Part-IChallenge to developing economies: How to access global markets How to do so in a way that provides for sustainable income growth (allowing for increasing pricing power or value creation over time)Labour intensive manufacturers from developing economies, such as wood furniture, and of particular relevance to SMEs that generally have Limited pricing power and Limited capabilities and options to upgrade.Main Causes of Failure: Growing competition and Falling pricesGlobal standards: Quality Price Timely delivery FlexibilityGlobal value chains and international production networks are the product of two interrelated processes transforming the international economydriven by Increasing economic liberalization Technological developmentFirst is the process of integration of product markets and relocation of economic activities within these markets: the internationalization of production. This is leading to the emergence of global value chains (GVC) in an increasingly broad range of product groups or industries; and integrating an expanding set of geographic locations.The second process involves reorganization of firms activities around core competencies, involving breaking up of production, marketing and distribution systems and moving them outside the firm and/or new locations. This is creating international production networks (IPN) involving the coordination and integration of production among geographically dispersed locations; more and more involving non-equity relationships among participating firms.

Part-IIPurpose: Access international markets directly by selling final products with pricing power and brand presence to international customers.Requirements: Information on existing conditions in markets available production technology existing product-market competition Capabilities to Design Produce Market Distribute Service the product on global markets Effective Response to Changing Market Conditions Evolving Tastes New CompetitorsIncreasingly intense global competition in product-markets is forcing prices down production, technological, and management capabilities upThis is creating a difficult competitive environment for enterprises that do not possess the range of necessary capabilities. Furthermore, even successful enterprises may find it hard to stay competitive over time as domestic economic and global product-market conditions changeGVCs and associated production networks may provide more manageable opportunities for SMEs to access global markets and upgrade capabilities over time.

1. Value chains: A value chain refers to the full range of value-added activities required to bring a product from its conception, through design, sourcing raw materials and intermediate inputs, production, marketing, distribution and support to final consumer. It presents a systemic perspective that incorporates all key activities related to the production, exchange, distribution, and after sales support for a given product or service. A value chain can span enterprises in a local economy, a national economy, a subregional or regional grouping of economies such as the GMS or ASEAN, and the global economy.

Simplified Value Chain:

Generic Value Chain & its Inputs:

2. Global Value Chain (GVC): Value chains become global, when their component activities are geographically dispersed across borders to multiple country locations. Value chain vs. supply chain: A supply chain generally refers to inbound and outbound logistics of a particular firm. A value chain encompasses the entire range of productive activities associated with a given product or service, irrespective of firm. For example, in the apparel value chain, the supply chain of a firm producing yarn would include the backward or input sourcing-related linkages to suppliers of natural fibres, and the forward or output delivery-related linkages to customers who are producers of fabrics. The apparel global value chain, however, includes the entire set or system of production-related activities from raw material inputs to sales, independent of particular firms involved. Value chains and industries: The value chain of the apparel industry also demonstrates potential differences between industry and value chain perspectives. Apparel production straddles more than one industry: it is closely linked to both agro-industry (e.g. wool, silk, cotton as inputs) and petrochemicals (e.g. for synthetics). These inter- or multi-industry linkages are reflected in the value chain representation whose focus is on key activities related to particular product groups, irrespective of industry or sector boundaries. Furthermore, value chain activities include manufacturing and services. In this context, non-manufacturing activitiesincreasingly with high intellectual content, such as R&D, engineering, design, sales, marketing, information systems, customer servicecontribute most of the value added in many manufactured products. This is also reflected explicitly in the value chain representation.3. Production Networks: A production network represents linkages within or among a group of selected firms in a particular value chain (GVC) for producing specific products such as computers, mobile phones, or cars. It represents how lead firms in the network, such as Toyota, Cisco, or Nike organize their particular networks of subsidiaries, affiliates, or suppliers to produce a given product. An international production network (IPN) involves the distribution and coordination of geographically dispersed activities in multiple country locations.

