• home
  •  

    A Closer Look: In-country Business Alliances

     

     
     
    © International Trade Centre, International Trade Forum - Issue 1/2003

    Relying on foreign direct investment alone is a risky path to export growth. From industrial clusters to contract farming, export production villages and hard business networks, in-country strategy options deserve a second look.

    Export strategy-makers devote too much attention to attracting foreign direct investment (FDI) as a means of increasing export capacity and reinforcing export competitiveness." This was the gist of one proposition presented to the 2002 Executive Forum and the Southern African Regional Executive Forum. It proved to be, as we expected, provocative. In fact, one participant asked if we were joking. We weren't.

    Our proposition was not that less attention should be given to promoting FDI. Promoting and servicing foreign direct investment are essential components of any national export development strategy. However, the ITC 'best practice' recommendation is that strategy-makers should attach higher priority, and invest more resources, in stimulating and supporting business alliances among local firms and organizations.

    Alliances between small and medium-sized enterprises (SMEs), between large and small firms, even between multinationals and non-governmental organizations (NGOs) have all helped to improve competitiveness in developing countries. They have created incomes, increased job opportunities and promoted rural development - sometimes all at once. The benefits from such alliances can be significantly boosted by the right strategy.

    FDI risks

    Consider the alternatives. The first is to concentrate on FDI. Competition among countries for foreign direct investment will be as - if not more - intense as it is among exporters for market share. It's a 'winner-takes-all' game. For any investment project, there are likely to be numerous contenders, but only one winner. The chances of success are slim for many developing countries, especially those that do not have an established FDI track record, do not have a natural competitive advantage, such as proximity to the target export market, or a key input to contribute. Of course, national export strategy must work towards ensuring and maintaining a pro-investment environment, a competitive investment regime, a proactive promotion programme and an efficient investor servicing capacity. But in the final analysis, the decision to invest rests with the investor - the foreign investor - over whom the strategy-maker has little direct influence.

    Advantages of in-country alliances

    The situation differs greatly when it comes to developing export capacity, and value addition, by promoting 'in-country' partnerships. It's not a question of beating international competition (to increase national export capacity), but of fostering cooperation within the local business community, particularly within the SME sector. In fact, focusing on in-country alliances to create incremental export capacity is largely a matter of working with SMEs, not multinationals (which is principally the domain of those concerned with FDI). With SMEs, the scope for creativity, initiative, proactivity and flexibility is substantially wider. The variables remain largely within the control of the strategy-maker. In short, the prospects of success are greater.

    While the impact of a single in-country alliance on export capacity is likely to be considerably smaller than a venture involving foreign direct investment, the cumulative value of a number of local, export-oriented partnerships should not be underestimated. FDI is likely to concentrate incremental capacity and value-addition in specific regions of a country (which probably already have an export orientation). A programme to foster in-country alliances can be more easily tailored to developmental considerations - rural development, poverty alleviation and geographic diversification of productive capacity. These are all issues that the export strategy should address.

    So what options are available to the strategy-maker? The participants in Executive Forum 2002 had several suggestions.

    Alliances in production and marketing

    They agreed that probably the most obvious strategy is to promote collaborative production and marketing arrangements. The concept of 'hard business networks' pioneered by the New Zealand Trade Development Board is probably the most straightforward and least resource-intensive (from the standpoint of resources available to implement national export strategy). Firms with similar and complementary capacities are encouraged to form a loose, informal association under which they pursue international commercial opportunities and share related expenses. While generally not leading directly to new export capacity, these national networks do lead to synergies, in terms of the dimensions and competitiveness of the export offer and the degree of value addition.

    This type of alliance is relevant for large, multi-disciplinary projects. However, it is also suitable for replication at a more modest level - by, for example, small-scale producers and manufacturers who, without pooling their production capacities, would be unable to meet minimum volumes required in the international marketplace. This type of in-country collaboration results directly in the creation of new export capacity. In the absence of such a partnership, none of the participating firms would, from the buyer's perspective, meet the basic criterion of export readiness.

    Alliances in the agricultural sector

    Contract farming

    In the agricultural sector, contract farming is an option worth exploring by the national strategy-maker. Again, it's an issue of critical mass. By affiliating small-scale producers who do not have the capacity, in terms of volume or know-how, with larger producers or commercial enterprises under some form of co-production arrangement, new export capacities and greater competitiveness can be achieved.

    There are, of course, prerequisites to success. The parties must recognize the meaning of a contract and have a legal system which ensures contract enforcement. Services must also be available to meet agreed quality, quantity and timeliness of output and to organize farmers into groups or associations which will assume contract management.

    Provided export strategy works towards meeting these prerequisites, contract farming can lead to a progressive expansion of export capacity. It establishes the foundation from which to introduce new, otherwise unaffordable, technologies to small production units, to increase efficiencies through bulk purchasing and distribution of inputs and to reduce the risks generally associated with producing for export. Conceptually, at least, everyone on the 'supply side' of the export transaction benefits.

