9: Frugal Innovation

The relevance of frugal innovation for LED will be higher when local innovation process can
connect with global innovation processes. In such a way that business opportunities arising from
these innovations also create employment at local level.
While this will be very difficult to achieve in some cases, in other cases this might be feasible
especially when the interaction between local and global innovation process is based on mutual
respect for each other’s knowledges.

In other words, the relevance of frugal innovation to LED increases when through innovations do
not only increase local access to affordable product, services and systems, but also create local
employment opportunities.

Frugal Innovations Definition

Simple, smart and affordable products, services, and systems with low user complexity, high
functionality, and high user value for relatively low-income people.

For example:
- Basic water on solar energy
- Mobile banking services for people without a bank account by simply using text
messaging to transfer money from the city to the village
- Mobile medical devices that health workers can carry on their bicycle and that can
perform all the main functions of an expensive x-ray machine in a hospital in the city

While normal innovations are often initially developed for the rich. And then later also
simplifies for middle class and poor people. Frugal innovations are especially targeted
at addressing needs of relatively lower income people.

 Such innovations can be produced by business as a commercial proposition.

 Can be produced by communities to address local constraints and deal with acute scarcity
issues
 Frugality as a matter of degree; not an all or nothing concept.

Different types of Frugal Innovations:

Some of the emerging literature on frugal innovation distinguishes between:
Top-down frugal innovations Bottom-up frugal innovations
Non local Local  This is of key
importance for the
connection with
LED
Business model to enter Base of Grassroot innovation, survival
Pyramid, stripped down versions of strategies, ‘below the radar’,
higher-end products, services and informal, community based. (in
systems. (Top-down frugal contrast, bottom-up frugal
innovations are often developed by innovations are also often called
multinational companies to enter grassroots innovations. And the
 poor consumer markets what in the And are often part of trying to
management literature is called the deal with crisis in survival or
bottom or base of the period. livelihood strategies. Most of
These companies often strip these informal and community-
existing products and services of based innovations remain below
the more luxury elements and the radar are not based on formal
reduce the options of what most research and development
people actually use and, in that efforts but are often crucial in
way, optimize functionality) addressing local constraints)

Both are important for LED.

Top-down frugal innovations can offer easy and cheap access to a variety of goods and services.
Think for example:
- Frugal drinking water facility
- Local electricity through mini grids based on solar panels
- Cheap mobile money services
Bottom-up frugal innovations are important on their own right as ways in which local people
with local constraint.

Connecting Frugal Innovations

From an LED perspective, the additional value added as a frugal innovation perspective is in
trying to achieve connections between the top-down and bottom-up frugal innovations.

Top-down & Bottom-up at Local Level

In the emerging literature, this is called polycentric frugal innovations. This means there is not
one location or center from which innovations are developed and subsequently distributed. But
there are multiple locations from which innovations originate and that these are integrated.
For example: the new ideas do not just come from the R&D lab of a multinational company but
they develop frugal innovations in interactions with local innovations in small town in Africa
who first-hand experience with the constraints they are trying to address. This also helps to
generate more skill intensive employment at local level.

Learning from each other, not only ‘Knowledge Transfer’ from formal to informal

To achieve these connections is not easy, it requires innovators on both sides to be open and
willing to learn from each other and to make adjustments that might lead to an overall better
result, but less visibility for their contributions. In many cases, this first of all means that those
with more formalized knowledge and training need to be prepared to really listen and think along
with informal innovators instead of arrogantly pushing their knowledge as inherently superior.

Should also consider unequal power relations, difficultly of building trust reliability of
institutions.
The potential benefits of connecting bottom-up and top-down frugal innovations can also be
inhibited by unequal power elated between formal and informal innovations which makes it
difficult for them to develop the trust needed to arrive at new and innovative combinations.
Finally, local institutions may not be open and respectful to local informal knowledges and they
actually prioritize outside technologies instead of trying to combine the more promising
competencies at local level with external sources of knowledge. LED practitioners can play an
important role here in terms of ensuring that local institutions are transparent and serve the
interests of all groups are local level.

Frugal Innovations and LED

How can Frugal Innovation contribute to LED?
To conclude, frugal innovations can contribute in three ways to local economic
development.
1. Increasing access to affordable products, services and systems.
First, it increases access of local populations to affordable good value for money
functional products, services and systems. International companies often develop such
frugal innovations and for example, multinationals from India and China are very active
and successful in reaching poorer consumers in developing regions. At the same time,
many more invisible frugal innovations are developed and distributed at the local level by
local firms and local communities. In some cases, these innovations also become a
commercial proposition. In other cases, they remain community efforts to address
community challenges.

