For bottom up development to work, you must go up

For about 6 years I was intensely involved in establishing, promoting and cheer leading Local Economic Development in South Africa and elsewhere. In a country where so much planning, allocation and overall coordination came from the top, these were exciting years. I was always amazed and delighted to find hard working champions in the public and the private sector in every town, city or community where we worked. Our GIZ programme identified private sector and governance experts; and we trained, developed methods, and supported these experts to provide hands on services to local communities, the private sector and the local governments over several years. A small group of experts emerged out of this that are still actively involved in Local Economic Development in South Africa and in many other countries.

While Local Economic Development is something NGOs, Business Associations and donors understand and value, it was often a hard sell to local government, provincial government and even national government. In many parts of the world where societies are more homogenous and where social trust is high, many important economic decisions are in fact made at the local level – this is even thought of as common sense. But not here in South Africa, and also not in many of the other countries in Africa where we worked (our communities is not homogenous and is often divided along ethnic and political lines, our social trust is low even within these ethnic and political groups). This is because the ideas generated by local communities and priorities expressed by business did not always tie in so well with what planners or public sector managers had in mind (I call this top down development as it is rooted in someones authority to decide on behalf of communities).

Everybody who appreciated local ownership, local self determination and participatory approaches liked our logic and could integrate our concepts into their activities, but for many public sector managers our ideas created tension. I must add, on a few occasions we also faced resistance from business, especially as participatory approaches often challenge those in powerful positions.

But the experts, many local government champions, and industry often felt frustrated (see the irony of bottom up development). A group of people actively engage in diagnosing the local economy, and lots of energy would be unleashed. Often, the disconnect between government plans and the real issues confronting business would sometimes become visible. Or the power plays between different politicians and even between different business interests would be revealed. The same patterns emerged in different places, and we could not address these at local level. Unfortunately, many funders of these local processes did not have a mandate nor an interest to go beyond their pilot or designated areas. For instance, an international donor funding an Local Economic Development process in a particular town wanted to see local action that would result in jobs, gender equality, etc. They did not want to rock the boat by questioning local, provincial or national policies and programmes that often made their primary objective unreachable. Even in cases where local government was strongly in support of local action, their funding for economic development often came from national or provincial funding programmes that had different priorities, resulting in good ideas not being implemented because of a lack of funds or too much bureaucracy.

In 2008 I decided to switch my attention to innovation systems, private sector promotion and applying science to industry. I remained committed to bottom up development and decentralized decision making, but felt that I had to get away from depending on local government. However, here too the same challenge emerged, but this time it was not the fault of local government. Reflecting on the last few years and relating it back to my years in Local Economic Development I realize that there is an important lesson in all this for me. The same patterns emerge when I work with universities, a small local chamber of business or a city.

For bottom up development to work, you must go “up”. Sounds simple. But think about it. You cannot just focus on working in a local community as if it is an eco system on its own. Many policies that are undermining local development, trust building, etc. are coming from outside the designated area. The same applies to value chain promotion, cluster promotion and any other flavor of development. Creating a little isolated area where things are working for a particular designated group while the greater system is not working (or creating incentives for contrasting behavior) is wasting resources – when you withdraw your external resources things go back to how they were (see my post here about how we draw boundaries). While I would never regret empowering more local champions to do their advocacy and development work better, I must wonder what would have happened if we could have taken more of our insights to higher levels BOTH within the countries where we work, BUT ALSO to the international agencies that often funded these programmes. Not that we did not try, but often our efforts to communicate what was wrong was challenged on the basis of a lack of data supporting our arguments.

We do not want “bottom development” only. While this may suit the priorities of an NGO to equip a small group of designated people, we should strive to identify patterns, find new paths, and then communicate and use this insight elsewhere in the economy to reinforce what is working and address what is undermining local development. One of the reasons why we as Mesopartner dived into complexity thinking is because we realized that much of the answers to the questions that effect local stakeholders and economic systems are not to be found in the traditional, silo based (also called focused development) that are increasingly becoming “evidence based”.

