Introduction ………… 3 Supporting the Growth of Exports by Industrial Clusters 4 Supporting the Growth of Supply Chains 9 Supporting the Growth of Global Value Chains 13 List of Tables Table 1: An Action Plan for Autonomously Emerging Clusters 6 Table 2: An Action Plan for Special Economic Zones 8 Table 3: An Action Plan for Supporting Supply Chain Development 12 Table 4: An Action Plan for Supporting Value Chain Development 16 List of Boxes Box 1: A Static Survivalist Cluster - The Eastland’s Garment Cluster, Nairobi 4 Box 2: A Dynamic Cluster - Otigba Computer Hardware Village (OCV), Lagos 5 Box 3: Economic Bottom Line - Supply Chain Development in South Africa 10 Box 4: Social Bottom Line – Corporate Social Responsibility (CSR) in Ghana 10 Box 5: Environmental Bottom Line – Greening Supply Chains in Ghana 11 Box 6: EU and Chinese Buyers’ 13 Box 7: The Apple iPhone 4 Vertically Specialised Value Chain 15 Box 8: The Cocoa Additive Value Chain 15
Strengthen key external economies to overcome infrastructure constraints and promote trust and collective action Discrete, decisive, well proportioned, transparent, actions are required to address these issues. There is no template which governments and other actors can use and apply across all sectors, all economies and over time. Attune actions appropriately to the context of cluster development. Distinguish between actions relevant to all clusters and those only relevant to particular sectoral clusters, and hence be mindful of the dangers of bowing to the pressure from special interest groups. Actions are dynamic and time-limited Support for clusters must tread a careful path between being long enough to support structural change and not being too long to dull entrepreneurial spirit. There is no formula for an optimal time period. The time period will be governed by the context, level of cluster development, sector, and particular policy interventions proposed. Table 2: An Action Plan for Special Economic Zones Policy Directive Rationale Key Implementation Activity Strategic policy directed at the Chinese government aid packages The official SEZs are an integral component of Chinese aid packages in selected countries with the objective of assisting their SOEs with inputs from Chinese firms. Negotiate bi-lateral arrangements to ensure a greater and deepening presence of domestic firms in their supply chains within these SEZs. Deal directly with Chinese lead firms over privately developed industrial estates (PIEs) These PIEs typically grow organically from a “first comer” industrialist which has established a successful enterprise and is looking to procure supplies locally. Pressure these lead Chinese private firms to facilitate the entry of local supplier firms into these estates and into their own supply chains.
Table 3: An Action Plan for Supporting Supply Chain Development Policy Directive Rationale Key Implementation Activity Identify and engage with key lead firms In most African economies there are a limited number of export sectors in which lead firms either play, or have the potential to play a critical role in supply chain efficiency. A focus on major export products, or significant exporting sectors, will identify the appropriate lead firms. Governments need to initiate strategic discussions with these lead firms to support, and if necessary, initiate supply chain development. Governments should pressure lead firms who are reluctant to promote supply chain development programmes. Assist firms in assembling a consortium of firms in their supply chains Lead firms are generally best able to identify, and engage with, their first-tier suppliers and customers. But this meets only a part of the agenda to achieve systemic competitiveness. Government can help to assemble a consortium of supply chain partners. This may involve government agencies, and institutions in the National System of Innovation (such as research centres and universities). Promoting bottom-up supply chain efficiency International experience shows governments have a role to play in facilitating supply chain efficiency, in part through incentives schemes to facilitate the growth of Business Services firms promoting supply chain development Government or international agencies should provide matching grant financing for upgrading programmes to assist local suppliers meet the international competitiveness standards of the lead firms. To ensure long sustainability support financing should be time-bound to create a market-driven bottom-up supply chain development programme. Certification to meet the social and environment bottom line Meeting the variety of supply chain standards imposed on suppliers (social, environmental, health etc.) requires being able to satisfy certification codes. Certification is costly and local suppliers struggle to muster the funds and capabilities to pass these tests. Government should reduce costs by establishing centralised local certification agencies. Government should provide one-off loans or grant subsidy funding to help firms fulfil the various certification processes.
