From a policy perspective, it is fundamental to take into account the high structural heterogeneity characterizing LPSs in LDCs, and in particular in Africa.
This notion is introduced by Andreoni and Chang (2017) in the context of manufacturing development. However, with respect to LPSs in LDCs, it is useful to introduce a more granular concept of structural heterogeneity, at the firm level.
Companies, indeed, are not equally distributed across the country and sectors, and even within the same regions and industries, they differ with respect to performance, access and use of skilled labour, production capacity and raw materials.
In African LPSs, for example, the distribution of companies is extremely skewed, with few large-scale actors and myriads of micro- and small-scale companies producing mainly for the local market. In countries such as Uganda, for example,
the presence of many micro-enterprises, far from being the sign of diffused entrepreneurial capabilities, is the expression of “survival entrepreneurship” and lack of good occupational opportunities.
Another key problem affecting LPSs in LDCs is the lack of middle-size companies – the already mentioned “missing middle” phenomenon. The absence of middle-size firms is particularly critical, since these companies ensure connection between small-scale and large-scale establishments, thus making the LPS more integrated and articulated.
A disaggregated analysis of 2013 firm data for the United Republic of Tanzania (Andreoni, 2017a, 2017b) reveals the high structural heterogeneity of the country’s industrial sector, in particular the extreme differences in industrial performance and drivers across the establishment types. The United Republic of Tanzania’s production system presents a dualist structure, with a high concentration of industrial activities in a few industries (e.g. mining and quarrying, manufacturing, manufacturing of food products) and regions (e.g. Morogoro and Dar es Salam), and a limited number of large- and major-scale establishments, while a vast group of micro- and small-scale firms remains largely excluded from value added processes, scaling up opportunities and market access. The 80 per cent of manufacturing value addition (MVA) is generated by 200 establishments employing at least 100 employees. Furthermore, the same group of companies accounts for 87 per cent of the total value exported (Figure III.7).
The limited number of medium-sized enterprises prevents the rebalancing of this dualist structure and leaves these two opposite and heterogeneous sets of industrial establishments disconnected. Industrial performance indicators and industrial drivers, such as the high degree of dependence on imports or the concentration in value added processes, confirm the lack of domestic backward and forward linkages. Moreover, the production capacity utilization in the manufacture of sectors – such as other non-metallic mineral products and chemical products – is strongly and positively correlated with firm size.
Finally, the positive relation between increasing establishment size and increasing presence of operative skilled workers is particularly pronounced in the manufacture of wearing apparel, pharmaceutical products, repair and installation of machinery and equipment, and other transport equipment. On the contrary, the ratio of unskilled operatives is systematically higher among small and medium establishments, and decreases for large ones (from 0.8 to 0.3 for mining and quarrying, and from 0.7 to 0.5 for manufacturing).
The production and analysis of better disaggregated statistics, reflecting the structural heterogeneity characterizing LPSs in LDCs, are fundamental steps towards more tailored and effective industrial policy interventions. For example, acknowledging that in the United Republic of Tanzania production capacity underutilization or skills gaps are particularly severe among specific establishment types within the same industry or region, reveals the importance of introducing targeted policies. Some of these could support small firms with a potential to scale up toward middle-size establishments, while other policies could focus on gradually reducing import dependence on specific inputs, coupled with increasing production capacity utilization of capable domestic firms.
Figure III.7
Structural heterogeneity in manufacturing, United Republic of Tanzania, 2013
Source: Andreoni, 2017b.
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