Dr. Víctor M. Hinojosa-Barragán:
Globalisation, SMEs upgrading and UNIDO Support

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Globalisation, SMEs upgrading and UNIDO Support
Dr. Víctor M. Hinojosa-Barragán

Mr. Chairman, Distinguished participants, Ladies and Gentlemen:

It is a great pleasure for me to participate in this important Regional Workshop on Transfer of Technology organised by SADC/SEPAC. I would like to take this opportunity to express on behalf of UNIDO and myself, the gratitude of having been invited to this well organised meeting. The intensive discussions we had yesterday with the distinguished participants were very fruitful for all of us and we will continue to reflect these issues during the forthcoming presentations of this Workshop.

I would like to share some thoughts and experiences with you. In this line, I would like to start my presentation by describing the general current macro-economic circumstances with particular regard to threats and challenges faced by the Small and Medium Scale Enterprises (SMEs) within the globalisation process. In addition, I would like to brief you on UNIDOs new approach and methodology in supporting the private sector development, to better cope with current and futures needs of developing countries (DC’s) and support sustainable industrial development in Africa.

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• Globalisation

Globalisation, the growing international interdependence of the world economy, the resolution of the Uruguay Round Agreement, the establishment of a new trading system based on the World Trade Organisation (WTO), all these challenging developments on the global market have a lot of implications on the industrial structure. The expansion and globalisation of the world economy has led to two different developments. In some regions, globalisation has rejuvenated the industrial development, addressing a unique period of high growth and export competitiveness. In other regions, economies have found it difficult to seize the opportunities offered by globalisation and a reformed market environment.

The new orientation focuses on the private sector as the main engine for economic growth. The redefinition of the State is also necessary. Its responsibilities are being transformed from ownership and an adjusted control function to the one of a promoter and facilitating agent in the country’s development process. Without any doubt, the new role of the State has to be addressed in a more pro-active way, strengthening national environment as a place for investment and international cooperation: attracting the interest of foreign technology, capital, markets, etc., therefore, supporting and promoting by this way the private production process. In this context, the importance of the role of the State is more than ever imperative within the ongoing globalisation process, but with a new orientation, which forces each country to participate and to internationalise its economy in order to use the unique chance to improve welfare and economic growth of the nation.

In order to be successful in this endeavour, each country has to define a long-term strategy, which includes elements of direction, common vision, dynamism, flexibility and political will. An enabling and favourable environment for efficient resource allocation has to be

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created at macro level. At micro level, enterprises, and in particular SME, have to strengthen the integrated product cycle, starting with product development, diversion and quality, logistics and product marketing by more competition-proofed efficiency.

Both, governments and private sector have to make the right decisions and coordinate contributions, in order to create sustainable social and economic welfare. The economic role of the State should therefore be based, in the long run, on recommendations of and agreements with the private sector and other main political and social players. Rapid globalisation and liberalisation requires deliberate action from both, the State and the private sector, to stimulate a successful and sustainable industrial development. The main target is to find an appropriate balance between governmental regulation and free play of market forces. A general recipe or magic formula concerning the responsibilities of the State does not exist, but one element is well known as the key element of whatever national strategy to overcome any development problem: to invest in human capital in association with the private sector to cope with implications of globalisation.

By now virtually all the countries belong to at least one formal regional trading arrangements. Economic interaction with the rest of the world brings a variety of dynamic effects. International trade leads to competition, competition induces innovation and innovation drives economic growth. Nevertheless the globalisation trend is accompanied by growing efforts towards regionalisation (EU, NAFTA and AFTA, etc.) and marginalisation. A small number of developing countries, the so called emerging markets, managed in a relatively short time-span of about five years to participate in this process under favourable conditions. This was mainly caused by a rapid process of adaptation and their significant reform programmes towards market liberalisation and deregulation. Another condition influencing this development is for example the geo-economic position of some countries, which

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supports the regional industrial growth, such as closeness to important markets.

