Sandy Kachale
Technology Transfer by Out-Contracting and Business Linkages: The Case of Malawi

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Technology Transfer by Out-Contracting and Business Linkages: The Case of Malawi
Sandy Kachale

Introduction: How has Malawi performed economically?

Malawis economy is predominantly based on agriculture, which accounts for 65 percent of the country GDP and over 80% of its exports (1995) while the industrial sector contributes 13% of GDP. Agriculture has been the largest employing sector accounting for 44.5% of the labour force while the industrial sector accounts for 24.1% of employment.

Guta in a recent study reported that agro-processing, especially tobacco, food products, tea and beverages, is the dominant sub-sector and the main source of growth as may be seen from Table 1 (p. 66).

The structure of production has not changed significantly over the past two decades. The manufacturing sector's contribution to employment generation in Malawi is shown in Table 2 (p. 67).

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Table 1: Value added in manufacturing

Subsector	Million Kwacha			Distribution
	1980	1990	1996	1980	1990	1996
Agro-processing	28.8	40.6	51.7	44.5	48.5	56.1
Textiles, clothing, leather	7.2	7.4	4.0	11.1	8.8	4.3
Wood products, Publishing	6.5	7.0	7.0	10.0	8.4	7.6
Chemicals, plastics, rubber	10.5	16.0	17.9	16.2	19.1	19.4
Non-metallic mineral products	4.3	4.7	5.2	6.6	5.6	5.6
Metal products. Machinery	6.1	5.8	3.4	9.4	6.9	3.7
Other manufacturers	1.3	2.3	3.0	2.0	2.7	3.3
Totals	64.7	83.7	92.1	100.0	100.0	100.0
Source: World Bank, Accelerating Malawi's Growth,1997

The competitiveness of Malawis industrial sector is hampered by a number of structural issues, chief of which is its landlockedness. The high costs of transportation make Malawi a high cost producer of both domestic and export products. Malawis comparative advantages, therefore, lies principally in its surplus labour, which must be used in high value-added activities. This calls for targeted investment in technology by both new and existing investors.

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Table 2: Distribution and growth of employment by sector of origin 1980 - 1994

	Average Composition		Average Growth Rate
Sector	1980-1989	1990-1994	1980-1989	1990-1994
Agriculture, Forestry, Fishing	47.4	44.5	2.1	2.5
Mining and Quarrying	0.1	0.1	7.7	161.6
Manufacturing	12.3	13.6	5.0	14.6
Electricity and Water	1.2	1.1	4.0	1.3
Building and Construction	7.3	9.3	1.2	26.1
Distribution	7.6	5.5	0.1	2.5
Transport and Communication	5.5	5.4	1.7	25.2
Financial and Professional Services	3.1	3.3	6.6	5.9
Community and Social Services	15.4	17.2	3.3	22,2
All industrial	100.00	100.00
Private sector	7.6	78.9	2.2	6.2
Government sector	25.4	21.1	2.3	13.7
Source: Reserve Bank of Malawi, Financing and Economic Review (Various)

Due to high population growth and low agricultural productivity levels resulting from high escalation of prices of agricultural inputs and the recent unfavourable weather conditions, the agricultural sector's capacity to sustain the livelihood of the population is undergoing exponential decay.

In cognisance of this development, the Government in turn has been strengthening its support to other sectors with potential for enterprise

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development and employment creation, particularly the micro, small and medium sector. The level of support includes the establishment of a number of institutions such as the Malawi Industrial Research and Technology Development Centre (MIRTDC) to facilitate the development of the MSME sector, directing donor programme support towards SMEs and provision of good will support towards the establishing of a conducive environment and friendly legislation for the Micro, Small and Medium Enterprises (MSMEs) sector. Towards this end, in 1995 it was reported that the total number of MSMEs operating in trading and manufacturing had grown to between 240,000 and 660,000.

