Linking large and small firms
Its theme for this year - Developing Strategic Partnership and Alliances between Large Organisations and SMEs has found an ally in Jane Nelson's Building Linkages for Competitive Entrepreneurship which we are currently running in The Entrepreneur Today.
'Start Small, Think Big' is a popular saying that goes with SMEs. The Small and Medium Enterprises Development Agencies of Nigeria (SMEDAN) is very much at home with this. The agency is currently running an advert that carries this slogan as copy. A good way to think big is to relate with the big. Most of the big companies we see today were small companies in the past. They all went through a growth stage and became big, thereafter. NASME has therefore made a good choice of theme for its coming conference.
Jane Nelson has a fine tooth comb analysis of linkages between large and small firms. According to her, critical to the process of upgrading, innovating and remaining competitive are the number, type, intensity and "spillover effects" of linkages between small enterprises and other firms- both firms of their own size for example through horizontal integration at the level of industry clusters, or vertical integration within value chains. UNIDO, she argues, says that integration into global value chains driven and governed by large national or global firms, which makeup a significant part of world trade (currently estimated at some 75 per cent), represents one of the most effective ways of promoting the upgrading of developing country small enterprises since such integration can provide them with access to markets, upgraded technology, improved management practices, and other benefits.
Different types of business linkages
There is much variety in the possible types of linkages between large and small firms. UNCTAD's 2001 World Investment Report and the UK's Department for International Development (DFID) use the common categorization of forward linkages, backward linkages, and horizontal linkages outlined as follows:
• Vertical backward linkages: These exist when foreign affiliates or domestic companies acquire goods and services from small enterprises, for example, though procurement, sub-contracting or outsourcing arrangements.
• Vertical forward linkages: These occur when foreign affiliates or domestic companies sell goods and services to small enterprises or distribute goods and services through small enterprises, for example under franchise or retailing arrangements.
• Horizontal linkages: these involves interaction or cooperation between small enterprises, often engaged in competing activities e.g. sharing production of large orders, bulk purchasing, or group leasing of equipment. Such linkages often provide the impetus for the development of industrial clusters. Linkages broadly defined, can also involve non-business entities like universities, training centres, research and technology institutes, NGOs, export promotion agencies, quality organizations, trade and industry associations, and other official and private institutions. The vertical backward linkages for instance are applicable to the subsisting arrangement under the US-sponsored African Growth and Opportunity Act (AGOA).
These linkages are applicable to our economy here and actually exist. Nigerian Export Promotion Council (NEPC) recently set up a garment manufacturing centre where young Nigerians are trained how to make garments and export to the United States under the AGOA arrangement. Over a hundred Nigerians have been trained at this NEPC centre to date. They are trained, encouraged to set up their own businesses and linked with fund locally, and order from the US.
Lesotho is ahead of Nigeria regarding this AGOA business. It has a well developed apparel manufacturing industry. Its manufacturers are the single largest users of the apparel provisions of the African Growth &Opportunity Act (AGOA). In 2003, they exported N50.0 billion - US $ 393 million (104 million square metres equivalents) to the United States; and in 2004, in spite of persistent US dollar weakness, they exported an astronomical N57.9 billion - US $ 456 million (112 million square metres equivalents).
Today Lesotho produces about 26 million pairs of denim jeans a year. The jeans are produced by eight factories which collectively employ almost 15,000 workers. Which produces its own yarn and more than 7,000 tons of denim fabric annually? Almost 98 per cent of all Lesotho-made jeans are sold in the USA; smaller volumes are sold into the EU, Canadian and SACU (Southern African Customs Union) market places.
It is estimated that Lesotho's garment industry also produces approximately 70 million knitted garments a year.
At its peak, in July 2004, it was estimated that the industry employed about 54,000 workers - at least 51,000 on a full-time basis and approximately 3,000 on a part-time/casual basis.
NEPC must have seen small Lesotho's intimidating garment manufacturing portfolio as a challenge.
The other linkages cited above, are also applicable to our economy. NASME is therefore on familiar terrain.
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