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).