Vertical specialisation or linkage development for agro-commodity value chain upgrading? The case of Malaysian palm oil

- Malaysia's palm oil sector upgrades through linkage development.
- Production characteristics, sectoral dynamics and historical settings explain it.
- Upgrading prospects favour local lead firms, leading to vertical integration.
- Vertical specialisation is unsuitable for agro-commodity and other additive chains.
- Policy and research should focus on removal of barriers to linkage development.

Developing countries have an opportunity to create and capture higher value added by participating in global value chains (GVCs). Such potential has spawned recommendations for successive vertical specialisation but the applicability of the strategy in GVCs for agricultural commodities is rarely scrutinised. This paper examines the fundamental question of whether participation and upgrading in agro-commodity value chains conform to vertical specialisation and if not, how and why. The case study on the Malaysian palm oil sector suggests that upgrading is prone to sectoral linkage development and vertical integration at local lead firms. State policies and firm-specific actions since the 1970s drove attainment of capabilities which Malaysia did not possess originally in segments across the value chain for production of more sophisticated goods and services. Unique production characteristics, sectoral dynamics and historical settings of agro-commodity value chains explain the trajectory. The study suggests that vertical specialisation is less applicable across all GVC types than thought, and that development policy and research should delve more into hindrances to linkage development in similar additive value chains.