Value-addition and human capital creation for economic growth: key elements of Local Content Policies

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Local Content Policies (LPCs) are part of a broader category of policies known as Productive Development Policies (PDPs) or Industrial Policies (IPs), which, in the most expansive definition, include all government interventions, measures or programmes that aim to increase shares of employment, services, manufacturing provisions and overall financial value to the local industry value chain (Tordo et al 2013). They also comprise initiatives that target the strengthening of the productive sectors of the national economy; be it in manufacturing or agriculture and are measured by the achieved growth or competitiveness of the targeted sectors. Their final objective is to raise growth and improve the competitiveness of the overall economy while maintaining a rising trend in living standards (Melo and Rodriguez-Clare 2006).

As a subset of this broader category, LCPs are specifically concerned with measures targeting the derivation of value, where value is placed entirely on areas that are defined as ‘localised’ (Acheampong et al 2016). Local content has been recognized within industrial policies as a means to develop domestic firms’ capabilities and their absorptive capacities coupled with the establishment of innovation systems aimed at creating local linkage development incentives and local content policy regulations to help drive the establishment of value-added industrial enclaves through long-term strategic planning within the extractive sector (Lauridsen 2010).

Therefore, industrial upgrading, industrial diversification and industrial deepening are the three important drivers of strategic industrial policy that remains useful and relevant for an emerging economy such as Guyana. Industrial upgrading supports technological advancement through organizational learning within a well-structured industrial configuration, whereas industrial deepening acknowledges local linkages through forward and backward industrial integration (Hansen et al 2016).

Hence, linking investment incentive policies with local content policy regulations at a pivotal position, will expand Guyana’s domestic economic activities, increase local value addition, as well as drive innovation systems which promotes local linkage development. Thus, the link between investment incentives policies with local content policy could drive both industrial deepening and industrial upgrading in Guyana.

Local Content Policy concentration for local linkage development

Local content policy remains the single most important driver in Guyana’s economic transformation from its petroleum resources and it also seeks to address the development imbalance by way of linking investment incentives with local content policies. The enforcement of local content policy regulations should address two critical policy instruments (human capital and domestic firm capability development) to remain effective and beneficial to the domestic economy. The embeddedness of human capital and domestic firm capability development practices within the local content policy regulation linked to investment incentives policies can contribute to the broader economy in the short and long term.

First, the establishment of Human Capital Development (HCD) focus is fundamental to advancing local workforce skills formation within the domestic economy (Ngoasong 2014). Developing the capabilities of the local workforce will significantly contribute to skilled spill overs. Notwithstanding, the effectiveness of advancing the human capital capabilities internally will largely depend on the availability and level of educational and training infrastructure in the country.

Although there has been some improvement in the level and availability of educational and training infrastructure, low quality of teaching and learning, poor quality of technical and science education, poor infrastructure and access remains major challenges in most communities in Guyana. This reality could undermine the effectiveness of developing the human capital of the local workforce. Government intervention and commitment to significant investment in education and training through the provision of infrastructure, increase access and improve quality of teaching and learning is a basic requirement for local content policy (Ovadia 2014).

The second critical policy instrument within an emerging oil and gas economy such as Guyana, is domestic firm capability development which should aim at developing the absorptive capabilities and competencies of domestic firms to increase linkage development (Fessehaie and Morris 2013). For example, domestic firm’s low absorption capacity could be one of the major challenges undermining the advancement of local linkage formation in the extractive sector in emerging economies like Guyana. Moreover, an area to develop and broaden local linkage development is to grow the skills of local producers and enhance their technological capabilities (Morris et al 2012). Thus, for a newly endowed resource rich economy like Guyana, knowledge sharing should be considered an important driver within the domestic firms’ capability development agenda which could be achieved through the establishment of technology transfer mechanisms, cluster initiatives and regional innovation systems. The conditions driving human capital and domestic firm capabilities development within local content policy framework are underpinned by the level of institutional support from the state and other stakeholders towards advancing local linkage development (Hunter 2014).

The success of developing the local workforce capabilities and domestic firm’s absorptive capabilities are underpinned by the effectiveness of government policy. There are five critical success factors that play a crucial role in ensuring the effectiveness of the two specific local content policy instruments.

