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close this bookExporting Africa: Technology, Trade and Industrialization in Sub-Saharan Africa (UNU, 1995, 434 pages)
close this folderPart I. Exporting Africa: an analysis
Open this folder and view contents1. Introduction
Open this folder and view contents2. Trade theory: relevance and implications for African export orientation
Open this folder and view contents3. Some conceptual issues and methodology of the study
Open this folder and view contents4. The changing world economy: market conditions and technological developments
Open this folder and view contents5. Main findings of the study: a synthesis
Open this folder and view contents6. Conclusions and policy implications
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Background

The economic crisis which has hit Africa in the past decade is raising questions about future prospects for the continent. Questions have been raised about the future position of Africa in world trade and whether Africa has any chance of developing a competitive industrial structure. This book is a modest attempt to address these questions. The stance taken is that there are lessons to be drawn from firms which have been exporting and are continuing to export manufactured products from Africa. A study of such firms can provide useful insights into the process by which they have been maintaining their position in the world market in spite of the general crisis conditions. Some exporting firms have been losing or changing their positions in world trade. Useful lessons can also be derived from the experience of these firms. This book brings insights from the experience of 55 exporting firms from six countries in Africa and draws out some policy implications regarding the prospects of restructuring for export orientation.

In the 1970s, and especially in the 1980s, many countries in Africa experienced economic crises of varying severity. Their economies have been characterized by weak growth in the productive sectors' with the initial spurt of industrial growth faltering, by poor export performance, reflected in the falling share of African exports in world trade and the unchanged export structure, and by increasing debt, a deteriorating economic and social infrastructure and increasing environmental degradation. This crisis has important implications for the prospects of transforming African economies, as envisaged by African governments (e.g. in the Lagos Plan of Action of 1980). The crisis has implications in two policy areas of particular relevance to the theme of this book: the previous import-substitution approach to industrialization as a means of economic transformation, and the position of Africa in world trade.

Debates on the causes of the crisis have centred on two categories of factors. The first category comprises exogenous factors such as bad weather, deteriorating terms of trade, fluctuating international interest rates and reduced inflows of foreign aid. The second category of explanations emphasizes endogenous factors such as inappropriate domestic policies, including incentive structures, and the mismanagement of public resources. The first line of argument, emphasizing exogenous factors, has largely been heard from governments in Africa and the UN Economic Commission for Africa (UNECA). Particular emphasis has been placed on the vulnerability of the performance of African economies to the vagaries of weather and to the unfavorable international environment, in particular to primary commodity prices, resource flows and debt conditions (UNECA, 1988).1 The second category of explanation, emphasizing the domestic policy inadequacies, has been argued by the Bretton Woods Institutions, as formulated in the Berg report (World Bank, 1981).²

One response to these crises has been the adoption of economic reforms. Most economic reforms have been implemented under the influence of multilateral financial institutions, notably the International Monetary Fund and the World Bank (IMF).³ According to these institutions, the rationale of these reforms is that Africa's slowness to respond to changing circumstances basically reflects domestic policy inadequacies, and it is these policy inadequacies that need to be addressed. In order to realize economic recovery, stabilization of the macro balance has been accorded high priority in policy-making. The conditions attached to external support have primarily been concerned with macroeconomic policy variables.

The nature and content of economic reforms carried out in various countries in Africa have varied in terms of coverage and emphasis. However, the main elements of economic reform have been liberalization of internal and external trade, greater reliance on market forces (i.e. price liberalization, devaluations and interest rate adjustments), tight monetary policies, mainly in the form of credit squeezes, and tight fiscal policy in the form of budget cuts and public sector reforms. These policies have primarily been designed to restore equilibrium, especially in the balance of payments and the fiscal and monetary variables. The policies followed in the structural adjustment programmes (SAPs) have succeeded in addressing the two policy areas which are relevant to the main theme of this book: improving the position of Africa in world trade and enhancing the role of industrialization in economic transformation.

The position of Africa in world trade

The current position of Africa in world trade is characterized by two main features: first, it has a small and declining share in world trade and second, its presence in world trade is largely confined to primary exports and the importation of non-primary products.

Africa's share in world trade is not only small, it has been declining. It varied from 4.1 to 4.9 per cent of world trade during 1960 65, fluctuated around 4.4 per cent during the 1970s and declined consistently to 2.3 per cent in 1987 (UNCTAD, 1993a).4 The share of Africa in world exports declined from 4.7 per cent in 1975 to 2.0 per cent in 1990. The share of Africa's least developed countries declined more drastically, from 0.6 per cent to 0.2 per cent over the same period (UNIDO, 1993).5 During 1980 87, while world exports were growing at 2.5 per cent per year, Africa's exports were declining at an annual rate of 7.4 per cent. The share of non-oil primary exports declined even more dramatically, from 7 per cent to 4 per cent, over the same period (Sharma, 1993).6 Manufactured exports, though small, have exhibited a similar trend. The share of manufactured exports from Sub-Saharan Africa (SSA) in world trade declined from 0.38 per cent in 1965 to 0.23 per cent in 1986 (Riddell, 1990).7 In relation to other developing countries, the share of Africa's manufactured exports declined from 5.2 per cent in 1975 to 2.6 per cent in 1985 and further to 2.5 per cent in 1990 (UNIDO, 1993). A preliminary study of the impact of the Single European Market has indicated that SSA countries lost their share mainly to other developing countries during 1987-91, in spite of preferential market access accorded to Africa through the Lomé Convention (UNCTAD, 1993b).8 These trends suggest that Africa has lagged in competitiveness relative to the rest of the world economy' indicating that productivity growth and technological learning and innovations in the export sector in Africa have been low relative to other regions. This problem of lack of competitiveness, in traditional and nontraditional exports, will need to be faced if Africa is to improve its position in world trade.

A major concern of structural adjustment programmes has been to shift the incentive structure in favour of tradables, with a view to improving the position of Africa in world trade. However, the response of African exports to the incentive structure built into the structural adjustment programmes has been disappointing in terms of the values of export earnings which have been attained and the lack of change in the export structure. Recent efforts to revive exports within the traditional setting have provided further evidence that exports cannot be an engine of growth if the export structure remains unchanged, because of the poor prospects of making breakthroughs in foreign exchange earning. Evaluating the impact of structural adjustment programmes in Sub-Saharan Africa, Husain (1994)9 has indicated that for 1985-90 the export volumes of nine major export commodities in countries which had undertaken adjustment programmes increased by 75 per cent as compared with the 1977-79 averages. Yet export earnings from these exports had fallen by 40 per cent over the same period, because of deteriorating barter terms of trade (Husain, 1994).

Africa's major exports have been primary agricultural and mineral products. The structure of exports has hardly changed in much of Sub-Saharan Africa in the past two or three decades. The share of primary commodities in total exports from Sub-Saharan Africa has declined marginally, from 92 per cent in 1965 to 86 per cent in 1987 (World Bank, 1989).10 For the low-income countries of Sub-Saharan Africa this share has even increased marginally, from 92 per cent in 1965 to 94 per cent in 1987 (World Bank, 1989). The export structure dominated by primary products is thus not changing to any significant extent.

The unchanging structure of exports may suggest that the export pessimism associated with traditional primary commodities has not been taken seriously in the design and implementation of development policies (before and after structural adjustment programmes). The first period of export pessimism was based either on declining terms of trade for primary products (Prebisch, 1954)11 or on the notion that the absorptive capacity of foreign markets was low (i.e. elasticity pessimism) as argued by Nurkse (1959)12. The future of most of these traditional commodity exports is rather bleak, considering the low income elasticities of demand associated with these products. Markets for many of these commodities are showing signs of saturation. A recent study has examined Africa s main primary exports13 and concluded that the path followed in Africa, of exporting mineral and agricultural resources, is a dead end because of their poor prospects in the world market (Brown and Tiffen, 1992).14 For instance, studies of the world cocoa market, in which exports from Africa comprise 55 per cent of traded volume, have shown that over a 20-year period (1960/65 to 1980/85), cocoa consumption increased by only 40 per cent, with negligible increases in the major consumer markets such as the EU (12 per cent) and US (19 per cent) over the same period (ITC, 1987).15 Consumption of robusta coffee (dominant in Africa) has stagnated at 12.5 million bags since the mid-1970s, while world exports of arabica coffee doubled between the 1960s and 1980s (Brown and Tiffen, 1992). For coffee from Africa, these trends are aggravated by problems of product quality, delays and unreliability.

The empirical evidence that is available on terms of trade in Sub-Saharan Africa seems to suggest that the export pessimism thesis continues to hold. A World Bank study, taking the year 1980 as the base, has indicated that the terms of trade index declined to 91 in 1985 and 84 in 1987 (World Bank, 1989). In a recent, more general survey of empirical studies on this subject, Killick (1992) has concluded that 'there is now wider acceptance than was formerly the case of the declining real commodity price thesis' (p. 3).16 If the importance of technological change is taken into consideration, this problem of export structures is even more serious, since the production of most traditional exports is associated with relatively limited technological dynamism.

Institutional/cognitive analysis can contribute towards understanding uneven patterns of economic performance and towards explaining path dependence (e.g. why some economies continue to stagnate). While learning is an incremental process filtered by the culture of a society, there is no guarantee that the stock of knowledge a society has accumulated will always enable it to confront new problems successfully. Societies that get stuck embody belief systems and institutions that fail to confront and solve new problems of societal complexity (North, 1994).17 The rationality assumption of neoclassical theory would suggest that 'political entrepreneurs' (as per the new political economy) in stagnating economies could turn around the bad performance of their economies by simply altering the rules of the game. In fact, the difficulty is in the nature of the political market and the underlying belief systems of the actors (North, 1994).

The institutional/cognitive approach to contemporary development problems implies that:

· an admixture of formal rules, informal norms and enforcement characteristics shape economic performance. While the rules may be changed overnight, informal norms take time to change. Even if a poor performer adopts the formal rules of a good performer, differences in performance may persist because of differences in informal norms and enforcement.

· the essence of development policy is the creation of policies that will create and enforce appropriate rules and norms. Both institutions and belief systems must change for successful reform to be realized.

· the key to long-run growth is adaptive rather than allocative efficiency. Adaptive efficiency results from the evolution of flexible institutional structures that can survive shocks and changes.

Africa's position in the new global trade relations will largely be determined by what action is taken in Africa in two directions: first, increasing the regional and international competitiveness of its production activities, and second, changing the structure of exports towards more dynamic, non-traditional products (in terms of their demand prospects and their potential to effect technological change). The need to effect change in the export structure will inevitably bring discussions of policy issues relating to export diversification, the transformation of production structures and industrialization back on the agenda.

Industrialization and economic transformation

The performance of Africa's industrial sector, in terms of growth and structural change, has been poor relative to other regions. Between 1980 and 1986, manufacturing value added (MVA) growth in SSA averaged 0.3 per cent, compared to 5.9 per cent in all developing countries and 7.7 per cent per annum in Southeast Asia (Riddell, 1990, pp. 10-15). The rate of growth of manufacturing value added in Africa has decelerated, from 5.1 per cent during 1975-85 to 3.5 per cent during 1985-90, while Southeast Asia enjoyed growth rates of 7.7 per cent and 8.8 per cent in the same periods (UNIDO, 1993). In terms of structural change, industry in SSA has remained more dominated by traditional and technologically simple consumer goods industries than industry in other regions.

In spite of the dismal performance of much of industry in Africa, debates during the 1980s on Africa's economic development in general and on economic recovery in particular have not given adequate attention to the role of industry (Riddell, 1990, p. 3). In some cases, industry has been identified as having been responsible for much of the waste of resources and a cure has been sought in diverting resources from industry to other sectors such as agriculture. The tendency to give less attention to industry is rather paradoxical for at least two reasons. First, the literature on economic development ascribes a high degree of dynamism to industry, a perception which has not been proved wrong. Second, industry has been instrumental to the generation and diffusion of technology, which is an important source of dynamism and competitiveness in any economy. The neglect of the role of industry amounts to the omission of a major source of technological dynamism in the development of SSA. What is needed now is to address the industrialization problem in the context of changed circumstances.

The approach taken in the economic reforms has influenced recent debates on industrialization in Africa. It is notable that in recent years discussions of industrial strategy in Africa have emphasized the importance of restructuring the supply side of the economy towards export orientation and to make it more competitive internationally. Such discussions have stressed the need to change the price structures which were associated with import substitution strategies by a return to the market.

Industrial restructuring is one component of the wider economic reforms adopted in many African countries. One implicit assumption of economic reforms and industrial restructuring is that enterprise-level inefficiencies are a reflection of distorted or inappropriate macroeconomic policies. It is suggested that if appropriate adjustments could be put in place at the macro level, enterprises would receive the right signals through the market. In response to these signals, enterprises would restructure appropriately. According to this approach, appropriate changes in policies (e.g. market prices, a realistic exchange rate, interest rates and competition) are expected to induce restructuring by favouring the expansion of efficient enterprises and the contraction of inefficient ones. This approach has been associated with the World Bank, especially in its earlier publications (World Bank, 1981). According to this approach, the reform and restructuring of industry is essentially a macroeconomic issue amounting to restructuring the supply side by putting in place appropriate macroeconomic and sectoral policies.18

One implication of the current shift towards export orientation in the industrialization debates has been to tilt the balance from import substitution strategies towards export-oriented industrialization. The debate between import substitution industrialization (ISI) and export-oriented industrialization (EOI) strategies is in many respects a debate between the structuralist and the neoclassical schools (Weiss, 1988).19 The structuralists have criticized the neoclassical school for failure to recognize the untenability of the static equilibrium and the pervasive market failures arising from various structural rigidities. In the structuralist tradition, the importance of various externalities and dynamic considerations is stressed. In their critique the neoclassical school has stressed the structural school's neglect of the role of prices and markets in resource allocation, while the radical perspective stresses the structuralists' inability to analyse the role of class formation in these countries and the constraints posed by the external economic environment. This debate between the contending schools has tended to be polarized.

One reflection of the polarity between these competing schools of thought on development is manifest in the way that the underlying assumption, that ISI and EOI are necessarily competitive alternatives, has often been carried too far. In recent years it has become increasingly evident that the rather strict separability between ISI and EOI which was assumed is questionable on both methodological and empirical grounds. In many respects, some of the propositions which were thought to apply exclusively to ISI or to EOI are increasingly appearing either to be applicable to both approaches or at least not to be confined exclusively to either one of them.

The propositions that export orientation is inevitably inimical to the establishment of domestic linkages and that a successful capitalist industrialization is not a viable option for developing countries have been put in question by the realities of industrialization in several developing countries of Southeast Asia. On the other hand, the rather common claim that EOI promotes faster growth in total factor productivity (TFP) has been questioned on methodological grounds, related to the problems of estimating TFP under conditions of restrictive trade environments, and on empirical grounds, since some country studies have suggested that the differences between EOI and ISI are probably more likely to be reflected in the direction of research and development (R&D) than in its level (Bhagwati and Srinivasan, 1975).20

The efficacy of market forces associated with these approaches is being subjected to serious reconsideration. It has now become evident that EOI can be preceded by and can even build on the achievements of ISI. Arguing that the success story of Korea is much more complex than the neoclassical paradigm would suggest, it has been revealed that Korea promoted labour-intensive import substitution as well as exports, and that most of the later exports resulted from early import substitution (World Bank, 1985).21 Selecting potential infant industries and giving them early encouragement to export can contribute to successful EOI and may became instrumental to technologically dynamic industrialization, as the experience of countries such as South Korea has shown (Westphal, 1981; Pack and Westphal, 1986; Jacobsson and Alam, 1994).22 In addition, some recent experiences in attempting to make the shift from ISI to EOI by relying mainly on market forces have not been very successful.

Taking into consideration these objections to the strict separability between import substitution and export orientation, this study proceeds on the premise that import substitution and export orientation are not necessarily competing alternatives but rather could converge and reinforce each other. If ISI is efficient it can form the basis of EOI, and EOI can be consistent with further development of efficient linkages and the acquisition of technological capabilities among domestic industries. The challenge is to blend ISI and EOI through a mix of policies which aim at maximizing the benefits from increased domestic demand and stimulating both substantial (and efficient) import substitution and increased export orientation on the basis of growing technological capabilities.

Export orientation and competition provide incentives for improving efficiency but this presupposes the ability to respond, i.e. it supposes capabilities in terms of skills and technological endowments. In fact the supply response of African industry to the kinds of incentives the structural adjustment programmes). have provided has been disappointing.

In this context, Lall et al. (1993)23 have rightly pointed out that the role of capability factors continues to be neglected in studies of African industrialization, while SAPs continue to be designed with an almost exclusive focus on incentive factors. The authors cited one study by the World Bank (1989) as an exception, for having observed that most industries in Africa remain isolated from world markets and new technologies and continue to operate at costs higher than world prices. The study suggests that acceleration of industrial capacity growth would be wasted unless the capacity to design, manage and use it was also improved (World Bank, 1989). In addition, the study calls for a shift from central planning to a market approach, from regulation to competition and from failed attempts to transplant technology to the systematic building up of capabilities (World Bank, 1989). The study by Lall et al. (1993) noted that although external shocks and inappropriate policies have influenced the performance of African industry, the widespread absence of competitiveness and technological dynamism is also explained by other constraints related to the lack of the capabilities needed to set up modern industry and operate it efficiently. Overall, little attention is given to the need for supportive policies which could complement market forces in ensuring technological dynamism. This suggests that the process of restructuring for export orientation has been only partially understood.

In the context of new technologies and rapidly changing world market conditions, the process of restructuring for export orientation is going to pose a challenge to developing countries, especially the less developed among them, most of which are found in Africa. The question which needs to be addressed is what constraints are likely to be encountered and what opportunities could emerge for these economies in this restructuring process.

One major consideration which will influence the way the industrialization problem is conceptualized relates to the changing character of innovations and technological change, and their role in international trade and competitiveness. The stance which this book takes recognizes that the Schumpeterian conceptualization of technological change, with its emphasis on learning and the accumulation of technological capabilities, can have considerable implications for the conceptualization of the industrialization problem in Africa. Industrialization, for the less industrialized countries in Africa, will have to take place under conditions of accelerating technical change and the pervasive application of new technologies. The main theme of this book is to demonstrate how some firms in Africa are coping with challenges from changing technological and world market conditions.

Some country studies have suggested that the problem of lack of competitiveness could be partly explained by more deep-seated structural and institutional problems in these countries and partly by the fact that, for geographical and infrastructural reasons, SSA firms were increasingly isolated from the dynamics of efficient change occurring elsewhere, notably as regards technical adaptation, advances in management techniques and developments in computer-aided manufacture and ancillary services (Riddell, 1990). Further protection tended to be the quick fix which in effect retarded the response. However, the performance of the industrial sector has exhibited considerable variations among countries within Africa and, within specific countries, inter-industry and inter-firm performance differences have been quite significant. For instance, although the export promotion efforts of the 1980s had little success, some firms which were originally oriented to the domestic market have switched significantly to the export market. It is quite possible that some of these firms are exporting on the basis of marginal cost pricing, with overhead costs covered by the higher returns from the domestic market (Riddell, 1990, pp. 36-7). It is also possible that some firms have maintained increased international competitiveness over time. There are a few firms whose production has always been export-oriented, with well over 50 per cent of their output destined for export markets. There may be useful lessons to be drawn from the experience of these firms. A major concern of this book is to try to understand the process by which exporting firms maintain international competitiveness. It may be necessary to form a better understanding of the problems of comparative inefficiency and the acquisition of capabilities at the enterprise level. Such understanding could be a useful guide to finding more effective kinds of policy intervention. If technological dynamism and international competitiveness are to be achieved, then these differences in themselves ought to raise further questions regarding the constraints and opportunities on the one hand and the policy implications at macro and micro level on the other.

Research questions

The future of traditional exports is rather bleak, considering the low income elasticities of demand associated with these products. The fact that the production of most traditional exports is associated with relatively limited technological dynamism raises doubts about their relevance for technological development in developing countries. Restructuring on the supply side needs to address the question of developing more technologically dynamic export sectors in these countries.

The main objective of this study is to understand more deeply the process of supply side restructuring and to examine the opportunities and feasible options for developing technologically dynamic and internationally competitive export industries in Africa in the context of the rapidly changing technological and world market conditions. This book will examine the process of building up and maintaining the capabilities which are necessary for maintaining competitiveness in export markets. The study examines such capabilities at firm, industry and national levels in selected countries in Africa. Since it is firms and not nations which compete on international markets, the analysis will focus on the firm level, emphasizing the process through which firms create and augment those capabilities which are necessary for acquiring and maintaining regional and/or international competitiveness over time in the context of internal and external influences (e.g. from factor markets, product markets, government interventions and institutions and policy remedies for market failures). In spite of this emphasis, the interdependence between the different levels is recognized and will be retained in the analysis.

The focus of the study is on exporting manufacturing firms, identifying and analysing the processes by which these firms have been maintaining or losing their competitiveness in international and/or regional markets. This is done by studying the capabilities of selected exporting firms with a view to understanding the process by which the creation and development of these capabilities has been promoted or inhibited over time by factors either internal or external to the firms. In this context, three main questions are addressed:

1 What factors and processes have influenced the paths which various firms have followed in attaining or losing regional and/or international competitiveness?

2 How have exporting firms been coping (or failing to cope) with changing technological and market conditions?

3 What lessons and policy implications can be drawn from the manner in which exporting firms have been maintaining (or losing) competitiveness in export markets and how have they been coping (or failing to cope) with changing technological and market conditions?

Organization of this book

Recent developments in trade theory could offer useful insights into the emerging relationship between international trade and industrialization. Chapter 2 examines trade theories with a view to examining how the changing conceptualization of the relationship between trade theory and trade policy relates to the industrialization process. Chapter 3 describes the methodology adopted in this study and Chapter 4 examines some technological developments and world market conditions which are likely to be important for Africa. Chapter 5 summarizes the major findings of the study and Chapter 6 draws conclusions and policy implication from the study. Chapters 7-12 are devoted to country case studies and Chapter 13 gives the survey questions used in these studies.

Introduction

Questions about the role of trade and trade policy in development represent one major factor in generalizations about macroeconomic policy and the choice of development strategy in developing countries (Colclough, 1991, p. 18a).1 In recent years, developments in trade theory and their implications for trade policy have led to changing views on the relative importance of factors influencing trade and trade patterns and on the role of trade in economic development. This chapter examines these developments with a view to drawing out some implications relevant to development efforts in Africa. The chapter begins by examining the core of conventional trade theory, its explanatory and predictive power, and proceeds to survey briefly some critics and extensions of the theory within the conventional framework, and developments from outside it. The chapter closes with some reflections on the relevance and implications of these developments for discussions regarding the options that may be open to Africa in its development efforts in two areas: improving its position in world trade and enhancing the role of industrialization in economic transformation in a changing world economy.

Conventional trade theory: essence and relevance

Classical theories of trade, notably the Ricardian type, have stressed international differences in technology and real wage levels. Their focus has been on factor productivity differences. Developments in trade theories within the neoclassical framework have shifted attention from such differences in factor productivity towards differences in factor endowments. The core of the conventional trade theory is the factor proportions theory of the Heckscher-Ohlin model and its extensions. The theory is based on general equilibrium models and the assumptions associated with them, including perfect competition, concave (or at least quasi-concave) and constant returns-to-scale production functions, and well-behaved and homo-thetic preference functions. Other theorems which are associated with the conventional theory are the factor equalization theorem, the Stolper-Samuelson theorem of gains accruing to the factors used in protected import-competing sectors and the Rybczynski theorem of the expansion (or contraction) of sectors which are intensive users of the abundant (or scarce) factor. As part of the general case for free markets, the case for free trade derives from the view that, as a production process, international trade is likely to be carried out more efficiently if it is left to the market mechanism.

Conventional trade theory has been questioned on methodological and empirical grounds. Critics who have emphasized the methodological problems of the conventional model are mainly associated with non-neoclassical formulations (e.g. evolutionary theory), while those who have questioned the empirical validity of the model have come from both within and outside the neoclassical framework.

The first empirical test of the Heckscher-Ohlin (H-O) model was administered by Leontief (1953).2 Using input-output analysis, Leontief found that the US was a net exporter of labour-intensive goods and a net importer of capital intensive goods. This was not thought to amount to nullification or serious questioning of the theory. Instead, the outcome was labeled 'the Leontief paradox, reflecting the strong faith economists had in the H-O theory and their reluctance to accept the results of the test. An extensive literature on international trade has been devoted to attempts to explain the Leontief paradox - attempts in fact to find reasons why the results of the test must mean something other than the nullification of the H-O model itself. However, more recently it has increasingly been admitted that the conventional trade theory is in several ways inadequate to explain what is actually happening in the real world (e.g. Helpman and Krugman, 1985; Porter, 1990).3

The explanatory and predictive power of the conventional trade theory has increasingly come under attack from both inside and outside the neoclassical framework of analysis. At least three factors have influenced views on the efficacy of the conventional theory: the changing character of international trade, the changing roles and relative competitive positions of countries in the world economy (e.g. the role of the US economy in world trade and competitiveness especially in relation to Japan) and changing views in the field of economics, especially as regards the analysis of industrial structure and competition (e.g. broadening the tool kit of economic analysis by borrowing from the field of industrial organization).

Patterns of trade have been changing in favour of North-North trade. This phenomenon, which Linder (1961)4 observed, has received more serious attention and extensions have been made in many respects. There has been a relatively steady growth in manufacturing exports, leading to high levels of trade between countries with similar factor endowments. Three quarters of all exports from the developed countries have their destination in other developed countries, which are supposed to be relatively similar in their relative factor endowments (Yoffie, 1993).5 The implication of these changes is that the explanation of the volume of trade on the basis of differences in factor endowments can be no more than partial. The composition of trade is also not adequately explained, since there is substantial two-way trade in goods of similar factor intensity, although it is largely true that countries' net exports seem to reflect a factor content which is consistent with underlying resources. These trends are likely to be reinforced by the on-going tendency to form larger trading blocs among developed countries (Ray, 1991).6

Increasing globalization has been particularly characterized by the growing role of transnational corporations (TNCs), facilitated by the explosive growth in international private financial flows. The number of TNCs has increased and the number of home bases has also increased. One consequence has been the increasing role of TNCs in exporting capital in the form of foreign direct investment (FDI). During the second half of the 1980s, FDI increased by 29 per cent annually, nearly three times the rate of growth of international trade. Further evidence from this area suggests that alliances are prevalent in global oligopolies, serving ubiquitously as vehicles for the transfer of technology between firms, achieving economies of scale, building technical standards and accessing markets, skills and resources (Yoffie, 1993). These developments have led to a new ranking of the factors creating interdependencies whereby FDI in manufacturing and services, rather than trade, is leading inter-nationalization and is influencing location and trade patterns. During the 1980s the pattern of internationalization and globalization was further facilitated by deregulation and the globalization of finance and by the enabling features and pressure from new technologies.

These developments cannot be adequately explained in the conventional theoretical framework.

Conventional trade theory associates trade with resource reallocation, which increases aggregate national income but leaves some factors with reduced real income. However, the realities as demonstrated by the EU and the US-Canada pacts suggest that little reallocation takes place and that trade may permit increased productivity of existing resources.

