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From enclave to linkage economies? A review of the literature on linkages between extractive multinational corporations and local industry in Africa Michael W. Hansen

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A DIIS ReCom publication WORKING PAPER WORKING

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MICHAEL W. HANSEN Copenhagen Business School, Center for Business and Development Studies [email protected]

Acknowledgements Dedicated research assistance has been provided by Cecilia Gregersen, Copenhagen Business School Center for Business and Development Studies. Special thanks to senior researcher Ole Therkildsen (DIIS), assistant professor Lars Buur (RUC) and associate professor Mette Kjær (AU) for inputs to this report.

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This report is part of the Research and Communication Programme (ReCom) on international development cooperation, funded by Danida (Danish Development Agency) and Sida (Swedish Development Agency), and undertaken by a number of institutions including UNU-WIDER and DIIS. For more information on the programme, please see http://recom.wider.unu.edu/ and http://www.diis.dk/recom

This paper has been prepared as part of the ReCom project ‘Aid and Growth-enhancing Governance’; see Buur et al., 2013 for summary report.

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TABLE OF CONTENTS

List of abbreviations 4 Abstract 5 1. Introduction 7 1.1 The importance of linkages 8 1.2 Perspectives on linkages 8 2. Linkages and extractives: Concepts and debates 10 2.1 The potential offered by extractives-based development 10 2.2 The role of FDI in extractives 12 2.3 Linkages and extractives 14 3. A review of the literature on linkages in African extractive industries 15 3.1 What is the state of linkages? 16 3.1.1 Overall, linkages are few and shallow 16 3.1.2 But there is evidence of linkage potential 16 3.1.3 Linkages are often to local representations of foreign suppliers 18 3.1.4 Inter industry spillovers are larger than intra industry spillovers 18 3.1.5 Backward linkages may have higher potential than forward linkages 19 3.1.6 Summary 20 3.2 The factors promoting and constraining linkage formation 20 3.2.1 Government strategies and capabilities 20 3.2.2 MNC strategies and capabilities 26 3.2.3 Local industry strategies and capabilities 29 3.2.4 Donor strategies and influence 32 4. Conclusion 34 List of references 36 Annex 1. Literature review 44

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LIST OF ABBREVIATIONS

ADB African Development Bank BRIC Brazil, Russia, India, China BSR Business for Social Responsibility CSR Corporate Social Responsibility EH&S standards Environment, Health and Safety standards EITI Extractives Industries Transparency Initiative FDI Foreign Direct Investment GATT General Agreement on Tariffs and GDP Gross Domestic Product GIZ Deutsche Gessellschaft für International Zusammenarbeit GVC Global Chain IB International Business ICMM International Council on Mining and Metals IRR Internal Rate of Return LDC Least Developed Country MMCP Making the Most of the Commodities Programme MNC Multinational Corporation NGO Non-Governmental Organisation NPV Net Present Value OECD Organisation for Economic SME Small- and Medium Sized Enterprise SSA Sub Saharan Africa TNC Transnational Corporation TRIM Trade Related Investment Measures UNCTAD United Nations Conference on Trade and Development UNECA United Nations Economic Comission for Africa UNIDO United Nations Industrial Development Organization WTO

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ABSTRACT

If African developing countries are to benefit fully from the current boom in foreign direct investment (FDI) in extractives (i.e. mining and oil/gas), it is essential that the foreign investors foster linkages to the local economy. Tra- ditionally, extractive FDI in Africa has been seen as the enclave economy par excellence, moving in with fully integrated value chains, extracting resources and exporting them as commodities having virtually no linkages to the local economy. However, new opportunities for promoting linkages are offered by changing business strategies of local African enterprises as well as foreign mul- tinational corporations (MNCs). MNCs in extractives are increasingly seeking local linkages as part of their efficiency, risk, and asset-seeking strategies, and linkage programmes are becoming integral elements in many MNCs’ corporate social responsibility (CSR) activities. At the same time, local African enterpris- es are eager to, and increasingly capable of, linking up to the foreign investors in order to expand their activities and acquire technology, skills and access. The changing strategies of MNCs and the improving capabilities of African enterprises offer new opportunities for governments and donors to mobilize extractive FDI for development goals. This paper seeks to take stock of what we know about the state of and driving forces of linkage formation in South Sahel Africa extractives based on a review of the extant literature. The paper argues that while MNCs and local enterprises by themselves will indeed produce linkages, the scope, depth and development impacts of linkages even- tually depend on government intervention. Resource-rich African countries’ governments are aware of this and linkage promotion is increasingly becoming a key element in their industrialization strategies. A main point of the paper is that the choice between different linkage policies and approaches should be informed by a firm understanding of the workings of the private sector as well as the political and institutional capacity of host governments to adopt and implement linkage policies and approaches.

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1. INTRODUCTION • FDI may create large technology, produc- tivity and market access spillovers on host Foreign direct investment (FDI) by multi- countries, but on the other hand, foreign national corporations (MNCs) is increasing- investors will adamantly resist leakage of ly involving developing countries and more core technology and skills to local firms than half of global FDI currently goes to (Rugraff & Hansen, 2011). developing countries (UNCTAD, 2013). Al- though these flows are concentrated in the Given these trade-offs, it is not surprising more advanced developing countries, they that there is widespread dispute about wheth- also play a pivotal role in less developed er FDI is boon or bane for economic devel- countries (LDCs) when measured in relation opment. Some conclude that, on balance, to the size of economies. These investments FDI contributes positively to economic and may have huge implications for development. social development, mainly because FDI typ- Potentially, MNCs impact host countries not ically represents an inflow of efficiency and only through their financial contribution, but advanced technology that would otherwise also through technology transfer and upgrad- not have been available to the host economy ing, creation of market-linkages, and through (Rugman, 1981; Forsgren, 2002). Others con- impacting the competitive environment of clude that, on balance, development impacts host countries (Dunning, 1993; Caves, 1996; are negative due to crowding out effects and Lall, 2002; UNCTAD, 1999; Narula, 2012). dissemination of restrictive business practic- While FDI potentially brings development es (Herkenrath & Bonschier, 2003; Cypher & benefits for host countries, there are difficult Diez, 2004) or that the positive impacts are trade-offs related to accessing these benefits: exaggerated (Narula, 2012; Nunnenkamp, 2002). It is notable that the assessments of the • FDI is ‘crowding in’ investments and jobs impact of FDI on development dimensions by creating new activities and fostering have changed significantly over time, from linkages to local industries but may be the scepticism of the past to the ‘obsession’ ‘crowding out’ other investments and jobs with FDI of the 1990s and early 2000s. in the process (Caves, 1996). However, this debate seems rather futile, • FDI opens new avenues for economic de- as obviously, the assessment of FDI impacts velopment that hitherto have been inac- depends on many factors. A more fruitful av- cessible due to lacking capabilities, but also enue of enquiry is to ask under which condi- forces developing countries to surrender tions FDI is boon or bane for host countries important aspects of their economy to de- (Nunnenkamp, 2002; Rugraff & Hansen, cision making at corporate headquarters in 2011). The literature points to a number of faraway countries (Dicken, 2007). such conditions and determinants of FDI im- • FDI offers opportunities for developing pacts. First, MNCs have different strategies, country firms to become integrated into organizations and owners and this may have global value chains and embark on ex- huge implications for how they impact host port-oriented development strategies, but countries: Some MNCs may be asset-exploit- often developing country firms are placed ing while others are asset-augmenting. Some in inferior and low value added functions MNCs will control everything from head- of global value chains (UNCTAD, 2013); quarters while others decentralize large parts

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of their decision making. Some MNCs may and strategies that leave few development ben- integrate parts of their home country’s devel- efits from FDI. Third, local industry may have opment strategies, while others may be sub- more or less capacity to partner up to MNCs dued strong financial performance mandates and learn from the foreign investors, and/or of equity funds. Second, host countries may may be pursuing strategies that are more or more or less skillfully craft frameworks for less effective in benefitting from FDI. foreign investors. Some may have the ability to attract the right kind of FDI and un-bun- dle the FDI package to benefit local economic 1.1 The importance of linkages development, while others may adopt policies Among the factors shaping FDI’s impacts are linkages to local firms. As part of their entry strategies, MNCs will foster collabora- Measuring FDI impacts tions and alliances with local firms in order Level of FDI impacts host countries on mul- to reduce costs, get greater efficiency, reduce tiple dimensions – sometimes contributing to risks, and/or acquire local knowledge and development goals (however defined), at other skills. Such linkages offer huge potential for times jeopardizing them – and the literature far job creation and export promotion as well as from agrees on how to measure and aggregate the impacts of FDI. Perusing through the lit- migration of skills and technologies (see e.g. erature, various ways to classify impacts can be UNCTAD, 2001, 2010a, 2013). Linkages po- identified: tentially are key engines of industrial devel- • impact: This is the distinction between mac- opment and economic transformation in host ro-economic effects (, countries: As stated by UNCTAD (2010a: 15) productivity of economy), meso-level effects ”TNC-SME business linkages are potentially one of (industry structure and ) and mi- the fastest and most effective ways of upgrading domes- cro level effects (resources and skills of firms) (see e.g. Dicken, 2007); tic enterprises, facilitating the transfer of technolog y, • Dimension of impact: This is the distinction knowledge and skills, improving business and man- between different dimensions of impact, e.g. agement practices, and facilitating access to finance effects on employment, on capital formation, and markets. Strong linkages can also promote pro- on growth, on poverty alleviation, on industry structure, on environment, on competiveness, duction efficiency, productivity growth, technological etc. (see e.g. Lall, 2002 or UNCTAD, 1999). and managerial capabilities and market diversifica- • Intentionality of impact: This is the distinc- tion in local firms”. tion between impacts based on whether or not This paper will focus on linkages and their they are an intended outcome of a business role in industrial development. After a brief transaction. Here, a distinction between direct, indirect and spillover effects is made. Direct exposition of the various perspectives on effects are effects deriving from the MNC sub- linkages, we will move on to review the liter- sidiary, e.g. job creation, exports, investment, ature on linkages in African extractives. etc. Indirect effects are effects that derive from a contract between the investor and a local op- erator. Spillovers are effects that are un-inten- tional seen from the perspective of the inves- 1.2 Perspectives on linkages tor. This is for instance demonstration effects Linkages between foreign investors are of or competition effects (IFC, 2013; Rugraff & crucial both from a business perspec- Hansen, 2011). tive and from a development perspective. From a business perspective, linkages play an

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important strategic and organizational role in spur development, developing countries must firms’ pursuit of sustainable competitive ad- be able to transform rents into productive vantage. Forming linkages – or what is some- investments The second type of linkages is times referred to as networks, outsourcing, ‘consumption linkages’, i.e. between consum- subcontracting, strategic alliances, licencing ers and productive sectors. These tend to be and franchising etc. – is a way for MNCs to limited in many developing countries as the collaborate with other firms in order to be needs of local consumers are met by imports. able to focus on core competencies (Phrah- The third type of linkages is ‘direct linkages’, alad & Doz, 1987); reduce costs (Doh, 2005; i.e. forward and backward linkages to other Sako, 2006); share risks (and opportunities) firms in the productive sectors. Such linkages with other firms (Altenburg, 2001); and/or could spur manufacturing development and complement own resources and capabilities the diversification of industry, thus offering (Barney, 1991). The International Business huge development potential. (IB) literature argues that linkages are key Hirschman also took up the issue of link- aspects of firm internationalization strate- ages in an international context (1981): Be- gies. Hence, internationalization rarely is a cause foreign investors have better access stand-alone endeavour (Johansson & Vahlne, to markets, capital and skills, linkages to 2009). Linkages to local firms in host coun- MNCs can potentially lead to upgrading of tries are needed in order to overcome liabili- local firms. Moreover, linkages may produce ties of foreignness and effectively tap into lo- ‘snow ball’ effects, where MNCs initially cre- cal knowledge and capabilities. Seen from the ate backward linkages to local firms which in perspective of a local firm in host countries, turn demand more products and inputs thus linkages to foreign investors may be a way to spurring a second round of FDI (Hobday, expand business, facilitate foreign market ac- 1995; Unido, 2012). cess, learn new skills and acquire new tech- Of course, there are other ways in which nologies that will allow them to move into local industry can benefit from MNCs than higher value added activities (Humphrey & through linkages. As pointed out by several Schmidth, 2001). authors, MNCs may have spillover effects From a development perspective, linkages on local firms without there being any direct may enhance economic welfare e.g. by facil- linkages (see e.g. Caves, 1996; Blomström & itating the spread of technology and skills, Kokko, 2000); Meyer & Sinan, 2009; or Ru- increasing capital formation, and producing graff & Hansen, 2011 for reviews of the spill- economies-of-scale and specialization. Al- over literature) e.g. by demonstrating more most 60 years ago, the American development advanced ways of producing to local firms Albert O. Hirschman (1958) not- or by introducing more competition into the ed that sectoral, temporal and geographical host economy. Moreover, the skills developed linkages are key sources of economic devel- at the MNC subsidiaries may migrate to oth- opment and that lack of linkages is one of the er firms including local entrepreneurial firms main causes of lack of industrial development as MNC employees seek new jobs. But most in developing countries. Hirschman argued authors argue that the presence of direct link- that there are three types of linkages. The first ages greatly enhances the possibilities of im- type of linkages is ‘fiscal linkages’, i.e. linkages pacts on local industry, both directly through between financial and productive sectors. To collaboration, but also indirectly through in-