Assisting small producers to meet GVC standards The transaction costs involved in working with small scale and informal producers may lead firms to adopt “excluding” supply chain upgrading policies in favour of large domestic firms or TNC subsidiaries, with adverse developmental results. Government agencies have an important role to play in assisting smaller scale producers to comply with global standards. Subsidise compliance costs since standards monitoring firms seldom modulate their charges by firm size. Policy should aid the development of a local diverse business services sector. Focus on policies specific to positioning in vertically specialised value chains Specialisation refers more to capabilities and less to sectors and products. Policies which specifically address the promotion of vertically specialised GVCs, particularly in the short run, relate primarily to trade policy and building of capabilities. Remove quotas and tariffs on imports, remove “at the border” bureaucracy and obstacles which hinder trade, introduce incentives to promote exports, and ensure the smooth functioning of trade infrastructure. Assist firms with upgrading activities to develop firm level knowledge based capabilities in manufacturing and services. Focus on policies specific to strengthening additive value chains The strategic focus is on building backward, forward and horizontal linkages, sometimes in partnership with international agencies or lead firms, in order to deepen value added in the sector. Institutionalise local content policies. Build infrastructure specifically to meet the needs of the resource sector. Create marketing institutions to support domestic processing. Consider export taxes to force local value addition Selective use of import taxes to promote local content and backward linkages Build industrial zones to facilitate linkages between lead firms and local manufacturers.
their buyers. The exporters were required to maintain a higher learning curve in order to remain competitive on a global level. This included learning new skills and techniques; obtaining higher quality raw materials; upgrading machinery and equipment; meeting stringent quality, safety, and environmental standards; and participating in design activities. Table : Africa’s Experience with 25 Clusters Cluster End Market Evidence of Dynamism External Economies Collective Action Forms of Institutional Support Egypt Domiatt Furniture (Domestic) Local, National None Labour supply, availability of suppliers, customer attraction, specialised service providers None Cluster/sectoral Domiatt Furniture (Export) International Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Marketing Learning Logistics External Ethiopia Merkato Leather Footwear Local, National None Labour supply, availability of suppliers, customer attraction, specialised service providers Logistics Government, Cluster/sectoral, External Shiro Meda Handloom Local, National None Labour supply, availability of suppliers, customer attraction None External Ghana Suame Metalwork Local Upgrading Labour supply, availability of suppliers, customer attraction None Government Suame Vehicle Repair Local, Regional None Availability of suppliers, customer attraction, specialised service providers Learning Government, Cluster/sectoral, External Kenya Gikomba Furniture Local None Labour supply, availability of suppliers, specialised service providers None None Ngong Furniture Local Growth Labour supply, availability of suppliers None None Kibuye Furniture Local None Labour supply, availability of suppliers, specialised service providers Logistics Cluster/sectoral Eastland Garment Local None Labour supply, availability of suppliers, customer attraction, specialised service providers None None Kamukunji Metalwork Local None Availability of suppliers, customer attraction Learning Government, Cluster/sectoral Ziwani Vehicle Local Upgrading Availability of suppliers, customer attraction Learning Cluster/sectoral, External ,
Lake Victoria Nile Perch Local, National, International Growth, Upgrading Availability of suppliers, customer attraction, specialised service providers Logistics, Learning Government, Cluster/sectoral, External Lake Naivasha Cut Flower International Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Marketing Learning Logistics Government, Cluster/sectoral, External Nigeria Otigba Computer Hardware National, Regional, International Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Marketing Learning Logistics Cluster/sectoral Nnewi Auto Parts National, Regional Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Logistics Cluster/sectoral, External Mauritius Textile & Clothing International Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Marketing Learning Logistics Government, Cluster/sectoral, External South Africa Cape Clothing & Textile National Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Logistics Learning Government, Cluster/sectoral, External KZN Clothing & Textile National Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Logistics Learning Government, Cluster/sectoral, External