Global Value Chains in Latin America: Experiences of Transformations (Sustainable Development Goals Series) 3031331028, 9783031331022

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Sustainable Development Goals Series

Connecting the Goals

Global Value Chains in Latin America Experiences of Transformations Edited by Pablo Pérez Akaki Marisol Velázquez-Salazar Gilma Sabina Lizama Gaitán

Sustainable Development Goals Series

The Sustainable Development Goals Series is Springer Nature’s inaugural cross-imprint book series that addresses and supports the United Nations’ seventeen Sustainable Development Goals. The series fosters comprehensive research focused on these global targets and endeavours to address some of society’s greatest grand challenges. The SDGs are inherently multidisciplinary, and they bring people working across different fields together and working towards a common goal. In this spirit, the Sustainable Development Goals series is the first at Springer Nature to publish books under both the Springer and Palgrave Macmillan imprints, bringing the strengths of our imprints together. The Sustainable Development Goals Series is organized into eighteen subseries: one subseries based around each of the seventeen respective Sustainable Development Goals, and an eighteenth subseries, “Connecting the Goals,” which serves as a home for volumes addressing multiple goals or studying the SDGs as a whole. Each subseries is guided by an expert Subseries Advisor with years or decades of experience studying and addressing core components of their respective Goal. The SDG Series has a remit as broad as the SDGs themselves, and contributions are welcome from scientists, academics, policymakers, and researchers working in fields related to any of the seventeen goals. If you are interested in contributing a monograph or curated volume to the series, please contact the Publishers: Zachary Romano [Springer; zachary. [email protected]] and Rachael Ballard [Palgrave Macmillan; rachael. [email protected]].

Pablo Pérez Akaki · Marisol Velázquez-Salazar · Gilma Sabina Lizama Gaitán Editors

Global Value Chains in Latin America Experiences of Transformations

Editors Pablo Pérez Akaki Monterrey Institute of Technology Atizapán de Zaragoza Estado de México, Mexico

Marisol Velázquez-Salazar Universidad Panamericana Mexico City, Mexico

Gilma Sabina Lizama Gaitán University of El Salvador San Salvador, El Salvador

ISSN 2523-3084 ISSN 2523-3092 (electronic) Sustainable Development Goals Series ISBN 978-3-031-33102-2 ISBN 978-3-031-33103-9 (eBook) https://doi.org/10.1007/978-3-031-33103-9 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 Color wheel and icons: From https://www.un.org/sustainabledevelopment/, Copyright © 2020 United Nations. Used with the permission of the United Nations. The content of this publication has not been approved by the United Nations and does not reflect the views of the United Nations or its officials or Member States. This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

Part I Global Value Chains Foundations and Empirical Facts in Latin America 3

1

Global Value Chains Evolution in Latin America Pablo Pérez Akaki, Marisol Velázquez-Salazar, and Gilma Sabina Lizama Gaitán

2

Latin American Economies in Global Value Chains: Main Evidence Yasmani Jimenez Barrera

15

Global Value Chains: Production and Innovation Clusters Antonia Terán-Bustamante and Antonieta Martínez-Velasco

29

3

Part II Governance, Institutions and Hierarchies 4

5

Sugar Agribusinesses in Central America: Institutionality and Policies César Trejos-Salazar and Rafael Díaz-Porras Governance in the D.O. Café Pluma Hidalgo from Oaxaca and the D.O. Habanero Pepper from the Yucatan Peninsula José Apolinar Zapata Aguilar

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83

v

vi

6

CONTENTS

Governance and the Institutional Framework: The Case of Products with Designation of Origin in Mexico Pablo Pérez Akaki, Nadia Viridiana Vega Vera, and Yuritzi Paola Enríquez Caballero

101

Part III Case studies in Agribusiness and Agri-Food Industries 7

8

9

10

Global Value Chains in the Coffee Sector: A Comparative Analysis Between El Salvador and Mexico Marisol Velázquez-Salazar and Gilma Sabina Lizama Gaitán

137

Coffee from Micro-Batches as a New Form of Marketing: The Case of Producers in the Western Central Valley, Costa Rica Fernando Sáenz-Segura, Alma Pérez Vásquez, and Roselia Servín Juárez

163

Upgrading Options for Small Cocoa Producers in Guatemala Pablo Alvarez

187

The Competitiveness of Corn Production from a Global Value Chain Approach in the Southern Region of Costa Rica Álvaro Martín Parada Gómez and Francinie Jiménez Ureña

215

Part IV Case Studies in Skill and Knowledge-Intensive Industries 11

12

The Gestation of a Triple Helix in Queretaro, Its Contribution to the Formation of the Global Value Chain of the Aerospace Industry and the Type of Upgrading That Powers Fernando Samperio Sánchez The Automotive Industry in Western Mexico and the Performance of Local Suppliers in the Value Chains of Multinational Companies Angélica Basulto Castillo

Index

251

287

325

Contributors

Pablo Alvarez San José, Costa Rica Angélica Basulto Castillo Universidad de Guadalajara, Jalisco, Mexico Rafael Díaz-Porras Centro Internacional de Política Económica para el Desarrollo Sostenible (CINPE), Universidad Nacional, Heredia, Costa Rica Yuritzi Paola Enríquez Caballero Universidad Panamericana, Mexico City, Mexico Yasmani Jimenez Barrera Department of Economics and Business Management, University of Alcala, Alcalá de Henares, Spain Francinie Jiménez Ureña Vicerrectoría de Nacional de Costa Rica, Heredia, Costa Rica

Extensión,

Universidad

Gilma Sabina Lizama Gaitán University of El Salvador, San Salvador, El Salvador Antonieta Martínez-Velasco Facultad Panamericana, Mexico City, Mexico

de

Ingeniería,

Universidad

Álvaro Martín Parada Gómez Vicerrectoría de Extensión, Universidad Nacional de Costa Rica, Heredia, Costa Rica

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CONTRIBUTORS

Pablo Pérez Akaki Departamento de Contabilidad y Finanzas, Escuela de Negocios, Tecnológico de Monterrey, Atizapán de Zaragoza, Estado de México, Mexico Alma Pérez Vásquez Colegio de Postgraduados Campus Córdoba, Heroica Veracruz, Mexico Fernando Sáenz-Segura Centro Internacional de Política Económica Para El Desarrollo Sostenible (CINPE), Heredia, Costa Rica Fernando Samperio Sánchez Mexico City, Mexico Roselia Servín Juárez Colegio de Postgraduados Campus Córdoba, Heroica Veracruz, Mexico Antonia Terán-Bustamante Facultad de Ciencias Económicas y Empresariales, Universidad Panamericana, Mexico City, Mexico César Trejos-Salazar Centro Internacional de Política Económica para el Desarrollo Sostenible (CINPE), Universidad Nacional, Heredia, Costa Rica Nadia Viridiana Vega Vera Universidad México, Mexico City, Mexico

Nacional

Autónoma

de

Marisol Velázquez-Salazar Facultad de Ciencias Económicas y Empresariales, Universidad Panamericana, Mexico City, Mexico José Apolinar Zapata Aguilar Universidad Tecnológica Metropolitana, Mérida, Yucatán, Mexico

List of Figures

Fig. 2.1 Fig. 2.2 Fig. 2.3 Fig. 2.4 Fig. Fig. Fig. Fig. Fig.

3.1 3.2 3.3 3.4 4.1

Fig. 4.2

Fig. 6.1

Fig. 6.2

Latin American economies: Rasmussen-Hirschman Index, 2018 (Source Durán [2018: 19]) Backward participation of Latin American economies in GVCs, 1995–2018 (Source Author’s elaboration) Forward participation of Latin American economies in GVCs, 1995–2018 (Source Author’s elaboration) Total intra-regional trade in goods in millions of dollars, 1995–2021 (Source Author’s elaboration) Country clusters by GC (Source Own elaboration) Heat map of the 8 clusters formed by a group of countries Characterization of each cluster Correlation between GVC and GII Central American sugar agrichains: Groupings of the elements associated with services in the electronic portal of the IOPs, by country. Year 2019 (Source Own elaboration, with information from THE WEBSITES) Comparative balance of the productive structures and policies of the sugar agroindustry in Central America (Source Own elaboration) Virtuous circle of the valorization of the product of origin (Source Own elaboration based on Belletti et al. [2017] and Vandecandelaere et al. [2010]) The Tequila chain and type of markets (Source Adapted from Orozco-Martínez [2011])

21 22 23 25 44 44 46 48

74

77

103 110

ix

x

LIST OF FIGURES

Fig. 6.3

Fig. 6.4

Fig. 6.5

Fig. 6.6

Fig. 6.7 Fig. 6.8 Fig. 7.1

Fig. 7.2

Fig. 8.1 Fig. 8.2

Fig. 8.3

Fig. 9.1 Fig. 9.2 Fig. 10.1

Approximate Tequila and Mezcal export prices in peso and kg agave equivalent and Average Rural Price of agave in tequila and mezcal municipalities, 2003–2018 (Source Own elaboration with data from SIAVI and SIAP) Agave production and industrial distillation in the protected regions of the Tequila and Mezcal Dos (Source Own elaboration with data from Anuario Estadístico de la Producción Agrícola, SIAP 2018 and Censos Económicos, INEGI 2014) Exports as a proportion of total Tequila and Mezcal production (Source CRM (2019) and CRT Online Statistics (https://www.crt.org.mx/EstadisticasCRT web/)) Regulatory transformations in Tequila and Mezcal (Source Own elaboration based on Diario Oficial de la Federación) Key actors and their relationship in DO Tequila (Source Own elaboration based by means of Cytoscape) Key actors and their relationship in DO Mezcal (Source Own elaboration based by means of Cytoscape) Structure of the coffee chain in Mexico and sequence of added value 2017 (Source Own elaboration based on Pérez Akaki, 2010; Jiménez Porras, 2011 and Velázquez) El Salvador: Coffee Chain Structure (Source Own elaboration with data provided by the Salvadoran Coffee Council) Eight Coffee Producing Regions Location of micro-processing facilities in the Western valley region (Source Vazquez, A., Milan, M. and González, G) Motivational factors for producing coffee under a micro-batch scheme (Source Own elaboration with research data) Guatemala. Dry cocoa grain circuits (Source Own elaboration) Guatemala. Wet Cocoa Circuits (Source Own elaboration) Costa Rica: Corn production chain, 2019 (Source Own elaboration, based on data from interviews with producers, 2019)

111

113

114

116 124 125

145

146 171

175

181 196 197

227

LIST OF FIGURES

Fig. 10.2

Fig. 11.1

Fig. 12.1

Fig. 12.2

Fig. 12.3

Fig. 12.4

Fig. 12.5

Fig. 12.6

Fig. 12.7

Fig. 12.8

Chart 7.1

Southern Region: Corn marketing chain according to different branches, 2019 (Source Own elaboration, based on fieldwork, 2019) Queretaro: leading aerospace industry companies by large segments (Source Own elaboration, based on data from the Querétaro Aerocluster [ACQ] and SEDESU, 2016) Mexico. Foreign direct investment in the automotive sector, 2010–2019 (Thousands of million dollars) (Source Elaboration based on the FDI statistics of the Ministry of Economy, México [2019]) Mexico. Average annual growth rates of national gross domestic product, manufacturing and the automotive industry from 2010 to 2019 (Source Developed based on the statistics of the Bank of Mexico) Mexico. Vehicle production and exports, 2010–2019 (Number of units) (Source Developed based on foreign trade statistics, INEGI) Mexico. Main countries of destination for exports vehicles 2010–2019 (Number of units) (Source Developed based on statistics of INEGI) Mexico. Exports and imports of automotive parts and accessories, 2000–2019 (Thousands of millions of dollars) (Source Developed based on statistics from The Observatory of Economic Complexity) Number of automotive economic units, 2004–2018 (Source Own elaboration based on the INEGI Economic Census [2004, 2009 and 2015] and by 2018 the directories of DENUE companies (INEGI) and the different Automotive Industry Clusters of the different states were used) Foreign Direct Investment according to selected states, 2010–2018 (Millions of dollars) (Source Developed based on statistics of Secretary de Economy) Automotive industry exports by selected states, 2010–2019 (Millions of dollars) (Source Developed based on foreign trade statistics, INEGI) Price differences (Source CSC, figures recorded as of July 31, 2022)

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298

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300

300

301

306

309

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154

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LIST OF FIGURES

Graph 4.1

Graph 4.2

Map 9.1

Central American sugar agrichains: Detail of the percentage of services offered in the electronic portal of the IOPs, by country. Year 2019 (Source Own elaboration, with information from THE WEBSITES) Agro sugar chains in Central America: Detail of the number of items associated with services on the electronic portal of the IOPs, by country. Year 2019 (Source own elaboration, with information from THE WEBSITES) Guatemala. Distribution of production by region (Source Own elaboration with information from the Ministry of Agriculture and Livestock of Guatemala [MAGA])

72

73

193

List of Tables

Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 3.5 Table 3.6 Table 4.1

Table 4.2 Table 4.3 Table 4.4

Table 4.5

Table 4.6

Countries where the largest Global Value Chains are concentrated Correlation between variables analyzed Hierarchy values relief feature selection algorithm Clusters formed for the value chains of the different countries Characterization of each cluster by the averages of the four variables Correlations between Global Value Chains and the Global Innovation Index Central America. Importance of sugar in the economy. Participation in the volume of total production in Central America Summary of sugar agrichains in Central America Central America: Estimated average sugar production per mill Central America. Importance of sugar in total agricultural exports by country and trade flow, years 2000–2016 Central America: share of sugar export value and volume in the regional total, by country, 2000 and 2016 Central America. Percentage share of the main items in the value of sugar exports and imports by country studied, by by-products, 2000–2016

39 40 40 42 45 47

63 64 66

67

67

68

xiii

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LIST OF TABLES

Table 4.7

Table 4.8 Table 4.9

Table 4.10 Table 6.1

Table Table Table Table

6.2 6.3 6.4 7.1

Table 7.2 Table 8.1 Table 8.2 Table 8.3 Table 9.1 Table 10.1

Table 10.2

Table 10.3 Table 10.4 Table 10.5 Table 10.6 Table 10.7

Central America. Unit value of sugar per country according to trade flow, periods 2000–2002 and 2014–2016 (Three-period mobile average VU—$1,000/tons) Central America: Characteristics of the sugar agrichains’ IOPs Central American agro-sugar chains: Number of services offered by meso-level organizations, by year 2019 Sugar agrichains in Central America: Synthesis of production policies by country at the meso level Average current prices per 750 ml bottle in Mexico in the wholesale channel of different distillates from 2012 to 2019 Categories of Mezcal NOM-070-SFCI-2016 Identification of key players in Tequila D.O.T Identification of key players in Mezcal D.O.M El Salvador: Number of coffee producers in the year 2022 El Salvador coffee exports harvest as of 2021/2022 Variables included in the interview applied to producers/processors Profile of specialty coffee producers in the Western valley region in Costa Rica Actors involved in the marketing of coffee from micro-batches Guatemala: Types of chain governance by buyer type World: absolute and percentage distribution of millions of tons produced, exported, and imported from corn by country, 2018 Costa Rica: absolute and percentage distribution of tons produced, hectares sown and harvested from corn by country, 2017/2018 Costa Rica: regional corn prices dollars/ton, 2017–2018 Costa Rica: absolute distribution of the number of producers per canton, 2017–2018 Costa Rica: matrix of dimensions, variables, and indicators to be studied Southern Region: actors involved in the corn chain in the Southern Region, 2019 Costa Rica: main varieties of white grain seeds available in the country according to origin, 2019

69 70

74 76

112 119 121 123 148 149 174 176 178 199

217

219 220 222 224 225 228

LIST OF TABLES

Table 10.8 Table 10.9 Table 10.10

Table 10.11 Table 10.12 Table 10.13 Table 10.14 Table 11.1

Table 11.2

Table 11.3 Table 12.1

Table 12.2 Table 12.3 Table 12.4 Table 12.5 Table 12.6 Table 12.7

Southern Region: costs in corn production for one hectare according to quintals (Dollars), 2019 Costa Rica: corn input-product matrix according to quintal production (Dollars), 2019 Southern Region: producer Associations located in the Southern Region according to canton and district, 2019 Southern Region: characterization of corn marketing according to product type (Dollars), 2019 World: government institutions linked to agricultural activities, 2019 Costa Rica: government institutions linked to corn cultivation, 2019 Costa Rica: policies for the development of agricultural activities, 2019 Mexico: main segments (processes/products) with which Bombardier and Safran’s production activities are associated in Queretaro, 2006–2018 Projects and amounts of the PEI fund allocated to the aerospace sector (Projects undertaken and amounts allocated: 2009–2015) UNAQ: evolution in the training pattern and graduates, 2006–2019 Mexico. Main receiving Foreign Direct Investment (FDI) from the automotive sector, 2019 (Millions of dollars) Plants located in the western states of Mexico and main products Automotive companies located in the Western Region of Mexico, depending on the origin of the capital, 2019 Aguascalientes. Category of automotive industry suppliers, according to origin Guanajuato. Category of automotive industry suppliers, according to origin Jalisco. Category of automotive industry suppliers, according to origin San Luis Potosí. Category of automotive industry suppliers, according to origin

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233 234 238 240 242

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268 275

302 307 312 314 318 319 320

PART I

Global Value Chains Foundations and Empirical Facts in Latin America

CHAPTER 1

Global Value Chains Evolution in Latin America Pablo Pérez Akaki, Marisol Velázquez-Salazar, and Gilma Sabina Lizama Gaitán

In last decades, global value chains (GVCs) have become one of the most outstanding features of the twenty-first-century economy: market opening, financial liberalization and the international division of labor are

P. Pérez Akaki (B) Departamento de Contabilidad y Finanzas, Escuela de Negocios, Tecnológico de Monterrey, Atizapán de Zaragoza, Estado de México, Mexico e-mail: [email protected] M. Velázquez-Salazar Facultad de Ciencias Económicas y Empresariales, Universidad Panamericana, Mexico City, Mexico e-mail: [email protected] G. S. Lizama Gaitán University of El Salvador, San Salvador, El Salvador e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_1

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identified as some of the important factors in shaping these global value chains, which have become widespread by all countries. According to the World Development Report 2020. Trading for Development in the Age of Global Value Chains edited by the World Bank, the boost to global chains over the past 30 years has contributed to the countries increases in revenues, productivity improvements, poverty reduction, among others. This has resulted in a hyper specialization, which has meant both increased efficiency and productivity to many companies. To the extent that it is an important vehicle for the transformation of countries, the document underlines with concern that close to 80% of the reduction of international trade from the 2008 crisis took place in global value chains (UNCTAD, 2013). The strengthening of GVCs observed since the 1990s transformed country industrial specialization into specialization in specific firm functions, including research and development, acquisitions, operations, assembly, manufacturing, marketing, customer services, etc. (De Backer and Moroudot, 2014, cited in Cepal, 2020). ECLAC (2020) emphasizes that GVCs shaping is organized around three major economic epicenters: the United States in North America, China, Japan and South Korea in Asia and Germany in Europe, and therefore argues that they are more regional value chains than global. It is estimated that between 70 and 80% of global trade is currently linked to networks of transnational companies involving services, raw materials, parts and components. Also, trade of intermediate goods had increased in the past decades as proportion of total trade and at the same time trade of final goods had decreased (Degain et al., 2017). While the 2008 crisis has marked a brake on the growth pattern trade, the pandemic in 2020 is even more worrying because it has meant in various countries a closure of borders, as well as a temporary stagnation of productive activities. For example, in the Mexican case, the pandemic paralyzed the entire trade of the automobile production chains for two months, April and May 2020, affecting nearly 3.6 million people who depend on it, with 90 economic activities in the secondary sector and 70 in the tertiary sector (Aguilar & Lira, 2020). Similar effects have been reported in other countries and economic sectors. Recently, the World Bank (2019) warned that GVCs benefits are not necessarily homogeneous among society and may compromise the environment. In the same sense, ECLAC (2020) warns of ethically questionable working conditions and their sustainability over time, further highlighting their vulnerability to external shocks such as the pandemic.

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These effects will undoubtedly generate transformations in global chains soon, probably becoming risk management a fundamental discipline for its operations. This last years after the beginning of COVID-19, global value chains have increased their relevance now because of the process of nearshoring that began after different but profound problems of coordination for long chains and the variety of difficulties that experienced along the routes. The nearshoring is representing structural changes in the way value chains are organized, because that is related to locating manufacturing close to the markets, and in that way Latin America have good opportunities for upgrading on them.

1.1 Latin American Countries (LAC) in Global Value Chains Latin American countries have a very relevant history in international trade since the last decade of the twentieth century, when almost all countries decided to deepen the opening of their frontiers to trade and international investment. That means an aggressive reduction in both trade and non-tariffs barriers through free trade agreements, liberalization on financial markets and a reduction in government functions. Even those changes in trade policies, have gone beyond than other regions worldwide, particularly Asian countries, that represented lower incomes to them (De Gregorio, 2007). This openness to trade represented in twenty-first century new patterns of Latin American countries, where almost all of them have increased their commercial relations with the United States, becoming its first or second trade partner and having a positive trade relation balance (Hornbeck, 2014). This is also a consequence of the multiplication of agreements between the United States and Latin American countries in several formats. Patterns of trade also have changed in Latin American countries in last years. The important growth of China and India in global trade in last years, have affected the way LAC behave in global markets. As Lederman et al. (2008) found, trade patterns have changed diverging from China and India, except in the case of Mexico. This difference is characterized by LAC concentration in natural resource intensive sectors, like agriculture, fisheries, forestry and mining. These results are consistent with Hornbeck (2014) and Kosacoff and López (2008), who found that except

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for Mexico, Brazil and Costa Rica, trade of Latin American countries is mainly concentrated on textiles and commodities. Global Value Chains appeared also in Latin America as the model of trade in this period, boosting the exports and imports from the region, notably also increasing the portion of intermediate goods, especially goods chained with North America, Europe and Asia (Durán Lima & Zaclicever, 2013). This structure of trade is continuously mentioned by Latin American politics as the latest model for development of their societies because this is the way the international investments arrive to localities and promote employment. But after several years of global value chains construction and enforcement worldwide, and specially in Latin America, still several questions remain about their benefits and the promised upgrading in local societies. Gereffi (2015) showed that Latin American countries had different participation trajectories in GVC during the first decade of century, since excluding Brazil and Mexico, their participation were mainly in raw products without any transformation. That result was also confirmed by Cadestin et al. (2016). Evidently, that behavior could be disappointing for the underdeveloped countries that want to participate in GVC to boost their economies. An important finding was that of Mudambi (2008) who recognized that the higher added value processes of global chains are located in the higher-income countries, and the lower added value ones are located in lower-income countries, something that in fact slow the process of economic convergence expected in foreign investments. Several works later have confirmed that pattern (Degain et al., 2017; Meng et al., 2020). Even in sustainability terms, Rivera-Basques et al. (2021) affirmed that empirical studies showed that Latin American countries had been inserted in GVC mainly in the early stages of production, what also had ecological costs measured in the costs associated with expansion of the agricultural frontier, and the net use embedded in the exchanged goods of both water and carbon emissions. Some studies have been developed to identify the way Latin American firms can participate in GVC and take advantage of them. Among them, Stezano (2013) suggested several economic policies for small and intermediate firms in Latin America, including financial assistance, technological innovation, clustering, new markets creation, etc. Previous to the beginning of the pandemic of COVID-19, several doubts remain for Latin American countries participation in GVC,

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partially because of the contrasting cases that can be found when studying about them and the disappointing results for many industries. After COVID-19, new efforts arrived to these countries because of the nearshoring that offers new opportunities for them. Several countries in Latin America are not prepared for nearshoring, but Mexico has a different position according to a “reshoring readiness index” Pietrobelli and Seri (2023). That index considers different indicators such as digital adoption, use of internet, human capital, R&D expenditure, intellectual property rights, resilience and some others. Then, not all countries and not all sectors could benefit from this trend in global markets. According to Pahl and Timmer (2020), GVC participation was very important in the long run in productivity, but not in employment. That’s a disappointing result for many developing countries because several efforts are made for attracting investments that let local firms to engage in global value chains. These last results contradict the importance of GVC participation for local firms in developing countries as a model for economic growth and generate important questions about policies for attracting new investments and local spillovers. On those doubts, De Marchi and Alford (2022) found that state has a relevant role for reaching economic, social and environmental objectives and that they affect the strategy for participating that requires a multi-scalar appreciation of GVC dynamics. Another important trend in the last years in GVC analysis is the analysis of resilience on global value chains. A resilient chain is that one can absorb, sustain and adapt to shocks and disruptions (Pettit et al., 2010). Resilient chains emerge as a topic for discussion because of the troubles caused by pandemic crisis and the responses that gave some governments, like the case of medical supplies, as documented by Gereffi et al. (2022). Several of the changes that are related to nearshoring in GVC can be associated to strengthening resilience. The movements from traditional Asian countries to other countries closer to the markets are seen as risk managing strategies for consumers, and some of that movements are affecting Latin American geographies. But there’s also the question about how the Latin American chains are facing the structural transformations in the last years.

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1.2 The Efforts from Latin American Researchers to Understand GVC in Its Own Territories During recent years, many foreign investments oriented to involve Latin American territories in global value chains, have shown to society different meanings about their effects. In this sense, the permanent study of these effects in different countries, at different times, is one of the objectives of the Latin American Network of Researchers in Global Commodity Chains (REDILACG), founded in 2016 within the framework of the 53rd International Meeting of Americanists (53 ICA) in El Salvador and which has active work in recent years on the study of global chains. REDILACG’s life is manifested in regular meetings organized among its members, as was the one held in Mexico City in May 2019, which was hosted by the Universidad Panamericana. This Second Seminar of the Latin American Network of Researchers in Global Value Chains was entitled “Value Chains Towards a Global Future?” and was attended by academics from Costa Rica, El Salvador, Mexico, Cuba and Germany, with a total of 4 master lectures and 11 plenary presentations by members of the network where they showed their research advances and therefore nurtured this book. In this meeting, a first master lecture was held by Dr. Enrique Dussell Peters, researcher at the Faculty of Economics of the National Autonomous University of Mexico, who discussed the relevance of global value chains and their methodological aspects. Secondly, Dr. Carlos Salas Páez, academic from UNAM FES Acatlán, offered a reflection on the concern of the labor aspects related to global value chains. Likewise, Dr. Ramón Padilla Pérez, head of ECLAC’s Economic Development Unit, based in Mexico, gave a second master lecture on the then recent research results of a product input methodology to measure the depth of value chains in Latin America. Finally, Dr. Hansjorg Herr, a researcher at the Free University of Berlin, offered a reflection on the future of global chains given the evolution in his later years. From the plenary presentations presented on 13 and 14 May 2019, 12 chapters were obtained that make up this book. All of them tell about experiences of global chains of different types in Latin American countries. The themes mainly revolve on agrifood chains, where we find coffee as one of the most important on a recurring basis among the members of the network, being one of the emblematic products of value chains

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in Central America, but also for its high economic representativeness for those countries. The chapters of the book manifest clearly relevant questions made by researchers in different regions of Latin America, related to the effects in local territories, the upgrading possibilities and the role of leading firms when they participate in global value chains. That is why the chapters discuss about the governance and institutional dimensions of GVC, the barriers of local firms to participate in chains, innovation on chains and the way they are dealing with problems of climate change and unequal distribution of benefits. In this sense, the next chapters must be read as close observations of Mexico and Central America from researchers on global chains on specific problems identified in this form of international investment and about the specific problems that several countries, regions and economic sectors face. Several of them are then case studies that share the main problems in specific chains. The book focuses principally in the primary sector, what is defined as agroindustrial and agrifood chains, that allow readers to get a perspective from works about different products along the geographies that can show us that many of the problems are common. This book has specific analysis over coffee, cocoa, maize, sugar, Tequila and Mezcal, and geographically the studies relate to Mexico and Central America. This sample of works confirm the relevance of primary products in GVC in this region and let us know about the effects of chains reorganization in these last years. Another relevant characteristic about these works is the analysis of the chains with the original proposal of Gereffi, updated with the inclusion of recent discussions about competitiveness, quality, territorial development, alternative chains and more. The book is organized in four sections: The first section is referred to the foundation of Global Value Chains and empirical facts in Latin American chains. The second section was named Governance, Institutions and Hierarchies that focuses on cases that concentrate on those dimensions of GVC. The third section is devoted to case studies on agrifood and agribusiness and the last section focuses on case studies on skill and knowledge intensive industries. For the first section, it’s composed by three chapters. The first is this initial chapter that has the objective to present the current discussions related to GVC and contextualize the discussions along the book, as well as the main findings of them. The second chapter focuses on the evolution of Latin American countries in the global value chains and the main

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obstacles for increasing their participation. The third chapter is devoted to the discussion about innovation and the relevance of cluster formation for this goal. The second section contains also three chapters and all of them have as main objective to reflect on governance and institutions on value chains and the effects of different types of institutional arrangements have on governance, hierarchies and development. The fourth chapter of the book discusses about sugar agribusiness in Central America and the institutional structure and the type of policies that emerge from it. The fifth chapter makes a comparison from a governance dimension on two important chains in Mexico that also have geographical indication recognition. The sixth chapter, also focused on Mexico, made a general evaluation of Geographical Indications and the main barriers they face in a GVC analysis that impedes better results for the society and the participants of the chains in the first steps. The third section of the book contains four case studies in Central America and Mexico related to coffee, cocoa and corn. Coffee is one of the most important products in GVC analysis for many years and it remains relevant in the agenda for Mexico and Central America, as is shown in Chapter 7 that makes comparisons about coffee chains evolution in Mexico and El Salvador. Also Chapter 8 is dedicated to the study of coffee but in a new type of chains, the micro batch market for highly ranked coffee. Chapter 9 studies cocoa chains in Guatemala, another agricultural tropical product that, as the case of coffee, is of the top priorities for these countries because they are related to sustainability. And the last chapter of the section is about corn chains, the main food product for Latin American society and for the same reason the most important chain in terms of feeding. Finally, the fourth section consists of two chapters. Chapter 11 studies aeronautical chains in Queretaro and the way several participants organized to facilitate the prosperity of this chain and the last chapter is also very important for the Mexican economy because it studied the automobile chain in western Mexico and the local development of that type of investments.

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Main Findings of the Cases

Several findings can be featured from the chapters of this book that are pointed in the next lines. The first conclusion about the complete book and the composition of it is that in the second decade of the twenty-first century, agrifood chains discussions are of the top priorities for the region. That condition is a sample of the slow change in economic structures in Mexico and Central America and the perpetuate of the traditional structures of global value chains. That’s the main conclusion of the work of Yasmani Jiménez in Chapter 2. That’s the main conclusion of the work of Yasmani Jiménez in Chapter 2, who evidenced a low participation of Latin American economies in global chains and from that point he suggests privileging the formation of regional value chains, that can be anchored to the main hubs of the continent: Mexico and Brazil. A second conclusion of the book is that benefits of participating in global value chains are not automatically obtained and several times they can be considered as elusive promises of welfare, employment and economic growth, as the work of Antonia Terán-Bustamante and Antonieta Martínez-Velasco concluded in Chapter 3. Those findings are also present in case studies such as that of sugar from César Francisco Trejos Salazar and Rafael A. Díaz Porras in Chapter 4 who studied sugarcane chains in Central America and found strong heterogeneity in public policies that were finally related to the outcomes for society. In the same sense are the finding in Chapters 5 and 6, from Apolinar Zapata, Pablo Pérez Akaki, Nadia Viridiana Vega Vera and Yuritzi Paola Enriquez Caballero, that relates to geographical indications in Mexico and again they remember the “promise of development”,that seems far from being reached in practice. In that sense, a third conclusion of this book is the fundamental role of public authorities in relation to GVC participation of local firms and the spillovers that must be present. That participation is a way to mediate in the asymmetries between the dominant firms in the chain and the local firms, but also to include more than economic goals in the definition of success of GVC participation. That findings are found in several of the chapters, such as Fernando Samperio’s chapter about aeronautical industry in Mexico and the formation of the triple helix. A fourth conclusion, also related to the third one, is the participation in innovative chains and the efforts that local firms and producers

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must make to participate in GVC. That finding is present in both chapters of coffee, the one from Fernando Saenz-Segura, Alma Pérez Vázquez y Roselia Servin Juárez, and the chapter from Marisol Velázquez Salazar and Gilma Sabina Lizama Gaitán. Both of them showed that innovation is important for engaging in GVC but cannot be made alone with producers’ own resources, so public participation is fundamental to promote that type of investments. The same conclusion is recognized by Pablo Álvarez Olea in Chapter 9 related to cocoa chain, that needs to insert in new chains to upgrade in value, but this effort is impossible with agricultural producer own resources. Then, an articulation of the stakeholders of the chains is an imperative to make it sustainable. In the same sense the chapter of Álvaro Martín Parada Gómez and Francinie Jiménez Ureña that studies the corn production found the need for investments in innovation for boosting productivity and then competitiveness in the sector, where the public authorities are needed due the small scale and resources of producers. In addition to the initial investments, support is needed over time to face the challenges of production and marketing. Also, in automotive industry, participation in GVC is demanding for local firms in investments, innovation processes, developing of new capacities to deal with changes in qualities and products of the multinational enterprise, as documented by Angélica Basulto in Chapter 12. This condition is also present in the aeronautical chain in Querétaro. Both of them are considered strategic investments for the countries and implied government participation to create viable conditions for investment of multinationals. With this contribution, we want to show the relevant experiences in this region of the world and how GVC are affecting local economies and social life. We are confident that this effort will be well valued by scholars on the subject.

References Aguilar García, F. J., & Lira Moctezuma, A. (2020). La pandemia COVID19 y su impacto en la industria automotriz mexicana, 2020. Espacio I+D, Innovación Más Desarrollo, 9(25). https://doi.org/10.31644/IMASD.25. 2020.a04

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Cadestin, C., et al. (2016). Participation in global value chains in Latin America: Implications for trade and trade-related policy. OECD Trade Policy Papers 192. Cepal, N. U. (2020). América Latina y el Caribe ante la pandemia del COVID19: efectos económicos y sociales. De Backer, K., & Miroudot, S. (2014). Mapping global value chains. ECB Working Paper No. 1677, Available at SSRN: https://doi.org/10.2139/ssrn. 2436411 Degain, C., Meng, B., & Wang, Z. (2017). Recent trends in global trade and global value chains. Global Value Chain Development Report (2017). De Gregorio, J. (2007). El crecimiento económico de la América Latina. Del desencanto del siglo XX a los desafíos del XXI. El Trimestre Económico, 75(297), 5–45. De Marchi, V., & Alford, M. (2022). State policies and upgrading in global value chains: A systematic literature review. Journal of International Business Policy, 5, 88–111. Durán Lima, J., & Zaclicever, D. (2013). América Latina y el Caribe en las cadenas internacionales de valor. Gereffi, G. (2015). América Latina en las cadenas globales de valor y el papel de China. Boletín informativo Technit, (350), 27–40. Gereffi, G., Pananond, P., & Pedersen, T. (2022). Resilience decoded: The role of firms, global value chains, and the state in COVID-19 medical supplies. California Management Review, 64(2), 46–70. Hornbeck, J. F. (2014). US-Latin America trade and investment in the 21st century: What’s next for deepening integration? Interamerican Dialogue WP 2014. Kosacoff, B., & López, A. (2008). América Latina y las Cadenas Globales de Valor: Debilidades y potencialidades. Journal of Globalizacion, Competitiveness & Governability, 2(1), 18–32. Lederman, D., et al. (2008). Trade specialization in Latin America: The impact of China and India. Review of World Economics, 144, 248–271. Meng, B., et al. (2020). Measuring Smile curves in global value chains. Oxford Bulletin of Economics and Statistics, 82(5), 0305–9049. Mudambi, R. (2008). Location, control and innovation in knowledge-intensive industries. Journal of Economic Geography, 8, 699–725. Pahl, S., & Timmer, M. P. (2020). Do global value chains enhance economic upgrading? A long view. The Journal of Development Studies, 56(9), 1683– 1705. Pettit, T. J., Fiksel, J., & Croxton, K. L. (2010, March). Ensuring supply chain resilience: Development of a conceptual framework. Journal of Business Logistics, 31(1), 1–20.

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Pietrobelli, C., & Seri, C. (2023). Reshoring, nearshoring and developing countries: Readiness and implications for Latin America. UNU-MERIT. UNU-MERIT Working Papers No. 003. Rivera-Basques, L., et al. (2021). Unequal ecological exchange in the era of value chains: The case of Latin America. Ecological Economics, 180, 106881. Stezano, F. (2013). Políticas para la inserción de las microempresas y las pequeñas y medianas empresas en cadenas globales de valor en América Latina. CEPAL. UNCTAD. (2013). World investment report 2013. Global value chains: Investment and trade for development. United Nations Conference on Trade and Development, United Nations Publication. World Bank. (2019). World development report 2020: Trading for development in the age of global value chains. The World Bank.

CHAPTER 2

Latin American Economies in Global Value Chains: Main Evidence Yasmani Jimenez Barrera

2.1

Introduction

In the last quarter century, an extensive bibliography has been written on the forms and dynamics of economic insertion in the globalization context. However, forming global and regional value chains is still the aim of different theoretical approaches that detail possible integration strategies of economies in selected production processes or stages of the production, distribution, and marketing of goods and services. The research objective of this paper is to analyze the main empirical evidence of selected Latin American economies (Argentina, Brazil, Chile, and Mexico) in GVCs. For this purpose, the methodology used is the processing of the Trade in Value Added (TiVA) database of the Organization for Economic Co-operation and Development (OECD). The

Y. Jimenez Barrera (B) Department of Economics and Business Management, University of Alcala, Alcalá de Henares, Spain e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_2

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first part of the paper focuses on a theoretical discussion of the analytical framework of GVCs and their current situation. Subsequently, the involvement of the selected Latin American economies is shown, and finally, some conclusions are offered.

2.2

The Analytical Framework for Global Value Chains

Significant transformations in the world economy have risen in the last four decades. The accelerated technological change in global capitalism has created a scenario conducive to disseminating stages or segments of production in spaces that are geographically distant from each other but at the same time have a functionality that allows economy to operate in real time. This paradox has resulted in a field of study recently incorporated into the specialized literature on international trade: global value chains (GVCs). The concepts of governance and promotion have been changing over time. Gereffi and Fernandez-Stark (2016: 7) propose a new view on both. As they indicate, there are three dimensions on a global level: (1) Input–output structure, which describes the process of transforming raw materials into final products; (2) Geographic scope, which explains how the industry is globally dispersed and what countries the different GVCs activities are carried out; and (3) Governance structure, which indicates how the value chain is controlled by the leading firm. There are three other dimensions: (4) Upgrading, which describes the dynamic movement within the value chain by examining how producers shift between different stages of the value chain; (5) Local institutional context in which the industry value chain is embedded in local economic and social elements, and finally (6) Industry stakeholders, which describes how the different local actors of the value chain interact to achieve industry upgrading. According to Daly and Gereffi (2017), there are currently two dimensions of industrial scaling or upgrading: economic and social. While economic upgrading describes how firms or countries can add value to their production or move into high-value activities, social upgrading condenses measurable improvements in quality (type of employment, wages, working hours, and social protection) and the possibility of workers’ rights (right to collective bargaining, freedom of association, and non-discrimination). Humphrey and Schmitz (2002) argue that in

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addition to the types of upgrading discussed above, there are process upgrading—an efficient transformation of inputs into outputs, product upgrading—moving into more sophisticated product lines, functional upgrading—acquiring new functions to become more skilled in their activities, and inter-sectoral or chain upgrading—moving into a new sector using the skills developed. Gereffi and Fernandez-Stark (2016) add value chain entry upgrading— when firms participate for the first time in national, regional, or global value chains, backward linkage upgrading—when local firms start offering traditional inputs and/or services to companies that are located in the country and are almost separated in a GVC, and end-market upgrading may include movements into the most sophisticated markets that require compliance with new and more rigorous standards or into larger markets that call for production on a greater scale and price accessibility. Buyer-driven chains (BDCs) have diverted focus away from empirical studies, since producer-driven chains (PDCs) mostly represent global oligopolies, which control their manufacturers at the place of origin. According to Gereffi et al. (2005: 83–84), there are five types of governance: (1) Market; (2) Modular, (3) Relational, (4) Captive, and (5) Hierarchy. “(…) we can identify and discuss three variables that play a large role in determining how global value chains are governed: the complexity of transactions; the ability to codify transactions; and the capabilities in the supply-base” (Gereffi et al., 2005: 84). There are three “determining variables” in the governance structure of GVCs: (1) The complexity of transactions, indicating the degree of difficulty in communicating supply and demand, information and knowledge between goods and services, (2) the ability to codify transactions, bringing the designed requirements to completion and achieving customer satisfaction, in other words, to convert complex knowledge into industry-wide standards. Meanwhile, (3) the capabilities in the supply-base indicate the level of buyer demand satisfaction, the ability of suppliers to meet transaction requirements. Peripheral companies face upstream problems when basing their strategies on the chain context. Thus, integration in GVCs is successfully achieved by combining learning with endogenous competences and strategic assets. A suppliers’ network based on the development of endogenous capabilities is of paramount importance. The message is clear: the forming process of regional value chains and productive linkages through learning that deploys technological change (Ali et al., 2022;

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Rodrik, 2018), are the key to the development process under current conditions.

2.3

Status of Global Value Chains

The slowdown in trade has been one of the main trends in the global economy in recent years. Following the outbreak of the COVID-19 pandemic, there have been problems in supply networks and bottlenecks in GVCs, which have affected both producers and consumers at the international level. GVCs, which grew substantially in previous decades, have reduced their expansion, forming regional value chains (RVCs). The ratio between external and domestic value added of world exports shows a value of 8.4% between 1995 and 2007, while in the 2010–2015 period it was estimated at 2.5% (ECLAC, 2017: 127). The coexistence of GVCs and RVCs has received very little attention in the scientific literature, mainly because of its implications for economic development and international trade. It is worth noting that in recent years, services in GVCs have grown a lot (Hernández et al., 2016). Although the pandemic has boosted telework and digital transformation, it has been shown (Ali et al., 2022) that there is a positive correlation between the deployment of new technologies and how countries participate in GVCs. According to several authors (Auboin & Borino, 2017; Constantinescu et al., 2015; Dollar et al., 2017; ECB, 2016; OECD, 2016), GVCs’ growth has been restricted since 2011. The external value of exports has shrunk to less than 30%. As a result, GVCs have slowed down their global expansion and have become more regional. GVCs have a strong regional component, whereby the most dynamic regions in the forming process of productive linkages have been called factories of regional character. The “North American factory” is made up of the USA, Canada, and Mexico, the “European factory” is centered around Germany, France, Great Britain, and other European Union countries, while the “Asian factory” is made up of China and the remaining East Asian countries. The changes in the global production structure are due to several factors: among them, in addition to the protectionist wave, they mention the substitution of domestically produced intermediate goods by imported intermediate goods in the most economically dynamic emerging economies. This factor is essentially a result of a change in the Chinese economic model, which has been reoriented toward its domestic market.

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This is an organizational restructuring conditioned by the maximum reduction of transaction costs. According to estimations by Constantinescu et al. (2015), the reduction in Chinese imports of parts and components reflects the increase of domestic value added in their exports. Within this trend, there has been a notable reorientation of chains toward Asia, given its low labor costs and high intra-regional trade. It is not surprising that the most significant upgrading has occurred in China much more than in other emerging economies. They also argue that technological innovation intensified the domestic division of labor in developed economies such as Japan and the USA. This last element suggests that the process of international production fragmentation has slowed down. GVCs involve very specific types of integration, where offerors that need to meet the quality standards demanded by the leading firm are marginalized. This is not a minor issue, the growth of GVCs has been one of the main drivers of the changes in the relationship between developed and underdeveloped countries. As a result of the emerging division of labor of the last three decades, developed economies have specialized in high-skill intensive activities, while underdeveloped economies have concentrated on capital-intensive production. In this context, essential modifications have spread in the irruption of new technologies, which have enabled “servicification” and “new disruptive technologies” (Bamber et al., 2017). According to these authors, the digitization of supply chains based on the implementation of analytical tools (3D printing, autonomous robotics, simulations, cybersecurity, virtual clouds, etc.) in the so-called “industry 4.0” has revolutionized the GVCs. In addition, servicification has boosted companies such as Google, Amazon, due to the payment for subscription services. In recent years, services have reached unsuspected levels in developing economies such as India, China, and Thailand, where business services greatly attract foreign investment. Modern services are currently the fastest growing, while trade in goods has declined rapidly in the last decade. What began as call centers, mainly from the USA, have been gradually transformed into sophisticated services, such as business services, data analysis, and research and development (Alvarez et al., 2020). Latin American countries have been slowly inserting themselves into these new trends (Hernández et al., 2014), but still represent a marginal proportion within all regions participating in these trade flows.

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2.4

Main Evidence of Latin America’s Insertion in Global Value Chains

This section presents empirical evidence on the potentialities and limitations of the region’s economies in their GVCs insertion process, as reported by the OECD’s TiVA database and other ECLAC statistics. For this purpose, we begin with the limitations and just after the potentialities, grouped according to their level of impact on the insertion process in GVCs. Limitations on Latin American Insertion into GVCs Since the end of the 1950s, the importance of productive linkages in economies for their economic development has been evident. Figure 2.1 shows the behavior of regional productive linkages by country. According to these figures, Mexico has backward linkages in just over 20% of its sectors and forward linkages in just over 40%, which is consistent with the maquila industries. Argentina shows a similar situation but with slightly lower backward and forward linkages than Mexico. Brazil has forward linkages exceeding 50%, while backward linkages are around 30%. Chile has 40% forward linkages and more than 30% backward linkages. On average, the region’s economies are backward chained with 28% of their sectors and forward chained with 48% and with a very low value in the regional GDP. It follows from the above that there is weak participation in GVCs, due to the low value of productive linkages in the regional GDP, even less when backward linkages are less significant. A study published by Banga (2013) estimated that 65% of the value added in GVCs corresponds to OECD member countries, while only 3.5% of the rest corresponds to Argentina, Brazil, Chile, and Mexico. In general terms, linkages represent 4% backward and 8% forward—deficient and barely irrelevant for active participation in GVCs—making it challenging to create regional value chains. Let us examine participation in GVCs. Low Participation in GVCs The implications of productive linkages in the development process are essential for developing economies considering their success depends on it. Low participation in backward linkages hinders job creation and the

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Fig. 2.1 Latin American economies: Rasmussen-Hirschman Index, 2018 (Source Durán [2018: 19])

figure of value added per dollar exported. Greater forward linkage participation is evidence of insertion with low value added and few possibilities of integration into productive domestic linkages. Let us analyze available statistics for seven Latin American economies in the TiVA database. According to Fig. 2.2, backward participation decreased in almost all Latin American countries between 1995 and 2018. The Mexican economy has the highest share of linkages in its GDP. However, it greatly exceeds other economies, reaching twice Costa Rica, three times Chile, Colombia, Brazil, and Peru, and even five times Argentina. Even so, the Mexican economy has lost ground in terms of development in the period mentioned above, which has much to do with its participation in the trade agreement with the USA and Canada and the marginal role of the maquila industries in the country’s development levels. For the rest of the economies, the situation is much more severe. Costa Rica, which also has strong links with the USA and has managed to attract companies such as Intel to the country, has also witnessed a reduction in its backward participation in GVCs, especially after the 2008 financial crisis. On the one hand, Colombia has remained almost in the same position during the period and Brazil, on the other hand, has increased slightly to nearly double its low participation to below 10%. Peru has increased its linkages similar to Brazil and Colombia, while Argentina ends the period with 5% of its GDP chained to leading sectors in economic

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Fig. 2.2 Backward participation of Latin American economies in GVCs, 1995– 2018 (Source Author’s elaboration)

development. This means that, in the almost quarter of a century above analyzed, the most important sectors in the development process of Latin American economies participated marginally in the GVCs. In other words, they missed opportunities for economic development. On the contrary, an examination of forward linkages in Fig. 2.3 shows another reality. The economies with the lowest backward linkages are those with the highest forward linkages. The growth of Peru and Chile stands out, to a greater and lesser extent, respectively, and their marked increase since 2003 with the boom in raw materials prices. Peru passed from 20% approximately of GDP in 1995 to 25% in 2002, and its growth in 2011 exceeded 30%. Chile, with a similar trend to the previous one, participated in 1995 in around 15% of its GDP in forward linkages, but in 2007 and after being almost around 25%, it fell steadily with a slight rebound in 1995. Colombia and Brazil have followed an almost identical path. Although Colombia grew slightly more, its share between 1995 and 2018 was around 15% of GDP. In the case of Argentina, it had a slight increase between 1995 and 2018, starting from approximately 7% and barely exceeding 10% in the last estimated year. Mexico managed to be around 7% for the entire period above analyzed and, although it participated in the 2003 raw materials boom, it declined to the level of 1995 after an erratic behavior in 2011. Costa Rica is the Latin American economy with the lowest forward linkages, remaining in the range of 5% and 7% in the

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Fig. 2.3 Forward participation of Latin American economies in GVCs, 1995– 2018 (Source Author’s elaboration)

24 years analyzed. As a conclusion, except Mexico and Costa Rica, the other Latin American economies examined above participate steadily with their forward linkages in the GVCs.

2.5 Potentialities of Latin America’s Insertion in Global Value Chains Strategic Geographical Position to Supply the USA Market Geographical proximity to a manufacturing power has been a determining factor for the countries around it in forming productive linkages with the leading country. Thus, the outsourcing of tasks and productive processes resulted in technological spillovers and the transfer of expertise to less developed economies. At the same time, the reduction of transportation costs guarantees bilateral trade in less time and with better responses to changes in product demand. The search for lower wage costs attracts linkages between the leading country and geographically closer economies, which reflect the regional functioning of GVCs or, in other words, the forming process of RVCs around the USA.

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Growing Domestic Market According to OECD/CAF/ECLAC (2018), developing the textile and electronics industries offers extensive possibilities for regional value chains. Argentina, Brazil, and Mexico have potentialities in the automotive industry. Brazil has wide possibilities of becoming a driver of South American regional value chains. The geographical barriers imposed by the Andes and the Amazonia to the forming process of transportation and communications networks must be removed to achieve productive integration. Figure 2.4 shows the growth of intra-regional trade of its leading economies, although the downturn due to the pandemic is noticeable in their similar behavior. Nevertheless, integration between Brazil and Mexico would complement each other to create a regional trade zone in which South America’s natural resources potentialities and Mexico’s maquila capacities would be exchanged focusing on the North American market. The region itself is the primary market for exports of a wide range of products, with the manufacturing market being the most important. More than 649 million inhabitants of the region constitute a relevant domestic market that is still under-exploited, which is a sensitive issue because there are many economic integration schemes throughout the region and, far from integration per se, there is a certain disintegration between subregions and countries that compete with each other and need to complement each other adequately.

2.6

Conclusions

The international expansion slowdown of global value chains since 2011 has regionalized them around three major manufacturing hubs, reflecting RVC’s possibilities for regional economic integration. The insertion of Latin American economies in global value chains has been very low regarding higher value-added links, while focusing on forward productive linkages. It resulted in participation where the leading companies take the benefits that cannot be reaped domestically. These Latin American economies come with several limitations and potentialities for a better insertion in global value chains, which have deepened the limitations and demonstrate the region’s weak participation in them. The few productive linkages have low participation in regional GDP that, together with the greater number of forward linkages in most

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Fig. 2.4 Total intra-regional trade in goods in millions of dollars, 1995–2021 (Source Author’s elaboration)

economies, has limited their progress to economic development. As a limitation, this paper focuses on the most important economies, but more is needed to analyze the magnitude of the research problem. The dynamics of international trade only conceives economic development with the operation of regional value chains, and it is precisely at this point that regional economic integration gains strength. Efforts to achieve convergence between their economies are more necessary than ever. They require forming regional productive linkages based on the complementarity of two large economies such as Mexico and Brazil that would

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need progress in political integration and agreement between different economic models.

References Ali, E., Gniniguè, M., & Awade, E. N. (2022). Sectoral value chains and environmental pollution in Africa: Can development policies target digitalization and structural transformation to enhance environmental governance? Journal of Environmental Economics and Policy, 1–19. https://doi.org/10.1080/216 06544.2022.2110163 Alvarez, M., Fernández-Stark, K., & Mulder, N. (Eds.) (2020). Governance and export performance of modern services in Latin America and India. LC/ TS.2019/112-P. Economic Commission for Latin America and the Caribbean (ECLAC). Auboin, M., & Borino, F. (2017). The falling elasticity of global trade to economic activity: Testing the demand channel. World Trade Organization. https:// www.wto.org/english/res_e/reser_e/ersd201709_e.pdf Bamber, P., Brun, L., Frederick, S., & Gereffi, G. (2017). Chapter 1: Global value chains and economic development (pp. 1–17). Duke Global Value Chains Center. Banga, R. (2013). Measuring value in global value chains (No. RVC8). UNCTAD Constantinescu, C., Mattoo, A., & Ruta, M. (2015). The global trade slowdown: Cyclical or structural? IMF Working Paper (15/6). Daly, J., & Gereffi, G. (2017). Tourism global value chains and Africa (pp. 1– 25). WIDER Working Paper No. 2017/17. United Nations University World Institute for Development Economics Research. Dollar, D., Reis, J. G., & Wang, Z. (Eds.). (2017). Global value chains report 2017. Measuring and analyzing the impact of GVCs on economic development, international bank for reconstruction and development. The World Bank, Organization for Economic Co-operation and Development, Research Center of Global Value Chains and the World Trade Organization. Durán, J. E. (2018). Cadenas de Valor e integración regional: El aporte de las MIP. Latin American and Caribbean Economic System, ECLAC presented at Seminar: Prospective Vision of Latin American and Caribbean Integration, Mexico City. ECB. (2016). Economic bulletin (Issue 6/2016). https://www.ecb.europa.eu/ pub/pdf/ecbu/eb201606.en.pdf?736d49e8295d82ec1762c76d09812ef8 ECLAC. (2017). Economic survey of Latin America and the Caribbean. Gereffi, G., & Fernandez-Stark, K. (2016). Global value chain analysis: A primer. Duke Center on Globalization, Governance & Competitiveness. https:/ /www.cggc.duke.edu/pdfs/Duke_CGGC_Global_Value_Chain_GVC_ Analysis_Primer_2nd_Ed_2016.pdf

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Gereffi, G., Humphrey, J., & Sturgeon, T. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78–104. Hernández, R., Hualde, A., Mulder, N., & Sauvé, P. (2016). Innovation and internationalization of Latin American services. Hernández, R. A., Martínez-Piva, J. M., & Mulder, N. (2014). Global value chains and world trade: Prospects and challenges for Latin America. ECLAC Books, No. 127, Economic Commission for Latin America and the Caribbean (ECLAC). Humphrey, J., & Schmitz, H. (2002). How does insertion in global value chains affect upgrading in industrial clusters? Regional Studies, 36(9), 1017–1027. OECD. (2016). Cardiac arrest or dizzy spell: Why is world trade so weak and what policy do about it? OECD Economic Policy Paper No. 18. 5jlr2h45q532en.pdf (oecd-ilibrary.org) OECD/CAF/ECLAC. (2018). Latin American economic outlook 2018: Rethinking institutions for development. Éditions OCDE. https://doi.org/10. 1787/leo-2018-es. Printed in United Nations. Rodrik, D. (2018). New technologies, global value chains, and developing economies (No. w25164).

CHAPTER 3

Global Value Chains: Production and Innovation Clusters Antonia Terán-Bustamante and Antonieta Martínez-Velasco

3.1

Introduction

In recent decades, international production and trade structure has changed radically. Global value chains (GVCs) are transforming the international flow of goods, services, investments, know-how, and human capital (Baldwin, 2006). As a result, a series of changes have been generated that reflect significant opportunities for companies to expand their exports, diversify their production, and access new information and communication technologies and transport services (Solaz, 2016). The forms of organization to produce goods and services and their mechanisms of international marketing have become more complex.

A. Terán-Bustamante (B) Facultad de Ciencias Económicas y Empresariales, Universidad Panamericana, Mexico City, Mexico e-mail: [email protected] A. Martínez-Velasco Facultad de Ingeniería, Universidad Panamericana, Mexico City, Mexico e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_3

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Products are no longer manufactured in one place but result from a series of production processes carried out in several countries (Peters, 2018). All these stages of the production process, from the conception of the product (research and development), the manufacture of the components, the assembly or integration, distribution, and commercialization, are carried out worldwide (Díaz & Rozo, 2015). As a result, each stage of the production process has become fragmented (Antràs et al., 2012)— both in simple and sophisticated goods/services. By the above, companies not only depend on the development of their capacities but also on the capabilities of the environment where they operate, on the infrastructure provided by the country, which allows scaling—upgrading—of the global production networks that it generates their links and relationships and supportive public policies. According to Gereffi (2009) and Humphrey and Schmitz (2002), the concept of scaling (upgrading) allows describing the improvements made to the value chain that are reflected in organizational competencies, in the position of companies in global industries, in their competitive advantages and profitability. Therefore, it is necessary to carry out analyses at the systemic level (Peters, 2018) to analyze the added value of global chains better. For Gereffi (2018), the analysis of these global chains has as its fundamental purpose to determine what makes companies productive and innovative in the international context, how the governance—corporate— of the productive sector and public policies influence their performance, and what factors and strategies allow companies to move to higher value segments of the chain. In addition, the concept of governance that examines how corporate power can actively shape the distribution of benefits and risks in an industry must be kept in mind in the analysis. This is because power in global value chains is exercised by leading companies. Despite having extensive literature regarding the analysis of Global Value Chains (GVC) and their added value, with all the complexity and dynamism they present, today it is complicated to analyze the added value they generate, significantly transforming the ability to interpret global production. The form that foreign value added takes in production is very diverse, ranging from very simple structures to structures with value created sequentially in a series of stages, with multiple parts and crossing borders several times. Therefore, this research aims to analyze the impact on global value chains at the country level through the added value of participation

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through conglomerates with the clustering technique. Furthermore, it is intended to analyze the value chain from a methodological perspective that allows analyzing countries in groups with the most significant similarities between them and differences concerning the countries of another cluster. The present work is organized into three sections: the first addresses the theoretical framework where the importance of global chains is conceptualized, characterized, and highlighted, as well as their typology. The importance of upgrading is also highlighted as a dynamic and complex process that entails innovation and causes an increase in the added value provided by a company within a value chain. The second section presents the methodological strategy used in analyzing added value with machine learning techniques, and the third section presents the results, discussion, and conclusions.

3.2

Literature Review

Global Value Chains: Conceptualization, Importance, and Typology The processes of globalization and the participation of multinational companies to generate more benefits and savings have focused them on the search to add more value in each part of the production chain, giving them a highlight to be more competitive to get greater preference for the consumer. Thus, multinational companies allocate their productive activities to different geographical regions that provide them with more added value (Sandoval, 2015). Therefore, a fundamental element in international production and trade analysis is global value chains (GVCs). According to Baldwin and Venables (2013), a global value chain (GVC) is the series of stages in producing a product or service for sale to consumers, and each stage adds value. It involves a combination of physical transformation and the entry of various services (Kaplinsky, 2013). Production processes are currently structured in several stages and often occur in more than one country. To manufacture a product, companies source intermediate inputs from several suppliers, and in many cases, these suppliers are located abroad. As a result, each stage adds value to the production process, and products can cross borders several times before finally being consumed. This international production-sharing agreement is known as a Global Value Chain (GVC) (Gunnella et al., 2019). That

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is, a GVC divides the production process between different countries. As a result, companies specialize in a specific task and do not produce the entire product (World Bank, 2020). Trade related to GVCs over the past two decades has seen significant economic growth in many countries worldwide. Reductions in transportation and communication costs and the lowering of trade barriers have driven this openness. However, the benefits of trade have not always accrued to all; many countries do not have the human, institutional, and infrastructure capacity—trade capacity—to participate effectively, coupled with the rise of protectionism and threats to global and regional trade agreements. In addition, new technological developments such as robotics, big data, and the Internet of Things (IoT) have begun to reshape further and transform GVCs (World Trade Organization, 2019). According to the World Trade Organization, more than two-thirds of global trade occurs through global value chains (GVCs), in which production crosses at least one border, usually many borders, before final assembly (World Trade Organization, 2019). Global Value Chains (GVC) and Global Production Networks (GPN) as Part of Upgrading For Coe et al. (2008a, 2008b), a production network is, in essence, the nexus of interconnected functions, operations, and transactions through which a specific product or service is created, produced, distributed, and consumed. Then, a global production network is one whose interconnected nodes and links extend spatially across borders and, in doing so, integrate parts of different national and international territories. Furthermore, it is a network whose fundamental purpose is to create value by transforming inputs into goods and services. According to Breul (2020), production processes in the global economy create two forms of networks: organizational and geographical. The former involves complex interactions within and between different firms and actors from other firms that constitute production networks— global production networks (GPNs). The second represents networks of economic activities based on particular geographies. Both networks are completely interrelated. In these two forms of networks, the different processes of sequential transformation are captured from inputs through the stages of transformation to products and up to distribution and final consumption, a sequence in which each

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stage adds value to the process of production of goods or services, and in which both networks are combined. It is at these different spatial scales of location that production activities overlap, mutate, and reconstruct themselves, where most of the trade consists of parts and components. At the same time, according to Gereffi (2001), three elements define scaling: 1. The first is related to the sequences of the export process as a contingent feature of industrial ascent (Gereffi, 2001: 32–33). 2. Secondly, it is related to organizational learning to improve the position of firms and/or nations in international trade and production networks (Gereffi & Tam, 1998: 22). 3. The third, in which physical and human capital is required, but also social capital (Gereffi, 2001: 33).

Global Value Chains and Innovation Innovation is an essential factor in the economic growth of countries in the way they face the economic crisis that we are currently experiencing and even more so in the process that leads to social welfare (TeránBustamante and Colla-De-Robertis, 2018). In other words, innovation is crucial for countries’ growth and sustainable economic development. Participation in Global Value Chains (GVC) is a crucial opportunity, especially for less developed countries. In these chains, the firm learns and accesses knowledge through the insertion of its company in the value chain, through the intermediate goods and services that they sell and that are dispersed in the various production processes fragmented internationally (De Marchi et al., 2018), which can allow them to innovate. According to Marchi et al. (2018), there are three types of innovators in GVCs: The first group is the leading innovators, characterized by high innovation levels and the use of all possible learning channels within the GVC. In particular, they interact directly with leading companies to train local staff. In some cases, innovation is induced by the need to meet the strict production standards imposed by leading companies, which is often achieved thanks to additional learning to the GVC. In addition to the intensive use of learning channels within the chains, innovation activities benefit from links with local actors (e.g., suppliers, universities, and

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business associations) and the imitation they can make from their best practices. The second group is autonomous innovators. For them the knowledge to generate innovation through the GVC channels is limited, because they mainly receive knowledge from the leading company to perform a small range of tasks and have face-to-face interactions with the managers of the leading companies. These companies do not take advantage over other GVC learning channels and depend almost entirely on internal R + D. To sustain their innovation effort, these companies gain knowledge from hiring skilled employees (often returnees or expatriates) and through capital agreements (acquisitions, joint ventures, licensing). These arrangements are often considered the most relevant, allowing for rapid and practical innovation. Finally, the third group is formed by marginal innovators, characterized by local firms having introduced only new, organizational, or product innovations for the company. They do not conduct research and development (R + D) internally, and the weakness of their local innovation system is that it does not encourage the use of local learning sources. Moreover, they only rely on GVC knowledge to a certain extent (De Marchi et al., 2018). According to the World Bank (2020), there are four types of participation of countries in global value chains based on their regularities of integration which can be backward or forward participation, which is in commodities, limited manufacturing, advanced manufacturing and services and innovative activities. Another critical factor in innovation in GVCs is technological innovations, as they have reduced transport and communication costs and have made it possible to break down the different stages of production at increasingly precise levels (Baldwin, 2006). In addition, new digital technologies, such as robotics and big data, are reshaping them, creating new opportunities for participation. Monge and Salazar-Xirinachs (2016) affirm that to achieve sustained economic growth, a country requires, in addition to having factors of production—investment, capital, and human—it also needs to continuously incorporate technology and knowledge in its production processes, the above, because learning processes and the incorporation of technology bring with them more innovation—in its various modalities—but also investments to increase productivity and competitiveness.