A number of surveys on the type of MSMEs businesses, conducted in a select number of districts in rural Malawi have unanimously concluded that most of MSMEs (52%) are engaged in trading, 43% are in manufacturing, 4% in services and 1% in agro-based enterprises.

Malawi is denominated as a net importer due to the high import component in the bulk of industrial and agricultural raw materials and trading merchandise. The MSME sector is being recognised for its potential to promote economic growth and development through a subcontracting (out-sourcing) and partnership linkage with the large scale industries. The MIRTDC is regarded as an institution with capacity to improve the productivity of MSMEs, provide technical support to private sector development, facilitate the necessary industrial linkage between the MSMEs and the LSEs, and provide technology support for import substitution manufacturing.

Who established MIRTDC and what is the mission?

The Centre (MIRTDC) was established by a trust deed under the Ministry of Commerce and Industry in 1991 by both Government and the private sector with the aim of enhancing the development of industries in Malawi, especially the small and medium enterprises through conducting industrial research and technology development.

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The trust deed became operational in 1993 when government provided rented buildings as business premises for the Centre, personnel and equipment and set aside financial support through monthly subvention.

What has been the framework of operation of the Centre?

Government and private sector had agreed that to achieve the objective of enhancing the development of the industrial sector in Malawi, the Centre should be charged to operate under the following services.

1. Industrial Research Services, including appraisal through contract research, of raw materials as inputs into industrial manufacturing processes and evaluation of intermediate products to improve quality and process efficiency, and develop new products.

2. Technology Development and Assessment Services, including development, adaptation and assessment of technology suitable to local condition and provision of guidance for selection of technologies for the manufacture of new products.

3. Technology Information Services, including provision through the Technology Services (TIS) Library, information and documents related to technology; information searches on technology in computer databases or databanks in international networks; provision of process know-how information and industrial investment opportunities profiles and related information.

The following databases are being developed to enable provision of information to the industry:

Industrial Raw Materials Database: contains information on local and imported raw materials used in manufacturing industry in Malawi.

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Project Database: contains information on projects completed, undertaken and proposed, impact assessment reports on projects, etc.

Company Database: contains company profiles and provides information on company activities, which can be selected, for subcontracting in technology transfer projects.

Database of Specialists: contains profiles on specialists in various fields at local and foreign level who can be consulted in specific projects of interest.

Database of Appropriate Technologies in Malawi: contains information of appropriate technologies being used in Malawi.

4. Engineering Services, including design and fabrication of machinery, equipment and spare parts, production process and plant layout.

5. Consultancy Services, including technical analysis and appraisal of industrial projects, economic feasibility studies and preparation of business plans, identification and selection of appropriate technologies for micro and small enterprises, applied research to improve industrial processes, assistance in quality improvement and skills capacity building.

What are the major programmes/projects undertaken by the Centre?

The Centre's operations have largely been in support of government initiatives and donor driven programmes including:

1. Renewable energy programmes where the Centre has been involved in sizing and installation of solar systems at the Makanjira Demonstration Solar Village in collaboration with Solartec, Zimbabwe, funded by UNESCO.

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2. Design and installation of biogas plants with technical assistance made available from Carmatec Tanzania and funded by UNESCO.

3. Development of national policies for the Micro, Small and Medium Enterprises and the national policy on Science and Technology with support from UNDP.

4. Technologies developed and/or disseminated by the Centre included the heat exchanger for agro-processing, treadle pump for small scale agricultural irrigation, bakery ovens, electric egg incubators, oil expellers, ethanol production, etc.

5. Development and promotion of technologies for traditional salt extraction from saline soils with support from UNESCO.

6. Implementation of the Appropriate Technology Component of the 5th County Programme (1992-1996) of the UNDP/Government of Malawi. Under the programme, the Centre developed and disseminated a number of technologies, which largely benefited the SME sector.

7. Implementation of the Technology Programme Objective in the Enterprise Development and Employment Creation Programme of the UNDP/Government of Malawi (1997-2001).

