African Export-Import Bank
DEVELOPING INDUSTRIAL CLUSTERS AND
SUPPLY CHAINS TO SUPPORT
DIVERSIFICATION AND SUSTAINABLE
DEVELOPMENT OF EXPORTS IN AFRICA
COMPOSITE REPORT
Raphael Kaplinsky and Mike Morris
(R.Kaplinsky@open.ac.uk; mike.morris@uct.ac.za)
October 2014
Not for circulation without author permission
PREFATORY COMMENTS
This Composite Report has been prepared for the African Export-Import Bank with
the aim of assisting African countries to create sustainable industrial diversification,
promote economic development and facilitate exports. It focuses on three key drivers
which can play a meaningful role in achieving these aims. These drivers are the
expansion of industrial clusters, the development of local supply chains, and
beneficial insertion into global value chains.
The Composite Report consists of three self-standing documents of varying length.
These are:

A concise Plan for Action derived from the analysis and policy issues
discussed in the main report, which can be used by policy makers as an
intervention tool.

A Summary Report setting out the structure of the principal argument in the
main report, with reference to evidence where appropriate, which can be used
as a relatively rapid introduction to the issues at stake.

A detailed and substantial Main Report containing analysis, evidence to
substantiate the argument, and consequent policy recommendations, which
can be used by policy makers as the substantial underpinning of their
approach to industrial diversification and export promotion.
These three documents are mutually reinforcing. However they are designed to be
read and used independently, although users will obviously benefit from reading and
digesting all three documents.
2
African Export-Import Bank
Developing Industrial Clusters And Supply Chains
To Support Diversification And Sustainable
Development of Exports in Africa
A PLAN FOR ACTION
Raphael Kaplinsky and Mike Morris
(R.Kaplinsky@open.ac.uk; mike.morris@uct.ac.za)
October 2014
TABLE OF CONTENTS
Introduction .......................................................................................... ………… ........ 1
Supporting the Growth of Exports by Industrial Clusters ................................... ........ 2
Supporting the Growth of Supply Chains ........................................................... ........ 7
Supporting the Growth of Global Value Chains ................................................. Error!
Bookmark not defined.
List of Tables
Table 1: An Action Plan for Autonomously Emerging Clusters ............................................................... 4
Table 2: An Action Plan for Special Economic Zones ............................................................................. 6
Table 3: An Action Plan for Supporting Supply Chain Development .................................................... 10
Table 4: An Action Plan for Supporting Value Chain Development ........ Error! Bookmark not defined.
List of Boxes
Box 1: A Static Survivalist Cluster - The Eastland’s Garment Cluster, Nairobi ....................................... 2
Box 2: A Dynamic Cluster - Otigba Computer Hardware Village (OCV), Lagos ..................................... 3
Box 3: Economic Bottom Line - Supply Chain Development in South Africa .......................................... 8
Box 4: Social Bottom Line – Corporate Social Responsibility (CSR) in Ghana ...................................... 8
Box 5: Environmental Bottom Line – Greening Supply Chains in Ghana ............................................... 9
Box 6: EU and Chinese Buyers’ Requirements....................................... Error! Bookmark not defined.
Box 7: The Apple iPhone 4 Vertically Specialised Value Chain .............. Error! Bookmark not defined.
Box 8: The Cocoa Additive Value Chain ................................................. Error! Bookmark not defined.
ii
INTRODUCTION
This Report addresses three drivers which can facilitate the expansion of Africa’s
exports and which can provide the basis for rapid and sustainable growth. The three
drivers are an expansion of industrial clusters, the consolidation and development of
supply chains, and gainful insertion into Global Value Chains (GVCs). In each of
these areas, the Report considers global developments which Africa can learn from,
documents Africa’s own performance and identifies a series of policy measures
which will allow African economies to take advantage of the opportunities offered by
rapid export growth.
This detailed discussion provides much food for thought for African policymakers in
both the public and private sectors as well as for pan-continental agencies such as
the Export-Import Bank. However, whilst providing a road-map for medium and longterm action, there is a danger that the degree of detail embodied in this Report will
deflect attention from short-term steps which can be taken to set the process of
structural change in motion.
As the Chinese philosopher Laozi observed, even the longest journey begins with the
first step. These “Action Steps” focus on each of the three drivers and in the process
also consider the implications for greater intra-regional trade and sectoral
prioritisation.
1
SUPPORTING THE GROWTH OF EXPORTS BY INDUSTRIAL CLUSTERS
Both global and African experience show that clusters are widely observed as a
natural process, arising from the external economies associated with geographical
clustering. Many clusters in Africa are static and survivalist in nature (see Box 1).
Box 1: A Static Survivalist Cluster - The Eastland’s Garment Cluster, Nairobi
The Eastlands garment manufacturing cluster in Kenya during the 1990s was located in two
market areas around Nairobi. The buildings housing them were not suitable for garment
production due to poor lighting, unstable power supply and lack of business services required
by the cluster. The cluster was mainly made up of small-scale producers that produced
garments for the local market. Collective action and collective efficiency were not strong
features in the Kenya’s garment cluster. Horizontal bilateral linkages (between two like firms)
were mainly limited to the lending and borrowing of basic tools and no horizontal multilateral
linkages (between groups of like firms) existed. Neither cluster had a site association or a
sectoral association. The weak linkages in the cluster did not appear to result in joint action.
The clusters appeared to be characterized by a lack of trust, with producers complaining that
as soon as they came up with a new design their competitors would steal their design.
These two Nairobi garment markets are typical examples of survivalist clusters, serving low
income local markets and generally engaged in “repair” (tailoring) rather than production.
They have suffered as much from external diseconomies (copying of designs) as benefitting
from external economies (proximity of suppliers and retailers). Product development was
limited, cooperation was virtually absent and the clusters struggled to compete with imports,
either of new or second hand clothes. The clusters also failed to form links with the large
exporting firms operating in the export processing zones.
However there is also extensive experience in both global and African economies of
successful and dynamic cluster development (see the example in Box 2). The
dynamic clusters are associated with an extension of their sales from the immediate
locality to national, regional and extra-African markets. They are also characterised
by a range of external economies, particularly with regard to skills, the clustering of
suppliers which provides for specialisation amongst firms, being a magnet for buyers,
developing trust to support collective action and by the capacity to upgrade their
operations. Numerous types of institutional support also accompany dynamic cluster
development. A major obstacle to cluster development is poor infrastructure,
particularly transport, water, power and secure accommodation.
2
Box 2: A Dynamic Cluster - Otigba Computer Hardware Village (OCV), Lagos
The OCV began in the early 1990s with a few firms concentrated on two streets, specialising in
computer, printer, and office equipment sales and repair. The initial activities - computer cloning,
assembly, and repair - were low risk activities. The formation of the cluster was made possible due
to the convergence of two simultaneously occurring phenomena: the growth in demand for
computer technology in Nigeria and neighbouring countries, and the high unemployment rates for
college graduates with degrees in computer science, computer engineering, and business
administration. The cluster benefits from the high demand of low priced, cloned computers systems.
This demand pattern was also evidenced in other ECOWAS countries, providing the scope for
export expansion and the solidification of OCV as a hub for low price computer systems tailored to
the regional market. By 2005, the cluster had significantly upgraded its assembly, trade, and
production activities, consisting of over 2,000 self-starting, self-sustaining enterprises, directly
employing approximately 15,000-20,000 people, with additional indirect employment numbered in
the thousands. Profitability grew from 39.5% in 1999 to 44.4% in 2004, while exports grew from
24.5% to 39% of sales.
External Economies and Specialisation
The cluster attracted new entrants, as well as buyers and traders from other West African countries,
facilitating the transfer of knowledge across borders. Cooperation amongst cluster firms resulted in
both intra, and inter, firm learning. The wide variety of components and services enabled easy
sourcing for assembly, cloning, and repair, and created a highly competitive environment. Firms
have moved onto higher-value added activities (locally branded computer or component production)
through mastering new capabilities - standardisation, design, marketing, and quality control. Skills
have been enhanced through the extensive use of apprenticeship programmes.
Horizontal and Vertical Linkages
There has been continual growth in the level of cooperation between firms with evidence of
substantial horizontal linkages. This is exhibited in increased use of industrial associations (for
information exchange, training, quality regulations, and joint marketing schemes), inter-firm credit
facilities to allow mutual supply of stock, joint sourcing and warehousing, marketing of technical
support and consultation both within and outside the cluster. Vertical linkages have taken the form
of establishing locally branded IT companies (Omtek and Zinox Computers) tailored to the local
environment, as well as increasing collaboration within the cluster between input suppliers and
assemblers/producers. Relationships with foreign firms in China, Malaysia, and Dubai have
increased the scale of information and technology transfer, improving quality and prospects for
innovative activity.
The main challenge facing the OCV is the absence of national government support through a
cluster support programme.
3
For the purposes of developing a policy informed action plan (Table 1 and 2) to
facilitate dynamic cluster activity, two types of clusters can be identified:
1. Clusters emerging “naturally” through autonomous spontaneous processes.
2. Clusters established ab initio as a result of policy interventions - e.g. Chinese
Special Economic Zones (SEZs), many of which are in a nascent form. There
are two types of Chinese zones – those supported directly through aid
packages from the Chinese government, and those involving private sector
firms. Thus far both almost entirely consist of Chinese firms.
Table 1: An Action Plan for Autonomously Emerging Clusters
Policy Directive
Establish a
cluster
development
unit
Generate an
inventory of
clusters
Identify
possible
sectors for
cluster
specialisation
Rationale
Cluster development will
require specialised support
programmes and the
political will to resist
pressure exerted by special
interest groups.
Autonomously developing
clusters are often “below
the radar”. They involve
both formal and informal
sector enterprises involved
in productive sector activity,
and extend beyond a
narrow focus on the
manufacturing sector.
Government should
consider the potential
comparative advantage of
those sectors involving
clusters in relation to the
economy’s endowments
Key Implementation Activity
 Establish a dedicated cluster support
programme with a mandate across all
sectors.
 Provide the programme with its own budget
to give it influence in establishing
collaboration with individual line ministries.
 The institutional location in government of
the unit and programme should be
determined by particular country
circumstances.
 Create an inventory of all productive sector
clusters so that government and the private
sector has a data base to inform its actions.
 Ensure it covers clusters both within sectors
as well as crossing between sectors so that
cooperation between sector associations
and sector directorates can be enlisted.
 Include dynamic and survivalist clusters.

Low and middle income economies will have
greater potential in labour intensive apparel,
footwear, furniture and tourist sectors.

Resource-endowed economies in agroprocessing, timber and leather sectors.

Middle income economies with more
developed industrial sectors may want to
prioritise machinery, assembly and producer
services sectors.
4
Policy Directive
Strategically
focus on
dynamic
clusters
Assist dynamic
clusters find
appropriate
end markets
Prioritise
clusters for
action
Rationale
Key Implementation Activity
Not all clusters are dynamic
in nature, and the evidence
suggests static clusters
either are survivalist or
‘die’.
 Direct scarce resources to dynamic clusters.
Dynamic clusters are
associated with end
markets which help firms
upgrade and grow. Selling
into national markets is
better than local markets,
but exporting to regional
markets helps firms learn
as a step to penetrating
global export markets.
 Focus on dynamic clusters in exporting to
global and regional markets.
 Focus resources on upgrading firms within
dynamic clusters, in particular on skills
development and logistics.
 Support clusters selling into regional and
global value chains to upgrade their firm
competitiveness.
 Direct policy support at dynamic clusters as
well as those which serve wider markets.
There is no scientific
method for determining
which clusters are most
suitable for policy
prioritisation.
 Take account of the nature of entry barriers
or preferential entry incentives in external
markets.
 Accept there are limits to the number of
clusters receiving support.
 Base prioritisation on the existing institutional
capacity to provide appropriate support.
 Resist pressures to support clusters exerted
by regional and industry lobbies since not all
clusters can be supported.
Identify key
external
economies and
infrastructure
bottlenecks
Typically, autonomously
developing clusters will
benefit from a range of
external economies which
explain their dynamism.
Identify the
constraints to
collective
action and act
on them
Clusters are strengthened
when their firms engage in
joint collective action (e.g.
purchasing and marketing).
These require developing
close trust relations
between cluster members.
 External economies supporting the cluster
development will require specialised support,
such as in the deepening of skills and better
links to external markets.
 By their nature, these clusters will also face
infrastructural constraints, such as with
regard to power, water and accommodation.
 These collective actions often require
external institutional support from both the
public and private sector to ensure they are
successful.
 Be aware that the dynamism of clusters may
also be inhibited by institutions which,
however well-meaning, act to limit beneficial
collective action.
5
Policy Directive
Strengthen key
external
economies to
overcome
infrastructure
constraints
and promote
trust and
collective
action
Actions are
dynamic and
time-limited
Rationale
Key Implementation Activity
 There is no template which governments and
other actors can use and apply across all
sectors, all economies and over time.
Discrete, decisive, well
proportioned, transparent,
actions are required to
address these issues.
 Attune actions appropriately to the context of
cluster development.
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.
 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.
 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.
6
SUPPORTING THE GROWTH OF SUPPLY CHAINS
It is abundantly clear from both global and African experience that successful
insertion into the global economy requires an efficient system of firms and supporting
institutions. Hence the widespread recognition that supply chain linkages are critical
to export competitiveness. A supply chain focus also serves development objectives
since they determine what sorts of producers (for example, small or large) are
incorporated in the chain, what impacts production has on the environment, and how
widely the benefits of production are spread.
A critical development in contemporary corporate strategy is that lead firms are
increasingly anxious to outsource activities in which they do not possess a distinctive
core competence. However, to maintain their own competitiveness they require their
supply chains to be efficient. Pressure from buyers and civil society organisations
also requires lead firms ensuring their chains meet the standards demanded in final
markets. This generally involves a “chain of custody” as raw materials and
intermediates move along the chain. Here, again, the lead firms require reliable
supply chains. Lead firms therefore have a vested interest in supply chain
development, providing much scope for win-win collaboration with policymakers and
suppliers.
By their nature, supply chains are derived from the operations of lead firms and this
provides a natural focal point for achieving what has come to be called “Triple Bottom
Line” development. This consists of:

Promoting systemic competitiveness for economic gain (“the economic bottom
line”).

Underwriting the social licence to operate (the “social bottom line”).

Reinforcing greening activities (the “environmental bottom line”).
An African example of each form of these supply chains (“economic”, “social”, and
“environmental”) is shown in Boxes 3, 4, and 5 respectively.
7
Box 3: Economic Bottom Line - Supply Chain Development in South Africa
In 1998 the local component suppliers were faced with the need to rapidly become
internationally competitive. Utilising a government matching grant support scheme to provide
65% funding, a learning network was established by a local business services firm to assist
local component suppliers to benchmark themselves and upgrade their capabilities against
international standards. By the early 2000s this network had matured into a national
organisation – the South African Automotive Benchmarking Club (SAABC) – with membership
from most of the major lead assembler firms and a substantial sample of their component
suppliers. Central to the SAABC was a benchmarking model of key competitiveness drivers
derived from the lead assemblers technical standards within the automotive industry. These
centred on measuring supplier firm performance in terms of cost control, quality, lead times,
operational flexibility, human resources and innovation capacity. The lead assemblers regarded
the Club’s activities as raising the performance levels of their suppliers and as a general form
of supply chain development. This was born out by the substantial improvement in
performance standards between 19989 and 2014. Supplier firms also substantially improved
their performance compared to internationally benchmarked standards, and in many instances
they were approaching the international frontier. Eventually the SAABC ceased to depend on
government funding and became financially self sustaining.
Box 4: Social Bottom Line – Corporate Social Responsibility (CSR) in Ghana
In 2002, the Ghana Mining Commission required all mining corporations to incorporate a
sustainable community development programme within their CSR models. Newmont Ghana
Gold designed its CSR programme to proactively challenge the assumption that mining in
Africa was an inherently enclave activity. Their strategy was implemented through publicprivate partnerships with local government institutions and NGOs. The programmes included
projects to establish community forums, write individual community responsibility agreements,
promote agro-processing subsectors, and upgrade health facilities. The most significant project
- the 2006 Ahafo Linkages Programme, in partnership with the International Finance
Corporation - was a three year plan to increase local content in the Newmont supply chain.
Beginning from a low base, the number of local content transactions was increased by 395%,
and the number of local SMMEs involved by 400%. Twenty two SMMEs were taken through a
managerial mentoring programme, and 282 new jobs (of which 181 were skilled jobs) were
created. The value of contracts in the CSR programme grew from $1.7m to $4.7m. Moreover
the programme was designed to generate backward supply chain linkages into the local
economy. In Ahafo, there are roughly 300 enterprises registered under the mining sector. Local
companies, mostly SMMEs, play a large role in the provision of goods and services to the 3 rd
and 4th tiers of the supply chain.
8
Box 5: Environmental Bottom Line – Greening Supply Chains in Ghana
In response to the public criticism and pressure from shareholders to become more
environmentally friendly, both Travis Perkins (Britain’s number one supplier of building and
construction materials) and one of its biggest suppliers (Timbnet Silverman) began seeking
solutions to green their supply chain. They jointly pressured Samartex Timber and Plywood, a
company with a long history in the Ghanaian timber industry, to undergo a transformation of
their timber sourcing practices in Ghana in return for an increase in the price and quantity of
wood demanded by Timbnet Silverman. In 2004, Samartex signed an agreement with the
World Wildlife Fund (WWF) to become the first certified sustainable timber supplier under the
Global Forest and Trade Network (GFTN). Since Samartex’s successful certification, eight
other timber suppliers in Ghana have undergone audits for certification. GFTN, with the help of
USAID and the UK DfID, coordinated and funded technical assistance and expertise required
for the greening of Samartex’s supply network. Samartex greatly reduced the amount of
damage caused by poor timber felling and hauling practices, and provided new roads and
hauling equipment to reduce the environmental impact of transporting timber. In addition, the
company developed CSR agreements and established a joint forum with local communities
intended to give rise to sustainable development solutions as well as educate the locals about
sustainable forestry practices.
The fact that supply chains are driven by lead firms provides a clear and identifiable
lever for government policy. But whilst the role of these lead firms is critical in supply
chain development (involving a “top-down approach” to systemic competitiveness),
there is simultaneously also an important role for governments and other agencies
working directly with suppliers (a “bottom-up” approach) to improve supplier
efficiency. This distinction between top-down and bottom-up supply chain
development provides an important architecture for a supply chain development
action plan (Table 3).
9
Table 3: An Action Plan for Supporting Supply Chain Development
Policy Directive
Identify and
engage with
key lead firms
Assist firms in
assembling a
consortium of
firms in their
supply chains
Promoting
bottom-up
supply chain
efficiency
Certification to
meet the social
and
environment
bottom line
Rationale
Key Implementation Activity
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.
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.
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
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.
 Governments should pressure lead firms
who are reluctant to promote supply chain
development programmes.
 This may involve government agencies, and
institutions in the National System of
Innovation (such as research centres and
universities).

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 term sustainability support
financing should be time-bound to create a
market-driven bottom-up supply chain
development programme.
 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.
10
SUPPORTING THE GROWTH OF GLOBAL VALUE CHAINS
Global Value Chains (GVCs) are the mechanism through which supply chains enter
external markets. Increasingly, exports are not marketed as arms-length and
impersonal sales, but involve close links between producers in the exporting country
and buyers in the importing country. The nature of these exchange relationships
affects key economic variables which determine the nature, rate and consequences
of export growth as well as the capacity of firms in the supply chain to upgrade their
operations in a manner which delivers sustainable growth. In turn, the relationships
between producers and buyers will largely be determined by the character of the
markets in which exports are sold. For example, northern markets are generally very
standards-intensive posing demands on supply chain performance, whereas regional
and southern markets generally tend to be less demanding (See Box 6)
Box 6: EU and Chinese Buyers’ Requirements
Predominantly driven by environmental concerns, and driven by both northern governments
and northern civil society organisations, buyers in Europe have increasingly demanded that
African timber producers meet a series of environmental standards. On the other hand, civil
society organisations in China, as well as the Chinese government have been less
demanding with regard to such standards in their sourcing patterns.
EU and Chinese (CN) Buyers’ Requirements
International Regulations and Standards
(1 = not important; 5 = very important)
EU
Formaldehyde emissions
5
CN
ISO standards
4
3
Phytosanitary
requirements
2
1
GPP
0
Sustainability certification
requirements
Product testing
requirements
Building codes
Legality certification
requirements
11
In resource intensive and low income economies (both attributes are common to
African economies) there is also a significant difference in value chains which affects
exports, patterns of economic diversification, and policy processes. The key
distinction here is between chains which involve ‘vertical specialisation’ and those
which are essentially ‘additive” in nature.
Vertically specialised value chains involve the fragmentation and slicing up of
production into a myriad of sub-processes which can be undertaken in parallel. Since
there is little processing loss in production and no degradation of inputs, there is no
intrinsic need for the various stages to be geographically co-located and they lend
themselves ideally to global dispersion. The more complex and extended the chain –
that is, the greater the number of stages in value addition - the more likely it will be
vertically specialised. In general this occurs in the manufacturing sector where final
products are assembled using a variety of components. The example of the Apple
iPhone 4 reflects a production chain in which parts are sourced from all over the
world, are assembled under Apple’s design in China and then branded and marketed
in the US and other final markets (See Box 7).
Additive value chains involve a process of sequentially adding value to each stage of
the chain, rather than in parallel. Additive GVCs tend to characterise the resource
sector where the primary input into the final conversion process makes up a large
proportion of total value of the final product, where the primary input may be varied
as a result of the specific characteristics of the resource, and where processing
losses may form an important component of overall product value. A typical example
of an additive chain is the production and processing of cocoa into chocolate (See
Box 8). This involves a series of sequential stages, which are difficult to execute in
parallel.
Thus whilst a supply chain policy programme engages with lead firms in the African
exporting economy, a policy promoting GVCs engages with lead firms and buyers in
external economies, as well as with lead firms in the regional and domestic economy.
Such policies will vary depending on the different standards being required, as well
as whether they are directed at vertically specialised or additive value chains. These
are reflected in the Action Plan for Supporting Value Chain Development (Table 4).
12
Box 7: The Apple iPhone 4 Vertically Specialised Value Chain
Box 8: The Cocoa Additive Value Chain
13
Table 4: An Action Plan for Supporting Value Chain Development
Policy Directive
Rationale
Assess the
market
potential in key
export sectors,
particularly in
regional
markets
This is a routine function of
government and quasigovernment agencies in
most African economies.
For historical reasons most
African economies trade
links are focused on
northern markets.
 Markets should be identified in key export
sectors.
Different export markets
will have different
characteristics with respect
to quality, price and
standards.
 Government can assist local producers
seeking to export, especially small and
medium sized firms, to search and analyse
these market characteristics.
Help exporters
to assess the
character of
demand in
different
markets
Meeting
standards
required in
different export
markets
Assisting small
producers to
meet GVC
standards
Lead firms ensure
standards compliance (for
example with regard to ISO
standards) by utilising
externally based
independent business
services providers to
monitor local producers.
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.
Key Implementation Activity
 Switch some of the market-intelligence
towards regional African markets and
markets in other emerging economies.
 Regional African markets are likely to have
less demanding standards than northern
markets, and determining this should be a
component of market intelligence activities.

