Please sir may I have some more’: Multinational enterprises and regional integration in an African context Abstract
Regionalism as a determinant of MNE activities
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Regionalism as a determinant of MNE activitiesFormal regional integration processes (‘regionalism’) impacts the activities of MNEs directly and indirectly: directly through reducing tariff and non-tariff barriers (including rules of origin), and indirectly through improving the general business environment and policy conditions, including the incalculable benefits to member institutions’ from enhanced cooperation, coordination, and harmonization with a more advanced economy (Mundell, 1961; Krugman, 1993; Bayoumi and Eichengreen, 1992). Regional and national infrastructure cuts across these two channels as it can target tariff barrier specific assets as well as general business environment infrastructure. The institutional aspects of infrastructure management which relate to non-tariff barriers - so called ‘soft infrastructure’ - may be improved through both direct and indirect means. Drawing on Krüger and Strauss (2013), the impacts of regionalism on MNEs can be divided up between the five or so regional integration ‘stages’ (see Balassa’s forms of economic integration, 1961).1 Some regional integration efforts are not specific to any of these stages. A key requirement for these stages to be implemented effectively is the development of institutional capacity in weaker member nations. This is itself reliant on regional integration efforts involving a coalescing of weaker and stronger states (Krüger and Strauss, 2013).
‘Direct’ effects from regional integration will be felt predominantly at the stages of the free trade area and the customs union. However, non-tariff barriers may remain high, which can be especially important to allow for greater levels of economic development. Direct measures will affect different types of FDI and NEMs differently. MNEs from within the economic union will also be differently affected to those from outside it. Indirect impacts from regional integration, often the most important, take longer to have an effect and often have higher requirements for the level of economic development (and similarity) between member states. Market seeking FDI related NEMs (franchising) is significantly influenced by large reductions in tariff and non-tariff barriers. For non-member MNEs lower internal tariffs in a free trade area, encourage FDI and the consolidation of subsidiaries or branches between member states if high external tariffs exist and are maintained. For member MNEs lower internal tariffs in a free trade area, encourage the use of trade rather than the expansion of branches and subsidiaries and likewise a consolidation of subsidiaries or branches (te Velde and Bezemer, 2004). With respect to efficiency-seeking FDI and related NEMs (contract manufacturing and outsourcing), a free trade area can assist in the development of regional supply networks. A customs union deepens this by advancing the source of inputs from abroad more cheaply. Preferential market access agreements in place like AGOA may encourage continued FDI by foreign firms. However, strong competition effects can lead to industry consolidation or precipitate the movement of more foot-lose capital between states or abroad. A monetary and fiscal union can have other important effects on FDI, but which are not of direct relevance to us (Krüger and Strauss, 2013).
MNEs in turn can influence regional integration processes. MNEs may place pressure on governments to improve the enabling conditions for trade openness, especially cross border soft and hard infrastructure (UNCTAD, 2013). This effect cannot, however, be guaranteed. MNEs may choose to export abroad rather than to their neighbours. Moreover, the private sector might incentives to sustain the malfunctioning of ports and other infrastructure (World Bank, 2013). This is consistent with the agenda of an inward looking regional integration scheme or high levels of market concentration. Through income and wealth effects MNEs change country comparative advantage, and its ability to meet minimum economic membership requirements (Balassa, 1961). This will influence the type of regional integration advanced (outward or inward) and how specific sectors or issues are treated in institutional settings. The competition and linkage effects from MNEs can impact regional integration through several channels. Spillovers can occur to complementary and/or competing sectors which in turn can enable sufficient domestic supply capacity to demand goods and services from neighbours. The same effect can also lead to industry concentration which may increase the chances of agglomeration from increased regional openness. A select group of ‘homegrown’ MNEs may dominate the regionalization process (as with South Africa and Africa) if expansion is primarily market-seeking and supply capacity is weak elsewhere. MNE activity may lead to linkages being developed. When this is a good or service with a more complex division of labour (usually manufacturing) then the greater the chance of market integration (regionalization) driving the regional integration process if member states have sufficient productive capabilities. One important way in which MNEs impact upon the regional integration process is through their sourcing policies.
