of them centered on value chain development. In the following we in a specified geographic region and linked to buyers. Policies should focus more on the exchange of knowledge, illustrate good practices that have resulted from these experiences and discuss some of the lessons learned. join learning among firms and organization of firms within the cluster addressing also issues of joint procurement, organization of supplies and joint marketing. 4.1 Focus on holistic value chain development • International buyers require quality assessment for which the right infrastructure and laboratories do not exist on the level of firms and among public and private service providers. As such, publicly funded compliance infrastructure Many tools for value chain analysis and development start with an overall mapping but then become slanted development can become a precondition for the country’s firms to participate in global value chains. However, towards a specific purpose (e.g., market access, inclusion of the poor, enterprise development, or compliance with often standard compliance infrastructure development programs do little to make use of the infrastructure within standards). In other words, most existing tools for value chain analysis are not holistic in nature; they do not provide respective chains which suffer, simultaneously from other development bottlenecks. Policies should therefore help to a broad enough perspective that takes into account all segments of the value chain. They may also underestimate remove compliance infrastructure constraints but only if they come together with concrete value chain development the complexity of the effects value chain development may have on different groups of people, including the intended strategies. primary beneficiaries and others. In consequence, many decision makers may engage in too few or erroneous value chain development interventions and no development impact is ultimately attained because certain complementary • Importing of knowledge and technology must not necessarily mean that local firms upgrade their capacities interventions are missing. systemically. Sometimes individual firms have been capacitated to comply with international standards, thanks to the support from global players. However, without the international buyer the upgraded firms would not be able to survive UNIDO (2011) propagates an approach to value chain development that is holistic in nature while having a clear focus in the market place because other service providers in the areas of product development, testing, packaging, labeling, on value addition. In this, the term “value chain” is understood as the process of continued addition of value that occurs transport, business services etc. are weekly developed if at all available. Policies should focus on developing systemic while the product passes from one actor in the chain to the next, gradually increasing its degree of transformation. competences in clusters and industries across a number of activities and services. The approach targets all activities that determine the performance of a value chain in terms of the quantity and consistency of production, product quality and sustainability in relation to market requirements, production and Clusters without connections to global players have serious troubles to set up their sales and marketing operations, • transactions costs transaction, the value added at each phase, as well as the capacity and organization of parties locally and internationally. Cluster-based production in developing countries (in the case of agricultural value chains involved. primary production clusters can often more precisely termed as “villages”) is prone to challenges in quality control, traceability and compliance with standards. The losers who do not make it are bound to sell to regional and local For the purpose of diagnosing this situation UNIDO has developed an integrated tool that suggests analyzing a low-value markets. Therefore strategies need to be developed for those who are going to lose out of international value chain according to 7 dimensions (see Figure 5). Out of such a diagnostic it is possible to develop most useful competitions. interventions that in combination would lead to the development of the chain meeting goals such as poverty reduction, • As global buyers may exercising lower standards regarding the products they source and due to missing culture and income and employment creation, economic growth, firm development and cleaner production and environmental experience among developing country producers integration into global value chains often comes with low attention sustainablity (see example in Box 2). to social and environmental issues. However, where international standards on sustainable production come in this is currently changing. Policies should focus on rigorously greening value chains and making them more sustainable.
