keskiviikko 25. elokuuta 2010

China is the winner in international trade - Finland has a lot to learn

Since the 1980s, China has been the fastest-growing nation with an average annual GDP growth rate over 10%. Exporting has been the primary catalyst of rapid economic growth. In the 1980s, China permitted FDI (Foreign Direct Investment) inflows for foreign investors with two conditions: export creation and joint ventures with Chinese firms. For FDI, China opened special economic zones (SEZs) [1] along the coast and, 14 coastal cities/ 3 coastal regions. China provided favored tax treatment for foreign investors and laws on contracts, patents, and other matters of concern to foreign businesses according to international standards. A major growth factor is China state’s investment in communication[2] and traffic[3] and in technology industries[4]. Following Deng Xiaoping’s[5] "socialist market economy", China has allowed the private sector to invest in export-oriented consumer industries such as the textile and clothing. A factor of Xiaoping’s success model has been to follow the “One Country, Two Systems policy” in Hong Kong and Macao that are the former European colonies[6]. Hong Kong and Macau are both free to participate as full members in international organizations, such as the WTO. When the former colonies are global centers of trade and finance, 98% of banking assets in China’s continent are state owned[7]. China has a well structured group of financial institutes:

1. People's Bank of China (PBC) is mainly responsible for international trade and overseas transactions

2. Bank of China (BOC) and its branch offices in many countries manages remittances of overseas Chinese

3. China Development Bank (CDB) funds economic development and outward FDI

4. Agricultural Bank of China (ABC) funds the agricultural sector

5. China Construction Bank (CCB) is responsible for capitalizing a portion of overall investment and for providing capital funds for certain industrial and construction firms.

6. Industrial and Commercial Bank of China (ICBC) conducts commercial transactions and acts as a savings bank for the public. 75% of state bank loans go to state owned enterprises (SOEs)[8] that provide inputs from utilities, raw material, and energy that facilitated private sector to grow and to invest, the foundation of national economy.

As a paradox to a "socialist market economy", China’s income distribution is continuously widening. Because of their success in international trade, a growing number of persons are becoming ultra-rich[9]. China’s average per capita income is relatively low[10] worldwide - $6,675 (ppp) in 2009[11]. Poor people are living in the vast rural regions[12]. The three wealthiest regions in the continent China are along the southeast coast[13]. China’s governmental policy is designed to remove the obstacles to accelerated growth in the wealth regions. Shanghai by itself accounts for 8-10% of China's gross value of industrial output and the east coast accounts for about 60% of China’s imports and exports[14]. The People's Republic of China (PRC) has wisely tolerated Hong Kong - GDP per capita $43,862 (ppp [15]) and Macao - GDP per capita $58,262 (ppp[16]) that as regions are among the richest countries in the world. Hong Kong is the second largest stock market in Asia after Japan. In 2007, Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange in China (mainland) had a market value of $1 trillion. China (mainland) is the third largest stock market in Asia and will be the world's third largest stock market after the U.S. and Japan by 2016. China’s (mainland) stock of money[17] is the third biggest in the world.

Table 1: The stock of money in 15 leading economies

Rank country Stock of money[18] Date of Information

1 European Union 5,542,000 31.12.2008
2 Japan 5,417,000 31.12.2008
3 China 2,434,000 31.12.2008
4 United States 1,436,000 31.12.2008
5 Burma 622,600 31.12.2008
6 Canada 356,200 31.12.2008
7 India 278,800 31.12.2009
8 Switzerland 275,500 31.12.2008 est.
9 Russia 252,500 31.12.2008
10 Australia 248,500 31.12.2008
11 Sweden 185,400 31.12. 2008
12 Denmark 155,600 31.12.2009
13 Hong Kong 127,300 31.12.2009
14 Brazil 125,000 30.12.2009
15 Poland 118,200 31.12.2008

