Global Value Chains, Technology Transfer and Local Firm Upgrading in Non-OECD Countries

Transcription

1 GIGA Research Programme: Soco-Economc Challenges n the Context of Globalsaton Global Value Chans, Technology Transfer and Local Frm Upgradng n Non-OECD Countres Julane Brach / Robert Kappel No 110 October 2009 GIGA Workng Papers serve to dssemnate the research results of work n progress pror to publcaton to encourage the exchange of deas and academc debate. Incluson of a paper n the Workng Papers seres does not consttute publcaton and should not lmt publcaton n any other venue. Copyrght remans wth the authors.

2 GIGA WP 110/2009 GIGA Workng Papers Edted by the GIGA German Insttute of Global and Area Studes Lebnz Insttut für Globale und Regonale Studen The GIGA Workng Papers seres serves to dssemnate the research results of work n progress pror to publcaton n order to encourage the exchange of deas and academc debate. An objectve of the seres s to get the fndngs out quckly, even f the presentatons are less than fully polshed. Incluson of a paper n the GIGA Workng Papers seres does not consttute publcaton and should not lmt publcaton n any other venue. Copyrght remans wth the authors. When workng papers are eventually accepted by or publshed n a journal or book, the correct ctaton reference and, f possble, the correspondng lnk wll then be ncluded on the GIGA Workng Papers webste at < hamburg.de/ workngpapers>. GIGA research unt responsble for ths ssue: Research Programme: Soco Economc Challenges n the Context of Globalsaton Edtor of the GIGA Workng Papers seres: Martn Beck <beck@gga hamburg.de> Copyrght for ths ssue: Julane Brach/Robert Kappel Englsh copy edtor: Melssa Nelson Edtoral assstant and producton: Slva Bücke All GIGA Workng Papers are avalable onlne and free of charge on the webste <www. gga hamburg.de/workngpapers>. They can also be ordered n prnt. For orders or other requests please contact: E mal: workngpapers@gga hamburg.de Phone: ++49 (0) The GIGA German Insttute of Global and Area Studes cannot be held responsble for errors or any consequences arsng from the use of nformaton contaned n ths Workng Paper; the vews and opnons expressed are solely those of the author or authors and do not necessarly reflect those of the Insttute. GIGA German Insttute of Global and Area Studes Lebnz Insttut für Globale und Regonale Studen Neuer Jungfernsteg Hamburg Germany E mal: nfo@gga hamburg.de Webste: hamburg.de

3 GIGA WP 110/2009 Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres Abstract The productvty and compettveness of local frms n non OECD countres depends as much on technologcal capactes and successful upgradng as n ndustralzed countres. However, developng countres undertake very lttle to no orgnal R&D and prmarly depend on foregn technology. Long term contracts and subcontractng arrangements wthn global value chans are here very mportant forms of transnatonal cooperaton and therefore also mportant channels for technology transfer, especally as the majorty of these countres attract only lmted foregn drect nvestment. Drawng on nnovaton and growth models as much as on value chan lterature, we outlne an analytcal model for emprcal research on local frm upgradng n non OECD countres and technology transfer wthn global value chans. Keywords: technology transfer, upgradng, nnovaton, non OECD countres, global value chans Professor Dr. Robert Kappel s presdent of the GIGA German Insttute of Global and Area Studes, a professor at the unverstes of Hamburg and Lepzg, and a member of the GIGA s Research Programme 3: Soco Economc Challenges n the Context of Globalsaton. E mal: kappel@gga hamburg.de Webste: hamburg.de/kappel Dr. Julane Brach s assstant research professor at the Department of Economcs, Unversty of Copenhagen; a research fellow at the GIGA Insttute of Mddle East Studes; and head of the Innovaton and Growth workng group of Research Programme 3: Soco Economc Challenges n the Context of Globalsaton. E mal: brach@gga hamburg.de Webste: hamburg.de/brach

4 Zusammenfassung Wertschöpfungsketten, Technologetransfer und Kompetenzerweterung lokaler Unternehmen n Ncht OECD Ländern De Produktvtät und Wettbewerbsfähgket lokaler Unternehmungen n Ncht OECD Ländern hängt genauso stark von hren technologschen Fähgketen und erfolgrechen Kompetenzerweterungen ab we n den ndustralserten Ländern. Allerdngs unternehmen dese m Verglech weng oder gar kene egene Forschungs und Entwcklungsaktvtäten, und snd deshalb prmär von der Nutzung und Anwendung ausländscher Technologen abhängg. Langfrstge Verträge und Subunternehmerarrangements nnerhalb globaler Wertschöpfungsketten snd n Ncht OECD Ländern de wohl wchtgste Form nternatonaler Kooperaton und deshalb auch ener der bedeutendsten Kanäle für Technologetransfer. Ausgehend von sowohl der Innovatons und Wachstumsforschung, als auch der Fachlteratur zum Thema Wertschöpfungsketten skzzeren wr n dem vorlegenden Artkel en analytsches Modell für emprsche Forschung m Berech der Kompetenzerweterung (upgradng) von lokalen Unternehmen n Ncht OECD Ländern und des Technologetransfers nnerhalb globaler Wertschöpfungsketten.

