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Benefiting from value chains
through TNC-SME linkages:
UNCTAD's approach
International Seminar
“Expanding the role of SMEs in value chains
between Asia and Latin America”
ECLAC, Santiago, 29 April 2015
Fulvia Farinelli,
Division on Investment and Enterprise
UNCTAD
Investment, Trade and Participation in Global Value Chains
Relationship between GVC participation and FDI inward stock,
189 countries over 20 years
Investment, Trade and Participation in Global Value Chains
FDI helps countries increase participation in GVCs
But the presence of TNCs that participate in GVCs does not guarantee
participation of local SMEs
Fragmentation of production: the example of the
Boeing 787 Dreamliner
Escape slides: Air Cruisers (USA)
Horizontal Stabiliser:
Alenia Aeronautica (Italy)
Centre fuselage: Alenia Aeronautica (Italy)
Final assembly: Boeing
Commercial Airplanes (USA)
Vertical Stabiliser: Boeing
Commercial Airplanes (USA)
Landing gear: Messier-Dowti (France)
Electric brakes: Messier-Bugatti (France)
Tires: Bridgestone Tires (Japan)
Doors & windows:
Zodiac Aerospace (USA)
PPG Aerospace (USA)
Tools/Software: Dassault Systemes (France)
Navigation: Honeywell (USA)
Pilot control system: Rockwell Colins (USA)
Wiring: Safran (France)
Centre wing box:
Fuji Heavy Industries (Japan)
Engines: GE Engines (USA),
Rolls Royce (UK)
Wing box: Mitsubishi Heavy Industries (Japan)
Wing ice protection: GKN Aerospace (UK)
Engine nacelles: Goodrich (USA) Aux. power unit: Hamilton
Sundstrand (USA)
Flight deck seats:
Ipeco (UK)
Lavatories:
Jamco (Japan)
Cargo doors: Saab (Sweden)
Forward fuselage:
Kawasaki Heavy Industries (Japan)
Spirit Aerosystems (USA)
Raked wing tips: Korean Airlines
Aerospace division (Korea)
Flight deck controls:
Esterline (USA),
Moog (USA)
Passenger doors:
Latécoère Aéroservices (France)
Prepreg composites:
Toray (Japan)
Rear fuselage:
Boeing South Carolina (USA)
Major Flow of Intermediate Goods and Finished Goods in Asia (Electrical/Electronic)
Source: RIETI-TID(2009), White Paper on International Economy and Trade 2010 (METI)
Japan
South
Korea
China/
Hong
Kong
Taiwan
ASEAN
* Electric/electronic machinery export value (billion USD)
3.2times (36.7←11.6)
US/
Europe 5.9times(124.4←21.1)
1.3times (19.1←15.1)
1.6times (23.3←14.4)
9.8times (43.8←4.5)
1.1times
(27.4←24.2)
2.1times
(35.1←16.8)
Flow of finished goods Flow of intermediate goods
2008←1998 2008←1998
5
The Emergence of Regional Value Chains
• There is a significant structural diversity and a
high degree of complementarity of emerging
regional production systems
• Production networking and regional division of
labour result in massive intra-industry trade in
parts and components within regions
• Intermediate goods are the « blood stream» that
irrigates regional supply chains
What are the implications:
consequences for SMEs
• New opportunities
• But also risks:
– Being pushed towards lower value added functions
– Being pushed towards lower tiers of suppliers
1. Leading software providers (such as Microsoft in Egypt or IBM in Vietnam) depend on local companies to adapt their products to the local market and to support local customers.
2. Rivalry among local companies is strong and is driving a constant upgrading process.
3. This, in turn, gives companies visibility and credibility not only in their domestic market but also in their region.
Results of UNCTAD’s case studies
on the software industry:
1. TNCs dominate the most important production networks. Creative industries face structural changes triggered by technology, both at the production and the distribution side.
2. The issue of local preferences, culture, formats and language is still a determining factor in shaping the emergence of new value chains in creative industries.
3. This opens up new opportunities for new, specialized entrants, such as the Colombian 3-D animation producers and local movie producers in “Nollywood” (Nigeria).
Results of UNCTAD’s case studies
on the audiovisual industry:
1. Most local suppliers in the case of Toyota in South
Africa, and Volkswagen in Mexico did not succeed
to become global sourcing partners.
2. In South Africa, a downgrading process took place.
Domestic SMEs are now linking up with first tier
suppliers of large TNCs.
3. Both in Mexico and South Africa, large
opportunities appear to have emerged in second-
tier sourcing.
Results of UNCTAD’s case studies
on the automobile industry:
TNC-SME Linkages
Local SMEs competitiveness and growth
The potential benefit of TNC-
SME linkages
• TNCs can be a powerful sources of demand for the output of local suppliers and subcontractors.
• They can raise the capabilities and quality to international level more effectively than links among domestic firms.
Common challenges
• Little knowledge of TNCs’ procurement procedures and
requirements
• Unable to meet corporate requirements or international
standards (price, quality, delivery, etc.)
• Lack of market information, international exposure and
networks
• Limited human and financial resources to handle large
volumes
• Weak managerial skills and entrepreneurial behaviour
• Lack of communication with local suppliers (ICT tools,
procurement procedures, culture)
• Financial transaction requirements (bank accounts,
bookkeeping)
• Complex payment procedures and requirements for local
sourcing (time, volumes, standards)
• Limited flexibility with short-noticed orders/changes
SMEs
TNCs
Moreover:
• Under import substitution regimes, many countries forced the pace of local content by imposing local performance requirements.
