Quick recap: what is an innovation system?

Before I continue with this series, it is necessary for me to refer you back to a post I wrote some time ago where I described what an innovation system is. For the full post, click here

For those to lazy to click on links I will quickly summary two key points.

Freeman (1987:1) defined an innovation system as “the network of institutions in the public and private sectors whose activities and interactions initiate, import and diffuse new technologies.” The emphasis is mainly on the dynamics, process and transformation of knowledge and learning into desired outputs within an adaptive and complex economic system.

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

For the rest of the post where I related innovation systems to the surrounding geographic environment click here.

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.

Hypothesis, questions and the underlying knowledge bases

I will assume that all my readers do actually formulate hypothesis very early on in every project, assignment or investigation that they undertake. We all know that hypothesis is important for us to capture our own bias, beliefs and assumptions. But the formulation of a hypothesis also allows us to involve our colleagues, counterparts and fellow-explorers. Practically you can do this by using little coloured cards. Use one colour for your own hypothesis, and another colour for your colleagues.

The hypothesis is then useful as it gives you clue of where to start your search. In other words, it helps you to formulate some search and research questions. As a hypothesis can only be true or false, your findings will often help you to refine your hypothesis. Sometimes in a 1 or 2 week assignment I even have a Hypothesis reflection session where we can reflect on our new hypothesis.

It is important to remember that although the original hypothesis and the research answers are important, the process of verifying or disproving the hypothesis is even more important. For instance, from an hypothesis “not much manufacturing is happening here” a story can be told about how the research team went about to eventually conclude that “some limited manufacturing is going on here, but it is mainly in food processing”. The story of discovery is also an important finding, as it explains why the hypothesis was not just a fact from the start!

 

But here is my real question. Where do you get your questions from? 

When I saw this picture on the right in one of those e-mails you get from friends it

What are you basing your questions on?

made me wonder.

How often are people basing their hypothesis on issues that they do not understand at all? Is this possible, and what would the consequence be? The consequence would be that they formulate the wrong questions, or they try to prove something that is not worth proving.

Now you would immediately say that this is not good, and that it should not be tolerated in economic development at all. Yet, often development programmes adopt names with nice titles without understanding the underlying body of knowledge (or the problem), nor do they understand how this specific body of theory relates to other bodies of knowledge. The result is that the law of unintended consequences immediately applies. When you do not understand a specific theory, you are not able to formulate proper questions that will help you diagnose or intervene in a specific field.

Therefore in our training programmes where we develop experts and practitioners we should make sure that practitioners understand the theories underneath our methods. Teaching practitioners how to run a method will not lead to insights that can form a firm bases for diagnosis or intervention design. These underlying theories helps practitioners to formulate better hypothesis. In most cases an hypothesis formulated by a practitioner will be informed by practical experience (things seen elsewhere) and underlying knowledge (knowledge bases) as well as a certain amount of preference.

 

 

 

The Death of a Guru: Eli Goldratt

On June 11 Dr. Eliyahu M. Goldratt passed away (1947 – 2011).  While he was not so well-known in the development field, his thinking and influence had a deep impact in the world of management and especially manufacturing operations.

He is most famous for the creation of the Theory of Constraints. There must be hundreds of consulting firms all over the world that make a living from his ideas, and his ideas have made manufacturing viable even in countries with high manufacturing costs. In his most popular book, The Goal, he uses a novel format to get the reader excited about certain challenges within a manufacturing firm. This was followed by several other books that challenged dominant paradigms in since the 1980s. I can still remember reading The Goal the first time and the applying the insights in my first business. All my staff also read the book and we applied the theories in our work at customers.

But you would be wrong to think this book and theory is about manufacturing. It is about change. Actually, come to think of it, it is about equipping managers to frame their concerns, and then think them through. From my daily experience of interviewing firms to find ways to improve their competitiveness, I know that this is a problem. Managers of firms are too scared to write down their fears or concerns. They just allow them to nibble away at their confidence.

Take a look at the following example of how a very simple 5 step process can be used as a mantra to equip managers to think things through. One of the many useful processes developed by Goldratt is called “the thinking process”. I believe this is relevant also to economic development. It is a set of tools to help managers (in our case it would be translated to stakeholders) through the steps of initiating and implementing a project. It helps people to not only think through a problem, but it actually helps to build momentum towards a specific set of solutions. The thinking process steps are:

  1. Gain agreement on the problem
  2. Gain agreement on the direction for a solution
  3. Gain agreement that the solution solves the problem
  4. Agree to overcome any potential negative ramifications
  5. Agree to overcome any obstacles to implementation

These steps seem very obvious for people that are trained in change management. Not surprisingly Theory of Constraints practitioners would refer to these steps as working through layers of resistance to change.

