Ponniah Anandajayasekeram Berhanu Gebremedhin CaSt and IPMS, ILRI ipms-ethiopia

1. Integrating Innovation Systems Perspective and Value Chain Analysis into Agricultural R&D: Issues and Challenges Ponniah Anandajayasekeram Berhanu Gebremedhin CaSt and IPMS, ILRI www.ipms-ethiopia.org

2. Objectives of presentation • Share our thinking about how ISP and VCA framework could be integrated into agricultural R&D and to discuss the issues and challenges • Solicit feedback on our thinking • Working towards publications

3. Outline of presentation • Introduction • Value Chains (VC) and Value Chain Analysis (VCA) • Innovation, Innovation Systems (IS), and Innovation Systems Perspective (ISP) • Integrating ISP and VCA into Agricultural R&D • Issues and Challenges

4. Introduction • Consensus that in the 21st century agriculture remains fundamental for poverty reduction, economic growth and environmental sustainability of agriculture-based countries (WDR, 2008). • Enhancing smallholder productivity and sustainable economic growth are pre-requisites to achieve this. • Agricultural R&D expected to play a significant role in the process

5. Introduction (2) • Currently, the knowledge generation, adaptation, dissemination and utilization process in the agricultural sector is guided by four complementary and mutually reinforcing concepts: • Innovation systems perspective • Value chains analysis framework • Impact orientation • R4D • Integrating these concepts and principles in an operational model to guide impact oriented R4D is a challenge facing many actors in the business • The core of this paper is looking at these integration issues.

6. Part I: Value Chains and Value Chain Analysis

7. Why worry about markets and market orientation? • Increased income through: • The realization of specialization, and comparative and competitive advantage • Economies of scale • Dynamic technological, organizational and institutional change that arises due to information flows through increased exchange • Markets are essential to realize the benefits of specialization and exchange

8. What is agricultural value chain (VC)? • Defined by a particular finished product or closely related products and includes all firms engaged in input supply, production, transport, processing and marketing of the product, and their associated activities, interactions and institutions governing the activities and interactions • Entails the addition of value as the product progresses from input supply to production to consumption • Includes input suppliers, producers, itinerant collectors, assembly traders, transporters, wholesalers, processors, exporters, retailers

9. Basic concepts in VC • Stages of value chain • Any operating stage capable of producing a saleable product or service serving as an input to the next stage in the chain or for final consumption or use • A stage of production in a value chain performs a function that makes significant contribution to the effective operation of the value chain • Vertical coordination • The key issue addressed in value chain analysis is vertical coordination: the way of coordinating and harmonizing the vertical stages of production, transformation and marketing • Intra-chain linkages are mostly of two-way nature

10. Basic concepts in VC (2) • Business development services • Services that play supporting role to enhance the operation of the different stages in the value chain and the chain as a whole • Infrastructural services (market place development, roads and transportation, communication, energy supply, water supply) • Production and storage services (input supply, genetic and production hardware from research, farm machinery services and supply, extension services, weather forecast, storage infrastructure) • Marketing and business development services (market information, market intelligence, technical and business training, facilitation of linkages of producers with buyers, organization and support for collective marketing) • Financial services (credit, saving, risk insurance) • Policy and regulatory services (property rights, market and trade regulations, investment incentives, legal services, taxation)

11. The Value Chain & Business Support Services Consumption Retailing Trading Processing Research Trading Transportation Govt. policy regulation Transport Communications Post-harvest handling Production input supply Production Tech. & business training & assistance Input Supply Financial services Market information and intelligence

12. What is value chain analysis (VCA)? • Value chain analysis is a heuristic or analytical tool designed to provide operational guidelines to improve efficiency of vertical coordination of chains. The research can be descriptive (positive) or prescriptive (normative). • VCA is a dynamic approach that examines how markets and industries respond to changes in the domestic and international demand and supply for a commodity; technological change in production and marketing; and developments in organizational models, institutional arrangements, or management techniques • VCA looks at the chain as a set of institutions and rules; as a set of activities in producing, processing and distributing commodities; and as a set of actors involved in the value addition and distribution process.

13. Why the interest on VCA? • A comprehensive understanding of the operation of commodity markets requires an understanding of the operation of the different stages through which a product and its associated value additions pass on from production to consumption or end use • A comprehensive understanding of the coordination of the value chain requires a careful assessment of consumer demand characteristics and the organizational and institutional arrangements that are in place to meet these demands.

