Outline

1. EGM on the Implementation Strategy for the Accelerated Industrial Development of AfricaAddis Ababa, October 4 to 7, 2010 Strategy for sustainable industrialization: local development of innovative sme clusters in global industries Presentation by Frederic Richard, AFIDE Expert and former UNIDO Director

2. Outline • What does sustainable industrialization mean and how industry contributes to it? • What are the global transformations which influence the dynamics of sustainable industrialization and what is the new role of SMES? • Why a strategy of integration in global value chains can help SME clusters to grow and innovate and how can they do it? • Why and how the innovation system plays a key role in supporting the innovation strategy of SME Clusters?

3. Sustainable industrialization Sustainable industrialisation is a long-term process of transformation towards a desired vision of an industrialised economy that contributes to wealth creation, social development and environmental sustainability.

4. Industry: engine of transformation of an economy • Applying technological progress • Driving and diffusing innovation • Developing new skills and attitudes • Stimulating modern services • Internationalizing economies

5. Technological Classification of Industries • Resource-based industries (for instance : processed food, wood, leather, refined petroleum & rubber products); • Low technology industries (for instance : textiles, garments, footwear, furniture, glassware, toys); • Medium technology industries (for instance : automotive industry, chemicals, metal products, machinery) • High technology industries (for instance : electronics, pharmaceuticals, biotechnology, precision instruments, aerospace ).

6. The Sustainable Industrialization Triangle Wealth creation Industrial innovation Environmental sustainability Social development

7. The industrial innovation path Resource based Low Tech Medium Tech High Tech High value added segments Low value added segments

8. The sustainable industrialization process: The High Road to compete • The path to a sustainable industrialization is for firms to compete through innovation; the alternative is to compete through lower wages and standards or through currency depreciation ; • To innovate means to improve products and processes in existing industries; to compete in higher value added industry segments; and to enter in technologically more complex industries; • In developing countries, the innovation process is usually based on the mobilization, adaptation and learning of existing technologies and management practices ; • To innovate requires firms to up-grade their technological, managerial and marketing capabilities ; it is a risky and difficult process with important efforts of investment, research and learning;

9. Global transformations The on-going and important global transformations strongly affect the dynamics of sustainable industrialization in developing countries and provide new challenges and opportunities for firms and in particular for SMEs to compete and innovate.

10. Global trends and issues • Very high level of wealth creation and improvement in quality of life during the last 50 years but not everywhere and not for everybody. • Globalization of financial, trade, investment an knowledge flows • Rapid and accelerating technological progress with many applications for product and process technologies: ICTs; biotechnology; new materials; fuel cells; nanotechnologies;etc… • Emergence of a global network society and new consumption patterns • Global governance with new international treaties, regulations and standards ( trade, quality, labor, environment, intellectual property rights, etc..) and new actors (global corporations, civil society, media) • However,alarming and unsustainable trends: poverty, environment, social development, economic marginalization,

11. Global transformations of industry • Globalization of product markets and research characterized by complexity, uncertainties and changes. • New and difficult challenges for sustainable industrialization: environment, social issues, poverty. • key factors of success : price, innovation, quality, flexibility, understanding and addressing local markets • New managerial and organizational processes and systems to design, produce and distribute products • New concept of industry: not only production but also design,, marketing, distribution and recycling • Globalization of value chains governed by MNCs and localization of the segments in specialized and localized clusters of firms which offer unique competitive advantages. • Rapid transformations of the world industrial map with the emergence of new and dynamic industrial centers in developing countries.

12. New role of SMES in a globalizing industry Global transformations have a strong impact on the role of SMEs in sustainable industrialization: • On the one hand, SMEs are well adapted to the new conditions of competition: flexibility, innovation and strong presence in and understanding of local markets. • On the other hand, they are isolated from and have limited understanding of the opportunities and challenges of globalization. These weaknesses are particularly important in developing countries • The policy challenge for developing and in particular African countries is not to protect them from global competition but to help entrepreneurs and small companies to address the challenges and opportunities by improving their links to global value chains and to improve their access to information, technology, finance and skills.

