With a little help from my friends – FDI in Africa

Holger Görg, Christiane Krieger-Boden, Adnan Seric 10 December 2013

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Foreign direct investment (FDI) and the emergence of multinational firms (MNEs) have proven successful strategies for the growth performance of host countries. In recent years, developing economies have gained substantial shares of such worldwide FDI flows. Now, a “new wave of FDI” has even swept sub-Saharan Africa, one of the poorest regions of the world (Figure 1). With this, the inflows to Africa are also becoming less and less concentrated compared to the recent past, both geographically – dispersing across ever more countries – as well as sectorally, shifting from extractive sectors to light manufacturing and services. The increase in the size and geographical scope of the flows is partly due to a significant expansion of South-South FDI – in particular intra-African FDI flows, along with those from emerging economies such as China, India and other Asian countries.

Figure 1. FDI inflows worldwide, to developing economies and to Africa, 1970-2010

Source: UNCTAD, FDI database (http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx).

Building on some older (albeit scattered) evidence (see for example Bwalya 2006, Waldkirch and Ofosu 2010, Görg and Strobl 2005, Boly et al. 2012 and Morrisey 2012), our new study digs further into FDI effects in Africa (Görg and Seric 2013). Based on firm level data for 19 sub-Saharan African countries (from the Africa Investor Survey 2010, administered by UNIDO) the study considers domestic firms’ performance in terms of productivity, product, and process innovation. We then investigate whether the firm’s customer-supplier relationship with a multinational in the country is related to this (measured in terms of percentage of output sold to and bought from multinationals, respectively). We also examine whether this relationship is mitigated by “assistance” received by the domestic firm from either the government (through Investment Promotion Agencies) or the multinational customer/supplier.

The empirical findings suggests that, as in other parts of the world, FDI flows impact positively also on African domestic firms. We estimate in particular vertical linkage effects – i.e. effects of FDI on firms that serve either as suppliers or as customers to MNEs1 – and their impact on output per worker, product innovation and process innovation of these firms. The study is not only interested in the direction and size of the effects but also on the channels through which they take place. Specifically, it investigates whether the performance effects of the customer/supplier relation with multinationals can be intensified by support from the government or from a multinational customer. The idea is that with such support, firms may be able to build up better absorptive capacities; they may thus not need to only rely on their own efforts.

Figure 2 shows that African firms in many countries (though with considerable variance between countries) indeed utilised support both from governments and from MNEs. The bulk of such help clearly came from the multinationals, with around 30% of all firms in the dataset reporting receipt of such help. Support was more often utilised when the African firm was a supplier to a MNE than when it was a customer, and the support usually took the form of workforce upgrading or technology transfer.

Figure 2. Support for African firms trading with MNEs

Source: UNIDO Africa Investor Survey 2010.

Overall, the results from the data analysis show for the average domestic firm:

  • Supplying to a foreign multinational (the backward linkage) fosters product innovation and, to a lesser extent, process innovation.
  • When also considering support either from government or MNEs, supplying to a multinational also improves the domestic firms’ labour productivity.
  • Buying from a multinational (the forward linkage) fosters labour productivity, but does not affect or even discourages product and process innovation.

FDI is thus likely to bring benefits to domestic firms also in sub-Saharan Africa, a region that has, for a long time, grappled with low FDI inflows and poor performance of domestic firms. Moreover, any support received by domestic firms, either from the government through investment support services or from the multinational business partner seem to widen the absorptive capacities of African firms and thereby to create benefits for domestic firms.

These results have important policy implications. The observed mechanisms can, at least to some extent, be influenced by policies, either through direct government support efforts, or by providing incentives for multinationals to give assistance. As the data show, the current level of such support is still quite low, leaving substantial room for improvement.

References

Boly A, N D Coniglio, F Prota and A Seric (2012), “Which Domestic Firms Benefit from FDI? Evidence from Selected African Countries,” Working Paper, UNIDO.

Bwalya, S M (2006), “Foreign direct investment and technology spillovers: Evidence from panel data analysis of manufacturing firms in Zambia,” Journal of Development Economics, 81, 514–526.

Görg, H and E Strobl, (2005), “Spillovers from foreign firms through worker mobility: an empirical investigation,” Scandinavian Journal of Economics, 107, 693-709.

Görg, H and A Seric, (2013), “With a little help from my friends: Supplying to multinationals, buying from multinationals, and domestic firm performance,” Kiel Working Paper 1867, Kiel Institute for the World Economy.

Morrissey, O (2012), “FDI in Sub-Saharan-Africa: Few Linkages, Fewer Spillovers,” European Journal of Development Research, 24, pp. 26-31.

Waldkirch, A and A Ofosu, (2010), “Foreign presence, spillovers, and productivity: Evidence from Ghana,” World Development, 38, 1114-1126.


1 Backward and forward linkages, respectively.

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Topics:  Development International trade

Tags:  Africa, FDI

Professor of International Economics, Kiel Institute for the World Economy

Christiane Krieger-Boden

Researcher, Kiel Institute for the World Economy

Researcher and industrial development officer, United Nations Industrial Development Organization