Enhancing Competitiveness in Small Developing States: Approaches, Tools and Policies

© 2024 Robert A Stoddard. All rights reserved.

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Published by AuthorHouse   08/14/2024

ISBN: 979-8-8230-8754-4 (sc)

ISBN: 979-8-8230-8755-1 (e)

Library of Congress Control Number: 2024908923

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Contents

Preface

1Introduction

Development Agenda for Small Developing States

Least Developed Countries in a Globalized World

Development Assistance for Small Developing States

2The Conceptual Notion of Small States

African Small Island Developing States

Asia, Pacific Island Countries (PICs)

The Smaller Island States (SIS)

Structural Development Challenges for Small States

3A Regional Manufacturing Sector in Perspective

An Analysis of Fiscal Incentives Provided

Selected Incentives Provided by Some Small States

Tax Holidays

Specialised Arrangements for Business Development

Special Zones

Industrial Parks

Cyber Parks

4Technology Transfer Towards Competitiveness

Technology Transfer; A Development Tool

Building Technological Capability

Scope and Dimensions of Technology Transfer

Technology Embodiment Scenario

Technology Transfer Modalities

Non-Commercial Channel of Technology Transfer

Enabling Factors for Technology Transfer

Technology Appropriation

The Impact of Technology Transfer on Development

Establishing the Framework for the Transfer of Technology

5Commercial & Technological Innovation

The Innovation Process

Strategic Approach to Innovation

Managing the Innovation Process

Innovation and Marketing in Product Development

Marketing; A Driver of Product Innovation

How Product Design Reflects Consumer Needs

How Marketing Information Enhances Innovative Design

The Role of Strategic Planning in Marketing Innovation

Science & Technology and the Evolution of Product Development

6Traditional Development Framework for Enterprises

Clustering / Networking in Small Enterprises

Business Incubation; Challenges and Opportunities

Capacity Building within Private Sector Organizations

E-Commerce; A Tool for Competitiveness

E-Commerce Infrastructure

Constraints within the E-Commerce Sector

The Role of E-commerce in Modern Business

ICT, A Business Facilitating Tool

7World-Class Manufacturing & Management Techniques

The Concept of World-Class Manufacturing

Evolution of World-Class Manufacturing Techniques

Features of World Class Manufacturing

World-Class Information Systems

World Class Manufacturing Strategy

World-Class Management Techniques and Philosophy

Production Planning and Control Techniques

Concurrent Engineering

Continuous Improvement (Kaizen)

Lean Production

Total Productive Maintenance (TPM)

8Managing Quality to Improve Competitiveness

Quality Assurance and Quality Control Approach

Quality Circles

Statistical Process Control (SPC)

Total Quality Management (TQM)

Total Quality Control

Total Employee Involvement

Benchmarking as a Competitive Tool

9Standards; A Catalyst for Competitiveness

Standards and Quality Approach to Competitiveness

How Standards Impact Quality

Globalization and Standards

10The Global Value Chain in Perspective

Challenges & Opportunities of the Global Value Chain

Functioning within the Value Chain Systems

The Agriculture Sector and its Linkages to the Supply Chain

Value Chain Challenges and Impact on Key Sectors

11A Strategic Framework to Support SMEs

Strategic Continuous Improvement

Assessment Phase

The Planning Phase

Implementation Phase

Productivity and Productivity Improvement

Benchmarking within the SCIM Process

Organizational Assessment

12The Paradigm of Competitiveness and Industry

Privatization Option for Public Sector Enterprises

Regional Industries & International Competitiveness

High-End Value Added

Niche Manufacturing in Small Island Economies

Niche Manufacturing; Challenges and Opportunities

13Development Strategies and their Relevance to SIDS

Comparative Experiences; The Newly Industrializing Economies

Lessons from Comparative Analysis

Structural and Economic Constraints

Complementarity

14Industrial Policy Issues; Perspectives and Proposals

Industrial Policy Structure and Framework

Macroeconomic Policies

Sectoral Policy

Traditional Approach to Industrial Policy

ISI Policy and Strategy Consideration

Industrial Policy Priorities for Small Economies

Strategic Goals of an Effective Industrial Policy

Sectoral Policy Shift towards Sustainable Growth

Policy Constraints within the SME Sector

Human Resource and Industry-led Growth

Technology Transfer Policy Imperatives

R&D a Catalyst for Product Development

Intellectual Property (IP)