  • First, an effective local content policy regulation needs to consider local business needs and the needs of government to ensure that the HCD programs reflect the domestic business needs.
  • Second, the proposed HCD practices should provide specific and clear guidelines on which areas international companies can base their HCD practices on to ensure that the HCD practices within the local content policy are fully achieved.
  • Third, the advancement of regional innovation systems via cluster initiatives within domestic firms’ capability development practices can play a critical role in knowledge sharing as part of the strategy to enhance domestic firm’s absorptive capabilities and competencies (Solvell et al 2003). Most importantly, regional innovation systems nurture and support local business development is a strategic tool for industrial and economic development. Industry clusters operate as knowledge boundary-spanning mechanisms, enabling the integration of knowledge from different organisations by facilitating inter-organisational collaborative interaction (Mitchell et al 2010).
  • The proposed knowledge sharing mechanism should guarantee the exchange of new technology with local industries, universities and research institutions and government agencies. To guarantee its success, the knowledge sharing strategy should promote research partnerships between international and domestic firms at both intra-firm and industry levels through regular monitoring and evaluation by an established regulatory authority. The policy should also provide a clear guideline on a well-developed mechanism through which such technology and technical know-how can be transferred to the domestic economy. Establishing a realistic policy strategy for developing local workforce capabilities and domestic firms’ absorptive capabilities remains crucial for linking investment incentives with local content policy regulations.
  • Lastly, linking investment incentives with local content policy regulation must look beyond the expectancy approach which gives international firms “free rider” opportunities (Auty 2012) to undertake certain business activities that are detrimental to domestic firms’ growth.

Moreover, the host country must legally bind international companies with the obligation to help contribute to the development of the domestic economy. Implicitly or explicitly, the degree of institutional support from the state and other important stakeholders in general will provide the impetus for linking investment incentives with local content policy regulation (Fessehaie 2012). This aspect is likely to be a major challenge in Guyana’s local economy because of domestic firms’ low absorptive capabilities. Second, institutional weaknesses (institutional instability), poor physical and social infrastructure, lack of government capacity will also play a significant role within the local content policy environment of Guyana’s economic institutional framework.

Indeed, deepening industrialization through the extractive sector have suggested that proactive government policy, regulations and support from key stakeholders are the underpinning driver of the sustainability of such linkage development. Thus, there is a need to develop deliberate policy actions through the provision of physical and social infrastructure to promote the private sector as the engine of growth through public and private sectors collaborations. To ensure the effective implementation of the strategic-balance framework, two important and specific local content policy instruments mus be considered. These strategies can help deepen the industrial base of Guyana’s domestic economy driven by the extractive sector through:

  • The up-stream linkage such as consumables, capital goods and services;
  • The down-stream linkage such as manufacturing; and
  • The mid/side-stream linkage such as infrastructural development.

The two policy dimensions that should be embedded into the local content policy framework is as follows:

  1. HCD practices that needs to be embedded in local content policy framework:
  • selection and recruitment of local employees;
  • develop the capabilities of the local workforce;
  • supporting and partnering with local institutions to develop the capabilities of the local workforce;
  • provide apprentice and internship programs for the local workforce; and
  • develop and implement knowledge sharing and transfer activities.
  1. Domestic firms’ capability development practices that needs to be embedded in local content policy framework:
  • developing the absorptive capacity of domestic firms;
  • domestic enterprise development;
  • implement technology transfer programs;
  • provide technical support for local suppliers;
  • the use of local suppliers as contractors and sub-contractors; and
  • providing funding support for local suppliers.

These instruments are of significance to the broader economy and can contribute to the expansion of the domestic economic activities, namely, HCD and domestic firms’ capability development. The ability of the state to integrate HCD and domestic firm capability development practices into the local content policy framework which are in turn linked to investment incentive policies potentially provide a fertile ground for the advancement of the domestic economy (Hansen 2014).

It is important to draw attention to the fact that the conditions driving the two policy instruments – human capital and domestic firm capabilities development – within local content policy framework are underpinned by the level of institutional support from the state and other stakeholders towards advancing local linkage development.

Five critical success factors that play a crucial role in ensuring the effectiveness of the two specific local content policy instruments:

  1. local content policy needs to consider the needs of the domestic economy;
  2. provide specific and clear policy guidelines;
  3. advance regional innovation systems and knowledge sharing through cluster initiatives;
  4. provide realistic or realisable policy targets; and
  5. local content policy regulation must look beyond the expectancy approach.

Accordingly, the embeddedness of HCD and domestic firm capability development practices into the local content policy framework is pivotal to economic diversification in the natural resources endowed economy of Guyana.