2. Develop local employment opportunities

The second contribution lies in local employment generation. This can be in local
producers of frugal innovations for local use and possibly also for distributing their
products and services more widely. Another common feature is local employment
generated in the distribution and maintenance of frugal innovations by outside
companies. For example, local women hired on a commission basis by a local contractor
working for an international company to increase sales by going to more isolated villages
to sell the more frugal products and services.

3. Polycentric innovation practices

Finally, the most promising and also most difficult to achieve trajectory is to more
towards more polycentric innovations in which new combinations of knowledges lea to
new business opportunities with also more skill. Intensive employment generation at
local level frugal innovation is a new potential addition to the LED toolkit. It is too early
to arrive at a final assessment of its relevance to LED but I think one thing is clear, we
are still in the early stages of understanding how major technological breakthroughs in,
think things like the internet of things, 3D printing and the financial services revolution
will impact upon local economic developments. These developments bring both threats
and opportunities to the local economies. To me, it is clear that those localities that are
more proactively trying to develop connections between top-down and bottom-up frugal
innovations stand a better chance to be successful in their LED policies in the years to
come.
14: Clusters

Westlands, The Netherlands

Clusters of flower growers which exports more flowers than any other region. And yet,
Westlands is one of the most unlikely locations to grow flowers as it is densely populated, high
labor cost, and not enough sunshine. Why? The reason is farmer’s cluster.

Objective:
Define
Describe its elements
Policies

Cluster Definition
“a geographic concentration of interconnected businesses, suppliers and associated institutions in
a particular industry. – Porter
Clusters are considered to increase the productivity and innovativeness of firms. The main idea is
that working together create collective efficiencies. This idea is far from new. As long back as
1890, Alfred Marshall discussed the concentration of specialized industries in the particular
locality in his famous book, Principles of Economics. Michael Porter popularized the term a
hundred years later. And governments have treated it as nirvana for local economic development
ever since.

Cluster Benefit
Why would the clusters (concentration of interconnected businesses, suppliers and associated
institutions) increase the productivity of firms?
And the answer’s to be found in the four elements of cluster
1. Interconnected Business and Suppliers (Firms and Suppliers Interconnect)
Westland houses thousands of small flower growers. Overtime, the flower growers
specialize in particular flowers, seeds or seedlings. This diffusion of works is called
Flexible Specialization. And it enables forms to become more efficient by focusing on
just one product. Specialization can be very profitable. Did you know that a kilo of
flower is more expensive than a kilo of gold? But that’s not all flower growers need
suppliers. Flowers are grown on clast (?) house which created a close to perfect
2. Associated Institutions
3. Access to Labor and Markets
4. Rivalry
15: Value Chains Introduction

Value chains are crucial to understand local economic development options as all firms at the
local level who sell their products outside of their locality are involved in value chains.
The terms and conditions under which they can sell their goods are determined by how the value
chain is organized and by whom.

1. What value chains are and how they are governed?

How local firms can upgrade in the value chains?
Conclude with the local economic development outcomes of being linked to value chains

Value chains consist of all the activities from raw materials, input suppliers, finance, to
processing or manufacturing, to wholesale and retail, including, logistics post-sales services and
recycling. A simple value chain in the agricultural sector looks like this:

Looking from the bottom-up, you can see how farmers use a variety of inputs from their
suppliers, need to get finance and R&D ideas, grow the products and then sell their produce to
processors or manufacturers who in turn sell to retailers who sell to consumers. The two large
arrows show the flow of goods and products as I just mentioned. And the right, shows to reverse
flow of consumer preferences and orders that are pushed down the chain. The basic idea of the
value chain is that different companies are involved in the distinct phases of growing production
and retail.

Example: Garment and Textile Industry Value Chains

Here, the different steps in the value chain are depicted horizontally but the idea of the flow is
the same. It starts with fibers like cotton that is grown on farms or an island that is produced in
factories. These fibers are spun into yarn and then woven into basic fabrics and next step is the
coloring and the actual making of the garments to the specifications of the brands and the
retailers. These steps are often undertaken by different companies in different countries. The
most powerful companies in these value chains are no the producers but are the companies who
own the brand names and or take care of the retailing.
Garment and Clothing Industry Countries

Here, you see some of those brand names of companies in the garment and clothing industry.
Such companies usually do not produce the garments sold under their brand names. The fibers,
the yarn and the actual production of the garments with their brand name is produced by
independent farmers and factories across the globe. This is true for products like garments and
shoes. For agricultural products like chocolates, tea and coffee. And also, for more complicated
products like mobile phones. These brands and big retailers like Walmart are so-called lead
firms in buyer driven value chains that they manage or govern. Even though they do not
formally own the firms that produce the inputs intermediaries or end products that they sell in
stores around the world. This is also very relevant for local economic development. Local firms
who sell their products to buyers outside their locality are usually part of regional, national or
global value change.

