Description
This paper considers both elements and assesses the nature of the relationship between the two. In so doing, it seeks to establish the requirements that are necessary for FDI to have an impact on SME development, and in particular the role of governments and TNCs.
Small Scale Enterprise
Development and Foreign Direct
Investment in Africa
CHALLENGES AND OPPORTUNITIES
United Nations
Offce of the Special Adviser on Africa
Acknowledgments
The study has been prepared by Jeya Wilson. It has benefted from useful
comments and suggestions of Katrin Toomel. The work was carried out
under the overall direction and guidance of David Mehdi Hamam.
TABLE OF CONTENTS
EXECUTIVE SUMMARY
LIST OF ABBREVIATIONS
INTRODUCTION
PART I The Foreign Direct Investment (FDI) Scenario in Africa
PART II Strategies for Small Scale Enterprise Development in Africa
II. 1 Providing Accurate and Accessible Data
II. 2 Clusters and Small Scale Enterprise Development
II. 3 Local Content and its Impact on Small Scale Enterprise Development
II. 4 Skills Development and Capacity Building for Global Competitiveness
II. 5 Transnational Corporation (TNC) – Small and Medium Enterprise (SME) Linkages
and their Impact on Small Scale Enterprise Development
II. 6 Meeting Global Standards: Preparedness of African SMEs for Participation
in Global Value Chains
PART III CONCLUSIONS AND RECOMMENDATIONS
ANNEX Overview of sample enterprise clusters
REFERENCES
TABLES
Table 1 FDI In?ows 2000-2006
Table 2 Top African FDI Recipient Countries, 2003-2006 by 2006 ranking
Table 3 Bene?ts Of Linkages
Table 4 ExxonMobil’s National Content Strategy
FIGURES
Figure 1 FDI in?ows 2000-2006
Figure 2 FDI in?ows 2000-2006 Africa
Figure 3 Distribution by Sector of Cross Border M&As 2003-2006
Figure 4 Egypt SME Distribution by Sector
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7
8
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13
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2 3
EXECUTIVE SUMMARY
Te infow of foreign direct investment (FDI) and the development of small scale enterprises
(SMEs) are both essential driving forces for economic growth in Africa. Tis paper considers both
elements and assesses the nature of the relationship between the two. In so doing, it seeks to es-
tablish the requirements that are necessary for FDI to have an impact on SME development, and
in particular the role of governments and TNCs. Clusters, local content, capacity building and
skills training are seen as efective strategies for SME development. TNC-SME linkages are the
optimal strategy for ensuring transference of the benefts of FDI to SMEs, and they bring benefts
to TNCs as well.
To be successful, these strategies require input from all stakeholders: from TNCs, the willingness
to integrate local suppliers into their global value chains; from SMEs the commitment to attain
and sustain global standards; from host governments, the willingness to provide the necessary
infrastructure, invest in skills and technology training, and create an appropriate regulatory en-
vironment for TNC-SME linkages. Only through a combination of such inputs can small scale
enterprises in Africa develop and become competitive in the global market.
LIST OF ABBREVIATIONS
AfDB African Development Bank
DFID Department for International Development (UK)
FDI Foreign Direct Investment
GDP Gross Domestic Product
GNI Gross National Income
GTZ Deutsche Gesellschaft für
technische Zusammenarbeit
HDSA Historically Disadvantaged South African
IFC International Finance Corporation
IPR Intellectual Property Rights
LDC Less Developed Countries
M&As Mergers and Acquisitions
NEPAD New Partnership for Africa’s Development
NGO Non-Governmental Organization
NSD National Suppliers Development Program (Egypt)
OECD Organization for Economic Cooperation
and Development
OSAA Of?ce of the Special Adviser on Africa
SMEs Small and Medium Enterprises
TNC Transnational Corporation
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNIDO United Nations Industrial Development Organization
USAID United States Agency for International Development
2 3
INTRODUCTION
It is a generally accepted tenet of international development that
small scale enterprises (also referred to as SMEs)
1
play an impor-
tant role in alleviating poverty, especially in Africa. Programs
addressing African development have identifed private sector
development, and in particular small scale enterprise develop-
ment as a priority area for action
2
. Tere have been a number
of small scale enterprise development programs over the years.
Some have evolved from the relationships established with
transnational companies (TNCs) and private sector initiatives,
while others have been driven by governments, multilateral and
donor agencies.
Te global investment scene has witnessed a sea change in the
past decade. Te size, scope and methods of foreign direct in-
vestment (FDI) have changed dramatically in response to fac-
tors such as technological advances, privatization, changes in
the capital markets, and the growing liberalization of the regu-
latory environment governing investment. FDI is a key factor
in global economic integration and the internationalization of
business. For the TNC making the investment, it can provide
resources, new markets, greater efciency and cheaper produc-
tion facilities. For the host country that receives the investment,
FDI provides a source of new technologies, processes, products,
capital, and management skills. For small scale enterprises, FDI
represents access to markets, access to expertise and most of all
access to technology.
As SMEs in themselves cannot attract FDI, these infows do
not automatically result in small scale enterprise development.
Neither do TNC-SME linkages develop simply because there
is investment by a TNC. As a case in point, in East Africa only
10 per cent of major contracts are awarded to domestic frms
even though 90 per cent of total registered engineering frms
are local
3
. Rather, for SME development to take place requires
the intervention and the input of all stakeholders: the support-
ive policies of the host government; the willingness of TNCs to
open their global value chains to local frms; and the prepared-
ness of SMEs to supply world class products.
Tis paper regards small enterprises or SMEs as relative terms
that cover a wide range of formal and informal businesses. How-
ever, given the difculty of obtaining data on the informal sec-
tor and the lack of any evidence to indicate that FDI impacts
directly on the informal sector, this paper focuses only on the
formal sector.
1 The de?nition of a business as a small scale enterprise or SME differs according
to the source. The AfDB, for example, de?nes a SME as having less than 50 employ-
ees. The IFC classi?es SMEs as companies with total assets of less than $15 million.
2 For example, NEPAD, IFC, UNIDO, UNDP, DFID and TICAD.
3 OSAA (2007) The Private Sector’s Institutional Response to NEPAD: Review of current
practices and experiences in the East African sub-region, S. 44.
Although FDI in its classical defnition occurs when a company
from one country makes a physical investment in another coun-
try, the defnition has now been broadened to include many
forms, such as the direct acquisition of a foreign frm, construc-
tion of a facility, investment in a joint venture, or a strategic al-
liance with a domestic company. However, it is usually accepted
that an investor has to acquire at least 10 per cent equity for
it to be recognized as a direct investment enterprise
4
. FDI can
take several forms: the purchase of an existing frm through a
merger or acquisition (M&A); a start up project; a joint ven-
ture with local partners; or partial acquisition through licensing
agreements.
Material for this paper is drawn from a range of secondary
sources with the caveat that data relating to FDI and SMEs are
not readily available and not always consistent
5
. As this paper’s
prism is on the impact of FDI on the African economy in gen-
eral, and small scale enterprises in particular, the assessments are
focused mainly on the economic aspect, and not on issues such
as gender equity or the environmental consequences of FDI.
Te paper is in three parts. Te frst part analyses the FDI fows
into Africa in relation to FDI globally, and in terms of the main
recipients of FDI on the continent, including a sectoral analysis.
Te second part looks at strategies for small scale enterprise de-
velopment and focuses on the role of governments and TNCs in
assisting SMEs to beneft from FDI. It shows with examples, the
various approaches that can be taken to promote TNC-SME
linkages and have demonstrable benefts. Specifc programs
that develop local enterprises to be globally competitive are dis-
cussed. Te paper concludes with recommendations for action
to develop the small scale enterprise sector in Africa.
4 The IMF recommends using this percentage to differentiate between direct
investment and portfolio investment in the form of shareholdings. IMF Balance of Pay-
ments Manual, Fifth edition.
5 The sources include UNCTAD’s World Investment Reports, World Bank surveys, Econo-
mist Intelligence Unit, UNIDO, and academic research papers.
4 5
PART I
THE FDI SCENARIO
IN AFRICA
In 2006, FDI infow into Africa was at its highest at $36 bil-
lion (Table 1). Yet this was only 2.7 per cent of global FDI.
As this table and Figure 1 show, although globally total FDI
infows varied considerably during the period 2000-2006, the
small FDI infows into Africa did not follow the global trend
throughout this period but simply increased slowly in dollar
terms. However, as Figure 2 shows, the contribution to this
increase in FDI was largely as a result of investment in North
Africa.
Table 1
FDI in?ows 2000-2006
(Billions of dollars)
Source: UNCTAD World Investment Reports
Sectoral distribution by primary, secondary and tertiary sectors
6
based on cross border M&As in the period 2003-2006 shows
there are large fuctuations on a year-by-year basis in all sec-
tors (Figure 3). Although the primary sector has traditionally
been the dominant sector in Africa, the tertiary sector
shows an appreciable increase during this period. Tis
is mostly accounted for by increases in sales of fnan-
cial institutions and in transport, storage and telecom-
munications in 2005 and 2006 as a result of sectoral
liberalisation in several countries
7
. Te impact of this
liberalization on SME development has depended on
the specifc industry. For example in Egypt when, for the frst
time, a fully government owned bank was part-sold to a foreign
entity, there was little, if any, impact on SME development
8
. By
contrast, Ghana’s liberalisation of allowing foreign ownership
in the telecommunications industry had a direct impact on
small scale enterprise development (see the example of MTN
discussed in Part II.5)
A major reason for the low FDI in the secondary sector is the
limited production facilities for manufacturing in many African
countries. Tis factor has been a barrier to capitalizing on the
opportunities ofered by the preferential market access for tex-
tiles under the US Africa Growth and Opportunity Act, and the
Everything But Arms Initiative and the Cotonou Agreement of
the European Union. In Botswana, for example, where the tex-
tile sector comprises 12 per cent of the manufacturing sector and
nearly 13 per cent of SMEs are textile companies; this failure has
had a negative efect on small scale enterprise development
9
.
6 The primary sector includes mining, quarrying and petroleum. The secondary sector cov-
ers manufacturing and includes food, beverages and tobacco, machinery, motor vehicles
and stone, clay, glass and concrete products. The tertiary sector covers services and
includes electricity, gas and water distribution, transport, storage and communications,
?nance and trade.
7 UNCTAD (2007) World Investment Report, p 38
8 80 per cent of the Bank of Alexandria to Sanpaolo, an Italian ?nancial institution.
9 Mbambo B and Cronje J (2007) Learning with a Website for the Textile Industry in Bo-
tswana. Educational Technology & Society, 10 (1), pp 157-170.
Figure 1
FDI in?ows 2000-2006
(Billions of dollars)
Source: Generated from Table 1
1600
1400
1200
1000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006
World Africa
2000 2001 2002 2003 2004 2005 2006
World ($bn) 1 408.3 851.1 618.1 557.9 742.1 945.7 1 305.9
Africa ($bn) 8.9 16.3 12.4 18.5 18.0 29.6 35.5
% world total 0.6 1.9 2.1 3.3 2.4 3.1 2.7
Figure 2
FDI in?ows 2000-2006 Africa
(Billions of dollars)
Source: Generated from data in Economist Intelligence Unit (2006)
World Investment Prospects to 2011
25
20
15
10
5
0
2000 2001 2002 2003 2004 2005 2000
Sub-Saharan Africa North-Africa
4 5
In the period 2003-2006, ninety per cent of FDI fows into
Africa were concentrated in twelve countries (Table 2). In
2006, all six countries in North Africa received over $1 bil-
lion, making the sub-region unique in the continent. Among
other factors, this is attributable to buoyant energy markets
and relatively low extraction costs for hydrocarbon, large scale
privatization of state owned assets, and access to EU markets
10
.
