Innovation systems in Metropolitan Regions of developing countries

During 2015 Frank Waeltring and I were commissioned by the GIZ Sector Project “Sustainable Development of Metropolitan Regions” (on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ), Division 312 – Water, Urban Development, Transport) to write a discussion paper about a hands-on approach to innovation systems promotion in metropolitan regions in developing countries. The discussion paper can be found here.

Frank (left) and Shawn (right) in front of the Berlin Wall Memorial

This assignment was a great opportunity for us to reflect on Frank’s experience on structural change in territorial economic development and my experience on industrialization and innovation systems in developing countries. We also had to think hard about some of the challenges of using a bottom up innovation systems logic in developing countries, as such an approach would rely heavily on the ability of local public management to coordinate strategic activities aimed to improve the dynamics between various public and private stakeholders. It was great to reflect on our past Local Economic Development experience and our more recent work on innovation systems, industrial upgrading and complexity thinking.

A key aspect of this discussion document was to think long and hard about where to start. We know many economic development practitioners in cities are often overrun by demands from both politicians and industries for support. We also know that by selecting promising sectors based on past data and assumptions about job and wealth creation often end in little impact and much frustration. We agreed that an innovation systems approach must be aimed at stimulating the innovative use of knowledge, so we decided to not start with a demand focus (assuming the officials are already responding to some of the demand) or with statistics but a knowledge application focus. The use, generation and recombination of knowledge is central to the technological upgrading of regions, industries, institutions and societies. From our experience in promoting innovation systems and our recent research into non-consensus based decision making (this is where you do not select target sectors based on consensus or assumptions about growth potential, but you look at emergent properties in the system) we decided to start with three questions to understand the dynamics of knowledge flows in the region:

  1. Which enterprises, organisations and even individuals are using knowledge in an innovative way? Obviously this question is not simple and can only be answered by reaching out in the local economy to institutions, firms and individuals.
  2. Which stakeholders are actively accumulating knowledge from local or external sources? Again, this is an exploration.
  3. Who are individuals or organisations that know something about unique problems (challenges, demands, constraints) in the region? These could be buyers, supply chain development officials, public officials, engineers or even politicians that are willing to articulate unique demands on the regional economy that might not have been responded on by local (or external) enterprises.

These three questions are treated as an exploration that will most likely be most intensive at the start. In our experience economic development practitioners should constantly be asking themselves these questions when working on any form of private sector upgrading.

A second dimension is about assessing the interplay between institutions and industries and its effect on innovative behavior within regions. Who is working with whom on what? Why? What are the characteristics of the life cycles or maturity of various kinds of stakeholders in the region? Thus we are trying to understand how knowledge “flows” or is disseminated in the region. While some knowledge flows are obvious, perhaps even formal, some knowledge flows could be more tacit and informal. For instance, while knowledge flows from education is quite formal, the informal knowledge exchange that takes place at social events is much more informal, yet very important.

Apart from the identification of the dynamics and interrelations between the industries and the different locations, one other key factor is to identify the drivers of change who want to develop the competitive advantages of the region.

We also present our technological capability upgrading approach as six lines of inquiry, some of which have been covered in earlier posts on this weblog:

  1. The company-level innovation capability and the incentives of firms to innovate, compete, collaborate and improve, in other words the firm-level factors affecting the performance of firms and their net-works of customers and suppliers. These include attempts within firms to become more competitive and also attempts between firms to cooperate on issues such as skills development, R&D, etc.
  2. The macroeconomic, regulatory, political and other framework conditions that shape the incentives of enterprises and institutions to develop technological capability and to be innovative.
  3. Investigation of the technological institutions that disseminate knowledge.
  4. The responsiveness and contribution of training and education organisations in building the capacity of industry, employees and society at large.
  5. Investigation not only of the interaction and dynamics between individual elements in the system, but of the whole system.
  6. Exploring poorly articulated needs or unmet demands that are not visibly pursued by the innovation system.

