Please sir may I have some more’: Multinational enterprises and regional integration in an African context Abstract
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| ‘Please sir may I have some more’: Multinational enterprises and regional integration in an African context
Abstract: Despite the centrality of MNEs to global production networks little research has gone into understanding the role of MNEs in shaping the regional integration process and outcomes in Africa. Similarly, the impact which regional integration has on these same enterprises is explored only ever in passing. Combining regional integration studies with a value chain approach to productive networks, this paper develops a new theoretical framework in order to understand the impact of regional integration on MNEs and vice versa. The Lesotho-South Africa garment value chain in SADC illustrates several ways in which regional integration processes and regulations work to shape economic integration. Rules of Origin, preference erosion through inter-state competition for FDI, non-tariff barriers, the Common Monetary Area of SACU, SACU’s Duty Credit Certificate scheme, location proximity, and duty free access within SACU are all regional integration policies and processes which have substantially shaped the outcomes found in this value chain. The impact of MNEs on these processes and outcomes is, however, less obvious. The policy implications of these findings are explored further.
Regional integration studies have been characterised by a neglect on the role of the private sector in regional processes and outcomes (UNCTAD, 2013b). The rise of regionalization – de facto economic integration through market processes not reliant on formal institutions – in the context of Asian economic integration has changed this somewhat (Munakata, 2004). However, there has been little success in adapting this approach to the African context, despite several efforts (Hartzenberg, 2011; UNCTAD, 2013b). Regionalism, defined as the ‘formal institutions’ and political processes which guide regional integration outcomes, has long dominated the regional integration agenda in Africa. But due to the low capabilities of most African states, insufficient institutional capacity exists for states’ to effectively participate in the processes designed to shape regional outcomes. Low levels of national economic development and severe economic disparities between states compound this problem. A separate field of enquiry focusing on ‘value chains’ has emerged to try and explore if and how less developed nations can benefit from integration into global productive chains (Fukunishi and Ramiarison, 2011; UNCTAD, 2013; Humphrey and Schmitz, 2002). This approach is useful due to its emphasis on the linkages which are fostered by lead firms to external companies in the course of a single productive network (Gereffi, Humphrey, and Sturgeon, 2005). Very often these networks have a strong regional concentration, especially in the production and trade of intermediate goods (Baldwin, 2012; 2013). Despite this, regional integration studies (RIS) have not employed a value chain analysis to try and better understand the economic dynamics which generate different regional economic configurations. This may be because RIS have classically been preoccupied with political processes and the conditions for entry into more advanced regional economic entities (Bayoumi and Eichengreen, 1992; Mundell, 1961). The role of multinational enterprises (MNEs) in effectively linking economies and impacting regional integration has only recently been explored in the African context and not within value chains (UNCTAD, 2013b). The concomitant impact of regional integration policies and institutions on these productive networks has similarly been neglected. This study aims to better understand the impact of MNEs on regional integration in Africa and vice versa, as well as outline some of the policy implications for governments, intra-state institutions, and private sector actors. The case study of the Lesotho-South Africa garment value chain in the Southern African Development Community (SADC) shows quite clearly that regional integration is having a profound effect – both positive and negative – on regional productive networks governed by MNEs. The impact of this on the regional integration process remains uncertain. Few linkages have developed between South African firms in Lesotho and 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, however, work to shape the perceived common interests of South Africa and Lesotho in regional and bilateral forums. Section 2 of this paper details key concepts necessary to understand value chains, their governance and locational determinants. A theoretical framework is laid out for how regionalism (formal regional integration) may influence MNE activities; and how MNE activities may in turn impact not only regionalism but also regionalization (de facto economic linkages). The role of supply chains in shaping corporate networks and regionalization is highlighted. Section 3 provides an overview of the African corporate landscape. These corporates are the potential ‘system integrators’ for the region. Section 4 describes the South Africa-Lesotho garment value chain which we use to assess the impact of MNEs on regional integration in Africa and vice versa. Section 5 concludes.
