Industry 4.0 can be a Game Changer for Businesses in Low-Income Countries

National digital development strategies need to recognise the potential and enable the change

The possibility of reconfiguring manufacturing processes through new digital technologies provides opportunities to reboot industrial development in low-income countries. But policymaking in the digital era needs to be deeply engaged in promoting the ways in which new technologies can be integrated into the economic performance of local firms. With an actively engaged policy framework that nurtures new forms of knowledge capabilities and supports firm-level activity, new markets, supply and demand linkages, and employment opportunities can be created.

Most discussions on industry 4.0 and development in recent trade negotiations, especially focused on e-commerce, have been incendiary in nature. But far removed from these discussions, entrepreneurial firms operating on the ground in Africa and least developed countries (LDCs) have been making strides.

In healthcare, for example, mPedigree, a Ghanaian company, has created a unique product identification marker as an anti-counterfeit solution for pharmaceuticals in the African market. In energy, companies like M-KOPA Solar are enabling decentralised solar power solutions in various African countries with a pay-as-you-go model.

Outside of traditional social sectors, many new companies are beginning to provide services that have been bottlenecks for industrial performance in general. For example, exports from low-income countries are often constrained by weak transport and road infrastructure. A new company, Trella, is capitalising on this niche by operating a B2B trucking marketplace that connects shippers with carriers to promote transport efficiency and supply chain capacity. Similarly, to enhance savings and investment among low-income communities and small firms, Exuus, a Rwandan fintech company is promoting cashless transactions through a digital platform that manages savings through ledger handling. Oko, a company based in Mali, is dedicated to helping rural farmers access crop insurance to strengthen their capacity to deal with climate instability and increase financial security.

Although big data, mostly monopolised by a small number of big tech companies, remains a large impediment to create efficient data-driven innovation in developing countries, the success of such firms points to the fact that opportunities do exist for home-grown innovation that arise primarily from markets and product niches are yet to be tapped on a large scale in low-income countries.

The real question is; can governments enact policy that helps firms like these grow and expand, and how can these efforts be directed at re-booting the industrialisation dream?

The opportunity for rebooting manufacturing

In the past, a number of distinct shortcomings have undermined firms in LDCs from achieving the economies of scale and scope needed in manufacturing. Key amongst these are: low investments in research and development, weak support from public science institutions, lagging human resources, lack of physical infrastructure (roads, electricity, transport) and the malfunctioning of a number of extension mechanisms that are critical for industry survival (finance, management, marketing, and technology incubation, for example).

But thanks to new digital technologies like big data, artificial intelligence, cloud computing and the internet of things, manufacturing is changing. As opposed to its reliance on economies of scale and scope, which most industrial sectors in LDCs have failed to achieve, “smart” manufacturing in the digital age is characterised by increasingly modular and personalised activities that are technology reliant.

Manufacturing of this kind is primed by a greater use of sensors, machines, and information and communications technology (ICT) systems that work together to connect production and innovation value chains, leading to an increasing convergence of manufacturing and services. While analogue manufacturing driven by certain conventional forms of production that demand economies of scale will continue in many sectors, new opportunities are emerging across the board to reconfigure products, activities, and services.

This opens up the possibility of configuring manufacturing as a set of discrete processes with smaller, but more targeted investments in high-technology industrial niches that have potential for expansion, with a number of benefits.

First, it can help local firms reap the benefits of many of these new techniques for production efficiency and technological change. According to the African Development Bank, artificial intelligence is expected to generate revenues up to US$47 billion by 2020 in Africa (up from US$8 billion in 2019), and the wider adoption of cloud technologies is estimated to have already increased GDP by US$120 billion. Companies can benefit from cost savings of up to 50%, in a ‘save to transform’ paradigm that also promotes new business growth models by using by increasingly using digital technologies as a 2019 global survey on the topic shows. Such a dual approach to saving and transforming businesses can give LDC firms a real boost. Second, smart manufacturing can help local firms collect and generate big data on their own, which can feed into new innovations in the digital economy; offering a welcome boost to local entrepreneurship. Finally, since all activities related to digital expansion, including cloud computing and big-data analytics, feed into and feed on smart manufacturing, it can create a virtuous employment cycle along several stages of the data value chain, including in data analytics and customer support.

Enabling the transformation

But enabling such a manufacturing transformation from analogue to smart modes will not be easy. Not only do all underlying digital technologies build on pre-existing ICT infrastructure and an open and steady internet, but they also rely on pre-existing capacity in other industrial and services sectors where they can be gainfully applied. From that perspective, LDCs are at a particular disadvantage, given the past difficulties in promoting industrialisation. It will require much effort to advance high technology skills and a shift towards jointly promoting manufacturing and services as dual engines of growth.

The role of policymaking in this new context is to actively envision national digital industrial development strategies that promote:

(a) the use of digital technologies to boost local capacity across the economy;

(b) help improve performance of local firms;

(c) with a view to enabling local firms recapture markets, in order to leverage what was previously viewed as a lack of advantage.

Such national digital development strategies need to be much more deeply engaged in championing the integration of new technologies into the economic performance of local firms. In this process, the secret is not to focus on what was being produced before but to prepare local firms to identify and build on these new digital technologies in all ways possible, and in all sectors of the economy.

An important focus on building a broad range of capabilities that can be applied across industry, such as management and enterprise skills as well as risk-taking is a must. Data sharing and open data strategies, especially for the use of already existing public data to boost innovation among local firms should also be considered. In combination, policymaking should also focus on nurturing new forms of knowledge capabilities that allow firms to identify and move effectively into new spaces that allow them to combine and integrate products with related services and increase customization. These changes (illustrated in the Table) will be quintessential to the move from analogue to digital production.

Supporting enterprise-level activity

Even at the simplest level, these capabilities will enable local firms to operate in the data economy, with large rewards for business processes. Access to big data — with the capacity to analyse it — can allow firms to better understand their customers and their preferences, and to expand markets. Local firms can also create value by incrementally changing their product design or service portfolios to suit consumer needs, thereby enhancing the agility of local innovation systems to respond to consumer demand and in so doing increase productivity gains.

Local firms, by integrating digitisation, can also eventually develop their capacity to move into data-driven value chains in new sectors and areas of manufacturing. With the ability to create their own smart products, firms can collect data at each stage of consumer use, thereby expanding their own data pools which can be used to feed into analytics that train artificial intelligence systems useful to local contexts. Such capabilities can be self-reinforcing, and learning outcomes of an unforeseen nature can materialise.

This article was first published in the EIF Secretariat Blog of the World Trade Organisation.