Assessing the Depth of Backward and Forward Linkages

At a Glance

  • Examining a project’s backward and forward linkages is an important first step in the process of assessing the potential for horizontal linkages.
  • It is important to assess the depth of backward and forward linkages (their quality, based on the degree of value added) not their breadth (the number of linkages).
  • In order for capabilities to be successfully transferred, existing (forward or backward) linkages must have actually developed local capabilities and added value.

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Key Resources

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Topic Briefing

To understand the domestic skills and capabilities that are being developed by extractive industry activity, policy makers must understand the extent of goods and services that are being supplied at the local level (backward linkages) and the extent to which local industry is processing extractive projects’ outputs (forward linkages). Examples of forward linkages include refining extracted oil and cutting and polishing extracted diamonds.

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It is advisable to examine the backward and forward linkages for each stage of a project, even if one particular stage has few, if any, significant linkages. During a mining project’s exploration stage, for example, there are generally few significant opportunities for backward linkages (local procurement). However, those that do exist can be utilized to build skills for other sectors. For example, the technical skills required to drill for samples can be used in construction.

Figure 1 lists the goods and services used at each stage of a mining project’s life cycle. By detailing the backward linkages stage by stage, this figure can be a useful starting point for assessing the potential for horizontal linkages. (As has been noted, horizontal linkages can also be developed from forward linkages.)

To create appropriate policies for fostering horizontal linkage, it is important to assess the depth of backward and forward linkages and not their breadth. The “depth” of linkages refers to the quality of the linkages as assessed by the degree of value added. “Breadth” only refers to the number of linkages. For instance, consider employees in the extractive industry value chain who are purchasing goods at the local level. If these goods are manufactured in the country, then these linkages are deep. If the goods are simply available in the country (but not necessarily made there), then the linkages are shallow. Horizontal linkages that involve the transfer of capabilities can only emerge from linkages that have actually developed local capabilities and local value added.

Figure 1: Goods and services used in each stage of the mining lifecycle, reprinted from Dobbs et al., Reverse the Curse: Maximizing the Potential of Resource-Driven Economies (McKinsey Global Institute, 2013), 78.

For further guidance on assessing the extent of backward linkages from extractive industry activity, see  Assessing the Current Situation.