Supply chains and the internationalization of SMEs · Supply chains and the internationalization of...
Transcript of Supply chains and the internationalization of SMEs · Supply chains and the internationalization of...
Supply chains and the
internationalization of SMEs Evidence from Italy
Connecting Local Enterprises to Global Markets
Geneva, October 8th, 2014
Giorgia Giovannetti Robert Schuman Centre for Advanced Studies,
European University Institute,
and University of Florence
The context
• Huge changes in the last 20 years: ICT & falling
costs led to emergence of GVC (production
networks; fragmentation; trade in tasks; etc) &
increasing globalization, with emerging actors
and different challenges.
• Structure of different countries remains different
• Many small and not very internationalized firms
(especially in developing countries, but also in
EU,e.g Italy)
– Africa, smaller and less internationalized
Many small firms….
Even in comparison to
developing countries,
the small firms in SSA
are the bulk, almost
70%, and the large are
less than 5%
AFRICA
0
200
400
600
800
1000
1200
1400
1600
1800
Micro/Small (<20 employees) Medium
(20-99 employees)
Large
(100+ employees)
Size distribution: Africa, Entreprise Survey, by country, last av. year
«Formal»
In Africa, most firms are micro or small
184 126
226 77
249
84
377
299
368
333
45
250
208
306 87
1461
114
409
111
361
483 422 437
232
131
97
108 54
68
51
103
206
94
240
54
98
132
142
52
386
90
75
27
376
186 169 225
221
45 45 60 19 42 16 46
139
32
140
51
12
58
31 11 44
37
22 12
200
54 49 58
146
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Micro/Small (<20 employees) Medium
(20-99 employees)
Large
(100+ employees)
Size distribution, %: Africa, by country, last av. Year, Ent. Survey
Formal=100
Firm size distribution by region
The size distribution in Africa peaks
at 7 employees per firm; the density
of larger firms is lower than
elsewhere
Outline
• The goals of the presentation
• The operative definition of Supply chain (and a
comparison with the alternatives); the empirical
issue of how to proxy participation to a supply
chain and lack of appropriate data.
• The case of Italy: use of a detailed survey with
specific questions on supply chain, networks and
position along the chain
• A focus on the agro value chain, in Italy
• Some general conclusion (can we learn any
lessons from the Italian case study?)
Goals: to answer…..
Q 1: Do GVC help firms to internationalize? how?
recent findings suggest yes (but data problems)
Q 2: For a small firm is it enough to belong to a supply
chain to enhance its probability to export?
Q 3: Does belonging to a supply chain increase the
intensive/ extensive margin?
Q4: Does the position in the value chain (upstream/
downstream) affect the probability to export or increase
the intensive/extensive margins?
And to see if lessons can be learned and applied to
different situations
Defining Global Value Chain
• Supply chains are defined in many ways
• Most definitions are built around the existence of an I/O
structure including a range of value-added activities.
– Recently, use of finely disaggregated I/O tables to determine their
distance to the final consumption of the goods produced.
• I take advantage of a direct measure of the involvement
of firms in supply chains. I use a survey. There is a
specific question asking about “participation in a specific
supply chain, implying a continuative contribution of the
firm to specific productions, provided that this activity
constitutes the majority of the firm’s turnover.”
• … is based on a direct answer from a firm’s
representative.
• It captures the specialization of the firm in specific
tasks within a well-defined production process.
• Thanks to specific information on firms’ upstream and
downstream activities, it also allows to control for the
role of firms within the production process.
• The involvement in a specific production process is
identified in the survey with a firm’s identification with a
specific supply chain, which is different from the sector
they belong to.
Our definition…..
Partecipation in supply chains….
• …. may enhance the internationalization of firms through complex
and highly interrelated mechanisms. A major one has to do with
incomplete contract theory and specialization.
• Heterogeneous firms deciding whether and how to fragment their
production (domestically and/or internationally) are likely to
undertake a relationship-specific investment in an incomplete
contracts environment. An example of such a situation is the
decision on where to position themselves along the supply chain,
according to their specialization.
• Since inputs are often customized to the buyers’ needs, trust
between agents becomes key. By «relationship-specific» we mean
that the value of assets or investments is higher inside a particular
relationship than outside of it.
Recognizing the importance of trust
……..has been used to justify the fact that firms could internationalize
through vertical FDI.