Business Associations

Infrastructure Development; A Key Prerequisite

Financing and Incentives Requirements

Policy Alternative to Incentives

Sea and Air Transportation

Public-Private Sector Partnership

Energy for Sustainable Development

Industrial Capacity Building

Institutional and Legal Strengthening

Production Integration

Marketing and Distribution Policy

Labour Relations and Good Governance

Environmentally Sustainable Manufacturing

References

Preface

During the last two decades, many small developing states have been experiencing significant challenges amidst changing trade rules that have denied them the opportunity of entering and competing in global markets. These factors have had a crippling effect on small enterprises and have retarded their growth and their ability to contribute significantly to economic development. Furthermore, the export trade in some traditional commodities has been severely affected due to a decrease in demand for these products. In some cases, some products have been replaced by low-cost substitutes and synthetic materials. This has resulted in the collapse of trade in some markets.

Most small developing states are characterized by small size, limited resources and lack of access to markets. These factors have stymied their growth for many years. This is evident by a rapid rise in their debt burden which provides them with little fiscal space. For the most part, governments depend on the contribution from the private sector and in particular small enterprises in their quest to provide employment and reduce poverty. In many cases, those enterprises that survive this economic malaise are rife with poor working conditions, low wage offerings and a lack of capital for further investment. The policy and regulatory environment to which they are subjected are more often than not archaic and need to be reformed to align them to current industrial best practices and trends.

To diversify their economies, many of these states turn to the services and the tourism industries for economic growth. The services sector is a nascent sector that requires heavy investment in infrastructure, trained personnel and other technological resources supported by the relevant regulatory framework. Over the years, there has been a tendency among some developing states to play copycats and copy many initiatives from developed countries without understanding the cultural and economic dynamics that have been attributed to their success. It requires a paradigm shift in small states that will compel them to develop their own economic model considering their comparative strengths and understanding their cultural heterogeneity, indigenous endowment and factors that impact economic sustainability. Understanding the comparative development path of other small economies with similar challenges and history is useful because there may be important lessons to be learned, but not necessarily to replicate wholesale.

This book addresses many of the existential challenges that have beset small developing states for many years that have become obstacles to their growth and success. It has also proposed several options for industrial and economic development and social transformation. Many initiatives and systems that are associated with new development buzzwords have been discussed and critiqued. Furthermore, alternative recommendations have been proffered based on rational arguments and competitive norms.

Several success stories from the Caribbean and elsewhere have been highlighted as well as anecdotal evidence where costly mistakes have been made with the appropriate caution to avoid them. Some of these cases have been linked to industrial policy issues that have been discussed at length.

Chapter 1

Introduction

Liberalisation of international trade has been in effect for most of the post-war period. However, there were key changes to bolster global trade in the mid-1980s with the launch of the Uruguay Round and in the early 1990s with its successful completion and subsequent creation of the WTO. This new thrust in world trade has resulted in numerous challenges and to some extent opportunities for small developing states, which, for many years, had been the beneficiaries of trade preferences under agreements such as the Lomé Convention and the Cotonou Agreement.

It was envisaged that in the years ahead, economic growth would spiral due to globalization and liberalization in trade, the two buzzwords of the 1990s. Although not a new phenomenon, there is no universally accepted definition for the term ‘globalization.’ It connotes the notion of a process where national markets are becoming increasingly interlinked. It has also enabled the internationalization of production through international trade and capital flows manifested by private firms operating in the global environment. Emanating from the process of globalization are profound changes in technology, new methods in industrial organization and the international division of labour.

As a result of these new trends, global production systems are fragmenting and many activities are being relocated to different parts of the world, while large companies subcontract production to specialised SMEs. It was expected that globalization and liberalisation would to a large extent reduce the divergence between rich and poor countries. These expectations were not fully realized and as a result, many developing countries have struggled since. Several studies have shown that there has been little improvement in real income and economic growth has been slow and unstable. The situation has led to a rethinking of development policies in low income countries that have led to the consensus that poverty reduction should be a key focus among developing countries, particularly small developing states.