Finally, increased tensions in the international trade environment and rapid technological progress, which is reflected in new products, new processes and increased productivity, have led to a reassessment of the relevance and applicability of conventional trade theory (Haque, 1991).7 In addition, the experience of the most successful newly industrialized economies (NIEs) does not seem to conform to the traditional model of specialization. Japan, for instance, encouraged industries which are associated with high income elasticity of demand, rapid technological progress and rising labour productivity. They relied on protection, and government policy played a key role in targeting and fostering industry. They realized that the comparative cost doctrine is inherently static: clearly, comparative advantage has to be created and maintained by responding to the changing world environment in which technology is advancing and new productive capacities are being created. Success in international trade has much to do with the ability to anticipate and to be prepared to exploit trade opportunities in a dynamic context.

Critics and extensions of conventional trade theory

The approach adopted by the critics is basically one of analysing the outcomes and trade implications of the behaviour of firms operating in conditions which fall short of the ideals of perfect competition (monopolistic competition, imperfect competition, increasing returns to scale). Much of the literature in this category represents sympathetic attempts to relax the basic assumptions of the H-O model and test its robustness (Kierzkowski, 1987).8 In this context, monopolistic competition and other forms of imperfect competition have come to be central to the literature on trade theory' largely reflecting the persistence of intra-industry trade in reality. At one extreme there are those who equate countries to single firms, analyse their oligopolistic interactions, and attempt to link the instruments and concepts of industrial organization with the general equilibrium model (Caves, 1980; Brander, 1981; Brander and Krugman, 1983).9 Other analyses have tried to formalize equilibrium trade patterns, with endogenous technological change and monopolistic competition as the innovative intermediate inputs (Ethier, 1979; Krugman, 1987; Grossman and Helpman, 1989, 1990a).10

The link between trade theory and industrial organization was first proposed simultaneously by Dixit and Norman (1980), Krugman (1979) and Lancaster (1980).11 It has even been suggested that it is the contribution by Dixit and Stiglitz (1977) and Lancaster (1979)12 that provided the foundations for a theoretical framework for analysing economies of scale and product differentiation in a general equilibrium setting (Greenway, 1991).13 Since then, developments in this area have taken two directions: modelling the role of economies of scale and analysing market structures. In the latter case various forms of imperfect competition are taken as a starting point and the possibilities of strategic behaviour and interactions between firms are treated in the analysis.

Grappling with the presence of economies of scale

Economies of scale have recently come to be seen as more important (e.g. Scherer, 1980).14 Various explanations for this trend have been given in the literature (e.g. Helpman and Krugman, 1985; Alcorta, 1994).15 First, where industries produce multiple products, many products may be produced at less than optimal scale. Second, there may be important economies of multi-product operation which are not captured by plant-based estimates of scale economies. Third, there may be important dynamic scale economies internal to firms.

The existence of economies of scale provides an incentive for international specialization and trade. This incentive may complement the explanatory power of differences in factor proportions, and may even give rise to trade in the absence of such differences (Helpman and Krugman, 1985). Except under special circumstances, a world of increasing returns to scale will not be a world of perfectly competitive markets. However, in the absence of a generally accepted theory of imperfect competition, the admission of economies of scale would make it difficult to generalize on trade. More specifically, the presence of economies of scale implies that the H-O model can guarantee neither gains from trade nor the existence and uniqueness of a free trade equilibrium. The problem is that the persistent presence of economies of scale is inherently inconsistent with competitive equilibrium, as marginal cost pricing would in that case imply losses. Thus the admission of economies of scale calls for an analysis based on a market structure that allows prices above marginal cost. It is in this context that more explicit consideration has been given to alternative market structures in the analysis of international trade.

Three different approaches to the analysis of increasing returns to scale under alternative market structures (other than perfect competition) can be identified in the literature: the Marshallian approach, the Chamberlinian approach and the Cournot approach (Krugman, 1987).

The Marshallian approach

In the Marshallian approach, increasing returns to scale are wholly external to the firm. In this special case the competitive model is still operative at the level of the firm.16 Economies of scale are then introduced in the general equilibrium models in ways which allow for the existence of a competitive equilibrium. However, the laissez faire competitive equilibrium is no longer Pareto optimal, to the extent that the private marginal rate of transformation deviates from the social marginal rate of transformation of any two commodities. It is in response to this rather undesirable outcome (for the advocates of free trade) that considerable literature on trade has grappled with the problem of optimal tariff policies.

It has been shown that working from the allocation of resources to production and trade rather than the other way round clarifies the role of economies of scale in determining the pattern of specialization and trade (Ethier, 1979, 1982).17 If external economies arise from economies of scale in the production of intermediate goods which are cheaply tradable, it is argued, economies of scale should apply at the international rather than national level. Economies of scale arising from increased specialization (rather than from plant size) depend (at the aggregate level) on the size of the world market rather than on geographical concentration of industry (at national level). Such international increasing returns to scale were shown to be free of the recurrent indeterminacy and multiple equilibria characteristic of national increasing returns to scale. This implies the possibility of a theory of intra-industry trade in intermediate goods in accordance with the basic H-O model. Intra-industry trade in manufactures is viewed as complementary to international factor movements as predicted by the H-O trade theory. However, the basic assumptions, that economies of scale arise solely from fixed costs and that intermediate components are symmetric, can be questioned on empirical grounds.18

There is a possibility that external economies may arise from the inability of firms to appropriate knowledge completely. In such cases information may be viewed as an externality. However, innovative industries will ordinarily not be perfectly competitive. An emphasis on the generation of knowledge calls for a dynamic rather than a static model. The question of the applicable unit of analysis arises. If external economies are assumed to result from the incomplete appropriability of knowledge, the applicable unit for the analysis of externalities will depend on the details of how innovations diffuse: are they likely to be confined to a local area, to a nation, or are they international? Recent advances in information and communications technologies are likely to tilt the relevant unit of analysis towards the international arena.

The Chamberlinian approach

In the Chamberlinian approach, the possibility of product differentiation and product variety is introduced into the analysis. The resulting interaction between demand for product variety and economies of scale leads to intra-industry trade (Helpman, 1981; Lancaster, 1980).19 Similar results have been demonstrated for differentiated intermediate goods to satisfy the demands of producers who use these diverse intermediate inputs (Ethier, 1982). Developments to the Chamberlinian approach have taken two directions. The first has assumed that each consumer has a taste for largely different varieties of product (e.g. Dixit and Stiglitz, 1977; Dixit and Norman, 1980). The second has approached product differentiation by positing a primary demand for the attributes of varieties (e.g. Lancaster, 1980). Both approaches introduce the possibility that the response to market expansion may be greater product variety. Consequently, gains from trade may occur in the form of greater choice of product varieties and in the form of lower prices. It has been shown that these basic results and their implications are retained even when demand for variety is allowed for at the level of the firm (Dixit and Norman, 1980).

The Cournot approach

The Cournot approach invokes economies of scale to explain the existence of oligopolies and treats imperfect competition as the main actor. An extension of the H-O model along these lines has introduced increasing returns to scale into the analysis and related it to the role of protection. This extension has opened up the possibility that protection of the domestic market can help the local producer to generate a higher level of output resulting in enhanced competitiveness in terms of lower average costs (Krugman, 1984).20 This approach shows the effect of trade on increasing competition and demonstrates the possibility of interpenetration of markets, because oligopolists perceive a higher elasticity of demand for exports than for domestic sales.

The real world, characterized by economies of scale, the accumulation of knowledge and the dynamics of innovations, is not incompatible with the ideals of free trade. But if the analysis of such dynamic phenomena is formalized in static models there is a risk of major potential pitfalls where static and dynamic analyses are mixed (Helpman and Krugman, 1985). If a static model has to be used as a proxy for a dynamic world, it should be viewed as a representation of the whole time path of that world and not a snapshot at a point in time. In particular, the comparison of equilibria involved in comparative statics exercises should be understood as a comparison between alternative histories and not a change that takes place over time. Using static models to think dynamically is even more risky in imperfectly competitive markets, in which games over time can have many possibilities not seen in one-period games.

Trade theory and various market structures

The analysis of trade issues in the context of a variety of market structures has explored several issues which could not have been addressed adequately in the framework of the perfectly competitive model. The most notable approaches to the analysis of various market structures include: trade policy and the power of domestic firms, the role of price discrimination and dumping, and the role of governments in giving domestic firms a competitive advantage. Another group of analysts raise questions of the implications of the link between market structures and trade theories for new arguments for protectionism. Further extensions along these lines have attempted to capture more complex insights such as the role of intermediate goods (Ethier, 1982), non-traded goods (Helpman and Krugman, 1985), market size effects (Krugman, 1980; Helpman and Krugman, 1985)21 and attempts to demonstrate that economies of scope and/or vertical integration lead to the emergence of multi-activity firms such as multinational corporations (Helpman and Krugman, 1985).

The literature within this strand has basically examined alternative theories of market structures which deviate from perfect competition (Helpman and Krugman, 1985). Such analyses assumed various kinds of imperfectly competitive market structures such as contestable markets22 (Baumol et al., 1982),23 Cournot oligopoly and monopolistic competition. 24 Two main strands can be identified here: those assuming various forms of Chamberlinian monopolistic competition and those analysing various forms of oligopoly.

Various models based on Chamberlinian monopolistic competition have been developed, mainly analysing the interaction between economies of scale, product differentiation and different forms of monopolistic competition (Krugman, 1987). These models have demonstrated welfare gains from increased product variety and from lower prices. Essentially, however, the insights of the H-O model are shown to hold quite well under conditions of product differentiation and such economies of scale.

The question which the analysts of various forms of oligopoly have asked is whether firms with market power act in a cooperative or non-cooperative manner. Since formal cartel and price-fixing arrangements are generally not legal, such cooperation arrangements are to a large extent tacit. Partly for this reason, the theory of cooperative behaviour in oligopolistic industries is not well developed. Most of the contributors on this subject have therefore restricted their analysis of markets to non-cooperative behaviour.

The outcome of non-cooperative behaviour by firms has largely depended on the strategic variables with which the game is played and the conditions of entry into and exit from the industry. Most theoretical work on oligopoly has tended to take as the strategic variable either outputs (the Cournot assumption) or prices (the Betrand assumption). In more general terms, various forms of market imperfection permit firms to earn returns exceeding those that are tenable in purely competitive industries, suggesting that trade policy can be used to influence the share of international profits accruing to domestic firms (and in that way to the economy). For instance, subsidies can be used to shift profits in favour of domestic firms, implying enhancement of their strategic position versus foreign rivals in competition for world markets.

Cournot's equilibrium is tenable when each firm is doing its best to maximize profit by choosing its output level, given the output levels of its rivals. In equilibrium, no aggressive threat by any firm is likely to be believed by its rivals. However, if one firm manages to reduce its costs (or get a subsidy), a new equilibrium would be set at a higher level of output and market share for that firm. Reference has also been made to the strategic use of R&D expenditure (or subsidies) to lower costs and shift the reaction curve outward. These results open up the possibility that government action can alter the outcome of the strategic game played by rival firms. It is in this context that possibilities for strategic trade policy have been proposed. The policy of protection to promote exports is one outcome of the presence of economies of scale. Movement down the firm's learning curve, leading to higher output (facilitated by protection) and falling marginal costs, is expected to enhance the firm's competitive position in world markets (Krugman, 1984).

Trade theory and accumulation effects: introducing new growth theories

Accumulation effects in the medium term can be derived from the neoclassical models of growth. The neoclassical model without exogenous shocks (e.g. productivity increases or population changes) presents a steady state capital-labour ratio determined by equating the real marginal product of capital and the discount rate. Any policy which raises the marginal product of capital will also raise the steady state capital-labour ratio, inducing output to grow faster in the medium term as capital accumulation takes place at a higher level (Solow, 1956; Baldwin, 1993).25 In the neoclassical model, medium-term growth results from the connection between trade and the marginal productivity of capital. Recent developments have augmented the Solow model by including human capital as a separate factor along with physical capital and unskilled labour (e.g. Mankiw et al., 1992).26 In this case, any policies (e.g. streamlining licensing procedures or easing foreign exchange restrictions) which would raise the marginal product of physical capital or human capital accruing to investors (e.g. by reducing the difficulty and expense of making investments) will also raise capital accumulation and growth in the medium term.

Although in the neoclassical growth models, continual accumulation takes the form of productivity-boosting knowledge, the rate of productivity growth is taken as given (determined exogenously). One contribution of the new growth theory is to endogenize the rate of productivity growth itself. A distinguishing feature of endogenous growth models (endogenizing investment) is that continuous accumulation requires that the return to accumulation does not fall as capital stock rises. Endogenous growth models have differed as to the type of factor which is thought to play a dominant role in the accumulation process: physical capital, human capital or knowledge capital.

The Marshallian concept, of increasing returns which are external to a firm but internal to an industry, was most widely used in static models, presumably because of the technical difficulties presented by dynamic models (Romer, 1986).27 Following Smith and Marshall, most authors explained the existence of increasing returns on the basis of increasing specialization and the division of labour, but these cannot rigorously be treated as technological externalities.

Evidence from observations made over almost three centuries, from 1700 to 1979, shows that productivity growth rates have been increasing for the Netherlands, UK and US (Romer, 1986). Similar evidence has been found for individual countries over shorter periods. Other evidence coming from growth accounting exercises and the estimation of aggregate production functions shows that the growth of inputs alone does not fully explain the rate of growth of outputs. Interest in dynamic models of growth driven by increasing returns was rekindled by Arrow's work on learning by doing (1962),28 in which increasing returns are supposed to arise from the new knowledge generated in the course of investment and production.

Some studies, closely related to the analysis of long-term growth, have focused on patterns of trade and their linkages with the patterns of innovation across countries, across sectors and over time. These studies have found some robust evidence regarding the impact of innovation on international competitiveness and on growth. This trend also relates to those neo-technology models which have attempted to endogenize technical progress within equilibrium open-economy development models (Krugman, 1979; Spencer, 1981) 29 Krugman's modelling of the technology gap between the North and the South and Spencer's analysis of the learning curve have contributed to bringing out some dynamic considerations in the discussions of international trade theory. Such approaches can be reduced to analyses of either learning curves or the generation of new intermediate inputs under monopolistic competition.

New growth theories which take technical progress as the driving force have extended Solow's insights by endogenizing technical progress. In the earlier models in this category, the rate of return to investment was prevented from falling due to technological spill-overs in production (Romer, 1986). The evidence on productivity growth over time coupled with the inadequacies of previous growth models motivated Romer (1986) to present a competitive equilibrium model of long-run growth with endogenous technological change, and with knowledge as an input which has increasing marginal productivity. In his model, long-run growth is primarily driven by the accumulation of knowledge by forward-looking, profit-maximizing agents. Knowledge is accumulated by devoting resources to research. New knowledge is assumed to be a product of research technology and this research exhibits diminishing returns. Romer combined three elements (externalities, increasing returns in the production of output and decreasing returns in the production of new knowledge) to constitute his competitive equilibrium model of growth. His model deviates from the Ramsey-Cass-Koopmans model and the Arrow model by assuming that knowledge is a capital good with an increasing marginal product.

A major problem with analyses undertaken in the equilibrium framework is their assumption of the existence of price- and/or quantity-based adjustment mechanisms which ensure clearing of all markets and the attainment of equilibrium in that sense. The assumptions based on the presence of maximizing agents become an inadequate representation of the general behaviour of agents when fundamental features of technological change (uncertainty and various irreversibilities) are invoked (Nelson and Winter, 1982; Dosi et al., 1990; Cooper, 1991).30 As North (1994) has suggested, the problem here reflects on the neoclassical body of theory. A theory of economic dynamics comparable to general equilibrium theory would be ideal for understanding economic change, but we do not have such a theory. The neoclassical theory is inappropriate for analysing and prescribing policy measures that will induce development. It is concerned with how markets operate rather than how they develop. Even when it attempts to take account of technological development and human capital investment, it still ignores the incentive structure, embodied in institutions, that influences societal investment in those factors.

Attempts to correct this deficiency have been based on more evolutionary micro foundations, whereby firms with different technologies and organizational traits interact under conditions of persistent disequilibrium. The essential aspects of Schumpeterian competition are highlighted, especially the diversity of firm characteristics and experience and the cumulative interaction of that diversity. Contributions in this category have focused more explicitly on the micro foundations of innovation by addressing firm-level decisions to invest in product or process innovations. The ceaseless search for better product quality and for cost-lowering process innovations continuously leads to productivity improvements. What Schumpeter referred to as 'creative destruction' is a process whereby the impulse coming from new products, new processes and new markets revolutionizes the economic structure from within, destroying the old one and creating a new one.

Contributors in this strand are more heretical and heterogeneous in nature and scope and their models are not always thoroughly formalized. Following Dosi et al. (1990), they may be classified into four broad groups: post-Keynesians (e.g. Posner, Vernon, Kaldor), structuralists in development economics (e.g. the dependency school), institutional economists such as Douglass North, and economic historians (e.g. Kuznets, Gerschenkron, Balough). Much of the management literature focusing on firm-level capabilities may be included in this approach (e.g. Porter, 1990). Studies which follow this approach agree on several points: that international differences in technology levels and innovative capabilities are crucial in explaining the trade flows and incomes of countries, that the general equilibrium mechanisms of international and inter-sectoral adjustment are relatively weak, that technology is not a free good and that allocation patterns induced by international trade have dynamic implications in the long term. The questions have implications regarding the causes of industrial development and growth, the linkages between these processes and their micro foundations, and the understanding of the on-going transformations and restructuring of world industry.

The evolutionary theory of economic change attempts to provide a formal theory of economic activity, driven by industrial innovation (consistent with the Schumpeterian view). It seeks to understand technical change, its sources and its impacts at micro and macro levels (Nelson and Winter, 1982). Evolutionary theory consists of heterogeneous modelling efforts which emphasize various aspects of economic change, such as the responses to market conditions of firms and industries, economic growth and competition through innovation. Many of its underlying ideas can be traced back to classical political economy (e.g. Smith, Marx, Schumpeter). In addition, contributors in this field have adopted tools of analysis from other fields. For instance, from the managerialists they have taken over a more realistic description of the motives that directly determine business decisions. From the behaviouralists they have taken an understanding of the limits of human rationality which make it unlikely that firms can maximize over the whole set of conceivable alternatives. The linkage of a firm's growth and profitability to its organizational structure, capabilities and behaviour is adopted from industrial organization (e.g. Coase, Williamson). The view that the histories of firms matter, because their previous experience influences their future capabilities, and that firms adapt to changing conditions is largely adopted from evolutionary theorists (e.g. Darwin, Lamarcker, Alchian) and economic historians berg. Rosenberg, David).

The version of evolutionary theory presented by Nelson and Winter (1982) questions two pillars of neoclassical theory. First, the maximization model of firm behaviour is questioned with respect to the way it specifies the objective function and the set of things that firms are supposed to know how to do. In addition, evolutionary theory objects to the way firms' actions are viewed as resulting from choices which maximize the degree to which the objective is achieved, given the set of known alternatives and constraints. Second, objections are raised to the concept of equilibrium which is used to generate conclusions about economic behaviour within the logic of the model.31 The general term that Nelson and Winter use for all the regular and predictable behavioural patterns of firms is 'routine'. Routine consists of well-defined technical routines for producing things, procedures (e.g. for hiring and firing, ordering new stocks), policies (e.g. for investment, R&D, advertising) and business strategies (e.g. on diversification, overseas investment). These routines are categorized into the operating characteristics governing short-run behaviour, those determining investment behaviour (period-to-period changes in the firm's capital stock) and those which operate to modify over time certain aspects of the operating characteristics (e.g. market analysis, operations research, R&D). There are also aspects of the behavioural patterns of firms which are essentially irregular and unpredictable. These are regarded as stochastic elements in the determination of decisions and decision outcomes. Evolutionary theory attempts to model the firm as having certain capabilities and decision rules and choice sets (through which the main objective is pursued). These choice sets are not well defined and exogenously given. The core concern of evolutionary theory is with the dynamic process by which firm behaviour patterns and market outcomes are jointly determined over time.

The emerging theory of dynamic firm capabilities is presented by focusing on three related features of a firm (Nelson, 1991):32 its strategy (a set of broad commitments made by a firm that define and rationalize its objectives and how it intends to pursue them), its structure (how a firm is organized and governed and how decisions are actually made and carried out) and its core capabilities (core organizational capabilities, particularly those which define how lower-order organizational skills are coordinated, the higher-order decision procedures for choosing what is to be done at lower levels, and R&D capabilities, particularly regarding innovation and how to take on-going economic advantage of innovation). Since the real world is too complicated for the firm to understand in the neoclassical way, firms will choose somewhat different strategies which will lead to their having different structures and different core capabilities.

When a new and potentially superior technology comes into existence in a relatively mature industry, the evidence suggests that what happens depends on whether the new technology is able to conform to the core capabilities of specific firms (competence enhancing) or requires very different kinds of capabilities (competence destroying) (Nelson, 1991). A change in management, and presumably a major change in strategy, is often necessary if an old firm is to survive in the new environment. Organizational change must be seen as the handmaid of technological advance and not as a separate force behind economic progress (Tidd, 1991; Nelson, 1991).33 In the long run, what has mattered most has been the organizational changes needed to enhance dynamic innovative capabilities. However, there is little in the way of tested and proven theory for predicting the best way of organizing a particular activity, and there is considerable disagreement about what features of a firm's organization are responsible for certain successes and/or failures. These can only be unveiled in concrete situations through empirical studies which seek to understand firm-level strategies, structures and capabilities and the environment in which they are operating.

Attempts to model the way allocation patterns of international trade influence the long-term dynamics of an economy have been made, incorporating the main ideas from the two-gap models and hypothesizing that world growth is determined by asymmetrical patterns of change in technological and demand structures (e.g. Kaldor, 1970, 1975; Pasinetti, 1981; Dosi et al., 1990).34 The locus of these approaches has largely been on the relationship between trade, levels of activity and growth.

It has been pointed out that the neoclassical premise of efficient markets is undermined by the existence of transaction costs, which create a need for institutions to define and enforce contracts. If trade is to prosper, certain informational and institutional requirements become necessary. Market institutions are expected to induce the actors to acquire information that will lead to the correction of their subjectively derived models. But if institutions shape the incentive structure of society, the learning process which occurs in the interaction between institutions and organizations shapes the institutional evolution of an economy (North, 1994). Institutions may be the rules of the game but organizations and entrepreneurs are the players. While the bulk of the choices made by players are routine, some involve altering existing contracts and some may even lead to alterations in the rules of the game. Thus the most fundamental long-run source of change is learning by the players.

Some implications of new trade theories for Africa

The main contributions of new trade theories are basically in the recognition that economies of scale (and the associated market structures) and differences in technological capabilities are important. As regards technological capabilities, some strands of these theories have contributed to setting (or resetting?) the stage towards endogenizing technological development and innovations in the analysis of trade issues.

One important message which comes out of the new trade theories is that technology differences are a fundamental force in shaping comparative advantages. This implies that, in the design of trade policy and the formulation of industrialization policies, it will be necessary to give explicit consideration to the changing role and conceptualization of technological change.

In the process of industrialization in the less industrialized economies, elevating the importance given to technological change could contribute to improving the efficiency of the import substitution industries and improving the international competitiveness of the export industries. In the field of trade, in particular, lessons from the new trade theories seem to be relevant in highlighting the role of technological development and innovation and the importance of being forward-looking in assessing trade potentials, in contrast to the implications of the static comparative advantages model. In addition, the new theories demonstrate the centrality of technology in trade and, in particular, the need to gain detailed knowledge of the structures and capabilities of exporting industries and firms as a basis for formulating export promotion policies and policies intended to promote industries with dynamic comparative advantages.

Although the focus of the new trade theories is primarily on North-North trade, some elements of the role of economies of scale, product diversity and explanations for intra-industry trade may be applicable to the place of South-South trade in the world economy. As regards intra-industry trade, the available evidence suggests that the average levels of such trade have been low in developing countries and even lower if we consider only the non-NICs (newly industrialized countries) (Greenway, 1991; Havrylyshyn and Civan, 1985).35 One problem with such evidence is that it is derived from static analysis and does not take into account the directions in which such intra-South trade could evolve. Such a dynamic conceptualization would require that consideration of South-South trade should address innovations such as the development of more appropriate products and processes for the South as a basis for South-South trade (Stewart, 1984, 1991)36 and should pose the question of the conditions under which South-South trade is feasible and viable, drawing lessons from the emerging patterns of trade as unveiled by the new trade theories. That policy has important implications for the evolution of intra-industry trade can be inferred from the evidence that intra-industry trade tends to be higher among countries (whether developed or developing) with some kind of integration arrangement (Balassa and Bauwens, 1988).37 This could be due to the lowering of trade barriers and/or the ability to exploit economies of scale, factors which are often associated with integration and cooperation arrangements.

The actual trade relations of SSA can be classified as a hub and spoke' arrangement, with Europe and North America as the hub and African countries as the spokes. The key feature of this arrangement is that trade between the hub and any spoke is easier than trade among the spokes (Baldwin, 1993). The hub-and-spoke trade arrangements exert a marginalizing effect on the African economies. Although the cost of production in SSA countries may be lower due to lower labour costs, higher trade costs (due to small markets as compared to those in the hub countries) are likely to more than offset the lower production costs. Trade liberalization between the hub and the spokes favours location of investments in the hub, especially if intra-SSA trade is not also liberalized. Hub-and-spoke trade liberalization artificially deters investment in the spoke countries. Reduction of intra-SSA trade costs would increase the chances that the lower SSA production costs will outweigh these trade costs, and so would facilitate investments in SSA.

Within the broader context of forging inter-firm linkages and cooperation arrangements, special attention will need to be paid to the possibilities of promoting investments, not only by TNCs from developed countries but also among countries in the region and with other developing countries. There is evidence that TNCs from developing countries can also have capabilities to share with other developing countries. As this study has shown, many exporting firms in Africa have undertaken various technological modifications and adaptations in response to country-specific conditions. Other studies have shown that adaptations have been made by developing country firms with respect to the characteristics of raw materials such as type, quality and input mix, scaling down, product quality and product mix, simplicity and capacity and factor intensity (Lecraw, 1981).38 As is noted in Chapter 4, these firms have tended to produce simpler, easily marketed products.

South-South inter-firm linkages and cooperation arrangements should be viewed as complementary to the kinds of benefits which can be obtained from inter-firm networks and cooperation arrangements with TNCs from the North and not necessarily as substitutes. The Abuja declaration on the establishment of the African Economic Community is an encouraging step. Its implementation, however, should involve taking steps towards establishing the institutional framework to spearhead the development of these kinds of inter-firm linkages and cooperation arrangements, not only within Africa but between Africa and other regions.

Differences in income levels, historical backgrounds and other environmental considerations suggest that there are bound to be inter-regional, inter-country and intra-country differences in demand structures. This diversity of demand structures means that African firms could find and exploit windows of opportunities in export markets inside and outside the region.

Intra-regional trade in Africa has remained low, at perhaps 5 per cent of total African trade, and has not shown any clear signs of increasing. However, there are at least two sources of optimism regarding the prospects of growth in regional cooperation in trade and investments. First, there are indications that a substantial volume of intra-regional trade is unrecorded. Second, the degree of complementarity is often understated. That the potential for intra-Africa trade is higher than trade figures suggest is indicated by the results of demand and supply studies. For instance, the project 'Promotion of Intra-regional Trade Through Supply and Demand Surveys' was part of a more comprehensive programme aimed at promoting trade between the member states of the Preferential Trade Areas for Eastern and Southern African States (PTA) (ITC, 1985).39 The data shows that many of the items which are imported into the PTA are also exported from the PTA, indicating that there are potentials for intra-regional trade in a wide range of sectors.40 In spite of having the necessary raw materials, the region continues to be a net importer of various light manufactures.

