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How some firms lose ground in export markets

The case studies have yielded some insights into the conditions under which firms which were once exporters to regional and international markets have lost or are losing ground in these markets.

Failure to cope with changing technology

Failure to keep pace with changes in production process technology was often reflected in uncompetitive costs of production and/or deficiencies in product quality. Some firms had made initial investments in labour-based production processes to take advantage of relatively low labour costs. However, the state of technology changed and such methods could not provide the quality and precision now required in finished products. Investment in more automated production methods became necessary. Those firms that failed to make these investments lost their markets because they could not meet the product quality demands of export markets.

There are several factors which inhibited investments in improved technologies. Some firms did not have search mechanisms for information on changing technological and market conditions and did not keep abreast of the technological trends in their industries. The gap had not been filled by any institutional arrangements initiated by governments or industry associations. Some firms had not made any investments in improved technology for lack of foreign exchange or of accumulated profits which could be ploughed back into the enterprises. Such firms had either accumulated losses or had failed to generate profits for a long time. Some firms had suffered from the effects of rigid price controls but others had been operating at low capacity utilization rates for a long time for various reasons. Firms which had been in financial problems for a long time had eroded their capacity to make any significant investments in capital equipment, training and innovations. Investment in general had been low or stagnant.

For instance, it was found that Tanganyika Textiles used to export vikoy, mainly to the Muslim community in Kenya, but it has been pushed out of that export market mainly because it could not modernize its 1959 labour-intensive textile technology. Capacity utilization rates have been falling during the last decade, from about 41 per cent in 1980 to around 20 per cent in 1993, leaving the firm too under-capitalized to modernize its technology in any substantial way. Competitors' finished products were perceived as being of higher quality and the export price could not cover the firm's costs of production. Although the collapse of its export market (in Kenya) was triggered by the collapse of the East African Community in 1977, this may have been only the last straw. In fact the firm has not recovered since then and in the meantime Kenya has developed its own textile base. Even in the domestic market this firm is losing its market share to imports from Southeast Asia.

After 1985, one manufacturer of kangas in Kenya (Rivatex) started to lose its markets in the Middle East and to some extent in Tanzania to the Far East, where prices were more competitive. While Rivatex was selling kangas at US$3.20 per pair, similar products from the Far East were selling at US$1.70 per pair. This loss of competitiveness is partly due to lack of technological improvements or innovations over time. The firm's ability to make investments in technology had been eroded by the rising costs of debt servicing on loans denominated in foreign exchange (between 1976 and 1992 the Kenya Shilling depreciated substantially against the Deutschmark). The firm has failed to inject new capital, to modernize its machinery, or to finance training programmes for its staff.

In the import liberalization phase, some firms which had operated profitably in protected domestic markets found it difficult to compete with imports. In response, instead of making efforts to improve their competitiveness, some firms resorted to export markets with the help of channels which were not strictly commercial, e.g. religious groups or charity organizations. This strategy seemed to work for a while but it could not be sustained. This indicates that losers in the domestic markets are not likely to succeed by seeking refuge in export markets, even if it may seem possible at first.

Some firms were found to be putting considerable effort into improving their competitiveness but the results in terms of export performance did not seem to be commensurate to their efforts. Two categories of reasons were identified in the case studies. First, it was found that the efforts these firms were making were blunted by the inadequacy of infrastructural and institutional support, which ordinarily originates from outside the firms. Second, the basic limitations in the technologies the firms were using were not being tackled. Instead, futile efforts were made in more peripheral aspects of technology. This situation was particularly present in areas in which technology had changed to the extent that high product quality was no longer being attained by highly skilled labour working with labour-intensive technologies but rather by the use of microelectronic controls. In such cases, further investment in training labour and perfecting skills in the labour-intensive methods could not yield much fruit. These firms succeeded in reducing costs and improving product quality but these achievements did not meet the requirements of international markets. This points to the limitations of small-scale, labour-intensive operations, in specific industry contexts, in producing high-quality products for the international market. Investments in more radical changes in technology were needed. This underscores the importance of understanding the pace and trends of technology development elsewhere, as a guide to the kinds of investment that must be made to create and develop new technological capabilities.

