Resources Policy 37 (2012) 408–416

Contents lists available at SciVerse ScienceDirect

Resources Policy

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‘‘One thing leads to another’’—Commodities, linkages andindustrial development

Mike Morris a, Raphael Kaplinsky b,n, David Kaplan a

a School of Economics, University of Cape Town, South Africab Development Policy and Practice, The Open University, United Kingdom

a r t i c l e i n f o

Article history:

Received 16 May 2012

Accepted 16 May 2012Available online 6 October 2012

JEL Classification:

O

O13

O38

O55

Keywords:

Resource curse

Commodities

Industrialisation

Backward and forward linkages

Enclave development

Global value chains

07/$ - see front matter & 2012 Elsevier Ltd. A

x.doi.org/10.1016/j.resourpol.2012.06.008

esponding author.

ail addresses: mike.morris@uct.ac.za (M. Mor

sky@open.ac (R. Kaplinsky), david.kaplan@uc

is article draws on three Discussion Pape

int and findings (Morris et al., 2011a, b, c).

e distinguish here between soft commodities

mmodities (predominantly mining) and ene

il ad gas). See Farooki and Kaplinsky, 2012 f

b-sectoral characteristics.

a b s t r a c t

With a particular focus on low income economies in SSA, this paper addresses the nature and

determinants of linkages from the commodities sectors and challenges the received view that enclave

development is an inherent characteristic of resource extraction, particularly in the hard and energy

commodities sectors. It argues that there has been a steady increase in linkage development and that

there are significant opportunities for deepening this process. The opportunities may be greater for

backward than for forward linkages, particularly in the minerals and energy sectors. In making this

case, this Discussion Paper draws on the experience of high income countries which have resource

intensive economic structures, the geographical specificity of many resources and the growing interest

of large resource extracting firms in outsourcing the production of inputs which are outside of their

core competences and in supporting local production of some inputs, it sets out a general model of

linkage development which distinguishes between win–win and win–lose outcomes.

& 2012 Elsevier Ltd. All rights reserved.

Introduction1

The strengthening of the industrial sector lies at the heartof the development agenda. This poses particular challengesfor resource intensive economies, since it is widely believedthat the exploitation of commodities is corrosive of industrialdevelopment.

Two primary reasons are offered to explain this negativeassociation between resource extraction and industrialisation.The first is the macroeconomic impact of resource extraction onrelative prices and incentive systems. The second is the inherentenclave nature of commodity extraction, particularly in hard andenergy commodities.2 In this paper we address the second ofthese arguments. We begin in Section The resource curse andindustrialisation with a brief review of that part of the Resource

ll rights reserved.

ris),

t.ac.za (D. Kaplan).

rs synthesising the MMCP

(predominantly agriculture),

rgy commodities (predomi-

or an extended discussion of

Curse literature which focuses on industrial development andwith the literature concerning enclave development in theresource sector. In Section Outsourcing and linkage development:a basic model we present a basic model of linkage development,distinguishing between intrinsic and contextual determinants.This is followed in Section Speeding up and slowing down linkagedevelopment by a discussion of factors promoting the speedingup and deepening, and those factors leading to a slowing downand shallowing of linkages from the resource sector. In SectionIndustrial policy for linkage development we briefly address thepolicy conclusions of this analysis. We take it as read in thisanalysis that commodity prices will remain firm in the mediumand long term (Dobbs et al., 2011; Farooki and Kaplinsky, 2012).

The resource curse and industrialisation

In a widely quoted and influential study, Sachs and Warner(1997) concluded that resource abundance, measured as the ratioof primary commodities exports to GDP, was negatively corre-lated with GDP growth. They and others additionally argued thatas a consequence of exchange rate appreciation (the DutchDisease) resource exploitation favoured non-tradeables and that

3 The share of intermediate products and services in global trade had grown

sharply in many sectors (Sturgeon and Memedovic, 2010), as companies specialise

in niches of global value chains. A particularly graphic example is the iPhone,

China’s exports of iPhones at a unit value of $178.96 embody only $6.50 of local

content (Xing and Detert, 2010).4 It follows from this that ‘‘local’’ is a relative concept meaning something like

‘‘nearer than faraway’’! That is, in some circumstances it may be directly

proximate to the mine, in other cases in the local region, in the country or in

the continental region. The substantive point is that it reflects a drive to minimise

distance in the sourcing of inputs and the processing of outputs.

M. Morris et al. / Resources Policy 37 (2012) 408–416 409

this undermined production in the tradeables sectors, including inmanufacturing.

This conclusion on the negative consequences for industryechoed a long tradition in development economics of the enclavenature of production in the commodities sector. In a seminalcontribution, Singer argued that as a consequence of the capitalintensity in resource extraction, few jobs were created, and therewere weak linkages to local suppliers (Singer, 1950, 1971). Instead,the beneficial spillovers were largely reaped in the high incomecountries where the suppliers to the foreign owned mining compa-nies were based. Singer further asserted that the commodities sectorwas characterised by low technology, limiting the learning spilloversto the local economy. This enclave character of commodity extrac-tion in developing economies was reflected in, and often caused by,the development of enclave oriented infrastructure, designed tofacilitate the export of commodities rather than the in reducinglogistics costs for domestic manufacturing.