Develop locally based independent business
service providers

Provide some form of temporary incentive or
direct support to local business service
providers, depending on the sector and the
level of economic diversification in the
exporting economy.
 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.
14
Policy Directive
Focus on
policies
specific to
positioning in
vertically
specialised
value chains
Focus on
policies
specific to
strengthening
additive value
chains
Rationale
Key Implementation Activity
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.
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.
 Assist firms with upgrading activities to
develop firm level knowledge based
capabilities in manufacturing and services.
 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.
15
African Export-Import Bank
How Can Africa Develop Industrial Clusters and
Supply Chains to Support Diversification and
Sustainable Development of Exports1
SUMMARY REPORT
Raphael Kaplinsky and Mike Morris
(R.Kaplinsky@open.ac.uk; mike.morris@uct.ac.za)
October 2014
This is a summary of the Main Report for the Afreximbank – Kaplinsky, R. and M. Morris,
(October 2014), Developing Industrial clusters and supply chains to support diversification
and sustainable development of exports in Africa.
1
TABLE OF CONTENTS
Globalisation and participation in global markets ............................................. 1
Africa’s participation in global markets ............................................................. 2
Africa’s experience with industrial clusters ....................................................... 4
Building supply chains in Africa...................................................................... 11
Global value chain dynamics as exporters enter global markets ................... 19
African examples of different types of value chain upgrading ........................ 21
Conclusion ..................................................................................................... 29
List of Tables and Figures
Table 1: Africa’s Experience with 25 Clusters ........................................................................... 6
Table 2: China’s Official Planned African SEZs ...................................................................... 10
Table 3: Competitiveness improvements of South African auto components cluster ............. 13
Figure 1: The destination of Africa’s exports (2000-2012) ........................................................ 3
ii
GLOBALISATION AND PARTICIPATION IN GLOBAL MARKETS
Productivity growth and economic diversification are the source of long term
economic development. They are aided by specialisation and the reaping of
scale economies. In turn, specialisation and scale economies are bounded by
the extent of the market. Export expansion offers the possibility of supporting
sustained economic and employment growth by aiding the reaping of scale
economies, the development of specialised capabilities and the learning
required to build dynamic capabilities. Hence by offering access to unlimited
markets, globalisation provides the opportunities for producers, especially in
relatively small and undifferentiated African economies, to enter a trajectory of
profitability, upgrading and productivity growth.
However, participating in global markets does not necessarily provide these
benefits. These depend on how producers enter global markets – which
markets they participate in and what role they play in a global division of
labour. Unless the exporting firms and economies add value in production –
and in an increasingly competitive economy this requires the development of
dynamic capabilities – it will always be subject to the erosion of benefits and
to the dangers of immiserising growth (that is, increasing economic activity
with reducing incomes).
Beneficial insertion into global markets needs to be guided both by an
economy’s resource endowments and by the character of the global markets.
It is thus both a function of supply and demand.
On the supply side firms that cluster in close proximity benefit from external
economies and often cooperate with each other to develop systemic
efficiency. In many cases clusters play leading roles in global export markets.
Clustering is particularly beneficial for SMEs, whose problems are not so
much that they are small, but that they are isolated. Supply capabilities in
competitive markets also necessarily have to ensure that competitiveness and
dynamism are embedded throughout the supply chain rather than in individual
1
firms. International experience shows that dynamic supply capabilities are
enhanced by the development of clusters and supply chain upgrading.
But on their own supply capabilities do not guarantee beneficial insertion in,
and reward from, global markets. This is why the demand side, meeting the
requirements and adjusting to the driving force of global markets, is so
important. This requires being inserted into global value chains (GVC) in a
manner which ensures firm profitability, operational upgrading, and the
building of dynamic capabilities in order to compete sustainably in a rapidly
changing global economy.
AFRICA’S PARTICIPATION IN GLOBAL MARKETS
The 1980s were a period of economic stagnation – and in many cases
economic reversal – in Africa. The growth rate remained low during the
1990s, but since 2000 Africa has become one of the most rapidly growing
regions in the global economy, growing at a compound rate of 5.3% p.a. It is
not surprising that phrases such as “Africa Rising” and “the African lion” have
gained widespread currency.
Africa’s current economic growth is impressive but it is built on weak
foundations, and its share of global GDP and global trade (2.7% and 3.7%
respectively in 2012) is small. Africa’s share of global manufactures trade
(0.9% in 2012) is not just particularly low but has barely changed since 2000.
These proportions contrast sharply with Africa’s existing share of global
population (15.5% in 2013) and particularly with its projected share of global
population in 2030 (19.2%). These low trade shares provide plenty of potential
to increase exports and for Africa to benefit from the scale economies and
learning arising from successful participation in global markets.
Despite its growing share of global exports, increasingly concentrated in the
resource sector, Africa’s net export performance has deteriorated. Imports
have grown more rapidly than exports, so that the continent’s net export
performance is less impressive than its gross export performance. Africa’s
current account trade balance expanded from a deficit of 2% of GDP in 2001
2
to 7% in 2013, despite the surge in commodity exports and the boom in
commodity prices. This arises from the pattern of Africa’s external trade, both
in terms of structure of exports and export destinations. Between 2000 and
2010, energy and hard commodities export shares increased from 50% to
58% and from 8% to 10% respectively, while the share of manufactures
decreased from 24% to 19%. Simultaneously there was a remarkable shift in
the destination of Arica’s exports - between 2000 and 2012 the share of
African exports directed to China jumped from 4% to 18%, whilst the share of
exports to the EU and US dropped substantially from 47% to 37% and 19% to
11% respectively (Figure 1).
Figure 1: The destination of Africa’s exports (2000-2012)
Source: UN Trade Statistics, accessed through WITS <http://wits.worldbank.org>,
accessed on 26th January 2014
Arica’s performance since 2000 must be set in the context of key
developments in the global economy. Four changes are especially relevant to
Africa’s future trade prospects – trade preferences; the shift in global growth
poles to Asia (China and India); the changing demand structure in low and
middle income export markets; and the sustained strength of commodity
prices.
In the context of its resource endowments these changes impact on Africa’s
ability to support export development in the future. Africa’s low share of global
trade provides the potential for substantial export growth, particularly to
rapidly growing low and middle income economies such as China and India.
3
These varied export opportunities arise in a context of attractive trade
preferences offered to Africa in the US, the EU and China.
Africa’s largely untapped resource endowment provides the scope for
economic diversification and export growth through the development of
linkages into and out of the resource sector. But without economic
diversification and the development of dynamic capabilities, export expansion
in itself is unlikely to generate sustained economic growth. Moreover, even
where resource rents are significant, it will be difficult to sustain these rents in
a world of intense global competition without process and product innovation.
Economic diversification is of considerable policy significance since over the
past decade Africa has “retreated” into a more intense structure of resource
dependence. Although resource dependence is less problematic than in
previous decades (since resource prices are likely to be robust in the midterm), commodity prices are volatile and this creates problems for
macroeconomic management. Moreover, mining/metals and oil/gas tend to be
very capital intensive sectors and without economic diversification the benefits
of resource abundance do not spread widely through the economy.
Economic diversification through export growth simultaneously provides a
major opportunity and a challenge for African economies. To be successful it
requires not just the ability to enhance production capabilities (including
through exploiting the benefits of cluster dynamics and supply chain linkages),
but also to insert appropriately in global value chains and global markets.
AFRICA’S EXPERIENCE WITH INDUSTRIAL CLUSTERS
International experience shows that industrial clusters have often played a
prominent role in global markets. In many cases they involve a range of firm
sizes, including SMEs. These clusters are evidenced in both high income and
low income economies. They arise because of the existence of external
economies – for example, skill development, labour spillovers, proximity of
buyers and sellers and the development of specialised service provides.
When firms in a cluster join together to achieve common ends, they benefit
4
from what has come to be called “collective efficiency”. This has proven to be
especially valuable for SMEs whose problems are not just that they are small,
but that they are isolated.
Industrial clusters also play a very prominent role in low and middle income
developing economies. Unlike clusters in the developed economies, these
developing country clusters are often “survivalist” showing little sign of
dynamism. On the other hand, there are many examples of successful and
dynamic exporting industrial clusters in developing economies.
Industrial clusters are widely observed throughout Africa, but are poorly
analysed and documented. A review of 25 African clusters addressed the
association between cluster dynamism and cluster characteristics (Table 1).
This showed that those selling into export markets tend to be more dynamic
and to be more deeply involved in upgrading. Moreover a number of detailed
case-studies of clusters in Egypt, Nigeria, Kenya and South Africa,
documented in the main report and spanning the furniture, metalworking,
clothing and auto repair sectors shows how varied cluster dynamics are2. It is
important to understand these dynamics if policy is to be effectively tailored to
support gainful participation in global markets.
Examples of “survivalist” clusters in Africa are numerous. These are clusters
that benefit from some external economies due to the benefits of proximity,
but have failed to capitalise on those benefits to improve firm performance or
move to higher value added activities.
For example, firms serving the
domestic market in the Domiatt Furniture Cluster in Egypt benefit from the
concentration of labour supply, the close proximity of suppliers and
specialised service providers, and the ability to draw customers to the cluster.
However these artisan workshops have failed to move into higher value
added activities because they are trapped by an informal credit scheme that
limits choices of workshop owners with regard to both raw material supply and
product differentiation. In this case, lack of institutional support, in the form of
2
See Section 3.6 in main report for detailed discussion of the various case studies discussing
examples of these different kinds of African clusters.
5
increased access for SMMEs to formal credit markets, has prevented the
cluster from moving into higher value added products for new end markets.
There are also a number of dynamic clusters in African economies, and these
are documented in the main report through various case studies. A good
example is the Domiatt cluster serving the export market. This has
demonstrated great evidence of dynamism, with exports growing from $30
million in 2002 to $300 million in 2009. Cluster firms selling to high-end
markets in America and Europe have benefited from a close relationship with
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 5: Africa’s Experience with 25 Clusters
Cluster
End Market
Domiatt
Local,
Furniture
National
Evidence of
Dynamism
None
Egypt
International
Ethiopia
External
Labour supply, availability of
Marketing
suppliers, customer attraction,
Learning
specialised service providers
Logistics
Merkato
Local,
Labour supply, availability of
Logistics
Leather
National
None
Shiro Meda
Local,
None
Handloom
National
Suame
Local
Upgrading
Suame
Local,
None
Vehicle
Regional
Government,
suppliers, customer attraction,
Cluster/sectoral,
specialised service providers
External
Labour supply, availability of
None
External
None
Government
Learning
Government,
suppliers, customer attraction
Metalwork
Ghana
Cluster/sectoral
Upgrading
Footwear
Kenya
Support
None
Growth,
(Export)
Labour supply, availability of
suppliers, customer attraction
Repair
Furniture
Institutional
specialised service providers
Furniture
Gikomba
Labour supply, availability of
Action
Forms of
suppliers, customer attraction,
(Domestic)
Domiatt
External Economies
Collective
Local
None
Availability of suppliers,
customer attraction,
Cluster/sectoral,
specialised service providers
External
Labour supply, availability of
None
None
suppliers, specialised service
providers
6
Ngong
Local
Growth
Furniture
Kibuye
Labour supply, availability of
None
None
Logistics
Cluster/sectoral
None
None
Availability of suppliers,
Marketing
Government,
customer attraction
, Learning
Cluster/sectoral
Availability of suppliers,
Learning
Cluster/sectoral,
suppliers
Local
None
Furniture
Labour supply, availability of
suppliers, specialised service
providers
Eastland
Local
None
Garment
Labour supply, availability of
suppliers, customer attraction,
specialised service providers
Kamukunji
Local
None
Metalwork
Ziwani
Local
Upgrading
Vehicle
customer attraction
Lake
Local,
Growth,
Availability of suppliers,
Logistics,
Government,
Victoria
National,
Upgrading
customer attraction,
Learning
Cluster/sectoral,
Nile Perch
International
Lake
International
Naivasha
specialised service providers
Labour supply, availability of
Marketing
Government,
Upgrading
suppliers, customer attraction,
Learning
Cluster/sectoral,
specialised service providers
Logistics
External
Cluster/sectoral
Nigeria
Otigba
National,
Growth,
Labour supply, availability of
Marketing
Computer
Regional,
Upgrading
suppliers, customer attraction,
Learning
Hardware
International
specialised service providers
Logistics
Nnewi
National,
Growth,
Labour supply, availability of
Logistics
Auto Parts
Regional
Upgrading
suppliers, customer attraction,
Cluster/sectoral,
External
specialised service providers
Textile &
Mauritius
External
Growth,
Cut Flower
International
Clothing
Cape
National
Clothing &
Growth,
Labour supply, availability of
Marketing
Government,
Upgrading
suppliers, customer attraction,
Learning
Cluster/sectoral,
specialised service providers
Logistics
External
Growth,
Labour supply, availability of
Logistics
Government,
Upgrading
suppliers, customer attraction,
Learning
Cluster/sectoral,
Textile
KZN
specialised service providers
National
Clothing &
External
Growth,
Labour supply, availability of
Logistics
Government,
Upgrading
suppliers, customer attraction,
Learning
Cluster/sectoral,
Textile
South Africa
External
specialised service providers
External
Durban
National,
Growth,
Labour supply, availability of
Marketing
Government,
Automotive
International
Upgrading
suppliers, customer attraction,
Learning
Cluster/sectoral,
specialised service providers
Logistics
External
South
Local,
Growth,
Labour supply, availability of
Marketing
Government,
African
National,
Upgrading
suppliers, customer attraction
Learning
External
Wine
International
Mwenge
Local,
Growth
customer attraction,
Learning
Government,
Handcrafts
National,
specialised service providers
Marketing
Cluster/sectoral
customer attraction,
Learning
Government,
specialised service providers
Marketing
Cluster/sectoral
Tanzania
Regional
Gerezani
Local,
Metalworks
National
None
7
Keko
Local,
Furniture
Regional
Growth
Labour supply, availability of
Learning
suppliers, customer attraction,
Marketing
Cluster/sectoral
Uganda
specialised service providers
Fish
Local,
Growth,
Availability of suppliers,
Logistics
Government,
Processing
National,
Upgrading
customer attraction,
Learning
Cluster/sectoral,
International
specialised service providers
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
seven clusters selling into the immediate vicinity show the least signs of
growth and upgrading – they are predominantly survivalist clusters.
All of the clusters benefited from external economies. Half of them gained
from all four types of recorded externalities – skill spillovers, proximity of
suppliers, proximity of customers and inter-firm specialisation. A third
benefitted from three externalities, and one-fifth from two externalities.
Joint action between firms was widely observed and closely associated with
cluster dynamism. The most prevalent form of joint action was in skill
development, followed by cooperation in marketing and logistics. The more
clusters engaged in different types of joint action simultaneously, the more
likely this was associated with cluster dynamism.
The impetus for joint action is often a lack of public service provision by the
national or local government. For example, the Nnewi Auto Parts Cluster in
Nigeria developed along familial and tribal lines in order to minimise
production costs. Extended family networks play a critical role in skills
development through apprenticeship programmes. They also served as the
basis for investment in joint infrastructure projects - for example, digging
boreholes, road construction and electricity generation - in order to share the
cost burden of providing services that arguably should have been provided by
the state.
8
Twenty two of the twenty five clusters were supported by institutions. The
most dominant type of institution involved the participation of multiple parties –
government, the private sector and foreign aid agencies and NGOs. The most
helpful form of institutional support seems to emanate from sector-specific
private institutions that formed in response to the needs of the cluster. These
institutions are often formed in response to poor institutional support from
government.
The Otigba Computer Hardware Village in Nigeria has benefitted from its
increasing use of industrial associations, utilised as mediums for information
exchange, training, quality regulations, and joint marketing schemes. The
Computer and
Allied
Products Dealers Association (CAPDAN) was
established in 2003 with the initial objective of addressing security and
infrastructural needs within the cluster. Since establishment the association
has registered all of the cluster enterprises, worked with local police to install
security cameras and security guards within the cluster, organised land
allocation and factory construction to accommodate the growing clusters
infrastructural needs, initiated a dialogue with Microsoft to get a reduction in
the cost of software for cluster enterprises.
In recent years, Chinese state-sponsored, but privately-run, Special Economic
Zones have been established in six Africa economies (Table 2). In principle
they represent a new approach to a perennial problem in industrial and cluster
development in Africa. But whilst the Egyptian and Mauritian SEZs appear to
have some dynamism, this does not appear to be the case in the other five
economies. Most of these SEZs are in their infancy and it is too early to judge
their likely future impact on growth, exports and employment.
9
Table 6: China’s Official Planned African SEZs
Country
Planning
Initiated
Status as of
late 2010
Developers
Planned Industry Focus
Zambia
Chambishi
2003
In operation/
under
construction
China Nonferrous Mining Group
Copper and Cobalt processing
Egypt
Suez
1994
In operation/
under
construction
Tianjin TEDA, China-African
Development Fund, Egypt-China
Corporation for Investment, Tainjin
Suez International Cooperation Co.
Textiles & garments, petroleum
equipment, automobile
assembly, electronics assembly
Nigeria
Lekki
2003
Under
construction
Transport equipment, textile &
light industries, home
appliances, telecommunications.
Possible oil refinery.
Nigeria
Ogun
2004
Under
construction
China Civil Engineering
Construction, Jiangning
Development Corp, Nanjing
Beyond, China Railway, Lekki
Worldwide Investments Ltd
Guangdong Xinguang, South China
Development Group, Ogun State
Government
Mauritius
Jinfei
2006-07
Under
construction
Shanxi-Tianli Group, Shanxi
Coking Coal Group, Taiyuan Iron &
Steel Co
Ethiopia
Oriental
2006-07
Under
construction
Algeria
Jiangling
2006-07
Approved but
suspended
Yonggang, Qiyuan Group,
Jianglian Int’l Trade, Yangyan
Asset management &
Zhangjiagang Free Trade Zone
Jiangling Automobile,
Zhongding International
Ceramics, ironware, furniture,
lighting wood processing,
medicine, computers,
construction materials
Services (tourism, finance,
education) Manufacturing
(textile, garment, machinery,
hi-tech), trade,
Electric machinery, steel &
metallurgy, construction
materials
Automobile assembly,
construction materials
The Suez SEZ is the furthest along in its construction phase due to the long
history of private Chinese participation in industrial zones and free economic
zones in Egypt. Planning for the SEZ began in 1994 when the Egyptian
government sought to copy the successful Chinese SEZ strategy. The
Northwest Suez Economic Area established in the early 2000s was a failure
due to its reliance on Egyptian partners for implementation - the project was
mired by lack of capacity and corruption. Tianjin Economic-Technological
Development Area (TEDA) Investment Holding Company learned from the
previous failure, developing a Suez Industrial Park without the support of
Egyptian investment. The park was successful, leading to an expansion of the
park which incorporates four export-oriented clusters - textiles and garments,
petroleum equipment, automotive assembly, and electrical equipment. A
second round of expansion was proposed by TEDA and accepted under the
current official Chinese SEZ programme in Africa. The progress of the Suez
SEZ, which began construction in 2009, demonstrates the long gestation
period necessary for SEZ success stories in an African context and the
necessary role that African national governments must play in the process. It
10
took many years for Chinese investors to get it right in Egypt and the
persistence of Chinese investors was encouraged by the Egyptian
government and guided by specific national policy goals.
BUILDING SUPPLY CHAINS IN AFRICA
From the 1950s there has been an increasing recognition in business strategy
that a chain is only as strong as its weakest link, that is, that islands of
competitiveness find it difficult to compete if they are located in a sea of
inefficiency. The translation of this abstract recognition into the everyday
practices of firms in their supply chains can be traced back to the Toyota
Motor Corporation which, after the 1960s, saw the first systematic, sustained
and large scale implementation of Supply Chain Management (SCM)
practices. It realised that, unless its suppliers adopted the same just-in-time
and quality-at-source 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. These were built on three
principles - contractual and competence trust, shifting from the anonymity of
arms-length relations to enduring and often “personalised” relations with
suppliers and introducing a series of key performance indicators which
suppliers had to meet. Toyota’s successful implementation of SCM through all
tiers of its extended supply chain provided it with major competitive benefits
and has served as a role model for virtually all global TNCs and other larger
northern firms.
The key components of modern supply chain management are: Mastering the
internal supply chain; targeting value chain efficiency; rationalising the vendor
base; communication of new requirements to vendors; monitoring and
sanctioning performance by suppliers; improving performance through
benchmarking; supporting and assisting suppliers; and supply chain learning.
11
Whilst the Toyota model enhanced the Economic Bottom Line (that is, the
profitability) of firms, it was increasingly challenged for only meeting the needs
of one set of stakeholders – owners. Most large global firms are now expected
to meet a Triple Bottom Line – the Economic, the Social and the
Environmental Bottom Lines. Thus, just as the search for the Economic
Bottom Line led to the development of profit-oriented SCM, so the imperatives
of the Social and Environmental Bottom Lines developed into new forms of
SCM – Corporate Social Responsibility and Supply Chain Greening.
All three forms of SCM management are weak in contemporary Africa. Whilst
SCM has diffused widely as an objective of corporate policy, the reality is
often somewhat different. The problem is that it is often costly and skills
intensive for management, particularly in the short term. Thus firms often
baulk at the costs required in effective supply chain management, even
though this might be critical to long-term profitability. Moreover, the
commitment of senior strategic management to SCM is often undermined by
the contradictory incentives imposed by human resource management,
particularly in the African context where senior management of global firms is
often distant from the firm’s operations and impose reporting requirements
that are unrelated to the local context. Supplier development takes time and
persistence, and the tight reporting requirements for purchasing managers
mean that it is much easier to import the supplies from abroad than to engage
in the time-consuming task of searching for local suppliers and assisting them
to upgrade their capabilities.
The Economic Bottom Line and Supply Chains in Africa
With regard to African case studies 3 of supply chain management and
development structured in terms of the Economic Bottom Line, the most
advanced example is the South African auto assembly and components
sector. It has made extensive use of competitiveness benchmarking to build
supply chain development. As a result of sustained interventions through the
South African Benchmarking Clubs, the average performance standard of the
3
See Section 4.4 in the main report.
12
automotive supply chain improved markedly over the period 1998/1999 to
2012 (Table 3). Customer return rates, a crucial measure of supplier
performance in the automotive industry improved dramatically, falling from
3,270 parts per million (ppm) in 1998/9 to 226 ppm in 2012. Inventory holding
more than halved, from 62.6 days to 26.2 days. Most significantly, from a
supply chain perspective, these improvements in operational performance
have been driven down the chain to 2nd and 3rd tier suppliers. This is evident
in the significant improvement in respect of delivery reliability from the
suppliers to these firms. This jumped from 78.7% to 92.5%. Internal reject
rates and scrap rates in 2012 are at the international standard – 1.7% versus
1.6% and 1.5% respectively. Delivery reliability to customers at 97.7% is
similar to international benchmarks (97.9%(; the same holds for delivery
reliability from suppliers – 92.5% versus 93.3%. Inventory holding (26.2 days)
is close to the international standard of 24.5 days. Although customer return
rates (226 ppm) have made remarkable progress they are still above that of
the international benchmark of 199 ppm.
Table 7: Competitiveness improvements in performance of South African
automotive components cluster, 1998/9 - 2012/3, & international comparisons
Market
driver
KPI
South African performance
standards
1998/9
Cost control
Quality
Reliability
Human
Resources
Inventory holding
(operating days)
Customer return rate
(ppm)
Internal reject rate (%)
Internal scrap rate (%)
OTIF delivery reliability
to customers (%)
OTIF delivery reliability
from suppliers (%)
Absenteeism
lost hours (%)
2012
International
standard
2012
SA vs.
International
standards, 2012
62.6
26.2
% Change
1998/9-2012
58.1%
3,270
226
93.1%
199
-11.9%
4.9
4.2
92.2
1.7
1.7
97.7
65.3%
59.5%
6.0%
1.6
1.5
97.9
-5.9%
-11.8%
-0.2%
78.7
92.5
17.5%
93.3
-0.9%
4.4
3.0
31.8%
2.6
-13.3%
24.5
-6.5%
Source: SAABC database, accessed January 2014
Perhaps the most important lesson to be drawn from this experience is that
most supplier firms in developing countries externalise their problems. They
fail to understand the need to upgrade, and even when they do, they do not
possess the internal capacity to change or build on their core competency.
Lead firms driving the process of upgrading their supply chains is crucial if
suppliers are to be shifted onto the level required to remain competitve. These
13
activities can occur within supply chain development programs run by the lead
firms themselves. However the South African example shows that supply
chain development, through collective action of suppliers facilitated by lead
firm involvement can also occur in a more indirect manner. Lead firms and
governments have an important role in pushing local supplier firms out of their
current stasis, breaking vested interests, and incentivising firm upgrading. But
external institutional support is critical in such a process - government (at
different levels) policy and financial support and efficient external service
provider facilitation.
A recent development of potentially far-reaching significance is the prospect
of large Chinese firms bringing their suppliers with them to Africa, although as
yet, most of these suppliers are Chinese private sector firms rather than local
enterprises4. However the mode of entry of large Chinese SOEs backed by
state-to-state agreements often limits local procurement. Local procurement in
these large SOE involvements is also hampered by the priority given by the
host government for rapid execution of potentially long gestation period
projects. However the drive for rapid execution hampers utilising local
suppliers because of low levels of capabilities in the domestic economy.
Hence the (limited) local supply chains feeding into these large SOE projects
predominantly involve Chinese firms rather than locally owned suppliers.
Nevertheless, despite these obstacles to local supply chain development,
there has been a growing presence of privately owned Chinese SMEs feeding
supplies into these large SOE ventures. Unlike the SOEs to whom they are
feeding inputs, the entry of these privately owned suppliers is not aided by the
Chinese government. Unrelated to the large SOE backed ventures, a number
of larger privately owned Chinese manufacturing firms are investing in Africa,
predominantly seeking to serve the growing domestic market. Faced with poor
infrastructure and weak local supply capabilities, they are creating industrial
estates and are bringing their Chinese supply chain with them to serve their
needs for key inputs.
4
See Section 4.5 in the main report.
14
Chinese initiated Privately Developed Industrial Estates (PIEs) are thus
gaining traction in many African countries, but there is little qualitative or
quantitative data available to accurately assess their impact. PIEs are smaller
than SEZs and are narrower in focus. They typically grow organically from a
“first comer” industrialist which has established a successful enterprise and is
looking to procure supplies locally.
The Yuemei Fabric Industrial Zone (YFIZ) in Nigeria is a PIE started by
Zhejiang, one of the largest private textile firms in China. In 2000, the
company began importing final products into Nigeria. In 2004, it invested $1
million and began manufacturing textiles. Zhejiang reinvested its profits and
expanded the business - a total investment of over $10 million. In 2008, the
company constructed an industrial park, which could house all the elements of
the value chain. Soon after construction of the YFIZ was complete, five
Chinese textile firms relocated or established new factories in the YFIZ. The
initial success allowed Zhejiang to expand the YFIZ. In 2011, 20 factories
operated in YFIZ with activities ranging from dyeing, weaving, spinning,
knitting, sewing and embroidery.
However the implementation of supply chain principles in relation to locally
owned suppliers are often poorly developed in the operations of Chinese lead
firms who are relatively new to operating outside of their home base. In the
Zambian copper mines, the Chinese mining firm lacks developed supply chain
management capabilities; it does not recognise that this is a lead firm
responsibility, and instead looks to government bilateral agreements to
support the upgrading of domestic suppliers. The latter are uncompetitive and
sorely in need of assistance, notwithstanding that they do not understand the
supply chain challenge themselves.
The Social Bottom Line and Supply Chains in Africa
In respect of social standards manifesting within supply chain relationships,
supply chain management in pursuit of the Social Bottom Line is expressed in
a number of ways, but principally through Corporate Social Responsibility
(CSR) principles and programmes. Contemporary CSR is seen as applying
15
both within the firm’s operations and in the role it plays in wider society.
Moreover, it seeks to embed CSR in the everyday operations of the firm
rather than as a sporadic and voluntary act undertaken after profits have been
made in production in a way which may, or may not, reflect the principles of
social responsibility. Given the global operations of the world’s leading
corporations, and given that they are subject to civil society pressure on these
global operations, most of the world’s leading TNCs have a commitment to
pursuing some elements of the Social Bottom Line in the global operations,
including in Africa.
A core driver of CSR is the “social licence to operate”. It targets SCM activities
on the incorporation and upgrading of local suppliers, generally privileging
indigenous producers, producers in close proximity to the lead firm’s
operations and often specifically addressing the incorporation and upgrading
of SMEs, women and youth. This is evident both in relation to some of the
largest resource extraction ventures and in the development of Fairtrade and
other civil society driven initiatives in the agricultural sector. In some cases
(Niger River Delta) CSR programmes are a reaction to intense local political
pressure for the gains of commodity extraction to be spread to the local
population. In other cases (Ghana’s gold sector) the lead firms have taken a
proactive approach to CSR, seeking to spread the benefits of resource
extraction before opposition from the local population mounts5.
The Niger River Delta provides an example of the significant transformation oil
corporations have undergone in their CSR strategies, largely in response to
escalating social pressure and hostility in the region. Historically transnational
companies viewed CSR as corporate philanthropy. These philanthropic gifts
did little to quell growing tension between oil corporations and their host
communities. Rioting, mass protests, and violence against oil company
employees caused the Nigerian government to reconstruct CSR policies in
cooperation with local communities in order to improve social relations. In the
early 2000s, Chevron, Shell, and Total developed a new socio-economic
5
See Section 4.6 in the report for further analysis and case studies of the Social Bottom Line.
16
development programme based on a Global Memorandum of Understanding
(GMoU). The firms promised to engage with local community institutions and
NGOs in order to generate sustainable and holistic development programmes
in return for a peaceful operating environment. The adoption of the GMoU
model was accompanied by an expansion of the CSR programme, both in
size and in budget - Shell allocated $65 million, while Total and Chevron both
allocated $50 million to their new CSR programmes. Additionally, each
corporation contributed 3% of its annual budget to the Niger Delta
Development Corporation.
The Environmental Bottom Line and Supply Chains in Africa
Although concern with the Environmental Bottom Line dates back at least as
long as the focus on the Social Bottom Line, its translation into SCM has been
much slower globally. The spread of environmental awareness outside of the
lead firm was spurred by the commitment made in 2005 by Wal-Mart to green
its supply chain and the requirement that its first tier suppliers try and meet its
green supply chain key performance indicators. However it is only very
recently that structured programmes of what has come to be called Supply
Chain Greening have been developed and are beginning to be rolled out
down supply chains. These have been driven by issues of cost saving (e.g.
energy, packaging, cleaning up), meeting consumer demands, and diverting
attention away from other consumer demands (e.g. for Wal-Mart union
recognition).
Supply Chain Greening is the least developed of the Triple Bottom Line
objectives in Africa6 and globally. However, many of the world’s largest firms
(including Wal-Mart which has just entered the continent) are rolling out large
supply chain greening programmes. There is evidence of nascent greening in
some African supply chains, but also disturbing evidence of ‘de-greening”
when enterprises formerly supplying high income markets in the EU switch
6
See Section 4.7 in the report for discussion and case studies of the Environmental Bottom
Line.
17
their output to less demanding markets in China and other emerging
economies.
The timber industry in Africa provides an example of both greening and degreening transformations in SCM. In Ghana a collaboration between a UK
lead timber supplier, and the WWF’s Global Forest and Trade Network
(GFTN) has led to the successful adoption of greener supply chain policies.
Travis Perkins, one of Britain’s primary supplier of building materials, came
under media pressure for poor sustainable sourcing practices in its renovation
of the British Parliament. In response it pressured its supplier, Samartex
Timber and Plywood, to green its Ghanaian supply chain with the assistance
of the GFTN. As a result, Samartex transformed its timber extraction practices
and became the first GFTN certified “green supplier.” Since
certification,
Samartex has increased its exports and eight Ghanaian firms have followed
its lead, largely motivated by the paucity of firms able to meet the increasing
demand for sustainable tropical hardwood.
In contrast, the Gabon timber industry has experienced ‘de-greening’ as
timber exports to Chinese end markets have increased. Until the late 1990s,
timber was predominantly exported to the EU. European consumers have
grown increasingly concerned to promote environmentally responsible forestry
practices, requiring legal certification along all links in the supply chain.
Chinese buyers, on the other hand, impose few environmental standards,
instead placing a premium on low price and large volumes. As the demand
market shifts from Europe to China, barriers to entry for SMMEs into the
timber industry are lowered, however, this occurs at the expense of the
capability expansion associated with serving high end markets with stricter
regulations.
In summary these various developments along the Triple Bottom Line
represent both threats and opportunities to the development of local supply
chains and to locally-owned supply chains. It is as yet too early to determine
the balance of outcomes. Moreover, it is unlikely that a single pattern will
emerge spans all African economies and all economic sectors.
18
GLOBAL VALUE CHAIN DYNAMICS AS EXPORTERS ENTER GLOBAL MARKETS
Previous sections addressed two of the major determinants of building supply
capabilities - industrial clusters and supply chain management (SCM) – to
assist firms enter global markets. In many cases clusters exhibiting active
cooperation between firms play leading roles in global export markets but the
bulk of African clusters are survivalist in nature, showing few signs of
dynamism, specialisation and upgrading. They generally produce simple
consumer goods and services for local customers. However, although
exporting clusters are still at an immature stage on the African Continent,
encouraging signs of dynamism have begun to emerge and in some
documented cases clusters participate actively in global final markets.
However, improving supply capabilities, through cluster development, supply
chain development or other policies designed to build capabilities, is only one
side in the economic development equation. Once production moves beyond
the subsistence level, development becomes a process of production and
consumption, supply and demand. In order to progress, producers need to
find market outlets which are some distance from their production facilities.
How producers enter markets, and which markets they enter, especially in
highly competitive markets, determines the price which they obtain for their
efforts.
Because markets are increasingly differentiated, dynamic and volatile,
producers need to develop the dynamic capabilities which are required to
sustain a profitable presence in final markets. However in this era of
globalisation the trajectory of this capability building is not just a result of
supply side interventions but is also defined by final markets and transmitted
to producers by buyers. In addition, many of the tools which facilitate the
upgrading of capabilities in production are made available to producers by the
lead firms who are responsible for the sale of products into final global
markets.
19
For all these reasons, a focus on supply alone - whether from the perspective
of the individual firm, clusters of cooperating firms, or supply chain
relationships between firms - does not provide enough of the tools which
producers in lower economies such as Africa require to penetrate and gain
from global markets. Production, however it occurs, has to be connected to
the markets, and in the contemporary global economy, this requires producers
to engage with, and participate gainfully in global value chains (GVCs).
Unlike the deep global integration in the nineteenth century which largely
comprised of trade in primary products and finished manufactures, the
‘second great unbundling’ in the latter decades of the 20th Century saw a
dramatic growth in the share of semi-processed intermediate products in
global trade. Trade is increasingly in semi-finished components and subassemblies rather than in final products. Concomitantly production has
become fragmented across national boundaries as lead firms outsourced their
non-core competences to other parties in the value chain. Hence GVCs have
become increasingly fractured (a growing number of links in the chain) and
chains have become increasingly dispersed globally.
The elements of GVC analysis
The value chain (VC) describes the full range of activities which are required
to bring a product or service from conception, through the different phases of
production (involving a combination of physical transformation and the input of
various producer services), delivery to final consumers, and final disposal
after use.
GVCs result from a series of developments which have been spurred by the
deepening of globalisation. Firms have begun to specialise in their core
competences and to outsource the balance of activities. This has required the
lead firms to ‘govern’ their value chains, either directly or through
intermediaries acting on their behalf. This defines the roles and performance
requirements that outsourced producers have to meet in order to sustain
participation in the VC. The character of high income markets which shaped
the development of GVCs increasingly demands better quality, greater
20
product variety, and availability.
This has led to a growing importance of
standards – technical, ethical, health, and sustainability – to satisfy different
market requirements. The dynamic nature of these markets also led to the
demand for firms in the chain to master different types of upgrading as
globalisation increases competition between different producers. Ownership
and the embeddedness of lead firms and their supply chains often plays a key
rile in determining the capacity of firms to respond to these complex demands.
The value chain analytic perspective is important for the following primary
reasons. First, building competences confined only to individual firms will
flounder on systemic inefficiency. Second, GVCs connect producers to final
markets which offer different possibilities for profitable production. Third,
different end markets impact on patterns of competence specialisation,
governance, standards, upgrading, and ownership in value chains. Finally
GVCs define the division of labour within and between the various links, which
affects the incomes and rents accruing to different parties involved in the
chain, as well as the capacity of producers to upgrade.
There are two major types of GVCs. ‘Additive value chains’ are characterised
by sequential processes of domestic value added. These tend to dominate in
the resource sectors. ‘Vertically specialised chains’ are characterised by the
increasing fragmentation of production in which individual processes occur
simultaneously. Between these two types of VCs are hybrid chains
incorporating a combination of additive and vertically specialised sub-chains.
Vertically specialised chains tend to dominate globalising manufacturing and
service sectors and are growing more rapidly than additive chains. By
contrast, there are few vertically specialised GVCs operating in Africa. These
tend to be concentrated in Southern Africa.
AFRICAN EXAMPLES OF DIFFERENT TYPES OF VALUE CHAIN UPGRADING
Examples of additive value chains in African countries
Cocoa’s technical characteristics shape the building of additive agroprocessing
value
chains
within
African
producer
countries.
Cocoa
intermediate products are more easily storable and tradable, making it
21
possible to relocate processing facilities in producing countries. Consequently
the large chocolate TNCs have been willing to outsource the intermediate
processing stages of the value chain, as long as this does not infringe on their
core business of producing the most profitable link – quality chocolate
manufacture, branding and marketing. Thus the cocoa and chocolate GVC
reflects both vertical specialisation and additive sub-chains. The former are
reflected in those parts of the chain in final markets which process
intermediates, and the additive parts of the chain are located in cocoaproducing countries which produce the intermediates.
Ghana (and to a lesser extent Nigeria) demonstrates the building of an
additive value chain by cooperation between lead firm, local producers and
government. This additive process is speeded up or retarded by specific
institutional policy/interventions in African producer countries. In Ghana the
proportion of cocoa exports processed domestically has increased steadily
from 12.4% in 2007 to 25.6% in 2011. The government plays a critical role in
maintaining the integrity of domestic value chain activities7.
Processed fresh fruit and vegetable exports from developing countries
have been facilitated by the European supermarkets and importers seeking to
maximise their rents, driving tighter standards down the value chain, and
developing closer relationships with export firms and suppliers in Zimbabwe
and Kenya8. Consequently various upgrading opportunities to deepen value
added opened up to local vegetable processing firms - improvements in
processing activities, new product combinations, and packaging for specialty
products. Local suppliers had to restructure their own operations, upgrade
facilities, processes and logistics handling to meet the new requirements.
Effective strategic collaboration between governments and the private sector
has been critical in designing and implementing institutional interventions to
support local upgrading processes. Government support encompassed the
following: subsidies have enabled firms to expand production, infrastructural
investment has reduced lead times, and farmer support has reduced costs.
7
8
See Section 5.5.1 in the report for elaboration of this cocoa value chain
See section 5.5.3 in the report for elaboration of this fresh fruit and vegetables value chain
22
However this has not benefitted all value chain participants. The requirements
of meeting these standards have marginalised small producers and exporters
in favour of large farmers and exporting firms that have the resources, skills,
facilities and knowledge capabilities to take advantage of these domestic
value additive opportunities. Hence there has been a significant consolidation
of an additive fruit and vegetable processing value in Kenya and Zimbabwe.
Leather can be exported as hides, semi processed tanned leather, or finished
leather9. A well-developed hide production and tanning industry is the basis
for upgrading leather product manufacturing in the leather value chain. This
requires regulation of the animal slaughter value chain, which impacts on the
quality of the hides available. Exporting of hides and semi processed leather
also has deleterious effects for developing a leather products manufacturing
sector down the value chain. The Ethiopian government addressed leakages
at the low value added links in the leather value chain to drive upgrading
through the chain. It upgraded animal husbandry/slaughtering, curbing the
export of low value added hides and semi-processed leather, and
encouraging higher value added export products. It imposed a stringent 150%
tax on hide exports to shift exports away from raw hides into finished leather.
Hides exports declined from 70% of total exports in 2004 to zero in 2011, and
the share of finished leather exports jumped from 30% to 93%. Government
also assisted the rejuvenation of the local leather footwear industry. Using
AGOA preferences, from a low base of $669,000 in 2011, Ethiopian footwear
exports to the US increased 29 fold to $19,378 million in 2013. Ethiopia is
thus a value added success story of building an additive leather value chain
leading all the way up to the export of final footwear products. Capabilities
have been built at all levels of the chain, as well as within government itself.
This is as a result of government intervention, engagement with lead firm
drivers to meet value chain standards, locally embedded firms upgrading their
core
competence
and
productive
activities,
end
market
preferential
preferences, and institutional support from various quarters10.
9
See section 5.5.4 in the report for elaboration of this leather value chain
See Section 5.5 for further examples of processed fresh fish and tea value chains
10
23
Oil exploration and extraction, given its capital, technology and skills
intensive nature, is dominated by multinational companies. The Nigerian
government has made substantive efforts to create an additive value chain by
increasing local content in terms of skills and backward linkages 11 . These
centre on institutions for training/education of technically skilled Nigerian
personnel, and working with lead oil firms to grow the number of local firms
supplying the oil extracting lead firms with products and services through
various local content policies. Significant local supplier linkages have been
created in fabrication and construction, well construction and completion, and
controls/ICT systems. In these three sub-sectors of the oil extracting industry,
a 2011 survey of 12 oil companies found that three quarters sourced more
than half of their goods and services from local firms. Although the oil
companies believed that they had reasonably close relationships with their
first tier own suppliers, this did not extend down their supply chain to providing
support to second and third tier suppliers. However across all these subsectors, 55% of first tier supplying firms purchased more than half of their
services from local second tier suppliers. This suggests a considerable depth
to backward linkages with substantial local value added. Domestic linkages
are deep, and local suppliers are not merely importers, but rather producers of
technologically complex goods and services. Moreover, as firms invest in
process and functional upgrading, with the support of oil companies, these
linkages are dynamic. This trajectory is a combination of the entrenched
capability within the Nigerian government to drive local content through its
policy framework, coupled with lead firms responding to the challenge and
driving the necessary technical standards down the value chain to create
competitive local supply.
Mining does not have to be an enclave activity but can instead develop a
backwardly oriented value chain into equipment supply12. South Africa has a
well-developed industrial sector, which has its origins in the development of
extensive value added linkages to the mining sector. With the introduction of
democratic rule and international acceptance, the Sotuh African mining
11
12
See section 5.5.6 in the report for elaboration of this oil value chain
See section 5.5.7 in the report for elaboration of this mining equipment value chain
24
companies expanded their actvities globally, but especially into SSA. Given
their historical relationships with local suppliers, South African mining firms
operating elsewhere tended to favour these same suppliers to service their
activities abroad. The South African economy therefore continues to maintain
a global competitive advantage in mining equipment and specialist services.
This is evidenced in the building of innovative capabilities in mining and
related technologies. The South African mining supplier industry is now a net
exporter of high local value added products. Finally this additive backward
linked value chain has also led to the building of horizontal linkages as
suppliers branched out to serve the needs of other sectors. This has resulted
in the development of various clusters of agglomeration, predominantly locally
owned, of equipment suppliers and institutions. There are a number of
conclusions to be drawn from this South African additive mining value chain
based on growing local suppliers. The technical specificity of South African
mining activities required the deployment and utilisation of advanced
technologies and systems. Historically government marshalled a suite of
specifically directed state policies (tariff, financial, technological, and
institutional research support) to the local supplier industry. The expansion
abroad of South African mining firms has created significant opportunities for
exports of mining related equipment and services. However, government has
in recent years reduced its support to this sector and there are signs of a
diminishing global comparative advantage.
Examples of vertically specialised value chains in African countries
Apparel exporting African economies (e.g. Kenya, Lesotho, Madagascar,
Mauritius, Swaziland) over the past 15 years have developed on the basis of
vertically specialised GVCs13. These vertically specialised GVCs were based
on Asian transnational firms locating plants in export processing zones and
use duty free preferential access (e.g. AGOA for SSA and QIZ for Egypt) to
the US market. The single transformation rules of origin (ROOs) encouraged
vertically specialised value chains, since all inputs used for apparel
13
See section 5.6 in the report for elaboration of this apparel value chain. Mauritius and
Madagascar have also built the most successful apparel production components through
backwardly integrated textile production (i.e. additive value chains).
25
manufacture could be imported. The transnational firms set up low value
added, simple assembly and cut-make-trim operations to produce relatively
basic garments in Africa. All other higher value activities, such textiles and
components, financing, sourcing fabrics, product development and design,
logistics, merchandising and marketing were carried out in the head offices in
Asia or in plants in Asia. As a result of AGOA and QIZ, African apparel
exports to the US have increased rapidly. All SSA apparel exports to the US
grew from $748 million in 2000 to $1,757 million in 2004. But a combination
of the ending of the Multi Fibre Agreement (December 2004) and the global
financial crisis in 2008 led to a sharp decline in exports so that by 2012
exports from these countries had declined to $866 million. The QIZ scheme
saw a doubling of Egypt's exports of textiles and clothing to the US from $422
million in 2004 to $871 million in 2012.
These vertically specialised apparel value chains have helped to build an
industrial base in the apparel sector in Africa. They have built an export
market, created employment for large number of workers, and built some low
level production capabilities, as workers learn to respond to export market
production requirements. But this does not extend beyond the operator and
lowest
supervisory
overwhelmingly
level,
for
managerial
dependant
on
expatriates.
and
technical
Virtually
all
skills
are
inputs
bar
infrastructure are imported. The basic production component of this value
chain is hence not embedded in local social and economic networks of the
host country. Its rationale is externally determined, driven by the product
requirements of the US buyers, the vested interests of the head offices of the
large transnational producers situated in Asia, and wage rates and
preferential access opportunities in other low income regions. These largely
Asian-based TNCs are not concerned with upgrading local capabilities,
functionally upgrading by moving into more rent rich activities, and extending
local value added linkages. While they remain important productive links, they
are footloose investors, able and willing to shift their operations to another
production site if duty free access conditions change.
26
These case studies of African GVCs illustrate how an understanding of the
dynamics of GVCs helps to explain the nature of economic diversification and
the determinants of upgrading amongst producers. They also show that
successful upgrading and insertion in GVCs is a function of the technical
character of individual chains; the strategies of the lead firms driving these
chains; the nature of domestic capabilities in individual African economies;
and the design and delivery of effective government policy.
DEVELOPING A POLICY RESPONSE TO ENABLE GAINFUL PARTICIPATION
As is clear from the international and African experience detailed above, there
is a clear role for industrial policy in assisting African firms to participate
gainfully in global markets. Formulating and implementing the appropriate
policy response involves engaging firms, as well as government and
institutions delivering public goods, to ensure that the private sector exporting
effort is being supported and not undermined. However policy development
requires not just that private and pubic actors draw on their individual
strengths, but also that they recognise their particular weaknesses.
International experience shows that competitiveness is hampered by a
pervasive combination of “state failure” and “market failure”. Thus, an effective
policy response to the opportunities opened up by global export markets
necessarily requires not only a recognition by key actors of their limitations but
also that they need to cooperate to learn and benefit from each other’s unique
strengths.
It is not possible to provide a laundry list of detailed generic policies since
context and sector require specific tailored policy support. Rather what is
required is a strategic framework within which appropriate detailed policies
can be developed by actors responsible for country-specific resource
allocation. The development of detailed policies will necessarily reflect the
specific circumstances confronting individual firms and economies in the
context of their particular constraints and capabilities. It will also necessarily
reflect the individual characteristics of the sector in which they operate and
27
the opportunities available in different global markets. Broadly speaking the
following recommendations can be made14.
In respect of clusters, the lack of awareness of the potential offered by
clusters has meant that in many cases, clusters have emerged beneath the
radar of policymakers. The primary role of actors outside the cluster is to
focus institutional interventions to build on what already exists rather than to
create clusters anew. Four sets of external economies explain the economics
of agglomeration – skill spillovers, proximity of suppliers, proximity of clusters
and inter-firm specialisation. Each of these externalities lend themselves to
policy action, both by firms internal to the cluster and by external parties. The
key parties affecting cluster development need to prioritise the development of
appropriate collective actions which are beneficial to cluster development.
Although still in embryonic form, Africa also has the opportunity to benefit from
China’s promotion of Special Economic Zones in various countries.
In respect of supply chain upgrading, government needs to support the
activities of lead firms, and to cajole reluctant supply chain managing firms to
build cooperation along their chains, particularly with respect to the
incorporation and upgrading of local SMEs in their chains. Lead firms and
governments have to recognise the financial constraints SME suppliers
operate under and assist them with timely payments. Policy has to recognise
that supply chain upgrading is a specialised activity, requires specialist skills,
and involves costs. Specialised private sector profit-driven service providers
and firms may require external financial support through temporary matching
grant schemes to deliver effective supply chain management assistance,
particularly in meeting triple bottom line requirements. SME suppliers are
often hampered by liquidity constraints and require working capital to feed into
supply chains. Finally governments may need to engage separately with
Chinese firms and their government to ensure that such lead firms play an
active role in developing their own local supply chains.
14
See section 6.2 in the report for specific and elaborated detail of various industrial policy
lessons aimed at addressing the strategic determinants between clusters, supply chains, and
global value interconnections chains.
28
The dynamics of different types of GVCs depend in part on ownership
characteristics of lead firms, whether they are additive or vertically
specialised, and which end markets they feed into. Hence host governments
need to acquire the appropriate knowledge of the strategies of various lead
firms and the differing market dynamics with regard to upgrading
opportunities. Due to the asymmetrical power relationships within GVCs, host
governments have a role to play in assisting their local producers through
various industrial policy and institutional interventions. Specialised service
providers have a particular role to play assisting local firms access value
chains to upgrade. Regional markets may offer more opportunities for
developing local value added activities since they are often less demanding,
provide learning opportunities, allow for the building of economies of scale,
and facilitate firms in these regional value chains to build their production
capabilities in a staged, step-by-step process. Finally since the essence of
beneficial participation in global markets depends on value chain alignment,
ongoing stakeholder consultation is crucial and should involve key parties
along the chain.
The above requires African governments to develop broadly framed and
integrated industrial policies which go beyond conceptualising the isolated
firm as the focus of concern. The thrust of this approach in this era of
globalisation is to view productive sector policy as a supportive process
encompassing the interrelations between individual firms, established clusters
of firms, hierarchical supply chain linkages, and dynamic value chain
relationships. In terms of finding ways to participate productively in the new
global economy, it is important to move beyond the debate of whether African
governments need to increase their exports and to introduce a site of
productive sector policies, to how these governments should insert
themselves in global markets and formulate and implement these supportive
policies.
CONCLUSION
At the outset we observed that participation in global markets offers
considerable potential to individual African firms, to groups of African firms
29
and to African economies at large. Large global markets provide the scope for
reaping scale economies, for specialisation, for learning, for profitable
production and for sustainable employment and income growth. However,
international experience shows that these benefits do not automatically
accrue from participating in global markets. It is possible for African producers
to be locked inappropriately into external markets, resulting in what has come
to be called “immiserising growth”, that is, expanded economic activity
associated with declining incomes and profitability. The objective, therefore,
for both private and public actors is to enter a trajectory of gainful participation
in global markets.
This gainful participation has to be rooted in the reality of individual firm and
country endowments and capabilities. Most African economies are reliant on
natural resources and the export of commodities. Thus the diversification
policy objective of both public and private actors is to both enhance the
productivity in the exploitation of these natural resources and to diversify their
activities, both by creating linkages to the resource sector and by developing
new specialisations in other sectors. However, these objectives can only be
achieved in the context of opportunities available in the global economy.
Whilst African exporters benefit from a range of preferential market access
agreements, they need to be aware of the stagnation of northern markets and
the rapid growth of southern markets. Switching between these different
markets requires the development of specific capabilities.
The supply capabilities required for this gainful insertion in differing global
markets are often enhanced by the development of co-located clusters of
firms. Co-location generates external economies and therefore enhances the
competitiveness of firms in the cluster. Where firms build on these external
economies and cooperate to meet common challenges, they benefit from
collective efficiency. This is particularly important for SMEs whose problems
are often less a matter of being small, and more a consequence of being
isolated. However, whilst many global clusters have participated effectively in
global markets, this is not always the case. Particularly in low income
30
economies and in Africa, clusters are often essentially survivalist in nature
and show few signs of the dynamism required to be successful exporters.
Whilst clusters of small firms are one important component of an effective
supply response to global market opportunities, many successful exporting
experiences are led by large lead firms. Globally, lead firms have come to
recognise that it is not possible to sustain competitive advantage by being an
island in a sea of inefficiency. It is necessary for them to assist their suppliers
to upgrade in order to achieve systemic and dynamic competitive capabilities.
Hence they have developed extensive programmes of supply chain
management. In recent decades, the objective of supply chain management
has moved beyond the achievement of profitability to target a triple bottom
line - that is to simultaneously address the social licence to operate and
environmental objectives. However supply chain management activities in
most African economies are in their infancy, and seldom encompass the
greening of supply chains.
Cluster and supply chain development are critical components of supply
capabilities. However, international experience makes it clear that on their
own, supply capabilities do not provide the key for gainful participation in
global markets. How producers are inserted into global value chains
determines the profitability of their operations and their capacity to upgrade
operations in order to develop the dynamic capabilities which are required to
compete sustainably in a rapidly changing global economy.
The GVC policy lens provides an integrated framework useful to both public
and private actors for considering both supply capabilities and the character of
final markets. Together, these two sets of factors influence who is
incorporated in global markets, how they are incorporated in global markets,
which global markets they are able to supply, and the roles which firms and
economies play in global production networks. Appropriate positioning in
GVCs thus addresses the challenges set out earlier, that is, it is not so much
a matter of whether to participate in the global economy, but how to do so in
order to ensure profitable, sustainable and equitable growth.
31
African Export-Import Bank
Developing Industrial Clusters And Supply Chains
To Support Diversification And Sustainable
Development of Exports in Africa
MAIN REPORT
Raphael Kaplinsky and Mike Morris
(R.Kaplinsky@open.ac.uk; mike.morris@uct.ac.za)
October 2014
with
Letsema Mbayi and Lucy Martin
TABLE OF CONTENTS
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
ii
4.6 SCM in pursuit of the Environmental Bottom Line .................................... 130
CHAPTER 5 ...................................................................................................... 145
GOVERNANCE IN GVCs AS EXPORTERS ENTER GLOBAL MARKETS ...... 145
SUMMARY ........................................................................................................ 145
5.1 Why ensuring supply is only part of export expansion .............................. 147
5.2 What explains the expansion of global value chains? .............................. 150
5.3. Different types of value chains ................................................................ 159
5.4. Africa’s experience with GVCs ................................................................ 162
5.5 Case-Studies of Additive GVCs in Africa ................................................. 164
5.6 Vertically Specialised Value Chains in Africa ........................................... 195
CHAPTER 6 ...................................................................................................... 201
DRAWING THE THREADS TOGETHER - SUPPORTING DIVERSIFICATION
AND THE SUSTAINABLE DEVELOPMENT OF AFRICAN EXPORTS ............ 201
6.1 Key lessons from global experience ........................................................ 201
6.2 Developing a policy response to enable gainful participation
in global markets .................................................................................... 203
REFERENCES .................................................................................................. 218
iii
List of Figures
Figure 2.1 Average annual growth rates
Figure 2.2 Africa’s share of global GDP, global trade and global manufactures trade
Figure 2.3 Africa’s current account and fiscal balances
Figure 2.4 The destination of Africa’s exports
Figure 2.5 Sectoral and geographical composition of Africa’s exports
Figure 2.6 The resource intensity of African exports
Figure 2.7 Sectoral shares of Africa’s GDP
Figure 2.8 Network of Plurilateral Groupings in Africa (and Middle East)
Figure 2.9 Number of households, by disposable income, China and India
Figure 2.10 Commodity prices
Figure 2.11 Declining ore yields in four key metals
Figure 2.12 Market driven linkages over time
Figure 3.1: Average number of employees by clusters
Figure 4.1: Suppliers and Users in the Production Chain
Figure 4.2: The Triple Bottom Line
Figure 4.3: Gabon export volumes of wood products in cubic meters
Figure 4.4: European and Chinese Buyers’ Requirements – Wood Logs
Figure 4.5: EU and Chinese Buyers’ Requirements – Regulations/Standards
Figure 5.1: The Apple iPhone GVC
Figure 5.2: GVC participation of African regions in 2011
Figure 5.3: Global cocoa/chocolate value chain
Figure 5.3: Value added content of cocoa exports, Cameroon, Ghana, Nigeria
Figure 5.4: Ghana cocoa value chain
Figure 5.5: Global tea value chain
Figure 5.6: The UK Processed Vegetable Value Chain
Figure 5.7: Leather Value Chain
Figure 5.8: Value added content of leather/hides exports from Ethiopia
Figure 5.9: Coffee value chain
Figure 5.10: The oil value chain
Figure 5.10: Garment Value Chain
Figure 6.1. Fragmented and integrated export policy support
10
11
11
12
14
14
15
18
20
21
21
23
62
98
101
142
143
143
160
163
165
166
168
170
173
177
179
184
191
195
217
iv
List of Tables
Table 2.1 Comparative trade indexes, by region (1995, 2011)
Table 3.1 Brazil’s Sinos Valley footwear cluster
Table 3.2. Number of firms and workers in four clusters
Table 3.3: Correlation of co-operation and performance
Table 3.4: Africa’s Experience with 25 Clusters
Table 3.5: The final market and cluster dynamism
Table 3.6: Prevalence of external economies
Table 3.7: Cluster dynamism and join action
Table 3.8: Institutional support for joint action
Table 3.9: Percentage - Micro, Small, Medium and Larger Furniture Enterprises
Table 3.10: Base unit’s technological capabilities
Table 3.11: Sources for acquiring of knowledge on production and innovation
Table 3.12: Nature of manufacturing by clusters
Table 3.13: Level of education by sector clusters
Table 3.12: Trends in profitability, turnover, and exports
Table 3.13: Operational performance of CCTC and KZNCTC combined
Table 3.14: China’s Official Planned African SEZs
Table 4.1: Key Performance Indicators measuring operational performance
Table 4.2: Competitiveness improvements in performance of South African
automotive components cluster,
Table 4.3: Private Chinese Firms and Employment by Sector
Table 4.4: Local Content Results
Table 4.5: Domestic purchases by Ghana Chamber of Mines Producing Members
Table 5.1: Composition of tea exports from Sri Lanka and Kenya
Table 5.2: Exports of Ethiopian footwear to US
Table 5.3: Fish Value Chain – Kenya, Tanzania, Uganda
Table 5.4: SSA apparel exporters to the US
13
36
37
38
44
47
48
48
49
51
53
54
60
62
70
80
82
104
106
120
127
128
171
179
181
198
List of Boxes
Box 1: What happens when a firm is unable to generate and appropriate rents
in global markets
Box 3.1: Michael Porters definition of Clusters
Box: 3.2 Collective efficiency
Box 3.3 Some examples of China’s industrial clusters
Box 3.4: What explains the success of China’s SEZs
Box 3.5: Business Incentives offered at Lekki Free Zone
Box 5.1: Four sets of standards are widely observed in GVCs
Box 5.2: Four types of upgrading
5
28
31
40
42
83
155
157
v
CHAPTER 1
PARTICIPATING GAINFULLY
IN 21ST CENTURY EXPORT MARKETS
SUMMARY

Productivity growth and economic diversification are the source of long
term economic development. They are aided by specialisation and the
reaping of scale economies. In turn, specialisation and scale
economies are bounded by the extent of the market. Hence by offering
access to unlimited markets, globalisation provides the opportunities
for producers, especially in relatively small and undifferentiated African
economies, to enter a trajectory of profitability, upgrading and
productivity growth.

However, participating in global markets does not necessarily provide
these benefits. These depend on how producers enter global markets –
which markets they participate in and what role they play in a global
division of labour.

Beneficial insertion into global markets needs to be guided both by an
economy’s resource endowments and by the character of the global
markets. It is thus both a function of supply and demand.

This Report focuses on both supply and demand factors. International
experience shows that supply capabilities are enhanced by the
development of clusters and supply chain upgrading. On the demand
side, it shows that the nature of insertion in global markets is
determined by the structure of global value chains.
1
1.1. THE CHALLENGE IS NOT WHETHER TO PARTICIPATE IN GLOBAL
MARKETS, BUT HOW TO DO SO.
Perhaps the most famous economic text, The Wealth of Nations by Adam
Smith, opens with the following phrase:
“The greatest improvement in the productive power of labour, and the
greater part of the skill, dexterity and judgement with which it is
anywhere directed, or applied, seem to have been the effects of the
division of labour.”
Adam Smith argued that the division of labour contributes to productivity and
economic growth for three sets of reasons. First, through specialisation,
repetition and practice, workers improve their performance. Second, because
workers can specialise, they do not need to waste time in changing over from
one task to another. And, third, the division of labour not only influences
productivity growth within the farm or enterprise. It also allows for sectoral
specialisation and the development of a capital goods industry which provides
the tools for productivity growth across a range of economic sectors. Smith
also showed that this division of labour enhanced welfare by reducing the
prices paid by consumers for the products which they purchased, and that the
quality of these final products also improved with specialisation.
The combination of productivity growth and reduced product prices rising from
specialisation and sustained investment - made possible through the profits
earned in specialisation-intensive economic activities - transformed the
welfare of humankind over the past three centuries. It began in Europe and
North America, spread through Asia in the second half of the twentieth
century and is now evidenced in Rising Africa, which is experiencing high and
historically unprecedented growth rates.
There is a second important insight which emerges early on in the Wealth of
Nations. Shortly into the text, Smith observes that
2
“…it is the power of exchanging that gives occasion to the division of
labour, so the extent of this division must always be limited by the
extent of that power, or, in other words, by the extent of the market.”
Without markets, there is little scope for the division of labour. Conversely, the
greater the scale of the market, the more elaborate a division of labour can
become. In Adam Smith’s day, an increase in scale meant trading with
neighbouring districts or cities. But now, with the sustained and massive
advances in communication and information processing technologies, the
market is global. There are very few regions in the world which are not
penetrated by global products; there are also a diminishing number of regions
in the world where producers do not participate in global markets, either
directly or as subcontractors.
Thus globalisation provides the scope to gain from scale economies and in so
doing, to reap the benefits of specialisation. But larger markets offer a further
benefit which was not evident to Adam Smith. Participating in global markets
offers the further potential benefit of augmenting learning and capability
building. Selling into demanding and competitive markets exposes producers
to new ways of processing, new capital goods, new product designs and new
activities which they can perform in their value chains. Given the rapidity of
technical progress in high competitive global markets, the capacity to learn
through exporting offers exciting prospects for economic management and for
individual producers.
However, the potential for reaping these different benefits made possible
through participating in global markets does not automatically translate into
the reality of achieving these gains. In order to understand why this is the
case, it is necessary to recognise one further insight which can be drawn from
the writings of classical economics. David Ricardo developed the theory of
rent. He argued that land – a gift of nature – was of differential quality. The
price of the final product was determined by the production costs of the least
efficient producer. However, farmers with relatively productive land benefited
from the gap – the resource rent - between their low production costs and
3
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).
Since it added virtually no value to the garments, and since it lacked the
4
capacity to improve its processes and products, the firm was locked into a
downward spiral and ultimately was bankrupted by its inability to generate and
appropriate process or product rents.
Box 1: What happens when a firm is unable to
generate and appropriate rents in global markets
The firm began making jeans under contract for a large US buyer. Its function was
to sew together the denim which had been produced and cut in the US, using
other imported components such as thread, labels and buttons, and then to pack
these in labelled boxes provided by its US principal. The firm began with a
contract to assemble 9,000 jeans a week for $2.18 per jean; after nine months,
the volume fell to 5,000 jeans a week, at a reduced unit price of $2.05, falling to
3,000 jeans a week at $1.87, three months later. Thirteen months after the
contract started, its was abruptly terminated. Its US principle had found a cheaper
source in the region, a consequence of a significant currency depreciation in a
neighbouring country.
Declining unit prices and investment instability: the case of jeans
manufacturing in the Dominican Republican Republic
Volume (per week)
Unit price ($)
January 1990
9,000
2.18
October 1990
5,000
2.05
December 1990
3,000
1.87
February 1991
Arrangement terminated and assembly
transferred to Honduras
Total investment in equipment by Dominican Republic firm was S$150,000
Source: Kaplinsky (1993)
This sad story of an individual firm’s experience must be seen in the wider
context of macro economic policy. The firm operated in an Economic
Processing Zone (EPZs) which gave special privileges to exporters. These
firms were exempt from taxes and import duties for all output which was
exported. From the perspective of external buyers, this was an attractive
source of supply, and there was a rush of American buyers into the region
where an EPZ-fever had led to a rash of similar duty, and tax, free zones in
5
neighbouring countries.
The falling price of Dominican Republic labour –
measured in US$ – was a major attraction to US clothing buyers. Between
1980 and 1990, these wages fell in $US by 55%, at a faster rate than the fall
in the neighbouring countries of Costa Rica (22%) and Mexico (33%); during
the same period, the dollar value of wages in the US rose by 15%. These
changes in relative wages were almost entirely a direct consequence of
currency devaluations in the region, with neighbouring countries devaluing
against the US and each other in order to enhance their price
competitiveness. The fate which confronted the Dominican Republic garment
exporter was that neighbouring countries devalued their currencies at a much
higher rate which meant that Dominican Republic wages in real terms (that is,
the dollars which the buyers dealt in) were no longer competitive. Since the
firm’s comparative advantage was limited to unskilled labour, it had no
capacity to adjust to changes in the exchange rate.
Two conclusions can be drawn from this contemporary Central American
experience to guide economic policy in Africa:

Although participating in export markets offers the potential for reaping
scale economies, for improving productivity, for learning and for
employment, these benefits do not automatically accrue to exporting
firms and economies. It is possible to enter global markets in a way
which only provides for immiserising growth, that is, increasing physical
output but with diminishing incomes.

Second, unless the exporting firms and economies add value in
production – and in an increasingly competitive economy this requires
the development of dynamic capabilities – it will always be subject to
the erosion of benefits and to the dangers of immiserising growth.
There is one partial exception to this picture which has relevance to African
exporters. This is that although Schumpeterian ’innovation rents’ are
increasingly important in most sectors of economic activity, there are cases in
6
which natural resource rents continue to be important. For example,
Botswana has been able to benefit from its relatively unique endowment of
natural diamonds (although this absolute scarcity of supplies has been aided
by deliberate policies over the years by the De Beers diamond cartel to limit
supplies into the global market). Yet even this unique resource rent is subject
to erosion through a combination of limited deposits in Botswana, the
incentive to find diamonds in other regions of the world, and the growing
capacity to produce synthetic diamonds which are virtually indistinguishable
from natural diamonds (Mbayi, 2013).
The determinants of these capabilities are the subject matter of this Report.
We begin in Chapter 2 by setting the export challenge in context, particularly
in the context of the changing geography of global production and the boom in
commodity prices. Chapter 3 then reports global and African experience in
regard to the role played by industrial clusters in achieving and sustaining the
development of dynamic capabilities. This is followed in Chapter 4 with a
review of global experience in the fostering of supply chain efficiency. But
growing production capabilities – facilitated through clustering and supply
chain improvements – is only part of the story of successful insertion in global
markets. Producers have to be inserted into profitable market channels and
this set of challenges can only be understood through the lens of global value
chains, the subject of Chapter 5. Chapter 6 concludes with a review of the
primary policy challenges which these various developments pose for
governments and the private sector in Africa. In participating in global export
markets, the simple reduction in impediments to market forces will not in itself
result in economically and socially desirable outcomes. Positioning in global
markets is critical, and the nature of this positioning, and the capacity to
change positioning, requires policies to augment capabilities in production as
well as in the capacity to feed into the most appropriate markets and market
niches.
7
CHAPTER 2
THE CONTEXT FOR AFRICA’S GROWING PARTICIPATION IN
GLOBAL EXPORT MARKETS
SUMMARY
Given Africa’s economic performance in the context of its resource
endowments and developments in the contemporary global economy, it is
possible to draw a series of lessons to support export development in the
future.

Export expansion offers the possibility of supporting sustained
economic and employment growth by aiding the reaping of scale
economies, the development of specialised capabilities and the
learning required to build dynamic capabilities.

Africa’s low share of global trade provides the potential for rapid export
growth, particularly to rapidly growing low and middle income
economies such as China and India.

These varied export opportunities arise in a context of attractive trade
preferences offered to Africa in North America, the EU and China.

Africa’s largely untapped resource endowment provides the scope for
economic diversification and export growth through the development of
linkages into and out of the resource sector.

Without the development of dynamic capabilities, export expansion in
itself is unlikely to generate sustained economic growth outside of a
limited (and declining) set of activities where Africa benefits from large
natural resource rents. Moreover, even in those cases where resource
rents are significant, it will be difficult to sustain these rents in a world
of intense global competition without innovation in processes and
product.
8

Economic diversification is of considerable policy significance since
over the past decade Africa has “retreated” into a more intense
structure of resource dependence. Although resource dependence is
less problematic than in previous decades (since resource prices are
likely to be robust in the mid-term), commodity prices are volatile and
this creates problems for macroeconomic management. Moreover,
mining and metals, and oil and gas tend to be very capital intensive
sectors and without economic diversification the benefits of resource
abundance do not spread widely through the economy.