5 Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres Julane Brach / Robert Kappel Artcle Outlne 1. Introducton 2. Cooperaton through Value Chans 3. Technology Transfer and Productvty 4. Local Frm Productvty: A New Theoretcal Framework 5. Concluson 1. Introducton Internatonal economc relatons are characterzed by globalzaton. Lead frms and supplers form tghtly knt networks across natonal borders. For years, a wde range of possbltes for nteracton wth nternatonal consumers has been open to frms; the followng are the three basc, dstngushable strateges: the export of products va global trade, producton (and servces) abroad n the company s own subsdares va foregn drect nvestment (FDI), and the lcensng of foregn frms (that s, contractual arrangements for the manufacturng of a company s own products). When we look at manufactured goods and do not consder unprocessed natural resources, vertcal cooperaton through transnatonal value chans s the most mportant form of nter

6 6 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres natonal ntegraton for most developng and emergng countres. These collaboratons are partcularly characterzed by an asymmetrcal relatonshp between a lead frm, mostly located n an OECD country, and ts supplers, who produce n one or more non OECD countres. In these cases, legally and economcally ndependent frms form long term relatonshps. The value chan partners make relatonshp specfc nvestments (technology transfer, specal machnes); ths, n turn, creates mutual dependences. The developments of recent years have shown that, ncreasngly, frms are globalzng ther producton wth the help of nternatonal supplers. Thus, the value creaton process s also beng nternatonalzed. These collaboratons between frms play an mportant role for the ndvdual frms n order for them to generate entrepreneural growth, and to create and expand compettve advantages (upgradng) and synergy effects. Thus, transnatonal and stuaton and cooperaton specfc norms, whch govern the conduct of the value chan actors, come nto exstence. If legal ndependence s retaned, frms are ndependent actors and are able to negotate these norms wth each other. The parameters of the norm generatng process are determned by varous factors. Contractual weaknesses, the degree of asymmetry between value chan partners, and the envronment n whch the value chan s ntegrated play a defnng role. Just lke lead frms and local supplers, value chans are also embedded n cvl socety networks whch, as a contextual factor, consttute a certan framework for normbuldng processes wthn a value chan. For nstance, relevant cvl socety actors such as trade unons, nongovernmental organzatons, assocatons, the epstemc communtes, and credt or consumer organzatons play an mportant role n the value chan s nternal negotaton and norm buldng processes, even though they are located outsde of the value chan. Here, a dstncton s made between local (natonal) and nternatonal (global) actors and (norm buldng) networks. Nowadays, there s a consensus that dfferences n technology are a sgnfcant cause of performance and productvty dfferences between companes, sectors, and countres. In the research on value chans, technologes and technologcal capactes are also mportant: 1) The technologcal ntensty of the economc sector/ndustry s determned by the complexty of the fnal and ntermedate products. 2) The productvty of the value chan s determned by the specfc nvestments of the valuechan enterprses n the consoldaton and expanson of technologcal capactes; for example, lead frms provde ther supplers wth technologes, whle the supplers nvest n specfc machnes and processes. 3) The competence level of supplers crucally depends on ther technologcal capactes. However, the technologcal capactes n value chans have yet to be systematcally ntegrated nto theory and explctly researched. In most studes they are merely named as mportant components or mplctly consdered n correspondng assumptons (Morrson, Petrobell and Rabellott, 2008). Also, there s nether an establshed theoretcal framework nor sutable data from the frm level for the examnaton of the frms technology selecton (Acemoglu,

7 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres 7 Antràs and Helpman, 2007). Therefore, our paper partcularly focuses on the ssue of negotaton processes n the context of technology transfer and mprovng technologcal capactes, and on the ssue of optmzng lnks between key frms and local enterprses. The remander of the artcle s organzed as follows: Sectons 2 and 3 provde an extensve revew of the lterature on value chans and endogenous growth, respectvely. Secton 4 then presents an outlne of a theoretcal model whch tres to formalze the descrptve concept of upgradng by local supplers and, thus, helps to dentfy the relevant varables for an emprcal analyss. Fnally, Secton 5 concludes by sketchng frutful areas for future research and outlnng the relevance and potental of such an analytcal framework for the analyss of value chan ntegraton and upgradng n the Mddle East and North Afrca (MENA) and sub Saharan Afrca. 2. Cooperaton through Value Chans In current economc relatons, cooperaton between frms plays an mportant role n the generaton of entrepreneural growth, and n the creaton and extenson of compettve advantages and synergy effects. The exstng research makes a basc dstncton between four dfferent types of cooperaton models (Gereff et al. 2005; Rauch, Hamlton, 2001): 1) Market coordnaton: characterzed by arm s length and short term purchase contractual relatonshps between legally and economcally ndependent frms. 2) Horzontal cooperaton: cooperatve, stable relatons between legally ndependent frms whch are on the same level of market or value creaton. Economcally, there s a symmetrc nterdependency between them. 3) Vertcal cooperaton: long term contracts between legally and economcally ndependent frms. In these cases, mutual dependences develop wth tme; unlke the case wth horzontal cooperaton, dependences are here characterzed by asymmetry between (one or more) lead frm(s), whch domnate the collaboraton and lead t strategcally, and (one or even many) small and medum szed (SMEs), whch have a suppler purchaser relatonshp. 4) Vertcal ntegraton: SMEs are owned by the lead frm/s and thus economcally and legally dependent. The advance of globalzaton, the progress n nformaton and communcatons technologes, and the concurrent reducton of transfer costs have promoted nternatonal vertcal cooperaton n transnatonal value chans, the most prevalent and wdespread form of ntegraton/cooperaton n non OECD countres and emergng markets. The majorty of such collaboratons are characterzed by an asymmetrcal relatonshp between a lead frm, based n an OECD country, and ts supplers, based n one or more non OECD countres or emergng markets. In ths paper we focus on ths asymmetrcal relatonshp between frms n the North and the South (for modelng such relatonshps see Acemoglu, Zlbott, 2001; Keller, 2004). The central topc wthn ths broader focus s technology transfer wthn value chans. As t s

