Analysis of Chinese Investments in Madagascar and their Implication for African Countries

Rasamimanana Mirana


CNKI

2012

130012

0431-85168357

Synopsis
Using the case study of Madagascar and the embedded case studies of the textile industry and two extractive deals, this thesis shed some light on the Chinese way of doing business in Africa, uncovering the process by which Chinese big extractive firms, textile EPZs and SMEs have settled on the continent and especially in Madagascar as a case study, with network theory as a theoretical framework. It also presaged for the feasibility of an industrialization process a la flying geese model of Africa under the Chinese leadership, looking at Madagascar as a case study in particular. In this extent, the most important part is played by African leaders as they are to assure that the momentum given by Chinas development does not pass the continent by. This thesis answered the questions of how and why do Chinese investors come to Africa, especially in a non-resource rich country, politically unstable and lacking basic industrial infrastructure like Madagascar. - How does China invest in Madagascar in particular and in Africa in general? Mostly through state-owned enterprises in extractive industry; and when it comes to private multi-national corporations through branches and subsidiaries; same goes for small and medium enterprises. Guanxibusiness networks created between administrative officials throughout African countries and overseas Chinese business networks also play a preponderant role as investment medium. A particular aspect for Chinese businessmen in Madagascar is that they become residents of the host country) and are no longer accounted as foreign investors after a while. - Why does China invest in Madagascar in particular and Africa in general? The attractiveness of preferential trade agreements is a principal motive for the case of Madagascars textile industry, as well as low wages and resources untapped reserves of minerals and oil- for Africa in general.


1 3

 - Guanxi 1 20 50 1975-1991 1992 2009 29.2% 22%15.8%13.9%1 2006 83% 1% 15% 2 2003 2008 1% 50
1

EDINGER H., PICTORIUS C Aspects of Chinese investment in the Africa resources sector. [J/OL] The Journal of The Southern African Institute of Mining and Metallurgy,Volume 111, 2011:501-510.p.504. Accessible at http://www.saimm.co.za/Journal/v111n07p501.pdf last accessed 03.04.2012 2 Statistics presented in Chinese Trade and Investment Activities in Africa [J/OL], Policy Brief VOl.1 Issue 4, 29 July 2010, The African Development Bank Group, Chief Economics Complex, Accessible at http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Chinese%20Trade%20%20Investment %20Activities%20in%20Africa%2020Aug.pdf last accessed 04.03.2012

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2009 1 2 2011
1

BUCKLEY, P. J., CLEGG, L. J., CROSS, A.R., & LIU, X. The Determinants of Chinese outward foreign direct investment [A] in; VOSS, Hinrich; and ZHEN, Ping. Journal of International Business Studies, 38, 2007: 499518. p. 513

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 EITI PWUP1 3 2060 2080 2 200993.3 22% 6 2010 8500 / 5

1

KONIJN, PETER in China and the resource curse in Africa ;Workshop: Beyond the resource curse, new dynamics in the management of natural resources: new actors and concepts, 3-4 November 2011, Paris.. 2 Based on the estimation by Maddison (2010. Historical Statistics of the World Economy: 1-2008 AD (www.ggdc.net/maddison/Historical_Statistics/vertical-file_02-2010.xls)), Chinas per capita income (measured in purchasing power parity) was 6,725 international dollars in 2008, the same level as in Japan in 1966, Korea in 1986, and Taiwan, China, in 1983. These economies started to relocate their labor-intensive manufacturing industries at that income level, Japan to the East Asian Tigers and Korea and Taiwan, China, to mainland China.

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 199311 4 2 2009 3
1

HART-LANDSBERG, MARTIN and BURKETT, PAUL Contradictions of Capitalist Industrialization in East Asia: A Critique of "Flying Geese" [J] Theories of Development Reviewed work(s): Economic Geography74(2) 1998:87-110. Published by: Clark University Stable URL: http://www.jstor.org/stable/144277.Accessed: 23/11/2011 09:49 P89. 2 According to Brautigams argument, the Mauritian case can be seen as an extra-Asian example of the global reach of Chinese business networks, and even evidence of the growing transnationalism of domestic capital in the Third World (as Mauritian investors expand their investments in nearby Madagascar). BRAUTIGAM, DEBORAH Close Encounters: Chinese Business Networks as Industrial Catalysts in Sub-Saharan Africa [J]. Royal African Society, 102.2003:447-467. P449. 3 While states material power is determined by the relative size of their material capital, social power is determined by the relative social capital created by and accessed through ties with other states in the international system such as ties through mutual membership in PTAs. HAFNER-BURTON, E., MONTGOMERY, A., Globalization and the Social Power Politics of International Economic Networks [A] (November 24, 2008). p25.Available at SSRN: http://ssrn.com/abstract=1306648 or http://dx.doi.org/10.2139/ssrn.1306648

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Abstract
The purpose of this dissertation is to introduce and demonstrate a new approach to China-Africa international relations, focused on investments. The methodology used is that of the case study, as a case study is suitable as a research strategy when a how or why question is being asked about a contemporary set of events, over which the investigator has little or no control. It is suitable when the case constitutes a unique case, i.e. a case that provides a rare opportunity to study a specific problem of high scientific interest, but where researchers have not yet been able to establish common patterns. Madagascar provides such a unique case: as demonstrated in length in the Introduction (chapter 1.3) Chinese investments in Madagascar have become more well established than in most African countries because of the kinship ties formed with the local population but where no flying-geese-like model of industrialization has arisen. It is also one of few countries of Africa classified as resource-poor that attracted MNCs in extractive industries and SMEs alike. This single case study is furthermore an embedded case study, where the embedded units of analysis are the studied SMEs and explorative MNCs as well as textile EPZs. Using the case study of Madagascar and the embedded case studies of the textile industry and two extractive deals, this thesis shed some light on the Chinese way of doing business in Africa, uncovering the process by which Chinese big extractive firms, textile EPZs and SMEs have settled on the continent and especially in Madagascar as a case study, using network theory as a theoretical framework. It also presaged for the feasibility of an industrialization process a la flying geese model of the continent under the Chinese leadership in Africa, looking at Madagascar as a case study in particular. In this extent, the most important part is played by African leaders as they are to assure that the momentum given by Chinas development does not pass the continent by. With regards to investment, the Chinese way of doing business in Africa can be beneficial to Africa if the African leaders are willing it to be Africa is changing. China is developing and the time is ripe for China to be a leading goose for Africa in the next wave of globalization.

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As for foreign policy in general, the difference between Chinese and Westernnamely American way of reacting to political crises in Africa is a matter of norms, and the norm of non-interference is more beneficial to Africa for the time being. The consistency of Chinese foreign policy and the respect of the norm of noninterference sketch a hope for some industrialization in Madagascar. While the preferential trade agreements from the United States is the instrument for this, as it comes with strings attached, Madagascar can politically get away from the influence of the United States and other traditional donors or at least find leverage in the scramble for resources playing on her own comparative advantages - and turn to China as Chinas rise is giving momentum to an alternative model of growth industrialization a la flying-geese model So can the rest of Africa. This thesis answered the questions of how and why do Chinese investors come to Africa, especially in a non-resource rich country, politically unstable and lacking basic industrial infrastructure like Madagascar. - How does China invest in Madagascar in particular and in Africa in general? Mostly through state-owned enterprises in extractive industry; and when it comes to private multi-national corporations through branches and subsidiaries; same goes for small and medium enterprises. Guanxi business networks created between administrative officials throughout African countries and overseas Chinese business networks also play a preponderant role in investment medium. A particular aspect for Chinese businessmen in Madagascar is that they become residents of the host country (Madagascar) and are no longer accounted as foreign investors after a while. - Why does China invest in Madagascar in particular and Africa in general? The attractiveness of preferential trade agreements in a principal motive for the case of Madagascars textile industry, as well as low wages and resources untapped reserves of minerals and oil- for Africa in general. The following list of findings emerges from this research on Chinese FDI in Madagascar.
Finding 1: Chinas OFDI profile suits that of Chinese FDI in Africa and in Madagascar.

- Chinese first began giving aid to Africa in the late 1950s as a tool of diplomacy and solidarity with fellow socialist countries. This is not the case in
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Madagascar, which recognized Taiwan under the Ratsiraka Presidency(1975-1991), and normalized her relations with China, PRC in 1992.
- While most Chinese investment in Africa is still directed towards extractive

industries, Chinese firms are increasingly seeking business opportunities in a wide range of sectors. The composition of Chinese investment on the African continent as of 2009 is as follows: the mining sector (including oil and minerals) had the largest share of FDI stock in 2009 at 29.2%, followed by manufacturing (22%), construction (15.8%), and financing (13.9%).1This is also the case in Madagascar in 2006 where Chinese businesses are present in telecommunications (83%), manufacturing (1%) and finance (15%).
- Chinas FDI flows into Africa from 2003 to 2008 are mostly directed to South

Africa as statistics from the Chinese Commerce Ministry show2, and Madagascar only benefitted from 1% of those investments, but Madagascar made it to the top 10 destinations of Chinese investment (regardless of the fact that she is not listed as a resource rich country) and this is substantial considering that there are over 50 countries in Africa.
- Statistics show that after the political crisis in 2009, the industries in

Madagascar met some difficulties, namely some firms left the country for good, but a few months after the crisis dynamism in some sectors was already seen. This shows that in a country where political crises are cyclic- almost a structure and not a conjuncture- the investors know what risks they incur and still knowingly invest in sectors they assume would rebound quickly into bringing growth. This is particularly true for Chinese investors, as Buckleys empirical results revealed3.Looking at risk perception; Chinese FDI seems to be rather attracted than deterred by political risk. This observation can be seen as supporting the analysis that the cooperative hands of the Chinese government can play a bigger role in Chinese FDI to countries with a weak rule of law, and have can provide less strong support in highly developed
1

EDINGER H., PICTORIUS C Aspects of Chinese investment in the Africa resources sector. [J/OL] The Journal of The Southern African Institute of Mining and Metallurgy,Volume 111, 2011:501-510.p.504. Accessible at http://www.saimm.co.za/Journal/v111n07p501.pdf last accessed 03.04.2012 2 Statistics presented in Chinese Trade and Investment Activities in Africa [J/OL], Policy Brief VOl.1 Issue 4, 29 July 2010, The African Development Bank Group, Chief Economics Complex, Accessible at http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Chinese%20Trade%20%20Investment %20Activities%20in%20Africa%2020Aug.pdf last accessed 04.03.2012 3 BUCKLEY, P. J., CLEGG, L. J., CROSS, A.R., & LIU, X. The Determinants of Chinese outward foreign direct investment [A] in; VOSS, Hinrich; and ZHEN, Ping. Journal of International Business Studies, 38, 2007: 499518. p. 513

markets. The case of Madagascar then supports this assumption, as for the past ten years, political turmoil and instability has put investors at bay for the most part.
Finding 2: The Chinese way of doing business in Africa can be beneficial to Africa if the African leaders are willing it to be.

- Chinas hunger for African resources is massive. Without access to these resources, it is unlikely that China can sustain its current economic growth rates. In short, China needs Africa. African leaders, if they are genuine in their desire for Africas development, should use Chinas reliance on Africas resources and leverage their position to negotiate beneficial social and economic agreements with their trading partners. The lion should tame the dragon by mimicking on its own turf how the dragon conducts business with foreign investors.
- The Angola model is at the origin a contract, that the Chinese government

has structured oil for aid deals that have allowed the Angolan government flexibility in determining the use of aid funds. Although these funds are earmarked for developmental projects in the healthcare, educational, and infrastructure sectors, pinpointing the exact location and use of the aid is impossible. This lack of transparency fosters an environment in which the intended developmental impact must be seriously questioned. - For resource-versus-infrastructure contracts in general, the host country can very well argue for more beneficial terms, as they can bargain using their comparative advantages for a leverage and play international buyers against one another. All that lacks is the political will to do good and for now, declared intentions of the Transitional government in Madagascar have shown that political will.
- The literature reveals a fundamental difference in perspective on the resource

curse between the West and China. Within the West a new orthodoxy has developed which identifies good governance as the key to development. The 2011 World Bank strategy for Africa and the EU Aid policy both stress good governance and democracy as pillars of sustainable development. The general discussion of the resource curse is in line with this orthodoxy. Promoting of good governance through increased transparency and accountability is seen as the solution to the resource curse. China on the other hand believes that economic growth comes first and that good or better governance will follow. Chinese policy makers do not share the concept of the
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resource curse. This difference in perspective has far reaching consequences for civil society advocacy. Chinese government and companies are not convinced that greater transparency and accountability in the extractive industries, as promoted by Extractive Industries Transparency Initiative (EITI) and Publish What You Pay (PWYP), make a sound business case and will reduce risk1 - Due to the uniqueness of Chinese culture and characteristics, relationship building is different from western practices. To add with, in the use of general framework of network as structure, context and entrepreneur are both important, But equally, if not more so in China, relationship building is important for the success of entrepreneurship. Indeed, western entrepreneurs may find difficulties in using western network building technique to develop the Chinese market.
Finding 3: Africa is changing, China is developing and the time is ripe for China to be a leading goose for Africa in the next wave of globalization.

- As Robert Zoellicks words suggest, todays rapidly evolving world economy is opening important opportunities for low-income countries. Following the logic of the new structural economics and its underlying flying-geese patterns in economic development, most notably Chinas emergence as the worlds factory for laborintensive industries and its upcoming graduation from such economic activities.
- China is at a stage like that reached by Japan in the 1960s and Hong Kong

SAR, China; Korea; Singapore; and Taiwan, China, in the 1980s. To continue growing dynamically against the background of declining wage competitiveness, China will have to follow the path of the earlier Asian geese and start to relocate its labor-intensive industries to low-income countries.2 Indeed, this is already happening. A large share of Chinas outward foreign direct investment in Africa, which had reached USD9.33 billion by the end of 2009, has gone to manufacturing (22 percent), second only to the share in mining (29 percent). And China is building six economic and trade cooperation zones in the Arab Republic of Egypt, Ethiopia, Mauritius,

KONIJN, PETER in China and the resource curse in Africa ;Workshop: Beyond the resource curse, new dynamics in the management of natural resources: new actors and concepts, 3-4 November 2011, Paris. 2 Based on the estimation by Maddison (2010. Historical Statistics of the World Economy: 1-2008 AD (www.ggdc.net/maddison/Historical_Statistics/vertical-file_02-2010.xls)), Chinas per capita income (measured in purchasing power parity) was 6,725 international dollars in 2008, the same level as in Japan in 1966, Korea in 1986, and Taiwan, China, in 1983. These economies started to relocate their labor-intensive manufacturing industries at that income level, Japan to the East Asian Tigers and Korea and Taiwan, China, to mainland China.

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Nigeria, and Zambia (China, Information Office of State Council 2010). More such initiatives are likely to happen.
- As China moves forward, there will be a major difference with earlier patterns

of industrial upgrading: its economy is significantly larger than those of the geese that led the first round of structural transformation in Asia. China has an estimated 85 million workers in manufacturing, most of them in labor-intensive sectors. The reallocation of these workers to higher value added, more sophisticated products and tasks will open up great opportunities for labor-abundant, lower-income countries to step in and produce the labor-intensive manufacturing goods that China leaves behind. As a result, China will not be a goose in the traditional leader-follower pattern of industrialization for a few lower-income countries but a dragon. - Five fundamental changes are seen to be at work in Africa: more democratic and accountable governments, more sensible economic policies, the end of the debt crisis and changing relationships with donors, the spread of new technologies, and the emergence of a new generation of policy makers, activists, and business leaders. This is exactly the argument defended by this thesis: the political turmoil witnessed in SubSaharan Africa is a transition phase towards better government regimes, and forecasts a future where countries like China, with her non-interference policy, can be the source of investment, technology transfer and ultimately economic growth, provided that the change of political system is for the better.
- According to Rabinovitch, there is a reason why main-stream economists have

praised the ASEAN-3 experience and the flying-geese model of development. Mainstream economists, especially supporters of the neoliberal agenda of the World Bank and International Monetary Fund (IMF), are finding it difficult to sustain their position that state interventions-especially "distortions" of market prices-are almost never helpful. They have, therefore, eagerly embraced the experience of the ASEAN3, whose rapid growth appears based more on unregulated market activity and foreign direct investment (World Bank 1993, 1).1 - In terms of manufacturing activities, it should be noted that Chinese investments are oriented towards activities to potential exporters like textiles and
1

HART-LANDSBERG, MARTIN and BURKETT, PAUL Contradictions of Capitalist Industrialization in East Asia: A Critique of "Flying Geese" [J] Theories of Development Reviewed work(s): Economic Geography74(2) 1998:87-110. Published by: Clark University Stable URL: http://www.jstor.org/stable/144277 .Accessed: 23/11/2011 09:49 P89.

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sugar, where Madagascar benefits from the various international agreements and PTAs on export quotas towards industrialized countries. - In terms of numbers, the subsidiaries are the most widespread form of foreign firm used by Chinese investors in Africa, as well as in Madagascar. Indeed, 56% Chinese-funded enterprises in 2006 are subsidiaries, followed by companies affiliated with 25% and Chinese-funded enterprises and branches which represent only 19%. These figures indicate an intention of China to work with the Malagasy part. This is beneficial for the country. There is a notion of knowledge sharing and expertise from Chinese investors. This goes in line with the argument that Chinese FDI can bring about transfer of technology to the local businesses, which is a very positive thing and a premise to the technological transfer needed for an industrialization process a la flying geese model.
- The success of the Zone Franche in Madagascar is under threat from other

factors than the recent political upheaval. Political sanctions as well as the very nature of the PTAs as time-limited institutions are to be blamed. Beyond the case of Madagascar, the Zone Franches success has added fuel to the idea that using EPZs to develop a productive manufacturing base is a possible path for African countries. The undermining of this success story would be fraught with repercussions and lessons since it would force Madagascar to develop an alternative growth model. Finding 4: The difference between Chinese and Western-namely American way of reacting to political crises in Africa is a matter of norms, and the norm of non-interference is more beneficial to Africa for the time being. - The Malagasy textile industry is a case in point to demonstrate the effect of flying geese model of industrialization on the textile industry in Madagascar, as suggested first by Deborah Brautigam with regards to decentralization of Mauritian textile industries towards Madagascar1. The development of the sector could have been a success story, but wasnt one because of political sanctions imposed by the United States on Madagascar following the 2009 political coup. It is also a an empirical proof that PTAs in this case the African Growth Opportunity Act, AGOA1

According to Brautigams argument, the Mauritian case can be seen as an extra-Asian example of the global reach of Chinese business networks, and even evFDInce of the growing transnationalism of domestic capital in the Third World (as Mauritian investors expand their investments in nearby Madagascar). BRAUTIGAM DEBORAH Close Encounters: Chinese Business Networks as Industrial Catalysts in Sub-Saharan Africa [J]. Royal African Society, 102.2003:447-467. P449.

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as structural social networks (see chapter 3.3 Network Theory: networks as structure), do not necessarily attenuate negative political sanctions from the most powerful state in terms of economic and social power1, although Hafner-Burton and Montgomerys analysis may say that the social powers of states do not equate their economic power. In the case of Madagascar, the non-respect of the democratic norm was the most significant element to the United States, thus causing the latter to sanction the former, and putting an end to what could have been a success story in the textile industry. - The political turmoil lately witnessed in Sub-Saharan Africa is a transition phase towards better government regimes, and forecasts a future where countries like China, with her non-interference policy, can be the source of investment, technology transfer and ultimately economic growth, provided that the change of political system is for the better. - The policy of political non-interference is a norm in Chinese Foreign Policy and its consistency is playing in favor of China.
- As concluding remarks it is important to note that Chinese FDI in Africa is not

so different from Western FDI in the sense that both parties are interested in resources and low wages from Africa. The main difference is maybe the norms paramount to those investments, namely Chinese norm of non-interference, that some researchers address to as the Beijing Consensus, as opposed to Western democratic norm paramount to the Washington Consensus.
- In this regard, Chinese firms do not discriminate against what the West would

qualify as rogue states to invest in. The Western finger pointing at China for this is very hypocritical in the sense that Chinese firms are not acting any differently from Western firms when the time for the scramble for Africa came, but the latter did so hypocritically. The difference of the Chinese way is consistency and largess when it comes to drawing resources-for-infrastructure deals. The choice to use the extended opportunities of the Chinese way of making business for rent-seeking or for sustainable development lies in the hands of African leaders.
- This said, one cannot generalize as to painting an image of China extending

disinterested hands of friendship to Africa, nor can one generalize as to fitting the
1

While states material power is determined by the relative size of their material capital, social power is determined by the relative social capital created by and accessed through ties with other states in the international system such as ties through mutual membership in PTAs. HAFNER-BURTON, E., MONTGOMERY, A., Globalization and the Social Power Politics of International Economic Networks [A] (November 24, 2008). p25.Available at SSRN: http://ssrn.com/abstract=1306648 or http://dx.doi.org/10.2139/ssrn.1306648.

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image of a China Inc. taking over the resources of Africa and the world.. Chinese firms are effectively investing in Africa for the comparative advantages the continent can offer. Depending on actors, the stories can be success stories or not, as demonstrated through the embedded case studies of Malagasy textile industry, the WISCO consortium exploitation of iron ore deal, or the failed deal for oil exploration attempted by China International Fund. Chinese firms are also rightly seizing opportunities that Western countries would disregard for normative reasons, which can be a chance or a curse for Africa, depending on the leaders.
- It is up to Africa to seize the opportunities Africa can advantage of the

backwardness following the flying geese model of industrialization and attracting EPZs with PTAs. Africa can take advantage of Chinas need for resource to lay the infrastructure needed as a prerequisite for industrialization

Key Words: Foreign direct investment, flying geese model of industrialization, EPZ, extractive industry, guanxi-networks

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Content
Preface...........................................................................................................................1 Chapter 1 Introduction ..............................................................................................1
1.1 Explanation of Topic...........................................................................1 1.2 Significance of Research ...................................................................2 1.3 Key Words .........................................................................................3 1.4 Intended Academic Breakthrough......................................................3 1.5 Literature review ..............................................................................4 1.5.1 China in Africa: myths and realities .............................................4 1.5.2 Chinese investments in Africa literature review...........................7 1.5.3 The case of Madagascar.............................................................16 1.5.4 Why a case study of Chinese investments in Madagascar.........22 1.6 Research questions and limitations..................................................23 1.7 Thesis outline...................................................................................24

Chapter 2 Methodology............................................................................................26
2.1 Methodological Considerations.........................................................26 2.2 Research Method..............................................................................28 2.3 Method of data collection ................................................................30 2.3.1 Questionnaire design and content..............................................31 2.3.2 Sample design............................................................................32 2.3.3 Population..................................................................................33 2.4 Gathering the data...........................................................................34 2.5 Data analysis....................................................................................34 2.6 Reporting the results........................................................................35

Chapter 3 Theoretical Framework..........................................................................36

3.1 The flying geese Model of industrialization ...................................39 - Model assumptions ..........................................................................39 3.1.1 The original framework by Kaname Akamatsu...........................39 3.1.2 The product-cycle theory...........................................................43 3.1.3 The modern multi-sequentialist paradigm................................45 3.2 Context and conditions for the flying geese Model to work in the case of China as a leading dragon and Africa as a follower..................50 3.3 A Unique Window of Opportunity for Africa: The Graduation of China (and Other Middle-Income Countries) ....................................................53
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3.4 The network theory..........................................................................61 A brief review of the internationalization literature.............................63 3.4.1 Network as structure .................................................................66 3.4.2 Chinese guanxi and Chinese business networks......................71 3.4.3 Business networks and social networks: the role of migrant Chinese communities..........................................................................74 3.5 summary of findings.........................................................................77

Chapter 4 Chinese FDI in Madagascar today: the big deals ................................79

4.1 Chinese investment in Madagascar: an overview.............................79 4.2 Case studies in Madagascar: new investment deals........................90 4.2.1 Case study 1: The Malagasy textile industry: the success story that wasnt..........................................................................................90 4.2.2 Case study 2: Wuhan Iron and Steel group to invest in iron ore exploitation in Madagascar ..............................................................114 4.2.3 Case study 3: China International Fund and aborted projects in Madagascar ......................................................................................121 4.3 Corruption problems.......................................................................126 4.4 Solutions and prospects.................................................................128

Chapter 5 Chinese SMEs comparative advantages..............................................141

5.1 Chinese communities in Madagascar: familial entrepreneurship and interweaved kinship ties.......................................................................141 5.2 Chinese Creating SME in Madagascar: From political task to real challenge..............................................................................................145

Chapter 6 Findings..................................................................................................149
Finding 1: Chinas OFDI profile suits that of Chinese FDI in Africa and in Madagascar .........................................................................................149 Finding 2: The Chinese way of doing business in Africa can be beneficial to Africa if the African leaders are willing it to be................150 Finding 3: Africa is changing , China is developing and the time is ripe for China to be a leading goose for Africa in the next wave of globalization ........................................................................................152 Finding 4: The difference between Chinese and Western-namely American way of reacting to political crises in Africa is a matter of norms, and the norm of non-interference is more beneficial to Africa for the time being......................................................................................154

Conclusions...............................................................................................................156 Bibliography..............................................................................................................163

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ASAYEHGN DESTA. Chinas South-South Cooperative Investments and Co-development Modalities in Africa [J]. Dominican University of California, San Rafael, California, USA International Journal of Business Research, Volume 9, Number 6, 2009..................................................165

Guinea: Blood and Money in the Streets: China's Business Ties to the Loathed Camara Junta Could Quickly Backfire [J/OL] .20 October 2009 http://allafrica.com/stories/200910201249.html(accessed 24/06/2011)................174 JING GU. Chinas Private Enterprises in Africa and the Implications for African Development [J]. Institute of Development Studies email: j.gu@ids.ac.uk European/ Journal of Development Research Special Issue, Vol. 24, No. 1, 2009 (Forthcoming)...........................................................................................................177 JING GU. The Last Golden Land? Chinese Private Companies Go to Africa [J]. IDS Working Paper 356 First published by the Institute of Development Studies in March 2011 Institute of Development Studies 2011 ISSN: 2040-0209 ISBN: 978 1 85864 983 8 a exploiter plus...........................................................................177 Acknowledgement....................................................................................................197

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List of figures
Figure 1 Figure 2 Figure 3 Figure 4 Chinese FDI stock in Africa per sector (2009).15 Destinations of Chinas FDI Flows into Africa (2003-2008)...20 Structural transformation in East Asia..38 Akamatsus original flying geese paradigm: a graphic presentation....41

Figure 5 The modern .multi-sequentialist. Flying geese paradigm: A graphic presentation....50 Figure 6 Figure 7 Figure 8 A network model..63 Evolution of inward investment stocks in Madagascar 2000-2006..84 FDI stocks in Madagascar per sector, 2000 and 2006..84

Figure 9 FDI Stocks in Madagascar per country of residence of investors 20052010....86 Figure 10 Chinese FDI per sector 2006....88 Figure 11 Distribution of Chinese-funded enterprises by type of investment firm..89

List of tables
Table 1 Table 2 Comparing manufacturing in China with that of earlier geese at similar Key features of three schools of internationalization .66

stages of development...56

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List of Acronyms
ASEAN BIANCO corruption) CAJAC COMESA CSLCC EPZ Association of South- East Asian Nations Independent bureau anti-corruption (Bureau indpendant antiLegal Support Centre and Citizen Action (Centre d'assistance juridique et d'action citoyenne) Common Market for Eastern & Southern Africa Higher Council for the Fight Against Corruption (Conseil superieur de lute contre la corruption) Export Processing Zone

GEFP Groupement des enterprises franches et partenaires (Grouping of Duty-Free Enterprises and Partners) HAT High Authority of Transition (transitional government authority in Madagascar since 2009) LDC MCBC MFA MOFCOM NIE OECD OFDI Least Developed Countries Malagasy Chinese Business Chamber of Commerce Multi-fibre arrangement Chinese Ministry of Commerce

Newly Industrialized Economies: Hong Kong SAR, China; Korea; Singapore; and Taiwan, China. Organization for Economic Co-operation and Development Outwards Foreign Direct Investment

SADC Southern African Development Community TNC UNCTAD Transnational corporations United Nations Conference on Trade and Development

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Preface

Preface
The purpose of this dissertation is to introduce and demonstrate a new approach to China-Africa international relations, focused on investments. The methodology used is that of the case study, as a case study is suitable as a research strategy when a how or why question is being asked about a contemporary set of events, over which the investigator has little or no control. It is suitable when the case constitutes a unique case, i.e. a case that provides a rare opportunity to study a specific problem of high scientific interest, but where researchers have not yet been able to establish common patterns. Madagascar provides such a unique case: as demonstrated in length in the Introduction (chapter 1.3) Chinese investments in Madagascar have become more well established than in most African countries because of the kinship ties formed with the local population but where no flying-geese-like model of industrialization has arisen. It is also one of few countries of Africa classified as resource-poor that attracted MNCs in extractive industries and SMEs alike. This single case study is furthermore an embedded case study, where the embedded units of analysis are the studied SMEs and explorative MNCs as well as textile EPZs. This thesis represents a culmination of work and learning that has taken place over a period of almost three years (2009-2012). Starting as a small group of people with different backgrounds in the Institute for International Study, Jilin University, research was undertaken about the characteristics of Chinese involvement in Africa, Latin America and the Caribbean. Early work proceeded with my lecturer and mentor Myungsik Ham, as he pointed out to the specificity of Chinese overseas business networks with regards to the Flying geese model of industrialization and the work of Deborah Brautigam on the matter. The academic interest of the Asian Political Economy was pointed out in a discussion with my colleague and friend Elaine Tolentino. The later orientation towards possible relations between Chinese investment in Africa and the theoretical framework of Flying-geese model of industrialization was discussed only during the last year with my co-supervisor and advisor Prof. He Zhipeng.

Chapter 1 Introduction

Chapter 1 Introduction
1.1 Explanation of Topic
The call for tenders on the exploitation of the deposit Soalala of 400 km was launched by the Government of Madagascar in 2008. After the unconstitutional change of government, the auction was put on hold. In September 2009, the Government of the High Authority of Transition (HAT) has decided to suspend the granting of permits for mining operations. Since then, Wisco is the first company to be granted an exploration permit. China is more than ever in a good position to acquire the mining contracts in Madagascar. Beijing does not bother with democratic principles and would even take advantage of the political situation to expand its investment. For its part, the HAT is trying to break its international isolation by selling the country's wealth to anyone interested.1 These few lines are quoted from a popular and acerbic blog reproducing the trend of overt suspicion perceived in local newspapers following the announcement of the biggest mining deal in the history of Madagascar The announcement of this great mining deal once more shed the spotlight on Chinese investments in Madagascar and gives momentum to this thesis dissertation. Malagasy people on the street and scholars alike ask themselves the question: is China in Madagascar to reap out the countrys untapped resources? Are Chinese investors really taking advantage of the political crisis or are they the only hope for funds for a country in perpetual political turmoil for the last ten years, and from which investors have been keeping clear ever since? The President of the transitional government2, which has yet to be fully recognized internationally after the 2009 unconstitutional change of governmentwhich many observers openly call a coup dtat- invited on a local private TV stations popular talk show, announced that the exploitation of the 20.000 tons of iron ore in the deposit of Soalala would bring 100 million USD per year cash flows to the
1

Madagascar : China first investor with a transition government not recognized internationally (La Chine, premier investisseur avec une HAT non reconnue) Mandoline.com 2010-05-31, Numro 148 http://pambazuka.org/fr/category/comment/64908 accessed on 03/01/2011 2 Hereafter we will use invariably transitional government and High authority of the transition (HAT).

country as the state is to perceive 5USD per ton of iron ore produced 1. A financial inflow warmly welcomed by a transitional government cut from the list of all regional and international organizations (SADC, COMESA, African Union, WTO), punished by traditional donors and which lost long lived friends like France and the European Union and obviously put on black list in the Bretton Woods institutions. This thesis will use the Wisco-Soalala iron ore exploitation project as a case study, as well as another explorative deal which stayed at the stage of announcement of declaration of intent - the CIF-crude oil exploration deal to analyze Chinese investments in the resource extraction in Madagascar who is not really what one would call a resource-rich country, but stores tremendous potentiality to become one. Another case study will be the textile EPZs and its unrealized success story, as it was hoping for more delocalization of Chinese textile firms from nearby Mauritius towards Madagascar, surfing on the next wave of globalization Regrettably unlike in Akamatsus proverbial flying-geese model of industrialization2, the following goose was shot by two consecutive political crises in 2002 and 2009. A fourth case study will look closely at the Chinese small and medium enterprises (SMEs) implanted in Madagascar as they seem interweaved in guanxinetworks of kinship ties and common region of origins in China. These four embedded case studies will be used in this thesis to answer the questions of why and how Chinese investor are in Africa and whether Chinese FDI will bring about sustainable development in an African country like Madagascar. The hypothesis to test is that the rise of China could give momentum for an African country like Madagascar to catch up on development, provided that the lion can tame the dragon3 that is if African leaders can take advantage of the deals offered by China.

1.2 Significance of Research

This thesis will be significant in two major ways:
1

Invite du Zoma (Friday Interview) aired March 23, 2012. Translated from Malagasy. Accessible on youtube: http://www.youtube.com/watch?v=TnQS2MmjyMc&feature=related last accessed 28.03.2012 2 AKAMATSU K.: A historical pattern of economic growth in developing countries [J]. Journal of Developing Economies, 1(1) 1962:3-25. P11. 3 WOELS, GERALD, China in Africa: how the lion should tame the dragon, [W/OL] International affairs review webpage, http://www.iar-gwu.org/node/395?utm_source=China+Africa+News+List&utm_campaign=bdf91d01a0Newsletter9_21_2011&utm_medium=email last accessed on 21/03/2012.

Chapter 1 Introduction

It will shed some light on the Chinese way of doing business in Africa, uncovering the process by which Chinese big extractive firms, textile EPZs and SMEs have settled on the continent and especially in Madagascar as a case study, using network theory as a theoretical framework.

It will presage for the feasibility of an industrialization process a la flying geese model of the continent under the Chinese leadership in Africa, looking at Madagascar as a case study in particular.

1.3 Key Words

Foreign direct investment, Flying geese model of industrialization, EPZ, extractive industry, guanxi-networks

1.4 Intended Academic Breakthrough

This thesis intends to add to the already abundant but all too general literature on China-Africa relations, especially in terms of investments, by giving empirical answers as to how and why do Chinese investors come to Africa, especially in a nonresource rich country, politically unstable and lacking basic industrial infrastructure like Madagascar. It will also provide an insiders point of view of how African administrative officials and leaders perceive the rise of China and her engagement in Africa, when most of the literature on the subject is from the West or from Chinese scholars. It will give a stage for Chinese businessmen to express their views on what motivated them to invest in an African country like Madagascar, by means of a small survey and interviews. It will provide a comparative analysis on Chinese and American reactions to a political crisis in Africa, like the one that happened in Madagascar in 2009, thereby emphasizing on the importance of the Chinese norm of non-interference as opposed to the norm of democracy paramount to the Washington Consensus - and how it affects the growing positive image China progressively builds in politically troubled African states.

Last but not least, it will revive the Flying-geese paradigm and its possible application to African countries as latest comers catching-up on industrialization on account of the tremendous economic growth of China.

1.5 Literature review

1.5.1 China in Africa: myths and realities This section offers a literature review of Chinese presence in Africa in general, but mostly in the economic realm, namely aid, trade and investment. Try as one may, it is very hard to delimit an exhaustive bibliography of the existing literature on China in Africa, since the literature abounds on the various aspects of the subject this fact in itself demonstrates how interesting the topic is to simple observers and scholars alike. Nevertheless an attempt to put together a bibliography on the relations between China and Africa was made by David Shinn1 and has served as starting point for this general literature review. In so doing, we agree with Daniel Larges general assessment of the existing literature that although those relations are widely covered they are also under-researched. 2. Chinas growing soft power here referring primarily to diplomatic and economic influence in the developing world has been a matter of concern for OECD countries, especially the United States of America (hereafter US). As a matter of fact, China's growing influence in Africa is, without a doubt, the most significant event in African history since the end of the Cold War. Most of the western literature related to the topic has therefore been quite skeptic on the positive impact that the dragon might have on the continent. Dragon slayers talk about Beijing as failing to promote democracy and supporting rogue states, aggravating corruption with her non interference policy, disregarding human rights and environmental preservation and the likes (see for example Tull3 and Alden4). On the other hand, panda huggers praise Beijings efforts of aid and investment as filling unmet development needs of
1

SHINN, DAVID H. China-Africa relations: a bibliography. [W/OL] Elliott School of International Affairs George Washington University accessible at http://elliott.gwu.edu/assets/docs/research/articles/shinn_ARD_108_2008-09.pdf last accessed on 12/03/2012 2 LARGE, DANIEL. Beyond Dragon in the Bush: The study of ChinaAfrica Relations [J]. African Affairs, 107/426, 2008: 4561 (Downloaded from http://afraf.oxfordjournals.org/ on February 27, 2012) 3 TULL, D. Chinas engagement in Africa: Scope, significance and consequences. [J] Journal of Modern African Studies, 44(3), 2006:459-479. 4 ALDEN, CHRIS, Red Star, Black Gold [A] in Review of African Political Economy, Taylor & Francis Ltd,32(104/105), Oiling the Wheels of Imperialism, 2005:415-419.

Chapter 1 Introduction

countries overlooked by major aid donors, and not just because she is attracted by natural resources but because of common experiences, values and principles (see for example Wenping1). These extreme positions certainly find their defenders in the literature, but much more contrasted opinions emerge as the picture paints itself in shades of grey and pink rather than just black and white over time (see for example Kaplinsky et. al.s analysis2). From this literature review we saw that the reality of Chinas engagement with Africa as a continent must be contrasted, as on one hand the fifty-three countries (fifty-four if you include the disputed Western Sahara) differ in their respective domestic politics, and on the other hand the stakeholders in China range from government agencies and state-owned enterprises to privately owned multinational corporations and SMEs who do not necessarily abide to the central government policies but rather to their own economic interests. Ian Taylor very nicely corrects the myth of a China Inc.: Although the central government may have a broad Africa policy, it has to be mediated via the economic interests of private corporations and the political motivations and aspirations of local state officials who, with growing autonomy, may not share the enunciated central vision.3 The bulk of the China-Africa literature is made up of broad descriptions of current Chinese involvement in Africa (Kaplinsky, McCormick, & Morris, 2007; Tull, 2006; Wang, 20074). When what is needed more than solely empirical or theoretical studies is a literature that can provide lessons for Africa and other countries in the world that have a stake at understanding Chinas engagement in Africa. As Daniel Large puts it, we are calling for the study of ChinaAfrica relations to develop a culture of serious research beyond current dragon in the bush preoccupations.5 Deborah Brutigams book The Dragons gift6 and the subsequent blog China in Africa: The Real Story7 are an attempt to go in that direction. Reviewers all agree that
1 2

WENPING HE, The Balancing Act of Chinas Africa Policy [J] China Security,2007,3(3):23- 40. KAPLINSKY R., McCORMICK D., MORRIS M., The impact of China on Sub-Saharan Africa [M] Institute of Development Studies Working paper 291.2007. 3 TAYLOR, IAN Chinas Maturing Foreign Policy: Implications for Africa A response to Chris Colley Emerging powers in Africa Watch 2008-11-03, Issue 405 [W/OL] http://www.pambazuka.org/en/category/africa_china/51738 accessed on 09/01/2012 4 WANG, J.Y. What Drives Chinas Growing Role in Africa? [M] IMF Working Paper African Department 2007. 5 LARGE, DANIEL. Beyond Dragon in the Bush: The study of ChinaAfrica Relations [J]. African Affairs, 107/426, 2008: 4561 (Downloaded from http://afraf.oxfordjournals.org/ on February 27, 2012) 6 BRAUTIGAM, DEBORAH, "The Dragon's Gift: the Real Story of China in Africa" [M], the Oxford University Press, 2009. 7 BRAUTIGAM, DEBORAH blog China in Africa the Real Story [W/OL] www.chinaafricarealstory.com

the book is unrecorded in listing the myths and drawing the realities of Chinas presence in Africa and the challenges and opportunities that arise from it1. A previous article published in the European Financial Review2 quite correctly sums up her views on the matter as follows:
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Is China a new comer in Africa? No, the Chinese first began giving aid to Africa in the late 1950s as a tool of diplomacy and solidarity with fellow socialist countries.

Is Chinas African adventure all about oil? Yes, China is very interested in Africas oil and other resources. But thats not all. Chinese banks, manufacturers, exporters and construction firms see much of Africa as wide open for business.

Does China target its aid to resource-rich pariah regimes the West refuses to engage? No, Chinas official aid is relatively small, and spread fairly evenly across the continent as a tool for diplomacy. Every country in Africa that has diplomatic ties with Beijing instead of Taiwan receives aid from China.

Do Chinese companies bring in all their own workers? The percentage of workers that are Chinese on any given project varies widely. In Angola and Algeria, where Chinese companies are a relatively new presence, oil-fueled construction booms have created shortages of skilled workers. Chinese companies here typically bring in at least half of their labor from home. But in Tanzania, Egypt and Zambia, where Chinese companies have been working for several decades, they tend to hire 80-90 percent of their workforce locally. Authors agree that Chinese foreign policy for aid, trade and investment towards

Africa is changing. As Gill et al.3 point out, For more than half a century, the Chinese systematically cultivated solidarity and working relations with a range of African states. It was a profitable diplomatic investment which persisted into the postCold War era when Western powers were more inclined to scale back their presence.
1

Book review: THE DRAGON'S GIFT: THE REAL STORY OF CHINA IN AFRICA Deborah Brautigam [J] Journal of the Washington Institute of China Studies, 5(1)2010:65-69. Accessible at http://wicsusa.org/journal/Papers/Summer_2010/06_dragon_gift.pdf (last accessed 07/02/2012). 2 BRAUTIGAM, DEBORAH China in Africa: Think again [W/OL] Aug 16th, 2010 http://www.worldfinancialreview.com/?p=197 accessed on 12.01.2012 3 GILL B., HUANG C., MORRISON S., Assessing Chinas Growing Influence in Africa [J] China Security, 3(3) 2007:3-21

Chapter 1 Introduction

Today, Chinas Africa policy is carried out on a higher plane and is more complex, multidimensional, and ambitious and, ultimately, entails greater risks.1 It is also evolving, under international scrutiny and criticism. On that aspect one interesting point is made by Jonatan Holslag2: he asserts that Chinas foreign policy in Africa is evolving as a case study of Chinas compliance to external expectations and international norms. The author says that Chinas foreign policy changes ostensibly only to give leeway to its revisionist aspirations. Furthermore, this change might also occur because China is very cautious of her image. As Rabinovitch 3 points out: On Taiwan, as on Sudan, the East China Sea and so much else, Beijing has shown that it is worried about how it looks.4. The experts of the International Crisis Group add: As it seeks increased legitimacy for its rise as a great power, China does not want to be seen as heading a league of the worlds worst dictatorships5, the way it is said to be doing in Africa. This thesis agrees with these authors, who say that China is rightly painting a better picture of herself in the international stage; nonetheless she does so in consistency with the norm of non-interference in internal affairs paramount to her foreign policy. The next section will present more in details Chinese investments in Africa as reported in the literature, after pointing out how the relevant literature is drawing the profile of Chinese outbound foreign direct investments (OFDI). 1.5.2 Chinese investments in Africa literature review While African interdependence with China remains proportionally smaller than that for most other geographical areas, it is growing rapidly as Besada et. al note, 6 and this is not reassuring for OECD countries, especially the United States 7. For example,
1 2

GILL et al. Op. Cit. p5. HOLSLAG, JONATAN Friendly Giant? Chinas Evolving Africa Policy [J] Asia Paper 2(5)2007:1-43. 3 RABINOVITCH, SIMON The Rise of an Image-Conscious China [J] China Security,4(3) 2008:33-47. 4 RABINOVITCH Op.Cit.p43. 5 Chinas thirst for oil, Crisis Group Asia Report N153, June 2008. Executive summary and recommendations p.i. 6 BESADA, H., WANG, Y., WHALLEY, J. Chinas growing economic activity in Africa [A] NBER WORKING PAPER SERIES Working Paper 14024 http://www.nber.org/papers/w14024 NATIONAL BUREAU OF ECONOMIC RESEARCH 2008 7 For the latest literature on the growing importance of Africa to U.S. strategic interests and expansive Chinese engagement in Africa, see GILL, B., HUANG, C. and J. S. MORRISON, Chinas Expanding Role in Africa: Implications for the United States [M](Washington, D.C.: Center for Strategic and Independent Studies, 2007); LYMAN, P. and J. S. MORRISON, More Than Humanitarianism: A Strategic U.S. Approach Toward Africa [M] (New York: Council on Foreign Relations, 2006); VINES, ALEX, China in Africa: A Mixed Blessing? [J] Current History (2007:213-219); BROADMAN, HARRY, Africas Silk Road: China and Indias New Economic Frontier [M] (Washington, D.C.: World Bank, 2007); GOLDSTEIN, A., PINAUD, N., Reisen, H. and X. CHEN, The Rise of China and India: Whats in it for Africa? [M] (Paris: Organization for Economic Cooperation and Development, 2006); and ALDEN, CHRIS China in Africa [J] Survival, 47(3) 2005:147-164.