Against the background of a growing fragile industrial climate, many small developing states are confronted by a plethora of global scenarios to which they must respond with alacrity by initiating steps to participate in activities from which they can benefit. To confront the challenges posed by an increasingly globalized economy, many countries opt for regional integration where groupings of countries can devise strategies to cope with the challenges of a globalized economy. In this context, regionalism particularly for small developing countries must take precedence over globalization.

Regionalism can embolden countries within specific groupings to develop their competitiveness within regional development schemes. The contrary will expose individual countries to the vagaries of globalization with negative consequences.

Globalization has engendered a pattern of cross-border activities where firms can get involved in bilateral agreements leading to international investment, trade and cooperation for purposes of product development, production, sourcing and marketing.

Some developing states, particularly those in the Pacific and the Caribbean are geographically positioned and politically committed to regionalism because they perceive economic gains can be achieved through economic integration of one form or another, which can have a positive impact on the industrial sector. Hemispherically, the Free Trade Area of the Americas (FTAA), which was established in 2005, was designed to liberate trade in goods within the hemisphere by progressively removing tariff barriers to zero tariff level. Among the potential benefits to small developing states within the Caribbean region, for instance, is enhanced access to the United States markets. In the case of the Pacific Island Countries (PIC), the proximity to their main market of Australia and New Zealand is a distinct advantage. Although some countries are competitive in terms of services, they will need to develop competitiveness in other sectors to derive net benefits in an enlarged free trade zone. Regionalism seems to offer some hope for small developing states since their combined efforts can redound to some form of economic benefit.

Many small states form regional integration agreements that allow preferential trade access to their member states, but at the same time, they maintain an unaltered external trade policy toward the rest of the world, thereby resulting in reduced profits for the entire bloc. Most of these states with similar geopolitical characteristics band themselves together in small trading and economic blocs, although relative geographical dispersion has made regional integration and harmonization a slow process.

Economic integration is becoming an integral part of regionalism as in the case of the Caribbean Community (CARICOM), which has fifteen member states, the sub-regional group of the Organization of Eastern Caribbean States (OECS) has seven member states, and the Pacific Islands Forum which represents heads of government of all sixteen independent and self-governing Pacific Island Countries, Australia, and New Zealand that subsumes the Smaller Island States (SIS) of eight small states.

In the meantime, arrangements are being pursued to deepen the economic integration movement within the CARICOM community towards a single market and economy. This arrangement will facilitate the free movement of goods, capital and labour, thereby overcoming the barriers of time, space, and location and facilitating trade and investment. These factors augur well for the industrial sector in the Caribbean region, in that, it will provide protective space which will enable industries in the small developing states that are part of the community to develop and improve their competitiveness through production efficiency and effective utilization of the factors of production.

For many decades, small developing states like those that are endowed with indigenous agricultural commodities (raw materials) exported them primarily in their primary or semi-finished state. This was a strategic colonial arrangement that provided Britain and other colonial powers with the raw materials required to drive their factories and establish their trading dominance. This pattern of trade in goods continued for many decades and these small states often received low prices in the regional and international markets for these commodities. Because of their heavy reliance on agricultural and extractive industries, they have seen the protective policies disappear and their products commoditized.

Over the last couple of decades, many small states have witnessed the erosion of their trade preferences; a rapid rise in their debt burden; increased susceptibility to climate change and rising concerns about security and crime. All these factors have a significant impact on development. Consequently, some states have turned to manufacturing by which they convert raw materials to semi-finished or finished products that will fetch a high price on the export market. This has increased export trade from developing countries to developed countries.

In subsequent years, some small developing states have experienced serious challenges in manufacturing export. As competitiveness in manufacturing declined in the 1990s, the advent of liberalised trade forced many developed countries to remove the barriers to trade employed earlier as a means of encouraging free trade among countries. For instance, in 1991, the Common External Tariff (CET) instituted by the Caribbean Community (CARICOM) was reduced from between 0-70 percent to between 0-45 percent and a further reduction to 0-20 percent five years later. In addition, the General Agreement on Tariffs and Trade (GATT) and its successor agreement WTO, which was established on January 1, 1995, also accelerated the process of opening the markets of all economies.