What distinguishes lead firms from non-lead firms in a network: They control access to key resources and activities that give them leverage over the enterprises in the production network and often generate the most profitable returns (e.g. product design, new technologies, brand names, market access/consumer demand).

Intra-firm international production networks: Production network primarily internal to a firm, involving ownership linkages among subsidiaries and affiliates in different geographic location. Classic transnational or multinational, vertically integrated corporation. Coordination and control of production and related activities is internalized within a particular firm, though it may stretch across borders. Inter-firm (non-equity based) production network: Production networks involve non-equity linkages, in which formally independent enterprises--suppliers, producers, and retailers--are linked through a variety of relationships such as Subcontracting, Licensing, Common technical standards, Marketing contracts and Shared network product- and process-related standards.

In an increasing number of industries, producers sell into final markets through such non-equity based production networks; usually coordinated by lead firms who set the standards for participation.

A given firm may belong to more than one such network. For example, in the apparel GVC a firm specializing in dyeing may be part of the production network where the lead firms include Levi, Nike, and Wall Mart; and the major auto parts supplier, Lear, is a member of the production networks of a number of lead auto assemblers, including among others GM, Ford, Toyota, and VW. 4. Increasing Importance of GVCs and IPNs: i. Challenge of Coordination: Generally 2 approaches have been followed to overcome this challenge. Hierarchy: Activities along the value chain within the control of a single firm, and coordinate them through ownership and direct management. Vertically integrated firmtogether with subsidiaries, affiliates, and joint ventures Ownership and control of inputs, components, and products as they are transformed along the value chain Example: Traditionally GM and Ford followed this but later on they moved from it. Markets: Coordinated by arms length transactions Products change ownership as they move between activities along the value chain, with no overall coordination of production among firms. Example: In the apparel industry a clothing manufacturer purchasing yarn on the open international market; or a supermarket purchasing fresh fruit on the market from any available supplier. ii. Dismantling hierarchy: This challenge can be overcome by: Focusing on their core competenciesactivities firms see themselves doing well and that allow them to capture higher returns Outsourcing non-core activities. Transforming traditionally vertically integrated hierarchical firms in a variety of industries into networks. (e.g. Levi Strauss in apparel) or into a hybrid forms of hierarchy with network characteristics (e.g. Ford and GM in the automotive industry). iii. Controlling Markets: Global buyers increasingly want more information and control with respect to their suppliers, and further back in the value chain. This is driven by a number of factors: Competitive pressures are forcing firms to Eliminate stocks and Reduce time-to-market to lower costs and Improve flexibility Final product markets are increasingly characterized by Consumer demand for higher quality Lower prices Speed (e.g. rapid response in production and distribution, shorter product life-cycles) Flexibility (e.g. build-to-order, configure-to-order) Increasingly stringent standards, including general standards such as SA8000 on labour, industry-specific standards such as phytosanitary standards in agro-industry, and firm-specific standards such as the in-house brands of global retailers like Carrefour. The trend is away from arms length market-based transactions, toward production networks, involving some form of linkage or alliance among firms along the value chain. iv. Emergence of network orchestrators: Some firms have emerged from the outset as networked firms, such as Cisco, Dell, Nike, and Li & Fung. These are firms that never owned production facilities, and are essentially network orchestrators. Basis for their competitive advantage--involves coordinating and integrating activities along a given value chain. Because they own fewer assets and leverage the resources of partner companies, network orchestrators require less capital and generate higher revenues then traditional firms under both expanding and adverse market conditions.5. Accessing Global Markets Through GVCs/IPNs: Implications:i. A Link to Global Markets: Success may be achieved through specialization, e.g. in activities/products and market niches. For example, even simple components, such as hubcaps, can be produced for regional and global markets in GVCs through an association with Toyotas and Fords networks; and specialized niche markets, such as organic fruit and vegetables, can be regional and global in nature through access to a global retailer such as Carrefour. GVCs and IPNs provide for SMEs an increasingly effective mechanism for accessing global and regional markets as suppliers within such chains and networks ii. Types of GVCs: Producer-driven chain or network: Large multinational manufacturer plays a central role in exercising relatively close control in coordinating a geographically distributed network of subsidiaries, affiliates, and suppliers. Characteristic of capital- and technology-intensive industries such as automobiles, telecommunications, IT, and semiconductors. As a consequence, to be a supplier to this type of chain/network requires a certain level of technical capabilities and sophistication, and associated investments However, the technology and knowledge transfers can be important, as illustrated by the automotive parts and IT industries. As an example, Sony, sourcing worldwide, imposes very high standards on suppliers, requiring strong technological capabilities, flexibility in response, strong customer service orientation, and the capacity to work with its IT-based e-procurement system.

