The evolution of technologies, industries and regions

In the earlier research on technological evolution in the 1970-1995 period, attention was mainly paid to either a whole economy or a single sector or technological paradigm. It is broadly understood from this research that different industries and technologies evolve at different rates. This means that over time, some industries may be more important than others, or at least, some may be accelerating while others may be stagnant or declining. In recent research by Saviotti and Pyka (2013), the emergence of new technologies and industries (and the goods and services that they provide) is seen as offsetting the diminishing returns that are innate in the development of existing technologies. Nelson (2015) argues that this is a reason why absorption and further development of these technologies are necessary to maintain economic development.

In enabling technological evolution in countries, a whole range of actors play a part. Individuals and informal networks, to large and small firms all play a role. However, for the last century, most technological advancements have been supported by scientists, the academia and professional societies and a range of supporting meso organisations. In Europe, professional associations often play an important role in the deepening and dissemination of technological knowledge.

I want to come back to the meso organisations mentioned in the earlier paragraph. Meso organisations or functions are created in response to structural issues like market failures, sometimes government failures or persistent patterns of underperformance in the economy. These meso functions are critical in supporting economic actors to discover what is possible in a given economic context, to assist stakeholders to overcome coordination failures, and to provide critical public goods (such as scarce or expensive technological infrastructure, demonstration facilities, testing facilities, public research, and so on).

The meso functions enable a society, industry or even the public sector to discover and absorb new ideas, they enable learning by doing, they encourage the adaptation and dissemination of new knowledge or technologies, and they connect different stakeholders to overcome coordination and search failures. These meso functions are a critical ingredient in the local innovation system as they extend the technological capability of a given sector, industry, market or region in a country.

You would have noticed that I have not yet mentioned universities and public research efforts. This is simply because I have written about them so often as they form a critical part of the local innovation system. I sometimes even think that the higher education sector receives too much attention. Yet, education from basic schooling to higher education plays a critical role. For me, a university is an important meso organisation, and research centres, technology extension centres and laboratories that provides testing facilities are all important meso functions or maybe even meso organisations hosted by a larger organisation.

The importance of the higher education sector in the technological infrastructure varies for different parts of the economy. Nelson contends that scientific and technological research and teaching, especially the more applied fields, provide a base of knowledge that is accessible to all technically sophisticated individuals and firms working to advance technology in a field (Nelson, 2015). However, different fields also depend, to different extents, on scientific and formal research and technology support. Therefore, measuring journal articles and research outputs as a contribution to the national innovation system or as a proxy for technological capability will always paint only a partial picture. It really also depends on the pace of change and scientific advancement that is taking place in a region, a technological domain or an industry.

Furthermore, different industries depend, to different extents, on government support and incentives. In some fields public support is crucial, and in other cases, provides little incentive or value. In many cases innovations preceded science, and continued development is only possible due to the iteration between researchers and enterprises. Nelson continues that the kinds of firms that do most of the innovating differ – in some fields this tends to be large, established firms while in others it is smaller firms or new start-ups (Nelson, 2015).

Nelson draws an important conclusion that has really shaped my own thinking. Nelson states that there is no single set of policies that are applicable to all technologies and industries. What will be effective in some fields will not be in others. For instance, small business promotion in some sectors in one country could work, but it could be ineffective in another country.

In South Africa, with its very high coordination costs and high compliance costs, smaller enterprises in the manufacturing sector are at a huge disadvantage. The distance to sophisticated buyers and the challenges with exports compounds the difficulty for smaller enterprises to compete globally from the local base.

Nelson is also known for his writing on the importance of a wide range of social institutions, both formal (for example a cluster development organisation) and informal (the trust networks between members of the clusters). He refers to these social institutions as social technologies, and he argues that they co-evolve with physical technologies to enable economic development. These social institutions range from central banks to a diverse range of firms, but importantly include other forms of organisations such as scientific and technological societies, universities, government agencies and even capital markets. These institutions are the focus of the discipline of innovation systems.

Nelson emphasises that “that when a potentially new technology emerges, new institutions often are needed to develop it, and invest in and operate effectively the economic practices based on it”.