China is becoming a major infrastructure financier for Sub-Saharan Africa1, as reported by Foster et al. According to a report by the Economist Corporate Network, China is the biggest infrastructure developer in Africa, having gained over 40% of the African market in 2008. Chinese construction firms have been involved in over 500 infrastructure projects across the continent2. This long neglected sector is just one of many where Chinese firms have invested. Apart from a few recent theses by students of business schools, Foster et. als article is a rare piece of literature that treats a view by sector of Chinas presence in Africa; except for the oil sector which appears to be the main focus of detailed research on the matter. This research will here present a literature review of Chinese outwards foreign direct investment3 (OFDI) and particularly the characteristics of that OFDI in Africa. Chinese OFDI profile As Rosen and Hanneman rightly point out, Chinas OFDI has reached commercially and geo-economically significant levels and begun to challenge international investment norms and affect international relations. Yet Chinas OFDI profile is poorly understood4. For starters, most authors agree that the statistical figures of the amount of Chinas OFDI may not be accurate and therefore distort the analyses (see for example Brautigams blog5, Rosen and Hanneman6, Scissors7). Derek Scissors, who hosts the China Global Investment Tracker comments: An accurate assessment, however, is confounded by widespread credulity regarding Chinese investment.

FOSTER V., BUTTERFIELD W., CHEN C., PUSHAK N., Building bridges: Chinas growing role as infrastructure financier for Sub-Saharan Africa [R] The International Bank for Reconstruction and Development / The World Bank 2008 2 GEARING UP Chinas impact on African business and the next wave of globalization [R] Economist Corporate Network 2011. p2. 3 For clarity, we refer to direct investment into China as foreign direct investment (FDI) and direct investment out of China as outbound foreign direct investment (OFDI). As opposed to portfolio investment, we use the term direct investment only for long-term cross-border investment with a final stake of greater than 10 percent, following the OECDs widely used benchmark definition of FDI (OECD 2008a). 4 ROSEN D.H., HANEMANN T.Chinas Changing Outbound Foreign Direct Investment Profile: Drivers and Policy Implications [A] Peter G. Peterson Institute for International Economics. Policy Brief number PB09-14 2009.p1. 5 Problems with Official Data on Chinese Overseas Investment Deborah Saturday, February 27, 2010 Brautigams blog China in Africa the real story http://www.chinaafricarealstory.com/2010/02/chinese-investment-in-africawhats-real.html accessed on 28/10/2011 6 ROSEN D.H., HANEMANN T.Chinas Changing Outbound Foreign Direct Investment Profile: Drivers and Policy Implications [A] Peter G. Peterson Institute for International Economics. Policy Brief number PB09-14 2009.p3. 7 SCISSORS, DEREK. Tracking Chinese Investment: Western Hemisphere Now Top Target [J] The Heritage Foundation The Asian Studies Center No. 2952 July 8, 2010 available at: http://report.heritage.org/wm2952. Last accessed 09/02/2012.

Chapter 1 Introduction

Although global media trumpet supposedly gigantic Chinese deals, such reports can be based on disinformation spread by host country governments.1 Nevertheless, the data available permits to draw some conclusions on the characteristics of Chinese OFDI:
-

Chinas investments abroad are growing despite an overall decline globally in foreign direct investment (FDI) following the 2008 financial crisis.2 Extensive media coverage of Chinese OFDI deals has provoked worries that Chinese firms are buying up the world. These concerns are exaggerated: Chinas role as a global investor remains minor in terms of both annual FDI flows and total FDI stock.3

China is well positioned to significantly increase its outbound investment in the coming years.4 According to a WWF review, Official estimates from the UNIDO Director-General show that Chinas overseas investments are likely to reach USUSD 60 billion by 2010.5

China has significant investments in the developed world, in contrast to the historical pattern of developing countries running large trade deficits and carefully husbanding hard currencies. The Chinese style of overseas investment also bucks international trends in another way. Rather than simply establishing wholly owned subsidiaries abroad, China is increasingly engaging in mergers and acquisitions (M&A).6

Chinese outward investment activities are often directed by the Chinese government, especially for firms in deals involving oil and minerals or telecommunications, which are required by the government to remain under government oversight or control.7 Chinas going global strategy was consolidated and important legislation was enacted to aid foreign investment.8

1 2

SCISSORS, DEREK Op.Cit.p2. SALIDJANOVA NARGIZA USCC Going Out: An Overview of Chinas Outward Foreign Direct Investment [R]U.S.-China Economic & Security Review Commission Staff Research Report 2011. p1. 3 ROSEN D. H, HANEMANN T. Op. Cit. p6. 4 Ibid: 7. 5 PAMLIN D., BAIJIN L. Rethink Chinas outward investment flows [A] WWFs Trade and Investment Policy Programme 2007 p17. 6 SALIDJANOVA NARGIZA Op.Cit. p3. 7 Ibid :4. 8 Ibid :5. The late 1990s saw an intensification of Chinas resource- driven commercial diplomacy through its go out strategy that encouraged state companies to invest abroad. Backed by generous government support such as preferential loans, state-owned enterprises were encouraged to explore strategic investment opportunities in oil and gas fields worldwide, marking a shift from a purely export-led growth strategy toward an emphasis on foreign direct investment (FDI), mergers and acquisitions. This policy of heavy state support was largely the result of a perception of vulnerability in access to energy supplies, but it also came about due to national oil companies requests to the state for help in becoming more competitive with multinationals.(see Chinas Thirst for Oil Crisis Group Asia Report N153, 9 June 2008. p10.)

Looking at the motivations of Chinese multinational enterprises (MNEs) to go international, most scholars (Buckley, 20071; Morck, 20072; Poncet, 20073) agree that classical motivations play the key role: Chinese MNEs are to various extents market-seeking, resource-seeking, and strategic assetseeking.4

Both Chinese state-owned enterprises (SOEs) and private enterprises are engaged in FDI, and no clear breakdown has been published on the shares of SOEs and private enterprises in the number of investment projects.5 These general remarks quoted from the literature offer an eye-opening view on

Chinese OFDI in the world. One concluding remark by Gugler and Boie is quite puzzling:
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The most important differences of Chinese MNEs compared to Western MNEs going international are not to be found in their motivations, but in the special characteristics of their home country in terms of the Chinese institutional and cultural context and with regards to home country resources. Especially, the by far largest outward investments by Chinese MNEs are undertaken by SOEs, and all investment projects follow a scheme that ensures that they are in strict line with government policies. Motivations of Chinese firms to internationalize and the government interest in this are to large extent in one line and institutionally intertwined.6 This affirmation is not quite true for Chinese investments in Africa in general

and in Madagascar as a case study in particular. As a matter of fact, Buckley et al.7 find that Since private firms were legally prohibited from investing abroad prior to
1

BUCKLEY, P. J., CLEGG, L. J., CROSS, A.R., & LIU, X. The Determinants of Chinese outward foreign direct investment [A] in; VOSS, Hinrich; and ZHEN, Ping. Journal of International Business Studies, 38, 2007: 499518. 2 MORCK, R., YEUNG, B., & ZHAO, M. [A]. Perspectives on Chinas Outward Foreign Direct Investment. Journal of International Business Studies. 2007 3 PONCET, S. Inward and Outward FDI in China. [A] Working paper at the Panthon-Sorbonne-Economie, Universit Paris I CNRS and CEPII, published at the homepage of the university Paris1:http://team.univparis1.fr/teamperso/sponcet/Perso/Book%20chapter%20Poncet%20April %2028%202007.pdf. 2007. Last visisted 13 May 2008. 4 GUGLER P., BOIE B., The Emergence of Chinese FDI: Determinants and Strategies of Chinese MNEs [A] Paper presented at the Conference Emerging Multinationals: Outward Foreign Direct Investment from Emerging and Developing Economies Copenhagen Business School, Copenhagen, Denmark 9-10 October 2008 p1. 5 GUGLER P., BOIE B. Op. Cit. p5. 6 GUGLER P., BOIE B. Op. Cit. p23. 7 BUCKLEY PETER J., CLEGG J., CROSS ADAM R., LIU XIN, VOSS HINRICH, ZHENG PING, The determinants of Chinese outward foreign direct investment. [A] Centre for International Business (CIBUL), Leeds University Business School, University of Leeds WestminsterResearch 2007. Available at http://www.wmin.ac.uk/westminsterresearch.

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Chapter 1 Introduction

2003, state-owned enterprises (SOEs) constitute the bulk of Chinese enterprises investing in Africa. Since 1979, when ODI was formally permitted under the Open Door policies, the internationalization of Chinese firms has been tightly controlled by national and provincial government, either directly, by administrative fiat, or indirectly, via economic policy and other measures designed to advance the economic development agenda. Initially, ODI was permitted on a very selective basis. However, in recent years administrative controls have been relaxed, approval processes and procedures streamlined, and the ceiling rose on the amount of foreign exchange that can be committed to individual investment projects1. The process of accelerated outward investment liberalization and growth can be traced from Deng Xiaopings tour of South China in 1992 through to the government-led go global (zou chu qu) initiative, which was instigated in 1999. This initiative aims to promote the international competitiveness of Chinese firms by further reducing or eliminating foreign exchange-related, fiscal and administrative obstacles to international investment2 . In order to properly understand Chinese OFDI, it is therefore important that formal empirical analysis takes full account of this changing institutional context and the idiosyncratic response by Chinese firms that it might engender. In other words, it is necessary to understand the extent to which the investment location decisions of Chinese MNEs, when considered in aggregate, are explicable by received theory or whether the context and institutional environment of the home country exerts a distinctive effect. Chinese investment in Africa Globalization is entering a new phase where China is in the driving seat. According to UNCTAD, China is now the fifth largest investor in the world, and the largest non-African developing economy investor in Africa. Chinas engagement in Africa is changing the continents economic landscape, and it has already influenced other emerging economies, or BRICs, to gear up their investments on the continent3.
1

SAUVANT, K. New sources of FDI: the BRICs. Outward FDI from Brazil, Russia, India and China [J], Journal of World Investment and Trade 6, 2005: 639-709. 2 SAUVANT, K. New sources of FDI: the BRICs. Outward FDI from Brazil, Russia, India and China [J], Journal of World Investment and Trade 6, 2005: 639-709. 3 GEARING UP Chinas impact on African business and the next wave of globalization [R] Economist Corporate Network 2011. p3.

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In 2007, over 700 registered Chinese state-owned and private companies (provided with government financial backing) have entered into a number of business ventures in collaboration with African national governments, state-owned corporations, and private firms. For instance, the Chinese government has designated about 180 companies to benefit from preferential finance, tax concessions, and political backing to go global and become true multinationals1. These numbers might seem big, but the precedent literature review shows that Africa is only fourth at best after Australia, East and West Asia to attract FDI from China 2. Although the literature is not unanimous depending on the source of the data: according to MOFCOM statistics, With USD 2556.82 Mio, Africa is receiving more foreign direct investment from China than any other continent except Asia3. Still, regardless of the data source, the trend is towards an evident increased presence of Chinese investment in Africa, as a report by the Economist Corporate Network shows: Although Africa still only makes up about 4% of Chinas total outward foreign direct investment (FDI), Chinas FDI in Africa is growing fast. Figures from the Chinese Ministry of Commerce (MOFCOM) show a dramatic increase in Chinese FDI in Africa in the last decade from USD 491 million in 2003 to USD 9.3 billion in 2009. China is also Africas largest trading partner in combined export and import values. In 2010, Chinas two-way trade with Africa surpassed USD 110 billion, and recorded a 43.5% year-on-year increase4. The Economist Networks paper continues, saying that Chinas appetite for Africas natural resources is generally the focus of reports on Chinas engagement in Africa. It is true that a significant share of the value of Chinese investment in Africa is directed towards the extractive industries. MOFCOM figures show that Chinese investment in the extractive industries accounted for 29.2% of Chinas total investment in Africa in 2009 (27.6% in 2000) 5. Considering the extractive sectors, more myths arise that need to be corrected with facts. China is allegedly in Africa only for oil, giving aid and infrastructure in
1

DESTA ASAYEHGN, Chinas South-South cooperative investments and co-development modalities in Africa, [J] International journal of business research 9(6), 2009:19-33. p24. 2 See the map of Chinas WorlwFDI Reach in SCISSORS, DEREK. Tracking Chinese Investment: Western Hemisphere Now Top Target [J] The Heritage Foundation The Asian Studies Center No. 2952 July 8, 2010 available at: http://report.heritage.org/wm2952. Last accessed 09/02/2012. 3 MOFCOM, (2006). Statistical Bulletin of Chinas Outward Foreign Direct Investment 2006. [WB/OL] Online on the homepage of the Chinese Ministry of Commerce, at: http://preview.hzs2.mofcom.gov.cn/accessory/200710/1192783779118.pdf. Visited last 09/02/2012.. 4 GEARING UP Chinas impact on African business and the next wave of globalization [R] Economist Corporate Network 2011. p3. 5 Op.Cit.p4.

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exchange for long term access to non-renewable resource, but the literature abounds in authors arguing otherwise. Erica Downs1 for example proved that Chinese oil companies are relatively small players compared to other western companies and that they are not there because of a highly coordinated government strategy. In fact, the companies decide where and how to invest: the Chinese energy bureaucracy is fractured, government agencies face enormous difficulties coordinating the formulation and implementation of energy decisions among themselves, let alone with the national oil companies (NOCs).2 Additionally, the Ministry of Foreign Affairs (MFA) has no direct control over Chinas NOCs, and communication and coordination between the MFA and the companies is sometimes lacking. Additionally, the liberalization and decentralization of Chinas energy sector, which is part of the broader transition from a centrally-planned to a market economy, has resulted in a shift of power and resources away from the central government toward the state-owned energy companies3. Downs concludes that the capacity of the Chinese government to control its NOCs is limited and the emerging rift between the commercial objectives of the companies and the political objectives of Beijing is likely to continue to widen in the years to come4. A conclusion that the International Crisis Group agrees with: foreign investments are generally made for purely commercial reasons, without any state influence.5 The rise of China and its relations to Africas commodities sector6 China has been among the fastest growing economies in the world, with a real GDP growth rate averaging near 10% over the 19802010 period (International Monetary Fund, 20117). With rapid rates of urbanization, and nearly half of its population expected to reach middle class consumer status (income between USD 5USD 7 a day) by 2025, Chinas future growth prospects are exceptionally promising, despite the hiccup of the recent global financial crisis. Chinas increased
1

DOWNS, ERICA, The Fact and Fiction of Sino-African Energy Relations Erica S. Downs [J] China Security, 3(3) 2007:42-68 2 DOWNS, ERICA Op.Cit. p49. 3 DOWNS, ERICA Op.Cit. p49. 4 Ibid: 63. 5 Chinas Thirst for Oil Crisis Group Asia Report N153, 9 June 2008. p10. 6 EDINGER H., PICTORIUS C., Aspects of Chinese investment in the Africa resources sector. [J/OL] The Journal of The Southern African Institute of Mining and Metallurgy VOLUME 111 JULY 2011, pp501-510. Accessible at http://www.saimm.co.za/Journal/v111n07p501.pdf last accessed 03.04.2012 7 INTERNATIONAL MONETARY FUND. Africas Power Supply Crisis: Unravelling the Paradoxes. [W/OL] IMF Survey. http://www.imf.org/external/pubs/ft/survey/so/2008/CAR052208C.htm last accessed 03.04.2012

13

competitiveness and its expanded presence in world markets has shifted the global production chain to Asia. Swift modernization and development, coupled with a deeper presence in global markets, has upped Beijings demand for various resources as the industrial structure of the nation is further developed. China is the top consumer of key resources, consuming about 30% of global aluminum and copper resources, 40% of iron ore and lead, and more than 50% of coal; and is the second largest consumer of oil after the USA, importing about one quarter of its oil needs from Africa, in all exemplifying its vast build-up of capital stock. Increasing resource demand from China underpinned the upswing in commodity prices during the pre-crisis years, and most recently in the post-crisis period. Oil prices peaked at almost USD 150 per barrel in mid-2008. Similarly, all types of commodities (including ferrous and non-ferrous metals, as well as precious stones) experienced major upward trends in prices, and have resurged to near pre-crisis levels of late. For example, copper prices saw massive gains, increasing more than threefold since 2002 until the global financial crisis. This increase resulted in miners rushing to capitalize on the swelling demand for alternative sources of raw materials, which led to large new capital injections into resource-rich but also undeveloped regions across Africa. Consequently, traditional investors as well as new emerging partners, including China, have made rapid inroads into Africas extractive industries, particularly from a trade and investment perspective. Chinas economic expansion, which has driven higher commodity prices, has significantly contributed to higher GDP growth rates, especially of resourceproducing states; at least in the short term (Collier and Goderis, 20081). Sub- Saharan Africa recorded 6.23% growth over the 2003-2008 period (IMF, 20112), following a similar upward growth trend to China. Since 2001, sub-Saharan Africa has increasingly become a supplier of resources to the Asian powerhouse. However, Collier and Goderis3 (2008) and Fraser and Lungu4 (2007) note that this commodity fuelled growth can be heavily misleading. In the long-term, rising commodity prices
1

COLLIER, P. and GODERIS, B. Structural Policies for Shock- Prone Commodity Exporters, [W.OL] http://users.ox.ac.uk/~econpco/research/pdfs/StructuralPolicies-ShockProneExporters.pdf. 2008. last accessed 03.04.2012 2 INTERNATIONAL MONETARY FUND. Africas Power Supply Crisis: Unravelling the Paradoxes. [W/OL] IMF Survey. http://www.imf.org/external/pubs/ft/survey/so/2008/CAR052208C.htm last accessed 03.04.2012 3 Op.Cit. 4 FRASER, A. and LUNGU, J. For Whom the Windfalls?: Winners & Losers in the Privatisation of Zambias Copper Mines. www.minewatchzambia.com. 2007. last accessed 03.04.2012

14

Chapter 1 Introduction

can implicate adverse effects on resource producers. This is especially the case if issues of governance, institutions, rent seeking, and lack of economic diversification are not addressed, and, if only primary commodities are exported as these are subject to volatile prices. This is important as the Sino-African trading relationship is heavily skewed towards resource-based trade and is yet to see more beneficiation and resource value addition. This thus begs the question if China will further perpetuate resource specialization in Africa or contribute to diversification. Commodity prices have historically been cyclical, and many countries have had to deal with the boombust scenarios, but may not necessarily have learnt from these.

Figure 1 Chinese FDI stock to Africa by sector (2009)1

While most Chinese investment in Africa is still directed towards extractive industries, Chinese firms are increasingly seeking business opportunities in a wide range of sectors. According to the Economist Corporate Network report in 2011, Chinese investment in Africas services sector has risen from about 20% of total inbound investment to nearly half last year2. According to figures from MOFCOM,
1

EDINGER H., PICTORIUS C., Aspects of Chinese investment in the Africa resources sector. [J/OL] The Journal of The Southern African Institute of Mining and Metallurgy VOLUME 111 JULY 2011, pp501-510. P504. Accessible at http://www.saimm.co.za/Journal/v111n07p501.pdf last accessed 03.04.2012 2 GEARING UP Chinas impact on African business and the next wave of globalization [A] Economist Corporate Network 2011. Op.Cit.p2.

15

which outline the composition of Chinese investment on the African continent, the mining sector (including oil and minerals) had the largest share of FDI stock in 2009 at 29.2%, followed by manufacturing (22%), construction (15.8%), and financing (13.9%).1 1.5.3 The case of Madagascar Madagascar: an introduction Madagascar, lying off the southeastern coast of Africa, is the fourth largest island in the world. Many rare species of flora and fauna inhabit the island, quite a few of which are hard to find elsewhere, hence the name A Land of Living Fossils. More than natural beauty, the country boasts abundant natural resources although she is classified among the non-resource countries (not rich in resources) in the classification of the World Economic and Financial Survey2 . Madagascar is considered by geologists as one of three countries harboring the largest variety of mineral resources in the world, alongside Brazil and India. Untapped reserves of oil (on and offshore) 3, cobalt, nickel, and gold and uranium deposits have been coveted by rich western countries alike, even though France as former colonizer has historically had the upper hand on explorations and exploitation. Recent deals made in the mining and oil sectors saw the apparition of more untraditional investors like companies from Canada (the giant cobalt and nickel exploitation by Dynatec, and the exploration for uranium by Pan African Mining Corp), Thailand (PTT PCL for fossil carbon), United States (Exxon Mobil for offshore oil reserves), etc.4 Despite recent developments of political instability in the past 10 years, the extractive sector is booming and investors fighting over rights to explore and exploit the resources, so
1 2

EDINGER H., PICTORIUS C Op.Cit. p.504. World Economic and Financial Survey Sub-Saharan Africa 2008 [R] INTERNATIONAL MONETARY FUND 2008:1-135. p94 3 According to a comment posted by Madagascar Oil (US) on Youtube: Madagascar is one of the most exciting untapped energy opportunities in the world, offering both great exploration potential and significant discovered resources. The combination of heavy oil, conventional oil, gas for steam generation, and even surface mining potential, make Madagascar especially attractive and is drawing interest from major oil companies around the world. With the largest onshore acreage, longstanding relationships, and deep understanding of the country, Madagascar Oil is uniquely positioned to be at the forefront of exploration and development of Madagascar's energy resources. http://www.youtube.com/watch?v=MqYAB-QUzN4&feature=share Madagascar Oil CEO interview [W/OL] last accessed 01/02/2012
4

Mining sector in Madagascar (le secteur minier a Madagascar) [W/OL] published on 05/07/2011 http://www.tresor.economie.gouv.fr/1630_le-secteur-minier-a-madagascar last accessed 27/02/2012; see also Surveys on Foreign Direct Investments in Madagascar [W/OL], Central Bank of Madagascar (Enquetes sur les investissements directs etrangers a Madagascar) 2000-2010. www.instat.mg

16

Chapter 1 Introduction

much so that the Ministry in charge of Mines and oil had to suspend the attribution of exploration and exploitation permits in September 2009 - for an indefinite period- for the remediation of the extractive sectors as well as strengthening the control system.1 China is also taking part in the scramble for resources, by the means of the countrys third largest steelmaker Wuhan Iron and Steel, who got clearance from the government to acquire the Soalala iron ore deposit in Madagascar. The project involves an area of more than 430 square kilometers and contains more than 800 million tons of reserves available for exploitation.
2

According to authorities, the

contract is approximately USD 8 billion (6.7 billion) worth and could generate "at least" 100,000 jobs. "This project is the first mining permit issued by the transitional government after remediation of the mining sector. It marks the investor confidence in the regime, "says one side of the Ministry of Mines. Soalala is the largest mining project ever launched in Madagascar, far ahead of the Dynatec Ambatovy project (nickel and cobalt, USD 4 billion), and already provides a significant windfall to the State - the Treasury would have collected USD 100 million under the provision of the deposit. During the first phase of research, which could last until 2013, the state should pocket USD 600 million a year from the income tax and USD 228 million in royalties.3 Details on the project and its implications will be given in chapter 4.3. After years of recession due to two subsequent political coups in 2002 and 2009, Madagascar has gradually returned to growth in 2010. However the country continues to suffer the political fallout of the coup of 2009, which had ousted President Marc Ravalomanana and exacerbated the impact of the global recession of 2008/09 on Madagascar. After falling 3.7% in 2009, the Malagasy economy grew by 0.3% in 2010, although development aid, which traditionally finances public investment in infrastructure, has declined. Since the international community rejected the standardization program policy of the current government; it is unlikely that development aid returns in a short-term period to its pre-crisis level, which suggests a slowdown in growth.
1

RAZAFINDRAMIADANA, LANTONIAINA, Madagascar: Mines et hydrocarbures - Les demandes de licence explosent [W/OL] Lexpress de Madagascar, 9 Mai 2011 http://fr.allafrica.com/stories/201105091705.html last accessed 27/02/12 2 ZHANG QI Wuhan Steel gets green light for Africa ventures[W/OL] (China Daily) Updated: 2010-05-25 09:16 http://www.chinadaily.com.cn/bizchina/2010-05/25/content_9888548.htm accessed on 20/01/2012 3 CARAYOL, REMI An iron steel contract (Un contrat dur comme fer) [W/OL] Jeuneafrique.com - le premier site d'information et d'actualit sur l'Afrique 24/06/2010 12h:51 http://www.jeuneafrique.com/Article/ARTJAJA2579p072-073.xml1/ accessed on 20/01/2012.

17

In 2010, growth was driven by the mining industry (expansion of production in large mines owned by foreign capital) and by the recovery in tourism. Agricultural production grew at a slow pace despite favorable weather. However, the construction sector and public works (BTP) and textiles continued to contract. The referendum in November 2010 which amended the Constitution could allow Andry Rajoelina, who seized power in 2009, to be elected president in 2011, although his nomination is not confirmed yet1 . The political environment remains unstable: both the opposition and most countries of the world felt that this referendum was not valid and the mediation efforts are not moving. In this context, emerging partners represent an opportunity for Madagascar. China has not recognized the current Malagasy government, but many of its businesses continue to sign contracts with him, like the Chinese group Wuhan Iron and Steel Co (WISCO) (see above). In 2010, the group has paid an advance of USD 100 million for a concession on mining of iron ore. If deposits are found as large as he hoped, he could invest USD 8 billion, which would be by far the largest foreign direct investment (FDI) made to date in Madagascar. The country, where corruption is rampant, will have to succeed in turning this opportunity into development through the equitable payment of royalties and creating spillover effects to the local economy.2 China in Madagascar since independence (1970 onwards) Relations between China and Madagascar have long been determined by the closeness between Madagascar and Taiwan. While Madagascar only recognized Chinese sovereignty over Taiwan in 1972, when Foreign Minister Didier Ratsiraka visited China, diplomatic relations between China and Madagascar go back as far as 1958, when a Consulate General was established and then an Embassy in 1960. China and Madagascar bilateral relations officially date from the 1970s. More precisely, China and Madagascar established diplomatic relations on November 6th, 19723. It was officially established with the signature of the "Joint Communiqu on the

To date it has not been confirmed whether Andry Rajoelina or his predecessor Marc Ravalomanana- would be candidate or not to the next presidential election, to be held sometime at the end of 2012 2 Madagascar Country profile, African Economic Outlook, 2011 http://www.africaneconomicoutlook.org/fileadmin/uploads/aeo/Country_Notes/2011/Full/Madagascar_long.pdf accessed on 23/11/2011 3 RAZAFINDRAVONONA J., RAKOTOMANANA E., RAJAOBELINA J., Etude sur les changes entre la Chine et Madagascar [R], Institut National de la Statistique, 2008 :11.

18

Chapter 1 Introduction

Establishment of the Diplomatic Relations between the People's Republic of China and the Democratic Republic of Madagascar". At a time of political rivalry between the USSR and China during the presidency of Didier Ratsiraka (1975-1991), China agreed to reconstruct the RN2 highway between Antananarivo and Toamasina, to build hospitals and the Mahamasina Stadium in the capital a project entrusted to the Sino-Malagasy Public Works Company (SMATP) still present in Madagascar today. Since 1972 Madagascar only recognizes continental China, although its position with regard to Taiwan was of an ambiguous nature until 1998. Indeed, during the 1990s, an agreement allowed Taipei to be represented by a special delegation of the Republic of China, which made it possible for Madagascar to benefit from Taiwanese aid. Certain players of that era report that President Albert Zafy was putting that aid into the equation, in order later on to obtain financial support from China, in the same way as Didier Ratsiraka was to do when he returned to power in 1997. Under pressure from China (visits from Vice-Prime Minister Jiang Chunyun in 1997 and from Vice-President Hu Jintao in 1999), Madagascar called a halt to that ambivalent situation and closed the Taiwanese representation in 2000, paving the way for the start of close relations with China, which have continued to grow stronger since then. This reversal is easier to explain with reference to the wish of the Peoples Republic of China to increase its foreign investments as part of its Going out Policy announced by President Jiang Zemin at the end of the 1990s. According to certain sources, Andry Rajoelinas regime was considering discussions with Taiwan in 2009, which once again would have definitely led to a sharp reaction on the part of the authorities in continental China.1 Chinese investment in Madagascar post-reform (1980 onwards) This rapid look back at the history of diplomatic relations between China and the Great Island shows that the sudden promotion through the media of the Chinese presence in the island following on from a number of contracts or impressive declarations of intent, is only part of a continuous consolidation of those relations ever since the end of the 1990s.
1

PELLERIN, MATHIEU The Recent Blossoming in Relations between China and Madagascar [A] IFRI Sub Saharan Africa Program February 2012 p. 9 accessible at http://www.ifri.org/?page=detailcontribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/2012

19

Figure 2 Destinations of Chinas FDI Flows into Africa (2003-2008) Source: Chinese Commerce Ministry, 2008

Chinas FDI flows into Africa from 2003 to 2008 are mostly directed to South Africa as statistics from the Chinese Commerce Ministry show1, and Madagascar only benefitted from 1% of those investments, but Madagascar made it to the top 10 destinations of Chinese investment (regardless of the fact that she is not listed as a resource rich country) and this is substantial considering that there are over 50 countries in Africa. 2 The full extent of this blossoming of bilateral relations is to the credit of President Marc Ravalomanana, whose aim of opening up Madagascar to globalization tied in with Chinas ambitions for international expansion. The frequency of visits in

Statistics presented in Chinese Trade and Investment Activities in Africa [J/OL], Policy Brief VOl.1 Issue 4, 29 July 2010, The African Development Bank Groupd, Chief Economis Complex, Accessible at http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Chinese%20Trade%20%20Investment %20Activities%20in%20Africa%2020Aug.pdf last accessed 04.03.2012 2 This position of Madagascar as part of the top 10 Chinese investment destinations is however changing depending on the source of the data: the heritage foundation, mentioned as a source by Kobus van der Wath, in Chinas Investment in Africa (Kobus van der Wath, Chinas Investment in Africa[W/OL], presented at Macquarie China Day in South Africa, Cape Town, 4 February 2011, accessible at Fwww.thebeijingaxis.com last accessed 04.03.2012.) list the top ten destinations as: South Africa, DR Congo, Niger, Gabon, Nigeria, Guinea, Ghana, Egypt, Mauritius and Angola. According to this study, African exports to China are largely mirrored by Chinese investment in the continent and overall, oil rich countries are not top receivers of funds, it is those with minerals. Yet another study finds that The top ten African country investment recipients constituted 76% of Chinese outward FDI stock in Africa, including mainly resource-endowed economies such as South Africa, Sudan, Nigeria, Zambia, and Algeria, as well as resource-poor economies such as for example Ethiopia.(EDINGER H., PICTORIUS C., Aspects of Chinese investment in the Africa resources sector. [J/OL] The Journal of The Southern African Institute of Mining and Metallurgy VOLUME 111 JULY 2011, pp501-510. Accessible at http://www.saimm.co.za/Journal/v111n07p501.pdf last accessed 03.04.2012)

20

Chapter 1 Introduction

both directions testifies to the close nature of these relations1. Numerous projects were indeed initiated by his regime, such as the launch of a second cement work in the country with the Chinese firm Maloci2. On the occasion of the hosting of the 13th Summit of the African Union planned to take place in July 20093, Madagascars Company for External Commerce and Construction (SOGECOA)4, a branch of the state-owned Anhui Fergen Construction Company (AFEC), was granted two major construction contracts: a 5-star hotel and the Ivato International Conference Center (CCII). Moreover, the former President had entrusted the leases and management of certain sugar-producing factories belonging to the national company the Siramamy Malagasy (SIRAMA) to the Chinese company, Complant. Finally, the former President, during one of his visits to China, had obtained a commitment from the Exim Bank for financial backing for the construction of a dam to be carried out by the company CAMC Engineering. This increase in Chinese investment was most conspicuous in the mining and oil domain. The Chinese company Sunpec was able to obtain a permit for prospecting in the very promising Block 3113. Sunpec is a subsidiary branch which would be working in Madagascar on behalf of China National Offshore Oil Corporation Ltd (CNOOC). This is clear from the fact that the executive director of Sunpec, Wang Tao, is also director of CNOOC. In the mining sphere, the provincial company Mainland Mining Ltd, has been working on the east coast since 2006 and is still exploring seams of ilmenite (iron oxide and titanium oxide) south of Toamasina. In addition, the Changyi Zhanguyuan Tungsten Company from Guanzhou, through its subsidiary AMI SARL155, obtained a mining permit in Maevatanana to prospect for gold. Finally, as pointed out in the introduction, Marc Ravalomanana invited tenders

These bilateral visits are listed on the site of Madagascars Embassy in China. http://www.ambamadbeijing.com/fr/about.asp?type1=4 (15/02/2011) 2 Cf LIU CHUNXIAO, Culture, Common Interests and Win-win Outcome 2010/10/29 -- Zhangs Business Building Secret in Africa, Africa Magazine, FOCAC Website accessible at http://big5.fmprc.gov.cn/gate/big5/www.fmprc.gov.cn/zflt/eng/zfgx/t765159.htm last accessed 03.04.2012 3 In view of international sanctions imposed on the transitional rgime, the task of holding the summit was eventually entrusted to Libya. 4 The SOGECOA has been in existence in Madagascar since the revival of Sino-Madagascan relations in 1997. It enjoys the support of the Chinese state and was entrusted with the construction of the Mahamasina Palace of Sports and the Horizon Ivato Supermarket. 5 African Mining Industry

21

for exploring the iron ore in Soalala. 1 Now this deal has been closed by the transitional government with the consortium Hong Kong Wisco Guanxin. 1.5.4 Why a case study of Chinese investments in Madagascar Chinese investments in Madagascar have become more well established than in most African countries because of the kinship ties formed with the local population but where no flying-geese-like model of industrialization has arisen. It is also one of few countries of Africa classified as resource-poor that attracted MNCs in extractive industries and SMEs alike. Madagascar is also one of the rare countries where textile EPZs could be launched successfully. Looking at risk perception, Buckleys empirical results reveal that Chinese FDI seems to be rather attracted than deterred by political risk2. This observation can be seen as supporting the analysis that the cooperative hands of the Chinese government can play a bigger role in Chinese FDI to countries with a weak rule of law, and have can provide less strong support in highly developed markets. The case of Madagascar is a good testing ground for this assumption, as for the past ten years, political turmoil and instability has put investors at bay for the most part. Since Independence Madagascar has experienced six crises: in 1972, when President Philibert Tsiranana was overthrown; in 1991 when President Didier Ratsiraka was overthrown; in 1996 when President Alvert Zafy was dismissed; in 2002 when there was a post-electoral crisis - Didier Ratsiraka against Marc Ravalomanana - and in 2009, when there was a coup dtat followed by the departure of President Marc Ravalomanana).
3

Madagascar is the only example alongside Mauritius of significant EPZ success in sub- Saharan Africa where all other free-zone initiatives have failed despite numerous attempts. A number of particularities provide additional reasons for the Madagascar success. These are, in particular, historical (presence of a large French community, which has contributed to the magnitude of French investments), cultural

PELLERIN, MATHIEU The Recent Blossoming in Relations between China and Madagascar [A] IFRI Sub Saharan Africa Program February 2012 p. 10-11 accessible at http://www.ifri.org/?page=detailcontribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/2012 2 BUCKLEY et. al. Op. Cit. 2007. p. 513 3 PELLERIN, MATHIEU The Recent Blossoming in Relations between China and Madagascar [A] IFRI Sub Saharan Africa Program February 2012 p. 5 accessible at http://www.ifri.org/?page=detailcontribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/2012

22

Chapter 1 Introduction

(national textile tradition), and geographic (close to Mauritius, one of the leading investors1).

1.6 Research questions and limitations

The major research question this thesis is to answer is whether the rise of china will give a chance to African countries like Madagascar to finally access industrialization a la flying-geese model, with help of Chinese foreign direct investment. Corollary research questions are:
-

Is there a Chinese way of doing business in Africa and if yes what are its features? How and why do Chinese investors come to Africa, especially in a nonresource rich country, politically unstable and lacking basic industrial infrastructure like Madagascar? More precisely, by which process do Chinese big extractive firms, textile EPZs and SMEs decide to settle on the continent and especially in Madagascar?

How do African administrative officials and leaders perceive the rise of China and her engagement in Africa? What is the difference between Chinese and Western-namely American way of reacting to political crises in Africa, like the one that happened in Madagascar in 2009? With regards to the specific case study of extractive industries in Madagascar,

the following questions are also interesting to consider:

-

Is there a resource curse and if yes, how can a country like Madagascar avoid it? Is the Angola model of doing business in extractive industry resources for infrastructure- bringing sustainable growth will it work for Madagascar?

In recent years, the Chinese in Mauritius have been actively exploring business opportunities in Southern Africa, where they may run into a growing number of Taiwanese and Hong Kong businesses that are investing in Lesotho, Madagascar, and South Africa. the Mauritian case can be seen as an extra-Asian example of the global reach of Chinese business networks, and even evidence of the growing transnationalism of domestic capital in the Third World (as Mauritian investors expand their investments in nearby Madagascar). See BRAUTIGAM DEBORAH Close Encounters: Chinese Business Networks as Industrial Catalysts in Sub-Saharan Africa [J]. Royal African Society, 102.2003:447-467. P449-461.

23

What are the conditions under which extractive industries can be beneficial for a host country? As for limitations, this thesis will not build a comparative study of Chinese

investments

in

Madagascar,

as

opposed

to

say

French

or

any

other

traditional/western economic partner. Although as it aims to define/highlight the characteristics of Chinese investment in Africa in general, using Madagascar as a case study, some comparisons will be made considering the statistics on hand.

1.7 Thesis outline

In order to answer the research question, the present thesis is divided into 5 main chapters apart from the Introduction and the Concluding Chapter. Chapter 1 is an introduction to the topic, giving the description of the topic, the intended academic breakthrough and main questions to be answered within the thesis as well as limitations. It also holds a literature review of Chinese outward foreign investment profile in general and of Chinese investment in Africa in particular, as well as a literature review of Chinese relations and investments with Madagascar as a case study. Chapter 2 holds methodological considerations on how the thesis was thought of, and how the research was conducted, with a special emphasis of the methodology of the survey undertaken by Chinese SMEs to know how and why they decided to invest in Madagascar. Chapter 3 presents the theoretical framework of the study that is the flying geese model of industrialization and the network theory, insisting on the guanxi-business network and network as structure. Chapter 4 shows three embedded case studies. The first one of the textile industry in Madagascar, is a success story that wasnt, showing the importance of political sanctions post-political crises on the sector, with an emphasis on the differing reactions to the political crises in Madagascar from the US and Chinese states and investors. The second case study is one of the mining industry, with an iron ore exploration contract, that is a potential success story to be and the third case is one of the oil industry, which is a failed deal undertaken by the China International Fund. Chapter 5 reports stories as empirical evidence that the guanxi-networks can be extended from the overseas Chinese communities to the Malagasy entrepreneurs,
24

Chapter 1 Introduction

forming a web of business networks that can be the structure for a more intensive industrialization in Madagascar. Chapter 6 sums up the findings defined by the thesis researcher. Chapter 7 is the concluding chapter, holding a critical assessment of the research, a restatement of the hypothesis, and a demonstration of the precision, thoroughness, and contribution of the thesis. It also draws further lines of research to be undertaken, with final concluding remarks.

25

Chapter 2 Methodology

2.1 Methodological Considerations

The methodological framework in this thesis draws on a realist philosophy of science. The essence of scientific realism is the assumption that the world exists independently of our knowledge of it () [and consists] not only of events, but objects, including structures, which have powers and liabilities capable of generating events1. This is expressed in the research design through the use of realist, as opposed to instrumentalist, research questions. Whereas an instrumentalist approach would opt for research questions regarding what can be directly observed and validated, i.e. the data itself, a realist approach favors research questions regarding the real phenomena behind the data2 In this study the research problem regards actual structures, processes, and events, rather than the informants perceptions of them. Selecting an appropriate research approach is critical for the studys ability to properly address the research problem. A deductive approach, as defined by Saunders, Lewis, and Thornhill involves the testing of a theoretical proposition by the employment of a research strategy specifically designed for the purpose of its testing3. An inductive approach, on the other hand, aims at development of a theory as a result of the observation of empirical data4 . For this study, neither of these two research approaches fit perfectly; the study employs a theoretical foundation and does compare the findings to their theoretical predictions, but the research design is not a test of theoretical hypotheses. According to Saunders et al. a third research approach: abduction, lies between these approaches and combines both induction and deduction. As with an inductive approach, the abduction puts emphasis on empirical findings, but does not ignore theoretical
1 2

SAYER, A. Method in social science A realist approach. [M] London: Routledge. 1992:5. MAXWELL, J. A. (2004). Qualitative research design: An interactive approach. [M] Thousand Oaks, CA: Sage Publications. 2004. 3 SAUNDERS, M., LEWIS, P., & THORNHILL, A. Research methods for business students. [M] London: Pearson Education. 2007: 597. 4 Op. Cit. p 599.

26

Chapter 2 Methodology

antecedents, which places it close also to the deductive approach. Analysis of empirical findings may be combined with, or preceded by, research of existing theories. This study therefore employs an abductive approach. When the fieldwork was initiated, the author had prior knowledge of the studied problem area, prevailing theories, and recommendations of best practice, which helped guide the fieldwork. This study furthermore uses theory as a framework to analyze and explain the empirical findings. Maxwell1 describes this method as using theory as a spotlight to draw attention to certain phenomena and shed light on relationships that may otherwise go unnoticed or misunderstood. The research strategy chosen for the study is the case study. Yin 2 defines the case study as an empirical inquiry that investigates a contemporary phenomenon within its real life context, especially; when the boundaries between phenomenon and context are not clearly evident3. According to Yin, a case study is suitable as a research strategy when a how or why question is being asked about a contemporary set of events, over which the investigator has little or no control4. As opposed to a history research strategy, which can also be suitable for answering how and why questions, a case study encompasses information sources such as direct observation and interviews with people involved in the studied events, and thereby allow researchers to study organizations in a natural setting and obtain insights into complex processes. A case study can include single or multiple cases. According to Yin, multiple case studies are preferable, as the scope of the study can increase the strength and generalizability of the findings. There are, however, certain conditions under which single case studies may be preferable. One of these conditions is when the case constitutes what Yin refers to as unique case, i.e. a case that provides a rare opportunity to study a specific problem of high scientific interest, but where researchers have not yet been able to establish common patterns. Madagascar provides such a unique case: as demonstrated in length in the Introduction (chapter 1.3) Chinese investments in Madagascar have become more well established than in most African countries because of the kinship ties formed
1

MAXWELLl, J. A. Qualitative research design: An interactive approach. [M] Thousand Oaks, CA: Sage Publications.2004 2 YIN, R. K. Case study research, design and methods (3rd ed.). [M] Thousand Oaks, CA: Sage Publications. 2004. 3 Op.Cit.p13. 4 Op.Cit.p.9.

