PAST CAN BE A GUIDE, NOT A BLUEPRINT

9:28 AM Jan 20, 1997

PAST CAN BE A GUIDE, NOT A BLUEPRINT
Geneva 20 Jan (Chakravarthi Raghavan) -- The successful industrialization experiences of the past - whether of the 19th century experience of Europe and North America, or of the Asian latecomers of this century -- cannot be replicated or serve as a blueprint, because of the changes in the world economy, but can be a guide.

"And much depends on the ingenuity and originality of developing countries in their attempts to develop and strengthen their enterprise base," says the secretariat of the UN Conference on Trade and Development in a report for this week's meeting of the Commission on Enterprises, Business Facilitation and Development.

The report, an issues paper on the "Changing nature of enterprises and competition and the implications for the formulation of an enterprise development strategy," analyses the changing nature of enterprises and competition in terms of the phenomenon of globalization and liberalization under way in the world economy.

In stressing the need for a strategy of enterprise development, Prof. Lynn Mytelka who heads the division, said that a strategy needs to go beyond today's crisis and take a longer-term perspective, say of three to five years.

For, even in periods of crisis, the choices made can affect future opportunities and constraints, and strategising hence means developing a vision of the future.

In its paper, analysing the implications of the liberalization and globalization processes in the world economy, the secretariat said these make it difficult, if not impossible, to replicate some past models of enterprise development, however successful such models may have been in the past.

The Uruguay Round agreements (URA), the high degree of integration and fierce competition prevailing in the world markets and the increasing weight of services in the world trade reduce the scope and efficacy of past successful policies such as import-substitution that enabled a number of emerging economies to develop industrial capacity.

In the current context such policies may encounter difficulties in implementation, and the scope and efficacy, even viability of such policies have been reduced by three new phenomena:

* The URA restrict, from a legal angle, the margin of manoeuvre of WTO members in resorting to trade protection.

* The high degree of integration and fierce competition prevailing in world markets, oblige enterprises, including those at an infant stage, to secure inputs from the best possible source, whether domestic or foreign, in terms of price, quality and continuity of supply.

* The increasing weight of services in world trade which, by their very nature, cannot be protected by tariffs and other barriers as easily as manufactured goods.

This did not mean that success stories of the past should not be studied. There is a great deal to learn from them. Neither need a judicious resort to temporary infant industry protection be ruled out.

But past success stories cannot be fully replicated. Just as the 19th century industrialization experience of European and North American countries was not fully duplicated by the Asian latecomers, the success of the latter has contributed irreversibly to changes in the world economy such that the path which they followed is no longer fully applicable to the new conditions.

"To a large extent therefore the past can serve better as a guide than as a blue-print and much depends on the ingenuity and originality of developing countries in their attempts to develop and strengthen their enterprise base."

The new dynamics of enterprise development and competition, Prof Mytelka said, stresses the importance of technological capacity building and innovation in sustaining competitiveness.

While there is a diversity among firms and national systems, there are many specific issues on which exchanges of experience and further comparative analysis and policy research could provide the basis for identifying the best practice and the conditions which facilitate it.

Articulated in a coherent fashion, such a work programme could yield a number of elements that need to be taken into account in an enterprise development strategy, she added.

The diversity of developing countries and their situations, the secretariat report notes, is related to the economic characteristics of individual countries and the level of development of their enterprises.

It is also related to their natural resource endowments, level of development of industrial base and of the physical and communications network, size of the domestic market and degree of integration of the domestic economy, the technological capacity and availability of adequate human capital in terms of skills, and the proximity to major production and consumption poles.

Such differences have a significant bearing on the manner in which enterprise development can best be pursued in each of these countries.

Some developing countries, mainly LDCs, and most of whom are in sub-Saharan Africa, have little or no industrial capacity and have under-developed infrastructure, institutions and markets. Their private sector in general, and modern firms in particular, except for mining and plantations, are in very early stages of development.

