‘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.
1
1. Introduction
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
2
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.
2. Theoretical Framework
2.1. MNEs and value chains: internalize or externalize
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
3
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 nonresident 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 hostcountry 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,
4
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):
5
Figure 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).
6
Table 2: Governance typologies and the internalization decision
Type of
linkage/governance
Necessary
proximity to
relevant lead
firm?
Reason
FDI
Typical Nonequity mode
Example
Market
No
No
None
Agriculture Spot
market
Modular
No
No
Co-location
Contract
manufacturing
Full package
producers
electronics
Relational
Product specification
simple or simple to
transmit
Easy to codify
information
Tacit information
required
Captive
Maybe (monitor
and control)
Hierarchy
Manufacture inhouse
FDI
No
Small suppliers
dependant on
buyers complex
product spec; inability
to codify
Inability to codify
and/or contract out
Complex transaction;
proprietary property
If
complementary
required
If
complementary
required
If in-house
capabilities are
expanded in
non-resident
location
Yes
Garment
manufacturers
Contract
Tiered supplier
structure in
automative
industry
No
In-house design
None
Market-seeking
subsidiary or
branch.
Source: Authors based on Sturgeon (2008); Gereffi, Humphrey, and Sturgeon (2005); and UNCTAD (2013).
Note: Full package producers supply all component parts.
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); efficiencyseeking (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), efficiencyseeking (contract manufacturing, outsourcing), or resource-seeking (contract-farming) motive (UNCTAD,
2011:127). Resource-seeking NEMs are particularly common in Africa.
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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.
2.2. Regionalism as a determinant of MNE activities
Formal 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).
Table 3: African RECs and the 5 ‘stages’ of economic regional integration, 2013
RECs
Date
AMU
CEN-SAD
1989
1998
COMESA
EAC
ECCAS
1994
2001
1983
ECOWAS
IGAD
SADC
1975
1998
1996
FTA
Customs
Union
Common
Market
Monetary
Union
Political
Federation
Source: AfDB (2013a).
Notes: Achieved (green), envisaged (blue), and not planned (grey).
‘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
1
They were never referred to as ‘stages’ by Balassa.
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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).
2.3. Impact of MNEs on regionalism and regionalization
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
9
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.
2.3.1.
MNE sourcing policy in Africa
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, $70bn in sales, and 1.8 million
employees (UNCTAD 2011:138). Of particular interest is that 70% of the outlets are ‘cross-border’ (Table
4). This is significantly higher elsewhere and perhaps due to the scarcity of modern franchises on the
continent outside of South Africa (Dalberg, 2009).
Table 4: Franchise Systems in the World and Africa, 2010
2
Based on company interviews.
This consists of all the franchised units and united managed by the franchisor itself that operate under the same banner and business format,
for example the KFC franchise system.
3
10
Region/economy
World
Development Economies
Europe
Japan
United States
Developing economies
Africa
Latin America & The Caribbean
Asia
South-East Europe and the CIS
Number
of
franchise
systems
30 000
12 200
7 700
1 200
2 500
17 400
1 600
3 800
11 200
800
Number of
outlets
(Thousands)
2 640
1 310
370
230
630
1 330
40
190
1 070
30
Sales ($
Billion)
2 480
2 210
340
250
1 480
270
30
70
170
5
Employees
(Thousands)
19 940
12 400
2 830
2 500
6 250
7 540
550
1 810
4 810
370
Crossborder (Per
cent)
15
10
20
5
5
30
70
20
25
50
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.
Figure 3: Regional spread of select South African retailers and franchisers, 2010
Source: UNCTAD (2011: 158).
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
4
Shoprite includes: Shoprite, Checkers, Usave, OK Furniture, OK Power Express, House & Home, Hungry Lion, OK Franchise.
11
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.
3. 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.
5
Interviews with Freshmark, Shoprites fruit and vegetable first tier supplier.
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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.
Table 5: Selected top sources of FDI into Africa, 2007-2012
Country
United States
South Africa
Kenya
Nigeria
Complete Total
New Projects
(2007-12)
CAGR % (2007-12)
516
11.20%
235
56.50%
113
60.00%
78
20.10%
4373
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.
6
Based on Financial Times fDi data on the number of Greenfield FDI projects.
13
Table 6: Top 10 ‘African’ MNEs by turn-over and market capitalization, 2013
Turn-over
Market
capitalization
SASOL
MTN GROUP
THE BIDVEST
GROUP
NASPERS
MTN GROUP
SASOL
SHOPRITE
HOLDINGS
DANGOTE
CEMENT PLC
STANDARD BANK
GROUP
STANDARD BANK
GROUP
IMPERIAL
HOLDINGS
VODACOM
GROUP
STEINHOFF
INTERNATIONAL
HOLDINGS
FIRSTRAND
VODACOM GROUP
KUMBA IRON
ORE
ROYAL CARIBBEAN
CRUISES LTD
THE ROYAL
SWAZILAND
SUGAR
CORPORATION
(RSSC)
MASSMART
HOLDINGS LTD
BARCLAYS
AFRICA GROUP
LIMITED
Source: Orbis (2013).
