Introduction

With the rise of global value chains (GVCs) and the tiered, internationally dispersed organization of production associated with GVCs, important questions have arisen about the conditions under which small suppliers and dependent contractors in supplier countries can create value and rise up from their position at the bottom of these chains (Carré, 2017; Bair and Gereffi, 2001; Gereffi 1999). A vast literature has arisen on the processes and prospects of upgrading within GVCs and production networks (Humphrey and Schmitz, 2002; Sturgeon et al., 2008; see Pipkin and Fuentes, 2017, for an excellent review). A vexing puzzle, however, persists about the substantial variation in the upgrading and learning outcomes among similarly situated firms located in the region, the same policy environment and even in the same sector. For example, I interviewed over forty component suppliers in the Indian automotive industry between 2000 and 2013, following about fifteen of them longitudinally through repeated interviews over time. During this period – a time of immense churn and growth in the Indian automotive sector with the arrival of many global auto-manufacturers and their suppliers into the country – some of the smallest suppliers in my sample thrived while others of similar size and in similar locations stagnated or went out of business.

Why do some firms succeed in upgrading and growing while other similarly situated firms are unable to do so? How and under what conditions can small suppliers in the lower reaches of GVCs and production networks learn to upgrade and improve their position within these value chains and networks?

This chapter contributes to the literature on upgrading among small producers in lower tiers of competitive GVCs. It explores the learning sequences associated with the upgrading pathways of suppliers that are usually regarded to be at risk of being trapped at the bottom of fast-moving GVCs (Barnes and Kaplinsky, 2000), or vulnerable to being displaced by more powerful, sophisticated and better connected top-tier suppliers of global original equipment manufacturers (OEMs) (Humphrey, 2003). The question of learning and upgrading among small suppliers is important because the vitality of an economy's manufacturing sector and its ability to compete and innovate in the face of global competition is shaped in part by the depth, quality and robustness of its locally rooted supply base.

Introduction

This chapter examines the need for a change in the growth strategy of Indian information technology (IT) service majors such as Infosys, TCS and Wipro. The chapter starts with the innovative global delivery model (GDM) that the Indian IT majors have implemented and the problems they may face if they continue on the same growth path. After this, it looks at the problem of path dependence and its manifestation in terms of low investment in research and development (R&D) and large cash build-ups. The chapter then looks at the challenges in bringing about a strategy change, the capabilities required and the role of both organic and inorganic growth.

The Indian IT services innovation model

The Indian IT software services industry was built on the basis of providing middle- to low-end programming services as part of an overall software service. The conception, design and architecture of the software were done by consultancy services such as IBM and Accenture, by the clients themselves, or by other IT consultancy companies. The Indian IT companies entered the picture to carry out programming, testing and maintenance of the software solution. In order to do this, the Indian industry innovated in coming up with what came to be known as the global delivery model (GDM), in which a software development service was broken up into a number of components. Some of the higher-end tasks requiring continuous or frequent interaction with the client were carried out on-site by the Indian firms’ IT engineers, who were sent to work on the client's site. Other components of the work were carried out offshore by engineers in Indian offices. The completed and tested software service was finally put together for delivery to the client.

This GDM, with its division of onshore and offshore work, was able to utilize the difference between salaries paid to IT engineers in the high-income client countries (HICs) and the low- or middle-income provider countries, such as India. In addition, it was also able to ‘follow the sun’, with work continuing in India while offices in the USA or Europe closed for the day and vice-versa. The GDM reduced both the costs of IT service production and the time required for delivery.

