Transcript Slide 1

TNC FDI firms and domestic
linkages: reflecting on SADC
case studies
Presentation of preliminary findings and issues
arising from an UNCTAD funded project.
Glen Robbins, Likani Lebani and Mike Rogan
TIPS Seminar
25 April 2007
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Structure of presentation
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Background
Study brief and methodology
Issues of interest beyond the brief
FDI, TNC and SME debates informing the study
Country cases
– Mozal
– Lesotho aparrel
– SA auto SMEs and Toyota
• Reflections
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Background to the research
• What is UNCTAD?
– Established in 1964, UNCTAD promotes the developmentfriendly integration of developing countries into the world
economy. It focus on knowledge generation and intergovernmental processes around:
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Trade
Investment
Enterprise development
Infrastructure and services
• Thematic focus emerging from UNCTAD XI: “The Sao
Paulo Consensus” –
– Ensuring developing country gains from trade and FDI
• Requires engagement with Trans-National Corporations
– Enhancing competitiveness of developing country SMEs
– These themes are likely to be endorsed again at UNCTAD X11
next week in Accra, Ghana
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Study brief and methodology
• Overall question: In what way can developing
countries enhance linkages between TNC FDI
firms and domestic SMEs?
• Identify the major lessons from SME-TNC
linkage programmes from 3 SADC case studies:
– Mozambique: Mozal aluminium smelter
– Lesotho: Clothing and textile investment related to
AGOA
– South Africa: SME suppliers and Toyota (from
previous UNCTAD report)
• Interview main stakeholders (TNC, government,
SME and informed observers)
• Review available project documentation and
literature
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Issues of interest beyond the brief
• In a context where real and relative flows of ODA are in decline in
relation to FDI, what is the scope for securing developmental
impacts from FDI for developing countries?
– ODA to developing countries was R70bn in 1990 and was R50bn in
2006
– FDI flows to developing countries were R50bn in 1990 and were at
R300bn in 2006
• FDI can compensate for domestic savings shortfalls and reduce
BOP imbalances. In what ways can it contribute to lasting structural
change in developing country production and productivity dynamics?
• To what degree do the sector dynamics of FDI activities influence
the scope for widening the net of local benefit?
• To what degree do host country relationships with major nodes of
value chain governance (often represented by TNCs) impact on
widening the net of local benefit?
• What scope is there for different types of host country policy
frameworks in widening the net of local benefit from FDI? Is it simply
“a race to the bottom” or are there real points of leverage?
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Knowledge informing the study
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FDI and development
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Capital shortfalls in developing countries result in a dependence on capital inflows (short and long
term) to sustain economic growth
FDI projects often allow for exploiting opportunities to earn much needed export revenue to assist
with balance of payments
FDI has been characterised variously as:
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Policy interest has explored ways of enhancing hosting country gains from FDI (international
regulation, domestic policy adjustment, capacity building) in a context where developing countries
often engage in a “race to the bottom: to attract FDI (incentives, infrastructure discounts)
TNCs and development
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A critical element of any developing country strategy to achieve development goals
An extension of colonial dependencies that undermines sovereignty and exposes countries to capitalist
exploitation
TNC account for 10% of world GDP
Foreign affiliates of TNCs increasingly accounting for the majority of employment in many
developing countries
Some estimates suggest 2/3 of world trade is generated with intra-TNC and inter-TNC networks
Developing country experiences with TNC have been variable and often exploitative
SMEs and development
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The bulk of developing country economies are characterised by small and medium enterprises of
varying levels of formality and capacity that provide a significant (if not the most significant) share
of employment and domestic economic activity
Combinations of historic conditions, domestic policies, international asymmetries have contributed
to the disconnections between these domestic SMEs and global economic processes
Facilitating linkages between domestic SMEs and TNC FDI firms is one of a number of possible
strategies to enhance the gains from FDI through systemic improvements in firm competitiveness
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FDI in SADC: The context
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African FDI flows doubled 2004-2006
Africa’s share of global FDI dropped from 3.1/% in 2005 to 2.7% in 2006 but is still
higher than 1.2% in 1999
African share of inward FDI dominated by extractive industries but services growing
Southern African trend heavily influenced by South Africa’s swings, but most
countries FDI positive
Southern Africa FDI inflows and outflows 2004-2006
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FDI category
(US$ millions)
2004
2005
2006
Inflows
3 629
6 202
-195
Outflows
1 337
1 171
6 779
Lesotho and Mozambique have seen solid flows since 2000, although Mozambique
FDI reflective of greater levels of capital investment
South Africa has had major swings depending on sales of interests, foreign listings etc.