However, the majority of DCs are facing problems to jump on the running train and to be in a better position. In this context there is a clear message for African countries, since there are more than 30 Less Developed Countries in Africa. The message is to built up their own capabilities, infrastructure and to create a sound environment to provide a profound alternative to attract the interest of foreign technology and investors partners. In African countries there are still chief constraints in form of limited infrastructure-facilities, low technological skills and underdeveloped private sector. At the current growth rates, -it seems- it will take Africa until 2004 to regain 1982's level of per capita income, which will still be lower than the one of the mid 1970s. The strategies of the past could not reverse this depressing trend. Since Africa has to compete for FDI flows with emerging markets of the developing countries, foreign international resources have to be attracted in a more rational and correlative way.

SME and related strategies

In particular the SME sector has to react to changed circumstances: an increased customerism, a more sophisticated consumer demand and system of distribution channels, growing importance of international demand, greater dependence on complementary products, etc.; an increase of substitution of products or services; a stronger competition, products reproduction under productive conditions and increased specialisation, an increased competition on the demand side of the firm concerning labour, capital markets; the need to out-source, new suppliers technologies, etc..

The new trend goes to flexible specialisation, through which SMEs have an important impact on economic development, rural

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industrialisation and social integration. In order to make use of these innate advantages, the SME culture has to be promoted and be able to formulate their necessities. Therefore, SMEs for instance have to operate in a co-operative network taking advantages of local externalities and creating a strong cluster identity, in distinctive industrial districts, with networking stretching beyond national borders. The advantage of SMEs lies in its inherent flexibility which allows them to adapt relatively easy to current market requirements. Globalisation of manufacturing demands more capital-intensive technologies and other skill-intensive production factors, which set natural entry barriers. This might restrict the number of participants at the respective markets to small group of enterprises of mainly developed and industrialised countries, if the private sector in DCs does not act accordingly - NOW.

As described by Michel Porter in his „Competitive Strategy", the challenges of globalisation require a certain behaviour of almost every enterprise in order to capitalise on the current opportunities. Trying to summarise and to apply his main assumptions for SMEs development in DC’s, it will be necessary to have a new set of attitudes which do not shy away from competition but embrace it; requires that the enterprise’s performance has to be done with its industry and with the company position within the industry; requires to run well the enterprise: aggressive marketing, efficiently run production plant, waste reduction, and innovative use of technology, etc; the achievement of a new, unique and sustainable strategic position; to think in terms of few segments regionally and globally with a same quality; to select what kind of mix of business to be in and how to integrate the different strategies across the organisation: i.e. various units, mainly big enterprises and clusters at the SME level.

You will certainly also agree with me, that the great weakness of SMEs is less their size, than being isolated from international

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economic events because of lack of information on technologies, on market and opportunities, etc. The introduction of new information technologies to SMEs is essential to increase their competitiveness. In contrast to large enterprises, SMEs are capable of changing their production capabilities much faster and can react therefore immediately to the trend of new flexibilisation. If they make good use of this capability, SMEs might be the winner of this trend. SMEs must be sensible towards developments on the software market and towards the process of technologies.

• Competitiveness and information

Today’s assets in competition are based on flexibility and specialisation in production, upgraded technological and managerial skills and on the understanding and processing of related information. In this context, where could we identify the niche for Africa? In fact, for each of the African countries? We have to answer this question. Certainly the competitive advantage of Southern African countries does not (only) lie any more in abundant raw material supply and low wages, we have to attract with knowledge-based advantages, such as skilled labour, technological capabilities and information networks.

Access to key markets represents an urgent need. In the global market, barriers and protectionism have fallen and new competition from abroad as well as on the domestic level comes up every day. For most of the SMEs this is a very crucial situation. In order to survive in this changed business environment, the enterprises have to adapt and transform themselves into becoming much more prepared for competition. Great efforts to support and a re-orientation at macro and micro level still need to be done for the development of the private sector: administrative procedures for establishing a patronage of enterprises have to be made more transparent and immediate; institutional and physical infrastructure has to be upgraded; polices

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have to be designed in order to promote export or equipment/inputs for exporting industries rather than to block them; credit lines, training activities, technological information and data bank systems are essential for efficient and dynamic private sector activities, which will also back-up the overall developments in the country.

