Introduction
The promotion of entrepreneurship and innovation in the private sector in Africa has entered the agenda of the economic and development research community and policymakers. All agree that innovative and dynamic businesses are crucial for catching up with global economic growth and development (Chaminade et al. 2010). A focus on promoting innovation and productivity in small and medium-sized enterprises (smes) in manufacturing would have a particularly positive development impact (Szirmai et al. 2011). This is because formally established smes in general provide employment and create a middle class in society, stabilising the overall economy. Moreover, economic development brings a shift from economic activity in agriculture to manufacturing, thus providing additional value in terms of a “structural change bonus”.
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The present economic contribution of the manufacturing sector to the overall economy in many African countries, compared to the agriculture and services sectors, is typically low. For instance, in Kenya and Ghana, the share of manufacturing to total gdp in terms of value added was 11.3 per cent and 5 per cent respectively in 2015.
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The actual situation of smes in Africa, however, is one of low productivity and low economic significance, termed the “missing middle”.
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Innovation is considered the best way to promote the stagnating manufacturing sme sector, because value creation results in a better-balanced economic structure, and increased competitiveness is the route towards import
Current research and theory development in innovation have mainly built on advanced economies in Western countries. Only recently have research projects started to address innovation, its processes and conditions in countries elsewhere. One such example is a research project funded by the uk’s Department for International Development (dfid) “Enabling Innovation and Productivity Growth in Low Income Countries” (eip-lic). The research explores innovation in manufacturing smes in ten African and Asian countries and assesses relationships with internal capabilities and external institutional factors. 4
During the research design of the project, several basic conceptual and theoretical issues emerged, such as the unclear definition and complicated measurement of innovation in developing countries. In research in advanced economies, innovation is typically measured by research and development (R&D) expenditures and the numbers of patents of new products or production technologies, as proposed in the Oslo Manual, for instance ( oecd 2005). Çapoğlu (2009) already observed that, despite increasing interest in the literature, the exact definition of innovation in developing and emerging economies remains an unresolved issue. This is because innovation in African manufacturing smes often manifests itself differently, not necessarily via high profile technological and radical “new to the world” breakthroughs involving explicit R&D investments and patents. Innovation often concerns incremental adoption and adaptation or new combinations of existing technologies (Szirmai et al. 2011). Many of these innovations involve “an aggregation of small insights and advances through learning by doing rather than on major technological inventions” (Carayannis et al. 2003). These forms of innovation, new to the company, are perhaps equally important for raising productivity and competitiveness of smes. In their initial efforts to formalise innovation in developing countries in a theoretical framework, Fagerberg et al. (2010) confirm that there is “another way to look at innovation that goes significantly beyond this high-tech picture. In this, broader perspective, innovation – the attempt to try out new or improved products, processes or ways to do things – is an aspect of most if not all economic activities. In this sense, innovation may be as relevant in the developing part of the world as elsewhere.”
Further eip-lic analysis into innovation processes within smes in developing countries also revealed some divergence between theory and reality.
The eip-lic research design with regard to the external conditions and the institutional context in which innovations evolve faced conceptual issues. In their analyses in advanced economies, Lundvall (1992) and Freeman (1987) suggest that innovation takes place within a relatively stable institutional context, “controlled” and supported by established formal actors and innovation policies, which they termed an “innovation system”. The innovation process is linked to a co-evolutionary network of supporting institutions: financial and legal institutions, technology development and research agencies, universities, education and training systems, governance structures and innovation policies (Edquist 1997).
In the Sub-Saharan African context, however, many of such formal institutions and links are typically not well developed. Instead, many enterprises are supported in their innovation activities by less visible or less commonly known informal institutional links. Informal institutions are broadly understood as links and ties with networks of friends and family and social capital, but are also considered as the informal “rules of the game” including traditions, culture, habits and mental models (Scott 2001). Informal institutions may include personal and family contacts, community and social networks, informal credit for incremental innovation and adoption. This reality of how innovation evolves within informal institutional contexts in Africa has just started to be acknowledged in recent innovation systems literature (Lundvall 2009; World Bank 2010).