8. The Press Trust, which is a public trust, is currently funding the following Research and Development projects in the Centre:

1. Vermiculture project
2. Assessment of lake sediments for manufacture of phosphatic fertilisers.
3. Medicinal and aromatic plants in Malawi.

9. Through contract research, consultancies and training, the Centre has undertaken a number of projects for the private sector.

10. Supported by UNIDO, the European Union and UNDP, the Centre is undertaking a Subcontracting and Partnership Exchange Programme to link MSMEs with LSEs.

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11. A number of surveys were undertaken including Industrial Raw Materials Survey, Agricultural and Industrial Wastes Survey, Textile and Clothing Sector Study, etc.

12. The Centre has been involved in conducting a number of feasibility studies for investment projects funded by the private sector.

What are the current threats facing the Centre?

The Centre is currently going through a restructuring process after Government indicated its intentions to withdraw its support to the Centre with effect from July 1999. The restructuring process involves the change of its corporate image from a public sector led organisation to a private sector led organisation, the change of its mandate and objectives to focus the needs of the private sector, amending its organisation structure to create a private sector type of organisation, re-engineering of its programmes and services, strengthening commercialisation capacity and business investments, to come up with an institution that would co-evolve with major developments in the private sector.

Linking SMEs to larger industries - what is the present situation?

The Centre through its regular contacts with industrial sectors noted that there is little interaction and linkages between small and large enterprises in Malawi. This relationship is a necessary step towards industrial development to stimulate the evolution of an integrated industrial sector.

Central to the success of economic recovery and development in Malawi will be the need to develop and sustain a strong enterprise sector - the sector which offers the best project for generating the type and level of growth, equity and employment needed to transform the rest of the economy and contribute to poverty reduction.

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While some progress has been made in Malawi since the change of government in 1994 with continued implementation of economic and structural reforms, much still remains to be done to promote economic reform and further advance private sector development. For example, there is an ongoing need to create an enabling environment for domestic and foreign investment to encourage the rapid development of micro-enterprise and small and medium sized enterprises, especially in rural and peri-urban areas; to promote competitiveness, equity, job creation and trade. In short, to stimulate increased private sector activity, growth and productivity and reduce poverty.

The various linkages that SMEs can establish among themselves and with large and state owned enterprises, are essential factors for their growth and competitiveness. While large firms are geared by their managerial and marketing strategies and mechanisms towards all forms of industrial linkages with other large enterprises, small and medium enterprises are not equipped to promote such collaboration and therefore deserve special attention and assistance in this area. Institutional support is, therefore, needed that will help them to acquire the necessary information on and access to upgrade technology, sources of finance, new markets, foreign licenses, and to establish long term industrial cooperation agreements. The Centre is therefore gearing towards establishing a Subcontracting and Partnership Linkage Centre in Malawi.

What is a Sub-contracting and Partnership Linkage Centre?

• It is a form of cooperation between SMEs and LSEs.
• Enables enterprises to achieve a high level of efficiency through a rational use of their installed capacity and improved use of other available resources.
• The main contractor entrusts one or several enterprises with the production and supply of parts of components or sub-assemblies, raw materials, specialised services, necessary for the manufacturing of its final products.

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• It is a form of division of labour within the industrial sector where the SMEs get increasingly specialised in one or more technological fields.

How do the LSEs make decisions to subcontract?

• Decisions can be based on production capacity when the quantity of orders received fluctuates, or
• on technical specialisation when LSEs desire to obtain the services of SMEs which have specialised equipment and machinery to undertake difficult and precision jobs.

What benefits does industrial linkage bring to LSEs?

• Availability of components and services at comparatively lower cost from SMEs as their overhead cost is low.
• Supply of quality goods and services as per specifications and thus LSEs maintain a very low level of inventories.
• Reduced investments in capital goods, saving financial resources, limiting the size of the organisational set-up and labour employed.
• Opportunity to optimise use of resources.