The case studies have also shown that technological changes in the materials used in production have undermined the competitiveness of firms which had based their competitive strength on cheap local resources. For instance, Orbit-sports of Kenya had gained a competitive advantage in exporting balls under licence from Adidas. This advantage was based on the domestic availability of cheap, high-quality leather. As a consequence of technological developments in materials, Adidas recommended a shift from leather to synthetic, non-woven fabrics. The problem has been aggravated by high import duties on imported synthetic materials. The firm has been losing some export orders to competitors from Asia and Europe.

Import substitution in importing countries

The countries which had made an earlier start on industrialization in Africa found their export markets in the neighbouring countries, whose level of industrial development was lower. Some of these regional markets have been lost as neighbouring countries decided to establish and protect their own industries. While this may be a necessary step towards industrialization, it poses the question of whether industrialization might not be better pursued within regional cooperation arrangements which could reduce duplication of productive capacities within the cooperating regions.

Problems of reliability of supply and quality of local inputs

Substitution of local inputs for imported inputs has been one innovative step taken to cut down costs or as a survival strategy in the face of import controls. For example, the shift in textiles in Tanzania, from using imported rayon to local cotton, and from imported starch to local cassava starch, was stimulated by cost-cutting considerations and responses to import controls. These modifications have resulted in a considerable reduction in production costs, as import content was lowered. But these are one-off cost cutting innovations and do not necessarily represent continuous efforts. In the past some of these innovations were made in response to foreign exchange constraints. As competitive pressures build up, with import liberalization and competition from export markets, product quality considerations are gaining in importance. Where such import substituting innovations had compromised product quality, these innovations are being reversed.

The case studies have shown that some exporting firms failed to meet product quality requirements or delivery times because of the low quality of local inputs and unreliability of supply. Firms which could not obtain good-quality inputs found it difficult to maintain their position in export markets. This has some similarities to findings on the Colombian clothing industry by Morawetz (1981).2 He made a comparison of Colombian and East Asian clothing exporters and found that, in early 1977, Colombian exporters were offering prices for jeans and shirts which were 44 per cent higher than prices from Korea, 25 per cent higher than Hong Kong and 11 per cent higher than Taiwan. One explanation of the lack of competitiveness of Colombian firms was the price and quality of their inputs. While East Asian firms obtained good-quality fabrics at world prices, the Colombian firms bought from domestic producers at prices 50-108 per cent higher than the world prices. These producers were protected and were too small to take advantage of economies of scale. Locally made zippers and threads in Colombia were two to three times the world price. The case studies suggest that the African situation is quite close to the Colombian one.

The industries which are supplying inputs to the exporting firms have more often developed monopolistic and protectionist structures than competitive ones. In Zimbabwe, for instance, there are about 250 garment manufacturing firms which get their fabrics from only five textile firms. There is little competition between these firms, since two of them account for 60 per cent of the total output of the sector. The local grey cloth which the textile mills manufacture is not competitive in the world market and it is difficult for those using this grey cloth as an input to face competition in export markets successfully.

This implies that local availability of inputs and linkages in the domestic economy are not always a blessing. If the firms using, local inputs have to be competitive, the efficiency of the supplying firms and supporting institutions also needs to be ensured.

The lack of specialization

The case studies have indicated that the degree of specialization in many firms was limited by two considerations: the size and stability of the markets which the firms had decided to target and the supply conditions in the supportive industries, especially those producing inputs.

Target market conditions were crucial determinants of specialization for firms which were primarily targeting domestic markets and became exporters at a later date. While supplying the domestic markets, these firms adopted the diversification strategy as a growth path where domestic markets for particular products were very small (e.g. NEM and Themi in Tanzania and the fertilizer and paints manufacturers in Mauritius). While these firms extended from domestic markets to exports they retained the wide variety of products they were manufacturing. Firms which targeted the export market from the outset tended to be more specialized than those which were primarily catering for the domestic market.

Product diversification has presented further challenges: shorter production runs, the associated loss of economies of scale and having to cope with requirements of marketing. The case studies have identified the lack of specialization as one factor which inhibited attainment of international competitiveness. The textile firms (e.g. those owned by the government in Kenya) had a low average size, of about eight thousand spindles per mill, compared to the minimum economic size of a spinning plant of 25-30 thousand spindles. These findings are corroborated by a previous study of the textile industry in Kenya (Pack, 1987).3 That study employed engineering and economic data to analyse the deviation of textile plants (in Kenya and Philippines) from international best practice. The lack of specialization was identified as the main source of such deviation. Excessive diversification of products (partly reflecting tariff protection) and the consequent short production runs accounted for considerable inefficiency.

