97836 Manufacturing fDi in Sub-Saharan africa: trenDS, DeterMinantS, anD iMpact MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT June 19, 2015 Guangzhe Chen, Michael Geiger, and Minghui Fu* * The report was cleared by Albert Zeufack (Practice Manager, GMFDR). The peer reviewers were: Tom Farole (Lead Economist, GCJDR), Apurva Sanghi (Program Leader, AFCE2), and Yoichiro Ishihara (Sr. Economist, GMFDR). Kevin Carey (Lead Economist, GMFDR) also provided comments and guidance. Gelila Woodeneh (Communications Officer, AFREC) designed the cover page. CONTENTS EXECUTIVE SUMMARY.................................................................................................................................... v INTRODUCTION............................................................................................................................................... 1 LITERATURE REVIEW...................................................................................................................................... 7 FDI Determinants......................................................................................................................................................7 Impact of FDI..........................................................................................................................................................10 RECENT FDI TRENDS IN NON-RESOURCE-RICH COUNTRIES......................................................... 13 CASE STUDIES.................................................................................................................................................. 23 Case Study 1: Ethiopia.............................................................................................................................................23 FDI Trends............................................................................................................................................................23 FDI Determinants..................................................................................................................................................26 FDI Impact and Results..........................................................................................................................................26 Case Study 2: Rwanda..............................................................................................................................................29 FDI Trends............................................................................................................................................................29 FDI Determinants..................................................................................................................................................31 FDI Impact and Results..........................................................................................................................................33 SUMMARY AND RECOMMENDATIONS.................................................................................................... 35 ANNEXES........................................................................................................................................................... 39 Annex 1: Data Definition.........................................................................................................................................39 Annex 2: Cost of Doing Business in Selected Countries...........................................................................................40 REFERENCES.................................................................................................................................................... 41 iii iv MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT LIST OF FIGURES Figure 1: Overall FDI Flows in Africa and the World................................................................................................3 Figure 2: Host Country Determinants of FDI: a Theoretical Framework...................................................................8 Figure 3: Sectoral FDI in Selected Countries in SSA................................................................................................14 Figure 4: Top Investors in Sub-Sectors that have Large Job Creation, Greenfield Projects........................................19 Figure 5: FDI in Ethiopia: Overall Trends...............................................................................................................24 Figure 6: FDI in Ethiopia: Employment Trends.......................................................................................................27 Figure 7: FDI in Rwanda.........................................................................................................................................30 LIST OF TABLES Table 1: Greenfield Manufacturing FDI in Selected Countries, US$M....................................................................4 Table 2: Total FDI Investment in Manufacturing by Investor Groups, Percent in Capital........................................5 Table 3: Indicators of Relative Magnitude of FDI Inflows to Selected Countries in Africa......................................13 Table 4: Greenfield Manufacturing FDI Inflows by Sub-Sector, 2003–2014, US$M..............................................15 Table 5: Greenfield Manufacturing FDI of Country Origin, 2003–2014, US$M..................................................16 Table 6: Cost of Doing Business: Electricity as a Constraint...................................................................................21 EXECUTIVE SUMMARY A frica has lagged behind in industrialization; FDI has proven useful in the past to advance the lack of industrial development has been economic development and foster structural change partially related to the challenge of attract- in host countries. Recent literature and empirical ing sufficient foreign direct investment (FDI). In evidence suggests due consideration is needed from 2013, the average share of manufacturing value added policy makers to maximize benefits of FDI, such as in GDP in Sub-Saharan Africa was 11 percent, almost skills and technological transfer, and foster overall unchanged from the 1990s. At the same time, the spillover effects to the domestic economy. These share of the worldwide FDI flows into SSA has been arguments are strongly supported by the practical rather low during the same period. In the Action Plan experiences of East Asian Tigers and of China, where for the Accelerated Industrial Development of Africa FDI contributed significantly to the upgrading and (AIDA) that were adopted by all the member gov- diversification of its industrial structure. A wide vari- ernments of the African Union in January 2008, the ety of polices to maintain macroeconomic stability, importance of manufacturing development was reiter- increase trade openness, and accelerate the growth of ated and attracting foreign investment was identified advanced industries were implemented. The evalua- as the major priority for the acceleration of Africa’s tion is assumed to vary depending on country, sector, industrialization. and the actual drivers of FDI. Compared to the past, FDI into Africa Manufacturing FDI in SSA is primarily mar- is relatively high and more diverse than ever ket-seeking. There are three main types—resource- before. FDI flows into SSA have expanded almost seeking, market-seeking and efficiency-seeking—when six-fold since 2000, reaching a record US$45 bil- looking at FDI in Africa. In reality there are overlaps lion and leading to a significantly higher FDI stock in these three types. Manufacturing FDI in SSA is (US$474 billion) in 2013. Still, FDI into Africa mainly market-seeking and its main determinants is only a fraction of world FDI flows. The more are market size and market potential. In addition, diversified nature manifests in several dimensions: political and economic stability are important fac- First, FDI into Africa is slowly shifting from extrac- tors considered by foreign manufacturers when they tive sectors to services and manufacturing sectors. choose the investment location. On the other hand, Second, FDI reached a larger geographic scope over efficiency-seeking FDI, observed at firm level, is the the past five years, with increasing shares received smaller part of manufacturing FDI in Africa since by Southern and Eastern Africa. Third, there is a only a handful of foreign companies are able to take significant increase of South-South FDI, includ- advantage of lower production cost in some manu- ing that from new partners led by China, India, facturing areas only, such as textile and clothing, and and Brazil, and intraregional partners led by South leather and footwear. Africa. Manufacturing FDI reflects similar diversi- Manufacturing FDI in Africa remains rela- fication patterns and some African countries such as tively undiversified, focusing on raw material Ethiopia are building up their manufacturing bases (food) processing or end-product assembly, which by attracting FDI from new partners. are characterized by low value addition, even in v vi MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT those countries that manage to attract significant environments, and many are more adapted entrepre- inflows. In addition, some manufacturing production neurs in high-risk environments. areas are more successful in attracting foreign investors Manufacturing FDI creates more jobs than FDI than others. Those areas differ by host countries. For in any other sector. Manufacturing has led in job example, in the last decade, some emerging subsectors creation among sectors in the reviewed SSA countries included textile and clothing, and leather and footwear such as Tanzania, Uganda, and Ethiopia. According in Ethiopia; non-metallic mineral products and motor to the most recent FDI data (2013/14), the manufac- vehicles and other transport equipment in Kenya; turing sector in Tanzania accounted for 43 percent of metal products and non-metallic mineral products total jobs created, three times more than jobs created in Tanzania; metal products and non-metallic min- in agriculture. Manufacturing FDI also achieved the eral products in Uganda; and non-metallic mineral largest job creation in Uganda in 2012, amounting to products and publishing and printing in Rwanda. 30 percent of the total FDI-driven jobs. Similar patterns In addition, FDI is traditionally concentrated in the are also recognizable in Ethiopia, especially in terms of food and beverage subsector in most of the countries. permanent employment creation. A significant por- This concentration in low value addition activities tion of employment opportunities in manufacturing is may be appropriate in the short run, however, as it attributed to non-traditional investors. However, formal is likely to be a first step for economies to integrate training remains insufficient in manufacturing firms. into Global Value Chains (GVCs) through exploiting Unstable supply of inputs and uncertainty their comparative advantages. of time required for transport and logistics build Non-traditional sources dominate FDI in a binding constraint for manufacturing FDI in Africa. New partners and African partners have been Africa. Drawing from empirical evidence and inves- the main sources of manufacturing FDI. Traditional tors’ perception, some binding constraints are identi- sources of manufacturing FDI are shrinking but still fied as critical to further improve the performance of account for large stocks. The share of investment from manufacturing FDI. The dependence on imported China and India increased rapidly, gradually taking production inputs, erratic electricity supply, and poor over the proportion of investment originating from trade logistics drive the cost up and pose the threat to the EU and the U.S. Intraregional investment con- the sustainability of FDI. These bottlenecks also lead tinued to soar and largely contributed to the rebound to production inefficiencies that constrains Africa’s of Africa FDI to the pre-crisis level. integration into the global value chain. While FDI into Africa generally tends to have The Ethiopian and Rwandan case studies sug- relatively high returns of investments, likely reflect- gest that the regulatory business climate is attrac- ing the high risk and low competition environment, tive for FDI and contributes to the rate of project profitability in manufacturing is generally even operationalization. For many manufacturers who are higher compared to other sectors. Recent evidence increasingly looking for new destinations to maintain shows that the overall rate of return of FDI in Africa lower cost for their labor-intensive industries, the reg- has been above 9 percent since 2006, higher than the istration and preparation process is often an experi- world average of 7.5 percent and developing country ment to find the most suitable location in which to average of 8.1 (data for 2011). On the other hand, in invest. As such, the low rate of conversion to oper- Rwanda, manufacturing realized an average return to ability in Ethiopia from the registered projects suggests equity of 24 percent in 2013. This result also partly that some discouraged investors had likely withdrawn explains what drives manufacturing FDI from new after initial setbacks, indicating that improving inves- partners into SSA. Investors from emerging countries tor care in some priority sectors is an urgent task to are more accustomed to less supportive institutional support FDI. Executive Summary vii Policy Recommendations  Third, increase investment on key infrastructure to overcome constraints for manufacturing activi- This report offers five policy recommendations that ties to develop, especially in power supply and could contribute to the attraction of manufactur- transportation and logistics services. ing FDI in Africa. To further the benefits of FDI,  Fourth, take better advantage of the currently especially in the manufacturing sector, policymakers dominating market-seeking manufacturing FDI in Africa should: to improve the weak industry base in the short- term. Market-seeking FDI has a sizeable positive  First, manage FDI flows and FDI-related poli- contribution to the host economy. cies in a way that maximizes spillovers in host  Fifth, strengthen the linkages between domes- countries. tic material input and foreign manufacturing  Second, realize the emergence of FDI from new investment. partners, especially in manufacturing FDI, and establish platforms that help in the attraction of new FDI. 1 INTRODUCTION I n most countries of Sub-Saharan Africa (SSA), Chains (GVCs), developing countries can jumpstart the process of industrialization has not taken industrialization by participating in international off in any significant way. The important role production networks. The East Asian experience over of industrialization in economic growth and struc- the last three decades showed how, in a globalizing tural transformation has been recognized by exten- world, FDI can help leverage investment to upgrade sive empirical literature and evidence.1 Moreover, and diversify industrial structures of host countries. the development of manufacturing and secondary The Four Asian Tigers4 were the first economies to industry is an important step within the industrializa- take advantage of this rise in globalization and FDI tion process, usually at its beginning. This process is flows in the 1980s, followed by China in the 1990s, typically reflected by a significant rise in the share of and Vietnam, Cambodia, and others in the 2000s employment in manufacturing and by the growing (UNCTAD 2005). As those countries “graduate” now share of national income from the industrial sectors and diversify into higher value-added industrial and (Bagchi 1990). But those signs of industrialization and service activities, there is an opportunity for latecomers structural transformation have not been observed in in the industrialization process to benefit from FDI in most SSA countries. In the last 20 years, the growth manufacturing, especially the labor-intensive kind of of manufacturing GDP per capita was 1.26 percent manufacturing (Lin 2011). To be able to benefit from on average per year and lower than those of the extrac- this potential FDI it is crucial for potential host coun- tives and services sector, which grew by 1.47 and 1.33 tries to position themselves early. Studying the trend percent on average per year, respectively (Figure 1.1). and impact of manufacturing FDI and improving the In addition, the share of manufacturing GDP declined policy framework to maximize the positive impact is from 14 percent in 1995 to 11 percent in 2013 for therefore crucial. It is not too late for Africa to get SSA as a whole (Figure 1.2).2 Furthermore, there is ready as Figure 1.4f shows: compared to the primary evidence that agriculture contributed almost 60 per- sector and services sector, manufacturing FDI in Africa cent to employment in SSA over the period 2002 to has not yet fully taken off (and in fact even declined 2012, followed by services with 32 percent, while slightly in value in 2013). only a meager 9 percent came from manufacturing In reality, FDI inflows into SSA represent only (Figure 1.3). Rodrik (2015) describes this as “prema- a fraction of the world total, yet they are rising fast. ture deindustrialization.”3 Fast economic growth has made SSA a more attractive Foreign Direct Investment (FDI), especially of the manufacturing type can play a catalyst role 1 See Datta (1952), Kuznets (1966), Bagchi (1990), and Maddison (1995). in the industrialization process. FDI can boost the 2 South Africa is an exception to this trend. host country’s economic growth by providing the 3 Rodrik defines this trend as Premature Deindustrialization—since it means “many (if not most) developing nations are becoming service much needed capital, creating new jobs, generating economies without having had a proper experience of industrialization.” productivity spillovers, and transferring technol- 4 The East Asian Tigers include four economies: Republic of Korea, Hong Kong, Singapore, and Taiwan. They have maintained high level ogy, skills, and management know-how (Prasad et of economic growth since the 1960s, boosted by exports and rapid al. 2003). Moreover, with the rise of Global Value industrialization. 