A global value chain is where products are the result of extracting, refining, manufacturing, assembling logistics detail across various companies. To reach the global market, it is essential for local and small businesses to integrate with Global Value Chain. With the use of GVC, at each step, value is added to the products, ultimately bought by the customers.
The global networks can be perceived more like a multi-tiered structure. In which, multiple vendors take part in the production process for a larger enterprise which in turn manufactures for the international vendor.
Direct participation in GVCs takes place when SMEs (Small and Medium-Sized Enterprises) export intermediate goods and services for further processing.
Evidence from South East Asian countries shows that selling inputs is particularly important. Manufacturing SMEs in these countries have a higher tendency than larger firms to export goods and services that are sold directly into GVCs.
The SMEs also benefit from the GVCs by indirectly forming a part of the export channel through producing and supplying intermediary goods. While the data for contribution to the export figures through direct engagement with the global vendors might be small, their contribution remains much higher when calculated through the indirect contribution by supplying to larger manufacturers for export.
Advantages of integrating small businesses with Global Value Chain
For the last 20 years world has been increasingly leading towards globalization, now made simpler with the help of GVC.
- Emerging economies can join existing supply chains.
- Set the pace for industrialization and modernization in the country.
- If you build in the value chain, it can increase productivity and ideas, tremendously, due to the involvement of the resources from around the world.
Elements critical for integration of the small businesses with the Global Value Chain
Standards for export or connection to the GVCs have a complex and myriad relationship with the trade. Compliance with standards can both aid in boosting exports from a said country and at the same time can also act as a barrier to countries that haven’t complied with the required standards set by the importing country.
The concept in itself is vast as each country has different standards for different products and every country has its own list of compliances. Some of the standards that affect the trade ecosystem of any country can be concisely defined as
The effect of all these compliances varies as per the type of product and the trading countries.
Studies suggest that food exports especially from lower-income countries, like those of African countries are more sensitive to tightened importer standards. In context with Indian SMEs, they struggle with meeting the standards of international vendors.
Read more: SME landscape in India
Meeting the set standards would require SMEs to incur additional costs on enhancing their product quality and production methods. In addition, exclusive standards of private companies pose additional barriers and burdens for SMEs.
Innovation and Adaption of Updated Technology
The regional markets have integrated into one global trade platform. Therefore, GVCs have ushered in a new wave of competition that requires continuous innovation to design better and advanced products.
With multiple regions and minds at work, the life span of devices has shortened. Also, products are becoming obsolete at a fast pace. This phenomenon has induced an environment where innovation has become the need of the hour for any enterprise to sustain its market visibility and share.
Hence, in the present market ecosystem, innovation, and adaptation to recent technology has become almost indispensable.
The GVCs are adapted as a conventional mode of production. Thus, regions have gained their own importance resulting in the transfer of knowledge. Access to updated technology is critical for enabling SMEs to integrate with the GVCs.
The use of appropriate technologies would address issues such as optimum production at appropriate costs. At the same time, it will encourage them to compete globally.
Innovation allows firms to increase their potential. The rise is in terms of both: producing better quality goods and catering to the global market in a more efficient way.
Intellectual Property Rights
Intellectual Property Rights are crucial. They protect indigenous knowledge of the SMEs and attract investment to commercialization their innovation.
Read more about IPR: Why Intellectual Property Rights are important for SMEs?
The Tokyo Action statement considers IPR reforms as essential. It also recommends governments of all the countries to enhance SMEs’ value obtained from intellectual assets and intellectual property from a development perspective Evidence shows that strengthening IPR protection may have a positive impact on the attraction of FDI. Also, it will help in technology transfer to developing countries (Lippoldt, 2005).
IPRs have been an area where patenting technology for Indian SMEs has been struggling. As there is a need of generating awareness on IPRs with the Indian MSMEs, the Government has taken up several initiatives to make the SMEs aware of IPRs. It has also highlighted its potential in attracting business.
With improved awareness of IPR, MSMEs will have the ability to make confirmed decisions on protecting their business ideas and business strategies.
Hence, the Government of India has launched the Intellectual Property Rights for Enhancing awareness about IPRs to enable the MSMEs for being more competitive in the global environment. The IPR project of the Indian Government is estimated with a total expenditure of US$12.5 million over a time period of five years. The scheme is expected to play an important role in the attainment of a more competitive position in the global market in terms of acquiring a competitive edge through exclusive innovations.
Access to more information about the benefits of IPR, handholding support towards filing IPR, and orienting the SMEs towards the benefits of patenting is the need of the hour to integrate the SMEs to the GVCs and make them competitive in the global market.
From a jar like Nutella to Apple gadgets and technology, companies now know the importance GVC holds.
As the Global Value Chain is based on segments like the production of goods and services, transport, communications, logistic services, and level of economic integration, it is crucial for all the sectors to globalize.