27

with the local population but where no flying-geese-like model of industrialization has arisen. It is also one of few countries of Africa classified as resource-poor that attracted MNCs in extractive industries and SMEs alike. This single case study is furthermore what Yin defines as an embedded case study, where the embedded units of analysis are the studied SMEs and explorative MNCs as well as textile EPZs.

2.2 Research Method

There are two basic types of research methods: qualitative and quantitative research. In Miles and Huberman's 1994 book Qualitative Data Analysis, quantitative researcher Fred Kerlinger is quoted as saying, "There's no such thing as qualitative data. Everything is either 1 or 0"1 To this another researcher, D. T. Campbell, asserts "all research ultimately has a qualitative grounding" 2. This back and forth banter among qualitative and quantitative researchers is "essentially unproductive" according to Miles and Huberman. They and many other researchers agree that these two research methods need each other more often than not. Quantitative research is associated with analytical research, and its purpose is to arrive at a universal statement. In the quantitative research, the researcher assigns numbers to observations. Data is produced by counting and measuring things or objects and there is heavy reliance of the researcher on data analysis to arrive at findings or conclusions. This type of research design also requires methods such as experiments and surveys to describe and explain phenomena. The methods could include techniques such as observation, preliminary investigations, quantitative analysis and questionnaires. Qualitative research on the other hand refers to research that produces descriptive data. Usually no numbers or counts are assigned to these observations. Qualitative research use methods such as case studies, in-depth interviewing of key informants, participant observation, questionnaires and perusal of personal documents (such as life histories, diaries and autobiographies) are used3 The study employed both qualitative and quantitative approaches. The quantitative approach focused on obtaining numerical findings was used with the
1

MILES, M.B., HUBERMAN, M. Qualitative Data Analysis [M] (2nd Edition). Thousand Oaks, CA: Sage Publications. 1994:40. 2 Ibid. 3 BRYNARD P. A. & HANEKOM S. X. Introduction to Research in Management- Related Fields.[M] (2nd Edition). Van Schaik publishers. 2006:37.

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Chapter 2 Methodology

survey method. The interview on the other hand, made up the qualitative approach of the study as this focused on personal accounts, observations, description and individual insights of the respondents. This study employed the combined approach so as to overcome the limitations of both approaches. There are three types of research that can be used in quantitative research or qualitative research, depending on the information required by the research problem. The three types of research are exploratory, descriptive and casual. The researcher in this study used the exploratory research in the following ways: By gathering preliminary information to help clarify the research problem By clarifying and defining the nature of the research problem or opportunity by giving ideas or insights as to how the research problem can be addressed By progressively narrowing the scope of the research topic and consequently paraphrase the problem or opportunity clearly By developing and refining the questionnaire items, and By refining the research question and problems. Also, the researcher used secondary data analysis by reviewing peer-reviewed journal articles, books, and other sources of information related to the. The secondary data analysis helped to refine the research question and problems. Interviews were also held with representatives of relevant Malagasy institutions and ministries, and, in order to better understand the general situation for Chinese investors in Madagascar, with major Chinese institutions in Madagascar (See: Appendix 1). A total of 4 interviews were held that are included in this study. Semistructured interviews and in some cases open-ended interviews were conducted with the Malagasy and Chinese institutions with questions adjusted for each organization were used. Questions were prepared following a literature study of the subject. They were, however, adjusted and revised throughout the fieldwork. A summary of the questions included in most interviews is included in Appendix 2. In addition, discussions were held between the researcher and his study leader to clarify issues related to the research questions and to refine the questionnaire.

29

Moreover, the researcher used the cross-sectional type-of-research as information was collected from the sample population only once through the survey method.

2.3 Method of data collection

The data collection method used in this study was the survey method as other methods such as observation and experimental methods were inapplicable to collecting data to investigate the research problems. In survey research, the researcher uses a research technique in which information is gathered from a sample of respondents using a standardized questionnaire. This study used survey research because it provides quick, inexpensive, efficient and accurate means of assessing information about the population. Also if conducted properly, surveys are extremely valuable as they ask questions to the respondents to find out what people think about a situation or problem i.e. abstract information of all types can be gathered by questioning others1 The self-administered type of survey method was used as questionnaires were personally delivered to the respondent by the researcher and completed by the respondent with no interviewer involved. This method of data collection was used by the researcher because according to Cooper and Schindler2 the self-administered survey has the following advantages: Expand geographic coverage without increase in costs Perceived as more anonymous Allows contact with otherwise inaccessible participants (business owners or CEOs) Allows participants time to think about questions Incentives may be used to increase response rate Often the lowest-cost option Requires minimal staff

1 2

ZIKMUND, W.G. Business Research Methods. [M] Ohio: Thomson Learning South-Western. 2003. COOPER, D.R. & SCHINDLER, P.S. [M] Business Research Methods. New York: McGraw Hill Inc.2006:253

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Chapter 2 Methodology

Proved to have a higher response rate than other data gathering techniques such as mail surveys. The researcher was able to obtain the names and telephone numbers of the respondents when the questionnaires were distributed. Repeated call backs were made to the respondents to ensure they completed the questionnaires. 2.3.1 Questionnaire design and content A questionnaire was a valuable research instrument in this study. Cooper and Schindler1 define a questionnaire as a set of questions delivered to the participant via a personal (intercept, phone) or non-personal (computer-delivered, mail-delivered) means that has to be completed by the participant. Questionnaires were used in this study because it gave the respondents enough time to think about the answers to the questions in the questionnaire. It also offers the possibility of standardizing and comparing scales and enables the anonymity of the data source to be preserved. Moreover, with the questionnaire, a large number of respondents distributed over a large geographical area can be reached2 Five-point Likert scale questions were used. The Likert scale was used to measure the respondent attitude. This was done by asking them to indicate how strongly they agree or disagree with the carefully constructed statements that were either positively or negatively phrased. Likert scales are friendly and minimize confusion and misunderstanding. The questions in the questionnaire were mostly closed-ended questions. The researcher used closed-ended questions because they are easier to code, record and analyze compared to the opened-ended questions. Also the closed-ended questions are favored by researchers over opened-ended questions for their efficiency and specificity. To add, the response rate is higher with surveys that use closed-ended question than with those that use open-ended questions3.The researcher used three open-ended questions for this research. The questions in the questionnaire were grouped into three sections: SECTION A: Motivation to start a business in Madagascar

1 2

COOPER, D.R. & SCHINDLER, P.S. [M] Business Research Methods. New York: McGraw Hill Inc.2006:716. BRYNARD P. A. & HANEKOM S. X. [M] Introduction to Research in Management- Related Fields. Second Edition. Van Schaik publishers.2006:46. 3 COOPER, D.R. & SCHINDLER, P.S. [M] Business Research Methods. New York: McGraw Hill Inc.2006:444.

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The main objective of this study was to investigate the motives of Chinese SMEs foreign direct investment in Madagascar and whether they were capable of potentially initiating a flying-geese-model-like wave of industrialization in Madagascar. Twenty questions were used in this section to determine what motivated them to invest in Madagascar. The questions were developed through a thorough review of the literature in chapters 2, 3 and 4 of this study. SECTION B: Networking The questions in this section were about the information sources/networks the Chinese SMEs owners considered when starting their business in Madagascar. The respondents were asked to rank the information sources from the most importance to the least important. They were also asked whether they were willing to take up a partnership with a local firm. SECTION C: Demographics The questions in this section were to determine the demographic information of the respondents. Questions in this section included experience, number of employees, industry type and level of competition in the industry. 2.3.2 Sample design A sample is a relatively small subset of a population. It could be drawn either using probability or non-probability procedures. A sample must be representative of a population from which it is drawn. In other words it should mirror characteristics of the population. A population, therefore, is the total of all the elements that share some common set of characteristics. Sampling on the other hand is a technique employed to select a small group (the sample) with a view to determining the characteristics of a large group (the population). If selected discerningly, the sample will display the same characteristics or properties as the large group1 Brynard and Hanekom acknowledge that a sample of a population is often used for the following reasons: To simplify the research: it is easier to study a representative sample of a population than to study the entire population.

BRYNARD P. A. & HANEKOM S. X. [M] Introduction to Research in Management- Related Fields. Second Edition. Van Schaik publishers.2006:54.

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Chapter 2 Methodology

To saves time: studying an entire population can be time-consuming, especially if the population is very large or distributed over a large geographical area. To cut cost: observing, interviewing or using questionnaires to collect data from every element of a population can be very costly if the population is large and geographically distributed over a large area. To determine specific properties of the whole (an example will be to eat a single slice of an apple- if it is sweet, then the whole apple is judged to be sweet). 2.3.3 Population For the purposes of sampling, population does not refer to population of a country but refers to a group in the universe which possesses specific characteristics. The universe refers to all the subjects who pass the attributes in which the researcher is interested1 In this study the research population is Chinese SMEs in Madagascar. The population size of Chinese SMEs in Madagascar was unknown as there was no database or information about the number of Chinese SMEs operating in Madagascar. The newly appointed Chinese ambassador merely declared that there were more than 30 big enterprises under Chinese social capital implanted in Madagascar and 8 SMEs2. The National Institute of Statistics listed a number of 55 Chinese non-resident businesses qualified as Chinese FDI enterprises in Madagascar3. Therefore, the researcher assumed that the Chinese firms in Madagascar were 55, among which the population size of Chinese SMEs was 8. This population being quite small, the researcher decided not to take a sample but to survey the whole population of Chinese SMEs in Madagascar. To identify them from the list of Chinese businesses in Madagascar, the researcher asked help from the former president of the Association of

BRYNARD P. A. & HANEKOM S. X. [M] Introduction to Research in Management- Related Fields. Second Edition. Van Schaik publishers.2006:55. 2 Soava A. et Sarala B. Ambassadeur Shen Yongxiang: " C'est l'Occident qui pille l'Afrique, et non la Chine!"(The West is plundering Africa, not China)[W/OL] Website: La Gazette de la Grande Ile, 30 March 2012. 3 Surveys on Foreign Direct Investments in Madagascar [W/OL], Central Bank of Madagascar (Enquetes sur les investissements directs etrangers a Madagascar) 2000-2010. www.instat.mg

33

Chinese Entrepreneurs in Madagascar, as most of the Chinese Entrepreneurs are linked through associations.

2.4 Gathering the data

The researcher personally distributed the questionnaires to the Chinese SME owners. The questionnaires were distributed to the respondents between the months of February and March of 2012. These questionnaires were distributed to Chinese SMEs owners across Antananarivo. The researcher was also able to obtain the names and telephone numbers of the respondents when the questionnaires were distributed. Repeated call backs were made to the respondents to ensure they completed the questionnaires. The links with Chinese students at the Confucius Institute of Antananarivo (University of Antananarivo) and with some Malagasy employees helped to ensure the collection of the data. Nevertheless, two Chinese owners of SMEs did not respond to the survey: one was unfortunately in China at the time of the survey, and the other simply refused to answer the questionnaire. Therefore, the response rate to the study is of 75%. Furthermore, there were questions that the respondents did not answer These unanswered questions were treated as missing values.

2.5 Data analysis

After the data was collected, the data was entered into an Excel spreadsheet in the form of numbers so that the data can become convenient to view and understand. Lancaster (2005:157) defined data analysis as the process of turning data into information that in turn can serve to develop concept, theories, explanations or understanding of the research findings. The researcher used the quantitative analysis tools and techniques to analyze the data collected. This quantitative tools and techniques were used because this research and its data are quantitative. Also, it was used because quantitative analysis of data offers some advantages over qualitative analysis. Quantitative analysis potentially offers the advantage of increased objectivity in interpreting data, measures of validity and reliability and can

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Chapter 2 Methodology

be used to analyse large volumes of data that in turn can be succinctly presented in a way which is readily communicable (Byrne, 2002; Lancaster, 2005:161). Statistical test applied The ExcelStat (Windows 2007) statistical software program was used in the statistical analysis of the data. This program which is dedicated to processing statistics is easy and convenient although not currently used by researchers in the social sciences field to perform quantitative analysis.

2.6 Reporting the results

After the data has been analyzed, the researcher will then report the results. The research report involves findings, analyses of findings, interpretations, conclusions and recommendations. This research study report will be presented in chapter five.

35

Chapter 3 Theoretical Framework

Kaname Akamatsus work on Japan, a country starting from a much lower level of income than the Western countries, was therefore of great interest for developing countries. In a seminal paper initially published in the 1930s but translated into English only in the 1960s, he documented what he called the wild-geese-flying pattern in economic development, noting that wild geese fly in orderly ranks forming an inverse V, just as airplanes fly in formation1. His observation is illustrated pictorially in figure 5, from a note prepared by the National Graduate Institute for Policy Studies in Tokyo for the GRIPS Development Forum in 20022. Are the Asian geese described by Akamatsu still flying? This pattern does appear to have persisted in Asia over the past two decades. For example, in the early 1990s China was already a dominant player in some light manufactures such as footwear and toys (table 1). Japan continued to be a dominant player in toys but was clearly moving up the technology ladder to more sophisticated games, such as Nintendo and Sony PlayStation. China, a low-income country in the 1990s, also still exported live animals on a large scale. In the 2000s it was able to move up the product ladder to more sophisticated manufactures and overtake Japan in world export shares in plastics, electrical machinery and parts, and television receivers. Korea was a major player in exports of live animals in the early 1990s but has now moved out of that primary sector. India lags in market shares but has gradually moved up in footwear.

AKAMATSU, K.: A historical pattern of economic growth in developing countries [J]. Journal of Developing Economies, 1(1) 1962:3-25. P11. 2 GRIPSs note draws on Kojima (2000); and Schroeppel and Nakajima (2002). See http://www.grips.ac.jp/module/prsp/FGeese.htm

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Chapter 3 Theoretical Framework

Figure 3 Structural transformation in East Asia

Source: GRIPS (http://www.grips.ac.jp/module/prsp/FGeese.htm). In JUSTIN YIFU LIN. From Flying Geese to Leading Dragons New Opportunities and Strategies for Structural Transformation in Developing Countries [R]. The World Bank Development Economics Office of the Vice President Policy research working paper 5702, June 2011. P9 Note: ASEAN4 = Indonesia, Malaysia, the Philippines, and Thailand. NIEs = newly industrialized economies, Hong Kong SAR, China; Korea; Singapore; and Taiwan, China.

37

The concept was applied by Deborah Brautigam to describe the influence of Chinese investors networks in Africa as potential industrial catalysts for the continent. Taking into account the contrasting cases of Chinese investors in Nigeria and Mauritius, she stresses the importance of a well established and sizeable Chinese overseas community with strong connections to the local business and a favorable investment policy environment as determinant factors for a successful transfer of the industrial leadership to the follower goose in the model. She rephrases the paradigm as follows: In the now well-known flying geese pattern, business networks facilitated the diffusion of manufacturing from the earliest industrializer, Japan, to the newly industrialized countries, Korea, Hong Kong, and Singapore. In the manner of a flock of geese shifting leadership as they continue moving forward, these later industrializers in turn became new leaders as they spread their investment networks to Indonesia, Malaysia, Thailand, and coastal China. 1 It is therefore imperative that African countries follow the flying-geese pattern to seize the opportunity provided by the industrial upgrading of China and other leading dragons. The key challenge is to find a way to sustain the momentum and foster structural transformation in Sub-Saharan Africa so as to achieve annual growth rates of 8 percent or more. This is feasible if policy makers help their economies develop industries according to their comparative advantage and tap the potential of the advantage of backwardness. On network theory, the paper employs the definition of networks utilized by Axelsson2 and Cook and Emerson3, which sees networks as sets of two or more connected exchange relationships. Networks are basically characterized by three elements: actors, activities and resources. As Hertz4 points out, networks are not concerned simply with interdependence in a relationship between two actors, but also with other interdependent relationships connected to these actors. From this idea, networks may have clusters of interdependent firms with varying degrees of interdependence. The relationships these firms have will themselves create new
1

BRAUTIGAM DEBORAH Close Encounters: Chinese Business Networks as Industrial Catalysts in SubSaharan Africa [J]. Royal African Society, 2003. - Vol. 102. - pp. 447-467. 2 AXELSSON, B. (1992). Corporate strategy models and networks diverging perspectives. [C] In Industrial networks: a new view of reality, (ed. B. Axelsson and G. Easton), pp. 184-204, Routledge, London. 3 COOK, K. S. and EMERSON, R. (1978). Power, equity and commitment in exchange networks. [J] American Sociological Review, 43, 712-739. 4 HERTZ, S. (1992). Towards more integrated industrial systems. [C] In Industrial networks: a new view of reality, (ed. B. Axelsson and G. Easton), pp. 105-124, Routledge, London.

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Chapter 3 Theoretical Framework

opportunities, which may in turn generate new forms of relationships. Therefore, interdependence is at the same time a source and a result of heterogeneity in networks
1

(Easton, 1992). Although networks are widely recognized as improving entrepreneurial

performance, China which is seen as a traditional Confucian society, has a unique form of networking, guanxi - special relationships. These guanxi networks were seen as a social means to overcome political, economic and legislative obstacles to enterprise. The study of Chinese business networks therefore cannot be undertaken without considering the effects of guanxi.

3.1 The flying geese Model of industrialization

- Model assumptions The Flying Geese Paradigm is a view of Japanese scholars upon the technological development in Southeast Asia viewing Japan as a leading power. It was developed in the 1930s, but gained wider popularity in the 1960s after its author Kaname Akamatsu published his ideas in the Journal of Developing economies2. Akamatsus third Flying Geese Paradigm is a model for international division of labor in East Asia based on dynamic comparative advantage. The paradigm postulated that Asian nations will catch up with the West as a part of a regional hierarchy where the production of commoditized goods would continuously move from the more advanced countries to the less advanced ones. The underdeveloped nations in the region could be considered to be aligned successively behind the advanced industrial nations in the order of their different stages of growth in a wild-geese-flying pattern.3 3.1.1 The original framework by Kaname Akamatsu The term flying geese (FG) came from the graphic presentation of three timeseries curves for a particular product, with the time dimension on the horizontal axis. The first curve represents import; the second is for production in a national economy;
1

EASTON, G. (1992). Industrial networks: a review. [C] In Industrial networks: a new view of reality, (ed. B. Axelsson and G. Easton), pp. 3-27, Routledge, London. 2 AKAMATSUonomies, 1(1) 1962:3-25. 3 OZAWA, T. Institutions, Industrial Upgrading, and Economic Performance in Japan The Flying-Geese Paradigm of Catch-up Growth [A]. Northampton, Massachusetts: Edward Elgar Publishing. 2005:9.

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and the third for export. The sequential appearance of these curves on a graph resemble geese flying in orderly ranks, each forming an inverse V, like geese flying in formation. Akamatsu formulated the paradigm on the basis of Japans experiences in catching up with the West. He explained how the import-production-export sequence of activities usually occurs for each product in the industrialization process - i.e., along the passage of time. Figure 4 Akamatsus original flying geese paradigm: a graphic representation

Source: SHIGEHISA KASAHARA. The Flying Geese Paradigm: A Critical study of its application to East Asian regional development [R]. No. 169 April 2004 United Nations Conference on Trade and Development Discussion Papers

Akamatsu (1961) presented a three-stage model of trade as a proxy, so to speak, indicating the level of economic development of late industrializing economies. His model was developed in the historical context of East-West trade relations (i.e., the economic relations between the Euro-American leaders and Asian followers). During the first stage, the follower economy begins to import foreign goods, which, through demonstration effects, gradually instigates the formation of local industrial development. The second stage starts with the actual production of the imported manufactured goods (import-substituting production), with either local or foreign capital, or possibly a combination of the two. The third stage is reached when the local production increases further to the extent that excessively produced goods begin to be exported.
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Chapter 3 Theoretical Framework

For each product group, these three stages occur sequentially. At each moment in time, the industrial outlook or, more accurately, the product mix of the national economy, consists of collective snapshots of activities that correspond specifically to each product group. The FG paradigm refers to a dynamic situation in which a follower, in pursuit of development, emulates the industries of advanced economies in a manner compatible with its own factor and technological endowments at a given specific time. As will be discussed later, the modern versions of the FG paradigm explain how factor and technological endowments could be augmented by activities of transnational corporations (TNCs). For Akamatsu, industrial development essentially exhibits production diversification of two kinds. One is the intra-industry product cycle that is created by the emergence of new product groups within each industrial sector, i.e., from crude and simple items to complex and refined goods as, for example, the production from cotton to woolen and synthetic materials. The other is the inter-industry product cycle that shows the level of development of any national economy. In the following discussion on Akamatsus flying geese framework, the West, the Euro-American leaders, the developed economies, the leader economies, etc. are used interchangeably; and likewise for the East, the Asian economies, the follower economies, the catching-up economies, etc. Each product cycle, whether intra- or inter-industry, repeats this three-stage importproduction-export sequence. At the same time during the cycle the efficiency and competitiveness (thereby rising value-added as well) in producing each product group is enhanced. Any product group whose production process can no longer be enhanced in terms of efficiency and competitiveness ceases to exist. This procedure is called the rationalization of production. Moreover, over time each product cycle also contributes to the diversification of production (the diversification in the structural compositions of industries and exports). Thus the interaction between, and parallel progress in the rationalization and diversification of production could stimulate the industrial development of the national economy1.

KOJIMA K, The flying geese model of Asian economic development: Origin, theoretical extensions, and regional policy implication [J]. Journal of Asian Economics, 11(4), 2000:375.401, p379.

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Regarding the industrial development of the follower economies, Akamatsu1 further points out three sets of facts: First, for all industrial goods there exists a sequential order, from import to domestic production and further to export. Secondly, the time for the curves of domestic production and export to go beyond that of import will come earlier in crude goods and later in refined goods, and similarly, earlier in consumer goods, and later in capital goods.
-

Thirdly, the import curve falls in proportion to the rise of the domestic production curve and it is probable that the export curve will sooner or later begin to fall with respect to crude or consumer goods and the domestic production curve of these goods will also decline in the future. Although he failed to elaborate on its mechanism, Akamatsu affirms trade as the

main way of introducing new products and technology into a country. Being either much cheaper or of a modern type vis--vis local counterparts, imported goods are likely to drive many local firms out of business, and impoverish many manufacturing segments in the follower economies. Over time, however, the situation will somehow reverse itself since, as Akamatsus argument goes, imports somehow facilitate the transfer of technology and the acquisition of the capital goods needed to produce the import-substitution products. In any case, as consumers in the follower economies acquire a taste for modern goods, the local market for such goods will expand. And when the market in the importing economy is large, or becomes large enough, local firms may effectively find their own niche in it. When original producers/exporters of particular products lose competitiveness in the world markets, their domestic production may also be phased out. However, Akamatsu is vague regarding the extent to which the domestic market of the original exporter will be taken over by original importers - i.e. the followers - abroad. Akamatsus dynamic framework is built on Hegelian dialectics such that any given national economy, being in a perpetual motion, tends to move to higher stages of industrial development2. Akamatsu incorporates the concept of heterogenization and homogenization based on his version of product-cycle theory3. The value of these
1

AKAMATSU K (). A theory of unbalanced growth in the world economy. [J] Weltwirtschaftliches Archiv .Review of World Economics, 86, 1961:3.25. p11-12. 2 KORHONEN P (1994a). Japan and the Pacific Free Trade Area. London and New York, Routledge.
3

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Chapter 3 Theoretical Framework

somewhat old-fashioned dialectical terminologies lies in the recognition that industrial upgrading is the process of resolving tensions between the old and new industrial establishments through the Schumpeterian concept of creative destruction. Thus as Rowthorn1 argues: The initial penetration of imports into a follower country will benefit local consumers but impoverish producers. When local firms eventually develop and drive out imports, the follower country may benefit, whilst the leading country as a whole may suffer. These dangers are scarcely recognized in more recent versions of the flying geese paradigm which ignore or seriously downplay the costs and difficulties of restructuring. We can sense that there exists another conflicting, if not exactly dialectical, element in his framework, which is analogous to imperialistic rivalry. Due probably to his mind-set to view Japan as a follower rather than a leader economy, Akamatsu did not pursue this argument. We are now in a more appropriate position to development this argument. Putting it in contemporary East Asian economic context, there are serious competitive tensions among the national economies, or more accurately their corporations, over sustaining their own industries that have began to lose competitiveness (i.e., comparatively disadvantaged industries) and are transplanted abroad (for example, in the second-tier NIEs and China). 3.1.2 The product-cycle theory According to Vernons product-cycle (PC) theory, the life cycle of each manufactured product goes through three stages: (1) novelty (a new product); (2) maturity (a mature product); and then (3) standardization (a standardized product). In the first stage, the utilized technology is not as yet defined, and product development expenditures dominate the cost structure. Therefore, an economy with relative abundance (thus comparative advantage) in resources related to research and development (R&D), and skilled labor needed for producing the new product is likely to be an exporter. Although most explanations of conventional trade theories are based on the supply-side of comparative advantage, demand conditions should not be overlooked. Initially, a new product is designed for the tastes of the firms own
1

ROWTHORN R, East Asian Development: The Flying geese paradigm reconsidered. [R] Study No.8, background paper prepared for the International Conference on East Asian Development, 29 February and 1 March 1996, Kuala Lumpur. Geneva, United Nations Conference on Trade and Development. (1996).

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home market because of the need for close contacts with consumers in the early stage of development of its market. The firm innovating a new product must experiment with the design in short production runs, making significant modifications after observing consumers response. Because of the absence of product standardization and product information, the price elasticity of demand is assumed to be relatively low. If scale economies arise from specialization in the home market, the product will be exported abroad. Perhaps, trade is likely to be greater between economies with similar per capita income and hence, similar taste. As the product matures and its production technology becomes routine, marketing and production costs, largely materials, capital and unskilled labor become crucial in cost calculation, and consequently its production site is likely to be shifted outside its national territory. What is crucial to the PC theory is that over the life cycle of each product, the relative significance of each input tends to vary. In technical terms, the PC theory fully recognizes the possibility of a factor intensity reversal over the life cycle of each product which the standard neoclassical trade theory rejects. Because the availability of particular type of inputs differs among national economies, cost effectiveness in production, thus the location of production, tends to change over time. According to Vernon (1966, 1971), new products or processes, typically the high-income products and labor-saving processes are likely to be introduced in a highly industrialized economy like the United States which also has the benefit of its own large and affluent market and a relatively abundant supply of technological and entrepreneurial resources. A United States manufacturer that invents a new product first exploits its domestic market, and then exports it to other industrialized economies. When its overseas market grows and the product, together with its associated technology, is perfected and standardized, foreign firms are motivated to imitate and manufacture the same product for their domestic markets, and eventually too for export. These foreign firms may eventually succeed in exporting the product in question to the United States where the product was first conceived, produced and exported. Although the United States firm may attempt to counter the transgression by setting up subsidiaries, the result could be the hollowing-out phenomenon within the industry that had produced the product, thereby unfavorably affecting its own domestic workforce.1
1

As mentioned in the text, this is one aspect to which Akamatsu did not pay much attention. His central concern was the process of catching-up by late industrializers rather than the process of being caught by early

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Chapter 3 Theoretical Framework

Is the shift in comparative advantage in producing a particular product caused by changes in its production process with the given factor endowments, including technology, in each economy? Or alternatively, is it caused by changes in the factor endowments, including technology, in each national economy with the given specific production process? The reality is obviously a mixture of both, since neither of them the production process nor the factor endowments - can be strictly rigid, particularly in the dynamic framework of the PC theory or the FG paradigm. With the risk of exaggeration, it nevertheless seems that the PC theory - with the analytical focus on trade and production activities (via FDI) in the context of the strategic movements of large United States manufacturing firms - tends to stress the former situation, while Akamatsus FG paradigm - with the analytical focus on trade and production activities in the context of economic development of a national economy - tends to stress the latter situation. In this regard, Akamatsus FG paradigm resembles the modern technology gap theory which postulates that a comparative advantage in a particular product (thus its exports) of an innovating economy exists until foreign producers succeed in eliminating what may be called technology gap or imitation gap. However, it seems that the recent emergence of a generic category of what Winters1 (1985) calls technology theories of trade has effectively made the previously discussed difference between the PC theory and the FG paradigm inconsequential.2 3.1.3 The modern multi-sequentialist paradigm The publication of Vernons (1966) PC theory encouraged Japanese theorists (including Akamatsu and his students Kojima and Ozawa) to develop the FG paradigm into modern versions. One of the most notable developments in Akamatsus FG paradigm in the post-war period, particularly after Vernons publication, was the
industrializers. 1 WINTERS LA (1985). International Economics, (3rd ed.). London, George Allen & Unwin. 2 Winters argues for the possible extension of the PC theory into something closer to the modern FG paradigm. As the product matures, its basic technology and functional specification become standardized (although peripheral product differentiation may still be rife), making flexibility [the flexibility required on the part of the producing firm at the early stage of the product cycle when uncertainty over production and marketability must be quickly adjusted] less important. World demand grows, making large-scale production feasible, and production costs become significant . especially if, as is usual, other, similarly endowed, countries are able to imitate the innovation. These changes tend to shift comparative advantage away from innovating countries, which are typically high-cost locations, towards other relatively wealthy capital-abundant, countries. Hence physical capital replaces human capital [skill labour] as intensive factor, and the innovating country may well switch from exporting to importing the good. The final stage occurred when (if) technology and specification become wholly standardized and universally known. This often allows production to be broken down into a number of relatively unskilled tasks, and certainly stimulates competition and pressure to reduce costs. Thus comparative advantage finally shifts to the low-wage, labour-abundant developing countries, which eventually become net exporters. (Winters, 1985:43.44).

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incorporation in the paradigm of a framework of regional development and integration (Kojima, 2000:376). This does not mean, however, that Vernons publication contains a theoretical base for regional integration as such. Japanese theorists were the first to link the various overseas activities of TNCs (through sub-contracting, licensing arrangement, joint ventures, FDI, etc.) with the theme of regional integration, particularly in East Asia. As was mentioned at the outset of this paper, however, the FG paradigm remained mostly an academic curiosity for a while in the post-war period. It was the late Saburo Okita, a former Japanese Foreign Minister, who introduced the FG paradigm to a wider audience when he presented a speech at the fourth conference of the Pacific Economic Cooperation Council, held in Seoul in 1985. After Minister Okitas speech, the FG paradigm rapidly gained popularity in the East Asian region, and has been thought to symbolize the Asian way of development and integration (Kojima, 2000:385). In the United States, the FG paradigm had begun to get noticed after Bruce Cummings published a famous article on the origins and development of North-East Asian political economy in 1984 (Cummings, 1984). Modern theorists depict the mechanism of collective advancement by means of consecutive catching-up efforts. With the postulation of a pattern of continuously altering product-cycle-based trade, the modern FG paradigm focuses on the regionally contextualized transformation of national economies, rather than on the strategic behavior of large firms of the PC theory. The FG paradigm presents large firms as benevolent conveyors of industrial knowledge - mostly industry-specific rather than firm-specific from one national economy to another. In this regard, the modern FG paradigm may be regarded as a derivative of what may be called the industry (life) cycle theory. The modern FG paradigm perceives the orderly transformation of economic activities among participating economies, which relegate its obsolete economic activities to less industrialized neighbors. This means that industrial products and production processes can be passed on from the more industrialized to the less industrialized economies through the increasing role of TNCs in accordance with dynamic and shifting patterns of comparative advantage.1 According to Ozawa2 (1991), the key to the national development and systematic regional integration is the simultaneous occurrence of three types of orderly
1

It is still debatable as to whether TNCs themselves are acting as creators or reacting as beneficiaries of these dynamic patterns.

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Chapter 3 Theoretical Framework

sequencing of economic activities - multisequentialist - within and among a group of national economies: (1) Product-cycle sequencing of a particular product (or a product group). The national economy follows the trade framework of a product life cycle, consisting of four stages: import, import-substituting production, export, and finally once again import. (2) Industry-cycle sequencing of economic development. The gradual development of industries in a manner compatible with a national economys changing factor and technological endowments, which also means that the country shifts production activities (and export), from the lower value-added, more laborintensive and less capital-intensive industries, to the higher value-added, less laborintensive and more capital-intensive industries. This clearly is an indication of a structured and orderly process to generate self-sustaining and self-propelling forces along the dynamic path of comparative advantage. (3) Inter-economy sequencing entailing the orderly transfer of industrial activities among national economies along the regional hierarchy. These industrial transfers will be made in those following economies that have acquired the resources and technological capacities most suitable to the transfers. The first two types of orderly sequencing activities - the product-cycle and industry-cycle sequencing - as seen explicitly for the former, and implicitly for the latter in Akamatsus framework, are internal in the sense that they occur within each national economy. The third - the inter-economy sequencing - is one that occurs among different national economies. Ozawa (1991) argues that TNCs, particularly those from Japan, tend to facilitate this type of systemic industrial relocation among national economies. In addition to FDI, Ozawa identifies other channels which facilitate inter-economy industrial relocation: licensing, subcontracting, technical assistance contracts, turnkey operation, market agreements (especially easier access to the leaders markets), financial loans, and official economic assistance - both financial and technical - to build infrastructure. As long as industrial upgrading occurs along the correct inter-economy sequence, TNCs do facilitate the restructuring of the economies of home and host.
2

OZAWA T. The dynamics of Pacific Rim industrialization: How Mexico can join the Asian flock of .flying geese.[C]. In: Roett R, ed., Mexicos External Relations in the 1990s. Boulder and London, Lynne Rienner Publications. 1991

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Figure 5 The modern multi-sequentialist flying-geese paradigm: a graphic representation.

Source: Yamazawa.s framework as presented in Kwan (1996:162).

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Chapter 3 Theoretical Framework

According to Ozawa1, what drives the flock of geese forward is the leaders perceived imperative for internal restructuring, with emphasis shifting from a laborintensive (low value-added, low technology), to a more capital-intensive (higher value-added, higher technology) set of activities. Thus, the regional industrial restructuring process is characteristically a top-down, rather than a bottom-up process. In East Asia, the mechanism of the third type of sequencing - the intereconomy sequencing - is the main source of growth for second-rank followers (the first-tier NIEs), which will emulate the leaders (Japan) restructuring efforts over time and eventually as a supplementary force serve to transmit their own growth stimuli, however small, to the next rank of followers (the second-tier NIEs and China).
1

OZAWA T. The dynamics of Pacific Rim industrialization: How Mexico can join the Asian flock of .flying geese.[C]. In: Roett R, ed., Mexicos External Relations in the 1990s. Boulder and London, Lynne Rienner Publications. 1991:104.

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One interesting question is: what are the principal factors that induce the leaders imperative for internal restructuring. In the East Asian context, protectionism, particularly in the United States and Western Europe, has been singled out as the external factor that systematically caps export surges from Japan, thereby providing special incentives to the first-tier NIEs to move into some of Japans export-oriented industries. At any rate, it is thought that FDI from Japan ostensibly aids in the replication of the Japanese development pattern.1

3.2 Context and conditions for the flying geese Model to work in the case of China as a leading dragon and Africa as a follower
The flying geese paradigm was applied by Deborah Brautigam to describe the influence of Chinese investment networks in Africa as potential industrial catalysts for the continent. Taking into account the contrasting cases of Chinese investors in Nigeria and Mauritius, she stresses the importance of a well established and sizeable Chinese overseas community with strong connections to the local business and a favorable investment policy environment as determinant factors for a successful transfer of the industrial leadership to the follower goose in the model. But to what extent can the paradigm be used in the context of Chinas rise? To a certain extent, Chinas approach towards Africa can be connected to some similarities with the Asian countries development strategies. Simon Rabinovitch describes it as a style of development [] stressing on deep interdependence and consensus, not vicious competition.2 The approach appeared very efficient in the regional interdependence of the countries regrouped in ASEAN because they could coordinate without profiting one another. This may lead to think that some principles of the China African Policy could stream from the Asian virtue, hence the parallel made by Deborah Brautigam to describe the influence of Chinese investment networks in Africa as potential industrial catalysts for the continent using the flyinggeese model. Justin Yifu Lin
1

suggests in a research published for the World Bank that the

time is ripe for Africa to benefit from the next wave of globalization and take
KASAHARA, SHIGEHISA. The Flying Geese Paradigm: A Critical study of its application to East Asian regional development [J]. No. 169 April 2004 United Nations Conference on Trade and Development Discussion Papers 2 RABINOVITCH, SIMON The rise of an image-conscious China [J], China Security, World Security Institute, Vol. 4 No. 3 Summer 2008, pp. 33-47, (p35).

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Chapter 3 Theoretical Framework

advantage of Chinas rise, by virtue of the flying geese paradigm. For him, coming up with effective economic development strategies is simply a matter of learning from history and carefully analyzing what helped to propel into prosperity countries as diverse as England (catching up with and surpassing the Netherlands in the 16th century), the United States (catching up with England in the 19th century), Japan after the Meiji Restoration, and a few others throughout the 20th century. The historical and empirical evidence mentioned above suggests that a reexamination of sustainable growth strategies for developing countries should devote special attention to structural change and its corollary, industrial upgrading and diversification, and to an imitation (not replication) of the successful approaches that have allowed a small group of countries to move from low- to high-income status. Justin Yifu Lin draws a new structural economics approach which takes the following principles into consideration: First, the structure of an economys factor endowment, which determines the economys comparative advantage, is given at any specific level of development and differs from one level to another. Therefore, the optimal industrial structure of the economy will differ at different levels of development. Besides differences in the capital intensity of industries, different industrial structures imply differences in optimal firm size, scale of production, market range, transaction complexity, and nature of risks. As a result, each industrial structure requires corresponding soft and hard infrastructure to facilitate its operations and transactions. Examples of hard infrastructure are power, transport, and telecommunications systems. Soft infrastructure includes the financial system and regulation, the education system, the legal framework, social networks, values, and other intangible structures in an economy. In fact, the optimal industrial structure determines the economys production frontier, and whether or not the actual production will locate on the frontier depends on, among others, the adequacy of infrastructure. Second, each level of economic development is a point on a continuum from low-income agrarian to high-income industrialized, not a dichotomy of two
3

LIN, JUSTIN YIFU. From Flying Geese to Leading Dragons New Opportunities and Strategies for Structural Transformation in Developing Countries [R]. The World Bank Development Economics Office of the Vice President Policy research working paper 5702, June 2011:23-25.

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stages: poor versus rich or developing versus industrialized. Given the endogeneity of industrial structure at each level of development, the targets of industrial and infrastructure upgrading in developing countries should not necessarily be the same as those in high-income countries. Third, following its comparative advantage to build up its industries is the best way for any developing country to sustain industrial upgrading and economic growth. By doing so, the country will be most competitive domestically and internationally. It will have the highest possible income and the most to save at its level of development. Investment will also have the highest possible return and therefore provide the highest incentives to save. As a result, capital will accumulate at the fastest possible rate. The countrys endowment structure will thus change from relatively resource or labor abundant to relatively more capital abundant, and its comparative advantage to more capital intensive. Latecomers engaged in industrial upgrading can benefit from the advantage of backwardness, as Gerschenkron explained, by borrowing technology from more advanced countriesas observed by Kuznets in his analysis of the leader-follower relationship and by Akamatsu in his analysis of the flying-geese pattern. Therefore, latecomers have the potential to grow much faster than forerunners. Fourth, the market is a necessary mechanism for a country to follow its comparative advantage in the process of development. The reason is that only through market competition will the relative prices in an economy reflect the relative abundance of factors and induce firms to develop industries according to the economys comparative advantage. But because market failures are inherent in the process of industrial upgrading and diversification, government facilitation is required to help firms overcome coordination and externality issues when the economy moves from one level of development to another. According to the author, that new approach to development is not just a theoretical argument. Based on historical evidence, it explains how latecomers in the development process can exploit their backwardness. It also provides a practical economic strategy for countries willing to follow the flying-geese pattern, which has served so many successfully catching-up countries since the advent of the modern
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growth period. It is all the more relevant today, with the emergence of new growth poles, the spectacular progress of large economies such as China, India, and Brazil, and the many opportunities of globalization opening new economic space and new possibilities for low-income countries.1

3.3 A Unique Window of Opportunity for Africa: The Graduation of China (and Other Middle-Income Countries) 2
In the aftermath of the recent global recession, World Bank President Robert Zoellick described the new economic landscape: If 1989 saw the end of the Second World with Communisms demise, then 2009 saw the end of what was known as the Third World: We are now in a new, fast-evolving multipolar world economyin which some developing countries are emerging as economic powers; others are moving towards becoming additional poles of growth; and some are struggling to attain their potential within this new system where North and South, East and West, are now points on a compass, not economic destinies. [] We are witnessing a move towards multiple poles of growth as middle classes grow in developing countries, billions of people join the world economy, and new patterns of integration combine regional intensification with global openness.3 As Zoellicks words suggest, todays rapidly evolving world economy is opening important opportunities for low-income countries. Following the logic of the new structural economics and its underlying flying-geese patterns in economic development, this section discusses those opportunities, most notably Chinas emergence as the worlds factory for labor-intensive industries and its upcoming graduation from such economic activities. China is at a stage like that reached by Japan in the 1960s and Hong Kong SAR, China; Korea; Singapore; and Taiwan, China, in the 1980s. To continue growing dynamically against the background of declining wage competitiveness, China will have to follow the path of the earlier Asian geese and start to relocate its labor1

LIN, JUSTIN YIFU. From Flying Geese to Leading Dragons New Opportunities and Strategies for Structural Transformation in Developing Countries [R]. The World Bank Development Economics Office of the Vice President Policy research working paper 5702, June 2011:25. 2 LIN, JUSTIN YIFU. From Flying Geese to Leading Dragons New Opportunities and Strategies for Structural Transformation in Developing Countries [R]. The World Bank Development Economics Office of the Vice President Policy research working paper 5702, June 2011:25-27. 3 ZOELLICK, R. B. 2010. The End of the Third World? Modernizing Multilateralism for a Multipolar World. Speech at the World BankInternational Monetary Fund Spring Meetings, Washington, DC, April 14.

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intensive industries to low-income countries.1 Indeed, this is already happening. A large share of Chinas outward foreign direct investment in Africa, which had reached USD9.33 billion by the end of 2009, has gone to manufacturing (22 percent), second only to the share in mining (29 percent). And China is building six economic and trade cooperation zones in the Arab Republic of Egypt, Ethiopia, Mauritius, Nigeria, and Zambia (China, Information Office of State Council 2010). More such initiatives are likely to happen. How Big Might the Benefits Be? As China moves forward, there will be a major difference with earlier patterns of industrial upgrading: its economy is significantly larger than those of the geese that led the first round of structural transformation in Asia (table 1). China has an estimated 85 million workers in manufacturing, most of them in labor-intensive sectors. The reallocation of these workers to higher value added, more sophisticated products and tasks will open up great opportunities for labor-abundant, lower-income countries to step in and produce the labor-intensive manufacturing goods that China leaves behind. As a result, China will not be a goose in the traditional leader-follower pattern of industrialization for a few lower-income countries but a dragon.

Table 1: Comparing manufacturing in China with that of earlier geese at similar stages of development

Based on the estimation by Maddison (2010. Historical Statistics of the World Economy: 1-2008 AD (www.ggdc.net/maddison/Historical_Statistics/vertical-file_02-2010.xls)), Chinas per capita income (measured in purchasing power parity) was 6,725 international dollars in 2008, the same level as in Japan in 1966, Korea in 1986, and Taiwan, China, in 1983. These economies started to relocate their labor-intensive manufacturing industries at that income level, Japan to the East Asian Tigers and Korea and Taiwan, China, to mainland China.

