Linking Local and Global Economies

The Ties that Bind

Carlo Pietrobelli, Arni Sverrison

• Publisher: Routledge
• Year: 2003
• eBook ISBN: 9781134433681
• Topic: Business
• Subtopic: Business General
• Index: Business

Clusters of small and medium sized enterprises (SMEs) have to adapt continually to a fast changing environment. This new book, containing contributions on countries ranging from Italy and Mexico to China and India, recognises the disparity between conditions in these countries and poses some interesting questions about what might be termed post clu

1 The ties that bind

Small and medium-sized enterprises in the global economy

Carlo Pietrobelli and Árni Sverrisson

This book is about the impact of globalisation on small and medium-sized enterprises (SMEs) and about the options this process presents to them. This issue is central when analysing linkages, networks or other types of relations among firms. The book discusses how such constellations influence aspects known to be important to firm survival and growth, such as learning, exports, innovation and patenting, marketing and technological change.

The book presents a series of case studies based on original research and three theoretical chapters that draw on such research. The case studies discussed in the book come from all continents and the book is, in this sense, truly global in scope. However, and perhaps more importantly, the different contributions all transcend the local, even parochial, perspectives that often beset empirical research. They clearly identify mechanisms and causations that readers may use to query other cases that they want to study.

Among the major issues that emerge from the book, one is particularly significant for its wide and remarkable repercussions: the current relocation of manufacturing to the Third World and the consequences in terms of economic dynamics and technological change. The result of this transformation in terms of lost jobs, underutilised infrastructure and educational investment in the former heartlands of industrial capitalism, are not central to this book, however.

Rather, our interest is on what happens on the ground in what we used to call the ‘Third World’ and in southern Europe. But central to the book is the study of the ‘ties’ that bind the North and the South, and the issue whether such ties, together with the industrialisation of the South are indeed leading to greater opportunities for development. It is also possible that the structures of under-development are deepened rather than transcended by industrialisation in the South. Perhaps we are merely seeing the last of a long sequence of transformations of dependency since the time of mercantile colonialism. Or perhaps we can only note the extreme diversity of experiences throughout the world: the Third World in not a unitary concept — perhaps it never has been and some regions or countries are actually ‘catching up’ with the more advanced countries, while others are sliding into ever-deeper misery. In other words, this book is above all about global economic mechanisms, and the ties that inevitably (especially) bind enterprises in the North and in the South of the world, and that may turn out to be impediments or powerful opportunities.

Thus, firms everywhere are increasingly embedded in multiple — multidimensional — relations, often crucially related to knowledge and technology transfers, and that occur both at the local and at the global level. One level does not exclude but often needs and complements the other. This is the central thesis of this book, and it is analysed from different perspectives.

The various authors in this volume contribute to the elucidation of this general topic each in their own way, and these differences are reflected in the organisation of the book. Three theoretical chapters immediately follow this introduction. The remaining chapters, which report empirical studies, are organised in three parts. The second part contains three studies of the relation between exports and enterprise growth and learning. The third part considers the direct role of different types of local and global linkages. The fourth part tries to strike a balance on whether opportunities or obstacles predominate in the processes discussed in the book, if evaluated from the vantage point of SMEs.

This introduction seeks to accomplish two tasks. The first is to provide a detailed, yet general, review of the different contributions in this book, within a consistent framework centred on the increasing relevance of the multiple linkages that tie firms across the world. The second is to draw conclusions about the future possible directions and nature of the relocation of manufacturing and of inter-firm relationships, and about the ensuing structure of world trade that is likely to prevail. We attend to them in this order.

Theoretical approaches

In Chapter 2, Árni Sverrisson presents and then criticises the work on ‘global commodity chains’ (GCC) originated by Immanuel Wallerstein and continued by, among others, Gary Gereffi. These latter developments of the concept include more aspects than Wallerstein's parsimonious version. As a result, the concept appears more and more as an empirical generalisation of a very limited number of cases, rather than as a theoretical concept proper and Wallerstein's initial insights are largely lost. However, Sverrisson argues that they can be salvaged with the aid of ideas developed by globalisation analysts such as Manuel Castells (2001) and network theorists such as Harrison White (2002) who provide concepts of more general validity.