1 2 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT BOX A: Overview of Sub-Saharan Africa’s Engagement with New Partners in FDI China’s share of total FDI inflows into Africa averaged about 5 percent of annual global FDI flows to SSA over the past decade. China’s outward FDI stock in SSA reached US$24 billion in 2013, up from US$462 million in 2003. African countries, such as South Africa, Zambia, Nigeria, Angola, DRC, and Ethiopia attracted the lion’s share of Chinese FDI (UNCTAD 2013). Chinese FDI presents in a broad range of countries, including non-resource-rich countries in East Africa countries in order to penetrate the domestic and regional markets. Sizable inflows from China are going into manufacturing, construction, and services. The latter includes financial services, ICT, and electricity. Investment from India is also significant. The total stock originating from India in SSA was more than US$12.9 billion as of 2012, accounting for 3 percent of the total FDI in SSA. India has traditionally concentrated in Mauritius, partly due to the ethnic links and the latter country’s offshore financial facilities that are used as transit points of FDI to other countries. As for sector, India has focused on manufacturing such as textile and garment, construction and related activates, as well as services (ICT in particular). Although still small, Brazil’s FDI to Africa is on the rise with the Portuguese-speaking countries such as Angola and Mozambique, as well as Ghana, South Africa, and Zambia as main destinations. Angola has been the largest recipient of Brazilian FDI so far, especially in energy, mining, and infrastructure, given the presence of a few large multinational corporations focusing on construction and mining. The Brazilian FDI in Angola reached US$11.7 billion. South Africa is the most important source of intraregional FDI in Africa. About 5 percent of total FDI in Africa originated from South Africa, which was the fifth largest holder of FDI stock in Africa as of 2011 (UNCTAD 2012). Most of South Africa’s FDI has been directed to Mauritius, Nigeria, Mozambique, and Zimbabwe. According to UNCTAD FDI/TNC database, South Africa holds sizable FDI in mining and quarrying, manufacturing, and finance. investment destination over the past decade: FDI flows on a decreasing trend since 2008. Still, they accounted into SSA have expanded almost six-fold, increasing the for as much as 41 percent of the total FDI inflows in FDI stock in Africa from US$148 billion in 2000 to 2012. The rapid increase in FDI from new partners US$246 billion in 2012. In particular, after the finan- is represented by investments from China, India cial crisis, FDI flows quickly returned to the pre-crisis and Brazil. To illustrate, Chinese FDI in Africa rep- level of US$35 billion and hit a record US$45 billion resented 7 percent of total FDI inflows to SSA and in 2013. Apart from traditional FDI concentration in reached US$24 billion in 2013. Also of note is India, a few mostly oil-producing countries (Angola, South which had a FDI stock of almost US$13 billion or Africa and Nigeria), FDI has been rising quickly 3 percent of the total FDI in Africa in 2012 (Data in some fast-growing non-oil-exporters, including from UNCTAD FDI/TNC database). Intraregional Tanzania, Zambia, Uganda and Ethiopia. Figure 1.5 partners are also of importance, led by South Africa indicates that FDI flows to SSA have become more (which accounts for 5 percent of total FDI in Africa diversified to different sub-regions. In 2012–2013, as of 2011, reported by UNCTAD 2012) followed by the overall increase was driven by increases in FDI in Nigeria and Kenya. See Box 1 for an overview of the Eastern and Southern Africa. Nevertheless, compared new partners’ FDI in SSA. to other regions, SSA FDI inflows only accounted for While FDI in Africa is at historic levels, only 3.1 percent in 2013 (Figures 1.5 and 1.6). a few countries have received significant increases Meanwhile, FDI from new partners has played in manufacturing FDI. This again was led by an important role in the rebound, leading to a new partners. Only six countries in SSA received diversification in the source countries. Since the the large majority of manufacturing FDI between 2008/09 crisis FDI inflows to SSA have been less 2011 and 2014 (Note: Data is Greenfield FDI only): volatile than the world average, partly due to con- sistently rising investments from new partners.5 The level of engagement of investors from traditional 5 The term “new partners” in this report refers to non-OECD FDI source countries. Please refer to the detailed classification of country countries such as from the EU, the U.S. and Japan is partners in Annex 1. Introduction 3 Mozambique, South Africa, Nigeria, Ghana, Zambia, to 31 and 22 percent of the total investment in terms and Ethiopia (Table 1). Similar to trends in overall of capital and project numbers, respectively. FDI, FDI from new partners has also played an impor- Given the rising importance of manufactur- tant role in the manufacturing sector in SSA. Table 2 ing FDI, this paper reviews recent evidence on the shows that investment from EU and the U.S. in the trends, determinants, and impacts of such FDI. Some manufacturing sector shrank in the last past decade. of the emerging findings explored in this paper are: During the same period, the proportions of overall investment originating from India, China, and South 1. FDI trends, particularly in the performance of Africa became noteworthy, making up 19 percent of manufacturing sector, differ significantly by coun- the total capital and 17 percent of the total numbers try and by sector. of projects. While in manufacturing sector, investment 2. New partners and African partners have been the from the three countries has even more presence, up main sources of manufacturing FDI; traditional FIGURE 1: Overall FDI Flows in Africa and the World 1. Growth in GDP Per Capita by Sector, SSA countries 2. Sectoral Contributions to GDP in SSA (%) 2 100 1.92 90 1.9 80 Output per capita index (1995=1) 1.8 70 1.7 1.69 60 1.6 50 1.84 40 1.5 1.55 30 1.4 20 1.3 10 1.2 0 1195 1196 1197 1198 1199 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1.1 1 Agriculture, value added (% of GDP) Manufacturing, value added (% of GDP) 1195 1196 1197 1198 1199 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Services, etc., value added (% of GDP) Agriculture Manufacturing Other industry Services Other Industry 3. Sectoral Composition of Labor (2002-2012) 4. Sectoral Distribution of Announced Greenfield FDI Projects in Africa (% of total value) 100 11 80 53 26 32.1 60 59.2 40 63 34 8.7 20 13 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Agriculture Industry Services Services Manufacturing Primary (continued on next page) 4 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT FIGURE 1: Overall FDI Flows in Africa and the World (continued) 5. SSA FDI Inflows, 2008-2013, US$bn, Share of World Total in Parenthesis 6. Share of FDI Inflows by Region, 2000-2013 50 45 0.6 42 41 (3.1%) 39 40 (2.5%) (3.2%) (3.1%) 0.5 40 (2.1%) 33 14.2 (2.3%) 0.4 12.5 14.8 18.6 16.6 30 12.0 0.3 13.2 20 6.7 0.2 14.2 12.3 4.5 7.6 9.9 8.2 0.1 9.4 8.5 10 5.0 6.0 0 7.0 7.4 7.5 7.9 9.3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 6.5 0 2008 2009 2010 2011 2012 2013 SSA Developing Asia Europe Eastern Africa Southern Africa Central Africa Western Africa North America LAC Transition Economies Source: 1.1 State of the Africa Region, Spring 2015, Francisco Ferreira, estimates based on WDI (2015). 1.2 World Development Indicator, 2014; 1.3 International Income Distribution Database; Ferreira, 2015; 1.4,1,5 and 1.6: UNCTAD, World Investment Report 2014; FDI Statistics. Note: “Other industry” includes mining, construction, electricity, water, and gas. Population-weighted average of 29 countries for which sectoral value added data can be decomposed into manufacturing and other industry. TABLE 1: Greenfield Manufacturing FDI in Selected Countries, US$M Country Annual Average (2003–2006) Annual Average (2007–2010) Annual Average (2011–2014) Mozambique 82 1,854 2,568 South Africa 2,002 2,526 1,819 Nigeria 4,987 1,204 1,675 Ghana 375 2,115 1,625 Zambia 430 365 1,561 Ethiopia 38 298 1,031 Kenya 140 99 498 Tanzania 89 346 194 Congo (DRC) 226 243 176 Uganda 65 1,809 164 Angola 363 929 155 Source: fDi Markets Database (www.fdimarkets.com). a a Definition in fDi Markets Database: 1) A project is defined as a cross-border investment in a new physical project or expansion of an existing in- vestment which creates new jobs and capital investment. 2) Projects were tracked based on publicly available information and may include projects that never went into operation. sources of manufacturing FDI are shrinking but 4. Key determinants of FDI in Africa include mar- are still significant in SSA. ket size and potential, as well as political and 3. Manufacturing FDI in SSA is mainly market- economic stability. seeking, aimed at penetrating the local or regional 5. Investment promotion seems to be instrumental markets. for attracting FDI. But investment climate factors Introduction 5 TABLE 2: Total FDI Investment in Manufacturing by Investor Groups, Percent in Capital Partners 2003–2006 2007–2010 2011–2014 Traditional Partners EU 43% 36% 28% US 19% 5% 12% Other Traditional 10% 9% 10% New Partners India 10% 14% 19% China 8% 12% 5% Middle East 1% 1% 2% LAC (mostly from Brazil) NA 1% 0.4% Other new partners 7% 2% 5% Intraregional Partners 2% 19% 19% Grand Total 100% 100% 100% Source: fDi Markets Database (www.fdimarkets.com). Note: EU includes Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Swe- den and the UK. are crucial for sustaining FDI in host countries 8. A significant portion of employment opportuni- (e.g., increasing the operational or survival rate ties in manufacturing is attributed to non-tradi- of FDI projects). tional investors. 6. For manufacturing FDI, the binding constraints are the shortage of production inputs, power out- The paper is organized as the following: i) the age, and trade logistics, which hinder the manu- paper conducts a literature review on the role, deter- facturing FDI’s integration into the value chain. minants, and the impact channels of FDI to set up a Findings suggest that the binding constraints can framework for empirical analysis and serve as a rationale be reduced by improved investment climate. for the focus on manufacturing FDI in non-resource 7. The rate of return of manufacturing FDI projects rich SSA countries; ii) the analysis reviews recent trends is found to be higher compared to other sectors and impact of FDI in these countries, with a focus due to the high risk and low competitive environ- on FDI from new partners; and iii) more in-depth ment in Africa; this fact is particularly valued by case studies in selected countries are added to further non-traditional investors. examine the determinants and impact channels of FDI. 2 LITERATURE REVIEW FDI Determinants trade policy is critical for attracting FDI in sectors that are strongly linked to global production networks. FDI can bring both benefits and costs to host coun- Third, absorptive capacity and host country charac- tries, which suggests that FDI needs to be managed teristics matter to determine the scale and nature of actively to maximize benefits. Common definitions spillovers from FDI. Absorptive capacity depends on of FDI emphasize the long-term character and the factors such as the technological gap, human capital fact that FDI carries a controlling ownership (e.g., and competition. Critical host country characteristics at least 10 percent or more of the equity shares) with to maximize spillovers are labor market regulations, the enterprises in the host country (see definitions of intellectual property rights, access to finance, and FDI by OECD, IMF, and the UN Statistics Division, learning and innovation infrastructure. Therefore, for instance). Therefore, FDI can offer not only stable policy makers can help the integration into GVCs by capital inflows but also job opportunities, technology improving the investment climate and formulating transfer, know-how of management, and access to open trade policies that help integrate the economy foreign markets because of the intention of a long- into global production networks. Increasing human term investment that requires the ability to monitor capital through better and more education and clos- and control the investment (Prasad et al. 2003). More ing the technological gap through key infrastructure recent studies also show that FDI is recognized to investments are examples of efforts that increase have positive spillover effects on local firms through absorptive capacity and maximize the host country increased productivity, skills formation, and value characteristics. chain integration (Lederman et al. 2010; Farole and There is a wide array of FDI determinants iden- Winkler 2014). Nevertheless, there are also potential tified in the literature about the motivations for drawbacks to FDI, including a deterioration of the foreign investors to invest. Theoretical and empiri- balance of payments as profits are repatriated, a lack cal studies largely agree that the determinants of FDI of positive linkages with local communities, and a inflows vary depending on sectors and regions. The lack of absorptive capacity for taking advantage of decision factors to invest in a foreign country range FDI spillover effects (OECD 2002). Given these from economic, political, and social factors to cultural characteristics of FDI, it is prudent for policymakers factors; these factors tend to be mutually reinforcing. to carefully evaluate the trend and impact of FDI on Some studies have further divided the factors influ- an ongoing basis so to maximize the benefits of FDI. encing FDI inflows in developing countries into two Moreover, governments can play a role to har- groups: i) on the demand side, factors are related to ness the potential