13. Innovation strategies of SME clusters in Global Value Chains The industrial success of developing countries in particular in Asia and now in other regions as well, including Africa, is based on the links between local industrial clusters and global value chains and in the capability of the local firms to innovate and up-grade their capabilities by networking and learning with the global corporations and the other clusters of the global network. A key factor of this industrial success is the support to this process provided by an innovation system of technical and financial institutions.

14. Strategic focus: SME Clusters in Global Value Chains GLOBAL VALUE CHAINS SME CLUSTERS

15. Global customers Large-scale, multi-outlet retailers Small-scale retailers Global buyers Buyer and export agents Local customers Large-scale or multi-plant manufacturers Small-scale manufacturers Small-scale suppliers SME Clusters in global value chains National boundary Domestic industrial cluster

16. A schematic value chain Disposal/Recycling After-Sales Service Knowledge Infrastructure Physical Infrastructure Regulatory Framework End Use Consumer Retail Sales Marketing • Product-related • Product Strategy • Product Conception • Product Design • Conceptual Design • Visual Design • Detailed Design Buying /Trading Final Assembly Sub-Assembly Components Materials Raw Materials Source: Bellagio Group 2001.

17. Governance of Global Value Chains Global value chains are led and coordinated by global firms ( buyers or producers) through different types of relationships and networks : • Market-based:enterprises deal with each other in arm’s length transactions • Hierarchy: enterprises are vertically integrated; the lead firm controls itssubsidiaries • Captive :lead firm sets the parameters under which others in the chain operate • Modular: eenterprises have complementary competences; no enterprise exercises control over others

18. SME Clusters in developing countries • Clustering of firms is an old phenomenon in developed and also in developing countries. Clusters of enterprises exist in all types of industries. • In developing countries, industrial clusters develop usually in Resource Based and Low Technology industries but increasingly in Medium and also in High Tech industries as part of global value chains. • Contrary to what certain economists predicted, “location matters” under the new conditions of globalization. Localized clusters are becoming key industrial units/systems in the organization of global value chains and networks . They are centers of specialized production and innovation. • The concept of sme clusters might be misleading as all clusters include small and large enterprises. What is important is the relationships between the small and large firms within the cluster and with the global value chain and between the small firms and the technical and financial institutions. • SMEs have limited market power and resources. The main policy challenge is how to improve their access to information and resources and their links in Global Value Chains.

19. How Global Value Chains affect the innovation process of SME clusters • Better understanding the profitability and value added of the different segments • Facilitate market access • Fast track to acquisition of technological capabilities

20. Drivers of SME cluster innovation process • GLOBAL LINKS • Global Buyers • Foreign Investment • Technological Acquisition LEAD FIRMS DOMESTIC BUYERS DOMESTIC SUPPLIERS • DOMESTIC CAPABILITIES • Enterprise Development • Skills • Technological Efforts • Infrastructure

21. Innovation strategies of SME clusters SME Clusters in developing countries enhance their competitiveness through a pro-active strategy of innovation which includes a cycle of : • LINKING with foreign partners and sources of technology and knowledge • LEVERAGING their local competitive advantages to mobilize the foreign knowledge and technology trough partnerships • LEARNING to up-grade capabilities by adapting, using and improving the acquired technology • And continuously repeating the LLL cycle

22. Example of an innovation path Value added by worker Assembly and Manufacturing R&D Design Distribution Marketing Source: Ministry of Industry and Trade of Malaysia (1996)

23. The innovation system The Innovation system plays a key role in supporting the process of innovation of SME Clusters in global value chains and in particular the Linking, Leveraging and Learning Strategy (LLL).

24. The Innovation System GLOBAL VALUE CHAINS • Financial resources SME CLUSTERS

25. Framework conditions • Quality and stability of the political system • Reliable and efficient legal system • Macroeconomic stability • Trade, investment and competition policies • Tax system and business regulations

26. Support systems for Resources and Capabilities • Utilities, Infrastructure and logistics • Human resources and education/training • Technological development and Research, • Entrepreneurship and Business Development Services • Financial resources and institutions • Information on markets and industries • Product , labour and environmental standards

27. Support systems for Global Linkages • Attracting foreign investment • promoting exports • Developing partnerships with global buyers • Acquisition of technology • Identifying foreign suppliers of capital goods

28. Next Presentation How to govern a strategy process for the development of innovative SME clusters in Global value chain and the organization of the innovation support system?

29. Thank you for your attention