This inherited wisdom is problematic. First, there is evidence ofsynergistic links between manufacturing and the resource sector ina number of industrialised. The Staples Theory literature whichsought to explain Canadian economic development argued that thedevelopment of Canadian manufacturing arose in large part fromlinkages to the export oriented fish, fur, timber and mineralscommodities sectors (Innis, 1957; Watkins, 1963). Others argue thatthe development of manufacturing in the US in the nineteenth andtwentieth centuries, as well as the recent development of industryin Australia and Norway, can also be directly traced back to thesynergies arising between commodities production and industry(Wright and Czelusta, 2004). Similarly, Sweden’s industrialisationprocess was driven by export booms in cereals, wood, pulp, paperand iron ore (Blomstrom and Kokko, 2007). Each of these historicalexperiences involved a positive and interactive symbiosis in whichindustrial growth was stimulated by linkages from the commoditiessectors. In turn, the capabilities developed in industry fed back intocommodities production by reducing costs and hence enabling theexploitation of less well endowed mineral seams, oil deposits, andagricultural land.

Second, econometric studies have challenged the Sachs andWarner (1997, 2001) analysis. Davies concludes that there was noevidence to support the contention that commodity dependenteconomies performed less well in respect of sustained growth orhuman development indices. To the contrary, whilst oil producersdid best on both counts, in most cases mineral economiesoutperformed non-mineral economies (Davies, 1995). Ledermanand Maloney employed different estimation techniques to Sachs–Warner, used time series data that allowed for a more sophisti-cated analysis of the dynamic interrelationship between growthand the commodities sector and a different proxy for resourceintensity (Lederman and Maloney, 2007). They conclude thatNorway, New Zealand, Canada, Finland and Australia ranked asthe most resource intensive economies rather than economiessuch as the DRC and Papua New Guinea. Similar conclusions onthe positive growth performance of resource intensive economiesare drawn by Manzano and Rigobon (2007); Bravo-Ortega and deGregorio (2007); and Lederman and Maloney (2007).

Two major challenges to the enclave thesis emerge from thesehistorical and econometric studies. First, in some cases there isdemonstrated evidence of a positive synergy between commoditiesand manufacturing (as well as between commodities and growth).Second, where commodity dependence is associated with a weakindustrial sector, this is more often a result of the underdevelopmentof the industrial sector rather than a consequence of the destructiveimpact of commodities production on industry. Thus what is inter-preted as a manufacturing sector weakened by a commoditiesspecialisation, is in fact often a commodities specialisation in aneconomy with no or little history of industrial development.

We will argue below that whatever the historical relationshipbetween industry and resources, in recent years there has been arestructuring of corporate strategy across a variety of sectors,including resource extraction, which enhances the scope forlinkage development. Moreover there has also been a quickeningpace of technological change associated with commodity produc-tion and the inputs into commodity production. These changeshave important consequences for the development of linkagesfrom the resources sector. But, while these developments enhancethe potential for linkage, the extent of linkage is also a function ofpolicy. Without appropriate and effective policies, the deindus-trialising consequences of resource extraction may indeed dis-advantage manufacturing. Conversely, policy can enhance boththe breadth and depth of linkages.

Outsourcing and linkage development: a basic model

The deepening of globalisation after the 1970s led to intensi-fied competition as firms were subject to a larger pool ofcompetitors. One of the most important responses to this wasthe drive by firms to concentrate on their core competences,namely those activities in which they had distinctive compe-tences, where there were barriers to entry and which werevaluable in the market place (Hamel and Prahalad, 1994). As aconsequence there was a growing trend for non-core activities tobe outsourced to low cost suppliers and for firms and economiesto specialise in capabilities rather than wholly manufacturedproducts (Kaplinsky and Morris, 2001; Gereffi et al., 2005).3 Thisis the antithesis of the pressures for internalisation which hadpreviously played an important role in driving foreign directinvestment (Dunning, 2000; Williamson, 1985).

Once the lead firm has made the decision in principle tooutsource non-core activities, the first task is to find the lowestcost suppliers who can produce to the required quality and meetdelivery schedules reliably. Suppliers able to offer unique tech-nological competences of their own are particularly attractive,especially in the first tier of suppliers. However, the logic iswherever possible to have these suppliers locate production andservice delivery close to the doorstep, rather than located abroad,or some distance from the lead firm’s activity.4 An efficientproximate supplier provides the capacity for flexible and tailoredresponses to the needs of the lead firm, allows for value chaininventories to be reduced, and removes uncertainties associatedwith extended logistics. This unfolding process of initial out-sourcing to seek the lowest cost supplier (‘‘global sourcing’’) thenextends in requiring the supplier to locate proximate to thefactory (‘‘follower supply’’) was initiated in the automobileindustry (Barnes and Kaplinsky, 2000). Global value chains nowdominate most manufacturing sectors and many service sectors.