I hope that Goldratt consulting and the whole Theory of Constraints movement will continue to share and promote their learning. We need this kind of frank discussion in the developing countries. If only we had such a neat and concise framework in economic development.

Dear Eli, Rest in Peace.

More on bottom up development

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

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

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

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

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

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

The irony of bottom-up development

From the participants of our trainings on local and regional economic development it seems evident that many national governments are paying lip service to bottom-up development. Often Local Economic Development (LED) is related to attempts to decentralise certain decision-making to lower tiers of governments. However, this is done in an uneven way where powers to make decisions about financial allocations, education, health investments are centralised. Even is places where local economic development decisions are decentralised to the local level, other national policies counteracts the power of local stakeholders. For instance, LED is decentralised by law in many Southern African countries, however, skills development, university programmes and even small enterprise development programmes are all designed and run from a national level. I do not count a local office of a national or provincial programme as “localisation”, as local representatives have no power over funding allocation and programme development. Other national programmes such as tender regulations, public procurement rules, and public finance legislation were all implemented to contain corrupt or incompetent public officials (thanks for that), but it also inadvertently reduces the ability of local government to drive their own development agenda. My late business partner liked to refer to that as “unintended consequences”.

Despite these obstacles to local development there are several brave souls that are trying to do local economic development from the bottom-up. They may be constrained in many ways, but they continue to try and mobilise local stakeholders.

Often bottom-up development activities in countries and specifically at the local level are driven by external development organizations (ranging from donors to charities). From my experience in Africa I can say that international development cooperation is often more serious about bottom-up development than most governments. While I know from my previous experience (I worked for GTZ on LED) that many national government officials think this is western ideology of democracy that is being forced down the throats of developing countries, I also know from experience that imperfect solutions that are developed by locals often have critical momentum that simply outperforms even smart initiative coming from the national level. But these development organisations are Macro level actors from outside of the country, so on a hierarchy they would be above the top!

Ok, I understand. For many national governments in Africa, their biggest obstacle to programme implementation is often the lower ranking officials in local governments. But this is not the cause of their problems, it is simply a symptom of other problems. A symptom that is further re-enforced by a lack of an ability to respond to the local context. Perhaps this is why local governments accross Africa are struggling more and more, despite evidence that national governments in Africa are improving their performance. But more about that in another post.

So the irony of bottom-up development is this: bottom-up development is often still happening in parts of Africa not because of top-down (national) support, but because of international (above-the-top down) support.

Until this situation changes, bottom-up development will always be limited to making local stakeholders feeling better about addressing some of their own issues without a guarantee that the framework conditions will re-enforce their goodwill. Sometimes this will yield excellent results if the right champions drive the activities, thus making it dependent on individuals and not systems. But for local initiative to become systemic, in other words, leveraged with multiplier effects, governments across Africa would have to sincerely embrace bottom-up development by addressing the constraints that limits local action.

Some market related reading

Thank you all for the comments and e-mails on my previous posting regarding markets. I promise to continue that thread in a few days time.

Here are some of my favourite books on markets!

To read more about market systems, their histories, and a broad overview of the topic, start with Reinventing the bazaar: a natural history of markets by John McMillan. Other authors that have helped to popularise the topic are Levitt and Dubner with their Freakonomics books, or Tim Harford with The Undercover Economist. For the more serious readers, take a look at John Kay’s Culture and prosperity: the truth about markets: why some nations are rich but most remain poor or Lindblom’s The market system: what it is, how it works, and what to make of it.

All of these and other books are available on our Amazon storefront!

Market failure or marketing failure, or just old ideas under new labels

I am often stunned at how development agencies and practitioners justify their interventions to support enterprises as “overcoming market failure”. To me it seems there is a huge misunderstanding of what a market failure is, and how one can intervene to overcome the under-performance of markets. Over the last 8 years I have done intensive research into market failures, so let me do some copying and pasting from my thesis (Cunningham, 2009). The sarcastic comments where of course added in today ;-). Sorry Anja and Lucho, this is not the summarised version yet.

Here is the theory part….

Although economists describe perfectly competitive markets, in the real world markets do not always perform perfectly or optimally. When markets do not perform in an optimal way economists refer to the situation as a “market failure”. The MacMillan Dictionary (1986) describes market failure as “The inability of a system of private markets to provide certain goods either at all or at the most desirable or ‘optimal’ level”. Reference is made to the allocation of resources not being at the desired or optimal level. Samuelson and Nordhaus (1992:741) define a market failure as “An imperfection in a price system that prevents an efficient allocation of resources”. In this definition reference is made to the importance of the price system being able to reflect the true costs and value of a product, with natural monopoly, imperfect competition, asymmetry of information and externalities cited as examples.