Durban Automotive National, International Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Marketing Learning Logistics Government, Cluster/sectoral, External South African Wine Local, National, International Growth, Upgrading Labour supply, availability of suppliers, customer attraction Marketing Learning Government, External Tanzania Mwenge Handcrafts Local, National, Regional Growth customer attraction, specialised service providers Learning Marketing Government, Cluster/sectoral Gerezani Metalworks Local, National None customer attraction, specialised service providers Learning Marketing Government, Cluster/sectoral Keko Furniture Local, Regional Growth Labour supply, availability of suppliers, customer attraction, specialised service providers Learning Marketing Cluster/sectoral Uganda Fish Processing Local, National, International Growth, Upgrading Availability of suppliers, customer attraction, specialised service providers Logistics Learning Government, Cluster/sectoral, External The analysis of the 25 clusters (Table 1) shows that signs of both sustained growth and upgrading is prevalent in each of the three clusters selling primarily into global markets, the six clusters selling into national markets and the 10 clusters selling into domestic and regional markets. By contrast, the
CHAPTER 1 1 PARTICIPATING GAINFULLY IN 21ST CENTURY EXPORT MARKETS 1 SUMMARY 1 1.1. The challenge is not whether to participate in global markets, but how to . 2 CHAPTER 2 8 THE CONTEXT FOR AFRICA’S GROWING PARTICIPATION IN GLOBAL EXPORT MARKETS 8 SUMMARY 8 2.1. The trajectory of Africa’s GDP and trade performance, 2000-2012 10 2.2. A slow pace of structural change 14 2.3. Important developments in the global trade environment 15 CHAPTER 3 25 AFRICA’S EXPERIENCE WITH INDUSTRIAL CLUSTERS 25 SUMMARY 25 3.1. Global experience: The “discovery” of clustering and industrial districts 27 3.2. What explains the existence of clustering? 29 3.3. What happens when the market changes – exports and GVCs 32 3.4. Industrial Clusters in Low and Middle Income Economies 34 3.5. Some examples of Industrial Clusters in Latin America and Asia. 35 3.5. African experience with Industrial Clusters 42 3.6 Case-studies: Unpacking the dynamics of African clusters 49 CHAPTER 4 89 BUILDING SUPPLY CHAINS 89 SUMMARY 89 4.1 The historical origins of supply chain management 92 4.2 The origins of supply management (scm): enhancing chain agility, fostering product development and reducing costs 97 4.3 Beyond agility, product development and cost reduction: the triple bottom line and supply chain management 100 4.4 Africa’s experience with SCM in pursuit of the economic Bottom Line 102 4.5 Africa’s experience with SCM pursuing the Social Bottom Line 121 4.6 SCM in pursuit of the Environmental Bottom Line 130 CHAPTER 5 145
from the gap – the resource rent - between their low production costs and those of the least efficient producer. In later decades, Alfred Marshall (another giant of economic theory), developed Ricardo’s theory of rent, and showed that rents are not just a gift of nature. They could be created through investments - the quality of land could be improved through landscaping and irrigation. But more significantly, the application of knowledge to production processes in agriculture, industry and services and in the development of improved machinery has meant that the creation of “innovation rents” provides the source of economic advantage. Joseph Schumpeter, an Austrian economist writing in the mid-twentieth century, extended this idea of purposefully created rents by focusing on “gales of creative destruction”. That is, new technologies continually eroded existing innovation rents so that the policy agenda confronting individual entrepreneurs, farmers, and indeed whole economies, was the need to achieve dynamic rents, and this could only be achieved through the development of dynamic capabilities. Unless they could achieve these dynamic rents, they would be subject to intense competition and find it difficult to survive in a competitive market. The pursuit of “dynamic capabilities” is now the primary driver of corporate strategy in many sectors across the global economy. What relevance do these writings of classical economists have for African producers in the 21st century? First, there is enormous potential benefit to be gained from successfully participating in global export markets. This offers the prospect not just of reducing production costs through reaping scale economies, but also of growing capabilities as a consequence of specialisation and through learning in global export markets. However, without the capacity to continually, and repeatedly, generate and appropriate rents, participating in global export markets in this era of globalisation may offer little scope for enhancing incomes. The dangers that a mistaken insertion into global exports markets poses can be seen from the experience of central American export processing zones in the 1980s and 1990s, witnessed in the challenges faced by a Dominican Republic garment exporting firm (Box 1).