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creasing the likelihood of spillovers (Markus- 2.1 The potential offered en & Venables, 1999; Blomström & Kokko, by extractives-based development 2000; Javorcik, 2004; Günther, 2005; Hansen Extractives-based development strategies & Schaumburg-Müller, 2006; Hansen et al., have had a somewhat ambiguous reputation 2009; UNIDO, 2012; Amendolaigne et al., due to allegations that they lead to , 2013). Especially for local SMEs, linkages diversion of resources away from productive are crucial as these often will have dispropor- activities, rent seeking, etc. It has even been tionate difficulties accessing technology and argued that for many African countries, ex- skills, raising capital for investments, and get- tractive endowments have become a ‘curse’ ting foreign market access. (see e.g. Sachs & Warner, 1995; Gylfason, It should be noted that the development 2001; UNCTAD, 2013). The resource curse literature also points out that linkages are argument holds that many of the develop- not always beneficial to host countries. Thus, ing countries rich on oil and minerals have the literature makes a distinction between failed to transform the income from these ‘developmental’ linkages (linkages that cre- resources into sustainable , ate jobs, develop skills and upgrade capabil- improvements on development indicators, ities in the local economy) and ‘dependent’ and industrial development. On the con- linkages (linkages that keep host economies trary, the resource abundance has created specialized in low value added functions and negative effects. This is because the foreign offer no possibilities for upgrading (Dicken, income from extractives may lead 2007)). However, generally, linkages are de- to appreciation of the currency, reduced scribed in positive terms. competitiveness of manufacturing sectors, diversion of talent and resources away from productive sectors, and eventually, increased aid dependence. In line with this, UNECA 2. LINKAGES AND (2013) argues that extractive-based develop- EXTRACTIVES: ment potentially causes ‘deindustrialization’, CONCEPTS AND DEBATES as rents from extractives are used to pay for imports and as extractive-related industries In recent years there has been renewed focus attract most of the country’s talent and re- on extractives as an engine of development sources. A related problem of resource-based in Africa. In this connection, a key issue re- development concerns the relative of lates to linkages between extractive investors extractives. Hence, it is argued that terms of and the broader economy. In the following trade for natural resource commodities are we will briefly recapitulate the debates on ex- consistently declining vis-à-vis manufactur- tractives-based development, focusing on the ing (Singer, 1950). A 2013 report from UNC- debates on the role played by linkages. Then TAD echoes this socalled Singer-Prebish hy- we will move on to review the literature on pothesis, arguing that the problems related to linkages in resource extraction in Africa. commodity-based development is “perennial” Throughout the report, extractive sectors and that drastic restructuring of global com- will be understood as precious minerals and modity trade regimes are needed in order for metals extractions and extraction of hydro- commodity-dependent developing countries carbons (oil, coal, gas). to benefit. UNCTAD (2013) similarly argues

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that the arrival of China as a major importer major consumer of resources, has fundamen- of extractive commodities and a highly ef- tally changed the commodity/manufacturing ficient exporter of manufactured products, terms of trade by lowering prices on manu- may further “entrench African developing countries facturing products and increasing demand for in the low end of the international division of labour” resources (Kaplinsky & Farooki, 2011). (UNCTAD, 2013; xv). While there remains disagreement about However, recently a number of reports and the causes and effects of resource-based authors have challenged the resource curse development, a number of recent reports and terms of trade arguments theoretical- have called for greater emphasis on extrac- ly and empirically. The cause of commodity tive-based development in Africa. A 2013 dependence is, it is argued, weak institutions report by the African Development Bank ar- rather than the other way around. Hence, gues that Africa has huge untapped potential it is the way in which the resource rents are in extractives (ADB, 2013). The report notes managed rather than the rents in themselves that extractives (here including agricultural that creates problems for resource-rich coun- commodities) have accounted for 35 percent tries (Brunnschweiler & Bulte, 2008; UNC- of resource-dependent African countries’ TAD, 2013). Morris et al. (2011a) argue that growth since 2000; 80 percent of export the apparent correlation between extractive products in 2011; more than 60 percent of development and weak industrial develop- greenfield FDI; and 50-60 percent of em- ment is a consequence of weak manufactur- ployment. For minerals such as PGMs, cobalt ing capacity in resource-rich countries rather and diamonds, Africa is accounting for the than crowding out effects from extractives. majority of the World’s production, for min- The ‘curse’ can be “neutralized or ameliorated erals such as chromite, manganese, gold and … through appropriate policies and strategies” and uranium, Africa is a very significant player, can “become a “blessing” through deployment of and for oil and gas, Africa has recently dis- the resource rents for enhancing productive capacities covered huge reserves. A 2013 report from and economic diversification” (UNCTAD, 2012: the United Nations Economic Commission 13). This ‘revisionist’ position holds that there on Africa (UNECA 2013) argues that with are numerous examples of countries that have the right policies, linkages and skills base in used extractives to spur industrial develop- place, resource-based development can lead ment; some of the world’s leading economies to positive development impacts, including a are in fact strongly resource-driven (Canada, diversification of the industrial base (UNE- Norway, and Australia). Moreover, the leading CA2013). Hence, according to UNECA, the industrial nations based their early industrial- question “is not whether Africa can industrialize ization on close linkages to the extractive sec- by ‘ignoring’ its commodities, but rather how the lat- tor (USA, Sweden, Germany, UK) and sever- ter can be used to promote value addition, new al developing countries have benefited from industries and technological capabilities that span resource-based development (South Africa, the sub regions of the continent.” (UNECA 2013: Malaysia, and Argentina). Moreover, concern- 95). UNIDO’s ‘Promoting Industrial Diver- ing the terms of trade argument, while there sification in Resource Intensive Economies’ historically is evidence of worsening terms report (2012) examines experiences and op- of trade for commodity-producing nations, tions for using extractive sectors to promote it is argued that the arrival of China as the manufacturing and industrial development

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Figure 1. African resource endowments

2000 2010 Africa’s Value of Number Africa’s Value of Number Real Differ- Future potential share of Africa’s of share of Africa’s of output ence global production countries global production countries growth in production (2010 USD 2000 production (2010 USD 2010 2000-10 countries in % million) in % million) in % PGMs 55 10 588 2 74 14 191 4 34 2 By 2017 33% output inrease Cobalt 43 490 6 62 1 775 8 262 2 By 2017 87% output increase Diamonds 45 4 265 16 54 4 967 17 16 1 By 2017 14% output increase Chromite 51 1 578 4 42 2 442 4 55 0 Manganese 32 493 4 30 3 131 8 535 4 Phosphates 28 4 607 10 26 5 662 10 23 0 Gold 24 25 568 36 19 19 947 39 -22 3 By 2017 53% output increase Uranium 17 111 3 19 1 013 4 813 1 Copper 3 2 871 11 8 7 806 12 172 1 By 2017 86% output increase Nickel 5 1 225 5 5 1 535 5 25 0 Iron ore 5 4 637 10 4 6 404 9 38 -1 By 2017 466% output increase Mining total 14 59 592 44 12 73 286 44 23 0 Oil 10 216 001 18 11 284 875 19 32 1 Gas 5 39 036 14 7 68 423 18 75 4 15-20% growth additional to normal expansion from new elds in Mozambique and Tanzania Coal 6 21 266 15 4 23 759 13 12 -2 Energy total 10 276 303 11 377 056 36 Food 8 195 082 54 9 260 910 54 34 0 Non food 8 5 618 54 6 5 729 54 2 0 Agriculture total 8 200 675 54 9 266 605 54 33 0 Timber 12 77 267 46 13 87 229 54 13 8 Note: Agriculture total does not include timber. Natural gas valued at average European price. Source: ADB, 2013. Authors’ calculations based on BRG (Bundesanstalt für Geowissenschaften und Rohstoffe) (n.d.), Data on mining production provided for this report, FAO(2012), FAOSTAT, (database), http://faostat.fao.org/, (data on soft resources), EIA (2012), “International Energy Statistic”, www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm (data on energy) (2013c), “Commodity Price Data - Pink Sheet”, http://go.worldbank.org/4ROCCIEQ50. in Africa and Asia and argues that the boom offers an opportunity for resource-depend- in extractives offers ‘a new development op- ent developing countries to embark on “sus- portunity’ for Africa, not only in terms of tainable growth paths” and that it is potential- fiscal revenues and direct jobs, but also in ly an “essential source of employment, income and terms of diversification and development of government revenues for most developing countries” manufacturing industries through linkages (UNCTAD, 2013). and spillovers. Even UNCTAD’s 2013 Com- modities and Development report, which is otherwise very critical of the current global 2.2 The role of FDI in extractives private and public governance structure for FDI typically plays a vital role in the devel- commodities, agrees that commodity-based opment of the extractive sector. Due to the development, given the right institutions, technological complexity of most extractive

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activities; due to the need for integration into tion to exports will tend to be very high (in global value chains in order to market ex- excess of 30%). The contribution to govern- tractive commodities; and due to the capital ment revenues is typically smaller (3-20%) al- intensity of most extractive operations, de- though still very substantial. The GDP con- veloping countries typically will need foreign tribution is relatively low compared to the investors to exploit their extractive endow- role played in FDI and exports, mainly due ments. Hence, extractives in Africa is dom- to the lack of spillover and linkage effects inated by MNCs. from much extraction. Also employment Extractive FDIs potentially have huge im- effects are typically low, although this pic- pacts on host countries. Some of these effects ture may change if all linkage and spillover will be related to capital formation and ex- job effects are included in the measurement. ports, others to government revenues, tech- However, it is widely held that FDI in ex- nology and skill transfer, and direct and indi- tractives in Africa has failed to produce the rect employment. expected development benefits (UNCTAD, The impacts can be depicted as a turned 2013) and it is intensely debated how it can pyramid (ICMM, 2012). In terms of con- be ensured that extractive FDI in the future tribution to FDI inflows, extractives (here leaves more lasting development benefits on mining) typically will be the main source (in Africa. As agued by Bourgouin (2011), ”the excess of 60%). As the African economies lack of visible development outcomes has highlighted typically are little diversified, the contribu- the tensions between the significant financial success of

Figure 2. The contribution of extractive FDI to development

Foreign Direct Investment 60% - 90%

Exports Mineral exports can rapidly rise to be a major share of 30% - 60% total exports in low income agrarian economies

Government Revenue 3% - 20% source of total tax revenues

National Income (GDP & GNI) Modern-day mining is a capital-intensive 3% - 10% industry

Employment is typically 1% - 2% low Source: ICMM, 2012

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the mining companies on the one hand and the ques- or that the technology gap to local industry is tionable socio-economic impact of mining activities on too large to bridge due to the technological, the other, and has made the sector unsurprisingly con- organizational and capabilities superiority of troversial. In recent years, the extractive industries extractive MNCs. have taken centre stage in public fora in response to Setting aside the fact that the enclave hy- the latest round of mounting public pressure”. The pothesis probably never was entirely correct debates on extractive FDI center around two (Wilkins, 1998), a recent revisionist litera- issues: 1) How to ensure that rents (tax in- ture argues that the dynamics of extractive come, fees, levies, royalties etc.) are extract- FDI have changed fundamentally in recent ed from extractive operations and distribut- years, rendering the enclave concern, if not ed fairly; 2) How to ensure that the foreign obsolete, then less germane: First, Western extractive investors produce jobs, skills and extractive MNCs are altering their strategies technology benefits for the host economy toward greater outsourcing of non-core ac- through linkages and spillovers. The former tivities, offering opportunities for local firms issue has received most attention in the lit- to link up to the MNCs (Morris et al., 2011a). erature (see e.g. Lundstøl et al., 2013 for a Second, MNCs are increasingly adopting review), however in recent years the issue of CSR and community-oriented strategies to linkages and spillovers has moved to the fore reduce risks and obtain a ‘social license to op- of the extractive debates in Africa. We will in erate’. A key component in such strategies is this paper focus on the latter. to foster linkages to local industries and firms (ICMM, 2011). Third, the ‘old’ extractives players – the western MNCs – are increas- 2.3 Linkages and extractives ingly challenged, not only from state-promot- Traditionally, linkages within the extractive ed new-comer extractive MNCs from Asia sector have been seen as miniscule. Indeed, (Kaplinsky & Morris, 2009), but also from in- numerous authors have referred to FDI in ex- creasingly competent local African extractive tractives as ‘enclaves’ (Prebish, 1950; Singer, ‘champions’. This, in combination with the 1950; Morrissey, 2012). The enclave argument increased demand for extractives, has meant essentially holds that natural resource seeking that the bargaining relation between MNCs FDI, contrary to what is the case with market and host governments has been altered in fa- and efficiency seeking FDI, will tend to cre- vour of the latter and that governments now ate isolated enclaves in the host economy with are much better positioned to push MNCs to few linkages to local products, financial and foster local linkages. Fourth, improved com- labour markets and with only small contribu- petencies and skills in African manufacturing tions to economic growth (Nunnenkamp & and service sectors (McKinsey, 2011; Hansen Spatz, 2003). The apparent enclave nature of et al., 2013) have incited MNCs to increasing- extractive FDI derives from several factors, ly utilize local skills and capabilities through e.g. that extractive operations typically are lo- linkages. Finally, many donors and interna- cated in remote areas where there are weak tional financial institutions have revised their infrastructures and weak industrial capacity; thinking about extractives and industrial de- that the comparative advantages sought by velopment and are now contemplating how extractive investors typically are unrelated to to use linkages and spillovers from extrac- the industrial capabilities of the host country; tives more actively in industrial development

