Auteur : Yunnan Chen
Site of publication : China Africa Research Initiative
Type of publication : Working Paper
Date of publication : April 2O2O
The question of how to promote structural transformation is central to fostering sustainable growth and poverty reduction in low-income African countries, and a pressing concern for commodity exporters facing the challenge of volatile global commodity prices. Nigeria’s oil-rich economy has faced grave economic impacts from the commodity price bust after 2014, however it remains a salient destination for foreign direct investment (FDI) from China for industry and manufacturing. Since the 2006 Forum for China-Africa Cooperation (FOCAC), capital investment from China into African economies has accelerated, both from state-owned enterprises (SOEs), often supported by Chinese state capital and major policy banks such as China Eximbank, and from small and medium-sized private enterprises and investors. Successive governments in Nigeria have tried to leverage these waves of investment to foster industrialization and structural transformation, recognizing manufacturing’s economic potential as a sector for job creation, and reducing dependence on oil commodity exports. Many African countries have courted Chinese investors to build and develop industrial zones and manufacturing clusters.
Background : China-Nigeria economic engagement
HISTORICALLY, NIGERIA HAS EXPERIENCED SEVERAL ‘WAVES’ of immigration and investment from China. The first was in the 1960s, when a wave of Chinese immigration from places like Shanghai and Ningbo came to Nigeria after the Communist revolution. Four of the largest Hong-Kong Chinese corporations survive to this day, including Lee’s Group and Tung’s Group, both which invest in a wide-range of manufacturing and food industries. A second wave in the early 2000s brought an influx of Chinese capital and migrant traders; this time, with a push from the Chinese state through the ‘going out’ policy. Nigeria was one of the African countries selected for six pilot economic trade and cooperation zones at the 2006 FOCAC, with two free trade zones ultimately established: one in Lekki, Lagos state, and one in Ogun state, a collaboration between the Ogun state and Guangdong provincial governments. These zones were designed with the intent of drawing Chinese investment and giving host governments an opportunity to borrow from China’s experiences with Special Economic Zones
NIGERIA’S POLICY CONTEXT
THE NIGERIAN GOVERNMENT HAS LONG RECOGNIZED the need to diversify its economic base. Prior to the recession, the Nigerian federal government introduced several policies to promote domestic manufacturing and industrialization—most prominently the Nigerian Industrial Revolution Plan—as part of a strategy to diversify away from oil exports. Under previous administrations, it introduced a series of import substitution policies, using customs duties on finished and unfinished goods, as well as import bans, to stimulate domestic production; such products included furniture, cardboard, pharmaceuticals, and processed foods.
TECHNOLOGY TRANSFER AND STRUCTURAL TRANSFORMATION
CHINA’S OWN DOMESTIC EXPERIENCE LEVERAGING FDI, particularly manufacturing investment, is a powerful demonstration of how foreign investment can help generate structural transformation. China in turn has become a salient source of outward FDI, forming a potential channel for technology transfer to domestic African industries. Foreign firms can generate technology transfer through horizontal and vertical spillover mechanisms to the local economy. Horizontally, skills and knowledge transfer can occur through labor mobility and ‘poaching’ of skilled workers between firms in the same sector. Vertically, backward and forward linkages in the supply chain can also be a channel where foreign firms can improve the management and technology of their domestic suppliers or vendors; in China’s experience, such backward linkages have been a potent source of technological upgrading and productivity gains.