Even within agriculture, which is often cited as an example of competitive structures, the potentials seem to be greater than official figures acknowledge. For instance, differences in climatic and agronomic conditions in the Eastern and Southern Africa region have been shown to be a source of complementarily of production (Koester and Thomas, 1992).41 Similar results have been obtained in the case of West Africa, where it has been found that the differences between countries in their access to international trade, and their historical conditions, technological accumulation and consumer preferences, suggest that there is a good potential for specialization (Badiane, 1992).42 The difference between potential and actual intra-Africa and South-South trade is due to the many obstacles to such trade: weak industrial structures, the lack of intra-industry linkages, inadequate infrastructure, tariff and non-tariff barriers, perceived unequal distribution of benefits and the instability of the real exchange rates between African countries.

The role of dynamic learning processes and the competitive pressures in export markets are relevant to the extent that such dynamic economies are industry-specific. Contrary to the neoclassical premise that all activities are equally important, new trade theories highlight the existence of strategic activities which could be developed through policy. One case is that of protection as a form of export promotion, as argued by Krugman (1984). The new trade theories' exposition of the possibility of 'import protection as export promotion' introduces a way of using trade policy strategically. The case for selectively supporting specific high-potential industries through government policy has been demonstrated to varying degrees in the experiences of the developed countries and the NICs.43

Some conceptual issues

Chapter 1 indicated that the main aim of this book is to explore and present some insights into the process of creating and maintaining the capabilities which are needed for attaining and maintaining competitiveness in export markets. For the purposes of this study the concepts of 'capability' and competitiveness in export markets' will need to be clarified.

Competitiveness in export markets implies high levels of productivity. In order to understand the concept of international competitiveness it is useful to revisit the concepts of productivity and efficiency, concepts which are often taken for granted.

The productivity of a production unit is the ratio of its output to its input. Productivity differences are accounted for by differences in production technology, differences in the efficiency of the production process and differences in the environment in which production occurs. Three problems of measurement arise here: the identification of inputs and outputs to be included in the analysis, what weights (prices) should be used in the aggregation process and (if one is comparing actual productivity with what is theoretically achievable) the determination of the potential of the production unit (Lovell, 1993).1

The efficiency of a production unit is the ratio between the observed and the potential maximum output obtainable from a given input, or the ratio of minimum potential input to the observed input required to produce a given output, Koopmans (1951)2 introduced a formal definition of technical efficiency, i.e. a producer is technically efficient if an increase in any output requires a reduction of at least one other output or an increase in at least one input, and if a reduction in any input requires an increase in at least one other input or a reduction in at least one output. Debreu (1951) and Farell (1957)3 introduced a measure of technical efficiency, equal to one minus the maximum equi-proportionate reduction in all inputs which would allow the continued production of given outputs. Debreu/Farell technical efficiency has been shown to be necessary but not sufficient for Koopmans' technical efficiency (Lovell, 1993). Variations in technical efficiency have been attributed to variations in the factors under the control of the producers (managerial input being the most common culprit), while variations in allocative efficiency have been attributed to divergence between expected and actual prices, the persistent over- or under-valuation of prices, discrimination, nepotism and satisfying behaviour.

Two important elements are often missing in discussions of efficiency in the economics literature. First, very little effort has been devoted to integrating the literature on the theory of production under uncertainty into the efficiency measurement literature. Second, the wide literature on the internal organization of the firm has not made any impression on the efficiency measurement literature, despite its obvious relevance for the measurement of producer performance (Lovell, 1993). In their efforts to develop hypotheses on efficiency variation, economists have made little use of insights from the literature on the internal organization of the firm. This book aims to make a contribution to filling this gap by examining various capabilities which are created and built up inside the firm.

International competitiveness has much to do with the ability to export, and in that process trade surpluses can be generated. However, international competitiveness is much more than simply the ability to export or generate trade surpluses, since these can be achieved temporarily through exchange rate action or the reduction of domestic expenditures. For instance, the greater utilization of capacity permitted by the foreign exchange which has become available with the implementation of SAPs in some countries in Africa may be important in the short run but may not necessarily be a source of sustained growth in TFP. In many African countries SAPs have not resulted in significantly greater capacities to produce exports, let alone the unchanged structure of the export sector. What is not yet clear is the extent to which even this availability of foreign exchange is sustainable. Sustainability would have to rest on greater capacity to earn foreign exchange, rather than more generous donor response in support of SAPs (Pack, 1993).4

As the experience of South Korea has shown, although export performance has been the main practical measure of progress towards international competitiveness, it has not been sufficient in itself. There are also various dynamic considerations such as the need to accept reformulations in the light of information gained (market signals, perceptions about industrial operations and potentials) during implementation (Pack and Westphal, 1986).

International competitiveness cannot adequately be explained in terms of low labour costs, especially considering the recent experience of countries such as Germany and Switzerland which are maintaining international competitiveness in spite of their high labour costs. Explanations based on natural resource endowments are put in doubt by the success of resource-poor countries such as South Korea and Japan. Explanations based on the level of productivity alone fail to deal with the problems the US economy is facing in some export markets, in spite of being the world leader in productivity levels.

The widely employed approach to the measurement of competitiveness based on prices, costs and exchange rates is losing ground, following a study by Kaldor (1978)5 and other studies which show that a drop in relative unit wage costs and in export prices had occurred simultaneously with losses in world export market shares for manufacturing. For the US, this finding was confirmed by the Brookings Institution. Fagerberg (1988)6 found that the main factors of international competitiveness were technological advancement and the ability to compete on delivery. In spite of these findings, much of government policy is still based on the cost price approach, neglecting these improved understandings of the role of technology. investment and organizational change.

International competitiveness is a multi-dimensional concept embracing the ability to export, the efficient use of resources and increasing productivity which ensures rising living standards for a nation. The international competitiveness of a nation is indicated by its ability to produce goods and services that meet the requirements of international markets under conditions of fair trade while maintaining and raising the real incomes of its citizens. In this context, it has been suggested that competitiveness may be indicated by at least four indicators: labour productivity, real wage growth, real returns on capital, and position in world trade (OECD, 1992a).7

International competitiveness is influenced by three factors: the macroeconomic environment. the ability to use and develop technology to reduce costs, improve product quality and generate new products and the ability to market products successfully. The debate on competitiveness implies a role and responsibility for government, not only in ensuring a stable macroeconomic environment but also in influencing technological development and marketing.

International competitiveness can be attained by exerting efforts at various levels: actions taken at firm level, actions and policies adopted at industry level and macroeconomic policies adopted at national level. In his review of recent writings by American authors on the competitiveness issue, Nelson (1992)8 has recognized these three levels and classified the literature in three clusters: authors who take firms as competitors and focus on factors that are internal to firms, authors who focus on the macroeconomic policy variables, and the cluster of authors who focus on active industrial policy by governments. Nelson has rightly viewed these three clusters of literature on competitiveness as complementary. While detailed comparative studies of firms have demonstrated that many American firms can do a lot on their own to become more competitive, they have found strong similarities among firms in the same country and inter-country differences regarding the structure, behaviour and performance of firms. This points to the importance of the environment (industrial policy and macroeconomic policy) in which the firms are operating. The authors who focus on active industrial policy have demonstrated that non-convexities and externalities are present in many industries, especially where technical advance is important. The field of industrial organization has traditionally viewed an industry (its unit of analysis) in terms of the firms that constitute it and its government regulators. However, recent research results make it possible to view industries as systems involving a mix of institutions (e.g. private firms, industry associations and professional societies, public R&D institutions and training institutions) which are in many ways complementary.

Although the approach adopted in this book emphasizes factors that are internal to firms, factors that are external to the firms (at industry or national level) are addressed as important complements.

It may be difficult to obtain adequate data to measure costs or efficiency. Subject to data availability, various proxies could be used to give reasonable indications of the relative and absolute levels of efficiency. The following indicators could be used selectively, according to the availability of data: export performance over time, productivity gains over time (labour productivity, total factor productivity), domestic resource costs and the effective rate of protection. The inadequacy of some of these static measures is well known. For instance, it has been pointed out that the use of domestic resource cost measures (DRCs) to establish the extent of international competitiveness is inadequate. Even if an investment or intervention achieves a low DRC, this does not necessarily mean that the effort will be socially profitable. The present discounted value of producers' surplus after international competitiveness is achieved will need to be compared with the discounted cost of protection (representing foregone consumers' surpluses) and any excess of production cost (e.g. R&D) over the international prices of the protected commodity (Pack, 1993). However, this caution is perhaps superfluous, since such comparisons are not known to have been used to guide major investment decisions in the technologically advanced countries. The difficulty of any attempt to use this criterion would be aggravated by the need to grapple with unquantifiables such as learning effects (including intra- and inter-firm) and many R&D spill-overs. A more serious weakness of DRCs is that high DRCs do not distinguish between the various sources of inefficiency, i.e. between allocative inefficiency (along the isoquant) and technical inefficiency (outside the best-practice isoquant or inside the production frontier). In addition, the DRCs do not reveal the dispersion of TFPs within an industry. Such dispersions indicate the potentials for TFP improvement through the inter-firm diffusion of technology.

Efforts have also been made to identify patterns in the manufacturing and management processes which seem to account for differential performance and competitive gaps and to deduce how the outcome has been influenced by the histories of the firms and how they have been evolving over time. A regionally and/or internationally competitive firm is not only one which has eliminated the competitive gap but also one which has gained some mastery of the key components of its production and exporting activity. In this sense, it will be necessary to try to understand the dynamic features which reflect the presence or absence of continuous struggle to attain excellence. To the extent that this study is investigating an essentially dynamic phenomenon, static criteria such as sales, quality, return on investment or prices of stocks can at best tell only part of the story, since they will not adequately capture the dynamics of firm development of capabilities. If these measures are observed over time they may capture some of the dynamics but they will need to be supplemented by more qualitative measures. Some of these measures are: whether the firm has innovative management, whether it exhibits unique ways of doing business, its degree of flexibility in dealing with changing environments, and whether the management of the firm has a vision.

The dynamics of firm capabilities

The firm as a unit of analysis

While recognizing the influence of macroeconomic policy and industrial policy, the premise adopted in this book is that it is primarily firms which compete and continue to develop the capability to remain competitive. Such firms achieve their competitiveness in a broader macroeconomic and sectoral policy context. Therefore the objective, to understand how firms have been developing their capabilities to survive and compete in export markets, is pursued within a broader macro and sectoral policy context.

In a study of this kind it is important to be cautious and to avoid taking it for granted that success of a few firms necessarily leads to success for an economy. In this context, this study tries to understand the conditions which influenced the process by which firms accumulated their capabilities to compete, with a view to assessing their sustainability and consistency with other aspects of development such as the development of indigenous skills, infrastructure and technological change in other firms in the same sector or in other sectors. It is important to establish the basis for the achievement that various firms have made over time. The study attempts to make a distinction between firms on the 'high road' to efficiency (based on improved technology, organization and marketing while maintaining or increasing real wages) and those on the 'low road' to efficiency (based on reducing real wages, tax revenues and the reward to other local factors). The guiding hypothesis here is that the sustainability of rising factor rewards will be ensured where the capacity to generate and appropriate technology rents is developed on a continuous basis.

The focus of the study is at firm level. It examines the internal and external influences on the process of acquiring and building technological and other capabilities of firms as seen from the standpoint of firms.

Studying firm-level capabilities: three components

In studying the dynamics of firm-level capabilities, attention has been given to three main components:

1 Firm histories are examined with a view to getting insights into the process through which firms have been acquiring (or losing) their competitiveness over time.

2 The present strategies and core capabilities of the firms are addressed, and also how they are being created and maintained (or lost) over time.

3 Developments in technology and world market conditions which are deemed relevant to the selected industries are addressed.

Firm histories

Firm histories are expected to shed light on the path the firms have followed over time and the historical conditions which have influenced that path towards (or away from) regional and/or international competitiveness. An attempt was made to form a picture of the evolution over time of factors such as the firm's ownership structure, technological processes, quality of production, export efforts, strategies and human resource development efforts, along with more easily quantified indicators such as size (in terms of workforce size, sales, total assets or investment), production, inputs and output mix and unit cost. The linkages between the firm and other firms and institutions were also considered. This could include, for instance, subcontracting relationships, demand conditions and types of markets, the industry structure, links with suppliers of equipment and inputs and with the providers of technical services and other services, infrastructure and government policies and regulations (macro, sectoral or specific).

Present strategies, core capabilities and levels of competitiveness

The current state of firm strategies and core capabilities were investigated and efforts have been made to identify the forces and influences which are impinging on the following: the formulation and reformulation of the strategies, the process of creating and sustaining their core capabilities, relationships with customers and competitors, linkages to supportive industries, physical configuration of the manufacturing and management process, core procedures and systems or routines and coordination of product and process design, adaptations and improvements, and related innovations.

Firm strategies consist of motivations, scope, time horizon and target segments. The following strategies have been included: investment strategies, production strategies, marketing strategies, innovation strategies (imitation, adaptations, technology search locally and in other countries, product development, internal and external linkages) and human resource development strategies. First, an attempt has been made to identify each firm's intended position. Second, the means of pursuing or implementing those intentions has been identified. Such means may include decisions to specialize or diversify, nature of product offerings, types of competitive strengths and how these are employed to compete with others in the industry and the role of technological change. In order to understand better the process of implementation, management control processes are examined. The following aspects have been addressed:

· whether standards are set.
· how performance is measured.
· how actual performance compares to the standards set.. how decisions on corrective action and feedback are made.

Core capabilities have been categorized in terms of investment, production, organization, searching for new courses of action, marketing and linkages. Each of these will be discussed later. However, in recent years it has increasingly been realized that technological capabilities, in development and innovation, are a major determinant of international competitiveness.

Enos (1991)9 has defined technological capability as something that enables a developing country to exploit existing techniques fully and, ideally, to improve upon those that are not perfectly suited to the country involved. He identified three components of technological capability: the individual constituents, their organization and their purpose. Technological capabilities in industry are defined as the information and skills (technical, managerial and institutional) that allow productive enterprises to utilize equipment and technology efficiently (Lall et al., 1993). Technological development is the process of building up such capabilities (Lall et al., 1993). Factors influencing industrial technology development are divided into three groups: the incentive framework (the demand side, largely originating from the macroeconomic environment and conditions in the major markets, such as their growth prospects), the supply factors (skills, finance, information), and institutions (the organizations set up to support the functioning of the supply factors). The process of technological development is evolutionary, involving conscious and purposeful efforts in buying some inputs from the market and providing others in-house, depending on factors such as technology, market conditions and firm strategies. In developing technological capabilities, firms also operate in a network of formal and informal relationships with suppliers, customers, competitors, consultants and various S&T (science and technology) institutions.

Technological capability may be an input into other economic activities (links formed on the input side representing the creation of technological capabilities) or an output representing the contribution it can make to the rest of the economy (Enos, 1991). Technological capability augments the firm's competitiveness in export markets in two ways: by enabling the firm to utilize the current stock of its resources more effectively or efficiently and by permitting a firm to advance more rapidly its mastery of technology. This book is concerned with the build-up of technological capabilities, possibly along with other types of capabilities (e.g. marketing, organizational), as a major contribution to improving the international competitiveness of exporting firms.

As was said above, eve capabilities have been categorized into those relating to investment, production, organization, marketing and searching for new courses of action, marketing and linkages. The state of human resource development is a factor in all of these activities, in terms of types and levels of skills, recruitment policies and approaches to upgrading skills (extent and organization of in-house training, training outside the firm in local institutions and abroad), labour relations, remuneration policies and practice (absolute and relative to competitors or other sectors) and quality of working conditions.

Investment capability

The capacity to make investments includes the capacity to undertake project activities such as: project identification, feasibility studies (marketing, technical, management and financial studies), preparation, design, setting up and commissioning and the financial management and mobilization of resources (short-term and long-term finance, managerial and technical skills, technology, foreign exchange).

Production capabilities

The capacity to carry out and manage production activities consists of plant and equipment, plus human resource capabilities in production management (planning, scheduling and work procedures. execution of orders), production engineering (raw material control and material use standards, standard production times, quality control) and repair and maintenance. Access to various critical resources was examined (short-term and long-term finance, managerial and technical skills, technology, foreign exchange).

Organizational capabilities

Organization capabilities consist of capabilities to relate and coordinate all necessary functions with a view to utilizing effectively various existing capacities in the firm or outside the firm. The following capabilities have been examined: general management capabilities (sharing responsibilities for each key area, long-term direction and cohesion, definition and clarity of policies and procedures and whether they are adhered to and reviewed for effectiveness, measurement and analysis of performance, information flow and its utilization in decision-making, awareness of external factors and other linkages impinging on the firm, overall assessment of the quality of management), management of technology, division of labour, mobilization of resources and capabilities to cope with new situations.

At the level of administration and marketing, the degree and pattern of introduction of new technologies over time was studied: office work (word processing, filing, mailing), accounts (payroll' accounting), information (acquisition, storage, manipulation and distribution) and the management of the marketing function (e.g. records of clients, analysis of market trends).

Innovation capabilities

Innovation capabilities consist of search capabilities and the capacity to integrate the results of such searches. Search capabilities are those required to find new ways of carrying out the firm's investment, production' marketing and organizational activities. The search for new routines is likely to be reflected in efforts to create new patterns of human resource development (through training in-house or outside the firm), in R&D (formal and informal), in searches for technological information from local and foreign sources and in technological adaptations and market research (study of market trends and potential markets and of the possibilities of introducing new products).

In response to changing market conditions and technological developments in their industry, firms are expected to introduce changes to their products (product mix, specifications and quality) and their production process (intensity of use of the various factors of production and technology requirements, e.g. flexibility, standardization, automation, computerization). This may also involve the introduction of new technologies and other new ways of carrying out production, marketing and administration. For instance, some studies of African industry have indicated that there have been improvements in product quality and changes in product design in response to changes in market demand and tastes (e.g. Ndlela et al., 1990; Amdi (n.d.); both as cited in Herbert-Copley, 1992).10 The extent to which this has happened has been of interest for this study.

The degree and pattern of the introduction of new technologies in the various manufacturing activities, such as design, control, storage, inventory, measurement and testing, have been examined.

Marketing capabilities

Marketing capabilities have been examined in the context of domestic and export markets with emphasis on the latter. The following aspects have been covered: the ability to maintain market shares as changes in technology and demand take place, the ability to collect and analyse relevant market information, product policies (introducing new products and abandoning unprofitable ones), price policies, distribution policies, product promotion policies, efficiency of the sales force and related incentives.

Linkage capabilities

Linkage capabilities consist of linkages which are supportive to, or influence the development and utilization of, a firm's internal capabilities. The following linkages have been considered: purchasing of complementary capabilities from consulting firms; licensing, management or marketing agreements; joint ventures; linkages with other institutions providing technical services; interactions with factor market conditions and with prevailing demand conditions (aggregate demand, export demand, the structure of demand and the link with customers); interaction with local and foreign competitors; government policy (macro and sectoral policies) and regulations (whether supportive or obstructive); linkages with various input suppliers (e.g. subcontracting relations, links with local and foreign technology suppliers); interactions with domestic and international finance institutions; and any other incentive structures which influence the firm's search for new opportunities.

Developments in technology and world market conditions

Studying this component of firm-level capabilities has entailed identification of the state of the art, recent trends and prospects relating to technological and world market conditions which impinge on the industries covered in the study.

Guiding questions of the study

The guiding questions of the study are as follows:

1 What factors and processes have influenced the path various firms have followed in attaining or losing regional and/or international competitiveness?

2 How have exporting firms been coping (or failing to cope) with changing technological and market conditions?

3 What lessons and policy implications can be drawn out from insights gained about the process by which exporting firms have been maintaining (or losing) their position in export markets?

The case study approach

The case study approach can be applied to at least three different situations in evaluation research: to explain the causal links in real-life interventions that are too complex for other research strategies, to describe the real-life context in which an intervention has occurred or for illustrative purposes, and to explore those situations where a single set of outcomes is not clear (Yin, 1984).11 This approach is particularly important when starting a new line of research and developing categories. In the process, new perspectives can be generated (Reid, 1987).12 Case studies are the preferred approach when 'how' and 'why' questions are being posed, when the investigator has very little control over events and when the focus is on a contemporary phenomenon within its real-life context (Yin, 1984).

Studies of industrialization or trade in Africa have not paid much attention to the firm-level activities and processes which influence the path the various firms have followed and how they have been coping in changing world technological and market conditions. Thus this book seeks to examine an area in which standardized propositions and factors have not yet been identified, at least in the African context. For this reason, a case study approach has been adopted, relying principally on semi-structured interviews. With the aid of an interview guide (Chapter 13), intensive discussions were held with people who were deemed knowledgeable in the respective firms.

The case study approach has some limitations when it comes to making generalizations. Usually, case studies are generalizable to theoretical propositions rather than to populations or universes. Unlike survey research, which relies on statistical generalization, the case study approach relies on analytical generalization, in which the investigator is striving to generalize from a particular set of results to some broader theory (Yin, 1984). As has been indicated in Chapter 2, the evolutionary theory of economic and technological change has been adopted as the general theory guiding this study. The questions of the study are posed in that perspective. Generalizations from the case studies will necessarily be made with caution, realizing that the researcher is making generalizations on the basis of cases which have been selectively sampled and that inferences are being drawn from a weak or non-representative sample of cases. However, in this case we are more interested in gaining insights into the process than in producing statistically significant outcomes.

Two precautions have been taken to reduce the risks entailed in the case study approach. First, the researchers who did the country studies have track records in doing various studies on the manufacturing sectors of their respective countries. Second, taking advantage of the unique ability of the case study approach to handle a variety of evidence, the information obtained in interviews has been complemented by information from official and unofficial documents and by follow-up interviews by the principal researcher to obtain the necessary clarifications. In addition, a workshop was held in May 1993 in which selected industrialists, policy-makers, researchers and international experts in the field reviewed first drafts, and comments arising from discussions at the workshop have been incorporated in the final drafts.

In the case of Africa, the poor performance of manufactured exports may suggest that success in exporting is more of an outlier result than an average or typical situation. Even if these firms may be outliers, the approach taken in this study is that it is also important to remember that outliers can be particularly informative. As has been suggested elsewhere, information about why firms fail or achieve unusual success is more likely to come from firms at the margins than from average firms (Reid, 1987).

Sampling: firms, industries and countries

Sample firms

Two main categories of firms were studied: those which are currently exporting manufactured products to regional and/or to international markets and firms which used to export manufactures but are being, or have already been, squeezed out of export markets.

One would expect that firms in the first category would have developed relevant core capabilities over time and that these capabilities would have been developed in response to competitive pressures from the market. The firms are also expected to be organized in such a way that they can cope with changing technological and market conditions. In addition, the linkages they have with other industries and institutions are expected to be supportive. The extent to which they are striving to sustain their international competitiveness was assessed, and the strategies they are employing to cope with the changing demands of the international market were identified, in order to gain further insights into the process by which those firms are creating and developing the necessary core capabilities. An understanding of supportive or restrictive interactions with external institutions has also been sought. Firms in this category may have acquired their success in exporting in one of two ways: by attaining international competitiveness at par with other world-class firms elsewhere, or by engaging in highly idiosyncratic exports and adapting to specific recipient environments.13

The second category of firms have been (or are gradually being) out-competed by other exporters. As was noted in Chapter 2, what happens when a mature industry encounters a new technology depends on whether the new technology requires changes in the core capabilities of specific firms and whether they are able to make the required changes in management and strategy. Firms in this category were expected to have failed as exporters largely because they had not managed to adjust their core capabilities to new technological and market conditions. This study addresses these processes with a view to gaining insights into the factors which have influenced their withdrawal from the race for the export market. Such factors may be domestic (e.g. developments in the domestic market, weakening of the core capabilities of the firms, or failure to cope with the growing capabilities of competitors in the world market, thus allowing the competitive gap to widen, or restrictive interactions between the firms and other government and/or non-government institutions) or they may be external (technological changes, marketing strategies and changing demands in the international markets).

The sampled firms are currently exporting manufactured products, whether to regional or international markets. Some 55 firms in 7 industries were studied: 20 in textiles and clothing, 11 in food and beverages, 4 in leather and footwear, 2 in paper and paper products, 5 in chemicals and pharmaceuticals, 3 in non-metallic mineral products and 10 in metal industries. The sample consisted of 4 small enterprises (with fewer than 50 persons engaged), 31 medium-sized enterprises (50-1 000 persons) and 20 large enterprises (over 1 000 persons). The ownership structures include public and private, and local and foreign, enterprises. The sample included 6 public enterprises, 19 local private enterprises, 9 foreign-owned enterprises and 21 joint ventures between local and foreign capital.

Sample industries

The industries studied were those which have been exporting. In each country the best export performers were included and, to facilitate inter-country comparison, the textiles and clothing industry was studied in all countries.

Sample countries

Research was carried out in a sample of six countries which are broadly representative of African countries in terms of level of development of industry and exports. The countries selected were as follows:

1 Zimbabwe: a country with one of the most diversified industrial sectors and a number of successful exporting firms. It is the most advanced in terms of technological capabilities and industrialization in Southern Africa, except for South Africa.

2 Tanzania: a country which, in its initial development. was peripheral to Kenya but which later strove to develop an industrial

sector and manufacturing exports. It faced decline in many sectors in the late 1970s and 1980s. Since the mid-1980s Tanzania has been making attempts to implement economic policy reforms and to restructure inefficient industries.

3 Nigeria: the most industrialized country in West Africa and one having the largest internal market in Sub-Saharan Africa. Nigeria is not only a large economy (by African standards), it also benefited from the oil boom in the 1970s (although that was followed by economic problems in the 1980s).

4 Kenya: the most advanced country in industrialization, industrial exports and the development of technological capabilities in East Africa.

5 The Ivory Coast: the most advanced country in industrialization and the export of manufactured products in Francophone West Africa.

6 Mauritius: a country which seems to have made considerable strides from a basically mono-crop economy in the 1960s to a diversified economy in the 1980s. Mauritius has developed its industrial sector, and in particular manufactured exports, at a faster pace than other African economies, a kind of development that is comparable to that of some lower-tier Asian NICs.

Implementation of the study

Researchers in these countries were commissioned to perform the country studies. The researchers selected were known to have done substantial previous research on issues relating to industrialization and manufactured exports in those countries. In order to include international information on the changing technological and world market conditions, data on these aspects was collected, mainly in Europe. The following were the major sources of information:

· OECD industry studies

· UNIDO industry studies on Africa and technological developments in selected industries

· from the International Trade Centre in Geneva, data on trade, especially data from case studies of exporting industries and export promotion policies

· selected TNCs in Europe (e.g. Unilever) which have exporting subsidiaries in Africa

· associations of industrialists in Europe

· selected European importers of manufactured products from Africa

· UNCTAD, for trade statistics and trade-related studies

· the EU in Brussels, for information on joint ventures between EU-based companies and exporting companies in Africa.

(introductory text...)

The world economy is undergoing change in technological and market conditions which could influence the position of Africa and the role it may play in the world market. The challenge for Africa is to understand these changes as a basis for developing the ability to respond constructively and positively. This chapter addresses some of the technological and world market conditions that are likely to influence the ability of exporters to attain and maintain their position in the world markets.