The global mining and oil and gas industries are relatively lateentrants to this trend towards specialisation and outsourcing.Although undocumented as a general phenomenon, there isevidence that this has been occurring across a range of commod-ity sectors. Mines have moved away from a high level of verticalintegration towards outsourcing almost every stage in the mining

M. Morris et al. / Resources Policy 37 (2012) 408–416410

process to independent firms, including the provision of capitalgoods and intermediate inputs such as chemicals (Urzua, 2007).This desirability of finding an efficient local supplier is particu-larly attractive in Africa. This is because transport and logistics arepoorly developed, because goods brought in from outside may besubject to long and unpredictable delays and because governmentpolicies have often mandated the deepening of local value added.Supplier firms have responded to these opportunities to beincorporated in the chain. For example, Bell Equipment in SouthAfrica built competences in the domestic mining sector, and thenbecame a supplier of these machines into a number of globalmarkets, including the mining, construction, sugar and forestrysectors (Kaplinsky and Mhlongo, 1997; Walker and Jourdan,2003). There has also been growth in the outsourcing of knowl-edge intensive services, and this has led to the emergence ofspecialised knowledge intensive mining services providers(SKIMS), offering not only specialised services but also other hightechnology inputs. Companies such as SRK in South Africa, whichstarted as a service provider to Anglo American, have grown into aglobal mining consulting firms. The development of local suppli-ers is more advanced in Chile where global mining companies areactively involved in building capabilities in their suppliers. BHPBilliton, for example, has an extensive supplier developmentprogramme in Chile (Barnett and Bell, 2011).

It is possible thus to construct a general model of linkagedevelopment (Fig. 1) taking account both of the localisation of whatwas previously imported and the growing trend towards outsour-cing by lead commodity firms. The vertical axis in Fig. 1 representsthe accretion of value added in the provision of inputs into theproduction of a commodity. Based on the insights drawn from thecore competences framework we can distinguish on the one handinputs which the lead commodity producers have no intrinsicinterest in maintaining in-house since they do not reflect their corecompetences. We characterise these as win–win linkages—wherelead commodity producing firms and local suppliers and customershave a common interest in developing local linkages. On the otherhand, there are a range of inputs which are central to the firm’scompetitiveness and which it is reluctant to see undertaken by acompetitor. We consider these to be win–lose linkages. We can takethe diamond value chain as an example to illustrate these twocategories of inputs into a commodities value chain. The cutting andpolishing firms may actively want auditing, office provisions andutilities to be provided by outsiders, undertaken in the best of allcases, by reliable and low cost suppliers based as close to theiroperations as possible. On the other hand, they are very reluctant,and have to be forced, to allow customers to participate in thecutting and polishing of diamonds, and in the logistics, branding andmarketing which guarantee their control over the profitable seg-ments of the diamond value chain. These are their core competences(Mbayi, 2011). The horizontal axis of Fig. 1 reflects the passage of

OutsideMining

Companycore

competences- win-win

Value added

Inside coreCompetences

- win-lose

Time

Fig. 1. Market driven linkages over time.

time. The curve shows that, as a general consequence of theoutsourcing of non-core competences, there is a market drivenprocess of linkage development. Initially the pace of outsourcing islow, it then speeds up and subsequently tails off as the easy hits areexhausted.

There are a number of factors which determine the nature,extent and the location of these outsourced linkages. It is helpfulto distinguish between intrinsic and contextual determinants oflinkage development, although of course these are not watertightdistinctions.

Intrinsic determinants of linkage development

Three primary intrinsic factors affect linkage development—the imperatives of lean production, the specificity of resourcedeposits and the technological intensity of extraction andprocessing.

Logistics, flexibility and costs

Unlike the Fordist era of mass production, modern competitive-ness is increasingly a function of a complex set of critical successfactors (CSFs) (Womack and Jones, 1996). Clearly, cost and price arecentral determinants of a profitable and sustainable market pre-sence. But so too is the heterogeneity and quality of final products,the frequency, size and predictability of delivery and the customisa-tion of final output. Although these CSFs are relatively moreimportant in the manufacturing and service sectors than in theresource sectors, they are increasingly evident across the range ofsoft, hard and energy commodities (Marin et al., 2009).

Meeting these CSFs has led to the development of leanproduction techniques. Pioneered by Toyota and then diffusingacross sectors, the introduction of lean production by coreproducers in value chains has important implications for suppli-ers, summed up in the Q-C-D mantra—quality, cost and delivery.A core component of this lean production capability is thecapacity of the supply chain as a whole to achieve low inven-tories, rapid response and flexible production.

The imperatives of lean production (both in resource extractionand in the supply chain) are important determinants of the natureand location of the outsourcing process, and hence of linkagedevelopment. This is for two reasons. First, proximity of suppliersand customers is critical in some key inputs. For that reason, it iscustomary for most lead firms in value chains to develop long termrelationships with core first tier suppliers and to expect them tolocate their supply functions close to the operations of the leadproducers—a strategy of global sourcing and follower supply(Barnes and Kaplinsky, 2000). On the output side, particularly inthe soft commodities sectors, processing necessarily occurs nearextraction, as in the case of sugar refining since unless cane iscrushed within 12 h of harvesting, the sucrose content falls. Thesecond is that in order to achieve lean supply chains, lead firms arerequired to develop sophisticated programmes of supply chainmanagement (Bessant et al., 2003). These two linked phenomenaare promoting near sourcing (that is, domestic linkages) as aparticular sub set of outsourcing, subject of course to the impera-tives of cost, quality and delivery. They also promotes the closerproximity of processing to commodity extraction.