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Chapter 3 Theoretical Framework

In the absence of detailed data on manufacturing employment in all African countries, one can only conjecture about the size of the potential gains for the region. Still, even back-of-the-envelope calculations suggest that the benefits would be enormous. In 2009 alone, China exported USD107 billion of apparel to the world, compared with Sub-Saharan Africas total apparel exports of USD2 billion (2 percent of Chinese apparel exports). Lets assume that as a result of rising wages, 1 percent of Chinas production of apparel is shifted to lower-wage African countries. All things equal, that alone would boost African production and exports of apparel by 47 percent. A 5 percent shift of Chinese export-related investments in the industry could translate into USD5.4 billion in additional exportsa 233 percent increase. Even rough employment estimates suggest the potential gains in manufacturing jobs. Africas population (north and south of the Sahara) is 1 billion, slightly less than Indias 1.15 billion. In 2009 manufacturing value added was 16 percent of GDP in India, 13 percent in Sub-Saharan African countries, and 16 percent in North African countries such as Egypt, Morocco, and Tunisia.24 Indias employment in manufacturing was 8.7 million in 2009. So it is reasonable to assume that total manufacturing employment in Africa is at most 10 million. This suggests that relocation of even a small share of Chinas 85 million labor-intensive manufacturing jobs would go a long way toward creating new opportunities for employment and sustained growth in Africa. The creation of manufacturing jobs, especially through foreign direct investment, generally leads to the creation of jobs in other sectors through backward and forward linkages (see UNCTAD, World Investment Report 20061) and through multiplier effects as additional employment raises income levels. Backward linkages tend to be weaker in developing countries because it is often difficult to source local products.
1

UNCTAD (United Nations Conference on Trade and Development). 2006. World Investment Report. Geneva: UNCTAD.

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But forward linkages can have a substantial effect on employment. In Lesotho, for example, computable general equilibrium model simulations indicate that the employment of 56,000 workers in the garment sector, sustained by foreign direct investment flows, could have led to the creation of 77,000 additional nonmanufacturing jobs (see World Bank 2005b). In India it is estimated that creating 2.5 million jobs in the information technology sector could lead to 8.3 million additional jobs (NASSCOM 20111). Clearly, the potential opportunities for Africas labor-intensive economies, which today are exporting mostly minerals are enormous. The story for low-income countries elsewhere in the world is similar. In 2009, with a total population of 846 million and 13 percent of their GDP coming from manufacturing, their employment in the sector likely amounted to no more than 10 million. Thus, just as for African countries, Chinas industrial upgrading would provide them a golden opportunity for dynamic manufacturing-led growth. But for developing countries everywhere, the ability to benefit from the opportunities depends on their quickly formulating and implementing credible economic development strategies that are consistent with their comparative advantage and the flying-geese paradigm. Africa may be on the verge of an economic takeoff, recent empirical work suggests. Young2 sees an African growth miracle in his analysis of such measures as real consumption, housing quality, and health and education. His results show that for the past two decades living standards in Sub-Saharan Africa have been rising by more than 3 percent a yearmore than three times the rate indicated in international data sets. Using a new methodology to estimate income distribution, poverty rates, and inequality and welfare indexes for African countries in 19702006, Pinkovskiy and Sala-i-Martin3 conclude that African poverty is fallingand is falling rapidly. Moreover, they find that the growth spurt that began in 1995 appears to have reduced African income inequality rather than increased it. Radelet4 has identified 17 African countries that achieved annual per capita growth rates of 2 percent or more in 1996
1

NASSCOM. 2011. The IT BPO Sector in India: Strategic Review 2011. New Delhi, India: International Youth Centre. 2 YOUNG, A. 2010. The African Growth Miracle.[A] Department of Economics, London School of Economics. Available at http://mfi.uchicago.edu/. 3 PINKOVSKIY, M., and X. SALA-I-MARTIN. 2010. African Poverty Is Falling . . . Much Faster Than You Think! [A] Massachusetts Institute of Technology and Columbia University. http://www.columbia.edu/~xs23/papers/pdfs/Africa_Paper_VX3.2.pdf. 4 RADELET, R. 2010. Emerging Africa: How 17 Countries Are Leading the Way. Washington, DC: Center for Global Development.

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2008 by putting behind them the conflict, stagnation, and dictatorships of the past and replacing them with steady economic growth, deepening democracy, improved governance, and decreased poverty. Five fundamental changes are seen to be at work: more democratic and accountable governments, more sensible economic policies, the end of the debt crisis and changing relationships with donors, the spread of new technologies, and the emergence of a new generation of policy makers, activists, and business leaders. This is exactly the argument defended by this thesis: the political turmoil witnessed in Sub-Saharan Africa is a transition phase towards better government regimes, and forecasts a future where countries like China, with her non-interference policy, can be the source of investment, technology transfer and ultimately economic growth, provided that the change of political system is for the better. Indeed, the improvement in Sub-Saharan Africas performance has been made possible largely by greater political and macroeconomic stability, a stronger political commitment to private sector growth, and higher investment in infrastructure and education (see Okonjo-Iweala 20101). High prices for oil, minerals, and other commodities have contributed substantially to GDP growth. But new research by the McKinsey Global Institute shows that resources accounted for only about a third of the improvement in performance. The rest resulted from internal structural changes that have spurred the broader domestic economy (see Leke and others 20102). Most economies in the region have been implementing macroeconomic, institutional, and sectoral reforms to improve the business climate and reduce transaction costs. For example, by 2010, 28 Sub-Saharan African countries had adopted the Extractive Industries Transparency Initiative, aimed at improving the transparency of company payments for and government revenue from oil, gas, and mining. The region has the fastest-growing cellular telecommunications market, increasing from less than 2 million mobile phones in 1998 to more than 400 million in a decade. Industries such as banking, retail, and construction are also booming, and private investment inflows are surging, though from a low level. 3
1 2

OKONJO-IWEALA, N. Fulfilling the Promise of Sub-Saharan Africa.[A] McKinsey Quarterly (June). 2010. LEKE, A., S. LUND, C. ROXBURGH, and A. van WAMELEN. What Is Driving Africas Growth?[A] McKinsey Quarterly (June). 2010. 3 LIN, JUSTIN YIFU. From Flying Geese to Leading Dragons New Opportunities and Strategies for Structural Transformation in Developing Countries [R]. The World Bank Development Economics Office of the Vice President Policy research working paper 5702, June 2011:27-32.

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While the regions collective GDP is still roughly equal to that of a single emerging economy such as Brazil (about USD1.6 trillion in 2008), its recent economic progress cannot be underestimated. Since 1990 Sub-Saharan Africa has almost tripled its exports and diversified its trade partners. Natural resources will clearly continue to be the regions main source of export revenue as global demand grows. But with continued reforms and increasing foreign direct investment going to industries with overt or latent comparative advantages, African economies are likely to become more diversified in the future, with the global demand for nontraditional exports also growing. Still, per capita growth rates in the range of 23 percent a year may not be enough to combat poverty and generate prosperity. So far, Africas economic development has been driven primarily by higher consumptionsupported in part by an inflow of remittances in response to improved macroeconomic policiesand the growing contribution of natural resources to GDP. For growth to be sustainable and to create jobs, it also needs to be supported by structural change based on manufacturing-driven industrialization. It is therefore imperative that African countries follow the flying-geese pattern to seize the opportunity provided by the industrial upgrading of China and other leading dragons. The key challenge is to find a way to sustain the momentum and foster structural transformation in Sub-Saharan Africa so as to achieve annual growth rates of 8 percent or more. This is feasible if policy makers help their economies develop industries according to their comparative advantage and tap the potential of the advantage of backwardness.

-Flying geese model and foreign direct investment Kojima1 (1978), who characterizes the FG paradigm as a catching-up product cycle model, initially added the dimension of FDI to the FG paradigm. The idea that Japanese manufacturing FDI, as opposed to United States manufacturing FDI, tends to encourage further industrialization rather than deindustrialization of the home
1

KOJIMA K (1978). Giant multinational corporations: Merits and defects. Hitotsubashi Journal of Economics, 18(2):1.17, February.

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economy (Japan) was originally put forward by Kojima1 (1973). The essential contention of Kojimas argument runs as follows: Japanese FDI tends to occur in relatively labor-intensive industries that have become uncompetitive in Japan due to rising real wages, whereas United States FDI tends to occur in relatively technologyintensive industries that have formed an oligopolistic market structure in the United States. Thus, much of Japanese FDI is allegedly pro-trade or trade-creating in that it is found in export-oriented projects that principally cater to the markets of Japan and other developed economies, whereas much of United States FDI is allegedly anti-trade or trade-substituting in that it is found in import-substituting projects that principally cater to the local market. Kojima stresses that Japanese FDI is macrofocused, and aims to develop the host economies, particularly of developing countries, so that they can supplement the Japanese economy, while United States FDI is micro-focused and aims to make profits for individual firms. Kojimas argument was once very influential on the study of Japanese FDI, but it has been vigorously criticized. Some argue that the special features of Japanese FDI were actually transitional and would disappear as the Japanese economy matured. As for the realization of the orderly progress of East Asia, the modern FG paradigm upholds an optimistic view that with the emergence of a hierarchically organized regional division of industrial labor, involved economies could avoid the situation of too many being engaged simultaneously in export-oriented production for a narrow line of product groups. This is because FDI could help the home economy by relocating abroad those industries and activities that have lost international competitiveness. This relocation releases the resources that are needed for upgrading export-oriented, competitive industries. That FDI contributes to the industrialization of host economies is now taken as a matter of course. - Existing critique According to Rabinovitch, there is a reason why main-stream economists have praised the ASEAN-3 experience and the flying-geese model of development. Mainstream economists, especially supporters of the neoliberal agenda of the World Bank and International Monetary Fund (IMF), have engaged in debate a small but influential group of structural-institutionalist scholars, who argue that interventionist
1

KOJIMA K (1973). A Macroeconomic approach to foreign direct investment. Hitotsubashi Journal of Economics, 14(1):1.21, June.

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state policies, rather than market liberalization, explain the economic success of Japan, South Korea, and Taiwan (see Amsden1; Wade2 1990). In light of mounting institutional evidence, supporters of the neoliberal agenda are finding it difficult to sustain their position that state interventions-especially "distortions" of market pricesare almost never helpful. They have, therefore, eagerly embraced the experience of the ASEAN-3, whose rapid growth appears based more on unregulated market activity and foreign direct investment (World Bank 1993, 1).3 While they are few in number, some observers have questioned the extent to which the flying geese paradigm accurately depicts the overall situation of East Asia. For instance, Bernard and Ravenhill4 (1995), Burkett and Hart-Landsberg5 (1998), Ozawa6 (2001), Rasiah7 (1998) and Rowthorn8 (1996), have attempted to assess the validity of the FG paradigm. Most of them, according to Kojima9, have done so from the dependency perspective. Yang and Lim admit that the dependency school provides some important insights in understanding development and underdevelopment in a global context; most importantly, the diagnosis of the dynamics of the world capitalist economy. Yet, they do point out that the dependency school tends to neglect internal factors within developing countries which may have contributed to their relatively unfavorable economic performance (Yang and Lim, 200010).

AMSDEN, ALICE H. Asia's next giant: South Korea and late industrialization , [M] Oxford University Press, New York, 1989. 2 WADE, ROBERT Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, [M] Princeton University Press, 1990. 3 HART-LANDSBERG, MARTIN and BURKETT, PAUL Contradictions of Capitalist Industrialization in East Asia: A Critique of "Flying Geese" [J] Theories of Development Reviewed work(s): Economic Geography74(2) 1998:87-110. Published by: Clark University Stable URL: http://www.jstor.org/stable/144277 .Accessed: 23/11/2011 09:49 P89. 4 BERNARD, M and RAVENHILL J . Beyond product cycles and flying geese: regionalization, hierarchy, and the industrialization of East Asia. [J] World Politics, 47. 1995:171.209, January. 5 BURKETT P and HART-LANDSBERG M. East Asia and the crisis of development theory. [J] Journal of Contemporary Asia, 28(4), 1998:435.456. 6 OZAWA, TERUTOMO. The "Hidden" SFDI of the "Flying-Geese" Model of Catch-Up Growth: Japan's Dirigiste Institutional Setup and a Deepening Financial Morrass[J]. Journal of Asian Economics, 12(4), 2001:471.491, Winter, accessible at: http://www.eastwestcenter.org/fileadmin/stored/pdfs/ECONwp020.pdf, last accessed 20.04.2011 7 RASIAH R . The export manufacturing experience of Indonesia, Malaysia and Thailand: Lesson for Africa [R]. UNCTAD Discussion Papers, 137. Geneva, United Nations Conference on Trade and Development, June. 1998 8 ROWTHORN RE . East Asian Development: The Flying geese paradigm reconsidered. Study No.8, background paper prepared for the International Conference on East Asian Development, 29 February and 1 March 1996, Kuala Lumpur. Geneva, United Nations Conference on Trade and Development. 1996. 9 KOJIMA K . The .flying geese. model of Asian economic development: Origin, theoretical extensions, and regional policy implication. Journal of Asian Economics, 11(4), Autumn. 2000:375.401 10 YANG J and LIM HC Asian values in capitalist development revisited. Asian Perspective, 24( 3), 2000:23.40.

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Still, the attractiveness of the flying geese approach, as analysis and ideology, stems from its empirical plausibility. At first sight, it is difficult to look at the postwar economic history of Japan, then Taiwan and South Korea, and now high-flying Thailand, Malaysia, and Indonesia and not conclude that global capitalism is working some growth magic. First one country, then another, and then another seems to be duplicating Japan's successful model of development. The conclusion seems to follow that global capitalism, if supported and encouraged by appropriate national economic policies, can produce a win-win situation for developed and less-developed countries.
1

3.4 The network theory

The Network Theory2 In the network theory the market is depicted as a system of social and industrial relationships among customers, suppliers, competitors, family and friends. According to the network perspective, the nature of relationships between various parties will influence strategic decisions. Consultancy firms, for instance, operate in networks of relationships connecting them to foreign markets and providing firms with the opportunity and motivation to internationalize. The difference between this approach and the incremental internationalization is that a firms internationalization strategy emerges as a pattern of behavior influenced by a variety of network relationships and not only from its own phases of preparedness. Johanson and Mattsson3 (1988) define internationalization in the context of the firm establishing and developing positions in relation to counterparts in different networks. A basic assumption in the network model is that the individual firm is dependent on resources controlled by other firms. The only way the firm can get access to these external resources is by establishing a position within the network. Though their research focused on internationalization in industrial systems its implication for the intermediary service company, as in this study, cannot be overemphasized.
1

SHIGEHISA KASAHARA. The Flying Geese Paradigm: A Critical study of its application to East Asian regional development [R]. No. 169 April 2004 United Nations Conference on Trade and Development Discussion Papers. 2 OFOSU, FOSTER, HOLSTIUS, KARIN. Internationalization and Networks:The case of an Intermediary company in Promoting Business Links between Ghana and Finland [A]. 3 JOHANSON, J. and MATTSON, L-G Internationalization in Industrial Systems A network Approach in Strategies in Global Competition [C] (ed. By Hood, N Vahlne J-E.) 1988:287-314.

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Figure 6: A network model

Actors: The main actors in the internationalization process are the institutions, firms and individuals that interact to exchange or facilitate exchange. They include importers and exporters, financiers, global bodies, governments and governmental institutions and consultants. Activities: Activities refer to the various forms of exchange that take place among the actors within the network. A network activity in international business may be direct or indirect. Direct activities are those that directly affect the exchange process as in the case of individual firms. Indirect activity links are those that are latent and derive from actions of governments and multilateral organizations. Resources: A basic assumption of the network theory is that an individual firm is dependent on resources controlled by other firms and in order to get access to these external resources the firm must establish a position within the network. This access is secured by the activities in the network1. Resource elements within the network include products, raw materials, information, market access, finance, technology, research and even the network itself. Network theory postulates that industries can be described through sets of interrelated actors performing interconnected activities by employing interdependent and primarily heterogeneous resources2. This dualistic view can be further combined
1 2

JOHANSON and MATTSSON Op.Cit.p 262 See HAKANSSON, R & SNEBOTA, I. (Eds.) (1995) Developing Relationships in Business Networks, New York, Routledge. Also see LUNDGREN, A (1993) 'Technological Innovation and the Emergence and Evolution of Industrial Networks: The Case of Digital Image Technology in Sweden". In: CAVUSGIL, T. S. & SHARMA, D. D. (Eds.), Advances in International Marketing, pp. 145-170, Jai Press Inc., 5.

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with the control aspect of resources through which networks can also be regarded as a form of governance1. A simple but strong way to describe industries is to identify the key actors, assess the resources they possess and the activities they predominantly perform, and the relationships established between actors. This descriptive information indicates the macro characteristics of the network. Both Easton & Araujo2 and Hakansson3 use the metaphor of chess to explain network evolution. Easton & Araujo exemplify the complex relations between each interaction and the network in which it is embedded, by using the relationship between an individual move and the unfolding sequence of moves in a chess game as the base domain. Hakansson uses the metaphor of chess to exemplify the existence of a logic driving the development of a network. According to Easton & Araujo, Hakansson's chess metaphor illustrates both the need for rules of interaction and the development of an individual logic of playing the 'interaction' game that gives rise to an emergent, macro logic of evolution at network level. Easton & Araujo say also that the logic is governed by two elements from network process. The first one is the notion of actors engaged in the combination and recombination of activities. The second involves control over resources and activities. However, there are two macro issues to be taken into account: technological change including innovation research and change in the governance structures within an industry. Technological change alters the relative value of resources and capabilities of specific actors in the industry influencing also the power structure of actors. Control of resources, which are becoming either more obsolete or more critical, shifts the balance and position of actors. Governmental actions either through direct regulations or changing the existing balance of power in favor of some actors or revaluing specific resources provides another driving force of change.4 A brief review of the internationalization literature5
1

See HAKANSSON, H & JOHANSSON, A (1993) "The Network as a Governance Structure Interfinn Cooperation Beyond Markets and Hierarchies". In: Grabber (Ed.), The Embedded Firm, London, London. 2 EASTON, G & ARAUJO, J. (1994) " ", in BIEMANS, W. G, and GHAURI, P. N, (eds.), Meeting the Challenges of New Frontiers.Proceedings of the 10th IMP Annual Conference, Groningen, September 29th October 1st. 3 HAKANSSON, R (1992) "Evolution Processes in Industrial Networks". In: AXELSSON, B & EASTON, G (eds.), Industrial Networks: A New View of Reality, pp. 129-143, London, Routledge. 4 UUSITALO, OLAVI Globalization of an industry A network perspective. The case of the Scandinavian flat glass industry [A] University of Jyvaskyla School of Business FINLAND 5 ROSSITER, RAISSA Networks, Collaboration and the Internationalization of Small and Medium-Sized Enterprises: An Interdisciplinary Perspective on the Network Approach Part I [A] Working Paper No 03/33 October 2003 Bradford University School of Management.p5.

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A definition of internationalization offered by Beamish 1 (1990) will be adopted in this paper: ...the process by which firms both increase their awareness of the direct influence of international transactions on their future, and establish and conduct transactions with other countries. The topic of internationalization is one of growing interest in the research on international business (Andersson2). Coviello and McAuley3 identified three major schools of thought regarding the internationalization of smaller enterprises: 1) the economic school of foreign direct investment (FDI), 2) the behavioral school of the stages model, and 3) the relationship school of the network perspective. The general FDI theory has developed from neoclassical and industrial trade theory and explains internationalization as a pattern of investment in foreign markets made by rational economic analysis. It assumes rational strategic decision-making. Much of the literature on the behavioral school of the stages model focuses on internationalization as a gradual process, taking place in increasing stages and over a relatively long period of time (Strandskov4; Cavusgil5). The network perspective takes an alternative view, by assuming that internationalization processes emerge as patterns of behavior influenced by various network members. These theoretical perspectives have been criticized for: (1) regarding environment as deterministic, (2) taking incremental learning as the main factor explaining a firms international behavior, (3) neglecting the importance of individuals influence on internationalization patterns, and (4) focusing the discussion at the firms level and not at the level of the firms environment (Andersson6). Table 1 provides a summary of the three schools of internationalization.7 Table 2: Key features of three schools of internationalization
1

BEAMISH, P. W. The Internationalisation process for smaller Ontario firms: a research agenda. [C] In Research in global strategic management -international business research for the twenty-first century: Canadas new research agenda, (ed. A. M. Rugman), 1990: 77-92, JAI Press Inc, Greenwich. 2 ANDERSSON, P. Connected internationalisation processes: the case of internationalising channel intermediaries. [J] International Business Review, 11, 2002:365-383. 3 COVIELLO, N.E. and McAULEY, A. Internationalisation and the smaller firm: A Contemporary Empirical Research. Management [A] International Review, Third Quarter 1999, Wiesbaden. 4 STRANDSKOY, J. M. Towards a new approach for studying the internationalization process of the firms. [C] In The internationalizaton of the firm: a reader, (ed. P. J. Buckley and P. Ghauri), 1994: 201-216, The Dryden Press, London. 5 CAVUSGIL, S. T. Differences among exporting firms based on degree of internationalization. [C] In The Internationalizaton of the Firm: A Reader, (ed. P.J. Buckley and P. Ghauri), 1994: 53-63, The Dryden Press, London. 6 ANDERSSON, P. Connected internationalisation processes: the case of internationalising channel intermediaries. [J] International Business Review, 11, 2002:365-383. 7 ROSSITER, RAISSA Op.Cit.p6.

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The network approach has developed rapidly, since its earlier stages in the 1980s, as a challenging theoretical explanation to inform cooperative behavior in business (Faulkner and De Rond1, 2001; Easton2, 1992). This theoretical perspective focuses on the entrepreneurial behavior of firms in the context of organizational boundaries that incorporate a network of evolving exchange relationships by various network members. Actors, activities, and resources form the basic elements, which are related to each other, in the overall structure of networks (Hakansson and Johanson3, 1992). Examining the literature in this field, it can be said that the network approach has been used frequently as a metaphor, as a model, and, not so often, as an analytical tool. As a model and metaphor, it provides a description of the world closely related to the reality of modern business organizations that many observers perceive, as argued by Axelsson and Easton4 in their seminal book on industrial networks. Consequently, it has a strong appeal for practitioners as well as academics. As an analytical tool, although underused, the network approach can be considered adequate for analyzing the internationalization of SMEs for a number of reasons. First, it represents a promising alternative for achieving a more interdisciplinary approach because it permits the consideration of multiple factors affecting the phenomenon under study. Second, it offers a viable framework for an in-depth understanding of complex forms of international business behavior. Finally, it pays attention to the broader network environment in which firms are embedded, allowing the examination
1

FAULKNER, D. and De ROND, M. Perspectives on cooperative strategy. [C] In Cooperative Strategy. Economics, Business, and Organizational Issues, (2nd edn) 2001: 3-39, Oxford University Press, Oxford. 2 EASTON, G. Industrial networks: a review. [C] In Industrial networks: a new view of reality, (ed. B. Axelsson and G. Easton), 1992:3-27, Routledge, London. 3 HAKANSSON, H. and JOHANSSON, J. A model of industrial networks. [C] In Industrial networks: a new view of reality, (ed. B. Axelsson and G. Easton), 1992:8-34, Routledge, London. 4 AXELSSON, B. and EASTON, G. Industrial networks: a new view of reality [M]. Routledge, London. 1992.

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of micro and macro dimensions as well as their linkages, as argued by sociologist Mark Granovetter1. Incorporating the role of the entrepreneur, and the organization and contextual dimensions into the network analysis means that the factors at the individual level as well as at the organizational and contextual level, which determine the success of any collaboration relationship, could be taken into account in network analysis and management. This has some implications for SMEs managers. First, it enables them to assess and develop collaborative relationships in networks. Second, it provides guidance in the management of these relationships, as managers need to have an understanding across the three dimensions within the framework.2 As Rossiter puts it, for researchers, the framework proposed in this paper may offer the possibility of taking a more integrative, pluralistic, and contextual approach to conceptual thought, empirical work and methodological development, as Coviello and McAuley3 (1999) advocated, involving different variables and other possible dimensions of the internationalization of SMEs and of the issues faced by todays entrepreneurs. This approach may have two methodological merits: (1) it assumes a triangulated approach to research design, overcoming the one-method approach which still dominates this research area; and (2) it encourages a more creative approach through the use of alternative methodologies drawn from fields such as sociology and anthropology, using these techniques to improve understanding of SME entrepreneurs practices.4 3.4.1 Network as structure Using network as a theoretical framework is also common in international relations theory while viewing network as structure. For example, Hafner-Burton and Montgomery5 consider the role of social networks in world politicssocial structures made up of actors that are connected through various ties ranging from terrorist and
1

GRANOVETTER, M. S. The Strength of Weak Ties. [J] American Journal of Sociology, 78(6), 1973:13601380. 2 ROSSITER, RAISSA Networks, Collaboration and the Internationalization of Small and Medium-Sized Enterprises: An Interdisciplinary Perspective on the Network Approach Part I [A] Working Paper No 03/33 October 2003 Bradford University School of Management.p11. 3 COVIELLO, N.E. and McAULEY, A. Internationalization and the smaller firm: A Contemporary Empirical Research. Management International Review, Third Quarter 1999, Wiesbaden. 4 ROSSITER, RAISSA. Ibid. 5 HAFNER-BURTON, EMILIE MARIE and MONTGMOMERY, ALEXANDER H., Globalization and the Social Power Politics of International Economic Networks [A] (November 24, 2008). Available at SSRN: http://ssrn.com/abstract=1306648 or http://dx.doi.org/10.2139/ssrn.1306648

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criminal networks to transnational human rights networks. Social network analysis (SNA) is not only a research focus on networksit is a research methodology distinctive to the social and behavioral sciences that is inherently concerned with such networks. It is possible to study networks without employing SNA, but it is not possible to employ SNA without attention to networks. Like rational choice, it is not a unified set of theories but rather a framework for analysis based on a set of primary assumptions and formal tools that can be applied to an assortment of subjects. At the most abstract level, SNA concerns relationships defined by linkages among units, such as people, institutions, or even states. The underlying difference between SNA and standard ways of analyzing behavioral processes is accordingly the use of concepts and indicators that Identify associations among units rather than solely focusing on the attributes of the units (Wasserman and Faust1 1994). In this chapter we adopt the same view as Hafner-Burton and Montgomery2 as a network as structure perspective to consider the rise and evolution of structural power inequalities in the international political economy; in it, we contrast inequalities in social power between states that result from relative possession of social capital due to density of ties through PTAs with inequalities in material power that result from relative possession of resources such as guns and butter. Our argument is a simple one. The globalization debate revolves around the consequences of increased trade and investment for inequality, both within and between states. That debate has focused mainly on material inequality. Examining the social networks formed by PTAs produces a different view of inequality, one which may redress in part the material effects of economic transactions. Trade is a set of transactions between agents that allocates information and material resources and, in the process, structures states material roles in the global economy (Snyder and Kick 1979; Smith and White 1992). We argue that the formal organizations that regulate trade (PTAs), like other intergovernmental organizations (IGOs), generate informal social networks through joint membership. These networks give some states more social capital than others, structuring group relations and creating a social dimension of power politics

WASSERMAN, STANLEY and FAUST, KATHERINE Social Network Analysis: Methods and Applications [M] Cambridge University Press, 25 nov. 1994 - 825 pages. 2 HAFNER-BURTON and MONTGOMERY Op Cit p.23-25.

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that also shapes inequality (Hafner-Burton 2005; Hafner-Burton and Montgomery 2006). PTAs are spreading rapidlyhundreds have already been notified to the WTO and more are being created. Are these agreements bad news, not just for global prosperity but also for global political equality? We do not adopt the standard economic refrain that a rise in absolute global economic prosperity offsets the importance of how those gains are distributed (Wolf 2004). Rather, we accept that the world economy is characterized by substantial distributional inequalities between states, generating material power politics and shaping development. But the increasing material gap between the poor and the rich is not the whole story, and international institutions are not uniformly making the problem worse, as some have argued, or better, as others think. Preferential trade arrangements such as NAFTA more and more govern economic exchange, shaping material power relations derived from sums of money or financial transactions although there is some debate about whether these organizations have an appreciable effect on material wealth and power (Frankel 1998); yet the same PTAs also create and sustain social power politics created by group dynamics. Like other organizations (Ingram, Robinson, and Busch 2005; Hafner-Burton and Montgomery 2006; Dorussen and Ward 2008), these institutions form social network structures, creating ties between states. The distribution of these ties endows certain states with more social capital than others, creating social power relationships that significantly affect international politics, shaping issues like whether states go to war or use economic sanctions (Hafner-Burton and Montgomery 2005, 2008). While states material power is determined by the relative size of their material capital, social power is determined by the relative social capital created by and accessed through ties with other states in the international system such as ties through mutual membership in PTAs1. Unlike inequality in material power (as measured by potential military power or gross domestic product), inequality in at least one form of social powerthat
1

Our conception of social power is derived from a particular conception of social capital. Bourdieu defines social capital as the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance or recognition (1986, 248); power can be measured by looking at relative amounts of capital. Two schools of thought regarding social capital due to networks have since developed (Portes 1998); the idea that structural holes (gaps in networks between important actors) are sources of capital (Burt 1992), and the idea that centrality is a source of capital (Coleman 1990). Following Bourdieu and Coleman, we take the latter definition as our basis for measuring social capital and therefore social power derived from PTA network membership.

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endowed to states by virtue of their positions in the international network of PTAs has been falling dramatically since 1947. Elsewhere, we have examined the effects of this form of social power on outcomes of interest in the international system; in this chapter, we concentrate on comparing how the distribution of one particular aspect of social capital in the international system (centrality in the PTA network) has varied over time relative to traditional conceptions of material power. In doing so, we add nuance to the traditional debates over inequality and globalization; this broader view suggests that the net institutional effects of globalization on inequality may be less severe than traditional measures suggest, although it is middle-ranking countries rather than marginalized states that are closing the gap. Our approach is different from but compatible with customary understandings of power. Scholarship on political economy has traditionally concerned itself with relative disparities in material power (Hirschman 1945; Gilpin 1987). International relations theory, however, has long recognized that disparities in social power also shape the landscape of politics; the recent rise of constructivism has recovered the insights of the English School, reemphasizing the role that social power plays in international relations (Bull 1977; Hopf 1998; Wendt 1999), while classical realists have long made the case that power arises from nonmaterial resources as well (Morgenthau 1948), and some liberal institutionalists have argued that soft power significantly affects international relations (Keohane and Nye 1977)1. Through social network analysis, we offer a way of conceptualizing and measuring the role of social power relationships in international relations created by the increasing institutionalization of interstate interactions. This method of analysis can help to explain why mutual membership in international organizations in general or preferential trade agreements in particular fails to have a consistent effect on politics, such as militarized disputes or economic sanctions (Russett, Oneal, and Davis 1998; Mansfield and Pevehouse 2000; Hafner-Burton and Montgomery 2008): the socially significant effects of membership can only be measured by aggregating across the effects of all ties rather than by just looking at mutual membership. Social network studies have found that although mutual membership is rarely a significant predictor of behavior, both social power and competition between groups due to membership patterns are strong predictors of belligerent behavior (Hafner-Burton and Montgomery
1

Soft power is defined as a residual category to hard power; by contrast, social capital (and social power) is positively defined.

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2005, 2006, 2008; Dorussen and Ward 2008). Consequently, the social network approach to power politics offers both a robust and nuanced perspective on how institutions shape violence and coercion. The PTA observed in this thesis is the African Growth Opportunity Act (AGOA) on textile as mentioned in the Chapter 4. Our social network approach is not intrinsically realist, liberal, or constructivist in orientation. Rather, it provides systematic empirical tools useful for analyzing all kinds of structural conjectures that take group aspects of international relations informational and psychologicalseriously, including insights from all three traditions. Nor does our approach argue against standard ways of thinking about international institutions, which focus on the individual attributes an institution has to offersuch as dispute resolution mechanisms or voting proceduresand how those attributes affect politics. We simply aim to demonstrate that international institutions also create social networks that place states in various structural positions of power, and that these positions, like dispute resolution mechanisms, can and do shape politics, sometimes in meaningful ways. The insights to be gained from this kind of approach to studying politics are many. We have added some nuance to the debate about whether trade liberalization is creating more inequality. In response to the critics of globalization, any economists argue that liberalization may be creating inequalities but that the gains in overall global welfare outweigh concerns about distribution because even the poor are, or will be, better off. Our argument suggests, rather, that poor states may also be making up for relative disparities in markets through rising social power in the network of PTAs, and that trade agreements can sometimes be a vehicle of power for states otherwise disenfranchised materially by globalization. The implication of this argument more broadly is that power relations in the political economy are more than a matter of markets; they also emerge from social networks created by the institutions that govern them. Scholars need to engage with this aspect of politics because research is beginning to show these networks matter for political outcomes, just as the size and strength of material resources do. More generally, however, the social network approach taken here offers tools to grapple with many aspects of international relations broadly, providing methods to study complex interactions that give rise to power differences.1
1

HAFNER-BURTON and MONTGOMERY Op Cit p.41.

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3.4.2 Chinese guanxi and Chinese business networks Although networks are widely recognized as improving entrepreneurial performance, China which is seen as a traditional Confucian society, has a unique form of networking, guanxi - special relationships. These guanxi networks were seen as a social means to overcome political, economic and legislative obstacles to enterprise.1 It has been proposed that personal characteristics, personal environment, personal goals, business environment and business idea are the five variables influencing an individuals decision to behave entrepreneurially (Naffziger, Hornsby & Kuratko, 1994). It is in this way that grasping some understanding of guanxi allows us to see how these personal variables may fit into the context of Chinese entrepreneurship. Guanxi is a complex phenomenon. The Chinese phrase guan-xi consists of two characters. The character guan means a gate or a hurdle, and xi refers to a tie, a relationship, or a connection. Guanxi literally means pass the gate and get connected. It has its roots in the cultural philosophy of Confucianism. Confucianism considers society as a huge network in which a person plays different roles. This is important, because in Chinese culture the collective is always considered more important than the individual. There are four kinds of basic relations in society: emperor-subject, father-son, husband-wife, friend-friend. Depending on these four kinds of relations, society achieves a balance (Yongqiang, Zhilong, 20062), the Confucian FDIal. More recently, Fan3 (2002) has identified a modern guanxi base, Family - (e.g. kin and in-laws) Relationship by nature- (e.g. from same town; classmate; same profession) Relationship acquired - (e.g. friend). Interestingly the first two are blood ties but the second and third are social. Thus, even today, Confucian tradition defines individuals in relational terms (Yang 19944). Unlike Christianity, which puts individuals in reference to God, Confucianism relates

YIU-CHUNG E., ANDERSON A. The role of guanxi in Chinese entrepreneurship [J] Journal of Asia Entrepreneurship and Sustainability 3(3) 2007 accessible at http://www.asiaentrepreneurshipjournal.com/AJESIII3Anderson.pdf last accessed 09/02/2012. p1 Abstract 2 YONGQIANG, G., ZHILONG, T., (2006), How Firms Influence the Government Policy, Singapore Management Review, 28 (1)73-85 3 FAN, Y., 2002, Questioning guanxi, definitional, classification and implications, International Business Review, 11, 543-561 4 YANG, M.M. (1994), Gifts, favors, banquets; the art of social relationships in China, Cornell University Press, New York

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individuals to their significant others (Bian and Ang, 19971). Thus Chinese society has been seen to be organized by concentric guanxi circles, extending outwards from the family (the core) to relatives, friends (Don and Dawes, 20052). The web of these obligations can be seen as the fabric of Chinese society. Given the role of this locational relationship, guanxi requires familiarity or intimacy, characterized by strong, rather than weak, ties. But guanxi is not merely a relationship, but also a tie through which the parties exchange valued materials or sentiments. Guanxi is also implicitly based on mutual interests and benefits (Yang 19943). Literally, guanxi means social connection and is a synonym for special favors and obligations within the guanxi circle. Sometimes seen, particularly by westerners, as corrupt because of the gifting aspects, these exchanges are not to be seen as equivalent to corruption. Therefore, due to the uniqueness of Chinese culture and characteristics, relationship building is different from western practices. To add with, in the use of general framework of network as structure, context and entrepreneur are both important, But equally, if not more so in China, relationship building is important for the success of entrepreneurship. Indeed, western entrepreneurs may find difficulties in using western network building technique to develop the Chinese market. Yiu-Chung and Anderson4 conclude that guanxi remains be a very important means of doing business in China, especially when starting up new venture. Yet this employment of a traditional way of doing things seems to have been modified, adapted and shaped into the use of sincerity, integrity and based on a true friendship to gain respect and guanxi from others. Material reciprocity appeared less important. By bestowing favor and face through considerate and sensitive giving of minor gifts, hosting appropriate dinners, and (most importantly) giving personal attention, a businessperson can demonstrate the good faith that forms the basis for a gradual transition from outsider to insider. Once good guanxi has been established, a number of benefits will accrue. The most important benefits appears to arise in respect of the smooth running of routine business, well-characterized as a "bureaucracy" variable, being operations, in securing information about government, and in securing
1

BIAN, Y., AANG, S. (1997), Guanxi Networks and Job Mobility in China and Singapore, Social Forces, 75(3) 981-1005 2 DON, Y., DAWES, P. L. (2005), Guanxi, Trust, and Long-Term Orientation [C] in Chinese Business Markets, Journal of International Marketing, 13(2), 28-56 3 YANG Op.Cit. 4 YIU-CHUNG E., ANDERSON A. Op.Cit. p15.

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administrative approvals.1 This is the case of Chinese entrepreneurs in Madagascar (see chapter 5). In a very general sense, guanxi resembles Pierre Bourdieus concept of social capital which, according to Bourdieu is the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance and recognition or in other words, to membership in a group- which provides each of its members with the backing of the collectivity-owned capital, a credential which entitles them to credit, in the various senses of the world.2 Hsu suggests that guanxi practices allowed people to create networks and build trust. It evolved into a flexible tool which allowed people to create trustworthy, expansive business networks in the absence of adequate legal guarantee a type of Capitalism without contract.3 Some scholars worry guanxi encourages corruption and impedes social actors abilities to make rational market based decisions. Hsu responds that there is a clear difference, at least to the Chinese between guanxi and bribery, and though guanxi can, did and does facilitate bribery, the later is officially and socially condemned, and is a minority case. She also notes that the market does not work perfectly anywhere, e.g. there will always be scarcities, information will always be incomplete, free riders, and irrational decision makers can be found even where there is not a problem of weak institutions. Hsu suggests that the Chinese use guanxi the way westerners use networking to be assured of appropriately filling important and higher level posts with appropriate persons in post communist China. For her, capitalism has flourished in PRC (?) Hong Kong, Taiwan, Singapore, all countries with guanxi / Chinese culture ; she even posits that most countries that have moved from 3rd to 1st world economic status in the 2nd half of the 20th century fit this model.

HOWARD DAVIES,THOMAS K. P. LEUNG SHERIFF T. K. LUK YIU-HING WONG The Benefits of "Guanxi" The Value of Relationships in Developing the Chinese Market Industrial Marketing Management 24, 207-214 (1995) 2 Cited in THOMAS GOLD, DOUG GUTHRIE, DAVID WANK, An introduction to the study of guanxi [C], in Social connections in China Institutions, Culture and the changing nature of guanxi Cambridge University Press. 2002.3-13. 3 HSU, CAROLYN Capitalism without contracts versus capitalists without capitalism: Comparing the influence of Chinese guanxi and Russian blat on marketization [J] Department of Sociology and Anthropology, Colgate University, 13 Oak Drive, 13346 Hamilton, NY, USA Available online 14 July 2005 C.L. Hsu / Communist and Post-Communist Studies 38 (2005) 309-327. p311

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The findings presented by Seung Ho Park and Yadong Lu1based on a survey of 128 firms in central China, provide strong support that institutional, strategic, and organizational factors are critical determinants of guanxi with competitive forces. However, only institutional and strategic factors are significant for guanxi utilization with government authorities. In general, guanxi leads to higher firm performance, but is limited to increased sales growth, and has little impact on profit growth. Guanxi benefits market expansion and competitive positioning of firms, but does not enhance internal operations. 3.4.3 Business networks and social networks: the role of migrant Chinese communities2 Some writers take the multinational corporation as the core economic actor in a global hierarchical fiat system (Dicken, 19983). Others conceive of the global system as a network of regional worlds (Scott, 19984).Within this network- governed economy, social ties between communities in the interacting regions are a central concern. Rather than taking the large corporation as the major actor, the network approach focuses on the social embeddedness of the ostensibly profit-oriented business world. The latter approach leads students of economic systems to bring the social back in, even at the global level (Castells, 19965; Saxenian and Hsu, 19996). Scholars adopting this network approach to globalization have focused on the role of ethnic ties, in particular, to explain the accelerated growth of cross-border economic transactions (Dicken and Yeung, 19997; Kao, 19938). They see social networks, not a social economic rationality, as the basis for the emergence of economic transnationalism. In contrast to theories of the product life cycle or new
1

GUANXI AND ORGANIZATIONAL DYNAMICS: ORGANIZATIONAL NETWORKING IN CHINESE FIRMS SEUNG HO PARK and YADONG LU Strategic Management Journal Strat. Mgmt. J., 22: 455477 (2001) 2 HSU, JINN-YUH, and SAXENIAN, ANNALEE. The limits of guanxi capitalism: transnational collaboration between Taiwan and the USA [J]. Environment and Planning A, volume 32, 2000: 1991-2005. 3 DICKEN P, Global Shift:Transforming theWorld Economy [M] 3rd edition (Guilford Press,NewYork) 1998 4 SCOTT A, 1998 Regions and theWorld Economy:The Coming Shape of Global Production, Competition and Political Order (Oxford University Press, Oxford) 5 CASTELLS M, 1996 The Rise of the Network Society (Blackwell, Cambridge, MA) 6 SAXENIAN A, Hsu J-Y, 1999, ``Transnational entrepreneurs and regional industrialization: the Silicon Valley ^ Hsinchu connection'', paper presented at the 1999 Annual Conference, Association of Collegiate Schools of Planning, Chicago, IL, 21 ^ 24 October; copy available from the authors 7 DICKEN P,YEUNGg H W-C, 1999, ``Investing in the future: East and Southeast Asian firms in the global economy'', in Globalisation and the Asia-Pacific: Contested Territories Eds P Kelly, L Kong. K Olds (Routledge, London) pp 107 ^ 128 8 KAO J, 1993, ``The worldwide web of Chinese business'' Harvard Business Review March-April, 24 ^ 36

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international division of labor, which focus on the multinational corporation, this view sees the members of the ethnic Diaspora constructing the technological and financial bridges between distant regional economies. The dominant example of this approach is the analysis of overseas Chinese business networks (OCBN). Students of what Kao refers to as the ``global web'' of Chinese business see the close ties between overseas Chinese and local Chinese communities as a central mechanism for economic cross-fertilization in the Pacific Rim. In this view, global economic transactions are enhanced by the advantage of blood bonds. Ethnic ties render the utilization and coordination of resources among firms of the cross-border regions flexible and economical, and hence reinforce their competitiveness (Borrus, 19971; Kao, 19932; Kotkin, 19923). Other students of Chinese capitalism stress the mediating role of guanxi in economic transactions among ethnic Chinese businesses, both local and cross-border (Hamilton, 19964; Hsing, 19985; Yeung, 19986). They claim that the Chinese cultivation of personal relationships, or guanxi, institutionalizes the trust, loyalty, reciprocity, and reputation that facilitate efficient business operations. As Hsing7 argued, ``Most writers agree that the foundation of the Chinese Style of business organization is familism (which usually includes nepotism, paternalism, and family ownership in firm organization) and interpersonal relationships-guanxi, on which a trusting and reciprocal obligatory relationship is built between business partners.'' In other words, cooperation, or cooperative competition, is the norm in the guanxi- based Chinese business world. Such a system is seen as particularly advantageous in the current economic environment as it allows the members of the network quickly to identify complementary assets and build close partnerships at a global scale. Wong

BORRUS M, 1997, ``Left for dead: Asian production networks and the revival of US electronics'', in The China Circle: Economics and Technology in the PRC, Taiwan, and Hong Kong Ed.B Naughton (Brookings Institution Press,Washington, DC) pp 139 ^ 163 2 KAO J, 1993, ``The worldwFDI web of Chinese business'' Harvard Business Review March-April, 24 ^ 36 3 KOTKIN J, 1992 Tribes: How Race, Religion, and FDIntity Determine Success in the New Global Economy (Random House, New York) 4 HAMILTON G, 1996, ``The organization of business in Taiwan''American Journal of Sociology 96 999 ^ 1006 5 HSING Y-T, 1998 Making Capitalism in China: The Taiwan Connection (Oxford University Press, New York) 6 YEUNG W-C, 1998 Transnational Corporations and Business Networks: Hong Kong Firms in the ASEAN Region (Routledge, London) 7 HSING Y-T, 1997, ``Building guanxi across the Straits: Taiwanese capital and local Chinese bureaucrats'', in Ungrounded Empires:The Cultural Politics ofModern ChineseTransnationalism Eds A Ong, D Nonini (Routledge, London) pp 143 ^ 166, p.144.