• Today, local content provisions are under the purview of the WTO Agreements.
• TNC-SME linkages are increasingly driven by pure cost and efficiency considerations.
UNCTAD's approach:
The technical assistance
response
Business Linkages for
Inclusive Value Chains
Success stories
• Successful policies promoting linkages can be found in Ireland, Chile, Mozambique, Brazil, Malaysia, Thailand, South Africa and Singapore
• Several TNCs implement their own supplier developing programmes(Toyota, Unilever, FIAT, AngloAmerican, DymlerChrysler, Volkswagen, INTEL, IBM, Tata)
• Many donors and international organization are active in linkages building. Among others, DFID (the Business Challenge Fund), IFC, ITC, UNDP, UNIDO, USAID, the World Bank, GTZ, UNCTAD
Main lessons learned from
successful cases
1. The establishment of sustainable linkages does not happen automatically, as a direct consequence of the presence of TNCs, but requires the participation and collaboration of all interested stakeholders (i.e. TNCs, local suppliers, government).
2. Only if a conducive policy environment is set up, specific linkages promotion programmes have a chance to be transformed from isolated cases, to sustainable and inclusive mechanisms to build the local productive capacity.
Integrated policy framework
Improving the investment climate
Strategic FDI
attraction
Strengthening
absorptive
capacity
Specific linkages
policies
Providing strategic guidance
and policy coordination
Primary strategic objectives of
IPAs in developing countries
(% of respondents)
0
0
8
11
14
16
22
35
43
62
86
0 10 20 30 40 50 60 70 80 90 100
Other
Privatization
Infrastructure
Import substitution
Competitiveness of local firms
Widening tax revenue base
Industry diversification
Increase in exports
Linkages for local suppliers
Transfer technology/skills
Job creation
Source: UNCTAD World Investment Report 2013 IPA Survey
Main objectives of UNCTAD's
linkages programmes
• Help develop domestic industry by upgrading local SMEs
to meet international standards
• Deepen the involvement and strategic interest of TNCs in
host country partners
• Maximize local purchasing of TNCs and facilitate import
substitution when possible
• Provide policy advice on improving the environment for
sustainable business linkages
• Share effective international business linkage strategies
with the various stakeholders
…in order to deliver tangible results for all
• UNCTAD’s Business Linkages Programme connects large
companies with domestic suppliers in developing countries
• Currently operational in Argentina, Benin, Brazil,
Mozambique, Peru, Tanzania, Uganda, Viet Nam and
Zambia
Empretec (Emprendedor
+ Tecnología)
• UNCTAD’s entrepreneurship capacity-building
programme since 1988
• Helps entrepreneurs to build innovative and internationally competitive SMEs
• Integrated with UNCTAD’s research and policy work on entrepreneurship and SME
development (EPF)
Brazil: Projeto Vínculos
Fill competitiveness gap between TNCs and SMEs
• 300 SMEs – 2500 employees
• 20 TNCs
10 TNC/SME doing business
6 SMEs action plan developed
7 SMEs action plan implemented
5 SMEs on board
4 SMEs selected
3 TNCs on board
2 Needs of TNC identified
1 Proposal to TNC
8 SMEs capable
15 Income increases of employees
11 SMEs perform better
12 SMEs expand
14 Employment increases
13 Other SMEs copy
9 Bottlenecks resolved
São Bernardo do Campo
Manaus
Bahia
Pernambuco
Ceará
Results monitoring: Brazil
Forging partnerships
• 3-level approach
Macro-level
Policies
Meso-level Micro-level
Institutions Companies
Projeto Vínculos Brazil
Results suppliers upgrading
Argentina: Promoting Business Linkages
Implementation of the Business Linkages Programme in Argentina by the Fundación EMPRETEC with the support of Banco de la Nación Argentina, the Corporación Andina de Fomento and UNCTAD.
Participation of the car manufacturers Fiat Auto Argentina S.A., General Motors Argentina S.A. y Renault Argentina S.A.
Participation of SMEs (12): ACM Argentina S.A., Bartolomé Macchiarola S.A., Compañía de Planeamiento
Acústico S.R.L., Fumiscor S.R.L., HAAS International Corporation, Ingeniería Plástica S.R.L., Laboratorios Funken S.A.I.C., Metalúrgica Pollastrini y Cia. S.R.L., Montich S.A., Papelera Bragado S.A., Pellacani S.R.L., VMG S.A.
Impact on employment: 60% of the SMEs experienced higher employment rates.
Impact on sales: The amount of sales of 70% of the SMEs increased during and after the implementation of the Programme.
Before the implementation of the Programme, 80% of the SMEs had confirmed being constrained in their investments because of the uncertainty of the sales forecast by TNCs. 70% of the participating SMEs increased their investments during the Programme.
The planning of purchasing between the car manufacturers and 90% of the participating SMEs improved significantly. 90% of the SMEs asserted that the Programme produced crucial changes within their enterprises.
Impact of the Business Linkages Programme in Argentina
Good practices
• Customization
Copying linkages from one country or sector to another without
understanding neither the country or the sector does not work
• All linkages must be market-driven
SMEs and anchor companies are in business and deals should
make sense
• Critical mass of purchasers and suppliers
• Pilot activities taken up by national counterparts
Building the capacity of national counterparts and involving them
since the beginning of the programme may increase its survival
beyond the project lifecycle
• Policy perspective
Incentives work better than legislative controls to attract anchor
companies to join a linkage programme
