Category: From the field

Connecting innovation systems with local and regional economies

Many of you have asked me how I connect my current focus on innovation systems and technological upgrading with industries with my past experiences of local and regional economic development. I thank you for repeatedly asking this question, and apologise for not providing you with an answer. The reason for my silence was that I was also not exactly sure how to connect these topics. But I think I am now starting to understand how these topics relate to each other.

Let me try to explain this.

Before I continue I need to make sure that you understand that an innovation system is far more than one or two innovative firms.  Freeman (1987:1) defined an innovation system as “the network of institutions in the public and private sectors whose activities and interactions initiate, import and diffuse new technologies.” The emphasis is mainly on the dynamics, process and transformation of knowledge and learning into desired outputs within an adaptive and complex economic system.

So how does innovation systems work within regions or places? Well, it is often affected by issues such as trust, social and informal networks, formal relationships, common customers or common inputs and other factors. You will notice that it sounds very similar to the characteristics of a cluster in its early days. The main characteristic of a local or regional innovation system is that it is mainly focused on a specific geographic space and on the specific knowledge spill-overs that occur around certain firms, industries or institutions unique to that space.

You will immediately notice that innovation thus favours places with more people and more firms. You are right, a close relationship exist between density of interactions between people (provided for by towns and cities, nightlife, and frequent social exchanges) and the innovation system. It does not mean that innovations are limited to these spaces, but simply that they emerge faster or with more success in these spaces. This is largely caused by the increasing importance of knowledge exchange and interaction between firms, knowledge service providers and technological and educational infrastructure. But more about that in a seperate post.

I want to leave you with 3 questions that I have found to be useful to better understand the relationship between places and innovation systems. I use it frequently at the start of an assessment into an innovation system, or to stimulate thinking of public and private leadership.

1) Why are people innovating in this specific location (and not on another space)?

2) How does this space or place support innovation, and more specifically, how does it reduce the costs of innovation?

3) How do innovations in firms affect this space?

Bear in mind that with innovation I mean product, process as well as organisational or business model innovations.

Ask these questions and let me know what you find. I am sure that you will find that many places do not actively support innovation (unless you have some really determined or stubborn innovators there). Nor do they make it cheaper for people to innovate, exchange knowledge or stimulate joint problem solving (or opportunity exploitation). To me it also seems increasingly obvious that the role of cities and towns in Africa are not fully exploited in national economic development as spaces for innovation.

In South Africa, innovation happens mainly in 9 major and about a dozen secondary urban spaces. No amount of public policy will break this pattern until settlement patterns change, or until smaller places start to attract skilled people that can afford to innovate from cities.

So how can we support innovation systems in each and every town? How can we built regional and local institutions that reduce the cost and risk of innovation. Again, I dont mean only product development as an innovation. I mean process and business model innovation as well.

Until we can build our own local technological and educational institutions using local priorities and local resources from the bottom up the trend of urbanisation and migration to the major centres will continue. This is great in terms of reducing the costs of innovation, but it makes us very dependent on national policy, and only a few good local administrations. I would prefer a situation where we can build our local institutions around local issues, this giving firms in for example a mining region a head start in innovating around problems or opportunities related to mining.  For instance, in the Mpumalanga  province (South Africa) we have a lot of coal mining with its associated problems. Why is it so difficult to create a small but focused research institute or technological institute in a town that will focus on applied research and knowledge generation around environmental technology related to coal mining? Could this not be an impulse with environmental solutions as well as innovation as outcomes? I could imagine that such an institute could create positive externalities in a space that would lead to innovation that our both cutting edge and relevant to our society.

Now if you think about it, then Africa is rich with millions of ideas (also known as opportunities, challenges and obstacles) that could serve as impulses to create, stimulate or grow local innovation systems around relevant issues. Dont get me wrong, I dont mean that the public sector must do the research, and then the private sector must commercialise the research (although a little of this certainly helps). I mean that public funds or public private partnerships could be used to establish local institutions that create positive advantages for firms to innovate within regions through reducing the costs of finding relevant information (about a problem, opportunity or technology) and by highligthing opportunities for application of new ideas (by better articulating demand or applications). But there must be sufficient scale of infrastructure to allow the people with the right knowledge, experience and perhaps financial resources to settle in the region to exploit (or address) the opportunities through innovation.

Let me know what you find when you ask these questions.

PS. I know I will receive hundreds of angry e-mails that I am implying that rural areas are doomed.  Re-read my post before hitting ‘send’.

Open data from Worldbank enables development

I know you will immediately point out that the Worldbank already announced on the 20th of April that they will open up access to it developmental data. But then I know that many development practitioners are working so close to the ground that data from the Worldbank may seem to be very far from the problems in rural economies.

But….

I think it is time that we stand back a little. Perhaps it is time to ask some old questions in new ways. And then to look at the data to see if it supports our logic.

For instance, why are development practitioners trying to stimulate “growth” in rural areas? Can you even remember why? Or maybe ask “what happened to wealth and prosperity?”.