Changing market conditions

The business environment in which exporting firms must be prepared to operate is characterized by unprecedented opportunities to tap new markets, while competition in traditional markets is increasing dramatically from both traditional adversaries and new entrants and because of the evaporation of barriers to previously protected markets. With competition arising from diverse and unexpected sources enterprises can no longer be confident about their market shares: they must constantly innovate to compete. In this new business environment the following key drivers have been gaining in importance: a focus on improving the productivity of knowledge and service workers (rather than industrial productivity), with productivity programmes shifting from culling costs to improving organizational performance and effectiveness; a focus on quality in both products and service, with quality programmes moving from manufacturing operations to knowledge and service operations and firms building a corporate culture around quality;1 the challenge of responsiveness, with a rising need to react rapidly to changing market conditions, competition and customer demands; the globalization of markets, operations and competition; an interest in out-sourcing certain aspects of production, distribution, sales service and support functions, resulting in a shift of enterprise focus to vertical and horizontal integration across organizations; partnering, to function on global markets by establishing alliances and joint ventures with other key players in both similar and disparate markets;2 and greater attention to social and environmental responsibility (Tapscott and Caston, 1993; Mytelka, 1991).3

Overall, the trend suggests that the changing market conditions now require firms to meet more refined and personalized customer tastes, as well as society's collective needs, as expressed through a wide range of democratic and associative mechanisms (OECD, 1992b).4 Interaction between producers and these more demanding and better informed customers is an essential factor for growth and competitiveness.

Changes in market conditions for such traditional products as textiles, clothing and footwear can be used here to make the point. The changes that have occurred in price and income elasticities of demand across products and income groups have produced a pattern of market segmentation (Mytelka, 1991). For instance, sportswear is increasingly worn in non-sport settings, leading to increasing price competition between sports specialty shops and general clothing retailers. In addition, the market has been highly influenced by developments in textile technologies (e.g. new manufacturing yarns and synthetic fibres such as Tactel, Gortex and Sympatex) and changes in fashion (CBI, 1991b).5

In the case of household and furnishing textiles, the traditional preference for white bed and bath linen has given way to an immense variety of colours, prints and patterns. The market has become more conscious of quality and variety, though trends are not as short-lived as those in apparel. Consumers are conscious of price, durability and fibre mixtures as well as design, colours, weight, ease of handling and product safety. The most important developments in bedroom linen have been the introduction of the fitted sheet, non-iron sheets and the eiderdown (also referred to as a duvet or quilt) together with quilt covers. In table linen the most important developments have been a decline in the daily use of tablecloths and an increase in attractive kitchen items. There is a trend away from very cheap tablecloths and towards higher-quality printed and embroidered cloths (CBI, 1991a).6

In the case of footwear, the European footwear importer supplies specifications, models and considerable assistance in technical know-how and quality control to the contract producer. The main suppliers are now the cheap and efficient sources in the Far East. New suppliers will have to offer the same level of competitiveness in terms of price, workmanship and timeliness (CBI, 1990).7 Markets are becoming more segmented, with quality and timely delivery becoming important factors in competitiveness. Globally spread production networks are developing, especially in sport shoes. African countries may only be able to enter such markets by tying themselves to major names such as Adidas and meeting their requirements for production at consistent high quality (UNIDO, 1992a).8

The changing prospects of access to world markets

Among the external constraints on the adjustment process, access to markets and to technology could be most difficult. Protectionism is on the rise. In fact, the two principal markets for developing country clothing exports, the US and KU, have steadily increased their degree of domestic protection, mainly in the form of orderly marketing arrangements (OMAs) and voluntary export restraints (VERs). The Multifibre Agreement (MFA) has contributed to limiting opportunities for new market entrants, in particular those from developing countries (Mytelka, 1991). As the MFA became more restrictive in the 1980s, some large firms in the NICs relocated production to make use of quotas available in the less developed countries. Negotiations to relax the restrictive clauses under the MFA have not yielded fruitful results so far. With the rising regional trading blocs in the developed countries there are indications that access prospects may not improve.

Patterns of trade have been changing in favour of North-North trade so much that many recent trade theories have focused on such trade. There has been a relatively steady growth in manufacturing exports, leading to high levels of trade between countries with similar factor endowments. Three quarters of all exports from the developed countries went to other developed countries. By 1989 only one third of developing country trade went to other developing countries (Yoffie, 1993). There are several emerging trends which suggest that this pattern is likely to be reinforced.

There is a tendency to form larger trading groups of Northern countries, a development which is likely to bring benefits of guaranteed access to larger markets for members but with the likelihood that many poor non-members, including African exporters, will suffer from loss of access. At the same time, there is a risk that trade wars could undermine the global benefits from multilateral trade. US support for free world trade after World War II seems to have been motivated by foreign policy concerns and by the relative international competitiveness of the US economy at that time. As the foreign policy concerns have changed and the international competitiveness of the US has declined relative to Japan, support in the US for world free trade seems to be on the decline and interest in regionalism on the increase. Bhagwati (1991)9 sees the advocacy of managed trade, and aggressive unilateralism and regionalism, as threats to GATT principles. One factor reinforcing the tendency to unfair trade is the 'diminished giant syndrome', because of the relative decline of the US within the world economy. Britain was in a similar situation at the end of the nineteenth century, as compared to the US and Germany. The other factors are the increasing crisscrossing of foreign investments, flexible exchange rates, the outbreak of protectionism in the 1980s, the increased focus on non-tariff barriers, and developments in the realms of ideas and ideology (e.g. the recognition of the irreversible gains in efficiency and competitiveness arising from learning). Bhagwati has warned that the extension of GATT rules to other areas (e.g. trade in services) may be opening up a Pandora's box and may diminish the possibility of agreeing to a rules-oriented trading system.

These developments suggest a strong case for introducing safeguards and disciplines in GATT to protect the multilateral world trading system from possibilities of damage from regional agreements. Under these conditions, the challenge seems to be whether a continuous search for new markets and market niches can be launched and sustained over time. This will have implications for the development of marketing capabilities in-house and/or appropriate linkages.

EU trade policies are essentially discriminatory against imports from the South. Even under the GSP (General System of Preferences) and Lomé Convention arrangements, the relief offered is subject to unilateral termination by the EU on grounds of graduation'. The EU is advocating selectivity in the application of safeguards (i.e. temporary import barriers imposed in order to protect domestic industries at risk) and is demanding that the South provides protection for intellectual property owned by nationals or companies of its member states. The question of access is particularly important for exports of manufactures. Recent intensification of protectionism in the North has subjected the South's manufactured exports to discriminatory restrictions precisely in those areas where the South has a comparative advantage. These restrictions take several forms: explicit departures from GATT (e.g. the MFA concerning textiles and clothing), VERs and OMAs.

There are further indications that the prospects of uninhibited entry of industrial products from the South to the EU are limited. One such indication is in the development and direction of R&D support. Subsidizing R&D is the core of EU industrial policy in the 1990s, as industrial policy shifts from sectoral subsidies to functional subsidies. These are used to encourage and promote the innovative capacity of firms (UNIDO, 1992a). Many EU R&D programmes are designed to improve manufacturing in traditional fields in which EU industry might otherwise lose its competitive edge (textiles and clothing, steel, and new materials such as artificial fibres which bridge the traditional separation of textile and chemical industries).

Although the Lomé Convention continues to favour African products' access to the EU market, there are reasons not to be too optimistic about this favour. First, the experience of Asian countries has shown that as soon as developing countries' progress in industry begins to threaten EU industries, quotas are often revised to limit previously favourable market access. Some of Africa's preferential provisions have been diluted in the Uruguay Round of the GATT negotiations. Second, rules of origin are likely to complicate South-South cooperation between Africa and the more advanced developing countries. Africa's favourable position in terms of access to the EU market partly derives from MFA restrictions on Asian exporters. This may induce Asian producers to relocate to Africa, as has already been occurring in Mauritius and Nigeria, as the country case studies have shown. Rules of origin, however, are likely to limit this trend as soon as it grows to a scale which threatens EU industries. Third, although this is often denied, there are indications that the former socialist countries of Eastern Europe will compete with Africa in the European scene as regards trade relations and other economic cooperation arrangements. The long-term success of the Lomé Convention as it relates to Africa should be evaluated in the light of the extent to which it has helped Africa to improve international competitiveness and change the structure of trade. It seems that, seen in these terms, it is unlikely much progress has been made.

In the Uruguay Round negotiations, there is a notable absence of agreement on specific commitments in the area of market access (UNCTAD, 1993a). The weaker trading partners have an interest in clear international disciplines to provide security of market access and to shield them from bilateral pressure from major trading powers. But the main question here is whether the market access commitments will provide improved access to markets in products of interest to Africa. It is therefore not surprising that the phasing out of the MFA, which has for years operated as a discriminatory instrument against the export interests of many developing countries, and the integration of trade in textiles and clothing in the GATT have been among the most difficult negotiations in the Uruguay Round. The outcome of the negotiations is that these sectors are to be integrated into the GATT over a 10-year period, with each party free to select specific products to be integrated at each of the four phases. Although there is provision for special treatment for the least developed countries, no specific differential or more favourable treatment has been accorded to them in the integration process. Since more advanced developing countries have moved into more sophisticated products, leaving exports of the simpler textile and clothing products to newcomers, and since the EU has been able to increase its exports of these products to developing countries, it has been suggested that a more liberal MFA would not cause much harm to producers in the industrial world (Waelbroeck and Kol, 1987).10 The EU does not seem quite convinced that their industries in these areas are not threatened. This explains why the MFA is to be phased out over a 10-year period. Considering that the MFA was first introduced in 1974 as a temporary measure to allow time for the developed countries to adjust to the threat of competitive imports from developing countries, it has been quite long-lived. The EU is now supporting R&D investments in these industries, among others, hoping that at the end of the 10 years the threat will have been averted through technological developments.

The Uruguay Round agreement on safeguards provides for the preservation of the non-discrimination rule and the prohibition and elimination of 'grey area' measures (e.g. VERB, OMAs). There are also provisions for reducing arbitrariness in the application of anti-dumping duties. The agreement contains more defined rules and disciplines for subsidies and improved provisions on countervailing measures.

Multilateral disciplines have been extended in two areas: trade in services (OATS) and trade-related intellectual property rights (TRIPS). The GATS agreement establishes the unconditional most favoured nation (MFN) clause as the fundamental principle of agreement and provides for increased participation of developing countries in world trade in services. The TRIPS agreement involves an international upward harmonization of standards of intellectual property protection (IPP) for all countries, irrespective of their level of development. It includes the obligation to comply with the substantive provisions of the Stockholm Act of the Paris Convention.

The South Commission Report argues that applying the rules traditionally applied to trade in goods to trade in services could undermine the ability of the South to regulate and promote its services industries. Recent advances in information and communications technologies have added a new dimension to the role of services in the development process. The new producer or business services, such as the computerization of inventory control or quality control, have a profound impact on the competitiveness of a wide range of economic processes and products. In the longer term, the report argues, an excessive dependence on imported services could seriously weaken the development process to the extent that an underdeveloped domestic services sector would imply weak links between the producers and users of services. This situation is not conducive to innovation, the absorption and assimilation of new technological changes, or to benefiting from learning by doing. The thrust of this caution is supportable under African conditions, provided that lessons can be drawn from previous instances of the perpetual protection of inefficient infant activities, which never grew to maturity. Protection must be more selective and less pervasive than in the past and should be accompanied by promotional policies for the development of key service activities.

Knowledge is increasingly being privatized, and the South is being excluded. Many countries in the South find themselves increasingly unable to predict, let alone to regulate, technology flows (South Commission, 1990, p. 219).11 The report observed that considerable progress towards facilitating the South's access to technology was made in the 1970s, with the Code of Conduct and intellectual property. 50 that by the early 1980s only two important matters remained to be settled in UNCTAD's code of conduct: the clause governing restrictive practices and the provision concerning applicable law and dispute settlement. The report points out that before mutual concessions by North and South on these two points could be made, further negotiations were blocked by the North and the revision of the Paris Convention was stalled for several years. The North has since used the recent acceleration of technological advances to press for a reversal of earlier negotiations (p. 254). In spite of the threatened reversal of earlier achievements, the report suggests that what is required is an international framework to regulate the activities of TNCs in developing countries, starting with the introduction of a code of conduct for TNCs.

The negotiations in the Uruguay Round have moved in the direction of greater liberalization of investments (under trade-related investment measures (TRIMS) and greater protection of intellectual property rights. TRIMS has the effect of liberalizing investments by reducing requirements for the entry and operation of foreign firms, while TRIPS will enable investors in technology and innovating firms to capture profits from their innovations. It is feared that TRIPS is likely to reduce access to new technologies. However, since the acquisition of technology requires effort in the form of tangible and intangible investments' Africa will need to tilt the balance of the debate in favour of the design of policies which would facilitate the transfer of technology through various forms of learning, especially by African firms. The process by which firms in African countries build up and accumulate skills and acquire technological capabilities through inter-firm networks and cooperation arrangements needs to be understood better, especially in terms of the kinds of technological efforts and investments which African governments and firms need to make. Having made such technological efforts and investments in technology, obstacles to increasing international competitiveness may begin to emerge. These obstacles may or may not include those relating to the code of conduct. On that basis, the thrust of the negotiations would shift towards those practices which inhibit the process of technological learning and the accumulation of the capabilities which are required for international competitiveness.

There are indications that developing countries have made major concessions in terms of their freedom to act in trade in goods and services and of their technological and social development policies in relation to technological transfer and TRIPS (UNCTAD, 1993a). The agreement on a World Trade Organization (WTO) provides that all agreements emerging from the Uruguay Round are to be incorporated into a single legal instrument and accepted by all contracting parties. The experience of Africa and its relationship with other multilateral institutions suggests that there is a possibility that the WTO could be used to discipline the weaker players while being powerless to discipline stronger players in the game of trade. The coordination of WTO activities with those of the World Bank and IMP could also result in strong cross-institutional conditionality (Peng, 1993/4).12

New technologies and the implications of changing technological conditions

Technological change in the developed countries has important implications for the competitiveness of manufactured exports in Africa. The policy implications of the changing technological conditions are likely to surface at two levels: a focus on monitoring new and emerging technologies with a view to making policy decisions relating to adopting and learning the new technologies at the right time, and an examination of the internal evolution of technological and demand condition.

Developments in some new technologies

During the past decade the greatest technological progress has been made in information technology (microelectronics and micro-photonics), space technologies, new materials, nuclear energy, biotechnology, and pharmaceuticals and fine chemicals (Salem, 1992).13 Technological change can boost the growth of some industries (and even revitalize declining industries) and cause decline in others. New industries may emerge and old ones may disappear.

Recent technological developments have led to shifts in the composition of factors of production, with a considerable decline in the importance of raw materials, energy and labour inputs and an increase in knowledge intensity. Material-saving innovations have led to a decline in the consumption of natural materials and their replacement by new and advanced materials (especially engineering ceramics and polymers, composites, semi-conductors, opto-electronic materials and amorphous alloys). In addition to replacing natural materials, the advanced materials also improve strength and quality, add flexibility and cut weight. In world trade there has been an increase in the share of manufactured products and in particular high-tech products.

Technological change can result in the redefinition of industry boundaries. Where key factors of success are capable of being shared, the limits between businesses (industries) tend to be blurred (e.g. computers, telecommunications and office automation) (Dussauge et al., 1992).14 Where technological change leads to a reduction in the sharing of the costs of key resources, the result may be de-segmentation of the industry into smaller units. The distinction between manufacturing and services sectors is being blurred by their growing interconnectedness. The competitiveness of manufacturing firms now depends crucially on the quality of their interactions with the services sector, notably business services (which collect, treat and supply specialized information) and key infrastructural services (OECD, 1992a).

In reality, the pattern of manufacturing industry in the highly industrialized countries has changed considerably as services take the lead, with new skill-and-capital intensive services such as informatics gaining ground. This makes Engels' elasticities more difficult to predict and the growth of many traditional capital goods industries has slowed (e.g. construction materials, electrical machinery industries, general engineering' machine tools, iron and steel industries) (Bagchi, 1987).15

The most economically significant of the new technologies, in terms of the range of new products, cost savings, quality improvements and sectors of application, is information technology, followed by new materials and biotechnology (Salem, 1992). The discussion here is confined to information technology as it has been most pervasive and has the greatest economic significance.

The new paradigm in information technology (IT) is characterized by profound changes in the business application of computers, in the nature of the technology itself and in leadership in the use of technology. Tapscott and Caston (1993) have identified several shifts that are revolutionizing IT: a shift from traditional semi-conductors to microprocessor-based systems; from host-based to network-based systems16 which allow users to access a wide range of data, applications and computing resources; from proprietary software to open software standards, which allow information to be transferred and software to be run on hardware of any size or brand; from single media to multimedia, enabling computerized documents to be exchanged containing data, text, voice and images; from account control to computer-assisted vendor-customer partnerships based on free will, with vendors now seeking partnerships with their customers based on customer choice; from craft to factory-based software development, with software developers using and reusing standardized and interchangeable modules;17 from alphanumeric forms to a multiform graphical user interface (GUI) with icons on the screen which can be manipulated using a mouse or by touching the screen; and a shift from stand-alone to integrated software applications, with modular software built to standards that make the programs more interchangeable and integrative.

Tapscott and Caston (1993) have noted that as hardware becomes a commodity, the software proportion will continue to grow. Software, rather than hardware, is where business value is added, so software is the differentiator of competitive advantage. Software production is manufacturing with a difference: it still requires a high degree of creativity to fabricate both individual parts and broader systems. There is a growing argument for computer-aided software engineering (CASE), which enables developers to apply software engineering principles, methods, techniques and concepts such as parallel processing, object orientation and reusable code more easily.

Changes in IT use have involved a shift from stand-alone equipment and applications to computer-based networking and new information services. Telecommunications are used to connect IT equipment in the office to equipment on the factory floor. This shift is a response to changes in market conditions. Changing market demands have to be adjusted to more quickly, and just-in-time deliveries and more customized products and services impose their own requirements. The rapid feedback and response which IT permits may spur innovation processes in terms of product and/or service improvements, including improvements in R&D itself (OECD, 1992b).

The application and impact of IT have even permeated many traditional industries (e.g. textiles and clothing), where the need to improve competitiveness has led to the internalization of production and rapid increases in the knowledge-intensiveness of production. This makes the adoption of new technologies a necessary investment in competitiveness. The rapid changes in technology and globalization favour flexibility and innovativeness in the adjustment process. Low labour costs are less effective as a basis of competitiveness, while low educational levels are not conducive to the adoption of new technologies.

Clothing and textiles

Mody and Wheeler (1990)18 found that clothing and textiles producers in the NICs. are facing competition from the exports of the newly invigorated economies of Asia, e.g. China, India, Indonesia, based on low wages. Along with this increase in wage-based competition, sophisticated microelectronics-based systems for clothing and textile production are emerging in the OECD economies. Robotics, in this scenario, is a critical infant industry, with protection of the textiles market expected to give enough time and investible surplus for the OECD manufacturers to consolidate and restructure for automated production. It is hoped that 10 years of phasing out the MFA, as agreed in the Uruguay Round, will provide ample time for this infant industry to mature (Mody and Wheeler, 1990).

However, semi-automated technology is now viable for a number of operations, resulting in very low wage costs. The advantages of using advanced technologies are most likely to be reflected in shortening the production cycle, thus saving time and working capital and improving the ability to respond to customer demand at short notice. Some of the areas which are likely to be relevant for technical progress in clothing are: computer design; automatic cutting; flexible sewing and finishing technology incorporating microprocessors; robotic handling; unit production systems; shop-floor controls; logistics; supplier linkages; retail linkages and merchandise control and implementation.

The textile industry has been characterized by continuous incremental technological changes. The industry produces some final products for the consumer market but its main products are inputs (yarn and cloth) into the clothing industry, which normally imposes product and design choice. This makes engineering design more important than product design in textiles. New raw materials are continuously being introduced to the industry but the basic characteristics of the products do not change dramatically. The introduction of microelectronics to machinery control operations has contributed to productivity increases, improved effectiveness and greater reliability, quality and flexibility. While developments in the textile industry are influenced by technological change, one should not lose sight of the influences of other factors such as changes in global demand and developments in the clothing industry and, in particular, the firm strategies of large clothing enterprises.

The share of developing countries in the global textile export market increased from 18.8 per cent in 1973 to 22.7 per cent in 1982 and 28 per cent in 1988. Exports from developed market economies accounted for 62 per cent of international trade in textiles in 1970, falling to 50 per cent in 1980 and to 39 per cent in 1985. At the same time, exports from developing market economies increased from 21 per cent of world trade in 1970 to 36.5 per cent in 1980 and 50.5 per cent in 1985 (UNIDO, 1990).19 Within the developing countries, the core of production is moving from the East Asian NICs to the second tier of lower-wage ASEAN countries such as Indonesia, Bangladesh, Sri Lanka, Thailand and the Philippines.

However, there are indications that OECD countries may be regaining competitiveness in some labour-intensive industrial activities in which they had seemed to be losing out to developing countries. For instance, in the textiles and clothing industries, the diffusion of the newest innovations has been greater in spinning and weaving technologies in OECD countries than in developing countries (UNIDO, 1990b).20 In the late 1980s textile exports from developed countries actually increased more than from developing countries, indicating that a turning point may have been reached following a new technology boost. The case for adopting new technologies is likely to be strengthened further by the fact that profit margins in the textile industry are lower than the manufacturing industry average, implying great pressure to increase efficiency.

Recent technological developments have occurred in overall mill control, the integration of factory departments, improved quality and reliability and increased flexibility in production. The main technological changes in the past 40 years (1950-90) have been automatic bale feeders, aerofeed systems, high-draft spinning, texturizing (with the development of the air-jet method and the false twist method resulting in increases in the speed and quality of yarn), shuttleless looms21 providing higher speed and better quality and flexibility of the woven fabric, needle-punch machines, transfer printing, rotary screen printing and increasing computer integration in the manufacturing process. The main changes in spinning have occurred in the spinning frame itself, through high-draft spinning and the development of new spinning methods (open-end spinning) which run at much higher spindle speeds. The main effect has been to reduce the number of pre-spinning steps and limit the need for roving. The newer spinning systems have also reduced the trade-off between productivity, product flexibility and quality. For instance, rotor and air-jet spinning can produce a greater number of yarn counts, of good quality and at high speed, suitable for most applications in knitting and weaving.

Rapid diffusion of some of these new technologies in spinning (see Tables 4.1 and 4.2), weaving and dyeing has led to considerable productivity gains in recent-years, reducing labour time, energy consumption, materials wastage and throughput time, while improving product quality (Mytelka, 1991).

There is still a relative advantage in labour costs in developing countries, as shown in Table 4.3. However, a country such as Italy does not have low labour costs, even within the OECD, yet it was the most successful in the OECD both in textile production and exports. This suggests that labour costs do not tell the whole story. The role of technological and organizational factors (including flexible linkages and production chains and contacts with the markets) in ensuring flexibility, fast and timely delivery and reliable high quality needs to be appreciated.

Table 4.1 Main technological developments in various phases of short staple-spinning and their effects on output

Activity/process

Output (pounds/hr) 1969

Output (pounds/hr) 1987

Projected output (pounds/hr) 2000

% change 1945-69

% change 1969-87

Blender

200

1320

2200

0

560

Cards

18

88

154

157

389

Drawings (ft/m)

800

547

874

700

-32

Lapping

500

836

990

233

67

Combing

50

110

132

78

120

Roving (warp)*

1.75

2

2

73

14

Roving (filling)*

1.30

-

-

87

-

Spinning (warp)*

0.036

0.036

0.048

66

0

Spinning (filling)*

0.023

0.036

0.048

51

55

Source: Adapted from UNIDO, 1990b. p. 202
Note: *Pounds/spindle/hour

Table 4.2 Main technological developments in various phases of short staple-spinning and their effects on capital cost per machine

Activity/process

Cost/unit (US$ 1000) 1969

Cost/unit (US$ 1000) 1987

Projected cost/unit (US$ 1000) 2000

%change 1945-69

% change 1969-87

Blender

4.5

103.4

206.9

228

2198

Cards

6.0

103.4

172.4

171

1623

Drawings

3.2

51.7

103.4

-

1516

Lapping

14.0

124.1

172.4

183

786

Combing

14.5

137.9

172.4

285

851

Roving

26.4

124.1

310.3

212

370

Spinning

21.5

79.5

149.0

340

270

Source: Adapted from UNIDO 1990b p. 202

Table 4.3 Labour costs in selected countries 1980-90

Country

1980

1990

% change 1980-90

Switzerland

9.65

19.23

99.3

Sweden

10.43

18.70

79.3

Holland

11.68

17.84

52.7

West Germany

10.65

16.46

54.6

Italy

9.12

16.13

76.9

Japan

4.35

13.96

220.9

UK

5.75

10.20

77.4

USA

6.37

10.02

57.3

Spain

4.90

7.69

56.9

Greece

4.03

5.85

45.2

Taiwan

1.26

4.56

261.9

South Korea

0.78

3.22

312.8

Brazil

1.57

1.97

25.5

Turkey

0.95

1.82

91.6

Thailand

0.33

0.92

178.8

Malaysia

-

0.86

-

India

0.60

0.72

20.0

Philippines

0.43

0.67

55.8

Indonesia

0.63

0.25

-60.3

Sri Lanka

0.16

0.24

50.0

Tunisia

1.13

2.82

149.6

South Africa

-

1.57

-

Morocco

0.85

1.28

50.6

Ethiopia

-

0.87

-

Kenya

-

0.63

-

Tanzania

-

0.32

-

Nigeria

-

0.30

-

Source: Time Horizons. March 1991

The relative labour cost advantage is not sufficient reason to delay the selective adoption of new technologies in low-wage economies. In spite of their relative labour cost advantage, some developing countries (especially the Asian countries) are closing the technological gap with developed countries. One indicator of this process is investment in new machinery. In 1988, Asian countries accounted for 46.3 per cent of world investment, ahead of Western Europe (26.1 per cent) and North America (10.5 per cent). South America (3.4 per cent) and Africa (1.9 per cent) seem to have lagged far behind. More investment occurred in new spinning machinery (US$2.8 billion) than for weaving (US$2.5 billion), suggesting an emphasis on modernizing yarn making rather than fabric making.

The clothing industry is not very dynamic. Its share of total manufacturing employment in the OECD declined from about 8 per cent in the 1960s to 3-4 per cent in the late 1980s (UNIDO, 1992b).22 However, clothing has grown relatively strongly in some countries (e.g. France and Italy) until recently. Developing country exports have increased from 30.2 per cent of world clothing exports in 1973 to 42.3 per cent in 1982 and 45.4 per cent in 1988 (GATT, various reports). Clothing production in developing countries rose from 20 per cent of world clothing production in 1970 to 29 per cent in 1985, suggesting greater export orientation in developing countries. The response of the developed countries to the growing import penetration has been twofold: the rise of protectionism, and technological innovations and the use of micro-electronic-based technologies.

The clothing industry is less strongly driven by its production technology than textiles, while product design and market considerations were found to be more important. The industry is more segmented, with very differentiated products (in terms of materials, designs and production requirements) for a variety of markets (Mytelka, 1991: UNIDO, 1992b).

In one segment of the clothing industry (that producing basic products) production cost is the main competitive advantage, while in the fashionable goods segment rapid response is the main focal point of manufacture. A third segment producing high-quality clothing has its competitive advantage in variety.

Intricate formal and informal links are found between retailers, manufacturers, textile merchants, subcontracting units and home-workers. Computer-assisted design (CAD) and electronic data interchange (EDI) are becoming important in developing and retaining these relationships. CAD enables a designer to consider different weaves and colours even before weaving begins, and the possibility of quick response to the market is enhanced. Combining CAD with telecommunication networks can enable the design functions and the labour-intensive core of the clothing industry to be geographically separated. For example, the Mattel Company transmits data on clothing design to Indonesia for manufacture. However, the advantages have to be weighed against the problems of time scales for delivery, the frequency of fashion changes and transport costs.