Value Chain Governance

The relationship between the outside lead buyer and local firms is usually managed or governed
through one out of the following three governance models:

Most common governance models in buyer-driven value chains:

1. Market: prices, standard products
First, market exchange on the basis of supply and demand of standardized components or
products that can be bough off the shelf, this is the economics textbook example of how
markets would function but actually, this is not very frequent in practice.

2. Captive: follow the rules, subservient to buyer

Second and much more common for firms, producing for lead buyers is the captive
governance model in which outside buyers specify in detail what and how local firms
should produce even though these firms are formally independent. The firm controls the
process often literally with sending in quality control inspectors. For example, Nike shoes
all look the same once they are in the retail shop but they are produced in factories all
around the world with strict inter instructions by Nike quality control inspectors.

3. Relational: interdependence, trust

The third governance model is relational. Here, the local firm also possesses key skills
that the lead firm is eager to make use of, for example, design skills or a specific high-
quality type of embroidery on garments based on a local tradition and with appeal in the
global market. In this model, the relationship between the outside buyer and the local
firm is based on interdependence and has more likelihood to develop also trust this stands
in contrast to the market model which is anonymous and the captive model is based on
dependence. This rational model requires more skills and is less common among
suppliers. I will show that the relational model offers the best opportunities for
endogenous local economic development.

Value Chain Upgrading

Need for Upgrading
 In order to explain the LED outcome of being included in value chains, I first
need to introduce the idea of upgrading in the value chain. Global buyers have a wide
choice of suppliers and in a more globalized economy. This has led to increased
competition and a need for improvement of upgrading. By local firms, updating has
become a necessity because all your competitors are also trying to improve. This is
known as running to stand still, meaning that when you do not improve, you will
fall behind and when you upgrade as much as others, you still do not improve your
relative position.

1. Process upgrading: doing things better

In this session, I distinguished three types of upgrading. The first is process
upgrading which is about improving the quality of the processes of production or
growing or distribution. For example, a new machine that can produce faster and
more accurate or a quality management system that reduces rejects and standardizes
the quality.

2. Product upgrading: producing better things

The second is product upgrade which is about producing higher quality products. For
example, through using higher quality inputs and more sophisticated designs

3. Functional Upgrading: engaging in additional and higher value-added activities.

The third is functional upgrading which deals with engaging in higher value-added
activities. In the chain, for example, profits are usually much higher when you can
sell a branded product. As compared to only producing for somebody else’s brand.
So, a local company who also develops its own branding strategy may earn much
more of the value added. This third type of upgrading is most important in terms of
generating more endogenous LED opportunities, but is also the more difficult one to
achieve.

Value Chain & LED Overview

Now, to conclude this session, we can now integrate the governance models with the types of
upgrading and identity different possible LED outcomes. The pluses in the table indicate a
positive relationship. The minuses and negative and the plus minus represents an unclear
outcome. As you can see in the table, the market governance model does not provide us with any
clatity on LED outcomes. Local firms are basically left to their own devices and the relationship
with buyers does not play a clear role in terms of upgrading. This is very different with the
captive governance model. In this model, very fast and important process is usually made in
process upgrading often with the direct support of the outside buyers who have an interest in
upgrading their suppliers in terms of standardizing quality. When local firms produce to the
satisfaction of these buyers, these buyers also often provide support at a late stage with product
upgrading. But the major limitations for endogenous local economic development in the captive
governance model is that outside buyers will obstruct functional upgrading by local firms as this
would encroach upon the core business model of the lead firms in the value check. The more
balanced opportunities come from the relational governance model where buyers have an interest
to support the process product and functional upgrading by local firms. While a relational
governance model is, thus, most attractive in terms of offering more LED opportunities. It is also
the most demanding as it requires local firms to be able to offer some relatively unique
competences and skills that cannot be easily offered or developed by other local firms in other
regions.

This finding reinforces the crucial importance of investing in developing such competencies at
local level after a careful identification of the specific value chain a type of activity in which the
local economy can offer such relatively unique competences. The actual LED strategies that can
developed from these findings will depend also on local competences of entrepreneurs and
workers on the extent to which a localized drive towards learning and upgrading already exists
and it depends on the specificities of the value chains that local firms are involved in or want to
become involved in this will be further discusses in, for example, the video on business
development and in our next video on clusters.