With a view to addressing the conceptual issues mentioned above, amongst others, the eip-lic research included a qualitative research component, a series of case studies. This concerned an inductive exploration of how innovation in manufacturing smes materialises on the ground. The aim of the case studies series was to complement the quantitative eip-lic research design, in particular in identifying, validating and complementing existing theories and hypotheses with contemporary realities, as perceived by manufacturing sme owners and managers. In this chapter, a selection of three cases from the eip-lic cases series are presented and analysed, addressing three overall
Approach and Method
In the ten countries of study within eip-lic, 5 we identified and interviewed 15 to 20 innovative manufacturing smes to develop the series of cases. To assure homogeneity, enabling comparison between companies and countries, we selected the smes by applying the following criteria: (i) formally registered smes in manufacturing; (ii) between ten and 150 employees (turnover, assets and capital formation are not considered), and: (iii) owned by African and Asian entrepreneurs. 6
We obtained the data for developing cases via holistic “semi-structured” interviews with sme owners and managers.
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We visited the enterprise premises and asked open questions about how they survive and expand, solving daily issues with new solutions, production techniques, processes or investments in new products and ways of marketing. More specifically, we followed the innovation typology of Kaplinsky and Morris (2001): (i) process innovation aiming at improving the efficiency of transforming inputs into outputs; (ii) product innovation leading to better quality, lower price and/or more differentiated products; (iii) business practice innovation, implying new ways to organise the business and attract new clients; (iv) functional innovations – assuming responsibility for new activities in the value chain, such as design, marketing and logistics; and (v) inter-chain innovations, moving to new and profitable chains.
After clarifying the types and processes of innovation, we then asked how the entrepreneurs perceive the company’s capabilities, or the lack thereof, in enabling the entrepreneur to innovate. We subsequently addressed the issue of how innovating entrepreneurs perceive and cope with the (ever-changing) external business and institutional context. We wrote the case studies based on transcribed interview recordings and on visual observations complemented with grey materials. The qualitative data were systematically stored in the eip-lic qualitative dataset. The analysis of the data, inductively and systematically identifying patterns and trends, was an iterative process with the data collection. Lastly, we reviewed the findings against literature for comparison and validation or to signal theoretical differences.
Regarding the validity of the research, qualitative research in general does not claim to collect and analyse data from a representative sample. Instead, on a case-by-case basis, qualitative analysis provides exploratory (inductive) insights into issues, processes and systems in a bottom-up way that helps to suggest theoretical concepts for the local context (Denzin and Lincoln 1998). Against this background, the selection of cases involved “information-oriented” sampling, as opposed to random sampling. Next, we present three selected cases from Kenya, Ghana and Tanzania manufacturing smes. In the analysis, we also refer to other cases in the series of dfid qualitative studies.
Cases
Food Processing – Palm Oil, Mixes, and Palm Cream (Ghana – 110 Employees)
The company started in 1994 with the production of various palm oils and related products. It is located on the northern side of Accra. The production processes, carried out in three large production halls, entail palm seed cleaning, cooking and milling, followed by extracting oils, drying the powders and cooking the creams as final products. A separate packaging and canning section is also a recent part of the company. To secure supply of the palm seeds used in production, the company has acquired 350 acres of land in different locations near Accra and in the Eastern Region. It cultivates oil palm, cassava, maize and other crops. The company has 110 employees.
Initially, the company focused on the domestic market. However, the owner soon realised the export potential of his products through his network of contacts. Moreover, distribution in the domestic market took a lot of effort – “Maintaining contacts and managing the logistics in the three regions
The company started exporting their products in the year 2000. Today, the company only deals with four principal importers overseas: in Europe (Netherlands, Germany and Norway), the usa, Canada and Australia.
Innovation and Internal Capabilities
The owner sees a constant need to develop new palm oil and other related products. The demand is changing continuously and technological developments make new products possible. In recent years, many new products – beyond palm oil – have been introduced as a result. The current range includes banku mix, gari, cereal mix, kokonte and hausa koko powder, canned palm cream concentrate and canned eggplants. In the future, the owner foresees new products “because day in day out our customers and importers ask if there is anything new.”
In this dynamic business context, the owner tries to keep well informed of trends, which “helps me to be one step ahead of the competition.” Most of the competing companies are Ghanaian companies. The owner has the advantage of exchanging new products within his international network of contacts and “by so doing we are always ahead, and that has really worked for us.”
