Summer Academy 2017 to focus on meso organizations

In July 2017 we (mesopartner) will host the next annual Summer Academy. This year is special for me, because the theme of the event is about meso-organisations in the economy. Meso organizations are often taken for granted. And it is often assumed that leading or growing a meso organization is like managing a business or a project.

We believe these organizations, and especially their leaders, need some special attention.

For those that wonder what is meant with “meso”, it refers to a specific kind of organization or program that is created with the intent to overcome a whole range of market failures in an economy. Meso-organisations are known by their specificity, for instance to assist specific industries to modernize, or to support start-ups, or to promote investment in particular new technologies or a specific sub-national region. The reality is that while we describe their role in terms of market failure, competitiveness and growth, very often these organizations, their funders and even their clients have very little interest in theoretical concepts like market failure, systemic competitiveness, innovation systems or even modernization. They have a mandate, a limited budget, and many competing demands.

Most of my work is about helping leadership teams of meso organizations to make better sense of their context, to design better programs and services so that they can have a bigger effect on the industries they serve, or to become more resilient.

Increasingly our focus is on helping these organizations to become more innovative, not only in their product/service offerings, but in the way they unleash the creativity of their staff, their networks and how they all learn and discover what is possible in their given social and economic context. It is about stretching the capability, the influence and the adaptiveness of the meso.

More_Meso

To manage a meso organization takes a special kind of person.

  • Firstly, the leader must meet the demands of their funders or stakeholders. They must be able to handle a huge bureaucracy and lots of reporting on the often seemingly senseless of indicators and targets that funders require. Spare a thought for those that depend on several sources of funding.
  • Secondly, the leader must meet the demands of industries, clients, wanna-be entrepreneurs and dreamers that come knocking on their door. While we can collectively call these businesses “clients”, they are in fact a very diverse group with a mind numbing diversity of requirements, demands, capabilities and competencies. While in an industrialized country it is sufficient to work with those enterprises that shows the right kind of curiosity and willingness to pay for top notch external support, in developing countries these meso organizations are often under pressure to work with lagging enterprises that are struggling to master the basics, marginalized groups and must also contribute to all kinds of social objectives. It is not simply about being at the cutting edge and competitiveness, but also about creating pathways for others to follow. This is very hard to do when there are huge shortages of professional management in companies, poor schooling and a whole host of interconnected market failures that seems to hold everyone from reaching their full potential.
  • Thirdly, these leaders must contend with their organizational context. For instance, many meso organizations I work with are associated with research institutions or universities. That means there is a demand on these centers to contribute to the academic objectives of their host. This includes creating opportunities for students to gain work experience, providing post graduate support, procuring raw material and components and running a business through an administration designed for another purpose.

My list could go on. But perhaps at another time.

We’ve been developing tools, instruments and concepts targeted at meso organizations for more than 10 years. This year we will focus on these, without losing focus on promoting the healthy economies of territories and industries.

I am looking forward to the Summer Academy where we can explore these and other issues. Every year we attract a range of experts and practitioners from around the world where we learn together and get to explore issues that we face in the field with a combination of theory and practical simulations. I hope to see you there!

For more information, visit the Mesopartner Summer Academy page.

The next step in systemic change

Over the course of 2016, Marcus and I worked on a piece of research on systemic change in market systems development, funded by the BEAM Exchange. In this work, we question the utility of the concep…

Source: The next step in systemic change, an update on our research written by Marcus Jenal on the Systemic-Insight.com website

Instigating Innovation: Tech push fallacy is still alive

Let me continue with the Instigating Innovation series. I will slowly shift my attention to the technology intermediaries, research centres and technology transfer organisations that exist in many countries to overcome persistent market failures in the private sector. Yes, I know it is a shock for some, but these centres do not really exist to promote the technical careers or the of these people in these centres, nor to promote a specific technology in itself. From a systemic perspective, these kinds of technological institutions exist because they are supposed to overcome pervasive causes of under investment in technology (and skills development) and patterns of poor performance of enterprises. Economists describe the last two phenomena as the result of market failures, mainly caused by information asymmetries, a lack of public goods, high coordination costs, economies of scale and a myriad of other challenges faced by enterprises (hierarchies), markets and networks.

