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
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ABSTRACT
INTRODUCTION
In the presence of global value chain dynamics, strategies for commodity development and industrial policies need
to be revised: first, measures of infant industry protection do not work where industry knowledge and technology is
provided through international input providers and buyers; second, measures of trade liberalization are ineffective
where global suppliers and buyers enable market access and dictate quality standards with which suppliers have to
comply. In this situation, developing countries need to define new policy tools and programme interventions that allow
their producers to capture a higher share of value in rapidly-evolving global value chains.
Productive development involves producing new goods with new knowledge and technologies. But which are the
right measures to foster productive development? This question has been at the heart of the discussions on
industrial policies for developing countries for decades. The scholary debate has been particularly dominated by
the dichotomy between protectionism and free trade, also leading to a divide in practical policy-making. For less
developed countries (with less developed industries), the debate often has centered around their willingness and
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
industries (Shafaeddin 2011a). In fact, almost all of today’s “rich” countries used tariff protection and subsidies to
develop their industries (Chang 2003).
This report argues that, in the presence of global value chain dynamics, developing countries need a revised strategy
for productive and industry development. It discusses various options for policy instruments from a theoretical
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
industry strategy development based as well as policy instruments focussing on private-sector-based pro-poor
development of existing clusters, supplier development, expert promotion via consortia, firm networking for local
capacity development, standards compliance infrastructure development, business agglomeration within industrial
parks as well as regional/supranational integrated value chain development. Further, systemic aspects of value
chain organization need to be taken into account so that supply, production and value addition activities are wellfunctioning and interlinked. In essence, developing countries need to move away from a trade-based approach to
industry development policies to innovation, knowledge and capacity development policies for inclusive and sustainable
industrial development.
The infant industry argument suggests that newly-established industries come with high production costs as compared
to established foreign industries and that they require time to become competitive. During this time, it would not pay
off for an entrepreneur to enter the industry. However, with protection and public support, dynamic factors would
come to play for increasing efficiency and eventually industry maturation (Krueger and Tuncer 1982). Protection
and support from the state budget would be justified on the basis of future returns. In essence, in the presence of
the infant industry argument, technological latecomer countries would want to pursue proactive industrial policies to
compensate for disadvantages vis-à-vis industrially-advanced countries.
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.
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The above illustrates how shaping industrial policies has been influenced in the past by the debate on liberalization
against protectionist policies. The debate, however, seems to have lost part of its relevance for present industrial
policy development due to a number of conditions that have become apparent in today’s international production
and trade system. These include:
1.An increasing specialization in the production processes allowing for a segmentation of different functions
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
product design and development, production, marketing and distribution in different countries (Grossman and
Rossi-Hansberg 2008). For example labor-intensive stages with low transport and communication costs can be
located in low-wage economies. For developing countries, this has often meant to become the cheap provider
of either raw materials or labor-intensive products. Via segmentation, lead companies that look for markets to
sell their products and purchase supplies for their production come to less-industrialized countries and trigger
engagement of local companies in the value chain and through this industry development.
2.The increasing concentration of production and trade in the hands of companies that act globally (global
players) that operate across countries and sectors and exercise substantial supplier or buyer power (see Gereffi
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).
policy today. Main areas of reorientation of industrial policies include the support of companies subject to global
player dominance, the introduction and further development of knowledge and technology via skills development
programmes and international exchange, the empowerment of companies to comply with standards, the
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
themselves in existing and new markets with existing and new products that comply with consumer demands.
This report discusses the need for, and the elements of a revised industrial policy for under-developed industries
in the presence of global value chain dynamics. With this, it aims at contributing to the renewed worldwide
debate on industrial policies. The report is structured as follows: Chapter 1 discusses, with special reference
to structural change, how global value chains are increasingly influencing productive and industry development
in developing countries. Chapter 2 discusses why industry development can be fostered via value chain-related
policies introducing also the importance of cluster-development approaches that are relevant in most value chain
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
industrial policies, based on UNIDO experiences. In the conclusions, we then provide a set of recommendations on
the orientation and elements of a modern industrial policy considering value chain organizational features.
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
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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
addition sectors within the industry sector) change (see UNIDO’s Industrial Development Report 2013 for a detailed
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.
One principal issue is whether developing countries should focus on their comparative advantage by promoting
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
leading industrial nations through blocks of catching-up countries (flying-geese paradigm) where labour-intensive
production would continuously move from the more advanced countries to the less advanced (Akamatsu 1962).
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;
through upgrading and diversification in manufacturing at a later stage; and through technological innovation at
an advanced stage”.
• Lead companies exercise buyer power in order to have local suppliers comply with standards of quality and
production.
Indeed, at the initial stage of industrialization agriculture is still the largest sector, though often least productive, and
the development of manufacturing can trigger growth of the overall economy. In countries that are on the way to
reach middle-income levels, industrial policy should look at two strategies: a) increase efficiency and productivity in
labor-intensive and low-tech sectors to increase competitiveness; and b) diversify and upgrade economic structure
towards more technologically-advanced sectors because otherwise competing on cost with low-income countries
will become increasingly difficult. At advanced levels of development, many high-income countries cannot compete
in low-cost, mature segments of industry and should pursue differentiation (by raising quality) and innovation by
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
(inclusive development) and sustainability (green industry) perspective.