Is building wealth in Africa still important to us? Or are we now all working on poverty alleviation?I. I think we all know that we have to find ways to stimulate local capital accumulation, savings and investment in Africa. But is this possible if we all work on rural development?

Please do not read anything into these questions, other that I sometimes get the feeling that we have forgotten what we are working for. And the more I play with the data from the Worldbank and Gapminder, the more I wonder if we are perhaps pushing the rope rather than pulling it.

Back to the data. Take a look at a report about the opportunities offered by better data according to some experts (Hans Rosling and Beth Noveck).  The data is now presented at a new website of the Worldbank. Hans Rosling is better known for Gapminder, a site that you should definitely look at for its innovative visual presentations of data.

To me it seems that we should be supporting the more advanced sectors in Africa. We should be asking questions about stimulating innovation, private sector development, and economic growth in the cities. We’ve known for more than 100 years already that cities play an important role in economic growth and prosperity of nations. That is why I bet that you prefer to live in a city if you are a knowledge worker! It makes me wonder why so many development practitioners seem to want to keep people in the rural areas…..

Two attitudinal trends about human mobility in Southern Africa

There are two attitudinal trends that emerge when you work with government officials responsible for economic development in many Southern African countries. The first, is that foreigners with skills pose a threat to locals, and that they should be kept out of the country to protect local jobs. Despite popular belief, this is not a position that is unique to Africa (ask anybody who tried to get a VISA to Germany recently!).  The second, is that rural people should be kept (by force or incentives) in the rural areas, and that jobs should go to rural areas to make sure that people do not migrate to cities.

Both these trends are disturbing as it limits our options to makes economic development reach its objectives. It is so important to attract people with skills to a developing country, as research shows that the best skills and knowledge transfer in developing countries does not take place through knowledge transfers from universities, it takes place through knowledge transfer from suppliers, customers and competitors (UNCTAD LDC report 2007 and others). When you attract foreigners with skills to your country, you basically save education costs as these individuals were trained and gained their experience at the expense of another country. Unfortunately, xenophobic propaganda that is often fuelled by insecure local politicians have succeeded in making it very difficult for foreigners with skills to feel comfortable or safe in many communities in our region. Governments also use the ‘scarce’ definition to basically make it extremely difficult to attract people with scarce skills. For instance, a UNIDO study in the SADC region found that most small enterprises lacked accounting and basic management skills that undermines their chances of surviving or thriving. Yet, accounting and business management skills is not recognised as a scarce skill in most of the SADC member states. Fortunately that may be changing soon in South Africa, but it may still take time for the government to figure out the new relaxed rules and procedures to make it easier to attract foreigners with ‘scarce’ skills.

The 2nd trend is that government officials want to fight the flight of people from the rural areas to the urban areas. The World Bank 2009 World Development report is still one of the best publications to describe the new rules of human mobility. It is a fact, people (for now) are moving to cities and towns. And it is also a fact that people are more emotional or sensitive about this topic than many other development topics. Yet, statistics show that people are engaging less in subsistence agriculture in many Southern African countries, and farm labourers that used to exchange manual labour for food and tenure on commercial farms are increasingly left without jobs due to changes in labour laws and value systems  in many countries.

In a recent interview with a father that moved his whole family from a rural area in South Africa to a squatter camp (informal settlement) explained that it was better to unemployed in the city than employed in the country side. His kids are going to a school that offered much better education than the rural school, so even if government succeeded in creating jobs in the rural country side, people like his family may still choose to take their chances in the city. Even though many people may choose to move to the city, there are still large numbers of people that are not as mobile, due to personal health, cultural or other reasons. With every skilled or capable person that decides to leave a rural area, the remaining people are increasingly marginalised as the options to create jobs for the remaining people dwindles as the average skill level in the region declines. For instance, if a person with some farm management skills leaves and area, the chances of creating jobs through effective farm management competencies goes down. Therefore, one of the most important government interventions into the rural areas should be education, as this at least makes it easier for future generations to exercise their choice of whether they want to stay or move. In any case, people with better qualifications (and experience) are more likely to succeed in an enterprise (or farm) in a rural area.

I moderated a conference in the region recently, where several participants felt that people from the rural areas SHOULD NOT BE ALLOWED into cities! I was quite shocked by how many others publicly endorsed this opinion. Basically this argument will enforce a new divide, those with shops, banks cinemas, traffic congestions, better jobs and good schools, and those without. I cannot even imagine going back with my family to the small town where I grew up.

So as development practitioners we have to embrace the new challenges of mobile human beings. We have to make our counterparts aware of ‘scarce’ skills that are missing in the system, and the benefits of attracting people into local systems that have gained expertise and qualifications elsewhere as a means to build local competencies. Furthermore, we should not fall in the trap of believing that people from rural areas and other countries are here to steal jobs.