Facing the absence of reliable networks for input supplies, some firms have taken steps in-house to tackle the problem. Diversification in the form of vertical integration has been adopted as one way of ensuring reliability in the supply of inputs. For instance, some clothing firms (e.g. Fashion Enterprises of Zimbabwe) have solved the problem of unreliable supply of fabrics by establishing their own fabrics-manufacturing units to guarantee quality and reliability of supply. While this kind of diversification increases reliability of input supplies, it has often led to higher costs. Where the domestic market has been protected, such costs could be passed on to consumers. In the export business, however, this may not be possible. Some firms have tried to check costs by creating autonomous production units under one group of companies. While this option has been feasible for large corporations operating a group of companies, it is more difficult for smaller firms.

Failure to cope with changing market conditions

Employment of high technology may be a necessary condition but it is by no means sufficient. Faulty marketing strategy and failure to develop the necessary marketing capabilities have led to disaster in spite of having invested in modern and advanced technology. For instance, the manufacture of cloth for shirts and trousers started in Mauritius in 1990 as a significant move towards high fashion and high-technology production in clothing manufacture and exports. The firm was equipped with the latest textile machinery available on the European market. However, due to a defective marketing strategy and a narrow and excessively concentrated customer base, sales collapsed and the firm was placed in receivership barely two years after its creation.

Linkages and supporting industries

Inter-firm linkages

The study found that internal linkages (i.e. within the country) are limited. While there were some linkages among firms which shared premises in the industrial estates, there were only isolated cases of subcontracting arrangements outside these networks. There is little subcontracting or local procurement of manufactured inputs in the exporting firms. Large firms have only infrequent relations with small firms except for the purchase of some repair and maintenance services. Information and technology diffusion among firms is minimal except for very informal channels.

Several factors explain this situation. First, import dependence over a long time has pre-empted the search for local alternative linkages. For instance, in the eases of NEM, Afrocooling and Matsushita, the lack of linkages reflects the pattern of import substitution industrialization which emphasizes import-dependent assembly. Second, access to tied donor finance reduced the need to search for local sources of supply. Third, the capability to search for various local suppliers had not been developed. Fourth, some firms competed with their potential suppliers of technological services rather than being assisted by them. For instance' Themi of Tanzania produced farm implements, some at least of which were also being produced for the domestic market by two research and development institutions. The competitive relationship between the firm and the institutions which are supposed to provide technological services was not conducive to the development of technological linkages between them. Lastly, poor inter-sectoral linkages may reflect poor infrastructural facilities for small firms, biases in policies and in credit markets and the lack of an extension network.

Industry associations had made attempts to promote interactions among local firms by harmonizing production processes (e.g. identification of excess capacity in individual firms and possibilities of subcontracting, trading in spares, joint quality control, etc.). The ease studies showed that in isolated incidents firms which receive large export orders have subcontracted some of the work to other firms. Inter-firm trade in unfinished products is very rare.

The creation of linkages or establishment of input-producing activities, have been influenced by government policy. For instance, in the case of textiles and brewing, the establishment of some input-supplying activities was influenced by government policies discouraging imports (e.g. yarn and malt in Nigeria). Some of these firms have achieved such tremendous expansion that they now export as well as selling on the local market. In the case of the brewing industry in Nigeria, the search for local alternatives was intensified with the introduction of restrictions on importing barley. Increasing success with local substitutes for barley malt improved the capacity utilization rate for the industry. The search for local substitutes for imported barley malt involved most of the firms in investment in R&D, as well as substantial plant conversion. Their efforts were complemented by the independent research endeavour at the Federal Institute of Industrial Research, Oshodi (FIIRO), which, through some of its research report series, demonstrated that lager beer could be produced using only sorghum. Today, most of the more successful firms use maize and sorghum in their beer production process.

Buyer-consumer links

The case studies found that buyers and consumers of the firms' products provided useful market information. They were very instrumental in inducing product quality improvements. The interaction with export markets, which are more demanding, was particularly effective in this respect.

