中国在马达加斯加的投资模式及其对非洲国家的启示

Analysis of Chinese Investments in Madagascar and their

Implication for African Countries

作者姓名：米哈娜

Rasamimanana Mirana

专业名称：国际政治

指导教师：刘德斌 教授

何志鹏 教授

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学科专业：国际政治

论文题目：中国在马达加斯加的投资模式及其对非洲国家的启示

作者签名： 　　　　　　指导教师签名：

　　　　　　　　　　　　　　　　　2012年 月 日

作者联系地址（邮编）：吉林大学国际关系研究所（130012）

作者联系电话：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 China’s 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. Guanxi–business 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

Madagascar’s textile industry, as well as low wages and resources – untapped reserves

of minerals and oil- for Africa in general.

I

中文摘要

通过对中国投资模式的解析，本文试图探索一种观察中非关系的新途径。

在理论方法上，作者倾向于案例研究，因为这是在一套复杂的、较难把握的国

际事件中理清“如何”及“为何”等问题的较好方式。在学界尚未建立相应研

究模式的情况下，选取恰当的、具有代表性和科学价值的案例来进行分析，这

不失为一种研究问题的合适方法。

马达加斯加为我们提供了这样一种有价值的案例：中国在马达加斯加的投

资状况优于大部分非洲国家（详见第 1 章第 3节），这部分缘于两国人口亲属

关系的不断增加，但马达加斯加工业化进程中并未引入“雁行模式”。此外，

马达加斯加是非洲少数几个被归为“资源匮乏”却又吸引了众多提炼行业跨国

公司和中小企业的国家。本文的案例分析采用嵌入式方法，其分析单位为中小

企业、勘探业跨国公司以及纺织业出口加工区。

通过对马达加斯加及上述嵌入单元（纺织业、勘探业、采掘业）的分析，

本文将对中国在非洲的商业运作模式进行解析，将中国在马达加斯加的纺织业

勘探业、提炼业投资作为具体的案例研究对象，并使用网络理论作为研究方法。

同时，本文将以马达加斯加作为研究对象，对中国领导下非洲大陆的 “雁

行模式”发展做出预测。在这股浪潮中，非洲各国领导人所起的作用是非常重

要的，他们必须确保自己的国家不会错失中国给非洲带来的发展机遇。

中国在非洲的投资和商业模式对非洲来说可以是有益的，但这里有一个前

提：非洲各国领导人必须认识到非洲正在改变且需要改变。随着经济的不断发

展，中国在下一波全球化浪潮中担当非洲“领头雁”的时机已经成熟。

从外交政策的整体情况来讲，中国与西方国家（例如美国）在非洲发生政

治危机后的处理方式存在原则上的差异。目前，不干涉原则对于非洲来说是最

有利的。

I

中国外交政策的连贯性及其不干涉内政原则为马达加斯加的工业化进程带

来了希望。而马达加斯加与美国签订的特惠贸易协定中有明显的附加条件。马

达加斯加在政治上可以逐渐摆脱联合国等传统的援助机构，并向中国倾斜——

中国的崛起可以通过“雁行模式”给马达加斯加的工业化发展带来机遇。如果

马达加斯加可以这样做的话，其他非洲国家同样可以。

本文回答了这样一个问题：中国投资者为何、以及如何来到了马达加斯加

这样一个资源并不丰富、政治较不稳定且工业基础设施较不完善的国家？

中国在马达加斯加乃至整个非洲的投资分别是怎样运作的？中国在马达加

斯加的投资项目大多为采掘业的国有大型企业，此外也有一些私有-国有复合型

企业及中小型企业。关系（Guanxi）——一种贯穿于中国和非洲官员之间的商

业网络联系也在中国对非洲的投资领域占有重要地位。另外，在马达加斯加从

事活动的中国商人有一个显著特点：他们逐渐定居在马达加斯加，并不再被视

为外国投资者。

中国为何要到马达加斯加乃至非洲来进行投资？马达加斯加纺织业的特惠

贸易协定对中国是一个很大的诱惑。此外，非洲范围内价格低廉的劳动力、尚

未被开采的矿产和油气资源也是吸引中国的一些重要因素。

以下是对中国在马达加斯加的直接投资进行分析后得出的结论：

结论 1：中国的对外直接投资模式适合中国在非洲和马达加斯加的投资

中国从 20世纪 50 年代末起开始对非援助，将其作为外交手段和扶植社会

主义国家的工具。但这种援助行为并未涉及到马达加斯加，因为马达加斯加在

拉齐拉卡总统当政期间（1975-1991）承认台湾的合法地位，直到 1992 年马达

加斯加和中华人民共和国才实现关系正常化。

目前中国在非洲的投资仍大多集中于矿产采掘业，但与此同时中国公司已

开始积极扩宽投资领域。2009 年中国在非洲大陆的投资结构如下：采掘业（包

括油气资源和矿产品）所占比重最大，达到 29.2%；接下来分别是制造业

II

（22%）、建筑行业（15.8%）和金融业（13.9%）。1 这种比例也与 2006 年中

国在马达加斯加的投资结构十分类似。而现在中国在马达加斯加的投资模式变

为：通讯行业占 83%、制造业占 1%、金融业占 15%。

根据中国商务部的统计数据，2 2003 年到 2008 年间中国对非洲的投资大多

流向南非，马达加斯加从中国的投资中只获得了 1%的份额。但若将非洲国家的

数量划定在 50多个的范围内，我们会发现马达加斯加已跻身中国对非洲投资额

排名前十的国家。

统计数据显示，2009 年的政治危机使马达加斯加国内工业遭遇了一系列问

题（例如一些公司永久撤离了马达加斯加）。但在危机后不久的几个月里，许

多部门出现了复苏的迹象。这表明，在一个结构性政治危机频发的国家里，投

资者了解风险与收益的辩证关系，并会选择在可靠的投资领域里继续经营下去

这种结论在中国投资者的身上表现得尤为突出，就像巴克利的经验主义所揭示

的那样。3从风险的角度来看，中国的投资者更像是被政治风险所吸引，而不是

被吓跑。本文的研究也证实了这样一种观点：中国政府的投资在秩序较差的国

家中可以发挥更大作用，而在市场较发达的国家中显得则相对弱势。马达加斯

加的例子进一步证明了上述观点——在过去的十年中，政治上的动荡常常吸引

了中国投资者的到来。

结论 2：只要得到非洲领导人的认可，中国在非洲的商业运作模式可以为非洲

带来诸多收益

中国对非洲资源的需求是十分巨大的。失去这些资源，中国的经济难以维

持较高的发展速度。简而言之，中国离不开非洲。非洲的领导人应该抓住这一

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 03.04.20122 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 04.03.20123 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: 499-518. p. 513

III

有利形势，利用中国对非洲的资源依赖来促进自身的经济发展与社会进步。非

洲雄狮应该借鉴中国巨龙对外招商引资的方法，以此为经验来维持与中国的贸

易联系。

“安哥拉模式”诞生于“石油换援助”这样一种协定。中国政府提供援助，

而安哥拉政府可以灵活的决定如何使用这些中国援助。这些援助旨在为安哥拉

国内的健康、教育和基础设施建设等发展规划提供必要的资金，然而去追踪这

些援助的最终用途及去向却是极其困难的。由于缺乏透明性和必要的监管措施

这种援助方式的实际效果值得商榷。

对于用资源换取基础设施建设这种协议安排，东道国可以讨价还价来谋求

利益的最大化，他们所需要的是敢于这样做的政治意愿。现在，马达加斯加的

过渡政府在一些声明中已经表现出了这样的政治意愿。

现实可以向我们揭示中国和西方国家在如何对待“资源诅咒”这个问题上

的不同想法。西方国家始终强调政府的有效管理，将其作为国家发展的动力。

在 2011 年世界银行和欧盟对非洲的发展援助计划中，“政府管理”和“民主”

两个词被视为非洲国家可持续发展的基石。在西方国家看来，“资源诅咒”国

家摆脱困境的方法也与这两个关键词息息相关：通过增强政府透明度和责任监

管，提高政府的管理水平。而在中国看来，经济发展应该被放在首位，政府管

理水平的高低是经济发展状况的结果。实际上，中国的领导人并不认同“资源

诅咒”这个概念。中国的这种不同于西方国家的发展视角在非洲国家内部产生

诸多反响。就矿产采掘业而言，中国不认为责任监督和提高透明度可以提高效

益、减少风险，因此对“采掘业透明度倡议”（EITI）和“资金支出公示”

（PWUP）也显得不以为然。1

中国文化及国民性格具有独特的含义，其人际关系网的建立与西方惯例也

有着很大不同。在商业网络的筹建中，人际背景和企业家都是很重要的，而关

系网的建立更是成功的关键。因此，当西方企业家运用西方惯例去开拓中国市

场时便难免遇到诸多困难。

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..