Introduction

‘In ten years, only three telecom-equipment companies will dominate the world: Siemens, Alcatel, and Huawei.’ This was how Ren Zhengfei, the CEO of Huawei, expressed his ambition for his company in 1994 (Fan, 2010). At that time, Huawei, a small local producer, just developed its first large-scale switching equipment, C&C08, and together with other domestic companies, such as Great Dragon Corporation, ZTE and Datang, it was on its way to start catching up with the multinational corporations (MNCs) in China's telecom-equipment industry. Huawei, ZTE and other domestic companies were fighting hard against the large MNCs in China to gain a share in the domestic market. Two decades later, the landscape of the global telecommunication industry dramatically changed. Ren's prediction about Siemens and Huawei as two of the top three became true, though. Following the lead of Siemens, Ericsson, Huawei, Alcatel-Lucent, Nokia Siemens Networks and ZTE are considered the global telecom companies that ‘dominated the world’ (listed here in decreasing order of their revenue in 2011). Huawei and ZTE, two Chinese telecom-equipment MNCs, have not only emerged into the scene, but also become the crucial players in the global market, thriving in emerging markets such as Africa, Asia and South America as well as in the developed markets of North America and western Europe.

In the early 1980s, China relied almost completely on imports to satisfy its demand for telecom equipment (Zhang, 2000). Within less than three decades, Chinese companies not only achieved remarkable success in the domestic market, but also competed directly with global giants in the mainstream markets mentioned earlier. Leading domestic companies set up networks of sales offices on almost every continent, built manufacturing facilities in key markets and established research and development (R&D) centres in global innovation centres such as Silicon Valley, Stockholm and Bangalore. In terms of innovation capability, some, such as Shanghai Bell, initially relied on technology transfer through joint ventures, whereas others, such as Huawei, ZTE, Great Dragon Technology (GDT) and Datang, developed their own capability from the beginning and made considerable technological catch-up (Fan, 2006a, 2006b; Shen, 1999) due to their knowledge of their own market and production sites, their focus on incremental and architectural innovation rather than radical innovation, and their integration with global knowledge networks (Ernst, 2006).

Introduction

The ‘reform and opening-up’ policies (gaige kaifang) initiated by the Chinese central government in the late 1970s have, on the one hand, enabled the country to achieve remarkable economic development and, on the other hand, fundamentally transformed its economic, political and institutional systems in three ways: (a) from a closed or partially closed economy to an open one that becomes increasingly integrated into the global economy and oriented towards export markets (globalization), (b) from a centrally planned to a decentralized political and fiscal system (decentralization) and (c) from a state- and collectively owned economy to one with a growing level of market orientation and private ownership (marketization) (He, Wei and Xie, 2008; McMillan and Naughton, 1992; Naughton, 1996; Wei, 2000, 2001). These changes have taken place alongside a new wave of economic globalization in which millions of Chinese consumers and workers have become more direct participants in the global economy, a process that has increasingly come to drive China's rapidly changing economic geography (Gereffi, 2009; Henderson and Nadvi, 2011). China's accession to the World Trade Organization (WTO) in 2001 further accelerated these transformations (Zhu and He, 2013). Driven by this export-oriented industrialization model, China's average annual gross domestic product (GDP) growth rate was around 9.8 per cent; exports increased by 12.4 per cent annually in the 1990s, and by more than 20 per cent a year in the early 2000s (National Bureau of Statistics of China, 2011).

There was a boom in some manufacturing sectors in response to internal reforms and international demand for Chinese exports goods (Gereffi, 1999; Lemoine and Ünal-Kesenci, 2004), particularly those dependent on unskilled or semi-skilled low-wage labour and the leveraging of China's domestic advantages, including its large domestic market and the low cost of other input factors, such as land and electricity (Gereffi, 2009). Production and employment in such manufacturing sectors have become heavily concentrated in the coastal regions of east and southeast China, especially in export-processing zones (Fujita and Hu, 2001; He et al., 2008; Wen, 2004). In addition to cheap labour and land, the impressive growth of China's export-oriented production has also been predicated on a flexible business environment, the half-hearted enforcement of labour and environmental regulations and loose inspection of imports and exports (Hsing, 1998; Hsueh, 2011).

Introduction

Catching-up requires the Indian pharmaceutical industry to catch up in the creation of knowledge for drug discovery and process innovations (Jiasu, Lin and Sha, 2016). During the post-TRIPS (Trade Related Intellectual Property Rights) era, in January 2000, India's policymakers laid down explicitly for the first time a policy for the promotion of drug discovery and development efforts. It was with the announcement of this policy that India's policymakers declared their ambition of not only developing contemporary therapeutics to help reduce the rates of morbidity and mortality for the country, but also of becoming a significant global player on the strength of domestic firms’ investments in drug discovery research and development (R&D).