Case study country FDI inflows 2004-2006 (US$ millions)
Country
2004
2005
2006
Lesotho
53
57
57
Mozambique
245
108
154
South Africa
799
6251
-323
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Mozambique: FDI and the Mozal
Experience
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FDI Inflows 1992-2006
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Average GDP growth of 8% between 1994 and 2004 (IMF 2006)
Annual FDI has increased from US$21 million to US$153million between 1994 and 2000 (UNIDO
2002)- largely tied to mega project investments
Mega project intensive: 60-70% of total exports tied to mega projects (IMF 2006)
400
350
300
250
200
150
100
50
0
92
9
1
99
-1
4
95 996 997 998 999 000 001 002 003 004 005 006
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1
1
1
1
2
2
2
2
2
2
2
(US $million) (Sources:UNIDO, UNCTAD and World Bank)
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Aluminium Sector (Mozal)
• Mozal smelter is the largest mega project in
Mozambique and accounts for 75% of mega project
contributions towards GDP, BoP and tax revenues (IMF
2006)
• Southern Africa now produces 7% of the global
aluminium supply and Mozal is currently one of the most
efficient producers of aluminium in the world- exports 2%
of global aluminium consumption (Pretorius 2005)
• Mozal granted IFZ status which allows it to import inputs
duty free, is exempt from VAT and pays no more than
1% of total sales as corporate tax (Castel-Branco 2004)
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The Linkage Process
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1997- Linkages form a key component of the
government’s Investment Attraction Strategy
for 1997-2000
2001- SMEELP is initiated for a two year
period to assist local firms to win contracts for
the expansion of the Mozal plant
2003- Mozlink I is introduced by Mozal to build
on the successes of SMEELP
2007- Mozlink II is an extension of Mozlink I
and is planned to continue until the end of
2008. It is intended that Mozlink II be rolled
out to other sectors.
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Findings: Mozal
• Success of linkages the result of a formal linkages programme
initiated by government and supported by Mozal and international
lending institutions = a good practice model
• Mozal is perceived to be important by local SMEs themselves
(Goldin 2004)
• Between the first two phases of the linkage programme, local
contracts increased from $US 5 million to $US 11 million
• Evidence of SME expansion and increasing revenues (Goldin 2004)
• Local SME performance has improved by roughly 20 per cent
through the Mozlink programme (IFC 2007)
• Challenges:
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Low employment impact
Lack of transparency in contracts
How to work with other sectors where there is less TNC commitment
Driver project viability driven mainly by discount power and tax
conditions
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The experience of Lesotho
with textile and apparel FDI
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Background to apparel sector in Lesotho
• Clothing industry dominated by export oriented manufacturing and
subsidiaries of foreign owned firms (80% Taiwanese, balance China
and SA)
• Growth of clothing industry a result of the 2000 AGOA trade
privileges. From 1999-2005, clothing industry grew form US$100m
to US$460m.
• Dominance of US markets, 93% of garments channeled to the US
(for The GAP, Walmart, Levis etc)
• Government has consciously focused on the garment industry due
to its employment creation capacity
• 40 000-55 000 workers employed in the garment industry out of a
workforce of 84 000
• Clothing industry contributes 20% of GDP and 70% of exports
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Global garment industry dynamics and
country constraints
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Post the MFA era a three-legged network has emerged:
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production strategy & coordination is driven from Taiwan/Hong Kong;
Production – Lesotho;
Market strategy, design and sales – US/Europe
It is a buyer driven value chain but key decisions are taken on responses to this
at production coordination hubs. Actual production hubs are very disconnected.
