Common Market for Eastern and Southern Africa

Transcription

1 2013 Foreign Direct Investment and Small and Medium Enterprise Linkages in COMESA COMESA Investment Report 2013 Common Market for Eastern and Southern Africa 1

2 ISBN October 2013 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by means, without prior permission from COMESA 2

3 2013 COMESA Member States (As of October 2013) Burundi Comoros Democratic Republic of Congo (DRC) Djibouti Egypt Eritrea Ethiopia Kenya Mauritius Rwanda Seychelles Swaziland Sudan Uganda Zambia Zimbabwe Libya Madagascar Malawi Statistics Unit Division of Trade, Customs and Monetary Affairs COMESA Secretariat PO Box Lusaka, Zambia

4 COMESA Investment Report TABLE OF CONTENTS Foreword... 6 Acknowledgements Foreign Direct Investment Trends Inward Foreign Direct Investment FDI Globalization in COMESA Average Intra-COMESA FDI Inflows Outward FDI Inward FDI Stocks in COMESA Direct Investment Income COMESA Greenfield FDI by COMESA and in COMESA Countries Mergers and Acquisitions by COMESA Seller and Purchaser Economies Regional and National Investment Developments 2012/ Regional Investment and Business Environment Reforms in Doing Business 2011/ COMESA s Global Competitiveness Index (GCI) Status The 12 Pillars of Competitiveness How COMESA can use the Global Competitiveness Index (GCI) Rankings COMESA Initiatives in developing Investment in the Region COMESA Model Double Taxation Agreements (DTAs) Business Environment COMESA Policy Reforms Programme COMESA Sustainable Tourism development Forum International Investment Policy Developments and Implications for COMESA Trends in international investment agreements (IIAs) Trends in investor-state arbitration Regionalism is on the rise Regionalism poses challenges and opportunities The BIT regime has reached a juncture providing opportunities for COMESA member countries to improving it Sustainable development considerations are gaining importance Towards a consolidated regional approach to international investment policy-making Foreign Direct Investment and Small and Medium Enterprise Linkages: Issues for COMESA countries Introduction Evolving imperatives and changing dynamics of global FDI

5 Impacts of FDI SME business linkages with FDI Types of linkages Factors influencing the development of TNC-SME linkages Policies to encourage SME-TNC linkages Experiences of linking TNCs and SMEs Policy reflections from international experiences The local business environment Linkage specific policies Targeted investment strategies Institutional capacity Infrastructure investment Strategies for SME development and linkages to FDI in COMESA Skills development and capacity building for SME competitiveness in COMESA Cases of SME-TNC linkages in COMESA and the African continent Zambian agriculture producers and retail FDI ICT FDI and Kenyan ICT companies Chinese shoemaker invests in Ethiopia Oil investor in Uganda Fertiliser in Madagascar From clothing and textile FDI to a growing services sector in Mauritius Policy recommendations A coherent and consistent approach to the attraction of FDI Effective SME development SME-TNC linkage development as a key element of domestic policy and institutional action Encourage networks and learning Use public procurement to encourage improved SME performance Be prepared for partnerships with a growing diversity of linkage opportunities Ensure investments in infrastructure for local SMEs are planned and delivered alongside FDI projects Consistency and building relationships over time Conclusion References

6 COMESA Investment Report LIST OF TABLES Table 1: Inward FDI Flows by Country, Values in US$ millions... 9 Table 2: Foreign Direct Investment Inflows as % of GDP Table 3: Intra-COMESA and Intra-African FDI Inflows for Selected COMESA Countries Table 4: Outward FDI Flows, US$ millions Table 5: COMESA Inward FDI Stocks, US$ millions Table 6: Inward FDI Stocks as % of GDP Table 7: Number of Greenfield FDI Projects by COMESA Source/Destination country Table 8: M&A Deals by COMESA Seller and Purchaser Economies Table 9: Ease of Doing Business Worldwide Rankings 2012 and 2013 compared Table 10.1: Developments in Regulatory Frameworks in COMESA 2011/ Table 10.2: Developments in Regulatory Frameworks in COMESA 2011/12 cont d Table 11: The Global Competitiveness Index (GCI) Rankings Table 12: Global Competiveness Rankings for Selected COMESA Member States Table 13: Relationship between regional and bilateral IIAs (illustrative) Table 14: Summary of policy recommendations in TNC-SME linkages reports LIST OF FIGURES Figure 1: Total COMESA Inward FDI, Figure 2: COMESA Country FDI Inflows, US$ millions... 9 Figure 3: FDI Inflows as % of Gross Fixed Capital Formation, Figure 4: COMESA FDI Outflows, US$ millions Figure 5: Rate of return on FDI Stocks (2011/12) Figure 6: Annual and cumulative BITs (1990-June 2013) Figure 7: Annual and cumulative BITs, COMESA countries (1990-June 2013) Figure 8: Known treaty-based investor-state cases, as of end

7 2013 5

8 COMESA Investment Report FOREWORD The COMESA region continues to be an attractive investment destination. This is evidenced by the overall growth rate of eight six percent in inward foreign direct investment (FDI) in The performance in 2012 marked a major recovery from what was witnessed in First a recovery in Egyptian FDI performance and increased flows to resource endowed COMESA countries contributed significantly to the observed FDI performance trend in COMESA s positive performance comes in the wake of declines in global inward FDI flows in 2012 which were attributed to uncertainty particularly in the Eurozone area and a weak macroeconomic environment in advanced economies. It is widely recognized that in an increasingly globalized business environment, the significance of FDI to a country s economic prospects has grown. This is especially true for many COMESA countries which have positive prospects of growing consumer markets and unrealized natural resource potential. Trans-National Corporations are at the centre of foreign direct investment activities with their capacity to marshal both capital and capabilities in environments displaying a scarcity of these factors. However, alongside these corporations and over and above the presence of official development actors and multi-lateral agencies, a proliferation of other actors such as globalizing small and medium enterprises, non-government or notfor profit organizations and philanthropic foundations have been witnessed. Within these environments, the once somewhat abstract question of where, in this mix of foreign and domestic investments, local enterprises can find a space has increasingly become a critical policy question. Fittingly and in line with the COMESA Summit theme of Enhancing Intra-COMESA Trade through Micro, Small and Medium Enterprise Development, the 2013 COMESA Investment Report analyses the linkages between FDI and Small and Medium Enterprises development and provides some policy recommendations on how COMESA can enhance these linkages. This once again fits into the desirable mould of promotion of inclusive growth and sustainable development. Sindiso Ngwenya Secretary General, Common Market for Eastern and Southern Africa 6

9 2013 ACKNOWLEDGEMENTS This report was jointly prepared by the COMESA Statistics Unit and the Division of Investment Promotion and Private Sector Development (IPPSD). Specific inputs for the report were prepared by Glenn Robbins and Njeleka Malata. The section on international investment policy developments was contributed by UNCTAD s Division on Investment and Enterprise (DIAE). It is based on the World Investment Report 2013, Chapter III, available at: The European Union s financial support in developing foreign direct investment statistics in the COMESA region under the COMESA Statistical multi annual Work Program is acknowledged. This support includes provision of funding for technical support and for the publication of the 2013 COMESA Investment Report. COMESA also wishes to acknowledge the technical support provided by the United Nations Conference on Trade and Development (UNCTAD) in building capacity in statistics of foreign direct investment and activities of transnational corporations in COMESA Member States. COMESA Member State Central Banks and Statistical Offices contributed data and other inputs into this report. 7

10 1 FOREIGN COMESA Investment Report DIRECT INVESTMENT TRENDS 1.1 INWARD FOREIGN DIRECT INVESTMENT COMESA inward FDI recovered in 2012 to register a growth of 86% compared to their 2011 levels. Key country drivers to this trend were Uganda, Democratic Republic of Congo and Madagascar that recorded growth rates of 93%, 96% and 85% respectively in Notable mention is made of Egypt that moved from a disinvestment of US$483 million in 2011 to an inward FDI of US$ 3,746 million in For Uganda in particular recent oil discoveries in Lake Albert have contributed to the observed levels of FDI inflows. This trend in natural resource driven inward FDI also applied to the DRC with the performance in 2012 reflecting steady investment into the mining sector among them the Tenke Fungurume copper-cobalt mines in the south-east of the country. Egypt in particular contributed significantly to the growth in COMESA inward FDI in 2012 moving from a disinvestment of US$483 Million in 2011 to a net investment of US$3.7 Billion in Other countries that experienced growth in inward FDI flows in 2012 were Eritrea (298%), Comoros (149%), Ethiopia (57%), Mauritius (32%) and Rwanda (51%). Burundi, Kenya, Seychelles, Sudan, Swaziland and Zambia all recorded lower FDI inflows in 2012 compared to ,000 Figure 1: Total COMESA Inward FDI, ,000 20,000 US$, millions 15,000 10,000 5,

11 2013 Figure 2: COMESA Country FDI Inflows, US$ millions Zimbabwe Zambia Uganda Swaziland Sudan Seychelles Rwanda Mauritius Malawi Madagascar Libya Kenya Ethiopia Eritrea Egypt DRC Djibouti Comoros Burundi -1, ,000 1,500 2,000 2,500 3,000 3,500 4,000 Table 1: Inward FDI Flows by Country, Values in US$ millions Growth rate (%) Burundi Comoros Djibouti DRC 1, , , , Egypt 13, , , ,745.7 *** Eritrea Ethiopia Kenya Libya 3, , , Madagascar Malawi Mauritius Rwanda Seychelles Sudan 2, , , , , Swaziland Uganda ,

12 COMESA Investment Report Growth rate (%) Zambia , , , Zimbabwe COMESA 24, , , , , *** Due to disinvestment in 2011, a growth rate does not convey the correct information. Suffice to say Egypt s inward FDI flows experienced huge growth between 2011 and FDI Globalization in COMESA The FDI intensity index measured by the ratio of inward FDI to GDP highlights the extent of FDI globalization in a country. Democratic Republic of Congo had the highest FDI intensity in COMESA in Seychelles, Madagascar and Uganda all registered intensity ratios of above 7% in Table 2: Foreign Direct Investment Inflows as % of GDP Burundi Comoros Djibouti DRC Egypt Eritrea Ethiopia Kenya Libya Madagascar Malawi Mauritius Rwanda Seychelles Sudan Swaziland Uganda Zambia Zimbabwe When the ratio of FDI inflows to gross fixed capital is considered, Seychelles, DRC, Djibouti and Madagascar top the COMESA list of countries with ratios of above 30%. 10

13 2013 Figure 3: FDI Inflows as % of Gross Fixed Capital Formation, 2012 Zimbabwe 18.7 Zambia 24.6 Uganda 21.0 Swaziland 24.3 Sudan 20.5 Seychelles 40.3 Rwanda 7.8 Mauritius 9.7 Malawi 19.1 Madagascar 30.7 Kenya 4.8 Ethiopia Eritrea Egypt DRC 38.2 Djibouti 32.4 Comoros 6.6 Burundi AVERAGE INTRA-COMESA FDI INFLOWS Intra COMESA FDI inflows are obtained from recent enterprise surveys and other sources for selected COMESA countries. Table 3 below averages the flows over the survey years for most countries while other countries provide more regular annual estimates. The average COMESA originating FDI inflows into Egypt over the period was US$44 million, representing 95% of African originating FDI into Egypt. For Madagascar the regional average from was US$78 Million. African originating inflows into Mauritius over the same period were from a singular source, South Africa and amounted to US$39 million. The pattern is similar for Swaziland with the average African originating FDI inflow of US$62 million coming solely from South Africa. Uganda s average inflows from Africa for amounted to US$177 million from COMESA and US$40 million from South Africa. An average of US$29 million worth of FDI between into Zambia was from COMESA countries. Within the same period, the average South African inflows in Zambia were worth US$8.4 million. 11

14 COMESA Investment Report For most of the countries covered in table 3, COMESA originating FDI is the main source of African originating FDI. Table 3: Intra-COMESA and Intra-African FDI Inflows for Selected COMESA Countries Source Country/Region & Period Average FDI Inflows, Millions US$ Destination Country Periods Covered COMESA EAC/SADC South Africa Rest of Africa Egypt Madagascar Mauritius Swaziland Uganda Zambia Source: COMESA 1.4 OUTWARD FDI Overall FDI outflows for reporting countries in COMESA increased by 160% in 2012 compared to Outflows from Libya in particular were worth US$2.5 billion in Other countries with significant FDI outflows in 2012 were DRC (US$420 million), Egypt (US$211 million) and Zambia (US$177 million). Figure 4: COMESA FDI Outflows, US$ millions Zimbabwe Zambia Uganda Swaziland Sudan Seychelles Rwanda Mauritius Malawi Madagascar Libya Kenya Ethiopia Eritrea Egypt DRC Djibouti Comoros Burundi ,000 1,500 2,000 2,500 3,

15 2013 Table 4: Outward FDI Flows, Millions US$ Burundi Comoros Djibouti DRC Egypt 1, ,71.1 1, ,25.5 2,11.1 Eritrea Ethiopia Kenya Libya 5, , , ,509.0 Madagascar Malawi Mauritius Rwanda Seychelles Sudan Swaziland Uganda Zambia , Zimbabwe Total 7, , , , ,

16 COMESA Investment Report 1.5 INWARD FDI STOCKS IN COMESA Total COMESA inward FDI stocks increased by 7% in 2012 compared to Among the countries registering a significant increase in FDI stock levels were Rwanda (27.4%), Uganda (26.6%), Comoros (20.5%) and Ethiopia (20%) inward stocks as a percentage of GDP continued to be the highest for Seychelles (186.6%), Djibouti (75.4%), Zambia (59.4%) and Madagascar (58.1%). Table 5: COMESA Inward FDI Stocks, US$ millions Burundi Comoros Dem. Rep. of Congo 1,521 2,521 3,058 3,994 4,528 4,488 Djibouti ,056 Egypt 50,503 59,997 66,709 73,095 72,612 75,410 Eritrea Ethiopia 3,588 3,697 3,918 4,206 4,833 5,803 Kenya 1,893 1,989 2,104 2,282 2,617 2,876 Libya 7,935 11,115 14,425 16,334 16,334 16,334 Madagascar 1,773 2,787 3,948 4,383 4,914 5,809 Malawi ,029 1,150 1,165 1,167 Mauritius 1,249 1,632 1,880 2,310 2,583 2,944 Rwanda Seychelles 1,194 1,323 1,442 1,602 1,745 1,859 Sudan 15,309 17,808 20,455 22,896 27,902 30,368 Swaziland Uganda 3,461 4,190 5,031 5,575 6,470 8,191 Zambia 7,072 8,222 8,880 9,957 10,927 11,994 Zimbabwe 1,492 1,544 1,649 1,814 2,201 2,601 Total 99, , , , , ,489 14

17 2013 Table 6: Inward FDI Stocks as % of GDP Burundi Comoros Dem. Rep. of Congo Djibouti Egypt Eritrea Ethiopia Kenya Libya Madagascar Malawi Mauritius Rwanda Seychelles Sudan Swaziland Uganda Zambia Zimbabwe Source: COMESA and UNCTAD 15

18 COMESA Investment Report 1.6 DIRECT INVESTMENT INCOME COMESA FDI Income amounted to US$8.5 billion in 2012, representing 86% of FDI inflows. Of this income, Egypt accounted for 67% in the same period. FDI income from Zambia accounted for 13% of total. Overall COMESA region rate of return on FDI income on stocks was 5% in 2012 compared to 6% in Swaziland continues to top the list of countries with the highest return peaking at 50% in Egypt, Kenya, Madagascar, Malawi, Mauritius, Uganda and Zambia all had rates of return of 10% in Figure 5 Rate of return on FDI Stocks (2011/12) Zimbabwe Zambia Uganda Swaziland Sudan Seychelles Rwanda Mauritius Malawi Madagascar Libya Kenya Ethiopia Egypt Djibouti

19 COMESA GREENFIELD FDI BY COMESA AND IN COMESA COUNTRIES COMESA countries initiated 50 Greenfield FDI projects in 2012 accounting for 26% of the total Greenfield FDI projects by African countries. Concomitantly 227 Greenfield FDI projects were initiated in COMESA countries with the largest number being in Egypt (60) and Kenya (54). When compared to Africa as a destination for Greenfield FDI, COMESA countries accounted for 30% of these projects in Table 7: Number of Greenfield FDI Projects by COMESA Source/Destination country Source region/economy 2012 COMESA Country as Source COMESA Country as Destination Burundi 1 3 Comoros - 1 Congo, Democratic Republic - 7 Djibouti - 2 Egypt Ethiopia 5 13 Kenya Libya Madagascar Malawi 1 4 Mauritius 3 11 Rwanda 2 7 Seychelles Sudan Swaziland Uganda Zambia 1 19 Zimbabwe - 6 COMESA Africa World 13,628 13, 628 COMESA as % of Africa 26% 30% Source: UNCTAD 17

20 COMESA Investment Report 1.8 MERGERS AND ACQUISITIONS BY COMESA SELLER AND PURCHASER ECONOMIES Twenty eight (28) mergers and acquisition (M&A) net sales deals were registered by COMESA based immediate acquired companies in This represented 33% of M&A net sales transactions in Africa. In the same period 14 M&A net purchases by COMESA based ultimate acquiring companies were registered representing 25% of M&A net purchases in Africa. Table 8: M&A Deals by COMESA Seller and Purchaser Economies Region/economy M&A Deals by COMESA Selling Economy 2012 M&A Deals by COMESA Purchasing Economy Burundi - Congo, Democratic Republic - 1 Djibouti - Egypt 11 2 Eritrea Ethiopia 4 Kenya 5 2 Libya 1 Madagascar Malawi - - Mauritius 4 6 Rwanda 1 Seychelles - 3 Sudan 1 Swaziland Uganda - - Zambia 2 Zimbabwe - COMESA Africa World 5,400 5,400 COMESA as % of Africa 33% 25% Source: UNCTAD 18

