Category: Complexity and Evolutionary Thinking

Identifying firms to work with to induce upgrading of industries

This post was revised in February 2018.

When working on the improvement of innovation systems in developing countries, we have to work with firms. These firms have several roles, and there are three units of analysis:

  1. The firm is an important unit of analysis of innovative practices (product, process, business model).
  2. The firm is also a unit of analysis in terms of cooperation and collaboration, thus its ability to cooperate with rivals is an important consideration when we design interventions.
  3. Working with the right firms also provides an important source of technology and knowledge spillovers. This is where the challenge comes in for development practitioners.

Generally, firms that are able to lead the way, or could be good role models, are difficult to involve in development programmes for a variety of reasons. I won’t discuss that right now. What is important to remember is that most firms not only absorb or use technology and knowledge, they are also the main sources of knowledge and technology. This is both from a supply perspective (equipment suppliers, technical or specialist sources of knowledge, etc.) and from a demand perspective (demanding customers, sophisticated demand). Whether firms are aware of their role as disseminators of knowledge of technology is another story!

I will rather focus on how to identify the firms that we can work with to improve innovation and competence in all three units of analysis discussed above. Remember, our objective is to find ways to improve the dynamic in innovation systems that will result in the modernisation and technological upgrading of industries and regions.

More than 25 years ago Bo Carlsson and Gunnar Eliasson described a concept called “economic competence”. At the time they defined economic competence as “the ability to identify, expand and exploit business opportunities” (Carlsson and Eliasson, 1991). This is a useful definition as we have to remember that we cannot innovate on behalf of a broader industry. Somehow we must work with those firms that are able to innovate, imitate, adapt and integrate new knowledge and ideas.

According to Carlsson and Eliasson, economic or business competence has four main components:

  1. Selective (strategic) capability: the ability to make innovative choices of markets, products, technologies and overall organisational structure; to engage in entrepreneurial activity; and especially to select key personnel and acquire key resources, including new competence. This aspect has been amply illustrated in recent years as many companies have struggled to define their corporate identities and strategies as distinct from their competitive strategies in each individual business unit (Porter, 1991).
  2. Organisational (integrative, coordinating) capability: the ability to organise the business units in such a way that there is greater value in the corporate entity as a whole than in the sum of the individual parts.
  3. Technical (functional) ability: this relates to the various functions within the firm, such as production, marketing, engineering, research and development, as well as product-specific capabilities. These are the areas of activity in which firms can compare themselves to their peers or leading competitors.
  4. Learning ability, or the shaping of a corporate culture which encourages continual change in response to changes in the environment.

Economic competence must be present in sufficient quantity and quality on the part of all relevant economic agents, users as well as suppliers, government agents, etc. in order for the technological system to function well. This is both true at a local or regional level, our a national or sectoral level.

If the buyers are not competent to demand or use new technology – or alternatively, if the suppliers are not able or willing to supply it – even a major technical breakthrough has no practical value or may even have negative value if competitors are quicker to take advantage of it.

I think that this business approach of choosing the entrepreneurs that we work with is very relevant to finding the people who can absorb new ideas and make them work in a developing country context. I would also go so far as to state that I do not believe that it is feasible to select “change agents” according to social criteria such as gender, age, etc. – but that we recognise that change within economic systems happens because of the economic competencies of the people who are recognised in the system (regardless of their demographic data). The reality is that you cannot be competent on behalf of other people!

I challenge you to review the firms that you are working with to see if they are economically competent!

Sources:

Carlsson, B. and Eliasson, G. (1991). The nature and importance of economic competence. Working Paper No. 294, The Industrial Institute for Economic and Social Research (IUI).

Porter, M.E. (1991). “Towards a dynamic theory of strategy“, Strategic Management Journal, 12 (Winter Special Issue), pp. 95-117.

More on bottom up development

I was reminded by a reader that Robert Chambers of the IDS is known to be a strong proponent of bottom up development, because it overcomes some of the issues of the complexity of development.

At the same time I found a recent blog post by Ben Ramalingam at the Aid on the edge of chaos blog about a meeting held earlier in May about Complexity and International Development. I am very jealous because Eric Beinhoecker, Robert Chambers and Ben Ramalingam (lead author of a fantastic paper  of a 2008 Overseas Development Institute working paper ‘Exploring the Science of Complexity: Ideas and Implications for International Development and Humanitarian Efforts’) were all in the same room talking about complexity and development. Can we have some of this in South Africa too? I have in previous posts mentioned some of the work these gurus are doing on complexity.

