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Developing country firms

Critically examine the advantages and disadvantages of developing country firms

becoming part of global value chains.

Global value chains essentially are about linking the local producers and service
providers from the developing world to the international markets. They provide a link to the
producers of raw materials and the eventual consumer. For instance, Generating an order will
basically land a firm at the bottom of the industrial chain while developing a branded range of a
reputable products advances the prospects of the producers to climb and advance the value chain
ladder or progress in the economic value chain.
Value chains in the developing world involves Globalization and expansion of international
markets as well as encouraging the fast growing middle and high income class and offering
opportunities to the developing and other semi-developed countries producers to enter and
operate in emerging markets i.e. regional, national or international markets. The major barriers
for these regional or national producers who venture in international markets lack favorable
enabling environment that offer institutional and infrastructural assistance, the availability of raw
materials or production resources needed for manufacturing processes, efficient and effective
value chain coordination. Small scale producers are greatly disadvantage as their capital is very

Finance For Development 2
limited, their labor is for subsistence production and their methods or techniques of production
are traditional and they lack the essential contacts with international or foreign market players.
The vertical perspective of developing countries value chain features the role played by
multinational companies and others on the national or regional markets and their interactions
with the smallholders (BoP producers) while the horizontal perspective includes the attention to
collaborate with all the producers for instance in cooperatives and other multi-actor networks
either the public or private partners interact with other regional industry clusters. Globalization
has contributed to the reduction of barriers on most international trade which have resulted in
reduction of tariffs and the price of the support and export market subsidies, the new emergence
of global value chains and the increased concentration and also consolidation of a number of
links in these chains. Many multinational companies have been turned into the new global
players in the overall sourcing and ultimate distribution of products in many markets of the
developing countries. (Meine and Trienekens, 2012)
The unequal or biased power relationships in most of these chains and other trade barriers have
a negative impact on all the distribution costs and the benefits above the chain participants and
retaining the high value and most profitable value adding activities in foreign western countries.
The producers in developing countries work hard to strengthen and to maintain a bargaining
position in these value chains, by collaborating horizontally among the producers and setting up
alliances in regional or other sector wide coordination networks or developing regional clusters
which in most cases are supported by the government which offer new opportunities for many
actors or players and the improvements of all competitive positions of a country or state.

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The upstream part of the food production in the global value chain, is actually not suited for
individual product differentiation as most food value chains heterogeneity for raw materials in
the upper part of the value chain are not really meant to be exploited for serving the market
heterogeneity in the lower part of the value chain i.e. downstream. Raw materials are initially
made homogeneous and later differentiated in the processing and distribution process stage for
instance through packaging. (Grunert, 2006) In most cases, the international value chains in the
upstream part are generally located in countries that are developing. These explains why only the
little or insignificant value added production in these global chains takes place in developing
Another advantage of the global value chain is that it increases the specialization in free and fair
trade especially in the organic products from the developing countries, while the regional and
traditional commodity chains like coffee portray a lot of differentiation tendencies. For example,
the amount payable to a producer for a kilogram of coffee represents only four percent (4%) of
the cost of a cup of cappuccino in the western coffee shops like Starbucks. (Fitter and Kaplinsky,
2001) The balance of the payments represents the ambiance and the value of the brand. These
types of specialty products have made it a conditional strategy to brand and add value to their
products to attract and gain market share in their particular sectors. (Gereffi, 1999)
The only disadvantage to the global value chain is its inability to counter the private label
penetration strategy which has been organized and initiated by many supermarket chains in the
developed countries. For instance, Tesco’s private brand label of the Chilean wine known as
Tesco Finest covers more half of its entire wine sales in its shops leaving only 50% to be shared
with the rest of the world in the wine market. (Gwayne, 2008)

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Global value chains are the vehicles by which the introduction of new or alternative
forms of production, advanced technologies, logistics, modern labor processes and
organizational relations and related networks are introduced. The car industry is an example
where the production process is advanced and the distribution networks are global and the
developing countries suppliers also participate in the research and the development of the
products in the sophisticated process. (Wilson and Abiola, 2003)
The major advantage of Global value chains is that they influence the production standards of
the participating firms. Multinational corporations and other western retailers have defined
manufacturing standards for all the production processes including food and other processed
products. These standards uplift the quality of products which also leads to a higher value for the
product. For instance the British Retail Consortium (BRC) and SQF (Safe Quality Food) The
major aims of production standards are to improve and enhance the quality and consistency in its
production. The standards also control the production process among the partners of the supply
chain. It also enhances the auditing and certification of standards for the products which provides
a launching ground for competitive trading and opens new markets. The certification of products
also provides defense in case of any incidences.
These standards are normally applied by the multinational companies and most importers from
different parts of the world to coordinate and monitor the supply chain activities and also to
control quality and social responsibility attributes. Retailers and foreign industries usually
demand for evidence of the certification processes in their production processes and producer