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According to Ramírez (2014), a significant advance in the case of services has been precisely related to information and communication technologies, which has given rise to increasingly complex systems of data and information exchange through all geographical limits. Also, ICTs have contributed to the standardization of many service activities, making it possible to increase commercialization between service providers and clients with geographically dispersed locations. For that reason, policymakers have to ensure that all share the benefits and that there is the proper use and adoption of these information and communication technologies. Following the above, it is essential to highlight that the ability of companies to learn, improve, and innovate in global value chains (GVC) is influenced by knowledge flows within these complex global networks and by institutional and national systems in which they are integrated (Hernández et al., 2014; Ramírez, 2014). Global Value Chains, Production Activities, and Value Added According to Wang et al. (2017), production activities are divided in GVCs into four types, depending on whether they involve sharing production between two or more countries, as follows: I. The first type is the value added produced at home and absorbed by final domestic demand without involving international trade. No factor content crosses national borders throughout the production and consumption process, i.e., it uses the value added of other countries to produce for domestic use. II. The second type is a domestic value added embodied in exports of final products, i.e., traditional trade: products are made entirely by factors, and factor content crosses a national border once only for consumption. III. The third type is a domestic value added embodied in the intermediate trade of a country’s sector used by the partner country to produce its domestically consumed products or a foreign value added imported directly from partner countries and used for domestically consumed products. The factor content is used in production outside the country of origin and crosses a bordering country once for production.

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IV. The fourth type is the value added embodied in intermediate exports/imports that a partner country uses to produce exports (intermediate or final) for other countries. In this case, the factor content crosses a national border at least twice, which is why it is known as GVC complex activities. That is, use the value added of other countries to produce their gross exports. Production activities in the first two types are carried out entirely within national borders, and there is no exchange of production between countries. However, the latter two types cross national borders (World Trade Organization, 2019). Clusters and the Impact on Global Production Chains Several countries have achieved productive transformation through industrial policies that include support for the development of clusters or agglomerations of companies within a value chain and a specific geographical area in such a way as to forge links that reduce information asymmetries, generate externalities such as knowledge transfer, the development of economies of scale, among others. All of the above results from better coordination of actions between companies (competitors, customers, and suppliers) and other organizations (universities, technology centers, vocational training centers, public institutions, and government). Moreover, these insertion forms open the way to achieve escalation processes— upgrading—toward the most complex activities. Because they allow moving to endogenous learning processes and the construction of new competencies (Moncaut et al., 2017), according to the above, clusters are the integrating element that consolidates the competitive advantage. Upgrading: The Link Between National Science, Technology, and Innovation System and Global Value Chains Currently, service activities associated with the complexity of global value networks are a characteristic of the dynamism of the world economy. Given this panorama and the increasingly stringent demands by leading companies in terms of quality, consistency, and speed of response, each country’s National Science, Technology, and Innovation Systems play a crucial role in the dissemination, transfer of knowledge, learning, and

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improvement of business skills. Moreover, this dissemination and absorption of knowledge positively impact Global Value Chains since companies have been forced to improve their skills, driven by the most complex activities with the highest added value. However, it is not enough for companies to be exposed to external knowledge to improve their capabilities; they, too, must make significant efforts to internalize, adapt, and use that knowledge (Coe et al. (2008a, 2008b); Humphrey & Sturgeon, 2005; Morrison et al., 2008; Ramírez, 2014).

3.3

Methodology

The present research is quantitative. The analysis uses the database published by UNCTAD-Eora Global Value Chain (GVC), which provides global coverage of 189 countries and a region of the rest of the world on crucial GVC indicators (UNCTAD, 2019). The Eora dataset provides input–output data at the global level to estimate value added in trade (Casella et al., 2019). The analysis is performed through machine learning techniques. The variables analyzed are: I. foreign value added—external value included in a country’s exports—(Foreign Added FVA), II. domestic value added— domestic value included in a country’s exports—(DVA Domestic Value Added) and indirect value added—(Indirect Value added Exports DVX). In this study, of the 189 countries in the database, 16 countries were removed because they did not submit information. Three experiments were carried out, two of clustering (clustering ) through machine learning techniques: 1. The first experiment considers the values recorded for the period 2000 to 2017. 2. The second experiment is carried out by taking into account only the year 2018. 3. In the third experiment, an analysis is carried out in which correlations are established between the values reported by EORA, for global value chains, and the Global Innovation Index (GII) with data for the year 2018.

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For the first and second experiments, the following procedure was followed: 1. An analysis of the correlation between the variables was performed. 2. The relevance of the variables for classification was determined. 3. Clusters were generated through the clustering technique for the dataset. This process is responsible for placing countries in groups, so the objects assigned to a given cluster are the most similar to each other, and different from the objects in another cluster. 4. Once the clusters or classes that group the countries with the most similarities have been found, the variables that have allowed them to establish belonging to the group were analyzed. This is done to obtain relevant information for the members of each group, based on the data analyzed. 5. After the cluster or class generation model has been validated against the test dataset, new datasets can be analyzed to make predictions about the membership of each cluster.

3.4

Results and Discussion

All countries participate in global value chains in different ways. Some countries, such as Algeria, Nigeria, and Venezuela, only participate at the base of the value chain, selling predominantly unprocessed agricultural products. In contrast, others are mainly engaged in simple manufacturing tasks. Others specialize in complex manufacturing segments or service tasks, such as Honduras, Ethiopia, and Bangladesh. Others, such as Malaysia, Poland, and the Philippines, specialize in more complex manufacturing segments or service tasks. The most advanced economies and some emerging countries, such as the Czech Republic, specialize mainly in innovation-intensive goods and tasks (World Bank, 2020). Following the above, when analyzing worldwide where most of the added value is found, it is evident that the Global Value Chains are concentrated mainly in Germany, China, and the United States, followed by the Netherlands, France, Belgium, the United Kingdom, Japan, Italy, South Korea, and Canada, among others. In contrast, the lowest value added is found in the Middle East, South America, and Africa (see Table 3.1).

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Table 3.1 Countries where the largest Global Value Chains are concentrated

Country Germany China The United States The Netherlands France Belgium The United Kingdom Japan Italy South Korea Canada

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Added value (2018) 1,330,000,000 961,000,000 841,000,000 642,000,000 596,000,000 529,000,000 521,000,000 506,000,000 493,000,000 374,000,000 307,000,000

Source Own elaboration based on UNCTAC (2019)

As can be seen, GCV growth is concentrated in three regions: North America, Western Europe, and East Asia. Most countries in these regions participate in complex GCVs, producing advanced and innovative manufacturing and services. In contrast, many countries in Africa, Latin America, and Central Asia still produce commodities processed in other countries or engaged in limited manufacturing (World Bank, 2020; World Bank, 2020). According to the analysis of the behavior of the countries that are referred to in Table 3.1, based on Spearman’s correlation coefficient— usually applied to variables with distributions different from usual—it was found that the highest correlation is the value added by exports and the domestic value added with a coefficient of 0.9, followed by the correlation between the variables domestic value added and indirect value added by exports with a coefficient of 0.855; then the value of the correlation added by exports and indirect value added by exports is 0.845 (see Table 3.2). The results obtained when establishing the hierarchy of the variables in the EORA database took the Global Value Chain (GVC) variable as the target variable. In this way, attributes were graded according to their correlation with class. This hierarchy was done utilizing the Relief feature selection algorithm. Relief feature selection is an algorithm developed by Kira and Rendell (1992) that adopts a filter method approach to variable selection that is remarkably sensitive to interactions between variables. The score obtained

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Table 3.2 Correlation between variables analyzed

Variable 1

Variable 2

Spearman’s coefficient

Value added by exports Domestic value added Value added by exports External value added External value added External value added

Domestic value added

0.9

Indirect value added by exports Indirect value added by exports Value added by exports Indirect value added by exports Domestic value added

0.855 0.845 0.318 0.255 –0.018

Source Own elaboration

represents the ability of an attribute to distinguish between classes in instances with similar data. First, the highest value of the hierarchy is obtained by the value added to exports with 0.377; this means that production abroad has become more critical, that is, the products are made with higher content of intermediate inputs supplied from abroad. Secondly, the indirect value added to exports appears at 0.367 (see Table 3.3). Identification of clusters was carried out through the clustering procedure using the unsupervised classification algorithm called k-means. The quantity of clusters is calculated based on the amount of data to be analyzed and the similarities between the instances (countries). In this work, eight clusters were generated for the range of years between 2000 and 2017. This number of clusters is the optimum number for the data. A more significant number would generate a close analysis Table 3.3 Hierarchy values relief feature selection algorithm

Variable

Score

Value added to exports Indirect value added to exports Domestic value added Added external value

0.377 0.367 0.351 0.221

Source Own elaboration

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of the individual for each instance, and a smaller number would overgeneralize between them. Each cluster was configured with the number of instances (countries) listed in Table 3.4. The analysis of the variables by cluster was elaborated based on the variables that characterize each instance (country). In this way, each one is located in a space of four dimensions, which correspond to the variables: 1. Value added to exports. 2. Indirect value added to exports. 3. Domestic value added. 4. Added external value. Figure 3.1 shows the 8 clusters , in cases where they are made up of more than 10 countries, only some of them are listed (due to lack of space). These graphs were elaborated based on the measure of its Silhouette, which refers to a method of interpretation and validation of consistency within data groups. The technique provides an accurate graphical representation of how well each country has ranked. The silhouette value is a measure of how similar an object is to its group (cohesion) compared to other groups (separation). The silhouette varies from −1 to +1, where a high value indicates that the object is well adapted to its group and poorly matched to neighboring groups. If most objects have a high value, then the grouping settings are appropriate. If many points have a low or negative value, then the grouping configuration may have too many or too few groups. The clusters generated in this job have silhouette values greater than 0.5, indicating that the configuration of these clusters is correct. Clusters can be identified by their low share in the quantity of commodities, in the high quantity of commodities, in the limited level of manufacturing, the advanced level of manufacturing and services, and in innovative activities (World Bank, 2020): 1. In cluster 1, there are countries such as Afghanistan, the Central African Republic, Bermuda, Cape Verde, Lesotho, Liechtenstein, and Andorra, among others. 2. In cluster 2, there are the United Kingdom, Italy, France, and Japan.

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Table 3.4 Clusters formed for the value chains of the different countries Country

Cluster Country

Cluster Country

Cluster Country

Cluster

South Sudan Sao Tome and Principe Cape Verde Djibouti San Marino Montenegro Somalia Lesotho Vanuatu Liechtenstein Bhutan Gaza Strip Samoa Monaco

C1

Mongolia

C1

Bangladesh

C1

Indonesia

C4

C1

Namibia

C1

Latvia

C1

Malaysia

C4

C1 C1 C1 C1 C1 C1 C1 C1 C1 C1 C1 C1

Armenia Greenland Bahamas Liberia Botswana Senegal Macao SAR Suriname Turkmenistan El Salvador Nepal Georgia

C1 C1 C1 C1 C1 C1 C1 C1 C1 C1 C1 C1

C1 C1 C1 C1 C1 C1 C1 C1 C1 C1 C1 C1

Austria Russia Sweden Spain Switzerland Germany UAE Philippines Hungary Turkey Venezuela Ireland

C4 C4 C4 C4 C4 C5 C6 C6 C6 C6 C6 C6

Maldives

C1

Cyprus

C1

Costa Rica Myanmar Angola Lithuania Estonia Sri Lanka Croatia Ecuador Tunisia Syria Oman Trinidad and Tobago Egypt

C1

C6

Burundi

C1

Honduras

C1

Bulgaria

C1

Gambia

C1

Zambia

C1

Pakistan

C1

Chad

C1

C1

Kazakhstan

C1

Seychelles Antigua

C1 C1

C1 C1

Qatar Colombia

C1 C1

Thailand Denmark

C6 C6

Andorra

C1

Bosnia and Herzegovina Lebanon Netherlands Antilles Mauritius

Hong Kong South Africa Czech Republic Brazil

C1

Iraq

C1

C6

British Virgin Islands Sierra Leone Belize Togo Rwanda

C1

Tanzania

C1

Luxembourg C1

Saudi Arabia Finland

C1 C1 C1 C1

Madagascar Cuba Malta Jordan

C1 C1 C1 C1

Peru Morocco Greece Viet Nam

C1 C1 C1 C1

C6 C6 C6 C7

Mali

C1

Azerbaijan

C1

Romania

C1

Poland Norway Taiwan South Korea Canada

C6 C6 C6

C6

C7

(continued)

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Table 3.4 (continued) Country

Cluster Country

Cluster Country

Cluster Country

Cluster

Cayman Islands Afghanistan Bermuda

C1

C1

Slovenia

C1

Belgium

C7

C1 C1

Nigeria Slovakia

C1 C1

Netherlands C7 China C8

Swaziland

C1

New Caledonia Jamaica Papua New Guinea Panama

C1

C1

Albania

C1

C1

Fiji Central African Republic French Polynesia Haiti Malawi Nicaragua Tajikistan Barbados Uganda Niger Laos Aruba

C1 C1

TFYR Macedonia DR Congo Guatemala

New Zealand Ukraine

C1 C1

Argentina Chile

C1 C1

C1

Gabon

C1

Israel

C1

C1 C1 C1 C1 C1 C1 C1 C1 C1

C1 C1 C1 C1 C1 C1 C1 C1 C1

Kuwait Portugal Iran Algeria Italy France UK Japan USA

C1 C1 C1 C1 C2 C2 C2 C2 C3

Mauritania Mozambique Cambodia Kyrgyzstan

C1 C1 C1 C1

Cameroon North Korea Ghana Paraguay Uruguay Uzbekistan Kenya Bolivia Dominican Republic Brunei Bahrain Iceland Cote dIvoire

C1 C1 C1 C1

Singapore India Mexico Australia

C4 C4 C4 C4

C1 C1

C1

Source Own elaboration

3. In cluster 3, there is the United States of America and in cluster 5 is Germany. These countries remain the most important centers in complex GVC networks. 4. In cluster 4, there are countries such as Singapore, Austria, Sweden, Malaysia, Indonesia, Russia, Australia, and Mexico. 5. In cluster 6, there is Venezuela, Turkey, South Africa, Saudi Arabia, Finland, Taiwan, Hungary, and Denmark. 6. In cluster 7 are Belgium, the Netherlands, South Korea, and Canada.

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Fig. 3.1 Country clusters by GC (Source Own elaboration)

7. Finally, cluster 8 is China. Despite representing a major cluster, it is a country with interregional activities, taking sophisticated components from Japan, the Republic of Korea, and Chinese Taipei and assembling them into final products. Therefore, it is at the end of many Asian value chains. The importance of each variable in the formation of the clusters can be explained graphically employing a heat diagram, where the values for each variable for the countries included in each cluster are shown. The highest values are indicated with yellow, the lowest with intense blue, and the intermediate values with magenta tones (see Fig. 3.2).

Indirect value added to exports. Value added to exports. Domestic value added. Added external value.

Fig. 3.2 Heat map of the 8 clusters formed by a group of countries

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Table 3.5 Characterization of each cluster by the averages of the four variables Cluster

Average domestic value added

Average foreign value added

Average foreign value added

Average indirect value added by exports

C1 C2 C3 C4 C5 C6 C7 C8

100,121,428.6 680,500,000 1,720,000,000 1,400,000,000 341,000,000 303,000,000 412,666,666.7 172,250,000

44,442,857.14 252,500,000 258,000,000 798,000,000 407,500,000 50,680,000 198,333,333.3 130,150,000

144,507,142.9 933,250,000 1,975,000,000 2,200,000,000 748,500,000 353,800,000 611,000,000 302,375,000

46,435,714.29 276,500,000 642,500,000 530,000,000 178,000,000 126,240,000 125,000,000 63,062,500

Source Own elaboration

For the instances that make up each cluster, each subject of study is represented as a point in a four-dimensional space (number of variables considered). Each cluster is made up of countries that share common characteristics. One way to show the characteristics that make countries belong to each cluster is through the averages of the four variables present for each of them (see Table 3.5). This is most clearly visualized by employing a bar chart (see Fig. 3.3). Relationship Between EORA and the GII Global Innovation Index (Experiment 3) One way to establish the relationship between Global Value Chains and innovation in countries is to establish correlations between the values reported through the EORA index, for global value chains, and the Global Innovation Index (GII). The correlations between both indices for the countries with the highest score for GVC were measured with the Spearman coefficient. It is instructive to note the greater correlations of GVCs with some variables used to measure innovation. The highest correlations between GVC and the variables associated with the GII are knowledge workers, logistics performance, and employment in knowledge-intensive services. This shows that the more complex the GVCs are, the more innovative and require more trained human capital (Table 3.6).

Fig. 3.3 Characterization of each cluster

Indirect value added to exports.

Value added to exports.

Added external value.

Domestic value added.

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Table 3.6 Correlations between Global Value Chains and the Global Innovation Index Spearman’s coefficient 0.782 0.773 0.745 0.727 0.536 0.382 0.382 0.336 0.155 0.109 0.091 0.045 0.027 –0.009 –0.145 –0.164 –0.2 –0.227 –0.309

Variable 1

Variable 2

GVC GVC GVC GVC GVC GVC GVC GVC GVC GVC GVC GVC GVC GVC GVC GVC GVC GVC GVC

Indirect value added by exports Knowledge workers Value added by exports External value added Domestic value added Logistic performance Global Innovation Index Employment in knowledge-intensive services Regulatory quality Environmental performance Rule of law Access to information technologies Research and development (R + D) Government effectiveness Political environment Regulatory environment Use of information technologies Researchers Information and communication technologies

Source Own elaboration

The correlation between GVC and GII is 0.382; although the score is not high, it indicates that as the GVC value increases, the GII value also increases (see Fig. 3.4). Colors identify GVCs: the highest value is yellow, and the lowest is deep blue.

3.5

Conclusions

Global value chain analysis provides conceptual and methodological tools for examining the global economy. Currently, global value chains have acquired great relevance. They have become more complex given the fragmentation and linkages they manage intra- and interregional, in such a way that the decisions made by countries to them can affect their entire environment. That is, it can affect their competitiveness and that of other countries with which they relate through various factors, among which are the inequality of the spatiality of production, consumption, and structural and institutional conditions at various scales. According to the

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Fig. 3.4 Correlation between GVC and GII

cluster analysis, it is evident that the benefits of participation in global value chains are not distributed equitably between or within different countries—the leading countries are the ones with the best benefits. Many countries do not have the human, institutional, and infrastructural capacity, i.e., the trade capacity to participate effectively, coupled with increased protectionism and threats to global and regional trade agreements, which also affect international trade. To achieve a better analysis of global value chains, it is necessary to approach it from a systemic level that encompasses both the global and the local. Finally, analyzing clusters and correlations between the various variables shows that GVCs, as countries transition to more complex systems, innovation becomes one of the main determinants of their leadership and participation. Therefore, they require a more educated workforce, better management practices, and management of information and communication technologies. The active participation of public policymakers and decision-makers is required to achieve structural change through activities characterized by higher productivity, more intensive use of technological knowledge, and the growing participation of small companies (Padilla, 2014). Under the above, the link between innovation and internationalization of services is one of the main trends in GVCs, which is why future research requires more studies that focus on the links between the

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governance of leading companies and national research systems for value creation that allow the development of capacities to scale toward more knowledge-intensive goods and services within global value chains.

References Antràs, P., Chor, D., Fally, T., & Hillberry, R. (2012). Measuring the upstreamness of production and trade flows. The American Economic Review, 102(3), 412–416. Baldwin, R. & Venables, A. J. (2013). Spiders and snakes: Offshoring and agglomeration in the global economy. Journal of International Economics. 90(2), 245–254. https://doi.org/10.1016/j.jinteco.2013.02.005 Banco Mundial. (2020). Informe sobre el desarrollo mundial 2020: El comercio al servicio del desarrollo en la era de las cadenas de valor mundiales , cuadernillo del “Panorama general”. Banco Mundial, Washington, DC. Baldwin, R. (2006). Globalisation: The great unbundling(s). Economic Council of Finland, 20, 5–47. Bair, J. (2015). Gendered commodity chains: Seeing women’s work and households in global production (Dunaway, W., Ed.). Bianchi, E., & Szpak, C. (2013). Cadenas globales de producción: implicancias para el comercio internacional y su gobernanza. Red Latinoamericana de Comercio. Cátedra OMC FLACSO Argentina. Breul, M. (2020). Cities as regional nodes in global value chains: The example of the oil and gas industry in Southeast Asia. In Gateway cities in global production networks (pp. 39–64). Springer. https://doi.org/10.1007/978-3030-16957-2_4 Casella, B., Bolwijn, R. & Moran, D, & Kanemoto, K. (2019). Improving the analysis of global value chains: the UNCTAD-Eora Database Transnational corporations. Volume 26, 2019, Number 3, 115–142. Coe, N., Dicken, P. & Hess M., (2008a) Global production networks: realizing the potential, Journal of Economic Geography Journal of Economic Geography, Volume 8, Issue, Pages 271–295, https://doi.org/10.1093/jeg/lbn002 Coe, N., Dicken, P., & Hess, M. (2008b, May). Introduction: Global production networks—Debates and challenges. Journal of Economic Geography, 8(3) 267– 269. https://doi.org/10.1093/jeg/lbn006 Daly, J., & Gereffi, G. (2017). Tourism global value chains and Africa. In Industries without smokestacks (p. 68). De Marchi, V., Giuliani, E., & Rabellotti, R. (2018). Do global value chains offer developing countries learning and innovation opportunities? The European Journal of Development Research, 30, 389–407. https://doi.org/10.1057/ s41287-017-0126-z

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Díaz, J., & Rozo, C. (2015). Cadenas globales de valor y Transferencia de tecnología, Enfoque teórico. DPE Documento de Trabajo No. 03. Universidad Autónoma Metropolitana-Xochimilco Departamento de Producción Económica. http://dcsh.xoc.uam.mx/produccioneconomica/publicaciones/ Cadenas_globales_de_valor_y_Transferencia_de_tecnologia.pdf Gereffi, G. (2001). Beyond the producer-driven/buyer-driven dichotomy the evolution of global value chains in the internet era. IDS Bulletin, 32(3), 30–40. https://doi.org/10.1111/j.1759-5436.2001.mp32003004.x Gereffi, G. (2009). Development models and industrial upgrading in China and Mexico. European Sociological Review, 25(1), 37–51. Gereffi, G. (2018). Global value chains and development: Redefining the contours of 21st century capitalism. Cambridge University Press. Gereffi, G., Humphrey, J., & Sturgeon, T. (2002, April). Developing a theory of global value chains: A framework document. In Global Value Chains Conference, Rockport, Massachusetts. Gereffi, G., Humphrey J., & Sturgeon, T. (2005, February). The governance of global value chains. Review of International Political Economy, 12(1), 78–104. https://doi.org/10.1080/09692290500049805 Gereffi, G., & Kaplinsky, R. (2001). Introduction: Globalisation, value chains and development. IDS Bulletin, 32(3), 1–8. Gereffi, G., & Tam, T. (1998). Industrial upgrading through organizational chains: Dynamics of rent, learning, and mobility in the global economy. Paper presented at the “93rd Annual Meeting of the American Sociological Association”, San Francisco, CA, pp. 21–25. Gereffi, G., Humphrey J. & Sturgeon, T. (2005). The governance of global value chains. Review of International Political Economy, 12 1 February 2005: 78–104. https://doi.org/10.1080/09692290500049805 Grossman, G. M., & Rossi-Hansberg, E. (2008). Trading tasks: A simple theory of offshoring. American Economic Review, 98, 1978–1997. https://doi.org/ 10.1257/aer.98.5.1978 Gunnella, V., Al-Haschimi, A., Benkovskis, K., Chiacchio, F., Di Lupidio, B., Fidora, M., Franco-Bedoya, S., & Frohm, E. (2019). The impact of global value chains on the euro area economy (Occasional Paper Series 221). European Central Bank. Henderson, J., Dicken, P., Hess, M., Coe, N., & Wai-Chung Yeung, H. (2002, August). Global production networks and the analysis of economic development. Review of International Political Economy, 9(3), 436–464. Hernández, R., Nanno Mulder, N., Fernandez, K., Sauvé, P., López, D., Muñoz, F. (2014). Latin America’s emergence in global services a new driver of structural change in the region? Economic Commission for Latin America and the Caribbean (ECLAC), United Nations, Santiago, Chile. ISBN 978-92-1-121844-2

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Humphrey, J., & Schmitz, H. (2002). How does insertion in global value chains affect upgrading in industrial clústers? Regional Studies, 36(9), 1017–1027. Kaplinsky, R. (2013). Global value chains: Where they came from, where they are going and why this is important. Innovation, Knowledge, Development Working Papers, 68, 1–28. Kira, K., & Rendell, L. A. (1992). The Feature Selection Problem: Traditional Methods and a New Algorithm. In: Proceedings of the 10th National Conference on Artificial Intelligence, AAAI Press, Atlanta, 129–134. https://doi. org/10.1016/B978-1-55860-247-2.50037-1 Monge, R., & Salazar-Xirinachs, J. M. (2016). Políticas de clústeres y de desarrollo productivo en la Comunidad Autónoma del País Vasco. Lecciones para América Latina y el Caribe. Lima: OIT, Oficina Regional para América Latina y el Caribe, 2016. 104 p. OIT Américas, Informes Técnicos 2016/ 3. Distrito industrial, desarrollo empresarial, política de desarrollo, buenas prácticas, España, América Latina, Caribe. Morrison, A., Pietrobelli, C., & Rabellotti, R. (2008). Global value chains and technological capabilities: A framework to study learning and innovation in developing countries. Oxford Development Studies, 36(1). Taylor & Francis. Moncaut, N., Robert, V., & Yoguel, G. (2017). Modalidades de inserción en cadenas globales de valor. Tres casos de estudio en Pymes argentinas del sector de software y servicios informáticos. Revista Pymes , Innovación y Desarrollo, 5(3), 3–22. Organización para la Cooperación y Desarrollo Económico OCDE. (2014). Perspectivas económicas de América Latina: Educación, Competencias e Innovación para el Desarrollo. OCDE, Naciones Unidas, CAF 2014. Padilla, P. (2014). Editoe. Fortalecimiento de las cadenas de valor como instrumento de la política industrial Metodología y experiencia de la CEPAL en Centroamérica. Comisión Económica para América Latina y el Caribe (CEPAL) Santiago de Chile, Peters, E. D. (2018). Cadenas globales de valor. Universidad Nacional Autónoma de México, Facultad de Economía, México. Ramírez, P. (2014). National innovation systems and learning, upgrading and innovation in services GVCs: Lessons from India, Ireland and Eastern Europe. In Hernández et al. (Eds.), Latin America’s emergence in global services a new driver of structural change in the region? Economic Commission for Latin America and the Caribbean (ECLAC), United Nations. Sandoval, S. (2015). La cadena global de valor: consideraciones desde el ciclo del capital. Problemas del Desarrollo. Revista Latinoamericana de Economía, 46(182). https://doi.org/10.1016/j.rpd.2015.04.003 Solaz, M. (2016). Cadenas globales de valor y generación de valor añadido: El caso de la economía española. WP-EC 2016-01. Instituto Valenciano de

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Investigaciones Económicas, S.A. Valencia, España. http://dx.medra.org/10. 12842/WPASEC-2016-01. Terán-Bustamante, A., & Colla-De-Robertis, E. (2018, September). Vinculando el talento de investigadores y emprendedores para la innovación. Revista Mexicana de Economía y Finanzas Nueva Época REMEF, 13(4), 547–569. ISSN 2448-6795. https://doi.org/10.21919/remef.v13i4.338. UNCTAD. (2019). The UNCTAD-Eora Global Value Chain (GVC) database. https://worldmrio.com/unctadgvc/ Wang, Zhi, Shang-Jin Wei, Xinding Yu, & Kunfu Zhu (2017). Measures of participation in global value chains and global business cycles (NBER Working Paper No. 23222). https://www.nber.org/papers/w23222 World Trade Organization. (2019). Global value chain development report 2019. Technological innovation, supply chain trade, and workers in a globalized world. World Trade Organization, the Institute of Developing Economies (IDE-JETRO), the Organisation for Economic Co-operation and Development, the Research Center of Global Value Chains at the University of International Business and Economics (RCGVC-UIBE), the World Bank Group, and the China Development Research Foundation. Switzerland. ISBN 978-92-870-4967-4 World Bank. (2020). World development report 2020: Trading for development in the age of global value chains. International Bank for Reconstruction and Development/The World Bank. World Bank & World Trade Organization. (2019). Global value chain development report 2019: Technological innovation, supply chain trade, and workers in a globalized world (English). World Bank Group. http://documents.worldb ank.org/curated/en/384161555079173489/Global-Value-Chain-Develo Ylömäki, T. (2016). Global value chain upgrading (No. 36). ETLA Working Papers.pment-Report-2019-Technological-Innovation-Supply-Chain-Tradeand-Workers-in-a-Globalized-World. The Research Institute of the Finnish Economy (ETLA), Helsinki.

PART II

Governance, Institutions and Hierarchies

CHAPTER 4

Sugar Agribusinesses in Central America: Institutionality and Policies César Trejos-Salazar and Rafael Díaz-Porras

4.1

Introduction

The agribusiness sugar cane has a productive and social structures. This chapter will emphasize on the dynamics of these agribusinesses, based on the analysis of their institutions, which is reflected in the sector policies. This agroindustry should contribute to the development of agro-industrial complexes ranging from agriculture to the processing of final products, and which are linked to domestic and foreign consumer markets. However, within the Central American countries, both the importance of the sector and policy orientations differ in each case. The analysis is based on the global commodity chain approach, focusing on the institutional dimension. The chapter will figure out the

C. Trejos-Salazar (B) · R. Díaz-Porras Centro Internacional de Política Económica para el Desarrollo Sostenible (CINPE), Universidad Nacional, Heredia, Costa Rica e-mail: [email protected] R. Díaz-Porras e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_4

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answer to the question about the directionality of sugar agribusiness policies in each country, framed within their productive and institutional structures. In other words, it seeks to understand the policy orientations for each of the countries in the region under study based on the premise that policies in the agrichains are the result of the interaction of government organizations with the productive sector, but with specificities in their dynamics. In this sense, an analysis of the functioning of the institutions of the agro-chain is methodologically tested, in the space of its meso level. The document continues with the theoretical and conceptual framework in Sect. 4.2, followed by the methodology in Sect. 4.3. An overview of sugar agribusiness in Central America is carried out in Sect. 4.4. Main findings are presented in Sect. 4.5 in order to conclude by proposing conclusions in Sect. 4.6.

4.2

Conceptual Framework

This document considers two theoretical approaches, the first one is Global Commodity Chains (GCC) as presented by Gereffi (2018), Gereffi and Fernandez-Stark (2016), Pelupessy (2001) and Kaplinsky (1999). The second one is the approach of productive policies, understood from the perspective of Systemic Competitiveness at a meso level (Esser et al. 2013; Diaz & Sandí, 2018). They are applied in a complementary way; firstly, the analysis of global commodity chains will make possible the study of links that are directly related to the distribution and operation of sugarcane production processes in Central America. Secondly, the analysis of productive policies, will allow the identification of their scope. Sugar Agribusiness in Central America Viewed from the Perspective of Global Commodity Chains (GCC) There are several conceptions of the Global Commodity Chains approach, according to Gereffi, they are made up of a set of networks organized around a commodity or product, connecting family units, companies and states within the world economy (Gereffi & Korzeniewicz, 1994: 2; Kaplinsky, 1999: 1). Agro-industrial chains usually include agricultural production, initial processing and one or more industrial transformations, sometimes for the purpose of exporting the product, in addition to the

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final provision or use of the good. Based on these conceptualizations, four dimensions or components of the Global Commodity Chain can be distinguished (Díaz Porras & Valenciano, 2012): • Input–output structure: from the extraction of raw materials, their processing, consumption and final disposal, through the processing and marketing stages. From this approach, it is essential to identify the direction of the links, where they can have a market or non-market character, as well as the different integration and coordination strategies, whether vertical or horizontal. • Territorial location: allows identifying the spatial dispersion or concentration of production and distribution networks, whether on a global, national or regional/local scale. • Institutional and socio-political dimension: markets as institutions reflecting social aspects and policy decisions that determine the organization and distribution of income within the chain. The productive policies generated to direct the sector will be conditioned by the internal or external institutional arrangement. • Driving force or control structure dimension (Governance): this translates into one or several actors with the capacity to determine or influence the extent, nature and flow of resources within the chain. This configures the power relations and hierarchy for the location of resources and flows within the chain. This document focuses on the analysis of the chains in their national coverage, i.e., the structure of the chains, their geographic location and the emphasis is on their institutional dimension. Productive Policies from the Systemic Competitiveness Approach at a Meso Level Productive policies in open economies consider structure productive transformation, in order to strengthen the potential growth which is associated to: exports, sustained by technological development and diffusion. As a result, this is going to allow the improvement of the positioning for domestic firms in the world market. Therefore, the opportunities to generate jobs and sustained increases in real wages, for example, will depend on international competitiveness. Hence, policies that have an

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impact on the dynamism, diversification and stability of export flows will improve the possibilities for growth and employment (Rosales, 1995). Regarding international competitiveness, Esser et al. (2013) point out that in today’s world not only companies but systems compete, although the company is the crucial node of competitiveness and innovation, it is integrated into a network. It includes suppliers of goods and services, the financial system, the educational, technological, energy, transportation and telecommunications systems, among others, as well as the infrastructure and the quality of the public sector and the relationships within the company itself, which in other words respond to what the authors call systemic competitiveness. Thus, competitiveness is the product of the complex and dynamic interaction between four economic and social levels of a national system, comprising the micro, meso, macro and meta levels. Under that context, competitiveness is systemic, as long as the micro level is aligned with the companies simultaneously seeking efficiency, quality, flexibility and speed of reaction, many of them being in networks of mutual collaboration; the meso level, which is the space in which the State and organizations of stakeholders interact, developing specific support policies, promoting the formation of factor market structures and articulating learning processes at the sectoral level; the macro level, which refers to macroeconomic variables and their stabilization, in order to make able firms to compete in the world market. Finally, the meta level, constituted by development-oriented patterns of political and economic organization, that guide the country trajectory of development. It includes both the basic institutional conditions and the consensus for industrial development and competitive integration in world markets which are reflected in terms of industrial governance and competitiveness. Policies usually are aimed to improve the use of existing factors of production, through incentives to increase capital accumulation, in order to achieve a solid productive transformation. They involve a series of elements to support and promote the competitiveness of industry. Some of these are: promotion of exports and investments, development of basic infrastructures, better institutional coordination and cooperation among local actors, as well as the efficient use of resources and the promotion of value chains and innovation through education and training (Alburquerque, 2015).

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The Meso Level: Institutions of Agrichains For the purposes of this paper, the focus of interest is on the meso level of systemic competitiveness, in which the state and social actor groups interact, develop specific support policies, promote the formation of factor market structures and articulate learning processes at the sectoral level (Esser et al., 2013). The formation of meso-level structures is promoted not only by public policy, since companies, intermediate institutions and associations (separately or together) can and should also contribute to the shaping of industrial location (Esser et al., 2013: 63), i.e., by providing training offers, developing information systems or accelerating the flow of information. The analysis in this document follows the approach to the institutional framework of agrichains proposed by Diaz and Sandí (2018), which understands it to be located at the meso level, since the global chain approach recognizes institutional framework as an element that determines the functioning of value chains. It is distinguished as one of the dimensions of the analysis (Gereffi, 1994: 9), recognizing the importance of the role of institutions, as the rules of the game, in the national and local spaces where the chains operate. This is reflected in the organizations in charge of implementing these rules of the game and the formulation and execution of policies (Gereffi & Fernández-Stark, 2011: 11). From this perspective, it is understood that, in the institutional dimension of the agrichains, we can visualize the meso level (Diaz & Sandí, 2018: 3), as a space in which the institutions and organizations related to, or from, the agrichain are found, such as interprofessional organizations of the agrichain (which serves as the core at this level), governmental organizations, external organizations to the chains and the base of organizations of the productive actors, linked to the micro level, which is constituted by the value chain itself. The aspects involved in the institutional framework of the agricultural chain are infrastructure development, education, technology, labor relations, environment and regional development. And these are determined by the interaction of public and private agents of the State, business chambers, trade organizations, universities, research and training centers, as well as national and international technical and financial cooperation agencies.

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Methodological Framework The research in this chapter goes through research processes that include the review of documentary and virtual information (secondary information). The analysis is located at the meso level, by collection of information from internet pages and documentary, resulting in the identification of the operation modes of the organizations within the sugar-based agrichain. The research approach is qualitative, highlighting the role played by the literature review and its interweaving with theory (Sampieri et al., 2006: 523). Cases (agrichains of countries) are analyzed insofar as they are coupled to an analysis of particular phenomena. Within these, it is possible to extract the subjects of analysis, which in this case has two levels and aims to generate an institutional comparison between them: • Using qualitative and quantitative information to generate descriptions, the interprofessional organizations (IPOs) of each of the five sugar chains in Central America were identified. A content analysis of the websites identifies their main characteristics as institutional centers. The main characteristics to be identified for each of them are market regulation, chain efficiency, promotion, demand management, supply management and innovation. • The second level is framed in the field of the chain’s meso level, which seeks to classify the institutions that make up the chain into: national and international public, private, organizations of chain actors, organizations that have an impact on the chain in certain relevant areas, and international organizations in the sector. The objective is to identify the contribution that each of these organizations makes to the chain, its competitiveness and strengthening, whether in the field of productive support, regulation, policy advocacy or even institutional density in terms of institutional strength.

4.3 Overview of Sugar Agrichains in Central America Sugarcane native to Polynesia, was found in China and India 800 BC. It arrived in Spain through trade from where it was introduced to the American continent during Christopher Columbus’s second voyage to

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the American continent (Alpízar et al., 2009: 61). The cultivation of sugarcane was concentrated, in the Antilles, due to climatic conditions and abundant availability of labor, especially slave workers from Africa; production was organized in the plantation system, mainly in Cuba, Puerto Rico and Haiti (Sanabria, 2015: 1). It was introduced in Mexican territory around 1522 by Hernán Cortés, and from there it expanded to Central America. Records indicate that sugar activity in Nicaragua dates back to 1526, by Governor Don Pedrarias Dávila. The activity began rustically in the estancias or haciendas at the end of the sixteenth century, with productive units oriented toward domestic consumption, among them the sugar mills that supplied the precarious local commerce. At the end of the eighteenth century, Nicaragua exported small quantities of raw sugar because of the generalization of sugarcane planting and cultivation at the national level. The first thirty years of the twentieth century can be catalogued as the consolidation of the Nicaraguan sugar industry, achieving from 1909 onward the export of approximately 36,000 quintals to Central America and Europe. The first sugar mill founded in Nicaragua was San Antonio, in 1892. In 1940, the Benjamín Zeledón sugar mill began operations; in 1948, the Monte Rosa sugar mill entered the sugar activity and later, in 1969, the Montelimar sugar mill (CNPA, 2020). Years later, sugarcane was introduced to Costa Rica by Pedro Arias Dávila, who brought it from Nicaragua in 1530; at this stage, sugarcane accompanied the colonial expansion throughout the Costa Rican territory, creating a connection between sugarcane, colonization, settlement and production (Chaves, 1998, p. 3). Sugarcane began to be cultivated in a rustic manner, essentially oriented toward subsistence and self-sufficiency. These crops were grown in an isolated manner, without any type of organization or commercial purpose, mainly in the area of Ujarrás in Cartago (Alpízar et al., 2009: 62), executed mainly by family nuclei that used their scarce technological knowledge for their production. That same year, 1530, in El Salvador, it is recorded that sugarcane was introduced into the country from Mexico. The actors involved in the transfer of the plant to Mexico are unknown (Dinarte et al., 2009). In Guatemala, sugarcane began to be cultivated in 1536 in Amatitlán. The rapid expansion of sugar in Guatemala caused that by the year 1587, there were already “several trapiches in the valley of Guatemala and therefore the town council of Santiago promulgated the ordinances of the

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guild of the ‘sugar makers’” (ASAZGUA, 2017) and “the order to establish the position of trapiches seller, who would be in charge of watching over the fixing of the maximum price, the measures of the ‘sugar cubes’ and the value of the wages” (ASAZGUA, 2016). By the seventeenth century, the most important sugar mills were in hands of religious orders. By the “eighteenth century, sugar mills proliferated in many regions of the Kingdom of Guatemala, to the point that in the same town, there were more than a dozen” (ASAZGUA, 2016). Finally, in 1544 the crop arrived in Honduras, specifically in the surroundings of Trujillo and within the valleys of Comayagua. However, the history of sugar agroindustry in Honduras dates back to the end of the nineteenth century, with a sugar mill in the Cantarranas area, which produced very small amounts of sugar with which it supplied employees and settlers of Mineral de San Juancito, as well as part of Tegucigalpa (APAH, 2018). According to data from the World Sugar Organization (International Sugar Organization: hereafter ISO), more than 130 countries produce sugarcane1 or sugar beet; on average sugarcane accounts for about 80% of global sugar production.2 In 1980, the top ten producing countries accounted for 56% of the global, while in 2016 the top ten accounted for 76%, i.e., production has become increasingly concentrated. According to ISO data, sugar trade is approximately 60 million tons per year, with raw sugar having the largest share, accounting for more than 60% of international trade volumes. Ten countries dominate global raw sugar exports, with Brazil, Thailand, Australia, Guatemala, Mexico, India, Cuba, Swaziland, Argentina and El Salvador accounting for 92% of trade in 2016. Brazil is the world’s largest producer and exporter, accounting for 45% of world export trade in 2016, up from 21% for 2000. China, Indonesia, the United States and the EU-28 were the world’s largest importing nations in 2016 (ISO, 2016: 1). The Latin American region is home to the world’s largest exporters. In Central America, Guatemala (currently the fourth largest exporter) and El Salvador stand out.

1 The Latin American region, in general, is characterized by the production of sugar from sugarcane. 2 The other 20% corresponds mostly to the production of sugar from sugar beet.

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4.4 Central America Participation in the Global Sugarcane Chain Comparison of Central American Sugar-Cane-Based Agribusiness The sugar agrichain has a different significance in each of the Central American countries. As shown in Table 4.1, Guatemala has the greatest weight in the overall Central American production, approaching 60% of the share, while El Salvador, Nicaragua and Honduras are located in a range of between 15 and 9%. If we consider the variation of the share in the period considered, Guatemala shows the highest growth (17%), followed by Nicaragua (12%). The other countries have experienced a reduction in participation, most intensely in Costa Rica (–37%), followed by Honduras (–22%) and El Salvador (–19%). Table 4.2, constructed following the GVC approach (Gereffi & Korzeniewicz, 1994), presents a summary of the characteristics, in terms of input–output and geography, of the agrichain in each country, from which central elements that share or differentiate each of the chains can be abstracted. The institutional dimension is analyzed in the following section. In relation to the similarities, we have: • Product Input Dimension: All countries at the production segment level present a significant similarity in their stages. Industrialization in the five Central American countries is carried out by the mills, generating the same sugarcane products. On the other hand, in the Table 4.1 Central America. Importance of sugar in the economy. Participation in the volume of total production in Central America Guatemala 2000 50.2 2016 58.8 Change in production share (%) 2000–2016 17.1

El Salvador

Honduras

Nicaragua

Costa Rica

15.6 12.6

12.0 9.4

10.7 11.9

11.5 7.3

–19.0

–22.1

11.8

–36.7

Source Diaz and Matarrita (2018). Table 37, based on FAOSTAT data

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Table 4.2 Summary of sugar agrichains in Central America Countries

Structure input-product

Number of producers

Number of sugar mills

Additional infrastructure

Guatemala

– Agricultural segment: Predominance of vertically integrated plantations – Industrial Segment: Sugar mill – Marketing Segment: Executed by sugar mills. Priority to supply the domestic market – Agricultural segment: Predominance of vertically integrated plantations Industrial Segment: sugar mill – Marketing segment: two actors together: Central de Ingenios S.A and the Association of Sugar Producers of Honduras. Priority to supply the domestic market – Agricultural segment: Predominance of vertically integrated plantations – Industrial segment: sugar mill – Marketing Segment: exercised by state institution CONSAA – Agricultural segment: Predominance of vertically integrated plantations – Industrial segment: sugar mill – Marketing segment: It is exercised by a single actor (Central Azucarera de Nicaragua S.A), a priority to supply the domestic market

82,000 direct 410 thousand indirect

12

It has a specialized port for the import and export of sugar and derivatives

Honduras

El Salvador

Nicaragua

8 200 thousand between direct and indirect

50 thousand direct 200 thousand indirect 35 thousand direct 135 indirect

6

4

(continued)

cases of Guatemala and Nicaragua, the mills have integrated in some cases the production of alcohol, ethanol and electric energy.

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Table 4.2 (continued) Countries

Structure input-product

Number of producers

Number of sugar mills

Additional infrastructure

Costa Rica

– Agricultural segment: Plantations, vertically integrated, with the participation of 7 thousand independent producers – Industrial segment: sugar mill – Marketing Segment: It is exercised by a single player (LAICA) priority to supply the domestic market

25,000 direct 100 thousand indirect

12

It has a specialized port for the import and export of sugar and derivatives

Source Trejos (2018)

In terms of commercialization, the domestic market is the end market for the five Central American countries’ with the exception of Guatemala, which has a greater emphasis on sugar exports. • Geographic dimension: Four countries share the spatial location of their mills on the Pacific coast: Nicaragua, Honduras, El Salvador and Guatemala, while Costa Rica and El Salvador have their mills geographically established throughout the national territory. In terms of export destinations, North American and Asian markets are the most important for Costa Rica, Nicaragua, Honduras and Guatemala. El Salvador concentrates more on its exports to Europe, while Guatemala to South America. • Institutional and socio-political context dimension: As will be discussed in the next section, which differences lie in actors in charge of the marketing, and regulatory policies. In both Nicaragua and Guatemala, the private sector regulates and carries out the commercialization of products. In Honduras and El Salvador, there are partial regulatory policies created by the public sector, while marketing is carried out by the private sector. Costa Rica is the only

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Table 4.3 Central America: Estimated average sugar production per mill

Country

Metric tons of sugar

Number of sugar millsa

Production per sugar millb

Guatemala El Salvador Honduras Nicaragua Costa Rica

2,700,000 1,638,626 1,160,000 1,695,822 452,160

12 6 8 4 12

225,000 273,104 145,000 423,955 37,680

Sources a Central America Data.Com (2017), CNPA, 2017–2018, Laica (2018), and La Tribuna (2018) b ISO (2016), Laica (2018), Deguate.com (2013), Melgar et al. (2012), Counterpoint (2016) La Tribuna (2016), and González (2017)

country in Central America that is totally controlled and regulated in all areas by public law. An interesting aspect in comparative terms is related to production scales. In Table 4.3, there are estimations by their average sugar mill production. Guatemala and Costa Rica have the largest number of mills, but the largest scale of production is in Nicaragua, where there are fewer mills. Guatemala and El Salvador have similar scales, although with a smaller capacity than Nicaragua, while Costa Rica has the smallest scale of production, which is below the rest of the countries. International Trade Table 4.4 shows the importance of sugar agrichain for Central America as part of the international trade in terms of participation from the total exports per country. For Guatemala and El Salvador, the share is the highest in the two years as considered, which is increasing, followed by Nicaragua, although in this case with a reduction in the share. Imports show low levels for all countries, which are complementary to domestic consumption. In all countries, apart from Costa Rica, there is a decrease in the share of imports. On the other hand, Table 4.5 shows the importance of exports by country. The country with the greatest weight is Guatemala, El Salvador

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Table 4.4 Central America. Importance of sugar in total agricultural exports by country and trade flow, years 2000–2016 Guatemala

El Salvador

Honduras

Nicaragua

Costa Rica

Flow

2000

2016

2000

2016

2000

2016

2000

2016

2000

2016

Exports Imports

13.07 0.42

22.24 0.01

10.25 0.03

32.04 0.01

0.88 0.63

2.90 0.04

9.20 0.53

5.95 0.02

1.43 0.06

2.32 0.45

Source Diaz and Matarrita (2018)

has shown a growth that exceeds 20% of the value in 2016, while Nicaragua significantly reduced its participation in the 2000–2016 period. Table 4.6 shows the most important items in the international trade of agribusiness chain products. Exports are dominated by raw material (raw sugar) and, temporarily, by refined sugar for some countries. Additionally, Table 4.6 also shows that imports are dominated by sugars other than cane sugar, which are generally products with a higher degree of industrialization. An estimate of competitiveness in terms of sales capacity is the unit value earned which is showed comparatively in Table 4.7. In general, there is a decrease in unit value, with exception of Costa Rica, whose unit value in the period 2014–2016 is the highest. This indicator approximates non-price competitiveness, because if it is increasing, there are product differentiation factors that report higher added value. In the case of imports the unit value in general grew, being significantly higher in the Table 4.5 Central America: share of sugar export value and volume in the regional total, by country, 2000 and 2016 Years

Guatemala

El Salvador

Honduras

Share of the value of exports in the total regional value 2000 61.4% 13.7% 2.4% 2016 56.5% 20.6% 6.3% Share of export volume in total regional volume 2000 63.9% 14.7% 5.0% 2016 68.1% 13.8% 6.0% Source Own elaboration with resource trade.earth data

Nicaragua

Costa Rica

14.0% 3.7%

8.4% 12.9%

6.5% 6.3%

9.9% 5.9%

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Table 4.6 Central America. Percentage share of the main items in the value of sugar exports and imports by country studied, by by-products, 2000–2016 Guatemala Item

2000

El Salvador

Honduras

Nicaragua

Costa Rica

2016 2000 2016 2000 2016 2000 2016 2000 2016

Share of sugar exports in thousands of dollars (US$1000) Raw cane sugar 88.2 69.4 92.4 71.5 84.2 60.1 48.5 56.7 97.2 89.8 Refined sugar without 8.4 25.8 0.0 11.7 0.0 17.8 51.3 20.3 0.9 2.4 flavourings or flavorings Share of imports in thousands of dollars (US$1000) Sugars other 56.6 99.0 94.1 99.2 39.1 90.7 31.3 88.8 92.1 56.0 than cane Source Diaz and Matarrita (2018)

period 2014–2016 to the unit value of exports. In other words, imports could be associated with differentiated or higher value-added products.

4.5

Institutional Core in Sugar Agribusinesses

One of the main similarities among the sugarcane agrichains in Central America is that they all have an institutional core, around which the institutional network revolves, where policies, support actions and coordination are managed. But strictly speaking, in Central America there is only one organization that plays the role of an IOP, which manages the production, processing, marketing and distribution of sugar at the same time, it is Liga Agrícola Industrial de la Caña de Azúcar (LAICA) (Diaz & Sandí, 2018: 2–6). In this research, we look for the equivalent to the institutional nucleus of the agrichain, that being the case this is the result of institutional arrangements between public and private actors in each country. This refers to institutions that govern through public or private legal bases, but with similar objectives: the protection and internal regulation of the sugarcane production sector. Table 4.8 shows, by Central American countries, their institutional nuclei, as well as complementary organizations, which give an essential conformation to the meso level of the agrichains.

0.18 0.12

Exports Imports

0.10 0.15

2014– 2016

Source Diaz and Matarrita (2018)

2000– 2002

Year flow

Guatemala

0.19 0.25

2000– 2002

El Salvador

0.18 0.64

2014– 2016 0.41 0.48

2000– 2002

Honduras

0.13 0.60

2014– 2016 0.22 0.05

2000– 2002

Nicaragua

0.07 0.33

2014– 2016

0.23 0.13

2000– 2002

Costa Rica

0.26 0.14

2014–2016

Table 4.7 Central America. Unit value of sugar per country according to trade flow, periods 2000–2002 and 2014– 2016 (Three-period mobile average VU—$1,000/tons)

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Table 4.8 Central America: Characteristics of the sugar agrichains’ IOPs Country

Legal basis

Regulation

Guatemala ASAZGUA (1957) Guatemala Sugar Association

Private

Generated from a private site for the entire chain

Honduras

Decree No. 261/05

Policy making on sugar production, industrialization and marketing Price fixing

Legislative Decree No. 490

Relation between coffee mills and these producers

Regulates Local Consumption and Export No. 106-MEIC Law 3579; regulates the entire sugar chain

Private area. Coordinates national and international sugar commercialization

El Salvador

Nicaragua

Costa Rica

Core Complementary organization organizations FUNDAZCAR (1990) RSE CENGICAA (1992), EXPOGRANEL (1994), ATAGUA Icc CNAA FUNAZUCAR (2005) (2005) National Central de Council of Ingenios CISA Sugar The Honduran Agribusiness Sugar Producers Association (APAH) CONSAA FUNDAZUCAR (2001) Sugar Association of El Salvadoran Salvador Council of the Sugar ATASAL Agribusiness CNPA Nicaraguan Nicaraguan Sugar Plant National Committee of Sugar Producers LAICA FEDECAÑA (1965) Sugarcane Industrial Agricultural League

Non-state but of public interest. It controls from cultivation to final consumption, and participates in international trade

Source Own elaboration

The characteristics of this institutional framework have to do with the history of the society itself, and the structure and trajectory of sugarcane activity, which are reflected in different types of operations. One of the main characteristics that can be considered outstanding in the above table is the variability of the institutional governance structures. One private institutional framework can be found in the cases of Guatemala

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and Nicaragua. Another, more focused on the public sphere, in the case of El Salvador and Honduras; and finally, a non-state institutional structure of public interest, as in the case of Costa Rica. Institutional Framework and Services Offered to the Sugar Sector in Central America Based on the identification of the IOPs in the previous section, the analysis of the contents of the organizations’ portals and related documents was carried out during 2019, which made it possible to analyze the services they offer to the sector. These were classified into four groups, with the following contents: • Promotion: including services for the provision of statistics, research, environmental issues, own publications and financing. • Information: image projection of the agribusiness chain, general information on production activities. • Production support: training, quality control, production services and export services. • Coverage: means of contact with actors in the sector. Graph 4.1 shows the percentage of services offered on the websites of the sugar agrichain IOPs, as an indicator of the elements that receive the most attention. It shows that in relative terms, information services predominate in Guatemala, Honduras and Nicaragua. Promotion activities have a similar participation in all countries, while productive support services have an important participation in Costa Rica. In addition, Graph 4.2 shows the distribution of each service by country in the bars. The most numerous are information, which are concentrated in Honduras and Nicaragua; and promotion in Honduras and Costa Rica. By country, the most important elements in terms of quantity are productive support in Costa Rica, information in Nicaragua and Guatemala and promotion in El Salvador. Figure 4.1, using a heat map, shows an association of the services located on the IOPs portals in terms of their frequency, resulting in concentrations of services associated with the platforms of the countries with the same information as in Graphs 4.1 and 4.2. However, toward the left side of the illustration, there are concentrations of elements that could be considered the lightest, because they are easier to provide and

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100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Guatemala Promotion

El Salvador

Honduras

Information

Nicaragua

Costa Rica

Productive support

Coverage

Graph 4.1 Central American sugar agrichains: Detail of the percentage of services offered in the electronic portal of the IOPs, by country. Year 2019 (Source Own elaboration, with information from THE WEBSITES)

are normally found on websites. This does not detract from their importance in terms of the information and availability they offer to the actors in the agrichains, whether direct or indirect. On the right side are elements that are more crucial in terms of supporting the development of the sector’s competitiveness, and which require more advanced institutions, such as research activities, financing and quality control, associated with the IOPs of Costa Rica and Guatemala. Table 4.9 shows the support services provided by the different organizations that are part of the meso level of the agrichain; this information comes from the analysis of web pages. At the aggregate level there are 40 organizations, most of them public. The most numerous services refer to policies, followed by productive support services and research actions.

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25 20 15 10 5 0 Promotion

Guatemala

Information

El Salvador

Productive support

Honduras

Nicaragua

Coverage

Costa Rica

Graph 4.2 Agro sugar chains in Central America: Detail of the number of items associated with services on the electronic portal of the IOPs, by country. Year 2019 (Source own elaboration, with information from THE WEBSITES)

4.6

Policy Overview

This section describes the main production policies for the sugar based on agroindustry in Central America. These policies are defined by interaction of meso-level actors, whose organizations are promoted not only by public policy, because we can find companies, intermediate institutions and associations that can contribute to the industrial configuration (Esser et al., 2013: 63–65). In this section, policies will be classified according to their actors, which include core organizations, governmental organizations, organizations outside the chain and organizations of productive actors. To summarize, systemic competitiveness is characterized by two fundamental elements: the first is the sector’s capacity to reorganize its productive processes in order to prepare them for more efficient participation, and the second factor is dynamism, associated with the increase in competitiveness resulting from the interaction of the system’s productive resources and other aspects such as technological innovation, business

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Fig. 4.1 Central American sugar agrichains: Groupings of the elements associated with services in the electronic portal of the IOPs, by country. Year 2019 (Source Own elaboration, with information from THE WEBSITES) Table 4.9 Central American agro-sugar chains: Number of services offered by meso-level organizations, by year 2019 Services offered

Policy supporta Research support Technical supportb Financial support Productive supportc Marketing supportd Certification support Social support TOTAL SERVICES TOTAL ORGANIZATIONS

Type of sector organization Gremial Agrichain

Public

Multila-teral

Private

2 0 1 0 6 3 0 0 12 5

18 1 2 1 12 4 0 0 38 17

5 10 15 5 0 0 0 0 35 8

1 2 4 0 1 3 0 3 14 9

Notes a Policy development/regulatory standards; Production/Innovation; d National/International Source Own elaboration

Agricultural Total gremial 1 0 0 0 0 0 0 0 1 1

b Processes/technology/trainings;

27 13 22 6 19 10 0 3 100 40 c Quality/

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capacity, physical infrastructure and communications, government policies, among others (Esser et al., 2013). The main objective of policy design at the meso level of the systemic competitiveness is to strengthen the competitiveness of various sectors within the chain. The concept on the meso level indicates six different areas: infrastructure for imports and exports, industrial structure, environment, technology, education and labor. Table 4.10 shows a general summary of the sectors in which production policies have been formulated from the meso-level perspective for each of the countries under study. Table 4.10 shows the area in which policymakers make most emphasis is technology, executed basically as a private dynamic. The interest of the sugar agroindustry in being at the forefront of technology is relevant. It is important to mention that technology in the countries of the current study is used for different purposes, since technology can be used in the agriculture stage to obtain higher yields, for industry to generate added value, and for marketing to be more efficient in logistical matters, among others. In addition, one area with the lowest policy support is education, essentially aimed at sugarcane impact zones. In Guatemala it is developed by the private sector throughout Foundation, in Costa Rica and Honduras with public sector participation. In terms of export and import infrastructure, Costa Rica and Guatemala stand out for having their own logistics infrastructure policies, as they have their own shipping terminal for sugarcane exports. Sugar Agrichains and Production Policies in Central America, a Comparative Analysis The sugarcane production for Central American countries is of utmost importance nowadays; one of the main products traded locally and internationally is sugar. Each country has been developing its methodology, objectives and actions based on the internal context of its production. As a result, in Central America policy design is not coordinated regionally, since they operate on an individual basis. The following paragraphs are an overview of the main productive political structures to better understand this regional dynamic: As can be seen in the general balance, Fig. 4.2, on the productive policies and their structures for each of the countries in Central America,

LAICA MAG CNAA MINAE Sugar mills, producer groups Sugar mills in collaboration with International Cooperation managed by the public sector Sugar mills, State Law ASAZGUA CENGICAÑA ICC EXPOGRANEL FUNDAZUCARATAGUA ✗ ✓

✗ ✓

✓ ✓

✓ ✗ ✗

✓ ✓ ✓

✓ ✗ ✗ ✓ ✓

✓ ✓ ✓

Technology

✗ ✓

✓ ✗ ✓

Education

✓ ✓

✓ ✗ ✗

Work3

3 On the Labor element: joint efforts have been made through the Azucareros del Istmo Centroamericano (AICA), in order for the sugar agribusiness to fight against child labor in all crop fields in Central America (including Panama) (Fernandéz, 2018).

✓ Shows the sectors where countries implement productive policies Source Own elaboration, coming from the review of their web portals and personal communication, Fernandez 2018

El Salvador Guatemala

Costa Rica Nicaragua Honduras

Industrial Environment Structure

Infrastructure (X-M)

Elements of competitiveness at the meso level addressed by productive policies

Dimensions countries

Actor(s)

Sugar agrichains in Central America: Synthesis of production policies by country at the meso level

Table 4.10

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in terms of the governance structure and the kind of regulations and policies, there are differentiated scenarios. On the one hand, there are structures including mixed institutional governance between public and private sectors, as in the case of Honduras and El Salvador, since public law is not in charge of regulating the entire national agroindustry, where the relations between producer and mill are the ones that escape in these cases (semi-structure). The private governance scenario is based on purely private coordination as in the case of Guatemala and Nicaragua, although the latter has an institutional decree, but lacks a regulatory law. In this case, it is the industrial mills and the institutions they themselves have created that coordinate this dynamic. The case of Costa Rica is an extreme example of maximum regulation of state origin, insofar as coordination is private, but of public interest, with regulations throughout the entire agrichain, defined by law and assigned to LAICA.

Fig. 4.2 Comparative balance of the productive structures and policies of the sugar agroindustry in Central America (Source Own elaboration)

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These structures also differ in their competitive stakes, which are oriented in four different directions: 1. The countries that are betting on strengthening their production, increasing tons per metric hectare, and the internationalization of their merchandize are: Guatemala, El Salvador, Nicaragua and Honduras. 2. Countries that are betting on the diversification of edible products with high added value, as in the case of Costa Rica. 3. Countries that are betting on diversification focused on energy cogeneration: Guatemala, Nicaragua. 4. Countries that are committed to the sustainability of the sector (environmental, social, economic, productive): All countries are generating individual and joint efforts, as they are under public scrutiny. Therefore, it is highlighted that for all the cases under study at the Central American level, there is an institutional nucleus where policies, support actions and coordination of sugarcane-based agribusiness are gestated, but in terms of their individual orientations or objectives. These orientations are dictated by the policies generated from their nuclei, mostly of a private nature.

