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

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.