Most countries are signatories to the WTO agreement, including small developing island states. As such, they have effectively committed themselves to the fulfillment of the objectives of achieving global free trade. Hence, they are obliged to comply with the organization’s rules governing international trade by way of tariffs and quotas imposed by industrialised countries and by constraints on the supply side, due to a lack of technology, skills, training and capital. The advent of the WTO ushered in a new paradigm in world trade that promotes trade liberalisation by strongly advocating the removal of trade barriers in enforcing its policy of open competition. Against the foregoing, enterprises in small developing states must compete by satisfying those requirements or exit the market.

Development Agenda for Small Developing States

Notwithstanding the enormous benefits of trade liberalisation, it has given rise to an increase in imports among third world countries and to some extent has put pressure on local industries, thereby restricting the growth of regional trade. Over the last four decades, particularly following the oil crisis of 1973, several industrialised countries that were former colonial powers have been seeking special dispensation in the international trading system for fairer and more stable prices for their raw materials as well as market access for their industrial products. It was in their best interest to do so because it guaranteed them a sustainable supply of raw materials. Consequently, eight proposals were forwarded by most of the developing countries. Among other things, these proposals include improving the terms of trade, increasing development assistance and developing country tariff reductions. The effect of such lobbying efforts resulted in the declaration of a New International Economic Order (NIEO) in May of 1974, at a special session of the United Nations General Assembly through the United Nations Conference on Trade and Development.

Many of the initiatives proposed by the United Nations to assist struggling developing nations have not yielded the success that was anticipated, evidenced by the fact that there has been little improvement in real income and economic growth in these countries. This reality has led to a rethink of development cooperation for struggling developing countries by multi-national agencies such as the World Bank and the IMF. Consequently, there was a new consensus among the international community that poverty reduction should be the new focus. Resulting from this new thinking was a reclassification of the economic status of developing states. Hence, countries that were hitherto considered poor have now been classified as middle-income states.

It is interesting to note, that leading organizations such as the World Bank and United Nations Industrial Development Organization (UNIDO) that have been involved in assisting disadvantaged groups of countries around the world have identified industrial development and in particular manufacturing as the main engine of growth for the economic survival of small states listed under the category of LDCs. The statistics bear evidence of the fact that those countries with a fragile manufacturing base have low value-added industries and are often doomed to economic failure. No one solution can be applied to arrest this economic situation. There is, however, a range of macroeconomic strategies and technological approaches that can be considered strategic interventions to enhance the well-being of small states.

There is an abundance of evidence to support the notion that industrialization is a fundamental requirement and a central and strategic pillar of economic development. Not only is industrialization the normal route to national development, but because of the globalization of industry, it can also accelerate the pace of development. The potential for accelerated growth could ideally be triggered by manufacturing with all the right economic conditions. It can be a decisive strategy to create opportunities for the poor and marginalised to break out of poverty and for middle-income countries to move up the economic ladder.

Small island economies are experiencing many challenges because of the effects of international economic conditions. Because these island states constitute small economies, the external trends and shocks create adverse situations for promoting growth and stability in their respective regions. Many of the challenges arise from fiscal imbalances and economic growth which fundamentally require countercyclical measures to sustain the economy. In the absence of a strategy to foster private sector development by increasing competitiveness and attracting foreign investment, sustained economic growth will not be possible. To face the economic challenges and improve the competitiveness of any region, the private sector will need to strengthen inter-firm collaboration, reduce costs while maintaining employment and lay the groundwork for strategies of diversification innovation and value-added exports in the medium term.

Countries do not necessarily create wealth by producing the same goods and services more productively. Change becomes essential in what is being produced and the nature of the production process. Structural transformation is the process whereby countries move to new economic activities that are more productive and are thereby able to pay higher wages. Countries that can upgrade their exports by developing new economic activities tend to grow faster. In recent years, trade, economic integration, competitiveness and private sector development issues have become thematic priorities in the discussion on competitiveness and economic development. Although regional organizations, donor agencies and governments have identified similar strategic priorities, there is no coherent strategy being implemented to forge the agenda forward. Consequently, there is a significant gap between diagnosing the real problem and implementing strategies to address it.

The involvement of the private sector is critical to national development. Hence, appropriate policies and strategies are required to expand the private sector’s participation in national development. Such policies should be designed to enable the government to overcome or prevent market failures, reduce burdensome transaction costs, provide an overall sound environment for private sector growth and support public-private participation in matters of competitiveness.

