In order to respond effectively to market opportunities, firms need to innovate to add value to products or services and to make production and marketing processes more efficient. These activities, known as firm-level upgrading, can provide MSEs with higher returns and a steady, more secure income through the development of knowledge and the ability to respond to changing market conditions. Upgrading at the industry-level focuses on increasing the competitiveness of all activities involved in the production, processing and/or marketing of a product or service and mitigating the constraints that limit value chain performance.
|Review basic information on upgrading.|
A number of factors affect opportunities for upgrading, including:
When MSE owners decide how to respond to upgrading opportunities, they may consider several relevant criteria, including profits, risks, time, sustainability, firm economic conditions, access to resources and social considerations.
MSE upgrading is most likely to occur when there are sufficient opportunities for entrepreneurs to learn about alternatives. MSEs tend to be risk averse and cannot afford to take a loss in anticipation of future benefits. The more firms can learn about upgrading opportunities, the better able they are to assess the current situation. MSEs rarely have complete information about the outcome of upgrading and do not know the exact value of future profits. Therefore, they must take this uncertainty into account and make upgrading decisions on the basis of risk-adjusted returns. Demonstration pilots can show the benefits of upgrading and convince producers to undertake sometimes costly production, process and/or product changes. MSE upgrading is also most likely to occur when there are favorable structural elements—strong demand in end markets, a conducive business enabling environment, extensive linkages between firms and effective supporting markets.
Efforts to facilitate upgrading frequently arise from inter-firm linkages—where assistance is provided by lead firms via vertical relationships or through collective efficiencies realized through horizontal linkages. Furthermore, access to support services like information and communications technologies (ICT) can help MSEs strengthen these inter-firm relationships to improve their opportunities and incentives for upgrading.