Table 3.4: Africa’s Experience with 25 Clusters: Cluster End Market Evidence of Dynamism External Economies Collective Action Forms of Institutional Support Egypt Domiatt Furniture (Domestic) Local, National None Labour supply, availability of suppliers, customer attraction, specialised service providers None Cluster/sectoral Domiatt Furniture (Export) International Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Marketing, Learning, Logistics External Ethiopia Merkato Leather Footwear Local, National None Labour supply, availability of suppliers, customer attraction, specialised service providers Logistics Government, Cluster/sectoral, External Shiro Meda Handloom Local, National None Labour supply, availability of suppliers, customer attraction None External Ghana Suame Metalwork Local Upgrading Labour supply, availability of suppliers, customer attraction None Government Suame Vehicle Repair Local, Regional None Availability of suppliers, customer attraction, specialised service providers Learning Government, Cluster/sectoral, External Kenya Gikomba Furniture Local None Labour supply, availability of suppliers, specialised service providers None None Ngong Furniture Local Growth Labour supply, availability of suppliers None None Kibuye Furniture Local None Labour supply, availability of suppliers, specialised service providers Logistics Cluster/sectoral Eastland Garment Local None Labour supply, availability of suppliers, customer attraction, specialised service providers None None
Kamukunji Metalwork Local None Availability of suppliers, customer attraction Marketing, Learning Government, Cluster/sectoral Ziwani Vehicle Local Upgrading Availability of suppliers, customer attraction Learning Cluster/sectoral, External Lake Victoria Nile Perch Local, National, International Growth, Upgrading Availability of suppliers, customer attraction, specialised service providers Logistics, Learning Government, Cluster/sectoral, External Lake Naivasha Cut Flower International Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Marketing, Learning, Logistics Government, Cluster/sectoral, External Nigeria Otigba Computer Hardware National, Regional, International Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Marketing, Learning, Logistics Cluster/sectoral Nnewi Auto Parts National, Regional Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Logistics Cluster/sectoral, External Mauritius Textile & Clothing International Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Marketing, Learning, Logistics Government, Cluster/sectoral, External South Africa Cape Clothing & Textile National Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Logistics, Learning Government, Cluster/sectoral, External KZN Clothing & Textile National Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Logistics, Learning Government, Cluster/sectoral, External Durban Automotive National, International Growth, Upgrading Labour supply, availability of suppliers, customer attraction, specialised service providers Marketing, Learning, Logistics Government, Cluster/sectoral, External
Table 3.6: Prevalence of external economies Evidence of External Economies Number of Clusters Availability of Labour Supply 18 Availability of Suppliers 23 Customer Attraction 22 Inter-firm specialization 19 2 External Economies 5 3 External Economies 8 All 4 External Economies 12 International experience shows that clusters achieve collective efficiency when members build on these accidental external economies and take deliberate joint action to strengthen cluster performance. Table 3.7 considers three types of joint action – skill development, marketing and logistics – and the extent to which this is associated with cluster dynamism. Approximately 75% of the 16 clusters cooperating in skill development have experienced sustained growth or upgrading, or both. A smaller number of clusters cooperated in either marketing (10 of 25 clusters) or logistics (11 of 25 clusters). Logistics cooperation is particularly closely associated with growth and upgrading, whereas joint marketing does not appear to be as important. The more clusters engaged in different types of joint action simultaneously, the more likely this was associated with cluster dynamism. Once again, causality cannot be imputed from these aggregate data alone. Table 3.7: Cluster dynamism and join action Evidence of Dynamism Number of Clusters Evidence of Collective Activity Growth Upgrading Growth & Upgrading Learning 12 11 10 16 Marketing 8 6 6 10 Logistics 10 10 10 11 1 Collective Activity 0 3 2 5 2 Collective Activities 7 5 5 9 All 3 Collective Activities 5 5 5 5
hoses, exhaust systems, and auto filters. 25% of firms exported their products to foreign markets, almost exclusively to other West African countries. Skill Acquisition/Innovation The transition from trading and marketing imported auto spares to producing them locally was made possible by the extensive experience that Nnewi entrepreneurs had acquired through close familial networks, the transfer of industry skills and knowledge generationally, and the longstanding relationships traders had fostered with their Taiwanese suppliers. Most of the early-entrant entrepreneurs had a very basic level of education and were semi-literate. They gained skills through an informal apprentice system rooted within extended family networks. By 2005, the average education levels of the entrepreneurs had improved markedly - 41% had a high school education, 29% had a technical school education, and 16% had a university degree. However, transfers of knowledge and skills through informal apprenticeships were still a critical source of training and continued to facilitate the accumulation of critical skills within family lineages. The system of knowledge and technological transfers from Taiwanese firms to Nnewe firms was maintained as Nnewe firms continued to upgrade their manufacturing processes. In 2006, 80% of the firms sourced more than 60% of their machinery from foreign suppliers. When firms chose to upgrade their technology, the main motivations were improving old processes, expanding the variety of products, and enlarging production capacity. 60% of firms interviewed chose to invest in process upgrading in order to achieve greater efficiency. While there is little evidence of major innovations in design or productive capacity - Nnewi firms were basically copying tried and true production processes developed in Asia - there is evidence of technological modifications. The modification and improvement of old technology in order to adapt to a Nigerian industrial setting illustrates a capacity for growth and dynamism within the cluster.