Meanwhile industry development also depends on the appearance and performance of clusters that are often
integrated into value chains and connected through value chains. Indeed, most value chains count with the presence
of clusters in some of their segments. As clusters we shall understand the geographic concentration of firms in
related lines of business. Both value chains and clusters constitute network-like patterns of transaction (MeyerStamer 2004). However, while the overarching subject of the value chain concept is the flow of products while value
is added passing from one actor to the next, for clusters it is rather the flow of knowledge and information between
actors with the purpose of joint learning, improved use of technologies, coordination and pooling of products.
Value chain organization can influence the process of structural transformation and indeed the process of productive
development, often it also leads to the development of manufacturing subsectors via chain organization. UNIDO
considers a value chain as a mechanism that allows producers, processors, buyers, and sellers — separated by time
and space — to gradually add value to products and services as they pass from one link in the chain to the next till
reaching the final consumer (UNIDO, 2011). The notion of the “value chain” can be used as a heuristic device to explain
positively the actual mechanisms in place that allow the flow of the product through the chain. However, the term
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
“managed”. Particularly the latter has led to confusion about the objectives of value chain development which can
generate benefits for different groups of people in the various segments of the value chain. For example, keeping a
certain country or region engaged in the production in a certain segment of the chain may be less important than
the generation of income and employment in another segment of the chain.
There is evidence that the influence of global value chains is rising. For example the trade in intermediate goods, a
widely used indicator of participation in global value chains, accounted for half of global trade in 2011, reflecting an
increase from 1970 to 2011 from around US$152 billion to US$6,922 billion, or nearly a 10 percent increase
annually (UNIDO 2013, adapted from IDE-JETRO, WTO and UN).
• Lead companies provide branding, marketing capacities and linkages to end-buyers necessary to sell larger
numbers of products. They can become marketing and branding agents for developing country suppliers.
• Companies grow and decline in dependence of relationships of international suppliers and buyers rendering
less effective government policies that foster development of sectors and allocation of industries. In a way, value
chain dynamics take over industry development and protection policies.
In essence, engagement in global value chains can lead to technological and skill upgrading and expansion of
production. In consequence industrialization, via engaging with leading companies in global value chains, can be
made “easier and faster”.
The relevance of clusters in development has been introduced through the works of Piore and Sabel (1990) who
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
practitioners has provided much information on how clusters can be both subject to and motor for development.
Proximity in regional clusters leads to collective efficiency by way of close interaction between businesses, formal
business interactions, informal communication, collective action in business associations, subcontracting to
competitiors, joint sourcing of inputs (see Box 2) and collaborative marketing. Spatial proximity plays a very important
role in stimulating learning-by-interacting and other forms of knowledge exchange and cumulative learning being able
to counterbalance growth and competitiveness limitation of small businesses (OECD 1992, Cooke 1994).
Development initiatives to foster enterprise clusters are now common in developed and developing regions, with both
horizontal and selective approaches to industrial policy. Warwick (2013) points out that cluster policies usually cut
across several different policy domains, but particularly focus an access to land (e.g. enterprise zones and planning
exemptions) and systemic support (e.g. cluster management companies and networking systems).
Clustering can occur in three generic ways: in primary production, in processing or in marketing and distribution of
the products of the value chain (see Figure 1). Meanwhile it is possible that no cluster at all occurs in the value chain.
For example, the banana value chain, in the past, was characterized by high levels of concentration in all segments of
the value chain as companies such as the United Fruit Company have monopolized production on large estates and
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.
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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.
Source: The authors
It is often the clusters engaging in primary production and processing that are relevant to developing countries’
industry development. The rationale is that developing country clusters are to be made fit to work with buyers and
suppliers in Global Value Chains (GVCs). Figure 2 illustrates the flow of products from clusters to international buyers
(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.
• Many developing country industries lack behind in their capacity to add value depriving them from higher
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.
• Certain developing countries industries neither have an appropriate business structure nor do they have the
necessary capacities and networks to enter into global value chains. Building all these would be too costly to
attract foreign investment and/or justify the spending of public money.
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
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2. POLICY INSTRUMENTS OF VALUE-CHAINCENTRED INDUSTRY DEVELOPMENT
While debates continue being held over the merits of industrial policy in the presence of market and government
failure (e.g. Pack and Saggi 2006) as well as unfair competition and trade liberalization (e.g. Chang 2009),
increasing evidence exists that a certain level of policy interventions is required for developing countries to perform
well in productive and industry development. The point for industry policy is being made, among others, in view of
the 2008-09 economic and financial crisis, increasing doubts about the functioning of market mechanism and
in particular the flow of finance to the “right sectors”, continuing structural imbalances in developing country
economies regarding demand and distribution of sectors and subsectors, and successes of fast growing countries
such as China that have applied strong industrial policy measures (Rodrik 2007,Warwick 2013). In addition there
are growing concerns about non-industrialization (countries move from agricultural-based societies directly into
the service sectors) and de-industrialization (declining share of manufacturing) in many middle income countries
and its negative effects on growth.
In consequence the discussion has moved towards the “how to” design and implement industrial policies.
However, in the “how to” discussion less emphasis has been put on how these policy measures should look like
in presence of global value chain dynamics. Eventually the industrial development models “protection of infant
industries” and “preferential market access and trade” have to be substituted, in parts, by a model in which a
good share of the measures unfold within the value chain in collaboration with value chain actors. A nuanced
industrial policy could, for example, aim at developing capacities in the later stages of the chain that allow
for capturing more value within the country in addition to maintaining cost-efficiency-based production in the
primary stages of the chain, a process that is known as functional upgrading (Gereffi 1999).
