Global Value Chains

Linking Local Producers from Developing Countries to

International Markets

Bandung Parahyangan University 16-4-15

Meine Pieter van Dijk, economist, prof. of
entrepreneurship at MSM, em. prof. at UNESCO-IHE and
at IHS & ISS of Erasmus University Rotterdam, the
Netherlands

GVC = Complex network of activities between local

producers and final consumers

The book analyzes the impact of these value chains at

the local, national & international level
It provides a theoretical and scientific framework
The value is demonstrated by analyzing case studies
such as beer brewing in Ghana, bio industry in
Namibia, semi-conductors in China and Malaysia and
tourism in Tanzania

Building Construction Value Chain:

Structure
Metal Hardware

(Production/ Import
/Wholesale)

Metalworks & Furniture

Cement Industry

Mining
(Limestone,
Gravel
stones,
Marble)

Concrete Pipes
Hollow Blocks
Concrete Tiles
Marble Production

Forestry

Logging

Consultants

Sawmills

Sanitary Ware
Electricals
Paints&Lacquer

General
Contractors

Specialist
Contractors

Clients- Govt/Private Sector

Sand, Earth & Gravel

Retail Trade
Timber

Furniture

Transport Services, Energy & Water

Equipment & Spare Parts
DBA -ENG. HB NJUGUNA

Banking,Financial & Business Services,

What is unique about the book?

1. A uniform theoretical framework
2. Original empirical material on sustainable
global value chains
3. Agricultural activities, but not the old filieres
connues, but bio fuels, beer, etc.
4. A focus on upgrading experiences
5. Also semi-conductors and tourism chains
6. Emphasis on Africa & efforts to visualize

Value chains:

shaping patterns of chain

governance

The book presents seven case studies of global

value chains. It deals with the following issues:
Impact of global value chains on local
upgrading strategies
Role of governance structures in shaping
global value chains
Role of buyers in creating, monitoring &
enforcing of commodity specifications &
international standards

Global value chain

Agricultural
production
Industrial
production

Local
value
chain

Clusters
Urban
consumer
market

Feedback
loop

Original empirical material on issues

which are important concerning the interface between global
value chains, clusters & producer organizations:
What determines the dynamics of the global value chain
(Morrison et al., 2008)?
What determines the dynamics of producer organizations or
clusters (Guiliani et al. eds, 2005)?
How do the two interact (Van Dijk, 2006)?
Governance of the chain: the lead organization for developing
and implementing a value chain and a producer organization or
cluster upgrading strategy (Humphrey and Schmitz, 2000)?
What would be a sustainable value chain upgrading strategy,
incorporating elements of CSR (Neilson, 2008)?

A uniform theoretical framework

Vertical relations
in value chains

Horizontal relations
Between producers:
business models,
clusters, etc.

Interface

Interface of vertical
value chain and horizontal
producer cooperation
And factors
influencing it

Global value chains, theoretical perspectives and empirical cases,

M. P. van Dijk & J. Trienekens eds., 2011 Amsterdam: AUP
M. P. van Dijk Factors determining competition within & between global value chains
D. de Boer, Tuninga and Van der Linden:
Value
chains and BOP
Table of
content
J. Trienekens Some recent theoretical developments in the literature on agricultural
value chains in developing countries
M. Brntrup, R. Herrmann Institutional Challenges of Bioenergy Value Chains for
Rural Development: the case of bush-to-energy in Namibia
Match Makers The Banana sub sector in Arusha Municipality and Arumeru District,
With emphasis on Banana Beverages
Gloria Otieno and Peter Knorringa Localising Global Standards: Illustrative Examples
from Kenyas Horticulture Sector
M. P. van Dijk Using partnerships to stimulate sustainable development in the palm
oil value chain
J. van Wijk and Herma Kwakkenbos Beer multinationals supporting Africas
development? Partnerships in sorghum-based beer value chains
M. P. van Dijk and P. Goes Global competition, a study of Malaysian and Chinese
semiconductor industries
D. de Boer Tourism in Tanzania
J. Trienekens Conclusions and the issue of value chain upgrading

The book looks at :

Role of different actors: governments, donors & civil
society influencing value chains (Governance issues)
The role of innovation & knowledge acquisition in
upgrading
The importance of local & global subcontracting
Impact of ICT on global value chain governance
The experiences with developing sustainable value chains
The importance of partnerships as mechanisms for value
chain upgrading (Malaysia palm oil & East African flower
exports)

Kaplinsky and Morris (2000) provide a definition

of the value chain:

The description of the full range of

activities which are required to bring a
product or service from conception,
through the different phases of
production (involving a combination of
physical transformation and the input of
various producer services), delivery to
final consumers, and final disposal after
use.