Market failures are often visible in the forms of the growth of monopolistic firms and other non-competitive organisations, and when factors of production stand idle or certain kinds of opportunities are not pursued by business. Markets also fail when externalities such as water and air pollution are not included in their costs by firms, so that they make private profit at the cost of society. Roberts and Boudreaux (2007) explain that when a market fails this is effectively caused by failures in the institutional arrangements that support the market.

What this means in practice

Thus addressing market failure is about getting markets to perform more efficiently or optimally in the way that resources are allocated or decisions made regarding the production of goods and services. While certain interventions will be aimed directly at the market, other interventions are needed at the institutional level, and only some will be aimed directly at enterprises.

So a quick test here would be for you to check how much time you are spending working with enterprises, and how much time on market systems and the supporting institutions (which could be organisations, but mostly means far more than this).

It takes time. Lots of it.

At this point it is important to realise that it takes demand and supply some time to find the right signals such as price. Unfortunately us development practitioners don’t like this part, but it can take a long time (sometimes a decade) for a market to figure out what the main drivers are (price, quality, value, etc). In a healthy market there is a range of product offerings at different prices targeting different customer profiles. These offerings may have very little relationship with the original products and firms that created the market in the first place.

So it takes time, that is why a market can be described as a dynamic system with feedback loops.

“But firms dont know what to produce or who to sell to – there is a market failure!”

This argument is held forward mainly by small enterprise development practitioners, although even academics in business schools sometimes argue that you can solve a market failure through better marketing.

It is important to distinguish between the economics concept of market failure, and the business management result of a marketing failure. In marketing management literature a marketing failure implies that a firm has made a poor judgement in its marketing strategy, or that marketers have failed to understand that marketing should not be seen as a functional discipline but as an integrative business process. When firms fail to capture a market share due to poor marketing strategies, this can be referred to as a marketing failure. The solution too marketing failure is not in economics or sociology, but in better business management.

The verdict

So how can a development practitioner claim to assist in overcoming market failure by assisting a firm to write a business plan, or by helping a firm to find a venture partner or a new customer? Or how can a university justify developing a product for a firm using state funds in order to overcome market failure.That is just bad development practice. Even if you could somehow justify these interventions on some sub-clause somehow related to a market failure, it remains highly un-systemic and the “failure” will persist.

Recycling old ideas under new labels

I suspect that despite huge international policy pressure for development programmes to address market failure, many practitioners are simply recycling their old tools like poverty alleviation and small enterprises development under new labels.

Perhaps it is best if  you just call what you are doing marketing and business management support, then at least you can refer to a whole pile of business management books.

PS.

Bear in mind there is a whole group of people that dispute that market failures even exist (I even agree with many of their arguments), as well as many groups that believe that markets are evil and should not exist (I agree that markets ARE NOT ALWAYS the best transaction mechanism). But let us leave something for another day.

References:

CUNNINGHAM, S. 2009. The role of market failure in the utilisation of Quality Management services by the tooling industry. Ph.D Thesis, North West University,

PEARCE, D.W. 1986.  Market Failure. In Macmillan dictionary of modern economics. Pearce, D.W. (Ed.).

ROBERTS, R. & BOUDREAUX, D. 2007.  Boudreaux on market failure, government failure and the economics of antitrust regulation. In Library of Economics and Liberty – EconTalk.  Liberty Fund, Inc., Indianapolis, IN. [Web]  http://www.econtalk.org//archives/2007/10/boudreaux_on_ma.html [Date of access: 2 February 2009].

SAMUELSON, P.A. & NORDHAUS, W.D. 1992.  Economics. 14th ed. New York, NY: McGraw-Hill.

Rediscovering things I once knew: 4 types of innovation

I am in the process of preparing for an intensive appraisal of several sectoral innovation systems around a University of Technology in South Africa. While reading up on my old notes I discovered something written a long time ago by the late Christopher Freeman in 1987. I thought it a good idea to share this with my readers.

According to Freeman, four types of innovation can be distinguished:

  • everyday, “incremental” technological change in small steps – an improvement in a production process, an improved product, a new service. It is this type of innovation that ensures that the productivity of firms will grow. Yet it does have inherent limits: even continuous improvements were, for instance, unable to prevent the replacement of sailing ships by steam ships;
  • technological breaks due to radical innovations, which alter the course of development of an entire industry – the introduction of the zipper, nuclear technology, or electronic word-processing systems are examples;
  • changes in a technical system that affect more than one industry; one example is the success of plastics;
  • changes in a techno-economic paradigm – new technologies prevail throughout entire societies, new industries emerge, old industries lose significance, conventional organizational patterns are invalidated. This type proceeds from the long-wave theory.

This is an important reminder that I have to design my process to be sensitive to these different kinds of change within technological systems!