Policies can be considered a combination of several policy instruments; some authors therefore also refer
to the term “policy mix” (e.g. Howlett and Rayner 2007, O’Sullivan et al. 2013). Often the policy mix is also
considered to include the processes by which such instruments emerge and interact (Flanagan et al. 2011).
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:
3.Economic incentives: These include instruments related to finance such as loans, credit schemes, state equity
assistance, state guarantees, etc. some of which are available across sectors and industries and others
targeted to certain segments and industries. Further there are specific subsidies, e.g. via price fixation, direct
payments and other means, that are of benefit to certain segments of the industry.
4.Leaning and improving capabilities and enabling exchange of and access to knowledge and information:
This refers to support to training and capacity building exercises on various aspects of business development
such as technical production and processing skills, business administration, accounting, business planning,
entrepreneurship, loan application, product development, creativity, and marketing. It also refers to all measures
ensuring actors in the industry getting access to crucial information, e.g. via market and price information
systems, investment promotion to provide information on investment opportunities, matchmaking exercises
which bring together buyers and suppliers, and business and supplier inventories. More indirectly the support to
research institutes and universities, R&D grants and loans and science councils ensures that the industry has
access to relevant knowledge and technology. The Government can also support the knowledge and information
exchange with and import from other countries which may be more advanced.
5.Organizational support: Support actors in the industry to organize and coordinate in a certain way, e.g. via
committees, regular meetings, demonstration days, fairs etc. In more coordinated environments this can
also include the development of joint strategies and sector and industry specific development plans. In case
this function is not taken by global players the focus on organizational support also emphasizes improving
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
support cluster development, which, among others, can lead to information exchange, learning and capacity
building and the support to productive agglomerations such as science and industry parks, economic corridors,
and tax free zones.
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.
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3. COMMON PRACTICE IN VALUE-CHAINBASED INDUSTRY POLICY
The above policy domains cannot always be sharply separated but there are overlaps and synergies. The degree to
which policy instruments cut across the entire economy or allow for selection of certain firms, industries, regions is
another dimension cutting through all the above domains (O’Sullivan et al. 2013) while the selection process itself
is also integrated part of the policy. Reflecting a distinction between pre-production, production and post-production
(Gereffi 2010, cited in Warwick 2013) we further include a dimension on value chain support measures leading
us to Figure 3. This “value-chain-oriented industry policy matrix” now shall help us in the further discussion on policy
instruments addressing industry development challenges and opportunities related to global value chain dynamics.
Figure 3: Policy instruments for value chain development
Level of Intervention
R&D Product
Design
Inputs and
supplies
Production
Processing
Marketing
Macro-level
Regulation
Industry/cluster level
Now that we have defined how value-chain-relevant industry policy instruments could look like the question is which
of these get actually applied in current practice. For this we apply a notion of value chain development in its broadest
sense considering it a complex development problem requiring a wide range of systematic interventions in various
segments and dimensions simultaneously. This notion of value chain development surpasses approaches that look
at issues of supply chains, logistics, production processes, technology, standard compliance, marketing, finance, etc.
in isolation.
While many countries in Africa and Latin America currently revisit their industrial policies (Di Maio 2010, Altenburg
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
protective industry policies in the past - is now fostering concrete measures of value chain development (see box 1) a
country like Colombia – more liberalization-oriented in the past and with a strong industrial value chain coordination
tissues effectively operating – is losing few words in on how to face international production sharing challenges and
opportunities in its industrial policy documents.
Firm level
Macro-level
Tariffs and
taxation
Industry/cluster level
Firm level
Macro-level
Economic
incentives
Industry/cluster level
Firm level
Macro-level
Leaning and
information
Industry/cluster level
Firm level
Macro-level
Organizational
support
Industry/cluster level
Firm level
Source: The authors
One could assume that the shift of industrial policies towards value chain development relevant instruments (in
comparison to traditional industry-development policies), eventually, would imply to move away from the interventionist
regulation and tariff-based policy dimensions (the weight of respective policy dimensions in the policy mix is depicted
through the triangle in Figure 1). We will see if this assumption holds true in current industry policy practices.
Box 1: The role of value chain development in Brazil’s industrial policy
Up to the 1970s Brazil had a well-defined industrial policy fostering import substitution combining a favorable
macroeconomic framework, intense use of tariff protection, financial incentives and fiscal incentives, and the
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
industry, IT, etc.), the resurrection of new sectors such as petrochemicals (structural change) and overall
income and employment effects in the economy. Less well evaluated were the regulations of existing sectors
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
to be reintroduced in the years 2000 but with less fiscal support and without effective coordination solutions.
The new industrial policy framework under the first legislation period of president Lula focused on industrial,
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
in the context of the Greater Brazil plan is to build and strengthen competencies and expand domestic and
external markets and ensure socially inclusive and environmentally sustainable growth. Typical tools that are
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
guarantees for exports, and Government procuring from strategic industry entities. With regard to support to
value chain development the policy has as one of its objectives the enhancement of productivity and technology
density within value chains.
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
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them. One of the reasons for limited industrial policy success in Africa may be the uneven access to industry
development instruments favoring rather larger medium and large and politically connected firms (Altenburg 2011).
