Opportunities and pitfalls of LDCs in value chains

30 September 2013
ITC News
How enterprises in the least developed countries can move up the value-chain ladder.

Fragmentation and geographic separation of production activities have created new opportunities for least developed countries (LDCs), allowing them to participate in the new order that is emerging in the global market. For LDCs, this means that they can now engage in one or more stages of the production process as they do not need to know everything about a final product to participate in global value chains.

As a result, many LDCs, notwithstanding their weak supply-side and institutional capacities, are gradually making a place for themselves in an evolving international production system. Some LDCs have created a niche for themselves in a number of cross-border production (commodity) chains. This has also opened up an opportunity for them to move towards industrialization, gradually demonstrating competence by servicing one or more stages of a fuller production process. In other words, LDCs may seek specialization in a narrowly defined segment of activities in the value chain and may also capture a certain amount of economic rent.

Many LDCs have already demonstrated that they have special advantages in agriculture and natural resources, as well as in simple manufacturing. Still, an LDC-based company is usually not the leader or first-tier supplier of value chains, but more often a second or third-tier supplier. This suggests that there is a need for enterprises in LDCs to upgrade their product skills, as this will allow them to capture a higher level value in the production process. This upgrading of LDC firms may take place at both product and process levels. Conversely, the inability to confront the risks and threats characterizing the global trading environment would mean marginalization, if not exclusion, of the LDC firms from the emerging international production structure.

LDC participation in value chains

The degree of LDC participation in global value chains varies according to sectors and their choice of segments of the value chains – production, processing or marketing. Estimates done by the author for an International Trade Centre study called Participation of the Least Developed Countries in the Global Value Chain: Trends, Determinants and Challenges indicate that 67% of LDCs are located in Africa, and the majority of these value chains are linked to African countries, followed by Asian and island countries. As African countries are endowed with agricultural products, minerals and other natural resources, 70% of their value chains are related to these primary sectors. On the other hand, value chains in Asian LDCs deal largely with agricultural and manufacturing products, which correspond to their economic structures, as well as their composition of trade.

It is notable that most of the value chains operating in LDCs are, by and large, narrow in their extent, indicating that operations are concentrated in specific sectors (for example, in resource extraction or in production). The nature and extent of supplier participation from LDCs in different value chains also differ in the amount of capital. For example their production levels, their compliance with buyer specifications and their ability to meet last-minute supply requests.

Still, because LDCs often lack production capacities and capabilities to meet demand, research suggests that suppliers located in these countries are rarely in a position to work in the first tier of global value chains.

There are three forms of output in a value chain: raw products, intermediate products and finished products. While LDCs participate in all three, their share of production in the three stages varies in the different value chains. Some 47% of their output is raw products, 39% is intermediate products, and only 14% of LDC output is finished products. This implies that LDC firms are losing out on a significant amount of value-added when exporting their products. It clearly shows that there is a need for policymakers – at the global and national levels – to do more to ensure increased value addition in LDCs to improve their participation in global value chains.

The challenges ahead

It is clear that LDCs are at a disadvantage in the exploitation of the full potential of global value chains. In agriculture, for example, production challenges include lack of quality produce, limited access to modern technologies, small-scale operations and lack of skilled workers. At the processing stage, the agriculture industry suffers from weak storage facilities, lack of post-harvest management, poor packaging facilities and limited quality-assurance facilities. The marketing of agricultural products is often hampered by high certification costs, poor packaging, limited knowledge about international markets, price uncertainty and unreliable transport facilities. Other sectors, such as extractive and manufacturing, face similar challenges.

Logistical challenges, too, are considered a major bottleneck in the development of value chains in LDCs. At a particular disadvantage are landlocked African and Asian countries, as well as remote island states. Suffering from poor road connections to ports, landlocked countries have limited scope to develop their supply chains, other than through neighbouring markets (particularly for their finished products) for both exports and imports. In addition, political volatility in many LDCs, which affects a smooth working environment, also impairs the prospects for these countries to participate more fully in global value chains.

Although many countries have taken steps to reduce the hassles involved in doing business – from getting the right licence or certificate to customs procedures – the development of competitive supply chains in LDCs is still some way off. True, the cost of doing business for start-ups has come down in many countries, but it is still very high for small and medium-sized enterprises. On top of these, complex and burdensome customs procedures have also kept LDCs from participating more extensively in global value chains.

Addressing the challenges

Clearly, public policy has an important role to play if LDCs are to realize their potential of greater participation in global value chains. To smooth this process, there are some supportive measures that can be taken to tackle these challenges, including: expanding LDC productive capacities; developing trade-related infrastructure; improving access to fresh produce and logistics; developing forward-looking policies for trade and industry; and promoting social mobility.

To strengthen their foothold in global value chains, enterprises in LDCs need to advance their economic standing and improve their production processes and their products. Still, moving up the value-chain ladder does not necessarily mean upward social mobility (and increased wages for workers). For this to happen, LDCs need to develop proper policies that can actually ensure that their businesses and workers are enabled and empowered to advance economically and then climb up the global value chains.