Please sir may I have some more’: Multinational enterprises and regional integration in an African context Abstract
Africa’s corporate landscape: potential ‘system integrators’
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- From South Africa to Lesotho and back again
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Africa’s corporate landscape: potential ‘system integrators’The African corporate landscape describes the activities and current pool of the major and minor ‘system integrators’ operating across Africa. Africa’s corporate landscape is dominated in number by informal and small producers with low levels of technology (as reflected in regional integration statistics, AfDB, 2013). Major commercial networks which span across countries are all dominated by MNEs generally of foreign origin and ownership. Africa has historically had far high levels of foreign ownership in its capital stock (UNIDO and UNCTAD, 2011). Since 2000, the commodity boom has driven a substantial increase in FDI into the continent. Over time, the flows have been somewhat more diversified, especially into services (Ernest and Young, 2013). Africa’s growing consumer markets is partly responsible for the increased diversity of flows (UNCTAD, 2013c). The trend is reflective of improved fundamentals in Africa (Ernest and Young 2013), changing demographics, and possibly the changing geographical sources of FDI into Africa. Many of the FDI flows are regional. According to Ernest and Young (2013:27)6: Intra-African contributions to FDI projects continue a strong upward trend, recording a high compound rate of 32.5% since 2007, compared with 15% CAGR for (non-African) emerging markets project investment into Africa, and only 8.4% for developed markets over the same period. South African firms are increasingly a driver of productive networks across the continent and is ranked fifth as a source country of Greenfield FDI project numbers into the rest of Africa since 2003. This has grown dramatically since 2007 (Ernest and Young, 2013). In Greenfield terms South African firms was the single largest investor (by number of projects) in Africa in 2012 after one removes investments from other countries into South Africa (Ernest and Young, 2013). In addition Kenyan firms emerge as an incredible ‘regional globaliser’ (Table 5). Notably absent are the North African firms.
Source: Ernest and Young (2013). Major investors are larger firms. Only 0.36% of African firms are big corporates (probably MNEs) with annual operating revenues of more than US $50 mn. 38% of these major corporates are listed in South African, with the remainder mainly in North Africa, Angola, Ghana, the Democratic Republic of Congo (DRC), Côte d'Ivoire, and Zambia. The majority of the 686,625 firms in the sample cannot, however, be classified, probably due to their small size and informality (Orbis, 2013). Out of the top 132 African listed corporates by market capitalization (Orbis, 2013), less than half are listed on exchanges outside of the Johannesburg Stock Exchange (JSE) in South Africa, with significant numbers listed in Nigeria, Morocco, Kenya, Egypt and even Swaziland. The top 10 ‘African’ listed MNEs by turn-over and market capitalization offers further insight into some the largest ‘African’ listed corporates governing productive networks on the continent.
MTN – a South African listed telecommunications providers – is the largest corporate by market capitalization. Shoprite is number 4 by revenue and 15 by market capitalization. Almost all the top companies are significantly diversified in their geographical locations, expanding heavily into Africa. Many of these major MNEs are also integrated across their supply chain. MTN receives the majority of its revenue from outside of South Africa, having significant market share in Nigeria, Ivory Coast, Ghana, Cameroon, Sudan, and Uganda (and Iran and Syria), totaling 190 million subscribers (MTN Annual Report 2013). It addition it has its ‘small opco cluster’ of countries which comprises of operations in Cyprus, Guinea, Guinea-Bissau, Botswana, Rwanda, Benin, Congo, Liberia, Afghanistan, Swaziland, Yemen, Zambia and South Sudan. Dangote Cement is owned by the Dangote Group, the largest industrial corporate in West Africa with interests in cement, sugar, flour, salt, pasta, beverages and real estate, and new projects in development in the oil and Natural gas, telecommunications, fertilizer, and steel. Several large South African listed are now truly global MNEs with their primary listing abroad. The big three are SABMiller, Anglo American, and BHP Billiton. Only their subsidiaries will be on the list (Anglo is the major share holder in Kumba Iron Ore). For both Anglo and SABMiller around half of their assets are now foreign, almost a half of sales, and almost a half of employment (UNCTAD, 2012). There is therefore no guarantee that developing ‘home grown’ MNEs will in any way place pressure on regional integration institutions (as argued by UNCTAD, 2013), nor that they will expand outwards into the continent, facilitating regional economies networks, rather than global networks. Without having to look at Table 7 below, the role of foreign based MNEs in Africa’s corporate landscape is already apparent. They have major subsidiaries listed on African stock exchanges and are majority shareholders of many major African listed companies. Almost every major global MNE has some presence in Africa.
