Concluding remarks

In the managed economy, small firms are viewed negatively compared to large firms because of their suboptimal size (Audretsch & Thurik, 2001), when they are considered less efficient use of resource and benefit less from economy of scale. The success behind the entrepreneurial economy is how to keep firms at small and medium scale for fairer competition and negate obstacles from larger corporation to exploit their powers. While

the managed economy is characterized by the domination of giant corporations, the entrepreneurial economy features circles of newly created, innovative emerging small businesses. The former aims for discipline, stability and predicted incremental innovation; the latter is about more radical and less incremental innovation, which could be regarded as a culture where individuals often tinker with technology and in general it is more beneficial for the society. An example is the medicine industry, where sunk cost for R&D to produce a new treatment is extremely high, potentially developed medicine cannot reach the poor if no sufficient profit is expected from large pharmacy companies. Given the rapid innovation in ICT, the term “start-up” is more being used as founding of tech companies, as they reach out for users of applications as customers instead of tangible products.

The proposed knowledge-based entrepreneurial economy satisfies SSA’s need of both high levels of employment and high wage, with the core of market share dominated by not a handful number of large firms but numerous small, diverse and high-quality businesses. Therefore, the model of entrepreneurial economy serves to answer both the questions of how to increase the rate of entrepreneurship and how to improve the quality of business in SSA. In order to best integrate into the world economy with increasing globalisation, SSA countries should have long term vision to transfer their comparative advantage from factor-based to knowledge-based, with appropriate institutional frameworks to sustain high level of entrepreneurship. The localized, entrepreneurial economy with the utilisation frugal innovations would help SSA firms to compete with globalized, managed corporations from developed world. In the age of globalisation, the speedy development of ICT and rapid change of market structure arm entrepreneurs that aim to start big with “born global” firms (Autio, et al., 2000), which can achieve high international growth rate right from start. An example is the recent emergence of the “access economy” and “sharing economy” of Uber and Airbnb, which rapidly spread out in the world and change the way services are provided. “Agripreneurs” are changing the way the traditional food production is practiced, which may have an impact on the market structure in the future.

However, this study also has many assumptions, with regards to difference between start- ups in OECD countries and SSA. Barriers to entry regarding access to credit, level of infrastructures and corruption could hamper SSA’s capability to implement an entrepreneurial economy approach. Informal competition and tax evasion are core problems in regulating entrepreneurship environment in order to bring a fair competition among SMEs, of which many of SSA countries are suffering of (World Bank, 2018). Intellectual property rights protection is low in many SSA countries, which degrades the motivation for innovation and commercialisation of new ideas.

Nevertheless, the approach of the entrepreneurial economy in SSA may serves as policy advocacy in limited aspects regarding implication of entrepreneurship policy. Some least developed countries in SSA have not even started industrialisation, which can be seen as a potential to avoid drawbacks from the mass-production features of the managed economy, especially in terms of environmental issues. In building an entrepreneurial economy, SSA can learn from the mistakes of the West. Thurik (2011) suggests a mix of managed-entrepreneurial economy approach for emerging economies, instead of a full transformation of the economy toward an entrepreneurial base. Selected policies could be applied to only target a handful number of upper level of high tech industry, such as proposal for a set of policies which foster the creation of commercialisation of new knowledge in the case of special economic zones (Draper, et al., 2016). Further research may require more data for the fragmentation of each of the fourteen dimensions, which could generate further empirical findings for SSA’s conditions under the model of entrepreneurial economy, which may pave the way for more practical application of appropriate institutional changes in SSA.

6

Is a ‘Factory Southern Africa’ Feasible? Harnessing

Flying Geese to the South African Gateway

6.1 Introduction

Enhanced by multilateral liberalisation as well as decreasing communication and transportation costs, deeper global economic integration has led to greater flexibility for firms. Production processes today are sliced or fragmented; and take place in global value chains (GVCs). This is important for developing countries in particular, since it means they can build competencies in particular aspects of the value chain without having to master the entire production cycle. This building of particular competencies can lead to rapid industrialisation and broader development, as experienced in, inter alia, East Asia and Mexico in recent decades. Consequently, in recent years GVCs have risen to the forefront of the global trade and investment policy debate.

GVCs are concentrated in what Richard Baldwin (2012) terms “Factory North America”, centred on the US; “Factory Europe”, centred primarily on Germany; and “Factory Asia”, centred on Japan. The existence of these regional concentrations of value chain activity highlights the fact that much of what are called “global” value chains are in fact regional. One notable exception is China, which in recent decades has been the world’s key player in international production fragmentation, serving as the central location for processing and assembly of manufactured goods destined for global markets. However, with rising Chinese labour costs production is relocating, partly back to the developed markets and notably the US (Sirkin, et al., 2011), or to developing countries like Vietnam, Cambodia and Mexico (Draper & Lawrence, 2013). It is this relocation process that offers, in theory, opportunities to other developing countries such as those in Southern Africa, particularly those comprising the Southern African Customs Union (SACU): Botswana, Lesotho, Namibia, Swaziland (BLNS) and South Africa.