The challenge is that very often the technology these intermediaries promote become an objective in itself. The technology, embodied in equipment, processes and codified knowledge, becomes the main focus. So now we see technology centres being created to promote Industry 4.0, or 3D printing, or environmentally friendly technology. While I am the first to admit that I am helping many of my clients come to grips with industry 4.0, additive manufacturing or environmentally friendly technology, we must not confuse means with ends.

About 20 years ago, my late business partner Jorg Meyer-Stamer and his colleagues at the German Development Institute developed the Systemic Competitiveness framework. Many of my posts on technological capability and innovation systems are based on this Systemic Competitiveness, but I wont go into this right now (perhaps I can do that in a later post), but will only state this this model has greatly influenced my thinking of how technological capability can be developed in order to upgrade, improve or stimulate the competitiveness and innovative behavior of enterprises and state institutions. In one of my current research contracts I had to retrace the evolutionary economics origins of this framework and I found the following paragraph in one of the early publications:

“A further fallacy also played a role in the past: the establishment of technology institutions was based on the technology-push model, according to which breakthroughs in basic research provide impulses to
applied research, which these in turn pass on to product development. In fact, however, research and development is for the most part an interactive process; and it is frequently not scientific breakthroughs
that impel technological progress, but, on the contrary, technological breakthroughs that induce scientific research, which then seeks to interpret the essence and foundations of a technology already in use.”

What struck me was the past tense in the first sentence. So many of the technology institutions I am working with are still established on these same grounds. A technology push model. Actually, much of economic development has the same mindset, a solution-push model. It implies that clever solutions are developed in a clinical and carefully managed environment, and then is made relevant to business people (as Jorg often said “stupid business people”) through iterations of “simplification” and “adaptation”. Don’t get me wrong. I am the first to promote scientific discovery. But this has its place. Modernisation of industry must start from the demand side:

  • where is the system now?
  • What is preventing companies from competing regionally and internationally?
  • What kind of failures, both in business models but also in markets are repeating over and over again?
  • What kind of positive externality can we create?
  • How can we reduce the costs for many enterprises to innovate and become more competitive?

Only then do you start asking what kind of technological solutions, combinations, coordination effort or demonstration is needed. Perhaps no new equipment or applied research is needed, maybe something else must first happen. Some non technical things that I have seen work are:

  • mobilising a group of enterprises into a discovery process of common constraints and issues
  • arranging exchange between researchers, academics and business people at management and operational levels
  • hosting interesting events that provides technical or strategic inspiration to the private sector
  • helping companies overcome coordination costs
  • making existing technology that is not widely used available to industry so that they can try it
  • placing interns at enterprises that have different skills than the enterprise use at the moment
  • arranging visits to successful enterprises; and many more.

The truth of the matter is that the innovative culture of the technology institution, and its openness to learn from the industries it is working with are much better predictors of whether the industries around them will be innovative. If the technology institutions are bureaucratic, stale or rigid, nobody in industry will be inspired by them to try new ideas, new technologies, explore applying technology into new markets, etc. Just like we can sense when we arrive (or contact) a succesful enterprise, so we can all sense when we have arrived at an innovative technology institution. It looks different, there is a vibe. It is information rich, everywhere you look you can see ideas being played with, things being tried, carcasses of past experiments can be seen in the corner.

I can already hear some of my customers leading technology centres reminding me that I must consider their “funding mandate from government” and their “institutional context in universities” as creating limitations in how creative they can be, and just how much demand orientation they can risk taking. Yes. I know this. In the end, leaders must also create some space between the expectations of their funders (masters?), their teams and their target industries. In fact, how leaders balance these demands and what is needed by their clients, students and staff can probably be described as business model innovation. If you cannot get funding from government for what you believe is required, just how creative are you to raise this funding through other (legal) means?

We have seen over and over again that it is not the shiny new piece of equipment in the technology centre that inspires industry; but the culture of the technology centre, the vibe, the willingness to try crazy ideas to make even old stuff work better or combining old and new. Ok, I agree, the shiny equipment excites geeks like me, but this is not all that matters.