of spillover effects offered by FDI the intrinsic motivations of foreign investors (Calvo in the context of GVCs. Determinants of spillovers et al. 1993); and ii) on the supply side, the motivating from FDI are (Farole and Winkler, 2014): First, a qual- factors are those which characterize the host countries, ity investment climate, including stable political and including variables such as macroeconomic policy and social conditions, favorable business environment, and performance, trade openness, tax levels and incentives, good access to land and infrastructure. Second, open the quality of legal and other institutions, market size 7 8 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT FIGURE 2: Host Country Determinants of FDI: a Theoretical Framework I. Policy framework for FDI, e.g. II. Economic Determinants • Availability of natural resources A. Resource Seeking FDI • Tax Policy (Tax holiday, Tax incentives) • Availability of raw materials • Trade Policy ( import-substitution vs. To secure cheaper supplies of raw • Availability of low-cost labor export-orientation) materials or inputs that are not available • Quality and efficiency of infrastructure • Policies affecting economic, political at home. and social stability (Monetary, fiscal, exchange rate policies) Example: Extracting oil (Nigeria), Gold (Ghana), and diamond  Mainly exists in primary, • Rules regarding entry and operations (Botswana) manufacturing • Sectoralpolicies (e.g., mining) • Market Size B. Market Seeking FDI • Market Growth • Access to regional and global markets Horizontal strategy to open up new • Structure of domestic market markets in the host country or its • Exports neighboring countries. Mainly exists in • Per capita income manufacturing and services sectorB. Host Country • Consumer preferences Market-Seeking FDI Horizontal strategy to Determinants open up new markets in the host country or its neighboring countries. Example: FDI aiming to have access to a large domestic (Brazil,  Mainly exists in manufacturing and China, India) or regional market (EU, NAFTA, ASEAN) services sectors • Cost of local labor • Inflation rate C. Efficiency-Seeking FDI III. Business Facilitation • Cost of production Vertical strategy which seeks to rationalize • Skills of the labor force the value chain. It divides and specializes • Investment promotion • Quality and efficiency of infrastructure production in line with the comparative • Investment Incentives advantages of different locations, usually • Corruption, red tape, etc. is export-oriented FDI. • Support services such as banking, legal accountancy services Example: Regionally integrated markets, such as Europe and  Mainly exists in manufacturing Asia. sector Source: World Bank staff own compilation, based on research of UNCTAD, World Investment Report (1998); IFC Investment Climate website (ac- cessed 2015); Dunning (2000); and Basu and Srinivasan (2002). Note: There is a fourth type of FDI by motivation, which is strategic-asset seeking FDI. This type of FDI takes place through cross-border mergers and acquisitions for a variety of strategic reasons, e.g., to access research and development, innovation, and advanced technology. It is barely present in Africa so that it is not considered in this analysis. and potential, the level of development of human manufacturing sector. Based on several recent studies,6 capital, etc. (Morisset 2000; Collins 2002). The role of this study uses a framework (depicted in Figure 2) that factors on the supply side stresses that countries offer- combines investor motivations (resource, market, or ing what foreign investors seek stand a greater chance efficiency-seeking) and host country features (e.g., the of attracting more FDI. The view of the demand side, sectors of investment and policy environment). This which identifies factors that enhances the attractive- provides a guide for the comparison of determinants ness of FDI, is important for policy makers. across countries and provides a basis for quantitative Looking at a combination of investor motiva- analysis and case studies on what contributes to the tions and host country features allows for the nar- successful and sustainable use of FDI in SSA. rowing and classification of the determinants of FDI to inform the analysis. The literature identifies 6 This framework is developed based on the information from UNCTAD, World Investment Report (1998); IFC Investment Climate website (ac- a set of analytically distinctive features that serve as cessed 2015 at www.wbginvestmentclimate.org); Dunning (2000); and a framework to study FDI in SSA, especially in the Basu and Srinivasan (2002). Literature review 9 Market size, access to natural resources and data for 30 SSA countries between 2000 and 2006, low cost of labor are major determinants of FDI Kinda (2014) concludes that host country infrastruc- in Africa.7 Morisset (2000) identifies the important ture, human capital, and institutions are major drivers role of market size, as is evidenced by the almost per- for the location of foreign firms in SSA. fect positive correlation (0.99) between FDI inflows Previous experiences in China and India in and GDP for a group of 29 African countries during receiving FDI also provide a useful comparative 1996 and 1997. In addition, market size also includes perspective on how policy and institutional con- market access to third country markets. Jaumotte ditions, such as the investment climate, affect FDI (2004) finds that regional trade agreements have a and their development impact. Both China and positive impact on the FDI received by the member India possess the necessary economic factors to attract countries. Similarly, Asiedu (2003) studies 22 African efficiency-seeking and market-seeking investments. countries observed from 1984 to 2000 and finds that Given the common feature of large and growing countries that are endowed with natural resources domestic markets for differentiated goods and services will attract more FDI. Moreover, a number of stud- and a large pool of low cost semi-skilled and skilled ies, such as Wheeler and Mody (1992) and Mody and labor, the differences in the policy and institutional Srinivasan (1998) find low cost of labor as a signifi- conditions likely determine the pattern of FDI in cantly important FDI determinant. these two countries (Patibandla 2002). India started In addition, there is an increasing importance to undertake market reforms in the early 1990’s. It of policy and institutional factors, such as trade pursued for a long time import-substitution strat- openness and human capital, endowments that egy relying on domestic resources and firms, and affect FDI in Africa, especially in non-resource-rich tried to encourage FDI only in high-tech industries. countries. Several empirical studies have shown that These market and policy conditions attracted more other things equal, countries whose policies are most market-seeking FDI in service. China, on the other conducive to foreign investors stand a better chance hand, opened up to FDI in Special Economic Zones of attracting FDI. Based on panel regression analysis in the 1980s and 90s and has progressively liberalized of 29 African countries between 1990 and 1997, its economy (Huang 2002). FDI inflows to China Morisset (2001) attributes successes in attracting include both market-seeking and efficiency-seeking, FDI in most SSA countries to their achievements in but their relative importance shifted over time, where improving their investment climate, and argues that the latter has become more dominant in recent years proactive policies and reform-oriented governments (UNCTAD 2012). Over the period 1985–2010, both can generate FDI interest. Also, Bende-Nabende countries showed increases in the trend of FDI. But (2002) analyzes the experiences of 19 SSA countries most of FDI in China flowed to the export-driven in 1970–2000 and finds that the most dominant manufacturing sector. In contrast, India showed an long-run drivers of FDI in SSA are market growth, impressive decline in the share of manufacturing FDI, export-orientation strategy, and FDI-related policy but the bulk of FDI has flowed into the service sector liberalization. Some recent studies also underscore (Naudé et al. 2013). the importance of enabling environments in SSA. FDI determinants differ when looking at dif- Lederman et al. (2010) uses firm-level data across in ferent sectors, but empirical evidence on the extent 13 SSA countries and points out that trade openness is is limited. There is some evidence differentiating especially important in comparison with other regions. between sectors and types in the drivers of FDI and Some industry examples include textiles in Lesotho and agro-food processing in Swaziland in 1990–99. 7 See Mody and Srinivasan (1998), Morisset (2000), Asiedu (2003), Similarly, using manufacturing and services firm-level Rojid et al. (2009), and Hailu (2010). 10 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT only few are looking at this issue in Africa. Kinda exhibited positive impact on employment, productiv- (2014) disaggregates non-resource-based FDI data ity, and exports. Examining firm-level data covering in SSA into vertical FDI (foreign firms producing for 1998–2007 in China’s manufacturing sector, Du et export—efficiency-seeking in this paper) and hori- al. (2011) conclude that trade reforms and tax poli- zontal FDI (foreign firms producing for local mar- cies adopted by China have generated productivity kets—market-seeking in this paper), and establishes spillovers, especially for backward linkages. They also that taxation is not a key driver for either type of FDI. find that China’s successful industrial policy harnessed Moreover, there is considerable contrast in behavior the FDI spillovers potential, as evidenced by the find- between market-seeking and efficiency-seeking FDI. ing that foreign investors who received corporate tax Market-seeking is attracted to areas with higher trade breaks transmitted larger spillovers to domestic enter- regulations, highlighting the investors’ interests in pro- prises. Studies on the relations between tax policies tected markets and import-substituting investment. and growth spurred by FDI in India share common Compared to efficiency-seeking FDI, market-seeking findings (Nataraj 2011). FDI is affected more by financing and human capital The literature finds that motivations for FDI constraints and less by infrastructure and institutional (i.e. the determinants) affect the impact. Some show constraints. Lemi et al. (2003) studies how the role that efficiency-seeking FDI exhibits stronger growth of uncertainty in affecting FDI differs by industrial effects compared to others, while others argue that groups by analyzing the U.S. manufacturing FDI and actual investments often have mixed and shifting U.S. non-manufacturing FDI flows in a sample of host motivations and thus make the analysis by motiva- countries in Africa. They find that for U.S. manufac- tion inappropriate in the first place. Yet, the following turing FDI, political stability and government policy findings stand out. commitment stand out as important factors; whereas Resource-seeking FDI is by-and-large regarded these factors are not significantly important for U.S. as having a limited overall effect on economies.8 non-manufacturing FDI. Likewise, recent evidence Some empirical studies establish that there has been from the Middle East and North Africa region sug- an inverse relationship between the intensity of natural gests that political instability has a sizable effect on resource and growth between 1970 and 1990 (Sachs the FDI composition in non-resource tradable goods and Warner 1995). Case studies in Africa show that sector (Ianchovichina et al., 2015). resource-seeking FDI usually creates less job opportu- nities and won’t exhibit positive spillover effects in the Impact of FDI short term, compared to other types of FDI. Selhausen (2009) uses panel regression of a dataset covering FDI can play a constructive role by transferring 72 developing countries (33 SSA countries) and capital, skills and know-how, but attracting FDI observes the differences of impact between resource- doesn’t automatically guarantee economic devel- seeking and non-resource-seeking FDI (primarily the opment. Previous findings suggest that whether manufacturing sector in his paper). He argues that as FDI contributes to development depends on mac- long as resource-seeking FDI dominates, SSA is still roeconomic and structural conditions in the host unable to benefit from its return on capital potential. economy (UNCTAD 2005). And a recent study Moreover, compared to developing countries in Asia further established that long term and sustainable and Latin America, SSA attracts higher portion of development comes from the aggregated productivity growth brought by FDI spillover effects (Farole and 8 Existing literature mainly examines the impact of resource-seeking FDI Winkler 2014). The successful cases are from develop- by considering this type of FDI as natural resource-based, somewhat dif- ing Asia. China has shown how foreign investment has ferent from the definition of “resource-seeking” in this paper. Literature review 11 resource-seeking FDI and the natural resources are likely to bring in technology and know-how that is mainly traded away rather than being processed in compatible to the host countries’ level of development; the region itself. Therefore, resource-seeking FDI ii) efficiency-seeking FDI is more likely to enable local doesn’t translate into sustained economic growth nor suppliers and competitors to benefit from spillovers institution change, but consequently crowds out the through adaptation and imitation; and iii) efficiency- seconded wave of manufacturing. China’s experience seeking FDI should generate foreign-exchange earnings shows that FDI related to manufacturing will have a for host countries. In addition, they argue that the bigger impact on economic growth than extractive- growth impact of market-seeking FDI should be weaker sector FDI (Buckley et al. 2012). than the growth impact of efficiency-seeking FDI. Market-seeking FDI has a sizeable positive Nevertheless, from the perspective of spillovers, contribution to the host economy. Market-seeking it is not always the case that efficiency-seeking FDI FDI in services and some parts of manufacturing is most beneficial to the host economy. Past expe- can benefit host countries’ consumers by creating rience has shown that efficiency FDI is more likely jobs, introducing new products and services and to enable local suppliers and competitors to benefit by modernizing local production and marketing. from spillovers through adaptation and imitation, e.g., But there are divided views on the results of the manufacturing FDI in East Asia. But some evidence competition effect brought by market-seeking FDI. in SSA reveals that spillovers delivered by efficiency- Nunnenkamp and Spatz(2012) conclude that severe seeking manufacturing FDI are limited because of competition may lead to the crowding out of local the constraints of local absorptive capacity (Farole firms, especially if foreign enterprises command and Winkler, 2013). In addition, with the emergence superior market power. Moreover, in the long run, of GVCs, the boundaries between market- and effi- the host countries’ balance of payments is likely to ciency-seeking FDI are not always clear-cut and often deteriorate through the repatriation of funds since both kinds even convert to each other. For example, market- seeking FDI often generates less export rev- once market-seeking FDI succeeded through the enues. Whereas in a case study on exploring the scope establishment of strong local production networks, and nature of spillovers in three apparel exporting those networks can relatively easily exploited for countries (Kenya, Lesotho, and Swaziland) in SSA, efficiency-seeking FDI. Farole and Winkler (2013) find that market-seeking Any impact assessment of FDI also depends on FDI is more likely to be integrated into the domestic the sectoral characteristics of the investment. Often, economy, to make greater use of local markets and empirical analysis do not account for the sectoral to provide assistance to suppliers than efficiency or composition of FDI when analyzing the FDI impact resource seeking investors. in SSA. But Alfaro (2003) explores the relationship Efficiency-seeking FDI has probably the between economic growth and sectoral FDI in a group strongest growth impact of all types of FDI. Yet, of 47 developing countries. The study finds that FDI the growth impact of FDI in general is not very flows in the different sectors of the economy (primary, pronounced as shown in a recent analysis of 38 SSA manufacturing, and services) exert different effects on countries (Calderón and Ha, 2015). On the other economic growth. While total FDI has an ambiguous hand, Nunnenkamp and Spatz (2012) study the FDI effect on the real per capita GDP growth rate, manu- originating from the U.S. in manufacturing and service facturing sector FDI has a positive, significant effect industry in developing countries. They conclude that on growth. FDI in the primary sector has a significant, one would expect a relatively strong growth impact of negative effect on growth; and the service sector result FDI in industries that attract efficiency-seeking FDI is ambiguous. Using sectoral FDI data in 12 Asian for several reasons: i) efficiency-seeking FDI is more economies, Wang (2002) reaches similar conclusions. 