Innovation systems in Metropolitan Regions of developing countries

During 2015 Frank Waeltring and I were commissioned by the GIZ Sector Project “Sustainable Development of Metropolitan Regions” (on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ), Division 312 – Water, Urban Development, Transport) to write a discussion paper about a hands-on approach to innovation systems promotion in metropolitan regions in developing countries. The discussion paper can be found here.

Frank (left) and Shawn (right) in front of the Berlin Wall Memorial

This assignment was a great opportunity for us to reflect on Frank’s experience on structural change in territorial economic development and my experience on industrialization and innovation systems in developing countries. We also had to think hard about some of the challenges of using a bottom up innovation systems logic in developing countries, as such an approach would rely heavily on the ability of local public management to coordinate strategic activities aimed to improve the dynamics between various public and private stakeholders. It was great to reflect on our past Local Economic Development experience and our more recent work on innovation systems, industrial upgrading and complexity thinking.

A key aspect of this discussion document was to think long and hard about where to start. We know many economic development practitioners in cities are often overrun by demands from both politicians and industries for support. We also know that by selecting promising sectors based on past data and assumptions about job and wealth creation often end in little impact and much frustration. We agreed that an innovation systems approach must be aimed at stimulating the innovative use of knowledge, so we decided to not start with a demand focus (assuming the officials are already responding to some of the demand) or with statistics but a knowledge application focus. The use, generation and recombination of knowledge is central to the technological upgrading of regions, industries, institutions and societies. From our experience in promoting innovation systems and our recent research into non-consensus based decision making (this is where you do not select target sectors based on consensus or assumptions about growth potential, but you look at emergent properties in the system) we decided to start with three questions to understand the dynamics of knowledge flows in the region:

  1. Which enterprises, organisations and even individuals are using knowledge in an innovative way? Obviously this question is not simple and can only be answered by reaching out in the local economy to institutions, firms and individuals.
  2. Which stakeholders are actively accumulating knowledge from local or external sources? Again, this is an exploration.
  3. Who are individuals or organisations that know something about unique problems (challenges, demands, constraints) in the region? These could be buyers, supply chain development officials, public officials, engineers or even politicians that are willing to articulate unique demands on the regional economy that might not have been responded on by local (or external) enterprises.

These three questions are treated as an exploration that will most likely be most intensive at the start. In our experience economic development practitioners should constantly be asking themselves these questions when working on any form of private sector upgrading.

A second dimension is about assessing the interplay between institutions and industries and its effect on innovative behavior within regions. Who is working with whom on what? Why? What are the characteristics of the life cycles or maturity of various kinds of stakeholders in the region? Thus we are trying to understand how knowledge “flows” or is disseminated in the region. While some knowledge flows are obvious, perhaps even formal, some knowledge flows could be more tacit and informal. For instance, while knowledge flows from education is quite formal, the informal knowledge exchange that takes place at social events is much more informal, yet very important.

Apart from the identification of the dynamics and interrelations between the industries and the different locations, one other key factor is to identify the drivers of change who want to develop the competitive advantages of the region.

We also present our technological capability upgrading approach as six lines of inquiry, some of which have been covered in earlier posts on this weblog:

  1. The company-level innovation capability and the incentives of firms to innovate, compete, collaborate and improve, in other words the firm-level factors affecting the performance of firms and their net-works of customers and suppliers. These include attempts within firms to become more competitive and also attempts between firms to cooperate on issues such as skills development, R&D, etc.
  2. The macroeconomic, regulatory, political and other framework conditions that shape the incentives of enterprises and institutions to develop technological capability and to be innovative.
  3. Investigation of the technological institutions that disseminate knowledge.
  4. The responsiveness and contribution of training and education organisations in building the capacity of industry, employees and society at large.
  5. Investigation not only of the interaction and dynamics between individual elements in the system, but of the whole system.
  6. Exploring poorly articulated needs or unmet demands that are not visibly pursued by the innovation system.

We, and of course our GIZ colleagues of the Sector Project Sustainable Development of Metropolitan Regions, are very keen to engage with the readers on these ideas? Please post your comments, questions to this weblog so that we can have a discussion.

Best wishes, Shawn and Frank (Mesopartner)

 

 

Series: Building technological capability

In the next few posts I will focus on building technological capability in developing countries. I am specifically thinking of Sub-Saharan Africa as I write these posts, but I am sure that some of the ideas will be relevant to my colleagues working in other parts of the world.

What do I mean with technological capability? We see technological capability as going beyond what firms can do, to what societies or parts of society can use or do with technology. It is a capability that is manifest in products and processes, but that arise from a capacity to match a problem or opportunity with technological systems, sub-systems or combinations of systems. This means that technological capability is not only about technological skills (for instance in knowing how to combine different technologies, or what the latest advances are), but also has business and networking skills to identify and recognize opportunities, discover what solutions can fit the context and constraints (like performance specifications, prices, volumes) and how to organize supply, delivery and maintenance. It thus combines all the elements of innovation including product knowledge (understanding components, sub-systems, architectures), process knowledge as well as business knowledge.

