Public Policy and Business Strategy for Industrial Development

Table of content

Abstract

1. Introduction

2. Statement of the Problem

3. The objective of the term paper

4. Literature Review
4.1. Theoretical Perspective of Public Policy and Business Strategy for Industrial Development
4.2. Empirical Perspective of Industrial Policy and Business Strategy for Industrial Development
4.2.1. Public Policy for Industrial Development in LDCs
4.2.2. Business Strategy for Industrial Development in LDCs
4.3. Public Policy and Business Strategy Towards Industrial Development in Ethiopia

5. Methodology

6. Conclusion and Policy Recommendations

7. Reference

Abstract

Industrial policies are one of the instruments for addressing market failures. This paper is aimed at assessing what public policy and business strategy for industrial development in developing countries looks like from empirical studies perspective. In developing and emerging economies, small scale industrial enterprises that require protection from the side of the government are major source of employment. The small-scale industrial firms particularly need access to credit to increase their competitiveness and integrate themselves into local and global value chains. Policies and strategies that play a role in transforming the dominant and low productive sector, subsistent agriculture, to highly productive industrial sector is the focus area of governments of developing economies. Strategic coordination between private and public need to be functional to have policies and strategies that are important for sustainable industrial development in developing economies.

1. Introduction

The role of industrial development is high in the economic growth of countries like China, the Republic of Korea, Taiwan, and Indonesia (Keniivila, 2004). Countries at all stages of advancement are using targeted industrial policies, not only for economic development purposes but also to take measures on numerous contemporary challenges. Especially, countries have had used industrial policies in creating job opportunities and reducing deprivation, contributes to the technological revolution and in global value chains (GVCs), promoting efficient and clean energy and greening the economy (Salazar et al. 2014).

Long-term economic growth is the product of progressive investment in physical infrastructure, innovation and research, and promoting inclusive and sustainable industries. Even though investment in research and development (R&D) at the global level and financing for economic infrastructure in developing countries has increased, the growth of manufacturing has decelerated and industrialization in LDCs is still too slow (UN, 2020).

Industrial policies of las times were failed because of the strategic mistake of setting goals inconsistent with the level of economic advancement of the country and the structure of its endowments at a given time. As pointed out by the African Development Bank Group (2017), many developing countries made the mistakes of trying to develop capital-intensive industries at a time when they had little or no capital, and when they needed labor-intensive industries to absorb their large labor force. They ended up creating economic distortions.

Most African countries are endowed with relatively abundant labor or natural resources but have relatively scarce capital. The price of labor or natural resources is relatively low and the price of capital relatively high in a developing country. This creates a problem in expanding industry across developing nations. One of the main challenges of industrial policy is to understand better how to support the development, in a coordinated fashion, of production and technological capabilities in new economic activities (Weiser, 2007).

Industrial development in developing economies can be affected both by industrial policy and prevailing business strategy. Therefore, the goal of this term paper is to look at trends and debates in the implementation of the public policy specifically contributions of this policy and business strategy towards industrial development in developing economies where abundant labor existent with low productivity and capital which mostly imported is expensive.

2. Statement of the Problem

Productivity growth is a precondition for increasing people’s living standards and maintaining competitiveness in the globalized economy. Low total factor productivity is the key reason for persistent destitute in developing economies (JICA, 2018; Altenburg, 2010). In developed countries, research and development (innovation) activities are the main drivers of technological change (Keniivila, 2004; Haeri & Arabmazar, 2019; Nurse, 2016). However, this is not the case in emerging economies like sub-Saharan Africa where investment in research and development is low.

The most powerful tool that improves the quality of life and reduces poverty in developing economies is economic growth. However, similar rates of economic progress can have very diverse effects on poverty, the employment prospects of the disadvantaged and broader pointers of human development under different situations. As OECD (2007) pointed out the challenge for a policy that prevails in the developing world is to combine growth-promoting policies with policies that allow the poor to participate fully in the opportunities unleashed and so contribute to that growth. The countries that profit most from FDI are those whose domestic firms and institutions build domestic technological capability, both through investment in own R&D and workforce education and training and through linkages created between domestic firms and foreign affiliates (Weiser, 2007).

Even though there are debates and controversies over the proper scope, instruments, and conditions of effectiveness of the industrial policy, many researchers and policymakers accept that countries should design and implement industrial policy to correct market and government failures (African Development Bank Group, 2017).

The appropriate policy mix in developing economies is improbable to be the same as in rich countries because both the capacity for public intervention and the requirements for that are substantially different. The challenges with industrial development in low-income economies are making policy decisions more transparent and ensuring the accountability of policymakers (Altenburg, 2010).