21 2 REGIONAL 2013 AND NATIONAL INVESTMENT DEVELOPMENTS 2012/13 This chapter looks at recent policy initiatives in improving FDI in COMESA Member States as well as examining the performance of COMESA Member States in improving the business environment using Doing Business Surveys and Global Competitiveness reports. The chapter also analyses recent COMESA regional Investment policy developments and reforms. 2.1 REGIONAL INVESTMENT AND BUSINESS ENVIRONMENT Several articles have been penned on the link between FDI and Doing Business Surveys. It has been suggested that higher Doing Business rankings will be associated with more foreign direct investment. Many policy makers have suggested that a better ranking for an economy implies that its investment climate is more favourable to foreign investors. This is underpinned by the Doing Business focus on small to medium sized domestic firms. The quality of the laws and regulations and the extent to which this quality is reflected in their implementation may be a useful signal to foreign investors of the overall quality of the business environment as some laws may affect foreign owned firms in the same way they affect domestic firms. It can be assumed that economies that provide good regulatory environment for domestic firms tend to provide conducive environments for foreign owned firms hence attracting more investment. Thus the Doing Business survey can be used as a reliable barometer for the COMESA region s business and investment environment. The comparative performance of COMESA Member States is shown in the table below. 19

22 COMESA Investment Report Table 9: Ease of Doing Business Worldwide Rankings 2012 and 2013 compared* Member State Ranking 2013 Survey Ranking, 2012 Survey Mauritius Rwanda Seychelles Zambia Egypt, Arab Rep Uganda Kenya Swaziland Ethiopia Madagascar Sudan Malawi Comoros Burundi Djibouti Zimbabwe Congo, Dem. Rep Eritrea Source: World Bank Doing Business *Ranked out of 185 economies around the world. Yet again the top performer in COMESA is Mauritius, ranked 19th in the world, an improvement from the previous year by climbing five places. This places Mauritius firmly in the top ranked 50 countries globally in In the sophomore position is Rwanda. Though Rwanda dropped four places from 48(2012) to 52(2013) it is still in the top fifty percent of the global rankings as is Seychelles. Among COMESA Member States that improved their worldwide rankings are Seychelles which climbed two places to 74 (2013) from 76(2012), Egypt placed 109th (2013) from 110th (2012) and Burundi, which had the most significant improvement jumping thirteen places ahead, ranking 159th in 2013 from 172nd in the previous year. A few of the Member States remained static such as Swaziland (123), Comoros (158), Djibouti (171) and Eritrea (182). 20

23 REFORMS IN DOING BUSINESS 2011/12 The World Bank s Doing Business Surveys are used to monitor regional investment climate programs. These Surveys were used to summarize the regional developments in regulatory frameworks in COMESA Member States. Table 10.1: Developments in Regulatory Frameworks in COMESA 2011/12 Member State Starting a business Dealing with Construction Permits Getting Electricity Registering Property Getting Credit Burundi Starting a business was made easier by eliminating the requirements to have company documents notarized, to publish information on new companies in a journal and to register new companies with the Ministry of Trade and Industry. Obtaining a construction permit was made easier by eliminating the requirement for a clearance from the Ministry of Health and reducing the cost of the geotechnical study. Property transfers were made faster by establishing a statutory time limit for processing property transfer requests at the land registry. Comoros Starting a business was made easier and less costly by replacing the requirement for a copy of the founders criminal records with one for a sworn declaration at the time of the company s registration and by reducing the fees to incorporate a company. Transfer property was made easier by reducing the property transfer tax. Democratic Republic of the Congo (DRC) Starting a business was made easier by appointing additional public notaries. Ethiopia Getting Credit was made easier by improving access to credit information by establishing an online platform for sharing such information and by guaranteeing borrowers right to inspect their personal data 21

24 COMESA Investment Report Member State Starting a business Dealing with Construction Permits Getting Electricity Registering Property Getting Credit Madagascar Starting a business was made easier by allowing the onestop shop to deal with the publication of the notice of incorporation. Malawi Dealing with construction permits was made more expensive by increasing the cost to obtain the plan approval and to register the property. Registering property was made more expensive by increasing the cost to register the property. Mauritius Property transfers were made faster by implementing an electronic information management system at the Registrar-General s Department. Improved access to credit information by starting to collect and distribute payment information from retailers and beginning to distribute both positive and negative information. Rwanda Getting electricity was made easier by reducing the cost of obtaining a new connection. Uganda Source: Doing Business 2013 Report Transferring property was made more difficult by introducing a requirement for property purchasers to obtain an income tax certificate before registration, resulting in delays at the Uganda Revenue Authority and the Ministry of Finance. At the same time, Uganda made it easier by digitizing records at the title registry, increasing efficiency at the assessor s office and making it possible for more banks to accept the stamp duty payment. 22

25 2013 Table 10.2: Developments in Regulatory Frameworks in COMESA 2011/12 cont d Member State Protecting Investors Paying Taxes Trading across Borders Enforcing Contracts Resolving Insolvency Burundi Reduced the time to trade across borders by enhancing its use of electronic data interchange systems, introducing a more efficient system for monitoring goods going through transit countries and improving border coordination with neighbouring transit countries. Ethiopia Increased costs by introducing a social insurance contribution Kenya Paying taxes was made faster for companies by enhancing electronic filing systems. Malawi Increased costs by introducing a mandatory pension contribution for companies Made Trading across borders easier by improving customs clearance procedures and transport links between the port of Beira in Mozambique and Blantyre. Rwanda Enforcing contracts was made easier by implementing an electronic filing system for initial complaints. Swaziland Introduced a value added tax. 23

26 COMESA Investment Report Member State Protecting Investors Paying Taxes Trading across Borders Enforcing Contracts Resolving Insolvency Uganda Zambia Source: Doing Business Report, 2013 Insolvency process was strengthened by clarifying rules on the creation of mortgages, establishing the duties of mortgagors and mortgagees, defining priority rules, providing remedies for mortgagors and mortgagees and establishing the powers of receivers. Insolvency process was strengthened by introducing further qualification requirements for receivers and liquidators and by establishing specific duties and remuneration rules for them. Most governments in 2012 were keen to attract and facilitate foreign investment. Some other reforms undertaken during the period under review included the establishment of special economic zones (SEZs), introducing one-stop border shops to attract and facilitate foreign investors (for example, Zambia s initiative to develop One-Stop-Shop Customs units at the strategic borders of Kasumbalesa, Nakonde, and Kasangula. The Sudan ratified the Investment Act 2013, which offers tax and customs privileges in strategic industries. It also provides for the establishment of special courts to deal with investment-related issues and disputes and offers guarantees to investors in cases of nationalization or confiscation. 1 1 Source: UNCTAD, Investment Policy Monitor database. Additional examples of investment-related policy measures can be found in UNCTAD s Investment Policy Monitors published in 2012 and

27 COMESA S GLOBAL COMPETITIVENESS INDEX (GCI) STATUS Sub-Saharan Africa has grown impressively over the past decade, averaging growth rates of over 5 percent in the past two years, making it one of the fastest growing regions in the world, even exceeding the global average. The region bounced back rather quickly from the global economic crisis when GDP regional growth dropped to 2.8 percent in These developments show that Africa, though resilient, is still vulnerable to global economic developments. It is important to determine whether COMESA economies have been making the types of investments and policies that make them competitive and place them firmly on the path towards sustainable economic growth. The GCI provides a useful diagnostic tool to determine how COMESA countries are faring in putting into place fundamentals that will sustain their rapid growth rates. The aim of the GCI is to portray the complexities of the phenomenon of national competitiveness, which can be improved only through an array of reforms in different areas that affect the longer-term productivity of a country, which is an important factor affecting economic growth performance of economies. Since 2005, the World Economic Forum has based its competitiveness analysis on the Global Competitiveness Index (GCI), a comprehensive tool that measures the microeconomic and macroeconomic foundations of national competitiveness. Competiveness is defined as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be earned by an economy. The productivity level also determines the rates of return obtained by investments in an economy, which in turn are the fundamental drivers of its growth rates. In other words, a more competitive economy is one that is likely to sustain growth. The concept of competitiveness thus involves static and dynamic components. Although the productivity of a country determines its ability to sustain a high level of income, it is also one of the central determinants of its returns to investment, which is one of the key factors explaining an economy s growth potential. Table 11 below depicts the GCI rankings for selected COMESA Member States. Within the COMESA region Mauritius ranks first and places 54th globally, second only to South Africa in the Sub-Saharan region. It has maintained its position from the previous years rankings. Rwanda moved up seven places to 63rd place on the GCI, placing second overall in the COMESA sub-region and third on the Sub-Saharan regional stage. Seychelles entered the Index for the first time occupying the 76th place overall. Kenya ranked 106th in 2012/13, dropping four places from the previous years. Other economies that declined in the index were Egypt, Ethiopia, Uganda, Malawi, Swaziland and Burundi. Zimbabwe remained static at 132nd position as did Madagascar. 25

28 COMESA Investment Report Table 11: The Global Competitiveness Index (GCI) Rankings* Member State GCI Rank GCI Rank 1 Mauritius Rwanda Seychelles 76-4 Zambia Kenya Egypt Libya Ethiopia Uganda Malawi Madagascar Zimbabwe Swaziland Burundi Source: WEF Global Competitiveness Report *Ranked out of 144 economies 2.4 THE 12 PILLARS OF COMPETITIVENESS Several factors drive productivity and competitiveness. Understanding the factors behind this process has occupied the minds of economists for hundreds of years, engendering theories ranging from Adam Smith s focus on specialization and the division of labour to neoclassical economists emphasis on investment in physical capital and infrastructure, and, more recently, to interest in other mechanisms such as education and training, technological progress, macroeconomic stability, good governance, firm sophistication, and market efficiency, among others. While all of these factors are likely to be important for competitiveness and growth, they are not mutually exclusive two or more of them can be significant at the same time, and in fact that is what has been shown in the economic literature (Schumpter 1942, Solow 1956, Sala-i-Martin et al, 2004). These components are grouped into 12 pillars of competitiveness upon which the GCI is based. The 12 pillars are further divided into three sub-indexes. These sub-indexes are referred to as Basic Requirements, Efficiency Enhancers and lastly, Innovation and Sophistication factors. 26

29 2013 Basic Requirements are identified as being key for factor-driven economies Pillar 1: Pillar 2: Pillar 3: Pillar 4: Institutions Infrastructure Macroeconomic environment Health and Primary Education The Efficiency Enhancers are key for efficiency driven economies Pillar 5: Pillar 6: Pillar 7: Pillar 8: Pillar 9: Pillar 10: Higher Education and Training Goods market efficiency Labour market efficiency Financial market development Technological readiness Market size The Innovation and Sophistication factors are key for innovation driven economies Pillar 11: Pillar 12: Business Sophistication Innovation Table 12: *Global Competiveness Rankings for Selected COMESA Member States Member State GCI Overall Basic Requirements Efficiency Innovation & Sophistication Rank Rank Rank Rank Mauritius Rwanda Seychelles Zambia Kenya Egypt Libya Ethiopia Uganda

30 COMESA Investment Report Member State GCI Overall Basic Requirements Efficiency Innovation & Sophistication Rank Rank Rank Rank Malawi Madagascar Zimbabwe Swaziland Burundi Source: WEF Global Competitiveness Report *Ranked out of a 144 economies With regard to the country performance according to the sub-indices, Mauritius benefits from strong and transparent public institutions, with clear property rights, strong judicial independence and an efficient government. The country s infrastructure is well developed by regional standards and health standards impressive compared to other COMESA countries. The private institutions are considered to be highly accountable with effective auditing and accounting standards and strong investor protection. Rwanda benefits from strong and relatively well functioning institutions, with low levels of corruption and a good security environment. Its labour markets are efficient and have relatively well developed financial markets. Rwanda is also characterized by a capacity for innovation that is quite good for a country at its stage of development. One of its greatest challenges is the state of the country s infrastructure, education and health sectors. Kenya s strengths are considered to be found in the more complex areas measured by the GCI. Kenya s innovative capacity is ranked an impressive 56th with high company spending on research and development and good scientific research institutions that collaborate well with the business sector in research activities. Supporting this innovative potential is an educational system that is relatively good. 2.5 HOW COMESA CAN USE THE GLOBAL COMPETITIVENESS INDEX (GCI) RANKINGS Since its inception in 2005, the GCI has been used by an increasing number of countries and institutions to bench mark national competitiveness. The structure of the GCI framework is useful for prioritizing policy reforms as it allows each country to identify the strengths and weaknesses of its national competitiveness environment and identify the factors that are constraining economic development. Furthermore COMESA can use the GCI as a platform for dialogue that can serve as a catalyst for productivity improving reforms. 28

31 COMESA INITIATIVES IN DEVELOPING INVESTMENT IN THE REGION COMESA Model Double Taxation Agreements (DTAs) Double taxation is an additional cost to the process of production in any investment. The Incidence of double taxation renders the activities of the private sector uncompetitive in the open world. A double taxation avoidance treaty/agreement helps to create the necessary enabling environment for private sector activity by encouraging foreign direct investment and cross border investment in the region. It is noticeable that COMESA Member States have negotiated very few double taxation avoidance agreements between them compared to what they have with countries outside of the region. It is recorded that only 20 DTAs have been signed among COMESA countries out of 213 DTAs in total. In 2012 a COMESA Model Double Taxation Agreement was developed and reviewed by Member States. The COMESA Model was developed based on the OECD and UN Models, taking into consideration existing cooperation modalities among COMESA Member States, information exchange and the fight against fiscal evasion. The Model avoids the incidence of double taxation and also addresses the issue of transfer pricing concerns. The COMESA Model DTA will be a negotiation fiscal tool for Member States that can be used to negotiate a double taxation agreement with a third party country or among them Business Environment COMESA Policy Reforms Programme The Secretariat undertook a COMESA Business Survey on the investment environment in COMESA Member States in 2009/2010. One of the major findings of the Survey was the generally negative perceptions by the private sector on the investment climate in most of the Member States. This perception matched the World Bank s Doing Business and the World Economic Forum s Global Competitiveness Reports. Based on the need for improving the business environment in the region, the June 2010 COMESA Council of Ministers meeting decided that the COMESA Secretariat assist the Member States in their efforts to improve their business climate. Following this decision and based on requests made by some countries to the Secretariat, four countries which are found to be among the least performing in the area of creating enabling business climate were selected to be among the first to benefit from this assistance. These are Djibouti, Zimbabwe, Swaziland and Democratic Republic of Congo. The programme consists of the following steps: (i) Consultations with the stakeholders including private and public actors and cooperating partners, priority constraints faced by the private sector; 29

32 COMESA Investment Report (ii) Preparation of a country roadmap with the stakeholders for addressing the above constraints; (iii) Launch the programme in a high level stakeholders forum (iv) Establishment of a high level steering committee at the country level for implementing the roadmap which will interact with the Secretariat on follow up actions. With the financial support of ACP-EU Business Climate Facility (Biz Clim ), the programme was implemented in four COMESA countries; Djibouti in April 2012, in Zimbabwe and Swaziland in May 2012, and in DR Congo in June Generally, an Investor Road Map is a document that constitutes overarching issues pinpointing administrative, procedural and regulatory impediments which have the potential to deter business in a country. It involves a comprehensive analysis of the general and specialised procedures that constitute public-private regulatory interaction. It is a detailed descriptive, and analytical tool which can be a catalyst for meaningful change. In line with the agreed upon implementation steps listed above, four high level meetings were held in the first half of 2012, one in each of the identified countries. The meetings main focus was on finding consensus on the launch on the programme on policy and institutional reforms, to review the draft Investor Road Maps and to learn strategies and means of improving the business environment in each respective country. In a bid to aid the process of policy and institutional reform the Secretariat brought together resource persons and experts from several countries such as Mauritius, Rwanda, South Africa and Zambia to share country experiences. In addition to this, several institutions such as IFC, UNCTAD and the COMESA Secretariat provided experts to share their expertise and experience in successfully implementing business climate reforms. The presentations showed real life business reform success stories from Mauritius and Rwanda and some of the steps and mindsets the countries had adopted in order to improve their Doing Business Rankings. Mauritius has been first in Doing Business in Africa over the last 6 years according to the World Bank s Doing Business rankings. In 2007 Mauritius was ranked 32nd out of 175 countries by the World Bank Doing Business report and 1st in Africa. Since then, Mauritius has kept this top 1st position in Africa. Rwanda s and Mauritius experiences showed that business reform required both high level government commitment as well as active participation of the private sector in the formulation and the implementation of investor roadmaps. The attendance of high level officials at all the meetings reinforced the governments commitments to explore and implement new approaches to policy and institutional reform that would result from the meeting. Each meeting concluded with an agreed upon way forward with regard to the draft Investor Roadmap and a commitment to set up high level National Steering Committees that would incorporate the private sector at every stage of the deliberations. The COMESA Secretariat continues to enhance the efforts of Member States in the area of policy and institutional reforms. 30

