A firm-level operational definition of productive capacities

From a “static efficiency” point of view, production and organizational capabilities are capabilities, skills, productive knowledge and managerial experiences whereby Productive capacities are defined as a set of different types of productive, organizational, technological and innovation capabilities embedded in organizations, institutions and infrastructures whose integration determines the capacity of a country to produce goods and services in a competitive global market.

Firm-level operational definition of productive capacity:

Firms’ productive capacities are personal and collective capabilities, skills, productive knowledge and managerial experiences needed to perform different productive tasks at efficient scale (productive capabilities) as well as to adapt and undertake in-house improvements across different organizational (organizational capabilities), technological (technological capabilities) and innovation (innovation capabilities) functions.

productive agents and organizations select, finance, install and maintain capital goods; operate technical and organizational functions; and perform and monitor the execution of a set of interdependent productive tasks given certain time and scale constraints. In fact, performing a set of interdependent productive tasks not only requires capable agents and functioning organizations – that is, individual and collective agents endowed with productive knowledge and relevant skills; it also requires the establishment of a certain scale-appropriate assortment of equipment, machinery and other capital goods.

Throughout history, production activities have been organized by relying on different organizational forms (Andreoni, 2014). The following are the main ones:

a. The job-shop system;

b. The putting-out system;

c. The factory production system;

d. The lean production system; and e. The global production network system.

Each of them represents a different way of organizing production tasks, complexity and variety of transformation processes and factors proportion. In other words, they present different ways of arranging the production process and addressing its main coordination problems. There are three main coordination problems that all production organizations will have to face independently from the industry under consideration. They are particularly important as they affect firm-level productivity and the efficient use of its productive capacities. Indeed, while expanding productive capacities is critical among firms in Africa and LDCs, it is also paramount to make effective use of them via addressing the following coordination problems in production.

The first coordination problem is related to the synchronisation in time of the production tasks. Given that the execution of each production task involves one or more human beings and that production tasks are interdependent, synchronization in time also means organization and coordination of human beings’ capabilities. Of course, production technologies and machineries as well as properties of the materials and flow inputs used in production will impose a number of constraints on the synchronization and organization problems (Landesmann and Scazzieri, 1996). The difficulty of matching the “time sequencing requirements” of all these factors (i.e. tasks, production capabilities and production technologies and machineries) makes perfect synchronization almost impossible. Time gaps and idle time in production processes are often present, especially in Africa and LDCs (Andreoni, 2014).

The temporal arrangements of production may follow different sequential or simultaneous models. For example, production tasks may be arranged in sequence (tasks are activated one after the other with no overlap in time), in line (tasks are activated with some predetermined lag time so that they overlap in part), or in parallel (a number n of tasks are activated at the same time and repeated once completed).

The second coordination problem is related to the definition of the production scale and the existence of indivisibilities. Processes are indivisible when they are not

“indifferent to size”. The fact that processes are “scale-specific” (in other words, that they are characterized by upper and lower bounds) implies that conducting a process on a smaller or a larger scale can only be done if a law of proportionality is satisfied (Andreoni and Scazzieri, 2014). This means that firms cannot decide to increase and reach efficient operational scale without “making jumps”. However, these jumps involve significant investments, financial commitments and risks, especially in countries where both the supply of raw materials and the final demand is very unstable.

The last coordination problem is associated with the definition of the factors combination (and their remuneration), typically the proportion between labour and capital (and the “distribution” of the production output value). Although the price of different factors and their availability are important variables, certain production processes might not be feasible without certain capital investments in machineries and equipment (advanced materials or flow inputs) or the deployment of specific production capabilities of high-skilled workers. In other words, the price of labour and capital becomes a relevant variable only when certain “feasibility conditions”

are satisfied.

More generally, the same production process can be performed with different proportions of labour and capital. However, changes in these factors proportions (more capital or more labour-intensive processes) may have contradictory effects on human capabilities and, more broadly, workers’ conditions. For example, capital investments in automation technologies may have a positive impact on workers’

conditions in terms of reduced physical stress and efforts. At the same time, they may also reduce overall employment in the sector or have a negative impact on the employees as a result of the need for retraining and intellectual efforts to adapt to new technologies, increasing speed of the process, etc.

The variety of production systems we observe today is strictly related to these fundamental coordination problems. In other words, new organizational forms have

historically developed as different responses to (and improvements upon) these fundamental coordination challenges. For example, the most modern lean and network production models have developed as new responses to increasingly complex coordination problems posed by vertically disintegrated production processes, and new outsourcing strategies and technologies (Landesmann and Scazzieri, 1996; Milberg and Winkler, 2013; Andreoni, 2014).

From a “dynamic efficiency” perspective, the absorption, adaptation and improvement of given productive techniques – as well as innovations across different organizational, technological and innovation functions – mainly depend on the availability of two specific subsets of productive capacities owned by firms and other technology/research focused actors. They are technological capabilities and innovation capabilities. Capabilities needed to generate, absorb and manage technological and organizational change may differ substantially from those needed to operate existing production systems.

A set of “determining factors”, such as technical education and R&D spending, works as knowledge ingredients in firms’ productive capacity-building. These knowledge ingredients are mainly human capital and investments in the acquisition of codified knowledge (e.g. design and engineering specifications for machineries).

These knowledge ingredients must be processed, transformed and adapted by the actors that undertake production in firms. This is the process whereby production, organizational, technological and innovation capabilities develop in firms.

According to the amount and quality of capabilities determinants available in a certain country, and given the ability of its entrepreneurs to identify and capture productive opportunities, productive firms will undertake production processes in a certain combination of sectors and industries. They will also experience cumulative processes of learning and productive capacity-building triggered by

“internal compulsions” in production (Andreoni, 2014). As a result, a certain amount of capabilities develops and accumulate, while others are simply transformed or even lost. In turn, the new developed and accumulated capabilities are continuously reinserted into production and affect the same learning processes from which they have been originated – i.e. there are feedback mechanisms.