Product innovation goes hand in hand with new technologies in processing, labelling and packaging. The establishment of the canning section in 2003 was one key technological innovation. Considering whether to make this investment, the owner realised that there were only a few canning companies in Ghana, while the demand was high. The new machines enabled the company to launch new products with a longer shelf life. The owner believes that part of the success of the canned products was “the existing and well-established reputation of the company brand in the market.”
The growth strategy of the company focuses on expanding the production volume and range of products. This involves innovation and technology, enabling the firm to process raw materials into high quality food products.
The expansion of the range of products will create more employment in the near future – “These innovations are not about saving on labour costs, but about the ability to produce new products that the customers want. Therefore, we envisage growth in terms of both machines and personnel.”
The owner recognises the positive effect of employment creation, in particular for women – “We have about 30 women employed directly, and the impact on their children is very positive. They are able to give good meals to the children and pay school fees, so the children get educated and learn about good hygiene: it is a multiple effect.”
The owner considers himself a real entrepreneur. When he sees opportunities and other products overseas, he says, “If others can do it, like producing some special type of product, I believe I can do it.” Once an opportunity arises, the owner reviews the financial implications and consequences. At the same time, he is aware that one can never be certain about a business plan, financial calculations and forecasts – “I am an entrepreneur, so I am able to smell an opportunity; that good feeling helps in taking some of these decisions.”
When a new product is first proposed, by a customer for instance, the owner and the principal product developer first brainstorm about the overall idea and sort out the technical details of the process and the ingredients. Sometimes company staff from the factory come forward with additional ideas. There has been input from employees in one way or another in all the new products so far. The owner also travels two to three times a year abroad (The Netherlands, Germany and Belgium) and studies new products in the various shops. He often goes just “to see products in the shops and to see how our products match with other products on the market in terms of presentation and pricing, and also to get customer feedback.” If the owner sees an interesting product, he brings it back. He feels that every suggestion from a customer could be useful – “We put it on the shelf since we cannot implement it immediately, even though it’s a good idea.”
The required minimum education level for staff is basic junior high school and the ability to read and write – “We also have some university educated staff in product development and quality monitoring.” The company undertakes quarterly training for their employees within the framework of a undp and unido programme “Sustaining Competitive Enterprise”. Trainers from local institutions discuss production techniques and practices for the highest possible quality and current product trends in the industry. They show videos and give participating staff the opportunity to present their own innovation ideas.
Indeed, quality has been one of the important areas of attention to assure continued access to the export market. Internally, the company has an agreed practice and culture of everyone being responsible for quality assurance – “You are on the machine working but you should open your eyes and observe.” Quality means, among other things, that the product looks traditional and natural.
The company does not yet have any formalised bonus or reward system. However, some years back a staff member came up with the idea for a new and successful product and “we gave him a bonus.”
External Business and Institutional Environment
Regarding the external business environment, the owner is facing several challenges. One major challenge perceived by many manufacturing companies in Ghana, according to the owner, is the unreliable electricity supply and frequent power cuts, which become more of a problem by the day. Without the generators purchased half a year ago, the company would not be able to survive. The generators can power the whole plant, but this brings with it a much higher cost “which could have been invested into the product or raw materials. In a day, the generators use almost 1000 Ghana cedi (300 usd) to keep the machines working and maintain production at the required level.”
The owner feels that the location of the company’s plant is not very good. Previously, the company was located in the outskirts of Accra, which is a more residential area. He tried to expand, but land acquisition was difficult and not well regulated – “You acquire a plot of land and before you know it, someone else is claiming ownership.” The current location provides space, but it is some distance from the central district, and road conditions are poor. The owner is trying to lobby for investments in infrastructure by local government, “but no matter how much you talk, you don’t get anywhere.”
In an effort to protect the brand name, the company has registered its name as a trademark, “despite the fact that enforcement is weakly implemented by the government.” The owner feels that government officials and politicians are usually looking at short-term policies and programmes that will bring them power and benefits rather than really helping the companies.
The owner is not very positive about the banking sector in Ghana. The interest rate for credit is about 35 per cent per year, “which is simply too high for any kind of business.” The company got credit because otherwise it was impossible to grow – “Certainly for at least a number of years you cannot do without credit. You definitely need credit to be able to meet all the industry standards.” The credit issue prevents the owner from doing things that he would like to do. Repayment is an ever-present challenge.
