Delivering Sustainable Growth in Africa:

Linkage between FDI and Local Economy

Public Lecture by Embassy of Japan in Kenya 11/15/2013

Institute of Developing Economies

Takahiro Fukunishi

Structure of Presentation

• Introduction: Will current growth be sustained?

• FDI-led economic development

• Case studies in Africa Horticulture in Kenya

Pineapple in Ghana

Beer industry in Uganda

Garment industry in Madagascar

Construction industry in Burkina Faso

• Policy recommendations

Steady Growth of African Economy

-6

-4

-2

0

2

4

6

8

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

GDP per capita Growth %

Low income

Sub-Saharan Africa(developing only)

Low & middle income

Source: World Development Indicators

Concern on Sustainability of Growth

0.222 0.118

0.278

0.130

0.505 0.644

0.586

0.745

0.266 0.225 0.127 0.107

0.000

0.200

0.400

0.600

0.800

1.000

1999 2008 1999 2008

All SSA Excl. SA and SACU

othersh

mnfgsh

resourcesh

agrifoodsh

Composition of Exports from Africa

Source: UN Comtrade

• Growth dependent on resource is recognized as unstable.

Commodity price fluctuation

Limited resource endowment per capita e.g. $488 p.c. in Nigeria, $15,841 p.c. in Gulf countries

“Resource Curse”

• Diversification of economic structure is necessary to sustain the current steady growth.

Productivity Growth

• Productivity growth is a key for development of the non-resource sector.

• But, overall productivity did not grow in Africa until 1990s. > African farmers and firms generally lack experience of steady productivity growth.

• New challenges are needed.

• How to realize productivity growth?

Training, supply of credit, facilitation of business environment, and so on..

We focus on learning from FDI; “FDI spillover”

7

FDI-led Industrialization: Asian Experience

• Multinational firms in developing countries facilitate technology transfer through ▫ Vertical linkage with local firms ▫ Labor turnover

MNC

Local supplier

Local subcontractor

Local competitor

8

• Advantage of FDI spillover MNC demonstrates technology on commercial basis MNC provides technical assistance and markets

• MNCs have incentive to use local suppliers

lower cost, shorter lead time, tax incentives

• In Asia, FDI contributed to develop local firms in apparel, electric appliances, automobile, motorbike etc.

• Applicable in Africa?

Pessimistic view: very small non-resource FDI, poor capacity of local firms, low skill of workers and low quality of biz env’t, and so on.

Case Studies in Africa

1. Non-traditional agriculture for export markets

cut flower (Kenya, Ethiopia)

fresh fruits (Ghana, SA)

vegetables (Kenya, Zimbabwe, Tanzania)

Supermarket in Europe

Exporter

Multinational growers

Local growers

10

11

12

1-a. Cut flower in Kenya (Jodie Keane)

• Kenyan roses account for 26% of total imports in the European market (2010).

• MNCs are from Holland and Israel. Several large growers and most of small growers are local origin (Kenya).

• Cut flower, particularly rose, requires large capital investment and compliance to sanitary standards. An estimated 97% of flower exports are from large, foreign growers.

• Small growers concentrate on decorative flowers.

1-b. Pineapple in Ghana (Aya Suzuki)

• Many local farmers are producing pineapples with assistances by exporters.

• Producing export pineapple requires meeting the sanitary standards as well as quality. Exporters provide inputs, training and some services (harvesting).

• It is more productive than other crops, e.g. cassava, and income of pineapple farmers was five times higher ($2200).

• However, educated, wealthier farmers tends to grow pineapple.

• And it is risky as exporters manipulate rejection rate of pineapples according to market demands.

> Profitable opportunity but not suitable for poor farmers.

Case Studies 2

2. Manufacturing

Export-oriented garment industry

Local-oriented beer industry

Retailors in Europe, US

Trading companies in

Asia

Multinational assemblers

Local assemblers

Multinational breweries in

Africa

Farmers association

Farmers

2-a. Beer Industry in Uganda (Akio Nishiura)

• Two multinational breweries, SAM Miller and East African Breweries, built malting plants in Uganda.

• Motivated by tax incentive and brand images, they have promoted sourcing locally produced barley.

hl 1000

0

200

400

600

800

1000

1200

1400

2006 2007 2008 2009 2010

Beer production at Nile Breweries, 2006–2010

Source: Nishiura (forthcoming), originally from SAB Miller website (http://www.sabmiller.com/index.asp?pageid=1169)

• The beer companies contracted with farmers associations in terms of purchase of barley. They provide seeds at subsidized price and technical service.

• Due to competition, beer companies offer better conditions to farmers; higher price, faster payment and better technical assistance.

• This encouraged participation of young and female farmers into barley production.

2-b. Garment Industry in Madagascar (Fukunishi, Ramiarison)

• In Madagascar, export-oriented garment industry started in the 1990s. Provision of preferential access to US, AGOA, further boosted apparel exports.

• The industry employed more than 100,000 workers (2008) who are mainly female and uneducated.

Source: United Nations Commodity Trade Statistics, report by US and EU27.

Apparel exports from Madagascar

• Local firms account for 28% of garment exporting firms.

• They tend be smaller than multinational assemblers, but as productive as them.

• But they are severely affected by the suspension of AGOA.

Multinational assemblers

Local assemblers

expatriates local workers

sub- contracting

Retailors in US, EU

Case Studies 3

3. Construction industry

Drastic increase of aid on infrastructure construction.

Construction demand for public works has hiked.

Sources: Tokuori (forthcoming), originally from ICA Annual Report (2008, 2009) Note: No data is available for the private sector, India, Arab Funds and African Regional Development Banks (ARDB) in 2005 and 2006.

Infrastructure Financial Contributions to Africa / US$ billion

3-a. Construction Industry In Burkina Faso (Tomomi Tokuori)

• Emergence of a few large and competitive local construction firms

• SMEs are not benefitted from increased construction demands.

Government, International organization

Foreign construction

firms

Local construction

firms

Local construction

firms

sub- contracting

Public works

International tender

Findings

• Mixed evidence about development of local producers, but some of them successfully learned and penetrated into export and local markets. > African producers can effectively learn when support is provided.

• Not all local producers but those with richer financial resource and human capital tend to be more benefitted.

• At the same time, supplying to export market entails substantial risks; e.g. price fluctuation, financial crisis, AGOA cancellation, etc.

Static Impact of FDI

0

10000

20000

30000

40000

50000

60000

70000

80000

1

profit

dividend

interest

rent

wage

depreciation

input, other cost

Sales of Safaricom (2009, mil.Ksh)

Source：Author’s calculation from

Safaricom Annual Report 2009

Value added

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Share of Net Factor Income From Abroad in GNI

Sub-Saharan Africa

East Asia & Pacific

Low & middle income

Source： World Development Indicators

-20.0%

-16.0%

-12.0%

-8.0%

-4.0%

0.0%

4.0%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Gap between GNI and GDP

Source： World Development Indicators

Dynamic Impacts: Facilitation of Linkage

• It is important to consider facilitation of linkages between FDI and local industry, so that FDI does not creates enclave.

• But governments do not have effective measure to facilitate FDI spillover.

• Given high risks and asymmetric relationship with international buyers, supports to mitigate adverse shocks are needed.

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• Supports for farmers and firms with less resource may help to enhance spillover effects. They can be benefitted from FDI pursuing local market.