To build technological capability in a country or an industry is the result of an ongoing search process where networks of businesses, academia and government officials search for what is possible at reasonable value and margins, what can and what cannot be done within the local context. What can and cannot be done in the local context is a complex issue that is affected by four factors that I will briefly outline below. It is not only an engineering design problem, and it is not only about products and patents. It is not about a lack of knowledge or a lack of PhDs and engineering students. There are several things that must be worked on at the same time but a whole range of actors working towards different goals.

In many instances the public sector is more eager to develop domestic technological capability than the private sector itself. The private sector in Sub Saharan Africa is in most countries fragmented, and search costs as well as coordination costs at the level of products, processes and networks are very high. That is why those that can afford to take risks and that can afford to take a long term view will most certainly benefit disproportionately to those who are driven by short term profits. For instance, local manufacturers of components that invest very little to nothing in R&D cannot be expected to compete in the long run with international or regional competitors who are investing in R&D.

My late friend and business partner, Jorg Meyer-Stamer argued that there are four pillars [1] that technological capability is built on:

  1. The skill of the producers to imitate and innovate at product, process and business model levels. This is largely dependent on pressure to compete as well as pressure to collaborate with each other;
  2. The economic, political, administrative and legal framework conditions, which determine whether incentives to develop technological capability exist. In the past, it was often not recognised that these incentives do not exist in many developing countries, especially if an import substitution policy relieved companies of all pressure to be competitive or to innovate;
  3. Direct support by technology-oriented state institutions or specific types of knowledge intensive service companies – depending on the given development level, the competition situation and the characteristics of a technology branch in the given country. These organizations disseminate technical and expert knowledge between different actors, knowledge domains and industries and play a critical role in the use of and application of tacit and explicit knowledge;
  4. Indirect support by the public and private educational system; in addition to a sound basic education it is important that technical training of a suitable quantity and quality is available at the secondary-school level and also in the universities. The private sector often plays a role in short term training aimed at particular technology applications. Overall the responsiveness of the education sector in identifying and responding to changes in how technology is applied, developed or used in society.

The close interaction between these four pillars creates technological capability. Thus technological capability differs between countries and even within countries because the context differs. A single firm may in the short to medium term manage to get a sophisticated product into the market, but to sustain its position it will sooner or later need to tap into the education system, the knowledge networks of intermediaries and technology experts, or in supplier networks. Technological capability is not measured at the level of patents or products developed (this does not measure the system, it measures a single firm), but is best measured at the level of regional or international competitiveness of industries, entrance of new domestic and international competitors, and exports.

What developing countries fail to achieve is to crowd in many firms and industry networks by creating public goods that intensifies competition and that force firms to collaborate on critical issues like skills development, the development of industry specific infrastructure, etc. Despite being a big buyer in many countries, procurement patterns, priorities and performance criteria are not available to domestic producers (until it is too late). The education sector is mainly funded to provide basic and undergraduate education along strict disciplines, not to constantly upgrade the existing workforce to cope with technological shifts and the integration of different knowledge bases. Universities are funded to do research at a product or process level, not to do applied research that will modernize industries. The importance of various networks of technological intermediaries and knowledge providers are overlooked.

The private sector must also shoulder some blame. Industry bodies are often mainly focused on advocating for favorable conditions to protect existing investment or interests, not on increasing local supplier networks or building industries. Firms would often rather collude than collaborate. Industry associations are typically organized via traditional sub-sector structures, while global production is becoming more integrated, multi-disciplinary and application orientated.

In closing, technological capability is not only created through policy. It is not created through industrial or innovation policy, although it helps. It is not created by individual champion firms, although this certainly makes it easier. Technological capability is built as a result of an innovation system where the context matters. Firms able to manage their own internal technology and innovation are essential, but these typical arise out of public funded investment into technology intermediaries, management capability and the overall performance in the education sector. It is not possible to increase the technological capability of a group of firms in a particular industry without looking at the broader context where the four areas outlined earlier shape the outcomes in the medium to long term.

From my experience in assisting to promote technological capability in developing countries an ongoing facilitation effort funded by the public sector AND the private sector is needed to broker collaboration, but also to look at ways that local demand can be met by the broader system in the long term. In many countries and industries the best host for such a process is a technology intermediary attached to an university or a development programme, with a mandate to build networks around local opportunities that is not only about engineering, but also about reducing the costs of finding opportunities, suppliers and suitable technologies.

 

Notes

1 – These four pillars later became the foundation of the RALIS methodology that we use to diagnose and improve innovation systems.