Also do not fall in the trap of stereotyping all people living in informal settlements as uneducated. The father I mentioned earlier is a qualified diesel mechanic that used to work in a rural tractor dealership. Understand that job creation in rural areas are difficult because of low volumes and the fact that people with skills and experience are (for now) moving to the urban areas. But we cannot prevent people from moving as this is an important choice for families to make. Rather, our spatial planning and city development strategies must deal with the fact that in the medium term more people are coming to cities.At the same time, the urban dynamics are changing. Cities are becoming the lifeblood of our African economies, and people live and work differently in these spaces. This also has an impact on our city management and our economic development opportunities. I sometimes wonder whether the poor public transport systems in South African cities are designed on the assumption that all the commuters will soon go away to where they came from.

The age of human mobility is upon us, and this is not only a luxury of only the wealthy. The poor, the desperate and the under valued people are also mobile, and when they move, they change the economic potentials of the spaces they leave behind as well as their destinations.

Innovative firms

Have you ever wondered why not all firms are innovative? If you are a development practitioner like I am, then you must have come across hundreds if not thousands of small and large firms that are not very innovative. This results in these firms also not being very competitive.

There could be many reasons why so many firms are not innovating, and one of these is that the firms are serving undemanding customers. This very often happens in rural or isolated areas, of where companies provide convenient goods and services.  Another reason why firms do not innovate is that innovation requires change, and this change is uncertain. This makes innovation not only risky, but also potentially expensive.

One of the reasons why development practitioners should try to stimulate the competitiveness of firms that they work with, is that increased competitiveness requires innovation. Again, this does not simply imply new products or processes are developed or improved, but also that firms try new management innovations. However, many development practitioners are not comfortable with competition, or do not understand the importance of competition to the socio-economic development of a society. There is a tendency in the field to try and get groups of individuals or firms to compete together against a competitor ‘out there’. This is a first step in the right direction, but we must also try to get our local firms to compete against each other. Thus we must try to create opportunities to collaborate, but at the same time we must try and increase or stimulate the local competition against each other. With this I am implying the nice and healthy kind of competition.

What is often forgotten in economic development, is that we are not only concerned with the health and the well-being of the business owners. Firms must also innovate to create better, healthier and more stimulating jobs, attract foreign investment, skills and knowledge into our areas, and finally, provide improved goods and services to local communities. The latter is usually overlooked. Thus, we want firms to be competing with each other, and together also competing with others, not only to make business owners and managers rich, but to ensure that our society in itself becomes wealthier and more innovative. This will then lead to more innovative and competitive businesses, and so the virtuous cycle is complete.

On the ground in Soweto

Early in May  I had the privilage of working with the international NGO Worldvision on a Local Economic Development in Soweto. The objective of the assignment was to assist Worldvision to focus its support activities in Orlando East. Zini Godden assisted me as the co-facilitator, and the method we applied was the PACA (Participatory Appraisal of Competitive Advantage) methodology.

Firstly, family and friends were all very worried about me working in Soweto. This was rather odd, as I have been working in predominately black areas since 2002. It shows that there are still some very large judgements about Soweto. For those that want to know, we stayed in a great guest house in the centre of Orlando East. And we had great food. Actually, there is a whole group of guesthouses in Soweto that are quite busy accommodating international tourists.

Secondly, Orlando East is very busy. It is busy on the surface, with people constantly moving about in the region. But it is also busy under the surface. The tavern that we used as our base during our workshops had a credit card terminal. This may sound odd to my foreign readers, but for a business in South Africa to keep a credit card terminal the business must process at least 3000 euro (R30,000) per month. That is a lot of spending power! At the same time, the new Maponya shopping mall in Kliptown is a must see!!!

Thirdly, there are many committed people working in Orlando East. We refer to them as champions, and they go out of their way to make sure the community functions. I have actually not witnessed this level of community involvement ANYWHERE where I have worked before. Some of these people are ward councillors (yeah, they do actually work in some places), community development workers, social workers and many others. The business people gave a lot of their time during several days of workshops, meetings and brainstorming.

Lastly, there are many untapped business opportunities in Orlando East. Unfortunately, there is also low local savings, which means that there is poor formation of investment capital in the region. At the same time, there is a lack of office space for businesses to start, and most investment is taking place in small spaza shops.

On the topic of spaza shops, I witnessed something really sad while working there. While the economic development unit of the City of Johannesburg was working with community structures and the hawkers to formalise and train the hawkers, the Metro police raided the stands of the hawkers. The heavily armed Metro Police moved in and basically destroyed the stands and confiscated the goods of the hawkers. I was so angry. This is a terrible example of how one unit in a municipality can work against another. Contrary to popular belief, many hawkers have invested ALL their savings in their stands. In same cases I estimate the investment to be in the region of more than R5000 (500 Euro) in several instances R10,000 (1000 Euro). I confronted an official and he told me that they were focusing in unlicensed or counterfeit goods (show me an unlicensed or counterfeit banana and win a prize). The official became aggresive when I took photos and insisted that they have warned all the hawkers in writing!!

Look at these pictures and tell me what you think!