Adoption of Technology

FIGURE 7.5 Framework for Policy and Instruments to Support the Firm-Level Adoption of Technology

Firm-level adoption of technology

General business functions (GBFs) (applied to all firms) Sector-specific business functions (SBFs) (applied to firms in a specific sector)

GBF 1 GBF 2 GBF 3 SBF 1 SBF 2 SBF 3

Technologies B1 Technologies B2 Technologies B3 Technologies C1 Technologies C2 Technologies C3

Policy instruments:

Business advisory services (BAS) Technology centers (TCs)

Technology extension services (TES)

Stages:

Ensuring enablers

Adequate diagnostics Source: Original figure for this volume.

Good targeting Appropriate human/financial resources Good evaluation mechanisms

1. Supporting Basic Technology Upgrading: Business Advisory Services

Business advisory services (BAS) consist of access to or the direct provision of specialist advice in areas such as accounting and financial services, human resources management, legal services, supply chain management, marketing and advertising, or pricing strategies. The delivery model tends to be more centered on demand. It is often structured around physical centers that act as infrastructure to serve SMEs and entrepreneurs, which can find either a suite of available services or referrals to those services. These services are directly linked to the digitalization of GBFs, and the specialist or consultants can act as mentors to SMEs during the digitalization project. These BAS models target smaller firms, although their more demand-driven approach is probably better suited to medium-size firms that may have more specific needs.

BAS are a common type of instrument in many countries but are implemented using different business models and degrees of proactivity in getting firms to engage. BAS were a key policy instrument of some of the “Asian miracles” such as Japan and Singapore (Cirera and Maloney 2017). In addition, some impact evaluations suggest very high returns for this type of intervention in developing countries. In low-income countries, agencies may struggle to find high-quality consultants to implement these services effectively, and willingness to pay for these services is usually low, which makes it difficult to reach out to large numbers of beneficiaries.

The primary target group of advisory services is usually SMEs. Owners and/or managers of SMEs often have a relatively narrow set of skills and competencies and limited networks, and therefore may not be knowledgeable about the skills needed to

implement in their business practices. Another important target group is advisory service providers. This group may comprise public, private, and nonprofit organizations involved in the provision of advisory, digital, and extension services, including regional business support centers, chambers of commerce, and small business associations and societies, in addition to private consultancy firms. Various organizations focus on specific types of services, firms, and local areas.

The main strengths of BAS need to be counterbalanced with the potential drawbacks and risks. This instrument has several positive features. First, it can provide an integrated suite of services to SMEs through a one-stop-shop approach, which can substantially reduce advisory costs. Second, it can provide diagnostics that enable programs to be tailored to SMEs. Third, it can support the building blocks of technological capabilities for SMEs. However, the design and implementation need to account for several risks. First, there is risk of overcrowding the market and lack of coordination between service providers, including government and nongovernmental organizations.7 Second, there might be a poor match between supply and demand for services and weak demand from those that could benefit most from the instrument.

Despite the diversity of BAS programs, there are a few key elements for good policy design that are likely to make them, and the firms they help, more effective. A common model is to have an external expert make an assessment in an initial diagnostic stage. Then, an action or improvement plan is developed, and further advice can be provided to help implement this plan. The advantage of this type of sequenced approach is that SMEs may misdiagnose their key problem, and an up-front assessment can improve the prioritization of subsequent activities. Using a rapid standard diagnostic to quickly benchmark the firm with respect to other firms with similar characteristics (such as the level of technology used by other firms and how this is associated with performance) can demonstrate the value of the information and build a relationship of trust between consultants and the firm.8

A key design issue is ensuring the quality and relevance of the business advice. As discussed, one of the main market/system failures in this area is strong information asymmetry that can result in adverse selection, where SMEs cannot determine the value and quality of the consultancy services provider. To address this issue, one option is to develop a vetted list of service providers that are known to provide quality services, and help SMEs negotiate the scope of any work from consultants if they are unfamiliar with the process. Given the severe information asymmetry that exists and lack of willingness to pay, constant outreach and engagement by the program is critical.

Digital Upgrading Programs. One type of BAS instrument that has gained popularity in recent years focuses on supporting the adoption of digital technologies. These programs follow the same general structure as BAS. They address information gaps and provide incentives and finance in different combinations. A difference is that they tend to concentrate on general business functions and tasks, with a large bias toward marketing and sales. The digitization of more specific production processes, as well as the automation and use

of Industry 4.0 technologies, tends to be the role of instruments such as TES and TCs, given the need for much more niche technologies and more specialized advice.

A review of 22 digital upgrading programs mainly in member-countries of the Organisation for Economic Co-operation and Development shows that at least 40 percent use BAS as the main instrument (Balbontin, Cusolito, and Cirera 2021).9 The use of financial incentives is very widespread, with 36 percent using vouchers and 27 percent using grants. At least 41 percent use outsourced expertise, even if combined with in-house expertise. Interestingly, most programs support business functions linked to transactions in marketing and sales as well as the processing of information for administration. Two-thirds of the programs emphasize the need for complementary investments.

Some of the support programs reviewed also aim to increase firms’ participation on digital platforms. Support is concentrated in specific elements needed to sell online, such as customer orientation, maintaining a good reputation, pricing, and quality control. As discussed, in most cases policy makers need to first assess why the platform itself is not offering support to small firms to participate and what the appropriate role of public policy is—which often should focus on ensuring compliance, regulating noncompetitive practices, and addressing regulatory bottlenecks.

2. Supporting Technology Upgrading in Sector-Specific Technologies: Technology Extension Services

Technology extension services (TES) provide direct on-site assistance to SMEs through extension staff, field offices, or dispersed technology centers to foster technological and knowledge-based modernization. A key differentiation between TES and BAS relates to the focus of services. TES tend to be more sophisticated, sector specific, and directly focused on supporting production technology and innovation capability and activity. While this type of instrument is a long-established model in agriculture (see box 7.3) and in manufacturing, it is less common in services sectors, although manufacturing extension services have often been utilized in sectors such as health care (for example, in hospitals) where process efficiency is important.10 TES can also offer skills development training, addressing both the demand for technology in the firm and the needed supply of adequate labor skills.

Some extension centers offer both BAS and TES indistinguishably, as well as skills development services and training. Some public research institutions also offer TES to industry. They are a key instrument to implement Industry 4.0 strategies such as smart manufacturing because they directly address the lack of technological capabilities.

TES and BAS usually address similar types of market and system failures. The potential beneficiaries targeted in TES tend to be larger, given that TES involves more sophisticated advice. TES also focuses on a third target group: knowledge providers, such as research organizations, universities, and public laboratories.