African-owned firms and investment in learning

Local firms in the Ethiopian floriculture export sector

Research output: Book/ReportPh.D. thesisResearch

Abstract

Locally owned firms need to develop their technological capabilities since accumulating firm-level capabilities is one of the most fundamental factors needed for structural change and economic development in African countries. However, building technological capabilities usually involves costly and risky investment with uncertain outcomes. Therefore, it is not usually appealing for local firms to invest in learning and develop their capabilities unless they are incentivised and compelled by the external environment. Firm-level capability building is the result of an interactive process between the internal learning effort of firms and their external environment, but African-owned firms usually face an unfavourable external environment with widespread market failures and few supporting institutions, which increase the learning costs and the uncertainties of a return on investment. As a result, the firms usually have low technological capabilities, which in turn makes it harder for these firms to acquire, absorb and adapt the foreign knowledge required for foreign direct investment spillovers and upgrading in global value chains to occur.
Despite the difficult circumstances, locally owned firms in some African countries manage to compete in global value chains, but there is limited knowledge on how those firms became internationally competitive through investing in learning and building capabilities, how they relate to foreign firms and global value chain actors, and whether they try and are able to move into higher value activities within global value chains. In order to contribute to filling this gap in literature, the thesis investigates under which conditions Ethiopian-owned firms in the floriculture export sector invest in building their technological capabilities, considering the national institutional context and floriculture global value chain dynamics in which firms operate. Methodologically, the thesis combines the technological capabilities and global value chain approaches in order to identify more precisely what kind of capabilities are required to enter, remain competitive and upgrade within floriculture global value chains. It uses a uniquely designed firm-level survey to collect the data used to measure the capabilities of Ethiopian floriculture firms, and uses data collected through a firm history method to examine the factors influencing whether and how firms invest in learning.
The findings show that local firms’ initial investment in the Ethiopian floriculture export sector was mainly incentivised by government industrial policy, while a Dutch development program played an important but less prominent role. Systems of innovation, foreign direct investment spillovers, global value chain governance, and the Dutch development program served as sources of knowledge and catalysed learning to various degrees. Nevertheless, firms’ learning efforts were influenced initially by sector specific characteristics, such as the Dutch auction offering relatively attractive rewards, the inherent narrow margin for failure that exists in the sector, and the absence of a significant domestic market for cut-flowers. However, firms’ further learning efforts and subsequently their level of technological capabilities was driven mainly by firm-specific characteristics, such as the owner’s perception of risk and reward about the export sector as well as in relation to their diversified business groups. Most of the Ethiopian floriculture firms had other business, and they made calculations of risk and reward about the diversified business group as a whole, which shaped their effort in relation to their flower export firm.
A key contribution of the thesis is that it distinguishes conceptually three dimensions of local firms’ technological capability building process: incentivizing firms’ initial investment, sources of knowledge or expanding knowledge sources locally and catalysing learning, and compelling firms’ learning effort. In reality, the three dimensions of TC building process are interactive and may not be separable from each other, but the conceptual distinction is important in order to provide a more nuanced view about how firms’ learning takes place and more specifically how national and global factors influence firms’ TC building process through shaping one or more of the three dimensions. These three dimensions can be useful in assessing processes of learning and firms’ TC building in other sectors as well as contexts.
The key factors that shaped firm-level capability building processes in the Ethiopia floriculture export case are industrial policy, national innovation systems, foreign direct investment spillovers, global value chain governance, a Dutch development program as well as firm specific characteristics. Thus, the thesis confirms much of the existing arguments in the literature in relation to these key factors, but it also elaborates on the causal mechanisms, refining our knowledge on these processes and how they work in a less developed African country such as Ethiopia. In particular, the thesis highlights the success and failures of the industrial policy of Ethiopian floriculture as lessons for policy makers in Ethiopia and other African as well as other low-income countries. It also discusses the role of the Dutch development program as a unique factor, not conceptualized in the literature, as the Dutch program was driven by both development cooperation objectives and the economic interest of the Dutch auction, making it a hybrid that has characteristics of a global value chain actor and a kind of government industrial policy financed by foreign aid. This finding points to opportunities for alternative forms of support for local firm learning.
Original languageEnglish
Place of PublicationRoskilde
PublisherRoskilde Universitet
Number of pages192
ISBN (Print)0909-9174
Publication statusPublished - 15 Oct 2019

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