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and Salaff1 (1998) argue, for example, that such ``network capital''2 can create relationships with low redundancy and allows producers to recruit efficiently and focus resources on economic competition.

Existing critique The overseas Chinese business networks argument overlooks the danger of lockin in the ethnic business circle. Although the ethnic enclave is a good strategy for survival, it is a bad arrangement for global competition. Zhou3 (1992) demonstrates that the abundance of cheap ethnic labor in New York's Chinatown removes a stimulus for innovation among local producers. The ethnic buffer developed to protect against outsiders can too easily become insulation from new ideas. Dense ties grow too dense to be broken to form new ties, undermining the ability to balance the coupling and decoupling needed for economic success within ethnic networks (Granovetter, 19954). The discourse of guanxi capitalism, by contrast, widens the scope of business networks to include non-blood bonds. Because guanxi is constructed rather than embedded, such arguments avoid the pitfalls of lock-in by allowing for the creation of divergent social networks within the Chinese community. However, such a constructivist interpretation of guanxi loses its rigor as a social category. Rather it becomes a chaotic concept that refers to different, even contradictory, meanings. Yeung5 (1998), for example, describes guanxi as a sort of `atmosphere' to engender the growth or solidarity of ongoing relationships within personal and business networks. He divides it into seven key components: trust, loyalty, obligation, reputation, reliability, respect, and sentiment. It is true that these elements can lubricate the process of economic transactions. However, it is essential to distinguish, for example, different modes of trust building: whereas `blind' trust can be created on
1

WONG S-L, SALAFF J, 1998, `Network capital: emigration from Hong Kong'' British Journal of Sociology 49 358 ^ 374 2 WONG and SALAFF (1998, page 359) define ``network capital'' as a type of capitals (along with social and economic capitals), which is cultivated by guanxi building, and is an asset capable of conferring strength, power, and consequently profit on their holder. 3 ZHOU M, 1992 Chinatown: The Socioeconomic Potential of an Urban Enclave (Temple University Press, Philadelphia, PA) 4 GRANOVETTER M, 1995, ``The economic sociology of firms and entrepreneurs'', in The Economic Sociology of Immigration Ed. A Portes (Rusell Sage Foundation, New York) pp 128 ^ 165 5 YEUNG W-C, 1998 Transnational Corporations and Business Networks: Hong Kong Firms in the ASEAN Region (Routledge, London)

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Chapter 3 Theoretical Framework

the base of obligation, loyalty, and sentiment, the `studied' trust that insures mutually beneficial business collaborations can only be learned by monitoring (Sabel, 19941). A concept with so many connotations ultimately lacks explanatory power. Since it seems explain everything, in reality it explains nothing. The guanxi argument, although more sophisticated than that of OCBN, still risks over-socializing economic behavior that is rooted in business and technological considerations. This is the blind spot in the discourse on social constitution, which assumes that social relationships determine economic transactions and outcomes. The economy is not reducible to interpersonal relationships, but composed of multiple production worlds that are defined by product configuration, market principles, and technology and production process (Storper and Salais, 19972). In other words, dense social ties cannot substitute for the sophisticated managerial and technological learning that is required to compete in a particular sector, in spite of the fact that the social dimension of learning is critical. Guanxi arguments overlook these complex differences. So the guanxi principle has been used to explain the organization both of Taiwan's traditional small and medium-sized enterprises (in sectors such as textiles and footwear) and of its newer technology producers (in sectors such as semiconductors and personal computers, PCs). As a result, the strength of affective relationships (or the sense of community) replaces the strength of managerial and technological expertise as the source of competitive advantage.3

3.5 summary of findings

Our social network approach is not intrinsically realist, liberal, or constructivist in orientation. Rather, it provides systematic empirical tools useful for analyzing all kinds of structural conjectures that take group aspects of international relations informational and psychologicalseriously, including insights from all three traditions. Nor does our approach argue against standard ways of thinking about international institutions, which focus on the individual attributes an institution has to offersuch as dispute resolution mechanisms or voting proceduresand how those attributes affect politics.
1

SABEL C, 1994, ``Learning by monitoring: the institutions of economic development'', in The Handbook of Economic Sociology Eds N Smelser, R Swedberg (Princeton University Press, Princeton, NJ) pp 137 ^ 165 2 STORPER M, Salais R, 1997 Worlds of Production: The Action Frameworks of the Economy (Harvard University Press, Cambridge, MA) 3 JINN-YUH HSU, SAXENIAN Op Cit p1993-1995.

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We simply aim to demonstrate that international institutions also create social networks that place states in various structural positions of power, and that these positions, like dispute resolution mechanisms, can and do shape politics, sometimes in meaningful ways. The insights to be gained from this kind of approach to studying politics are many. We have added some nuance to the debate about whether trade liberalization is creating more inequality. In response to the critics of globalization, many economists argue that liberalization may be creating inequalities but that the gains in overall global welfare outweigh concerns about distribution because even the poor are, or will be, better off. Our argument suggests, rather, that poor states may also be making up for relative disparities in markets through rising social power in the network of PTAs, and that trade agreements can sometimes be a vehicle of power for states otherwise disenfranchised materially by globalization. The implication of this argument more broadly is that power relations in the political economy are more than a matter of markets; they also emerge from social networks created by the institutions that govern them. Scholars need to engage with this aspect of politics because research is beginning to show these networks matter for political outcomes, just as the size and strength of material resources do. More generally, however, the social network approach taken here offers tools to grapple with many aspects of international relations broadly, providing methods to study complex interactions that give rise to power differences.

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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

Chapter 4 Chinese FDI in Madagascar today: the big deals

4.1 Chinese investment in Madagascar: an overview
-Chinese investors in Madagascar post-reform (1980 onwards) 1957 official statistics showed 7,349 Chinese living in Madagascar, in forty-eight of the country's fifty-eight districts.1 By 2006, that number had grown to roughly forty thousand, composed of thirty thousand of the original migrants and their descendants, as well as ten thousand new expatriates from the People's Republic of China, and another hundred from the Republic of China on Taiwan. The recent migrants trace their origins to a more diverse set of provinces, including Fujian and Zhejiang. Half lived in either Toamasina or Antananarivo, with a further one-eighth in the Diana Region; the remainder was distributed among the other provinces.2 Most of the Chinese in Madagascar are engaged in retail business. In the 1990s, they controlled half of the alcoholic beverages and textiles industries; by the mid2000s, their share of the alcoholic beverages industry had fallen to one-fifth, while that of the textiles industry had increased to 90%.3 Others operated cake shops and ice-cream parlors, somewhat along the lines of coffee shops, where customers could sit down and enjoy a dessert; they controlled about 10% of this industry.4 Popular resentment at the influx of Chinese small traders, whose prices undercut those of their Malagasy competitors, has strained relations with the People's Republic of China.5 Interrogated on that topic, Pan Huanyou, first secretary to the Chinese Embassy in Madagascar commented: There is obviously some competition, but the bigger Chinese businesses keep on selling wholesale products to small Malagasy retailers, for example those who are established in the other provinces and therefore help the distribution of cheap products to the big majority of Malagasy. The quality is not optimum, but the goods are cheap and help the poorest have a better living.6
1

TSIEN TCHE-HO (January 1961), "La Vie Sociale des Chinois a Madagascar", Comparative Studies in Society and History (Cambridge University Press) 3 (2): 170181, p.170. 2 MAN Op.Cit p1. 3 Ibid. 4 Bureau of Foreign Affairs and Overseas Chinese Affairs 2007 [WB/OL] http://www.madhszh.com/ 5 BROWN, MERVYN(2004), "Madagascar: Recent History", Africa South of the Sahara, Taylor and Francis, pp. 630636, p635. 6 Interview, January 12th, 2012, Chinese Embassy in Madagascar, Nanisana Ambatobe Antananarivo. Translated from French.

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Since its considerable boom in the first decade of the new century Madagascars trade balance has remained in deficit: its exports are significantly less important than its imports. The structure of the trade balance may well be upset by investments in mining and oil, not to mention illegal exports of rosewood to China worth several hundred million dollars1. In 2008 most of Malagasy imports consisted of Chinese products and 50% of their value was destined for tax-free enterprise zones: this applied in particular to textiles (the vast majority of which had come from Taiwan and Hong Kong). Yet two thirds of these imports are not destined for Madagascars internal market but for local processing before being re-exported to the European or American market. Madagascar served as a hub because of the preferential conditions granted to it by the African Growth and Opportunity Act (AGOA). As a result, when Madagascar was no longer able to avail itself of this arrangement at the end of 2009, this led dozens of Chinese enterprises to leave for other tax-free zones, which in its turn meant that several thousand jobs were lost. (See details in the next section) As in most African countries, imports of Chinese products and the presence of Chinese traders are often accused of undermining local Malagasy industry and of competing with small-scale local traders. Although this line of reasoning remains relevant in relation to Madagascar, it should not overshadow the advantages enjoyed by numerous Malagasy thanks to the Chinese presence. The Behoririka district in the centre of Antananarivo, wrongly referred to as Chinatown2, contains a considerable number of small shops owned by Chinese traders which would appear to be competing with Malagasy shop-keepers. In the case in point, it is appropriate to recall that property regulations in Madagascar prohibit foreigners from owning land and that virtually all the Chinese benefit from lease agreements, apart from the rare individuals who have become citizens of Madagascar. This means that the shops remain the property of Malagasy. In addition, if the shops are run by Chinese (in particular Globe, Venice and Advance Centre), these consist of a large number of stands, of which close on 80% are leased out to Malagasy. Furthermore, the Chinese traders now
1

Investigation into the Global Trade in Malagasy Precious Woods: Rosewood, Ebony and Pallisander, Environmental Investigation Agency, October 2010, http://www.eia-global.org. 2 As has been aptly pointed out by Catherina Fournet-Gurin, describing Behoririka as Chinatown is misplaced in view of the fact that many Chinese have moved to settle elsewhere (in particular in Ivato) and that Behoririka remains a district in which the vast majority of the inhabitants are Malagasy. Catherine Fournet-Gurin, Les Chinois de Tananarive (Madagascar): une minorit citadine inscrite dans des rseaux multiples toutes les chelles (The Chinese of Tananive [Madagascar] : an urban minority drawn into multiple networks at all levels), Annales de gographie, 2009/5 (No. 669).

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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

have to compete directly with Malagasy traders. Indeed the introduction of a new direct Air Madagascar route from Antananarivo to Guangzhou in 2007 has enabled a fair number of Malagasy to bypass Chinese intermediaries and stock up directly from suppliers based in China. The descendants of the old Chinese have moreover exploited this opportunity by setting up several hotels in Guangzhou and offering interpreting and mediation services on the spot. They have thus been able to a large degree to encourage Malagasy to come to China.1 The golden years: Chinese FDI in Madagascar from 2000 onwards General assessment of FDI in Madagascar Since 2003, a series of surveys about foreign-funded enterprises has been conducted annually in Madagascar2. Thus, these surveys remain our primary source of data. These different surveys have shown the importance of FDI relative to other types of investments. Foreign investments are grouped into three broad groups namely FDI, IPF (Portfolio investment) and other investments. It is relevant to precise again the definition of FDI as adopted by these surveys: they specifically refer to transactions funds between a foreign investor (owning more than 10% of capital share in the company) and the resident entity- that is the company.

Figure 7 Evolution of inward investment stocks in Madagascar 2000-2006

PELLERIN MATHIEU. The Recent Blossoming in Relations between China and Madagascar [A]. IFRI Sub Saharan Africa Program February 2012 p12 http://www.ifri.org/?page=detailcontribution&id=7013&id_provenance=88&provenance_context_id=1 (accessed 29/02/2012) 2 Available on the Central Bank of Madagascars website : http://www.banque-centrale.mg/index.php?id=m5_7 last accessed 29/03/2012.

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FDI stock increased from 141 million USD in 2000 to 500 million USD in 2006; a 265% increase during the period. In terms of growth, 2006 has recorded an explosion in FDI, the growth rate between 2005 and 2006 reaching 87%. Only the years 2004 and 2005 experienced a decline in the stock of FDI. The decrease is not related to disinvestment but rather a huge depreciation of the local currency against foreign currencies like the USD and the euro. Evaluated as local currency (Ariary), FDI stocks have continued to increase during this period from 2000 to 2006. Figure 8 Structure per sector FDI stocks in Madagascar, 2000 and 2006

Source: Study on FDI and portfolio Madagascar, Central bank, INSTAT

In terms of structure, in 2006, extractive industries and mining activity has become the main sector benefiting from FDI. This sector represents 38.24% of FDI stocks in 2006, while in 2000; it represented only 3.64% and was only the 6 th most important sector of investment. This major change is the corollary of the economic
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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

policy in Madagascar. Indeed, it is only recently that major programs of resource mining in Madagascar have started with the exploitation of ilmenite, cobalt and the exploration of oil resources.1 The other main sectors that benefit from FDI are finances, with 15.70% of FDI stocks in 2006, manufacturing (industrial sector) with 11.83%, trade with 10.89%, the activities of transport and communication 8.50%, fishing activities 5.04% and the industrial sector of construction with 4.23%. Moreover, with the road construction programs initiated by the Malagasy government under the Ravalomanana presidency, from 2002 to 2007, the branch "Construction" has been a significant part of FDI: its share in FDI stock increased from 0.01% to 4.23% between 2000 and 2006. It should be noted that the FDI received in the trade sector is mostly alimented by the market of petroleum products and that of "transport and communications" is due to booming telecommunication operators. This recalls the positive image given by Young2 of an African growth miracle reflected in the dynamism of the region as the fastest-growing cellular telecommunications market, increasing from less than 2 million mobile phones in 1998 to more than 400 million in a decade. Industries such as banking, retail, and construction are also booming, and private investment inflows are surging, though from a low level.

Figure 9 FDI Stocks per country of residence of investors 2005-2010.

1

RAZAFINDRAVONONA JEAN, RAKOTOMANANA ERIC, RAJAOBELINA JIMMY. Etude sur les Echanges entre Chine et Madagascar (Study on exchanges between China and Madagascar) [R]. Janvier 2008 2 YOUNG, A. 2010. The African Growth Miracle.[A] Department of Economics, London School of Economics. Available at http://mfi.uchicago.edu/.

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Unit: Million USD Source: Study on FDI and portfolio Madagascar, Central bank, INSTAT

The four main countries of origin of FDI are the United Kingdom, Canada, Japan, and Korea. These are the countries of residence of investors in the sector of "Mining and quarrying". After these four countries, found in the following order: France, Mauritius, Italy, China and the United States. The stock of FDI received from nine of these countries represented over 90% of the overall stock end-2010. While France was the main partner of Madagascar for years, in terms of FDI, in 2006 Canada became the main investor in Madagascar. On the one hand, the share of France has reached 23.7% of the stock of FDI in 2006, while in 2005, she monopolized up to 33.7%. On the other hand, Canada's participation has risen to a level of 37.9% in 2006 when it was only 8.4% in 2005. This phenomenon is explained by a large investment of QIT Madagascar Minerals which exploits ilmenite in Madagascar. Mauritius also holds a good 10.4% share of the stock of FDI in Madagascar, with activities concentrated in the export processing zones (EPZ) in Madagascar, namely transport, auxiliary transport and telecommunications.

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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

China came in 7th place in 2006 with a 2.9% share of FDI stock in 2006, in real terms around 14 million USD. Compared to the year 2009, the rank held by Chinese investors has seen a big change, thanks to the license granted to WISCO for iron mining in the western part of the island, but also their presence in the exploration of oil with the project SUNPEC. Chinese FDI in Madagascar Is qualified FDI any investment in the social capital of a firm superior to 10% of that social capital. Thus, it is interesting to see the size of Chinese investments through the analysis of social capital. The level of share capital held by foreigners at the enterprise level in Madagascar is of about 153.8 million USD in 2006. The weight of Chinese investors is around 11% with a capital value of around 16.6 million USD. The majority of Chinese capital is from Hong Kong. There was a big change in the structure share of FDI between 2000 and 2006. Although France remains the first foreign investor in terms of capital, its share has declined to be assessed at 34.9% of the total foreign capital in Madagascar. The investors from Canada come second with a capital equivalent to 23.7% of total FDI. As for China, her weight increased from 0.8% to 10.9% during this period. This figure indicates an intensification of Chinese investments in the Malagasy economy. Most notably, the first sizeable joint-venture was signed in the construction industry, with the creation of the Socit Sino-Malgache de Travaux Publics1 (SMATP). As the first major financial commitment from China to Madagascar, the firm was visited by a second rank official from China.2

Figure 10 Chinese FDI per sector 2006

1 2

Sino-Malagasy Public Works Company. La SinAfrique en Marche (China-Africa advance???) [W/OL] http://madagascan.over-blog.com/15-categorie847142.html accessed on 12/03/2012

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Chinese investments have turned mainly to the telecommunications and financial activities. In the telecommunications sector, Distacom of Hong Kong became the strategic investor in Telecom Malagasy (Telma) in Madagascar, paying 12.6 million USD for a 68 percent stake and committing 165 million USD in additional investments over five years. This seems to be a trend in Africa, as Goldstein et. al. noticed1: two other Chinese telecommunication firms invested in Southern Africa: ZTE, a Chinese vendor, runs a joint venture mobile operation in the Republic of Congo with the local operator and bought a 51 percent stake in Niger Telecommunications when the company was privatized. Star Communications of China is to provide Zimbabwe with USUSD60mworth of transmission equipment which will enable all parts of the country to receive state radio and television (a barter arrangement for chrome). In August 2006 Huawei Technologies won 70% of a USUSD100m contract to supply Code division multiple access equipment (CDMA) to Nigerias Multilinks. Concerning Financial activities, the creation of the Industrial and Commercial Bank of Madagascar (BICM) is the most noticeable fact. The Hong Kong multi1

GOLDSTEIN A, PINAUDN N, REISEN H, CHEN X. The Rise of China and India: What's in it for Africa? Paris: OECD. 151. http://www.fesnam.org/pdf/2006/reports_publications/Goldstein_China_India_WhatsinItforAfrica2006.pdf (2006)

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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

millionaire Hui Chi Ming, former chairman of Sunpec is the now founder-chairman of the BICM Bank (Industrial and Commercial Bank of Madagascar) and of several mining and oil enterprises including Madagascar Petroleum International and Madagascar Mining Group.1 Besides these two giants, there is indeed a Chinese presence in other sectors namely the trade and manufacturing activities. In terms of manufacturing activities, it should be noted that Chinese investments are oriented towards activities to potential exporters like textiles and sugar, where Madagascar benefits from the various international agreements and PTAs on export quotas towards industrialized countries. Chinese firms established in Madagascar are affiliated companies, subsidiaries or branches. Affiliated companies are those foreign firms in which nonresident holds between 10% to 50% shares of the capital; the subsidiaries are those where the nonresident holds between 50% to 100% of the shares of the capital; and the branches where the nonresident hold the total share of the capital. Figure 11 Distribution of Chinese-funded enterprises by type of investment firm

Source: Study "Foreign direct investment and portfolio in Madagascar", BCM INSTAT

In terms of numbers, the subsidiaries are the most widespread form of foreign firm used by Chinese investors. Indeed, 56% Chinese-funded enterprises in 2006 are subsidiaries, followed by companies affiliated with 25% and Chinese-funded enterprises and branches which represent only 19%. These figures indicate an intention of China to work with the Malagasy part. This is beneficial for the country. There is a notion of knowledge sharing and expertise from Chinese investors. This goes in line with the argument that Chinese FDI can bring about transfer of
1

PELLERIN MATHIEU. The Recent Blossoming in Relations between China and Madagascar [A]. IFRI Sub Saharan Africa Program February 2012, p6. http://www.ifri.org/?page=detailcontribution&id=7013&id_provenance=88&provenance_context_id=1 (accessed 29/02/2012)

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technology to the local businesses, which is a very positive thing and a premise to the technological transfer needed for an industrialization process a la flying geese model. To complete this analysis on the capital, an overview of the evolution of Chinese business creation per sector, between 2000 and 2006, is addressed in this document. In terms of numbers, most of these companies is moving towards trade, especially wholesale (67% of enterprises created between 2000 and 2006), then come the textile industries and service companies. The number of Chinese enterprises created over the period 2000-2006 is of 146. However the list of Chinese companies identified in 2006 only presents 32 enterprises. This difference is explained by the behavior of Chinese investors. Indeed, the majority of non-resident shareholders are individuals, not companies established in China. Thus, these individuals become, after some years settled in Madagascar, residents and get out of the field of foreign direct investment. Economic activity is thus one of reasons for migration of Chinese. This has an impact on the small share of FDI flows from China to Madagascar on the whole period from 2003 to 2006. The only year in which the flow was important was the year in 2004. During this year, there was, in fact, the privatization of Telecom Malagasy. And since 2005, the average FDI flows from the China is around 2.5 million USD. However, the weight of China in FDI flows did increase in recent years with the new cement industry, hotels and many other branches. Since last year and especially this year, cooperation between the two countries continues to intensify. Finally the analysis of employment created by Chinese FDI in Madagascar will be discussed. Here the analysis remains on permanent jobs (i.e. more than one year). Chinese companies have employed 6,041 people in 2006. This figure gives a weight of 10.7% over the total labor force employed by FDI enterprises in 2006. Over 90% of these jobs are from the subsidiaries; this level can be explained by the high number of Chinese companies to be formed under this type. 309 permanent jobs are created in one subsidiary on average, against 69 for branches and 9 for affiliates. Another interpretation of these figures gives an estimate of the size of firms owned by Chinese entrepreneurs. Indeed, given the number of jobs, subsidiaries are large companies; branches are medium business enterprises, and affiliated small businesses. The analysis of jobs by sector gives another idea of Chinese FDI. While FDI are evaluated in terms of capital, the telecommunication and financial activities sectors
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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

stand out. If evaluated in terms of employment, it is the companies of "manufacturing activities" which are the most dynamic with share of employment that represents 60% of all Chinese enterprises. Then comes the telecommunications sector with 38% of the total. Since 2006, the subsidiary undertakings have captured most of the total production of foreign-funded enterprises in Madagascar. Their importance is still considerable (around 80%) compared to other types of businesses. Despite their strength, they have experienced a downward trend from 2008. For example, between the first half of 2008 and the first half of 2010, they recorded an annual growth rate of 16% of the total production volume. Companies have branches also declined in importance from 2007. These facts are explained by the permanent closure and layoffs seen in some companies. By contrast, affiliated companies continued positive growth over the years. They reached an annual average growth rate of 16.1% and their weights were in the range of 15.7% of total production companies FDI in the first half of 2010. The structure of the volume of industrial production varies the contribution of nonresident investor in the capital of the company. Overall, the volume of production of industrial enterprises with foreign capital is divided primarily between four divisions: 'manufacture of textiles and apparels "," Manufacture of metallic mineral products "," Manufacture of products tobacco "and" Chemicals-Pharmaceuticals-fats "which represent respectively 39.5%, 21.2%, 15.8% and 14.1% of total production. The Index of Industrial Production1 of companies in foreign direct investment in Madagascar amounted to 85.0 in the first half of 2009 and to 88.5 in the second half of 2009. These figures indicate a slowdown of -15.0% in industrial activity during the first half of 2009 and -11.5% in the second half compared to the six-month average in
1

The 2009-2010 survey results on foreign direct investment in Madagascar includes a new methodology for calculating the IPI for the monitoring of the secondary sector. The structural change of the Malagasy economy induced by economic and political contexts, whether national or international, but especially because of the variability of the population of foreign industrial enterprises in Madagascar direct investment leads the construction of a new index to better reflect reality: "the chain index." Actually, the indices defining the level of FDI in previous years would refer to a fixed base, namely that of the year 2006, to define the fluctuation of FDI level. However, survey results showed that the population of FDI firms is constantly changing (because of the definition of FDI as all enterprises where non-residents hold 10% or more of the social capital, and the fact that from one year to another, individuals would change their status from nonresident to resident) so that the reference in relation to a fixed base quickly becomes outdated. If the IPI should show a short-term development of the economy - particularly the level of production of the secondary sector such a definition would bias the economic reality, hence the construction of an index-based mobile commonly known under the term Chain index. It will then, in each period, update the base year: the index calculated for 2009 refers to the year 2008, the year 2010 refers to the year 2009, and that of 2011 to 2010. And generally, the index for year n refers to the year n-1. Survey on foreign investment and portfolio BCM-ISNTAT 2009-2010 p30.

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2008,. As to the first half of 2010, the decline in the general level of production was -8.5%. However, despite a decline of 7.2% compared to 2009, the forecast data in the second half of 2010 offered hope of a 3.3% increase of the IPI for the first half of 2010. This increase would be particularly induced by dynamic sectors like "Manufacture of metal work", "Manufacture of chemicals and pharmaceuticals and fats" and by the sector manufacture of textiles1 The above statistics show that after the political crisis in 2009, the industries in Madagascar met some difficulties, namely some firms left the country for good, but a few months after the crisis dynamism in some sectors was already seen. This shows that in a country where political crises are cyclic- almost a structure and not a conjuncture- the investors know what risks they incur and still knowingly invest in sectors they assume would rebound quickly into bringing growth. This is particularly true for Chinese investors, as Buckleys empirical results revealed 2. Looking at risk perception, Chinese FDI seems to be rather attracted than deterred by political risk. This observation can be seen as supporting the analysis that the cooperative hands of the Chinese government can play a bigger role in Chinese FDI to countries with a weak rule of law, and have can provide less strong support in highly developed markets. The case of Madagascar then supports this assumption, as for the past ten years, political turmoil and instability has put investors at bay for the most part. Since Independence Madagascar has experienced six crises: in 1972, when President Philibert Tsiranana was overthrown; in 1991 when President Didier Ratsiraka was overthrown; in 1996 when President Alvert Zafy was dismissed; in 2002 when there was a post-electoral crisis - Didier Ratsiraka against Marc Ravalomanana - and in 2009, when there was a coup dtat followed by the departure of President Marc Ravalomanana). The following case study will give in debt analysis of the response of the textile industry following the political crises of 2002 and 2009.

4.2 Case studies in Madagascar: new investment deals

4.2.1 Case study 1: The Malagasy textile industry: the success story that wasnt This case study is a case in point to demonstrate the effect of flying geese model of industrialization on the textile industry in Madagascar, as suggested first by
1 2

Ibid. Buckley et. al. Op. Cit. 2007. p. 513

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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

Deborah Brautigam with regards to decentralization of Mauritian textile industries towards Madagascar1. The development of the sector could have been a success story, but wasnt one because of political sanctions imposed by the United States on Madagascar following the 2009 political coup. It is also a an empirical proof that PTAs in this case the African Growth Opportunity Act, AGOA- as structural social networks (see chapter 3.3 Network Theory: networks as structure), do not necessarily attenuate negative political sanctions from the most powerful state in terms of economic and social power2, although Hafner-Burton and Montgomerys analysis may say that the social powers of states do not equate their economic power. In the case of Madagascar, the non-respect of the democratic norm was the most significant element to the United States, thus causing the latter to sanction the former, and putting an end to what could have been a success story in the textile industry. In this section the origins of the Malagasy textile industry will first be revisited, insisting on the large part played by Chinese textile industry delocalized from Mauritius. Then the importance of the textile industry development as a potential first step towards industrialization, in the line of the flying-geese paradigm will be demonstrated. Finally, the consequences of the political sanctions imposed by the United States on the sector and the prospects for the Malagasy textile industry in the hope of normalization of the political context in the country will be drawn. The origins of the Malagasy textile industry The origins of the Malagasy apparel export industry are intertwined with those of Mauritius. The existence of an export processing institutional arrangement attracted investors from Mauritius, as the price of labor began to rise following Mauritius successful industrialization in the 1970s and 80s, as well as other countries. It also enabled Madagascar-based firms to take quick advantage of new market opportunities offered by the Africa Growth and Opportunity Act (AGOA), passed in October 2000. In this story, the role of Chinese overseas communities (or more precisely the role of Guanxi; see chapter 3.3 network theory: guanxi) is very important as pointed
1

According to Brautigams argument, the Mauritian case can be seen as an extra-Asian example of the global reach of Chinese business networks, and even evidence of the growing transnationalism of domestic capital in the Third World (as Mauritian investors expand their investments in nearby Madagascar). BRAUTIGAM DEBORAH Close Encounters: Chinese Business Networks as Industrial Catalysts in Sub-Saharan Africa [J]. Royal African Society, 102.2003:447-467. P449. 2 While states material power is determined by the relative size of their material capital, social power is determined by the relative social capital created by and accessed through ties with other states in the international system such as ties through mutual membership in PTAs. HAFNER-BURTON and MONTGOMERY Op.Cit. p25.

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out by Deborah Brautigam1: Chinese immigration was significant only in South Africa, Madagascar, and Mauritius, and in all three countries Chinese entered into manufacturing. 2 As a matter of fact, a second wave of investment seems to have come in large part from Mauritius, but also from large Asian apparel producers, principally from Hong Kong and China, Singapore and Malaysia. It has been fuelled by a third wave of investors from the Middle East, Dubai, Saudi Arabia, United Arab Emirates, and Pakistan that are primarily establishing very large CMT factories, each employing more than a thousand people, and capitalizing on the recent African Growth and Opportunity Act (AGOA). The latest wave of potential investors appears to be from Sri Lanka and India. The majority of garment manufacturing companies are foreign-owned. There are, however, also a number of locally owned companies. In 2001, Madagascar was the third largest exporter of clothing to the U.S. market in terms of volume and the fourth largest in terms of value. Strong growth of the EPZ sector, whose value of exports rose by 8% in 2001, contributed to extremely favorable conditions in the external sector in that year.3 The development of Textile and Clothing as a major export sector in Madagascar has been made possible by the introduction of the EPZ in the late 80s. Development in the 90s came mainly from exports to the EU. During the last few years, exports have essentially been driven by opportunities offered under AGOA, which enables Madagascar clothing firms to benefit from quota and duty free exports of products manufactured from third country fabrics into the US market. Madagascar is the only example, alongside Mauritius, of significant EPZ success in sub- Saharan Africa where all other free-zone initiatives have failed despite numerous attempts.4 The example of Mauritius is well known, but not so the Madagascar EPZs otherwise known as the Zone Franche. For example, the World
1

BRAUTIGAM DEBORAH Close Encounters: Chinese Business Networks as Industrial Catalysts in SubSaharan Africa [J]. Royal African Society, 2003. - Vol. 102. - pp. 447-467. 2 In Mauritius the Chinese population reached 2530,000, or nearly 3 percent, in Madagascar 18,000 (including children of mixed parentage), and in South Africa 2025,000. Chinese immigration was not significant in any other African country. Pann, Encyclopedia (passim). 3 Madagascar: Cotton and Textile Cotton - Textile Apparel Value Chain Report Madagascar [R] Regional Agricultural Trade Expansion Support Program Nairobi, Kenya . February 2005 p 2. 4 The Kenyan EPZs posted negligible output through to 2000 yet have really taken off since 2001 as a result of AGOA. However, they are still very modest in size with just 36,000 employees by the end of 2003, as reported by the EPZ authority (website: www.epzakenya.com).

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Bank working paper on EPZs in Africa published by Watson1 does not even mention them. A British government white paper published in 2004 even states that [excepting Mauritius] other African countries such as Zimbabwe, Senegal, Madagascar and Cameroon have failed to benefit substantially from EPZs 2 Yet the Zone Franche has developed quite remarkably in just one decade: It has gained considerable ground in terms of exports and formal employment, making a significant contribution to the economic upturn observed in the second half of the 1990s. The open political conflict that followed the disputed presidential election in December 2001 had a drastic effect on the Zone Franche3. In the first half of 2002, the island was hard hit by the split in the government4, the capital Antananarivo (where most Zone Franche companies were established) being blockaded and a general strike (see Raison-Jourde & Raison 20025; Roubaud, 20026). Although the crisis came to a peaceful conclusion in July 2002, a large number of companies had by then already left for good. Preliminary export and employment figure estimates for 2004 suggest that business has returned to its precrisis levels. The Zone Franche association reports that there were 180 firms in business with over 100,000 employees at the end of 2004. Of these, 124 were textile companies, 12 were food companies, and 12 were specialized in information technology.7 Three main factors have been behind the success of the Madagascar EPZs or the Zone Franche since the early 1990s: Low labor costs accompanied by relatively high
1

WATSON, P. (2001). Export processing zones: Has Africa missed the boat? Not yet! [R] World Bank Africa Region Working Paper No. 17. Washington, DC: The World Bank. 2 HM Treasury & Department of Trade and Industry (2004). Trade and the global economy: The role of international trade in productivity, economic reform and growth. Joint Report. London: HM Treasury. 3 International Monetary Fund (2003). Madagascar: Selected issues and statistical appendix. IMF Country Report No. 03/7. Washington, DC: IMF. 4 Historical background of the political crisis in 2002: In December 2001, a presFDIntial election was held in which both major candidates claimed victory. The Ministry of the Interior declared incumbent Ratsiraka of the AREMA party victorious. Marc Ravalomanana contested the results and claimed victory. A political crisis followed in which Ratsiraka supporters cut major transport routes from the primary port city to the capital city, a stronghold of Ravalomanana support. Sporadic violence and consFDIrable economic disruption continued until July 2002, when Ratsiraka and several of his prominent supporters fled to exile in France. Source: Background note on Madagascar, [W/OL] Website: United States Government, January 19, 2012, Bureau of Africa Affairs, http://www.state.gov/r/pa/ei/bgn/5460.htm last accessed 30/03/2012. 5 RAISON-JOURDE, F., & RAISON, J.-P. (2002). Madagascar, les urnes et la rue. Politique africaine, 86(juin), numro spcial. 6 ROUBAUD, F. (Ed.) (2002). Madagascar aprs la tourmente: regards sur dix ans de transitions politique et conomique, Afrique contemporaine, 202203, avril septembre, numro spcial. 7 CLING JEAN-PIERRE, RAZAFINDRAKOTO MIREILLE, ROUBAUD FRANCOIS. Export processing zones in Madagascar: A Success Story Under Threat [J] World Development 33(5). 2005:785803, Document de travail DIAL / Unit de Recherche CIPRE Mars 2004 Accessible at http://www.dial.prd.fr/dial_publications/PDF/Doc_travail/2004-02.pdf (accessed 07/02/2012)

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productivity, an attractive policy for foreign investment with the introduction of a highly advantageous tax and customs scheme, and the granting of trade preferences by the European Union and the United States of America, which has increased Madagascars competitiveness over its competitors. A number of particularities provide additional reasons for the Madagascar success. These are, in particular, historical (presence of a large French community, which has contributed to the magnitude of French investments), cultural (national textile tradition), and geographic (close to Mauritius, one of the leading investors1). Given these circumstances, the Zone Franche has been the main driving force behind employment and export growth over the last 10 years and has made a major contribution to the economic upturn observed since 1995 after a long recession period. Although the Madagascar Zone Franche is a highly specific case in that it is the only successful EPZ in an African LDC, our analysis shows that its characteristics are similar to those usually observed on other continents. Specialization in virtually one single product (apparel) goes hand in hand with the Zone Franches growing and currently decisive weight in the countrys exports. The Zone Franche has hence set the economy on the road to industrialization. This success may eventually meet its limits in the absence of clear prospects for the diversification of exports outside of the Zone Franche, consistent with a scenario often observed in the small countries2. The Zone Franche, whose effect is geographically highly targeted (concentrated essentially in the capital), is also a factor for rising inequalities. Yet despite notinconsiderable spillover effects, it represents too small a weight to have a significant impact on poverty reduction. The workforce is made up mainly of young low-skilled women who, on average, do not stay in the company very long. However, there is no suggestion that the strong demographic dynamic and the youth of the firms are the result of a deliberate high staff turnover policy. Moreover, despite particularly long
1

In recent years, the Chinese in Mauritius have been actively exploring business opportunities in Southern Africa, where they may run into a growing number of Taiwanese and Hong Kong businesses that are investing in Lesotho, Madagascar, and South Africa. the Mauritian case can be seen as an extra-Asian example of the global reach of Chinese business networks, and even evidence of the growing transnationalism of domestic capital in the Third World (as Mauritian investors expand their investments in nearby Madagascar). See BRAUTIGAM DEBORAH Close Encounters: Chinese Business Networks as Industrial Catalysts in Sub-Saharan Africa [J]. Royal African Society, 102.2003:447-467. P449-461. 2 SCHRANK, A. (2001). Export processing zones: Free market islands or bridges to structural transformation? Development Policy Review, 19(2), 223242.

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working hours a priori rather incompatible with family life, married women with or without children do not appear to be excluded from the Madagascar EPZ companies 1 contrary to observations in other countries. The 2002 political crisis2 highlighted the vulnerability of the Zone Franche system. Given that investment in this sector is relatively light and hence conducive to quick profits, companies can easily pull out whenever there is the slightest political, economic, or social problem. For this reason, Winters, McCulloch, and McKay (2004)3 consider that the EPZs constitute an example of liberalization that increases household vulnerability. Yet although the EPZ firms were the hardest hit by the crisis, the latest information available shows that they have also been the most buoyant since4. Unfortunately, the firms were hit again by the political crisis in 2009 and the subsequent sanctions from the US on AGOA. The textile industry and flying-geese model of industrialization Madagascars integrated cotton textile industry and the abundant land and human resources it possesses are considered as a key asset to elevate the country as a major player in the textile trade. The country does have infrastructural constraints, like all LDCs, which tend to affect investment projects. But this is not seen as an insurmountable problem considering the magnitude of growth it has registered and the amount of foreign investments it has been able to attract during the few years before the political crisis in 2002. The caliber of investors that have delocalized in Madagascar is another factor supporting this positive view. Two years after the international community recognized the administration of President Ravalomanana as the legitimate government of Madagascar, the country appeared to be stabilized. Business was on the increase. In 2003, Madagascar was the fourth largest exporter of
1

GLICK, P. J., & ROUBAUD, F. (2004). Export processing zone expansion in an African country. What are the labour market and gender impacts? DIALWorking Paper No. DT/2004/15. Paris: DIAL. 2 Historical background of the political crisis in 2002: In December 2001, a presidential election was held in which both major candidates claimed victory. The Ministry of the Interior declared incumbent Ratsiraka of the AREMA party victorious. Marc Ravalomanana contested the results and claimed victory. A political crisis followed in which Ratsiraka supporters cut major transport routes from the primary port city to the capital city, a stronghold of Ravalomanana support. Sporadic violence and considerable economic disruption continued until July 2002, when Ratsiraka and several of his prominent supporters fled to exile in France. Source: Background note on Madagascar, [W/OL] Website: United States Government, January 19, 2012, Bureau of Africa Affairs, http://www.state.gov/r/pa/ei/bgn/5460.htm last accessed 30/03/2012. 3 WINTERS, L. A., McCULLOCH, N., & McKAY, A. (2004). Trade liberalization and poverty: The evidence so far. Journal of Economic Literature, XLII(March), 72115. 4 JEAN-PIERRE CLING, MIREILLE RAZAFINDRAKOTO, FRANCOIS ROUBAUD. Export processing zones in Madagascar: A Success Story Under Threat [J] World Development 33(5). 2005:785803, Document de travail DIAL / Unit de Recherche CIPRE Mars 2004 Accessible at http://www.dial.prd.fr/dial_publications/PDF/Doc_travail/2004-02.pdf (accessed 07/02/2012). Pp788-800.

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clothing to the US market in terms of volume and the fourth largest in terms of value within AGOA. 1 Furthermore, it is believed that textile is the economic sector that is able simultaneously to alleviate poverty levels the most rapidly in the urban as well as the rural areas. But the ambitions concerning the development of textile should also be gauged against economic reality. One major constraint Madagascar will have to face is in fact, time. With a half year countdown before the abolition of quotas, many investors will most likely wish to hold on to investment plans until the future become more comprehensible. Heavy investments in textile manufacturing are impeded by fundamental factors that are related to political stability history, investment guarantee and factor costs. Unlike garment manufacturing, Madagascars labor wage differential with other countries does not result necessarily in production cost reductions. For one, the share of labor cost is smaller, and, secondly due to the high technical requirements of functions, training is lengthy and heavy expatriate costs will have to be borne before local personnel is trained. Madagascar must work actively to convince the world market that it is committed to expansion of its textiles sector, and in that sense give incentive for more Asian firms especially Chinese ones to delocalize to the island. First, the world market needs to know that Madagascars textile and clothing is working to increase its integration with African suppliers of lint, yarn, and fabric, in order to prepare to meet AGOAs requirements after expiration of the Special Rule. In addition, the world market needs to see that Madagascar is taking steps to improve the competitiveness of its cotton-textiles-clothing sector through improved integration with suppliers and final customers.2 Steps towards industrialization a la flying-geese-model As many Asian countries had already saturated their quotas, the choice of Madagascar helped circumvent the textile quotas imposed by the developed countries under the Multi-fibre arrangement (MFA). Hence, the Central Bank of Madagascar (2002)3 reported that clothing accounted for 90% of the Zone Franches production in

Madagascar: Cotton and Textile Cotton - Textile Apparel Value Chain Report Madagascar [R] Regional Agricultural Trade Expansion Support Program Nairobi, Kenya . February 2005 p 41. 2 Op.Cit. p42. 3 Banque centrale de Madagascar (2002). Rapport annuel 2001. Antananarivo, Madagascar: Banque central de Madagascar.

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2001. Madagascar enjoys duty-free and quota-free access to the European and American markets: Madagascar has been AGOA (African Growth and Opportunity Act) eligible since 2001. Starting in 199798, investments were made in the Zone Franche in anticipation of AGOA (Gibbon, 2003)1. Yet although AGOA authorizes duty-free access to the American market for the products it covers, it imposes restrictive conditions in terms of inputs (third-party fabric provision), which must come either from the United States or other countries benefiting from the agreement. However, Madagascar was granted a dispensation for its clothing sector to use inputs from other countries. In 2004, this was extended through to the end of 2007. Madagascar also benefits from tax-free access to the European market under the terms of the Cotonou Agreement signed between the EU and the ACP (Africa CaribbeanPacific) States and, since 2001, under the Everything But Arms (EBA) initiative covering all LDCs (least developed countries). The rules of origin are particularly strict under these agreements too, especially as regards the EBA. 2 Clothing exports are concentrated on the American and European markets, which are the top two markets worldwide for these products. Sales to the European market grew through to 1998 before stagnating thereafter. Sales to the American market, which were marginal until 2000, then took over due to AGOA and drove growth in the Zone Franche. Madagascar clothing exports to the United States nearly tripled from 1999 to 2001, reaching almost the same level as those to the European Union. Yet although trade preferences played an important role in this trend, they would not have been taken up had it not been for the tax breaks granted under the EPZ scheme. EPZ managers interviewed by several surveys clearly state that they would not have invested in Madagascar had it not been for these advantage. (Cadot & Nasir, 20013; Razafindrakoto & Roubaud, 20024).

Gibbon, P. (2003). The African Growth and Opportunity Act and the global commodity chain for clothing. World Development, 31(11), 18091827. 2 JEAN-PIERRE CLING, MIREILLE RAZAFINDRAKOTO, FRANCOIS ROUBAUD. Export processing zones in Madagascar: A Success Story Under Threat [J] World Development 33(5). 2005:785803, Document de travail DIAL / Unit de Recherche CIPRE Mars 2004 Accessible at http://www.dial.prd.fr/dial_publications/PDF/Doc_travail/2004-02.pdf (accessed 07/02/2012) pp787-788. 3 CADOT, O., & NASIR, J. (2001). Incentives and obstacles to growth: Lessons from manufacturing case studies in Madagascar. Regional Program on Enterprise Development, Discussion Paper No. 117. Washington, DC: The World Bank. 4 RAZAFINDRAKOTO, M., & ROUBAUD, F. (2002). Les entreprises franches a` Madagascar: Atouts et contraintes dune insertion mondiale russie. Afrique contemporaine, 202203(avrilseptembre), 147163.

