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Boosting SME Competitiveness By Linking Them into GVCs

By WASME Editorial:

Globalization of Production

Though the globalization process has been underway for decades, it has gained momentum with the substantial growth of world imports and exports since the 1980s. It got a further boost through foreign direct investment (FDI). In fact, globalization is infamous for hollowing out the manufacturing sector and the offshoring of jobs in some advanced countries even though it has generated large benefits for less advanced nations.

With globalization and increased regional economic integration, there has been a heightened competition in both national and international markets leading to new models of global business. In today’s global economy, the organisation of the production of goods and services has changed. The productive activities involved in the production of goods and services have to a greater extent spread across several enterprises and nations. This facet of globalization, in particular, has evolved with the growing need for efficiency, tapping into new and growing markets and the need for complementary and strategic assets. Therefore, over the past decades, the organisation of the production of goods and services has undergone a tremendous transformation and thereby paved the way for new forms of industrial and enterprise organisation worldwide.

In this day and age, the production of goods and services is spread over businesses based in several countries. The productive activities that lead a product from the stage of conception to final product or delivery are shared among the participating firms. Businesses are less dependent on the expertise or hiring an intermediary to export to a modern market. At best, they can pitch in to the value chain as suppliers of intermediate inputs.

Notion of Value Chain

The concept of value creation as a chain, represented by a full range of activities performed one after the other, was basically based on a manufacturing/retail view of industry. This model has its limitation in representing a firm’s activity and its relationships with customers and suppliers across many business sectors.

The OECD Working Party on SMEs and Entrepreneurship (WPSMEE) study in 2008, however, suggested “alternative models of value creation, called ‘value configurations’, to describe and analyse firm-level value creation across a broad range of industries.”

To be precise, a value chain is defined as the full gamut of activities via which goods or services pass from conception to distribution and beyond. The Global Value Chain (GVC) is defined as a chain of activities spread over multiple firms in different geographical locations to lead a product or a service from conception to final stage of delivery to consumers.

GVCs- the driving force of global economic growth

Among other factors, GVCs are now widely reckoned as one of the driving forces of global economic growth. Apart from countries’ patterns of industrialization, GVCs have also transmogrified the terms by which trade is conducted around the globe. Countries no more produce an entire range of products and services domestically; instead they flourish by specializing in certain activities that enable them to integrate into parts of a value chain and thereby increase their production.

The development of information and communications technology (ICT) coupled with improvements in transportation system have enabled businesses to establish chains that are spread across countries and regions. With the rise of GVCs, a structural shift in the international division of labour has also taken place.

Today, nearly all industries are interwoven through different chains. For instance, the agro-food sector’s participation in GVCs begins with agriculture and fertilizer industries; extractive and raw material industries present an attractive potential for GVC development in manufacturing; and the service sector including financial services, transport services, mobile telephony services and information technology (IT) services horizontally serve all GVCs.

As per the APEC Policy Support Unit 2014, a research and analysis arm for APEC (Asia-Pacific Economic Cooperation), a growing number of developing countries are participating in GVCs, and their share in global value added rose from 20% in the early 1990s to 30% in 2000s.

Further, there are empirical works to show that businesses that have access to the global economy through exports, FDI or as suppliers to exporters tend to be more productive than those serving their native markets only. As a result of higher productivity, businesses remain better equipped to compete in global markets, tap into bigger benefits through GVCs, and become capable enough to pass on the gains through higher wages resulting in prosperous communities.

 Why SMEs’ Participation in GVCs Matter

Small and medium-sized enterprises (SMEs) are the backbone of the global economy which play a crucial role from various perspectives including employment generation, output growth, suppliers of products and services to large and multinational enterprises, poverty alleviation, economic empowerment and distribution of wealth.

SMEs need a new growth paradigm and business strategy for surviving in an ever-increasing competitive environment. GVCs offer an opportunity for SMEs to upscale their business models and to grow across borders. Participation in GVCs enables SMEs to increase their competitiveness through business linkages, technological transfer, skills upgradation, innovation and expansion to new markets.

The 2008 OECD Working Party on SMEs and Entrepreneurship (WPSMEE) report, which analysed global value chains in five sectors where SMEs act as subcontractors or suppliers in OECD countries, noted that globalization of value chains brings a host of opportunities for SMEs. The report mentioned the following key benefits that result from SMEs participation in GVCs:

  1. Participation in global value chains enhances SME internationalisation and growth.
  2. Small firms that focus on multipurpose technologies secure their position in the market by becoming specialised suppliers.
  3. SMEs increasingly choose to outsource, even offshore, non-core activities.
  4. Co-operation with partners upstream and downstream improves the small firm’s efficiency.
  5. Innovating and keeping up with new technologies.

The pace of growth of labour productivity in developing Asia has been slowing down in the aftermath of the Global Financial Crisis. According to the 2015 Asian Development Bank (ADB) report, SMEs, the key drivers of Asia’s economies, have the potential to reverse this deceleration trend of labour productivity in Asia. The report lays emphasis on the role of GVCs in unlocking business opportunities for SMEs which will, in turn, lead to increased national productivity.

SME Integration Initiatives

To help SMEs to identify opportunities in the GVC and to understand how they can fit into the value chain, a number of initiatives have been taken across the world.

Enhancing the integration into global markets of goods, services, investment, and knowledge of SMEs in low-, middle-, and high-income countries is a policy priority for the Group of Twenty (G-20) countries (OECD and World Bank Report 2015).

Asia-Pacific Economic Cooperation (APEC) economies devised a multi-year initiative (2015-2016) on Promoting SMEs’ Integration into GVCs in Major Industries to facilitate SMEs’ integration into GVCs.

International organizations such as the International Labour Organization (ILO), Organization for Economic Cooperation and Development (OECD), the United Nations Industrial Development Organization (UNIDO) and the United Nations Conference on Trade and Development (UNCTAD) have undertaken various research programmes and organised expert meetings and ministerial conferences to lay emphasis on SME contributions and what governments should do to assist the entry of SMEs into GVCs and to make sure that they benefit from such participation.

Perennial Challenges

Notwithstanding the benefits from SME participation in GVCs, there are still many issues facing the SMEs that need to be addressed. Issues such as providing SMEs’ access to finance, technological innovation, management skills besides providing an enabling operating environment for SMEs through sufficient transportation, infrastructure, and regulations for SME activities continue to persist.

The OCED 2007 report mentions that SMEs’ involvement in value chains requires greater managerial and financial resources, the ability to meet international standards and the protection of in-house intellectual property. In order to meet these challenges, SMEs need the support of their governments, even those in developed countries.

As far as global value chains are concerned, SMEs face dual challenges of entering a global value chain as well as moving up the chain by upgrading the value-added content of their activities.

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