What are benefits to SMMEs

• Advantage of utilising installed capacity on regular basis, ensuring the security of employment of work force.
• Marketing problems are taken care of.
• Timely payment from main contractor.
• Technology transfer from LSEs to SMEs in the area of technical assistance, standardisation and quality control.

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What is the Centre's role under this initiative?

The Centre is undertaking a project to establish an Industrial Subcontracting and Partnership Exchange (SPX) in Malawi that is responsible for linking SMEs to LSEs. The SPX activities include the provision of information and advisory services to SMEs and promote linkages between Malawi enterprises. The objectives of this programme are to reinforce the capacity of SMEs to increase their production and employment, to upgrade their manufacturing processes and products, to improve their productivity and international competitiveness, to encourage import substitution and to promote the export of manufacturing products from the SMEs.

What are the project strategies that the Centre has embarked on to establish the SPX?

1. Awareness building: the Centre has conducted awareness campaigns to the private and public sector and lending institutions in various fora.

2. Feasibility Study: With support from UNIDO, the Centre undertook a feasibility study led by an Industrial Consultant from UNIDO to find out the viability of establishing subcontracting arrangements in Malawi and to identify priority sectors with high potential for subcontracting linkages.

The study also included an overall assessment of the local industrial system and existing sub-contracting practices and relationships and development of workplan for establishing the SPX.

3. Legal Inquiry: the Centre with funding from the European Union has engaged the services of a private legal firm to study the Malawi legal environment for the improvement of policy or regulatory environment such as tax incentives, multilateral customs regulations and guidelines in order to establish a conducive environment for subcontracting and partnership linkage.

4. SPX Database Equipment: the Centre with support from the European Union has acquired a computer system for setting up an

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information exchange database for SPX which will keep records of SMEs and LSEs and undertake match-making to link the enterprises.

5. International Consultant: the Centre with support from UNIDO engaged an International Associate Expert to prepare the framework of operation of the subcontracting arrangement.

6. Study Tour: with funding from the European Union, the Centre undertook a study tour to Mauritius and participated in the regional fair on subcontracting.

7. Survey of subcontracting capacity: The Centre with funding from the UNDP is currently undertaking a survey on the sub-contracting capacity and capability of the local industry in specific sub-sectors. The aim of this inventory survey is to identify a list of industrial enterprises, both, SMEs and LSEs, that have linkage potential.

8. Next Strategies: The Centre's next strategy is to build-up the SPX database, promote linkages, and operationalise the SPX Centre. The SPX Centre shall be sustainable by charging for its services and collecting fees from members comprising LSEs and SMEs. Efforts shall also be made for the promotion of cooperative activities with other SPXs and main contractors in the region. The SPX Centre shall mostly be controlled by the private sector through its majority of membership in the Management Committee of the MIRTDC Board.

What has been the response from the industrial sector on this initiative?

Both, the LSEs and SMEs support the Sub-contracting and Partnership Linkage Programme and are willing to link. Through the awareness workshops conducted, the Malawi Development Cooperation which looks into the development of industries in Malawi and also functions as lending institution for industrial investment, has moved ahead to establish a sodium silicate producing plant in joint venture with a local small scale entrepreneur. The product is being supplied to the soaps and detergent industries such as Lever Brothers, as raw material in production. This is a positive response and a good example of subcontracting that has since taken place.

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The subcontracting capacity survey mentioned above has identified a number of sectors that can be linked. For instance, the survey noted that over 500 small-scale soap manufacturers had closed business in the past 4 years due to lack of a raw material called fallow. What the sub-contracting arrangement wishes to do is to stimulate SME investments in fallow manufacturing that will link to other SMEs and LSEs in the soaps and detergent sector.

References

1. Guta, C.W., Malawi Government/UNESCO/UNDP Joint National/ International Consultancy on the National Science and Technology Policy (Draft), August 1998
2. UNDP/UNIDO, Review of the Micro, Small, and Medium Scale Enterprise Sector in Malawi, by V. Post and P. Kulemeka. Lilongwe, 3 May 1995