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The answers given by Zone Franche company heads interviewed for the 1998 industrial survey show that 66% of Zone Franche companies, accounting for 87% of exports, would not have been created had it not been for the special scheme (Razafindrakoto & Roubaud, 20021). This observation reinforces the argument that developing an industry through FDI requires identifying and developing comparative advantages, in order to create in term industrialization a la flying-geese model (see chapter 3.2 Flying-geese model). According to estimates by Roger Zacaropoulos, who runs a consultancy firm specialized in the textile sector, the manufacturing cost of a product in Madagascar amounts to 7 cents per minute.2 This price is very competitive internationally, especially because of the recent rise in wages in Asia. And this is one of the comparative advantages mentioned above. Madagascar must take advantage of this situation to present itself as an alternative, between the ultra-short European tour and Asia. Besides the price, it is the quality and skill of its workforce that Madagascar should highlight to demonstrate its competitiveness. The country responds more to social and environmental standards in force and has few raw materials, which is important in times of rising prices like the one that hit the cotton and cashmere. On the other hand, there are challenges and constraints coming from the multilateral trade context. Madagascars success in attracting investment in the Textile and Clothing Industry and its capacity to penetrate the EU and US results from the preference it enjoys being exempted from MFA provisions. The phasing-out of the MFA in 2004 will erode this comparative advantage and provoke a dramatic change in international competition. Negotiations for further tariff cuts within the WTO constitute an additional threat for its competitiveness. That is the reason why apparel producers in Madagascar should consider diversification into exports of synthetic apparel (including poly-cotton) as a strategic option for maximizing post-2004 preferential tariffs. There is some specific product diversification opportunities that apparel firms in Madagascar should consider in light of the January 1, 2005 quota elimination which highlight the potential for those firms to position themselves in the US and EU markets advantageously in response to rapidly changing market trends.
1 2

Ibid. LISANN, Textile : Madagascar est en train de redresser la barre. Les Nouvelles, 05/04/2011 accessible at http://www.textile-mada.com/telecharger/articles-presses-etoi.pdf last accessed 28/03/2012.

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The success of the Zone Franche has enabled Madagascar to join the select club of countries receiving direct investment in the clothing sector. Generally speaking, the Zone Franches continued growth in Madagascar will depend in the long run on whether its costs remain competitive and whether it continues to benefit from the current preferential conditions of access to the leading markets. There is probably no call for concern as regards the first point, given the tax advantages granted Zone Franche companies and the current low labor costs, which guarantee a substantial competitive margin even though the business environment remains difficult1 The main threat facing the Zone Franche comes in the form of the change on the international trade scene. In the short run, the final dismantling of MFA customs quotas on January 1, 2005 will mainly benefit the Asian countries and especially China, which has been a member of the WTO since 2001, and will have a negative impact on poor countries such as Madagascar (Mattoo, Roy, & Subramanian, 20032; Nordas, 20043). Yet although one of the main incentives for Asian investment in the Zone Franche will no longer exist (the Asians are cashing in on the current situation to strengthen their sales networks on the American market), it is important to note that the Zone Franche will continue to benefit from duty-free access to the US and EU markets, which is not the case for Asian exporters.4 Yet in the medium run, these preferences are under threat since Madagascar has only been granted temporary exemption from AGOAs rules of origin and the Cotonou agreement is being revised5. Madagascar will have to adjust to satisfy the rules of origin requirements imposed by the United States of America and the European Union and hold onto preferential access to their markets. This provides

1
2

CADOT, O., & NASIR.Op.Cit; MATTOO, A., ROY D., & SUBRAMANIAN, A. (2003). The Africa Growth and Opportunity Act and its rules of origin: Generosity undermined? World Economy, 26, 829851. 3 NORDAS, H. K. (2004). The global textile and clothing industry post the Agreement on Textiles and Clothing. World Trade Organization Discussion Paper No.5. Geneva: WTO. 4 In addition, the Zone Franche will benefit from the WTO Agreement on Subsidies and Countervailing Measures (ASCM). This agreement prohibits export subsidies for countries with a per capita income exceeding 1,000 dollars (the agreement has been in force since 2003, but several countries, including Mauritius, have been granted exemption through to 2007). Madagascar does not fit into this category of excluded countries. In the long run, the application of this agreement will strengthen Madagascars competitiveness, as most of the EPZs in competing countries are likely to disappear or at least withdraw their main tax incentive schemes. 5 The obligation to respect the AGOA rules in the long run by importing inputs from other African suppliers would generate extra costs compared with the EPZs current Asian suppliers. Furthermore, like the other ACP countries, Madagascar will only benefit from the Cotonou Agreement as of 2008 if it signs an Economic Partnership Agreement with the European Union. Failing this, it will be offered the less advantageous conditions of the EBA initiative.

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a good opportunity for developing an internationally competitive cotton industry in Madagascar, which would call for major reorganization in the sector1. The success of the Zone Franche is therefore under threat from other factors than the recent political upheaval. Political sanctions as well as the very nature of the PTAs as time-limited institutions are to be blamed. Beyond the case of Madagascar, the Zone Franches success has added fuel to the idea that using EPZs to develop a productive manufacturing base is a possible path for African countries. The undermining of this success story would be fraught with repercussions and lessons since it would force Madagascar to develop an alternative growth model. The political and economic sanctions subsequent to the political crisis in 2009 and their effects on the textile industry In 2008, the Madagascar export textiles and clothing was USD 617 million, which represents over 70% of exports from the free zone companies and 53.2% of total exports. Over 85% of the country's textile exports were destined for the U.S., which generated a value of nearly USD 324 million. AGOA allows African countries to export a variety of textile, food and other products to the United States free of tariffs. Madagascar was suspended from AGOA in 2009 following the sudden change of power between former President Marc Ravalomanana and Andry Rajoelina his successor, the U.S. government has called illegitimate and unconstitutional.2 The background note of the US government stipulates: On March 17, 2009, democratically elected President Marc Ravalomanana stepped down and purported to transfer his authority to a senior military figure, who in turn purported to confer the presidency on opposition leader Andry Rajoelina, who is currently heading the self-proclaimed High Transitional Authority (HAT). The United States characterized the transfer of power as tantamount to a military coup d'tat and does not recognize the HAT. References to de facto government officials in this text do not reflect U.S. recognition of the HAT regime.3
1

Integrated Framework (2003). Madagascar. Diagnostic trade integration study, Vol. 1. Draft, August 15. Available from http://www.integratedframework.org. 2 U.S. Position on World Banks Investment in Madagascars Third Environmental Program Support Project [W/OL] Website US Treasury http://www.treasury.gov/resource-center/international/developmentbanks/Documents/US%20%20Position%20on%20Proposed%20Madagascar%20Third%20Environmental %20Support%20Project.pdf last accessed 31/03/2012 3 Background note on Madagascar, [W/OL] Website: United States Government, January 19, 2012, Bureau of Africa Affairs, http://www.state.gov/r/pa/ei/bgn/5460.htm last accessed 30/03/2012.

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A statement from the U.S. Embassy in Antananarivo reported in January 2012 that Madagascar was still not in the list of beneficiaries of AGOA benefits because she did not meet criteria eligibility of countries regarding the defense and promotion of human rights, maintaining the rule of law, the fight against corruption and the fight against child labor. Yet U.S. officials view economic and political development as being intertwined and emphasize the need for democratic norms to be met in order to enjoy the trade benefits.1 Therefore the Obama administration has decided to suspend trade benefits granted under the African Growth and Opportunity Act (AGOA) for Guinea, Niger and Madagascar, citing a lack of democratic progress, which is a primary criterion for eligibility in the program. At the same time, it is reinstating Mauritania in recognition of democratic elections that replaced a government which came to power through a 2008 military coup.2 "The main point of AGOA is to reward countries that perform well," Anthony Newton, the director of the economic policy staff in the State Department's Bureau of African Affairs, told America.gov December 24."The country that demonstrates good governance and respects democratic norms is certainly more liable to have good economic policies as well," Newton said. The government is responsible "for society and the economy as a whole," he said. Newton said the decision to suspend Madagascar was "fairly complicated," since a democracy-restoration process had been launched in the country following its March 2009 coup, including the installation of a transitional government and elections proposed for 2010. "The process was full of fits and starts ... but in general it was moving forward," Newton said. However, over the last two weeks interim President Andry Rajoelina has "subverted the process" and barred political opposition leaders from the country. "In light of all that, we have taken the decision to suspend or to terminate Madagascar's eligibility. We didn't do this lightly," Newton said.
1

Three countries suspended from AGOA, [W/OL] Webpage: AGOA.info Date: 2009-12-24 | Source: America.gov (Washington, DC) http://agoa.info/?view=.&story=news&subtext=1189 last accessed 28/03/2012 2 Ibid.

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"The point is that governments that don't demonstrate good governance or adherence to democratic norms, unfortunately, find themselves in the position of being terminated," he said. "AGOA isn't just an economic incentive program. It has its political components as well." Mauritania's restoration to AGOA comes after it successfully replaced the government formed by its August 2008 military coup with a transition government and democratic elections held in July. Mauritania "did what we were hoping Madagascar would do," Newton said. "The coup government was replaced by a transition government which then had democratic elections." When U.S. officials perform their annual review to determine eligibility for AGOA, "we're not totally inflexible," Newton said, pointing to the fact that Mauritania's elected president, Mohamed Ould Abdel Aziz, was actually a leader of the 2008 coup. "If something bad happens, if there is a coup, but a country is able to right itself and put itself back on a certain path moving back toward democracy, we take that under consideration and we give credit where credit is due," he said. (emphasis added)1 As this US government official pointed out, the restoration of Madagascars eligibility in the AGOA is a matter of respect of the democratic norm, and only by following the path back to democracy can Madagascars textile industry enjoy the benefits of the PTA. It is also a an empirical proof that PTAs in this case the African Growth Opportunity Act, AGOA- as structural social networks (see chapter 3.3 Network Theory: networks as structure), do not necessarily attenuate negative political sanctions from the most powerful state in terms of economic and social power2, although Hafner-Burton and Montgomerys analysis may say that the social powers of states do not equate their economic power. Their argument implies that
1

Three countries suspended from AGOA, [W/OL] Webpage: AGOA.info Date: 2009-12-24 | Source: America.gov (Washington, DC) http://agoa.info/?view=.&story=news&subtext=1189 last accessed 28/03/2012 2 While states material power is determined by the relative size of their material capital, social power is determined by the relative social capital created by and accessed through ties with other states in the international system such as ties through mutual membership in PTAs. HAFNER-BURTON and MONTGOMERY Op.Cit. p25.

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economically disadvantaged states are making up for relative disparities in material power through rising social power in the network of PTAs, which gives them some new advantages. Although trade is dividing the world into haves and have-nots, PTAs can be a vehicle of social power for states otherwise disenfranchised materially by globalization, although the middle states benefit most; while the distribution of social power through PTAs may be more equitable, it is far from a level playing field (Hafner-Burton 2005; Hafner-Burton and Montgomery 20061). In the case of Madagascar, the non-respect of the democratic norm was the most significant element to the United States, thus causing the latter to sanction the former, and putting an end to what could have been a success story in the textile industry. Due to the suspension of Madagascar to the AGOA, Madagascars export of textile products, which amounted to 211 million USD in 2009, dropped to only 54 million USD in 2010. The World Bank statistics showed that 42% of export earnings of all textile exporting countries of the Indian Ocean were generated by industries from Madagascar while she benefited from AGOA, but the addition of Madagascar has declined to less 10% after suspension from AGOA. In addition, the suspension of AGOA has forced hundreds of free enterprises and textile industries Madagascar to close their doors and has caused the loss of nearly 25,000 direct jobs.2 All AGOA countries are reviewed for eligibility every year. Newton said the suspended countries could be restored before the end of 2010 if they show pronounced improvement, but suspensions occur only on an annual basis. But Madagascars restoration is far from being granted. Interviewed by the press group Ma-LAZA, the Charge dAffaires of the United States Eric Wong said: For there to be recognition of the regime will require a democratically elected government. To do this, one possible way: fair elections, free and transparent. This requires the establishment of an environment of reconciliation and inclusiveness conducive to the installation of a rule of law. Respect for human rights is also important for the re-launch of the AGOA program, suspended since 2009.3
1 2

. HAFNER-BURTON and MONTGOMERY Op Cit. p Madagascar: une hausse de 20% en volume pour le textile en 2011. [W/OL] Webpage: Afriqueinfos Lundi 6 fvrier 2012 accessible at http://www.afriquinfos.com/articles/2012/2/6/afrique-australe-196167.asp last accessed 28/03/2012 3 Claudia R. Amnistie: Eric Wong explique la position des USA (Amnisty : Eric Wong explains the position of the US) [W/OL] Website: Ma-TV 8 fvr. 2012 http://www.matv.mg/?p=37660 last accessed 31/03/2012

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So far, some positive signs have already been seen. For example, on September 17, 2011, representatives of most of Madagascar's major political factions signed a "Roadmap for Ending the Crisis in Madagascar," endorsed by the Southern African Development Community (SADC), which aimed at ending the long political crisis through the formation of a more neutral, power-sharing interim government that would prepare the country for elections. With regards to the 2009 political crisis, it is interesting to make a comparison between the attitudes of the United States and China, knowing that the political sanction from the US condemned the success story of the Malagasy textile industry to come to a halt. Comparison between the United States and Chinese political stance on Madagascar 2009 crisis and their consequence on the economy. With regards to the relations between China and Madagascar during the Transitional Regime, which is after the 2009 political crisis, the coherence of Chinese diplomacy is being put to test. China had to say No to political interference and Yes to technical continuity. 1 Refusing any interference in internal matters is a pillar of Chinese diplomacy. Distinguishing Chinese engagement around the world is Chinas respect of sovereign autonomy, underlining a strict policy of non-interference in another nations affairs in stark contrast to Western reforms-for-funds policies. This double-edged sword has proved problematic in Africa, especially in case when a despotic ruler plunders strategic national resources and violates basic civil rights, while at the same time still receiving economic assistance from China as other countries opted for boycotts or embargoes. It becomes increasingly difficult to maintain this position vis--vis the rest of the international community and China goes out of its way to show solidarity with the latter as soon as the protection of its strategic rights does not prevent it from doing so. Madagascar does not belong among strategic states in the eyes of the Chinese government and it has to be said that China has followed to the letter the position of the international community, ever since sanctions were imposed on the transitional regime in 2009. Numerous examples of this can be cited: at the time of the Sharm- elSheikh Africa-China Summit meeting in December 2009 China demanded from the
1

PELLERIN, MATHIEU The Recent Blossoming in Relations between China and Madagascar [A] IFRI Sub Saharan Africa Program February 2012 p.13-14 accessible at http://www.ifri.org/?page=detailcontribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/2012

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HAT regime that neither the President nor any minister should come to represent Madagascar. So the Madagascan ambassador in China, Victor Sikonina, and a delegation of technicians were invited. By the same token no minister was invited to the celebrations for Chinas National Day on October 1st in Antananarivo, only minor officials. This wish not to place itself on the fringes of the international community was clearly manifested throughout 2010, during which China was never represented at functions organized by the HAT, unlike most of the other bilateral players including France, the United States, Japan or Germany. The celebration for exchanging good wishes for the New Year at the beginning of 2011 confirmed this trend: Chinese diplomats fell into line with Western chancelleries and did not participate. Earlier in the year the Chinese stayed away from the ceremony for the proclamation of the fourth Republic, the celebration for National Day on June 26th and also the meeting called for the announcement of information about the draft for the Constitution to be put to a referendum at the end of the year. This lack of representation by Chinese diplomats or the decision not to invite members of the HAT should not be understood as the expression of a sanction with regard to the transitional regime or as Chinas adoption of a stand different from that of the rest of the international community, but rather as the manifestation of a position of non-interference adopted by China. The Chinese embassy also makes a point of never commenting on the political situation in Madagascar, especially on the question as to how legitimate or not the current regime is. When a ceremony was held to commemorate the 61st anniversary of the founding of the Republic of China in September 2010, the then Chinese charg daffaires, Shen Yongxiang merely welcomed the sincere and friendly co-operation between the two countries without making any reference to the context of transition and the lack of international recognition for the HAT. This policy of political non-interference is a norm in Chinese Foreign Policy and its consistency is playing in favor of China. Since it does not interfere in internal political affairs, China is thus able to pursue its bilateral technical co-operation with any regime whatsoever. All the co-operation programs China was involved in before 2009 are still ongoing. The same applies to training programs in the fields of health and education or the sending of Madagascan diplomatic personnel to China. Co-operation programs between the Chinese and
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Madagascan police forces and armies are also continuing, albeit at a slower pace. Donations of military equipment have not been interrupted either. In February 2009, when President Ravalomanana had had to confront the opposition movement led by the current president of the transitional regime, China made deliveries of equipment for maintaining public order. It is that same President of the transitional regime who is today availing himself of those donations. So political non-interference and neutral technical pragmatism are the order of the day. Even so, China has encouraged a re-adjustment of the trade balance with Madagascar, agreeing in May 2010 that products exported to China should not be subjected to any customs dues. This respect of previously agreed PTAs regardless of the political situation is a sign of coherence in Chinese foreign policy and respect of the norm of non-intervention in internal affairs. While at the insistence of other backers urgent donations and those of a humanitarian character have continued, this is also the case for all the cooperation programs. A donation of 3 million yuan has thus been approved for the principal Chinese co-operation project Riz Hybride, while missions for traditional Chinese medicine continued. According to Mathieu Pellerin, the coherence of Chinese diplomacy has, however, been undermined somewhat by certain actions. An official from Madagascars Ministry of Foreign Affairs has indeed noted a slight shift on the part of the Chinese: Before the crisis, unlike all the other backers, it was China who used to propose cooperation programs. Now, since the crisis began, China has refused certain requests for co-operation programs. Being no doubt aware that the decision to continue providing technical support might arouse the anger of its international partners, China is therefore seeking to keep them on side by shortening sail slightly. Reduction of the volume of financial support for technical co-operation also testifies to this trend. According to some sources, China may even have decided to cancel a major financial aid previously granted to the transitional regime.1 This insinuation made by Mathieu Pellerin is somewhat overstated, especially with regards to investments. According to the first secretary of the Chinese embassy in Madagascar, Pan Huanyou2, Despite the political crisis, the projects signed with the former government will be realized when the political situation normalizes: for
1 2

PELLERIN, MATHIEU p.13-14 Op. Cit. Interview, January 12th, 2012, Chinese Embassy in Madagascar, Nanisana Ambatobe Antananarivo. Translated from French.

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instance we are talking about lights for the roads, public hospitals and primary schoolsFor now, we are still struggling with administrative problems concerning big projects like the construction of a public hospital. It being a government-togovernment project, the material imported from China should be free of taxes, which is not the case yet otherwise the cost of the project will be much higher than the initially estimated 700.000USD. Concerning new projects, they will be studied after the elections. As a matter of fact, as soon as the political crisis seemed to resolve itself, the Chinese Charge daffaires in charge of Madagascar, Shen Yongxian, was reappointed as official ambassador of China in Madagascar, on March 14th, 2012. According to local press, this gesture of the PRC coincides with the outcome of the problem with the amnesty, the key step that will allow the Big Island to lead the organization of free and transparent elections1.Shen Yongxiang emphasized that these pending projects affect the hydroelectric field, access to clean water and new energy. He declared to the local press that "A meeting between China and other ministries should be held to discuss in detail the technical and financial support for the implementation of these projects,"2. On the US side, so far the US did not make any move towards recognition of the HAT, putting off any hope of return to the normalcy of the relations between the two governments, as well as the hope for a continuation of the AGOA in the short term. Prospects for the textile industry A six-month crisis of political transition cost the Malagasy economy 12% of its GDP in 2002. It took three years after that to show positive signs that Madagascars garment export industry was once again gearing up for increased activity. Still, already in 2003, Madagascar was the fourth largest exporter of clothing to the U.S. market in terms of volume and the fourth largest in terms of value.3
1

Ambassade de Chine Antananarivo: Shen Yongxiang, nouvel ambassadeur (Chinese embassy in Antananarivo : Shen Yongxian, new embassador)[W/OL] Website: La gazette de la Grande Ile, March 14th, 2012. 2012. http://www.lagazette-dgi.com/index.php?option=com_content&view=article&id=20413:ambassade-de-chine-aantananarivo-shen-yongxiang-nouvel-ambassadeur&catid=64:newsflash&Itemid=67 last access 30.03.2012 2 RABESETRA HERITIANA Coopration :Les Chinois reviennent. L'ambassadeur chinois a remis les copies figures de ses lettres de crance, hier. La coopration avec la Grande Ile continue. (Cooperation: the Chinese are back The Chinese ambassador gave a copy of figured his credentials yesterday. Cooperation continues with the Big Island.) [W/OL], Website: Lexpress de Madagascar, March 15th, 2012. http://lexpress.haisoft.mg/cooperationmadagascar/32845-les-chinois-reviennent.html last accessed 30.03.2012 3 Madagascar: Cotton and Textile Cotton - Textile Apparel Value Chain Report Madagascar February 2005 Regional Agricultural Trade Expansion Support Program Nairobi, Kenya [R] p2.

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A former owner of a textile EPZ that closed following the 2002 political crisis is very pessimistic on the prospects of the textile industry: The textile sector was sacrificed. Despite the global dynamic that inscribed Madagascar in the logic of textile production, the investors from Hong Kong that could have made the future of Malagasy textile industry left. They had already started to leave China 15 years ago to move first to the South East Asia and the Indian Ocean, Mauritius and Madagascar. Textiles through PTAs like the AGOA and EUR1 could easily create one million jobs, without the slowdown of 2007 and the policy of American sanctions. Now to take advantage of Malagasy workers low wages, some Chinese companies established in Mauritius import Malagasy workers to Mauritius. Like the Arab Spring made investors leave North Africa, Madagascar's chance to get rich by industrialization has passed. 1 In the wake of this new political crisis, and after three years of hold, other actors of the sector still have hope for a continuation of the success story of the textile industry. South Africa: A New Market: the importance of regionalization in the FGM Regarding opportunities, Madagascars trade policy is patterned along the framework of regional agreements which have been signed with COMESA (Common Market for Eastern & Southern Africa), SADC and Indian Ocean Commission. At the bottom of these agreements is a tariff reform program. Madagascar is one of the 11 countries which have reduced tariff on intra-COMESA trade to zero. Madagascar may have lost the U.S. market with the suspension of the AGOA, which cost the country the loss of thousands of jobs, but it continues to have preferential access to European market, that is to say, exempt from quota and tariffs, which usually amounted to 12%. However, it is towards the regional market that Madagascar can expect the greatest expansion, according to Frederic Nibo, member of the Grouping of Free Enterprises and Partners (GEFP).2 Being a member of SADC makes it possible to avoid the 40% tariff that South Africa requires to textile imports. In SADC Madagascar is committed to the time for reduction of intra-regional tariffs to zero by
1 2

Interview via email, Antananarivo 14 March 2012. LISANN, Textile : Madagascar est en train de redresser la barre. Les Nouvelles, 05/04/2011 accessible at http://www.textile-mada.com/telecharger/articles-presses-etoi.pdf last accessed 28/03/2012.

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2012. The problem is, the membership of Madagascar to the SADC is on hold given the political crisis of 2009. Despite the fact that the SADC is very much involved in the process of normalization of the political situation and the organization of elections in Madagascar. Madagascar benefitting from preferential access to this market represents a real potential. For Frederic Nibo, it is to this market and that of other countries in the SADC, COMESA and of the Indian Ocean that operators have an incentive to turn to wider markets. This strategy goes in line with the importance of regional integration and turn to regional markets in the industrialization process a la FGM. The contractor has also expressed his hope that Madagascars eligibility to the AGOA returns and the jobs lost since recovered after the implementation of the roadmap and good political developments. In the line of the importance of regional institutions in an industrialization process a la FGM, Madagascar joined some regional institutions such as SADC, COMESA, the Indian Ocean Commission (IOC), and the Indian Ocean RimAssociation for Regional Co-operation (IOR-ARC), and has been part of the Cross Border Initiative (ITF / CBI) since its launch. Besides adherence to regional institutions, the eligibility of Madagascar as part of the Africa Bill for a period of eight years is an advantage that adds to the country's participation in "Cotonou Agreement" along with other ACP countries. Thus, the country benefits from a duty free and quota free (on different goods, especially textiles) in the U.S. market, which can presage an increase of export volume. The textile sector still has some weaknesses to overcome. According to Roger Zacaropoulos, the first obstacle is the remoteness of Madagascar compared to its major markets. This disadvantage is compounded by problems of maritime logistics. Indeed, shipments must pass through Mauritius, from which the largest container ships. This lack of direct maritime shipping prolongs delivery time, and therefore represents a lack of competitiveness. The second problem is the still incomplete state of the industry Madagascar textile and clothing. Even if it is more complete than those that can be found in North Africa for example, it does not equal global chains operating in Asia and Turkey.1
1

LISANN, Textile : Madagascar est en train de redresser la barre. Les Nouvelles, 05/04/2011 accessible at http://www.textile-mada.com/telecharger/articles-presses-etoi.pdf last accessed 28/03/2012.

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The Chair of Textile Mada Group, Sandrine Duglat, said that 85% of Madagascar exports in textile products are being sent to Europe, while 15% are to South Africa, and the country is also currently in the process of implementing its export to Eastern Europe. Also, the Madagascar government and GEFP expect to create 200.000 jobs between 2011 and 2016, a bold estimate compared to the 100,000 jobs creation recorded in 2010.The tax provisions, which governs the EPZ in Madagascar, also places a flat tax on transfers, a zero registration fee, a zero tax to value added (TVA) on imports and exports, an exemption of customs duties and import taxes, and a more simplified export procedure.1 The recommendations of the study on the textile and apparel value chain report on Madagascar include elements of a plan to increase Madagascar firms integration with African suppliers of raw materials. Here are those recommendations: Privatization of a significant share of HASYMA (Malagasy Cotton Industry) in order to reinvigorate raw cotton production in Madagascar (under way).
-

Rapid implementation of an aggressive research, extension, input

supply, marketing, and investment campaign by the new majority shareholder of HASYMA to make cotton an attractive option once again for peasant farmers, and thus to expand production.
-

Market development assistance to Madagascar textile and clothing

companies to develop commercial relations with other African suppliers of lint, yarn, and fabric.
-

Elaboration of a promotion plan to attract foreign investment in Establishment of a modern workforce development program:

expanded spinning, weaving, knitting, dyeing capacity in Madagascar.

-

Workforce development in the textiles sector should address the skills and training needs of middle- and high skilled textile/clothing sector workers, in order to help Madagascar participate more fully in the benefits of expanded textiles activity. Implementation by government of pro-market policies in the areas of Institutions (e.g. customs modernization),

Ibid.

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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

Trade rules (e.g. inspection), Taxation, and Infrastructure development (e.g. priority rail line modernization, port modernization, reduction in electricity costs), to ensure that Madagascar is competitive in terms of competitive unit costs, sufficient volumes that can be delivered to world markets, and lead times that are as short as possible. The important progress that is already being made by the government on these issues should be publicized as visibly as possible in the global trade press.
-

Diversification Garment producers in Madagascar should take the

opportunity to consider diversifying into synthetic apparel exports (including poly-cotton) in order to maximize post-2004 tariff preferences. While diversification presents one strategic option to help apparel producers in Madagascar along the path to long term sustainable export growth, it also presents a challenge. All countries and industries have inherent strengths and comparative advantages.
-

A cluster development strategy

Madagascar currently supports three key elements of a vertical textiles chain, i.e. seed cotton production and ginning, spinning and weaving/spinning and knitting, and garment assembly. These are currently supported by suppliers of logistics and energy. Professional associations Madagascar: Baseline Study and Market Assessment Cotton and Textile - 43 43that actively represent the interests of producers and logistics companies include both the GEM (Madagascars Enterprise Association) and the GEFP (Association of Duty-Free Enterprises and Partners).
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While the existence of these elements is important, Madagascar does not yet have a fully developed textiles cluster. The availability of key factors such as skilled labor and infrastructure, the degree to which clear signals are given about what consumers are looking for, the presence of globally competitive supplier industries such as machinery and trims manufacturers, and the presence of a corporate culture, style of management, and competitive market environment that promotes innovation and global perspective determine the extent to which a cluster will succeed internationally or not. In the longer run, Madagascars cotton textiles- clothing value-chain will need the support of a more fully developed cluster to succeed.1 As of 2010, the textile industry did receive FDI inflows, and represents 9.1% of the total volume of manufacturing production to foreign direct investment. Summary and concluding remarks Since 1990 Sub-Saharan Africa has almost tripled its exports and diversified its trade partners. Natural resources will clearly continue to be the regions main source of export revenue as global demand grows. But with continued reforms and increasing foreign direct investment going to industries with overt or latent comparative advantages, African economies are likely to become more diversified in the future, with the global demand for nontraditional exports also growing. In Madagascar, structural reforms began in the late 1980s, initially under pressure from international financial institutions. An initial privatization program (1988-1993) and the development of an export processing zone (EPZ) regime in the early 1990s were key milestones in this effort. A period of significant stagnation from 1991-96 was followed by 5 years of solid economic growth and accelerating foreign investment, driven by a second wave of privatizations and EPZ development. Although structural reforms advanced, governance remained weak and perceived corruption in Madagascar was extremely high. During the period of solid growth from 1997 through 2001, poverty levels remained high, especially in rural areas. A 6-month political crisis triggered by a dispute over the outcome of the presidential elections held in December 2001 virtually halted economic activity in the first half of 2002.
1

Madagascar: Cotton and Textile Cotton - Textile Apparel Value Chain Report Madagascar February 2005 Regional Agricultural Trade Expansion Support Program Nairobi, Kenya [R] p41.

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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

Although the Madagascar Zone Franche is a highly specific case in that it is the only successful EPZ in an African LDC, our analysis shows that its characteristics are similar to those usually observed on other continents. Specialization in virtually one single product (apparel) goes hand in hand with the Zone Franches growing and currently decisive weight in the countrys exports. The Zone Franche has hence set the economy on the road to industrialization. This success may eventually meet its limits in the absence of clear prospects for the diversification of exports outside of the Zone Franche, consistent with a scenario often observed in the small countries1. The Zone Franche, whose effect is geographically highly targeted (concentrated essentially in the capital), is also a factor for rising inequalities. The success of the Zone Franche is therefore under threat from other factors than the recent political upheaval. The 2002 political crisis highlighted the vulnerability of the Zone Franche system. Given that investment in this sector is relatively light and hence conducive to quick profits, companies can easily pull out whenever there is the slightest political, economic, or social problem. Beyond the case of Madagascar, the Zone Franches success has added fuel to the idea that using EPZs to develop a productive manufacturing base is a possible path for African countries. The potential undermining of this success story would be fraught with repercussions and lessons since it would force Madagascar to develop an alternative growth model. As concluding remarks for this section, it is important to note that many Chinese textile industries stayed in Madagascar despite the subsequent political crises2, among them the Kam Hing group3, which maintained its shipment towards the United States4.
1

SCHRANK, A. (2001). Export processing zones: Free market islands or bridges to structural transformation? Development Policy Review, 19(2), 223242. 2 According to the survey of Foreign investment by National institute of statistics and Central Bank (BCMINSTAT), there are still 4 manufacturing textile and clothing Chinese industries in Madagascar in 2010,who were there since the 1990s and all benefit from the EPZ tax-free zone. 3 Kam Hing International Holdings Limited is a Hong Kong-based corporation listed on the Stock Exchange of Hong Kong and has highly vertically-integrated operations, which include marketing and sales, research and development, production processes including knitting, fabric dyeing and yarn dyeing, and final processing, such as setting and pre-shrinking and garment manufacturing. Kam Hing International Holdings Limited was founded in 1996. The manufacturing base is located in the Panyu district of Guangzhou city, China, with a facilities area of 226,000 sq. metres. To cope with the rising market demand, Kam Hing established a second fabric factory in Enping, Guangdong Province in the PRC. The Group established garment factories in Madagascar and China. In 2008 a new spinning factory has been set up in Hubei Province in the PRC which further strengthen the vertically-integrated operations. Kam Hing has several subsidiaries located in China, Hong Kong, Macau, Singapore, Madagascar and Korea. The finished products are distributed in Hong Kong, Macau, South-East Asia, Europe, Japan, Korea, Africa, the Americas, the South Pacific, South Asia, China and other countries. Kam Hing Group online corporate profile 2009 Brochure. (emphasis added) [W/OL] http://www.kamhingintl.com/en/aboutus/index.htm last accessed 28.03.2012 4 77 shipments of garment from July 2007 to March 2012 to 8 US companies[W/OL] http://panjiva.com/KamHing-Madagascar-SARL/1149781 last accessed 28.03.2012

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Whats more: the group diversified its activities in the country by investing in the extractive industry. It holds 20% capital rights of the Hong Kong Wisco Guanxin which was granted a permit for the exploration and exploitation right of open iron resources in Soalala, Madagascar.1 That deal will be this thesiss second case study, analyzed in the next section. 4.2.2 Case study 2: Wuhan Iron and Steel group to invest in iron ore exploitation in Madagascar In 2010, the Chinese group Wuhan Iron and Steel Co (WISCO) has paid an advance of 100 million USD for a concession on mining of iron ore on the west coast of Madagascar. If deposits are found as large as he hoped, he could invest USD 8 billion, which would be by far the largest foreign direct investment (FDI), made to date in Madagascar.2 The announcement of this great mining deal once more shed the spotlight on Chinese investments in Madagascar and gives momentum to this thesis dissertation. Malagasy people on the street and scholars alike ask themselves the question: is China in Madagascar to reap out the countrys untapped resources? Are Chinese investors really taking advantage of the political crisis or are they the only hope for funds for a country in perpetual political turmoil for the last ten years, and from which most investors have been keeping clear ever since? A tender for this project was launched in 2008 by the Office of the Mining Cadastre in the Ministry of Mines and Hydrocarbons and the authorization given to Wisco is the first issued by the Ministry since the suspension of operating permit September 2009.Wisco funds approximately 2 billion USD as exploration but during this phase, scheduled until 2012, the Malagasy government will negotiate its interests, its level of participation in the capital and the share in production sharing.

Kam Hing International Holdings Limited (HKG:2307) announced that Hong Kong Wisco Guangxin signed the formal contract with the Government of Madagascar for the project and the exploration licence was granted to Hong Kong Wisco Guangxin on 8 May 2010. Trading in shares of the Company will be resumed this morning. Hong Kong Wisco Guangxin is held as to 42% by Wuhan Iron and Steel (Group) Company, 38% by Guangdong Foreign Trade Group Co., Ltd., and 20% by the Group, for the exploration and exploitation right of open iron resources in Soalala, Madagascar, Africa. The project involves an area of more than 430 square kilometers and contains more than 800 million tonnes of reserves available for exploitation for only about one-fourth of the total area. [W/OL] Posted on 5-12-2010 Website Source: Infocast News http://www.chinesestock.org/show.aspx?id=73246&cid=28 accessed on 20/01/2012. 2 Madagascar: un consortium Chinois autorise a exploiter du fer. (Madagascar : a Chinese consortium authorised to exploit iron ore) Copyright Chine Nouvelle (Xinhua) le 26-05-2010 12:27http://www.chineinformations.com/actualite/madagascar-un-consortium-chinois-autorise-a-exploiter-du-fer_20673.html last accessed 28.03.2012

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The president of the HAT, Andry Rajoelina recently announced very publicly in a talk show on a local TV station (the first of the kind in Madagascar where a head of state agreed to answer questions on air) that the deal would bring 100 million USD per year to the country1. According to this interview, the HAT is banking to finance its big projects, amongst which the construction of public hospitals were health care would be free of charge for the public, in the face of abandonment from traditional aid donors and investors like the World Bank or Western countries like France or the United States- who still do not recognize the countrys unconstitutional government so far. In this interview, the president of the HAT Andry Rajoelina declared: This is the first mining deal were the Malagasy people will know exactly the returns will go to We in Madagascar are sleeping on a mattress of mining resources, untapped resources for the country. We are going to change that and make the people take advantage of those resources. We are going to create our wealth with our own resources wealth. And this is possible despite detractors declarations that 3 months after the launch of the Transition government and because 70% of the States budget come from donors aid, and that abandoned from the traditional international partners, the country would go bankrupt it did not. And the state continued to pay the salary of public administration, to make the administration work. 2 The president implied that the returns from previous mining deals like that of cobalt3 or ilmenite exploitation were not accessible to the Transition Government. But he said: the contract of exploitation of iron ore which was signed under the Transition Government will bring about at least 5USD of public tax returns per ton of iron ore extracted that is a financial flow of 100 million USD per year is to be expected starting from 2014 or 2015 form that contract alone. 4 Actually, the president of the HAT had already announced that financial mane in another interview, less publicized, accorded to a French political analyst and

Interview accessible on youtube: http://www.youtube.com/watch?v=TnQS2MmjyMc&feature=related last accessed 28.02.2012 2 Invite du Zoma (Friday Interview) aired March 23, 2012. Translated from Malagasy. Accessible on youtube: http://www.youtube.com/watch?v=TnQS2MmjyMc&feature=related last accessed 28.03.2012 3 The Dynatec Ambatovy project for exploitation of nickel and cobalt is worth 4 billion USD, 4 Ibid.

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published in the journal Revue politique internationale (International political review)1: I am in favor of large multinational companies that invest here, but I will be careful to ensure that they do so under fair conditions. Malagasy people are aware that in the past, entire sections of their national wealth have been delivered, without consideration, to foreign interests. Remember the Daewoo scandal: Ravalomanana had rented for 99 years, half of the country's arable land (1.3 million hectares) to the South Korean company Daewoo, which planned to resell the product in Korea of the corn crop and palm oil. A fool's bargain for the Malagasy, but brought a fortune, now placed somewhere abroad, to my predecessor2! Well, we do not want that. Concessions should bring money to the Malagasy State. The agreement with the Chinese is actually returning each year USD 100 million in public funds. And that shows you are aware that everything is transparent. We need to invent a win-win. We have much to offer companies and countries that want to invest here, but they should come with a healthy state of mind and seek balanced agreements. According to the original statement from the then ministry of Mines, Wisco is committed to creating up to 100,000 employment opportunities for the Malagasy, pending the decision of the Malagasy government on his involvement. In return, the state will receive approximately 228 million USD in royalties and 600 million USD a year in taxes on profits. China is also taking part in the scramble for resources, by the means of the countrys third largest steelmaker Wuhan Iron and Steel, who got clearance from the government to acquire the Soalala iron ore deposit in Madagascar. The project involves an area of more than 430 square kilometers and contains more than 800 million tons of reserves available for exploitation.
3

Soalala is the largest

mining project ever launched in Madagascar, far ahead of the Dynatec Ambatovy

CHAUPRADE AYMERICK, November 30, 2010 - (La Revue politique internationale n129 automne) Posted on December 1st, 2010 http://www.madagate.com/politique-madagascar/dossier/1604-andry-rajoelina-la-verite-sije-mens Last accessed 28.03.2012 2 The Daewoo scandal was actually one decisive reason for the public support of the political coup of 2009. 3 ZHANG QI Wuhan Steel gets green light for Africa ventures[W/OL] (China Daily) Updated: 2010-05-25 09:16 http://www.chinadaily.com.cn/bizchina/2010-05/25/content_9888548.htm accessed on 20/01/2012

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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

project (nickel and cobalt, worth 5.5 billion USD1) and the QMM-Rio Tinto (ilmenite and zircon, worth 1.1 billion USD with 940 million USD invested in Madagascar2). The production of iron concentrate is expected by 2014, and additional investments will be evaluated later, Wisco intending to turn iron on hand to give added value to Madagascar. Wisco plans to export steel billets by 2019 and crude steel thereafter.3 Of course the deal sparked curiosity and scrutiny from local and foreign observers. According to local press articles, Wisco presented an attractive deal to the Malagasy government, by agreeing to transform part of the iron production before exporting. The project involves the construction of a large industrial complex with plants and also places of residence, an investment of USD 1.2 billion. Like the other two giant multinationals exploiting minerals from Madagascar4, Wisco will also build a port whose cost is estimated at USD 4.3 billion and an electricity generating station worth USD 1.8 billion dollars. The local opposition press is full of criticism towards this deal in particular and Chinese involvement in the Malagasy mining industry in general: In September 2009, the Government of the High Authority of Transition (HAT) has decided to suspend the granting of permits for mining operations. Since then, Wisco is the first company to be granted an exploration permit. China is more than ever in a good position to acquire the mining contracts in Madagascar. Beijing does not bother with democratic
1

The Ambatovy Project is a large-tonnage, long-life nickel and cobalt mining enterprise located in Madagascar. At a construction cost of approximately US$5.5 billion, the Project is the largest-ever foreign investment in the country and one of the biggest in sub-Saharan Africa and the Indian Ocean region. Once fully operational, it will have the annual capacity to produce 60,000 tonnes of refined nickel, 5,600 tonnes of cobalt, and 210,000 tonnes of ammonium sulphate fertilizer. Ambatovy is positioned to be among the worlds largest lateritic nickel mines. [W/OL] http://www.ambatovy.com/docs/wp-content/uploads/factsheetVE3_Update04.11.pdf last accessed 03/04/2012 2 QIT Madagascar Minerals (QMM), owned 80% by Rio Tinto and 20% by the Malagasy government, has initiated a process to extract the mineral sands near Fort Dauphin in the southeast end of Madagascar. Over the next 40 years, plans to extract QMM ilmenite and zircon from heavy mineral sands on an area of approximately 6000 hectares along the coast. QMM conducted a study of Social and Environmental Impact Assessment (ESIA) formally between 1998 and 2001. The Government has granted an environmental permit in 2001. The mining project has obtained the investment decision of Rio Tinto in August 2005. Construction began in January 2006 and May 2009, the first shipment of ilmenite was transported from the port Ehoala newly constructed south-west of Fort Dauphin. The total cost of investment in Madagascar and Canada to complete the project is 1.1 billion U.S. dollars, with about 940 million U.S. dollars invested in Madagascar. W/OL] http://www.riotintomadagascar.com/french/aboutQMM.asp Last accessed 03/04/2012. 3 Madagascar: un consortium Chinois autorise a exploiter du fer. (Madagascar : a Chinese consortium authorised to exploit iron ore) Copyright Chine Nouvelle (Xinhua) le 26-05-2010 12:27http://www.chineinformations.com/actualite/madagascar-un-consortium-chinois-autorise-a-exploiter-du-fer_20673.html last accessed 28.03.2012 4 Rio Tinto-Qit Madagascar Minerals for ilmenite on the north coast, and Dynatec-Ambatovy for cobalt and nickel on the east coast.

