Identifying firms to work with to induce upgrading of industries

This is a continuation of the series on improving innovation systems.

When working on the improvement of innovation systems in development countries, we have to work with firms. These firms have multiple roles. Firstly, the firm is an important unit of analysis where we look at innovative practices (product, process, business model). Furthermore, the firm is also an unit of analysis in terms of cooperation and collaboration, thus their ability to cooperate with rivals is an important consideration when we design interventions.

Lastly, 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 be good role models, are difficult to involve in development programmes for different 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 in technology is another story!

Businesses absorb knowledge from other businesses that are economically competent

I will rather focus on how to find the firms that we can work with to improve innovation and competence for all 3 units of analysis discussed earlier. Remember, our objective is to find ways to improve the dynamic in innovation systems that will result in the modernization and technological upgrading of industries and regions.

More than 15 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 important as we have to remember that we cannot innovative on behalf of industry. Somehow we must work with the firms that are able to innovate, imitate, adapt and integrate new knowledge and ideas into their firms.

According to Carlsson and Eliasson economic or business competence has four main components:

  1. Selective (strategic) capability: the ability to make innovative choices or markets, products, technologies and overall organizational 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. Organizational (integrative, coordinating) capability, i.e. the ability to organize 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 relating 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.

If the users 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 to choose the entrepreneurs that we work with is very relevant to finding the people that can absorb new ideas and that can make it work in a developing country context. I will also state that I do not believe it feasible to select “change agents” on 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 that are recognized in the system (regardless of their demographical information). 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!


Carlsson, B and Eliasson, G,.1991 The nature and importance of economic competence

Porter, M.E. (1991) “Towards a Dynamic Theory of Strategy“, Strategic Management Journal, 12 (Winter Special Issue), pp. 95-117.

3 Responses to “Identifying firms to work with to induce upgrading of industries”

  1. Marcus Jenal Says:

    Dear Shawn
    I’m very impressed by the density of your posts and the knowledge and experience you are sharing. These posts open a whole new window for me into innovation systems – and I’m fascinated for that matter.

    One question, however, crossed my mind. Most of us development practitioners do have the need to sell economic or private sector development projects to donors that require to know how many poor people we can reach with our project and what our impact on gender equality will be. Thus, we have to select private sector partners that are willing to go into this direction. In Bangladesh, we had the luck to work with one of the biggest pharmaceutical companies – and I would say one of the more innovative ones. We could convince them to directly work with poor communities to source their medicinal plant raw-material. In other sectors, this was not so easy.

    I know that there is a large space between the way of private sector development as you describe it and the work most development projects do – without much success, one has to say. But my question really is: how to bridge this gap?

    Is this the classical debate about if we want to do poverty reduction all we need is growth vs. we need to work directly with the poor to know their priorities and improve their livelihoods? One intermediate step that is proposed by the people that developed the ‘making markets work for the poor’ approach is that we have to work for both, growth and access of the poor.

    What is your stand in this debate?



  2. Blog-Posts I liked « marcus jenal Says:

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