Buyer-driven chain or network: Large retailers, marketers and brand manufacturers play the pivotal role in working with and sourcing from decentralized networks of independent suppliers, defining product and process specifications and standards. Characteristic of labour-intensive, consumer goods industries such as apparel, footwear, agro-industry, and consumer electronics The participation requirementsalthough can be quite stringent as in the case of IKEA (see below)--are relatively low, offering many opportunities for developing country producers, including SMEs, capable of meeting the buyers requirements. May provide opportunities for upgrading over time Hybrid chain or network: Less Prevalent More Horizontal in nature Multiple power centers in different parts of the value chain and Generally no overall dominant lead firm with the power to determine the ultimate shape of the final product For example, although Intel, Microsoft, and Dell are lead firms in their own production networks within the PC global value chain, a specific PC marketed by Dell reflects more a balancing of forces, shaped by Microsofts software strategy, Intels strategy in semiconductors, and Dells customer-based branded assembly and marketing strategy.iii. Key Characteristics of GVCs/IPNs: Governance: strategies of lead firms, including with respect to role of suppliers;Upgrading and innovation: the basis for strengthening competitive performance, pricing power, and achieving sustainable returns within chains and networks;Standards: product and process standards: both as market-driven requirements, and as the basis for ensuring consistency and reliability in the chain/network; andEmerging key role of global suppliers: emergence of global suppliers as key players in organizing participation in value chains and production networks.Governance: Lead firms try to control the rules of the game in a chain/network that govern the role of suppliers. This includes control of who can be a supplier; what will they produce (outputs of suppliers in the network); how it is to be produced (e.g. quality and other product and process standardsalthough some standards may also be externally set, for example as related to food and pharmaceuticals); how much is to be produced by each supplier, and when; which functions will the suppliers be allowed to undertake in the network (e.g. production, design, marketing); in which of these areas will suppliers be allowed to upgrade (e.g. moving from production, also into design, likely to add higher value). Lead firms often exert operational control through increasingly IT/e-commerce-based management and logistics systems that integrate activities within the network. Lead firms try to retain and guard value chain activities with the highest returns and value-added. For example, in the case of a producer-driven network such as automobiles, this means control by lead firms such as Toyota and Ford of functions such as basic R&D and fundamental product innovationeven if these are partially outsourced. In the case of a buyer-driven network such as apparel, this means control by firms such as Levi, Nike or IKEA of functions such as design, branding, marketing and distribution.Upgrading and innovation: Continuous innovation and upgrading throughout the value chain is becoming a requirement in an increasing range of product groups. This is the consequence of growing intensity of global competition, shortening of product life cycles, and falling barriers to entry in some industries. Innovation and upgrading by a given firm can allow it to reposition itself and improve its pricing power and competitive position within a given network or value chain. For example, a wood furniture manufacturer that upgrades from manufacturing to product design may strengthen its position in the value chain and network. Key innovations can also be the source of competitive advantage for a given production network as a whole within a global value chain. For example, Toyotas strengthening of its competitive position through key product innovations (e.g. of its own, or combined with its 1st tier supplier, Denso) can strengthen the competitive position of the set of firms in the Toyota-led production network--including its lower tier auto parts suppliers--against other such networks, such as Fords, within the automobile industry. Types of Innovation: Process innovation: increasing efficiencies in the production process, for example through improvements in production technology or labour productivity. Product innovation: improving existing products, or developing new products. Functional innovation: changing the mix of value chain activities undertaken by a supplier; for example, moving upstream from manufacturing to product design. Chain innovation: involves using existing capabilities to upgrade to a new and more attractive value chain, from example, the shift of some Taiwanese firms from producing microwaves to higher value personal computers. Standards: There is growing pressure in key markets, such as the US and EU, for global producers to adjust their operations to reflect not only profitability, but also social and environmental objectives (e.g. corporate social responsibility or CSP requirements) Examples of the diversity of standards include internationally agreed standards, such as ISO 900 (quality), ISO 14,000 (environment), SA 8000 (labour), G3 for cellular phones; industry-specific standards, such as phytosanitory standards and Hazard Analysis and Critical Point (HACCP) in the food industry; region-specific standards, such as QS 9000 (quality in autos originating in the US); and firm-specific standards, supporting brand name (e.g. VDA6.1, Volkswagen quality standard, Carrefours in-house brand standards). Emergence of global suppliers: Leading firms in an increasing number of industries are reconfiguring their strategies and reorganizing their production networks; and in the process placing global suppliers in a key role within such networks. This is particularly evident in two important industries: electronics and automobiles. Lead firms in these industries are becoming increasingly reliant on global suppliers, often based close to home, but supported by global sub-contractors. This spreads the risks and lowers the costs of doing business to lead firms. Global suppliers, in turn, are reorganizing networks within value chains, redefining the role and relationships of lower-level suppliers/producers, further back in the chain. In this context, lead firms and their supporting global suppliers are increasingly looking for firms that already have the requisite production capabilities, not firms that need to be brought up to required standards. 6. How SMEs Fit Into GVCs/IPNs: Global value chains and associated production networks are evolving a tiered structure. The key role in the network is played by the lead firm, e.g. Levi in apparel, Ford in autos, Carrefour in fresh fruit and vegetables. These lead firms are supported by an increasingly smaller number of preferred 1st tier or global suppliers; who are, in turn, surrounded by lower-tier suppliers of parts, components, and other inputs. These lower tier suppliers, further back in the network, are often SMEs doing low-skill, low-value added activities, producing relatively simple outputs, and competing on the basis of low cost, with limited capacity and/or options for upgrading. In general, it is easier to enter into a chain/network as a lower-tier supplier. But this is likely to be an unstable position for a firm, since it is easier to be replaced by otherfor example lower costsuppliers. The challenge therefore for an SME is to enter the chain/network as a higher-tier supplier; or alternatively as a lower-tier supplier but with the opportunity to upgradeto move up the value chain and increase the value content of activities. (Fig. 6) The key issues for the SMEs in this context include: (1) what does it take to become a supplier with the opportunity to upgrade in a particular GVC; and (2) how stable is this implicit bargain likely to be for a specific SME in a given GVC/network.