We, and of course our GIZ colleagues of the Sector Project Sustainable Development of Metropolitan Regions, are very keen to engage with the readers on these ideas? Please post your comments, questions to this weblog so that we can have a discussion.

Best wishes, Shawn and Frank (Mesopartner)

 

 

Supporting business that creates wealth and growth should be our main priority

I see that in the USA there is a similar debate as here in South Africa about whether government should support small firms or growing firms.
Andrew Hargadon wrote a brilliant post on the debate that was brought to my attention by Tim Kastelle. Hargadon argues that hindsight is often mistaken for foresight. He explains that many small firms stay small for many years before they grow, and that it is hard to predict which will grow, which will just survive and which would fail. From my own business and consulting experience I support his view and have seen on many occasions that it sometimes takes a change of ownership or management to get a small enterprise onto a growth path. But sometimes we are so obsessed with the romantic idea of an entrepreneur fighting an honorable fight against market forces and the onerous framework conditions that we miss the bigger picture. Some people are good at starting enterprises, others are good at growing enterprises, other good at maintaining an enterprises. Some will just never be able to do it no matter how much support you provide (or waste). Most people will make better employees than entrepreneurs.

The myth that small enterprises drives growth and employment is an old one, one that is firmly in the rooted in minds of policy makers and development practitioners here in RSA and in our region. There seems to be a confusion between correlation and causation. Even if statistics shows that 60% of people in RSA are employed in small enterprises (thus a correlation seem to exist between small firms and employment) it does not tell us anything about causation (does small firms create employment, or does more employment lead to more small firms being created). Research by many reputable scholars have shown that small enterprises hardly drives growth, but that it often responds to growth; it is more likely that larger better resourced companies will drive growth and efficiency in the economy, with ecosystems of small firms emerging around them providing specialized and also some general services.

For instance, the reputable scholar Thorsten Beck argues that the dynamism of enterprises is more important than the size of small firms in the total economy. I first came across Becks work while doing my PhD research (he has since moved from the Worlbank to Tilburg University). Beck has done many cross-country micro economic studies and argues that:“Policy efforts targeted at SMEs have often been justified with arguments that

(1) SMEs are an engine of innovation and growth and

(2) they help reduce poverty because they are labor-intensive and thus stimulate job growth, but

(3) they are constrained by institutional and market failures.

Cross-country, country-level, and microeconomic studies, however, do not support these claims. One study shows that, although faster-growing economies have a higher share of SME employment in their manufacturing sectors, it is not the size of this segment that drives growth“.

The full report can be found here

Here in South Africa development practitioners have the challenge that we have to pursue objectives that are in conflict.
Everyone seems to agree that we should create more employment, as the waste of human capital in our country is just socially not sustainable nor justifiable. Yet, we are constrained in that we cannot always support those firms that are more likely to create employment because of the race of the owners, or for other demographic criteria or preconditions. Sadly, many entrepreneurs that can help us absorb the unemployed have left, or have shifted into industries where they don’t have to rely so much on low skilled workers. Many have simply taken up jobs in the corporate or service sectors (people like me and many others I know). The current legislative environment just does not make it easy or attractive enough for people to start new firms or expand existing ones. In fact, many people that have the capacity to start medium sized firms are investing their money elsewhere. Now don’t get me wrong, I am not against the principle of equity enshrined in our constitution, I strongly support this. I also believe that labor should be paid fairly in a just relationship. The current labour and BEE environment just does not make for an environment where people will start firms or spin-offs that will address our primary problem of unemployment.

I believe that having a job goes a long way to equipping (black or white, male or female, young or not-so-young) employees to start a business at some point when they have gained sufficient technical AND market experience. Employment experienced and education will still do much more for sustainable black economic empowerment than any other measure. Furthermore, a focus on employment (no matter what the profile of the employer is) will also increase our tax base so that we can do more to develop our country. I will not get into my feelings about too few taxpayers supporting a too big social spend and government here.

