An important feature of the new global environment is the increased internationalization of industrial production. Production is being increasingly segmented in different stages located in different countries, according to the competitive advantages of each location. This so-called globalization of the value chain, or global value chain, allows producers to improve on competitiveness by making better strategic use of available global endowments, skills and capabilities to lower costs. It also creates opportunities for a greater number of countries to take part in the global industrialization process and in so doing spur their own national industrial development.
By segmenting production into a range of small, narrowly defined tasks, global value chains facilitate the participation of SMEs into international production networks, as it should be relatively easier for SMEs from developing countries to develop comparative advantages in a range of small, narrowly defined items by learning by doing and scale economies (Bigsten and Soderbom, 2009). Participation in global value chains also gives SMEs an opportunity to exploit large, profitable world export markets and engage in industrial and technological upgrading (UNIDO, 2004).
The participation of African enterprises in these global value chains can offer African countries an opportunity to tap into the global industrial export market. For countries that have freshly embarked on an industrialization path, the insertion of their enterprises in global value chains, by forging relationships with foreign investors, can provide an entry point into the global industrial stage. Such insertion can provide opportunities for local enterprises to access international markets, acquire information on export markets and develop technological capabilities through exporting, or learning by exporting (UNCTAD, 2007b). However, the insertion of firms from developing countries into global value chains can be fraught with difficulties. As pointed out by Kaplinsky and Morris (2003), entry in global networks is determined more by rules set by private actors rather than by governments in trade policies. The large firms in the global value chain – be it retailers, traders or marketers – that distribute contracts to suppliers in developing countries very often set parameters or “rules”, such as environmental and labour standards, quality specifications and process standards.
Another barrier to entry for newcomers lies in whether they can forge relationships with the big buyers in these networks. Lead firms in the global value chains may already be relying on an existing network of suppliers. Their willingness to switch to new suppliers may be low if relationships with subcontractors and suppliers are governed by trust and reputation because of high transaction costs rather than on competitive considerations such as production costs alone. Transaction costs can matter more than simple direct production costs, especially in product lines where quality and timely delivery are determining market factors and buyers have to make significant investments to strengthen capabilities of their suppliers and to monitor them.
Global value chains are often driven by multinational enterprises that are themselves involved in several global value chains. A strategic option for breaking into global value chains consists in African countries positioning themselves as reliable suppliers or subcontractors for global producers such as multinational enterprises in the manufacture of intermediate, semi-finished and/or finished goods. Trade in intermediate goods, for instance, has become the dominant type of trade flows and accounts for around 60 per cent of world exports (WTO, 2010). There is evidence that its increased dominance is due to increased international production, especially the growing importance of the network of multinational enterprises (Kleinert, 2003). African countries can take advantage of the expanding trade in intermediate goods by positioning themselves as reliable suppliers of intermediate industrial inputs for global industrial networks.
Specific measures should also be taken to facilitate the integration of African SMEs into global value chains. UNCTAD (2010c) highlights a series of policy recommendations that are relevant for African industries. It notes that promoting an enabling business environment is a prerequisite for SME’s to integrate into global value chains. This can range from stable macroeconomic policies; streamlining and efficiently applying business procedures, laws and regulations; setting up complementary policies in competition, trade and investment to supporting human resource development and improving access to nance. Public policy interventions to support SMEs, should, according to UNCTAD (2010c), focus on skills development and training, investments in appropriate technologies for continuous technological upgrading, enhanced compliance with international standards and linkages between SMEs and multinational enterprises via speci c promotion measures especially targeting multinational enterprises that are known to establish linkages with SMEs. Other public policy measures would include setting up business development services, promoting clusters such as science and technology parks or industry villages, enhancing intellectual property protection and developing productive capacities.
Despite the advantages of participation in global value chains, there is the danger that, once enterprises start out as low-cost suppliers in a low value-added end of a global value chain where entry is easier, they may remain trapped there. In this context, whether African countries gain in the long run from participation in global value chains depends on several factors. One factor relates to how proactive firms and national governments are at fostering continuous upgrading opportunities for domestic firms in global value chains, building linkages across firms supplying global value chains in different sectors and forging closer relationships with foreign buyers/lead firms in the global value chains. Government-assisted measures such as human resource training, investing in science and technology and fostering linkages between business and scientific and educational institutes may prove indispensable, for instance, to facilitate learning by local firms so that these firms can engage in upgrading over time.
Another factor is the ability of local firms to increase the costs for its foreign buyers to switch to alternative suppliers elsewhere. That is the ability of the local firm to lock in its buyers. This in turn may depend on the type of hierarchical relationships within the chain between the foreign buyer and its suppliers; the degree of support provided by the lead firms to its suppliers for complying with standards; investments on the part of local firms to meet buyers’ requirements and how easy it may be for foreign buyers to access same supplies elsewhere. African countries that are commodity rich, for example, are in a better position to lock in their buyers if they have access to a critical raw material, such as gold, diamonds or metals, that is in short supply somewhere else. Resource-rich African countries can market their exclusive supplies of critical commodities to enter as a supplier in commodity-driven global value chains.
Source: Economic Development in Africa Report 2011 by United Nations Conference on Trade and Development (UNCTAD)