Backward linkages and resource specificity

A key characteristic of virtually every mining or energyresource is that it is location specific. No two deposits will beidentical. The technology and the accompanying knowledge andskill inputs required for efficient identification and exploitation ofthe resource therefore are of necessity to be applied locally onsite. This provides the possibility of drawing on local skills and

M. Morris et al. / Resources Policy 37 (2012) 408–416 411

knowledge as well as the local presence of technology spillovers.This need to cater for the specificity of local deposits often leadsto the localisation of input provision, even in relatively pooreconomies with generally weak backward linkages such asTanzania’s gold mining industry where local providers feedinputs, such as local assays into mine prospecting (Mjimba,2011). In the South African coal industry the presence of poorquality coal deposits with many impurities led to the develop-ment of advanced technological capabilities in washing of coals.Arising from the development of capabilities by supplier firms tomeet this challenge, horizontal linkages developed enabling thesupplier firms to penetrate new and different markets, forexample washing spirals for utilisation in the Canadian tar sands(Pogue, 2008). In each of these cases, the knowledge is locationspecific and provides the potential for local supply. Thereafter,applications of this knowledge can be used in the production ofproducts and services that can be adapted to different markets, athome and abroad.

In each of these cases, the knowledge is location specific andprovides the potential for local supply. Thereafter, applications ofthis knowledge can be used in the production of products andservices that can be adapted to export markets.

Where there are multiple points of production in a singlecountry (that is, a number of different and independently ownedmines) particular possibilities are opened for specialised suppliersto benefit from economies of scope, meeting the needs of a varietyof customers. By contrast, where production is concentrated in asingle or a limited number of producers, the specificity and scaleof resources will favour in-house production as opposed toprocurement from outside suppliers leading to the internalisationof these capabilities within the operations of the lead commodityproducing firm.

5 China’s Ministry of Commerce (MOFCOM) is supporting the development of

seven economic and trade cooperation zones in Zambia, Egypt, Nigeria, Sierra

Leone, Mauritius, Uganda and Ethiopia.

Technological and scale complexity

As we saw above Singer argued that the mining industry wasinherently enclave in nature. His view was that mining wascapital and scale intensive so that in the absence of a developedindustrial base, linkages in low income countries would begenerated abroad. Where there were limited local linkages, thesewere predominantly low in technological intensity and therewould consequently be few learning spillovers in the domesticeconomy.

In general, technological barriers to entry are less evident inthe soft commodities sectors, where technological complexity andlearning spillovers are less limited than in the hard and energycommodities sectors. But even in the scale and technologyintensive hard and energy commodity sectors there are multipleinputs which are relatively low in technological content and withfew barriers to entry. At the most basic level this includes theprovision of food and accommodation for the workforce, trans-port and logistics, security, some utilities, and simple mainte-nance and repair. How feasible low cost and flexible local supplyis will of course reflect not only the intrinsic technologicalcomplexity of the resource sector in question, but also the extentof capabilities in the local economy, that is the technological gap.Here, too, the conventional wisdom of enclave development oftenoverstates the shortfall in local capabilities in low incomeeconomies. Compared to the era in which Singer and the enclavetheory was advanced, there has been a massive accretion ofcapabilities in very many low income economies, often to asurprising degree. (In 1970, the height of the enclave agenda,only around two per cent of global R&D occurred in low incomecountries; in 2009, this had risen to 22 per cent—Singer et al.,1970; Hollander and Soete, 2010). As a consequence there isevidence of growing linkages even in high technology products

and services in low income economies in often surprising circum-stances, such as IT services in Nigeria’s oil industry (Oyejide andAdewuyi, this issue), umbilicals in Angola’s offshore oil industry(Teka, this issue) and knowledge intensive service in Ghana’s goldindustry (Bloch and Owusu, this issue). In other cases such asSouth Africa and Australia where domestic capabilities are muchmore developed, linkages extend into high technology inputs(Kaplan, this issue).

Contextual determinants of linkage development

Beyond the above mentioned factors which are intrinsic toresource sectors across operating environments there are a seriesof factors which reflect the particular context of operation. Draw-ing on the SSA case studies of the Making the Most of Commod-ities Programme (op. cit.***), four contextual factors stand out inimportance. Although particularly relevant to the SSA operatingenvironment, we believe that they also have wider relevance.These are ownership, infrastructure, capabilities and policy.

Ownership

The firm is an heterogeneous entity, and although each firm isindividual with particular competences and business strategies, thereare important structural features which influence the behaviour offirms in general, and with regard to linkage development in parti-cular. Here we can distinguish three different ownership attributes.

