57042 Findings reports on ongoing operational, economic and sector work carried out by the World Bank and its member governments in the Africa Region. It is published periodically by the Africa Technical Department on behalf of the Region. Sub-Saharan Africa : Assessing Technological Capabilities and Firm Productivity The supply response of the industrial sector to structural adjustment programs has been more sluggish than expected in Sub-Saharan Africa (SSA). This is a cause for concern for African governments as well as in the development community at large, and is stimulating an examination of factors that may underlie the inadequate rates of growth. In addition to issues such as policy uncertainty and financial constraints, a critical area of concern in this context is the problem of technological capability. For firms to respond effectively to changes in incentives and to grow over time, entrepreneurs and workers must have the required technological capabilities - the skills and information required to establish and operate modern machinery, and the learning ability to upgrade these skills when needed. Technological capabilities are at the center of the new theories of economic growth which focus on technology and human capital as engines of growth. Recent developments in this literature suggest that long-run economic growth, as seen most recently in East Asia, reflects sustained increases in firm productivity stemming from the continuous accumulation of technological capabilities. In this view, therefore, a liberal economic setting and policies to increase technological capabilities are the two blades of the scissors necessary to achieve increases in productivity and economic growth. One without the other is likely to be considerably less effective. The study, Technological Capabilities and Learning in African Enterprises, reports on one of the first systematic attempts to assess technological capabilities and firm productivity in SSA. Despite their crucial importance, not much is known about these issues in the SSA manufacturing sector. The study utilizes primary data from two surveys of manufacturing firms in each of three representative countries, Ghana, Kenya and Zimbabwe, all countries currently undergoing extensive structural reforms. As a group, these countries span the diversity of per capita incomes and industrial development patterns of the Africa region. The study undertakes a comprehensive analysis of technological capabilities and manufacturing productivity in these countries, focusing on a number of broad issues related to the patterns and determinants of manufacturing productivity, the levels of endowment of technological capabilities, the specific nature of technological efforts being undertaken by manufacturing firms, and the constraints they face in enhancing such endeavors. The objective of the investigation is to gain a better understanding of the technological problems facing African enterprises, large and small, and to help the World Bank and other development agencies design more effective assistance programs to accelerate the supply response to policy reforms. Technological capabilities cover a wide spectrum of technical efforts undertaken by firms. To make their analysis manageable, these capabilities are categorized into three functional groups: investment capabilities, production capabilities, and learning mechanisms. The first set of capabilities refers to the skills and information needed to identify feasible projects, locate and purchase suitable technologies, design and engineer the plant, and manage the construction, commission and start-up. The skills and knowledge needed for the subsequent operation and improvement of the plant are defined as production capabilities. Lastly, the learning mechanisms available to firms determine the extent to which they can augment their endowments of production and investment capabilities over time. Together, the three types of capabilities determine how efficiently firms organize and manage their activities, i.e. their total factor productivity. The analysis of manufacturing productivity in Ghana, Kenya and Zimbabwe yields a number of important findings. First, it is seen that African manufacturing displays structural relationships similar to those found in other developing regions. Second, there is considerable heterogeneity in the technical efficiency of firms across these three SSA countries with firms in Zimbabwe the most technically efficient on average and those in Ghana the least. Third, patterns of inter-firm productivity differentials across firm sizes indicate that neither small nor very large firms are relatively the most efficient. Medium-sized firms tend to be the most efficient in the sample. Finally, comparisons suggest that African firms on average have lower levels of total factor productivity than their international counterparts. Firm Productivity The analysis of sources of inefficiency in the sampled firms yields additional important findings. In particular, the results show that all the learning mechanisms that firms can use to change their endowments of production and investment capabilities have a large impact on enhancing productivity. On-the-job training of workers, both inside and outside the firm, has relatively the largest impact on productivity. Specifically, an increase of 1% in the number of workers trained potentially increases the value added of the sampled firms by as much as 60%. Similarly, informational links established by foreign-owned firms increase value added by 30%, an impact comparable to the productivity gains contributed by technology transfer through technical assistance contracts or licensing arrangements. Interestingly, the results also show that access to working capital financing is another critical determinant of firm efficiency. For the sample of firms as a whole, access to such financing increased productivity by 37%. At the same time, the contribution to firm productivity of access to longer term bank loans is insignificant. This finding has implications for targeted credit policies which often place an exclusive emphasis on bank loans to finance fixed-asset acquisition. A similar picture emerges when only the very small firms and microenterprises are considered. Again, training of workers is the most important contributor to higher value added by firms while access to working capital finance raises productivity by as much as 40%. In addition, previous experience of the entrepreneur and age of the firm, both of which contribute to human capital in the firm, are also positively associated with higher productivity. The results also show that even within the very small firms, firms that are in the formal sector (in the sense of being registered) entities have substantially higher levels of efficiency than the small informal firms. Endowments of Technological Capabilities Given the importance of technological capabilities, and particularly of learning mechanisms, in determining manufacturing productivity, country case studies are utilized to provide additional details on the nature of technological effort undertaken in firms in the three countries. An important advantage of the case studies is that they show greater qualitative details (e.g., whether or not plants display a good layout) about production and investment capabilities which otherwise cannot be captured fully in the large-scale survey used for the full sample of firms. This detailed "snapshot" of endowments of firm capabilities