Economic
diversification
through
export
growth
simultaneously
provides a major opportunity and a major challenge for African
economies. To be successful it requires not just the ability to enhance
production capabilities (including through exploiting the benefits of
cluster dynamics and supply chain linkages), but also to insert
appropriately in global value chains and global markets.
9
2.1. THE TRAJECTORY OF AFRICA’S GDP AND TRADE PERFORMANCE,
2000-2012
The 1980s was a period of economic stagnation – and in many cases
economic reversal – in Africa. The growth rate remained low during the
1990s, but since 2000 Africa has become one of the most rapidly growing
regions in the global economy (Figure 2.1), growing at a compound rate of
5.3% p.a. It is not surprising that phrases such as “Africa Rising” and “the
African lion” have gained widespread currency.
Figure 2.1 Average annual growth rates (1970 – 2000)
Source: www.UNCTADstats
Nevertheless, despite this impressive performance, Africa’s growth is built on
weak foundations, and its share of global GDP and global trade (2.7% and
3.7% respectively in 2012) is small (Figure 2.2). Africa’s share of global
manufactures trade (0.9% in 2012) is not just particularly low but has barely
changed since 2000. These proportions contrast sharply with Africa’s existing
share of global population (15.5% in 2013) and particularly with its projected
share of global population in 2030 (19.2%) (UNCTADstat). On the other hand,
these low trade shares provide plenty of potential to increase exports and for
Africa to benefit from the scale economies and learning arising from
successful participation in global markets.
10
Figure 2.2 Africa’s share of global GDP, global trade
and global manufactures trade
Source: World Development Indicators, accessed <http://databank.worldbank.org>,
accessed on 26th January 2014
Despite its growing share of global exports, Africa’s net export performance
has deteriorated. Imports have grown more rapidly than exports, so that the
continent’s net export performance is less impressive than its gross export
performance. As Figure 2.3 indicates, Africa’s current account trade balance
expanded from a deficit of 2% of GDP in 2001 to 7% in 2013, despite the
surge in commodity exports and the boom in commodity prices.
Figure 2.3 Africa’s current account and fiscal balances
Source: African Economic Outlook, 2013.
11
This overall trade performance occurred at the same time as a remarkable
shift in the destination of Arica’s exports (Figure 2.4). Between 2000 and
2012, the share of exports going to China grew from 4% to 18%. During the
same period, the share of exports going to the EU25 fell from 47% to 37%,
and exports destined to the US fell from 19% to 11% of the total.
Figure 2.4 The destination of Africa’s exports (2000-2012)
Source: UN Trade Statistics, accessed through WITS <http://wits.worldbank.org>,
accessed on 26th January 2014
Underlying these significant changes in export destination is the changing
structure of Africa’s exports (Figure 2.5). In terms of Africa’s specialisation in
global trade, the share of oil and gas exports dominates, and increasingly so.
Between 2000 and 2010, the share of these fuel exports in total exports rose
from 50% to 58%. The share of manufactures in exports fell over the decade,
from 24% to 19%, while that of ores and minerals rose slightly from 8% to
10%. Considered globally, therefore, Africa’s export structure became
increasingly concentrated in the resource sector in the first decade of the 21 st
Century.
Table 2.1 shows Africa’s export product concentration and diversification
compared to other developing economy regions. Detailed analysis of all 53
African countries reveals that more than half of the 53 African countries are
characterised by an export concentration index equal or higher than 0.40
(Morris and Fessehaie 2012). (The export product concentration index
measures the degree of export concentration. Values closer to 1 indicate an
12
economy dependent on export of one product.) The index is equal or higher
than 0.60 for a quarter of African economies. The export diversification index
measures the extent to which the structure of trade of a particular country
differs from the world average. The export diversification index ranges from 1
(the largest difference from the world average) to 0 (an alignment to the world
average). All African countries have a diversification index equal to 0.5 or
higher. For almost a third of African economies the diversification index is
higher than 0.80, which is significantly higher than indices for Asia (0.24) and
Latin America (0.34). As Table 2.1 indicates, excluding South Africa, Africa’s
average export concentration index has increased since 1995. However, the
diversification indexes of Asia and Latin America, including the Least
Developed Countries group, show that these regions are more aligned with
world averages and, moreover, they have improved compared to 1995.
Table 2.1 Comparative trade indexes, by region (1995, 2011)
Export Concentration
Index
1995
2011
Export Diversification
Index
1995
2011
Developing economies: Africa
0.24
0.43
0.55
0.55
Africa excluding South Africa
0.34
0.51
0.67
0.62
Developing economies: America
0.09
0.13
0.36
0.34
Developing economies: Asia
0.09
0.12
0.32
0.24
0.24
0.23
0.75
0.69
Low-income developing economies
LDCs: Asia
0.14
0.25
0.57
0.47
Major exporters of primary commodities
excluding fuels: Developing America
Source: UNCTADStats, accessed in July 2012
0.14
0.18
0.61
0.64
The resource concentration of Africa’s trade with China is particularly marked
(Figure 2.5), although the share of oil and gas fell between 2005 and 2010 as
exports of minerals and ores to China grew rapidly. Africa’s intra regional
trade represents a sharp contrast with this pattern of global and China trade
specialisation. Oil and gas exports were a small and falling proportion, with
minerals and ores dominating. It is also notable that the share of exports of
manufactures within the African region was larger than in Africa’s trade with
China and the world. Moreover, and this has important policy conclusions
which will be addressed in Chapter 6, the technological intensity of Africa’s
13
intra-regional exports is considerably more technology intensive than its trade
with either China or the world (Figure 2.6).
Figure 2.5 Sectoral and geographical composition of Africa’s exports
Source: World Development Indicators, accessed <http://databank.worldbank.org>,
accessed on 26th January 2014
Figure 2.6 The resource intensity of African exports
x
Source: World Development Indicators, accessed <http://databank.worldbank.org>,
accessed on 26th January 2014
2.2. A SLOW PACE OF STRUCTURAL CHANGE
The rapid growth of Asian economies in previous decades - China, Korea,
Taiwan, Singapore and Malaysia – was accompanied by a sharp increase in
exports. This led to changes in economic structure, and notably an expanding
share of manufacturing in GDP, and a rapid growth in employment. Africa’s
14
recent experience does not mirror these trends (Figure 2.7). Whilst the share
of agriculture in GDP remained broadly stable after 2000, and the share of
mining rose sharply until the financial crisis of 2008 led to a sharp fall in
commodity prices, manufacturing’s share of continental GDP declined steadily
over the decade, falling from 13.5% in 2000 to 10.9% in 2011. In part, this
absence of structural change is a result of rising commodity prices and
Africa’s export product concentration (see above). But it also reflects the low
rates of manufacturing growth across the continent.
Figure 2.7 Sectoral shares of Africa’s GDP
Calculated from data supplied by OECD Development Centre, February 2014.
2.3. IMPORTANT DEVELOPMENTS IN THE GLOBAL TRADE ENVIRONMENT
The dynamic nature of Arica’s trade performance since 2000 must be set in
the context of key changes in the global economy. Four changes are
especially relevant to Africa’s future trade prospects – trade preferences; the
shift in global growth poles; the demand structure in low and middle income
export markets; and the sustained strength of commodity prices.
Africa’s trade preferences
There are two major types of preferential market access schemes which
influence the direction and content of African exports - regional and bilateral
trade agreements, and the Generalized System of Preferences (GSP).
15
Developed countries, in particular the EU, Japan, and the US, have
negotiated regional trade agreements to further regional production networks.
Twenty-seven developed countries have provided unilateral tariff preferences
to over 100 beneficiary countries through the GSP. Within the GSP, there is
some preferential access for lower-income countries, such as with the
Everything but Arms (EBA), the EU GSP and GSP+ initiatives, the Lomé
Convention and its successors, the Cotonou Agreement and the US’s Africa
Growth and Opportunity Act (AGOA). Canada and Japan have also improved
preferential market access for least developed countries (LDCs) in their GSP
in the early 2000s. Preferential market access in these agreements is
governed by more or less restrictive rules of origin (ROO), which have a
crucial impact on outcomes. A motivation behind restrictive ROO is also to
support backward integration and regional integration as cumulation
provisions often allow for the use of regionally produced inputs. Restrictive
ROO may however hinder market access for lower income countries by
threatening the competitiveness of beneficiary countries as they are not able
to source inputs from the most competitive source globally.
AGOA provides preferential access to over 6,400 products, and the EBA
covers 10,200 products. The EBA is very regulation-intensive and is poorly
utilised by eligible African countries. The benefits of the AGOA trade
preferences are distributed unevenly between sectors (particularly oil, but
apparel exports have also been a major beneficiary) and between various
African countries. The primary lesson that can be drawn from these access
arrangements is that “the benefits of trade preferences for Africa are rarely
distributed evenly, and depend largely on the existing export capacity of each
beneficiary” (Minson 2007: 8). Industrial capability of the African exporting
country is hence a crucial factor in determining the success of these
institutional arrangements.
By 2010, China had granted duty free access to 31 SSA LDCs for more than
4,700 items, covering 60% of the exports of SSA LDCs. Most African
countries exports to China are primary products, with oil dominating in value
16
terms. Given the importance of these items, China’s preferential market
access programme does not seem to have had the intended effect of
increasing manufactured imports from low income SSA countries. Given
Africa’s production capacity constraints and capability deficits, the available
evidence points to the fact this market access has not helped preferenceeligible countries gain a competitive edge over other rival exporters (Co and
Dimova 2014; Kareem and Kareem 2011).
African countries have also increasingly negotiated regional trade agreements
(Figure 2.8).
For SSA the most important are the Southern African
Development Community (SADC), Southern African Customs Union (SACU),
the East African Community (EAC), the Common Market for Eastern and
Southern Africa (COMESA), and the Economic Community of West African
States (ECOWAS). North Africa has a number of regional trade agreements
with Middle East countries – e.g. the Agadir Agreement (Egypt, Morocco,
Tunisia, Jordan) and the Arab Maghreb Union (Tunisia, Morocco, Algeria,
Libya, Mauritania).
17
Figure 2.8 Network of Plurilateral Groupings in Africa (and Middle East)
Source: Chauffour and Maur 2011
The shift in global growth poles
The second important trend framing the global economic environment within
which Africa seeks to improve its export performance is the changing
geography of global growth. On the one hand, the formerly dominant northern
economies have experienced low growth rates in recent years, particularly
after the financial crisis of 2008. Despite the recent revival of growth in the US
(and the potential for sustained future growth provided by low-cost nonconventional oil and gas supplies), at best growth in the north is unlikely to
exceed 2-3% per annum for some years to come. By contrast, growth in many
southern economies, particularly in China and India, has been at historically
high rates. During the 1990s, China grew at a compound growth rate of 9.9%
p.a. and India at 5.5% p.a. In the decade after 2000 growth averaged more
than 9% and 7% respectively. As a consequence the combined share of
China and India in global GDP grew from a low point of 6.9% in 1969 to more
18
than 20% in 2006 and by 2030 is likely to exceed 35%. Despite the fact that
growth has slowed in both China and India after 2012, these two very large
economies are likely to continue to grow more rapidly than the northern high
income economies (UNCTAD, 2013). The growth slowdown in the `north’ has
led to a growing sense of export pessimism, although it is widely
acknowledged that markets will continue to grow rapidly in low and middle
income economies in general, and China and India in particular.
The character of dynamic global markets is shifting
The significance of this growing share of global production by the two large
Asian Driver economies (China and India) goes beyond the size of their
markets and the potential this offers to African suppliers to increase the value
of their exports. As important as their market size, is the fact that markets in
these two very large economies (as well as in other rapidly growing middle
income economies) are of a different character to those in high income
markets. This affects the pattern of import demand, and as will be shown in
later sections of this Report, this has important implications for African
exporters. Despite the existence of pockets of high income consumption,
markets in China and other low and middle income markets are dominated by
low income consumers. Figure 2.9 shows how household incomes in both
China and India are clustered in the income ranges of $2,500 to $10,000,
considerably below household incomes in the north. Although many of these
consumers aspire to the higher quality branded goods which dominate
northern final markets, they lack the incomes to support these aspirations and
thus prefer lower cost, lower quality and often less branded final products.
19
Figure 2.9 Number of households, by disposable income, China and India,
2004 and 2009
India
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Households ('000)
Households ('000)
China
<1,000
1,000 2,500
2,500 5,000
5,000 10,000
10,000 - >55,000
55,000
Annual Household Income (US $ Constant)
2004
2009
100,000
80,000
60,000
40,000
20,000
0
<1,000
1,000 2,500
2,500 5,000
5,000 10,000
10,000 - >55,000
55,000
Annual Household Income (US $ Constant)
2004
2009
Source: Compiled from http://www.portal.euromonitor.com accessed July 2010
Sustained high commodity prices
Commodity prices have surged since 2001 (Figure 2.10). Given its resource
dependence (see above), this is clearly of considerable importance for Africa.
Although commodity prices fell back after the financial crisis of 2008, they
remain at more than double the level of 2000 and previous decades. Perhaps
more important, there are a series of reasons why commodity prices are likely
to remain robust in future decades (Farooki and Kaplinsky, 2012; Dobbs et al.,
2011). First, the demand elasticity for commodities is high in low and middle
income economies, in large part because the major market for many minerals
and ores is in infrastructure. China, India, Brazil, Indonesia and other heavily
populated lower income economies are urbanising rapidly and their
automobile markets are expanding rapidly. (China’s auto market is not only
the largest global market, but is also growing much rapidly than in other
countries). This requires heavy investments in construction and infrastructure.
In the case of soft agricultural commodities, as incomes grow in these
economies, demand is switching to meat products whose production is very
land intensive, placing competitive demands for land across a range of
agricultural commodities. Second, on the supply side, with a few exceptions,
there are major impediments to the supply of low-cost resources. High
yielding ores have largely been exploited (Figure 2.11), and where low cost
deposits do exist, the gestation period in their exploitation is long, often more
than 15 years. Moreover, in periods of major uncertainty, and in the context of
20
growing financialisation in the northern economies, there has been a
slowdown in the heavy investments which are required to bring new supplies
to the market. The net result of these linked developments is that the prices of
all three families of commodities – agricultural, mineral and ores, and oil and
gas – are likely to remain robust for some years to come.
Figure 2.10 Commodity prices
Source: http://www.insg.org/presents/Dr_Farooki_2_Apr13.pdf
Figure 2.11 Declining ore yields in four key metals
Source: Farooki, M (2013), 'An Industry at Risk?',
http://www.insg.org/presents/Dr_Farooki_1_Apr13.pdf
This rise in commodity prices poses a number of challenges for Africa. One
challenge is the capturing of rent. In previous discussion we distinguished
between resource rents (arising as a gift of nature) and innovation rents
(arising out of investments in knowledge and capital equipment). Although
21
Africa does benefit from many resource rents, these are often overestimated
in importance. Production costs are high in the context of poorly developed
infrastructure and civil war, and it is notable that the bulk of new investment in
mining has gone to Latin America (29% of total investment in 2012), North
America (20%) and Oceania (17%). Africa only accounted for 14% of total
investment in 2012, 2011 and 2010 (Farooki 2013). This means that there is
an imperative for African resource producers to generate and appropriate
innovation rents by reducing costs in extraction and processing.
A second important challenge is to link the resource sectors to the
manufacturing and service sectors. This is an agenda which is widely termed
“Making the Most of Commodities”. Based on an in-depth study of linkages to
the resource sector in nine African economies (Morris et al. 2012), it is
possible to construct a general model of linkage development in the continent
(Figure 2.12) taking account both of the localisation of what was previously
imported and the growing trend towards outsourcing by lead commodity firms.
The vertical axis in Figure 2.12 represents the accretion of value added in the
provision of inputs into the production of a commodity. Based on the insights
drawn from the core competences framework (which will be discussed in
Chapter 4 below), we can identify inputs which the lead commodity producers
have no intrinsic interest in maintaining in-house since they do not reflect their
core competences. These are win-win linkages between the lead firms and
their potential suppliers. On the other hand, there are a range of inputs which
are central to the lead firm’s competitiveness and which it is reluctant to see
undertaken by a competitor. These constitute win-lose linkages. The
horizontal axis of Figure 2.12 reflects the passage of time. The curve shows
that, as a general consequence of the outsourcing of non-core competences,
there is a market driven process of linkage development. Initially the pace of
outsourcing is low, it then speeds up and subsequently tails off as the easy
hits are exhausted. This discussion of Figure 2.12 has given examples of
backward linkages, but analogous examples can be provided for forward
linkages, as core firms jettison non-core processing activities from their
operations.
22
Figure 2.12 Market driven linkages over time
Source: Morris et al, 2012
The shape of this curve is determined by a combination of intrinsic and
contextual factors. The intrinsic factors reflect the technological specificities of
the sector in question and which provide the opportunity for domestic
linkages. The contextual factors, which determine the economic feasibility of
local linkage development, reflect a series of social, political and policy
factors. Based on the research conducted on linkage development in the
resource sector in nine African economies (Morris et al, 2012) four dominant
contextual factors can be identified. The first is ownership, particularly of the
lead commodity firms but also of suppliers. In many cases the embeddedness
of locally owned firms is an important influencing factor (Morris and Staritz,
2014), but there are also significant differences between individual firms and
in the behaviour of lead firms emanating from different countries (including the
distinctiveness of Chinese and Indian firms relative to Northern firms)
(Fessehaie, 2012b; Fessehaie and Morris 2013).
A second factor of significance is the quality of hard and soft infrastructure.
This is a complex linkage determinant, since whilst poor infrastructure acts as
a form of protection to local producers, it also simultaneously undermines their
competitiveness.
The third contextual factor is the level of capabilities in the local economy, the
character of the National System of Innovation (which includes education and
23
training) and the gap between these capabilities and the particular demands
of the commodity sector in question.
Finally, a factor of pervasive importance – which we will discuss in Chapter 6
– is the nature of the policy environment, as well as the willingness and the
capacity of the state to define and implement an effective strategy to promote
linkages.
24
CHAPTER 3
AFRICA’S EXPERIENCE WITH INDUSTRIAL CLUSTERS
SUMMARY

International experience shows that industrial clusters have often
played a prominent role in global markets. In many cases they involve
a range of firm sizes, including SMEs.

These clusters are evidenced in both high income and low income
economies. They arise because of the existence of external economies
– for example, skill development, labour spillovers, proximity of buyers
and sellers and the development of specialised service provides.

When firms in a cluster join together to achieve common ends, they
benefit from what has come to be called “collective efficiency”. This has
proven to be especially valuable for SMEs whose problems are not just
that they are small, but that they are isolated.

Industrial clusters also play a very prominent role in low and middle
income developing economies. Unlike clusters in the developed
economies, these developing country clusters are often “survivalist”
showing little sign of dynamism. On the other hand, there are many
examples of successful and dynamic exporting industrial clusters in
developing economies.

Industrial clusters are widely observed throughout Africa, but are poorly
analysed and documented. A review of 25 African clusters showed that
those selling into export markets tend to be more dynamic and to be
more deeply involved in upgrading.

All of these 25 clusters benefited from external economies. Half of
them gained from all four types of recorded externalities – skill
spillovers, proximity of suppliers, proximity of customers and inter-firm
25
specialisation. A third benefitted from three externalities, and one-fifth
from two externalities.

Joint action between firms was widely observed and closely associated
with cluster dynamism in Africa. The most prevalent form of joint action
was in skill development, followed by cooperation in marketing and
logistics.

Twenty two of the twenty five clusters were supported by institutions.
The most dominant type of institution involved the participation of
multiple parties – government, the private sector and foreign aid
agencies and NGOs.

This macro analysis of the 25 clusters only addressed the association
between cluster dynamism and cluster characteristics. A number of
detailed case-studies in Egypt, Nigeria, Kenya and South Africa shows
how varied cluster dynamics are. It is important to understand these
dynamics if policy is to be effectively tailored to support gainful
participation in global markets.

In recent years, Chinese state sponsored, but privately run, seven
Special Economic Zones have been established in six African
economies (Egypt has two). In principle they represent a new approach
to a perennial problem in industrial and cluster development in Africa.
But whilst one of the Egyptian and the Mauritian SEZs appear to have
some dynamism, this does not appear to be the case in the other five
economies. Most of these SEZs are in their infancy and it is too early to
judge their likely future impact on growth, exports and employment.
26
3.1. GLOBAL EXPERIENCE: THE “DISCOVERY” OF CLUSTERING AND
INDUSTRIAL DISTRICTS
Until the late 1980s, Italy – an industrially advanced and high income
economy – was the world’s largest net exporter of clothing, furniture and
footwear. Given that these sectors were (at least at that time) labour intensive,
this was a somewhat surprising performance, since wages in Italy were
substantially higher than those in many low income economies, including
those with diversified and developed industrial sectors. But perhaps even
more surprising than this export success in traditional industries was the
average size of Italian firms operating in these export-oriented clusters. In
each sector, average firm size was less than seven employees. This low
average did not reflect a myriad of one-two people enterprises and a few very
large firms, but rather a relatively even dispersion of small sized firms in each
sector. Despite initial scepticism, it rapidly became apparent that the reality
was that these dynamic export sectors were indeed being driven by a very
large number of small scale firms. The policy and academic worlds woke to
the reality of industrial clusters.
The fastest growing district of Italy during the 1970s was the Emilia-Romagna
region, which had the country’s highest per capita income. In 1980 the
average firm size in the Emilia Romagna region was five employees. Ninety
per cent of these firms employed less than 99 workers. During this period, the
region experienced very rapid industrialisation – between 1951 and 1971, the
share of the population employed in industry rose from 25% to 51%. In 1983
Emilia-Romagna accounted for 10% of Italy’s exports, and had a trade surplus
of $5bn. Its industrial centre, Modena, had the highest per capita exports in
Italy, and these exports included both labour intensive traditional industries
(clothing and ceramics) and higher tech sectors (transport, machinery and
metalworking).15
One of the striking features of this export success in Italy is that economic
sectors were often spontaneously clustered in particular towns. Woollen
15
All data in this paragraph are drawn from Best, 1990: 204-205
27
textile firms concentrated in Prato, ham producers in Parma, ceramics in
Sassuolo and ladies footwear in Brenta. Hence, the phrases “clusters” and
“industrial districts” were largely synonymous in the Italian context and this
ambiguity in nomenclature continues to exist. As a general rule (and as we
shall see below, this is for good reasons) in most countries clusters are
generally concentrated sectorally in particular districts (Box 3.1).
Box 3.1: Michael Porters definition of Clusters
Clusters are geographic concentrations of inter-connected companies and
institutions in a particular field. Clusters encompass an array of linked
industries and other entities important to competition. They include, for
example, suppliers of specialized inputs such as components, machinery, and
services, and providers of specialized infrastructure (Porter, 1998: 78)
Once the academic researchers had “discovered” these sectoral and
industrial clusters in Italy, they began to unearth a large variety of such
clusters in other industrial economies. One example which caught attention
was Hollywood (and now also Bollywood and Nollywood). But Los Angeles
was less an ensemble of firms, than of capabilities. “Virtual teams” of
specialists would assemble to produce a film, and then dissolve after the film
was made, recombining with other specialists in the region to make different
films. Another famous and striking example from the US was Silicon Valley,
initially spinning off from Hewlett Packard and Stanford University and rapidly
transforming into a dense network of dynamic and interacting hardware and
software firms, and mobile skills. In Seattle, specialist software firms operate
in the vicinity of Microsoft and firms specialising in new materials are clustered
around the Boeing plant. Similar clusters developed in the electronic games
industry in the UK, with regional clusters of capabilities as well as firms in
Guildford, Leeds, Brighton and Dundee. In Germany, metalworking and
machine tools are clustered in mid-sized “Middelstand” firms in Bad
Wurtenburg and, in France high tech enterprises are clustered around Sophia
Antopolis. Clustering is not just evident in production – in most global cities,
particular types of retail shops (for example, selling electrical lights, or
furniture) are often co-located; the threats of competition are evidently more
28
than compensated for by the attraction of similar shops to customers seeking
particular types of goods.
So, how can the existence of these clusters be explained, and are they also to
be found in low and middle income economies?
3.2. WHAT EXPLAINS THE EXISTENCE OF CLUSTERING?16
External economies
The “discovery” of clustering took academics back to the writings of the
economist Alfred Marshall in the late nineteenth century (Marshall 1920).
Marshall observed the existence of industrial clusters around Birmingham
during the UK’s industrial development, that is, “the concentration of many
small businesses of a similar character in particular localities” (Marshall, 1920:
221). His explanation for this clustering – which he referred to as ‘industrial
districts’ - was the phenomenon of ‘external economies’. Marshall defined
these as the gains which are “dependent on the general development of the
industry” economies, and distinguished these from the ‘internal economies’
which are “dependent on the resources of the individual houses or businesses
…, on their organisation and the efficiency of their management “
(Marshall,1920: 221). Crucially, Marshall saw external economies as being
accidental, an “unintended or incidental by-product of some otherwise
legitimate activity”, and contrasted this with the internal economies which
resulted from the deliberate decisions of management.
What might these external economies be? One clear advantage of clustering
is the existence of a pool of skilled labour. For example, the electronic games
clusters in UK cities are characterised by a large turnover of firms, with high
mortality rates. But as some firms die, new ones emerge, drawing on the pool
of mobile labour in the environs. Another form of external economy is the
existence of a pool of specialised suppliers. This can be widely observed in
the auto sector, with component firms clustering around assembly plants such
as Toyota City in Japan and (formerly) Michigan in the US. More than 80% of
16
The discussion in this section is informed by Schmitz 1995,1999, and 2000
29
the world’s racing cars are produced in a small area around Nottingham and
Milton Keynes in the UK, aided by scores of specialised firms producing
advanced new materials and with expertise in braking and energy recovery
technologies. Third, this supply base is often located near a set of advanced
Research and Technology Organisations in what is called a ‘National’,
‘Regional’ or ‘Sectoral’ system of innovation. A fourth important source of
external economy is that clusters draw buyers to an area, in the knowledge
that one amongst the many co-located firms (or indeed shops, in the retail
sector) will be able to meet their needs. Finally, where production systems
require rapid response (for example, when market demand is customised or is
volatile), or involve the transport of bulky materials, the co-location of
suppliers and assemblers can reduce inventories and transport costs.
Given the unintended nature of the process and the fact that it arises purely
from external economies of co-location, this form of clustering is referred to as
“simple agglomeration”.
From external economies to collective efficiency and trust
Detailed examination of the performance of clusters in an increasingly
competitive global economy after the 1970s showed the limits of external
economies. It became evident that successful and dynamic clusters could not
be sustained if they relied on unintended and accidental external economies
alone. For example, how could the small Italian clothing, footwear and
furniture firms which dominated global sales meet the needs of buyers
purchasing in large volumes? The answer was that these firms operated in
consorzia, sharing brandnames and showrooms, often agreeing to common
designs and dividing large volume orders amongst a large number of small
scale suppliers
(Piore and Sabel, 1984; Best, 1990). Other forms of
cooperation included access to finance. In Modena, Italy, during the 1970s,
3,500 firms participated in a Loan Consortium, providing financial guarantees
to members obtaining loans from banks. This not only provided access to
finance, but because of low default rates, meant that the costs of loans was
1.5-2% lower than for non-members (Best, 1990: 215).
30
An oft-cited example of successful collaboration was the Consorzio
Poggibonsi in Tuscany Italy. Comprised predominantly of furniture firms, in
1983 it had 85 member firms employing 2,000 people with a turnover of
$150m, of which 30% was exported. Members paid $6,000 a year and
benefited from joint export promotion in trade fairs (domestically and abroad),
market research, an export office offering (inter alia) translation and producing
catalogues, bulk-buying in order to reduce the cost of supplies, training and
assistance with computerisation (in those days this was something of a
novelty) (Best, 1990: 216).
Thus it became evident that dynamic and sustainable clusters were
characterised by what has come to be called “collective efficiency” (Schmitz,
1995). This involved two phenomena. The first was the external economies
which arose as unintended and unplanned consequences of simple
agglomeration. As we saw this comprised benefits such as a reservoir of
skills, local suppliers and a “magnet” for customers seeking alternative
suppliers. But the second component of collective efficiency is when firms in
the cluster engage in purposeful, planned joint action. The Consorzio
Poggibonso was a particularly well-developed form of collective action, but it
was not unique. Other forms of joint action in clusters are often more limited,
focusing perhaps on marketing alone, or cooperation in training.
Box 3.2: Collective efficiency
Collective efficiency is “defined as the competitive advantage derived from local
external economies and joint action. In other words, there is unplanned and
planned, or as some prefer, passive and active collective efficiency” (Schmitz,
1995: 536)
The experience of clusters in the high income economies suggests that
successful collective efficiency depends on the degree of trust amongst
members. Consider, for example, the financial consorzio in Tuscany
described above. The collective guarantee of loans depended on trust in the
reliability of individual members to repay loans which were mutually
guaranteed. Or the Consorzio Poggibonsi who sold the output of its members
31
under a common brandname – quality weaknesses in any one member would
have undermined the market position of all members. Two elements of trust
can be identified from these examples (Humphrey, Kaplinsky and Saraph,
1998). The first is competence trust, the knowledge that members of the
cluster have the capabilities to not only meet existing technological and
organisational challenges, but in a dynamic and fluid world economy, to also
respond to new and often unanticipated technological and organisational
challenges. The second form of trust is contractual trust – can the members’
word be depended on, will they adhere to their commitments?
But important as inter-firm cooperation and trust might be, they are generally
not enough to ensure a cluster’s survival in a turbulent world. Clusters often
also require support from government, whether this be local, regional or
national government. In Italy, where government was highly decentralised,
during the heyday of its industrial clusters the Emilia Romagna region was
dominated by communist led municipal governments. As the clusters
increasingly participated in global markets and as technology became
increasingly challenging (including the diffusion of computers), local
governments helped sectorally specialised service centres provide training
and technological support. In the UK’s new media and computer games
sector, local government in Sussex supported the development of a large, and
now almost entirely privately-funded support centre, assisting more than
2,000 members with business development, training, accommodation, labour
mobility, marketing and other services (www.wiredsussex.com).
3.3. WHAT HAPPENS WHEN THE MARKET CHANGES – EXPORTS AND GVCS
The industrial clusters developed around Birmingham during Britain’s
industrial revolution unearthed by Alfred Marshall served a local market. This
was true of most clusters until the advance of globalisation. After the 1960s
trade policy reform swept through much of the world economy and the
consequent liberalisation challenged clusters in a number of ways. First, as
the market widened, they had to learn to meet the demands of alien and
distant consumers with whom they were not familiar. Second, they had to
32
produce in much larger volumes, since typically the global buyers who were
driving globalisation sought to sell into a variety of markets at the same time.
A third challenge increasingly confronting the vibrant clusters of the 1960s
and 1970s was the rapid advance of new technologies. This required a shift
from artisanal production to semi-automated and automated production. It
also vastly increased the knowledge content in production, requiring member
firms to become increasingly specialised and to invest in skills, R&D and
design. These challenges posed major problems for clusters across sectors,
and many of the clusters which had dominated global trade in sectors such as
footwear, ceramics, clothing and furniture failed to make the required
transitions. The Italian industrial districts which had been the exemplar for
industrial districts during the 1980s and 1990s saw a sharp rate of decline.
There were 184 classified industrial districts in the regional heartland of this
industrial activity (North-West, North-East and Centre) in 1991. Ten years
later their number had dropped to 130. Some of this decline was caused by
competition from emerging economies in labour intensive sectors. But it also
arose as a consequence of the merging of industrial districts, their members
successfully transitioning into larger firms, and a movement away from
manufacturing production towards higher value added service clusters
(Rabellotti et al., 2009).
The fourth challenge was even more daunting for cluster development. It is an
issue which we will take up in much more detail in Chapter 4 below, but it is
important to flag its importance here. The expansion of the global economy in
the last quarter of the twentieth century was largely driven by global value
chains. This involved the fragmentation and coordination of very complex
chains of production meeting diverse and volatile consumer needs across the
world. As we shall see, successful participation in these chains is very
demanding and producers have to dance to the tunes of global buyers of final
and intermediate products and services. Unless producers can meet these
needs, they are excluded from these global value chains. Trust – competence
and contract – is just as critical in these vertical global chains as it is in the
horizontal industrial clusters. But so, too, is the capacity of individual
producers in the chain to wrestle not only with improvements in process and
33
product, but also in their positioning in these global value chains. The upshot
of this transition from “horizontal” to “vertical” allegiances has often placed
insuperable pressures on clusters and cluster members, radically altering the
policy attraction of promoting industrial clusters in an era of global production
and forcing a deep structural reorganisation of their form and structure.
In developed economies such as Italy, the impact of globalisation and global
value chains has resulted in some labour intensive clusters (footwear,
garments,
furniture)
internationalising
their
own
operations
through
outsourcing part of their production to low cost regions in Eastern Europe and
North Africa while maintaining control of their higher value added core
competences and links to their global buyers. The net effect of these
internationalisation processes is a shift in the size of firms in these Italian
districts towards medium sized and groups of firms which have experienced
the highest growth rates (Rabelotti et al 2009). The stresses and strains which
this conflict in allegiances poses has, as will be shown, below, undermined
the success of many clusters in developing economies making the transition
from local to global markets.
3.4. INDUSTRIAL CLUSTERS IN LOW AND MIDDLE INCOME ECONOMIES
So much for the dynamic clusters in high income economies. But what of
clusters in low and middle income economies? It is widely argued that clusters
in low and middle income economies are distinctive from those clusters in the
high income economies (Schmitz and Nadvi 1999). These differences are
said to take the following forms.
First, many clusters, particularly those in the least developed economies or in
localities of great poverty in middle income economies, are essentially
survivalist in nature. They are composed of informal sector operations and,
unlike the dynamic clusters of Emilia Romagna, the participants in these
clusters have few alternative sources of employment. Hence they engage in
petty manufacturing or services, often on an occasional or “casual basis”.
These clusters remain essentially static in nature for many years, showing
34
little signs of upgrading or firm development. Competition within the cluster is
intense and little surplus is generated to enable investment in new equipment,
experimentation and upgrading. The second distinguishing feature of the low
income clusters is the market which is served. This is overwhelmingly local in
nature. The entrepreneurs essentially make the sorts of products which they
themselves consume and there is little incentive for product upgrading or for
the extended division of labour which, as we saw in Chapter 1, is a function of
the size of the market. Third, and this is a strength of a limited number of
these low income clusters, they do have the advantage of providing “riskable”,
small steps for improvement. In theory this provides the capacity for SMEs in
these economies to fill the “missing middle” between the myriad of small firms
and the large, often foreign-owned enterprises which dominate the industrial
sector (Schmitz, 1995). This then raises the possibility of shifting policy from
support for SMEs (a widely used policy lever in many economies) to support
for industrial clusters in which SMEs participate.
In reviewing the experience of industrial clusters in the developing world, we
recount the experience of notable clusters in Brazil, India, Mexico and
Pakistan and contrast this with the prominent role played by industrial clusters
in China. This is followed by a review of the African experience with clusters.
3.5. SOME EXAMPLES OF INDUSTRIAL CLUSTERS IN LATIN AMERICA AND
ASIA.
One of the striking features of the Italian experience with cluster development
was the concentration of many of these clusters in precisely the industries in
which low and middle income economies were thought to possess a
comparative advantage. These were sectors - clothing, footwear and furniture
- which were labour intensive in nature and which had a high elasticity of
demand at low per capita incomes. As we saw above, for many years Italy
was the largest net exporter in these sectors. But during the 1980s and
1990s, dynamic clusters began to emerge in a number of developing
economies, leading to a substantial growth in exports, and eating into the
market dominance of Italian and other high income economy producers.
35
These dynamic clusters were not limited to these three sectors, and similar
dynamism was evidenced in other sectors such as surgical instruments and
footballs.
Brazil’s export move in footwear was largely driven by a cluster of firms in the
Sinos Valley (Table 3.1). Significantly, this was a region of immigration, in
previous decades from Germany, resulting in strong social bonds and trust
relations – initially at least – in the cluster. Between 1970 and 1990, a cluster
of almost 2,000 firms in the Sinos Valley in Brazil raised its share of world
leather footwear exports from 3% to 12%, specialising in women’s shoes. By
1991 they exported nearly 100m pairs of shoes annually, valued at $900m.
These firms covered a range of links in the footwear chain, and created more
than 15,000 jobs:
Table 3.1 Brazil’s Sinos Valley footwear cluster
Sub-sector
No. Firms
Direct Jobs
Footwear manufacture
480
70,000
Shoe components
223
28,000
Tanning
135
22,000
Service industries/workshops
710
18,000
Leather articles
52
4,900
Others
106
4,900
Leather and footwear machines
45
3,600
Export and forwarding agents
70
2,000
Total
1,821
153,400
Source: IDS Policy Briefing 10, 1997
The surgical instrument cluster in Sialkot, Pakistan, produced scissors,
forceps, and other precision instruments using stainless steel. In the late
1990s it comprised of more than 300 manufacturers, subcontracting work to
more than 1,500 SMEs, and sourcing inputs from 200 local suppliers and
more than 800 service providers. Over 90% of output was exported and the
cluster accounted for more than 20% of global trade, making Pakistan the
second largest exporter after Germany (Nadvi, 1999).
36
The growth of this medical instruments cluster was spurred by the interaction
and division of labour between two sets of industrial clusters. The German
cluster, which had for many years dominated the global industry, began to
specialise in more complex types of surgical instruments as its cost structure
rose. It developed links with the Pakistan cluster which fed less technologyintensive instruments into the global trade networks which the German cluster
had developed. Collective efficiency – that is, purposive joint action – in this
case thus involved not only cooperation between firms within a particular
cluster, but between firms in a different cluster as well as between the two
clusters as groups of firms (Nadvi and Halder 2005).
Joint action was critical to the dynamism of the Pakistan surgical instruments
cluster, driven by the need to meet quality standards in global markets and
the need to overcome logistical problems in importing materials and exporting
final products. But the importance of joint action can be evidenced in other
clusters as well. Table 3.2 provides basic data on three footwear clusters (in
Brazil, Mexico and India) as well as the Pakistan surgical instruments cluster.
As can be seen, each case involved a substantial number of workers and
firms. Each of the clusters also had significant exports. Table 3.3 reports the
findings on the links between the performance of each of these clusters and
their engagement in joint action.
Table 3.2. Number of firms and workers in four clusters
Footwear and related industries
Surgical
instruments
Sialkot
Pakistan
Guadalajara
Mexico
Sinos Valley
Brazil
Agra
India
315
391
4,500
300
15 - 20,000
83,800
48,000
10,000
- number of firms
160
260
75
260
- number of workers
NA
55,000
?
2-3,000
- number of firms
NA
760
225
1,500
- number of workers
NA
23,400
2,000
9,000
Manufacturers of end product
- number of firms
- number of workers
Suppliers of inputs
Subcontractors
Source: Schmitz, 2000a
37
The contribution of cooperation within clusters to the performance of individual
firms was high (Table 3.3). To varying degrees three forms of cooperation
proved to be important. The first was between two firms producing similar
goods and services (bilateral horizontal). The second was cooperation
between more than two firms producing similar goods and services
(multilateral horizontal) and the third was between two firms in the vertical
chain (vertical bilateral). In each case, cooperation was spurred by the need
to confront a major challenge in its external environment. The greater the
degree of cooperation in their responses, the better was the cluster’s
performance. Cooperation was much deeper when more than two firms
cooperated, and when firms cooperated in a vertical value chain rather than
with firms undertaking the same activities.
Table 3.3: Correlation of co-operation and performance
Footwear and related industries
Guadalajara
Mexico
Sinos Valley
Brazil
Surgical
instruments
Sialkot
Pakistan
Agra
India
Horizontal
Positive,
Positive,
Positive,
bilateral
significant at 10%
insignificant.
insignificant.
Horizontal
Positive,
Positive,
Positive,
Positive,
multilateral
significant at 1%
significant at 1%
significant at 1%
insignificant.
Vertical
Positive,
Positive,
Positive,
Positive,
bilateral
significant at 5%
significant at 5%.
insignificant.
significant at 10%.
Positive,
Positive,
Positive,
insignificant.
insignificant.
significant at 1%.
with suppliers
with sub-
-
contractors
Note: In the cases of India, Pakistan and Brazil the correlations are between changes and
in the Mexican case between levels of co-operation and performance.
Source: Schmitz, 2000a
But sustaining cluster momentum is not easy. The Sinos Valley footwear
cluster was undermined after the late 1990s by two related sets of
developments. First, the primary US buyers of footwear had their own value
chain requirements which, as we observed earlier, required longer-term
commitments from suppliers and involved extended trust relations. The Sinos
Valley firms who prospered in this vertical chain then began to experience
conflicts in their horizontal commitments to other manufacturing and supplier
38
firms in the region with whom they had previously cooperated closely. Hence
deep insertion into the global value chain undermined close links in the local
chain. The second challenge faced by the Sinos Valley cluster was that the
American buying principles saw the opportunity of obtaining cheaper shoes
from China, and they began to reduce their imports from Brazil. The very
same steps which had allowed them to benefit from entry into the global chain
– that is, the surrender of their own design, brand and marketing capabilities
in favour of those of their American buyers – undermined their capacity to
respond to the new challenges posed when their American buyers switched
sourcing to China.
These two sets of developments – the undermining of local links through
developing external links, and the loss of brand and design capabilities when
clusters participate in global value chains – are widely experienced in other
industrial clusters. They are, in fact, also evidenced in the decline of the Italian
industrial clusters in recent years.
China’s experience with industrial clusters is distinctive. The clusters in Brazil,
India, Mexico and Pakistan described above developed autonomously,
although as they matured each subsequently benefitted from local and
national government support. By contrast, although China has a long history
of cluster development (Enright et al., 2005) the recent dynamism of their
clusters has been driven by proactive government policies. This policy agenda
began in the immediate post-revolutionary period in which Mao Zedong
actively promoted clusters as a strategic defence against the possibility of
hostile external forces. Following this, a series of Special Economic Zones
(SEZs) were established, providing tax and other incentives and designed to
promote exports through inward FDI and (increasingly) joint ventures between
Chinese and foreign owned firms. The first five experimental SEZs were
established between 1980 and 1984, a further 14 were created in 1984 and
the number has expanded rapidly since then.
Initially these clusters concentrated in labour intensive sectors, and although
of diminishing relative importance in the economy, they continue to make a
39
major contribution to output, exports and employment. By 2006, in 15 labour
intensive industries, there were an estimated 536 clusters in China, with an
average of 923 enterprises, $620m of sales and 51,883 employees per cluster
(Wang and Mei, 2009). Box 3.3 provides some examples of the breath-taking
scale of some of the industrial clusters in labour intensive sectors.
Box 3.3 Some examples of China’s industrial clusters

Jinjiang in Fujian Province has more than 5,000 footwear firms, employing
more than 5000,000 workers. It accounts for 20% of total global production of
sports shoes and sneakers.

Donguan Province accounts for 30% of the total global output of toys.

Daleng Town in Dongguan Province is a centre for sweater knitwear, with
more than 3,000 firms producing 1.2bn pieces a year and employing more
than 150,000 people. Humen Town, also in Dongguan Province, has more
than 2,000 clothing firms, employing more than 300,000 people and
producing 2.5bn garments a year.

One in five of the worlds computers are manufactured in Dongguan Province,
which hosts more than 10,000 IT firms and employs more than 7,000,000
workers.

Zhuji town in Zhejang Province has more than 3,000 firms manufacturing
socks.
http://www.cn-jif.com/main.asp; http://old.dongguantoday.com/Economic04.htm
http://www.economist.com/node/21552898
Most of these industrial clusters were located in formally constituted SEZs. In
total, these SEZs – labour intensive and high-tech - were estimated to
account for 22% of China’s GDP and 60% of exports and to have resulted in
30m jobs in 2007. More recently, the SEZs have concentrated on high tech
sectors and between 1995 and 2010, these high tech clusters accounted for
half of the value of high tech industrial output and one-third of China’s hightech exports (Zhihua, 2014).
40
A critical and distinctive thread running through this experience of the export
oriented SEZs which have largely driven China’s industrial surge since the
mid 1980s has been the major role played by government (Box 3.4). The
central state initially saw these clusters as a way of driving employment and
exports, and then subsequently as the key to promoting technology transfer,
and upgrading, and then ultimately as the route to transforming the economy
from a low-tech and labour intensive structure to a high-tech knowledge
intensive structure. But support for clustering in general, and SEZs in
particular, was not limited to the central government. Provisional government
was also an active participant in cluster development as was city and
township government. China’s Township and Village Enterprises (TVEs) were
the backbone of its industrial development until the end of the twentieth
century.
41
Box 3.4: What explains the success of China’s SEZs
“The key experiences of China’s SEZs and industrial clusters can best be
summarized as gradualism with an experimental approach; a strong commitment;
and the active, pragmatic facilitation of the state. Some of the specific lessons
include the importance of strong commitment and pragmatism from the top
leadership; preferential policies and broad institutional autonomy; staunch support
and proactive participation of governments, especially in the areas of public goods
and externalities; public-private partnerships; foreign direct investment and
investment from the Chinese diaspora; clear goals and vigorous benchmarking,
monitoring, and competition; business value chains and social networks; as well as
continuous technology learning and upgrading” (Zhihua, 2014).
3.5. AFRICAN EXPERIENCE WITH INDUSTRIAL CLUSTERS
An overview of cluster development in Africa
With more than 50 countries, each with its own history and trajectory, with
different ecologies and endowments of natural resources, there is inevitably a
range of cluster experience on the African continent. Moreover, unlike the
widely documented European and Chinese clusters, the characteristics of
most African clusters are poorly recorded. It is thus difficult to generalise with
any confidence across such a diverse landscape, but a review of what is
known about African clusters does point to a few general trends.
An extensive search of the English-language academic literature documents,
with varying degrees of detail and with different focal points, yielded
information on the experience of 25 African clusters (Table 3.4.). These span
9 economies – Egypt, Ethiopia, Ghana, Kenya, Nigeria, Mauritius, South
Africa, Tanzania and Uganda. They include clusters in the south, east, west
and north of the continent, and both the manufacturing and agricultural
sectors. The cluster experience is considered in relation to the major
determinants of cluster dynamics in other regions of the global economy.
The first consideration is the market for the cluster’s output. As we saw earlier
in this Chapter and in previous chapters, the nature of the final market is a
primary determinant in the organisation of competitive supply. The second
42
issue considered is the dynamism of the cluster with respect to its growth and
upgrading trajectories. Not all clusters are dynamic, and the evidence
suggests that static clusters either are survivalist in nature or ‘die’. The third is
the nature of the external economies which explain why most clusters exist.
These are the spillovers between co-located enterprises which are unplanned,
in particular with regard to labour and skills, the proximity of suppliers and
customers and the extent of specialisation between firms. Beyond unintended
external economies lies the possibility of joint action between enterprises,
distinguishing in our analysis logistics, marketing and training. Finally, the
institutionalisation of support to each of the clusters is assessed. This support
may be provided by government, by formal associations developed by the
private sector and by parties external to the economy, such as lead firms or
aid agencies.
All of these observations are judgements made on the basis of publically
available material on the nature and the performance of these 25 clusters. It is
not possible to subject these clusters to any form of numerical analysis since
each of these clusters has been documented in a different form. In later
sections of this Chapter we consider the performance of selected clusters in
more detail.
43
Table 3.4: Africa’s Experience with 25 Clusters:
Cluster
Domiatt Furniture
End Market
Local, National
Evidence of
Dynamism
None
(Domestic)
Egypt
Domiatt Furniture
Labour supply, availability of suppliers, customer
Collective
Forms of Institutional
Action
Support
None
Cluster/sectoral
External
attraction, specialised service providers
International
(Export)
Growth,
Labour supply, availability of suppliers, customer
Marketing,
Upgrading
attraction, specialised service providers
Learning,
Logistics
Merkato Leather
Local, National
None
Footwear
Ethiopia
External Economies
Shiro Meda
Logistics
attraction, specialised service providers
Local, National
None
Handloom
Suame Metalwork
Labour supply, availability of suppliers, customer
Labour supply, availability of suppliers, customer
Government,
Cluster/sectoral, External
None
External
None
Government
Learning
Government,
attraction
Local
Upgrading
Labour supply, availability of suppliers, customer
Ghana
attraction
Suame Vehicle
Local,
Repair
Regional
Gikomba
Local
None
Availability of suppliers, customer attraction,
specialised service providers
None
Furniture
Labour supply, availability of suppliers,
Cluster/sectoral, External
None
None
specialised service providers
Ngong Furniture
Local
Growth
Labour supply, availability of suppliers
None
None
Kibuye Furniture
Local
None
Labour supply, availability of suppliers,
Logistics
Cluster/sectoral
None
None
Kenya
specialised service providers
Eastland Garment
Local
None
Labour supply, availability of suppliers, customer
attraction, specialised service providers
44
Kamukunji
Local
None
Availability of suppliers, customer attraction
Metalwork
Marketing,
Government,
Learning
Cluster/sectoral
Ziwani Vehicle
Local
Upgrading
Availability of suppliers, customer attraction
Learning
Cluster/sectoral, External
Lake Victoria Nile
Local, National,
Growth,
Availability of suppliers, customer attraction,
Logistics,
Government,
Perch
International
Upgrading
specialised service providers
Learning
Cluster/sectoral, External
Lake Naivasha
International
Growth,
Labour supply, availability of suppliers, customer
Marketing,
Government,
Upgrading
attraction, specialised service providers
Learning,
Cluster/sectoral, External
Cut Flower
Logistics
Otigba Computer
National,
Growth,
Labour supply, availability of suppliers, customer
Marketing,
Hardware
Regional,
Upgrading
attraction, specialised service providers
Learning,
Nigeria
International
Nnewi Auto Parts
Growth,
Labour supply, availability of suppliers, customer
Logistics
Cluster/sectoral, External
Regional
Upgrading
attraction, specialised service providers
International
Growth,
Labour supply, availability of suppliers, customer
Marketing,
Government,
Upgrading
attraction, specialised service providers
Learning,
Cluster/sectoral, External
Logistics
Cape Clothing &
National
Textile
KZN Clothing &
National
Textile
South Africa
Logistics
National,
Mauritius
Textile & Clothing
Cluster/sectoral
Growth,
Labour supply, availability of suppliers, customer
Logistics,
Government,
Upgrading
attraction, specialised service providers
Learning
Cluster/sectoral, External
Growth,
Labour supply, availability of suppliers, customer
Logistics,
Government,
Upgrading
attraction, specialised service providers
Learning
Cluster/sectoral, External
Durban
National,
Growth,
Labour supply, availability of suppliers, customer
Marketing,
Government,
Automotive
International
Upgrading
attraction, specialised service providers
Learning,
Cluster/sectoral, External
Logistics
45
Uganda Tanzania
South African
Local, National,
Growth,
Labour supply, availability of suppliers, customer
Marketing,
Wine
International
Upgrading
attraction
Learning
Mwenge
Local, National,
Growth
customer attraction, specialised service
Learning,
Government,
Handcrafts
Regional
providers
Marketing
Cluster/sectoral
Gerezani
Local, National
customer attraction, specialised service
Learning,
Government,
providers
Marketing
Cluster/sectoral
Labour supply, availability of suppliers, customer
Learning,
Cluster/sectoral
attraction, specialised service providers
Marketing
None
Metalworks
Keko Furniture
Fish Processing
Local, Regional
Growth
Government, External
Local, National,
Growth,
Availability of suppliers, customer attraction,
Logistics,
Government,
International
Upgrading
specialised service providers
Learning
Cluster/sectoral, External
46
Moving beyond this summary of 25 clusters (Table 3.4), we now consider
each of these cluster characteristics in more detail. The first issue is whether
there is any correspondence between the location of the final market and the
dynamism of the clusters (Table 3.5). A clear pattern emerges here. 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 show signs of both sustained growth and upgrading. By contrast, the
seven clusters selling into the immediate vicinity show the least signs of
growth and upgrading – they are predominantly survivalist clusters. It is not
possible to determine the direction of causality in these numbers, that is
whether only dynamic clusters are able to sell outside local markets, or
whether the act of selling outside local markets leads to enhanced growth and
upgrading.
Table 3.5: The final market and cluster dynamism
Evidence of Dynamism
Market Orientation
Growth &
Number of
Clusters
Growth
Upgrading
Local only
1
2
0
7
Domestic (Local and National)
2
2
2
6
Domestic and Regional
1
0
1
4
Domestic and International
5
5
5
5
International only
3
3
3
3
Upgrading
As can be seen from Table 3.4 above, all of the 25 clusters benefit from at
least one of the four categories of external economies – labour skills
spillovers, proximity of suppliers, proximity of customers and the development
of inter-firm specialisation and the division of labour. Table 3.6 considers the
prevalence of individual external economies in these 25 clusters. It shows that
12 of the clusters benefit from all four types of spillover, eight benefit from
three types, and five benefit from two types of externalities. In none of the
clusters did firms benefit from only one type of external economy.
47
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
Evidence of Collective Activity
Growth &
Number of
Clusters
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
Upgrading
48
Finally, there are a variety of forms of institutionalisation of joint action
activities. One source of support is through government, either national or
local government or both. Another form of institution is that created by the
members of the cluster itself, or by sectoral associations. These institutions
are both private sector driven. The third form of support is provided by parties
external to the economy, such as through aid or NGOs. Table 3.8 shows the
distribution of these institutional support programmes in the 25 clusters. The
largest number of clusters received multiple types of support – from
government, through the firm’s own contributions and from external sources.
Four of the clusters support institutions were entirely the result of private
sector cluster and sectoral initiatives, and an additional three involved
collaborations between governments and the private sector.
Table 3.8: Institutional support for joint action
Number of
Evidence of Institutional Support
Clusters
Only Government
1
Only Cluster/sectoral
4
Only External
2
Government & Cluster/sectoral
3
Government & External
1
Cluster/sectoral & External
2
Government, Cluster/sectoral, External
9
3.6 CASE-STUDIES: UNPACKING THE DYNAMICS OF AFRICAN CLUSTERS
Whilst the sample of studies summarised in Tables 3.4 - 3.8 is by no means
ideal in providing an overview of cluster experience in Africa, it does provide a
reasonably comprehensive snapshot of what exists. What the summary table
does not provide, however, is an understanding of causality, the determinants
of the dynamics of these clusters – what drives them, and what explains their
trajectories. An understanding of these cluster dynamics is essential for policy
development and for this reason, the Report now covers the experience of
some of these clusters in more detail, constrained of course by the extent to
which the academic literature provides a holistic analysis of their trajectories.
49
These clusters are located in Egypt, Nigeria, Kenya and South Africa and
span the furniture, metalworking, clothing and auto repair sectors.
3.6.1 Egypt: The Domiatt Furniture Cluster
Egypt has a long-lived and thriving cluster of furniture producers. However,
what appears to be a single cluster in fact masks two sub-clusters with very
different trajectories, and serving very different final markets.
Cluster History and Characteristics18
Like much of the developing world’s early industrial development, the Domiatt
Furniture Cluster had its origins in the disruption of global trade during the
aftermath of WW1 and WW2. Production in France and Italy had been
adversely affected during these two wars, and on both occasions Egyptian
furniture manufacturers took advantage of the opening in the market. It
clustered around the port city of Domiatt - a necessity due to their need to
import wood (since Egypt had no timber of its own). Domiatt soon became the
largest furniture producer in Egypt, companies expanded, and family owned
firms gained an international reputation for high quality craftsmanship.
After the initial boom, labour in the Domiatt cluster organised and industrial
action increased. Firms chose to either remain in higher value added markets
by importing high-tech machinery from Europe or to move down the value
chain, to become showroom owners serving the domestic market and to
outsource production of low-value added products to small non-unionised
workshops. This shift was paralleled by a shift in the domestic consumer
market toward cheaper, lower quality furniture. This saw the origins of two
distinct sub-clusters of furniture producers – one targeting export markets,
and the other the domestic market.
The large majority of enterprises in the Domiatt cluster were small/micro firms
with less than 14 employees (Table 3.9). In 2002, there were at least 50,000
firms operating in the area, employing over 100,000 people, 10% of the
Domiatt population. The sector was characterised by high levels of artisanal
18
This account of the Domiatt furniture industry is drawn from El-Shahat 2007; 2011
50
skills mastered over a 25 year apprenticeship/journeyman learning process,
and largely passed on through generations. Like many clusters situated in an
African context, the Domiatt cluster operated without the support or
assistance from the state.
Table 3.9: Percentage - Micro, Small, Medium and Larger Furniture Enterprises
Micro
Small
Medium
Large
(1-4 workers)
(5-14 workers)
(15-49 workers)
(50+ workers)
Egyptian Manufacturing
83.9
13.8
1.8
0.56
Furniture manufacturing (Egypt)
93.2
6.5
0.25
0.03
Furniture manufacturing (Domiatt)
92.4
7.5
0.09
.01
Source: CAPMAS, Firm Census 2003, cited in El-Shahat 2007
Domestic Value Chain
Chain governance and trust
The domestic VC consisted of three main actors - showroom owners, small
workshop owners, and wood sellers. The domestic VC was price-driven,
catering to the local market for cheap, low quality furniture, and characterised
by power asymmetries that were consolidated through showroom owner
governed credit schemes. The showroom owners held the power in the
domestic VC. When an order came to the showroom owners, they passed on
the “white wood” order and the design (a bare wooden structure) to the small
workshop owner along with a letter of credit to purchase wood from a wood
seller. When the small workshop owner completed the order, the product was
delivered to the showroom owner and the credit deducted from payment to
the small workshop owner. All higher value added activities (upholstery, paint,
veneer) were then overseen by the showroom owner.
There was evidence of trust between the furniture producers. When the
showroom owners hired a small workshop owner, they provided them with an
advanced payment so that the artisan could outsource certain activities to
other specialised independent artisans - leg cutters, carvers, sculptors, etc.
These networks formed a basic unit of collaboration between producers with
evidence of significant specialisation. Most of these units have been working
together for many years and exhibit strong trust relations. However, these
51
trust relations were not reflected relations with the wood suppliers. A major
consequence of this lack of trust and vertical cooperation between producers
and wood suppliers was the high rate of wood waste (5-20%). This resulted
from a number of factors:

Wood sellers used imperial measurements, while the small workshop
owners used metric measurements.