A problem, however, is that current theories of production networks and globalisation do not adequately outline the alternative actions that are available to Third World producers, within the general framework provided by global media and universal design principles, brought about by electronic communication systems, container transport and easily transferable automated techniques for labour-intensive assembly plants. Sverrisson argues that the options in the Third World are qualitatively more varied than suggested by the GCC theorists who maintain that because of globalisation, technological upgrading can only occur through insertion into a GCC governed from the North. On a closer look, most actual production chains are not all that closely controlled by Northern designers and marketing departments (cf. Amsden 2001). While they monopolise certain (and important) aspects of the process, the capability and knowledge necessary to maintain effective manufacturing operations is increasingly losing relevance in the North but developing in the South. Further, effective demand for basic manufactures is increasing in the South even if it lags behind absolute increases in the North.¹ Hence, both the markets for cheap manufactured products and the capability to provide them is becoming more and more a South—South affair. A global production chain theory that constructs directionality exclusively from the South to the exploitative North is unable to grasp this major development, according to Sverrisson.

In Chapter 3, Marjolein Caniëls and Henny Romijn bring together two strands of work in order to conceptualise how technological learning takes place in enterprise clusters. One is the studies of ‘collective efficiency’ generated in the wake of Hubert Schmitz' studies in Latin America (Schmitz and Nadvi 1999). The other is the technological capability literature (e.g. Enos 1991; Lall 1992; Bell and Pavitt 1992) that is more concerned with firm-level learning processes and technological change.

Caniëls and Romijn argue that agglomeration advantages (and hence, collective efficiency) can be divided into five major aspects. The first is conventionally economic in nature and includes benefits from large local markets that by lowering unit costs leave more resources available for technology acquisition. The second aspect relates to more recent discourses about knowledge economies and particularly the lowering of thresholds for exchange of information that occurs in at least some clusters and networks. The third aspect refers to knowledge spillovers that occur when enterprises are able to directly observe each other within a cluster and learn from these observations. This encourages competitive attitudes among entrepreneurs as well. The fourth aspect is the human capital formation that occurs in clusters through varied organised learning efforts, such as local vocational training. The fifth aspect refers to the circumstance that the fundamentally individual benefit of learning is appropriated as a collective good when people who learn in one company move to another. Similar benefits occur when companies provide information to each other as a part of user-producer interaction but no special payment for this is expected or offered.

These aspects are analysed in turn by Caniëls and Romijn, who argue that, ceteris paribus, collaboration in learning and R&D tasks offers larger rewards in industries with considerable economies of scale and scope and where technological change is fast. This partly explains why the immediate incentives for such collaboration are small in many Third World contexts.

In Chapter 4, Bernard d'Mello develops and illustrates a theory of profit sharing among different categories: capital owners, managers, experts and service providers. This theory combines three, rather different, theoretical approaches that originate in the work of Karl Marx, Thorstein Veblen andJoseph A. Schumpeter respectively. D'Mello argues that the outcome of the sharing process is as important for reinvestment and growth as the generation of profit and productivity increases per se. The more profit accrues to others than to the owner (or the company itself in some form) the less is available for reinvesting and hence, for technological development and productivity growth. The more of this latter profit share that is used on conspicuous consumption, advertising and other types of symbolic positioning of the company and its owner, the less is available for production purposes strictu sensu. Thus, technological change is constrained both by the sharing of profits and by ‘unproductive costs’ such as advertising. D'Mello illustrates this thesis with evidence from India.

SME analysts working in various parts of the world have certainly noted this problem. Conspicuous consumption may indeed funnel funds away from small enterprises (in which company operations and the owners' personal expenditure tend to be mixed in various ways). However, if the problem is well known to the point of being taken for granted, less is known of the structural mechanisms that aggravate or amend it. Why is it that conspicuous consumption is considered good advertising that generates trust in some countries (and this is the case in India according to d'Mello) while among other peoples (e.g. the Swedes) it is not encouraged and can indeed create suspicion if expensive goods, land and buildings are paraded publicly and in ways considered ‘bad taste’? While not providing a final answer to this question, d'Mello initiates an interesting avenue of further analysis of how productivity growth is embedded in social mores that either facilitate or impede investment in production and technology.

Exports and enterprise growth and learning

One of the most common arguments in favour of a liberal world trade regime is that it facilitates specialisation according to countries' comparative advantage, and therefore an efficient allocation of world resources. This is based on the hypothesis that markets work and efficiently allocate resources, and that rules, if any, are applied on an equal basis. Both hypotheses are notably weak.

