TRADE AND DEVELOPMENT BOARD COMMISSION ON ENTERPRISE, BUSINESS FACILITATION AND DEVELOPMENT EXPERT MEETING ON BEST PRACTICES AND POLICY OPTIONS IN THE PROMOTION OF SME-TNC LINKAGES GENEVA, 6-8 NOVEMBER 2006 PAPER SUBMITTED TO THE EXPERT MEETING* ENHANCING THE ROLE OF SMEs IN GLOBAL VALUE CHAINS by Mr. Alain Schoenenberger Eco Diagnostic / University of Fribourg Global Value Chain Research Group * The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.
Enhancing the role of SMEs in Global Value Chains Unctad, Geneva 11/6-7/2006 Alain Schoenenberger Eco Diagnostic / University of Fribourg Global Value Chain Research Group
GVC OECD/UNCTAD Project The research team Global Value Chain Research Group = Swiss Team OECD UNCTAD The sponsors Geneva International Academic Network, Swiss Government The subject takes a comprehensive view, including transformation and distribution ends considers goods, but also services draws from desk and also field work in selected countries/ industries. Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 2
Research design A B C D E SME in the industry context Major player interviews SME interviews OECD country / industry UNCTAD field / industry Automotive A B C D E Precision Industry A B C D E Conceptual issues Software A B C D E Music & Cinema A B C D E Tourism A B C D E Recommen dations Industry reports Final report Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 3
Major issue today Focal point what are the problems that SMEs face in a global value chain dominated by large enterprises/ transnational corporations (TNCs)? TNC strategic advantages access to «cheap» and abundant finance; worldwide, integration of operations; economies of scale and scope in production; R&D : mastering the timing of technological progress and innovations ; unique marketing and brand management. Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 4
Global Value Chain (notion) Useful but fuzzy notion sometimes is used to describe the steps of transformation from raw materials to the final product, each step adding value to its inputs ( vertical linkages ); in management literature refers to the relations between enterprises involved in different transformation steps (supply chain); in macro-economic context, and in the development debate, GVC refers, implicitly or explicitly, to national (local) economies in which different steps of transformation are located (FDI, intra-industry trade, technology transfer, clusters). Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 5
Global Value Chain (limits) Limits of industry approach enterprise belongs to many VC and many industries (contributing to different final goods and services); SME is not only a question of size (ownership, contracts); trans-enterprise processes and coordination, partnership (including horizontal linkages ) organisation and operation of VC may depend on specificities of the observed industries => Case studies: software, automotive and precision instruments industries Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 6
Case study: software INDIA (1) Industry Software services rather than products (maintenance, migration, small applications), Less or no involvement in design, conception and problem analysis, but presence of large (foreign) international consultancy firms, Cost efficient but competition from inside (small enterprises), China, Philipines and Eastern Europe (outsourcing) Lack of domain knowledge and credibility Cultural factors (work, attitude) Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 7
Case study: software INDIA (2) Challenges Moving up the value chain, away from low cost services: Understand what the client wants (solution not development orientation) Long term relationship (know how, investment) and thinking (not the quick profit), Retention of trained and experienced people (high rotation) Provide whenever possible niche solutions in new «open» areas such as security, biometrics, system integration) Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 8
Case study: software SWI Industry Mature market for IT solutions: producers and distributors (planning, installation, implementation) work together SMEs: rather small companies, some of them acting on a global scale Partnership with large (foreign) software producers, and esp. vendors, but few contacts in case of niche, specialised products Problems Standard setting of the large firms (eg. Java, system solutions) Profitability require a niche, specialised product (eg. for the local market) Considerable effort in training of the personnel, rotation Experience with low cost countries (India) Difficult project-management Lack of domain knowledge Challenges Integration of services (incl. R&D) Complexity of the requirement (customers) Standard setting by TNCs and larger firms Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 9
Automotive and precision instruments industries (no niche) No niche product SMEs in GVC: Concentration of clients Large use of sub-contracting (all configurations) Fierce competition in low tech, mass production (cost cut policies), short term contracts => R&D difficult Necessity to be present in the end product markets (along with TNCs) Success depends on the development of Quality Own know-how, technology Complementary services, products Cost effiiency But: access to finance (dependance, profitability)? Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 10
Automotive and precision instruments industries (niche) Niche product SMEs in GVC: Acquisition and protection of intellectual proprety (patents, trade and production secrets) Access to finance (R&D) and markets (close cooperation with local distributors) Success depends on Quality Own know-how, technology Management of (own) GVC Problems: dumping by TNCs, high labour costs Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 11
First findings In manufacturing GVC three roles for independent SMEs: as semi-dependent agents in distribution networks; deeply rooted in the market, fighting with the network to keep the unique access to the final customer (key asset); as niche suppliers, or producers of know-how or equipment; preserve knowledge, few strategic partnerships, R&D; mutual trust used to be the key, raising distrust is making things more difficult; as mass sub-contractors; cost-cutting pressure is growing; transparency required; contribution to development costs. the real battlefield is the final customer (brand) Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 12
First findings (2) General findings over activities SMEs search how to add services to goods in order to make the relations within the GVC more stable; SMEs want to move up the GVC get closer to the final customer; SMEs have often to fight off the curiosity of their large contractors; SMEs have to face questions of size (financing, economies of scale), and the financial logic; SMEs have problems to deal with and to understand TNCs, and they often do not know what is their place in the GVC. Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 13
Is there room for SMEs in GVC? The «market» is fading away, replaced by a more pragmatic notion of «network»; «transaction» replaced by «relation» (confidence?); balanced medium-term relation important; buyer s commitment for a viable strategy pressure of large enterprise and TNCs for sharing R&D costs (lost autonomy) The question of size is (not always) critical (software) outsourcing is limited in case of niche products; Protection of knowledge is crucial For SMEs niche markets blossom Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 14
Measures and support proposed by SMEs in GVC Often no ideas, no direct state interventions Easy solution: integration within larger enterprise (dependant SMEs); Easy financing (start up, development) Easy access to innovation, technology (cooperation with universities, etc.) Cooperation with other SMEs to form cluster or virtual TNC Coaching and help when strategic decisions have to be taken Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 15
Policy implications New negotiating and management skills (SMEs have a poor understanding of the «new global economy»); Access to public (R&)D financing; Adequate knowledge protection; Clustering may prove a powerful tool. Geneva, 11/6-7/2006 A. Schoenenberger - Global Value Chain Research Group 16