The first is the origin of ownership and place of incorporation ofthe lead commodity exploiting firm. A widely held view (not alwayssupported by evidence) is that locally owned and/or locally incor-porated lead firms are more deeply embedded in the local economy,have greater familiarity with local suppliers and customers, knowtheir way around the institutional infrastructure and, crucially, thatthey are more committed to local development than footloose,foreign owned firms. Each of these characteristics has a potentialeffect on domestic linkages, with the likely outcome that locallyowned and incorporated firms are more prone to participate inlinkage intensive chains. Beyond the ownership and incorporationattributes of lead commodity firms is the ownership of theirsuppliers and customers. Their horizons too may be affected bytheir origins and their embeddedness in the local economy.

Second, the particular nationality of foreign ownership mayhave implications for linkage development. For example, thenature of equity markets in the home countries may predisposefirms to operate with particular time horizons and attitudes torisk. Firms which are affected by shareholder value structures orwhich raise their funds on short term markets may have littlepatience with long term local supplier or customer development.By contrast, firms with greater access to patient capital, withhigher internal savings rates and which are supported and‘‘guided’’ by their governments, are more likely to be involvedin long term and risky resource extraction than are their northerncompetitors (Farooki and Kaplinsky, 2012), and may also havemore patience with local linkage development. Patient capital iswidely argued to be characteristic of Chinese firms in the resourceand infrastructure sectors (Fessehaie, 2011; Perkins and Robbins2011). But, despite the fact that, at least in the African case,linkage development may be strengthened through support fromthe Chinese government which is engaged in the construction ofindustrial processing zones in six African countries,5 the generalview is that Chinese firms import a disproportionate share of theirinputs from China, or where they use locally sourced inputs, they

M. Morris et al. / Resources Policy 37 (2012) 408–416412

bring their suppliers with them, leaving little space for localsupplier development (Corkin, this issue, Fessehaie, forthcoming,Suliman & Badawi 2010). Another element of nationality ofownership is that northern based firms are often subject tointense pressure from civil society organisations to implementCorporate Social Responsibility (CSR) programmes to introducesupplier development schemes to spread the benefits of com-modity extraction to communities living close to resource extrac-tion. This is often an important driver of backward linkages. Firmswith their bases in low income countries such as China and Indiaface fewer pressures of this sort, and consequently may be lesslikely to promote backward linkages as a response to CSRimperatives.

Third, and beyond the nationality of ownership are a series offirm specific attributes. The importance of this factor was pre-figured by theories of imperfect competition in the 1930s(Chamberlin, 1933), developed further by Hymer (1975), andelaborated subsequently in the widely used OLI (Ownership,Location and Internalisation) framework in Dunning’s eclectictheory of foreign direct investment (Dunning, 2000). Individualfirms act in very different ways even though they may operate inthe same industry and same environment. This individual beha-viour will reflect a number of conditioning factors, including thefirm’s pioneering or follower position in the industry, the firm’sparticular bundle of competences and the strategic visions of firmleadership, each of which affect their propensity to developlinkages. The impact of individual firm strategies on local inputprovision is evident in the gold mining industry in Tanzania andthe DRC (Hanlin and Hanlin, this issue).

Infrastructure

Infrastructure can take various forms, both physical and social.It can be ‘‘physical’’, embodied in road and rail transport, utilitiesand telecommunication networks. In each of these cases theeffectiveness of infrastructure development is a function ofreliability, quality of provision and the cost to the user. But thereis also a compendium of ‘‘social’’ infrastructures. These reflect theefficiency and cost of the administrative and regulatory regimewhich supports the productive sector. These characteristics ofefficient infrastructure bound all economic activity, but they areparticularly important not just for exporters of commodities, butalso for their local suppliers and processors. Four sets of factorsare important in determining the role played by infrastructure inthe development of linkages into and out of the commoditiessector.

First, the nature of the commodity has a significant impact onthe development of infrastructure in a number of ways (Perkinsand Robbins, 2011). Commodities produced and exported in bulkand in great volumes (such as coal or iron ore) require large scaletransport infrastructure to move their mined outputs. This mayhave externalities for the local economy, including for suppliersand processors. Lead commodity firms in these sectors are oftenable to cover the costs of these infrastructural investments—

where governments are responsible for infrastructure provision,fiscal constraints may slow these investments down. Second, andrelated, the nature of the infrastructure has important implica-tions for the development of linkages. Some infrastructure ishighly specific to a particular commodity producer, and has verylow potential for positive spillovers which might facilitate thegrowth of backward and forward linkages (for example, oilpipelines). By contrast the development of road and rail infra-structure as proposed in the corridor infrastructure developmentprogrammes in East and Central Africa have the potential to lowerlogistics costs for suppliers and processors (Perkins and Robbins,2011). Third, if infrastructure in a commodity exporting developing

country is primarily or solely focused on meeting the requirementsof the lead commodity extracting firm, then it is likely to result inenclave infrastructural development, which will hamper the abilityof local suppliers or processors to link with and participate effec-tively in the country’s commodities value chains (Teka, this issue;Oyejide and Adewuyi, this issue).