    Export production villages

    Export production villages (EPVs) represent a particularly interesting approach to creating new export capacity through in-country alliances.

    Pioneered in Sri Lanka in the 1980s, the model has now been successfully replicated in other developing countries. Its interest lies in the fact that it addresses both commercial and developmental challenges of national export strategy-makers. The EPV approach has, in fact, evolved into two separate models of an in-country, export-oriented alliance.

    Under the original model, rural producers are supported through technical assistance from the national trade support network (in Sri Lanka's case, the Sri Lanka Export Development Board) to form EPV People's Companies (EPCs). Each producer is a shareholder in the company. The objectives are to promote export production and give collective strength to the individual producer.

    The Export Development Board facilitates the formal linkage of the EPC to a suitable export house, which assumes marketing responsibility and completes international transactions. The Board also acts as intermediary, ensuring fair trade and mutual benefit for the EPV and the exporter, and provides advice and supporting services to both parties.

    A second model has evolved that adds value. Under this approach, a second legal entity further processes, finishes and packages the product for export. Given the significantly higher investment required, the export house is granted a 50% equity share in the EPC/EPA (EPV People's Alliance).

    The EPV People's Company receives 30% equity while the Export Development Board retains 20%, which is equivalent to the seed capital it contributed (occasionally together with other members of the national trade support network) to launch the EPC. The EPV People's Company has the right to purchase the Board's equity share out of the profits generated by the venture, thus eventually becoming equal partners with the export house.

    Alliances in manufacturing

    Export processing zones

    In the manufacturing sector, strategy-makers should consider the linkage between firms located in export processing zones (EPZs) and those outside the zone.

    These 'backward-forward' linkages are natural and can lead to both new export capacity and higher value-retention within the national 'value chain'.

    More often than not, however, strategists neglect these links. Yet the scope for partnership is considerable.

    Industrial clusters

    The consensus is that clusters provide not only an incubator for competitiveness, but also a platform for business alliances. They help enterprises to specialize, attract suppliers and buyers, spread ideas and the capacity to innovate and, most importantly, engender cooperative action.

    But the mere existence of a concentration of enterprises operating in the same sector is no guarantee that competitiveness-enhancement partnerships will evolve. Such partnerships do not emerge automatically. That is where strategy comes in.

    Alliances formed in the context of industrial clusters provide a series of options for the strategy-makers. These range from 'vertical' partnerships formed under hard business networks and joint marketing groups, to more formal production-sharing arrangements, whereby individual firms specialize in specific production and commercial applications under a formal business relationship.

    Again, strategy-makers in developing countries tend to give such arrangements limited attention and only in a very few cases has strategy directly addressed the development and nurturing of such alliances.

    Best practice

    There are three 'best practice' strategy principles to keep in mind for in-country alliances.

    • The trade support network should play the role of catalyst. Especially in developing countries, partnerships require an 'external agent' or broker. A public sector agency, probably the national trade support organization, is perhaps best placed to be the catalyst. The bigger picture calls for a public-private sector partnership, in which government agencies directly and continuously help lay the groundwork for private sector alliances, and follow up with support services.

    • In-country alliances need not be partnerships between firms only. In the case of rural-based alliances, an NGO, with either technical or coordination capabilities (and ideally both), is best placed to be the catalyst and broker. Indeed, NGOs are becoming increasingly relevant in trade promotion and in developing alliances. In rural communities, they provide the technical glue which holds many export-oriented alliances together. From the standpoint of developing the management competency that must accompany export production capability, NGOs - such as universities and technical training centres - represent indispensable partners in the export alliance.

    • Broker partnerships between the big and the small. The idea of bringing together local subsidiaries of multinationals with small, even informal, producers to form internationally competitive ventures is not as far-fetched as it may sound. Experience has proven that such seemingly unlikely partnerships are viable, not only in a developmental sense but also commercially. The PRONAMAZON-Poverty and Environment in the Amazon (POEMA)-DaimlerChrysler venture in Brazil is an excellent case in point. Further information on this type of business relationship can be found at http://www.bosaamazonia.com.br.




      Meeting commercial and developmental objectives

      The Export Production Village (EPV) and its associated People's Company or Alliance have several benefits. The EPV:

      • effectively uses rural raw material resources and human skills for export purposes;

      • eliminates intermediaries and middlemen, thus increasing the return to the producer;

      • provides a basis for future value-addition in the export mix;

      • stimulates rural-based entrepreneurship and reduces dependence on state assistance; and

      • creates substantial employment opportunities, thus reducing migration (particularly of rural youth) to urban centres.




      The article is based on contributions to the Executive Forum from Giovanna Ceglie of the United Nations Industrial Development Organization (gceglie@unido.org), Vicky Schreiber of POEMA, Brazil (vicky@ufpa.br), Edward Seidler, of the UN Food and Agriculture Organization (edward.seidler@fao.org) and Geoffrey Tillikeratne, Director General, Sri Lanka Export Development Board (lsgt@edb.tradenetsl).