Under what circumstances can small and medium-sized enterprises (SMEs) in developing countries ‘upgrade to compete’? In other words, what factors enable SMEs to follow the ‘high road’ to competitiveness in global markets, using innovation – rather than lower wages – to enhance their productivity and achieve higher profits and wages in a sustainable way? This is the important question Pietrobelli and Rabellotti have sought to answer in their edited volume.
The editors define ‘upgrading’ as ‘innovating to increase value added’. An SME can do this by improving its products or processes or even by developing new, more advanced functions in the value chain such as design or marketing. In analysing the ability of SMEs to upgrade, this book makes a theoretical contribution by bringing together the literatures on clusters and global value chains, usually considered separately, to analyse how the nature of the cluster, global value chain and industrial sector in which an SME operates affects its ability to upgrade. The book's most important contribution, however, is empirical: its collection of case studies, based on primary field research by assorted authors, of industrial upgrading in different industries. These case studies comprise the bulk of the book, making up six of its ten chapters. (Numerous other cases discussed in the literature and referred to throughout the volume bring the total number of cases analysed to 40.) By comparing clusters that are part of global value chains in sectors as diverse as dairy production in Nicaragua, salmon farming in Chile, metalworking in Brazil and software development in Mexico, the book offers insights on upgrading that go beyond most studies of clusters and of global value chains, which tend to focus exclusively on comparisons within one industry.
The editors themselves indicate that the book's primary purpose is to provide case studies that can be useful for theory development, leading to more rigorous, quantitative testing of specific propositions later on (p. 3). Nevertheless, in Chapter 1 they present a hypothesis which provides a framework for the entire book. This is the proposition that the ability of SMEs to upgrade is related to the actions of the individual firms as well as to the environment in which firms operate. The key factors that influence the environment of a firm in a particular cluster, global value chain and industrial sector, affecting its ability to upgrade, are (1) the cluster's ‘collective efficiency’, (2) the value chain's ‘pattern of governance’, and (3) the sector's characteristics related to ‘learning and upgrading’ (p. 3).
The editors do a fine job in Chapter 1 of explaining these key concepts, most of which have already been well developed by other scholars. A cluster's collective efficiency is defined as ‘the competitive advantage derived from local external economies and joint actions’ (p. 6). External economies are non-market-related by-products of interactions between economic actors, such as the quick diffusion of information among firms. Joint actions are consciously undertaken cooperative actions among firms, such as the formation of business associations to represent their interests. A global value chain's pattern of governance refers to the way in which the relationship between firms in the chain is coordinated. In the most common ‘quasi-hierarchical’ governance pattern, one firm establishes rules or procedures that other, formally independent firms in the chain must follow. For example, a global retail firm like Wal-Mart may demand that local suppliers meet certain specified quality or regulatory standards in their products and processes, and assist them in upgrading to meet these standards.
These concepts are not new, but the editors' unique theoretical claim is that ‘[t]he impact of collective efficiency and patterns of governance on the capacity of SMEs to upgrade may differ across sectors’ (p. 14). The case studies in the book suggest that the nature of the industrial sector in which an SME operates, as well as the cluster's collective efficiency and the value chain's pattern of governance, do indeed have a significant impact on an SME's ability to upgrade.
Of course, the editors explain that they have intentionally selected cases in which upgrading of some kind has taken place (p. 22). In fact, of the six field case studies presented as individual chapters by different authors in the book, only one, the Segusino rustic furniture cluster in Chipolo, Mexico, could be considered a ‘failure’ case in which successful upgrading was not sustainable over time. By including more case studies of clusters in which upgrading did not occur or could not be sustained, the editors might have been able to demonstrate even more powerfully how a cluster's collective efficiency and a value chain's governance pattern can affect an SME's upgrading ability.
In the final chapter of the book, the editors offer policy suggestions based on their analysis. In addition to providing some general suggestions for policymakers, such as supporting the training of SMEs as suppliers, the editors provide specific policy recommendations for government action in different industrial sectors. In making these recommendations, however, the editors seem to assume that all governments are equally effective at implementing policies. Neither the authors of the field research-based case studies nor the editors themselves discuss any underlying political factors that might make some governments better equipped than others to implement effective policy actions; the ability of governments to implement industrial policy is simply taken for granted. Although this is not the focus of the book, any discussion of policymaking in Latin America should at least acknowledge the importance of such factors.
Despite these relatively minor criticisms, this is a highly useful book, logically argued and clearly written, which makes an important contribution to our understanding of development in Latin America. All those interested in this topic, scholars as well as policymakers, would benefit greatly from reading it.