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strategies (see e.g. ADB, 2013; UNCTAD, micro perspective. Some of these studies are 2013; UNIDO, 2012). In the following, we economic studies that based on econometric will review the literature on linkages and ex- methodology analyze linkages and spillovers tractives in Africa to get an impression of the at the aggregated level. Other econometric current state and dynamics of linkage for- studies use input-output models to measure mation in African extractive industries. The impacts such as multiplier effects at the meso aim is to assess the extent to which the high level. At the meso level, Global Value Chain hopes recently invested in linkages are well theory inspired studies map extractive value founded. chains and the factors shaping firm relations within those chains. Finally, we have inspired firm level studies which typically conduct case studies of linkage and 3. A REVIEW OF THE CSR strategies of MNCs. LITERATURE ON LINKAGES To organize the review of the literature IN AFRICAN EXTRACTIVE on linkages in extractives, we propose a sim- INDUSTRIES ple analytical framework (see Figure 3). The framework makes a distinction between the As a point of departure it should be noted breadth of linkages (how many linkages are that the literature on linkages in African ex- formed, what is the volume, how many jobs tractives is relatively embryonic, and scattered are created) and the depth of linkages (how theoretically and methodologically. Howev- advanced are the activities subject to link- er in recent years, a number of studies have age collaboration and how much local value emerged that try to understand linkages in is added through the linkages). The breadth African extractives from a macro, meso and and depth of linkages are seen as shaped

Figure 3. Analytical framework

Donor intervention

Host country strategy and capabilities

MNC strategy The breadth and and capabilities depth of linkages Impacts

Local rm strategy and spill overs) indirect (direct, and capabilities

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by four sets of factors and their interaction, formation in African extractives. UNCTAD namely governments, MNCs, local firms and (2013) concludes that lack of linkages and donors (see e.g. Altenburg (2001) for a similar limited absorptive capacity in local indus- model). In the following, we will first assess tries has combined to render FDI in extrac- what the literature tells us about the state of tives of limited use to host countries’ devel- linkages and then move on to understand opment. Fessehaie (2011) in a case study of what the literature tells us about the factors copper mining in Zambia found that while shaping these linkages (see Annex Table 1 for mining companies in Zambia directed a sig- a resume of some of the key studies of Afri- nificant share of their expenditures to the can extractives). local procurement, the depth of local link- ages was low, i.e. added value was low. As skills availability was poor due to low public 3.1 What is the state of linkages? investment and low propensity of firms to invest in in-house training, there were only 3.1.1 Overall, linkages are few and shallow few examples of suppliers succeeding to ex- Several recent reports and studies have as- pand their markets and upgrade into high- sessed the state of linkages and spillovers ly-skilled activities. Mjimba (2011) in a case based on econometric methodology. Gener- study of Tanzanian gold mining found that ally, this literature reaches rather pessimis- local and service linkages remained tic conclusions regarding linkages and spill- limited and restricted to low complexity and overs from extractive FDI in Africa. Based low criticality (mainly on a cross-sectional review of the linkage food and beverages and security). Critical and spillover literature on Africa, Morrissey supplies (critical to the buyer) were largely (2012) concludes that the contribution of imported, with virtually no local value add- FDI to African economic growth has been ing. According to Mjimba in particular two limited. This is because the dominant FDI in factors limited the linkage formation, name- Africa is extractive FDI which tends to foster ly the skills deficit in Tanzanian industry few linkages. Moreover, where linkages are and the incoherent policy measures adopt- formed, they will tend to produce few spill- ed by the Tanzanian government. In a case overs on the wider local economy. Hence, study of Ghanaian gold mining Larsen et al. African FDI “is often of the wrong type because in- (2009) found that liberalization of FDI in vestors are more interested in extraction than produc- this industry led to insourcing of previously tion” (Morrissey, 2012: 28). As a consequence outsourced activities, causing a reduction in of the lack of linkages, FDI is leaving few local linkages. In areas where outsourcing benefits on host countries other than direct was maintained, it mainly took place to for- employment, (a share of) export earnings and eign suppliers represented in Ghana. More- some revenues. Other econometric studies over, all advanced inputs such as machinery confirm that linkages in African extractives and equipment were imported. are few and shallow and that spillovers on the broader economy are miniscule (Bwalya, 2006; Akinlo, 2004). 3.1.2 But there is evidence of linkage potential From a value chain perspective, a number In spite of the overall pessimistic view of link- of studies similarly point to limited linkage ages, recent research has produced evidence of

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linkage potential in extractives. In the major Nigeria – in an African context – has made Open University/University of Cape Town huge strides forward, local content in Nige- research project ‘Making most of the Com- ria is still significantly below local content in modities’ (MMCP), the breadth and depth of countries like Brazil, Malaysia and Venezuela extractive linkages in eight African countries (Morris et al., 2011b). were analysed from a Global Value Chain per- In general, the literature suggests that time spective (see Morris et al. (2011b) for an over- is of essence in the development of local con- view of findings). The project concluded that tent. Hence, several authors (Amendolaigne of the eight African countries studied, extrac- et al., 2013; Merlevede et al., 2011) argue that tive linkages in two of them were of increas- as Africa is relatively new to extractive FDI- ing breadth and depth (Ghana and Nigeria); in based development, it is likely that the lack of two of them of increasing depth only (Angola linkages detected could be related to the recent and Botswana); in three of them ‘shallowing’ nature of the development of this industry, (decreasing depth) (Gabon, South Africa and rather than inherent structural deficiencies. Zambia); and in one, Tanzania, ‘static’. Over- There are a handful of studies reporting all, the project produced mixed evidence of that skills obtained by local firms through linkages in African extractives. Hence, it was linkage collaboration with MNCs have been concluded that linkage formation in African used to move into new industries. For in- extractives remains limited and that where stance, Lorentzen (2008) provides an exam- linkages existed, their depth was ‘thinner’ ple of a South African firm which transposed than their breadth. Nevertheless, the study skills regarding X-ray technology obtained in displayed a number of success stories and con- the diamond industry to develop a new busi- cluded that there is a large untapped potential ness in the medical industry. ADB (2013) re- for spurring development through linkage for- ports that as many of the skills acquired by mation in African extractives. African engineering firms engaged in linkage Linkages are often discussed under the collaborations with MNCs are ‘generic’, they heading of local content or local procure- have been used to generate new businesses ment. ADB (2013) reports that in the Zambi- in other industries. Perkins & Robbins (2011) an mining industry between 60 percent and report that providers of infrastructure ser- 86 percent of goods and services are pro- vices have developed skills that can be used cured locally in Zambia. However, at closer in other infrastructure projects. This is par- inspection, the ‘local’ firms were often im- ticularly the case for ‘high volume mineral port firms creating little local value added. resources’ (e.g. coal or iron), whereas the po- More encouraging evidence is found from tential is less for low volume extraction (e.g. the Nigerian oil industry where it is report- gold and diamonds), which tend to promote ed that local content has gradually increased enclave-type effects. over time, from a level of around 5 percent A number of studies assess so-called mul- before 2000, over 14 percent in 2003 and 20 tiplier effects of FDI based on input-output percent in 2004, to around 35 percent in 2010 models (for a review of methodologies to (UNCTAD/CALAG, 2006; Ovadia, 2013). measure multiplier effects, see Tordo et al., The majority of local firms involved in those 2013). Among these multiplier effects are activities were controlled by local job creation at local linkage partners. ADB (Oyejide & Adewuyi, 2011). However, even if (2013) assesses that job creation at local link-

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age partners in extractives oscillates between fostered few local linkages and that those one and three jobs. Lundstøl et al. (2013) es- linkages mainly were to local representations timates multiplier effects in mining to range of foreign supplier firms (Larsen et al., 2009). from a factor one to a factor six. A study of Similarly, Mjimba (2011) argued that the ‘lo- mining in Zambia (McMahon & Tracy, 2012) cal’ procurement made by gold mines in Tan- suggests that each direct job in mining firms zania overwhelmingly was made from for- generated 0.7 additional jobs at first tier min- eign suppliers and that only low value-added ing suppliers. In addition, five times as many and low critical tasks were performed by lo- jobs were created outside the mining sector cally controlled companies. Even the locally through ‘induced’ effects. A study from the controlled firms often had significant foreign Ghana gold sector (Kapstein & Kim, 2011) interests involved. More generally, Morris et found that 2.8 jobs were created at suppliers al. (2011c) report that many linkages between for each job created at the mining operation MNCs and local firms in African extractives proper. This study moreover suggests that for seem to be simple ‘window dressing’ activi- each direct mining job created, 28 indirect ties, transferring the efficient imports of sup- and induced jobs, formal as well as informal, plies by the MNC with less efficient imports were created. by local entrepreneurs. Overall, these studies suggest that link- ages in extractives may be in the process of becoming more widespread and that these 3.1.4 Inter industry spillovers are larger than linkages may lead to significant indirect job intra industry spillovers creation as well as skills upgrading and other Generally, econometric studies of aggregat- spillovers on the local economy. However, it ed FDI data conclude that the potential for is also clear that these deviations from the en- learning and spillovers is higher between clave situation only occur under certain con- industries than within industries (Nunnen- ditions. Below in section 4 we will examine kamp, 2002; Rugraff & Hansen, 2011) which these conditions in more detail. is also the impression from the literature on African extractives. Hence, Bwalya (2006) in a cross-sectoral econometric study based on 3.1.3 Linkages are often to local panel data from the World Bank Regional representations of foreign suppliers Program on Enterprise Development found As argued above, there is evidence that that there were no significant intra-industry MNCs increasingly are sourcing activities spillovers, while there were significant in- and functions to suppliers and service pro- ter-industry technology spillovers from for- viders in the African host countries. Howev- eign firms to local firms. Focusing specifical- er, numerous studies suggest that these ‘local’ ly on the African extractive industry from a partners typically are foreign controlled firms value chain perspective, Morris et al. (2011a) (Morrissey, 2012; UNCTAD, 2013). In other argue that backward linkages have larger de- words, it appears that MNCs in extractives velopment potential than horizontal linkages. to a large extent are transposing their global In their study of extractive industries in eight value chains to developing countries. For in- African countries they found that in four of stance, a study of gold mining in Ghana con- these no horizontal linkages were identified, cluded that foreign investors in this industry in two they were ‘probable’ (but not identi-

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fied) and in one (South Africa) there were the technologically and financially superior substantial horizontal linkages (Morris et al., and politically well-connected MNCs, and 2011b). In contrast, there was much broader MNCs are often forced to shut down opera- evidence of backward linkages. tions due to illegal actions by artisanal min- Unfortunately, given the mediocre results ers. Kweka (2009) reports that there is very of horizontal linkage promotion, African little evidence of actual linkage collabora- governments have almost exclusively focused tions between MNCs and artisanal miners in on fostering horizontal linkages at the ex- Tanzania, and although there in theory may pense of backward linkages (Morris et al., exist spillovers in the form of demonstration 2011c). The reason why spillovers are more and competition effects on local miners from likely between industries than within indus- MNC investments, the evidence is scarce. tries is that MNCs are more willing to share Likewise, a study of gold mining in Ghana technology and knowhow with linkage part- found that there were no linkages between ners upstream and downstream in their value large-scale foreign mining operations and the chains than they are with firms in their own local small-scale mining industry, maintain- industry which potentially can become com- ing the large-scale gold mines’ status as en- petitors. claves (Larsen et al., 2009). The most common type of horizontal link- age is to state-owned extractive firms. The limited research on such extractive joint ven- 3.1.5 Backward linkages may have higher tures tends to conclude that spillovers and potential than forward linkages learning effects have been limited. The state The literature hypothesizes that backward owned enterprises typically become ‘sleeping linkages to suppliers and service providers partners’ and minimal technology transfer are more common and have higher devel- and skills upgrading take place. For instance, opment potential than forward linkages to from Tanzanian mining Kweka (2009) re- processors and distributors. Hence, Korinek ports that little learning has taken place in (2013) and ADB (2013) argue that as extrac- Tanzanian joint ventures and that none of tive processing industries (forward linkages) the Tanzanian joint venture partners created are capital intensive and offer relatively low through mandatory ownership programmes returns, their linkage potential is limited, reached skills and technology levels where whereas there are more opportunities (and they could undertake mining operations more multiplier effects) involved in develop- alone. ing backward linkages. Indeed, most of the A number of studies examine intra industry evidence of linkage broadening and deep- linkages and spillovers to artisanal and small- ening from African extractives comes from scale mines. This relationship is for instance backward linkages although there also are analyzed by several economic and political examples of successful forward linkage for- economy studies of mining (see e.g. Lange, mation, the prime example being Botswana’s 2006; Curtis & Lissu, 2008; Kweka, 2009; diamond-polishing industry (Mbayi, 2011). Bourgouin, 2011; Therkildsen & Bourgouin, However, the evidence on this matter seems 2012; Pedro, 2006). Mainly, the relationship too limited and scattered to arrive at firm is described as hostile and adversarial: arti- conclusions regarding the strengths of back- sanal miners are frequently crowded out by ward and forward linkages, respectively.