14. Why VCA (2) • VCA overcomes a number of the weaknesses of the traditional industry analyses: • By focusing on inter-linkages, VCA allows for easier uncovering of dynamic flow of economic, organizational and institutional activities between the value chain actors, even on a global scale • VCA goes beyond the firm specificity of innovations • VCA focuses on chain governance and the power relations that determine how value is distributed at the different levels  through the analysis of systems and power relations at different levels, it enables a more comprehensive modeling of effects of interventions • However, VCA and industry studies complement each other, since they attempt to answer different types of questions

15. Concepts underpinning VCA • Effective demand • Effective demand as the force that pulls goods and services through the vertical system • Hence the need to understand how demand is changing both at the domestic and international markets, and the implications for value chain organization and performance • Competition between channels • A value chain often involves more than one market channel, • Different channels may compete with each other for inputs or clients • VCA examines the competition and devises how it might be modified to achieve better economic performance

16. Concepts underpinning VCA (2) • Verticality and vertical coordination • Verticality implies that conditions in one stage in the chain are likely to be strongly affected by conditions in the other stages in the chain, in direct and indirect ways and in expected and unexpected ways • Hence, primary focus of VCA is on the vertical dimension and the interest is how productive, efficient and effective value chain are in the production, transformation and distribution of the commodity • VCA needs to unravel this

17. Concepts underpinning VCA (3) • Value chain governance • The roles of coordination and associated roles of identifying dynamic profitable opportunities and apportioning roles to key players • Implies interactions between firms reflect organization, rather than randomness • Three types of power in chain governance • Setting basic rules for participation in the chain • Monitoring the performance of chain actors in complying with the basic rules • Helping chain actors adhere to basic rules • Some value chain may exhibit very little governance • There may be multiple sources of governance • Power of governance may be vested with the chains, in local communities, or in business associations

18. Concepts underpinning VCA (4) • Leverage • Interventions that could have the most significant impact on the value chain • With a large number of firms, interventions aimed at each individual firm may be infeasible • Hence, VCA helps identify leverage points: • System nodes • Geographic clustering • Policy constraints

19. Potential objectives of VCA • Identification of leverage points to improve chain performance • Analysis of agriculture-industry linkages • Analysis of income distribution • Analysis of employment issues • Analysis of environmental impact of interventions • Guide collective action for marketing • Guide research priority setting • Conduct policy inventory and analysis

20. Innovation possibilities in VC • Input supply • Production and post harvest • Marketing options • Technical assistance and training • Organization and coordination of marketing functions • Market information and intelligence • Market institutions • Market infrastructure • Financial services • Policy and regulatory issues

21. Part II: Innovation, Innovation System and Innovation Systems Perspective

22. System • A collection of related elements that must function in a coordinated manner to achieve a desired result • Consists of interlinked sub-systems • The whole is greater than the sum • Inter-related parts drive the system • Feed back loops are central to the system behavior and are circular rather than linear in nature • System thinking is not new to agriculture

23. What is Innovation? • Successful application of “knowledge” to social & economic benefit. • Knowledge creation, adaptation, dissemination and use of knowledge, not just knowledge creation • Both new knowledge and novel combination of exiting knowledge

24. Knowledge: forms and sources • Different forms – codified and tacit • Different sources – Indigenous and scientific • Different type – technical, institutional, organizational, managerial, service delivery • Note: Knowledge is necessary but not sufficient for innovation

25. Innovation System • Network of organizations, enterprises, and individuals that focuses on bringing new products, new processes, and new forms of organizations into economic use, together with the institutions and policies that affect their behavior and performance (World Bank, 2008).

26. Components and levels of an innovation system • Components of the Innovation System are • Actors (individuals, organizations) • Actions, interactions • Rules governing interactions (institutions) • Framework conditions • Associated learning • Can be defined at different levels (national, sectoral, commodity, intervention based) • most relevant one is problem/intervention focused • IS is a “soft system”, an organizing principle and analytical construct

27. Evolution of ISP • Innovation System is a logical evolution • To address shortcoming of the existing R&D system • To benefit from successful application in industrial sector

28. Systems Thinking and Its Application in Agriculture

29. As one moves from NARI to AIS.. • The goal of the system becomes broader • The number of organizations considered as “components” becomes larger and all inclusive • Issue of linkages, partnerships and interactions become central to organizational performance

30. Innovation Systems Perspective (ISP) • Using the innovation lens in analyzing critical constraints; identifying, implementing and assessing appropriate interventions, and the subsequent utilization of knowledge generated • Suggests as analysis of three elements • Components (organizations and actors) • Relationships and interactions (partnerships and institutions) • Competencies, functions, results and outcomes of such interactions

31. Key Features of ISP • Focus on innovation as its organizing principle • Makes the distinction between “invention system” and “innovation system” • Makes the distinction between “organizations” and “institutions” explicit • Partnerships and networks are integral parts • Learning and role of institutions are critical • Leads to triangular model for commercialization of knowledge • Is problem specific

32. Invention vs Innovation Systems • Invention system deals with knowledge generation • Innovation system = Invention system + adaptation, dissemination and utilization of knowledge generated

33. Organisations and Institutions • Organizations are entities created by individuals to support the collaborative pursuit of specified goals. Formal organization is that kind of cooperation that is conscious, deliberate, and purposeful. • Institutions are the “rules of the game” which prohibit, permit, or require certain actions. Whether formal or informal, they are recognized and generally followed by members of the community.

