Authors: Yvonne Gitu and Moses Owidhi
This blog is based on highlights and discussions held during the ‘Industrializing through Global Value Chains: What Africa can learn from East Asia and Latin America’ webinar – AfricaLics Webinar Series 01, held on 16th February 2023. The keynote speaker of the webinar was Dr. Jegede is a Research Fellow at the African Institute for Science Policy and Innovation (AISPI), Obafemi Awolowo University, in Ile-Ife, Nigeria.
Introduction
Innovation is a crucial driver of development, its impact can be seen through various indicators of economic progress across nations. Technological innovation has played a significant role in advancing many economies – however, it’s not the only way to achieve development. Inclusive practices that involve all members of society can also contribute to economic growth and development. One of the critical elements for achieving developed status is value addition. The traditional definition of trade and manufacturing has evolved, countries that can produce ‘components’ of products have become essential contributors to industrial development. The global value chain has become a critical aspect of the innovation discourse, particularly in Africa, where primary products are often exported without value addition, leading to a perception of underdevelopment.
While some countries have achieved development without extensive industrialization, most have found success through the growth of their manufacturing industry. In Asia, countries have taken advantage of the global value chain opportunity by gradually building capabilities to produce components of products. They have also imported intermediate goods, added value to them and exported the final product. This approach has allowed them to become a destination for global value chains, as they are seen as a ‘place to add value to products.’ Africa’s lack of value addition has resulted in a perception of underdevelopment. To achieve industrial development, African countries need to import intermediate goods for value addition. This will allow them to become a destination for global value chains and increase their value-added exports. By creating an environment that supports innovation and inclusive practices, Africa can unlock its potential and achieve significant economic development.
Asian miracle
The “Asian Miracle” refers to the significant economic growth and development experienced by several Asian countries during the latter part of the 20th century. Japan, Taiwan and South Korea, which previously had considerably lower per capita incomes than the United States, transformed their economies. These countries were able to close the income gap with the US within 40 years by actively engaging in global value chains. Instead of focusing on producing final goods, they concentrated on executing specific tasks within the value chain, which they could perform more efficiently and at a lower cost than their competitors. China has also made remarkable progress in becoming a manufacturing hub, which has been credited to its involvement in global value chains. It has emerged as the primary destination for intermediate goods, with many countries relocating their factories to China, aiding it in becoming an industrial superpower. Other Asian countries, including Japan, South Korea, Taiwan, Hong Kong and Thailand have also adopted this approach.
To promote global value chains, countries must focus on factors such as international demand, industrial processing zones, offshore & onshore strategies, infrastructure and favorable trade policies. By taking advantage of global value chains, countries can significantly accelerate their economic development and improve their standard of living. The “Asian Miracle” has been studied by different schools of thought with varying opinions on what contributed to the region’s economic success. Some attribute it to industrial policies that cover science, technology and innovation while others argue for free trade markets or government intervention. Over the past 50 years, Asian countries have focused on promoting industries with significant potential through industry protection, export promotion and policies supporting small & indigenous businesses. This led to increased absorptive capacity and foreign direct investment, facilitating the assimilation of knowledge to produce original products. Ultimately, the success of the “Asian Miracle” can be attributed to a combination of factors, including innovation, government support and policies promoting local industries & businesses.
Evolution
The governments of Japan, Korea, Taiwan and Singapore played an essential role in the “Asian Miracle” by promoting local industries through various policies. In Japan, the government used trade protection, subsidies and deliberation councils to support R&D and infrastructure development. In Korea, the government encouraged mergers, acquisitions and established state-owned enterprises to promote exports. Taiwan’s government provided funding and technology transfer, with most large firms today starting as state-owned enterprises, while Singapore used a free trade system to promote Foreign Direct Investment (FDI) and global value chains. In all these countries, policymaking was inclusive, with the establishment of deliberation councils. The government provided R&D support and infrastructure to local businesses while simultaneously implementing trade protection policies.
What Africa can do?
In examining the effectiveness of innovation and industrial policies from the Asian miracle countries, Africa can potentially apply similar strategies to foster economic development. These strategies include openness in exchange rate management, import substitution, export promotion, selective approach to FDI, enterprise development, investment incentives, capability building, dynamic industrial policy, and favorable external conditions. By implementing similar policies, African countries can promote local industries, support small and indigenous businesses, increase absorptive capacity and attract foreign direct investment to facilitate knowledge transfer and the production of original products. Additionally, inclusive policymaking through deliberation councils can be established to ensure effective implementation of these policies. By learning from the Asian miracle countries’ success, African countries can take steps towards economic growth and development.
