January 29, 2008

Globalization, alliances and networking: A strategy for competitiveness and productivity (Part 3)

Globalization, alliances and networking: A strategy for competitiveness and productivityBy Joseph Prokopenko (From:Enterprise and Management Development Working Paper - EMD/21/E, International Labour Organization).....Part 3

3. Sustainability approach: positive or negative productivity factor?

Sustainable development is increasingly becoming a major issue in national development strategies, as well as in societies' competitiveness factors. In assessing the impact of industrial growth on sustainable development, it is important to identify activities which have environmentally negative effects. Today, those countries which have drastically reduced their specific energy and material consumption are at the top of the international list of economic performance.

Because of the serious environmental effects resulting from overtaxing the ecosystem, efficient use of resources ("materials productivity") has become a major new strategy for achieving sustainable development. These new policies for resource conservation, material productivity, and environmentally significant structural change, cannot be appropriately described by the monetary values used in standard national accounts and productivity formulae. There is a need for a new benchmarking approach, for the new family of measures.

The sustainability approach indicates that it is not growth per se that is important but the "how" of economic growth that is more crucial. The development strategies that must be adopted are those that accelerate the rate of economic development but with reduced environmental degradation so as not to exceed the threshold to irreversibility. This particular pattern of development leads us to consider the positive relationship between productivity improvement and sustainable development. The Brundtland Commission Report defines sustainable development as "development that meets the needs of the present without compromising the ability of the future generations to meet their own needs".(8)

In the broad sense, sustainability means that input of raw materials and energy to an economy and the output of waste materials and heat must be within the regenerative and absorptive capacities of the ecosystem.(9)

When one goes back to the underlying concept of productivity, it is clear that there are close positive links between productivity and sustainable development. Productivity in its broad sense is a measure of how efficient and effective resources are used as inputs to produce products and services needed by the society in the long-term.

Productivity improvement creates the wealth that can be used to meet present needs and for investments to better meet the needs of the future. Improved national wealth and higher levels of income brought about by productivity improvement enable the society to invest more on environment protection and rehabilitation measures. Productivity improvement is the elimination of waste in all forms. Where there is much waste there is low productivity, and where there is less waste there is high productivity. Total factor productivity improvement then is one very effective strategy towards insuring sustainable development.(10)

At the same time, it is important to recognize that environmental regulations can have adverse impacts on firms as well as enhancing their competitiveness. In the first instance, domestic firms complying with too stringent environmental standards may suffer competitive disadvantages in relation to firms in countries that allow lower standards. In the second case, it could spur the use of cleaner and fewer inputs, cleaner and more efficient technologies, and waste minimization of recycling. Firms which invest early in environmental technology can realize advantages in productivity and put themselves in a position of a comparative advantage in meeting future regulations. Automobile firms can increase market share by developing more fuel-efficient, recyclable vehicles that pollute less.(11)

All these measures have the objective of inducing three types of actions or programmes towards protecting the ecological environment: actions to prevent or reduce the rate of environmental degradation; actions to correct or clean-up the damage done; and actions to adapt to the changed environment. The emphasis of pollution control is shifting from the treatment of industrial by-products to the promotion of waste prevention and minimization.(12)

As a result of sustainability approach pressures, new concepts and approaches to productivity movements are emerging. Some of them still need to be developed, but several are already quite evident. They are:

  • A need to broaden the boundaries of the enterprise as a "system" - Interaction of the enterprise with its environment (and MNK with its international environment) is expressed mainly in terms of commercial exchanges of financial values. Efforts are needed to broaden the scope of the analytical tools to cover considerations of social and physical aspects of sustainable enterprise development as a system.
  • A need to incorporate sustainable development concerns in the productivity management system - Significant and continuing improvements result from programmes that consider productivity enhancement as a total organization change process that must be managed.
  • A need for a new productivity measurement system - Sustainability considerations should be included in productivity assessment and analysis of options to provide indicators on social, economic and physical impacts on the environment.

4. The impact of technological developments

There is strong evidence that technological advancement is a major source of productivity improvement and its growth depends on the research and development (R&D) efforts of the enterprise, industry and country. It is safe to say that developed countries spend about 2 to 3 per cent, and in the case of Germany and Japan around 4 per cent, of its GNP on R&D expenditure. Most least developed countries (LDCs) could probably only spend around 0.1 to 0.5 per cent of their GNP. R&D, be it at national level or firm level, will only be effective at a certain minimum critical mass of funds, expertise and integration. The latter is particularly important because of the lack of "organic" integration with local industries and technologies, and other institutional reasons. The use of even the most important technology does not always result in productivity improvement.