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principles and would even take advantage of the political situation to expand its investment. As for the HAT, it is trying to break its international isolation by selling the country's wealth to those interested (emphasis added).1 These few lines quoted from a local newspaper were quite provocative and triggered the thinking process that led to the choice of topic for this thesis. Actually the snide comment made by the author on an alleged Chinese disregard for democratic norms and principles made for one aspect of the argument defended by this thesis: Chinas policy of non-interference did not cause China to invest in rogue states, in point of fact despite political tensions with the international community Chinese investors did see an economic opportunity and did not penalize further a country already in economic and political difficulty. Comment: However, Collier and Goderis2 (2008) and Fraser and Lungu3 (2007) note that this commodity fuelled growth can be heavily misleading. In the long-term, rising commodity prices can implicate adverse effects on resource producers. This is especially the case if issues of governance, institutions, rent seeking, and lack of economic diversification are not addressed, and, if only primary commodities are exported as these are subject to volatile prices. This is important as the Sino-African trading relationship is heavily skewed towards resource-based trade and is yet to see more beneficiation and resource value addition. This thus begs the question if China will further perpetuate resource specialization in Africa or contribute to diversification. Commodity prices have historically been cyclical, and many countries have had to deal with the boom-bust scenarios, but may not necessarily have learnt from these. Because the WISCO deal involves transforming the iron ore into iron bullers and crude steel on hand it involves some added value for the country, yet it would better impact on the countrys industrialization process by selling some of the products on the national territory too and at a preferential price. On the Chinese side, Wuhan Steel has been seeking to invest in more overseas iron ore assets to cut reliance on expensive imports. "We aim to be self-sufficient in

Madagascar : China first investor with a transition government not recognized internationally (La Chine, premier investisseur avec une HAT non reconnue) Mandoline.com 2010-05-31, Numro 148 http://pambazuka.org/fr/category/comment/64908 accessed on 03/01/2011 2 Op.Cit. 3 FRASER, A. and LUNGU, J. For Whom the Windfalls?: Winners & Losers in the Privatisation of Zambias Copper Mines. www.minewatchzambia.com. 2007. last accessed 03.04.2012

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iron ore supplies in three to five years," Deng Qilin, chairman of Wuhan Steel, said in March.1 Wuhan Iron and Steel Group is China's third largest steelmaker. The company received approval from the National Development and Reform Commission (NDRC) for two overseas acquisition deals in Africa that are expected to contribute nearly 2 billion tons of iron ore deposits. The government cleared Wuhan Steel's plan to acquire the Soalala iron ore deposit in Madagascar with two other companies and the company's stake buy in a Liberian iron ore project. Wuhan Steel also signed an agreement on March 12 to pay China-Africa Development Fund USD68.46 million for a 60 percent stake in China Union Investment Co, which owns an iron ore deposit located in central Liberia. The project is also the largest overseas investment in Liberia, with a deposit of 1.31 billion tons of iron ore reserves and is connected to ports via an 80-kilometer railway. But this is not all: the company has also secured material from Brazil and Australia, to secure its resources and break the monopoly of the three major iron providers- Rio Tinto, BHP Billiton and Vale. In this case then, on the Chinese side, the investment deal goes in line with state policy on resources and had receive state back-up and authorization.2 Because the Malagasy Soalala deal involves quite a huge surface, the project involving an area of more than 430 square kilometers with more than 800 million tons of reserves available for exploitation, environmental studies were made to ensure the protection of Madagascars biodiversity. According to Ms. Lantosoa Rakotonianina, manager of the Office of Environmental Studies and Industrial Expertise which is charged by the Chinese WISCO to conduct studies of environmental studies themselves on their behalf, WISCOs case is different from that of Qit Madagascar
1

ZHANG QI Wuhan Steel gets green light for Africa ventures; Company acquiring Soalala iron ore mine in Madagascar to boost stocks (China Daily) [W/OL] Updated: 2010-05-25 09:16 last accessed 20.03.2012 2 Wuhan Steel acquired a 21.52 percent stake in Brazilian iron ore miner MMX Mineracao e Metalicos SA for $400 million last year. The company also received approval from the Australian government for a A$271 million ($249 million) investment in Centrex Metals Ltd in November, and also for a 60-percent stake in the iron ore rights of five Centrex projects in South Australia that could contain up to 2 billion tons of resources. "Africa has huge iron ore resources. But iron ore transportation requires advanced infrastructure development due to the large quantities involved," said Yu Liangui, a senior steel analyst with Mysteel.com. "It will require huge investment to build railways and ports in Africa, which might be the reason why Africa is not the first choice for Chinese enterprises." "However, with the ore prices surging, China needs to diversify its iron ore supplies to break the monopoly of the three global miners - Rio Tinto, BHP Billiton and Vale," he said. Rio Tinto has increased ore prices by $10 per ton in the second quarter compared with the first quarter. Accordingly its 63.5 percent grade iron ore powder now costs $123 per ton (Free On Board), while iron ore lumps are at $138 per ton. The price increase in the second quarter is expected to push costs for Chinese steelmakers by an additional 40 billion yuan based on the import volume in April. See: Zhang Qi Wuhan Steel gets green light for Africa ventures; Company acquiring Soalala iron ore mine in Madagascar to boost stocks (China Daily) [W/OL] Updated: 2010-05-25 09:16 last accessed 20.03.2012

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Minerals1 for example, since in the region Soalala which will host the future extraction plant, biodiversity will not be turned upside down inside out, as it consists only of savannahs and steppes2. The payment of the famous 100 million USD does not visibly free of WISCO strictly follow legal procedure in force, for obtaining the environmental permit, without which nothing can start. The CEO of ONE3, meanwhile, said that the population concerned by the project will not be left out, since it will be associated in decision making: its opinions will be sought, and it will primarily benefit impacts positive project, both socially and economically. Thus, the drilling begins in late May, and the objective of the government through the ONE is that environmental impacts are reduced as much as possible. The president of WISCO, which gave a speech in Chinese, has given all possible guarantees: WISCO is a consortium serious, respectful of the environment and follows strict laws in countries where it operates. According to a study by Mathieu Pellerin for a France-based European think tank, Ifri4, The Chinese authorities have also found themselves confronted by the public announcement of investment projects of Chinese businesses that had been agreed with a regime not recognized by the international community. By way of defense the Chinese ambassador has explained many times in the Madagascan press that he had not known about the contract linking Wisco and the Chinese state, even implying that he did not know those in charge of the mining company. Without it having to be spelt out, this project has been denounced with reference to the fact that a transitional regime is supposed to manage its ongoing business without engaging in long-term investment projects. In this context, if the Chinese embassy was to declare support for this project, it would isolate China from the rest of the international community. Chinese diplomats have therefore decided to adopt a stance of indifference: China is maintaining the coherence of its policy by distancing itself from Wisco and is thus maximizing its strategic interests (need for iron) by letting the company operate freely. Behind this diplomatic skill, there is every reason to think that Wisco is not unknown to the Chinese authorities, particularly because it is a
1 2

Exploration of ilmenite by Rio Tinto in the North coastal area of Madagascar. http://environnementmadagascar.blogspot.com/2011/04/office-national-de-lenvironnement.html 3 National Office of Environment. 4 PELLERIN, MATHIEU The Recent Blossoming in Relations between China and Madagascar [A] IFRI Sub Saharan Africa Program February 2012 p. accessible at http://www.ifri.org/?page=detailcontribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/2012

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national company of the Peoples Republic of China and not a provincial one and above all because it is the third largest producer of Chinese steel. This is right: the Chinese government did know about Wiscos investment in Madagascar since it gave authorization to the SOE prior to the deal.1 Newly appointed Chinese ambassador to Madagascar Shen Yongxiang declared, with reference to the WISCO project: In economic terms, more than thirty major companies are located in China's capital in Madagascar, more than eight medium. The Chinese are investing in Madagascar that operate on a win-win. Madagascar is known to be rich in mineral resources. We encourage Chinese investors to come and exploit the natural wealth Malagasy. Here, I must correct the perception of Western powers who claim that China plundering Africa's wealth. This is false and some figures to prove it. In 2008 for example, 70% of oil extracted in Africa were shipped in the U.S. and Europe, and only 9% were in China. I declare that China is investing in Africa, may the country be rich or poor, because our goal is human development.2 This reassuring rhetoric can actually be backed up by facts in the case of the Wisco consortium, but some deals announced later by the China International Fund did tarnish the image of Chinese investors in Madagascar, as a result of their already 4.2.3 Case study 3: China International Fund and aborted projects in Madagascar Since the signing of the contract with Wisco, the HAT has mobilized its networks in order to attract Chinese capital3. Mamy Ravatomanga, director general of Sodiat, is one of the prominent intermediaries in this context. This goes in line with the Guanxi network argument used in this thesis. Ministers and councilors struggle desperately to become part of Chinese missions and Chinese delegations come one after another to Madagascar, like the one made up of representatives of the Chinese
1

ZHANG QI Wuhan Steel gets green light for Africa ventures[W/OL] (China Daily) Updated: 2010-05-25 09:16 http://www.chinadaily.com.cn/bizchina/2010-05/25/content_9888548.htm accessed on 20/01/2012 2 Soava A. et Sarala B. Ambassadeur Shen Yongxiang: " C'est l'Occident qui pille l'Afrique, et non la Chine!"(The West is plundering Africa, not China)[W/OL] Website: La Gazette de la Grande Ile, 30 March 2012. http://www.lagazette-dgi.com/index.php?option=com_content&view=article&id=12371:ambassadeur-shenyongxiang-q-cest-loccFDInt-qui-pille-lafrique-et-non-la-chine--q last accessed 30.03.2012 3 Cf Declaration by the president of the HAT Andry Rajoelina to French journalist for the Revue Politique Internationale. Aymeric Chauprade, November 30, 2010 - (La Revue politique internationale n129 automne) Posted on December 1st, 2010 http://www.madagate.com/politique-madagascar/dossier/1604-andry-rajoelina-laverite-si-je-mens Last accessed 28.03.2012

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companies INTERDES and CMEC (Chinese Machine and Equipment Company) in June 2010. Yet for the last few months Madagascan eyes have been focused on the China International Fund (CIF) with which the state of Madagascar has created a holding entitled the Madagascar Development Corporation, which resembles the Chinese-Guinean development company the CIF tried to establish in Guinea at the end of 2009. The key-figure responsible for the arrival of the CIF is the former Guinean Minister of Mines, Mahmoud Thiam, who has close ties with the influential Madagascan Minister of Mines and Hydro-carbons, Mamy Ratovomalala. The CIF must be the principal player in these ambitious projects announced with great pomp in November 2010: the largest cement works in the Indian Ocean region according to Andry Rajoelina, a tram system in the capital, 10,000 units of social housing and an overhaul of Madagascars air-fleet. Most of these projects stayed at the declaration of intent. As for the tramway system In the capital city for example, officials close to the project criticized the Chinese part for proposing a radical change in the citys transport infrastructure without even considering a study on the social and economic effects it would have, regardless of the fact that the financing proposed by CIF did not even include all the infrastructure needed for the project. These package deals signed by Chinese companies in Africa traditionally provide for the construction of infrastructures in exchange for mining and oil concessions.1 Such deals have been announced in Guinea (Conakry) where the President Cond counts on China to boost his popularity. According to Africa-Asia Confidential: Officials from the China Development Bank (CDB) are offering to finance a substantial part of the Conakry governments USUSD8.6 billion overhaul of mining and industrial infratructure, according to a source close to negotiations. Chinese mining companies are looking at Guineas world-class reserves of iron ore and bauxite, and many of the proposed road, rail and electric power projects would be financed through countertrade for mineral exports. Since President Alpha Cond came to power in November 2010, his
1

see Brautigam on this: Friday, December 23, 2011 China's "Checkbook Diplomacy" and Overseas Investment Reconsidered Deborah Brautigams blog China in Africa the real storyhttp://www.chinaafricarealstory.com/2011/12/chinas-checkbook-diplomacy-and-overseas.html accessed on 23/12/2011

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government has made little progress in unscrambling the many opaque mining and infrastructure contracts set up by successive military governments. There are fears that more countertrade agreements with Beijing could further complicate Conakrys obligations. () Even before the new CDB financing for the five-year plan is finalized, there is a raft of new projects under way: In March, Guinea selected China Geo-Engineering Corporation to build a 385-kilometre road from Sriba to Mdina Gounass to link Guinea and Senegal. The USD16 mn. project is financed by the Arab Bank for Economic Development in Africa. On 16 February, China Airport Construction Corporation announced it would build an new international airport at Mafrinya, about 75 km from Conakry. Financed by China Export-Import Bank, the new airport will be about 12 km long and 5 km wide, said CACC Vice-President Liu Ying after meeting Cond in February. On 1 February, Shanghai Construction Group started building a USD65 mn. 5-star, 18-storey hotel, a few metres from the presidential palace in Kaloum. China Hyway Group which submitted a multibillion-dollar mines-forinfrastructure deal to the military junta is still looking for mining permits. There are no guarantees that they will get them (AAC Vol 3 No 12, More contracts as the vote looms & China Hyway Group's mines-for-roads deal). Chinalco (in joint venture with Rio Tinto to develop Blocks 3 and 4 of the giant Simandou iron ore project) has not seen any further upheaval since finally accepting the governments cancellation to Blocks 1 and 2. Rio Tinto and Chinalco say they are committed to building the Trans-Guinen Railway that will link the southeast of the country to the west coast over some 1,000 km and at a cost of more than USD3 bn. (AAC Vol 2 No 12, Blood and money in the streets). China Power Investment Corporation hopes to conclude negotiations in the coming months and get to work on USD5.8 bn. in investments for a 4 mn. tonne-per-year alumina refinery at Boffa, a deepwater port at Bel Air and a 340-megawatt power plant.l China International Water and Electric
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Corporation began construction in March on the 240-MW hydroelectric dam at Kaleta. On 4 April, the government will start work on the USD446 mn. dam, of which 75% will be financed by China. Controversy at Forcariah. The China Power Investment project at Forcariah (AAC Vol 4 No 11, Betting on Boffa) is the best-established in the country but also the most controversial. It is run by the Guinea Development Corporation (GDC), a joint venture between the China International Fund (CIF) and the Guinean government. Part of the problem may be political: former Mines Minister Mahmoud Thiam, who launched several controversial mining deals under successive military regimes, has left Guinea for his base in the United States, where he works as a director of China Sonangol, a CIF affiliate (AAC Vol 4 No 7, Shine on you crazy diamond1). Thiam played a key role in negotiating deals for China Sonangol and CIF in Madagascar and Angola.2 This is the CIFs usual practice, as in Angola for example, where it has been involved from the start in numerous infrastructure projects. In Tanzania the CIF had promised to buy up 49% of Air Tanzania in exchange for the granting of oil concessions. The Tanzanian air company, however, had not been able to guarantee the concessions and so in the end the CIF did not inject a single dollar into the company. The story did not end well for the former Chief Executive Officer of troubled Air Tanzania Corporation Limited, David Mattaka, and two others who appeared in court on 21 March to answer charges of abuse of office and procuring 26 used vehicles worth USD 809,000 without competitive tender from a Dubai-based company, Bin Dalmouk Motors, in 2007. Government investigators are only now digging into the financial mismanagement of the state-owned ATCL, but it is likely that those
1

The diamond mines have been closely guarded by the Angolan elite and a Chinese company is set to make its first investment in Angolas precious stones The ownership and control of the multi-billion-dollar China Sonangol joint venture continue to baffle business people in Luanda. Ask officials from Beijing about China Sonangol and the response is an embarrassed disavowal and an insistence that it is purely a commercial entity. However, a few months of research into China Sonangols corporate structure have revealed clear links to the Chinese state and its agencies (AAC Vol 2 No 12). Having recruited African businessmen such as Guineas former Mines Minister Mahmoud Thiam, who knows Wall Street as well as Africas big mining houses, China Sonangol is expanding operations, winning political influence in Africa and pushing out more timid commercial competitors.... http://www.africa-asia-confidential.com/articlepreview/id/566/Shine_on_you_crazy_diamond last accessed 04/02/2012. 2 Cond wants quick results, [W/OL] Africa-Asia Confidential April 2012, Vol 5. N.6, http://www.africa-asiaconfidential.com/article/id/723/Cond%C3%A9_wants_quick_results last accessed 02/04/2012.

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responsible for the companys biggest debts and failed, Chinese-backed projects will face justice.1 In Madagascar the regime announced its intention to buy back four out of every five exploration Blocks from Madagascar Oil, so as to cede them back, apparently, to China Sonangol (part of the same group as the CIF). In order to facilitate this operation, the auditing work launched by the HAT regime was entrusted to the CIF, which was thus called upon to be both judge and jury. Is another Tanzanian scenario to be expected, if the HAT fails to get back the Madagascar Oil permits? Incidentally, the projects so far announced are for the time being at the declaration of intent or publicity stage, but their implementation is by no means guaranteed. As for the largest cement works in the Indian Ocean region promised by Andry Rajoelina, it does not correspond to the scale of needs in Madagascar, if we are to believe what certain operators in the cement market say and would hardly make it possible to bring down the price of cement through increased competition. Examining the activity of the CIF in the African continent entitles us to have doubts about the investments promised to Madagascar. It is the Chinese company whose presence in the African continent raises the greatest controversy since its activity is opaque in the extreme. It belongs to the Dayuan Group, which was established in Hong Kong and which directs the 88 Queensway Group Company a name which stems from the Hong Kong address where 30 branches of the Group are registered, which include the CIF and Sonangol. The CIF, which operates in Angola, where it has a forty-storey headquarters, has a strategy for the future which involves putting down roots in countries outlawed by the international community: Zimbabwe, Guinea-Conakry, Niger and from now on Madagascar. Suspected of moneylaundering in the context of its activities in Angola, where the group is close to the Dos Santos regime, it is also accused of not fulfilling a number of its commitments. In Guinea, Niger and Angola, the Chinese ambassadors have even dissociated themselves from the commitments undertaken by the CIF, openly criticizing the projects engaged in by the company. In Guinea, the local and international press had been continually relaying all the good intentions of the CIF, after it signed a contract with the government of Guinea in 2009. On February 8, 2011, however, the secretarygeneral from Guineas Ministry of Mines, Guillaume Curtis, announced publicly that

Air Tanzania soars no more [J/OL] Africa confidential Headlines Vol.5, N.6, April 2012, , www.africaconfidential.com : http://www.africa-asia-confidential.com/article-preview/id/732/Air_Tanzania_soars_no_more last accessed 02/04/2012.

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nobody in the Ministry of Mines was in possession of even minimal information about the contract, expressing doubts as to the transparency or rigor of the CIF.1 As for the former Ministry of Mines of Guinea, Mahmoud Thiam, who played a key role in negotiating deals for China Sonangol and CIF in Madagascar and Angola, he has left Guinea for his base in the United States, where he works as a director of China Sonangol, a CIF affiliate.2

4.3 Corruption problems

Is Chinas non-interference policy and the practice of guanxi opening doors for corruption, especially in big extractive projects? Somehow authors like Alden and Davies3 point out how similar the profile of the operations of Chinese multinationals in Africa is to that of Western companies since they started the scramble for Africa and up until now. Therefore Western criticism towards China is merely organized hypocrisy. Cited here is a list of evidence presented by a Crisis Group Asia Report4: The perception of a China threat appears to have convinced some within China that they must pursue energy deals with problematic governments because they lack opportunities in places such as the US. The history of exploitation in developing countries by industrialized nations and their continued close relations with many repressive and corrupt regimes make it more difficult to press for change in Chinas behavior 5.Elf Aquitaine, the formerly state-owned French oil company, once considered bribes a taxdeductible expense6. No conditions on human rights or transparency were attached to the USD870 million signature bonus paid by BP-Amoco, TotalFinaElf and Exxon for Angolas ultra-deepwater blocks 31, 32 and 33 in 1999, which set an industry records. Since 1995, the U.S. Export-Import Bank
1 2

PELLERIN, MATHIEU Op. Cit. Africa Asia Confidential Vol 4 No 7, Shine on you crazy diamond [W/OL] http://www.africa-asiaconfidential.com/article-preview/id/566/Shine_on_you_crazy_diamond 3 ALDEN C., DAVIES M., A profile of the operations of Chinese multinationals in Africa [J] South African Journal of International Affairs 13(1) 2006:83-96. 4 Chinas Thirst for Oil Crisis Group Asia Report N153, 9 June 2008, p.15. 5 In 1973 Gulf Oil admitted funneling more than $10 million to U.S. and foreign politicians over several years. When the Securities and Exchange Commission responded with a questionnaire asking American corporations if they paid bribes, more than 400 corporations including major oil companies like Exxon acknowledged making questionable payments to foreign government officials, politicians and political parties. The result was the passage in 1977 of the Foreign Corrupt Practices Act the worlds first, and toughest, anti-bribery legislation.[This legislation] does contain some significant loopholes, such as the exemption for facilitating payments, defined as payments to facilitate or expedite performance of routine governmental actions. These actions include processing of permits, licenses or visas, but do not include any decision by a foreign official to award new business. According to some analysts, the exemption also covers signature bonuses. Phillip van Niekerk and Laura Peterson, Greasing the Skids of Corruption, 4 November 2002, at www.publicintegrity.org/bow/report.aspx?aid=150. A Chinese sovereign wealth fund bought a 1.5 per cent share in Total, which is no longer state-owned, in April 2008. 6 Liechtenstein and Switzerland for payouts to the heads of state of Gabon, Congo-Brazzaville, Cameroon, Nigeria and Angola. According to Elfs Andre Tarallo, All international oil companies have used kickbacks since the first oil shock of the 1970s to guarantee the companies access to oil, Tarallo said. You have official bonuses as part of a contract: the company seeking to exploit an oil field commits itself to building a school, a hospital or a road. Then you have parallel bonuses, which can be paid to increase the likelihood of obtaining the contract. Phillip van Niekerk and Laura Peterson, Greasing the Skids of Corruption, op. cit.

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has provided USD9.8 billion in financing and the Overseas Private Investment Corporation (OPIC) USD5.4 billion for oil, gas and extraction pipelines and other projects abroad1, including to help finance projects of ExxonMobil and Chevron in countries with severe human rights problems, most notably Indonesia and Myanmar/Burma.2 Other priorities also sometimes outweigh Western governments attachment to principles. The U.S. maintains a relationship with Sudan for coordinating counterterrorism efforts,3 even as it keeps it on its list of states that sponsor terrorism.4 All major U.S. allies in Africa, including Kenya, Egypt, Ethiopia, Nigeria and Angola, have poor human rights records, according to its own assessments.5 And in 2006, the U.S. renewed its friendship with Equatorial Guinea, considered one of the most corrupt states in Africa, where human rights abuses are prevalent but U.S.-based oil companies dominate.6 Beyond Africa, the U.S. government is prosecuting James Giffen for allegedly paying bribes to Kazakhstans President Nursultan Nazarbayev on behalf of Western oil companies, while it feted Nazarbayev during an official visit in September 2006.7 In the Middle East, Western countries remain buyers of oil from many countries with repressive regimes, such as Saudi Arabia. This view aside, corruption is a structural problem of low income countries where income level and responsibility level do now correspond, giving leeway for rent-seeking behaviours from administrative officials at different strategic levels. In
1

Steve Kretzmann and Meg Boyle, The Best Congress Oil Could Buy, January 2007, at http://priceofoil.org/wpcontent/uploads/2007/01/BestCongress4Oil.pdf. 2 In Indonesia, Mobil Oil has admitted to supplying food, fuel and equipment to soldiers hired to protect oil installations. The soldiers were later implicated in massacres in Aceh and reportedly used Mobils equipment to dig mass graves. In the 1990s in Myanmar, a Unocal official admitted to hiring troops to protect two natural gas pipelines and supplying them with intelligence, such as aerial photographs; according to human rights groups and media reports, Unocals French partner, Total, hired and supplied its own Burmese troops with food and trucks. See van Niekerk and Peterson, Greasing the Skids, op. cit. 3 John Prendergast and Colin Thomas-Jensen, Blowing the Horn, Foreign Affairs, March-April 2007. Reports indicate that the U.S. embassy in Khartoum the largest in Africa also houses the biggest Central Intelligence Agency (CIA) listening post outsFDI the U.S. Glittering towers in a war zone, The Economist, 7 December 2006; US to build largest CIA centre for East Africa in Sudan, Sudan Tribune, 13 March 2007. 4 Country Reports on Terrorism, U.S. Department of State, Office of the Coordinator for Counter-terrorism, 30 April 2007, at www.state.gov/s/ct/rls/crt/2006/82736.htm. 5 2007 Country Reports on Human Rights Practices, U.S.Department of State, released on 11 March 2008. 6 Secretary of State Condoleezza Rice called President Teodoro Obiang a good friend when they met in 2006 to discuss reestablishing diplomatic ties. Equatorial Guineas dismal human rights record is well-documented, and there are allegations of serious mismanagement of its oil revenues. Obiangs alleged money laundering involvement was a reason for the collapse of U.S.-based Riggs Bank in 2005. Equatorial Guinea was ranked 168 of 179 countries on the Transparency International Corruption Perceptions Index 2007. See Condoleezza Rice, Remarks With Equatorial Guinean President Teodoro Obiang Nguema Mbasogo Before Their Meeting, Washington DC, 12 April 2006, at www.state.gov/secretary/rm/2006/64434.htm; Chris McGreal and Dan Glaister, The tiny African state, the presFDInts playboy son and the $35m Malibu mansion, The Guardian, 10 November 2006, at www.guardian.co.uk/world/2006/nov/ 10/equatorialguinea.danglaister; Ken Silverstein, Obiangs Banking Again: State Department and Washington insFDIrs help a dictator get what he wants, Harpers Magazine, 9 August 2006; Joshua Kurlantzick, Putting lipstick on a dictator, Mother Jones, 7 May 2007, at www.motherjones. com/news/outfront/2007/05/extreme_makeover.html; Justin Blum, Equatorial Guinea, USA: US Oil Firms Entwined in Equatorial Guinea Deals, The Washington Post, 9 September 2004; and Henri Astier, Elf was secret arm of French policy, BBC, 19 March 2003. 7 See Ron Stodghill, Oil, Cash, and Corruption, The New York Times, 5 November 2006.

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this extent, rent seeking behavior is the expenditure of resources in order to bring about an uncompensated transfer of goods or services from another person or persons to one's self as the result of a favorable decision on some public policy. The term seems to have been coined (or at least popularized in contemporary political economy) by the economist Gordon Tullock. Examples of rent-seeking behavior would include all of the various ways by which individuals or groups lobby government for taxing, spending and regulatory policies that confer financial benefits or other special advantages upon them at the expense of the taxpayers or of consumers or of other groups or individuals with which the beneficiaries may be in economic competition.1 In order to circumvent these tendencies in the long term, structural reforms of the administrative sector in terms of wages need to be undertaken, unfortunately most low income states cannot afford these reforms. Here the financial inflow from the resource extracting deals like that of WISCO in Madagascar can be put to good work. Other anti-corruption institutions can be created, or movements like the Extractive Industries Transparency Initiative (EITI) and Publish What You Pay (PWYP) can be solutions to the corruption problems. This will be seen in the next section.

4.4 Solutions and prospects

Is the Angola model working ?2 An estimated 80% of Chinas global outward FDI originates from SOEs, which are financed by the state policy banks (Davies, 2010). In this regard, the ExportImport Bank of China (China EXIM Bank) and the China Development Bank (CDB) now also through the China-Africa Development Fund (CADFund)are the key players bankrolling large Chinese investment in Africa across sectors that mainly include extractive industries, construction and infrastructure. Increasingly also, the state-owned China Construction Bank has started to engage investors and assets alike. Perhaps more telling is Chinas method of bequeathing economic assistance. Apart from ordinary trade flows and stock buildup, Chinese investments are not that easily defined, and are beyond the standard FDI protocolswhich capture only a
1

Rent Seeking definition. A Glossary of political economic terms [W/OL] http://www.auburn.edu/~johnspm/gloss/rent-seeking_behavior last accessed 04/04/2012. 2 KONIJN, PETER in China and the resource curse in Africa ;Workshop: Beyond the resource curse, new dynamics in the management of natural resources: new actors and concepts, 3-4 November 2011, Paris.

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small share of Chinese engagement in Africa. Chinas economic assistance and investments can also be considered under an umbrella of concessional packages, whereby future offtake agreements are bartered for, exchanging rich African resources for Chinese capital, equipment, and skills used to roll out much-needed infrastructure projects. As such, Chinese capital financing infrastructure development and refurbishments is committed in return for mining rights and mineral concessions. China EXIM Bank is alone in extending concessional loan packages as the concessional financing arm of the Chinese government; while CDB financing utilizes a combination of equity injections (through CADFund) and debt via a favoured stateowned company. In both cases, however, the use of Chinese contractors on construction projects related to mining activity (mine construction, supporting infrastructure linking to mining activity) or infrastructure projects (roads, bridges, ICT, etc) can be a prerequisite of the deal or a de facto outcome. Alden and Alves1 are quite positive about the developmental impact of Chinese investments related to the natural resource sector. Chinas provision of public infrastructure like roads, railways and hydropower plants makes an important contribution towards alleviating poverty, according to Alden and Alves. Furthermore, by removing long-time bottlenecks in transport and electricity production these investments lay the foundation for Africas economic take-off. Large and comprehensive package deals sometimes referred to as the Angola model, characterise the Chinese business formula in the natural resource sector. The Chinese Exim bank finances the construction of major infrastructure works as part of these deals. These billion-dollar infrastructure loans are repaid by future oil and mining revenues. This distinct Chinese way of trading infrastructure for resources creates direct and highly visible economic benefits on the ground, thereby partly circumventing the problem of large scale squandering and looting of oil and mining revenues associated with the resource curse. In this way the resources-forinfrastructure-loans help transform the natural resource boom into a development boom. The Chinese government has very effectively utilized this packaged loan model of financing (including also grants) in several African countries, by directing
1

See ALDEN, CHRIS and ALVES (2009) China and Africas Natural Resources: The Challenges and Implications for Development and Governance, SAIIA, sept 2009. Also see Alden, Chris and Ana Alves (2008) Let a hundred flowers bloom. China and the governance of Africas natural resources, Fatal Transactions.

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significant amounts of capital to the acquisition of assets in strategic sectors. China EXIM Bank has, for example, provided concessional financing for infrastructure projects in Ghana, Angola, Ethiopia, Nigeria, Republic of the Congo, Sudan, and Zimbabwe, in addition to also financing export buyers credits, as well as construction and investment projects. These package deals can be viewed as financing models in which economic assistance is given to a recipient country, with the financing linked to the signing of a commodity offtake agreement, and infrastructure rollouts in the recipient country as a reciprocal part of the deal. The model has come to be known as the Angola Model or China Model in the wake of a US$2 billion deal signed by China EXIM Bank with the Ministry of Finance in Angola in 2004. The recipient African partners desperately require power and transport infrastructure, managerial skills, and technological sharing, all of which this exemplifies. The resource offtake on the other hand, is a guarantee that effectively securitizes the loan and huge layouts of economic assistance from China. As chance would have it, African economies that are most in need of development assistance do not have the financial means to provide sufficient financial security, yet they do possess immense wealth in untapped resources, which is exactly where China comes inthrough being able to deploy unprecedented sums of capital to build the proverbial bridge of friendship, and at the same time secure a future supply of preciously demanded commodities and energy resources. As disaggregated and comparative FDI figures are lacking, mergers and acquisition (M&A) activity is a good indicator to gauge the extend of Chinas interest in Africa, especially with respect to specific sectors, while also highlighting the countrys relative size compared to other stakeholders seeking African assets. According to Ernst and Young1 (2011), acquisitions from emerging economies accounted for 43% (US$49.4 billion) of total deal value in 2010. India in particular moved up the ranks from 14th place in 2009 to 7th in 2010, alone taking 5% of global deal value. And thus Chinas outbound M&A of US$4.5 billion was marginally surpassed by Indias US$4.6 billion. Of the total emerging market M&A activity in 2010, African countries hardly feature, instead forming part of the Other grouping. The only African country that records as a significant target was Guinea, accounting for 6% of the total. Broken down by acquiring emerging market country, the
1

ERNST & YOUNG. Ungeared for Growth: Mergers, acquisitions and capital raising in mining and metals. [R] 2011.

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powerhouse newly industrialized countries of China (25%), Brazil (28%), India (11%), South Korea (11%), and Russia (8%) all feature prominently. Africa is again bracketed under the 17% of Other. Within Africa, it is interesting to note the key investors. Of Africas 2010 M&A activity, only 13% of acquisitions were taken up by China, which is small compared to Brazils 27% of the total. Overall, Africas resource companies saw a 105% annual increase in deal making activity for 2010, with inbound deals up 223% (Ernst & Young, 20111). Iron ore and coal remained the two most popular commodities as steelmakers continued to position themselves aggressively in Africa. Hong Kongbased China International Fund (CIF) invested US$2.7 billion into Australian company Bellzones iron ore asset in Guinea. Iron ore alone made up 32% of target commodities in 2010, while coal was relatively small at 7%, yet remains a crucial growth sector going forward. The rapid and sustained investment by Chinese companies in the natural resources sectors of several African countries has been a cause for concern in certain quarters, particularly as the Angola Model comes with seemingly no strings attached to the investment. That is not entirely the case. Western multinationals (and other resource-seekers) being crowded out by Chinese competitiona combination of low cost, fast and efficient deliveryhave in effect villainized Chinas engagement in Africa (Krause-Jackson, 20112). This criticism has, however, been hypocritical as any developing economy coming from a low base needs infrastructure buildup and investment via economic assistance (as opposed to ineffectual aid hand-outs that perpetuate a status quo rather than seed commercial enablement) if it wishes to achieve working capital stock. The Angola Model is in fact nothing new, and has been a reliable method for development used between Japan and China for instance during the 1960s,while the Asia Development Bank extended its first concessional assistance package in 1969, and again in 1974 as a means of lending economic development support to its poorest members3. This argument joins the one stated in this thesis, as part of the FGM and East Asian economic development model. The
1 2

Ibid. KRAUSE-JACKSON, F. Clinton chastises China on internet, African New Colonialism. [W/OL] Bloomberg. http://www.bloomberg.com/news/2011-06-11/clinton-chastises-china-on-internet-african-new-colonialism-.html. 2011. Last accessed 04.04.2012 3 Japan extended China a US$10 billion credit line in exchange for oil according to BRAUTIGAM, D. The Dragons Gift: The Real Story of China in Africa [M], Oxford University Press, New York. 2010.

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benefits of this engagement thus make China an attractive partner, financier, and investor in Africas minerals sector. The antagonistic views of this model (which applies to large state-supported or state-aligned Chinese entities, rather than smaller entrepreneurs and private businesses) that needs taking heed of comes from African stakeholders themselves. The concerns are that the huge Chinese economic assistance and investment deals bring with them Chinese laborers, Chinese managers, Chinese technological means and equipment, all contracted by state-owned Chinese enterprises. This system of vertical integration offers powerful benefits to China, yet apart from the final infrastructure facility build (a mine, road, railroad, building, or power station), the spillovers of Chinese skills and capital is not yet taking place as hoped. We however caution these concerns; changes are afoot that demand Chinese firms pay over a percentage of the project costs into training and skills development of Africans, while tenders too are being offered by demanding a cap on Chinese contractors, laborers, and managers utilized in a project (Brautigam, 20101). This, however, will increasingly depend on how deals are negotiateddeals negotiated by host economies that should have the favor of not only African governments but the greater populace at heart by leveraging the resource endowments for socio-economic and development prospects. The Chinese-funded special economic zones in Africa2 too are put forward as exemplary investments built on the fundamentals of technological sharing and positive spillovers, the likes of which need to create enabling commercial environments for local and foreign companies alike (Sandrey and Edinger, 2011 3; Pistorius, 20114). The first such zonea multi-facility economic zone (MFEZ) announced in February 2007 is located in the mining area of Chambishi in Zambia. Officially named the Zambia-China Economic and Trade Cooperation Zone (ZCCZ), it looks to catalyse industrial and economic development in the manufacturing sector for the purpose of enhancing both domestic and export orientated business and will operate on the principal of value-addition.5 It could potentially be a step forward in
1 2

Ibid. These include established developments of zones in Zambia, Mauritius, Egypt, Nigeria, Ethiopia, and a number of other proposed zones. See BRAUTIGAM DEBORAHs blog, China in Africa. [W/OL] Accessible at http://www.chinaafricarealstory.com/2011/02/chinas-special-economic-zones-in-africa.html last accessed 04.04.2012. 3 SANDREY, R. and EDINGER, H. Chinas manufacturing and competition in Africa. {J} African Development Bank, Working Paper Series, No. 128, April 2011. 4 PISTORIUS, C. China-sponsored special economic zones in Africa and their impact on economic progress. [W/OL] China Analyst, March 2011. http://www.thebeijingaxis.com/en/news-a-media/the-china-analyst. 2011. last accessed 03.04.2012. 5 See Zambian Ministry of Commerce, Trade & Industry website [W/OL] http://www.mcti.gov.zm/ last accessed 04.04.2012

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the right direction for Zambias extractive industry to not only export the unprocessed mineral wealth but to beneficiate and increase the value-add to copper, and to reap the fruits of its mineral resources domestically. Africa had a collective GDP of US$1.6 trillion 2008, roughly the same as Brazil or Russia. It is crucial to note that natural resources directly account for only a quarter (24%) of GDP growth between 2000 through to 2008. Even though this is substantial for a single sector, the remaining three quarters share comes from wholesale and retail trade, transportation, telecommunications, and manufacturing. The resource-rich commodity exporting countries in Africa grew 5.4% over the said period, while the non-commodity exporters grew marginally slower at 4.6% (Harvard Business Review, 2011).The argument that Chinas demand for commodities are skewing Africas growth is a myth; if anything, the Chinese assistance and investment interests are reaching into every sector of the economy (including services and manufacturing), assisting non-commodity reliant countries like Kenya, Ethiopia and Rwanda to prosper and realize benefits from their engagement with the Asian giant. As already noted, considering FDI alone, the level of Chinese engagement pales in comparison to all the noise and on-the-ground activity observed. However, FDI does not account for bartering loan agreements, such as concessional package deals, nor does it account for the grey area of Chinese development and economic assistance. China does not conform to the donor protocols of the official OECD Development Assistance Committee. Chinas version of economic assistance can for instance be viewed in light of its investments in infrastructure-for-resources deals, where the recipient African country takes on the debt via mortgaging its vast resource wealth, hence minimizing the direct financing burden, and bequeaths the off take and development rights for resources. Arguably, Africa needs more economic assistance than foreign aid handouts that perpetuate a vicious cycle of indebtedness and lacks enabling private sector growth. Keenan1 (2008) sees another positive effect of Chinese engagement. Western companies in the natural resource sector are forced to compete with Chinese firms that are cost effective and have a high tolerance for risk. This may bring benefits for the host country.

KEENAN, PATRICK J. Curse or Cure? China, Africa, and the Effects of Unconditioned Wealth, [J] Berkeley Journal of International Law (2008)

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Meyersson, Prado and Qian1 (2008) develop a completely different approach. Based on a statistical analysis of cross-country trade, economic and governance data they conclude that African exports of natural resources to China has a uniquely large positive effect on economic growth and investment, but with a detrimental effect on internal conflict and human rights. The economic benefits of exporting natural resources to China are particularly large when compared to trade with US and India. The authors suggest that subsidized credit and cheap labour enable Chinese companies to develop oil fields and mines cheaper and faster than their western counterparts. So if resource-rich countries divert trade to China they will obtain on average a better effective price for their natural resources. The analysis shows that economic growth has led to increased government consumption. However there is no positive effect on public spending on health care or education. So the money is not spent on basic services for the people. The detrimental effect on internal conflict and human rights is believed to result from the indifference of Chinese companies to the human rights performance of their host countries. However the authors stress that the detrimental effect on human rights is not unique to China. The same effect is found for the export of natural resources to the US. The research finds evidence for the resource curse thesis that exporting natural resources in general increases autocracy. and will it work in Madagascar? Madagascar banks on processes of transparency like the EITI. Local press recently stated that all companies working in the extractive industry as of 2012 will have to join the EITI process, as it is explicitly written in the Constitution, in order to protect the resources of Madagascar and avoid rent-seeking behavior from the part of the government officials. Any mining company and oil exploration will join the Transparency Initiative extractive industry, from 2012.

MEYERSSON ERIK, GERARD PRADO and NANCY QIAN (2008) The Rise of China and the Natural Resource Curse in Africa, World Bank [R]

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Transparency requirement for mining companies and oil exploration in 2012. They must adhere to the Extractive Industries Transparency Initiative (EITI). The national committee, composed of representatives of civil society, government and companies themselves, set the materiality threshold to just USD 100 000. In other words, all companies operating in this sector, and pay over 200 million Ariary taxes and royalties to the State, will have to undergo the procedure of EITI. "In principle, membership of companies in EITI is voluntary. But it is the government putting in place mechanisms to encourage or require companies to integrate the process, "explains Tahiny Tsarabory Judical, executive secretary of the EITI Madagascar, on the sidelines of a training session organized for journalists. To date, three mining companies have joined the EITI process, namely the Ambatovy project that will exploit the nickel and cobalt Ambatovy, QIT Madagascar Minerals (QMM) ilmenite which already exports Tolagnaro, and Kraomita Malagasy (Kraoma). With the new standard set by the national committee, this number should increase substantially in 2012. In Madagascar there are currently thirty mining companies and oil exploration companies. 15 of them pay more than 200 million Ariary taxes and royalties to the state, and a dozen have already expressed their willingness to integrate the process. "The others still need to be encouraged, even forced. In other countries, joining the EITI is enshrined in the constitution. The government can also get an order or recommendation, or send a simple invitation to companies to join the process, "said the executive secretary of Madagascar EITI.1 The strict measures described in this press article go hand in hand with the declared political will from the Transitional government not to let the resources wealth go to waste but make them benefit the population. In this sense, the Angola model or however the resources for infrastructure terms of contract proposed by
1

RAKOTOMALALA, MAHEFA http://eiti-madagascar.org/fr/content/compagnies-mini%C3%A8res-adhesionobligatoire-%C3%A0-leiti-en-2012 last accessed 27/02/2012

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China in her mining and oil ventures proves to be in the best interest of the government. Talks about the construction of many hospitals have been overheard by sources close to the presidency, as the president himself announced on a talk show recently1. What he had not mentioned is that, all parts of these hospitals from construction materials to medical utensils- would be imported from China and free of taxes2, while the construction companies to build those hospitals is allegedly very close to the president Andry Rajoelina, although no confirmation or information has been given on that topic. However, Madagascar had already undergone structural changes to try to eradicate the rampant corruption in the administration, even more so since cash flows from extractive deals came into public coffers. Notably, the law anti corruption3 instated:
-

the independent bureau anti-corruption (Bureau independent anti-corruption, BIANCO), an executive body whose mission is to exploit the information and investigate grievances or complaints relating to events suspected of corruption and related offenses, search for in the legislation, regulations, procedures and administrative practices factors of corruption, and recommend reforms to eliminate them; provide advice for the prevention of corruption to any person or public or private organization and recommend measures, including legislative ones to prevent corruption.4

The Higher Council for the Fight against Corruption (CSLCC): The Supreme Council for the Fight against Corruption is an advisory body of the Independent Anti-Corruption Bureau and its mission is to provide oversight and monitoring of the implementation of policy and national strategy against corruption. It must be consulted on the general effectiveness of the strategy against corruption, operating procedures, human resource requirements and general conditions of staffing of the Independent Anti-Corruption Bureau.

Invite du Zoma (Friday Interview) aired March 23, 2012. Translated from Malagasy. Accessible on youtube: http://www.youtube.com/watch?v=TnQS2MmjyMc&feature=related last accessed 28.03.2012 2 This part of the deal had been mentioned by the First secretary (Consul)of the Embassy of the Popular Republic of China in Madagascar, Mr Pan Huanyou, in an Interview conducted in Nanisana, Ambatobe, January 12th, 2012. Translated from French 3 Loi n 2004 030 sur la lutte contre la corruption EXPOSE DES MOTIFS Art. 18 and 19 (Law No. 2004 030 on the fight against corruption EXPLANATORY MEMORANDUM) [W/OL]http://www.droitafrique.com/images/textes/Madagascar/Mada%20-%20Lutte%20anticorruption.pdf last accessed 04.04.2012 4 Op.Cit Art. 22.

