Category: 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.

What do we mean with systemic?

There are hundreds of ways of describing the word systemic. Yet in development it is important that we at least narrow down the definitions as to not cause confusion.

Richard Hummelbrunner describes three emergent features of methods and approaches from systems thinking:

  • An understanding of interrelationships
  • A commitment to multiple perspectives
  • An awareness of boundaries

Richard then explains that each of these features focused in the development of the systems thinking field in the last fifty years. Up to the 60s, the focus was interrelationships. This was followed by an increasing awareness of the different perspectives as a critical issue. This affected the way people recognized interrelationships. In the 1980s the focus shifted towards the boundaries of the system, as practitioners realized that they system had to be bounded in some way to allow for diagnosis. This raised the ethical question of who decides what is part of the system and what is not, as the shifting of these boundaries has great influence on what is revealed and understood when the system is diagnosed.

Our firm, Mesopartner, is known for the “Systemic Competitiveness” framework that we use in our work. The framework originated within the German Development Institute in the mid 90s. One of the common misunderstandings about Systemic Competitiveness is that people confuse systemic with systematic. The latter in my mind would refer to a very detailed and exact way of understanding and doing things that may be very rigid. This may detract from the fact that to really understand a system we might have to embrace complexity, dilemmas and issues in a more dynamic way, something that a very recipe driven systematic approach may not allow.

Reference:

Williams, B and Hummelbrunner, R. 2010. Systems concepts in action: a practitioners toolkit. Stanford Business Books.

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

MEYER-STAMER, J. 2005.  Systemic competitiveness revisited. Conclusions for technical assistance in private sector development. Mesopartner

Happy 2012

Hi,

You may have noticed that I took it slow for most of December. This picture that I received in an e-mail joke probably best describes my December holiday. I am at the moment trying to figure out what the best way would be to start 2012.

Early on during our December holiday our family stayed over at a beautiful Hole in the Wall holiday resort at the Wild Coast in the Eastern Cape province. The scenery and landscape was breathtaking, and I cherished the time spent with my family.

 

 

However, my mind could not rest due to the visible poverty all around us. The people live in small huts, scattered over the country side. The environment shows the strains of poverty. The animal rescue centre nearby has collected more than 8000 illegal snares and traps in the last 2 years, and the locals trade in undersized lobsters and fish in order to stay alive. How do you build market systems in such a place where there seems to be little scale of anything?

A small hut and a kraal for sheep
Cattle and people mix on the beach

 

 

 

 

 

 

 

 

 

I decided not to write any blog posts in that state of mind.

 

Reflecting on 2011, I made 23 blog posts, and had about 6000 visitors on the blog site (excluding visits to my Linkedin page). Seems like it is worth the effort to continue investing time reflecting here. If you have any ideas, requests or comments that will help me improve this personal reflection space then please let me know!

I wish all my readers, friends and fellow adventurers a prosperous 2012!

Shawn Cunningham

Business profits in South Africa and elsewhere

I spend a large amount of time interviewing and engaging with private sector enterprises. This fieldwork is sometimes like a roller coaster ride, because you can go from seeing a cutting edge business to seeing a business on the verge of collapse within one morning.

While even I have often lamented the state of competitiveness of our South African manufacturing sector, I am often amazed at how profitable many businesses are. If so many of our enterprises are so profitable, why are we complaining? Oh, perhaps it is also good to ask that if so many enterprises are so profitable, why are they not also competitive? Can less competitive enterprises still be profitable? Lastly, a business person recently asked me what I mean with profitable. His argument was that it is better to keep the cash for the “thin years” than to invest now.

So even uncompetitive enterprises can still be profitable. A enterprise that is not “price” or “performance” competitive can still be profitable because they are one of few firms that provide a particular product or service. While many quantitative measures of competitiveness concentrate on measurable indicators, softer indicators such as service, good relations, free (embedded) advise, etc. are not measured. Hence it is possible for an enterprise that could be measured to be uncompetitive to still be profitable. Back to the main argument.

Lets look at those enterprises that are competitive (using some or other objective measure) and they are profitable. Why are so few of them not investing, and treating their current profitability as a short term (if you can call 8 years short) phenomenon? Firstly, many business people comment that earning only 21% gross profit is not good compared to the margins of 15 years ago. No comment. Secondly, many business people in RSA are uncertain about the future and the overall investment climate. News reports about the unsustainable consumer spending also reinforces the message that current demand is unhealthy, unsustainable, or even undesireable. No wonder business people only expand their operations AFTER they get longer term orders.

In general, our developmental challenge is that it is hard to say just how many of our enterprises are profitable. Most of the press coverage and academics research either focus on the listed companies, or on micro enterprises. Take a look at the editorial in the South African Business Day for some of the explanations behind why it is easier for listed companies to be analysed. Of course, their data is publicly accesible.