18 19 Figure 5: Seven dimensions of industrial value chain diagnostics Box 2: Integrated seaweed value chain development in Zanzibar: Seaweed farming has proven to be one of the few opportunities for rural people in Zanzibar, especially DIAGNOSTIC DIMENSIONS PARAMETERS women, to earn incomes and get out of poverty. Indeed, the income earned from seaweed production Mapping 0.1 Product has allowed women to contribute to family welfare and the education of boys and girls, and it also contributed to their general empowerment. UNIDO, together with local partners in the private 0.2 Value chain actors and their functions sector and the Zanzibar Government - the Ministry of Trade, Industry & Marketing and the Ministry of 0.3 Flow of product and end-markets Livestock & Fisheries -, is currently developing a project to upgrade the seaweed value chain in three ways: 0.4 Business interactions 0.5 Service provision (1) The building of a seaweed processing facility introducing multi-stream, zero-effluent processing technologies, Dimension 1: 1.1 Primary product characteristics which allows converting live seaweed to juice and pulp. UNIDO will also work on improving the packaging of the Sourcing of Inputs & Supplies 1.2 Characteristics of primary producers and input providers product and it’s marketing. 1.3 Contractual arrangements (2) The setting up of effective business linkages between the processing facility and the producers of seaweed, 1.4 Logistics especially women, as well as existing and new buyers of processed seaweed products. Producers of seaweed will also receive support to be able to comply with new quality criteria and increase their productivity. 1.5 Infrastructure and transport facilities 1.6 Communication (3) The strengthening of public institutions’ capacities to continuously promote sustainable seaweed development effectively. The project, still in the funding-identification stage, seeks to improve Zanzibar’s people’s Dimension 2: 2.1 Production capacity livelihoods and more specifically poor seaweed farmers (95% are women), fishermen and laborers. Production Capacity 2.2 Technology The direct beneficiaries, accounting for 1,200 households and representing 10% of the seaweed producers, will and Technology 2.3 Knowledge use see their incomes increase by 50% within three years. The remaining 12,000 seaweed producing-households 2.4 Costs and margins of Zanzibar – half of them live below the poverty line – will benefit from the effect the project will have on 2.5 Innovation increasing prices for raw seaweed. Dimension 3: 3.1 End-product characteristics End-markets and Trade 3.2 Consumer demand 3.3 End-buyer perspectives 3.4 Marketing and trade capacities 3.5 Standards Dimension 4: 4.1 Actor domination Governance of Value Chains 4.2 Participation in and distribution of value addition 4.3 Cluster conventration 4.4 Type of governance Dimension 5: 5.1 Use of materials Sustainable Production and 5.2 Energy use Energy Use 5.3 Use of water 5.4 Effects on bio-diversity 5.5 Emissions 5.6 Waste management Dimension 6: 6.1 Financial attractiveness Value Chain Finance 6.2 Financial risk 6.3 Norms and practices 6.4 Availability of financing 6.5 Financing gaps Source: Neish and Msuya (2013) Dimension 7: 7.1 Business environment Business Environment 7.2 Product and trade regulations and Socio-political Context 7.3 Public and private service provision [1] The Global Food Safety Initiative is a business-driven initiative for the continuous improvement of food safety management systems to ensure confidence in the delivery of safe food to consumers worldwide. GFSI provides a platform for collaboration between some of the world›s leading food safety 7.4 Social and cultural context experts from retailer, manufacturer and food service companies, and service providers associated with the food supply chain, international organizations, academia and government
[2] While the pilot project and expanded initiative in Egypt did not compare local market prices with those paid by Metro/Makro, future projects implementing SSDPs will aim at documenting such information in greater detail
20 21 4.2 Focus on private-sector-based pro-poor development of existing clusters Box 4: UNIDO-Metro Partnership to enable suppliers complying with quality criteria UNIDO (2013b) approaches cluster development by focusing on existing clusters, private-sector-based pro-poor UNIDO, together with Metro Group, developed a capacity building programme to apply the Global Food Safety growth, and collective efficiency through joint actions (see also www.clustersfordevelopment.org). Measures to Initiative’s (GFSI[1]) Global Markets Protocol (GMP), which enables SMEs to meet the internationally-recognized help cluster stakeholders reduce barriers to cooperation and help them overcome their isolation include: 1) Foster requirements in terms of food safety and quality. Pilot projects have so far been implemented in Egypt, India linkages between cluster stakeholders, 2) facilitate consensus building, 3) build relationships, 4) encourage trust and Russia, where suppliers have achieved considerable improvement in their performance and compliance building, 5) strengthen governance mechanism and 6) support the cluster’s institutional network and 7) strengthen with food safety standards and Good Agricultural Practices (GAP). In Egypt, UNIDO initiated its partnership