Finance & economics
Investment in Africa
Links in the chain
Why linkages between foreign and local firms are all too rare
In 2016 daniel kinuthia started a small business in Kenya making shoe uppers for the local subsidiary of Bata, a multinational footwear company. He was short of finance and equipment, and his contract with Bata ended when covid-19 hit. But he says supplying Bata and visiting its factory taught him "what happens, how the shoe is marketed, the kind of shoe that can be sold". Now he dreams of using those skills to build a factory of his own.
Many African governments are keen to attract foreign investment. But its impact hinges on what Albert Hirschman, a postwar economist, called "linkages". By supplying or buying from multinationals, local firms like Mr Kinuthia's can learn about markets and technology. Such linkages are all too rare in Africa, however. Many multinationals ship in their inputs and export what they produce. That brings jobs and dollars, but does not spur development.
A recent study by John Rand of the University of Copenhagen and others finds that linkages are scarcer in Africa than in developing Asia. The multinationals they surveyed in Kenya imported two-thirds of their intermediate inputs, for instance, whereas those in Vietnam imported just a quarter. And local linkages transferred less technology than expected. Firms learned as much by trading across oceans as they did from foreign firms in their backyard.
Extractive industries in particular tend to operate as enclaves. Mining concessions often come with import-duty waivers, says Lukas Bekker, a supply-chain expert who has helped set up mines in three African countries. That makes it cheaper to import equipment than to use local contractors. And buying local can be risky. A finance manager with 20 years' experience in African mining says he prefers to keep procurement offshore, having uncovered "frauds and kickbacks" between staff and local suppliers in the past.
Capacity takes time to build. In Uganda, which has long been preparing to pump oil, a survey in 2012 found that only 200 trucks in a local fleet of 2,500 were up to scratch. "We had to transform our business," says Jeff Baitwa, who spent $20m buying equipment to upgrade his haulage company for oil contracts. Sometimes the technical gap is too wide. "I'm told the pipeline has what they call 'seamless pipes'," says Stuart Mwesigwa, a manager at Uganda's largest steel company. "No one in east Africa is manufacturing that!"