For these countries, the main issue is how to speed up creation of supply capacity through mobilization of adequate resources, both domestic and foreign, for the development of productive capacity (physical, human and institutional). This is a necessary first step towards building export capabilities.

Their main concerns, hence, are quite different from those of other developing countries which have developed some industrial base, but need to improve their productivity and efficiency in order to penetrate international markets or of those developing countries which have competitive enterprises and significant export capacity, such as the newly industrializing countries and a number of second tier NICs, which need though to sustain their export capabilities through a process of continuous upgrading and productivity improvement.

However, in all cases, innovation in its broad sense, plays an important role in achieving competitiveness. And to move from one stage of their development to another, firms need to upgrade their ability to innovate and to adapt to changing circumstances and needs.

There is also a diversity in the strategies of the world's major corporations -- which differ on the intended kinds of investments in developing countries -- with some firms tending to attach greater importance than others to use of local resources, decentralization of decision-making and recourse to subcontracting and other inter-firm arrangements.

Also, their strategies may be more or less responsive, and adaptive, to policy incentives introduced by governments of developing countries.

This diversity poses a challenge to developing countries to design policies which attract appropriate foreign firms and induce such firms to conform to national objectives related to enterprise development.

The result of this double diversity (among countries and among TNCs) is a very wide spectrum of policy options, requiring careful research and policy analysis to ascertain their suitability to particular national contexts.

The choice of an appropriate policy option is all the more important for LDCS. The fierce international competition and the ever growing ability of well established firms to penetrate remote and under-developed markets makes it increasingly difficult for enterprises of low-income countries, in particular the LDCs, to survive, let alone compete, unless strong supportive action is taken so as to redress the structural handicaps faced by these firms.

Faced with the related phenomenon of a large informal sector and a "missing middle" in their enterprise structure, LDCs need to take specific measures, in the context of their enterprise development strategies, targeted at helping their micro and small enterprises to grow and drawing them into the formal sector.

This should be done through the development of an infrastructural and human resource base, the strengthening of their technological capabilities, and the provision of finance, training and other business support services.

But strong international support is needed if LDCs are to succeed in these efforts, the paper concludes.

Mytelka said the elaboration of an enterprise development strategy, which involves a vision of the future and a longer-term perspective, creates opportunities for dialogue and these potentially help to cement commitment to the vision and to the steps needed to attain it.

The best strategy has to explicitly recognize the contingent nature of all such strategic thinking and acknowledge that strategising is an iterative process requiring continuous dialogue among the principal actors in order to adjust strategies to changing conditions.

In the current context of globalization and liberalization, sustaining the competitiveness of firms involves both enhancing their productivity and innovativeness of enterprises themselves.

But it is difficult in today's rapidly changing world for enterprises to remain competitive in the absence of supporting linkages to suppliers and clients, universities, research institutions, productivity centres and a host of other actors in the national system of innovation. This is all the more important for small and medium enterprises.

Implicit in the notion of an enterprise development strategy is the recognition of the holistic and interactive nature of the process. Policy coherence is thus an integral element of a strategy to strengthen the productivity, innovativeness and sustained competition of firms. There is need for greater cohesiveness amongst macro and micro policies, and across a broad range of policy instruments affecting what were hitherto considered as quite distinct activities.

In terms of a work programme, in looking at the contribution of inter-firm partnership and networking or public-private sector dialogue, the number and nature of actors and policies, as also their dynamic interaction have to be considered.

Policies and programmes designed to affect large enterprises may not be effective when applied to micro- small- or medium-sized enterprises.

Similarly, policies that may work under certain competitive conditions in industrial sectors in which technologies are stable and access to new technology is relatively cheap, competition is price-based and most firms are small or medium-sized, may not work where markets are oligopolistic, technology is rapidly changing, access to such technology is costly and competition is based on ability to change competitive advantages through innovation in products, processes, management or marketing policies.

Financing mechanisms that are designed to catalyze and facilitate changes in the enterprise sector must take such differences into consideration.