For some insights into the discussions at that meeting head over to the blogsite of Duncan Green (Oxfam) where he wrote a post titled “so the world is complex – what do we do differently“.

Perhaps what I neglected to say this explicitly on my previous post is that bottom-up development is about much more the Local Economic Development. You would have noticed that in my recent posts I have associated bottom up diagnosis with innovation systems, industrial development, advanced manufacturing, the service sector and many other topics. We have to strive to understand the system, and not get caught up with specific target groups. This will take us further from understanding and carefully intervening into the complex local system.

Also to clarify. You do not diagnose the complexity of the system by analysing data. You do this by engaging with people, and allowing them to reach a deeper understanding of the system that they are part of.

Let me know if I again forgot to say something!!

Why the advanced sectors are so often overlooked

It is amazing how little support the advanced sectors of our economy receives from public sources. It seems like this disinterest is caused by multiple factors. One, it is not in line with the priorities of the labour movement. The labour unions prefer a focus on job creation for low skilled workers. However, research has also shown that every professional worker in the knowledge sector creates a multiplier of jobs for lower skilled workers. But like an official told me last week: “the problem is that we don’t want the rich people with skills to get richer. We want the poor people without skills to benefit”. Before you laugh, many development agencies and donors are nurturing the same ideas.  Can someone please explain to me why we choose to cap the income of the ‘rich’ and ‘skilled’? The fact that there is such a high premium on skilled workers are symptoms of a much bigger problem. Can someone also again explain how we are going to get people out of poverty by focusing exclusively on the people in the trap?

Let me get back to my main argument…

The second reason why the advanced sectors are overlooked is because they are so difficult to understand. Knowledge is often not a product in itself, but an input into other production sectors. Therefore it is difficult to describe, capture, measure and report on. But the truth is that more and more of our economic sectors are becoming knowledge intensive. Even something is ‘simple’ as farming (which was done mainly be people with low academic qualifications less than 50 years ago) is now increasingly knowledge intensive. This knowledge intensity is partly due to technology, but also because of the natural specialisation that occurs within industries. A challenge is that we do not do enough in developing countries to embrace and measure the knowledge economy (which is not about clever academics).

The third reason the advanced sectors receive so little public support is because the business sector itself struggles to justify or articulate their needs. The problem with specialisation is that everyone is indeed on their own little island. Thus fragmentation is part of the character of the system.

Perhaps final reason is because development practitioners and public officials think that the clever dudes in the advanced sector can help themselves. Well, have you ever noticed what happens with collective intelligence without a facilitator – it goes down. Putting a bunch of experts in the room will not necessarily result in clever expert ideas coming out. Furthermore, the business owners in the advanced sectors are fierce rivals, all fighting or lobbying for their ideas to become standard. Perhaps I should add that even highly educated and specifically highly experienced people are also blinded sometimes, or are sucked down a dependency path. A final point is that the advanced sectors in other countries are getting really advanced support from the public sector, so leaving our advanced sectors to help themselves is not a wise idea in the longer term. If you want to see what income inequality looks like, then leave the game for just a few to play, with high risks and even higher rewards to the few people that can overcome the technical, market and government obstacles placed in their way (if it sounds familiar it is because it is already happening. Come to South Africa if you want to see this).

Might I add that many donors also prefer to work with the poor and the helpless for political reasons, despite the fact that so many research reports have shown that you cannot solve the problem by working on the symptoms.

So perhaps we need to take a step back and look at the levers created by the advanced sectors in developing countries. We need a more systemic perspective of what is driving change and prosperity in these countries.  I am convinced that we should shift our attention from trying to get one more farmer into a system with no margins, and shift our attention to the industries in the countries we work in. We should use our diagnostic tools to overcome market failures, low economies of scale, and help articulate demand that can create new industries (or new pressures to improve performance).

Crossposting from Aid on the Edge of Chaos

I enjoy the Aid on the Edge of Chaos blog. Although I have listed them under “other blogs and podcasts I like”, I have decided to highlight two of their recent posts.

The first post, “From the Neoclassical Logic Piano to All That Jazz” is about a recent speech by Dr DeLisle Worrell, Governor of the Central Bank of Barbados. Worrell focused on the problems with economics today, with much of his talk given over to ‘complexity economics‘. If I said anymore here I would spoil a really good posting.