Bottom up development remains important as we recognize that economies are complex adaptive systems and that the way to make an economy healthier is to equip its agents (business people, local government officials, communities) to make better decisions based on the signals they receive and the factors that affect them locally (local here means close to a particular context).  Our task in development is to try and identify patterns that can be amplified, or to assist agents to probe and try low risk experiments to create new paths for upgrading, decision making and wealth creation. This will require that we challenge how development programmes decide where to work, what to do and what outcomes to expect. Mesopartner is actively involved in the international discussion about how this complexity insight will challenge our development paradigms.

A final reflection. Perhaps our objective in Local Economic Development was wrong to start with. It is not (just) about empowering local stakeholders. Our objective should have been to use the insight from what is possible and what is not possible at the local level to try and affect top down strategy. Or maybe it was about holding up a mirror for top down and bottom up champions to see their effect and role in the system. These questions are at the heart of our new thematic area in Mesopartner looking into bottom up industrial policy, and will be a theme in our 2014 Summer Academy event in Berlin. Remember to apply soon as the early bird discount deadline expires at the end of March.

Recent Mesopartner Working paper on complexity theory and development

This article was originally posted by Marcus Jenal on the systemic-insight.com website in December 2013. I co-authored this paper with Marcus. It is an output of the theme of applying complexity theories to economic development.

For the last 3 years we at Mesopartner have been purposefully experimenting with complexity and systems theories in our practice. Not only did we change our company logo and strapline based on our new learning, we started to dismantle and question almost every aspect of our instruments, tools and theories.

This was a steep learning curve for us and for our key customers who agreed that we could embark on these serendipitous journeys together. While we still believe in bottom up development, we are wondering about how to achieve developmental change within the typical timelines and resource constraints that development projects often face.

One of the results of this process is this website (http://systemic-insight.com), where we want to share our thoughts and invite our followers to contribute to the discussions we have.

A new Mesopartner working paper now provides a theoretical grounding for the work we have done in the last three years and will continue to do. We consider some definitions, ponder the implications and try to formulate some responses to some of the key challenges that systems and complexity theories confront us with in our field of bottom up economic development.

We see this paper as an input into a broader discussion with our close collaborators, our close clients, and the broader network that we form part of. We ask  you to send us your thoughts and add your comments to this and future posts.

We thank the colleagues that have already commented on the paper. Many of the suggestions are already incorporated into this version. Your contributions are greatly appreciated. Shawn and Marcus

Building institutions that supports knowledge flows to industry

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

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

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

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

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

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

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

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

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

Linking – Posts on innovation and science

Somewhere in December I started to rest and neglected reading some of my favorite blog sites. I have now caught up and here are some important posts that I would like to share with my readers.

One of my favorite authors on innovation, Tim Kastelle, made the following posts:

  • Innovation: Are you a gardener or an architect? You can guess that architects plan their innovations, while gardeners are sensitive to what emerges from their environment. When we deal with economic development, we have too many architects and too few gardeners.
  • Failure is ALWAYS an option. This post is also relevant for practitioners working in economic development. We must use our resources to assist our counterparts to experiment. Their resources are often to scarce or expensive for them to experiment with things that might just fail!

One of my other favorite authors, Duncan Green, posted an excellent summary of research on what White House Policy Makers want from Researchers? This is an important question for practitioners working on promoting science to industry and to government. He provides some interesting comments on the original research that is available from his blog article.

In future I will post articles on systemic thinking and complexity on the Systemic Insight Blog that I co-author with Marcus Jenal

Innovation happens in a systemic context

I am preparing to conduct a 2 day training on diagnosing innovation systems. The participants will be mainly from universities, but there will be also some senior government officials responsible for promoting industrialization and R & D.

I already know what some practitioners will ask me. They will ask “why bother with an abstract concept like an innovation system if we can directly help enterprises to innovate?”