12 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT The study finds that manufacturing FDI has a greater Nunnenkamp and Spatz (2012) conclude that the positive effect on growth than aggregated FDI in the link between FDI and economic growth is stronger in sample and primary sector FDI has a negative effect on the services sector than in the manufacturing sector. growth. Comparing the median growth rates between In addition, within the manufacturing sector positive subgroups of FDI data in 37 developing countries, growth effects are found in efficiency-seeking FDI. RECENT FDI TRENDS IN NON- 3 RESOURCE-RICH COUNTRIES9 When FDI performance is zoomed in at the coun- face the challenge of obtaining reasonable amount try-level the FDI trend measures are not universally of FDI in more diversified sectors. As shown in increasing. For the sample countries (See Figure 3.1 Figure 3.2, the FDI composition in some countries is and Table 3), FDI into Tanzania has been the highest clearly more diversified than in others. Ethiopia’s FDI is on average over the past decade within east Africa. The dominated by the manufacturing sector. In Kenya, FDI growing trends with all ratios indicate a relatively sus- in the services sector has far exceeded the investment in tainable FDI flows into these countries. Uganda saw a the manufacturing sector. The mining sector remains the consecutive three-year growth in FDI after a moderate largest sector in Uganda and Tanzania but Tanzania has decline in 2010, leading to an overall increase over the given relatively more focus on manufacturing. While in past decade. Ethiopia was the top performers during Rwanda, most of FDI was directed to the services sec- 2013, with the size of FDI more than tripled compare tor such as ICT and finance, as well as manufacturing. to the figure in 2012. Similarly, FDI in Kenya almost With respect to FDI in manufacturing, the doubled during the last year. Despite the fast growth performance of subsector al allocation also varies rate, FDI in Kenya and Ethiopia remains relatively across countries. Each country has attracted a certain weak considering the size of its economy, as evidenced level of investment in non-metallic mineral products by the relatively low ratios. In contrast, Rwanda, as manufactures. Food, beverages, and the tobacco indus- a small land-locked country, has kept pace with the try also has large presence across countries, except in overall increasing FDI trend in Africa and continues Rwanda. Motor vehicles equipment is another widely to attract certain levels of FDI, which as a share of its distributed industry. Certain types of manufacturers GDP or per capita is quite significant. These findings are more consistent with the literature that empha- 9 Notes: i) Sample countries have been selected based on the relevance sizes the importance of country-level institutional and for the manufacturing sector and data availability; and ii) in view of the policy factors in attracting FDI. fact that Greenfield projects are the major form for investors to enter the manufacturing sector in Africa, this section uses data from fDi Markets, Moreover, FDI trends differ significantly by sec- a cross-sectional project-level database operated by the Financial Times tor, indicating that most SSA countries continue to newspaper that tracks data on cross-border Greenfield investments. TABLE 3: Indicators of Relative Magnitude of FDI Inflows to Selected Countries in Africa FDI/GDP FDI/GFCI FDI/Export FDI per capita Country 02–05 06–09 10–13 02–05 06–09 10–13 02–05 06–09 10–13 02–05 06–09 10–13 Tanzania 3.79 4.35 6.30 0.18 0.15 0.19 0.20 0.18 0.22 12.77 19.68 35.78 Uganda 3.53 5.93 5.18 0.17 0.27 0.21 0.28 0.31 0.23 9.63 24.00 26.60 Ethiopia 4.04 1.44 1.39 0.13 0.05 0.04 0.29 0.11 0.10 5.24 3.41 5.87 Rwanda 0.27 1.89 1.52 0.02 0.09 0.06 0.03 0.16 0.12 0.62 8.21 9.20 Kenya 0.29 0.76 0.67 0.02 0.04 0.03 0.01 0.04 0.03 1.29 6.52 7.48 Source: World Bank staff own calculations, based on data from World Development Indicator (2014). 13 14 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT have favored some countries. For example, Ethiopia in specific sub-sectors may be appropriate in the holds large amount of FDI in textiles, clothing and short run. With the emergence of GVCs, low value leather, and footwear. Other prominent examples addition is recognized as a starting point to benefit- include electrical and electronic equipment in Kenya, ing from global trade and investment integration. In and metal and metal products in Tanzania and Uganda the long run, by specializing in the tasks in which (see Table 4). the countries have comparative advantage, countries However, manufacturing FDI in SSA character- have greater opportunities to achieve the FDI-induced ized by low value addition and the concentration productivity gain, which will contribute to the FIGURE 3: Sectoral FDI in Selected Countries in SSA 1. Foreign Direct Investment, Net Inflows (BOP, Current US$bn) 2. Main Sectors of FDI in Sample Countries by FDI Stocks, % of total value 76% 2.0 80% 70% 64% 60% 49% 50% 44% 1.5 41% 40% 30% 20% 19% 19% 16% 20% 14% 14% 1.0 12% 12% 11% 10% 9% 8% 8% 9% 10% 8% 7% 6% 6% 5% 4% 4% 3% Transporation&storage 2% Others 1% Hotels& Restaurants 1% 0% Manufacturing Agriculture Real estate, Machinery and… Construction Mining&Quarrying Finance&Insurance Manufacturing Electricity& gas Wholesale &Retail Others Mining&quarrying Manufacturing Electricity & gas Finance&Insurance Accommodation Others ICT Finance & Insurance Manufacturing Wholesale & Retail Agriculture Others Wholesale and retail trade Manufacturing Finance & Insurance Electricity & gas Others 0.5 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Ethiopia Rwanda Tanzania Uganda Kenya Ethiopia (2013) Uganda (2012) Tanzania (2012) Rwanda(2013) Kenya (2011) 3. Top Investors of FDI in Sample Countries by FDI stocks, % of total value 4. Greenfield Manufacturing FDI by Investor Groups, Sample Countries, 2003/14, Share of Total Investment 50% 100% 44% 90% 80% 36% 40% 33% 33% 70% 60% 28% 26% 30% 25% 25% 24% 50% 23% 22% 19% 40% 18% 18% 20% 15% 30% 13% 10% 20% 9% 9% 9% 9% 8% 7% 10% 7% 6% 10% 5% 5% 5% 3% 3% 0% 0% Ethiopia Uganda Tanzania Rwanda Kenya Turkey China Saudi Arabia India France Others Netherlands Australia Kenya Mauritius Others South Africa Barbados Canada Kenya Others Mauritius South Africa Kenya Netherlands Nigeria Others Maritius US Japan Netherland Others UK UK UK China EU India Intraregional partner Other new partners (incl. Middle East) Other traditional Ethiopia (2014) Uganda (2012) Tanzania (2012) Rwanda(2013) Kenya (2011) US LAC (continued on next page) RECENT FDI TRENDS IN NON-RESOURCE-RICH COUNTRIES 15 FIGURE 3: Sectoral FDI in Selected Countries in SSA (continued) 5. Top Sectors in Manufacturing FDI for Job Creation, Greenfield Projects, 6. Job Creation in Manufacturing FDI by Investor Groups in Sample Countries, 2003/14, % in Total 2003/14, % in Total Others 10% 100% Electrical and electronic equipment 8% Kenya Consumer Products 14% Non-metallic mineral products 17% 90% Motor Vehicles and others 21% Food & beverages 29% 80% Others 21% Metals and metal products 8% Rwanda Non-metallic mineral products 12% 70% Machinery and equipment 14% Electrical and electronic equipment 20% Chemicals and pharmaceuticals 25% 60% Others 21% Chemicals and pharmaceuticals 4% 50% Tanzania Consumer Products 7% Metals and metal products 7% Food & beverages 27% 40% Non-metallic mineral products 35% Others 9% Coke, petroleum products and nuclear… 9% 30% Uganda Consumer Products 13% Motor Vehicles and others 17% 20% Food & beverages 23% Metals and metal products 28% Others 4% 10% Chemicals and pharmaceuticals 2% Ethioipa Non-metallic mineral products 3% Motor Vehicles and others 8% 0% Food & beverages 12% Ethiopia Uganda Tanzania Rwanda Kenya Textiles, clothing and leather, shoemaking 72% China EU India Intraregional partner Middle East) Other new partners 0% 50% 100% Other traditional US LAC Source: 3.1 World Development Indicator, 2014; 3.2, 3.3 Ethiopia data from EIC; Other countries are from Foreign Investor surveys conducted by respective Central Banks, various issues; 3.4–3.6 fDi Markets (www.fdimarkets.com). TABLE 4: Greenfield Manufacturing FDI Inflows by Sub-Sector, 2003–2014, US$M Ethiopia Kenya Rwanda Tanzania Uganda Coke, petroleum products, and nuclear fuel 1,641 6,641 Food, beverages, and tobacco 1,290 456 440 385 Textiles, clothing and leather, and footwear 2,510 Non-metallic mineral products (including building & 546 580 165 791 260 construction materials) Motor vehicles and other transport equipment 505 508 61 255 Chemicals and pharmaceuticals 264 458 65 179 Metals and metal products 75 61 214 455 Publishing and printing 165 163 65 Consumer products 247 52 Electrical and electronic equipment 178 69 Machinery and equipment 78 49 Rubber and plastic products 73 Source: fDi Markets Database (www.fdimarkets.com). Note: Only sectors with cumulative investments more than US$50 million are highlighted. 16 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT TABLE 5: Greenfield Manufacturing FDI of Country Origin, 2003–2014, US$M Other Intraregional Middle new Other China India EU US Partner East partners Traditional LAC Coke, petroleum products 5,000 3,282 & nuclear fuel Food, beverages and 388 1,098 334 118 185 122 tobacco 348 Textiles, clothing and 580 1,226 327 215 169 leather, footwear Non-metallic products 145 393 1,712 67 (incl. construction materials) Motor vehicles and 556 465 95 212 transport equipment Chemicals and 162 256 350 179 pharmaceuticals Metals and metal products 161 179 61 219 191 Publishing and printing 379 Consumer products 273 54 Electrical and electronic 145 69 equipment Machinery and equipment 80 Rubber and plastic 80 products Source: fDi Markets Database (www.fdimarkets.com). Note: Only sectors with cumulative investments more than US$50 million are highlighted. economic growth and welfare improvements (Farole China, India, and South Africa. The major fields of and Winkler, 2013). investment are textile and clothing, and leather and FDI in the manufacturing sector in Africa footwear; and motor vehicles and transport equipment is dominated by non-traditional sources. This is for both India and China in manufacturing. Besides, consistent with the analysis of Lin (2014). He shows China focuses more on metal and metal products that rising labor cost in China has been a major factor while India does so on food processing. South Africa’s in driving its overseas investment in labor-intensive investment in the manufacturing sector is relatively manufacturing. Figures 3.3 and 3.4 demonstrate small compared to that of China and India, target- respectively the major investors for overall FDI and ing food and beverages, chemicals, and construction manufacturing FDI in the five sample countries. materials (see Table 5). Traditional partners accounted for large stocks in Measured by investment motivation, manufac- 2012–2014 for overall FDI but represent much less turing FDI is mainly market-seeking in SSA. A series proportion in manufacturing FDI. In contrast, the of occasional surveys by the central banks and invest- bulk of FDI inflows to the manufacturing sector were ment promotion agencies all point out that most of from new partners and intraregional partners, led by manufacturing FDI are dominated by market-seeking RECENT FDI TRENDS IN NON-RESOURCE-RICH COUNTRIES 17 FDI. For example, in the investor survey conducted large-scale manufacturing investment with predicted by Uganda Investment Agency in 2012, 65 percent risk under control. New partners, on the other hand, of respondents reported that access to domestic and rely heavily on the channel of experimentation and the regional markets was the major factor that influenced “word of mouth.” Investors from these countries are their investment decisions, second only to the fac- more accustomed to less supportive institutional envi- tor that was “favorable macroeconomic and politi- ronments, and many are more adapted entrepreneurs cal stability.” (Uganda Bureau of Statistics 2012).10 in high-risk environments. According to the Africa Also, among Greenfield projects in the countries we Investor Report 2011, the major information source examine, firms are found to be mainly driven by the for investment opportunities for traditional partners desire to access either directly the national market or are “external expert” and “HQ/Parent company” chan- indirectly the regional or international market through nels; to new partners information comes from exist- the host country. Factors influencing efficiency FDI ing investors. These types of channels brought many inflows such as cost of production and skills of the small-scale, flexible manufacturing investments to labor force have been found to affect FDI decisions Africa. In addition to existing investors, a significant less (fDi Market, 2003–2014). In addition, survey number of Chinese manufacturing firms invested in results suggest that access to market will continue to SSA reported that they consulted embassies about be important for South-South FDI going forward.11 investment opportunities—both African embassies Moreover, profitability in manufacturing gen- in China and Chinese embassies in Africa. erally higher compared to other sectors, likely While high rate of return helps attract FDI in reflecting the high risk and low competitive envi- manufacturing, it doesn’t translate into positive ronment.12 First, recent surveys show that the overall benefits to host economy automatically. On the rate of return of FDI in Africa has been above 9 per- one hand, the high return on manufacturing FDI has cent since 2006, higher than world average of 7.5 the potential to attract increased FDI, which in turn percent and developing country average of 8.1 (data generates value-added in host countries, creates jobs for 2011). In Rwanda, manufacturing realized an and income for workers, and contributes to GDP. On average return to equity (ROE) of 24 percent in 2013. the other hand, the increase of retained earnings has In Tanzania, net profits after tax in manufacturing been slower than that of repatriated earnings over the increased consistently since 2008 and tripled between last few years in the sample countries.13 In the long 2008 and 2011. Similarly, the profitability of manu- run, this may have negative effects on the balance facturing FDI in Uganda has been the second only to of payments of the countries since the dominated finance among all sectors in 2011–12 and 2012. These high rates of return have attracted more FDI inflows to SSA (Razafimahefa and Hamori, 2005), and also 10 Moreover, the foreign investment survey administrated in Kenya indicated that more than 60 percent of the respondents in manufactur- reflect the low competitive environment and high risk ing sector recognized that access to domestic and international markets involved in investing in Africa. have a positive effect on their business operations. This percentage is higher than that was reported in services sector (Kenya National Bureau Higher tolerance of risk seems to have sup- of Statistics, 2013). ported larger increases of FDI from new partners 11 The World Bank/UNIDO survey of 713 potential investors from Brazil, India, South Africa and South Korea. to SSA. Investors from traditional partners are used 12 Profitability of stockholders’ investment is measured by the rate of to more supportive institutional environments, and return, which is the ratio of the net income from a business or a project to the total money invested in the venture; or return on equity, which thus most prefer to make informed decisions on is the ratio of the net income of a business to its stockholders’ equity investment location and strategic considerations based during a year. 13 See Foreign Investor Survey, Kenya National Bureau of National Sta- on thorough demanding technical evaluation, using tistics, 2013; Private Sector Investment Survey, Bank of Uganda, 2013; their existing business model. This usually leads to and Foreign Private Investment in Rwanda, Bank of Rwanda, 2013. 