Table 2
Top African FDI Recipient Countries, 2003-
2006 by 2006 ranking
(Millions of dollars)
2003 2004 2005 2006
Egypt 237 2 157 5 376 10 043
Nigeria 2 171 2 127 3 403 5 445
Sudan 713 1 511 2 305 3 541
Tunisia 821 639 782 3 312
Morocco 2 314 1 070 2 946 2 898
Algeria 634 882 1 081 1 795
Libya 143 357 1 038 1 734
Equatorial Guinea 1 431 1 651 1 873 1 656
Chad 713 495 613 700
Ghana 137 139 145 435
South Africa 720 799 6 251 - 323
Angola 3 505 1 449 - 1 303 - 1 140
Source: UNCTAD World Investment Reports data
Egypt, the largest recipient of FDI in Africa has more than 1.6
million registered SMEs, and their distribution by sector is giv-
10 Economist Intelligence Unit (2007) World Investment Prospects to 2011, p 57
en in Figure 4. It can be seen that the majority of SMEs are in
the tertiary sector, and none in the mining sector. However, as
more than 80 per cent of FDI infows into Egypt in 2006 went
into non-extractive activities, there is potential scope for small
scale enterprise development in these sectors
11
.
South Africa had the highest infow of all African countries in
2005. A major contributing factor for this was the acquisition of
60 per cent of a South African bank
12
. By contrast, FDI was nega-
tive in 2006 because of the sale of foreign owned equity in gold
mines to a local mining company
13
. Both these transactions have
an impact on SME development because of South Africa’s Min-
ing Charter and Financial Sector Charter both of which stress the
need for preferential procurement and enterprise development
for small black and women-owned enterprises, referred to as “His-
torically Disadvantaged South African” (HDSA) companies.
Other African countries with substantial increases in FDI infows
are Burundi, Cape Verde, Djibouti, Ethiopia, Gambia, Guinea-
Bissau, Madagascar and Somalia
14
. Tese infows were mainly di-
rected at new oil exploration and mining where there are limited
opportunities for small scale enterprise development.
In the extractive industries, local input is minimal because of
the high degree of specialization required in exploration and ex-
traction. Downstream activities are mainly confned to refning,
and local sourcing is generally limited to catering, cleaning and
construction services. Te opportunities for domestic SMEs to
beneft from FDI are therefore very limited, and the conditions
have to be proactively created for SME participation. Some of
the programs that have successfully incorporated small scale en-
terprises into TNC value chains in the extractive sector form
part of the discussion in the next section.
11 UNCTAD (2007) World Investment Report, p 36.
12 ABSA, by Barclays Bank UK.
13 Sale by Canadian ?rm Barrick in South Deep mine and Russian ?rm Polyus in Gold?elds
14 UNCTAD (2007) World Investment Report, pp 251-2.
Figure 3
Distribution by Sector of
Cross Border M&As 2003-2006
Source: Compiled and generated from UNCTAD
World Investment Reports
Secondary Primary Tertiary
80%
70%
60%
50%
40%
30%
20%
10%
0%
2003 2004 2005 2006
90%
100%
Figure 4
Egypt SME Distribution by Sector
Source: Compiled from Ministry of Finance, Egypt (2005) Pro?le of
M/SMEs in Egypt. English translation. SME Development Unit.
Transport
3%
Construction
2%
Mining
0%
Finance
4%
Services
17%
Manufacturing
18%
Electricity
1%
Wholesale and Retail
55%
6 7
PART II
STRATEGIES FOR SMALL
SCALE ENTERPRISE
DEVELOPMENT IN AFRICA
Te biggest challenge facing small scale enterprises in Af-
rica is the globalization of value chains with the production
of goods and services increasingly fragmented across enter-
prises and countries. Te majority of SMEs interviewed by
the OECD in seven in-depth country/enterprise case stud-
ies which included two African countries - Egypt and South
Africa - were not able to identify their competitive strengths
within the value chain, and some explicitly pointed to the
lack of time and resources to understand the evolving global
context. Te SMEs stated that government support was criti-
cal to facilitate their participation in global value chains
15
.
Intervention by government and the cooperation of TNCs are
necessary for small scale enterprises to beneft from FDI. Tis
part looks at ways in which SMEs can be integrated into global
value chains, the obstacles facing such integration, and the ac-
tion that can be taken by TNCs and governments to facilitate
the process.
II. 1
Providing Accurate and Accessible
Data
One of the frst steps to facilitate small enterprise development
is for governments to take the initiative to ensure that there is
reliable and detailed data on SMEs. Te OECD takes the view
that, given the diverse, incomplete and defcient state of SME
statistics, careful analysis of the raw data is important before at-
tempting to draw any policy conclusions. In addition, it under-
lines that SME statistics are a sub-set of business statistics for
the economy as whole and should not be seen in isolation
16
.
A research team analyzing the role of SMEs in the Egyptian
economy cites the lack of available data on SMEs in Egypt as
a pressing limitation. In many instances even when the data is
available, it is outdated. In addition, despite a number of wide
ranging SME surveys conducted by donor-funded projects,
data remains inaccessible to both specialized research institu-
tions and the public
17
. Tis lack of accessible and accurate data
is confrmed in an UNCTAD study on South Africa that also
found very little information on the nature of the contribution
of the small business sector to the economy, and no statistical
information on TNC-SME linkages
18
.
15 OECD (2007b) Enhancing the Role of SMEs in Global Value Chains. OECD background
report for OECD conference, Tokyo, 2007, p 5.
16 OECD (2004c) SME Statistics: Towards a More Systematic Statistical Measurement of
SME Behaviour, p 6.
17 Ministry of Finance, Egypt (2005) Pro?le of M/SMEs in Egypt. English translation. SME
Development Unit, p 5
18 Robbins, G (2006) Strategies and Policies on TNC: SME Linkages Country Case
Studies: South Africa. A study for UNCTAD.
II. 2
Clusters and Small Scale
Enterprise Development
Clusters provide small scale enterprises the opportunity to
take advantage of FDI and global value chains by being able to
position themselves to access capital, technology and markets.
By doing so, they strengthen their comparative advantages in
a sustainable manner and become attractive sites for FDI. Te
presence of TNCs and appropriate intervention by govern-
ment become crucial in integrating clusters into global value
chains
19
.
Clusters are defned by the combination of two characteristics:
sectoral specialization and geographical location. Tey allow
for economies of scale and the leveraging of local comparative
advantage. Tey develop an experienced local pool of skilled
labour and a network of frms cooperating in complementary
areas of specialization along cluster-based value chains. Clus-
ters improve competitiveness by increasing the productivity of
the enterprises in the cluster through product specialization
and collective efciency, and they foster teamwork and coop-
eration as enterprises in a cluster see themselves as being inter-
dependent as allies with a shared vision and goal.
Te potential as well as the challenges of clusters are seen in
the overview of 11 enterprise clusters in the Annexe. Te au-
tomotive cluster at Nnewi in Nigeria is one of these clusters
20
.
It is made up of four villages, with each village hosting a num-
ber of automotive spare parts manufacturing frms of varying
sizes. Tere is a total 85 frms with an average of 12 employ-
ees. Over the years, Nnewi entrepreneurs developed close links
with automotive spare part producers and wholesalers in Asian
countries. Tese links proved invaluable when Nnewi traders
began to develop their own production activities and were able
to obtain detailed advice and other technical assistance from
their Asian suppliers on the type of machinery and other tech-
nologies they should acquire and the specifc skills needed to
operate these efciently
21
.
Te Nigerian government has not, however, given the level
of government support that the cluster requires. In a survey
among the frms in the cluster where various government poli-
cies were examined, less than seven percent of the frms indi-
cated that there was sufcient support from government for
the needs of the cluster such as water, electricity, transport, IT
and the protection of intellectual property rights (IPR)
22
. Te
role of trade and manufacturing associations has been crucial
in the absence of efective government support, particularly
the Nnewi Chamber of Commerce and the Nigerian Associa-
tion of Small Scale Industries.
19 Zeng, DZ (2006) Knowledge, Technology and Cluster-based growth in Africa,” World
Bank Institute, April 2006
20 Abiola, B (2006) “The case study of Nnewi auto parts cluster in “Nigeria,” World Bank
Institute, and Zeng, D Z (no year given) African Experience in Cluster Development. World
Bank Institute, ppt.
21 Abiola, op. cit, p 21.
22 ibid, p 17.
6 7
In Kenya, the government has deliberately chosen to limit its
role in the cut fower cluster which has 5 000 to 6 000 small
scale growers and 85 large growers. Tis cluster has six per cent
share of the world market in cut fowers
23
. Te government’s
role here stands in contrast to its historical role in the cofee
industry where marketing boards and centralized cooperatives
run by the government limited the competitiveness of the cofee
industry
24
. In the case of the cut fower cluster, the government
set up a specialized agency
25
to promote and facilitate the in-
dustry, and made foriculture a priority sector. It created an en-
abling business environment, enacting laws to protect IPR with
regard to new plant varieties, promoting quality standards and
providing incentives for exports. Direct involvement, however,
has been minimal and this “hands-of” approach has encour-
aged private sector growth and development
26
. Small scale fori-
culturists have, however, requested government intervention in
diversifying export destinations and becoming part of an inte-
grated supply chain in preference to an ad hoc value chain sup-
plying the Dutch auction system in which they currently oper-
ate. Tey also need assistance in incorporating technology and
tougher environmental standards into production practices.
II. 3
Local Content and its Impact on
Small Scale Enterprise Development
Te eforts and initiatives by African countries to develop in-
dustry clusters around TNC-based mineral extraction have
met with only limited success. To remedy the situation, the
level of local content is ofen specifed in contracts, with
TNCs being asked to specify how they plan to increase such
content, with the percentage of local products or services,
such as automotive components for TNC assembly plants,
being measured either in terms of volume or value
27
. From
the 1960s, the Nigerian government attempted to increase
local content, but the level remained around fve per cent
from the 1960’s to 2006. In a further attempt to foster link-
ages between TNCs and local frms, a target of 45 per cent
local content was set for oil-related projects by 2006 and 70
per cent by 2010. However, Nigeria has not yet reached 20
per cent local content according to one source, although the
ofcial fgure is currently given as between 33 and 35 per
cent
28
. Te reason given for not reaching the target is the lack
of Nigerian companies with the required capabilities and
technical skills
29
. Hence it is evident that to attain high levels of
local content requires the development of local suppliers who
can add value, and that this cannot happen by decree alone.
23 Hornberger, K et al (2007) Kenya’s Cut Flower Cluster. Harvard Business School, p 15.
24 ibid, p 23.