4.7

Conclusions

This chapter was guided by the question regarding the directionality of sugar agroindustry policies in Central America, and the link with its productive and institutional structure. From the productive point of view, one of the main conclusions reached by this research is that for several Central American countries, sugar activity has a strong export emphasis. Some countries stand out for their high exports at world level, participating in an industry where they interact with countries that produce large volumes of production and are protected by policies that can undermine international prices. On the other hand, Central American sugar agrichains are characterized by institutional heterogeneity, which is reflected in the varied institutional arrangements. With the exception of the Costa Rican case, participation in policy design by the public sector is small, largely due to

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the weakness of the public institutional framework and the strength of the private sector. This is reflected in the regulations governing the sugar chain, which, except in the case of Costa Rica, are lax, with the presence of large producers and agroindustrial complexes, to the detriment of small farmers and agricultural workers or those dependent on some link in the chain, who are left unprotected and at the expense of free competition. With respect to the directionality of policies in the sugar agrichains, there are challenges in two important aspects. On the one hand, there is the sustainability of the sector, especially in environmental terms, a sustainability threatened by elements such as climate change, irrational use of natural resources, coupled with national and international requirements for environmental protection and food security. On the other hand, the sugar agribusiness in Central America faces the complex international context related to the subsidies that many producing and exporting countries inject into the sector (Pakistan, the European Union, Thailand, India, the United States, among others). This has the consequences of trade distortion, non-compliance with general trade rules, fluctuations in international sugar prices. For small countries, this is often reflected in volatile prices. In the face of this, the sugar sector presents in Central America a heterogeneous system, with individual objectives and visions. In fact, this is reflected in the absence of regional policies, as the courses of each of the countries go in scattered directions, thus preventing them from working as a sugar block in the face of the complex and distorted international reality of sugar. Finally, alternatives are displayed in three important axes of action from the analysis carried out in this research: 1. Technology and innovation: It is necessary to promote investment in R&D programs in order to strengthen high value-added models and improve the tray of products offered, in addition to contributing to field productivity efficiency. 2. Sustainability of the sector: The institutions in charge of managing relations between producers and industrialists must oversee the redistribution of benefits throughout the value chain to ensure its subsistence. This is linked to efforts in environmental, social and economic terms and their commitment to making the sector sustainable over the years.

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3. Institutional level: Triple Helix models are required, where private, public and academic efforts are brought together in order to strengthen the sector through sustainable and updated policies, with a better balance between the interests of the productive actors in the chain and the promotion of national development.

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CHAPTER 5

Governance in the D.O. Café Pluma Hidalgo from Oaxaca and the D.O. Habanero Pepper from the Yucatan Peninsula José Apolinar Zapata Aguilar

5.1

Introduction

Globalization has allowed connecting the world and stablishing commercial relationships that boost the exchange of goods and services. This intercommunication is the starting point for markets to be more demanding each day regarding the access they have to satisfactory levels. In which the IMPI is thegovernment entity in charge of granting the designation of origin. That is why their owners must ensure a protection against piracy or illegal use of its name. In Mexico, the Instituto Mexicano de la Propiedad Industrial (IMPI), is responsible for protecting the industrial property in the country. In which the IMPI is the government entity in charge of granting the designation of origin.

J. A. Zapata Aguilar (B) Universidad Tecnológica Metropolitana, Mérida, Yucatán, Mexico e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_5

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IMPI (2016) points out that “In the future, society will realize the importance of generating unique products in specific regions of the country and the Designation of origin is a national and global marketing strategy to distinguish Mexico as a producer of quality products”. Being Mexico a country of such cultural diversity, conformed by microregions with unique characteristics linked to their territory, opens a wide range of original and once-in-a-lifetime products that must be exploited in favor of economic development for the states of the country, proof of that is the touristic potential throughout the country, that have made it one of the most popular touristic destinations worldwide.

5.2

Geographical Indications

Geographical Indications (GI) are distinctions of international recognition to products with unique characteristics, linked to the nature of the territory in which they are produced, that makes them different. The difference of products, with its corresponding national and international protection, gives certainty to these goods, and the security that nowhere in the world a product with the same features, due to the nature of the territory in which they are produced, can be obtained. According to IMPI (2016), a GI is a distinctive symbol with which a product of a certain region is recognized. The quality of the product is due to its geographical location, that is, the natural factors (weather, soil, minerals, water) and the human factor, that has the knowledge to produce it. The GI is a distinctive with a name or indication that protects a product that comes from a certain geographical area, which can be a country or a specific region; for being from that region and the customs of production or transformation of its inhabitants, comprises a specific process and, therefore, the product must possess a link between the quality and the processes from which it’s produced, the materials that intervene in its production with characteristics and a reputation that differentiates it from similar products of other geographical areas (Ceballos & Garcia, 2013). Mexico currently holds 18 GI, that has the level of Appellation of Origin (DO in Spanish), which are: Tequila, Mezcal, Olinalá, Raicilla, Charanda, Bacanora, Yahualica, Talavera, Sotol, Café Pluma, Cacao Grijalva, Café Chiapas, Café de Veracruz, Ámbas de Chiapas, Mango Ataulfo de Soconusco, Chile habanero de la Peninsula of Yucatan, Vainilla de Papantla and Arroz de Morelos.

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However, producing goods with a GI or DO, is not a warranty of its commercial success, and especially not of its international success, since to achieve that, an organized chain or commercialization is required; one which fits into the dynamic of international commerce through the global chains of marketing. A DO gives added value to an original product, whose characteristics are so unique because it is elaborated through a series of factors that can hardly be replicated in equivalent environments. The Experience of the Designation of Origin of Tequila in Mexico Tequila is the most successful CO in Mexico and one of the most important in the world, for different reasons, among them, it was the oldest CO outside of Europe, its participation in the market has been increasing in the last few years and it has become a model for other countries in Latin America (Bowen, 2012). The existence of a well-organized Regulating Council of Tequila has been decisive for the success of the model, it includes the standardization of the production processes, the articulation of the chain and an integral logistic that allows the worldwide distribution of the product. Being an iconic product for Mexico, Tequila has increased its demand in the last few years, exporting more than half of its production to 120 countries, being the United States the firsts on the list (Olmedo & Carranza, 2010). In 2006, the United Nations Educational, Scientific and Cultural Organization (UNESCO), declared the agave landscape Cultural Heritage of Humanity, this distinction comprises the farmlands, the ancient industrial facilities, distilleries, haciendas and towns. The agave landscape carries a great historical and cultural value, which also involves the cultivation processes of the raw material, the design of the bottles, the gastronomy and an endless list of cultural manifestations that accompany such drink (Olmedo & Carranza, 2010). The Appellation of Origin as a Driver of Economic Development For the European Union, public policies for rural development are decisive for the Common Agricultural Policy (CAP), created for the collective organization after the Second World War, its initial objectives were to ensure the supply of food and increase the production in the fields, which was achieved through subsidy and guarantee prices. During the

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80’s the strategy shifted, reducing the use of subsidies and increasing market-oriented production, which resulted in productive diversification, and a boost in the quality of agrifood goods. Currently, CAP is guided by three objectives: creating more competitivity in rural spaces, diversifying traditional activities and improving the natural environment and rural contexts. In these policies, geographical indications according to the European regulation, have three forms: Protected Geographical Indications (PGI), Protected Designation of Origin (PDO), Traditional Specialty Guaranteed (TSG), all of which have become a strategy among local societies to boost their economies and comply with the quality norms demanded by the European and global markets (Perez & Campos, 2013). The advantage of the geographical indication dwells on the fact of building a powerful tool of differentiation and positioning of agroindustrial and farming sectors. Countries of the European Union understand it that way and, therefore, consider this an instrument of the European systems of value and protection of agrifood products within the field of quality policies of the Agricultural and Rural development sector of the European Commission. The CO serve consumers as it provides a warranty in regard to the quality, it holds economic advantages in promoting alliances and associations of small and medium businesses and the exportation of different specialties, generating wealth for the country and its respective regional economies (Errazuriz, 2010). Besides, it has clear environmental repercussions, since it constitutes a bond between the product and the land, and thus, contribute to ensure sustainable production techniques. According to Sacco and Vellada (2010), the PGI can become an important instrument for the development of rural Latin American areas, in terms of employment and generation of wealth, as long as they are framed within a wider approach of development, which focuses on public policies related with the cultural identity of the territories, that is why it is important to promote not only vertical links in the value chain of a specific product associated to a specific territory, but also and above all, the horizontal links that are stablished among the different actors present in said territory and connected to the value of the product. A product will be successful in the market if it offers added value, that is, that exceeds the expectations of the consumer, which is addressed to a specific market willing to acquire it and, relies on the pertinent distribution channels (Ghirardelly, 2013).

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Global Value Chain

According to Santarcangelo et al. (2017), the activities that comprehend the GVC encompass not only the tangible production (including supplies, parts or used components), but also the wide range of services involved, from design to commercialization, distribution, support and after-sales. Each stage of this sequence or group of activities is responsible for adding a part of the total added value of the goods, thus the denomination of value chain. For Fernandez-Stark and Gereffi (2019), the value chain is described by all the range of activities that are developed by firms and workers to carry a product from its conception to its final use, and sometimes even beyond that. It is where the analysis of governance allows to understand which actors of the chain have more power than others and control it. According to Perez (2019), the conception of the value chain, was used to analyze the sequence of activities necessary for the manufacture of a specific product, not only in its tangible aspect, but in all the range of services associated with it (commercialization, distribution, post-sales, etc.). The following section comprises the comparative analysis of the three indicators of the Governance dimension, under the methodological proposal of Gary Gereffi for the study of the global chains of merchandises, focused on the Certificates of Origin of Pluma Hidalgo Coffee from Oaxaca and Habanero Chili from the Yucatan Peninsula. The selected indicators are structure, level of coordination and level of asymmetry. The level of coordination refers to the degree of integration of the different links of the commercialization chain, for better dynamism. The level of asymmetry refers to the way in which wealth from the sales of farming goods is distributed among the different links of the chain. Coffee Pluma Hidalgo from Oaxaca In February 2020, Pluma Coffee from the community of Hidalgo Oaxaca was recognized as a Designation of Origin. It is a farming product grown under shade with a microclimate in the region of Pluma, very close to the coast, with a very special geographic location which contributes to its unique taste. According to the DOF (2020), Pluma Coffee must be extracted from the fruit of the species Coffea Arabica, fundamental for the Typica variety,

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as the original variety and from Pluma Hidalgo, Bourbon, mondo novo, mango Gype, Marsellesa, oro Azteca, Sarchimor, Geisha and Java varieties, all from the fields located in the Pluma region. The varieties of Pluma Coffee are a result of the interaction of the genotypes with the geographical environment and the type of climate typical of the area or protected geographical zone. From the ripe fruit, constituted by the skin and flesh that encloses the subsequent parts, at harvest and processing, the following classes are obtained: • Parchment coffee bean is covered of its mucilage, substance eliminated at processing, remaining only its skin. • Dried coffee is obtained by the harvested fruit, dried out under the sun along with all its parts. • Washed-green coffee bean is obtained from parchment coffee bean, after eliminating the skin, keeping only the bean with its adhesion of cuticle. • Natural-green coffee bean is obtained from dried coffee through a peeling process, leaving only the bean with its adhesion of cuticle. • Toasted coffee bean is obtained from washed-green coffee bean, which at heating processing, eliminates the cuticle and loses weight and humidity, acquiring sienna colors. • Ground coffee is obtained from toasted coffee beans, without the skin, which transforms into granulated fragments at processing. All of these transformed and finished products, in their diversified commercial types, contain the distinctive quantitative and qualitative characteristics that make Pluma coffee unique. Flores et al. (2017) stated that just as Francisco Javier Herrera Lopez, Mexican taster specialist with great experience, mentioned at the first Pluma Coffee as “One of the main characteristics of a cup of Pluma Coffee is its fruity fragrance, sweet taste, average acidity, very balanced, its flavor is typically honey-colored and a chocolaty taste…”. According to Espinosa and Barrita (2018), currently the demand of quality innocuous products, and the concern for environmental conservation, requires producers to offer goods that satisfy the expectations and preferences of the consumers, producing organic foods that comply with the demands.

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In Mexico, there are 14 states that produce coffee, each one with particular characteristics according to its cultivation zone. Nonetheless, only Chiapas and Veracruz coffee held a Designation of Origin. The declaration of Pluma Hidalgo Coffee from Oaxaca contemplates 30 communities of this state. The Structure of the Marketing Chain for Pluma Hidalgo Coffee from Oaxaca In the case of Pluma Hidalgo Coffee from Oaxaca, the chain of commercialization considers four levels, in which the earnings result from the sales of the coffee, and it is distributed among the actors of the chain of commercialization of this important farming product. Currently, the chain is being directed by the buyer, in this case, the transformer, who keeps the highest percentage of the finished sale price of the product. The conventional coffee chain, in global terms, is dominated by the consumer countries, moreover, by transnational corporations that do not benefit the producer with respect to the price that is paid to them per each Pluma Hidalgo Coffee bean that is harvested (Velazquez, 2017). That is because producers, who are the ones holding the main responsibility in the production of the coffee beans, from its planting to its harvest, are not the main beneficiaries by the price paid for the final product by the consumer. This can be observed clearly in the description of the chain of commercialization. This chain consists of four levels, on the first level producers are found, represented by the farmers of the coffee beans, the small, and medium producers, and the agroindustry that with a bigger investment and better technology, achieve important harvests. On the second level, the intermediaries are found, most importantly: the collectors, farming associations and the same national corporations. Starting on the third level, national and transnational enterprises can be found, who oversee the processes for the transformation of the coffee bean (toasting, grounding and packaging), to give the added value before handing it to the final consumer. The last link on the chain of commercialization of Pluma Hidalgo Coffee from Oaxaca, is occupied by the final consumer, represented by the supermarkets, coffee shops, hotels, restaurants, among others. It is important to highlight that Mexico as a producer only takes part in the first two links of the chain, since starting on the third link, it is controlled by the countries that transform the coffee bean and give the

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added value to deliver it to the final consumer. It is the third link of the chain of commercialization of Pluma Hidalgo Coffee from Oaxaca, the one in charge of giving the highest added value to the coffee bean, and therefore, they get the highest percentage of price paid by the final consumer. Coordination Level in the Marketing Chain of Pluma Hidalgo Coffee from Oaxaca The existence of a structure in the chain of commercialization of Pluma Hidalgo Coffee from Oaxaca, carries a coordination among the links to transform the coffee bean in a completed product, ready to be consumed. In this case, there is a low level of coordination between the links of the chain. Now, it is important to highlight that the participation of the producing country, in this case Mexico, is only found in the two first links of the chain, since starting on the second and third link, production is controlled by transnational enterprises who acquire the bean in high volume for its transformation and disposition for its final consumption. That coordination includes the tasks that each link carries out, and the way in which the coffee bean is delivered to the next link of the chain. According to Velazquez (2017) torrefaction enterprises who conduct the final stage of processing, that is, toasting, grounding and in some cases, decaffeinate and solubilize the bean. As Flores et al. (2017) state, the production of Pluma Hidalgo Coffee from Oaxaca faces three problems that need to be addressed to take full advantage of the Designation of Origin of this important farming product: 1. The cultural and political differences of the internal organization and of formal institutions associated with the product. 2. The problems with the genetic vulnerability of the product. 3. Risk of quality lost.

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Asymmetry in the Marketing Chain of Pluma Hidalgo Coffee from Oaxaca According to the interviews conducted on the field, a high asymmetry in the income obtained by each one of the links of the chain of commercialization of Pluma Hidalgo Coffee from Oaxaca is observed. That is since the coffee producers, specifically the farmers, who are at a higher risk of losing their fields due to climate change and plagues, are the ones less benefited from the final price paid by the consumer of the product. The inequality is one of the main characteristics of the chain of commercialization of coffee in the world. Even though the bean is the second most marketed in an international level, only after raw petroleum, it is also true that it is hardly beneficial for the primary producer (Velazquez, 2017). Though intermediaries play a key role as a link between the producers and the transformers, its intervention absorbs part of the cost paid by the final consumer, leaving producers at a disadvantage, even when they are at a higher risk at having to keep their fields in good shape until the harvest season. Velazquez (2017) states that the conventional coffee chain, in global terms, is dominated by consumer countries, specifically, by international corporations, that do not favor the producer in terms of the percentage of price obtained, with respect to the final price. The asymmetry also detracts the farmers from cultivating coffee, since to everything stated before, demands in terms of quality made by the transformers when purchasing the beans are added; among the most important demands, innocuity in the cultivation process and how organic the bean might be, can be found.

5.4

Habanero Pepper from the Yucatan Peninsula

Habanero Chili, whose scientific name is Capsicum Chinense Jacq, is a fruit of a plant that is barely a meter tall, with a trunk and grows dichotically: one trunk gives origin to two branches, and these, to two more. The seeds are grown in appropriate conditions for the development of plants that are planted in greenhouses, and then transplanted to the desired type of soil (IMPI, 2016). According to Flores and Sanchez (2017), the importance of the production of the chili revolves around its high rate of consumption and

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preference in the food sector, and lately in the scientific and technological sectors. The consumption of chili is a food habit that encompasses nutritional, cultural, historical, social and economical aspects. Its high consumption rate has been linked to the stimulus it causes in as well as for satiety, salivation and better digestion when combined with other types of foods, besides, medicinal and antioxidant properties are given to it. The use of this food is so embedded in Mexican culture that it has become distinctive; this can be observed specially by its high rate of consumption in the south of the country (Montes, 2010). Habanero Chili obtained its Designation of Origin in June 2010, with which the fruit and all its derived products produced in the Yucatan Peninsula are protected. The finished products that are now protected are: (a) Habanero Chili from the Yucatan Peninsula, fresh, raw ripe and unripe. (b) Pickled Habanero Chili from the Yucatan Peninsula. (c) Habanero Chili from the Yucatan Peninsula in paste. (d) Dried in whole, and in powder Habanero Chili from the Yucatan Peninsula. (e) Habanero Chili from the Yucatan Peninsula in sauce. Gomez (2010) states that the characteristics of Habanero Chili have brought the attention of the international food industry, that has adopted it to produce snacks, soups, dressings, seasoning beverages, confectionery, dairy among other national and exporting products. Among the benefits to human health which have been found for the consumption of this fruit are: it is an excellent source of vitamin A; it has a double amount of vitamin C than any citrus fruit, and it boosts the immune system; it has high concentrations of beta-carotenes and flavonoids as well as antioxidants that slow down aging and help to prevent arthritis; it is also a very powerful anti-inflammatory that relieves muscle and rheumatic pain. Chan et al. (2011) point out that Habanero Chili is currently found among the vegetables that have a higher demand in the local and international market, given its importance in the use of food as a source of natural colorants, vitamins and minerals, and for other components for the health and cosmetic industry.

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In Yucatan, Habanero Chili for the general population is not only an ingredient to accompany dishes, but also a symbol of regional identity, considered as one of the spiciest chilies in Mexico and in the world (SIIDETEY, 2014). The Structure of the Marketing Chain of Habanero Chili from the Yucatan Peninsula The chain of commercialization of Habanero Chili from the Yucatan Peninsula possesses 5 levels. On the first level, low and medium technology producers are located, some private companies that using technology have improved their production, can also be found in this level. On the second level, collectors or intermediaries can be located, who making use of a vehicle, purchase directly from farmers after harvesting, to then sell it on local markets; intermediaries usually purchase different farming products along the way, with the aim of getting the best quality products to the local market. The industry which acquires the chili in fresh and transforms it into pastes or sauces, can be found on the third level of the chain of commercialization; paste of chili is used as a primary ingredient in the production of seasoning and sauce to be later consumed as dressing in different dishes. On the fourth level, the local, national and international markets are located, where the collectors or intermediaries take fresh Habanero Chili for its commercialization. Over 75% of the habanero that is exported, reaches countries such as the United States, Canada, Portugal and France, for nostalgic reasons. On the fifth level, consumers are found, which are represented by civilians, restaurant clients, guests at hotels or supermarket shoppers. It is important to mention that the three presentations of Habanero Chili that are commercialized are fresh, pastes or sauces. According to Chel (2010), the final consumer of Habanero Chili acquires 80% of the product in raw, and 20%, industrialized in sauce or seasoning. Coordination Level in the Marketing Chain of Habanero Chili from the Yucatan Peninsula A low level of coordination among the different links in the chain of commercialization of the Habanero Chili from Yucatan Peninsula was found. The reason for this is that even though the actors performing on the chain know each other, there has not been up to this date the

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constitution of a regulating council for Habanero Chili from the Yucatan Peninsula that can allow for the integration and efficient coordination of the links. Regulating councils are responsible for looking after the traceability in the cultivation of the different farming products until they reach the consumers hands, and with the active participation of the different actors of the chain of commercialization, who must compromise to achieve the outmost exploitation of the Designation of Origin, Tequila being the best example of such, which regulating council has become a reference, to make a traditional product a worldwide quality good. Level of Asymmetry in the Marketing Chain of Habanero Chili from the Yucatan Peninsula According to SAGARPA (2015), the percentage of participation on the final price of Habanero Chili that the producer receives is 29.4%, the intermediary, receives 19.8% and the wholesale intermediary retains 50.8%, leaving the producer with less than half of the income for the total sales of the product. This allows to observe a high level of asymmetry in the distribution of income among the different links that conform the chain of commercialization of Habanero Chili from the Yucatan Peninsula. Being producers the first link the less benefited and the one at the highest risk for the cultivation of the fruit, due to climate change and plagues. The intermediaries and the industries are the ones with the highest benefits, since they purchase the prime quality product at very low prices and sale it for a much higher price, and anything that might remain unsold, as well as second-class productions, gets transformed into pastes and sauces, and redirected to the different markets.

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5.5 Comparative Analysis of Indicators of the Governance Dimension Under the Methodology of Global Chains of Gary Gereffi between the DOs of the Pluma Hidalgo Coffee from Oaxaca and the Habanero Pepper from the Yucatan Peninsula A coincidence in two of the indicators of the dimension Governance of the methodology of Gereffi for the study of chains of commercialization of Pluma Hidalgo Coffee from Oaxaca and Habanero Chili from the Yucatan Peninsula was found. Pluma Hidalgo Coffee from Oaxaca and Habanero Chili from the Yucatan Peninsula have clearly identified links in their chains of commercialization, which made possible to identify the coincidence mentioned above by interviews conducted to the members of the chain of commercialization of both farming products, finding that the earnings obtained for the sale of both, put the producer in disadvantage and favor the purchaser according to the methodology proposed by Gereffi, which confirms an asymmetry in the way in which the benefits are distributed along the links of the chain of commercialization of Pluma Hidalgo Coffee from Oaxaca and Habanero Chili from the Yucatan Peninsula. A difference between the coordination of the links of the studied chain was found: In the case of Habanero Chili from the Yucatan Peninsula, the actors of the chain are in contact and know each other, since the representative of the producers of Habanero Chili interacts informally with industries, commercialists and academics, although there is no regulating council in the peninsula, in charge of stablishing the rules of operation and exploitation of the Designation of origin of the Habanero Chili from the Yucatan Peninsula. In the case of Pluma Hidalgo Coffee from Oaxaca, there are differences among the producers and the other links of the chain, which make its integration even more complicated. Therefore, there is a low level of coordination, due not only to the lack of a regulating council, but also to the cultural and political differences of each link of the chain, and to multiple factors that risk the genetics and quality of the product, that by its own demands it to be natural and innocuous.

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It is necessary to mention that even before the COVID-19 pandemic in the year 2020, there was an approach among the different actors, both direct and indirect, that conform the chain of commercialization of Habanero Chili from the Yucatan Peninsula to discuss the possibility of the constitution of a regulating council for the product; these dialogues were suddenly interrupted and have not been reestablished up to date. What is meaningful about these dialogues is that at such were not only the direct actors in the chain of commercialization of Habanero Chili from the three states of the Peninsula, Campeche, Quintana Roo and Yucatan, but also the indirect actors, like university faculty members, and important researchers for investigation centers, and whose findings help enormously to the project of the Habanero Chili from the Yucatan Peninsula. The open dialogue at these meetings provided positive insight into the necessities of the chain of commercialization of Habanero Chili, and above all to the alignment of the necessities had in common for the constitution of a possible Peninsular Regulating Council, that is, one that attends to and guides the exploitation of the Designation of Origin in the three states of the Peninsula. Even when the primary reason for the existence of certificates of origin is the protection of the products with unique characteristics of place of origin or process of production, a Designation of origin also aims at detonating the economic development of the region, allowing the different actors of the chain of commercialization attaining long-term economic benefits to positively impact their quality of life and preserve the originality and nature of the products they make. In Europe, the geographical indications have worked for several years. In Mexico, the opportunities of use for this protection and promotion resource are highly valuable due to the diversity of unique goods that are produced long and wide throughout the country, which are all good candidates to obtain a CO. For that to happen, they must work very hard within their local governments to create the conditions for the constitution of regulating councils which can work as arbitrators and vigilantes in the compliance of the normativity that products that have been distinguished with a CO demand, if they fail to do so, all efforts will be in vain. If the products that are elaborated do not comply with the specifications demanded by the norm, they will not be able to use the distinctive in the international markets and will have to limit themselves to the generic markets of less value.

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Conclusions

This chapter compares three of the indicators of the Governance dimension for the study of global chains, under Gereffi’s methodological proposal. These indicators were the type of chain structure, the coordination of the links and the asymmetry between the chain links. It was very enlightening to find similarities in the chains of commercialization of Pluma Hidalgo Coffee from Oaxaca and of Habanero Chili from the Peninsula of Yucatan, observing certain advantage in the Designation of Origin of Habanero Chili from the Yucatan Peninsula to the Designation of Origin of Pluma Hidalgo Coffee from Oaxaca, with respect to the coordination of the links of the chain. This is due to the Designation of Origin of Habanero Chili is older than the Designation of Origin of Pluma Hidalgo Coffee, which has allowed that the actors of the chain in the case of Habanero Chili from the Yucatan Peninsula, to have more time to discuss and agree on ways to permit the organization of a regulating council that in the case of Habanero will have to be on a peninsular level, since the certificate contemplates the states of Campeche and Quintana Roo. With respect to the structure and asymmetry indicators among the links of the chain of commercialization, coincidences were found, since in both cases very similar levels of participation were observed, and the unfortunate inequality in the earnings obtained by each link. The asymmetry in the earnings that each link obtains in the chain of commercialization is very comparable, since in the production of both Pluma Hidalgo Coffee and Habanero Chili from the Peninsula, farmers are more disadvantaged, as they are totally responsible for the cultivation of the farming goods, facing the challenges of environmental disasters, fighting to eliminate plagues and surviving until the next harvest, against the intermediaries and collectors and the national and international industry, which once gotten ahold of the goods work to give added value, charging a lot more for it. Farmers facing the challenges of maintaining the fields under the required standards by the markets, are the most affected as when investing in their crops, the recovery of their investment is never guaranteed. That is because, as the trees age naturally, after the first crops generally the product becomes less abundant, in color and in aroma, that is, there is a decrease in quality and in parallel, in their price. It is a reality that the intermediation is key in the whole chain of commercialization, this is the reason why it must not be eradicated, on the

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contrary, as far as there are regulating councils of goods with a Designation of origin, including and controlling intermediaries will be a necessity, so that in their labor, there is no damage done to the main provider of farming goods, that is, to the farmer. While all the direct and indirect actors in the chain of commercialization play an important role, it is wellknown that as long as there is a coordinating entity better results are to be expected, specifically since the entity will be vigilant, supervisor and judge in the resolution of disagreement and controversies that may arise in the operation of the chain of commercialization. The lack of clear rules in the functioning of a formal chain of commercialization, results in abuse from some of the actors, who having a better academic formation or better knowledge of the market, takes advantage of the ignorance of the weaker links, therefore the existence of a mediator for a chain or commercialization is of the outmost importance for its functioning well, since it allows the exploitation of the Designation of origin, distinction with international recognition.

References Bowen, S. (2012). Las indicaciones geográficas, la globalización y el desarrollo territorial: El caso del tequila. Agroalimentaria, 18(34), 91–103. Ceballos, R., & García I. (2013). Protección legal de las denominaciones de origen y marcas frente a los tratados de libre comercio suscritos por Colombia. Revista Prolegómenos. Derechos y valores, 16(32), 175–179. Chan, N., Sauri, E., Olivera, L., & Rivas, J. (2011). Evaluación de la Calidad en la Industrialización del Chile Habanero (Capsicum Chínense). Revista Iberoamericana de Tecnología Postcosecha, 12(2), 222–226. Chel, L. (2010). Planeación estratégica en la obtención de la Denominación de Origen del Chile Habanero. México. Tesis en opción al grado de Maestro en Administración. Facultad de Contaduría y Administración. UADY. DOF. (2010). Declaratoria general de protección de la Denominación de Origen Chile Habanero de la Península de Yucatán. Recuperado de. http://dof. gob.mx/nota_detalle.php?codigo=5145315&fecha=04/06/2010#:~:text= El%20Chile%20habanero%20de%20la,de%20la%20Pen%C3%ADnsula%20de% 20Yucat%C3%A1n DOF. (2020). Declaración de protección de la Denominación de Origen Pluma. Recuperado de. https://www.dof.gob.mx/nota_detalle.php?codigo= 5585437&fecha=04/02/2020

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Errazúriz, C. (2010). Indicaciones geográficas y denominaciones de origen. Revista Chilena de Derecho (Vol. 37, Número 2, pp. 207–239). Pontifica Universidad Católica de Chile. Espinosa, M., & Barrita, E. (2018). Rentabilidad de dos sistemas de producción de café cereza en Pluma, Hidalgo, Oaxaca. Agroproductividad, 11(3), 104– 107. Fernandez-Stark., & Gereffi. (2019). Global value chains and development redefining the contours of 21st century capitalism global value chain analysis: A primer (2nd Ed., pp. 305–342). Cambridge University Press. Flores, F., Espitia, J., & Alonzo, R. (2017). Recuperado de. https://www.resear chgate.net/publication/334625019_Prospectiva_del_cafe_Pluma_Hidalgo_ origenes_crisis_varietal_del_producto_actores_estrategia_de_solucion Flores, M., & Sanchez, E. (2017). Entorno productive del chile habanero en la península de Yucatán, México. CIATEJ. Recuperado de. https://ciatej.rep ositorioinstitucional.mx/jspui/bitstream/1023/715/1/Cap%2017%20Ento rno%20productivo%20del%20chile%20habanero.pdf Gereffi, G., & Korzeniewicz. (1994). Commodity chains and global capitalism. Praeger. Ghirardelly, F. (2013). Tres Características de un Producto Exitoso. Informa BTL. Recuperado el 26 de Septiembre de 2014 de. http://www.informabtl.com/ 2013/10/21/3-caracteristicas-de-un-producto-exitoso/ Gómez, T. (2010). Sabor de México con Chile Habanero de Yucatán. INIFAP. Recuperado de. http://www.inifap.gob.mx/cirse/chile_habanero.pdf IMPI. (2016). Denominaciones de Origen. Orgullo de México. Secretaría de Economía. Lizarralde, L., & Irizar I. (2005). Desarrollo Regional y Aprendizaje Cooperativo. Número de clasificación JEL A13 O31 R11 J54. Mondragón Universidad. Macías, A., & Valenzuela, A. (2009). El tequila en tiempos de la mundialización. Comercio Exterior No 59 Número 6 Junio 2009. Martínez, A. (2008). Tequila, mezcal y cerveza: de México para el mundo. Agricultura, Sociedad y Desarrollo. Julio-Diciembre 2008. México. Mendoza, R. (2000). The hierarchical legacy in coffe commodity chains. In R. Ruerd & J. Batiaensen (Eds.), Rural development in Central America (pp. 58–76). Antony Rowe. Montes, H. (2010) Recopilación y análisis de la información existente de las especies del género Capsium cultivadas en México. CONABIO. México, D.F. Noriega, L., & Solano, V. (2009). La Producción y Comercialización de Bacanora como Estrategia de Desarrollo Regional en la Sierra Sonorense. Estudios Sociales. Revista de Investigación Científica (pp. 205–219). Olmedo-Carranza, B. (2010). El tequila: de su origen a su desnaturalización ¿A quién le pertenece su conocimiento? Una aproximación. Revista CENIC.

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Ciencias Químicas (Vol. 41, pp. 1–13). Centro Nacional de Investigaciones Científicas. La Habana, Cuba. Pelupessy, W (2001). El enfoque de la cadena global de mercancías como herramienta analítica en las economías en vías de desarrollo. In Economía y Sociedad, Enero-Abril 2001 (pp. 111–120). Pérez, J. (2019). Cadenas Globales de Valor. Semestre económico, 22(51), 63–81. Recuperado de. http://www.scielo.org.co/pdf/seec/v22n51/01206346-seec-22-51-63.pdf Pérez, P., & Campos, J. (2013). El Mediterráneo y su Desarrollo Agrícola en el siglo XXI . Instituto de Enseñanza e Investigación en Ciencias Agrícolas. México. Pérez, P., & Pérez M. (2010). Las Denominaciones de Origen del Café en México ¿Posibilidades para el Desarrollo Regional? Geocalli. Universidad de Guadalajara. Año 12. No 21 Enero-Junio 2010. Rosillo, F. (2009). Estudio de la Cadena de Comercialización del Maíz Blanco en la Provincia de Bolivar. Rio Bamba. Ecuador. Tesis. Escuela de Ingeniería Agronómica. SAGARPA. (2015). Márgenes de comercialización SIAP. https://www.gob.mx/ cms/uploads/attachment/file/71239/MargenesComer_ChileHabanero_Mar zo2015.pdf Santarcángelo, J., Schteingart, D., & Porta, F. (2017) Cadenas Globales de Valor: una mirada critica a una nueva forma de pensar el desarrollo. Cuadernos de Economía Critica. Num 7 2017 pp. 99–129. Sociedad de Economía Critica. La Plata Argentina. Sacco, F., & Vellada, N. (2010). Indicaciones Geográficas , Desarrollo e Identidad Territorial. Universidad Federal de Pelotas de Brasil. Agricultura Familiar en España (pp. 207–214) Recuperado el 2 de Noviembre de 2012 de. http:// www.upa.es/anuario_2010/pag_207-214_saccodosanjos.pdf SIIDETEY. (2014). Chile habanero. Gaceta. Año 6 No 48 Julio de 2014. Recuperado de. http://yucataninnovador.org/wp-content/uploads/2017/ 02/48-chile-habanero.pd Valenzuela, A. (2007). Las denominaciones de origen tequila y mezcal y la biodiversidad en el género agave sp. Universidad de Guadalajara. Departamento de Salud Pública. México. Velázquez, M. (2017). Consumo y comercialización del café en México. Tesis Doctoral. UNAM. FES Acatlán.

CHAPTER 6

Governance and the Institutional Framework: The Case of Products with Designation of Origin in Mexico Pablo Pérez Akaki, Nadia Viridiana Vega Vera, and Yuritzi Paola Enríquez Caballero

6.1 Appellations of Origin: The Importance of the Governance and the Institutional Framework A Designation of Origin (DO) is a special type of Geographical Indication (GI) that requires the existence of a qualitative link between the product to which it refers and its place of origin: its quality or the characteristics of the product must be exclusive or essentially a consequence of

P. Pérez Akaki (B) Departamento de Contabilidad y Finanzas, Tecnológico de Monterrey, Monterrey, Mexico e-mail: [email protected] N. V. Vega Vera Universidad Nacional Autónoma de México, Mexico City, Mexico

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_6

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its geographical origin, implying that the raw materials must come from the place of origin and that the product must also be produced and/or processed locally (WIPO, 2007; 2017). This definition emphasizes that it requires the existence of a close qualitative link between the product to which it refers and its place of origin, being recognized as a heritage of the territory where it is produced. The GI can generate positive effects in different dimensions: economically, an increase in the volume and added value of the product is obtained, as well as a more equitable distribution among the participants in the marketing chain; socially, traditions and cultural heritage are preserved, links between people and local businesses are strengthened, in addition to promoting employment opportunities for different categories of the population; environmentally: sustainable use of natural resources is realized, protecting them from depletion and boosting the preservation of agrobiodiversity (Belletti et al., 2017). Vandecandelaere et al. (2010) proposed a virtuous circle linked to the opportunity to generate positive territorial effects in the producing areas, whose main components are: identification of local awareness and assessment of productive potential, qualification, and establishment of rules regarding value creation and preservation of local resources, remuneration of the product through the local system and marketing, reproduction of local resources in a way that reinforces the sustainability of the system and territorial public policies, which should provide an appropriate institutional framework for these initiatives, as well as a set of strategies that promote all phases of the virtuous circle. In this sense, local and external actors (production and marketing, public actors, non-governmental organizations, research, and development centers) play a fundamental role in all phases. Likewise, the institutional framework (public policies and regulations) plays an important role in the promotion and regulation of quality linked to geographical schemes. Figure 6.1 summarizes the virtuous circle.

e-mail: [email protected] Y. P. Enríquez Caballero Universidad Panamericana, Mexico City, Mexico e-mail: [email protected]

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Fig. 6.1 Virtuous circle of the valorization of the product of origin (Source Own elaboration based on Belletti et al. [2017] and Vandecandelaere et al. [2010])

Vandecandelaere et al. (2010) mentioned that the GI could lead to an increase in the income and quality of life of producers; a boost in the dynamics of the rural economy as a whole and allow the appropriation of the productive dynamics by local actors, to involve them in the decisionmaking processes related to quality seals, as well as lead to an equitable distribution of benefits among the actors. On the other hand, a GI, also recognized as a territorial quality label, can become a factor of innovation, as it identifies an evolutionary path of the actors to adapt the product and the production practices to the needs of the consumers, as well as a factor of cohesion, promoting an exchange of a unified strategy among the relevant actors in the productive chain and the territory (Belletti et al., 2017). According to Giovannucci et al.

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(2009) and ITC (2019), the degree of benefits that a GI spill into society depends on several factors, highlighting: – Strong organizational structures and institutions to maintain, market, and control GI. The main processes of (i) identification and appropriate demarcation, (ii) organization of current practices and standards, and (iii) establishment of a protection and marketing plan for these tools always require the creation of institutions and management structures at the local level that is willing to make a long-term commitment to participatory cooperative methods. – Equitable participation between producers and companies in the region of origin of the GI. Equity is achieved when the local stakeholders benefiting from the GI not only share the costs and benefits, but also share the control and decisions over their public goods. – Effective legal protection, including a strong national system of protection for GIs. Carefully chosen protection options will ensure effective control and enforcement in the relevant markets to reduce the potential for fraud to compromise their reputation and even their legal validity. In this context, the institutions, the equal participation between the actors involved in decision-making, and the effective legal protection of a strong national system of protection, qualification, and establishment of rules and an appropriate institutional framework take a central role in achieving the benefits so longed for by the application of a GI. These elements can be analyzed with the help of the Global Value Chains methodology, especially in its governance dimensions and institutional framework. This methodology analyzes the total variety of activities required to take a product from its conception to its delivery to the consumer, disposal, and final disposal, through various phases or intermediate production chains, involving combinations of physical transformation and inputs from different producer services, are the Global Value Chains (GVCs) (Gereffi & Korzniewics, 1994). From the approach proposed by Gereffi and Korzeniewics (1994: 2), GVCs are understood as “a set of networks organized among themselves, grouped around a product, connecting family units, companies and States within the global economy.”

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The GVCs make it possible to analyze appellations of origin from their first approach, based on the relationships that exist between the actors that participate in the chain (Trejo et al., 2011). The analysis of an GI under the GVC methodology from your first approach involves four dimensions (Díaz et al., 2009; Gereffi, 1994): the institutional framework, input-output, geographic scale, and governance.1 • Structure of entry and exit or also called input-output production system The process of transformation of the raw material to the final product is described, and the processes of value generation are observed vertically, in other words, a set of products and services linked in a sequence of economic activities that add value. • Geographical coverage or territoriality The geographical location reflects the dynamism of the assignment of roles in the chain due to the strategies developed by the most influential companies, associated with geographical spaces, as well as refers to the spatial dispersion or concentration of production and distribution networks, composed of companies of different sizes or types. • Governance structure A key aspect within the GVC approach is that of governance, referring to the “relations of authority and power that determine how financial, material and human resources are placed in the flows within the chain” (Gereffi, 1994). Governance can be seen as the process of organizing activities with the purpose of achieving a certain functional division of labor along the chain, resulting in specific resource allocations and profit distribution. Governance consists of defining the terms of membership in the chain, incorporating/excluding other actors accordingly, and

1 Given their evolution and contributions, GVCs can be analyzed from three approaches: governance as driving, governance as coordination, and governance as normalization, which are not mutually exclusive but complementary. In this paper, only the first approach (governance as driving (Díaz et al., 2009; Gereffi, 1994) is analyzed.

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assigning added value to certain activities that the leading actors do not wish to carry out, the leading actors or companies are the ones that exercise purchasing power to coordinate the activities of the chain, pressure suppliers to improve quality and reduce costs, and influence procurement decisions for inputs, specific machinery, and territories where to invest (Sturgeon, 2011). • The institutional and socio-political framework The socio-political and institutional context is important because have an impact on the operation of the chains and the development of the competitiveness of the actors involved within them. National states, local institutions, and international institutions affect chains, and the competitiveness of national actors, through the various policy instruments of productive promotion market regulations and trade policies (Díaz et al., 2009). The influence that institutions have on GVCs (Sturgeon, 2011) depends on geography and the structure of value chains to the different behaviors of companies. Douglas North (1993) conceived institutions as the rules of the game, formal (written rules) or informal (agreements and codes of conduct) in a society, those man-made limitations that shape and are the framework of human interaction. Institutional limitations include what individuals are prohibited from doing and sometimes the conditions under which some individuals are allowed to take charge of certain activities. Its main function is to reduce uncertainty by establishing a stable (but not necessarily efficient) structure of human interaction. The importance of institutions and the emphasis on agencies or organizations (groups of individuals linked by some common identity to certain objectives) lie primarily in their role as agents of institutional change (how societies evolve over time), affecting economic performance. Scharpf (1997) defines them as a system of rules that structure the courses of action, which a group of actors can choose. It includes formal legal rules that are sanctioned by the judicial system and the state, as well as social norms that actors generally respect and whose violation will be punished for loss of reputation, social disapproval, withdrawal of cooperation and rewards, or even ostracism (voluntary isolation and banishment). Institutions are the most important influences, the most useful sources of information about actors, and their interactions being one of the most

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general and public sources of reliable information about the intentions we can expect from others. Sturgeon (2011), citing several authors such as North (1990), Meyer and Rowan (1977), Stinchcombe (1997), and Yeung (unpublished), mentions that institutions can be thought of as: bureaucratic organizations with employees and physically address; the rules that govern a society, whether within normative and legal frameworks or through societal norms; institutions as rules of the game that shape and give functions to markets and the relations between them; institutions derived from beliefs, values, and meanings, rooted in the societies that create, inhabit and finance them; and as limits on the actions of firms and their managers, running the risk of being sanctioned for not obeying them and creating pressures on them to comply with the behavior of the societies in which they operate. In another sense, Ponte and Gibbon (2005) consider governance as coordination that the rules and conditions for participating in GVC are the key operational mechanisms of governance. Thus, GVCs are shaped by governance, seen as power relations, and exercised through laws, or lack of laws, and agreements or lack of agreements of institutional actors; consumers’ purchasing decisions; workers’ pressure tools. Also, the way of accumulating and maintaining these power relations between the different actors of the chain is reflected in asymmetries or non-asymmetries of power (Sturgeon, 2011). Thus, the institutional category, the role played by the institutions in the relations between the actors, becomes one of the three pillars of analysis of the GVCs: along with governance, how power is distributed among actors, and geographic coverage or location (Sturgeon, 2011). With this, it is essential to deepen the socio-political and institutional context within the GVC of a product of origin with a Geographical Indication, as is the case of the Tequila and Mezcal, the most representative and relevant the Mexican history.

6.2 The Main Mexican Designations of Origin and Their Marketing Chains Mexican experiences in Designations of Origin (DO) have been more than controversial. In the economic dimension, Tequila’s results are exemplary for any DO in the world. However, questions about the territorial effects on agave areas are extremely worrying. Mezcal has followed

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a similar path over the last 15 years, although given the experience of its predecessor, the road has become more complex. In terms of volume, the Tequila and Mezcal trade has shown a dizzying growth rate since there is a specific record (1995 and 2010, respectively), which can be described as a resounding commercial success. However, the way in which the chain has been organized raises serious questions about the possibility of spillover down the value chains. Then, the next sections are an analysis of both distillates from the perspective of GVC, discussing their main characteristics, with a special focus on the institutional framework and the governance dimension. Input–Output Dimension The input-output dimension is similar in both cases and is characterized by the following points: the process of elaboration of both distillates begins with the cutting of the agave. Appears the symbol of the jimador, the person who is responsible for cutting the stalks and leaving only the pineapple, the heart of the agave. The ripening time depends on the type of agave, the most used due to their properties of faster ripening speed (approximately 6 years) and better yields are the blue agave in the case of Tequila and espadín agave for Mezcal. In the second step, after cutting the agave, the agave is cooked and several technologies can be used, from small wood oven buries in the ground to industrial ovens called autoclaves. There are clear differences in efficiency in both methods and the flavors that the distillate will later assume. The third process is milling, which can also be carried out in different ways, either in very fast industrial presses or in canoes, using a mallet, which means a great physical effort for those who participate in this last type of process. At an intermediate level, it is carried out with the help of a pack animal, which drags a wheel that grinds the pineapples until they become bagasse in a circular route. Next comes fermentation, which can take several days and takes place in different ways depending on the type of process followed: in industrial cases, it is carried out in large stainless-steel tanks, which guarantees a faster fermentation. In the traditional method, it is made in clay or wooden containers, which can take several days but implies greater care. Again, these differences affect the flavor of the final product, since in the case of clay or wood, the ferment acquires other sensory properties, which does not occur with stainless steel.

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The next step is the distillation process, which is traditionally carried out in copper stills and clay pots, although in more modern cases, it is also done in columns, which means a cleaner process, since it is done more selective manner. Several companies even use more than one distillation, which allows them to give greater purity to the distillate, since this process separates the sugars to classify them better. In some cases, up to three distillations are used. Although this process offers a ready-to-drink beverage, several producers of these beverages like to age their product in barrels for a certain period, to obtain versions (reposado and añejo versions of their distillates). This takes place in wooden barrels and the aging time varies according to the category: reposado lasts less than one year commonly, but añejo can last longer than 3 years in a special category of extra añejo. The bottling process will be the last link before the distribution of the distillate to consumer markets, which, due to its appellation of origin status, should be carried out in the same place where it is processed. This has been one of the controversial points that have been discussed in recent years, which will be taken up again in the governance dimension. Several innovations have been developed over time to achieve greater efficiency in this general process, such as tearing the pineapples before cooking, filtering after distillation, including recycling processes of certain wastes in the process, as well as wastewater, among others. Some of these innovations have been mandated by the authorities, by pressure from civil society, but mainly to achieve greater productivity in the processes. A graphic expression of this process and the type of markets found is presented in Orozco-Martínez (2011), which shows that agave producers in Tequila go through a condition of oligopsony or monopolistic competition, depending on their contact with coyotes (intermediary dealer) or distillers, respectively. This can be seen in Fig. 6.2, which is not very different from the Mezcal chain developed by Palma et al. (2016). According to Díaz (2022), the chain is composed of 26,236 agaveros and 174 authorized tequila producers, made up of 122 micro, 20 small, 14 medium, and 18 large producers, in addition to various service providers. On the Mezcal side, as of 2017, 2,014 maguey estates, 830 distillers, 394 bottlers, and 643 brands were recognized (CRM, 2017). Orozco-Martínez (2011) found that, in this oligopsony structure, there is a transfer of value added to the final links in the chain, i.e., a process of impoverishment of agricultural producers in favor of marketers. This situation undoubtedly calls into question the role of marketing

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Fig. 6.2 The Tequila chain and type of markets (Source Adapted from OrozcoMartínez [2011])

chains for this product as a strategy for territorial development. In this regard, Madrigal and Pérez (2014) point out that the organization of the value chain and the institutional framework for regulation and promotion of DO Tequila, from its beginnings to recent years, have been gradual and fragmented processes. This is since the Tequila Regulatory Council (which was founded by the private initiative), in addition to fulfilling its role as a regulatory institution, covers administrative and management functions. This market condition is reflected in an analysis of price differentials at the farm level, measured with the Average Rural Price (PMR in Spanish) offered by SAGARPA through SIAP for agave in the producing municipalities, as well as an approximation of the average export price reported by the Tariff Information System via Internet (SIAVI) of the Ministry of Economy, which presents data by tariff fraction for Tequila and Mezcal exports. With both sources it is possible to estimate part of the value accumulated in the domestic links of the international agave-tequila and agave-mezcal chains, trying to understand their distribution between the agricultural activity of the chain and the industrial and marketing activities. This result is presented in Fig. 6.3. . Figure 6.3 shows that export prices in pesos for both distillates are high, but when converted into equivalent prices per kg of agave, differentials

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Fig. 6.3 Approximate Tequila and Mezcal export prices in peso and kg agave equivalent and Average Rural Price of agave in tequila and mezcal municipalities, 2003–2018 (Source Own elaboration with data from SIAVI and SIAP)

are very low with respect to the average field price for agave. This would imply that the generation of value for both chains is low at the export destination, which contrasts sharply with the prices of both distillates in local consumer markets, where the profit margins for Mezcal are higher than those of the other distillate and the international market, although those of domestic Tequila are better than those of foreign distillates. This can be seen in Fig. 6.3 and Table 6.1. However, it should also be noted that the market share of each of the distillates is very different: while Tequila is consumed domestically in a proportion close to 1.2% of the population, Mezcal reaches barely 0.06% (CRM, 2016). Geographic Scale The third dimension of analysis consists of the geographic scale, which also presents interesting and contrasting characteristics. In principle, agave production takes place on large areas of land, which generates great heterogeneity with respect to the product obtained from the field. While in the case of Tequila, there are 181 municipalities in 5 states that report

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Table 6.1 Average current prices per 750 ml bottle in Mexico in the wholesale channel of different distillates from 2012 to 2019 Distillate

2012

2013

2014

Cognac $574 $642 $654 Armagnac $585 $622 $578 Mezcal $241 $279 $304 Oporto $284 $302 $323 Whisky $285 $283 $281 Ginebra $150 $169 $186 Tequila $127 $132 $138 Brandy $135 $136 $136 Vodka $125 $126 $126 Ron $107 $108 $108 Aguardiente $25 $25 $25 Equivalent prices in Kg of agave Mezcal $30.13 $34.88 $38.00 Tequila $15.88 $16.50 $17.25

2015

2016

2017

2018

2019

$681 $563 $354 $315 $270 $254 $155 $134 $127 $108 $26

$689 $632 $367 $338 $305 $239 $163 $152 $140 $118 $27

$756 $848 $382 $359 $307 $298 $204 $152 $151 $132 $27

$746 $774 $392 $395 $278 $306 $219 $143 $143 $130 $27

$819 $844 $413 $399 $302 $299 $246 $146 $138 $131 $28

$44.25 $19.38

$45.88 $20.38

$47.75 $25.50

$49.00 $27.38

$51.63 $30.75

Note The equivalent prices in Kg of agave have been calculated based on the amount of raw material used to produce the distillates, which approximates the input costs for their production Source Own elaboration with data from CRM (2019)

agricultural activity, in the case of Mezcal the figure is even higher, exceeding 1,000 total municipalities in a set of 12 recognized states. Figure 6.4 identifies the municipalities where agave is grown in the protected regions for both goods. However, neither agave production nor industrial distillation processes are equally dispersed throughout the territory but are concentrated in a group of municipalities oriented to this purpose, as shown in Fig. 6.4. This analysis also identifies a high concentration of industrial distillation activities, although the agave production regions are very extensive, occupying large areas of the national territory. This geographical condition evidences the dispersion of the value added generated by the distillate in large agricultural agave extensions but in few industrial locations. Consumption spaces are declaredly located in the country’s large cities, mainly Mexico City, as well as in international destinations, where the United States is the main consumer of both distillates. As a proportion of total production, Tequila exports reached an average of 72% of total production between 2011 and 2019, while those of Mezcal in the same period were 65%, which can be seen in Fig. 6.5. This shows the

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Fig. 6.4 Agave production and industrial distillation in the protected regions of the Tequila and Mezcal Dos (Source Own elaboration with data from Anuario Estadístico de la Producción Agrícola, SIAP 2018 and Censos Económicos, INEGI 2014)

high dependence of Tequila on external markets, and gradually that same orientation for the case of Mezcal, although with a volume scale much lower than the former, because while in 2018 Tequila exports reached 309 million liters, for Mezcal they were almost 6 million, according to figures from the regulatory councils themselves. Institutional Framework The evolution of the institutional framework studies the regulatory framework governing geographical indications and appellations of origin in Mexico. The Designation of Origin Tequila (DOT) was approved in 1974 under the Industrial Property Law of 1942, and it was administered by the Secretaría de Industria y Comercio (SIC), through the Dirección General de Propiedad Industrial (DOF, 1942).

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Fig. 6.5 Exports as a proportion of total Tequila and Mezcal production (Source CRM (2019) and CRT Online Statistics (https://www.crt.org.mx/Est adisticasCRTweb/))

After the publication of the Organic Law of Public Administration (Ley Orgánica de la Administración Pública—LOAP) in the Official Gazette of the Federation (Diario Oficial de la Federación—DOF), on December 29, 1976, the attribution of designations of origin fell into the Secretariat of Patrimony and Industrial Development, specifically to the General Directorate of Inventions and Trademarks (DOF, 1977), under the understanding that they are heritages of the State. A year later with this regulatory framework an amendment to the DOT was published, at the request of a distilling company from Tamaulipas (La Gonzaleña) that finally managed to be included. The resolution extended the designation to a set of eleven municipalities. With the reform of the LOAP in 1982 (DOF, 1982), the responsibility for DOs was again transferred to the Secretariat of Commerce and Industrial Development (SCFI).2 In 1988, a new version of the Industrial Property Law (LPI) was published. This led to the creation of the Mexican Institute for Industrial Property (IMPI) in 1993 and the creation of the Regulatory Councils, the first of which was the Tequila Regulatory

2 The Secretariat of Patrimony became the Secretariat of Energy, Mines, and Parastatal Industry, oriented more towards the administration of oil resources and other extractive activities.

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Council (CRT) in 1994 and 10 years later the second, the Mezcal Regulatory Council (CRM), was founded in 2003. The IMPI is the current body in charge of the reception, evaluation, and authorization of DOs, and after the 2018 reform of the LPI, also of Geographical Indications.3 Under this body, 18 designations of origin have been declared since the foundation of IMPI. With respect to Tequila, there are many works that question its behavior throughout its experience as a denomination of origin, its distancing between the links in the commercialization chain, as well as the co-optation of the control spaces of the regulatory council by the industrialists of the sector, which are now mainly internationally owned (Bowen & Valenzuela, 2009; Macias & Valenzuela, 2009). The series of legal transformations that Tequila has undergone, both in the declaration of DO and in the definitions of the quality aspects written in the corresponding Official Mexican Standard (NOM), has been on a large scale, seeking to better adapt it to the markets, but also mainly to the needs of distillers. Tequila has been subject to a quality standard since 1949; to date, nine versions have been issued in which sanitary, physical-chemical, and organoleptic specifications for the final product, for the raw material (agave), and for other ingredients (sugar) have been modified; requirements on: (i) facilities, equipment, personnel and the process for the preparation of the distillate; (ii) the type of agave; (iii) agricultural practices for the cultivation of agave; and, iv) information for conformity assessment purposes (Madrigal & Pérez, 2014). On the other hand, there are the declarations, four so far, in which the territory that includes the Denomination is established; from the first declaration that considered 167 municipalities to the fourth that extended the territory to 181. Similar behavior has been observed in the case of Mezcal, whose regulatory aspects have been oriented toward the standard presented by Tequila. Although there have been fewer transformations due to the shorter term that this denomination has had, it is also necessary to comment that it has faced greater resistance in recent years in the face of a discouraging experience for agaveros and small industrials who have seen Tequila not as a model for development but as a threat to the sustainability of their territories. Figure 6.6 shows the series of historical 3 In 2000, the Secretariat of Commerce and Industrial Development became the Secretariat of Economy.

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transformations that both the declaration and the NOM have undergone in both distillates. The first Official Quality Standard for Mezcal—D.G.N. R10-1949 was published in 1950 in the Official Gazette of the Federation where

Fig. 6.6 Regulatory transformations in Tequila and Mezcal (Source Own elaboration based on Diario Oficial de la Federación)

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Mezcal was defined as a spirit obtained from agave species cultivated in San Luis Potosí, Zacatecas, Coahuila, Nuevo León, Oaxaca, and Sinaloa. The beverage was not allowed to be bottled outside the distillery or the production region, only in the premises established by the authority, in which two qualities of Mezcal could be produced: natural Mezcal (type A) and aged Mezcal (type B). This standard remained in force until 1993, when Mexican Standard NMX-V-8-1993-SCFI was published, replacing the 1950 standard. The new standard allowed the addition of 40% of other sugars. This implied the creation of two categories of distillate, Type I Mezcal 100% agave and Type II Mezcal, with a limit of 40% for other different sugars. With this standard in force, the application for approval of the DOM was made. Parallel to the process of obtaining the DOM, the project to renew the Official Standard was developed and published on August 17, 1994. After more than two years and without finalizing the constitution of the evaluation body, on June 12, 1997, NOM-070-SFCI-1994 was finally approved, establishing the specifications and test methods and commercial information to ensure the quality of Mezcal. NOM-070-SFCI-1994 defined Mezcal as a beverage distilled from the “mature heads of the agaves mentioned,” where for type II up to 20% of other sugars are allowed. Additionally, it was specified that only mature agaves registered in the stock of estates installed by the accredited product certification body may be used to preserve its quality, Mezcal may not be adulterated or mixed with distillates of different origins. In addition, a clear administrative record must be kept of the transfer, bottling, bottling, and other procedures. The standard also prohibited bulk sales at the international level, only in 5-liter containers, allowing it at the national level under certain rules. NOM-070-SFCI-1994 was in force for more than 9 years coming to an end on February 23, 2017, the day the Official Mexican Standard NOM-070-SFCI-2016 was published, preceded by the Draft Standard PROY-NOM-070-SFCI-2015 published on November 25, 2015. NOM070-SFCI-2016 was prepared by: – National Consultative Committee for Standardization of the Ministry of Economy (CCONNSE) made up of Governmental Secretariats, Councils, and Standardization and Certification Bodies, as well as higher-level educational institutions such as the Universidad Nacional Autónoma de México (UNAM) and the Instituto

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Politécnico Nacional (IPN), two most important public universities in México. – Working Group of voluntary participation involving Associations, Committees, Mezcal and Tequila Industry Councils, distillers, marketers, and higher education institutions (Tecnológico de Monterrey and Universidad Autónoma Chapingo). – Collaboration of approximately 300 people and companies that prepared the draft proposal for the modification of the Mexican Official Standard. In the latter official standard, Mezcal is defined as …Mexican distilled alcoholic beverage, 100% maguey or agave, obtained by the distillation of fermented juices with spontaneous or cultivated microorganisms, extracted from mature heads of cooked magueys or agaves, harvested in the territory covered by the Resolution published on November 28, 1994, and subsequent modifications. It is a liquid with aroma and flavor derived from the species of maguey or agave used and the elaboration process; diversifying its qualities by the type of soil, topography, climate, water, authorized producer, mezcal master, alcoholic graduation, microorganisms, among other factors that define the character and organoleptic sensations produced by each Mezcal. (DOF, 2017)

Under this new definition, three categories of distillate are recognized (Mezcal, Mezcal Artesanal, and Mezcal Ancestral ) based on the type of equipment (tools and machinery) used in the cooking, milling, fermentation, and distillation processes. Table 6.2 presents a comparison of each of the categories. From the processes indicated above in Table 6.2, the distillate can also be classified into different classes: white, glass-matured, reposado, añejo, “abocado con…” and “destilado con….” The “abocado con” is defined as Mezcal in which ingredients are directly incorporated to add flavors, such as maguey worm, damiana, lemon, honey, orange, mango, among others. It is important to note that the term “abocado” in the current standard does not refer to the addition of other sugars for distillation, the ingredients are added to the finished product, and relates to the use of Mezcal as a remedy. For its part, “distilled with” refers to Mezcal that is distilled with ingredients to incorporate flavors, such as turkey or chicken breast, rabbit, mole, and plums, among others (DOF, 2017).

