The role of manufacturing and industrial policy in development

Production and innovation capabilities are key drivers of development, as recognised by Sustainable Development Goal (SDG) 9: “Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation.”

In particular, target 9.2 aims at doubling manufacturing’s share of employment and gross domestic product in least developed countries by 2030.

Globally, manufacturing is the largest traded sector and contributes to 13% of all jobs. Additionally, as the COVID-19 pandemic has made apparent, manufacturing plays a key role in socioeconomic resilience, as it provides goods that are critical to life and national security.

However, even before the pandemic, the pace of growth of manufacturing had slowed down in both developing and developed regions, mainly due to trade and tariff barriers.

In LDCs the share of manufacturing in total GDP increased from 12% to 12.7% between 2015 (baseline) and 2018. However, this pace of growth is insufficient to double manufacturing’s share by 2030. Investing in production, managerial and innovation capabilities to harness the potential of Manufacturing 4.0 can contribute to accelerating this growth rate.

Drivers of digital industrialisation are changing

Technology upgrading through the adoption of Manufacturing 4.0 technologies is particularly relevant to LDCs, as factors such as social responsibility, supply chain transparency and agility, and environmental sustainability are becoming more important to participation in global value chains.

Industrial digitalisation may also offer jobs for the growing economically active population in LDCs, which is expected to increase by 13.2 million workers per year in the next decade.

Industrial digitalisation, however, also risks increasing market concentration and deepening existing inequalities, as has become apparent during the COVID-19 pandemic.

In a post-COVID-19 context, industrial policy has become even more relevant to ensure that LDCs recover from the current economic crisis and are not further left behind in the digital industrialisation journey.

As global value chains are being reconfigured, with an emphasis on regional integration, those countries with adequate policies in place will be able to participate in, and benefit more from, new market opportunities.

Manufacturing value chains are evolving

A manufacturing value chain can be composed of five basic activities:

• Customer Relationship Management (CRM), which consists of Marketing, Sales and Customer Services activities.
• Production, which consists of Materials Planning, Computer-Aided Design (CAD), and Computer-aided Manufacturing (CAM), Raw Materials Inventory Purchasing and Management, and manual aspects of manufacturing (such as packaging and shipping).
• Logistics, which consists of Quality Assurance (QA) and Risk Management, Product Lifecycle Management (PLM), and Product Data Management (PDM) of the actual products being produced.
• Warehousing and Distribution, which consists of managing finished goods inventories and shipping products to customers.
• Supply Chain Management systems, which monitor incoming as well as outgoing raw materials and finished goods and then schedules them based on demand.

Value chains can be divided into stages of development, from those comprising completely manual activities (Stage 0) to autonomous factories were nearly or all activities area automated (Stage 4).

Harnessed appropriately, this evolution of value chains can open new opportunities for manfuacruing across the Commonwealth, including in LDCs and SIDS, as technology lessons infrastructure and geographic challenges.

The GVC Smile Curve and moving toward an "outcome economy"

It is useful to examine value chains more broadly, in terms of Global Value Chains (GVCs), the role of manufacturing in value-added activities, and the shift toward an "outcome economy".

Participation in GVCs and exposure to international markets is generally associated with higher levels of productivity and economic performance. It makes it possible for enterprises in developing countries, LDCs and SIDS to gain access to more sophisticated capabilities as part of production processes by specialising in niche areas of GVCs with larger and more mature enterprises from developed countries.

Meanwhile, new digital technologies and processes are leading to a new business paradigm with firms operating in an “outcome economy”, whereby companies create value not by making and selling products but by delivering solutions that directly produce quantifiable outcomes.

Efforts to climb the value chain

Developing countries across the Commonwealth are successfully beginning to climb manufacturing value chains to higher value-added activities, though there is still a way to go.

Here and in the next sections we look at the state of local manufacturing and potential relevance and application of Manufacturing 4.0 technologies.

To allow for regional analysis, we divide Commonwealth countries into SIDS, LDCs and developing countries to account for differences in geographies and economic development.

Commonwealth developing countries are generally furthest along in terms of the maturity and sophistication of their manufacturing sectors. Click below for regional relevance and analysis of Manufacturing 4.0 on Commonwealth Developing Africa and Asia.

The focus of this Guide is on Commonwealth SIDS and LDCs, continue to the next section for more.