This is also confirmed by di Maio (2010) who screened industrial development policies in Africa and argues that in
view of their structural disparities, African countries must go further to adopt suitable industrial policy mixes that
combine trade, education and innovation, sectoral and competition policies, that correspond more accurately to
their economic characteristics. Page (2013) suggests that industrial policies in Africa must go further to promote
export oriented industrial clusters, improve the investment climate, close infrastructure gaps, create new skills
and encourage regional integration. As a policy option, Page further suggests that African countries, rather than
processing agricultural products can add value to products in packaging, transportation and distribution of fresh
consumable products responding to standards and product requirements compliance in global value chains.
Figure 4. Industrial policies in the LAC region in relation to value chain and cluster development
Country
Main focus of industrial policy
Argentina (Sanchez et
Strong support to SMEs, to increase GDI,
investment, exports, technological innovation, jobs
.creation and diminishing of imports
Build and strengthen competencies, expand
domestic and external markets and ensure social
inclusiveness and environmentally sustainable
growth. Support for innovation and technological
.infrastructure, grants and tax incentives
Economical reactivation and increase
competiveness and investment, promotion of “world
.class” sector value
)al 2011
Brazil
Ingtec USP Research Group(
)2013
Colombia
)Melendez and Perry 2010(
Chile
.)Agosin et al 2010(
Guatemala
)Cuevas et al 2010(
Mexico
)Baz et al 2010(
Panamá
)Fernández 2011(
Enhancing productivity and technology density
.within value chains
Although no explicit mention to value chain
development in policy, it is identified that public/
private alliances are needed to support emerging
clusters, solve coordination problems and
.overcome bottlenecks
Correction of market failures and heavily promoting Orientation of innovation policy towards selected
innovation centered on the application of knowledge export oriented clusters and value chains to
to production. Export growth strategies for selected .foster productivity enhancement
.chains
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
micro, SMEs, cluster promotion, and export and
and associations between local producers
.investment promotion
and exporters, specifically in activities relating
to business process outsourcing and contact
.centers
Focus on increasing competitiveness by supporting Strategy focused on cluster development,
SMEs as well as innovation activities through
insertion into supply and global value chains (e.g.
higher investment in research and development;
automobile industry) and promotion in trade fairs.
emphasis on specific sectors based on their weight
in economic terms or their potential to increase
value added.
Promoting competiveness through market
Technical assistance to clusters export oriented
access and free trade; encouraging the export
and regional value/supply chains integration,
infrastructure, fiscal incentives, foreign investment mainly through Free Trade Zones /Agreements.
with high added value, technical and financial
support for SMEs, regional integration.
Source: The authors
16
Policy elements linked to value chain and cluster
development
Promotion of cluster formation, mostly through
market interventions
For small economies and less developed countries in Asia Brunner (2013) could show that regional economic
integration in fact can provide the necessary incentives for integration of the regional portions of GVCs to the global
portions of GVCs. Brunner then suggests main strategies such as 1) diversifying trade in terms of sectors and
markets by branching out into new products in close proximity in product space(horizontal integration), 2) move
into higher value-added market segments within established sectors with increasing labor costs, as in the case
with India, 3) move into niche markets, possibly with higher value-added, and to make use of subcontracting (vertical
integration) in cases of proximity to larger markets such as India (particularly relevant for landlocked LDCs) and 4)
push processing activities down the value chain, in order to allow greater differentiation in product characteristics
closer to the customer, and offering greater flexibility in serving small orders. All of this requires, he argues, would
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
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
with Europe plus an industrial upgrading programme, Vietnam has no clear strategy for going beyond first-stage
industry development based on labor-intensive businesses where it has been rather successful (e.g. coffee, shrimp,
fish). Namibia seems to even have no strategy at all while Mozambique’s focus is donor-driven focusing on industries
such as cashew nuts. For Latin America Peres (2013) argues that under the influence of the global value chains
and international trade Latin American countries successful policies nowadays combine new and old objectives and
instruments, such as cluster development and structural change, with technology funds and state procurement.
Comparison of industrial policies across countries and regions is difficult but one common feature seems to be that
value chain development supporting policies are often dealt with step motherly. This refers to the depth with which
value chain dynamics and the options for insertion in the global value chains are analyzed and the assumptions on
development impacts of certain policy measures. For example, often the development of industrial parks is marked
as a policy measure without further analysis how the firms to be allocated there would enter in value chains. However,
indeed our assumption in section 2 holds true, most policy instruments relate to organizational issues such as
cluster development and setting up of industrial parks as well as the upgrading of knowledge and technology.
So what’s missing and what is wrong in the current practice of industrial policies aiming at value chain development?
Apparently a policy shift towards more value chain development oriented industrial policies is already unfolding but
some countries still seem to try to make sense of it while others are certainly lacking behind. In the following we
provide a gap analysis and discussion of common problems and issues in value chain-development-relevant policies:
• Insertion in the value chain per-se is not of benefit to developing country firms if it is not paired with increasing sales
and/or improved levels of productivity resulting in higher profits. However, in the absence of any other demand,
developing country firms may want to stay engaged in production and therefore will continue to value sales options
with international buyers. In other words, engagement in global value chains may be enough for a few individual
firms but it may not be beneficial for an industry of a developing country at large. Therefore industrial policies shall
be designed that aim at more substantial profit generation for local firms. This would include helping firms to raise
their profits via cost reduction, productivity increase and expansion of production, and it would go beyond the simply
enabling local firms to sell.
