Value Chain Glossary: Inter-firm Cooperation
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Inter-Firm Cooperation
Formal or informal joint action between two or more firms in a value chain that are horizontally or vertically linked. A foundational premise of value chain analysis is that inter-firm relationships are critical to industry competitiveness. The value chain approach provides a framework and tools for analyzing these relationships, as well as best practices for intervening in relationships to improve competitiveness and the benefits that micro- and small enterprises (MSEs) are able to capture. Since the value chain approach focuses on the role of inter-firm relationships in facilitating or hampering inclusive industry competitiveness (competitiveness]] that enhances MSE benefits), it is logical to categorize relation-ships in terms of their relation to two extremes: supportive of inclusive industry competitiveness or adversarial to it.
Categorizing Inter-firm Relationships
Relationships that support industry competitiveness occur horizontally (between similar kinds of firms), vertically (between buyers and sellers in a value chain), and between value chain actors and other stakeholders (such as service providers or relevant government bodies). Supportive relationships can be characterized as mutually beneficial, recurrent and substantial and voluntary. While supportive inter-firm relationships are based on a long-term view of the industry, adversarial relationships are structured to maximize short-term profits. Horizontal relationships dominated by self-interest rather than driven by common objectives often exhibit free-rider problems or invite corruption.
Vertical relationships are generally inequitable: In most industries, buyers are more powerful than suppliers and are therefore able to reap greater benefits from an adversarial relationship. Various factors may facilitate such relationships. For example, where switching costs are low, buyers can exploit producers with impunity, knowing that there are other suppliers from whom they can purchase. Similarly, when there are only a few buyers (monopoly) the potential exists for collusion to maintain inequitable transaction terms and conditions.
Related Articles
- Horizontal Linkages
- Vertical Linkages
- Briefing Paper: Transforming Inter-firm Relationships to Increase Competitiveness, Ruth Campbell, September, 2008.
- Note from Lebanon: Increasing Competitiveness through Cooperation in the Value Chain, July, 2009.
- Briefing Paper: Strengthening Vertical Linkages, Vikas Choudhary,October 2008