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3.1.6 Summary sion of linkage promotion activities’ role in Overall, the literature finds few and relative- industrial development strategies and moving ly shallow linkages in African extractives. on to examine specific linkage promotion ac- However there are exceptions where suc- tivities. cessful linkages have been fostered, especial- ly backward in the MNC value chain. What Industrial policies and linkage promotion do we make of this mixed evidence? First, Forming local linkages is part of MNCs’ the finding could be ascribed to the different strategies to reduce costs, increase efficiency, methodological and theoretical lenses adopt- access resources and capabilities, and reduce ed by the various studies (Rugraff & Hansen, risks. However, the market optimum for link- 2011). Hence, there seems to be a tendency ages may be different from the social opti- that econometric studies which look at ag- mum. Linkages may be undersupplied due to gregated data, find little evidence of posi- various market failures such as lack of infor- tive effects, whereas firm-level studies and mation about linkage opportunities or lack studies of multiplier effects tend to produce of availability of linkage support services. Or more evidence of spillovers and linkages (see they can be caused by governance failures, Morrissey, 2012 or Rugraff & Hansen, 2011 e.g. lack of coordination between different for similar arguments). Second, the mixed areas of public policy. Hence, theoretically evidence is most likely caused by the fact there may be good reasons for governments that linkage formation is studied in differ- to intervene in linkage formation. ent contexts, that is, in different countries, Linkage formation seems to be in the pro- in different sectors, and involving different cess of becoming a key aspect of industrial firms. Hence, certain contexts are more con- policy in South Sahel Africa. As argued by ducive of linkage formation than others. In Morrissey (2012), without a coherent indus- the following we will examine how the liter- trial policy, SSA economies will be unable to ature accounts for the influence of context identify the important linkages to be promot- on linkage formation. ed through FDI, and even less able to provide the incentives and capabilities for spillovers to occur. Similarly, Mjimba (2011) argues that 3.2 The factors promoting and the main public policy problem is govern- constraining linkage formation ment failure to translate and implement long- As mentioned in connection with the pres- term macro policy visions to sectoral policies entation of the analytical framework, we with appropriate sanctions and incentives. argue that linkages are shaped by the strate- The question is what type of industrial gies and capabilities of four actors, namely, policy should be adopted to effectively pro- governments, MNCs, local firms, and do- mote linkages. Here, a distinction between nors. four generic approaches or industrial pol- icies has been made, namely ‘passive open door’, ‘active open door’, ‘strategic target and 3.2.1 Government strategies and capabilities guide’, and ‘strategic restrict and exploit’ pol- In the following we will analyse how African icies (Lall, 1995; Altenburg, 2001). Most cur- governments are promoting likage forma- rent linkage policies oscillate between active tion, starting with the most generic discus- open-door policies and strategic target and

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guide policies (Altenburg, 2001). The two the premise that attracting FDI and provid- positions can be seen as reflections of differ- ing a stable and conducive business environ- ent orthodoxies in relation to industrial pol- ment will more or less automatically lead to icies: On the one hand we have the ‘neo-lib- linkages, and hence there will be no need for eral perspective’ focusing on getting policies, specific linkage formation measures; indeed, institutions and governance ‘right’. On the trade- and investment-related performance other hand we have the ‘heterodox develop- measures may prevent or limit linkages and mentalist perspective’ focusing on strategic spillovers on the host economy (see e.g. Mo- intervention, establishment of appropriate in- ran et al. 2005). This approach is related to stitutions, and taking into consideration the the so-called Washington Consensus of the political processes and power relations when 1980s and 1990s which held that macro-eco- devising strategies (Lauridsen, 2013). nomic stabilization, liberalization of factor Where passive and active open-door pol- markets, and opening of economies will spur icies employ mainly ‘horizontal’ measures private sector development. The active open- aimed at strengthening capacity in local in- door policy in contrast, prescribes some in- dustry and linkages across industries, strategic tervention in linkage formation, e.g. through policies employ ‘vertical’ measures aimed at development of supplier capacity and infra- carefully selecting and promoting the devel- structure, however across industries. opment of particular industries (Lall, 1995). On the other hand, advocates of strate- The passive open-door strategy is based on gic target and guide policies hold that local

Figure 4. Approaches to FDI policy in developing countries

Passive open-door policy Open-door policy with Strategic target and Strategic restrict and with limited and only active and sometimes guide-policy with exploit-policy with horizontal interventions selective support selective interventions strong selective to improve supply measures to improve to develop advanced interventions conditions supply conditions factors

No industrial policy Liberalization of trade Strategic vision and Strategic vision and targets de ned, and investment policies, targets formulated; targets formulated; no restrictions to FDI; no restrictions to FDI; Selective targeting of Import and FDI Wholesale liberalization Some, mainly horizontal, “developmental” FDI; restrictions, mandatory of trade and investment measures to improve technology licensing; Support measures to policies; relevant infrastructure, encourage and induce Technological manpower training, and Few and only horizontal (rather than trying to development driven by to promote the location policies to improve impose) technological local rms: market abroad national supply spillovers; reservation policies, conditions; export promotion, Selective support to picking winners and FDI promotion focussing foster innovations, selective subsidies for on given factor develop skills for local companies endowment rather than the future and help dynamic potential promising SMEs

Source: Altenburg, 2001

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content requirements as well as various per- to the wider economy promoted (Bourgouin, formance measures related to export perfor- 2011). This passive open-door approach to mance and technology transfer are required extractives was to a large extent encouraged if the potential of FDI is to be unleashed – if not induced – by international finance and local industrial upgrading is to be pro- institutions (in particular the World Bank moted (Lall & Narula, 2004; Chang, 2002; and the IMF) and other donors (Bourgouin, Altenburg, 2011). Local content rules, if im- 2011). plemented in a competitive environment, Several authors argue that African gov- will allow infant local supplier industries to ernments recently have become more asser- gradually develop capabilities to meet the tive in relation to foreign investors and have standards of the foreign buyers. And prefer- moved from passive open-door approaches ential treatment of local suppliers may assist toward more selective and targeted approach- in curbing the market power of foreign firms. es, e.g. targeted programmes to develop local In line with this, UNCTAD (2013) argues supplier capacity, mandatory local content that it is insufficient simply to rely on mar- programmes, renegotiation of concessions, kets to create extractive linkages. This will and investor screening (BSR, 2011). The aim only “entrench the burgeoning bargaining power of is not only to spur development of extrac- the TNCs at the expense of often diverse and frag- tive-related industries, but more generally, mented commodity producers” and will force local to promote development of the ailing Afri- industries into ‘races to the bottom’ where can manufacturing sector (UNIDO, 2012). they compete on low costs and low standards. The more assertive approach is reflected in The solution is to assist local firms in mov- the evolution of FDI legislation. According ing into functions and activities that generate to UNCTAD (2012), the number of restric- higher value (Sigam & Garcia, 2012). This tive interventions relative to the number of will require “effective public-private partnerships favourable interventions has been on the rise and an industrial policy flexible enough to respond in Africa during the 2000s. to a rapidly changing global economy” (UNCTAD, 2013). This position on linkage formation is Specific linkage interventions in accordance with the ‘development state’ ar- A host of instruments and strategies are gument which holds that strong coordination employed by African governments to pro- and collaboration between government/bu- mote linkages in extractives, e.g. ownership reaucracy and private sector is a pre-requisite requirements, local content requirements, for effective growth and economic develop- local processing standards, hiring require- ment (Amsden, 1989; Evans, 1995; UNIDO, ments, mandatory CSR programmes, sup- 2012). plier development programmes etc. (UNC- During the 1990s and 2000s, African gov- TAD, 2010a). These linkage promotion ernments have intervened extensively in ex- activities can be clustered into essentially tractive sectors, mainly through attraction of four types of intervention that are more or FDI, privatization, and through developing a less interrelated: Specific linkage policies; stable, transparent and private sector friend- strategic FDI attraction; improving the ly business environment. Only to a limited general investment climate; and building extent did these interventions consider how absorptive capacity in local industry (UNC- linkages could be formed and how benefits TAD, 2010a) (see Figure 5).

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Figure 5. Components in a linkage promotion policy

Improving the investment climate

Speci c linkage policies

Strengthening Strategic FDI absorptive attraction capacity

Source: UNCTAD, 2010

Strategic FDI attraction common types of measures are ownership re- The first step in linkage promotion is to quirements and local content requirements: target those investors that have the largest Concerning ownership requirements, Af- potential for linkages and spillovers (Amen- rican governments have historically relied dolaigne et al., 2013). Due to scarce resources extensively on ownership requirements to in most developing countries, it is argued that promote linkages and spillovers from ex- it is essential that efforts are concentrated on tractive FDI. Hence, African governments investors with large linkage potential (Amen- have required extractive MNCs to have lo- dolaigne et al., 2013). Governments can select cal ownership, typically state ownership, in investors with high linkage potential and/or their operations. The philosophy behind lo- provide specific incentives for those MNCs cal ownership requirements was that as ex- that have the best linkage package to offer. tractive operations are enclaves, learning and Where developed countries typically attract upgrading opportunities will more effectively preferred types of investors through subsi- be promoted through joint ventures with lo- dies, the constrained budgetary situation in cal enterprises (Morris et al., 2011a). many developing countries means that tax Morris et al. (2011a) argue that African exemptions and regulatory exemptions are governments in their pursuit of horizon- the preferred methods to attract the right tal linkages have ignored potentials of for- kind of investors (Blomström et al., 2003). ward and in particular backward linkages. A host of instruments are employed to pro- Specific linkage policies mote vertical linkages in extractives, e.g. A second step in linkage promotion is to local content requirements, local processing introduce measures that force or encourage standards, local hiring, the creation of man- MNCs to link up to local firms. The two most datory CSR programmes, supplier develop-

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ment programmes etc. (UNCTAD, 2010a). ploitation; 4. Protection of strategic sectors. The most common (and controversial) The neoliberal literature on the other hand measure is local content requirements. Ado fears that local content rules may be subject (2013) reports that resource-rich developing to capture from bureaucrats and entrenched countries have seen a tide of local content local industry interests; lead to the promotion requirements and rules adopted in recent of the wrong industries; lead to inflated pric- years. A bourgeoning literature has emerged es; and/or reduce the overall FDI level in the that focuses on the conditions and effects country (see Warner (2010) for an overview). of local content (see e.g. Kazzazi & Nouri Hence, Warner (2010) argues that local con- (2012) or Ado (2013) for overviews). Local tent rules may significantly affect MNCs’ net content has long been practiced e.g. in the present value (NPV) calculation and internal defence industry, the wind turbine industry, rate of return (IRR) and that overzealous the automobile industry and especially in local content requirements eventually may the oil and gas industry. Also in Africa, lo- scare away FDI. Moreover, sudden chang- cal content rules have been a driver of link- es in local content requirements may be ex- age formation: From Angola, Teka (2011) tremely harmful to the local investment cli- reports that manufacturing linkages in the mate; indeed, it is argued that changes in local Angolan oil and gas sector have expanded content requirements are more worrying to since the early 2000s and that local content foreign investors than changes in financial policy pressure has been the main driver requirements such as taxes and royalties. This of this process. From Nigeria it is reported is because whereas changes in taxation and that local content measures have gradual- royalty requirements generally are subject to ly increased local content in the oil indus- quite formalized arbitration procedures in ‘fi- try from a level of around 5 percent before nancial stabilization clauses’ and internation- 2000, over 14 percent in 2003, 20 percent in al investment agreements, changes to local 2004, and 35 percent in 2010 (UNCTAD, content rules are largely in a legal grey zone. 2006; Ovadia, 2013). This level is however A middle position (see e.g. Tordo et al., still well below levels achieved in more ad- 2013; UNECA, 2013; Altenburg, 2001) holds vanced resource-rich economies (45-75%). that local content requirements are accept- The literature is somewhat ambiguous as able under certain conditions. to the merits of local content policies: The de- velopmentalist literature (see e.g. Wade 1990; • A cost benefit analysis must be conducted: Amsden, 1989; Evans, 1995) tends to argue Warner (2011) argues that governments, that local content can assist development of when designing local content policies, weak local industries, facilitate technology should observe the core principle called transfer and increase domestic production ‘the golden thread’, that is that contracts and job-creation. Ado argues that there are should be awarded based on internation- four arguments in favour of local content: 1. al competiveness in terms of price, quality Protecting infant industry; 2. Curbing market and delivery. If this principle is not ob- power of foreign industry vis-à-vis local in- served there is, Warner argues, a danger of dustry; 3. Providing social compensation to ‘double ’, that is that govern- and harmony with local communities suffer- ments in the pursuit of correcting market ing the environmental and social costs of ex- failures related to infant industry and mar-