• There is a strong dependence of developing country producers on knowledge and technology provided by global
players. This can lead to locking them in certain technology trajectories, makes them vulnerable to market shocks
and links them to the business fate of certain buyers. While knowledge and technology provision through leadbuyers should be maintained countries should also make efforts to generate their own knowledge and technology
and exchange experiences with other countries. Therefore policy interventions that help local producers to acquire
knowledge and technology for the production they become currently and in the future involved in.
• The knowledge and technology provided by lead buyers does only focus on supplier technology and does not allow
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.
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
schemes, and investments from global buyers. The focus seems to be on having firms being set up and allocated
in a specified geographic region and linked to buyers. Policies should focus more on the exchange of knowledge,
join learning among firms and organization of firms within the cluster addressing also issues of joint procurement,
organization of supplies and joint marketing.
• 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
development can become a precondition for the country’s firms to participate in global value chains. However,
often standard compliance infrastructure development programs do little to make use of the infrastructure within
respective chains which suffer, simultaneously from other development bottlenecks. Policies should therefore help to
remove compliance infrastructure constraints but only if they come together with concrete value chain development
strategies.
• Importing of knowledge and technology must not necessarily mean that local firms upgrade their capacities
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
in the market place because other service providers in the areas of product development, testing, packaging, labeling,
transport, business services etc. are weekly developed if at all available. Policies should focus on developing systemic
competences in clusters and industries across a number of activities and services.
• Clusters without connections to global players have serious troubles to set up their sales and marketing operations,
locally and internationally. Cluster-based production in developing countries (in the case of agricultural value chains
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
low-value markets. Therefore strategies need to be developed for those who are going to lose out of international
competitions.
• As global buyers may exercising lower standards regarding the products they source and due to missing culture and
experience among developing country producers integration into global value chains often comes with low attention
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
UNIDO, given its mandate on sustainable and inclusive industrial development, has accumulated substantial experience
on industrial policy instruments and actions, many of them centered on value chain development. In the following we
illustrate good practices that have resulted from these experiences and discuss some of the lessons learned.
4.1 Focus on holistic value chain development
Many tools for value chain analysis and development start with an overall mapping but then become slanted
towards a specific purpose (e.g., market access, inclusion of the poor, enterprise development, or compliance with
standards). In other words, most existing tools for value chain analysis are not holistic in nature; they do not provide
a broad enough perspective that takes into account all segments of the value chain. They may also underestimate
the complexity of the effects value chain development may have on different groups of people, including the intended
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
interventions are missing.
UNIDO (2011) propagates an approach to value chain development that is holistic in nature while having a clear focus
on value addition. In this, the term “value chain” is understood as the process of continued addition of value that occurs
while the product passes from one actor in the chain to the next, gradually increasing its degree of transformation.
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
transactions costs transaction, the value added at each phase, as well as the capacity and organization of parties
involved.
For the purpose of diagnosing this situation UNIDO has developed an integrated tool that suggests analyzing a
value chain according to 7 dimensions (see Figure 5). Out of such a diagnostic it is possible to develop most useful
interventions that in combination would lead to the development of the chain meeting goals such as poverty reduction,
income and employment creation, economic growth, firm development and cleaner production and environmental
sustainablity (see example in Box 2).
19
Figure 5: Seven dimensions of industrial value chain diagnostics
DIAGNOSTIC DIMENSIONS 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
women, to earn incomes and get out of poverty. Indeed, the income earned from seaweed production
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
sector and the Zanzibar Government - the Ministry of Trade, Industry & Marketing and the Ministry of
Livestock & Fisheries -, is currently developing a project to upgrade the seaweed value chain in three ways:
PARAMETERS
Mapping0.1 Product
0.2 Value chain actors and their functions
0.3 Flow of product and end-markets
0.4 Business interactions
0.5 Service provision
Dimension 1:
1.1 Primary product characteristics
Sourcing of Inputs & Supplies
1.2 Characteristics of primary producers and input providers
1.3 Contractual arrangements
1.4 Logistics
1.5 Infrastructure and transport facilities
1.6 Communication
Dimension 2:
2.1 Production capacity
Production Capacity
2.2 Technology
and Technology
2.3 Knowledge use
2.4 Costs and margins
2.5 Innovation
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
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
7.4 Social and cultural context
(1) The building of a seaweed processing facility introducing multi-stream, zero-effluent processing technologies,
which allows converting live seaweed to juice and pulp. UNIDO will also work on improving the packaging of the
product and it’s marketing. (2) The setting up of effective business linkages between the processing facility and the producers of seaweed,
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.
(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
livelihoods and more specifically poor seaweed farmers (95% are women), fishermen and laborers.
The direct beneficiaries, accounting for 1,200 households and representing 10% of the seaweed producers, will
see their incomes increase by 50% within three years. The remaining 12,000 seaweed producing-households
of Zanzibar – half of them live below the poverty line – will benefit from the effect the project will have on
increasing prices for raw seaweed.
Source: Neish and Msuya (2013)
[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
experts from retailer, manufacturer and food service companies, and service providers associated with the food supply chain, international organizations,
academia and government
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
[2]
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
growth, and collective efficiency through joint actions (see also www.clustersfordevelopment.org). Measures to
help cluster stakeholders reduce barriers to cooperation and help them overcome their isolation include: 1) Foster
linkages between cluster stakeholders, 2) facilitate consensus building, 3) build relationships, 4) encourage trust
building, 5) strengthen governance mechanism and 6) support the cluster’s institutional network and 7) strengthen
cluster governance mechanisms. Box 3 provides an example of a UNIDO cluster development projects.