Linking: Rodrik on industrialisation

One of the leading scholars on the topic of industrialization is Prof Dani Rodrik. Two of his recent blogposts are relevant for the readers of my blog.

The most recent post by Prof Rodrik is titled “Premature deindustrialization in the developing world“. In this article he explains that industrialization is affecting the developing world more than the industrial world. This is a brilliant read. The full NBER paper that his blog post is based on can be found here.

Another recent post by Prof Rodrik is about services, manufacturing and new growth strategies. In a presentation that he mentions in this post he argues that many developing countries are focusing too much on unproductive small enterprises that face high costs, but that these same small enterprises often absorb low skilled labour. If I say anything more I will most likely mess up his argument, so take a look for yourself!

The oblique search for new industrial opportunities

Industrial policy is typically set at national level. It is often aspirational and attempting to “stretch” an economy into new kinds of production and value addition. Programmes are designed, targets are set such as doubling manufacturing contribution of x% within 7 years. Therefore it is sometimes disconnected from the present as it seeks a new Status Quo, a different structure of production.

Yet the natural process under which new production activities are created is complex. It is not as simple as finding a market opportunity, finding the right production process, securing funding and launching a business. The economic context, the political climate, the entrepreneurs with the right levels of experience, backing and confidence are all needed. And don’t forget individuals with a desire to expand, take risks and try new things.

Danni Rodrik argues that Industrial Policy should be a search and learning process. Many centrally planned industrial policies even cite Rodrik as they then commence with outlining with great certainty what must be done, by whom, with which resources and to which effect. This logic completely ignores the importance of what exists, and what is possible from here. It ignores that fact that the past matters, and that the current structures are the result of a series of evolutionary steps. Complexity science teach us that these plans ignore the fitness landscape, a landscape that is dynamic and constantly changing. Any attempt to extend the horison further than what is within reach should be treated with great caution. One of the greatest obstacles is the attide towards risk and the optimism of enterprises. I don’t think Rodrik meant the ministers officials must do the search, rather, industry must do the search or at least be actively involved in the search in partnership with government and institutions.

But the search is not about answering a simple question. A more oblique approach is called for (see John Kay, Obliquity). Which means we should set aside targets and indicators, and focus on creating small experiments to introduce more variety and options into the system. It means that finding out that something is not possible is as valueble as figuring out that something else is indeed possible. Taking Rodrik literally, it would mean also giving much more attention to what entrepreneurs are searching for and experimenting with in the background. It requires that we recognise that the current economy is creating what is viable under the current dynamic circumstances, and that only strategies that recognise where we are and what is certainly within reach from here is in fact viable. The challenge for developing economies is that what is possible is typically limited and further constrained by strong ideological bias as to what is possible or desirable. For instance, many South African business owners are trying to shift out of price sensitive markets competing on a basis of low cost skills. Entrepreneurs are moving into knowledge and capital intensive production, with more focus on service and integration. Government is searching for a way to employ people with low skills because its own social programmes and service delivery is not a viable fall back for people with insufficient skills.

The search is not about analysis
Complexity describes a situation where the patterns of what exactly is going on is unclear or shifting. We cannot entirely figure out what is leading to what and what is reinforcing what. Due to the dynamism, we cannot really understand the situation better through analysis. Another way of explaining this, is that a situation is complex when more than one competing hypothesis can with some probability explain what is going on. The only way to make sense of complexity is to try something, actually, try many things. And then see what seems to work better. It means that we start with what we have and who we know (and can trust), and then try a range of things with the simple purpose of seeing what is possible within the current constraints of the economic system. Steps must be taken to reduce risks (for instance by ensuring that the costs of failure are small, or that the experiments try different ways of solving the same problem), but then this whole approach in itself must be recognised to be politically risky.

This is where donors and development partners come in. By assisting developing countries to conduct low key experiments in order to create variety is essential, as development partners can reduce the political risks of their counterparts. This approach will furthermore require the abondenment of targets and indicators as an attempt to measure accountability and progress. A more subjective approach that sets indicators that monitors the overall health or dynamism is needed so that the experimentors can sense when they are indeed making progress. Thus the indicators does not measure success, nor input.

Perhaps then a skunkwork approach to a more complexity sensitive industrial policy approach is needed. Let the normal industrial policy targets and rigmarole be there. Politicions and bureacrats like this sense of certainty and purpose. But allow for some experimentation on the side under the heading “industrial policy research”. Allow this team to work with private sector partners to conduct small experiments to try new business models in an incremental way. For instance, do incubation to try new ways of mineral beneficiation, but without investing in large buildings or expensive equipment. Use what is existing as far as possible, even if it means having the manufacturing done on a contract basis elsewhere in order to test if local demand for the outputs exist.

