Aligning Rent Seeking with Growth of MSMEs

0

Reuben Umunna

“The barbarous gold barons – they did not find the gold, they did not mine the gold, they did not mill the gold, but by some weird alchemy all the gold belonged to them.”

This quote helps bring sharp focus to the dichotomy between makers and takers in an economy.
Along similar lines, the colloquial expression “monkey dey work, baboon dey chop,” signals discontent from a party who believes he has earned much lower wage relative to another despite contributing more mentally and physically to a transaction.

Debates on who should be working and who should be receiving the benefit for that work are alternative ways of discussing the protection of intellectual property right from rent seekers.

In basic terms, makers are producers and manufacturers that create value, while takers are persons or institutions who take, for personal use, far more than they bring to the economy. Takers are rent seekers who use bribes to influence public officials or public officials who demand rents. A key function of government is to efficiently provide public goods such as roads, law & order and protection of property rights including intellectual property. However, takers corrupt government and gets it to fail in its functions. Through rents, takers are able to obtain payments that far exceed the cost of whatever value they are delivering – in short, takers distort the market.

The private sector thrives on the foundations of the innovative solutions they bring to consumers. Failure to protect these innovative values using intellectual property right curbs the overall growth potential of the private sector. Rent seeking attacks private property right from two flanks.

First flank: illegitimate public rent seeking transfers funds from the private sector to government bureaucrats in form of kickbacks or bribes. Private sector innovators who would need government services such as licenses, permits, and forex are often forced to pay rents to government bureaucrats.

According to a World Bank report, between 2008 and 2014, rent seeking activities increased 27 per cent points to occupy the second position on the list of various obstacles in doing business in Nigeria only coming behind electricity.

Second flank: private rent seekers attack existing wealth such as land, capital, and intellectual property within the private sector. Rent seeking behavior disincentivizes the pain-stricken research and development (R&D) process that creates intellectual property. Addressing rent seeking requires appropriate policy regimes that must be designed to align the mission of MDAs, government bureaucrats, and private sector innovators.

The role of Research & Development (R&D) in creating the knowledge required to drive innovation within the private sector is well understood. Protecting applied research outcomes using intellectual property right is the mainstay of developed economies.
However, bespoke strategies to implement functional and effective regimes where R&D and Intellectual Property Right become tools for national wealth creation and development remains a challenge for emerging economies such as Nigeria.

According to Organisation for Economic Co-operation and Development (OECD), a one per cent increase in the strength of patent protection, a form of intellectual property right protection, correlates to nearly 1 per cent increase in domestic R&D in developing countries and similar increase in trademark and copyright protection correlates to 1.4 per cent and 3.3 per cent increase in domestic R&D respectively.

A key priority area of the national Economic Recovery and Growth Plan (ERGP) for the period of 2017-2020 is to drive industrialization through (Micro Small, Medium and Enterprises) MSMEs. A 2010 joint survey by Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) and National Bureau for Statistics indicate that there are over 17 million MSMEs in Nigeria, which collectively contributed 50 per cent of GDP out of which 9.5 per cent was from manufacturing.

MSMEs – by their sheer number and contribution to national gross domestic product (GDP) – occupy a central position in growing the manufacturing sector in Nigeria. In 2015, MSMEs accounted for only 7.25 per cent of export earnings in Nigeria. Indeed, there is a sizable potential to stimulate and strengthen R&D activities within MSMEs in Nigeria.

The National Office for Technology Acquisition and Promotion (NOTAP) is making strides in promoting the culture of registering intellectual property and increasing linkages between research institutes, universities and the industry. By establishing Intellectual Property and Technology Transfer Offices (IPTTOs) in over 40 universities, polytechnic, and research institutions in Nigeria, NOTAP increased the number of local patents by 400 per cent in 2014 from 100 per year in 2006. However, the linkage that facilitates technology transfer and absorption by MSMEs is weak.

Rent seeking can be rigged to correlate positively with economic expansion. Between 1963 – 93, South Korea’s GDP grew more than 90 times. Over the same period, however, South Korea’s high growth rate was inextricably linked to rent seeking activities.

South Korea is an example of a country where rent seeking is linked to a political strategy that supports growth. Learning and entrepreneurial rents are growth enhancing. While learning rent can help mobilize technology from research institutes and universities to MSMEs or across international borders, entrepreneurial rent can be applied to accelerate local diffusion of innovation. Government can utilize learning rents to subsidize the cost of acquiring or transferring technology. Entrepreneurial rent can help raise revenues and support MSMEs until they achieve economies of scale. It is, however, important to preserve the risk and competition that stimulates innovation.

Most MSMEs in Nigeria lack the financial and human capital to independently conduct the research it needs to continuously improve and create innovative products capable of competing in a global free market.

A United Nations discussion paper examined the characteristics of clusters in Nigeria and found that automobile spare part manufacturers in Nnewi, which are mostly MSMEs, were semi-illiterates. Other artisanal labor intensive MSME clusters such as the leather tannery in Kano, leatherworks and garment in Aba, and metal works in old Panteka market in Kaduna are equally dominated by illiterate owners.

Although some of the MSMEs in these clusters have existed for decades, the absence of applied R&D deprives them of the innovative manufacturing processes they need to sustain growth. Being mostly illiterates, MSMEs owners are unaware of the direct positive impact R&D can have on their revenues, hence they hardly make deliberate effort to invest in R&D – however little.

Recommendations

In line with the policy objectives listed in the Economic Recovery & Growth Plan, SMEDAN must wade in to address failure in innovation by supplying R&D as a public good and creating necessary linkages between national research institutes, universities and MSMEs. Learning and entrepreneurial rents should be used to drive the growth of labor intensive MSMEs involved in manufacturing. For example, using learning and entrepreneurial rents, a well-designed policy will trigger quicker and more effective technology transfers from national research institutes and universities to MSMEs and bring about increased productivity and revenues.

As a government instrument, SMEDAN should initiate policies that would identify and allow specific applied research needs of MSMEs to be carried out by universities and research institutes across Nigeria. Such a policy adopts a bottom-up approach in addressing university-MSME linkages, closing gaps in IPTTO’s current top-down approach.

The policy should be carefully engineered to ensure that it does not only link rent seeking to national growth positively, but also aligns the interest of government bureaucrats with those of MSME innovators, establishing a system of push from the government and a pull from MSMEs. The design of the policy must redistribute risks by meticulously allocating some risks to government bureaucrats from MSMEs. Through such a policy, the interests of government bureaucrats is better brought in tandem with individual missions of MDAs and the private sector they regulate so that rent seeking is curtailed, formalised, and forward-facing.

Here, a recommendation to formalize rents seeking in public service with the intent to drive quick growth of MSMEs engaged in manufacturing is proposed. This is not a new policy strategy. In 2015, 700,000 metric tons of rice was imported to Nigeria. However, through appropriate policies, by 2018, Nigeria moved to become virtually subsistent in rice production. No one was left behind, not even public officers. Section 2 (b) of the 1999 constitution does not preclude public servants from actively engaging in agriculture. Similar approach should be adopted to push for more engagement in manufacturing. The constitution should be amended to allow and define extent to which public officers can engage in manufacturing.

Umunna (Ph.D) is an expert on science, technology and international affairs policy and he writes from the Johns Hopkins University School of Advanced International Studies, Washington DC