Nelson acknowledges it is not an easy task, as it is hard to predict which emerging fields of promising new technologies are going to be important in driving economic progress in the future, and which will have a modest impact. The policies to create or reform institutions need to be adaptive and flexible. Arthur (2009:186) confirms the view of Nelson and argues that “We cannot tell in advance which phenomena will be discovered and converted into the basis of new technologies. Nor can we predict which combinations will be created.”

That brings me back to my intent with this post. When we look at technological disruption and change, it is very easy to get caught up in the potential or risks of any given technology. But we must not take our eye of the informal and formal institutions, market systems, regulations and technological domain specific organisations that are needed to make a new technology viable. At the same time, we also have to figure out how to gracefully exit older technologies and how to either shut down or transform public organisations that once had a critical role in supporting those industries and technologies.

Again, I repeat, the so-called fourth industrial revolution is going to be more disruptive at the level of institutions and social arrangements than it will be disruptive for the enterprises that are competing at the technological frontier.

In South Africa, we have a triple-challenge.

1 – Our institutions change very slowly, and we have huge social tensions about how to allocate resources and wealth in the economy. Our local municipalities and local economic development activities are ineffective (with some exceptions in some of the larger metros). Yet, local authorities have hardly any influence over the quality and effectiveness of national meso programmes that are supposed to enable economic change.

2 – This is compounded by a largely uncompetitive economy with lots of market concentration.  The regulatory burden in the economy keeps a lot of potential entrepreneurs employed in the corporate and the public sectors.

3 – Our discussions in South Africa about technological change, technological capability and the promotion of the innovation system is dominated by a linear logic of science leading to technology leading to innovation (the so-called STI approach). There is not enough attention being paid to the eco-system of organisations, technology extension agencies that can help enterprises master new technological domains, reduce coordination costs, the so-called Do, Use, Integrate (DUI) kind of innovation. On that point, we also have very few (if any) technological organisations tasked with transforming or upgrading whole sectors or regions in the country from a technological perspective. Everything is aimed at one enterprise at a time.

My research agenda:

This is what my research is about at the moment. I am working with a team from TIPS and the dti (South African Department of Trade and Industry) to strengthen the visibility of this technological meso network, while also strengthening the public sectors ability to spot technological disruptions and to be more pro-active.

Please sign up below if you want to stay informed of our progress as I will not be able to share all of our learning in the public space all the time.



Sources:

Arthur, W.B. 2009.  The nature of technology : what it is and how it evolves. New York: Free Press.

Nelson, R.R. 2015.  Understanding long-run economic development as an evolutionary process. Economia Politica,Vol. 32(1) pp. 11-29.

Saviotti, P.P. and Pyka, A. 2013.  The co-evolution of innovation, demand and growth. Economics of Innovation & New Technology, Vol. 225 pp. 461-482.

Pondering disruptions and industrial revolutions

I am asked almost daily about my opinion about “the fourth industrial revolution”, technological disruptions and the impact on jobs.

Depending on who asks, I might fire off a statement like “I don’t believe there is a fourth industrial revolution underway”. Or perhaps I might be a little bit more popular and say “I don’t think there is one, but probably many smaller revolutions going on”. I must be honest, I have also told several leaders in business and government, “definitely, and you had better pull up your socks and scan the horizon so that you don’t get caught with your pants down”.

I do feel a certain responsibility towards those that ask me these questions. I am all too aware that my response might encourage somebody to think more seriously about their organisation’s ability to sense change and to respond. Or my response might paralyse, or maybe even give somebody a reason to remain complacent. The truth is, we simply do not know the exact answer or extent of the technological changes around us.

When the change is as complex as it is now, and so dispersed across many actors in the economy and the world, we simply do not know. We can measure patents, imports, exports, value add, jobs, but we simply do not know how many entrepreneurs, government leaders or citizens are reading up on new ideas, trying new combinations, dreaming in the middle of the night of new business models and arrangements. These changes, when they aggregate into a pattern or a groundswell, often only make sense looking back. When we look back we see those moments where shifts took place, where tipping points were reached, where narrow or broad revolutions took place. But in the present moment, it is just foam, sweat and conflicting messages in the news that seems to make us numb.