Industry development under conditions of complexity

Most economic development projects have a tendency to separate analysis from intervention or implementation. This follows on an engineering approach where you must first understand a problem or issue before you can design interventions which is then logically followed by implementation and later on evaluation. I will not now go off on why this logic is questionable as I have written about this before and we have dedicated the Systemic-Insight.com website to this topic.

But complexity thinking is challenging this norm of separating analysis and intervention.

Auwhere to gothors such as Snowden argues that under conditions of complexity, the best approach is to diagnose through intervention, which means that there is no real separation between diagnosis and intervention. Practically, you might have to spend some days and a little bit of effort to analyze who is interested in a particular issue so that you know where to start, but you have to recognize that even asking some simple questions is in itself already an intervention. Furthermore, the objective of working under conditions of complexity is to introduce more variety so that different approaches to overcoming constraints can be tried out simultaneously. This means that small portfolios of experiments must be developed and supported, trying many different ways to solve a problem. Many of these are guaranteed to fail, but new novelty will also arise. The health of a system depends on more options being proven viable. Strong alignment of interests, priorities and interventions are actually unhealthy for a system in the long run.

I’ve had this discussion many times with fellow practitioners in the last years and usually at some point somebody would say “but not everything is complex”. I agree. They would argue that there are definite casual relations between for instance education and economic development. Well, this may be true in some places. However, whenever a government (or a donor) decides that a particular sector or industry requires support it should assume that the issue is much more complex than it may appear, otherwise the industry actors and supporting organizations and demanding clients would have sorted things out by themselves.

The idea that diagnosis takes place during intervention has many detractors, despite the fact that many strong economic development organizations intuitively follows this process logic of working with diverse stakeholders in an ongoing process. Here is a short list of some of the detractors and their main reason for resisting such a process approach:

  • Large consulting firms: They would fight this approach as processes are much more difficult to quote and manage than a clearly defined project. Furthermore, this kind of approach depends on more expensive multidisciplinary experts that require a combination of technical, facilitation, change and business skills. The number of people that can support such a process are few and far in between.
  • The public sector: To overcome constraints created by complexity requires that dissent be nurtured and premature alignment be avoided. This is also risky for the public sector as things may not be so neat nor supportive of past policies and decisions. Furthermore, when more options are created it is not certain which firms will really take up the solutions – meaning that in a country like South Africa with strong benefit bias this is too risky, as preferred candidates might not be the beneficiaries of public support.
  • Donors and development organizations: Simple cause and effect interventions that depends on controlling certain inputs in order to benefit specific target groups still dominate the logic of donors. Therefore a process that is not specific, and that explores different alternatives may not be appealing to donors. Furthermore, donors are expected to be able to very precisely report not only in inputs, but also on impact. A process that has multiple shifting goal posts makes planning and resource management very difficult. However, many examples exist of donor supported projects that are very open to this approach, but this is mainly the prerogative of the programme managers deployed into the field – it is not systemic.
  • The private sector: Yes, even firms may resist an open ended and exploratory approach. One reason is that firms try to push the problems experienced in the private sector back onto the public sector (blame and responsibility shifting). An exploratory approach puts much more onus on the private sector to not only contribute, but to be open for alternatives and to then actively pursue opportunities that arise. Secondly, the incumbents in the private sector sometimes profits from a disorderly system. Many existing firms will resist newcomers trying different things and trying to create new markets, as this disrupts the way things are done at the moment. In a complexity sensitive approach we have to on purpose introduce novelty into the existing structures, and this means challenging some of the dominant views and agreements about what is going on, what must be done and why nothing has changed. This is very unsettling for the existing actors.
  • Top management in an organization: Management science in itself assumes many casual relations. For instance, strategy development typically starts with defining a vision and objectives, and then making sure that everyone is aligned and committed to these goals. As one of my favorite strategy David Maister argued  “strategy means saying no”. This means that resources are dedicated to a few specific areas in the belief that addressing these would have predictable and desirable effects.

Now I must state that in more ordered domains, where there is less complexity, many of the arguments outlined above are valid. In a small organization with limited resources priorities must be set. Governments cannot help everyone, so somehow a selection must be made. However, I believe that industry development is in many cases complex also because it is so hard to see how unpredictable effects will affect an industry.

I am grateful that I work with organizations that are willing to embark on industry development or institutional development processes that are more complexity sensitive. I believe that such an approach is particularly important for innovation systems promotion and for industrial policy. I am surprised at how many manufacturers and universities have agreed to embrace a more complexity sensitive approach to development, strategy formation and developing new services/products. All involved have been amazed at the early results this far, as these processes typically unleash a lot of energy and creativity by different stakeholders that in the past were more than willing to just observe from a distance what was going on.