In India, the process of creation and accumulation of firm-specific advantages by domestic firms began under the new patent regime with the passing of FERA regulations and the New Drug Policy 1978 to reduce activities of multinational corporations (MNCs) in the sector. Although the pioneering domestic pharmaceutical firms took some time to export to the highly regulated markets of the US and Europe, but what is really important is that the route taken was one of developing in-house capabilities for generic manufacturing and R&D with the help of the capabilities of the public-sector industry and R&D institutions in place in India. The entry of domestic firms into the US market started when Ranbaxy developed an alternative process for manufacturing Eli Lilly's patented drug Cefaclor. The American company sensed that it would lose its markets to Ranbaxy's low-cost substitute in countries that did not recognize product patents. To make the best of a bad situation, Eli Lilly offered a manufacturing contract to Ranbaxy for producing 7 ACCA, intermediate for Cefaclor. In 1993, Ranbaxy laboratories signed a contract manufacturing agreement with Eli Lilly (Pradhan, 2006).

This chapter examines the contribution of domestic pharmaceutical firms to the drug discovery efforts undertaken after the implementation of the TRIPS Agreement in India. It assesses their contribution towards system-building activities. The policy impact is tracked in terms of the progress made in the strengthening of in-house capabilities and the development of system-wide links and relations for the creation of knowledge for drug discovery.

Unconnected economic sub-systems

A characteristic of developing economies is the complex production layers that coexist, often disaggregated and disconnected from each other. Hirschman (1958) and Arthur Lewis (1954) were among the influential development economists who recognized the challenge of dispersed, isolated sectors. Their approaches were consistent with the later rise of the neo-Schumpeterian evolutionary tradition that also focuses on non-equilibrium, dynamic characteristics of production systems. These approaches include the non-traded aspects of the domestic economy which constitute heterogeneous production. While there is much written on why these coexisting and evolving systems are not easy to describe in neoclassical economics, there is still a limited body of work addressing what this dynamism means for development and the roles of states. Indeed, the open-ended and evolutionary aspects of this technological change may have been understated. What draws these different economics traditions together, however, is the importance they all placed, admittedly in very different ways, on the institutional permutations through which the sectors connect. This chapter emphasizes that the unconnected sub-systems raise at least two challenges: one, that there are many productive sub-systems within which innovation occurs and coordination is no easy task. This has been well recognized in scholarship; the second aspect, however, has not received the attention it deserves: that demand evolves in these different, inter-linked sub-systems. Determining how demand emerges is no straightforward task.

While global value chains (GVCs) reflect influential changes in the production structure of industrializing economies in trade, these linkages offer some complexities and important omissions. Structurally and cognitively, the ‘ends of the chain’ constitute extensive networks of small firm suppliers. Even when GVCs exist or dominate, the economy may have a large un-traded component, comprising a large mix of ‘informal’ micro and small firms involved in both domestic and international trade, and economic activity that is characterized by piece-rate, own-account, self-employed and subsistence activities (Chen, 2005). Size is not the only qualification; the institutional contexts in which people can productively work and innovate are. How people innovate with an institutional mix that lies largely outside that favouring GVCs deserves attention (Srinivas and Sutz, 2008), and how we consider time t=0 matters in any evolution of a sub-system, even that of the now dominant GVC (see Srinivas, 2009).