The company monitors the international firms in Ghana: their new and existing products, marketing, types of packaging, machines used, etc. The company sees Nestlé and Unilever as its main role models. The company recently collaborated with the Food Research Institute in a yam preservation project.
Wood Processing – Furniture (Tanzania – 40 Employees)
The company produces furniture and is situated on a busy road on the south side of Dar es Salaam. It also sells different kinds of wood for construction projects. The company has an open workshop including a number of heavy sawing machines. The company also saws wood and parts for other furniture producers, as a paid service.
The owner started in 1995 as a trader, buying wood from villages in the country and selling to wholesalers in Dar es Salaam. However, organising and implementing the transportation became increasingly complicated over the years. Despite the fact that he always had the required paperwork, the police and government officers from the Ministry of Natural Resources made the transport difficult – “they did not trust the documents, so there were extra costs to make sure the timber reached town.” In 2003, he decided to change his trading activity – “because in everything I was doing I faced challenges. I asked myself, why don’t I become a manufacturer of furniture myself?” Shortly thereafter, he started making furniture and immediately secured orders.
To buy his first sawing machine, the owner took out a loan from a private commercial bank, which was possible because he had an established and registered office of trading business, a plot of land and some furniture as collateral. Initially, the bank paperwork was too difficult to complete. The bank then simplified it because “they lowered the amount of money I wanted.” Eventually, he secured the loan with an interest rate of 23 per cent for six months. The owner was very much aware that the loan was not very attractive – “but it was a must to get money to start manufacturing.” He had confidence in the market for furniture.
Innovation and Internal Capabilities
Since 2003, despite ups and downs, the business has been growing steadily. With the profits and savings, the owner managed to buy six large and 12 small hand machines. He had confidence to invest in the machines because his network of clients had provided him with sufficient orders thus far. The production techniques improved and became more refined. The business
The sawing machines enable the owner to produce pieces faster and of higher quality than local competitors. He bought the large machines second-hand from the uk. Before he did so, he visited several small companies in Dar es Salaam that use similar models. Then, a contact in the uk helped him to find second-hand machines for sale and checked their condition and operational efficiency. The owner is very satisfied with these machines. The small hand machines were bought new from the local agent of a Japanese importer.
The company employs an average of 40 workers, although currently only has 12 workers (when we visited the company for this research project). The workers do not have fixed employment contracts. Instead, the owner recruits workers once he receives orders. He negotiates payment depending on the number of pieces to be produced and concludes a short-term contract. The 12 current workers work most of the time in the company. They know beforehand how much they will earn – “they know once there is a large order, then they will earn a lot.” The owner does not train his workers. It is not difficult get good skilled workers and the required skills for furniture making are not very difficult to obtain. Most of the workers can produce what the clients want. The owner mentions that there is no education or school to increase their knowledge and skills.
To design the furniture, the owner has a large collection of printed pictures of products (tables, chairs, cupboards, drawers, etc.) – “but that was before the coming of smartphones. Now, I have lots of pictures on my mobile phone.” When a new client comes to the workshop, the owner first listens to what design he or she wants. Sometimes the owner shows pictures to get ideas. Before making a more detailed design drawing of the furniture, the owner visits the customer’s home and takes measurements. The owner drafts several drawings with the sizes. Then once the customer agrees, the owner discusses with the workers how to best produce it. They sit down and the workers also provide ideas.
External Business and Institutional Environment
The clients of the company are mostly private households. Occasionally, the owner receives orders from schools for classroom furniture from other areas in
Lately, there is more competition from larger shops on the outskirts of Dar es Salaam that import furniture from China. In large showrooms, this imported furniture is on display – “and because of the imported furniture it is more difficult to get orders from the government offices. Most government agencies prefer imported furniture.” The owner wonders why the government is buying imported instead of local products – “people from the government usually say that they will buy furniture from Tanzania, but I have never seen them actually buying local furniture.” The owner considers that Chinese products are not very good and lack durability. He wonders why Tanzanian clients buy this lower quality Chinese furniture at a much higher price.
Regarding the business environment, the owner does not receive support from the government – “most of the time when government officers come here, they are coming for their official issues. They want me to pay tax.” The owner finds the government more of a hindrance than a support. Many government officials visit: an official from the municipality regarding business registration, a representative from the Ministry of Natural Resources inspecting the wood – “I never see them coming here to talk or ask how the business is going or what problems I am facing.”