Preparing for a different manufacturing future

In Africa, we face the challenge of a manufacturing sector that often manufactures products in low volumes. In a country like South Africa, we manufacture a wide range of products but often at low scale. Even our manufacturers that manufacture in larger volumes are still small compared to European or Asian competitors. In some parts of Africa we are further challenged by not having very sophisticated domestic demand in many sectors. When demanding customers are far away it becomes much more difficult to be innovative and well informed of what is possible and what can be done to exceed or at least meet the demands of customers.

But I can sense an important change taking place. I am frequently visiting manufacturers that are becoming much more knowledge intensive. They are smaller and more flexible than their more established competitors, and they combine different skills sets, technology platforms and knowledge bases.

In a forthcoming paper [1] that I co-authored with Garth Williams of the Department of Science and Technology and Prof. Deon de Beer (Vaal University of Technology), we offered the following definition of Advanced Manufacturing.

Advanced manufacturing is an approach that

  • Depends on the use and integration of information, knowledge, state of the art equipment, precision tooling, automation, computation, software, modelling and simulation, sensing and networking;
  • Makes use of cutting edge materials, new industrial platform technologies [2], emerging physical or biological scientific capabilities [3] and green manufacturing philosophies; and/or
  • Uses a high degree of design and highly skilled people (including scientific skills) from different disciplines and in a multidisciplinary manner.

We also argue that Advanced Manufacturing includes a combination of the following.

  • Product innovation: Making new products emerging out of new advanced technologies (including processing technologies).
  • Process innovation: New methods of making existing products (goods or services).
  • Organizational innovation or business model innovation: Combining new or old knowledge and technologies with traditional factors of production [4] in non-traditional fields or disciplines in unique configurations.

I am very proud that our definition of advanced manufacturing was also taken up by the Department of Trade and Industry in their next Industrial Policy Action Plan (IPAP) 2014/15-2016/2017.

The implication is that our technology development, technology transfer and education programmes need to change in order to be better able to equip and support manufacturers. Manufacturers increasingly need to be able to manage multidisciplinary teams using different technologies. These manufacturers must not only be able to learn fast from the market around them, they must be harness and pro-actively develop new combinations of knowledge within their enterprise. Existing or potential manufacturers must also think differently about manufacturing. Smaller factories, using more modern equipment in a flexible way is now a competitive advantage. The entry costs for starting a small manufacturing enterprise has never been so low. For instance, the cost of an automated electronics surface mount production line has come down by more than 70% in less than 10 years. Additive manufacturing allows tooling and products to be developed in parallel, but also makes it possible to develop new products very fast.

Where do South Africa enterprises learn to become more knowledge intensive at the moment? The answer is: At European Trade Shows. If you are a manufacturer or a potential entrepreneur, start saving up. There are many excellent trade shows throughout the year.

Which Meso-organisations offers the best examples, technology demonstration and training on this? Again, European Universities, Technology Transfer centres and universities. (The US and Canada also provide brilliant services, but it is much harder to access for us). If you cannot find a local expert or academics to help you, reach up to Europe.

What do we have to do? Think of ways to get as many of our entrepreneurs curious or interested in the newer technologies available, and learn from our (larger) competitors. Also, we have to get our universities to be more involved in technology adaptation and participating in new research areas. The academia should focus less on publishing in journals and get involved in real research collaboration that gives our industries (exporting) opportunities and that at the same time address unique needs in our domestic markets.

Oh, and by the way. Start reading up on the “internet of things”. Maybe my next post should focus on that.

 

Notes:

[1]  Our paper will be presented at the International Conference on Manufacturing-Led Growth for Employment and Equality in Johannesburg on the 20th and 21st of May. The paper is titled “Advanced Manufacturing and Jobs in South Africa: An Examination of Perceptions and Trends”.

[2] Such platforms have multiple commercial applications, e.g. composite materials, and exhibit high spill-over effects.

[3] E.g. nanotechnology, biotechnology, chemistry and biology.

[4] Labour, materials, capital goods, energy, etc.

 

Absorbed into the networks behind the systems we see

Its been a while since I have last posted here. The reason for my absence is two-fold.

Firstly, I am busy with a course offered by Coursera and the University of Michigan about Social Network Analysis (SNA). My business partners and one of our associates in Mesopartner are participating in this course. The course is 9 weeks long and I must admit that it is taking much more of my time than I originally anticipated.

The second reason I am hardly online is that the industrial policy in South Africa is starting to have positive effects on local industry. As I work mainly with the manufacturing sector on topics like innovation systems, industrialization, identifying and addressing market failures, and the competitiveness of regions, it means that there is suddenly an upsurge in demand. The demand is lead by state owned companies that are suddenly obliged to procure manufactured content locally, and by local industries that realize that years of underinvestment and fighting to survive against cheap and sometimes lower quality goods have left many sub-sector uncompetitive.