25 The Horticultural Crops Development Authority.
26 Zeng, D.Z (2007) African Experience in Cluster Development. World Bank Institute.
27 Discussed in detail in Black, A and Bhanisi, S (2006) “Globalisation, Imports and
Local Content in the South African Automotive Industry, Accelerated and Shared Growth
Conference 2006.
28 Reported in Nigeria’s business paper “This Day” 12 November 2007.
29 ibid.
Te South African government has had greater success with
the Petroleum and Liquid Fuels Charter which sets a target for
HDSA companies to own 25 per cent of the total equity in the
operating assets of the oil sector by 2011
30
. To achieve this tar-
get, the government has put several interventions in place. Tese
include: compiling and updating a list of HDSA suppliers; re-
quiring all licensees to contribute funds toward an “Upstream
Training Trust” to fund skills development strategies for HD-
SAs; promoting HDSA companies as joint venture partners in
expansion or upgrades by TNCs in the oil sector; and encourag-
ing the involvement of small scale HDSA companies in market-
ing and distribution because entry costs are lower than in explo-
ration or refning and there is an immediate, regular cash fow.
II. 4
Skills Development and
Capacity Building for Global
Competitiveness
To survive international competition, SMEs require the man-
agement skills and production expertise to be able to match
product quality requirements of TNCs and to scale up quick-
ly. Te availability and quality of domestic suppliers is a key
determinant to participation in TNC global value chains
31
.
Te Egyptian government, in partnership with the private sec-
tor, set up the National Suppliers Development Program aimed
at making hundreds of small suppliers globally competitive.
Trough this initiative, the Government provides active sup-
port in turning enterprises currently supplying the domestic
market into outward-oriented suppliers with a frm foothold
in an existing global supply chain. Te programme assists frms
to improve quality and lower production costs in order to be
competitive in the globalized market. Both UNCTAD and the
American Chamber of Commerce Egypt note that the Govern-
ment’s initiative is an example of how a country can attract FDI
without risking the demise of local producers, and that without
this type of programme, Egyptian producers, like many other Af-
rican producers, risk becoming marginalized even in their own
markets
32
. Among the TNCs that have helped pioneer projects
under the program are General Motors, which owns Egypt’s larg-
est vehicle assembly plant, DaimlerChrysler, Americana, Cad-
bury and Hero.
Te Egyptian government is also playing an active role in sup-
porting the country’s
ICT sector. Te initiatives include:
“smart villages” which are high tech business parks that provide
enterprises with world class infrastructure at a reasonable cost;
subsidies for training, marketing and technological develop-
ment; and partnerships with TNCs such as Siemens, Alcatel
and Cisco to training ICT graduates
33
.
30 Charter for the South African Petroleum and Liquid Fuels Industry on Empowering
Historically Disadvantaged South Africans in the Petroleum and Liquid Fuels Industry
31 UNCTAD (2001) World Investment Report, p xxiii
32 UNCTAD (2006) World Investment Report, p 47; AmCham Egypt Bulletin, November 2006.
33 UNCTAD (2007c) Enhancing the Participation of Small and Medium Sized Enterprises
in Global Value Chains, Note by the UNCTAD Secretariat, p 12.
8 9
Te government initiatives are paying dividends with SMEs
in the ICT sector. Small scale enterprises supplying Microsof
Egypt have been able to leverage the reputation of their lead
partner through the “lighthouse efect” of having credibility be-
stowed by a global player. SME suppliers that are certifed Mi-
crosof Gold Partners have used the Microsof network for other
projects both in Egypt and in the region
34
. At the same time the
supplier network assists Microsof with new market entry and
local credibility.
Part of the South African government’s intervention in the oil
sector is through the Sector Education and Training Authority,
which is a statutory body that operates in 23 sectors and was re-
launched in 2004 to respond to evolving skills needs. In addi-
tion, the Small and Medium Enterprises Development Program
(SMEDP) was complemented by the Skills Support Program
in 2005 as a shortage of skilled labor was a serious constraint
on attaining competitiveness through FDI. Te program gives
training and promotes the development of advanced skills
for SMEs to engage with TNCs and beneft from FDI. Over
12,000 enterprises have benefted from the SMEDP. Another
programme, the Workplace Challenge Programme, focuses on
adopting world class manufacturing practices and assists enter-
prises to improve their productivity and competitiveness. Eleven
clusters incorporating nearly 100 enterprises have been assisted
under the program
35
.
II. 5
TNC –SME Linkages and their
Impact on Small Scale Enterprise
Development
Linkages are a tried and tested method by which small scale en-
terprises can beneft from TNCs and is the predominant form of
interface between the two. When a TNC invests in a country, it
has three options for obtaining inputs in that country: import,
produce locally in-house, or procure from a local supplier. Link-
ages are an optimal way for an SME to beneft as a local supplier
and to meet the criteria set by the TNC. Tey are the strongest
channel for the transference of skills, knowledge and technology
from TNCs.
Anglo Zimele in South Africa is an example of a mining TNC’s
linkage programme. Started in 1989 as a small business initiative
by Anglo American, the programme is based on the three pil-
lars of procurement, business development and fnance. Anglo
American’s procurement department identifes HDSA suppliers
who can participate in their supply chains, and a transfer of skills
transfer and strategic guidance are given to these companies. A
mining fund assists small black-owned junior mining companies
with funding and technical support during the typically high risk
exploration and pre-feasibility phases of mining projects, bring-
ing them to commercially bankable positions. Te programme
has invested in over 54 SMEs and supports over 2 000 direct
34 OECD (2007b) Enhancing the Role of SMEs in Global Value Chains. OECD background
report for OECD conference, Tokyo, 2007, p 50.
35 South Africa Yearbook 2007, Chapter 7.
jobs. An evaluation carried out in 2005, showed a survival rate
of 72 per cent over eight years
36
.
Te signifcant benefts that linkages aford for both the SMEs
and the TNCs are summarized in Table 3.
Table 3
Bene?ts Of Linkages
Source: Adapted from IFC (2007a) Business Linkages: Lesson,
Opportunities and Challenges.
Six main types of mechanisms have been identifed
37
through
which TNCs partner with each other or with other stakeholders to
support business linkages and SME development, ofen with the
explicit goal of overcoming some of the obstacles faced by SMEs:
• linkages along individual company value chains
• groups of companies in the same industry sector
or location working collectively together
• traditional trade and industry associations enhanc-
ing their capacity to better serve SMEs
• joint public-private fnancing mechanisms
• dedicated small enterprise support centers
• multi-stakeholder public policy structures
An example of an individual company’s linkages contributing to
SME development is MTN, a telecommunications TNC which
operates in 15 African countries. MTN has extensive backward
36 Bickham, E (2006) Local Business Development- Anglo American’s experience in South
Africa, ppt.
37 Nelson J (2007) “Building Linkages for Competitive and Responsible Entrepreneurship”
UNIDO and Harvard University.
BENEFITS TO SMALL
SCALE ENTERPRISES
Knowledge transfer and
technology upgrading
Skills, capacity and stan-
dards enhancement
Access to new markets,
domestic and foreign
Prospects for further FDI
especially into cluster
Diversi?cation of
customer and market
structures
Risk-sharing through joint
funding and operations
Access to ?nance
Opportunities to up-
grade, innovate and in-
crease competitiveness.
More stable buyer or
producer relationships
Growth in size and
turnover
BENEFITS TO TNCS
Reduction in procure-
ment, production and
distribution costs.
Opportunity for cor-
porate social respon-
sibility combined with
pro?tability.
Local credibility and
reputation.
Greater integration in
domestic markets.
Increase in knowledge
of and access to local
consumers.
Access to new
innovation
Import substitution
and foreign exchange
savings.
Greater ?exibility in
changes to design and
production because
supply is local.
8 9
and forward linkages
38
with small support companies that pro-
vide a wide platform of services to it. MTN Ghana, for instance,
reaches the market through a distribution infrastructure that has
35 distributor ofces, 575 sub-distributors, over 91 000 retailers
and some 40 000 electronic voucher resale points. MTN Nigeria
has extensive wholesale and retail distribution channels, with 161
appointed distributors and 19 451 second and third tier points
39
.
TNCs can, and do, take SME development and linkage pro-
grams beyond their own value chains. Ofen they do this for
reasons of public relations or corporate social responsibility as
it demonstrates their commitment to the community, strength-
ens their license to operate, and gives recognition to the central
role that a dynamic SME sector plays in local economic devel-
opment.
Recognising that access to fnance is a perennial problem for
SMEs, Shell launched a fund of nearly $100.00 million in
2006, with 70% of capital leveraged from African partners,
open to SMEs in all sectors in Tanzania, Kenya Uganda, Ni-
geria, Rwanda and South Africa
40
. As of October 2007, 59
SMEs have been fnanced with 33% going to start-ups. A fur-
ther 492 SMEs have received business development assistance
41
.
BP Tanzania chairs what is known as the Private Sector Initia-
tive, which brings together TNCs to seek out better ways to
integrate local SMEs into their supply chains. An SME sup-
plier database of 506 Tanzanian suppliers is shared between the
procurement departments of the TNCs, resulting in an expand-
ed market and increased opportunities for the SMEs while at
the same time reducing the risks associated with such transac-
tions
42
.
In Chad, ExxonMobil developed a National Content Strategy
when faced with the challenge of local enterprises that were not
well enough equipped to win contracts and, when they did, had
difculty sustaining acceptable performance levels. ExxonMobil
collaborated with the IFC and the local chamber of commerce
in overcoming the challenge, and this benefted other TNCs in
Chad as well (Table 4).
A very successful public-private partnership strategy for
linkage creation has been South Africa’s approach to indus-
trial development through the Motor Industry Develop-
ment Program introduced in 1995. It helped establish com-
petitive and relatively integrated linkages between motor
vehicle assembly plants and local frms supplying a range
of components
43
. Tere are now more than 220 automo-
tive component manufacturers in South Africa, and anoth-
er 150 that supply the industry on a non-exclusive basis
44
.
38 Backward linkage is the use by one ?rm or industry of produced inputs from another
?rm or industry. Forward linkage is the distribution chain connecting the producer or sup-
plier with customers.
39 and about 30 000 informal distributors, MTN Website.
40 Aspire Funds in partnership with GroFin. Shell Foundation website and 2007 Report.
41 ibid.
42 PSI-Tanzania website.
43 BMW, Daimler Chrysler, VW, Toyota and most recently Renault have assembly plants
in South Africa.
44 Flatters, F (2005) The Economics of MDIP and the South African Motor Industry,
Queen’s University; South Africa investment website.
Table 4
ExxonMobil’s National Content Strategy
Source: IFC (2007a) Business Linkages: Lesson, Opportuni-
ties and Challenges.
II.6
Meeting Global Standards: Pre-
paredness of African SMEs for Par-
ticipation in Global Value Chains
Te globalization of value chains constitutes a major challenge
for small scale enterprises accustomed to serving local and na-
tional markets. Meeting the strict product standards and quality
required for participation in global value chains is difcult and
costly.
An UNCTAD study conducted in fve countries, including
Uganda and South Africa, indicates that TNCs, with a few ex-
ceptions, are reluctant to cooperate with the SME sector because
of shortcomings such as lack of quality, high production costs,
poor reliability and a preference for cash transactions because of
limited access to credit. As a result, many TNCs prefer either to
import, purchase from other TNC subsidiaries, or produce in-
house rather than investing in local SME linkages
45
.
