Value Chain Glossary: Upgrading
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Upgrading
Investments or innovations made by firms that increase firm and/or value chain competitiveness, efficiency, product differentiation or reaches new markets, resulting in greater benefits. In order to respond effectively to market opportunities, firms and industries need to innovate to add value to products or services and to make production and marketing processes more efficient. These activities, known as firm-level upgrading, can provide MSEs with higher returns and a steady, more secure income through the development of knowledge and the ability to respond to changing market conditions. Upgrading at the industry-level focuses on increasing the competitiveness of all activities involved in the production, processing and/or marketing of a product or service and mitigating the constraints that limit value chain performance. Upgrading needs to be a continual process and can leads to national economic growth. In value chain analysis, the objective is to identify opportunities and constraints to firm- and industry-level upgrading; specifically the analysis looks for catalyst firms with the incentives, resources and willingness to promote and facilitate upgrading within the chain.
Upgrading activities generally fall into the following categories:
- Process Upgrading: Increasing efficiency, reducing per unit cost of production. Driven by the need to cut costs and/or increase output in response to competition within the value chain or between value chains.
- Product Upgrading: Improving product quality, increasing value to consumers. Motivated by changes in end markets, usually stemming from changes in consumer preferences.
- Functional Upgrading: Firm entry into a new level in the value chain. Motivated by the power to eliminate the market power of intermediaries, the desire to improve the flow of market signals to producers, or both.
- Channel Upgrading: Firm entry into a new pathway leading to a new end market within the same value chain. Motivated by desire to improve risk-adjusted returns.
- Inter-sectoral Upgrading: Firm entry into a new value chain based on a different product.
Related Articles
- Upgrading
- Briefing Paper: MSE Upgrading in Value Chains. Dunn, Elizabeth; Sebstad, Jennefer; Batzdorff, Lisa; Parsons, Holly. December, 2006
