Made in Beijing, assembled in Ethiopia

The old industrial economies face tough competition from emerging ones in terms of trade and investment destined for Africa.  As the newest entrants to the game, emerging economies such as China and India have lower standards in choosing the destination of their FDI, thereby putting the industrialized countries at a greater disadvantage.

However, a recent case study about Chinese Foreign Direct Investment in Ethiopia showed that even with lower standards, the Chinese are having trouble functioning in the Ethiopian business environment, writes Asrat Seyoum.      

At the height of technological innovation and the digit age, one individual stood tall among its peers in using the latest advancements in his field to benefit consumers. He was the product of the computer revolution of the 80s in the U.S who started out by offering Macintosh computers to the world. He did not stop there however, over the years, his outside-the-box thinking brought technology closer to ordinary people more than ever. Yes, he was the computer whiz turned inventor and billionaire - Steve Jobs. Last year, the high-tech society and the world in general lost Jobs to cancer at the age of 57. 

As it is, Jobs and his rival Bill Gate are parts of the generation who opened a new frontier in the world of high-tech. Without exaggeration, this industry and the professional are sources of great pride to U.S. marking its leading position in the field. Perhaps among the most popular products that Jobs and his Apple Inc. gave the world was the iPhone. Currently, the latest version of this product, iPhone 5 is already in the market, it is fair to say that the product has become a household name. Like in all corners of the world, there is a considerable consumer base for the iPhone in Ethiopia. Hence, a number of local users in recent times have stumbled upon an interesting fact; even the most sophisticated products, like the iPhone is assembled in production lines in China. Made in California and assembled in China, inscribed on the back of every phone.

However, the fact that  Apple is moving production to the east, particularly to China is just the tip of the iceberg. In fact, in the past three decades, a lot of U.S. and European multinationals disassembled their production lines and moved to new and attractive Asian countries like China, South Korea, Indonesia and others. With that, a number of high-paying jobs in the northern hemisphere disappeared, crossing oceans to their new destinations and beneficiaries. It is obvious that cost is the basic motivation for these moves. The Asians were on a fast track to industrialization at the time when the cost of labor and raw materials was extremely attractive to those up in the manufacturing ladder. But, things were also cheaper in other developing countries in Asia and Africa, so why did so few of these nations become the center of attention for manufacturers from north?

It was because these emerging economies were doing something. The Likes of China, Korea and India invested heavily on institutions, infrastructures, and education to claim the lion's share of FDI that was coming to the region and to the developing world as a whole. And what an investment it was! These economies used foreign capital and technologies to achieve miracles in their manufacturing and other sectors of their economies. Eventually, they dominated the world manufacturing products market, even in the case of high-tech items like the iPhone. Currently, of consumer products sold in the U.S. almost everything is made in China and a few other countries. Furthermore, China did not stop there; the process of technology transfer seems to be working out in these economies as well. Huge industries like the Hyundai and Samsung of South Korea, the telecom giants like ZTE and Huawei of China and one of the most renowned IT centers in the world, Bangalore are a few of the examples of successful technology transfers in these countries.

Change in the status quo

For almost three decades, some of the emerging economies mentioned above have been experiencing sustainable economic growth and structural transformation. Just about all narratives about the growth miracle that the Asians were able to pull off over the course of this period did not leave out the role played by FDI. These nations became centers of export-oriented industries, which gave them access to the limitless world market and the feel of this market rigor. Hence, these nations started to industrialize, and they did so fast.  Together with this, the level of savings and technological accumulation reached a point where these emerging economies needed investment outlets themselves. What it meant was that the developed economies now have competition in terms of economic dominance manifested in terms of trade and investment. More specifically, the FDI flow patterns in the world started to exhibit some shifts. The emerging economies began to claim their own share, eventually creating competition.

From a different angle, the emerging economic forces did not slowly start to contest the dominant position of the developed economies, but also ceased to be the cost effective investment destination for developed economies. The situation that led the industrialized economies to migrate from their own base and go to Asia finally caught-up with the Asians. Economic growth and structural transformation slowly rose the wage levels in emerging nations and once again, it was time to look for alternative, cheaper destinations in other parts of the world. However, this time around, the process was different from the ones in the seventies, where a wave of FDI began to pour into Asia. How?
For one, the possibly newest FDI destination for the capital and technology rich countries was Africa; and to some extent, few underdeveloped Asian nation. Given the history of this continent that is marred with conflict and poor institutional quality, it was quite difficult to make a bold move to invest here. On the other hand, the traditional investors now had fierce competition from the more aggressive and capital rich nations of Asia.