Many small developing states continue to strive for new energy sources, efficient methods of food production, better quality products, improved human health and options for institutional changes and environmentally benign technologies. There are a plethora of studies highlighting the importance of agro-industrial development to the expansion and diversification of the agricultural sector. Many agro-processing operations including jams, jellies, fruit nectars and other beverages have been well established in some regions. The technology which is utilised in the small-scale processing sector for the processing of these products remained traditional and labour intensive. For some agricultural inputs such as agrochemicals and agricultural machinery, most small island states are almost completely dependent on importation from a foreign country.

Adopting world-class manufacturing techniques and maintaining a vibrant agro-industrial sector could invariably result in the expansion of markets for primary agricultural products. This approach can be done through value-added activities and by vertically integrating primary production and food processing systems to minimise post-harvest losses. With a few exceptions, the agro-industrial sector remains rudimentary, underdeveloped and largely without significant institutional, technical and financial support.

For many years, industrial development has been an important driver of economic growth. This is especially true in the case of developing countries and economies in transition. Economic growth has enabled countries to increase their factor productivity, which in turn has established the foundation for improvement in the standard of living. There are, however, other sectors in the economy that depend on strong industrial development for their momentum and success. For instance, an increase in agricultural productivity and the processing of agricultural goods. Many high-tech firms survive and grow by responding to the demands created by manufacturing activities. It must be iterated that the industrial revolution in England and its subsequent spread to countries in Europe and North America became the catalyst for economic growth.

There is an ongoing debate, which suggests that society has entered an era of post-industrialization. Although de-industrialization is progressing at a rather rapid pace, industry is still a dominant force in economic development. Over the last several decades, the services sector, which has become one of the fastest-growing sectors, owes its rapid growth to the corresponding growth in manufacturing output. The growth in telecommunication services could not be possible without continuous demand for manufactured hardware.

In most developing countries today, industrial development continues to be the catalyst for economic growth driven by technological progress which has led to income generation and the creation of employment. Much of the slowdown in manufacturing in developing countries is related to the diversion of manufacturing activities through foreign direct investments and the globalization of production. In small developing economies industrial development contributes significantly to value-added and employment. It is noticeable that for countries in transition, large inefficient state-owned enterprises have given or are giving way to smaller and more efficient private sector entities.

In recent decades, the process of industrialization has undergone profound changes while industrial development has remained the fundamental instrument of economic growth and social development, particularly in developing countries. These developments have been influenced by decisions in the international sphere that were responsible for the removal of natural and legal protection previously granted to many small island states that were once colonies of several developed countries in Europe. Consequently, small states have been exposed to high levels of external competition in an increasingly integrated international market.

Least Developed Countries in a Globalized World

Countries around the world have been categorized into several economic groupings. Among them are More Developed Countries (MDCs); Least Developed Countries (LDCs); Newly Industrialised Countries (NICs) and Small Island Developing States (SIDS). These categorizations are based on several criteria derived from the indices of economic indicators.

Although frequent reference will be made to small island developing states, the status of those countries generally considered as least developed cannot be ignored. The list of Least Developed Countries (LDCs) was approved by the UN General Assembly in 1971, in recognition of the existence of a category of countries whose distinction lies not only in the extent of their overall poverty and unemployment but also in their limited economic, institutional and human resources, often compounded by geophysical challenges.

Small states are characterized by the small size of their economies, which prevents the exploitation of economies of scale. These countries are also typically remote from major markets and are more vulnerable to environmental disasters. There are 10 SIDS among the LDCs. In 2010, the sub-Saharan countries represented 61 percent of the LDCs’ population. The largest LDC is Bangladesh, which accounts for 19 percent of the LDCs’ total population, followed by Ethiopia (10 %) and the Democratic Republic of the Congo (8 %).

A UNIDO analysis suggests that several LDCs, particularly in Asia, are on a sustained path towards industrialization, while LDCs (mainly in Africa) are facing deindustrialization. Regarding international trade, LDCs continue to play a minor role in world trade despite their remarkable export performance in recent years. Their exports are dominated by resource-based and low technology products and they concentrate on a limited number of markets and products, thereby increasing their vulnerability to external shocks. GDP per capita, which measures the level of total economic output in a year per unit of population, has remained relatively low in most LDCs. In 2009, GDP per capita in LDCs was 4 to 9 times lower respectively than that of MDCs and the world average. Low manufacturing value added (MVA) levels combined with fast-growing populations may explain the low level of MVA per capita in LDCs. LDCs were unable to add value to their exports because they continued to export low-technology goods.