But perhaps there is another reason. While many of our publicly listed firms are larger firms with many smaller subsidiaries, these listed firms cannot sit and wait for the economic climate to change. Their investors wants continuous financial returns, and hence these firms are constantly trying to find new markets, new niches and new ways to earn a return on their investment. Businesses with private investors behave in the same way. But the rest of the businesses that are “owner managed” do not have this same pressure, and hence they are under less pressure to find innovative ways of investing their profits and earning a return. This is where the underinvestment (despite higher profits) are the most pervasive. If a listed company generates profits, they pay a divident, but the rest of the profits are invested after a while. Financial experts don’t like huge piles of cash doing nothing…

So perhaps another way to get our businesses to treat the current trend as an expansion opportunity would be to get more firms to list on the alternative or development exchanges, or for more private investors to buy into owner-managed enterprises. I know this is easier said than don

My frustration is that smaller (profitable) businesses are not seeing the profitable trend of the last few years continuing into the future. Perhaps we need some stronger leadership in government so that we can unleash investment in the private sector by the private sector. But perhaps that would be shifting the responsibility of forming a vision of the future to government. Actually, the private sector also has a role to play in shaping the future that goes beyond lobbying and advocacy. Often advocacy and lobbying includes painting a bleak picture, so we might just be shooting ourself in the foot if we dont also focus on the bright side and the profitable opportunities that can pursued in South Africa.

By getting the private sector to invest their profits back into the country is the only way that we can use what we already have (clever and brave business people with some capital) to address what we don’t want (unemployed people becoming restless because they feel sidelined).

 

My dictionary for economic development practitioners

At any point in time I am coaching several development experts and learners around the world. I have a short list of words that when I see them in any document I see red flags. However, there are also several words that when I see them I know we are on the right track.

I share my list with you. Some refer to this as Shawn’s Dictionary for Economic Development.

Synergy NOT compromise. Synergy you focus on using the strengths of different ideas, people, organisations.

Collaboration NOT cooperation through control. Get organisations to work together yet independent. Do not try everyone to sing from the same hymn sheet. Rather allow for some jazz.

Balance NOT single minded or focus. Balance allows you to work with contradiction, conflict and seemingly opposing ideas.

Catalytic NOT incidence or isolated. I know that focus is good in an office environment. But in development focus on a specific incident can easily ignore the bigger system.

Stimulate NOT achieve. Try to find ways of getting the people to work better. Energize the system, don’t just fix the problem.

Identify patterns NOT problems. The patterns tell you about the system, the problem is a symptom.

Explore NOT prescribe. Get the people in the system to better understand what is going on.

Crowd in NOT filter out. By excluding elements in the system by creating artificial filters (like gender, wealth or social status) you weaken the system.

People and relationships NOT products and technology.  This one I have to frequently remind myself about. In the end it is about the process that we use to get people to work and thing together, not about the technology or products. The latter is always temporary.

Now I know that there may be certain contexts where my dictionary might not work, but that is why a red flag goes up when I see these “wrong” words. When I see one of the wrong words I must immediately ask some deeper questions.

Which words do you red flag?

Lets build a list and have a debate!

Job creation for electronics contract manufacturing

I know some readers are waiting for the continuation of the series on the services sector. Apologies for the delay.

In the meantime, here is a link to a lead editorial that I wrote for the EngineerIT Journal in Southern Africa. The article is informed by my ongoing work in the electronics sector in South Africa. Advanced sectors such as electronics are often overlooked in developing countries because they don’t seem to absorb low-skilled staff.  However, these advanced sectors play a critical role in upgrading our economy, drawing out different kinds of suppliers, experts and even customers.

Perhaps our greatest asset for the advanced manufacturing sectors in South Africa is that we have some very demanding customers here and in the region. These demanding customers wants sophisticated products that solve problems that are rather unique.  For instance, the depth of mining in the region requires much more robust products that can work for long periods in tough environments. Also, the sophistication of the international crime cartels in the region place stringent demands on the police force in terms of communication technology. I can cite many other examples of how demand shapes the development of certain sectors.

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.

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.

Starting the innovation system series

The next few posts will be focused on my work in the last 18 months. I have dedicated a large part of my work into diagnosing and improving innovation systems in South Africa.

My perspective is quite unique, as I did not conduct these studies to develop national policy, but rather to assist intermediary organizations to take steps to improve the innovation systems that we diagnosed. What further differentiates my view is that we start our diagnosis with the private sector, and then work our way back to universities, technology intermediaries and other public sector organizations.

When I went down this road I thought that I had parted with my previous work on local economic development (which has been ruined in South Africa due to petty politics and misguided local government interventions). Little did I know that my previous experience in mobilising local stakeholders, trying to access national public sector programmes, and begging for a more responsive national stakeholders would remain so relevant in this exercise.

Many people ask me why I switched into a topic like Innovation Systems. It sounds so IT’ish. Well, it is far from that. My concern is with finding ways to build manufacturing industries and their supporting sectors from the bottom up (can we panic about the de-industrialisation in Africa, please?). My obsession is to figure out what can be done to get whole parts of an economy to upgrade technologically, without industry expecting governments to pay for everything. So basically, I am trying stimulate reflection and adjustment in  the manufacturing sector which includes their public and private supporters in the system around them. Also important is to equip the stakeholders in the system to reflect on the patterns around them, and to understand how they can change their own behaviour and how to actively shape the supporting environment around them.