According to the OECD (2008:12) MNEs “usually comprise companies or other entities established in more than one country and so linked that they may co-ordinate their operations in various ways”. For Gereffi (1999:1) the idea of globalization itself presupposes a “functional integration between internationally dispersed activities”. Today MNEs manage thousands of tasks along an increasingly finely sliced value chain (UNCTAD, 2011:126). These tasks can be internalized within the MNE or externalized to an outside firm. Figure 1: Selected non-equity modes of production along a value chain 
Source: UNCTAD (2011:126) based on Porter (1985). While the ‘supply chain’ trade has grown dramatically, many of the resulting chain linkages are often regional in focus (Baldwin, 2012). While the networks as a whole are global in reach and are managed by a small group of ‘system integrator’ companies, or “businesses with dominant brands and superior technologies, which are at the apex of value chains that serve the global middle classes. These global businesses, in turn, exert enormous pressure on their supply chains, creating ever-rising consolidation there, as well” (Wolf, 2013). These networks are in constant reorganization and can be managed through foreign direct investment (FDI) or outsourcing, or through a simple arms-length market relationship. FDI keeps the task internal to the firm. This is when a resident entity acquires a lasting interest in a non-resident entity. A minimum ownership of 10% of the voting power is generally the main criterion. External supplier capability as well as information complexity and the ability to codify it must not be sufficient to make externalizing production a more attractive alternative. Externalization leads to a non-equity mode of production (NEM). UNCTAD (2011) defines this as the externalization of a business’s operation in which a level of control or influence is extended over a host-country business by means other than equity holdings. This influence could include specifications on the design and quality of the product (standards) or what business model the firm should follow. Examples of NEMs are a contractual partner in manufacturing, licensing, or franchising. These are distinct from arm’s-length transaction networks. NEMs and FDI are often complementary (UNCTAD, 2011), such as the coexistence of a franchise outlet and retail outlet, or an owned procurement and distribution centre to support contract manufacturers. The successful growth and industrialization of a host of mainly East Asian economies through global value chains has led to a debate on whether Africa can follow a similar path to prosperity (UNCTAD, 2012; Kaplinsky and Morris, 2001). The role of regional integration in integrating Africa into more complex efficiency-seeking chains is explored further in sections 2 and 4. We now turn to some of the determinants of attracting a value chain. Upgrading is conditioned by the internal and external governance structures which affect the value chain. “The former are negotiated between firms within a GVC. The latter are set by governments and determine the environment within which the GVCs operate” (ODI, 2013). Internal governance structures are useful in understanding how and why firms organize their cross-border arrangements in the way in which they do, and how power and profits are distributed between chain actors. The two initial governance typologies used to explain the formation of different chain linkages were ‘buyer-driven’ and ‘producer-driven’. Buyer-driven chains reflect marketing and brands, in particular large retailers (Wal-Mart), marketers (Nike) and branded merchandisers (Levi Strauss & Co) (Gereffi, 1999). These buyers help to “create, shape, and coordinate the global value chains that supply their products, sometimes directly from overseas buying offices’ and sometimes through intermediaries…most notably trading companies” (Sturgeon, 2008:7). Few own their own factories. Labour intensive industries tend to be governed by buyers owing to the concentration of valuable property in the design and marketing (Sturgeon, 2008). FDI is less important here though does still occur. Producer-driven chains involve more complex production technology and processes (Gereffi, 1999). This leads to more complex supply networks, often created through foreign direct investment (Gereffi, 1999). Capital and technology intensive industries tend to be governed by producers, either internally or through closely affiliated ‘captive’ suppliers who are restricted in the use of the proprietary property which is shared with them (Sturgeon, 2008) In practice global production networks involve more complex linkage patterns between firms leading to a greater variety of governance types (Sturgeon, 2008). Linkage patterns are typically thought to be a function of supplier capability, and the extent of information complexity and its ability to be codified. Less noted is how maintenance of the lead MNEs proprietary property may shape linkages and influence distributional outcomes. The governance typologies (Table 1), as listed by Gereffi, Humphrey, and Sturgeon (2005), and summarised in Sturgeon (2008:10) are: 1) simple market linkages, governed by price; 2) modular linkages, where complex information regarding the transaction is codified and often digitized before being passed to highly competent suppliers; 3) relational linkages, where tacit information is exchanged between buyers and highly competent suppliers; 4) captive linkages, where less competent suppliers are provided with detailed instructions; and 5) vertical integration or ‘hierarchy’: linkages within the same firm, governed by management hierarchy. Table 1: Key governance types by complexity, ability to codify, and supply capabilities 
Source: Sturgeon (2008). Visually, we have the following five stylized linkage patterns (Figure 2): F  igure 2: Stylized linkage patterns/governance types of value chains
Source: Gereffi, Humphrey, and Sturgeon (2005:89). Though power asymmetries are noted in Figure 2 as being lower the more market based the transaction, this is misleading. The market is the ultimate medium through which all unequal power relations are mediated and take advantage of. The framework also helps to explain when and why parts of the chain will be located at a distance or relatively close to the first tier supplier or lead firm (Table 2).
As technology, supplier capability, and codification schemes change so too does the necessary governance type applicable to the chain linkage (Sturgeon, 2008). Given the weakness of pre-existing manufacturing capacity outside of Northern and South Africa, FDI is needed to establish firms in Africa with sufficient supply capabilities to undertake the task. An example is the recent investments by Samsung (assembly) and Honda (motorcycle production) into Kenya. The determinants of attracting FDI differ greatly by the underlying motive of the investment (UNCTAD, 2010, 2011). The primary motives are market-seeking (capture increased market share); efficiency-seeking (the vertical FDI commonly associated with global value chains) used to take advantage of differing cost and quality conditions in different locations; and resource-seeking. Especially for efficiency-seeking FDI, business environment and policy conditions which reduce risk, lower transaction and other costs, and raise the productivity of capital and labour are all important. In the case of Africa, FDI flows closely reflect market size potential, the distribution of economic competitiveness (located mainly in South Africa), and the incidence of natural resources. Similarly, NEMs can be looked at as having a market-seeking (brand licensing, franchising), efficiency-seeking (contract manufacturing, outsourcing), or resource-seeking (contract-farming) motive (UNCTAD, 2011:127). Resource-seeking NEMs are particularly common in Africa. In Zambia, for example, 100% of cotton and paprika is produced through contract farming (UNCTAD, 2011). Studies on contract farming (e.g. Oya, 2011) do not, however, explore any cross-country dimensions of value chains. One such example is cocoa production in West Africa, which we explore in the final draft of this paper.
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