In Chapter 5, Jorge Katz reviews the Latin American evidence on these and related issues. He concludes that the results of the market-oriented reforms of the 1990s have been disappointing. This does not mean that they have been absent: indeed they have ‘induced a major transformation in the pattern of production, specialisation and trade’. As a result, two major strategies have evolved. One is based on deeper specialisation in food products and raw materials. The other is centred on assembly industries or maquiladoras, an example of which is analysed in considerable detail by Robine van Dooren in Chapter 11. Within these general paradigms, both winners and losers emerge. In some activities, for instance, SMEs are catching up with larger enterprises and even bypassing them in terms of productivity growth. In other cases, the opposite is true. However, on balance, the Latin American economies seem to be suffering more than benefiting from liberalised trade regimes.

Katz argues in particular that more ‘institutional engineering’ is needed in areas such as the creation and diffusion of technology, in the training of personnel in building access to foreign markets and finance, and in improving the legal framework. Put differently: Latin American markets cannot by themselves create the information and knowledge infrastructures they need in order to function properly, not to mention effective justice and checks on monopoly powers. Public institutions need to accomplish this and adapt to the opportunities opened by the new world trade regime.

In Chapter 6, Roberto Basile, Anna Giunta and Jeffrey B. Nugent approach the relation between exports and growth from a different angle, with a focus on SMEs. They argue that it is too simplistic to analyse exports and enterprise growth as if exporting were only a dichotomous (yes/no) choice. Thus, a deep and continuing involvement in foreign markets may indeed imply the use of marketing agents and the establishment of linkages with other (foreign) firms operating in foreign markets, investing there, establishing dedicated production units or facilitating production on licence. Only after a deeper and more stable involvement is achieved, then major benefits of enterprise exports may become apparent. With this aim, the authors construct an index that can grasp these different forms of foreign expansion. Their econometric analysis of Italian data reveals that there are large differences between highly specialised industries with industrial customers, where expansion is relatively easier, and scale-intensive industries where expansion is apparently more difficult. Indeed, more complex forms of foreign expansion may be more advantageous from the firm's point of view, but this requires capabilities and structures, close monitoring and adherence to the specifications appropriate for the intended market.

In Chapter 7, Davide Castellani poses more pointedly the question of whether exporting can in itself be considered a learning mechanism. While it is generally accepted that exporting usually needs considerable preliminary learning and general upgrading of a firm's operations, much less is known about the learning that occurs through exporting itself, whether it is deeper in some sense, or in other ways qualitatively different from pre-export learning.

Most importantly, it has been difficult to determine the direction of causality between exporting and learning and to date the empirical evidence is inconclusive in this regard. In the literature, the results seem to differ depending on the measure used: post-export learning effects are indeed difficult to distinguish from pre-export learning. Thus, positive correlations between export intensity (i.e. the share of export in total sales) and various learning related variables (labour productivity) do not add much to this issue.

Moreover, other factors affect the interaction between increased labour productivity and learning processes: as firms with higher export intensity also tend to be larger, it is likely that the result is an effect of economies of scale and not learning per se. Larger firms tend to have more sophisticated management structures and therefore they can appropriate and utilise knowledge more effectively: they are better learners. Castellani therefore investigates if there are differences between large and small firms in the learning effect made possible by exporting, and this turns out to be the case: the correlation between export intensity and productivity growth that Castellani detects in his sample is indeed mainly explained by the large firms. Thus, increased export intensity leads to learning effects, but only if internal organisation of the firm is sufficiently sophisticated to absorb and utilise relevant information and knowledge and thus capture the learning benefits.

In sum, all the three contributions in this part suggest that in order to benefit from exporting and more generally, from trade liberalisation, firms must be especially prepared for this. Moreover, the institutions that help them face foreign markets must be in place: this especially applies to developing knowledge infrastructures and information channels of various kinds.

Global versus local links

In Part III, four studies are presented that address the more specific role that local versus global linkages have in determining success or failure among enterprises and enterprise clusters. In Chapter 8, Carlo Pietrobelli presents a typology of industrial districts that refers to their overall structure rather than the content and character of individual links (based on Markusen 1996). Three types are identified: the Marshallian industrial ...

Table of contents

• Cover
• Linking Local and Global Economies
• Routledge Studies in the Modern World Economy
• Full Title
• Copyright
• Contents
• Illustrations
• Contributors
• Foreword
• Acknowledgements
• Abbreviations
• 1 The ties that bind: small and medium-sized enterprises in the global economy
• PART I Theoretical approaches
• PART II Exports, enterprise growth and learning
• PART III Global and local links: mutual support or divided attention?
• PART IV Opportunities, obstacles and global rules
• Index