Linkages with marketing agents have been common among exporting firms which are not large enough to afford large investments in building their marketing capabilities. The role of marketing agents had been observed to be important in South Korea but there seems to be one difference; that is, Korean firms selectively let foreign buyers do much of the marketing during the early stages of export development but this role was gradually transferred to the firms or to local trading institutions. This progressive transfer process does not seem to have taken place as yet except for some firms in Mauritius.

Infrastructural problems

Various problems of infrastructure have been pointed out in the country studies as obstacles to the attainment and maintenance of competitiveness in export markets. Supportive infrastructure is an important prerequisite for successful exporting. Expensive, sporadic and unreliable transport and communications are a serious impediment to the exporters of non-traditional goods. Reliability of delivery is also critical. High transport costs contribute greatly to the lack of competitiveness of exports. Poor telecommunications and constant power and water interruptions also raise the costs of doing business and compound the problem of lack of information. To obtain electricity, some firms had to purchase generators or other equipment which is ordinarily supposed to be purchased by the national electricity supply authorities. This added unnecessary costs to the operations of the firms.

Information flow is very important if firms are to respond to opportunities which arise from time to time. It was one thing to introduce supportive facilities, it is another to make full use of the facility. Some firms were found not to be aware of the existence of some of the facilities which were supposed to assist them.

The influence of policy on firms' export activity

The macro and sectoral policy environment in which exporting firms have been operating has an influence on decisions taken by firms.

Import policies

Import policies have been mentioned as important in influencing the performance of exporting firms. The competitiveness of some exporting firms was undermined by high duties on imported inputs or difficulties of access to quality inputs required to meet export orders. This study has also revealed that there are cases in which government support had favoured subsidiaries of TNCs which were in competition with local firms. For instance, Cosmivoire would have performed better if the government had been able to guarantee fair competition within its sector: its main competitor is a subsidiary of a powerful multinational which receives many advantages from the government. In the case of Kenya, Sharpley and Lewis (1990)4 have pointed out that the rate of effective protection for foreign private firms (averaging 57 per cent) and especially parastatal enterprises (65 per cent) was considerably higher than for local firms (35 per cent).

One major problem mentioned by all firms in the sample is that of cumbersome, bureaucratic and lengthy procedures for licensing, access to credit and foreign exchange, and export documentation. Some exporters have to travel long distances from the regions to the capital city simply to register themselves. There are also still tight bureaucratic bottlenecks in foreign exchange allocation, resulting in long lead times for imports. Such long and cumbersome procedures involving many institutions impose extra implicit costs (in terms of delays, etc.) on exporters. Delays could be even more disastrous for risk exports such as fresh fruits and fish. Some country studies have proposed the establishment of some kind of export centre which would offer at one location a package of relevant export services such as registration, licensing, proofs of ownership, export advice and export promotion.

Bureaucratic delays at Customs and related obstructionist tendencies increased the operating costs in many ways, making it less attractive for exporting firms to export, or to import in order to export. For instance, several respondents complained about Customs' insistence on sticking to the letter of their duties, even when there is little or no customs revenue involved and delays could cost the country not just one particular export order but perhaps a valuable relationship with an overseas client. For example, in preparing an export order for the UK, Bata was requested to tag the shoes with bar codes. As these could not be produced in Zimbabwe, Bata requested their UK customer to supply the tags, which were duly sent but then seized by Customs and held while they decided what tariff to apply. In the process Bata's ability to meet the deadline was threatened. Similar experiences have been cited in respect of the Customs handling of samples.

Under very restrictive import control regimes, the incentive offered by export retention schemes (where exporters could retain a portion of their foreign exchange earnings to pay for imported inputs) was quite effective (e.g. Tanzania, Zimbabwe). While export retention schemes (ERSs) made it easier for exporting firms to import the inputs they required, the consequences of the schemes were not always positive. Their implementation had side-effects associated with market distortions. The case studies showed that some exporting firms had 'over-responded' to this kind of incentive by selling to the export markets at a financial loss (at the official exchange rate) and by diverting a greater part of their output to exports even if the domestic market was deprived.