The main phases of clothing manufacture are: the pre-production stages such as design, pattern making, grading, nesting, marking and cutting; the actual production process such as sewing and assembling the product; and the finishing operations, which consist of inspection, pressing and packaging. While technological change has occurred in all these phases, it is the pre-production activities that have seen the most important technological developments. The major microelectronic improvements have occurred in pre-assembly (design, marking, grading and cutting) and post-assembly (warehouse, distribution and management) stages. In both clothing and textile production, the advanced technologies which were observed by Mody and Wheeler (1990) are reported to be still so costly that they are optimal only in high-labour-cost environments. This finding is welcome for African countries but it is uncertain how long this situation will continue.

Developed countries have applied new technologies and organizational forms to improve flexibility, a benefit that could erode and invalidate the advantage of low wages in the developing countries. The success of the Italian networking fashion clothing companies (e.g. Benetton) is a case in point. Analyses of the costs of the various stages in the clothing industry have shown that flexible automation technology is gaining ground, especially in the pre-assembly stages, where the US now ranks first in competitive advantage in the production of women's high-style printed polyester dresses, displacing Jamaica from first position (Mody and Wheeler, 1990).

The most important technological innovations in the 1970s have been: the use of computers in marketing, inventory control and work-flow management; the use of CAD in grading and marking operations; the use of numerically controlled equipment and computer-aided laser cutting systems, which are faster, are more accurate and reduce material losses; and the use of pre-programmed, dedicated sewing machines in sub-assembly operations.

In pattern making, CAD systems are used to break down a piece of clothing to manageable components more efficiently, although there are still difficulties with tasks where optical and sensory attributes are necessary. The steps to be followed in assembling the various pieces can be defined, and the corresponding production times and costs can be calculated, using computer-based production planning. The similarity of clothing production processes allows for the use of inter-firm production planning services to improve the overall efficiency of the industry (as practiced in the US). CAD and computer-assisted manufacturing (CAM) permit almost instantaneous grading for any market-specific size specifications, a task that was once tedious and time-consuming, and reduce material wastage and skilled labour requirements. The cutting process, the most highly skilled activity, underwent considerable innovations in the 1970s, with the introduction of hot wires, plasma streams, water jets and laser beams.

Sewing technology has developed slowly, with the gradual replacement of electro-mechanical systems with electronics. Three basic types of machine control applications have been developed: the dedication of microprocessors and numerical control units to the operations of specialized work stations; the use of pre-programmable convertible multi-task machines; and the use of operator-programmable sewing machines which, once programmed, take over all functions except guiding the material. Technological change in the sewing process has been essentially incremental and concentrated in three features: faster operation, the development of work aids to facilitate material handling and the mechanization of small-parts assembly.

Technological innovations in the finishing phase have been limited to pressing and repairing rejects from the inspection process.

The spread of automation has been found to be slower in small firms Considering that many clothing firms are small (even in Germany over 50 per cent of all firms employ fewer than 50 persons), labour-intensive and operate with high flexibility in the design-based segments of the industry, the spread of new technologies is not expected to be very rapid. In Germany, for instance, only 6 per cent of firms had introduced flexible sewing units by 1987, while 8 per cent had sequential automation and 14 per cent had full cycle automation. Some 23 per cent used CAD in pattern making and grading and 36 per cent in production planning.

Footwear

The footwear industry23 grew by only 4.1 per cent between 1983 and 1987, to 9.7 billion pairs. Global production was dominated by Asia (51 per cent), followed by Eastern Europe (18 per cent), Western Europe (12.5 per cent), South America (9 per cent) and Central and North America (6.5 per cent). World footwear exports amounted to US$20 billion, led by Italy and followed by Taiwan, Korea and Brazil. These four countries together accounted for 65 per cent of exports. Footwear exports from Korea and Taiwan increased from US$10 million in each country in 1969 to $1.5 billion and $2.3 billion respectively, in 1985 (Levy, 1990).24 Recently, high export growth has occurred in China, Thailand and Indonesia. For the latter two, growth has resulted from a shift of high-volume, low-cost footwear manufacturing from South Korea. They have also benefited from the General System of Preferences in the KU, benefits which are not available to Taiwan, South Korea, Hong Kong and Singapore. African footwear has been insignificant and has even declined.

Technological development has been relatively slow, evolutionary and incremental, with modest automation occurring in stand-alone machines and the functions of the production process only. Machinery is quite standardized and even old machines are still in use. Microelectronic machinery controls have been applied in only a few areas such as cutting, closing, and preparing the bottom stock. Computers are used mainly in product design and management systems. New technology has had the greatest impact in the 'making' process (pulling the uppers over the last and attaching the sole), particularly in the roughing and lasting stages. Numerically controlled machines are an improvement over both the manual method and automatic machines using templates. Little technical change has taken place in finishing (examining the shoe, correcting minor faults and spraying the colour if necessary), while many technological innovations have occurred in new materials for the uppers, new insole or lining fabrics, new threads, adhesives and glues.

Towards new organizational patterns

As was noted in Chapter 2, what happens when a new technology enters a mature industry depends on whether the new technology enhances the core capabilities of extant firms or requires very different kinds of capabilities, which may entail a change of management or strategy. Organizational change must be seen as the handmaid of technological advance and not a separate force behind economic progress.

There is a growing consensus that technological developments and market trends are converging. Some refer to a transition from Fordism to neo-Fordism, characterized by more flexible production and fragmented demand. Others, such as Michael Porter, refer to the declining importance of economies of scale and the growth of flexible factories serving multi-niche markets. Yet others argue that under flexible specialization, technologically dynamic smaller firms using craft practices will challenge larger manufacturers.

Others, such as Kaplinsky (1990),25 suggest that the greatest impact of advanced manufacturing technologies (AMT) will be in batch production, thus improving the competitiveness of small and medium-sized enterprises. Tidd (1991, p. 4) found that the management literature was unanimous in predicting that the winners in the 1990s will be smaller, more specialized, focused factories competing on the basis of quality and responsiveness to niche markets.

Tapscott and Caston (1993)26 identify four paradigm shifts which are affecting business today: new technology (new roles for IT and open, user-centred and network computing); the new business environment (open, competitive dynamic market place); new enterprises (open, networked and information-based organization); and the new geopolitical order (open, volatile and multi-polar world).

The new enterprise is becoming more open in scope, shifting from a multi-layered hierarchy to flatter networks of relatively autonomous businesses. The concept of the organization is expanding to include links with external business partners and the professional is replacing the manager as the central player, often working in multidisciplinary teams. Individuals develop strong specialized expertise and broader competencies in a working-learning environment, where the notion of life-long learning is replacing the older notion of learning job skills that require only periodic updating. The new team is self-managed, with the team members united by a common vision and individuals empowered to act responsibly and creatively. The new enterprise structure is possible when each member understands the team vision, has the required competencies, has the trust of others and has access to the information and tools required to function and collaborate within the team in a broader context.

In fact, production organization and increasing responsiveness to the market may be more important factors for competitiveness than microelectronic applications. Over time, however, microelectronics are likely to gain in importance to the extent that they enhance quality and productivity and enable more efficient control over the whole production process.

As to whether a new techno-economic system has emerged, this is debatable if a techno-economic system is defined as a bundle of technologies, institutions and forms of economic and social organization which make up a coherent whole, are mutually interdependent and enable synergies to emerge (OECD, 1991).27 However, the mass production model is undergoing change in the direction of greater

flexibility and variety, and previously separate production phases are being integrated due to generic technologies such as information technologies or new materials. Technological fusion is taking place as firms combine technologies and firms are searching for new types of relationships. Three aspects of such cooperation deserve attention: technological cooperation in relation to the diversity and variety of technological skills required, vertical cooperation between producers and users and relationships between assemblers and their suppliers. All this does not necessarily mean that a new dominant technological style has emerged; instead we may be at the beginning of a process, the elements of which are not yet wholly under control. For instance, the advances in IT have also meant an explosion in the mass of information that needs to be handled, raising problems of compatibility and bottlenecks arising from human error. Diffusion is slowed further by the high fixed costs which are involved, uncertainty, 'pure vintage effects' (the time needed to adapt the structure of capital to the demands of best practice) and the heterogeneity of firms and their environments.

It is against this background of incompatibilities and bottlenecks (at least in part) that, even in the OECD countries, there is a notable contradiction between the rapid technological progress from the end of the 1970s and the apparent failure to make a significant impact on total factor productivity. It is difficult to separate out the effect of progress made in the services sector, because its frontiers are increasingly being blurred with the manufacturing sector, but there are indications that the lack of significant impact from technical progress on total factor productivity is a reflection of the mismatch between earlier forms of corporate organization (including the public sector) and the requirements of new technologies (OECD, 1992a, 1992b). Tapscott and Caston (1993) have suggested that the main challenge for organizations is not in the area of technology but in managing change. The organizational structures for managing change, along with the knowledge, skills, resource base, approaches to systems planning and even organizational culture, are being challenged by the new era. Many of the information system (IS) professionals and managers are so buried in fighting the bush fires of the old IS world that they are unable to lead in the new era; vendors are unlikely to provide leadership because the new enterprise has relationships with multiple vendors; and third parties (e.g. consultants) are unlikely to lead the way because old approaches, knowledge, methods and attitudes die hard. The study found that leadership to manage change came from every conceivable place in every conceivable type of organization, leading to the conclusion leadership is your personal challenge, whatever your organizational role.

The concept of flexible specialization (FS) has been used to capture new ways of organizing industrial production. The concept can capture changes at macro and at micro level. At the macro level, the concept of FS refers to the move from a dominant mass production system (where stable markets, factor cost reductions and economies of scale are key variables) to more diversified and ever-changing markets, products and production processes where flexibility and innovation are central (Rasmussem et al. 1992).28 At the micro level the concept captures a new type of industrial organization able to cope with the demands of increasing flexibility and innovation. In large firms FS takes the forms of decentralization into semi-autonomous specialized units, new factory layouts and just-in-time inventory control. In small firms it may take forms such as independent production. working as subcontractors to large firms and cooperative production in industrial districts.29 Piore and Sabel (1984)30 have used the attribute 'flexible' to refer to four aspects: technology (the multi-purpose machine), the worker (wide range of skills), the individual firm (wide range of products) and groups of firms (wide range of products and volumes).

In the neoclassical concept of the firm, flexibility is simply interpreted as the flatness of the average cost curve, implying the firm's ability to respond to changes in price and/or demand. However, in the presence of economies of scope (where the cost of the joint production of several products is less than the cost of producing each separately), the fact that the firm has end product and technology choices to confront can provide a rationale for diversification. Tidd (1991) has identified two forms of flexibility: 'active' (or adaptable), referring to the ability to respond to change by taking appropriate action; and 'passive' (or insensitive), referring to the innate ability to function well in more than one state. In the former case, three dimensions have to be considered: the range of possible states, the cost of moving from one state to another and the time taken. Tidd, drawing on earlier work by Browne et al. (1984),31 has distinguished different types of flexibility: machine flexibility (ease of producing many types of products on one machine), process flexibility (ability to make a product in different ways), product flexibility (ability to switch to producing a new product), routing flexibility (ability to cope with breakdowns by processing via alternative routes), volume flexibility, expansion flexibility, operation flexibility (ability to switch the order of several different operations for each product) and production flexibility (the universe of product types that the system can produce). Since different types of flexibility may conflict in practice, the firm must decide which types of flexibility are most important and the most appropriate means of achieving them.

Innovations in firm organization in the clothing industry, characterized by the creation of firm networks, were rated as more important than technological innovations. The core of the network may be a marketing firm using outside designers and producers, or a designing firm using outside producers and marketers, or a manufacturer using outside designers, marketing agencies and other specialized subcontractors.

However, no international patterns of development or adoption of AMT have emerged, after more than ten years of diffusion, probably because different organizational and market contexts lead to divergent paths, the technologies themselves being inherently adaptable.

Changing requirements for human resource development

The move to FMS and other integrated automation technologies poses a challenge to traditional organizational patterns. Various departments need to work together and to coordinate their activities - design and production functions, and business systems engineers with manufacturing systems engineers - and to encourage coordinated and broadening skills. The trend is towards flatter and less structurally functional occupations. It has even been suggested that the benefits of FMS investment often come more from the organizational changes it induces than from the equipment as such.

The structure of employment is changing, with a shift from manual to mental work as indirect production/support work is gaining ground over direct work. Practical skills have to be complemented by higher levels of theoretical skills in science and modern technologies and there is a preference for personnel with multidisciplinary skills.

In the case of the footwear industry, for instance, changing skill requirements are apparent with deskilling in pattern making, cutting and stitching and increased skills requirements in management information and control and pre-production planning. New and better skills are required in functional management (organization and control of workers, human relations, quality control, marketing, financial planning and cost control). As a starting point, user-oriented strategies towards new technologies can result in improvements. The question is how much learning is necessary for the effective use of new technologies. Computer literacy and basic electronic hardware maintenance skills are likely to be essential.

The technical innovations in clothing have not had significant effects on the modes of manpower use or on the content of individual tasks at firm level, since the major changes have been in the initial stages of the manufacturing process. However, the division of labour between the designer and the master-tailor has become more obscure, automation of the cutting process has reduced the professional cutter to an operator and automatic conveyor systems have reduced cooperation among workers at various stages. In the process, new needs for training have emerged: needs for higher basic education, training for increased flexibility, training in machinery know-how, in production planning systems and the circulation of goods, and in electronic data processing and information and communication techniques, and training to improve quality.

Towards further internationalization and globalization

The processes of internationalization and globalization were referred to briefly in Chapter 2 (pp. 18-19) as one factor influencing views on the explanatory power of conventional trade theory. The new wave of internationalization is led by the increasing importance of TNCs and by DFI (direct foreign investment) in manufacturing and services rather than by international trade. The deregulation and globalization of finance and pressure from new technologies have led to new forms of inter-firm agreements which have developed into major means of international technology transfer. These tendencies threaten to leave many developing countries on the margins of globalized information networks and may invoke the role of the state in setting rules and codes of behaviour for firms engaged in global competition (OECD, 1992b).

In the context of globalization, computer networking extends the reach of companies and organizations, allowing better coordination of various activities at international level. Such networks may be alternatives to strategic alliances among firms and can present new opportunities which could influence the structure of industrial activities and their location (OECD, 1992b).32 Furthermore. recent developments indicate that new technology is increasingly under commercial control and can therefore be obtained from firms and not from governments. It has also been suggested that there is a tendency for some TNCs to be more willing to locate a greater portion of their R&D activities in developing countries than they did in the past. The implications of these and related new trends for the transfer of technology are worth exploring, with a view to taking advantage of opportunities they may offer.

Africa needs to recognize these trends and respond to these changes by putting greater effort into exploring the possibilities of beneficial inter-firm linkages with TNCs from the North and from the South. New forms of networking with TNCs need to be forged and the conditions under which the role of TNCs could be complementary and supportive of the development of international competitiveness by developing countries need to be identified. However, it would appear that, if the potential benefits from TNCs are to be realized, domestic policies concerning the development of domestic firms' technological capabilities, education and vocational training, investment, trade, technology adaptation and R&D can play a crucial role. The guiding question here should be: in what ways can global trade negotiations increase the access of African firms to forging inter-firm linkages and cooperation arrangements, which can contribute to the development of the technological and other capabilities that are necessary for making gains in international competitiveness? Recent work on global trends in inter-firm partnering has raised some doubts about the usefulness of such partnerships for the less developed partner. In a recent article, Freeman and Hagedoorn (1994)32 have concluded that inter-firm partnering has not enabled the LDCs (less developed countries), or most of the NICs to catch up. This is because it has, on the whole, led only to the concentration of technological competence within the developed economies. They distinguish between two forms of inter-firm technology partnering: strategic technology partnering and inter-firm technology transfer agreements. Of the strategic technology alliances during the 1980s, they found 95.6 per cent to have been between firms in developed countries, 2.3 per cent between firms in the Triad (US, EU and Japan) countries and those in NICs. and just 1.5 per cent were between Triad firms and LDC firms. The corresponding shares for technology transfer agreements were 90 per cent, 6 per cent and 4 per cent. Nevertheless, in their conclusions they suggest, correctly in my opinion, that the building of indigenous technological capabilities could be facilitated by capitalizing on the learning process that comes with international partnering. After all, learning by learning and learning by doing are strong elements of successful corporate innovative behaviour. Although the learning capabilities have to be built up within firms, the process can in part depend on the broader technological infrastructure.

Within the broader context of forging inter-firm linkages and cooperation arrangements, special attention will need to be paid to the possibilities of promoting investment flows among developing countries (Lecraw, 1981; UNESCAP, 1990).33 The case for promoting inter-firm linkages within the South can be made on grounds of complementarily to other forms of networks. There is evidence that TNCs from developing countries have undertaken various modifications in response to the characteristics of raw materials (type, quality and input mix), size (scaling down), product quality and product mix (degree of diversification), machinery (simplicity and capacity) and factor intensity (Lecraw, 1981). These TNCs have tended to produce simpler, lower-technology, low-cost products which required little marketing ability to sell in world markets. They have had a higher propensity to form joint ventures with local firms, have used more local human resources and raw materials and often have down-scaled imported technologies. A case study of an Indian joint venture in Thailand showed that, since they are themselves in a learning stage, developing country firms transfer not only the know-how but also the know-why (UNESCAP, 1990). One reason why this occurs is that developing country TNCs often set up overseas enterprises using machinery imported from developed countries. This necessitates adaptation of this machinery to local conditions on site in the host country, thus providing the TNC with the opportunity to learn by doing. This would imply that developing country TNCs may be more skilled in specific technology adaptations and that they transfer those skills. Developing country firms are also associated with the ability to design smaller plants for small market segments. Through these various forms of learning, adapting and modifying imported technologies, Southern TNCs have acquired unique technological capabilities and can carry out these and related activities quite efficiently (Lecraw, 1981). This is corroborated by further indications that TNCs from the South are more appropriate for developing country needs, in terms of the characteristics of the technology with which they have expertise, integration with domestic demand and balance of payments effects (Sharma, 1993).

However, various obstacles inhibit further South-South technological cooperation: lack of information, inadequate institutional frameworks and economic and legal harriers. Some of these obstacles can be mitigated through trade policy, which needs to shift in several directions: improved South-South trading infrastructure, liberalization of intra-South trade restrictions, forging organizational ties to enhance the exploitation of economies of specialization and the creation of an effective and innovative capacity for more efficient appropriate processes and products (Sharma, 1993).

The changing characteristics of technological efforts: role of the state

Technological development requires effort. Much of this effort is expected to take the form of tangible and intangible investments. The former is the traditional investment in physical assets, while intangible investments refer to human and financial resources allocated to R&D expenditures and other forms of purchasing technology, and to training. business services, marketing expenditures and the acquisition and exploration of software (OUCH, 1992a).

In recent years there has been a tendency to take a hands-off, attitude towards the role of the state, especially in Africa. Yet governments elsewhere are playing a leading role in shaping new trade relations. In addition to the crucial role that governments are playing in forging new trade blocs (e.g. NAFTA, EU), they have been instrumental in assisting firms to acquire international competitiveness. In the OECD there is evidence of renewed interest in funding industrial R&D, with a shift from ensuring public funding on terms favourable to enterprises to greater emphasis on the organization of capital markets and harking policies and the manner in which these influence firms' investment decisions.

Building on strategic trade theory and administrative theories of the firm, as well as the conventional explanations that focus on country characteristics, it has now become clear that when industries become globally concentrated, visible hands (of TNCs and governments) rather than the invisible hands of the market emerge to guide trade. The patterns of international trade and production are the complex outcome of several factors: traditional country advantages, the international structure of the industry, specific firm characteristics of TNCs, the style and intrusiveness of government policy and the inertia of history (Yoffie, 1993). One policy implication of these patterns is that the government can facilitate the expansion of the sources of competitive advantage over time.

The case for selectively supporting specific high-potential industries through government policy has been demonstrated to varying degrees in the experiences of the developed countries and the NICs. In the case of Japan, for instance, MITI is reported to have picked winners after ample consultation with, or the participation of experts from, diverse sectors (industry, universities, banks, trade unions and the mass media) and to have figured out which development strategy suited the capabilities of Japanese producers after paying close attention to developments in the domestic and international markets (Yamamura, 1986; Carliner, 1986).34 In the case of South Korea, the government intervened to create and develop market agents. Its intervention was selective and favoured industries which were deemed to have dynamic comparative advantage. In selecting industries to be supported, the government consulted extensively with knowledgeable agents in the private sector (Pack and Westphal, 1986). The government operated a dual policy structure, with industries in which Korea had a static comparative advantage operating largely in a neutral incentive structure and the infant industries getting direct and indirect promotional incentives. Export performance has been the main practical measure of progress towards international competitiveness, with detailed strategy in this highly uncertain area being reformulated in the light of information gained (market signals, perceptions about industrial operations and potentials) during implementation (Pack and Westphal, 1986). Unlike most African countries, protection in Korea was not confined only to import substitution industries but went beyond and made export an ultimate target.

In mainframe computers and semi-conductors, where barriers to entry were high and the US had a first-mover competitive advantage, the government of Japan employed trade restrictions combined with limitations on FDI to encourage Japanese firms to invest aggressively in emerging technologies. The Japanese carefully limited the role of dominant foreign firms in the domestic market while providing domestic firms with incentives to export. Other governments' interventions have determined the longevity and exporting success of local industries such as textiles and apparel, steel, machine tools and colour televisions. Protectionism has kept American producers in the textile and steel business long after most free-market-based trade models would have predicted their exit (Yoffie, 1993). The governments' heavy, visible hand has often sculpted, manipulated or even directly determined the direction and volume of trade flows.

The OECD (1992a) has emphasized the role played by non-market coordination between private agents in the creation of externalities and interactive mechanisms. For countries with less developed markets, such policies may be the only way to create crucial externalities and trigger growth-generating cumulative processes. Trends in automation have shown that state intervention is necessary is various ways: in the development of education and skills; in providing consultancy assistance; in conducting awareness-raising activities, including applications and demonstration projects; in creating enabling infrastructure and information channels for technology transfer from publicly supported technology institutes and decentralized applications centres; in enhancing technology supply (upstream) by supporting domestic technology supply and improving access to foreign technology suppliers; in supporting product development and helping with organizational changes, process development and process applications; in supporting modernizing industries which have failed to adopt best-practice technologies (e.g. by providing finance to overcome their investment barriers); in organizing support programmes for diffusing new technologies; and in market identification, exploration and development (UNIDO, 1992b).

New policy challenges in the OECD countries have been in the area of policy formulation, taking into account the increasing overlap of previously distinct areas, such as industrial, telecommunications and IT policy-making, and of the institutions involved in this process. Two policy issues are relevant: industry must be supported in its efforts to develop technology, markets and competitiveness; and the legitimate regulatory functions of government must be established and maintained (OECD, 1992b).

It may be useful to emphasize that, while Africa must avoid the mistakes of the past, efforts to influence Africa's position in the new global trade relations will require that governments play an active role.

Conclusion

Changes in the world market and in technological conditions in the world economy in the recent past, in particular in the last decade, pose new challenges to industrialization and the development of a competitive manufacturing sector in Africa. Three main categories of changes are most relevant: changes in market conditions, in technology hardware and software and in the organization of production.

In many respects the conventional advantage of low labour cost is being undermined by the increasing importance of competitive characteristics other than cost of production, notably product/service quality and just-in-time delivery. To cope with these requirements, greater effort will be required to develop design, marketing and new organizational and linkage capabilities, in addition to selectively acquiring new manufacturing technologies.

These market and technological changes are likely to have considerable implications for the shift in the direction of knowledge-intensive production and for the kinds of capabilities that must be developed to cope with the changing situation. First, greater effort will be needed to monitor these changes with a view to adapting to the new situation. This will often imply selective adoption of new technologies in production and marketing at the right time and in the right applications according to the dictates of quality, precision, speed and productivity requirements. Second, greater effort will be needed to create a conducive environment for the creation and development of core capabilities within firms and in the institutions that interact with those firms so as to cope with the changing conditions.

Position of exporting firms in the world market

Type of product

The position of firms in the market is influenced by the type of product they produce. Many firms' exports are primarily common products differentiated largely by the use of brand names. Except for the subsidiaries of multinational enterprises, very few firms design and develop their own products. Most products are imitations of foreign products, usually products which were being imported and are now manufactured' following the logic of import substitution. Competition in the product market is largely based on price and quality.

Types of target markets

The exporting firms have mainly targeted regional markets, with smaller volumes being exported to international markets. Firms which target international markets are mainly resource-based manufacturers, deriving their initial comparative advantage from access to natural resources. This observation in the case studies corroborates earlier case studies in which it was noted that manufactured exports have tended to be dominated by processed goods destined for the markets outside Africa (Riddell, 1990. p. 35). If major primary processed exports are excluded then the much smaller remainder is mostly destined for neighbouring markets.

While some exporters started as export-oriented enterprises (EOEs), targeting export markets right from their inception, others started as import substitution enterprises (ISEs), targeting the domestic market and later moved into export markets. Firms took various routes in shifting or extending from domestic markets to export markets. Two categories can be identified. Some firms moved from the domestic markets to regional markets and later penetrated international markets. Others developed from domestic to regional markets and stayed there or have not penetrated international markets as yet.

The transition from domestic markets to regional markets has been influenced by the similarity between these markets. Two types of exporting firms were found to have taken advantage of this phenomenon. First, there are exporters who have found the regional market no more demanding in terms of product quality than the domestic market (e.g. steel products). Exporting based on this feature is likely to be short-lived at best, considering that quality requirements are likely to rise as economies in the region become more open. Export opportunities based on lower product quality are unlikely to be sustainable in the face of imports from elsewhere. Such less demanding export markets may produce only limited learning by exporting.

Second, opportunities in the regional markets have been tapped on the basis of product quality and appropriateness to the specific conditions in the region. For instance, regional exports in agricultural machinery and other farm implements were found to be based on products which had been developed to suit agro-economic conditions in the region. Zimbabwean firms exporting agricultural machinery had developed products which suited the soil and climatic conditions in the region. Their competitiveness was a result of many years of continuous investment in searching and learning, as indicated by their R&D activities. The firms started by copying imported designs and made efforts, in response to demands from farmers, to make innovations to suit the specificities of the region. The development of agricultural machinery suited to the conditions of Southern Africa was encouraged by the domestic demand for such innovations from the large-scale farming community. The specificity of the technological adaptations gave the firms natural protection from international competition. Because of the appropriateness of these products to the specific soil conditions in the region, they could even sell at higher prices than their imported counterparts.

However, even where there appears to be a natural monopoly, intra-regional competition has to be faced at some point, as the case of agricultural machinery from Zimbabwe and South Africa has shown. Natural protection is tenable up to a point, beyond which there is danger of losing markets to competitors from other regions. Even if imported products are not as suitable to local conditions, competitors from outside the region have sometimes penetrated the regional market by supplying their products at lower prices or by supplying products whose quality of finish looks better. Thus specific local markets can be lost to others if continuous efforts are not made to develop competitiveness in terms of quality and price.

In some cases competitors from other regions have made products specifically for the African regional market. Kangas coming from some Asian countries (e.g. India and China) or African prints from Europe have been manufactured specifically to suit the demand in the African markets. There are signs that such products are taking a share of the market from firms in the region. The evidence indicates that the specificity of regional markets may make the competition for various products less intense but it does not guarantee a monopoly. The need to exert continuous effort to attain and maintain competitiveness in such markets does not seem to be obviated by any specific characteristics of regional demand.