Introduction

The global electronics industry GVC has experienced significant changes in recent years. Increased competition and restructuring amongst branded firms, technological advancements and opportunities presented in emerging economies have shaped outsourcing, upgrading and transformations in the industry. An important group of supplier firms affected by these changes are contract manufacturers. Contract manufacturers are a small group of first-tier suppliers that carry out most of the manufacturing of electronic products for branded firms in the GVC. According to estimates by the European Commission, branded firms outsourced 80 per cent of their manufacturing to only five contract manufacturers (European Commission, 2012). They are Foxconn, Flex, Jabil Circuit, Celestica and Sanmina-SCI. The majority of these contract manufacturers originated in North America (Jabil Circuit, Flex and Sanmina-SCI in the United States and Celestica in Canada. Foxconn is a Taiwanese firm). Over the past ten years, contract manufacturers have transformed into suppliers with a wide range of capabilities that include design, engineering, technological and manufacturing innovation, alongside diversification strategies that have moved them into higher value-added operations for a variety of industries. In 2015, the contract manufacturing industry was worth US$430 billion (New Venture Research, 2016).

This chapter begins by discussing the changing landscape of contract manufacturing in the electronics industry GVC in light of wider global market dynamics. It aims to update earlier conceptualizations of contract manufacturers in the GVC literature in three ways. First, since the rise of contract manufacturing

in the 1990s, these suppliers have moved beyond solely manufacturing for lead firms in GVCs. They have increased their capabilities, both organically and through strategic mergers and acquisitions (M&As), towards design, innovation and engineering work. Second, this increase in their capabilities has occurred in conjunction with diversification into new industries such as the automotive, aerospace, defence and health. Finally, emerging market locations in Asia such as China have opened up further opportunities for expanding design centres. These factors have shaped the upward trajectory of upgrading and growth amongst contract manufacturers. Through these changes, contract manufacturers show a variety of paths to upgrading which challenge earlier descriptions of contract manufacturers in the GVC literature as suppliers with ‘generic capabilities’ which are interchangeable, easily substitutable and present low switching costs to lead firms (Gereffi, Humphrey and Sturgeon, 2005).

Frugal engineering as the latest managerial fad?

‘Frugal engineering’ predates the term ‘frugal innovation’. It describes (in the same way that ‘reverse engineering’ describes itself) the norms of engineering practice in Indian companies designed to lower the cost of product development and manufacturing. Carlos Ghosn, the Chief Executive Officer of Nissan and Renault, is usually attributed with the first use of the term (Radjou et al., 2012). In mainstream management circles, frugal engineering was highlighted by The Economist (2010a, 2010b).

Frugal innovation has arisen not from the writings of academics or experts but out of management responses to unique economic, social and competitive challenges faced by firms in developing countries. There are no generally accepted guidelines or simple rules that can be universally followed in order to materialize any perceived or promised results. Frugal innovation, as it stands, seems to be complex, multifaceted and can be interpreted and applied in a number of ways in different firms (Kar, 2012).

While it was in the management practitioners’ literature that the concept of frugal innovation was originally defined, this has been followed by the research concerns of the academic community. The practitioners’ conception may continue to remain dominant but for organizations to imitate effectively or to adopt frugal innovation strategies, academic research is needed to help define its full potential as well as to understand its limitations. Towards the end of the twentieth century, ‘lean’ processes based on eliminating waste (for example, lean engineering and just-in-time manufacturing) originating in Japan's Toyota Production System (TPS) was widely adopted by other firms.

The legacy of lean practices

Lean manufacturing is emerging as the dominant paradigm for the design and operation of current manufacturing facilities. The term ‘lean’ is usually understood to be associated with the operational aspect of a manufacturing enterprise, including processes associated with the supply of materials, component production, the delivery of products and customer service. However, lean thinking can also be applied outside manufacturing operations, although examples of this (such as applications in service-based enterprises) are relatively rare.

Knowledge-based activities such as design, new product introduction (NPI), engineering and product development (PD) are areas within an enterprise where the potential benefits from the adoption of lean engineering principles may be significant.

The Philippines in manufacturing GVCs: An overview

After decades of stagnant growth, in the 2010s, the Philippines emerged to become one of the fastest-growing economies globally, with an average annual gross domestic product (GDP) growth of 5.4 per cent between 2005 and 2015 (World Bank, 2016a). The country's economic development was driven by an expanding population, improvements in trade and investment conditions, and strong human capital. In 2014, total exports reached US$87 billion, while foreign investment increased five-fold between 2010 and 2014, accounting for approximately 2.5 per cent of the country's GDP that year (UNCTAD, 2016; World Bank, 2016b). These trends helped foster strong job creation, a key agenda for governments of the period, which placed a premium on an inclusive economic growth agenda (NEDA, 2011).

