A HANDBOOK FOR VALUE CHAIN RESEARCH

1 A HANDBOOK FOR VALUE CHAINRESEARCHP repared for the IDRC byRaphael Kaplinsky and Mike Morris*We are grateful to colleagues in both our individual institutions and in the Spreadingthe Gains from Globalisation Network (particularly those participating in the BellagioWorkshop in September 2000) for discussions around many of the issues covered inthis HANDBOOK and also to Stephanie Barrientos, Jayne Smith and Justin Important Health WarningorA Guide for Using this HandbookLest anyone feel overwhelmed by the depth of detail in this HANDBOOK , especiallywith respect to the sections on methodology, we would like to emphasise at the outset:this HANDBOOK is not meant to be used or read as a comprehensive step by stepprocess that has to be followed in order to undertake a VALUE CHAIN analysis .

2 We knowof no VALUE CHAIN analysis that has comprehensively covered all the aspects dealt within the following pages, and certainly not in the methodologically sequential Handbookset out below. Indeed to try and do so in this form would be methodologicallyoverwhelming, and would certainly bore any reader of such an analysis to intention in producing a HANDBOOK on researching VALUE chains is to try andcomprehensively cover as many aspects of VALUE CHAIN analysis as possible so as toallow researchers to dip in and utilise what is relevant and where it is appropriate. It isnot an attempt to restrict researchers within a methodological strait-jacket, but ratherto free them to use whatever tools are deemed suitable from the variety text below attempts to cover the broad terrain of researching VALUE chains, andhence spans the contextually relevant, the conceptually abstract, the methodologicallyparticular, and the policy relevant.

3 Part 3 on Methodology can therefore be read in anumber of ways: as a form of expanding the conceptual issues raised in Part 1 onBasic Definitions and Part 2 on Analytic Constructs; or as an array of possibletechnical tools, some of which may be usefully adopted and methodologically appliedeither partially or fully depending on circumstances; or whole parts can be skippedand not read at , apart from using it as a RESEARCH tool, it is not even our intention that everyoneshould read the HANDBOOK in the way one would go through a (good) novel sequentially, and from cover to cover. We therefore urge readers to use their commonsense and treat it as one does an edited book, or researchers to read it in the same wayone reads a mechanics manual for finding out about one s car.

4 Treat the contents pageas an la carte menu, read the bits that are interesting, take what is relevant forwhatever RESEARCH task is at hand, and skim what is not 1 PART 1: BASIC DEFINITIONS AND 42 WHAT IS A VALUE CHAIN ?.. Simple VALUE extended VALUE or many VALUE or many labels?.. 63 WHY IS VALUE CHAIN analysis IMPORTANT?.. GROWING IMPORTANCE OF SYSTEMIC EFFICIENT PRODUCTION ENOUGH?.. the best of march of and losers from the best of the worst of does VALUE CHAIN RESEARCH inform this debate on globalisation?22 PART 2: KEY ANALYTICAL 244IS THE VALUE CHAIN A HEURISTIC DEVICE OR AN ANALYTICALTOOL?.. KEY ELEMENTS OF VALUE CHAIN to entry and types of VALUE 325 VALUE CHAINS, INNOVATION AND 37 DIFFERENT TYPES OF 376 VALUE CHAIN analysis AND THE DETERMINANTS OF DISTRIBUTIONAL OUTCOMES IN THE VALUE THE DETERMINANTS OF INCOME DISTRIBUTION IN OF POWER IN VALUE CHAIN 447 HOW DOES VALUE CHAIN analysis DIFFER FROMCONVENTIONAL INDUSTRY STUDIES AND FROM WHAT SOCIALSCIENTISTS (AND ESPECIALLY ECONOMISTS) NORMALLY DO?

