Paper short abstract:

The paper shows that hyper-competition intensifies the difficulties that low-income country governments face in using industrial policies to compel local firms to invest in learning, increasing the importance of ex post learning rents linked to foreign partnerships and of diversifying end-markets.

Paper long abstract:

The development of local manufacturing export firms remains a major challenge for Sub-Saharan African countries due to local factors as well as the high requirements and competition in global value chains. This paper argues that we need to look more closely at intra-firm capability building processes and at how and why local firms invest in building capabilities, or not, in order to understand these industrialization challenges. It presents a conceptual approach for assessing local firm capability building in new export sectors by combining the global value chain and production network approaches with the technological capabilities approach and insights from structural development economics. We apply this approach to the Ethiopian apparel export sector, which buyers considered the next big apparel sourcing location, not least due to the government's industrial policy. The paper shows that local apparel exporting firms in Ethiopia struggled to enter apparel global value chains due to their low initial capabilities, high learning costs, and low unit prices. Hyper-competition intensifies the difficulties that low-income country governments face in using industrial policies to compel local firms to invest in learning, increasing the importance of ex post learning rents linked to partnerships with foreign firms or managers and diversifying end-markets.