He has some advice for the government. One important issue is that the government should establish a single set of consistent rules and regulations for business operation. Many government officials come to collect payment of different taxes – “and it is changing all the time.” The same applies to the owner’s experience of the Tanzanian Revenue Authority (tra) – “you might go there and pay tax but they will come here again for something else.” The owner would like to see a government consensus on regulations for starting and running a business.
The owner does not receive external advice or expertise. When he faces technical or design challenges, he solves the matter himself or calls friends for help. There are no contacts with formal institutions, vocational training or technology centres – “one example yesterday, I had a piece of marble work to do for a kitchen cabinet. I asked a friend who specialises in this. I wanted to see how he does it, so I called him and asked him to do the work while I was watching.”
His friends or family do not support the business, which relies on the owner entirely. He hopes to modify his work in future, because it is his only employment. He manages to take care of his family – “and that is very important for
Textile and Clothing – Company Uniforms and Accessories Tailoring (Kenya – 30 Employees)
The company is a Kenyan-owned textile and garment manufacturer located in a commercial area in South Nairobi. It has a small workshop with one production line and 30 employees. The company is involved in the stitching, tailoring and branding (printing logos) of company and school uniforms and work clothes. Occasionally, other promotional items such as T-shirts and polo shirts, caps and reflective jackets are produced. The enterprise usually deals with big private companies, hotels, ngos and schools in Nairobi and the surrounding area, because this involves a certain level of mass production: only 20 pieces or more are cost-effective. The company does not export, but there are buyers from Tanzania and Southern Sudan, who themselves take the products back to their countries.
The textile inputs and fabrics come from suppliers in Nairobi. The company has an agreement with the suppliers allowing payment after a certain period of time. This is because most of the clients do not pay cash upfront or directly after delivery, but usually after 30 days or more.
This new enterprise is only 18 months old. Its young owner is motivated to develop his company and committed to developing business more widely in Kenya. As a child, he lived with his family in the usa for a time. However, the Western world was not what they expected, and so the family returned. The owner is happy that he gained exposure to the outside world, which helps him to do business today in Kenya.
Despite the fact that Kenya is a developing country, the owner sees great opportunities. Most of the successful businessmen he knows started small, and he is aware that starting a business is not only about money – “If you are only money oriented your business will never live on.” In his opinion, an entrepreneur has to like what he or she is doing – “If you like what you are doing, you will come up with new inventions which people will really like. Then the money will follow.”
Innovation and Internal Capabilities
He started the business in 2013. Previously, he tried to get a regular job, but without success. He started to explore other opportunities, such as starting a business by himself. The idea of a textile business came from a friend who
Initially, he started a “briefcase” company by acquiring orders from corporates and hotels for uniforms. Once he got an order, he subcontracted it to a friend who had a small tailoring workshop. He subsequently delivered the product to the client and earned a small commission. After a while, he realised that he could get a much higher profit margin by manufacturing the textiles himself. The sewing and printing machines are usually expensive to buy, but luckily, he was able to borrow a machine from a client asking to have 200 shirts stitched. Shortly after, more clients placed orders for clothes, enabling him to buy another machine and expand the company.
His growing client base has forced the owner to innovate and expand. He plans to increase production capacity and move to a larger production hall in the industrial area, where he will get double the amount of space for the same rent. By installing two more production lines, he will be able to handle a big order of, for instance, 1000 or more overalls or dustcoats. At the same time, he will be able to handle other orders. The owner sees the necessity to innovate. He is aware that if an entrepreneur wants to survive in Kenya, he or she has to be innovative and think outside the box – “Because if you don’t, somebody else will and they will kick you out.” He knows that if he does not come up with new machinery, the company will have to close down. The owner also mentions that Chinese traders, with modern machines, may take over the market soon. It is better that Kenyan firms capture the market right now.
He is making arrangements and investigating possibilities. He has found an Asian supplier of the new machinery, which is technologically advanced and much more efficient. He is also exploring the possibility of producing leather products, such as handbags and women’s shoes, the latter currently imported from China. He is considering importing the raw materials and manufacturing shoes locally.
The business currently has 30 employees. Most came without previous knowledge or experience, and were trained on the job. Some are qualified, and train others in how to tailor new products. There is no formal training within the company. The supplier of the sewing machines provides instruction on how to use the machines.
