Creating Incentives To Increase Economic Links

At a Glance
  • To overcome core challenges facing first mover companies, governments can provide incentivesto help advanced-suppliers of the extractive industry sector expand into new markets and products, or to help non-extractive value chain suppliers obtain the necessary capabilities from extractive value chain suppliers to offer new goods and/or services. 
  • One possible approach is the creation of a ‘new product development fund’(financed through extractive industry taxation) which can be used to fund training, market research, and support infrastructure.
  • Another approach would be to provide tax credits to first movers via a national suppliers’ development program, until such time that the transition to a new sector is well-established.
  • Business support centres and national support systems for innovation are key to enabling the formation of a strong and innovative SME fabric which can serve the extractive sector and other sectors necessitating the same capabilities. 

The core of the challenge for horizontal linkage formation is that first mover companies need to take the risks to expand to new markets. For this reason, governments can consider providing incentives to help advanced-suppliers of the extractive industry sector into new markets and products, or to help non-extractive value chain suppliers obtain the capabilities from extractive value chain suppliers to offer new products. One approach could be to create a “new product” development fund financing training, market research and support infrastructure.[1] Tax collected from extractive industry activity could finance the fund, and there may be existing funding for small and medium-sized enterprises (SMEs) available through NGOs and other funds. First movers could also benefit from tax credits for a limited period of time until a transition to the new sector is well-established. Such a scheme could be part of the national suppliers' development program.

National support systems for innovation are key to enabling the formation of a strong and innovative SME fabric which can serve the extractive sector and other sectors necessitating the same capabilities. Many countries also have business support centers. These help local SMEs develop the capacity and access the funding required to participate in extractive industry value chains. Depending on the country and commodity context, other policies to create incentives include subsidies, tax holidays, export finance insurance and guarantees, and trade finance.

 

View footnotes

[1] Kaplan, 2011, as cited in CCSI, Linkages to the Resource Sector: The Role of Companies, Government and International Development Companies, (Bonn and Eschborn: GIZ, 2016), 46

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