The handling of foreign exchange by individual units raises some longer-term concerns. For instance, the case of Zimbabwe has shown that the trend towards individual farmer control over foreign currency could undermine the capacity to support agriculture on a sector-wide basis with adequate supplies of inputs. Not only is it inefficient for companies to go through all the export procedures for each individual farmer, but individual access to foreign currency is leading individual farmers to keep significant stocks of spare parts, while the agent has virtually none. From all points of view (the individual farmer, the agricultural support sector and the nation), this case study found that these unintended consequences of the ERS system amount to a highly inefficient use of foreign exchange resources. The weakening of agricultural support companies not only makes it more difficult for them to compete in export markets, it also disadvantages farmers who produce mainly for the domestic market and do not have access to ERS funds. These disadvantages have led to some policy changes in which tradable ERS funds have become available and are widely used, alleviating these problems.

Trade liberalization

Trade liberalization measures were found to have been implemented in most case study countries in the 1980s. Trade liberalization introduces competitive pressures which may stimulate firms to build capabilities to cope with the new situation but it also carries the potential dangers of deindustrialization, exposes the fragile manufacturing sector to the danger of dumping and other external trade practices and may make it difficult to address major gaps in the sector. The implications of liberalization measures and their impact on the competitiveness of exporting firms varied. Three types of import liberalization regimes were identified in the case studies.

The first regime is represented by countries like the Ivory Coast and, to a lesser extent, Kenya, which were already fairly open. Import liberalization merely lowered and rationalized some tariffs but did not represent a major shock for industrial firms. The second regime is that of countries like Tanzania, where quantitative restrictions on imports had been quite pervasive, so that import liberalization came as a major policy shift. Competition from imports came suddenly, not giving much time for adjustment to the new competitive environment. In the case of Nigeria, the end of the oil boom around 1980 led to extensive use of tariffs and quantitative restrictions. The various foreign exchange conservation measures implemented in the period 1982-85 meant that several industries which were dependent on imported inputs had to operate considerably below capacity, hence reducing growth and worsening unemployment. The adoption of the SAP in 1986 represented a fundamental shift in the basic philosophy of economic management at the national level. The reforms include the adoption of a largely market-determined exchange rate and the removal or relaxation of quantitative restrictions on many tradable goods.

The third regime is represented by Zimbabwe and Mauritius, in which the implementation of trade liberalization was managed more selectively in a situation where the export sector was already quite diversified and firms had attained a reasonable degree of competitiveness. Trade liberalization had a constructive effect in that firms were given adequate time to make adjustments. In Zimbabwe, for instance, import liberalization started with imported inputs through some form of an open general import licence system. The users of these inputs were made aware that the next phase of import liberalization would be applied to outputs. This message induced many firms to invest in technological improvements of various kinds in anticipation of a more competitive environment. Managed import liberalization stands a better chance of providing an opportunity and incentive for firms to build up capabilities which can cope with a more competitive environment.

The influx of imports in the liberalization phase took part of firms' market shares, forcing them to look for new markets abroad. This could be the beginning of intra-industry trade as practiced in the more developed countries, or it could be a futile attempt to conceal inherent inefficiency. In the latter case, such survival would at best be short-lived. In the former case, the level of competitiveness of the firm could be raised if this move meant that less efficient lines of production contracted while more efficient lines expanded and further improved their competitiveness.

Pricing policies

Pricing policies may influence the prices of inputs or outputs of firms. Price controls on inputs affect the cost competitiveness of firms, while price controls on outputs affect the revenue side. The case studies showed that some exporting firms had to procure local inputs (e.g. cotton, palm oil) at prices well above their world market prices, putting users of these inputs at a relative disadvantage to their competitors in export markets. It was pointed out that local users of cotton (e.g. textile firms in Zimbabwe) and steel (e.g. manufacturers of agricultural machinery in Zimbabwe) were paying more for these local inputs than their competitors (in the importing countries) were paying for the same inputs.

Some firms had access to inputs at prices which were lower than the world market prices. For instance, in addition to the fiscal advantages provided by the 1959 investment code, a setting-up agreement signed between Capral-Nestlé and the Ivory Coast government allowed the firm to buy green coffee at local prices, which are sometimes as low as one third or one quarter of world prices. However, in 1984 the government put an end to this arrangement and the fiscal advantages under the investment code expired at the same time.