IV

结论3：非洲在改变，中国在发展。现在时机已经成熟——中国可以在下一波全

球化浪潮中担当非洲发展的“领头雁”

如今中国所步入的发展阶段类似于日本在20世纪60年代和香港、韩国、新

加坡、台湾在20世纪80年代所面对的历史机遇。为了在工人薪资竞争力不断下

降的背景下保持经济活力，中国不得不效仿上述几个亚洲“领头雁”的发展模

式，把劳动密集型产业转移到低收入国家。1 我们已经看到了这样的迹象：到

2009年，中国在非洲直接投资的很大一部分（93.3亿美元）已经转向制造业

（22%），仅次于排名第一的采矿业。此外，中国已在埃及、埃塞俄比亚、毛

里求斯、尼日利亚和赞比亚建立了6个经济与贸易合作区（中国国务院新闻办公

室发布，2010年），且这种趋势还将继续下去。

随着中国的不断发展，其在产业升级方面也将发生明显的变化：它的经济

规模已超越了先前那些亚洲经济的“领头雁”。中国有大约8500万工人在制造

业从事工作，且大都集中在劳动密集型产业。随着中国产业升级的加快，很多

此类劳动密集型工业将转移到劳动力充足且价格低廉的国家，为这些国家制造

业的发展带来机遇。这样一来，中国对这些低收入国家来说就不仅仅是传统意

义上的领导者/跟随者模式中的“领头雁”，而将成为一条真正的“开路龙”。

非洲正在经历5个根本性的改变：更加民主和负责任的政府、更加明智的经

济政策、债务危机的结束和非洲与援助者关系的改变、新技术的扩散、新一代

决策者与商业精英的出现等等。这些正是本文所要论证的观点：撒哈拉以南的

非洲经历的政治动荡是向更好政府迈进的过渡阶段，只要非洲政府转型成功，

中国在“不干涉内政”原则下对非洲的投资和技术转让将成为非洲经济发展的

强有力后盾。

拉宾诺维奇曾说，主流经济学家对“东盟三国”和“雁行模式”的首肯是

有原因的。主流经济学家，尤其是那些世界银行和国际货币基金组织“新自由

主义”政策的支持者，正在越来越多的对国家干预（尤其是对市场价格的调1 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)), China‘s 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.

V

控）持接受态度，并开始借鉴“东盟三国”的市场和国外投资经验（世界银行，

1993年1月）。1

在生产活动方面，中国的投资大多指向潜在的纺织品和制糖出口国，马达

加斯加因各种国际协定和对工业国家关于出口配额的贸易协定而获得一定收益。

同最近的政治动乱相比，马达加斯加的贸易自由区更多的受到了其它因素

的影响。政治制裁和贸易协定的短期性是两个很致命的因素。在马达加斯加的

例子之外，我们还可以看到贸易自由区的成功进一步支撑了利用出口加工区来

发展非洲制造业基地的观点。

结论4：中国和西方国家（例如美国）对非洲政治危机的反应存在一种原则上的

差异。对现在的非洲而言，“不干涉政策”是最为有利的

马达加斯加纺织业的发展可以印证“领头雁”模式的有效性，戴博拉·布罗

蒂格姆对此也曾建议将毛里求斯的纺织业向马达加斯加转移。2 这种发展思路本

来可以获得成功，但却因2009年马达加斯加政变后美国强加的政治制裁而毁于

一旦。这次制裁也向人们证明，贸易协定（在此为《非洲增长与机会法案》）

并未能约束经济、社会力量强大的外国制裁所带来的负面影响， 3 尽管哈夫

纳·波顿和蒙哥马利认为社会力量强大并不必然意味着经济力量也同样强大。对

马达加斯加来说，民主制度的缺失在美国看来是最大的问题，这促使美国采取

政治制裁并最终扼杀了纺织业的发展势头。

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 P89.2According to Brautigam’s 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

VI

后来人们看到，撒哈拉以南的非洲经历的政治动荡是向更好政府迈进的过

渡阶段，只要非洲政府转型成功，中国在“不干涉”原则下对非洲的投资和技

术转让将成为非洲经济发展的强有力后盾。

“不干涉”原则是中国外交政策中的一个鲜明特点，并被中国政府持续贯彻。

在结论部分，我们首先应该认识到：中国与西方国家对非洲的直接投资并

无本质差异，二者都觊觎非洲的资源和廉价劳动力。不同的是，中国在投资过

程中坚持“不干涉”原则，这可以从“北京共识”中得到体现；而西方国家对

非洲坚持民主原则，这在“华盛顿共识”中也有所体现。

中国公司在投资过程中不会歧视那些被西方列为“流氓政权”的国家。西

方国家对此曾评价说中国很“伪善”。事实上，中国与西方在非洲最大的不同

体现在中国政策的持续性，以及在资源换取基础设施时所表现出来的慷慨。在

对待中国商业投资的态度上，究竟将其视为短期“寻租”还是作为非洲持续发

展的助推力，这种选择权掌握在非洲领导人的手中。

我们不能简单的将中国对非洲的投资与援助加以定性，也不能想当然的认

为中国公司正在攫取非洲乃至全世界的资源。中国公司正在非洲进行有效投资

吸引他们这样做的原因是非洲大陆可以提供一种相对优势。中国在非洲舞台能

否上演成功的一幕取决于各位演出者的表现。这如同马达加斯加所提供的案例

一样，或者成功——就像马达加斯加纺织业和武汉钢铁公司在当地开发铁矿石

那样，或者失败——中国国际基金未能在马达加斯加石油开采方面取得进展。

此外，某些在西方国家看来因原则问题而难以入手的项目，却被中国公司抓住

了机会，而其最终结果如何仍取决于非洲领导人的决策。

在机会面前，非洲能否有效把握取决于它自身的行动。非洲可以借鉴“雁

行模式”，利用自由贸易协定来促进出口加工区的发展。与此同时，中国对资

源的需求为非洲提供了机遇，非洲可以抓住这个契机，推动基础设施建设，为

工业化发展打下基础。

VII

关键词：

外国直接投资；工业化雁行模式；出口加工区；采掘工业；关系网络

VIII

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 China’s

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.

IX

As for foreign policy in general, 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 consistency of Chinese foreign policy and the respect of the norm of non-

interference 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 China’s 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

Madagascar’s 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: China’s 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

X

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%).

- China’s 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 Buckley’s 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 03.04.20122 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 04.03.20123 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: 499-518. p. 513

XI

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.

- China’s 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

Africa’s development, should use China’s reliance on Africa’s 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

XII

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 Zoellick’s words suggest, today’s 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 China’s emergence as “the world‘s 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

labor-intensive industries to low-income countries.2 Indeed, this is already happening.

A large share of China‘s 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,

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)), China‘s 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.

XIII

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 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.

- 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

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.

XIV

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 Franche’s 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 wasn’t 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-

1According to Brautigam’s 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.

XV

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 Montgomery’s

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.

XVI

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 China’s 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

XVII

Content

Preface 1

Chapter 1 Introduction1

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 27

2.1 Methodological Considerations.......................................................27

2.2 Research Method.............................................................................29

2.3 Method of data collection................................................................31

2.3.1 Questionnaire design and content..............................................32

2.3.2 Sample design............................................................................33

2.3.3 Population..................................................................................34

2.4 Gathering the data............................................................................35

2.5 Data analysis....................................................................................35

2.6 Reporting the results........................................................................36

Chapter 3 Theoretical Framework 37

3.1 The ‘flying geese’ Model of industrialization.................................40

3.1.1 The original framework by Kaname Akamatsu........................40

3.1.2 The product-cycle theory...........................................................45

I

3.1.3 The modern ‘multi-sequentialist’ paradigm..............................47

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...............51

3.3 A Unique Window of Opportunity for Africa: The Graduation of

China (and Other Middle-Income Countries) .......................................54

3.4 The network theory..........................................................................62

A brief review of the internationalization literature...........................65

3.4.1 Network as structure..................................................................68

3.4.2 Chinese ‘guanxi’ and Chinese business networks.....................72

3.4.3 Business networks and social networks: the role of migrant

Chinese communities.........................................................................75

3.5 summary of findings........................................................................78

Chapter 4 Chinese FDI in Madagascar today: the big deals 81

4.1 Chinese investment in Madagascar: an overview...........................81

4.2 Case studies in Madagascar: new investment deals........................93

4.2.1 Case study 1: The Malagasy textile industry: the success story

that wasn’t..........................................................................................93

4.2.2 Case study 2: Wuhan Iron and Steel group to invest in iron ore

exploitation in Madagascar..............................................................117

