S3 Policy Brief Series Fatime Barbara Hegyi and Ruslan Rakhmatullin
Global Value Chains Mapping: Methodology and Cases for Policy Makers. Thematic Work on Value Chain Mapping in the Context of Smart Specialisation
TODEVA Emanuela, RAKHMATULLIN Ruslan
Smart specialisation requires EU MS and regions to focus their efforts and resources on a limited number of ambitious yet realistic priorities (niches or activities), where as a result, they would be able to develop excellence as well as compete in the global economy in a sustainable (financially, socially and environmentally) manner. When implemented, these strategies are expected to allow Member States and regions to strengthen their research and innovation systems, maximise knowledge flows, absorption and utilisation as well as spread the benefits of innovation throughout their economies.
The RIS3 approach requires looking beyond the national/regional administrative boundaries. In other words, a country/region should be able to identify its competitive advantages through systematic comparisons with other countries/regions, mapping their national and the international context in search of examples to learn from, or to mark a difference with, and performing effective benchmarking. Moreover, each country/region should be able to identify relevant linkages and flows of goods, services and knowledge revealing possible patterns of integration with partner regions. This is important in the case of both developed and for less developed countries/ regions that would often require to source know-how and technology from elsewhere.
In this context the significance and role of Global Value Chains (GVC) merit consideration. The position of businesses within global value chains in this respect is a crucial element to be considered. This type of analysis is particularly important as the S3 concept warns against 'blind' duplication of investments in other European regions. Any such blind duplication of efforts could lead to excessive fragmentation, loss of synergy potential, and ultimately could hamper the reach of the critical mass required for success. On the contrary, interregional collaboration should be pursued whenever similarities or complementarities with other regions are detected.
European and Global Value Chains in the context of Smart Specialisation [i]
Smart specialisation is an engine for the development of European eco-systems that are necessary to gather enough of a critical mass to ensure successful market breakthroughs. Therefore policy support for the organisation of European ecosystems for interregional collaboration becomes a strategic factor in the co-creation process of these eco-systems. The value chain describes the entire range of activities that firms engage in to bring a product from its conception to its end use and beyond and ranging from design, production, marketing to distribution and support to the final consumer. The activities that comprise a value chain can be contained within a single firm or divided among different firms. Value chain activities can produce goods or services, and can be contained within a single geographical location or spread over wider areas. Value chains can be divided among multiple firms and dispersed across the globe, thus, resulting in global value chains.
Activities of value chain may be implanted in existing clusters focusing on particular activities. As a result, cluster analysis can help policymakers to explore the extent to which a cluster forms part of a value chain. European and global value chains are effectively the representation of flows of materials, goods, information, knowledge, finance and people. Value chains are the basis of any such flows. The on-going construction, deconstruction and reconstruction of such chains provides the infrastructure through which globalisation is enabled. Their innovative and efficient design, configuration and coordination are central to the role of many multinational enterprises (MNEs). Integrating emerging technologies into such chains to create symbiotic business systems that yield maximum performance is the key to competitive advantage in today’s globalised world.
Industrial value chains take an increasingly complex ‘end-to-end’ perspective in terms of activities, resources, assets, capabilities, relationships and financial and operating data. This facilitates thinking holistically across the chain and identifying opportunities in terms of new ideas and innovations that could emerge from a questioning of what is, what is not and what could be. As firms have sought to maximise returns, they have embraced various strategies directed towards value capture including slicing the value chain, outsourcing, off-shoring (either in-house or contracted out), repositioning on the chain and/or collaborating with other parties on the industry value chain. Thus firms determine value chain configurations, i.e. the way in which the activities of the value chain are spatially arranged within the constraints of product physical and knowledge characteristics.
The big value-chain trade flows have been demonstrated to be in sectors such as transport equipment, electrical and optical equipment and chemicals [ii]. Final-good shares of production have reduced in all sectors from 1995 to 2009, which is evidence that value chains have fragmented and that about half of the world's output of goods and services are sold as intermediate inputs. The world is still more globalised for final goods than it is for intermediates; the domestic-sales-to-export split is about 60–40 for final manufactures while it is about 70–30 for intermediates. Overall, world production is not yet very internationalised with the imported intermediates share of total world manufacturing at only 16 per cent and 8 per cent for the production of all goods and services [ii].
At the level of aggregation available today, most nations are largely self-sufficient in terms of intermediate inputs. However, smaller economies (e.g. Hungary) and certain sectors (e.g. electronic goods exports) have typically higher ratios of imported intermediate goods destined for the export market. At the same time, 80% of global trade is accounted for by value chains administered by MNEs such that global investment and trade ‘are thoroughly entwined international production networks’ [iii].
It has been also argued that a new type of European value added could be achieved through the provision of 'European public goods' that leverage interconnections (similar to regional cluster policies). The provision of such international public goods is something that needs to be considered in a broader policy framework for using the European Single Market as a catalyser of new industrial value chains and the role of European cluster policies in a modern European industrial policy. The S3 Platform is to focus some of its activities on interconnecting various regional eco-systems and its Quadruple Helix actors in a range of smart specialisation niches. It is possible to leverage the dynamics of entrepreneurial discovery at a higher scale by using smart specialisation as a coordination principle for interregional collaboration.