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ket power of foreign buyers create produc- to manage linkages in extractives is lacking tion inefficiencies and inflated prices. in African countries (see e.g. BSR (2011) • Local industrial capacity must be taken or Wyse & Shtylla (2007)). Mjimba (2011) into account: UNECA (2013) argues that if reports how Tanzanian legislation in fact governments intend to increase the depth is imposing a penalty on prospective local of linkages, they need to target local indus- supplier firms because they, unlike foreign try skills development, technological capa- investors, will have to pay import tariffs. bilities, and access to capital, etc. Likewise, Lack of coordination and rivalry between the ADB (2013) argues that if mandatory different administrative units (between measures are to be implemented, some re- ministries or between local and central ad- lationship to world market prices must be ministrative levels) may further undermine established and the requirements should the institutional underpinnings of local take into account the absorptive capacity content (BSR, 2011). of local suppliers. As a starting point, the ADB argues, any linkage promotion in- One thing is whether local content measures tervention must assess which types of in- are desirable, another is whether they are per- puts can realistically be sourced locally and mitted by international trade and investment which types of inputs must be sourced in- law. Hence, local content rules are restricted ternationally because they are not available by international trade agreements, especially locally. the WTO TRIMs (Trade Related Investment • The strategies and capabilities of MNCs Measures) agreement which restricts perfor- are understood: Morris et al. (2011a) ar- mance measures related to trade. Mandatory gue that if governments pressure MNCs requirements to source locally can be seen as to local content against the MNCs’ inher- a subset of such performance requirements. ent strategies, they may in fact experience How much local content rules are prohibit- a ‘shallowing’ (meaning that less advanced ed is however disputed. Chang (2002) refers activities will be made subject to linkages) to the WTO rules and other trade rules as and/or a ‘slowing down’ (meaning a slower ‘kicking away the ladder’, as they prohibit the implementation of linkage activities) (Mor- kind of performance measures and protective ris et al., 2011a). policies that were the basis for western coun- • Local institutional capacity must be con- tries’ industrialization. Warner (2011) and sidered: The more ambitious the local con- Ado (2013) argue that if a purchase is legally tent measures are, the greater demands are mandated to be from a local firm, it is clearly on the capacity of government to set tar- prohibited under WTO/GATT non-discrim- gets, devise supportive measures, and es- ination clauses. Others argue that consider- tablish monitoring and evaluation systems. able scope remains for developing countries The problem in many African less-devel- to introduce local content measures, partly by oped countries is that “while the need to correct referring to developing countries’ exemptions market failure is much greater than it is in rich to the non-discrimination and national treat- and institutionally advanced societies, the ability of ment clauses of international trade law, partly the public sector to tackle such failure is also much by introducing such measures in a non-bind- more limited” (Altenburg 2011; 3). Several ing manner (UNCTAD, 2010a; BSR, 2011; studies confirm that institutional capacity Tordo et al., 2013; Ado, 2013).

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Strenghening absorptive capacity vestment in fundamentals – high-quality pub- A third step in linkage promotion, according lic service, institutional and regulatory envi- to UNCTAD (2010a), is to strengthen the ronment, capable government and access to capacity of local supply industries to absorb finance and markets. In his study of Zambia, the opportunities offered by MNCs. Govern- Haglund (2008) finds that the nature of the ment measures to develop local absorptive regulatory environment is key to maximizing capacity can span from policies targeted spe- benefits to society from foreign investment. cific firms and industries that have the poten- Also, UNIDO (2012) argues that MNCs’ tial to link up to foreign investors, to cross- and local firms’ decisions as to whether they the-board capacity development policies. To will engage in contractual relations with each develop local linkages in Africa, it is essential other depend on the likelihood that contracts that governments invest in the development can be enforced by the legal system. If the of local technological capabilities and nation- business environment is non-conducive of al innovation systems (see e.g. Mjimba, 2011; contracts, MNCs will be less inclined to en- Narula & Portelli, 2004). Fessehaie (2011) gage in linkages (UNIDO, 2012). reports that with low public investment in building technological capabilities, African supplier firms are caught in a trap of no ac- 3.2.2 MNC strategies and capabilities cess to investment capital, low technological Our second driver and shaper of linkage capabilities to start with, low incentives to practices in extractives are the MNCs’ strate- adopt new technologies, and high risk that gies and capabilities. Generally, the literature the market will not reward such investment. looks at macro- and meso-level determinants An example of an apparently successful lo- of linkages and little has been written about cal supplier development programme is the firm-level determinants (Mjimba, 2011; Ru- Nigerian Content Support Fund which was graff & Hansen, 2011). In the following we dedicated financial support for Nigerian sup- will argue that recent developments in MNCs’ plier development in the oil and gas industry. strategies and capabilities have opened new Otti (2011) reports that this scheme, together opportunities for linkage formation in Afri- with other local content measures, raised Ni- can extractives. These developments are: 1. gerian local content from 5 percent in 2004 Growing competition among the extractive to 35 percent in 2010. MNCs; 2. Growing disintegration of lead MNCs’ value chains; and 3. Growing MNC Improving the investment climate engagement in development and CSR-related The final element in linkage promotion is activities. according to UNCTAD (2010a) to establish an investment environment that is conducive Growing competition of linkages. As argued by UNCTAD (2013), Extraction is typically a highly capital-inten- many opportunities for spillovers and link- sive activity that demands economies-of-scale ages can be missed due to weaknesses in in- to be viable. Hence there is a pressure to- frastructure, education, research and devel- ward concentration. Indeed, we have in re- opment support, extension systems, and legal cent years seen a strong consolidation of and regulatory environments. Similarly, ADB this sector through mergers and acquisitions (2013) argues that host governments need in- (UNCTAD, 2013). This consolidation pro-

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cess has made some observers fear that the Traditionally, lead extractive MNCs were market and bargaining power of lead extrac- depicted as large, integrated firms charac- tive MNCs will increase and that powerful terized by strong, centralized coordination MNCs will be able to dictate supplier firms from headquarters in western capitals. The and governments their terms (Hoekman & hierarchical MNC offered few opportuni- Martin, 2012). Paradoxically however – in ties for host country suppliers and service light of the consolidation process – other providers to break into the value chain and observers point toward growing competi- obtain contracts. However, as is the case in tion and rivalry within extractives. This is manufacturing and services, also extractives because the inherent oligopolistic nature of have in recent decades witnessed a profound extractives is countered by the arrival of new international disintegration of value chains players from emerging markets such as Chi- (Morris et al. 2011b). Hence we have seen na, South Africa, India and Brazil as well as a significant restructuring of the extractive increasingly competent national champions MNCs, where non-core activities are be- from Africa. The growing competition for ing outsourced and where the boundaries extractive concessions created by these new for outsourcing constantly are moved for- players will, ceteris paribus, strengthen the bar- ward (UNCTAD, 2005; Urzua, 2007; Mjim- gaining power of host governments vis-à-vis ba, 2011). This value chain reconfiguration MNCs and allow governments to put more provides new opportunities for local firms pressure on prospective investors to produce to break into the value chains of large ex- local linkages and spillovers (BSR, 2011). tractive MNCs and is the basis for much of the growing optimism with regard to the Growing value chain disintegration creation of developmental linkages in Afri- In recent decades, there has been a clear can extractives. As argued by Morris et al. movement toward international disintegra- (2011a), “perhaps the most important lesson to be tion of firm value chains within services and learned from the development of outsourcing strate- manufacturing. This disintegration - what gies by lead firms in global value chains is that the some refer to as ‘outsourcing’ - takes place to enclave mentality to diversification in low economies reduce costs, spread risks, obtain benefits of is an anachronism. There is extensive scope for gov- specialization, and tap into the resources and ernments and the private sector – both firms directly capabilities of other firms. Value chain disin- involved in the commodities sector and those with the tegration is typically a carefully planned and potential to develop linkages in the commodities sector strategic process where significant resources – to work together to identify the range of win-win are invested in identifying, negotiating with, outcomes available in promoting diversification”. upgrading and monitoring prospective sup- However, the tendency towards disintegra- pliers and service providers. Hence, firms are tion of value chains is countered by risks and developing shortlists of competent suppli- costs of disintegration: First, the specific de- ers, they are organizing competitive bids for cision to outsource activities depends on the contracts, they are devising supplier develop- transaction costs of the outsourcing compared ment and training programmes, and they are to the internal (or coordination) costs of main- working with authorities to facilitate educa- taining the activity in-house. As pointed out tion, training and local technological capacity by the literature (Williamson (Hansen & Schaumburg-Müller, 2006). 1975; Hennart, 1982), engaging with third par-

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ties in contractual agreements imply additional propriety technology and skills in some Afri- costs in terms of information, bargaining and can developing countries. monitoring that may override the benefits of Third, there are limits to how advanced outsourcing. Hence, if the transaction costs of functions MNCs will be willing to place in contracting with a linkage partner become too linkage collaborations. As pointed out by Por- high, the linkage will not come off the ground. ter (1986), MNCs are increasingly configuring The transaction costs are determined by the their value chains at a global scale, placing val- quality of market support institutions (e.g. ue chain functions according to comparative contract enforcement and information provi- advantage of the various locations. Hence, sion) as well as the quality and reliability of po- higher value added functions such as those tential linkage partners. As institutional envi- related to sales and marketing and R&D are ronments surrounding extractives in African increasingly located in global centers of ex- countries often is weak and underdeveloped cellence in countries offering optimal condi- and as local industrial capacity is lacking, the tions for such activities. Lower value added transaction costs of local linkage formation functions are located in countries with less will be high. Consequently, MNCs will opt conducive conditions (Mudambi, 2007). The either for internalization, or for partnerships consequence is that while more activities re- with foreign partners which have known ca- lated to extractives may be outsourced to local pabilities and proven track records. This is the producers in Africa, these will tend to be lower reason why most of the opportunities offered value added activities (UNCTAD, 2013; Mor- by the outsourcing strategies of lead firms are ris et al., 2011b). Another consequence of the picked up by foreign suppliers. global configuration of extractive value chains Second, outsourcing depends on the de- is that as MNCs demand increasingly special- gree to which MNCs fear leakage of core ized inputs, the entry barriers for less spe- competencies. MNCs may have no problem cialized and less efficient developing country sharing non-core technology and skills with firms become higher (Sigam & Garcia, 2012; local firms; however they will be unwilling to Jourdan, 2008; UNCTAD, 2013). Moreover, risk contributing to the development of future as MNCs need to coordinate the increasing- competitors. As a consequence, MNCs are ly global value chain configuration in order to more willing to engage in vertical (inter-in- obtain scale advantages and synergies, global dustry) linkages than horizontal (intra-indus- integration mandates will increasingly conflict try) linkages (Altenburg, 2001; Nunnenkamp, with mandates to create local linkages: Hence, 2002; Meyer & Sinan, 2009). In line with this the BSR (2011) argues that local procurement Morris et al. (2011a) in their study of Afri- is constrained by MNCs’ quest for strategic, can linkages find that there are fast and large technical and operational alignment and scale opportunities for linkage formation where within the global organization. linkages are outside the core competencies Finally, it is well known from the IB liter- of the MNCs, whereas the opportunities for ature that MNCs from different home coun- linkages are significantly constrained when tries have different propensities to outsource. MNCs are asked to diffuse their core com- These differences can be related to culture, petencies in joint ventures. The unwillingness business networks, ownership structure, or to engage in horizontal partnerships is further relationship to the state. In line with this, confounded by the weak legal protection of several authors point out that linkage prac-

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tices in African extractives depend on the forms of politicization (BSR, 2011). home country of the MNC: The Chinese Where some MNCs adopt linkage devel- MNCs appear to have extensive local linkag- opment programmes as a strategic tool to dif- es in Africa, however, as seen in Sudan oil or ferentiate themselves against competitors or Zambia copper mining, the linkages are pre- handle risks, others are adopting linkage de- dominantly to other Chinese firms (Haglund, velopment activities as part of their CSR pro- 2008; Fessehaie, 2011; Morris et al., 2011a). grammes (Hilson, 2012). Due to extractive Similarly, Morrissey (2012) argues that Chi- industries’ often huge social, environmental nese MNCs only marginally involve them- and cultural impacts, MNCs in these indus- selves in developing local linkages and that tries are increasingly forced to consider how linkages are limited. Instead, Chinese firms they can mitigate their negative impacts and bring more or less everything with them increase their local goodwill through various from China; equipment, supplies, employees forms of outreach and support for local com- and suppliers (UNIDO, 2012). munities. Consequently, most large extractive MNCs have adopted – at least formally – CSR Developmental activities and CSR programmes programmes and activities. Linkage forma- Many extractive MNCs today view link- tion as part of CSR programmes can take the age development as a key part of their busi- form of local procurement policies, training ness strategy, and linkage development pro- and education activities related to local ser- grammes are becoming an institutionalized vice providers and suppliers, or programmes corporate practice, especially in the oil and to involve locals in building infrastructures gas industry (Tordo et al., 2013). Morris et al. etc. (ICMM, 2011; BSR, 2011). (2011b) report that a survey from Nigerian oil industry found that 75 percent of MNCs have supplier development programmes, e.g. 3.2.3 Local industry strategies and training and information exchange aimed at capabilities improving quality, lead time and technolog- A third key driver and shaper of linkage prac- ical capabilities of local suppliers. Such link- tices relates to the capabilities and strategies age development programmes provide MNCs of local firms. Local firms are not automati- with substantial commercial and strategic cally and passively responding to regulatory benefits. First, developing local suppliers may initiatives and/or strategies of MNCs. Local eventually transform into cheaper, more relia- firms have different capabilities and interests ble and higher-quality inputs. Second, linkage in linkage formation and use different strat- programmes may become a ‘license to oper- egies to pursue these interests. In general ate’ in countries increasingly concerned with however, there are strong incentives for most the (lack of) development effects of MNCs; local firms to link up with foreign investors, indeed a proven track record on linkages may partly to increase sales and volume, partly to be an increasingly important differentiator learn and upgrade. in bids for concessions in African extrac- As discussed above, several recent devel- tives. Third, strong linkage formation may opments enhance the opportunities for local be seen as a key ingredient of risk manage- firms to engage in linkages with extractive ment as it may reduce the risk of local-com- MNCs, including MNCs’ growing engage- munity-caused stops-of-operations and other ment in local linkage development as well

