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The essentials of a manufacturing ecosystem

Aref Adamali's picture

Value addition through manufacturing has been a major focus of economic policymakers across the world, and at times with remarkable success, most famously in East Asia. Initial ‘Asian miracles’ in places like South Korea have since been eclipsed by the meteoric rise of manufacturing in China, which has grown its exports in manufactures by 18 percent a year over the past 10 years, compared to a global average of 7 percent (ITC Trade Map data).

'Flying geese'
 
Most countries generally seemed to follow a basic pattern, initially establishing manufacturing credentials in light manufacturing, such as in textile and apparel, but then in time moving on from such products to higher-value-added and more complex products. As they moved on and up, they opened space for other countries to move into the initial entry products, following the so-called ‘flying geese’ model of division of labor.





There have been noticeable absences though, with not all regions having moved into manufacturing. This is partially the case with Central and South America, but most strikingly with Sub-Saharan Africa.  
 
What can be done to support countries in their quest to deepen their manufacturing sectors, and extract the jobs and technological development that this can offer? How can they develop the kinds of deep and comprehensive manufacturing ecosystems that have enabled China to maintain investment despite fast-rising labor costs?

Joining the flock
 
Addressing this challenge requires a comprehensive approach, touching on a variety of areas that all need improvement if a country’s manufacturers are to have a fighting chance of making it in a competitive global economy.
 
The work starts with the need for strategic clarity, developing the knowledge to create a vision for change and a clear business case that justifies and drives action. This also requires developing platforms for public-private dialogue and inter-firm coordination, so as to facilitate vertical coordination throughout a supply chain.
 
Businesses can’t grow without money. But, along with capital, investment also often brings access to new markets, technology and skills. Therefore, creating an investor-friendly framework to attractive and retain investors – all investors, foreign and domestic alike – is critical. The seed of Bangladesh’s large and hugely successful apparel sector came from a joint venture between a local firm, Desh Garments, and Daewoo of Korea in 1977. Of the 128 Desh staff members taken to South Korea for training, 115 of them moved on to set up or run new apparel factories, launching what has become a key pillar of Bangladesh’s economy and a vital source of jobs.

In countries with challenging investment climates – which is the case for many countries that are struggling to punch into manufacturing – industrial parks and zones hold the promise of delivering a business environment in which firms can more competitively manufacture products in the near term, while longer-term actions to fix the general investment climate are worked through. Support in this area goes beyond helping governments establish a sound regulatory framework for zones: It includes ensuring that they market-test their viability and involve the private sector wherever possible. This will help avoid the all-too-common "white elephant zones" with low occupancy levels.
 
Time and cost to market is make-or-break in manufacturing. Countries therefore need cheap and efficient trade logistics systems. This requires a clear government policy to ensure an open and competitive transportation sector and efficient customs services. One complaint that I've heard, from a leading apparel brand, is that the labels for an order were once held up in the Kenyan customs process for more than a week. If that type of issue were to continue, Kenya would remain out of the running as a manufacturing economy.

Finally, technology has always been at the heart of manufacturing, starting with the introduction of water-powered fabric mills in 18th-century England and extending to Toyota’s pioneering of "just-in-time" manufacturing in the 1970s. Many business people will tell you that a key challenge in adopting new technology lies in access to affordable capital. This is true, but only to a certain degree. The arguably harder work lies in the re-engineering of business processes required by the deployment of new technologies. That requires a strong and constantly evolving human-resource base, from the factory floor to senior management. Therefore, ensuring that tertiary-education and vocational-training institutions are informed by what the market requires of them, and equipping them to respond to such a demand for skills, plays an important role in establishing the critical human-resource foundations on which firms build their productivity.
 
A broad but necessary agenda
 
This is certainly a broad agenda for change, spanning areas as diverse as investment, industrial infrastructure, market access and technology adoption. However, none of those areas can be wholly excluded if a country’s manufacturers are to have a chance of breaking in and having staying power in a highly competitive global economy.
 
Yet no country will be starting from scratch. There will be areas of a manufacturing ecosystem that are comparatively further advanced than others, so change efforts can focus on initially addressing the areas that are lagging. It may also make sense to focus on a few high-potential manufacturing sectors, generating successes to build momentum and to help develop blueprints for similar action in other sectors.
 
If this type of change is undertaken in a concerted manner, countries have a chance of building the kinds of manufacturing ecosystems that have served Chinese manufacturers so well over the past few decades. If they are sufficiently robust, such ecosystems may even prove attractive enough to lure Chinese manufacturers to work their magic in a different location.