Whether big or small, I put my money behind family owned businesses (Yes, I have a small bias). They somehow have the ability to consider both short term but also long term priorities at the same time. Even if they don’t make decisions fast, or if they sometimes appear to be conservative, I found family owned businesses are more likely to continuously invest in better equipment, in developing capacity, and in securing new markets. Family owned businesses makes for more stable employment, and generally they are more aware of the social needs of their employees. But these are also the kind of firms that are least likely to give up shares and management positions if it does not make long term business sense, thus Black Economic Empowerment policies and many conditional support incentives actually undermines this (often unrecognized) backbone of our economy.

What most people choose to ignore is that 3 drivers of costs of business are escalating very rapidly. These are:

  1. cost of raw materials. We buy smaller volumes and pay more compared to other international markets, with many countries even subsidizing access to raw materials.
  2. cost of energy. Our energy cost has increased faster than firms could upgrade, so we are far from efficient and thus at disadvantage. Municipalities further charge double and triple digit margins on top of the official electricity rates. Lastly, those that want to expand often cannot secure or afford access to electricity due to more than a decade of underinvestment in the grid at municipal level
  3. cost of labour. Many other factors are making wages too low for workers to live on (like the cost of transport), while raising the cost component of labour in business without increasing productivity resulting in South African enterprises being uncompetitive. Most employers when they do agree to wage increases simply reduce their staff, because other types of productivity improvement simply takes too long to yield results.

There is only one way that I know of to overcome these 3 cost drivers, and that is innovation at all levels of the enterprise (product, process and business model innovation). We also need social innovation, especially with regards to finding better ways at training, re-training or current workforce and the unemployed.

I can see in many sectors that those entrepreneurs that can create businesses that mainly employes skilled or educated employees are able to compete domestically and internationally. Those enterprises that depend on low skilled workers will simply struggle to compete, their costs are just to high and more and more of them are failing. Larger firms with access to capital and debt are more likely to be able to balance the investments in capital and labour that is required to be profitable in our economy, while smaller firms are struggling to balance this while raising capital and exploring new markets at the same time. The transaction costs for smaller firms to experiment until the find a workable business model in many instances is just to high. This is visible in the popularity of franchises where an entrepreneur buys into a proven business model and where the costs of experimenting with the business model is shared by many franchisees. (I wish we had something similar in manufacturing).

From my research over the last 3 years into innovation in industries I can say with confidence that our smaller manufacturers are hardly investing in Research and Development, mainly because they are under such strong cost and competitive pressure. Those smaller firms that do innovate formally often do this on contract, meaning they are paid by larger firms to do so. Larger firms that are active internationally are more likely to pay for R & D in order to drive down costs while creating new markets and new products. In doing so they support a wide range of smaller firms that provide experts services, specialized components or other intermediary inputs needed by the larger firms.

In the end, we have to direct our funds to those that can create employment, create wealth, create new markets and create new kinds of jobs. We should assess which firms we support by looking at the multiplier effects and the spillovers. We should support those firms that optimally and responsibly use existing resources, whether it be financial, natural or human resources. We must try to support the areas where dynamism already exist to start with, and then we have to try and support dynamism elsewhere. But we should not assume that our large and established smaller enterprises are able to develop all by themselves. The current focus is too much on small and not enough on multipliers and dynamism in the whole economy.

For me all other priorities come second to the objectives of growth and wealth creation, as we cannot achieve all of our countries many priorities at the same time. Growth will absorb more people, will attract more investment, will create new markets, new skills and new opportunities. Wealth creation is as important for employees as it is for investors, entrepreneurs, managers and also the government.

We have to send a strong message to ALL entrepreneurs that we value their investment, their energy and their attempts to create new markets. But we cannot help all of them, and by assisting some of them based on social criteria will not take us toward our countries biggest crises, the unemployed youth, nor will it allow us to optimally leverage the wisdom and experience of our older generation of technicians, engineers, managers and academics no matter what their demographic profile.