But these two reasons are also having an effect on each other. I have been applying many of the principles and tools of Social Network Analysis in my diagnostic work for the last 2 years, and for the last year I have been using SNA as my main diagnosis instrument. This recent course have simply forced me to read up more and more on many of the theories and the concepts behind the instruments I have been using. I am still trying to figure out how to do this kind of diagnosis fast, and how to teach these instruments and theories to the practitioners that we (Mesopartner) are working with around the world. At this moment the diagnosis that I am doing in valve, pump, tooling, automotive and industrial equipment is still slow and it takes all my attention.

What is the benefit of taking a SNA approach to sub-sector development?

  1. Well, firstly, a network diagnostic very quickly reveals whether there is a cluster or even a value chain. We often assume that these constructs are real, but in the last few years we have learned that just because all the actors that should be in a chain are there doesn’t mean that a value chain exists. Same goes for a cluster, just because all the elements are there doesn’t mean there is a dense network of cooperation, knowledge exchange and systemic competitiveness.
  2. Secondly, a network view assists with understanding the deeper relationships, trust patterns and information flows in a small part of a real system. These relationships makes it possible to predict how information flows, who the thought leaders are and how influential institutions, leaders, officials and business people are. This is directly relevant for my work with innovation systems.
  3. Lastly, Social Network Analysis also highlights how complex even a single link in a value chain can be. When you look at the spider web of relations, ownership structures, communication channels and knowledge spillovers, then you see how traditional development interventions have completely missed the leverage points.

All I can do at this moment is to commit to blog more frequently once this course is done. I will share some of the results of the industrial diagnosis that I am currently busy with in a few weeks time. Below I will give a sneak preview of the network map of the valve manufacturing cluster in South Africa. You will immediately see that some manufacturers (in red) and some foundries (in blue) are more connected than others. The yellow dots are valve manufacturers that are not yet part of the formal valve cluster structure. Hardly any additional analysis is needed to show that the more connected firms are the ones we should work with.

 

Cluster drawing 4

However, the additional analysis that we can run on this cluster further narrows the choices of whom to work with to get both the highest impact (in terms of both ability to grow their business, increase employment and meet customers needs) and in terms of getting the highest demonstration and spill over effects. The latter is important, because when you want to upgrade an industry you should prioritize firms that are able to create positive spillovers and that others are willing to follow. To do this kind of analysis we need a combination of qualitative and quantitative information, and we use specialized software applications. But more about this in a future post!

Localisation and building domestic manufacturing capacity

At the moment I am spending most of my time working with the more traditional manufacturing sector in South Africa. Traditional apparently means non-advanced, but it would be a mistake to think that because a particular object (like a metal casting) has been made for 8000 years that there is nothing advanced about it. For instance, in a typical foundry you find very different technical, engineering and management capacities that must be combined in order to make metal components for very demanding customers.

Localisation in South Africa (and in other places like the US) means to bring orders that have gone offshore back into the country. It often involves trying to rebuild manufacturing capacity that once existed in a country, but that originally developed under completely different economic conditions. For instance, 30 years ago many manufacturers grew in South Africa, starting very small and growing over time. About 10 years ago these manufacturers closed, or moved offshore. In the meantime global market consolidated and found low cost producers. To now try and create this capacity again is not an easy task. Firstly, you don’t have 20 years for experimentation in technologies, business models and market segments. Secondly, customers already now know what they want, and this usually includes a proven product at a competitive price. The new enterprise must hit the ground running with proven technology, management and adequate resources. This means that you have to develop both local producers and their supporting institutions, service providers and their markets at the same time. Bear in mind that their competitors overseas are benefiting from this same ecosystem developing naturally.

Localization is seen by some as the opposite of globalization and outsourcing. But buying from a local manufacturer is still outsourcing . As far as localization as the antidote to globalization is concerned, this is not correct, as localized products often enter world markets again, as does local knowledge workers that are now mobile due to their enhanced expertise. Localization is about creating local manufacturing capacity. It is about more than just helping local entrepreneurs start firms – it is often about finding or developing unique local capacity that meets very specific local requirements. It is therefore often driven by public policy- however the most successful localization is often driven by businesses wanting certain suppliers or competencies nearby.

Perhaps another way of looking at localization could be to see it as part of a natural cycle. Products are made locally at $x and a small volume supported by a limited local market. Over time standards, low cost production methods evolve, market consolidate and production concentrates in a few places able to reach scale and efficiency. Now the numbers are high – new entrants struggle to enter as existing firms ramp up efficiency. Right about then flexibility is lost, management becomes expensive, and you may be sharing production facilities with current and future competitors. In the meantime, products evolve, markets and applications differentiate, and suddenly there is a need for more specific production to meet a specific market. this is where a local producer with the right technology, people and business model could gain a foothold (if only they knew about the opportunity). The cycle might just start all over again. This is just one simple example. I acknowledge that many countries have not been able to recapture orders once they are lost to offshore competitors – partly because several economies have also progressed up the value chain. But for developing countries, evolving up a value chain is a very painful process that is often not possible.