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Table 6.2 Categories of Mezcal NOM-070-SFCI-2016 Category

Mezcal

Characteristics Stages

Equipment

Cooking Milling

Pit, masonry or autoclave kilns Tahona, Chilean or Egyptian mill, trapiche, ripper, mill train, or diffuser Wooden vessels, masonry basins, or stainless-steel tanks Alembic stills, continuous distillers, or copper or stainless-steel columns Pit ovens or elevated masonry ovens Mazo, tahona, Chilean or Egyptian mill, trapiche, or ripper Stone cavities, floor or trunco, masonry basins, wood or clay containers, animal skins, whose process can include maguey or agave fiber (bagasse) With direct fire in copper cauldron stills or clay pots and clay, wood, copper or stainless-steel pot stills, whose process may include maguey or agave fiber (bagasse) Pit ovens Mazo, tahona, Chilean or Egyptian mills Hollows in stone, soil or trunk, masonry basins, wooden or clay containers, animal skins, whose process can include the fiber of the agave The process can include the fiber of the maguey or agave (bagasse) With direct fire in clay pots and clay or wood pots, whose process can include the fiber of the maguey or agave (bagasse) maguey or agave fiber (bagasse)

Fermentation Distillation Artisanal Mezcal

Cooking Milling Fermentation

Distillation

Mezcal Ancestral

Cooking Milling Fermentation

Distillation

Source Own elaboration based on DOF (2017)

The initiative to categorize Mezcal according to the type of equipment used in the production process, something that is not apparent in the previous standards, should be recognized. However, the categorization is confusing and does not totally exclude certain equipment from one category to another. On the other hand, it should be questioned whether it is not necessary to include maximum yields of agave production per hectare, as well as to indicate more specifically the link with the geographical area and the specific practices for processing and restrictions imposed, as in the case of the “Rioja” Qualified Designation of Origin (Rioja, 2023). As well as verifying that all the permitted equipment is really all that exists in

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the winemaking processes of the different protected territories, otherwise conflicts of exclusion are incurred. On the packaging and marketing side, the new NOM-070-SFCI-2016 leaves certain empty spaces, for example, in the case of bulk marketing, key in the construction of asymmetries in both information and distribution of profits between the links in the Mezcal marketing chain, the word is only mentioned to indicate the origin of the Mezcal within the logbook provided to the Conformity Assessment Body (OEC) and is still allowed in packaging outside the production region. The OEC is presented as the person accredited and approved as a certification body, verification unit, or testing laboratory in terms of the Federal Law on Metrology and Standardization that will evaluate that the Mezcal, the authorized producer, bottler, and marketer comply with the NOM. Another important change in institutional arrangements is related to a territorial extension of the DOM: in 1994, the year in which the declaration was published, a protected territory of 806 municipalities was established in five states of Guerrero, Durango, San Luis Potosí, Zacatecas and Oaxaca, particularly in the area known as the “Mezcal Region”, comprising the municipalities of Sola de Vega, Miahuatlán, Yautepec, Santiago Matatlán Tlacolula, Ocotlán, Ejutla, and Zimatlán. From that year to date, this extension has had ten modifications including municipalities from different states of the country: in 2001 San Felipe, a municipality of Guanajuato; in 2003 eleven municipalities of Tamaulipas; in 2012 twenty-nine municipalities of Michoacán; in 2015 a municipality of Guanajuato, San Luis de la Paz and 115 municipalities of the state of Puebla; 2018, fifteen municipalities of the State of Mexico, seven municipalities of Aguascalientes, one more of Puebla and 23 of Morelos; and finally in 2021, four municipalities of Sinaloa. With all the modifications to date, there is a protected territory of 1,013 municipalities in thirteen states of the country, representing 41% of the total in Mexico. Once the institutions have been taken up as formal norms of the Tequila and Mezcal Denomination of Origin, it is necessary to address the institutional framework from the key actors that affect the construction of the Quality Standards and the declarations of both distillates. The key actors of the Denomination of Origin Tequila are presented in Table 6.3 and for Mezcal in Table 6.4 along with their abbreviation and actions and the main characteristics they perform in relation to the DOs. And in

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Figs. 6.7 and 6.8 actors are represented in the way they have related to each other. As we can see, Tequila’s network is very complex in the number and the role of the actors that participate in it, due to its long experience Table 6.3 Identification of key players in Tequila D.O.T Key Actor

Abbreviation

Actions and characteristics

Tequila Regulatory Council

CRT

National Chamber of the Tequila Industry

CNIT

National Committee of the Agave Tequilana AC Product System

CNBCECRA

Blue agave Tequilana Weber farmers council of Jalisco

CPAATWJ

Universities and Research Centers

UCID

Mexican Government

GM

Foreign Governments and International Treaties for Intellectual Property

GETPI

Is an inter-professional organization comprising all actors and production staff associated with the Tequila production. The aim of the CRT is to promote the culture and quality of this beverage that has gained an important place among the national identity symbols. It was founded in 1994 Its objective is to represent, promote and defend the common interests of its associates, proposing and carrying out actions that satisfy their needs and expectations to strengthen the prestige and image of the Tequila Industry in general and of Tequila in particular. Founded in 1959 The National Law for Sustainable Rural Development obliges the foundation of Product Systems, as social entities to promote development along the chain agave-tequila together all actors involved on it. The first board of representatives was founded in 2007 Represents the agave producers, but organization is difficult because of the wide area of agave plantations and the politization in the agricultural sector Institutions related to industry like ITESO, UdeG, Chapingo and others related to Tequila Industry and agave producers The original owner of the DO Tequila, that is related specifically with this by the Ministers of Economics, Agriculture, Social Development, etc Mexican Government has signed several treaties for intellectual property protection, also by been part of WTO. All of them define specific rules for protection of own and foreign Geographic Indications

(continued)

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Table 6.3 (continued) Key Actor

Abbreviation

Actions and characteristics

Alcoholic Beverages Regulatory Authorities

ARBB

Agave producers and producer organizations Financial and insurance institutions Intermediaries / Middleman

EPAUAP

Tequila producers

PT

In the alcoholic industry, there are several authorities that regulate the way these products must be traded, marketed, and promoted with consumers. One of them is DISCUS (Distilled Spirits Council of United States) the most important organization for producers and marketers of alcoholic beverages The organization of agave producers is made by small groups in their towns Tequila is a 7-year crop that needs financing because of the length of the period These intermediaries are firms that buy agave from small producers (collectors) for distillers mainly. Sometimes they work for their own interest, but several times they act representing distillers The most visible part of the chain is because they are related to brands. We can find here Cuervo, Sauza, etc Bottlers that work in México, mainly for domestic consumption, of for exports in bottle One of the main problems in Tequila is bulk exports, that is bottled outside México Once bottled outside, Tequila runs in a complex net of distributors prior the final consumers

SBA CI

Tequila bottlers in ECRT México Tequila bottlers outside ENV Mexico Tequila distributors DB

Source Own elaboration based on CRT (2015), Bowen and Gaytán (2012), Macías and Valenzuela (2009), Hernández (2009, 2013)

and the industrial dominance, we have found in the network, led by the Tequila Regulatory Council (CRT) that has public activities but is a private figure. All actors must be represented in CRT, but not all interests and demands are supported in the same way. Throughout the existence of the CRT, industrials have had a greater influence on the body, represented by the National Chamber of the Tequila Industry, in permanent debate and conflict with agave farmers, represented by several organizations but the most visible is the Blue agave Tequilana Weber farmers council of Jalisco (CPAATWJ). Also, distillers and agave farmers are part the National Committee of the Agave Tequilana AC Product System

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Table 6.4 Identification of key players in Mezcal D.O.M Key Actor

Abbreviation

Mezcal Regulatory CRM Council Maguey Mezcal Product System Committee

CSPMM

Associated with the CRM Not Certified by CRM Maguey and Mezcal Study Center A.C

AC

Mexican Institute of Industrial Property

IMPI

CRM International Clients Michoacan Agrifood Innovation and Development Center A.C Mexican Certifier of Ecological Products and Processes Entidad Mexicana de Acreditación Certificación Bat Friendly Gobiernos Estatales

CI

NC CEMMEZ

Actions and characteristics Certifying body of the quality of Mezcal, created in 1997 and start of formal activities in 2003. Its headquarters are in the city of Oaxaca de Juárez Civil association is defined as a network made up of all the links of the agri-food chain; producers with the aim of working for the competitiveness of agribusiness with full market orientation, promoting conditions of equity, equality, and trust between the parties involved Agave and mezcal producers, packers, and mezcal marketers certified by the CRM Agave and mezcal producers, packers, and mezcal marketers certified by the CRM Non-governmental organization formed in 2017. Its purpose is to study and promote the preservation of traditional mezcals and the development of sustainable production and marketing Decentralized public body. Among its functions is to accept or reject applications for Appellations of Origin, Geographical Indications, and Collective Marks Foreign natural or legal person with and without activity in the mezcal production chain

CIDAM

Certifying body and verification unit of Michoacán under different quality standards, including NOM-070-SCFI-2016 (Mezcal)

CERTIMEX

Inspection and quality certification of agricultural, livestock, agro-industrial and forestry processes and products

EMA

First privately managed entity in Mexico with the aim of accrediting conformity assessment bodies Project that seeks to promote and incorporate “Bat Friendly” practices Subdivision of Mexico’s governance structure

BAT FRIENDLY GE

(continued)

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Table 6.4 (continued) Key Actor

Abbreviation

Actions and characteristics

National Autonomous University of Chapingo Secretary of Agriculture and Rural Development National Association of Appellations of Origin Secretaría de Economía

UACH

Educational institution related to the rural sector, agricultural planning and agricultural, forestry and other natural resources

SAGARPA

Dependence on the Federal Executive Branch

Representative of 15 appellations of origin recognized in Mexico and others in the process of certification SE

Dependence on the Federal Executive Branch

Source Own elaboration based on CRM (2021), SienteMezcal (2016), CEMMEZ (2021), IMPI (2021), CIDAM (2021), CERTIMEX(2021), EMA (2021), BAT FRIENDLY (2021), UACH (2021) and ANDO (2021)

Fig. 6.7 Key actors and their relationship in DO Tequila (Source Own elaboration based by means of Cytoscape)

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Fig. 6.8 Key actors and their relationship in DO Mezcal (Source Own elaboration based by means of Cytoscape)

(CNBCECRA), a public organism that must be represented by all actors of the agave-Tequila network. In accordance with Denomination of Origin Mezcal, the actor with the greatest number of relationships is the CRM, because of the great influence it has on the rest of the actors in the chain, and therefore on the decisions regarding the construction of the Mezcal Quality Standard and its modifications. The CSPMM is another important actor, its relationships are toward the links in the mezcal marketing chain, certified and non-certified. Also, with the UACH and SAGARPA, their decisions impact through technological innovations within the rural sector driven by government programs. On the other hand, the IMPI has little relationship with the other actors, its function is only to accept or reject requests for declarations of DO, IG, and MC. Finally, it is worth highlighting the different entities of third-party certification, organic certification, CERTIMEX, BAT FRIENDLY, and the appearance of new Conformity Assessment Bodies that certify the quality of mezcal. So, the trend is toward reducing the CRM monopoly.

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Governance Originally, both distillates had a mainly domestic scope: in the case of Tequila, since the first Designation of Origin in 1974, it was already oriented toward international markets, but the ownership of the industry was domestic, with short chains between agents, but not in distance, since the distillate has been consumed mainly in the United States since the 1980s (Luna, 2012). In Mezcal, until just 20 years ago its main consumption market was local and regional, it was during the first decade of the twenty-first century that it turned its image around and began to succeed in international markets (CRM, 2016). The “Tequila boom” in the last decade of the twentieth century prompted new changes in the production structure, pointing, according to Luna (2012), toward a premiumization of the distillate, which has led to a transformation toward long global marketing chains, where the ownership of the distilleries, as well as retail distribution, have become international, driving important innovations in the product to better meet the different tastes of consumers. These changes were accompanied by a process of concentration in very few hands, 4 to be specific, which represented 65% in 2005: Cuervo, Sauza, Herradura, and Cazadores (Macías & Valenzuela, 2009). The latter can be recognized as a foreign investment of large international consortiums oriented to the distillation and marketing of Tequila: Diageo owns Tequila De León, Don Julio, after being a partner of Cuervo for several years responsible for the international distribution of its distillates and in 2017 acquired the brand founded by George Clooney, Tequila Casamigos; Brown Forman owns Herradura, Jimador and Pepe López; Beam Suntory owns Sauza and Viuda de Romero after buying them from Allied Domecq and Pernod Ricard; Tequila Milagro which is owned by William Grant & Sons; Tequila Olmeca is owned by Pernod Ricard; Bacardi owns Tequila Patrón and Cazadores, among others. A statement in 2017, the director of the CRT stated that “only” one-third of the 1,635 registered brands belong to foreigners, which is positive because identity, tradition, and artisanal processes are not lost (El Financiero, 2017a). Therefore, Luna (2012) argues that, with the internationalization of Tequila, the chain went from a governance led by industrialists to one led by distributors and marketers of the distillate. On the Mezcal side international investments have also occurred, Diageo is a partner of Mezcal Unión (Aguilar, 2016) and acquired

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Mezcal Pierde Almas (Sánchez, 2018); Pernod Ricard acquired Mezcal Del Maguey and Bacardí made a partnership with Mezcal Ilegal (El Financiero, 2017b); Casa Pedro Domeq has a partnership with Casa Guillermo Prieto for distribution of its brands Zignum, Señorío, El Recuerdo de Oaxaca (Economía hoy, 2018). Even Tequila Cuervo has also entered the mezcal segment with the creation of the 400 Conejos brand (Altonivel, 2018). Although in the mezcal industry until recently there were no major players with oligopolistic power, expectations are that this will change drastically in the short term with the arrival of these large players. In this context, it is pertinent to evaluate whether the agave municipalities have improved as a result of the strengthening of marketing chains, foreign investment, and the increase in volume reported by the chains. A first approach to this would be by means of del Human Development Index (HDI) in the agave municipalities over the period from 2000 to 2015, as measured by the OECD in both years.4 Neither in the most representative municipalities of the Tequila D.O. nor in those of the Mezcal D.O. is a relative improvement in the HDI appreciated throughout the 15 years of the analysis, confronting the idea that the denominations of origin could be a tool for the development of the regions where the goods are produced. Although the development of the regions or their backwardness may be associated with different causes, in the municipalities that are predominantly agave-producing, living conditions should show an effect in the long term, which in this case is not strongly appreciated.

6.3

Conclusions

In this analysis, the experience of the two most important distillates in terms of volume of production and trade with denomination of origin in Mexico was discussed: Tequila and Mezcal. The former, more advanced in terms of experience over time, has been oriented since the 1980s in geographically long chains, although short in terms of relationships since

4 It is worth noting that the HDI is an international measure used to compare progress in the well-being of societies over time. It is related to health, education, and income. Due to the regularity of its estimation by public agencies in Mexico, it is possible to make comparisons at different moments in time on this indicator to know the improvement of living conditions.

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the ownership of the distilleries remained national. It was not until the mid-1990s that the structure of the chain changed, giving way to international investments, which now occupy important spaces in global markets, including Tequila as a product in their spirits portfolios. This has undoubtedly contributed strongly to the increase in volumes observed since the creation of the Tequila Regulatory Council. Today, its marketing chains are global, with very specific industrial standards, with major investments in marketing and product innovations to offer greater varieties that appeal to different palates. On the Mezcal side, to this day the story is a little different, although the expectation in coming years is to follow the trend of Tequila. Mezcal began its experience as a D.O. 20 years after Tequila and has also presented strong conflicts throughout its existence, mainly because of the positions found that those involved in its marketing chain have had. But in the last years, several disputes emerged in the mezcal sector due to the autorization of new territories as part of protected area and the changes in quality standards that try to relax the rules to increase the volume of production. This distillate has struggled to stay in short social chains, seeking closeness between producers and consumers and maintaining small scales, although this may be changing due to the accelerated growth results that have been recorded in recent years. This has piqued the interest of companies of another size that have invested in reputable brands, although recent changes to the NOM-070 in which the artisanal and ancestral categories are recognized could help curb this trend. That mezcal is giving in to the economic dimension, following the path that Tequila has charted. But to do this are the public institutions, to order this path and orient it toward a more equitable benefit in the participants of the chains, as mentioned in the virtuous circle, where the institutional framework and public policies would have to play an important role in the promotion and regulation of quality to generate positive effects in the territories. It must be accompanied by hard work within the institutional framework and the construction of quality standards allowing the entry and inclusion of small and medium-sized producers in decision-making, as well as betting on a lower generalization of production processes and linking origin to products. As was observed in the analysis of key actors within the DOM, the main actor with the greatest influence to modify the Quality Standards is the CRM. Therefore, the organization, inclusion, and participation of all

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the actors involved should be promoted by such an entity. Unfortunately, such an institution is within a struggle of economic and political interests, which would hardly allow the construction of rules to benefit small and medium-sized producers and protect the quality of the beverage by considering the typicity and special characteristics of the products and their origin. Using the DO Tequila and DO Mezcal as a tool to promote territorial development is incongruous in practice, since they have deficiencies in protecting the sociocultural system of appropriation of nature linked to the production of Tequila and Mezcal, to benefit a production more homogeneous industrial sector (Mantilla & Alarcón, 2017).

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PART III

Case studies in Agribusiness and Agri-Food Industries

CHAPTER 7

Global Value Chains in the Coffee Sector: A Comparative Analysis Between El Salvador and Mexico Marisol Velázquez-Salazar and Gilma Sabina Lizama Gaitán

7.1

Introduction

The problem of the coffee sector in producing countries whose production is small compared to large producers, such as Brazil and Colombia, continues to exist since price volatility does not respond to their needs, and the chains’ conditions are marginal. This study compares two countries where coffee is an essential product for production. In Mexico, it is the second most crucial product in cultural and food terms after corn; that is, it is a subsistence product for small producers, who represent

M. Velázquez-Salazar (B) Facultad de Ciencias Económicas y Empresariales, Universidad Panamericana, Mexico City, Mexico e-mail: [email protected] G. S. Lizama Gaitán University of El Salvador, San Salvador, El Salvador e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_7

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70% of the total producers in the country. For El Salvador, exports are essential since they generate foreign exchange and income for the national economy. The conceptual framework used is the one proposed by Gereffi (1994, 2015, 2018a, 2022) that incorporates four dimensions of analysis: output input, spatiality, institutional framework, and governance. In both countries, the chain is studied under these dimensions and similarities are found, as well as differences. After the introduction, the second section presents the conceptual framework scopes and limits of the GVC approach, the relevance of the institutional framework and governance, and the relevance of the study in a comparative sense. The third section describes the methodology and methods. The fourth section shows the significant findings of the chain analysis in each country, and it is divided into 4 subsections. Within them, this study analyzes the grain’s specificities, the features of exported products, the altitude as a quality property of the coffee, the sequence of value-added, and the structure of the value chain as part of the input-product dimension. The dimension of economic geography relating to spatiality or territoriality is then also studied, including production, producer conditions, exports, and the leading export destination of both countries. Next, the institutional framework discusses the coffee policy in Mexico and El Salvador. The following subsection examines governance based on the typology of general governance that includes governance by domain, linkage and regulation. Finally, section five discusses the dimensions and proposals contributing to producers’ economic and social improvement.

7.2

Conceptual Framework

The section reviews the scope and relevance of the study in comparing Global Value Chains between different countries or regions and comparative bases under similarities or differences. The scope of the analysis of Global Value Chains allows us to observe the behavior of the commodity in question under different dimensions, which makes it possible to separate each process within the chain, but at the same time, observe it in a general and interconnected level. That is, it places each link with its participants. Different agents built these socioeconomic relationships, resulting in dominance or coordination chains between actors and regulations. In this way, each dimension establishes

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specific parameters that allow the comparison between different products, goods, and, in this case, chains of the same good in different spaces. This framework includes the spatiality or territory, the specificities of each and the place where the different productive activities are carried out, which enriches the comparison since the differences of the regions stand out, as is the case between Mexico and El Salvador, and at the same time saves the similarities. Concerning temporality, it enables observation from a timeline and highlights the moments when the chain has presented changes, from the subtlest to those that structurally defined another course. Another advantage is that the chain structure can be presented as linear, in which one process leads to another. However, there are also cases of greater complexity in which there are circularity, reverse processes, or juxtaposed processes. In general, the essential links included, at least for the agrifood sector, are production, processing, marketing, distribution, and, to a lesser extent, consumption. Being the minimum required, they also function as a comparative basis between countries since all chains have at least these five processes. The institutional framework and governance in grain analysis in producing countries are currently highlighted within the dimensions. The first is because it has been observed, from previous studies, that the entry or permanence of producers within the chain depends mainly on the institutional policy practiced in each country, but also and with more impact, at the international level. Agencies and institutions operating worldwide have influenced the direction of the coffee chain in the world. They have refocused their objectives based on market liberalization in the 1990s and responded to the context of today’s globalization and consumerism, leaving the producer’s interests on a secondary level. In addition to the above, some third-party institutions evaluate, validate, certify, and regulate production, and also regulate the quality of the product from it leaves the ground until its consumption and other attributes that are not perceived under sensory aspects such as the preservation and conservation of the environment, food safety and health, traceability, fair trade, child labor prohibition, and exploitation, among others. The dimension of governance is one of the elements by which the GVC methodology is chosen as a sequence of analysis since it captures not only the production processes but the economic relationships of power that operate between the actors from the domain, through the coordination

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between primary producers, transformers, and marketers, to the links that exist with third-party agents.1 In addition, it compares the state of the chains over time and evaluates the market structure under which the chain is located. Some points of governance discussion are worth mentioning. Within this context, two categories are distinguished according to the governance of the chain and the power of the dominant actors, which is raised in Gereffi’s original Global Commodity Chains (GCC) approach (1994) and Gereffi’s (2005) approach to which it incorporates the term Global Value Chains (GVC). The first refers to Global Commodity Chains (GCC), and the second is understood as Global Value Chains (GVC). When the GCC study begins, the chain could be leaded by the supply or by the demand. The supply-led chain, where the transnational capital and technology-intensive industries organize the links back and forth in production or supply networks, is explained. The subsidiaries and subcontractors of the parent company can be located in developing countries to capture the advantages of low costs and externalities. In addition, vertical control of core services is related to inputs and technology supply. Demand-driven chains are usually presented in less capital and technology-intensive industries and more in labor such as toys, clothing, footwear, and recently agro-industrial industries. In demand-driven chains, core services are located further down or back. They are related to retail, after-sales services, advertising, product design, quality improvement, and management. Under this first approach, it is determined whether the producer or buyer is the agent that dominates the chain in each country, namely, which agent controls the global chain under the parameters raised according to governance by domain. In the second approach (Gereffi, 2005), the concept of GCC is redefined as Global Value Chain (GVC), as well as the concept of governance in chains, going from a macro definition to a more micro or business definition, including more dynamic aspects and allowing to measure the level of coordination and asymmetry in the chains resulting in five types of governance by coordination: market, modular, relational, captive and hierarchy. The GVC study is flexible as it depends on how the problem

1 Third-party agents are not members of the chain but influence it. For example, they certify agrifood chains’ production processes from the outside.

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to be solved is addressed, is applied to any sector, product, or company, and also ties in with other theoretical approaches. Likewise, under the industry-focused analysis framework, it is more challenging to compare the chains of different countries concerning the level of coordination or asymmetry because the analysis becomes thinner and more particular to each company or farm. Gibbon and Ponte (2008) contribute to the debate by raising governance by regulation, which states that the chain may be governed by the six states based on the Theory of Conventions (1989). Each convention is determined by a set of rules that, in turn, are based on a coordination mechanism between producers, intermediaries, and final consumers. They are classified according to the quality and type of consumer preference, i.e., what is meant by quality is the key to the choice of the final consumer. If the convention is commercial or market, the product will be purchased at the value of the market, and the quality will explain any difference in production. According to domestic convention, preference is associated with tradition and influence over consumers. It is the case of products that are constantly consumed by generations and stay in style, which generates long-term relationships. In this case, consumption is guaranteed by loyalty to the brand, associated product, and territory. Regarding the opinion or reputation convention, quality is measured by the opinion value of specialists. Therefore, consumption depends on the opinion judgment of a third-party agent. The civic convention links quality with representativeness and is influenced by collective, social, and environmental well-being. It occurs in chains with specific market niches, such as those concerned with the ecosystem, preservation, and conservation of the environment, fair prices, non-exploitation of work, and non-child labor, among other examples. The industrial convention is distinguished by productive efficiency and measured by standards and standards a third party evaluates. For example, it appears when there is a set of rules related to processes, procedures, and ways companies must achieve to comply with an external standard and thus enter a competition. The inspirational convention is oriented to the level of creativity that the product has, it is subjective, and although it is difficult to value it, it is essential in terms of appropriation. There are, for example, the cases of work of art or crafts, but also those products linked to territories whose tradition of producing some good gives it extra value (Gibon & Ponte,

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2008; Eymard, 1992; Velázquez, 2017). However, because this is the most specialized approach to nodes and is more successful for analysis between distinct chains, it will only be considered in general terms. In 2014, Ponte and Sturgeon proposed cross-governance between coordination and normativity. They argue that both can be considered in the analysis of the chains since the first is the link between primary producers and firms, while the second is the relationship between each other link (Ponte & Sturgeon, 2014; Velázquez, 2017). In 2018, Gereffi emphasizes the importance of analyzing institutions and policies that affect value chains. With Lim and Lee the author wrote about trade policies, firm strategies, and adaptive reconfigurations of global value chains in 2021. And in 2022 he started to discuss the resiliencies and disruptions in global value chains after the pandemic. The next discussion was about reshoring firms (Canello et al., 2022), and finally, he introduced digital transformations into the chain analysis (Butollo et al., 2022). Regarding the contribution to the institutional dimension, Gereffi (2018a, 2018b) stresses that there is an absence in the scheme to assess the levels of participation, effects, impacts, and efficiency, among other indicators, of the policies carried out by the institutions. It is also necessary that economic and non-economic policies should include their influence over other areas such as culture, tradition, and society and be understood as an institution not only to governments but also to private organizations and civil society whether they are formally constituted or not, this would achieve a comprehensive and interdisciplinary vision, inclusive approaches, proposals that come from the bottom up and other options for upgrading the chain by producers. According to the observation of the chains in Mexico and El Salvador, both agree on the absence of a comprehensive coffee policy and indicators that could evaluate it, which opens the discussion at a regional level on the measures that must be taken in these countries to stabilize the chain and preserve it in the long term. This response to the institutional framework was presented by Gereffi (2018a, 2018b) and is discussed in the corresponding section. Although the approach is traditional, the main contribution of this chapter to the current literature is the use of the dimensions of global value chains as a comparative analysis tool between two countries.

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Methodology

The methodology used to make the comparison is a mixed quantitative and qualitative analysis and deepening through case studies. For Mexico, the principal secondary sources are the National Institute of Statistics and Geography (INEGI) and the Rural Development Ministry (SADER). The primary source is surveys of producers in coffee-producing states from 2019 to 2022. For El Salvador, the principal secondary source is the Salvadoran Coffee Council and surveys of producers in coffee-producing departments as primary source from 2019 to 2022. The quantitative method is the exploratory data analysis (EDA) and spatial exploratory data analysis (ESDA) applied to each dimension of the conceptual framework.

7.4 Major Findings in Coffee Chains in Mexico and El Salvador Mexico and El Salvador have been global producers of conventional coffee for several years. Therefore, the comparative analysis between the two countries allows, within the meaning of the GVC, the discussion of proposals and the future of the coffee sector without leaving aside similarities and structural differences in economics, culture, society, and geographical aspects such as area and population. Input–Output Dimension Both the robust and the arabica species are produced in Mexico. However, the second is a more significant proportion in which the typical or Creole variety among 120 other varieties stands out (AMCCE, 2020). In El Salvador, the most produced varieties are Bourbon, Pacas, Catimor, and Cuscatleco, also of the arabica species. These two countries coincide in the species, which excels in markets for being considered one of the best grain forms, with a certain degree of speciality, unlike other coffee regions that produce robust orienting their market to volume without quality. The properties of each variety determine the level of speciality and quality of the grain and, therefore, its domestic marketing and demand abroad. It is worth mentioning that arabica coffee is more sensitive to pests than robust coffee, making both countries vulnerable to plant diseases. Furthermore, both territories market most coffee produced as green grain

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at the export level, meaning they only make the wet and dry benefit process and sell it to companies for further processing and marketing. Some Mexican producers have sought to place their coffee in specific foreign markets and have achieved differentiation through certified organic coffee, putting the country among the first producers competing for the last ten years with Costa Rica and Peru. But only three Mexican states, the fifteen coffee producers in Mexico, have this orientation. Within them, these kinds of alternative production remain a minority. For its part, El Salvador has some initiatives to produce this alternative coffee, but it has yet to come to consolidate, so its main product is conventional coffee. The Mexican Green Coffee Standard, according to the Economic Ministry (SE, 2008), determines that coffee can be of Strict Height (>1200 m.a.s.l.), Height (900–1200 m.a.s.l.), Extra-Premium Washing (800–900 m.a.s.l.), Premium Washing (600–800 m.a.s.l.), and Good Washing (250–600 m.a.s.l.). The highest altitude areas are concentrated in the country’s south and represent 57% of the coffee municipalities in the Height and Strict Height categories, providing coffee with a strong aroma and a nice body. In turn, 36% is Good Washing or Premium Washing, and the remaining Extra-Premium Washing; they are distinguished by a mild taste, delicate aroma, light acidity, and thin body (INEGI, 2016; Velázquez, 2017). In a similar structure, El Salvador produces most of its coffee at an average to a Strict Height that is comparable to Height and Strict Height in Mexico, with the majority of producers in the western region of the country (51%), with a production of approximately 56% in this region, distributed between two coffee mountain ranges: (1) Apaneca-Ilamatepec and (2) Alotepec-Metapán (CSC, 2020a). In the Mexican case and intuitively in El Salvador, the value-added sequence shows that, of the total final price in the market, the producer only gets 16% at best. In comparison, the added value in intermediary marketing countries gets 83%. The rest corresponds to transport, logistics, and storage costs. As shown in Fig. 7.1, the chain structure allows us to observe the different actors and locate the value’s concentration. In the Salvadoran case in Fig. 7.2, the chain shows that the most critical channel starts with small-scale producers, who sell the product to the beneficiaries for the first grain processing. Next, these agents export to importing houses that place coffee with international roasters. They market with distributors until they reach the final consumer abroad.

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Fig. 7.1 Structure of the coffee chain in Mexico and sequence of added value 2017 (Source Own elaboration based on Pérez Akaki, 2010; Jiménez Porras, 2011 and Velázquez)

Finally, at the domestic level, beneficiaries, which function as domestic threshers and at the same time as exporters, are a minimum percentage distributed on the domestic market. The initial stage, known as the Agricultural Phase, comprises individuals and legal entities involved in natural production. Among them, the majority are natural persons, specifically men and women, who privately produce or operate family farms. They do not form associations or companies under Salvadoran laws, constituting approximately 95% of the total (CSC, 2020a, 2020b). In the second phase, processing and benefiting, at the end of 2019, it was registered to 75 beneficiaries, who perform the complete processing of the conversion of grape grain or cherry to gold or green grain, ready for export, in addition to 59 at the level of coffee parchment workers, who do not perform all phases of industrialization, but only a part, processing the grape coffee by wet and dried way without reaching the process of removing the endocarp; that is, without reaching the threshing process.

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EL SALVADOR 1.5%

INTERNATIONAL MARKET Coffee mills No Exporters

0.5% Intermediarios

Producers 95%

Coffee mills Exporters

Import Houses

Coffee Roasters Prepared coffee

National Roasters

Distributors

3% Prepared coffee

Distributors

Global Consumer

National Consumer

Most important channel Internal consumption channel Minimum Internal flow

Agricultural Phase

Processing and marketing phase

Border

Fig. 7.2 El Salvador: Coffee Chain Structure (Source Own elaboration with data provided by the Salvadoran Coffee Council)

In both territories, the geographical border that marks the space in which the processes are carried out is also the point at which value aggregation is divided. After the second green marketing in the Mexican case and after the border in the Salvadoran case, the highest added value is concentrated. At the same time, in both countries, the producers are left with the lowest percentage of the value and, therefore, of the profits generated by the chain. Spatiality and Economic Geography or Territoriality in the Coffee Chain in Mexico and El Salvador Worldwide, it is estimated that the production of coffee was 167.2 million bags of 60 kilograms in 2021/2022, of which 56% was arabica coffee and 44% was robust (ICO, 2023). In Mexico, 4 million bags of arabica and robust were produced, and almost 6 of arabica were produced for each

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sack of robust. El Salvador, for its part, produced a total of 660,000 bags of 60 kilograms of arabica coffee (ICO, 2020). Nationally, the three primary Mexican states, per tons obtained, were Chiapas (40.6%), Veracruz (24.2%), and Puebla (15.7%) (SIAP, 2021). In turn, these regions generated 80.6% of the total production value, amounting to US$215,041.46 (exchange rate 21.98 pesos per dollar). Meanwhile, organic coffee production for the United States, the European Union, and Japan amounted to 33.7 thousand tons with a generated value of US$9502.90 (exchange rate 21.98 pesos per dollar). Chiapas (82%) and Oaxaca (11%) are the main producers (SIAP, 2019). The socioeconomic conditions of many coffee producers in Mexico are at margin levels, and the farms are far from the main communication routes. They belong to municipalities with indigenous populations and lack essential services, such as drinking water, access to drainage, gas, and toilet. In addition, the houses are unfinished, and the ceilings are foil. These small producers have less than 2.5 hectares and have only primary education. Generational change is now presented as they are old, and the children have left the community to improve their situation, so for many of them, the crop is about to be lost. However, there is evidence in fieldwork that shows some probability that those who will reactivate coffee production are the grandchildren of producers who are now studying average levels of education. Another economic feature is that to survive, producers have other sources of income such as government support, support from children who carry out other economic activities within the country but outside their locality and remittances sent by migrant relatives outside the country. In addition, the same producers have other economic activities, mainly in the tertiary sector. El Salvador is divided into six coffee regions. Producers are the prominent participants in the chain because they develop the productive activity and provide the exportable raw material to developed countries, in terms of coffee, through organizational units, mainly of a family nature. Table 7.1 shows that the country has approximately 24,685 coffee producers, of which 93.2% are small producers with a growing area of less than or equal to 25 blocks. Both in Mexico and in El Salvador, despite the vital role that producers play within the chain, they are the ones who run most of the risks that characterize coffee production since their status as small is accompanied by significant resource constraints, both financial and technological. In

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Table 7.1 El Salvador: Number of coffee producers in the year 2022

Area in Blocks De 0.01–10.00 De 10.01–25.00 De 25.01–50.00 De 50.01–10.00 Más de 100 TOTAL

Producers 21,513 1,513 776 466 415 24,683

Percentage (%) 87.2 6.1 3.1 1.9 1.7 100.0

Source Salvadoran Coffee Council, 2022

addition, they are characterized by receiving a price paid on a farm that sometimes does not meet their costs, making them more vulnerable to the inability to pay the credits with which they operate. Around the coffee are other derived activities carried out by the same producers or other actors of the coffee plantations to make the product known from a more profound view. Such is the case of tourism, ecotourism, promotion of coffee routes, guided tours of the farms and stays with the producing families that invite the final consumer to know how the grain is produced, life in the field and show the importance of valorizing the product linked to the territory. Likewise, coffee products such as creams, oils, jewelry, and handicrafts made with grains are found in the areas whose primary cultivation is this grain. The Salvadoran and Mexican coffee sectors, given their very nature and structure of the chain, make it difficult for small and medium-sized producers to finance the acquisition of agricultural inputs, making them more vulnerable to both price variations and credit interest rates. For 2019/2020, the estimates show that Mexico exported, in June 2020, approximately 3.2 million bags of 60 kilograms of coffee, ranking 10th globally. Of the total, 63% was green coffee, 31% soluble, and 6% toasted and ground (USDA, 2019). El Salvador exported about half a million sacks (USDA, 2019). It produces coffee primarily for export; between 85 and 95% of domestic production is exported. Table 7.2 shows the exports recorded in the 2021/2022 harvest until July 31, 2022, where the main buyers in the international market are displayed. This structure reflects the market power companies that hoard the highest percentage of the raw material, coffee beans, continue to have, which also happens in Mexico.

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Table 7.2 El Salvador coffee exports harvest as of 2021/2022 No

Buyer

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

ECOM AGROINDUSTRIAL CORP. LTD PARAGON COFFEE TRADING CO. L.P VOLCAFE LIMITED (LTD) BE GREEN TRADING SA LOUIS DREYFUS COMPANY SUISSE SA BENECKE COFFE GMBH & CO. KG BLISS PRODUCTS INTL. CORP ITOCHU CORPORATION WALTER MATTER, S.A ODYSSEY COFFEES, LLC EFICO NV INTERKOM SPA PANAMERICAN COFFEE TRADING CO, S.A TOP OF THE CROP NV MARUBENI AMERICA CORPORATION FALCON COFFEE INC RGC COFFE INC STARBUCKS COFFE TRADING COMPANY SUCAFINA NA INC N.V. COFFETEAM, S.A OTHERS TOTAL

Quintals

Percentage (%)

143,895.00 51,487.50 40,837.50 30,112.50 29,700.00 24,744.10 23,346.40 16,050.00 15,037.50 12,305.90 11,737.70 11,115.00 10,973.80 10,965.00 9,657.10 7,750.60 5,376.50 5,362.50 5,183.20 5,175.00 145,848.20 616,661.00

23.3 8.3 6.6 4.9 4.8 4.0 3.8 2.6 2.4 2.0 1.9 1.8 1.8 1.8 1.6 1.3 0.9 0.9 0.8 0.8 23.7 100.0

Source Salvadorean Coffee Council as of July 31, 2022

Following the analysis of the identification of international markets to which El Salvador directs its exports, the United States is first, with 46.1%, followed by Germany with 9.1%, Italy with 7.5%, Belgium with 6.7%, Japan with 4.1%, among the main ones. Mexico has the same pattern, with the United States as the leading importer. At the company level, Nestlé through Nescafé, Nespresso, AMSA, Cafés California, and Neumann Kaffe Groupe account for 75% of the commercialization of coffee in Mexico (Sagarpa, 2015).

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Institutional Dimension and Coffee Policy of the Coffee Chain in Mexico and El Salvador The coffee sector in Mexico and El Salvador has been affected by the course of the related institutions. Since the liberalization of the markets in the 1990s, they have acted according to the particular interests of a specific group, and the relationship built between government agencies and producers has since been flawed. The current challenge is to clean up corruption and mismanagement of policies, which resulted in the distrust of some and dependence on others. In both countries, intervention in the country’s coffee towns and municipalities has been intermittent, insufficient, marginal, and conditional. However, even with a failed policy that slowly protects production, with what little is offered, cultivation has endured thanks to the link between producers and their farms and the collective or community organization between the actors. In the 2019–2024 Development Plan, which has been incorporated by the Mexican government (2018–2024), a policy has been outlined for the agricultural sector, with particular emphasis on providing targeted assistance to the coffee industry. These are aimed at “promoting the renewal of coffee plantations, the use of better genetic materials, the implementation of sustainable production practices, the aggregation of value and differentiation of their products and the conservation and better use of soil and water and the conservation of biodiversity.“ There are over 500 thousand producers, and 50% of this total is projected to receive support (Government of Mexico, 2020). This proposal is comprehensive because it includes a productive and environmental component. However, it is because it needs to include the social and biocultural aspects. The first element leads to a greater production volume; the following focuses on conserving and preserving the environment, especially support for organic crops. Nevertheless, as support for the countryside descends, the reality is far from the expected results. The aid consists of plant acquisition, productivity improvement, training, technical advice, and organic or other quality certifications. However, they arrive at the wrong time and must be updated from the planting and harvesting season. Moreover, only formal producers who can issue invoices are considered, in addition to often being conditioned to votes within political organizations or parties.

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In addition, the valorization of the product in a biocultural sense is not considered, i.e., monetarily, the tradition, culture, or environment under which coffee is produced is not worth something, even though there is a differentiated market for this willingness to pay an overprice for the recognition of the linkage with the territory. Both the current government and related institutions refer to promoting and using mechanisms such as existing appellations of origin and geographical indications, as well as mechanisms to improve prices paid to producers and to consider the coffee stock situation to meet the needs of the domestic and export market and to promote both needs, but what happens is a rupture between the links being sneered. However, it has been a very complex process. Regarding the above, it is worth mentioning that there are 3 Denominations of Origin (D.O.) in Coffee in Mexico: the D.O. Café Veracruz, Café Chiapas, and the currently protected Café Pluma. However, it has yet to work in the long term, and it has not fulfilled the mission of valorizing the product in the territory. All three have been proposed by a group whose interests have been political more than protection. Furthermore, it has resulted in distrust and rejection of protection by producers who were not considered to carry out these initiatives. Around the chain, some institutions seek to rescue Mexican coffee farming, each in its way and interests. Highlights include CONABIO, SENASICA, SNICS, SNITT, SEMARNAT, INIFAP, CDI, SIAP, CONANP, World Coffee Research, FIRA, FND, IICA, Autonomous University of Chapingo, GEF, Conservation International, Pronatura, Promecafe, Rainforest Alliance, Amecafé.2 among others. However, each organization has different rules and objectives, which hinder or contradict the strategies of one another. Some have significantly influenced producing areas, while others focus on field-specific policies. On the one hand, there is the Federal Government; on the other, nongovernmental organizations, universities, research centers, commissions, and, in addition, coffee organizations and coordinators that are made up of producers (although some of them with meaningful participation are the ones). Many care about coffee chaining, but in the end, policies fail. It shows that from 2007 to date, Mexico has been displaced as one of the first five major coffee-producing countries, becoming between 11 to 15th. 2 The institutions cited were part of the National Agricultural Planning 2016–2030, presented by Víctor Manuel Villalobos, Director of IICA, in 2018.

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Harvests and crops have been lost to diseases such as rust and climate impacts, and the sector has been punished with a low price, sometimes below production costs. Until 2022, the closest thing to a coffee institute in Mexico is the AMECAFE; its mission is to “make coffee farming a profitable and sustainable agribusiness that promotes regional development and promotes income generation in a framework of full consumer satisfaction”; its priority objectives are “strengthening the institutional framework, improving the competitiveness of the Coffee Sector and developing the domestic market” (AMECAFE, 2020). However, at the operational level, it only helps producers export the grain, which requires international certifications that need constant training provided by the institute to the producers concerned. Therefore, the association’s support includes training, promoting international competitions, and placing the winning grain in international markets. Beyond that, their activities are limited. For its part, El Salvador has also maintained a changing institutional dimension with little force in implementing a clear policy toward the coffee sector. The coffee-related institutions are headed by the Salvadoran Coffee Council (CSC), the country’s largest coffee policy body, established in 1989 as an autonomous state entity involving producers, beneficiaries, and exporters. It is listed as public–private, whose board of directors consists of members of public entities (MINEC, MAG, MH, BCR) and private entities (ABECAFE, UCAFES, UCRAPROBEX, ACDES). The CSC replaces the National Coffee Institute (INCAFE), having been a wholly stateowned company responsible for the purchase, benefit, industrialization, and export of coffee..3 Currently, the CSC, financially, is sustained from the collection of a registration fee for each sale of coffee, equivalent to $0.35 for each quintal of gold exported, among other services it provides to the sector, such as the analysis of samples for quality control and the Coffee School that started in 2007. In the long term, the coffee policy cannot be identified; that is, mainly, the policies have been designed to beat momentary crises, which are increasingly recurring; the primary support issues are restructuring or forgiveness of debts, management of trusts with certain limitations to the

3 Coffee Council Act. Legislative Decree No. 353, October 1989.

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little ones, restructuring of the coffee park with deficiencies in the quality of the plants that are given to them, among the main ones. The financing and technical assistance side has been the biggest obstacle small and medium-sized producers face. However, some efforts have been made to strengthen the financing, starting with adopting the Development Banking Act in September 2011, which led to the birth of the Development Bank of El Salvador (BDES). This Law expected the BMI to become a first-floor bank, as the intermediation between it and commercial banking has caused interest rates to be higher, a situation that has yet to lead to the expected results. Producers need help accessing financing, tiny ones, given the filters and restrictions established to be creditors of such financing. As for technical assistance, for ten years, the sector has been without an institution that provided this service, with the liquidation of the Salvadoran Coffee Research Foundation (PROCAFE); however, the Salvadoran congress recently approved transitional provisions as part of a plan to take off and rescue Salvadoran coffee culture that will allow the birth of a new institution that carries out the research, innovation, and technological development activities of coffee culture (CSC, 2020a, 2020b). Thus, in the case of the Salvadoran coffee sector, given its nature and the very structure of the chain, small and medium-sized producers find it challenging to finance the acquisition of agricultural inputs, making them more vulnerable, both to changes in the price and interest rates of credits, as well as the share of innovation of alternative processes and forms of production. Governance in the Global Coffee Value Chain in Mexico and El Salvador In both Mexico’s and El Salvador’s global coffee chains, given their respective structure, roasters are listed as the entity that exercises the most significant dominance, being that power is determined not only by the way the chain is coordinated, but also by how the various resources are distributed and allocated throughout it. A market highly concentrated in the upper links of the international coffee chain has allowed multinational companies such as Nestlé, Procter & Gamble, Kraft, and Sara Lee to exercise almost absolute control in the processed and ground coffee markets for domestic consumption in both territories.

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The insertion of these leading companies into national markets gives a particular turn to the analysis of the whole chain, as certain power groups emerge and dominate most of the second link, which is the national beneficiaries and exporters, who establish alliances with these leading companies (ICAP, 2016, 16–24). From here, we can see an inequitable distribution of the revenues from the sale of coffee. In the case of exports, this results in a differential between the price paid to the producer and the selling price received by the beneficiary/exporting companies. For example, in the case of El Salvador, according to CSC data, during the 2011/2012 harvest, there was a differential between the average price traded and the reference price of contract “C,” equivalent to $31.84, for a quintal of gold grain in favor of exporting companies, with fluctuations in each harvest, being the last differential recorded of $49.78, as shown in Chart. 7.1. Continuing coordination governance in both countries, there are relational links in which the intermediary between the producer and the processing or marketing company is known; in Mexico, it is the intermediary company, such as AMSA or before Becafisa and in El Salvador, the beneficiaries that export or market internally resulting in an average level of coordination with high coordination in complexity in transactions, a high level of demand for the responsiveness of producers, but $60.00

$300.00

$40.00

$35.10 $31.84

$30.00

$250.00

$44.20

$28.13

$32.32

$35.25

$32.77 $31.00

$200.00 $150.00

$20.00

$100.00 $11.61

$10.00

$50.00

$0.00

$0.00

PRICE DIFFERENTIAL (US$/QQ)

Negotiated Price

$50.00

Price Differential

$50.33

$49.03

AVERAGE ANNUAL PRICE (US$/QQ)

NEGOTIATED PRICE (US$/QQ)

Chart 7.1

Price differences (Source CSC, figures recorded as of July 31, 2022)

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with a low level in terms of the coding of transactions, i.e., the producer only provides the grain in green. Nevertheless, on the other hand, the processing company or marketer defines the quality of the cup. Many producers need to pay attention to where their coffee will stop as a final product for consumers and need to know the value of a cup. Regarding conventions, opinion conventions are presented through a third party that evaluates the characteristics of the good. In contrast, a third party assesses the quality of the grain and domestics, indicating coordination through loyalty to brands or territories. In the latter comes again the concept of biocultural territorial good, since the same buyers (understood as beneficiaries or marketers) seek Mexican or Salvadoran coffee specifically from the producing states or one of the six coffee regions of El Salvador. In both countries, there are also captive and hierarchical links as the levels of coordination are extreme, i.e., the producer needs to meet what the purchasing company requires, and asymmetrical power presents a wide gap. It should be mentioned that before the liberalization of the market in the 1990s, the typology of coffee in Mexico corresponded to governance in which the chain was led by the producer, an agent that controlled the chain, the barriers to entry and the prices that were guaranteed by the International Coffee Organization, whose mission was to protect the sector worldwide (Velazquez, 2017). Given the above analysis and the characteristics of the conventional chaining in Mexico and El Salvador, buyer-led global governance is relational to hierarchical links, medium– high coordination, and intermediate-to-high asymmetric power. Mexican organic coffee is a chain that has become important since it is one of the leading producers and has gained a reputation for quality, price, and compliance with standards. Like conventional coffee, the chain is run by the buyer as it dictates the rules of the game within the chain; there is a stronger captive type of linkage, much more demanding than the conventional one since, in addition to the complexity in the transactions and the high capacity that the producers must have, they must also know the product. In this case, if the coffee is marketed correctly, an aboveconventional price has incentivized this alternative type of production. Conventions in this Mexican organic coffee chain include civic coordination standards, including environmental ones, i.e., there is an interest on the part of the buyer to conserve the environment, in addition to cultural respect for biodiversity and ecosystem, including humans as part

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of nature and there is a concern for the way of work and working conditions; being, at the relative level with the Salvadoran case, a substantial difference, since this type of effort to produce organic coffee that is within the differentiated, is about 11% (CSC, 2020a, 2020b).

7.5

Conclusions

The similarities between the countries are more significant than the differences. The grain is of an arabica species, although different variety. It is exported in green, and the quality varies between Height and Strict Height. Agents appropriate the higher value-added ratio outside the geographical border, which leads to the conclusion that most of the profits generated by the coffee chain remain outside producing countries, such as Mexico and El Salvador. The direct marketing of both countries is before the coffee processing process, indicating that producers have yet to scale up in the chain forward in processes other than planting and harvesting. Therefore, value-added uptake is concentrated right on the links that follow the primary link. At the same time, there is a demand for volume and quality on the part of the towering companies that take care of roasting and grinding the grain, too, in turn, re-export it in its final product version. These corporations, often large transnationals, receive the coffee selected by intermediaries, and the appropriation of the most significant benefit is because they have the machinery, infrastructure, and knowledge of the tastes and preferences of the end customer. Once they have the primary input, they make it what the consumer wants. Thus, one way in which conditions could change in these producing countries is by climbing the chain, taking the next step in transforming it into soluble coffee or coffee, and marketing it in the form of a direct finished product to the consumer. However, it is a challenging task for producers and an institutional context supporting this initiative is needed. In addition, conventional coffee competition internationally increasingly affects producing countries, especially those such as Mexico and El Salvador, which have relatively small parks and cannot compete in volume. Therefore, it is necessary to consider differentiating the product from elements other than quality and reorienting markets toward consumers interested in purchasing products with attributes that link the producer to coffee and, thus, with themselves.

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As an example, differentiation could be achieved through the association of specific types of Salvadoran coffee with regions renowned for their coffee traditions. Additionally, integrating coffee cultivation with local traditions and festivals in certain Mexican regions, as well as preserving the landscapes where coffee is harvested, can further enhance the unique appeal. Consequently, producers would have the opportunity to market not just the coffee beans themselves but also the rich experience associated with their production. As for the structure of the chain, it is similar in the two territories, and the main agents are the same, producers, mostly small and some medium-sized; beneficiaries-exporters or intermediaries, who sell green coffee internally or globally; large roasters and grain processors that are almost always transnational corporations that worldwide market so that coffee reaches its main destinations. It should be mentioned that at this point, the producer no longer knows where his coffee is or who is consuming it. It is blurred from the chain as soon as it passes into the hands of the marketer, who mixes, processes, and distributes it. It leads to another opportunity that should be taken advantage of in both countries; the producer must know what he sells, the characteristics that make it unique and what are the advantages of knowing his product, how it is sold and who buys it, who, for example, has a particular taste for the grain of a specific region. Of course, this requires organization, planning, and cooperation between various agents within and outside the chain, including producers, local institutions, and companies that could bring knowledge and experience to local producers. In terms of conventional and organic coffee production, there is a difference in volume given the geographical conditions in each country because the production of Mexican-certified organic coffee has been increasing for some years. However, there is a coincidence in the socioeconomic conditions of producers because, being small or medium, they mostly share characteristics of marginalization and, as mentioned, difficulty in achieving some upgrading in the chain and thus improving their living conditions, leading directly to the discussion on the dimension of the institutional framework. Given the geographical and structural characteristics of Mexico and El Salvador, there is no stability or continuity in public policies, but a changing policy according to the economic situation and economic conditions of governments in turn, but repetitive in terms of the purpose of

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the application, forgiveness, or restructuring of debt, creation of transitional trusts, granting plants to renovate the coffee park, among the most recurrent. Moreover, while there are new proposals in Mexico based on quality, environment, and biocultural practices rather than productivity, implementation needs more clarity. Over the past few decades, proposals for strategies, plans, and programs in the coffee sector, both in El Salvador and Mexico, have been changing, reorienting itself to the productive approach, leaving aside the interest of improving marketing so that the producer is directly benefited. On the one hand, some dependence on government and support has been created; on the other, there is mistrust in the institutions. The ties needed to strengthen the coffee structure have been constantly broken, and rebuilding them is difficult. In both cases, both in Mexico and El Salvador, public policy should be oriented to create conditions that favor most participants within the chain. For El Salvador, it is to consider strengthening national banks for the provision of low-interest-rate credit and prudential payment period, as well as further promote associativity among small producers so that they can invest and give greater added value to the grain, to scale up the chain and reduce dependence on the big beneficiary and exporting companies. For Mexico, coffee must be considered a public good that must be valued in a sense not only economical but also biocultural, which gives identity to the country as well as maize because of the specific characteristics of the one who produces it and has preserved it over the years. For both countries, domestic coffee policy should be one, integrating the various proposals and their dimensions, such as productivity, the environment, biodiversity, and the biocultural aspect. It is an agrifood export good that generates foreign exchange. It becomes public when the link with the land gives identity to an entire sector dedicated to it for as many generations as the first coffee plantations. In this sense, institutions of various origins, public and private, national and foreign, and the coffee producer organizations themselves, commit a productive sense that encompasses culture, tradition, and the environment. According to previous studies, there are years when producers do not get beyond the cost of production because there are low prices globally, i.e., there is no valorization of these elements because it is interpreted as subjective, although it is not. It is an area of opportunity that the current coffee policy must consider.

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Regarding governance, the most prominent companies dedicated to the benefit of coffee in Mexico and El Salvador also act as exporters. Therefore, it presents governance by a domain of coffee transformers and marketers and, simultaneously, hierarchical given this vertical integration. It is, therefore, necessary to create mechanisms to strengthen the horizontal integration of activities within the chain at the national level and to support small producers to scale within the chain. Small and medium-sized producers have tended to disappear since the first coffee crises in the 1980s, and we still have them. Nevertheless, they have a strong relationship with the agrifood goods and within the territory. Even though conditions have disadvantaged them in productive and social terms, they continue to conserve production in these countries. It is, therefore, necessary to review and reorient the sector’s strategies toward a more inclusive and sustainable sense through public policy, but also by incorporating other actors who are willing to strengthen the sector, such as academics, local companies, local and national tourism sector, support organizations, university students and, in general, the population of each region interested in preserving this agrifood good that is characteristic in both countries for giving identity to coffee-producing areas.

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ICAP. (2016). Transnational corporations in Salvadoran coffee culture and sustainable development in western El Salvador. Central American Journal of the Public Administration, 9–36. http://publicaciones.icap.ac.cr/index.php/ articulos-70 ICO-International Coffee Organization. (2023). Crop year production by country. Reviewed on 2023. https://www.ico.org/new_historical.asp?sec tion=Statistics. INEGI. (2016). Update of the agricultural census framework. National Institute of Statistics and Geography. Jiménez Porras, G. (2011). Sustainable upgrading of smallholders in global Agrifood chains. Jorquera Beas, D. (2011). Governance for local development. Working Paper No. 6. Knowledge and change project in rural poverty and development. Retrieved from Rimisp. Kooiman, J. (2003). Governance in governance. Presentation presented at the International Conference on governance, democracy, and social welfare. (pp. 57–81). Goberna. Mexico Economic Ministry-SE. (2008). Green coffee standard and its products: vocabulary, terms, and definitions. Normativity, Secretariat of economy. Pastor, G., & Mairal, P. (2015). Local governance: Challenges and opportunities. Retrieved from Research gate: https://www.researchgate.net/publication/ 309013526_La_gobernanza_local_Retos_y_Oportunidades/citation/dow nload Pérez Akaki, P. (2010). The small coffee producers of the Otomi tepehua region. UNAM FES Acatlán. Ponte, S., & Sturgeon, T. (2014). Explaining governance in global value chains: A modular theorybuilding effort. Review of International Political Economy, 21, 195–223. Ramos, J.M., & Reyes, M. (s.f.). Local governments and citizen participation: Towards an associated strategic management approach. Spiral (Guadalajara), 12(34), pp. 39–66. Obtained from Spiral: Recovered on August 22, 2020. http://www.scielo.org.mx/scielo.php?script=sci_arttext& pid=S1665-05652005000300002&lng=es&tlng=es. Sagarpa. (2015). Consultation agrifood information system. Servicio de Información Agroalimentaria y Pesquera. Agriculture and Rural Development Ministry. Retrieved from https://www.gob.mx/siap/documentos/siacon-ng161430. SIAP. (2019). Food and fisheries information service. Ministry of Agriculture and Rural Development. Obtained from SIACON. SIAP. (2021). Food and fisheries information service. Ministry of Agriculture and Rural Development. Obtained from SIACON.

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SUSTER. (2020). Networks of knowledge, skills, and competencies for inclusive and sustainable territorial valorization of cultural heritage, products of origin and biodiversity. http://suster.org/. USDA. (2019). Coffee: World markets and trade. Retrieved from United States Department of Agriculture: https://downloads.usda.library.cornell.edu/usdaesmis/files/m900nt40f/xk81jw68v/kp78gs60d/coffee.pdf Vandecandelaere, E., Arfini, F., Belletti, G., & Marescotti, A. (2009). Linking people, places, and products. A guide to promoting quality linked to origin and sustainable geographical indications. FAO. Vegas Melendez, H. (2017). Public policies and joint governance for autonomous local governance. Polis (Santiago), 16(48), 155–172. Obtained from Polis. https://doi.org/10.4067/S0718-65682017000300155 Velázquez Salazar, M. (2017). Consumption and marketing of coffee in MexicoDoctoral Thesis. pp. 124–125. National Autonomous University of Mexico.

CHAPTER 8

Coffee from Micro-Batches as a New Form of Marketing: The Case of Producers in the Western Central Valley, Costa Rica Fernando Sáenz-Segura, Alma Pérez Vásquez, and Roselia Servín Juárez

F. Sáenz-Segura (B) Centro Internacional de Política Económica Para El Desarrollo Sostenible (CINPE), Heredia, Costa Rica e-mail: [email protected] A. Pérez Vásquez · R. Servín Juárez Colegio de Postgraduados Campus Córdoba, Heroica Veracruz, Mexico e-mail: [email protected] R. Servín Juárez e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_8

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8.1

Introduction

Historically, coffee has been produced and industrially transformed as a commodity, a primary component of another higher value-added final product. Coffee and sugar are typical commodities produced in tropical regions, and marketed in conventional futures markets. In these markets, commodities are traded into large volumes of future production, with generally highly standardized quality criteria. In other words, commodities are sold in bulk. Two major coffee futures markets are the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). In such markets, the leading players are intermediaries or brokers, who define the price in a supply and demand game. Producers have little or no influence on the formation of the final price. In addition, the stage of industrialization that follows the sale in the futures market and before the consumer sale, called roasting, is also outside the influence of coffeeproducing countries. Approximately, 80% of coffee is estimated to be traded as a commodity in a conventional market where demand is concentrated in a few international marketing companies, directly influencing price (Cannet & Soto, 2017; Quintero & Rosales, 2014). Apart from being a traditional commodity, coffee is produced mainly by small and medium-sized producers from developing countries (approximately 26 million producers in 50 countries) (Borrella et al., 2015; Daviron & Ponte, 2005; Fitter & Kaplisky, 2001; ITC, 2011). In a commodity market, these small coffee producers generally sell their products through companies that either process or export coffee. Export companies sell the coffee to the brokers, who pay back to exporters, who in turn pay back to producers. Hence, in these markets, the final price is formed mainly at the middle/end part of the chain, while coffee producers just become the final price takers. This price-formation model worked relatively well until 1989 when the International Coffee Convention was ended. This convention was an agreement between coffee producers and coffee consumer countries, under which the global supply and demand were regulated, and the price remained acceptable for all participants. However, in 1989, international prices showed high volatility because of speculation on international exchanges, with years showing meager prices, as happened in 2000. This recurrent situation negatively affects small and medium-sized coffee producers since prices hardly cover the production costs (Balbuena, 2012; Ponte, 2001; Renard & Breña, 2010; Silveira et al., 2017).

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On the other hand, in Costa Rica, there is a national coffee organization called Instituto del Café de Costa Rica (ICAFE), created by the Law No. 2762 of 1933. ICAFE rules several institutions regulating a coffee harvest-season price yearly, dramatically favoring the producer (the so-called liquidation price). In addition, ICAFE promotes an entire agenda of research and technological transfer, which allowed, among other things, to assist producers during the last coffee rust attack in 2013 (Sáenz-Segura & Chaves Moreira, 2014). However, this ICAFE model has certain limitations in bringing cutting-edge technology to poorer producers, while liquidation prices generally do not meet producers’ economic expectations. In summary, marketing coffee as a commodity is a big drawback for small coffee producers since no quality recognition, exports, and roasters define prices. These prices must be higher for sustainable primary production (Daviron & Ponte, 2005; Romero, 2010). Small countries like Costa Rica, with small coffee production, have no chance of influencing these commodity markets or reversing those negative empowerments in the coffee value chain. Given the former disadvantageous context, some coffee producers in countries such as Costa Rica and Mexico have sought new forms of marketing where coffee quality is more valued than volume. This is how an alternative value chain emerged called differentiated coffee markets (Canet & Soto, 2017), where processed coffee is traded under various presentations. This coffee is promoted into these differentiated coffee markets using certifications such as organic, fair trade, shaded coffees, controlled designation of origin, and specialty coffees (Escamilla & Landeros, 2016; Valenciano-Salazar et al., 2023). The so-called specialty coffees are traded in markets where the price is determined by the “cup quality” of coffee, which is defined by the assessment of sensorial attributes when cupping, like flavor, aftertaste, aroma, acidity, balance, sweetness, and uniformity (Díaz-Cárdenas, 2015; CBI, 2022). Although there is not a single definition of specialty coffee, there are cupping protocols defined by the Coffee Quality Institute and the Specialty Coffee Association that define scores for assessing which coffees can be traded as specialty coffee and which cannot (CBI, 2022). This has established a new value chain where Costa Rica and Guatemala have ventured in, increasing their share of these niche markets by 35 to 50% (Varangis et al., 2002). On the other hand, there have been changes in coffee consumption globally, with more sophisticated consumers demanding better quality

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coffee. This new demand has allowed for niche, or specialty, market development, where quality characteristics are more important than volume (Brenes et al., 2016; Peterson, 2013). For example, from 2001 onwards, the market for specialty coffees in North America grew by 5 to 10% compared to the supply of conventional coffees, making this niche an option for small-scale producers (Bacon, 2005). However, there are certain limitations to the specialty coffee market niche. For example, many producers need to be made aware of the quality of products, especially small producers in poorer and lagging areas. In addition, even if producers are aware of the quality of their coffee, their potential quality sales are constrained by a lack of stimulus for enhancing quality production. It also influences the fact that many of these producers need the conditions, human capacities, and resources to participate in alternative markets that require a learning techniques process and patience. Finally, the little research on how these markets work and operate and how successful the existing specialty coffee production experiences are makes this type of niche market little known or restricted. This research aims to systematize a little-known specialty coffee sale in Costa Rica, the so-called micro-batch modality. We analyze this sale mode closely, identify how many agents intervene in this alternative market chain, and what the participants obtain the results. Micro-batch is presented as quality-based direct marketing, where communication between chain agents is more forthright. Therefore, coffee producers operating under this modality would be expected to receive better coffee prices than conventional outlets. Besides, at a higher level of information on the purchase and sale of coffee, the probability of demand for specialty coffee increases. The study area is the area of the Western Central Valley. The rest of the chapter is organized as follows. The following section describes how specialty coffee emerges and its micro-batch variant as a product for an alternate global value chain that responds to a niche market with specific demands. The third section describes the study area, while the fourth section presents the methodology. The fifth section presents the main results of the research and concludes in the sixth section.