When a single MNE is responsible for governing productive networks which span several African countries, their supply networks effectively integrate producers into their markets. For example several global MNE auto part contract manufacturers have production facilities located in South Africa. ZF Friedrichshafen from Germany has 5 subsidiaries and Magna international has 2 (UNCTAD, 2011:220). As certain car dealerships or production facilities expand into Africa and require spare parts, they may source these inputs from South Africa, as is the case with the new Honda dealership in Kenya. Sourcing decisions are influenced by several factors. First tier suppliers often follow their lead MNEs. For example, South African firms supply certain mining MNEs even as they expand elsewhere into Africa. This, however, can have the effect of displacing local suppliers, as in Zambia (Morris, Kaplinsky, and Kaplan 2012). In addition, sourcing policy is influenced by the nationality of the MNE (Morris, Kaplinsky and Kaplan 2012); the capabilities of the domestic supplier; the cultural and language requirements of the country into which the MNE has expanded;2and the transportation costs from the supply base (Vink et al., 2006). Retail supplier networks are particularly relevant in the African context. The expansion of supermarkets into Africa has been driven by large South African modern retailers with some owner-operated franchisers. In 2010 Africa had 3800 franchise systems,3with 190 000 outlets, $70bn in sales, and 1.8 million employees (UNCTAD 2011:138). Of particular interest is that 70% of the outlets are ‘cross-border’ (Table 4). This is significantly higher elsewhere and perhaps due to the scarcity of modern franchises on the continent outside of South Africa (Dalberg, 2009). Table 4: Franchise Systems in the World and Africa, 2010
Source: UNCTAD (2011). Note: A franchise system consists of all the franchised units and units managed by the franchisor itself that operate under the same banner and business format. Shoprite group4 is Africa’s largest food retailer. Unlike South African fast-food restaurants, ‘they have primarily expanded primarily through Greenfield and merger and acquisitions (M&A). Shoprite’s only franchise brand is OK. Driven by growing markets in Africa, fewer opportunities domestically, and the relatively undeveloped modern retail and franchise market on the continent, South African retailers and franchisers have rapidly advanced their footprint across the continent over the past decade.
Shoprite has 1456 corporate and 380 franchise outlets in 17 countries across Africa with substantial amounts in other countries (see appendix and Shoprite, 2013). In turn Shoprite has contracts with hundreds of suppliers from across the continent and abroad. Supply decisions are influenced by price and quality criteria related to supplier capabilities, transport costs in Africa and between Africa and abroad, and cultural considerations. The latter means that, in Angola for example, goods have to be displayed with a Portuguese label and products from Brazil and rice are preferred in the former Portuguese colonies. Some perishables might be sourced locally where possible, with smaller suppliers capabilities being developed where possible (a relational governance mode); while key fruits and vegetables will be transported by refrigerated container or truck, or flown in depending on the distance from South Africa and infrastructure conditions -- though many of the goods from South may come from abroad too. Canned goods, specialty items, and higher quality produce are generally transported from South Africa.5 Shoprite’s largest distribution centre is in Centurion where the main building of 114 000 m² is the largest distribution centre under one roof on the continent (Shoprite, 2013). Regional integration in this instance has been shaped by a confluence of factors and driven by the lead MNE and their first tier supplier. Agricultural producers in Africa not previously exposed to modern retailers have become inserted into such a chain and subject to new pressures (University of Pretoria, 2008). Captive chains exist at various points, driven by Shoprite’s enormous market power as a substantial purchaser of goods. In terms of franchising, profits are extracted especially through owning proprietary property (brands, recipes) and through renting out properties to franchisers. Relational chain linkages also exist between suppliers and have led to the emergence of more trained agricultural producers across Africa.
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