16: Learning Regions

Many economists assume that free-market bring development all by themselves and that
government should preferably not interfere.
Schoolers on learning regions have a different opinion. They believe that learning is a pre-
condition for local economic development. We constantly have to learn new technologies, new
ways of working, new market, new people, etc. We also have to learn how to be more
competitive, inclusive, environmentally friendly.

Objectives:
1. Why learning is important in local economies?
Possibly you want your local economy to catch up in more advanced economies.
Good news:
Schoolers assume that poorer regions can relatively easily catch up with advanced
economies because they can absorb the latest technologies. It allows your region to grow
at a relatively fast pace because absorbing knowledge is less risky, less time consuming
than innovating new technologies by yourself.
Bad news:
This process is proven to be problematic because firms need absorptive capacities.
Firms and developing countries should first of all have to be able to assess which new
technologies are relevant and which are not. Far too often, developmental governments
have assumed that the latest technologies are relevant that they set up high-tech industries
in their countries. These industries often fail, because skilled labor is missing, local
supplies are so weak or because new industries are unable to remain innovative. New
technologies are also non-adoptive to local conditions. When a firm buys a new
technology, it is to adjust the technology to local conditions. Most likely, the way of
working has to change. Old and new technologies have to be combined and calibrated. If
these absorptive capacities are in short supply, then catching down, slows down, catching
up, slows down.

Learning to stay ahead:

a. Learn to be First Movers:
Possibly, you may also want your local economy to stay ahead or to become more
inclusive or environmentally friendly. In those cases, local firms have to become first
movers to develop new technologies, new ways of working.

b. R&D, Risk taking, Innovative systems

Research and development, risk taking attitudes, and innovation systems that
stimulate radical innovation.

c. Transform and learn new skills

It is not easy to change from absorbing knowledge to become a first mover.
Instead of absorbing technologies, firms have to learn how to identify develop and
test new technologies. And this demands different capacities, different risks.
Government and other supporter organizations have to learn different business
development support, different finances needed. In other words, the economy has to
be transformed. For example, South Korea became the first mover in hard drive disk.
The first produced for multinationals and learned how to produced. Now, they can
also innovate hard drive disks, and this transformation is supported by governments who
actively stimulated research.

Double Loop learning

Catching up an economic transformation demands different types of learning.
Learning is a process of acquiring new and modifying existing knowledge, behaviors,
skills, failures and preferences

(2) Types of Learning:

a. Absorbing the existing knowledge, it helps you to catch up. And this entails that
existing firms are identified and learned the latest technologies and skills.

But if you are to transform an economy, one has to move out of your comfort
zone, learn new tricks. This aspect is about learning to learn and may demand new firms,
new support organizations, possibly in related but in new sectors.

The two aspects are referred to as double loop learning. The first loop, enables
learning, and the second, learning to learn. The first enables an economic to remain
productive and the second loop enables economic transformations.
 2. Learning of people, firms and regions
a. Life-long learning. It is important to realize that learning is a life-long process. Too
often, professionals learn at school. After which, the working environment
demotivates any further learning
b. Award problem-solvers, look for new knowledge, Internal communication –
Organizations that enable learning, they award professionals who move beyond
routine, who solve problems, who take risks. As we all know, these are not qualities
that many local governments possess. The bureaucratic organizations are unlikely to
come up with creative solutions. And governments can learn how to become more
resource driven more problem solving. Second, organizations should actively look for
new and relevant knowledge. This are often tasked to R&D departments. Strong
internal communication can then ensure that learning is institutionalized.
c. Flow of Ideas, Strategy Planning, Clustering, Innovation System – And that brings
me to that questions how regions learn. Learning regions provided an environment
which facilitates the flow of knowledge, ideas and learning among individuals and
actors, such as firms and governments. How do we facilitate the flow of knowledge?
ideally, we all share knowledge. in reality, governments and firms do not lead
regularly, do not trust each other enough to share. Trust can be built by conducting
joints activities. Strategic planning and partnerships, they may therefore enable the
flow of information and hence result in learning. Knowledge also flows informally if
firms share working spaces, if they cluster, if innovations systems work properly or a
firms and universities conduct joint research. The case studies in this book, they offer
excellent examples of joint activities that lead to network learning.

3. How local economies can become learning regions

Conclusion: First, learning is of essence if you want your local economy to catch up, to
stay on top or to change direction. Second, learning is a multi-scale of process of individuals,
actors and networks. To develop our local economies, we have to learn at all these 3 scales. If
your regions are ready to become a learning region, what do you think can be improve upon?