Domestic capabilities and systems of innovation

Effective commodity extraction, and even more so the supplyof inputs, requires a range of skills. Even the basic commodities,such as foodstuffs, require some level of skills and technologicalknowledge. As linkages develop further—as more products aresupplied by local producers (breadth of linkage) and also asproducts that are supplied locally increase in local content (depthof linkage)—so will the demand for skills and for product andprocess development capabilities increase. Growing the skills andenhancing technological capacities of commodity producers andespecially of firms supplying inputs will therefore be critical toenhancing the breadth and depth of linkage.

The employment of local rather than expatriate skilled andmanagerial labour will depend crucially on high level educationand training. Apart from enhancing supply, skills need to beharnessed effectively, so organisation and managerial routines areadditional core requirements. Further, since technologies arechanging rapidly, firms also require the capacity to identify,effectively assimilate and improve new technology, and this oftenhappens as a precursor to firms developing their own innovativetechnologies. The development of national institutions that sup-port and enhance technological development in supplier firms isespecially important as the technological intensity of linkagesincreases. These supporting institutions may be very local innature and comprise a ‘‘regional system of innovation’’ (Braczyket al., 1998). They also often have sectoral specificities (a ‘‘sectoralsystem of innovation’’, Malerba, 2004). But most typically they areassembled on an economy wide basis and comprise a ‘‘nationalsystem of innovation’’, (Lundvall, 1992; Freeman, 1995).

All of these factors determining skill development, the effec-tive use of skills and innovaiton are subject to market failure.Thus to the extent that they support the localisation of inputprovision and processing, their availability is a function of theeffectiveness of the policy environment.

The policy environment

Policy is demonstrably a critical factor in the development oflinkages. In some respect, policy is the single most importantfactor, at least in relation to linkage development in SSA’sresource sector (Morris et al., 2011b). It is important to distin-guish between policies which are directly targeted at the resourcesector itself, and policies which are of relevance to a wider set ofsectors, but which have important implications for the resourcesector, including with regard to the intrinsic factors of ownership,infrastructure and capabilities discussed above.

Effective state policy development and implementation withregard to linkages involves six sets of overlapping factors. In thefirst instance government needs to develop a realistic strategy forthe resource sector’s development in general, and for linkagedevelopment in particular. This needs to steer a path betweenover ambition (setting unrealistic objectives) and the absence ofambition (an entirely laissez faire attitude to the resource sectorand to linkage development). Second, this strategic vision needsto be accompanied by specific policy instruments (for example,local content policy and capability building of supplier firmsproduction competences). Third, these policy instruments needto move beyond exhortation to embody positive and negativeincentives and sanctions. Fourth, these policies need to align and

M. Morris et al. / Resources Policy 37 (2012) 408–416 413

to be mutually reinforcing. For example, there is a widespreadtendency for FDI in mining to be accompanied by exemption fromimport duties on inputs, whereas domestic suppliers are expectedto pay duty on their imported inputs (Mjimba, 2011). This tradepolicy undermines other government policies designed to pro-mote backward linkages. Fifth, governments will need to possessand develop the capabilities to implement their strategic visionand the accompanying policies, as well as the will and legitimacyto do so.

Finally, governments are only one actor in the policy chain.They are often also not the most important actor in the develop-ment of linkages into and out of the resource sector. Successfulpolicy development and implementation therefore requires analignment of visions and capabilities between the state and theprivate sector and in some cases (since linkage development oftenreflects pressures for Corporate Social Responsibility, CSR) also,with civil society organisations, often operating in adjacent localcommunities.

Related to the need for effective state policy development andimplementation are complementary requirements at the corpo-rate level. In the same way that governments may have visionswithout backing policies or capabilities, or policies which do notalign, or where they lack the capacity and will to implementvisions and policies, so the corporate sector faces similar chal-lenges. The corporate sector is unlikely to be able to implement itsvision unless it is able to develop a coherent alignment andcooperative interactions with state policymakers and, often alsowith civil society organisations.

Speeding up and slowing down linkage development

In Section Outsourcing and linkage development: a basicmodel, following Hirschman, we observed that contrary to muchreceived wisdom, linkage development in the resource sectoroccurs as a natural outcome of market forces which lead to the

Table 1Summary of findings on the breadth, depth and trajectory in linkages.

Linkages fromcommodities toother sectors in eightSSA economies

Sector Linkagetype

Breadth oflinkage

Depth of linkage

Angola Offshore oil Backward Thin Thin (labour only)

Botswana Diamonds Forward Thin Thin (labour only)

Gabon Timber Forward Thick Transformation of

commodities

Ghana Gold Backward Beyond thin Some transformation

inputs, and knowledg

intensive services

Nigeria Oil Backward Approaching

thick

Knowledge intensive

South Africa Mining

capital

equipment

& specialist

services

Backward Thick Transformation of inp

considerable knowled

intensive services

Tanzania Gold Backward Thin Thin

Zambia Copper Backward Approaching

thick, but

diminishing

Approaching thick

transformation of inp

outputs, but diminish

backward linkages

development of linkages in general, and local linkages in parti-cular. The nature and extent of local linkages reflects a combina-tion of factors intrinsic to the sector and to the character of globalcompetition and contextual factors which reflect the particularenvironment in which resource extraction occurs. In addition tothese intrinsic and contextual factors, linkage development is alsoa function of time (the horizontal axis in Fig. 1)—the older andmore established a particular resource sector, the more likely thatlocal linkages will have developed. As we saw above, it is alsoimportant to recognise that linkage development is both a matterof the breadth of linkages (the proportion of inputs sourced locallyor outputs processed locally) and the depth of linkages (how‘‘thick’’ the linkages are, that is, their domestic value added).