Note: Companies had to have a minimum US$1 mn market capitalization to make either list.
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.
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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.
Table 7: Top 10 largest MNEs with a subsidiary in Africa, by turn-over and market capitalization, 2013
Turn-over
Market
capitalization
WAL-MART
STORES
EXXON MOBIL
CORP
ROYAL DUTCH
SHELL
MICROSOFT
EXXON MOBIL
JOHNSON &
JOHNSON
BP
WAL-MART
VOLKSWAGEN
AG
GENERAL
ELECTRIC
COMPANY
CHEVRON
CORPORATION
CHEVRON
CORPORATION
TOTAL S.A.
WELLS FARGO
& COMPANY
TOYOTA
MOTOR
CORPORATION
PROCTER &
GAMBLE CO
GLENCORE
XSTRATA PLC
TOYOTA
MOTOR
CORPORATION
SAMSUNG
ELECTRONICS
NESTLE S.A.
Source: Orbis (2013).
Note: Companies had to have a minimum US$7.6 mn market capitalization to make this table.
15
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.
4. Regional integration and the South Africa-Lesotho garment value chain
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).
16
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.
7
Data to be updated for final draft paper.
8
Data to be updated for final draft paper.
17
4.1.
From South Africa to Lesotho and back again
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).
18
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).
19
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-myneighbor 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.
4.2. From Mauritius to Madagascar
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
20
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.
5.
Conclusion
The Lesotho-South Africa garment value chain highlights the potentially significant impact which
regional integration may have in impeding or promoting regional value chains. The Duty Credit
Certificate played a vital role in sustaining the Lesotho clothing industry; while the duty-free market
access which SACU provides was essential to enabling the benefits of proximity to be utilized by South
African firms. Proximity has shown to be especially useful given the potentially relational nature of
aspects of the value chain. On the other hand Regional integration has possibly impeded the expansion
of the garment chain through overly restrictive rules of origin, non-tariff barriers, and preference
erosion arising from harmful inter-state competition for clothing and textile FDI.
The policy implications of this for governments, intra-state institutions, and private sector actors are
several. Intra-state institutions such as SACU and SADC need to come up with consistent rules of origin
with each other and coherent in and of themselves. Part of the decisions must involve an evaluation of
the implications of aligning their ROO with AGOA’s and the EPAs. Ideally the decision should not be a
capitulation to any short-term protectionist needs of individual states but based on a coherent and
mutually agreed upon regional plan for the clothing and textile industry. An analysis by the SADC
secretariat on the effects of national industrial policy on the erosion of final preference margins needs
to take place. The results of this should inform the orientation of policy makers towards these issues,
with an eye to making regional submissions on the issue once sufficient consensus has been reached.
Further research is required to assess the optimality of the continuation of a DCC like scheme in the
future for the garment industry or any other sectors identified by the secretariat as requiring
intervention and coordination. The various costs and benefits as well the distribution of these need to
be properly weighted before any conclusions are reached.
For this to occur national governments need to garner consensus from their own constituencies on the
role of regional industrial policy in policy making, as well as on the specific points which are being
suggested for the industry. National governments need to refrain from engaging in harmful financial,
fiscal, and regulatory competition for foot-lose capital and FDI and perhaps explore many of the useful
recommendations made by the IFC at the World Bank on this matter.9As stated indirectly in the SADC
model bilateral investment treaty (BIT) template, tax competition between states should be minimized.
Private sector actors need to focus on upgrading production, investing in sustainable business practices,
and working with governments and regional institutions to develop business models which are
9
See for example: James, S. (2009). Incentives and Investments: Evidence and Policy Implications. World Bank.
21
sustainable and competitive for the region. Business plays a vital role in engaging with government.
Government in turn must have appropriate consultative forums where both business and labour can
make submissions and recommendations to be integrated into national industrial policy and where
necessary, recommended for discussion in regional forums. Intra-state institutions need to properly
monitor and communicate with national governments on these issues.
The case study of the West African cocoa value chain (UNCTAD, 2008) governed across Côte d’Ivoire,
Ghana, and Nigeria by Archer Daniel Midland (ADM), Barry Callebaut, and a few other MNEs will be
explored further in the final paper once company interviews have been completed.
As illustrated here, there is significant potential for cross pollination between regional integration and
value chain studies. In contrast to the European context, this demands a focus away from an emphasis
on complex regionalism, and towards an attempt to understand the very basic country and regional
preconditions required to engage successfully in regional integration at a more essential level.
22
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Appendix
Table 9: Shoprite outlets, stores, and services by country and brand, 2012
Source: Shoprite (2013)
26