45 UNCTAD (2006) Promoting TNC–SME linkages to enhance the productive capacity of
developing countries’ ?rms: A policy perspective.
LINKAGE
ACTIVITY ACTIONS OUTCOME
Procurement
Break up contracts into sizes
more manageable for SMEs
Introduce shorter payment
cycles
Award contracts for longer
terms
Using local SME
suppliers helps inst-
itutionalize Exxon
Mobil’s commitment
to the community
and brings a high
return on reputation.
Supplier
base
Work with external partners to
develop supplier database
Collate information on contact
details, goods and services,
as well as needs for over 60
potential suppliers assessed
by ExxonMobil.
Additional 1,000 SMEs
surveyed by IFC and local
chamber of commerce.
ExxonMobil has ac-
cess to reliable and
actionable informa-
tion on local supplier
base.
Supplier
development
IFC establishes Enterprise
Centre providing SME capac-
ity building so that suppliers
can qualify for participation in
ExxonMobil and other TNC’s
value chains.
SMEs may only bid in areas in
which they have demonstrat-
ed adequate competence.
300 SMEs are
trained, and con-
tracts signed to
the value of $22.5
million.
10 11
South African SMEs in the Toyota supply chain, however, ex-
press concern about their ability to upgrade and respond in
time to deliver products that are in line with the expectations of
Toyota in terms of quality, supply standards and delivery times.
Teir proximity to the local Toyota plant, the ability to produce
a component according to specifcation and a history of rela-
tionship does not necessarily guarantee an ongoing relationship
with Toyota.
Te suppliers feel that many of the requirements are onerous
and complex, and absorb administrative time but do not pro-
vide a basis to obtain a premium in prices in the automotive
value chain
46
. Tey list among their requirements assistance
from government on skills development, investment in technol-
ogy development, increase in safety and security, and improved
infrastructure
47
.
Even when SMEs do not enter into the global value chain of
TNCs with which they have linkages, they still feel compelled to
conform to those international standards for technology, quality,
delivery and afer sales service in their particular industry. SMEs
also have to adapt routines and practices developed at the cluster
level to administrative and managerial practices set by interna-
tional buyers. To mitigate this pressure on SMEs, governments
should provide assistance by ensuring, for example, that national
certifcation systems do not impose an excessive burden on small
frms and encourage SME participation in the standard-setting
process.
Business organizations such as chambers of commerce and pro-
fessional associations can also help as most members of cham-
bers are SMEs. Te Zululand Chamber of Commerce in South
Africa, for example, has not only worked with TNCs to develop
linkages with small suppliers, but also has a system of accredi-
tation that gives potential business partners confdence in the
capabilities of accredited suppliers
48
. Tis is a model that could
well be replicated elsewhere as it is important to map and identi-
fy the extent to which local capabilities match the input require-
ments of TNCs, and the scope for local enterprises to move up
the value chain. Part of the exercise is technology benchmarking,
providing support for global standards such as ISO certifcation
and skills audits. Such an analysis is essential for a linkage strat-
egy as it assists the government in the allocation of resources.
PART III
CONCLUSIONS AND
RECOMMENDATIONS
Tere is a symbiotic relationship between the TNCs that invest
in a host country and the SMEs in that country. Tis paper has
considered the nature of this relationship from four aspects: the
pattern and fow of FDI to Africa; the opportunities and chal-
lenges faced by small scale enterprises in benefting from FDI;
46 OECD (2007b) Enhancing the Role of SMEs in Global Value Chains. OECD background
report for OECD conference, Tokyo, 2007, p 56.
47 UNCTAD (2007c) Enhancing the Participation of Small and Medium Sized Enterprises in
Global Value Chains, Note by the UNCTAD Secretariat, p 9.
48 ibid
the response of TNCs to creating linkages with SMEs; and the
role of government in assisting small scale enterprises to beneft
from FDI.
FDI infows to Africa, despite record levels, remain but a small
part of global FDI. Virtually all the infow goes to a handful of
countries, the majority of which are in North Africa, and the
FDI infow to sub-Saharan Africa is abysmally low. SMEs in
Africa face constraints due to a lack of skills, technology and
fnance, as well as a lack of economies of scale. Although this
paints a gloomy picture, FDI can, and does bring an array of ben-
efts in terms of capital, skills, technologies, processes, products,
and markets. As examples in this paper have shown, SMEs have
gained such benefts through linkages with the TNCs that make
the investment.
The further enhancement of TNC-SME linkages, how-
ever, is contingent upon:
• Te willingness of the SMEs to reach and sustain global
standards.
• Te willingness of the TNCs to integrate local small sup-
pliers into their global value chains.
• Te willingness of governments to create a regulatory en-
vironment that encourages small scale enterprise devel-
opment, to invest in upgrading the skills and techno-
logical capabilities, and to implement policy promoting
sector-specifc FDI and TNC-SME link ages.
Te reluctance of TNCs to engage with local suppliers is a salu-
tary lesson for SMEs. Tere is an onus on SMEs that want the
“Triple A” of: access to expertise; access to markets, especially in-
ternational markets; and access to technology. Tey have to take
responsibility for themselves to take advantage of the benefts of
FDI, and aim at achieving global standards.
TNCs need to venture beyond their “comfort zone” supplier
base, and not consider their investment exclusively in terms of
low wages and low labour standards. Outsourcing non-core
business to local suppliers has its own “Triple A”: access to lo-
cal consumers; access to local knowledge; access to loyalty. In
the African context, brand loyalty ofen lasts a lifetime, and the
return on reputation has an incalculable value. TNCs that have
opened their linkage programs to SMEs in other sectors in ad-
dition to their own, as examples in this paper show, help create
an environment that is ultimately in their own long term inter-
ests. In short, integration of local SMEs into TNC global value
chains ought to become a business imperative.
Government intervention can take the form of diferent inputs.
Investing in sound infrastructure such as water, electricity, roads
and IT services not only attracts TNCs but also ensures that
local enterprises are not at a competitive disadvantage. When
a government invests in clusters and supplier development pro-
grams, and establishes training centers and programmes that
provide technical assistance, skills training and capacity de-
velopment, as the examples in this paper show, it assists small
suppliers to upgrade skills and technology to take advantage of
the benefts of FDI. Creating specialized agencies to promote
10 11
and coordinate industry development, as in the case of the cut
fower industry in Kenya, establishes close communication
with enterprises and clusters in growth sectors that have TNC
connections.
When governments are sector-specifc in attracting FDI there
are benefts to be gained, as the ICT sector in Egypt and the
automotive sector in South Africa demonstrate. Even in the
extractive sector, which is arguably the most difcult sector
for SME linkages, the South African industry charter shows
the positive impact when there is local content reservation for
SMEs belonging to a designated group, as long as there is suf-
fcient capacity and skills to meet the requirements of global
value chains. Tax and other incentives such as a quid pro quo
agreement, whereby TNCs are encouraged to work with local
frms in return for certain concessions, also help in encouraging
and supporting TNCs to establish linkages with SMEs within
their own value chain and beyond.
African governments need to capitalise on the opportunities
for continental and regional integration. One of the disincen-
tives for investment is the small size of many African markets
and the lack of integration between them. UNCTAD notes
that, apart from a few countries such as Egypt and South Af-
rica, African countries generally lack linkages between TNCs
and local enterprises, and eforts to promote regional integra-
tion have been too limited to allow economies of scale. As a re-
sult, SMEs are unable to participate competitively in the inter-
national production networks of TNCs
49
. Assisting enterprises
to meet global standards through defning sectoral standards,
policies and regulations would ensure better integration with
the global economy. It would also facilitate greater FDI which,
if correctly targeted, act as a catalyst for small scale enterprise
development
With global integration, the protection of IPR is an increasing-
ly important area in TNC-SME linkages, as technology trans-
fer is not only from TNC to SME but can fow in the other di-
rection as well. Te OECD Guidelines at present refer only to
the transfer of technology and the need for protection of IPR
from TNCs to other partners, as it is assumed that TNCs are
the main conduit of technology transfer across borders
50
. Gov-
ernments should, as a matter of priority, include protection for
technology transfer from SMEs to TNCs, as inadequate pro-
tection of IPR can inhibit the incentive to innovate and have
negative consequences for small scale enterprise development.
Business organizations play a critical role, as do multilateral and
donor agencies, in small scale enterprise development. Te in-
clusion of business organizations as a key stakeholder improves
the advocacy and representation of the interests of SMEs. As
an intermediary, business organizations give SMEs a stronger
voice and promote the requirements of small businesses with
policy makers, especially with regard to legal and regulatory
reforms. From the perspective of multilateral agencies and do-
nor countries, the international agenda on FDI and small scale
49 UNCTAD (2006) World Investment Report, p 45.
50 Section VIII Science and Technology, OECD Guidelines for MNEs, Revision 2000, cited
in ibid, p 7.
enterprise development is a complex one with a plethora of
programs
51
. Te challenge lies in the monitoring and evalua-
tion of business linkage activities, as the metrics are not always
congruent in terms of the business impact on the one hand,
and the development impact on the other. Te agencies also
need to expand, refne and reconcile their existing databases on
FDI and SMEs, especially where there are discrepancies within
the same study or between diferent studies, as ensuring the
reliability and accuracy of data enables policy decisions to be
made on a more informed basis.
FDI measurement needs to be based not only on quantita-
tive values but also on quality. Tis concept of quality ought
to incorporate not only job creation and technology transfer
but importantly the long term commitment of a TNC and the
extent to which it establishes mutually benefcial linkages with
local suppliers. In such a qualitative approach, value should be
imputed to the extent of the interaction, and networking with
domestic enterprises, and the opportunities that are created
through the partnership for innovation and value added func-
tions as demonstrated in the case of Microsof Egypt.
Te task of ensuring that the increase in FDI in Africa trans-
lates into tangible small scale enterprise development does not
rest with TNCs, governments, SMEs or multilateral agencies
alone. It is only when collective responsibility is taken that the
developmental goals of African governments and the business
goals of TNCs can become congruent and small scale enter-
prises truly beneft.
51 Including, the IFC’s Business Linkages Program and its Private Enterprise Partnership
for Africa, UNDP’s Growing Sustainable Business initiative, and UNCTAD’s Business Link-
age Initiative. GTZ, DFID, USAID and most donor agencies have small business develop-
ment initiatives in one form or another. NEPAD has private sector development at the core
of the implementation of its projects, and both the-Africa-Asia Business Forum and the
Tokyo International Conference for Africa’s Development have sought to boost the expan-
sion of investments by Asian ?rms.
12 13
ANNEX
Overview of sample enterprise clusters
CLUSTER COUNTRY
NO. OF
FIRMS
FIRM SIZE (NO.
OF EMPLOYEES PRODUCTS MAJOR CHALLENGES
LAKE VICTORIA Uganda
17 ?sh
plants not available
Fish production and
processing
Falling ?sh stock and EU quality
standards
MWENGE Tanzania 2 200 15 – 20 Handicrafts
Lack of ?nance, weak ?rm capac-
ity, weak public institutions and
infrastructure
KEKO Tanzania 2 – 130 not available Furniture
Weak infrastructure, lack of tech-
nological support and access to
?nance
NNEWI Nigeria 85
This paper considers both elements and assesses the nature of the relationship between the two. In so doing, it seeks to establish the requirements that are necessary for FDI to have an impact on SME development, and in particular the role of governments and TNCs.