Global Value Chains

(GVCs)

The GVC concept emphasize that there may be a

huge distance between local producers of a good
or service and its global consumer (Bair, 2005)
We emphasize the importance of linking to GVCs
The advantage of the GVC concept is that the
development of economic activities is put in an
international context of resources & markets, of
individual entrepreneurs & clusters of producers
competing in local, regional or international
markets (Bair & Gerefi, 2001)

Global Value Chain literature focuses

on:
Export oriented (agro-) industries, which are
usually privately owned and managed and
may have a governance structure enforcing
compliance with international standards
(Humphrey and Schmitz, 2004).
This approach takes the down and upstream
activities into account!
It leads to identifying a number of bottlenecks
or challenges!

CONTRACTOR PROGRESSION PATH

General
Contractors
Specialist
Contractors

Subcontractors
Consultants

General
Contractors

Specialist
Contractors

Consultants

General
Contractors

Specialist
DBA -ENG. HBContractors
NJUGUNA

Medium
Contractors
At National
level

CLIENTS

Subcontractors

Large
Contractors
At
International
level

CLIENTS

Consultants

CLIENTS

Subcontractors

Small
Contractors
At local
level 14

Often agricultural activities, but not the old GVCS but

bio fuels, beer, banana beverages & horticulture

Standards
Is production according to standards prescribed by MNCs or
Western retailers?
How do these standards impact on production and
distribution processes?
Value chain governance
How are inter-company relationships in the value chain
organized (e.g. contract-based and/or trust-based)?
What is the impact of government or semi-government
regulations?
Is there a role for NGOs or other public parties to establish
cooperation of smallholders or other links in the value chain?

Issues (challenges) discussed:

Competitiveness & parallel value chains

Governance of Global value chains
The influence of standards & Certification
Distributional issues in the chain
Formal or informal
Sustainable value chains
Value chain upgrading & use of Partnerships

Competitiveness GVC
Within one chain
Between chains
Factors influencing it
1. Demand (taste, income & price elasticities)
2. Technological developments
3. Availability & publicity
4. Quality & cooperation
5. The rise of China as manufacturing country

Figure 7 Competitive dimensions

1. The number of patents granted per

1.000.000 residents

100.00
12. Proximity to local customer base

2. Innovation Capability Index

80.00
60.00

11. Strength of internal market: total spending

capacity

3. Presence of National Innovation System

40.00
20.00
10. Quality of human resources

4. Countrys R&D spending

0.00

9. Promotion of free and fair-trade policies

5. Legislative environment for investors

8. Effective Intellectual Property protection

6. The level of literacy and health

7. Adequacy of legal environment

Malaysia

China

Competitiveness has to do with:

Competitive advantage at the enterprise level is
the capacity of a firm to gain, maintain and
expand its share in markets for final products
Using export markets & foreign partners
Improving technology & innovation
Improving quality and design
Using foreign capital & skills to the maximum
This leads to the issue of upgrading clusters and
value chains, summarized in the last slides of
this presentation

Parallel value chains

We like to draw the attention to a special
phenomenon: the case of parallel value chains
For example bio fuels is a hot topic, but there
are many types of bio fuels and the future for
these competing products (palm oil, sugar,
maize, etc.) is uncertain
It depends how other (parallel) chains develop
themselves & the price of crude (petroleum)

Value chain governance

Governance is not just the power to control
what is happening in a value chain, but also
the rules that determine how the game is
played
These rules tend to take the form of
regulation, the rules of the game!
Governance is broader than just the
government; it deals with cooperation
between all the stakeholders

Stakeholders in the value chain

Producers (including small farmers & small
enterprises)
Traders and transport companies
Governments at different levels
Chambers of commerce
NGOs & Round tables started by them
United Nations
Consumers
Arbitration mechanisms

Organizations influencing what

happens in GVCs

The lead firms

Trade unions
Producers organizations
Consumers organizations
Cooperatives
Associations
Organizations of the United nations

Organizations influencing what

happens in GVCs

The lead firms

Trade unions
Producers organizations
Consumers organizations
Cooperatives
Associations
Organizations of the United Nations (FAO,
UNIDO, UNCTAD, etc.)