The quality of wood supplied was low and sometimes unacceptable for
furniture production.

The high humidity rates of the wood made it difficult to work with. Kiln
drying required an investment that was often too expensive for small
workshop owners to undertake.
These chain inefficiencies could be traced back to the nature of value chain
governance (an issue which will be addressed as a general phenomenon in
Chapter 5). When providing credit for wood purchasing to the small workshop
owners at the start of the production process, the showroom owners dictated
what firm the small workshop owner must purchase from and what type of
wood should be used. The restrictions placed on this process, severely limited
the potential for knowledge transfers and increased operational inefficiency
between the small workshop owners and their wood suppliers. The small
workshop owners were locked into this arrangement. If they decided to
produce their own products, to purchase their wood independently and to sell
to other traders, they were “frozen out of the market” (El-Shahat 2007: 148).
Skill Acquisition/Innovation
The historical and cultural significance of furniture making in Domiatt
generated a longstanding tradition of skill acquisition. The artisans that owned
small workshops possessed a high level of skill. But they were price-takers in
a competitive price-driven domestic market. As a result their margins were
squeezed, and by 2002, 67% of the 80 firms interviewed had cancelled their
apprenticeship programmes and 43% had reduced the number of
journeymen. Table 3.10 gives an overview of the capabilities possessed by a
52
sample of 80 small workshop owners. Significantly, the firms were capable of
modifying machinery and producing a wide variety of products.
Skill acquisition was poorly supported by the state, and three out of the five
furniture training schools in Domiatt closed. The remaining two schools were
poorly funded and lacked skilled teaching staff. A Domiatt Technical Centre
was established, but was unable to fulfil its mandate due to lack of funding.
Consequently, the lack of training facilities in Domiatt led to an erosion of the
high level of skill and quantity of specialised artisans that gave Domiatt its
competitive advantage in the first place.
Table 3.10: Base unit’s technological capabilities (sample: 80 firms)
Capability
Firms (%)
Construct own machinery
58
Construct own flexible machinery
43
Modify imported machinery
87
Number of product varieties, 25+
85
Research and development
11
Internal design skills
9
Source: El-Shahat 2007
The showroom owners lacked essential R&D and design skills. Artisans
producing “white wood” furniture for the showroom owners lacked knowledge
in both creating and reading technical drawings. This was one of the
consequences of the governance of the chain by the showroom owners. The
small workshop owners had no experience with executing codified production
for tastes in export markets. They produced to the specifications of the
showroom owners, largely transmitted through pictures of the desired
products in outdated (over 5 years old) catalogues (Table 3.11).
53
Table 3.11: Sources for acquiring of knowledge on production and innovation
Source of Knowledge
Frequency of use of such a source
(% of firms using such source at given frequency)
Often
Occasionally
Never
Catalogues (> 5years)
87
13
0
Catalogues (< 2years)
5
20
75
Timber suppliers
7
2
91
Machine suppliers
0
5
95
Showroom owners
Paint/lacquer appliers
35
18
14
25
51
57
Fairs
9
14
77
Specialised publications
0
0
100
Technology Centre
0
0
100
Network (base unit)
88
12
0
Other Networks
4
10
86
Export Agents
0
21
79
Libraries or information Services
0
0
100
Spillovers
63
28
9
Institutional Constraints
The Chamber for Trade and Commerce (CTC) in Domiatt claimed to
represent firms from all links in the VC. In reality, the board consisted of
representatives of showroom owners and wood sellers and perpetuated the
value chain governance structures that undermined the autonomy of the small
workshop owners. Furthermore, membership in the Chamber was expensive,
creating a barrier to entry for cash-strapped small workshop owners. The first
point of contact for potential foreign or domestic customers was the CTC,
whose board directed those customers to its members. El-Shahat (2007: 142)
described the CTC as a “private club,” that acts as an “old boys network.”
The pervasiveness of showroom owner-operated credit schemes which was
an important component of their chain-power was indicative of a larger
problem in Egypt - the lack of a well-functioning credit market. Showroom
owners had access to formal credit at cheaper rates and were able to
postpone repayment for longer periods. Both formal and informal artisan
workshops had few assets to serve as acceptable collateral in a formal credit
54
market - over 96% of SMMEs in Egypt did not have access to formal bank
credit. Lack of access to the credit market was the main institutional constraint
preventing small workshop owners from breaking out of this cycle.
Export Value Chain
The export VC was of different nature. Unlike the dispersed-ownership
domestic chain, It was and dominated by three large firms, accounting for
85% of furniture exports and each employing 150-200 workers. Exporting
firms produced high priced, high value added furniture for boutique markets in
America and Europe. Domiatt’s advantage in these external markets came
from the high level of skill and specialisation of its artisans. The subsector
grew at a rapid rate. In 2002 exports were $30 million - by 2009, exports had
grown tenfold, reaching $300 million.
Skill Acquisition and Evidence of Upgrading
Domiatt began as an export-oriented cluster after WW2. However, making the
transition to successful exportation within the context of increasing global
dispersion of production was a complex endeavour. The exporters were
required to upgrade continuously in order to remain competitive. The following
examples demonstrate ways in which exporters upgraded their skill levels in
order to supply sophisticated international markets:

Firms entering foreign markets were expected to reproduce a sample
from technical drawings supplied by the buyer. Since none of the firms
employed artisans that could read technical drawings, they had to
invest in technical training, to learn how to produce furniture according
to codified specifications, and to gain knowledge of ergonomics.

In the beginning, buyers would often refuse payment because the
product was in poor condition due to high levels of moisture in the
wood supplied by Domiatt’s wood sellers. Since the wood sellers
refused to supply the exporters with a higher quality of wood, the
exporting firms were forced to invest in kiln driers to meet international
moisture level requirements.
55

Prior to entering the market, the firms gave little thought to how to store
wood correctly, resulting in waste when the wood warped due to
humidity and poor quality final products. The firms learned to store
wood in moisture controlled storage rooms. They also upgraded their
productive process, establishing a centralised cutting area in the
factory, identifying productive uses for scrap wood, and switchws to a
4-month wood procurement cycle in order to reduce inventories.

American buyers demanded higher environmental standards for their
imported furniture products. This meant the firms had to switch to
water-based paints and lacquers, which required a transformation of
the painting process and more efficient factory layout. Firms brought in
foreign expertise to help them upgrade their process.

American and European buyers demanded health and safety
standards from their supplying factories, requiring the firms to make
safety adjustments to machinery, to increase factory cleanliness and to
provide safety masks and gloves to their workers.
Collective Action and Trust Relations
Cooperation between the three main exporters has grown in recent years as
they realised the benefits of collective action, facilitated by a “gentleman’s
agreement” to specialise in different areas of the export market. The export
VC enjoyed the benefits of collective action in the following areas:

They shipped together, benefiting from lower logistical costs.

They shared the cost of hiring foreign experts to introduce new
processes or technologies.

They shared specialised technicians - painters, sculptors, etc.
Because the firms were not directly competing with one another, they fostered
a network of freely exchanged knowledge and information. At an international
fair, the three main exporters witnessed furniture suppliers utilising wood
56
substitutes due to higher durability and versatility. One of the firms, with
assistance from EXPOLINK (see below), had been using wood substitutes in
their products for years and shared this knowledge with the other two firms.
The switch to using wood substitutes reduced the cost of purchasing wood by
60% and also lessened their reliance on the weak competences of Domiatt
wood sellers.
Institutionalised Collective Action
As opposed to the CTC, which largely represented powerful firms in the
domestic VC, the export VC turned to the Egyptian Exporters Association
(EXPOLINK) for support. EXPOLINK was backed by USAID and provided the
following services for exporters:

Connecting firms with foreign consultants who visited factories and
gave advice on how to improve operations;

Providing firms with specialists to aid in mastering a new skill or
technology;

Collecting and communicating a wide knowledge-base of different
trends, quality standards, regulations, and market characteristics
across the world;

Subsidising 80% of costs for firms to travel to international furniture
fairs. Significantly, these trips gave the three main firms an opportunity
to spend time together, to share information and knowledge, and to
build relationships of mutual trust.
Specific examples of EXPOLINK’s contribution to the Export VC:

Exporting firms learned through visiting an international furniture fair
that Red Cherry and Maple furniture would be in high demand from
buyers that coming year. EXPOLINK connected the three firms with a
wood merchant in Cairo who was able to source those types of wood.
The merchant also imparted knowledge of the wood’s special
57
properties and how to properly handle the wood throughout the
production process.

A buyer demanded a “Spanish coating” for an order. The firm turned to
EXPOLINK who connected the firm with a “painting and coating”
expert. Due to the “Spanish coating” process, the firm was also forced
to change their factory layout to ensure sequential execution of the
detailed process.
Concluding Remarks
Due to the high standards of product and process quality imposed on the
exporting firms from boutique retailers in American and Europe and the lack of
direct competition between the three main exporters, the export VC managed
to upgrade cluster production processes, to break into higher-value added
activities, and to acquire a wider range of technical skills. This resulted in
rapid growth in the subsector.
This export VC stood in stark contrast to the domestic VC. Small workshop
owners, victims of an asymmetrical power structure, were stuck in low-value
added activities to meet the demands of a price-driven market. They began a
process of de-skilling in order to cut costs. This further eroded their chances
of breaking into higher value product markets.
There was some crossover between the two clusters. Some of the exporting
firms occasionally subcontracted work to small workshop owners to cut
production costs. The exporting firm supplied the pre-dried wood or wood
substitute to the workshop owners and gave them a sample of the product to
be replicated. Within this relationship there was evidence of some knowledge
transfer. The artisanal workshops gained experience through working with a
higher quality of wood and wood substitutes, and were expected to create a
product to a higher level of specification. It was in the exporters interest to
maintain this relationship after investing time and money in upgrading the
skills of the workshop owner - herein lay the hope for workshop owner
upgrading. If the export market continued to expand, more small workshop
58
producers would be brought in from the domestic market as subcontractors,
freeing them from the control of the showroom owners and placing them on
an upgrading path.
3.6.2 Kenya: The Gikomba, Ngong, and Kibuye Furniture Clusters19
Given the ready availability of timber and local demand for a basic consumer
good, Kenya has a long history of furniture-making, spanning both the formal
and informal sectors. The experience of the furniture clusters reported below
addresses the experience of three informal sector clusters. The significant
dynamic in these clusters is that it shows how, over time and in specific
circumstances, some clusters can evolve to move beyond a survivalist
strategy to target higher income markets, with the potential for reaching into
export markets. Significantly, not all clusters display this dynamic and are
able to make this transition.
Two of these clusters (the Gikomba and Ngong clusters) are located in
Nairobi, the capital city of Kenya, and the third (the Kibuye cluster) is located
in Kisumu, the third largest city in Kenya and the provincial capital of Kenya’s
western region in Nyanza Province. The information presented in this casestudy is based on data collected between August 2012 and January 2013
from 111 firms, of which 53 are located in the Ngong cluster, 25 in the
Gikomba cluster and the remaining 33 operate in the Kibuye cluster.
The majority of the firms operating in the Gikomba and Kibuye clusters were
not registered businesses - only 1 firm in Gikomba and 2 firms in Kibuye were
registered, compared to 18 registered firms in the Ngong cluster. The firms in
each cluster manufactured similar products, but with important differences.
Whilst the Gikoma and Kibuye clusters produced exclusively for low income
consumers where price was dominant, the Ngong cluster produced both for
these low income consumers and for higher income consumers. In the latter
case, their products were beginning to compete with output from the formal
sector and from imports. Firms in the Ngong cluster reported that they
19
This account of the Kenya furniture cluster is drawn from Attah-Ankomah 2014.
59
occasionally were visited by customers who they believed were foreigners,
but they could not tell whether those items were for use in Kenya or in
regional or overseas markets.
External economies and specialised services
Despite being locked into fiercely competitive price sensitive markets, firms
co-locate because of externalities. These include benefits which have arisen
as a consequence of deepening specialisation in each of the clusters. Some
of the firms, particularly those in Gikomba and Kibuye, specialise in machining
services to other firms while others provide such services in addition to
manufacturing furniture (Table 3.12). The capacity of the Ngong cluster to
provide both machine services and to produce furniture is a reflection of this
cluster’s dynamism since some of the machinery requires relatively large
investment. A second externality is that firms in these clusters rely on each
other for product designs by copying the products of their neighbours. Third,
suppliers of raw materials are also located in the cluster. And, fourth, working
in the same geographical location allows the enterprises to draw on a pool of
experienced labour, particularly in the Ngong cluster.
Table 3.12: Nature of manufacturing by clusters
Nature of Manufacturing
Informal Sector Clusters
All
Ngong
Gikomba
Kibuye
Furniture only
62.3
16.0
42.4
46.0
Machine work only
0.0
52.0
33.3
21.6
Furniture & machine work
37.7
32.0
24.2
32.4
Total
100
100
100
100
Collective action and trust relations
Collective action - that is, building on external economies through joint action is poorly developed in these clusters. However, in Kibuye where there is an
ethnically homogenous cluster where trust relations are relatively high, the
local association was trying to erect permanent sheds to accommodate
members. For the other clusters which are located in ethnically diverse
Nairobi, collective action at the cluster level was virtually absent. The
importance of ethnicity in supporting trust relations was evidenced by the
60
views of one of the firms in Gikomba: “We don’t trust each other but some
people also envy others ... everybody here is careful if you don’t know the
other person well, we always want to work with our tribe man.” Ethnicity
appears less pervasive in the Ngong than the Kibuye cluster in Nairobi,
reflecting the transition in Ngong to a more sophisticated product portfolio and
the higher levels of education of the entrepreneurs in the cluster (see below).
Cluster Dynamism
The firms in the Ngong cluster are relatively dynamic and exhibit high growth
potential compared to their counterparts in the other two clusters. Several
factors reflect this dynamism. First, the firms in this cluster are able to produce
furniture which is beginning to compete with products from large-scale or
“formal sector” firms, which mainly target high-income consumers. One of the
entrepreneurs reported that “... we have been in business for a long time and
we produce high quality furniture that compares well with those imported from
Europe or Asia and so my prices are not friendly. Sometimes, people come
here and they run away because of our prices. Then, they go and buy
[something from a low price cluster] .. which won’t last and then later they
come back to us”. Second, the firms in the Ngong cluster are relatively young
(the average age is 7.8 years, compared to 10.3 years for Kibuye and 12
years for Gikomba); yet, they employ more people on average than their
counterparts in the other two clusters (Figure 3.1), suggesting that growth
dynamics in this cluster are better than in the other two clusters. Third, the
educational background of the entrepreneurs in the Ngong cluster is higher
than the other clusters (Table 3.11). The cluster can boast of entrepreneurs
with university and polytechnic qualifications and many more high school
graduates, who seem to prefer entrepreneurship to employment in the formal
sector.
61
Figure 3.1: Average number of employees by clusters
Table 3.13: Level of education by sector clusters
Level of Education
Informal Sector Clusters
All
Ngong
Gikomba
Kibuye
Primary or basic
17
12
19
48
High school
17
11
11
39
Basic + poly
3
2
2
7
High school + poly
11
0
1
12
University
5
0
0
5
Total
53
25
33
111
Challenges and government policy
The firms operating in these clusters face many challenges. Infrastructure is
poor. Particularly in the Gikomba cluster, firms operate in makeshift temporary
structures which have poor electrical connections and are prone to fire
outbreaks, flooding, and theft. While infrastructure is better for the firms at
Ngong, they face potential ejection from this location as their sheds straddle
one side of the Nairobi-Ngong Road which is due to be widened. If this
happens, government may not provide alternative location, as officials from
the Nairobi city council have already tried to prevent the operators from using
this space. However, the 2008 Presidential Directive committed the
government to channel all public furniture procurement to local firms, showing
some evidence of support from the national government.
62
Conclusion
The experience of these Kenyan furniture clusters evidences the effect of
clustering on the operations of a group of firms and on industrialisation more
generally. Clustering leads to several positive external economies such as
those associated with the opportunities for creating and accessing specialised
services, technological spillovers (e.g. copying of furniture designs) and skill
spillovers. More importantly, the dynamism of the Ngong cluster – firms of
growing size, moving into higher price markets, investing in more costly
equipment and involving more educated entrepreneurs - suggests that
clusters may evolve over time, with appropriate support form local and
national government, into the sort of dynamic furniture clusters which
emerged in Italy in the post WW2 period. However, as the Kibuye and
Gikomba clusters show, not all clusters make this transition and are locked
into a survivalist trajectory.
3.6.3 Kenya: The Eastland’s Garment Cluster20
Context
The Eastlands garment manufacturing cluster in Kenya during the 1990s was
located in two areas around Nairobi: the first, the Quarry Road market, in
Gikomba, two kilometers east of Nairobi’s city centre: the second, Uhuru,
situated a few kilometers to the south of Nairobi. Both markets were made up
of concrete-block buildings that were built in 1974 to replace the previous
make-shift establishments that dated back to colonial times. Although the new
buildings were much better than the previous premises, they were still not
suitable for garment production due to poor lighting, unstable power supply
and lack of business services required by the cluster.
The cluster was mainly made up of small-scale producers that produced
garments for the local market. In the late 1990s there were over 600
producers plus a number of suppliers who provided the producers with
various goods and services, such as machine repairing, scissors sharpening,
20
This account of the Eastlands garment cluster is drawn from McCormick 1998; McCormick
1992; Biggs et al. 1994, 1996; McCormick et al 1994; Ongile and McCormick 1996
63
transport and catering. Credit was also available from non-formal financial
institutes like various NGOs.
Interaction with Global Value Chains
The two clusters began to grow in the 1970s when businesses started to
manufacture clothing instead of selling second-hand clothes. The change was
strengthened by the ban on imported second-hand clothes introduced in
1984. The locally manufactured clothes sold well in Nairobi and in other
towns. However, this progress was interrupted in 1991 when the ban on
second-hand clothes was lifted. Market liberalisation was a big blow to smallscale production as it combined with the already increased competition in the
cluster as well as the weakened demand in Kenya’s depressed economy.
Collective Action and Collective Efficiency
Collective action and collective efficiency were not strong features in the
Kenya’s garment cluster. For example, horizontal bilateral linkages (between
two like firms) were mainly limited to the lending and borrowing of basic tools
and no horizontal multilateral linkages (between groups of like firms) existed.
Moreover, neither market had a site association or a sectoral association.
Some limited vertical linkages developed between producers and their
suppliers and traders. For example, some firms had strong enough
relationships with their wholesalers to qualify for credit and the presence of
traders in the markets enabled producers to access final markets. Despite
these vertical linkages, the overall weak linkages in the cluster did not appear
to result in joint action. A key characteristic in the clusters appeared to be the
lack of trust, with producers complaining that as soon as they came up with a
new design their competitors would steal their design.
General Lessons
The two Nairobi garment clusters are best characterised as survivalist,
serving low income local markets and generally engaged in “repair” (tailoring)
rather than production. They appear to have suffered as much from external
diseconomies (copying of designs) as benefitting from external economies
(proximity of suppliers and retailers). Product development was limited,
cooperation was virtually absent and the clusters found it difficult to compete
64
with imports, either of new clothes or second hand clothes. The clusters also
failed to form links with the large scale cut-make-and trim exporting firms
operating in the export processing zones and exporting into the AGOA
preferential market in the USA (which will be considered in Chapter 5).
3.6.4 Kenya: Kamukunji Metalwork Cluster21
Context
During the 1990s, the Kamukunji metalwork cluster, mainly a craft-based
cluster, comprised of nearly two thousand artisans making a variety of metal
products with little division of labour within or between firms. Their products
include tin-trunks, charcoal stoves, security bolts, cooking pots, griddles,
bicycle carriers and wheelbarrows. The cluster was situated between the
industrial area and the bus station, making it easier for the cluster to access
the supply and product markets. The cluster has poor electrical supply and, as
a result, most firms could only utilise simple technologies. This made the
production processes slow and the products tended to be cheap and of a low
quality, targeted at the large low-income domestic market. The location of the
metalworking artisans in one area enabled them to benefit from external
economies, particularly in accessing both product markets and final markets.
The cluster had not been able to achieve economies of scale or significant
technological spillovers.
Collective Action and Collective Efficiency
Collective action through multilateral linkages existed in the cluster primarily
due to state action in the 1980s. President Moi had established the cluster in
order to assist the artisans displaced as a result of the construction of a new
housing estate. Most of the vehicle repair firms moved to Ziwani (see below).
The metalworkers mainly relocated to Kumukunji where they were joined by
other artisans. In 1985 the President visited the cluster, gave them the land
permanently, and instructed the artisans to set up an association.
21
This account of the Kenyan metalwork cluster is drawn from Frijns et al., 1997; King 1996:
55–57; Undugu Design Unit, 1995; Haan 1995; McCormick, 1988 in McCormick, 1998
65
In 1994 the new Kamukunji Association of Artisans was formed. With
approximately 850 members it represented all cluster artisans. It was affiliated
with the National Federation of Associations, enabling the government to
channel assistance through the National Federation. The association gave its
members maximum exposure by encouraging them to participate in various
trade shows and exhibitions. The association also provided joint security and
recycling services and sought to assist members to find new markets, both
domestically and in other African countries, particularly through the Kenyan
National Chamber of Commerce.
Another form of multilateral inter-firm cooperation was through informal
groupings of firms that made similar products. However, this form of
collaboration was limited, and the only documented example involved twelve
firms that produced wheelbarrows in the cluster. This group helped replicate
and simplify the production of a wheelbarrow they obtained from a local
hardware store. The group also jointly marketed these locally produced
wheelbarrows to local retailers. However, the group was unable to
standardise parts across its group members.
This case study illustrates the potential role played by government in fostering
cluster development. Nevertheless, over a period spanning at least two
decades, this metalworking cluster seemed to have developed little
dynamism, benefitting from few externalities and displaying only limited signs
of collective action. As in the previous case-study of the Kenyan clothing
sector clusters, this metalworking cluster was located at the survivalist end of
the cluster spectrum.
3.6.5 Kenya: Ziwani Vehicle Repair Cluster22
Ziwani Vehicle Repair Cluster is situated in the Eastlands of Nairobi. In the
late 1990s, the cluster was small by comparison with other clusters in Kenya,
with 506 enterprises crowded on 1.2 acres of land. The cluster included
general mechanics, panel beaters, spray painters, vehicle-wiring specialists
22
This account of the Ziwani cluster is drawn from McCormick, 1998; Kinjanjui, 2000;
McCormick et al, 1996.
66
and gas and electrical welders. The cluster also included some manufacturing
firms that produced vehicle parts (such as silencers, rubber bushes, chassis,
and car seat cushions), machines and household goods. There were also two
spare parts shops retailing locally manufactured and imported spares, but
most firms purchased their spares from other parts of Nairobi. The cluster
specialised in the repair of older vehicles since the maintenance of newer
models required costly diagnostic equipment.
The cluster developed spontaneously in the 1970s. As in the case of the
clothing and Kumukunji metalworking clusters, the Ziwani cluster benefitted
from the change of attitude in Government towards the informal sector. This
legitimised the cluster and brought growth and better infrastructure to the
cluster. The second major turning point came with market liberalization. This
resulted in the importation of spare parts and second hand vehicles. The large
formal sector garages, medium-scale garages, and small shops, including the
informal enterprises located in Ziwani, shared the market for vehicle repair in
Nairobi. Being located at Ziwani facilitated market access for the informal
sector firms because of the cluster’s reputation as a source of competitive
vehicle repairing services. The firms also benefitted from the cluster’s labour
pool, such as trainees, worker and entrepreneurs.
Collective Action and Collective Efficiency
Bilateral linkages were initially weak or non-existent with only a small
percentage of firms in the cluster initially exchanging or sharing equipment.
But as the cluster developed, there were signs of emerging informal
cooperation between firms. For example, there was widespread information
sharing from one vehicle repairer to another on new processes, such as the
repair of new vehicles or the mixing of paint before spraying. There was,
however, little sign of firms sharing equipment.
In the late 1990s virtually all firms were involved in subcontracting, either
accepting subcontracts or providing subcontracts. One of the distinctive
features of the Ziwani Vehicle Cluster was the strengthening of this
subcontracting system. A cluster association was formed and became
67
responsible for contract enforcement. All members of the cluster were
members of the association, which provided extensive assistance to its
members, including contract enforcement and security. Building on these
successful subcontracts, the association took a further step by purchasing the
land that the cluster was situated on from the City Council. The association
also attempted to reduce its member’s capital costs by purchasing gas
cylinders for shared use.
Thus, unlike the Kumukunji metalworking cluster, the Ziwani cluster was
strengthened endogenously through actions taken by member firms, rather
than as a result of a Presidential Directive. The cluster slowly developed the
capacity to take collective action through its own association, and in so doing
to support the development of contractual trust relations, to purchase the land
for its members and to purchase costly and scale intensive equipment which
could be used jointly. Like the Ngong furniture cluster, the Ziwani cluster
shows evidence of cluster dynamism, supporting external economies with
joint action as it slowly built its collective efficiency.
3.6.6 Nigeria: Computer hardware and auto parts Otigba Computer
Hardware Village (OCV), Lagos23
Cluster History and Characteristics
The OCV began in the early 1990s with a few firms concentrated on two
streets, specialising in computer, printer, and office equipment sales and
repair. By the late 1990s, as computer demand in Nigeria grew, Otigba Street
began attracting more and more enterprises, leading to the spontaneous
development of a cluster of firms involved in the assembly and trade of
computers and computer components. By 2004, 12 years after the initial signs
of sector concentration, the cluster had expanded to include 8 streets and had
significantly upgraded its assembly, trade, and production activities.
By 2005, the cluster consisted of over 2,000 self-starting, self-sustaining
enterprises, directly employing approximately 15,000-20,000 people, with
23
This account of the Nigerian OCV is drawn from Oyelaran-Oyeyinka 2007; Zeng 2006;
Boladale 2006; Bamiro O.A. 2003; Brautigam, D 1997
68
additional indirect employment numbered in the thousands. The OVC is now
perceived as the ‘Silicon Valley’ of not only Nigeria, but of the entire ECOWAS
region.
Evidence of Dynamism and Growth
Several key characteristics of the OCV facilitated the creation of what became
a dynamic cluster offering the potential for a significant future impact on
innovation and high-value production systems throughout West Africa.

The initial activities - computer cloning, assembly, and repair - were low
risk activities, the small riskable steps observed as being important in
cluster development in other regions of the world (see earlier in this
Chapter).

Further lowering risk levels and encouraging firm entry was the fact
that the market for computers and computer components expanded
rapidly in Nigeria during the 1990s, and continues to expand as the
country requires higher levels of technological capacity to fuel rapid
economic growth.

The activities require a high base-level of knowledge and skill, creating
an agglomeration of highly knowledgeable entrepreneurs. 90% of the
entrepreneurs have formal schooling beyond secondary education 5% are university graduates, 15% polytechnic school graduates and
20% are specialised technicians.

The formation of the cluster was made possible due to the
convergence of two simultaneously occurring phenomena: the growth
in demand for computer technology in Nigeria and the high
unemployment rates for college graduates with degrees in computer
science, computer engineering, and business administration.
The cluster experienced a constant stream of new entrants after its informal
establishment in the early 1990s. Moreover, firms within the cluster
experienced impressive growth in profitability and exports. Table 3.12 shows
69
trends in profitability, turnover rates, and exports between 1999 and 2004.
Profitability grew from 39.5% in 1999 to 44.4% in 2004, while exports grew
from 24.5% to 39% of sales.
This trend can be expected to continue - the cluster benefits from the high
demand of low priced, cloned computers systems, which will expand as per
capita incomes rise in Nigeria. 85% of Nigerians prefer cloned computers
because of their low cost. This demand pattern is also evidenced in other
ECOWAS countries, providing the potential for export expansion and the
solidification of OCV as a hub for low price computer systems tailored to the
regional market.
Table 3.12: Trends in profitability, turnover, and exports
Profitability (%)
Turnover (%)
Output exported (%)
1999
39.48
107.50
24.51
2000
34.75
82.14
23.98
2001
36.63
64.83
27.41
2002
39.24
192.50
33.37
2003
41.85
87.00
35.48
2004
44.37
58.00
38.99
Source: Oyelaran-Oyeyinka 2007.
External Economies and Specialisation
The cluster consisted of a wide variety of enterprises - suppliers, buyers,
importers, clone assemblers, traders, repairs and servicing. Within each of
the activities there was further specialisation. The large variety and level of
specialisation of the firms translated into increases in operating efficiencies
and provided the impetus for further firm entry in the following ways:

Large knowledge base: The cluster attracted new entrants, as well as
buyers and traders from other West African countries, facilitating the
transfer of knowledge across borders.

Inter-firm learning: The quantity and quality of knowledgeable
enterprises combined with high levels of cooperation within the cluster
(97% of firms indicate they cooperated with other firms in the cluster).
70

Access to inputs: The wide variety of components and services within
a small geographical area enabled easy sourcing for assembly,
cloning, and repair. The quantity of input suppliers created a highly
competitive environment, driving prices down.

Upgrading to higher-value added activities: Due to the high level of
education within the cluster and the willingness to share and transfer
knowledge, firms who entered the market in lower value-added
activities (clone assembly) have demonstrated the ability to move onto
higher-value added activities (locally branded computer or component
production). Upgrading to branded production requires the mastering of
a new set of capabilities - standardisation, design, marketing, and
quality control. Once a firm moved to the level of computer production,
these new capabilities were then externalised through the extensive
use of apprenticeship programmes within OCV.
Horizontal and Vertical Linkages
There has been continual growth in the level of cooperation between firms
with evidence of substantial horizontal linkages:

Increase in use of industrial associations - utilised as mediums for
information exchange, training, quality regulations, and joint marketing
schemes.

The presence of inter-firm credit facilities allowing firms that have run
low on stock to purchase inputs on credit from others within the cluster.

Cooperation in the form of joint warehousing of inputs and finished
products, as well as joint sourcing schemes for smaller enterprises.

Apprenticeship programmes which have been the main method of
learning and skill upgrading within OCV. After completing an
apprenticeship, the individual often established a new enterprise within
the cluster. If the individual established a business outside of the
cluster, they tended to maintain horizontal linkages with firms in OCV.
71

Technical support and consultation from experts recognised within the
cluster. The reputation of expertise in the cluster led to firms from not
only outside the cluster, but outside the region seeking technical
support from the OCV.
There are also a set of vertical linkages which developed in latter stages of
the cluster’s development:

The emergence of local production of computer parts and accessories.
This has been accomplished by established locally branded IT
companies, like Omtek and Zinox Computers who have managed to
break into the highly competitive and foreign-dominated market by
creating products that match their foreign counterparts in quality, but
are tailored to the local environment. For example, Zinox designed the
power units of its computer systems in response to Nigeria’s erratic
power supply. Omtek designed keyboards that included the Nigerian
currency symbol and which could accommodate three different
Nigerian languages.

There is increasing collaboration within the cluster between input
suppliers and assemblers/producers. This is especially significant with
regard to collaboration with both foreign input suppliers and foreign
buyers of cloned or locally branded computers systems. Relationships
with foreign firms in China, Malaysia, and Dubai have increased the
scale of information and technology transfer, improving quality and
prospects for innovative activity.
Institutionalised Collective Action
Horizontal linkages have been institutionalised in the form of industrial
organisations. The most significant of these associations is the Computer and
Allied Products Dealers Association (CAPDAN). CAPAN was established in
2003 with the initial objective of addressing security and infrastructural issues
within the cluster. Since establishment, CAPDAN has accomplished the
following:
72

Registration of all of the enterprises operating in OCV, involving over
4,500 firms and 1,500 street vendors.

Worked with local police to install security cameras on Otigba Street,
resulting in a significant decrease in crime.

Negotiated with the Ikeja local government to provide an indoor facility
for street vendors, further improving security.

Applied for land allocation in Abuja to develop another IT cluster similar
to OCV in order to better meet the growing technological demand from
government ministries located in Abuja.

Initiated a dialogue with Microsoft to get a significant reduction in the
cost of Microsoft software in order to address pervasive software piracy
in the cluster.
Challenges and Government Policy
The main challenge facing the OCV is the absence of national government
support. Nigerian industrial policy long favoured a strategy of supporting large
state-owned enterprises at the expense of SMME development. While the
national government does have an ICT development policy, this involves a
blanket application of generalised interventions with no differentiation of
policies to address the needs of different sizes, subsectors such as ICT, and
locales such as Ikeja. Furthermore, the state has not supported the cluster in
upgrading infrastructure, providing new industrial spaces, or increasing
access to seed funding to encourage new entrants and innovation.
In summary, the spontaneous creation of a cluster, consisting almost entirely
of SMMEs that participate in technologically advanced activities is unusual in
an African context. The fact that it has occurred without the direct support
from national government and within the context of poor institutional and
infrastructure systems, makes it all the more unusual. As in the case of
Kenya’s furniture and auto repair clusters, the OCV cluster shows the
importance of time. Clusters, including those which have developed
spontaneously, have their own trajectories and take time to develop.
73
However, in this case, the cluster shows the potential for sustained and high
value added development in the future. Compared to the survivalist clothing
and metalworking clusters in Kenya, it is at the opposite end of the African
cluster spectrum when considering dynamism and future growth potential.
This potential is particularly marked in the case of future Nigerian exports
within the region, rather than into intensely competitive global markets, not
least because of the cluster’s capacity to tailor its products and services to
meet specific local operating conditions.
3.6.7 Nigeria: Nnewi Auto Parts Cluster24
Cluster History and Characteristics
Nnewi encompasses four villages in rural Southeast Nigeria. The area has a
long history of trading in automotive spare parts. The destruction caused by
the Nigerian Civil War (1967-1970), prompted a consolidation of the auto
spare trading network into one centralised location - the Nkwor Motor Spare
Parts Market. The physical proximity of the firms enabled the establishment of
trading rules and norms, and social cohesion and cooperation.
The development trajectory of most of the manufacturing firms operating in
Nnewi is remarkably similar to the iCT in Otigba. Nnewi manufacturers began
as importers and distributors of auto spares from East Asia (mainly Taiwan).
These distribution networks developed through extended family ties, with
each family often specialising in supplying spare parts for a particular
automotive brand.
Trading activities allowed Nnewe industrialists to build the capital and
knowledge levels necessary to enter into repair and manufacturing with
greatly reduced risk. They utilised the relationships they had built up and
maintained over decades with their East Asian suppliers in order to learn
about the market and the technology necessary for production. In most cases,
the new factories began producing the same products which they were
24
This account of the Nnewi cluster is drawn from Abiola 2006; Oyelaran-Oyeyinka 1997;
Brautigam 1997, 2003.
74
previously importing, using second-hand imported machinery sourced from
their Taiwanese partners. The Taiwanese partner would often train the new
manufacturing staff in either their Taiwanese factory or send their technicians
to Nnewe.
Nigeria’s Structural Adjustment Programme from the late 1980s resulted in
the devaluation of the Nigerian currency, which increased the costs of
importing spares. During this time, Nnewi experienced an increasing amount
of new entrants into the auto spares sector to fill the domestic demand for
products that were now too expensive to import. By the mid-1990s, the cluster
was supplying more than 80% of auto spares in Nigeria. In the context of a
national and regional economic decline, the rapid rate of cluster growth was
impressive, especially when so many SMMEs in Nigeria were failing.
By the end of the 1990s, the cluster largely comprised of SMMEs (80%), most
established between 1977 and 1987, and fully Nigerian-owned. The
manufacturing firms produced a wide variety of products including, but not
limited to, automotive spare parts, motorcycle parts and engines, cables and
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
75
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.
Linkages and Trust Relations
Relationships within the Nnewi cluster can be separated into three categories:
trade, social, and production relationships. Each operated at different levels of
sophistication and impact on the cluster’s development.

Trade relationships (backward linkages with input suppliers): The most
advantageous networking relationship was between individual Nnewi
firms and their respective Taiwanese partners. These relationships
were strong and enduring and entailed a great deal of trust. Taiwanese
producers and wholesalers provided critical advice, assistance, and
training that benefited the Nnewi firms in terms of machinery and
technology upgrading.

Social relationships (horizontal linkages): The origins of the cluster,
rooted in familial networks, created a foundation for horizontal linkages
between firms - sharing of information, experienced personnel, and
76
equipment is common within lineages. As described above, familial ties
played a critical role in skill acquisition through apprenticeship systems.
Extended families often jointly invested in service provision to multiple
factories (i.e. access roads, water boreholes, generators). Additionally,
where the state failed to provide accessible services, close-knit family
and ethnic ties facilitated access to informal credit and venture capital.
When industrialists in Nnewe wanted to start or expand their business,
wealthy friends or family would often assist by providing ‘informal
shares’ in the endeavour.

Production relationships (horizontal linkages): While joint action was
common within family circles, cooperation extending beyond family was
rare. Collective action in the areas of joint marketing and labour training
was low. Levels of subcontracting and specialisation stagnated.
Institutional Constraints and Policy Implications
In Nnewi, there were two private industrial associations which represented the
needs of the manufacturers - the Nnewi Chamber of Commerce, Industry
Mines, and Agriculture (NCC/MA) and the Nigerian Association of Small Scale
Industries (NASSI). Most firms belonged to at least one of these associations.
These private institutions worked to provide opportunities for inter-firm
communication, information exchange, and joint action to solve collective
problems. Most significantly, the institutions promoted the needs of the cluster
on a national scale, especially with regard to lobbying the government to
improve the state of infrastructure in Nnewi.
Nnewi industrialists have ‘substituted for the state’ in the provision of public
goods. Without public provision of basic infrastructure - roads, water,
electricity - or access to financing, the manufacturers in Nnewi have had to
create private solutions to these public problems. However, these solutions
entailed large overhead costs, undermining the ability of firms to invest in
R&D, design skills, and technical upgrading - all essential elements to
maintain cluster dynamism.
77
In summary, as in the case of the cluster of computer firms in Lagos, the
Nnewi auto parts cluster represents a relatively advanced case of cluster
development in Africa which bodes well for future development. It exists
despite rather than because of state support and, like the Demiatt furniture
cluster, has its origins in the breakdown of reliable import channels during
periods of conflict. Not only has the state effectively ignored the cluster’s
dynamism, but the cluster has had to fill gaps in the provision of public goods
which are normally considered to be the responsibility of government. One of
the important features in this story of cluster dynamism is the role of trust –
within families in the Nnewi region, and between Nnewi entrepreneurs and
their Taiwanese business partners. These trust relations evidence the
importance of time in trust and cluster development. A further important
aspect of this cluster’s development is that its exports begin in the regional
market, mirroring the experience of the Nigeria’s computer cluster and
Ghana’s mining services sector (Morris et al. 2012). Finally, as in the OCV
computer cluster, cluster dynamism was associated with sustained upgrading
at the firm level.
3.6.8 South Africa: The Clothing & Textile Clusters (CCTC/KZNCTC)25
Cluster history and context
In mid 2004, the Western Cape provincial government approached a service
provider firm, Benchmarking and Manufacturing Analysts (BMA), which was
working with the automotive sector to build competitiveness through a
cluster/learning network approach. BMA was asked to use its experience and
facilitate the establishment of a provincial cluster in the garment and textile
industry in the Western Cape. Soon afterwards the Durban Metropolitan local
government requested a similar initiative in KwaZulu-Natal province.
The Cape Clothing and Textile Cluster (CCTC) and KwaZulu-Natal Clothing
and Textile Cluster (KZNCTC) were launched in 2004 and 2005 respectively.
The Western Cape Provincial government provided funding and institutional
support for the CCTC. The KZNCTC received support from the Durban
25
This account of the CCTC and KZNCTC is drawn from Arde 2011, Morris and Levy 2014;
Morris and Barnes 2007.
78
Metropolitan Government and the Provincial Government. Both clusters are
currently very active
Horizontal/Vertical Linkages and Trust Relations
The clusters are private/public sector organisations. They are membership
driven and constitutionally governed organisations of firms comprising a
critical mass of the leading garment and textile firms in each province.
Provincial and local government provide the enabling environment and the
majority of funding, whilst the service providers provide technical support.
Both clusters are legally registered as non-profit membership based
organisations. Their constitutions specify clear governance functions - an
elected
executive
committee
of
manufacturer
firms,
plus
provincial
government representatives, as well as the service providers. Only
manufacturers are eligible to be elected office bearers of any committees.
Manufacturers pay membership fees which account for 25% of operating
costs, with government funding covering the remainder. Retailers pay full
membership fees plus additional funding for two special programs – value
chain alignment and world class manufacturing.
Retailers participate in cluster activities through multiple channels (though
they have seldom played a leading role in operational cluster activities). Their
joining in the cluster sent an important message to producers, and exerted
pressure on their own suppliers to join the clusters. In some cases this has
been through fear of losing favour, in others it has been as a means of
enhancing operational quality and remaining in the retailer’s supply chain.
Perhaps most fundamentally, in the early stages of development the retailers
demonstration of their commitment to upgrading the domestic industry helped
build trust, confidence and hope.
Institutionalised Collective Action
There are three technical steering committees comprising member firm
volunteers and focusing on three areas of cluster activity - world class
manufacturing, human resource development, and value chain alignment.
These operate with clear business plans and budgets. Activities and services
provided in the three core areas are decided upon and administered by the
79
technical steering committees. All members receive newsletters, are
individually benchmarked in terms of world class manufacturing operational
performance criteria, comparing their own performance to South African and
international industry norms. They are expected to participate in workshop
training activities, and receive technical assistance in preparing applications
for industry support programs sponsored by central government.
Skill Acquisition and Evidence of Upgrading
These clusters are fundamentally concerned with raising the operational
performance and competitiveness of member firms. Hence the workshops
and activities are heavily loaded towards skills acquisition in world class
manufacturing techniques and therefore process upgrading. This is reflected
in the changes in the average operational performance data for the two
clusters between 2006 and 2012 (Table 3.13).
Average work-in-progress
inventory improved by 28%, whilst finished goods inventory was reduced by
34%, resulting not only in lower financing costs but also in an ability to move
towards greater flexibility. Similarly, quality (reflected in customer return rates)
improved by nearly 50%. Their change in capabilities to undertake more rapid
style changeover is another index of flexibility and this improved by 30%.
Table 3.13: Operational performance of CCTC and KZNCTC combined
2006
2012
Total Inventory (Days)
37.56
30.58
% Change
2006-2012
18.58
Work in Progress (Days)
6.90
4.98
27.74
Finished Goods (Days)
11.76
7.76
34.07
Customer Return Rate (%)
2.68
1.39
48.04
Style Changeovers (%)
Source: BMA
8.36
5.85
30.05
Cluster drivers
The differentiating feature of clothing and textiles is the critical lead role
played in the domestic value chain by the large domestic retail firms which
hold the future of the firms in their supply chain in their hands. Although the
existence of the cluster is not in jeopardy, its momentum has been uneven.
Membership has fluctuated due to government inconsistency in funding, the
global crisis, and finally, the fact that domestic retailers are shifting their
80
primary focus from support for the cluster generally to vertical linkage support
for their primary suppliers in their own supply chains.
3.6.9 China SEZs in Africa26
At the Beijing Forum on China-African Cooperation (FOCAC) Summit in
November 2006, the Chinese government, in line with its “Going Global”
economic strategy, presented a framework for future Chinese investment in
the continent. A key element of this framework was the development of
Special Economic Zones (SEZs), modelled on its very successful domestic
SEZ programme that successfully underlay rapid export growth and
employment (and described earlier in this Chapter). After the FOCAC summit,
the Ministry of Commerce (MOFCOM) held two rounds of tenders. More than
120 Chinese companies submitted proposals to a panel of experts who then
selected 19 global SEZ projects, seven of which were located in Africa.
China’s
SEZ programme
represents
a
new approach
to
industrial
development in Africa. In the past, African economic zones and industrial
parks have been designed, developed, and run by central government
agencies. The results of these programmes have been largely disappointing.
In contrast, although funded by the Chinese government, these new zones
were designed and run by private firms, who were selected on the basis of
economic feasibility and potential profit gains. The Chinese government has
assumed a hands-off approach to the SEZs - support is given through funding
in grants and long-term loans. Chinese companies, both SOEs and private
enterprises, are the drivers of SEZ design and implementation.
Two of the seven zones are 100% Chinese owned (Mauritius and Ethiopia),
while the other five are joint ventures between Chinese companies and
African state partners. In both Egypt and Mauritius, the SEZs predate the
2006 discussions at FOCAC for the wider establishment of SEZs in Africa.
Table 3.14 provides data on the seven SEZs selected for construction in six
African countries (there are two in Nigeria). Many of the SEZ projects involve
This account of China’s SEZ programme in Africa is drawn from Ancharaz & Nowbutsing
2010; Brautigam & Xiaoyang, 2011; Brautigam and Tang 2011; FIAS 2008; LFZDC 2014;
World Bank 2009
26
81
expanding or upgrading existing Chinese industrial clusters - their planning
and construction predates the 2006 announcement of the programme.
Table 3.14: China’s Official Planned African SEZs
Country
Zambia
Planning
Initiated
2003
Chambishi
Egypt Suez
Status as of
late 2010
Developers
In operation/under
China Nonferrous Mining Group
construction
1994
Planned Industry
Focus
Copper and Cobalt
processing
In operation/under
Tianjin TEDA, China-African
Textiles & garments,
construction
Development Fund, Egypt-China
petroleum equipment,
Corporation for Investment,
automobile assembly,
Tainjin Suez International
electronics assembly
Cooperation Co.
Nigeria
2003
Under construction
Lekki
Nigeria
2004
Under construction
Ogun
China Civil Engineering
Transport equipment,
Construction, Jiangning
textile & light industries,
Development Corp, Nanjing
home appliances,
Beyond, China Railway, Lekki
telecommunications.
Worldwide Investments Ltd
Possible oil refinery.
Guangdong Xinguang, South
Ceramics, ironware,
China Development Group,
furniture, lighting wood
Ogun State Government
processing, medicine,
computers,
construction materials
Mauritius
2006-07
Under construction
Jinfei
Shanxi-Tianli Group, Shanxi
Services (tourism,
Coking Coal Group, Taiyuan
finance, education)
Iron & Steel Co
Manufacturing (textile,
garment, machinery,
hi-tech), trade,
Ethiopia
2006-07
Under construction
Oriental
Yonggang, Qiyuan Group,
Electric machinery,
Jianglian Int’l Trade, Yangyan
steel & metallurgy,
Asset management &
construction materials
Zhangjiagang Free Trade Zone
Algeria
Jiangling
2006-07
Approved but
Jiangling Automobile,
Automobile assembly,
suspended
Zhongding International
construction materials
Source: Brautigam & Xiaoyang, 2011
African governments are expected to regulate zone activities and provide
incentives for foreign investment in the zones. The incentive packages offered
are similar across the different host countries, providing tax holidays, removal
of import tariffs on inputs and low labour regulation. Box 3.5 gives an example
of the incentives offered by the Lekki Free Zone in Lagos.
82
Box 3.5: Business Incentives offered at Lekki Free Zone