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167

Conceptual Framework

From a Commodity to a Differentiated Product The end of the International Coffee Agreement in 1989 gave rise to a new type of conventional market characterized by volatile prices and the empowerment of speculators (Valenciano-Salazar et al., 2023), where producing countries have little or no control over price formation. In addition, it is estimated that about 80% of the coffee sold in the world is made in this type of conventional market. In these markets, coffee is traded as a commodity, as a raw input for another highly added-value product, so it is mainly bulked and sold at the lowest possible price (Quintero & Rosales, 2014). Under this scheme, coffee producers act as final price takers, while price formation occurs in the final segments of the chain. Hence, coffee producers are exposed to prices that often do not cover their production costs in a conventional market. This situation discourages investments in coffee plots, increases rural unemployment, and is a source of poverty, crime, and immigration (Valenciano-Salazar et al., 2023). Alternative market forms emerge as a response to a disadvantageous commodity market. These alternative value chains look for fewer intermediaries, less complexity in the distribution system, and a better flow of information. Specific literature calls these types of chains as Short Food Supply Chain (SFSC). Even though there is not a unified definition for SFSC, it means a close relationship between producers and consumers and specific focus on cultural and social values around the traded product (Maas et al., 2022). In the case of a shorter coffee value chain, the traded product is sought to be appreciated for its characteristics and production context and not by an offered volume. Differentiated coffee markets are a type of alternative market (Canet & Soto, 2017), under which there are a wide variety of presentations in response to final consumers’ requirements regarding quality (taste and aroma) and environmental concerns. In this niche market, there is a commitment to addressing these consumers’ concerns. To address consumer concerns and desires, coffee producers should have enough information about the tastes and preferences of the final consumer. Differentiated coffee markets arise as a new and more dynamic alternative market by responding to the wishes and concerns of a specific consumer. According to the International Coffee Organization (IIC) and the Specialty Coffee Association of America (SCAA), they have an annual

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sales growth of 5 to 10% (Escamilla, 2007; FAO, 2012; Perez & Ubeda, 2013). Specialty Coffee as a Differentiation Strategy Within the category of differentiated coffees, there are the so-called specialty coffees. These cafes are marketed based on physical and sensory attributes, for which they can win prizes or have recognition from roasters and final consumers (González & Escobar, 2014). Coffee differentiation is based on three characteristics or aspects around the product: (1) the intrinsic characteristics of the grain, which constitutes a biophysical attribute; (2) the personalized and sophisticated way in which coffee is prepared and served to the consumer in specialty coffee shops, where the environment and attention constitute a social attribute; and (3) the secondary characteristics of the place where the grain was produced, which has to do with origin, history, and site or geographical location. The latter constitutes a cultural attribute (Daviron & Ponte, 2005; ITC, 2011). The term specialty coffee is not new. It had been popular in the 1960s, especially in North America, among the specific type of consumer characterized by a high income and sophisticated way of life, but also with concerns about quality issues in terms of taste, aroma, and information regarding the origin of coffee (Cardona, 2010; PROMECAFE, 1996). The Coffee Quality Institute and the Specialty Coffee Association (SCA) have defined scores for classifying of coffee according to its cupping profile (CBI, 2022). The SCA defines specialty coffee as a drink made from high-quality grains. At the same time, this quality is evaluated and recognized by the consumer (in a particular market and at any given time) regarding aroma, flavor, and presentation (Lopez, 2014). The score in the cup must be above 80 points, sometimes even 85 points or above (CBI, 2022), and must be awarded by a certified Q grader taster. Hence, the taster is a crucial player in the marketing process of specialty coffees. The certified taster is trained in performing a sensorial analysis of coffee, where the aroma and taste are valued (Alvarado and Linnemann, 2010), based on a methodology, or tasting format, established by the Specialty Coffee Association (SCA). This tasting format emerged in 1999 as a specialty coffee stimulus program, and the International Coffee Organization sponsored it. It consists of a protocol that qualifies the following ten attributes: (1) fragrance/aroma, (2) flavor, (3) post-taste or residual

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taste, (4) acidity, (5) body, (6) uniformity, (7) balance, (8) clean cup, (9) sweetness, and (10) taster rating (CBI, 2022; Lingle & Menon, 2017; Parker & Austin 2011). Tasting is thus a beneficial instrument to establish what coffee mixes or “blends” can be made. Besides, it is possible to associate coffee quality characteristics, in terms of aroma, fragrance, and acidity, with a particular geographical area, a specific process, or a cultural value. The tasting detects flaws in the process (Escamilla y Landeros, 2016; Nebesny & Budryn, 2006). As stated before, specialty coffee producers and traders deal with discerning consumers; thus, information is critical in this market chain. Information goes from the coffee-producing farm to the coffee shop where the drink is sold. Micro-roasters have promoted a direct coffee trade through continuous and “direct” relationships among farmers, cooperatives, and exporters to promote this flow of information. As a result, different flavors and coffee qualities can be better positioned in the final market (Holland et al., 2016). The specialized exporter is another critical player in the specialty coffee chain because he places the product in specialty markets (Borrella et al., 2015; Holland et al., 2016; Ponte, 2001). In the case of Costa Rica, experience indicates that establishing close relationships and flows of information between producers/roasters/exporters have successfully allowed access to specialized markets where prices are substantially higher (Abarca, 2017; ICAFE, 2016; Valenciano-Salazar et al., 2023). In summary, specialty coffee markets show an excellent opportunity for coffee producers to participate in more specialized markets, where they can take a more significant part of the coffee value. However, this market niche participation in the global coffee trade is relatively small since it accounts for only 13% of the world’s coffee consumption (Martínez et al., 2017; Traore et al., 2018). Besides, for producers in the developing world, it is easy-to-participate, since certain not common human conditions and capacities are required. In other words, a level of education, investment in equipment, and training are required, which is not available to all coffee producers. Micro-Batch as an Option to Sell Specialty Coffees There is no specific definition for a micro-batch coffee. The specialized practice of this type of coffee states that it is a specialty coffee whit highly valued sensory attributes, where the geographical origin matters a lot,

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and the type of performed processing, namely, wet, or dry. As the name implies, it is a coffee sold in batches of limited production with specific exclusivity characteristics. It is coffee of high demand between roasters and baristas, who are willing to pay for such characteristics of quality and exclusivity. The micro-batch is a planning activity performed by the coffee producer. There may be other micro-batches or other parts of the farm under coffee production that do not respond to specific differentiations of micro-batches. Having micro-batches imply to have a greater diversity of coffee offered than any other production array. In a micro-batch, quality results of several biophysical factors, like soil, altitude, and climate, and cultural factors, like variety, production system, and processing. This combination of factors allows a given expression of physicochemical characteristics from the farm to the cup test (Cañas, 2015). Like any specialty coffee, micro-batch coffee is traded under an alternative market institution, where information is exchanged and direct negotiation among specialized producers, roasters, and baristas. Baristas are the final segment of the chain, and they operate specialized coffee shops and have certain types of customers willing to pay higher prices for specific types of coffee. A specialty coffee must have more than 80 points in a cup, certified by a Q grader tester. This information must flow along the price negotiation. Micro-batch coffee traders care not only about the coffee quality characteristics but also the conditions of production and delivery. That is why the relationship among producers, the roaster/exporters, and baristas’ technically certified information flows are significant. Furthermore, this approach visualizes the permanence and constancy of consumers and the development of long-term business relationships. In summary, micro-batch coffee is intended for a highly specialized niche market, where participating producers can interact and establish direct negotiations with roasters and baristas willing to pay for the characteristics of coffee. Consequently, producers acquire competitive advantages and better benefits that they would not have in conventional markets (Oliveira, 2008).

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Description of the Study Area

The Coffee Institute of Costa Rica (ICAFE) divides coffee production into eight regions: Central Valley, Tres Ríos, Turrialba, Brunca, Guanacaste, Tarrazú, Orosí, and Wester Valley (Fig. 8.1). This research was conducted in the Western Valley Region on the west side of the Central Valley (dark red area). This region is characterized by its high population density and urban development, while major economic activities are commerce and agricultural production. In addition, it consists of the coffee cantons: Palmares, Naranjo, San Ramón, Grecia, Valverde Vega, and Atenas. The Western Valley region has good conditions for coffee production, namely fertile volcanic soils, 81% humidity, stable temperatures, an

Fig. 8.1 Eight Coffee Producing Regions

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average of 21.5C°, and adequate year-round sunlight of 48 to 52%, with an average of 2,250 hours per year. The rainfall is 2,250 millimeters annually, an average of 160 days. In addition, it has significant country watersheds, which supply the demand for drinking water for 50% of the Costa Rican population (ICAFE, 2017–2018). The study region is renowned for its high-quality cup, recognized in several cups of excellence contests. In 2015, coffees from both regions, the Western Valley and Central Valley (the famous Tarrazú coffee comes from), won the cup of excellence contest with notes greater than 85 points on the 100 scale. In addition, the Western Central Valley region is pioneering the offer of coffee from micro-batches.

8.4

Methodology

A qualitative research approach was used, using the case study as an analysis method. In this approach, data collection goes through the participation of key informants and on-site visits, which provide primary information about the current state of the specialty coffee marketing model and the context in which it is developed. It is information from the perspective of the interviewed person himself. Although there are few observations in the case study, the collection method allows for extensive information on the decisions made by the micro-batch coffee producer regarding the management of the production and process of a given batch and the market channel used. This information includes both qualitative and quantitative data (Alvarez-Gayou, 2003). Without an accurate and complete database of all specialized producers/processors working under the micro-batch modality, we collected different lists found on different websites. Then, we crosschecked these lists with the Ministry of Agriculture and Livestock (MAG) extension agents in coffee plantation areas. After a first evaluation, we chose the Western Central Valley region since it has the most cases of producer processors working with micro-batches. A second selection criterion was that the area is easier to access and is a shorter distance from San José than other regions. The non-existence of a comprehensive database of specialized coffee producers/processors makes it challenging to estimate a target population, so we dropped the use of a probabilistic sampling method and a “snowball” sampling method. This technique consists of the location of some individuals, which leads to other similar individuals until reaching

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an adequate number of cases (Hanneman, 2001). Under the case study technique, few observations are required, and it does not involve rigorous statistical management, as it focuses on building the situation through testimonies (Hernández et al., 2010). The list of potential interviewees was cross-checked again with secondary data obtained from ICAFE. A single form with structured and unstructured questions was applied to each interviewee. The variables used are shown in Table 8.1. The research had a descriptive, analytical, and exploratory scope. Fourteen cases of micro-beneficiary producers were interviewed, including two coffee exporting companies (see Fig. 8.2). Interviews were conducted in the Western Central Valley region in 2017. The information was systematized in a database for further analysis.

8.5

Results

Characteristics of Coffee Producers Under the Micro-Batch Production System ICAFE divides coffee producers as follows: 92 percent of the producers have an area planted with coffee of less than five hectares and, together, they represent 44 percent of the total area. 6 percent have surfaces between 5 and 20 hectares and represent 21 percent of the aforementioned area, and two percent have plantations of more than 20 hectares, which represent 35 percent. The plot area determine how much fanegas they deliver (https://www.icafe.cr/nuestro-cafe/estructura-del-sector/). In Costa Rica, a fanega is a volume measure used to measure harvested coffee berries, approximately 258 kg of green coffee, or 46.5 kilograms of processed coffee. In the case of the producers we interviewed, they deliver between 200 and 700 fanegas. Their main characteristics are shown in Table 8.2. Interviewed producers are primarily men, with an average age of 50 (39 years the younger and 58 years the older), with around 33 years of working experience in coffee production. It draws attention to the fact that only some women or younger people are involved in this activity. Surprisingly, a large majority have a university bachelor’s degree (53%), and 66% are specialized coffee producers who dedicate 44 hours per week to the activity. However, only two producers with a university degree reported that they recently started producing and selling coffee under a micro-batch scheme and as a secondary economic activity.

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Table 8.1 Variables included in the interview applied to producers/processors Section

Variables

Producer overview

Gender, age, degree of studies, years of experience in the coffee activity, time spent in the activity, and the realization of coffee activity combined with other members in the family For years he/she has been marketing micro-batches, which is why he started offering his coffee in micro-batches, characteristics of micro-batches, factors in selling them in this way, factors that determine the quality of the product, and risks when marketing micro-batches The total area of the coffee farm, altitude (m.s.n.m.1 ), the total area of the plot(s) intended for micro-batches, exact area for micro-batches (ha), criteria used to define the number of micro-batches and the location of these, varieties of coffee grown for micro-batches, the average age of plants that are intended for micro-batches, distribution of varieties in the plot, the distance between plants, production system on the plot of micro-batches, the reason why they have these varieties, management of nutrition, pests, and diseases, obtaining plants, commercial crops, certification, production, workers and collectors per hectare, costs Training, price determination, price-setting process, buyers, profits, tasting, exporter delivery, business relationships, competencies, benefits processes, limiting factors, success factors, participating institutions, participation in coffee quality events, needs to produce micro-batches

Background and context of the marketing of coffee through micro-batches

Factors involved in the marketing of coffee through micro-batches

Actors involved in the sale of coffee through micro-batches

Source Own elaboration with research data

Interviewed producers’ households are composed of 4 to 6 members, and most of them participate in the production of coffee. Coffee farms 1 M.s.n.m: meters above sea level.

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Fig. 8.2 Location of micro-processing facilities in the Western valley region (Source Vazquez, A., Milan, M. and González, G)

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Table 8.2 Profile of specialty coffee producers in the Western valley region in Costa Rica Average age

Gender

Experience working with coffee

Schooling level

Another activity than coffee farming

Time spent active coffee maker a week

50 years old

92.4% men 7.6% women

33 years old

15.3% Primary 23% Secondary 8.6% High School 53% Bachelor

33% Yes 66% No

44 hours

Source Own elaboration based on interviewed producers

range from 2 to 37 ha, with age plants between 5 and 10 years old, within altitude floors ranging from 1300 to 1700. The most common coffee varieties are Caturra, Villa Sarchí, Geisha, Typica, Catuaí, Kenya, and San Roque. Plague and disease control is performed uses a mixture of biologically controlled measures and agrochemicals. Most interviewed producers agree that crucial success relies on the constant control of each stage of coffee production. Hence, the producers must be present at each stage of the crop, to supervise the coffee crop harvest and processing. This marks a contrast to conventional coffee production, where producers have partial control and records of the activities they are carrying out. Micro-batch producers conduct precise records regarding every activity and decision they perform on each plot, thus offering a quality guarantee for buyers looking for unique characteristics of coffee. Furthermore, with these records, buyers can track the whole coffee production cycle, even from their locations abroad. There are three essential selling determinants for coffee from microbatches, namely: 1. Knowledge development of coffee quality: Interviewed producers reported that they started working directly with buyers through exporters, who already appreciated the specialized work involved in micro-batches production. Along the quality construction process, producers acquired technical advice and training on sensory analysis, aiming to emphasize cup quality and thus aspiring to gain a

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higher quality-based procurement price. This quality construction process also promotes participation in national and international competitions that reward coffee quality. 2. Market demand: Trading coffee from micro-batches implies a personal relationship with buyers. Hence, active participation of the buyer is expected, where buyers show interest in the crop production, the type of performed production system, and harvesting and processing. 3. Overprice: A higher coffee quality ensures a higher procurement price, and the final quality of the coffee stock determines this. Therefore, micro-batch producers take the risk of investing in infrastructure and other specialized inputs that yield such expected higher coffee quality, the critical price determinant.

Actors Involved in the Marketing of Coffee Through Micro-Batches Coffee marketing transactions are regulated by ICAFE (Law No. 2762). In the micro-batches case, we identified three critical actors in coffee marketing: the producer, the exporter, and the buyer. Table 8.3 describes the performed activities of each of these actors. Unlike conventional coffee, prices for micro-batches coffee are determined by the cup quality because of the negotiation of the three main actors (producer, exporter, and buyer). Interviewed producers indicated that the price per quintal of coffee could be two to three times higher than in conventional markets (e.g., US$600 vis-a-vis US$200 in each market, respectively). The exporter is the clue intermediating actor for price formation dealing between the producer and the buyer. An experienced exporter knows in advance the quality of the coffee he or she is offering in the international market while usually having a database of potential buyers’ tastes and preferences. Therefore, the exporter matches those buyers’ preferences with different coffee qualities by offering micro-batch coffee samples from a specific producer to a given buyer, who tastes the coffee and starts bidding the price. Hence, the exporter is a micro-batch coffee producer and a buyer abroad, where information and price bidding go two ways. The process of matching an offer with demand, tasting samples, and price negotiation takes a month, on average.

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Table 8.3 Actors involved in the marketing of coffee from micro-batches Agro-production performs a specific production system on the plot. Harvesting: Supervises good harvesting practices of pure ripe coffee berries. Coffee pickers are usually better paid than the ones harvesting conventional coffee.

Micro-batch coffee producer

Wet and dry coffee processing: Coffee berries are peeled off, followed by a process where 80% of coffee is finished with a “honey flavor” type and 20% is washed, or the so-called natural process. At the end of this stage, coffee is dried in a type of grid. Trite: To remove the shell from coffee beans to obtain green or gold coffee. Storage: Coffee beans are packed in unique bags with a plastic layer at 12-13% humidity and in jute bags. Tasting: make the tasting of your coffee so that you can negotiate with the exporter. Trite: sometimes performed. Tasting: tasting is mainly based on the cup score obtained by a specific lot of coffee of a micro-batch. Coffee promotion: linking producers with coffee buyers.

Export

Advising: Advising producers to improve production processes to meet international buyers’ expectations. Packaging: Bagging green coffee beans to be delivered abroad. Shipping transactions: Performing all the required logistics for exporting coffee.

Roasting: Buyers perform roasting according to customer expectations. Grinding: Milling coffee beans prior the selling to final customers. Buyers (Roasters and baristas)

Communication: The buyer is present at some stages, mainly during the harvest.

Source Own elaboration with research data

To be regarded as a specialty, coffee must range between 80 tasting points and up to a maximum of 85, awarded by a registered taster. Between 85 and 90 tasting points, coffee is considered a boutique café, and it is within this score where the best micro-batch coffees are selected.

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Conversely, with more than 90 tasting points is an exceptionally unique coffee. Stated otherwise, an excellent micro-batch coffee should be above 85 tasting points, or it would be regarded as just a specialty coffee and could even be sold at lower prices. It is important to note that producers are unaware of the exporter’s price share at the end of the price negotiation. However, all respondents showed that they were happy with the procured price and considered it fair because each actor performs a role that benefits the others. In this marketing system, there is constant communication between producers, exporters, and buyers in the target markets (roasters and baristas), where diverse information and communication technologies are used. Interviewed producers reported that these international buyers visit the farms often, especially during harvest time, for better information and control of the post-harvest production process. Some producers also reported that they have traveled to the countries where their coffee is sold and know how these roasters and baristas pack and sell their coffee. Many of these packaging indicate the type and origin of the contented coffee and the name of the farm from which it comes. The main buyer countries mentioned by producers are England, Japan, Canada, Australia, Denmark, the United States, Korea, and Taiwan. Advantages and Disadvantages of Marketing Coffee from Micro-Batches Western Valley producers know the advantages and disadvantages of working under a micro-batch scheme. The first disadvantage even considered a risk factor is that the producer must know to be aware that he works for a very demanding market. It is a relatively small market of micro-roasters and very specialized baristas who sell coffee to demanding customers. Therefore, a micro-batch producer must devote much more time and resources than he would allocate producing of coffee destined for conventional markets. In this sense, the producer must perform a minimum of three rounds of fertilization per year, plus all required agronomic measures, while keeping an accurate record of all activities carried out on the farm. In addition, the producer must invest in sophisticated (and rather expensive) equipment, such as machines for coffee pealing and grain selection, to train the workforce involved throughout the production process. Finally, the most critical production stage is the wet and drying process. An error at this stage could cause the micro-batch to fail

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to exceed, or even barely reach, the 85 points in a cup, which yields a coffee that must be sold as a regular specialty coffee or, even worse, as a conventional coffee. On the other hand, the producer also faces the risk associated with climate variability, making it challenging to maintain the same quality standards as the ones previously obtained with a successful former microbatch. Furthermore, since a micro-batch producer must use a single coffee plant variety per batch (no mixing plants), he is more exposed to pests and diseases than conventional producers, so he must invest more caring time and pesticides. Another identified risk factor is that sometimes buyers only want the “best of the best” of the offered coffee. Thus, the percentage of coffee sold under micro-batch is reduced by 70% to 80%. The rest goes to other markets. It is important to remember that subjective factors, such as tasting condition, the procurement price, and if, in the end, the buyer does not like what he tastes, he drops out of negotiating. Therefore, part of the producer’s strategy is to produce small micro-batches that do not exceed 100 fanegas,2 increasing the chances that the whole lot will be sold. Additionally, caring and processing time is more manageable with shorter lots than larger ones. Interviewed producers usually have an extensive experience in coffee production, but their experience with micro-batches is variable. Some reported working with a micro-batch scheme for over ten years, while others have two years. However, they all reported that they started with micro-batches through another producer, who was already experienced in improving coffee quality. Therefore, a new micro-batch producer started by looking for information and experimenting on their coffee plots until they realized the coffee quality they had on selected plots. In this way, the producer is the first to select coffee based on the type of process and taste. Self-recognizing his coffee quality is the first motivation behind the decision to move into micro-batch coffee production (see Fig. 8.3). This can be named “personal motivation.” The second factor concerns the challenge of working in a demanding market, with a high probability of meeting specialized buyers who often visit Costa Rica searching for

2 Each fanega equals approximately 100 pounds of coffee or 46.5 kilograms of green coffee.

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certain specific quality characteristics. This can be named “social motivation.” The last factor is the expectation of an overpriced based on quality, up to three times more than the price paid for conventional coffee. This can be named “economic motivation.” Finally, interviewed producers acknowledge that moving into a microbatch production scheme has transformed them. Since it is an activity with critical points in the process, producers get used to keeping a strict record of everything they perform and how they do it. There is also the possibility of participating in competitions, such as the cup of excellence, and meeting other actors involved in the specialized coffee market. Stated otherwise, the producer transformed himself into a specialized producer with a specific international experience while leaving behind the drawbacks of traditional markets.

1. Knowledge of coffee quality

Based on tastings and participation in competitions that reward quality.

2. Market demand characteristics

Strong market trend, international buyers are interested in buying coffee from micro-batches.

3. Overprice

Quality ensures much higher procurement prices than other outlets.

Fig. 8.3 Motivational factors for producing coffee under a micro-batch scheme (Source Own elaboration with research data)

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8.6

Conclusions

Three key participants were identified in the micro-batch coffee market of Costa Rica: the producer, exporter, and buyer, whom each carries out their activities. The business relationship between these three actors implies a building-up process where coordination, trust, and flow of information are clue issues. This is a short and highly specialized value chain. Marketing coffee from micro-batches is a way to enter a high-paid specialty coffee market and is an attractive alternative to traditional markets. However, some producers only achieve success, but not most, where agroecological characteristics of coffee plots, human capacities, and financing are required conditions. A willingness to take risks is also required. Among the identified limiting factors are (1) high production costs; (2) investing in specialized coffee plant varieties to ensure high quality is required, besides specialized machinery and training of the workforce; (3) some financial capacity is needed to maintain the whole operation, and to cope with any losses. Therefore, a producer should only assume that some of the micro-batch coffee production can be sold under a high overprice; (4) a source of financing is required, which is difficult for many small producers; and (5) enough plots or farms to expand production. This is important because any specialty coffee requires plots between 1300 and 1400 m.s.n.m., which are sometimes challenging. Among the success factors are: (1) The producer has a good knowledge and confidence about the type of coffee he can offer; thus, tasting quality is a required capacity that any micro-batch producer must have. This is important because quality is the base for negotiating the price; (2) having excellent communication and social skills to perform a good trading relationship with the exporter and the final buyer. In addition, the producer must know the target market characteristics, tastes, and preferences of final customers, which costs time and resources; (3) the ability to find new buyers. Besides being a producer, the producer must do his best to position and identify his coffee in these specialized markets. Micro-batch production scheme is not an option for poor, loweducated small producers, with production systems where quality control and plant care are minimal or zero. It represents an attractive alternative market for actors, where coffee production, processing, and commercialization are regarded as an integrated business model. Under this concept,

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each participant works satisfactorily, performing their related activity. Differentiating coffee is an investment and a learning process, where risks are taken, but success is well paid for. Acknowledgements To the National Council of Science and Technology (CONACYT) for the research grant awarded to Alma Yanet Pérez Vázquez, whose Master’s thesis project this chapter was based on. We appreciated the support received by the Colegio de Postgraduados Campus Córdoba, Veracruz in Mexico, and the International Center for Economic Policy for Sustainable Development (CINPE), of the Universidad Nacional de Costa Rica. Finally, we thank the coffee producers in the Valle Central Occidental in Costa Rica, who kindly provided the information on which this research was developed.

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ICAFE. (2016). http://www.icafe.cr/ IICA. (2004). IICA: Cadena Agroindustrial del Café. IICA. International Trade Centre (ITC). (2011). The coffee exporter’s guide, 3rd (pp. 16–40). ITC. Lingle, T. R., & y Menon, S. N. (2017). Cupping and grading—discovering character and quality. En: The craft and science of coffee pp. 181–203. López, P. K. (2014). El mercado mundial del café tostado. Promotora del Comercio Exterior de Costa Rica (PROCOMER), p. 48. Martínez, V. M., Aristizábal, I. D., & y Moreno, E. L. (2017). Evaluation of the composition effect of harvested coffee in the organoleptic properties of coffee drink. Vitae, Revista De La Facultad De Ciencias Farmacéuticas y Alimentarias., 24, 47–48. Maas, M., Abebe, G. K., Hartt, C. M., & Yiridoe, E. K. (2022). (2022) Consumer perceptions about the value of short food supply chains during COVID-19: Atlantic Canada Perspective. Sustainability, 14, 8216. https:// doi.org/10.3390/su14138216 Nebesny, E., & y Budryn, G. (2006). Evaluation of sensory attributes of coffee brews from robusta coffee roasted under different conditions. European Food Research and Technology, 224, 159–165. https://doi.org/10.1007/s00217006-0308-y Oliveira S., R., D’Antonino F. L., & y Marçal de Q. D. (2008). Qualidade dos grãos de café (Coffea arábica L.) em coco processados por via seca. Revista Caatinga, 21(2), 139–146. Parker, S.F., & y Austin W. M. (2011). Coffee philosophy for everyone: Grounds for debate, pp. 34–45. John Wiley & Sons Ltd. Primera edición. Pérez, M. J., & y Ubeda, Z. R. (2013). Incidencia del proceso de beneficiado húmedo y factores ambientales en la calidad del café obtenida por los productores de las cooperativas Coomprocom, Cooapante y Asocafemat, para una propuesta de denominación de origen en el departamento Matagalpa (pp. 1–12). Universidad Nacional de Ingeniería. Sede Regional del Norte. Peterson, P. (2013). Nuevos mercados, nuevos valores. Leisa Revista Agroecológica. Biblioteca Nacional del Perú, 29(2), 5–6 Ponte, S. (2001). The late revolution. Winners and losers. PROMECAFE. (1996). Crece la preferencia por cafés de especialidad. Instituto Interamericano de Cooperación para la Agricultura (IICA) Guatemala. Quintero, R. M. L., & y Rosales, M. (2014). El mercado mundial del café: Tendencias recientes, estructura y estrategias de competitividad. Visión Gerencial, 13(2), 291–307. Renard M., C., & y Breña O., M. (2010). The Mexican coffee crisis. Latin American perspectives, 37 (2,), 14. Romero, G. A. M. (2010). Estudio sobre la cadena de valor del café ugandés de comercio justo. Análisis de la cadena de valor del café robusta de Uganda

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de Comercio Justo y su impacto en los medios de vida de los productores ugandeses. http://www.intermonoxfam.org/cms/HT. Sáenz-Segura F., & Chaves Moreira, J. M. (2014). La Institucionalidad del sector agropecuario costarricense: evolución y efectos sobre el desarrollo del sector. XX Informe del Estado de la Nación en Desarrollo Humano Sostenible, p. 69. http://hdl.handle.net/20.500.12337/270. Traore, T. M., Wilson, N. L. W., & y Fields, D. (2018). What explains specialty coffee quality scores and prices: A case study from the cup of excellence program. Journal of Agricultural and Applied Economics, 50(3), 1–20. Varangis, P., Siegel, P., & Giovannucci, B. L. W. D. (2002). La crisis cafetalera: Efectos y estrategias para hacerle frente. World Bank Policy Research Working Paper, pp. 3–61. Valenciano-Salazar, J. A., André, F. J., & Díaz-Porras, R. (2023). Differentiation strategies in coffee farms: Opportunities for Costa Rican growers. Environment and Development Economics, 28(1), 68–88. https://doi.org/10.1017/ S1355770X22000134

CHAPTER 9

Upgrading Options for Small Cocoa Producers in Guatemala Pablo Alvarez

9.1

Introduction

This article is structured as follows: After this introduction, a brief presentation of conceptual framework and methodology is made. A brief characterization of cocoa activity in Central America, locating activity within the framework of the global cocoa market, the destination of production and some particularities of the countries of the region around cocoa activity are presented in the next section.

This article is based on chapters 3 and 4 of the Thesis “Cocoa as a Development Alternative in Central America: An Analysis from the Perspective of Value Chains”, in order to obtain the title of Master economic policy with mention in the External Sector of THE CINPE, National University of Costa Rica. The thesis document is in the process of final review for its defense by the end of June 2020. P. Alvarez (B) San José, Costa Rica e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_9

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In this same section, there is a characterization of the cocoa chain in Guatemala, considering its links: inputs and production, post harvesting and marketing of grain, processing (intermediate and finished products), and consumption. In each link, we have tried to identify the direct actors involved, and in particular, we have privileged those links and relationships between actors, where small cocoa producers have a relevant role. In particular, we have sought to characterize the relationships between grain producers and buyers, in terms of the governance of the marketing link, and how this relates to the final destination of the product and the possibilities of small producers to improve their position in the chain. The next (fourth) section focuses on a brief characterization of the different markets—for final products—that we have identified from the study of the global cocoa chain and, specifically, the cocoa chain in Guatemala. We have then tested the identified characteristics of these markets, with the conditions of small producers, in the search for escalation alternatives for them. In the fifth and final section, conclusions are provided in terms of scaling options for Guatemala’s small cocoa producers.

9.2

Conceptual Framework

The analysis of cocoa activity in Guatemala is based on the approach of global commodity chains,1 which is complemented with different theories of international trade, which can guide in the identification and definition of competitiveness strategies, and specifically with respect to the characteristics of the markets: cocoa for the conventional/mainstream market, cocoa with sustainability certifications, fine cocoa, and others. The Global Commodity Chains perspective seeks first to identify the interlinkages of activities that make a commodity available to the final consumer. This perspective gives a panoramic view of this process, which goes from the generation of inputs, the production itself, and the subsequent distribution among consumers. Although the approach considers the micro-level activities carried out by a company, it focuses on an aggregate characterization of the tasks performed by the different companies during the process, to have a global vision of the activity. 1 See Arce, R. (2009), Demenus and Crespo (2011), Díaz et al. (2009), Díaz and Sandí (n.d.), Díaz and Valenciano (2012), Fernández-Stark & Gereffi, (2011), Gereffi et al. (2001).

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Likewise, the concept of “Upgrading” or economic scaling is defined as the process in which economic units enter and/or move to higher value-added activities in the production chain, thus improving their position in it (Fernández-Stark & Gereffi, 2011: 42). This concept is of vital importance for the design of strategies in the different chains, since it allows them to be evaluated in terms of an improvement in the position of companies along the chain. Fernández-Stark and Gereffi (2011) distinguish several types of economic upgrading: – PRODUCT: Orientation toward more advanced and sophisticated product lines in terms of unit value.2 – PROCESS: More efficient transformation of inputs into outputs by reorganizing the production system or introducing superior technology.3 – FUNCTIONAL: Consists of acquiring new higher functions in the chain such as design, marketing, or abandoning existing low valueadded functions to concentrate on higher value-added activities. The concept of “Upgrading” is present throughout this work in terms of “improvements in chain insertion”, as well as under the concepts of sources of competitiveness and vertical and horizontal differentiation. The options for improving insertion in the chain are worked on by identifying real and potential markets, which are then contrasted with the characteristics of the cocoa chain in Guatemala; the markets are rated according to the opportunities for successful insertion from the perspective of small-scale cocoa producers. Based on this, aspects of the chain structure are identified that should be modified and improved to strengthen the market options identified. Specifically, the findings of the analysis of the global cocoa chain and the cocoa chain in Guatemala in particular, and especially where smallscale producers are involved, are used to develop proposals for improving the activity.

2 In the case of cocoa, it could be to work in the line of fine cocoa of origin from native varieties, or to produce and process under Fair Trade standards. 3 This could range from the introduction of higher yielding varieties to improvements in fermentation systems, etc.

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The analysis of productive development options is evaluated considering the following aspects: differentiation potential (Horizontal and Vertical) and upgrading potential (Functional, Process, and Product). The assessment of opportunities for small producers to better integrate into the global cocoa chain is based on the identification of demand patterns and the possibilities for small producers in Guatemala to respond to them. The demand is characterized as for regular cocoa and its derivatives and for differentiated cocoa and its derivatives. Once, the situation of producers in the Guatemalan cocoa chain has been evaluated; alternatives are identified for a better insertion in the different markets, according to demand.

9.3

Methodology

The methodology used consisted of a literature review, review and analysis of international and national statistics, company websites, and key informant interviews. The interviews were conducted with key informants (organized producers, buying companies, business sector leaders, private technical support organizations, and national and international financiers) during visits to the country at the end of 2016, complemented with new interviews during 2018 and 2019. This is a descriptive analysis of the cocoa sector in Guatemala (meso level), identifying the articulations/chains present; the descriptive research was combined with an explanatory study in that it sought to relate the results found in the descriptive part, with limitations and challenges for further development of the activity for cocoa producers, and identify possible alternatives for overcoming them. The main limitations of the study are that it is not based on information from surveys of producers, collectors, processors, and retailers. The same would be very costly to carry out, both in financial and time terms.

9.4 Central America and Its Location in the Global Chain Latin America produced approximately 989 thousand tons (t) of cocoa in 2020 representing 17% of the world’s production. Central America (CA), including Belize, produced 9,677 tons, negligible quantity in the global supply of cocoa beans and just over 1% of Latin American production (ICCA, 2017). While it is an insignificant activity in global terms,

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Central America is considered to have adequate agro-ecological conditions for cultivation, territories to expand activity, good quality genetic materials, and producers and companies interested in the activity, as well as an international and regional market capable of absorbing this production. In addition, CA has a great experience in the activity, which can be resumed and expanded, not only considering the market elements, but also its potential environmental (agroforestry and biodiversity systems) and social benefits, as it is an activity developed mainly by small producers of family type. On the other hand, it is estimated that 52% of cocoa production in CA is intended for consumption or processing in the producing countries themselves; 32% is traded between the countries themselves in the Central American Region, while the rest (16%) is exported to the US and Europe (Veco, 2016). It is important to note that cocoa activity differs between the countries of Central America, where Guatemala, El Salvador, and Costa Rica are characterized by the processing of the raw material with the aim of having finished products for their national and regional markets, and due to the inadequacy of their domestic production, import grain, mainly from other Central American countries; on the other hand, Nicaragua, Honduras, and Belize concentrate on the primary production phases, exporting cocoa beans to both regional and non-regional markets (US and Europe). In this sense, it can be noted that both heterogeneity and complementarity between cocoa chains should be considered in the formulation of escalation strategies for the activity. Below is the cocoa chain in Guatemala, in the line of identifying escalation opportunities for small producers.

9.5 Characterization of the Cocoa Chain in Guatemala Inputs and Production Guatemala has the highest cocoa consumption in Central America, both for its final consumption by its population, and for the production of finished products that go to export markets. Despite this high consumption, its production is scarce so it imports grains from Nicaragua and Honduras, as well as intermediate and finished products from outside Central America.

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By 2017, its production was approximately 1,180 tons and had a harvested area of 4,354 hectares (ha). Cocoa production in Guatemala reached its highest levels in the early 1990s (3,000 t), but since then it has been falling mostly since 2000,4 remaining above 1,000 tons since 2010 without major changes. Similarly, the area dedicated to the activity had its peak in 1990 (4,700 ha), tending to fall since then, but less aggressively than cocoa production (MINECO, 2015). Cocoa has remained in Guatemala as a secondary activity of farms and in the national economy, going through periods of high and low according to the behavior of international prices. On the other hand, cocoa cultivation decreased by competition from other crops (land use) such as cotton, cane, rubber, and African palm. In theory, the country could grow in cocoa, because by natural conditions, it has the potential to sow almost 160 thousand hectares and generate a production of 47 thousand tons of cocoa with current yields, but is taking advantage of only 3% of this potential area today. In the last 7 years, cocoa activity has tended to be energized by increasing demand for fine cocoa and an increase in grain prices, between 2010 and 2016. Cocoa in Guatemala is mainly grown in 2 regions: North, which includes the lower parts of the departments of Alta Verapaz (Cobán), El Quiché, Izabal, and the southern part of Petén. The other is the SouthWest region that encompasses Suchitepéquez, Retalhuleu, Quetzaltenango, and San Marcos. An approximation of cocoa areas in Guatemala is shown in the Map. 9.1. In Guatemala, there are various varieties of cocoa, both Trinitarian, Forastero, and Criollo, which, if they include good handling, have characteristics to be considered as fine cocoa aroma. Until the 1950s, “Criollas” varieties predominated, but they were displaced by “foreign” varieties, due to their susceptibility to disease. In recent years due to the increase in demand for fine cocoa, efforts have been made for the rescue and reproduction of Creole varieties as they allow to obtain fine cocoa of aroma and flavor. With this perspective, the processes of new cocoa planting and renewal are being carried out with improved Creole materials. Its production is carried out by nurseries driven by producer organizations, communes, and non-governmental organizations (NGOs), often with

4 Process that began with the emergence of the Monilia (cocoa disease, produced by the fungus Monilia) in the 1990s.

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Map 9.1 Guatemala. Distribution of production by region (Source Own elaboration with information from the Ministry of Agriculture and Livestock of Guatemala [MAGA])

support from international cooperation. Currently, according to the international cocoa organization (ICCO) criterion, 75% of cocoa exported by Guatemala can be considered as fine-scented cocoa, increasing this rating by 50% until March 2019. Cocoa production is mainly carried out by small producers (85 to 90%), and it is estimated that there are about 9,000 producers involved in the activity.5 Cocoa is produced in Guatemala mainly on small farms of family farming (the labor is mainly family), with plantings between

5 In any case, the figures contrast with other activities in terms of the labor involved,

for example, about 125 thousand producers participate in coffee, while in cardamom we are talking about 350 thousand producers. On the other hand, studies indicate that the number of cocoa producers is much lower than indicated, as it is based on a 2003 Census. However, this data (9 thousand) is used, as it is cited in recent documents of characterization of the sector (Tapia S, 2016).

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half and one hectare, although we can find differences by region,6 and as part of a broader production system (which may include basic grains, coffee, bananas, cardamom, etc.). Cocoa is not considered a major activity for these producers, which partly explains their low yields, to which the advanced age of cocoa trees also contributes, especially in the South West. There are 2 harvests per year: the first is concentrated in the months of October, November, and December, and the second during March and April, period where a higher volume is obtained. While almost no external inputs are used in cocoa production, especially in the case of small producers, few have organic certifications, with a greater presence in the North Zone. On the other hand, there are also private farms7 and research centers with larger cocoa extensions (between 15 and 120 has); most of these cocoa farms are located in the South West of Guatemala. One trend captured is that there are several medium and large farms, some of which had cocoa in the past, which are revitalizing it, attracted not only by good prices, but also by the promotion of activity in Guatemala, and seeing possibilities to generate processes of processing the grain into the farms themselves (added value) for sale to more exclusive markets (fine chocolate, but also as a seasoning, to produce vinegar, etc.). These types of farms would be betting on obtaining fine cocoa aroma, with an increase in cocoa production estimated with their income in the medium term.8 It is estimated that between 50 and 65% of cocoa producers participate in some form of productive or communal organization (cooperatives and associations), but this does not imply that they necessarily market through them, nor that a majority of these organizations have business capacities developed around cocoa, and in many cases be able to engage

6 In the North, between 0.25 and 0.75 hectares are used for cocoa production (Alta Verapaz), while in the South West between 0.5 and 1 hectare, but also farms that plant up to 4.3 hectares. 7 At least 20 to 30 medium- and large-sized producer farms are identified, where some of them are affiliated with the Cocoa AGEXPORT. 8 It would be about 4 or 5 farms with intentions of planting between 100 and 200

hectares. An estimated 800 to 1,000 hectares, which would mean a 20% increase in the sown area, and an increase in production of at least 30 to 35% (managing higher yields than the small producer). Regardless of whether these farms will enter or not, several informants have been found pointing to 1 or 2 cases of planting in areas greater than 50 hectares, including Izabal Agro Forest’s intention to increase its cocoa extensions.

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in organizational work of other crops, as the main activity of the organization. It also points to the informality of some of these groups in terms of legal constitution, which affects their operations and the possibilities of entering into contracts or having access to public services and banking. Another important aspect to consider is the existence of a large number of organizations, estimated at least 50, which implies a strong atomization of organizational processes. Therefore, although there is a significant proportion of cocoa producers participating in some group, the organization of producers around cocoa is weak. Most organized groups are located in the north of the country. The organizations with the largest number of cocoa producers are the Federation of Verapaces Cooperatives R.L FEDECOVERA, Fundación Laguna Lachuá and the Association of Organic Producers for Integral Development of Polochic (APODIP),9 all located in the north of the country, while in the south the National Association of Cocoa Producers (ANAKAKAW) was identified. Post-Harvest Management and Grain Marketing Usually the producer, once the cocoa cob is harvested, opens the fruit, removes the seed with slime, sometimes washes, dries it and stores it for sale to intermediaries. There are also producers who perform a handcrafted fermented wine on their farms. It is estimated that 80% of the cocoa harvested in Guatemala10 has this type of post-harvest management (Tapia, 2016). The aggregation of this dry and unfermented cocoa is mainly done by informal private traders who go to the farms of the producers or are located in local markets in the communities.11 Once

9 Both Fedecovera how Apodip are cooperatives that are certified Fair Trade organic, but are focused on coffee marketing. 10 966 tons on average between 2013–2015. 11 “In the informal market, the first network of intermediaries operating in the commu-

nities consists of a fleet of trucks or vans that run from farm to farm or in mountain ports. They buy cocoa bean with the slightest quality requirements ( …). The second circuit of marketers is located in the markets of departmental headers. They usually buy ordinary cocoa, cocoa semi fermented and second-rate fermented cocoa. One of the most important markets is the La President market in Guatemala City, which is considered the market where the largest amount of cocoa in beans is traded that is sold to the domestic consumer market” (Tapia S, 2016: 31).

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Small producers dry cocoa grain (996 Ton)

Informal private traders

FEDECOVERA

Artisanal Producers (Choc Imperial, Asichoq)

Market in departamen

Industry (La Grecia, Granada)

Fig. 9.1 Guatemala. Dry cocoa grain circuits (Source Own elaboration)

collected, the merchant sometimes finishes the drying process, sorts it and transports it, and delivers it to the buyer. These traders deliver the product to the domestic industry for different purposes, some of this cocoa is also handled by producer organizations, with the same destination of the product, as seen in Fig. 9.1. Most of this cocoa remains in the domestic market for both industry and the artisanal sector. An important part goes to the artisanal sector that mainly produces traditional chocolate for beverages, including some producer organizations that produce their own artisanal chocolates. The rest, it targets about 8 industries that produce ordinary chocolate from the grain produced in Guatemala, but mainly with imported raw material (grains and cocoa powder) such as Chocolatería La Grecia, Chocolate Granada, Real de Alimentos, and others. On the other hand, it is estimated that 20% of the production is fermented (240 tons); in this case, the producers open the fruit and remove the seed in slime and pack it for delivery to an organization of producers or companies (see Fig. 9.2). Since the production of a demand for cocoa beans for export, a few years ago, the delivery of wet cocoa by producers has been stimulated, in order to centralize the fermentation and drying processes and the result of a higher and homogeneous quality cocoa.12 Wet cocoa is 12 The organization of producers or companies carry out the fermentation process,

where the pulp is removed and, most importantly, transformations are generated in the seed that allow the formation of color, aroma, and flavors. Once fermented, a drying process should be carried out in order to reduce the moisture content from 40 to 50% to 6 or 7%. Drying is usually done in the sun. Subsequently, a selection is made where impurities such as garbage, split grains, moldy, and small. This can be done manually or

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Fedecovera

Small producers wet cocoa grain (240 Ton)

Fundalachua Cacao

Fine chocolatiers EEUU y Europa

Verapaz Others producer organizations: Apodip, ADAC, Adiosmac, Anakakaw

XOCO

Fig. 9.2 Guatemala. Wet Cocoa Circuits (Source Own elaboration)

usually collected by producer organizations (Fedecovera, Fundalachuá, Adiosmac) and some private companies, for later sale to companies exporting cocoa to the United States of America (such as Cacao Verapaz) and by a smaller percentage for about 4 to 5 local fine chocolate industries (Chocolates Danta and others). Some producer organizations while collecting cocoa also export directly, as in the case of FEDECOVERA and Fundalachuá. The presence of producer organizations in the collection is more pronounced in the north of the country. It is important to note that the lack of productive infrastructure for fermenting and especially for grain drying limits the chances of obtaining higher amounts of cocoa beans with the qualities required for more demanding markets. It is also common for producers to have different types of varieties on their farms, which adversely affects the quality of the fermented product; a weakness that increases when it comes to the collection of small quantities from various producers, also affecting the opportunities to sell to more specialized markets. In terms of the territorial dimension at this stage of the chain, and according to information from UN COMTRADE and FAOSTAT, it is estimated that in the period 2013–2017, on average 94% of the production collected remained in the country. However, by 2017 this proportion

with grain selectors, similar to use in coffee. The grains are packed in sacks and stored and then transferred to the grain buyer.

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was reduced to 87%, increasing the grain exported to countries such as the Netherlands, the US, France, and El Salvador by 13%. The latter country has been the largest recipient of Guatemala’s grain exports, from 2002 to 2015, losing importance to export growth to other countries, mainly to the US. Export growth to the US, Holland, and France in recent years (2015 to 2018) coincides with the increase in demand for fine cocoa from Guatemala by buyers in these countries, according to information generated from UN COMTRADE. In this way, grain exports have been increasing as a percentage of production, from 4% between 2011 and 2015, 6% between 2013 and 2017, to 13% in 2017. It is important to note that this change in the diversification of grain export destinations has led to an increase in the unit value of cocoa exported by Guatemala. Thus, while before 2011 it exported to just over thirty dollars a ton (US$300), in 2011–2015 it increased to almost US$2,000, while in 2018 it sold about US$3,000 on average, an increase of nearly US$6,000 paid per ton of grain by buyers in the US and Holland, prices found on the stock exchange, given the condition of being considered as fine-scented cocoa. This higher value of cocoa exports to the US and European countries is also reflected in terms of the prices paid to cocoa producers, and indirectly in power relations in the chain. Therefore, different types of governance can be identified in the relationship between cocoa bean producers and buyers (see Table 9.1), partially reflected in prices and services offered by buyers/copyers. The prices of cocoa beans that reach quality levels for the fine-scented cocoa market are often higher than they can be obtained from local traders. However, given the scarcity of local grain in the market, and depending on the market conditions of neighboring countries (Nicaragua, Honduras, and others), the prices offered by local traders are relatively high,13 pay cash, and do not have high quality requirements, which hinder the greater interest of producers in obtaining and selling cocoa with the characteristics desired by buyers of fine aroma, despite offering higher prices.14 13 Overall, the price in Guatemala is above the stock market price, and this due to the high consumption of cocoa in Guatemala. 14 One aspect that catches the eye, at least detected in the survey that was conducted in mid-2016 by the researcher, is that the price paid for delivering cocoa in slime or grain did not have much difference. This may discourage the producer from deciding to keep

Cocoa Verapaz

relational

Modular

market

Type of governance

(continued)

There are no greater cooperation relationships between producers and buyers. Quality is not a central element in pricing (% humidity). Market prices are paid or above, although you can obtain cocoa beans from Nicaragua with relative ease. The payment is cash, and this is one of its great competitive advantages. As a dry product, the producer is not obliged to sell it immediately. Normally, the power is on the buyer’s side FEDECOVERA member cooperatives make the collection in slime and deliver it to this organization, where the fermentation and drying process is carried out. It pays market or market prices, but there are not as many quality demands for baba cocoa. FEDECOVERA provides credits and technical assistance to producers. The cooperative exports directly and has organic and Fair Trade certifications, and contacts for the sale of grain in the local market. Therefore, it is in a hierarchical position in front of the producers. However, the above, the producers supplying it are independently in terms of cocoa production and selling to other markets It establishes relationships with producer organizations that collect cocoa from its members. Cacao Verapaz buys and pays against fine cocoa quality (fermentation, humidity, etc.). Prices on the market, at approximately 60 to 70% (US$5,000 per Ton). It involves levels of cooperation between producer and buyer (technical assistance) and the existence of contracts between the company and the organized producers. However, producer organizations may establish sales relationships with other buyers. Cacao Verapaz exports directly and has relationships with final buyers. Although the power is tilted on the side of Cacao Verapaz, organized producers have bargaining power that gives them fermentation and the particularities of the cocoa they offer; another aspect that gives producers power is that Cacao Verapaz is a company specialized in fine cocoa that buys most of its cocoa in Guatemala (although it also buys in Haiti, Colombia, Bolivia, Ghana). All this is expressed in the prices obtained, although the payment is not immediate, which is a problem for the organizations that sell to this company

Local Merchants

FEDECOVERA

Description of the relationship

Guatemala: Types of chain governance by buyer type

Types of buyers

Table 9.1

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Producers must produce in accordance with specific rules dictated by the company, especially the use of the seed of the varieties handled by OXO Fine Cocoa, and cannot negotiate the product with other buyers. There is an exclusivity contract that they must sign with the company. While the greatest power is in the contracting company because of the conditions of exclusivity, producers, even if they are individual, count the power of sowing a specific variety, which the buyer cannot easily obtain from other producers, at least in the short term They buy from producer organizations, both unfermented cocoa and fermented cocoa (usually the second that does not have export quality). The quality of the grain, in terms of fermentation, is not an essential aspect, because its product uses sugar-intensively to flavor the powder. Pay market prices or above these. It differs from a market relationship, whereas meanwhile it may involve prior agreements between the parties, in terms of volumes and qualities; however, the differences are not as explicit

Fine Cocoa Exporting Company/XOCO

Source Own elaboration

Local producers of artisanal/traditional chocolates

Description of the relationship

(continued)

Types of buyers

Table 9.1

Modular

Captive

Type of governance

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Both companies and organizations, when they can, try to add value to the relationship with suppliers by offering technical assistance, delivery of seedlings for planting and renewal, and some inputs. This is most marked when there are some NGOs supporting the process. They identify with these services Fundalachuá, Fedecovera, APODIP, Fundación Fray Domingo de Vico. Cacao Verapaz also offers additional services such as support for investments in processing, technical assistance, and payment in advance. Xoco provides genetic material and technical assistance. Being able to make advances or provide collection credits is an obstacle faced by both producer organizations as well as some companies in order to collect the grain, so producers must wait for the product to be sold in order to receive its payment, which is not the case with the private merchant.15 It is complex to try to identify a company’s leadership at this stage of the chain, but it is certainly on the domestic market side. FEDECOVERA is a leading company for its levels of cocoa grain purchase, and product placement in domestic industries. There are some traders who stand out for their buying levels, but it was not possible to determine this with certainty. In the purchase of grain from traders and producer organizations, the power of the Guatemalan traditional chocolate industry in the articulation of the chain is undeniable, since they define in large part the quantities, prices, and qualities of the cocoa purchased, which is deepened in the next section. When it comes to cocoa beans for export, Cacao Verapaz stands out as a leader in this segment of the chain, followed by FEDECOVERA, Fundalechuá and XOCO. However, it is a small part of the chain, and while growing, it does not appear that in the short to medium term the external cocoa market becomes the axis that articulates the chain. Intermediate Processing and End Products As already indicated, most cocoa produced in Guatemala (94%) continues with the intermediate processing and production of final goods in its own territory. In the country, there is an industry that produces processed goods of an industrial and artisanal/traditional nature of the utmost cocoa in slime because of the risk that the product will break down and be lost (which is not the case when it is dry), if there is no really attractive price for wet cocoa. 15 Access to credit funds could increase the governance of organizations and businesses against traders, at this stage of the chain.

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importance. There are no figures of how Guatemala-produced cocoa is divided among these 2 processing subsectors, but it is estimated that the artisanal sector should take an important part for its traditional chocolate production processes (Herrera, I, personal communication). In addition, there is a third subsector, which would be chocolate shops with a gourmet chocolate approach (beans to bar) and that demands between 2 to 3% of domestic production, and which has been growing in recent years (idem). The industrial sector consists of a number of companies that produce chocolates in bars and food preparations containing cocoa. They buy the grain from Guatemala, but most cocoa and other intermediate goods are imported (mainly grain from Nicaragua and cocoa powder from the Netherlands and the US). This type of industry produces both for other raw material industries (butter and cocoa powder, covered with chocolate) and goods for the end consumer that are usually sold in supermarkets and other outlets. They also export finished product (chocolate powder), mainly to the rest of Central America (65%), and in general to Latin American countries (90% of the finished product). In Guatemala there are about 8 companies with these characteristics, the most important being the Chocolatería la Grecia and the Fábrica Granada. In terms of artisanal production,16 these are mainly small and microfamily enterprises, located mainly in Quetzaltenango and Chimaltenango. It is also known from some cocoa producer organizations that are producing their own chocolates by hand on a small scale. In the case of small businesses stand out the case of Chocolates Imperial, located in Quetzaltenango and the Association of Chocolates of Quetzaltenango (ASICHOQ), which associates a large number of micro-entrepreneurs dedicated to the production of traditional chocolate for beverages. In addition to these companies, many other microenterprises produce cocoa in tablets for the preparation of chocolate in cup. It is important to indicate that in such initiatives there is significant participation of women throughout the production process.

16 The process of making artisan chocolate is: The seeds are toasted, pulverized, and then mixed with sugar and cinnamon (also rice, in some cases), then the product obtained from this process serves to prepare traditional chocolate in the form of discs or tablets, which are dissolved in water or milk, by the final consumer.

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The production of gourmet chocolates (artisanal production) is carried out by about 4 or 5 small and medium-sized companies that sell chocolate in bar and chocolates nationally and that buy their raw material in Guatemala (fermented cocoa). Most of the fermented cocoa exported, and especially by Cacao Verapaz and Xoco, goes directly to gourmet chocolates in the US and Europe, who perform all the processing, artisanal type, and obtain a chocolate of characteristics differentiated to the currents (Last, J., personal communication). Also, and in deterred quantities, a portion of the grain, not necessarily fermented, is exported to El Salvador, where it is used to supply the local cocoa-based industry with traditional products. Consumption As already indicated, on average between 2013 and 2017 Guatemala consumed internally 94% of cocoa produced in the country, either as traditional chocolates (dust or discs and tablets for the production of chocolate in cup), ordinary chocolate, and a very small proportion such as gourmet chocolates (Last, J., personal communication). However, while the country consumes almost all of its cocoa production domestically, this amount is insufficient to meet its domestic demand. Considering all its exports and imports of finished and intermediate products, Guatemala is estimated to have had an apparent consumption of almost 6,000 tons (5,879 tons) of cocoa between 2016 and 2018, implying that Guatemala would have the capacity to absorb about 5 times the current cocoa production. This high consumption relative to domestic supply involves imports of US$ 39 million and a trade deficit of almost $27 million annually in the cocoa-based prepared food sector, according to information from UN COMTRADE. This local production deficit,17 relative to domestic consumption, creates opportunities to increase local production of grains and finished products. The product consumed in the country was channeled through local markets, street sales, small food businesses, tourism sales, and restaurants and cafes. In the case of ordinary chocolate through supermarkets and 17 The calculation was made considering domestic production, plus imports of finished product (chocolates and other food preparations) and intermediates (cocoa bean, pasta, butter, powder, shellfish), minus exports (finished and intermediate product). For finished products, a content of 30% cocoa was considered. All data in metric tons.

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convenience stores, it highlights the consumption of traditional chocolate by popular groups as something distinctive of some countries of the Region, but especially Guatemala. The rest (gourmet chocolate) is marketed in specialized shops and cafes, for a consumer of medium and high economic income, both domestic and foreign (tourists). As for the exported grain, and especially to the US, these are bars, chocolates and others, which are sold in specialized shops and cafes that offer gourmet type product, for a very demanding consumer in terms of flavors, who is interested in origin, and willing to pay for exclusivity (Last, J., personal communication). In the case of exports of processed product by Guatemala, apparently a significant part of these corresponds to cocoa powder for beverage preparation (Tapia S, 2016: 19), which is sold to that consumed in different commercial establishments, mainly in El Salvador, Honduras, and the Dominican Republic.

9.6

Identification of Upgrading Opportunities for Small Cocoa Producers in Guatemala

The opportunity assessment was carried out taking into account the different markets identified from the analysis of the global chain, as well as the particularities of the cocoa chain in Guatemala. In the identified market positions, two large market blocks are distinguished: • Current market according to international market parameters (conventional chocolate). From the position of the producers, it is mainly the sale of cocoa beans (bulk/bulk cocoa, wholesale). This is the majority market and already includes some certified cocoa. The purchase of cocoa beans and their intermediate processing is concentrated in few companies (between 8 and 9) such as Barry Callebaut, Olam, Cargill Inc., ECOM, Mondelez, which are made in countries where there are significant volumes of cocoa production such as Ivory Coast, Ghana, Cameroon, Indonesia, Brazil, Ecuador, and among the main ones. In terms of finished products, it is generally characterized by its low prices and low cocoa content (25 to 35%) and where almost 80% of chocolate and confit sales are made by only 10 companies, including Mars, Mondelez, Nestlé, Ferrero, and Meiji (ICCA, 2017).

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• Differentiated Markets. It is a market that expresses different tastes and preferences in terms of bar chocolates and other cocoa-based products, usually from a higher-income and more educated population located in high-income countries, mainly European, but we also find such consumers in producing countries, including those in Latin America. This market generally pays higher prices to producers, compared to conventional or current, it also requires a more direct relationship between the manufacturer and the producer, and while relatively small, it is growing. Under the concept of differentiation we can identify a greater segmentation of this demand, which we will call—Certified Markets: Currently, approximately 45% of the world’s cocoa grain production has some kind of certification, but represent only 22–25% of sales. The main ones are Rain Forest/Utz, Organic and Fair Trade certification. In recent years, companies have opted for Rain Forest/Utz certification, equivalent to approximately 90% of certified cocoa purchases, and it is mainly used for ordinary chocolate processing. This segmentation can be subdivided as follows: Fine Cocoa Market: It is a very demanding market, which requires specific varieties (Criollo mainly, but also Forastero), in order to obtain particular flavors in chocolate. In addition to this requirement, it needs careful management of post-harvest processes, especially with respect to the fermentation process of cassava in grain. It is processed both industrially and semi-artisanally. Buyers of this type of cocoa can pay twice as much as the price on the stock exchange. It is estimated to have a size of 6% of the market. The main bidders of this type of cocoa are found in Latin America (Ecuador, Peru, Colombia) (ICCO, 2019). Healthy Food Markets: This is a market for low-sugar and low-fat products, which contain higher amounts of cocoa than ordinary chocolate, with little processing, especially in the case of raw or raw cocoa, and which bring benefits to consumer health.18 The 18 From the absence of fermentation, or reduced fermentation, without toasting or with a toasting less than 45 degrees Celsius. In general, it is not to expose it to high temperatures to preserve its characteristics as an antioxidant (Mayorga, A. Personal Communication).

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best-known variant of this market is dark chocolate, which usually contains between 70 and 80% cocoa in the product. Traditional Products Markets: The traditional products market is mainly found in Guatemala, El Salvador, and Nicaragua (pinolillo), and extends to neighboring Mexico. These are cocoa-based products mainly for traditional drinks (pasta in the form of cocoa cakes). They are mainly consumed by popular groups from these countries, and respond to a cultural and culinary tradition that comes from before the arrival of Spaniards in these territories.19 Once, the market options have been presented, each of the markets identified above is contrasted with the characteristics of the participation of small producers in the cocoa chain in Guatemala, in terms of obstacles and opportunities for the realization of escalation processes.

9.7

Market Valuation for Guatemalan Producers Current Cocoa Market for the International Market

The option of producing and selling running cocoa for the international market is not considered a viable improvement option for Guatemala’s small cocoa producers considering the following aspects: • Market characteristics: concentrated on few players from the grain purchasing phase to the production of final goods (power imbalance) and volatile price behavior. • Production volumes from Guatemala and Central American countries are insignificant relative to world production, which does not make them attractive as commodity bidders for mass market production. As noted above, leading companies have a presence in the main cocoa beans producing countries. The near-total absence of 19 Traditional/artisanal chocolate, mainly for the production of beverages, does not have the extraction or separation phase of cocoa butter, and therefore, works with cocoa liqueur/paste. It is different from ordinary chocolate in terms of texture and flavor since cocoa butter is kept in its original proportion, subtracting possibilities from dosing it in terms of texture and flavor. In addition, it is a grain that has generally not gone through fermentation processes, which has an impact on its taste and aroma (bitter and astringent). It is usually mixed with sugar and cinnamon, reducing the bitterness of its flavor. Its taste is different from chocolate stream.

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the world’s leading big market companies in Central America is a sign of this. • Linked to the above, while there could be growth in cocoa production in the future, from large plantations by international companies (foreign investment) and local entrepreneurs, the same would not necessarily mean greater opportunities for small cocoa producers (although obviously from the perspective of the cocoa sector in each country). • Almost no options to enter the market with processed products given the economies of scale of the world’s large processors and the power of brands.20

Differentiated Markets Differentiated markets show greater opportunities for Guatemala’s small producers, considering the characteristics of the sector. The options identified in this study are reviewed below. Certified Markets In the case of Guatemala, betting on certified markets does not seem very reasonable, as it is a market that requires volume, which the country does not have, even if it allocated all its production to export for these markets. In addition, certified cocoa producers such as Fair Trade and Organic are few and it would only make sense to obtain certification, whether there are buyers who require it, or partner with an organization that already has it (such as APODIP or FEDECOVERA). On the other hand, purchases made of cocoa certified as fair trade and organic globally are relatively small and variable and considering the size of this market (2 and 3% of the world market in fair trade and 1 to 2% in organic), great growth in demand for certified cocoa in them cannot be expected. It is also important to note that approximately 40% of Fair Trade certified cocoa is sold with the prize offered by this certification, i.e., apparently the supply of certified cocoa is higher than the effective 20 “ICCO analysis indicate that there are now high barriers to the processing of cocoa. It is very difficult for market entrants to gain a foothold at all. This is due to the significant economies of scale large plants generate during the production and further processing of industrial chocolate into end products favouring prices considerably” (Hütz-Adams, F & Schneeweiß A., 2018: 8).

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demand for cocoa certified under this standard, while more than 60% of certified cocoa must be sold at prices and conditions of ordinary cocoa (Hütz-Adams, F & Schneeweiß A, 2018).21 Selling cocoa with a UTZ/RA certification, which does have a significant portion of the market, does not seem like a viable option for small producers, as they recognize a very small plus over the exchange price and the costs of its implementation are high (Mack, R personal communication). Another disadvantage of this market is that the demand for certified cocoa comes mainly from the markets of Europe and the US, not being significant in the domestic market or in the regional market, which prevents taking advantage of knowledge and closeness with the final consumer.22 The possibilities of advancing the phases of the chain to have finished product (functional escalation) are not many, since certified cocoa is mainly used to produce ordinary chocolates, so being able to offer intermediate product (pasta, butter, and powder) or final products (chocolate bars) in this market, is very complex for small producers, because of aspects of economies of scale and brand power of large international companies, as already indicated for the current cocoa market option. Fine-Scented Cocoa Market Guatemala has been gaining international prestige as an offer of fine cocoa aroma. It has varieties, but above all with an image and history strongly linked to this crop, especially related to the indigenous population. This is manifested in the approach to the country of companies specializing in fine cocoa, the growth of its exports at prices far above the stock exchange (also higher than the prices of export cocoa from other countries in the region), and the increase in the percentage of fine poo by ICCO (50 to 75%). However, Guatemala has the disadvantage of having little infrastructure for optimal fermentation and grain drying processes, a crucial aspect to achieve the quality standards of this market. 21 One of the respondents stated that the minor purchase of certified cocoa Fair Trade, compared to the certified volume, could be explained because sometimes the quality of the grain does not reach the minimums required by buyers, or that in some years the price paid per Exchange has been higher than the price offered by Fair Trade, preferring producers to sell the grain outside this market (Mack, R, Personal Communication). 22 Perhaps an exception being products certified as organic.

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It is also considered that there are too many expectations about this market, in terms of demand volumes. Indeed, if demand for fine aroma cocoa is about 5 to 6% of the world market, we would be talking about 250 thousand to 300 thousand tons each year, which can be covered by the supply of several Latin American countries, reducing Guatemala’s chances of obtaining the good prices offered by this market, as a supplier of matter. In this sense, the potential supply of fine-scented cocoa would be higher than expected demand, especially if we consider that many countries are betting on increasing their supply of fine cocoa (Central and South America, especially Ecuador), so prices of these could tend to fall significantly (ICCA, 2017 and own calculations based on information from ICCO and FAOSTAT). An advantage of fine cocoa is that the demand for this type of cocoa, also given to the interior of Guatemala, is consumption of tourists, as of a segment of consumers of medium and high incomes, which allows a proximity to them and offer finished product directly, which is already done by some Guatemalan companies. Since a part of the “industry” of fine cocoa performs relatively artisanal processes to obtain the finished product (a chocolate bar), as in the case of small fine chocolacolars in Europe and the US, it is also possible in Guatemala to achieve similar qualities of finished product by producers (functional escalation), with specialized advice on the starting phases of this process.23 In this sense, the fine cocoa market could make it easier for producers to move directly toward finished products or seek to strengthen existing partnerships, as partners with domestic, regional, and market chocolacolators located in the US and Europe.24 This would allow them to exit the role of privileged supplier of raw materials (fine cocoa beans) and advance

23 Different recipes are required for the production of the product, as well as training in chocolate production techniques, which allow to achieve characteristics of fine. 24 It is important to do the caveat, which cannot be expected of a large market with finished products as in other products that have taken that path from the market. It is estimated that the fine (artisanal) chocolate market is only 0.1% of the total value of chocolate sales, while in coffee, specialty coffees (specialty coffee) is 12%, fine wines 15%, artisan cheese is 15% and beer 20%. (Hyman, Spencer: What can craft chocolate learn from speciality coffee, craft beer and other craft movements? April 2019, https://www.lin kedin.com/pulse/what-can-craft-chocolate-learn-from-speciality-coffee-spencer-hyman/).