Box 3: Technology upgrading among small and medium edible oil processors in Ethiopia
In Ethiopia, UNIDO works to enhance the performance of the entire edible oil value chain by improving the raw
material supply system; by promoting efficient processing capacity; and by improving access to finance and markets.
Through this UNIDO aims at increasing the supply of locally-manufactured good quality edible oil. The benefits of
a strengthened edible oil value chain are already becoming noticed among farming communities and processing
clusters. To ensure sustainability, the focus has now shifted to ensuring the participation of the private sector: all
in all, 4 farmers’ unions and 10 farmers’ cooperatives (over 1,400 farmers) received technical assistance; two
sets of seed-cleaning and grading machineries were installed; and private limited companies were formed in the
regions of Oromia and Amhara by 82 oil processors who raised funds for the establishment of common facilities
(such as oil refineries).
4.3 Focus on supplier development
UNIDO’s supplier development aims at farms and firms in developing countries – commonly organized in clusters
- that face difficulties complying with market requirements and lack the technical and financial means to produce
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
among a group of very capable suppliers based on a limited set of key performance indicators. Specialized training
and assessment processes at different levels are applied for that purpose while agreeing with the buyers on
the quality level that compliance should aim at. The focus of the training shall not only be compliance with the
standards but also maintaining and improving the profitability on the level of suppliers.
• Develop partnerships for responsible supply chain development and promote appropriate and feasible cost
sharing among different partners: Often the costs of compliance development is left to the suppliers. Therefore
it is important to engage also buyers and other stakeholders to ensure a better distribution of the costs and
benefits of compliance development. As the UNIDO-METRO partnership experience has shown (see Box 4), local
and international as well as public and private actors can make relevant technical, financial and organizational
contributions based on their “competitive” advantage. Organizations such as UNIDO can play a useful role in
structuring and coordinating such collaborative processes and broker effective linkages among a multitude of
different actors.
• Adapt to country or region: Planned interventions and the provision of technical assistance have to be tailored to
local specificities and ensure consistency with existing supply chain governance structures and power relationships.
Often cultural differences are a main obstacle to the diffusion of international standards in developing countries. A
simple adoption of “Western” or buyer-driven agenda should be avoided.
• 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
and facilitating compliance across a broad range of SMe suppliers.
• Promote networking among firms: This ensures that firms increase their own capacity and bargaining power. A
clustering approach for enhanced outreach and scaling up can furthermore be promoted through collaboration
with local business membership organizations (BMos).
22
UNIDO, together with Metro Group, developed a capacity building programme to apply the Global Food Safety
Initiative’s (GFSI[1]) Global Markets Protocol (GMP), which enables SMEs to meet the internationally-recognized
requirements in terms of food safety and quality. Pilot projects have so far been implemented in Egypt, India
and Russia, where suppliers have achieved considerable improvement in their performance and compliance
with food safety standards and Good Agricultural Practices (GAP). In Egypt, UNIDO initiated its partnership with
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
access to profitable new market opportunities and establish business linkages with potential buyers. While the
Metro Group provides know-how on standards compliance measures, UNIDO set up effective communication
channels with SMEs, organized training activities and on-site visits to assess the suppliers against the GFSI GMP
requirements and provided follow-up counseling and coaching jointly with the Egyptian Traceability Centre for
Agro-Industrial Exports (ETRACE/ATC). Overall, the programme was implemented based on a multi-stakeholder
platform where all project partners, including the development agencies, governments, the private sector,
donors, academia, etc. contribute either in-kind or financially. Suppliers, at the same time, were enrolled in the
programme free of charge. In less than five months, the suppliers passed the basic and intermediate level
requirements of the Global Markets Protocol and were thus considered suitable to become METRO suppliers.
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
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
contracts with the majority of the upgraded suppliers.[2] Based on the successful pilot, the project in Egypt has
been expanded to cover 90 suppliers over the period 2009-2010.
4.4 Focus on expert promotion via consortia
There are many cases where developing country producers are capable of producing quality products for the
world market and they would not need international buyers to help them in product and process upgrading.
Simply such producers do not have access to markets to be able to sell their products and/or would like to
avoid selling through global buyers and branders who reap off a large share of the value added. Indeed, for many
firms especially exporting is a complex business involving high risks. In such cases export promotion via consortia
development is useful that enables producers to access local and international markets and different marketing
channels such as fair trade, organic, sustainable, etc.
An export consortium is a voluntary alliance of firms with the objective of promoting the export of goods and
services of its members through joint actions. By cooperating with other firms within an export consortium,
firms can effectively penetrate and increase their share of foreign markets, at reduced cost and risk. At the
same time, members can improve their profitability, achieve productivity gains and accumulate knowledge through
various types of joint action that are not directly related to export marketing, such as joint management training
programmes, joint ISO certification programmes, improve shop floor procedures, and the like. Consortia also
help their members to move from simply supplying products to customers (“reactive” exporting) to a true export
strategy where domestic marketing activities can be extended and technical specifications and/or prices are not
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
develop their own distribution channels.