Based on in depth analysis of the breadth and depth of linkages(Morris et al., 2011b), there is a range of experiences of linkagedevelopment in SSA’s resource sectors (Table 1). Beginning with thebreadth and depth of linkages, at the one extreme lie Angola,Botswana and Tanzania. In each of these countries linkages are verythin, although there a more positive trajectory in Angola andBotswana (in both cases linkages have deepened in recent years)than in Tanzania (where linkage development has been very slow).At the other extreme is South Africa, where there is a very broadspectrum of linkages, with considerable depth, in some cases of aglobally leading character. There are also less substantial, but welldeveloped linkages in Zambia, Nigeria and Gabon. It is notable thatthe breadth of these linkages are often limited, and the extent of thedepth tends to be even thinner than the breadth of linkages. InAngola, Botswana and Tanzania, the only effective addition to valuewas the labour content, although in two of these countries (Angolaand Botswana) there was an increasing depth to these skills. But notall linkage development is progressive.

The duration of commodity exploitation also emerges as anexplanatory factor in this comparative experience. South Africa,where large scale mineral exploitation stretches back for morethan a century is a clear indicator of this at one extreme. Thedepth and breadth of linkages in Zambia and Nigeria (particularly

Horizontallinkages

Maturity ofthecommoditysector

Gap between capabilities,sectoral complexity andcapital cost

Trajectoryof linkages

None Mid 1990s Complex and capital

intensive sector vs low

domestic capabilities

Increasing

depth

None 1960s Craft intensive processing

and weak skills

Increasing

breadth

and depth

None Early 1960s Capital intensive processing,

weak skill and supplier base

Resistance

to

shallowing

of

e

Not known,

but

probable

late 19th

Century

Capital intensive processing,

moderate skill base

Increasing

breadth

and depth

services Not known,

but

probable

1950s Capital intensive processing,

improving skill base

Increasing

breadth

and depth

uts, and

ge

Substantial 1880s Knowledge and capital

intensive, well developed

industrial skill and and

knowledge base

Shallowing

Unlikely 1998 Capital intensive processing,

weak skill base

Static

uts and

ing

Not known,

but

probable

Early 20th

Century

Capital intensive processing,

moderate industrial base

Shallowing

Time

OutsideMiningCompanycorecompetences- win-win

Value addedInside coreCompetences - win-lose

Speeding up

Deepening

Shallowing

Slowing down

Fig. 2. Different trajectories of linkage development.

Beyond

M. Morris et al. / Resources Policy 37 (2012) 408–416414

when contrasted with the pattern of linkages in the same sectorin Angola) also shows a positive association with time, as does thepattern of linkage in the gold sectors of Ghana and Tanzania.Gabon, too, reflects the deepening of linkages over time. But timeis not in itself a necessary determinant of linkage development.Despite the diamond industry having a fifty year history inBotswana, linkages only really began to develop after 2005.Finally, the growth of linkages does not occur evenly over time.In some countries—Angola, Botswana, Ghana and Nigeria—thereare signs of linkage growth. By contrast, in other countries thedegree of linkages is static. This is the case for Tanzania as well asin Gabon where the tendency for linkages to become shallower hasonly been arrested due to government fiats limiting the export oflogs. In the two most advanced cases of linkages—South Africa andZambia—there is evidence of a shallowing of linkages.

In all countries there are important capability gaps whichhinder the extension of linkages. As we have observed, this is anatural character of production in virtually all sectors andcountries. But the nature of this gap differs across our sample ofcountries. In some cases, such as South Africa and to a lesserextent Nigeria and Ghana, this capability gap is reflected at arelatively high level of knowledge intensity. In other cases, suchas Angola and Tanzania, the gap surfaces at very basic levels ofindustrial capabilities and knowledge capabilities.

On the basis of this observed reality we can draw on our basicmodel (Fig. 1) to observe different trajectories of linkage devel-opment as affected by the intrinsic and contextual factorsdiscussed in Section Outsourcing and linkage development: abasic model above. This may reflect processes which lead to thespeeding up and deepening of linkages beyond which wouldoccur had they just evolved through the operation of marketforces over time. Conversely they may also reflect factors whichmay have impeded or led to a shallowing of this market ledprocess of linkage development (Fig. 2).

Cost of Supply(including price, quality, delivery)

Complexity/Time/Scale

Globalbestpractice

Movingfrontier of global best practice

Withinearlygrasp

Embryonic capabilities

feasiblereach

Fig. 3. Trajectory of local supply.

