Monday, April 22, 2024

ON THE LEFT: Concentrate on the human capital

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THERE HAS BEEN A STEADY DECLINE in output from the manufacturing industry of Barbados. During the 1970s and 1980s, the industry contributed significantly to economic activity in the economy, representing on average, 20 per cent of gross domestic product (GDP).

More recently, manufacturing has experienced a decline in output, and was estimated at just four per cent of GDP in 2014. Given the decline in economic activity, along with other challenges such as globalised free trade, and increasing external current account deficits, Barbados must continue its attempts to diversify the economy.

Despite the myriad of challenges that face Barbadian manufacturers, and other manufacturers in similar small island states, countries such as Prince Edward Island and Mauritius have shown that manufacturing can be a viable enterprise in island states.

Economic factors are still the main driving force behind manufacturing firm performance. The number of full-time employees, capital, firm size and labour productivity are significant to manufacturing firm growth.

In addition, the variables employee training and international certification and the sales from innovation activities also have some influence on the growth rate in sales.

Firm performance of island manufacturers is mainly explained by firm level economic variables: full-time employees, the level of capital, labour productivity and firm size. Therefore, small and medium sized manufacturers seem to be maximising the input potential of their labour and capital to increase productivity, which in turn positively impacts on firm performance.

Firms may be underutilising their human capital. The statistically significant, positive relationship found between employee training and the short-run growth rate in sales suggests manufacturers should focus on the development of persons through training activities.

In doing so, firms create employees who have technical expertise in their jobs, building human capacity which in turn leads to more competitive firms.

Attaining international certification and adhering to global standards is another factor in which manufacturers may enhance their performance. In doing so, small and medium sized firms have the opportunity to expand into foreign markets, increasing their market share and sales.

The innovation firm level variables, sales from innovation, is the only variable that is statistically significant on firm performance. Overall, the innovation model does not have a significant impact on firm performance.The negative relationship found between sales from innovation activities and firm performance may be due to the fact that firms usually gain returns from investment in innovation activities in the long run.

Moreover, since the proxies for firm performance utilised in the empirics were all short run indicators, this may account for the negative and insignificant relationship between the sales from innovation and firm performance. The results not only have implications for manufacturers but also for policymakers who facilitate the business environment in which these firms operate. Policymakers must implement programmes that are simple and effective enough to increase the capacity of manufacturers.

Public assistance is needed in the areas of human capital development, technical training, quality control and regulation as well as targeted innovation activities to improve the performance of manufacturers. In general, the state has a responsibility to provide support systems that facilitate the growth and competitiveness of the private sector. The manufacturing industry may become competitive if the right resources are employed. More emphasis must be placed by private owners and public officials on human capital, technological development and the fostering of creative and innovative thinking with the fundamental objective of exporting locally produced goods.

Taken from a recent paper released by the Central Bank. It was authored by Crystal Drakes of the Department of Economics/Centre For Resource Management and Environmental Studies, University of the West Indies, Cave Hill Campus, and Professor Winston Moore, Head of the Department of Economics at the Cave Hill Campus.

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