Production linkages, clusters and global value chains: seeking answers for SMEs
Bridging the gap in SMEs’ production and exports in the region justifies the need to implement efficient production linkage policies based on instruments to promote business co-operation and institutional collaboration in order to improve businesses’ competitive performance and create a dynamic, innovative business environment. There is a whole range of partnership projects in Latin America, aimed at promoting clusters, business networks and regional programmes, as well as SMEs’ participation in global value chains. However, these projects have been based on approaches and instruments whose operational modes of action are not always consistent with the goals being pursued.
For production linkage policies to have more impact it is essential for them to be part of countries’ national development policies. These strategies being broader and more long-range, provide clear signals to enhance the efforts of companies, link them with sector priorities, and seek greater co-ordination between public instruments and an environment of dialogue and consensus with private support initiatives. When there are scattered development initiatives in a weak institutional context with a lack of priorities for industrial policy and for selecting production chains and sectors, there is less chance for complementarity, co-ordination of support and institutional learning that are required in promoting this type of action from the public sector with co-operation from the private sector.
Small and medium-sized enterprises (SMEs) are part of a heterogenous universe of extremely diverse economic agents, whose characteristics vary depending on the business sector they operate in, the markets they serve, the products they produce and how involved and connected they are with the macroeconomic context and support institutions.
In the past two decades, the governments of different Latin American countries have implemented various support instruments and programmes for SMEs to create a favourable business environment, encourage structural change and improve such agents’ performance. These initiatives have often focused on reducing levels of informality, facilitating financing and access to credit, promoting improvements in management and quality, introducing business-development mechanisms and human-resource training, and fostering the search for and entry into markets.
International experience indicates that actions and policies to support SMEs should consider various aspects. With specific reference to this segment, important factors include bolstering co-operation among businesses and inter-institutional co-operation, intended to improve production performance and competitiveness, by stimulating a dynamic, innovative business environment. This involves implementing production linkage policies to strengthen links and integration among companies in different lines of business. Often, SMEs are part of production linkage chains made up of different-sized companies from different sectors. Embracing this type of production requires a comprehensive, systemic policy approach, which can have a large impact if it includes elements that make it possible to boost businesses’ productivity and competitiveness and consider regional, sectoral and institutional variables that are important to ensuring the quality and efficiency of public policy.
Given these motivations, this chapter will analyse several aspects of production linkage policies in Latin America. To do this, it assesses the lag in production and exports among SMEs in the region, which justifies the need for efficient production linkage policies. It also defines this type of instrument and illustrates its implementation in the region. This is followed by a specific analysis of SMEs’ integration into global value chains, an example of a more complex associative strategy that has gained relevance in the wake of worldwide fragmentation of production. Lastly, it gives a general assessment of these types of projects in the region.
Production context, performance of exports, and SMEs’ productivity in Latin America
Though the world economy is tending towards globalisation, the economic system consists of a set of very different business activities. While some of this activity is integrated into the globalised core of dynamic activities whose meeting place is the global market, most of the region’s economic activity takes place in restricted markets (local or national) that are not fully integrated or are still on the margins of globalisation.
Latin American SMEs generally have a hard time entering the trade and production streams that characterise the globalised economy and most of them participate in local or national, rather than supranational, production systems. This is due to the nature of the goods they produce and the types of markets they serve, among other reasons (such as management and production capabilities, quality, scale and pricing).
The greater trade integration of economies is a result of changes in technology, industrial organisation and an international division of labour. These have facilitated a fast and profound fragmentation of production systems that has made it possible for large companies to outsource certain activities, some of which have been assigned to smaller firms. Export strategies vary depending on the size of the business (Abel-Koch, 2011). Most major companies export directly, while SMEs have low participation in exports and seek to access foreign markets indirectly, through partnership schemes, consortia, sales groups and market operators.
SMEs in Latin America are less internationalised than those in other regions. According to World Bank data, direct and indirect export levels of Latin American SMEs are only half of those recorded in Europe and are one-third less than those seen in four East Asian countries (Figure 6.1). In short, there are two realities in Latin America: one group of companies, comprised mostly of SMEs, that operate on a local, national or regional scale, and another globalised core, clearly weighted towards larger companies.
Figure 6.1. Enterprises that export directly or indirectly, by size and by region, 2009-10
SMEs in Latin America are less internationalised than those in other regions. Direct and indirect export levels of Latin American SMEs are only half of those recorded in Europe and are one-third less than those seen in four East Asian countries.
Participation in export markets is related to the productivity gaps between SMEs and larger companies. As mentioned in Chapter 2, Latin America’s micro, small and medium-sized enterprises have an average productivity that is respectively 13%, 32% and 43% that of large firms (very low percentages compared to other regions). This is linked to the limited participation of the region’s businesses in international markets. According to World Bank Enterprise Survey data (2009-10), there is evidence that production growth rates are higher in businesses that export directly or indirectly than in businesses that exclusively serve the domestic market.
Overcoming Latin America’s lag in productivity requires differentiated policies, since the distinct business categories (globalised and domestic) operate based on a different underlying logic. As shown below, this difference between types of businesses justifies a broad range of production linkage policies, with considerable differences in their design, actions and goals.