4.2.3 Case study 3: China International Fund and aborted projects in

Madagascar.......................................................................................124

4.3 Corruption problems......................................................................129

4.4 Solutions and prospects.................................................................131

Chapter 5 Chinese SMEs comparative advantages 143

5.1 Chinese communities in Madagascar: familial entrepreneurship and

interweaved kinship ties......................................................................143

5.2 Chinese Creating SME in Madagascar: From political task to real

challenge..............................................................................................147

II

Chapter 6 Findings 151

Conclusions 159

Bibliography 165

Acknowledgements 199

III

List of figures

Figure 1 Chinese FDI stock in Africa per sector (2009)………………………….15

Figure 2 Destinations of China’s FDI Flows into Africa (2003-2008)…………...20

Figure 3 Structural transformation in East Asia……………………………..……38

Figure 4 Akamatsu’s original flying geese paradigm: a graphic presentation…....41

Figure 5 The modern .multi-sequentialist. Flying geese paradigm: A graphic presentation……………………………………………………………...………….50

Figure 6 A network model……………………………………………………..…63

Figure 7 Evolution of inward investment stocks in Madagascar 2000-2006…..…84

Figure 8 FDI stocks in Madagascar per sector, 2000 and 2006…………………..84

Figure 9 FDI Stocks in Madagascar per country of residence of investors 2005-2010………………………………………………………………….…………...…86

Figure 10 Chinese FDI per sector 2006…………………………………………....88

Figure 11 Distribution of Chinese-funded enterprises by type of investment firm..89

I

List of tables

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

stages of development………………………………………………………...…56

Table 2 Key features of three schools of internationalization ……………….66

II

List of Acronyms

ASEAN Association of South- East Asian Nations

BIANCO Independent bureau anti-corruption (Bureau indépendant anti-corruption)

CAJAC Legal Support Centre and Citizen Action (Centre d'assistance juridique et d'action citoyenne)

COMESA Common Market for Eastern & Southern Africa

CSLCC Higher Council for the Fight Against Corruption (Conseil superieur de lute contre la corruption)

EPZ 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 Least Developed Countries

MCBC Malagasy Chinese Business Chamber of Commerce

MFA Multi-fibre arrangement

MOFCOM Chinese Ministry of Commerce

NIE Newly Industrialized Economies: Hong Kong SAR, China; Korea; Singapore; and Taiwan, China.

OECD Organization for Economic Co-operation and Development

OFDI Outwards Foreign Direct Investment

SADC Southern African Development Community

TNC Transnational corporations

UNCTAD United Nations Conference on Trade and Development

III

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.

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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

² 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

country’s 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 government-

which many observers openly call a coup d’état- invited on a local private TV

station’s 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, Numéro 148 http://pambazuka.org/fr/category/comment/64908 accessed on 03/01/20112 Hereafter we will use invariably transitional government and High authority of the transition (HAT).

1

吉林大学博士学位论文

country as the state is to perceive 5USD per ton of iron ore produced1. 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 Akamatsu’s 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 guanxi-

networks 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 28.03.20122 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=bdf91d01a0-Newsletter9_21_2011&utm_medium=email last accessed on 21/03/2012.

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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 non-

resource 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.

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吉林大学博士学位论文

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 Large’s general

assessment of the existing literature that “although those relations are widely covered

they are also under-researched”. 2.

China’s 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

Beijing’s 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 12/03/20122 LARGE, DANIEL. Beyond ‘Dragon in the Bush’: The study of China–Africa Relations [J]. African Affairs, 107/426, 2008: 45–61 (Downloaded from http://afraf.oxfordjournals.org/ on February 27, 2012)3 TULL, D. China’s 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.

4

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 China’s 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 China’s engagement in Africa. As Daniel

Large puts it, we are “calling for the study of China–Africa relations to develop a

culture of serious research beyond current ‘dragon in the bush’ preoccupations”.5

Deborah Bräutigam’s book The Dragon’s gift6 and the subsequent blog China in

Africa: The Real Story7 are an attempt to go in that direction. Reviewers all agree that

1 WENPING HE, The Balancing Act of China’s Africa Policy [J] China Security,2007,3(3):23- 40.2 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 China’s 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 09/01/20124WANG, J.Y. What Drives China’s Growing Role in Africa? [M] IMF Working Paper African Department 2007.5 LARGE, DANIEL. Beyond ‘Dragon in the Bush’: The study of China–Africa Relations [J]. African Affairs, 107/426, 2008: 45–61 (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

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吉林大学博士学位论文

the book is unrecorded in listing the myths and drawing the realities of China’s

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:

- 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 China’s African adventure all about oil? Yes, China is very interested in

Africa’s oil and other resources. But that’s 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, China’s 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 post-

Cold War era when Western powers were more inclined to scale back their presence.

Today, China’s Africa policy is carried out on a higher plane and is more complex,

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://wics-usa.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 China’s Growing Influence in Africa [J] China Security, 3(3) 2007:3-21

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Chapter 1 Introduction

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 China’s foreign policy in Africa is

evolving as “a case study of China’s compliance” to external expectations and

international norms. The author says that China’s 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 Rabinovitch3 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 world’s worst dictatorships”5, 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 States7. For example,

1 GILL et al. Op. Cit. p5.2 HOLSLAG, JONATAN Friendly Giant? China’s 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 China’s thirst for oil, Crisis Group Asia Report N153, June 2008. Executive summary and recommendations p.i.6 BESADA, H., WANG, Y., WHALLEY, J. China’s growing economic activity in Africa [A] NBER WORKING PAPER SERIES Working Paper 14024 http://www.nber.org/papers/w14024 NATIONAL BUREAU OF ECONOMIC RESEARCH 20087 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, China’s 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, Africa’s Silk Road: China and India’s 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: What’s 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.

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吉林大学博士学位论文

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 continent”2. 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. al’s article is a rare piece of literature that

treats a view by sector of China’s 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, “China’s OFDI has reached commercially

and geo-economically significant levels and begun to challenge international

investment norms and affect international relations. Yet China’s OFDI profile is

poorly understood”4. For starters, most authors agree that the statistical figures of the

amount of China’s OFDI may not be accurate and therefore distort the analyses (see

for example Brautigam’s 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.

1 FOSTER V., BUTTERFIELD W., CHEN C., PUSHAK N., Building bridges: China’s growing role as infrastructure financier for Sub-Saharan Africa [R] The International Bank for Reconstruction and Development / The World Bank 20082 GEARING UP China’s 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 OECD’s widely used benchmark definition of FDI (OECD 2008a).4ROSEN D.H., HANEMANN T.China’s 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 Brautigam’s blog China in Africa the real story http://www.chinaafricarealstory.com/2010/02/chinese-investment-in-africa-whats-real.html accessed on 28/10/20116 ROSEN D.H., HANEMANN T.China’s 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.

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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:

- “China’s 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:

China’s 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 China’s 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 “China’s “going global” strategy was

consolidated and important legislation was enacted to aid foreign

investment.”8

1 SCISSORS, DEREK Op.Cit.p2.2 SALIDJANOVA NARGIZA USCC Going Out: An Overview of China’s 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: 7.5PAMLIN D., BAIJIN L. Rethink China’s outward investment flows [A] WWF’s 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 China’s 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 China’s Thirst for Oil Crisis Group Asia Report N°153, 9 June 2008. p10.)

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吉林大学博士学位论文

- “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 asset-

seeking”.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:

- “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: 499-518.2 MORCK, R., YEUNG, B., & ZHAO, M. [A]. Perspectives on China’s Outward Foreign Direct Investment. Journal of International Business Studies. 20073 PONCET, S. Inward and Outward FDI in China. [A] Working paper at the Panthéon-Sorbonne-Economie, Université 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 Xiaoping’s 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. China’s

engagement in Africa is changing the continent’s economic landscape, and it

has already influenced other emerging economies, or BRICs, to gear up their

investments on the continent”3. 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 China’s impact on African business and the next wave of globalization [R] © Economist Corporate Network 2011. p3.

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吉林大学博士学位论文

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 Asia”3. 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 China’s total outward foreign direct investment

(FDI), China’s 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

Africa’s largest trading partner in combined export and import values. In 2010,

China’s two-way trade with Africa surpassed USD 110 billion, and recorded a 43.5%

year-on-year increase”4. The Economist Network’s paper continues, saying that

“China’s appetite for Africa’s natural resources is generally the focus of reports on

China’s 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 China’s 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, China’s 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 China’s 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 China’s 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 China’s impact on African business and the next wave of globalization [R] © Economist Corporate Network 2011. p3.5 Op.Cit.p4.

