About the AFRICAP project
Constraints on productivity
Local firms in African countries seeking to enter new export markets are initially uncompetitive due to two types of constraints. The first kind of constraint consists of factors outside the firm that lead to high production costs, but which are costly or impossible for individual firms to address on their own, such as poor infrastructure, limited access and high cost of finance, absence of skilled labour, and problems in accessing land and insecurity of property rights. These constraints drive up the cost of production. A second kind of constraint relates to factors inside farms and firms, and has to do with what are called technological capabilities.
Despite low wages, African-owned firms can fail to achieve a level of productivity and quality that makes them internationally competitive. This is because a major aspect of capability building, even in labor-intensive industries, is the ability to organize and manage the firms’ labor force, acquire managerial experience and knowledge of new production layouts on the factory floor. Technological capabilities are the managerial and organizational skills required to use hard technology (equipment and scientific knowledge) profitably.
Building technological capabilities within global value chains
In the twenty-first century, late industrialization takes a different form. Developing countries’ firms export by entering globalized industries, in which production is fragmented and dispersed across the globe. They participate in global value chains and undertake a specialized set of economic activities, rather than creating entire industries within their borders and exporting final goods. Global value chains are still largely geared towards consumer markets in rich countries, and governed by lead firms in these countries that control high value added activities such as design, branding, marketing, and retailing. African-owned firms entering these globalized industries need specific technological capabilities related to meeting high requirements on price, quality, time and delivery; building relationships with foreign buyers, suppliers and intermediaries; and meeting social, environmental and safety standards.
The Learning Trap
Technological capabilities are a form of tacit knowledge, which means they can only be acquired through the accumulation of experience and conscious effort at learning. This tacit knowledge is the main barrier to entry in new industries, because learning-by-doing can be a long, costly, and risky process. The risk and cost are highest for the first investors, when the knowledge and infrastructure required to become competitive does not yet exist in the country, and first movers have to acquire new knowledge. If local entrepreneurs have alternative economic opportunities, they will not take the risk—creating a learning trap.
AFRICAP specifically asks: Why do African-owned firms invest in building technological capabilities in new export sectors?
Firm-level effort in building technological capabilities to enter new export sectors is shaped by firm-specific characteristics, national institutional and political contexts as well as the industry and global value chain context where local firms and FDI are embedded.
- Firm-specific characteristics:
How do initial capabilities, previous experience, and type of ownership (indigenous, immigrant, diaspora, state-owned, joint venture) shape decisions of African-owned firms to invest in learning?
- National institutional environment: How do national institutions and industrial policies concerning infrastructure, land, trade, investment, finance, research, and training affect individual firms’ decisions to invest in learning, as well as their learning processes?
- Global value chain characteristics: How do governance structures of lead firms, production and sourcing strategies of foreign investors, and end markets in particular global value chains shape local firms’ strategies for investing in learning and their success in building capabilities?