Rigid price controls on output can run down an otherwise profitable firm to near collapse by depriving it of the resources to plough back into investment in general and technology in particular. For example, in one case it was pointed out that for over eight years the government had failed to adjust prices to levels that would turn around the firm's performance, making it difficult for the firm (Bamburi of Kenya) to secure financial assistance to refurbish the plant. Continuing under-capitalization of the firm placed it in an increasingly poor position, threatening to wipe out its exports.

Pricing, however, has also been used positively to encourage firms to increase efficiency and attain competitiveness in export markets, as in the case of agricultural machinery manufacturers in Zimbabwe. Altering the generous cost-plus pricing system (by allowing lower prices) exposed long-term weaknesses in the firms, which led to the adoption of more cost-effective production methods (Riddell, 1990, pp. 354-8). Some of the actions taken include expansion into the export market, reorganizing production lines to a continuous flow system, staff training and recruitment of more skilled personnel, leading to higher-quality products and improved designs of traditional lines.

Fiscal and monetary policies

High interest rates reduced economic access to export finance and other working capital requirements. High interest rates made working capital and fixed investments more expensive, leading to the postponement of some investments in technology. Affordability becomes more of a problem than availability. In such situations subsidiary companies have an advantage in receiving soft loans from their mother companies.

Provisions for tax rebates or drawback schemes were evidenced in the country case studies. However, implementation has not been commensurate with the intentions of such schemes. The problem of bureaucratic delays in paying export incentives was particularly noted in the case of exporting firms, in all country case studies except Mauritius. The effect of bureaucratic delays was to reduce the effectiveness of whatever export incentives had been put in place.

Relationship between government and the enterprise sector

The relationship between government and the enterprise sector influences cooperation with the enterprise sector and the effectiveness of government policy. In three cases it was found that the rapport between the government and the enterprise sector was good and consultations were made between them on a regular basis. In the case of Zimbabwe during the Unilateral Declaration of Independence (UDI) period, the industrialists and the government of the day shared a determination to overcome the impact of sanctions which the international community had imposed on the then Rhodesia. The system of controls was made to operate effectively and the highly protected system that they constituted did not lead to the gross inefficiency which has characterized other import substitution regimes. The need to adapt and innovate led to the development of a wide range of technical skills, particularly in various branches of engineering. The strong orientation to market requirements led to a proliferation of products, often produced within large, vertically integrated conglomerates.

In the case of Mauritius the government and the enterprise sector cooperated in many ways and held consultations on matters affecting industry. Government policy facilitated the process by which local entrepreneurs continuously gained control of industrial development. In the Ivory Coast the government worked with and was supportive of enterprise sector development in a way which did not threaten the main actors in industry, even if they were non-lvorians.

In the other three countries (Tanzania, Kenya and Nigeria) and the post-independence Zimbabwe, the relationship between government and the enterprise sector (or significant parts of it) was less cordial. Government intervention in industrial development was perceived as intending to address imbalances in society, as a result of which some leading actors in industrial development could be losers. In Tanzania the nationalization policy and the socialist policy were perceived as a threat to the private sector. In Kenya the way the Africanization policy was introduced and practiced was perceived as a threat to the Asian community, who were the leading local private-sector industrialist group. The indigenization policy in Nigeria posed a threat to some foreign investors. In post-independence Zimbabwe, too, the relationship between government and sections of the enterprise sector became less cordial as the government began to address some imbalances in society. The leading white community entrepreneurs perceived that they would be the losers. The application of controls in the absence of the rapport with the private sector that had existed under the previous regime, and the introduction of new controls on wages and labour relations, led to a situation in which bureaucracy became a major obstacle to the running of any kind of economic enterprise.

6. Conclusions and policy implications

Building core capabilities: towards competitiveness
Economic reforms and industrialization
Export orientation or import substitution?
Local or foreign investment?
Regional cooperation and trade agreements
Notes to part I

Building core capabilities: towards competitiveness

In the context of new technologies and the rapidly changing world market conditions, the process of restructuring for export orientation poses a challenge to Africa. Constraints are bound to arise but opportunities could also emerge for these economies as they set out to restructure and develop their industrial sectors towards export orientation.

One major consideration which will influence the way the industrialization problem is conceptualized relates to the changing character of innovations and their role in international trade and competitiveness. Industrialization, for the less industrialized countries in Africa, will have to take place under conditions of accelerating technical change and the pervasive application of new technologies. The evidence presented in this book supports the Schumpeterian conceptualization of technological change, which emphasizes learning and the accumulation of technological capabilities. This is bound to have considerable implications for the conceptualization of the industrialization problem in Africa.