Role of each organization

Lead firm wants low prices & good quality

Trade unions respect for labour conditions
Producers organizations: defend their interests
Consumers organizations : defend their interests
Cooperatives : defend interests of farmers
Associations COC: defend interests of companies
Organizations of the United Nations: create
conditions for international development
International environmental organizations: eco
development, human & animal rights

Promoting governance in GVCs means

Create structures where stakeholders can meet
Bring them actually together, for example IT
companies in Nanjing or palm oil chain in RSPO
Allow participation also of weaker stakeholders,
to create inclusive GVCs
Force respect for labour & environmental and
other standards
There are producer, consumer (fashion) and
producer driven chains (mining)

Standards & certification

Standards concern the quality of the product,
the quantity to be delivered & continuity
Is production according to standards
prescribed by MNCs or Western retailers?
How do these standards impact on quality, the
production and distribution processes?
Examples: supermarkets, flowers, sustainable
palm oil, organic coffee & cotton, etc.

Distributional issues in the chain: the

example of cacao
Farmers would get only 6% of the final price of
chocolate & 1% premium for certified cacao
Chocolate is too expensive to make it sustainable!
Distribution is linked to cutting up of the process in
global value chains
Production is rarely 100% in 1 country
If that is true, local content requirement is not useful
& international governance needed
Bananas 18%, chili 40%, cacao 6%,

The margins: who gets what?

Analyzing value chains the question needs to be
asked each time: how are the benefits distributed
in the chain?
Where is the value added achieved?
This requires data collection on the margins of
different actors and ideally calculations at the
micro level, which would indicate how the
profitability of one type of bio fuel affects other
bio fuels (Van Dijk, 2010)
Think about your Iphone which brings 80$ to
China!

Examples certification
Palm oil
Hardwood
Round Table soy beans
Conditions:
No virgin forest
No use of fertilizer or pesticides & insecticides
Sustainable processing & storing
Sustainable trading & transport

Formal or informal: does it matter?

First agree informal according to which
criterion: wage, registration, paying tax, etc.
Does not make a big difference, except that
informal producers are less well organized
Formal or informal may change due to
regulation, standards or certification: those
who do not qualify are all of sudden informal!
Informal operators tend not to be recognized
as stakeholders in the value chain!

Sectoral differences
There are big sectoral differences:
A value chain for apples is very differently
organized than an iron ore chain
International chains, for example require high
quality goods, financing constructions &
insurance
An global automobile chain (parts from 168
countries) is difficult to compare with the
production of staple foods, but they are all Global
Value Chains and can be analyzed in a similar way

Problems standardisation/certification
Organizational problems
Who agree on the standards?
Who promote implementation of them?
Who monitors the effects?
Real life problems
There are sometimes more organizations, using
different criteria
Not always implementation & monitoring
Not everybody trusts every certificate

Finally on certification
Not always the same name & the same
approach:
Organic cotton
Sustainable palm oil
Green building
Halal meat
Responsible production
Certified hard wood

Sustainability what does it mean?

We do not want:
1. All kind of chemical products in our food
2. The growing of palm oil to go at the expense of the
environment
3. Deforestation
4. Palm oil to be grown under adverse labour conditions
5. Palm oil to be manufactured causing pollution or CO2
emissions
6. Lower standards when investing in palm oil abroad

What can be done:

1. Mind the use of pesticides, insecticides and fertilizers
2. Keep up bio-diversity and opportunities for orangutans
3. Limit deforestation and replant trees
4. No child or forced labour, minimum wages and
freedom to organize themselves
5. Reduce CO2 emissions and limit different types of
pollution
6. Apply rigorously the same standards in Indonesia or
Africa as in Malaysia