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The Law provides that the board's independence is guaranteed by the security function of its leaders, the availability of sufficient resources and autonomy in operations. Yet, after the breakdown of European aid, officially June 7, 2010, the Bianco is currently in a difficult situation. Since its establishment in 2003, it was still the Norwegian state which ensured its operation on the physical and financial. 1 So the consequences of the political crisis of 2009 also hinder the fight against corruption. In addition to the bodies provided by the law, an initiative of Madagascar and the European Union to create the Legal Support Centre and Citizen Action (Cajac) was supported and funded by Transparency International (TI).2 As of February 2011, the CAJAC and the BIANCO are working hand in hand in the fight against corruption.3 Yet Madagascar is the goal of achieving a CPI (Index Corruption Perceptions) of 7/10 in 2015 is far from being achieved, as in 2009, Madagascar holds the 14th rank among 47 Sub-Saharan African states with a 3 points CPI. (0 being the worst, and 10 the cleanest score)4 So far these institutional bodies did not do so well in fighting against corruption, and some 5rumors even point out to the members of the very bodies supposed to guard against malpractices being the first ones to tax faulty administrative elite with blackmail.6 In this sense, the public has somewhat lost faith in political institutions supposed to fight corruption, as small favors seem to be the norm to accelerate administrative affairs in Madagascar, something like the way Russian blat used to work, as Carolyn Hsu stated. Anyway, institutions like the EITI do not really suit China as it does not follow its political culture, where guanxi is omni-present.
1

V.M. Madagascar: le Bianco mis en difficulte (Madagascar the BIANCO in difficulty) [W/OL] La Tribune Tuesday, July 20th 2010, Accessible at http://latribune.cyber-diego.com/societe/139-madagascar--le-bianco-mis-endifficulte-par-la-suppression-des-aides-europeennes.html last accessed 04/04/2012. 2 RADASIMALALA VONJY, Le CAJAC dj trs sollicit (the CAJAC already very sollicitated) Lexpress de Madagascar, July 20th 2010, accessible at http://www.lexpressmada.com/anti-corruption-madagascar/17748-cajacdeja-tres-sollicite.html last accessed 04/04/2012. 3 RAKOTOARILALA NINAIVO, Lutte contre la corruption Collaboration entre BIANCO et Transparency International (Fight against corruption : collaboration between the BIANCO and Transparency International) [W/OL], La Tribune Madagascar, Thrusday 3, 2011, Accessible at http://www.madagascar-tribune.com/Collaboration-entre-BIANCO-et,15425.html last accesse 04/04/2012. 4 Transparency International Corruption perception index 2009, Regional highlights Sub-Saharan Africa Countries/Territories included: 47. P2 5 HSU, CAROLYN Capitalism without contracts versus capitalists without capitalism: Comparing the influence of Chinese guanxi and Russian blat on marketization [J] Department of Sociology and Anthropology, Colgate University, 13 Oak Drive, 13346 Hamilton, NY, USA Available online 14 July 2005 C.L. Hsu / Communist and Post-Communist Studies 38 (2005) 309-327. p311 6 About Bianco for example, it seems that you now have to pay a small tuition of 6 million Ariary (about 2000) ... to integrate the "prestigious" institution white list See Madagascar le pays le plus corrompu du monde (Madagascar, most corrupted country in the world) [W/OL] Accessible at Tananews http://www.tananews.com/2011/02/madagascar-le-pays-le-plus-corrompu-au-monde/ last accessed 04/04/2012.

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The literature suggests a marriage of convenience, metaphorically speaking, between Chinese and African elite interests. A tacit understanding between African elites, who do not condition or regulate Chinese investment, which is driven by domestic interests and policies, and the Chinese government, who does not impose political conditions on African elites that rely on well-established patronage networks. To understand how this marriage actually works we need to combine the different strands of research. The literature reveals a fundamental difference in perspective on the resource curse between the West and China. Within the West a new orthodoxy has developed which identifies good governance as the key to development. The 2011 World Bank strategy for Africa and the EU Aid policy both stress good governance and democracy as pillars of sustainable development. The general discussion of the resource curse is in line with this orthodoxy. Promoting of good governance through increased transparency and accountability is seen as the solution to the resource curse. China on the other hand believes that economic growth comes first and that good or better governance will follow. Chinese policy makers do not share the concept of the resource curse. This difference in perspective has far reaching consequences for civil society advocacy. Chinese government and companies are not convinced that greater transparency and accountability in the extractive industries, as promoted by Extractive Industries Transparency Initiative (EITI) and Publish What You Pay (PWYP), make a sound business case and will reduce risk1 Conditions under which extractive industries can be beneficial for host country? The United Nations World Investment Report is a good starting point in understanding the nature of relations between transnational corporations, extractive industries and development. The report examines these relations and analyses the impacts extractive industries can have on host economies. This report put forward the argument that extractive industries can either help or hamper development objectives. These industries seem to hamper development objectives when the host country lacks the right institutions and regulations. In order for extractive industries to have a positive impact on development, countries need strong domestic resources and
1

KONIJN, PETER Op.Cit.

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productive capabilities, coupled to strong institutions and a long term plan concerning natural resources extraction: the challenge is to take advantage of what natural resource extraction can offer as a catalyst for industrial and economic growth while minimizing the costs1. Another way to think about it is this one: Chinas hunger for African resources is massive. Without access to these resources, it is unlikely that China can sustain its current economic growth rates. In short, China needs Africa. African leaders, if they are genuine in their desire for Africas development, should use Chinas reliance on Africas resources and leverage their position to negotiate beneficial social and economic agreements with their trading partners. The lion should tame the dragon by mimicking on its own turf how the dragon conducts business with foreign investors (emphasis added). 2 These few lines clearly state the line of thoughts that emerge after this research on Chinese FDI in Africa, particularly for the case of Madagascar. Even though classified as a non resource country, Madagascar already has to face the prospects of big mining deals as Chinas resource need is growing and she is securing more reserves, especially on iron ore. So far, Western policymakers, politicians and business leaders have pointed the finger at China for extracting Africas natural resources on the cheap and exploiting weak political institutions for economic gain while leaving Africans with the crumbs. However, the only thing China exploits is the improvidence of some of Africas political elite. Blaming China for Africas ills would be nave3. After all, the Angola model is at the origin a contract, that the Chinese government has structured oil for aid deals that have allowed the Angolan government flexibility in determining the use of aid funds. Although these funds are earmarked for developmental projects in the healthcare, educational, and infrastructure sectors, pinpointing the exact location and use of the aid is impossible. This lack of transparency fosters an environment in which the intended developmental impact must be seriously questioned.
1

UN World Investment Report,2007:154 cited by Domici Spitz, in China in Africa : plunder or co-development, MSc in International Business Summer Dissertation, Nottingham University Business School. Accessible online at http://edissertations.nottingham.ac.uk/2129/1/08MSClixds15.pdf last accessed on 07/02/3012 2 WOELS, GERALD, China in Africa: how the lion should tame the dragon, [W/OL] International affairs review webpage, http://www.iar-gwu.org/node/395?utm_source=China+Africa+News+List&utm_campaign=bdf91d01a0Newsletter9_21_2011&utm_medium=email last accessed on 21/03/2012 3 Ibid.

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For resource-versus-infrastructure contracts in general, the host country can very well argue for more beneficial terms, as they can bargain using their comparative advantages for a leverage and play international buyers against one another. All that lacks is the political will to do good and for now, declared intentions of the Transitional government in Madagascar have shown that political will.

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Chapter 5 Chinese SMEs comparative advantages

Chapter 5 Chinese SMEs comparative advantages

5.1 Chinese communities in Madagascar: familial entrepreneurship and interweaved kinship ties
Among all 53 African countries, the four pioneer states which experienced earlier Chinese waves of migration - South Africa, Mauritius, Madagascar and Reunion - host 92% of the continents Chinese population1. Interestingly, according to Mohan and Tan-Mullins, the higher integration between the Chinese and the local communities, both socially and politically, was also observed in those four countries 2. In Mauritius almost 30,000 older generation Chinese migrants have taken up Mauritian citizenship; in Madagascar intermarriages are common and at least 60% of the Chinese are mixed ethnically3. The first Chinese migrant to Madagascar arrived in the east coast port of Tamatave (now renamed Toamasina) in 1862, where he opened a shop, and later married a local Malagasy woman.4 Six others came to Nosy Be off the north-western coast in 1866, then three more in 1872. Fourteen were noted at Majunga (Mahajanga), also in the northwest, in 1894. Then, a contingent of five hundred arrived at Tamatave in 1896.5 The following year, three thousand Chinese more labourers were brought in at the initiative of the French general Joseph Gallieni to work on the construction of the railway.6 The initial migrants came from Guangxi, but were later supplemented by Cantonese-speakers, both those who came directly from Guangdong and those who had been driven out of Mauritius by increasing competition from Hakka-speakers. 7 Upon arrival, the Cantonese speakers colluded to prevent any Hakka migration to
1

Ohio University Database [O]. - Shao Centre. - September 15, 2010. www.library.ohiou.edu/subjects/shao/databases_popdis.htm. 2 MOHAN GILES and TAN-MULLINS MAY Chinese Migrants in Africa as New Agents of Development? An Analytical Framework [J] European Journal of Development Research. European Association of Development Research and Training Institutes, 2009. - 4 : Vol. 21. - pp. 588605. 3 ZHANG W. and WANG S. Overseas Chinese in Africa (Adapted and translated from Zhang Wanxin, 2005, HuaJiaoHuaRenGaiShu - Overseas Chinese Brief) [R]. Overseas Chinese Affairs Office of the State Council, CCP, PRC, 2005. - pp. 215-235. 4 Mc LEAN, THOMPSON, VIRGINIAa; ADLOFF, RICHARD(1965), The Malagasy Republic: Madagascar today, Stanford University Press p. 271 5 GRANDIDIER, ALFRED (1908), Histoire physique, naturelle et politique de Madagascar, Paris: Impr. nationale pp. 518, 521. 6 GRANDIDIER Op. Cit. p 522 7 PAN, LYNN (1994), Sons of the Yellow Emperor: A History of the Chinese Diaspora, Kodansha Globe, p. 62.

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Madagascar.1 As a result, the Chinese population remained largely homogenous; 98% traced their origins not just to Guangdong, but specifically to the Shunde district.2 Import-export was one popular business, with products such as coffee, cloves, vanilla beans, and sea cucumbers flowing outwards.3 Intermarriage between Chinese men and native Malagasy women was not uncommon.4 Actually, according to a second generation Chinese, who inherited the familial restaurant in the capital city Antananarivo, Those who were lucky enough to make money returned to the country (China) to take a wife. The others took Malagasy wives5. Telling the story of his ancestors, he explains: My grandfather, the first of the family to set foot in Madagascar, arrived by boat in Toamasina with some of his cousins at the beginning of the twentieth century, around the age of 10. He worked among other things for the construction of rails Toamasina-Antananarivo, before establishing himself as a merchant of local products in the Analan'Jirofo region, in a village called Fotsialana. You should know that the later Chinese trader begins their business (and the less wealthy they are), the further they settled at the production chain end, that is to say far from the collection center or the city of Toamasina, where the major buyers of local products such as the French La Lyonnaise or La Marseillaise are.6 Chinese came not just as indentured laborers, but as free migrants too. Often, a Sino-Mauritian would bring his relatives over from China to Mauritius for a period of apprenticeship in his business; after they had gained sufficient familiarity with commercial practices and life in a colonial society, he would send them onwards with letters of introduction, lending them his own capital to start up businesses in neighboring countries, including Madagascar This fact corroborates the argument about the importance of social networks, and the special role played by Chinese overseas business, guanxi and social communities in Madagascar. 7

YAP, MELANIE; LEONG MAN, DIANE (1996), Colour, Confusion, and Concessions: The History of the Chinese in South Africa, Hong Kong University Press, p. 37. 2 MAN, SHUFANG, "", Overseas Chinese Net (People's Republic of China: Chinese Language Education Foundation). 2006-06-30 accessible at http://www.chinaqw.com/news/2006/0630/68/34599.shtml 3 PAN Op.Cit. p63. 4 PAN op.Cit.p157. 5 Interview via email, March 14th, 2012. Translated from French. 6 Ibid. 7 YAP & LEONG MAN 1996 Op.Cit.p37.

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Actually there are two camps within the Chinese community in Madagascar, according to Mathieu Pellerin8. This dichotomy between the old and new Chinese is well and truly real, but behind it, despite everything, there are inter-personal relations which are, essentially speaking, based on business relations, which lend rather more subtle nuances to the idea of a cold co-existence between the two groups. The restaurant known as Le TRAM, for instance, located on the ground floor of the Casino 2000 building and owned by a new Chinese is managed by the director general of the TRAM, Marcel Chan, a descendant of Chinese of the first generation. This same Marcel Chan, who still maintains rather tenuous relations with the region of China from which he originally came, created in 2001 the Malagasy Chinese Business Chamber (MCBC) with Ntsoa Randriamifidimanana - chairman and managing director of the PACOM Group, Fidy Raharimanana chairman of Harson Development, Ramaroson Au Taiove Paul, a Chinese Malagascan based in Hong Kong and Shunde (Guangdong Province), as well as Jacky Radavidra ex-president of GEFP (Group of French and Madagascan Enterprises) and in addition father-in-law of the daughter of Marc Ravalomanana. Through the Malagasy Chinese Business Chamber he organized visits to China for various delegations from local businesses (Madagascan or foreign): these included Gamo (paints), MCI (chemicals), SMEF (refrigeration equipment), Pacom (general hardware), Gerbor (bakeries) and Synergie Communication. As we can see from these few lines, the existence of two camps does not impede the existence of strong business and guanxi networks, reaching even outside the Chinese community to the Malagasy entrepreneurs. This is a very good example of sharing of experience and information through guanxi-networks leading to entrepreneurial innovation in the host country already a good step towards further industrialization. Interviewed on this matter for the purpose of this thesis, Marcel Chan explains how important the creation of the Malagasy Chinese Business Chamber of Commerce (MCBC) was for the development of networks between his region of origin, Shunde, and the Chinese community living in Madagascar, as well as for the Malagasy businesses:
8

PELLERIN MATHIEU, Op.Cit. P5.

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The Town of Shunde, one of the richest municipalities of China, regularly

organizes meetings between Natives of Shunde Overseas and the people of Shunde. You can visit the factories and you are asked to invest when your means allow. Regional Chambers of Commerce, very active, take over. The economic operators there are organized by the Chamber of Commerce China and want to share business opportunities with the Chambers of Commerce in other countries, other regions. Unfortunately, shortcomings of CCIAA Tana (Chamber of Commerce and Industry Antananarivo) have long hampered relations that could be better established otherwise. The MCBC was intended to open up the opportunities offered by China to Chinese operators and Malagasy businessmen of Madagascar. Several visits of delegations of Malagasy entrepreneurs have also been organized in China. For reasons of economy and availability of the Bureau, the MCBC has been put on standby a few years ago. We expect a good time to resume normal activities. Most of our members already work directly with China, since we have opened up the path. Our role has contacted works. A member that has largely benefited from our structure is SMEF which procures equipment cooling in China and has multiplied its sales thanks to this, Shunde producing over one third of air conditioners in the world. The Cement MALOCI is also one of our founding members.1 According to the study by Mathieu Pellerin2, in the same spirit, the Hong Kong multi-millionaire Hui Chi Ming3 entrusted the management of his Madagascan affairs to one of Madagascars old Chinese, William Chan Kong, who happens to be the nephew of the vice-president of the Chinese Congregation and the AMC (Madagascar-China Friendship Association), Georges Chan Kong. A final example of the present-day relationship between the two generations is provided by the Trading Centre building situated on Independence Avenue, before it burnt down at the
1 2

Marcel Chan Interview via email, Antananarivo Madagascar, 14 March 2012. PELLERIN, MATHIEU Op Cit p6. 3 This former chairman of Sunpec is now founder-chairman of the BICM Bank (Industrial and Commercial Bank of Madagascar) and of several mining and oil enterprises including Madagascar Petroleum International and Madagascar Mining Group.

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beginning of 2009, which had been the fruit of a co-operation between a new Chinese, Chan Rakotofiringa, and an old Chinese, Jacquelin Chan Kong. It is, indeed, appropriate to recall that the old Chinese are second-class citizens, given that China does not permit dual nationality. This means that many old Chinese have to travel to China on a Malagasy passport. This, however, does not prevent the oldChinese chairman of the Chinese Congregation, Mr. Fong, from making the most of his close contacts with the Chinese Embassy so as to prosper in the world of business as the head of his Samkowa family business. Business sense would thus seem to do away with certain cultural barriers, which are sometimes wrongly presented as insurmountable. Trade in rosewood currently provides the best example of this: Chinese established in continental China come to Madagascar and some of them rely on old Chinese based in the East of the country and directly involved in the procurement of rosewood. This is how an old Chinese would describe the situation: it is more a question of timing than anything else. The new Chinese come here only to earn money in the short term and then go back to China. For us Madagascar is the land we were born in and shall die in we dont approach things in the same way.1 These stories reported here are all empirical evidence that the guanxi-networks can be extended from the overseas Chinese communities to the Malagasy entrepreneurs, forming a web of business networks that can be the structure for a more intensive industrialization in Madagascar. This argument will be tested further among Chinese SMEs who invest in Madagascar, through an interview and a survey, the results of which will be treated in the section after next.

5.2 Chinese Creating SME in Madagascar: From political task to real challenge
In this section, the success stories of Chinese businessmen investing in Madagascar will be told, pointing out how Chinese investment in small and medium enterprises (SMEs) can be beneficial for both investor and host country, even though the intent and motivation to invest was not there in the first place Actually, the investors mentioned they were in Madagascar for political or social reasons, and ended up investing in private companies.
1

PELLERIN, MATHIEU The Recent Blossoming in Relations between China and Madagascar [A] IFRI Sub Saharan Africa Program February 2012 p.7-9 accessible at http://www.ifri.org/?page=detailcontribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/2012

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The first case, and the only nominal case we will give here, is that of Ren Yu Jie, former member of the official Chinese medical mission in 1992, who now is owner of the very prosperous enterprise Bao Lai, official retailer of the Chinese brand Chang Hong in Madagascar, and former president of the Association of Chinese Entrepreneurs in Madagascar. He was interviewed for the purpose of this thesis in March 2012.1 For Ren Yu Jie, he was given the mission to provide medical care in the rural district of Ambovombe in the South and, seeing business opportunities in the country, decided to quit the public sector in 1995 for the business of importing and selling good quality products at affordable prices, ranging from winter blankets to toys... And then in 2003 he began importing home appliances from the brand Chang Hong, of which he obtained exclusive resale of the mark on all of Madagascar in 2005. According to his story, developing some links with some local operators did help him a lot in founding his business: Some of the local Chinese operators are longtime friends of the time when I was a doctor, and it is these friends who introduced me to the business community in Madagascar. My case is somewhat unusual, because I was part of a mission as a physician; I have not had relations with public enterprises.2 He therefore did not receive any incentive to invest in Madagascar. His case is very different from that of 67% of the Chinese SME owners that undertook the survey, who did benefit from Chinese government incentives to go to Africa for investment purposes. Regarding guanxi-business networks, as former president of the Association of Chinese Entrepreneurs in Madagascar, he did mention that there were some contacts between the Chinese overseas entrepreneurs, but very few and only on matters of common interest3, as everyone was busy with their own economic activity. Additionally, Ren Yu Jie mentioned the existence of an association that regrouped Malagasy and Chinese that is the Club of Friends of China (Le Club des
1 2

Interview in Antananarivo, Madagascar on March, 5th 2012. Translated from French. Ibid. 3 One example of such a matter was the incident that happened on November 22, 2011, when a Malagasy employee of a Chinese operating in retail business was physically attacked by his employer, causing a fury of the crowd against all Chinese merchants present in Behoririka, the capital citys Chinatown. In a statement, the Chinese Embassy in Madagascar emphasizes that it attaches great attention to the incident at Behoririka yesterday. Having heard the news, she appealed to the party concerned to cooperate with the police and to transfer the author of the indicent. In addition, the embassy says it is closely monitoring the situation of the wounded. In the process, it urges the Chinese living in Madagascar to respect the law in force and to live harmoniously with the Malagasy people. As reported by Seth Andriamarohasina for Lexpress de Madagascar, November23, 2011. http://www.lexpressmada.com/behoririka-madagascar/29411-emeutes-a-la-galerie-commerciale-venic.html last accessed 04.04.2012.

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Amis de la Chine), created by Malagasy administrative officials and students who underwent training programs in China. This formal structure can hold guanxi-relations between Malagasy administrative officials and Chinese officials, as the association works in partnership with the Chinese Embassy and the Chinese Bureau of Cooperation, as well as with the Association of Chinese entrepreneurs in Madagascar. As for business relations with Malagasy counterparts, Ren Yu Jie mentioned that he only did appeal to companies Malagasy for advertising only. He noticed that his retailers in shops in the provinces were Malagasy or Indian, but they only entertained seldom joint-problem solving with no sharing of business information. This tendency to stay away from Malagasy businesses is not seen through the survey, as 50% of interviewed Chinese SMEs have a Malagasy business partner and 60% of those who do not have business partners wish to create a joint-venture with a Malagasy counterpart. As for the Chinese SMEs who do have a Malagasy business partner, 100% of them trust their Malagasy counterpart and solve business-problems with them; 75% of them share business information with their Malagasy partner. So the tendency uncovered by the survey is towards a possible formation of business networks between Chinese SMEs and their Malagasy counterparts. The second case is that of Zhang Chunlai, board chairman of Tangshan Shuguang Group of China, was given the mission to invest and build a factory in Madagascar in 2007, as reported on the web site of the FOCAC as an example to follow for Chinese investors in Africa.1, braving a critical situation, when he began developing his African ties. His working experiences in the past few years in Africa has provided him with a lot of inspirations, which he shared without reservation when taking an interview with this journalist in the hope that other Chinese private entrepreneurs could learn and benefit from them before going to Africa. Zhangs ties with Africa came about purely out of chance. Once upon a time, he accompanied the China-Africa Chamber of Commerce of Private Businesses on an investigation tour to Africa. Soon upon returning, he received a call from his boss, who hoped that the Shuguang Group could get the contract of building a cement plant in Madagascar and it should start as soon as possible. It turned out that the then President of Madagascar,
1

LIU CHUNXIAO, Culture, Common Interests and Win-win Outcome-- Zhangs Business Building Secret in Africa, 2010/10/29 , Africa Magazine http://www.focac.org/eng/zxxx/t765159.htm accessed on 15/02/2012 website FOCAC Last accessed 04.04.2012.

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Marc Ravalomanana, had made a request to the Chinese government hoping that the Chinese investment could arrive in a speedy manner to help the country address the serious shortage of cement on the domestic market. Zhang confesses candidly that he knew little about investing in Africa, and the decision to invest in cement making in Madagascar was more of a political task. Nonetheless, it was just this unexpected political mission that led the Shuguang Group into Africa and set up his ties with the continent. As opposed to Zhang Chunlai and Ren Yu Jie, the Chinese entrepreneurs encountered during the survey did not come to Madagascar for political reasons, although many of them (50%) qualified a former personal visit as having a very important weight in their decision to invest in Madagascar.

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Chapter 6 Findings
The following list of findings emerges from this research on Chinese FDI in Madagascar.

Finding 1: Chinas OFDI profile suits that of Chinese FDI in Africa and in Madagascar
Chinese first began giving aid to Africa in the late 1950s as a tool of diplomacy and solidarity with fellow socialist countries. This is not the case in Madagascar, which recognized Taiwan under the Ratsiraka Presidency(19751991), and normalized her relations with China, PRC in 1992.
-

While most Chinese investment in Africa is still directed towards extractive industries, Chinese firms are increasingly seeking business opportunities in a wide range of sectors. The composition of Chinese investment on the African continent as of 2009 is as follows: the mining sector (including oil and minerals) had the largest share of FDI stock in 2009 at 29.2%, followed by manufacturing (22%), construction (15.8%), and financing (13.9%).1This is also the case in Madagascar in 2006 where Chinese businesses are present in telecommunications (83%), manufacturing (1%) and finance (15%).

Chinas FDI flows into Africa from 2003 to 2008 are mostly directed to South Africa as statistics from the Chinese Commerce Ministry show2, and Madagascar only benefitted from 1% of those investments, but Madagascar made it to the top 10 destinations of Chinese investment (regardless of the fact that she is not listed as a resource rich country) and this is substantial considering that there are over 50 countries in Africa.

Statistics show that after the political crisis in 2009, the industries in Madagascar met some difficulties, namely some firms left the country for good, but a few months after the crisis a dynamism in some sectors was

1 2

EDINGER H., PICTORIUS C Op.Cit. p.504. Statistics presented in Chinese Trade and Investment Activities in Africa [J/OL], Policy Brief VOl.1 Issue 4, 29 July 2010, The African Development Bank Groupd, Chief Economis Complex, Accessible at http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Chinese%20Trade%20%20Investment %20Activities%20in%20Africa%2020Aug.pdf last accessed 04.03.2012

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already seen. This shows that in a country where political crises are cyclicalmost a structure and not a conjuncture- the investors know what risks they incur and still knowingly invest in sectors they assume would rebound quickly into bringing growth. This is particularly true for Chinese investors, as Buckleys empirical results revealed1.Looking at risk perception, Chinese FDI seems to be rather attracted than deterred by political risk. This observation can be seen as supporting the analysis that the cooperative hands of the Chinese government can play a bigger role in Chinese FDI to countries with a weak rule of law, and have can provide less strong support in highly developed markets. The case of Madagascar then supports this assumption, as for the past ten years, political turmoil and instability has put investors at bay for the most part.

Finding 2: The Chinese way of doing business in Africa can be beneficial to Africa if the African leaders are willing it to be
Chinas hunger for African resources is massive. Without access to these resources, it is unlikely that China can sustain its current economic growth rates. In short, China needs Africa. African leaders, if they are genuine in their desire for Africas development, should use Chinas reliance on Africas resources and leverage their position to negotiate beneficial social and economic agreements with their trading partners. The lion should tame the dragon by mimicking on its own turf how the dragon conducts business with foreign investors.
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The Angola model is at the origin a contract, that the Chinese government has structured oil for aid deals that have allowed the Angolan government flexibility in determining the use of aid funds. Although these funds are earmarked for developmental projects in the healthcare, educational, and infrastructure sectors, pinpointing the exact location and use of the aid is impossible. This lack of transparency fosters an environment in which the intended developmental impact must be seriously questioned.

BUCKLEY et. al. Op. Cit. 2007. p. 513

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For resource-versus-infrastructure contracts in general, the host country can very well argue for more beneficial terms, as they can bargain using their comparative advantages for a leverage and play international buyers against one another. All that lacks is the political will to do good and for now, declared intentions of the Transitional government in Madagascar have shown that political will.

The literature reveals a fundamental difference in perspective on the resource curse between the West and China. Within the West a new orthodoxy has developed which identifies good governance as the key to development. The 2011 World Bank strategy for Africa and the EU Aid policy both stress good governance and democracy as pillars of sustainable development. The general discussion of the resource curse is in line with this orthodoxy. Promoting of good governance through increased transparency and accountability is seen as the solution to the resource curse. China on the other hand believes that economic growth comes first and that good or better governance will follow. Chinese policy makers do not share the concept of the resource curse. This difference in perspective has far reaching consequences for civil society advocacy. Chinese government and companies are not convinced that greater transparency and accountability in the extractive industries, as promoted by Extractive Industries Transparency Initiative (EITI) and Publish What You Pay (PWYP), make a sound business case and will reduce risk1

Due to the uniqueness of Chinese culture and characteristics, relationship building is different from western practices. To add with, in the use of general framework of network as structure, context and entrepreneur are both important, But equally, if not more so in China, relationship building is important for the success of entrepreneurship. Indeed, western entrepreneurs may find difficulties in using western network building technique to develop the Chinese market.

PETER KONIJN Op.Cit.

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Finding 3: Africa is changing , China is developing and the time is ripe for China to be a leading goose for Africa in the next wave of globalization
As Robert Zoellicks words suggest, todays rapidly evolving world economy is opening important opportunities for low-income countries. Following the logic of the new structural economics and its underlying flying-geese patterns in economic development, most notably Chinas emergence as the worlds factory for labor-intensive industries and its upcoming graduation from such economic activities.
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China is at a stage like that reached by Japan in the 1960s and Hong Kong SAR, China; Korea; Singapore; and Taiwan, China, in the 1980s. To continue growing dynamically against the background of declining wage competitiveness, China will have to follow the path of the earlier Asian geese and start to relocate its labor-intensive industries to low-income countries.1 Indeed, this is already happening. A large share of Chinas outward foreign direct investment in Africa, which had reached USD9.33 billion by the end of 2009, has gone to manufacturing (22 percent), second only to the share in mining (29 percent). And China is building six economic and trade cooperation zones in the Arab Republic of Egypt, Ethiopia, Mauritius, Nigeria, and Zambia (China, Information Office of State Council 2010). More such initiatives are likely to happen.

As China moves forward, there will be a major difference with earlier patterns of industrial upgrading: its economy is significantly larger than those of the geese that led the first round of structural transformation in Asia. China has an estimated 85 million workers in manufacturing, most of them in laborintensive sectors. The reallocation of these workers to higher value added, more sophisticated products and tasks will open up great opportunities for labor-abundant, lower-income countries to step in and produce the labor-

Based on the estimation by Maddison (2010. Historical Statistics of the World Economy: 1-2008 AD (www.ggdc.net/maddison/Historical_Statistics/vertical-file_02-2010.xls)), Chinas per capita income (measured in purchasing power parity) was 6,725 international dollars in 2008, the same level as in Japan in 1966, Korea in 1986, and Taiwan, China, in 1983. These economies started to relocate their labor-intensive manufacturing industries at that income level, Japan to the East Asian Tigers and Korea and Taiwan, China, to mainland China.

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intensive manufacturing goods that China leaves behind. As a result, China will not be a goose in the traditional leader-follower pattern of industrialization for a few lower-income countries but a dragon. Five fundamental changes are seen to be at work in Africa: more democratic and accountable governments, more sensible economic policies, the end of the debt crisis and changing relationships with donors, the spread of new technologies, and the emergence of a new generation of policy makers, activists, and business leaders. This is exactly the argument defended by this thesis: the political turmoil witnessed in Sub-Saharan Africa is a transition phase towards better government regimes, and forecasts a future where countries like China, with her non-interference policy, can be the source of investment, technology transfer and ultimately economic growth, provided that the change of political system is for the better.
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According to Rabinovitch, there is a reason why main-stream economists have praised the ASEAN-3 experience and the flying-geese model of development. Mainstream economists, especially supporters of the neoliberal agenda of the World Bank and International Monetary Fund (IMF), are finding it difficult to sustain their position that state interventions-especially "distortions" of market prices-are almost never helpful. They have, therefore, eagerly embraced the experience of the ASEAN-3, whose rapid growth appears based more on unregulated market activity and foreign direct investment (World Bank 1993, 1).1

In terms of manufacturing activities, it should be noted that Chinese investments are oriented towards activities to potential exporters like textiles and sugar, where Madagascar benefits from the various international agreements and PTAs on export quotas towards industrialized countries.

In terms of numbers, the subsidiaries are the most widespread form of foreign firm used by Chinese investors in Africa, as well as in Madagascar. Indeed, 56% Chinese-funded enterprises in 2006 are subsidiaries, followed by

HART-LANDSBERG, MARTIN and BURKETT, PAUL Contradictions of Capitalist Industrialization in East Asia: A Critique of "Flying Geese" [J] Theories of Development Reviewed work(s): Economic Geography74(2) 1998:87-110. Published by: Clark University Stable URL: http://www.jstor.org/stable/144277 .Accessed: 23/11/2011 09:49 P89.

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companies affiliated with 25% and Chinese-funded enterprises and branches which represent only 19%. These figures indicate an intention of China to work with the Malagasy part. This is beneficial for the country. There is a notion of knowledge sharing and expertise from Chinese investors. This goes in line with the argument that Chinese FDI can bring about transfer of technology to the local businesses, which is a very positive thing and a premise to the technological transfer needed for an industrialization process a la flying geese model.
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The success of the Zone Franche in Madagascar is under threat from other factors than the recent political upheaval. Political sanctions as well as the very nature of the PTAs as time-limited institutions are to be blamed. Beyond the case of Madagascar, the Zone Franches success has added fuel to the idea that using EPZs to develop a productive manufacturing base is a possible path for African countries. The undermining of this success story would be fraught with repercussions and lessons since it would force Madagascar to develop an alternative growth model.

Finding 4: The difference between Chinese and Western-namely American way of reacting to political crises in Africa is a matter of norms, and the norm of non-interference is more beneficial to Africa for the time being
The Malagasy textile industry is a case in point to demonstrate the effect of flying geese model of industrialization on the textile industry in Madagascar, as suggested first by Deborah Brautigam with regards to decentralization of Mauritian textile industries towards Madagascar1. The development of the sector could have been a success story, but wasnt one because of political sanctions imposed by the United States on Madagascar following the 2009 political coup. It is also a an empirical proof that PTAs in this case the African Growth Opportunity Act, AGOA- as structural social networks (see
1

According to Brautigams argument, the Mauritian case can be seen as an extra-Asian example of the global reach of Chinese business networks, and even evidence of the growing transnationalism of domestic capital in the Third World (as Mauritian investors expand their investments in nearby Madagascar). BRAUTIGAM DEBORAH Close Encounters: Chinese Business Networks as Industrial Catalysts in Sub-Saharan Africa [J]. Royal African Society, 102.2003:447-467. P449.

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chapter 3.3 Network Theory: networks as structure), do not necessarily attenuate negative political sanctions from the most powerful state in terms of economic and social power1, although Hafner-Burton and Montgomerys analysis may say that the social powers of states do not equate their economic power. In the case of Madagascar, the non-respect of the democratic norm was the most significant element to the United States, thus causing the latter to sanction the former, and putting an end to what could have been a success story in the textile industry. The political turmoil lately witnessed in Sub-Saharan Africa is a transition phase towards better government regimes, and forecasts a future where countries like China, with her non-interference policy, can be the source of investment, technology transfer and ultimately economic growth, provided that the change of political system is for the better. The policy of political non-interference is a norm in Chinese Foreign Policy and its consistency is playing in favor of China.

While states material power is determined by the relative size of their material capital, social power is determined by the relative social capital created by and accessed through ties with other states in the international system such as ties through mutual membership in PTAs. HAFNER-BURTON and MONTGOMERY Op.Cit. p25.

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Conclusions
The majority of Chinas investments have been in non-resource rich economies, such as Tanzania, Ethiopia and Rwanda. These countries have benefited from Chinas focus on sectors like telecommunications and manufacturing. This is a growing trend. Chinas own manufacturing base is becoming more innovative and wages are increasing, forcing Chinese firms to seek new manufacturing locations and production centers around the world. As Chinas investment portfolio on the continent continues to diversify and expand, African leaders should take advantage of new opportunities and revenue sources for their states. [] , African firms need to form international partnerships that are advantageous for Africa, allowing it to develop skilled human capital, provide access to knowledge transfer, and capture technical know-howall crucial for growth on the continent.1 These few lines quite correctly sum up the recommendations this thesis can make after analyzing Chinese FDI in Madagascar as a case study and testing ground to understand better Chinese FDI in Africa. Using the case study of Madagascar and the embedded case studies of the textile industry and two extractive deals, this thesis shed some light on the Chinese way of doing business in Africa, uncovering the process by which Chinese big extractive firms, textile EPZs and SMEs have settled on the continent and especially in Madagascar as a case study, using network theory as a theoretical framework. It also presaged for the feasibility of an industrialization process a la flying geese model of the continent under the Chinese leadership in Africa, looking at Madagascar as a case study in particular. In this extent, the most important part is played by African leaders as they are to assure that the momentum given by Chinas development does not pass the continent by.
1

WOELS, GERALD, China in Africa: how the lion should tame the dragon, [W/OL] International affairs review webpage, http://www.iar-gwu.org/node/395?utm_source=China+Africa+News+List&utm_campaign=bdf91d01a0Newsletter9_21_2011&utm_medium=email last accessed on 21/03/2012

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Conclusions

With regards to investment, the Chinese way of doing business in Africa can be beneficial to Africa if the African leaders are willing it to be Africa is changing. China is developing and the time is ripe for China to be a leading goose for Africa in the next wave of globalization. As for foreign policy in general, the difference between Chinese and Westernnamely American way of reacting to political crises in Africa is a matter of norms, and the norm of non-interference is more beneficial to Africa for the time being. The consistency of Chinese foreign policy and the respect of the norm of noninterference sketch a hope for some industrialization in Madagascar. While the preferential trade agreements from the United States is the instrument for this, as it comes with strings attached, Madagascar can politically get away from the influence of the United States and other traditional donors or at least find leverage in the scramble for resources playing on her own comparative advantages - and turn to China as Chinas rise is giving momentum to an alternative model of growth industrialization a la flying-geese model So can the rest of Africa. This thesis answered the questions of how and why do Chinese investors come to Africa, especially in a non-resource rich country, politically unstable and lacking basic industrial infrastructure like Madagascar. - How does China invest in Madagascar in particular and in Africa in general? Mostly through state-owned enterprises in extractive industry; and when it comes to private multi-national corporations through branches and subsidiaries; same goes for small and medium enterprises. Guanxi business networks created between administrative officials throughout African countries and overseas Chinese business networks also play a preponderant role in investment medium. A particular aspect for Chinese businessmen in Madagascar is that they become residents of the host country (Madagascar) and are no longer accounted as foreign investors after a while. - Why does China invest in Madagascar in particular and Africa in general? The attractiveness of preferential trade agreements in a principal motive for the case of Madagascars textile industry, as well as low wages and resources untapped reserves of minerals and oil- for Africa in general. As concluding remarks it is important to note that Chinese FDI in Africa is not so different from Western FDI in the sense that both parties are interested in resources and low wages from Africa. The main difference is maybe the norms paramount to
157

those investments, namely Chinese norm of non-interference, that some researchers address to as the Beijing Consensus, as opposed to Western democratic norm paramount to the Washington Consensus. In this regard, Chinese firms do not discriminate against what the West would qualify as rogue states to invest in. The Western finger pointing at China for this is very hypocritical in the sense that Chinese firms are not acting any differently from Western firms when the time for the scramble for Africa came, but the latter did so hypocritically. The difference of the Chinese way is consistency and largess when it comes to drawing resources-for-infrastructure deals. The choice to use the extended opportunities of the Chinese way of making business for rent-seeking or for sustainable development lies in the hands of African leaders. This said, one cannot generalize as to painting an image of China extending disinterested hands of friendship to Africa, nor can one generalize as to fitting the image of a China Inc. taking over the resources of Africa and the world.. Chinese firms are effectively investing in Africa for the comparative advantages the continent can offer. Depending on actors, the stories can be success stories or not, as demonstrated through the embedded case studies of Malagasy textile industry, the WISCO consortium exploitation of iron ore deal, or the failed deal for oil exploration attempted by China International Fund. Chinese firms are also rightly seizing opportunities that Western countries would disregard for normative reasons, which can be a chance or a curse for Africa, depending on the leaders. It is up to Africa to seize the opportunities Africa can advantage of the backwardness following the flying geese model of industrialization and attracting EPZs with PTAs. Africa can take advantage of Chinas need for resource to lay the infrastructure needed as a prerequisite for industrialization As for the case of Madagascar, some further research work can be undertaken to study the impact of Malagasy traders who imports goods from China to Madagascar, in application of Akamatsus theory that : Trade is the main way of introducing new products and technology into a country. Being either much cheaper or of a modern type vis--vis local counterparts, imported goods are likely to drive many local firms out of business, and impoverish many manufacturing segments in the follower economies. Over time, however, the situation will somehow reverse itself since, as Akamatsus argument goes, imports
158

Conclusions

somehow facilitate the transfer of technology and the acquisition of the capital goods needed to produce the import-substitution products. In any case, as consumers in the follower economies acquire a taste for modern goods, the local market for such goods will expand. And when the market in the importing economy is large, or becomes large enough, local firms may effectively find their own niche in it. The further research could show how Malagasy traders opened their eyes to new niches and micro-industries as the food and beverages industry, left open by the end of the monopoly held by former president Marc Ravalomanana. During the field research for this thesis, the researcher already witnessed a boom of production of food and beverages that came about in Madagascar as Malagasy went to Guangzhou industrial fairs and bought ready-made small industry plants for food and beverages, PVC and aluminum etc. This new research prospect could draw on the work by Deborah Brautigam on the Nigerian entrepreneurs in the eastern Nigerian town of Nnewi, and how they used their connections to Chinese trading networks (mainly in Taiwan) to assist in the transition from importing auto spare parts, to producing them, creating a small industrial boom.1

See BRAUTIGAM DEBORAH Close Encounters: Chinese Business Networks as Industrial Catalysts in SubSaharan Africa [J]. Royal African Society, 102.2003:447-467. P449-461.

159

Appendix

Appendix 1. List of Interviewees

Representative for Chinese Institutions
Interviewee 1

Pan Huanyou

First Secretary (Consul) of the Embassy of the Peoples Republic of China in Madagascar,

Interviewed on January 12th 2012, in Antananarivo, Madagascar.

Representative for Malagasy Institutions

Interviewee 2

Denis Raoelijaona

Director of Investments at the Ministry of Industry

Interviewed on April 13th 2011, in Antananarivo, Madagascar.

Representatives for Chinese entrepreneurs

Interviewee 3

Ren Yu Jie,

Owner of the enterprise Bao Lai, Official retailer of the Chinese brand Chang Hong in Madagascar Former president of the Association of Chinese Entrepreneurs in Madagascar.

Interviewed on March 5th 2012 in Antananarivo, Madagascar.

Interviewee 4

Marcel Chan

Owner of the restaurant Le Tram

Interviewed on March 14th,2012, via email, in Antananarivo, Madagascar.

160

Appendix

Appendix 2: List of questions asked during interviews

To the Chinese representative:

1> How would you describe the relationships within the Chinese community in Madagascar? 2> What is the number of Chinese overseas businessmen installed in Madagascar? 3> In which sector of economic activity do Chinese operate in Madagascar? 4> How did the Chinese investment in Madagascar evolve during the past thirty years? 5> What is the situation of Chinese public and private investments in Madagascar? 6> Please describe the different networks tying Chinese overseas in Madagascar. 7> How would you assess the Chinese investments in Madagascar overall?
To the Malagasy representative:

1. How would you describe the overall investment framework in Madagascar? 2. From which countries do FDI in Madagascar come for the most part and did this trend change in the wake of political crises? 3. In which sector of economic activity do Chinese operate in Madagascar? 4. How did the Chinese investment in Madagascar evolve during the past thirty years? 5. What is the situation of Chinese public and private investments in Madagascar? 6. How would you assess the Chinese investments in Madagascar overall?
To the representatives of the Chinese entrepreneurs:

1. Please tell the history of how you/your ancestors came to Madagascar.

161

2. What are your links with the Chinese community in Madagascar especially

concerning kinship ties and guanxi-networks?

3. What are your links China especially concerning guanxi-networks?

4. What are your links with the Malagasy community, especially concerning business networks? 5. What are your links with the Chinese community, especially concerning business networks?

162

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Acknowledgement

Acknowledgement
This research project would not have been possible without the support of many people. It is with immense gratitude that I acknowledge the support and help of my Professor and Supervisor, Prof. Liu Debin. I am indebted to my co-supervisor, Prof. He Zhipeng, who was abundantly helpful and offered invaluable assistance, support and guidance all through the writing process. Deepest gratitude is also due to the coordinators of the Institute for International Studies, Dr. Wang Qiubin, Dr. Ham Myungsik, and Mr. Yan Zhen, and to all academic and administrative members of the IIS and Jilin University. I would also like to convey thanks to the Chinese Scholarship Council and the Embassy of the Peoples Republic of China in Madagascar for providing me with a scholarship that permitted me to attain my academic goals. Thanks are due to Mr. Pan Huanyou, first secretary of the Embassy of the Peoples Republic of China in Madagascar; Mr. Ravelomanantsoa Grard, General Director of the National Institute of Statistics of Madagascar and Mr. Jimmy Rajaobelina, Chief of the Service of Economic Statistics at the National Institute of Statistics of Madagascar; Mr. Denis Raoelijaona valuable time. Special thanks also to all my graduate friends, especially group members, Jo Anderson-Figueroa, Kristina Taylor Sibblies and Laurelia Aliana Floutine, for sharing the literature and invaluable assistance. I cannot find words to express my love and gratitude to my families; for their understanding and endless love, through the duration of my studies. This thesis could not have been written without my father Rasamimanana Andriamisaina and my mother in law Razakasoa Ihantariminos babysitting time, my mother Rasamimanana Olgas connections and my father in law Rakotoarimanana Mahefasons delicious meals. I dedicate this thesis to my husband Rakotoarimanana Mahefa Tsilavo, as without his support the journey would have been tougher, and to my beloved daughter Rakotoarimanana Kaloiniaina MahayTia.
197

Director of Investments at the

Ministry of Industry; Mr. Ren Yu Jie, Mr. Marcel Chan and all interviewees for their