Governance and Upgrading in Value Chains: Opportunities and Challenges

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1 GLOBAL COMMODITIES FORUM 7-8 April 2014 Governance and Upgrading in Value Chains: Opportunities and Challenges by Mr. Stefano Ponte Professor of International Political Economy Department of Business and Politics Copenhagen Business School The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.

2 Governance and Upgrading in Value Chains: Opportunities and Challenges Stefano Ponte Professor of International Political Economy Department of Business and Politics Copenhagen Business School Presented at GCF, 7 April September 2013 Side 1

3 Outline Why value chains Governance of value chains Value chain upgrading Sustainability standards and transparency Value chain interventions Conclusion 11. September 2013 Side 2

4 Why value chains? Last 20 years From trade in products to trade in tasks/value added From vertically integrated TNCs to governing of various layers of suppliers End of commodity agreements as ways of co governing trade + market liberalization More recently, increased focus on Learning from buyers Industrial policy and building (specific) productive capacity 11. September 2013 Side 3

5 Value chains Full range of activities that are required to bring a product or service from conception, through different phases of production and processing, delivery to final consumers and final disposal/recycling Can be global, regional, local 11. September 2013 Side 4

6 Figure 3. Generic Value Chain Map EXPORT Channel LOCAL Channel CONSUMER Inernational consumer segment Local consumers OUTLET International supermarket Wholesaler Local supermarket Restaurants Street vendors TRADER International trader Local traders Financial services AGRO FOOD PROCESSING PRODUCER Large size national processor Contract outgrowers Large scale producer Farming cooperative with integrated postharvest handling and agrofood processing SME processors Local smallholder Marketing services INPUT SUPPLY Large size national supplier International supplier Small size local Technical services 11. September 2013 Side 5

7 Value chain governance Actively governed, rarely true markets Lead firms govern value chains through specific demands (buyer power), rarely through direct ownership Eg retailers (Wal-Mart, Tesco, etc.) Branded processors (Nestle, Unilever) International traders (Cargill, ADM) Driving mechanisms Buyer-driven, producer-driven value chains Different linkages along the value chain Market, Modular, Relational, Captive, Hierarchy 11. September 2013 Side 6

8 Value chain participation Does it work for for actors in CDDCs? Important to understand: how GVC inclusion and exclusion take place under what conditions and rewards opportunities and threats, risk and vulnerability Depends on: What value chain? Which lead firms? What forms of governance and linkages? What standards are required? Food safety, quantity, quality, volume, logistics, time to market Sustainability certifications 11. September 2013 Side 7

9 Institutional and economic frameworks, regulation Export node Chain actors Vertical linkages (contracts, flows of products, information, inputs) Primary processing/tradingnode Production node Horizontal impacts 11. on September participants 2013 and Side 8 non participants and their communities

10 Upgrading in value chains Different possibilities: make better products improve processes add functions receive higher prices for the same product (FT, GIs) match standards, logistics, volume, timing demands provide wider portfolio of product qualities 11. September 2013 Side 9

11 Sustainability standards and transparency Becoming increasingly demanded by buyers Adding transparency on conditions of production BUT, also placing extra demands on producers and small enterprises in developing countries can be costly (often paid by donors, NGOs, exporters) Often not paying a premium at the farm gate Offer entry point to a market or buyer 11. September 2013 Side 10

12 Value chain interventions creating new value chains; increasing the capabilities of target groups to improve the terms of value chain participation also through collective action leverage points minimizing the possible negative impacts of value chain operations on non participants and/or adjacent communities 11. September 2013 Side 11

13 Value chain interventions (cont) Strengthening vertical links e.g. between farmers and agro food processors or exporters contract farming improved information on product forms, prices, quality Addressing bottlenecks in the value chain inputs, logistics, cold chain, technology, infrastructure Develop productive capacity Support in meeting standards & certification 11. September 2013 Side 12

14 Conclusion Opportunities and challenges in: value chain participation upgrading trajectories Answer is not always in trading up volume still important, wider portfolios (including lower quality), emerging markets Regulation and donor/public sector support important but needs to be devised in view of actual functioning and governance of value chains 11. September 2013 Side 13