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Reaching sustainable regional development in China

By Marcos Fava Neves (chinadaily.com.cn)
Updated: 2009-10-19 17:31

In a last article on China Daily was discussed the importance of including small farmers and small companies in modern integrated food chains, in order to promote development and income distribution. In this article four dimensions that are important to reach this objective of inclusion that could be important to China's regional development are discussed, base on experiences in Brazil.

The first dimension is the project management dimension. All projects must have deep criteria in terms of viability and attractiveness. A rigorous analysis has to do first with the technical feasibility about the activity which one intends to attract to a specific region. For instance, food processing requires different models of estimating agricultural and industrial investments and costs. It is also extremely important to analyze the market condition of the product to be produced. Insisting into produce and industrialize products with many competitors and no clear regional competitive advantage is clearly a mistake. It is important to understand the demand behavior, quantitatively and qualitatively. All investments today must have a very strong world class project analysis, and even more if they are supported by Federal or local Governments.

The second dimension to reach sustainable regional development deals with integration. It is the one with the biggest relevance. Many investments fail for reasons regarding to a lack of a holistic view that considers chain coordination and integration aspects. A firm must competitively buy from suppliers and sell to distributors and final consumers. The way the firm will govern the relationships with these agents is fundamental for its development. This may range from vertical integration, contractual arrangements and spot market. This is the basics of 2009 Economy Nobel Prize Award Oliver Williamson's discussion on the boundaries of the firm. In regional development, Government may think in attracting an anchor firm that leads production, having the control and knowledge over the demand information. Take as an example a juice industry that will be an anchor company coordinating all regional fruit growers. The challenge must be to coordinate supplying transactions with small holders.

Different governance modes when seen from a social perspective have different consequences. Vertical integration (anchor industrial company owns farms) creates jobs, salaries, taxes, exports and might transfer knowledge from the firm to the employees by means of training programs, which in fact, employees may become entrepreneurs later on. Buying from large growers based in the region also generates the benefits listed above, except for the quicker technological transfer due to the fact that there are some independent producers and more employees linked to them. Buying from small holders and cooperatives may be even better in terms of wealth distribution and development, once there are a larger number of rural families involved in the production activities. Attraction of anchor companies helps increasing the grower's capabilities with private knowledge transfer, credit facilitation, since one of the biggest challenges for small holders access to credit for financing investments and production. A possible form and a key research agenda is the public incentives and advantages for the projects that insert the larger number of small producers.

The third important dimension is the business dimension. It has to be clear that all the agents have to generate profits above their capital cost. Regarding small holders, their income must be high enough to keep them motivated and committed to the activity. This is the basis for the long term orientation of the producing chain and economic sustainability. It is important to mention the need for innovation and quality improvements that any chain has to have, and this could be done by linkages with local research centers, universities and technical consultants. All the integrated chain must have a long term perspective.

The fourth and last important dimension for regional sustainable development is the sustainable dimension. Sustainability comprehends three different components: the environment, the economic development, and the equal wealth distribution for the participants. It is important to motivate national and international environmental certification processes because they help preparing the firm and the region to attend environmental criteria and later on to open markets. Companies should invest in market segments like organics, fair trade, and promote social insertion in poor communities.

Sustainable inclusion is the speech and action for private and public sector for the next 10 years. This article presented four big dimensions that should be taken in consideration by Federal and local Governments, private companies when thinking in new development projects to promote inclusion that is sustainable, profitable and contributing to growth of the economy, income distribution and wealth.

The author is professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil (www.favaneves.org).