33 COMESA Sustainable Tourism development Forum Tourism and tourism related FDI can be a vehicle for economic growth and development. FDI is one way COMESA Member States can carry out tourism more effectively. Tourism is unique as it is both a far reaching and cross cutting activity. It joins together a series of cross-cutting activities involved in the provision of goods and services such as accommodation, transport, entertainment, and construction and agricultural and fisheries production. Its industry covers a wide range of players, ranging from global trans-national companies to small and medium sized enterprises (SMEs), thus enabling participation in the industry at different scales and levels of the market. Additionally, even the smallest transaction represents an export, enabling a developing country to be part of the global economy and presenting a way for small enterprises in particular access to the global supply chain. If properly organized, tourism offers significant opportunities for poverty reduction through its incomegenerating and job-creating effects. (UNCTAD, 2007). The tourism sector is one of the priority sectors identified by the COMESA Treaty. Tourism is the fastest-developing enterprise in Africa and one of the continent s major investment opportunities, standing at a 6 percent growth rate in the last decennium. Africa receives 4.8 percent of all tourist arrivals in the world and 3.3 percent of the receipts. The World Travel and Tourism Council (WTTC) estimates that, from direct and indirect activities combined, the tour and travel sector now accounts for 9.2 percent of global GDP. Tourism contribution to employment is estimated at 6-7 percent of the overall number of jobs worldwide, and it makes up 4.8 percent of world s exports and 9.2 percent of world investments. 2 To hasten the implementation of the tourism agenda in the COMESA region, the COMESA Secretariat organized on August 2012, in Nairobi, Kenya, the first COMESA Tourism Development Forum. The objective of the forum was to come up with an agreed action plan by Member States on a COMESA sustainable Tourism development plan based on the COMESA study on the status of the tourism sector in the COMESA region. The theme of the forum was: Shaping the Future of Tourism in the Region. The Forum was also attended by the representatives from EAC Secretariat and SADC/RETOSA, and other representatives from specialized regional and international institutions and organizations dealing directly and indirectly with tourism including among others UNECA sub-region office in Eastern Africa, Serena Group of Hotels, Africa Standardization Organization, E-Tourism Frontier Limited, Kenya Airways and East African Tourism Platform (TBC) The aim of the forum was to promote a more competitive, investor friendly, sustainable tourism sector in the region, by putting in place a framework for a regional policy and strategy that defines tourism in the region; promotes the relaxation of visa requirements for tourists, packages, brands tourism, and investment in infrastructure for tourism development; upgrades the sector to meet regional and global standards; promotes investment in key areas of tourism, such as hospitality and catering; addresses the supply side of constraints in the hotel industry; and exploits the benefits of e-tourism among others. 2 Viewed on the COMESA website accessed on July

34 COMESA Investment Report Some of the activities outlined in the action plan involved identifying unique products that increase the competitiveness of the destination, developing and marketing tourism products and building the capacity of Member States in the Tourism sector, developing policies, strategies, guidelines and products for cultural and community tourism in the Member States, facilitating the movement of tourists in the region, forming a private sector tourism working group. Developing a tourism database and COMESA web portal to promote tourism in the region and marketing COMESA as a single destination for tourism. The forum addressed some of the following themes which were identified as intervention areas for the action plan: Innovative Tourism: Success stories among key business leaders in Africa Expanding economic opportunities and regional development to impact the global economy- Best practices for Tourism sustainable Development The COMESA Sustainable Tourism Development Framework: Basis for Policy and Strategy Sustainable Tourism: Prioritizing the tourism industry to ensure corporate and environmental responsibility for community development Movement of tourists: Relaxation of Visa requirements Coalition in the Tourism Industry: Regional Cooperation amongst players in the tourism sector Tourism and Climate Change: Conserving biodiversity for tourism development Upgrading the tourism industry standards and developing human and institutional capacities Tourism and Infrastructure Development: Information and Communications Technology (ICT) and Air Transport Tourism Product Development and Marketing Formation of the CBC tourism workgroup The Forum unanimously agreed that COMESA Member States need to take a common and regional approach towards sustainable tourism development and adopt a Sustainable Tourism Development Policy and Strategy by the end of 2013 and engage in implementing the plan of action that was proposed in the forum. The action plan would create a borderless tourism market as a good way of encouraging domestic tourism as well as further encouraging tourists from outside the region. African economies are seen as growing and factors like new mineral resource discoveries and growing service industries have been tipped as growth drivers that will create adequate middle class with disposable income to travel within the region. 32

35 3 INTERNATIONAL INVESTMENT POLICY DEVELOPMENTS AND IMPLICATIONS FOR COMESA TRENDS IN INTERNATIONAL INVESTMENT AGREEMENTS (IIAS) 2012 saw the conclusion of 30 IIAs: 20 bilateral investment treaties (BITs) and 10 other IIAs 3, bringing the total to 3,196 (2,857 BITs and 339 other IIAs ) by year-end. BIT-making bottomed out in 2012, with only 20 BITs signed, the lowest annual number in a quarter century (figure 6). This slowdown is revealed distinctly in multi-year period comparisons. From 2009 to 2012, on average one IIA per week was signed. This was a quarter of the frequency rate during a three-year period in the mid-1990s, when treaty conclusions peaked at an average of four per week. Figure 6: Annual and cumulative BITs (1990-June 2013) 250 Annual BITs All BITs cumulative Annual number of BITs Cumulative number of BITS Source: UNCTAD 3 Other IIAs refer to economic agreements, other than BITs, that include investment-related provisions (for example, investment chapters in economic partnership agreements and free trade agreements, regional economic integration agreements and framework agreements on economic cooperation). 33

36 COMESA Investment Report As of end 2012, COMESA member countries had concluded a total of 332 BITs to promote and protect investments with third parties. Overall, Egypt with 100 BITs ranks first among COMESA countries in terms of the number of treaties concluded, followed by Mauritius (37), Zimbabwe (30) and Ethiopia (29) while Swaziland and Eritrea with five and four BITs respectively signed the least. In keeping with the global drive for conclusion of BITs, COMESA member countries intensified signing BITs during the second half of the 1990 s where 30 BITs were signed in 1998 alone. In recent years, the number of BITs concluded by COMESA countries has been declining (figure 7). A marked decline was observed in 2002, and then in 2006 where only eight BITs were signed. Between 2011 and July 2013 only six BITs were signed by COMESA countries Figure 7: Annual and cumulative BITs, COMESA countries (1990-June 2013) Annual BITs All BITs cumulative Annual number of BITs Cumulative number of BITS Source: UNCTAD. 3.2 TRENDS IN INVESTOR-STATE ARBITRATION In 2012, 58 new international investor State claims were initiated. 5 This constitutes the highest number of known investor-state dispute claims ever filed in one year and confirms foreign investors increased inclination to resort to investor State arbitration (figure 8). In 66 per cent of the new cases, respondents were developing or transition economies. 4 Democratic Republic of Congo BITs with China and Portugal (2011); Kenya-Slovakia BIT (2011); Sudan-United Arab Emirates BIT (2011); Zimbabwe-Botswana BIT (2011); Mauritius-Turkey BIT (2013). 5 For more details, see UNCTAD, Latest Developments in Investor-State Dispute Settlement, IIA Issues Note, No. 1, March

37 Figure 8: Known treaty-based investor-state cases, as of end Annual number of cases Cumulative number of cases ICSID Non-ICSID All cases cumulative Source: UNCTAD. In 2012, foreign investors challenged a broad range of government measures, including changes to domestic regulatory frameworks (with respect to gas, nuclear energy, the marketing of gold, and currency regulations), as well as measures relating to revocation of licences (in the mining, telecommunications and tourism sectors). Investors also took action on the grounds of alleged breaches of investment contracts; alleged irregularities in public tenders; withdrawals of previously granted subsidies (in the solar energy sector); and direct expropriations of investments. By the end of 2012, the total number of known cases (concluded, pending or discontinued 6 ) reached 514, and the total number of countries that have responded to one or more investor-state claims increased to 95. The majority of cases continued to accrue under the ICSID Convention and the ICSID. Additional Facility Rules (314 cases) and the UNCITRAL Rules (131). Other arbitral venues have been used only rarely. COMESA member countries have responded to a total of 28 treaty-based investor-state claims. Egypt alone responded to 17 claims, followed by the D.R. Congo (4), Zimbabwe (3), Burundi (2), while Ethiopia and Uganda responded to one case each. In 2012, four cases were brought against COMESA member countries, three against Egypt relating to natural gas exports and waste management services and one against Uganda relating to a petroleum exploration, development and production agreement. 3.3 REGIONALISM IS ON THE RISE The importance of regionalism is manifest in ongoing IIA negotiations. By 2013 at least 110 countries were involved in 22 negotiations of regional agreements. 7 Regional and inter-regional investment treaty-making involving more than two parties can take different forms notably, negotiations within a regional grouping, negotiations between a regional bloc and a third country, or negotiations between like-minded countries. The COMESA Common Investment Area (CCIA) and the Southern African Development Community (SADC) Finance and Investment Protocol are examples of African regional cooperation on investment issues. 8 6 DA case may be discontinued, e.g. due to the failure to pay the required cost advances to the relevant arbitral institution. 7 This includes the 27 EU Member States counted individually. 8 For more details, see COMESA Investment Report 2012, available at: (comstat.comesa.int/). 35

38 COMESA Investment Report The rise of regionalism is partially driven by the European Union s (EU) negotiations of FTAs with investment provisions in line with acquired EU competence over FDI from Member States after the entry into force in December 2009 of the Lisbon Treaty. 9 Fifteen of the 22 regional agreements under negotiations involved the EU. For example, on 1 March 2013, the EU and Morocco launched negotiations for a Deep and Comprehensive Free Trade Agreement (DCFTA). Morocco is the first Mediterranean country to negotiate a DCFTA with the EU that includes investment. Negotiations with Egypt, Jordan and Tunisia are expected to follow. 10 At the inter-regional level, African groups are engaged in negotiations on comprehensive Economic Partnership Agreements (EPAs) with the EU. The Cotonou Agreement signed in June 2000, established the legal basis for a new trade and investment regime between the EU and African countries and paves the way for the conclusion of EPAs. The EU concluded EPAs with the Ivory Coast in November 2008, while negotiations are ongoing with the Economic Community of West African States (ECOWAS); interim Agreements were reached with SADC (2007); the Eastern and Southern Africa (ESA) States (2009); and the EAC (2009). The scope and depth of the investment provisions has been an important element in ongoing negotiations. The new EU mandate may allow for the inclusion of substantive investment protection chapters. Regional cooperation can also take the form of agreements among two or more regional economic integration organizations. In 2011, the Heads of State and Government of COMESA, the East African Community (EAC) and SADC signed a declaration launching negotiations for the establishment of the COMESA-EAC-SADC Free Trade Area (FTA). Negotiations towards the free trade area picked up momentum in 2012 with the establishment of the Tripartite Trade Negotiation Forum (TTNF), the body responsible for technical negotiations and guided by the road map adopted for the negotiations. Investment talks are scheduled as part of the second phase of negotiations, envisaged to commence in the latter half of The Tripartite FTA involves 26 African countries with the strategic objective of consolidating existing regional economic communities to achieving a common market covering the African continent. The draft stipulates that members undertake to create a single investment area, develop policies and strategies which promote cross-border investment, reduce the cost of doing business in the region, and create a conducive environment for private sector development. 12 In North Africa and the Middle East, Arab countries are expected to continue discussions and negotiations on a revised Unified Agreement for the Investment of Arab Capital in the Arab States. A draft text was adopted early in 2013, ensuring free movement of capital and providing national treatment and most-favored-nation (MFN) status to investments. 9 See also, World Investment Reports 2010 and These negotiations are taking place after the European Commission, in December 2012, received a mandate to upgrade association agreements with its Mediterranean partner countries to include investment protection. See doclib/press/index.cfm?id= The first phase of the negotiations, scheduled to conclude in June 2014, will focus on merchandise trade liberalization, infrastructure development and industrial development. 12 COMESA-EAC-SADC Tripartite Framework: State of Play, Report by the Chair of the Tripartite Task Force, (February 2011), available at < See also UNCTAD, Regional Development and Foreign Direct Investment in Developing and Transition Economies (3 December 2012) TD/BC.II/ MEM.4/2. 36

39 REGIONALISM POSES CHALLENGES AND OPPORTUNITIES The current IIA regime is known for its complexity and incoherence, gaps and overlaps. Rising regionalism in international investment policymaking presents a rare opportunity to rationalize the regime and create a more coherent, manageable and development-oriented set of investment policies. In reality, however, regionalism is moving in the opposite direction, effectively leading to a multiplication of treaty layers, making the network of international investment obligations even more complex and prone to overlap and inconsistency. An analysis of recent regional IIAs signed between 2006 and 2012 reveals that most treaties do not provide for the phasing out of older BITs (Table 13). Instead, most treaty provisions governing the relationship between regional agreements and other (investment) treaties allow for the continuing existence of the BITs in parallel with the regional treaty. Table 13: Relationship between regional and bilateral IIAs (illustrative) Regional agreement ASEAN Comprehensive Investment Agreement (2009) Affected bilateral treaties Relationship Relevant article 26 Parallel Article 44 ASEAN China Investment Agreement (2009) 10 Parallel Article 23 ASEAN Republic of Korea Investment Agreement (2009) Consolidated Central European Free Trade Agreement (CEFTA) (2006) China Japan Republic of Korea investment agreement (2012) 8 Parallel Article Parallel Article 30 3 Parallel Article 25 COMESA Common Investment Area (CCIA) (2007) 24 Parallel* Article 32 Dominican Republic Central America United States FTA ( CAFTA) (2004) 4 Parallel* Article 1.3 ASEAN Australia New Zealand FTA (2009) 2 Parallel* Article 2 (of chapter 18) SADC Protocol on Finance and Investment (2006) 16 Silent N.A. Eurasian Economic Community investment agreement (2008) 9 Silent N.A. Central America Mexico FTA (2011) 4 Replace Article 21.7 Note: All except CEFTA include substantive and procedural investment protection provisions as commonly found in BITs. (CEFTA contains some BIT-like substantive obligations but no ISDS mechanism.) *The language of the relevant provision leaves room for doubt as to whether it results in the parallel application of prior BITs and with the regional IIA. The parallel existence of such prior BITs and the more recent regional agreements with investment provisions has systemic implications and poses a number of legal and policy questions. For example, parallelism raises questions about how to deal with possible inconsistencies between the treaties. While some IIAs include specific conflict rules, stating which treaty prevails in the case of an 37

40 COMESA Investment Report inconsistency, 13 others do not. In the absence of such a conflict rule, the general rules of international law enshrined in the Vienna Convention on the Law of Treaties (in particular, the lex posterior rule) apply. Next, parallelism may pose a challenge in the context of ISDS. Parallel IIAs may create situations in which a single government measure could be challenged by the same foreign investor twice, under two formally different legal instruments. Parallelism is also at the heart of systemic problems of overlap, inconsistency and the concomitant lack of transparency and predictability arising from a multi-faceted, multi-layered IIA regime. It adds yet another layer of obligations and further complicates countries ability to navigate the complex spaghetti bowl of treaties and to pursue a coherent, focused IIA strategy. Although parallelism appears to be the prevalent approach, current regional IIA negotiations nevertheless present a window of opportunity to consolidate the existing network of BITs. The extent to which parties opt to replace several existing BITs with an investment chapter in one regional agreement could help consolidate the IIA network. For example, if an investment chapter is included in the COMESA-EAC-SADC Tripartite Free Trade Area, this may create an opportunity for the replacement of 47 BITs in existence between African countries members of the three groups. Along similar lines, if investment protection provisions are included in the EU EPAs ongoing negotiations with regional African groups, this may potentially supersede 224 BITs between EU member States and individual African countries. In total, this would represent an opportunity to phase out 81% of the total number of BITs signed by COMESA countries. Such an approach is already envisaged in the EU context, where Regulation 1219/2012, adopted in December 2012, sets out a transitional arrangement for BITs between EU Member States and third countries. Article 3 of the Regulation stipulates that without prejudice to other obligations of the Member States under Union law, bilateral investment agreements notified pursuant to article 2 of this Regulation may be maintained in force, or enter into force, in accordance with the [Treaty on the Functioning of the European Union] and this Regulation, until a bilateral investment agreement between the Union and the same third country enters into force. 13 The COMESA investment agreement, for example, states in Article 32.3: In the event of inconsistency between this Agreement and such other agreements between Member States mentioned in paragraph 2 of this Article, this agreement shall prevail to the extent of the inconsistency, except as otherwise provided in this Agreement. Article 2.3 of the ASEAN Australia New Zealand FTA enshrines a soft approach to inconsistent obligations whereby In the event of any inconsistency between this Agreement and any other agreement to which two or more Parties are party, such Parties shall immediately consult with a view to finding a mutually satisfactory solution. 38

41 THE BIT REGIME HAS REACHED A JUNCTURE PROVIDING OPPORTUNITIES FOR COMESA MEMBER COUNTRIES TO IMPROVE IT COMESA BIT-making activity peaked in the late 1990s. Between 1996 and 1999, 102 BITs were signed, representing over 30% of the total COMESA BIT network. Fifteen years on, the inclination to enter into BITs has bottomed out. This has brought the COMESA BIT regime to a juncture that provides an opportunity to effect systemic change. 14 As agreements reach their expiry date, a treaty partner can opt for automatic prolongation of the treaty or notify its wish to revoke a treaty. 15 The latter option gives treaty partners an opportunity to revisit their agreements, update their content with cognisance of past experiences and incorporate provisions to accommodate novel policy objectives. Given that a large proportion of the existing COMESA BITs were signed in the late 1990s and that most of them have reached the end of their initial period, the overall number of COMESA BITs that can be terminated by a party at any time is estimated to exceed 138 BITs by the end of Effectively using treaty expirations to instigate change in the existing IIA regime is not a straightforward endeavour. First, there is a need to understand how BIT rules related to treaty termination work, so as to identify when opportunities arise and what procedural steps are required (box 1). Box 1.Treaty termination and prolongation clauses BITs usually specify that they shall remain in force for an initial fixed period, most typically 10 or 15 years. Very few treaties do not set forth such an initial fixed term providing for indefinite duration from the outset. BITs that establish an initial term of application typically contain a mechanism for their prolongation. Two approaches are prevalent. The first states that, after the end of the initial fixed term and unless one party opts to terminate, the treaty shall continue to be in force indefinitely. However, each party retains the right to terminate the agreement at any time by giving written notice. The second approach provides that the treaty shall continue to be in force for additional fixed terms (usually equal in length to the initial term, sometimes shorter), in which case the treaty can be terminated only at the end of each fixed period. The majority of BITs thus fall in one of the two categories: (1) those that can be terminated at any time after the end of an initial fixed term, and (2) those that can be terminated only at the end of each fixed term. These two options may be referred to as anytime termination and end-of-term termination. 14 This section is limited to BITs and does not apply to other IIAs as the latter raise a different set of issues. Importantly, an investment chapter in a broad economic agreement such as an FTA cannot be terminated separately, without terminating the whole treaty. 15 In accordance with general international law, a treaty may also be terminated by consent of the contracting parties at any time, regardless of whether the treaty has reached the end of its initial fixed term (Article 54(b) of the Vienna Convention on the Law of Treaties). 39