8 8 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres usually assumed that the lead frm sets the norms n vertcal cooperaton, we wll focus prmarly on such a case and challenge ths perspectve. Value chans and value chan networks are, by defnton, a hybrd form of organzaton n whch legally ndependent frms cooperate on consecutve levels of the value chan. Often the value chan approach s confused wth the value chan analyss accordng to Porter (1990), wth whch t s surely related but not dentcal. Studes n the tradton of Porter focus on prmary and supportng actvtes wthn a value chan (Porter, 1990; Stern, Porter, Furman, 2000). Ths strand of the dscusson wll not be consdered here as these studes lack emprcal foundaton, or focus partcularly on horzontal relatons or supportng actvtes. Numerous studes analyze local developments n ndustral clusters (cf. Gulan and Rabellott, 2005; Schmtz, 2004; McCormck, 1999; Schmtz, 1999) and the ndustral dvde, as well as the mutual relatonshps between chan members and spatal locaton patterns (Krugman 1996; Saxenan, 2006). Also, ndustral clusters of SMEs are vewed as the bass for ntegraton nto value chans, wth a partcular focus on jont acton and collectve effcency (cf. Schmtz 2004; Humphrey, Schmtz, 2002; Schmtz, 1999). Especally relevant here are those examnatons that deal wth relatons between the state and the prvate sector; supportng facltes (for example, research facltes, busness development servces); and envronments and networks (cf. Krugman, 1991; Saxenan, 2006; Camagn, 1991, Humphrey, Schmtz, 1998). Studes of envronments and networks focus prmarly on trust and the ndustral settng of the local, epstemc communty (cf. Polany, 1962; Camagn, 1991). Many of these analyses, publshed snce the md 1990s, concentrate on conceptual ssues and place an emprcal focus on varous sectors (for example, the clothng ndustry and the coffee, frut and vegetable trades) (e.g., Ponte 2008; Nadv 2008; McCormck 1999). The more recent dscusson of value chans has arrved at a basc typology wth four dfferent dmensons (Gereff/Korzenewcz, 1994; Humphrey/Schmtz, 2002): 1) Input Output structure: forms of cooperaton wthn a value chan for the manufacturng of a product. 2) Governance structure: types of governance structures concernng the dstrbuton of fnancal, materal, and human resources wthn a value chan and ther nfluence on the cooperaton of frms. 3) Spatal patterns: dstrbuton of value chan actvtes across varous regons or countres and ther effects on the dstrbuton of return flows and regonal development. 4) Insttutonal framework: regulatons for the nteracton of ndvdual levels of value creaton n a natonal and nternatonal context Governance Partcularly snce the md 1990s, the studes of governance structures have receved the largest degree of attenton of the four dmensons. A conceptual dstncton s usually made between

9 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres 9 the governance of a value chan and ts coordnaton (cf. Schmtz, 2004). Whereas governance descrbes the power relatonshp between the actors and other partcpants, at least n the context of the value chan approach, coordnaton refers more to the transton management of tangble goods and products at the segment nterfaces of a value chan. Governance of a value chan refers to four steps n the value chan approach (Kaplnsky/ Morrs, 2001: 67 73): the settng of rules, support of the other actors n a chan n order to facltate complance wth the rules, the montorng of complance wth the rules, and the punshment of volaton of the rules. Opnons dffer on whether ndvdual frms or several actors set the parameters. Humphrey and Schmtz (2002) and Gereff, Humphrey and Sturgeon (2005) clam that n modern value chans ndvdual frms domnaton over others gves rse to the development of asymmetrcal relatonshps. The governance of value chans occurs va the settng of parameters concernng the product, processes, and logstcs. Other studes pont out that one frm does not have the power to set norms; rather, several actors have a sgnfcant mpact on the shapng of specfc chans (e.g., Rakes et al. 2000; Jansen, 2007). Global commodty chans (GCCs), as defned by Gereff (1995) and Gereff/Korzenewcz (1994), focus predomnantly on the descrpton and analyss of the current stuaton of value chans wth regard to governance and nput output structure (cf. Gulan and Rabellott, 2005). In global producton networks (GPNs) (cf. Ernst, 2002), large corporatons from ndustralzed countres domnate the exchange of goods. The lead frms are often companes whch have wthdrawn from performng ther own manufacturng. Increasngly, ther core competences are the skll ntensve actvtes such as market forecasts, desgn, product and brand development, and management and also globally sourcng work and specfc resources (cf. Kaplnsky 2000). Papers on GPNs deal wth ssues such as upgradng, appropraton of rents n the chan, barrers to entry, and governance structure (cf. Kaplnsky 2000). Gereff, however, makes a dstncton between two types of herarchcal chans: buyer drven value chans and producer drven value chans. Buyer drven value chans (BDCs) are laborntensve producton chans n whch the producers hold a subordnate poston to the lead frms. These lead frms are, n most cases, global trade or marketng chans and brand producers. They produce the desgn and organze the marketng, whch plays a key role n these chans. The decentralzed producton networks are predomnantly located n developng and transton countres as the entry barrers are relatvely low. Often, lead frms have no producton facltes of ther own. Accordng to Gereff, BDCs consst of, among others, the clothng and toy ndustres and foodstuff producers. In producer drven value chans (PDCs), accordng to Gereff, multnatonals (lead frms) play the domnant role. Here, t s a matter of captaland technology ntensve producton, for example, the manufacturng of cars, arplanes, and computers. PDCs may consst of thousands of companes. The lead frms themselves handle the largest part of the captal ntensve producton. Subordnate frms manufacture more laborntensve or standardzed parts. The lead frms usually belong to global olgopoles.