This is not a trivial question. Practitioners from universities that assist enterprises to develop new products, solve problems, conduct research or improve processes have direct evidence that their services are contributing to better results, new products, new markets; in other words, they are directly facilitating innovation.

However, helping one firm at a time is costly, and takes up time. While this kind of 1-on-1 support is necessary, it is not sufficient. Innovation is only to a small extent the result of isolated actions by producers and their technological intermediaries that support them. We need to recognize that there are many other facts that makes it more likely that whole industries, countries or regions will be competitive because they are innovative.

For industries, countries and regions to innovate, a more systemic approach is needed. It must be recognized that innovation rests on:

1. The interaction between companies, which include interaction with:

  • input suppliers,
  • equipment manufacturers,
  • competitors,
  • joint ventures,
  • alliances; and
  • demanding and sophisticated customers

2. The interaction between companies and their supporting institutions:

  • Education institution and training providers that are not only responsive, but creating the skills needed for tomorrow
  • technology extension that reduces the cost of experimentation and that overcomes high costs,
  • knowledge intensive business services and technical consulting services that adds value
  • Research and Development institutions and specialists that are accessible,

3. The framework conditions that determine:

  • the incentive to innovate (which is often related to the pressure by others to compete and try harder)
  • the direction of technical change
  • the overall market conditions domestically

4. The ability to leverage unique regional demand or sophisticated demand to create innovation eco systems

In Africa, we have to focus on using the unique regional demands placed on our industries, our products and our innovation systems. We have to use these unique demands to create supporting institutions, creative firms and specific products that responds to these needs. Because our domestic volumes are often low, we have to focus on making sure that we can better integrate different disciplines, technologies and knowledge bases. This will require much more than innovative products and innovative processes, but will demand that we also create innovative business models.

Conclusion

We have many examples of entrepreneurs who have (despite some very demanding local conditions) managed to create innovative products and processes that have been successful globally. The question we are trying to ask with an innovation systems approach is “how do we increase the chances of our innovators to be successful by creating a dynamic system around the entrepreneurs?”. We recognize that a creative entrepreneur or technologist is not enough to create a new momentum. The whole system around these entrepreneurs need to be dynamic and innovative in itself.

When we get institutions, experts and policies around entrepreneurs to be more innovative, we will immediately see results at the levels of firms, industries and regions.

Moving from generic to specific and then onto systemic

When working with development organizations in the mesolevel we often find that their programmes are very generic. The same can be said of the findings of many diagnosis. The result is that firms do not really use the services of these organizations, because the value add and the impact of the services are not really clear.

For me there should always be a movement from the generic (e.g. the foundry sector is not competitive) towards the specific (e.g. the foundry industry is not competitive because it lacks capacity to do good front end engineering and design). After we have developed a sense of some specific issues that are affecting the performance of firms, there are two things we have to do.

Firstly, we want to try and figure out if there is something that we can do at a more systemic level to try and influence the specific issues. With systemic I mean that instead of addressing a particular issue repeatedly at various firms, see if there are other ways to achieve the same outcome. An example would be instead of only offering a design service to firms, make sure that the university curricula includes sufficient content dealing with design. Of course, we should always strive to have multiple interventions to address a particular issue.

Secondly, we should verify whether our specific findings are unique to the firms we have diagnosed or engaged with. For instance, and food initiative run by a university might find that the private sector is affected by a lack of a particular kind of testing lab. Then instead of designing a solution just for a limited number of producers, the university should check whether similar firms in other industries (related and not even related) are facing the same constraints. It may just be possible to design a solution that is useful to a much broader target group, making the solution more sustainable and more relevant to the private sector.

From my experience of working within many different value chains is that there are many issues that are treated as being unique (or specific) to a particular value chain that are in fact affecting many different kinds of enterprises. The South African Industrial Policy framework for instance is designed around many different sub-sectors, with many different interventions implemented by different organizations and programmes that are actually not unique to a particular sub-sector. This is expensive and also not really systemic, these interventions are not permanently changing the meso level in South Africa or the service offerings of meso organizations such as universities and other development programmes. The South African manufacturing sector is struggling with low volume, outdated designs and rapidly increasing costs across the board. I imagine that it should be possible to based on the insights from the different sub sectors to design much better programmes that are cross cutting over many different sub sectors, and that from the start are designed to improve the service offerings from meso organizations to firms.