42 COMESA Investment Report Anytime termination End-of-term termination Duration: Initial fixed term; automatic renewal for an indefinite period. Duration: Initial fixed term; automatic renewal for further fixed terms. Duration: No initial fixed term; indefinite duration from the start. Duration: Initial fixed term; automatic renewal for further fixed terms. Termination: 1. At the end of the initial fixed term; 2. at any time after the end of the initial fixed term. Termination: 1. At the end of the initial fixed term; 2. at any time after the end of the initial fixed term. Termination: 1. At any time. Termination: 1. At the end of the initial fixed term; 2. at the end of each subsequent fixed term. Example: Burundi Germany BIT (1984) Example: Egypt Bosnia Herzegovina BIT (1998) Example: Armenia Canada BIT (1997) Example: Egypt Slovakia BIT (1997) The anytime termination model provides the most flexibility for review as the parties are not tied to a particular date by which they must notify the other party of their wish to terminate the BIT. The end-of-period model, in contrast, provides opportunities to terminate the treaty only once every few years. Failure to notify within a specified notification period (usually either 6 or 12 months prior to the expiry date) of the intention to terminate will lock the parties into another multi-year period during which the treaty cannot be unilaterally terminated. Source: UNCTAD. A second challenge originates from the so-called survival clause, contained in most BITs, which prevents unilateral termination of the treaty with immediate effect. The survival clause effectively prolongs the exposure of the host State to international responsibility by extending the treaty s application for a further period, typically 10 or 15 years, with respect to investments made prior to the termination of the treaty. 16 Third, renegotiation efforts aimed at reducing or rebalancing treaty obligations can be rendered futile by the MFN obligation. If the scope of the MFN clause in the new treaty is not limited, it can result in the unanticipated incorporation of stronger investor rights from IIAs with third countries. Hence, in case of amendments and/or renegotiations, IIA negotiators may wish to formulate MFN provisions that preclude the importation of substantive IIA provisions from other IIAs. This will ensure that older or future treaties do not spill over into carefully crafted agreements by way of an open-ended MFN clause It is an open question whether the survival clause becomes operative only in cases of unilateral treaty termination or also applies in situations where the treaty is terminated by the mutual consent of the contracting parties. The solution may depend on the wording of the specific clause and other interpretative factors. 17 This will not automatically solve the issue of those older treaties that were not renegotiated; but it will gradually form a new basis on which negotiators can build a more balanced network of IIAs. 40

43 3.6 SUSTAINABLE DEVELOPMENT CONSIDERATIONS ARE GAINING IMPORTANCE 2013 Another development relates to the substantive content of IIAs. While the annual number of IIAs continues to decline as described in Section 1, they increasingly include sustainable-developmentoriented features. 18 Most of the new treaties refer to the protection of health and safety, labour rights, environment or sustainable development in their preamble; include general exceptions for example, for the protection of human, animal or plant life or health, or the conservation of exhaustible natural resources; and contain clauses that explicitly recognize that parties should not relax health, safety or environmental standards to attract investment. These sustainable development features are supplemented by treaty elements that aim more broadly to preserve regulatory space for public policies in general or to minimize exposure to investment litigation in particular. The analysed agreements include provisions that (i) focus the treaty scope narrowly (for example, by excluding certain assets from the definition of investment), (ii) clarify obligations (by crafting detailed clauses on fair and equitable treatment or indirect expropriation); (iii) set forth exceptions to the transfer-of-funds obligation or carve-outs for prudential measures; or (iv) carefully regulate access to ISDS (clauses that, for example, limit treaty provisions that are subject to ISDS, exclude certain policy areas from ISDS, set out a special mechanism for taxation and prudential measures, or restrict the allotted time period within which claims can be submitted). Some agreements leave out umbrella clauses or omit ISDS altogether. 3.7 TOWARDS A CONSOLIDATED REGIONAL APPROACH TO INTERNATIONAL INVESTMENT POLICY-MAKING The gradual transformation of the international investment policy landscape described above present a series of opportunities for future action by COMESA countries: First, the rise of regionalism in international investment relations may create a new momentum for COMESA countries to engage in regional dialogue on investment policies for development to find consensus on how to best ensure coherence between regional and bilateral investment agreements. This could lead COMESA countries to reconsider the relationship between BITs signed by individual COMESA countries and regional investment agreements such as the CCIA and the ongoing negotiations for a COMESA-EAC-SADC Tripartite Free Trade Area. These agreements provide an opportunity for COMESA members to phase out older BITs that no longer reflect the sustainable development priorities of COMESA countries. Second, as many BITs signed by COMESA countries in the late 1990s are reaching their expiry date, countries have an opportunity to revisit their content and incorporate provisions that reflect the latest trends in international investment law. 18 The analysis is based on the review of 16 IIAs signed in 2012 for which text was available namely, the Albania Azerbaijan BIT, Australia Malaysia FTA, Bangladesh Turkey BIT, Cameroon Turkey BIT, Canada China BIT, China Japan Republic of Korea Trilateral investment agreement, EU Central America Association Agreement, EU Colombia Peru FTA, EU Iraq Partnership and Cooperation Agreement (PCA), Former Yugoslav Republic of Macedonia Kazakhstan BIT, Gabon Turkey BIT, Iraq Japan BIT, Japan Kuwait BIT, Nicaragua Russian Federation BIT and Pakistan Turkey BIT. 41

44 COMESA Investment Report Third, as sustainability considerations continue gaining prominence in the negotiation of IIAs as well as in other investment policymaking processes, COMESA countries could take this opportunity to steer away from the traditional BIT model that focuses solely on investment protection, to a more balanced model that ensures that the treaty does not interfere with, but instead contributes to, countries sustainable development strategies that focus on inclusive economic growth, policies for industrial development, and the environmental and social impacts of investment. 19 In these processes COMESA countries could benefit from various policy options provided in UNCTAD s Investment Policy Framework for Sustainable Development (IPFSD). 20 This could assist member countries in ensuring coherence between the CCIA, the BITs signed by COMESA countries, and the national legal frameworks of each member State. Furthermore, IPFSD technical assistance activities could provide a guidance framework for COMESA countries seeking to increase the awareness of government officials on the importance of strengthening the sustainable development dimension of regional, bilateral and national investment policies taking into account public policy concerns in line with the evolution in international investment law. UNCTAD s IPFSD could also be relevant in the development of a COMESA model BIT template to promote harmonization of COMESA members investment policies. 19 For more details, see Chapter III of the World Investment Report 2012, available at: TAD-WIR2012-Chapter-III-en.pdf 20 IPFSD is available online at: ipfsd.unctad.org/ to establish an interactive open-source platform that enables stakeholders to exchange views and experiences in order to stimulate critical and constructive debate on issues related to investment policies. 42

45 4 FOREIGN 2013 DIRECT INVESTMENT AND SMALL AND MEDIUM ENTERPRISE LINKAGES: ISSUES FOR COMESA COUNTRIES 4.1 INTRODUCTION In an increasingly globalised business environment, accompanied by the increasing openness of many developing country economic frameworks, the importance of foreign direct investment (FDI) to country economic prospects has grown. This is particularly true for many developing countries, which are seen to have prospects as growing consumer markets and sites of untapped resource potential in the form of mineral, oil, gas and agricultural commodities. Elsewhere in this report the scale of this growth in inward FDI to Africa is documented from its generally low base in the 1980 of 400 million US Dollars (UNCTAD Stats from to over 50 billion US Dollars in 2012 (UNCTAD, 2013: 213). In Ernst & Young s Attractiveness survey Africa 2013, the company reported that, FDI projects into sub-saharan Africa have grown at a compound rate of 22% since (Ernst & Young, 2013: 5). Trans-National Corporations 21 (TNCs) continue to be at the heart of this process with their ability to mobilise both capital and capabilities in environments displaying a scarcity of these factors (UNCTAD, 2013). However, alongside these giants of the global economy and over and above the presence of official development actors and multi-lateral agencies, a proliferation of other actors such as globalizing small and medium enterprises, non-government or not-for profit organisations and philanthropic foundations have been witnessed alongside these growing flows of capital. Within these environments, the once somewhat abstract question of where, in this mix of foreign and domestic investments, local enterprises can find a space has increasingly come to the fore as a critical issue for actors to consider. This chapter explores the perspectives and experiences on enhancing the scale, scope and depth of interaction between actors in the FDI sphere, primarily TNCs, and local SMEs. The material reflects specifically on COMESA Member States and other African countries but also draws on material from 21 The terms Trans-National Corporations (TNCs), Multi-National Corporations (MNCs) and Multi-National Enterprises (MNEs) are all used by different writers and institutions, often with some notable semantic or conceptual nuances. In this chapter it is generally understood that they all refer to companies of some considerable scale with a significant degree of operational presence or influence (in a host of different forms) in countries outside the country in which the main corporate headquarters are located. However, for the purposes of this chapter, TNC is used, unless in a direct quote from another source using a different term or acronym. 43

46 COMESA Investment Report other regions and countries, both developed and developing. The chapter concludes with some policies that have been shown to have some success within COMESA and beyond. 4.2 EVOLVING IMPERATIVES AND CHANGING DYNAMICS OF GLOBAL FDI Before discussing the literature on FDI and SME linkages it is worth briefly recapping some of the arguments why FDI might take place. This is important because any process aimed at seeking to encourage greater integration between FDI actors and domestic SMEs must be informed by an understanding of why any particular FDI actor has chosen to be present in a particular country. In this regard it should be noted that the rationales for undertaking FDI, most often by TNCs, vary, sometimes considerably from case to case and from country to country (COMESA, 2012a). Variables at play in this regard are numerous and would include the following opportunities: to exert monopolistic or oligopolistic power within the target country or elsewhere; to enable a greater guarantee of supply of inputs needed within a TNC or within a value chain in which a TNC participates; and the reduction of transaction costs through internalisation. Bartles et al., (2008) cite Dunning (2000) as identifying, cost-based factors; vertical integration; investment climate; host and regional market factors; push (parent country encouragements); and pull (host government inducements) as all influencing FDI choices (Bartles et al., 2008: 4). They go on to point out that a variety of studies have described the varied motivations of TNCs in their FDI choice making as fitting into three broad categories of efficiency-, market- and strategic asset-seeking behaviour. Strategic asset- or resource-seeking MNEs focus on supply-oriented variables (Castro 2007), and assets for the economic growth of the home country (Jenkins and Edwards 2006; Ndikumana and Verick 2008). Market-seeking MNEs focus on demand-oriented variables. Efficiency-seeking MNEs wish to reduce transaction costs and enhance productivity through economies of scale. (Bartles et al., 2008: 4) COMESA s (2012a) report on investment in the Member States also highlights the impact of factors such as market size and growth trends in these markets as being critical factors. In addition to these factors, COMESA highlights the relevance of international agreements and rules such as those relating to trade and investment agreements on the patterns of FDI as well as issues relating to host country policy frameworks (COMESA, 2012a: 36). The report goes on to point out, how with particular relevance to COMESA countries and their intentions, the degree of regional integration can enhance a climate for FDI. For instance harmonisation of trade regulation, tariffs and such measures can enable TNCs to better access a critical mass of opportunities across a number of countries (COMESA, 2012a: 39-41). It is also worth noting that factors influencing contemporary FDI have evolved over time and that the present conditions across the globe influence both the rationale and patterns of FDI. Bartles et al. (2008) describe these changes as including, the superior rate of world trade growth compared to world output growth since the 1960s; the superior rate of FDI growth compared to world trade growth during ; three-quarters of world trade occurring internally within the international 44

47 2013 operations of Multinational Enterprises (MNEs) as geo-spatially distributed intra- and inter-firm relations; the superior rate of growth in vertically integrated intra-industry trade (30% of world trade) compared to FDI growth; and the superior rate of growth of financial capitalism compared to world output growth. (Bartels et al., 2008: 1) More recently, it has been widely documented that the global financial crisis has had a profound impact on flows of FDI and on the behaviour of firms driving these flows (UNCTAD, 2013). For instance, it is noted in the 2013 World Investment Report, that many developed country TNCs in the finance sector, particularly those from the troubled Eurozone, have divested themselves of foreign assets to enhance their balance sheet whilst others have sought to use foreign earnings to replace lost earnings in their primary regions of operations or to drive any new expansions at home or abroad. These shifts have also driven home the long observed trend of developed and transition country origin FDI as a major force in world investment including a rise in state owned TNCs and the growing presence of Sovereign Wealth Funds (SWFs) in the global investment terrain (UNCTAD, 2013: xiv). Under these changing circumstances the imperative for recipient countries to be alive to the changing imperatives of existing and new TNCs becomes all the more important. The literature on Global Value Chains (Gereffi et al., 2005) has also provided important insights into the nature of evolving FDI through the influence of TNC actors and the choices that they make. A key element in many of the studies on these processes is now just how important various relationships are in these GVCs and how dominant actors might exert influence, but also how these can get disrupted by one or other actor or group of actors. Thus, those interested in the ebb and flow of FDI have to be attuned not only to the strategic orientation of existing dominant actors, but also to the emerging role of new sets of actors. Sturgeon s (2008) description of the global automotive industry provides excellent illustrations of this. The growth of many African economies, often at rates not witnessed before, alongside greater levels of political and economic stability experienced in many countries has also translated to growing consumption levels. For instance the COMESA (2012a) report points to the growth of the African middle class as a factor supporting an improved FDI environment for market seeking FDI. In this report it was reported that, Africa s middle class has grown in size and purchasing power following significant reduction in poverty levels (largely emanating from strong economic growth over the past two decades) that have lifted substantial numbers of the poor out of poverty into the middle class. The estimations show that by 2010 the broad category of the middle class had risen to 34.3% of the population (i.e. 326 million people) up from 26.2% (or 115 million) in 1980, 27% (157 million) in 1990 and 27.2% (204 million) in As the movement of the poor into the middle class outperformed the drop of the rich class into the middle class, it implies this category of the middle class in Africa is still expected to increase demand for private sector supplied consumables and hence is vital for the African economy. (COMESA, 2012a: 49) 45

48 COMESA Investment Report Although less documented, it is also apparent to many observers, that these changes have also driven a proliferation of new actors in FDI that might have been less present in past processes. Developing country capitals and commercial hubs are increasingly finding themselves host to a plethora of intermediaries active in the FDI process. These range from the global business services TNCs so familiar in the capitals of the developed world, right through to local and international consultancies, big and small, seeking to provide one or other service to states, TNCs, SMEs or other actors as deals are considered, projects are planned, implemented and operated. In and of themselves, these are an important by-product of the FDI process and in some cases could be argued as having access to knowledge or influence to enable them to have a more direct impact on FDI processes. Alongside these are many local and international NGOs who, having seen the shift in shares of capital inflows to developing countries from ODA to FDI in the past two decades, have neatly repositioned themselves in the space of private sector development. Often supported by ODA funders or as part of increasingly common corporate backed endeavours these actors are becoming a feature in programmes such as Making Markets Work for the Poor and a variety of different fair-trade type initiatives where, in a growing number of cases, FDI processes are being harnessed for a variety of forms of local impact. These have often been joined by a new array of foreign SMEs able to take advantage of access to TNCs in their home countries or quick-response entrepreneurialism around initiatives such as those associated with the Clean Development Mechanism ( and obligations associated with broader triple bottom line reporting. Within these processes, domestic SMEs should not always be automatically assumed to be relegated to the margins. Whilst in relative terms their economic contributions might often be modest, the fast pace of economic growth witnessed in many developing countries, particular those in Africa, over the past decade and more has generated a range of opportunities both connected to and independent from TNCs. These enterprises are themselves also stimulating a market for the products and services of TNCs that might not have otherwise been apparent in the more constrained economic environments of the past. One only has to witness the extent to which many SMEs utilise or provide services related to cellular communications to appreciate the scale and scope of some of these changes. The kinds of changes discussed above reflect substantially on the modes of FDI and the motivations, but they also talk to its impact. The following section discusses the general impacts of FDI and more specifically provides an overview of literature on FDI and SME linkages. 46

49 IMPACTS OF FDI It should be noted that the impacts of FDI vary substantially from context to context and from project to project. Much of the discussion on FDI impacts looks at the issue from an aggregated perspective, whilst much of the literature on FDI-SME linkages seeks to generalise from cases describing the experiences of specific firms or groups of firms. It is however, necessary to begin with a discussion on the broader FDI impacts as a number of these are very pertinent to a discussion of FDI-SME impacts. Perspectives on the impacts of inward foreign direct investment in developing countries reflect a wide variety of views including those which talk to a range of benefits as well as costs that might arise (Blomström & Kokko, 1997; Hanson, 2001). Much of this analysis has focused on fiscal and regulatory matters such as taxation or on macro-economic factors such as those related to the Gross Domestic Product (GDP), balance of payments or export performance. However, there is also a considerable body of literature exploring more discreet impacts such as those relating to the spillovers around skills or business processes that might accrue, and have in some cases been demonstrated, in the context of inward FDI. In terms of benefits, claims are often made as to the gains a country s current account (often under stress in developing countries) might receive from the inflow of capital as well as from enhanced foreign exchange earnings related to exports. Others have also sought to measure general economic impacts from enhanced local expenditure in direct terms (such as purchasing of inputs) and indirect terms (second round expenditure effects such as business services or transport suppliers). Studies have also reported on possible spillover effects from such projects which might include enhancements arising from an injection of new skills or technology that could have ripple effects beyond the FDI firm itself either through purposive action (a contract with a supplier involving training) or through more informal effects (such as an FDI firm ex-staff member starting their own business) (Blomström and Kokko, 1997). Other spillover effects identified from FDI in the literature, as paraphrased from Blomström and Kokko (2003) include: contributing to efficiency by breaking supply bottlenecks; introducing new know-how by demonstrating new technologies and training workers who later take employment in local firms; breaking down monopolies and stimulating competition and efficiency or creating a more monopolistic industry structure, depending on the strength and responses of the local firms; transferring techniques for inventory and quality control and standardization to their local suppliers and distribution channels; and, forcing local firms to increase their managerial efforts, or to adopt some of the marketing techniques used by TNCs, either on the local market or internationally. 47