Generally, clients ask for specific pre-designed products. However, the owner would like to do more of his own design work in the future – “It’s not the client who drives me, it’s me who drives the client.” He develops his own ideas and researches internet retail sites to see what is available on the market in other countries.
He has a designer meeting twice a week. Some new designs are successful, while others are not. The experienced staff also come up with ideas that are
External Business and Institutional Environment
The owner finds the business environment in Kenya hard – “It is every man for himself.” He feels that the government is letting small companies down because of the many taxes and laws. Government officials visit often and deliberately look for administrative mistakes. The government creates an uncertain and hostile business environment. A company never knows when the government officials will visit, and “when they show up, you go down.” The owner’s critical opinion grew from witnessing more challenges as his company was growing – “If the government officials were doing what they were supposed to do we would be doing well.” What really upsets the owner is that there are so many young people in Kenya with great ideas and energy, but stuck in a political system that prevents them from taking initiative and growing new businesses.
The owner is concerned about the increasing imports of cheap, low quality products. He thinks that the advantage of being located in Kenya is the quick delivery time of tailor-made products, last-minute production and close proximity to the client.
Without the financial and emotional support of his family and friends, he could not have set up his business. They were very supportive in overcoming initial insecurities. He attributes much of the success of his business to his wife and parents. They help him in developing ideas and running a business – “we go through these problems together.”
Analysis of Trends and Patterns
Innovation
While some reports about the African economic situation sketch a pessimistic picture of the manufacturing sme sector, the enterprises analysed in the eip-lic qualitative series of cases innovated, expanded and started exporting. In further analysing the firms’ innovation in terms of incremental adoption and adaptation or new combinations of existing technologies (Szirmai et al. 2011), it is evident that the interviewed smes’ owners introduced a number of product, process and business practice innovations.
The palm oil company in Ghana initially manufactured products for the local market, then successfully accessed the export market, along with the introduction of several new products and new production processes. The furniture
Applying the innovation typology of Kaplinsky and Morris (2001), however, is not so straightforward. The reality shows a combination of several types of innovations within the smes, where one type of innovation often interacted with or triggered another. This pattern was observed in all smes subject to the qualitative research in eip-lic.
Although the innovations in the cases are not radical or “new to the world”, they were new for the companies. They mostly concern product innovations involving new technology; value is created by expanding the range of products with higher quality while using locally available raw materials. Against this background, all cases comply with the characteristics of innovation in factor-driven economies (Porter et al. 2002). In these economies, low-cost labour and unprocessed natural resources are the dominant basis of competitive advantage and exports. The next stage would be an efficiency-driven economy, where products and services become more advanced and production highly efficient. This is not yet happening in the cases in Ghana, Kenya and Tanzania.
Internal Capabilities
With regard to the internal capabilities, all companies are informally organised. None of them has an innovation or R&D specialised department. Typically, the companies possess old and outdated machinery, often purchased second-hand from Europe (or in other cases from China). Owners are aware of the necessity to innovate and pursue efforts to do so. They have numerous innovation ideas and initiated tests and trials. The resilience of the owners is notable in this respect. They all have determination and persistence in setting up their business as well as a “drive” to continually improve their operations. Several owners among the smes interviewed in eip-lic explicitly mentioned that they did not establish the company for profit reasons only. The sense of fulfilment and achievement gained from setting up the business is valued, regardless of how difficult it is to make ends meet.
The internally managed innovation processes observed in the cases do not follow a linear and “projectified” approach involving a strategic plan, a cost-benefit analysis and a timeframe for the implementation, as often described in technology-push innovation approaches (Godin 2006). Instead, the owners of the interviewed companies work step-by-step and see what works and what does not. This innovation process is earlier described by Kline and Rosenberg
Regarding the workforce of the smes, companies in the three cases presented in this chapter do not face difficulties in recruiting staff. However, in many other companies interviewed within eip-lic, owners report the problematic recruitment of skilled craftsmen and operators to work with modern machines in particular. Younger generations lack relevant experience and are not very motivated to do manufacturing work. Regarding innovative ideas, the owners indicate that most of their employees have little knowledge or exposure to new technologies, products and other outside information. Although ideas from the workers and production managers are generally appreciated, they only suggest occasional improvements on the production level. Teece et al. (1997) suggest that the focus needs to be defined in terms of distinctive competences or capability of the workforce. Products, for that matter, are the manifestation of competence. Innovation in a dynamic context depends in large measure on internal technological, organisational, and managerial processes inside the firm. Organising the sme effectively and efficiently is generally more fundamental to innovation than is strategising in, for instance, engaging in business conduct that keeps competitors off balance, raises rivals’ costs, and excludes new entrants (Ibid).
