Could the localisation of competitive value chains aid the recovery and growth of agribusinesses beyond Covid-19? Dr Mahlogedi Thindisa, an agricultural economist and agripreneur, unpacks this question.
The National Development Plan, specifically chapter six on rural economies, identifies the inability to access markets by agribusinesses in general, as a barrier to participation in mainstream value chains. This is specifically true for small and medium-sized enterprises.
Further, the draft Agriculture and Agro-processing Master Plan amplifies the challenges faced by agribusinesses regarding inability to access markets. Market orientation is among various metrics considered a significant contributor to the competitive performance of agribusinesses.
Marketing is an integral part of business management. Scholars indicate that access to markets is a function of agribusinesses capabilities relating to marketing mix:
- the choice of the novel product for sale;
- the choice of marketing channels;
- promotion-advertising aspects;
- and the choice of pricing mechanisms.
Price is the element in the marketing mix that generates revenue whilst other variables create costs. Research indicates that access to markets by agribusinesses is influenced by social capital in terms of the quantum of network and ties with prospective buyers.
Customers may be incentivised via a cogent and coherent localisation strategy to source and procure locally produced and/or manufactured products from small and medium agribusinesses.
The economic reconstruction and recovery plan announced by President Cyril Ramaphosa as a response to the ravaging impact of Covid-19 on the economy, identifies localisation as a strategy for the recovery and growth of agribusinesses.
Localisation refers to the domestication of production and manufacturing capacity targeting value chains so that the country possesses competitive advantage. Similarly, possession of unique and superior set of productive resources and capabilities over competitors is critical to the competitive performance of agribusinesses.
Competitive advantage may assume various forms such as scale and scope, ability to source and attain cheaper raw materials, utilisation of innovative production methods, intellectual property and compliance to global regulatory requirements.
Localisation initiatives may be a strategic source of access to markets by agribusinesses. The thrust of localisation efforts must be centred on promoting higher productivity while entrenching inclusive economic growth.
The state should drive localisation initiatives through, among others, determination of appropriate institutions including effective and efficient application. A responsive and robust mechanism to enforce regulations is an important factor to ensure compliance by value chain actors.
It is useful to distinguish institutions from organisations. Consistent with the theory of new institutional economics, institutions set the rules, regulations and define parameters of engagement, whereas organisations are value-chain actors. Organisations provide structure for interaction.
The likely response to institutional void is an inefficient value chain. Ineffective formal and informal institutions are likely to strengthen rent-seeking and free-rider behaviour that might compromise localisation efforts. The state should set regulations to localise competitive value chains.
Government’s role in driving localisation
There are various instruments available to the state to drive localisation efforts while consistent with the World Trade Organisation regulations, such as designation of product lines, tariffs, import quotas and incentive schemes. One-size-fits-all interventions may not accrue the desired outcomes considering each industry posses idiosyncratic elements.
Designation of product lines relates to ring-fencing a category and quantum of products lines produced and/or manufactured in Mzansi for procurement by the State from strata of producers through preferential procurement strategy.
Reports indicate that canned foods and some vegetables were recently designated by the department of trade, industry and competition. Moreover, researchers estimate that the state procures more than R12 billion of agriculture, food and related products.
A significant fraction thereof should be set aside exclusively for small and medium agribusinesses. On the other hand, tariffs are taxes imposed on goods that are imported. The general effect of a tariff is to raise the prices of imported products.
Faced with the products of similar attributes, consumers are likely to prefer cheaper products thereby stimulating demand for domestic products. However, the rise in prices of dedicated foodstuffs due to the application of tariffs is likely to adversely impact household food security whose per capita income is severely stretched due to negative impact of Covid-19.
The other instrument to drive localisation is import quotas that refer to the limitation in the quantum of prescribed goods that can be imported into the country. The quantum of product restriction and subsequent gap in the market is expected to stimulate demand for domestically produced and/or manufactured products.
Import quotas should be complemented and supplemented by appropriate state support, both financial and non-financial, to ignite domestic production and manufacturing capacity. The classic example is the progressive recommendations articulated in the Poultry Master Plan.
An interesting option for the state to drive localisation is the dis/incentive schemes model. Incentive is an economic instrument geared to encourage and/or enable economic activity towards localisation as an outcome. Incentives may take various shapes and forms such as production/manufacturing support, subsidies, rebates or export incentive.
Large lead dynamic (LLD) agribusinesses should be incentivised by the state to procure locally produced and manufactured products lines from designated agribusiness through enterprise and supplier development (ESD).
In contrast, the disincentive mechanism via penalties and taxes may discourage value chain actors from following business path that contradicts and undermines localisation efforts. Research reports indicate that legislated and mandatory inclusivity targets were noted as effective and impactful subject to enforcement than informal or voluntary prescripts.
Localisation strategy required
Disincentives should be determined and applied to LLD agribusinesses whose business and procurement strategy undermines localisation and inclusivity efforts. Researchers indicate that corporate social investment programmes were preferred by LLD relative to ESD. Notwithstanding ESD initiatives are noted as financially sustainable and impactful juxtaposing CSI endeavours.
In conclusion, inclusive economic growth via localisation is unlikely to be achieved through the invisible hand of Professor Adam Smith. The economy of Mzansi is characterised by information asymmetry, concentration and market failure.
Hence, the state should determine and implement a cogent-coherent localisation strategy underpinned by regulatory framework. The drivers of the strategy being industrialization while turbo-charging export penetration of competitive value chains.
Similarly, the state must determine institutions geared to set the rules, regulations and define parameters of engagement. However, rules and regulations are effective if accompanied by application and enforcement.
The mandate of the Competition Commission to investigate, control and evaluate restrictive business practice and abuse of dominant position is critical to localisation efforts. These endeavours should be complemented and supplemented by the establishment of an ombudsman to investigate complaints of non-compliance to inclusivity and localisation measures and determination of enforce-able remedial action.
It will therefore be in the interest of LLD firms to proactively and voluntarily infuse localisation and inclusivity efforts in their business and procurement strategies.
- Dr Mahlogedi Thindisa is an agricultural economist and agripreneur. He writes in his personal capacity.
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