50 COMESA Investment Report There is also a wide variety of literature pointing out some negative effects associated with FDI. These range from social impacts, such as where there are displaced communities and also extensive commentary on environmental costs (Fisher, 2007; Kitula, 2006; Pegg, 2006; Viega et al., 2001 reflecting on mining in particular). It has also been pointed out that in some cases FDI projects displace existing economic activity in direct terms or generate business environment challenges for domestic firms as they crowd in dedicated public expenditure and services for their own needs (e.g. drawing more power from the grid leaving domestic firms with power cuts). Authors such as Jenkins (2005) have also cast doubt as to the extent to which programmes such as those related to Corporate Social Responsibility (CSR) have any meaningful impact on problems of poverty in developing countries. Critics have also pointed out that there has been much evidence of TNCs avoiding formal linkages with domestic enterprises out of concern that such relationships might present a variety of risks compared to tried and tested relationships they might have in other markets (Castel-Branco, 2004). It has also been suggested that in some cases TNCs might displace local enterprises through bringing to bear economies of scale or through anti-competitive market practices if host governments do not have access to policy instruments to strengthen domestic firms (Chang, 2003). Others, such as Globerman and Shapiro (2002) point out that countries with weak governance systems are also likely to see weak FDI effects. Considering the dominance of commodity extraction oriented FDI in the African markets, it is also worthwhile briefly touching on these activities and their impacts. Much of the FDI literature generalises about FDI impacts as a broad category with mining more often seen as an exception, categorised under the resource curse perspective which would suggest that mining FDI impacts might have some short term benefit but often reinforce problematic tendencies such as exposure to commodity cycles and undermining other forms of investment. For example, Morris et al. make reference to Sachs and Warner s (1997) study concluding that, resource abundance, measured as the ratio of primary commodities exports to GDP, was negatively correlated with GDP growth. (cited in Morris et al., 2011a: 9) Although mining investment in developing countries is not particularly well covered in the FDI discussions, Morris et al. (2011a) do report on the dominant reflections about often weak impacts of mining FDI on domestic productive capacity, pointing out that, it is widely believed that the exploitation of commodities and industrial development do not go hand-in-hand, particularly in low income countries and economies which are heavily dependent on the export of natural resources. (Morris et al., 2011a: 6) Interestingly, these authors suggest that this tendency to view the sector as often bypassing interactions with domestic productive capacity needs some reassessment on the basis of their discussion of case material from a number of African countries which suggests that some benefits do accrue to local firms and that there is scope in firm strategy and government policy to enhance this (Morris et al., 2011b). The authors suggest that, there are reasons to question the hard version of this conventional wisdom, partly because it misreads history, and partly because of profound changes which are now occurring in the global economy. (Morris et al., 2011a: 6) 48

51 SME BUSINESS LINKAGES WITH FDI SME-FDI businesses linkages, for the purposes of this report, refer to the direct and indirect interactions between domestic small and medium enterprises (SMEs) and foreign direct investment (FDI) actors, most often with a presence in host countries as TNCs. The character of linkages between FDI firms and domestic enterprises, or the muted character of such linkages, has been widely discussed (Blomström and Kokko, 1997; UNCTAD, 2010). The prospect of such linkages has often been used as part of a case for how, Foreign investment can result in benefits for host countries For instance, local firms may be able to improve their productivity as a result of forward or backward linkages with MNC affiliates (Blomström & Kokko, 1998: 2). In support of this, influential policy makers have argued that, business linkages represent one of the best ways for SMEs to enhance their competitiveness (UNCTAD, 2010: 9). Business linkages have been seen as important for economic development as they are seen to offer the prospect of deepening local economic capabilities thereby helping to transform and mature economies. The concept has long been associated with discussions on paths to industrialisation in developing countries where linkages between enterprises can help build capabilities that individual enterprises might not be able to deliver on. In Morris et al. (2011a) the contribution of Hirschmann (1981), who is paraphrased as saying that development is about the, incremental (but not necessarily slow) unfolding of linkages between related economic activities. (Morris et al., 2011a: 25) Types of linkages Hirschman (1981) identified three types of linkages in broad economic terms. The first of these was that of fiscal linkages where economic activities are used to generate public resources which might be in turn invested to deepen industrialisation. The second element of linkages was that of production linkages where firms interact directly with one another. The final category of linkages discussed by Hirschman was that of consumption linkages stimulated by a variety of forms of local production. Of these three categories Hirschmann argued that production linkages (forward and backward) were the most relevant to enhancing developing economy prospects. UNCTAD (2010) makes reference to four major types of business linkages: those between TNCs and their suppliers (backward linkages); interactions with customers (forward linkages); technology partnerships (often over use of licenses and the like); and those that are generated through possible spillover effects. All of these can have relevance in a host country environment. It is perhaps backward linkages (between suppliers and TNCs) that have received the most attention from policy makers as they have been seen to be crucial to helping local economies industrialise and mature as firms get exposure to the domestic and global opportunities associated with TNCs. These can arise through the irregular or regular purchase of supplies needed for a TNCs local operations including production inputs, spare parts, consumables and services. Historically, there has been a tendency for backward linkages in many FDI cases in Africa to be concentrated in the supply of raw materials and lower value activities without much of the deeper integration that suppliers might 49

52 COMESA Investment Report have experienced in other contexts. Morris et al. (ibid) propose a slight broadening of Hirschman s conceptualisation of production linkages. They suggest that backward linkages can also see supplying firms learning to develop a set of capabilities to supply to other economic processes than those of the original linkage. For instance, a supply arrangement with an FDI firm might come with strict quality control elements that a supplying firm might be able to utilise to competitively develop other business opportunities. FDI linkages with customers (or forward linkages) have become increasingly common as growth of markets has drawn more and more TNCs into considering supplying into customers in the developing world. Not only has this been in the much discussed field of retail consumables, but also through TNCs building relationships with distributors and intermediate and final goods producers making their way in emerging markets. Linkages in this field include those related to training around products, distribution and retail contracts, service contracts and the like. The third area of linkages outlined by UNCTAD (2010) are those related specifically to technology partners of TNCs and other FDI actors. Collaborations in this field include those to enable customisation of products and services in domestic markets as well as joint ventures and the licensing of the use of technology. Software companies, information and communication technologies have been prominent in this field. The fourth category of linkages is that covering a range of other spillover effects in local economies. These might have originally been considered in terms of processes such as the spillover of skills into the local economy (workers trained in the TNC using their skills in other economic processes) or through local enterprises observing and learning from the behaviour of TNCs in the operations processes. Perkins and Robbins (2011) have also noted that in some environments TNCs have sought to encourage modernisation of regulatory environments to enable improved competitiveness. These can be considered a form of a spillover in that TNCs often engage in this activity purely for their own benefit and for that of their direct suppliers. However, in a context of more generalised regulatory reforms these changes can offer benefits to wider groups of enterprises in an economy. A similar point can be made around the quality and costs of various public services. Spillovers such as these can have a profound impact on the prospects of local firms to take advantage of a better local environment in seeking engagement with or responding to opportunities from TNCs. It might also be possible to consider a fifth category of linkages. These are linkages derived from a policy effect, either in the country of origin of the FDI, or through international or bi-national type agreements, or in the target country for the FDI. These could include things such as local content requirements and local equity requirements for TNCs in host countries or they could relate to global compacts which TNCs might have committed to (voluntary and otherwise), or even listing and ethical investment requirements, around the character of their engagements with enterprises in countries which they have a presence. In some cases, witnessed recently for instance with some Chinese corporations, diplomatic imperatives have also guided them towards forms of local engagement that 50

53 2013 might not have been present had these imperatives not been there (Kaplinsky & Morris, 2009; Corkin, 2011) Factors influencing the development of TNC-SME linkages Beyond the various types of linkages it is also important to discuss the types of advantages implied in these typologies to investing TNCs and SMEs, and the more general factors which might impact on linkage development in an economy. With regard to contextual factors influencing linkages development Morris et al. (2011a) notes that the character of backward and forward linkages is heavily influenced by the nature of the industrial process or value chains being considered. Some processes might lend themselves to a more complex and elaborate set of linkages than other processes. In other cases higher technological capabilities might also exclude some linkage opportunities (at least initially). Morris et al. also note that some commodity extraction processes that supply inputs into manufacturing lend themselves to higher or lower barrier-to-entry activities (for example capital intensive mining or small scale farming). Literature on Global Value Chains, introduced earlier in the chapter, also sets out how the character of value chain governance can support broadening of supplier relationships or its narrowing (Humphrey & Schmitz, 2000; Gereffi et al., 2005). Beyond these industry and value chain dynamic issues other business environment factors have an impact. Morris et al. (2011a) and Robbins and Perkins (2012) note the influences of public policies which can also impact on the character of backward and forward linkages as well as other linkage types. Obviously public policy is intrinsic to the public-policy-generated linkages described in the typologies of linkages. However, these public policies also have influence over other linkage typologies. For example tariff policies might impact on the imports of technology that local suppliers might need to competitively bid for contracts with FDI firms. Policy matters such as those related to taxation, business regulation, incentives and the array of possible economic programmes supported by governments are all relevant. These can either encourage linkages or deter them. Critical in this mix is ensuring that the business environment for local firms is one that does not detract from their ability to offer competitive supplies or services. For instance, in many countries it is not uncommon for local firms to have to operate in industrial areas with much lower quality infrastructure than FDI firms generally have to put up with. Predictability, stability and transparency are all seen as important elements in supporting linkage formation and deepening. 22 Indeed, not too dissimilar from aid-for-trade type arrangements of other ODA countries in the past and their more subtle contemporary echoes. 51

54 COMESA Investment Report Public policy can also influence capabilities of local firms through public procurement systems. Drawing on Porter (2000) it is recognised that demanding customers and competitive supply environments can provide firms with important signals to improve their own offerings. In less developed and developing country environments, the public sector looms large as a purchaser of services and inputs. If such purchase arrangements are not sufficiently informed by the need to encourage continuous improvements, local firms (and indeed importers and foreign firms) can have their competitive edge blunted. It has been reported in some studies of highly successful Asian countries that the approach of the public sector to public procurement can be one which helps firms build capabilities to engage with the wider economy rather than provide disincentives. Geography also matters in linkage formation. This can be through two main mechanisms. In the first instance proximity or distance of a country production location from other elements of a value chain or from locations of input or final markets can be a critical element. TNCs operating in host countries at a major distance from their main markets might be inclined to reserve many processes for sites in closer proximity to relevant markets. This could be done to ensure that there is a quick response to customer needs and to enable local customisation. For instance the further processing, roasting, blending, packaging and branding of coffee might best be done closer to final markets. Proximity to such final markets, of developing country production sites, can help overcome some of these barriers, for instance with some north African countries supplying the European garment retail sector with quick response production. However, proximity is not necessarily a guarantee of an advantage. The geographic positioning of various elements of a GVC can also influence linkage potential in a location. For instance, the centralising of Europe, Middle East and African R&D and purchasing functions in Belgium by Toyota curtailed the access of local second and third-tier automotive component suppliers in South Africa to these facilities at the local plant of Toyota Manufacturing Corporation thus creating barriers to their access to technology and know-how support (Robbins, 2010). The recent emergence of some technology and human resource driven economic sectors such as Business Process Outsourcing (BPO) has raised the possibility that distance might not always be a barrier. For instance call centres or back office processing activities have been developed by some developing country firms in partnership with TNCs at some considerable distance from the markets where some of the TNC products are services that are actually monetised. Geography also matters in a second critical way. Firms that operate in industrial districts with other firms can potentially harness economies that have the potential to reduce costs and generate some competitive capabilities. Alfred Marshall, the British economist, writing in the nineteenth century is credited with contributing the core ideas which have influenced the use of the term agglomeration by economists, geographers and more widely amongst urbanists in subsequent years (Marshall, 1982). Marshall was particularly interested in forces that contributed to the concentration activity in space witnessed during the industrial revolution. He suggested that there were increasing returns to firms and society or external economies of scale in the growing concentration of activity in space. 52

55 2013 Marshall (as cited in Rosenthal & Strange, 2003) described three possible sources of these agglomeration economies: The first of these is the sharing of inputs whose production involves internal increasing returns to scale. The second is labour market pooling, where agglomeration allows a better match between an employer s needs and a worker s skills and reduces risk for both. The third source is spillovers in knowledge that take place when an industry is localised, allowing workers to learn from each other. (Rosenthal & Strange, 2003: 2) In this context the presence or otherwise of such emergent or established industrial districts could also have impacts on the supply of local capabilities for TNC-SME linkages. Related to both the public policy factors and to the character of inter-firm relations in space would also be matters of institutional capacity and social capital. Porter (2000, 2003) makes the point that in an industry (cluster) related and supporting industries and the variety of public sector institutions influence the overall competitiveness of any particular cluster. If a variety of relevant institutions are not well governed, are not responsive, have been captured by one or other interest group or have other short-comings they tend to reduce the scope for a wider range of economic actors to emerge. The often described process of inter-firm clustering (Schmitz, 1995; Altenburg & Mayer- Stamer, 1999; Humphrey & Schmitz, 2000), where collective action from firms in the cluster enables them to attend to both endogenous and exogenous obstacles can also be undermined by institutional weaknesses. In these processes, Social Capital the ability of local actors to bond with one another and for groups to bridge divides between them (including between local and foreign firms) can also be critical (Storper, 2010). With regard to the benefits from local linkages that might encourage TNCs to pursue them, there are a number of issues to consider. In the first instance firms can access networks of local knowledge that might be facilitated through local partners. Whilst it is conventionally assumed that TNCs have a monopoly on knowledge in their field of business, these forms of knowledge often have to be adjusted to suit local conditions. These include not only factors such as language or culture but also forms of indigenous or commercialised knowledge for example around issues that might motivate productivity or enable successful recruitment of staff. It could also relate to knowledge of other local suppliers or operating environments for production and distribution facilities and the like. A second potential benefit to forming relationships with local suppliers and customers relates to the security and trust that comes from proximate engagement and the implied immediacy for resolving supply or distribution and service obstacles. Often TNCs have encouraged follower suppliers to enter new markets with them to try and ensure the security characteristics of other production environments is replicated. However, there can also be a case to develop local suppliers even if only as secondary or back-up suppliers to be able to ensure a lowering of risk with regard to things like logistics delays or production disruptions. In some contexts development of local suppliers, whilst perhaps being more difficult initially, could help reduce transaction costs of the businesses if the alternative is sourcing supplies from international partners. There is also some evidence that FDI projects that bring in their own suppliers can result in the development of a layer of local suppliers 53

56 COMESA Investment Report to these first order suppliers. For example the hospitality (catering and accommodation) supplier at a mine might be part of a foreign owned consortium, but could develop a series of local supply arrangements to meet its delivery obligations for reasons such as aligning with local tastes or for reducing risks with imported inputs Policies to encourage SME-TNC linkages Blomström and Kokko (2003) argue that the most convincing theoretical case for incentives for FDI is that related to securing knowledge spillovers where a case is made that FDI firms can generate impacts of benefit to the local productive sector. For instance, local firms may be able to improve their productivity as a result of forward or backward linkages with MNC affiliates, they may imitate MNC technologies, or hire workers trained by MNCs. The increase in competition that occurs as a result of foreign entry may also be considered a benefit, in particular if it forces local firms to introduce new technology and work harder. (Blomström & Kokko, 2003: 3) Although the generation of such spillovers or externalities might be of benefit to a host nation in terms of social returns they are not necessarily captured in the private return to firms, hence motivating a commitment of public resources to fill the gap between private returns and desired social returns Experiences of linking TNCs and SMEs In both the developed and developing world the experience of linkages between FDI processes and SMEs suggests that possibilities do exist for connections meaningful to both parties. However, it is also clear that such linkages are not fostered as a matter of course in all FDI processes and that some present far more challenges than others, either because of particular dynamics within the FDI process itself and the GVCs that the TNC might be part of or because of the conditions in the target country, and the SMEs within that country, which might undermine such linkages processes. This is one of the reasons that the matter of SME interactions with FDI has been of some considerable importance in policy making circles. A look at the industrial policy commitments of national and sub-national governments, and their associated institutional arrangements, will reveal that the encouragementof FDI is almost always accompanied by plans to integrate existing and emerging SMEs with these prospective TNC investors. For example Malaysia, in its Industrial Master Plans, sought to increase exports through the attracting of targeted FDI in priority sectors. These policy frameworks sought to explicitly encourage linkages between local SMEs as potential suppliers through industry cluster type programmes (UNCTAD, 2010: 20). More recently the United Kingdom has facilitated the entry of a Chinese automotive firms into its ailing motor-manufacturing and assembly business with a very clear intention to help enable this FDI to sustain and grow the supply-base of British enterprises (Automotive Council UK, 2013). In Uganda, the government, together with donor partners and UNCTAD have worked with larger national enterprises and TNCs to deepen the domestic supply base, whether it be smaller scale sugar farmers or companies producing products required in the retail of cellular phones, airtime and related services (UNCTAD, 2010: ). 54