Small Scale Enterprise
Development and Foreign Direct
Investment in Africa
CHALLENGES AND OPPORTUNITIES
United Nations
Offce of the Special Adviser on Africa
Acknowledgments
The study has been prepared by Jeya Wilson. It has benefted from useful
comments and suggestions of Katrin Toomel. The work was carried out
under the overall direction and guidance of David Mehdi Hamam.
TABLE OF CONTENTS
EXECUTIVE SUMMARY
LIST OF ABBREVIATIONS
INTRODUCTION
PART I The Foreign Direct Investment (FDI) Scenario in Africa
PART II Strategies for Small Scale Enterprise Development in Africa
II. 1 Providing Accurate and Accessible Data
II. 2 Clusters and Small Scale Enterprise Development
II. 3 Local Content and its Impact on Small Scale Enterprise Development
II. 4 Skills Development and Capacity Building for Global Competitiveness
II. 5 Transnational Corporation (TNC) – Small and Medium Enterprise (SME) Linkages
and their Impact on Small Scale Enterprise Development
II. 6 Meeting Global Standards: Preparedness of African SMEs for Participation
in Global Value Chains
PART III CONCLUSIONS AND RECOMMENDATIONS
ANNEX Overview of sample enterprise clusters
REFERENCES
TABLES
Table 1 FDI In?ows 2000-2006
Table 2 Top African FDI Recipient Countries, 2003-2006 by 2006 ranking
Table 3 Bene?ts Of Linkages
Table 4 ExxonMobil’s National Content Strategy
FIGURES
Figure 1 FDI in?ows 2000-2006
Figure 2 FDI in?ows 2000-2006 Africa
Figure 3 Distribution by Sector of Cross Border M&As 2003-2006
Figure 4 Egypt SME Distribution by Sector
2
2
3
4
6
6
6
7
7
8
9
10
12
13
4
5
8
9
4
4
5
5
2 3
EXECUTIVE SUMMARY
Te infow of foreign direct investment (FDI) and the development of small scale enterprises
(SMEs) are both essential driving forces for economic growth in Africa. Tis paper considers both
elements and assesses the nature of the relationship between the two. In so doing, it seeks to es-
tablish the requirements that are necessary for FDI to have an impact on SME development, and
in particular the role of governments and TNCs. Clusters, local content, capacity building and
skills training are seen as efective strategies for SME development. TNC-SME linkages are the
optimal strategy for ensuring transference of the benefts of FDI to SMEs, and they bring benefts
to TNCs as well.
To be successful, these strategies require input from all stakeholders: from TNCs, the willingness
to integrate local suppliers into their global value chains; from SMEs the commitment to attain
and sustain global standards; from host governments, the willingness to provide the necessary
infrastructure, invest in skills and technology training, and create an appropriate regulatory en-
vironment for TNC-SME linkages. Only through a combination of such inputs can small scale
enterprises in Africa develop and become competitive in the global market.
LIST OF ABBREVIATIONS
AfDB African Development Bank
DFID Department for International Development (UK)
FDI Foreign Direct Investment
GDP Gross Domestic Product
GNI Gross National Income
GTZ Deutsche Gesellschaft für
technische Zusammenarbeit
HDSA Historically Disadvantaged South African
IFC International Finance Corporation
IPR Intellectual Property Rights
LDC Less Developed Countries
M&As Mergers and Acquisitions
NEPAD New Partnership for Africa’s Development
NGO Non-Governmental Organization
NSD National Suppliers Development Program (Egypt)
OECD Organization for Economic Cooperation
and Development
OSAA Of?ce of the Special Adviser on Africa
SMEs Small and Medium Enterprises
TNC Transnational Corporation
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNIDO United Nations Industrial Development Organization
USAID United States Agency for International Development
2 3
INTRODUCTION
It is a generally accepted tenet of international development that
small scale enterprises (also referred to as SMEs)
1
play an impor-
tant role in alleviating poverty, especially in Africa. Programs
addressing African development have identifed private sector
development, and in particular small scale enterprise develop-
ment as a priority area for action
2
. Tere have been a number
of small scale enterprise development programs over the years.
Some have evolved from the relationships established with
transnational companies (TNCs) and private sector initiatives,
while others have been driven by governments, multilateral and
donor agencies.
Te global investment scene has witnessed a sea change in the
past decade. Te size, scope and methods of foreign direct in-
vestment (FDI) have changed dramatically in response to fac-
tors such as technological advances, privatization, changes in
the capital markets, and the growing liberalization of the regu-
latory environment governing investment. FDI is a key factor
in global economic integration and the internationalization of
business. For the TNC making the investment, it can provide
resources, new markets, greater efciency and cheaper produc-
tion facilities. For the host country that receives the investment,
FDI provides a source of new technologies, processes, products,
capital, and management skills. For small scale enterprises, FDI
represents access to markets, access to expertise and most of all
access to technology.
As SMEs in themselves cannot attract FDI, these infows do
not automatically result in small scale enterprise development.
Neither do TNC-SME linkages develop simply because there
is investment by a TNC. As a case in point, in East Africa only
10 per cent of major contracts are awarded to domestic frms
even though 90 per cent of total registered engineering frms
are local
3
. Rather, for SME development to take place requires
the intervention and the input of all stakeholders: the support-
ive policies of the host government; the willingness of TNCs to
open their global value chains to local frms; and the prepared-
ness of SMEs to supply world class products.
Tis paper regards small enterprises or SMEs as relative terms
that cover a wide range of formal and informal businesses. How-
ever, given the difculty of obtaining data on the informal sec-
tor and the lack of any evidence to indicate that FDI impacts
directly on the informal sector, this paper focuses only on the
formal sector.
1 The de?nition of a business as a small scale enterprise or SME differs according
to the source. The AfDB, for example, de?nes a SME as having less than 50 employ-
ees. The IFC classi?es SMEs as companies with total assets of less than $15 million.
2 For example, NEPAD, IFC, UNIDO, UNDP, DFID and TICAD.
3 OSAA (2007) The Private Sector’s Institutional Response to NEPAD: Review of current
practices and experiences in the East African sub-region, S. 44.
Although FDI in its classical defnition occurs when a company
from one country makes a physical investment in another coun-
try, the defnition has now been broadened to include many
forms, such as the direct acquisition of a foreign frm, construc-
tion of a facility, investment in a joint venture, or a strategic al-
liance with a domestic company. However, it is usually accepted
that an investor has to acquire at least 10 per cent equity for
it to be recognized as a direct investment enterprise
4
. FDI can
take several forms: the purchase of an existing frm through a
merger or acquisition (M&A); a start up project; a joint ven-
ture with local partners; or partial acquisition through licensing
agreements.
Material for this paper is drawn from a range of secondary
sources with the caveat that data relating to FDI and SMEs are
not readily available and not always consistent
5
. As this paper’s
prism is on the impact of FDI on the African economy in gen-
eral, and small scale enterprises in particular, the assessments are
focused mainly on the economic aspect, and not on issues such
as gender equity or the environmental consequences of FDI.
Te paper is in three parts. Te frst part analyses the FDI fows
into Africa in relation to FDI globally, and in terms of the main
recipients of FDI on the continent, including a sectoral analysis.
Te second part looks at strategies for small scale enterprise de-
velopment and focuses on the role of governments and TNCs in
assisting SMEs to beneft from FDI. It shows with examples, the
various approaches that can be taken to promote TNC-SME
linkages and have demonstrable benefts. Specifc programs
that develop local enterprises to be globally competitive are dis-
cussed. Te paper concludes with recommendations for action
to develop the small scale enterprise sector in Africa.
4 The IMF recommends using this percentage to differentiate between direct
investment and portfolio investment in the form of shareholdings. IMF Balance of Pay-
ments Manual, Fifth edition.
5 The sources include UNCTAD’s World Investment Reports, World Bank surveys, Econo-
mist Intelligence Unit, UNIDO, and academic research papers.
4 5
PART I
THE FDI SCENARIO
IN AFRICA
In 2006, FDI infow into Africa was at its highest at $36 bil-
lion (Table 1). Yet this was only 2.7 per cent of global FDI.
As this table and Figure 1 show, although globally total FDI
infows varied considerably during the period 2000-2006, the
small FDI infows into Africa did not follow the global trend
throughout this period but simply increased slowly in dollar
terms. However, as Figure 2 shows, the contribution to this
increase in FDI was largely as a result of investment in North
Africa.
Table 1
FDI in?ows 2000-2006
(Billions of dollars)
Source: UNCTAD World Investment Reports
Sectoral distribution by primary, secondary and tertiary sectors
6
based on cross border M&As in the period 2003-2006 shows
there are large fuctuations on a year-by-year basis in all sec-
tors (Figure 3). Although the primary sector has traditionally
been the dominant sector in Africa, the tertiary sector
shows an appreciable increase during this period. Tis
is mostly accounted for by increases in sales of fnan-
cial institutions and in transport, storage and telecom-
munications in 2005 and 2006 as a result of sectoral
liberalisation in several countries
7
. Te impact of this
liberalization on SME development has depended on
the specifc industry. For example in Egypt when, for the frst
time, a fully government owned bank was part-sold to a foreign
entity, there was little, if any, impact on SME development
8
. By
contrast, Ghana’s liberalisation of allowing foreign ownership
in the telecommunications industry had a direct impact on
small scale enterprise development (see the example of MTN
discussed in Part II.5)
A major reason for the low FDI in the secondary sector is the
limited production facilities for manufacturing in many African
countries. Tis factor has been a barrier to capitalizing on the
opportunities ofered by the preferential market access for tex-
tiles under the US Africa Growth and Opportunity Act, and the
Everything But Arms Initiative and the Cotonou Agreement of
the European Union. In Botswana, for example, where the tex-
tile sector comprises 12 per cent of the manufacturing sector and
nearly 13 per cent of SMEs are textile companies; this failure has
had a negative efect on small scale enterprise development
9
.
6 The primary sector includes mining, quarrying and petroleum. The secondary sector cov-
ers manufacturing and includes food, beverages and tobacco, machinery, motor vehicles
and stone, clay, glass and concrete products. The tertiary sector covers services and
includes electricity, gas and water distribution, transport, storage and communications,
?nance and trade.
7 UNCTAD (2007) World Investment Report, p 38
8 80 per cent of the Bank of Alexandria to Sanpaolo, an Italian ?nancial institution.
9 Mbambo B and Cronje J (2007) Learning with a Website for the Textile Industry in Bo-
tswana. Educational Technology & Society, 10 (1), pp 157-170.
Figure 1
FDI in?ows 2000-2006
(Billions of dollars)
Source: Generated from Table 1
1600
1400
1200
1000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006
World Africa
2000 2001 2002 2003 2004 2005 2006
World ($bn) 1 408.3 851.1 618.1 557.9 742.1 945.7 1 305.9
Africa ($bn) 8.9 16.3 12.4 18.5 18.0 29.6 35.5
% world total 0.6 1.9 2.1 3.3 2.4 3.1 2.7
Figure 2
FDI in?ows 2000-2006 Africa
(Billions of dollars)
Source: Generated from data in Economist Intelligence Unit (2006)
World Investment Prospects to 2011
25
20
15
10
5
0
2000 2001 2002 2003 2004 2005 2000
Sub-Saharan Africa North-Africa
4 5
In the period 2003-2006, ninety per cent of FDI fows into
Africa were concentrated in twelve countries (Table 2). In
2006, all six countries in North Africa received over $1 bil-
lion, making the sub-region unique in the continent. Among
other factors, this is attributable to buoyant energy markets
and relatively low extraction costs for hydrocarbon, large scale
privatization of state owned assets, and access to EU markets
10
.