LDCs have a relatively high reliance on the primary sector, which increases their vulnerability to external shocks due, for example, to volatile commodity prices. To build more resilient economies, broadening and deepening the manufacturing sector may be deemed a desirable path as manufacturing brings several potential benefits. Firstly, a vibrant manufacturing sector stimulates technological change by adopting, mastering and developing improved production processes and new technologies, boosting productivity throughout the economy. This will invariably require further development of skills and learning, thereby shifting employment towards highly skilled and better-paid job categories.

Secondly, manufacturing promotes economic growth through forward and backward linkages. Linkages are created when a sector utilizes the products of other sectors as inputs (backward linkages), while other sectors use their output as inputs in their production processes (forward linkages); as a result, the growth of one sector can fuel the development of other related sectors. In addition, increased activities in manufacturing can lead to the development of support sectors such as finance and transport.

Finally, by taking advantage of the globalization of production, LDCs can integrate global production networks and access international markets. The expansion of trade is a central pillar of the globalization of the world economy, with manufactured exports consistently accounting for over 80 percent of total exports since 1990. Compared to commodities, manufactured products are less exposed to price fluctuations and can yield more revenues on account of higher value-added. Shifting economic production towards manufacturing may therefore hold higher promise for long-term growth. Yet, it will be important to lean on the primary sector as a provider of both financial resources that may be needed for investments in the manufacture of intermediary inputs (forward linkages) that can be used in manufacturing production.

Opportunities stemming from the rapidly changing global industrial landscape provide no guarantees for economic prosperity. Formulating the responses needed to convert opportunities into sources of wealth creation is a process that requires both the private and public sectors. The recently published report by the World Bank on the independent Commission on Growth and Development argues that the government and the private sector have critical roles to play in boosting growth in developing countries. In the past, economists believed that the developing world was replete with market failures, which refers to the inability of the market system to provide some necessary goods and services or to provide them in optimum quantities or levels. The only way in which poor countries could escape the poverty traps was through forceful government intervention.

Import substitution policy, planning, and state ownership have produced some success in the past, but where there was little or no attempt to change such policies in response to the new world order (particularly so, when other countries were adopting alternative policies that were proven successful) they have led to colossal failures and crises. Economic liberalisation and opening up of markets offered many benefits to countries with a focus on export markets.

Furthermore, emphasis on financial interests and the development of skilled workers for new industries resulted in economy-wide growth rates (in output and productivity). It is misleading to believe that state planning and public investment can exclusively act as the driving forces of economic development.

It is increasingly being recognized that developing societies need to integrate private initiatives into a framework of public policy that encourages restructuring, diversification and technological dynamism beyond what market forces on their own would generate. Perhaps not surprisingly, this recognition is now particularly evident in those parts of the world where market-oriented reforms were taken the farthest and the disappointment with the outcome is correspondingly the greatest. Market forces and private entrepreneurship must continue to be given top policy priority. The government should also perform a strategic and coordinating role in the productive sphere.

A developing country is sometimes referred to as a third world, less developed or underdeveloped country. A developing country is generally characterized by less developed industrial and technological infrastructure and a low Human Development Index (HDI) relative to the developed countries. Since the late 1990s, some developing countries have demonstrated higher growth rates than many of the so-called developed countries. Although there is no universally accepted definition of a developing country from that of a developed country, there is sometimes criticism regarding which countries ideally fit into these two categories. There are, however, general reference points such as a country’s GDP per capita, level of industrialization and standard of living that help to clarify the distinction.

The case of India and China ideally explains the confusion between the two categories of countries. Although they are regarded as developing countries their phenomenal economic growth over the last several years has advanced the argument for them to be categorized as developed countries. Many countries dislike the terms developing and underdeveloped countries because they connote inferiority to the more developed countries, and in many cases, there is no clear line of demarcation between the two groups since some developing countries have been exhibiting comparable characteristics.

Development Assistance for Small Developing States

There has always been a disparity between developed and developing countries because developed countries possess a greater share of the world’s wealth and have been able to develop the infrastructure and industrial systems to promote manufacturing enterprises through which they can dominate trade. To