57 2013 Drawing primarily from the work of UNCTAD (2010) a number of examples of linkages are reported on below as demonstrating the scale and scope of the potential that exists. It should be noted that domestic policy issues are of relevance in all of these cases but are by no means the only determining influence. Brazil has been widely cited as a case of successful economic development since the late 1990s. It has seen considerable inflows of FDI and has also become a very important sources of FDI outflows, particularly in the Latin American region. This came after a number of decades of economic turmoil including periods of very high inflation and low economic growth. SMEs with a diverse range of capabilities have long been a feature of the Brazilian economy, but their ability to be successful in their interactions with Global Value Chains and local FDI partners has not always been associated with them. The import-substitution type policy arrangements of the country in the 1960s through to the early 1980s tended to reinforce the role of Brazilian SMEs servicing the local market directly or through other domestic enterprises. Although the various governments sought to develop SME capabilities through a variety of support mechanisms, these remained focus on internal needs. However, the size of Brazil s population and its steady progress over time still made it a site of some importance to TNC FDI as they sought markets within Brazil or amongst its neighbours. As reforms to the economy started to take hold in the 1980s, TNCs operating in Brazil sought to grow their market shares in the region and beyond and as a result sought deeper connections with local suppliers. Local SMEs also sought ways of surviving growing imported competition as trade reforms removed some of the tariff barriers that firms had operated behind (Schmitz, 1999). A key feature of much of the FDI in Brazil in the past few decades is that it has been market seeking in that Brazil itself is a major growing market and it is close to some growing markets of significance. As such much FDI into Brazil sought to build linkages with local suppliers or further develop linkages where TNCs made acquisitions in order to gain knowledge and capabilities to make such operations successful (UNCTAD, 2010). As this investment activity has matured, and as TNCs and their suppliers have gained confidence in the longer term development of the economy, so processes have been initiated to draw domestic suppliers into global value chains, for example those in the automotive sector. Follower suppliers of some of the TNCs have also deepened their supply relationships with domestic firms as the capability of these SMEs has improved over time. The Japanese company Honda is cited as an example of this (UNCTAD, 2010: 33). Observers have credited some of this to the stable and attractive business environment in Brazil, although the size of its market remains a major factor. 55

58 COMESA Investment Report Since the major reforms of the 1990s, Brazil has encouraged FDI and sought to gradually improve the environment for both FDI firms and local SMEs and its various institutional arrangements for the delivery of firm support are actively involved in encouraging and supporting linkage formation between large enterprises generally and their smaller counterparts. More recently programmes such as PROMINP, a National Oil & Natural Gas Industry Mobilization Program, was initiated by the federal government in 2003 to encourage greater participation of local SMEs in the growing oil and gas industry (Jenkins et al, 2007). Brazil s small business development agency, SEBRAE, has also partnered with Petrobras, the national oil and gas company, to support the growth of SME suppliers. Malaysia has also been cited as a prime example of a country that has sought to support the development of SME-TNC linkages. The Economic Commission for Africa report (2013) highlights how public policy supported the development of downstream business linkages from resource-based production using domestically mobilised capital (also a feature in Brazil). However, subsequent to these experiences Malaysia sought to attract targeted FDI in sectors such as electronics and invested heavily in the institutional capabilities to encourage the deepening of local linkages (UNCTAD, 2010). The relative high ranking of Malaysia in the World Bank s Doing Business surveys (24th in 2007 and 12th in 2013) 23 clearly demonstrates that the environment for businesses is a major focus of the government. This has included a focus on investor protection as well as on high quality efficient infrastructure and skills development. In the Industrial Master Plan (IMP2) explicit attention was given to enhancing connections between local firms and targeted FDI sectors and their supply chains. This has been repeated and reinforced in subsequent IMPs and the National Plan (UNCTAD, 2010). An example of this would be the Penang Skills Development Centre as a partnership with the public sector and the private sector (including TNCs). In this and other programmes investment from the public sector was directed to raising the skill level of local workers in SMEs (UNCTAD, 2010). 4.5 POLICY REFLECTIONS FROM INTERNATIONAL EXPERIENCES Jenkins et al (2007) and UNCTAD (2010) identify a range of policy lessons drawn from the experience of linkages across a range of countries, including some in Africa. These lessons apply not just to the public sector, but also to a range of other actors including TNCs The local business environment Countries need to pay attention to the business environment in order to ensure that local business and TNCs can operate in an environment which does not detract from their competitive potential. If the climate for doing business is weak, it is possible that TNCs can overcome these shortcomings whilst local SMEs would not have the resources to do so. Local SMEs are better placed to succeed in linkages if they can operate in a competitive business environment. 23 Accessed from on 13 July

59 Linkage specific policies It has become increasingly common for countries to look to adopt policy frameworks in support of the promotion of linkages. These are often associated with frameworks for attracting FDI and with industrial policies or SME development policies where greater numbers and deeper linkages are identified as an important element of a programme to enhance domestic economic capabilities. In some cases policies have also set conditions of local participation associated with regulatory approval of FDI or offered incentives to TNCs to engage in local business development and sourcing. It has also not been uncommon for countries to offer incentives for inward FDI from TNCs and to further attach linkage conditions to the securing of these incentives Targeted investment strategies Governments have also, at times with private sector partners, sought to develop targeted FDI investments that allow the development of local capabilities deemed to be relevant to country s development path. Such targeting allows a concentration of scarce resources around a narrow set of opportunities as the supply chain requirements of TNCs are often specialised in higher-value areas. Such an approach also presupposes a measure of effective interaction between those seeking to promote linkages and the officials in the TNCs Institutional capacity A number of countries have developed very clear and direct connections between the mandates of Investment Promotion Agencies (IPAs) as these entities are often best placed to introduce possible partnerships for linkage projects with TNCs right at the start of their investment enquiries. Similarly, the capabilities of SME development agencies can often be supported to play a more effective role in linkage development. Partnerships with private actors are also deemed to be important to ensure that such efforts have access to technology and systems that are utilised by TNCs Infrastructure investment Although part of strategies to improve the business environment, the development of specific infrastructure projects to support linkages is also a feature in the international policy experience. Often export processing zones or the like have been part of these processes to enable linkages. However, there is also a case to ensure that existing business areas and industrial estates, often host to domestic businesses, are also upgraded to ensure that they are served adequately by infrastructure that is reliable and meets needs of growing businesses. These broader policy processes can all contribute to an environment where linkages can be effectively promoted. Beyond this there are also a set of specific activities that governments (and other actors) can engage in to support linkages. These are listed below. 57

60 COMESA Investment Report Activities for governments to support linkages (drawn from UNCTAD, 2010: 21-22) Provision of information on potential linkages, requirements and process elements Matchmaking buyers with potential suppliers Technology upgrading (through advice, training, partnerships and financing) Promoting supplier associations to help with learning networks and the like Supporting training programmes to upgrade enterprise capabilities and to engage with TNCs and the buyers Fostering entrepreneurial development Collaboration with international agencies to support programmes, share knowledge and leverage their influence Improving access to financial and non-financial business services Strategies for SME development and linkages to FDI in COMESA The COMESA membership includes a diversity of countries with highly differentiated exposure to FDI and economic policy environments. However, the COMESA Member States do all share the characteristic of having SMEs, both formal and informal, contributing significantly to total economic activity. Although the scale and scope of FDI varies from one country to the next, as do the related policy frameworks, there is a shared concern around the need for countries to have more and more enterprises engaging with global value chains and to enhance their capabilities to compete in an environment of growing international competition. A scan of COMESA Member States reveals that issues of linkages with TNCs has grown in significance as the continents role as a growing destination for FDI has also grown. Within COMESA processes, issues of FDI and SME development, have been a feature not only since its formation in 1994 but also in the processes around the Preferential Trade Area going back some decades. Although COMESA s origins were in supporting trade integration between members, all had a concern around possible paths to industrialisation. As such, sharing information and frameworks to support domestic enterprises as well as making the most of FDI was high on the agenda, even where countries looked to more endogenous sources of growth and development. However, during this evolution of policies, it is also worth noting that a number of factors impeded development of domestic enterprises. These included in some cases, geo-political as well as regional and in-country conflicts which often damaged infrastructure, destroyed enterprises and curtailed business opportunities. Governments also embraced a variety of political and economic policy frameworks, some of which were less sympathetic to domestic enterprises and to TNCs. Furthermore, internally and/or externally driven economic crises also undermined the scope for enterprise development. High levels of government indebtedness, and related capital shortages did little to enable a better environment for SME development that was already constrained by the impacts of deep and widespread poverty on business development prospects. 58

61 2013 Despite these considerable constraints that affected many countries on the continent, small and medium enterprises in fact became a larger feature in domestic economic processes. Growing pressures for more liberalised economic frameworks in the late 1980s and 1990s brought with them greater exposure to business competition and opportunities for domestic enterprises to access new markets and link with global suppliers. These processes of expanding enterprise activity were subsequently reinforced by new global influences such as those related to technology (for example mobile phones), financial deregulation and growing trade alongside the widespread increases in FDI flows as countries economies showed signs of recovery. These processes, influenced in part by COMESA s formation and the growing role of other regional bodies, began to turn what had for a long time been abstract discussions of policy frameworks in the absence of sustained economic growth, into meaningful exchanges on actual experiences. Supported in part by agendas of donors and multi-lateral agencies, COMESA countries, and other countries on the continent, began to initiate a variety of policy reform processes and programme interventions. Amongst the most prominent policy reforms included those aimed at improving the business environment for all enterprises by streamlining regulatory processes, removing biases in policies and promoting a growing, vibrant and capable domestic business sector. These initiatives were seen as critical, not only to help sustain longer term growth potential, but also to ensure local enterprises could gain from increasing economic openness. Beyond this, a considerable number of countries made specific attempts to reform their environment to enable inward FDI growth in light of domestic shortages of capital. This involved not only FDI seeking resource extraction opportunities to meet growing demand from Asia, but also market seeking FDI as TNCs saw long term market growth potential in Africa as countries recovered from decades of subdued economic performance. Whilst such investment, almost all of it in the form of inward foreign direct investment (FDI), has grown from a low base and Africa s share of global inward FDI remains low at around 2.8 percent for 2011 (UNCTAD, 2012: 39), this change has been nonetheless significant in raising rates of Gross Domestic Product (GDP) growth across the continent. Average rates of growth have moved from below the four percent average of the period through to 5.1 percent in 2011 after a peak of 7.1 percent in 2007 (IMF, 2012: 197). The importance of inward FDI is highlighted by the fact that for many of the countries on the African continent, FDI-related activities by Trans-National Corporations (TNCs) are the dominant contributors to national economies across a range of measures. For instance, UNCTAD notes that, Africa is the region where TNCs contribute most to the economy in terms of value added and wages. (UNCTAD, 2012: 32) 59

62 COMESA Investment Report Today COMESA Member States are not only reforming their policy environment, many are also, together with a variety of partners, engaging in more ambitious policy agendas many of which are already having impacts on the scale and character of FDI as well as on domestic enterprise development. These include initiatives such as export processing zones, major infrastructure upgrades, support and resourcing of enterprise capacity development and engaging more actively with diplomatic partners from which most FDI is sourced as well as directly with TNCs themselves. In many contexts, a host of other institutional actors have also stepped up their activities. These would include NGOs, multilateral agencies, development finance institutions, private foundations as well as TNCs themselves and an array of private intermediaries and enterprises. Beyond COMESA, a range of other continental institutions have also worked with COMESA as a body and with COMESA member states in moving forward policies and programmes with respect to FDI and SME development. The African Development Bank (AfDB), legacy initiatives around the New Partnership for Africa s Development (NEPAD) and the Economic Commission for Africa (ECA) have all made strides in promoting on-going reform of policy environments, the expansion of systems of support for SMEs and to strengthen the capabilities of African actors in their engagement with FDI actors (originating from within and from beyond the continent). For instance, the ECA s 2013 report on the continent is titled, Making the Most of Africa s Commodities: Industrializing for Growth, Jobs and Economic Transformation (ECA, 2013) and deals extensively with the role of domestic SME linkages with commodity extraction FDI in potential industrialisation paths. However, despite this growing interest and an array of actions undertaken, measurable progress for many African SMEs and existing and potential entrepreneurs remains highly challenging. As the ECA report concludes, Despite some gains in manufacturing over the last decade, the continent is yet to reverse the de-industrialization that has defined its structural change in recent decades: in , its share of manufacturing in aggregate output declined from more than 12 per cent to around 11 per cent, but remained at more than 31 per cent in East Asia, where labour-intensive industries induced high and sustained growth and helped lift hundreds of millions of citizens out of poverty. (ECA, 2013: 7) Nevertheless, despite a picture in which, for many countries, the benefits to local productive capacity from FDI might still seem to be scarce, there has been growing evidence demonstrating that possibilities do exist for enhancing sustained positive impacts. The slow progress with many programmes, within countries or across borders, is not particularly surprising considering the low base from which these programmes had their starting points. Working with domestic enterprises that have had little exposure to the cut and thrust of global business is not a field where many overnight successes will be witnessed. Hanlin (2011) notes that in many cases it can take a decade or more for a business to develop the experience and tested capabilities to be an effective partner to businesses active in more demanding global value chains. This is especially true considering some of the deficits businesses located in some environments might have faced in terms of education systems, access to technology and the nature of markets supplied. However, considering the business development backlogs that exist in many countries and the context of widespread poverty it is understandable that governments 60

63 2013 and other social actors have expressed frustration at the slow pace of change, particularly where it seems, despite interventions aimed to achieve the contrary, local businesses are not thriving. This has led to a variety of responses from governments, responding at times to growing pressure from interest groups or societal formations. Initiatives such as Zimbabwe s indigenisation programme or the more robust engagement in Ethiopia around the nature of benefits accruing to local suppliers to TNCs in the agricultural/horticultural products sector are reflective of these attempts to accelerate progress around enhancing domestic gains from international economic engagement and FDI. 4.6 SKILLS DEVELOPMENT AND CAPACITY BUILDING FOR SME COMPETITIVENESS IN COMESA A wide variety of programmes and projects have been tried and tested in COMESA Member States and beyond in recent years. Many of these have elements that are common to one another despite different labels used. In broad terms these programmes can be seen to follow two distinct paths. The first of these would be those activities where the bulk of countries have followed some type of private sector environment reform programme. These initiatives are often associated with assessments of the business environment in countries (such as the World Bank s Doing Business surveys More often than not these types of benchmarking exercises have been used to guide programmes related to improving the business environment in countries. The main focus of the development and training processes associated with these are government departments, state agencies, public utilities and the like. Alongside these initiatives there have also been a range of interventions by governments and other domestic actors, as well as by external partners and various continental or regional bodies to improve government support of SMEs whether it be in terms of upgrading Business Development Services (BDS), enhancements in micro-finance or other financing instruments and in terms of working with groups of firms to improve their capabilities and competitiveness to grow their markets and, in some cases, to engage more effectively with TNCs. The preliminary activities around the COMESA clusters programme are an example of a regional body seeking to equip member countries and relevant enterprises with capabilities to work across national borders to enhance nascent or existing cluster s of firms. These programmes tend to extend beyond the public sector in that they require development of programme activities with domestic (and at times TNC) private actors. A COMESA report on the proposed activities suggests that, Studies of economic development in both developing and advanced countries have shown that firms located in clusters are more likely be innovative, pay higher wages, and achieve greater productivity than firms that are geographically isolated. When firms and related organizations are situated in physical proximity to each other, they have more (and more varied) interaction than geographically dispersed firms. (COMESA, 2012b: 5) A key part of these processes is building the public and private sector capacity to facilitate cluster type activities where sectoral capabilities are deepened. 61

64 COMESA Investment Report Zeng (2006) points to initiatives such as the Kenyan Horticultural Crops Development Authority, created many decades ago in 1967, as playing a critical role in developing more specialised training and development activities for local producers required in accessing global cut flower and other horticultural crop value chains. In Ethiopia, a similar, although more recent, institutional arrangement has also promoted highly specialised training for domestic producers in interacting with TNCs and global value chains. Progress in exports of horticultural products in Ethiopia illustrates the potential for such schemes that work closely with TNCs in trying to understand their needs to play a very important development role. Whilst in the past such entities might have had as their focus the involvement in supplying inputs and providing a stable market, the sustainability of these activities has been challenged in more liberalized economic environments. However, such entities have been shown to be able to turn their proximity to the actors and internal knowledge to translating TNC requirements into meaningful local support measures. Business enterprises themselves are also being exposed to a wide range of training and development programmes. Whilst it might be true that at present, in many countries, these only happen to reach a relatively narrow band of enterprises, the provision of such development activities has steadily become a bigger feature of business life. Beyond public sector activities and those of the NGO sector, there is also a growing presence of private providers as well as activities connected with the programmes of TNCs themselves. For example in Uganda, an SME development programme under the Empretec model geared to upgrading SME capabilities, was extended to offer specific support to potential SME suppliers to TNCs operating in the country with the support of the Ugandan Government, UNCTAD, the TNCs and the domestic business organisations (UNCTAD, 2010). In other contexts various investment promotion agencies (IPAs) have also extended their focus from direct interactions with TNCs about FDI projects to also facilitating linkages and the development of capabilities for such linkages with domestic enterprises. The role of the Centre for the Promotion of Investments (CPI) in Mozambique in supporting linkage programmes with BHP Billiton s aluminium smelter are an example of this, where a variety of partners collaborated to build domestic firm capabilities guided by the TNC s very specific requirements (Robbins et al., 2008). UNCTAD has long promoted the idea that IPAs and public sector SME development entities need to develop close collaboration, noting for instance that IPAs are well placed to help inform local SME training activities as to the nature of the demands that TNCs place on suppliers. The facilitation of partnerships for this type of training for SMEs is also noted as important in a report produced by the United Nations Office of the Special Advisor on Africa (2009), which discusses the case of the Egyptian government, which partnered with the private sector in setting up the National Suppliers Development Program. This was geared to assist local enterprises in becoming more competitive. In the report it is stated that, Both UNCTAD and the American Chamber of Commerce Egypt note that the Government s initiative is an example of how a country can attract FDI without risking the demise of local producers, and that without this type of programme, Egyptian producers, like many other African producers, risk becoming marginalized even in their own markets. (United Nations Office of the Special Advisor on Africa, 2009: 7) 62