100% foreign ownership of investment

100% repatriation of capital, profit, and dividends

Complete tax holiday form all Federal, State and Local government taxes,
custom duties, and levies

Permission to sell 100% of manufactured, assembled or imported goods into
the domestic Nigerian market

Waiver on all import and export licenses

Duty-free, tax-free import of raw materials and components for goods
destined for re-export

Duty-free capital goods, consumer goods, machinery, equipment, and
furniture

No threshold/quota for foreign employees

Prohibition of strikes within 10 years of operation

Long lease for investors (up to 99 years since 2006)
Source: LFZDC 201427
There are a number of factors underlying this commitment by China to the
development of SEZs in Africa. Many critics of Chinese involvement in Africa
argue that the EPZs are a reflection of Chinese neo-colonialism, viewing the
SEZs as a mechanism for the extraction of resources. However, although
each of the SEZs differ with regard to design, ownership, and sectoral focus,
they are predominantly oriented towards manufacturing. Only one of the SEZs
(Chambishi) is explicitly linked to commodity extraction and processing.
There are two other rationales for the SEZ programme:

Emerging consumer markets in Africa hold potential as a future
destination for Chinese goods and services. If African countries
experience sustained economic growth, per capita incomes will
continue to rise, and, subsequently, consumer demand will expand.
China recognises Africa’s untapped potential and is strategically
positioning itself to benefit from the growing consumer market.
27
http://www.lfzdc.org/index.php?option=com_content&view=article&id=40&Itemid=17
83

China views the SEZs as regional hubs for the future growth of
Chinese industry in Africa. SEZs will engage in the production of a
variety of intermediate inputs - wires, cables, machinery, metal and
plastic products, etc. - that feed supply chains throughout the continent.
They will also provide centralised nodes for financial and business
services for both Chinese and African companies. By using the SEZ as
a catalyst for backward and forward linkages, China is decreasing
transaction costs and reducing the risk of doing business for future
entrants into the market.
How might the Chinese EPZ promote linkages and upgrading?
The greatest reservation about the SEZ programme is the concern that these
zones will develop as enclaves detached from local socio-economic systems,
with little positive impact on the development of host communities and local
capabilities. For these SEZ’s to serve as a catalyst for local development they
will have to significantly involve domestic investors and domestic labour and
facilitate knowledge, skills and technological transfers. However, one of the
main aims of China’s “Going Global” strategy is moving Chinese companies
offshore - SEZs are seen as a key mechanism for achieving this aim.
MOFCOM hopes that Chinese companies will constitute 70-80% of total firms
in the zones.
Nevertheless, each zone has been designed to incorporate investment from
Chinese, African, and other foreign sources. Most plan to establish clusters in
labour-intensive,
low-skill
industries
that
necessitate
the
knowledge,
participation, and services of existing local networks. But the host
governments have adopted different strategies towards local content and this
will inevitably influence the breadth and depth of linkages from the SEZs.
Mauritius restricted local firms from relocating to the SEZ during the first
phase of development. The government saw the zone as attracting new
capacity rather than providing the opportunity for existing firms to reduce their
tax contributions and pay less for their labour force. Zambia, by contrast, has
not introduced these restrictions. It encouraged domestic and foreign firms
84
alike to invest in the zones, aiming to attract 40 Chinese companies and
companies from at least 10 other countries (including Zambia). In Nigeria, 42
companies have registered to invest in the proposed Lekki Free Zone, only six
of which are Chinese.
Requirements for local labour content also vary widely across the SEZs. In
Egypt, one foreign work permit is granted for every nine local employees. The
initial construction phase of the Suez SEZ necessitated 1,880 labourers,
1,800 of whom were Egyptian. In Ethiopia, each firm was only allowed two
residence permits for foreign workers. During the construction of the
Chambishi Zone, 500 Zambians and 400 Chinese were employed. By 2009,
3,300 Zambian and 700 Chinese workers were employed. In the Nigerian
SEZ, at least 40% of the workforce was required to be Nigerian. Mauritius, on
the other hand, placed few restrictions on how many foreigners were allowed
to work in the country.
A second potential benefit arising from the SEZs is the transfer of knowledge
and technology from foreign firms to domestic firms, upgrading capabilities
both within the zone and beyond its borders. The potential for growth in this
area is, again, very much in the hands of government policy. At this time,
there is no evidence of any host governments developing policy to encourage
linkages between established domestic firms outside of the SEZ and those
within the SEZ. This is a major cause for concern.
MOFCOM has provided some stimulus to the learning and skill acquisition
process. 60 African representatives from Zambia, Nigeria, and Ethiopia were
invited to attend a 20-day workshop in China focused on the Chinese SEZ
experience and lessons in SEZ management. The training programme was
helpful, but short-lived. A sustained effort to elevate the knowledge levels of
not only higher officials and managers, but unskilled labourers, administrators,
engineers and artisans, is required to maximise the success and impact of the
SEZ on the host country.
85
The Egyptian and Mauritian SEZs, described below, were amongst the first
SEZs to begin construction and suggest that the lack of progress in SEZs in
Nigeria, Zambia, and Ethiopia may be a function of their more recent origins.
Whilst in principle they offer a new approach to the perennial problem of
promoting industrial and cluster development in Africa, the jury is out on
whether this new approach to cluster and industrial zones development in
Africa will be any more successful than previous generations of zones.
Chinese SEZs in Egypt
Egypt has a substantial history of utilising industrial zones and free economic
zones to attract FDI into the country. This strategy helped grow manufacturing
exports from $5.3 billion in 2000 to $25.5 billion in 2009.
Planning for a
Chinese SEZ in the Northwest Suez region began as early as 1994 when the
Egyptian government sought to copy the successful Chinese SEZs. In 1998,
China and Egypt signed a MoU for construction of the Northwest Suez
Economic Area (NWSEA) with joint ownership between the Tianjin EconomicTechnological Development Area (TEDA) Investment Holding Company and
four Egyptian investors. The area was a failure, largely due to lack of capacity
and pervasive corruption with TEDA’s four Egyptian partners.
The failure to develop the NWSEA in partnership with local enterprises led
TEDA to venture out on its own, establishing the Suez International
Cooperation Company (SICC) in 2000. SICC bought land from the EgyptChina 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).
86
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
developers usually allot a period of 10-15 years before a zone is fully
functioning

White TEDA’s continued involvement in the Suez region was a profitmotivated private venture, Egypt’s national government played a role in
expanding TEDA’s interest in the region and guiding it toward larger
national policy goals.
Chinese SEZs in Mauritius
China’s decision to locate an SEZ in Mauritius is an odd one at first glance.
The island has a small domestic market, a shortage of unemployed labourers,
87
and aside from sugar, has no exploitable natural resources. Since 2007,
leading up to the construction of the Jin Fei SEZ, there has been a spike in
Chinese FDI funnelled into the Mauritius SEZ, a trend that has shown no
signs of slowing down.
The Jin Fei SEZ was officially launched in September 2009. The first phase of
constructing industrial spaces and developing infrastructure was completed in
2012. The second phase of attracting investors, filling industrial spaces and
developing manufacturing activities will be completed in 2015. The Jin Fei
SEZ manufacturing base is intended to concentrate on light industry
processing, pharmaceuticals, stainless steel, and aquaculture.
The distinctive feature of the Mauritius SEZ is that service provision, not
manufacturing, will be the main focus of activity. Over half of the activities in
Jin Fei will be in education, logistics, information technology, and hospitality.
Situated in the Indian Ocean, between Africa and Asia, China is looking to
position Mauritius as its regional business hub for future operations in the
continent. Mauritius offers many features that make it a practical locale as the
future centre of Chinese investment in Africa:

A stable macroeconomic environment and an upper-middle income
country.

Strategically located between African and Asian markets.

Duty-free access to a number of key markets through bilateral or
multilateral trade agreements.

A member of both SADC and COMESA, providing an easy platform for
entry into developing SSA markets.

A history of being welcoming to foreign workers from China,
Bangladesh, and India with lax expatriate labour laws.
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CHAPTER 4
BUILDING SUPPLY CHAINS
SUMMARY

From the 1950s there has been an increasing recognition in business
strategy that a chain is only as strong as its weakest link, that is, that
islands of competitiveness find it difficult to compete if they are located
in a sea of inefficiency.

The translation of this abstract recognition into the everyday practices
of firms in their supply chains can be traced back to the Toyota Motor
Corporation which, after the 1960s, saw the first systematic, sustained
and large scale implementation of Supply Chain Management (SCM)
practices.

Toyota’s successful implementation of SCM through all tiers of its
extended supply chain provided it with major competitive benefits and
has served as a role model for virtually all global TNCs and other larger
northern firms.

Whilst the Toyota model enhanced the Economic Bottom Line (that is,
the profitability) of firms, it was increasingly challenged for only meeting
the needs of one set of stakeholders – owners. Most large global firms
are now expected to meet a Triple Bottom Line – the Economic, the
Social and the Environmental Bottom Lines - and to push this through
their supply chains.

All three forms of the Triple Bottom Line SCM are weak in
contemporary Africa.
o With regard to the Economic Bottom Line, the most advanced
example is the development of supply chains in the South African
auto assembly and components sector. A recent development of
potentially far-reaching significance is the prospect of large Chinese
89
firms bringing their suppliers with them to Africa, although as yet,
most of these suppliers are Chinese rather than local firms.
o SCM in pursuit of the Social Bottom Line is evidenced both in
relation to some of the largest resource extraction ventures and in
the development of Fairtrade and other civil society driven initiatives
in the agricultural sector.
o Supply Chain Greening is the least developed of the Triple Bottom
Line objectives in Africa and globally. However, many of the world’s
largest firms (including Wal-Mart which has just entered the
continent) are rolling out large supply chain greening programmes.
There is evidence of nascent greening in some African supply
chains, but also disturbing evidence of ‘de-greening” when
enterprises formerly supplying high income markets in the EU
switch their output to less demanding markets in China and other
emerging economies.

There has been rapid growth in Chinese-related supply chains as
Chinese activity expands in Africa. Although there is a great variety in
these supply chains, a number of common characteristics are evident:
o
In some cases, such as Zambia’s copper industry, entry into the
Chinese supply chain is easier than for northern resource
extracting firms; yet when faced with poor capabilities, Chinese
firms are less likely to engage in Supply Chain upgrading than their
northern competitors.
o
The mode of entry of large Chinese SOEs backed by state-to-state
agreements and utilising the ‘Angola mode’ of financing often limits
local procurement.
o
Local procurement in these large SOE involvements is hampered
by the priority given by the host government for rapid execution of
potentially long gestation period projects.
90
o
Rapid execution of utilising local suppliers is hampered by low
levels of capabilities in the domestic economy. Hence the (limited)
local supply chains feeding into these large SOE projects
predominantly involve Chinese firms rather than locally owned
suppliers.
o
Unrelated to the large SOE backed ventures, a number of larger
privately owned Chinese manufacturing firms are investing in
Africa, predominantly seeking to serve the growing domestic
market. Faced with poor infrastructure and weak local supply
capabilities, they are creating industrial estates and are bringing
their Chinese supply chain with them to serve their needs for key
inputs. Unlike the SOEs to whom they are feeding inputs, the entry
of these privately owned suppliers is not aided by the Chinese
government.

These developments represent both threats and opportunities to the
development of local supply chains and to locally-owned supply chains.
It is as yet too early to determine the balance of outcomes. Moreover, it
is unlikely that a single pattern will emerge spans all African economies
and all economic sectors.
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4.1 THE HISTORICAL ORIGINS OF SUPPLY CHAIN MANAGEMENT
One of the most important threads running through development and growth
policy in high, middle and low income economies alike is the critically
important role which markets can play in efficient resource allocation. Whilst
to greater or lesser degrees it is accepted that the state and other non-market
actors have a constructive role to play in this process, the default position in
much of the policy agenda is one of market-efficiency. The starting point for
policy is market allocation.
One of they key intellectual edifices on which this policy framework is built is
that of perfect competition. Analysis and policies which do not confirm to this
model are seen as departures from the norm. For example, the theory of
imperfect competition analyses exchange relationships such as oligopoly and
oligopsony (a few large sellers and buyers respectively), and monopoly and
monopsony (a single seller and buyer respectively) in terms of their distance
from perfect competition.
There are four key assumptions within the theory of perfect competition which
are relevant to supply chain management and supply chain upgrading:

The market consists of a very large - in fact, infinite - number of buyers
and sellers.

These buyers and sellers have no specific identity – market exchanges
are anonymous and impersonal, and exchanges are of an “arms-length
nature”.

It follows from this that no buyer or seller is large enough to affect the
prices which are reached in market exchanges – they do not produce
or buy in sufficient volumes to affect trading outcomes.

All producers supply the same, undifferentiated product.
92
A hypothetical example of this set of market exchanges might be an
agricultural commodity such as maize, produced by a myriad of small farmers,
and sold into markets comprised of a very large number of customers. If there
is face-to-face contact between these producers and consumers, then this is
anonymous – that is, they either do not know each other, or if they do, this
has no impact on the price of the product or the volume exchanged. Put this
way it is immediately clear how fanciful the theory of perfect completion is in
reality. Maize is not an undifferentiated product, not all suppliers produce at
such small scale, few buyers purchase in such small volumes, and exchanges
are seldom without personal identity
This world view of perfect competition in economic theory had its equivalent in
classical business strategy. This viewed the firm as an independent island,
seeking to maximise its own profitability in a hostile win-lose environment.
Whilst the intellectual edifice of perfect competition was increasingly eroded in
economic theory after the 1930s (Chamberlain, 1933; Robinson, 1933), it was
only in the 1950s that the theory of optimal business strategy began to reflect
what was actually occurring in the real world. That is, firms did not act as
isolated entities. A classical publication in supply chain theory in 1958
concluded that:
“Management is on the verge of a major breakthrough in understanding
how industrial company success depends on the interactions [with other
firms and institutions] between the flows of information, materials,
money, manpower, and capital equipment. The way these five flow
systems interlock to amplify one another and to cause change and
fluctuation will form the basis for anticipating the effects of decisions,
policies, organizational forms, and investment choices” (Forrester 1958,
p. 37, cited in Park, Nayyar and Low, 2013: 47).
The largely static theory of business strategy was overtaken by events,
particularly in the Japanese automobile industry and especially in relation to
the development of what came to be called the Toyota Production System
93
(Monden, 1983). To understand why this happened, and its key role in the
development of supply chain management, we need to return to the
discussion in Chapter 3 when we reflected on the impact of market
segmentation and market volatility on cluster development.
When Toyota and the Japanese auto industry began to rebuild production
during the 1950s, they were confronted with a domestic market which was too
small to allow for the scale economies involved in the mass production of
autos. Typically, a large US plant would produce more than 200,000 cars a
year of the same model. Yet by the end of the 1950s the entire Japanese
market was less than 250,000 cars. Therefore, profitable production of autos
in Japan required a new form of production organisation.
The widely celebrated mass production plant introduced by Henry Ford in the
late 1920s served as the prototype for not just other auto firms, but for most
industries. It was built around the principles of standardisation. Hence, once
the final product was “locked”, specialised machinery could be introduced,
dedicated to clearly defined tasks and depreciated over the years with large
volume production. Critical to this mass production organisation was inventory
control, with large volumes of work in progress being available “just in case”
something should happen which might interrupt the continuous operation of
these large and very costly machines. Since production could not be
interrupted, quality control occurred after production was completed.
Clearly, given limited market size, this model could not work effectively in
Japan. Instead, Toyota pioneered what has come to be called “just in time” or
“lean production” (Womack and Jones, 1990; Kaplinsky, 1994). Instead of
standardising production around a single unchanging model, the objective
was to allow plants to become adaptable, producing in smaller batches. For
small batch production to be effective, large volumes of work in progress
inventories were an obstacle. So Toyota pioneered new forms of work
organisation within the plants which involved very much reduced levels of
stock. The organising principle was small batch production, and small batch
production required low levels of inventories. But if there were few inventories
94
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 qualityat-source 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
95
suppliers (many of whom were very small). Hence to be effective, this
required a root-and-branch reform of operations in the whole chain and
between the links in the chain. In order to achieve this change, Toyota formed
supply chain networks in which its first–tier suppliers worked with their
suppliers (who in turn worked with their suppliers) to introduce the principles
of just in time production along the chain (Cusumano, 1985).
There were three critical elements to this supply chain management system,
each of which challenged the idea that firms operated as isolated ‘island’.
First, trust was critical (Sako, 1992), both the contractual trust and the
competence trust which (as we saw in Chapter 3) were important in the
development of industrial clusters. Second, and as a consequence, Toyota
and its supply chain moved away from the anonymity of arms-length relations
which dominated the win-lose mentality of mass production to enduring and
often ‘personalised’ relations with suppliers. These were ‘sticky’ in the sense
that they were long-lived, and if a supplier had problems, Toyota or its first-tier
suppliers would send in teams of experts to help resolve the issue. And, third,
in managing their relations with the supply chain, Toyota introduced a series
of standards which suppliers had to meet. These standards had a dual
purpose. They were not only introduced to ensure that Toyota operated its
just in time system with full confidence that its suppliers would not let it down
or ‘hide’ inventories and defects elsewhere in the chain, but it was also used
to build improvement and innovation into its supply chain. Suppliers would be
provided with moving quality targets. For example, the acceptable level of
defects for delivered components systematically moved down from more than
1,500 parts per million (ppm) to the current target of zero ppm. Similarly, it
introduced a ‘cost down’ approach to pricing which, in the 1980s and 1990s,
required annual cost reductions by supplier of 3% per year.
It is clear from this that a core component of supply chain management was
the move away from anonymity and win-lose mentalities to sustained
cooperation and win-win approaches. If suppliers could not meet their targets,
Toyota teams would work with them to improve, and similarly its first-tier
suppliers would do the same further down the supply chain. This was the birth
96
of modern supply chain management and consequently supply chain
development. Its demonstrable superiority led to its replication in other
Japanese auto firms, to the Japanese electronics sector and then diffused
globally to other countries and firms (Womack and Jones, 1996), including to
low and middle income economies (Kaplinsky, 1994).
The success of the Toyota system in these more high tech industries
extended to retailers of consumer goods such as clothing, food and footwear,
adopting and then adapting its principles. One of the most successful
examples of the ‘Toyota Production System’ to other industries has been the
Spanish retailer Zara adapting and introducing it for the management and
development of its garment suppliers so as to create a ‘fast product’ supplier
system. This is the basis of Zara (and H&M) being able to have rapid turnover
(sometimes on a two weekly cycle) of different garment styles in its stores on
a more frequent basis than the previous four season year.
4.2 THE ORIGINS OF SUPPLY MANAGEMENT (SCM): ENHANCING CHAIN
AGILITY, FOSTERING PRODUCT DEVELOPMENT AND REDUCING COSTS
Many supply chains are extended, involving a variety of tiers. Although in the
auto sector these supply chains involved backward linkages with tiers of
suppliers, in many other sectors there are also forward linkages, with tiers of
users (Figure 4.1). In general, the further down the chain the tier, the more
likely it is to involve a small scale firm or farm. For example, in the 1980s,
many of the third-tier suppliers in Toyota’s supply chain were small firms
employing less than 20 people (Cusumano, 1985).
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Figure 4.1: Suppliers and Users in the Production Chain
Source: Lambert and Cooper (2000)
A well-known definition of SCM is that provided by Mentzer et al in 2001:
“…supply chain management is defined as the systemic, strategic
coordination of the traditional business functions and the tactics
across … business functions within a particular company and
across businesses within the supply chain, for the purposes of
improving the long-term performance of the individual companies
and the supply chain as a whole” (Mentzer et al. 2001),
The key components of modern supply chain management are as follows
(Bessant, Kaplinsky and Lamming, 2003):
1. Mastering the internal supply chain. The lead firm in the chain has to begin
by focusing on its own operations, ensuring that the various stages in its
own operations are interacting in a systemically efficient manner. This will
invariably involve the adoption of small inventories and quality at source
procedures. This ‘internal supply chain management’ needs to be
mastered before the lead firm can realistically think about managing its
external supply chain effectively.
98
2. Targeting value chain efficiency. Having recognised the need to change its
internal operations, and having taken action to do so, the lead firm needs
to recognise the need for its external value chain to become more
effective. It also needs to recognise that this value chain improvement
must extend beyond the first tier, and that SME suppliers in its chain may
have particular problems.
3. Rationalisation of vendor/customer base. In achieving this chain efficiency,
almost always the first step which the lead firm will need to take will be to
rationalise its supply base, identifying a set of reliable suppliers with whom
it can develop high trust relations and who are capable of systematically
improving their performance. This may often involve a substantial
reduction in the number of its suppliers.
4. Communication of new requirements to vendors. Having rationalised the
supply base, the lead firm must communicate its needs – generally with
regard to quality, cost and delivery – to its supply base. These are the Key
Performance Indicators (KPIs) which will drive the chain and which are
central to supply chain management.
5. Monitoring
and
sanctioning
performance
by
suppliers.
Supplier
performance then has to be measured, and the results communicated to
the suppliers. Where persistently deficient, suppliers need to be negatively
sanctioned, and this may or may not be complemented by positive
rewards to those suppliers who consistently perform well.
6. Benchmarking and stretching. Measuring performance in a number of
suppliers provides the capacity to compare, and hence to identify relative
weaknesses. This is known as benchmarking. These relative weaknesses
need to be systematically addressed to raise all supplier performance to
best- practice levels. But, equally important, indicators of performance can
be used to set objectives for further improvement, for stretching, and
hence for improving competitiveness along the chain. ‘Best practice’ then
becomes a moving frontier driving supply chain management.
99
7. Supporting and assisting suppliers. Where a supplier experiences
difficulties, the lead firm will either need to provide direct development
support to the supplier or ensure that the required support is provided by a
third party. Support also needs to be targeted beyond the first tier of the
chain.
8. Supply chain learning. Sophisticated value chain governors will then also
go on to recognise that they can not only assist their suppliers to upgrade,
but can also learn from them as well.
SMEs pose particular problems for supply chains producing in large volumes
or involving relatively sophisticated technologies. Their management may be
undertrained, facilities may be poorly equipped with low levels of fixed
investment, and the workforce may be unskilled and often even be barely
literate and numerate. This will require the lead firm to take special steps to
meet the needs of SMEs, as can be evidenced from the experience of
Crompton Greaves, one of India’s largest manufacturing firms, in the late
1990s (Humphrey, Kaplinsky and Saraph, 1998). Many of its suppliers were
very small firms, often employing less than 5 workers, operating in dingy
premises with poor health and safety and maintaining very few records of
production operations. Since Crompton Greaves was not only moving towards
a zero-defect policy of total quality control but also seeking to achieve
ISO9000 Quality Certification, it clearly had to either jettison these suppliers or
to help in their upgrading. Since there were few alternative suppliers, it had to
take the latter route and therefore invested considerable resources in
developing a SCM team to directly assist many of its suppliers.
4.3 BEYOND AGILITY, PRODUCT DEVELOPMENT AND COST REDUCTION: THE
TRIPLE BOTTOM LINE AND SUPPLY CHAIN MANAGEMENT
The Toyota Production System (which is now widely referred to as \lean
production’) did much to enable manufacturing and service firms across the
sectoral spectrum to become more agile and thus to serve increasingly
volatile and segmented markets. It also significantly reduced the trade-offs
100
between cost and quality and cost and variety which were central to mass
production. But it diffused through other sectors and other economies during
the 1980s and 1990s at a time when consumers in the high income northern
economies were becoming more discriminating in their consumption habits.
They not only demanded better quality and more frequently changing
products at affordable costs, but also became increasingly concerned about
the social and environmental character of the supply chains producing
products for their final consumption. The rallying call for these wider supply
chain concerns was the ‘Triple Bottom Line’ (see for example, Ekins, 1992)
and ‘sustainability’ (see for example, the Bruntland Commission, 1987).
Figure 4.2: The Triple Bottom Line
Source http://www.vanderbilt.edu/sustainvu/who-we-are/what-is-sustainability/, accessed 13th
February 2014.
The Triple Bottom Line philosophy argued that the Economic Bottom Line only
met the needs of a particular set of stakeholders in production, that is, the
101
owners of capital. There was also the need to satisfy other stakeholders, such
as the workers involved in production (their working conditions, their safety,
their training, etc) which represented a Social Bottom Line. Increasingly there
was also the need to ensure that the environment was not degraded in
production, that is, the Environmental Bottom Line. The Bruntland
Commission and its successors have argued that unless all these Bottom
Lines were addressed, production would not be sustainable - without an
Economic Bottom Line firms would be unprofitable and would not invest;
without a Social Bottom Line, the absence of a ‘social licence to operate’
would undermine the feasibility of operations, and without an Environmental
Bottom Line, production would be overwhelmed by environmental costs.
Thus, just as the search for the Economic Bottom Line led to the development
of profit-oriented SCM, so the imperatives of the Social and Environmental
Bottom Lines developed into new forms of SCM – Corporate Social
Responsibility and Supply Chain Greening.
Supply chain management in Africa is still in its infancy. To the extent that it
has diffused, this has primarily been in the pursuit of cost competitiveness as
suppliers have become incorporated in GVCs – the Economic Bottom Line.
Progress with respect to the other two dimensions of the Triple Bottom Line –
the social and environmental - has been less rapid.
4.4 AFRICA’S EXPERIENCE WITH SCM IN PURSUIT OF THE ECONOMIC
BOTTOM LINE
SCM addressing the Economic Bottom Line in Africa predominantly arises
through the operations of Transnational Corporations who have rolled put
SCM in their global operations. One example of an advanced programme is
that developed in South Africa in the automobile and clothing sectors. Its
origins are to be found in the attempts by Toyota South Africa to restructure
its supply chain (see below). Assisted by government support in its early
stage, this developed into a large programme involving much of South Africa’s
automobile supply chain, with significant improvements in supply chain
102
efficiency. Based on this sector’s success, the supply chain programme
extended into the clothing and textiles sector.
4.4.1 South African experience with competitiveness-driven SCM
In the mid-1990s South Africa shifted from import substituting industrialisation
to trade liberalisation, significantly reducing quantitative restrictions and tariffs
and promoting a rapid integration into the world economy. This posed major
challenges for the automotive component sector which was faced with the
need to rapidly become internationally competitive. When the lead firms – the
auto assemblers – announced that they were considering sourcing their
components offshore, this raised immediate concern amongst the component
suppliers. Utilising a government matching grant support scheme to provide
65% funding, a learning network was established in 1998 called the ‘KwaZuluNatal Benchmarking Club’ (KZNBC). It comprised 11 component suppliers
and one lead assembler firm (Toyota), facilitated by a private service provider
(Benchmarking and Manufacturing Analysts, BMA), and operating as a
manufacturing excellence learning network (Morris and Barnes 2007). The
membership of the lead assembler was important in providing credibility to the
KZNBC’s activities in raising the general competitiveness and performance
levels of the component suppliers. Since all the members of the KZNBC were
also in its own supply chain, Toyota South Africa regarded the Club’s activities
as raising the performance levels of its suppliers and as a general form of
supply chain development.
Central to the KZNBC was a benchmarking model of key competitiveness
drivers derived from the lead assemblers technical standards within the
automotive industry. These were originally derived from the Toyota model of
supply chain development and generalised throughout the automotive
industry (Table 4.1).
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Table 4.1: Key Performance Indicators measuring operational performance
Market drivers
Cost control
Quality
Operational performance measures
Linked organizational practices
Inventory use (raw materials, work in
Single unit flow, quality at source,
progress, finished goods)
cellular production, kanbans
Customer return rates, internal reject,
Quality control structures,
rework and scrap rates, return rates to
statistical process control, quality
suppliers
circles, team working, multi-skilling
Time from customer order to delivery,
Business process engineering,
Lead times
delivery frequency of suppliers and supplier
cellular structures, processing and
(Value chain
flexibility)
delivery reliability, delivery frequency to
dispatch, value chain relationships
customers and delivery reliability
and supply chain management
Flexibility
(Operations)
Capacity to
change
(Human
Resources)
Manufacturing throughput time, machine
changeover times, batch sizes, inventory
levels, production flow
Production scheduling, JIT, single
minute exchange of dies, multi
tasking and multi-skilling, cellular
production in manufacturing
Literacy/numeracy, suggestion schemes,
Continuous improvement (kaizen),
employee development/training,
work organisation, worker
absenteeism rates, labour/management
development and commitment
turnover, employee output
programmes, industrial relations
Innovation
R&D expenditure (process and product),
Capacity
Contribution of new products to total sales
Concurrent engineering, R&D
The executive of the Club consisted of firm representatives. They controlled
policy, budget and payments, with two facilitators as non-voting members.
The following services were provided to members:

A confidential diagnostic report for each firm measuring its operational
performance, compared with a benchmark against an international
competitor.

Monthly aggregate benchmark data for the whole network.

Quarterly ‘best practice’ inter-firm workshops.
The first difficulty encountered in this benchmarking supply chain programme
was a lack of trust, an unwillingness to share information and a tendency to
blame others for emerging problems – government, suppliers, customers.
This changed as members took ownership of the network, and workshops
104
were run in the factories themselves, signalling a shift towards more open
experience sharing and trust building.
The Club’s success led to three similar regional clustered networks being
established in other cities where there were agglomerations of automotive
firms. As in KwaZulu Natal, the lead assembler firms in these various centres
joined the club in their region operating in a similar way as the lead assembler
in the KZNBC. As the clubs matured they merged into one organisation – the
South African Automotive Benchmarking Club (SAABC) – which later became
self funding, requiring no financial support from government.
There is clear evidence of growth in the network’s popularity through
membership expansion and qualitative/anecdotal statements by members
showing that firms perceived the activities as beneficial.
But the most
significant indicator of learning are the improvements in the performance of
firms.
Data from the South African Automotive Benchmarking Club (SAABC), in
conjunction with internationally comparative data, shows the nature and rate
of performance improvement of the automotive component manufacturers
(Table 4.2). Whilst not strictly comparable from one year to the next due to
constantly shifting participation in the SAABC, the average performance
standard of the automotive supply chain improved markedly over the period
1998/1999 to 2012. For each of the seven metrics analysed the performance
of the set of South African firms benchmarked annually improved markedly
over the period. For certain Key Performance Indicators (KPIs) performance
improved very significantly. Customer return rates, a crucial measure of
supplier performance in the automotive industry, improved dramatically, falling
from 3,270 ppm in 1998/9 to 226 ppm in 2012. The number of days of
inventory more than halved during the same period, from 62.6 days to 26.2
days. Most significantly, from a supply chain perspective, these improvements
in operational performance have been driven down the chain to 2nd and 3rd tier
suppliers. This is evident in the significant improvement in respect of delivery
105
reliability from the suppliers to these firms. This jumped from 78.7% to 92.5%
reliability.
In a globalised world, competitiveness improvements cannot however simply
be measured by local supplier performance changes. Successful supply chain
development has to be comparative, using international benchmarks as the
measurement comparator.
Here SAABC members also show significant
comparative performance. In respect of the other quality measures, internal
reject rates (measuring re-works) and scrap rates in 2012 are at the
international standard – 1.7% versus 1.6% and 1.5% respectively. Delivery
reliability to customers at 97.7% is similar, 97.9%, to international
benchmarks; the same holds for delivery reliability from suppliers – 92.5%
versus 93.3%. Inventory holding is also reasonably close to the international
standard of 24.5 days. Although customer return rates have made remarkable
progress they are still above that of the international benchmark of 199 ppm.
Table 4.2: Competitiveness improvements in performance of South African
automotive components cluster, 1998/9 - 2012/3, & international comparisons
Market
driver
KPI
South African performance
standards
1998/9
Cost control
Quality
Reliability
Human
Resources
Inventory holding
(operating days)
Customer return rate
(ppm)
Internal reject rate (%)
Internal scrap rate (%)
OTIF delivery reliability
to customers (%)
OTIF delivery reliability
from suppliers (%)
Absenteeism
lost hours (%)
2012
International
standard
2012
SA vs.
International
standards, 2012
62.6
26.2
% Change
1998/9-2012
58.1%
3,270
226
93.1%
199
-11.9%
4.9
4.2
92.2
1.7
1.7
97.7
65.3%
59.5%
6.0%
1.6
1.5
97.9
-5.9%
-11.8%
-0.2%
78.7
92.5
17.5%
93.3
-0.9%
4.4
3.0
31.8%
2.6
-13.3%
24.5
-6.5%
Source: Barnes and Morris (2008), SAABC database, accessed January 2014
Building on the success of the benchmarking club, the Durban city local
government was keen to set up a more complex, multi-tiered cluster to assist
the regional lead assembler. Toyota SA, the major assembler in Durban, had
secured a significant export order and the opportunity presented itself to work
with them and key suppliers to enable regional economic growth. This gave
rise to the Durban Auto Cluster (DAC) which, as a public-private initiative, was
formally launched in January 2002, with many of the original benchmarking
106
club firms as members and the same service provider facilitating the process.
Most of the finance came from local government with firms also paying
membership fees. Whilst Toyota’s support was important, it was agreed by all
involved that it would take a back seat. This enabled suppliers to feel
comfortable working on strategies of benefit to the lead firm without feeling
dominated by the powerful assembler (Morris and Barnes 2007).
The DAC was based on four development programmes - logistics, human
resources, supply chain development, and operational competitiveness.
These were run by technical steering committees controlling programme
activities and expenditure, chaired by firm representatives, with technical
support from the service provider.
The logistics programme provides a notable example of how the DAC acted to
improve supply chain performance. Logistics accounts for between 5-15% of
selling costs, hence critically affecting competitiveness. Sea freight charges
for smaller firms were more than double those of the largest first tier firm,
affecting competitiveness throughout the value chain. Driven by the 1st tier
firm, a special ‘cluster rate’ was negotiated between Europe and SA, which
was only marginally above that of the largest 1st tier supplier rate. This
improved competitiveness all along the supply chain as cluster members from
the various tiers fed into the lead assembler.
In a recent development the South African national government has set up an
incentive support programme to assist the lead automotive assemblers
develop the competitiveness of their supply chains - the Automotive Supply
Chain Competitiveness Initiative (ASCCI) is set to run to 2017. The budget of
R63 million will be 50% funded by the Department of Trade and Industry
(DTI), and 50% by other stakeholders in the automotive industry. Key focus
areas of the ASCCI include improving component supplier operational
capabilities, increasing levels of localisation and achieving manufacturing
value addition in South Africa.
107
Lessons
There were five drivers to this increase in supply chain performance:

Upgrading of competitiveness was essential given the threat by the
lead firms to import components.

It was fortuitous that the origins of this supply chain programme were in
KwaZulu Natal, involving firms feeding into Toyota’s supply chain. This
had an influence on the manner in which these firms viewed the
importance of supply chain improvements. As was shown earlier in this
chapter, Toyota was the lead firm globally driving the development of
SCM.

Government financial support was critical in the early phases of this
supply chain programme. However, equally important, this financial
support tapered off, forcing the supply chain members to take greater
responsibility for the programme’s development.

Fortuitously, the proximity of the KZNBC to a leading university with
close links to local industry led to the emergence of a world class
service provider. This shows the significance of the National System of
Innovation in the promotion of global competitiveness.

Without the commitment of the 1st tier supply chain firms to improve
their performance, none of the developments would have been
possible.
Perhaps the most important lesson to be drawn from this experience is that
most firms in developing countries externalise their problems. They fail to
understand the need to upgrade, and even when they do, they do not possess
the internal capacity to change or build on their core competency. Lead firms
driving the process of upgrading their supply chains is crucial if suppliers are
to be shifted onto the level required to remain competitve. These activities can
occur within supply chain development programs run by the lead firms
themselves. However the South African example shows that supply chain
108
development, through collective action of suppliers facilitated by lead firm
involvement can also occur in a more indirect manner. But external
institutional support is critical in such a process - government (at different
levels) policy and financial support and efficient external service provider
facilitation. Lead firms and governments have an important role in pushing
local supplier firms out of their current stasis, breaking vested interests, and
incentivising firm upgrading.
4.4.2 Explaining the SCM gap in Africa
This experience in the development of benchmarking programmes designed
to improve supply chain efficiency is not confined to the auto, and clothing and
textiles sectors (see Chapter 3 on clothing clusters) in South Africa. For
example, large and indigenously owned and managed South African firms
such as Nampak (in packaging), South African Breweries (beverages), WalMart/Massmart (fresh food), and Anglo American (in mining) each have their
own well-developed ‘economic bottom line SCM programmes’. However a
2010 survey found that the majority of companies in South Africa either do not
work, or work ineffectively, with suppliers and customers to reduce overall
supply chain risk (CSIR 2011).
These lead-firm SCM initiatives are also not confined to South Africa in the
African continent, although few other African economies have well developed
SCM programmes. There are a number of reasons why this lacuna exists.
First, the gap is not unique to Africa. Whilst SCM has diffused widely as an
objective of corporate policy, the reality is often somewhat different. The
problem is that SCM often seems costly for management, particularly in the
short-term. Monitoring programmes have to be developed using new Key
Performance Indicators. Supply chain teams have to be established, and
sending them to trouble-shoot in supplier plants is not cost-free. The lead
firms are also increasingly under pressure to deliver rapid results in
competitive environments. This changes the focal length of management in
the implementation of strategy from the medium- and the long-term to the
109
short-term. Thus firms often baulk at the costs required in effective supply
chain management, even though this might be critical to long-term profitability.
Second, whilst SCM is not rocket-science – its core principles are easy to
understand – it is nevertheless skill-intensive. These skills are experiential
and are often more tacit than codified, and are cumulative. They take both
time and persistence to develop.
Third, the commitment of senior strategic management to supply chain
management is often undermined by the contradictory incentives imposed by
human resource management, particularly in the African context where senior
management of global firms is often distant from the firm’s operations. For
example, the Tanzanian gold mines are located in rural areas some way from
major cities. Expatriate staff work on cycles - eight weeks on, and eight weeks
off. Typically their off-periods are spent back in their home bases, or in South
Africa. Given this cycle, it is common for purchasing managers to take a week
to settle down when they return to the mine. The last week of their cycle is
preparing to go home, which leaves six weeks to focus on their purchasing
responsibilities. But supplier development takes time and persistence, and the
tight reporting requirements for purchasing managers mean that it is much
easier to import the supplies from abroad than to engage in the timeconsuming task of searching for local suppliers and assisting them to upgrade
their capabilities (Morris et al., 2012).
A fourth reason for the underdevelopment of SCM in Africa is that the
principles are sometimes poorly developed in the operations of southern lead
firms who are relatively new to overseas operations. For example, in the
Zambian copper mines, whilst Chinese firms are more open to using local
suppliers than are northern mining firms, when their suppliers run into
difficulties, they are more likely to be jettisoned than are the suppliers to the
northern firms. The Chinese mining firm lacks developed supply chain
management capabilities; it does not understand that this is a lead firm
responsibility, and instead looks to government bilateral agreements to
support the upgrading of domestic suppliers. This stands in marked contrast
110
to the northern mining companies who set high standards. Whilst this makes it
difficult for local firms to enter their supply chains, once accepted as a
supplier, they assist these local firms to upgrade to meet their performance
criteria (Fessehaie and Morris 2013).
4.4.3. Chinese competiveness driven SCM in Africa
Private Sector driven Chinese Supply Chains
In 2011, the Chinese Ministry of Commerce (MOFOCM) reported that only
2.6% of its outbound FDI went to Africa. However, once the round-tripping of
Chinese investment flows through financial centres such as the Cayman
Islands (CI) and British Virgin Islands (BVI) and Hong Kong are taken into
account, a more realistic figure is that Africa accounted for the largest share
(40%) of Chinese outward FDI in 2008. While the state plays a large role in
guiding Chinese investment, an increasing share is undertaken by the
Chinese private sector. In 2011, 53% of total FDI was undertaken by the
private sector in 923 different projects. Most of this involved small to medium
enterprises with little connection to large SOEs (Shen 2013). Furthermore,
while SOEs are mainly involved in resource extraction and construction,
private FDI has been concentrated in the labour-intensive manufacturing,
export-oriented,
and
service
sectors.
China’s
‘Going
Global’
policy
encouraged many domestic mature industries, especially those from overpopulated coastal industrial cities, to expand or relocate to foreign locations.
The main motivations driving private Chinese firms to invest in African
countries are:28

Access to the rapidly growing and potentially large African market. The
market opportunities are not just within destination countries, but in the
regional economies in which Chinese firms relocated.

Rising labour costs in China have made African wage rates more
enticing, potentially in the future, although few had taken advantage of
these low wage costs to export from their African operations.
28
This discussion draws on Shen (2013)
111

Sourcing raw materials for ‘light industry’ has become increasingly
difficult in the coastal cities of China. In Africa, many of the the raw
materials necessary for production are available and cheap, especially
with regard to agro-processing inputs like leather, cotton and wood.

Import substitution policies in some African countries serve as an
incentive for firms looking to penetrate trade barriers and remain
competitive in African markets.
A significant spin-off from this flow of Chinese private FDI into Africa (Gu
2009) has been the emergence of a series of embryonic clusters which, as
was shown in Chapter 3, are an important component of supply capabilities.
Chinese initiated Privately Developed Industrial Estates (PIEs) are gaining
traction in many African countries, but there is little qualitative or quantitative
data available to accurately assess their impact. PIEs are smaller than SEZs
and are narrower in focus. They typically grow organically from a “first comer”
industrialist which has established a successful enterprise and is looking to
procure supplies locally. Shen (2013) offers a number of explanations for the
organic nature of PIE formation and the accompanying SCM:

If a country lacks basic infrastructure or service provision, a PIE will
form around the private installation of a road, borehole, generator, or
water treatment system in order to minimise the coasts of installation.

PIEs help speed up the transfer of knowledge from ‘first comers’ to new
entrants. A PIE founder which has been successful in developing a
business in the host country context will help other entrepreneurs
navigate foreign business customs, procedures, laws, and regulations.

Many successful PIEs have roots in sector-specific SEZs from the
coastal regions of China. Successful industrialists from these SEZs will
relocate or establish a new factory in an African country. Over time,
former suppliers to the factory in China will follow, creating a clustered
supply chain feeding into one specific subsector.
112

PIEs offer a more realistic alternative than relocating to one of the
official SEZ locations. The SEZs are still in the construction phase and
will not be fully operational for a number of years. They involve the
coordination of a number of different agencies, and construction is
often delayed due the complexity of the projects and the number of
stakeholders involved. It is far cheaper and faster to privately organise
a cluster.

PIEs are composed of firms that face similar constraints and can,
therefore, more easily arrive at mutually beneficial solutions, benefitting
not just from externalities, but also from collective action. SOEs and
large corporations which are involved in the development of the official
SEZs do not face the same financial pressures that the small/medium
firms do - they can afford to make mistakes and delay action because
they have government backing.
Shen gives two examples of successful PIEs in Nigeria that formed in order to
decrease the cost of doing business in an African context:
The Yuemei Fabric Industrial Zone (YFIZ) in Nigeria is a PIE started by
Zhejiang, one of the largest private textile firms in China. In 2000, the
company began importing final products into Nigeria. In 2004, it invested $1
million and began manufacturing textiles. Zhejiang reinvested its profits year
after year and expanded the business - a total investment of over $10 million.
In 2008, the company constructed an industrial park that could house all the
elements of the value chain. Soon after construction of the YFIZ was
complete, five Chinese textile firms relocated or established new factories in
the YFIZ. The initial success of YFIZ allowed Zhejiang to invest in the
expansion of the YFIZ. In 2011, 20 suppliers operated in YFIZ with activities
ranging from dyeing, weaving, spinning, knitting, sewing and embroidery.
The Hazan Shoe Industrial Park (HSIP) was also established by Zhejiang in
Nigeria. The goal of the HSIP was to replicate the success of the YFIZ, but
113
with high quality footwear for domestic and export markets. In 2004, Zhejiang
began manufacturing shoes in Nigeria by importing inputs from China and
assembling in a small factory. The company encouraged its suppliers to
establish enterprises in the same area in order to cut transportation costs and
has plans to reinvest its profits to expand the industrial park.
It is significant that both of these PIEs are located in Nigeria. Nigeria is one of
the main destinations for private Chinese investment. This is due to both the
massive size of the domestic and regional market, as well as Nigeria’s polices
which raise the cost of importing goods. Nigeria also suffers from poor quality
and availability of basic infrastructure, which encourages private Chinese
firms to cluster together in order to reduce the (private-borne) costs of
supplementary service provision.
Chinese SOE copper mines and their supply chain in Zambia
Zambia’s mining sector has a diversified country ownership structure with the
largest sources of FDI in 2009 from Canada, India, Australia, Switzerland, and
China with a much smaller share. China’s entry into Zambia’s mining sector in
1998 was gradual, beginning with the acquisition of a relatively small mining
operation, NFC Mining Co. However in 2009 it bought Luanshya, a mine with
significant potential for expanded production, which had been closed. China
was also in the process of financing and constructing the Chambishi Multifacility Economic Zone, which included the Chambishi Copper Smelter and
the acid plants, as well as a copper semi-fabricates manufacturing plant. The
Chinese firm the China Non-Ferrous Metals Corporation (CNMC), one of
China’s largest SOEs. CNMC was one of the national champions selected by
the Chinese government for special support at domestic and international
levels.
The experience of how Chinese copper mines relate to their suppliers
demonstrates that ownership characteristics of lead firms shape the
trajectories of supply chains. These can be analysed in terms of three
dimensions: entry and selection of their suppliers; market parameters set in
114
the supply chain; and upgrading of local supplier capabilities (Fessehaie and
Morris 2013).
Northern mining companies are increasingly tending to outsource activities
outside their core business and, whenever possible, prefer a local supply
chain. They selected suppliers on the basis of well-established procurement
procedures, relying heavily on past relationships with preferred suppliers.
These buyers also had a high level of brand loyalty for critical supply links,
such as capital equipment and components, which made OEM subsidiaries
and distributers their preferred suppliers. This procurement procedure
excluded new local entrants, and placed distributors of new brands at a
disadvantage.
The Chinese mining company did not inherit an existing supply chain. To
minimise the risk of relying on local suppliers that did not meet its
expectations in terms of volume and price, it followed a more vertically
integrated path. It invested in in-house engineering services (electrical,
mechanical), a foundry, and exploration and drilling services. For other inputs,
the Chinese buyers outsourced a wide range of goods and services: capital
equipment and spares, explosives, steel plates, oil, rubber products, cement,
lubricants, tyres, components and personal protective equipment.
In contrast to Northern traditional mining companies, entry barriers to the
Chinese supply chain were low and local suppliers found it easier to secure
access to the supply chain. Chinese buyers were willing to try new
products/new suppliers and had low brand loyalty. Lacking the social
embeddedness with historical suppliers which characterised the Northern
mining buyers, they instead invested in, and relied on, extensive auditing.
Chinese buyers were consistently reported by suppliers as ‘very good
customers’ and ‘result oriented’. They engaged in tough price negotiations,
but paid on time and reduced red tape to the minimum (Fessehaie 2012a).
In terms of meeting market parameters within the supply chain, both the
Northern and the Chinese mining companies regarded reliability of delivery,
115
trust and quality as critical and a basic requirement to participate in the supply
chain. In the Northern supply chain, trust was built through long-term
relationships. In some cases, they assisted suppliers with product quality
improvement, jointly running quality tests and providing quality feedbacks.
Indirect cooperation took place through the International Finance Corporation
(IFC) Suppliers Development Programme. By contrast, because of language
and cultural barriers, it was the suppliers who had to take the initiative to build
a relationship with the Chinese mine, rather than, as in the case of northern
firms, the lead mining firm driving this relationship. The Chinese buyers did
not provide any direct or indirect assistance to suppliers. Indeed, its buying
department engaged consistently only in negotiations regarding payment and
delivery times.
Significantly, unlike the Northern companies which were adjusting to the 2008
financial crisis and had introduced an investment standstill and stringent costcutting measures, the Chinese mining company had a countercyclical
expansion, with the acquisition and recapitalisation of a new mine and
continued investment in the China-Zambia Chambishi Economic Zone. The
Chinese mining firm therefore did not cut production, staff or development
projects.
This difference in approach to supply chain upgrading reflected the different
approach of the Chinese mine to supplier responsibility and the internalisation
of supply chain development. Instead of taking responsibility for SCM, the
Chinese
company
relied
heavily
on
government-to-government
intermediation, assuming that the government would take responsibility for
supply chain upgrading. Put simply, the Chinese mining company did not see
local supply chain development as part of its corporate strategy and,
therefore, did not invest in embedding itself into local supplier upgrading. It
regarded the localisation of upstream linkages as the responsibility of the
Zambian government to be catalysed by investment in the China-Zambia
Chambishi Economic Zone.
116
Weakly developed supply chains in the Angolan Construction Industry
After three decades of civil war, Angola needed to rebuild quickly. The
Chinese offered an alternative to conditional IMF loans that required greater
government transparency and macroeconomic reforms and which were
transactions-intensive and slow to materialise. In 2002, the President
appealed to the Chinese Exim Bank for assistance in rebuilding the country’s
infrastructure. In return, the Chinese gained access to Angola’s crude oil
reserves needed to fuel China’s rapidly expanding economy. Chapter 2
highlighted this relationship as the “Angolan mode”.
The first loan agreement between the Chinese Exim Bank and the Angolan
government was signed in March 2004. Since 2004, the three Chinese stateowned banks (Exim Bank, the China Development Bank and the Industrial
and Commercial Bank of China) have provided a total of $14.5 billion in oilbacked loans (Shelton and Kabemba 2012). The terms of the loan call for
Chinese government approval of the Chinese firm selected for each
infrastructure project. The construction company, invariably an SOE, is paid
directly by the Exim Bank, which then writes off the amount against the loan
given to the Angolan Ministry of Finance. The terms of the Exim Bank
financing ensure that procurement is directed towards Chinese goods and
services. It requires that no less than 50% of the value of project procurement
come from China, and also dictates that only a maximum of 30% of the
contracts can be locally subcontracted (Corkin 2011).
A supply chain of private Chinese investment closely trailed these SOE
involvements. These small-to-medium sized firms are subcontracted for small
jobs, set up a procurement supply chain to provide equipment and materials
from China, and provide distribution of Chinese products and services that are
required by the SOEs. Many have expanded beyond the construction industry
to provide consumable products and services to the surrounding communities.
Although this process ensures that a supply chain is quickly established,
albeit transplanted from China, it also limits local content and the development
of local capabilities.
117
Angola’s reconstruction process has therefore yet to result in any meaningful
linkages to the local economy. Local content is limited by a number of factors:

External sourcing requirements. Crude oil makes up 99.9% of Angola’s
exports to China. 39% of Angola’s total oil exports go to China,
composing 15.7% of China’s total imports of crude oil (Corkin 2011).
The volume of Angolan oil exported to China poses a problem to
China’s balance of trade. As a result, the Chinese embassy has
prioritised increasing Chinese exports to Angola to counteract the huge
trade deficit. To achieve this aim, as shown above, Exim Bank loans
are disbursed with a procurement requirement to source a minimum of
50% of equipment, labour, and services from China.