The relevant question for many developing countries today is not only whether to develop all technology indigenously or to transfer it from developed countries, but rather on how to transfer it in the most appropriate way in terms of its synergistic impact and adaptation to the local conditions, minimizing its physical and social costs.

An interesting lesson from Korea, Singapore and Taiwan is that the first step to be taken by the government is to built and support the technology and industrial infra-structure conducive to the technology development. This lesson demonstrates that an important factor in technology transfer is not the mode of technology entry, but the quality of management of these transfer processes. In the high technology sector that is changing very fast, direct foreign investment and joint-ventures are probably better than a licensing agreement. However, in more simpler products requiring less sophisticated processes licensing agreements could be more appropriate. In Korea and India, transferring technology in the form of turnkey projects was very successful since they insisted that local experts were allowed to join the project preparation from the start. Employing foreign experts from local companies is also a popular mode of acquiring technology if the domestic organization has already gained enough experience in running a successful business. An interesting case in Indonesia in technology acquisition is the development of the aircraft industry . Within a 10 year period a small experimental Air Force aircraft workshop was transformed into a sophisticated aviation producing conglomerate (see box 1)(13). It is of course very difficult to judge strategic and defence industry cost-benefit from the return on investment criteria alone, although long-term benefits should always be taken into consideration.

Dramatic impact on productivity is made by new developments in information technology. The creation of the information super-highway, in particular, stimulates many new applications of IT based on digital electronics, optical data storage, more powerful and portable computers, and computer networks. Another major trend is more integration of technology with work; more work will be computer-mediated, and technology itself will be more portable and user-friendly. Computer power will continue to migrate from the mainframe to the desktop, to the briefcase, to the users' hand.

The "information highway" will give rise to entire new industries designed to serve business and social communities offering them services specially designed and delivered electronically directly to their home or office. Direct access to consumers will tear down traditional barriers to the market place, open doors to those who take advantage of technology and penalize those who don't. The most dramatic impact is likely to be on the job. The ability to move information over great distances at an instant promises to transform the very nature of our jobs. In the future there will be a growing emphasis on mobility and flexibility. The most visible change in the working life of white collar professionals is likely to be the disappearing desktop. The coming decade will witness an explosion of such flexible arrangements - the "virtual office" - when you can sit anywhere you want and be connected.(14)

Box 1: The case of the Indonesian aircraft industry
In the mid-1970s Indonesia began an aggressive programme to promote high-technology industrialization: from telecommunications and shipbuilding to nuclear energy and weapons production. This strategy was particularly ambitious for a country which, even by the mid-1960s, had little indigenous manufacturing experience outside of simple consumer products and natural resources processing.

The force behind Indonesia's push into high technology was Mr. Habibie, then a 37 year old aeronautical engineer who in the ten years since receiving his Doctorate had risen to the position of Vice President of Technology Applications at Messerschmitt-Boelhow-Blohm GmbH (MBB), the German aerospace company. After becoming State Minister in 1978, and with the President's continued support, Habibie was in a position to implement his programme in setting-up the aircraft industry.

This would have been impossible without a congenial environment policy, direct government subsidies, a guaranteed domestic market, and exemption from government policies to buy only domestic inputs. Considerable discretionary authority was granted to Minister Habibie.
However, after the aircraft company (IPTN) was established and expanded, some of the above advantages became constraints resulting in reduced competition. Another critical problem was weak management capabilities which were primarily responsible for bottlenecks in production. IPTN managerial skills were strained by the company's extraordinary growth. Traditional management systems could no longer integrate and coordinate the administrative and logistical tasks supporting a few separate projects and enterprises. Underdeveloped, centralized and functional-oriented management systems were major obstacles to increasing productivity. This system was unable to merge and transform several systems into one. The "softer" and less glamorous managerial skills associated with coordination, marketing, after-sales service, personnel management, pricing, scheduling and inventory control were neglected. Indonesia's weak scientific and engineering infrastructure was another important obstacle.
Even if the return on investment in this industry was not good, long-term benefit such as accumulation of know-how in technology and management of R&D, backward linkages to smaller companies, demands for high-tech skills and more sophisticated management, etc., should always be taken into consideration while judging the final impact.

Technological removal of time and space barriers will allow resource allocation and match productive resources more effectively. The deciding factor shaping the future technological advancement is sociotechnical driving forces. The way the future technologies will play out will be more a function of policy, regulatory frameworks, and social and economic actions than a function of technology per se. So technology integration with social factors will determine the future of productivity improvement in the long-term.
(To be con't)

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