USAID’s Microenterprise Development office seeks to link economic growth and poverty reduction by fostering the competitiveness of value chains and promoting the participation of MSEs within these chains. In many cases, MSEs must respond to new market opportunities by innovating and increasing value added, a process also known as “upgrading.” This paper examines how MSE owners respond to upgrading opportunities within the context of the value chains in which they operate. Four specific types of upgrading are considered:
- Process upgrading is an increase in production efficiency, resulting in either greater output for the same level of inputs or the same level of output from fewer inputs.
- Product upgrading is a qualitative improvement that makes the product more desirable to consumers.
- Functional upgrading is the entry of a firm into a new, higher value-added level in the value chain.
- Channel upgrading is the entry of a firm into a pathway that leads to a new, higher value-added end market in the value chain.