Wednesday, 30 September 2015

Does radical innovation require extra reforms of business practices in Rwanda?

Rwandan companies often produce innovations that are new to the company (but which are already present in the market), and less often but still frequently produce innovations that are also new to the market.  Business practices can adjust at the same time (for example, to make production processes more compatible), and the changes may differ between two types of innovation.

The table below shows the rates of business practice reform in Rwandan businesses that introduced innovations new to the company over years 2009-2011.  The rate of practice reform is high, averaging over 80 percent.

The next table shows the rate of practice reform in companies introducing innovations new to the market.  The rate is even higher than in companies with less radical innovations, approaching 90 percent.  The practice reform requirements seem to be more extensive with more radical innovations.

Monday, 28 September 2015

What reforms of business practices accompany innovations in Rwandan companies?

New product innovations can also require reforms of business practices in order for them to work well.  It may give larger companies advantages over small companies, because the larger companies may have the resources to implement the reforms in a way consistent with recommendations for best managerial practice - for example, big companies can hire expensively trained executives.  A similar argument applies for companies in developed countries having an advantage over those in developing countries.

In Rwanda, business practice reform usually accompanies innovations in products and services.  The table shows that in more than three quarters of cases of companies undertaking innovation in the last three years, there is simultaneous introduction of new manufacturing methods, logistical processes, organisational structures, and marketing methods.


However, these statistics don't tell the whole story.  It may be that companies are introducing business practice reforms independently of whether they are innovating in products and services.  The next table shows that companies often introduce business practice reforms even if they are not innovating, but the rate of reform is lower.

The biggest gap in the rates for innovating and non-innovating companies are for manufacturing methods, followed by new logistical processes.  In other words, Rwandan companies are more likely to change their manufacturing methods and logistical processes if they are innovating, but there is less of a change in their organisation and marketing.  I don't know whether new organisation and marketing methods are not needed for the innovations, or whether the skills to implement the new methods are not there.

Wednesday, 23 September 2015

Supermarket fire in Burundi, insurance, and opportunities for suppliers of fire prevention equipment

On Monday, fire destroyed a supermarket in Bujumbura.  While not on the same scale as the fire last month in Gitega or the catastrophic fire at Burundi's central market a couple of years ago, it does point to a tendency for fires to destroy centres of trade in Burundi.  The fire service does not seem to be able to respond, so surely there are opportunities for suppliers of fire prevention equipment.

My rough calculations of the available profits would be something like this:

Suppose there is a market valued at US$1 million, and it has a 10% chance of being destroyed by fire in any one year.  An insurer sells an annual policy, and would charge for the expected cost of damage (equal to US$1m*10%=US$0.1m) plus a risk cost.  The risk is pretty big and uncertain (10% chance of $1m), so the insurer has to provide a lot of capital to protect against the chance of loss.  They have to put up the full $1m for a year, and would want to earn a good return on it - say 30%.  So the risk cost will be US$1m*30%=US$0.3m.  The total premium would be $US0.1m+$US0.3m=$US0.4m.

Suppose instead that the risk of destruction was much smaller and the amount of damage much more certain (it is expected to be 3%, and never more than 20% of the market's value).  The expected cost would be lower (US$1m*3%=$0.03m).  The insurer would have to put up US$1m*20%=$0.2m to cover the risk, and would charge US$0.2m*30%=US$0.06m.  The cost of insurance would be US$0.03m+US$0.06m=US$0.09m.

The gap between the two insurance prices is $US0.4m-US$0.09m=US$0.31m.  That's a third of a million dollars for sharing between the market owners and the suppliers of the fire prevention equipment.  Although insurance may not be widely used, the risk borne by traders is self-insurance with an equivalent value, so they would be likely to be willing to pay well for prevention equipment.

Monday, 21 September 2015

Interruptions in water supply hinder chemical innovation in the DRC

Chemical production uses water; it would be impossible for a chemical industry to develop in its absence.  However, in the DRC many chemical companies face intermittent water supply.  Of DRC chemical manufacturers who use water in production (almost all of them) and surveyed in 2013, four out of ten had experienced insufficient water supply for production. The average frequency of shortages was 4.6 times each month.


How severe is the problem for output from the industry?  If a company had no water shortages, then two thirds of the time they had introduced a new product in the previous three years.  If a company had experienced water shortages, then they introduced a new product less than a third of the time. 

It may be that innovative companies try harder to get reliable water supply.  But there is also a strong argument that if water supply is not reliable, the experimentation process required for innovation will be severely hindered.  Where experimentation does occur, companies with reliable supply are more likely to get to market first with the new product.

