Executive Forum 2002
Managing Competitive Advantage:
The Values of National Strategy

SESSION 3 SUMMARY

Thursday, 26 September 2002

Session 3: Adding Value  - Building Value-Addition Alliances  -- What Works? 

Brian Barclay, Coordinator of the Executive Forum, said he wanted to challenge the traditional presumption that export performance for developing countries depends on foreign direct investment. "While FDI does make a contribution to performance, the principal concern of the strategy team should be in-country alliances that target value-addition," he argued. This session therefore looked at ways of creating those alliances. 

Edward Seidler, Senior Officer in the Agricultural Marketing and Rural Finance Service of FAO, declared that farmers in developing country face a much more complex situation than 15 years ago. Phytosanitary measures are being applied to import products. World markets are increasingly integrated. Consumers are also concerned about quality, packaging and traceability. Cold chains, storage facilities and proper treatment must be in place. Your logistics have to be up to scratch. "Farmers will require links to corporations and supermarket chains in the developed countries […]vertical alliances with companies that can meet the requirements of the developed markets.” Contract farming represents a viable alliance. It provides the low-risk, high-standards environment that serves the priority concerns of the producer and the exporter. 

Vicky Schreiber from POEMA-DaimlerChrysler, Brazil, said her partnership promotes action on poverty and environment working with rural populations in Amazonia while ensuring production standards required by the market. This informal-formal sector alliance has now been replicated in other countries, including South Africa. The alliance involves an NGO, supported by academia, and the local operation for a major multinational. 

The first step was to promote sustainable management of the forest and extractive areas. "However, it is not enough just to achieve improved incomes for families. This alone fails to release them from the trap in which rural communities are found -- the gap between the sale price of raw materials and the purchase price of manufactured goods they need to acquire. A second step is necessary: aggregating value to the raw materials produced sustainably at the local level. In other words the challenge is to build value-added chains," she noted in a paper (see website). 

Nine counties, involving some 4000 families, are now processing coconut fibres for DaimlerChrysler. A POEMAtec factory opened in 2001 now produces seats, seatbacks, headrests and side noise absorbers for automobiles, trucks and buses. Waste products are used in agriculture, furniture, construction and the gardening industry. This was possible because DaimlerChrysler, based in Brazil for over 40 years, is committed to local sourcing, in trying to improve local living conditions, and environmental sustainability. 

But between the company and the communities, a "middle man" was needed. POEMA acts as the scientific and technical intermediary. Such projects also require the government for financing and infrastructure, she observed. "This is also a way to scale up, if things work government will put them into broader programmes." And in working with rural populations, capacity-building is essential. 

Michael Morris of the School of Development Studies at University of Natal, South Africa, reviewed the successful ‘horizontal’ alliance in South Africa’s automotive sector. He said the question about value chains is: can we purposefully intervene to bring about organization? "That's a key question for governments in developing countries." South Africa had created five cluster alliances, fostering cooperation among companies that had not been working together before. 

Does it bring about competitiveness and added value? he asked. The auto cluster set up benchmarking clubs involving 48 firms in three different regions. This had resulted in "massive increases in operational performance and a huge decrease in defects -- firms that were the worst have done very well." However, reductions of costs along the chain of external linkages had been considerably less than internally. As a result, a regional auto cluster along the whole value chain had been started in Durban. Sharing of information and negotiating as a cluster had, for example, halved the freight costs per container for smaller firms. Training costs were being shared, including making places available for outsiders in one large firm's training scheme. And now only one audit is carried out for all the firms on behalf of buyers. "We cut out of a tremendous amount of wasted time." 

"Is this generalizable?" Morris asked. "Yes, but you have to look at a whole variety of things to get purposive action. You need external intermediaries, you need dominant firms to take a lead. You need governments to give support." 

Peter Ryan of the Fédération Mondiale des Zones Franches, pointed out that 80% of Mauritius's exports came from free zones, as did 90% of Sri Lanka's manufactured exports. Ireland changed during 1960-1980 from a purely agricultural to a high-tech exporting country  -- ."a shining example of a national export strategy" -- by investing in education, exporting, creating small business centres, pioneering duty free shopping at Shannon airport, with the its associated free manufacturing estate as a showpiece. The Shannon Free Zone turned the Irish economy around. 

South Korea took the innovative path of creating industrial estates that supplied to two exporting free zones from the domestic economy. The government worked to avoid having to import raw materials and planned so that domestic suppliers could service the free zones. "With good planning, as in Ireland and South Korea, free zones can lead to backward linkages into the local economy," Ryan emphasized. "But it requires sticking with the policy whether the world economy goes up or down." 

Doreen Conrad, Head of the Trade Services Unit of ITC, noted that business and professional services have a wider scope for value-addition exports. It has another peculiarity: "Buyers have to take a chance as they make their orders on the basis of a promise." There is no product to demonstrate, only an intangible service. As a result, word of mouth is very important in developing business. Service operations are also very fragmented: firms usually have no single place to gather (except in Uganda), and businesses are often very, sometimes one-person firms. 

These conditions make it more difficult to create sectoral alliances, but the returns are also potentially great. In-cluster alliances for projects or for investors can be very promising. For example, construction, design, planning, surveying, mapping and architectural services could be clustered for an engineering project. Foreign investors might appreciate clustering alliances in corporate real estate, legal, accounting, insurance and banking services in a country. For the association this could offer a wider network, credibility abroad through linkages, a one-stop stop for clients, new opportunities can be identified, and smaller members can tap into marketing experience, while speaking with a single voice to government. 

Table discussion emphasized the importance of FDI, but as Mike Morris noted: "We can't sit and wait for FDI to arrive. You can develop in-country alliances that strengthen national values and make the country more competitive, thus attracting FDI."