Cover Image
close this bookExporting Africa: Technology, Trade and Industrialization in Sub-Saharan Africa (UNU, 1995, 434 pages)
close this folderPart I. Exporting Africa: an analysis
close this folder5. Main findings of the study: a synthesis
View the documentPosition of exporting firms in the world market
View the documentHistory of exporting: conditions and path followed
View the documentHow firms maintain or improve their positions in export markets
View the documentHow some firms lose ground in export markets
View the documentLinkages and supporting industries
View the documentThe influence of policy on firms' export activity

The influence of policy on firms' export activity

The macro and sectoral policy environment in which exporting firms have been operating has an influence on decisions taken by firms.

Import policies

Import policies have been mentioned as important in influencing the performance of exporting firms. The competitiveness of some exporting firms was undermined by high duties on imported inputs or difficulties of access to quality inputs required to meet export orders. This study has also revealed that there are cases in which government support had favoured subsidiaries of TNCs which were in competition with local firms. For instance, Cosmivoire would have performed better if the government had been able to guarantee fair competition within its sector: its main competitor is a subsidiary of a powerful multinational which receives many advantages from the government. In the case of Kenya, Sharpley and Lewis (1990)4 have pointed out that the rate of effective protection for foreign private firms (averaging 57 per cent) and especially parastatal enterprises (65 per cent) was considerably higher than for local firms (35 per cent).

One major problem mentioned by all firms in the sample is that of cumbersome, bureaucratic and lengthy procedures for licensing, access to credit and foreign exchange, and export documentation. Some exporters have to travel long distances from the regions to the capital city simply to register themselves. There are also still tight bureaucratic bottlenecks in foreign exchange allocation, resulting in long lead times for imports. Such long and cumbersome procedures involving many institutions impose extra implicit costs (in terms of delays, etc.) on exporters. Delays could be even more disastrous for risk exports such as fresh fruits and fish. Some country studies have proposed the establishment of some kind of export centre which would offer at one location a package of relevant export services such as registration, licensing, proofs of ownership, export advice and export promotion.

Bureaucratic delays at Customs and related obstructionist tendencies increased the operating costs in many ways, making it less attractive for exporting firms to export, or to import in order to export. For instance, several respondents complained about Customs' insistence on sticking to the letter of their duties, even when there is little or no customs revenue involved and delays could cost the country not just one particular export order but perhaps a valuable relationship with an overseas client. For example, in preparing an export order for the UK, Bata was requested to tag the shoes with bar codes. As these could not be produced in Zimbabwe, Bata requested their UK customer to supply the tags, which were duly sent but then seized by Customs and held while they decided what tariff to apply. In the process Bata's ability to meet the deadline was threatened. Similar experiences have been cited in respect of the Customs handling of samples.

Under very restrictive import control regimes, the incentive offered by export retention schemes (where exporters could retain a portion of their foreign exchange earnings to pay for imported inputs) was quite effective (e.g. Tanzania, Zimbabwe). While export retention schemes (ERSs) made it easier for exporting firms to import the inputs they required, the consequences of the schemes were not always positive. Their implementation had side-effects associated with market distortions. The case studies showed that some exporting firms had 'over-responded' to this kind of incentive by selling to the export markets at a financial loss (at the official exchange rate) and by diverting a greater part of their output to exports even if the domestic market was deprived.

The handling of foreign exchange by individual units raises some longer-term concerns. For instance, the case of Zimbabwe has shown that the trend towards individual farmer control over foreign currency could undermine the capacity to support agriculture on a sector-wide basis with adequate supplies of inputs. Not only is it inefficient for companies to go through all the export procedures for each individual farmer, but individual access to foreign currency is leading individual farmers to keep significant stocks of spare parts, while the agent has virtually none. From all points of view (the individual farmer, the agricultural support sector and the nation), this case study found that these unintended consequences of the ERS system amount to a highly inefficient use of foreign exchange resources. The weakening of agricultural support companies not only makes it more difficult for them to compete in export markets, it also disadvantages farmers who produce mainly for the domestic market and do not have access to ERS funds. These disadvantages have led to some policy changes in which tradable ERS funds have become available and are widely used, alleviating these problems.

Trade liberalization

Trade liberalization measures were found to have been implemented in most case study countries in the 1980s. Trade liberalization introduces competitive pressures which may stimulate firms to build capabilities to cope with the new situation but it also carries the potential dangers of deindustrialization, exposes the fragile manufacturing sector to the danger of dumping and other external trade practices and may make it difficult to address major gaps in the sector. The implications of liberalization measures and their impact on the competitiveness of exporting firms varied. Three types of import liberalization regimes were identified in the case studies.

The first regime is represented by countries like the Ivory Coast and, to a lesser extent, Kenya, which were already fairly open. Import liberalization merely lowered and rationalized some tariffs but did not represent a major shock for industrial firms. The second regime is that of countries like Tanzania, where quantitative restrictions on imports had been quite pervasive, so that import liberalization came as a major policy shift. Competition from imports came suddenly, not giving much time for adjustment to the new competitive environment. In the case of Nigeria, the end of the oil boom around 1980 led to extensive use of tariffs and quantitative restrictions. The various foreign exchange conservation measures implemented in the period 1982-85 meant that several industries which were dependent on imported inputs had to operate considerably below capacity, hence reducing growth and worsening unemployment. The adoption of the SAP in 1986 represented a fundamental shift in the basic philosophy of economic management at the national level. The reforms include the adoption of a largely market-determined exchange rate and the removal or relaxation of quantitative restrictions on many tradable goods.