Lack of local suppliers. Even if these procurement requirements were
not in place, Angola produces so little in-country that materials
necessary for the massive reconstruction projects could not be sourced
from local suppliers. Furthermore, the Angolan government’s priority is
to complete these infrastructure projects rapidly. Even where local
capabilities have evolved without the support of government, the firms
are unable to keep up with the demand of the reconstruction process.
In the cement sector for example, there are five Angolan firms,
however, they do not have the capacity to meet the demands of the
SOEs, or even subcontracting private Chinese firms. In 2010, cement
was the most imported product in Angola, the vast majority of which
was sourced form China (Corkin 2011).

Risk mitigation. The Chinese SOEs operating in Angola entered the
market with little knowledge of the local economic context. It takes
effort to identify local suppliers, who will then require SCM inputs which
the SOEs are loath (and sometimes unable) to provide.

Weak institutional framework. Local content laws (Angola’s Private
Investment Law 54/1) requires all companies registered with the
Agencia Nacional para Investimento Privado (ANIP) to have a 70%
Angolan workforce. However, due to the nature of the public
118
infrastructure projects, the SOEs are contracted by the Chinese Exim
Bank who deals directly with the Ministry of Finance. Therefore,
Angolan local content regulations do not apply in these ventures. Even
in cases where local content regulations may apply, the wording of the
law is ambiguous - local content could refer to local ownership, local
partner, or local incorporation. Chinese firms are able to circumvent
this restriction by opening a base in Angola and importing all products
from China.

Lack of political will. The weak institutional framework is compounded
by a lack of political will to pursue a localisation agenda. Huge
infrastructure projects have great public visibility and the government
does not want to “slow projects down” by facilitating local contributions
to the reconstruction process (Corkin 2011).

Lack of Local Skill/Knowledge. Twenty six years of civil war has
deprived the Angola of skilled workers. More significantly, the war has
left the country with little training or educational institutions to equip the
next generation of workers with skills necessary to compete in the
global economy. Some of the SOEs have started training programmes
for local workers. However, this is often done on a superficial level to
improve public perception (Corkin 2011).
Chinese oil firms in Sudan import their domestic supply chains
Oil exploration and extraction in the Sudan has been dominated by FDI from
China, mainly from investments by 13 large Chinese SOEs in the first decade
of the 21st Century (Table 4.3). Whilst these 13 oil-related investments are
dwarfed in number by investments by other Chinese firms, the value of the 13
SOE investments ($7.6b in 2010) far exceeded that of other ventures ($82m
in 2010) (Suliman and Badawi 2010).
Chinese FDI in the Sudan is however not restricted to these Chinese SOEs.
Following in their wake there was a surge of investment by private Chinese
SMEs mostly feeding into the oil-sector’s supply chain. Unlike the SOEs who
have depended on Chinese state assistance, these private firms generally
119
invested independently, seeking market opportunities by supplying the needs
of the oil sector. By 2007, 97 Chinese supplier firms had invested in Sudan 67 of these were wholly Chinese owned, and 30 were registered as private
joint ventures. In total, they employed 6,828 workers. These Chinese firms
participate in manufacturing, construction, services and agriculture and
predominantly feed into the supply chain of the 13 large SOE oil lead firms
(Table 4.3). By number of firms, they are concentrated in the construction
sector; by number of employees, the agricultural sector is preponderant. The
distribution of employment by nationality is not available. However, a study of
a sample of 20 Chinese private firms revealed a ratio of 68% Chinese and
32% Sudanese employees (Suliman and Badawi 2010).
Table 4.3: Private Chinese Firms and Employment by Sector (%)
Percentage
Percentage
Firms
Employees
Mining
3.1
9.1
Food processing
3.1
2.4
Textile
2.1
1.1
Furniture
4.1
2.8
Paper
2.1
1.7
Plastic
10.3
7.2
Metals
2.1
2.1
Construction
37.0
22.0
Machine assembly
1.0
1.6
Leather
5.2
3.9
Electronics
4.1
2.5
Pharmaceutical
2.1
1.7
Restaurants and Hotels
3.1
1.2
Engineering; mechanics services
4.1
2.0
Transportation
6.2
5.8
Advertisement
3.1
1.2
Medical services
1.0
0.1
Agriculture
6.2
32.2
Total
100
100
Source: Ministry of Investment (MOI) Company Register registry, (Suliman and Badawi 2010)
In conclusion, we can observe a number of what appear to be common trends
in the role played by Chinese investment in the development of supply chains
in Africa.

The mode of entry of large Chinese SOEs backed by state-to-state
agreements and utilising the ‘Angola mode’ of financing often limits
local procurement.
120

Local procurement in these large SOE involvements is also hampered
by the priority given by the host government for rapid execution of
potentially long gestation period projects.

Rapid execution utilising local suppliers is hampered by low levels of
capabilities in the domestic economy. Hence the (limited) local supply
chains feeding into these large SOE projects predominantly involve
Chinese firms rather than locally-owned suppliers.

Nevertheless,
despite
these
obstacles
to
local
supply
chain
development, there has been a growing presence of privately-owned
Chinese SMEs feeding supplies into these large SOE ventures. Unlike
the SOEs to whom they are feeding inputs, the entry of these privately
owned suppliers is seldom facilitated or actively supported by the
Chinese government.

Unrelated to the large SOE backed ventures, a number of larger
privately owned Chinese manufacturing firms are investing in Africa,
predominantly seeking to serve the growing domestic market. Faced
with poor infrastructure and weak local supply capabilities, they are
creating industrial estates and are bringing their Chinese supply chain
with them to serve their needs for key inputs.
These developments represent both threats and opportunities to the
development of local supply chains and to locally owned supply chains. It is
as yet too early to determine the balance of outcomes. Moreover, it is unlikely
that a single pattern will emerge which spans all African economies and all
economic sectors.
4.5 AFRICA’S EXPERIENCE WITH SCM PURSUING THE SOCIAL BOTTOM LINE
There is a long tradition of corporate philanthropy in the global economy, in
which corporate owners make charitable contributions in the quest to play a
more positive social role in society. This is an especially rich stream in the US
121
where some of the more infamous ‘robber baron families’ who made their
fortunes in the nineteenth century (such as the Carnegies and Rockefellers)
subsequently established charitable foundations in the twentieth century. In
recent decades the Gates Foundation, bolstered by support from Warren
Buffet and other billionaires have maintained this charitable tradition, making
a substantial contribution to the development of preventive health care in the
developing world. A similar pattern of corporate philanthropy has begun to
emerge in Africa, for example through the Mo Ibrahim Foundation. In India,
many of the large firms have charitable operations directed at their own labour
forces. For example, in the late 1990s in each factory of the Crompton
Greaves Firm, whenever a worker died, all employees of a plant would donate
a day’s salary to the family of the bereaved (Humphrey et al., 1998).
However, contemporary CSR goes well beyond this philanthropic approach to
the Social Bottom Line. The World Business Council, representing some of
the world’s largest TNCs defines CSR in much broader terms:
“Corporate Social Responsibility is the continuing commitment by
business
to
behave
ethically
and
contribute
to
economic
development while improving the quality of life of the workforce and
their families as well as of the local community and society at large”
(Holme and Watts, 2000).
This represents a much larger agenda for CSR than corporate philanthropy.
Crucially, CSR is seen as applying both within the firm’s operations and in the
role it plays in wider society. Moreover, it seeks to embed CSR in the
everyday operations of the firm rather than as a sporadic and voluntary act
undertaken after profits have been made in production in a way which may, or
may not, reflect the principles of social responsibility. (The embedding of fair
prices, fair labour standards and better organic and environmental standards
in GVCs will be considered in Chapter 5). In this sense contemporary CSR is
drawn more from the European than the North American charitable approach
to the Social Bottom Line. Given the global operations of the world’s leading
corporations, and given that they are subject to civil society pressure on these
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global operations, most of the world’s leading TNCs now have a commitment
to pursuing some elements of the Social Bottom Line in the global operations,
including in Africa.
A core driver of CSR is the ‘social licence to operate’. It targets SCM activities
in the incorporation and upgrading of local suppliers, generally privileging
indigenous producers, producers in close proximity to the lead firm’s
operations and often specifically addressing the incorporation and upgrading
of SMEs, women and youth. In some cases – as in the Niger River Delta (see
below) – CSR programmes are a reaction to intense local political pressure
for the gains of commodity extraction to be spread to the local population. In
other cases – as in Ghana’s gold sector (see below) – the lead firms have
taken a proactive approach to CSR, seeking to spread the benefits of
resource extraction before opposition from the local population mounts. Either
way, this new approach to CSR is aimed at incorporating formerly excluded
communities in their supply chains rather than distributing welfare handouts to
alleviate the costs of exclusion.
4.5.1 Niger Delta – CSR as a reaction to local political pressure
Reflecting this transition in pursuit of the Social Bottom Line, CSR strategies
adopted by transnational oil corporations operating in the Niger Delta have
underdone a significant transformation in response to escalating social
pressure and hostility in the region.
The utilisation of CSR rhetoric in the region dates back to the 1960s and
1970s, during the first surge of oil exploration and production in the Delta. Ite
(2007) classifies the period from 1960-1997 as one of “Community
Assistance” - transnational oil companies like Chevron, Shell, and Total
viewed CSR as a form of corporate philanthropy, undertaken on a limited
scale. They engaged in basic infrastructure projects, cash transfers,
scholarships, school and hospital construction, and agricultural development.
All of these projects were one-off gifts – ‘spreading the wealth' - serving as
recompense for the negative externalities caused by large-scale oil extraction
on both the local communities and the local environment.
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The early generation CSR projects in the region suffered from a range of
problems. First, the projects were selected with no involvement from the
communities themselves, based on the judgement of Shell and Chevron on
what was appropriate for local needs. Second, and arguably partly as a
consequence of the exclusion of local decision-makers, the interventions were
often left unfinished, poorly executed, or poorly maintained. Schools were
built, but lacked supplies; roads were constructed and then left to deteriorate.
Third, these “gifts” were allocated without much coordination. They lacked a
driving goal or strategy, often decided on an ad hoc basis in reaction to
specific demands from a vocal specific community. This resulted in uneven
development
and
uneven
distribution
of
company
resources,
often
aggravating and reinforcing pre-existing ethnic and tribal tensions in the
region (Frynas 2001, 2005).
These philanthropic projects did little to quell the growing tension between the
oil corporations and their host communities. Violent protests broke out in the
early 1990s in the form of rioting, attacks on pipelines, violence against oil
company employees, mass protests, and armed resistance by various militant
groups. The prolonged conflict caused massive civil unrest and multiple
disruptions in oil production in the Niger Delta over the past two decades.
In response to the increasingly hostile environment, the Nigerian government
asked the oil corporations to construct socio-economic development
programmes in cooperation with their host communities in an attempt to
improve relations between the two parties. In 2002, Chevron undertook an
internal investigation into the corporation’s CSR strategy. Shell soon followed
suit. The result saw the adoption of a new model of CSR based on a Global
Memorandum of Understanding (GMoU) through which oil corporations
promised to engage with local community institutions and NGOs in order to
generate
sustainable
development
programmes,
including
through
incorporation in their supply chains, in return for the maintenance of a
peaceful operating environment in the region (Amnesty International 2005).
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The adoption of GMoUs was paralleled by an expansion of CSR programmes
within the oil corporations. New departments were created with large budgets,
staffed by development and regional experts rather than oil-company
technical experts. In 2010, Shell announced it would invest $65 million in its
GMoU development package. Total and Chevron each allotted $50 million.
Additionally, each corporation contributes 3% of its annual budget to the Niger
Delta Development Corporation (NDDC). The NDDC’s budget for 2010 was
$1.5 billion, $640 million of which was donated by oil corporations (Renouard
and Lado, 2012).
These second generation CSR programmes are built upon a foundation of
long-term development goals. Chevron’s new CSR strategy is indicative of the
changes taking place throughout the industry. With its new outlook, Chevron
hopes to achieve the following aims:29

Work to increase local incomes and employment by improving the local
business environment;

Promote inclusive local growth and employment, with a special
emphasis on addressing youth unemployment;

Foster competitive business practices and improve the quality and
quantity of locally sourced goods and services;

Establish mutually beneficially partnerships with local stakeholders to
improve local content in oil production processes.
In order to achieve these aims, Chevron introduced a pilot programme in 2010
- the Niger Delta Partnership Initiatives Foundation (NDPI). The NDPI
represents the new role Chevron hopes to play as a development catalyst in
the region. Future interventions will be designed and implemented according
to the following criteria: (a) thorough research and analysis of local markets;
(b) active consultation with local stakeholders and NGOs; and (c) orientation
http://www.theguardian.com/global-development-professionals-network/daipartner-zone/niger-delta-chevron-new-paradigm-corporate-social-investment
29
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toward upgrading of local production capabilities within the context of existing
market structures.
Central to NDPI’s strategy is the expansion of local content in the oil
production supply chain. NDPI has created a database of local enterprises
who can provide goods and services to the supply chain, prioritising
intervention in programmes offering the largest potential for employment and
output growth. Additionally, the NDPI has selected three priority subsectors
unrelated to oil production - palm oil, aquaculture, and cassava - as targets for
pilot programmes aimed at broad-based local development in the Niger Delta.
4.5.2 Ghana – a proactive approach to SCM and the Social Bottom Line
The transformation of CSR programmes in the Niger Delta is an example of a
direct and reactive response on behalf of large TNCs to increasing pressure
and hostilities from local host communities. It is too early to determine
whether these efforts will be successful. The long history of conflict between
community and corporation in the region may prove to be a serious obstacle
to meaningful corporate-led development for local enterprises.
The case of the Newmont Ghana Gold Corporation’s interaction with the
Ahafo mining communities describes a different setting for CSR programmes.
Unlike the open and sometimes violent confrontation in the Niger Delta,
Newmont’s programme in Ghana was conducted in a more peaceful and
cooperative environment. Newmont, an American company founded in 1921,
is the second largest gold mining firm in Ghana (GFMS 2010). Its CSR
programme was designed to proactively challenge the assumption that mining
in Africa was an inherently enclave activity.
In 2002, the Ghana Mining Commission (GMC) required all mining
corporations to incorporate a sustainable community development programme
within their CSR models. Since its establishment, Newmont’s programme has
succeeded in generating “imperfect, but promising economic linkages” (Bloch
2012: 435). Newmont’s CSR model is “committed to sustainable economic
and social development of the Ahafo Mine Communities and its environs”
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(Newmont 2009). The strategy consists of five pillar programmes, all of which
are implemented through public-private partnerships with local government
institutions and NGOs. The programmes cover a wide range of projects establishing community forums, writing individual community responsibility
agreements, promoting agro-processing subsectors, and upgrading health
facilities.
The most significant project is the Ahafo Linkages Programme (ALP). The
programme was started in partnership with the International Finance
Corporation in 2006 with a three-year plan to increase local content in the
Newmont supply chain. Table 4.4 illustrates the programmes results over the
period. Beginning from a low base, the number of local content transactions
was increased by 395%, and the number of local SMMEs involved by 400%.
During this three year period, the ALP trained 22 SMMEs through a
managerial mentoring programme and created 282 new jobs (of which 181
were skilled jobs). The value of contracts grew from $1.7m to $4.7m.
Table 4.4: Local Content Results
2006
Contract values (US$)
2007
2008
1,718,949
4,182,654
4,668,404
Number of transactions
121
282
599
Number of local SMMEs
25
52
125
Source: Newmont 2009
In addition to the fiscal linkages that are normally associated with commodity
extraction - royalties, corporate taxes, payroll taxes, etc. - Newmont’s CSR
model has begun to generate backward supply chain linkages into the local
economy. In Ahafo, there are roughly 300 enterprises registered under the
mining sector. Local companies, mostly SMMEs, play a large role in the
provision of goods and services to the 3rd and 4th tiers of the supply chain.
Table 4.5 illustrates the distribution of mining expenditure amongst producing
members of the Ghana Chamber of Mines (GCOM). Significantly, 38% of total
spend (including fuel and power) is allocated to local purchases. Newmont
currently lists 521 local enterprises as suppliers into its production chain
(Bloch 2012, 440).
Not all of these linkages are a result of its CSR
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programme. Nevertheless, the programme has played a major role in
deepening these backward linkages, and especially in seeking to skew these
linkages to indigenous and small scale suppliers.
Table 4.5: Domestic purchases by Ghana Chamber of Mines Producing
Members (2008)
Classification
Amount (US$m)
Percentage
Employees
175
8
CAPEX
669
29
Direct to State
146
6
12
1
Local purchases
467
20
Local purchase (fuel/power)
428
18
52
2
376
16
2325
100
Mining host communities
Loans (interest
Imported consumables
Total
Source: Bloch 2012
The Ghana Mining Commission in partnership with the Ghana Chamber of
Mines is utilising the Newmont CSR strategy as a model for guiding future
corporate engagement with host communities. The GMC is developing a
policy that will require all mining companies to commit to the implementation
of a local business development programme with the express purpose of
increasing localisation of supply chains. The new policy will be based on
specific targeting of products and subsectors not on minimum percentage
requirements of local content. The GCOM has already identified 27 product
categories that are already manufactured locally and can be incorporated into
the mining supply chain. Additionally, 35 local manufacturers have been
identified for support from the GCM to upgrade their products and production
processes in order to attain the quality necessary to enter into the supply
chain.
4.5.3 Wal-Mart in South Africa
Wal-Mart’s acquisition of Massmart in 2012 is a particular case of the
incorporation of CSR activities into a direct supply chain development
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programme. The particular and unique nature of the case derives from South
Africa’s racialised economic history. As a result of the historical policies of
segregation and apartheid large swathes of the private sector were
concentrated in white hands. This was particularly marked in the agricultural
sector where most commercial agricultural was concentrated in large farming
units. The new democratically elected Government has over the past 20 years
been prioritising the empowerment of black ownership as part of the process
of redistribution of economic resources. As a Competition Appeal Court
condition for the takeover of Massmart, Wal-Mart offered to set up a fund,
administered by a special unit within its supply chain development unit,
directed at empowering small and medium enterprises. Although not defined
in racial terms, the major recipients thus far have been black suppliers. This is
therefore an example of a proactive CSR type initiative directly focused on
supply chain management and development activities.
The Wal-Mart/Massmart Supplier Development Fund (SDF) was launched at
the end of 2012 to support SME development in Massmart supply chains.
Massmart has allocated R240m (roughly $22 million) to the fund, to be
distributed over a period of five years. The objectives of the SDF are to assist
existing and potential local small and medium sized suppliers to Massmart
which fall outside of its priority supply chain development, and to assist highly
focused clusters of micro-enterprises (existing or new) to upgrade their
capabilities and give them access to its supply chain. The fund provides input
loans for seed capital, marketing and sales support, technical support on
basic financial management, help with packaging and transport, as well as
guarantees and credit support for working capital and equipment funding. It
targets existing Massmart suppliers and potential vendors, giving priority to
SMMEs, suppliers with potential for export, products that are environmentally
and social sustainable, and enterprises with capacity for labour absorption.
Thus far, the main focus of the SDF has been on rural micro enterprise
clusters, building the capabilities of small farmers in four regions to supply
processed vegetables to Massmart’s main urban stores. This comprises 17
projects, thus far aimed at 165 small black farming enterprises, with 297
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farmers trained and 645 seasonal labourers employed. TechnoServe is
employed on contract to assist these small farmers in building capabilities to
meet the necessary requirements and standards of the Massmart supply
chain. The SDF has also provided support to 25 black-owned wine farms in
the Western Cape in order to supply their products to domestic Massmart
branches as well as integrate products into Thierry’s Wine Services global
supply chain. A number of small manufacturers in the Gauteng have also
been targeted by SDF with the goal of transforming the firms into long-term
suppliers of Massmart products.
4.6 SCM IN PURSUIT OF THE ENVIRONMENTAL BOTTOM LINE
Although concern with the Environmental Bottom Line dates back at least as
long as the focus on the Social Bottom Line, its translation into SCM has been
much slower. It is only very recently that structured programmes of what has
come to be called Supply Chain Greening have been developed and are
beginning to be rolled out along supply chains.
As in the case of the competiveness driver of SCM, the first and most
important step in supply chain greening is the restructuring of internal
operations within the lead firms. The building blocks for this internal reform
were
provided
with
the
introduction of
the International Standards
Organisation (ISO) ISO14000 standard introduced in 1996, modelled on the
British Standard BS7750 which was introduced in 1992. Mirroring the
ISO9000 family of quality standards, ISO14000 provides the potential for
better environmental practices by embedding environmental monitoring
throughout internal manufacturing operations. It does not guarantee better
environmental performance since the firm may or may not take actions to
correct the suboptimal environmental practices which the ISO14000
monitoring system unearths.
The spread of environmental awareness outside of the lead firm was spurred
by the commitment made in 2005 by Wal-Mart to green its supply chain. WalMart is the world’s largest corporation by turnover (and is China’s ninth largest
130
trading partner). It announced its intentions to move towards four greening
objectives in its internal operations in 2005. The first step was to focus on
energy and to move towards 100% renewable energy in its internal
operations; the second was to strive to reach “zero waste” (modelled on the
principle of “zero defects” in just-in-time production – see above); the third
was to “sell products that sustain people and the environment”; and the fourth,
was to green its domestic supply chain.
The greening of its global supply chain accelerated after 2008 following the
considerable progress made in greening its internal operations and its US
supply chain. Wal-Mart began in China by inviting 1,000 CEOs of its largest
suppliers to a meeting in Beijing.
“When they arrived, the CEOs were told that half of them would be
getting more business from Walmart and the other half would no
longer be doing any business at all with the retail giant. Walmart’s
new environmental rules were then handed out and the CEOs were
told to make sure they figured out how to end up in the winning half”
(Wharton Business School, 2012: 2).
The topic of the summit was Wal-Mart’s “Global Responsible Sourcing
Initiative.” The initiative challenged suppliers to meet five goals:
(1)
All suppliers must declare their factories compliant with local social
and environmental regulations by 2011;
(2)
All suppliers must disclose the name and location of every factory
they use to make Wal-Mart products by the end of 2009;
(3)
Suppliers must reach a near-zero defective return rate by 2012;
(4)
A 20% improvement on energy efficiency in all supplier factories in
China by 2012; and
131
(5)
All suppliers must source 95% of their products from factories that
receive Wal-Mart’s highest rating for environmental and social
practices by 2012.
In 2009, Wal-Mart announced the development of a worldwide Sustainability
Product Index, which established a uniform survey to be completed by all
Wal-Mart suppliers. The survey consists of 15 questions surrounding energy
use, climate impact, material efficiency, natural resource usage, and local
community involvement. The surveys feed into the “Sustainability Index
Consortium,” an open platform database that allows for analysis and
dispersion of the information collected from Wal-Mart’s 100,000 suppliers.
By 2012, 500 suppliers and 107 product categories had participated in the
Sustainability Product Index. At the Global Sustainability Milestone Meeting in
Beijing, CEO Mike Duke announced plans to expand participation to 70% of
suppliers by 2017. At the event, he made it clear that failure to participate in
the Index would result in removal of the firms from Wal-Mart’s supply chain.
He also announced five key initiatives to accelerate progress in supply chain
greening:

Increasing the use of recycled materials and increasing the recyclable
content in packaging;

Offering products with greener chemicals, following the introduction of
Wal-Mart’s Consumable Chemicals Initiative;

Reducing fertiliser use in agriculture, requiring suppliers who use
commodity grains to develop a fertiliser optimisation plan;

Expanding the sustainability index to international markets, beginning
with Wal-Mart Chile, Wal-Mart Mexico, and Massmart South Africa in
2014;

Improving energy efficiency in factories.
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Wal-Mart’s commitment to greening its supply chain, as well as the efforts of
follower firms, was driven by a number of factors. First, as in the case of total
quality control, greening is cost-saving. A reduction in energy costs as a
consequence of greater energy efficiency is an important driver, but so too is
a reduction in the cost of packaging and the costs involved in cleaning up
spillages, and so on. Second, consumers have a growing awareness of
environmental issues, and a green supply chain provides a potentially
important marketing tool in final markets. And, third, greening is widely seen
as a way of diverting attention from other consumer demands. In Wal-Mart’s
case greening has been criticised as a defensive response to widespread
criticism of its rejection of collective bargaining and in its failure to recognise
trade unions. In the resource sector it was widely seen to deflect attention
from consumer concerns with working conditions and corruption. Wal-Mart’s
current goal is to have 70% of its global suppliers utilising its Green Index by
2017. As yet, this Green Index does not stretch beyond its first-tier suppliers.
Other firms have begun to mirror Wal-Mart’s greening programme. IBM
introduced a Social and Environmental Management System programme in
2010, targeting its 28,000 first-tier suppliers. It required suppliers to introduce
both CSR and greening programmes. Critically, seeking to promote
implementation, IBM required suppliers to measure performance against
environmental goals and to publicly disclose both their metrics and their
results. These first-tier suppliers are then required to push the same
programmes through their supply base (Wharton Business School 2012).
Hewlett Packard, Apple and other large electronics firms had been monitoring
the environmental practices in their assembly operations and suppliers in
China, Malaysia and other Asian economies for some time (Raj-Reichert,
2013). Lockheed Martin, one of the world’s largest and most technologically
advanced aerospace and military contractors has moved forward on its Green
Procurement agenda, defining this as
133
“… a product that fulfills one or more of the following criteria:
•
Products with recycled or recyclable content
•
Products that are energy and water efficient
•
Bio-based products
•
Alternative fuels
•
Fuel-efficient and alternative technology vehicles
•
Products that minimize toxic and hazardous ingredients
•
Products that minimize packaging waste
•
Regionally sourced products to reduce transportation costs.
Green Procurement can apply to office products, printing services,
electronic
equipment,
fleet
vehicles,
appliances,
lighting,
construction, renovations and maintenance, and more.”
Seeking to extend the benefits of supply chain greening to low and middle
income economies, the International Finance Corporation has initiated a
support programme arguing that
“Upgrades along the value chain can improve productivity,
profitability, and regulatory compliance, making a firm more
competitive.
Upgrades may also include renewable energy
upgrades and other greening tactics as well as improving health
and safety awareness, generating broad financial, social and
environmental benefits and demonstrating a commitment to good
corporate governance”.30
Focusing particularly on small enterprises in agriculture and food processing
for export, the IFC seeks to provide the finance to enable suppliers to meet
the increasingly demanding requirements of lead firms in GVCs. “With IFC’s
assistance, [Financial Institutions] can offer financing packages designed to
improve supplier business performance and credit risk, while generating
attractive portfolio returns from an untapped market.”
30 http://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/CB_
Home/Sectors/Greening+Supply+Chains/
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Thus, whatever the historic and current reality of supply chain greening as a
form of “greenwash”, there is little doubt that it will become an increasingly
important component of SCM in the future, if for no other reason than the fact
that it is cost saving. However, as yet it is still in embryonic form, and seldom
extends beyond first-tier suppliers. There is also little sign of it being
implemented in Africa. Some large firms, particularly TNC subsidiaries, are
beginning to green their internal practices, but there is little evidence of even
this limited form of internal greening diffusing to SMEs. A recent study of
energy reduction practices in the Kenyan maize and the Nigerian cassava
sectors shows very limited progress being made, with no signs of any
awareness of the importance of supply chain greening (Adeoti et al., 2013).
4.6.1 Supply chain greening in Africa
The consequences of the extension of global value chains in the fresh fruit
and vegetable sector to incorporate African suppliers will be illustrated in the
discussion of global value chains in Chapter 5. Particularly in fresh produce,
the greening of supply chains plays an important role in ensuring that the
major importing European retailers can meet the challenging conditions in
their final markets. It is not just that consumers are wary of harmful chemical
residues in final products, but government regulations also forbid the use of
certain pesticides and fertilisers and place limits on the amount of residues of
other less harmful chemical inputs.
This has required the lead firms to put in place complex and systemic
procedures to ensure the provenance of their supply chain. It affects the
whole chain including soil preparation, seed selection, fertilisers, pesticides,
washing and packing. This requires the introduction and monitoring of
greening processes throughout the supply chain. It is accompanied by chain
of custody documentation so that any unwanted concentration of chemical
residue can be traced back to the individual plot of land, the individual
farmer/picker, the day of harvesting and packing and the packing house
involved in washing and packaging the final product. The greening of these
135
supply chains are a sine qua non for participation in these Europe-focused
value chains.
Similar procedures are required in other agricultural sectors such as in the
wood-furniture and leather-footwear chains, as will be shown below. This
supply chain greening is a function of market entry into high income markets
and involves firms from high income countries responding to vocal civil society
organisations. But what happens when the lead firms and lead markets are
from low and middle income economies where lower per capita incomes and
less well developed civil society organisations mean that environmental
concerns are less important in consumer preferences? China’s rapidly
growing presence in Africa provides the opportunity to assess these issues.
Case Study: China’s “Green” Policies & the Ugandan Footwear Industry
China has been widely criticised for the lack of environmental regulation and
oversight throughout the country’s rapid industrialisation process. The severity
of China’s current domestic air and water pollution crisis has prompted
questions about the environmental impact of China’s increased involvement in
foreign industries.
In response to concerns from the international community, the Chinese Exim
Bank signed a MoU with the IFC to work together to mitigate the impact of
Chinese industrialisation both domestically and abroad, utilising the IFC’s
“Equator Principles” as a blueprint. In 2008, the China Exim Bank published
more stringent guidelines for environmental impact assessments (EIAs) for
new development projects in foreign countries. By late 2008, the China Exim
Bank was almost exclusively using European consultants for their EIAs
because Chinese consultants lacked international credibility. That same year,
the Chinese Academy for Environmental Planning drafted a new manual for
environmentally sustainable practices for Chinese companies investing in
developing countries.
China began incorporating more stringent environmental regulations into their
new African projects, but encountered problems when it came to lack of
136
capacity within host countries to implement the necessary infrastructural
requirements to ensure green production. Chinese investment in the Ugandan
footwear industry provides an example of this challenge.
Establishing leather and footwear based industries in Africa is an area of
focus for both private and public Chinese entities. Footwear clusters in China,
especially that of the Wenzhou province, have been extremely successful in
absorbing unskilled labour and upgrading to higher value added activities.
Hazan Shoes, a private shoe company based in Wenzhou, invested $6 million
to build an assembly factory in Lagos (see above). Hazan’s long-term plan is
to establish a vertically integrated footwear cluster centred around the Lekki
SEZ after construction is completed.
In order to upgrade capacity in African footwear industries, China funded
several month-long training courses at the China Leather and Footwear
Industry Research Institute in Beijing. Representatives from eight African
countries with promising footwear industries, including Nigeria, Ethiopia, and
Uganda, attended the training sessions. Amongst technical and managerial
skill building workshops, the institute held sessions on environmentally
friendly leather processing methods, focusing particularly on methods that
utilise non-toxic chemicals, vegetable-based dyeing, and minimise effluent.
However, establishing leather and footwear enterprises in Africa has proved
to be a challenge for Chinese businesses due to the inability of host countries
to meet the environmentally sustainable production requirements. In 2006,
Sun Jun, a Chinese company, broke ground on Skyfat Tannery in Jinja,
Uganda. The national water and sanitation company built the necessary
infrastructure to meet the requirements of the plant and, within six months of
production, the tannery had exported $4 million worth of wet blue hides.
Soon after, the Jinja local government alerted Skyfat to the fact that the
government constructed sewer lines could not handle the amount of effluent
the tannery was producing. This required Skyfat to take over treatment of the
factory’s waste. By November 2007, the amount of effluent produced by
137
Skyfat and surrounding tanneries in the cluster had grown to an extent that
the Jinja government forced the cluster to shut down production. 250 jobs
were lost (Brautigam 2009). Skyfat placed the blame on the Ugandan
authorities who approved Sun Jun’s investment without first doing an in-depth
analysis of the infrastructure requirements for an environmentally safe method
of disposing of the tannery’s waste.
The leather and footwear industry has great potential to grow in African
countries which have already established activity in the subsector. However,
the infrastructure systems required to mitigate the environmental impacts of
the industry require a substantial amount of investment and planning. The
example of the Skyfat Tannery, part of the supply chain feeding into the shoe
sector, illustrates how environmental regulation within supply chains has the
potential to catalyse upgrading of production processes and infrastructure
development, thereby attracting further enterprises to the region. However
implementation has to occur with full engagement of national and local
government in order to be successful.
Case Study: Ghanaian Timber Industry
The relatively successful greening of the Ghanaian timber supply chain
involves three main actors— two British timber buyers, a timber supplier in
Ghana, and the WWF’s Global Forest and Trade Network:

Travis Perkins, Britain’s number one supplier of building and
construction materials, was criticised by civil society organisations for
sourcing wood from suppliers with poor sustainability practices for
major government building projects, including the renovation of the
British Parliament building. The British government requires that all
state-run construction projects involve materials from sustainable
sources. One of Travis Perkin’s biggest suppliers, Timbnet Silverman,
the largest importer of hardwood in the UK, sources 40% of its wood
from Ghana (Emmet and Sood 2010).

Samartex Timber and Plywood is a company with a long history in the
Ghanaian timber industry and a longstanding business relationship with
138
Timbnet Silverman. The company is currently the lead supplier of
sustainable timber in Ghana.

The Global Forest and Trade Network (GFTN) is a World Wildlife Fund
(WWF) initiative to pressure large construction corporations to source
wood materials from environmentally sustainable supply chains. The
GFTN creates links between global corporations and local timber
suppliers that are both committed to creating ‘green’ supply chains.
The network also uses an independent auditor to certify each firm in
the supply chain according to responsible forest management
principles.
In response to the public criticism and pressure from shareholders to become
more environmentally friendly, both Travis Perkins and Timbnet Silverman
began seeking solutions to green their supply chain. They pressured
Samartex to undergo a transformation of their timber sourcing practices in
Ghana in return for an increase in the price and quantity of wood demanded
by Timbnet Silverman.
In 2004, Samartex signed an agreement with the WWF to become the first
certified sustainable timber supplier under the GFTN. Since Samartex’s
successful certification, eight other timber suppliers in Ghana have undergone
audits for certification. GFTN, with the help of USAID and the UK Department
of International Development, coordinated and funded technical assistance
and expertise required for the greening of Samartex’s supply network.
Samartex greatly reduced the amount of damage caused by poor timber
felling and hauling practices, also providing new roads and hauling equipment
to reduce the environmental impact of transporting timber. In addition to
transforming its environmental practices, the company developed CSR
agreements and established a joint forum with communities in the area,
intended to give rise to sustainable development solutions as well as educate
the locals about sustainable forestry practices.
139
Since Samartex has received its certification, the company’s orders have
increased by $2 million from timber supply companies looking to improve their
sourcing practices (Emmet and Sood 2010).
Samartex has served as a
model for Ghanaian companies looking to achieve GFTN certification, largely
motivated by the paucity of firms able to meet the increasing demand for
sustainable tropical hardwood.
4.6.2 But Greening can also be reversed.
The Ugandan leather and footwear experience is one of no progress, and
contrasts sharply with the relatively successful experience of the Ghanaian
timber sector. However, not all greening trajectories in Africa are positive, as
can be seen form developments in Gabon between 2007 and 2001.
De-greening in Gabon’s timber supply chain
Gabon is the third largest global exporter of tropical timber. In 2008, 80% of
total export earnings and 65% of government revenue were derived from the
oil industry. However, these resource rents are very unevenly distributed.
Timber is Gabon’s third largest export after oil and manganese, accounting for
6.2% of total exports in 2008 and around 3% of GDP. It is, however, the
second largest employer after the state, absorbing an estimated 28-30% of
the active labour force (much of this is part-time employment).
Until the late 1990s, timber was predominantly exported to France and other
EU markets. Since then, exports to China have grown rapidly and (in round
wood equivalent volume) now exceed exports to the EU. In 2001, the
government introduced legislation designed to create a sustainable timber
industry and to encourage forward linkages. Amongst the objectives of the
Forestry Code (Loi No 016/01 Portant Code Forestier) of 2001 was the
development of a sustainable forest management system. One of the drivers
of this push for sustainable forestry was pressure from major European
buyers and external agencies, including the IMF and the World Bank
(Gabon’s largest creditors) and European governments.
Responding to concerns from civil society, a variety of standards emerged to
protect forest ecosystems and the sustainability of forest resources, and this
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determines the greening of the supply chain. Some of these standards are set
by buyers, some are industry standards, and others are set by governments
and are mandatory. Responding to concerns from civil society, European
buyers increasingly require legality certification. In particular, OLB (Origine et
Légalité des Bois) certifies that the particular logging company is the legal
owner of the concession and has the right to sell the specified logs. Legality
certification falls increasingly under the umbrella of the EU FLEGT
programme (Forest Law Enforcement, Governance and Trade), whose
primary aim is to eradicate illegal timber trade.
In addition to this legally backed FLEGT programme, buyers in Europe are
increasingly conforming to the Forest Stewardship Council (FSC) certification,
which provides for the systematic recording of sustainable production
standards, and a chain of custody certificate tracing timber all the way through
the value chain. The FSC scheme has wide-ranging requirements including
the protection of the rights of indigenous peoples and detailed procedures
designed to protect the environment. The ISO 14000 standards are also
protective of the environmental impact of the timber value chain. Many EU
and US governments have a series of health and safety concerns in the
timber value chain. These technical features, for example, address
formaldehyde emissions arising from the adhesives used to produce plywood,
chemicals used in the production of medium-density fibreboards or pollution
from paint. Phytosanitary requirements ensure that the producer is capable of
cleaning, sanitising and sterilizing timber to ensure that it is free from
unwanted dirt, seeds, pests or germs. Critically, certification requires that
these standards are implemented throughout the supply chain
After the introduction of the Forestry Code in 2001, exports of processed
timber products grew rapidly, exceeding 450,000 cubic metres in 2005.
However, there are important differences between market destinations.
European buyers have imported a growing proportion of processed timber
products, whereas Chinese buyers almost exclusively buy unprocessed logs
(Figure 4.3).
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Figure 4.3: Gabon export volumes of wood products in cubic meters (1961-2007)
600
500
400
300
200
100
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Sawnwood
Veneer sheets
Plywood
Source: ForesSTAT data online http://faostat.fao.org (accessed January 2011)
This switch in final markets had major implications for the greening of Gabon’s
timber supply chain. Whereas the EU market is increasingly subject to green
supply chain considerations, and this is reflected in the standards which they
require from suppliers, few of these standards are imposed by Chinese
buyers, since civil society organisation do not exert the same pressure on
imported commodities. The Chinese government, too, has imposed few
standards on imports which affect the greening of the supply chain. This
contrasting experience between the EU and the Chinese markets is shown in
the critical success factors governing timber exports.
With the exception of some large foreign enterprises or joint ventures, wood
processing companies largely follow a low-cost/low-price competitive strategy
with a focus on quantity rather than quality. This contrast between the drivers
of consumption and the determinants of market access in the EU and China
surfaces in the preferences of global buyers operating in Gabon. Buyers from
China tend to place a premium on low price and large volumes. They are
generally less concerned with specific varieties than are the EU buyers, and
also show particularly low preferences for environmental compliance and the
quality of the logs which they are purchasing (Figure 4.4). Specifically with
respect to environmental standards, Chinese buyers make very few demands
from Gabonese suppliers, particularly in comparison to EU buyers (Figure
4.5).
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Figure 4.4: European and Chinese Buyers’ Requirements – Wood Logs (1=not
important; 5=very important)
Price
EU
CN
Environmental
compliance
5
4
3
2
1
0
Variety tree species
Volume
Quality
Source: Terheggen’s fieldwork data collected Nov. 2008 – Feb. 2009
Figure 4.5: EU and Chinese Buyers’ Requirements –International Regulations
and Standards (1=not important; 5=very important)*
EU
Formaldehyde emissions
5
CN
ISO standards
4
3
Phytosanitary
requirements
2
1
GPP
0
Sustainability certification
requirements
Product testing
requirements
Building codes
Legality certification
requirements
Source: Terheggen’s fieldwork data collected Nov. 2008 – Feb. 2009
Note: * See Box 3 for details of standards
There are three supply chain consequences of this shift in global markets
which, as we observed in Chapter 2, are likely to become increasingly
prominent. These are likely to have widespread consequences beyond the
timber sector. First, despite the growth of higher income segments of final
demand in China (and other emerging economies), their demand profiles are
more focused on price than on environmental concerns. Hence as global
143
demand shifts from the north to the south it is likely that greening concerns
will be much less prominent and that in some cases, as in Gabon’s timber
sector, the momentum is likely to be one of de-greening rather than greening.
Second, standards have important implications for capability-building. Greater
demands for environmental and quality standards require enhanced skills and
the capacity to improve quality over time. A reduction in greening pressure on
the supply chain will undermine the growth of capabilities in African supply
chains. Third, at the same time, environmental standards require relatively
sophisticated suppliers, and this has acted as a barrier to entry for SMEs.
Therefore, one positive impact of a reduction in supply chain greening
pressures is to provide enhanced space for SMEs in global supply chains.
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CHAPTER 5
GOVERNANCE IN GVCs AS EXPORTERS ENTER GLOBAL
MARKETS
SUMMARY

The value chain (VC) describes the full range of activities which are
required to bring a product or service from conception, through the
different phases of production (involving a combination of physical
transformation and the input of various producer services), delivery to
final consumers, and final disposal after use.

The VC perspective is important for three primary reasons:
o A chain is only as strong as its weakest link. Building
competences confined to individual firms will flounder on
systemic inefficiency.
o Value chains connect producers to final markets; these final
markets offer different possibilities for profitable production.
o Value chains define the division of labour in the chain and this
affects the incomes which accrue to different parties in the chain
and the capacity of producers to upgrade.

VCs result from a series of developments which have been spurred by
the deepening of globalisation:
o The specialisation by firms in their core competences.
o The governance of GVCs.
o The character of high income markets.
o The growing importance of standards.
o The demand to master different types of upgrading.
o The importance of ownership.
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
Different end markets have significant ramifications for patterns of
competence specialisation, governance, standards, upgrading and
ownership in value chains.

There are two major families of GVCs:
o ‘Additive value chains’ - are characterised by sequential
processes of domestic value added. These tend to
dominate in the resource sectors.
o ‘Vertically specialised’ chains – involved the increasing
fragmentation of production in which individual processes
occur simultaneously. These tend to dominate globalising
manufacturing and service sectors.

Vertically specialised GVCs dominate in high income economies and
are growing most rapidly. By contrast, there are few vertically
specialised GVCs operating in Africa, and those which do tend to be
concentrated in Southern Africa.

Case studies of African GVCs illustrate how an understanding of the
dynamics of GVCs helps to explain the nature of economic
diversification and the determinants of upgrading amongst producers.
They also show that successful upgrading and insertion in GVCs is a
function of:
o The technical character of individual chains
o The strategies of the lead firms driving these
chains
o The nature of domestic capabilities in individual
African economies
o The design and delivery of effective government
policy
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5.1 WHY ENSURING SUPPLY IS ONLY PART OF EXPORT EXPANSION
Chapters 3 and 4 addressed two of the major determinants of supply
capabilities – industrial clusters and supply chain management (SCM).
As we saw in Chapter 3, international experience shows that firms who cluster
in close proximity benefit from external economies and often cooperate with
each other to develop systemic efficiency. In many cases clusters play leading
roles in global export markets. Clustering is particularly beneficial for SMEs,
whose problems are not so much that they are small, but that they are
isolated. International experience also shows that clusters have their own
internal dynamics – in general, effective policy consolidates and strengthens
rather than creates clusters. A range of different types of clusters are evident
in Africa. Unlike the high income northern economies - but like many low
income southern economies - the bulk of African clusters are survivalist in
nature, showing few signs of dynamism, specialisation and upgrading. They
generally produce simple consumer goods and services for local customers.
However, although clusters are still at an immature stage on the African
Continent, encouraging signs of dynamism have begun to emerge. In some
cases, such as the furniture industry in Egypt, clusters participate actively in
global final markets. In Nigeria, clusters are emerging in the high-tech sector,
and are beginning to differentiate and to draw in educated entrepreneurs.
These dynamic trends are also evident in one of Kenya’s furniture clusters.
Successful clusters are characterised by active cooperation between firms –
“horizontal glue” is important in these production networks. This cooperation
requires trust. Clustering is also strengthened by the development of
specialised institutions which facilitate relations between firms. However,
cooperation is not only evidenced at a horizontal level, between firms
engaging in similar types of activity. It is also to be found in the vertical
relations between firms in the value chain. ‘A chain is only as a strong as its
weakest link’ is as true for a production system as it is for the anchor chain in
a large ship. Hence, supply capabilities in competitive markets necessarily
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have to ensure that competitiveness and dynamism are embedded throughout
the chain rather than in individual firms.
The structured improvement of supply chains – supply chain management
(SCM) – has emerged spontaneously as an outcome of market forces as lead
firms acted to strengthen capabilities in their supply chain. They were led to
develop their supply chains in order to respond with agility to changing market
conditions and to lower costs by improving quality, reducing inventories and
cutting out waste. But agility and cost reduction are not the only factors which
have driven the development of SCM. Lead firms have also taken actions to
strengthen their supply chains in order to enter profitable niche markets and to
consolidate their ‘social licence to operate’ by spreading the benefits of their
operations locally. More recently, supply chain greening has become an
important driver of SCM, both as a route to cost saving and in order to
strengthen presence in profitable global niche markets.
Supply chain management in Africa is still in its infancy. Large firms selling
into global export markets – particularly, but not only subsidiaries of global
TNCs - have begun to work with their supply chains. But, with the exception of
some firms in South Africa, they have seldom ventured beyond the first-tier of
their chains to interact with second- and third-tier SMEs. More typically these
large firms have resorted to importing their inputs rather than upgrading the
capabilities of local suppliers. In terms of sectoral differentiation in Africa,
SCM has begun to emerge as a major element of corporate strategy
(although often with low levels of implementation) in Africa’s resource sector.
This is a response by lead resource extracting firms to the twin challenges of
pressure from consumers in final markets and from the populations adjacent
to their production activities who demand a greater share of the benefits
accruing from resource extraction.
However,
improving
supply
capabilities
–
whether
through
cluster
development, supply chain development or other policies designed to build
capabilities - is only one side in the equation of economic development. Once
production moves beyond the subsistence level, development becomes a
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process of production and consumption, supply and demand. The exchange
relationship between producers and consumers is critical for a number of
reasons. First, as we saw in Chapter 1, the specialisation and division of
labour which drives productivity growth is dependent on the scale of the
market. Thus, in order to progress, producers need to find market outlets
which are some distance from their production facilities. Second, how
producers enter markets, and which markets they enter, determines the price
which they obtain for their efforts. Selling into highly competitive markets is
often associated with cut-throat margins. Third, because (as we saw I
Chapters 2 and 3) markets are increasingly differentiated, dynamic and
volatile, producers need to develop the dynamic capabilities which are
required to sustain a profitable presence in final markets. The trajectory of this
capability building is defined by final markets and transmitted to producers by
buyers. Moreover, many of the tools which facilitate the upgrading of
capabilities in production are made available to producers by the lead firms
who are responsible for the sale of products into final global markets. The
challenges associated with entering and participating on a sustainable basis
in final markets are particularly daunting for suppliers in low and middle
income economies who are unfamiliar with the nature of demand in distant
final markets. SMEs operating in industrial clusters are amongst the most
challenged groups of producers.
For all these reasons, a focus on supply alone does not provide enough of the
tools which producers in lower economies such as Africa require to penetrate
and gain from global markets. It is akin to building a very large factory
(perhaps using the most advanced technologies) to produce products which
are then stacked in a warehouse. Production has to be connected to the
markets, and in the contemporary global economy, this requires producers to
engage with, and participate in global value chains (GVCs). Understanding
the dynamics of GVCs is the subject of the analysis undertaken below.
Before considering African experience in GVCs (Section 5.5), it is first
necessary to understand the character of GVCs, and to briefly consider
comparative experience on how producers participate in global markets.
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5.2 WHAT EXPLAINS THE EXPANSION OF GLOBAL VALUE CHAINS?
The value chain (VC) describes the full range of activities which are required
to bring a product or service from conception, through the different phases of
production (involving a combination of physical transformation and the input of
various producer services), delivery to final consumers, and final disposal
after use.
Two central features of VCs are that they have become increasingly fractured
(a growing number of links in the chain) and that chains have become
increasingly dispersed globally.
The depth of integration of the global economy has grown in recent decades.
The ratio of global exports to global GDP more than doubled from 11.4% in
1970 to 26.1% in 2009. Unlike the deep global integration in the nineteenth
century which largely comprised of trade in primary products and finished
manufactures, the ‘second great unbundling’ after the 1950s saw a dramatic
growth in the share of semi-processed intermediate products in global trade
(Baldwin, 2012a). This was increasingly driven in recent decades by
advances in information and communications and transport technology. By
2012, more than half of total global merchandise exports and more than half
of traded services comprised intermediate products and services (Lanz et al.
2009).
Behind these trends in global macro aggregates lies the restructuring of
production in global value chains (GVCs). As will be shown below, this
involves the fragmentation of production across national borders. Trade is
increasingly in semi-finished components and sub-assemblies rather than in
final products. This is evidenced in an increasing number of sectors, in both
physical goods and services. So great is the resultant trade in intermediates,
that according to the World Trade Organisation, 28% ($5tr out of $19tr) of
global trade in 2010 involved double-counting, that is the value of intermediate
products
traded
directly
across
national
borders
and
indirectly
as
subsequently incorporated in final products (UNCTAD, 2013).
150
A number of linked factors explain this rise in fragmented trade:

The specialisation by firms in their core competences in the pursuit of
innovation rents.