Common to Tables 7 and 8 is their geographical reach. Large companies need large revenue streams and this comes with market share, which entails exports and/or FDI either within the continent or elsewhere. It is questionable though the extent to which all the major African listed corporates can be considered ‘system integrators’ (discussed previously). ‘System integrators’ are in fact few and far between. Note Martin Wolf (2013): Using data from 2006-09, Prof Nolan concludes that the number of globally dominant businesses in the manufacture of large commercial aircraft and carbonated drinks was two; of mobile telecommunications infrastructure and smart phones, just three; of beer, elevators, heavy-duty trucks and personal computers, four; of digital cameras, six; and of motor vehicles and pharmaceuticals, 10. In these cases, dominant businesses supplied between half and all of the world market. Similar degrees of concentration have emerged, after consolidation, in many industries. Much the same concentration can be seen among component suppliers. Look at aircraft. The world has three dominant suppliers of engines, two of brakes, three of tyres, two of seats, one supplier of lavatory systems and one of wiring. In the motor industries, as well as information technology, beverages and many others, the world has just a few dominant suppliers of the essential components. We now take a closer look at an important regional productive network governed by major South African retailers.
Clothing forms a central plank of Sub-Saharan Africa’s manufactured exports. Between 1995-2008 it consistently accounted for almost half of SSA’s exports of ‘narrow manufactures’ (Kaplinsky and Wamae, 2010). Kenya, Swaziland, Lesotho, Madagascar and Mauritius together accounted for more than 90 percent of SSA’s total apparel exports for much of the 2000s (Morris and Staritz, 2013). Table 8: Importance of the Textile and Garments industry in SADC, 2009 
Source: USAID (2011)7. South Africa accounts for the largest portion of intra-SADC clothing and textile imports, with Madagascar being the second largest, importing substantial quantities of fabric from Mauritius for further processing. Figure 4: SADC member shares’ in intra-SADC textile and clothing exports, 2009 
Source: USAID (2011)8. Within the SADC their seems to be a clear distinction between countries such as Zimbabwe and Zambia which provide raw materials and Madagascar, South Africa, Lesotho, Tanzania, and others which concentrate on apparel exports (USAID, 2011). The case study below explores the creation of a new garment value chain in Lesotho driven by South African FDI, and governed ultimately by South African retailers.
At 18% of GDP, almost 70% of manufacturing production, and 60% of total exports the apparel sector is central to Lesotho’s economy and its efforts to reduce poverty, which remains widespread. Lesotho is the largest SSA exporter under AGOA to the USA, with its share growing since 1997 to 35% in 2011 (Morris and Staritz, 2013). Lesotho’s apparel industry was initially based on FDI that came almost exclusively from Taiwanese investors, with AGOA providing the impetus for its take-off and growth. Taiwanese firms were motivated by ‘quota hopping’ and preferential market access (Morris and Staritz, 2013). The Lesotho firms servicing this chain are basic cut-make-trim (CMT) outfits with key design, logistics, marketing, fabric sourcing, and financing being located in Taiwan. Exports are low quality bulk orders. In 2004/5 large waves of South African garment and efficiency-seeking FDI began to enter Lesotho. Unlike the Taiwanese firms, South African investors were not interested in using Lesotho as a production base to take advantage of AGOA. Instead, their investments were driven by the lower labour costs and unregulated working conditions. These served to shelter South African producers from increased competition from its cheaper Asian competitors for the orders from the major South African retailers (Woolworth, Edgars, Foschini, and Mr. Price). The retailers require smaller more time sensitive runs, and all within tight cost demands imposed by the threat of imports by the retailers from abroad. The key condition facilitating this move was duty-free market access to South Africa through the Southern African Customs Union (SACU). Moreover, South African producers were drawn to Lesotho by the geographical proximity to its retailers, as well as to the production houses’ head offices in South Africa. This provided a geographical advantage over the Asian-based networks based in Lesotho (Morris and Caritz, 2013); especially since the South Africa-Lesotho chain linkage was, to some extent, a ‘relational’ one which required South African lead producers to assist their Lesotho counterparts in meeting new and