5 46 PART 3: A METHODOLOGY FOR UNDERTAKING VALUE 498 THE POINT OF ENTRY FOR VALUE CHAIN 509 MAPPING VALUE 5310 PRODUCT SEGMENTS AND CRITICAL SUCCESS FACTOR S INFINAL 5511 HOW PRODUCERS ACCESS FINAL 6012 BENCHMARKING PRODUCTION 6313 GOVERNANCE OF VALUE GOVERNANCE : AN AND RULE OF AND EXTERNAL IN THE LEGITIMACY OF PERVASIVENESS OF THE 7414 UPGRADING IN VALUE AND BARRIERS TO UNIT OF ACCOUNT, THAT IS WHICH CURRENCY IS UTILISED TO WHAT CIRCUMSTANCES TURNOVER AND VALUE ADDED DATA ILLUMINATETHE IS PROFITABILITY TO BE MEASURED, AND ARE PROFITS AN APPROPRIATEMEASURE OF DISTRIBUTIONAL OUTCOMES?.. LOCATIONAL DIMENSIONS OF INCOME INCOME STREAMS - CLASS, GENDER, ETHNICITY, AND INCOMEGROUPS.

6 9115 INCORPORATING A KNOWLEDGE FOCUS INTO VALUE 9416 HOW DO SMES FIT INTO GLOBAL VALUE CHAINS?.. 9717 CONCLUSION AND POLICY 1051 INTRODUCTION1 INTRODUCTIONFor many of the world s population, the growing integration of the global economyhas provided the opportunity for substantial economic and income growth. The factthat globalisation in this new era has also come to include the production ofmanufactured components linked and coordinated on a global scale has openedsignificant opportunities for developing countries and regions. For the citizens of thedeveloping world it contains the promise of potentially increasing the rate and scopeof industrial growth and the upgrading of their manufacturing and service understand that without sustained economic growth in the their countries there islittle hope of addressing the poverty and inequality that is so pervasive.

7 Theytherefore view the growing integration of the global economy as an opportunity forentering into a new era of economic and industrial growth, reflected not only in thepossibility of reaping higher incomes, but also in the improved availability of betterquality and increasingly differentiated final , at the same time, globalisation has had its dark side. There has been anincreasing tendency towards growing unequalisation within and between countriesand a growing incidence in the absolute levels of poverty, not just in poor positive and negative attributes of globalisation have been experienced at anumber of different levels the individual, the household, the firm, the town, theregion, the sector and the nation.

8 The distributional pattern emerging in recentdecades of globalisation is thus simultaneously heterogeneous and those who had lost from globalisation had been confined to the non-participants, thepolicy implications would be clear take every step to be an active participant inglobal production and trade. However, the challenge is much more daunting than this,since the losers include many of those who have participated actively in the process ofglobal integration. Hence, there is a need to manage the mode of insertion into theglobal economy, to ensure that incomes are not reduced or further central questions arise from these observations:q why has the participation in global product markets and the geographical dispersalof economic activity not led to a concomitant spread in social and economicbenefits for those newly integrated populations?

9 Or, to put it another way, why isthere a disjuncture between high levels of economic integration into globalproduct markets and the extent to which countries and people actually gain fromglobalisation?q to what extent is it possible to identify a causal link between globalisation andinequality?q what can be done to arrest the unequalising tendencies of globalisation?q how can the factors and processes facilitating the upgrading of globally dispersedmanufacturing activities so as to provide for raised living standards be analysed?These related questions have important methodological implications what is the bestway to generate the information required to document these developments in2 INTRODUCTION production and appropriation, and how can we identify policy instruments whichmight arrest, and perhaps partially reverse these developments?

10 CHAIN analysis provides important insights into these four issues. Of course itdoes not tell the whole story, which to be complete would also have to addressmacroeconomic issues (particularly capital flows and their volatility), political issues(particularly the factors determining the rate and productivity of investment) and thedeterminants of social capital. But VALUE CHAIN analysis , which focuses on thedynamics of inter-linkages within the productive sector, especially the way in whichfirms and countries are globally integrated, takes us a great deal further thantraditional modes of economic and social CHAIN analysis overcomes a number of important weaknesses of traditionalsectoral analysis which tends to be static and suffers from the weakness of its ownbounded parameters.