Africa: Digital Industrial Hubs Are Key To Africa’s Economic Transformation

Good policy and stable macroeconomics won’t drive industrial innovation – tech hubs, start-ups and manufacturers must be involved.

Digital innovation enables transparency in public services and new opportunities in commerce, health, education and agriculture. But Africa lags behind the rest of the world in nearly every digital-related indicator except mobile money.

It is especially behind on innovation and digitalisation in industry and manufacturing to spur economic transformation. There are great examples of African companies using 3D printing or machine learning or drones, but these mostly represent Africa’s aspirations, not its reality.

Even where there is progress, countries aren’t benefiting enough from new technology and innovation because of low absorptive capacity and lagging digital infrastructure. The average internet penetration in sub-Saharan Africa is 25% – half the global average. The impact of doubling internet penetration on manufacturing labour productivity is also significantly lower in these countries.

Digitalisation can create new opportunities in manufacturing. These include increases in efficiency, diversification into more value-added products, expansion in regional and global trade, lower production costs, optimising supply chains, and better export competitiveness. But to achieve this, governments must incentivise innovation in industry and manufacturing while providing an appropriate business environment for the private sector.

Africa lags behind the rest of the world in nearly every digital-related indicator except mobile money

The African Center for Economic Transformation (ACET) recently analysed seven countries (Côte d’Ivoire, Ethiopia, Ghana, Morocco, Senegal, Togo and Tunisia) to better understand where industrial innovation policies were in place. It found that the private sector had limited investments in innovation, digital, and the Fourth Industrial Revolution technologies. Governments were also doing little to promote smart technology and incentivise industrial innovation.

The ACET study concluded that the biggest challenge to building an industrial innovation ecosystem in the countries reviewed was the lack of substantive engagement with the private sector.

Good policies and a conducive macroeconomic framework are enablers but aren’t enough to drive industrial innovation. Governments were drafting policies but not engaging enough with industries, tech hubs and start-ups. Besides Tunisia and Morocco (where gaps remain), there was little strategic contact with the private sector.

Institute of Development Studies research in 2021 showed that projects such as digital industrial hubs must be implemented in partnership with local tech providers. These providers can offer maintenance, repair and troubleshooting services for digital hardware and software. This will require building local capacity and facilitating links with local tech providers.

Poor integration between local manufacturing and technology sectors prevents large-scale job creation

Political economy thinking needs to be embedded into Africa’s digital industrial hub design. This will show how structural factors shape their uptake and who is involved in their design. It will also shed light on the formal and informal ‘rules of the game’ – how social, cultural and gender norms affect the adoption of digital hubs.

For example, a 2020 World Trade Organization and World Bank study found that smaller firms with female CEOs suffered the most from inefficiencies in IT connectivity, infrastructure and digital regulations.

There are significant opportunities for African countries to prepare for an acceleration of investment in digital industrial hubs. For example, e-commerce protocols in the African Continental Free Trade Area agreement are being negotiated by the African Union (AU). Also, global tech giants such as Google and Microsoft are investing substantially in Africa. And efforts such as the European Union-AU digital partnership and the G20 Compact with Africa facilitate investment.

There are concerns about the impact of digitalisation on employment. But a key roadblock to large-scale job creation in African countries is a lack of integration between the local manufacturing and technology sectors.

In many developing countries, manufacturing firms import digital solutions due to a lack of awareness and trust in domestic options. To scale up local production in Africa – and thereby create jobs – requires more focus on domestic integration. Global firms should be linked with potential local suppliers, and domestic digital start-ups and small and medium enterprises (SMEs) with existing manufacturing supply chains.

Digital industrial hubs can help African firms create economies of scale, grow demand and provide jobs

ACET’s business incubator for start-ups works with SMEs with a manufacturing or assembly component in their business model. The aim is to integrate them into regional markets and the global value chains of large multinationals. The programme provides free technical and managerial services, financial support and transaction advice. But ACET finds that even firms that invest in technology often respond to market trends that present opportunities rather than having a strategy to scale and enter value chains.

Digitalisation provides opportunities for expanding Africa’s manufacturing, but this requires incentivising industrial innovation policy. Regional and global efforts can support the evolution to digital industrial hubs as long as there is domestic integration and backing for companies entering regional and international value chains.

Well-integrated digital industrial hubs can help African firms create economies of scale, grow demand and provide jobs. As pockets of digital infrastructure and skills, they can inform policy and attract local and foreign investment, with the potential to nurture regional hubs with access to regional value chains.

More information is needed on the potential of digital industrial hubs in different countries, sectors and policy environments. Digital start-ups also need help integrating into manufacturing value chains through digital services and e-commerce.

To achieve this, African governments must tackle digital infrastructure deficiencies and policy gaps related to intellectual property, data protection and privacy. National digital industrialisation roadmaps are also needed that target female workers and entrepreneurs.

As fissures in the global economy continue, African governments and companies must prepare for an economic rebound by an increasingly digitised industrial base with new regional and global value chains. Digital industrial hubs will be central to the continent’s economic transformation, poverty reduction and equitable growth.

Rob Floyd, Karishma Banga and Freda Yawson, African Center for Economic Transformation, Accra, Ghana

This article was first published in Africa Tomorrow, the ISS African Futures blog.

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