The building and operation of such consortia is a difficult task that the members would not always be able to
organize. Drawing also from its cluster development tools, UNIDO provides a range of services to this end including
support to consortia creation, training of promoters of export consortia in the public or private sectors, promoting a
23
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
the empowerment of weaker economic partners and linking them with dynamic firms. The consortia can organize
joint marketing campaigns, screen and access international buyers, and organize sales jointly to be able to unite
larger quantities that certain buyers require. Often a joint branding is used for making the products known among
buyers (see Box 5 for an example). Also the insertion into global value chains and linking to global buyers can be part
of export consortia development activities.
Box 5: Forming processors consortia for exporting from Peru:
In Peru, UNIDO has promoted the use of collective marks to improve the quality and reputation of typical
products as well as to enable their joint marketing abroad. To this end, producers are organized within an
origin consortium that develops a marketing strategy around a typical product, increases the visibility of the
product with various partners in connection with a local-tourism project, and enable consumers to “live and
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
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
of registering their collective marks. In 2013, the UNIDO approach was awarded the “good governmental
practice” award.
4.5 Focus on firm networking for local capacity development
Networks are alliances of firms that work together towards an economic goal. They can be established between
firms within clusters but also exist outside clusters. Horizontal networks are built between firms that compete for the
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
buyer assisting its suppliers for upgrading. Clustering and networking of firms result in greater flexibility and faster
adaptability to changing market demands (see Kanungo 2004). UNIDO supports the development of firm networks
via a rang of measures including (see also http://www.unido.org/clusters.html/clusters & networks):
• Building institutional capacities to foster network development: Local institutions and individuals need to be
trained on the need for and the elements of network development. Moreover, leaders should be identified to drive
the process ahead.
• 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.
• Engaging knowledge network brokers: Such a person or institution would be coaching the getting together and
exchange of information among members of the network.
• Fostering learning through collaboration: Networks have the potential to accelerate the learning process if it is
focused on business-relevant knowledge and technology.
• Stimulation of ideas, skills and competencies development: Stronger inter-firm relations provide a platform for
excellence through the integration of varied production techniques and capabilities.
24
Box 6: Building learning networks among primary producers in the Nicaraguan Cocoa value chain.
In Nicaragua UNIDO has worked with communities of cocoa farmers in the poor Northern Atlantic Autonomous
region helping them to build networks of skills-building and information exchange that enabled them to plant new
cocoa plantations applying a system of agroforestry management. Sustaining these networks the project will
now move on to set up community-operated pre-processing units for quality fermentation and drying of cocoa
and help processing groups to comply with quality standards while receiving technical support and finance from
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
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
pre-processing units that are community owned. While the owners are concerned about getting paid the
highest price possible the processing units also need to ensure quality and cost recovery of their operation and
maintenance. The project tries to achieve this via the building entrepreneurial groups that will be commissioned
by the communities to professionally run the units for a fee and share in profits.
4.6 Focus on standards compliance infrastructure development
UNIDO helps developing countries and economies in transition to comply with international standards (see
www.unido.org/trade). Manufacturers in developing countries and related industry support institutions need
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.
UNIDO’s assistance consists particularly in:
• Enabling national standards bodies to offer services for industrial compliance with WTO agreements, while
taking into account private sector, exporter and consumer needs;
• Developing local capacities in metrology, calibration and product testing, in order to provide services to local
testers, producers and exporters according to international best practices, and also to enhance consumer
protection;
• Enabling national and regional accreditation schemes to assess the performance of local and regional
laboratories, inspection units and certification bodies; and
• Building the capacities of consumer associations to promote consumer rights based on national policies and in
line with international best practices.
Box 7: Bringing state of the art technology for the benefit of the cotton value chain in the Ivory Coast
The Ivory Coast’s cotton farmers, who still use traditional manual methods, were missing out on the possibility
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
would move classification away from subjective indicators to objectively-measured quality indicators including
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
for the classification of cotton and recognition of the Bouaké centre as the only national body authorized to
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.
25
4.7 Focus on business agglomeration within industrial parks
Small-scale manufacturers in developing countries often find it difficult to bear the high costs of doing business
originating from the acquisition of modern technologies, equipment and infrastructure. In the end they remain with
old production methods without being able to produce high quality products under hygienic conditions. Industrial
parks are a means of meeting these challenges, and may provide both the critical mass and the catalyst that will
enable the firms to compete. Industrial parks are able to provide business-enabling conditions and infrastructure
that are not available elsewhere in a less developed country. Firms located in industrial parks often use the services
of local companies, creating backward and forward linkages in the local economy, and diffusing economic learning
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
high growth regions and directing national economic development.
This suggests a public service role in the establishment and operation of industrial parks. It may be convenient for
the government to provide subsidies to encourage newcomers or simply to provide the framework and legislation
in which the private sector can flourish. This may include the provision of land, subsidies for the provision of the
infrastructure needed (e.g. roads, buildings, power-lines, etc.) and exemptions for park management and/or park
tenants from selected taxation - at least during a period of start-up. Government is also obliged to consider the wider
implications of international business arrangements at this time. The domestic manufacturer should not face undue
financial difficulties when seeking access to equipment or supplies, or additional hikes in purchasing price as the
result of duties and levies when buying from foreign suppliers.