Finance For Development 5
The major disadvantage of the certification process is the cost and the high standards of
production process required under the process. Many small scale producers are often locked out
of the certification process because of the costs involved.
The distribution of products and value in the chain is also an important issue. The value of the
products increases and its availability is assured because of the extensive nature of global
distribution associated with the global value chain. One of the disadvantages is that the smaller
firms are normally exploited by the larger and more established firms in the value chain. The
Marxist theories point out that Global value chains lead to extreme exploitation of the small
producers in different value chains. (Gerefi and Korzeniewicz, 1994)
The other advantage of Global value chain is that it leads to reduction of poverty in the
developing world as it creates a lot of employment opportunities which generates the much
needed income for the poor people living in rural areas.
Global value chain has contributed in promotion and application of different technologies and
many types of management models in most African countries. These modern technologies and
management practices improved the economic and financial status and the viability of the Global
value chains. This has resulted in financial and economic growth for both the companies
involved and also the country.
Global value chain involves the use of quality standards mostly in developed countries like in
the European Union which limit the market for other companies in the developing world. Its
governance is also rigid i.e. it involves too much regulation and it’s affected greatly by lack of
basic infrastructures like roads. The high costs of transportation and the low levels of education,
innovation and technology makes the Global value chain difficult to expand in certain regions in

Finance For Development 6
developing countries and if they succeed they eventually make the exports or the products even
more expensive. (Meine and Trienekens, 2012)
Global value chains increases investment which also increases the rate of exports and also
reduces the reliance on imports leading to improved balance of payment to the host country. This
improves the host country’s economy and the living standards of people. Global value chains
also assist in equalizing the costs of all the factors of production nationally or internationally.
This leads to a sustainable and equal growth around the world and mostly in the developing
countries. They also provide an efficient and credible ways of integrating the economies of the
countries involved in the Global value chain.
Global value chain enables and facilitates acquisition of cheaper raw materials from foreign
countries abroad or solicits on behalf of the host nation for cheaper raw materials across the
world. A lot of expertise is acquired from the competition in global markets in terms of
management and technological advancement. The jobs and mostly the career opportunities
available at home and also abroad in connection with the Global value chain assure host
countries of a steady flow of income from overseas. (Meyer-Stamer, 2007).
The production costs in the global value chain depend on some factors which also includes the
organization selected. In case of agricultural value chains, the major problems may be that the
farm inputs may be too expensive or unavailable or even the wrong type. The farmer’s extension
services may be too far or not suited to their immediate needs or they lack any forms of financial
or credit facilities and also they lack the services of intermediary companies or organization. The
marketing facilities may be in adequate or unaffordable to the small farmer.

Finance For Development 7
For the value chains to contribute positively to the development of a country and also to the
income of the people it’s upgrading is very important. Value chain upgrading could incorporate
partnership between the public and also the private sector. This entails a different scenario for the
global value chain or the local chain.
The primary role of partnerships in implementing, developing and maintaining value chains is
interesting. The challenge or problem is to identify the factors that explain the rate of success of
the partnerships. A clear distinction is made between the internal process variables and the
external variables or impact of the main context. These situation leads to the question how the
upgrading process of the value chain is influenced by partnership. The need for external agency
or organization to organize the farmers and other dependants at the bottom or lower end of the
value chain is often felt. To achieve these, different solutions can be used. The government can
step in to assist the farmers or the farmers’ cooperative societies or even the private sector. In
many countries private companies actively involved in the provision of farmers extension
services. Foreign companies have mobilized poor farmers for instance in the case of Jatropha in
Tanzania and Zambia. Global value chains stimulate innovation in many projects in the
developing world which also leads to the global value chain upgrading. Wijk, Linden and Boer,
The susceptibility of Global value chains to the host country’s government policies is a great
disadvantage to the advancement of its objectives in countries that are hostile to its activities.
Global value chains currently face inter and intra-chain competition within the value chains and
among the others. (Porter, 1990)

