The Impact of Business Linkages and Knowledge Spillovers on Manufacturing Growth

The project explores whether business can be encouraged to form horizontal linkages and collaborate on higher quality production through the offer of an opportunity to be part of a vertical linkage in Zambia.

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SMEs are likely to become far more effective if they are able to work together, as collaboration allows them to overcome scale constraints and be able to take up opportunities for value chain integration. Governments around the world seem to be aware of this: a common goal of multi-facility economic zones and clusters is to facilitate horizontal linkages between firms. Yet there is little evidence on how clusters can be valuable, or which policies can best foster horizontal linkages that allow businesses to take advantage of vertical linkages, to improve productivity and to grow. Hence, this project uses a field experiment to explore whether businesses can be encouraged to form horizontal linkages and collaborate on higher quality production through the offer of an opportunity to be part of a vertical linkage in Lusaka, Zambia. In addition, the project intends to explore the extent to which the learning of these firms spills over to surrounding firms.

Firms will be randomized into four groups, each one obtaining different combinations of quality training, linkage opportunity and legal facilitation to form a joint venture with another SME. The comparison between these groups of SMEs will provide standard insights into the effect of quality training on firm productivity, growth, collaboration, the role of formalization of horizontal linkages to encourage a path out of informality, and others key factors.

The challenge of diversifying a growing economy away from agriculture and natural resource extraction plagues many developing countries, as they attempt to diversify their economies toward the manufacturing sector. Diversification policies have often taken the form of fostering vertical business linkages by integrating local suppliers into international value chains. However, such programmes have faced issues due to the inability for small domestic suppliers to produce at i) sufficient scale and ii) high enough quality. Producing at scale can potentially be overcome through small firms creating horizontal business linkages, which governments have attempted to facilitate through the creation of multi-facility economic zones and clusters. As these policies lacked rigorous tests, this project tries to shed light on the mechanisms that lead to their success or failure.