Part IV Preparing SMEs for Competing on International Markets:1. Accessing Global Markets: Constraints on SMEs Enterprise performance in global product-markets is no longer a function of price alone. Within the context of GVCs and associated networks it is now primarily a function of reliability, which involves getting the right products in the right quantity, of the specified quality, at a competitive price, to the right place, at the right time. Along the way, firms must be able to meet an increasing number of stringent standards, conformity requirements, and certifications. The challenges facing SMEs in competing on global markets are many and varied. Because of their size and isolation individual SMEs are constrained from achieving economies of scale in the purchase of such inputs as equipment, raw materials, finance, and consulting services; are often unable to identify potential markets. unable to take advantage of market opportunities that require large volumes, consistent quality and homogenous standards, and regular supply.Small size is also a constraint on accessing such functions as training, market intelligence, logistics and technology. These constraints make it difficult for SMEs to access global markets; and also limit their performance in increasingly open, competitive domestic markets. Entering into a supplier relationship with larger enterprises in GVCs can mean a larger and more stable market for SME outputs, allowing such firms to better organize their production and improve their technologies. However, GVCs also define a more demanding environment, requiring SMEs to work in a more formal manner, and upgrade not only their production methods, but their management practices as well. Improvements in product, process, technology, and organizational functions such as design, logistics, and marketing have become key success factors in firm competitiveness in a globalizing economy. SMEs are thus under additional pressure to innovate, to upgrade their operations in order to participate in international markets. However, they often lack the resources to do so. In this, small firms are constrained in their access to key business development services which large firms either have internally, or can purchase.2. Loosening Constraints through Business Development Services (BDS)

