Functional upgrading dynamics of latecomer firms in challenging innovation system and global value chain contexts: evidence from cacao-chocolate firms in the Philippines

ABSTRACT

Functional upgrading of latecomer firms is most likely to occur when firms build capabilities facilitated by conducive innovation system (IS) or global value chains (GVC) environments. However, many developing countries suffer from simultaneously ineffective IS-GVC learning channels. Based on comparative case research of key cacao-chocolate firms in the Philippines, this study provides evidence that latecomer firms build functional upgrading capabilities directly through global knowledge networks and indirectly through market-based chain buyers in weak IS-GVC contexts. It highlights the role of learning source and sequence in functional upgrading; finding an advantageous order of formal course learning, informal internal experimentations, global knowledge networks engagement, and internal innovation activities by specialized technical teams. The study’s main contribution lies in its empirical exploration of how latecomer firms manage various internal and external learning mechanisms according to the different types of capability needed in the functional upgrading process. Implications on functional upgrading strategies are discussed.

KEYWORDS:

• Global value chains
• innovation system
• functional upgrading
• technological capabilities
• learning
• latecomer firm

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Firms are anonymized due to privacy and data protection concerns raised by firm representatives.

2 The Philippine Council for Agriculture, Aquatic and Natural Resources Research and Development (PCAARRD) is the apex organization under DOST that coordinates and supports the national network of public research institutes and universities in conducting R&D in crops, livestock, forestry, fisheries, soil and water, and mineral resources.

3 Terroir refers to the conditions such as climate, soil, terrain, nearby plants where cacao is produced that impacts its flavour development.

4 Micro, Small, and Medium Enterprises (MSMEs) in the Philippines is defined as any business activity or enterprise engaged in industry, agri-business and/or services that has: (1) an asset size (less land) of up to PhP100 million; and (2) an employment size with less than 200 employees.