with cluster governance mechanisms. Box 3 provides an example of a UNIDO cluster development projects. METRO in 2009 and began with the upgrading of 18 food processors of meat poultry and dairy products, fruits, vegetables and confectionery products in the context of a programme to develop suppliers in such a way that they can gain lasting market access. The objective of the programme was to enable clusters of suppliers to gain Box 3: Technology upgrading among small and medium edible oil processors in Ethiopia access to profitable new market opportunities and establish business linkages with potential buyers. While the In Ethiopia, UNIDO works to enhance the performance of the entire edible oil value chain by improving the raw Metro Group provides know-how on standards compliance measures, UNIDO set up effective communication material supply system; by promoting efficient processing capacity; and by improving access to finance and markets. channels with SMEs, organized training activities and on-site visits to assess the suppliers against the GFSI GMP Through this UNIDO aims at increasing the supply of locally-manufactured good quality edible oil. The benefits of requirements and provided follow-up counseling and coaching jointly with the Egyptian Traceability Centre for a strengthened edible oil value chain are already becoming noticed among farming communities and processing Agro-Industrial Exports (ETRACE/ATC). Overall, the programme was implemented based on a multi-stakeholder clusters. To ensure sustainability, the focus has now shifted to ensuring the participation of the private sector: all platform where all project partners, including the development agencies, governments, the private sector, in all, 4 farmers’ unions and 10 farmers’ cooperatives (over 1,400 farmers) received technical assistance; two donors, academia, etc. contribute either in-kind or financially. Suppliers, at the same time, were enrolled in the sets of seed-cleaning and grading machineries were installed; and private limited companies were formed in the programme free of charge. In less than five months, the suppliers passed the basic and intermediate level regions of Oromia and Amhara by 82 oil processors who raised funds for the establishment of common facilities requirements of the Global Markets Protocol and were thus considered suitable to become METRO suppliers. (such as oil refineries). More specifically, suppliers demonstrated a 45% increase in compliance with basic food safety standards as well as in individual competencies (a 13.6% increase in food safety knowledge) as compared to the initial supplier assessment. As a result, the quality and volume of marketable products has improved. At the same 4.3 Focus on supplier development time, local consumers have benefited from better and safer products as well as more stable food prices. Moreover, market access for suppliers has been improved and become more stable as METRO has signed UNIDO’s supplier development aims at farms and firms in developing countries – commonly organized in clusters contracts with the majority of the upgraded suppliers.[2] Based on the successful pilot, the project in Egypt has - that face difficulties complying with market requirements and lack the technical and financial means to produce been expanded to cover 90 suppliers over the period 2009-2010. cost-effective goods of sufficient quantity and the required high quality (UNIDO 2013c). The approach emphasizes:
• Gradual capacity building among suppliers in developing countries with a continuous improvement focus at heart: Important here is to ensure that the capacity of a wider group of firms is built and buyers do not merely select 4.4 Focus on expert promotion via consortia among a group of very capable suppliers based on a limited set of key performance indicators. Specialized training There are many cases where developing country producers are capable of producing quality products for the and assessment processes at different levels are applied for that purpose while agreeing with the buyers on world market and they would not need international buyers to help them in product and process upgrading. the quality level that compliance should aim at. The focus of the training shall not only be compliance with the Simply such producers do not have access to markets to be able to sell their products and/or would like to standards but also maintaining and improving the profitability on the level of suppliers. avoid selling through global buyers and branders who reap off a large share of the value added. Indeed, for many • Develop partnerships for responsible supply chain development and promote appropriate and feasible cost firms especially exporting is a complex business involving high risks. In such cases export promotion via consortia sharing among different partners: Often the costs of compliance development is left to the suppliers. Therefore development is useful that enables producers to access local and international markets and different marketing it is important to engage also buyers and other stakeholders to ensure a better distribution of the costs and channels such as fair trade, organic, sustainable, etc. benefits of compliance development. As the UNIDO-METRO partnership experience has shown (see Box 4), local An export consortium is a voluntary alliance of firms with the