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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

History of exporting: conditions and path followed

The conditions and factors which influenced entry into the export market were addressed by the case studies, shedding some light on the path which was followed in the history of exporting and providing some insights into the process and activities which led to the first entry into export markets.

Exporting strategy

The case studies have shown that most exporting firms started by serving the domestic market. The strategy of exporting came later in response to developments in their domestic markets. Most of these enterprises started exporting to regional markets, mainly in countries which did not have similar industries. The share of exports in total output is usually small (about 5-15 per cent). With such a small share of exports in their total sales, some of these firms could sell in the export market at a loss, the loss being offset by more profitable sales in the domestic market. Firms in this category have tended to position themselves with a fairly broad competitive scope, reflecting the broad competitive scope they had in domestic markets.

Import substituting firms grew up and built up various core capabilities by producing for the domestic market. The protection of the domestic market allowed them to accumulate resources, which were in turn invested in developing capabilities which enabled them to turn to exports at a later stage. ISEs were either motivated to export by export promotion incentives of various kinds or resorted to exporting as one response to saturated or collapsing domestic markets. Developments in domestic markets took several forms.

In some countries the domestic market contracted as aggregate expenditure in the economy was reduced during the implementation of economic reforms. This kind of development in the domestic markets was particularly experienced by the Ivory Coast and Zimbabwe, with the effects of drought exacerbating the contraction in the latter case. Some firms responded to the contraction of the domestic market by increasing efforts to locate new markets in other countries. The success of such attempts was limited by the fact that the transition towards exporting was rushed, without the necessary preparations. However, this survival strategy failed to compensate for the loss of domestic markets in a sustainable way. This implies that export markets are not likely to be a quick fix for the problem of contracting domestic demand.

In some cases the collapse of the domestic market occurred because a firm was established with one major local consumer in mind and that consumer collapsed. The response of the supplier firms was to turn to export markets. Morogoro Canvas of Tanzania was one such case: it had been set as a supplier of canvas to the Morogoro Shoe factory. When that factory went bankrupt, the canvas mill adjusted swiftly by changing its product mix and entering the export market (uniforms, grey cloth and bed sheets). The firm responded by making the necessary investments in technology to meet requirements of the export markets and the transition seems to have been managed quite well. Today the mill exports about 60 per cent of its output. The breakthrough in the export business is mainly attributed to special machines used for export production. This investment in technology coupled with the employment of foreign management under contract has enabled Morogoro canvas to develop a sizeable and diversified export market in the US, the UK, Canada, Holland, Germany, Saudi Arabia, the UAE and neighbouring countries.

The case studies have also shown that a few firms started as exporting firms from the outset. These firms started with an eye on the export market and showed awareness of changing market conditions from the initial stages. For these firms the export market accounted for a large share (more than 50 per cent) of their total sales. These enterprises tended to target international markets in which they occupied a specific market niche and maintained that niche by closely following changing market requirements. Some of them took advantage of preferential access to the EU markets. This strategy was adopted most conspicuously in Mauritius, for some time following the implementation of the import substitution phase. The critical measure was the Export Processing Zones (EPZ) Act (1970), which provided additional special incentives to exporting firms. The EPZ enterprises were allowed to sell their products on the local market to only a limited extent.

Some firms were motivated to pursue export strategies from the beginning because they faced small domestic markets. For instance, the radiator manufacturer in Tanzania targeted the slow end of the export market where markets are small and isolated. The firm adopted a strategy of striving to attain quality and competitiveness in export markets. However, its real breakthrough in export markets came with Original Equipment Manufacturer (OEM) certificates from well-known manufacturers such as Scania, Valmet and Landrover. Obtaining the OEM certificates facilitated exports to Europe and these achievements were used to promote exports into the region.

Previous experience of key management figures

Previous experience had prepared some key managerial and entrepreneurial personnel for conditions in the export markets and put them in contact with technology suppliers. They acquired their experience as traders in similar products or as representatives of multinational enterprises which were engaged in similar activities.

The typical local private exporting firms started as family trading enterprises and later moved into the manufacture of products which were related to their earlier trade activities. Their activities in trade had given them contacts and connections which were later useful at the manufacturing stage. The capabilities which were developed in the previous stages were put to use in the subsequent stages of development. Foreign technical assistance was sought in those areas where local capability was deficient, so that technology investments were largely in the form of more modern machinery in order to manufacture higher-quality products for the export market.

Various forms of linkages and networks

It may be unnecessary to possess all the capabilities in-house if some of them can be obtained outside the firm. However, in such cases the firm needs at least to have the capability to identify the kinds of capabilities it needs to buy from elsewhere and how best to utilize inputs and services provided by others. It was found that information provided by buyers in the export markets often influenced product specifications. Some firms entered agreements with foreign firms, under which they could have access to information about latest fashions and other market requirements. Networks and interactions with various suppliers of inputs and equipment and buyers of output had affected the choices of technology and products which enabled firms to penetrate export markets.

Foreign partners were found in many exporting firms, with their role varying according to the nature of the product, the scale of operations, the type of market and the kinds of core capabilities that the firms possessed. Typically, foreign partners supplied some form of technical assistance in aspects of technology and marketing. The various roles of foreign partners in providing these services are documented in the case studies. These foreign firms had either formed joint ventures with local firms or were hired agents for specific technology and/or marketing activities. In some cases technical cooperation agreements also involve the use of foreign brand names and trade marks. For instance, a major breakthrough for Orbitsports of Kenya occurred in 1974 when it entered into a technical cooperation agreement with Adidas, the world's largest supplier of leather balls. The firm paid royalties to Adidas for technical services, including training of the company's workers at Adidas in France, evaluating the quality of raw materials, checking the quality of final products and providing technical advice on the purchase of machinery and equipment.