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Chapter 1 Introduction

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

China’s NOCs, and communication and coordination between the MFA and the

companies is sometimes lacking. Additionally, “the liberalization and

decentralization of China’s 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

companies”3. 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 come”4. 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 Africa’s commodities sector6

China has been among the fastest growing economies in the world, with a real

GDP growth rate averaging near 10% over the 1980–2010 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 5-

USD 7 a day) by 2025, China’s future growth prospects are exceptionally promising,

1DOWNS, ERICA, The Fact and Fiction of Sino-African Energy Relations Erica S. Downs [J] China Security, 3(3) 2007:42-682 DOWNS, ERICA Op.Cit. p49.3 DOWNS, ERICA Op.Cit. p49.4 Ibid: 63.5 China’s Thirst for Oil Crisis Group Asia Report N°153, 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 03.04.20127 INTERNATIONAL MONETARY FUND. Africa’s 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

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吉林大学博士学位论文

despite the hiccup of the recent global financial crisis. China’s increased

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 Beijing’s 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 Africa’s extractive industries,

particularly from a trade and investment perspective.

China’s economic expansion, which has driven higher commodity prices, has

significantly contributed to higher GDP growth rates, especially of resource-

producing 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

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 03.04.20122 INTERNATIONAL MONETARY FUND. Africa’s Power Supply Crisis: Unravelling the Paradoxes. [W/OL] IMF Survey. http://www.imf.org/external/pubs/ft/survey/so/2008/CAR052208C.htm last accessed 03.04.20123 Op.Cit.4 FRASER, A. and LUNGU, J. For Whom the Windfalls?: Winners & Losers in the Privatisation of Zambia’s Copper Mines. www.minewatchzambia.com. 2007. last accessed 03.04.2012

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Chapter 1 Introduction

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.

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 Africa’s services sector has risen from about 20% of total

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

15

吉林大学博士学位论文

inbound investment to nearly half last year”1. According to figures from MOFCOM,

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%).2

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 Survey3 . 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) 4, 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.5 Despite recent

1GEARING UP China’s impact on African business and the next wave of globalization [A] © Economist Corporate Network 2011. Op.Cit.p2.2 EDINGER H., PICTORIUS C Op.Cit. p.504.3 World Economic and Financial Survey Sub-Saharan Africa 2008 [R] INTERNATIONAL MONETARY FUND 2008:1-135. p944 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 01/02/20125 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

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

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

country’s 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

1 RAZAFINDRAMIADANA, LANTONIAINA, Madagascar: Mines et hydrocarbures - Les demandes de licence explosent [W/OL] L’express de Madagascar, 9 Mai 2011 http://fr.allafrica.com/stories/201105091705.html last accessed 27/02/122 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 20/01/20123 CARAYOL, REMI An iron steel contract (Un contrat dur comme fer) [W/OL] Jeuneafrique.com - le premier site d'information et d'actualité sur l'Afrique 24/06/2010 à 12h:51 http://www.jeuneafrique.com/Article/ARTJAJA2579p072-073.xml1/ accessed on 20/01/2012.

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吉林大学博士学位论文

development aid returns in a short-term period to its pre-crisis level, which suggests a

slowdown in growth.

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

1 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 20122 Madagascar Country profile, African Economic Outlook, 2011 http://www.africaneconomicoutlook.org/fileadmin/uploads/aeo/Country_Notes/2011/Full/Madagascar_long.pdf accessed on 23/11/20113 RAZAFINDRAVONONA J., RAKOTOMANANA E., RAJAOBELINA J., Etude sur les échanges entre la Chine et Madagascar [R], Institut National de la Statistique, 2008 :11.

18

Chapter 1 Introduction

was officially established with the signature of the "Joint Communiqué on the

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 People’s

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 Rajoelina’s 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

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=detail-contribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/2012

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吉林大学博士学位论文

declarations of intent, is only part of a continuous consolidation of those relations ever

since the end of the 1990s.

Figure 2 Destinations of China’s FDI Flows into Africa (2003-2008)

Source: Chinese Commerce Ministry, 2008

China’s 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

1 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 04.03.20122 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 China’s Investment in Africa (Kobus van der Wath, China’s 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)

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Chapter 1 Introduction

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 China’s ambitions for international expansion. The frequency of visits in

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, Madagascar’s

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

1 These bilateral visits are listed on the site of Madagascar’s 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 -- Zhang’s 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 03.04.20123 In view of international sanctions imposed on the transitional régime, 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

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吉林大学博士学位论文

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, Buckley’s 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 d’état 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

1 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=detail-contribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/20122 BUCKLEY et. al. Op. Cit. 2007. p. 5133 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=detail-contribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/2012

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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 non-

resource 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?

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.

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吉林大学博士学位论文

- 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 wasn’t, 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,

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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

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

events”1. 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 study’s 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 testing”3. An inductive approach,

on the other hand, aims at “development of a theory as a result of the observation of

empirical data”4 .

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 SAYER, A. Method in social science – A realist approach. [M] London: Routledge. 1992:5.2 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.

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吉林大学博士学位论文

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. Yin2 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 evident”3. 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 control”4. 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.20042 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.

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Chapter 2 Methodology

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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吉林大学博士学位论文

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. Semi-

structured 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.

Moreover, the researcher used the cross-sectional type-of-research as information was

collected from the sample population only once through the survey method.

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Chapter 2 Methodology

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

Proved to have a higher response rate than other data gathering techniques

such as mail surveys.

1 ZIKMUND, W.G. Business Research Methods. [M] Ohio: Thomson Learning South-Western. 2003.2 COOPER, D.R. & SCHINDLER, P.S. [M] Business Research Methods. New York: McGraw Hill Inc.2006:253

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吉林大学博士学位论文

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

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

1 COOPER, D.R. & SCHINDLER, P.S. [M] Business Research Methods. New York: McGraw Hill Inc.2006:716.2 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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Chapter 2 Methodology

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.

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.

1 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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吉林大学博士学位论文

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

Chinese Entrepreneurs in Madagascar, as most of the Chinese Entrepreneurs are

linked through associations.

1 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 Saraléa 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

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Chapter 2 Methodology

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

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

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吉林大学博士学位论文

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.

36

Chapter 3 Theoretical Framework

Chapter 3 Theoretical Framework

Kaname Akamatsu’s 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 formation”1. 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.

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

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吉林大学博士学位论文

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. P9Note: ASEAN4 = Indonesia, Malaysia, the Philippines, and Thailand. NIEs = newly industrialized economies, Hong Kong SAR, China; Korea; Singapore; and Taiwan, China.

38

Chapter 3 Theoretical Framework

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 Sub-Saharan 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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吉林大学博士学位论文

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.

Akamatsu’s 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 time-

series 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) 1962:3-25.3OZAWA, 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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Chapter 3 Theoretical Framework

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 Japan’s 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 Akamatsu’s 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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吉林大学博士学位论文

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 Akamatsu’s 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 import-

production-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.

1 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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Chapter 3 Theoretical Framework

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-à-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 Akamatsu’s 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.

Akamatsu’s 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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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 Vernon’s 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 firm’s 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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Chapter 3 Theoretical Framework

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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吉林大学博士学位论文

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

Akamatsu’s 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, Akamatsu’s 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 Vernon’s (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 Akamatsu’s

FG paradigm in the post-war period, particularly after Vernon’s 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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Chapter 3 Theoretical Framework

incorporation in the paradigm of a framework of regional development and integration

(Kojima, 2000:376). This does not mean, however, that Vernon’s 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 Okita’s 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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吉林大学博士学位论文

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 economy’s

changing factor and technological endowments, which also means that the country

shifts production activities (and export), from the lower value-added, more labor-

intensive and less capital-intensive industries, to the higher value-added, less labor-

intensive 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 Akamatsu’s 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 leader’s 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., Mexico’s External Relations in the 1990s. Boulder and London, Lynne Rienner Publications. 1991

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Chapter 3 Theoretical Framework

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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吉林大学博士学位论文

According to Ozawa1, what drives the flock of geese forward is the leader’s

perceived imperative for internal restructuring, with emphasis shifting from a labor-

intensive (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 inter-

economy sequencing - is the main source of growth for second-rank followers (the

first-tier NIEs), which will emulate the leader’s (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., Mexico’s External Relations in the 1990s. Boulder and London, Lynne Rienner Publications. 1991:104.

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Chapter 3 Theoretical Framework

One interesting question is: what are the principal factors that induce the leader’s

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 Japan’s 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 China’s rise?

To a certain extent, China’s 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 ‘flying-

geese’ model.

1 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 Papers2 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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Justin Yifu Lin 3 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

advantage of China’s 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 economy‘s factor endowment, which determines the

economy‘s 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 economy‘s production frontier, and whether or not the actual production

will locate on the frontier depends on, among others, the adequacy of

infrastructure.