Challenges for palm oil policy makers

Environmental challenges
Doubts about the quality
Changes in health consequences
Availability of cheaper substitutes, or use for bio
fuel
Competing countries
Technological developments, for example high
yielding varieties
Trade limitations
Higher cost of transportation

How to deal with these major challenges

Limit environmental consequences

Quality problems could lead to restricting imports
Health issues: groundnut oil became less popular
when it proved less healthy
Cheaper substitutes: less demand
Used as bio fuel: higher prices
Competition: African producers may be cheaper
Technological developments: competitive advantage
may change to new producers
Trade limitations: export would be more difficult
Cost of transportation^->higher prices& less demand

Some barriers to upgrading

1. Quality standards in developed countries like
in the EU
2. No access to skilled worker, or to credit
3. Local regulation
4. Lack of infrastructure, it makes export more
difficult, more expensive, but no possibility to
finance the necessary investments
5. Too much paperwork increasing the cost of
production

Partnerships to improve sustainability

in GVC palm oil
One Public sector initiated partnership:
Malaysia, Netherlands & Indonesia
Two Private sector initiated partnerships in Mal.:
1. RSPO and the GreenPalm certificates trading
scheme
2. Trading companies with vertically integrated
companies: oil is traceable, a guaranteed
delivery of segregated sustainable oil

What is a partnership?
A partnership is a form of cooperation between
parties with similar objectives but different
(complementary) qualities, which each contribute
resources and share in the investment risks
Basic characteristics
Common objective
Some legal or informal arrangement
Joint activity
Shared resources
Sharing of risks

Three partnerships
The government initiated partnership involved
representatives of the three governments
involved, the private sector and nongovernmental organizations (NGO) in the three
countries concerned
The RSPO is a partnership initiated by the private
(commercial and non-commercial) sector
Finally, the third partnership is between two big
companies, one of which assures the
sustainability for the first part of the chain

Have PPPs contributed to sustainable

development of the palm oil sector?
The question is whether PPPs in Malaysia have
contributed to sustainability by defining & respecting
standards concerning the achievement of sustainable
production, transport, manufacturing & distribution of
palm oil
OECD (2002) defines evaluation as an assessment, as
systematic and objective as possible, of an on-going or
completed project, programme or policy, its design,
implementation and results
The concepts of relevance, impact, efficiency and
effectiveness are used to assess to the dynamics of the
partnership process

What determines the dynamics of the

GVCs?
Look at how China did it! For example Lenovo
buying IBM PCs
Free trade arrangements
Access to international capital
Innovation, observe Microsoft buying small
companies which developed interesting products!
Policies to improve the competitiveness of GVC
Upgrading activities

Value chain upgrading

A focus on value chain upgrading & the role of
partnerships:
Which upgrading options are considered: product,
process, marketing, organisational?
Are we focusing on upgrading partnerships between
actors of the value chain?, or
Do we look at multiple public-private partnerships to
achieve upgrading?

Value chain upgrading is

important

Value chain upgrading could take place via a

partnership between the public and the
private sector or it works out differently for
global value chains or for local (parallel) chains
A GVC may run into market access problems if
a receiving country introduces more strict
health and environmental conditions, which
may limit its exports: it needs a parternship to
solve the problem

Upgrading strategies
Through an increase of value added, for example
by promoting innovation
By improving market access
Through better governance structures
Through partnerships
By developing local clusters
Helping local enterprises to export, for example in
the framework of ASEAN or the Asian Economic
Community (AEC), starting at the end of 2015!

Policies to develop clusters:

Five cluster-specific policies (Van Winden):
1. Starters policies
2. Infrastructure policies
3. ICT adoption policies
4. Inward investment policies
5. The development of business locations for
new-economy activities

Conclusions
1.
2.
3.
4.

Environmental issues are very important

Value chain governance is an issue
Competing value chains at the global scale
Who gets what in the value chain, think of
iPhones being produced in China!
5. A need for more empirical research on value
chain development & upgrading!

Developing a GVC analysis

Learned to analyze a GVC by paying attention
to the major issues and knowing the major
concepts
A more quantitative analysis would look at
competitive advantage & factors influencing
the market share
A more qualitative analysis focuses on power
in the GVC and ways to negotiate
improvements

Questions?
Thank You!