Consequently, attention is turning to the possibility that Southern Africa may benefit from the geographic relocation of GVCs. The question, therefore, is whether a “Factory Southern Africa” is feasible, and if so what kind of policy mix would facilitate its development? We examine this question in light of international comparative experience, and with a particular focus on SACU countries. We use the term “Factory Southern Africa” to refer to the SACU countries throughout this report.

In the analysis, we highlight the importance of regional value chains (RVCs) as a complementary analytical category to GVCs. In essence the value chain concept is the same, regardless of whether the analytical focus is regional or global. Nonetheless, the distinction we would draw between the two is that RVCs are primarily operated within a particular region, by regional actors, for regional markets. By contrast GVCs are primarily operated by global companies or multinational corporations (MNCs), transcend regional boundaries even though they may be concentrated in particular regions, and are oriented towards extra-regional (global) markets. RVCs may constitute the first step towards establishing or tying into GVCs. Furthermore, we acknowledge that there are many different kinds of value chains, corresponding to different economic activities encompassing different economic sectors, from minerals extraction, to agriculture, manufacturing, and services. It is beyond the scope of this paper to delve into how SACU countries can orientate themselves within particular value chains, whether RVCs or GVCs. Our analysis is high level, and focused on the policy orientations appropriate to building participation in RVCs and GVCs, with application to SACU countries.

It is critical to locate the policy issues in international comparative experience. While there are numerous examples we could draw on, East Asia has been the standout success story in the evolution of GVCs so we focus on that region. At the heart of this story, at least initially, is the role played by Japanese MNCs in sparking the growth of, first, RVCs, and GVCs over time. This points to the importance of a leading economy in the region concerned; in this case Japan drove the establishment of “Factory Asia”. Similarly, the United States (US) drove the establishment of “Factory America”, while the origins of “Factory Europe” were more dispersed but are increasingly centred on Germany. In this

light, it is our contention that if “Factory Southern Africa” were to emerge, South Africa would be at its centre.

Accordingly, Section 6.2 focuses on the “flying geese” pattern, centred on the role of Japanese foreign direct investment (FDI) and trade in driving East Asian economic integration and growth. We ask whether a comparable process could conceivably unfold in Southern Africa, led by South Africa as the “lead goose”. We argue that while South Africa is already driving regional investment to a significant extent it does not possess the requisite capacities to propel the region into sustained growth and global integration. Furthermore, we note that the SACU region possesses very different comparative advantages vis à vis East Asia. Consequently, we argue that a different kind of integration process is required in SACU.

In Section 6.3 we elaborate on this, centring on attraction to the region of MNCs from outside the region, using South Africa as their Southern African “gateway”. This draws on the later elaboration of the flying geese pattern, in which Japanese MNCs were joined by their US, European, and East Asian counterparts to drive the development of GVCs, centred increasingly on China. Since there is no China in Southern Africa, the orientation of South African and global MNCs would necessarily be different, and probably more oriented to regional rather than global markets. We briefly explore some contours of those differences.

In Section 6.4 we then ask how the SACU region is currently positioned, from a policy perspective, in relation to the “flying geese/gateway” proposition. This depends substantially on different countries’ comparative advantages, and the prospects for GVC- oriented industries to take root. A key issue for the BLNS states is that South African firms dominate their economic landscapes, with MNCs occupying most of the left-over spaces. A central question, therefore, is how they can harness this dominance to their own advantage; an approach that requires niche-oriented thinking. Simply put, the BLNS governments need to actively identify the value chains their companies can realistically plug into, whether RVCs or GVCs, then consciously assist their companies to access them.

Therefore, concerted state action is necessary, to build the enabling institutional environment MNCs require before they will transfer higher order technologies, and to identify key lead firms for targeted investment promotion into the region. Furthermore, the flying geese and gateway propositions require a liberal policy orientation – to attract FDI by “lead firms” that coordinate GVCs or RVCs, the region has to make itself more attractive by reducing transaction costs across the board.

However, some SACU countries are pursuing a different policy vision, one more sceptical of FDI by MNCs. This policy approach is anchored in a view of RVCs that is akin to import substitution extended from the national terrain to the region. While we are sympathetic to the impulses behind this approach we argue that it would be to the region’s benefit to think about how to link RVCs to GVCs, rather than how to replace MNC activities in the region. This requires a facilitative approach, harnessing the gateway and actively promoting South Africa’s lead role; in other words, working cooperatively with both South African and foreign MNCs rather than seeking to curtail their activities.