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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Chapter 3 Theoretical Framework

- 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

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 country‘s 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 countries—as 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 economy‘s 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

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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

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 Communism‘s demise, then

2009 saw the end of what was known as the “Third World”: We are now in a new,

fast-evolving multipolar world economy—in 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 Zoellick’s words suggest, today’s 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 China’s

emergence as ―the world‘s 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

1 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 Bank–International Monetary Fund Spring Meetings, Washington, DC, April 14.

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Chapter 3 Theoretical Framework

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 China‘s 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

1 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)), China‘s 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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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 Africa‘s total apparel exports of USD2 billion (2 percent

of Chinese apparel exports). Let‘s assume that as a result of rising wages, 1 percent of

China‘s 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 exports—a 233 percent increase.

Even rough employment estimates suggest the potential gains in manufacturing

jobs. Africa‘s population (north and south of the Sahara) is 1 billion, slightly less than

India‘s 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 India‘s 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 China‘s 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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Chapter 3 Theoretical Framework

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 Africa‘s

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, China‘s 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 year—more 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 1970–2006, Pinkovskiy

and Sala-i-Martin3 conclude that African poverty is falling—and 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 Africa‘s 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 OKONJO-IWEALA, N. ―Fulfilling the Promise of Sub-Saharan Africa.[A] McKinsey Quarterly (June). 2010.2 LEKE, A., S. LUND, C. ROXBURGH, and A. van WAMELEN. ―What Is Driving Africa‘s 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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Chapter 3 Theoretical Framework

While the region‘s 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 region‘s 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 2–3 percent a year may not be

enough to combat poverty and generate prosperity. So far, Africa‘s economic

development has been driven primarily by higher consumption—supported in part by

an inflow of remittances in response to improved macroeconomic policies—and 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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吉林大学博士学位论文

economy (Japan) was originally put forward by Kojima1 (1973). The essential

contention of Kojima’s 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 technology-

intensive 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 ‘macro-

focused’, 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. Kojima’s

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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Chapter 3 Theoretical Framework

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 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)”.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).

1 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 20.04.20117 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. 19988 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. 2000:375.40110 YANG J and LIM HC Asian values in capitalist development revisited. Asian Perspective, 24( 3), 2000:23.40.

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吉林大学博士学位论文

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 firm’s 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].3JOHANSON, 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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Chapter 3 Theoretical Framework

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 JOHANSON and MATTSSON Op.Cit.p 2622 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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吉林大学博士学位论文

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 re-

valuing 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 FINLAND5 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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Chapter 3 Theoretical Framework

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 firm’s international behavior, (3) neglecting the importance of

individuals’ influence on internationalization patterns, and (4) focusing the discussion

at the firm’s level and not at the level of the firm’s 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: Canada’s 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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Chapter 3 Theoretical Framework

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 today’s

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 politics—social 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), 1973:1360-1380.2 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 networks—it 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

1 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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Chapter 3 Theoretical Framework

that also shapes inequality (Hafner-Burton 2005; Hafner-Burton and Montgomery

2006).

PTAs are spreading rapidly—hundreds 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 power—that

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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Chapter 3 Theoretical Framework

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 psychological—seriously, 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

offer—such as dispute resolution mechanisms or voting procedures—and 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.41.71

吉林大学博士学位论文

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 individual’s 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

1 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 Abstract2 YONGQIANG, G., ZHILONG, T., (2006), How Firms Influence the Government Policy, Singapore Management Review, 28 (1)73-853 FAN, Y., 2002, Questioning guanxi, definitional, classification and implications, International Business Review, 11, 543-5614 YANG, M.M. (1994), Gifts, favors, banquets; the art of social relationships in China, Cornell University Press, New York

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Chapter 3 Theoretical Framework

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) 981-10052 DON, Y., DAWES, P. L. (2005), Guanxi, Trust, and Long-Term Orientation [C] in Chinese Business Markets, Journal of International Marketing, 13(2), 28-563 YANG Op.Cit.4 YIU-CHUNG E., ANDERSON A. Op.Cit. p15.

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吉林大学博士学位论文

administrative approvals.1 This is the case of Chinese entrepreneurs in Madagascar

(see chapter 5).

In a very general sense, guanxi resembles Pierre Bourdieu’s 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.

1 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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Chapter 3 Theoretical Framework

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: 455–477 (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) 19984 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 authors7 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 ^ 1288 KAO J, 1993, ``The worldwide web of Chinese business'' Harvard Business Review March-April, 24 ^ 36

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吉林大学博士学位论文

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

1 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 ^ 1632 KAO J, 1993, ``The worldwFDI web of Chinese business'' Harvard Business Review March-April, 24 ^ 363 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 ^ 10065 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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Chapter 3 Theoretical Framework

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 lock-

in 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 ^ 3742 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 ^ 1655 YEUNG W-C, 1998 Transnational Corporations and Business Networks: Hong Kong Firms in the ASEAN Region (Routledge, London)

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吉林大学博士学位论文

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 psychological—seriously, 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

offer—such as dispute resolution mechanisms or voting procedures—and 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 ^ 1652 STORPER M, Salais R, 1997 Worlds of Production: The Action Frameworks of the Economy (HarvardUniversity Press, Cambridge, MA)3 JINN-YUH HSU, SAXENIAN Op Cit p1993-1995.

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Chapter 3 Theoretical Framework

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.

79

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 mid-

2000s, 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

1 TSIEN TCHE-HO (January 1961), "La Vie Sociale des Chinois a Madagascar", Comparative Studies in Society and History (Cambridge University Press) 3 (2): 170–181, p.170.2 MAN Op.Cit p1.3 Ibid.4Bureau 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. 630–636, p635.

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吉林大学博士学位论文

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.”1

Since its considerable boom in the first decade of the new century Madagascar’s

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 dollars2. 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 Madagascar’s

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 “Chinatown”3, 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

1 Interview, January 12th, 2012, Chinese Embassy in Madagascar, Nanisana Ambatobe Antananarivo. Translated from French.2 Investigation into the Global Trade in Malagasy Precious Woods: Rosewood, Ebony and Pallisander, Environmental Investigation Agency, October 2010, http://www.eia-global.org.3 As has been aptly pointed out by Catherina Fournet-Guérin, 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-Guérin, “Les Chinois de Tananarive (Madagascar): une minorité citadine inscrite dans des réseaux multiples à toutes les échelles » (The Chinese of Tananive [Madagascar] : an urban minority drawn into multiple networks at all levels), Annales de géographie, 2009/5 (No. 669).

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

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

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.

1 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=detail-contribution&id=7013&id_provenance=88&provenance_context_id=1 (accessed 29/02/2012)2 Available on the Central Bank of Madagascar’s website : http://www.banque-centrale.mg/index.php?id=m5_7 last accessed 29/03/2012.

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

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

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

important sector of investment. This major change is the corollary of the economic

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.

1 RAZAFINDRAVONONA JEAN, RAKOTOMANANA ERIC, RAJAOBELINA JIMMY. Etude sur les Echanges entre Chine et Madagascar (Study on exchanges between China and Madagascar) [R]. Janvier 20082 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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Figure 9 FDI Stocks per country of residence of investors 2005-2010.

Unit: Million USDSource: 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 Société 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

1 Sino-Malagasy Public Works Company.2 La SinAfrique en Marche (“China-Africa advance”???) [W/OL] http://madagascan.over-blog.com/15-categorie-847142.html accessed on 12/03/2012

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Figure 10 Chinese FDI per sector 2006

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 USUSD60m-

worth 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

Nigeria’s Multilinks.

1 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

Concerning Financial activities, the creation of the Industrial and Commercial

Bank of Madagascar (BICM) is the most noticeable fact. The Hong Kong multi-

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 non-

resident 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

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=detail-contribution&id=7013&id_provenance=88&provenance_context_id=1 (accessed 29/02/2012)

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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.

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.

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

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

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

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 non-resident 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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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

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 textiles»1

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 Buckley’s empirical results revealed2. 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 d’état 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 wasn’t

1 Ibid.2 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

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

Deborah Brautigam with regards to decentralization of Mauritian textile industries

towards Madagascar1. The development of the sector could have been a success story,

but wasn’t 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 Montgomery’s 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.

1According to Brautigam’s 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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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

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 80’s. Development

in the 90’s came mainly from exports to the EU. During the last few years, exports 1 BRAUTIGAM DEBORAH Close Encounters: Chinese Business Networks as Industrial Catalysts in Sub-Saharan Africa [J]. Royal African Society, 2003. - Vol. 102. - pp. 447-467. 2 In Mauritius the Chinese population reached 25–30,000, or nearly 3 percent, in Madagascar 18,000 (including children of mixed parentage), and in South Africa 20–25,000. 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.