From the demand side we have a different perspective. Multinationals or large local manufacturers wanting to localize typically have an existing production system, or they are expanding local capacity. They have advanced or well developed management systems, markets, products and supply chains. Often, buying local is not first choice as they might have invested already in capacity elsewhere, although localization is frequently a requirement of developing country procurement policies. So they first localize non-core activities, the crumbs or components where few things can go wrong. For local manufacturers, this is the toughest place to enter, as these basic components are often like commodities – they are standard, and hence competitors have already reached scale and efficiency levels that are hard to beat.

For buyers, another problem is that local manufacturing capacity is hard to identify and secure. Existing manufacturers in developing countries are either undergoing BOOM or BUST. The boomers are just to busy in markets and products they already understand, and the busters just cant be trusted. Lastly, large multinationals that tries to localize production very often draw their domestic engineering, management and other skills directly from the very limited skills pool that exists locally, attracting skills from the local manufacturing sector that is hard to replace.

So some insights:

a) firstly, don’t let your local manufacturing sector collapse, even if they are not entirely local or entirely politically correct

b) don’t assume that multinationals can easily do business with local manufacturers, don’t depend on checklists.

c) don’t assume that all that your local manufacturers need are some orders from the big firms or government – they are most likely behind in multiple areas, such as skills, working capital, engineering technology and capacity

d) it is not just about technology. Large firms giving technology to local firms is not the solution. Local firms must get a deeper understanding into the market, the drivers of change, the drivers of performance and manufacturing management methods.

e) for a local manufacturer to grow, take on new (demanding) customers, add additional shifts, manage a busier schedule, recruit and train more staff – all these things require change. Remember to assess the readiness of local entrepreneurs to change, invest and expand.

 

Lastly, localization should not be  about import substitution at all cost, because this reduces the buy local decision to a costing issue. Isolating local manufacturers from international markets will not help in the long run. Rather, the focus must be to connect local manufacturers with global markets, knowledge pools, trends and developments.

If you really want to develop your local manufacturing sector, start with the buyers and understand their needs. Understand their business risks, their cost drivers, their incentives to expand and their means to support local manufacturing. Then find out which experts they bring into their operations, what challenges they had to create and maintain their own systems – chances are that what is an inconvenience to a large firm could be a complete obstacle to a local firm. Then articulate these messages, trends and projects clearly to local producers.

I have found that the main issue for large firms wanting to localize is not price – it is reliability and flexibility of local supply. It is dedication to getting the product right at the right quality, on time. And it is also a supply chain of local engineering and management skills.

Oh, did I mention that small firms also want to localize, not just the big firms? More about that next time.

 

 

My activities in the last months

So what have I been up to in the last few months?

At the moment I am working with several industry organizations and development institutions in South Africa on topics that are all interrelated around the topic of upgrading of our manufacturing sector. This involves working both on the softer issues such as facilitation of processes, building trust, identifying patterns, mobilizing stakeholders and lobbying for change to both government and the private sector. Another dimension of this work is to assist meso level organizations created to stimulate upgrading and competitiveness of industries to design better and more relevant programmes, developed organizational plans, and diagnosing industries to find systemic intervention points. I am involved in several cluster development programmes, and I am also working quite a bit with universities to better respond to the (often unarticulated) needs of industries. Lastly, I am assisting several large international and national buyers to develop their South African supply chains. This work is partly fueled by the public sectors increased emphasis on localisation.

For me all of this can be summarized under the heading of upgrading innovation systems, and building new industrial competencies. Sometimes I describe it as modernizing industries, or to stimulate technological upgrading of industries and regions. My customers do not often use these words.I thought it would be interesting to perhaps share with you how some of my current customers describe the work I am doing. I will not share their details due to the sensitivity of the work I am sometimes involved in.

The universities I work with describe my work as :

  • stimulating industry- academia relations around upgrading and regional innovation,
  • facilitating the improvement of technology transfer,
  • developing industry partnerships, research strategies and applied research programmes. This involves improving innovation within the academia
  • improving innovation systems that the university forms part of by designing appropriate support programmes

The industry development organizations I work with describe my work as:

  • facilitating the improved competitiveness of industries,
  • facilitating change processes in industry in order to unlock new markets and improve competitiveness,
  • developing public sector programmes that are responsive to the needs of industries.
  • High level policy advocacy and industry partnerships

For the government officials that I work with my work is:

  • developing industry – government partnerships,
  • supporting the development of local industries,
  • brokering partnerships,
  • shaping policy based on industry insight and
  • developing practical development programmes.

Why do I share this with you? The insight for me is that I am using a limited number of tools (mainly facilitation skills, some insight into manufacturing and technology transfer, insights into innovation systems, organizational development and a fearless approach to engaging with industry leaders) to work with a largely overlapping set of stakeholders.

