By Mark Doumba
The United States is the world’s largest producer of chocolate, despite barely growing any cocoa trees. Conversely, the Democratic Republic of Congo (DRC) holds over half of the world’s reserves of cobalt, the key raw material for the batteries used to power smartphones and autonomous vehicles. And yet, the DRC barely exports any of these products. Instead, the US, China, South Korea and Japan are the world’s largest manufacturers and exporters of renewable batteries. Why is this the case?
The knowledge economy
Governance aside, one possible explanation relates to the rise of “intangible assets” such as intellectual property rights, brands, relationships with stakeholders, norms, traditions, access to global markets and the ability to coordinate global production and distribution networks. The move to the intangible economy means that “know how” is of greater importance, and that value is increasingly placed on “access” to, rather than “ownership” of, industrial infrastructure.
The implications for this new economic paradigm are profound for development policy. Traditional models of vertical industrial integration have failed to generate relevant welfare gains in sub-Saharan Africa over the past 50 years. From 1970 to 2017, the average real income per capita in US dollars has only grown at an annual rate of 0.47%, according to data from the World Bank Development Indicators Databank. In the context of sub-Saharan Africa and other developing markets, structural shifts suggest that even when a country is naturally endowed with raw materials, it will not necessarily thrive by exporting and commercialising these products and services in the global market.
This is because the commercial side of the value chain requires capabilities and a level of sophistication that are radically different from those needed in more upstream activities such as manufacturing. If countries that do not grow raw materials (cocoa trees) still manage to capture a high share of the added value (chocolate), this suggests that ownership of the raw materials and of industrial facilities in the cocoa-growing country does not bring the same results as in the industrial age of the 19th and 20th century. In Globalisation 4.0, companies that have nothing to do with growing cocoa still capture a disproportionate amount of profits from its end products.
One example of this lies in the West African countries of Ghana and Côte d’Ivoire. These countries are the world’s two largest producers of cocoa beans, together holding over 50% of market share. They generated $5.7 billion in cocoa bean export earnings in 2016. In contrast, the US-based Hershey Company (the world’s largest chocolate manufacturer) generated $7.4 billion in net sales – roughly more than 30% of the export earnings of Ghana and Côte d’Ivoire combined. Why is an investment in Hershey’s, which is a diversified downstream chocolate company, more profitable than an investment in concentrated upstream cocoa operations in Ghana and Côte d’Ivoire?
These trends persist across countries. Excluding Brazil, the five largest recipients of foreign direct investment (FDI) – the US, China, Hong Kong SAR, Singapore and the Netherlands – captured 44% of total incoming FDI flows in 2017. These countries are largely undergoing deindustrialisation, moving further into knowledge-intensive and domestic consumption growth models. Their outputs may be different, but their models are similar: they commercialise products for which they do not necessarily own the raw materials. This industrial know-how attracts higher levels of FDI because a strong public infrastructure and more knowledge-intensive segments of global value chains result in higher returns on investment, especially when compared to mineral and manufacturing investment alternatives in host economies.
Acquiring know-how by exporting FDI
According to Nobel Prize Laureate Robert Solow, long-term economic growth is about the factor accumulation of capital, savings and population growth. Most recently, know-how and technological capacity have shown to be the most critical determinants in sustained economic growth. As a result, a complementary policy recommendation to inward FDI and vertical industrialisation would be for sub-Saharan African countries and their firms to become foreign investors in more advanced economies, diversifying their portfolios and mitigating risk. Essentially, in addition to growing cocoa trees, Ghana and Côte d’Ivoire should consider investing in the Hershey Company.
It may seem counterintuitive to advise policy-makers of capital-constrained countries to mobilise a share of domestic resources (savings, assets, mineral reserves) to make strategic investments abroad. However, research shows the benefits of foreign investments in acquiring know-how and technology. A number of international firms that engage in mergers and acquisitions have done so on this premise. For example, India’s Tata Motors acquired the expertise and experience involved in building luxury vehicles by purchasing a luxury vehicle company, Jaguar Land Rover Limited.
The promotion of outward FDI in downstream segments of global value chains can help improve the trade, fiscal and debt positions of developing economies in a number of ways. Outward FDI can help a country generate stable dividends and foreign currencies to finance its imports, repay its foreign-denominated debt, and complement generally low domestic fiscal revenues. Singapore, Abu Dhabi and China export FDI for many of these reasons. These three countries acquire equity ownership in companies that hold proprietary know-how that they lack, in order to understand and adapt these newly acquired technologies and skills in their home markets.
Mark Doumba is a co-founder of Okoume Capital, a Sovereign-backed venture capital fund based in Gabon that focuses on SME investments and ecosystem buildup.