The second and more recent posting, “Complexity, crises and moving beyond recipes“, is about complexity in development. To quote from the posting directly “The argument that modern organisations have to deal with complexity on a daily basis is fast becoming one of the least controversial statements any analyst, policy maker or practitioner can make. But what this actually means in practice is up for debate.”

I don’t get any commission!
Go there, read it.

Local economic development as an evolutionary process

Modern evolutionary economics is about 20 years old now, and many research programmes continue to add to the content of the subject. I think that development practitioners have a lot to learn from this subject. When we work at the local level, with local stakeholders and local resources, we are often confronted by the failures of traditional economic models (for instance the obsession with supply and demand). For instance, traditional economics often focus on distribution or allocation of wealth, while in evolutionary economics the focus is more on wealth creation. Traditional economic models assume that you can use the data of the past to make reliable predictions about the future. Just this simple insight will already change many LED approaches that emphasize working with the youth and the marginalised (solving an allocation problem) towards understanding the systemic interaction of economic technologies, social technologies and physical technologies that co-evolve to create wealth.

To be more precise, an economy should be recognised as a complex adaptive system (Beinhocker, 2007; Ramalingham, Jones, Reba and Young, 2008). This means that the economy is a system of interacting agents that adapt to each other and their environment in a complex way. Complex adaptive systems are sub-systems of open systems. It recognises that change and advancement are forces within the system created by the agents, and that it takes energy to create and process information, and to create order.

Dosi and Nelson (1994) explains that “evolutionary” implies a class of theories that tries to explain the movement or change of something over time. It furthermore involves both random elements which generate or renew some variables, as well as mechanisms that systematically create variation. Central to these theories are the concepts of deductive and experimental learning and discovery.

Beinhocker explains a simple formula that is common to all evolutionary systems. Firstly, a system needs to create variety (for instance through many innovators trying new things), and then there must be some selection or fitness criteria (often this is provided by markets). Next there is a selection process, where the ‘best’ or rather most-suitable designs are selected, and thereafter these choices are amplified or repeated (also known as imitated).

So if you think of your local economy, then consider how certain businesses came about. The variety of businesses is a direct result of novelty or variety creation, and how they ‘fit’ to the criteria of local consumers,resulting in these business models being ‘chosen’. Every now and then, a business person with a new or different idea comes along, and this in many cases may even result in local consumers changing their fitness criteria. This describes a process where economic resources (as well as labour and technology) are continuously being allocated to those who are able to combine or create new ideas, new products, and new business models.

In the next few posts I will try to delve deeper into this topic, as I believe that it holds many important insights to why local economies grow in such an unpredictable and dynamic way, and why so few local governments or organised business in Southern Africa struggle to have any real positive and leveraged effect on local economies.

References and additional reading:

BEINHOCKER, E.D. 2007.  The origin of wealth. Evolution, complexity, and radical remaking of economics`. London: Random House.

DOSI, G. & NELSON, R.R. 1994.  An Introduction to Evolutionary Theories in Economics. Journal of Evolutionary Economics, Vol. 4(3).

NELSON, R.R. 1995.  Co-evolution of industry structure, technology and supporting Institutions, and the making of comparitive advantage. International Journal of the Economics of Busienss, Vol. 2(2) pp:171-184.

RAMALINGHAM, B., JONES, H., REBA, T. & YOUNG, J. 2008. Exploring the science of complexity. Ideas and implications for development and humanitarian efforts.  Working Paper 285, London: Overseas Development Institute.

January lazy linking

Excuse me for being a bit slow….but I cannot shrug off the holiday feeling yet.  So to make up I provide you with links to some interesting articles in other blogs that I have read in the last few days:

Urbanisation,complexity and poverty – or why aid agencies should be reading Jane Jacobs

This is an excellent article about the famous Jane Jacobs and how she described cities as living ecosystems. The author describes several insights that development agencies should learn from Jane Jacobs and other complex systems authors.

The author of the “Aid on the edge of chaos“, Ben Ramalingam, is also the lead author of a fantastic paper  of a 2008 Overseas Development Institute working paper ‘Exploring the Science of Complexity: Ideas and Implications for International Development and Humanitarian Efforts’.  This is a publication worth reading!

By the way, you will see me post more on the topic of complexity, as my December reading list finally convinced me that traditional economics cannot provide the answers to the complex and adaptive economic system that we are part of.

