Categories
Addressing persistent market failure From the field Industrial Policy Knowledge Intensive Business Services Private Sector Development

Localisation and building domestic manufacturing capacity

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

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

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

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

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

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

So some insights:

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

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

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

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

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

 

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

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

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

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

 

 

Categories
Industrial Policy Private Sector Development Process and Change Facilitation Promoting Innovation Systems

My activities in the last months

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

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

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

The universities I work with describe my work as :

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

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

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

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

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

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

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

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

 

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

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

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

Categories
Addressing persistent market failure Industrial Policy Private Sector Development Process and Change Facilitation Promoting Value Chains Sustainable Economic Development

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

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

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

Let me explain.

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

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

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

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

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

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

Categories
Addressing persistent market failure Private Sector Development Process and Change Facilitation Sustainable Economic Development

The MaFI-festo: changing the rules of the international development “game” to unleash the power of markets to end poverty

I am supporting great initiative of the Market Facilitation Initiative. Lucho submitted the online debate we’ve been having since 2008 into the annual Harvard Business Review/McKinsey M-Prize for Management Innovation (called MIX). I am a member of the MaFI discussions.

Lucho provides the following short summary “Bilateral and multilateral donors and NGOs re-write the rules of the International Development Cooperation System to unleash the real potential of markets and the private sector to end poverty at a large scale… easier, faster and cheaper. How? Through trust-based partnerships, complexity science, effective organisational learning, systemic M&E and co-evolutionary experimentation.”

The solution offered by Lucho (based on the MaFI dialogue) is:

A series of national and international conferences, seminars and workshops to bring donors, NGOs and leading firms to identify the rules of the development “game” that need to change to make market development initiatives more inclusive, accountable, responsive, innovative, holistic and cost-effective.
MaFI (The Market Facilitation Initiative) started in 2008 and has more than 240 experts from all over the world working in NGOs, donor agencies, private firms and academic institutions. The aim of MaFI is to advance policies and practices based on facilitation and systems thinking to make markets work better for the poor and the environment. MaFI is a working group of The SEEP Network with the technical support of Practical Action.

After almost two years of of discussions, MaFI members produced a manifesto (The MaFI-festo) which has three main objectives:

  •  To focus the attention of key stakeholders on a set of strategic changes that are urgently needed if the international development system is to effectively harness the full potential of markets to reduce poverty at scale and protect the environment
  • To promote convergence and collaboration between bilateral and multilateral donors, practitioners and academic researchers working in the fields of “aid effectiveness” and inclusive markets.
  • To inspire NGO leaders to promote the adoption of systems thinking and facilitation approaches in their own organizations and networks to increase their ability to interact with the private sector and leverage the full potential of inclusive market development programs.

The MaFI-festo focuses on four areas (in no particular order of importance):

  1. Changing how we work in the field
  2. Balancing flexibility and accountability
  3. Building the capacity of facilitators
  4. Changing what and how we measure change

The MaFI-festo will give content and focus to the series of conferences, seminars and workshops mentioned above. These are called the MaFI-festo Dialogues.

What must you do?

To see the application go to http://www.managementexchange.com/node/62551

Find out more about the M-Prize go to: http://www.managementexchange.com/m-prize/long-term-capitalism-challenge

We need you to:

Comment, vote and throw in your ideas!

With each comment, like, or Tweet our submission goes up in the rankings!

Categories
From the field Private Sector Development Sustainable Economic Development

Why is private sector development such a low priority in Sub-Saharan Africa?

I will start my post by linking to another blog from Kenya. The blogger makes reference to a report by Robert Wade, professor of political economy and development at the London School of Economics, which discusses the role of industrial policy in Asia and how donors completely neglected it in Africa. In essence, Prof Wade compared the economic development activities of donors in Asia with development efforts in Africa.

I can’t help but wonder why industrial development is such a low priority for Africa.

Although donors generally respond to the demands from their developing country counterparts, I know from experience that donors also have preferential aid packages. But why is private sector development such a low priority? Why are we not seeing the same kind of productive infrastructure and technology transfer into Africa that we saw go into Asia? Even donors with “Sustainable Economic Development” Programmes are more concerned with rural development, gender and limited agri-processing support. What about building new industries, new processing facilities, new productive capacity in Africa? Instead the focus as at a micro level, and perhaps at some regional level.

Please don’t tell me it is because the enabling environment is not right. When it suited Western countries they invested in autocratic countries with very poor human rights track records.  Billions of dollars went (and still go) into countries without an enabling business environment. Most countries in Africa today are at a better governance standing than their Asian counterparts were in the 1980s-1990s.

Just thinking out loud. What can we do to make industrial development more important in Sub-Saharan Africa?