It is proposed to establish a multi-level support mechanism, combining efforts at regional, national and European level which addresses any market and system failures that prevent breakthroughs, starting with information and coordination failures and demand uncertainty. The development of interregional collaboration will be driven by the opening-up in regional smart specialisation strategies. The establishment of such a support mechanism calls for the interregional knowledge building, mapping the matchmaking potential around GVCs between regional smart specialisation priorities, identifying some pilot examples of interregional value chains, key stakeholders, available equipment and facilities and relevant actors/skills in smart specialisation areas and applying the proposed methodology with a view to identifying examples of matching of national and regional cluster organisations in identified value chains of smart specialisation areas.
Many EU regions and countries identify their areas of smart specialisation through the so-called entrepreneurial discovery process (EDP). This process allows regions and countries to explore and understand their regional capacities, potential and opportunities. However, mapping of formal and informal networks, positioning their capabilities within European and global value chains (E/GVCs), mapping flows of goods and services, cooperation in R&I projects have not been performed by all regions and Member States to the same extent to date. For example, some advanced regions already have a good knowledge of their regional actors as they have put in place a range of cooperative measures aiming to enhance productivity and quality output (e.g. Four motors for Europe).
On the other hand, employing the entrepreneurial discovery process offered many regions a good opportunity to learn about their regional actors, explore their activities and markets. As a result, these regions got an important opportunity to interact with their regional stakeholders and to map their activities, opportunities, weaknesses and needs. However, some less developed regions are at the earlier stages of the process. In fact, a recent analysis of RIS3 strategies in EU-13 countries suggests that the transformative agendas prepared by regional and national governments tend to be somewhat inward looking and do not always employ an adequate strategic approach to enable and facilitate trans-regional collaboration.
Many EU Member States and regions are open to internationalisation. However, while they acknowledge the importance of E/GVCs for national economies (primarily, through MNEs and inward FDI), they do not necessarily consider trans-regional and/or transnational collaboration as a potential vehicle to support innovation and growth. Furthermore, neither advanced nor less advanced regions have a comprehensive knowledge of their cooperation possibilities at regional, national and European levels in their chosen smart specialisation areas. Smart specialisation is however an on-going process that relies on a combination of exploration and exploitation of the research potential and business opportunities. S3 areas should not be seen as fixed R&I areas, but as flexible living domains that adapt quickly to changing conditions. What does this flexibility mean for cooperation in smart specialisation areas? First implication is that regional and national policy-makers in charge of RIS3 are expected to collect continuously all relevant information about any research, business and market opportunities at local and European levels. This implies a continuous entrepreneurial discovery process combined with exploration of activities, capacities, demand and offer of regional stakeholders as well as their needs and opportunities.
A number of questions would need to be addressed regularly, which will require resources, access to data, skills and time. Are regional actors searching for new partners to perform R&I of some niche technologies? Do they need to acquire some specific technologies to complement their products? Are they searching for designers, developers, manufactures or customers? At what level can stakeholders' needs be satisfied best – local, national or international? Who are competitors and possible partners or consumers?
Secondly, a manufacturing cycle that starts with research and finishes with sales and service of the products is a long and often knowledge and resource intensive process. Nowadays, not many companies are able to sustain the whole process on their own, and thus they engage with other partners through European and global value chains (E/GVCs).
European and global value chains can be understood as production activities that lead to final production and end use. Outsourcing of very technology and knowledge intensive goods can be domestic, i.e. large companies-SMEs, large companies-large companies or SMEs-SMEs located in the same region or country. Also, any such outsourcing can be between companies located in different countries. Companies outsource not only to decrease production costs, but also to purchase missing skills, technical knowledge or production capacities. This is particularly case of more technically advanced industries where very specific and costly technical knowledge and production processes cannot be completely supplied by one firm. Therefore, companies search for external suppliers that can address their needs, and thus fill the gap in their research/testing/production/delivery chain. This type of outsourcing is often cyclical and based on stable collaborative relationship. Companies thus create linkages and collaborative networks in the country and across borders to address their production needs.
Thirdly, companies as well as government and public institutions and universities generate demand. Government demand towards business can be either for its own use, or for collective consumption through public services, i.e. education and healthcare. Business demand towards universities can be either for talented and highly qualified students (with an adequate mix of skills and knowledge) or for research infrastructure and researchers to test and demonstrate their (semi-)products.
Finally, business and university demand towards government can be for legislative and financial support. Based on demand analysis, companies produce customer-tailored products and services, governments put in place funds and programmes to support R&I activities, and universities organise training and degree courses for the labour market. It is therefore essential to understand and map the demand of regional stakeholders and match it with current or potential offer. It is crucial to bring demand and offer together first at the regional level, and consequently scaled them up to national and European level.
References [i] Brennan L., Rakhmatullin R. (2015). Global Value Chains and Smart Specialisation Strategy. Thematic Work on the Understanding of Global Value Chains and their Analysis within the Context of Smart Specialisation. JRC S3 Policy Brief. [ii] Baldwin R. and J. Lopez-Gonzalez (2014), Supply-Chain Trade: A Portrait of Global Patterns and Several Testable Hypotheses, The World Economy. [iii] UNCTAD (2013), Global Value Chains and Development: Investment and Value-Added Trade in the Global Economy.
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