18 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT market-seeking FDI in African economies doesn’t currently the main source of labor-intensive subsector generate export revenues. Therefore a policy objective s in manufacturing. For example, looking at Greenfield should probably be to maximize the reinvestment rate projects between 2003 and 2014, India, China, UK, in order to accrue the FDI income to the domestic and Germany provided the most job opportunities in economy as much as possible and generate further pro- SSA. By investor group, total number of jobs created ductive capacity for development (UNCTAD 2012). by new partners (e.g., China and India) or intrare- Manufacturing FDI has led to increased job cre- gional partners (e.g., South Africa and Kenya) is com- ation among sectors in some sample SSA countries, parable with those provided by traditional partners according to recent data and studies. In Tanzania (e.g., UK, U.S. and Germany) (Figure 3.6). However, and Uganda, for example, even though manufacturing the major job creator in terms of sectors within each is not always the largest sector in capital investment group was different: for China and India, the major- there, it has generated the largest number of jobs in ity of jobs were channeled through industries such these two countries. In Tanzania, foreign investor sur- as textiles and clothing, and leather and footwear; vey reported that manufacturing was the largest job whereas EU group created more jobs in food and creator among sectors over the period 2008–2009, beverages, and some high-skilled sectors such as coke averaging 36,303 jobs per year and accounting for and petroleum products. Figures 4.1 to 4.5 show the 43 percent of total jobs created by FDI (Bank of top employers in subsector s that generated large job Tanzania, 2013). Uganda’s investor survey divided opportunities in the sample countries. jobs into full-time and part-time types, and showed Unskilled jobs usually constitute large numbers that manufacturing achieved the highest job creation of local employment created.14 Due to the fact that in 2012, both in full-time (23 percent of total) and low-skilled15 manufacturing is dominant in the exam- part-time (79 percent of total) (Bank of Uganda, ined countries, foreign firms demand more trainable 2013). In Ethiopia, manufacturing accounts for 28 unskilled laborers than skilled ones considering the percent of total employment opportunities between lower wages of unskilled employment (The World Bank 2008 and 2014, the largest non-agricultural sector 2012a and 2015). However, formal training remains in terms of job-creating FDI (Ethiopia Investment insufficient in manufacturing firms (Figure 4.6). Commission, 2014). Moreover, the training results are below the expectation Different sectors dominate different countries of the foreign investors. Sometimes less educated work- in terms of FDI job creation. For example, in the ers are unable to operate machines properly; in some last decade (2003 to 2014), some emerging subsectors cases, communication gaps resulting from language and characterized by large employment included textile cultural differences affect the efficiency and accuracy and clothing, and leather and footwear in Ethiopia. In of training.16 Because of the limitation on the educa- Kenya it was food and beverage, and motor vehicles tion level of workers and training capacity of firms, the and other transport equipment. Non-metallic mineral quality of goods produced by trained workers is still products, and food and beverage were the main job- poor and uncompetitive in the global market. This is creating FDI sectors in Tanzania; while metal products a common issue for textile and leather factories, which and food and beverage led in Uganda, and chemicals adopt a “low-wage” strategy for higher profit. and pharmaceuticals did so in Rwanda (Figure 3.5). Available data suggest that FDI from new and 14 Unskilled jobs are defined as jobs that don’t provide any formal train- intraregional partners drives employment creation ing to the workers. in manufacturing. It is not surprising that the consid- 15 Low-skilled manufacturing includes food and beverage, wood and wood products, and textiles, clothing and leather. See Moran 2015. erable contributions to job creation in manufacturing 16 This is more serious for Chinese firms where English, French, or came from investment of new partners, since they are Portuguese are not the working languages. RECENT FDI TRENDS IN NON-RESOURCE-RICH COUNTRIES 19 Overall, investment climate factors have resources and market potential in SSA countries but become more important to sustain FDI beyond gradually find it is not easy to survive and thrive the initial project implementation, a fact derived due to some constraints. As several studies indicate from empirical evidence and investors’ perception. (for instance (Kinda 2014; and Morisset 2001) the Investors, especially those from emerging countries long-term drivers of FDI into SSA countries can be are initially attracted by abundant natural and human attributed to investment climate factors related to FIGURE 4: Top Investors in Sub-Sectors that have Large Job Creation, Greenfield Projects 1. Top Investors in Ethiopia (2003–2014) 2. Top Investors in Uganda (2003–2014) 25000 8000 2500 1200 7000 20000 2000 1000 6000 800 15000 5000 1500 4000 600 10000 3000 1000 400 2000 5000 500 200 1000 0 0 0 0 Turkey India China India Germany United States China India Russia Nigeria UAE South Africa Singapore Germany Tanzania China Germany Kenya Libya Iran China India US Germany Kenya UK UK Textiles, Food & Motor Non-metallic Chemicals Metals and Food & Motor Consumer Coke, clothing and beverages Vehicles and mineral and products beverages Vehicles Products petroleum & leather, others products pharmaceu- nuclear fuel footwear ticals Total Jobs Average Jobs Total Jobs Average Jobs 3. Top Investors in Kenya (2003–2014) 4. Top Investors in Tanzania (2003–2014) 2500 1800 1800 1400 1600 1600 1200 2000 1400 1400 1000 1200 1200 1500 800 1000 1000 800 800 600 1000 600 600 400 500 400 400 200 200 200 0 0 0 0 Egypt US Spain India Japan China India Nigeria Romania France South Korea China Germany South Africa Nigeria Kenya Egypt UAE UAE Mauritius South Korea Japan China UK UK Food & Motor Non-metallic Consumer Electrical Non-metallic Food & Metals and Consumer Chemicals beverages Vehicles mineral Products and mineral beverages products Products and andothers products electronic products pharmaceu- equipment ticals Total Jobs Average Jobs Total Jobs Average Jobs (continued on next page) 20 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT FIGURE 4: Top Investors in Sub-Sectors that have Large Job Creation, Greenfield… (continued) 5. Top Investors in Rwanda (2003–2014) 6. Formal Training in Foreign Manufacturing Firms (% of Total) 800 8000 70 700 7000 600 6000 60 500 5000 400 4000 50 300 3000 200 2000 40 1000 66% 100 65% 0 0 30 60% India Brazil South Korea China South Africa Uganda Mauritius 20 39% 27% Chemicals Electrical & Machinery Non-metallic Metals and and electronic equipment mineral products 10 pharmaceuti- equip. products cals 0 Ethiopia Kenya Rwanda Tanzania Uganda Total Jobs Average Jobs (2011) (2013) (2011) (2013) (2013) Source: 4.1–4.5 fDi Markets (www.fdimarkets.com);4.6: Enterprise Survey, including both foreign firms and domestic firms. Note: 4.6: considers companies with 10 percent or more foreign ownership. infrastructure, human capital and institutions. Less foreign investors succeed in starting their operations, conducive investment climate can drive cost of doing they still will face challenges threaten their survival. business up and further offset the benefits from factor Increasingly, empirical evidence suggests that endowments. For example, on average 37 percent of some labor-intensive subsectors in manufacturing the foreign manufacturing firms in the five countries are more sensitive to value chain integration (or identified electricity as the major constraint, resulting lack thereof ), particularly when it comes to the in the loss amounting to average 6 percent of annual supply of production inputs. Moreover, the short- sales (Enterprise Survey 2011/13). At subsector level, age of intermediate inputs is negatively affected by more serious losses happened in chemical, plastic & unfavorable business environment factors such as trade rubber in Kenya (7.5 percent loss of annual sales); logistics and import tax rate. As discussed in a World food industry in Uganda (as high as 19.7 percent loss Bank study on light manufacturing in Africa in 2012 of annual sales); and textile and garment industry in there are critical input constraints in five subsectors Tanzania (7.3 percent loss of annual sales) (Enterprise in Ethiopia (World Bank 2012a): apparel, leather Survey 2011/13). During the past five years, several products, wood products, metal products, and agri- Chinese textile companies in Tanzania and Uganda business. And in fact, this is a common issue in other were forced to shut down due to the electricity prob- countries as well. In Uganda, about 14 percent (or lem (see Table 6 with an overview of electricity as 124) of foreign firms reported that the unreliable sup- constraint).17 Other major issues include delays at ply of production inputs was the main reason leading ports/airports and shortages of skilled workers (Moran them to operate below installed production capacity in 2015; Akhlaque and Buba 2015). Annex 2 compares the cost of doing business in the sample countries. With the high cost of doing business, even though 17 See more examples in Tang 2015, page 184. RECENT FDI TRENDS IN NON-RESOURCE-RICH COUNTRIES 21 TABLE 6: Cost of Doing Business: Electricity as a Constraint Percent of firms Number of Losses due to Proportion of Percent of firms identifying electrical outages electrical outages electricity from a owning or sharing electricity as a Economy in a typical month (% of annual sales) generator (%) a generator major constraint Ethiopia 7.6 5.3 27.4 86.0 46.8 Kenya 6.7 6.2 8.5 70.0 45.7 Rwanda 5.2 1.1 4.8 69.6 17.8 Tanzania 8.3 3.7 13.6 68.7 57.7 Uganda 4.9 14.2 15.6 78.3 14.8 Source: Enterprise Survey, data as of 2015. Note: This table considers companies with 10 percent or more foreign ownership. 2012 (Uganda Bureau of Statistics, 2012). In Rwanda, are facing supply issues of intermediate materials (e.g., access to raw materials was identified the most bind- ginning cotton lint). Therefore, there is a loophole of ing constraint for both small and large manufacturing primary materials that disconnects the raw materials firms in a survey of 43 representative firms18 (Gathani and finished products of the value chain, restricting and Stoelinga, 2013). In Tanzania, between 2009 the scale and speed of the manufacturing development and 2007, only 11 percent of foreign firms chose to (Tang, 2014). source more than half of their raw materials from local market, others either imported or produced locally (Bank of Tanzania, 2013). While evidence shows that Chinese investors encountered difficulties in realizing 18 Manufacturing firms surveyed were selected based on criteria that the local low-cost labor advantage due to the overly included, among others, a profiled turnover more than US$1M per year, and hiring more than 30 employees. high cost of raw materials.19 This problem is crucial 19 For example, the cost of importing pebble material is US$40/m^3, when comes to textile and garment industry, which which is almost four times the price in China. (Lu and Kweka 2013). 4 CASE STUDIES Case Study 1: Ethiopia20 percent by project number or 16 percent by invested capital)23 moved from preparation to operations. FDI Trends Moreover, the share of operational projects in all licensed projects declined in recent years (from 38 Ethiopia’s economic performance has been robust, percent in 2008 to 18 percent in 2012) (Figures 5.1 but its FDI inflows have increased only moderately and 5.2; Figure 5.3 shows the similar trends across over the past decade. Ethiopia is one of the fast- sectors). Data for pre-implementation may be slightly est growing non-oil producing economies in Africa inflated due to the ease of registering interest to invest with an average growth rate of 10.7 percent per year even when no concrete investor interest persists. On between 2004 and 2012, almost double the SSA the other hand it is difficult to distinguish registrations average of 5.4 percent over the same period. Since that never aimed to get operationalized and those that Ethiopia issued its first investment proclamation in failed to operationalize for real reasons. However, the 1992, an attempt has been made to use FDI as an overall trend of low and decreasing operationalization instrument to develop the economy. However, FDI is most likely to be intact as evidenced when only look- inflows to Ethiopia have struggled to grow for many ing at declining numbers of operational FDI projects years. The ratio of FDI to GDP declined to below 1 in Ethiopia across all sector (Figure 5.3). percent between 2008 and 2013, making Ethiopia As for manufacturing FDI, although its cumu- the second lowest in the average FDI-to-GDP ratio lative growth is in line with the country’s develop- among comparators.21 Similarly, the share of FDI to ment plan as described in Ethiopia’s Growth and export averaged 10 percent in this period, lower than Transformation Plan (GTP), recent data indicates the comparators (Table 3). Recent annual data shows challenges in implementing manufacturing proj- a significant increase in FDI, however. Ethiopia’s FDI ects and bringing them to the operational stage has hit a record high of US$953 million, or about 2 (Figure 5.4). The registered projects in manufacturing percent of GDP in 2013, indicating a sign of new momentum (WDI 2015). 20 This section is primarily based on data from the FDI database of the Within FDI flows, the conversion rate of Ethiopia Investment Commission (EIC). EIC keeps a list of FDI proj- ects in the form of a “three stages” classification: Pre-implementation, licensed FDI projects from the “pre-implemen- Implementation and Operations. According to EIC’s classification, at tation” phase to the “operational” phase is quite the “pre-implementation” phase firms declare their intention to invest in Ethiopia and claim allotment of land; at “implementation” firms low, and it varies significantly across sectors. While effectively receive the land and start construction and installation of some of this may be related to methodological issues, machinery; and at “operations” phase firms are allowed to start operations. Data spot checks show that a clear distinction of projects along the three there is a real trend of decreasing operationalization. stages cannot be done and ‘double counting’ may occur. The primary Ethiopia’s official FDI data distinguishes various FDI analysis in this section therefore focuses on the projects under operation. 