objective of promoting the export of goods and and international as well as public and private actors can make relevant technical, financial and organizational services of its members through joint actions. By cooperating with other firms within an export consortium, contributions based on their “competitive” advantage. Organizations such as UNIDO can play a useful role in firms can effectively penetrate and increase their share of foreign markets, at reduced cost and risk. At the structuring and coordinating such collaborative processes and broker effective linkages among a multitude of same time, members can improve their profitability, achieve productivity gains and accumulate knowledge through different actors. various types of joint action that are not directly related to export marketing, such as joint management training • Adapt to country or region: Planned interventions and the provision of technical assistance have to be tailored to programmes, joint ISO certification programmes, improve shop floor procedures, and the like. Consortia also local specificities and ensure consistency with existing supply chain governance structures and power relationships. help their members to move from simply supplying products to customers (“reactive” exporting) to a true export Often cultural differences are a main obstacle to the diffusion of international standards in developing countries. A strategy where domestic marketing activities can be extended and technical specifications and/or prices are not simple adoption of “Western” or buyer-driven agenda should be avoided. simply prescribed by clients (“active” exporting). When several enterprises join forces to promote their exports, they increase their bargaining power with distributors and buyers. In some cases, consortia may even be able to • Engage in harmonization of standards: In view of the proliferation of Corporate Social Responsability (CSR) and other standards and buyer requirements it is important to seek ways of harmonizing requirements across buyers develop their own distribution channels. and facilitating compliance across a broad range of SMe suppliers. The building and operation of such consortia is a difficult task that the members would not always be able to • Promote networking among firms: This ensures that firms increase their own capacity and bargaining power. A organize. Drawing also from its cluster development tools, UNIDO provides a range of services to this end including clustering approach for enhanced outreach and scaling up can furthermore be promoted through collaboration support to consortia creation, training of promoters of export consortia in the public or private sectors, promoting a with local business membership organizations (BMos).
22 23 Box 6: Building learning networks among primary producers in the Nicaraguan Cocoa value chain. favorable institutional and regulatory environment for the development of export consortia; and the benchmarking of international good/best practice (see http://www.unido.org/exportconsortia.html). UNIDO would also emphasize In Nicaragua UNIDO has worked with communities of cocoa farmers in the poor Northern Atlantic Autonomous the empowerment of weaker economic partners and linking them with dynamic firms. The consortia can organize region helping them to build networks of skills-building and information exchange that enabled them to plant new joint marketing campaigns, screen and access international buyers, and organize sales jointly to be able to unite cocoa plantations applying a system of agroforestry management. Sustaining these networks the project will larger quantities that certain buyers require. Often a joint branding is used for making the products known among now move on to set up community-operated pre-processing units for quality fermentation and drying of cocoa buyers (see Box 5 for an example). Also the insertion into global value chains and linking to global buyers can be part and help processing groups to comply with quality standards while receiving technical support and finance from of export consortia development activities. anchor buyers which whom sustainable business relationships are being set up. The producers, as owners of the processing facilities, will be able to capture a higher value from their product, quality-fermented and Box 5: Forming processors consortia for exporting from Peru: homogenously dry beans, for which international buyers are willing to pay a much higher price. A main challenge here is to build the technical and administrative capacities among selected individuals to set up and run the In Peru, UNIDO has promoted the use of collective marks to improve the quality and reputation of typical pre-processing units that are community owned. While the owners are concerned about getting paid the products as well as to enable their joint marketing abroad. To this end, producers are organized within an highest price possible the processing units also need to ensure quality and cost recovery of their operation and origin consortium that develops a marketing strategy around a typical product, increases the visibility of the maintenance. The project tries to achieve this via the building entrepreneurial groups that will be commissioned product with various partners in connection with a local-tourism project, and enable consumers to “live and by the