34. Knowledge Formal Research based (Basic and Applied Natural and Social Public and Private); and other sources Extension/Outreach (National, Regional, Local, NGOs, Commercial groups, Commodity groups Farmer based) End Users (Farmers, Processors, Agribusiness, Policy makers, Consumers groups, Scientific disciplines) Source: Adapted and modified from Lacy (2001) Triangular model for commercialization of knowledge

35. Innovation Ecology and Innovation system • Innovation ecology: Set of individuals usually working within organizations who are repositories and generators of existing and new knowledge. A generic concept, national in scope with sub-national degree variation, more permanent in nature. • Innovation systems are constructed to address specific problem, connects the relevant components of the ecology. • Transient and transboundary in nature. • Are spatially unconstrained.

36. Integrating ISP and VCA • Enterprises and value chains are embedded in the AIS • Market process and IS are mutually embedded and cannot have one without the other • Innovation can occur any where along the value chain

37. Within the value chain context • An Innovationisa continuous learning process in which individuals/group of individuals/organizations/firms master and implement the design, production, and marketing of goods and services that are new to them, although not necessarily new to their competitors domestic or foreign (Metcalfe, 2008). • Embraces: • Continuous improvement in product design and quality • Change in organization and management routines • Creativity in marketing • Modification to production processes

38. Informal institutions, practices and attitudes Examples: Learning orientation; trust; communications; practices; routines Agricultural value chain actors & organizations Agricultural research and education systems Bridging institutions Political channels Agricultural education system * Primary / secondary * Post-secondary* Vocational training Consumers Stakeholder platforms Trade processing, wholesale, retail, Agricultural advisory services * Public sector* Private sector* Third sector Agricultural producers * Different categories Agricultural research system * Public sector * Private sector * Third sector Integration in value chains Input suppliers Agricultural policies and investments General agricultural policies and specific agricultural innovation policies Linkages to general science & technology Linkages to international actors Linkages to political system Linkages to other economic sectors Agricultural Innovation System Source: (Birner & Spielman, 2007)

39. AIS in an Agri-value chain Enabling environment Political stability, law and order, infrastructure, Governance favorable micro-macro and sectoral policies, etc. • Agro industry • (Product marketing) • Processing • Value adding • Marketing Agro-industry (Input supply) Agricultural production (Farm production) Facilitating Institutions Policies, legal framework, market, information, quality control Research, extension, training, credit, etc.) Facilitating Services Transport, storage, packaging, facilitating, equipment, import and export, communication, promotion, etc.

40. Framework Conditions INST I TUT IONS ACTORS + ACTIONS+ INTERACTION Knowledge Generation Knowledge Adaptation Knowledge Dissemination Knowledge Application + Use INNOVATION CAN OCCURE ANYWHERE IN THE VALUE CHAIN Value addition Value addition Agro-industry inputs and services • Agro industry • Processing • Marketing • Retailing Agricultural Production LEARNING Integration of Value Chain and Innovation

41. Target Group Identification National Innovation System- Generic (dealing with science and technology at National Level) Broad understanding of the Livelihood of the Target Groups (Unit of analysis is the HH) Agricultural Innovation System-Generic (dealing with Agricultural S & T) Prioritizing enterprises within the Target Group Identifying and describing the Value chain of priority enterprises Sectoral /Commodity based Innovation System (dealing with the entire value chain of an enterprise) Prioritizing the key component of the Value chain-1st level priority setting Prioritizing problems within the priority key component identified Intervention Based Innovation System (Based on the priority problem) Analysis of the priority problems identified Identifying potential Intervention Screening (Ex-ante assessment) Identifying feasible Intervention Planning, Implementation and Evaluation in Dissemination, Utilization by end users, and scaling out Integration of Value chain and Innovation system perspective in Research for Development

42. This implies • Much more flexible arrangements in which dense networks of entrepreneurs, farmers, research, training and policy organizations interact and respond to new circumstances is required • New skills and attitudes are required to work with partners in multi-stakeholder process and networks and platforms.

43. Key Issues and Challenges • Limited awareness of the concept, application and implications • Lack of empirical evidence in the application, utility and value addition (agricultural sector) • Outstanding methodological issues • assessing successful partnerships, networks and innovations • reducing transaction costs

44. Key Issues and Challenges (2) • Institutionalization and effective Integration into the agricultural R&D process requires • Changing the mindset and attitude of various stakeholders • Building the culture of innovation • Building capacity • To apply the concept • To continue to build capacity • Sustainable governance mechanisms for AIS • Incentive and reward system • Developing coherent set of policies • Internally driven organizational strategy

45. Key Issues and Challenges (3) • How do we scale up the capacity to innovate? Absorptive capacity: acquisition, assimilation, transformation and exploitation of knowledge • How to promote pro-poor innovation? • How to identify/generate commercially relevant innovation and how to achieve it consistently • How to ensure socio-economic equity and environmental sustainability?

46. Note • Effective integration is an evolutionary process which requires long-term commitment by all key stakeholders within the AIS

47. Thank You! We appreciate your comments and suggestions