How China and India Really Operate in Africa

Africa's “first mover investment advantages” are being affected by the Global South's growing investments on the continent through more subtle channels. Some of these multinational corporations are engaged in comparatively sophisticated production processes, sometimes linked to global trade networks.

The result is that semi- to fully processed goods are sometimes now being exported from the African continent, embodied with a relatively high value-added content. This is in contrast to the raw materials that African firms have historically — and most still — continue to export.

Indeed, China and India's rapidly growing commerce with the sub-Saharan continent presents to its people a new major development opportunity — one that is arguably qualitatively different than that provided by its traditional commercial partners from the Global North. In recent years, the international marketplace has witnessed a big change.

Production processes have been fragmented, and tightly integrated global production and distribution networks have emerged, boosting trade in intermediate goods and components.

These transformations are a major challenge, but also an opportunity for the businesses operating or hoping to operate in Africa and for African policymakers — provided all understand how they fit in the new international division of labor.

Technological advances in information, logistics and production processes have enabled corporations worldwide to become more footloose. This is as a result of production chains being divided into discrete functions that can be performed by separate entities, such as foreign subsidiaries or suppliers.

The advent of data systems that provide information on real-time international movements, up and down the production chain, has allowed for more efficient and ever cheaper shipping over large distances. Not only assembled durable goods, but also components for just-in-time manufacturing products and — this is important for developing countries in Africa — even perishable goods are shipped with ease.

The result has been the rapid growth of intra-industry trade, or "network trade" — such as importing cotton that is then manufactured into garments and exported to third countries. This is especially relative to the more traditional inter-industry trade of final goods and services — such as exporting cotton and importing machinery.

Such global value chains have been creating opportunities for African countries to increase the volume and the diversity of, as well as the value added to, their exports. African companies in several industries — automobiles (South Africa), fresh-cut horticulture (Uganda) and apparel manufacturing (Kenya) — have either already engaged in or have strong prospects for engaging in network trade.

However, they do face far tougher standards and competition in international markets than do the continent's raw commodities dealers. In the services sector, too, African participation in network trade has been emerging. Foreign tourism in Africa is rapidly growing not only in traditional destinations such as Botswana and Kenya, but also in "newer" locales like Malawi, Mozambique and Zambia.

Many of the Chinese and Indian firms active on the sub-Saharan continent are relatively sophisticated businesses and often part of larger international group structures already integrated into global value chains.

This has created opportunities for African companies to expand and leverage their own engagement in network trade. This is evident in food processing (Tanzania), textiles (Ghana), fishing (Senegal) and outsourcing and back-office services (Ghana, Kenya and Tanzania).

Moreover, as a result of their integrated corporate structures, Chinese and Indian firms engaged in Africa have been playing a significant role in facilitating links between trade and FDI on the continent.

New business case studies and firm-level survey data on these enterprises' African operations show that their trade and investment activities are mutually reinforcing. One result of these activities is the inward flows of investment to Africa by these firms that are engendering an increase in the volume of African exports.

Another consequence is that Chinese and Indian businesses in Africa are able to achieve larger-sized operations — and so greater economies of scale — than their African counterparts.

As a result, Chinese and Indian firms have been able to export more goods from the African continent that are more diverse and higher up the value chain than have African firms in the same sectors. They also have more extensively integrated into Africa's own regional trade networks and reached a wider set of markets, geographically, outside of Africa.

Although, at present, their share of overall foreign investment on the African continent is still quite modest, the trend of what the Chinese and Indian firms operating in Africa are doing is unmistakable.

In some cases, more so than African firms themselves, they are forming the vanguard of the integration of both the African economies on the continent and into the global marketplace. This is a form of a first mover advantage that could well be costly to replicate.

Editor’s Note: This article has been adapted from Harry G. Broadman’s essay titled “‘First Mover’ Advantages in Sub-Saharan Africa: Why Northern Multinationals Should React (Quickly) to Their Southern Counterparts,” published in the CESifo Forum Journal (Munich) in Volume 10, No. 4, 2009/2010.