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The competitiveness yardstick can be used to measure the performance of global value chain
at the regional, city or at the national or even at the local cluster level. In the biofuel chain, the
competitive questions are concerned with the sections that are competitive and the stages that are
critical in the whole biofuel production process and the market share that one can develop and
maintain a constant market share. The reliability of the global value chain can be affected either
positively or negatively by the policy of the government. These factors make some of the global
value chains unreliable in certain countries. Changes in international and national prices in
transportation increases the costs of the value chains causing fluctuations in the final costs of the
product making them more expensive. The international regulations in respect to the
transportation and production of biofuel may also affect the prices and the outcomes of the
global value chain.
The liberalization of the economy in respect to agricultural imports in some parts of Europe and
the innovations of the production of seeds and plants affected the global value chain. The sudden
changes in prices of petrol and its close substitutes affects the profitability of one or two types of
the biofuel chain which in turn affects the development and production of other close substitutes.
The cost of the additional reagents that turn the biofuel into biodiesel and other related close
substitutes also affect the eventual cost in the global value chain. (Humphrey, 2003) The global
value chain has the advantage in technological abilities in mixing the different kinds of biofuel
with the ordinary conventional fuel. The host country gains in the area of advanced technology
which it gains by interacting with the value chains. The value chain is concerned with a wide
range of prices from crude oil extraction to the additional cost of generating extra kilowatt of
electricity by windmills. It also affects the cross elasticity and determines the substitution effect
which creates a good impression and importance of the effects of the fluctuations. For instance,

Finance For Development 9
in the year 2008, the prices of crude oil rose to $148 per barrel, and the production of biofuel was
profitable hence the biofuel sector flourished and attracted more investment in the sector. A few
months later, the prices dropped to $40 per barrel and companies started to shelve there
expansion into the sector while those that were already in the market scaled down their
operations substantially. Royal Dutch Shell for instance reduced their operations in some
developing countries. (Warhurst, 2005)
The value chain analysis is a concept in analytical approach that can be applied to understand
the existence and nature of ties between the local firms and the global markets, their influence in
regional and international markets and to critically analyze the links in the global trade and the
production methods. Value chain analysis provides a detailed insight into the ways and activities
of the producers, their firms or regions or their countries participate in the global economy or
how they are connected to the global trade. Global value chain helps in the distribution of
benefits while the analysis assists in the explanation of the whole process of the distribution of
the benefits especially the income to the traders that are participating in the whole global
economy. Value chain allows the identification of policies and procedures that can be
implemented to enable the traders and the producers to participate actively in the global trade
and increase their shares of gain that can be achieved as a result of globalization. (Kaplinsky and
Morris, 2002)
Global value chain main advantage is that it provides a deep insight into the activities and mode
of insertion of the traders and the producers involved in the value chain. To understand the real
value of the potential of the global value chain, consideration has to be taken into account that
currently all the gains and benefits of globalization are not equally distributed. There is a
glowing disparity among the global economic integration processes and the extent and nature in

Finance For Development 10
which people and countries actually benefit from globalization. The main explanation for this
disparity is rooted in the inappropriate insertion of companies, regions and countries in their
respective value chains. This is a situation where a producer specializes in certain specific links
in the value chain that are exposed to intense competition which may record less trading
activities and reduced financial income.(Gereffi et al, 2003) When producers substantially fail to
insert or adhere themselves in the right way or in an appropriate manner into the global market, it
may lead to a path of self destruction in which they proceed and enter a path of immiserizing
growth which locks them into an even bigger competition reducing their incomes even further.
Immiserizing growth is a situation where increased economic growth is matched by reduced
economic returns. Meaning that there is more output or production and more employment but
falling trend in economic returns. (Kaplinsky and Morris, 2002) Tropical commodities and farm
products such as coffee or cotton provide a good example of inappropriate insertion. Despite
regular increases in consumption, most farmers have not significantly benefitted from the
increasing demand as this increase has been matched with an even greater or substantial decrease
in the prices of these farm products. The primary level of oversupply in most markets has
resulted in deterioration in the terms of trade which is generally one of the consequences of the
low barriers to the market entry. (Singer, 2003)
Another advantage of the global value chain is that it explains the nature and the determinants
of the general competitiveness, and it expressively shows that the natural determinants of the
income distribution are actually dynamic. It implies that the competitiveness at some point in
time may not be sufficient to sustain economic growth. Value chains allows a systematic focus
and specific analysis that is better suited for the dynamic nature of the value creation that
stretches beyond the real focus on a single company or a specific sector in a given economy.

