Understanding Knowledge Dynamics and Scaling-up in Micro Enterprises in Otigba Market Cluster

By Oluseye Jegede

In part 1, I discussed our preliminary findings from 73 field interviews conducted by my team and I in the Otigba Market Cluster. Since then we have conducted an additional 123 interviews, making a total of 200 interviews in all. In this second post, I will discuss more on the kind of innovations in the cluster, how MSMEs in the cluster scale-up, and the impact of knowledge sharing on MSMEs’ innovativeness.

Types of Innovation Within the Cluster

We have found that businesses in the cluster are innovating in a number of ways. Nearly 70% are involved in process innovation (i.e. how they do their work), with marketing innovation (i.e. how they attract clients) coming in at second with about 30%, and product innovation (i.e. what they are creating) being low. Organisational innovation (i.e. how they manage their work), however, was the most dynamic. This took the form of both adaptive innovation – that is making slight modifications creating something new – as well as adoptive – something new being adopted by the business but not new to the market.  Of those interviewed, 46.2% of businesses reported adaptive organisational innovation and 53.8% reported they had engaged in adoptive organisational innovation. In addition, marketing innovation – which includes such things as advertisements, promotions, and ventures into new local and international markets – was more adaptive than adoptive, likely due to the fact that these businesses are operating within the cluster. Product and process innovations were found to be mainly adoptive, perhaps due to the fact that most of their items are imported into the country as nearly finished products.

Scaling-Up Within the Cluster

The majority of businesses surveyed reported that they scaled-up within a few years of the establishment of their businesses. The majority of businesses reported that they had significantly increased their number of employees, gross earnings, and gross sales. In the first three years after starting their businesses, between 15% and 25% of firms experienced some form of scaling-up. After three years, however, less than 10% of firms reported scaling-up. When asked why they scaled-up, 78% stated that this was primarily speculative, in the hopes of having more sales, while the remaining 22% of businesses reported that they scaled-up either as a precautionary motive (to avoid going out of business due to fierce competition) or as a transactional motive (to be a market leader).

Of those interviewed, most businesses had increased their capital base or were able to access larger funds once in operation. The number one source of these funds were from commercial banks, followed by co-operative societies. The latter is not surprising as co-operative societies have been a common feature of traditional African societies. In addition, it is noteworthy that the interest rates charged by commercial banks in Nigeria are frequently 20% or more; requiring an entrepreneur to be very serious about taking on such loans, considering the risks involved. Meanwhile, of those surveyed, approximately only 12% of businesses reported receiving funds from angel investors or micro-credit organisations.

With regard to employees, the majority of businesses said they had increased their work force to improve the running of their businesses. Within 2 years of establishment, over 45% increased their number of employees by between 1 and 5, 10% had an increase of 6 to 10 employees, and 3.5% had an increase of 11-14 employees. These small average increases in the number of employees is understandable since most businesses are owned by one person, who may not be able to feasibly manage more people. Equally, most of the businesses reported that they do not sub-contract and so may not have enough work to hire a large number of employees. There were notable exceptions to this, however. Interestingly, a small number of businesses had started outsourcing work to other firms and are beginning to inspire others to do the same. This is a good sign, as it constitutes a level of scaling-up within the cluster as a whole and likely increasing the number of jobs available overall.

Finally, most businesses recorded that they had an increase in their annual gross earnings within 2 to 4 years of operation – a positive sign of economic growth in the informal sector. The majority of businesses had an increase in annual gross earnings of nearly 15%while a few had an increase between 20% and 25%. Similarly, most of the businesses recorded the same level of increase in their annual sales volumes. This shows that the majority of businesses are scaling-up in terms of their activities as well.

Implications for Polices and Theories

Otigba Market is an ICT cluster in Lagos’ informal sector that is innovating and experiencing notable growth. It is contributing significantly to the economy of Lagos, Nigeria, and West Africa, but is under the radar of most measurements of innovation and economic growth; national innovation survey worldwide still exclude the informal sector. We hope these preliminary findings encourage scholars and policymakers to broaden their research and to better include the informal sector. This research challenges the efficacy of existing innovation measures such as the Oslo, Bogota, and Frascati manuals, to effectively and efficiently measure innovation in developing countries and Africa in particular.

Second, this study is advancing our knowledge of the specific role knowledge dynamics (i.e. sharing versus proprietary) play in enterprise innovativeness and scaling-up. Our preliminary findings suggest that knowledge need not be protected in clusters, or in the informal sector more generally, but can instead be shared widely so that many other businesses can adopt / adapt it in their production activities. This is not simply copying and stealing business, as the originator should get a reward for being the first (i.e. first mover advantage) perhaps through government incentives or through their relevant professional / trade / industry associations and unions. This sharing of innovations will spur further innovation and add further momentum to the rapid development of the sector. In turn, this will also aid in the development of other sectors though knowledge spill overs, creating healthy competition among businesses both within the cluster and outside of it.

Third, we are finding that most of the knowledge-based businesses in the Otigba Computer Village are informal enterprises adapting to a rapidly evolving ICT industry without intellectual property (IP) protection playing any important role. On the contrary, knowledge sharing and collaborative problem solving approaches represent the currency of trade within the cluster. How much an enterprise knows, how fast they can learn something new, and how much knowledge it is willing to volunteer, in fact determines the vibrancy of the business rather than how much knowledge it protects. Moreover, most of the stakeholders in the cluster do not attribute any value to IP rights. Therefore, what is needed and wanted is support for facilitating increased knowledge transfers among the businesses in the cluster as well as to other informal enterprises nationwide, and perhaps even wider.

Our study as well as those of many of our colleagues are finding that the practice of open collaborative innovation among knowledge-based enterprises and networks are being highly productive in scaling up businesses, clusters, and the local economy. Thus, it is strongly recommended that governments, unions, professional bodies, trade associations, NGOs, and self-help organizations quickly learn more about how the informal sector is actually working and begin to encourage it. Supporting open innovation will help to ensure that the economic and social benefits of knowledge reach all enterprises and result in businesses, as well as clusters and sectors, scaling-up for economic improvement and development.

2 thoughts on “Understanding Knowledge Dynamics and Scaling-up in Micro Enterprises in Otigba Market Cluster”

  1. These preliminary reports are quite catchy. The insights are encouraging toward promoting sustainable policies. I hope future works on Innovation would shift and report more from other productive/service sectors within the Southwest and other zones in Nigeria. Well done!

    1. I completely agree with you. I really hope that this research can be duplicated in other sectors…indeed, we need to develop metrics for innovation measurement for Africa.

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