My main point is this. Technology Institutions should focus on understanding the patterns of performance or under-performance in the industries and technology domains they are working in, and should then devise innovative products, services and business models to respond to these. This means working back from the constraint to what is possible, often through technology. To be effective in helping entrepreneurs overcome the issues they are facing would require that these technology institutions are innovative to the core. Not just using innovative technology, or offering some innovative services, but also in how these institutions are managed, how they discover what is needed and in how the collaborate with other institutions and the private sector.

To instigate innovation in the private sector, publicly funded technology institutions need to be innovative themselves.

 

Source:

ESSER, K., HILLEBRAND, W., MESSNER, D. & MEYER-STAMER, J. 1995.  Systemic competitiveness. New patterns for industrial development. London: Frank Cas. Page 69

 

 

Significance over scale when selecting sectors

When promoting territorial economic development from an innovation systems perspective it is important to find ways of increasing the use of knowledge and innovation in the region. However, in mainstream economic development there is a tendency to target the private sector based on scale. This means that practitioners look at quantitative measures such as jobs, numbers of enterprises, numbers of beneficiaries, etc. when deciding where to do analysis and focus support. This is common practice in value chain promotion, sub sector selection, etc. Many development programmes do this as well prioritizing scale measures such as jobs, women, rural individuals, etc.

From my experience of assisting development organisations to strengthen the economic resilience of regional economies (which means more innovation, more experiments, more diversity, increased use of knowledge, more collaboration between different technological domains), I have found that the scale argument is distracting and too focused on the beneficiaries (whatever is counted) and not focused enough on those indirect public or private agents that are significant and that enable a whole variety of economic activities to take place. With significant I mean that there could even be only one stakeholder or entry point (so the direct scale measure is low) but by addressing an issue it enables a whole variety of economic activities to take place.

Of course, scale is very important when a local politicians need votes. It is also important when you have limited budget and must try to achieve wide spread benefit. For this reason scale is very important for social programmes.

However, when local institutions are trying to strengthen the local innovation system, in other words improve the diversity technological capability of a region, then scale becomes a second priority. The first priority then becomes identifying economic activity that enables diversity or that reduces the costs for enterprises to innovate, use knowledge more productively should be targeted. The reason why this does not happen naturally is that these activities are often much harder to detect. To make it worse, “significance” could also be a matter of opinion (which means you have to actually speak to enterprises and their supporting institutions) while crunching data and making graphs often feel safer and appear to be more rigorous.

My argument is that in regions, the long term evolution and growth of the economy is based on supporting diversification and the creation of options. These options are combined and recombined by entrepreneurs to create new economic value in the region, and in so doing they create more options for others. By focusing exclusively on scale, economic actors and their networks increasingly behave in a homogeneous way. Innovation becomes harder, economic diversity is not really increased. I would go as far as saying that success becomes a trap, because once a recipe is proven it is also harder to change. As the different actors becomes more interdependent and synchronized the system becomes path dependent. Some systems thinkers refer to this phenomena as tightly coupled, meaning a failure in one area quickly spills over into other areas. This explains why whole regions goes into decline when key industries are in decline, the economic system in the region became too tightly coupled.

But I must contradict myself just briefly. When interventions are more generic in nature, meaning they address market failures that affect many different industries and economic activities, then scale is of course important.

The experienced development practitioners manage to develop portfolios where there are some activities that are about scale (for instance, targeting a large number of informal traders) and then some activities that are about significance (for instance ensuring that local conformity testing labs are accessible to local manufacturers).

The real challenge is to figure out what the emergent significant economic activities are that improves the technological capability in the region. New emergent ideas are undermined by market failures and often struggle to gain traction. Many new activities requires a certain minimum economic scale before it can be sustained, but this is a different kind of scale than when practitioners use scale of impact as a selection criteria. Many small but significant economic activities cannot grow if they do not receive public support in the form of promotion, awareness raising or perhaps some carefully designed funding support.