Table 2
Top African FDI Recipient Countries, 2003-
2006 by 2006 ranking
(Millions of dollars)
2003 2004 2005 2006
Egypt 237 2 157 5 376 10 043
Nigeria 2 171 2 127 3 403 5 445
Sudan 713 1 511 2 305 3 541
Tunisia 821 639 782 3 312
Morocco 2 314 1 070 2 946 2 898
Algeria 634 882 1 081 1 795
Libya 143 357 1 038 1 734
Equatorial Guinea 1 431 1 651 1 873 1 656
Chad 713 495 613 700
Ghana 137 139 145 435
South Africa 720 799 6 251 - 323
Angola 3 505 1 449 - 1 303 - 1 140
Source: UNCTAD World Investment Reports data
Egypt, the largest recipient of FDI in Africa has more than 1.6
million registered SMEs, and their distribution by sector is giv-
10 Economist Intelligence Unit (2007) World Investment Prospects to 2011, p 57
en in Figure 4. It can be seen that the majority of SMEs are in
the tertiary sector, and none in the mining sector. However, as
more than 80 per cent of FDI infows into Egypt in 2006 went
into non-extractive activities, there is potential scope for small
scale enterprise development in these sectors
11
.
South Africa had the highest infow of all African countries in
2005. A major contributing factor for this was the acquisition of
60 per cent of a South African bank
12
. By contrast, FDI was nega-
tive in 2006 because of the sale of foreign owned equity in gold
mines to a local mining company
13
. Both these transactions have
an impact on SME development because of South Africa’s Min-
ing Charter and Financial Sector Charter both of which stress the
need for preferential procurement and enterprise development
for small black and women-owned enterprises, referred to as “His-
torically Disadvantaged South African” (HDSA) companies.
Other African countries with substantial increases in FDI infows
are Burundi, Cape Verde, Djibouti, Ethiopia, Gambia, Guinea-
Bissau, Madagascar and Somalia
14
. Tese infows were mainly di-
rected at new oil exploration and mining where there are limited
opportunities for small scale enterprise development.
In the extractive industries, local input is minimal because of
the high degree of specialization required in exploration and ex-
traction. Downstream activities are mainly confned to refning,
and local sourcing is generally limited to catering, cleaning and
construction services. Te opportunities for domestic SMEs to
beneft from FDI are therefore very limited, and the conditions
have to be proactively created for SME participation. Some of
the programs that have successfully incorporated small scale en-
terprises into TNC value chains in the extractive sector form
part of the discussion in the next section.
11 UNCTAD (2007) World Investment Report, p 36.
12 ABSA, by Barclays Bank UK.
13 Sale by Canadian ?rm Barrick in South Deep mine and Russian ?rm Polyus in Gold?elds
14 UNCTAD (2007) World Investment Report, pp 251-2.
Figure 3
Distribution by Sector of
Cross Border M&As 2003-2006
Source: Compiled and generated from UNCTAD
World Investment Reports
Secondary Primary Tertiary
80%
70%
60%
50%
40%
30%
20%
10%
0%
2003 2004 2005 2006
90%
100%
Figure 4
Egypt SME Distribution by Sector
Source: Compiled from Ministry of Finance, Egypt (2005) Pro?le of
M/SMEs in Egypt. English translation. SME Development Unit.
Transport
3%
Construction
2%
Mining
0%
Finance
4%
Services
17%
Manufacturing
18%
Electricity
1%
Wholesale and Retail
55%
6 7
PART II
STRATEGIES FOR SMALL
SCALE ENTERPRISE
DEVELOPMENT IN AFRICA
Te biggest challenge facing small scale enterprises in Af-
rica is the globalization of value chains with the production
of goods and services increasingly fragmented across enter-
prises and countries. Te majority of SMEs interviewed by
the OECD in seven in-depth country/enterprise case stud-
ies which included two African countries - Egypt and South
Africa - were not able to identify their competitive strengths
within the value chain, and some explicitly pointed to the
lack of time and resources to understand the evolving global
context. Te SMEs stated that government support was criti-
cal to facilitate their participation in global value chains
15
.
Intervention by government and the cooperation of TNCs are
necessary for small scale enterprises to beneft from FDI. Tis
part looks at ways in which SMEs can be integrated into global
value chains, the obstacles facing such integration, and the ac-
tion that can be taken by TNCs and governments to facilitate
the process.
II. 1
Providing Accurate and Accessible
Data
One of the frst steps to facilitate small enterprise development
is for governments to take the initiative to ensure that there is
reliable and detailed data on SMEs. Te OECD takes the view
that, given the diverse, incomplete and defcient state of SME
statistics, careful analysis of the raw data is important before at-
tempting to draw any policy conclusions. In addition, it under-
lines that SME statistics are a sub-set of business statistics for
the economy as whole and should not be seen in isolation
16
.
A research team analyzing the role of SMEs in the Egyptian
economy cites the lack of available data on SMEs in Egypt as
a pressing limitation. In many instances even when the data is
available, it is outdated. In addition, despite a number of wide
ranging SME surveys conducted by donor-funded projects,
data remains inaccessible to both specialized research institu-
tions and the public
17
. Tis lack of accessible and accurate data
is confrmed in an UNCTAD study on South Africa that also
found very little information on the nature of the contribution
of the small business sector to the economy, and no statistical
information on TNC-SME linkages
18
.
15 OECD (2007b) Enhancing the Role of SMEs in Global Value Chains. OECD background
report for OECD conference, Tokyo, 2007, p 5.
16 OECD (2004c) SME Statistics: Towards a More Systematic Statistical Measurement of
SME Behaviour, p 6.
17 Ministry of Finance, Egypt (2005) Pro?le of M/SMEs in Egypt. English translation. SME
Development Unit, p 5
18 Robbins, G (2006) Strategies and Policies on TNC: SME Linkages Country Case
Studies: South Africa. A study for UNCTAD.
II. 2
Clusters and Small Scale
Enterprise Development
Clusters provide small scale enterprises the opportunity to
take advantage of FDI and global value chains by being able to
position themselves to access capital, technology and markets.
By doing so, they strengthen their comparative advantages in
a sustainable manner and become attractive sites for FDI. Te
presence of TNCs and appropriate intervention by govern-
ment become crucial in integrating clusters into global value
chains
19
.
Clusters are defned by the combination of two characteristics:
sectoral specialization and geographical location. Tey allow
for economies of scale and the leveraging of local comparative
advantage. Tey develop an experienced local pool of skilled
labour and a network of frms cooperating in complementary
areas of specialization along cluster-based value chains. Clus-
ters improve competitiveness by increasing the productivity of
the enterprises in the cluster through product specialization
and collective efciency, and they foster teamwork and coop-
eration as enterprises in a cluster see themselves as being inter-
dependent as allies with a shared vision and goal.
Te potential as well as the challenges of clusters are seen in
the overview of 11 enterprise clusters in the Annexe. Te au-
tomotive cluster at Nnewi in Nigeria is one of these clusters
20
.
It is made up of four villages, with each village hosting a num-
ber of automotive spare parts manufacturing frms of varying
sizes. Tere is a total 85 frms with an average of 12 employ-
ees. Over the years, Nnewi entrepreneurs developed close links
with automotive spare part producers and wholesalers in Asian
countries. Tese links proved invaluable when Nnewi traders
began to develop their own production activities and were able
to obtain detailed advice and other technical assistance from
their Asian suppliers on the type of machinery and other tech-
nologies they should acquire and the specifc skills needed to
operate these efciently
21
.
Te Nigerian government has not, however, given the level
of government support that the cluster requires. In a survey
among the frms in the cluster where various government poli-
cies were examined, less than seven percent of the frms indi-
cated that there was sufcient support from government for
the needs of the cluster such as water, electricity, transport, IT
and the protection of intellectual property rights (IPR)
22
. Te
role of trade and manufacturing associations has been crucial
in the absence of efective government support, particularly
the Nnewi Chamber of Commerce and the Nigerian Associa-
tion of Small Scale Industries.
19 Zeng, DZ (2006) Knowledge, Technology and Cluster-based growth in Africa,” World
Bank Institute, April 2006
20 Abiola, B (2006) “The case study of Nnewi auto parts cluster in “Nigeria,” World Bank
Institute, and Zeng, D Z (no year given) African Experience in Cluster Development. World
Bank Institute, ppt.
21 Abiola, op. cit, p 21.
22 ibid, p 17.
6 7
In Kenya, the government has deliberately chosen to limit its
role in the cut fower cluster which has 5 000 to 6 000 small
scale growers and 85 large growers. Tis cluster has six per cent
share of the world market in cut fowers
23
. Te government’s
role here stands in contrast to its historical role in the cofee
industry where marketing boards and centralized cooperatives
run by the government limited the competitiveness of the cofee
industry
24
. In the case of the cut fower cluster, the government
set up a specialized agency
25
to promote and facilitate the in-
dustry, and made foriculture a priority sector. It created an en-
abling business environment, enacting laws to protect IPR with
regard to new plant varieties, promoting quality standards and
providing incentives for exports. Direct involvement, however,
has been minimal and this “hands-of” approach has encour-
aged private sector growth and development
26
. Small scale fori-
culturists have, however, requested government intervention in
diversifying export destinations and becoming part of an inte-
grated supply chain in preference to an ad hoc value chain sup-
plying the Dutch auction system in which they currently oper-
ate. Tey also need assistance in incorporating technology and
tougher environmental standards into production practices.
II. 3
Local Content and its Impact on
Small Scale Enterprise Development
Te eforts and initiatives by African countries to develop in-
dustry clusters around TNC-based mineral extraction have
met with only limited success. To remedy the situation, the
level of local content is ofen specifed in contracts, with
TNCs being asked to specify how they plan to increase such
content, with the percentage of local products or services,
such as automotive components for TNC assembly plants,
being measured either in terms of volume or value
27
. From
the 1960s, the Nigerian government attempted to increase
local content, but the level remained around fve per cent
from the 1960’s to 2006. In a further attempt to foster link-
ages between TNCs and local frms, a target of 45 per cent
local content was set for oil-related projects by 2006 and 70
per cent by 2010. However, Nigeria has not yet reached 20
per cent local content according to one source, although the
ofcial fgure is currently given as between 33 and 35 per
cent
28
. Te reason given for not reaching the target is the lack
of Nigerian companies with the required capabilities and
technical skills
29
. Hence it is evident that to attain high levels of
local content requires the development of local suppliers who
can add value, and that this cannot happen by decree alone.
23 Hornberger, K et al (2007) Kenya’s Cut Flower Cluster. Harvard Business School, p 15.
24 ibid, p 23.