reveals levels of investment and production capabilities that are significantly lower, on average, than international standards. The country case studies also present a detailed look at learning mechanisms available to firms in the three countries. Learning mechanisms constitute the most important category of technological capabilities since they enable firms to augment their endowments of the other two types of capabilities. Two types of learning mechanisms are distinguished: private and collective. Private learning mechanisms may be internal to the firm, such as in-house training and R&D, or external, involving relationships with buyers and suppliers, interactions with other firms through subcontracting, industry networks, and hiring local or foreign consultants. Collective mechanisms, on the other hand, consist of technical support services provided by NGOs, business associations, the government or donors. Most firms operate in an information-poor environment: · there are very few vertical and horizontal linkages between firms because large enterprises tend to be vertically integrated and there is very little subcontracting; · direct foreign investment is limited, reducing the ability to "learn-by-copying" and the ability to "benchmark" the firm's operations against internationally competitive firms in the same business; · training opportunities and specialized consultancy services are weak or non-existent locally, and expensive if imported; and · information sources on technical and business matters are poor. In addition, with the exception of multinational companies and a few large exporters, most firms are also technologically isolated from the rest of the world. As a consequence, connections with international private learning sources, such as foreign buyers and suppliers, are weak or non- existent. In all three countries, collective support services to assist and facilitate enterprise technical learning are often poorly delivered, when they exist at all. Business associations are also weak and deliver very few services, if any. NGOs and international development agencies provide some useful services, but coverage is limited and the support services are aimed at only a few areas, like finance. With such poor external learning sources available to them, African firms are forced to rely almost exclusively on internal learning efforts to build their technical capabilities. By itself, this fact is not particularly problematical. Internal efforts have been identified as the most important source of technological capabilities among successful small-scale exporters in Asia and Latin America. The problem in Africa is that internal technical efforts of firms, with the exception of a few large multinationals, appear to be less than what is needed, limited in scope and sporadic rather than continuous. For example, internal efforts at R&D are both quantitatively and qualitatively minuscule in international terms. Similarly, internal training of workers is widely prevalent among firms, with patterns of incidence remarkably similar to those found in other countries, but with levels that are much lower than international averages. Thus, without the availability of adequate external learning channels to increase the inflow of new know-how, internal learning activities can not go very far in upgrading skills towards internationally comparable levels. Technology Policy Recommendations for Africa The study identifies policies at four levels that can enhance manufacturing productivity: · policies that affect efficiency indirectly by altering the functioning of the national economy; · policies that directly affect the efficiency of an industry as a whole; · policies that influence the technical capability and efficiency of the individual enterprise; and · policies whose main impact is on the task-level efficiency of individual workers. Nationwide policies in the form of macroeconomic policies, financial system development, infrastructure, and national education attainment have important impacts on the efficiency of all firms. It is important to emphasize, therefore, the need for continued structural adjustment of African economies in terms of macroeconomic reforms and elimination of gross distortions in prices and incentive structures. The principal objectives of industry- wide policies in SSA should be to reduce the inter-firm variance in efficiency observed in given industries, and to raise the average productivity of the best local firms closer to international best practice. To some extent, the heightened competitive pressure induced by policy reforms is causing firms to move towards best practice. There are, however, some problems which might be lessened by proactive, industry-level policies addressed by the study. For example, underinvestment in enterprise training, because of problems like worker mobility, might be addressed by cooperative efforts on an industrywide basis. Firm-level policies are perhaps the most critical element of any technology policy, since firms are the most important actors in accumulating technological capabilities through developing, establishing and operating specific production systems. The central objective of firm-level technology policy should be to encourage and support the learning process in existing firms and to enhance incentives for innovation and imitation. The leading source of technical learning in firms in all countries is through private channels - either internally from technical efforts within the firms themselves, or externally, from business interactions with other firms in the same industry, from hiring consultants and other technical experts, and so on. Enhancing the levels of these private learning mechanisms is a crucial policy goal. Policy measures here span a wide range of issues, but might include: · Reducing the problems and costs to firms in hiring experienced expatriate personnel; · Making the environment better for foreign direct investment in key labor-intensive industries and encouraging vertical and horizontal links with local companies; and · Finding ways to lower transactions costs of sub-contracting. An exclusive reliance on private learning mechanisms may reduce the participation of small firms, which in many countries are primarily owned by black Africans, in the technical upgrading process. Hence, policymakers should also focus on collective learning mechanisms. Key here are programs delivered by NGOs, business associations, donors and governments, such as: · Provision of industry-specific training; · Facilitating the use of technical consultants, perhaps on a cost-sharing basis; · Making technical information available; and · Promoting information sharing among firms. The most highly desired services according to the firm surveys were specialized technical courses and technical assistance for productivity improvement. The task-level efficiency of African workers is generally low by international standards. The objective of task-level policies to improve this deficiency should be to raise the quality of enterprise managers and to provide more systematic worker training. Learning-by-doing should also play a significant role in raising task-level efficiency as policy reforms promote increasing export production. Biggs, Kedia, Srivastava. 1995. Technological Capabilities and Learning in African Enterprises. Technical Paper No. 288. For further information contact: M.Mbuyi, Africa Technical Department, World Bank, Washington, D.C. 20433. Tel: 202-473-9574