10 10 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres In more recent accounts, a further typology of value chans based on ther governance structure, that s, the type of relatons among the actors wthn the value chan, has been developed. The two most well establshed dstnctons, by Humphrey and Schmtz (2002) and Gereff et al. (2005), are based on one another and hghlght three dfferent forms of value chans as relevant types: 1) Modular value chans: These develop n cases where products have a modular archtecture, that s, ther elements are, to a large extent, produced separately and assembled on the bass of standardzed nterfaces. The supplers produce customzed products, retanng, however, full responsblty for the process technologes used. 2) Relatonal value chans: Here, complex nteractons between buyers and sellers are n place; often, they lead to a hgh degree of mutual dependence. Mutual trust, famly tes, and ethnc tes support the functon of these chans. 3) Captve value chans: Smaller supplers depend to a great extent on large clents. Changng to other buyers would nduce prohbtve costs. These chans are often characterzed by a hgh degree of montorng and control by the lead frms. Table 1 summarzes the dscusson and the dfferent cooperaton models, provdng an overvew of the value chan typology accordng to governance structure (cooperaton form) (cf. Ernst, 2002). Table 1: Overvew of Cooperaton Models Cooperaton models Descrpton Cooperaton forms, governance structure Market coordnaton Arm s length sales contract Horzontal cooperaton (networks) Vertcal cooperaton (value chans, strategc networks) Vertcal ntegraton (herarchy) Cooperatve, stable relatons; legally ndependent, but economcally dependent frms; symmetrcal dependency Long term between legally and economcally ndependent frms; mutual dependences develop wth tme; asymmetrcal dependency Integraton causes loss of legal ndependence of htherto only economcally dependent frms; asymmetrcal dependence Jont ventures: establshment of a jont, legally ndependent frm Strategc allance: contractual agreement Modular value chans: Lead frms set product and qualty gudelnes; smaller frms, however, produce ndependently and take full responsblty Relatonal value chans: Complex nteractons leadng to strong mutual dependences Captve value chans: Characterzed by a hgh degree of montorng and control by one or more lead frm(s); small supplers are, to a great extent, dependent on lead frms (lcensng and franchsng contracts, Keretsu) Sectors (examples) Car ndustry pharmaceutcal ndustry, IT, consumer goods, electroncs Consumer goods, botech Car ndustry, consumer goods, foodstuff, clothes Source: Authors own complaton.

11 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres 11 We wll furthermore dentfy and elaborate on three crucal factors (cf. Gereff et al., 2005) n the prevalence of a partcular governance structure n a specfc value chan: 1) The complexty of the transacton. Transacton costs are especally hgh when complex and customer specfc products are produced by dfferent companes whch have to coordnate ther actvtes wth each other. 2) The possblty of codng nformaton and knowledge to facltate economcal and effcent transfers. 3) The exstng level of suppler competence. The hgher ths s, the more lkely t s that the lead frm wll attempt to avod learnng costs and delegate decsons to the upstream actors n the chan. Followng these lnes of dscusson, we attempt to consder the socal context n whch a value chan s embedded. Ths relatonshp, a contextual factor, consttutes a certan framework for the norm buldng processes wthn a value chan. External actors beyond the value chans trade unons, NGOs, federatons of commercal enterprses, the epstemc communtes, and credt or consumer organzatons are not an mmedate part of the value chan s nternal negotaton and norm buldng processes; nevertheless, they play an (ndrect) role. Thus, we dfferentate between local (natonal) and nternatonal (global) external actors and (normbuldng) networks Interactons wthn Value Chans On the one hand, SMEs enjoy advantages due to ther commtment to value chans and the formaton of long term oblgatons that mprove plannng relablty and facltate learnng and synergy effects (cf. Table 2). Actve cooperaton (for example, through technology and transfer of knowledge) reduces transacton costs and creates trust (Rauch/Casella 2001; Murphy, 2002). Dependng on the type of value chan (cf. typology), entrepreneural rsks and costs (addtonal tranng, technologes) are reduced through partcpaton n a value chan. SMEs do not have to tackle the challenges necessary for upgradng, such as actvtes and nvestments, by themselves. Instead, the lead frm actvely supports them as a partner and, n fact, profts from spllover and external effects. In addton, frms wthout such lnks more often rsk remanng n the nformal sector and pursung only very mnmalst and rsk averse strateges (cf. Ishengoma, Kappel, 2007; Rans, Stewart, 1999). On the other hand, value chan ntegraton causes the SMEs (addtonal) costs.