Best case examples and benchmarking have something in common – neither is good practice

Every time I conduct training on value chain diagnosis, innovation system promotion, or Local Economic Development, I get asked the to explain important principles or ideas with examples. The question usually posed is “can you give us more examples?”. Or even worse, “this is too much theory, please give us a clue how we can use this information in practice. Give us the best practice”. The hope is that there is a magic formula, silver bullet, case study or a high standard (benchmark) that can be followed that will guarantee us some success without risking too much. Within Mesopartner, we have agreed as trainers to be very selective with our case examples, as they typically narrow down the options our trainees should go an investigate themselves. We promote that people conduct a diagnosis or analysis of their environment, and then develop some strategic options, assess their options – and then make a decision and start with their action. If they made the wrong decision, then they should detect this as soon as possible in order to make corrective action. There are no shortcuts!

The same logic goes for benchmarking. Tim Kastelle recently published an excellent blog post on benchmarking and the myth that knowing how we compare with others will allow us to improve our own performance. This post is a must read. I love the title “You can’t benchmark your way to greatness“. From a complexity perspective I must add that the context wherein you have to define your own strategy is unique, and therefore we know that blueprints from elsewhere cannot work. Somehow everybody knows this, yet everyone wants to hear how others dealt with their situation. This is a circular logic that just doesn’t make sense.

But I must add that in the early days of benchmarking there was a more explicit understanding that you benchmarked yourself with companies that were completely different from your own. So automotive manufacturers benchmarked certain processes (like procurement of components) with photocopier companies. This was then an opportunity to learn and benefit from the different contexts that the respective firms were in. The idea was not to copy the process, but to learn how others used unique factors in their environment to address a specific issue. This is still the important for innovation, as learning from other contexts can provide important ideas on how to try something different. Nowadays, customers asks me to assist with benchmarking because they want to know what similar entities are doing better in order to replicate or copy the processes themselves. The main assumption is that if we do the same things as them then we will get similar results.

So coming back to examples. In my training I like to tell stories of examples, but I try to avoid describing “the method” too much. I rather try to explain the logic, the key principles, or the choices the decision makers in “the example” had to make based on their assessment of their options. I do believe we can learn from other contexts, but I believe the real value is sometimes to recognize that “the example” had figured out what choices they had to make. This is often what my learners are hoping to avoid. It is instinctive to copy the decisions the “best case examples” have made, and not to copy the fact that the example DEVELOPED OPTIONS AND MADE A DECISION, or sometimes they skipped the options part and they just took some specific action (innovation by accident).

To connect this back to benchmarking. The problem with benchmarking with competitors or other locations, is that their current performance is in fact informed by strategic decisions made some time ago. So if we chase the numbers in a benchmark, we are essentially chasing shadows, the competitor is already today making decisions that will result in performance indicators and processes that we will have to chase in 3 years when we catch up with their current numbers (which by then is old news for them). By then, the competitor have already adapted to their new context, while we are still struggling to fully integrate this new learning into our activities.

In conclusion, benchmarking and best case examples (or good practice as it is often softened down to) are not good practice in development. We cannot copy the blueprint, the practice or the approach of someone else. Firstly, context matters. As complexity in developing countries increase, so the importance of basing decisions on the local context increases. Secondly, the thinking behind the options and the decisions made matters even more than the outcome or the visible practice that can be identified during benchmarking or in a case example.

Linking: 5 Differences between complexity & systems thinking

If you are interested in complexity and systems then you have to look at this great post by Sonja Blignaut – 5 Differences between complexity & systems thinking.