The local firms located the foreign partners themselves. However, in a few cases the government and state promotion institutions played a decisive role in initiating contacts between local firms and their foreign partners. For instance, the sister industry programmes in Tanzania enabled a manufacturer of electrical goods to go into exporting.

Investments in technology

Although some regional export markets were no more demanding, in terms of product quality, than domestic markets (e.g. exports of kangas from Kenya to Tanzania), the case studies have shown that entry into export markets has often been preceded by investments in upgrading technology to meet higher quality requirements. These investments were for technological improvements to equipment and for quality control facilities. In some cases firms established new sites specifically for producing for export markets (e.g. Bata Shoes in Zimbabwe, Northern Electrical Manufacturers in Tanzania) or installed separate production lines for exports, in which special machines were installed for selected processes to guarantee export quality (e.g. Friendship Textiles and Morogoro Canvas in Tanzania, Sunflag in Kenya).

Foreign v. local investment

The positive role of foreign investment in building local technological capabilities has come out quite clearly in Mauritius, where local private capital has been progressively buying out foreign capital. This harmonious nationalization of investments has been facilitated by the existence of an entrepreneurial class which developed from the local plantocracy during the years when sugar production was dominant. The surpluses which were accumulated then were invested in industry. In addition, the macroeconomic environment and the climate for investments have been conducive for both local and foreign investment. For instance, one of the leading exporting firms in Mauritius, the knitwear firm, was established initially by Hong Kong investors with a minority Mauritian participation. After a few years the Hong Kong shareholders were bought out by Mauritians, and since 1977 the company has had an entirely local shareholding. The bulk of the shares are held by a local investment company belonging to a large sugar group. The existence of a capital market and a group of local individuals and institutions who are willing to invest seems to have favoured the process of nationalization in Mauritius.

The transfer of control from foreigners to indigenous owners has sometimes been far from smooth and possibly more destructive than constructive. For instance, the indigenization programme in Nigeria was carried out in 1974 and, together with further phases which were implemented before 1980, resulted in Nigerians taking over the control of several businesses hitherto controlled by foreigners. However, it would appear that the policy-makers overlooked the economic side-effects of the indigenization programme, especially its possible negation of the goal of economic independence. The import substitution industries which had been established were acquiring the capability to manufacture for export but this development was thwarted by the manpower dislocation caused by the indigenization programme. Several of the newly established activities experienced manpower problems and some of them failed as a result.

The contribution of foreign investment in building local capabilities has not always been positive. The case studies showed that some locally controlled firms had been bought out by TNCs in response to the threat of competition (e.g. Trituraf of the Ivory Coast). Another multinational, Saco, had a monopoly for about 10 years, after which many state-created companies started trading in the Ivory Coast. But in the middle of the 1980s nearly all of these newcomers disappeared or were taken over, leaving Saco in control of most of the local cocoa-bean processing and by-product production in the Ivory Coast.

In discussions of the role foreign investment could play in industrialization and in building technological capabilities within firms it is important that the changing forms of foreign investment be recognized. This study has shown that exporting firms in Africa have benefited in different ways from various forms of relationships with foreign firms. Foreign investment is increasingly taking forms other than the traditional direct foreign investment. There is considerable evidence that new forms of investment (NFI) will continue to gain importance in developing countries, superseding traditional FDI in some areas and complementing it in others (OECD, 1989).1 The implication of the debt crisis and foreign exchange shortages for the balance between FDI and NFI is likely to vary from one country to another, reflecting differences in host country policies (macroeconomic policies and policies on foreign investment), the host-country's market potential, perceived degree of bureaucratic red tape, political stability and the availability of local managerial skills and skilled labour. However, it is likely that, as some developing countries acquire various capabilities, they may want to bring in only those assets which they cannot obtain locally in order to minimize foreign exchange losses (through remissions abroad and payments for various services). Such long-term financial and foreign exchange considerations may lead to more selective pursuit of NFI, with government attitudes and policies tending to be more industry-specific, reflecting long-term benefits from learning by doing (OECD, 1989).

The changing perceptions of TNCs may continue to favour a relative increase in NFI, on the grounds that it increases leverage on firm-specific assets and that it has risk-shedding advantages over traditional FDI. In future, the balance between traditional FDI and NFI is likely to be influenced more by the global dynamics of inter-firm competition and by the interplay between those dynamics and host-government policies than by the latter's unilateral decisions (OECD, 1989). This underscores the importance of understanding the global trends within specific industries.

The evidence presented by the OECD (1989) suggests that there is a long-term trend in the division of risks and responsibilities between TNCs, host countries and international lenders, which is characterized by increasing emphasis by TNCs on flexibility and the development of capabilities in relatively protected industry segments (where profit potentials are high), operating upstream of production (as suppliers of technology and management) in some industries and downstream (in marketing) in others. Host-country investors are increasingly retaining partial or total ownership of investment projects, while the degree of effective control depends increasingly on factors other than host-country ownership of equity. International lenders are likely to continue to play a central role in channelling financial capital to developing countries (in the form of new loans and debt rescheduling) and in that way will exert significant control over the international investment process (OECD, 1989).