25 The Horticultural Crops Development Authority.
26 Zeng, D.Z (2007) African Experience in Cluster Development. World Bank Institute.
27 Discussed in detail in Black, A and Bhanisi, S (2006) “Globalisation, Imports and
Local Content in the South African Automotive Industry, Accelerated and Shared Growth
Conference 2006.
28 Reported in Nigeria’s business paper “This Day” 12 November 2007.
29 ibid.
Te South African government has had greater success with
the Petroleum and Liquid Fuels Charter which sets a target for
HDSA companies to own 25 per cent of the total equity in the
operating assets of the oil sector by 2011
30
. To achieve this tar-
get, the government has put several interventions in place. Tese
include: compiling and updating a list of HDSA suppliers; re-
quiring all licensees to contribute funds toward an “Upstream
Training Trust” to fund skills development strategies for HD-
SAs; promoting HDSA companies as joint venture partners in
expansion or upgrades by TNCs in the oil sector; and encourag-
ing the involvement of small scale HDSA companies in market-
ing and distribution because entry costs are lower than in explo-
ration or refning and there is an immediate, regular cash fow.
II. 4
Skills Development and
Capacity Building for Global
Competitiveness
To survive international competition, SMEs require the man-
agement skills and production expertise to be able to match
product quality requirements of TNCs and to scale up quick-
ly. Te availability and quality of domestic suppliers is a key
determinant to participation in TNC global value chains
31
.
Te Egyptian government, in partnership with the private sec-
tor, set up the National Suppliers Development Program aimed
at making hundreds of small suppliers globally competitive.
Trough this initiative, the Government provides active sup-
port in turning enterprises currently supplying the domestic
market into outward-oriented suppliers with a frm foothold
in an existing global supply chain. Te programme assists frms
to improve quality and lower production costs in order to be
competitive in the globalized market. Both UNCTAD and the
American Chamber of Commerce Egypt note that the Govern-
ment’s initiative is an example of how a country can attract FDI
without risking the demise of local producers, and that without
this type of programme, Egyptian producers, like many other Af-
rican producers, risk becoming marginalized even in their own
markets
32
. Among the TNCs that have helped pioneer projects
under the program are General Motors, which owns Egypt’s larg-
est vehicle assembly plant, DaimlerChrysler, Americana, Cad-
bury and Hero.
Te Egyptian government is also playing an active role in sup-
porting the country’s
ICT sector. Te initiatives include:
“smart villages” which are high tech business parks that provide
enterprises with world class infrastructure at a reasonable cost;
subsidies for training, marketing and technological develop-
ment; and partnerships with TNCs such as Siemens, Alcatel
and Cisco to training ICT graduates
33
.
30 Charter for the South African Petroleum and Liquid Fuels Industry on Empowering
Historically Disadvantaged South Africans in the Petroleum and Liquid Fuels Industry
31 UNCTAD (2001) World Investment Report, p xxiii
32 UNCTAD (2006) World Investment Report, p 47; AmCham Egypt Bulletin, November 2006.
33 UNCTAD (2007c) Enhancing the Participation of Small and Medium Sized Enterprises
in Global Value Chains, Note by the UNCTAD Secretariat, p 12.
8 9
Te government initiatives are paying dividends with SMEs
in the ICT sector. Small scale enterprises supplying Microsof
Egypt have been able to leverage the reputation of their lead
partner through the “lighthouse efect” of having credibility be-
stowed by a global player. SME suppliers that are certifed Mi-
crosof Gold Partners have used the Microsof network for other
projects both in Egypt and in the region
34
. At the same time the
supplier network assists Microsof with new market entry and
local credibility.
Part of the South African government’s intervention in the oil
sector is through the Sector Education and Training Authority,
which is a statutory body that operates in 23 sectors and was re-
launched in 2004 to respond to evolving skills needs. In addi-
tion, the Small and Medium Enterprises Development Program
(SMEDP) was complemented by the Skills Support Program
in 2005 as a shortage of skilled labor was a serious constraint
on attaining competitiveness through FDI. Te program gives
training and promotes the development of advanced skills
for SMEs to engage with TNCs and beneft from FDI. Over
12,000 enterprises have benefted from the SMEDP. Another
programme, the Workplace Challenge Programme, focuses on
adopting world class manufacturing practices and assists enter-
prises to improve their productivity and competitiveness. Eleven
clusters incorporating nearly 100 enterprises have been assisted
under the program
35
.
II. 5
TNC –SME Linkages and their
Impact on Small Scale Enterprise
Development
Linkages are a tried and tested method by which small scale en-
terprises can beneft from TNCs and is the predominant form of
interface between the two. When a TNC invests in a country, it
has three options for obtaining inputs in that country: import,
produce locally in-house, or procure from a local supplier. Link-
ages are an optimal way for an SME to beneft as a local supplier
and to meet the criteria set by the TNC. Tey are the strongest
channel for the transference of skills, knowledge and technology
from TNCs.
Anglo Zimele in South Africa is an example of a mining TNC’s
linkage programme. Started in 1989 as a small business initiative
by Anglo American, the programme is based on the three pil-
lars of procurement, business development and fnance. Anglo
American’s procurement department identifes HDSA suppliers
who can participate in their supply chains, and a transfer of skills
transfer and strategic guidance are given to these companies. A
mining fund assists small black-owned junior mining companies
with funding and technical support during the typically high risk
exploration and pre-feasibility phases of mining projects, bring-
ing them to commercially bankable positions. Te programme
has invested in over 54 SMEs and supports over 2 000 direct
34 OECD (2007b) Enhancing the Role of SMEs in Global Value Chains. OECD background
report for OECD conference, Tokyo, 2007, p 50.
35 South Africa Yearbook 2007, Chapter 7.
jobs. An evaluation carried out in 2005, showed a survival rate
of 72 per cent over eight years
36
.
Te signifcant benefts that linkages aford for both the SMEs
and the TNCs are summarized in Table 3.
Table 3
Bene?ts Of Linkages
Source: Adapted from IFC (2007a) Business Linkages: Lesson,
Opportunities and Challenges.
Six main types of mechanisms have been identifed
37
through
which TNCs partner with each other or with other stakeholders to
support business linkages and SME development, ofen with the
explicit goal of overcoming some of the obstacles faced by SMEs:
• linkages along individual company value chains
• groups of companies in the same industry sector
or location working collectively together
• traditional trade and industry associations enhanc-
ing their capacity to better serve SMEs
• joint public-private fnancing mechanisms
• dedicated small enterprise support centers
• multi-stakeholder public policy structures
An example of an individual company’s linkages contributing to
SME development is MTN, a telecommunications TNC which
operates in 15 African countries. MTN has extensive backward
36 Bickham, E (2006) Local Business Development- Anglo American’s experience in South
Africa, ppt.
37 Nelson J (2007) “Building Linkages for Competitive and Responsible Entrepreneurship”
UNIDO and Harvard University.
BENEFITS TO SMALL
SCALE ENTERPRISES
Knowledge transfer and
technology upgrading
Skills, capacity and stan-
dards enhancement
Access to new markets,
domestic and foreign
Prospects for further FDI
especially into cluster
Diversi?cation of
customer and market
structures
Risk-sharing through joint
funding and operations
Access to ?nance
Opportunities to up-
grade, innovate and in-
crease competitiveness.
More stable buyer or
producer relationships
Growth in size and
turnover
BENEFITS TO TNCS
Reduction in procure-
ment, production and
distribution costs.
Opportunity for cor-
porate social respon-
sibility combined with
pro?tability.
Local credibility and
reputation.
Greater integration in
domestic markets.
Increase in knowledge
of and access to local
consumers.
Access to new
innovation
Import substitution
and foreign exchange
savings.
Greater ?exibility in
changes to design and
production because
supply is local.
8 9
and forward linkages
38
with small support companies that pro-
vide a wide platform of services to it. MTN Ghana, for instance,
reaches the market through a distribution infrastructure that has
35 distributor ofces, 575 sub-distributors, over 91 000 retailers
and some 40 000 electronic voucher resale points. MTN Nigeria
has extensive wholesale and retail distribution channels, with 161
appointed distributors and 19 451 second and third tier points
39
.
TNCs can, and do, take SME development and linkage pro-
grams beyond their own value chains. Ofen they do this for
reasons of public relations or corporate social responsibility as
it demonstrates their commitment to the community, strength-
ens their license to operate, and gives recognition to the central
role that a dynamic SME sector plays in local economic devel-
opment.
Recognising that access to fnance is a perennial problem for
SMEs, Shell launched a fund of nearly $100.00 million in
2006, with 70% of capital leveraged from African partners,
open to SMEs in all sectors in Tanzania, Kenya Uganda, Ni-
geria, Rwanda and South Africa
40
. As of October 2007, 59
SMEs have been fnanced with 33% going to start-ups. A fur-
ther 492 SMEs have received business development assistance
41
.
BP Tanzania chairs what is known as the Private Sector Initia-
tive, which brings together TNCs to seek out better ways to
integrate local SMEs into their supply chains. An SME sup-
plier database of 506 Tanzanian suppliers is shared between the
procurement departments of the TNCs, resulting in an expand-
ed market and increased opportunities for the SMEs while at
the same time reducing the risks associated with such transac-
tions
42
.
In Chad, ExxonMobil developed a National Content Strategy
when faced with the challenge of local enterprises that were not
well enough equipped to win contracts and, when they did, had
difculty sustaining acceptable performance levels. ExxonMobil
collaborated with the IFC and the local chamber of commerce
in overcoming the challenge, and this benefted other TNCs in
Chad as well (Table 4).
A very successful public-private partnership strategy for
linkage creation has been South Africa’s approach to indus-
trial development through the Motor Industry Develop-
ment Program introduced in 1995. It helped establish com-
petitive and relatively integrated linkages between motor
vehicle assembly plants and local frms supplying a range
of components
43
. Tere are now more than 220 automo-
tive component manufacturers in South Africa, and anoth-
er 150 that supply the industry on a non-exclusive basis
44
.
38 Backward linkage is the use by one ?rm or industry of produced inputs from another
?rm or industry. Forward linkage is the distribution chain connecting the producer or sup-
plier with customers.
39 and about 30 000 informal distributors, MTN Website.
40 Aspire Funds in partnership with GroFin. Shell Foundation website and 2007 Report.
41 ibid.
42 PSI-Tanzania website.
43 BMW, Daimler Chrysler, VW, Toyota and most recently Renault have assembly plants
in South Africa.
44 Flatters, F (2005) The Economics of MDIP and the South African Motor Industry,
Queen’s University; South Africa investment website.
Table 4
ExxonMobil’s National Content Strategy
Source: IFC (2007a) Business Linkages: Lesson, Opportuni-
ties and Challenges.
II.6
Meeting Global Standards: Pre-
paredness of African SMEs for Par-
ticipation in Global Value Chains
Te globalization of value chains constitutes a major challenge
for small scale enterprises accustomed to serving local and na-
tional markets. Meeting the strict product standards and quality
required for participation in global value chains is difcult and
costly.
An UNCTAD study conducted in fve countries, including
Uganda and South Africa, indicates that TNCs, with a few ex-
ceptions, are reluctant to cooperate with the SME sector because
of shortcomings such as lack of quality, high production costs,
poor reliability and a preference for cash transactions because of
limited access to credit. As a result, many TNCs prefer either to
import, purchase from other TNC subsidiaries, or produce in-
house rather than investing in local SME linkages
45
.