It is not easy to neglect former strategies and be open to new ones, if one has always been convinced that what „he or she was doing, was the right way". And it is not that everything has to change. We just have to observe more carefully the new paradigm of globalisation, high product specialisation and market differentiation. This represents a special challenge for SME development at the private sector level requiring a dynamic entrepreneurial culture, as well as on the governmental level, with a pro-active state acting as promoter, which should provide suitable framework for further developments. It is very important to be aware of this trend, but this is not enough. We have to react immediately and to adapt to market requirements.

In order to compete in global markets, the private sector/SMEs of DCs have to address and overcome several sincere handicaps, such as the lack of awareness about possible impacts of the ongoing globalisation process and rapid technological changes that are taking place, as well as the difficulty to establish partnerships of strategic alliances between local SME and enterprises from industrialised countries. In addition, the limited marketing capabilities of SMEs would be broadened by employing advanced information technology and other tools for global network, such as the Internet, communications, computers, networking, software information storage and support systems. The capacity to implement the latest technological applications depends on several factors, such as the degree of investment, infrastructure and human resources development and skills. Therefore governments should joint efforts with the private sector to mobilise productive resources, not only equity participation or export, but also other kinds

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of industrial cooperation agreements, such as technology supply, loans, suppliers credits, management, marketing expertise, training, equipment and raw material supply, export-agreements, licensing, subcontracting, market access, etc.

Within this process a shift from mass production to mass customisation is taking place. Technology is the major gateway to industrial development. Competition requires the employment of new updated technologies. The technology we were accessing and employing up to now is not competitive. In order to escape from growing external dependency, we have to allocate resources to establish a comprehensive framework for technological innovation capabilities. In fact, the latter is nowadays more important than technology itself. This is particularly important since technological capacities become easily outdated (not just competitive) and the basement of industrial development on borrowing technologies might not be the most favourable alternative.

Both, technological transfer and globalisation at large, are phenomena, which do not take place in single identifiable events. Globalisation is without any doubt one of the most significant occurrences of the forthcoming 21st century, in terms of markets for commodities, capital, information, labour, technology and services. Therefore, in my opinion, it would be necessary to establish a continuous-permanent and rational adaptation mechanism at macro and micro economic level.

In fact, the introduction of technological innovation at the enterprise level and the building of industrial clusters should be one of the main focus for policy-makers in this region by promoting training in the efficient use of technology and information networks. This is a very dynamic sector, and the pace of the technological progress is speeded-up by new information systems, advanced materials, new electronic

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media and other aspects which might change every day. This makes the ability to assimilate and manage knowledge that is nowadays so essential for succeeding if not surviving in international competition.

• Botswana/UNIDO entrepreneurial training programme

Let us focus for a moment on our host country. The Government has been supporting SMEs development. Food processing sector is an emerging sub-sector in Botswana. Since there is a lot of potential to substitute some of these imports by encouraging entrepreneurs to use the country’s own resources, the government is making efforts to link agricultural plants with food processing enterprises in selected sub-sectors. However, in a general way it seems that to start a small business in the food-processing sector is still seen as one of the last alternatives.

One of the projects in this area has been carried out with UNIDOs support. In the framework of the TF/BOT/94/c10 Project, the Botswana Technology Centre/Food Technology Research Services has acted as a national counterpart for a training programme which started in 1995. The main objective was to train women entrepreneurs and to enhance their skills in order to increase the number of businesswomen who could set-up and maintain viable micro and small-scale agro-processing units. This programme intended to foster the institutional capacity of the national counterpart in terms of providing technical and business training in food processing, in particular to women entrepreneurs.

Additional efforts need to be done. In this line we are now discussing with national authorities a second phase of the programme for 1999-2000, with a possible orientation to expand and to improve network coordination as well as to decentralise training capacities of the FTRS

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for entrepreneurial development for food processing. This could include the strengthening of the entrepreneurial base, the establishment of an information system for market opportunities and technology, and support on training financial appraisal activities. UNIDO would like to create a successful showcase in changing the entrepreneurial culture to be more adapted and prepared to cope with the ongoing globalisation process.