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

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.1 The example of Mauritius is well known, but not so the

Madagascar EPZs otherwise known as the Zone Franche. For example, the World

Bank working paper on EPZs in Africa published by Watson2 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’’ 3 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 Franche4. In the first half of 2002, the island

was hard hit by the split in the government5, the capital Antananarivo (where most

Zone Franche companies were established) being blockaded and a general strike (see

Raison-Jourde & Raison 20026; Roubaud, 20027). Although the crisis came to a

peaceful conclusion in July 2002, a large number of companies had by then already

1 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).2 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.3 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.4 International Monetary Fund (2003). Madagascar: Selected issues and statistical appendix. IMF Country Report No. 03/7. Washington, DC: IMF.5 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 30/03/2012.6 RAISON-JOURDE, F., & RAISON, J.-P. (2002). Madagascar, les urnes et la rue. Politique africaine, 86(juin), numéro spécial.7 ROUBAUD, F. (Ed.) (2002). Madagascar après la tourmente: regards sur dix ans de transitions politique et économique, Afrique contemporaine, 202–203, avril– septembre, numéro spécial.

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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.1

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

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

Madagascar’s 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 investors2).

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 Franche’s growing and

currently decisive weight in the country’s 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

1 CLING JEAN-PIERRE, RAZAFINDRAKOTO MIREILLE, ROUBAUD FRANCOIS. Export processing zones in Madagascar: A Success Story Under Threat [J] World Development 33(5). 2005:785–803, Document de travail DIAL / Unité de Recherche CIPRE Mars 2004 Accessible at http://www.dial.prd.fr/dial_publications/PDF/Doc_travail/2004-02.pdf (accessed 07/02/2012)2 “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.

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

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. Yet despite not-

inconsiderable 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

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 companies2

contrary to observations in other countries. The 2002 political crisis3 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)4 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 since5. Unfortunately, the firms were hit again

by the political crisis in 2009 and the subsequent sanctions from the US on AGOA.

1 SCHRANK, A. (2001). Export processing zones: Free market islands or bridges to structural transformation? Development Policy Review, 19(2), 223–242.2 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.3Historical 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 30/03/2012.4 WINTERS, L. A., McCULLOCH, N., & McKAY, A. (2004). Trade liberalization and poverty: The evidence so far. Journal of Economic Literature, XLII(March), 72–115.5 JEAN-PIERRE CLING, MIREILLE RAZAFINDRAKOTO, FRANCOIS ROUBAUD. Export processing zones in Madagascar: A Success Story Under Threat [J] World Development 33(5). 2005:785–803, Document de travail DIAL / Unité 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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The textile industry and ‘flying-geese’ model of industrialization

Madagascar’s 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

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, Madagascar’s 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.

1 Madagascar: Cotton and Textile Cotton - Textile – Apparel Value Chain Report Madagascar [R] Regional Agricultural Trade Expansion Support Program Nairobi, Kenya . February 2005 p 41.

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

First, the world market needs to know that Madagascar’s textile and clothing is

working to increase its integration with African suppliers of lint, yarn, and fabric, in

order to prepare to meet AGOA’s 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.1

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)2 reported that clothing accounted for 90% of the Zone Franche’s production in

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 1997–98, investments were made in the Zone Franche in

anticipation of AGOA (Gibbon, 2003)3. 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–

Caribbean–Pacific) 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. 4

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

1 Op.Cit. p42.2 Banque centrale de Madagascar (2002). Rapport annuel 2001. Antananarivo, Madagascar: Banque central de Madagascar.3 Gibbon, P. (2003). The African Growth and Opportunity Act and the global commodity chain for clothing. World Development, 31(11), 1809–1827.4 JEAN-PIERRE CLING, MIREILLE RAZAFINDRAKOTO, FRANCOIS ROUBAUD. Export processing zones in Madagascar: A Success Story Under Threat [J] World Development 33(5). 2005:785–803, Document de travail DIAL / Unité 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.

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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,

20011; Razafindrakoto & Roubaud, 20022).

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, 20023). 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.4 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. Madagascar’s success in attracting investment in the Textile

1 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.2 RAZAFINDRAKOTO, M., & ROUBAUD, F. (2002). Les entreprises franches a` Madagascar: Atouts et contraintes d’une insertion mondiale réussie. Afrique contemporaine, 202–203(avril–septembre), 147–163.3 Ibid.4 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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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

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.

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 Franche’s 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

1 CADOT, O., & NASIR.Op.Cit;2 MATTOO, A., ROY D., & SUBRAMANIAN, A. (2003). The Africa Growth and Opportunity Act and its rules of origin: Generosity undermined? World Economy, 26, 829–851.3 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.

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case for Asian exporters.1 Yet in the medium run, these preferences are under threat

since Madagascar has only been granted temporary exemption from AGOA’s rules of

origin and the Cotonou agreement is being revised2. 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

a good opportunity for developing an internationally competitive cotton industry in

Madagascar, which would call for major reorganization in the sector3.

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 Franche’s 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

1 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 Madagascar’s competitiveness, as most of the EPZs in competing countries are likely to disappear or at least withdraw their main tax incentive schemes.2 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.3 Integrated Framework (2003). Madagascar. Diagnostic trade integration study, Vol. 1. Draft, August 15. Available from http://www.integratedframework.org.

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

‘illegitimate and unconstitutional’.1 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'état 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.2

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.3

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.4

"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.

1 U.S. Position on World Bank’s Investment in Madagascar’s “Third Environmental Program Support Project” [W/OL] Website US Treasury http://www.treasury.gov/resource-center/international/development-banks/Documents/US%20%20Position%20on%20Proposed%20Madagascar%20Third%20Environmental%20Support%20Project.pdf last accessed 31/03/20122 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 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 28/03/20124 Ibid.

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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.

"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,

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

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 Madagascar’s

eligibility in the AGOA is a matter of respect of the democratic norm, and only by

following the path back to democracy can Madagascar’s 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 Montgomery’s analysis may say that the social

powers of states do not equate their economic power. Their argument implies that

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 20063).

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, Madagascar’s 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

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 28/03/20122 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. p25.3. HAFNER-BURTON and MONTGOMERY Op Cit. p

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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.1

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

Madagascar’s restoration is far from being granted.

Interviewed by the press group Ma-LAZA, the Charge d’Affaires 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”.2

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

1 Madagascar: une hausse de 20% en volume pour le textile en 2011. [W/OL] Webpage: Afriqueinfos Lundi 6 février 2012 accessible at http://www.afriquinfos.com/articles/2012/2/6/afrique-australe-196167.asp last accessed 28/03/20122 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 févr. 2012 http://www.matv.mg/?p=37660 last accessed 31/03/2012

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

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 China’s respect of sovereign

autonomy, underlining a strict policy of non-interference in another nation’s 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-à-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- el-

Sheikh Africa-China Summit meeting in December 2009 China demanded from the

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 China’s 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

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=detail-contribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/2012

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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 China’s 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 chargé d’affaires, 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

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

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

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

Madagascar’s 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

instance we are talking about lights for the roads, public hospitals and primary

schools…For now, we are still struggling with administrative problems concerning

big projects like the construction of a public hospital. It being a government-to-

government 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 d’affaires 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

1 PELLERIN, MATHIEU p.13-14 Op. Cit.2 Interview, January 12th, 2012, Chinese Embassy in Madagascar, Nanisana Ambatobe Antananarivo. Translated from French.

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and transparent elections”1.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 Madagascar’s

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

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

1 Ambassade de Chine à 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-a-antananarivo-shen-yongxiang-nouvel-ambassadeur&catid=64:newsflash&Itemid=67 last access 30.03.20122 RABESETRA HERITIANA “Coopération :Les Chinois reviennent. L'ambassadeur chinois a remis les copies figurées de ses lettres de créance, hier. La coopération 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: L’express de Madagascar, March 15th, 2012. http://lexpress.haisoft.mg/cooperation-madagascar/32845-les-chinois-reviennent.html last accessed 30.03.20123 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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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

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, Madagascar’s 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

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 Madagascar’s eligibility to the AGOA returns and the

1 Interview via email, Antananarivo 14 March 2012.2 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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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 Rim-

Association 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

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.2

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 28/03/2012.2 Ibid.

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

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

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

- Establishment of a modern workforce development program: 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),

• 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.

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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 (Madagascar’s Enterprise Association) and the GEFP

(Association of Duty-Free Enterprises and Partners).

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, Madagascar’s cotton

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

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 region‘s 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.

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 Franche’s growing and

currently decisive weight in the country’s 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

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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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 Franche’s 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.