65 CASES OF SME-TNC LINKAGES IN COMESA AND THE AFRICAN CONTINENT Whilst the growth of SME-TNC linkages is difficult to quantify in any reliable manner there appears to be widespread consensus that direct and indirect linkages have been growing at a considerable rate as a result of, for at least many of COMESA s membership, consistent FDI to those countries. Whilst indirect linkages are not discussed in any detail in this chapter, they are often the most obvious feature of the generally improved economic climate often closely associated with rising FDI and more consistent economic management. Many service industry businesses have been a particular beneficiary of this growth in FDI as it has raised the demand for their services, not only from TNCs, but also as a result of the upswing in the overall economic environment. For example, transport service providers, from taxis to trucking companies have often been noted as beneficiaries of these more indirect connections. At times these relationships have developed into more substantial formal linkages as opposed to ad hoc purchases of services. Others point to construction companies and accommodation providers as also showing some prospects to take advantage of FDI-related demand for services and products. Many countries have reported a growth in business registrations linked to the opportunities created by growing TNC activity in their economies something that has also been impacted by parallel processes to reform business regulation. Vertical or supply chain linkages, where enterprises contract directly with one another around the delivery of a particular service or transformation of a product, are also widely argued to have been growing. Even in the commodity sector, often argued to have limited potential for such linkages, research has shown there are examples of considerable significance in the context of emerging economic environments (see for example the cases reported in the studies under the Making the Most of Commodities Programme reported in part in the Economic Commission for Africa s 2013 report). Although levels of industrialization in the bulk of SSA countries have remained low for almost three decades, and in a number of cases fallen, the growing list of anecdotes of linkages associated with a potential for deepening domestic economic processes is worthy of attention. This is particularly important in a context where many developing nations in other higher growth regions of the world have demonstrated significant progress in industrialization. The following cases, not all of them from COMESA Member States, provide an insight into the varied linkage activities being explored on the continent. They supplement the references to other cases already made in other sections of this chapter. These cases are drawn from a range of sources including those profiled in company reports (of listed TNCs), examples profiled in business publications both from the continent and beyond and those reported in various reports on linkages and FDI in Africa. These cases have been chosen because they illustrate the diversity of what is happening and not because they fit any particular selection criteria beyond this. These cases have not been subjected to any in depth independent review and as such their longer term impact needs further enquiry. 63

66 COMESA Investment Report Zambian agriculture producers and retail FDI Zambian beef supplier, Zambeef, has partnered with foreign supermarket investor Shoprite (listed on the JSE in South Africa) in a deal that aims to secure the domestic market for Zambeef. The entry of big supermarket groups into fragmented grocery markets can shake up both the retail and supplier sector but Zambeef has been able to continue growing after the deal was struck when Shoprite entered the market in Shoprite is Sub-Saharan Africa s largest grocer with annual sales of over US$8 billion. The venture between Zambeef and Shoprite sees the meat suppliers operating butcheries within all 20 Shoprite stores across Zambia as well as in the chain s newer outlets in Ghana and Nigeria, according to the Economist (June 8, 2013). Criticisms that Shoprite ignores Zambian suppliers have surfaced occasionally but Shoprite Zambia says 65% of turnover is sourced in Zambia. Shoprite adds it is instrumental in the development of local suppliers for a vast range of items, including dairy products (according to the Saturday Post: Sempelwe, 2011). Zambian food producers and processors are particularly vulnerable because Johannesburg listed Shoprite has a both a sophisticated supplier base in relatively nearby South Africa and the country s leading grocery distribution network. Zambeef, which is dual listed on London s Alternative Investment Market (AIM) and Lusaka, was founded in 1994 to serve the lower reaches of the market but the Economist (2013) now describes it as one of Sub-Saharan Africa s few big indigenous firms that serve the continent s middle class. In the half-year to March 2013 Zambeef increased revenue 20% to US $153 million compared to the same period the previous year. Gross margins expanded but profits were constrained by higher wage bills and capital expenditure. Nevertheless net income swung to a profit of $7 million from a loss of $3 million ICT FDI and Kenyan ICT companies The combination of a US $610 million investment in broadband undersea data cables by pan-african investors, with seed capital provided by developed countries, has hastened a communication revolution in Kenya. That transformation was already underway after the Kenyan government deregulated the information and communications technology (ICT) sector in 1999, despite having a vested interest, leading to among the lowest communication and broadband prices in Sub-Saharan Africa. Since 2000, the Kenyan ICT sector has grown on average by 20% each year, outperforming every other sector by a wide margin, World Bank blogger Wolfgang Fengler (2011) said on the expansion up to This added almost one percentage point to overall economic growth, according to Fengler. Since 2009 when the US $375 million SEACOM cable, the first of the two new submarine cables, went live to East and Southern Africa, growth has continued at over 20% to 2011, according to Centre for Global Communications executive research fellow Adam Peake (undated). 64

67 2013 From 2009 financial year mobile and fixed data revenue at Kenya s biggest telecoms firm, Safaricom, has increased by 72% to US$1.4 billion in financial year While the UK s Vodafone is the largest shareholder in Safaricom the Kenyan government is a close second. Kenyan fund managers and individuals only own small stakes, underlining criticism that private domestic investors do not always gain direct economic opportunities from foreign investment. But growth has not been limited to corporate bodies and consumers. The country has a vibrant ICT business environment in the high-risk start-up sector with two of Africa s top 14 innovation incubators listed by Silicon Africa (ihub and NaiLab) located in Kenya. In 2012 Google executive chairman Eric Schmidt alongside the Nairobi based Savannah Fund, privately invested US $2 million in the computer application or app binu mobile for the East African market, according to the African Venture Capital Association (Forbes, 2012). The app brings Smartphone like features to low-end phones Chinese shoemaker invests in Ethiopia Major Chinese shoemaker, Huajian Group, has built a factory in Ethiopia to take advantage of the country s plentiful supply of animal hides and plans to invest further, according to CNN (2012). With 50 million cattle, 25 million sheep and 23 million goats Ethiopia has the world s tenth largest livestock population and the biggest in Africa according to the Ethiopian Leather Industries Association ( Reports have also highlighted the low labour costs in the country as wages rise in China. The Huajian shoe factory, which started production in 2012, employs people and exports US $1 million of shoes a month to the US and UK, according to The Africa Report. But the manufacturer has bigger intentions, planning to establish a shoe city on 300 hectares of land it has already leased on the outskirts of Addis Ababa. Huajian and the China-Africa Development Fund have jointly committed $2 billion in the hope that it will attract rivals, including footwear and handbag makers, to a hub that will benefit all in terms of supplies, logistics and skills development. Huajian s vision, according to the company and government officials, is aligned with Ethiopia s industrialisation strategy, which is designed to take advantage of sectors where the raw materials can be sourced domestically. Ethiopia has long been established as a hide exporter and leather processing centre though much of the sector still has characteristics of a cottage industry. Over the last decade China has intensified African investment to secure supply of mineral commodities for its industrialising economy. To date there has been less emphasis on investment in the African consumer manufacturing sector but more recently China has placed more importance on its growing domestic consumer economy. The plan potentially offers Ethiopian livestock farmers a significant and regular domestic market if initiatives to provide consistent supply of better quality hides are successful. Much of the livestock hide supply in Ethiopia is provided by small-scale farmers but now at least one foreign investor, Pittards, a British leather processor, is developing a farm in Debre Berhan to introduce rearing methods that 65

68 COMESA Investment Report prevent damaging the leather, according to The Africa Report. This includes goat and sheep coats that are blemished in grazing lands and scarred from branding. But for both Huajian and Pittards logistics in the landlocked country are a drawback. Transport costs to the export harbour in neighbouring Djibouti and port handling costs are both high (Jobson, 2013) Oil investor in Uganda Tullow Oil spent US $48 million on local suppliers in Uganda during 2012 as it discovered hydrocarbons at 12 out of 16 wells drilled, the company said in a recent exploration report (Tullow Exploration, 2013). As part of Tullow s initiative to train domestic businesses in the provision of oil and gas services as it moved into the production phase it launched a pilot of the Nakawa Vocational Training Institute. The London and Ghana-listed group provided undisclosed seed funding. This will help to ensure local suppliers can develop much needed skills in the construction sector by introducing apprenticeships in a variety of the maintrades including electrical, plumbing, welding and steel fabrication, the company said in its 2012 corporate social responsibility report (Tullow Oil, 2012). While domestic economic development and ownership elements can be crucial to foreign investors in the resources sector gaining operating licenses, Tullow local content manager Jim Walsh also contends working with local companies can reduce our project times and costs (Tullow Oil, 2013b). The group said it had potential with partners Total and CNOOC to produce over barrels a day from the Lake Albert basin in the East African country. For the highly mechanised oil and gas sector it can be difficult to source goods and services domestically, beyond basics such as catering and security, given the shortage of engineering skills in Sub-Saharan Africa. In Ghana where Tullow is already in production, it has moved to procure a more sophisticated service locally, in the form of Zeal Environmental Technologies. Zeal is more than a waste removal company and includes technical expertise to conduct oil spill emergency response, laboratory analysis and air emission modeling. According to Zeal chief executive Kwaku Ennin, since working with Tullow, we have expanded threefold and also increased employment for previously unemployed youths. (Tullow Oil, 2013c) The consultancy, which began providing environmental services to other industries, including the then named Ashanti Gold Fields, is now the biggest indigenous Ghanaian oil & gas waste management company according to Zeal (Tullow Oil, 2013c) Fertiliser in Madagascar Private equity investor, the African Agriculture Fund (AAF) SME Fund, has recently invested in the Madagascan bat guano fertiliser producer, Guanomad, providing the potential for farmers on the island to boost production, (AAF SME Fund, 2013). The AAF SME Fund, which invested an undisclosed amount to expand Guanomad capacity, is a sub-fund of the African Agriculture Fund, a pool of European and African development finance institutions. AAF SME Funds, which initially closed with US $30 million in 2012, is managed by Mauritius-registered Databank Agrifund Manager Limited (DAFML), and is an affiliate of Ghanaian investment bank the Databank Group. 66

69 2013 Transport costs to the Indian Ocean island, which has, by global standards, a minor farming sector despite it being the biggest employer there, make imported chemical fertiliser a more expensive option for local farmers. Yet the greatest opportunity for Guanomad is also its biggest challenge traditionally small-scale farmers in Madagascar have never used fertiliser. There is a lot of resistance to using fertiliser from local subsistence farmers who have historically never used fertilisers, DAFML managing partner Brian Frimpong said in response to ed questions (Private communication). Guanomad, together with the AAF Technical Assistance Facility, plan on a major educational exercise to highlight the benefit of fertiliser usage to the farmers. The AFF SME Fund describes Guanomad, founded in 2005, as a leading Madagascar organic fertilizer company (AAF SME Fund, 2013). Frimpong added, that guano fertilizer is a slow release fertilizer that treats the soil more holistically than the chemical fertilizers that are applied for immediate uptake by the plants. (Private communication) According to the Fund the fertiliser is also Ecocert certified, enabling it to increase exports to the growing markets for non-polluting fertiliser in the EU and the Americas. Domestically the Madagascan government and non-governmental organisations have previously used Guanomad fertiliser to supply small farmer development schemes. The AAF s Technical Assistance Facility (TAF) will explore the possibility of funding a smallholder support scheme that would enhance the yields and incomes of farmers using Guanomad s products, the Fund added (AAF SME Fund, 2013). Commenting on the political risk on the island the Fund said: The Company s progress was hamstrung by the local economic crisis resulting from political unrest that erupted in Since then Madagascar s macro economy has steadily been recovering and international investment has been on the increase. (AAF SME Fund, 2013) From clothing and textile FDI to a growing services sector in Mauritius Mauritius is widely cited as highly successful example of FDI attraction in Sub-Saharan Africa (Frankel, 2010; Sobhee, 2009). The country was able to successfully take advantage of trade preferences for the export of textiles and garments into Europe and North America linked to the Multi-Fibre Agreement (MFA) and later to the US American Growth and Opportunities Act (AGOA). As Sobhee explains, In contrast to 1968, today the share of primary sector production has declined from 23% to 6%; manufacturing has increased from 15% to 30% while services have expanded further from 62% to 64% albeit with more intra-sectoral diversification. (Sobhee, 2009: 30). Both Sobhee (ibid.) and Frankel (2010) point out that these structural changes and the improved economic circumstances that accompanied them were not only due to trade preferences, but also closely connected with the country s strategic orientation to attracting FDI through reforms in the tourism sector as well as those in agriculture and in the formation of the Mauritian Export Processeing Zone (EPZ). Mauritius had also made a choice by noting that in order to deepen the impact of the garment investment it would liberalise its financial and services sectors to try and build a more diversified base in higher- 67

70 COMESA Investment Report value services activities (such as they supporting garment trading houses and off-shore financial instruments). Although direct linkages between Mauritian manufacturing SMEs and clothing and textile exporting firms operating in the EPZ have been modest, there has been progress in the more indirect linkages in the services sector associated with the country s status as a trading and export hub. Tourism FDI growth has also seen some growing impacts in the growth of local enterprises providing supplies and services to hotels and the like (UNCTAD, 2008). The cost of supplying mostly imported goods into the hotel sector has resulted in both Mauritian owned and foreign owned hotels seeking to cultivate some alternative local suppliers. This has been supported by investment in improved training and research as a variety of tertiary institutions. Finance and business services have also benefitted from the country s ability to draw on demand from the Indian diaspora who find the Indian policy context too restrictive for their global activities, thus making Mauritius a major foreign investor in India. This has been particularly important in a context of the eroding Most Favoured Nation (MFN) trade benefits that were important in the past. The availability of capital in the country, and its attractive investment environment, has also meant that it has not been uncommon for the textile investors to re-orient their production to different markets with strong support from the government. Policy makers in Mauritius have recognized that the status of a small island nation in terms of long term manufacturing growth is one that does present some limitations such as being distant from many major markets and having a relatively small population without agglomeration affects that might be important to diversifying manufacturing. This has seen ongoing efforts, not only to sustain garment-linked FDI and to deepen its impacts, but also to strengthen other capabilities such as those mentioned in the financial services sector, tourism and also logistics. This approach was informed by an understanding that successful EPZ investors would be open to attractive opportunities in other sectors if Mauritius made the investment environment attractive enough for firms, financiers and individuals not to always repatriate profits to other countries. 4.8 POLICY RECOMMENDATIONS A wide range of policy recommendations have already been referred to in this chapter and there are many different institutions and organisations that have sought to synthesise some key pointers for policy makers. Some of these policies are synthesized in table 13. The discussion which follows does not seek to repeat in detail these often mentioned policy ideas but does present them for reflection. Over and above this a few additional policy suggestions are also proposed as drawn from less widely documented material. 68

71 A coherent and consistent approach to the attraction of FDI Most obviously, for countries still struggling with domestic capital scarcity, the attraction of FDI, much of it through TNCs, remains a critical starting point. A variety of reports have noted the increasing standardisation of approaches in the 1990s and 2000s. Clearly, in an environment where there might be sustained high demand for resources from Africa and COMESA in particular, some TNC investors might be willing to tolerate the risks of policy uncertainty and inconsistency. However, such an environment is not conducive to securing downstream or upstream linkages Effective SME development Sustained and effective SME support is an imperative in ensuring that local enterprises are able to position themselves for possible linkages. This involves giving due consideration to the business environment local SMEs face, not just in terms of regulatory matters, but also in terms of access to quality services at a competitive cost. If local SMEs have to carry administrative costs that are high or face problems with issues like the electricity supply they are likely to struggle to position themselves for linkages. Over and above this governments and various other agencies must provide relevant SME business development services including those related to advisory services, training and working to expose SMEs to new business practices and the imperatives that come with supplying larger, often global, firms SME-TNC linkage development as a key element of domestic policy and institutional action Those countries that have sought, in a variety of ways, to make clear their commitment to encourage SME-TNC linkages are likely to be able to engage more openly with local firms and with TNCs. Through ensuring that investment policy frameworks, industrial policy and SME development policy all take account of linkage development processes and their requisite support, it is likely that the public (and other) entities will work towards enhancing prospects for more and deeper linkages. IPAs that engage with TNCs, small business development agencies and other policy programmes around stimulating economic activity are often all needed to sustain the often time-consuming and cautious activities that can, over time, convert nascent business contacts into something more substantial Encourage networks and learning It is often assumed that existing business associations whether they be composed of domestic firms or TNCs create meaningful platforms for businesses to share ideas and approaches with one another. However, often these bodies have an orientation to influence aspects of national or local policy and do not always create the spaces where firms can exchange ideas about other matters. TNCs can learn from one another s experiences in developing local linkages over and above being able to introduce one another to potential suppliers and the like. Even if such TNCs are in competition with one another, they can reduce risks for their longer term operations by contributing to a more 69

72 COMESA Investment Report effective supplier base and can engage more effectively with other actors that might be able to assist in this regard (such as the IFC or various government departments and their programmes). Existing and potential suppliers to TNCs can also be assisted to form networks to enable learning Use public procurement to encourage improved SME performance It is not uncommon for public procurement systems to be associated with less well performing enterprises and for the procurement process itself to do little to encourage supplier upgrading. As the public sector remains a key economic player in the bulk of countries under consideration, a process which encourages service providers to the public sector to work towards meeting similar standards of those expected by TNCs has some potential to encourage more domestic firms to be familiar with operating in terms of issues such as product certification and delivery reliability Be prepared for partnerships with a growing diversity of linkage opportunities As has already been noted in prior sections of this chapter and the case studies there has been a growing diversity of linkage opportunities associated with different categories of FDI and also with other actors beyond TNCs or in addition to TNCs. The bulk of these processes are geared to linking opportunities in African countries to global markets but not all involve the direct presence of TNCs as other intermediaries either seek to bypass TNCs or to work at engineering linkages to connect into possible TNC markets. Governments, other actors, domestic SMEs and TNCs all need to become familiar with these other players whether they be those of DFI-type investment funds or entrepreneurs acting as intermediaries to make connections which could in the longer run lead to market access or follow-up FDI. These processes are not just the result of a random proliferation of various types of other actors, rather they reflect a growing level of scale and opportunity in many countries where existing networks of actors are unable or are slow to respond to opportunities. It should also be recognised that horizontal type linkages or those that are somewhat removed from firm productive processes can also have some potential. For example in the Ghanaian gold mining sector, over a period of time a host of enterprises have evolved to serve not just the needs of the mining sector, but also other sectors. These would include transport firms, recruitment companies and maintenance businesses. Countries that ignore the potential of these are likely to forgo the potential of deepening local capabilities that could ultimately support deepening of direct supplier capabilities. 70