potentially challenging product specifications. Evidence suggests that some South African apparel manufacturers are aiming to transfer higher value-adding pre- and post-production functions (such as pattern making, fabric management, logistic coordination, etc.) from South Africa to Lesotho (Kaplinsky and Wamae, 2010). This governance structure stands in contrast to the hierarchical chain linkages typical between Asian firms in Lesotho and their counterparts in Taiwan. Lesotho’s garment sector nearly collapsed in 2004.The phase out of the Multi Fibre Arrangement (MFA) combined with several other factors to create a perfect storm for its industry (ODI, 2013; Morris and Staritz, 2013). Revisions to the global regulatory environment, especially those permitting the derogation for third country fabric (TCF) sourcing was one such factor; the ending of the Duty Credit Certificate (DCC) scheme run by SACU was another. The latter was “crucial” to the survival of Lesotho firms post-MFA (Morris and Staritz, 2013:9). The DCC was a rebate scheme set at 25 percent of the duty paid on imports of textile and apparel products based. This was based on the value of the goods exported outside SACU. It ran from March 2003 till 2011, being renewed twice during this period. The benefit earned by the exporter was determined by the degree of manufacture required to produce the finished good (SADC, 2003). As it happens only a minority of these DCCs were used for “own-account fabric imports; most were sold to South African retailers, which used them for apparel imports” (Morris and Staritz, 2013:9). Regulation changes in 2006 and 2009 meant that the DCCs eventually covered fewer product lines and were of less monetary value. In March 2011, the scheme was phased out and with it the effective export subsidy in the order of 14-25 percent of sales (Morris and Staritz, 2013). South African apparel manufactures played an important role in stabilizing the Lesotho garment industry. Between 2006 and 2011 apparel exports from Lesotho to South Africa increased almost 27 times; and even more when cotton, yarn, knit and woven fabric are included (Morris and Staritz, 2013). The regional value chain was further strengthened when South Africa imposed quotas on Chinese imports in 2007 and 2008 (Morris and Staritz, 2013). For Lesotho this fortuitous import diversion was an unintended consequence of South Africa’s attempt to protect its South African based producers from cheaper Asian goods (Morris and Reed, 2009). The viability of the Lesotho garment industry remains precarious, however; dependant on cheaper and more productive labour for the survival of the South Africa value chain; and preferential market access for the Asian-AGOA value chain. Unless investments in infrastructure and firm level capabilities takes place in Lesotho, the long-term viability of the industry, as well as its effects of the economy as a whole, will remain weak. We now elaborate further on five or six ‘regional integration factors’ which impacted upon the South Africa-Lesotho garment value chain. First is the issue of the loti (Lesotho’s currency), which has a ‘hard peg’ to the South African rand on a 1:1 basis through the common monetary area between South Africa, Lesotho, and Swaziland. The appreciation of the rand was part of the ‘perfect storm’ which nearly decimated the industry in 2004. The issue for regional integration is if, and how, it can assist in better aligning South Africa and Lesotho’s business cycles to ensure that Lesotho’s loss of monetary policy is of less significance. This requires deeper and more coordinated integration. Second is the impact of regional integration in reducing non-tariff barriers. South African and especially Taiwanese firms listed high transport, logistics, and customs-related costs as key challenges to their business model. In addition to the above, South African firms cited a lack of skills as an important constraint and long lead times related to the unavailability of local and regional yarns and fabrics among their critical challenges (Morris and Statitz, 2013). This brings us onto the third regional driven issue affecting this value chain - restrictive rules of origin (ROO). The long lead times of local and regional yarns has been made an issue because of the restrictive ROO required for an SADC located firm to be eligible for duty-free imports when shipped from one SADC Member State to another (USAID, 2011). ‘Double stage transformation’ ROO requires intermediate inputs, such as fabrics, to be made in an eligible (i.e. member) country. SADC implemented such requirements partly in an effort to promote regional value chains through the purchase of further inputs at each stage of production from regional sources. In theory ROO are meant primarily to prevent trade deflection