Supporting business that creates wealth and responsible growth should be our main priority.

There is more value to the value chain than adding value to products

I am supporting value chain practitioners in various programmes where I am coaching, teaching, supporting, pushing and pulling experts. This is one of the perks of my job as I get to look over the shoulders of practitioners working all around the world on commodity, agricultural, manufacturing and service value chains.

While marking some assignments for a course I am tutoring for the ILO I realized that many practitioners are trapped in a particular chain, just like the actors that they are trying to empower. With trapped, I mean that they are working with the actors and the chain for the benefit of the chain. They completely miss the broader impact of their work. (I know that this is often more the fault of the people who design programmes, more about this elsewhere in my blogs).

Let me explain.

For me a value chain is something we construct so that we can understand a part of a sub-system. If you are diagnosing a tomato value chain then it is true that you are getting a deeper understanding of the tomato system. But you are also gaining an insight into an agricultural system, a regional system of stakeholders and communities, but also an insight into the national or maybe even global economy. While some value chains exists in a very formal way, with contracts linking the different actors, most value chains can rather be described as temporary social phenomena. Temporary because they tend to change over time.

Back to my main argument. While it is true that value chains are known by their end products or markets, there is more to a value chain than just the conversion stages of a product/service. Value chains show us how an economic system works. It show us how responsive institutions and supporting organizations and indeed a whole society is towards economic activities of a certain kind. Value chains also tell us some fluffy yet important things about the society it is framed by. It tell us something about the social relations, the search costs (finding people to do business with), the social capital (how well we trust each other, how easily we collaborate), the enabling environment, and the returns on investment and effort in different parts of the system.

So if we find that tomato farmers are not very sophisticated, that they have poor market relations, that entry barriers are very low hence nobody has an incentive to invest, that suppliers are dishonest, that there are some new market niches developing but that nobody knows, that intermediaries have disproportionate power; I am not surprised at all. In fact, your findings are rather typical, even predictable in some sectors. What I am surprised by is if you treat this like it is a unique finding contained only to the tomato farming sector. The chance that these characteristics are contained only to those involved in the tomato chain is rather slim. This is the real risk of having a too narrow product focus.

Yes. Value chains are known by their end markets or products. But no, we are not locked into a product. We want to understand the system better so that we can support the emergence of institutions, market systems and interventions that make the whole system work better. Those issues that I outlined before in my tomato example can be verified in the sectors or crops around it. In my experience, many crops or business sectors sometimes have similar challenges. Therefore instead of trying to work at a low scale with some tomato farmers, you could possible be working with 10 crop types in a region, involving 1000s of farmers, and maybe a dozen supporting institutions. Few extension services for instance focus on one crop, they often handle a variety of crops, animals and markets. So you have to try and understand what each kind of economy activity (like farming with tomatoes) have in common with other business types or farms, and then what is unique. When you do this you often find that the actors in the chain have far more in common than the product or crop. They could all be equally unskilled, equally under-capitalised, equally vulnerable to market fluctuations, equally exposed to poor contract enforcement, or monopolies. This is how we get to real systemic interventions.

But the idea should never be to promote some products. This is the job of business people and entrepreneurs, not development practitioners. No, development practitioners should try to understand and strengthen the system. We make the features of the system that is overlooked or not visible to stakeholders more apparent. I also dislike it when practitioners start with an hypothesis that profit is unfairly distributed, or many of the other typical biases that exists in this field. The simple truth is that investments in economies flows to where there are (visible) returns. If it becomes more profitable to invest in retail than in manufacturing or farming, then this tells us something about the system. It is an important finding in itself which then allows us to ask the next question “how to make farming more profitable for investors (farmers and the poor are also investors)?”.

Your value chain has more value in it than the value added at each stage of the chain. What is valuable is the insight you are gaining about how a part of the economy works. Don’t become a product promoter. Be a system builder.