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as government-promoted local procurement as extractive supply and service industries in- programmes. Moreover, the financial, stra- creasingly specialize and as lead MNCs, pres- tegic and technological capabilities of Afri- sured by governments and NGOs, raise envi- can industries have improved significantly in ronment, health and safety standards (Sigam recent years (McKinsey, 2011), thus making & Garcia, 2012; Jourdan, 2008; UNCTAD, linkage formation more feasible. 2013). Hence, while, as argued before, CSR However, there remain huge problems programmes by MNCs may create new op- with the abilities of African firms to link up portunities for inclusion of local suppliers in to foreign investors and benefit from such the lead MNC value chain, these CSR pro- linkages, among those weak capacities and grammes may also raise the entry barriers and transactional risks of linkages: costs for local suppliers. Not only does the in- troduction of CSR programmes raise the bar Capacity barriers to linkage formation in terms of standards, auditing and reporting Several studies find that a main cause of lack requirements, these are also difficult to work of linkages in African extractives is the capa- with for local firms because different MNCs bility gap between MNCs and local industry impose different and sometimes conflicting (Diyamett et al., 2012; Robbins et al., 2009; standards and requirements. Morrissey, 2012). The gap is partly related to An aspect related to technology gap con- technology, partly to scale and productivity cerns the ability of local firms to learn and (Robbins et al., 2009). Based on an expert sur- develop new competencies based on the vey, the African Development Bank finds that linkage collaboration, what some refer to as technological complexity and lack of skills in ‘absorptive capacity’. The absorptive capacity local industry are among the main obstacles in extractive industries in Africa is general- to linkage development in African extractives ly considered very low (Osabutey & Debrah, (ADB, 2013) (see Figure 6). It is argued that 2012; Narula & Portelli, 2004: Morris et al., the technology gap in fact may be widening 2011c) and is seen as a key factor why host

Figure 6. Obstacles to linkages

Technological complexity of resource production/limited local capacity to enter value chains 62 Low relative competitiveness of local suppliers/processors 55 Insuf cient skill base and lack of innovation 52 Insuf cient infrastructure (transport, , telecommunications) 52 Others 21 Lack of conductive policy framework 21 Enclave mentality of resource companies 17 Lack of monitoring and positive/negative sanctions for non-compliance with policies 10 Trade barriers in countries of export destination 0 0 10 20 30 40 50 60 70

Source: ADB, 2013

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countries fail to benefit from linkages (UNC- investments, the asset specificity of the MNC TAD, 2013). Nevertheless, there are excep- transaction may become too high for the lo- tions where it has been possible to build local cal firm. Only if the assets dedicated to the industries with some level of absorptive ca- MNC linkage can be used in linkages with pacity; Ghana gold mining or Botswana dia- other MNCs in the country or region, or if mond mining are the usually cited examples the assets can be put in use in other indus- (Morris et al., 2011b). tries, will the linkage make sense (Robbins Finally, the weak financial position of et al., 2009). many African supplier firms may impede linkage formation. Especially SME suppli- The diversity of ‘local firms’ ers will have limited working capital and will One of the weaknesses of much of the liter- therefore be unable to undertake the neces- ature on FDI and linkages in extractives is sary investments to service foreign buyers. that local supplier firms generally are seen Moreover, as discussed, linkage formation, as a coherent group, reacting more or less regulation and tariff policies may sometimes passively and similarly to opportunities and disfavour local supplier firms. For instance, constraints. However, the potential local many African countries grant tax and other supplier firms have widely differing interests exemptions to foreign firms in order to at- and capabilities. Some firms will see foreign tract FDI. However, as local firms do not get investors as a threat and adopt ‘shelter strat- such exemptions they will have a competitive egies’, while others will embrace the arrival disadvantage (Mjimba, 2011). Also currency of foreign investors as an opportunity to ac- fluctuations may hit the competitive position quire skills and gain market access. To sim- of local supplier firms hard. Supplier contracts plify, it can be argued that we have at least are often denominated in USD. If and when four categories of local firms with differing the currency appreciates – as is often the case interests in linkages, ‘the national champi- in resource-rich developing countries – input ons’, ‘the artisanal extractive firms’, ‘the lo- prices will grow, thus undermining the com- cal conglomerates’, and ‘the entrepreneurial petitiveness of local suppliers (ADB, 2013). challenger’ firms (Hansen et al., 2013). The two former categories have the potential of Transactional risks of linkages engaging with extractive MNCs in horizon- It should be noted that while there may be tal linkages, while the two latter will focus huge commercial and strategic benefits from on vertical linkages: The ‘national cham- linking up to MNCs, linkages may also intail pions’ are engaging in horizontal linkages substantial risks for local firms. Linkages im- with foreign investors, partly as joint venture pose transactional risks for local firms which partners, partly as technology partners. The may explain why local firms sometimes may relationships will in early stages of the joint be reluctant to enter linkages: First, lack of venture be shallow and one-directional, but contract enforcement, instability of insti- as national champions gain knowledge and tutions, and general regulatory uncertainty experience from the partnership, the rela- in many African countries may discourage tionship may become more reciprocal. In MNCs and local firms from engaging in African countries like South Africa, Ghana contractual relations. Second, as extractive and Nigeria there is evidence that increas- investments typically are large-scale, one-off ingly competent local players evolve from

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joint venture collaborations with MNCs in even more attractive to these entrepreneur- the mining and oil sectors, although there ial firms. also is evidence countering this (Kweka, 2009). ‘Artisanal extractive firms’ are small mining operators with low technology and 3.2.4 Donor strategies and influence skill level. Such companies often have very The final force driving and shaping linkages significant job-creation and income-gen- is the donor community, which plays a key erating potential (Pedro, 2006). However, role in large parts of Africa. With the grow- their relationship to MNCs is strained, at ing prices for extractives and the intensify- best, as MNCs due to their better access to ing race to access African extractives, donors governments and their superior technology have become more engaged in the extractive and finance, frequently crowd out artisanal industry. Extractives may be the most potent mining. Linkages to such firms do exists development engine in many African coun- (Kweka, 2009) but are very hard to estab- tries and donors are seeking for ways in which lish due to the huge technology gap and due they can link up to this development. Moreo- to the fact that they essentially are potential ver, the arrival of large extractive foreign in- competitors to the MNCs. ‘Local conglom- vestors in Africa fundamentally changes the erates’ are typically highly diversified firms landscape of African development assistance that have evolved and thrived due to lack of by introducing a – to development assistance competition in the home market and due to – major competing source of development fi- privileged access to government. In theory, nance (Jensen & Wantchekon, 2004). they have a certain level of organizational Historically, the role of donors in extrac- and technological capability that could allow tives in Africa has been related to the liber- them to embark on collaborative ventures alization and structural adjustment agendas with MNCs. Moreover, being politically well of the 1980s and 1990s. Hence, one outcome connected, they will be well positioned to of structural adjustment programmes were obtain contracts with the foreign investors. widespread privatization of state-owned nat- However, having evolved behind protective ural resource extraction operations and liber- tariff and regulatory walls, these conglomer- alization of FDI regimes to allow for greater ates may not have the mindset, nor the effec- foreign involvement in extractives. These re- tiveness and dynamic capabilities required to forms were to a large extent conceived and engage with foreign investors in linkage col- promoted by the World Bank and the IMF laborations. In contrast, ‘the entrepreneur- (Bourgouin, 2011). On the one hand, these ial firm’ – basically firms that are seeking reforms provided new opportunities for de- to operate on commercial terms and adopt velopment of the sector by facilitating inflow competitive market-oriented strategies – will of foreign investors and technology. On the tend to see the arrival of foreign investors in other hand, as the reforms were largely de- extractives as an opportunity for generating signed to correct the problems created by more activities and acquire new capabilities the highly dirigiste approaches to extractives and skills. The limited growth opportunities management of the 60s and 70s, they went in a home market dominated by state-pro- to great lengths to reduce states’ leverage in tected conglomerates and an informal indus- the sector (Killick, 2004). During the 2000s, try may make the foreign linkage strategy mounting critique of the lack of development

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contribution and negative side effects of FDI 2013). Moreover, donors have eagerly sup- in African extractives prompted donors to ported initiatives such as the UK-sponsored revisit their strategies in the sector. In a re- Extractive Industries Transparency Initiative port from 2003 – the Extractive Industries (EITI) which is aimed at improving extrac- Review – the World Bank formulated a new tives management institutions, prevent fraud, vision for extractive governance with more and increase transparency. Another initia- focus on transparency, institutional capaci- tive is the IMF’s ‘Multi-donor Tropical Trust ty, control of environmental and social side Fund on Managing Extractive Wealth’ which effects, and stakeholder involvement (World provides techical assistance to resource-rich Bank, 2003). The priciples laid out in this re- develping countries on how to avoid adverse port provided the basis for the World Bank’s macro-economic impacts of extractive rents. broad engagement in extractives across the The growing use of budget support by do- African continent in subsequent years. nors in countries such as Ghana, Uganda, Most recently, extractives are receiving re- Mozambique and Tanzania has furthermore newed attention from donors due to growing prompted donors to take a more direct inter- interests in African natural resources, but now est in the collection and allocation of rents the configurations shaping the donor engage- from extractives (Morrison, 2007). ment are radically different from those exist- While donor involvement in extractives ing just 10 years ago. Hence, donors are now has focussed on taxation, donors have recent- facing much more assertive governments, ly started gearing up for engagement in link- and donors no longer have the leverage they age formation. In line with this, Bourgouin had before, when African governments faced (2011) calls for a more activist approach by severe macro-economic imbalances. donors and argues that “interventions by donors As a consequence of the huge commercial (and NGOs) should be designed to improve the eco- and developmental potential of extractive nomic integration and to attract competitive invest- FDI, we see donors throughout the African ments that boost regional linkages between mining continent gear up to engage in this sector. and other sectors. In order for donors and NGOs to Among the activities of donors are 1. Provid- help positive development gain a foothold, they should ing technical assistance and dissemination of work to improve the growth and employment linkages experiences with best practices across devel- of large-scale commercial mines with the surrounding oping countries; 2. Building infrastructural, societies as well as to improve their fiscal linkages with institutional and absorptive capacity; 3. Fa- the host countries”. It is however widely disput- cilitating specific extractive investment pro- ed how and how much donors should involve jects; 4. Mediating between extractive MNCs themselves in linkage promotion, especially and local governments. One of the key the- as linkage promotion easily becomes ‘indus- matic areas of donor involvement in extrac- trial policy’, an area of donor intervention tives relates to taxation and of that has been shunned by donors for decades. rents. Hence, the World Bank has in sever- Donors are thus seeking ways in which al African countries conditioned its project they can intervene in linkage formation. The loans to development of extractive industries World Bank and other donors have under- and infrastructures on the establishment of taken scoping missions across African ex- transparent mechanisms for distribution of tractives, aimed at identifying local industry revenues (Morrison, 2007; Lundstøl et al., capabilities and gaps in these. These scoping

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missions provide the basis for organizing vo- cently stressed how extractive FDI offers cational and tertiary training programmes re- new development opportunities for Africa lated to extractives industries and for identify- in terms of generation of rents and creation ing linkage opportunities. Moreover, donors of linkages and spillovers. In particular the are involved in developing the physical and linkage issue has gained prominence on the institutional infrastructure related to linkage development agenda. Through vertical link- formation in extractives. There are also ex- ages, extractive FDI may develop local in- amples of donor interventions aimed at pro- dustries upstream and downstream in the ex- moting specific FDI-local industry linkages. tractive value chain, and through horizontal To the latter category belongs home country linkages, it may assist in developing national measures to foster (the right kind of) linkages champions. In an industrialization perspec- between foreign investors and local suppliers. tive, extractive FDI may spur development While donor intervention ideally should of manufacturing capacity in extractive-relat- adhere to the Paris Declaration’s principles ed industries and the development of these of donor harmonization and local ownership, supply industries, may in turn create spillo- the realities on the ground are far from those vers on other manufacturing sectors through ideals. In practice, donors each have their migration of employees as well as through own national economic and political agen- demonstration and competition effects. Giv- das to pursue, and donors may be tempted en the huge developmental stakes related to to promote their often substantial national linkages it is no wonder that linkages and economic interests in extractives. The arrival spillovers from extractive FDI are becoming of new donor countries, such as those from key aspects of industrial development strate- Asia and which do not neces- gies in Africa. sarily adhere to the Paris Declaration’s letter The question is if empirical evidence or spirit (Alden & Davies, 2006; Luo et al., gives basis for the hopes invested in extrac- 2010), has introduced a new level of rivalry tives linkages. In this paper we provided a between donors in this field and has drasti- literature review of what is known about cally altered the bargaining relationship be- linkages in African extractives. The overall tween donors, MNCs and local governments. impression is that there is indeed evidence suggesting that FDI in extractives does not necessarily lead to enclave economies. Hence there is evidence that linkages are be- 4. CONCLUSION ing formed, that they sometimes are deep- ening, and that wider spillovers on the Af- Where FDI in extractives in Africa for many rican economies are created. However, it is years was seen as being, at best, of limited also clear that the evidence is scattered and benefit to host countries due to its enclave limited and is produced from various the- nature, at worst, being a curse due to its cre- oretical and methodological perspectives. ation of macro-economic imbalances, there Hence, generalizations are difficult to make. is now renewed hope invested in extractive Moreover, there are plenty of studies point- FDI across Africa. A number of reports from ing to the limitations of linkage formation: international organizations such as the ADB, that they in many sectors and countries are UNCTAD, UNIDO and UNECA have re- few and short-term, that they are mainly re-