The owners mention that the skills and knowledge gained through formal education do not match the company’s requirements. Practical skills and an entrepreneurial and creative attitude is a particular area for improvement, according to the owners. Despite the shortcomings, no interviewed company provides additional external formal training for the workers, opting instead for on the job training. Some owners are reluctant to provide any training at all because of past experience of workers moving to other jobs.
Most owners in the cases demonstrate social awareness and a sense of responsibility towards the community and environment in which they operate. Owners take environmental and social considerations into account, and go “beyond compliance” in terms of employment creation for the community stakeholders, and women in particular, and contribute to poverty alleviation. The concept of Social Corporate Responsibility (csr) is definitely not exclusively for large companies in Western countries (Quazi et al. 2007).
External Business Environment and Formal and Informal Institutions
All the sme owners indicate that the business environment in their respective country is challenging. They all see promising market opportunities on the
Business Context
Regarding ideas for innovation, and available technology in particular, suggestions come from the suppliers’ side, amongst others. Most owners and managers are well informed about the technology possibilities and alternatives for their manufacturing through suppliers of machinery and equipment. They research suppliers’ websites abroad and travel to fairs, identifying existing technology that could be adapted or adopted in their local context. In addition, interviewed owners are client-oriented and get innovation ideas via the demand side. The customers often come with requirements and suggestions, to which most owners are attentive. In fact, the buyers and clients are a strong force for the so-called market-pull types of innovation in the cases, corresponding to the theory distinguishing buyer-driven from producer-driven value chains (Gereffi et al. 2005).
There are no links observed with Western multinationals in the form of subcontracting or supplier arrangements; the interviewed companies operate independently. There is no spill-over of technology as a result of cooperation within value chains.
Formal Institutional Context
All sme owners have a more or less negative perception about the formal institutional context. Dealing with government agencies involves various political and bureaucratic challenges. In general, the sme owners keep the government at a distance.
On the one hand, the owners do not see a consistent regulatory or policy framework for manufacturing smes (nor an explicit long-term overall economic development plan). Many ministries and governmental agencies have different regulations, which makes the institutional context conflicting and
On the other hand, owners also see that staff within ministries and agencies are motivated and engaged in efforts to develop and promote innovation policy. Increasingly, policy frameworks and associated documents are being developed. Despite considerable effort in developing strategies and plans, actual implementation is only just beginning in Ghana, Tanzania and Kenya, due to the limited availability of public budgets and knowledgeable staff.
Interaction with existing technology institutions, as formal innovation system actors, is virtually non-existent. Many smes indicate that they would like to cooperate with universities to undertake research at their premises, sharing the research insights obtained. The technological focus of universities is often different and very much focused on theory development rather than practical application within smes. The interviewed companies did not enjoy the support of these formal innovation system institutions in their efforts to innovate. They do not feel supported at all by the government, and feel that they have to survive on their own.
The banking system was often discussed as the last element of the interviews. The owners do not consider formal banks as an attractive source of finance for smes. The most problematic issues here concern high interest rates, collateral requirements and complex paperwork. The owners mention interest rates ranging from 16 to 35 per cent per year, which is difficult to cover, given the low profit margins of their operations.
Informal Institutions
The company owners mentioned that friends and family were critical in the set-up and innovation efforts of the business. Previous working experience overseas or in export further strengthened their informal networks, as well as informal contacts via social media and elsewhere. These networks provide a safety net as well as encouragement and stimulation, also described in the theoretical framework of social capital (Knight, 2003).