Industrial policy for linkage development

Drawing on the intrinsic and contextual factors discussedabove, if linkage development is to be enhanced, governmentsand firms need to develop a strategic focus for linkage develop-ment. This is based, as we argued in Figs. 1 and 2, on what webelieve is the existence of substantial opportunities for linkagedevelopment. These opportunities are unrecognised by manygovernments who assume that lead commodity firms seek tooperate in enclaves. They are also often unrecognised by leadcommodity firms, and by their suppliers and processors.

Central to our analysis of the attributes of successful policydesign and implementation is the question of strategy. This is acritical precursor, midwife and parent to an effective programme of

linkage extension. Guiding this process of strategic focus—affectingnot just policies directed to the resource sector itself, but policies(such as those on infrastructure and skill development) which haveindirect impacts on linkage development—is the need for stake-holders to align their visions to take advantage of what we perceiveto be significant scope for win–win linkage development.

A guiding framework for this multi stakeholder approachtowards linkage development is suggested in Fig. 3. This involvesan informed process in which stakeholders cooperate in identify-ing three broad families of linkages in the context of widespreadinnovation globally which results in a trend towards lower cost,more reliable and effective, and more customised suppliers andcustomers. The first are the ‘‘low hanging fruit’’, linkages whichprovide short term returns to lead commodity firms and theirsuppliers and customers. Policies should be designed to graspthese win–win opportunities. Beyond this are linkages whereembryonic capabilities exist and where there is some prospect,that with reasonable time bound support, they become globallycompetitive. The response here should be to develop targetedinterventions which bring these opportunities within reach.Beyond these are ambitious and often high profile linkages whichare beyond feasible reach in the short to medium term. Policyhere should be focused on blocking the political pressures oftenexerted by local stakeholders (such as segments of industry andlocal scientists and engineers) to promote these overly ambitiouslinkages.

If these strategic opportunities are grasped, the potential thenarises for linkages from the commodities sector to provide aconsiderable impetus to industrialisation. Here it is helpful todraw on the framework of linkage development developed somedecades ago by Hirschman. Hirschman, one of the pioneers in postwar development studies, characterised development ‘‘y asessentially the record of how one thing leads to another’’ (emphasisadded) (1981:75). In other words, successful economic growth isinevitably an incremental (but not necessarily slow) unfolding oflinkages between related economic activities. Hirschman pro-posed three major types of linkages from the commodities sector.The first are fiscal linkages, the resource rents which the govern-ment is able to harvest from the commodities sectors in theform of corporate taxes, royalties and taxes on the incomesof employees. These rents can be used to promote industrialdevelopment in sectors unrelated to commodities. The secondare consumption linkages, the demand for the output of othersectors arising from the incomes earned in the commoditiessector. The third are production linkages, both forward (processingcommodities) and backward (producing inputs to be utilised incommodity production).

M. Morris et al. / Resources Policy 37 (2012) 408–416 415

Hirschman (1981) argued that the fiscal linkages generallytended to be limited and provide no guidance as to which sectorsthe commodity rents should be used to develop—the ‘‘ability totax the enclave is hardly a sufficient condition for vigorouseconomic growth. For the fiscal linkage to be an effective devel-opment mechanism, the ability to tax must be combined with theability to invest productively. [But] here lies precisely the weak-ness of fiscal linkages in comparison to the more direct produc-tion and consumption linkagesy [since] noy guidance y isforthcoming when a portion of the income stream earned in anenclave is siphoned off for the purpose of irrigating other areas ofthe economy’’ (Hirschman, 1981, p. 68–69). Hirschman alsobelieved that in the context of poorly developed manufacturingsectors in many low income economies, consumption linkageswould be felt abroad as the needs of domestic consumers wouldbe met through imports. For Hirschman, direct forward andbackward linkages were the most likely to lead to the develop-ment of a more diversified economic structure.

In conclusion, growing obstacles to traditional routes toimport substituting and export oriented industrialisation makeit imperative that all economies, including commodity exportingeconomies, develop effective strategies to promote their indus-trial sectors. Without ruling out the use of resource rents topromote industrial development in sectors unrelated toresources,6 we concur with Hirschman’s view that productionlinkages from the resource sector—predominantly backward, butalso in some cases forward linkages—provide an important andunrealised potential for industrial development in many resourceproducing economies.

The current commodity price supercycle, and the prospects ofits extension into the future provide an added impetus for theextension of these linkages. It is clearly the case that manyresource rents have been squandered in linkage development inthe past, particularly in high profile forward linkages. But, equally,a great deal of resource rents have been squandered throughdevelopments in other sectors, and in a world of enormousfinancial uncertainty, the harvesting of resource rents and theirstorage in sovereign wealth funds may also be problematic.Linkages from the resource sector are no magic bullet for growthand industrial expansion, but they may nevertheless be (to mixmetaphors) an important nutrient for sustainable long termdevelopment.

Acknowledgements

The authors are grateful for considerable assistance providedby Masuma Farooki and Judith Fessehaie and for constructivecomments from Norman Clark and David Wield.

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