Fixed costs between firms along the supply chain are likely to be
lower vis à vis vertical integration, except in the case in which intra-
firm trade along the chain involves valuable intangible resources
(Atalay et al., 2014).
Being part of a supply chain is a strategy that could be chosen also
by relatively less productive firms, such as small firms and
suppliers, which may not be able to afford the costs of vertical
integration.
Supply chains can then enhance SEs engagement in international
markets, by opening new niches, also for service suppliers, and
allowing firms to overcome information costs, incompleteness of
contracts and other structural barriers to internationalization.
I exploit an original dataset….
• ….. based on a survey conducted by MET
(Monitoraggio Economia e Territorio) on over
25000 Italian firms, which include direct
information on their involvement in supply
chains.
• I rely on a direct measure of supply chain: the
answer to an ad-hoc question included in the
survey
The survey
• 25,090 Italian firms, of which 86.2% SMEs
• Merged and matched with balance sheets data
(AIDA) and ICE Reprint data for FDI.
• Final dataset has 7,590 firms (loss mainly due to
micro-small firms)
• 40% of firms export; 16% are in a supply chain;
6% are in a foreign network
• In Italy, large literature on importance of imports
(what, from where), networks and supply chain
integration (especially for SMEs)
• The supply chains variable includes firms that buy
and/or sell intermediate inputs and at the same time
have some degree of participation in the design of the
final product, which is likely to signal the “contribution
of the firm to specific productions.
• According to our definition, in Italy (with our dataset)
firms belonging to a supply chain are 15.7 percent of
the sample, a majority (82.3 percent) being
manufacturers.
• NB: in the empirical exercise we have also run all the
regressions using a “traditional” proxy for supply chain
Supply chains in our dataset (Italy)
• The share of exporters (40.3 %) rises to 58.3 % for
firms in a supply chain.
• Belonging to a supply chain increases the share of
exporters for all the employment classes, but
particularly for smaller firms (figure next slide).
Definition, 2
Complex degree of international
involvement:
• About 9.5 % of firms are both exporting and
involved in FDIs; this corresponds to 24 % of
FDI firms among exporters and to 73.8 % of
exporters among FDI firms.
• Our TFP estimates are in line with the
findings of the literature, and show that
productivity premia are different for different
internationalization modes
The underlying hypothesis and results
• Even small and less productive firms, if involved in production
chains, can take advantage of reduced costs of entry and
economies of scale that enhance their probability to export
• We perform an empirical exercise and find a positive and
significant relation between being part of a supply chain and the
probability to export, as well as the intensive margin of trade.
The number of foreign markets served (the extensive margin), on the
other hand, does not seem to be affected.
• We also find that downstream producers tend to benefit more
Italy peculiar specialization
• Italy’s sectorial specialization and industrial
structure triggered a high division of labor
among firms, many of which often work as
specialized suppliers
• Traditional small suppliers can take advantage
from the international fragmentation of
production to engage in more complementary
activities with final firms and improve their
performance
Networks
• Italian SMEs often engage in formal and informal
networking at the local level, involving
cooperation among specialized firms, to achieve
collective efficiency and better performance
compared to firms outside industrial districts.
• The survey also has direct information on whether
a firm belongs to a “local” , “domestic” o
“international” network.
• “local” are the industrial districts (clusters), very
common in Italy in traditional sectors
Our Results….
• show that belonging to a supply chain helps offsetting
some of the competitive disadvantages of SEs (e.g. lower
levels of productivity), as it is positively correlated to (i)
their probability to export and (ii) the intensive margin of
export (measured as share of total exports on turnover).
• Supply chain participation does not seem to affect the
extensive margin, measured as the number of foreign
markets served, in line with the view that structural limits
linked to the size matter for international expansion of SEs.
• Firms involved in downstream activities benefit more
from being part of a supply chain.
… and suggest some important
implications
• ….. especially for countries like Italy
characterized by a high number of small firms
and a fragmented production system
• only a small fraction of domestic firms is able
to autonomously integrate in supply chains
• Need for specific policies supporting the
inclusion in more organized, domestic and
global, production processes.
The marginal effects are significant for
small firms…
-.4-.2
0.2
<=5 <=15 <=30 <=50 >=50 >=100 >=200 >=300n. of employees
Supply chain marginal effect 95% c.i.