Business model innovation in manufacturers in developing countries

The topic of Business model innovation is receiving increasing attention as a solution to surviving in turbulent economic times. The discussion on business model innovation to me seems to be driven by finding ways to respond to opportunities, unmet needs, creating new markets or thinking up novel ways of doing business. Many articles on business model innovation contains phrases like “responding to change”, “rapid” and “creating opportunities”. From my experience of engaging with many typical manufacturers in developing countries they don’t identify with this literature. It seems like many firms are able to absorb external changes, partly by ignoring them or simply by being to paralyzed to change. I think in some instances this is also their saving grace in the short term, although in the long term it might erode the competitiveness and dare I use the word “resilience” of the firm.

From my weekly engagements with business, it seems like we need to get our industries in developing countries to better respond to semi-permanent or emerging long term framework conditions. It reminds me of the story of the frog in the pot of water on the stove; because the heat (negative framework conditions) is increasing slowly most firms do not realize the pending disaster of not making these external forces part of core business strategy. I think it is called conditioning.
What many of the manufacturers that I am engaged with are struggling with is finding ways of responding to some of the obstacles, irritations or constraints in their environment that seems to become established or permanent features over time. In South Africa, many manufacturers are waiting, hoping, or lobbying for electricity prices to come down, for labour to become more reasonable, for government to curb the influx of more competitive imports, for inputs to become cheaper, for government investment grants to increase, etc. At the same time, the average size of orders are going down as other countries are able to manufacture the same quality at a much lower landed cost.
From visiting more than 50 manufacturers in traditional manufacturing sectors like valve, pump and industrial equipment this year I can see that those manufacturers that take these external factors as drivers for change or key considerations in their strategy are thriving. While the rest of manufacturers seems to be making mainly small incremental adjustments, hoping that something in the external environment would change returning them to their previous levels of competitiveness. The problem is that too few firms have the will to respond to some of the slow moving changes in their environment. Those firms that do change their business models to adjust to the prevailing circumstances are doing well despite still being in the same country as those firms that are simply trying to cope.
So what I would like to see is a dialogue on how to use business model innovation to deal with these semi-permanent constraints in the external economic environment as drivers for innovation within firms. To me it seems that many manufacturers do not feel driven by opportunity anymore, especially when they perceive the prevailing economic and political conditions to be negative or anti business.
In the field of promoting innovation systems we have hardly come up with systemic models on how to induce widespread change in how business models are designed, created, changed or even shelved. At the moment the topic still seems to driven by dialogue in business schools, or by advocates of social responsibility.

Update from the field

I wondered if I should name this post “from the airport lounge” but then I realized that I still travel much less than my business partners and some friends.

Seeing that so many of you ask me where I am I thought I will give a quick update.

Since my previoSplit Team Smallus post I have traveled to Split in Croatia to conduct an LED training for a group of local government officials from Bosnia. This was a great event because I had the opportunity to conduct the training with my business partners Frank Waeltring and Christian Schoen. This event was arranged for and funded by GIZ Bosnia and took place during the first week of September.

During this event it again struck me how no matter where we work with Local Economic Development, the main principles and challenges remain the same. The people, the language and also the priorities might be different, but the issues that we are always confronted by is a breakdown in trust between business and local government, fragmentation and confusion between local and national stakeholders, and the tension between bottom up and top down priorities and intervention means.

 

 

Immediately after Croatia I traveled to India to assist GIZ India to assist with designing a Private Sector Development Programme. The mission included capacity building of local experts, consultants and policy makers on innovation systems and how this perspective can be used to strengthen cluster, value chain and regional development programmes. I traveled with the GIZ team to Bangalore and Aurangabad to assess the readiness of different clusters to benefit from an innovation systems perspective.

In Delhi, my hotel room overlooked the famous Jantra Mantar astronomy instrument. It is anJantra Mantra heritage site that dates from 1724 that was one of the great astronomy observation posts of the time. I spent a whole Saturday morning looking at the details of this site. I also spent half a day on the Hop on Hop Off Bus in India.

I am looking forward to traveling back to India shortly for an extension on this assignment.