Maybe it deserves a blog post on its own, but what we have to bear in mind is that in the original meaning of an industrial revolution, the “industrial” should be understood as technological change. The revolution describes what happens to many forms of social institutions. That means small and large, formal and informal social institutions are too clumsy, too rigid, fitting an older order but not ready for the new order. So it is not the autonomous vehicle that will disrupt us (well, maybe us geeks might be very distracted by them); the disruption will come from the massive investments that would be required in transport infrastructure, in the way we move around, in the way governments regulate, collect taxes, and so on. Maybe it challenges how companies are organised, maybe it completely challenges global supply chains or creates new markets that are much better than older markets. The physical technology, when it outpaces the evolution of the social technologies, disrupts the latter.

I must say this in stronger terms. When the evolution of the physical technologies is too far ahead it destabilises the society, because the required social technology modules are not available. It destabilises because the “have’s” can draw from other societies social institutions, while the rest are left out behind a huge and growing barrier.

For me, that means that we should figure out ways to enable experimentation and innovation in social technologies because this is the hard part. Investing in a specific physical technology and the required knowledge to use is still the easier bit. Figuring out how to crowd in a broad cross-section of the society, how to get more people to try new ways of managing, new forms of enterprise, new arrangements of market and non-market actors; that is where we need resilience and creativity.

In South Africa, I feel that we are all too focused on the physical technologies, the gadgets. Yet, our societies ability to raise new enterprises, to experiment with new management models, new ways of doing business enabled by new technologies, is just too low. Despite having richly diverse demography, having people with great experience and qualifications unemployed or employed and frustrated, we are simply creating or encouraging too few people to venture out and start something new.

The difference between the terms Fourth Industrial Revolution and Industrie 4.0 matters

There are two terms that many of my clients use interchangeably, which really bothers me. The first is the term “the Fourth Industrial Revolution”, and the other is “Industrie 4.0”. What bothers me is that these two labels represent two concepts that only partially overlap. Sometimes they are conjoined with an “and” in a sweeping statement to emphasise just how pervasive and disruptive a specific technology is, and how utterly unprepared everybody is.

The Fourth Industrial Revolution is a concept that was popularised by Klaus Schwab and the World Economic Forum (although the name goes back almost 50 years). Many international consultancies have also developed instruments and advisory services around this theme (I admire their animations and graphics). The Fourth Industrial Revolution is a banner over many new technologies. Most of the technologies that are highlighted by the WEF are not new, e.g. 3D printing, sensors and artificial intelligence, whereas the narrative of the Fourth Industrial Revolution highlights the effects of the convergence of several scientific and technological domains (take a look at this link to read more about some of the technologies). Due to the reach of digital technologies, smartphones and global software platforms, new applications of technology are spreading very fast. It almost seems as though the rapidity of technological development is increasing, and that the depth and breadth of convergence and its impact on industries, firms, governments and whole societies is potentially disruptive. Hence the “revolution” part.

I must add that not everybody is convinced of this revolution. Some argue that we are still in the third revolution, albeit in a second or third extension. Others argue that we are already undergoing the fifth or sixth revolution. Then one might also argue that revolutions are usually not predictable, or that revolutions go hand-in-hand with massive social, political and institutional upheavals, which we have not yet really seen. Others, like Carlota Perez argue that these revolutions are unavoidable, and that governments have a key role to play in preparing for societies to cope with these wave of change. In fact, we have not seen massive employment displacement in Europe attributed to massive technological disruption, despite all the machines, robots and drones. I for one am also not convinced that the technologies and their convergence are revolutionary. What I find really eyebrow-raising is the immense interest of capital and political elites in technology, and all the hype around these technologies. I must also confess that I am impressed by how well the applications, use cases and adaptation paths of many of these technologies are described on the web. For instance, take a look at the Blockchain use cases on the WEF site here.

The second label is Industrie 4.0. It is usually spelled this way because the concept originated in Germany as the rallying cry of their new “High-Tech Strategy” which has emerged over the last ten years. The German high-tech strategy has a dual focus. The first and often overlooked emphasis is on continuing the incremental and export-oriented technological development that German manufacturers are known for. It builds on Germany’s current excellence and ability to innovate, especially at the level of product and process technologies.