The findings of this study support the thrust of recent trade and growth models which have focused more explicitly on the micro-foundations of innovation by addressing firm-level decisions to invest in product or process innovations. The case studies have shown that ceaseless search for improvements in technology (especially product quality and cost-lowering process innovations) has been most instrumental in improving productivity. Productivity growth, in turn, was a most important factor enabling exporting firms to succeed in the changing technological and market conditions. Exporting firms maintained and improved their market position by investing in technology and continuing to improve on it. Improvements were made not only in the firm's products but also in the processes of production, in order to cope with pressure to keep costs at competitive levels or to improve product quality (level and consistency). These responses were derived from signals given in e export markets.

A major policy implication suggested by these findings is that, in conceptualizing the industrialization problem in Africa, fuller recognition will need to be given to the altering nature of technological change, with an emphasis on learning and the accumulation of technological capabilities within firms, with the requisite support from the state in the form of various supportive infrastructural investments. This contrasts with the previous emphasis on the transfer of the capital and know-how required for an industrialization process which was primarily directed at import substitution.

Economic reforms and industrialization

The poor record of many developing countries can be explained by their inability to create internationally competitive industry. One criticism of the structural adjustment programmes which many of the countries in Sub-Saharan Africa adopted during the 1980s has been their over-emphasis on 'getting prices right' to the neglect of other things that governments ought to be doing. The nature of the problems that exporting firms face in their struggle to remain competitive in world markets suggests that, although exchange rate action and import liberalization and incentives for improving tradables can help, it is difficult to sustain an export recovery without additional steps being taken to assist firms in the export sector to improve their international competitiveness. Some firms have found it difficult to maintain their position in export markets because of a lack of complementary supportive investments by government. In fact, references often made to the deindustrialization consequences of economic reforms in Africa could be a reflection of this lack of complementary supportive intervention by governments. As the Chinese example has shown, the withdrawal of the state, combined with active intervention in infrastructural support, can lead to a booming non-state sector (Qian and Xu, 1993).1

The findings of this study suggest that economic reform policies can enhance the industrialization process and restructuring of the export sector in Africa, provided that these policies incorporate a considerable element of government support, in particular complementary investments to assist firms to build the technological capabilities which are necessary for attaining and maintaining competitiveness.

Export orientation or import substitution?

The case studies have shown that most exporting firms started by serving the domestic market. Import substituting firms grew up and built up various core capabilities by producing for the domestic market. The protection of the domestic market allowed them to accumulate resources, which were in turn invested in developing capabilities which enabled them to turn to exports at a later stage. In this sense, the findings of this study have underscored the point that import substitution and export orientation are complementary in the African context. Import substitution has preceded exporting and has, under certain circumstances, formed an important basis for export orientation. At firm level, the experience and capabilities which were developed during the import substitution phase became useful in the next phase, when the firms were shifting to or extending to export markets. At the broader level, export orientation programmes such the Mauritian EPZs built on the capabilities which had been accumulated during the import substitution phase. The policy implication in this is that, if import substitution is effective in providing for the development of technological capabilities, it can establish the basis for building a competitive export sector. In the process of exporting, firms can develop efficient linkages and acquire technological capabilities. The challenge is to blend efficient import substitution and export orientation through a mix of policies which aim at maximizing the benefits from increased domestic demand and at stimulating both substantial (and efficient) import substitution and increased export orientation on the basis of growing technological capabilities.

Local or foreign investment?

This study shows that outsiders (foreign firms in some form of partnership with local firms, or non-indigenous entrepreneurs) have sometimes been instrumental in initiating the process of building up the capabilities that are necessary for improving competitiveness. This occurred where these outsiders were incorporated into the national accumulation process and their capital and know-how were transferred to others.

The case studies revealed an array of relationships between foreign capital and local capital. In some cases foreign investment preceded investment by local firms but the latter developed and gradually took over ownership from foreign-controlled firms. In other cases, foreign firms had been buying out local firms. Foreign investment and other industrialization agents have a role in building technological capabilities. Foreign investment, in particular, could make a contribution to filling some important gaps in the capabilities of African firms.

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