The coming of the multinationals

The very concept of economic diplomacy itself made its public debut only recently. It was during a press conference that the late PM Meles Zenawi announced the change of focus of Ethiopia’s foreign policy and that his diplomatic troupe around the world would have one thing in mind from then on; that is the economy. Meles’ statement however came during the most unexpected time. A time when he was asked to explain why his administration made the unprecedented move to shutdown its embassy in Sweden, severing diplomatic ties between the nations. Contrary to rumors of political squabble between the two nations, Meles said the reason lays somewhere in the foreign policy direction of his administration.

“Gone are the days when we operate foreign diplomatic missions which make no economic in terms of attracting valuable Foreign Direct Investment (FDI) to the country,” the PM argued. He also argued saying that Sweden offers nothing by way of trade and investment to Ethiopia and that it would make more economic sense to close our diplomatic mission in Sweden in favor of opening one in Brazil.

This is economic diplomacy setting in, Meles announced, and said that his administration’s external relations would be tailored to foster economic growth from that point on. “Our embassies would have to be economic units that generate economic gains to the nation,” he stated. Well, economic units they have become. The takeoff in FDI coming to Ethiopia is partly attributable to this move to economic diplomacy, according to official statements.

The new administration seem to have taken the economic diplomacy direction and, is running with it. Since the opening of the Ethiopian economy, some 89 billion birr worth of FDI have started operations in the country. Better yet, just last year, 20.4 billion birr capital landed to Ethiopia in the form of FDI, and the highest share came from so called emerging economies such as Turkey, China, India and the like.

One thing that is for sure is that the emerging nations are on top in respect to investment in Africa. But the West is not yet ready to accept defeat, it seems. Now, companies from the advanced economies are starting to come in numbers, hoping to get a piece of the new pie. Perhaps, emerging economies interest in Africa may have helped the continent two-folds. One is in terms of physical infrastructure building, which countries of the poorest continent in the world need badly, while the other is making Africa interesting to the advanced nations and hence luring investment to the continent. In a way, some say that they helped Ethiopia and others in the continent to get on the world’s investment map. In fact, the relative success of the economic diplomacy team, which was in the US, recently speaks volumes of the intensity of the FDI flow to Ethiopia. It looks like US- based big players of the investment world have zoomed in on Ethiopia. Girma Birru, former trade minister and now Ambassador of Ethiopia to the US, told The Reporter that some of the big companies that have shown interest, and that are already starting to take steps towards coming to Ethiopia are the actual meaning of what a BIG Multinational is.

Only recently, companies like General Electric (GE), KKR & Co. L.P. (formerly known as Kohlberg Kravis Roberts & Co.), Dow Chemical co. (commonly known as Dow), and The Blackstone Group L.P. have expressed readiness to invest in Ethiopia. In fact, some of them have already made commitments with local partners thus ascertaining their presence in the Ethiopian market. Particularly, KKR and Blackstone are world-renowned financial service companies with hundreds of billions of dollars at their disposal. According to Girma, between the two, hundreds of billions can be accessible to Ethiopian companies in the form of equity. KKR has already made a two hundred million dollar equity injection to a Dutch horticultural farm in Ethiopia, Sher Ethiopia, as an eye opening investment in the country. While the other financial service companies Blackstone has shown interest in financing an oil pipeline project linking the port of Djibouti to hinterland Ethiopia.

On the other hand, Dow Chemical, also dubbed the chemical factory of chemical factories has already set foot in Africa. Dow has branch offices in Kenya and is in the process of doing the same in Ethiopia with plans to join the production sector as well. The story is also the same with GE according to Girma. Viewed as a world leader in the power and energy sector, GE is also set to enter the Ethiopian market with a considerable equity injection to the Ethio-America Doctors Group. Girma says that this is the real ball game. These and many other companies preparing to come to Ethiopia are really experienced international players. Indeed, companies from the emerging economies and those multinationals from advanced nations do have certain subtle differences in the way they do business. To begin with, the two hugely differ in their mode of entry to a destination country.