Although I think that I am basically doing the same kind of work, my customers describes my work in completely different ways, even if ALL my current customers have the same objectives (they all want to improve manufacturing competitiveness and grow the local industries).

This work is all based on process consulting and I am very happy that I have a complementary set of customers that are all eager to work together to achieve our common goals. The work is very intensive and I am also grateful that I have contracts that have sufficient time and sufficient flexibility in so that my work can be supportive and responsive to the people I work with.

 

Note 1: Right at the moment I hardly work for any donors agencies in South Africa, mainly because private sector development and especially innovation system promotion in South Africa is not very high on their agendas. I do however assist with capacity building, coaching and programme design work occasionally.

Note 2: One important contract is with GFA on behalf of GIZ where I am supporting several technology stations at universities to improve their technological services to the industries they work with. This work is included in the descriptions above about the work I do for universities.

Note 3: The work I am currently doing is all possible due to the experience I have gained by working for organizations such as the GIZ (then GTZ) on issues such as innovation systems, university industry relations and local/regional economic development.

There is more value to the value chain than adding value to products

I am supporting value chain practitioners in various programmes where I am coaching, teaching, supporting, pushing and pulling experts. This is one of the perks of my job as I get to look over the shoulders of practitioners working all around the world on commodity, agricultural, manufacturing and service value chains.

While marking some assignments for a course I am tutoring for the ILO I realized that many practitioners are trapped in a particular chain, just like the actors that they are trying to empower. With trapped, I mean that they are working with the actors and the chain for the benefit of the chain. They completely miss the broader impact of their work. (I know that this is often more the fault of the people who design programmes, more about this elsewhere in my blogs).

Let me explain.

For me a value chain is something we construct so that we can understand a part of a sub-system. If you are diagnosing a tomato value chain then it is true that you are getting a deeper understanding of the tomato system. But you are also gaining an insight into an agricultural system, a regional system of stakeholders and communities, but also an insight into the national or maybe even global economy. While some value chains exists in a very formal way, with contracts linking the different actors, most value chains can rather be described as temporary social phenomena. Temporary because they tend to change over time.

Back to my main argument. While it is true that value chains are known by their end products or markets, there is more to a value chain than just the conversion stages of a product/service. Value chains show us how an economic system works. It show us how responsive institutions and supporting organizations and indeed a whole society is towards economic activities of a certain kind. Value chains also tell us some fluffy yet important things about the society it is framed by. It tell us something about the social relations, the search costs (finding people to do business with), the social capital (how well we trust each other, how easily we collaborate), the enabling environment, and the returns on investment and effort in different parts of the system.

So if we find that tomato farmers are not very sophisticated, that they have poor market relations, that entry barriers are very low hence nobody has an incentive to invest, that suppliers are dishonest, that there are some new market niches developing but that nobody knows, that intermediaries have disproportionate power; I am not surprised at all. In fact, your findings are rather typical, even predictable in some sectors. What I am surprised by is if you treat this like it is a unique finding contained only to the tomato farming sector. The chance that these characteristics are contained only to those involved in the tomato chain is rather slim. This is the real risk of having a too narrow product focus.

Yes. Value chains are known by their end markets or products. But no, we are not locked into a product. We want to understand the system better so that we can support the emergence of institutions, market systems and interventions that make the whole system work better. Those issues that I outlined before in my tomato example can be verified in the sectors or crops around it. In my experience, many crops or business sectors sometimes have similar challenges. Therefore instead of trying to work at a low scale with some tomato farmers, you could possible be working with 10 crop types in a region, involving 1000s of farmers, and maybe a dozen supporting institutions. Few extension services for instance focus on one crop, they often handle a variety of crops, animals and markets. So you have to try and understand what each kind of economy activity (like farming with tomatoes) have in common with other business types or farms, and then what is unique. When you do this you often find that the actors in the chain have far more in common than the product or crop. They could all be equally unskilled, equally under-capitalised, equally vulnerable to market fluctuations, equally exposed to poor contract enforcement, or monopolies. This is how we get to real systemic interventions.

But the idea should never be to promote some products. This is the job of business people and entrepreneurs, not development practitioners. No, development practitioners should try to understand and strengthen the system. We make the features of the system that is overlooked or not visible to stakeholders more apparent. I also dislike it when practitioners start with an hypothesis that profit is unfairly distributed, or many of the other typical biases that exists in this field. The simple truth is that investments in economies flows to where there are (visible) returns. If it becomes more profitable to invest in retail than in manufacturing or farming, then this tells us something about the system. It is an important finding in itself which then allows us to ask the next question “how to make farming more profitable for investors (farmers and the poor are also investors)?”.

Your value chain has more value in it than the value added at each stage of the chain. What is valuable is the insight you are gaining about how a part of the economy works. Don’t become a product promoter. Be a system builder.