Categories
Complexity and Evolutionary Thinking From the field Local Economic Development Private Sector Development Thinking out loud

Complexity and international development

A while ago I posted an article about the exciting developments in the various fields around complexity science and development (actually there are several earlier articles making reference to this topic). Recently Marcus Jenal wrote a great review of the work of Ben Ramalingam (author of the blog Aid on the Edge of Chaos) and Harry Jones with Toussaint Reba and John Young. The paper can be downloaded here.

 

Perhaps you have noticed that I often make reference in my posts to “complexity”, “evolution” and “complex systems” in the context of development. Some have even asked me why I do this. Well, already there are moves by donors and monitoring bodies to start using a more complexity-sensitive approach to evaluation. This is not entirely fair, as too many development programmes are still designed in a very linear way (log frames, impact chains are mostly used in a linear fashion). This means that to reach your impact you must combine your programme activity with faith and good luck (plus good weather) because most programmes are operating in a sea of complexity. There are just too many factors that can influence your outcomes. And even if you hit all your targets the system may remain exactly the same way. (wink wink: I wonder why no-one is making more of a fuss of the poor track of donor programmes in South Africa that were supposed to deal with systemic failures in education, rural development and even Local Economic Development?)

Another reason I am interested in these topics (other than my usual curiosity) relates to my practical activities around building industrial systems from the bottom up. Although I am still biased towards manufacturing with some emphasis on specialized services, I am trying my best to understand the complexity of not only relations between the actors, but also between the factors that are influencing their behavior. Then throw in some factors like policies several self justified meso-level organizations, mix in some government failure, market failure, network failure and also just the uncertainty from Europe. That makes for a complex system where there are a myriad of vicious and virtuous cycles and then the dynamism of time delays.Mix into this that the political system in South Africa also fights bottom up decision making. Local stakeholders have a limited number of instruments at their disposal and can hardly hold other spheres of the public sector (and other organisations) accountable. Despite this all kinds of firms are innovating, and there are even innovation systems that involves individuals in public agencies that are committed to support local actors (even if their institutions is unwilling or incapable to assist).

I find a lot of comfort and maybe some good questions in the literature on complexity and perhaps also the literature on evolutionary economics. Perhaps I even find some comfort that even the so-called industrialized world is struggling with the increasingly complex and interrelated policy environment.

If you are working on bottom-up industrial policy then please let me know, perhaps we can exchange notes.

Categories
Knowledge Intensive Business Services Private Sector Development Service sector Thinking out loud

New series: the role of the service sector in economic development

It is time for me to venture into one of my other favourite topics: the service sector and its role in economic development. With this I am not shifting into promoting  like DVD rentals (don’t worry), I am mainly interested in the knowledge intensive business sector (a.k.a KIBS) and how it enables economic growth and productivity enhancement [1].

Let me start my story.

From an economics perspective, the service sector did not receive much attention from the classical theorists, and it only really came to the fore in the twentieth century. If you are interested to know more about the history, then I can post something on this later.

The service sector is becoming increasingly important in the economies of developed and developing countries. This is not unique to South Africa. While some countries have recognised the importance of strategies to further stimulate the productivity and growth of the service sector, other countries have not yet recognised that the service sector is constrained by a variety of challenges that are unique to this sector. In fact, many countries hope that services will go away. This sector is already a large contributor to jobs and Gross Domestic Product worldwide (not only in OECD countries).

Services are different from goods and require different strategies for development than the primary and secondary sectors which have been traditionally given attention. Although not everybody agrees on how to classify services, it is generally agreed that services are becoming very important in economic development. In some cases manufacturing will not become more productive without more specialised services.

A challenge we face as development practitioners is that data on the service sector in developing countries is unreliable, if it exists at all. For instance, in many countries the engineering services offered by a small engineering firm are recorded under the clients industry in the national accounts. Thus engineering services used by a mine are recorded as mining financial data (thus inflating the primary sector and deflating the tertiary sector in the national accounts). The implication is that the role of the service sector could be much bigger than the formal statistics suggest.

For the manufacturing sector, the service sector, especially knowledge-intensive and business services, is being increasingly recognised as important levers for growth and development of the economy. Knowledge intensive service providers are not only carriers of specialised knowledge; they are also connectors, technology transfer agents and problem solvers.

In many cases developing countries undermine the development of knowledge intensive business services through poorly designed public sponsored business services. Often these services are too generic to really stimulate the growth or increased productivity of the manufacturing sector.

The service sector is also more prone to market failures for many reasons. One of the reasons why poorly developed public services harm the development of knowledge intensive business services is that it is very difficult to compare and value different service offerings (not only between private providers, but also between public and private providers).

Developing countries face the additional challenge that the producer service sector tends to favour countries with higher skill levels or human capital, and shuns countries with large pools of unskilled labour. Due to the close relationship between the service sector and the manufacturing sector, low sophistication of the service sector will also restrain the growth and development of the manufacturing sector. Services often accompany goods in global trade, and service firms are affected by this wherever they are. Thus both the service sector and the manufacturing sector must be upgraded at the same time to overcome the low equilibrium that exists.