45 UNCTAD (2006) Promoting TNC–SME linkages to enhance the productive capacity of
developing countries’ ?rms: A policy perspective.
LINKAGE
ACTIVITY ACTIONS OUTCOME
Procurement
Break up contracts into sizes
more manageable for SMEs
Introduce shorter payment
cycles
Award contracts for longer
terms
Using local SME
suppliers helps inst-
itutionalize Exxon
Mobil’s commitment
to the community
and brings a high
return on reputation.
Supplier
base
Work with external partners to
develop supplier database
Collate information on contact
details, goods and services,
as well as needs for over 60
potential suppliers assessed
by ExxonMobil.
Additional 1,000 SMEs
surveyed by IFC and local
chamber of commerce.
ExxonMobil has ac-
cess to reliable and
actionable informa-
tion on local supplier
base.
Supplier
development
IFC establishes Enterprise
Centre providing SME capac-
ity building so that suppliers
can qualify for participation in
ExxonMobil and other TNC’s
value chains.
SMEs may only bid in areas in
which they have demonstrat-
ed adequate competence.
300 SMEs are
trained, and con-
tracts signed to
the value of $22.5
million.
10 11
South African SMEs in the Toyota supply chain, however, ex-
press concern about their ability to upgrade and respond in
time to deliver products that are in line with the expectations of
Toyota in terms of quality, supply standards and delivery times.
Teir proximity to the local Toyota plant, the ability to produce
a component according to specifcation and a history of rela-
tionship does not necessarily guarantee an ongoing relationship
with Toyota.
Te suppliers feel that many of the requirements are onerous
and complex, and absorb administrative time but do not pro-
vide a basis to obtain a premium in prices in the automotive
value chain
46
. Tey list among their requirements assistance
from government on skills development, investment in technol-
ogy development, increase in safety and security, and improved
infrastructure
47
.
Even when SMEs do not enter into the global value chain of
TNCs with which they have linkages, they still feel compelled to
conform to those international standards for technology, quality,
delivery and afer sales service in their particular industry. SMEs
also have to adapt routines and practices developed at the cluster
level to administrative and managerial practices set by interna-
tional buyers. To mitigate this pressure on SMEs, governments
should provide assistance by ensuring, for example, that national
certifcation systems do not impose an excessive burden on small
frms and encourage SME participation in the standard-setting
process.
Business organizations such as chambers of commerce and pro-
fessional associations can also help as most members of cham-
bers are SMEs. Te Zululand Chamber of Commerce in South
Africa, for example, has not only worked with TNCs to develop
linkages with small suppliers, but also has a system of accredi-
tation that gives potential business partners confdence in the
capabilities of accredited suppliers
48
. Tis is a model that could
well be replicated elsewhere as it is important to map and identi-
fy the extent to which local capabilities match the input require-
ments of TNCs, and the scope for local enterprises to move up
the value chain. Part of the exercise is technology benchmarking,
providing support for global standards such as ISO certifcation
and skills audits. Such an analysis is essential for a linkage strat-
egy as it assists the government in the allocation of resources.
PART III
CONCLUSIONS AND
RECOMMENDATIONS
Tere is a symbiotic relationship between the TNCs that invest
in a host country and the SMEs in that country. Tis paper has
considered the nature of this relationship from four aspects: the
pattern and fow of FDI to Africa; the opportunities and chal-
lenges faced by small scale enterprises in benefting from FDI;
46 OECD (2007b) Enhancing the Role of SMEs in Global Value Chains. OECD background
report for OECD conference, Tokyo, 2007, p 56.
47 UNCTAD (2007c) Enhancing the Participation of Small and Medium Sized Enterprises in
Global Value Chains, Note by the UNCTAD Secretariat, p 9.
48 ibid
the response of TNCs to creating linkages with SMEs; and the
role of government in assisting small scale enterprises to beneft
from FDI.
FDI infows to Africa, despite record levels, remain but a small
part of global FDI. Virtually all the infow goes to a handful of
countries, the majority of which are in North Africa, and the
FDI infow to sub-Saharan Africa is abysmally low. SMEs in
Africa face constraints due to a lack of skills, technology and
fnance, as well as a lack of economies of scale. Although this
paints a gloomy picture, FDI can, and does bring an array of ben-
efts in terms of capital, skills, technologies, processes, products,
and markets. As examples in this paper have shown, SMEs have
gained such benefts through linkages with the TNCs that make
the investment.
The further enhancement of TNC-SME linkages, how-
ever, is contingent upon:
• Te willingness of the SMEs to reach and sustain global
standards.
• Te willingness of the TNCs to integrate local small sup-
pliers into their global value chains.
• Te willingness of governments to create a regulatory en-
vironment that encourages small scale enterprise devel-
opment, to invest in upgrading the skills and techno-
logical capabilities, and to implement policy promoting
sector-specifc FDI and TNC-SME link ages.
Te reluctance of TNCs to engage with local suppliers is a salu-
tary lesson for SMEs. Tere is an onus on SMEs that want the
“Triple A” of: access to expertise; access to markets, especially in-
ternational markets; and access to technology. Tey have to take
responsibility for themselves to take advantage of the benefts of
FDI, and aim at achieving global standards.
TNCs need to venture beyond their “comfort zone” supplier
base, and not consider their investment exclusively in terms of
low wages and low labour standards. Outsourcing non-core
business to local suppliers has its own “Triple A”: access to lo-
cal consumers; access to local knowledge; access to loyalty. In
the African context, brand loyalty ofen lasts a lifetime, and the
return on reputation has an incalculable value. TNCs that have
opened their linkage programs to SMEs in other sectors in ad-
dition to their own, as examples in this paper show, help create
an environment that is ultimately in their own long term inter-
ests. In short, integration of local SMEs into TNC global value
chains ought to become a business imperative.
Government intervention can take the form of diferent inputs.
Investing in sound infrastructure such as water, electricity, roads
and IT services not only attracts TNCs but also ensures that
local enterprises are not at a competitive disadvantage. When
a government invests in clusters and supplier development pro-
grams, and establishes training centers and programmes that
provide technical assistance, skills training and capacity de-
velopment, as the examples in this paper show, it assists small
suppliers to upgrade skills and technology to take advantage of
the benefts of FDI. Creating specialized agencies to promote
10 11
and coordinate industry development, as in the case of the cut
fower industry in Kenya, establishes close communication
with enterprises and clusters in growth sectors that have TNC
connections.
When governments are sector-specifc in attracting FDI there
are benefts to be gained, as the ICT sector in Egypt and the
automotive sector in South Africa demonstrate. Even in the
extractive sector, which is arguably the most difcult sector
for SME linkages, the South African industry charter shows
the positive impact when there is local content reservation for
SMEs belonging to a designated group, as long as there is suf-
fcient capacity and skills to meet the requirements of global
value chains. Tax and other incentives such as a quid pro quo
agreement, whereby TNCs are encouraged to work with local
frms in return for certain concessions, also help in encouraging
and supporting TNCs to establish linkages with SMEs within
their own value chain and beyond.
African governments need to capitalise on the opportunities
for continental and regional integration. One of the disincen-
tives for investment is the small size of many African markets
and the lack of integration between them. UNCTAD notes
that, apart from a few countries such as Egypt and South Af-
rica, African countries generally lack linkages between TNCs
and local enterprises, and eforts to promote regional integra-
tion have been too limited to allow economies of scale. As a re-
sult, SMEs are unable to participate competitively in the inter-
national production networks of TNCs
49
. Assisting enterprises
to meet global standards through defning sectoral standards,
policies and regulations would ensure better integration with
the global economy. It would also facilitate greater FDI which,
if correctly targeted, act as a catalyst for small scale enterprise
development
With global integration, the protection of IPR is an increasing-
ly important area in TNC-SME linkages, as technology trans-
fer is not only from TNC to SME but can fow in the other di-
rection as well. Te OECD Guidelines at present refer only to
the transfer of technology and the need for protection of IPR
from TNCs to other partners, as it is assumed that TNCs are
the main conduit of technology transfer across borders
50
. Gov-
ernments should, as a matter of priority, include protection for
technology transfer from SMEs to TNCs, as inadequate pro-
tection of IPR can inhibit the incentive to innovate and have
negative consequences for small scale enterprise development.
Business organizations play a critical role, as do multilateral and
donor agencies, in small scale enterprise development. Te in-
clusion of business organizations as a key stakeholder improves
the advocacy and representation of the interests of SMEs. As
an intermediary, business organizations give SMEs a stronger
voice and promote the requirements of small businesses with
policy makers, especially with regard to legal and regulatory
reforms. From the perspective of multilateral agencies and do-
nor countries, the international agenda on FDI and small scale
49 UNCTAD (2006) World Investment Report, p 45.
50 Section VIII Science and Technology, OECD Guidelines for MNEs, Revision 2000, cited
in ibid, p 7.
enterprise development is a complex one with a plethora of
programs
51
. Te challenge lies in the monitoring and evalua-
tion of business linkage activities, as the metrics are not always
congruent in terms of the business impact on the one hand,
and the development impact on the other. Te agencies also
need to expand, refne and reconcile their existing databases on
FDI and SMEs, especially where there are discrepancies within
the same study or between diferent studies, as ensuring the
reliability and accuracy of data enables policy decisions to be
made on a more informed basis.
FDI measurement needs to be based not only on quantita-
tive values but also on quality. Tis concept of quality ought
to incorporate not only job creation and technology transfer
but importantly the long term commitment of a TNC and the
extent to which it establishes mutually benefcial linkages with
local suppliers. In such a qualitative approach, value should be
imputed to the extent of the interaction, and networking with
domestic enterprises, and the opportunities that are created
through the partnership for innovation and value added func-
tions as demonstrated in the case of Microsof Egypt.
Te task of ensuring that the increase in FDI in Africa trans-
lates into tangible small scale enterprise development does not
rest with TNCs, governments, SMEs or multilateral agencies
alone. It is only when collective responsibility is taken that the
developmental goals of African governments and the business
goals of TNCs can become congruent and small scale enter-
prises truly beneft.
51 Including, the IFC’s Business Linkages Program and its Private Enterprise Partnership
for Africa, UNDP’s Growing Sustainable Business initiative, and UNCTAD’s Business Link-
age Initiative. GTZ, DFID, USAID and most donor agencies have small business develop-
ment initiatives in one form or another. NEPAD has private sector development at the core
of the implementation of its projects, and both the-Africa-Asia Business Forum and the
Tokyo International Conference for Africa’s Development have sought to boost the expan-
sion of investments by Asian ?rms.
12 13
ANNEX
Overview of sample enterprise clusters
CLUSTER COUNTRY
NO. OF
FIRMS
FIRM SIZE (NO.
OF EMPLOYEES PRODUCTS MAJOR CHALLENGES
LAKE VICTORIA Uganda
17 ?sh
plants not available
Fish production and
processing
Falling ?sh stock and EU quality
standards
MWENGE Tanzania 2 200 15 – 20 Handicrafts
Lack of ?nance, weak ?rm capac-
ity, weak public institutions and
infrastructure
KEKO Tanzania 2 – 130 not available Furniture
Weak infrastructure, lack of tech-
nological support and access to
?nance
NNEWI Nigeria 85