I will close by saying that diagnosing a system around an industry is never a once off exercise. This is perhaps why so many development interventions don’t set change processes in motion that is re-inforcing and ongoing. Our biggest challenge is not to convince industries that they have to change, but to assist them to frequently reflect on their patterns of behaviour (even after we have left). We have to help industries to develop new habits of interaction (that adds value and this makes business sense), we have to strengthen local institutions to assist with strengthening signals of change and improvement (so that firms know that if they stop trying to improve they will fall behind). In the end it does not help that we understand their system, but that they understand their own systems.

The best part is that I get to work with real entrepreneurs, real scientists, real social change agents, and often really committed public officials. Real change without logframes and impact chains. Unfortunately we often also have to achieve this change with small budgets.

How competitive is South Africa?

Hopefully my international readers are not following the news in South Africa. Over the last few months we have been blasted with negative and mixed messages from the government. It sometimes seems like the government is fighting itself.

But to be honest. Actually, the mood here is not so positive everyday, and for the first time in my professional career I am being asked by industry associations and by local enterprises on practical ways to move parts of their business out of the country. That is one of the main reasons why I have not blogged much in the last weeks. As a positive leader I felt that I did not have anything optimistic to say because I was feeling depressed about the situation.

But the recent long weekend we had gave me some time to reflect.

Firstly, I spend a lot of my time interviewing and visiting businesses to find innovative and competitive enterprises. Take my word, we have some fantastic business people out there. And not all of them are big. Not all of them are famous. Not all of them are white. Many enterprises just get on with it. While some get the basics right, others get the extraordinary right. Unfortunately I also know (like they do) that many enterprises can do better, they can create more wealth and they are all able to absorb more labour. But then the reasons why they don’t is out there in the press. And I understand this reasoning.

Secondly, I agree with an excellent article by Cindy Mauigue about our competitiveness and the reasons for our declining rankings. I would argue that South Africa can make up for the loss in its international rankings of the WEF and the World Competitiveness Reports by being smart (and by setting some priorities that may not be popular). On many of the areas we are in deep trouble, and with the current power of the unions I am not sure that the cluster of indicators around labour market flexibility and competitiveness will be dealt with soon.

But there are also some “low hanging fruit”, indicators that we can address in the next few years. Some of these deal with technical issues like extending and lowering the costs of internet connectivity (can we please have some decision making on this soon?). If you look at how we perform on the criteria of the WEF then you see that we are ranked very high on many of the economic and technological indicators. In fact, we are frequently ranked in the top 10 or 20 on several of the 12 main areas.

So according to the rankings we are falling behind our peers with every year, but as I have just argued, there are some things that our country can do in the next two or three years as well. Unfortunately not many of these issues are described as urgent or important in the planning that our government is busy with (National Planning Commission and the New Growth Plan, to cite just two).

To improve our rankings would require that the senior leaders of our country make up their minds about the image we want to project inwards (to our local investors, entrepreneurs and young people wondering what to do with their lives) and outwards (foreign investors and people with skills thinking of moving here). If we do not clear up the signals then entrepreneurs will keep their cash safe (probably by moving it out of the country), will take fewer risks, and in general our economy will struggle to absorb more people into the labour force. We have to find ways to harness the creativity and the resources of more South Africans to solve the problems and explore the opportunities that we face.

While I agree that we are sitting on a ticking time bomb caused by unemployment in our country, I do not believe that our main intervention point should be “job creation”(this to me is more a result). There are many other things that must also happen, and the government must acknowledge that they have to happen at the same time, or that sometimes we need some things to happen first. I wonder what would happen if we made “quality education from beginning of school to end” the highest priority? Would that not also create sustainable jobs in the long run?

I do believe that we should focus on getting our existing businesses to invest and grow as a first priority, with economic empowerment as a second priority and job creation as a result. The expanding gap in our gini coefficient is not caused by equity disparities, it is caused by differences in education.

I wish I could drive my kids to school without seeing the posters of the newspapers. We are being poisoned by a lack of clear and consistent leadership on many important economic points in this country that will greatly affect us in the short and the long term. And often it is not about leaders not making up their minds, it about lacking a will to take action. It seems like government leaders are afraid to upset their social partners, or to upset anybody out there!

It reminds me of the saying of David Maister that the essence of strategy is deciding when to say “no”! Just what exactly are we saying no to in South Africa.

My wish is that we say “yes” to some of the issues that MUST be addressed to strengthen our economy and unleash the entrepreneurship that we have (regardless of race, age, gender or social status). Let us get our entrepreneurs to be excited about this country and its potential. But let us also all work together on the huge social challenges that remain. And let us acknowledge that some people will make profit from this, but let us focus on getting the systems to work for our country.

In concluding. Our country is more competitive than we think. Please don’t believe everything you read. Come and visit some businesses with me if you need to be convinced. For now I am staying here, and I am investing here very carefully. But I am constantly evaluating my options.

For my business readers: You have to do whatever it takes to grow and expand your business, and to secure your ability to earn returns today AND tomorrow. The risks in South Africa is high, but the returns are higher.