The MaFI-festo: changing the rules of the international development “game” to unleash the power of markets to end poverty

I am supporting great initiative of the Market Facilitation Initiative. Lucho submitted the online debate we’ve been having since 2008 into the annual Harvard Business Review/McKinsey M-Prize for Management Innovation (called MIX). I am a member of the MaFI discussions.

Lucho provides the following short summary “Bilateral and multilateral donors and NGOs re-write the rules of the International Development Cooperation System to unleash the real potential of markets and the private sector to end poverty at a large scale… easier, faster and cheaper. How? Through trust-based partnerships, complexity science, effective organisational learning, systemic M&E and co-evolutionary experimentation.”

The solution offered by Lucho (based on the MaFI dialogue) is:

A series of national and international conferences, seminars and workshops to bring donors, NGOs and leading firms to identify the rules of the development “game” that need to change to make market development initiatives more inclusive, accountable, responsive, innovative, holistic and cost-effective.
MaFI (The Market Facilitation Initiative) started in 2008 and has more than 240 experts from all over the world working in NGOs, donor agencies, private firms and academic institutions. The aim of MaFI is to advance policies and practices based on facilitation and systems thinking to make markets work better for the poor and the environment. MaFI is a working group of The SEEP Network with the technical support of Practical Action.

After almost two years of of discussions, MaFI members produced a manifesto (The MaFI-festo) which has three main objectives:

  •  To focus the attention of key stakeholders on a set of strategic changes that are urgently needed if the international development system is to effectively harness the full potential of markets to reduce poverty at scale and protect the environment
  • To promote convergence and collaboration between bilateral and multilateral donors, practitioners and academic researchers working in the fields of “aid effectiveness” and inclusive markets.
  • To inspire NGO leaders to promote the adoption of systems thinking and facilitation approaches in their own organizations and networks to increase their ability to interact with the private sector and leverage the full potential of inclusive market development programs.

The MaFI-festo focuses on four areas (in no particular order of importance):

  1. Changing how we work in the field
  2. Balancing flexibility and accountability
  3. Building the capacity of facilitators
  4. Changing what and how we measure change

The MaFI-festo will give content and focus to the series of conferences, seminars and workshops mentioned above. These are called the MaFI-festo Dialogues.

What must you do?

To see the application go to http://www.managementexchange.com/node/62551

Find out more about the M-Prize go to: http://www.managementexchange.com/m-prize/long-term-capitalism-challenge

We need you to:

Comment, vote and throw in your ideas!

With each comment, like, or Tweet our submission goes up in the rankings!

Why is private sector development such a low priority in Sub-Saharan Africa?

I will start my post by linking to another blog from Kenya. The blogger makes reference to a report by Robert Wade, professor of political economy and development at the London School of Economics, which discusses the role of industrial policy in Asia and how donors completely neglected it in Africa. In essence, Prof Wade compared the economic development activities of donors in Asia with development efforts in Africa.

I can’t help but wonder why industrial development is such a low priority for Africa.

Although donors generally respond to the demands from their developing country counterparts, I know from experience that donors also have preferential aid packages. But why is private sector development such a low priority? Why are we not seeing the same kind of productive infrastructure and technology transfer into Africa that we saw go into Asia? Even donors with “Sustainable Economic Development” Programmes are more concerned with rural development, gender and limited agri-processing support. What about building new industries, new processing facilities, new productive capacity in Africa? Instead the focus as at a micro level, and perhaps at some regional level.

Please don’t tell me it is because the enabling environment is not right. When it suited Western countries they invested in autocratic countries with very poor human rights track records.  Billions of dollars went (and still go) into countries without an enabling business environment. Most countries in Africa today are at a better governance standing than their Asian counterparts were in the 1980s-1990s.

Just thinking out loud. What can we do to make industrial development more important in Sub-Saharan Africa?

Developing territories from the bottom up

Its been a while since I have made a post, largely because watching the discussions in our local press is so amusing and entertaining. I had to keep my fingers in fists not to type anything I would regret later. This is a poor excuse, so let me get back to the reason why you are reading this post.