communities to professionally run the units for a fee and share in profits. experience” the product in its territory of origin. UNIDO also supported the producers to improve product quality to meet the expectations of markets and regulators and ensured, through the registration of a collective label of geographical origin, common branding. Through this the project was able to increase the producers added 4.6 Focus on standards compliance infrastructure development value and raise the employment rates. So far, five origin consortia integrating 748 rural producers have officially registered their collective marks and five more origin consortia including 700 producers are in the process UNIDO helps developing countries and economies in transition to comply with international standards (see of registering their collective marks. In 2013, the UNIDO approach was awarded the “good governmental www.unido.org/trade). Manufacturers in developing countries and related industry support institutions need practice” award. to develop systems to comply with the new management standards, and therefore require assistance in related capacity building, awareness building and the dissemination of the necessary know-how and information (see Box 7). UNIDO also provides technical assistance to ensure that before products enter global markets they are adequately tested according to international standards and conformity assessment requirements. Countries are required to operate laboratories, which are able to test products and samples for compliance to international standards. 4.5 Focus on firm networking for local capacity development UNIDO’s assistance consists particularly in: Networks are alliances of firms that work together towards an economic goal. They can be established between • Enabling national standards bodies to offer services for industrial compliance with WTO agreements, while firms within clusters but also exist outside clusters. Horizontal networks are built between firms that compete for the taking into account private sector, exporter and consumer needs; same market, such as a group of producers establishing a joint retail shop. Vertical networks, particularly supplier development schemes, are alliances between firms belonging to different levels of the same value chain, such as a • Developing local capacities in metrology, calibration and product testing, in order to provide services to local buyer assisting its suppliers for upgrading. Clustering and networking of firms result in greater flexibility and faster testers, producers and exporters according to international best practices, and also to enhance consumer adaptability to changing market demands (see Kanungo 2004). UNIDO supports the development of firm networks protection; via a rang of measures including (see also http://www.unido.org/clusters.html/clusters & networks): • Enabling national and regional accreditation schemes to assess the performance of local and regional • Building institutional capacities to foster network development: Local institutions and individuals need to be laboratories, inspection units and certification bodies; and trained on the need for and the elements of network development. Moreover, leaders should be identified to drive the process ahead. • Building the capacities of consumer associations to promote consumer rights based on national policies and in line with international best practices. • Trust building: Firms in the network, in the beginning, may be skeptical about the outcome of interactions with competitors and business partners and would start off with low risks and as trust builds up they shift to more complex interactions. Box 7: Bringing state of the art technology for the benefit of the cotton value chain in the Ivory Coast
• Engaging knowledge network brokers: Such a person or institution would be coaching the getting together and The Ivory Coast’s cotton farmers, who still use traditional manual methods, were missing out on the possibility exchange of information among members of the network. of obtaining improved prices for their produce, especially since over 40% of the world production is now traded through an instrument-based classification. A High Volume Instrument (HVI) unit was introduced which • Fostering learning through collaboration: Networks have the potential to accelerate the learning process if it is would move classification away from subjective indicators to objectively-measured quality indicators including focused on business-relevant knowledge and technology. micronaire, reflectance, yellowness, trash, length, length uniformity, strength and elongation. It was also of utmost importance to ensure that an appropriate legal framework and professional agreements were introduced • Stimulation of ideas, skills and competencies development: Stronger inter-firm relations provide a platform for for the classification of cotton and recognition of the Bouaké centre as the only national body authorized to excellence through the integration of varied production techniques and capabilities. label Ivorian cotton fibre. The HVI classification system now allows the accurate measurement of cotton fibre produced in the Ivory Coast in accordance with international standards,. The entire cotton industry stands to benefit from the projected price increase of around 5% based on more accurate classification.