Friday, 18 September 2015

Capacity utilisation shows little relation to growth in Burundian companies

Here's a graph showing how much of their total capacity was utilised by Burundi's companies in the year 2013-2014.  Capacity utilization is the company's output as a percentage of the maximum possible output with their available staff, machinery, and factories.


A quarter of companies were working at full capacity.  However, most weren't, and the average utilisation is 70 percent.

So what makes some Burundian companies use more of their capacity?  It could be sales growth - if a company is doing well, then the owners and managers could push the company hard to benefit from the strong performance.  But the data says otherwise.  The next graph shows the annual growth rates plotted against capacity utilisation for a selection of Burundian companies, with a best fit line included.


There is very little relation between growth and utilisation.  It's a similar story for the relation between growth and hours worked per week.

Tuesday, 15 September 2015

What type of companies do banks fund in Burundi?

I wrote in the last blog post about how innovative companies get a larger share of their funding from banks, compared with non-innovative companies.  I tested for other features of Burundian companies that are associated with higher bank funding, using a correlation analysis (which is quick and subject to uncertainty).  The company characteristics that are loosely associated with bank funding are:
  • Size
  • Male owners
  • (Direct) exporting
  • Long inventories
  • Suffering theft and other crime
  • Paying for goods after delivery
  • Purchasing land and buildings
  • Spending lots of time dealing with government regulations
  • Experienced employees

These are features that either suggest the company has assets and is creditworthy, is reputable, or is spending on things.  So it is reasonable to think that they would be connected with bank borrowing.  For the importance of male owners, there are studies elsewhere in the world that suggest that men can access credit networks more easily than women, so the same may be true in Burundi.

Saturday, 12 September 2015

Are banks financing Burundi's innovative companies?

Banks have various important roles in an economy, and one of them is lending to firms with good prospects.  A way of measuring whether a firm has good prospects is whether it is innovative.  Are banks in Burundi fulfilling their role of financing innovative companies?


The graph shows the amount of working capital in Burundian companies financed by banks, for companies that introduced a new or significantly improved product over the period 2011-2014 (right side) and didn't (left side).  Innovative companies raised more of their funding from banks.  In both cases, bank finance accounted for the majority of companies' external funding requirements.

It might be that companies are not innovative because they couldn't get bank finance, rather than banks selecting innovative companies to fund.  However, the innovation is in the recent past, and financing is current, so it looks like banks are providing funds to more innovative companies.

Wednesday, 9 September 2015

Legal constraints on women's economic involvement in the DRC

My blog last week mentioned how business in the DRC is having some difficulties with hiring married women, because permission from the husband is required first.  I didn't know at the time whether women's rights to work are legally restricted there.

It transpires that their work rights are indeed restricted.  The World Bank report "Women, business and the Law" on page 108 describes the law in the DRC as it relates to married women operating in business.  The detailed questions are on page 47.  Married women have to get permission to get a job, sign a contract, register a business, open a bank account, and choose where they live.

These are severe constraints on married women engaging in the economy, and there is clear evidence from surveys that they damage the DRC's competitiveness.

Sunday, 6 September 2015

Is it profitable for businesses to avoid DRC bureaucracy?

Politics in the DRC are challenging at the moment, as the current president may be moving to a controversial bid for a third term in office (with similar situations in Burundi and Rwanda too).  Businesses would be prudent to avoid strong alignment with either side in the debate.  But is it a good idea for businesses to avoid DRC bureaucracy as much as possible?


Here's a table showing the engagement of the best performing companies (growth champions, with annual growth above 20 percent in 2012-2013), compared with the engagement of other companies.  The first row shows the average number of tax inspections or meetings in the previous year. Growth champions had slightly fewer than other companies.  The second row shows the percentage of companies who applied for government contracts over the same period.  Growth champions applied less often, but again there's not a big gap.  The third row shows the percentage of annual sales paid in informal payments, which can been seen as a means of getting bureaucracy out of the way.  Growth champions pay a bit more.

Overall, growth champions seem to be a bit less engaged with DRC bureaucracy, but the differences are small.

Thursday, 3 September 2015

Computer assembly in Rwanda

The "East African" newspaper is reporting that a Rwandan factory is to start assembling laptop parts, and supplying the computers to local schools.  The article says that there is a shortage of laptops, citing problems with the quality of currently available models.  I suppose that computers of sufficient quality are too expensive in the market, and that the manufacturer is producing them more cheaply than available computers of an adequate standard.

It is exciting to read of a Rwandan factory able to compete on the international market, even if only in a niche market linked to the "One Laptop Per Child" program.  The foreign owners of the factory say that they intend further expansion in the region, exploiting economies of scale.  A welcome longer term outcome would be international sales in mass-market computers.