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Industrial Localization: A Tool for Competitiveness

Industrial Localization: A Tool for Competitiveness

João Gomes – Partner @ JASON Mozambique

This article is related to a recent challenge I was given to find the “best industrial location” (MLI) in Mozambique.

In the sequence, I ask the readers to analyse with me the role of geography as a tool to build and enhance business competitiveness.

We will not take care here to analyse the following extreme situations of location, as the solutions are obvious:

  • The case of the extractive industry, for which total proximity to the source of raw materials is a sine qua non condition for success in the “MLI” equation of the respective units.
  • The case of the so-called quaternary industry, for which total proximity to the market is a sine qua non condition for success in the “MLI” equation of the respective plants.
  • Nor will we see the case of the “footloose industry” (e.g. diamonds, computer chips and mobile manufacturing) whose units can be placed anywhere, and are therefore neutral to the effects of the location of production factors such as land, labour and capital.

Putting aside the three extreme cases of location and focusing on manufacturing (e.g. cement, textiles, chicken slaughtering and processing, etc.), let us look successively at:

1) What competitive advantages do manufacturing companies intend to obtain by setting up in “MLI” areas?

Objectively, the investor’s decision to place his unit in the “MLI” is mainly based on the following reasons:

a) To obtain a significant reduction in investment costs (Capex5) and operating costs (Opex6).

b) To maximise profit.

c) The previous reasons and, in addition, to grow the business (by obtaining scale advantages associated with interdependence or agglomeration economies), for example, by locating the unit near another industrial unit of which it is a supplier (e.g. car component supply industry).

2) What are the factors that most tend to influence the “MLI”?

Each sector has specificities, but we list the seven factors that are mandatory to evaluate and whose availability – in quality, quantity, proximity and cost – should be carefully analysed by the project team in order to assure the “MLI”.

According to our experience, the order in which the factors are presented is equivalent to the degree of difficulty in obtaining them in Mozambique.

a) Land: Valid titles (DUAT) covering the entire useful life of the industrial unit, flat land, with adequate morphological characteristics and with guaranteed accessibility.

b) Energy: although the National “Energy for All” Programme is advancing, with the objective set for 2030, this is one of the major Achilles’ heels in Mozambique. In the search for the security of energy supply, it will be necessary to ensure that no additional investments are necessary, either in the transmission line or in the transformer station.

c) Labour force: proximity and easy access to human capital that guarantees above-average productivity levels, with a willingness and ability to learn, continue to be among the most powerful factors for industrial competitiveness.

d) Raw materials: in the search for security of supply of raw materials, these must be available in quality and quantity, at competitive prices and with a secure and timely supply. The proximity of the raw material remains one of the most powerful factors of industrial competitiveness.

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e) Market: a close customer base (physical and emotional distance) – voluminous, with needs and purchasing power for our product – continues to be one of the most powerful industrial competitiveness factors.

f) Transport (in and out): the high degree of portability of raw materials (input) and intermediate or final products (output), in terms of volume, perishability, danger and fragility, together with the reduction in distance and the cost of freight, continues to be one of the most powerful factors for industrial competitiveness.

g) Government policy: the availability of financial incentives, tax breaks, technical assistance and an open, friendly attitude towards private investors on the part of the State, so as to make the location of investment in a given region more attractive, continues to be one of the most powerful factors in industrial competitiveness. Purposely, and given the negative experience, we do not talk about the so-called “industrial districts”, which, in the Mozambican case, means setting up in a free trade and export zone (e.g. a Special Economic Zone (SEZ) or an Industrial Free Trade Zone (IFTZ).

Conclusion

The necessary ‘import substitution’ effort provides a rare opportunity for the Mozambican business community to consider the path of industrialisation (especially manufacturing) as a viable option.

In this context, we assessed the role that the “Best Industrial Location” can play as a tool for building and strengthening competitive advantages in the manufacturing industry. And we highlighted seven factors that condition the distribution of the “MLI” between i) proximity to the raw material or ii) proximity to the market. The capital factor, given its current extreme mobility, is no longer part of the compulsory inventory of “MLI”, but without denying its relative importance.

We highlight, i) on the positive side, the human capital factor, as it has a decisive influence on productivity, which is considered by the New Economy Geography school as the mother of all “MLI” factors, and ii) on the negative side, in Mozambique, the lack of geographic attractiveness of the “industrial districts” (e.g. SEZs and IFZs).

Not to consider industrial location as a factor of industrial competitiveness is to create the conditions for us to have a manufacturing industry that is ‘prisoner of geography’.

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