24 25 4.7 Focus on business agglomeration within industrial parks 4.8 Focus on regional/supranational integrated value chain development Small-scale manufacturers in developing countries often find it difficult to bear the high costs of doing business While the scholarly debate has mostly looked at global value chains and international networks of brand owners, originating from the acquisition of modern technologies, equipment and infrastructure. In the end they remain with designers, producers and distributors value chains also exist on other levels of aggregation, e.g. on the local level old production methods without being able to produce high quality products under hygienic conditions. Industrial (where a cluster may involve most elements of a value chain, like in the ceramic tile industry), the regional level, parks are a means of meeting these challenges, and may provide both the critical mass and the catalyst that will the national level and the supranational level (Meyer-Stamer 2004). Most of the value-chain related interventions enable the firms to compete. Industrial parks are able to provide business-enabling conditions and infrastructure supported by developing agencies do not focus on the entire chain and all its actors but on specific underdeveloped that are not available elsewhere in a less developed country. Firms located in industrial parks often use the services regions and certain beneficiaries. As such, one can argue, that through the engagement of development agencies of local companies, creating backward and forward linkages in the local economy, and diffusing economic learning value chain development has become regionalized. to the wider business community in the country. A concentration of certain types of industries and industry support services attracts investors. Successful industrial parks can therefore become growth and innovation hubs, creating Regionalization of value chains makes sense only if conditions in the international supplies and market network high growth regions and directing national economic development. allow for it. First, there are nearby markets which do not require compliance with international standards and global This suggests a public service role in the establishment and operation of industrial parks. It may be convenient for buyers. An example here could be the Indian IT industry which does not need to look for markets abroad and can the government to provide subsidies to encourage newcomers or simply to provide the framework and legislation source certain services from neighboring less developed countries (Fernandez-Stark et al., 2013). Regionalization in which the private sector can flourish. This may include the provision of land, subsidies for the provision of the here can even mean deliberately avoiding international buyers and standards compliance. However, particularly infrastructure needed (e.g. roads, buildings, power-lines, etc.) and exemptions for park management and/or park effective this strategy may be when international standards and buyer requirements are in the near run out of reach tenants from selected taxation - at least during a period of start-up. Government is also obliged to consider the wider to local producers. Further regionalization only makes sense if the necessary knowledge and capacity can be actually implications of international business arrangements at this time. The domestic manufacturer should not face undue developed without inputs from global actors and the necessary inputs and supplies can be sourced regionally. Figure financial difficulties when seeking access to equipment or supplies, or additional hikes in purchasing price as the 5 below shows regional integration of certain industry blocks in Latin America suggesting that the development of result of duties and levies when buying from foreign suppliers. regional value chains is possible there are higher percentages of total intraregional exports of intermediate goods.
The types of facilities, services and amenities that a park provides depend on the industries and sectors it is targeting, and the obstacles the park is intended to overcome (UNIDO 2012). Science and technology parks are Figure 5: Subregional integration blocs of main industries (percentages of total intraregional exports aimed at technologically-advanced industries and emphasise high-level support services, such as marketing, technical of intermediate goods) consultancy through networking with local R&D institutions, advisory services on finance and venture capital and joint venture partners. Along similar lines to industrial parks, Export Processing Zones (EPZs) are useful for countries INDUSTRIES MERCOSUR CACM ANDEAN working to establish export-oriented manufacturing sectors while lacking the technical or administrative capacity to COMMUNITY develop a countrywide system to allow exporters duty-free access to imported equipment and materials. In some countries, EPZs preceded the establishment of industrial parks. Support to the setting up of industrial parks can Agribusiness 3 10 3 be a valuable instrument to increase regional and national industrial competitiveness, as well as to arrest negative Textiles and garments 2 9 9 externalities associated with urban congestion and ‘brain drain’. Paper and cardboard 5 3 8 UNIDO supports the development of industrial parks with measures in the areas of identifying appropriate locations, Pharmaceuticals 3 12 7 planning of scope and scale of park operations, marketing and promotion of the park concept, promotion of Chemicals and petrochemicals 33 33 37 investments, setting up service providers that are able to provide infrastructure, setting up capacity to manage park Steel and metalworking 16 22 23 development and park operation, linking up firms in the park via cluster and networking approaches, provision of manufacturing and agro-processing knowledge and technology and support to marketing efforts of firms (see Box 8 Machinery and equipment 8 1 1 for an example). Electricals goods and electronics 3 4 3 Automotive (and auto parts) 24 0 2 Other industries 2 7 6 Box 8: Agro-Industrial Park Development in Ethiopia 5 main industries 87 85 85 All industries 100 100 100 UNIDO in cooperation with ABD (Agri-Business Development Unit) developed a business plan for piloting Integrated Agro-Food Parks (IAFP) in Ethiopia. In the framework of the project, UNIDO provides technical support Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of the United in the mapping and profiling exercise of at least 50 companies focusing on existing companies, particularly Nations Commodity Trade Statistics Dadabase (COMTRADE). women-led and those processing traditional products, in order to boost national and international investment for the selected companies.