However, foreign firms can also operate as enclaves, with little connection to the local economy, competing with local firms for market share
ALTHOUGH MOST BELONGED TO A MANUFACTURING ASSOCIATION, many firms were skeptical of industry associations and their benefits. Small manufacturers in the Lagos area tended to be involved in smaller trade and commerce associations, often tied to their Chinese province of origin, which served as hosts for charity and social functions as well as a commercial platform. There is a plethora of regional and provincial organizations such as the Guangdong association, which helps member Adonis Cutlery to source parts from home, the Fujian association with Time Ceramics as a member, and the Shandong association with Jingsi Wihu as a member. Many sectors were simply too competitive to establish associations. The packaging sector was a prime example
BEYOND THE COMPETITIVE PRESSURE IN DOMESTIC Chinese markets, the growing middle-class market in Nigeria is a big draw for Chinese firms investing overseas. Many cited the large consumer market in Nigeria as a factor, compared to other African countries. Even some firms that still operate in China, such as Discovery Furniture, claim that overseas markets are now more lucrative. The Belt and Road Initiative (BRI) has had little material impact for most firms in Nigeria, but the rhetoric has been a powerful signal for investors.
WHILE WE FOUND SOME SIGNIFICANT CASES OF SKILLS TRANSFER and training initiatives within firms, it varied widely between product sectors. The lack of a rich industrial ecosystem for parts and products also limited the leverage and pressure Chinese firms could put on local suppliers, and many of these relationships were fairly shallow. True joint ventures between Chinese and Nigerian investors were also rare.
While technology spillovers are occurring, there is still more to be done to leverage them
- Labor training and skills transfer
ASIDE FROM A SMALL NUMBER OF NEW FIRMS THAT HAD not yet hired staff, field interviews found high ratios of local employment at almost every Chinese firm we interviewed, further refuting the popular notion that Chinese companies import their own labor force. In the case of Lekki FTZ, the zone management company noted that on average, firms in the zone had a labor ratio of around 70 percent local Nigerians, and the firms sampled during fieldwork had on average an 83 percent locally hired labor share. I
- Informal Training
INFORMAL, ‘SHOW AND TELL’ TRAINING IS COMMON AMONG many firms. Almost all firms used “hands-on” (“shoubashou”) training to instruct on health and safety, machine operation, and production processes on the job. New Watson Time doors, rather than doing the training themselves, hired specialists from Zhejiang at the same time that they purchased the machinery for their production line. These specialists then came to Nigeria and trained their local staff on the equipment, after which the workers would train each other.
- Labor mobility
MANY FIRMS NOTED A HIGH DEGREE OF LABOR MOBILITY. This was especially the case in the steel and ceramics industry, where there are a large number of factories and workers with transferable skills that are able to ‘hop’ between the two.
ALMOST EVERY COMPANY NAMED CURRENCY FLUCTUATIONS as one of their most serious challenges. The fall in global oil prices that sent Nigeria’s economy into recession also halved the value of its currency, which tumbled from 150 naira per dollar in 2013, to close to 500 naira per dollar in 2015—at least at the black-market exchange rate. The official rate was kept at 199 naira per dollar until the Buhari administration allowed it to float in mid-2016 but attempts to stabilize the naira led to a credit crunch, ultimately limiting private firms’ access to scarce dollar reserves
CHINESE DIRECT INVESTMENT IN NIGERIA’S MANUFACTURING sector has grown dramatically in the last few decades and continues to evolve in scope and scale. This paper highlights the changing landscape of these emerging manufacturing industries, and the challenges facing investors, particularly in the period following the collapse of global oil prices. Through in-depth interviews with Chinese investors and manufacturers, we found established and emerging clusters of investment in sectors including furniture, ceramics, and steel, many of which were oriented towards the domestic market, particularly the real estate and construction sectors. Indeed, a new Fujianese-origin cluster in Benin, identified by fieldwork in this paper, was oriented around real estate and construction entirely.
Aside from macroeconomic challenges, firms emphasized the negative impact corruption and policy instability had on their operations, and in particular their role in deterring potential new investors
Cultural challenges also hinder much-needed trust for joint investment and cooperation to flourish. In many firms, there was a palpable tension between Chinese managers and their African employees. A prejudice of low expectations is common, accompanied by stereotypes towards black or African peoples. This is a roadblock to localization. As a few respondents noted, even with local Nigerians promoted to managerial positions, it was difficult to ask Chinese to work under them