The third regime is represented by Zimbabwe and Mauritius, in which the implementation of trade liberalization was managed more selectively in a situation where the export sector was already quite diversified and firms had attained a reasonable degree of competitiveness. Trade liberalization had a constructive effect in that firms were given adequate time to make adjustments. In Zimbabwe, for instance, import liberalization started with imported inputs through some form of an open general import licence system. The users of these inputs were made aware that the next phase of import liberalization would be applied to outputs. This message induced many firms to invest in technological improvements of various kinds in anticipation of a more competitive environment. Managed import liberalization stands a better chance of providing an opportunity and incentive for firms to build up capabilities which can cope with a more competitive environment.

The influx of imports in the liberalization phase took part of firms' market shares, forcing them to look for new markets abroad. This could be the beginning of intra-industry trade as practiced in the more developed countries, or it could be a futile attempt to conceal inherent inefficiency. In the latter case, such survival would at best be short-lived. In the former case, the level of competitiveness of the firm could be raised if this move meant that less efficient lines of production contracted while more efficient lines expanded and further improved their competitiveness.

Pricing policies

Pricing policies may influence the prices of inputs or outputs of firms. Price controls on inputs affect the cost competitiveness of firms, while price controls on outputs affect the revenue side. The case studies showed that some exporting firms had to procure local inputs (e.g. cotton, palm oil) at prices well above their world market prices, putting users of these inputs at a relative disadvantage to their competitors in export markets. It was pointed out that local users of cotton (e.g. textile firms in Zimbabwe) and steel (e.g. manufacturers of agricultural machinery in Zimbabwe) were paying more for these local inputs than their competitors (in the importing countries) were paying for the same inputs.

Some firms had access to inputs at prices which were lower than the world market prices. For instance, in addition to the fiscal advantages provided by the 1959 investment code, a setting-up agreement signed between Capral-Nestlé and the Ivory Coast government allowed the firm to buy green coffee at local prices, which are sometimes as low as one third or one quarter of world prices. However, in 1984 the government put an end to this arrangement and the fiscal advantages under the investment code expired at the same time.

Rigid price controls on output can run down an otherwise profitable firm to near collapse by depriving it of the resources to plough back into investment in general and technology in particular. For example, in one case it was pointed out that for over eight years the government had failed to adjust prices to levels that would turn around the firm's performance, making it difficult for the firm (Bamburi of Kenya) to secure financial assistance to refurbish the plant. Continuing under-capitalization of the firm placed it in an increasingly poor position, threatening to wipe out its exports.

Pricing, however, has also been used positively to encourage firms to increase efficiency and attain competitiveness in export markets, as in the case of agricultural machinery manufacturers in Zimbabwe. Altering the generous cost-plus pricing system (by allowing lower prices) exposed long-term weaknesses in the firms, which led to the adoption of more cost-effective production methods (Riddell, 1990, pp. 354-8). Some of the actions taken include expansion into the export market, reorganizing production lines to a continuous flow system, staff training and recruitment of more skilled personnel, leading to higher-quality products and improved designs of traditional lines.

Fiscal and monetary policies

High interest rates reduced economic access to export finance and other working capital requirements. High interest rates made working capital and fixed investments more expensive, leading to the postponement of some investments in technology. Affordability becomes more of a problem than availability. In such situations subsidiary companies have an advantage in receiving soft loans from their mother companies.

Provisions for tax rebates or drawback schemes were evidenced in the country case studies. However, implementation has not been commensurate with the intentions of such schemes. The problem of bureaucratic delays in paying export incentives was particularly noted in the case of exporting firms, in all country case studies except Mauritius. The effect of bureaucratic delays was to reduce the effectiveness of whatever export incentives had been put in place.

Relationship between government and the enterprise sector

The relationship between government and the enterprise sector influences cooperation with the enterprise sector and the effectiveness of government policy. In three cases it was found that the rapport between the government and the enterprise sector was good and consultations were made between them on a regular basis. In the case of Zimbabwe during the Unilateral Declaration of Independence (UDI) period, the industrialists and the government of the day shared a determination to overcome the impact of sanctions which the international community had imposed on the then Rhodesia. The system of controls was made to operate effectively and the highly protected system that they constituted did not lead to the gross inefficiency which has characterized other import substitution regimes. The need to adapt and innovate led to the development of a wide range of technical skills, particularly in various branches of engineering. The strong orientation to market requirements led to a proliferation of products, often produced within large, vertically integrated conglomerates.

In the case of Mauritius the government and the enterprise sector cooperated in many ways and held consultations on matters affecting industry. Government policy facilitated the process by which local entrepreneurs continuously gained control of industrial development. In the Ivory Coast the government worked with and was supportive of enterprise sector development in a way which did not threaten the main actors in industry, even if they were non-lvorians.

In the other three countries (Tanzania, Kenya and Nigeria) and the post-independence Zimbabwe, the relationship between government and the enterprise sector (or significant parts of it) was less cordial. Government intervention in industrial development was perceived as intending to address imbalances in society, as a result of which some leading actors in industrial development could be losers. In Tanzania the nationalization policy and the socialist policy were perceived as a threat to the private sector. In Kenya the way the Africanization policy was introduced and practiced was perceived as a threat to the Asian community, who were the leading local private-sector industrialist group. The indigenization policy in Nigeria posed a threat to some foreign investors. In post-independence Zimbabwe, too, the relationship between government and sections of the enterprise sector became less cordial as the government began to address some imbalances in society. The leading white community entrepreneurs perceived that they would be the losers. The application of controls in the absence of the rapport with the private sector that had existed under the previous regime, and the introduction of new controls on wages and labour relations, led to a situation in which bureaucracy became a major obstacle to the running of any kind of economic enterprise.