Summary of main results
• Direct focus on supply chain and export (new data);
• Supply chain particularly helpful for SMEs and
downstream firms (relevant for the case of Italy):
– SMEs and subcontractors are less likely to export; the
effect of the supply chain seems to decrease with size;
• Size matters especially for the extensive margin (n of
markets), where supply chain do not seem to help
much;
• Results for SMEs robust to different econometric
specifications, use of alternative dummies, different
estimation methods
An application to agrifood value chain
• An interesting sector (for Africa for instance) is
agri-food
• We performed a specific analysis for agro value
chains in Italy
• Using the same dataset (a subsample) and getting
very similar results in general and interesting
results on quality
• The agrifood firms in the sample are 1080, 7,5% of
the total, most small and integrated in supply
chains
Summing up
• Results very similar to the general case, but also
interesting insights into the issue of quality
• Value Chains allow to enhance quality of small
producers
• Agri food value chain can be very relevant for
developing countries (Italian case could be
considered as an example)
Can we extend results or policy implications
to other countries?
• We assessed the importance of GVC, especially for
small domestic firms: what about developing countries
(Q1)?
• How to improve SMEs positioning in GVC and reap
benefits (Q2)?
• The case of Ethiopia (Q3) (Sutton survey, better
information; example of leather GVC, Bruatigham)
• Are there links between SME and FDI (Q4)?
• Best practices and policy options
1. What really matters is where the value added is created….
Yarn Raw
Cotton
Textile
Finishing Garment
production
11.3% 16.0% 6.9% 54.5% 11.3%
2. GVCs (or RVCs?) today: stylized facts
• US+EU27 share is getting decreasing; developing & emerging countries’ share increasing
• This is driven by just few countries, most of them in Asia.
• Nevertheless, developed countries still take the majority of
income generated in GVCs
Two issues:
• Many developing countries do not (yet?) participate in GVCs
• If and when they do participate, they are at the low end of the value chain.
2.UPGRADING IN GLOBAL VALUE CHAINS
How?
– Improving Process
– Improving Products
– Specialising in new
functions
– Moving to a new VC
Introduction of better quality control systems or new production equipment.
A footwear producer shifts from mass produced low-cost shoes to more fashion-intensive footwear sold for higher prices
Moving from a manufacturing to a design function.
Move from TV to computer monitor production
New role of SMES in a globalizing
industry
• On the one hand, SMEs are well adapted to the new conditions of competition: flexibility, innovation and strong presence in and understanding of local markets.
• On the other hand, they are isolated from and have limited understanding of the opportunities and challenges of globalization. These weaknesses are particularly important in developing countries
• The policy challenge for developing and in particular African countries is not to protect them from global competition but to help entrepreneurs and small companies to address the challenges and opportunities by improving their links to global value chains and to improve their access to information, technology, finance and skills.
Global transformations have a strong impact on the role of
SMEs in sustainable industrialization:
06/10/2011
SME Clusters in global value chains
National boundary
Domestic industrial cluster
Global customers
Large-scale, multi-outlet retailers Small-scale retailers
Global buyers
Buyer and export agents
Local customers Large-scale or multi-plant manufacturers
Small-scale manufacturers
Small-scale suppliers
Where is SSAfrica in the global value chain?
• Lead firms are primarily from developed
countries
• Several first-tier suppliers are from developed
or emerging economies such as HK, Malaysia,
India etc
• African companies are second, third or fourth-tier
suppliers
• Global value chains (which operate in a transparent and accountable way) can be engines for economic growth and sustainable development
• They can support export propensity for SMEs
• Indeed they are key for sustainable development and SME support
• (It is important to include in the Aid for trade initiative the enterprise dimension in building productive capacities, to unleash enterpreneurial talents and skills in developing countries)
• (Dynamics effects of regional integration and South-South co-operation)
• Public Private Partnerships deliver good results (to be further explored)
Summing up
In conclusion
• GVC help firms internationalization; but it is important to
be «on the right point»
• Value added is not created all along
• Also clusters and network help (technological clusters, e.g
case of shoes industry in Spain)
• GVC support SMEs in complying with intl standards. This
is key in the agro-food industry (e.g. salmon case in
Chile);
• Experiment with new forms of private-public partnerships
(participatory systems for setting research agendas,
intermediary organizations linking small firms with
universities) (the wine case in Chile and SA).