Lessons Learned on MSE Upgrading in Value Chains

The paper points to economic growth key to reducing poverty more quickly. It notes that one way to link growth and poverty reduction is by promoting the participation of MSEs in growing industries – since MSEs provide income to large numbers of poor people, widespread MSE participation in productive, competitive value chains offers significant opportunities to increase the income of the poor.

The process of responding to market opportunities by innovating and increasing value-added is referred to as “upgrading”. It is suggested that through upgrading, MSEs can enhance the competitiveness of a value-chain, and thus contribute to economic growth. At the same time, the benefit to the MSE is felt through higher returns.

This paper examines how MSE owners respond to the benefits, costs and risks associated with upgrading opportunities. The conditions that promote upgrading opportunities, and MSE owners’ responses to these opportunities, are all interpreted within the context of the value chains in which the firms operate. The paper uses data provided by project documents and reports associated with nine value chains and considers four specific types of upgrading:

  1. Process upgrading – an increase in production efficiency, resulting in either greater output for the same level of inputs or the same level of output from fewer inputs.
  2. Product upgrading – a qualitative improvement that makes the product more desirable to consumers.
  3. Functional upgrading – the entry of a firm into a new, higher value-added level in the value chain.
  4. Channel upgrading – the entry of a firm into a pathway that leads to a new, higher value-added end market in the value chain.

Following the introductory section the paper presents the introductory framework for the analysis of MSE upgrading. This is followed, in section III, with a description of the key features of each of the nine value chains – 6 are related to agriculture and three are related to small-scale production of handmade goods. The main findings from the analysis, in terms of lessons learned about MSE upgrading, are presented in section IV. The final section provides a brief discussion of the implications of the findings for facilitating MSE upgrading and enhancing MSE benefits.

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