Export-led growth and the entry and upgrading of the Philippines in a variety of global value chains (GVCs) were important elements of the country's development. While services exports contributed significantly to growth, the Philippines also entered new manufacturing value chains and expanded both global and regional trade in niche product categories.Although the country was still a relatively small and low-value player in manufacturing GVCs compared to its regional peers in Asia, by the middle of the decade, it began to diversify, upgrade and innovate in a few select chains.

While electronics has been the country's largest global industry, the automotive electronics and aerospace industries were two sectors where the Philippines’ emergence and upgrading has been most visible. In addition to

becoming a hub for wire harness production, the Philippines increased its exports of automotive electronics and began manufacturing and assembling flight controls and aircraft interiors for the sophisticated aerospace industry. This upgrading boosted both the quality and quantity of jobs in the country – the assembly of wire harnesses is labour-intensive, and entry into the aerospace industry provided an opportunity for large numbers of engineers.

Involvement in these manufacturing GVCs was predicated on several factors, including: (a) strong human capital associated with a growing population, (b) favourable investment regimes and (c) exploitation of similar strengths across related value chains.

Introduction

Manufacturers in the apparel industry are not price-makers; rather, they are generally price-takers. Entry into the apparel manufacturing global value chain (GVC) segment is relatively easy because there is no requirement for complex technical knowledge, or for a large amount of capital. Apparel manufacture in GVCs is often a country's first entry into modern manufacturing. Thus, there is a high level of competition in the apparel manufacturing GVC segments, both at the national and international levels. This raises the question: is there any scope for apparel manufacturers to increase their returns despite taking prices as given? Obviously, this can happen only if they are able to cheapen the cost of production compared to their competitors, either by reducing the cost of inputs, mainly labour (often called the ‘low road’); or by increasing the efficiency of production (the ‘high road’). An improvement in the efficiency of production will require some investment, but the investment can pay off in terms of higher returns with respect to the overall investment made.

Increases in returns due to improvements in production processes are called process rents; they are returns on investments which are higher than those secured by competitors who do not carry out such incremental improvements. However, process improvements are easily copied and can spread throughout the industry. If that happens, we get the Prebish-Singer-Kaplinsky (Kaplinsky, 2005) result: the gains of productivity improvement will be captured by the buyers, the brands and big retailers, and not accrue to the producer firms. In order for some firms to secure process rents, the situation would need to be one where some firms undertake the process improvements, but this practice has not spread across the industry as a whole. This spreading of the process improvements would need to be considered not only on a national, but on a global scale, given that lead firms can, over time, switch the location of production.

These process improvements can be called process innovations. Even if they are not new to the industry as a whole, they represent a change or innovation in the functioning of supplier firms. The innovations dealt with fall into the category of incremental innovation. However, it is these incremental innovations that allow some manufacturers to increase their returns even while functioning under the same market conditions as other non-innovative firms.

Introduction

The global landscape of the apparel industry is being profoundly transformed following the termination of the Multi-Fibre Arrangement (MFA) on 1 January 2005. International buyers are now free to source apparel from any country, subject only to the system of tariffs. Since they are no longer constrained by country-specific quotas, buyers can demand many more attributes of products from suppliers in addition to price. These would include things like product variety, quality and timely delivery. They have also started to aggressively restructure their sourcing patterns to procure from fewer efficient suppliers worldwide and to develop long-term strategic partnerships with core suppliers by setting up local sourcing offices, bypassing their erstwhile sourcing agents (Fung, Fung and Wind, 2007; USITC, 2012). The importance of these non-price factors in export success in the post-MFA era has been further elevated by the ongoing process of ‘lean retailing’, a business strategy that has become widespread in the apparel trade in developed countries since the mid-1990s (Abernathy et al., 1999, 2006; Evens and Harrigan, 2005; Harrigan and Barrows, 2009). Lean retailing involves replenishing the range of apparel on offer on the shop floor in very short cycles (rather than seasonally, as was traditionally done), while defraying the inventory risk by holding low stocks. In the process of lean retailing, ‘suppliers’ warehouses and distribution centres act in many ways as virtual warehouses and distribution centres for the retailer (Abernathy et al., 1999, 16). The buyers also increasingly require suppliers to undertake tasks such as labelling, packaging and barcoding, which were traditionally done in the buyer's warehouses or distribution centres (Abernathy et al., 2006; Fung et al., 2007).