12 12 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres Table 2: Interacton wthn a Value Chan Interacton wthn a value chan Intentonal support of partners: Actve, purposeful transfer of knowledge and technologes (usually) by lead frm Spllover effects: Unplanned, not mmedately ntended transfer of knowledge and technologes Specfc nvestments by the SME n order to facltate or guarantee close cooperaton wth lead frm. The prerequste for ths s the SME s trust n the longevty of the value chan. Otherwse t would have sunk costs. Transfer of technology, personnel development, addtonal tranng Learnng by observng, learnng effects, re engneerng, spn off products Specal machnes, talor made processes, personnel, locatons Source: Authors own complaton. The nteractons between the actors wthn the value chan are nether entrely market based nor undrectonal. On the contrary, learnng processes come nto exstence (cf. Gulan and Rabellott, 2005, Marshall, 1982; Krugman 1991). So far, two mportant forms of nteracton have been dentfed: 1) The ntentonal support of partners: Actve transfer of knowledge and support of suppler competences are part of the lead frm s value chan governance, wth the ntenton of combnng the advantageous flexblty of outsourcng non core competences wth the secure supply of hgh qualty ntermedate products. Also, the necessary mplementaton of ncreasngly mportant standards leads to learnng effects along the chan (cf. Kaplnky, Redman, 2001: 28 33). 2) Spllovers n formalzed partnershps: In specal cases, lead frms establsh development partnershps wth supplers n non OECD countres and, f necessary, local research and development (R&D) nsttutons n order to, for nstance, adapt nternatonal technologes to the local condtons. Then, n addton to the mmedately ntended learnng and upgradng processes, downgradng, unplanned technologcal spllover, and spn off effects may occur. 1 However, not n every case do lead frms necessarly ntend learnng effects along the value chan. Companes at the far end of the chan can acqure sklls and knowledge that stll belong to the core competences of the lead frm through demonstraton effects and learnng by observng. SMEs, however, often have to make specfc nvestments that would be sunken costs f they were outsde of the value chan. For the SME, partcpaton n a vertcal collaboraton essentally depends on a cost beneft analyss. However, one has to bear n mnd that there s a lack of other optons, especally for SMEs n non OECD countres. The crtera for the lead frms to ntegrate an SME nto a value chan are far less obvous and reman far less researched. 1 Cf. Maskell, Malmberg, 1999; Krugman 1996; Smarzynska Javorck, 2004; n ths context, spllover means unplanned learnng effects through thrd actors. Spn offs means unplanned, commercally applcable results from R&D work.

13 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres Upgradng Despte partally grave asymmetry n the relatonshps between lead frms and SMEs, an ncreasng number of frms n non OECD countres and emergng markets are enterng nto such cooperaton. From the perspectve of the SMEs, the nterest n dong so s essentally lnked to the ncreased possbltes of mprovng ther own competence levels (upgradng). Ths study focuses prmarly on the creaton and extenson of technologcal sklls and capactes wthn a transnatonal value chan. We dfferentate between two fundamentally dfferent types of upgradng: 1) The expanson of the technologcal sklls and capactes of a subcontractor (frm upgradng). These development opportuntes are generally open to every company, regardless of ther ntegraton nto the value chan. The followng belong to ths category: Process upgradng: The reorganzaton of producton processes, or the ntroducton of new technologes, results n hgher effcency, consttutng a compettve advantage. Product upgradng: New products are launched, or old products are mproved more quckly than by compettors. Thus, frms can move up to hgher qualty product lnes. 2) The upgradng of a subcontractor functon wthn the value chan (chan upgradng); ntegraton nto the value chan s the prerequste. Functonal upgradng: Overall mprovement of a frm s abltes and sklls through ts assumpton of a new feld of responsblty and, possbly, the termnaton of actvtes n prevous felds. Intersectoral upgradng (or chan upgradng) means changng from one chan to another. Ths can occur due to the utlzaton of specfc competences whch are transferable from one sector to another. Thus, for nstance, the ablty to manufacture televson screens can serve as a startng pont for nvolvement n the hgher qualty computer sector. Even though the concepts regardng upgradng, the sgnfcance of technologcal competences, and the mprovement of competences are very promnent and well establshed arguments n the value chan debate, they are mostly vewed as exogenous determnants for SMEs. 3. Technology Transfer and Productvty The economc debate has arrved at the consensus that dfferences n technology are a sgnfcant cause of dfferences n the performance and productvty of frms, sectors, and countres (Acemoglu, 2007). Robert Solow (1956, 1957) presented the frst economc model to explan the process of captal accumulaton and emphasze the sgnfcance of technologcal progress as the ultmate source of sustaned economc development. Not untl the begnnng of the 1990s dd varous authors succeed n correctng Solow (Aghon and Howtt, 1992; Grossman and Helpman 1990; Romer 1990), who had not explaned how technologcal progress s generated. The new theorsts descrbe technologcal progress as the result of suc