73 Ensure investments in infrastructure for local SMEs are planned and delivered alongside FDI projects Although many governments remain highly resource constrained, there is nonetheless an imperative to ensure that the environments in which domestic firms operate support their productive capabilities. In FDI projects where some effort has been made to develop supplier industrial parks (such as next to the Mozal plant in Mozambique), potential local suppliers can benefit from the same higher quality operating environment provided for the TNC. This type of development also can work towards enabling some processes of agglomeration and associated clustering which if often made less possible in poorly serviced and fragmented business areas or where even such older order facilities are not even available. These types of initiatives can be considered as partnerships between different levels of government and TNCs and could also encourage TNC follower suppliers which could in turn develop their own supplier networks Consistency and building relationships over time International experience on the African continent suggests that TNC FDI is more likely to engage in local linkages when there is a pattern of linkage behaviour from other TNCs and when their operations have reached some considerable maturity. One of the reasons for this is that capabilities in the domestic SME sector often take some time to develop to the point where TNCs feel confident to work with them on longer term supply relationships. Obviously various forms of support, regulation or incentives can speed up this process but linkage programmes often need cultivating over a number of years with some considerable learning along the way. Fast track mechanisms can often yield results in less critical supply areas or simply to meet various obligations. These should not be dismissed, however, deeper connections are more likely to be seen over years and not months. 71

74 COMESA Investment Report Table 14: Summary of policy recommendations in TNC-SME linkages reports Zeng, 2006 Report Jenkins et al, 2007 United Nations Office of the Special Advisor on Africa, 2009 UNCTAD, 2010 Economic Commission for Africa, 2013 Main policy recommendations Encourage further knowledge acquisition, adaptation and dissemination [on linkages]. Strengthen the knowledge and technology institutes and their linkages with the business sector. Establish and enforce a conducive institutional regime, including clear regulations, standards, and quality assurance mechanisms. Strengthen skills upgrading and training. Provide sound basic infrastructure. In the long run, promote greater purchasing power of consumers. Encourage value chain linkages by TNCs and support SME capacity in the value chains. Encourage TNCs to build a supply network beyond the value chain. Strengthen the enabling environment for business linkages. Support SME capacity through promoting access to TNC-type supplier development training, improving the business climate for SMEs, facilitating peer learning, creating platforms for business dialogue and public engagement, building public sector capacity to support linkages. Providing accurate and accessible data. Clusters and small enterprise development. Local content requirements. Skills Development and Capacity Building for Global Competitiveness. Industry and government support for TNC-SME linkage activity. Meeting Global Standards: supporting the preparedness of African SMEs for participation in Global Value Chains. Create a conducive investment environment. Develop a systematic approach to business linkage building. Establish a clear role for IPAs. Orient government policy in support of: targeted investment promotion; strategic use of incentives; creation of dedicated zones; offering support programmes (information, matchmaking, technology upgrading, technology transfer, training and BDS for SMEs, promoting supplier associations, fostering entrepreneurial development, partnerships with international agencies, improved access to financial services). Support linkage deepening through extending the pool of qualifying enterprises, partnerships with TNCs, and providing on-going support mechanisms. Encourage FDI from international buyers within the relevant value chains. Invest behind infrastructure, services and support for on-going support for firms in GVCs. Give attention to supporting all links in the value chain. Develop and hone capabilities in regional markets. Negotiate trade access for domestic producers. Adopt a coherent industrial policy. Create institutional industrial policy mechanisms. Developing local content policy. Engaging with lead firms on procurement and sourcing arrangements. Running supply-chain development programmes among major commodity firms. Boosting local skills and technologies. Addressing infrastructure bottlenecks. Coordinating ministries to improve policy implementation. Negotiating regional trade arrangements and fostering intra-african trade. 72

75 5 CONCLUSION 2013 Linkages between domestic SMEs and TNCs in COMESA countries are increasingly being seen as a necessity by host governments, TNCs themselves and a variety of other actors. In the absence of the scale of TNC that many countries are seeing today the notion of linkages was often spoken of but with little to show for it. Today it is clear that FDI has become a major element of the economic make up of many African countries and more and more actors are seeking to play a role in engineering connections between producers on the continent and markets either on the continent or beyond. With these processes comes the imperative to turn broad policy prescriptions or corporate statements from words to reality. Much can be learnt from past experience in developing such linkages and a strong case exists to explore a variety of different paths to establishing and deepening linkages as economies and business processes evolve in the COMESA region. 73

76 COMESA Investment Report REFERENCES AAF SME Fund web site - AAF SME Fund, July Press release. Accessed from aspx?id=228 on 4 August African Agriculture Fund web site - Altenburg, T & Mayer-Stamer, J, How to Promote Clusters: Policy Experiences from Latin America. In World Development 27 (9), pp Amendolagine, V, Amadou, B, Coniglio, N, Prota, F and Seric, A FDI and local linkages in developing countries: Evidence from sub-saharan Africa. UNIDO: Vienna. Accessed from publications/research_and_policy/files/working_papers/2012/wp072012_ebook.pdf on 21 July Automotive Council UK, Driving success a strategy for growth and sustainability in the UK automotive sector. HM Government. Accessed from system/uploads/attachment_data/file/211901/ driving-success-uk-automotivestrategy-for-growth-and-sustainability.pdf on 22 July Bartels, F, Kratzsch, S & Eicher, M, Foreign Direct Investment in Sub-Saharan Africa: Determinants and Location Decisions. UNIDO Research and Statistics Branch Working Paper, 08/2008. UNIDO: Vienna. BizClim Assist the COMESA Member States in strengthening their capacity in the area of Double Taxation Avoidance Agreements (DTAA) and in negotiating DTAA among them and with countries from other regions May 2012 ACP Blomstrom M, and Kokko, A The Economics of Foreign Direct Investment Incentives. Stockholm School of Economics Working Paper 168, Stockholm School of Economics: Stockholm. Blomstrom, M and Kokko, A How Foreign Investment Affects Host Countries. World Bank Policy Research Working Paper Washington, DC: World Bank. Blomstrom, M and Kokko, A Multinational corporations and spillovers. Journal of Economic Surveys 12(2): Bloomberg Businessweek, Huajian of China s Ethiopian export zone may generate 4 billion. Accessed from 28 June Castel-Branco, C, What is the experience and impact of South African trade and investment on the growth and development of host economies? A view from Mozambique. Paper presented at SARPN/HSRC conference, Pretoria, South Africa, March

77 2013 Chang, H-J, Kicking away the Ladder: Development Strategies in Historical Perspective. London: Anthem Press. Clean Development Mechanism web site - CNN, Huajian Group - Chinese shoe maker moved to Ethiopia. CNN.com news report accessed from on 3 July COMESA, 2012a. COMESA Investment Report 2012: Regional Integration and Foreign Direct Investment in COMESA. COMESA: Lusaka COMESA, 2012b, COMESA Mission Report: Improving Business Environment Project in Djibouti, Kempinski April 2012 COMESA, 2012c. Draft Cluster Development Programme. COMESA: Lusaka. COMESA, 2012d, COMESA Mission Report: Improving the Business Environment in Zimbabwe, Harare, May 2012 COMESA, 2012e, COMESA Mission Report: Improving the Business Environment in Swaziland, Mbabane, May 2012 COMESA, 2012f, COMESA Mission Report: Improving Business Environment in DR Congo, Kinshasha June COMESA, 2012g, COMESA Report of the First COMESA Sustainable Tourism Development Forum Shaping the Future of Tourism in the Region. Nairobi Kenya August 2012 Corkin, L, China and Angola: Strategic partnership or relationship of convenience? In Angola Brief 1 (1). Published by CMI: Norway and CEIC: Luanda. Accessed from cmi.no/publications/file/3938-china-and-angola-strategic-partnership-or-marriage.pdf on 2 July Databank Agrifund Manager web site - Doing Business survey web site - malaysia/ Eassy web site - EASSY, accessed on 26 June Economic Commission for Africa, Economic Report on Africa 2013: Making the Most of Africa s Commodities: Industrializing for Growth, Jobs and Economic Transformation. UNECA: Addis Ababa. Economist, A rare meat success in Africa. In the Economist, 8 June, Accessed from on 10 June

78 COMESA Investment Report interview with Databank Agrifund Manager managing partner Brian Frimpong. Ernst & Young, Attractiveness survey Africa Accessed from Publication/vwLUAssets/Africa_Attract_2013_-_Getting_down_to_business/$FILE/Africa_ attractiveness_2013_web.pdf on 27 August Ethiopian Leather Industries Association web site - Ethiopian Leather Industries Association, Fengler, W Learning from a Kenyan Revolution. 28 November Accessed from blogs. worldbank.org on 11 June Findings from Eleven Case Studies of Enterprise Clusters in Africa. World Bank Institute Knowledge for Development (K4D) Program. World Bank: Washington. Fisher, E, Occupying the margins: Labour integration and social exclusion in artisanal mining in Tanzania. Development and Change 38(4): Forbes, Africa s Savannah Fund and Google s Eric Schmidt invest in Binu mobile via $2 million fundraising round. Fobes.com report of 23 August 2012 accessed from avca-africa.org/index.php/page/news/124 on 23 June Frankel, J, Mauritius: African Success Story. NBER Working Paper no Accessed from on 27 August Gereffi, G, Humphrey, J & Sturgeon, T, The governance of global value chains. Review of International Political Economy, 12 (1), Pages Globerman, S & Shapiro, D, Global foreign direct investment flows: The role of governance infrastructure. World Development 30(11): Guanomad web site - Guardian, The, Chinese investment in Ethiopia shoe city. Accessed from guardian.co.uk/global-development/2013/apr/30/chinese-investment-ethiopia-shoe-city on 29 June Hanlin, C, The drive to increase local procurement in the Mining Sector in Africa: Myth or reality?. MMCP Discussion Paper No 4, Cape Town, the University of Cape Town, and Milton Keynes, the Open University Hirschmann, A Essays in Trespassing: Economics to Politics and Beyond. New York: Cambridge University Press. Humphrey, J & Schmitz, H Governance and Upgrading: Linking Industrial Cluster and Global Value Chain Research. Institute of Development Studies Working Paper 120, IDS: Flamer. 76

79 2013 IMF, World Economic Outlook. IMF: Washington. Accessed from external/pubs/ft/weo/2012/01/pdf/text.pdf on 25 July Jenkins, B, Akhalkatsi, A, Roberts, B & Gardiner, A Business Linkages: Lessons, Opportunities, and Challenges. IFC, International Business Leaders Forum, and the Fellows of Harvard College: Harvard. Jenkins, R, Globalization, corporate social responsibility and poverty. International Affairs 81(3): Jobson, E Chinese investment creates a new global hub in Ethiopia. Accessed from The Africa Report of 4 June 2013 on 11 June Kaplinsky, R & Morris, M, Chinese FDI in Sub-Saharan Africa: engaging with large dragons. European Journal of Development Research, 21(4), pp Kitula, A, The environmental and socio- economic impacts of mining on local livelihoods in Tanzania: A case study of Geita District. Journal of Cleaner Production 14(3/ 4): Koutonin, M, Top business incubators in Africa. Accessed from com/top-business-incubators-in-africa/ on 18 June Leather Industry Development Institute, Ledgard, J Digital Africa. In Economist Intelligent Life, Spring 2011, accessed from moreintelligentlife.com/content/ideas/jm-ledgard/digital-africa?page=full on 7 June Making the Most of Commodities Programme web site - Marshall, A, (8th edition). Principles of Economics: an introductory volume. Basingstoke: MacMillan. Morris, M, Kaplinsky, R and Kaplan, D, 2011a. One Thing Leads to Another Commodities, Linkages and Industrial Development: A Conceptual Overview. Making the Most of Commodities (MMCP) Discussion Paper No. 12. Milton Keynes and Cape Town: Open University and University of Cape Town. Morris, M, Kaplinsky, R and Kaplan, D, 2011b. Commodities and Linkages: Industrialisation in Sub-Saharan Africa. Making the Most of Commodities (MMCP) Discussion Paper No. 13. Milton Keynes and Cape Town: Open University and University of Cape Town. Oyelaran-Oyeyinka, B & McCormick, D, Chapter 13: Conclusion and policy implications. In Oyelaran-Oyeyinka, B & McCormick, D (Eds), Industrial Clusters and Innovation Systems. United Nations University Press: Tokyo

80 COMESA Investment Report Peake, A. undated. Kenya s ICT Sector, Mobile Money and the Transformation to a Middle- Income Country. Accessed from Japanese Institute of Global Communications (Glocom) Pegg, S, Mining and poverty reduction: Transforming rhetoric into reality. Journal of Cleaner Production 14(3/4): Perkins, D and Robbins, G, The Contribution to Local Enterprise Development of Infrastructure for Commodity Extraction Projects: Tanzania s Central Corridor and Mozambique s Zambezi Valley. Making the Most of Commodities (MMCP) Discussion Paper No. 9. Milton Keynes and Cape Town: Open University and University of Cape Town. Porter, M, Location, Competition and Economic Development: Local Clusters in a Global Economy. Economic Development Quarterly 14 (1): Porter, M, The Economic Performance of Regions. In Regional Studies, 37 (6-7): Robbins, G and Perkins, D, Mining FDI and Infrastructure Development on Africa s East Coast: Examining the recent experience of Tanzania and Mozambique, Journal of International Development, 24 (2), pages Robbins, G, Mining FDI and urban economies in sub-saharan Africa: Exploring the possible linkages. In Local Economy, 28(2): Robbins, G, Lebani, L and Rogan, M TNC FDI Firms and Domestic SME Linkages Reflecting on three SADC Case Studies. TIPS Working Paper TIPS: Pretoria Robbins, G Chapter VI: Strategies and Policies for Promoting TNC-SME Linkages in South Africa. In UNCTAD, Creating Business Linkages: A Policy Perspective. UNCTAD: Geneva. Rosenthal, S & Strange, W, Evidence on the Nature and Sources of Agglomeration Economies. In Henderson, J & Thisse, J-F (Eds), Handbook of Urban and Regional Economics, edition 1, volume 4, chapter 49, Elsevier: Safaricom, Annual financial report. Accessed from on 25 June Sala-i-Martín, X. and E. V. Artadi, The Global Competitiveness Index. The Global Competitiveness Report Hampshire: Palgrave Macmillan Schmitz, H Collective Efficiency: Growth Path for Small-Scale Industry. In Journal of Development Studies, 31 (4): Schmitz, H Global competition and local co-operation: success and failure in the Sinos Valley, Brazil. In World Development, 27(9): Schumpeter, J Capitalism, Socialism and Democracy. New York: Harper & Row; 3rd Edition,

81 2013 SEACOM, accessed on 26 June Shoprite web site - Shoprite, Trading update July Accessed from pages/ /investor-relations/sens/trading-update-july-2012.asp accessed on 26 June Simpelwe, N Shoprite pledges more rural investment. In Saturday Post Accessed from on 10 June 2013 Sobhee, S, The economic success of Mauritius: lessons and policy options for Africa. Journal or Economic Policy Reform, 12 (1): Solow, R A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics 70 (February): Storper, M, Why Does a City Grow? Specialisation, Human Capital or Institutions? In Urban Studies, 47: Sturgeon, T, Value Chains, Networks, and Clusters: Reframing the Global Automotive Industry. In Journal of Economic Geography, 8: The Financial Times web site - The Global Competitiveness Report : Full Data Edition, World Economic Forum Tullow Exploration, 2013a. Tullow Exploration report conversion rate of wells drilled to discoveries. Accessed from on 2 August Tullow Oil, 2012, Corporate Social Responsibility Report. Accessed from com/index.asp?pageid=363&casestudyid=63 on 2 August Tullow Oil, 2013b. Tullow local content manager Jim Walsh. Accessed from com/supplier_centre/index.asp?pageid=23 on 2 August Tullow Oil, 2013c, Zeal Environmental Technologies chief executive Kwaku Ennin. Accessed from on 2 August UNCTAD 2007, FDI, tourism and developing countries - Selected developing country case studies (New York and Geneva: United Nations). UNCTAD 2013, World Investment Report 2013:Global Value Chains: Investment and trade for Development UNITED NATIONS PUBLICATION,ISBN UNCTAD June 2013, Investment Policy Monitor database. (New York and Geneva: United Nations). 79

82 COMESA Investment Report UNCTAD Statistics web site - aspx?reportid=88 UNCTAD, Foreign Direct Investment In Africa: Performance and Potential. UNCTAD: Geneva. Accessed from on 27 August UNCTAD, A Survey of Support by Investment Promotion Agencies to Linkages. UNCTAD: Geneva. UNCTAD, FDI and Tourism: the development dimension East and Southern Africa. Accessed from on 27 August UNCTAD, Creating Business Linkages: A Policy Perspective. UNCTAD: Geneva. UNCTAD, World Investment Report UNCTAD: Geneva. UNCTAD, World Investment Report UNCTAD: Geneva. UNIDO, Integrating SMEs in Global Value Chains: Towards Partnerships for Development. UNIDO: Vienna. United Nations Office of the Special Advisor on Africa, Small Scale Enterprise Development and Foreign Direct Investment in Africa: Challenges and Opportunities. United Nations: New York Veiga M, Scoble M and McAllister M (2001) Mining with communities. Natural Resources Forum 25(3): World Bank (2009) World Development Report 2009: Reshaping Economic Geography. Washington, DC: World Bank. World Bank Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group. DOI: / on 12 June Zambeef web site - Zeng, D, Knowledge, Technology and Cluster-based Growth in Africa 80

83

84 Statistics Unit & Investment Promotion and Private Sector Development Division COMESA Secretariat PO Box Lusaka, Zambia Printed with financial support from the EU