The resultant effect was quite interesting. The fight between the traditional investors and the new one started to take center stage after the turn of the century. And as of 2012, the FDI from the South to the South grew more important, especially for African countries. Why are the emerging economies gaining on the industrialized ones?

The subject inspired a few academic researches but the explanation seemed quite fascinating. Overall, the act of investing in foreign land entails a wide range of risks for investors. The first and most important one is the political stability of that country. Business and political violence do not go together, researches indicate. And above all, fragile security and sometimes simply the history of violence on the African continent served as the main deterrence to FDI. Next to that, the quality of the institutions that govern the economy also played their part in this regard.

But, it is known that most African economies still exhibit such institutional weaknesses. On the contrary though, African countries like Ethiopia are now getting acquainted with FDI and quite a few of them seem to be reaping the benefits. Now, the only difference here is in the nature of the investors. The emerging economies in fact have the capacity to stomach institutional failures and work their way through it; at least they have better tolerance to it than the industrialized economies. The basic reason for this is better proximity to the new investment destinations' objective conditions. These emerging nations were almost at a similar position with their current investment destinations decades earlier. Hence, professionals conclude that the Asian emerging economies are prevailing in this new frontier.

Unable to meet the low standards

Now, the relatively lower standards have indeed helped some of these African nations to be attractive investment destinations for at least Asian emerging economies. Here, it could also be noted that the move by the Asian emerging countries also awakened some of the traditional investors, inspiring them to get in on the race and scramble for investment stakes in the continent of the future. But, the momentum of this new move can only bring about a limited level of FDI to Africa. If FDI is to play a role equivalent or better than it did in the Asian development, the volume must increase significantly, pundits claim.

In this mindset, upon the request of the government, the World Bank country office in Ethiopia conducted a survey of the Chinese FDI in Ethiopia. The survey that is based on some 86 Chinese firms doing business in Ethiopia, pinpointed some critical areas of concern for foreign investment in Ethiopia. The survey, which is based on the pool of Chinese companies from the manufacturing, construction and service sectors invested in the country noted some six principal obstacles to doing business in Ethiopia. Around three of these obstacles appear to be playing an offsetting role to the basic attraction towards the country as a viable investment destination. The first and most constricting obstacle, according to the firms studied by the Bank, is the customs, trade and logistic system of the country. Almost all of these companies said yes to the customs and logistic obstacles undermining their competitive edge. On average, it takes some 47 days for an imported supply to reach the local market, as opposed to the time in China or Kenya, which takes half as long, reads the survey. Huajian, a reputable shoemaker in the world and currently a tenant in the East Industrial Zone, revealed that the average lead time of a pair of shoes destined for the U.S. market was 47-60 days in China, however, now this has increased to 100 days, owing primarily to time taking logistic processes. Now, the shoemaker is considering airfreight as a mode of transport, which costs four folds more, to reduce the lead-time. 

On the other hand, foreign exchange risk is also another obstacle according to the respondents. Here, the steep devaluation seen in September 2010 was frequently cited as a forex risk these firms want to avoid. This is a particular concern for the Chinese FDI firms because they rely on imported supplies of raw materials for the bulk of their production. There is no working local input supply network in Ethiopia, the survey noted, and the kind of forex change seen in 2010 could mean heavy loss for manufacturing firms. Similarly, unpredictable and inconsistent tax proclamations and other business regulations is another one of the major headaches for the Chinese, WB's survey details. In this regard, respondents of the study expressed frustrations over tax proclamation, frequent revision and inconsistent interpretations of these laws. At times, being forced to pay tax arrears retroactively, some of these FDI companies have expressed concerns, the survey read.

Still, another most severe constraint, particularly for those in the manufacturing and the construction sector, is the skill level and the productivity of the labor that the local market offers. According to the survey, on average, the Ethiopian laborer employed in the manufacturing sector has 6-10 years of education, and so frequent skill upgrading trainings have to be given to augment productivity levels. Here, the most constricting part of this obstacle, as it was laid out in the survey, is cheap labor. So, the additional cost incurred due to training is making local labor expensive; perhaps more than what it was in China, the survey shows. This erodes the primary advantage that attracted the FDI to Ethiopia in the first place.     

More interestingly, the survey found that more than half of the Chinese investors surveyed have made commitments to stay in Ethiopia for 10 years or more  albeit these sever obstacles. The pundits, on one hand, question the country’s institutional quality and the policies governing the business environment as it seems unable to fulfill even the minimal conditions that FDI source countries require.