TNC articulated constraints which has impacted on the sector
– Future status of 3rd country fabric provision
– the Maloti-Rand which is pegged to the ZAR, Lesotho’s garments exports
become less competitive when the Rand appreciates
– Low productivity and wage demands
– lack of local fabric mills (1 denim plant)
– water quality and quantity
– problems with solid waste disposal;
– inefficient transport infrastructure impacting on lead times
– excessive bureaucracy within Lesotho’s government departments
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These concerns led to the formation by the Lesotho government of an InterMinisterial Task Team (IMTT) to address business concerns and create a
viable environment for employment generating firms
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Lesotho’s experience with linkages
• This local SME service and supply linkages were not a
priority for:
– Government: “This is all about jobs”
– TNC garment firms: “It is not our job to resolve the country’s
economic problems. Things are already tough for us.”
• Some attempts were made to secure outsourcing
contracts but failed due to supplier shortcomings and
financing problems.
• Indirect linkages with a service orientation have been
generated:
– Accommodation
– Transport
– Business and legal services
• New attempts are being contemplated by BEDCO but
limited success forecast without comprehensive support
mechanism
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Findings: Lesotho apparel
• Limited scope to engage local SMEs – Ownership structure, lack of
interest by global players and the nature of global sourcing hinders
linkage activities. Most decisions made in Taiwan - e.g. Trims preapproved in Taiwan
• No particular policy to create linkages, existing linkage activities are
of an ad hoc and informal nature (e.g. transport, packaging, sprinting)
• Lesotho government priority is employment creation and no
consistent engagement has been pursued with TNC firms
• Competition for FDI and the need to create employment is a major
challenge for the government that dominates interaction
• Lesotho SMEs lack the requisite capabilities to produce for TNCs.
Major issues relate to quality, poor work ethics, pricing.
• The combined effect of complex sector conditions, a meek
government and unwilling TNCs does little to encourage linkages.
• Is there any scope for Lesotho to use this TNC investment as a
basis for future industrialisation? – especially with AGOA’s limited
lifespan.
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SA SMEs in Toyota’s global value chain
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SMEs in South Africa’s auto sector
• Prior to the restructuring of the early 1990s SA SME
suppliers were:
– Diversified operations supplying the auto sector as just one of
their markets
– Producing products of low value, low volume and low technical
specifications
– Operating licensed technology - much of it quite outdated
– Reliant on personal and relatively informal trust relations rather
than formal contracts
– Often kept in the dark about OEMs strategy and price was the
dominant aspect in many procurement decisions
– Weak performers in relation to international benchmarks
• One could conclude that they were marginal players in a
relatively truncated South African automotive value chain
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SMEs in South Africa’s auto sector
• Since the early 1990s SME suppliers have:
– Restructured relationships with domestic OEMs who have in-turn
slotted in into global supply relationships
– Needed to acquire complex standard and quality certifications
– Either had to forgo the automotive market or to remain part of it
• As aftermarket producers
• As scaled up volume suppliers to the OEMs
– Required major capital investment and re-organisation of
production systems to maintain a foothold in automotive supply
– Participated in emerging networks of collaboration between SME
suppliers and the OEMs to deal with common problems
– And have been supported through the Government’s Motor
Industry Development Programme (MIDP)
• Some supplier firms have strengthened their position in
the value chain whilst for many their experience has
been one of increased marginalisation
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A look at some of the impacts
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SA’s auto industry is now connected with the global arena:
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Since 1995 exports experienced a 9-fold increase from R4.2 to R39.2 bn in 2004
SA’s share of global auto production was 0.61% in 2000 and grew to 0.79% in 2006
Total vehicle production in 2006 was 621 900 units – more than double the units produced in 1999
Combined Car and LCV figures (domestic production local sales, exports and imports)
900000
800000
700000
600000
500000
Imports
Exports
400000
Domestic production local sales
300000
200000
100000
0
1995
1998
2001
Selected years
2004
2006
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Toyota and its SME suppliers
• In the late 1990s
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TSA produced 80 000 units across seven model platforms
Almost exclusively for the South African market
It had 154 suppliers
28% of suppliers to TSA could be characterised as global sourcing
partners
• In 2007
– TSA will produce over 200 000 units mainly across two models
– 65% of production will be for export to Europe
– The firm will have 78 suppliers (to be reduced in the next few years to
62)
– 82% of suppliers which will be what TSA refers to as global sourcing
partners
• Global sourcing had seen South African costs for the production of
the Corolla reduced by 32% in the past 5 years
• Between 2003 and 2006 the proportion of supply into TSA from
suppliers not party to global sourcing arrangements dropped from
41% of total sourcing to 18%
• The value of local purchasing has increased in this period from R2.3
billion to R5.4 billion. Today 70% of the Hilux is sourced locally up
from 60% five years ago.