14 14 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres cessful nnovaton processes, that s, the nvestments of market based frms n R&D. Ths category of endogenous growth models has, therefore, lad the mcroeconomc foundaton of macroeconomc growth theory and caused a wave of research on nnovaton processes and productvty dfferences. Ever snce, the majorty of models and studes n ths tradton have focused on the nnovaton processes and R&D actvtes of frms, partcularly n the hgh tech sector (avaton, space travel, pharmaceutcals, nano or botechnology) as these demonstrate the greatest nvestment n R&D and technology ntensty. Indeed, nnovatons n the hgh tech feld and n leadng nternatonal research have proven to be an extremely mportant source of productvty. However, t s manly reserved for hghly ndustralzed countres, predomnantly those of the OECD. Furthermore, hgh tech ndustres are a very small sector. Even n the leadng country for ths sector, the USA, the producton of hgh tech goods consttutes only 3 per cent of the gross natonal product (GNP). In most non OECD countres and emergng markets ths sector does not exst at all. 2 Therefore, the focus of the productvty debate n the context of non OECD countres has shfted, n essence, from the development of productvty ncreasng technologes to ther accessblty (Arora and Vamvakds, 2005; Coe and Helpman, 1995; Dollar and Kraay, 2004; Feenstra, 2004; Frankel and Romer, 1999; Keller, 2002). For countres wthout or wth only lmted ndgenous research actvtes, there s, accordng to the consensus, the comparably easy possblty of usng the exstng technologes on the global market as a source of productvty especally through channels such as nternatonal trade and the revolutonzed nformaton and communcatons technologes. In 1998 Basu and Wel (1998) crtcally addressed the technology bas to whch frms n non OECD countres that want to use foregn technologes are exposed. Technologes are developed n the hghly ndustralzed countres and are desgned for ther correspondng clmate, personnel, and fnancal crcumstances, whch most often are not approprate n the context of non OECD countres. Thus, argue Basu and Wel, the development of countres capactes for the adaptaton and utlzaton of exstng technologes s at least as mportant as access to these technologes. More recent quanttatve analyses (cf. Acemoglu and Zlbott, 2001; Los and Tmmer, 2006) underlne the sgnfcance of ths approach. Hausmann and Rodrk (2003) expand Basu and Wel s argumentaton. They drectly compare the technologcal adaptaton process of frms n non OECD countres wth the nnovaton process n ndustralzed countres. Here, technologcal adaptaton s descrbed as an entrepreneural process whch has the same relaton to costs as the nnovaton process. Keller (2004) compares varous channels of nternatonal technology transfer and ponts out that, despte extensve offers of foregn technology, local technologcal endeavors partcularly ncrease the productvty of accessble technologes. 2 Some authors do consder nnovaton actvtes but at the same tme, however, deny any growth relevance or producton ncreasng effects (Futagam and Ohkusa, 2003; Segerstrom, 1991; Zeng, 2001; Archbug and Mche, 1997).

15 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres 15 Partcularly n value chans, technologes and technologcal capactes play a central role on dfferent levels, as mentoned above. However, technologcal capactes n value chans have so far nether been systematcally ntegrated nto theory nor explctly researched. The majorty of studes and models merely name them as mportant components or mplctly consder them n correspondng assumptons. So far, as mentoned before, the concept of upgradng has not been clearly descrbed, but the dfferent versons of endogenous growth models dscussed n ths paragraph may possbly be sutable for further dfferentaton and stronger formalzaton. Addtonally, however, we have to take a look at some mportant dfferences between cooperaton that occurs through value chans and other forms of cooperaton (cf. Table 1 and Table 2) n the value chantechnology dscusson: (1) The value chan actors are bound by long term contracts, unlke the partcpants n the htherto assumed market relatonshps (arm s length relatonshps) between supplers and producers of end products (lead frms). (2) Supplers receve support for the adaptaton and selecton of technologes. They do not have to bear the costs or rsks alone. (3) The productvty of the value chan (and, thus, the fnal product) depends to a great extent on the specfc nvestments of the value chan actors (technology spllover effects). The nvestments can only be partally defned by contracts. Technology transfer wthn a value chan takes place between economcally dependent, legally ndependent, non state actors. Hence, ths s clearly dfferent from 1) technology transfer n the context of offcal development ad (ODA), whch s, to a large extent, conducted by state actors; 2) technology transfer wthn multnatonal frms (MNFs) where the lead frm legally owns, completely or partally, ts supplers; and also 3) publc prvate partnershps. Due to the sharp ncrease n the sgnfcance of trade n ntermedate products n recent years and the ncrease n the number of foregn subsdares and amounts of FDI (Grossman, Helpman and Szedl, 2006; Helpman, 2006), research on the ntegraton strateges of MNFs has boomed. The classc dfferentaton between horzontally and vertcally ntegrated MNFs has been replaced n more recent models (Helpman, Meltz, and Yeaple, 2004; Yeaple 2003) wth more complex organzatonal strateges. These take nto account the emprcal observaton that most MNFs dsplay vertcal and horzontal ntegraton n some form and focus on varous aspects of the make or buy decson. For nstance, Helpman (2006) descrbes optmum ntegraton strateges whch depend on the transport costs of fnal or ntermedate products. In contrast, Antràs and Helpman (2004) concentrate on dfferences n productvty between lead frms and relate these to ownershp structures and locaton decsons. Lead frms wegh the advantages of low varable producton costs (n non OECD countres) and lower fxed costs (n the home market) aganst the advantages of ownershp through the vertcal ntegraton of the supplers and arm s length market relatons (ncentves wth ndependent