21 Comparators are Kenya, Tanzania, Uganda, and Rwanda as noted phases from pre-implementation to operational. From previously. 2008 to April 2014, 4,378 investment projects were 22 Ethiopia Investment Agency was reorganized as Ethiopia Investment Commission (EIC) in 2014. registered with the Ethiopia Investment Agency.22 23 Note: The EIA (EIC) updates the status of projects regularly. Thus the However, of these projects, only a small fraction (21 discussion focuses on the status as of April 2014. 23 24 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT reached 1,472 cumulative over the time period from 2013. Even after six years, only 25 percent started 2008 to 2013 (or about $US8.9 billion), indicat- operations, and the rest of projects have likely been ing a good level of interest by foreign investors in discontinued. Therefore, the low conversion rate is a this sector. Compared to other sectors, the share of key issue that Ethiopia needs to solve in order to real- operational projects in manufacturing is the highest ize the potential benefits of FDI because significant in capital investment. However, the proportion of delays may force investors to leave and adversely affect manufacturing projects that actually started opera- investor confidence in Ethiopia. tions, after obtaining business licenses issued by EIC, The remainder of this analysis focuses on was estimated at 25 percent (374 out of 1,472) from operational projects over the period of 2008 to 2008 to 2013. Of these, only 4 percent (16 out of 2013 in order to capture the actual amount and 433) commenced operations in less than one year in pattern of FDI. FIGURE 5: FDI in Ethiopia: Overall Trends 1. FDI by Number of Projects in Ethiopia, 2008–2013 2. FDI by Capital Investment in Ethiopia, 2008–2013, US$M 900 100% 4000 100% 90% 800 90% 3500 90% 75% 80% 80% 700 3000 600 70% 70% 59% 2500 52% 54% 60% 60% 500 42% 822 771 50% 2000 50% 400 785 683 38% 496 40% 1500 40% 300 740 29% 28% 30% 30% 200 21% 18% 1000 21% 20% 20% 19% 19% 20% 500 100 4% 10% 10% 7% 7% 0 0% 0 0% 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 Total Project Number Share of Pre-implementation (%) Total Project Number Share of Pre-implementation (%) Share of Implementation (%) Share of Operation (%) Share of Implementation (%) Share of Operation (%) 3. Trend of FDI Projects under Operation in Ethiopia, 4. Trend of Manufacturing FDI by Investment Status in Ethiopia, by Main Sectors, 2008–2013 by Project Number, Status as of 2014 120 400 100 350 80 300 60 250 40 200 150 20 100 0 2008 2009 2010 2011 2012 2013 500 Agriculture Construction Hotel and Tourism Machinery and Equipment Rental 0 2008 2009 2010 2011 2012 2013 (Including Restaurant, lodge service) and Consultancy Service Manufacturing Implementation Operation Pre-Implementation (continued on next page) Case studies 25 FIGURE 5: FDI in Ethiopia: Overall Trends (continued) 5. The Sub-Sectoral Composition of Manufacturing FDI, 6. FDI in Ethiopia at Operations Stage, by Sectors & Top Investors, by Project Number, 2008–2013 2008 – April, 2014 100% 120 116 90% 100 80% 80 70% 60% 60 50% 40 37 34 29 28 40% 24 20 14 11 11 11 12 11 9 9 30% 8 8 7 6 5 9 4 3 0 20% Sudan India Netherlands Israel Saudi Arabia China India Turkey Sudan Pakistan China Turkey India China Sudan USA China USA Britain Sudan India Turkey 10% 0% 2008–2010 2011–2013 Agriculture Manufacturing Construction Hotel and Machinery and Paper, printing & Packaging Food and beverages Tourism Equipment Metals and metal products Textiles, clothing and leather, shoemaking (including Rental and Chemicals and Pharmaceuticals Others Restaurants) Consultancy Non-metallic mineral products (including building &construction materials) Service Source: Ethiopia Investment Commission (EIC). Note: In Figure 5.5, “Others” include rubber and plastic products, wood and wood products, electrical and electronic equipment, motor vehicles and other transport equipment, machinery and equipment, and consumer products. The manufacturing sector was the top recipi- and pharmaceuticals subsectors roughly maintained ent of FDI both by number of projects and level of the same weight. Because only projects that survived investment. Manufacturing accounts for the largest were examined, this may imply that current invest- share at 76 percent of the total investment for opera- ment climate has favored some subsector s over others. tional projects, reaching US$2.2 billion over the last The majority of manufacturing FDI comes six years. Moreover, the average size of manufactur- from new partners such as China, India, Turkey, ing projects has been the largest, almost double than and Sudan, and their average project sizes vary that of agriculture projects, the second largest sector considerably. There were 920 operational projects in in average size of project (EIC, 2014) Ethiopia from 2008 to 2013, either solely owned by The FDI trend varies by subsectors in the man- one country or as joint venture. By project number ufacturing sector from 2008 to 2013. As Figure 5.5 the top five investors are China (196 fully owned by shows, the composition of FDI in manufacturing sec- Chinese), India (64), Turkey (57), Sudan (54) and tor has changed over the time. The relative weight of the U.S. (45); while by capital, the top five are Turkey textile and clothing, and leather and footwear subsec- (US$967 million), China (US$545 million), Saudi tors increased rapidly; and the same happened to the Arabia (US$279 million), India (US$254 million) and food and beverage subsector. Additionally, the paper, France (US$96 million). Among these, Turkey has the printing, and packaging subsector also increased. In largest average project size; in contrast, Sudan’s project comparison, nonmetallic mineral products (such size is the smallest. Figure 5.6 shows the top inves- as cement, concrete, and gypsum manufactur- tors across sectors. In the manufacturing sector, new ing) declined. Finally, the metal products, chemicals, partners (China, India, Turkey, and Sudan) are also 26 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT the top investors by project number, while traditional in 2014 also revealed that market size and potential, investors have limited presence because most of their investment incentives and political and social stabil- investment is in services. Furthermore, traditional ity are top three drivers for foreign investments in investors use joint ventures more often in this sector, Ethiopia (Teka 2014). and Netherlands, Germany, the US and Italy are the In addition, specifically related to manufactur- major investors in this group. ing FDI, low cost of labor stands out as a major Among new partners, China and India have driver. A survey of 45 Chinese manufacturing firms maintained long historical ties with Ethiopia in Ethiopia in 2012 shows that their good understanding trade and investment, but exhibited many dif- of investment climate comes through through social ferences in investment patterns. Before 2008, the networking, and that the low cost of labor and local Chinese FDI was mainly in construction and related market size in Ethiopia are the main reasons influ- activities (30 percent by number of projects and 56 encing their decision (World Bank 2012). The first percent by investment since 1992) (EEA/EEPRI reason reflects the traditional investment behavior 2009). In comparison, the Indian FDI concentrated in among Chinese investors who tend to form clusters cut flowers, plastic manufacturing, and water drilling. to share risks when investing overseas. As discussed Manufacturing FDI from both countries has grown earlier, information from existing investors is one rapidly and their operational projects reached peak in critical source for new partners to make investment 2008–2009. Over last seven years, manufacturing has decisions, while the reasons represent the main char- attracted the lion’s share of FDI from both countries. acteristics of resource-seeking and market-seeking type Also, China and India recorded relatively high conver- of FDI, respectively. Similarly, India’s investment has sion rate: both reached 30 percent. Apart from textile been mainly attracted to the low cost of labor and raw and clothing, leather and footwear, and nonmetallic materials (e.g., cotton for textile, hide for leather) as mineral products (including building and construc- well as investment incentives (Ancharaz et al. 2014). tion materials), Chinese and Indian FDIs have shown different concentrations in manufacturing products. FDI Impact and Results Chinese companies have become engaged in products such as electrical and electronic equipment and rub- Of all jobs created by FDI in Ethiopia, the manu- ber and plastic products; while Indian investors focus facturing sector has created the most permanent on chemicals and pharmaceuticals, as well as paper, jobs over the last five years. Based on data from the printing and packaging. Ethiopia Investment Commission, at first glance FDI in agriculture seems to employ 54 percent of the work- FDI Determinants force, while manufacturing is second only to agricul- ture, employing 28 percent of the total from 2008 to Market size and political and social stability have April 2014 (Figure 6.1). However, the bulk of jobs in been the two major determinants for FDI in agriculture are temporary. In contrast, manufacturing Ethiopia. There have been numerous surveys and created more permanent jobs. In fact, if only perma- studies investigating the determinants and types of nent jobs are examined, manufacturing becomes the FDI inflows to Ethiopia, and an emerging consensus top job creator, accounting for 60 percent of the total is that market size and potential, a comparatively safe permanent jobs created (Figure 6.2). and less corrupt business and social environment, and a favorable temperature for agriculture are the main 24 According to the fDi Markets database, the key reasons for investment were regulations or business climate, domestic market growth potential, drivers (UNCTAD 2004). Recent survey data by fDi and natural resources, in that order. The motives for investment were market24 also confirmed these findings. Another survey cited by companies for 20 projects. Case studies 27 While FDI from new partners has created the jobs), Turkey (22 percent) and India (6 percent) are most manufacturing jobs, they are concentrated in the top three job creators in the manufacturing sec- low-skill sectors. Textiles and clothing, and leather tor both for permanent and temporary type of jobs and footwear; construction-related manufacturing; from 2008 to 2014, creating more than half of the and food and beverage are sectors that hold the largest total employment, in which 70 percent are perma- employment (Figure 6.3). China (24 percent of total nent jobs (Figure 6.4). Moreover, their job creation FIGURE 6: FDI in Ethiopia: Employment Trends 1. Employment Opportunities Created at Operations Stage by Sector, 2. Sectoral Contribution to Job Creation by Job Type, 2008–2014 2008–2014 140,000 120,000 100,000 80,000 28% 60,000 40,000 54% 20,000 1% 1% 0 5% Manufacturing Agriculture Real estate, Machinery and Equipment Rental and Consultancy Service Construction Contracting Including Water Well Drilling Hotels (Including Resort Hotels, Motels and Lodges) and Restaurants Others* 11% Manufacturing Education Hotels (Including Resort Hotels, Real estate, Machinery and Equipment Motels and Lodges) and Restaurants Rental and Consultancy Service Perm. Empl. Temp. Empl. Construction Contracting Including Agriculture * Others includes Mining, Tour Operation, Transport and Communication, Water Well Drilling Education, etc. 3. Top Sub-Sectors in Manufacturing FDI for Job Creation, Ethiopia, 2008–2014 4. Top Investors in Manufacturing FDI for Job Creation, Ethiopia, 2008–2014 25000 18000 20000 16000 15000 14000 10000 12000 5000 10000 0 Textiles, clothing andleather, shoemaking Non-metallic mineral products (including building&construction materials) Food, beverages and tobacco Chemicals and Pharmaceuticals Electrical and electronic equipment Metals and metal products Rubber and plastic products Wood and wood products Machinery and equipment Paper, printing & Packaging Motor vehicles and other transport equipment Consumer product Other 8000 6000 4000 2000 0 China Turkey India Saudi Arabia Germany USA Others Temp Employment Perm Employment Sum of Temp Employment Sum of Perm Employment (continued on next page) 28 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT FIGURE 6: FDI in Ethiopia: Employment Trends (continued) 5. Top Investors in Sub-Sectors that have Large Job Creation, 2008–2014, Ethiopia Textiles, clothing and leather, footwear India China Turkey Non-metallic mineral products Turkey (including building & construction materials) Saudi Arabia China Food, beverages and tobacco Pakistan China Turkey Chemicals and Pharmaceuticals China India USA Electrical and electronic equipment India China Turkey Metals and metal products Kenya China India Rubber and plastic products India USA China Wood and wood products Turkey Pakistan China 0 2000 4000 6000 8000 10000 12000 14000 Source: 6.1–6.5 Ethiopia Investment Commission (EIC). record differs by subsector (Figure 6.5). For example, are vertically integrated into the supply chain. For Chinese FDI tends to create major job opportunities example, Indian investors have invested about US$50 in construction-related manufacturing, such as non- million in processing hide by establishing tanneries metallic mineral products including steel products, while at the same time purchasing leather through cement, and gypsum products, while Turkish and local sourcing. Similar evidence is emerging in the cot- Indian FDI firms hire workers for textiles, clothing ton-textile-apparel value chain. Moreover, increased and leather, and footwear subsectors. labor productivity ensures these foreign investors can Recent evidence in Ethiopia also suggests that integrate advantages of the factor endowment and resource-seeking and market-seeking FDI can be policy incentives into efficiency-enhancing operations. converted or upgraded to efficiency-seeking when For example, Hua Jian, a Chinese footwear firm has such FDI matures under a supportive business relocated its factory to Ethiopia to take advantage of environment. Although Ethiopia is dominated by the low cost of labor and preferential access to the market-seeking (e.g., food processing such as Diageo U.S. and EU market, but over time the consolidation Brewery or chemical such as Unilever) and resource- of these two factors has resulted in some productivity seeking (for securing cheap labor and raw input) type advantages, which would also classify their operations of FDI, some evidence proves that efficiency-seeking as efficiency-seeking. FDI is emerging in textile sector and leather sector. Investment climate factors are shown to signifi- In the textile subsector, Indian firms have fostered cantly affect FDI operations in Ethiopia. As shown value-addition by investing in products such as cot- in the literature survey, FDI requires a combination ton yarn that generate additional value for export of factors in host countries, such as infrastructure (Ancharaz et al. 2014). Some value-added products facilities plus a skilled workforce. Firm-level data in Case studies 29 Ethiopia show that insufficient infrastructure, poor decade, averaging about 8 percent since 2004. From trade logistics, and a lack of skilled labor are currently a low basis, FDI per capita increased almost 15 times the key constraints for FDI in Ethiopia (World Bank in Rwanda when comparing the periods 2002/05 2015a; Akhlaque and Buba 2015). These issues may with 2010/13 (see Table 3). Between 2008 and 2013, seriously undermine investors’ confidence, and some a total of 280 investment projects, either fully owned may choose to discontinue their investment prepara- by foreign investors or in the form of joint ventures, tion. Specifically, the utility problem already adversely were registered with the Rwanda Development Board. affected potential investment decisions in the Eastern The accompanied capital investment has increased Industry Zone.25 In addition, many small manufac- significantly, reaching a high of US$258 million in turing FDI firms adopt the “foot-loose” model, where 2013, up from US$103 million in 2009. Still, FDI manufactures put a premium on the ability to move inflows as a share of GDP remain low. In fact, the ratio quickly from one country to another (Tang, 2014). fell to 1.5 percent in 2013 after a peak of 4.5 percent Therefore, they are sensitive to the cost of labor and in 2010. Moreover, compared to the other 31 land- investment incentives in the host country. As a result, locked countries in the world, Rwanda’s FDI to GDP the registration and preparation process is often an ratio is about average, making it the 21st landlocked experiment to find the most suitable location to invest. country in FDI inflows over the period 2011–2013 As such, the low rate of conversion from the registered (World Bank, 2015). projects suggest that some discouraged investors would Manufacturing has been the third largest sec- likely have withdrawn after initial setbacks, indicating tor in attracting FDI in Rwanda, consistent with that improving investor care in some priority sectors supportive government policies towards this sector. is an urgent task to support FDI in Ethiopia. From a national perspective, a blend of policies have Policy measures can help attract more FDI been formulated and implemented in supporting the and improve its impact. In the short-term, effective development of manufacturing sector.27 According investment promotion (e.g., one-stop-shop service, to the National Bank of Rwanda, manufacturing aftercare, etc.) and incentives (e.g., tax holiday, import accounts for the third largest share (19 percent) of the duty free, etc.) can serve to attract more manufacturing total FDI stock as of 2013, after ICT (41 percent) and firms and facilitate the operationalization of projects. the financial sector (20 percent) (Figure 7.1). Also, FDI In the long-term, for the sustainable development, inflows in manufacturing increased steadily by about the Ethiopian government should focus more on sup- 2.6 times per year; investment in the ICT sector varied porting infrastructure, streamlining trade logistics and significantly over the years, from a dramatic spike in addressing the shortage of skilled human resources. 