What’s 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

1 SCHRANK, A. (2001). Export processing zones: Free market islands or bridges to structural transformation? Development Policy Review, 19(2), 223–242.2 According to the survey of Foreign investment by National institute of statistics and Central Bank (BCM-INSTAT), 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 28.03.20124 77 shipments of garment from July 2007 to March 2012 to 8 US companies[W/OL] http://panjiva.com/Kam-Hing-Madagascar-SARL/1149781 last accessed 28.03.2012

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

resources in Soalala, Madagascar.1 That deal will be this thesis’s 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 country’s 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.

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

1 “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.chine-informations.com/actualite/madagascar-un-consortium-chinois-autorise-a-exploiter-du-fer_20673.html last accessed 28.03.2012

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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 country’s ‘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 State’s budget come from donor’s 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

published in the journal Revue politique internationale (International political

review)5:

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

1 Interview accessible on youtube: http://www.youtube.com/watch?v=TnQS2MmjyMc&feature=related last accessed 28.02.20122 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 28.03.20123 The Dynatec Ambatovy project for exploitation of nickel and cobalt is worth 4 billion USD, 4 Ibid.5 CHAUPRADE AYMERICK, November 30, 2010 - (La Revue politique internationale n°129 automne) Posted on December 1st, 2010 http://www.madagate.com/politique-madagascar/dossier/1604-andry-rajoelina-la-verite-si-je-mens Last accessed 28.03.2012

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

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 predecessor1!

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 country’s 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 Soalala is the largest

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

project (nickel and cobalt, worth 5.5 billion USD3) and the QMM-Rio Tinto (ilmenite

and zircon, worth 1.1 billion USD with 940 million USD invested in Madagascar4).

1 The Daewoo scandal was actually one decisive reason for the public support of the political coup of 2009.2 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 20/01/20123 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 world’s largest lateritic nickel mines. [W/OL] http://www.ambatovy.com/docs/wp-content/uploads/factsheetVE3_Update04.11.pdf last accessed 03/04/20124 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

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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.1

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 Madagascar2, 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

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).”3

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

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 03/04/2012.1 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.chine-informations.com/actualite/madagascar-un-consortium-chinois-autorise-a-exploiter-du-fer_20673.html last accessed 28.03.20122 Rio Tinto-Qit Madagascar Minerals for ilmenite on the north coast, and Dynatec-Ambatovy for cobalt and nickel on the east coast. 3 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, Numéro 148 http://pambazuka.org/fr/category/comment/64908 accessed on 03/01/2011

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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:

China’s 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 Goderis1 (2008) and Fraser and Lungu2 (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 country’s 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

iron ore supplies in three to five years," Deng Qilin, chairman of Wuhan Steel, said in

March.3

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

1 Op.Cit.2 FRASER, A. and LUNGU, J. For Whom the Windfalls?: Winners & Losers in the Privatisation of Zambia’s Copper Mines. www.minewatchzambia.com. 2007. last accessed 03.04.20123 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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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.1

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 Madagascar’s 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, WISCO’s case is different from that of Qit Madagascar

Minerals2 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 steppes3. 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 ONE4,

meanwhile, said that the population concerned by the project will not be left out, since

1 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 20.03.20122 Exploration of ilmenite by Rio Tinto in the North coastal area of Madagascar.3 http://environnementmadagascar.blogspot.com/2011/04/office-national-de-lenvironnement.html4 National Office of Environment.

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

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, Ifri1, “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

national company of the People’s 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 Wisco’s investment in Madagascar since it gave

authorization to the SOE prior to the deal.2

Newly appointed Chinese ambassador to Madagascar Shen Yongxiang declared,

with reference to the WISCO project:

1 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=detail-contribution&id=7013&id_provenance=88&provenance_context_id=1 last accessed 29/02/20122 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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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.1

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 capital2. 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

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

1 Soava A. et Saraléa 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-shen-yongxiang-q-cest-loccFDInt-qui-pille-lafrique-et-non-la-chine--q last accessed 30.03.20122 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 n°129 automne) Posted on December 1st, 2010 http://www.madagate.com/politique-madagascar/dossier/1604-andry-rajoelina-la-verite-si-je-mens Last accessed 28.03.2012

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

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 Madagascar’s 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 city’s 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 Condé

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 government’s USUSD8.6 billion overhaul of

mining and industrial infratructure, according to a source close to

negotiations. Chinese mining companies are looking at Guinea’s 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 Condé came to power in November 2010, his

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 Conakry’s obligations.

(…)

1 see Brautigam on this: Friday, December 23, 2011 China's "Checkbook Diplomacy" and Overseas Investment Reconsidered Deborah Brautigam’s 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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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 Sériba to Médina 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 Maférinya, 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 Condé 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-for-

infrastructure 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 government’s cancellation to Blocks 1 and 2. Rio Tinto

and Chinalco say they are committed to building the Trans-Guinéen 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

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 Forécariah. The China Power Investment project at

Forécariah (AAC Vol 4 No 11, Betting on Boffa) is the best-established in the

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

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 CIF’s 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

responsible for the company’s biggest debts and failed, Chinese-backed projects will

face justice.3

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

1 The diamond mines have been closely guarded by the Angolan elite and a Chinese company is set to make its first investment in Angola’s precious stonesThe 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 Sonangol’s corporate structure have revealed clear links to the Chinese state and its agencies (AAC Vol 2 No 12). Having recruited African businessmen such as Guinea’s former Mines Minister Mahmoud Thiam, who knows Wall Street as well as Africa’s 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/article-preview/id/566/Shine_on_you_crazy_diamond last accessed 04/02/2012.2 Condé wants quick results, [W/OL] Africa-Asia Confidential April 2012, Vol 5. N.6, http://www.africa-asia-confidential.com/article/id/723/Cond%C3%A9_wants_quick_results last accessed 02/04/2012.3 Air Tanzania soars no more [J/OL] Africa confidential Headlines Vol.5, N.6, April 2012, , www.africa-confidential.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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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 money-

laundering 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 secretary-

general from Guinea’s Ministry of Mines, Guillaume Curtis, announced publicly that

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

1 PELLERIN, MATHIEU Op. Cit.2 Africa Asia Confidential Vol 4 No 7, Shine on you crazy diamond [W/OL] http://www.africa-asia-confidential.com/article-preview/id/566/Shine_on_you_crazy_diamond

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4.3 Corruption problems

Is China’s non-interference policy and the practice of guanxi opening doors for corruption, especially in big extractive projects? Somehow authors like Alden and Davies1 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 Report2:

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 China’s behavior3.Elf Aquitaine, the formerly state-owned French oil company, once considered bribes a tax-deductible expense4. No conditions on human rights or transparency were attached to the USD870 million signature bonus paid by BP-Amoco, TotalFinaElf and Exxon for Angola’s ultra-deepwater blocks 31, 32 and 33 in 1999, which set an industry records. Since 1995, the U.S. Export-Import Bank 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 abroad5, including to help finance projects of ExxonMobil and Chevron in countries with severe human rights problems, most notably Indonesia and Myanmar/Burma.6

1 ALDEN C., DAVIES M., A profile of the operations of Chinese multinationals in Africa [J] South African Journal of International Affairs 13(1) 2006:83-96.2 China’s Thirst for Oil Crisis Group Asia Report N°153, 9 June 2008, p.15.3 “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 world’s 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 2008.4 Liechtenstein and Switzerland for payouts to the heads of state of Gabon, Congo-Brazzaville, Cameroon, Nigeria and Angola. According to Elf’s 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.5 Steve Kretzmann and Meg Boyle, “The Best Congress Oil Could Buy”, January 2007, at http://priceofoil.org/wpcontent/uploads/2007/01/BestCongress4Oil.pdf.6 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 Mobil’s 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, Unocal’s French partner, Total, hired and supplied its own Burmese troops with food and trucks.

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Other priorities also sometimes outweigh Western governments’ attachment to principles. The U.S. maintains a relationship with Sudan for coordinating counterterrorism efforts,1 even as it keeps it on its list of states that sponsor terrorism.2 All major U.S. allies in Africa, including Kenya, Egypt, Ethiopia, Nigeria and Angola, have poor human rights records, according to its own assessments.3 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.4 Beyond Africa, the U.S. government is prosecuting James Giffen for allegedly paying bribes to Kazakhstan’s President Nursultan Nazarbayev on behalf of Western oil companies, while it feted Nazarbayev during an official visit in September 2006.5 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

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

See van Niekerk and Peterson, “Greasing the Skids”, op. cit.1 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 2007.2 “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.3 “2007 Country Reports on Human Rights Practices”, U.S.Department of State, released on 11 March 2008.4 Secretary of State Condoleezza Rice called President Teodoro Obiang a “good friend” when they met in 2006 to discuss reestablishing diplomatic ties. Equatorial Guinea’s dismal human rights record is well-documented, and there are allegations of serious mismanagement of its oil revenues. Obiang’s 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 presFDInt’s 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, “Obiang’sBanking 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 2003.5 See Ron Stodghill, “Oil, Cash, and Corruption”, The New York Times, 5 November 2006.