The next few posts will delve a little deeper into the service sector

[1] For those that don’t know, my PhD thesis was about market failures in knowledge intensive business services.

Categories
Advancing manufacturing Complexity and Evolutionary Thinking Private Sector Development Process and Change Facilitation Promoting Innovation Systems Technology and innovation management Thinking out loud

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.

Categories
Innovation Private Sector Development Promoting Innovation Systems Technology and innovation management

The difference between invention and innovation

This post is copied from a chapter in a book that I am working on about the fundamentals of innovation systems. I am responsible for the thematic area of innovation systems within the knowledge consultancy mesopartner that I am a partner of. If you want to stay abreast of the work I am doing on this topic then I urge you to subscribe to my blogsite so that you can receive an e-mail every time I add some content (click on the sign me up button on the top right).

We often find that development practitioners, business people and policy makers are not clear about the distinctions between innovation and invention.

A widely accepted distinction between invention and innovation is provided by Fagerberg et al. (2005:4). According to Fagerberg et al., invention is the first occurrence of an idea for a new product or process (first to the world), while innovation is the first attempt to carry it out in practice within a specific context (by, for instance, introducing a machine from another country into a local manufacturing process). Thus invention and innovation could be closely linked, although in most cases they are separated in time (sometimes decades or centuries), place and organisation. However, the fact that innovation typically emerges within a complex system is often overlooked. For instance, as Schumpeter (1964/1911) explained, the innovator who invented the steam engine still had to wait for others to develop the different aspects of the rail system before it could be commercially viable. The steam engine was initially invented in a completely different context, again illustrating how inventions are dependent on the context in which they arise.

While many innovations can be linked to well-funded research programmes, funding is not a pre-condition for innovation. In fact, in many cases a lack of resources could stimulate people to innovate. Firms usually innovate because they believe there is a commercial benefit to the effort and costs involved in innovating. This commercial benefit could be measured in terms of return on investment or profits, but it could also be about cost saving, resource optimisation, solving a recurring problem or responding to the demands of a customer. Often increased competition, changes in market structure or market demand, or changes in technological performance also affect the innovation process. However, innovation requires taking or at least managing risks. Therefore, firms with low capital or with tied up resources are less likely to innovate.

To turn an invention into an innovation, a firm typically needs to combine several different types of knowledge, capabilities, skills and resources from within the organisation and the external environment (Schumpeter, 1964/1911). The interaction between knowledge and learning will be discussed in more detail in the next section.

The willingness of an individual to tinker and explore better solutions is influenced in part by the organisational context of the innovator, but also by factors such as education, qualifications, meta-level factors such as culture, personal characteristics (such as patience, inquisitiveness or tolerance of failure) and the institutional environment. Other factors such as competitive pressure, problem pressure, or social and economic incentives also play a role. Locations with a more diverse economic and social make-up are more likely to be conducive to innovation, as actors interact with people with similar and different interests. The proximity of other actors and the density of interactions make imitation, cross-pollination of ideas, learning from others and the combination of different ideas into new products and services more viable (and less expensive). This feature could explain why urban areas are often hotbeds of innovation – there are more people with different ideas and perspectives that stimulates and often absorbs new innovations.

Why does this matter? Well, many countries (including South Africa) over emphasize “invention” (even when they say “innovation”). Many financial incentives, loans and support programmes prioritize novelty as opposed to absorption. Absorption is important for innovation, as it indicates how ready firms, industries or societies are to not only learn from their own mistakes (and success), but to also learn from the mistakes and the success of others.

Therefore innovation stimulation is about getting our developing countries ready and willing to absorb insights and ideas from others, as much as it is about getting our entrepreneurs to be creative.

As someone famous once said: “why re-invent the wheel?”. With our small budgets we are highly unlikely to out-invent our international peers on many of the topics that are now seen as “sexy” like climate technology etc.

Our priority should remain to get our entrepreneurs and enterprises to be innovative at product, process and business model level. Only once we improve our absorptive capacity will we be able to become inventive.

Sources:

FAGERBERG, J., MOWERY, D.C. & NELSON, R.R. 2005.  The Oxford handbook of innovation. Oxford ; New York: Oxford University Press.

SCHUMPETER, J. 1964/1911.  Theorie der wirtschaftlichen Entwicklung. Eine Untersuchung über Unternehmergewinn, Kapital, Kredit, Zins und den Konjunkturzyklus. Berlin: Duncker und Humblot.

Categories
Addressing persistent market failure Complexity and Evolutionary Thinking Industrial Policy Knowledge Intensive Business Services Private Sector Development Thinking out loud

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).