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value-added processes.25 Obviously, the option to process fine cocoa will depend on the additional added value obtained in international markets.26 While leading companies also have their own fine chocolate lines (Nestlé, Lindt, Godiva/Ulker, Valor) the marketing channels for artisanal fine chocolates are different (specialized stores, gourmet coffee shops, hotels, the internet, etc.), reducing physical spaces of competition with leaders (with a greater presence in supermarket shelves). Healthy Food Markets from Cocoa It is a market known to groups of producers and companies in Guatemala, especially dark chocolate. It is an expanding market and has high growth in both Europe and the US, as well as other markets, including consumer segments in Central American countries. It has the advantage that is not associated with any particular variety (aroma fine), nor some certification, and basically you can work with the current cocoa offer. It is a product characterized by intensive use of cocoa and with little processing, especially in raw cocoa.27 This type of market allows product innovation and ranges from cocoa nibs and snacks, cocoa paste, and dark bar chocolate (60 to 100%) whether artisanal or semi-industrial, allowing product and functional escalation. This is already done on a small scale, with some groups organized both in Guatemala and in other Latin American countries. In the case of dark chocolates, competition with leading companies would be very strong, however, as in the case of fine cocoa, differentiated marketing channels can be sought, especially those where consumers interested in “natural” and “healthy” products come, including websites. In the case of raw cocoa, the main risk is the safe management of the processes, as well as the appropriate marketing channels. In this sense, if cocoa producers want to enter more specialized in health markets, advice

25 Aspect that can be diminishing if we consider the current supply of fine and aroma

cocoa, and the growth expectations of other bidders. 26 The higher the price paid on the international market for the grain the lower the stimulus to try to process it directly. 27 From the absence of fermentation, or reduced fermentation, without toasting or with a toasting less than 45 degrees Celsius. In general, it is not to expose it to high temperatures to preserve its characteristics as an antioxidant.

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on safety, product development, and marketing channels is required for this market.28 Market for Traditional Products The traditional products market can be an important opportunity for small producers. As noted above, a significant proportion of cocoa produced in Guatemala targets traditional markets for the production and processing of traditional chocolate and other cocoa-based food products. For small producers, it is feasible to move toward the production of these final products, whether for the domestic market as regional (functional escalation), which some small organized and individual producers are already carrying out. Other advantages of working in this market, is that the production is not associated with any particular variety, do not require a demanding fermentation and the equipment and processes can be artisanal or semi-industrial. In addition, the products already exist in the market and consumers are close geographically, allowing a greater knowledge of their tastes and preferences. These markets generally place consumers of low economic strata, and therefore, product prices must be adapted to this condition. One aspect to consider in terms of competitiveness is that many of these activities are within the informal market and therefore do not pay taxes or social burdens to employees, nor do they have operating permits (safety and others), so it should be analyzed whether it is possible for organized groups to compete in terms of costs (Paz, S. Personal Communication).29 However, it is probably more profitable than selling ordinary grain to local traders, as it is possible to organize the direct sale of the product to the final consumer (or get quite close). It is also feasible to offer these same products to mid- and highincome consumers, with improvements in marketing channels, presentation improvements, and possibly the product, incorporating quality 28 In the specific case of cocoa raw, its differentiation occurs from post-harvest management (total or partial absence of fermentation and roasting). However, it requires in many cases the design of the products, and strict management of production processes, to have the necessary safety in the product, since cocoa not subjected to high temperatures can contain a series of bacteria harmful to humans (Mayorga, A. personal communication). 29 Whether they can be exempted from payment of certain taxes, social charges and other requirements because of their status as micro and small businesses, either because current activities are formalized, or therefore must comply with the payments required by the laws of each country.

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criteria throughout the process (product escalation). The growth of the traditional chocolate market with progress in product quality can initially occur in the tourism market, nostalgic market (export and local), and then expand its base of domestic consumers seeking product quality. A disadvantage of these markets is that producers are not organized, nor does the chain appear to be clearly structured. Likewise, neither producers nor other actors in this chain are actively involved in development initiatives from the private sector and the government. In addition, its competitiveness is based more on low costs and prices than on quality improvements. Notwithstanding the foregoing, producers that are already organized could expand their range of work by entering this market directly with products finished from their own production, and/or design a strategy to progressively incorporate individual producers into this effort, as well as other actors participating in the traditional cocoa chain, who may be interested in the development of this market, based on quality improvements for different consumer strata in both Guatemala and other countries in the region (including Mexico).

9.8

Conclusion

Guatemala presents escalation opportunities for small producers by strengthening their foray into traditional products (national and regional) and fine-scented cocoa (grain), but they can also explore healthy eating markets. Where the fewer options are found is in the certified and ordinary cocoa markets. An opportunity for those involved in traditional markets is to strengthen producer groups’ attempts to process their cocoa for these markets, starting with a cost and price competition strategy, but introducing the medium- and long-term approach to quality differentiation, enabling them to venture in addition to customers willing to pay for quality. In addition, Guatemala’s small producers can position themselves well in fine cocoa markets, as it offers a small amount of room for growth, allowing more producers to benefit from the characteristics of this market. The strategy could focus on channeling some of the production that is now going to domestic consumption for that market, as long as they have the intrinsic quality conditions to be considered as fine cocoa. Another option is to increase the production of fine cocoa from varieties that

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meet the requirements of this. In addition, certain equipment and infrastructure are required to expand and improve fermentation and drying processes, along with training actions. These strategic recommendations require improvements in the governance of the chain for implementation, most actively incorporating those producers and actors who articulate around the national market, taking into account the importance of the national market in the structuring of the current cocoa chain in the country. Finally, it is important to note that the Global Chains approach proved a fairly effective tool for identifying market opportunities and developing proposals for better use of them, highlighting changes in international consumer trends that can be exploited by producers in Guatemala, as well as the importance of national and regional markets as relevant options, which also reflect, in a way, these international trends.

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Hyman, Spencer: What can craft chocolate learn from specialty coffee, craft beer and other craft movements? https://www.linkedin.com/pulse/what-cancraft-chocolate-learn-from-speciality-coffee-spencer-hyman/ Abril 2019. Hütz-Adams, F y Schneeweiß, A. (2018). Pricing in the cocoa value chain— causes and effects. GIZ. ICCA. I. (2017). Arvelo Sánchez, Miguel II. González León, Diego III. Delgado López, Tania IV. Maroto Arce, Steven V. Montoya Rodríguez, Paola VI. IICA VII. Colpos Foundation. Current state on the production, trade and cultivation of cocoa in America / Inter-American Institute of Cooperation for Agriculture, Foundation College of Postgraduates in Agricultural Sciences. – San José, C.R.: IICA.). ICCO. (2019). Report of the Ad Hoc Panel Meeting on the revision of Annex “C” to the CIC, 2010. Ministry of Economy (MINECO). (2015). Government of Guatemala. Cocoa Culture Chain Baseline. Guatemala. Tapia, S. (2016). Current situation of the Cocoa Value Chain in Guatemala. VECO/COSUDE. Veco Mesoamerica. (2016). Current situation of Cocoa Value Chains from a Regional perspective.

Interviews Herrera, Ismael. (2016, September). In charge of Coffee and Cocoa. Guatemalan Exporters’ Gremial (AGEXPORT). (Pablo Alvarez Olea, Interviewer) Guatemala. Last, Jesse. (2016, September). Chocolate Cup Company. (Pablo Alvarez Olea, Interviewer) USA. Mayorga, Ana Lucia (2019, May). Professor at the School of Food Technology. UCR (Pablo Alvarez Olea, Interviewer) Costa Rica. Mack, Roberto. (2019, June). Responsible for links between cocoa products and international companies, in different latin American countries. (Pablo Alvarez Olea, Interviewer) Costa Rica.

Websites Fao (S, f). Food and Agriculture Organization of the United Nations. http:// www.fao.org/faostat/en/#data/QC/visualize Icco (S.f). Icco. Retrieved from https://www.icco.org/ Trademap (S, f). Trademap. Obtained from https://www.trademap.org/

CHAPTER 10

The Competitiveness of Corn Production from a Global Value Chain Approach in the Southern Region of Costa Rica

Álvaro Martín Parada Gómez and Francinie Jiménez Ureña

10.1

Introduction

The process of globalization of the economy partly accelerated by trade openness has highlighted the constraints of many productive sectors in developing countries, such as Costa Rica. In particular, the agricultural sector has lost dynamism compared to the trade and services sector. The first represents 8% of gross domestic product (GDP) and the second 15% (BCCR, 2017). In the case of corn production, the displacement of domestic production by imported corn has been evident during the early

Á. M. Parada Gómez (B) · F. Jiménez Ureña Vicerrectoría de Extensión, Universidad Nacional de Costa Rica, Heredia, Costa Rica e-mail: [email protected] F. Jiménez Ureña e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_10

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twenty-first century due to the decline in domestic supply and growth in domestic demand. For example, corn production in the country for the period 2017–2018 was a total of 5,801 tons of corn, or 6,691.7 tons less than in the period 2012–2013; so that production has decreased by 54%. This economic activity predominates in the Southern Region and Chorotega of the country where 92% of the total supply occurs. However, the condition of little availability has led to the importation of the grain on a recurring basis. The competitiveness of the corn-producing sector has been challenged by low productivity compared to advanced countries such as the United States. Multiple factors could be explaining low productivity such as climate change, low financial resources, continuously rising input cost, low productivity seed use, remoteness from end markets, marginal industrialization processes, among others. In this context, the question arises: How can corn producers overcome obstacles to competitiveness in Costa Rica? The purpose of this chapter is to explain the competitiveness of corn production through Costa Rica’s global value chain approach. The structure of the chapter is as follows: Sect. 10.2 will provide an analysis of the national and international context of the corn-producing sector. Section 10.3 explains different approaches to competitiveness in relation to the global value chain approach. The fourth section explains the basics of the methodology used. Section 10.5 explains the organization of the corn production chain in southern Costa Rica. In Sect. 10.6, it characterizes the institutional dimension of support for the organization of the corn production chain. Brief conclusions are presented in Sect. 10.7.

10.2 International and National Context of Corn Production International Analysis Global corn production is relevant to the food and nutritional security of nations. Parada et al. (2018) in line with FAO’s position (2016) state that “food security depends on physical availability, economic and physical access, use and stability over time” (P.3). By 2018, global corn production was 1,117.18 million tons, achieving growth in the last decade of 29.06%. Historically, it has been hoarded by the United States which is

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the largest producer of this cereal based on data from the Food Organization of the United Nations (FAO, 2019). In 2018, the total production of this country was 366.29 million tons representing 32.79% of the world’s production (Table 10.1). The second country with the highest production is China, with a global production share of 23.03%. Factors that have favored high production include labor intensive use, good use of water resources (irrigation channels), use of sowers, as well as appropriate fertilization methods. According to Tao Zhang, the country has ample production potential, but requires greater technical efficiency (Zhang, 2008). In the case of Latin American countries, production from countries such as Brazil stands out, which has a 7.22% share of the world market and 3.89% for Argentina. Table 10.1 World: absolute and percentage distribution of millions of tons produced, exported, and imported from corn by country, 2018

Country

Total United States China Brazil European Union Argentina other Total United States Ukraine Argentina Brazil Russian Federation other Total European Union Mexico Japan Republic of Korea Egypt other

Production absolute

%

1,117.18 366.29 257.33 80.71 69.00 43.46 300.36 Exports 159.88 60.33 28.00 26.50 25.00 2.80 17.25 Imports 157.98 20.50 16.50 16.10 10.00 9.80 85.08

100 32.79 23.03 7.22 6.18 3.89 26.89%

Source Own elaboration, based on FAO 2019 data

100 37.73 17.51 16.58 15.64 1.75 10.79 100 12.98 10.44 10.19 6.33 6.20 53.86

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These two countries have taken advantage of the comparative advantage of having large areas of territory and climatic conditions that favor good crop productivity. The European Union ranks fourth in production globally in relative terms to 6.18%. Global corn exports are concentrated in five countries, which centralize 89.21% of total world exports. The country with the highest number of exports is the United States with a market share of 37.73%; that is, it exports 16.47% of its total production by 2018. Also, countries relevant to corn exports include Ukraine, Argentina, and Brazil that export approximately 28; 26 million and 25 million tons per year, respectively, and with less participation is the Russian Federation only exports 2.8 million tons. For its part, China despite being a large producing country is not a major importer because production is for the self-consumption of the population; one person consumes 10 kilograms of cornmeal annually in China. Global corn imports in total amount to 157.98 million tons in 2018; imports are concentrated in the European Union with 20.50 million tons; mainly because the consumption per capita is 9.5 kilograms per year; that is, it files an unmet domestic lawsuit. Mexico and Japan import approximately 11% of the total tons imported globally; Mexico is the country with the highest per capita consumption, with this at 130 kilograms per person per year. In the case of Mexico, the indigenous cultural influence that has marked the custom of producing and consuming by-products of corn persists. In the words of Parkin (2002), corn production in Mexico transcends the productivist logic because the farmer produces it even having recurring losses. Also, the author states that in Mexico “traditional products: colored tortillas, tamales and pozoles…” (p.25) are alternatives that increase consumption. In countries such as the Republic of Korea and Egypt, they do not have a culture so ingrained in corn consumption, which translates into a small share in the import of each country, this being approximately 10 million tons per year. National Analysis Corn production in Costa Rica over the course of the last decade of the twentieth century, one, has declined considerably; in 2010, a total of 16,512 tons per year were produced, producing 5,801 tons; that is, there has been a 64.86% decline in these years. In respect of harvested

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Table 10.2 Costa Rica: absolute and percentage distribution of tons produced, hectares sown and harvested from corn by country, 2017/2018 Regions

Sown area

Harvest area (has)

Yield (t/ha)

Production (t)

Participation (%)

Total Country Pacific Cent Chorotega Brunca Huetar North Huetar Caribe

3,629 313 1,483 1,030 588 215

3,510 313 1,409 1,030 543 215

1.65 1.25 1.25 2.30 1.74 1.58

5,801 392 1,762 2,365 943 340

100 6.75 30.37 40.76 16.25 5.86

Source Own elaboration, based on CNP data, 2019

hectares, they have decreased by 60.14% from harvesting 8,806 hectares in 2010/2011 to a total of 3,510 hectares in 2017/2018. The regions that concentrate domestic production are the Brunca region from which 40.76% of total domestic production is obtained and in the Chorotega region 30.37% is produced; 71.13% of total domestic production is concentrated in these two regions (Table 10.2). Low domestic production causes domestic demand to be dissatisfied, forcing recourse to the importation of corn on a recurring basis. In 2018, a total of 17,195 metric tons were imported; that is, imports are 3 times more than domestic production. Another factor that significantly influences the import of corn is the price variable, it is much cheaper to buy it in other countries. Table 10.3 shows the corn prices of Central American countries comparatively with one of the world’s leading producers and the region as Argentina. Costa Rica is the country of the region that has the highest prices of corn; this price is 3.86 times higher than the sale price in Argentina by one of the largest producers in the world. At the Central American level, it is the second country with high prices in Nicaragua. One of the factors directly affecting this price differential is the labor cost set in Costa Rica by the Costa Rican Ministry of Labor (MTSS), as well as inputs that have high costs.

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Table 10.3 Costa Rica: regional corn prices dollars/ton, 2017–2018 Year 2017 2018

Argentina Costa Rica El Salvador Guatemala Honduras 180.43 172.12

727.48 664.63

265.16 376.02

330.53 369.22

271.91 357.64

Mexico

Nicaragua

290.82 301.00

289.76 411.42

Source Own elaboration, based on CNP data, 2019

10.3

Competitiveness from the Global Value Chain Approach

Global value chains (GVCs) have been defined as broad networks of work that enable the generation of an intermediate or final product. For Gereffi and Korzeniewicz (1994), it is the articulation of different links that begins with the appropriation of inputs, going through the production process, marketing, marketing, and final consumption. These networks are dynamized by companies in markets located in different parts of the world that operate based on the principles of productive specialization through the international division of labor manage to produce final goods in an integrated way. The challenge, taken over by different Latin American countries, has been to integrate domestic productive activities into links within the composition of global value chains. Productive dynamics have shown that in developing countries, they have integrated into global economic dynamics. For example, Costa Rica did so in the 1980s and 1990s through the establishment of textile maquila, specializing in particular products, such as underwear, blue jeans, and shorts. Also, recently in 2018, the development of medical components and devices is activated with the entry into operation of the company “Hospira” (Barquero, 2017). On the other hand, the Mexican economy managed in the 1990s to integrate into the global textile chain manufacturing “Blue jeans” in the city of Torreón, exporting them to the US market in the 1990s (Van Dooren, 2003) and recently aggressively integrated into automotive processing through the automotive industry. Developing countries in Latin America have shown that it is possible to integrate into the General Sales Conditions. However, criticism of the type of integration persists, noting that it is only through the assembly of raw materials for the processing of final goods that national companies in these countries have a low added value (basically remuneration to work)

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participate in them, showing themselves at a limited level in productive chains. This is associated with the type of competitiveness fostered in countries, which is associated with competitiveness based on comparative and non-competitive advantages. Clarifying that the former come from the natural endowment of typically abundant productive factors which makes them cheap and the second originated by research, development, and scientific knowledge (Porter, 1990). Multinational companies have indeed been in countries such as Mexico and Costa Rica in part because in developing countries they face tax costs that are not assumed in the preferential regimes of free zones or special investment zones granted by national legislation and guaranteed politically by different governments. The integration of domestic companies into these chains demands and demands high competitiveness, understood as quality in raw materials, support of the logistics industry, adequate infrastructure and low costs in electricity, qualified labor, but with relatively costs, among other requirements. In this regard, Fajnzylber in analyzing Latin America’s competitiveness has strongly criticized the pursuit of competitiveness based on the good management of price variables such as interest rate, inflation, wage rate, and electricity costs (Fajnzylber, 1990). From this point of view, competitiveness based on low wages and production costs to be inserted into chains is not a lasting position in markets because a country can define lower costs and attract investment, causing companies to exit a country and missing the favorable position in international markets. This raises the understanding of competitiveness in a different way by integrating competitive advantages from the technological field, created from scientific and technological development, well-achieved processes in developed countries, such as Germany, Canada, and the United States. This means that developing countries have the ability to climb to a better position in the global chain, i.e., what Fernandez-Stark, Bamber, and Gereffi (2012) have called “upgrading” processes in the chains. This involves activating a number of educational institutions, government, non-governmental agencies, industry associations, among others, which can improve the skills and skills of the human resource, among other aspects to be improved. An interesting hypothesis in value in the context of the relationship of competitiveness approaches and the productive structure in developing countries could be the competitiveness approach

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that is assumed in each country and productive sector determines the productive policy to be followed.

Methodological Aspects

10.4

The analysis of the corn production chain is part of the definition of a sample derived from the composition of an existing population framework. The research used probabilistic sampling, with the Finite population being corn producers located in the Southern Region of the country. The total producer data were consulted with the market intelligence department belonging to the National Production Council (CNP), which provided the data available for the period 2017–2018. According to the data provided there are a total of 238 corn producers active in the Southern Region in the period 2017–2018 (Table 10.4). According to Jorge Acuña in his Manual of Formulas and Statistical Tables, the following formula is established the calculation of the sample: (Acuña, 1999) n=

N ∗ Z α2 ∗ p ∗ q d 2 ∗ (N − 1) + Z α2 ∗ p ∗ q

where N= Total population.

n = Sample size. z∝ = Confidence level, value corresponding to Gauss distribution. p = Expected prevalence of the parameter to be evaluated. q = heterogeneity (equivalent to 1-p). d = Margin of error. Table 10.4 Costa Rica: absolute distribution of the number of producers per canton, 2017–2018

Canton

Number of Producers

Total Buenos Aires Coto Brus Pérez Zeledón

238 91 3 144

Source Own elaboration based on CLAUDES CNP, 2019

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The population of 238 producers is in the Southern Region in three cantons: Pérez Zeledón, Buenos Aires, and Coto Brus. Thus, a stratified sample will be applied by dividing the population into subpopulations or strata, obtaining a significant proportional weight for each subpopulation (Otzen & Manterola, 2017). For the calculation of the sample size, a margin of error (d) of 5% is used. The recommended confidence level is 95%, so that the estimated value is at the confidence intervals and a heterogeneity (q) of 5%. All this resulted in a sample of 147 producers. The following distribution was obtained for each canton: Coto Brus 2, in Buenos Aires 56, and in Pérez Zeledón 89. The analyzed data are at the confidence level of the population value, with an estimate in the range ± 5 of the actual data (Hernández, 2012). Corn producers in the Southern Region were identified through local associations, such as Eagle, Veracruz, and the Food Processing and Market Center (CEPROMA) located in Pejibaye district; Pilas, Colinas, and Guagaral in the district of Buenos Aires. Secondary sources identified in the public institutional framework were also used. These were the databases and reports of the Central Bank of Costa Rica (BCCR), information and statistics of the agri-food sector published by the National Production Council (CNP), Agricultural Markets Information System (SIMA), and the Executive Secretariat for Agricultural Sectoral Planning (SEPSA). National statistics collected and published by the National Institute of Statistics and Census (INEC), information on the trade balance through the Promoter of Foreign Trade (Procomer), and data obtained from the official “Datasur” website. The definition of dimensions and variables to be analyzed in surveys applied to producers and marketers is shown in the Table 10.5:

10.5 Organization of the Corn Production Chain The Corn Chain in Costa Rica in Its General Form The corn production chain consists of four links that begins with the appropriation of inputs required for corn production, starting from the pre-sowing, sowing, and harvesting phase. The corn chain integrates marketing and marketing until corn is effectively consumed in two ways,

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Table 10.5 Costa Rica: matrix of dimensions, variables, and indicators to be studied Market

dimensions

Variables

indicator

production

offer

Production

Productive capacity per producer (quintals) Total hectares per producer for corn production Number of direct and indirect jobs Fixed and variable costs Sale price of the product To whom you buy the supplies (location) To whom you sell the product (location) Seed varieties Net income from corn production Months of higher production Training and technical advice Fixed and variable costs Months of increased commercialization Purchase price and sale price Grain or derivatives sales product (quality) Value generation processes that are carried out marketing Number of direct and indirect jobs Locally and nationally To whom you buy the raw material (location) To whom you sell the product (location) Formal or informal

Hectares Employment Costs Prices Chains

marketing

demand

raw material Revenue Seasonality Institutionality Costs Seasonality Prices Product Value added Market strategy Employment Competence Chains

Organization Source Own elaboration, 2019

either in fresh corn or as corn converted into flour where the tortilla byproduct comes out. This chain brings together several productive activities where the product, labor, and financial markets intermediate. They also operate different social actors of a public and private nature that energize the generation of added value. In this regard, it should be noted that the chain approach explains the shaping of many actors in

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the chain far exceeding the default logic that is made when analyzing a perfect competitive market where only consumers and producers reach agreements through the pricing mechanism that ultimately ends up allocating resources in the economy. The following Table 10.6 shows the set of actors who have been part of Costa Rica’s corn chain analysis. The criminalization of actors in Costa Rica’s corn chain broadly helps clarify the global level of a production chain that is apparently very national, regional, and local. This is evident, when looking at companies belonging to corporate groups that make heavy machinery such as tractors used to plow the earth. Also, the improved corn seed other than the Table 10.6 Southern Region: actors involved in the corn chain in the Southern Region, 2019 Actors

definition

Seed supplier

It refers to commercial houses that offer seeds other than Creole with their own trademark Multinational corporate groups Provides the producer with the primary inputs needed for corn production Performs the corn production process; from pre-sowing, planting, and harvesting (harvesting) Organizations that are responsible for marketing the product to the large flour processed industries Person who provides the service of transporting corn from the farm to the collection center or marketing center Retail intermediary that is responsible for marketing mainly the product in the cans Wholesale corn buyers. They industrialize corn by adding value, obtaining derivatives, such as flour and others Individuals who demand corn in the final markets to make products, such as tortillas, tamales, and others

Machinery supplier Supplier of inputs (Cooperatives, Agricultural Development Centers) Producer (Farmer)

Producers’ associations

Carrier

Private receiver

Big industries

Final consumer

Source Own elaboration, with data from interviews with producers, 2019

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traditional or Creole seed comes from the outside, where large commercial houses have positioned themselves on the market making a relevant control in the supply of the different varieties. Similarly, chemical fertilizers have international origin and are imported by input suppliers as agricultural cooperatives and commercial warehouses that supply producers. Corn carriers use large trucks that are typically imported from the United States, China, and Europe. As noted in the description of actors in the corn chain, it is clear that a chain that is apparently national and regional has wide participation of global aspects that are decisive in the organization of the chain (Fig. 10.1). The corn chain involves institutional actors that have not been defined but identify as the entire public institutional framework for supporting the corn-producing sector. In the logic of improving the productive structure of developing countries, the Economic Commission for Latin America (ECLAC) has called it part of the triple helix of competitiveness to the institutional dimension (Padilla & Oddone, 2018). Each link describes the activities that are performed for the operation of the chain; as well as the relationships that exist in the local market with the international market; identifying in this way the main actors of the network. Table 10.1 describes in detail the functional logic of the corn production chain in Costa Rica; and cross-cuttingly are the dimensions: institutional, driving force, geographical, and input-product structure. In the link of the appropriation of inputs, the main input for the development of production is seed; it can be of different varieties: hybrids, diamonds, or Creole. The hybrid variety is imported; diamonds are produced in the country by government organizations such as the National Production Council (CNP) and the National Food Technology Institute (INTA), while Creole seed is appropriate by producers. The difference from variety to variety lies in the performance and quality obtained in production. The following Table 10.7 shows the distribution in producers’ use of corn seeds. Fertilizers are necessary for the proper development of corn plants; in this area, products such as the complete formula 10-30-10 for plant growth are used, while ammonium nitrate is for the development of corn cobs. Also, agrochemicals are required for weed control, producers prefer burning; this is immediate in the removal of weeds, but at the same time decreases soil fertility, similarly occurs when using the herbicide round up. The production link covers all those activities that are carried out to obtain the product. It is understood as pre-sowing, planting, harvesting,

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Internacional Semillas de Maíz Estados Unidos México Guatemala Colombia

Pionner Apropiación de Insumos

Criolla

Hibrida HR-245 Nitrato de Amonio

Fertilizantes

Monsanto Pionner Prosemillas

Formula 10-30-10 Quemante Agroquímicos

Pre-cosecha

Siembra

Limpieza

Distancia de siembra

Proceso de Producción

Manual

Chindagua

Química

Plaguicida

Espeque

1m entre calle y 0.5m mata

Panamá

Roundop

Abonos del Pacífico (Abopac) México

Abonar

Desyerbar

Monsanto

Macanas

Control de plagas

Insectos Acaros Virus

Control de enfermedades

Hongos Bacterías

Fertilización

Química

Control de maleza

Química

El Salvador

Formula 10-30-10 Nitrato de Amonio Quemante Roundup

Manual Cosecha

Recolección del producto

Elotes

Grano seco Post-cosecha

Trillado

Transporte

Almacenado

Desgrane

Camión

Secado

Chapulín

Chapulín

Empaque

Distribución

Alemania

Comercialización

Minorista

Feria del agricultor

Venta directa

Vecinos

Matra

Recibidor privado Mayorista

Intermediarios CENADA

Consumo final

Autoconsumo

Familias

Consumo general

Familias Industria

Centroamérica Europa Estados Unidos

Asociaciones locales Grandes industrias

DEMASA Instamasa

Fig. 10.1 Costa Rica: Corn production chain, 2019 (Source Own elaboration, based on data from interviews with producers, 2019)

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Table 10.7 Costa Rica: main varieties of white grain seeds available in the country according to origin, 2019

Variety

Production house

Origin

Diamonds 8843 Proteinta UPIAV-G6 3086 P4081W P4082W HR-101 HR-99 HRQ-2988 HR-245 HS-23 HS-5G ST TREX 16

Inta Inta Inta Pioneer Pioneer Pioneer ProSemillas ProSemillas ProSemillas ProSemillas Monsanto Monsanto Seeds of the tropics Seeds of the tropics Monsanto Pioneer Valley Seeds

Costa Rica Costa Rica Costa Rica United States United States United States Guatemala Guatemala Guatemala Guatemala Guatemala Guatemala Guatemala

Tropical 103 Dk-357 30F96 Marshal

Guatemala Mexico Mexico Colombia

Source Own elaboration, with data from the National Seed Office (ONS) of the CNP, 2019

and post-harvesting activities. The details of these phases are explained below: a. Pre-sowing: These consist of the cleanliness of the soil, which is carried out using pesticides mostly of chemical origin. Also, it is done manually, using knives or slobs. b. Sowing: This phase is used the technique of the speck to make the sowing of the seeds. Corn is sown with a distance of one meter between street and 0.5 meters between kills, then proceeds to clean the ground. In a period of 15 days after growing the seed, the producer applied the first paid using the fertilizer formula 10-3010 for planting. Approximately one and a half month after the first payment, the second with ammonium nitrate is applied. At 15 days later it is re-paid with the same fertilizer. Fertilization is performed to obtain the highest possible yield and a bether productivity. c. Harvest: The product is collected; collection time is going to depend on the time. In summer the producer lasts about a week, while in

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the winter it is required on average two weeks (it is necessary to store the product in sacks); this time is estimated for one hectare. Depending on how the producer markets it is collected for dry grain or in corns. d. Post-harvest: For the case of dry grain, the degreasing is carried out by means of the chapulín in an estimated time of 40 minutes per 100 quintals; it transports it to the association for cleaning and drying in this process is estimated to last 7 hours. The quality grain is selected and it depends on its weight. Also, it proceeds to pack; finally, it is delivered to the buyer or final consummer. The Nonquality grain is packaged for sale for animal consumption. In the post-harvest, some special activities are carried out like dry grain, the trite, degreasing, transport using a truck, collection, drying, packaging, and distribution are proceeded as part of the processing. After the collected production of corn the producers do not require any additional processing along the process it.

Product Input Structure and Corn Production In order to carry out these activities, the producer incurs a number of additional costs when production is marketed in dry grain. When selling the product in dry grain the producer must pay for the degreasing of the cobs, which costs 83 cents per quintal, the total cost of the degreasing varies depending on the quintals obtained in the harvest. Subsequently, the grain is transported, by means of the chapulín (associations) the price of this is 50 dollars per trip; however, the associations are responsible for providing you with a discount of $8.34. Some carry out the transport by own car or taxi the price is approximately 25 dollars. Associations when collecting the product incur other costs for cleaning and drying the grain; for which, they charge $0.83 per quintal processed. In addition, some producers hire pawns for the harvest season; paying $2 an hour for an eight-hour day a week; in total it would be 84 hours per pawn and the number of pawns depends on the total number of hectares sown. Table 10.8 shows the detail of production costs: In the link of production, the producer must incur a total cost of $647.41 on the assumption that producers hire labor and have to pay rent on the farm. If the producer does not incur the costs of leasing and labor; then incurred a cost of $178.63 in total. The income producers receive

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Table 10.8 Southern Region: costs in corn production for one hectare according to quintals (Dollars), 2019 Production costs

Supplier

Quantity

Cost (dollars)

Transporting the harvest Shelling Cleaning and drying Operating expenses Farm rental

associations

1 trip

41.74

grasshopper associations associations local

80 qq N/A By harvest N/A

Labor

local

84 hours

0.83 per quintal 0.83 per quintal Electricity, wages A quarter of the harvest 2.0 per hour

*Total cost 41.74 66.78 66.78 3.34 300.50 168.28

(*) The cost of production in US dollars was estimated at a ratio of $1 per 599 Costa Rican settlers as of March 30, 2019, defined by the Central Bank of Costa Rica. Source Own elaboration, based on surveys applied to producers, 2019

from the marketing of corn depends on the number of hectares sown; for one hectare, the estimated production would obtain approximately 80 quintals and 50 dollars in dry grain. If the average price per quintal is $15, it would get $1,202, and if the corn unit price is 0.83 cents, it would receive $2,003.33. According to the producers surveyed 95.2%, it sells the product in dry grain and 4.8% in corns; that is, for every 21 dry grain producers there is an corn producer. Table 10.9 characterizes the structure or matrix of input product. It covers all the necessary functions in the agricultural activity of corn production. The cost of appropriation of inputs represents 35.4% of total costs and 64.6% represent the remaining costs. According to each of the costs, the most representative in relative terms is the lease of the farms this represents 29.96% of the total costs. Producers must pay 25% of the harvest in kind to the landowner; that is, one hectare on average generates 80 quintals and 20 quintals are the ones that are needed to pay the rent of the land. In the twenty-first century, payments in typical species of the colonial era in Costa Rica are still maintained in some cases in corn production. In this activity, extensive use of labor is required; however, this work is not paid in full for being family farming (small producers); in total, it is estimated that the producer requires 226 hours of work per harvest, and in some cases, producers additionally hire pawns (informal work) for 84 hours these account for 16.78% of the total costs.

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Table 10.9 Costa Rica: corn input-product matrix according to quintal production (Dollars), 2019 Type of costs

seed

*Total cost

%

Unit use

Total utilization (per harvest)

Description

25 kg sack

125.21

12.48

25 kg

Fertilizer sows 10–30-10 Ammonium nitrate fertilizer Roundup

73.46

7.32

2 paid

25 kg per hectare 4 sacks

93.49

9.32

2 paid

4 sacks

45 kg sack

18.43

1.84

3 liters

3 liters

burning

19.91

1.98

3 liters

3 liters

Transport of inputs

25.04

2.50

1 trip

1 trip

Transporting the harvest Shelling

41.74

4.16

1 trip

100 quintals

One-liter gallon One-liter gallon Own transport or taxi Grasshopper

66.78

6.66

Cleaning and drying Operating Expenses (ASOPRO) Farm rental

66.78

6.66

500 per quintal 500 per quintal

80 quintals per hectare 80 quintals per hectare

3.34

0.33

300.50

29.96

Labor

168.28

16.78

TOTAL COST HARVEST INCOME benefit

1.002.94

45 kg sack

Grasshopper Associations Administrative expenses

A quarter of the harvest 1 person for a 84 hours week

Informal work

100.00

1.202.0 199.05

(*) The cost of production in US dollars was estimated at a ratio of $1 per 599 Costa Rican settlers as of March 30, 2019, defined by the Central Bank of Costa Rica. Source Own elaboration, based on surveys applied to producers, 2019

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The provision of seeds is a significant cost to producers. This represents in relative terms 12.48%, a sack of 25 kg of hybrid seed is required to produce one hectare of corn. Therefore, the total cost to produce one hectare of corn is $1,002.94 per harvest, and the unit cost per quintal is $12.53, while the income that net income is earned per hectare is $1,202.0, because one hectare produces on average 80 quintals in dry grain and sells at an average price of $15. So that the gross profit of the producer per harvest is $199.05, and a quintal profit of $2.48; the annual benefit is $398.11 for producers who make two harvests a year. For producers marketing corns production, it costs $0.027 per corn; gross profit of $1,179 per hectare. The profit per corn is 0.04 cents; this profit being 5.9 times greater than the profit made from selling it in quintals. Producers’ gains will be subject to the number of hectares sown and yields obtained in production according to harvested area, which are affected by the presence of pests and adverse climatic conditions (long droughts in the summer); therefore, the gain per dry grain crop could be less than $199.05 per hectare. Currently, production yield in the region is 52.9 quintals per hectare; that is, the producer with this level of production makes no profit and would be incurring losses estimated at $208.12. Marketing Corn production in the region is marketed through direct sales to retailers such as farmers’ neighbors or fairs, and to wholesalers who are intermediaries. In the area, there are two large intermediaries producer associations; they buy the product in dry grain and sell it to large wholesale industries (DEMASA, INSTAMASA, and the Carthaginian Corn Processor), and local or external private halls that purchase corns and dry grain retail for sale at the National Food Supply and Distribution Center. In the case of producer associations in the area, there are a total of 6 organizations registered under this modality, and a Corn Production Centre (CEPROMA) under the legislation of the Institute for Rural Development (INDER); for their part, the local private halls are two; one is located in Pejibaye district and one in the Eagle community (Table 10.10). The organizational structure of the producers is based on associations that agglomerate most growers in the area, associative ties have

10

Table 10.10 Southern Region: producer Associations located in the Southern Region according to canton and district, 2019

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canton

community

name

Pérez Zeledón

Pejibaye

Buenos Aires

Batteries

ASOPRO The Eagle ASOPRO Veracruz CEPROMA ASOPRO Conception ASOPRO Batteries ASOPRO Guagaral ASOPRO Hills

Buenos Aires Hills Source Own elaboration, based on fieldwork, 2019

favored integration which favors the process of direct sale by the individual producer to the associative form. Almost 92% sell their product to these organizations while ensuring the purchase of the seed to organize future planting. Only 6.9% sell corn to privately operated receivers and 1.4% place it in halls outside the Southern Region. The strongest marketing channel in the region is the sale of partnerships to large industries (wholesale), and the weakest is the direct sale of producers to consumers (retail purchases). Large industries acquire most of the production because they have a high added value of corn because they make the most of the profit. The loss of grain is very little; it is made the most of which means that the demand for this product is high. For its part, the marketing of corn in corn is a direct channel to the consumer with higher yields; however, producers in the region prefer to sell dry grain production to ensure the purchase of the product at the end of the harvest. Table 10.11 describes the marketing channels for white corn that currently exist (Fig. 10.2). The producer sells the quintal of corn at a price of $15 to local producer associations. The associations sell the product to large industries at a price of $18.36; that is, it appropriates a profit of $3.33 to cover its operating expenses. Industries incur a transportation cost of 0.83 cents per quintal. Companies such as DEMASA and INSTAMASA are the strongest buyers in the area, totaling 21,426 quintals annually; the costs

13.35 0.0066 13.35

Dry grain*

Corns**

Dry grain

Producer to local private receiver Producer to external private receiver mills

CENADA

INSTAMASA DEMASA Carthaginian Corn Processor DEMASA

detail

28.38

0.20

10.69

23.37

18.36

price Sale to supermarkets DEMASA and Pozuelo Sale to supermarkets Final consumer Final consumer

Detail

mass precocida

Dry grain flour

flour

product

MASECA

INSTAMASA MASECA MASECA

brand

1 kg

500 g

500 g 500 g 500 g

Weight

2.17

1.29

1.08 1.29 1.29

price

Note (*) The product refers to dry grain in quintals (**): The product refers to corns in units. (***): The production price in US dollars was estimated at a ratio of $1 per 599 Costa Rican colones as of March 30, 2019, defined by the Central Bank of Costa Rica. Source Own elaboration, based on fieldwork, 2019

15.0

Dry grain

Producer to the associations

Price***

Production

Marketers

Table 10.11 Southern Region: characterization of corn marketing according to product type (Dollars), 2019

234 Á. M. PARADA GÓMEZ AND F. JIMÉNEZ UREÑA

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Consumidor Final Vecinos Ferias del Agricultor

Productor

Productor

Recibidor privado local

DEMASA

Consumidor Final

Productor

Recibidor privado externo

CENADA Molinos

Consumidor Final

Productor

Asociaciones locales

Grandes Industrias

Consumidor Final

235

Venta minorista

Venta Mayorista

Fig. 10.2 Southern Region: Corn marketing chain according to different branches, 2019 (Source Own elaboration, based on fieldwork, 2019)

that the marketer obtains to transport the product to the facility are $1.67 per quintal, to a truck on average have the capacity to carry 500 quintals. Both companies make the added value to dry grain by transforming it into various products that reach the commercial business where they are acquired by end consumers. The main selling and consumption product are cornmeal; this is acquired in 500 g presentations. Industries require 1.67 kilos of corn grain in order to obtain a kilo of cornmeal; then 835 kg of grain is required for 500 g of flour. DEMASA distributes the brand of cornmeal MASECA is priced at 1.29 dollars the package of 500 g, while the INSTAMASA industry distributes a cornmeal of the same name at a price of $1.08 a 500 g package for the end consumer. The Carthaginian Corn Processor imports from the United States 90% of the corn it markets mainly because domestic supply does not supplement all its demand (out of stock), the remaining 10% acquires it in the domestic market in the Southern Region of producer associations and independent producers. This company markets yellow corn at a price of $15 a quintal and white grain at $23.37 a quintal and distributes cornmeal wholesale by $16.69 per 25 kg; that is, the kilogram would be priced at $0.66. The main buyers are the wholesale industry such as DEMASA and the biscuit company Pozuelo. Local private halls buy corn in dry grain, store it, and pack it. The product is purchased from producers at a price of $13.35 per quintal and sold to DEMASA for $16.69 per quintal. Private receivers outside the area purchase dry grain for wholesale and production in corns from independent producers pays a price of 0.066 cents per corn. The private receiver incurs a transportation cost of $417.36 to be transported to CENADA, where they sell the product to the final consumer at an average price of

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0.20 cents on the corn. These halls sell dry grain to mills in different areas of the country such as Carthage and Heredia; mills buy corn is $28.38 a quintal and transform dry grain into pre-sewn corn dough. In Carthage (Three Rivers), the mass is priced at $3 a kilogram and is mostly acquired by community neighbors, while in Heredia (San Rafael) 90% of production is sold to neighbors and 10% by the internet and external consumers; the kilo of dough sells for $3. The highest marketing dates of the product are in December and Holy Week; the rest of the year the product has very little marketing. Final Consumer Corn is a grain of high nutritional value which is included in the costa Rican diet, and is mostly consumed by the middle and lower class. Based on data from the National Seed Office (ONS), corn consumption per capita in the country is 3.5 kilograms per year. In addition, this grain is functional for animal consumption as a concentrate for birds, livestock, and pigs; in many countries, it is used by industries as fuel. In the country its use is present in rural households for the consumption of people (tortillas, pork tamales, among others) and for the rearing of pigs, sheep, goats, poultry that they have on farms; that is, in these areas, there is the planting of corn for self-sufficiency. Most of the population located in the urban area (largest population) consumes corn transformed into derivatives, and it is distributed by large industries. The main product purchased in commercial premises such as supermarkets, pulp shops, and small shops is cornmeal. Also, the main derivatives such as tortillas snacks, light foods are consumed between meals and other products. The main consumers of corn are households and commercial businesses. On the household side, they acquire the final products such as tortillas, snacks, cornmeal, and so on; demand for homemade precook dough increases on holy week dates for biscuits, roasted tamal and in December for the traditional pork tamal. The case of commercial businesses such as sodas, restaurants, bakeries among others acquire intermediate products derived from corn to produce final products that they offer in their businesses; the most common case is flour and corn dough.

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10.6

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Institutional Dimension

Institutional dimension in global value chains is represented by all public–private organizations that participate directly or indirectly in the production of the different goods and services that are transferred in economies. The role of institutions is relevant to the functioning of the chains which facilitating the regulation of markets in the search for greater competitiveness, contributing to the interaction of the main players of the chain, and leading an equitable distribution in the appropriation of profits by actors (producers, marketers, among others). Costa Rica as a relatively small and price-taking economy of international markets; is affected by policy decisions made by its main trading partners. It is also influenced by trade and policy guidelines for the agricultural sector formulated in international organizations linked to this sector, such as the Food and Agriculture Organization of the United Nations, the Inter-American Institute for Cooperation on Agriculture (IICA), and the World Trade Organization (WTO). International Policies International agencies set out their work plans and policy actions on agricultural issues under the 2030 Agenda for Sustainable Development in which the United Nations (UN) in 2015 identified and promoted the Sustainable Development Goals (SDGs) for the world. Prioritizing seventeen objectives, one of these emphasizes the food and nutritional security of nations. SDS 12 and 13 emphasize sustainable consumption and take measures to help mitigate the effects of climate change on the world (UN, 2016). The following Table 10.12 details the strategic objectives of global organizations that are causally related to the agricultural sector and which have the power to influence countries’ forms of production. Government Food and Nutrition Security (SAN) programs have succeeded in establishing policies in Costa Rica that help ensure access to food for all people and that products with high nutritional components and certified quality standards are offered. WTO through the various free trade agreements established by the country with the rest of the world, and mainly through the Dominican Republic-Central America-United States Free Trade Agreement (FTA-CARICOM), which safeguards in some part the volumes of trade in agricultural products through the application of safeguards to protect domestic production.

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Table 10.12 World: government institutions linked to agricultural activities, 2019 Institution

Objectives

Food and Agriculture Organization of the United Nations (FAO)

Help eliminate hunger, food insecurity and malnutrition Make agriculture, forestry activity, and fisheries more productive and sustainable Reduce rural poverty Promote inclusive and efficient agricultural and food systems Increase livelihood resilience to catastrophes Improve the productivity and competitiveness of the agricultural sector To enhance the contribution of agriculture to the development of territories and to rural well-being Improve agriculture’s ability to mitigate and adapt to climate change and make better use of natural resources Improve agriculture’s contribution to food security Improve the level of well-being of the population of the member countries

Inter-American Institute for Cooperation on Agriculture (IICA)

World Trade Organization (WTO)

Source Own elaboration, based on the strategic plans of the organizations, 2019

The Inter-American Institute for Cooperation on Agriculture (IICA) has promoted in the countries of the region including Costa Rica the knowledge; it has in the development of innovation and extension strategies. The application of good practices application in the agricultural sector requires several elements such as:methodologies, monitoring, policy design, work plans and formulation of projects in order to focus on the development of the agro-sector in the region (IICA, 2018). Therefore, there are international policies that support and promote the development of agricultural activities in the different countries of the world, with the focus of these crops to strengthen the food and nutritional security of nations and at the same time being a commitment to the 2020 SDS.

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National Policies In Costa Rica, the agricultural sector in accordance with article 30 of Law No. 7064 on the Promotion of Agricultural Production (Fodea) consists of all those institutions and programs that carry out activities aimed at agriculture, livestock, and maritime fishing. The institutions are regulated by the Minister of Economy Industry and Trade in conjunction with the National Agricultural Sectoral Council (CAN); sectoral coordination institutions are Executive Secretariat of Agricultural Sectoral Planning (SEPSA), Agricultural Sectoral Technical Committee (Cotecsa), Regional Agricultural Sectoral Committees (CSRA), and Local Sectoral Committees (COSEL). Decentralized institutions linked to agricultural production are Institute for Rural Development (Inder), Integral Agricultural Marketing Program (PIMA), and the National Production Council (CNP). The Ministry of Agriculture and Livestock (MAG) has under its coordination and for specific support to the agricultural sector to the: National Seed Office (ONS), National Institute of Innovation, and Transfer in Agricultural Technology (INTA). All these institutions that make up the regulatory framework of the national agricultural sector have the power and obligation to define policies and implement them with the aim of promoting the development of territories. Specifically in the case of the corn value chain, these policies function as a cross-cutting axis to promote their production and improve the conditions of producers in the country. Table 10.13 describes the specific role of each institution. The agricultural sector to promote its development is marked by two essential objectives: poverty reduction and economic growth. For the proper fulfillment of these objectives, both national and sectoral plans are emphasized in five pillars: food security and sovereignty, opportunities for youth in agriculture and rural territories, territorial rural development, adaptation, and mitigation of agriculture to climate change, strengthening the agricultural-export sector (SEPSA, 2015). The Policies for the Agricultural Sector and the Development of rural territories 2015–2018 are aimed at reducing the social, economic gaps that exist in the rural territories of the country, positioning agriculture as the means to reduce unemployment and inequality, as presented in Table 10.14. It also aims to meet the needs of producers by providing the necessary research and technical support. Marketing is a strategic point,

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Table 10.13 Costa Rica: government institutions linked to corn cultivation, 2019 Organism

Function

Ministry of Economy Industry and Trade (MEIC)

Development of policies and decrees to mitigate the national shortage of corn Strengthening product development in the country, which improve the competitiveness of the different productive sectors The Council is a body responsible for coordination, consultation, and advice. This council is made up of all agricultural institutions see Fig. 22, as well as staff from the Central Bank of Costa Rica, MIDEPLAN, and the National Bank Body responsible for advising and supporting the Rectory and the hierarchies of the institutions of the sector, for the conduct, efficient and effective articulation of national agricultural development This instance is responsible for coordinating the planning processes of the institutions involved in the agro-sector; it is also responsible for operating all agreements taken in the CAN Technical advice to producers, such as good agricultural practices, bio-inputs, and other workshops Services that support vulnerable small and medium-sized producers Application of technology in the development of new agricultural production mechanisms; for example, new seed variety trials Implement new technologies that allow greater competitiveness of the national producer Promote the production and marketing of good quality seeds Market information Support in the production and marketing of corn Promotes the inclusion of rural territories, in which; the producer, security, and food sovereignty are safeguarded Delivery of input for producers It is a program aimed at promoting the commercialization of products linked to the agricultural sector CSRAs make decisions that allow the effective implementation of industry policy lines to operate

National Agricultural Sectoral Council (CAN)

Executive Secretariat for Agricultural Sectoral Planning (Sepsa) Agricultural Sectoral Technical Committee (Cotecsa) Ministry of Agriculture (MAG)

National Institute of Agricultural Technology (INTA)

National Seed Office (ONS) National Production Council (CNP) Institute for Rural Development (INDER) Comprehensive Agricultural Marketing Program (PIMA) Regional Agricultural Sectoral Committees (CSRA)

(continued)

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Table 10.13 (continued) Organism

Function

Local Sectoral Committees (COSEL)

They are the most active instance of the sectoral planning system, related to the development of the agricultural sector and the rural environment, where the services provided by public institutions are provided and a more direct relationship is maintained with producers and their organizations

Source Own elaboration, based on the strategic plans of the institutions, 2019

this sector needs producers to have an organization that manages to give them greater bargaining power (SEPSA/MAG, 2014). For the micro-level, there are policies and programs that are specific to corn cultivation. The Agricultural Technology Research and Transfer Program in Corn (Pitta corn) involving CNP, INTA, MAG, ONS, UNA, INDER, and UNED; corn cultivation is addressed from different edges by research, marketing, transfer, and extension. It bases its dynamics on the participation of producers, as well as field activities involving technology assessments, technical tours, training activities, among others (INTA, 2008). The trade policy of corn signed in the Free Trade Agreement signed by Central America and the Dominican Republic (CAFTA-DR), Annex 3.3 to this treaty indicates the tariff for the importation of white corn of the 15% base (year 2009) with respect to the customs value of corn and shall be zero fifteen years from the signing of the treaty, which is fulfilled in 2024. Safeguard measures to protect domestic corn production are also detailed in Annex 3.15 to the same trade treaty indicates that the level of activation will be from 9,000 tons of white corn per year. The annex to tariff reduction for corn shall reduce this tariff by 15 equal parts from the signing of the agreement, i.e., in 2019 white corn imports have a tariff of 1%, which is divided into 0.9% which is the Import Tariff Law (DAI) and 0.1% of law tax No. 6946 the National Emergency Act. Institutions such as the Ministry of Foreign Trade (COMEX), MEIC, and MAG develop executive decrees which focus on determining preferential tariffs for the importation of corn under Law No. 8763 if it is demonstrated that the country is out of stock in this product; it still happens in the case of bean. During the period of the last five years, they have been issued by decrees for national corn shortage.

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Table 10.14 Costa Rica: policies for the development of agricultural activities, 2019 policies

Objectives

Agricultural Production Promotion Act (Fodea) No. 7064

Regulate the overall policy framework for the development of the agricultural sector in the country. It includes the lines to be followed by industry-linked institutions, such as MAG and SEPSA Reduce poverty in general and particularly extreme poverty and reduce social and territorial inequality Generate greater economic growth, characterized by more and better jobs Support the national poverty reduction target, through actions that improve living conditions in rural territories and promote the dignification of rural people Increase agricultural value added, driving improved productivity, and sustainable rural development Raise the level of competitiveness of the Costa Rican agri-food sector Strengthen and integrate innovative activities and the generation and transfer of agri-food technology and their links between the different competent entities, public and private Promote the balanced development of rural territories and the rescue and improvement of family farming Promote cross-sectoral efforts to prevent, mitigate, and adapt to the climate change process and achieve agri-environmental management of excellence, which, in addition to promoting the sustainability of production processes, allows greater differentiation of national exportable supply in world markets Dignify families, workers, employees, producers, and producers of agriculture and rural territories

National Development Plan 2015–2018 (PND)

Sectoral Plan for Agricultural and Rural Development 2015–2018

State Policy for the Agri-Food Sector and Costa Rican Rural Development 2010–2021

Policies for the Agricultural Sector and Rural Territories Development 2015–2018

(continued)

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Table 10.14 (continued) policies

Objectives

National Food and Nutrition Security Policy 2011–2021

Promote food and nutrition security through systems for the production, marketing, and consumption of health-promoting foods, under socio-environmental safety and sustainability criteria Improve the nutritional status of the general population, with an emphasis on groups in poverty, vulnerability, and exclusion Promote a physical infrastructure for the production, conservation, distribution, preparation, and consumption of food in order to ensure food and nutritional security as the right of the population

Source Own elaboration, based on policy documents, 2019

The country in the long term establishes policy reference frameworks such as the State Policy for the Agri-Food Sector and Costa Rican Rural Development 2010–2021; it is expected to develop an inclusive, modern, competitive, and environmentally responsible agri-food sector. In addition, focused on four pillars, such as competitiveness, innovation and technological development, rural territory management and family farming, and climate change and agri-environmental management (SEPSA/MAG, 2011). Another policy that focuses on the development of agro in the long term is the National Food and Nutrition Security Policy 2011–2021, developed by the Ministry of Health (MS). These policies are guided by the work of the Food and Nutrition Systems (SAN) in Costa Rica. This policy has pillars, such as the right to food, diversity, social cohesion, and gender equality and equity (Health, 2011). In short and medium term, national policies for the agricultural sector have as their central axis the improvement of the competitiveness of the domestic producer, as well as the dignification of producing families in rural areas. These measures are the operational plan to counter the effects of the country’s trade policy, in which the importation of white corn is being greatly encouraged, with compliance with the tariff known as the Import Tariff Law (DAI), which will be zero percent by 2020, degreasing

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the importation of this grain altogether, and at the same time completely unprotecting the domestic producer. In practice, the interaction of agricultural production support policies between institutions remains marginal in terms of resolving production decline difficulties, rising costs, among others. However, existing policies clearly establish the routes of work, but instead are not reflected in the reality of the producers. At the meso-level, the different sectoral and regional programs maintained by the country for the strengthening of territories were identified. However, the efforts made by these institutions such as MAG, CNP, INTA, and INDER remain insufficient. There is no denying institutional effort to the producer in aspects such as training, input deliveries, analysis and technical assistance in different communities, research for the production of more productive and low-cost seed varieties. However, the reality of the sector remains adverse and with serious difficulties in competing with supply imported from other countries. Producers have benefited from good agricultural practices (pre-care phase) as well as not all that make them, the inputs they receive are an aid for a certain period (which cannot be constant over time); in such a way that efforts exist, but the central problem of recovering much of the production and offering better conditions to producing families does not present a clear path to the solution. This requires fostering effective networks of cooperation from government institutions to local producer associations. The linkage of the policies of each institution in the agricultural sector should consolidate the process of associativity by corn producers either in cooperative forms or as currently determined, through producer associations. In the Southern Region, associations operate unlinked between them, generating fair competition that gradually benefits the achievement of a price appropriate to production costs. It is, therefore, urgent to unify institutional efforts to achieve common objectives that ensure better productive conditions and competitiveness in this economic activity.

10.7

Conclusion

Corn production in the region represents the main economic activity, the source of household income, and job creation. However, it faces a very unfavorable situation with high input costs, declining agricultural yields, sales prices that fail to recover the initial investment, requiring the planting of this crop not to guarantee the supply of domestic demand,

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forcing the importation of white and yellow corn, and avoiding possible food and nutritional insecurity in the country. The corn producer makes efforts to have an adequate level of wellbeing from the planting of other crops such as beans, coffee, tubers, among others. However, the main factor in achieving this increased wellbeing is the lack of competitiveness of domestic production compared to the prices of corn imports. For example, industries find greater economic benefits by buying corn in international markets because prices are comparatively favorable to locally offered ones. To be sure, Costa Rica’s trade opening policy accelerated by signing CAFTA-RD in January 2009, encouraging imports of raw materials such as corn, leaving the domestic producer unprotected because by 2020 the import tariff will be zero for white corn. Despite these circumstances that currently affect the national production of this grain, there is a productive potential in the area as they are: good soil fertility, known labor, adequate level of associativity (8 associations), and satisfactory technical support. These conditions should be optimized to overcome high competition and low productivity in corn production. This is relevant, in order to boost the generation of value added (flour production), because if competitive prices are not achieved, there is a risk of openness to industrialization processes that do not manage to have an adequate supply of raw materials (yellow corn), forcing the import of grain. On the other hand, it is urgent to promote improvements in the conditions of placement of the product in the final market (marketing), with purchase prices that exceed the average cost incurred by the producer and can add a profit margin as is normal in any productive activity. This would drive the recovery of the initial investment, ensuring the sustainability of agricultural activity and at the same time generate family livelihoods in the households of producers. From this perspective, the following actions to strengthen this agricultural activity are suggested. Boost Chaining in Corn Production There are currently chains in the corn value chain that encourages the interaction of corn production actors. However, these are not the most suitable and should further strengthen the vertical dynamics in the chain. Chaining should be promoted both backward through genetic improvement in seeds, certification of good agricultural practices, use of bio

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platelets and biofertilizers, as well as forward through better negotiations with marketers, packaging and labeling of processed corn (flour). Also, the cultural value of corn as part of the value-added strategy need to be included as a dimension to integrate in the framework of many institutions that are working for the welfare of agricultural sector. Government institutions recognize the importance of reclaiming agricultural activities to promote rural development of territories and generating productive chains in value chains. A budget of $102.86 million is available for technology, land acquisition, infrastructure investment, lending, among others. However, the implementation of the budget in the period 2015–2018 has no effect that could have been evidenced from the perspective of the recovery of production. Corn producers require a fully equipped plant with technology to perform grain processing, storage, and selection processes; increase the territories for corn planting and venture; and other varieties. Diversification of corn-based products in addition to expanding market niches reduces single-product losses by a greater proportion. It is currently only marketed in grain or corn in such a way that if the demand for any of these products decreases in domestic markets, the producer is significantly affected; so diversifying production reduces the risks associated with this. These chains are articulated with the need for added value. Value-Added Generation in Corn Production In the institution’s development plans, value added is established as a pillar to strengthen agricultural activities, increasing corn productivity. However, increasing productive yields is important, but beyond that product placement at a fair price in markets is essential. Value added in corn production is concentrated entirely in the link of marketing (large industries), severing this resource in the local economy. Grain processing is an alternative by which white corn could be placed on the domestic market at a better price requires efforts to articulate the main players in the chain producers and associations. This articulation can be achieved through institutions such as CNP, MAG, INDER, establishing a fully equipped plant in CEPROMA (regulated by INDER). In this way, it is possible to increase the current production and concentrate it in a single processing plant, establish a single sales price.

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Finally, national policy is the most immediate mechanism to be geared toward the rescue of domestic agriculture, providing the right conditions in technology, marketing, training to improve the competitiveness of domestic white corn producers. Public institutions linked to the agricultural sector through strategic plans provide advice to producers by training them on specific issues; however, there has been no evidence in the recovery of production. The national strategy to incentivize corn production could improve if it manages to enhance productive chains along the value chain with the aim of generating added value in this activity. Innovation for grain processing into other derivatives that let them enter into new markets that provide an opportunity for better and greater net profits for producers and indirectly increase economic development in the region.

References Acuña, J. A. (1999). Manual of formulas and statistical tables (2nd ed.). Costa Rican Technology Editorial. Central Bank of Costa Rica. Economic Indicators Database 2017. San Jose Fajnzylber, F. (1990). "Industrialization in Latin America: From the “Caja Negra” to the “Cajallero Vacio”, Notebooks of ECLAC, 60. Santiago. FAO. (2017). Food Safety Statistics. Food and agriculture organization of the United Nations. http://www.fao.org/economic/ess/ess-fs/es/ Fernandez, K., Bamber, P., & Gereffi, G. (2012). Upgrading in global value chains: Addressing the skills challenge in developing countries. OECD Background. Duke University, Center on Globalization, Governance & Competitiveness (Duke CGGC). United States of America. Gereffi and Miguel Korzeniewicz. (1994). Commodity chain and global capitalism. Praeger. Health, M. d. (2011). National policy for food and nutrition security 2011–2021. The Ministry. Hernandez. (2012). Element statistics for social sciences. UCR. IICA. (2018). IICA Annual Report 2017 . IICA. Inta. (2008). Corn cultivation recommendations manual. INTA. Multinacional, B. M., & Hospira confirms transfer of operation from the Dominican Republic to Costa Rica. (4 April, 2017). The Nation. Costa Rica. Otzen, T., & Manterola, C. (2017). Sampling techniques on a population to study. International Journal of Morphology, 35(1), 227–232. https://doi.org/ 10.4067/S0717-95022017000100037 Padilla R., Oddone N. (2018). Manual for strengthening value chains. Economic Commission for Latin America (ECLAC). Mexico City.

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Parkin, D. (2002). Corn: the persistence of a culture in Mexico Article in Cahiers des Amériques latines (Paris, France: 1985). DOI: 10,4000/cal.6810. Porter, M. (1990). The Competitive Advantage of Nations. Macmillan. First edition. London. 1–178. SEPSA. (2015). Agricultural and rural development sector plan 2015–2018. San Jose; Costa Rica: SEPSA. SEPSA, MAG. (2011). State policy for the agri-food sector and Costa Rican rural development 2010–2021. SEPSA. SEPSA, MAG. (2014). Policies for the agricultural sector and the development of rural territories 2015–2018. SEPSA. Stop A, Loaiza E., Artavia L., & Benavides Sh. (2018). Food and nutritional safety: a retrospective look RIVAR, 5(15), September 2018: 1–21. ISSN 0719– 4994 1. UN. (2016). 2030 Agenda and the sustainable development goals. An opportunity for Latin America and the Caribbean. Santiago: Copyright © United Nations. Van Dooren, R. (2003). Garments on the move: The local dynamics of export networks in La Laguna. Faculty of Geographical Sciences, Universiteit Utrecht. Zhang T. (2008). Environmental performance in China’s agricultural sector: A case study in corn production. Applied Economics Letters. 15, 641–645 Department of Economics, National University of Ireland, Galway, Ireland.