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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 China’s global outward FDI originates from SOEs, which

are financed by the state policy banks (Davies, 2010). In this regard, the Export-

Import 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 China’s 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 protocols—which capture only a

small share of Chinese engagement in Africa. China’s 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

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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concessional financing arm of the Chinese government; while CDB financing utilizes

a combination of equity injections (through CADFund) and debt via a favoured state-

owned 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. China’s 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 Africa’s 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-for-

infrastructure-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

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

1 See ALDEN, CHRIS and ALVES (2009) China and Africa’s 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 Africa’s natural resources, Fatal Transactions.

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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 in—through 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 China’s interest

in Africa, especially with respect to specific sectors, while also highlighting the

country’s 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 China’s outbound M&A of US$4.5 billion was marginally

surpassed by India’s 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

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 Africa’s 2010 M&A

activity, only 13% of acquisitions were taken up by China, which is small compared

to Brazil’s 27% of the total. Overall, Africa’s resource companies saw a 105% annual

increase in deal making activity for 2010, with inbound deals up 223% (Ernst & 1 ERNST & YOUNG. Ungeared for Growth: Mergers, acquisitions and capital raising in mining and metals. [R] 2011.

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Young, 20111). Iron ore and coal remained the two most popular commodities as

steelmakers continued to position themselves aggressively in Africa. Hong Kong-

based China International Fund (CIF) invested US$2.7 billion into Australian

company Bellzone’s 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 competition—a combination of

low cost, fast and efficient delivery—have in effect villainized China’s 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

benefits of this engagement thus make China an attractive partner, financier, and

investor in Africa’s 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

1 Ibid.2 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 04.04.20123 Japan extended China a US$10 billion credit line in exchange for oil according to BRAUTIGAM, D. The Dragon’s Gift: The Real Story of China in Africa [M], Oxford University Press, New York. 2010.

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

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 negotiated—deals 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, 20113;

Pistorius, 20114). The first such zone—a 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

the right direction for Zambia’s 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

1 Ibid.2 These include established developments of zones in Zambia, Mauritius, Egypt, Nigeria, Ethiopia, and a number of other proposed zones. See BRAUTIGAM DEBORAH’s 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. China’s 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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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 China’s demand for commodities are skewing Africa’s

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. China’s 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.

Meyersson, Prado and Qian2 (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

1 KEENAN, PATRICK J. Curse or Cure? China, Africa, and the Effects of Unconditioned Wealth, [J] Berkeley Journal of International Law (2008)2 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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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

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.

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

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to integrate the process, "explains Tahiny Tsarabory Judicaël, 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

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

recently2. 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

taxes3, while the construction companies to build those hospitals is allegedly very

1 RAKOTOMALALA, MAHEFA http://eiti-madagascar.org/fr/content/compagnies-mini%C3%A8res-adhesion-obligatoire-%C3%A0-leiti-en-2012 last accessed 27/02/20122 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 28.03.20123 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

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

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 corruption1 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.2

- 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.

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.3 So the

consequences of the political crisis of 2009 also hinder the fight against corruption.

1 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.droit-afrique.com/images/textes/Madagascar/Mada%20-%20Lutte%20anticorruption.pdf last accessed 04.04.20122 Op.Cit Art. 22.3 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-en-difficulte-par-la-suppression-des-aides-europeennes.html last accessed 04/04/2012.

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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).1 As of February 2011, the

CAJAC and the BIANCO are working hand in hand in the fight against corruption.2

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 14 th rank

among 47 Sub-Saharan African states with a 3 points CPI. (0 being the worst, and 10

the cleanest score)3 So far these institutional bodies did not do so well in fighting

against corruption, and some 4rumors 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.5

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.

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.

1RADASIMALALA VONJY, Le CAJAC déjà très sollicité (the CAJAC already very sollicitated) L’express de Madagascar, July 20th 2010, accessible at http://www.lexpressmada.com/anti-corruption-madagascar/17748-cajac-deja-tres-sollicite.html last accessed 04/04/2012.2RAKOTOARILALA 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 04/04/2012.3 Transparency International Corruption perception index 2009, Regional highlights Sub-Saharan Africa Countries/Territories included: 47. P24 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. p3115 “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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Chapter 4 Chinese FDI in Madagascar today: the big deals in extractive industries

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

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 costs2.

Another way to think about it is this one: “China’s hunger for African resources

is massive. Without access to these resources, it is unlikely that China can sustain its

1 KONIJN, PETER Op.Cit.2 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

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current economic growth rates. In short, China needs Africa. African leaders, if they

are genuine in their desire for Africa’s development, should use China’s reliance on

Africa’s 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)”. 1

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 China’s 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 Africa’s 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 Africa’s political elite. Blaming China for Africa’s ills

would be naïve”2.

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.

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.

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=bdf91d01a0-Newsletter9_21_2011&utm_medium=email last accessed on 21/03/20122 Ibid.

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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 continent’s 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 countries2.

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. 588–605.3 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. 2715 GRANDIDIER, ALFRED (1908), Histoire physique, naturelle et politique de Madagascar, Paris: Impr. nationale pp. 518, 521.6 GRANDIDIER Op. Cit. p 5227 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 wives”5.

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

1 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, " 马达加斯加华侨华人概况 " , 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.shtml3 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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Chapter 5 Chinese SMEs comparative advantages

Actually there are two camps within the Chinese community in Madagascar,

according to Mathieu Pellerin1.

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), Gerb’or (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:

1 PELLERIN MATHIEU, Op.Cit. P5.145

吉林大学博士学位论文

“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 Madagascar’s “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 Marcel Chan Interview via email, Antananarivo Madagascar, 14 March 2012.2 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 “old-

Chinese” 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 don’t 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=detail-contribution&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 Interview in Antananarivo, Madagascar on March, 5th 2012. Translated from French.2 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 city’s 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 L’express 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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Chapter 5 Chinese SMEs comparative advantages

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. Zhang’s 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,

Marc Ravalomanana, had made a request to the Chinese government hoping that the 1 LIU CHUNXIAO, Culture, Common Interests and Win-win Outcome-- Zhang’s 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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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

Chapter 6 Findings

The following list of findings emerges from this research on Chinese FDI in

Madagascar.

Finding 1: China’s 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(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%).

- China’s 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

already seen. This shows that in a country where political crises are cyclic-

1 EDINGER H., PICTORIUS C Op.Cit. p.504.2 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 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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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

Buckley’s 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

- China’s 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 Africa’s development, should use China’s reliance on Africa’s

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

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Chapter 6 Findings

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.

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 Zoellick’s words suggest, today’s rapidly evolving world economy

is opening important opportunities for low-income countries. Following the

1 PETER KONIJN Op.Cit.153

吉林大学博士学位论文

logic of the new structural economics and its underlying flying-geese patterns

in economic development, most notably China’s emergence as “the world‘s

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 labor-intensive industries to low-income

countries.1 Indeed, this is already happening. A large share of China‘s 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 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,

1 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)), China‘s 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 6 Findings

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.

- 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

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.

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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- 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 Franche’s 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 wasn’t 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 Montgomery’s

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

1According to Brautigam’s 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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Chapter 6 Findings

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.

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Conclusions

Conclusions

The majority of China’s investments have been in non-resource rich

economies, such as Tanzania, Ethiopia and Rwanda. These countries have

benefited from China’s focus on sectors like telecommunications and

manufacturing. This is a growing trend. China’s 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 China’s 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-how—all 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 China’s

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=bdf91d01a0-Newsletter9_21_2011&utm_medium=email last accessed on 21/03/2012

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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 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 consistency of Chinese foreign policy and the respect of the norm of non-

interference 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 China’s 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

Madagascar’s 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

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Conclusions

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 China’s 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 Akamatsu’s 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-à-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 Akamatsu’s argument goes, imports

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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

1 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.

162

Appendix

Appendix

Appendix 1. List of Interviewees

Representative for Chinese Institutions

Interviewee 1

Pan Huanyou First Secretary (Consul) of the Embassy of the People’s 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 MadagascarFormer 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.

163

吉林大学博士学位论文

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.

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?

164

Appendix

5. What are your links with the Chinese community, especially concerning

business networks?

165

吉林大学博士学位论文

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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 People’s 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

People’s Republic of China in Madagascar; Mr. Ravelomanantsoa Gérard, 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 Director of Investments at the

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

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 Ihantarimino’s babysitting time, my mother Rasamimanana

Olga’s connections and my father in law Rakotoarimanana Mahefason’s 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.

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