2011 to US$167 million down to US$20 million in Therefore, at this point, newly designed policies may 2013; investments in the financial sector experienced be first piloted in the Special Economic Zones as an a moderate growth, averaging at US$29 million per experiment to be implemented nationwide in the year (Figure 7.2). Overall, however, manufacturing long term.26 25 Interview with Eastern Industry Zone Operator, November 2014. Case Study 2: Rwanda 26 See Lin (2013) for details. 27 For example, in the second phase of the Economic Development Poverty Reduction Strategy (EDPRS II), Rwanda placed manufacturing FDI Trends as a critical sector to ensure economic transformation. Targets were for- mulated in this respect, aiming to have the industrial sector (manufactur- ing, construction and mining) contribute 20 percent to GDP by 2018. FDI to Rwanda has gained momentum over the Moreover, in the Rwanda Private Sector Development Strategy (PSDS), there is an entire pillar that aims at building a more competitive manu- last five years, albeit is still on a low level. Real facturing sector by adopting new technologies, improved quality and GDP growth in Rwanda has been high over the past deepening value chains; all aspects in which FDI can play a crucial role. 30 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT FIGURE 7: FDI in Rwanda 1. FDI Stocks in Rwanda, End 2013, US$M 2. FDI Inflows in Main Sectors of FDI in Rwanda, 2011–2013, US$M $38 $38 180 $167 $38 160 $42 $50 140 $25 120 $341 100 $167 80 $155 $64 60 $38 40 $38 $27 ICT Tourism $25 20 $22 $21 Manufacturing Construction $12 Finance & Insurance Mining 0 Agriculture Others 2011 2012 2013 Wholesale & Retail ICT Manufacturing Finance & Insurance 3. Return on Equity by Sector in 2013, Rwanda 4. Distribution of Job Creation by Sector in Rwanda, 2011–2013, Cumulative 0.3 100,000 97,665 21,885 0.25 80,000 13,597 0.2 60,000 13,456 0.15 0.28 13,156 40,000 0.24 0.23 0.1 11,840 0.2 0.15 20,000 0.11 0.05 4,283 Others 15,294 2,196 1,958 0.07 ICT 0.01 0% 0 Manufacturing Mining Transportation Financial & insurance Wholesale & retail trade Agriculture Others Total Agriculture Real estate Mining & quarrying Financial & insurance Manufacturing Administrative Wholesale & retail trade ICT Source: Foreign Private Investment in Rwanda, National Bank of Rwanda (2013). contributed only 0.3 percent to the average annual among others, is developing particularly in the subsec- GDP growth rate of 7.1 percent (2009–2014), lagging tors of construction materials (such as cement and steel behind the services (4.0 percent) and the agriculture products), food processing, and dairy and beverages sector (1.6 percent). (AfDB 2014). Construction material is the largest and The construction materials and agro-processing fastest growing component of Rwanda’s manufactur- subsectors dominate manufacturing FDI, mainly ing sector, representing 51percent of recent invest- due to local availability of raw materials and the ments in the manufacturing sector (National Bank of booming construction sector. Light manufacturing, Rwanda 2013). In the food processing subsector, a few Case studies 31 foreign firms account for the majority of market share: Africa) presence in Rwanda is still limited. This is Bakhresa Group (from Tanzania) is the largest wheat partly because China and India investors are attracted flour producer; Bralirwa (from The Netherlands) is the to the development potential in the ICT sector in largest brewer and soft beverage company (Gathani Rwanda: both of their largest investments of FDI were and Stoelinga 2013). in the ICT sector.30 The bulk of manufacturing FDI in Rwanda has been market-seeking. Although Rwanda has a FDI Determinants relatively small domestic market, the market potential is quite significant due to the Common Market for A rising domestic market owed to good economic East and Southern Africa (COMESA), East African performance has been a cornerstone of Rwanda’s Community (EAC), and the African Growth and relative success in attracting FDI. Rwanda is one Opportunity Act (AGOA) market, all of which offer of the fastest growing economies in Africa with a quota- and duty-free market access. This view is sup- growth rate averaging at 7.7 percent between 2004 ported by surveys carried out through fDi M,arkets on and 2013. Empirical evidence suggests that economic the motives for 32 Greenfield projects between 2003 success in Rwanda is an effective determinant for and 2014. The key reasons for investors to choose attracting FDI. Using time series data covering the Rwanda as destination were proximity to markets or period of 1971 to 2003, Surge et al. (2008) conclude customers (43.8 percent), regulations or business cli- that economic growth has a significantly positive mate (25 percent) and domestic market growth poten- impact on foreign direct investment (FDI) inflows tial (21.9 percent). Infrastructure and logistics, skilled in Rwanda. In addition, because country risk rat- workforce, and natural resources were only cited by 3 ings are reported to have a high correlation to actual percent of companies as the reason for the investment future equity returns (Harvey et al. 1996), political decision, respectively. In contrast, efficiency-seeking and social stability since the late 1990s also plays an manufacturing investment in Rwanda has been rela- important role when the investors make their deci- tively low, as investment in the main subsectors of sion to invest in Rwanda. construction materials and food-processing still target Access to regional and global markets is a for domestic consumption and preferential access to critical economic determinant of market-seeking the EAC region and DRC.28 FDI inflows to Rwanda. This advantage has been Traditional investors and African investors strengthened by Rwanda’s trade policy reform. provide the two major sources of manufacturing Rwanda has an open trade regime. It is a member FDI. The principal foreign investors are from South of the World Trade Organization and of several sub- Africa, Mauritius,29 Kenya, Uganda, The Netherlands, regional economic organizations, such as East African and Switzerland. Intra-African investment has been Community (EAC),31 Common Market for East and the largest source for manufacturing FDI in Rwanda, representing respective 84 percent and 54 percent of 28 On average, between 2008 and 2010, 53 percent of manufactured investment in capital and the number of Greenfield exports went to the DRC, 23 percent to Burundi, 8 percent to Kenya, FDI projects respectively. The investment are more 3 percent to Uganda, 1 percent to Tanzania and another 1 percent to other destinations (Gathani and Stoelinga 2012). diversified and across all the subsector groups. 29 Mauritius is among the large investor countries due to the fact it Traditional investors are very active in the light manu- hosts most of holding companies even though the ultimate controlling companies are not based in Mauritius. Historically, Indian FDI tends to facturing and agro-processing sectors, especially in the be channeled through Mauritius. tea, coffee, and alcoholic beverages sectors (Gathani 30 China’s largest deal is Star Communication Network Technologies in terms of amount; India’s is Bharti Airtel. and Stoelinga 2013). Except for South Africa, other 31 The members of EAC include Burundi, Kenya, Rwanda, Uganda, BRICS countries’ (Brazil, India, China, and South and Tanzania. 32 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT Southern Africa (COMESA),32 and the Economic the previous case study on Ethiopia showed that only Community of the Great Lakes (CEPGL).33 These 21 percent of projects there moved from preparation regional organizations have allowed foreign investors to operation. The Government of Rwanda undertook in Rwanda to have easier access to the larger regional a number of key reforms targeted at the implementa- market. Moreover, the country enjoys the preferen- tion of investment projects, including aftercare services tial access to EU (through the Everything But Arms and better trade logistics. Initiative), and to the U.S. (though the Africa Growth The establishment of aftercare services, some and Opportunities Act and the Generalized System of of which especially target manufacturing FDI Preferences). In addition, Rwanda has several bilateral supports implementation of investment projects treaties with some individual countries such as China, in Rwanda. The Rwanda Development Board func- Malaysia, and South Africa. Through the active coop- tions as “one-stop shop” with delegated authority from eration in the fields of cross-border trade, Rwanda’s various government agencies. It provides a full range ranking in trading across border as a dimension of of investment-related facilitation services including doing business indicator leaped from 169th in 2010 business plan evaluation, securing required approvals, to 31th in 2014. Empirical evidence shows that trade and certificates, and obtaining building, construction, openness has exhibited positive impact in attracting and work permits. Specifically for manufacturing, the FDI in Rwanda (Surge et al. 2008). manufacturing development division in the Rwanda In addition to promising markets, good invest- Development Board offers aftercare services so as to ment climate factors play a role for Rwanda in facilitate investors in implementation and operation attracting FDI. As mentioned earlier, countries whose of their investment projects and also address binding policies are conducive to foreign investment activities constraints through policy advocacy. stand a better chance of attracting FDI. This is a crucial By adopting an ambitious Trade Logistics and reason why Rwanda, as a small, land-locked, non- Distribution Services Strategy, Rwanda has made resource-rich country, is able to attract sizeable levels consistent progress in reducing the heavy logistics of FDI. The Government has made the attraction of and transport costs and facilitating exports. The investment a key policy priority and therefore estab- OECD Trade Facilitation Indicators (TFIs), and the lished the Rwanda Development Board in 2009 as a World Bank Logistics Performance Index (LPI) have one-stop shop supporting private sector development reported improved trade logistics indicators over the through investment and export promotion. It takes past five to seven years.34 Recently, the Government only six hours to register a new business irrespective of has undertaken several proactive steps to reduce the the initial capital requirement ($250,000 for foreign average time taken to import or export goods both in investors), making Rwanda one of the most straight- forward countries for business registration. Rwanda 32 This organization includes Rwanda, Burundi, Comoros, DRC, Dji- also has good reputation for fighting corruption. The bouti, Egypt, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, high-profile anti-corruption effort led by the govern- Seychelles, Sudan, Swaziland, Uganda, and Zimbabwe. 33 Members are Rwanda, DRC, and Burundi. ment plays an important role in attracting FDI. 34 TFIs reveal that Rwanda performs better than the average SSA coun- Rwanda has a relatively high operational rate tries in the areas of information availability, streamlining procedures, governance, and impartiality; LPI indicates that Rwanda outperformed of FDI projects compared to Ethiopia. Between the average SSA countries in all six dimensions. As for overall LPI score, 2009 and 2013, of the 280 registered FDI projects in Rwanda ranks 80th out of 160 economies surveyed. The six dimensions include: 1) efficiency of the clearance process, including customs; 2) Rwanda, more than half (54 percent) are operational quality of trade and transport related infrastructure (e.g., ports, railroads, and 25 percent (or 69 projects) are in the pre-imple- roads, information technology); 3) ease of arranging competitively priced shipments; 4) competence and quality of logistics services (e.g., transport mentation phase. Only 14 percent or 38 projects are operators, customs brokers); 5) ability to track and trace consignments; still committed to starting their activities. To compare: and 6) timeliness of shipments. Case studies 33 transit countries and at the port of entry.35 Through and profitability, it is likely that foreign-invested firms streamlining border procedures and reducing the have performed better and grown faster than domestic number of documentation requirements, it is expected firms. This is further proven by some cases in which to reduce the time to clear goods by three days, which foreign investors took over domestic firms that had will lead to direct savings for business estimated to run into financial difficulty and returned the firms to be US$6–9 million per year (Permanent Mission of profitability (Gathani and Stoelinga 2013). Rwanda to the UN 2014). Finally, Rwanda is aiming Average job creation in Rwanda is relatively to establish industrial zones to avail serviced land and low, a reflection of more FDI directed to ICT and facilitate quick project operationalization. financial services. Over the period 2009–2013, the 280 registered FDI projects created a total of 34,580 FDI Impact and Results jobs. Most of the employment generated by FDI was still in the agriculture sector; jobs created by manu- FDI accounts for a large share of total manufactur- facturing FDI only account for 12 percent of the total ing output and realized the highest profitability (Figure 7.4). This result corroborates with the survey across sectors. In a sample of Rwanda’s 47 largest conducted among the largest manufacturing firms construction materials and agribusiness firms, it is in 2013 that total employment corresponds to just estimated that firms that are either fully owned by 0.34 percent of Rwanda’s labor force (Gathani and foreign capital or in which foreign investors hold a Stoelinga 2013). majority stake accounted for about 70 percent of the total output in 2011, with an estimated aggre- 35 Measures include developing an e-government portal to improve in- gate output of US$280–290 million (Gathani and formation availability; implementing Electronic Single Window System Stoelinga 2013). Among the sectors, manufacturing (ESWS) that allows all parties involved in trade and transport to docu- ment information with a single entry point, to name a few; See details in realized the highest profit in 2013, with a ROE of 24 Trade Facilitation and Transit Transport, speech by the permanent mission percent (Figure 7.3). Given these measures in output of Rwanda to the United Nations, New York, June 2014. 