There are a wide range of market failures such as high coordination costs with other actors, high search cost, adverse selection, information asymmetry and public good failures that undermines emergence in local economies. It is exactly for this reason that public sector support at a territorial level (meaning sub national) must be sensitive to these market failures and how they undermine the emergence of new ideas that could be significant to others. The challenge is that often local stakeholders such as local governments have limited influence over public institutions in the region that are funded from other spheres of public administration.

Let me wrap up. My argument is that scale is often the wrong place to start when trying to improve the innovation system in a region. Yes, there are instances where scale is important. But my argument is that some things that could be significant, like the emergence of variety and new ideas often get lost when interventions are selected based on outreach. Furthermore, the focus on large scale impact draws the attention to symptoms of problems and not the the institutional or technological institutions that are supposed to address market failures and support the emergence of novelty.

I will stop writing now, Marcus always complains that my posts are too long!

Let me know if I should expand on the kinds of market failures that prevent local economies from becoming technologically more capable.

 

 

On market failures – perhaps you are too close

I am often involved in coaching and capacity building a different kinds of private sector development experts working in the developed and developing world. I am sometimes shocked when I realize that a practitioners or programme managers in the field involved in market development do not understand some of the basics of how markets work or how to address market failure. This is often made worse by the broad ideological blindness of the organizations that promote market development approaches. I state this based on my experience that when markets and its alternatives are properly explained to teams in organizations, many problems resolve themselves, largely because the way markets function and evolve are better understood. Don’t get me wrong, I love markets. They are amazing in that they can emerge almost anywhere but where we often seem to need them. But I am not blind to their limitations (like how unfairly they allocate gains), nor am I naive about what it takes to get market systems to work.

If you are trying to solve market failures by bringing suppliers and buyers of a particular good or service together you may be too close to the action to really make a difference in the medium to long term. Actually, you might be making it harder for markets to evolve, as trust that is weakened when something does not work as it should or as promised is not easily forgiven in the real world, making 2nd attempts very hard if not impossible. There are many reasons why I say this.

Firstly, a market failure is a symptom that something else is wrong. It could mean that knowledge about the product or service, or how or why it is used, is not available or costly. This could imply a deeper failure (knowledge related) that people do not understand the value, the impact or the modalities of the good or service, or how the good or service will affect them or what it might depend on. Or the supplier is not able to demonstrate or explain how a good or a service can be used, or that it will address a particular need.

Secondly, modern markets are tightly intertwined and interdependent on other markets and other forms of allocation beyond markets. For instance, the service for quality management advice needed by food producers is dependent on many other services, including management consulting, HR consulting and sufficient demand for companies that are for quality accredited. It may also depend on some technical expertise in the form of a service about the product itself and the regulations it must comply with. These different markets co-evolve and depend on each other. Furthermore, this quality management service is also shaped by domestic and international regulations, standards and norms. Lastly, this service may also be specific to a particular service or product type, so the potential impact of the service or particular good may be easier (or harder) to guess so that a potential buyers of the service can figure out if this money might be spent in a better way. Remember that spending money on the wrong thing (adverse selection) is also a market failure if this is caused by an inability to thoroughly evaluate the expected benefits of alternative choices.

Thirdly, most services and products traded in markets also depend on related or supporting networks and hierarchies. For instance, few market services or products used by businesses can be used if that business (a hierarchy) does not have a management capacity, or absorption capacity (to figure out how the product or service will impact the rest of the business) or a functional capacity (internal expertise to use the product/service optimally). Many first time users of products and service depends on social networks to evaluate alternatives.

Fourthly, many services are not provided only by the private sector, but also by public providers and not-for-profit organizations (and even via networks). The more generic the service, the more likely that it wont succeed as a private service (because business typically pays for additionality, generic solutions can often be developed in-house (via hierarchy). Many “business services” in developed countries are provided by private, public, not-for-profit (networks) or hybrid models. Multilateral development organizations often promote “commercial” business services even when in their own countries these services are also available as public or hybrid services. Often services are first provided by the public sector, and the complimented by the private sector as demand becomes more specialized. Or services are provided by the private sector, until the public sector realize that it is in fact a public good or service and that it should in fact be provided by the state. But often, in the long run, products and services provided in the public sector are also provided in the private sector, and vice versa. The order depends not only on the context, but also on the dependency and interdependency of the markets, as well as the costs and efficiency of the alternative means of provision.