16 16 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres supplers). The results show that the decson largely depends on wage dfferences n the North and the South, property rghts abroad, the dstrbuton of negotatng power between the lead frm and supplers, and the necessary headquarter ntensty of the fnal product. At the same tme, Antràs and Helpman pont out that, unlke market relatons between producers and supplers, contracts for transnatonal supply relatons are contnuously ncreasng. Systematc analyses of subcontractng are, however, not yet avalable. Antràs (2005) assumes that the nternatonal organzaton of producton does not consttute a choce of locaton n the classcal sense but rather a decson on the type and extent of control over producton. Even though ths feld of research, by and large, deals wth vertcal ntegraton, there s nevertheless a crucal lnk to our topc, norm buldng processes. For the frst tme, the form of the frm s nternal organzaton s endogenzed. Therefore, a combnaton of the value chan approach wth these research papers allows us to analyze the nfluental factors that lead to dfferent organzaton or governance structures, dscussed earler n ths paper, and to systematcally clarfy ther connectons n a formalzed context. For the frst tme, Acemoglu, Antràs, and Helpman (2007) have establshed a formal theoretcal connecton between the two approaches of () the endogenzaton of frm specfc producton and () the endogenzed selecton of organzatonal forms when contracts are ncomplete. They examne the nfluence of contractual ncompleteness and the technologcal complementarty of supplers on the selecton of technology. The authors assume that all suppler actvtes are relaton specfc and cannot be fully governed by contracts. Even so, the authors pont out that, so far, there has been nether an establshed theoretcal framework nor sutable data at the frm level for the examnaton of frms technology selecton (Acemoglu, Antràs and Helpman, 2007). Despte the exstng consensus that dfferences n technology are a sgnfcant cause of dfferences n the performance and productvty of frms, sectors, and countres and despte the sgnfcance attrbuted to these dfferences n the context of the value chan debate technologcal capactes n value chans have yet to be systematcally ntegrated nto theory and explctly researched (Morrson, Petrobell and Rabellott, 2008). 4. Local Frm Productvty: A New Theoretcal Framework In recent years, the quantty and methodologcal dversty of studes analyzng nternatonally organzed value chans have ncreased sharply. These studes have ncreasngly focused on value chans combnng ndustralzed and non OECD countres. In spte of ths, many research questons reman unanswered, as shown n the aforementoned conclusons. One sgnfcant pont of crtcsm s that, so far, no analytcal framework has been developed that systematcally combnes the value chan debate wth nnovaton and growth research. Technologcal capactes bult through the transfer of technology, spllovers, and learnng effects reman largely unstuded.

17 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres 17 Even though the sgnfcance of technologcal capactes for upgradng and for governance structure s explctly emphaszed n most studes, the followng ssues exst: 1) The concept of upgradng remans relatvely vague. Addtonally, Morrson, Petrobell and Rabellott (2008) pont out a contradcton n logc: upgradng s often used as a synonym for nnovaton and, at the same tme, as a result of the nnovaton process. 2) The transfer of technology and knowledge, and ts effectveness, s usually regarded as exogenously gven for local SMEs. 3) It s normally suggested that the governance structure of a value chan and the strategy of a value chan s lead frm determne the extent and drecton of the transfer of technology and knowledge. In ths secton, we therefore outlne a theoretcal model as an analytcal framework that systematcally endogenzes the creaton and extenson of technologcal capactes n local SMEs. Endogenous nnovaton and growth models are the bass for our model. 3 In order to take nto account the specal characterstcs of the nnovaton processes n non OECD countres whch are, as mentoned above, ponted out by several authors such as Hausman and Rodrk (2003), Basu and Wel (1998), Keller (2004) the OECD nnovaton and growth models need to be adjusted to the stuaton of the non OECD countres. Hausman and Rodrk provde an mportant bass for our analyss, whch s based on the assumpton that the technologcal adaptaton process (that s, the adaptaton of exstng technologes rather than the new development of technologes ) occurs analogously to the nnovaton process n ndustralzed countres. Ths entrepreneural process s not cost neutral; on the contrary, t requres nvestments n physcal and human captal. Ths process s characterzed by nsecurtes and consderable entrepreneural rsk. A correspondngly adapted endogenous growth model, as outlned n the next secton, makes t possble to break open the htherto rgd assumpton that technology s exogenous to local frms and delneate the concepts of nnovaton and upgradng clearly. Table 3 summarzes the nterrelatons of concepts, actors and ther nteractons n table form: 3 The model relates to and bulds on Grossman and Helpman (1991) and Aghon and Howtt (1999).

18 18 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres Table 3: Summary Supported/promoted by Actor SME Lead frm External Intentonal Unntentonal Governance structure / Form of cooperaton SME s own effort Specfc nvestment Support of partner Spll over effects External effects Captve Modular Relatonal Development opportuntes for SMEs Implementaton of development opportuntes through nnovaton processes Increase n competence level: process upgradng product upgradng Promoton wthn a value chan: From prmary to supportng actvtes (functonal upgradng) Change nto a hgher qualty value chan (chan or ntersectoral upgradng) Process nnovaton Product nnovaton/ product dfferentaton ? Set by lead frm, profts from spll overs + + +? Set by lead frm + + +? Very unlkely Increase n effcency/ reducton of costs Qualty ncreasng Varety expandng Dependent on SME s own ntatve Dependent on SME s own ntatve Possble, n related sector Matter of negotaton wthn margns set by lead frm Matter of negotaton wthn margns set by lead frm Rather unlkely Source: Authors own complaton. 4.1 The Model Buldng on the lterature and our argumentaton, we present a draft model of technology transfer and upgradng processes wthn a transnatonal value chan where the lead frm only produces (or assembles) the fnal product and all ntermedate products are provded by small and medum local supplers. fnal We assume that the value chan output Y s produced accordng to the producton functon of the value chan fnal γ η 1 γ η Y = AleaderKleaderD Lleader, wth γ, η > 0, γ + η < 1 (1) where Aleader s the postve constant technology parameter of the lead frm, Kleader s the captal of the lead frm, Lleader s the total employment of labor n the fnal producton by the lead frm, and D s a composte ndex of ntermedate nputs produced by SMEs.