Strangely, our discussions here in South Africa is not yet focused on the real issues of how to grow the local economies. Most projects contained in Integrated Development Plans are still un-systemic and often deal more with social than with business and growth related issues. Yes, with our history this is important. But I would immediately argue that it is possible to have systemic interventions (that unlocks growth and investment) that at the same time also has benefits or leveraged impact for the poor and marginalised.

Why are we not talking about building local meso-level institutions that not only supports local industries or address local issues, but at the same time draws on science and research to create new solutions? Why are so many local municipalities still doing such shallow Local Economic Development? At what point will the private sector at the local level realise that they need to be more reflective of their competitiveness and cooperation. OK, granted, this happens in some places. But not everywhere. And not enough.

It seems to me that so many solutions are still driven from the national level of government (and business) in South Africa. At what point will locals start demanding “economic” service delivery, which means infrastructure that supports the growth, profitability and expansion of business. Why bother with “small town economic development” if the potholes in the main road are as deep as opencast mines? (see the picture further down below)

Perhaps a reason for this hesitance to seriously and systemically engage in “Territorial Development” is because Local Economic Development is still seen as a narrow field of enterprise support through public planning instruments, instead of being seen as a multidisciplinary approach aimed at improving the local economic system. The systems perspective and an understanding of the complexity of this systems seems to be lacking. You cannot develop the tourism sector in a small town by itself, without dealing with retail, infrastructure, and many other issues.

I know there are many places that gets this right, and where a proper and interactive relationship exist between local government and local business.  But we need much more than a few anecdotal examples. We need to inspire our local businesses to invest, to grow and expand. Inspire them to paint their shops, and tidy their yards. Get them to think of new ideas, new opportunities. Only when we unleash the creativity of our existing businesses will new businesses emerge.

Look at the nice pothole below. The largest employer in this little town is moving to Johannesburg. Guess what, hardly any of its employees are staying behind and starting businesses. With them, they take their spouses, who are often providing services as teachers, medical staff, managers in other firms, and local consumers.

– Why would locals start a business here in this town?

– Why is fixing the potholes and the general look of the town not a major priority?

If business was important here, the main street would not look like this

– How can a few isolated “entrepreneurship” training and other isolated projects undo the impact of the large corporate moving away?

– Why can not a single business person here remember when last a local official contacted them to find out if there is anything that the municipality to can do to support the business in growing.

I think I know the answer. Business is simply not important here. LED in this place is about little projects and not about the bigger system. Business people also tend not to block roads and burn councillor houses.

Perhaps we should coin a new phrase “local private sector development” to describe what we should be doing as Territorial Development Practitioners. But then again, we know that you have to look at the whole system at the territorial level, so perhaps this title is not a good idea. To grow territories from the bottom up would need a focus on the private sector, but it would also require attention the public sector, both as a provider of critical infrastructure and other services, as well as a coordinator of many essential (and often overlooked) public goods. My main point is this. While the national frameworks are important, local energy is what matters. South Africa appears to be trying to build local economies from the top down (depending on national policy, grants and programmes), and not from the bottom up with based on an  understanding the local economy, opportunities and constraints, and then using local energy and resources.

UNCTAD releases Economic Development in Africa report 2010

UNCTAD release.

Two weeks ago the UN Conference on Trade and Development (UNCTAD) released the “Economic Development in Africa Report 2010-South-South Cooperation: Africa and the New Forms of Development Partnership” report. The report examines the recent trends in the economic relationships in Africa with other developing countries, as well as new forms of partnership that have emerged in the past years.

The report argues that South-South cooperation has the potential to enhance Africa’s capacity to deal with the challenges of poverty and poor infrastructure, the development of productive capacity, and emerging threats associated with climate change, as well as the food, energy, financial and economic crises. In this regard, the report argues that there is a need for African countries to mainstream South–South cooperation into their development strategies to ensure that it further contributes to the achievement of national and regional development goals.

Highlights of the report can be found here

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