The governance of GVCs.

The character of high income markets.

The growing importance of standards.

The demand to master different types of upgrading

The importance of ownership.
It is necessary to briefly explore these determinants of GVC evolution in order
to understand the specific nature of Africa’s involvement in GVCs.
Core competences – the building block for firm-level specialisation.
As we saw in Chapters 2 and 3, markets in the high income northern
economies became increasingly volatile and fragmented after the 1970s.
These changing market requirements placed enormous pressure on firms
which had been accustomed to operating in a world of stable and predictable
markets which largely accepted their product offerings. They consequently
had to find a way of adapting to this new competition, and one path to this
was to refine and specialise their roles in their value chains. They did this in
part by focusing on their core competences.
Core competences describe a series of capabilities which satisfy three basic
conditions – they are unique to the firm, they are difficult to copy and they
have a value in the market place (Hamel and Prahalad, 1994). In a world of
growing knowledge-intensity in production, there is increasing space for
unique and specialised capabilities. The logical outcome of the need to
identify and exploit core competences is to give up on those parts of the chain
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which are not unique to the firm and/or which are easily copied. These noncore competences can then be outsourced to other parties in the value chain,
subject of course to the firm’s capacity to manage this outsourcing structure.
Facilitated by falling trade barriers, declining transport costs and the growing
capabilities of information processing and communicating technologies, this
outsourcing has become increasingly global in nature. For many of the world’s
largest producers who had previously offshored parts of their internal
operations to foreign subsidiaries to reduce production costs, this global
outsourcing of some operations to suppliers with whom there were no equity
links was a natural development of trajectories which they already had in
place.
The pursuit of innovation rents drives core competences
As we saw in Chapter 2, core competences can be understood as rents, that
is, possessing a capability or an attribute which is protected from competition.
Although some rents are gifts of nature, most rents have been created or
augmented. But in world of competition, rents are inherently dynamic. Despite
intensive attempts to protect rents, a special attribute today, may become a
commodity tomorrow, that is a product or service which has few barriers to
entry. These rents are distributed through the chain and the function of
focusing on core competences is to identify areas of high rent which are
protected from competition.
The balance of chain activities which do not constitute core competences is
outsourced. But this outsourcing has to be managed to both ensure systemic
chain efficiency and to institute processes which ensure that the chain as a
whole responds to changing market conditions. It is customary to refer to the
management of these chain relations as value chain governance.
The management of chain rents requires Chain Governance
GVCs which occur entirely within a single transnational firm are by definition
tightly governed by the firm’s management structure. But even where there
are no equity links between firms in the vertical chain, coordination and
governance are critical. Each link in the chain has to be accorded a specific
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role, defining the boundaries of its roles and the performance requirements it
has to meet in order to sustain its role in the VC.
The key actor in GVC governance has increasingly become the buyers who
feed products into final markets. In some sectors, these buyers are individual
firms who utilise intermediate products in their downstream operations – the
experience of Toyota described in Chapter 4 is a good example of this type of
buyer. A second type of buyer is the retail supermarkets who dominate many
final global markets. In most European markets, more than 80% of total retail
sales are controlled by less than five firms. Wal-Mart, with annual sales of
$476.3 billion has a turnover equal to the GDP of the 25th economy in the
world, and is China’s ninth largest trading partner. Buyer concentration in
retail is also rapidly unfolding in Africa as Wal-Mart, Nakumatt, Shoprite,
Woolworths, etc. move into various cities in the continent. A third major
category of buyer is final branded product firms such as Nike, Levi-Strauss,
Zara who have few manufacturing facilities of their own, but specify their
needs very precisely to producers.
Between these three types of dominant buyers are a range of intermediaries
who have an important bearing on chain structure (and who play a major role
in intermediating exports by African producers into global markets). Some
sectors, such as garments and electronics, have seen the emergence of
‘triangular buyer governance’ in which the lead firm (for example Nike)
specifies product requirements, and a systems coordinator (for example Li
and Fung from Hong Kong) takes control of the outsourcing function and the
management of the supply chain (Gereffi, 1999). In agricultural commodities
there are a plethora of local buyers feeding produce into ‘category buyers’
who serve the needs of the retail chains for particular types of products (for
example, fresh fruit and vegetables), or very large TNCs who specialise in
trading (such as Cargill).
Market characteristics determine chain structure and performance
As we have repeatedly observed, the transition in production organisation
over recent decades, as well as the emergence of GVCs, are both
153
consequences of the maturation of post-WW2 final markets. The first two
decades after the end of the war were associated with a severe production
shortfall in the high income economies. In this environment the producer was
king and could virtually sell anything which it could produce. But as incomes
grew and as basic needs were satisfied, so consumers in these markets
became increasingly demanding. They required better quality, greater variety
and new products - produced more ethically and sustainably - and wanted
these changes to be made with increasing frequency. They were rich enough
to pay the higher prices which these attributes entailed. Although not all
consumers in high income countries were rich enough to translate these
wishes into effective demand, these consumption patterns were increasingly
dominant and determined GVC configuration. In general, the more demanding
final markets were, the higher the margins available to producers in the chains
feeding into these markets.
By contrast, the very rapid growth of low and middle income markets
(described in Chapter 2) provides a different imperative in market dynamics.
These are much more like the supply-constrained markets in the high income
economies after WW2 and are relatively price conscious and not nearly as
discriminating with respect to production conditions in the value chains. It is
not that consumers in these countries do not aspire to the (higher priced)
product consumed in the higher income economies, but outside of the elite,
they are unable to afford them.
The growing prevalence of standards in VC governance
Standards are a central component of governance in virtually all chains.
These standards play a critical role in deciding who is incorporated in the
chain, what they do in the chain and how they perform their allotted tasks. The
emergence and growing importance of standards is explained by the
changing nature of final markets in high income economies. The agility which
is required to meet volatile demand, and the growing concern of consumers
and governments around safety and ethical issues has forced value chains to
ensure the integrity of production processes throughout the chain, not just at
the final stage of production and assembly. ‘Chains of custody’, documenting
154
performance throughout the chain are now a central requirement for
participating in many markets, especially in higher margin and more profitable
markets.
Box 5.1: Four sets of standards are widely observed in GVCs

Corporate standards are internal to the chain. Typically they address
quality, cost and delivery (QCD), and increasingly also environmental
processes. These are used to specify the requirements of the lead firm for
supplier firms to meet in order to ensure systemic chain competitiveness.
An ability to innovate is another critical component of supplier performance,
but is typically not measured in the same way as quality (parts per million
defects), ‘cost-down’ (a specified annual decrease in unit prices) and
delivery (percentage on time delivery, agreed batch-sizes).

Generic standards are industry specific or are relevant across a range of
sectors such as ISO9000 standards on quality and ISO14000 on the
environment.

Standards set by governments (for example food safety standards) and
international bodies (for example, EU farm-to-fork standards).

Standards emerging from civil society, such as labour standards, organic
standards and Fairtrade certification.
(Kaplinsky, 2010)
As a general rule, corporate, industry and regulatory standards are nonnegotiable – the supplier either performs or does not perform, and the product
either does or does not qualify for market entry. By contrast, civil society
standards are seldom mandatory but affect the market niche in which the
value chain is inserted. Typically, civil-society standards tend to involve
participation in higher margin niche markets.
However, whether optional or mandatory, a common characteristic of
standards is that, even though they help to raise quality, they often involve
increased expenditure on the part of producers and other links in the chain.
155
For example, in the horticulture sector in South Africa, an individual farm audit
for GlobalGap costs R6,000 (approximately €400), excluding auditor transport
and food. BRC audits costs double per packhouse, and ethical audits cost
about R8,000 (€550) per farm. (Barrientos and Visser 2012). Moreover, they
generally require a literate and numerate labour force or the employment of a
full time manager to oversee the accreditation process and implementation of
standards. These requirements often act to exclude small scale and informal
producers, who are further disadvantaged by the costs of (generally
renewable) accreditation.
On the other hand, standards are often an
important conduit for capability building, hence intensifying the learning
involved in exporting.
A recent development of potentially high significance is the extent to which
standards are involved in GVCs which sell into low and middle income
markets (see Chapter 4 above, and Kaplinsky, Terheggen and Tijaja, 2010).
Lead firms from these importing economies may have fewer and less exacting
corporate standards; the regulations affecting entry into these markets (for
example, those governing food safety) may be less well developed, and the
pressure exerted by civil society groups in low and middle income economies
tends to be lower. One consequence of the lower standards-intensity of
southern markets is that it reduces the barriers to entry for small scale
suppliers in these chains.
The complexity of upgrading
As observed above, in the context of intense global competition, rents are
inherently dynamic. The degree of dynamism is a function of the depth of
rents (that is, the margins which they provide) and the strength of barriers to
entry. Even within intellectual property rights the relative strength of different
barriers may vary – brand names, for example, effectively exist in perpetuity
whereas patents are time-bound. But even brand names are subject to
erosion without heavy investments in promotion and in the development and
consolidation of product attributes.
156
The continuous pressure on rents therefore means that throughout the GVC
there is a continuous drive towards upgrading. This can take a variety of
forms, but all upgrading is concerned with engaging in activities with the aim
of increasing the rents that can accrue. Upgrading is usually seen as taking
place within the production process, or in the kinds of products produced, or
moving up the chain into new functions, or shifting to a more profitable value
chain altogether (Box 5.2).
Box 5.2: Four types of upgrading

Process: Improvements in the process of producing products may take an
embodied form or reflect changes to organisation, within specific links in
the chain or in the chain as a whole. These improvements target
productivity in production processes.

Product: Improvements in products which may be in tangible products or
services. They affect the quality and variety of products, as well as the
introduction of new products.

Functional: Changing position in the chain may mean engaging in links
which are new to the firm – for example, moving beyond assembly to the
manufacture of components, or developing capabilities in design or
marketing. But it may also involve the vacating of existing links so that the
firm moves out of manufacturing into design, rather than engaging in both
manufacturing and design.

Chain: The final component of upgrading in the GVC framework is to move
from one chain to another, in the way that Nokia progressed from rubber
boots, through timber machinery to mobile telephony (which has now been
divested).
Ownership and embeddedness
The commitment of producers to the local and domestic economy is emerging
as a major component of GVC dynamics, including in Africa. This commitment
is referred to as ‘embeddedness’, and is closely linked to ownership.
157
The early stages of post-colonial development policy in Africa gave great
prominence to the issue of ownership, It was assumed that locally-owned
enterprises and farms would have a greater commitment to the development
of domestic capabilities and value added. However, the drive towards
liberalisation which gathered pace after the 1980s overturned this policy
agenda. It led to the removal of this privileging of local ownership, substituting
two, often contradictory policy agendas. The first was to remove ownership
from the policy equation – for example, the TRIMS negotiations and current
WTO regulations prohibit special concessions provided to locally-owned firms.
On the other hand, much of Africa’s recent policy agenda has been designed
to attract and often to privilege foreign direct investment (FDI) not just as a
source of scarce capital, but also as a mechanism for encouraging technology
transfer and helping producers enter global markets.
A problem with this policy agenda is that it ignores the role of GVCs as the
driver of globalisation. A variety of GVC issues which are related to different
forms of ownership and embeddedness tend to get pushed to the margins by
this analytic and policy agenda including the following:

The ownership of the firm will influence the final market into which the
chain feeds. These final markets have entry barriers such as tariffs and
product standards. Their demand characteristics have implications for
who is incorporated in the chain and the upgrading paths which are
open to suppliers. The market niches which the firms feed into will
determine the margins open to the producers, and the standards which
they are required to meet. Ownership also influences the range of
competitive suppliers who are available to meet the lead firm’s needs.

Firm strategies differ and these strategies may often be a function of
individual firm trajectories and/or their nationality of origin or ownership.
For example, firms with subsidiaries producing the same product in
many places or sourcing identical inputs from many countries may be
particularly footloose. In other respects, firms from different countries of
158
origin may operate their foreign subsidiaries in distinctive ways. For
example, as we saw in Chapter 4, in many respects Chinese owned
firms behave differently to northern owned firms in Africa, and Chinese
state-owned firms differently to Chinese private sector firms.

The embeddedness of the lead firm will influence how it responds to
changes in exogenous conditions, for example, a currency devaluation
or civil unrest. It will also determine the extent to which the firm is
prepared for the longer term challenge of building capabilities.
Ownership and embeddedness are closely related, but are not the same
thing. In principle there is the expectation that locally owned firms are more
deeply embedded in, and committed to, the local economy than are foreign
firms. But this is not always the case. There are many circumstances in which
local firms are even more footloose, and even less likely to invest in building
local capabilities than foreign owned firms. The key lesson for policy
development is to determine which factors determine the embeddedness of
producers and their commitment to upgrade and the role that ownership plays
in their embeddedness.
5.3. DIFFERENT TYPES OF VALUE CHAINS
It is customary to distinguish between VCs which are ‘buyer driven’ (in which
the lead firm is one of the different categories of buyers described above) and
‘producer driven’ chains (in which the chain governor commands a core
technology and acts as system integrator of the chain). As GVCs have
evolved over the past two decades, there has been a notable shift towards
greater buyer-driven-ness, even in the generally more technology-intensive
producer driven chains.
However, when resource intensive and low income economies are concerned
(both attributes are common to African economies) there is a more significant
difference in chains which affects exports and patterns of economic
159
diversification. The key distinction here is between chains which involve
‘vertical specialisation’ and those which are essentially ‘additive” in nature.

Vertically specialised value chains involve the fragmentation and slicing
up of production into a myriad of sub-processes. These activities can
be undertaken in parallel – that is, at the same time - and since there is
little processing loss in production and no degradation of inputs, there
is no intrinsic need for the various stages to be co-located. They lend
themselves ideally to global dispersion. The well-known example of the
Apple iPhone4 illustrates this well. Each device retailed at just under
$500 in the US. The phones were exported from China - ‘made in
China’ – at a unit price of $179. But the value added in China was only
$6.50, with the balance made up of imported components (for example,
valued at $80 from Korea, $25 from the US and $16 from Germany),
and service payments to Apple in the US (Xing and Detert 2010). This
reflects a production chain in which parts are sourced from all over the
world, are assembled under Apple’s design in China and then branded
and marketed in the US and other final markets (Figure 5.1).
Figure 5.1: The Apple iPhone GVC
Source: Xing and Detert (2010) and www.newairplane.com.

Additive value chains involve a process of sequentially adding value to
each subsequent stage of the chain within the same country. For
example, raw materials such as minerals and agricultural produce can
be transformed and then processed in successive downstream stages
before they are exported. In Henry Ford’s mass production River
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Rouge plant constructed in 1927 (and described in Chapter 3), virtually
the whole value of the car was added in a single plant.
The more complex and extended the chain – that is, the greater the number of
stages in value addition - the more likely it will be vertically specialised. In
general this occurs in the manufacturing sector where final products are
assembled using a variety of components (more than 3,000 in the case of an
automobile). A reconfiguration of the way in which services are produced, also
means that these too can comprise of a range of ‘assembled’ activities. For
example, call-centres are part of a much larger fragmented chain of
production, distribution and after-sales support.
However there are exceptions to this general trend and some manufactured
products are best suited to sequential value addition. This is generally the
case if the primary input into the final conversion process makes up a large
proportion of total value of the final product, is extremely varied in terms of
complexity and form, and where lead times to ensure flexibility are critically
important. For example, in the apparel sector where garments are made on a
quick and flexible replenishment platform for retailers based on fast product
principles, then having ready access to varieties of local fabric can be crucial
in achieving value chain alignment and systemic efficiency. It is for this reason
that Zara has vertically integrated backwards into fabric production through
Inditex. As will be shown below it explains also how Mauritius (and
Madagascar) draw on their ability to source local fabric to successfully
compete in certain European and South African market segments.
The resource sectors tend to be dominated by additive value chains for a
number of reasons. First, the options for advancing value addition inside the
country are bounded by the technical characteristics of the processing
activities. Resource extraction is relatively immobile, that is, it is determined
by a gift of nature. In addition, it is often also highly specific, since no two
deposits or plots of land are identical. These various stages of production are
generally necessarily additive – that is, they are sequential outcomes of
previous stages of transformation. Second, in the case of almost all natural
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resources there is extensive weight/volume loss in processing, or degradation
in the quality of agricultural inputs if they are not processed soon after
harvesting. (But this is not always the case. For example, in order to preserve
its flavour, coffee roasting and grinding have to be done near the consumption
stage). Third, when there are few rents in forward processing (in other words,
many producers can compete against each other), lead firms often encourage
value additive value chains in resource producing economies. This is
particularly the case in many agricultural commodities.
The GVC framework makes it possible to understand why specific chains
have distinctive dynamics in various sectors and thus to determine what is the
optimal strategy to pursue in any particular set of circumstances.
Understanding these chain dynamics in terms of core competences and
outsourcing, rent appropriation, governance, market fragmentation and
segmentation, standards, upgrading and ownership and embeddedness, is
critical in this strategic positioning.
5.4. AFRICA’S EXPERIENCE WITH GVCS
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
162
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)
120
Value added exports (USD Million)
100
Forward
80
60
40
20
0
Southern Northern
Africa
Africa
Western
Africa
Eastern
Africa
Central
Africa
Indian
Ocean
Source: OECD Africa Economic Outlook, 2014.
Although these macro statistics take us a long way forward in understanding
the insertion of Africa into GVCs, they suffer from three major disadvantages.
First, as they are based on input-output tables, they are a blunt instrument in
understanding the sectoral disaggregation of Africa’s exports. Second, few
African economies have comprehensive, accurate and up-to-date input-output
163
tables. And, third, these macro data do not explain the dynamics of how and
in which global markets African exporters are incorporated, how and which
capabilities are built, and what policies may be most appropriate to foster
gainful participation in global markets.
In order to get a better understanding of these issues, it is necessary to
analyse Africa’s export performance through the lens of the GVC framework.
Additive and vertically specialised GVCs are distinct in character and, as we
shall see, this has important implications for policy. However, in almost all
cases they are affected by the same central characteristics of GVCs
discussed in Section 5.2 above. That is, despite the differences in some of
their technical characteristics, their dynamics are affected by outsourcing and
specialisation in core competences as an outcome of rent-seeking behaviour;
the governance of GVCs; the character of high income markets; the growing
importance of standards; the demand to master different types of upgrading;
and the importance of ownership and embeddedness.
5.5 CASE-STUDIES OF ADDITIVE GVCS IN AFRICA
5.5.1 Cocoa GVCs in West Africa31
The cocoa value chain is part of a larger value chain resulting in the
production of chocolate (Figure 5.3). The major links comprise harvesting,
cocoa beans processing, processing in cocoa butter and paste, and final
chocolate manufacturing. The cocoa and chocolate GVC reflects both vertical
specialisation and additive sub-chains. The former are reflected in those parts
of the chain in final markets which process intermediates, and the additive
parts of the chain are located in cocoa-producing countries which produce the
intermediates.
The lead firm grinders and chocolate manufacturers work with imported
intermediate products and dominate forward linkages in the cocoa global
31
We draw on the following for this discussion of cocoa: Talbot 2002; Barrientos and AsensoOkyere, 2008; Barrientos, 2011; Fold, 2002; Morris and Fessehaie 2012; UNECA 2013.
164
value
chain.
Increasing
market
concentration
through
mergers
and
acquisitions has resulted in them controlling the highest value added chain
links - trading and marketing. In Africa, producing countries are not only
excluded from control over global logistics and marketing channels, but also
from intermediate and final product manufacturing.
Chocolate manufacturing is dominated by a few large TNCs in Europe and the
US (Nestlé, Cadbury Schweppes, Mars). They have outsourced intermediate
manufacturing stages, in some cases even standard chocolate production, to
grinders. This enables them to focus on their core business - product
development, marketing and distribution, targeting high value added products
and markets differentiated by product quality and social and environmental
standards. Smaller manufacturers (Ferrero, Lindt and Sprüngli) remain
vertically integrated in order to preserve commercial secrecy and tight quality
control systems.
Figure 5.3: Global cocoa/chocolate value chain
seeds, inputs, extension,
growing, fermentation and drying
beans
roasting
grinding
cocoa liquor
Cocoa butter cocoa powder
Chocolate manufacturing
confectionary and drinks
Branding and marketing
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Cocoa intermediate products (such as cocoa paste, butter, powder and cake,
but not chocolate) are more easily storable and tradable, two characteristics
which have made it possible to relocate processing facilities in producing
countries. Consequently the large chocolate TNCs in the developed countries
have been willing to outsource the intermediate processing stages of the
value chain, as long as this does not infringe on their core business of
producing the most profitable link – quality chocolate manufacture, branding
and marketing.
This is one reason why cocoa processing has been
increasingly relocated to cocoa producing countries, including West Africa
(Fold, 2002). These development of these additive chains is speeded up or
retarded by specific institutional policy/interventions in African producer
countries.
A handful of large scale grinders - Cargill, Archer Daniels Midland (ADM), and
Barry Callebaut – have marginalised international traders and warehouses
and dominate the intermediate stages of the cocoa global value chain. They
control R&D, food processing technologies, and bulk logistics to transport
thousands of tonnes of beans. This has created very high knowledge and
capital entry barriers for potential competitors. In order to supply intermediate
products on a just-in-time basis and in compliance with national standards,
grinders have invested in technological and logistics capabilities. In turn, this
has increased their market power along the global value chain. To manage
large-scale logistical systems, grinders have vertically integrated backwards
into producing countries - relocating purchasing, grading, and shipping
functions.
Ghana, Nigeria and the Cameroon are examples of additive cocoa VCs, albeit
with varying degrees of value added. Raw beans represent 76% of Ghana’s
total export value (of $3.5bn), 83% of Nigeria’s cocoa exports (of $1bn) and
87% of Cameroon’s exports (Figure 5.3).32
32
Cameroon exports US$ 0.7 billion but government interventions are ineffective, and the
TNCs have shown little investment interest; hence there is little additive processing occurring.
166
Cocoa processing in Ghana and Nigeria is growing, due to global grinders
integrating backward into producing countries. Relocating processing facilities
and buying activities has secured supplies and increased their flexibility to
meet global chocolate manufacturers quality and price specifications.
Industrial policies have also incentivised local processing.
Figure 5.3: Value added content of cocoa exports, Cameroon, Ghana, Nigeria
(‘000 US$, 2011)
Stage 1: cocoa beans
Nigeria
Stage 2: cocoa shells
Ghana
Stage 3: cocoa paste
Stage 4: cocoa butter
and powder
Cameroon
Stage 5: chocolate
-
2,000,000
4,000,000
Source: ITC Trademap accessed in August 2012
Nigerian processing companies are involved in both intermediate (cocoa
butter, cocoa cake, cocoa liquor, and cocoa powder) and even some final
stages (through Cadbury and Nestle producing beverages and confectionary)
of the value chain. In Ghana the proportion of cocoa exports processed
domestically has increased steadily from about 12.4% in 2007 to 25.6% in
2011. The government plays a critical role in maintaining the integrity of value
chain activities within the country. It maintains control over production/sales
through the marketing board (COCOBOD), grading and quality assurance
processes, as well as exports (Figure 5.4).
The growth of the additive cocoa value chain in these two countries is a result
of the technical characteristics of cocoa making it possible, the strategic role
of their governments in creating a strategic platform to facilitate the process,
and most importantly, in this policy environment, the lead firms (grinders and
manufacturers) perceiving it was in their own interests to assist the process.
167
Figure 5.4: Ghana cocoa value chain
Ghana (and to a much lesser extent Nigeria) demonstrates building an
additive value chain by cooperation between lead firm, local producers and
government. For a variety of technical reasons in the cocoa value chain the
lead firms are open to shifting and increasing value added processing
activities through backward integration into cocoa producing developing
countries. However a critical component for domestic links to deepen is for the
host government to design and implement appropriate and effective policy
measures. These depend on two forms of existing capability - within the
168
producers themselves and within government - to be able to assist producers
to build capability.
The case study demonstrates two extremes: The Ghanaian government has
created a strategic platform along all the links to facilitate building an additive
value chain. In contrast, in Cameroon the lack of public initiative has led to
very thin domestic value added and has resulted in the export mainly of raw
cocoa beans. Hence in Ghana existing capability entrenched within the
producers arising from institutional support through the marketing boards was
built on by the institutional capabilities of government.
5.5.2 Tea Value Chain in Africa33
Tea requires processing shortly after harvesting. Black tea, the vast bulk of
the market, requires complex processing. The leaves are withered (or partially
dried), and rolled up or cut, fermented, dried, and eventually sorted by size.
This processing can be done in an orthodox manner for high quality loose
teas, or alternatively through a process of cut, tear, and curl for bulk teas for
tea bags. The end result in both cases is ‘made tea’ (Figure 5.5). Green tea
represents only a small part of the market and its processing is relatively
simple - tea leaves are heated, then rolled or twisted, and finally dried. Hence,
unlike the cocoa and chocolate VC which comprises both additive and vertical
specialisation sub-chains, the tea GVC is in some cases entirely additive in
nature, albeit it a chain which is in many cases governed by lead buyers in
importing countries.
33
We draw on the following for the discussion of the tea value chain: World Bank, 2008;
Talbot, 2002; Fold and Larsen, 2011; Ganewatta, 2005; Republic of Kenya, 2012
169
Figure 5.5: Global tea value chain
seeds, inputs, extension
plucked tea leaf
post-harvest processing (wither, crush, ferment, dry)
made tea
packet tea
instant tea
tea bags
Further additive processing activities involve packing into tea bags, branded
(retailers) small packs, instant tea, and ready-to-drink (RTD) beverages. The
highest growth potential can be found in niche markets - organic teas,
flavoured teas, green teas, and speciality teas with high health benefits.
The marketing and distribution links are dominated by a few large TNCs which
control more than 80 percent of the world market. The distinctive
characteristic of the tea value chain is that these TNCs are often vertically
integrated backwards into large scale tea plantations. The relative capital and
scale intensity required by post-harvest processing has favoured the
development of such integrated companies. However Kenya’s tea industry
(the third largest in the world and the largest exporter) is an exception to this
trend as it is based on small scale production. The small growers market
through their own cooperative – the Kenya Tea Development Agency (KTDA).
Kenyan government policy is focused on developing small holder production
rather than facilitating additive forward processing within the country.
Consequently Kenya remains confined to exporting bulk tea and not engaging
in additional value added through packaging, blending, manufacturing RTD
beverages, nor moving into niche markets.
170
Additive value addition in Kenya is hence minimal. However we have included
it as an example to contrast to that of Sri Lanka, a case demonstrating the
possibilities for growing the additive tea value chain. In the absence of a large
domestic market Sri Lanka had to focus on exports in order to protect its tea
industry. However it has done so by the government looking to upgrade the
industry, and move into greater value added products such as teabags and
retail branded packets. To do this it had to break the stranglehold of the large
foreign brands. The government established a Tea Board and Tea Promotion
Bureau. The former offered tax free incentives for exporting based on the
previous year’s incremental export value of teabags and tea packets. In
addition it offered matching loans for capital investment in processing plants.
The latter supported national brands by providing grants to firms exporting
value added products.
Table 5.1: Composition of tea exports from Sri Lanka and Kenya, 2011 (%)
Bulk black tea
Value added black tea
Sri Lanka
50.41%
46.46%
Kenya
98.98%
0.12%
Source: ITC Trademap, accessed in August 2012
In 2011 Sri Lanka exported 46.5% of its black tea in value added form, in
sharp contrast to Kenya which exported 99% of its tea in bulk (Table 5.1).
Substantial upgrading has taken place in the former, whilst Kenya has allowed
the lead firms to maintain their command over chain rents. The difference
between Sri Lanka and Kenya in terms of different government approaches to
the development of value added processing in the tea industry and the
creation of an additive value chain is therefore stark.
In summary, Kenya is an example of a weakly developed additive value chain
whereas Sri Lanka has successfully built an additive value chain. As Sri
Lanka demonstrates, there are opportunities for creating an additive value
chain and engaging in domestic upgrading activities, as long as the tea
producing host government is willing to take the appropriate industrial policy
initiatives and shift the management of rents and the chain structure in favour
of a domestic upgrading process.
171
Since the lead firms are clearly not willing to upgrade producers down the tea
value chain, upgrading in producing countries depends on government
initiatives and its capability to implement the required strategies. The inability
to follow this path in Kenya with respect to tea linkages is likely to be a
function of government sectoral institutional failure since, as will be shown
below, the country demonstrates the ability to build capabilities amongst
producers in the fresh vegetable value chain.
5.5.3 Processed Fresh Fruit and Vegetables Value Chain in Africa34
Africa’s fresh and processed fruits and vegetable exports have historically
targeted the European market. In the 1990s supermarkets in the UK
transformed their value chain relationships with horticulture suppliers in Africa.
UK multiple stores (supermarkets and major retail chains) increased their
share of total fresh fruit and vegetable sales from 44% in 1992, to 76% in
1997. This was accompanied by a shift from purely market, arms length
based relationships with suppliers to an organised value chain with
concentrated and coordinated relationships with a more stable set of suppliers
in African countries – notably Kenya and Zimbabwe – who had to meet new
standards. The supermarkets reconfigured the value chain by bypassing the
traditional wholesale markets and instead working directly with a smaller
group of UK importers (Figure 5.6).
34
We draw on the following for this discussion of the fruit and vegetables value chain: Dolan
and Humphrey 2000; Dolan and Humphrey 2004; Fold and Larsen, 2011; Evers et al 2014;
Barrientos and Asenso-Okyere, 2008; Ouma, 2010; Fold and Larsen, 2011; Kaplan and
Kaplinsky, 1999; Basboga et al., 2010; Dolan, Humphrey and Harris-Pascal 1999
172
Figure 5.6: The UK Processed Vegetable Value Chain
The lower barrier-to-entry and lower-profit functions, such as quality control,
monitoring, and distribution, were delegated to these importers. These
importers were also tasked with responsibility for accessing new sources of
supply, supporting developing-country producers and monitoring their
performance. This was accompanied by a shift from loose, bulk products to
greater product variety, innovation in products and presentation, and in
packaged goods. This value added product shift in turn increased the level of
processing required and affected how products were grown, harvested and
stored, how they were packaged, how packhouses were organised, how the
produce was stored before processing, airport handling facilities, and final
processing facilities at the UK importers. Simultaneous with the introduction of
private supermarket driven standards, European governments introduced
strict food safety regulations. In order to maintain these various standards
importers concentrated suppliers, varied them so as not to depend on one
country or a single supplier source, and introduced traceability of supply to
meet the various regulatory conditions imposed by government and
international agreements. In order to do this they restructured relationships
within the value chain, tightening VC governance structure, increasing
coordination and control, and, in the process, changing the nature and scope
of firms in the value chain.
173
This reconfiguration of the processing value chain meant that developing
country exporters, such as Kenya and Zimbabwe, developed closer exclusive
supplier relationships with importers through the chain. The proliferation of
standards (public and private) has been a serious challenge for Kenyan
exporters, which have had to face up to 15 different standards (GlobalGap,
Tesco’s Nature Choice, Marks and Spencer’s Field to Fork, Fair Trade, etc).
Exporters and their suppliers had to restructure their own operations and
upgrade facilities, processes and logistics handling within Kenya and
Zimbabwe to maintain consistency and meet the new requirements.
For these African industries various upgrading opportunities opened up to
local vegetable processing firms. They were given the opportunity to deepen
value added through improvements in processing activities (washed, chopped
products), through new product combinations (mixed washed, peeled, and
chopped vegetables, ready for cooking), and packaging (for specialty
products). These new products are important for supermarkets and branded
manufacturers because they allow them to “re-format” traditional products in
high-income markets.
For Kenya and Zimbabwe this resulted in the following:

A concentration of exporter firms and the tendency to exclude small
and medium size exporters from the value chain. In order to compete
,exporters needed well-developed organisational and management
capabilities, investment in post-harvest facilities, sophisticated logistics,
large volumes, and close relations with European importers.

Agricultural production moved away from smallholders to large farms,
many of which were owned by the exporters.

Upgrading of local export firms which had to create sophisticated
quality assurance systems that document seed procurement, planting
schedules, pesticide and fertiliser use, spraying, and personal hygiene
to guarantee food safety.
174

Market power shifted from cost saving activities to value added ones,
and a tendency to push value adding activities down the value chain
closer to the African supplier.

Hence product upgrading occurred in these producer countries. A
substantial amount of produce sold in the UK supermarkets were
locally (Kenya and Zimbabwe) packed and barcoded to differentiate
products, varieties, countries and suppliers.

In order to build local capabilities, processing firms in Kenya and
Zimbabwe cooperated with farmers by allocating dedicated staff and
providing farmers with inputs and technical services.