• UNIDO’s response

The isolation of SMEs in DC’s could and should be overcome by governments in their new role with the support of UN Agencies. After more than 30 years of experience, UNIDO can offer rich expertise in establishing favourable institutional conditions and promoting a more efficient cooperation between the public and private sector at national and regional level, in particular supporting industrial sustainable development in developing countries at the SMEs level. Enriched by UNIDO's new system-wide approach to development in a more demand-oriented, integrated form, UNIDO is the ideal partner in strengthening industrial capacities, in particular in the areas of agro-related industries, local industry development and women entrepreneurship.

UNIDO has undertaken several activities in Africa related to training, investment promotion, advice on technical and managerial matters and providing also financial support and strengthening national institutions. UNIDO capacity-building activities implemented in Africa have covered different areas such as: technology promotion, agro-industry development, private sector development, including SMEs and women entrepreneurship development, quality control, industrial information, environment and cleaner production technologies, etc. In response to the changing and dynamic world economy, UNIDO has been carrying out a vigorous reform

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programme based on clients’ demands with a strong integration of entrepreneurial sector needs. In December 1997, the Member States of UNIDO approved a Business Plan on Future Functions of UNIDO. Administrative and programmatic transformation strategies have been designed and are currently implemented. Following an integrated approach, different Technical Modules (see attached preliminary table on UNIDO’s services) have been composed with a set of distinctly structured technical cooperation elements that can be integrated to best meet the country requirements. Nowadays different integrated programmes are being prepared with this approach in Burkina Faso, Tanzania, Uganda, and in other regions.

It is not necessary to point out that Africa is the geographic priority region for UNIDO. The region is characterised by significant national and sub-regional different regions and our goal to give equal relevance to all target countries is a very thorough one. Therefore we are willing to join all our expertise with new gained dynamism and dedicate all our efforts, jointly with national authorities, in designing and setting up for Botswana a possible comprehensive tailor-made integrated agroindustrial programme to overcome these constraints. A more technical business approach is required.

• Final comments

The globalisation process has changed the nature of competition at entrepreneurial and international level and implies the need to restructure economic activity in terms of effectiveness and efficiency in the production process. I would like to stress again that a general recipe or magic formula for industrial development and/or international integration does not exist.

The way and methodology to be integrated into the global economy varies from region to region, country to country, as well as from sector

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to sector. Generalisation would mislead the target of a country’s development level at any stage. In this context it is clear that the role of the State has changed significantly through the globalisation of the economies. Strong State intervention was replaced by activities to support the development of the private sector as the engine for growth of the economy.

Special efforts have to be made in most African countries for industrial development. The efforts and possible targeted entrepreneurial development programme to be undertaken in the agro-industry sector in line with this new approach, will have a definitive impact for all economic parties involved in African countries, in particular the SMEs. In order to support this international integration, these countries should reinforce their national structures to provide direct support and information access, for both, foreign and national partners, through integrated and tailor-made sectoral programmes.

The industrial sector, for instance has to be enhanced sector by sector, which bear traditionally positive comparative cost advantages of DC’s, such as food processing, footwear, leather products, furniture and wood products. For specific branches, an assessment should be done to have a clear picture of the trend in each branch sector and its possible strategy of development. The transfer of environmentally sound technologies is required. Technological transfer among other beneficiary effects will pave the way to associate possible foreign investors and national entrepreneurs in selected target sectors such as the agroindustrial one. A dynamic and sustainable development strategy has to focus on both, comparative advantage on national level and competitive advantage on enterprise level. Training activities (formal or on the job training) and the upgrading of skill capabilities are the key words. In this context, UNIDO, in its efforts to address the changing needs of SMEs and to serve DC’s, would like to address the

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countries’ needs in a long term and in a more accurate way, with Africa as the top priority.