Finance For Development 11
Global value chain provides a link that identifies all the other value chain links and their
activities and analyzing which ones are subject to the increasing or the decreasing returns. With
these clear distinctions, policymakers can ultimately decide which actions to implement in order
to facilitate the links upgrading in the value chain in order to generate good returns. A good
example of a value chain policy that has been formulated to aid in the global value chain is the
forward integration. Its goal is to increase the real level of the value added in the country where
the production of the commodity is taking place. For example, processing the farm products into
finished goods instead of selling them just as ordinary inputs in manufacturing plants abroad.
Global value chain enables analysis of all the economic activities and the opportunities from the
perspective of the value chain as well as the constraints to operating a value chain that’s
profitable. (OECD, 2009)
Inadequate banking products, high tariffs, lack of sound industrial policies and organized
farmers, insufficient technology and knowledge together with the uncertain market demand
makes global value chain to be susceptible to unreliability and substandard performance.
The global value chain enhances its performance by studying and understanding the constraints
above and avoids them by developing measures to counter their effects or reduce their effects to
insignificant levels. Identifying where and how the trader’s interventions should be implemented
in order to bypass the obstacles and add the value that has been created in the value chain.
(UNCTAD, 2004)
The companies within the triangles of the private sector, public and the civil society play roles in
the value chain i.e. actors in the value chain or in the broad context of the chain. Different
combinations of traders and actors are involved. When the value chain is analyzed, the

Finance For Development 12
opportunities and challenges in the triangles faced by the actors in the sustainable firm and
business development at the BoP in the developing markets,’ are all scrutinized and their insights
assessed if they are profitable or not. The main aim of the sustainable business development
mostly at BoP is to develop sustainable, organized closed loop chains, in which all the traders
and actors benefit directly from the value that has been created in the value chain. (OECD,
Global software companies are among the leading and fastest growing in the current world and
mostly dynamic in product development and process innovation. They provide the drive and
impetus for the growth of other related sectors. Egypt, Vietnam, Brazil, Mexico and China.
These countries are the major exporters of highly developed technology and related information
products and services. (UNCTAD, 2001), (Assad, 2007), (Ruiz, 2006), (Gereffi and Memedovic,
In Nigeria, the film industry is one of the largest film producers in Africa, only third from
United States and India. New technologies have allowed the production of different kinds of
movies which have changed and added the value chain in cinema and also the TV programs.
(Ola, 2007).
South Africa has been the largest car producer for the Toyota brand of vehicles in Africa
and it enjoys preferential treatment and access to their local customers although it has very high
import tariffs. After the liberalization of the South African economy in 1994, the government
adopted an open policy to encourage exports. TSA (Toyota South Africa) has explored and
exploited opportunities to join the Toyota Manufacturing Corporations major global sourcing
company. TSA manufactures Hilux and Corrolla brands of Toyota vehicles. A major aspect of

Finance For Development 13
the initial restructuring process included increasing all the local value added. The TSA plant has
moved from the production of seven different types of models at low prices and volumes to
manufacturing only two models at very high volumes, and secured a larger value added due to
the orders for the two specialized brands. (Robbins, 2006), (OECD, 2007b).
Global value chain may include different numbers or various types of actors i.e.
from the private sector to the public and civil society. They can be found I the emerging markets
or developed markets or in both markets. For instance, the extractive sector in the mining
industry in South Africa includes other subsectors like gold mining. The other subsector within
the gold mining i.e. an example of a typical value chain is the gold value chain in the city of
Pretoria in South Africa. This example of gold chain exemplifies the global value chain. The
ultimate product of the chain after several stages of adding value ends up as the jewelry that’s
sold in most shops in large cities like London and New York. Another example of an ordinary
value chain is the tomato chain in the town of Iringa, in Tanzania (East Africa) In these instance ,
tomatoes are produced, marketed and consumed locally, a real example of a local or even
regional value chain. http://unctad.org/en/Docs/diaeed20095_en.pdf
Value chain approach targets both the general supply and the demand side and adds the various
links in the whole business system. A clear understanding of the links in the system in terms of
the strongest and the weakest may result in an approach that’s effective in increasing the
economic development in the global value chain markets. The advantages of the global value
chain clearly outweigh the disadvantages. The policies designed to promote the economic growth
of the global value chains and the market for its products determine its profitability.

Finance For Development 14

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Kaplinsky, R. and Morris, M. (2002). A handbook for value chain research. Prepared for IDRC.
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Fitter, R. and Kaplinsky, R. (2001). Who gains from product rents as the coffee market becomes
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Finance For Development 15
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Finance For Development 16

Background Notes for Workshop on Spreading the Gains from Globalization, Institute of
Development Studies
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Finance For Development 17
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