Functional upgrading occurred by shifting some value adding activities,
previously undertaken in the UK back into Kenya and Zimbabwe packaging, cold storage, installation of labeling processing equipment.
The net effect of this has seen a diminution in the vertical specialisation in the
chain and a significant deepening of value addition in Kenya and Zimbabwe,
and hence the consolidation of a substantial additive fruit and vegetable
processing value chain in these African countries. There is evidence that
Kenya is also becoming a growing supplier of fresh vegetables to
supermarkets in South Africa.
Effective strategic collaboration between
governments and the private sector has been critical in designing and
implementing institutional interventions to support local upgrading processes.
Government support encompassed the following: subsidies have enabled
firms to expand production, infrastructural investment has reduced lead times,
and farmer support has reduced costs.
This fresh fruit and vegetables value chain exemplifies the manner in which
the pursuit by the lead firms (supermarkets) to maximise their rents has
altered the structure of the various links in the chain. Driving standards down
the chain has created a complex process of upgrading in Zimbabwe and
Kenya, and hence an additive value chain. However this has not benefitted all
175
value chain participants. The requirements of meeting these standards have
marginalised small producers and exporters in favour of large farmers and
exporting firms who have the resources, skills, facilities and knowledge
capabilities to take advantage of these domestic value additive opportunities.
Capabilities have therefore been built with the support of the lead producers
but not to the benefit of all producers and exporters. The inability to distribute
capabilities to small and medium size firms and producers is a failure of
institutional capability on the part of government.
5.5.4 Ethiopian Leather Value Chain35
The global leather value chain begins with hides (bovine, sheep and
goatskins) and ends with the manufacture of leather goods. The hides are
processed in tanneries before being manufactured into leather footwear,
garments, accessories (travel bags, belts, etc), technical products, and
upholstery. There are five stages in the value chain: hide supply, semiprocessed leather, finished leather, finished products, and the diverse end
markets (Figure 5.7).
At all stages the leather can be exported as
intermediates (hides, semi processed, or finished leather) or as finished
products (shoes, jackets and bags)
A peculiarity of the leather value chain is that it is essentially a by product of
processes and activities in another value chain – animal production and
slaughter for meat – and the quality for the first stage is dependant on the
ability to collect and preserve the hides. Industrialised countries have
established standards for animal husbandry, animal living conditions, high
quality feeding, transportation conditions, as well as defined methods of
slaughtering. This ensures not only good meat, but also unblemished and
high quality hides. This is not the case in developing countries where hide
quality is tarnished by pre- and post-slaughter defects. This has major
implications for value added activities further down the leather value chain.
35
We draw on the following for this discussion of the leather value chain: Bini, 2002; Tegegne
and Tilahun, 2009; Morris and Fessehaie 2012; Kiruthu 2002; Memedovic and Mattila, 2008
176
Figure 5.7: Leather Value Chain
The raw hides are either exported or tanned at wet blue tanneries which
effectively preserves the hide as a semi-processed leather. These wet blues
are further processed into different types of finished leather ready for use by a
variety of manufacturers. After the wet blue stage the leather undergoes a
tanning process to produce finished leather used in manufacturing - either in
the production of footwear and general goods, or more refined leather
destined for the automotive industry. The value added of finished leather is
higher than that of raw hides or semi-processed hides and therefore offers
potential gains to developing countries.
Manufacture of leather products is undertaken by a variety of firms ranging
from large capital intensive factories to small, labour-intensive enterprises.
Global marketing agents, operating at different stages in the chain, selling
intermediate (hides, semi processed and finished leather) and end products,
drive the global leather value chain. These agents have market knowledge,
design capability, and a wide network of sales channels. They manage the
complex supplier stages of the chain, contract production by enterprises, set
the quality standards, sometimes provide the necessary finance, and serve
the customers in the final end markets. US, Italian and other European buyers
set demanding targets – for example, quality, price, volumes, and especially
177
strict technical standards (chemicals, processing techniques). In turn, the local
tanneries try to set equally demanding market parameters to their suppliers, in
terms of quality, price, learning capabilities, lead times, and trust.
A leather industry can flourish both in low and high-wage economies. As is
apparent in the case of Ethiopia (see below), there is scope for African
countries to build an additive leather value chain. Upgrading activities are
however tied to meeting the value chain knowledge intensive and technical
standards, which imposes a major burden on low income country producers.
For they often lack the knowledge, managerial capabilities, and design skills
to meet these or identify their own end markets. A well-developed hide
production and tanning industry is the starting point for upgrading leather
product manufacturing in the leather value chain. The problem is that animal
husbandry and slaughtering occurs in another industry, undertaken by firms
without the perspective of transforming hides and skins into quality leather.
This gives rise to a variety of problems - logistics, quality, defects, improper
recovery of the raw stocks etc.
Exporting of hides and semi processed leather also has deleterious effects for
developing a leather products manufacturing sector down the value chain.
This has led the Ethiopian government to address leakages at the bottom low
value added links in the leather value chain and to drive upgrading through
the links. The foundation for this is upgrading husbandry/slaughtering, curbing
the export of low value added hides and semi-processed leather, and
encouraging higher value added export products so as to encourage value
chain additive upgrading.
The Ethiopian government imposed a stringent export tax of 150% on the
export of hides in an attempt to shift the composition of Ethiopia’s leather
exports away from raw hides into finished leather. Hides exports declined
from 70% of total exports in 2004 to zero in 2011 (Figure 5.8). Conversely, the
share of finished leather over total exports increased from 30% to 93%.
178
Figure 5.8: Value added content of leather/hides exports from Ethiopia
(%, 2004-2011)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Footwear
Leather
Hides
2004 2005 2006 2007 2008 2009 2010 2011
Notes: SITC 21, 61, 85. Source: UN Comtrade data accessed October 2012
This process has also assisted the rejuvenation of the Ethiopian leather
footwear industry, both for the domestic market and export markets. Currently
the US is the largest market for footwear exports through utilising AGOA
preferences. But exports to the EU are also beginning to take off. From a low
base of $669,000 in 2011, Ethiopian footwear exports to the US increased 29
fold to $19,378 million in 2013, with AGOA preferences accounting for
$19,241 million of these exports (Table 5.2).
Table 5.2: Exports of Ethiopian footwear to US 2011 - 2013
2011
2012
2013
Total Footwear Exports
669
7,093
19,378
AGOA Preferences
630
6,860
19,241
(http://agoa.info/profiles/ethiopia.html).
Government has supported this upgrading export sector by providing
industrial zones and assisting large firms to partner with international actors.
The Leather and Leather Product Training Institute (LLPTI) has helped firms
innovate and upgrade through training in design and shoe production for
employees of large and medium firms. This industrial policy initiative went
hand in hand with government engaging the global lead drivers of the value
chain to assist the upgrading of local tanneries (and also footwear firms) in
line with world class standards. These international agents began to provide
support to local tanners for process upgrading in the areas of ‘layout
179
improvements’,
‘speed-up’ and increased ‘reliability’ of production. This
helped them to produce faster and to improve productivity at a better quality.
Local footwear manufacturers also introduced firm level product and process
innovations, as the larger firms installed new machinery, introduced new
production organisation, upgraded product quality, and sought new export
markets. Finally, the World Bank-Ethiopia funded Ethiopian Competitiveness
Facility (ECF) provided matching grants to exporting companies engaged in,
among others, the leather and shoe sectors. IFC has also provided loans and
equity capital to private investors in the manufacturing sector.
Chinese private capital has also invested substantially in shoe manufacture
on the back of the successful upgrading of leather, the ability to benefit from
preferential trade preferences and lower labour costs. Huajian, one of the
largest shoe exporters in China, has opened a large export plant employing
around 1,750 workers in an industrial zone in Addis Ababa with future plans to
substantially expand its footprint. The company makes ladies shoes for
Tommy Hilfiger, Guess, Naturalizer, Clarkes, and other brands in Europe and
the US.
Ethiopia is a value added success story of building an additive leather value
chain leading all the way up to the export of final footwear products.
Capabilities have been built at all levels of the chain, as well as within
government itself. This is as a result of government intervention, engagement
with lead firm drivers to meet value chain standards, locally embedded firms
upgrading their core competence and productive activities, end market
preferential preferences, and institutional support from various quarters.
5.5.5 The East African Processed Fresh Fish Value Chain36
There is a high demand for fish in European markets. This is especially the
case for chilled fresh fillets, which are seen as healthy, convenient and
preferable to frozen fish. Kenya, Tanzania and Uganda have built a reputation
as some of the few non-EU countries that are able to competitively deliver
36
We have drawn on the following for this discussion of the Nile perch value chain: Asche
2006; Hempel 2010; Morris 2003
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chilled fresh fillets of Nile perch which meet the high standards (food safety,
health, quality, regularity of delivery) set by European supermarkets. The East
African fish value chain (from Lake Victoria to European supermarkets)
illustrates the role of foreign lead firms and governments in meeting exacting
standards, upgrading the local industry, and increasing domestic value added
in the additive value chain.
In order to shift the Lake Victoria fishing industry away from exporting
unprocessed fish, Kenyan, Tanzania and Ugandan governments have
attempted to assist local processing firms to supply European supermarkets
with processed and packaged fish fillets. The value chain is dominated by
European
importers and
distributors, and
domestically by on-shore
processors and traders. Processing of Nile perch is done at on-shore
processing plants. The processing of Nile perch takes place in modern
facilities that are fully compliant with the food safety standards of export
markets. Fish is filleted, packaged in labelled cartons, and exported chilled by
airplane. Processors get a relatively small share (about 20%) of the
supermarket retail price. The processing activity also has a large waste factor
of about 60% per kilogram. The big winner in the Nile perch industry is the
retail sector, including marketing, transportation, storage and packaging. This
sector gets over 60% of the total retail value. This is reflected in the
distribution of value within the value chain. In Kenya, Tanzania and Uganda
the fishermen and lake side fish collectors retain between 13% – 20% of the
value of the retail price for Nile perch in European supermarkets (Table 5.3).
Table 5.3: Fish Value Chain – Kenya, Tanzania, Uganda
Average Value added and percentage of final price received
Key Chain Links
Kenya
Tanzania
Uganda
Fishermen, Fish collectors, Buying agents
13%
20%
13%
Factory processing
21%
20%
24%
(Filleting, chilling, bulk packing)
European Buyers (Packaging, branding)
65%
60%
63%
Source: Derived from Morris 2003; Asche 2006, Hempel 2010
Fishing is undertaken by traditional artisanal methods in small canoes
propelled by paddles and sails. A few fishermen use small boats with
outboard motors, and a small group of commercial fishermen employ large
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fishing vessels with on board chilling facilities. Kenya has been predominantly
using artisanal fishermen, Tanzania primarily artisanal, but also some larger
boats, while the Ugandan industry is dominated by commercial fishing.
Developing independent fish processing plants close to the Nairobi
international airport was a strategic decision for the Kenyan government, as
was supporting traditional artisan fishing methods. The Ugandan government
however, decided to support foreign direct investment. A joint venture with
local fisherman and processors resulted. The joint venture built a processing
plant close to the airport that was also close to the Lake (geographical
advantage) and supported the purchase of boats equipped with chilled holds.
In Tanzania, the processing of Nile perch is undertaken in an on-shore
processing plant.
From 1997 to 2000, several health incidents concerning Nile perch resulted in
the EU banning Lake Victoria Nile perch imports. An EU commission
investigated the industry. It found numerous failures to meet health standards.
The EU ban shut off the supply of Nile perch which European consumers
demanded. This created major incentives for all those in the value chain to
work together in order to tackle the issue of how to meet the required value
chain standards.
Uganda is a good example of how cooperation was undertaken by the
Uganda Fish Processors and Exporters Association (UFPEA), European fish
importers, the Government of Uganda, and the EU. The principle intervention
was to restructure the government agencies responsible for managing the
certification process so that they could align with the European supermarket
driven EurepGAP framework. The government revised its fish regulatory
systems to ensure they were accredited to certify fish exports as EurepGAP
compliant. However implementation was a problem because of the large
number of landing sites relative to the size of the monitoring inspectorate. In
order to ensure adequate testing, the Belgian firm Chemipher opened a
testing laboratory in Uganda. This streamlined the certification process,
reduced costs and added domestic value to the chain.
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The unintended consequence of the EU ban was the upgrading of the value
chain, from fishing to processing. It resulted in the integration of certification
processes into the local industry, thereby opening up the US market which
also required HACCP compliance. The installation of local laboratories raised
the knowledge intensive nature of local aspects of the value chain, and
improved export performance.
The Nile perch value chain story exemplifies how regulatory standards and
their implementation has facilitated domestic capability upgrading and
increased value added in Kenya, Uganda, and Tanzania. This process was
driven by the EU supermarkets needing to satisfy the demands of European
consumers for fresh processed Nile perch, and hence to ensure these
countries could meet the level of certification required. However it was only
successful because of collaboration between the EU regulatory bodies and
the African local governments, with strong assistance from EU based
institutions. The end result was local upgrading to meet end market
requirements, consolidating an additive value chain in these African countries.
The strength of EU institutions in assisting local governments to build
capabilities to regulate the value chain has played a critical role in the
upgrading process.
5.5.6 Coffee Value Chain in Africa37:
In many African countries, coffee represents a major source of foreign
exchange earnings and employment. Between the mid-1980s and 2000,
coffee producing countries have experienced declining world prices. This is
partly due to the ending of the International Coffee Agreements and the
dismantling of the coffee marketing boards. The state withdrawal from the
provision of extension and quality control services also impacted on global
coffee dynamics. While export volumes generally increased, there was a
deterioration in quality and a higher exposure to price volatility. Whereas
Uganda’s liberalised market made it a large supplier of relatively low quality
coffee, Kenya’s restrictive export regulations contributed to maintaining its
37
We draw on the following for this discussion of coffee: Fold and Ponte, 2008; Kaplinsky and
Fitter, 2004; Kaplinsky, 2004; Ponte, 2002c; Talbot, 1997b,
183
reputation as a supplier of fine, albeit inconsistent, quality coffee. Since the
mid-2000s coffee prices have increased following the general price surge
experienced by agricultural commodities.
Figure 5.9: Coffee value chain
seeds, inputs, extension,
coffee cherries
dry process
wet process
parchment coffee
mill
green coffee
roast
roasted ground
instant
Figure 5.9 displays the coffee global value chain. Coffee is a multi grade crop.
If it is sold as raw unprocessed beans then the different value grades get lost
in the aggregated crop, and processors up the chain reap the higher value
and accruing rents. In order to reap higher value the beans have to be dried,
then milled – i.e. have the husk broken off - resulting in the less bulky green
beans. This allows for the beans to be graded according to density and size,
followed by colour sorting. This process immediately adds value to the crop as
it allows for different sorted grades to be channelled into different niches. The
higher grades yield higher values in the market place and can be channelled
into mixed blends for export as well as roasting. There is therefore a threefold
process of value addition: milling and grading; sorting to ensure that each
184
graded bean gets the correct value in the blending process; roasting for final
product.
Private firms now play a key role in the coffee global value chain. Forward
linkages are controlled by a small number of international traders, roasters,
and retailers, which over the 1990s acquired a high level of market
concentration.
Roasters are the key drivers of the coffee global value chain. Roasters set the
market parameters for growers, processors, and domestic traders in
producing countries, and for international traders. Retail is controlled by
supermarkets, but roasters command larger profit margins than supermarkets.
Rather than pursuing vertical integration, roasters focus on their core
business: product development, R&D, marketing. In order to shed non-core
activities and overheads, they have moved to supplier managed inventory,
which requires international traders to manage stocks of varying volumes,
quality and origin of coffee to be supplied on a Just In Time (JIT) basis. To do
so, international traders have integrated backward in coffee producing
countries. The liberalisation of coffee marketing in coffee producing countries
has facilitated this process, as many capital starved domestic traders have
been partially or entirely acquired by international traders.
The governance power of roasters has been enhanced by innovations in
coffee processing technology. New washing techniques enable roasters to
blend different varieties of coffees to create a specific flavour. This increases
the roasters flexibility in their sourcing strategies, reducing their dependence
on specific sources and qualities, minimising the risk of shortages and price
variations, and enhancing their ability to combine supplies of varying quality
and prices. On the producer side, this implies less bargaining power with
respect to price and volumes.
To counteract potential demand slumps, roasters and retailers have cultivated
niche markets, creating products to respond to health, environmental and
social consumer concerns. Product differentiation responds to the need to
185
supply fast-growing niche markets for specialty, fair trade and organic coffees.
Indeed coffee has as much potential for differentiation as wine, and this is
reflected in the price variance.
Market concentration in forward linkages has resulted not only in higher entry
barriers for new entrants, but also in an increasingly unequal distribution of
income between producing and consuming countries. Until the mid-2000s,
while coffee growers in producing countries saw their farm gate prices
collapse, retailers in consuming countries faced relatively stable revenue
streams. It is estimated that roasters and retailers control, respectively, up to
30 percent and 20 percent of total value added in the coffee global value
chain.
In producing countries, declining world coffee prices impacted negatively on
coffee growers’ income. The option for producer countries is to embark on
local upgrading strategies in the value chain. A number of upgrading
strategies are available to coffee producing countries. The first consists of
moving into processing of the raw beans The second involves product
upgrading strategies, that is production of higher quality coffee, or different
types of coffees (fair trade, organic), aimed at increasing growers’ prices. The
third consists of functional upgrading, that is moving beyond green beans
exports, by acquiring processing, marketing and distribution capabilities which
involve not only growers, but also food manufacturers, and service providers.
For roasters, quality consistency represents a key market parameter, because
inconsistent quality forces them to adjust processing equipment and
procedures. Hence, they value consistency as much as quality. The final
quality of coffee depends as much on bean types as on farming practices and
primary processing (drying, washing, storage). Therefore, process upgrading
requires investment in extension services to farmers, capacity building for
processing, transport and storage, and domestic quality control systems.
Finally, producer countries can engage in functional upgrading through
producing roasted coffee and instant coffee. In general, roasted coffee needs
to be processed near a consumption point in order to preserve its flavour. This
explains why international trade has traditionally taken place in green beans
186
form. Vacuum packing enables it to preserve the flavour for a slightly longer
period, but also increases transportation costs.
A Zimbabwean case study
Coffee sales were traditionally controlled by the government through the
marketing board. Farmers sold their raw beans to the marketing board which
then exported the crop on the global commodities market without any further
value addition. Farmers got paid an amount based on tonnage irrespective of
the quality of the different beans In 1994 the large commercial farmers broke
away from the marketing board and engaged in a process of adding value
along the chain. Around 60 farmers leveraged funding and built a coffee mill
and roasting plant. The debt was paid back in three years. The mill had a
capacity of 20 000 tons per annum. Each of the commercial farmers held pro
rata shares in the mill based on their throughput tonnage. In order to
encourage the small coffee growing sector, the Zimbabwe Coffee Mill gave a
portion of the shareholding to small scale (black) farmers. These mostly held
the shares collectively, through clusters of coops for the small out-growers. In
addition some of the wealthier small holders producing bigger crops held
individual shares. The mill provided these small farm holders with technical,
financial and extension support.
The addition of the milling, grading and sorting process radically changed the
manner in which value accrued and rents were distributed to each grower.
Every farmer’s load of coffee brought to the mill was individually sorted,
tagged and monitored through the system. Every load of coffee was therefore
sold according to its true value, and each farmer could receive the appropriate
amount for the coffee harvested. The greater proportion of high quality beans,
the greater the rents accruing to the individual farmer once the coffee was
sold.
Through this value adding process, the Zimbabwe Coffee Mill at its height was
able to sell the very low grade beans (about 5% of the crop) into the domestic
market and to instant coffee manufacturers. The remainder of the coffee
beans were milled, graded, polished, sorted and blended, and exported to
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various brands of coffee. The roasting process was still taking off but around
5% of the top quality graded beans were being roasted and this fetched even
higher prices on the export market. Japan was the primary niche export
market for high quality blended coffee beans. This processing activity raised
the average price per ton of coffee substantially when compared to the
previous marketing board system. Prior to 1994 when the coffee exports were
based on commodity exports of raw, unprocessed beans the average price
per ton was around $1500, whereas the new milling/grading/sorting process
was yielding average prices per ton of around $4000 per ton.
These cluster and value chain linkages had a major impact on the small
growers. Coffee growing based on value addition has relatively long lead
times from harvesting to sales. Small growers thus struggled with cash flow as
they waited until the end of the process. Hence the mill paid them a flat
amount as soon as the coffee was delivered. After the milling, sorting and
grading process had been completed and the blended and even roasted
coffee etc. had been sold, each farmer received an additional back payment
based on the appropriate, proportional amount of their load. This collective
additive value process made an enormous difference to these small growers.
They received finance and technical support. As dry land farmers this allowed
them to escape the exigencies of the weather and invest in irrigation and
storage sheds. They were assisted with transport and drying points. The mill
was able to buy inputs (e.g. fertiliser) in bulk and cut costs. Finally it attracted
other infrastructural development, and allowed them to escape purely
subsistence farming.
This additive value chain depended on a symbiotic relationship between small
growers, large commercial farmers and the processing plant (milling/roasting).
It was an additive value chain dependant on maintaining vertical and
horizontal cooperation between the various links of the chain. However if
some of the links were broken the systemic nature of the value chain would
result in collapse. At its height in 2000 the Zimbabwe Coffee Mill had built up
farming capacity to around 20 000 hectares under coffee production,
producing around 12 000 tons per annum. The bulk of the coffee, around 10
188
000 tons, came from the large commercial farmers, with the small holder
sector producing the rest. With the land invasions of white owned farms post
2000, and forcible appropriation of these farms by government, the
commercial coffee farming sector declined over time and eventually
collapsed. The small holder cooperatives could not produce enough tonnage
to carry the overhead cost of the mill which required throughput of a minimum
of 4500 tons per year to break even. The small holders could not do this, and
by 2007 the mill effectively stopped functioning. The result was that the whole
additive value chain broke down.
The Zimbabwean coffee example highlights a number of key clustering and
value chain issues. It demonstrates, contrary to the experience in the fresh
fruit and vegetables value chain, how the lead (commercial farm) value chain
drivers were able to facilitate clustering of small scale farmers, build their
capabilities, enable upgrading along all the links in the chain, distribute the
gains, and capture additional value in this additive value chain. It also
demonstrates how misplaced government policy interventions attacking the
key chain drivers (the white commercial farmers) for external political gain
rapidly destroyed the overall functioning of the entire value chain leading to
systemic collapse.
5.5.7 Additive Value Chains in Energy38
Additive resource based value chains do not only occur in regard to forward
processing. The development of value added links in a value chain can also
be the result of global lead firms establishing themselves in a developing
country and developing domestic backward linkages into local supply. In this
case the lead firm (e.g. manufacture, assembly, mining or oil/gas) establishes
that it is in its interests to do so, through the need for near sourcing of supply,
and this is facilitated and accelerated by the host country’s government
policies requiring certain degrees of local content.
38
We have drawn on the following for this discussion of Nigerian oil: Urzua, 2007; Morris et al
2012; Oyejide and Adewuyi, 2011;
189
The development of value chains and lead firm outsourcing to suppliers has
also been established in the mining and energy industries, albeit later than
other industries. Mines and oil companies have moved away from a high level
of vertical integration towards outsourcing almost every stage in the process
to independent firms, including the provision of capital goods and intermediate
inputs. These suppliers are often large global brands or firms in their own
country with which they have established a history of supply. However this is
a costly process bringing in imports. Hence the emergence of a tendency
towards near-sourcing, because transport and logistics are poorly developed,
because goods brought in from outside may be subject to long and
unpredictable delays and because government policies have often mandated
the deepening of local value added. As a result the desirability of finding an
efficient local supplier is particularly attractive in Africa. African governments
and local supplier firms have responded to these opportunities in order to be
incorporated into the chain.
There are a number of factors that determine the nature, extent and the
location of these outsourced linkages. In the first instance, there are technical
factors intrinsic to resource sectors, such as the specificity of resource
deposits and technological requirements. However there exist also a series of
secondary contextual factors which may speed up the process of developing
locally
based
backward
linkages
–
lead
firm
ownership/nationality,
infrastructure quality and availability, skill and knowledge capabilities, and
government policy interventions.
To illustrate this particular form of additive value chain we have concentrated
on the development of backward linkages in the Nigerian oil value chain
(Figure 5.9). Multinational companies dominate exploration and TNCs
dominate oil production. Since oil extraction is capital-, technology- and skillsintensive, oil field services are provided by a range of international and
national suppliers. Shell is the largest oil extracting company, followed by
Chevron. The state-owned Nigeria National Petroleum Corporation (NNPC)
has established a number of joint ventures with oil extraction companies.
190
Figure 5.10: The oil value chain
The Nigerian government has made substantive efforts to increase local
content in terms of skills and backward linkages. These centre on
training/education of technically skilled Nigerian personnel (Petroleum
Technology Development Fund, Petroleum Training Institute, National College
of Petroleum Studies), working with lead oil firms and growing the number of
local firms supplying the oil extracting lead firms with products and services
through various local content policies.
In regard to local supply to the oil industry, significant local supplier linkages
have been created in fabrication and construction, well construction and
completion, and controls/ICT systems. A 2011 survey of 12 oil companies
found that three quarters sourced more than half of their goods and services
from local firms to these three sub-sectors of the oil extracting industry. All in
all, the value of local supplies amounted to 25% of the value of the final
product for 41% of oil firms, while for one third of them, this share was 50%.
Despite this high-level of local sourcing, much of this occurred on an arm’s
length basis, suggesting that there is considerable leeway for the promotion of
better links between the oil firms and their suppliers through enhanced value
chain governance. Although the oil companies believed that they had
reasonably close relationships with their first-tier own suppliers, this did not
191
extend down their supply chain to providing support to second- and third-tier
suppliers. However this did not mean that first-tier suppliers were simply
importing most of their goods and services. A survey of 80 first-tier suppliers
in these sub-sectors revealed substantial levels of local content in their own
purchases. Across all these sub-sectors 55% of first-tier supplying firms
purchased more than half of their services from local second-tier suppliers.
This suggests a considerable depth to backward linkages with substantial
local value added.
In summary, Nigeria’s lead oil extractive firms have been pushed by
government policy to create an oil export additive value chain with substantial
linkage development to local suppliers. Domestic linkages are deep, and local
suppliers are not merely importers, but rather producers of technologically
complex goods and services. Moreover, as firms invest in process and
functional upgrading, with the support of oil companies, these linkages are
dynamic. This trajectory is a combination of the entrenched capability within
the Nigerian government to drive local content through its policy framework,
coupled with lead firms responding to the challenge and driving the necessary
technical standards down the value chain to create competitive local supply.
Past investments
in domestic higher level education and Nigerian
professionals returning from abroad have made these developments feasible.
5.5.8 Additive value chains in Mining39
The large-scale exploitation of minerals in South Africa dates back to the latter
decades of the 19th century with the discovery of diamonds and the
exploitation of deep deposits of gold ore. South Africa possesses not only the
most developed mining sector, but also the most advanced mining supply
industry in Africa. It also possesses extensive forward linkages, not just in the
processing of many ores, but also especially in the processing of soft
industrial commodities. In some cases, as in the incorporation of platinum in
catalytic exhausts for automobiles (where it is the world’s largest producer),
forward linkages have moved beyond processing to the beneficiation of
39
This discussion of the South African mining equipment value chain draws on: Kaplan 2011;
Kaplan 2012; Morris et al., 2012.
192
minerals. In respect of additive value chains, South Africa has a welldeveloped industrial sector, which has its origins in the development of
extensive value added linkages to the mining sector.
Historically, government economic policies with regard to mining had two
main objectives - to provide a favourable environment for mining investors to
lower the wage costs of (black) labour, and to support policies to advance
backward linkages to local suppliers. Both were focused on building an
additive mining value chain. Although these two thrusts were considerably
weakened after democratic transition in 1994, this dependence on an
industrialisation path grounded in mining extraction and supply has persisted.
With the introduction of democratic rule and international acceptance, the
local supplier firms were able to move into new export markets and they did
so rapidly. This was facilitated by the South African mining firms expanding
their activities globally, and especially into SSA. Given their historical
relationships with local suppliers, South African mining firms operating
elsewhere tended to favour these same suppliers to service their activities
abroad. The South African economy therefore continues to maintain a global
competitive advantage in mining equipment and specialist services and a
number of large non-South African mining TNCs operating on the continent
source skills and equipment and other supplies from South Africa.
South Africa thus possesses a variety of in-depth capabilities in mining and
related technologies. Mining related technology patents make up a much
larger share of South Africa’s total patenting activity than for other comparator
countries with significant mining industries, including in higher income
economies with developed resource sectors. This can also be seen in South
African exports of mining equipment where it is a net exporter of high local
value added products. Furthermore the South African mining supplier industry
has developed globally competitive capabilities based on supplying its local
mining industry, and is a world leader in a host of mining equipment products,
especially those related to deep level mining. For example, spirals for washing
coal; pumping up water from deep levels; hydropower; tracked mining;
underground locomotives; ventilation; shaft sinking; turnkey new mine design
193
and operation. Finally this additive backward linked value chain has led to the
building of horizontal linkages. The mining sector provided the initial source of
demand and successful domestic firms, having built competencies from
supplying their mine customers, branched out to serve the needs of other
sectors. Examples of such horizontal linkages are in transport, haulage, and
hydraulic equipment where South Africa has leading global products.
This has resulted in the development of various clusters of agglomeration of
equipment suppliers and institutions, many of which are located on the East
Rand region near Johnannesburg. A database of 678 companies involved in
supplying mining inputs shows the depth of locally owned suppliers - 67% are
locally owned, and most of the foreign firms are specialist consultants or
branded Original Equipment Manufacturers.
There are a number of conclusions to be drawn from this South African
additive mining value chain based on growing local suppliers. First, the
technical specificity of South African mining activities required the deployment
and utilisation of advanced technologies and systems. Second, the historical
success of the South African mining equipment and services sector resulted
from considerable and extended public support for research and training.
Government marshalled a suite of directed state policies (tariff, financial,
technological, and institutional research support) to the local supplier industry.
This allowed for the early development of considerable local technological
expertise and, in many subsectors, South African firms are at the global
technological frontier. Third, the expansion abroad of South African mining
firms has created significant opportunities for exports of mining related
equipment and services. Fifth, in a highly competitive world, these unique
capabilities have to be dynamic and sustained. However, government has in
recent years reduced its support to this sector and there are signs of a
diminishing global comparative advantage.
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5.6 VERTICALLY SPECIALISED VALUE CHAINS IN AFRICA
5.6.1. Apparel Value Chains in Africa40
Whilst many African countries have sought to promote an integrated additive
textile and apparel value chain, recent decades have seen growing African
participation in vertically specialised apparel exporting GVCs. Located in
export processing zones and generally (but not exclusively) dominated by
foreign owned lead firms, these apparel exporters have sought to take
advantage of preferential trade regimes such as AGOA. In entering these
vertically specialised value chains, African apparel producers are following a
well-trodden global path. The apparel value chains described below often coexist with additive apparel value chains focused on the domestic markets and
in some emerging cases, represent hybrid forms, involving components of
both types of value chains.
Figure 5.10: Garment Value Chain
The apparel value chain can be divided into five stages (Figure 5.10): natural
and synthetic fibres; yarn; fabric (woven, knits and industrial textiles);
manufactured apparel and other textile based products; distribution and sales
This discussion of the apparel value chain draws on: Al – Azmeh 2013; Morris et al 2014;
Morris and Staritz 2014; Morris et al 2011; Staritz 2011.
40
195
channels at the wholesale and retail levels. Fibres are processed from animal,
plant or synthetic raw materials and are spun into yarn which is used to
produce woven or knitted fabric. The fabrics are then finished, dyed or printed,
and converted into garments or products for other end-markets (e.g.
household and home furnishings, industrial or technical consumer products).
A large part of apparel production remains labour intensive, has low start-up
and fixed costs and requires simple technology. These have encouraged the
relocation of apparel production to low-cost locations, mainly in developing
countries. With an increasingly fine division of labour, in some cases
(including in Africa) this process of ‘manufacturing’ might be more accurately
described as ‘apparel assembly’. Textile production is more capital and scale
intensive, demands higher workers’ skills and has partly remained in
developed countries or shifted towards middle-income countries. There is also
a series of “intangible” activities that add value to apparel - product
development, design, textile sourcing, distribution, branding, and retail. These
are primarily controlled by lead firms, as well as some intermediaries and
supplier firms.
The apparel value chain has been one of the most trade-regulated
manufacturing activities in the global economy. While quotas were eliminated
1st January 2005 with the phase out of the Agreement on Clothing and
Textiles (ACT)/Multi Fibre Agreement (MFA), tariffs still play a central role in
global apparel trade. Average Most Favoured Nation (MFN) tariffs on clothing
imports are around 11% for the EU and the US. However, these tariffs vary
considerably for different product categories. In the US, tariffs on clothing
products are significant, with duties on cotton products ranging on average
between 13% and 17% and duties on synthetic products between 25% and
32%. In the EU, tariffs on clothing products vary between 0% and 12%.
In this context preferential market access to the US and EU markets has a
substantial impact on global clothing trade patterns and provides a significant
advantage for African clothing producing countries ability to compete with
Chinese and South East Asian exporters. The most important duty free PTAs
are (a) to the US – the African Growth and Opportunity Act (AGOA) for SSA
196
and Qualifying Industrial Zone (QIZ) for Egypt; (b) to the EU - Everything But
Arms (EBA) Initiative and Economic Partnership Agreements (EPAs); and (c)
South Africa - the Southern African Customs Union (SACU) and Southern
African Development Cooperation (SADC).
AGOA, which was enacted in 2000, has Rules of Origin (ROO) requirements
stating that clothing has to be made 85% from yarns, fabrics and threads from
the US or produced in AGOA beneficiary countries. However, the Third
Country Fabric derogation allows eligible lesser developed countries duty free
access for clothing made from fabrics originating anywhere in the world. This
has been especially important for the development of apparel industry in
Africa. QIZ, which came into force in 2005, contains a similar exemption for
Egypt allowing it to export under single transformation conditions. For those
countries that signed interim EPAs in 2008 and 2009, ROO requirements
changed to single transformation. SADC ROOs require double transformation
for duty free entry to the South African market.
Single transformation ROOs encourage vertically specialised value chains,
since all inputs prior to apparel manufacture can be sourced from outside the
country. Hence it is the AGOA/QIZ PTA that forms the focus of this
interrogation of the vertically specialised apparel value chain in Africa. The
EU/SA PTAs are more complicated, as they include double transformation
requirements which tends to incentivise an additive value chain (we shall refer
to them as a point of comparison later in the discussion).
As a result of the AGOA and QIZ schemes, clothing exports from Africa
(especially the major key SSA country exporters) to the US have increased
rapidly (Table 5.4). All SSA apparel exports to the US grew from $748 million
in 2000 to $1,757 million in 2004. But a combination of the ending of the Multi
Fibre Agreement (December 2004) and the global financial crisis in 2008 led
to a sharp decline in exports so that by 2012 exports from these countries had
declined to $866 million (Table 5.4). The QIZ scheme saw a doubling of
Egypt's exports of textiles and clothing to the US from $422 million in 2004 to
$871 million in 2012.
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Table 5.4: SSA apparel exporters to the US by year ($US Mil)
Exporter
2000
2004
2007
2012
SSA Total
748
1,757
1,293
866
Lesotho
140
456
384
301
44
277
248
254
Mauritius
245
226
115
163
Swaziland
32
179
135
60
110
323
290
43
Kenya
Madagascar
Source: USITC; General Customs Value; Apparel represents HS 61+62
AGOA resulted in a major injection of Asian transnational FDI (initially from
Taiwan, Hong Kong and Korea) into the five major SSA apparel producing
countries. These firms sought to take advantage of preferential access to the
US market - initially of MFA quota access, but also, and more importantly, in
the longer run of preferential tariffs. These transnational producers had firmly
established themselves within apparel value chains driven by US buyers of
the large retailers and feeding into the US market. They developed global
manufacturing networks to avoid quota restrictions, rising labour costs, and to
meet the high demand from US based buyers. Over 90% of their production
was destined for the bulk US market segment, and was driven by the value
chain requirements of this market segment. Their motivation for investing in
Africa was to take advantage of preferential, global regulatory regimes - quota
hopping and preferential market access to the US market.
They own or source from production units in several countries and regions,
following a global strategy involving long-run production of a narrow range of
basic, low complexity, undifferentiated, low value added products. These are
made in large plants in a number of competing low income countries.
Operating at high volumes, these are generally highly inflexible production set
ups, and specialise in a narrow range of activities. By contrast, their African
plants are low value added, and highly specialised basic assembly and cutmake-trim (CMT) operations. All other higher value activities, such textiles and
components, financing, sourcing fabrics, product development and design,
logistics, merchandising and marketing are carried out in the head offices in
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Asia or in plants in Asia. When the MFA phase-out eliminated the need for
quota free locations, several of these footloose and highly mobile operations
closed. The AGOA or QIZ duty-free access motivation remains, but only as
long as this advantage is sufficient for them to remain globally costcompetitive.
This vertically specialised apparel value chain has helped to build an industrial
base in the apparel sector in Africa. It has built an export market, created
employment for large number of workers, and built some low level production
capabilities, as workers learn to respond to export market production
requirements. But this does not extend beyond the operator and lowest
supervisory level, for managerial and technical skills are overwhelmingly
dependant on expatriates. Virtually all inputs bar infrastructure are imported.
The basic production component of this value chain is hence not embedded in
local social and economic networks of the host country. Its rationale is
externally determined, driven by the product requirements of the US buyers,
the vested interests of the head offices of the large transnational producers
situated in Asia, and wage rates and preferential access opportunities in other
low income regions. These largely Asian-based TNCs are not concerned with
upgrading local capabilities, functionally upgrading by moving into more rent
rich activities, and extending local value added linkages. While they remain
important productive links in the export apparel value chain, they are footloose
investors, able and willing to shift their operations to another production site if
duty free access conditions change.
Madagascar illustrates a recent example of the footloose nature of this value
chain. After the coup in January 2009, the US withdrew AGOA status from
Madagascar, and, consequently, duty free access to this market disappeared.
With the withdrawal of AGOA eligibility, apparel exports to the US market
collapsed - dropping from $295 million in 2008, to $55 million in 2010 and $40
million in 2011. Most of the Asian firms closed overnight. Those who remain –
said to be six – have effectively closed but maintain an office presence in a
‘wait and see’ position, hoping for a return of AGOA status.
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In this respect it is helpful to contrast this footloose investment with an export
apparel value chain, which contains more value additive linkages and, through
a different ownership structure, is also more embedded in African countries. In
the SSA apparel export industry, only Kenya has an export apparel sector
structured primarily on the basis of Asian investors oriented to supplying the
US market. Lesotho, Madagascar, Mauritius, and Swaziland have built
alternative export value chain platforms in the apparel sector. These are
structured around supplying the EU and the South African markets, which
have very different market characteristics and product requirements. Although
differing in detail and depending on dynamics in different producer countries,
in contrast to the US, these two markets require smaller order sizes, higher
quality, and more complex garments – i.e. higher value added garments. PTA
requirements in many cases (SADC for Mauritius and Madagascar regional
exports to South Africa, and until recently to the EU) also require two stage
conversion and hence the use of local or regional fabric to ensure duty free
status.
The firms that supply these markets are locally or regionally embedded in
African countries. They may be natural citizens (Mauritius), embedded
diaspora owners of French origin but who regard themselves as locals
(Madagascar), or owners of apparel firms in one country investing in an
adjacent one (regional investors from Mauritius in Madagascar, or South
Africa in Lesotho and Swaziland). This combination of local embeddedness,
derived from such ownership patterns, with more flexible end-market
requirements from the EU and South African buyers, has led to a very
different value chain upgrading trajectory from that of the purely vertically
specialised value chain serving the US market. This is a hybrid of a vertically
specialised and additive value chain. It is still driven by having to meet the
standards and market requirements of the lead firm buyers, but it also has an
internal dynamic driven by these ownership patterns which ensures it is locally
embedded and oriented to increasing domestic value addition.
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CHAPTER 6
DRAWING THE THREADS TOGETHER - SUPPORTING
DIVERSIFICATION AND THE SUSTAINABLE DEVELOPMENT
OF AFRICAN EXPORTS
6.1 KEY LESSONS FROM GLOBAL EXPERIENCE
At the outset of this Report we observed that participation in global markets
offers considerable potential to individual African firms, to groups of African
firms and to African economies at large. Large global markets provide the
scope for reaping scale economies, for specialisation, for learning, for
profitable production and for sustainable employment and income growth.
However, international experience shows that these benefits do not
automatically accrue from participating in global markets. It is possible for
African producers to be locked inappropriately into external markets, resulting
in what has come to be called ‘immiserising growth’, that is, expanded
economic activity associated with declining incomes and profitability. The
objective, therefore, for both private and public actors is to enter a trajectory of
gainful participation in global markets.
This gainful participation has to be rooted in the reality of individual firm and
country endowments and capabilities. Chapter 2 of this Report evidenced the
reliance of most African economies on the export of commodities. Thus the
policy objective of both public and private actors is to both enhance the
productivity in the exploitation of these natural resources and to diversify their
activities, both by creating linkages to the resource sector and by developing
new specialisations in other sectors. However, these objectives can only be
achieved in the context of opportunities available in the global economy.
Whilst African exporters benefit from a range of preferential market access
agreements, they need to be aware of the stagnation of northern markets and
the rapid growth of southern markets. Switching between these different
markets requires the development of specific capabilities.
201
As was evidenced in Chapter 3, the supply capabilities required for this gainful
insertion in differing global markets are often enhanced by the development of
co-located clusters of firms. Co-location generates external economies and
therefore enhances the competitiveness of firms in the cluster. Where firms
build on these external economies and cooperate to meet common
challenges, they benefit from collective efficiency. This is particularly
important for SMEs whose problems are often less a matter of being small,
and more a consequence of being isolated. However, whilst many global
clusters have participated effectively in global markets, this is not always the
case. Particularly in low income economies and in Africa, clusters are often
essentially survivalist in nature and show few signs of the dynamism required
to be successful exporters.
Whilst clusters of small firms are one important component of an effective
supply response to global market opportunities, as was shown in Chapter 4,
many successful exporting experiences are led by large lead firms. Globally,
lead firms have come to recognise that it is not possible to sustain competitive
advantage by being an island in a sea of inefficiency. It is necessary for them
to assist their suppliers to upgrade in order to achieve systemic and dynamic
competitive capabilities. Hence they have developed extensive programmes
of supply chain management. In recent decades, the objective of supply chain
management has moved beyond the achievement of profitability to target a
triple bottom line, that is to simultaneously address the social licence to
operate and environmental objectives. Supply chain management activities in
most African economies are in their infancy, and seldom encompass the
greening of supply chains.
Cluster and supply chain development are critical components of supply
capabilities. However, international experience makes it clear that on their
own, supply capabilities do not provide the key for gainful participation in
global markets (Chapter 5). How producers are inserted into global value
chains determines the profitability of their operations and their capacity to
upgrade operations in order to develop the dynamic capabilities which are
required to compete sustainably in a rapidly changing global economy.
202
The GVC policy lens provides an integrated framework useful to both public
and private actors for considering both supply capabilities and the character of
final markets. Together, these two sets of factors influence who is
incorporated in global markets, how they are incorporated in global markets,
which global markets they are able to supply, and the roles which firms and
economies play in global production networks. Appropriate positioning in
GVCs thus addresses the challenges set out in the opening Chapter of this
Report, that is, it is not so much a matter of whether to participate in the global
economy, but how to do so in order to ensure profitable, sustainable and
equitable growth,
6.2 DEVELOPING A POLICY RESPONSE TO ENABLE GAINFUL PARTICIPATION
IN GLOBAL MARKETS
Markets are critical to gainful participation in the global economy. Ultimately it
is the firm which has to wrestle with the competitive challenge, to manage
supply effectively and to export the products to final markets. Thus it is
essential that private actors are fully informed of international experience with
regard to clusters, supply chains, global value chains and the development of
dynamic capabilities. But firms do not exist in a vacuum. So it is equally
important that public actors take appropriate steps to ensure that the private
sector is being supported by, rather than undermined by the environment in
which they operate. Public action is not however limited to governments
(operating both at the national and provincial/state level), but also of panstatal institutions providing public goods such as the AfriEximBank, the
African Development Bank, the World Bank, UNIDO International Finance
Corporation, bilateral aid agencies and global NGOs.
Business and policy development requires not just that private and pubic
actors draw on their individual strengths, but also that they recognise their
particular weaknesses. International experience shows that competitiveness
is hampered by a pervasive combination of “state failure” and “market failure”.
Without these “failures” all producers would be at the frontier of global
203
competitiveness and this is patently not the case. Thus, an effective response
to the opportunities opened up by global export markets necessarily requires
not only a recognition by key actors of their limitations but also that they need
to cooperate to learn and benefit from each other’s unique strengths. In the
words of one of the most influential contemporary theorists of industrial policy:
" … the task of industrial policy is as much about eliciting
information from the private sector ... as it is about implementing
appropriate policies. The right model … is ... strategic
collaboration between the private sector and the government with
the aim of uncovering where the most significant obstacles to
restructuring lie and what type of interventions are most likely to
remove them. … Hence the right way of thinking of industrial
policy is as a discovery process - one where firms and the
government learn about underlying costs and opportunities and
engage in strategic coordination. (2004: 3)."
We now consider the nature of the key policy responses required of private
and public actors - including of critical support institutions such as the
AfriEximBank - to meet these competitive challenges. Before addressing
these responses, it is important to recognise a number of critical caveats:

The development of supply capabilities and gainful insertion in global
markets occurs in a wider macroeconomic context. They will be aided
by a stable and predictable macroeconomic environment, and
transparent and predictable governance and property laws.

To a greater or lesser degree, all export activity will be directly and
indirectly affected by the quality of hard and soft infrastructure. This
challenge has been acknowledged by individual African governments
and by multilateral institutions within the framework of PIDA
(Programme for Infrastructural Development in Africa).
204

Capability development, in both static and dynamic respects, depends
critically on human resource development and in the quality of the
education
and
training
system
and
research
and
technology
organisations operating within institutions in the National System of
Innovation.

New ventures have a high failure rate. Even in the high income
economies, nine out of ten new firms fail to thrive. Therefore not all
clusters will be dynamic – indeed, not all clusters will continue to
survive. Nor will supply chain upgrading initiatives necessarily work
effectively. Hence failure, both in private and public spheres, is
endemic and, arguably, the absence of failure means that strategic
objectives have been insufficiently ambitious.

Policy needs to be evidence-based, reflecting the particular character
of a sector and an operating environment. Generic, catch-all policies
are unlikely to be effective. At best they may be harmless; at worst they
can create considerable damage to competitiveness in external
markets.
Each of these broad policy issues lie outside of cluster, supply chain and
value chain development. But they are crucial to their success.
It is neither possible nor desirable to provide a laundry list of generic policies
which can be applied across sectors, countries and over time. However it is
possible to identify a strategic framework within which appropriate detailed
policies can be developed by actors responsible for country specific resource
allocation. The development of detailed policies will necessarily reflect the
specific circumstances confronting individual firms and economies in the
context of their particular constraints and capabilities. It will also necessarily
reflect the individual characteristics of the sector in which they operate and
the opportunities available in different global markets. Given these caveats,
we now turn to the general strategic determinants of policy formation with
205
regard to clusters, supply chains, global value chains and the interactions
between these three set of strategic policies.
6.2.1. Policies to promote cluster development
Four insights from international experience frame cluster policy development.
1. The lack of awareness of the potential offered by clusters has meant
that in many cases, clusters have emerged beneath the radar of
policymakers.
A first step in cluster development policies is to create an inventory of
what clusters exist in a given economic space
2. Dynamic clusters invariably emerge spontaneously rather than as a
consequence of support from the government or other institutional
agencies. The primary role of actors outside the cluster is to focus
institutional interventions to build on what already exists rather than to
create clusters anew. This requires an informed identification of
dynamic clusters in an economic space.
Having distinguished a set of clusters in an economic space, it is then
necessary to develop a knowledge base which allows for the
identification of dynamic clusters and provides an explanation of the
nature and sources of their dynamism
3. By definition, self-developing clusters are characterised by external
economies which explain the economics of agglomeration. Empirical
analysis of 25 African clusters suggests that four sets of external
economies are particularly prominent – skill spillovers, proximity of
suppliers, proximity of clusters and inter-firm specialisation.
Each of these externalities lend themselves to policy action, both by
firms internal to the cluster and by external parties.

A combination of sector specific and generic training schemes
(especially aimed at institutionalising world class manufacturing
206
practices) can promote human resource development in the
short to medium term, whilst the development of the educational
system can provide the human capability foundations required
for skills development.

Schemes need to be developed to bring both suppliers and
customers in closer contact with cluster firms, either by
promoting physical co-location or by enhancing communications
and fostering participation in distant markets.

Inter-firm specialisation is less open to policy development and
will tend to emerge as a response to market forces, supply chain
development activities, and value chain dynamics. However
policy needs to be flexibly attuned to be able to respond to
specific opportunities that may arise so firms can be assisted
where appropriate.
4. Collective action across a broad range of frontiers and scope of
activities has proven to be an important factor underwriting the
dynamism of clusters and is particularly important for SMEs. African
experience with cluster development (Chapter 3) shows that the most
successful form of collective action involve a range of actors, both
internal to the cluster (notably firms) and external to the cluster
(government, international aid agencies and NGOs).
Each of the key parties affecting cluster development – firms within the
cluster and external parties who have the capacity to influence
developments in the cluster – need to prioritise the development of
appropriate collective actions which are beneficial to the country and
sector specific needs of cluster development.

By its nature, effective cluster collective action needs to have
the active participation of cluster firms and wherever possible
207
needs to be driven by individual firms operating as change
agents within a cluster.

There
is extensive international experience with
cluster
facilitation – “network brokers” – which can be drawn on in
supporting the development of cluster collective action.

Government can play an important role in creating an enabling
environment to foster specific collective actions within general
cluster development.

Government can also, under strictly regulated circumstances to
control rent seeking, provide matching grant financial support to
foster cluster facilitation and collective action.
5. Beyond these four sets of policy insights which emerge from
international experience, Africa has the opportunity to benefit from the
distinctive experience of China in cluster development. Chinese
clusters have in many cases, and particularly in their early
development, often been the creation of government.
In recent years China has begun to promote Special Economic Zones
in Africa, and although most of these are in very embryonic form, their
progress needs to be monitored, and advantage taken of opportunities
wherever possible. Where they are successful, lessons need to be
learned and to be carried over into the wider development of clusters in
Africa.
6.2.2. Policies to promote supply chain development
Six insights from international experience frame policy development for supply
chain upgrading:
1. Lead firms drive supply chain upgrading. In the best cases, this goes
beyond first-tier suppliers and customers, and lead firms not only make
demands of suppliers and customers but actively assist their upgrading
208
efforts. However not all lead firms are equally disposed to develop their
suppliers and customers.
Public actors supporting supply chain development should be informed
about the track record of the lead firms in the relevant sectors of their
economy in supply chain management. Wherever possible they need
to support the activities of these lead firms, and to cajole reluctant
supply chain managing firms to improve their efforts, particularly with
respect to the incorporation and upgrading of SMEs in their chains.
Private actors should be required to cooperate along their chains,
encouraged to see this as a learning and upgrading opportunity rather
than an assault on their competences.
2. Whilst lead firms play the key role in driving supply chain upgrading,
they may not necessarily be the implementers of these programmes.
Implementation may be the responsibility of first-tier suppliers and
customers as well as being supported by specialised service providers.
These service providers may be profit-seeking private actors, or be
NGOs. Extension services provided directly by governments in supply
chain management tend to be limited to the agricultural sector.
Supply chain upgrading is a specialised activity and requires specialist
skills. In the more advanced cases they are profit driven, but
government and support institutions such as Chambers of Commerce,
industry associations, development banks, and international agencies
may play a key role in promoting their development.
3. Small and medium enterprises have specific problems in accessing
and remaining in lead firm supply chains. One of the major constraints
they face is being hampered by financial and credit restriction concerns
arising from the often delayed payment schedules of their customers.
Delays in payment of invoices are common, and although their need is
to be paid as soon as possible, lead firm purchasing managers and
government procurement officers often do not pay within the agreed 30
209
day period and often pay as late as 90 days after invoice. Unfortunately
government is often the worst culprit in this regard, and many SMEs
face bankruptcy after being awarded apparently lucrative contracts.
The suppliers are therefore continuously bounded by cash flow
constraints which, at best restrict their ability to engage in the
necessary building of their dynamic capabilities to meet lead firm
requirements, and at worst threaten their very survival.
Lead firms need to implement strict internal policies to pay their small
and medium suppliers on the basis of 14 to 30 days after receipt of
goods and services. Government should also implement similar
departmental directives, as well as creating internal monitoring and
evaluation systems to ensure that these are adhered to. Moreover,
government should also engage with lead firms to appraise them of the
necessity to assist their SME suppliers overcome such financial
constraints as a necessary condition for supply chain development.
4. Whilst participating in supply chain improvement is on balance
profitable, it often requires upfront costs. Given that supply chain
development skills require intensive elaboration, specialised private
sector profit-driven service providers will be unable to deliver effective
supply chain management without support. At the same time, whilst
firms in the supply chain may in the full course of time be prepared to
pay for the supply chain upgrading services they receive, they may be
unaware of the benefits offered by these service providers.
Consequently, many governments, from the UK to South Africa, have
subsidised the early stages of development of a specialised supply
chain upgrading programme
Financial incentives provided by governments or other supporting
institutions may be required to promote both the demand for supply
chain upgrading services and the supply of these services. To be
effective and to minimise the cost-burden, it is however important that
this support have a grant component, be temporary and that it tails off
210
gradually to promote the development of a specialised and profit-driven
business services provider sector.
5. Increasingly, supply chain upgrading transcends the profit-driven
search for a reduction in costs by driving inventories down, and
improving quality and delivery schedules. It has also had to respond to
pressure to take account of social and environmental issues in its
supply chain – i.e. meeting its ‘triple bottom line’ responsibilities to
ensure
sustainable
production
activities.
Corporate
Social
Responsibility (social) objectives have become increasingly important,
particularly in the resource sector. However, early generation CSR
charitable concerns have been succeeded by attempts to promote
linkages as a way of productively including local suppliers and
customers in supply chains. Supply chain greening to meet
environmental responsibilities is also a new agenda which, although
still in embryonic form, has the potential to impact substantially on the
ability of suppliers being able to meet demands in niche global
markets.
Government and other agencies are required to support the CSR
objectives of lead firms by providing assistance to supply chain
upgrading, including through the provision of efficient infrastructure.
Supply chain greening is a relatively new agenda and may require
particular forms of customised support.
6. Supply chains feeding into and out of Chinese-owned enterprises pose
particular challenges for Africa. Large scale Chinese state owned firms
tend to source from China and, when they do source locally, from
Chinese owned suppliers. They also tend to see supply chain
management as a role to be played by the host government rather than
by lead firms. Both these trends are inimical to the development of a
diversified and indigenous economy.
211
Host governments need to recognise these trends and to take actions
to mitigate their harmful consequences. The Chinese government
should be encouraged to recognise that in the African context it is
expected that the lead firm will play a more active role in the upgrading
of its supply chain. The terms of Angola-mode sourcing procedures
need to be challenged to ensure a greater degree of local content in
supply chains dominated by lead Chinese firms.
6.2.3. Policies to support gainful insertion in Global Value Chains
Seven insights from international experience frame policy development with
regard to participation in GVCs:
1. Typically, GVCs are dominated by a restricted number of large
transnational firms. Each of these firms tends to have distinctive
strategies towards supply chain development and to feed into particular
markets and market segments.
Since there are a restricted number of lead firms, it is important that
governments and key local suppliers are aware of the distinctive nature
and strengths and weaknesses of these lead firms. It is essential that
the approaches towards these firms be knowledge-based, particularly
in sectors which are of significance in existing or projected export
sectors. Governments can be assisted in the development of this
knowledge-base by external institutions (such as the AfriEximBank).
2. The dominance of most sectors by a limited number of very large firms
puts them in an asymmetrical power relationship with African producers
and their suppliers. Host governments have a role to play in assisting
their local producers, particularly when external lead firms are seeking
access to the scarce resources which characterise many additive
natural resource based value chains.
Governments should be aware of the oligopolistic rivalry characteristic
of lead firms in most sectors. In some cases this provides the
212
opportunity to use access to domestic markets and scarce resources to
ensure enhanced supply chain development and a gainful role for
producers in global markets. This is analogous to the strategies
adopted by large Chinese State owned enterprises which bundle aid
and investment in order to ensure access to Africa’s scarce natural
resources.
3. Two major families of GVCs exhibit distinctive dynamic characteristics
and
provide
different
upgrading
opportunities. ‘Additive
value
chains’ tend to dominate in the resource sectors and are characterised
by
sequential
processes
of
domestic
value
added. ‘Vertically
specialised’ chains tend to dominate globalising manufacturing and
service sectors and involve the increasing fragmentation of production
in which individual processes occur simultaneously and can be
economically
undertaken
in
different
locations
in
the
global
economy. Vertically specialised GVCs dominate in high income
economies and are growing most rapidly. By contrast, African
economies are dominated by additive value chains. There are few
vertically specialised GVCs operating in Africa, and, those that do, tend
to be concentrated in Southern Africa.
Additive value chains provide more favourable opportunities for
building a variety of value added activities and linkages within African
economies than do vertical specialisation value chains. In some
sectors, if the correct enabling conditions are created, this can be
undertaken with the cooperation of lead firms who are willing to allow
such linkages to be embedded in developing countries. In other sectors
where
the
technical
conditions
are less
favourable,
African
governments will have to play a more proactive policy role to ensure
that such functional and process upgrading occurs.
By contrast, vertical specialisation value chains provide considerably
more scope for employment generation in manufacturing, particularly in
the manufacturing and services sectors. The attraction of these chains
213
to Africa requires particular packages of support from government, but
care should be taken to ensure that these support schemes induce
upgrading over time and that they do not undermine additive value
chains by encourage a process of inappropriate downgrading to take
advantage of incentive packages as in SEZs.
4. The character of value chains is significantly affected by the destination
of end-markets. This affects the pattern of specialisation in core
competences, governance structures, standards and the scope for
upgrading. Some end-markets may provide more scope for upgrading
and the development of dynamic capabilities.
Therefore an important component of government support for private
sector involvement in global value chains should encompass the extent
to which lead value chain firms are inserted in particular types of end
markets. This needs to address both the specificities of market niches
and the regional location of markets since these are often closely
related. Preferential trade access can be helpful in accessing particular
end markets, but the accompanying rules of origin may affect the
scope for upgrading and the developing of dynamic capabilities
5. Standards are an increasingly important requirement for participating in
external markets, particularly in northern markets. Many African
producers have poor awareness of the importance of these standards
and lack the capacity to achieve these standards. This is particularly
evident for SMEs seeking to participate gainfully in GVCs.
As in the case of the business services sector supporting supply chain
upgrading, governments and other support agencies (including NGOs
and development banks) will be required to support both the demand
for and supply of the services assisting firms to achieve the standards
necessary to participate in export markets. Whilst these specialised
service providers may become viable on their own in later years, they
214
will generally require financial support in the short term. It is necessary
that this financial support tail off over time.
6. Regional markets may offer more opportunities for value added
activities in value chains than do markets in northern economies.
Regional markets are often less demanding, provide learning
opportunities, allow for building up economies of scale, and facilitate
firms in these regional value chains to build their production capabilities
in a staged, step-by-step process.
Regional integration processes within Africa should be fast-tracked and
streamlined to support the development of capabilities and local
competitive advantage.
7. Value chain alignment is important in strategy development and policy
implementation. An effective and evidence-based policy process
requires that consultation should involve key parties from along the
chain. It is also necessary that this consultation process be ongoing,
since sector dynamics are constantly in flux and policy is a moving
agenda.
Whilst the key parties in the chain should be included in policy
development on an ongoing basis, it is important that some key actors
do not dominate the policy process for individual gain at the cost of
collective efficiency. Hence the government or chain facilitator should
have some measure of autonomy from key chain actors. Chain
facilitation may be exercised by a variety of parties including
governments and private sector actors, but this is contingent upon the
circumstances of each chain and each economy.
6.6.4. An integrated framework for export development
As observed in the Introduction to this Report, much policy development
treats clustering, supply chains and value chains as if they were separate
policy agendas. But whilst each of these policy agendas has specific
characteristics, they overlap in many respects. As Figure 6.1 suggests, it is
215
imperative that wherever possible these policy agendas are integrated. In
designing and implementing these agendas, it is important that key lessons
be learned from international experience, namely that:

The process begins with strategy formulation which should occur at the
highest feasible level given the particular importance of a sector in a
given economy. Strategy formulation should set out the key objectives
of sectoral development and the key targets for export targeting.

Once a strategy has been formulated, this needs then to be backed by
specific policy instruments.

To be effective, policy instruments must have teeth – carrots for
positive performance and sticks for poor performance.

Policies must be aligned and mutually consistent. Policies which
provide conflicting incentives not only fail to achieve their objectives,
but promote confusion and weaken resolve.

Policies should be aligned to capabilities. There is no point in
introducing policies which are beyond the capacity of implementing
individuals, firms, governments and institutions.

Policy design must be backed by policy will. Those implementing
policies should operate with diligence and transparency.

Strategy and policy development as well as implementation should
involve a full range of stakeholders, from private and public sectors
and, where relevant and functional, from civil society.

External agents such as the AfriEximBank may have a key role to play
in strategy development and in providing an effective evidence base to
guide policy development and implementation.
216
Figure 6.1. Fragmented and integrated export policy support
Export policy development fragmentation
Supply
Clusters
chains
Value
chains
Export policy development integration
Supply
Clusters
chains
Value
chains
In conclusion this requires African governments to develop broadly framed
and integrated industrial policies which go beyond conceptualising the
isolated firm as the focus of concern. The thrust of this approach in this era of
globalisation
is
to
view
industrial
policy
as
a
supportive
process
encompassing the interrelations between individual firms, established clusters
of firms, hierarchical supply chain linkages, and dynamic value chain
relationships. The aim of such industrial policy is to build dynamic local
capabilities on the basis of whichever of these relationships is most suitable to
support at any given moment in any given economy. In terms of finding ways
to participate productively in the new global economy, we need to move
beyond the debate of whether African governments need industrial policies, to
how these governments should be formulating and running such policies.
217
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