PART IV

Case Studies in Skill and Knowledge-Intensive Industries

CHAPTER 11

The Gestation of a Triple Helix in Queretaro, Its Contribution to the Formation of the Global Value Chain of the Aerospace Industry and the Type of Upgrading That Powers Fernando Samperio Sánchez

11.1

Introduction

The overall objective of this chapter is, first, to characterize the advancement and level of participation of the Aeronautical University of Queretaro (UNAQ) and the research centers in the gestation of a collaborative form of triple helix in Queretaro (university-industry-government ), and finally, to explain how the linkage and collaboration with companies have contributed to shaping the global value chain (GVC) of the aerospace

F. Samperio Sánchez (B) Mexico City, Mexico e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_11

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industry (AI) in Mexico, and the type of labor and industrial upgrading that this relationship allows and promotes. The growth and expansion of AI in Queretaro are associated with the transferring process, the global value chain (GVC) decentralization of large multinational companies (MNCs), and incentives by governments to attract and facilitate the expansion of the productive activities of these firms. However, such take-off related to production and exportation has not resulted in backward spillover effects. In this regard, this chapter highlights the almost zero integration of local companies and suppliers, which are estimated to participate only in 5% of the aerospace production carried out in Mexico. Among the development objectives of AI in Queretaro, at least in the plans and declarations of the government, the configuration of a triple helix that allows greater participation and integration of local suppliers can be found. This configuration differs from the corporate/competitive and profitability strategy pursued by MNs when establishing themselves in Mexico, which makes the real possibilities of improving the trajectory of local integration in AI a slow, subordinated, and complex process. This problem can be associated with the productive features that characterize the segments (processes and products ) of AI GVCs: low volume and high mix; large amounts of investment in middle and upper segments; rigorous traceability, and strict safety standards and certifications; but also, bonding and collaboration of agents in the triple helix (universityindustry-government ). Such bonding and collaboration are functional or attracting investments, installing companies, and advancing aerospace production and exports; but very limited to promote and/or enhance processes that enable greater integration of local companies and suppliers. Among the main results, the triple helix formed in Queretaro does not help to enhance an industrial upgrading process with inter-company connections and dragging backward local companies, as described in the most positive part of the literature (Gereffi, 2001). In the AI in Queretaro, one can see indications of a potential process of intra-company upgrading within large global companies (Bombardier and Safran), who have taken advantage of the development of infrastructure, collaboration with research centers, and educational and academic aspects (UNAQ) to extend and enhance productive progress in different segments within their plants in Queretaro. This process has slowly changed the demand for the profile of UNAQ graduates (technicians vs. engineers) in accordance with the progress

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established in the requirements of companies in Queretaro. This change has made possible some labor upgrading—understood as an evolution in the quantity, quality, and profile of employment required by AI companies— in the context of a regional process that, although it has a slow feedback, has a comprehensible hierarchical governance based on the guidelines established from the technological production chain led by MNs. This chapter is divided into four sections. In the first section, the theoretical references associated with the perspective of the triple helix are stated. The second section highlights the main segments (processes and products ) associated with the productive activities of the AI GVCs in Queretaro and the productive activities of Bombardier and Safran. The third section, together with the debate on the beneficiaries of science, technology, and innovation (STI) policies, highlights the evolution and level of participation of the triple helix model of UNAQ and research centers with companies as well as the type of industrial and labor upgrading that they favor. The conclusions to this chapter appear in the fourth section.

11.2 The Perspective of the Triple Helix (University-Industry-Government) The study of the university-industry-government relationship (triple helix) is a collaborative reflection model initially proposed by Etzkowitz and Leydesdorff (1995), whose premise is to understand the transition toward a knowledge society. The model aims to make the university a source of collaboration and knowledge, allowing such model to play a key role in the relationship with companies and the government, seeking to enhance the way said participants come together and collaborate to generate innovation in the organizations as a source of knowledge creation.1 To achieve the foregoing, the authors propose a

1 Innovation, understood as a process, is associated with the expansion of a set of productive, scientific, technological, and learning capacities. To achieve this expansion, progress is needed in at least two respects: (1) Structuring an industrial policy that directs investment toward key sectors of higher added value (auto-parts, electronics, computing, biotechnology, and aeronautics) and (2) Establishing an industrial prospective area, somewhere in the federal government that allows private sector investment to be directed toward new industrialization niches, encouraging the private sector to establish its own R&D centers (Ruiz Durán, 2008).

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gradual decrease in the differences between disciplines, types of knowledge, and instances related to the university-industry-government linkage. In Etzkowitz (2008), it is stated that new social arrangements and channels of interaction emerge when industry and government are linked by universities in knowledge-based economies. Etzkowitz and Klofsten (2005) highlight the search for a triple helix collaborative model that better reflects the complexity associated with the concept of linkage as a dynamic and changing process. The model is characterized by the following aspects: (i) It places greater importance on the role of universities in innovation, especially when they can act together with the industry and government to shape a knowledgebased society; (ii) It proposes a movement toward collaborative relationships between institutional areas, seeking that the “innovation policy” is increasingly the result of interaction and not of a government plan, and; (iii) It proposes that each of the institutional areas (university-industry/ company-government) assume and understand the role of others. The basic idea is that each participant operates their “new role” within the triad on par with their traditional role.2 From this perspective, the model to be achieved implies the generation of a knowledge-infrastructure in terms of overlapping institutional spheres, where the university can lead the way of innovation, but each helix assumes the role of the others and hybrid organizations emerge at the interfaces of the triad. This idealized configuration is commonly known as the triple helix model. In reality, the formation of participants and the presence of collaborative university-industry-government models often present varying degrees of asymmetry with clear patterns of hierarchical governance. Over time, one can refer to different versions of the triple helix where historically the participants have interacted in more or less linked and efficient ways, and with different results.3 2 Linkage is a dynamic and changing process that is proposed as a new paradigm between the elements of the triple helix based on the analysis and application of the model proposed by Etzkowitz. 3 Etzkowitz associates the first version of the triple helix (TH1) to situations when the

Nation-State encompasses academia and the companies veiledly direct relations between them. The strongest example of this model can be found in the post-war period in the former Soviet Union (the companies here were not companies, but the State itself). In the extreme case of the former USSR and, for certain industries such as that relate to auto parts, household appliances, and electronics productive innovation and competitiveness can

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The triple helix model highlights the importance of the evolution of innovation systems while allowing discussion of conflict regarding the paths that university-industry-government relationships must take to achieve institutional arrangements, so it has been recommended as a useful method for fostering entrepreneurship and collaboration.4 In the triple helix, both national and multinational relations are key components in the innovation strategy. One of the questions that arise within academic research is how to reconcile the components of research, both the exogenous component (curiosity and invention) with endogenous (market-driven innovations). In the aspects related to the use of technology, both the application of knowledge and the business interest in a given activity are manifested. The development of technology has been one of the fundamental interests of universities in the application of knowledge (praxis ) and the training of human resources. In this respect, the model stresses that policies should not be centralized, as they may lose their orientation and become an obstacle between linkage projects.5 The triple helix model represents a normative and strategic paradigm that could be adopted by certain countries in the context of the decentralization and transfer of segments of GVCs to specific regions, since the knowledge and learning skills produced in collaboration by the

be visualized as failed development models since innovation was discouraged, rather than fostered. In Latin America and other European countries, weaker and more heterogeneous versions of TH1 were formulated, which were associated with nationalist positions and a decrease in productive and technological dependence through import substitution. In the triple helix-II (TH2), the limited form of collaboration is linked to laissez-faire thinking and was recommended as a shock policy to promote the freedom and independence of the companies, reducing the participation of the State. In extreme positions, the phrase “the best industrial policy is to have no industrial policy” became popular. The debate continues today and part of the discussion is associated with defining toward which industrial sectors the efforts and support should be directed. That is the answer to the questions of where, how, and for what regarding industrial policy and scientific and technological innovation. 4 There is broad reflection and debate in the literature on the origin, evolution, and effectiveness of regional innovation systems, particularly if they are designed only by the government. On this topic, see Dutrénit (2010, 2015), Llisterri and Pietrobelli (2016), Navarro Arancegui (2007), Montecinos Paniagua (2015) and Ruiz Durán (2008); and on the case of reflection in the aerospace industry, see R. Ibáñez and C. López (2006). 5 This cooperation involves visualizing the aspects that make the relationship difficult: (a) Public Policies; (b) Administrative Processes and Bureaucracy; (c) Goals Clash (while universities are interested in developing academic activities that generate sources to fund projects and research, the companies are interested in the performance that research can generate); (d) Excessive academic burden, etc.

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triple helix, could allow and improve endogenous processes of regional development. For the triple helix model, over time, innovation, and competitiveness have originated mainly because there are such interrelationships in different industries. The model proposes understanding the generation of competitiveness and innovation from a systemic perspective (Esser et al., 1994), rather than associated with issues of productivity, competition, and rivalry between different actors, as postulated by the liberalization and openness paradigm in the 1990s.6 In this context, countries and regions immersed in GVCs associated with technology-based companies and industries, such as AI, could contribute from the institutional perspective to configure some form of the triple helix that allows them some type of industrial upgrading, seeking not to be trapped in the segments of the chain with low added value, which in practice turn out to be those transferred mostly by MNs to emerging regions, at least initially. One of the key objectives of the government programs in the triple helix model is to advance toward the construction of an environment of productive support and innovative infrastructure based on technology-based universities, involving initiatives that allow economic growth based on knowledge.

11.3 Distinctive Characteristics of AI in Queretaro and Major Segments of the Global Value Chain (GVC), and the Productive Activities of Bombardier and Safran Based on data from the Secretariat of Sustainable Development (SEDESU) to 2016 and the Economic Yearbook of the State of Queretaro to 2019, some distinctive facts associated with productive aspects,

6 The systemic competitiveness approach proposes that industrial competitiveness does not arise spontaneously when the macro context improves (monetary, financial, and fiscal balance), nor is it created using only the spirit of enterprise at the micro level. Rather, it is the product of a pattern of more complex and dynamic interactions between the state, companies, institutions, and the organizational capacity of society, where the technological scientific apparatus and the network of suppliers and subcontractors are involved (Esser et al., 1994). The systemic approach provides a broader perspective to explain competitiveness in the contemporary context (Esser et al., 1994; Messner, 1996; Messner & Meyer-Sanders, 1994), which results in many respects contrary to competitiveness approaches in Porter (1996) and related authors.

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infrastructure, and investments in the IA of Queretaro are briefly highlighted7 : 1. Cumulative Foreign Direct Investment (FDI) in the aerospace sector as of 2015, 1,300 million dollars ($1.3 billion), placed Queretaro as the state with the highest index of aerospace FDI in the country. 2. As of 2017, with data from the National Registry of Foreign Investments of the Secretary of Economy (RNIE/SE), Queretaro had captured about 40% of the aerospace FDI that arrived in Mexico. 3. Queretaro led aeronautical exports (2010–2015) and was the first state to develop industrial parks dedicated to the aerospace sector. 4. Queretaro has the only university in the country that specialized in the training of labor in aeronautical subjects (UNAQ). This, among other incentives, is associated with the attraction of companies and investments. 5. Since Bombardier’s arrival in 2006, the AI in Queretaro has been leading the growth of economic activities, presenting a sustained growth of 17% per year from 2007 to 2017.8 6. Some of the most important global AI players operating in Mexico have plants in Queretaro: Bombardier, Airbus, GE, Safran, ITP, PCC, Airbus Helicopters, among others. According to the Mexican Federation of the Aerospace Industry (FEMIA), there are companies of three major segments in Queretaro: (1) Manufacturing, which includes companies that manufacture and market at least one aerospace product with the required certifications; (2) Research and development (R&D), which includes companies that develop or have centers or infrastructure and capabilities in the region to perform research, design, and engineering in the aerospace sector; and (3) Maintenance, review, and overhauling (MRO), which include companies that offer certified MRO services. 7 The data and observations included in this section are based on the Aerospace Route Map for AI in Queretaro, which was officially presented by SEDESU/ProMéxico at the end of 2015. The Queretaro Statistical Yearbook (2019) is available at: https://anuarioec onomico.municipiodeQueretaro.gob.mx/english/. 8 Cited by Claude Gobenceaux, the president of the Aerocluster (ACQ) at the time. Referred to in: https://www.elfinanciero.com.mx/bajio/Queretaro-destino-lider-de-la-inv ersion-aeronautica-en-mexico.html.

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As of 2015, there were 65 entities associated with the IA in Queretaro. The entities include the companies plus research, organization, and support institutions: 26 in manufacturing, 18 in R&D, 6 in MRO, and 15 in support services. About 21% of all companies and support agencies associated with AI in Mexico are located in Queretaro. Additionally, 50% of the region’s aeronautical companies, many of them MNs, are part of the Queretaro Aerocluster (ACQ).9 Within these entities, institutions and agencies that offer support services to the cluster and contribute to the operational and/or administrative management of companies should be highlighted. Among them are the Aeronautical University of Queretaro (UNAQ), Secretary of Sustainable Development (SEDESU), Research and Development Centers (Conacyt), and Queretaro’s Aerocluster (ACQ). The core business of the installed capacity of AI companies in Queretaro is associated with eight items: (i) Electrical harnesses and raw materials; (ii) Maintenance, repair, and overhauling (MRO) to engines, aircraft and, landing gears; (iii) Manufacture of engine components; (iv) Composite materials; (v) Complex machinery and components of 5 and 6 axes; (vi) Surface and heat treatments (vii) Aero-structures; and (viii) Component of landing and braking systems. In addition, Queretaro brings together the largest number of aeronautical maintenance centers in various systems and structures and large MNs associated with them operate: • In turbine aeronautical engine repairs: Snecma America Engine Services (SAMES/Safran Group) and ITR (ITP Group). • In major landing gear repairs, Messier Services (Safran Group). • At MRO for commercial aircraft, TechOps (Aeromexico/Delta Airlines). • For major aircraft repairs, Airbus Helicopters (Airbus Group). Currently, around 75–80% of the aerospace industry exports in Queretaro go to the United States with the rest being mainly split between Europe and Canada. Figure 11.1 summarizes the productive expertise that the 9 As of 2017, according to an interview with the Director of FEMIA, 312 industrial facilities (plants) were estimated throughout Mexico, but only about 270–280 companies exist since there are companies that have several plants, such as Safran Group and Bombardier (Samperio Sánchez, 2018).

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Aerostructures

Propulsion

● Crio ● Southwest United de México ● NDT Expert México ● TTT Aeroprocess

● Bombardier ● Safran ● Meggitt ● Messier Services

● ITP ● General Electric (GEIQ) ● Safran ● ITR

Systemics and Avionics

15% 46% 24%

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Special processes

● Bombardier ● Airbus Helicopters ● Aernnova A & C. ● PCC Aerostructures ● Curtis Wright Controls Flight Systems (CWCFS) ● Delta TechOps

15%

Fig. 11.1 Queretaro: leading aerospace industry companies by large segments (Source Own elaboration, based on data from the Querétaro Aerocluster [ACQ] and SEDESU, 2016)

aerospace industry has developed in Queretaro and the type of companies involved, some work in different activities and segments. Around 65–70% of what AI produces in Queretaro can be considered aerospace manufacturing, and most of the remaining 30% can be associated with MRO activities. However, there are also research and development (R&D) activities associated with engineering and design. It becomes important to know what design and production capacities the plants and their locations have reached and what segments (processes and products ) of the GVC they impact. Regarding engineering and design in AI, many of the designs belong to the same group (company), so it is difficult to make a separation between those who do the design and engineering and the general manufacturing process of each firm. However, the generation and appropriation of knowledge as well as patents and royalties will remain within the same group, regardless of who designed it or where it was made. Queretaro is home to three relevant companies associated with research, design, and engineering in the aerospace sector:

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1. ITP Aero is a world leader in the aeronautical and industrial engine market. In Queretaro, the company carries out design and engineering processes mainly associated with the development of engines and valves exported to Europe.10 2. General Electric Engineering and Infrastructure Center (GEIQ), which is the largest employer in terms of engineering and design. Not only does it employ a large number of engineers (over 1,800 as of May 2019), but it has progressed locally to have the ability to sign designs. Once the design is signed, it can go directly to production without the need for another intermediary. In the aeronautical part, GEIQ works on activities related to aircraft display screens, as well as the generation and distribution of energy inside them.11 3. Bombardier Aerospace Queretaro (BAQ) has engineering and design areas. They do not occupy most of their critical mass, but they are important in the entity’s ecosystem. It can be said that, in the AI established in Mexico, manufacturing processes predominate. However, Queretaro is distinguished by concentrating the largest number of public scientific research centers, related to R&D activities in the sector. This is a prerequisite that can contribute to attracting projects with greater added value and scaling, which are associated with the increase in the demand for jobs with greater training expertise and better pay. The companies that lead the productive activity and the network of suppliers in Queretaro are the Bombardier (Canada) and Safran Group (France) multinationals. The operations of both companies have 10 ITP Aero is a Spanish company with 30 years of history. It has become one of the top 10 aeronautical engine companies in the world and is among the top 100 in the industry. The company participates in both commercial aviation and defense programs. Referred to in: https://www.itpaero.com/es/sobre-itp-aero/. 11 GEIQ went from employing 500 engineers in 2006 to 1,800 in May 2019. According to the company’s page, 20–25% have master’s or doctorate studies, 81% being men and 19% being women (above the average of women who study engineering, 3–4%). GEIQ is characterized by hiring young graduates and then training them by following a catalog of courses. At GEIQ, engineering and design are handled virtually and results are stored on a server, allowing interaction with other GE research and design centers around the world. GEIQ works in four areas: (1) Aviation Engines, (2) Aviation Systems, (3) Energy, and recently, (4) Oil and Gas. Referred to in: https://gereportslatinoamerica. com/geiq-20-años-de-impulsar-talento-de-altura-d7c92a0512c5. http://www.eluniversalQ ueretaro.mx/portada/03-09-2013/general-electric-va-por-mas-ingenieros.

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grown in Mexico, in particular in Queretaro. At the beginning of 2020, Bombardier operated four plants while Safran reached six. The announcement of the arrival of Bombardier to Queretaro was given on October 26, 2005, but it formally began productive activities in May 2006. Recently, in a large global operation, Bombardier sold the part of the company related to commercial aviation to the European Airbus. So far, there have been no major impacts or changes to Bombardier’s local operations.12 Table 11.1 highlights the main productive and MRO activities carried out by these companies in Queretaro, and the components and segments of the global value chain (GVC) with which they are associated. The last column describes the functions that manufactured products fulfill within the aircraft.

11.4 Government Participation in the Triple Helix and Debate Over Who Benefits Science, Technology, and Innovation Policies Seeking to promote the advancement and development of AI in Queretaro, the federal and state governments actively promote the advancement of the cluster at fairs and local forums and abroad, seeking to attract flows of FDI and companies, highlighting three aspects: 1. The development of federal and state infrastructure, mainly the Queretaro Intercontinental Airport (AIQ) and the industrial parks: Queretaro Industrial Park (PIQ) and Queretaro Aerospace Park (PAQ).

12 On January 17, 2020, the rating agency Standard & Poor’s went from stable to negative debt ratings for Bombardier. The amount of debt was estimated at 9,000 million of dollars, with losses of 1,610 million of dollars in 2019. They ended up pushing the sale of the commercial aviation part of Bombardier. This involved a final acquisition agreement for 75% of the A220 program (previously C-Series) by the European conglomerate Airbus. Referred to in: https://www.aerotendencias.com/industria-aeronautica/49671-bombar dier-vende-su-participacion-en-el-programa-del-a220-por-591-millones-de-dolares/.

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Table 11.1 Mexico: main segments (processes/products) with which Bombardier and Safran’s production activities are associated in Queretaro, 2006–2018 COMPONENTS

SEGMENTS (Processes and Products)

Features / Functions

► Rear fuselage of the Global family aircraft for model 5000 and 6000 of (Bombardier) ► Rear and intermediate fuselage of the aircraft Bombardier LearJet 85 family. The project made possible inter-company industrial upgrading because It was looking for up to 75% integration with suppliers local and national). However, the project was suspended in 2015. STRUCTURAL

MRO

ELECTRICAL

MAIN PROCESSES CARRIED OUT ON MATERIALS AND STRUCTURES

COMPOSITE MATERIALS

Aircraft (airplanes) are made up of three fuselages: front, middle, and rear. The fuselage is the structure where the other parts of the plane are attached.

► Rear fuselage for the Global family aircraft for models 7000 and 8000 of (Bombardier) ► Stabilizers for aircraft, airplanes and helicopters (Bombardier)

They are located in the tail of the aircraft and serve to stabilize the flight.

► Flight controls (rudder, elevator and horizontal stabilizer) For example, for the Q400 family aircraft (Bombardier)

They are located in the cockpit, allow the aircraft to be directed, to be able to turn, ascend and descend.

► Landing Gears, both MRO and parts manufacturing (Safran) ► Engines (Safran)

Set of subassemblies, wheels, supports, shock absorbers and other equipment used by aircraft for takeoff and landing.

► Electrical harnesses and subassemblies (Bombardier)

They are equivalent to the nervous system of the aircraft, they comprise all the wiring that is used to connect, for example: from the air conditioning, up to the different types of signal ligths, plus connections reaching the engine.

► High precision machined, including various processes and operations (Bombardier) ► Laminate (Bombardier) ► Hard and soft machined, includes various processes and operations (Safran) ► Thermal processes (Safran)

It includes work on different parts and forgings, as well as the manufacture of small components such as structural parts, screws, fasteners, rings, etc., which are used to join the fuselage in different operations and sub-assembly processes (they have as base the metalworking industry).

► Composite Materials (Bombardier and Safran)

They are known that way, because they are formed by the union of two (or more) materials, such as carbon fiber and glass. In the case of Bombardier, they would be used in the manufacture of the fuselage of the Learjet 85. (Project suspended in 2015) In Safran's case, it will produce motor blades made of composite materials (the blades are the propellers that are installed in front of the engine turbines). This technology is new to the world and Safran chose UNAQ and Querétaro for it.

Source Own elaboration based on in situ interviews, Secretariat of Sustainable Development (SEDESU) and Engineering and Industrial Development Center (CIDESI), Queretaro

2. The Collaborative capacities to cover and attend to the technical aspects required by aeronautical companies and other industries in the state. This includes Conacyt’s R&D centers and testing laboratories related to the processes and products used in the aerospace industry.

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3. The creation of the UNAQ and the formation of the work profile required by companies at much lower costs than in their countries of origin. In short, incentives so that the decentralization and transfer of activities and segments of the GVCs of the companies that land in Queretaro are profitable and competitive. The signs of the presence of some type of industrial upgrading in the Aerospace Industry of Queretaro are presented within the large MNs (intra-company). On the other hand, despite the considerable influx of companies and investments, there are almost no signs of industrial upgrading between companies. The drag connections with local companies and suppliers have simply not been generated. This leads to question whether the set of support (state and federal) in science, technology, innovation, and infrastructure is subsidizing the arrival of FDI from MNs, with little or no intention to evolve productively, according to the segments (processes and products ) manufactured in Mexico. This debate has also been present, with the arrival of companies and automotive investments to certain locations (Audi, BMW, KIA, etc.), associated with the concessions granted by different governments for the installation and advancement of their productive activities.13 Historical investment in science, technology, and innovation (STI) in Mexico is four times less than that recommended worldwide. Although the current administration (2018–2024) promised not to reduce the budget and, if possible, to increase the allocated budget, the facts seem to go in another direction. In 2019, Mexico allocated 1.6% of its spending (91,400 million pesos) to STI, which represents a decrease of 0.6 percentage points from the expenditure made in 2018 (92,000 million pesos). This “small cut” turned out to be the largest in 7 years, affecting 97 scientific and technological research institutes to a lesser or

13 In the case of the Korean company KIA in 2014, the Nuevo León government offered a very aggressive incentive proposal to attract the company and take the plant from Durango. However, after the change of government, the new administration found various irregularities, and incentives that it considered exaggerated and disadvantageous, such as compensation for payroll tax of up to 20 years granted to the company when the law allows a maximum of 5 years. Similar cases have appeared in other states. Referred to in: https://www.sdpnoticias.com/nacional/2016/01/22/kia-amenaza-con-irse-de-nuevoleon-e-inclusive-de-mexico.

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greater extent.14 At the moment, the repercussions of these controversial decisions on the scientific and technological structure created in specific regions over 3 to 4 decades cannot be clearly discerned. In addition, the effects of the economic crisis associated with the COVID-19 pandemic will be present for several semesters. The current government seems to make a fairly polarized reading of the main winners of state and federal investments in STI, as well as the appropriation and generation of knowledge (by companies or for society). For the current administration, it is the large national private companies and especially foreign MNs that benefit greatly from the federal and state budgets in STI. Both the president and the director of the National Council for Science and Technology (Conacyt) have referred that multinational companies show investment rates in R&D much lower than in their countries of origin, which is true but it does not justify a budget reduction in STI. However, without getting into the debate on the relevance of the arguments and the punishment of the budget in STI, it should be noted that both the construction of scientific and technological infrastructure, as well as the development of industrial and labor expertise in any region/ country, implies a slow and complex process of development of learning capacities and knowledge.15 In this context, untimely blocking or limiting an important part of the collaborative forms created and decreasing investment in associated 14 In the last 20 years, Mexico has invested between 0.4 and 0.5% of its GDP in STI. While the “ideal” investment in STI, according to UNESCO international standards, should be 2.5% to 3% of GDP. Mexico invests annually only a quarter of the minimum investment required and a fifth of what is required worldwide. 15 On April 24, 2020, in a controversial intervention, the Director of Conacyt mentioned that during the “neoliberal” period, the government allocated more than 35 billion pesos to finance the development of innovation in private without positive results. In Mexico, unlike other countries, the private sector contributes only about 18% of the investment in STI. The director explained that since January 2020, and given the expected arrival in Mexico of the COVID-19 pandemic and in response to the presidential instruction, Conacyt summoned researchers from Public Research Centers and institutions such as UNAM and IPN, to coordinate the design and manufacturing of “100% mexican mechanical medical respirators” to serve critical COVID-19 patients throughout the country. The collaboration came from different public centers of Conacyt and the “solidarity” participation of several companies in the automotive and aerospace industry, among others. At that time, it was commented that the first 700 could be ready by the second half of May, which did not happen. Referred to in: https://www.conacyt.gob.mx/index.php/comuni cados/1265-com156-2020.

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programs and research centers (grants and stays, scientific programs, technological development, experimentation, and testing, etc.) could slow the progress, as well as the generation of local learning and knowledge. This can weaken the industrial cooperation and the triple helix links and vocations of specific regions, which have contributed to the formation of human resources and specialized productive profiles which just a few decades ago did not exist such as the aeronautical industry in Queretaro. In this sense, the low effects of endogenous spillover and the scarce connection of multinational companies with suppliers and local companies, especially SMEs, can cloud the scope of collaborative efforts and triple helix support, thinking that the winners are only on one side.16 This can become a too subjective and erroneous assessment, leading the current government to make hasty decisions about STI policy, with negative effects on the attraction and extension of investment projects in different segments of the GVCs of global companies, who may perceive a non-collaborative policy. It can even affect the possibilities of industrial and labor upgrading within the MNs companies, observed in certain profiles in the aerospace industry.

11.5 The Participation of Research Centers in the Triple Helix and Their Contribution to Boost Upgrading It must be emphasized that Queretaro has the largest number of public scientific and technological research centers related to R&D activities in the aerospace sector. These provide direct support in R&D activities in specific plants and segments to certain companies. It also has the Center for Advanced Technology (CIATEQ), which is the only testing laboratory in Latin America, and the National Center for Aeronautical Technology (CENTA), recently inaugurated in 2017, which will have the ability to work with composite materials. Queretaro has set up a triple helix linkage, collaboration, and support mechanism (university-industry-government ), which connects UNAQ 16 The person in charge of Conacyt did not comment that the vast majority of “solidarity” companies are foreigners MNs and that the Zodiac Aerospace company, whom they thanked for its collaboration within the exhibition, is a firm owned by the Safran Group, a French company who has invested nearly 1,000 million dollars in Mexico in the last 10 years (Samperio Sánchez, 2018).

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with research centers and companies. The mechanism has been functional as a collaborative form and is not present in this way in any other AI cluster in Mexico.17 By the end of 2018, Queretaro had 8 research centers, five of which were Conacyt centers. The most recent creation (CENTA) was designed ex profeso for the development of research and testing with composite materials for the aerospace industry. These centers are complemented by the infrastructure and capabilities of academic institutions such as the Aeronautical University of Queretaro (UNAQ), the Autonomous University of Queretaro (UAQ), the Technological Institute of Queretaro (ITQ), and the Aeronautical Conalep. The research centers that stand out are: 1. CIDESI: Center for Engineering and Industrial Development (Centro Conacyt) 2. CINVESTAV: Queretaro Research and Advanced Studies Center, IPN (Conacyt Center) 3. CIDETEQ: Center for Research and Technological Development in Electrochemistry (Conacyt Center) 4. CENAM: National Metrology Center 5. CIATEQ: Advanced Manufacturing Centre. Within CIATEQ operates the Aeronautical Testing Laboratory (Conacyt Center) 6. CAT: High-Tech Center, UNAM 7. CICATA: Research Center in Applied Science and Advanced Technology, IPN 8. CENTA: National Center for Aeronautical Technology of Queretaro. Construction began in 2015, the final budget was 120 million pesos, opened in 2017 (Conacyt Center).

17 The Advanced Technology Center (CIATEQ) specializes in the development of processes and products in manufacturing. It has more than 500 employees and specialized infrastructure: computer-aided engineering software, manufacturing and machining workshops, measurement equipment, laboratories of certified service, and concurrent engineering and virtual reality rooms that facilitate multidisciplinary interaction for the realization of remote projects. The technological offer can cover the needs of different industrial sectors: automotive, auto parts, aeronautics, hydrocarbons, energy, water, food, electrical appliances, communications and transport, and machinery and equipment, among others.

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The importance of developed infrastructure and institutional and academic helix participation (UNAQ + research centers + international airport + industrial parks) appears to be associated with the flows of FDI flowing into the state. From 2009 to 2015, Queretaro received about 52% of the FDI that arrived in Mexico linked to the aerospace sector. It is also the state with the highest resources received by the Conacyt incentive program for innovation (PEI). It participated in 1 of every 5 projects and received 1 of every 4 million pesos allocated to the aerospace sector among the participating states (Table 11.2).18 In interviews with key agents of the aerospace sector in Queretaro (Samperio Sánchez, 2018), I asked about the collaboration that exists between UNAQ, research centers, and AI companies. The answers, to a greater or lesser extent highlighted the formation of a type of triple helix in the entity (universityindustry-government ), which gave a distinctive character to the cluster in Queretaro, regarding what is observed in a productive and labor sense in other states.19

11.6

UNAQ’s Evolution and Participation in the Triple Helix and Its Contribution to Boost Upgrading

Just over a decade after Bombardier arrived in Queretaro (2006–2019), the education and research profile associated with the aerospace industry in the state has been consistently expanded. In this regard, it highlights the collaboration of the Aeronautical University of Queretaro (UNAQ)

18 The incentive program for innovation (PEI) was established in 2009. The objective of the program is to contribute to promoting scientific and technological education as an indispensable element for the transformation of Mexico into a knowledge society, starting with the generation of Research and Technological Development in projects related to industry and companies. Referred to in: http://www.siicyt.gob.mx/index.php/u003-pro grama-de-estimulos-a-la-innovacion. 19 The comments and quotations in this and the following sections come from a set of interviews that were conducted in situ between May and June 2017. The interviewees were: José Antonio Velasquez (Aerocluster Coordinator), Gabriel Lemus Lara (Deputy Director of TSU Programs at UNAQ), and Luis Lizcano (Director of FEMIA), among others (Samperio Sánchez, 2018).

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Table 11.2 Projects and amounts of the PEI fund allocated to the aerospace sector (Projects undertaken and amounts allocated: 2009–2015) Projects

Querétaro Baja California Chihuahua Nuevo León Jalisco Sonora CDMX (DF) Oaxaca Coahuila San Luis Potosí EdoMex Guanajuato Puebla Tlaxcala Aguascalientes Zacatecas Nayarit Hidalgo Total

Amounts

Number

Participation (%)

Millions pesos

Participation (%)

29 25 16 16 8 9 10 6 6 3 3 2 1 1 1 1 3 1 141

20.6 17.7 11.3 11.3 5.7 6.4 7.1 4.3 4.3 2.1 2.1 1.4 0.7 0.7 0.7 0.7 2.1 0.7 100.0

162 104 83 81 67 61 28 17 16 14 11 10 7 3 3 3 3 1 674

24.0 15.4 12.3 12.0 9.9 9.1 4.2 2.5 2.4 2.1 1.6 1.5 1.0 0.4 0.4 0.4 0.4 0.1 100.0

Note PEI: Incentive program for innovation, Conacyt Source Own elaboration, based on AeroPEI with data from Conacyt, 2015 and 2016 and UNAQ 2017

and the scientific and technological research centers with the companies located in the cluster.20 The linkage, collaboration, and importance of UNAQ in the triple helix, and its contribution to the formation of the aerospace cluster in Queretaro appear in the statistics. Since its inauguration in 2009 and until the end of 2018, nearly 8,000 professionals associated with the aerospace industry had undergone education and training processes at UNAQ. 20 The aerospace takeoff in Queretaro is associated with the start of Bombardier production in May 2006. From 2006 to 2019, Bombardier invested more than 550 million dollars in the state. It currently has about 2000 employees and around 90% of them (1800 workers) were trained at UNAQ. Referred to in: https://www.liderempresarial. com/bombardier-el-parteaguas-de-la-aeroindustria-en-el-bajio/.

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It should be noted that UNAQ was created at the explicit request of Bombardier, who served as the anchor company for aerospace production activities in the state. For its arrival, Bombardier made an agreement with the government of Queretaro, the need to create an aeronautical training center for workers. This training requirement was initially met at the University of Technology of Queretaro (UTQ), through the establishment of the intensive training program for the aerospace industry (PEIA) which began on January 9, 2006. PEIA intended to train labor for electrical and structural assemblies, which would be the activities that Bombardier would develop when arriving in Mexico. The PEIA program was followed by a training program for work (PFT) and subsequently by a training program for novel composite materials (NMC). The latter involves segments with higher added value, expertise, and training, associated with Learjet aircraft— particularly the Learjet 85—project that would become the pride of AI in Mexico because it would allow greater integration of local suppliers, however, it was subsequently suspended.21 As the activities and requirements of the IA in Queretaro progressed, it became necessary to create a specific university. The decree for the creation of UNAQ was published in November 2007 and the facilities were inaugurated in January 2009. The financing received by UNAQ was 100% public (50% federal and 50% state), with an estimated investment of 530.6 million pesos, and about 39.3 million dollars at the current exchange rate (13.49 pesos/USD). In its early days, the UNAQ campus would advance to serve three thousand students in all modalities, from the training programs for work requested by aerospace companies (basic technical training) to the profiles of senior university technicians (TSU), engineering, and post-graduate. However, the productive and labor expectations, associated with the evolution of the cluster and the location of investments and companies in Queretaro, were clearly exceeded. With the installation of Bombardier, some companies associated with its supply line arrived (Aernnova/Spain and Safran/France), and as more investments and companies arrived, the UNAQ project was consolidated. For this, both federal and state support was important, as well as the

21 On the arguments and rumors that arose from the suspension of the program Learjet 85, see: Samperio Sánchez (2018).

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development of infrastructure (industrial parks and international airports) and the creation of the UNAQ itself. The considerable wage gaps that exist between countries in the aerospace industry, concerning the work profile in the different segments (processes and products) that are developed in Queretaro should also be mentioned. This has proven to be functional for the strategies of MNs seeking to transfer or decentralize part of their manufacturing from their GVCs to more competitive emerging markets. Bombardier’s own vice president of manufacturing at the time (Real Gervais) commented that one of the central reasons for the company to settle in Queretaro: “it was very competitive for the aerospace industry to do business from Mexico.” For them, the country not only offers advantages in the sense of labor costs but also enables industrial transfer and competitive location with previous experience in automotive and metalworking manufacturing. Furthermore, the NAFTA structure makes it possible to lower costs and shorten transport times from Queretaro.22 Bombardier’s arrival led to the formation of UNAQ, and the growth and consolidation of UNAQ, allowed aerospace companies to extend and update their activities to other segments (processes and products ) in Mexico. Regarding the forms of collaboration and participation in the triple helix, it should be noted that more than 20 aeronautical projects have been presented in Queretaro in which UNAQ has participated directly. The best-known project is associated with the creation of the Franco-Mexican platform within the UNAQ campus, where part of the capital was a federal contribution, another was from the state and another was granted by the French government.23 22 Real Gervais retired in 2012, after thirty-three years of collaborating with the aerospace industry. Referred to in: https://www.elsiglodetorreon.com.mx/noticia/406 613.Queretaro-centro-aeronautico.html. 23 When Bombardier arrived in Mexico, it came to work with lower segments (processes and products ) and did not plan to evolve toward the manufacture of a complete aircraft in the short term. Mexico needed to build three pillars to advance in that direction: (1) Consolidate the educational system to generate professionals at the sector level and expand research centers linked to AI (UNAQ and the recent creation of CENTA operate in this sense). (2) Strengthen and create adequate infrastructure for the optimal development of aeronautical production (numerous industrial parks have been created in addition to the Queretaro International Airport), and (3) Ensure that the Mexican Aerospace Industry interacts with the leading countries and improves on issues regarding regulations and certifications of production and the aerospace MRO. Progress here is slow and marginal since although the BASA agreement with the United States has been signed, it operates in

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The triple helix collaborative form in this case (university-industrygovernment ) resulted in a bilateral agreement signed at the highest level by the governments of the presidents of Mexico (Enrique Peña Nieto) and France (Francois Hollande) in April 2014. The agreement seeks to train the technical staff of UNAQ to the same level that exists in Europe, seeking that graduate students can be hired without any inconvenience by French companies established in Queretaro and Mexico. This reinforced the arrival and extension of the productive activities of European and French companies such as the Safran Group, Airbus Helicopters, and everything related to Snecma engines.24 The attraction and arrival of companies and investments and the formation of a functional and competitive cluster have been powerful incentives for the growth of UNAQ’s annual budget and the public sector’s investment in AI-associated infrastructure in Queretaro. This leads us to reflect on the role of universities (limits and scope) in the success of the triple helix collaborative model. It should be remembered that Queretaro competed against other states such as Baja California, Nuevo León, and Chihuahua for the arrival of Bombardier. In this regard, the rector of UNAQ (Jorge Gutiérrez de Velasco) who was present in the negotiation with Bombardier for his arrival in Queretaro, points out that the university has become one of the promotion axes of the state and the region. It has contributed to Queretaro becoming the main recipient of aerospace investments in a decade (more than 1,700 million dollars as of 2017) and has directly served and collaborated in more than 20 investment projects with companies in the aeronautical sector. One of the challenges will be not to depend on subsidies from the public sector for its operation and to move toward self-sufficiency in an increasing percentage. In 2017, UNAQ’s own income represented around 22% of the annual budget, and it intends to advance along that route anticipating any political change. a very limited and asymmetric way. The General Directorate of Civil Aeronautics (DGAC) of Mexico is completely subordinate to the regulations and certifications of the United States Agency (FAA), and agreements with Europe or Asia are still absent. 24 In September 2015, the aeronautical teaching laboratory was opened, as part of

the Franco-Mexican campus at UNAQ. This space has workshops and laboratories similar to those of companies in the industry and operates through strategic alliances with the aeronautical sector and the Mexican and French governments seeking the training of professionals: Technical Baccalaureate (TB) and University Superior Technician (TSU). Referred to in: http://www.unaq.edu.mx/.

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Another reflection of the collaborative progress between the propellers is the one that led to the formation of the Aerocluster of Queretaro (ACQ), where Safran Group is a founding partner. The ACQ is distinguished by the diversity of activities and segments (processes and products ) that companies work in the region. Other Aeroclusters are mainly engaged in manufacturing or basic assembly, something similar to maquila in the aerospace industry. While in Queretaro, in addition to working in manufacturing and harnesses, companies work mechanized, heat and chemical treatments, composite materials, and MRO services. According to the ACQ coordinator, this diversity is not found in any of the other AI clusters in Mexico: “This does not exist in Tijuana or Chihuahua, which are much larger.” In the ACQ companies, not only activities of various segments are carried out, but more than half of the qualified personnel working in the aerospace industry went through training processes at UNAQ. That is the level of participation and importance of the university in collaborative triple helix relationships. For engineer Gabriel Lemus Lara, responsible for the training processes of University Superior Technician (TSU) at UNAQ, the importance of the university for the advancement of the cluster is associated with its participation in worker templates of certain companies, which serves as a mechanism that contributes to attract and train talent. Thanks to UNAQ, companies no longer have to invest as much in the training and qualification of their staff which saves them a lot of money. Specialized training helps correct faults present in the production lines, improving process efficiency, product quality, and production costs which generates confidence in Aerocluster companies. Similarly, with the arrival of the electronics industry in Jalisco in the 1990s (Dussel Peters, 1999; Dussel Peters & Palacios Lara, 2004), a profile of engineering graduates, that electronic companies did not require at that moment, was created. The companies were almost exclusively looking for labor to work in lower segments, so institutional efforts created profiles that ended up unemployed, generating incentives for the migration of trained professionals to other destinations within and outside of Mexico. This caused discouragement in the government and a debate in the academy about the level of support for the training of workers. In on-site interviews, I asked if something similar could happen in the AI in Queretaro. In this regard, the head of TSU programs at UNAQ highlights: “One of UNAQ’s successes is that it has grown together with aerospace industry (AI). A study was carried out 10 years ago of how

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other aeronautical industries in the world did it, talking about Wichita, for example, or Toulouse … or how these large Aeroclusters had grown.” “The study detected strengths and weaknesses. Among the virtues, it found that there was no point in putting himself ahead of the needs of the industry. In other words, if UNAQ had opted for engineering or postgraduate studies 10 years ago, surely we would have had many graduates but few with jobs because the AI did not need them at that time. This is one of the successes of UNAQ, getting grown together with AI, not before. When the industry begins to require more skills, higher levels of education, the UNAQ comes in and does it. In other words, the UNAQ is very flexible, it quickly begins to adapt to the needs of the industry. We have approved methodology to detect business needs. This is where UNAQ has been a factor in attracting talent and resources and has been able to adapt and meet industry expectations. Right now we can say that we are already in the third stage. This stage already has to do with design and technological development, and that is where our graduate engineers are already beginning to succeed, and even post-graduate students, but 10 years ago these profiles did not make sense.” The triple helix bond and collaboration appear to have achieved a functional form in AI in Queretaro. More than 10 years ago, skilled labor and personnel were needed for minor jobs and requirements linked to Bombardier harnesses and structural assemblies. To meet these needs, the intensive training programs for the aerospace industry (PEIA) and training for work (PFT), basically aerospace maquila, were adequate. However, from 2011 to 2012, AI companies in Queretaro began to require higher university technicians (TSU) and to have more clarity about the engineering needs to be developed for certain segments. For 2017, the TSU and Engineering programs were consolidated, and it was envisioned that the aeronautical labor needs associated with specific post-graduate courses could gradually increase. According to the Deputy Director of the TSU program at UNAQ, the needs of the cluster are constantly monitored. There are talent attraction weeks where the main companies come to hire young students and graduates. This allows the university to clearly detect the segments (processes and products ) that need to be served and the evolution of the profiles they demand. In this order of ideas, the design and updating of UNAQ’s programs conform to the specific requirements of companies in time and space; it is a form of collaboration where companies lead the chain hierarchically.

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According to the interview, the main input to improve and develop the curriculum at UNAQ is the situational analyses of the work that has to do with the needs and requirements of companies and what they suggest. These are reviewed with representatives of the Ministry of Labor of the State and with professors and researchers from UNAQ. From a critical perspective, this form of triple helix collaboration can be associated with a certain degree of subordination of the UNAQ and the government to the productive needs and requirements of the companies to locate in Mexico. However, in the context of decentralization and transfer of GVC segments from different industries to emerging regions and given the high unemployment in many regions of Mexico and the world, the triple helix collaborative form allows less disconnection between supply and demand in the labor market by satisfying specific needs and requirements of the firms. As we highlight, in a competitive sense, subordination and dependency are also associated with the huge salary differences that AI has in different countries. This is a powerful incentive to decentralize and transfer specific segments and activities to cheaper emerging countries and regions, provided they have or develop the right infrastructure and work profile. In the case of Queretaro, the development of infrastructure and the training of labor have allowed the attraction of investments, the expansion of production, and the increase of exports, mainly promoting a specific type of industrial upgrading (intra-company). However, if aeronautical growth is to be achieved with interconnection effects with suppliers and local companies (inter-company), it seems necessary to build other negotiation strategies with MNs. In this context, from the beginning of the attraction of projects, ways should be sought that make it possible to improve the integration of local companies and suppliers, seeking industrial and labor upgrading processes not only intra-company, but also inter-company with greater local spillover effects. Table 11.3 summarizes the face-to-face work associated with the evolution and training profile of UNAQ and shows updated figures based on data and reports from the university’s institutional page. The total number of graduates includes technical training courses for work (company employees), as well as personnel with higher training (TSU + Engineering + Post-graduate). Since its foundation and until mid-2019, an estimated 8,000 people trained and graduated from UNAQ. This includes the initial programs associated with Bombardier (PEIA and PFT), training courses for work

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Table 11.3 UNAQ: evolution in the training pattern and graduates, 2006– 2019 From 2006 to 2019 about 6,500 people have gone through different training programs for work in AI

Announcement of the arrival of Bombardier Octuber 2005

First training at UTEQ Training program for AI PEIA (harnesses, assemblies electrical and structural) January 2006 First templates of bombardier workers Operations begin May-June 2006

2005-06

Decree Creation of the UNAQ * November 2007

Aernnova company arrives

2007-08

Opening of facilities from UNAQ January 2009 Public Financing: 530.6 million pesos (50% Federal and 50% State)

As of 2019, it was estimated about 1500 graduates of TSU and Engineering of the (UNAQ)

Total personnel trained to work + TSU + Engineering = 8000 specialists in 11 years.

UNAQ Superior Training ** TSU (80%) : 2 years Engineering (20%): 4 years

TSU and Engineering are consolidated Post-graduated courses begin

Basic training for work Aprox. Monthly Salary 3-6 month duration TSU: 8,000 - 15,000 MXN / Month ENG.: 18,000 - 25,000 MXN / Month (according to the requirements of the company) Bombardier: 3 months at UNAQ Advancement of TSU and Engineering profiles plus 1 month of practice in the plant

2009-10

2011-12

2013-14

There is technical and educational advancement to work with composite materials and NON-destructive tests

2015-16

2017-18

2019-2020

Source Own elaboration based on interviews (Deputy Director of TSU at UNAQ, Director of CEDIA and Coordinator of Aerocluster), May–June 2017 The update of the data to 2019 was obtained from the UNAQ page and from publications in the specialized press. See: https://www.unaq.edu.mx/noticias/ *The decree for the creation of the UNAQ is promulgated in November 2007 and the facilities are opened in January 2009 **The initial careers were: University Superior Technician, originally in Avionics (TSUA) and Aeronautical Engineering in Manufacturing The offer has been expanded to three specialties at TSU and three in engineering The professional offer is adjusted and updated with the active participation of companies, government institutions and UNAQ (Triple Helix)

(basic training), and graduates with formal studies (TSU and Engineering) which add up to 1,629 as of March 2020 (80% TSU and 20% engineering). The generation that graduated in March (2020) shows a change in these average proportions, which appears to be linked to a certain industrial and labor upgrading of intra-company productive activities in key multinationals. Of the 129 graduates, from March 2020, 79 correspond to TSU (61%), 49 to engineering (39%), and 1 to post-graduate. UNAQ has become the hotbed of labor for the different segments (processes and products ) of AI worked in Queretaro. So far, most of the personnel trained at UNAQ continue to be those with basic training for the job. This is a training requested expressly by the companies that last between 3 and 6 months depending on the requirements of each firm. At Bombardier, for example, during the job training and education programs that follow the recruitment and selection process, the worker

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spends 3 months of training at UNAQ, plus 1 month of practice at the plant (4 months in total). This basic training is far from the 2 years that the TSU training requires and the 4 of aeronautical engineering. The advancement of profiles with higher training requirements at UNAQ presents a slow evolution over time. Table 11.3 highlights how the demand for the Higher University Technician (TSU) profile began to increase in 2011–2012, reaching 1,279 graduates as of March 2020, while in 2013–2014, the demand for engineers began to increase, reaching 349 graduates as of March 2020. It should be noted that these would only be engineers who graduated from UNAQ. In the fieldwork and during the visit to the Safran plant in Queretaro, one can find engineers linked to AI companies from other entities in the country, mainly from universities in Mexico City. The triple helix collaboration in AI in Queretaro is evident, although this implies an exercise of subordination and hierarchy. The UNAQ rector himself serves as the secretary of the ACQ. This helps to a large extent the existence of different collaborative agreements, but always adhering to the job profile and the needs demanded by the main aeronautical companies. At the same time, due to the complexities associated with the production, certification, traceability, and safety of aeronautical activities in the world, multinational companies often bring their own line of suppliers from abroad. This significantly reduces the integration possibilities of local companies and suppliers, especially SMEs. However, in a positive sense, UNAQ can win by receiving technological support through donations of aeronautical equipment and improving its infrastructure in laboratories, machinery, and equipment. This allows another level of “linkage” (collaboration and support), which enhances learning and technical training capacities through practice which do not exist in other universities and industries. According to the head of TSU’s programs at UNAQ, some of the existing agreements involve training, donations, and investment: “We recently received a donation of a complete CFM56 engine from the Safran Group, and that engine costs around 10 million dollars. The idea for us is that there is not such a great gap between preparation in college, and what companies require and demand as it happens in other industries. It is a fact that UNAQ has been a milestone in enhancing the profile of the workforce. As soon as an aeronautical company arrives in Queretaro, we approach to sign an agreement with them. This agreement serves as a framework, it is a general agreement and from it, specific agreements on

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donations, courses required by the company, etc. are derived. Then, we (UNAQ) provide the associated part to training for the technical staff of the company, while the company rewards us with a donation of material, even with some equipment that they themselves currently use looking for a win–win relationship. For me, it is a very virtuous circle and everyone wins all the time.” The triple helix aligns with the requirements and needs of aerospace companies, while the donations of materials and equipment contribute to developing and expanding the learning capacities of the workforce at UNAQ, which enhances some type of labor upgrading. The same director of the TSU program emphasizes: “If a certain company comes and tells us—for example, TechOps company—, I need a course on air conditioning systems for the 737 aircraft. Then the UNAQ develops that course, certifies it with the aeronautical authority and finally teaches it to the staff. And I have to tell you that we have seen the needs of the companies that arrive evolve, they require more and more complex courses, and the UNAQ adapts to the needs of the industry.” It is highlighted then, that UNAQ collaborates directly in the triple helix and that companies make it participate. Even companies can request certain job profiles to work in higher segments (processes and products ). However, this seems to occur only if companies require it as part of their corporate and competitive strategy associated with productive decisions between parent companies and subsidiaries. As an example, I can highlight the collaboration (university-company-government ), which was configured to meet the requirements associated with the composite materials segments that are planned to work at Safran’s sixth plant in Queretaro. Safran will invest 74–100 million dollars in this plant and it will be located in the Queretaro Aerospace Park (PAQ). The UNAQ will be responsible for training the workforce estimated at 500 workers, and the national center for aeronautical technologies (CENTA-Conacyt) which has federal investments of about 120 million pesos will collaborate by carrying out research and testing associated with composite materials. This is a clear example of intra-company industrial and labor upgrading

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that can be associated with triple helix collaborative work, beyond the asymmetries that the relationship may have (Samperio Sánchez, 2018).25 On this fact, the Deputy Director of TSU highlights in an interview: “I don’t know if you already know it, but Safran Group has a very interesting project regarding a sixth plant in Queretaro, where it will produce motor blades with composite materials (the blades are the propellers you see in front of the engine turbines). This technology is new to the world and Safran chose to partner with UNAQ for this. The collaboration implies a very strong investment from both Safran and the state and federal government to carry out the development of this technology in Queretaro.” This confirms what I have pointed out: Triple helix collaboration has favored and promoted intra-company industrial upgrading in specific multinationals, rather than inter-company industrial upgrading, associated with greater backward spillover effects. This is due to the low connection and participation of suppliers and local companies. In general, the propellers of the university and the government help to promote the competitiveness and exports of large MNs, who take advantage of the institutional support network, the personnel trained at UNAQ and the level of labor costs to increase and expand their production. On the other hand, the endogenous spillover effects that are appreciated are concentrated in the development of infrastructure and new job profiles. Once again, I highlight the advancement in learning capacities in science, technology, and innovation (STI), associated with the creation of UNAQ and related research centers (CENTA), along with the construction of industrial parks and the international airport. On these foundations, at least in Queretaro, there seems to be the intention of some companies to include and/or scale a part of their activities toward segments (processes and products ) with higher added value in some of their plants. 25 The Aeronautical Technology Center (CENTA) inaugurated in January 2018 has federal investments of 120 million pesos and is part of the collaborative process (universitycompany-government). The center enables and enhances the industrial upgrading process within large multinational companies (Intra-company) (Samperio Sánchez, 2018). The center is associated with composite materials testing, certification, and research, and it is planned to evolve to develop research and non-destructive testing on aluminum and other materials. Unlike the test laboratory project (CIATEQ), it is intended that CENTA can develop more applications for engineering. Referred to in: http://eleconomista.com.mx/ estados/Queretaro/2014/12/18/Queretaro-sumara-cinco-centros-investigacion.

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In Queretaro, the aerospace sector has occupied an important place in development programs at the state level since the arrival of Bombardier. Governments have worked together not only to attract FDI, but to create universities and research centers that really work, and from their perspective, can provide and manage the human capital needs of companies. For the ACQ coordinator, the triple helix is real and palpable: “The triple helix works… when investors come to Queretaro and ask “where are the companies?” We answer that they are within a radius of 2 kms, while 1 km away is the international airport, while the research center and the university (UNAQ), and the Aerocluster (ACQ) are located within the university campus.” For the deputy director responsible for the formation of the TSUs at UNAQ, the triple helix also works and operates perfectly in Queretaro. He puts as an example an upcoming meeting on his agenda, where there will be people from Safran, government representatives, union representatives, and university staff. The meeting seeks to consolidate the professional stay plan for graduates of the TSU programs in the Safran Group companies in France. From his vision, the triple helix is totally collaborative, a win–win for all: “Safran wins with our graduates, we (UNAQ) win by sending them abroad, governments wins because the numbers stand out. This is the kind of collaborative meeting that we have, we just need to consolidate the funding and it is not much. Great things have been done at UNAQ and in aeronautic industry of Queretaro, and I cannot find one that has not been shared between the triple helix.” Finally, the UNAQ does not ignore the almost null integration of local companies and suppliers in the GVC of the cluster and the limited backward spillover effects. Although they declare the situation in a positive sense, there does not seem to be a possible way in the short term to improve that. In interviews at UNAQ and ACQ, the need to generate a specific area of support for local non-aeronautical companies interested in joining the aerospace GVC was mentioned. From his perspective, it would be a first step toward building the necessary capabilities to join the supply line in some of the GVC segments (initially in lower segments). In this sense, some business projects of UNAQ graduates stand out, who have taken advantage of the knowledge acquired in the companies of the sector and the needs detected. However, due to the productive characteristics of AI (high mix—low volume), investment amounts, and the required certifications, the integration examples are few and are associated with lower segments. One of

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the best-known success stories was Mobateck, which achieved sales of one million pesos and production of up to 26 pieces per year. However, the company left the venture and the market in 2017. This corroborates the observations associated with the fact that the possibilities of integration of local SMEs with the arrival of multinationals are very limited, occur in low value-added activities, and are generally of short duration.26

11.7

Conclusions

The model of the triple helix proposes a movement toward collaborative relations between institutional areas, seeking that “innovation policy” is increasingly the result of interaction and not a recipe for the government (Etzkowitz & Klofsten, 2005). Each institutional area must also position itself in the role of others, seeking the generation of infrastructure of knowledge in terms of overlapping institutional spheres where, while the university “can” carry the baton in innovation, each participant takes on the role of the others, and emerging hybrid organizations exist in each of the interfaces. However, as has been highlighted, the formation of participants and the presence of collaborative university-industry-government models, often present different degrees of asymmetry and hierarchical governance, as in the case of AI in Queretaro, where the guidelines are established by multinational companies based on their requirements and interests in the 26 Mobateck is the name of the first entrepreneurship project promoted by UNAQ, with one of its graduates with an aeronautical engineering degree in manufacturing. The SME was created in September 2013 and in less than two years; it was a supplier to one of the most important companies in the sector (Aeromexico and the Delta/TechOps maintenance center) to later become a supplier to Airbus Helicopters. It manufactured support bases to carry out the repairs. The bases are used, for example, to lower and support an aircraft wing or stabilizer, so that the operator can safely manipulate the component. In 2014, it achieved sales of 1 million pesos and produced 26 pieces. In the beginning, the company had no employees or partners and the founder handled purchasing, engineering, and negotiations with clients. The manufacture, welding, and painting of the bases were carried out through other suppliers. UNAQ provided support by signing a collaboration agreement with the entrepreneur and giving him technical and legal advice, in addition to connecting him with the companies he works with. However, in 2017 and after 4 years of collaborating with TechOps, the entrepreneur ended the Mobateck cycle—to according to a press interview—undertake an ISC-TECH microcompany project that he considers more robust. It offers engineering solutions for various industries, not just aeronautics. Referred to in: https://www.eluniversalQueretaro.mx/org ullo-queretano/orgulloqueretano-unaq-me-ayudo-trabajar-en-grande-miguel-bribiesca.

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context of decentralization and transfer of segments of global value chains (GVCs). On the other hand, the triple helix model highlights the importance of the evolution of innovation systems at the same time that it allows the discussion of the conflict around the paths that the relations between university and company should take, seeking that they land in institutional arrangements. This is consistent but, from certain points of view, it generates a heated debate associated with the functionality of public sector investments and the promotion and support of certain industries since the infrastructure and scientific research centers—given the initial weakness and the lack of competition from local companies and suppliers—end up being exploited mostly by multinational companies, as highlighted by the AI in Queretaro, where the type of Industrial upgrading that occurs does not enable irrigation connections between companies and backward but occurs within certain segments and activities within companies (intra-company). The triple helix relations, both nationally and multi-nationally, are a key component in the innovation strategy. The development of technology is one of the fundamental interests of universities in the application of knowledge (praxis) and the training of human resources. It is clear that it should not be centralized since it may lose its “guidance” and become an obstacle between linkage projects. However, care must be taken not to over-idealize the form of collaboration (university-industry-government) because there will always be conflicting goals in orientation. While the university may be interested in developing academic activities that generate sources of funding (public and private) for projects and research, the company is primarily interested in the economic performance (profitability/security/protection/patents) that research can generate; this can move significantly away from regional objectives from the institutional sphere for development and vision for a given industry in a region. For example, increasing the participation content of local suppliers and companies in the AI GVC in Queretaro, and causing greater endogenous irrigation effects when, in the sense of profitability, expertise, and strategy (parent/subsidiary), this may not be functional for companies. Based on empirical and research work in the development of AI in Queretaro, the triple helix relationship is far from a symmetrical relationship “where the university carries the baton and is the basis of innovation and knowledge.” In the idealized vision of the triple helix, regarding

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the spillover effects of the creation of collaborative knowledge, it would be thought that they would land for greater local and social benefit, which does not seem to be an adequate explanation for what happens in Queretaro when you think of patents and appropriation of knowledge by companies. Understanding the asymmetry and complexities involved in the alignment of interests in the collaborative field, the triple helix model represents a normative and strategic paradigm, which can be adopted by certain countries in the context of the decentralization and transfer of GVC segments to specific regions. From this perspective, knowledge and learning capabilities are produced collaboratively by the three propellers. Linking and collaboration could enable and enhance endogenous regional growth and development, since, as the triple helix model highlights, innovation, and competitiveness have originated mainly from the existence of such interrelationships (university-industry-government ) in different industries. However, the possibility of influencing the formation of some type of triple helix with greater industrial and labor upgrading depends largely on the type and quality of the agreements and negotiations promoted by the federal/state governments to different levels, with the multinational companies who lead the GVCs in specific regions, seeking that the progress of the cluster is not totally subordinated to the guidelines and strategies (corporate and competitive) of the multinationals, and their parent/subsidiary relationships. In emerging countries such as Mexico, it is important that the productive/institutional configuration, when negotiating with global MNs, allows for networks and strategic alliances between large and small local companies with academic research groups, research centers, and universities that allow the construction of a collaborative triple helix model that is more inclusive and less asymmetric resulting in greater endogenous spillover effects. On the level of participation of UNAQ and the research centers in the gestation of a collaborative form of triple helix in Queretaro, I emphasize that collaboration (university-industry-government ) has favored and enabled mostly an industrial upgrading within multinational firms (intra-company), and not between companies (inter-company) with local suppliers (the great failure so far).

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This is partly associated with the productive complexity of AI (low volume-high mix), as well as the certification, investment amounts, security, and traceability that involve the processes and products in the different segments, as you move up in the GVC, which establishes enormous barriers to the integration of local companies and suppliers. In this context, the expansion and growth of aerospace production and exports in Queretaro and Mexico do not promote industrial linkages with local companies. What is observed is that the large firms of the cluster take advantage of the installed infrastructure, research centers, and the formative advancement of the local workforce (UNAQ), to advance the segments (processes and products ) they produce locally, promoting certain industrial upgrading within the company (intra-company), always in the context of the CGV’s parent/subsidiary strategy. However, the collaboration and existing linkage (university-industrygovernment ) has allowed configuring a scientific research structure and theme parks, as well as a labor profile, and the creation and consolidation of a university specialized in aeronautical topics, unique in Mexico and Latin America (UNAQ). The work generated at UNAQ is associated with a formative and professional profile and expertise, which did not exist just a decade ago, which is one of the most prominent aspects of regional evolution and endogenous progress. Finally, while manufacturing processes predominate in AI in Mexico, Queretaro is distinguished by having the only university with training expertise in aeronautical subjects (UNAQ), along with the largest number of public scientific research centers related to R&D activities in the aerospace sector, which is associated with the advancement of activities of greater expertise and added value in certain segments within the major global firms and the increase in higher-skilled and better-paid jobs in such cases.

Bibliography De la Garza Toledo, E. (2014, July–December 2014). Labor relations strategies of large corporations. ILO, Plaza and Valdes. Dussel Peters, E. (1999). La subcontratación como proceso de aprendizaje: el caso de la electrónica en Jalisco (México) en la década de los noventa. Cepal.

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Dussel Peters, E., Palacios Lara, J. J., & Gomez, G. W. (2003). The electronics industry in Mexico: Problems, perspectives and proposals. DR University of Guadalajara. Dussel Peters, E., & Palacios Lara, J. J. (2004). Conditions and challenges of electronics in Mexico. NYCE. Dutrénit, G. (2010). The Mexican national innovation system: Institutions, policies, performance and challenges. Metropolitan Autonomous University (UAM). Dutrénit, G. (2015). Innovation policies to strengthen advanced manufacturing capabilities in Mexico. Ernst, D. (2001). Global production networks and industrial upgrading: A knowledge-centered approach (No. 25). East-West Center. Ernst, D., & Kim, L. (2001). Global production networks, knowledge diffusion, and local capability formation: A conceptual framework (No. 19). East-West Center. Espinoza, R. O. (2011). Evolution and complexity in the development of productive chains in Mexico. The challenges of building the aerospace cluster in Queretaro. Esser, K., et al. (1994). Systemic competitiveness. International competitiveness of required companies and policies. German Development Institute. Etzkowitz, H., & Klofsten, M. (2005). The innovating region: Toward a theory of knowledge-based regional development. R&D Management, 35(3), 243– 255. Etzkowitz, H., & Leydesdorff, L. (1995). The triple helix-university-industrygovernment relations: A laboratory for knowledge-based economic development. EASST Review, 14(1), 14–19. Etzkowitz, H., Webster, A., Gebhardt, C., & Terra, B. (2000). The future of the university and the university of the future: Evolution of ivory tower to entrepreneurial paradigm. Research Policy, 29(2), 313–330. Etzkowitz, H. (2008). The triple helix. Innovation in action. Routledge. Gereffi, G., & Kaplinsky, R. (2001). Introduction: Globalisation, value chains and development. IDS Bulletin, 32(3), 1–8. Gereffi, G. (2001). Productive chains as an analytical framework for globalization. Development Problems. Latin American Journal of Economics, 32(125). Ibáñez, R., & López, C. (2006). The aerospace industry in Europe: Technological innovation and productive reorganization, EU-Mercosur industrial laboratory project (Sectoral Reports). http://www.sindlab.org/download_up/aeroespac ialEuropa.pdf Kaplinsky, R., & Morris, M. (2000). A handbook for value chain research (Vol. 113). Institute of Development Studies, University of Sussex. Llisterri, J. J., & Pietrobelli, C. (2016). Regional innovation systems in Latin America.