History of exporting: conditions and path followed

The conditions and factors which influenced entry into the export market were addressed by the case studies, shedding some light on the path which was followed in the history of exporting and providing some insights into the process and activities which led to the first entry into export markets.

Exporting strategy

The case studies have shown that most exporting firms started by serving the domestic market. The strategy of exporting came later in response to developments in their domestic markets. Most of these enterprises started exporting to regional markets, mainly in countries which did not have similar industries. The share of exports in total output is usually small (about 5-15 per cent). With such a small share of exports in their total sales, some of these firms could sell in the export market at a loss, the loss being offset by more profitable sales in the domestic market. Firms in this category have tended to position themselves with a fairly broad competitive scope, reflecting the broad competitive scope they had in domestic markets.

Import substituting firms grew up and built up various core capabilities by producing for the domestic market. The protection of the domestic market allowed them to accumulate resources, which were in turn invested in developing capabilities which enabled them to turn to exports at a later stage. ISEs were either motivated to export by export promotion incentives of various kinds or resorted to exporting as one response to saturated or collapsing domestic markets. Developments in domestic markets took several forms.

In some countries the domestic market contracted as aggregate expenditure in the economy was reduced during the implementation of economic reforms. This kind of development in the domestic markets was particularly experienced by the Ivory Coast and Zimbabwe, with the effects of drought exacerbating the contraction in the latter case. Some firms responded to the contraction of the domestic market by increasing efforts to locate new markets in other countries. The success of such attempts was limited by the fact that the transition towards exporting was rushed, without the necessary preparations. However, this survival strategy failed to compensate for the loss of domestic markets in a sustainable way. This implies that export markets are not likely to be a quick fix for the problem of contracting domestic demand.

In some cases the collapse of the domestic market occurred because a firm was established with one major local consumer in mind and that consumer collapsed. The response of the supplier firms was to turn to export markets. Morogoro Canvas of Tanzania was one such case: it had been set as a supplier of canvas to the Morogoro Shoe factory. When that factory went bankrupt, the canvas mill adjusted swiftly by changing its product mix and entering the export market (uniforms, grey cloth and bed sheets). The firm responded by making the necessary investments in technology to meet requirements of the export markets and the transition seems to have been managed quite well. Today the mill exports about 60 per cent of its output. The breakthrough in the export business is mainly attributed to special machines used for export production. This investment in technology coupled with the employment of foreign management under contract has enabled Morogoro canvas to develop a sizeable and diversified export market in the US, the UK, Canada, Holland, Germany, Saudi Arabia, the UAE and neighbouring countries.

The case studies have also shown that a few firms started as exporting firms from the outset. These firms started with an eye on the export market and showed awareness of changing market conditions from the initial stages. For these firms the export market accounted for a large share (more than 50 per cent) of their total sales. These enterprises tended to target international markets in which they occupied a specific market niche and maintained that niche by closely following changing market requirements. Some of them took advantage of preferential access to the EU markets. This strategy was adopted most conspicuously in Mauritius, for some time following the implementation of the import substitution phase. The critical measure was the Export Processing Zones (EPZ) Act (1970), which provided additional special incentives to exporting firms. The EPZ enterprises were allowed to sell their products on the local market to only a limited extent.

Some firms were motivated to pursue export strategies from the beginning because they faced small domestic markets. For instance, the radiator manufacturer in Tanzania targeted the slow end of the export market where markets are small and isolated. The firm adopted a strategy of striving to attain quality and competitiveness in export markets. However, its real breakthrough in export markets came with Original Equipment Manufacturer (OEM) certificates from well-known manufacturers such as Scania, Valmet and Landrover. Obtaining the OEM certificates facilitated exports to Europe and these achievements were used to promote exports into the region.

Previous experience of key management figures

Previous experience had prepared some key managerial and entrepreneurial personnel for conditions in the export markets and put them in contact with technology suppliers. They acquired their experience as traders in similar products or as representatives of multinational enterprises which were engaged in similar activities.

The typical local private exporting firms started as family trading enterprises and later moved into the manufacture of products which were related to their earlier trade activities. Their activities in trade had given them contacts and connections which were later useful at the manufacturing stage. The capabilities which were developed in the previous stages were put to use in the subsequent stages of development. Foreign technical assistance was sought in those areas where local capability was deficient, so that technology investments were largely in the form of more modern machinery in order to manufacture higher-quality products for the export market.

Various forms of linkages and networks

It may be unnecessary to possess all the capabilities in-house if some of them can be obtained outside the firm. However, in such cases the firm needs at least to have the capability to identify the kinds of capabilities it needs to buy from elsewhere and how best to utilize inputs and services provided by others. It was found that information provided by buyers in the export markets often influenced product specifications. Some firms entered agreements with foreign firms, under which they could have access to information about latest fashions and other market requirements. Networks and interactions with various suppliers of inputs and equipment and buyers of output had affected the choices of technology and products which enabled firms to penetrate export markets.

Foreign partners were found in many exporting firms, with their role varying according to the nature of the product, the scale of operations, the type of market and the kinds of core capabilities that the firms possessed. Typically, foreign partners supplied some form of technical assistance in aspects of technology and marketing. The various roles of foreign partners in providing these services are documented in the case studies. These foreign firms had either formed joint ventures with local firms or were hired agents for specific technology and/or marketing activities. In some cases technical cooperation agreements also involve the use of foreign brand names and trade marks. For instance, a major breakthrough for Orbitsports of Kenya occurred in 1974 when it entered into a technical cooperation agreement with Adidas, the world's largest supplier of leather balls. The firm paid royalties to Adidas for technical services, including training of the company's workers at Adidas in France, evaluating the quality of raw materials, checking the quality of final products and providing technical advice on the purchase of machinery and equipment.

The local firms located the foreign partners themselves. However, in a few cases the government and state promotion institutions played a decisive role in initiating contacts between local firms and their foreign partners. For instance, the sister industry programmes in Tanzania enabled a manufacturer of electrical goods to go into exporting.

Investments in technology

Although some regional export markets were no more demanding, in terms of product quality, than domestic markets (e.g. exports of kangas from Kenya to Tanzania), the case studies have shown that entry into export markets has often been preceded by investments in upgrading technology to meet higher quality requirements. These investments were for technological improvements to equipment and for quality control facilities. In some cases firms established new sites specifically for producing for export markets (e.g. Bata Shoes in Zimbabwe, Northern Electrical Manufacturers in Tanzania) or installed separate production lines for exports, in which special machines were installed for selected processes to guarantee export quality (e.g. Friendship Textiles and Morogoro Canvas in Tanzania, Sunflag in Kenya).

Foreign v. local investment

The positive role of foreign investment in building local technological capabilities has come out quite clearly in Mauritius, where local private capital has been progressively buying out foreign capital. This harmonious nationalization of investments has been facilitated by the existence of an entrepreneurial class which developed from the local plantocracy during the years when sugar production was dominant. The surpluses which were accumulated then were invested in industry. In addition, the macroeconomic environment and the climate for investments have been conducive for both local and foreign investment. For instance, one of the leading exporting firms in Mauritius, the knitwear firm, was established initially by Hong Kong investors with a minority Mauritian participation. After a few years the Hong Kong shareholders were bought out by Mauritians, and since 1977 the company has had an entirely local shareholding. The bulk of the shares are held by a local investment company belonging to a large sugar group. The existence of a capital market and a group of local individuals and institutions who are willing to invest seems to have favoured the process of nationalization in Mauritius.

The transfer of control from foreigners to indigenous owners has sometimes been far from smooth and possibly more destructive than constructive. For instance, the indigenization programme in Nigeria was carried out in 1974 and, together with further phases which were implemented before 1980, resulted in Nigerians taking over the control of several businesses hitherto controlled by foreigners. However, it would appear that the policy-makers overlooked the economic side-effects of the indigenization programme, especially its possible negation of the goal of economic independence. The import substitution industries which had been established were acquiring the capability to manufacture for export but this development was thwarted by the manpower dislocation caused by the indigenization programme. Several of the newly established activities experienced manpower problems and some of them failed as a result.

The contribution of foreign investment in building local capabilities has not always been positive. The case studies showed that some locally controlled firms had been bought out by TNCs in response to the threat of competition (e.g. Trituraf of the Ivory Coast). Another multinational, Saco, had a monopoly for about 10 years, after which many state-created companies started trading in the Ivory Coast. But in the middle of the 1980s nearly all of these newcomers disappeared or were taken over, leaving Saco in control of most of the local cocoa-bean processing and by-product production in the Ivory Coast.

In discussions of the role foreign investment could play in industrialization and in building technological capabilities within firms it is important that the changing forms of foreign investment be recognized. This study has shown that exporting firms in Africa have benefited in different ways from various forms of relationships with foreign firms. Foreign investment is increasingly taking forms other than the traditional direct foreign investment. There is considerable evidence that new forms of investment (NFI) will continue to gain importance in developing countries, superseding traditional FDI in some areas and complementing it in others (OECD, 1989).1 The implication of the debt crisis and foreign exchange shortages for the balance between FDI and NFI is likely to vary from one country to another, reflecting differences in host country policies (macroeconomic policies and policies on foreign investment), the host-country's market potential, perceived degree of bureaucratic red tape, political stability and the availability of local managerial skills and skilled labour. However, it is likely that, as some developing countries acquire various capabilities, they may want to bring in only those assets which they cannot obtain locally in order to minimize foreign exchange losses (through remissions abroad and payments for various services). Such long-term financial and foreign exchange considerations may lead to more selective pursuit of NFI, with government attitudes and policies tending to be more industry-specific, reflecting long-term benefits from learning by doing (OECD, 1989).

The changing perceptions of TNCs may continue to favour a relative increase in NFI, on the grounds that it increases leverage on firm-specific assets and that it has risk-shedding advantages over traditional FDI. In future, the balance between traditional FDI and NFI is likely to be influenced more by the global dynamics of inter-firm competition and by the interplay between those dynamics and host-government policies than by the latter's unilateral decisions (OECD, 1989). This underscores the importance of understanding the global trends within specific industries.

The evidence presented by the OECD (1989) suggests that there is a long-term trend in the division of risks and responsibilities between TNCs, host countries and international lenders, which is characterized by increasing emphasis by TNCs on flexibility and the development of capabilities in relatively protected industry segments (where profit potentials are high), operating upstream of production (as suppliers of technology and management) in some industries and downstream (in marketing) in others. Host-country investors are increasingly retaining partial or total ownership of investment projects, while the degree of effective control depends increasingly on factors other than host-country ownership of equity. International lenders are likely to continue to play a central role in channelling financial capital to developing countries (in the form of new loans and debt rescheduling) and in that way will exert significant control over the international investment process (OECD, 1989).

How firms maintain or improve their positions in export markets

Having entered the export markets, maintaining and possibly improving their market position becomes a major challenge for firms. Understanding this process and gaining insights into the basis of their competitiveness has been a major interest of this study. The likely sustainability of such competitiveness over time and how consistent it is likely to be with overall increases in productivity in the economy were also of interest. Some firms have tried to maintain their positions in export markets by cutting the costs of inputs and other factors of production, while other firms have been improving productivity through searching and learning continuously over time. Only in the latter case is international competitiveness in export markets sustainable.

A competitive strategy would be expected to grow out of a sophisticated understanding of the structure of the industry and how it is changing. The changes that matter may be technological or market requirements. Firms need to maintain and improve their positions in export markets by facing the threats of new entrants and of substitutes and by coping with the rivalry among existing competitors.

The case studies have shown that the main sources of comparative advantage are in the primary activities of production and marketing, with little advantage deriving from the availability of support services such as the providers of purchased inputs and infrastructure. The advantage has been derived from lower-order factors such as low labour costs or cheap raw materials, factors which are relatively easy to imitate and therefore less sustainable. The case studies have indicated that some exporting firms have striven to develop higher-order advantages through sustained and cumulative investment in physical facilities, human resource development and searching.

Making investments in technology improvement

The case studies have indicated that exporting firms maintained and improved their market position by investing in technology and making technology improvements on a continuous basis. Improvements were made either in the production processes or in products. The processes of production were improved in order to cope with pressure to keep costs at competitive levels or to improve product quality (level and consistency). These responses were derived from signals given in export markets.

Older and simpler technology has been found to have an advantage, in that local skills can operate and maintain such equipment more efficiently. The case studies have also shown that efficiency in the use of such technologies can be pushed to its limits by the demands of export markets. For instance, much of the equipment in shoe factories in Zimbabwe is old, but it is also 'appropriate' in that it is operational and is readily maintained with local skills. Productivity, measured in units such as pairs per person per day, is low by international standards (from 7 to 45, with international levels two to three times higher for comparable styles) but the total costs of production, reflecting the written-down costs of the antiquated but operational equipment and relatively low labour costs, would appear to be competitive. This situation may have been favoured by the relatively slow pace of technological innovation in the footwear industry world-wide, as noted in Chapter 4. Productivity could be improved by reducing the number of styles being produced, while cost efficiency is already being improved through more efficient stock control, a spin-off of the present tight monetary conditions. However, given the speed at which technological development in general is moving, such efforts can at best guarantee survival for a while. In the longer run, investment in newer technologies is necessary. Some firms have started to do that already. For instance, Bata installed new export production lines in Gweru in 1993 and has just commissioned a three-colour screen printer at its Kwekwe factory. Coupled with a combined lasting and two-colour plastic sole injection moulding machine, this should make it possible to attain internationally competitive productivity levels for high-fashion sports shoes and sneakers.

Technology improvements have also been made in response to rising costs of labour. In Mauritius, for instance, as labour became less abundant and labour costs started to rise, there was a shift towards less labour-intensive processes. Owing to labour scarcity and the consequent increase in salaries, the paint manufacturing firm in Mauritius has moved to the use of more powerful equipment and less manpower. Although it has a very large share of the domestic market, the paint manufacturer faces strong competition from other domestic producers. The knitwear manufacturer in Mauritius has made significant changes in process and product technologies - the use of more sophisticated equipment and increasing automation. There have also been changes in the type and quality of its products. Fancy knitwear now accounts for 60 per cent of the firm's total output. However, unlike some large leading firms in the developed countries, these changes have not been a result of large R&D investments, since they are based on imported technologies rather than development of production processes by the firms themselves.

Some firms have introduced a number of new technologies in their production processes in order to achieve higher levels of productivity and product quality. For instance, investments in more modern spinning technology in the textile industry have led to higher production rates and higher and more uniform quality than was possible with conventional ring-spinning technology.

The use of new technologies such as computers has started to spread in various fields. Computers are used for general office work in accounting and payroll functions and in some firms they are used in projecting market demand and machine inventories. Most firms also have fax facilities. The use of computers in controlling production processes was limited, although several firms were contemplating the introduction of computer control in selected production processes as a major step towards increasing efficiency, improving quality and raising productivity. The finding that micro-electronic-based technologies are being introduced selectively in some processes suggests that the further development of these technologies in Africa itself may be appropriate and perhaps unavoidable. For instance, Pack (1993) has suggested that, in the short run, relatively low rates of effective domestic protection could be granted to production based on mechanical and chemical engineering but that no protection should be given to production based on electronics or biotechnology The latter industries, it is feared, are associated with rapid changes in technology. However, the separability of these categories (mechanical versus electronic) is more questionable if micro-electronic-haled technologies are becoming widespread, albeit selectively.

Exporting firms have been investing in product design and in quality control facilities as required by export markets. Typical exporting firms have strict quality control systems in place. Quality is regarded as an important part of production, and quality standards are insisted upon at every stage of the production process. In one firm, management said that their in-house training programmes insist that quality and output go hand in hand. A trainee is only brought into the production line after achieving 75 per cent efficiency in both quality and targeted output levels. In other words, the concept of putting quality in the forefront of production is treated as a long-term strategy by companies which have been maintaining their positions in the export business. Investments in product quality sometimes involved moving from labour-intensive methods of production to more automated methods. The introduction of automatic power spraying of paint by Northern Electrical Manufacturers (NEM) of Tanzania was in this sense a necessary investment to achieve the quality standards which were required if the firm was to maintain its position in export markets.

Product design capabilities were found to be limited to copying or making minor adaptations of imported designs following the logic of import substitution. Most of the garment manufacturers said that they had no designers to speak of, except for some women's garments. The local designers generally only copy fashions and trends from overseas. Where firms have, over the years, developed design capabilities, their designs have initially been intended for the domestic market but some have been progressively adapted to the demands and specifications of external markets.

Firms which are manufacturing products whose demand characteristics are specific to the region, such as agricultural machinery, were found to have made the most consistent progress in their adaptations and design capabilities. For instance, Bain and Tinto, making agricultural machinery in Zimbabwe, have design departments staffed by highly qualified engineers and agriculturalists. Both companies have a policy of continuous improvement and innovation, not only to keep up with each other, but with an eye on the export markets in the region. During the fieldwork, it was noted that Tinto was undertaking various capital investments such as the refurbishment of the foundry at the Harare works, the installation of an arc furnace control system to improve energy efficiency and the acquisition of computer-controlled machining centres.

Larger firms have technical development departments which, beside their long-term project development, look into market requirements, especially the need for new varieties of products. However, in general R&D is done on a small scale.

Case studies revealed the introduction of new technologies such as CAD in the design functions. CAD is primarily applicable to small batch-type manufacturing organizations, since resetting becomes merely a matter of selecting and activating different computer programmes For instance, Fashion Enterprises, the leader in women's clothing in Zimbabwe, have acquired CAD/CAM facilities for their long-run production for the export markets. The company's design capabilities have been developed jointly with overseas customers or through promoting its in-house designs for both the domestic and export markets. Both Bata and Superior Shoe manufacturers in Zimbabwe have acquired their own CAD facilities, coupled to laser pattern cutters, in recent months. This technology was first introduced to the Zimbabwean shoe industry through a grant from UNIDO to the Leather Institute, the equipment being installed in the Institute's premises in Bulawayo. It is, unfortunately, not much used at present, although it is available for use by the smaller companies in the industry. The widespread application of such new technologies is still limited by various infrastructural problems.

One major obstacle to the introduction and spread of microelectronics in industry is the lack of resources and the inadequate supportive infrastructure (e.g. constant telephone interruptions and power failures) resulting in constant machinery breakdowns. The telecommunications infrastructure needed for data transmission between user and producer is non-existent or malfunctioning. Already there are problems of inadequate software and difficulties in obtaining specialized components. Moreover, low levels of education mean that most workers are not easily trainable to handle or operate new technologies.

The case studies have shown that firms which maintained or improved their position in export markets had a way of accessing information on changes in technology. The common information channels were international industry journals, international trade fairs and membership of international industry associations. However, it was found that there is very little support by the government and other public institutions in this area. The subsidiaries of TNCs had an edge on other firms because of their connections with the parent companies abroad.

Exporting firms in which important technological functions are performed by foreign individuals and/or firms can have good export performances without necessarily building the local core capabilities which are needed to sustain exports. This phenomenon was found largely in subsidiaries of TNCs. Technological capabilities tend to be limited, since the parent company is responsible for recommending the selection of technology and the recommendations are ordinarily followed by the subsidiaries. The parent companies provide the subsidiaries with the necessary product designs and drawings (e.g. Uniwax of the Ivory Coast gets its product designs from Vlisco of Holland). The subsidiary firms therefore undertake very little technical innovation. At best they possess a technical workshop which undertakes some maintenance and the processing and preparation of designs received from the parent companies. This lack of their own technological capabilities is reflected in the high royalties and technical assistance fees paid by the subsidiary companies to their parent companies, as shown by the case study on the Ivory Coast.

However, it was found that in subsidiaries which had activities which were rather singular, in that they had no exact replica in the activities of the TNC, there was greater willingness to invest in local adaptations and in the development of local technological capabilities. The circumstances make it imperative for the local subsidiary to make modifications and innovations, as the case of Del Monte of Kenya has shown. Many vital pieces of machinery unique to the pineapple industry are made at the firm's own machine fabrication workshop. This innovative workshop produces massive, 120-feet-span boom harvesters in addition to fumigators tailored to local conditions. Some in-house modifications have also been made to mechanical slicers, crushers and sterilizers/coolers. The in-house equipment, though slightly inferior in engineering efficiency, was said 17, to be more reliable, easily serviceable and more cost-effective. In addition, a sugar recovery plant uses waste pineapple skins to manufacture high-grade refined sugar. The refinery provides 20 per cent of the cannery's sugar needs and has helped the company to integrate its activities.

The position of those who have argued that TNCs and their subsidiaries can be effective vehicles for raising productivity because they choose appropriate factor proportions, provide advice on the purchase of appropriate equipment and can advise on marketing (e.g. Pack, 1993) is supported by evidence from this category of TNCs. But the findings from the case studies do not seem to support this position as a generalization for all TNC activities in Africa.

Human resource development as investing in learning

Improvements in the production processes or product technology need to be accompanied by a labour force which has the skills to utilize such technologies efficiently. It was found that many exporting firms maintained or improved their position in export markets by investing in training the workforce and upgrading in-house labour skills and by making efforts to engage expatriate staff for selected activities for which local personnel did not have the requisite capabilities.

It has been pointed out in the previous section that firms have maintained their positions in export markets by making continuous investments in technological upgrading. The human resource requirements to cope with these technologies are also changing. The case studies have shown that the level of formal education among the recruited workers has been rising. The firms indicated that this has been encouraged by the need for flexible labour skills and rapid learning to operate new machinery and more sophisticated technologies. Thus firms which were recruiting primary-school levers in low-skill jobs are now recruiting secondary-school levers (holders of 'O' level or 'A' level certificates). Graduates are increasingly replacing secondary-school levers for middle-level jobs. These trends imply that industrial demands for higher educational levels will have to be met by further investments in education. Governments may be called on to take the lead in this respect. In the light of these findings, the suggestion that African manufacturing should make intensive use of unskilled labour (e.g. by Pack, 1993) should be received with great caution.

The case studies have shown that various forms of training, in-house, in specialized local institutions and in other countries, were used to enhance production capabilities. Many exporting firms have an elaborate training programme and their production managers indicated that trained labour was an important requirement if the firm was to achieve its production and export targets. Overseas training is expensive and has therefore largely been confined to a few managerial and specialized technical and professional skills. Local training in technical and professional institutions had catered for the training of the majority of staff. A major limitation which came out in the case studies is the absence of specialist institutions for specific industries to teach subjects such as textiles technology, and garment- and shoe-manufacturing technical skills. Lower-level skills were acquired through in-house training, either within the production facility or in the firm's training institute, for those which had one. This is an area in which investments by the state will be necessary.

Interactions with foreign partners was found to have enhanced managerial and technological capabilities but only under certain conditions. Top management or entrepreneurs who had previous experience in commerce and/or industry tended to accumulate learning faster. Their visits abroad could be a useful eye-opener when such visits were well targeted (the experience of NEM of Tanzania being a good case in point). The training of local personnel to replace expatriates was found to be more rigorous in TNC subsidiaries. These firms could take advantage of their greater size to achieve economies of training.

Where the subsidiaries were set up to do simple assembly work and sell primarily in the domestic market, very little learning took place. The main motivation in these cases was to gain access to the market of the country in which the assembly activities were located and to neighbouring countries whose domestic markets were not big enough to warrant the setting up of similar assembly activities (e.g. exports to Burundi by Matsushita Electrical Manufacturing Co. in Tanzania). The kinds and level of skills that were required were rather low and could be acquired in-house through on-the-job training without requiring any high level of formal or professional training. In spite of the emphasis these firms placed on local training, there were fewer opportunities for the indigenous workers to upgrade themselves technologically. This is partly because they worked on assembly lines which were labour-intensive and in the least skill-intensive parts of the production process. There is thus little incentive to search for or train more skilled operators and technicians. Recruitment has thus been focused mainly on primary-school levers (seven years of schooling) who are then trained on the job. The lack of opportunities is also partly because the areas with the greatest potential for enhancing capability acquisition are reserved for expatriate personnel. For instance, in the case of Matsushita Electrical Manufacturer in Tanzania, the top management is foreign and most of the training for local workers has therefore focused on manual skills. There has been little training to enhance indigenous management, administrative and marketing capabilities.

The TNCs which were manufacturing locally for world markets were making considerable investments in training. For instance, Del Monte of Kenya placed great emphasis on training local employees in all relevant fields, on both the management and technical sides of its operations. Employees in the agricultural, canned foods processing, management, finance and accounting departments of the firm are all likely to go through the company's training department at least once in their careers. Their training needs are assessed every year. The firm uses both in-house and local training institutions and works closely with the government's Management Training and Advisory Centre, the Directorate of Industrial Training and the Kenya Polytechnic. The firm's internal courses are supplemented by on-going local management programmes conducted by reputable local firms, and several staff members are sent overseas for further training and practical experience within the Del Monte network every year. These on-going training programmes have enabled Kenyans to take up senior posts. In the past two years, the number of expatriate employees has dropped from 20 to 9, all of whom hold highly technical or senior management positions. The productivity of labour also increased. Between 1980 and 1990, the total labour force increased by 20 per cent, while canned pineapple production increased by 142 per cent, leading to a decline in the share of labour costs in total output from 10.4 per cent in 1970 to 7.1 per cent in 1990.

As the case studies have indicated, training is an important source of capability acquisition for even low-technology activities. With the emergence of new technologies, the demands for higher levels of education and professional training are increasing. Many firms have made investments in staff training but this is largely on-the job training and other kinds of short-term training which may not be sufficient to develop the capabilities to handle the more demanding stages of industrial development. Many firms could not train their staff at a higher technical or professional level because they lack resources and face the risk of losing staff after training them. Training within firms can expand the base of required human resources but it cannot be a substitute for investment in basic and higher formal education for higher-level managerial and technical personnel. At higher levels of industrialization, the demands for government intervention in investment on education, especially in technical and engineering areas, is likely to increase. There is a strong case for the government to provide the levels of formal education and training needed to acquire industrial capabilities.

Organization of production

A new technology may or may not conform to the core capabilities of a firm. If it does not, a change in some of the core capabilities may be required. A change in management and organization systems is often necessary. In the long term, organizational changes are needed to enhance dynamic innovative capabilities.

The case studies show that some of the firms which were maintaining their positions in the export markets through undertaking continuous investments in technology, training and marketing had also taken initiatives to change the way they organized production. For example, Bain of Zimbabwe has benefited in recent years from an International Trade Centre project which seconded a master welder to assist in improving performance on the shop floor. Apart from offering training in welding skills and suggesting changes in component design to improve weld strength and overall finish, the person concerned also made suggestions about plant layout, handling equipment and maintenance. The changes implemented have had a marked effect on efficiency. In response to increasing competition, Tinto has taken steps to improve its production management system. By employing a local consulting organization, the Kawasaki Production System has been introduced. This is essentially a 'just-in-time' production system, which has been particularly successful in improving productivity and efficiency at the Norton factory. There have been significant financial savings from reducing the amount of work in progress, which has also allowed for a 60 per cent reduction in working space.

Investing in marketing capabilities

Firms which invested in marketing, either by building in-house capabilities or by engaging various types of marketing services, managed to follow changes in the export markets and to make adjustments in response to the signals which came from the market.

Investments in marketing have taken the form of building in-house capabilities by strengthening marketing departments. Firms chose one or more of the following channels for marketing their products in export markets: using overseas agents, making direct contacts with some chain stores, posting their own agents in export markets and relying on the assistance of national external trade institutions.

Larger companies were more likely to be able to afford to set up their own agents in marketing offices in the export market. The subsidiaries of TNCs had an advantage in that they already had established offices which could handle marketing functions in many countries.