Actual FDI on the ground in Ethiopia is telling as to preference of countries when it comes to investing. For instance, 86 percent of the total Chinese FDI in Ethiopia is wholly owned subsidiaries or branches of parent companies back home while the rest, less than 14 percent, is a joint venture arrangement with Ethiopians. This is an important departure point for FDI coming from the emerging and advanced economies. As far as the FDI of the emerging economies is concerned, the most favored mode of entering the Ethiopian market, or the African market for that matter, is wholly owned subsidiaries. On the other hand, those advanced countries’ multinationals are more interested to get involved in equity terms than setting up subsidiaries that would be fully managed by parent companies.  What to note here is that the two forms of entry have their own issues. As far as wholly owned subsidiaries are concerned, it is an arrangement that favors maximum control of all aspects of the business. The parent company would have the chance to keep its managerial and technical skills to itself and protect its technological edge and valuable market experience. According to experts, its in the interest of FDI companies to protect their business secret, however, it is not always up to the interest of companies. The decision of companies regarding their entry mode to FDI destinations is in fact influenced by facts on the ground. From an FDI company point of view, lack of critical business knowledge about a destination country can force the investor to seek partners. A host country’s company should be in control of valuable information or knowledge about the local market that the investor could not imagine to succeed without that partner.

The fact of matter is that what the FDI companies find advantageous is not necessarily the case for nations. At times, choice of entry mode doesn’t depend on the decision of the FDI companies alone but on the government of the destination country. That is for joint venture arrangements is superior to wholly owned subsidiaries in terms of positive spillovers. According to Gedion Gemora, researcher on Sino-Africa relations, joint ventures are far too advantageous for FDI host countries on account of a greater chance for transfer of managerial and technical skill to partners in destination countries. In addition, technological transfer and market access can also be better gained in the joint venture setting than wholly owned subsidiaries.

Hence, it is rather interesting to observe that the bulk of FDI that came to Ethiopia preferred wholly owned subsidiaries to joint ventures. Gedion argues, there are various factors that hindered the development of joint ventures in Ethiopia. “Among few, language barrier, unequal integration of Ethiopian firms and their counterparts to international market and technical difficulty to negotiate Joint Ventures (JVs) have detracting formation of JVs between Ethiopian and multinational companies,” he explains.

Nevertheless, for an investment consultant like Henok Assefa, who is also Chief of Party, USAID Agribusiness Innovation and Incubation Center at Precise Consult International, the problem is way deeper and more complicated. As far as he is concerned, it is an issue of compatibility. Although both Ethiopian and multinational companies look for partners to fill their gaps, where for the local firms it is about finance, technology and access to international market, for multinationals it is about accessing the local market and cheap labor, finding compatible partner is a problem, he says. For instance, he observes that for most western companies, Ethiopian firms are too small to partner with. “In Ethiopia there are something like 1000 companies who record revenues of 25 million birr or more. This is a mere 1.2 million dollars in revenue a year,” Henok responded to The Reporter via email. And that is way too small for big multinationals and the cost of managing such (small) partners tends to get higher. Gedion also shares the concern of meeting standards to partner with foreign multinationals. He says, with the exception of a few, most do not meet the standard to be viable partners for international companies. “It is often difficult to find firms who keep very good audited books, understand how equity investments work, and are capable of negotiating investment term sheets,” Henok says on his part. And to add to that is a lack of professionals likes lawyers, accountants and consultants who can facilitate on the intricate process of negotiating with the multinationals.

Yet again, Gedion goes as far as arguing that some of the local firms do not even have the interest to work in joint venture arrangements with foreign companies. Commentators also agree that the culture of partnering is not yet well internalized among the Ethiopian business community. Girma is also of the opinion that capacity limitation could be costly and that local firms might not be able to use the opportunity, that is, access to multinational companies and their unlimited finances and market access. He feels that this is a good opportunity for local firms to change their destiny for the better, but he fears that it is not squandered. It is Girma’s view that local companies should step up and try to work with the multinationals that are in the process of investing in Ethiopia. Gedion is stronger on this point. He argues that a government agency like the investment promotion commission should assume the task of promoting joint venture arrangements among local businesses and provide the necessary support to make them well equipped to work with foreign firms.

Almost equally, other commentators also warn that the regulatory side should also be strengthened if Ethiopia is to take advantage of the investment of these multinational companies. These companies have a lot of experience in doing business around the world and a sharp regulatory framework and staff is important, commentators continue to argue. Tedros Adhanom, foreign minister and leader of the economic diplomatic team, looks to be aware of these issues. He told The Reporter that his government is aware that some of these companies are too big to affect the Ethiopian economy and that they need to be dealt with properly and carefully. “We are working on a new structure to cater to these huge multinationals,” he said. Nevertheless, most agree that it is crunch time for Ethiopia and that the coming of the multinationals could have far reaching consequences.

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