- Africa should focus on exports and restrict imports to boost economies. African countries currently allow almost any product into their borders, but face challenges when trying to export finished products due to high tariffs imposed by other countries. They should develop a strategic approach to increase exports while limiting imports, undervaluing the local currency to boost competitiveness and attracting FDI for import substitution and export promotion.
- Africa needs to develop capabilities within African countries to ensure that they are not solely dependent on imports. Nigeria’s previous success in manufacturing textiles, plastic and car tires before opening its borders to all sorts of products, led to the demise of local industries. Promoting domestic products makes it difficult for imports to penetrate the market and produce goods with government support.
- FDI can be beneficial to African countries if used strategically. African governments should adopt a similar approach to China, Korea, and Taiwan, where multinational companies complement local businesses by acting as strict suppliers of services, human capital, and knowledge. Additionally, the governments of these countries imposed a local content policy, where a percentage of their workforce had to be indigenous people, which facilitated the transfer of knowledge from multinational companies to local businesses.
FDI is a critical driver of economic development, but it should not crowd out local firms, as is currently happening in Africa. The government should take the risk of venturing into businesses where local firms cannot venture due to capital and uncertainty. Additionally, it is essential to support local businesses through enterprise development and investment incentives, allowing for vertical integration of sectors of the economy.
Asian countries initially started with small-scale production of parts and components and then shifted their focus to export strategies to ensure their products met international standards. The success of their industrial policies relied on the government’s ability to regulate and discipline recipients of subsidies, tariffs and entry barriers. African countries can take cues from these Asian countries by starting with small-scale production, prioritizing global value chains and utilizing government subsidies & tariffs to promote both domestic and external markets. It is also important for the government to possess “embedded autonomy” meaning they have a stake in society or the private sector while also having the autonomy to provide interventions for businesses.
By adopting these strategies, African countries can achieve similar success in their innovation and industrial policies. However, it is crucial for African countries to maintain a balance between FDI and local business growth to ensure sustainable economic development. The government’s role in promoting economic growth through innovation and industrial policies should be one of support, regulation and discipline to ensure a thriving private sector.
Conclusion
East Asian countries like Korea, Taiwan, Singapore and Japan succeeded in industrialization due to a well-coordinated industrial policy that was adaptable and responsive to their needs and capabilities. The government played a crucial role in supporting domestic production capabilities through interventions such as technological upgrading and innovation. To achieve similar success in Africa, there must be synergy between innovation policy and industrial policy, with a shared focus on building capabilities and promoting growth.
About the speaker
Dr. Jegede is a Research Fellow at the African Institute for Science Policy and Innovation (AISPI), Obafemi Awolowo University, in Ile-Ife, Nigeria. He holds a PhD in Technology Management from Obafemi Awolowo University. Dr. Jegede was the sole African regional winner of the Emerging Economies Doctoral Students Award by the Production and Operations Management Society in 2014. Prior to joining AISPI, Dr. Jegede was a Research Officer at the National Centre for Technology Management (NACETEM), an Agency of the Federal Ministry of Science and Technology in Nigeria, from 2010 to March 2016. At NACETEM, he participated in the review of Nigeria’s National Science, Technology and Innovation (STI) Policy as well as in the development of Nigeria’s STI Indicators. These STI indicators have been used for planning, monitoring, reviewing and benchmarking STI activities for economic development in Nigeria. Currently, Dr. Jegede is a member of the Scientific Board of the Global Network for the Economics of Learning, Innovation and Competence Building Systems (Globelics) and a researcher with the African Network for the Economics of Learning, Innovation and Competence Building Systems (AfricaLics). Dr Jegede has published numerous articles on STI policy and Innovation Systems and was guest editor of the Innovation and Development Journal’s special issue on “Firm-Level Innovation: overcoming limits and constraints”. Dr. Jegede’s main areas of research are science policy, and innovation. He joined the Open African Innovation Research (OpenAIR) network in 2016 as a case study researcher, analyzing innovation in the informal sector.