Change in societies – part 2

In my work with trying to get the private sector to perform better, I often deal with sectors and their support institutions. Very often there are official or recognised industry bodies that are promoting the interests of industry. The least these industry bodies do is to organise an annual golf day, with some even playing an important role to lobby with government. The more organised sector bodies play an active role in sharing information, promoting standards amongst their members, or in some cases actively trying to develop their members or new markets. So these industry bodies often try to affect change in the way I described in the previous post.

But although these organisations are functional units themselves, they are actors trying to promote change in a small part of a society. This means that while they can affect change internal to their organisation through formal change or organisation development methods (using hierarchies, sanctions, incentives and process management), they have to also play a leading role in changing the society around them. The members of the industry body, their supporters and the broader innovation system related to this industry body is not physically part of the organisation, but forms a sub-group of the society around the industry body.

Several challenges arise in this process of trying to get a part of a society to change. The first challenge is that this process of upgrading the performance of industry is often not recognised as a change process. Secondly, societal change is a tough thing to do, and the body of knowledge on how to achieve change in societies is still in infancy. Thirdly, to affect change in a society it is important to appeal to the common identity or value system of the group being targeted, and very often both these factor are weak within industries. For example, some pharmaceutical companies consider themselves to be in the cosmetic sector, while others in health. This means that even if we classify a firm in a given sector, they may still identify more with another sub-group in the society.

For instance, in my earlier post I mentioned the importance of leaders using value systems to lead through example. How can this be related to trying to change the performance or behaviour of an industry? The answer is that we have to make positive examples of those that are early adopters, or leaders. By showing how some firms innovative, or overcome problems through innovative thinking, creates opportunities for others to imitate. Furthermore, industry bodies cannot really use incentives or sanctions to inspire change. However, they can play an extremely important role of communicating why behavioural change or improvement is necessary. If industry bodies cannot build a better case for why firms need to pull up their socks, cooperate better, compete more, innovate or invest, then nobody else will be able to achieve this until it is too late.

Thus, industry bodies have a critical role to play in using their organised members to inspire behavioural change or performance improvement. This process must be understood as a change process at the level of the society. The desired change must be seen in a systemic way to make sure that individuals are not just thinking about measurable improvements (such as time to assemble a gadget) but to also consider the societal change aspects (how to recognise the new values or how to know whom to follow)

Change in societies

The previous post described a typology of competitiveness that spans three levels. In order for individuals, hierarchies (e.g. firms) to improve their competitiveness or performance some kind of change of performance is required. While some of these changes are incremental and takes little effort, it may in many cases require a more concentrated effort to make a significant change. A few years ago Holger Nauheimer introduced me to three different levels of change that corresponds with the typology of competitiveness.

Firstly, there is change in the performance or behaviour of individuals. This may be related to an effort to improve competitiveness, or it may simply be a change of behaviour. Secondly, there are change processes in organisations in order to improve performance and competitiveness. Lastly, there may be changes at the level of the society that results in improved performance and competitiveness.

In the first instance, individuals try to change their performance or behaviour through a combination of self-motivation, self-discipline, practice and concentration. Whether the change is success depends largely on the self-control of the individual, and their own incentives and value system. For organisation to change may require small incremental improvements. In most cases a change process requires proper management, transparrent leadership, transparency and clear communication with staff. Management may decide to use a structured approach, drawing on topics such as organisational development, change management and project management. A combination of sanctions and incentives may be used to shape the behaviour of people in the organisation.

At the highest level, changes occur in societies. These changes typically affect the performance of individuals and organisation, and are also affected by the performance of individuals and organisations in the society. For leaders to influence the transformation in societies, clear leadership with strongly communicated values are required. In my imagination I can think of leaders such as Nelson Mandela and Barack Obama at being particularly good at this. The challenge with change in societies is that it is difficult to manage, due to the fact that incentives and sanctions are weaker. There is also growing awareness of the psychology of crowds and how people in societies create and respond to signals of change. At the same time, we don’t have to think of whole societies changing. Malcolm Gladwell in “The tipping point” explains that when a small enough part of a society change, that it could lead to a tipping point where a larger scale change in behaviour takes place. This activism of change agents in societies are what seems to be keeping many societies in check at the moment, while at the same time promoting ongoing improvement and advancement.

From a systems perspective, the changes in individuals, organisations and societies should be recognised as complex human and social systems. There are many feedback loops, and delays between interventions and results. Furthermore, there are complex dynamics between different elements of the system. Therefore the results of decisions to change are often unpredictable, and care should be taken to create a habit of continous improvement combined with reflective exercises to make sure that the people in the system are able to respond to surprises and changes in the dynamics.