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
aimed at technologically-advanced industries and emphasise high-level support services, such as marketing, technical
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
working to establish export-oriented manufacturing sectors while lacking the technical or administrative capacity to
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
be a valuable instrument to increase regional and national industrial competitiveness, as well as to arrest negative
externalities associated with urban congestion and ‘brain drain’.
UNIDO supports the development of industrial parks with measures in the areas of identifying appropriate locations,
planning of scope and scale of park operations, marketing and promotion of the park concept, promotion of
investments, setting up service providers that are able to provide infrastructure, setting up capacity to manage park
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
for an example).
Box 8: Agro-Industrial Park Development in Ethiopia
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
in the mapping and profiling exercise of at least 50 companies focusing on existing companies, particularly
women-led and those processing traditional products, in order to boost national and international investment
for the selected companies.
26
4.8 Focus on regional/supranational integrated value chain development
While the scholarly debate has mostly looked at global value chains and international networks of brand owners,
designers, producers and distributors value chains also exist on other levels of aggregation, e.g. on the local level
(where a cluster may involve most elements of a value chain, like in the ceramic tile industry), the regional level,
the national level and the supranational level (Meyer-Stamer 2004). Most of the value-chain related interventions
supported by developing agencies do not focus on the entire chain and all its actors but on specific underdeveloped
regions and certain beneficiaries. As such, one can argue, that through the engagement of development agencies
value chain development has become regionalized.
Regionalization of value chains makes sense only if conditions in the international supplies and market network
allow for it. First, there are nearby markets which do not require compliance with international standards and global
buyers. An example here could be the Indian IT industry which does not need to look for markets abroad and can
source certain services from neighboring less developed countries (Fernandez-Stark et al., 2013). Regionalization
here can even mean deliberately avoiding international buyers and standards compliance. However, particularly
effective this strategy may be when international standards and buyer requirements are in the near run out of reach
to local producers. Further regionalization only makes sense if the necessary knowledge and capacity can be actually
developed without inputs from global actors and the necessary inputs and supplies can be sourced regionally. Figure
5 below shows regional integration of certain industry blocks in Latin America suggesting that the development of
regional value chains is possible there are higher percentages of total intraregional exports of intermediate goods.
Figure 5: Subregional integration blocs of main industries (percentages of total intraregional exports
of intermediate goods)
INDUSTRIESMERCOSURCACM
Agribusiness 3
10
Textiles and garments
2
9
Paper and cardboard
5
3
Pharmaceuticals 312
Chemicals and petrochemicals
33
33
Steel and metalworking
16
22
Machinery and equipment
8
1
Electricals goods and electronics
3
4
Automotive (and auto parts)
24
0
Other industries
2
7
5 main industries
87
85
All industries
100
100
ANDEAN
COMMUNITY
3
9
8
7
37
23
1
3
2
6
85
100
Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of the United
Nations Commodity Trade Statistics Dadabase (COMTRADE).
27
CONCLUSIONS
Box 9: Networking for exporting
EcoHamaca is a network comprised of 11 small enterprises involved in the handicraft hammock production
sector located in Masaya, 25 km south of the capital Managua. Each of these enterprises employs 15 people on
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
resources to venture into the export market. It facilitated the process by enhancing the design, production and
marketing capacity of the firms. Producers received assistance in standardizing their production that resulted
in improved product quality and design, better pricing systems and attaining appropriate quantities for export.
Realization of the need to implement eco-friendly technologies to penetrate profitable EU and USA markets, led
to the transition from using cedar wood (which is near extinction) for poles to other exotic species (guassimo,
alurel, maria). There has also been a shift in the use of dyes – from chemical to natural. The cooperative spirit is
manifested in having chosen a brand name “Made in Masaya” which reflects their intention of promoting a local
identity. The producers have successfully exported to destinations like Sweden, Finland, USA and Peru with an
average export rate of more than 3,000 hammocks per month. The producers represented Nicaragua in the
Iberoamerican Handicraft Trade Fair in Spain in November 1997. The Chilean enterprise located in Nicaragua
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
assisting in developing technical and financial capabilities, with cooperation from local SME support institutions,
to strengthen their marketing and production abilities.
Source: Kanungo 2004
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. In response modern
value-chain-focused industrial policy has become more complex as it needs to account for the influence of value chain
organization in a local, national, supranational and global context. In this report we have been discussing why policies
for value chain development are important and how they could look like in generic terms and in practice.
We find that policy makers in developing countries, development agencies and donors engaged in industrial development
interventions are well advised to support local firms that are subject to global player dominance strengthening
their skills and the technology they use in existing products and processes but also developing innovate capacities
to venture into new activities downstream in the value chain and in other sectors. Obviously the concrete policy
measures should be drawing from in-depth value chain analysis and corresponding industry strategy development
based on a holistic understanding of the value chain. In particular policies and programmes can be designed as a mix
of instruments in line with the structure of the chains, firm’s needs and business opportunities. Policy instruments
should particularly focus on private-sector-based pro-poor development of existing clusters, supplier development,
expert promotion via consortia, firm networking for local capacity development, standards compliance infrastructure
development, business agglomeration within industrial parks as well as regional/supranational integrated value
chain development.
Finally, modern policies cannot simply focus on the survival or growth of an industry in terms of its overall production
output or export value. Rather, industrial policies nowadays need to be compliant with development goals and prove
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
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
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31
Beyond infant industries and
trade liberalization: Productive
development in a value chain
and cluster context
Frank Hartwich and Gerardo Patacconi