Some firms continued to sell in export markets, even at a loss, for the sake of maintaining their market positions while they were making the investments in technology necessary to improve their competitiveness. This kind of exporting at a loss is an investment, provided it is a matter of temporarily holding onto export markets while specific core capabilities are being built or strengthened.

Small and medium-size firms may find the investments needed to build core capabilities in marketing beyond their means. In these cases public institutions for handling trade matters such as organizing trade fairs and establishing contacts can be very useful. Institutions such as ZimTrade of Zimbabwe, the Board of External Trade in Tanzania and the Kenya External Trade Authority were established to play that role. Many firms in the case studies benefited from the services of these institutions but it was often said that their effectiveness needs improvement.

The trade-production nexus

The trade-production nexus was manifested in two forms. First, the contacts which were made in the trading phase with consumers or with suppliers enabled firms to accumulate capabilities and knowledge about the characteristics of the markets and of suppliers. These contacts were a useful asset when these firms entered the manufacturing stage. Second, as some firms shifted from trading to manufacturing, part of the family continued with trading activities and some of them were located abroad. The local manufacturing firms then made use of the family connections, who acted as trusted agents and 'marketing offices' abroad. Networking with family members in foreign countries has been useful in getting access to information about market opportunities and sources of technology. Such family connections were found very effective in Mauritius, in Zimbabwe within the white community and in Tanzania and Kenya within the Asian community. A large number of these contacts were retained and operated as networks through which new ideas about changing technological and marketing conditions were disseminated, contributing to the improvement of firms' positions in export markets.

Exporting firms which are subsidiaries of TNCs have benefited from a production-trade nexus of a different kind. Through their global networks of companies, TNCs in resource-based activities have engaged in the production and processing of primary resources and trading in the final products. Either they control the source of raw materials by developing their own plantations or, by establishing processing activities at the source of the raw materials, they have priority over procurement. For instance, the production of cotton is highly dispersed world-wide but its marketing is concentrated in the hands of a few big traders (notably 15 cotton traders of whom two are European companies, eight are US companies and five are Japanese trading houses). The coffee market is dominated by a few trading companies (General Foods, Nestlé, Suchard).

Even in areas where TNCs used to procure the raw materials from local producers, technological developments are opening up possibilities for them to establish their own plantations. For instance, tissue-culture coffee trees have already been planted in large plantations (mainly by multinationals such as Nestlé) in Malaysia, Singapore and Indonesia with an eye on the Japanese market (Brown and Tiffen, 1992). Trading activities are also carried out by their own companies.

In clothing production, barriers to entry are low, but in the garment trade large OECD-based buying groups dominate the market, using their vast purchasing power to influence the design, quality and price of garments. The degree of concentration in international buying is very high, so, instead of making direct investments, buying groups use their assets to undertake non-equity forms of investment in developing countries, mainly in the form of international subcontracting and licensing of trade marks and brand names (OECD, 1989).

How some firms lose ground in export markets

The case studies have yielded some insights into the conditions under which firms which were once exporters to regional and international markets have lost or are losing ground in these markets.

Failure to cope with changing technology

Failure to keep pace with changes in production process technology was often reflected in uncompetitive costs of production and/or deficiencies in product quality. Some firms had made initial investments in labour-based production processes to take advantage of relatively low labour costs. However, the state of technology changed and such methods could not provide the quality and precision now required in finished products. Investment in more automated production methods became necessary. Those firms that failed to make these investments lost their markets because they could not meet the product quality demands of export markets.

There are several factors which inhibited investments in improved technologies. Some firms did not have search mechanisms for information on changing technological and market conditions and did not keep abreast of the technological trends in their industries. The gap had not been filled by any institutional arrangements initiated by governments or industry associations. Some firms had not made any investments in improved technology for lack of foreign exchange or of accumulated profits which could be ploughed back into the enterprises. Such firms had either accumulated losses or had failed to generate profits for a long time. Some firms had suffered from the effects of rigid price controls but others had been operating at low capacity utilization rates for a long time for various reasons. Firms which had been in financial problems for a long time had eroded their capacity to make any significant investments in capital equipment, training and innovations. Investment in general had been low or stagnant.

For instance, it was found that Tanganyika Textiles used to export vikoy, mainly to the Muslim community in Kenya, but it has been pushed out of that export market mainly because it could not modernize its 1959 labour-intensive textile technology. Capacity utilization rates have been falling during the last decade, from about 41 per cent in 1980 to around 20 per cent in 1993, leaving the firm too under-capitalized to modernize its technology in any substantial way. Competitors' finished products were perceived as being of higher quality and the export price could not cover the firm's costs of production. Although the collapse of its export market (in Kenya) was triggered by the collapse of the East African Community in 1977, this may have been only the last straw. In fact the firm has not recovered since then and in the meantime Kenya has developed its own textile base. Even in the domestic market this firm is losing its market share to imports from Southeast Asia.

After 1985, one manufacturer of kangas in Kenya (Rivatex) started to lose its markets in the Middle East and to some extent in Tanzania to the Far East, where prices were more competitive. While Rivatex was selling kangas at US$3.20 per pair, similar products from the Far East were selling at US$1.70 per pair. This loss of competitiveness is partly due to lack of technological improvements or innovations over time. The firm's ability to make investments in technology had been eroded by the rising costs of debt servicing on loans denominated in foreign exchange (between 1976 and 1992 the Kenya Shilling depreciated substantially against the Deutschmark). The firm has failed to inject new capital, to modernize its machinery, or to finance training programmes for its staff.

In the import liberalization phase, some firms which had operated profitably in protected domestic markets found it difficult to compete with imports. In response, instead of making efforts to improve their competitiveness, some firms resorted to export markets with the help of channels which were not strictly commercial, e.g. religious groups or charity organizations. This strategy seemed to work for a while but it could not be sustained. This indicates that losers in the domestic markets are not likely to succeed by seeking refuge in export markets, even if it may seem possible at first.

Some firms were found to be putting considerable effort into improving their competitiveness but the results in terms of export performance did not seem to be commensurate to their efforts. Two categories of reasons were identified in the case studies. First, it was found that the efforts these firms were making were blunted by the inadequacy of infrastructural and institutional support, which ordinarily originates from outside the firms. Second, the basic limitations in the technologies the firms were using were not being tackled. Instead, futile efforts were made in more peripheral aspects of technology. This situation was particularly present in areas in which technology had changed to the extent that high product quality was no longer being attained by highly skilled labour working' with labour-intensive technologies but rather by the use of microelectronic controls. In such cases, further investment in training labour and perfecting skills in the labour-intensive methods could not yield much fruit. These firms succeeded in reducing costs and improving product quality but these achievements did not meet the requirements of international markets. This points to the limitations of small-scale, labour-intensive operations, in specific industry contexts, in producing high-quality products for the international market. Investments in more radical changes in technology were needed. This underscores the importance of understanding the pace and trends of technology development elsewhere, as a guide to the kinds of investment that must be made to create and develop new technological capabilities.

The case studies have also shown that technological changes in the materials used in production have undermined the competitiveness of firms which had based their competitive strength on cheap local resources. For instance, Orbit-sports of Kenya had gained a competitive advantage in exporting balls under licence from Adidas. This advantage was based on the domestic availability of cheap, high-quality leather. As a consequence of technological developments in materials, Adidas recommended a shift from leather to synthetic, non-woven fabrics. The problem has been aggravated by high import duties on imported synthetic materials. The firm has been losing some export orders to competitors from Asia and Europe.

Import substitution in importing countries

The countries which had made an earlier start on industrialization in Africa found their export markets in the neighbouring countries, whose level of industrial development was lower. Some of these regional markets have been lost as neighbouring countries decided to establish and protect their own industries. While this may be a necessary step towards industrialization, it poses the question of whether industrialization might not be better pursued within regional cooperation arrangements which could reduce duplication of productive capacities within the cooperating regions.

Problems of reliability of supply and quality of local inputs

Substitution of local inputs for imported inputs has been one innovative step taken to cut down costs or as a survival strategy in the face of import controls. For example, the shift in textiles in Tanzania, from using imported rayon to local cotton, and from imported starch to local cassava starch, was stimulated by cost-cutting considerations and responses to import controls. These modifications have resulted in a considerable reduction in production costs, as import content was lowered. But these are one-off cost cutting innovations and do not necessarily represent continuous efforts. In the past some of these innovations were made in response to foreign exchange constraints. As competitive pressures build up, with import liberalization and competition from export markets, product quality considerations are gaining in importance. Where such import substituting innovations had compromised product quality, these innovations are being reversed.

The case studies have shown that some exporting firms failed to meet product quality requirements or delivery times because of the low quality of local inputs and unreliability of supply. Firms which could not obtain good-quality inputs found it difficult to maintain their position in export markets. This has some similarities to findings on the Colombian clothing industry by Morawetz (1981).2 He made a comparison of Colombian and East Asian clothing exporters and found that, in early 1977, Colombian exporters were offering prices for jeans and shirts which were 44 per cent higher than prices from Korea, 25 per cent higher than Hong Kong and 11 per cent higher than Taiwan. One explanation of the lack of competitiveness of Colombian firms was the price and quality of their inputs. While East Asian firms obtained good-quality fabrics at world prices, the Colombian firms bought from domestic producers at prices 50-108 per cent higher than the world prices. These producers were protected and were too small to take advantage of economies of scale. Locally made zippers and threads in Colombia were two to three times the world price. The case studies suggest that the African situation is quite close to the Colombian one.

The industries which are supplying inputs to the exporting firms have more often developed monopolistic and protectionist structures than competitive ones. In Zimbabwe, for instance, there are about 250 garment manufacturing firms which get their fabrics from only five textile firms. There is little competition between these firms, since two of them account for 60 per cent of the total output of the sector. The local grey cloth which the textile mills manufacture is not competitive in the world market and it is difficult for those using this grey cloth as an input to face competition in export markets successfully.

This implies that local availability of inputs and linkages in the domestic economy are not always a blessing. If the firms using, local inputs have to be competitive, the efficiency of the supplying firms and supporting institutions also needs to be ensured.

The lack of specialization

The case studies have indicated that the degree of specialization in many firms was limited by two considerations: the size and stability of the markets which the firms had decided to target and the supply conditions in the supportive industries, especially those producing inputs.

Target market conditions were crucial determinants of specialization for firms which were primarily targeting domestic markets and became exporters at a later date. While supplying the domestic markets, these firms adopted the diversification strategy as a growth path where domestic markets for particular products were very small (e.g. NEM and Themi in Tanzania and the fertilizer and paints manufacturers in Mauritius). While these firms extended from domestic markets to exports they retained the wide variety of products they were manufacturing. Firms which targeted the export market from the outset tended to be more specialized than those which were primarily catering for the domestic market.

Product diversification has presented further challenges: shorter production runs, the associated loss of economies of scale and having to cope with requirements of marketing. The case studies have identified the lack of specialization as one factor which inhibited attainment of international competitiveness. The textile firms (e.g. those owned by the government in Kenya) had a low average size, of about eight thousand spindles per mill, compared to the minimum economic size of a spinning plant of 25-30 thousand spindles. These findings are corroborated by a previous study of the textile industry in Kenya (Pack, 1987).3 That study employed engineering and economic data to analyse the deviation of textile plants (in Kenya and Philippines) from international best practice. The lack of specialization was identified as the main source of such deviation. Excessive diversification of products (partly reflecting tariff protection) and the consequent short production runs accounted for considerable inefficiency.

Facing the absence of reliable networks for input supplies, some firms have taken steps in-house to tackle the problem. Diversification in the form of vertical integration has been adopted as one way of ensuring reliability in the supply of inputs. For instance, some clothing firms (e.g. Fashion Enterprises of Zimbabwe) have solved the problem of unreliable supply of fabrics by establishing their own fabrics-manufacturing units to guarantee quality and reliability of supply. While this kind of diversification increases reliability of input supplies, it has often led to higher costs. Where the domestic market has been protected, such costs could be passed on to consumers. In the export business, however, this may not be possible. Some firms have tried to check costs by creating autonomous production units under one group of companies. While this option has been feasible for large corporations operating a group of companies, it is more difficult for smaller firms.

Failure to cope with changing market conditions

Employment of high technology may be a necessary condition but it is by no means sufficient. Faulty marketing strategy and failure to develop the necessary marketing capabilities have led to disaster in spite of having invested in modern and advanced technology. For instance, the manufacture of cloth for shirts and trousers started in Mauritius in 1990 as a significant move towards high fashion and high-technology production in clothing manufacture and exports. The firm was equipped with the latest textile machinery available on the European market. However, due to a defective marketing strategy and a narrow and excessively concentrated customer base, sales collapsed and the firm was placed in receivership barely two years after its creation.

Linkages and supporting industries

Inter-firm linkages

The study found that internal linkages (i.e. within the country) are limited. While there were some linkages among firms which shared premises in the industrial estates, there were only isolated cases of subcontracting arrangements outside these networks. There is little subcontracting or local procurement of manufactured inputs in the exporting firms. Large firms have only infrequent relations with small firms except for the purchase of some repair and maintenance services. Information and technology diffusion among firms is minimal except for very informal channels.

Several factors explain this situation. First, import dependence over a long time has pre-empted the search for local alternative linkages. For instance, in the eases of NEM, Afrocooling and Matsushita, the lack of linkages reflects the pattern of import substitution industrialization which emphasizes import-dependent assembly. Second, access to tied donor finance reduced the need to search for local sources of supply. Third, the capability to search for various local suppliers had not been developed. Fourth, some firms competed with their potential suppliers of technological services rather than being assisted by them. For instance' Themi of Tanzania produced farm implements, some at least of which were also being produced for the domestic market by two research and development institutions. The competitive relationship between the firm and the institutions which are supposed to provide technological services was not conducive to the development of technological linkages between them. Lastly, poor inter-sectoral linkages may reflect poor infrastructural facilities for small firms, biases in policies and in credit markets and the lack of an extension network.

Industry associations had made attempts to promote interactions among local firms by harmonizing production processes (e.g. identification of excess capacity in individual firms and possibilities of subcontracting, trading in spares, joint quality control, etc.). The ease studies showed that in isolated incidents firms which receive large export orders have subcontracted some of the work to other firms. Inter-firm trade in unfinished products is very rare.

The creation of linkages or establishment of input-producing activities, have been influenced by government policy. For instance, in the case of textiles and brewing, the establishment of some input-supplying activities was influenced by government policies discouraging imports (e.g. yarn and malt in Nigeria). Some of these firms have achieved such tremendous expansion that they now export as well as selling on the local market. In the case of the brewing industry in Nigeria, the search for local alternatives was intensified with the introduction of restrictions on importing barley. Increasing success with local substitutes for barley malt improved the capacity utilization rate for the industry. The search for local substitutes for imported barley malt involved most of the firms in investment in R&D, as well as substantial plant conversion. Their efforts were complemented by the independent research endeavour at the Federal Institute of Industrial Research, Oshodi (FIIRO), which, through some of its research report series, demonstrated that lager beer could be produced using only sorghum. Today, most of the more successful firms use maize and sorghum in their beer production process.

Buyer-consumer links

The case studies found that buyers and consumers of the firms' products provided useful market information. They were very instrumental in inducing product quality improvements. The interaction with export markets, which are more demanding, was particularly effective in this respect.

Linkages with marketing agents have been common among exporting firms which are not large enough to afford large investments in building their marketing capabilities. The role of marketing agents had been observed to be important in South Korea but there seems to be one difference; that is, Korean firms selectively let foreign buyers do much of the marketing during the early stages of export development but this role was gradually transferred to the firms or to local trading institutions. This progressive transfer process does not seem to have taken place as yet except for some firms in Mauritius.

Infrastructural problems

Various problems of infrastructure have been pointed out in the country studies as obstacles to the attainment and maintenance of competitiveness in export markets. Supportive infrastructure is an important prerequisite for successful exporting. Expensive, sporadic and unreliable transport and communications are a serious impediment to the exporters of non-traditional goods. Reliability of delivery is also critical. High transport costs contribute greatly to the lack of competitiveness of exports. Poor telecommunications and constant power and water interruptions also raise the costs of doing business and compound the problem of lack of information. To obtain electricity, some firms had to purchase generators or other equipment which is ordinarily supposed to be purchased by the national electricity supply authorities. This added unnecessary costs to the operations of the firms.

Information flow is very important if firms are to respond to opportunities which arise from time to time. It was one thing to introduce supportive facilities, it is another to make full use of the facility. Some firms were found not to be aware of the existence of some of the facilities which were supposed to assist them.

The influence of policy on firms' export activity

The macro and sectoral policy environment in which exporting firms have been operating has an influence on decisions taken by firms.

Import policies

Import policies have been mentioned as important in influencing the performance of exporting firms. The competitiveness of some exporting firms was undermined by high duties on imported inputs or difficulties of access to quality inputs required to meet export orders. This study has also revealed that there are cases in which government support had favoured subsidiaries of TNCs which were in competition with local firms. For instance, Cosmivoire would have performed better if the government had been able to guarantee fair competition within its sector: its main competitor is a subsidiary of a powerful multinational which receives many advantages from the government. In the case of Kenya, Sharpley and Lewis (1990)4 have pointed out that the rate of effective protection for foreign private firms (averaging 57 per cent) and especially parastatal enterprises (65 per cent) was considerably higher than for local firms (35 per cent).

One major problem mentioned by all firms in the sample is that of cumbersome, bureaucratic and lengthy procedures for licensing, access to credit and foreign exchange, and export documentation. Some exporters have to travel long distances from the regions to the capital city simply to register themselves. There are also still tight bureaucratic bottlenecks in foreign exchange allocation, resulting in long lead times for imports. Such long and cumbersome procedures involving many institutions impose extra implicit costs (in terms of delays, etc.) on exporters. Delays could be even more disastrous for risk exports such as fresh fruits and fish. Some country studies have proposed the establishment of some kind of export centre which would offer at one location a package of relevant export services such as registration, licensing, proofs of ownership, export advice and export promotion.

Bureaucratic delays at Customs and related obstructionist tendencies increased the operating costs in many ways, making it less attractive for exporting firms to export, or to import in order to export. For instance, several respondents complained about Customs' insistence on sticking to the letter of their duties, even when there is little or no customs revenue involved and delays could cost the country not just one particular export order but perhaps a valuable relationship with an overseas client. For example, in preparing an export order for the UK, Bata was requested to tag the shoes with bar codes. As these could not be produced in Zimbabwe, Bata requested their UK customer to supply the tags, which were duly sent but then seized by Customs and held while they decided what tariff to apply. In the process Bata's ability to meet the deadline was threatened. Similar experiences have been cited in respect of the Customs handling of samples.

Under very restrictive import control regimes, the incentive offered by export retention schemes (where exporters could retain a portion of their foreign exchange earnings to pay for imported inputs) was quite effective (e.g. Tanzania, Zimbabwe). While export retention schemes (ERSs) made it easier for exporting firms to import the inputs they required, the consequences of the schemes were not always positive. Their implementation had side-effects associated with market distortions. The case studies showed that some exporting firms had 'over-responded' to this kind of incentive by selling to the export markets at a financial loss (at the official exchange rate) and by diverting a greater part of their output to exports even if the domestic market was deprived.

The handling of foreign exchange by individual units raises some longer-term concerns. For instance, the case of Zimbabwe has shown that the trend towards individual farmer control over foreign currency could undermine the capacity to support agriculture on a sector-wide basis with adequate supplies of inputs. Not only is it inefficient for companies to go through all the export procedures for each individual farmer, but individual access to foreign currency is leading individual farmers to keep significant stocks of spare parts, while the agent has virtually none. From all points of view (the individual farmer, the agricultural support sector and the nation), this case study found that these unintended consequences of the ERS system amount to a highly inefficient use of foreign exchange resources. The weakening of agricultural support companies not only makes it more difficult for them to compete in export markets, it also disadvantages farmers who produce mainly for the domestic market and do not have access to ERS funds. These disadvantages have led to some policy changes in which tradable ERS funds have become available and are widely used, alleviating these problems.

Trade liberalization

Trade liberalization measures were found to have been implemented in most case study countries in the 1980s. Trade liberalization introduces competitive pressures which may stimulate firms to build capabilities to cope with the new situation but it also carries the potential dangers of deindustrialization, exposes the fragile manufacturing sector to the danger of dumping and other external trade practices and may make it difficult to address major gaps in the sector. The implications of liberalization measures and their impact on the competitiveness of exporting firms varied. Three types of import liberalization regimes were identified in the case studies.

The first regime is represented by countries like the Ivory Coast and, to a lesser extent, Kenya, which were already fairly open. Import liberalization merely lowered and rationalized some tariffs but did not represent a major shock for industrial firms. The second regime is that of countries like Tanzania, where quantitative restrictions on imports had been quite pervasive, so that import liberalization came as a major policy shift. Competition from imports came suddenly, not giving much time for adjustment to the new competitive environment. In the case of Nigeria, the end of the oil boom around 1980 led to extensive use of tariffs and quantitative restrictions. The various foreign exchange conservation measures implemented in the period 1982-85 meant that several industries which were dependent on imported inputs had to operate considerably below capacity, hence reducing growth and worsening unemployment. The adoption of the SAP in 1986 represented a fundamental shift in the basic philosophy of economic management at the national level. The reforms include the adoption of a largely market-determined exchange rate and the removal or relaxation of quantitative restrictions on many tradable goods.

The third regime is represented by Zimbabwe and Mauritius, in which the implementation of trade liberalization was managed more selectively in a situation where the export sector was already quite diversified and firms had attained a reasonable degree of competitiveness. Trade liberalization had a constructive effect in that firms were given adequate time to make adjustments. In Zimbabwe, for instance, import liberalization started with imported inputs through some form of an open general import licence system. The users of these inputs were made aware that the next phase of import liberalization would be applied to outputs. This message induced many firms to invest in technological improvements of various kinds in anticipation of a more competitive environment. Managed import liberalization stands a better chance of providing an opportunity and incentive for firms to build up capabilities which can cope with a more competitive environment.

The influx of imports in the liberalization phase took part of firms' market shares, forcing them to look for new markets abroad. This could be the beginning of intra-industry trade as practiced in the more developed countries, or it could be a futile attempt to conceal inherent inefficiency. In the latter case, such survival would at best be short-lived. In the former case, the level of competitiveness of the firm could be raised if this move meant that less efficient lines of production contracted while more efficient lines expanded and further improved their competitiveness.

Pricing policies

Pricing policies may influence the prices of inputs or outputs of firms. Price controls on inputs affect the cost competitiveness of firms, while price controls on outputs affect the revenue side. The case studies showed that some exporting firms had to procure local inputs (e.g. cotton, palm oil) at prices well above their world market prices, putting users of these inputs at a relative disadvantage to their competitors in export markets. It was pointed out that local users of cotton (e.g. textile firms in Zimbabwe) and steel (e.g. manufacturers of agricultural machinery in Zimbabwe) were paying more for these local inputs than their competitors (in the importing countries) were paying for the same inputs.

Some firms had access to inputs at prices which were lower than the world market prices. For instance, in addition to the fiscal advantages provided by the 1959 investment code, a setting-up agreement signed between Capral-Nestlé and the Ivory Coast government allowed the firm to buy green coffee at local prices, which are sometimes as low as one third or one quarter of world prices. However, in 1984 the government put an end to this arrangement and the fiscal advantages under the investment code expired at the same time.

Rigid price controls on output can run down an otherwise profitable firm to near collapse by depriving it of the resources to plough back into investment in general and technology in particular. For example, in one case it was pointed out that for over eight years the government had failed to adjust prices to levels that would turn around the firm's performance, making it difficult for the firm (Bamburi of Kenya) to secure financial assistance to refurbish the plant. Continuing under-capitalization of the firm placed it in an increasingly poor position, threatening to wipe out its exports.

Pricing, however, has also been used positively to encourage firms to increase efficiency and attain competitiveness in export markets, as in the case of agricultural machinery manufacturers in Zimbabwe. Altering the generous cost-plus pricing system (by allowing lower prices) exposed long-term weaknesses in the firms, which led to the adoption of more cost-effective production methods (Riddell, 1990, pp. 354-8). Some of the actions taken include expansion into the export market, reorganizing production lines to a continuous flow system, staff training and recruitment of more skilled personnel, leading to higher-quality products and improved designs of traditional lines.

Fiscal and monetary policies

High interest rates reduced economic access to export finance and other working capital requirements. High interest rates made working capital and fixed investments more expensive, leading to the postponement of some investments in technology. Affordability becomes more of a problem than availability. In such situations subsidiary companies have an advantage in receiving soft loans from their mother companies.

Provisions for tax rebates or drawback schemes were evidenced in the country case studies. However, implementation has not been commensurate with the intentions of such schemes. The problem of bureaucratic delays in paying export incentives was particularly noted in the case of exporting firms, in all country case studies except Mauritius. The effect of bureaucratic delays was to reduce the effectiveness of whatever export incentives had been put in place.

Relationship between government and the enterprise sector

The relationship between government and the enterprise sector influences cooperation with the enterprise sector and the effectiveness of government policy. In three cases it was found that the rapport between the government and the enterprise sector was good and consultations were made between them on a regular basis. In the case of Zimbabwe during the Unilateral Declaration of Independence (UDI) period, the industrialists and the government of the day shared a determination to overcome the impact of sanctions which the international community had imposed on the then Rhodesia. The system of controls was made to operate effectively and the highly protected system that they constituted did not lead to the gross inefficiency which has characterized other import substitution regimes. The need to adapt and innovate led to the development of a wide range of technical skills, particularly in various branches of engineering. The strong orientation to market requirements led to a proliferation of products, often produced within large, vertically integrated conglomerates.

In the case of Mauritius the government and the enterprise sector cooperated in many ways and held consultations on matters affecting industry. Government policy facilitated the process by which local entrepreneurs continuously gained control of industrial development. In the Ivory Coast the government worked with and was supportive of enterprise sector development in a way which did not threaten the main actors in industry, even if they were non-lvorians.

In the other three countries (Tanzania, Kenya and Nigeria) and the post-independence Zimbabwe, the relationship between government and the enterprise sector (or significant parts of it) was less cordial. Government intervention in industrial development was perceived as intending to address imbalances in society, as a result of which some leading actors in industrial development could be losers. In Tanzania the nationalization policy and the socialist policy were perceived as a threat to the private sector. In Kenya the way the Africanization policy was introduced and practiced was perceived as a threat to the Asian community, who were the leading local private-sector industrialist group. The indigenization policy in Nigeria posed a threat to some foreign investors. In post-independence Zimbabwe, too, the relationship between government and sections of the enterprise sector became less cordial as the government began to address some imbalances in society. The leading white community entrepreneurs perceived that they would be the losers. The application of controls in the absence of the rapport with the private sector that had existed under the previous regime, and the introduction of new controls on wages and labour relations, led to a situation in which bureaucracy became a major obstacle to the running of any kind of economic enterprise.

Building core capabilities: towards competitiveness

In the context of new technologies and the rapidly changing world market conditions, the process of restructuring for export orientation poses a challenge to Africa. Constraints are bound to arise but opportunities could also emerge for these economies as they set out to restructure and develop their industrial sectors towards export orientation.

One major consideration which will influence the way the industrialization problem is conceptualized relates to the changing character of innovations and their role in international trade and competitiveness. Industrialization, for the less industrialized countries in Africa, will have to take place under conditions of accelerating technical change and the pervasive application of new technologies. The evidence presented in this book supports the Schumpeterian conceptualization of technological change, which emphasizes learning and the accumulation of technological capabilities. This is bound to have considerable implications for the conceptualization of the industrialization problem in Africa.