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Changing component supply
proportions to Toyota SA
Local SMEs
Local SMEs
Local SMEs
Imports
Imports
Imports
Locally based
MNCs
Prior to
liberalisation
Locally based
MNCs
JVs: Local SMEs
And MNCs
Early
liberalisation
Locally based
MNCs
JVs: Local SMEs
and MNCs
OEM aligned MNCs
Alignment with
Toyota GVC
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Exploring SA’s SME policy response?
• South Africa has sought to develop industrial policy and SME
support systems favourable to:
– reducing the bias against SMEs in the large-firm dominated economy,
and
– responding to growing international competition
• However, the bulk of SME support has been geared to relatively
recently established micro-enterprises
• Some automotive component firms did qualify for some limited
support such as that offered through manufacturing advisory centres
• National sector strategies identified the imperative of supporting the
role of SMEs and the MIDP created the space for a continued
presence of SMEs in OEM supplier processes, but beyond creating
the space there was little in terms of meaningful SME support
• Government at the national, provincial and local level did, for a time,
support nascent regional clusters of firms engaging in networking
activities
• It has been the locally framed cluster/firm networking activities –
such as the Durban Auto Cluster and KZN Benchmarking Club - to
which SME firms and OEMs attribute most of their linkage
successes: MIDP was a necessary but not sufficient condition
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Some reflections by the SA SMEs on GVC
participation/linkages
• Positive
– Improved growth potential for firms on basis of increased volume
orders allowing for scaling up
– Investment and technical support
– Access to knowledge networks of intermediary supplier firms
– Greater strategic engagement on new model platforms
• Negative
– Threat to risk-diversifying non-auto activities – the need to
specialise
– Profit margins shrinking despite adoption of required standards
– Inability to leverage many auto-supply systems and standards to
other markets (no scope to recover investment through
increased premiums)
– Uncertainty about character of MNC suppliers acting as
intermediaries with OEMs
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Auto SME policy issues in SA
• Supporting improved access of SMEs to GVCs must be combined with
enhancing benefits to SME firms. This requires the examining of:
– Global trade compacts, investment protocols and industrial policy
frameworks
– Continuous upgrading support for firms (quality, delivery reliability,
innovation, lead time flexibility etc)
• Countries need to continue to attend to basics of infrastructure quality,
services costs and other operating environment factors in non-core
sites where SMEs operate
– Failure to address these weakens the SMEs links to chains of production
• The importance of physical proximity for integrated JIT suppliers OEMs
is being challenged by the growing importance of networked supply at
key GVC nodal points – often via first tier suppliers …
– Therefore SME support frameworks need to accommodate globalisation of
firms and be flexible in relation to new geographies of firm activities
– SMEs also continue to emphasise enhanced local networking with OEMs
and their first and second tier follow suppliers. These need ongoing policy
support with an emphasis on active and not just passive collaboration.
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Reflecting on the 3 cases
• FDI processes without negotiated and facilitated linkage
effects to host country SMEs is a missed opportunity
• Active facilitation and support from a range of institutions
is critical to ensure the programmes function effectively
• Firm and sector dynamics do matter in that they impact
on the scope for and nature of linkage opportunities
• The approach of TNCs to FDI in specific contexts is
important – both in terms of TNCs position in the value
chain and in terms of their attitudes
• Host country governments, regional bodies and multilaterals should work collectively to extend and enhance
linkage processes alongside FDI related efforts in fields
such as:
– tax/royalty/incentives regimes
– regulatory reform
– export infrastructure
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