Training in general business management, entrepreneurship, and particular business skills such as marketing, accounting, finance; Counseling and advice, often on a firm by firm basis, and where particularly effective, as follow-up to training; Technology development and transfer, involving the adaptation, design and development of technologies and their dissemination to SMEs; Information on markets, buyers, technology, increasingly available through ICT-based facilities, as well through traditional mechanisms such as trade fairs, exhibitions, visits/tours; Business linkages involving the development and strengthening of commercial linkages between SMEs and large firms (e.g. subcontracting) and among SMEs (e.g. development of enterprise clusters); and Financing aimed at channeling funds to SMEs either directly (e.g. special purpose financial institutions such as SME Banks) or indirectly (e.g. through special windows of commercial banks), perhaps at preferential rates. The following general criteria or objectives may be useful in assessing the effectiveness of BDS: (i) outreach--ensuring scope of coverage to as large a number of the target SMEs as possible; (ii) sustainabilitythe continuity of BDS over time consistent with enterprise needs, for example, beyond any initial support from donors and government; (iii) cost-effectiveness in the delivery of services; and (iv) impactimproving the productivity and competitive performance of the SMEs involved.

3. The Role of Enterprise Clusters i. Clusters and GVCs Cooperation can help SMEs by creating opportunities for achieving collective efficiency and joint action to address shared constraints and opportunities including: Collective efficiency based on scale: Achieving economies of scale beyond the reach of individual small firms in the purchase of inputs including technology, creating a pool of skilled workers, use of machinery, and pooling of production capacity to meet large volume orders from global buyers; Collective efficiency based on specialization: Cooperation can enable SMEs to specialize in their core businesses and evolve a division of labour among firms, achieving efficiency in production, and learning from each other about areas such as markets and product and process improvements; and Joint action: Collaboration, for example through producer associations that help open up access to both international markets and related BDSs. ii. Development and Strengthening of Clusters The transition from an informal grouping or agglomeration to cooperative clusters and networks such as in Sialkot or Tirrupur is challenging. Based on a review of experience, the general factors necessary for successful transition include the following: Proximity is a key factor for inter-firm cooperation in promoting joint initiatives. It lowers transaction costs, and facilitates learning because of both physical closeness and shared background and experiences. Incentives are generally necessary for inducing cooperation among often intensely competitive firms. Perhaps the best incentives for the establishment of clusters or networks from informal groupings are crises and collective opportunities with clear payoffs for participants, e.g. changes in market standards such as food safety, and specific new market opportunities with ready buyers. These provide visible shared challenges with clear potential payoffs that individual enterprises can recognize as very important, yet cannot address on their own. Trust is the fundamental requirement for SME clusters and networks. The building and maintenance of trust over time is the foundation for SME cooperation. Since clusters and networks involve independent firms with no formal (e.g. equity-based) linkages, cooperation is fundamentally based on shared expectations and reciprocal obligations. Joint activities and mechanisms for clarifying mutual roles and obligations, and testing firm reliability and performance are part of the process of progressively building and nurturing trust.