Business-to-business relations: access to inputs and cooperation

Access to inputs in terms of quantity, quality and variety is essential for companies to achieve high levels of productivity. So is cooperation, which allows them to obtain the necessary inputs for their production in a more efficient way and to have a flow of information that facilitates the adoption of innovative inputs and better technologies.

In this sense, given that production is organized in value chains where one company depends on the inputs of others, distortions in one sector can be transmitted to others and affect their productivity. Therefore, the web of inter-firm relationships acts as a transmission mechanism for sectoral shocks that eventually affect aggregate productivity.

The service sector

An analysis of sectoral input-output relations in LAC reveals the great importance of the services sectors and, in particular, of the commerce sector as an input supplier (Álvarez et al., 2018). It also identifies sectoral distortions affecting access to inputs. These distortions, taken together, are estimated to cause productivity losses equivalent to 14 % of output on average in the region.. 

Although these distortions stem, to a large extent, from the set of regulations and market failures that affect all sectors, some arise from sector-specific problems. The service sector seems to be particularly affected by this type of problem, which is relevant given its degree of influence within the economy.

This is related to the marked deficiencies in the quality of some services in the region, such as electricity, transportation and logistics services, which are essential for business operations. The low quality of services is due, in part, to the existence of important infrastructure gaps, as mentioned in Chapter 1. Another determining factor is the presence of deficient regulatory frameworks that limit competition and impose barriers to trade in services.. 

Addressing these problems implies carrying out reforms to these regulatory frameworks and implementing measures that favor competition, private participation and international trade in services, some of which have already been discussed. Other measures may be aimed at encouraging public-private partnerships in infrastructure projects and foreign direct investment in services.

Cluster policies

Cluster promotion policies can be powerful instruments for improving access to inputs and fostering cooperation among firms. This is particularly relevant in industries where coordination is essential to achieve economies of scale or to favor access to specialized workers or inputs.

Cluster policies can also generate significant sectoral productivity gains by fostering the division and specialization of labor, the development of a wide range of high-quality inputs and services for the sector, the provision of essential public goods and infrastructure, the development of business partnerships, and the innovation and diffusion of knowledge. For cluster policies to be effective, they must promote capacity building in both the public and private sectors. This implies strengthening institutions, promoting human capital formation and facilitating collaboration between companies, Government, universities and research institutions. In addition, it is crucial to promote the benefits generated by clusters, such as knowledge spillovers. To this end, measures that strengthen linkages within the cluster and facilitate its integration with external markets must be implemented (Álvarez et al., 2018).

This approach requires a comprehensive set of actions ranging from the identification of potential clusters and dialogue with key stakeholders, to the provision of public goods, the promotion of collective investments, support for the training of specialized human capital, the improvement of logistics infrastructure and the development of efficient supply chains. 

Participation in global value chains

Integration into global value chains (GVCs) is a key aspect to enhance the impact of clusters. It offers multiple benefits, such as access to higher quality inputs, advanced technologies and more efficient production processes. Integration also exposes companies to best practices, international standards and innovations that can result in knowledge transfers. In addition, companies have access to global markets that allow them to grow, take advantage of economies of scale and increase their efficiency.

There is a channel that runs along the production chain that makes the benefits of international trade grow and grow as we build on the production chain. This is a very important element that speaks of the importance of having access to better inputs. And that not only translates into me importing better or cheaper inputs, but also into competitive pressure on input levels. It also leads to an improvement in the local production of those inputs.

Based on an interview with Marcela Eslava

A study by Fernandes et al. (2021) reveals that exporting companies in the region that participate in GVCs—that is, those that not only export, but also import intermediate inputs and capital goods—have a better export performance. These companies also tend to be larger and more diversified.

When looking at Latin America’s integration into large value chains, we find that we are connected at the beginning or at the end of the chain with some products. The studies that have been done show that the countries that have been most successful in growth typically have multidimensional and varied connections with global value chains. In particular, they are highly embedded in the intermediate segments. This suggests that when you are in the middle of the chain, you have more options for learning, acquiring and developing new technologies, and improving the quality of what you do because, on the one hand, you have to import, and on the other, you have to export.

Based on an interview with Augusto de la Torre

Unfortunately, LAC shows a low level of integration into GVCs¹. This is also reflected in a weak integration into regional value chains, which is in line with the low level of intra-regional trade already mentioned. The evidence shows that, compared to other regions, LAC exporting companies are less dependent on intraregional markets, both for their exports and for obtaining inputs (Fernandes et al., 2021).

The integration of the region’s companies into GVCs requires a comprehensive strategy that addresses several key aspects. First, facilitating foreign direct investment (FDI). This allows multinational companies to take advantage of local economic benefits, such as lower costs or the availability of specific inputs. In addition, FDI can generate opportunities for domestic companies to integrate into the production chains of these multinationals and create spillover effects that benefit local companies.

Second, there is a need for cross-cutting policies that promote trade openness, innovation and human capital development, as well as others that improve access to financing. Institutional reforms are also needed, for example, to strengthen property rights and promote regulatory transparency.

Finally, in order to reinforce regional value chains, it is essential to simplify and harmonize the rules of origin in intra-regional trade agreements. The complexity and inconsistency of these rules hinder the accumulation of production processes in several countries and discourage regional integration.