In this context, the export success of apparel manufactures depend crucially on industrial upgrading, the ability to ‘climb the value chain from basic assembly activities to full-package supply and integrated manufacturing’ (Gereffi and Fernandez-Stark, 2016, 5). Understanding the processes and drivers of industrial upgrading is vital for crafting national policies for facilitating the required industrial adjustment. Much has been written about the impact of MFA on global trade patterns and the governance of the global apparel value chain, especially about the way in which lead firms organize their supply chain on a global scale. There is, however, a dearth of studies of the experiences of exporting countries in repositioning in the apparel value chain in the post-MFA era.

Who are these people? What do you know about them? What do they know about you or your subject? Before you go any further in your preparation, ask a few simple questions about the people in your audience. Once you know more about them, you can figure out how to motivate them to listen. These categories of information might prove useful as you prepare your remarks.

Age. How old are your audience members? Will they be familiar with the concepts you plan to speak about? What's their vocabulary range? What sort of life experiences have they had? Remember, if you're speaking to a group of 20-yearolds, you should know that they were born at the turn of the century during the latter years of the Clinton Administration. They have no direct memory of Hubble Space Telescope being launched, the Persian Gulf War began before they were born and the Internet has been available for use their entire lives. Make certain your references to events and ideas are both known to them and relevant to their concerns. Similarly, an older audience might have been around for certain events, but references to WhatsApp, freeware cross-platform messaging or social video livestream on Snapchat may well be lost on them.

Education. Knowing the age of the audience will tell you something about how much education they have had, but perhaps not as much as you would like to know. Presentation content, including central themes and vocabulary, will certainly be influenced by the level and type of education of your audience.

Personal beliefs. Knowing what this group believes may well be more important than knowing their age or education level. The reason is simple: your beliefs define who you are. Are these folks liberal or conservative? What's their political affiliation? Are they committed to a particular religious or social point of view? Do they have certain biases favoring or opposing such issues as red meat, gluten, singleuse plastic, gun ownership or parallel parking?

Occupation. What do these people do for a living? Are they students? As such, many of them may not work for a living, but might hope to have occupations someday. Are they managers, professionals or colleagues of yours? Knowing how people earn their living will tell you something about their educational background and their daily routines, as well as their motivations and interests.

There is nothing more important than your audience. Some speakers look at audience members as the enemy: they're the ones inducing stress in the speaker, they're the ones with the difficult questions and they're the ones who are seemingly impossible to please.

The truth is, however, the audience is the only reason you're there. I'll talk later about analyzing your audience and getting to know them better. For now, let's concentrate on what they'll be looking for in your presentation.

Most audience members will tell you that they come to a presentation looking for something they can use that is positive and beneficial to them. The audience generally assesses that content in three ways: organization, expression and support.

Organization is the simplest and easiest of the three criteria to explain. Your task is to organize your presentation in a way that makes sense to your audience. The better organized it is, the greater the chance they'll pay attention and do what you want. If you make them do the work, either because you're unable or unwilling to organize your thoughts, the audience won't like it. If they're highly motivated and know they'll receive some useful benefit from organizing the information you present, they may stay with you. They won't like, but they'll stay engaged. If the reward doesn't justify the effort, though, they'll simply check out.

You can use any of these organizational patterns to make your presentation useful, interesting and easy to understand.