19 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres 19 γ and η denote the captal share and the share of ntermedates, respectvely. Dependng on the degree to whch the lead frm s a buyer or producer, these parameters vary. However, the shares of captal, labor, and ntermedates are always postve. The ndex of ntermedate goods depends on the output of each local SME consstng of vertcally dfferentated goods x of vntage qm log D ( t) = log q m m x m (2) Each SME produces only one product at dfferent vntage levels for one sector, and does not dversfy across dfferent sectors. If we assume that only the products at the hghest qualty level are sutable for use wthn the value chan, the SME value chan output functon yelds the followng form: m log D = log λ x wth 1, > 0 λ > m, (3) where m s the vntage level and λ an exogenous constant, common to all SMEs that depend on the sector of the value chan. That s, λ denotes the dstance of qualty ladders and thus the technologcal effort necessary to reach the next qualty level. 1/λ s the degree of technologcal dffculty and complexty of the sector. The total output of all SMEs wthn the value chan add up to the composte ndex D m log D = log D = log λ x (4) Gven the producton functon of the value chan, we now turn to the process of upgradng, that s, the dentfcaton of technologes n order to mprove the ntermedate nputs at the SME level. Untl now, m, the qualty level at whch the SME s producng, has been consdered to be exogenous (cf. equaton 3). However, each SME s able to mprove (upgrade) the qualty level of ts products; therefore, the qualty level m s endogenous and yelds the followng form. m = m ( ι ) (5) s the number of successful qualty mprovements, whch depends on the research ntensty or technologcal actvty ι of SME. Local producers who are not ntegrated n a value chan do not proft from any value chan spllover effects. In ths case SME upgradng corresponds to the research ntensty of Grossman and Helpman (1991), L ι ( μ, L, a ) = (1 μ) a (6) μρ where ρ s the exogenous rate of tme preference and μ s the exogenous degree of technologcal complexty of the products that depend on the sector. Recall that accordng to equaton

20 20 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres 1 (3), μ, L s the employment of labor n the producton of ntermedate goods by SME I, λ and a s the productvty of SME. In the next step we consder the upgradng processes of SMEs that are ntegrated n a value chan and therefore, n addton to ther own efforts, proft from spllover effects and technologcal support from the sde of the lead frm. The model covers process, product, and functonal upgradng smultaneously. Wth value chans, the technologcal effcency of SME WK ι s gven as WK WK ι = ι ( ι, ITT, SI, SPE) (7) where ι s the ndvdual technologcal effcency of SME explaned n equaton (6). ITT s the effect of the ntentonal technology transfer provded by the lead frm, SI the specfc nvestments on the sde of the SME demanded by the lead frm, and SPE external spllover effects. All three addtonal factors are, as mentoned above, value chan specfc. All of them the extent and knd of ntentonal technology transfer (ITT) provded by the lead frm, the extent and amount of specal nvestments (SP) expected from the SME, and the manner and modaltes of the use of spllover effects (SPE) can be consdered to be nternal value chan norms and depend on the negotaton process between the lead frm and local suppler SMEs. 4.2 Regresson Equatons Internal value chan nteractons are nether entrely market based nor undrectonal, as dscussed earler n ths paper. However, the followng estmaton equaton can be deducted from the theoretcal models, whch help to account for these learnng processes and spllover effects. The SME s negotaton power (np) s as follows: WK np = c + β 1ι + β 2LN + β3μ + ε (8) whereby the degree of technologcal complexty μ s to be nserted from equaton (6) and the research ntensty WK ι from equaton (7). LN depcts the strength of the local cvl network. The successful upgradng of an SME (UP) s correspondngly modeled wth a dependence on the branch specfc degree of technologcal complexty μ, whch models the research ntensty WK ι of the value chan, the dstrbuton of the lead frm s negotatng power nplead, and the ndvdual SME np WK UP = c + β 3 ι + β4np + β5nplead + β6sp + ε (9) Heren, the followng endogenosty has to be consdered. Also, n reverse, the research ntensty of the value chan depends on the research ntensty of every SME, the IIT (ntended technology transfer), the specal nvestment (SI), and external spllovers:

21 Brach/Kappel: Global Value Chans, Technology Transfer and Local Frm Upgradng n Non OECD Countres 21 WK ι = c + β ι + β IIT + β SI + β SP + ε (10) In each of the estmaton equatons c represents the ntercept, β,..., β 1 10 the estmaton parameters, and ε the error term. 5. Concluson The orgnal contrbuton of ths artcle s () to present an analytcal framework whch ncorporates an endogenous process of nnovaton and technology adopton nto the transnatonal value chan approach and related models, and () to provde an ntegrated research method whch relates the governance structure of the value chan to both nternal value chan factors and natonal contextual factors. Drawng on ths framework, future research can focus more on understandng technologcal capactes and upgradng n non OECD countres n general and SME ntegraton n global value chans n partcular. Applyng ths framework could be especally useful n better understandng and utlzng the economc potental of those countres n the Mddle East, North Afrca and sub Saharan Afrca that are currently beneftng the least from nternatonal captal and FDI nflows and where value chan ntegraton s among the most effectve and most promsng means of ntegraton n the global economy. 4 4 Coller/Gunnng, 1999; Ajay, 2008; Brach 2008; Cammett 2007.

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