Pro-Poor Value Chain Development - Capacity.org

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Upgrading capacity
We consider upgrading capacity as the ability of agents to appropriate rent in an
economic transaction through their agency. The literature on global value chains has
identified four main types of upgrading processes (Greffi et al, 2001).
a. Product upgrading refers to the capacity of agents (firms or individuals) to
appropriate rent by means of changing the attribute of a product;
b. Process upgrading can be achieved when the transformation of inputs into outputs
is carried out in a more efficient way;
c. Functional upgrading refers to the capacity to generate and retain rent through
the adoption of new functions in the value chain (vertical integration for instance);
d. Network or “relational” upgrading is the process of acquiring rent through changes
in the relationships with suppliers or costumers.
In the present chapter we introduce a new typology of upgrading: collective or
horizontal upgrading is the ability to add value through the concerted action of agents
in the same node of the value chain, through collective action (for instance by means
of the activities of farmers’ groups).
Although these categories are defined as distinctive processes, the way most value
chain players appropriate rent is usually through a combination of different types of
upgrading mechanisms, which indeed might be very complementary. Upgrading is a
dynamic concept, which allows grasping the changing role of agents in value chains.
Rents can be added or eroded, depending on the competitive forces and the responses
of actors to them. The capacity to upgrade is a key aspect of entrepreneurship and
it is expected to determine the prospects to retain or add value to production across
time.
In addition, an important contribution of the value chain thinking is the notion that the
capacity of an agent to appropriate rent depends not only on its own agency, but also
on the upgrading strategies adopted by other players down- or upstream in the chain.
The upgrading opportunities of different actors in the chain are hence interconnected.
The appropriation of rent by a particular agent may occur at the expense of others
along the chain. However, it is also possible that a number, or all the actors involved in
a value chain, could simultaneously enhance their ability to generate and retain rent.
This is only possible when the total income allocated to the chain is enlarged. From
this point of view, it would be possible to talk about ‘value chain upgrading’ when all
the agents involved, or a particular set of them, upgrade their capacities to retain rent
in a concerted way (creating the possibility of win-win situations).
In Chapter 6 we introduce two new concepts to understand the relationship between
the upgrading of different agents along the chain. By ‘concerted upgrading’ we refer
to the situation that arises when upstream and downstream agents of the value chain
reinforce each other’s upgrading strategies, by means of concerted action. An example
of this kind of situation is the improvement of the quality of a particular product
facilitated by the provision of training or advisory services from buyers to suppliers.
For instance, Ivarsson and Göran Alvstam (2010) report a deliberate strategy of
IKEA to engage in concerted upgrading with its suppliers, as a move to reduce costs
and ensure products specificities. Bolwig et al (2009) show evidence of concerted
upgrading between coffee farmers and a lead firm. The opposite process in which
agents diverge in the capacity to appropriate rent can be referred to as ’divergent
upgrading.’ This means that the upgrading of one is achieved at the expense of the
other or in other words, while the rent of one agent is enhanced the added value
of the other is squeezed. Value chain interventions are based on the assumption
that buyers (lead firms for example) will engage in concerted upgrading with ‘poor’
suppliers, contributing through this ‘pulling effect’ to poverty alleviation. Below we
explore the conditions that favour processes of concerted upgrading.