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.

4 Responses to “Building institutions that supports knowledge flows to industry”

  1. Bart Doorneweert Says:

    Hi Shawn,

    I’m currently working a bit in the space of developing these meso-type organizations in The Netherlands. It’s interesting to see that they do address market failure, but that it’s very hard to take them off the government grant line. Things collapse again after funding is withdrawn.

    I think this indicates that yes, there is definitively a value proposition for tackling these public problems, but no there isn’t a sustainable business model which underlies these meso-organizations. In setting up of meso-organizations, the search for that sustainable business model should also be part of the mission and mandate.


  2. Liza Van Der Merwe Says:

    Shawn, Have a look at this TED talk “How to green the world’s deserts and reverse climate change” by Savory to see how “ knowledge” is changing agriculture & challenging the sustainable development paradigm head-on. This is a bottom-up knowledge flow drastically needed by the planet. There is a multiplicity of failures that can be overcome promoting knowledge that are contrary to the rational model, however need an easy message to spread…

    Liza van der Merwe Enterprise Resilience Assessment Manager


  3. cheulrico Says:

    Dear Shawn,

    within the group of KIBS I would like to highlight the relevance of Conformity Assessment Bodies (CABs) like certification, testing and calibration laboratories. The use of these services is crucial for companies, also in developing countries, to get access to foreign market. Beyond facilitating access to markets these service providers offer also additional services related to market intelligence and productivity improvement, which are even more knowledge intensive.

    Unfortunately, these services are mainly used by transnational and large national companies and not so much by the majority of SMEs. Here we find also market failure related to critical mass and indivisibility of these services. For example, calibrating a measurement instruments costs the same independently if you measure 100 or 100.000 objects with it. A positive exception we find in the group certification for agriculture small holders, which helps to reduce certification cost for individual farmers.

    Another challenge for developing countries it that tin the are of CABs we observe a strong concentration process. Today large transnational companies are already dominating the market of testing and certification. Local service providers have hardly a chance to compete with these capital-intensive competitors. I recall a situation when we analyzed to support within a development project the building of a laboratory for honey in local university. The small Lab was designed to test around 100 sample a week, meanwhile one of the leading laboratory in Germany was doing several thousands of such test in the same time and this with a much broader scope and higher reliability. Additionally, the German laboratory had a worldwide database of honey samples collected over several decades. This knowledge is impossible to recreate in a individual lab start up in the developing world.

    All this make me ask about the real possibilities for developing countries to enter in the area of KIBS. As competing in conventional business is already difficult, it is even a greater challenge to compete in knowledge intensive services.

    Kind regards,
    Ulrich Harmes-Liedtke, Mesopartner


    • Dr Shawn Cunningham Says:

      Dear Ulli,
      Thank you for highlighting the importance of the Conformity Assessment Bodies and the Quality Infrastructure (Also known as SQAM) to manufacturing. Indeed, all these different forms of metrology, certification, assessment, certification and testing are part of the KIBS family. The benefit of the international dominance of these services is that when a particular body issues a certificate of compliance, it really counts elsewhere. I don’t think that developing countries must necessarily try to compete in KIBS, rather if they don’t recognize that they need to stimulate KIBS their manufacturing sector will suffer or gradually decline into a marginal domestic producer. In Southern Africa, it is often the international CAB actors that introduce new standards and forms of certification into the market place because of their intimate knowledge of the ever changing requirements in European markets.

      An interesting issue that that you raise about the example of the German based lab, is the phenomena where some firms are starting to figure out how to offer a very context specific and content intensive service in a standardized form around the world. Just a few years ago this was thought to be impossible. But we see the same kind of service emerging in the construction sector, in aviation and in biotechnology (a field called formulation). A pre-condition for this kind of standardized yet highly context specific knowledge to arise is cutting edge tertiary education and post doctoral research programmes where these kind of standard protocols are refined.

      Best wishes,

      Shawn Cunningham


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