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lated to low value added activities, and that ability of investments thus reducing overall they offer few opportunities for learning FDI. Likewise, we suggested that local firms, and upgrading. especially those that are not too entrenched Based on this mixed evidence, the key in collusive relationships with government, question for policy makers in government, may have capacity to engage with foreign in- MNCs and the donor community becomes vestors in developmental linkage collabora- under which conditions developmental link- tions. But we also cautioned that local firms ages between extractive MNCs and local face significant constraints, partly related to firms are and can be formed. We argued that their inability to meet MNCs’ technical, qual- essentially four actors and their interrela- ity and EH&S standards and partly related to tionship shape and drive linkage formation the often extremely hostile business environ- in African extractives, namely governments, ments of African resource-rich countries. In MNCs, local firms, and donors. While MNCs short, governments, assisted by donors, are and local firms through their strategies and in the drivers’ seat, but they need to under- programmes may have a large impact on the stand that imposing heavy handed linkage breadth and depth of linkages in African ex- measures without providing the conditions tractives, it is our view that linkage formation, for domestic private sector development will at the end of the day, is a result of the insti- at best lead to symbolic linkages with few or tutions, governance mechanisms and policies no spillovers on the local economy, at worst provided by governments, often in collabora- lead to foregone investments. tion with donors. But also that the actions by governments and donors should be informed by a firm understanding of the strategies, in- terests and capabilities of the private sector, domestic as well as foreign. We suggested that modern extractive MNCs in fact may be interested in developing local linkages, partly as part of their commercial agenda and partly as part of their CSR agenda. By drawing on the strategic interest of MNCs to form linkag- es, governments and donors may create more effective and durable linkage policies. Gov- ernments and donors should also base inter- ventions in linkages on a firm understanding of the limits of MNC involvement in linkage formation: MNCs cannot compromise their core competencies when partnering with lo- cal firms, nor can they risk that salient safe- ty, quality and environmental standards are compromised. Moreover, in contexts with low absorptive capacity of local industry, lo- cal content requirements may lead to price hikes and eventually undermine the -

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43 DIIS WORKING PAPER 2014:02 . Policy and domestic capabilities are critical are and domestic capabilities Policy can be such as local content measures Policies and institutional scal regime, Transparency, chains TNC and buyer-driven – GVC structure fewer tend to have investments Resource-seeking can be missed due to Opportunities spillovers for ‘appropriate’ lack an investments Resource-seeking Development of forward and backward linkages and and backward of forward Development determined by opportunities upgrading are for of the technical characteristics and the structure industry. determinants. of backward the breadth successful in increasing linkages. of the value added the depth of linkages, increase To essential to target skills are measures local activities, access to technological capabilities, development, etc capital, linkage policy needs to be supported by Forward complementary policies targeting competencies of industries and of local suppliers. processing opportunities and limited absorptive spillover Few of economic levels due to low capabilities development. an impact. have regulation fewer leaving most of the value added, capture country rms developing and linkages for spillovers in the chains. do not seek typically bene ts as they development technologies unlike new or develop to introduce in manufacturing. investments research education, in infrastructure, weaknesses legal extension systems, support, and development and regulatory environments. to occur. of technology spillovers for level Main ndings concerning conditions of linkages Main ndings concerning conditions of linkages and spillovers Few forward linkages found in Zambia’s copper in Zambia’s linkages found forward Few gold seen in Ghana’s local sourcing Heavy TNCs tend to locate technological innovation opportunities local for few to leave Tend rare, are in resources spillovers Technological through of high-quality jobs created The number Local sourcing by oil companies in Nigeria is seen by Local sourcing and services goods – deep across to be broad Effortsoil companies seen by chain. local supply in upstream local capabilities weak addressing Strong Deep linkages and upgrading. industries. local content policy. companies seen by Investments mining industry. lack Local manufacturers in Human Resources. and to enter capital- technological capability chain. technology-intensive links of the supply has failed to encourage companies Policy local content or to upgrade increase linkages but shallow Broad suppliers’ capabilities. No policy framework. upgrading. and no real of local value addition industry not indicative (yet Local suppliers often or domestic ownership). rarely due to local products import products Growing meeting industry requirements. local content New basis. a low but from linkages, policy. local supplier to develop less likely TNCs are linkages. develop- human resource systems and high-level local reducing ment in OECD countries, opportunities.capacity-building linkages due to optimization. downward - improve productivity the limited scope for given or a wide products intensive ment of labour- with the host economy. technological gap limited. remains investment resource-seeking Main ndings concerning linkages and spillovers Main ndings concerning linkages Country case study analysis of Review empirical and literature of analysis data set Method Global value chain Extractive curse Global Value Chain The ‘poverty trap’ Theory Lead rms and local rms Lead TNCs and local rms Firm Sector Soft com- modities (cocoa, tea, coffee, agro- products) & Industrial commodities (cotton, textile, clothing, oil, leather, copper and gold) Commodities Country Nigeria, Nigeria, Ghana and Zambia Developing countries in general Literature review Literature

Annex 1. Annex UNECA 2013 UNCTAD UNCTAD Commodities and Development Report 2013 Author and year

44 DIIS WORKING PAPER 2014:02 Speci c requirements for natural-resource sectors natural-resource for Speci c requirements managing After necessary ful lled, conditions are legal system are Good institutions and a reliable impact if a greater companies can have Extractive Needs investment in fundamentals – high-quality Needs investment institutional and regulatory public service, and access to government capable environment, nance and markets. extensions of the fundamental conditions which are all sectors need to thrive. policy, depends on ownership, extractives and accountability. transparency of a local presence Time since entry rms, of foreign and nal market partner structure in the ownership associated with higher local linkages. orientation are boosting linkages. for pre-conditions and infrastructure Depends on ownership, (national system of innovation). capacity absorptive is policy of host though, Most important factor, country. accountability and weak transparency, Governance, often of local governments capacity administrative being lower ows lead to local bene ts of extractive generated. than revenues business models integrating inclusive develop they local SMEs into their value chains.

More and more countries are signing up to countries are and more More has production The expansion of natural-resource rms with a local partner and a Foreign higher when the local manage- Local linkages are base which is too rms with knowledge Foreign tend to generate larger Diaspora investments Extractive industries are not labour-intensive, not labour-intensive, industries are Extractive seen to use strategic industries are Extractive companies in human extractive by Investments Linkages and transfer of know how are taken as a taken are how of know Linkages and transfer investment. foreign from given of resource transparency that promote initiatives and responsible citizen control to ensure revenues spending. of jobs (estimated 600,000 a large number created FDI green eld 2003 and 2012 from jobs between Africa). in into extractives their linkages Africa increase businesses in Foreign time. with local rms over of a higher degree orientation have nal-market interactions with local rms. the headquarters. autonomous from ment is more of capacity to the absorptive advanced with respect to less conducive are the domestic economy interactions with domestic agents. linkages. backward and/or depth of breadth In 4 countries growing while one static. breadth, reduced in two linkages, Extractive industries are capital-intensive and rely and rely capital-intensive industries are Extractive on imported goods. heavily in the industry although employment offers higher income than in other sectors. signi cantly limited in their ability to industries are Extractive employment. generate large-scale impact through local economic opportunity creating philanthropy the and generating medium-term bene ts for suppliers and developing companies by extractive buyers. Expanded economic opportunity can be seen as risk companies. extractive mitigation by on speci c skill tend to focus tal development capi areas.

Statistical case analysis, studies Econometric of analysis original rm-level panel data the from UNIDO Africa Investor 2010 Survey Qualitative case studies Qualitative case studies Structural - transforma tion FDI theory Linkage theory Linkage theory Global value chain Linkage theory CSR MNCs MNCs and domestic suppliers Numerous and western Chinese MNCs Multinational extractive companies Extractives All sectors of the economy Gold, diamonds Extractives 53 African countries 19 countries in SSA 8 African countries Global

Economic Outlook 2013 Amendo- laigne et al. 2013 Morris et al. 2011 Wise and Shtylla 2007 African

45 DIIS WORKING PAPER 2014:02 Barriers are often created by the companies’ risk by often created are Barriers is technology and that there require FDI spillovers is some that there also require spillovers Effective SSA industrial policy, Without a coherent the host from of Chinese FDI, The problem of FDI to understanding of the failure A proper donors and NGOs to help positive for In order Procurement decisions on operational mines are decisions on operational mines are Procurement in the design or construction often pre-determined the detached from who are decision makers phase by that barriers creating environment, local procurement also local sources, from exclude procurement of local capacity. inhibiting the development know strategies choosing suppliers that they aversion local suppliers. and trust over occurring, exist without the spillover Linkages may rm does not support the either because the foreign the or because the local rms do not have transfer the transfer. ‘extract’ or learn from to capabilities rm that could embodied in the foreign know-how that the MNC is willing to be of use to local rms, some of this (implicit/explicit) and that the transfer domestic rm wants to learn. to and mechanism to facilitate the transfer support). the local rms (government utilization by unable to identify the important economies are less able and even FDI, through linkages to promote for and capabilities the incentives to provide to occur. spillovers is that Chinese rms typically country perspective, equipment and even machinery, bring their own minimal linkages. are – there workers bene t SSA economies lies in exploring the truly industrial policy. a coherent to develop failure donors and NGOs should be Interventions by the economic integration and designed to improve that boost investments to attract competitive mining and other sectors. linkages between regional to should work they gain a foothold, development linkages of and employment the growth improve mines with the surrounding large-scale commercial their scal linkages as to improve societies as well with the host countries. Main ndings concerning conditions of linkages Main ndings concerning conditions of linkages and spillovers Manufacturing tends to provide the strongest the strongest tends to provide Manufacturing extractions sectors – the most The resource learning (knowledge imply Meaningful spillovers mining activities can Large-scale commercial The direct impact of Africa’s mining operations on Africa’s impact of The direct - dispropor and local economies appear the regional low. tionately associated with spillover, rarely In SSA linkages are and transfer, is no learning or knowledge as there modest. the linkages are often even is FDI in manufacturing However, linkages in SSA. and and the mechanisms to promote quite low, support rms and sectors are linkages between underdeveloped. few important FDI in SSA – provide sectors for and (a share employment bene ts other than direct of) export earnings. able to occurs and the bene ciaries are transfer this knowledge). apply mining activity in a large-scale commercial Any potential great provides society always developing linkages into the small-scale manufacturing, for and service sectors. agricultural, that sustain economies in ways regional diversify mine closure. after an eventual even growth regional Main ndings concerning linkages and spillovers Main ndings concerning linkages Observations as a practitioner in the mining sector of East Africa brief Policy (Recommen - dations based on observations) Method Linkage theory Linkage theory Industrial Policy Spillover Spillover theory Theory MNCs MNCs and domestic rms Commercial mining compaies Firm Sector Mining sector All sectors of the economy Mining sector Country Africa SSA Developing countries Hanlin 2011 Morrissey 2012 Bourgouin 2011 Author and year

46 DIIS WORKING PAPER 2014:02 The main challenge to improving linkages is the The main challenge to improving of SMEs, management capacity Access to nance, TNCs and local rms Linkage activity between networking of inter- rm Encouraging forms in host TNCs invest The context in which big and skilled labour needed for capacity quality ad delivery contracts (poor standards, be constraints. may integration and political will is necessaryPolicy to SMEs damages for Bad business environment the affected Shortcomings in infrastructure Ownership matters. Upgrading of generic manufacturing-related Upgrading of generic manufacturing-related of the SMEs is required. capabilities scale, technology, the production between sheer gap mega contrac - by and ef ciency that was required by Mozal) and those that could be offered tors (like local SMEs. key. are transparency the support of facilitation processes, active requires and the involvement a range of institutional parties, design and of all parties in the conceptualization, that ensures implementation of linkage programmes to the varied needs of activities respond stakeholders. host country suppliers amongst prospective and programmes for a solid platform provides learning and effective a more for allows critically upgrading dynamic to be encouraged. of countries is also important to the promotion the of economic activity, level linkages (a country’s of trust levels of local rms, density and capabilities other factors). and many players major role between linkages: Challenges for • the technical not have Domestic SMEs may • Language (written contracts in English) • A lack of access to nance • Uncertain policy and regulatory climate • infrastructure Poor The type of mineral being mined has impacts in linkage opportunities. terms of related the mining maximise the opportunities around sector and its potential impacts. linkages. for prospects further undermining domestic enterprise sector, linkage opportunities.

