In Africa, foreign companies are often disconnected from local companies
IB 2016 DANIEL KINUTHIA started a small business in Kenya manufacturing shoe uppers for the local subsidiary of Bata, a multinational footwear company. He lacked funding and equipment, and his contract with Bata ended when covid-19 hit. But he says sourcing from Bata and visiting his factory taught him “what’s going on, how the shoe is marketed, the type of shoe that can be sold.” Now he dreams of using these skills to build his own factory.
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Many African governments are keen to attract foreign investment. But its impact depends on what Albert Hirschman, a postwar economist, called the “links.” By sourcing or buying from multinationals, local businesses like Mr. Kinuthia’s can learn about markets and technology. However, such links are too rare in Africa. Many multinationals ship their inputs and export what they produce. It creates jobs and dollars, but does not stimulate development.
A recent study by John Rand of the University of Copenhagen and others finds that links are rarer in Africa than in developing countries in Asia. The multinationals surveyed in Kenya, for example, imported two-thirds of their intermediate inputs, while those in Vietnam only imported a quarter. And local links transferred less technology than expected. Businesses have learned as much from trading across the oceans as they have from foreign businesses in their backyards.
Extractive industries, in particular, tend to operate as enclaves. Mining concessions often come with import duty exemptions, says Lukas Bekker, a supply chain expert who has helped set up mines in three African countries. This makes importing equipment cheaper than hiring local contractors. And buying local can be risky. CFO with 20 years of experience in African mining says he prefers to keep sourcing overseas, having uncovered “frauds and bribes” between staff and local suppliers in the past.
Capacity takes time to develop. In Uganda, which has long been preparing to pump oil, a survey in 2012 found that only 200 trucks out of a local fleet of 2,500 were up to the task. “We had to transform our business,” says Jeff Baitwa, who spent $ 20 million to buy equipment to modernize his transport company for oil contracts. Sometimes the technical gap is too big. “I’ve been told that the pipeline has what they call ‘seamless pipes’,” says Stuart Mwesigwa, director of Uganda’s largest steel company. “No one in East Africa makes this! “
The problem goes beyond mining. International supermarkets often truck goods from distribution centers – in South Africa, for example – rather than sourcing from where they operate. Much of Africa’s coffee, cashews and cocoa leaves the continent in packaging made abroad. Tailors assemble imported fabrics with imported zippers and buttons.
Attempts by governments to maintain ties show how difficult they are to create. Some are trying to build knowledge clusters in industrial parks. Raghav Pattar, an Indian, came to Hawassa Industrial Park in Ethiopia as the manager of a Chinese clothing factory. From there, it was only a step towards his current position as managing director of Nasa Garment, the first Ethiopian company there. These types of movements contribute to the dissemination of skills and know-how. But most Ethiopian companies “don’t come to the industrial park,” says Pattar. They struggle to get the loans and expertise that foreign companies can acquire overseas. In many countries, the entrepreneurs who benefit most from foreign investment are often those with existing connections, such as those of European or Asian origin.
Governments are also trying to foster linkage through “local content” rules, which force multinationals to source locally for licenses. The focus should be on suppliers who add value, notes Judith Fessehaie of the International Trade Center, a development agency, which has studied such policies in southern Africa’s mining sectors, so that contracts don’t come back. not to importers with nothing more than “a briefcase and a desk”. But the risk is that severe restrictions completely prevent foreign companies from setting up in a country.
Some hope that the market could create incentives to source locally, as consumers become more interested in the origin of the products they buy. “Our goal is to develop the Ghanaian ecosystem,” says Keren Pybus of Ethical Apparel Africa, a UK clothing supply company that has invested in a factory in Ghana. Ms. Pybus imports fabric but one day wishes to buy it locally. Foreign brewers are switching from imported barley to local grains, marketing beer consumption as a patriotic act. But unless suppliers have the funds, capacity, and expertise to leverage foreign relationships, such efforts will amount to little beer. ■
This article appeared in the Finance & Economics section of the print edition under the title “Links in the chain”