3. The objective of the term paper

The major objectives of the paper are as follows:

- To assess what public policy and business strategy for industrial development in developing countries looks like from theoretical and empirical studies.
- To detect what public policy and business strategy contribute to industrial development in the economy of Ethiopia from different views of various scholars.

4. Literature Review

4.1. Theoretical Perspective of Public Policy and Business Strategy for Industrial Development

Public policy refers to a sequence of actions that leads to a range of connected actions in a given field. Public policy delivers direction to governments and responsibility links to citizens. Policy instruments are procedures at the disposal of the government to implement policy goals. (Mackay & Shaxton, 2005; Subirats, 2001). The modern industrial policy comprises restructuring policies that facilitate the transfer of resources to the more dynamic activities of an economy, be they agriculture, industry or services. These are both ‘horizontal’ and ‘vertical’ policies. The former refers to the provision of inputs that can be used by a broad range of firms across different sectors. Vertical policies favor a particular sector (for example, training electronic engineers) (Felipe, 2015).

The modern industrial policy also entails sector. However, the strategies used to select sectors have a clear rationale and the tools to promote them are stage- development dependent and linked to performance measures; that is, they are allocated according to the principle of reciprocity and given in exchange for concrete performance standards. Modern industrial policy also has a clear objective: to address the typical market failures that many firms face in the discovery of new activities in which they may thrive and that may ultimately lead to an economy’s transformation. To solve these problems, modern industrial policy uses both horizontal and vertical tools. Firms from developing countries face a multiplicity of market failures. Two that are typical are information and coordination externalities. The first derives from the difference between the social and private values that entrepreneurs face when they try a new venture. Coordination externalities refer to the fact that new industries require capital that private entrepreneurs may not have (Felipe, 2015).

Development is about the structural transformation of the economy. This idea has three key dimensions: diversify the economy, increase product/service sophistication and transfer of resources (both labor and capital) toward the more productive activities of the economy. These lead to higher wages. The key question for developing countries today is the speed at which this process happens. Historical experience shows that, with a few exceptions, it has been very slow and path dependent. Structural transformation is slow and not a natural process because it is rife with market failures and because developing countries often lack organizational capabilities. The rationale for industrial policy is the desire to expedite this process through government intervention. The selection of industrial policy tools is also stage- of- development dependent. These can be classified into one of eight categories: fiscal incentives, investment attraction programs, training policies, infrastructure support, trade measures, public procurement, financial mechanisms and industrial restructuring schemes (Felipe, 2015)..

4.2. Empirical Perspective of Industrial Policy and Business Strategy for Industrial Development

4.2.1. Public Policy for Industrial Development in LDCs

Public policy focuses on the decisions that create the outputs of a political system, such as transport policies, the management of a public health service, the administration of a system schooling and the organization of a defense force. Industrial policies are government policies directed at affecting the economic structure or the shape of the economy (including the sectoral allocation of resources and the choices of technology within any given sector) (Haeri & Arabmazar, 2019; African Development Bank Group, 2017).

Industrial policies generally used to focus on the protection or promotion of specific industries and on catalyzing structural transformation. According to UNCTAD (2018) and Herr (2019), technological adoption of policies in many developing countries in promoting global value chains and GVC-led development strategies is a key driver for the transformation of industrial policies.

Depending on specific endowments and competitive advantages, industrial policies inspire and assist economic activities (Gebreeyesus, 2013) that generate exports in fragmented and geographically dispersed industry value chains. As pointed out by UNCTAD (2018), timely delivery of and consistent quality in products within the value chain is required to improve global value chain participation.

The importance of industrializing least developed countries which are 34 in Africa and 13 in Asia and the Pacific is that meeting sustainable development goals by 2030 is unlikely to take place without it. In developing economies this may be a mere wish without having the high commitment of governments and strong policies in favor of industrialization, innovation and infrastructure (UN, 2020).

The other reason behind the need for innovation is that all-encompassing and sustainable industrial expansion is related to job creation, sustainable livelihoods, innovation, technology and skills development, food security and equitable growth that are crucial for eradicating poverty by 2030. It is also unfortunate to the country to evolve from poor to rich without sustained structural transformation from subsistent agriculture or resource-based economy towards an industrial or service-based economy. According to UNIDO (2016) states play a central role in planning, articulating and implementing policies that contribute a lot to the attainment of structural transformation. Africa and least developed countries can attain it if their policymakers steer it, avoiding the mistakes richer countries have made.

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