5 SUMMARY AND RECOMMENDATIONS Summary FDI has proven useful in the past to advance eco- nomic development and foster structural change in Africa has lagged behind in industrialization; the host countries. Recent literature and empirical evidence lack of industrial development has been partially suggests due consideration is needed from policy makers related to the challenge of attracting sufficient for- to maximize benefits of FDI, such as skills and techno- eign direct investment (FDI). In 2013, the average logical transfer, and foster overall spillover effects to the share of manufacturing value added in GDP in Sub- domestic economy. These arguments are strongly sup- Saharan Africa was 11 percent, almost unchanged from ported by the practical experiences of East Asian Tigers the 1990s. At the same time, the share of the world- and of China, where FDI contributed significantly to wide FDI flows into SSA has been rather low during upgrading and diversification of its industrial structure. the same period. In the Action Plan for the Accelerated A wide variety of polices to maintain macroeconomic Industrial Development of Africa (AIDA) that were stability, increase trade openness, and accelerate the adopted by all the member governments of the African growth of advanced industries were implemented. The Union in January 2008, the importance of manufactur- evaluation is assumed to vary depending on country, ing development was reiterated and attracting foreign sector, and the motivation of FDI that can be. investment was identified as the major priority for the Manufacturing FDI in SSA is primarily market- acceleration of Africa’s industrialization. seeking. There are three types—resource-seeking, Compared to the past, FDI into Africa is rela- market-seeking and efficiency-seeking—when looking tively high and more diverse than ever before. FDI at FDI in Africa. Manufacturing FDI in SSA is mainly flows into SSA have expanded almost six-fold since market-seeking and its main determinants are market 2000, reaching a record US$45 billion and leading size and market potential. In addition, political and to a significantly higher FDI stock (US$474 bil- economic stability are important factors considered by lion) in 2013. Still, FDI into Africa is only a fraction foreign manufacturers when they choose the invest- of world FDI flows. The more diversified nature mani- ment location. On the other hand, efficiency-seeking fests in several dimensions: First, FDI into Africa is FDI, observed at firm level, is the smaller part of slowly shifting from extractive sectors to services and manufacturing FDI in Africa since only a handful of manufacturing sectors. Second, FDI reached a larger foreign companies are able to take advantage of lower geographic scope over the past five years, with increas- production cost in some manufacturing areas only, ing shares received by Southern and Eastern Africa. such as textile and clothing, and leather and footwear. Third, there is a significant increase of South-South Manufacturing FDI in Africa remains rela- FDI, including that from new partners led by China, tively undiversified, focusing on raw material India, and Brazil, and intraregional partners led by (food) processing or end-product assembly, which South Africa. Manufacturing FDI reflects similar are characterized by low value addition, even in diversification patterns and some African countries those countries that manage to attract significant such as Ethiopia are building up their manufacturing inflows. In addition, some manufacturing production bases by attracting FDI from new partners. areas are more successful in attracting foreign investors 35 36 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT than others. Those areas differ by host countries. For total jobs created, three times more than jobs created example, in the last decade, some emerging subsectors in agriculture. Manufacturing FDI also achieved the included textile and clothing, and leather and footwear largest job creation in Uganda in 2012, amounting to in Ethiopia; non-metallic mineral products and motor 30 percent of the total FDI-driven jobs. Similar patterns vehicles and other transport equipment in Kenya; are also recognizable in Ethiopia, especially in terms of metal products and non-metallic mineral products permanent employment creation. A significant por- in Tanzania; metal products and non-metallic min- tion of employment opportunities in manufacturing is eral products in Uganda; and non-metallic mineral attributed to non-traditional investors. However, formal products and publishing and printing in Rwanda. training remains insufficient in manufacturing firms. In addition, FDI is traditionally concentrated in the Unstable supply of inputs and uncertainty food and beverage subsector in most of the countries. of time required for transport and logistics build Non-traditional sources dominate FDI in a binding constraint for manufacturing FDI in Africa. New partners and African partners have been Africa. Drawing from empirical evidence and inves- the main sources of manufacturing FDI. Traditional tors’ perception, some binding constraints are identi- sources of manufacturing FDI are shrinking but still fied as critical to further improve the performance of account for large stocks. The share of investment from manufacturing FDI. The dependence on imported China and India increased rapidly, gradually taking production inputs, erratic electricity supply, and poor over the proportion of investment originating from trade logistics drive the cost up and pose the threat to the EU and the U.S. Intraregional investment con- the sustainability of FDI. These bottlenecks also lead tinued to soar and largely contributed to the rebound to production inefficiencies that constrains Africa’s of Africa FDI to the pre-crisis level. integration into the global value chain. While FDI into Africa generally tends to have The Ethiopian and Rwandan case studies sug- relatively high returns of investments, likely reflect- gest that the regulatory business climate is attrac- ing the high risk and low competition environment, tive for FDI and contributes to the rate of project profitability in manufacturing is generally even operationalization. For many manufacturers who are higher compared to other sectors. Recent evidence increasingly looking for new destinations to maintain shows that the overall rate of return of FDI in Africa lower cost for their labor-intensive industries, the regis- has been above 9 percent since 2006, higher than the tration and preparation process is often an experiment world average of 7.5 percent and developing country to find the most suitable location in which to invest. average of 8.1 (data for 2011). On the other hand, in As such, the low rate of conversion to operability in Rwanda, manufacturing realized an average return to Ethiopia from the registered projects suggests that some equity of 24 percent in 2013. This result also partly discouraged investors had likely withdrawn after initial explains what drives manufacturing FDI from new setbacks, indicating that improving investor care in partners into SSA. Investors from emerging countries some priority sectors is an urgent task to support FDI. are more accustomed to less supportive institutional environment, and many are more adapted entrepre- Recommendations neurs in high-risk environments. Manufacturing FDI creates more jobs than FDI This report offers five policy recommendations that in any other sector. Manufacturing has led in job could contribute to the attraction of manufacturing creation among sectors in the reviewed SSA countries FDI in Africa. To further the benefits of FDI, espe- such as Tanzania, Uganda and Ethiopia. According to cially in the manufacturing sector, policymakers in the most recent FDI data (2013/14), the manufactur- Africa would need to pay close attention to FDI flows ing sector in Tanzania accounted for 43 percent of and trends, especially from emerging (new) partners. Summary and recommendations 37 First , manage FDI flows and FDI-related implementation, a fact derived from empirical evi- policies in a way that maximizes spillovers in host dence and investors’ perception. Investors, especially countries. FDI can bring both benefits and costs to those from emerging countries, are initially attracted host countries, which suggests that FDI needs to be by abundant natural and human resources and market managed actively to maximize benefits. Common potential in SSA countries, but gradually find it is not definitions of FDI emphasize its long-term character easy to survive and thrive due to some constraints. and the fact that FDI carries a controlling ownership With the high cost of doing business, even though with the enterprises in the host country. Nevertheless, foreign investors succeed in starting their operations, there are also potential drawbacks to FDI, including a they will often still face challenges to sustain opera- deterioration of the balance of payments as profits are tions. Overcoming key constraints, be it infrastructure repatriated, a lack of positive linkages with local com- or policy-related is therefore critical to ensure a high munities, and a lack of absorptive capacity for taking operationalization of FDI in Africa. advantage of FDI spillover effects. Policy makers can Fourth, take better advantage of the currently increase the absorptive capacity by, for instance, pur- dominating market-seeking manufacturing FDI to suing investment policies that aim to close technology improve the weak industry base in the short-term. gap, by increasing human capital through better and Market-seeking FDI has a sizeable positive contribu- more education services, and by establishing sound tion to the host economy, but the depth of the positive competition policies. spillovers depends again on the absorptive capacity of Second, realize the emergence of FDI from the host economy. Competition polices are important new partners, especially in manufacturing FDI, to strike a balance between avoiding crowding out and establish platforms that help in the attrac- of local firms and policies that restrict foreign entry. tion of new FDI.. While FDI in Africa is at historic Likewise, the strength of intellectual property rights levels, only a few countries have received significant in a host country has an impact on the quality of for- increases in manufacturing FDI, which is again led by eign investment that can be attracted, and therefore new partners. Only six countries in SSA received the the potential for FDI spillovers. large majority of manufacturing FDI between 2011 Fifth, strengthen the linkages between domes- and 2014. To seize the opportunity and attract FDI tic material input and foreign manufacturing for the development of the manufacturing sector due investment. Increasingly, empirical evidence suggests consideration and attention needs to be put on the that some labor-intensive subsectors in manufacturing policies and activities of emerging (new) partners. This are more sensitive to value chain integration (or lack analysis showed that the major information source for thereof ), particularly when it comes to the supply potential new partners comes from existing investors. of production inputs. Strengthening the absorptive Creating channels and fora for information exchange capacity of the host economy is instrumental (again) to between existing and prospective investors, possibly connect local companies to foreign ones. Lowering through embassies and investment promotion agen- the technological gap and increasing human capital cies, seems thus to be a good way to attract investment are instrumental; more specifically, however, are also from new partners. such concrete issues such as the ability of domestic Third, increase investment in key infrastruc- firms to engage in scale production and the location of ture to overcome constraints for manufacturing those companies compared to foreign ones. Industrial activities to develop, especially in power supply parks can play a role in this regard and pursuing their and transportation and logistics services. Overall, establishment could be a suitable complement to exist- investment climate factors have become more ing investment policies (see for the case of Ethiopia: important to sustain FDI beyond the initial project World Bank 2015b). ANNEXES Annex 1: Data Definition New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, and the United States. Drawing from the definition of several studies, the Others include Bulgaria, Croatia, Republic of Cyprus, paper considers that New Partners are those that Czech Republic, Estonia, Finland, France, Hungary, come from emerging countries. This group consists Latvia, Lithuania, Malta, Poland, Romania, Slovakia, of BRIC countries (Brazil, Russia, India, and China); and Slovenia. Intraregional Partners (or African Partners, African The analysis uses data from fDi Markets, a cross- countries led by South Africa); and others (including sectional project-level database compiled and operated Malaysia, Turkey, and Saudi Arabia). by the Financial Times that tracks data on cross-border Traditional Partners are those that are member Greenfield investments. In addition to fDi Markets, countries of the OECD Development Assistance the analysis of case studies is complemented by data Committee. These include Australia, Austria, Belgium, from investment promotion agencies, and by infor- Canada, Denmark, Finland, France, Germany, Greece, mation from foreign investment surveys conducted Ireland, Italy, Japan, Korea, Luxembourg, Netherlands, by Central Banks. 39 40 MANUFACTURING FDI IN SUB-SAHARAN AFRICA: TRENDS, DETERMINANTS, AND IMPACT Annex 2: Cost of Doing Business in Selected Countries Country Ethiopia Kenya Rwanda Tanzania Uganda Starting a Business Number of Procedures 9 10 8 9 15 Time (days) 15 30 6.5 26 32 Cost (% of income per capita) 89.3 42.7 52.3 23.8 64.4 Dealing with Construction Procedures (number) 7 8 10 18 15 Permits Time (days) 125 125 77 205 154 Cost (% of warehouse value) 3.2 9.3 4.1 8.1 11.7 Getting Electricity Procedures (number) 4 6 4 4 6 Time (days) 95 158 34 109 132 Cost (% of income per capita, US$) 1,676.6 1,020.2 3,073.9 1,453.0 11,004.9 Registering Property Procedures (number) 10 9 3 8 11 Time (days) 41 72 32 67 43 Cost (% of property value) 2.1 4.3 0.1 4.5 2.6 Getting Credit Strength of legal rights index (0–12) 3 7 11 5 6 Credit registry coverage (% of adults) 0.2 0 2.4 0 0 Credit bureau coverage (% of adults) 0 4.9 15.7 0.6 4.9 Paying Taxes Payments (number per year) 30 30 17 49 31 Time (hours per year) 306 201.5 107 181 209 Profit tax (%) 26.2 30.8 26.3 20.7 25.2 Labor tax and contributions (%) 4.8 1.9 5.6 17.5 11.3 Other taxes (%) 0.8 5.4 1.5 6.2 0.1 Total tax rate (% profit) 31.8 38.1 33.5 44.3 36.5 Trading Across Borders Documents to export (number) 8 8 7 7 7 Time to export (days) 44 26 26 18 28 Cost to export (US$ per container) 2,380.0 2,255.0 3,245.0 1,090.0 2,800.0 Documents to import (number) 11 9 9 11 10 Time to import (days) 44 26 27 26 31 Cost to import (US$ per container) 2,960.0 2,350.0 4,990.0 1,615.0 3,375.0 Enforcing Contracts Time (days) 530 465 230 515 490 Cost (% of claim) 15.2 47.2 82.7 14.3 31.3 Procedures (number) 38 44 23 38 38 Source: The World Bank, Doing Business, 2015. 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