26 27 CONCLUSIONS
The international production and trade system has become subject to global value chain organization in whose Box 9: Networking for exporting presence late-industrializing countries need to redefine and strengthen their industrial policies. In response modern value-chain-focused industrial policy has become more complex as it needs to account for the influence of value chain EcoHamaca is a network comprised of 11 small enterprises involved in the handicraft hammock production organization in a local, national, supranational and global context. In this report we have been discussing why policies sector located in Masaya, 25 km south of the capital Managua. Each of these enterprises employs 15 people on for value chain development are important and how they could look like in generic terms and in practice. average. Prior to the UNIDO intervention, the enterprises competed against each other in the local market and had no direct exporting experience. The UNIDO networking project assisted the producers in pooling talent and We find that policy makers in developing countries, development agencies and donors engaged in industrial development resources to venture into the export market. It facilitated the process by enhancing the design, production and interventions are well advised to support local firms that are subject to global player dominance strengthening marketing capacity of the firms. Producers received assistance in standardizing their production that resulted their skills and the technology they use in existing products and processes but also developing innovate capacities in improved product quality and design, better pricing systems and attaining appropriate quantities for export. to venture into new activities downstream in the value chain and in other sectors. Obviously the concrete policy Realization of the need to implement eco-friendly technologies to penetrate profitable EU and USA markets, led measures should be drawing from in-depth value chain analysis and corresponding industry strategy development to the transition from using cedar wood (which is near extinction) for poles to other exotic species (guassimo, based on a holistic understanding of the value chain. In particular policies and programmes can be designed as a mix alurel, maria). There has also been a shift in the use of dyes – from chemical to natural. The cooperative spirit is of instruments in line with the structure of the chains, firm’s needs and business opportunities. Policy instruments manifested in having chosen a brand name “Made in Masaya” which reflects their intention of promoting a local should particularly focus on private-sector-based pro-poor development of existing clusters, supplier development, identity. The producers have successfully exported to destinations like Sweden, Finland, USA and Peru with an expert promotion via consortia, firm networking for local capacity development, standards compliance infrastructure average export rate of more than 3,000 hammocks per month. The producers represented Nicaragua in the development, business agglomeration within industrial parks as well as regional/supranational integrated value Iberoamerican Handicraft Trade Fair in Spain in November 1997. The Chilean enterprise located in Nicaragua chain development. has also approached the group to start exporting to South America. In order to meet the growing demand, the 11 producers have hired a manager who would be responsible for identifying more formal training schemes, and Finally, modern policies cannot simply focus on the survival or growth of an industry in terms of its overall production assisting in developing technical and financial capabilities, with cooperation from local SME support institutions, output or export value. Rather, industrial policies nowadays need to be compliant with development goals and prove to strengthen their marketing and production abilities. that they ensure the economic sustainability of development, that the benefits of industrialization are distributed more equally in society (also benefitting women and vulnerable groups) thereby strengthening social inclusiveness Source: Kanungo 2004 and that industrial production does not turn out a burden of on natural resources and the environment.
However, policy makers and development agents should be cautious to not channel subsidies to single and privileged firms, projects or regions and adhere to well-established principles in the design and evaluation of industrial development programs. A close collaboration of private and public stakeholders along the value chain is useful and this requires engaging in a mutual understanding and joint learning process. Further, industrial policy needs to be embedded in a broader development strategy and combined with and complemented by other policies such as education, infrastructure, trade, investment and macroeconomics, agriculture and social development policies.
28 29 LITERATURE REFERENCES
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30 31 Beyond infant industries and trade liberalization: Productive development in a value chain and cluster context
Frank Hartwich and Gerardo Patacconi