Cooperation Company (SICC) in 2000. SICC bought land from the Corporation for Investment (ECCI) and began construction on an industrial park targeted toward small-to-medium Chinese firms. By 2006, construction was complete and Chinese began operation. By 2009, the Industrial Park was full. In response to the FOCAC Summit in 2006, TEDA submitted a proposal to expand the Suez Industrial Park under the new name, Egypt Suez Cooperation Zone (ESCZ), of which TEDA would be the majority shareholder. MOFCOM accepted the proposal, with funding from the Chinese African Development Fund (CADF). The ESCZ strategy focused on the development of four clusters - textiles and garments, petroleum equipment, automotive assembly, and electrical equipment. The zone began operation in 2009 with 19 registered companies and total capital investment of $180 million. The zone produces products for export to Europe, China, and America, as well as producing for the domestic market. Service activities in banking, catering and customs grew in response to increased demand from the manufacturing firms. Although the firms were under Chinese ownership, they almost exclusively employed Egyptian labourers. In 2008, TEDA submitted a tender to develop a Northwest Suez Special Economic Zone (NSSEZ) next to the ESCZ. This was largely prompted by the Egyptian government which incorporated plans to establish a SEZ within Egypt’s larger industrial policy framework. The tender was accepted in 2009 and the NSSEZ is currently under construction. The coordinated effort between China and Egypt to create a successful export-oriented industrial zone is the longest running relationship within China’s current African SEZ programme. It provides two key insights into the nature of establishing a successful SEZ. It takes a long time to reach successful operation of an Industrial Park, Cooperation Zone, Industrial Processing Zone or an SEZ. Chinese
available – ‘just in case’ something went wrong – it was no longer sensible to relegate quality inspection and rectification to the end of the production line. Instead, Toyota adopted a new mentality towards quality which had been developed in the US by Deming (1986) and Juran (1989) – Total Quality Control. This involved embedding a mentality of zero-defects into work organisation, and this required the adoption of in-process quality-at-source procedures. Thus the Toyota model moved away from the principles of mass production (large volumes of standardised products, very large ‘just in case’ inventories and end-of-line quality control) to a new system of flexible production (‘just in time’ small batches of inventories, and quality-at-source). However, at the same time, Toyota’s restructuring of its internal operations occurred in a context in which it, and its fellow Japanese auto firms, sourced much more of its inputs from external suppliers than did their US competitors. Typically a US auto firm was vertically integrated and would produce more than 60% of the value of a car internally. Henry Ford’s River Rouge plant built in 1927 pioneered the principles of mass production and took this internalisation to the extreme. It produced nearly 100% of the value of the car, including the manufacture of its own steel making plant. By contrast, Toyota (and other Japanese producers) bought in more than 60% of the car’s value from suppliers (Hoffman and Kaplinsky, 1988). The confluence of these two developments – the move from mass production to lean production, and the greater reliance on external suppliers – forced Toyota to develop a structured approach towards managing its supply chain. It realised that, unless its suppliers adopted the same just-in-time and processes which it had developed in its own plants, it would not be able to effectively make the transition towards low-cost flexible production. However, it also recognised that its suppliers were not ready themselves to make the transition to the new form of production organisation. Hence, over a period of almost two decades, Toyota established procedures to restructure operations with its supply chain, beginning with its core, first-tier suppliers. But these first tier suppliers were themselves dependent on purchases from second-tier suppliers, who in turn were dependent on third- and fourth-tier
5.4. Recent attempts have been made to measure Africa’s specialisation in different types of GVCs (Lanz 2009; OECD, 2014; Baldwin, 2012b). The measures which have been developed closely proximate the distinction between additive and vertically specialised GVCs discussed above. The first category of VC identified for measurement is termed ‘backward participation’, and refers to exports which draw on imported intermediates; this proximates to the ‘vertical specialisation’ VCs described in the previous section. The second category of VC used to measure export profiles is ‘forward participation’ VCs in which domestically sourced inputs are exported either in raw or semi-processed form and are incorporated as intermediate inputs in ‘backward specialisation’ VCs in other economies; these are the additive VCs described in the previous section. Using input-output and trade data sets, It is estimated that 85% of global GVC trade occurs within three trading regions – East Asia, North America and Europe - and that three quarters of this trade involves the use of imported components in final exports. In other words, most GVC trade is vertically specialised, that is, ‘backward specialisation’. These GVCs are also growing more rapidly than the additive, forward participation GVCs. Between 1995 and 2011, Africa increased its share of global GVC trade, but from a very small base, that is from 1.4% to 2.2% (Baldwin, 2012b). However, the structure of Africa’s insertion into GVCs was very different from the global picture. Most of Africa’s as yet still limited participation in GVCs involves Southern Africa and West Africa (Figure 5.2), and even in the these regions, most of this involves forward participation. In other words, most African trade involves insertion in additive GVCs. Figure 5.2: GVC participation of African regions in 2011 (Southern Africa in lead, Northern/Western Africa driven by forward integration) Source: OECD Africa Economic Outlook, 2014.