Trade-FDI Integration in the African-Asian Context

300
AFRICA
’
S SILK ROAD
:
CHINA AND INDIA
’
S NEW ECONOMIC FRONTIER
the African continent are becoming more integrated, and that firms are pursuing such strategies in a complementary fashion. However, unlike other regions of the world, where it is foreign firms from advanced countries in the North, such as the United States, the EU, and Japan, that have tended to be dominant in integrating investment and trade, in Africa, especially in the last few years, it is increasingly foreign firms from the South,
especially China and India, that are exhibiting the most rapid growth in combining investment and trade.
To a certain extent, the integration of FDI and trade flows in Africa has been fostered by special market-access incentives engendered by trade preferences the African countries have been receiving from certain industrial countries, such as the Untied States AGOA program, the EU’s
Everything But Arms initiative, and country Generalized System of Preference schemes (see chapter Beyond the objective of exploiting such incentive regimes—which pertain essentially only to exports from
Africa and only to designated markets—the evidence from the WBAATI
firm-level survey and business case studies points to the fact that Chinese and Indian firms operating in Africa are also engaging in such integration—albeit on a limited scale, as discussed below—as a means of strategically diversifying their production channels in global supply chains, and they are doing so in both export as well as import transactions.
In other words, the emergence of network trade between Africa and
China and India is being driven by more than taking advantage of trade preference schemes.
A useful way to analyze how trade and FDI flows are becoming integrated in the business relations between Africa and Asia is to categorize such integration according to the markets being targeted by Chinese and
Indian businesses operating in Africa in the selling (exporting) of their products and services.
15
(An analogous categorization could be done regarding where Asian firms operating in Africa are purchasing (importing)
their inputs) This categorization gives rise to the following tripartite taxonomy.
Host Country–Targeted Investment
FDI in Africa in which the goods (or services) produced are sold primarily in the markets where they are made—either within a single African country or subregionally (that is, among several African countries)—can bethought of as host country–targeted investment. It would be rare in the
06-Chap6:06-Chap6 10/9/06 2:39 PM Page 300

INVESTMENT
-
TRADE LINKAGES IN AFRICAN
-
ASIAN COMMERCE
301
African case, except for perhaps South Africa, for host country–targeted investment to engender, or be associated with, network trade, and if such trade did arise, it would likely be of the buyer-driven variety.
From the s through the s, Asian firms making such investments were mostly (but not exclusively) Japanese businesses in the light manufacturing sectors, for example, the home electronic appliance and textile sectors. These investments were aimed at supplying manufactured products to Africa’s domestic markets, which were protected by high tariffs under African governments import substitution policies during this period. In subsequent years, African import liberalization reforms (see chapter 3) eliminated some of the competitive advantages that local sales from such investments may have had vis-à-vis direct importation of the product in question. For example, some Japanese electronic firms such as Matsushita Electric-Côte d’Ivoire and Sanyo
Electric-Kenya were forced out of the market by a growing wave of cheaper imported products (some of which were imported through a black market. As a result, the recent rapidly growing Asian investors in
Africa—the Chinese and Indians—that operate in such manufacturing industries and sell output locally (or subregionally) face direct competition from imports (as discussed in chapter 4), far more so than did the earlier Asian investors in Africa.
At the same time, the export prospects for the Chinese and Indian firms invested in these host-country sectors are also limited—at least at this juncture—especially in today’s fiercely competitive global marketplace.
This is because such investments and any intra-African regional trade associated with them are generally bound by the constraints of most African countries small local markets and high transactions costs the limited size of the typical African domestic market limits economies of scale and thus the pursuit of the mass-production manufacturing business model commonly used in larger country markets, whether in the South or the North.
In part, that is why intraregional trade on the African continent, while growing, remains small at present see figure 6.1. Other reasons include policy barriers to intraregional trade, such as tariffs and nontariff trade barriers (NTBs); these are discussed below. If the various initiatives fostering regional trade integration in Africa (described in chapter 3) are successful,
they could help achieve economies of scale and reduce production costs.
This could enable the output from such manufacturing investments to become more competitive vis-à-vis imports, thus making subregional trade
06-Chap6:06-Chap6 10/9/06 2:39 PM Page 301

302
AFRICA
’
S SILK ROAD
:
CHINA AND INDIA
’
S NEW ECONOMIC FRONTIER
more cost effective, and possibly, vis-à-vis international production in global markets, fostering exports.
To be sure, there are cases where such constraints may not greatly impinge on business viability and thus small and medium scale is sustainable. One instance is where the foreign presence by Asian firms is made not through direct investment per se or long-term contracting, but rather by manufacturing through local licensing or franchising. Although there were cases of this mode of entry into Africa by Japanese businesses in the past few decades, for example, in the chemical sectors, at present, based on the latest available evidence from the WBAATI survey and business case studies, existing Chinese and Indian manufacturing firms in Africa appear to use this mode in a more limited fashion see chapter One prominent example of this is an Indian investment in a locally owned brewery in
South Africa see box In many ways, this example epitomizes one difference between Chinese and Indian firms in the way in which they operate in Africa whereas
Indian firms integrate relatively deeply into local African economies—
including, in some cases, business managers becoming involved in municipal government—and operate through informal networks, Chinese firms have a tendency to operate as enclaves. In part, no doubt, these differences stem from the longer history that ethnic Indians have living in Africa as
FIGURE 6.1

Download 5.17 Mb.

Share with your friends: