Mediating regional development : how metalworking firms forged lasting linkages with steel in Ciudad, Guayana, Venezuela

Abstract

Ever since the late 1950s, planners have lured large firms to lagging regions with the expectation that they will trigger local industrial activity. According to the literatures on unbalanced growth, growth poles, foreign direct investment, and global commodity chains, large firms can dynamize lagging economies by creating a market for inputs, which then stimulates and fortifies local suppliers. Yet in practice, many national and regional development efforts centered on attracting large firms have not elicited this hoped for, backward linkage effect. This study researches why large firms arriving to lagging regions seldom induce local suppliers, and how they can. Existing studies relate linkage behavior to firm-specific or industry-specific variables. This research differs in looking at the process through which large firms develop links to local suppliers. Specifically, this study traces the evolution of backward linkages in Ciudad Guayana, Venezuela, where more than 100 small and medium metalworking firms developed to supply the large steel firm Siderirgica del Orinoco (SIDOR) with maintenance, parts and equipment. Research of other steel-centered cases in lagging regions reveals that this linkage effect is uncommon. When it happens, local suppliers tend to disappear following their client firm's restructuring. In contrast, Ciudad Guayana's metalworking firms successfully survived SIDOR's 1997 privatization to a foreign multinational, and head regional development efforts there today.

(cont.) Two main findings emerge from this study. First, backward linkages do not occur automatically, for large firms arriving to lagging regions tend to resist local procurement. In Ciudad Guayana, both foreign firms and state-owned enterprises charged with regional development exhibited this resistance towards local suppliers. Second, local suppliers can build customer-supplier relations to these large, potential customers despite their initial resistance. To do so, local suppliers must simultaneously address the demand-side and supply-side difficulties that inhibit localized linkages. Local suppliers must convince potential customers to procure locally, and at the same time facilitate local firms' investment in upgrading. This work requires significant collective action, mediation, and embeddedness on the part of local suppliers' business organizations. Luckily, the case of Ciudad Guayana shows how local suppliers may develop these abilities within the process of building backward linkages itself.