The findings of this study support the thrust of recent trade and growth models which have focused more explicitly on the micro-foundations of innovation by addressing firm-level decisions to invest in product or process innovations. The case studies have shown that ceaseless search for improvements in technology (especially product quality and cost-lowering process innovations) has been most instrumental in improving productivity. Productivity growth, in turn, was a most important factor enabling exporting firms to succeed in the changing technological and market conditions. Exporting firms maintained and improved their market position by investing in technology and continuing to improve on it. Improvements were made not only in the firm's products but also in the processes of production, in order to cope with pressure to keep costs at competitive levels or to improve product quality (level and consistency). These responses were derived from signals given in e export markets.

A major policy implication suggested by these findings is that, in conceptualizing the industrialization problem in Africa, fuller recognition will need to be given to the altering nature of technological change, with an emphasis on learning and the accumulation of technological capabilities within firms, with the requisite support from the state in the form of various supportive infrastructural investments. This contrasts with the previous emphasis on the transfer of the capital and know-how required for an industrialization process which was primarily directed at import substitution.

Economic reforms and industrialization

The poor record of many developing countries can be explained by their inability to create internationally competitive industry. One criticism of the structural adjustment programmes which many of the countries in Sub-Saharan Africa adopted during the 1980s has been their over-emphasis on 'getting prices right' to the neglect of other things that governments ought to be doing. The nature of the problems that exporting firms face in their struggle to remain competitive in world markets suggests that, although exchange rate action and import liberalization and incentives for improving tradables can help, it is difficult to sustain an export recovery without additional steps being taken to assist firms in the export sector to improve their international competitiveness. Some firms have found it difficult to maintain their position in export markets because of a lack of complementary supportive investments by government. In fact, references often made to the deindustrialization consequences of economic reforms in Africa could be a reflection of this lack of complementary supportive intervention by governments. As the Chinese example has shown, the withdrawal of the state, combined with active intervention in infrastructural support, can lead to a booming non-state sector (Qian and Xu, 1993).1

The findings of this study suggest that economic reform policies can enhance the industrialization process and restructuring of the export sector in Africa, provided that these policies incorporate a considerable element of government support, in particular complementary investments to assist firms to build the technological capabilities which are necessary for attaining and maintaining competitiveness.

Export orientation or import substitution?

The case studies have shown that most exporting firms started by serving the domestic market. Import substituting firms grew up and built up various core capabilities by producing for the domestic market. The protection of the domestic market allowed them to accumulate resources, which were in turn invested in developing capabilities which enabled them to turn to exports at a later stage. In this sense, the findings of this study have underscored the point that import substitution and export orientation are complementary in the African context. Import substitution has preceded exporting and has, under certain circumstances, formed an important basis for export orientation. At firm level, the experience and capabilities which were developed during the import substitution phase became useful in the next phase, when the firms were shifting to or extending to export markets. At the broader level, export orientation programmes such the Mauritian EPZs built on the capabilities which had been accumulated during the import substitution phase. The policy implication in this is that, if import substitution is effective in providing for the development of technological capabilities, it can establish the basis for building a competitive export sector. In the process of exporting, firms can develop efficient linkages and acquire technological capabilities. The challenge is to blend efficient import substitution and export orientation through a mix of policies which aim at maximizing the benefits from increased domestic demand and at stimulating both substantial (and efficient) import substitution and increased export orientation on the basis of growing technological capabilities.

Local or foreign investment?

This study shows that outsiders (foreign firms in some form of partnership with local firms, or non-indigenous entrepreneurs) have sometimes been instrumental in initiating the process of building up the capabilities that are necessary for improving competitiveness. This occurred where these outsiders were incorporated into the national accumulation process and their capital and know-how were transferred to others.

The case studies revealed an array of relationships between foreign capital and local capital. In some cases foreign investment preceded investment by local firms but the latter developed and gradually took over ownership from foreign-controlled firms. In other cases, foreign firms had been buying out local firms. Foreign investment and other industrialization agents have a role in building technological capabilities. Foreign investment, in particular, could make a contribution to filling some important gaps in the capabilities of African firms.

Regional cooperation and trade agreements

The volume of trade to countries in the region was found to be influenced by the nature of the regional cooperation and trade agreements. This finding is grounds for a reassessment of the viability of small-scale import substitution and far more consideration for regional cooperation and regional trade, which enable economies of scale to be tapped.

The exporting firms have mainly targeted regional markets, with smaller volumes being exported to international markets. This study has found that even to sustain regional markets, competition with other regions of the world will have to be faced sooner or later. There is always a danger of losing the regional markets to competitors from other regions. Even if imported products are not as suitable to local conditions, competitors from outside the region have sometimes penetrated the regional market by supplying their products at lower prices or by supplying products with a better finish. Thus specific local and regional markets can be lost to others if continuous efforts are not made to develop competitiveness in terms of quality and price. The study has revealed some cases in which competitors from other regions have made products specifically for the African regional market. Thus the specificity of regional markets may make the competition for various products less intense but it does not guarantee a monopoly. The need to exert continuous effort to attain and maintain competitiveness in such markets does not seem to be obviated by any specific characteristics of regional demand.

Africa has demonstrated the slowest progress in developing regional integration and cooperation arrangements (UNCTAD, 1993b). The challenge which emerges from this study is whether regional cooperation arrangements can be designed for Africa to facilitate (through investments, joint technological activities and trade) the process by which firms and other institutions in Africa build up technological capabilities. The African Economic Community and existing sub-regional economic cooperation arrangements should accord high priority to promoting trade expansion' based on both exports and imports, by removing distortions, avoiding the duplication of large investments where national markets are small, reducing transaction costs (e.g. by trading arrangements which guarantee market access, regional marketing intelligence, improvements in the marketing infrastructure) and by redirecting trade flows.

Notes to part I

1 INTRODUCTION

1 UNECA, Beyond Recovery: ECA-revised Perspectives of Africa's Development, 1988-2008, E/ECA/CM.14/31, Addis Ababa, March 1988.

2 World Bank. Accelerated Development in Sub-Saharan Africa, Washington, D.C., 1981.

3 During 1980-88. 33 countries in Africa had agreements with the IMF and 12 had extended fund facilities, while 15 had Strategic Adjustment Loans with the World Bank.

4 UNCTAD, Developments and Issues in the Uruguay Round of Particular Concern to Developing Countries Note by the UNCTAD Secretariat, TD/B/39(2)/CPR 1, 15 March 1993a.

5 UNIDO, African Industry in Figures Vienna, 1993.

6 Sharma, R., The 'Missing Middle' in Sub-Saharan Africa: Role of South-South Cooperation Research and Information for the Non-aligned and other Developing Countries New Delhi, Interest Publications, 1993.

7 Riddell, R.C. (ed.), Manufacturing Africa: Performance and Prospects of Seven Countries in Sub-Saharan Africa London, James Curry, etc., 1990.

8 UNCTAD, Follow-up to the Recommendations Adopted by the Conference at its Eighth Session: Evolution and Consequences of Economic Spaces and Regional Integration Processes TD/B/40(1)7. 23 July 1993b.

9 Husain, I., Structural Adjustment and Long-term Development in Sub-Saharan Africa, in van de I Hooven, R., and van de Kraaj, F. (eds) Structural Adjustment in Sub-Saharan Africa London, James Curry, 1994.

10 Sub-Saharan Africa: From Crisis to Sustainable Growth A Long-term Perspective Study Washington, D.C., 1989.

11 Prebisch, R., Five Stages in My Thinking about Development, in Bauer, P., Meier, G., and Seers, D. (eds), Pioneers in Development, New York, 1954.

12 Nurkse, R., Patterns of Trade and Development Wicksell Lectures, Stockholm, 1959.

13 The main exports in order of importance arc: cocoa, coffee, timber, cotton, sugar, live animals and meat, tobacco, tea, fish products, rubber, groundnuts, palm oil, bananas, sisal, spices and fruits.

14 Brown, M.B. and Tiffen, P., Short Changed: Africa and World Trade London, Pluto Press, 1992.

15 ITC, Cocoa: Traders' Guide Geneva, International Trade Centre, 1987.

16 Killick, T., Explaining Africa's Post-independence Development Experiences. Paper presented at the Second Biennial Conference on African Economic Issues, Abidjan, 13-15 October, 1992

17 North, Douglass C., Economic Performance through Time, American Economic Review 84 (3), June 1994.

18 However, over time there has been a shift in this approach towards recognition of institutional and enterprise-level actions as a complement to macroeconomic and sectoral policies [Lieberman, I., Industrial Restructuring Policy and Practice Research and Policy Series, Washington, D.C., World Bank, 1990].

19 Weiss, J., Industry in Developing Countries: Theory Polity and Evidence London and New York, Routledge, 1988.

20 Bhagwati, J.N. and Srinivasan, T.N., Foreign Trade Regimes and Economic Development: India, National Bureau of Economic Research, New York, Columbia University Press, 1975.

21 World Bank, Capital Accumulation and Economic Growth: The Korean Paradigm, World Bank Staff Working Papers, No. 712, Washington, D.C., 1985.

22 Westphal, L., Empirical Justification for Infant Industry Protection World Bank Staff Working Paper No. 445, Washington, D.C, 1981; Pack, H. and Westphal, L.E., Industrial Strategy and Technological Change: Theory versus Reality, Journal of Development Economics 22, 1986; Jacobsson, S. and Alam, G., Liberalization and Industrial Development in the Third World: A Comparison of the Indian and South Korean Engineering Industries New Delhi, Sage, 1994.

23 Lall, S., Navaretti, G.B., Teitel, S. and Wignaraja, C., Technological Capabilities and Industrial Development in Ghana Study prepared for the World Bank, Washington, D.C., March 1993.

2 TRADE THEORY: RELEVANCE AND IMPLICATIONS FOR AFRICAN EXPORT ORIENTATION

1 Colclough, C., Structuralism versus Neo-liberalism: An Introduction, in Colclough and Manor, p. 18a, 1991.

2 Leontief, W.W., Studies in the Structure of the American Economy, New York, Oxford University Press, 1953

3 Helpman, E. and Krugman, P., Market Structure and Foreign Trade: Increasing Returns Imperfect Competition and the International Economy, Brighton, Wheatsheaf, 1985; Porter, M., The Competitive Advantage of Nations London and Basingstoke, Macmillan, 1990.

4 Linder, S. B., An Essay on Trade and Transformation, Stockholm, Almquist and Wikell, 1961 (reprinted New York, Garland, 1983).

5 Yoffie, D.B. (ed.) Beyond Free Trade: Firms Governments and Global Competition Boston, Mass.. Harvard University School Press, 1993.

6 Ray, E.J., US Protection and Intra-industry Trade: The Message for Developing Countries, Economic Development and Cultural Change, 40 (1), October 1991.

7 Haque, I.U., International Competitiveness: Public Sector/Private Sector Interface, in Haque, I.U., (ed.) International Competitiveness: Interaction of the Public and Private Sectors, collected papers from an EDI policy seminar in Seoul, Republic of Korea, 18-21, April 1990.

8 Kierzkowski, H., Recent Advances in Trade Theory: A Selected Survey, Oxford Review of Economic Policy 3 (1), 1987.

9 Caves, R., International Trade and Industrial Organization: Introduction, Journal of Industrial Economics, 29, 1980; Brander, J.A., Intra-industry Trade in Identical Commodities, Journal of International Economics, 11, 1981; Brander, J.A. and Krugman, P.A., A Reciprocal Dumping Model of International Trade, Journal of International Economics, 1983.

10 Ethier, W.J., Internationally Decreasing Costs and World Trade, Journal of International Economics, 9, 1979; Krugman, P.R., Increasing Returns and the Theory of International Trade, in Bewley, T. (ed.), Advances in Economic Theory, Cambridge, 1987; Grossman, G. and Helpman, E., Product Development and International Trade, Journal of Political Economy, 97, 1989, Grossman, G.M. and Helpman, E., Trade Innovation and Growth, American Economic Review, Papers and Proceedings, May 1990a.

11 Dixit, A.K. and Norman, V., Theory of International Trade, Cambridge, Nisbet, 1980; Krugman, P.R., A Model of Innovation, Technology Transfer and the World Distribution of Income, Journal of Political Economy, 87, 1979; Lancaster, R., Intra-industry Trade under Perfect Monopolistic Competition, Journal of International Economics, 10, 1980.

12 Dixit, A.K. and Stiglitz, J., Monopolistic Competition and Optimum Product Diversity, American Economic Review, 67, 1977; Lancaster, R., Variety, Equity and Efficiency, New York, Columbia University Press, 1979.

13 Greenway. D., New Trade Theories and Developing Countries, in Bala-subramanyam, V.N. and Lall, S. (eds), Current Issues in Development Economics, London, Macmillan, 1991.

14 Scherer, F., Industrial Market Structure and Economic Performance, Chicago etc.. Houghton Mifflin, 1980

15 Alcorta, L., The Impact of New Technologies on Scale in Manufacturing Industry: Issues and Evidence, World Development, 22 (5), May 1994.

16 The traditional formulation assumed that the output of the domestic industry is the source of external economies via the larger demands for intermediate inputs (presumably produced at lower cost).

17 Ethier, W.J., National and International Returns to Scale in the Modern Theory of international Trade, American Economic Review, 72, 1982.

18 The assumption of symmetry requires that all intermediate goods (components) be producible from capital and labour via identical production functions and that all these components contribute in totally symmetric fashion to the finished manufactured goods, implying that all components are produced in equal amounts.

19 Helpman, E., International Trade in the Presence of Product Differentiation, Economies of Scale and Monopolistic Competition, Journal of International Economics 11, 1981.

20 Krugman, P.R., Import Protection as Export Promotion, in Kierzkowski, 1984.

21 Krugman, P., Scale Economies, Product Differentiation and the Pattern of Trade, American Economic Review 70, 1980.

22 The concept of contestable markets combines the Betrand behaviour of firms and costless unrestricted entry and exit.

23 Baumol, W.J., Panzar, J.C. and Willig, R.D., Contestable Markets and the Theory of Industrial Structure New York, Harcourt Brace Jovanovich, 1982.

24 Monopolistic competition is like contestable markets, with the possibility of product differentiation.

25 Solow, R.A., Contribution to the Theory of Economic Growth, Quarterly Journal of Economics 71, 1956; Baldwin, R.E., Review of Theoretical Developments on Regional Integration. Paper presented at the first Project Workshop on Regional Integration and Trade Liberalization in Sub-Saharan Africa, African Economic Research Consortium, Nairobi, 2 -4 December 1993.

26 Mankiw, G., Romer, D. and Weil, D., A Contribution to the Empirics of Economic Growth, Quarterly Journal of Economics 107 1992.

27 Romer, P. Increasing Returns and Long-run Growth, Journal of Political Economy 94, 1986.

28 Arrow, K., The Economic Implications of Learning by Doing, Review of Economic Studies June 1962.

29 Spencer, M., The Learning Curve and Competition, Bell Journal of Economics 12, 1981.

30 Nelson, R. and Winter, S., An Evolutionary Theory of Economic Change Cambridge, Mass., Belknap Press of Harvard University Press, 1982; Dosi, G., Pavitt, K. and Soete, L., The Economics of Technical Change and International Trade, London, Harvester Wheatsheaf, 1990; Cooper, C., Are Innovation Studies on Industrialized Economies Relevant to Technology Policy in Developing Countries?, Maastricht, INTECH Working Paper, No. 3, 1991.

31 In mathematical terms, the addition of an equation specifying equilibrium conditions is a way of providing for the model's 'determination' or closing the model'.

32 Nelson, R.' The Role of Firm Differences in an Evolutionary Theory of Technical Advance, Science and Public Policy 18 (6), December 1991.

33 Tidd, J., Flexible Manufacturing Technologies and International Competitiveness London, Pinter, 1991.

34 Kaldor, M., The Case for Regional Policies, Scottish Journal of Political Economy, 17, 1970; Kaldor, M., What is Wrong with Economic Theory?, Quarterly Journal of Economics, 89, 1975; Pasinetti, L.L., Structural Change and Economic Growth A Theoretical Essay on the Dynamics of the Wealth of Nations Cambridge, Cambridge University Press, 1981.

35 Havrylyshyn. O. and Civan, E., Intra-industry Trade among Developing Countries, Journal of Development Economics, 18, 1985. Greenway (1991) evaluated the extent of intra-industry trade in developing countries as a way of determining how widespread economies of scale and product differentiation are. Two categories of intra-industry studies arc invoked: documentary studies recording the incidence of intra-industry trade at a given level of aggregation, and econometric studies identifying the determinants of a given level or change in intra-industry trade.

36 Stewart, F., Recent Theories of International Trade: Some Implications for the South, in Kierzkowski, 1984; Stewart, F., A Note on 'Strategic' Trade Theory and the South, Journal of International Development, 3 (5), 1991.

37 Balassa. B. and Bauwens, L., Changing Trade Patterns in Manufactured Goods, Amsterdam, North-Holland, 1988.

38 Lecraw, D., Technological Activities of LDC-based Multinationals, Annals of the American Academy of Political and Social Science, 458, November 1981.

39 ITC, Supply and Demand Surveys: Indicative Value of Imports and Export Trade in Selected Products for Member Countries of the PTA (1981-1985), Geneva, ITC/UNCTAD/GATT, December 1985.

40 The COMTRADE data base was used. This contains foreign trade statistics for 199 countries and customs areas. In the absence of sufficient data for all PTA countries, the official statistics of the countries' trading partners were systematically scanned. The data series relate to 17 countries: Angola, Burundi, Comoros, Djibouti, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Mozambique, Rwanda, Seychelles, Somalia, Uganda, Tanzania, Zambia and Zimbabwe. Data for Botswana, Lesotho and Swaziland had to be excluded as their trade flows are recorded as part of the Southern African Customs Union. Trade with South Africa and the then USSR is not reflected in the data base. However, the data displays a high degree of volatility from year to year: often a country changes from a large exporter of a product one year to a non-exporter in the following years. This could be a reflection of the quality of data.

41 Koester, U. and Thomas, M., Agricultural Trade among Malawi, Tanzania, Zambia and Zimbabwe, IFPRI, Washington, D.C., February 1992.

42 Badiane, O.. Macroeconomic Policies and Inter-country Trade in West Africa, IFPRI, Washington, D.C., 1992.

43 See, e.g., Spencer, B.J., What Should Trade Policy Target?, in Krugman, 1986. The point has been disputed in Srinivasan, T.N., Recent Theories of Imperfect Competition and International Trade: Any Implications for Development Strategy? Indian Economic Review, 24 (1), 1989.

3 SOME CONCEPTUAL ISSUES AND METHODOLOGY OF THE STUDY

1 Lovell, K.C.A., Production Frontiers and Productive Efficiency. In Fried, Harold O., Lovell K.C.A. and Schmidt, Shelton S. (eds), The Measurement of Productive Efficiency: Techniques and Applications, Oxford, Oxford University Press, 1993.

2 Koopmans, T.C., An Analysis of Production as an Efficient Combination of Activities, in Koopmans T.C., (ed.), Activity Analysis, Production and Allocation, Cowles Commission for Research in Economics, Monograph No. 13, New York, John Wiley, 1951.

3 Debreu, G., The Coefficient of Resource Utilization, Econometrica, 19 (3), July 1951; Farell, M.J., The Measurement of Productive Efficiency, Journal of the Royal Statistical Society, series A, General, 120 (3). 1957.

4 Pack, H., Productivity and Industrial Development in Sub-Saharan Africa, World Development, 21 (1), 1993.

5 Kaldor, N., The Effect of Devaluations on Trade in Manufactures, in Further Essays on Applied Economics, London, Duckworth, 1978.

6 Fagerberg, J., International Competitiveness, Economic Journal. 98 (391) 1988.

7 OECD, Technology and the Economy: The Key Relationships, Paris, OECD, 1992a.

8 Nelson, R., Recent Writings on Competitiveness: Boxing the Compass, California Management Review, 34, (2), Winter 1992.

9 Enos, J. L., The Creation of Technological al Capability in Development Countries, Pinter, London, 1991.

10 Ndlela, D. B., Kaliyathi, J.W.E., Mutungwazi, D. and Zwizwai, B.M., A Study of the Transfer of Technology and Technology Acquisition in the Metals and Metal Goods Sector in Zimbabwe, in East Africa Technology Policy Studies Network (EATPS), Technology Policy Studies in Eastern and Southern Africa, Nairobi, International Development Research Centre (IDRC), 1990; Amdi, I.E.S., Government Policy and Assistance in the Development of Technological Capacity of the Metalworking Cabottage Sector on Benue State of Nigeria, Zaira, Nigeria, Department of Political Science, Ahmadu Bello I University (n.d.); Herbert-Copley, B., Technical Change in African Industry: Reflections on IDRC Supported Research, Canadian Journal of Development Studies, 13 (2), 1992.

11 Yin, R.K., Case Study Research: Design and Methods, Applied Social Science Research Methods Series, Vol. 5, London and New Delhi, Beverly Hills, 1984.

12 Reid, G.C., Theories of' Industrial Organization, Oxford, Blackwell, Oxford, 1987.

13 Competitiveness based on minor, locally generated adaptations and improvements specific to recipient environments has been cited in the case of Argentina's international sale of industrial plants and engineering works.

THE CHANGING WORLD ECONOMY: MARKET CONDITIONS AND TECHNOLOGICAL DEVELOPMENTS

1 The concept of 'quality' has been broadened to encompass consistency, predictability, employee motivation, supplier involvement and performance measurement.

2 Partnering can involve R&D consortia, joint ventures and cross-licensing arrangements.

3 Tapscott, D. and Caston, A., Paradigm Shift: The New Promise of Information Technology New York, McGraw-Hill, 1993; Mytelka, L.K., Strategic Partnerships: States Firms and International Competition London, Pinter and Cranbury, N.J.. Fairleigh Dickinson University Press, 1991.

4 OECD, Information Networks and New Technologies: Opportunities and Policy Implications for the 1990s Information Computer Communications Policy, No. 30, Paris. OECD, 1992b.

5 CBI, Active Sportwear. A Survey of the Netherlands and Other Major Markets in the European Community, Rotterdam, CBI, September 1991b.

6 CBI, Household and Furnishing Textile: A Survey of the Netherlands and Other Major Markets in the European Community Rotterdam, CBI, January 1991a.

7 CBI, Footwear: A Survey of the Netherlands and Other Major Markets in the EC Rotterdam CBI, 1990.

8 UNIDO, The Implications of the Single European Market for Industry in Developing Countries PPD. 229 (SPECK.) Vienna, 6 October 1992a.

9 Bhagwati, J.N., The World System at Risk London, Harvester Wheatsheaf, 1991.

10 Waelbroeck, J. and Kol, J., Export Opportunities for the South in the Evolving Pattern of World Trade Brussels, CEPS, 1987.

11 South Commission, The Challenge to the South The Report of the South Commission, Oxford, Oxford University Press, 1990.

12 Peng, Martin Khor Kok, The End of the Uruguay Round and Third World Interests, South/ester. Winter 1993/Spring 1994.

13 Salam, M.A., Science and Technology: Challenge far the South, Trieste, Third World Academy of Sciences and Third World Network of Scientific Institutions, 1992.

14 Dussauge, P., Hart, S. and Ramanantsoa, B., Strategic Technology Management Chichester, John Wiley, 1992.

15 Bagchi, A.K., Public Intervention and Industrial Restructuring in China India and the Republic of Korea Geneva, IL-ARTEP, 1987.

16 This computing architecture goes by various names, such as network computing, cooperative processing and client/server architectures.

17 This is a fundamentally different approach called object-oriented software, which enables the developer to inherit all the expertise of those who used and improved the object in the past. It reduces the number of design and programming errors by reducing the number and complexity of the programming operations required to develop an application.

18 Mody, A. and Wheeler, D., Automation and World Competition: New Technologies Industrial Location and Trade Basingstoke and London, Macmillan, 1990.

19 UNIDO, Industry and Development Global Report 1989/90 Vienna, 1990a.

20 UNIDO, Industry and Development Global Report 1990/91 Vienna, 1990b.

21 There are three types of shuttleless looms, each featuring some form of specialization. Air-jet looms are used on plain fabrics, while rapier and projectile looms can weave more complicated types of fabrics (e.g. colour stripes and designs).

22 UNIDO, 7 reeds in Industrial Automation PPD 231 (SPEC.), Vienna, 1992b.

23 Information on footwear is largely drawn from UNIDO (1992b).

24 Levy, B., Transactions Costs, the Size of Firms and Industrial Policy: Lessons from a Comparative Case Study of the Footwear Industry in Korea and Taiwan, Journal of Development Economics 32 (1/2), November, 1990.

25 Kaplinsky, R., Firm Size and Technical Change in a Dynamic Context, in Freeman, C. (ed.), The Economics of lnnovation, Aldershot, E. Elgar, 1990.

26 Their findings are based on a study of several thousand organizations in North America, Europe and the Far East. The main objective of the study was to investigate the nature and impacts of changes in technology, including emerging applications, organizational benefits and management implications.

27 OECD, Technology and Productivity: The Challenge for Economic Policy, Paris, OECD, 1991.

28 Rasmussen, J., Schmitz, H. and Dijk, M.P. van, introduction - Exploring a New Approach to Small-scale Industry, IDS Bulletin 23 (3), July 1992.

29 On this point Rasmussen et al. (1992) have made reference to Pyke, F., Becattini, G. and Sengenberger, W. (eds), Industrial Districts and Inter-firm Cooperation in Italy Geneva, International Institute for Labour Studies, 1990.

30 Piore, M. and Sabel, C., The Second Industrial Divide: Possibilities for Prosperity New York, Basic Books, 1984.

31 Browne, J., Dubois, D., Rathmill, K., Sethi, S.P. and Steke, K.E., Classification of Flexible Manufacturing Systems, The FMS Magazine April 1984.

32 Freeman, C. and Hagedoorn, J., Catching up or Falling behind: Patterns in international Inter-firm Technology Partnering, World Development, 22 (5), May 1994.

33 UNESCAP, Technology Flows in Asia - Strategies for Enhancing the Flow of Technologies among Regional Developing Countries (Prepared by Prasada Reddy), Bangkok, 1990.

34 Yamamura, K., Caveat Emptor: The Industrial Policy of Japan, in Krugman, 1986; Carliner, G., Industrial Policy for Emerging Industries. In Krugman, 1986.

5 MAIN FINDINGS OF THE STUDY: A SYSTHESIS

1 OECD, New Forms of Investment in Developing Country Industries: Mining Petrochemicals Automobiles Textiles Food by Charles Oman in collaboration with others, Paris, Development Centre of the OECD, 1989.

2 Morawetz, D., Why the Emperor's New Clothes are Not Made in Columbia: A Case Study in Latin American and East Asian Manufactured Exports New York, Oxford University Press, 1981.

3 Pack, H., Productivity Technology and Industrial Development New York, Oxford University Press, 1987.

4 Sharpley, J. and Lewis, S., Kenya: The Manufacturing Sector to the Mid-1981s see pp. 211 and 232, in Riddell, 1990.

6 CONCLUSIONS AND POLICY IMPLICATIONS

1 Qian, Yingyi and Xu, Chenggang, Why China's Economic Reforms Differ: The M-form Hierarchy and Entry/Expansion of the Non-state Sector. The Economics of Transition 1 (2), 1993. China's economic reforms differ from those of Eastern Europe and the then Soviet Union in the way they have permitted on-going entry and expansion of the non-state sector, resulting in economic growth averaging 8.6 per cent during 1979-91, and a substantial improvement in the standard of living.

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