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Luter, R. R. (2003). Regional innovation systems: Background, origin and perspectives. Convergence Journals of Social Sciences (33). Messner, D. (1996). Latin America towards the world economy: Conditions for the development of systemic competitiveness. Duisburg Peace and Development Institute. http://www.fes.cl/prosur/prosur96-0.html Messner, D., & Meyer-Stamer, J. (1994). Competitividad sistémica. Pautas de gobierno y de desarrollo. Nueva Sociedad, 133, 72–87. Montecinos Paniagua, C. (2015). Regional Innovation Systems (SRI): The impact of regional public cooperation and financing on the innovative initiative of enterprises. Navarro Arancegui, M. (2007). Regional innovation systems in Europe: A literature with clearings. Porter, M. E. (1996). Competitive advantage, agglomeration economies, and regional policy. International Regional Science Review, 19(1–2), 85–90. ProAéreo. (2012–2020). Strategic Program of the Aerospace Industry in Mexico. Mexican Federation of the Aerospace Industry (FEMIA)/Secretariat of Economy (SE). ProMéxico. (2014), National flight plan: Technological route map of the Mexican aerospace industry, Mexico. Ruiz Durán, C. (2008). Mexico: Economic geography of innovation. Trade, 58(11), 756–768. Salinas García Javier, R. (2016). The industrial configuration of the aerospace sector in the state of Queretaro, Mexico. Fontamara, UAQ. Samperio Sánchez, F. (2018). Indications of productive and labor escalation in the aerospace industry in Mexico (2004–2016) and in intra-enterprise cases in Queretaro (Doctoral Thesis). Postgraduate Degree in Economics, DEPFE, UNAM, Mexico. Secretariat of Economy [SE]. (2012). Aeronautical industry in Mexico. Monograph developed by the general management of the heavy and high-tech industries (DGIPAT).

CHAPTER 12

The Automotive Industry in Western Mexico and the Performance of Local Suppliers in the Value Chains of Multinational Companies Angélica Basulto Castillo

12.1

Introduction

In the current context of production in the global environment, characterized by geographical dispersion of production processes and operations, including high value-added ones, global automotive corporations have undergone changes in their production structure. This has caused in its productive operations and functions being located anywhere in the world, focusing on a balance between costs, mind and workmanship, as well as an appropriate environment for investments. This process has led to the emergence of manufacturing centers in some regions in different parts of the world, oriented to the development

A. Basulto Castillo (B) Universidad de Guadalajara, Jalisco, Mexico e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9_12

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of assembly processes and activities linked to technological development, which has allowed their entrenchment as industrial poles that in some cases have scaled productively within the global value chains of the automotive sector. Since this century, the automotive industry in Mexico has experienced strong growth, both because of the number of plants of foreign companies that have been located in the country, to carry out production and assembly processes, and by the number of units produced and exported to different parts of the world. This expansion of the industry in Mexico is due to its certain competitive advantages that place it as a strategic place for most firms, among which are its proximity to the United States, which ranks as the largest car consumer in the world. To name a few figures, from 2015 to 2019 in the United States more than 17 million light vehicles were marketed annually, mainly produced in Germany, Japan, Korea, Mexico, Canada, as well as in that country.1 Additionally, Mexico’s position as one of the main manufacturing centers in the sector, responds to the consolidating of a wide chain of auto parts supply, as well as by the specialization of labor and mind in some regions of the territory. Among the indicators showing the sector’s remarkable progress in the economy particularly, in Mexico the greatest development and dynamism acquired by the industry in the last two decades has concentrated in three regions: North, Central and West. The first integrates the states of Baja California, Sonora, Chihuahua, Nuevo León and Coahuila. In the second stand out the states of Guanajuato, Aguascalientes, Jalisco and San Luis Potosí. The third consists of the State of Mexico, Puebla and Morelos.2 In these regions are located production plants of thirteen of the most important firms worldwide: Nissan, Ford, General Motors, Volkswagen, Fiat Chrysler Automobiles (FCA), Honda, Toyota, Mazda, Kia, Mercedes Benz, Audi, Infiniti and BMW. In total, 23 production plants located in 12 states of the republic: six in the north of the country, 13 plants in the West and the rest in the Central region. The latter region stands out for being home to a significant number of shipowners, mainly in the states

1 According to statistics from the Mexican Association of the Automotive Industry (AMIA) with information obtained from Ward’s Automotive. 2 This regionalization was based on the one developed by ProMéxico (2016).

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of Guanajuato (GM, Mazda, Honda, Toyota and Volkswagen), Aguascalientes (Nissan, Infiniti, Mercedes Benz), Jalisco (Honda) and San Luis Potosí (BMW and General Motors). As a result of Mexico’s significant performance within the global value chains of the automotive sector, in terms of light and heavy vehicle production, in 2019 it ranked sixth globally, after China, the United States, Japan, Germany and India. In this year, the number of units produced amounted to 4.1 million.3 In terms of exports of light vehicles produced on The Mexican territory, in 2019 they had as their main destinations the United States, Canada and Germany. Only 2.57 million units were exported to the United States alone, representing 74% of total production, while 248.6 thousand units were exported to Canada, representing 7.2% of the total.4 As regards the companies that generated the highest volume of production in the country in 2019, they stand out in order of importance: General Motors, Nissan, FCA and Volkswagen recorded a share of the total of 21%, 20%, 16% and 11%, respectively. In addition, these same firms record the highest volume of exports within the sector. Among the indicators showing the sector’s remarkable progress in the economy at the national level in 2019, its contribution to GDP stands out at more than 3.5% and the 19% share of manufacturing GDP. In addition, in the same year it generated more than 900 thousand direct and indirect jobs in the country, for the assembly of vehicles, manufacture of auto parts and manufacture of bodyworks.5 Having said that, it is possible to infer that from this century onward the automotive industry in Mexico has shown signs of unprecedented growth and with broad expectations of continuing its expansion in years to come, especially in the west of the country from the recent arrival of important assembly companies that continue to bring their suppliers of inputs from different latitudes closer. This has led to a widening of the production chain from the increase of suppliers of different categories and

3 According to statistics from the International Organization of Motor Vehicle Manufacturers (OICA) (2019). 4 According to statistics from the Mexican Association of the Automotive Industry (AMIA) (2019). 5 According to statistics from the Mexican Association of the Automotive Industry (AMIA) and INEGI (2018).

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industrial sector, aimed at meeting the growing demand for inputs from shipowners. In the face of these conditions in which the industrial ecosystem operates, the integration of local companies into the value chains in which global firms operate has been slow and emerging, due to new provisions related to quality certifications, but in particular due to the accelerated growth in the number of foreign suppliers, developers of state-of-the-art processes, who have entered Mexican territory at the request of the same firms to meet the progressive demand for inputs, consolidate the production chain locally and move forward according to market conditions and demands. This situation has complicated the linkage of local companies, but even more so has reduced their ability to move to higher levels within the links of the production chain, due to the constraints they face, in terms of productive resources and capacities, to advance technology, face competition and consolidate their position within the global value chains of multinational firms. Having said that, this research aims to analyze the dynamics of the sector’s production chain in Western Mexico. The latter is that in recent years this region—composed of the states of Aguascalientes, Guanajuato, Jalisco and San Luis Potosí—has been characterized by a growing expansion following the arrival of new assembly plants and suppliers of different origins. This has led to the gradual integration of suppliers of national origin of different levels. It delves into the analysis of the type of local suppliers that have managed to integrate into the GVCs of the firms located in the region, their share within the chains, level and productive capacity. The study is based on the theoretical global value chain approach and the theory of resources and capacities, as together they explain the problem raised. Research assumes that there are several factors that make it possible to integrate local companies into the GVCs of automotive companies including the expertise that has been generated in the environment, the incentives and interests of firms, as well as the productive resources and capabilities available to local suppliers to efficiently meet all the requirements demanded by the industry. The document is structured as follows: the first section discusses the theoretical references on global value chains and resources and capacities, which together support this research. The second part aims to analyze the dynamics of the automotive industry in Mexico. The third section

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discusses the structure of the production chain in the Western region of Mexico, as well as the category of local companies that have managed to link to the GVCs of multinational companies concentrated in the region. Finally, the conclusions and analytical closure of the investigation are presented.

12.2 Global Value Chains and Resource Capability Theory Since the process of global economic liberalization, the expansion and scope of global value chains (GVCs) to different territories has deepened. This phenomenon responds to the productive strategies of multinational firms, the main promoters of their global dispersion, as a means of reducing transaction costs and minimizing the asymmetry of information in the contractual relationships of their operations, based on the outsourcing of asset suppliers with a strong position in the markets, as well as the outsourcing of processes to different regions taking advantage of the opportunities offered by various locations, either because of their geographical proximity to the main markets that are consumers of goods or because they have productive resources—tangible and intangible—to develop the multiple phases of the production process. Another factor that has been fundamental to the redefinition and restructuring of the GVC in recent years, which has deepened the phenomenon of process outsourcing, responds to the specialization acquired by some territories in certain industries and consequently the capacity acquired by the workforce and mind to develop productive activities related to the sector. Therefore, the amplification of GVCs as a productive strategy responds to a double coincidence of interests. Firstly, by multinational firms that seek to strengthen their position in the markets by invigorating their competitiveness from the fragmentation and outsourcing of processes to different highly specialized regions, often far between, pursuing to reduce costs, diversifying risks and accessing high-level human resources. On the other hand, the interest of some countries in strengthening their participation and position in the GVCs through public initiatives aimed at the development of highly globalized sectors, such as automotive, promoting productive specialization of specific regions, establishing a stimulation or incentives for productive investments, as well as supporting the strengthening of the local production chain.

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In this context that prevails in the face of the possible amplification of the GVCs of multinational companies in the sector and consequently the outsourcing of processes to different regions, which have advantages according to the interests of the firms, has influenced the gradual articulation of local companies, most of the time small and medium-sized. This opening of opportunities for the linking of local companies to the CGV firms, is amplified as long as they have the resources and capabilities to efficiently meet the demands. First and foremost, the relevance of the establishment of the contractual link between firms and local suppliers is that the process generates a significant exchange of topical and explicit knowledge between the parties to the transaction within a very high-grade frame of explicit coordination, which if properly absorbed will affect a productive upgrading of the local companies linked to the General Sales Conditions that govern the signatures.6 This matches with one of the main approaches of the GVC approach, which refers to the development of regions, recipients of productive segments of globally integrated companies, largely dependent on the ability of local companies to link to the production chains of those firms. This happens when the expansion of an industry makes possible and drives the growth of a local business base, but especially when its specialization and productive efficiency are promoted by being subject to compliance with contractual structures demanded by buyers, such as just-in-time delivery or quality certifications in the different areas of the company. In turn, this promotes the development of skills of local companies through learning, which leads them to improve their position in the domestic and even international market (Ernst, 2003; Gereffi et al., 2001, 2005). In another order of ideas, some authors use resource theory to explain the acquisition of knowledge and capabilities in productive collaboration environments between local companies and multinational firms, as a permanent source of competitive advantage (Carrillo & Novick, 2006; Ernst, 2003; Ernst & Kim, 2002; Humphrey & Schmitz, 2002; Lamming, 1993; Madhok, 2002). For this reason, it is crucial to examine some approaches that arise around the benefits of collaboration and

6 The upgrading consists of advancing upward within the links of the GVCs, when more technologically complex assets are developed, which will allow to move to higher value-added production lines or that require a higher level of specialization, for example, the design and development of highly complex products.

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productive linkage of local companies with multinationals and their connection to endogenous regional development. The analysis of inter-enterprise productive relationships in the global environment has become relevant, in particular because of the economic impact and spills generated in the regional environment, by virtue of its interconnected international and local economic actors. However, there has been debate in academia regarding the permanent and definitive adherence of knowledge, as well as the productive resources and capacities generated in the industrial environment of the regions.7 The analysis of economic development that underlies the dynamics acquired by an industry involving companies of different technological level and productive category, have opened and intensified some lines of study, among which are the theory of the company as organizer of knowledge and learning and the theory of resources. Ernst and Kim (2002) and Ernst (2003) apply the first two when studying knowledge transfer and local capacity building, for their part. Madhok (2002) uses resource theory to explain capacity acquisition in productive collaboration environments between companies, as a permanent source of competitive advantage (Basulto, 2015). At first, the study of productive links between global companies and local enterprises and their connection to regional development, as well as the implications for economies receiving disjointed processes, is examined promptly by Ernst and Kim (2002). From this perspective it is proposed that the expansion of capacities of local actors depends to a large extent on the dissemination and outpourings of knowledge generated in an industrial ecosystem, as well as the resources available to these actors to assimilate the learning—explicit and topical—that it acquires in the environment. Therefore, the territories that manage to integrate into the GVC of multinational firms have more favorable conditions for endogenous development and expand their possibilities of inserting themselves into highvalue segments within the productive networks (Ernst, 2003; Ernst & Kim, 2002).

7 Examples of resources are: trademarks, technology, qualified personnel, business contacts, policies and procedures, financial resources, among others. And capabilities can be divided into: productive capacities that are aimed at meeting customer requirements on product specifications, production volumes and management or organizational capabilities that refer to the strategy of use of resources in strategic management of the company.

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In short, the productive articulation between companies of different category in the global environment, which is built through value chains governed by multinational firms, involves the transfer of knowledge to local supplier companies that allows them, to a greater or lesser extent, to enhance their efficiency and productive capacities, factors that directly affect the strengthening of an endogenous business base and, as a result, drive local economic development. However, knowledge transfer is not automatic, as certain conditions are required to achieve a high degree of absorption capacity in order to internalize the knowledge received (Ernst & Kim, 2002).8 One of these conditions is causally related to the local entrepreneurship to establish businesses according to the needs and demands of firms and the assimilation of cognitive resources emanating from the productive relationship to meet the quality, efficiency and competitive cost requirements demanded by global markets. From another perspective, Madhok (2002) converges with the theoretical approach of GVC by assuming that transactions between agents originating in the market are intended to minimize costs, which contribute to establishing inter-enterprise links in the global environment. In this circumstance, the division of labor between a firm and other independent organizations results in a division of labor between companies, that is, a distribution of economic activity between them is generated, the objective of which is to avoid the transaction costs that originate in an open market. Therefore, being immersed in a company in a production chain promotes its specialization in a specific production process derived from acquired learning and experience, achieving a competitive advantage over its potential competitors. This argument is based on differences in yields and competitiveness, aspects that are addressed promptly by resource and capacity theory. The theory of resources and capabilities is distinguished in that it focuses its attention and analysis on specific companies, trying to answer the question of why companies are heterogeneous in terms of competitiveness, efficiency and profits obtained. This heterogeneity explains why only some companies, despite being in the same region, manage to link up to GVC governed by global firms. As stated, this theory is the object of analysis to the company, basically supporting itself in the production function from the attributes 8 At this point in his analysis, Ernst recognizes that the assimilation of knowledge transfer and local capacity building is limited.

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corresponding to productive resources and capacities, based on knowledge and skills, as well as the scope of competitive advantage. In view of these research, it is possible to identify what differentiates one company from another in terms of yields and, therefore, its competitive advantage, against the structure and industrial dynamics in which they operate or plan to venture, as well as the type of market to which they orient their production (regional, national or international). Even more the type of inter-enterprise ties that are strengthened, Madhok (2002) warns that it is more common to find alliances in high-tech industrial environments, such as electronics, automotive and aerospace. Therefore, the speed of response in terms of adaptation, flexibility and productive efficiency are essential to enhance its competitive advantage. This explains why these industrial ecosystems are made up of companies of different levels, sizes and origin (highlighting in number small and medium-sized enterprises), many of which are directly outsourced by global firms to develop highly specialized activities in order to minimize transaction costs. Moreover, in the face of environments of uncertainty and technological complexity, contractual links between companies are invigorated in response to some firms leaning toward establishing businesses with other highly specialized, generally smaller ones, rather than taking premature risks of costly investment obsolescence. Similarly, the alliances allow a complementarity of resources and capacities between the two parties, the smaller ones being the most benefited by the transfer of skills and knowledge, which undeniably strengthen their productive capacity, efficiency, speed of adaptation and flexibility, essential factors to increase their competitiveness. At this point, Madhok (2002) agrees with Ernst and Kim (2002) in their assessments of the advantages underlying the linkage of suppliers with multinational firms (Basulto, 2015). In short, the study of inter-enterprise structure and relationships in the global environment shows that not only is governance structure important in harmonizing transactions and their costs, but also plays a transcendental role in the capacities, skills and productive competence of companies that are immersed in or with a view to linking to them. In this context, one company can leverage its own or those of others, or a combination of both, to achieve cost advantage in highly competitive and volatile industrial environments. This makes it possible to assume that the establishment of inter-enterprise cooperation structures such as the General Sales Conditions allows for improvements in efficiency and

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competitiveness, in contrast to what would be achieved if each company would choose to do everything on its own, which is why the study of such institutional structures has become especially important in recent years (Madhok, 2002). Finally, it is important to note that the linkage of local companies to the GVC of dominant corporations in high complexity industries such as automotive is relevant and advantageous, as it allows them to access complementary cognitive resources to overcome their limitations and productive capacity, increase their competitiveness and achieve better market positioning from agreements that expand their production frontier, especially in high-speed technological environments. According to Madhok (2002), a close relationship or intense interaction between companies of different levels not only minimizes transaction and production costs, and also leads to an increase in the productivity of both parties. For this reason, global firms expand their productive operations around the world, depending on the advantages that each region offers to boost the business. In this way they outsource their activities to different countries by shaping their production structure around an extensive GVC. Based on the theoretical references referred to, this work is based on the assumption that one of the ways for local companies to enter world trade is from their productive linkage to GVC of global firms. The establishment of this type of contractual link allows them to acquire productive capacities and meet the required quality standards in a highly competitive global environment. For this reason, local companies must prioritize, invigorate and strengthen their productive resources and capacities, first of all, to venture into the GVCs and then enhance the new capacities acquired through knowledge transfer, being part of this type of productive structure, to strengthen their productive upgrading and respond with efficiency and quality the asset requirements that the industry demands. Based on these assumptions, global inter-enterprise structures can foster the development of a local business base in certain regions, with extensive capacities and productive resources to address dominant international trade practices, the promoting and strengthening the competitiveness of territories.

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The Automotive Industry in Mexico

Globally, the automotive industry is characterized by operating in line with an inextricable functional and productive structure that is configured through an extensive GVCs involving different specialized regions in the different phases of the production process. This has enabled the improvement of some operations and the development of high-demand and technologically complex assets manufactured in countries with great potential for human capital for development. This productive structure, distinguished by its wide versatility, has generated the development of productive conglomerates of different productive level and specialization located in different regions of the world. Above the scenario, the highlight is that some industrial centers located in emerging countries have acquired a significant role within the GVCs of the sector, among which are Mexico, India and Brazil. Since the beginning of this Mexico already highlighted for achieving an important position within the GVCs of the automotive industry, however, in the last decade its growth has experienced a significant expansion, following the arrival of a large group of assembly plants of the most important companies in the sector. This has led to the emergence of industrial complexes located in some regions of Mexico and that some existing ones, since the end of the last century, have boosted their growth. This positions the country as one of the main recipients of significant investment flows related to the automotive sector. In the last decade, the acquisition of foreign direct investment (EDI) in the automotive sector has increased rapidly, reaching its highest level in 2019 (see Fig. 12.1). According to statistics from the Secretary of the Economy, in 2019 the EDI for the manufacture of cars, trucks and parts, recorded an investment volume of more than $6.9 million, representing 21% of the country’s total receptions. Other sectors that contributed to EDI were financial services (15.3%), trade (9.7%), mass media (5.5%) and mining (5.5%). This growth in automotive EDI flows has been reflected in the increase in production of more than 35% in the period 2011–2018. The origin of the EDI is mainly the United States, Japan and Germany. In addition to the above, this significant growth of the indicator follows the recent opening of new assembly plants of BMW companies in San Luis Potosí, Toyota in Guanajuato and Daimler in Aguascalientes. In 2019, new projects are also launched, including the expansion of new Nissan production lines, as well as the arrival of new auto parts companies: two to

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Fig. 12.1 Mexico. Foreign direct investment in the automotive sector, 2010– 2019 (Thousands of million dollars) (Source Elaboration based on the FDI statistics of the Ministry of Economy, México [2019])

Guanajuato (Kamax and Waldaschaff); one to St. Louis Potosí (Hirotec) and one to Querétaro (Hyunbo). Therefore, these automotive EDI indicators are closely linked to the investment flows of the auto parts sector. It is important to note that most of the assembly plants located in Mexican territory generate an industrial cluster in their environment composed of a large group of companies of different origin, oriented to the manufacture of automotive parts and components. These indicators have been the main precursors to the strong growth of the sector and its potential share of national manufacturing GDP, which in 2019 was 20%. The origin of the EDI is mainly the United States, Japan and Germany. The contribution of the automotive industry to national GDP has shown significant growth in recent years, from 2010 to 2019 alone, from a 2.1% to 3.7% stake. In addition, it has a potential advance in its share of manufacturing GDP. However, by comparing the average annual growth in 2010–2019 of national GDP (2.4%), the GDP of manufacturing (2.3%) and the participation of the automotive industry in GDP, the significant growth of the latter indicator (7.4%) can be identified relative to the remaining ones (see Fig. 12.2). Other indicators showing the rapid growth of the automotive industry are the production and exports of light vehicles. Figure 12.3 shows that from 2010 to 2019, the growth of both variables has been extremely

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Fig. 12.2 Mexico. Average annual growth rates of national gross domestic product, manufacturing and the automotive industry from 2010 to 2019 (Source Developed based on the statistics of the Bank of Mexico)

prominent. In making estimates of the annual growth rate for both indicators for this period, it resulted in production growing by 7%, while exports grew by 8%. This shows the importance of production destined for international markets, as on average 83% of vehicles manufactured in Mexico are destined for export. As far as the main destination countries of vehicle exports are, it highlights the significant growth of the United States as the main recipient of light cars manufactured in Mexico, participating with more than 72% today; in the period 2010–2019 alone, the number of units sent to the northern neighbor increased from 1.28 million to 2.7 million (see Fig. 12.4), representing an average annual growth rate of 8.5%. In addition to Mexico’s global position in vehicle production, it has begun to increase its share of exports of automotive parts and accessories. This is extremely relevant because it makes it possible to identify Mexico’s progress within the GVCs of the automotive sector, not only by establishing itself as a mere assembler of vehicles, but also a strong automotive auto parts industry has begun to be deployed within the country, involving the integration into the GVCs of companies of a significant

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Fig. 12.3 Mexico. Vehicle production and exports, 2010–2019 (Number of units) (Source Developed based on foreign trade statistics, INEGI)

Fig. 12.4 Mexico. Main countries of destination for exports vehicles 2010– 2019 (Number of units) (Source Developed based on statistics of INEGI)

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number of supplier companies of foreign origin as a national. This is to meet the demand for inputs from assembly plants located in the national territory and in other countries. Figure 12.5 shows that in the period 2010–2019 exports of automotive parts and accessories have increased from 12,7 to 31.4 mmd in the span, representing an average annual growth rate of 10.6%, while imports increase by 8.4%. Moreover, within the group of the main assembly companies located in Mexico, General Motors ranks as the main producer and exporter of light vehicles in 2019, displacing Nissan that in 2016 and 2017 was placed in the top position. For General Motors, exports accounted for 97% of the total produced in the country in 2019, whose main destination is the United States, while Nissan exported only 65%, or much of the production marketed on the domestic market. Other companies that stand out for the volume of exports relative to total production are: Fiat Chrysler Automobiles (FCA) (99%), Audi (99%), Ford (97%), Toyota (98%), Mazda (92%), Honda (89%) and Volkswagen (87%).9 It is important to say that Mazda, Audi and Kia are companies of recent arrival in Mexican territory (the first start of operations in 2014 and the

Fig. 12.5 Mexico. Exports and imports of automotive parts and accessories, 2000–2019 (Thousands of millions of dollars) (Source Developed based on statistics from The Observatory of Economic Complexity)

9 According to statistics from the Mexican Association of the Automotive Industry (AMIA), 2019.

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remaining two in 2016), however, the volume of production has grown significantly, even more than the Japanese Honda plant that was located in Jalisco in the eighties of the last century. Among the main federation entities receiving the highest IED of the automotive sector in 2019, Puebla, Nuevo León, Coahuila and Guanajuato are located; the first is located in the central region, the second and third in the north of the country and the last in the Western region (see Table 12.1). However, when analyzing the value of the sector’s EDF relative to the total received by the entities, we can see that Guanajuato, Morelos, Puebla, Coahuila, San Luis Potosí and Aguascalientes stand out for their orientation toward the automotive sector. For example, of the total EDI received in Guanajuato, 74.9% targeted the automotive industry. Having said that, it is important to note that the automotive industry in Mexico is divided into two segments, on the one hand, is oriented to the assembly or assembly of automobiles, which are mainly carried out by subsidiaries of multinational companies, also called shipowners. These plants are responsible for the design, development and marketing of vehicles. The other industrial segment is the one focused on the manufacture of auto parts, in which the supplier companies, both foreign and domestic, are located, responsible for supplying parts and components to the shipowners. Table 12.1 Mexico. Main receiving Foreign Direct Investment (FDI) from the automotive sector, 2019 (Millions of dollars)

State Puebla Nuevo León Coahuila Guanajuato Chihuahua Estado de México San Luis Potosí Morelos Aguascalientes Querétaro Sonora Jalisco Tamaulipas

FDI total

FDI automotive

%

2,044.0 3,274.6 1,492.1 796.0 1,407.0 2,932.8 853.8 655.6 452.1 1,168.1 449.7 1,568.6 1,623.3

1,285.0 1,233.6 888.8 595.9 591.6 560.7 491.9 486.8 233.6 153.0 128.6 117.7 114.2

62.9 37.7 59.6 74.9 42.0 19.1 57.6 74.3 51.7 13.1 28.6 7.5 7.0

Source Developed based on statistics of Secretary de Economy

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Currently, the auto parts industry is made up of 2,559 companies nationwide of which about 70% are foreign, mainly from the United States, Japan and Germany.10 Car manufacturing is increasingly competitive in the country, innovation and sophistication of products force manufacturing companies to improve their processes. This is why auto parts companies located in the country focus on investing in state-of-theart machinery and equipment, as well as in the recruitment of specialized personnel, with the intention of developing innovative products that meet the demands of the market (ProMéxico, 2016). However, the value chain of the automotive industry is extremely complex, even likely to outperform that of many other industrial sectors. These are mainly three aspects that lead to this complexity: (a) the chain is made up of companies that manufacture a large number of parts and components, (b) production is generally high volumes and (c) suppliers must meet strict quality standards. Given the above, the industry and the companies that integrate it have evolved technologically in order to respond to this complexity (Musik, 2004). Given its complexity, the supply chain structure of the automotive industry is composed of groups of companies that are classified into three basic levels, according to the degree of technological complexity and contribution to the generated value of the assets that occur within each link. First, there are companies classified as Tier1. This is home to suppliers who supply the main components to the shipowners of global companies. These components include engine parts, steering and suspension systems, air conditioning systems, electronic components, among others.11 This is the closest group of companies to shipowners and is responsible for directly meeting your demands. Currently more than 300 suppliers belonging to this level are in Mexico (ProMéxico, 2016). Below are the group of vendors that are categorized as second level or Tier2. This group of suppliers are responsible for supplying inputs to first-tier companies (Tier1); they basically meet the demand for components used for the development of other technologically more advanced or specialized systems for the industry, such as forging or stamping parts, injecting 10 According to Statistics of the National Auto parts Industry. 11 This group is also made up of suppliers of radiators, alternators, rims, brake systems,

transmissions, among other components of fundamental importance for the final product. Examples of these components are hoses, air filters, tank plugs, pistons, spark plugs, torsion bars, etc.

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plastic or aluminum, casting and machining parts, among others. Finally, you will find the Tier3 group of suppliers. Tier2 providers are located at this level. Its function is to supply inputs of lower technological level and therefore lower added value. In general, they are small and medium-sized enterprises, however, they have seen rapid growth in recent years. We’ll talk about it later. As stated above, there are currently shipowners of the most important international companies in the automotive sector: General Motors, Ford, FCA, Volkswagen, Nissan, Honda, Toyota and Mazda. Recently Audi, BMW and Kia Motors began operations in Mexico, which adds to the list of vehicle shipowners located in the national territory. Some of these companies have brought with them their own suppliers of auto parts, originating from different latitudes, for their extensive track record within the sector, as well as their high technological level to meet the demand for quality parts and components in a timely way. Totally, 24 production plants have been located in 12 states of the republic: 6 in the North region of the country, 6 in the Central region and 12 in the West region. The latter region stands out for being home to the largest proportion of assembly plants, in the states of Guanajuato (5), San Luis Potosí (2), Aguascalientes (4) and Jalisco (1). Having said that, for the purposes of this research, the dynamics of the sector’s production chain in the Western region of Mexico will be analyzed. The latter is that in recent years, this region has been characterized by a growing expansion following the arrival of new assembly plants and suppliers of different latitudes, which has led to the gradual integration of suppliers of national origin of different levels. It delves into the analysis of the type of local suppliers that, to integrate into the GVCs of the firms located in the region, their share within the chain, level and productive capacity.

12.4 Automotive Industry Dynamics in Western Mexico In recent years, Mexico’s Western region has stood out for strong growth in the automotive industry, both in terms of EDI flows and volume of production, and for the significant widening of the supplier base, domestic and foreign, that has been generated in its environment. The Western region, for the purposes of this research, is composed of the states of Aguascalientes, Guanajuato, Jalisco and San Luis Potosí. To mention

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some outstanding attributes of these federative entities, it can be noted that Aguascalientes is one of the forerunner states of the sector in the country, also because it is located two Nissan plants, one of the companies of greatest tradition and importance within the sector; in addition, Infiniti and Mercedes Benz were recently integrated. For its part, Guanajuato is the state that has presented the greatest dynamics of the sector in recent years, after locating four of the most important automotive companies: General Motors, Volkswagen, Honda and Mazda. In Jalisco is the Honda plant, it is also a state that has been a forerunner in the automotive electronics industry for more than four decades, which has generated the installation of important companies offering automotive electronic equipment and systems, among which are Siemens, Continental and Sumida, among others. In San Luis Potosí, there is a General Motors plant and a BMW plant. The latter of recent installation on the entity. In addition, the state has developed a major cluster of auto parts that brings together more than 120 suppliers of different level and origin. It is worth noting the significant growth of companies that integrate the industrial ecosystems of the sector into the entities that make up the region (see Fig. 12.6). Guanajuato is the state with the largest increase in the number of economic units, with only 45 companies in 2004 and by 2018 it rises to 201, representing an average annual growth rate of 11.3%. For its part, Jalisco, despite having many companies related to the sector, registers moderate growth in the period. This is because its greatest growth, especially from automotive electronics-oriented companies, was generated in the last decade of the last century. Aguascalientes and San Luis Potosí also excel at the accelerated increase in companies that make up the sector; however, Aguascalientes has a higher annual average growth rate (7.7%). As regards the number of plants, four of them are in Guanajuato: General Motors, Mazda, Honda and Volkswagen. The largest company in the town is General Motors, which started operations in 1995, with an assembly plant in Silao, however, it has expanded its operations because in 1997 a stamping plant was added, in 2001 the start of an engine plant and in 2008 a transmission plant was inaugurated.12 Aguascalientes is home to two Nissan plants, the first was installed in 1982 and the second in

12 The 4.8L, 5.3L, 6.0L and 6.2L engines are manufactured at this plant.

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Fig. 12.6 Number of automotive economic units, 2004–2018 (Source Own elaboration based on the INEGI Economic Census [2004, 2009 and 2015] and by 2018 the directories of DENUE companies (INEGI) and the different Automotive Industry Clusters of the different states were used)

2013, in addition to Infiniti and Mercedes Benz, which began operations in 2016. In San Luis Potosí is a General Motors plant, opened in 2008 and another one of BMW. However, the state’s orientation for auto parts industry-related activities dates back to the 1950s. Among the companies of this turn and seniority in the town are Metalsa, which began operating in the 1950s. In the sixties and seventies, the companies Specialized Steel Products, Industrial Group C&F, R. Bosch Brake Systems, Continental Tire and Lascasiana were installed.13 In 1985 a plant of the Company Honda was installed in Jalisco, in which the CR-V model is assembled. This company has generated the development of an industrial ecosystem of parts and components, as well as overly complex electronic equipment and systems (see Table 12.2). In addition, this region is characterized by an important auto parts industry. In general, it can be mentioned that it specializes in the manufacture of products and components, such as prints, electronic equipment,

13 Information provided by the Secretariat of Economic Development of the state of San Luis Potosí.

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Table 12.2 Plants located in the western states of Mexico and main products Company

State

Year of City inauguration of the plant

Products

General motors

Guanajuato

1995

Silao

San Luis Potosí

2008

San Luis Potosí

Guanajuato Jalisco Guanajuato Aguascalientes

2014 1985 2014 1982

Salamanca El Salto Celaya Aguascalientes 1

Aguascalientes

2013

Guanajuato San Luis Potosí Aguascalientes Aguascalientes

2013 2017

Aguascalientes 2 Guanajuato Villa de Reyes

Chevrolet Cheyenne, Chevrolet Silverado, GMC Sierra and Cadillac Escalade Engines and transmissions Chevrolet Aveo and Chevrolet Trax Transmissions Mazda 3 CR- V Fit March, Versa, Sentra, Note Four-cylinder engines Sentra

2016 2016

Aguascalientes Aguascalientes

Model Infiniti QX50 Class A model

Guanajuato

2016

Tacoma

Guanajuato

2016

Apaseo el Grande Irapuato

Mazda Honda Nissan

Volkswagen BMW Infiniti Mercedes Benz Toyota Ford

High-tech engines Model Series 3

Transmissions for vehicles

Source Own elaboration with information of AMIA

brakes and their parts, rubber products, engine parts and transmissions for automobiles, body parts, suspension, gasoline tanks, clutch components and pastes, speed sensors, airbag systems and engine parts. The region has also stood out for developing processes of high degree of complexity, so innovation has become a central element for the creation of components and products in some of the plants located there, which have had a strong impact on the industry worldwide. Such is the case of the Volkswagen plant located in Guanajuato that is responsible for the manufacture of the 1.8-liter TSI Turbo loaded engine, which was

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recognized in 2015 as one of the top ten engines in the industry globally by “Ward’s Automotive”, which is incorporated into the Jetta, Beetle and Passat models. In that year, the Honda Fit EXL model was also recognized by the same organization as one of the ten models with the best and innovative interiors. This car is manufactured only at the firm’s plant located in Guanajuato. In this category, Chevrolet Trax models, which are manufactured at the General Motors plant located in San Luis Potosí, as well as Honda’s CR-V model manufactured in Jalisco, Ohio and Ontario, also earned nominations. On the other hand, Nissan Aguascalientes ranked third in the Rankin of the 5 outstanding producers in North America (ProMéxico, 2016). From the above, it can be inferred that Mexico has traveled from assembly and simple manufacturing to higher value-added activities, as well as to the generation of innovative products. This has been possible due to the emergence in the country of more than 30 automotive design centers; some of them are located in the states that make up the region under study. Among the most important are: (1) The Centre for Vehicular Electronic Technology (CTEV), founded in 2006 in Jalisco, by a joint initiative of the Instituto Tecnológico y de Estudios Superiores de Occidente (ITESO) and the company Technology Solutions, is responsible for developing electronic systems for automotive applications, as well as electronic and software components. (2) Nissan’s NISTEC Technology Development Center, which has been based in the State of Mexico since the 1990s, is responsible for parts design and vehicle evaluation, and has a test center related to the development of parts and vehicles, as well as calibration and evaluation of gas emissions at the Aguascalientes plant. (3) The Center for Research and Development of Continental Automotive in Jalisco, which started operations more than 15 years ago, has about 1,500 specialists conducting research in three areas: safeguarding the lives of drivers avoiding accidents, minimizing polluting emissions through hydrocarbon-based fuel optimization or electric propulsion and interconnecting vehicles with the rest of the world. In addition, it is responsible for developing new automotive products for the market, among which are: dashboards for motor and commercial vehicles, connectivity, interaction with the driver and passengers, in-car entertainment, anti-lock brake controllers (ABS), airbag controllers, combustion engine controllers and access and comfort control systems (remote control, input and start).

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At the beginning of today’s decade, the automotive industry was consolidated as one of the important ones for the economies of the entities that make up the West region under review, in terms of foreign direct investment (EDI) received. This is confirmed by comparing the total amount of EDI for the manufacture of transport equipment in the region in 2010–2018, as in 2010 the total amount recorded was $831.4 million and by 2018 it increased to $1,440, which translates to an almost double increase in just eight years. It should be noted that the amount of IED received has not increased by the same proportion in the four federal entities. Figure 12.7 shows that the entity that substantially increased this type of investment is Guanajuato, under which in the span this indicator increased from 84.3 million to 596 million dollars, representing an average annual growth rate of 36%, which is followed in order of importance Aguascalientes (21%), San Luis Potosí (29%) and finally, Jalisco (6%). Moreover, in the period 2010–2019, the state of Guanajuato was consolidated as the main exporter of vehicles in the region, separated by a wide gap of San Luis Potosí and Aguascalientes (see Fig. 12.8).

Fig. 12.7 Foreign Direct Investment according to selected states, 2010–2018 (Millions of dollars) (Source Developed based on statistics of Secretary de Economy)

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Fig. 12.8 Automotive industry exports by selected states, 2010–2019 (Millions of dollars) (Source Developed based on foreign trade statistics, INEGI)

In this context, a risk factor for the region’s economies is the strong dependence of a single sector, because a crisis in industry or a decline in global demand can have consequences for entities. For this reason, it is important to identify the capacities and potential of local companies to establish productive links with multinational companies in the sector, which allows to acquire capacities to enter other productive sectors and international markets. The analysis will be guided in the following sections on the latter.

12.5

The Automotive Industry’s Production Chain in Mexico’s Western Region

For the elaboration of this section, the methodological guide consisted of the integration of a database from different directories of companies whose activities are related to the automotive industry for the states of Aguascalientes, Guanajuato, Jalisco and San Luis Potosí*. This allowed to identify its validity, origin, position in the production chain of the sector (Tier1, Tier2 and Tier3) and size, for 2019. From the analysis of

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the results obtained, it was possible to identify the position of Mexican companies in the GVCs of the companies and, at the same time, it was possible to warn of the growing presence in supplier entities of different parts of the world, to meet the requirements of high value-added inputs of leading firms within the industrial ecosystem. First, it is important to mention that from the analysis of the database generated on the companies that make up the automotive sector in the different federal entities that make up the region, it was possible to note that the constant flow of foreign investment by both assembly companies and world-class suppliers (Tier1, which are mostly of foreign origin), have forged a dynamic industrial ecosystem with great potential to continue growing. In view of this, it is crucial to examine the extent to which local companies have taken advantage of this situation to enter the industry, through contractual linkage with leading multinationals located in different states. Origin of the Companies That Make up the Production Chain in the West Region As stated above, in recent years the automotive industry in the Western region of Mexico has experienced rapid growth. For this reason, for the purposes of this research, it was taken as a case study. As far as Aguascalientes is concerned, in the 1980s only ten companies in the sector were in the entity, being mostly foreign firms. Two decades away his number had increased to 53. By 2019, the industrial ecosystem consisted of 200 companies of different origins, including suppliers of the different levels, among which are Mexican companies that have managed to link to the production chains of multinationals. From this database, the origin of the capital of each of the companies listed in the different directories was checked in a timely manner, resulting in 53.5% being of national origin, 29% Japanese and 8.5% US, the rest originating in different countries, including co-investments (see Table 12.3). It should be noted that the companies that are co-investments the United States/Mexico and Japan/Mexico, were originally of Mexican origin and have been attractive to foreign investors, who have decided to partner with Mexican entrepreneurs. For its part, Guanajuato is one of the states characterized by a large number of companies that carry out activities related to the automotive industry, of different origin, category, and technological capacity; it also

Mexico Japan USA USA/Japan Germany Japan/Mexico USA/Mexico France France/Mexico France/Japan Spain/Japan China China/Japan South Korea Singapore Sweden Spain Canada Austria Belgium Swiss Italy

Country

107 58 17 4 3 1 1 1 1 1 1 1 1 1 1 1

Number of companies

Aguascalientes

53.5 29 8.5 2 1.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

% 28.2 26.6 14.7 13.1 0.3 3.2

0.3

5.4 1.3 0.6 0.3 1.0

41 1 10

1

17 4 2 1 3

%

88 83 46

Number of companies

Guanajuato

1 3

0.8 2.5

0.8

2.5

3

1

10.2 0.8 0.8 0.8

59.3 14.4 5.1

%

12 1 1 1

70 17 6

Number of companies

Jalisco

4 1 1 2

5.2 1.3 1.3 2.6

9.1

3.9 3.9

3 3 7

6.5

14.3

13 22.1 14.3

%

5

11

10 17 11

Number of companies

San Luis Potosí

11 3 2 2 3

9 2

4 7

17

67

275 175 80

Total

Table 12.3 Automotive companies located in the Western Region of Mexico, depending on the origin of the capital, 2019

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200

Number of companies

100

% 1.9 0.3 0.6 0.3 0.3 0.3 0.3 0.3 0.3 100

1 312

%

6 1 2 1 1 1 1 1

Number of companies

Guanajuato

100

0.8

1 118

0.8

%

1

Number of companies

Jalisco

Source Own elaboration from the different directories of companies in the automotive industry, 2019

UK India Brazil Slovenia Holland Saudi Arabia Luxembourg Czech Republic Panama Poland Total

Country

Aguascalientes

1 77

1

Number of companies

San Luis Potosí

1.3 100

1.3

%

2 671

6 2 2 1 1

Total

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stands out for its potential to continue to widen the sector’s supplier base. As stated above, four assembly plants have been in this state of some of the most important companies in the sector: General Motors, Mazda, Honda and Volkswagen; being the senior General Motors plant, which began operations in 1997. From the specialization generated in the region were added the remaining plants, as well as a vast number of suppliers of different latitudes, which has created a phenomenon of industrial agglomeration that has generated economic spills to the entity. From the database, it was possible to identify that the industry is composed of 312 companies, of which its origin was identified. Like Aguascalientes, in Guanajuato Mexican companies are the largest, accounting for 28% of the total in the state (see Table 12.4). These are followed in order of importance by Japan (26.6%), the United States (14.7%), Germany (13.1%) and Spain (5.4%). Jalisco was able to identify 118 companies related to the automotive industry. It is important to note that Jalisco has located a plant of the Japanese company Honda since 1985, which has led to the development of local companies to supply some inputs of different technological level. It is also necessary to emphasize that the state has developed a high-tech complex aimed at developing equipment for the electronics and automotive industry. For this reason, companies oriented to design and technological development have been in the entity, among which are Continental, Siemens, Sumida, Molex and Mexikor; even some CEMs Table 12.4 Aguascalientes. according to origin Country Japan Mexico USA Germany China France South Korea Spain Total

Category

of

automotive

industry

suppliers,

Tier1

Tier2

Tier3

Total

37 2 15 3 1 1 1 1 61

20 21 6 0 1 1 0 0 49

1 18 1 0 0 0 0 0 20

58 41 22 3 2 2 1 1 130

Source Own elaboration from the information of the companies that make up the total population of the database

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(contract equipment manufacturers)—such as Jabil and Flextronics—that had originally been installed in the entity to provide manufacturing services to electronics companies, have for several years begun to carry out high-value processes for some automotive firms located in Mexico. In Table 12.3 we can see that, for the state of Jalisco, like the previous states, companies of national origin stand out in number, representing 59.3% of the total. Japanese companies (14.4%) and German companies (10.2%) also excel in their number. The United States of America (5.1%). San Luis Potosí is one of the states of the West region that presents an incipient integration of companies of local origin to the GVCs of the assembly companies, against Aguascalientes, Guanajuato and Jalisco, since it was possible to identify only 10 national companies, representing 13% of the total that the entity houses. Among the companies that show the largest share according to their origin respect for the total, are those from Japan (22.1%), Germany (14.3%) and the United States (14.3%). It is important to emphasize that since the seventies in San Luis Potosí, the auto parts industry began to develop and is consolidated in the nineties of the last century when 43 auto parts companies of different origins were registered. In the first decade of today’s century, there is significant growth of such companies. In the same period General Motors was installed, which managed to enhance the growth of the automotive industrial ecosystem in the state.

12.6 Category of Local Companies Linked to the GVCs of Multinational Companies in the Western Region The persistent reception of productive capital related to the automotive industry to the region, both assemblers and high-level suppliers, have forged a dynamic industrial ecosystem with wide possibilities to continue its expansion. In view of this picture, it is essential to examine the extent to which local companies have taken advantage of this situation to enter the industry, through contractual linkage with the leading multinationals located in the states that make up the region. In addition, the objective of this paragraph is to identify the set of productive capacities that local undertakings have achieved to link up to the General Sales Conditions run by multinational companies and specially, to identify the position in which they are located.

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From the analysis of the database built, it could be found that although a large proportion of enterprises are of national origin, they are mostly small and medium-sized. In addition, by analyzing the turn of domestic suppliers, it was possible to identify that very few are at supply levels close to assemblers, as they are mostly located at the lowest levels of the production chain (Tier3) that are responsible for providing companies with inputs or low-tech components (e.g., plastic parts, aluminum and forged for various components, machining, mechanical metal parts, paint and coating, etc.). However, it is important to note that some companies have managed to venture into the supply of parts for the manufacture of car seat structures and fabric for interior coatings. Both activities correspond to Tier2, so it is noted that these companies have productively scaled within the industry supply chain. By contrast, foreign capital suppliers are mostly large companies (some exceed one thousand workers) and are generally direct suppliers of assemblers (Tier1) that supply high value-added inputs within the production chain, i.e., more technologically complex (e.g., engine parts, transmission, electronic systems, steering, brakes, air conditioning, seat and interior manufacturing and main components for a vehicle’s mechanical systems). It was also possible to identify companies that supply, packaging, part metal, radiators, dies, moldings, among the most important (Tier2). As stated above, one of the objectives of this study is to identify the level reached by local suppliers in the GVCs of multinational companies in the automotive sector. For this purpose, it proceeded to find out, by different means, the category in which each of the companies that make up the database that was built from the different directories obtained is located.14 Below are the results of empirical work on each of the states that make up the region taken as a case study. In principle, in the case of Aguascalientes, after a thorough analysis, it was possible to identify the level they occupy within the GVCs of the assemblers 65% of the companies that make up the database. The results were systematized according to the category (Tier1, Tier2 or Tier3) and the country of origin. Table 12.4 shows that companies of Japanese origin are the most numerous (relative to the identified category) and are mostly within Tier1 (64%); that is, they are providers of high value-added assets. 14 The information was obtained through phone calls and by visiting the websites of each of the companies. This process was exhaustive, however, only a percentage of the total population was referenced.

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Secondly are Mexican companies, most of which rank as Tier2 and a couple more have dabbled as direct suppliers of Tier1 assembly plants, showing the embryonic productive upgrading of local companies from the development of resources and capacities. This makes it possible to note that much of the local suppliers have scaled productively to the highest levels of the industry’s production chain. However, 44% of companies are at the lowest level of the production chain (Tier3). This shows that Mexican companies have begun to develop processes of greater technological complexity and therefore higher added value. For their part, foreign companies are the ones that are most closely located as Tier1, mainly those originating in Japan, the United States and Germany. In the case of Guanajuato, information was obtained on the level of supply at which 63% of the companies that make up the total population of the database are located. The uniqueness of this entity refers to the registration of the largest number of suppliers originating in different countries. The results showed: the largest companies are those of Hispanic and American origin, and they are mostly located at the highest levels of the GVCs of assembly firms (Tier1 and Tier2). Thirdly, there are Mexican companies, the most numerous being those that rank as Tier2 and, most significantly, eight of them have scaled to Tier1 category, representing an important advance of this group in resources and capacities to achieve a better position in the GVCs of the assembly companies. By contrast, eight other local companies are located at the lowest level of the supplier base (Tier3). When it comes to foreign companies, the vast majority rank as Tier1, among which are those in Japan, the United States and Germany. For their part, the highest number Tier2 companies also come from these same countries (see Table 12.5). The analysis carried out for the state of Jalisco was based on the information obtained from 25.4% of the companies that make up the total population of the database. According to the results, it was possible to identify that like the previous federal entities examined, the largest number of suppliers that have been integrated into the GVCs of the firms that are in the entity, according to Tier category, are of Japanese origin. Most notably, a significant percentage of companies of this origin have positioned themselves as Tier1 and Tier2, which means that the first group provides them with higher-tech inputs, while the latter supplies fewer complex assets. Moreover, as regards the number of undertakings of

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Table 12.5 Guanajuato. Category of automotive industry suppliers, according to origin Country

Tier1

Tier2

Tier3

Total

Japan USA Mexico Germany Spain France Canada Austria China Belgium UK Italy Brazil Holland Slovenia Swiss India South Korea Total

36 19 8 19 6 5 5 1 1 2 2 1 1 1 1 1 0 0 109

23 18 14 5 5 5 0 2 2 0 0 1 0 0 0 0 1 1 77

1 1 8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10

60 38 30 24 11 10 5 3 3 2 2 2 1 1 1 1 1 1 196

Source Own elaboration from the information of the companies that make up the total population of the database

German origin, they are in the second position, however, almost entirely (88%) Tier1 suppliers. It was also possible to identify that locally sourced suppliers are scarce, comparing their number with the rest of the states that make up the West region, but the significant thing is that they are in Tier2 category, which correspond to medium-sized technologically complex inputs, which means that they have the resources and capabilities to advance productively in the production chain (see Table 12.6). As for the most important foreign suppliers located in the GVCs, companies originating in countries such as Germany and Japan were identified, largely located as Tier1. However, their number is small, which means that the Honda automotive firm plant, which is in Estado de México, directly imports its plant inputs located in other latitudes, or is supplied by suppliers located abroad or in other states of the country.

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Table 12.6 Jalisco. Category of automotive industry suppliers, according to origin Country Japan Germany China Mexico USA France Singapore Spain Total

Tier1

Tier2

Tier3

Total

6 7 0 0 1 0 0 0 14

5 1 3 3 0 1 1 1 15

1 0 0 0 0 0 0 0 1

12 8 3 3 1 1 1 1 30

Source Own elaboration from the information of the companies that make up the total population of the database

The analysis of the category of suppliers located in San Luis Potosí was based on information obtained from 100% of the companies of the total population that make up the database. Like the previous federations examined, the nations that stand out in terms of the number of companies located in the state, depending on Tier’s category, are Japan, the United States and Germany; however, those of Mexican and South Korean origin also stand out. Most of these suppliers rank Tier1, while Japanese companies also gain a good position as Tier2 (see Table 12.7). For their part, locally sourced suppliers predominate as Tier1 and Tier2, showing that Mexican companies have begun to develop high-tech resources and capabilities to advance to the highest level of GVCs of the signatures located in the entity and in the country. The previous comparative study showed the structure of the GVCs run by multinational companies in the automotive industry located in the Western region of Mexico, as well as the activities that develop within the sector. At the same time, it provided an accurate idea of the role that Mexican companies currently play within this productive structure. The most significant part of the empirical study is that it is possible to identify local companies that have managed to develop resources and capacities to link to the GVCs of multinational companies. Moreover, they have made progress toward high-tech processes to be located as direct suppliers of plants (Tier1) located in the Western region and other entities in Mexico.

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Table 12.7 San Luis Potosí. Category of automotive industry suppliers, according to origin Country Japan Germany USA Mexico South Korea France Canada China Spain Swiss Austria Belgium India Poland Total

Tier1

Tier2

Tier3

Total

9 10 7 5 5 3 2 2 3 2 0 1 0 0 49

8 1 4 5 2 2 1 1 0 0 1 0 1 1 27

0 0 0 0 0 0 1 0 0 0 0 0 0 0 1

17 11 11 10 7 5 4 3 3 2 1 1 1 1 77

Source Own elaboration from the information of the companies that make up the total population of the database

In short, from the information poured here, it can be concluded that in general local companies have managed to link to the GVCs of multinational companies by having fundamental productive resources and capacities to meet strict quality standards, in addition to staying within the supplier base of the firms was trained as a constant tenacity to scale technologically within the chains, as well as the willingness to be flexible to adapt to the changes that the market demands. In addition, the new demands and incessant changes in the volumes demanded by the firms that make up the automotive ecosystem have forced supplier companies to implement innovative systems and processes that have enabled them to be more efficient. It was also identified that local suppliers in the sector have scaled productively to competitively progress in products and processes to be more efficient and meet the quality standards requested by multinationals.

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Conclusions

In recent years, the automotive industry in Mexico has experienced significant growth, with high potential to continue expanding in the West region of the country in the next decade. This represents, without a doubt, a business opportunity for companies of national origin with an interest in being part of the GVCs of the companies that make up the industry. However, it is not an easy task due to the high difficulty faced by local companies in meeting the quality standards required by the sector to establish productive links with multinational companies, the strong competition generated by supplier companies that have come from different latitudes to meet the demand of firms and the large proportion of imports generated by the industrial ecosystem, due to the high dependence on some foreign-sourced inputs. The complicated access to the GVCs of assembly companies is the main challenge facing local companies looking to expand their market and expand their customer portfolio. In particular, the most difficult process facing such companies to integrate with GVC of global firms is to establish the contractual relationship and subsequently to remain a supplier. Once the productive link is established, local companies can end mediumand long-term contractual relationships with multinationals, if they have productive capabilities to scale productively and with resources to meet the required quality standards. For the purposes of this research, the dynamics of the sector’s production chain in Western Mexico were examined, under which in recent years this region—composed of the states of Aguascalientes, Guanajuato, Jalisco and San Luis Potosí—has been characterized by a growing expansion following the arrival in recent years of new assembly companies of different latitudes, which has led to the gradual integration of foreign and domestic suppliers of different levels. From the empirical study, it has been identified that it is not an easy task for local companies to maintain the productive pace demanded by multinational companies of their suppliers, so it has been difficult for this group to systematically advance to categories of supply close to shipowners and, consequently, increase the local content of the automotive industry located in the Western region. This situation has led to an accelerated increase in foreign direct investment that responds essentially to the relentless arrival of a significant number of foreign suppliers to supply high-tech parts and components (Tier1) to shipowners located

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in the region. The origin of recent investment comes mainly from the United States, Japan and Germany. In order to identify the set of productive capacities that local companies have achieved to link to the GVCs run by multinational companies and, to identify the position in which they are located, the sector’s production chain was analyzed in each of the federative entities that make up the region under study. The results showed that although there is a significant proportion of the companies that make up the supplier base are of national origin, they are mostly located in the lowest categories of the production chain (Tier2 and Tier3), because they are small and medium with difficult access to state-of-the-art technology. In addition, by analyzing the turn of national suppliers, it was possible to identify that they are mostly responsible for providing companies with medium- and low-tech inputs or components (e.g., plastic parts, aluminum and forged for various components, machining, mechanical metal parts, paint and coating, etc.). However, it should be noted that a few companies have managed to venture into the supply of parts for the manufacture of car seat structures and fabric for interior coatings, as well as some parts and components of intermediate technology. Both activities correspond to Tier2, which proves that some domestic companies have productively scaled within the industry supply chain. In contrast, it is possible to identify that foreign capital suppliers are mostly large direct suppliers of assembly companies (Tier1), which are responsible for supplying high value-added inputs within the production chain, i.e., of greater technological complexity (e.g., engine parts, transmission, electronic systems, steering, brakes, air conditioning, seat and interior manufacturing and main components for a vehicle’s mechanical systems). The most significant part of the empirical study is the possibility to note that local companies that have managed to develop resources and capacities to link up to the GVCs of multinational companies, which coincides with the statement made by Ernst (2003) and Madhok (2002). Moreover, they have made progress toward high-tech processes to be located as direct suppliers of plants (Tier1) located in the West region and other entities in the Mexican republic. From the information poured here, it can be concluded that in general a significant group of local companies have managed to link up to the GVCs of multinational companies by having fundamental productive resources and capacities to meet strict quality standards. In addition, to

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stay within the supplier base of the firms, the tenacity to scale technologically within the chains, as well as the willingness to be flexible to adapt to the changes that the market demands, was reflected as a constant. In addition, the new demands and incessant changes in the volumes demanded by the firms that make up the automotive ecosystem have forced suppliers to implement new quality systems and innovative processes that have allowed them to be more efficient.15 In general, the evidence gathered suggests that the linkage of local companies to the GVC of multinational companies is conditioned by factors of various nature. On the one hand, we find the productive dynamics generated by foreign firms and the interest in reducing transaction costs. On the other hand, the entrepreneurial condition of national companies to enter a productive dynamic that implies a high demand in terms of quality and technological level of the products. Local companies therefore need to have optimal production capacities and resources to establish productive links with companies in the sector. In short, the participation of local companies in GVCs contributes to strengthening their competitiveness in the global environment, as they must face more demanding demand, as well as stimulate the development of new resources and capacities derived from the transfer of knowledge acquired from the establishment of productive relationships with the leaders of the chain, as indicated by Ernst and Kim (2002), Ernst (2003) and Madhok (2002).

References AMIA. (2019). Estadísticas de la Asociación Mexicana de la industria Automotriz. http://www.amia.com.mx/ AMIA e INEGI. (2018). Colección de estudios sectoriales y regionales. Conociendo la industria automotriz. INEGI. Basulto, A. (2015). Iniciativa empresarial e integración a cadenas globales de valor. El caso de los proveedores locales de las multinacionales de la electrónica en Jalisco. Editorial Universitaria. Carrillo, J., & Novick, M. (2006). Eslabonamientos productivos globales y actores locales. Debates y experiencias en América Latina. En E. de la Garza

15 For example, the ISO/TS quality standard has been transferred to that of International Automotive Task Force (IATF) quality management systems.

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(coord.), Teorías Sociales y estudios del trabajo: nuevos enfoques. AnthroposUAM. Ernst, D. (2003). Redes globales de producción, difusión de conocimiento y formación de capacidades locales. Un marco conceptual. En E. Dussel, J. J. Palacios y G. Woo (coords.), La industria electrónica en México: problemática, perspectivas y propuestas (pp. 13–58). Universidad de Guadalajara. Ernst, D., & Kim, L. (2002). Global production networks, information technology and knowledge diffusion. Industry and Innovation, 9(3), 147–153. Gereffi, G., Humphrey, J., Kaplinsky, R., & Sturgeon, T. (2001). Globalization, value chains and development. IDS Bulletin, 32(3), 1–8. Gereffi, G., Humphrey, J., & Sturgeon, T. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78–104. Humphrey, J., & Schmitz, H. (2002). Developing country firms in the world economy: Governance and upgrading in global value chains (INEF Report). Institut für Entwicklung und Frieden der Gerhard-Mercator-Universität Duisburg. INEGI. (2004). Censos Económicos 2004. www.inegi.org.mx INEGI. (2009). Censos Económicos 2009. www.inegi.org.mx INEGI. (2015). Censos Económicos 2014. www.inegi.org.mx INEGI. (2019a). Estadísticas del Comercio Exterior. www.inegi.org.mx. INEGI. (2019b). Estadísticas del Inversión Extranjera Directa. www.inegi.org. mx. INEGI. (2019c). Directorio Estadístico Nacional de Unidades Económicas (DENUE). Lamming, R. (1993). Beyond partnership: Strategies for innovation and lean supply. Prentice Hall. Madhok, A. (2002). Reassessing the fundamentals and beyond: Ronald Coase, the transaction cost and resource-based theories of the firm and the institutional structure of production. Strategic Management Journal, 23, 535–550. Musik, G. A. (2004). El sector autopartes en México; diagnóstico, prospectiva y estrategia. Centro de Estudios de Competitividad. ITAM. OICA. (2019). Estadísticas de la International Organization of Motor Vehicle Manufacturers, 2017 . http://www.oica.net ProMéxico. (2016). Monografía de la industria automotriz 2015. www.promex ico.gob.mx, www.inegi.org.mx Secretaria de Economía. (2019). Estadísticas del Inversión Extranjera Directa. https://datos.gob.mx/busca/dataset/informacion-estadistica-de-lainversion-extranjera-directa The Observatory of Economic Complexity. (2020). Estadísticas. https://oec.wor ld/en/

Index

A Added value, 6, 30, 31, 37–39, 67, 75, 78, 85–87, 89, 90, 97, 102, 106, 144–146, 158, 194, 210, 220, 224, 233, 235, 246, 247, 256, 260, 269, 278, 283, 304, 317 Aerospace Industry in Mexico, 252, 270 Agribusiness, 9, 67, 71, 123 Agrichains, 56, 59, 60, 68, 72 Agrifood chain, 8, 9, 11 Agro-chain, 56 Alternative value chain, 165, 167 Appellation of origin, 84 Automotive industry, 12, 24, 220, 288–290, 297–299, 302–304, 309–311, 313–315, 318–321

B Biocultural product, 151

C Case study, 172, 173, 311, 316 Clusters, 6, 10, 31, 36–38, 40–42, 44–46, 48, 258, 261, 267–269, 271–273, 279, 282, 283, 298, 305 Coffee Micro batch, 164, 177 Competitiveness, 9, 12, 34, 47, 58, 60, 67, 72, 73, 75, 76, 106, 123, 152, 188, 189, 211, 212, 216, 220, 221, 226, 237, 238, 240, 242–245, 247, 256, 278, 282, 291, 294–296, 323 Conventional market, 164, 167, 170, 177, 179

D Designation of origin, 84, 85, 87, 89, 90, 92, 94–98, 101, 119, 126, 165

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 P. Pérez Akaki et al. (eds.), Global Value Chains in Latin America, Sustainable Development Goals Series, https://doi.org/10.1007/978-3-031-33103-9

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326

INDEX

F Foreign direct investment, 257, 297, 298, 302, 309, 321

N Niche market, 165–167, 170

G Geographical dimension, 226 Geographical origin, 102, 169 Globalization, 15, 31, 83, 139, 215 Governance, 9, 10, 16, 17, 30, 49, 57, 87, 101, 105, 107, 126, 138–141, 153–155, 159, 188, 198, 213, 253, 254, 280, 295

O Organic products, 195

I Industrial modernization, 252 Innovation, 9, 10, 12, 31, 33, 34, 45, 48, 58, 60, 103, 109, 126, 153, 238, 243, 247, 253–256, 263, 280–282, 303, 307 Input-output structure, 16, 57 Institutional framework, 59, 70, 71, 79, 101, 102, 104, 105, 108, 110, 113, 120, 128, 138, 139, 142, 152, 157, 223, 226 Investment, 5–10, 12, 19, 29, 34, 58, 79, 89, 97, 126–128, 167, 169, 183, 201, 221, 244–246, 252, 253, 257, 263–265, 269, 271, 274, 276–279, 281, 287, 291, 295, 297, 298, 309, 322

S Small producers, 122, 137, 147, 158, 166, 182, 188, 190, 191, 193, 194, 206–208, 211, 212, 230 Spatiality dimension, 138 Specialty coffee, 165, 166, 168–170, 172, 176, 179, 180, 182 Sustainability, 4, 6, 10, 78, 79, 102, 115, 242, 245

L Labor upgrading in AI, 253 Latin American countries, 5, 6 M Meso level, 56–60, 68, 72–76, 190, 244

P Production networks, 30, 32, 33 Productive policies, 56, 57, 75, 76

T Territorial dimension, 138, 139 Third-party institutions, 139 Trading relationship, 182 Triple helix, 11, 80, 226, 251–256, 265, 267, 268, 270–274, 276–282

U Upgrading, 5, 6, 9, 16, 17, 19, 30, 31, 36, 142, 157, 189, 221, 252, 256, 263, 265, 274, 275, 277, 278, 281, 282, 296, 317