Experiences with Innovation and Value Chains

1. Experiences with Innovation and Value Chains Paramaribo, Suriname, 11-12 March 2015

2. Panel: Experiences with Innovation, Clusters and Value Chains • The Experience of Clusters in the Caribbean Region, Celene Cleland-Gomez, Compete Caribbean • The experience in Clusters/Value Chains in LAC, Gabriel Casaburi, IDB. • Value Chains in Mining Clusters, Cornelio Delgado; • Mining Companies and Value Chains, Sergio Akiemboto, Director Grassalco State Mining Company

3. Value Chains and Clusters for Industrial Development: what do we mean? • Focus on linkages (beyond only transactions) • A difficult equilibrium between cooperation and competition • The governance of the relationships within them • Maximize the impact on enterprise development and competitiveness Rethinking Productive DevelopmentSound Policies and Institutions for Economic Transformation “More than the Sum of its Parts: Cluster-Based Policies“, Casaburi, Maffioli, Pietrobelli, 2014, in http://www.iadb.org/en/research-and-data/dia-publication-details,3185.html?id=2014

4. Often linkages are insufficient and of poor quality • Many linkages already exist, but often not sufficiently structured, and firms fail to exploit their full potential. • Other times firms fail to set up linkages themselves. • What affects this failure? • asymmetric information between actors (e.g. buyer would not ex-ante the efficiency, quality and compliance capability of its suppliers, and the latter would not be sure of the reliability of the buyer’s demand, willingness to pay, ...) • the fear of externalities (e.g. without adequate protection of IP the buyer may fear the spillover of core knowledge during the process, and prefer vertical integration or to reduce the amount and quality of information and knowledge transferred together with the market transaction) • the existence of coordination failures. Investment decision of one agent interrelated to those of the others 4

5. A Cluster is a spatial agglomeration of specialized firms Firms (often SMEs) localized within clusters benefit from collective efficiency: • Together they generate external economies, that may spill-over on other firms (passive involuntary effect of participating in a cluster); • They may carry out joint collective actions (conscious - active – effects of participating in a cluster);

6. Costa Rica in the Medical Devices GVC Components Manufacturing Assembly / Production Research & Product Development Distribution & Marketing Post-Sales Services Prototype Wholesale distributors Software Development Assembly Training Packaging Electronics development Regulatory Approval Doctors & Nurses Consulting Sterilization Precision metal works Process Development Hospitals(Public/Private) Maintenance, Repair Plastics extrusion & molding Sustaining Engineering Individual Patients Weaving/Knitting Textiles Main Segments: Exports Input Suppliers Capital Equip. US$32.5 million Metals Therapeutics US$301 million Resin Disposables US$575.5 million Chemicals Textiles Instruments US$270.5 million Local firms are mainly in packaging & support services (12 of 19) versus 4 in limited role in plastics molding & metal finishing and 1 OEM with exports under $2 million.

8. Objectives of Value Chain Interventions (Humphrey, Navas-Aleman, 2010) • working with lead firms often regarded as most promising way for firms’ upgrading in developing countries • access to strategic knowledge (technology and markets) • horizontal linkages • alternative links to reduce dependency and raise bargaining power

9. GVC Policies and Programmes? • Getting access, integrating into GVCs (I attraction, trade facilitation) • Capturing value within GVCs – • challenge to enter segments of higher value added, • ….with larger opportunities for learning and innovation (capacity to attract knowledge, intangibles) • Helpdevelop local technologicalcapabilities

10. Key principles for GVC policies and programs

11. IDB Support to Clusters in Latin America and the Caribbean since 2000. An Estimate

12. Do Cluster and Value Chain Programs work? IDB ongoing impact evaluation efforts. A Cluster Toolkit • Maffioli, Pietrobelli, Stucchi, 2015, Cluster programs Evaluation, Washington DC, IDB • Giuliani E., Maffioli A., Pacheco M., Pietrobelli C., Stucchi R., 2013, “Evaluating the Impact of Cluster Development Programs”, IDB TN-551 July. http://publications.iadb.org/bitstream/handle/11319/5960/Evaluating%20the%20Impact%20of%20Cluster%20Development%20Programs.pdf?sequence=1 12

13. Do Cluster and Value Chain Programs work? (1) Programas Asociativos in Chile – PROFOS(Rivas, 2010) Return on Investment: 1US$ invested in these programs, generated US$2.4 of additional revenues. Larger fiscal revenues: pesos 3.2 of additional VAT revenue for each peso invested in the program (in net present values). Changes in behavior induced by the program: during 1996-1999 (Asian crisis) firms participating in PROFOS grew at 12.9% per year whilst non-beneficiary firms decreased their sales at 2.1% per year (Dep.t Economics, University of Chile, 2003).

14. IDB Cluster programs in Minas Gerais and Sao Paulo (Brazil): Econometric evaluation with difference-in-difference of the performance of beneficiary firms in clusters relative to control groups(non-beneficiaries and indirect beneficiaries): Positive direct and significant effects on: Employment: about 20% increase in 3-5 years; Probability to export: about +5% for year relative to the original proportion of exporting firms; Export levels: between50% and 80% for each exporter for beneficiary firms. Effects persist and grow overtime. Indirect effects on firms localized in the area of influence of clusters, especially on the probability to export and less on export levels. Do Cluster and Value Chain Programs work? (2)

15. Do Cluster and Value Chain Programs work? (3) Chile Supplier Development Program • Set up in the late 1990s, mostly to take advantage of newly opened markets generated by Chile’s free trade agreements • Used mostly by agricultural value chains, in which exporter firms sponsored a group of suppliers to upgrade their quality/yields/sanitary conditions • Program finances 50% of initial diagnosis and upgrading activities, the rest covered by sponsor firm • Program coverage increased sharply over the 2000s, reaching over 7000 firms per year by the end of the decade • A quantitative evaluation in 2010 found positive impact in supplier SME (sales, employment and sustainability) as well as lead firms (sales and likelihood of exporting)

16. How can clusters and value chain foster learning, innovation and competitiveness? Examples from your experiences? Should policies and programs support clusters and value chains? How? What are the conditions for their success? Can cluster and value chain policies work in countries like Suriname (small economy, specialized in mining, agro and commerce)? What role for Government, enterprise sector and international organizations? Questions for the panel