Inter- rm networks can offer a forum for sharing for a forum can offer networks Inter- rm an impact on job creation MNC-SME linkages have on MNCs effects positive Linkages can also have Despite limited linkage dynamics in Mozambique, Facilitated networking activities between TNCs and activities between Facilitated networking of the competitiveness domestic SMEs can increase can be linkage programs rm and government-led successful (case of Mozambique). ideas and experiences pertaining to contracts with TNCs in Mozambique. large jobs) and indirect direct (through is due to ef ciency and productivity Mozal’s (e.g. A part of the linkages with local rms. positive success is the people). Tanzania The character of the mining activity in limited linkages with domestic generated only at the time of although this was growing enterprises, research. in terms of promising was more the project establishing the types of connections envisaged and infrastructure mining investment between development.

Qualitative Qualitative case studies Case study analysis Linkage theory between TNCs and domestic SMEs Spillover theory FDI Inter- rm networks Industrial policy framework Linkage theory TNCs Tanzania’s central and corridor Mozam - bique’s Zambezi Valley projects Gas and Provision management of infrastructure mining for Mozambique, Mozambique, Lesotho and South Africa and Tanzania Mozambique

Robbins et al. Robbins et al. 2009 and Perkins Robbins 2011

47 DIIS WORKING PAPER 2014:02 A multi-centre development of the gas sector would of the gas sector would development A multi-centre has a of the necessary human Tanzania considering the establishment of Both countries are sourced linkages and types of locally Backward The economic and political context surrounding civil society reporting. Suggests more national system of innovation infrastructure, Skills, both public and private determined by Linkages are failure is government The main public policy problem The extraction of gas in Mozambique must be used in The extraction of gas in Mozambique must training, as to maximize employment, such a way of and the growth development infrastructure institutional capacities. to the prospects economic growth bring the greatest and contribute most to in Mozambique, various regions take but it would reduction, and poverty employment outcomes. the required the longest time to achieve in skills and knowledge with the required resources And natural gas infrastruc - the natural gas industry. needs to be developed. ture funds. wealth sovereign are particularly human capital, capabilities, Absorptive vital. the technological capability determined by inputs are rms. of the linked to maximizing bene ts is key Regulatory environment investment. foreign to society from risks undermining the Chinese investment social and scal of local environmental, effectiveness Chinese regulatory setting, Within a weak regulation. pose signi cant challenges for may investment business regulation. effective gold Tanzania’s of linkages in is the main driver Policy mining sector. also important. are and ownership sector policy. policy to translate and implement long-term macro visions into sectorial policies with appropriate The main private policy sanctions and incentives. strategy. is the external suppliers’ outsourcing problem Main ndings concerning conditions of linkages Main ndings concerning conditions of linkages and spillovers Tanzania: Companies that are investing in the investing Companies that are Tanzania: backward acquisition has led to more FDI through is an industry-wideThere skill shortage and legislation unchecked One example underlines the potential for has limited the Tanzania The skills de cit in - policy has failed to spur the develop Incoherent Mozambique: pro ts can be used to promote can be used to promote pro ts Mozambique: local that increases manufacturing value-added and creates local businesses, promotes employment, the country. bene ts across broader potentially community undertake natural gas sector must of and the promotion programmes development in Public Private Partnerships to enable investments the natural gas industry. acquisition has led to industrial upgrading FDI through rms. and technology within the acquired transfer and “hard” Evidence of technology both in transfer “soft” forms. local rms was from sourcing linkages – however, input whereas simple manufacturing for only medium technology for inputs was from sourcing rms. other foreign is extractives for regulatory environment Zambia’s to physically and lacks inspectors resources weak inspect the mining sector. the is outdated with nes amounting to pennies for mining companies. another seeking to undermine local regulations, pro t issues. and tax evasion emphasizes scal regulation and services limited and Local goods linkages remain criticality goods complexity and low to low restricted critical sup- Highly and services and beverages). (food and services of goods are plies (critical to the buyers) importedlargely with virtually no local value addition. the mining in skills from opportunities of spillovers sector to other sectors of the economy. ment of domestic niche industries high cost and service manufacture inputs. Main ndings concerning linkages and spillovers Main ndings concerning linkages Qualitative Qualitative case study Empirical case study analysis Privatisation of state-owned enterprises FDI through Case study and Political economic analysis Qualitative case studies Policy analysis Method Regulatory framework Institutional setting FDI attractiveness Extractive curse Global value chain theory Technological upgrading OLI framework Institutional theory Global value chain Linkage theory Theory Anadarko, Anadarko, ENI, BG/Ophir, Statoil MNCs Chinese copper mining rms MNCs Firm Sector Gas - Manufactur ing Copper mining Minerals, Gold Country Mozambique and Tanzania Tanzania Zambia Tanzania Ledesma 2013 Narula and Portelli 2004 Haglund 2008 Mjimba 2011 Author and year

48 DIIS WORKING PAPER 2014:02 Ownership and Infrastructure are also seen to be are Ownership and Infrastructure local to increased One of the main barriers skilled and weak, NSI is extremely Angolan The the most important means for remains Policy of is the main driver Local content policy pressure forward towards local policy is skewed Incoherent factors determining the extent The most relevant much to have Regional dimensions do not appear Forward linkages from diamond mining are policy diamond mining are linkages from Forward skills. is held up by and their progress driven national whereas quite important in driving linkages, factors are and regional systems of innovation important.moderately is one of the most of ownership The nature important of local linkages in this case drivers nancing). of project (ownership is lack of training. employment the except for trained local labour is too expensive limited are networks regional largest Chinese rms, constraint to a key remains and infrastructure Chinese companies. Angola. in encouraging local content development the main determi - are and local capabilities Policy nants of linkages. of Angola, activity in localisation of manufacturing of intangible intermediate inputs at the high volumes and of the high basic and mid-technical levels of basic general products. of supply volume linkages. of linkages in the oil and gas sector and nature NSI and ownership. skills, policy, are Angola of linkages. inuence on the depth and breadth The most signi cant local linkages are through through The most signi cant local linkages are employment from Consumption linkages resulting that Angola in-countrySo little is produced in that Chinese companies, shown Studies have has kind of skills transfer It is unclear whether any the manufacturing Intermediate linkages between - Limited local content in the localised manufactur of local content in terms human High volume of in supply local linkage is occurring The foremost The cutting and polishing industry does have The cutting and polishing industry does have in most signi cant linkages with the local economy In some activities with activities of the value chain. such as the employment, the most potential for maintenance and repair of consumables, provision as limited linkages taking place, services are there and servicesbeig imported.goods largely are in 16 cutting and polishing directly local employment factories. in the cutting and polishing industry more are currently, However chain. valuable than in the supply local job the consumption linkages taking place from less than the consumption signi cantly are creation expatriate job creation. linkages for Chinese construction companies’ local linkages in very weak. are Angola rather than materials, procured” “locally often only However, available. materials are produced” “locally becoming available of the basic materials are more and localised production due to increased Angola in cement). of importers network (e.g. an increased inputs such as nishings and value-added More locally. to be produced yet specialities have African experience in those with more especially ‘localise’. willing to becoming more are markets, local value of developing place in the way taken chain linkages. oil and gas Angolan linkages in the Manufacturing 2000s. expanded since the early sector have limited. remain function and the local economy ing function. local by driven at basic and semi-skilled levels capital is limited local there However, content policy. at higher technical levels. content in human capital input in no direct which have basic general products function. the manufacturing Qualitative Qualitative primary and secondary data analysis Primary empirical research Primary empirical qualitative and research secondary research Linkage theory GVC GVC Linkage theory GVC Linkage theory MNCs in the diamond cutting and polishing industry Chinese construction companies Oil and gas companies Diamond cutting and polishing Construction - Manufactur ing sector in the oil and gas value chain Botswana Angola Angola Mbayi 2011 Corkin 2011 2011 Teka

49 DIIS WORKING PAPER 2014:02 Consumption and scal linkages are more driven by by driven more Consumption and scal linkages are as the policies and legislation as well Sector-speci c regional comes after and ownership, Infrastructure Backward linkages are driven by ownership, policy, policy, ownership, by driven linkages are Backward factors. skills and regional infrastructure, NSI, NSI and skills in policy, by driven linkages are Forward the mining industry. and consumption policy and infrastructure ownership, skills as well. furtherby driven linkages are mining to gold relevant policy framework broader and critical to the factor, been the strongest have and consumption backward of scal, development causal factors are policy, Following linkages. The NSI and skills and infrastructure. ownership, to be weaker. dimension appear regional ef cient for its environment improve must Tanzania - market-seek will be a shift from as there production ing to ef ciency-seeking MNEs. policies and NSI stand of skilled labour, Availability out as the major drivers. after. dimensions and other factors follow Main ndings concerning conditions of linkages Main ndings concerning conditions of linkages and spillovers There has been a strengthening of the scal has been a strengthening There of consumption linkages due to Little evidence been linkages have kinds of backward 27 different been implemented to have CSR initiatives Several in the has been an improvement there All in all, linkages with limited backward Local rms have than MNEs import 75% of their inputs but more product about 16% of local rms acquired Only process about 13% of local rms acquired Only rst-tier and second-tier Linkages between Service in their rms and oil companies differ Most servicing national but the rms are There is little evidence of forward linkages in the of forward is little evidence There industry processing in Ghana. gold with up to 20% tax linkages in the past 10 years, the mining industry. from revenue methodological dif culties. and are mining industry, gold in Ghana’s identi ed increasing. designed linkage mining-company promote programmes. the depth of linkages stemming and even breadth mining in the last 20 years. gold from through Tanzania rms entered 8% of surveyed Only mainly MNCs were merger and acquisition. market-seeking. MNCs. local sources, half of the MNEs buy material from local sourcing. more for prospects implying MNEs while about from technological capabilities other sources. them from 84% acquired MNEs. from technological capabilities of input (local of local sourcing The degree system and ICT sub-sector suppliers) in the control is less than other sub-sectors. exchange is though information weak, suppliers are higher. relatively with oil the two, opinion of linkages between companies rating them higher. system and ICT sub-sector has the control MNCs dominate the oil highest MNC presence. and few joint ventures, by sector followed national rms. Main ndings concerning linkages and spillovers Main ndings concerning linkages Literature Literature review, qualitative and statistical analysis brief Policy Primary and (survey) secondary data analysis Descriptive and inferential analysis Method GVC Linkage theory Technological capabilities theory Linkage theory of Motives MNCs Linkage theory Theory Companies in the gold mining value chain (MNCs and local rms) MNCs and local rms MNCs and local rms Firm Sector Gold mining - Manufactur ing Oil and gas industry Country Ghana Tanzania Nigeria 1 Bloch and Owusu 201 et Diyamett 2012 al. Oyejide and Adewuyi 2011 Author and year

50 DIIS WORKING PAPER 2014:02 The weakness of the NSI also contributed negatively of the NSI also contributed negatively The weakness of specialization on size and some level A minimum public policies or strong The absence of effective a negative to have found policy and NSI were Weak Policy and investment incentives, absorptive absorptive incentives, and investment Policy – tertiary capital capacity/human education is key. enhance the science and technologyGhana must FDI and technology base to attract more knowledge threshold human capital – the minimum transfer entry into the Zambia copper value chain China’s impact on the localisation of had a distinctive linkages. upstream public With low to the deepening of local linkages. rms in building technological capabilities, investment of no access to investment caught in a trap were to start technological capabilities with, low capital, technologies and risk to adopt new incentives low such investment not reward would that the market to in order required links were critical supply accommodate upgrading processes. GVCs has led to or foreign cooperation with buyers chains. ‘squeezing’ out of some rms the supply a linkages. impact on the localisation of upstream rather than be regional may spillovers Technology sectorial. public was poor due to low Skills availability chain the mines to supply from Skills spillovers Zambian suppliers, Reducing transaction costs for Policies and incentives appear to be geared towards towards to be geared appear and incentives Policies that encourage attracting FDI but lack incentives collaborations. foreign-local a signi cant Mining companies in Zambia directed chain. to the local supply of their expenditures share the depth of local linkages was low. However, rms to invest from propensity and low investment with the exception of original in in-house training, (OEMs) subsidiaries, equipment manufactures suppliers to expand constraining the possibility for and to upgrade into highly-skilled their markets activities. rms with technical skills and knowledge provided this was not However, about the internal process. and upgrading processes. growth critical for and linking them to mines in DRC second-tier the gave Africa and overseas suppliers in South potential to expand and deepen local linkages. project No signi cant intra-industry (horizontal) spillovers (vertical) while signi cant inter-industry exist, rms in upstream foreign from technology spillovers sectors are sector to local rms in downstream found. Secondary data analysis Qualitative case study Panel data of analysis and nature occurrence of technology spillovers annual from data collect- the ed by Bank World the through Regional on Program Enterprise Development from 1993-1995 FDI policy Spillover theory Technology and knowledge transfer Absorptive capacity Vc upgrading/ downgrading chain/ Supply value chain/ gvc Linkages theory National innovation system Technology and productivity spillover theory MNCs in general Mining companies rms Foreign All sectors of the economy Copper mining - Manufactur ing sector (food, textiles, and wood metal industries) Ghana Zambia Zambia Osabutey and Debrah 2012 Fessehaie 2011 Bwalya 2006

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