The interviewed companies source credit mostly from informal financial institutions. Most of the companies were given informal loans and gifts by family and friends. Informal money lenders, or “Shylocks”, demand even higher interest rates, but provide flexibility. Beyond family and friends, in some cases informal channels and contacts within the business sector and some government
Concluding Remarks with Regard to Policy Issues
The official figures, in the World Bank databases amongst others, indicate that the manufacturing sector in many African countries including Ghana, Tanzania and Kenya is diminishing, whereas this sector could bring significant benefit for overall development, as explained in the introduction to this chapter. Manufacturing smes choose, or are forced, to close down their business in the harsh business environment. This results in African countries exporting raw materials while importing processed and manufactured products, thus missing the added value of a manufacturing sector, and the structural change bonus it brings. This remains an issue to be further examined by policymakers within government, civil society and development organisations as well as the manufacturing sector itself (Aubert 2005).
One of the critical reasons for the diminishing manufacturing sector, as explained by various sme owners, is that they lose out to cheap imports. Innovation would be one way to make more efficient use of resources and processes and compete with imports on the local market. Thus, innovation within local manufacturing smes could be precisely the response needed: introduce local higher quality products at lower costs. Several owners do see the low quality of imported products as a motivation to innovate, focusing on affordable durable consumer goods. The reality, however, is that many local manufacturing smes have limited capacity to innovate and stagnate or give up as a result. Limited firm level capabilities are one problem, but the difficult institutional context and lack of innovation support and policies appear to be more critical.
Innovation policies in Western countries are typically based on innovation systems theory, which states that innovation is not considered as a firm-level effort only. The support of a network of formal institutions (Freeman 1987; Lundvall 1992) is critical. The underlying idea of the associated Science-Technology-Innovation (sti) policies is to link innovation within firms to science and technology via research and development organisations and technical universities, innovation and research funds, the financial and banking sector, education institutes, patent registration bureaus and certification offices ( oecd 2005).
In fact, many African countries have started to develop and adopt sti policies (Ozor 2011). sti policy aims to understand the innovation system structure,
Once acquired, the companies themselves refine and adapt the existing technology. The innovations observed in the cases are the product of experiential learning and a process of doing, using and interacting (dui) in an informal way, earlier described by Lundvall et al. (2009). Learning by doing and interaction with suppliers, clients and informal networks, and experiential and social learning (Kolb 1984; Beers et al. 2010) is more useful for building a broader understanding of innovation systems in developing countries. dui focuses on innovations, on interactive and on the job learning through informal structures and relationships, which Lundvall considers highly relevant for developing countries. Instead, using the sti approach as a blueprint, policymakers within government agencies could opt for a broader view of innovation systems based on the dui concept.
The informal context is also critical in the dui concept. Informal institutions in dui practices described by Lundvall (2009) take on the role of the insecure formal institutional context and provide stability and predictability. The role of informal institutions in supporting innovation is increasingly acknowledged in innovation in Africa (World Bank 2010). Policy could also allow and strengthen the informal institutional context instead of overruling informality.
Apart from government innovation policies, the World Bank (2010) recently reported an alternative market ideology, taking the view that innovation occurs naturally in a good business climate and most of all through interactions in the business system. Innovation thus is fundamentally the task of the private sector and of entrepreneurs, and occurs through horizontal and vertical linkages of businesses, spillover and actors’ networks, involving subcontracting, interactive learning within supplier and buyer value chains and foreign direct investment.
Finally, yet importantly, is the impact of a hostile and unfriendly government, as it is often engaged in bribery and corruption. Despite their good intentions in formulating innovation policies written by government agencies, the entrepreneurs prefer to keep the government at a distance. While
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Any shift of labour and other resources from agriculture to manufacturing results in an immediate increase in overall productivity and income per capita. This is referred to as the “structural change bonus”.
This phrase has been used relatively loosely in economic development discussions, meaning a lack of smes, particularly in the developing world. See: http://www.africa.com/blog/investing_in_africa_defining_themissing_middle_/.
The research and the development of the argument in this chapter was funded in the framework of dfid (EIP-LIC/PO5639): https://www.tilburguniversity.edu/dfid-innovation-and-growth/.
Ethiopia, Ghana, Kenya, South Africa, Tanzania, Uganda, Bangladesh, India, Indonesia and Vietnam.
In Africa, one should be careful about talking about “African entrepreneurs”. Many businesses in African countries have Indian (or other Asian) owners. The owners and their families have been in these countries for generations and gained local nationality. They are well integrated in the local economic life and society.
eip-lic has a case study database developed in the framework of qualitative research activities in the African and Asian countries of study.