Micro and small enterprises (MSEs) are key contributors to the economic well-being for many developing country households. Globalization represents both an opportunity and a threat to the long-term survival of these MSEs. It creates opportunities for MSEs to participate in international markets, which can lead to increased incomes at the household level and accelerated economic growth and development at the national level. On the other hand, globalization also leads to higher standards and heightened competition in local and national markets, the traditional strongholds for MSEs. Whether the potential benefits of globalization will be realized depends critically on how effectively MSEs adapt to new conditions and increase their competitiveness, as well as the extent to which the value chains in which they participate can remain competitive over time. Collaborative, mutually beneficial linkages between firms in the value chain, including linkages among MSEs and linkages between MSEs and larger firms, can increase efficiency, improve competitiveness, and provide a means for firms to actively participate in and benefit from increasingly global markets.

Using in-depth field interviews and a survey of buyers and producers, this study takes a “bottom-up” perspective to investigate the nature, determinants, and consequences of MSE participation in the textile handicrafts and high-value horticulture value chains in Guatemala. It empirically tests the characteristics of value chain linkages that facilitate or inhibit the formation of collaborative inter-firm relationships, both vertically (between firms at different levels of the value chain) and horizontally (among firms at the same level of the value chain). This is followed by an analysis of the impact of these vertical and horizontal relationships on MSE owners’ ability to innovate, or upgrade, their enterprise. The results indicate the importance of market information, inter-firm communication, reduced transaction costs, risk-offsetting opportunities, and effective group governance in building strong horizontal and vertical relationships that promote MSE upgrading and enhance the competitiveness of value chains.