Leveraging the services sector for inclusive value chains in developing countries
The nature of production, business processes, and economic interdependence has been fundamentally altered by the emergence of regional and global value chains.
Changes of this scope and scale represent both opportunities and challenges in terms of advancing sustainable development outcomes in least developed and low income countries. Ensuring that developing country firms can not only participate in value chains but also, and perhaps more importantly, upgrade within them is of vital importance.
Both participation and upgrading within value chains require access to key services inputs such as information and communication technology services, financial services, energy, transportation, and logistics – many of which are outsourced. The increasing servicification of manufacturing, as well as growing levels of modularisation of services, helps to explain the rising share of services within the export baskets of both developing and developed economies. These trends have important implications for the achievement of inclusive and sustainable economic growth, given the contribution of services within new production networks to employment, economic growth, and poverty alleviation.
In this paper, Judith Fessehaie presents a conceptual framework of the contribution of services to value chains, examines the involvement of services within value chains at the macro, meso, and micro levels, and discusses the sustainable development implications of services in value chains. The author further provides readers with a number of key conclusions and general policy implications.
With few exceptions, such as finance and logistics, the role of services in global value chains (GVCs) is usually neglected. Yet, services contribute to GVCs in broader and deeper ways. For example, it was technological advances in transport and communication that made it possible at all for transnational corporations, retailers, and brand houses to outsource and offshore production to distant countries. Moreover, most discussions on services and developing countries tend to be framed in terms of opportunities for trade in services (tourism, business process outsourcing (BPO)) rather than services supportive of participation and upgrading in GVCs. Only recently have we started to understand the extent of “servicification” of GVCs.
This paper looks at the contribution of services to GVCs. In particular, it discusses the multiple roles of services in GVCs – as essential inputs, highly profitable value-added links, and channels to attain the Sustainable Development Goals (SDGs).
Two aspects of services in GVCs are noticeable. Firstly, the areas where firms in developing countries have struggled to upgrade are service related: research and development (R&D), product development, and marketing are knowledge intensive and tend to be located in countries with high endowments of skills, technologies, and “know-how.” A small number of emerging economies have now joined this group of countries.
Secondly, participation and upgrading in GVCs requires access to services inputs which are usually outsourced. Some inputs are acquired using existing networks (telecom); others are outsourced to third parties. Competitive access to these inputs is essential to promote participation and upgrading in GVCs – for example, financial services allow firms to invest in innovation and expand production; transport services allow firms to access inputs and export markets; and technical testing and analysis services allow firms to participate in standards-intensive GVCs such as fresh fruits and vegetables and upgrade into high-value, niche markets such as organics or fair trade.
The paper discusses the servicification of GVCs for key service sectors, focusing on the following aspects:
The participation and upgrading opportunities for Low Income Countries (LICs) and least developed countries (LDCs) in regional value chains (RVCs) in particular;
The potential impact of servicification of GVCs on selected SDGs; and
Policy implications in terms of trade in services and investment.
The key messages for policymakers arising from this paper are summarised as follows:
1. No “one size fits all” strategy
Value chain upgrading strategies need to be adjusted to take account of countries’ capabilities, industries, segment of the value chain targeted, and end markets. Hence, some services will be more important than others.
2. Trade policy design needs to be informed by detailed value chain analysis
Trade negotiations need to take a holistic view across goods and services. Trade policy design should be based on detailed understanding of which services sectors’ liberalisation and regulation can be instrumental to value chain competitiveness and where increased services exports and imports are supportive of exports of goods.
3. Domestic regulations
Domestic regulations are important to ensure access by SMEs, women, and youth; new entry and competition; and effective market access liberalisation in RVCs. The impact on SDGs critically depends on the design and enforcement of these regulations. Moreover, Heuser and Mattoo (2017) argue that exporting countries should place more emphasis on international cooperation in regulatory cooperation and on credible regulatory commitments to safeguard the interests of consumers in importing countries. These processes would be critical to support further processes of services liberalisation.
4. Need for broader policy interventions
Trade policies and domestic regulations need to be accompanied by policies and measures to address bottlenecks to firm competitiveness and increase firm productivity. These include: skills development, in particular at the technical level; increased access to ICT, finance, and business development services; investment in domestic technological upgrading in terms of equipment, management, and organisations; cheaper and more reliable physical infrastructure; improvement of administrative procedures and reduced red tape, in particular across borders; improved access to market information, business to business linkages, and export promotion; and institutional capacity building for government and business associations. Domestic policy interventions can also increase the domestic value-added content of exports by developing linkages between exporting firms and local SMEs.
5. Standards and participation in GVCs
Participation in GVCs often requires compliance with international standards. This requirement affects not only suppliers to global buyers but also suppliers further down the value chain. This implies that local service providers, such as information technology companies, professional service providers, and logistics companies, have to meet very high standards in order to supply their export-oriented customers. While compliance costs are generally high across the board, they can be particularly burdensome for SMEs in developing countries. Case studies from Latin America and Asia highlight standards compliance as a critical area for support from policymakers.
6. Broad stakeholder consultations
Designing value chains and trade strategies requires broad, substantial, and continuous consultations with government ministries and agencies, foreign and domestic lead firms, and domestic suppliers. This will ensure that strategies are effective and stakeholders are committed to their implementation and monitoring.
7. Role for public-private partnerships
Policymakers should explore areas where partnerships with lead firms can facilitate participation and upgrading processes. Examples include partnerships with offshore industry firms to promote skills development; with supermarkets to promote local sourcing; and with lead auto, machinery, and electronics original equipment manufacturers to localise high-value aftermarket services.
8. Regional value chains and regional cooperation
Regional value chains offer significant opportunities for LIC and LDC firms with limited product development, marketing, and distribution capabilities to participate and upgrade in value chains. Deepening regional integration in goods and services can support the development of RVCs. A recent review of case studies in Africa shows that successful services exports started in the region and in one mode of supply, and subsequently generated services exports in other, complementary modes, sometimes beyond the continent. Moreover, regional cooperation should target shared infrastructure and scale and/or knowledgeintensive services such as sectoral R&D.
This paper was produced under ICTSD’s Programme on Inclusive Economic Transformation as part of a project focused on global value chains which is aimed at empowering least developed and low income countries to effectively utilise value chains to achieve sustainable and inclusive economic transformation.
The views expressed in this publication are those of the author and do not necessarily reflect the views of ICTSD or the funding institutions.