Lastly, in the words of Mark Granovetter, markets are deeply embedded within a societal context. Markets are part of the society, it reveals what a society values, how much it trusts, and how much it values people keeping their promises. You cannot isolate a market from the context, optimize it and then insert it back in the society. The societal context provides the trust, the enforcement and even information flows that makes it possible for markets to work. Out of this society a whole range of institutions emerge, some in the form of organizations, others in the form of norms, habits and routines.

During training sessions on how markets work, practitioners are often surprised to find out that markets are only one way a society allocates goods. The other way is through networks (often not in exchange of currency), or through hierarchies (organizations that allocate resources internally). When markets are new, they often emerge first as networks. Over time a group of people that know each other socially formalize their transactions, and out of this markets emerge. This is why we often advise practitioners that when one form of allocation fails, the solution is often to stimulate the others. So when a market fails, first try networks or hierarchies.

We often use a case study to illustrate the point. A service provided in one country by the private sector as a commercial service, is provided in another country as a public service. In a third country, the service is provided by an association as a network good. Pairs of practitioners from different countries then assess the three cases and must make a recommendation. It is quite funny to see how people from different parts of the world disagree on what constitutes a commercial service (market transaction), what constitutes a public good (allocation via hierarchy) and when a network transaction is better.

On the point of designing markets. While it is true that some markets are designed, these designs are often carefully planned and regulated. Think of mobile phone spectrum or broadcasting rights. It is not so easy to design markets that needs many actors to cooperate and that depends on many other variables that you cannot control through regulations. Even if you could use regulations, you might have the problem of not being able to change something if you need to.

In the end, markets learn and adapt. Actors in markets experiment, they learn from each other, and they adapt. This takes time, much longer than the life of a development programme. Ask yourself, why does a market for cigarettes develop in a prison within hours, but a market for tomatoes can take years? We have to understand the preconditions and the evolution of markets much better if we want to assist the evolution of societies and their markets.

To solve market failures, we often have to move one level up to where societies turn broad and generic policies about the society into organizations or targeted interventions. This may still mean working with the people doing the transactions to learn from them, but often the solutions will lie in institutions, policies and eventually maybe in regulations and standards.

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.

Industrial policy is different at local and national levels

Industrial policy at the national, provincial or sub-national and local levels is different. While at the national level, industrial policy is often focused on coordinating public resources around certain priority areas, local industrial policy is almost completely focused on the pressing issues of the private sector and organizing the public sector around these needs. While at the national level, selecting opportunities for investment is often difficult and focused on the future, at the local level industrial policy might get trapped into grappling with “what is” and the legacy of the past.
At all the levels policy makers will be grappling with balancing “what we have now” with “what is desirable”. All too often “what is possible or within reach with what we have” is not asked enough of public and private actors. These questions are much harder to ask and to answer at the higher levels, because the industries are further away or maybe not even entirely visible, and emerging competencies in public and private actors may still be hidden.
At the local level, business is more visible. Unfortunately, at the local level past relations and power struggles between various actors still shape the current dialogue and possibilities for future collaboration. Therefore, industrial policy implementation at a local level must have a strong process element that attempts to reconfigure stakeholder relations around areas of common potential or concern. In our practical experience we know that at the local level it is easier to mobilize the private sector around problems (such as skills shortages and inadequate infrastructure) than around opportunities. However, it requires a certain confidence and maturity of local government and local public agencies to engage with the private sector when they know that they will be dealing with complaining business people. The one thing both the local private sector and the local agencies of the public sector have in common is limited resources. Perhaps local industrial policy then should focus on making the best of the existing limited resources. The focus should be to find opportunities for collaboration that can be exploited in a process approach, not focused on large projects or a grand vision dominated by the public sector, but on a process of finding small opportunities to make better use of local competencies, local knowledge and local capacity in both the public and the private sector. I am not arguing that local industrial policy must be completely inward looking, as the relation between local firms and external markets are an important resource. However, I am arguing that local industrial policy must start with the current reality while mindful of the past and focused on what is called the adjacent possible. The adjacent possible means opportunities or solutions that are within reach by combining, recombining and maybe adding a little to what we have now.
I conclude by stating that at the local level, industrial policy is not so much about the public sector supporting structural change or achieving a vision of new industries. At a local level, industrial policy needs to be entrepreneurial in that it should focus on exploiting existing resources, knowledge and competencies to the fullest. Local industrial policy must have a process approach that does not get trapped into existing stakeholder and sectoral interests, but that strive to unlock the potential of the different knowledge bases and competencies in the locality to solve existing problems in innovative ways, while searching in an ongoing basis for opportunities for collaboration.