through low tariff partners. For SADC its implementation was also intended to prevent transshipment of garments from outside SADC (USAID, 2011). A number of SADC garment producers struggled to source sufficient amounts of quality fabrics and yarn from within the region to meet SADC ROO, owing partly to SADC’s limited current capacity for manufacturing fabrics and yarn. Liberalization of ROO to a ‘single transformation’ rule may have the effect of more effectively inserting SADC firms into global value chains, leading potentially to greater participation in global value chains, though at the cost of a drop in regional value added (UNCTAD, 2013: 126 for definitions). Continuing from the above, the fourth relevant issue is member state industry level policy coordination. USAID (2011) finds that a key challenge in reforming SADC ROO is divergence in industrial policies toward the clothing and textile sector by member states which sees different margins of preferences – the difference between the most favored nation (MFN) rate and the preferential rate – being accorded to member states. The degree of the resulting duty preference depends on the external duty charged on third country imports by the importing member state. For example, countries such as Mauritius, Malawi and Madagascar which produce textiles and garments in export processing zones enhance the value of SADC preference to their garments exporters by not charging duties on imported intermediate inputs in the case of garments (USAID 2011). South Africa as the richer nation is able to go beyond financial (tax) incentives and provides a coherent package of additional fiscal incentives. That SACU countries have so far been unable to reach consensus on which ROO option to propose to SADC in the ongoing debates on this issue is indicative of the conflicting interests between its member states (SACU, 2013). Coordination on such an issue across industries requires, however, far deeper levels of integration. In the case of the EU, the Multi-Sectoral Framework on Regional Aid demands that the European Commission must be notified of all investment subsidies in advance, and can prohibit or modify them if they are in violation of EU law. Governments can only provide support to firms in proportion to the disadvantage of the region. The issue of destructive competition between REC members for FDI has arisen previously in the context of the East African Community (see Tax Justice Network-Africa & ActionAid International, 2012) This raises a far more fundamental question: what should long-term objectives should regional integration should be guided by? The creation of the Lesotho-South Africa regional value chain in garments has come at the expense of some South African producers who had higher labour standards and wage costs. Regional integration must aim to progressively expand the available economic opportunities. Doing so requires rules which differentiate competition that is unfair, as it competes in a zero-sum manner, and competition that is fair, as it facilitates the progressive expansion of the size of the economy (drawing on Joan Robinson cited in Brittan, 2013). Competition based on technological advances and improved quality is fair. They expand output and potentially benefit everyone. Beggar-my-neighbor labour policies compete through lowering the real wage, worsening working conditions, and engaging in unfair trade practices. Balassa (1961) noted that regional integration can only promote its objectives if it pursues both the “lessening of discrimination” as well as its “suppression”. Discriminatory FDI incentives and footloose capital subsidies in deregulated economic zones certainly do not work towards these objectives. Finally, the obverse – the impact of MNEs on the regional integration process, is slightly less obvious. Though not mentioned so far, few linkages have developed from South African firms in Lesotho to other potential Lesotho clothing producers (Morris and Statitz, 2013). This bodes poorly for enhanced regional integration which requires a two way flow in goods and services. The impact of South African firms moving to Lesotho will play a role in shaping how the perceived common interests of South Africa and Lesotho play out in regional integration and bilateral forums.
Space permitting, this section will be explore the dynamics of the Mauritius-Madagascar regional garment value chain; its drivers and governance modes; the impact which the lead MNEs have had on regional integration; and how regional integration has in turn influenced the dynamics of the chain. This draws on Morris and Kaplinsky (2009), Morris and Staritz (2013b), Fukunishi and Ramiarison (2011, 2012), and Kaplinsky and Wamae (2010) for the core narrative.
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