The second and more frequently discussed drive of the German Industrie 4.0 strategy is all about digitalisation, knowledge intensification, trust building, dialogue and networking (some topical areas are described here). Digitalisation is not only about connecting things to the internet, but also about manufacturers being smart about integrating their suppliers, clients and internal processes. Improving the competitiveness of German manufacturing and making the society, workplaces and communities healthier and happier in the future are recurring themes. So are the environment, the circular economy and the importance of investing in longer-term technological platform and capability development. What only a few people in Germany would acknowledge is that this high-tech strategy was a response to the realisation that Germany was not as digitally savvy as one would have expected (to see the Tuft Universities renowned digital performance assessment of countries head over here). The Industrie 4.0 strategy in Germany (and now also in many other countries) is already quite mature, decentralised and, dare I say, pervasive. Also, Germany is very critical of its own performance. For instance, the Federal Ministry for Economic Affairs and Energy (BMWi), publishes an annual assessment (only in Germany) of the digital performance of Germany on their website at www.bmwi.de).

 

In Germany, and increasingly in other EU countries, it seems that every university, technology centre, industry association and consultancy is involved in cluster activities, Industrie 4.0 readiness assessments, technology demonstration, research and so on (look here to see a list of “testbeds” in Germany). The snowball is gaining momentum. Different ministries and spheres of government are coordinating around clearly described projects that are managed transparently and concurrently (look at the Platform Industrie 4.0 website to see the number and composition of initiatives). Many initiatives, such as industry mobilisation, making constructive policy inputs, developing standards for data integration, compatibility, etc. are being driven by private sector organisations, private sector representatives, science and engineering bodies or associations (Here is a link to the National Academy of Science and Engineering website).  Manufacturers in Germany are at this moment spoiled for choice when it comes to choosing which technology service provider to use to solve a problem or test a new solution (link to use cases, link to tech support centres). Both public and private service providers are striving to be relevant, at the cutting edge and valuable to the private sector.

Now this second label, Industrie 4.0, is something that the developing world should take note of. This industrial strategy is about much more than adding digital capability to existing products and processes. It is about a modern digital business model which is smart, has strong feedback loops within the organisation and beyond, and reaches out to suppliers, supporting institutions, clients and devices ( go here to assess your readiness and to see how wide this assessment is). It is not only a public strategy, but has now become a private sector strategy too. It is about deep integration, collaboration on long-term technology and capability development, co-funding, skills development and standards, and is globally focused.

I believe that this second label has the potential to disrupt the developing world far more than the Fourth Industrial Revolution notion can. If we do not respond, our developing country manufacturers may be left behind.

This is not about tweaking existing products, adding sensors or tracking data. It is about improving the ability of organisations to make sense of change, future possibilities and their performance within this fluid context. It means that those local companies that could be globally competitive would be under pressure if they were not able to tap into or track this gaining momentum in Europe and elsewhere.

Decision makers in business and government in developing countries often underestimate the funding and effort that go into building trust, collaboration and joint problem solving or policy making in Europe and beyond. Both Industrie 4.0 and the Fourth Industrial Revolution are not about products or process technologies, they are about new business models and new ways of collaborating, with the long-term intent of laying new foundations for the future.

If you are a supplier to European manufacturers, be alert, be proactive! Get involved.
If you are competing with European products and businesses, be awake!

This is not a project for your design team, your IT department or functional managers. This is a strategic re-think of your whole organisation and how it develops new capabilities, how it measures and interprets data and how it works with other organisations. This is not a quick fix, this requires a longer-term holistic re-think of your technological capability, of the new applications that may be possible and of new forms of collaboration, co-competition and integration all enabled by digital technologies.

So why do I argue we need to understand these terms? I see the Industrie 4.0 movement as a strategic and intentional approach to shaping the future. While the Fourth Industrial Revolution narrative of the WEF and others helps us to understand what has already changed. It helps us to respond better, while the other urges us to actively get involved in shaping the future. I know this difference is subtle, and I know that the WEF is also trying to shape the future, but the popular narrative about the revolution is unfortunately often about technologies and how we respond to them.

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!