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.

 

Entrepreneurs and markets

While most entrepreneurs depend on functioning and competitive markets to survive, there are those entrepreneurs that actually thrive in imperfect markets. These are the entrepreneurs that creates a business around something like an information failure, high costs of finding suppliers or customers (brokering), or overcoming economies of scale (for instance by leasing expensive equipment on a pay-per-use basis).  Their services or products are valuable to the societies that they create their businesses in, as they overcome barriers to entry and barriers to upgrading. However, there are long term consequences to an economy that is riddled with market failures especially when these failures become very profitable for some. But more about that later.

Anecdotal evidence would suggest that entrepreneurs that exploit market failures to create new markets often earn disproportionate returns. They take huge risks as governments could address the market imperfection if it had the will, the competence and the resources to do so. Once these entrepreneurs are established they often have near monopoly market dominance. Unequal income for me is not such a big problem (it basically tells me there are many systemic failures), rather unequal opportunities is a much bigger issue as it is more widespread. For instance, can the cycle of inter-generational poverty be broken in a society? Can a child from a poor rural location one day choose to become a lawyer, engineer, or teacher; or are they trapped with few options? Is the society creating opportunities only for a few entrepreneurs that have connections and that can protect their interests, or are we creating markets where many entrepreneurs can compete in?

In a European country, with layers and layers of competition and market policies, most entrepreneurs compete on a more-or-less even playing field with markets that are carefully designed, or regulated as they emerge. In Africa, many entrepreneurs are competing in markets where government actually introduce imperfections, largely because markets and competition is not trusted (it is called the Law of Unintended Consequences). The situation is also made worse in that our market regulating and shaping institutions are often not resourced sufficiently and over-run with both creating market systems and coping with ongoing change.

How to overcome this situation?

Industrial policy in developing countries cannot be driven only from the perspective of trade and industry, as many other departments (or policy areas) are introducing market failures into the system in for instance health, education, science and agriculture. These conflicting policies then creates market imperfections that if exploited by a few entrepreneurs will lead to huge profits and a firm market footing. Society may benefit in the short term from a particular solution being available, but in the long term society may be stuck with a market that very quickly develops its own interests that may not necessarily be in the interests of the wider society.

Furthermore, market institutions must recognize and identify the patterns that plays out repeatedly in a society, and try to address these. We should not celebrate when one entrepreneur jumps on an opportunity (although this is still better that nothing). We should celebrate when many entrepreneurs are crowded into a market. I don’t know whether it is naive to ask policy makers to also think about the unintended consequences of their decisions. This is the reason why we’ve had to delve into complexity theories to try and curb the damage being done by well-intended policies.

If we do not succeed in building the right market systems that are based on fair competition we will forever be creating opportunities just for a few entrepreneurs. In the meantime, we depend on a few entrepreneurs that combine intelligence about an opportunity with the right resources and the right competences.

Building institutions that supports knowledge flows to industry

It sounds like a cliche to state that manufacturing has changed a lot in the last 30 years. Yet people often say this without thinking of how it has changed. It is not just about the size of our manufacturers, or the increased competition from Asia or elsewhere. It is also not about the sophisticated equipment and the tremendous range of products that are now available to consumers. An important aspect of manufacturing change is the dependence on knowledge from internal and external experts, or Knowledge Intensive Business Services (KIBS). These knowledge experts include engineers, product developers, process experts, industry experts or logistical experts. While in a country like Germany, there are many public, academic and private specialists to go around and assist manufacturers to tweak their processes or solve specific problems, in developing countries we have a bigger challenge. Knowledge intensive services are prone to several market failures, and therefore it is important that we consider the role, importance and challenges that these knowledge services have.

Let me just state upfront that despite my PhD research focusing on the importance of knowledge services in the manufacturing sector, I am hesitant to treat the “knowledge economy” as something separate as it is often done in the South. The increasing importance of many different kinds of knowledge throughout the economy is pervasive. Just ask a commercial farmer in Africa how they have had to change their farming practices in the last 3 decades. It is almost unthinkable that 30 years ago a person could start commercial farming without a tertiary education or at least one highly experienced supervisor. The same goes for manufacturing.

There is a big difference between generic Business Development Services (BDS) and Knowledge Intensive Services. While with BDS our problem is to get good all-rounders to provide services to enterprises where it is very hard to determine the real value of the service offering, in Knowledge Intensive Services the service is very specific to a certain (technical) problem, it is deep knowledge and the value (and cost) is usually very clear. Firms that know what they are doing need knowledge intensive service providers to fill in the gaps where deep knowledge is needed, a BDS provider is typically out of their depth with a manufacturing enterprise that are trying to be competitive.

  • The first challenge we have with intensive or specific knowledge is scale. When just a few manufacturers use more advanced equipment in a country there is a good chance that few service providers, experts or technicians will be available. In market failure terms, this is called an indivisibility (you cant divide the cost of the expert easily between different enterprises, or just take a small piece of the expert). It could also be about scale (not enough business to justify the emergence of a specialized service provider). It is often difficult for manufacturers to coordinate their use of expert service providers, or to coordinate the procurement of similar equipment that makes the development of a pool of service providers possible. This is called a coordination failure and it is pervasive in our developing economies.
  • A second challenge is that many manufacturers are hesitant to search outside their firm. This is often due to costs (which includes the time spent to find the right expert), but also because for so long manufacturers had everything they needed in-house. In South Africa, many of our older firms are hesitant to use “consultants” because they don’t trust them. This could be described as a market failure around asymmetrical information or adverse selection.

One way to increase the availability of knowledge intensive service provision in a developing country is through the connection between academic institutions, public funded industry support programmes and industries themselves. This requires that technical or knowledge experts are able to be released from certain teaching or research duties to work with firms. This is often very difficult due to the high student load in many of our African universities. I am often astounded by the world class research capacity and expertise that are hidden inside universities that are desperately needed in industry. This failure has many names, but in market failure terms it is called a public goods failure, in other words, public funds are not used to overcome persistent market failures in industry.

A second and parallel strategy should be to make sure that the Meso level organizations (which include universities and higher education institutions) are concentrating on overcoming the market failures in industries and in firms. In developing countries these Meso organizations, meant to address specific performance issues at firm or industry level, are more focused on securing and spending national (or international) funding than to become valuable and responsive to the needs of industry. To get the Meso organizations focused on the plight of firms requires an industrial and modernization policy that is focused on building the right economic and industry supporting institutions – this cannot be done just by merely implementing projects or programmes – it must be systemic. With right I mean relevant and equipped with high level experts that understand and can relate to the issues in industry.

This phenomena of the disconnect between public knowledge services and the need of industry is more widespread than you would think in our developing countries. It is a public good failure that undermines the well being of our economies. I believe this is also an ideological failure, because governments tries to use their funds to provide incentives or prioritize certain kinds of behavior both in the public sector and in the private sector. Instead of responding to what is emerging or what is needed in the private sector, the public sector tries to prioritize what it believes to be ideal. The result is that the firms that are most able to create jobs and wealth are left without public support.

In Mesopartner we will be working on consolidating our experience in bottom up industrial policy. We will work closely with research organizations and development partners around the world to strengthen and develop a body of knowledge on how some of these issues can be addressed in the developing world. We do this by developing a theme where instruments, concepts, theories and practice can be integrated. If you are interested in participating in this process, or have experience to share, please give us a shout.

I have previously written about this some years ago in the post about the service sector  and about the increased importance of knowledge intensity here.