China’s labor force is 813.5 million persons (2009 estimation) of which about 50% is working in agriculture, forestry, and fishing. There is a huge potential to improve the productivity and international competitiveness of China’s manufacturing industry[19].The official unemployment ratio for urban areas is 4.3% (September 2009 estimation) [20]. About 200 million rural laborers[21] and their dependents have been relocated to urban areas to find work. From 50 to 100 million surplus rural workers were adrift between the villages and the cities, many subsisting through part-time low-paying jobs. When including migrants the total unemployment in urban areas will be boosted to 9%. In rural areas the underemployment is still a serious social problem. China needs adequate job growth programs for tens of millions of migrants and new entrants to the work force. In 2008 the export demand for Chinese products, e.g. in toy and textile manufacture, calmed down as a result of financial crisis. China’s labor markets were in imbalance since 20 million jobs in 67,000 factories were lost[22]. In the long run, there is strong demand for young workers in manufacturing industries. However, Chinese school children prefer to attend college rather than minimum-waged factories. The positive result of education is that China provides a huge increase in the world’s collective brain capacity.

China expanded the public sector to take up the slack caused by the global financial crisis[23]. In order to deal with the crisis of 2008–2009, China launched its Economic Stimulus Plan ($586 billion), called China's "New Deal" financed from China’s foreign exchange reserves (over $2 trillion)[24] and was focused on investment into infrastructure development, such as the rail network, roads and ports[25]. In 2009, China's economy grew by 8.7% and its GDP reached $4.9 trillion.[26] China is the second largest economy in the world after the U.S. (GDP $8.77 trillion, measured in purchasing power parity, ppp)[27]. Because of stimulus-driven domestic demand imports grew faster than exports. The trade surplus shrank 34% in 2009[28]. In July 2010 China’s surplus climbed to $28.7 billion. Exports grew 38.1% from the same month a year earlier, while imports rose only 22.7%[29]. China is the world's leading exporter. About 80% of China's exports are manufactured goods. Its exports are over $1.5 trillion (30% of GDP) slightly over Germany's exports[30]. Table 2 shows the distribution of China’s trade.

China’s primary export commodities include electrical goods, apparel, textiles, iron and steel, optical and medical equipment. China’s primary import commodities include oil and mineral fuels, optical and medical equipment, metal ores, plastics and organic chemicals. China's main
export countries 2008) are US 17.7%, Hong Kong 13.3%, Japan 8.1%, South Korea 5.1%, Germany 4.1% and the main import countries Japan 13.3%, South Korea 9.9%, US 7.2%, Germany 4.9%[31] The intra-regional trade is important for China. About 50% of China's imports come from South-East Asia, and 25% of China's exports go to the same destinations. China’s export to the U.S. has been a political issue since China’s trade surplus with the U.S. jumped to $232.5 billion in 2006 doubling from 1999[32]. On June 2010 China’s central bank finally announced that it will allow the country’s currency, the renminbi, to fluctuate more against other currencies, a decision that the U.S. expected to lead to the renminbi’s appreciation against the dollar. However, the pace of that appreciation has been very slow so far. A stronger renminbi would make Chinese export products more expensive in foreign markets, and would make foreign goods more affordable for Chinese buyers.[33] The political debate between the U.S. and Chinese governments is useless since the primary decision-makers are the U.S. consumers and traders. Many of the big U.S. traders are active partners with China. Wal-Mart, the world’s largest retailer, is China's 7th largest export partner, just ahead of the UK. China can take so big markets shares of Wal-Mart for the reason that Chinese firms are ready to provide full-scale services to Wal-Mart combined with the reasonable prices.

Besides China there are two big industrializing countries in Asia, India and Russia. China is India's largest trade partner. Bilateral trade rose 34% to $51 billion in 2008 from the year earlier. While trade is flourishing, the economic rivalry is becoming harder. In 2009, India blocked Chinese toy imports for safety reasons. India has a dozen antidumping cases against China at the WTO. India uses to claim that while China talks about free trade China subsidizes exporters, obstructs Indian farm imports and supports Chinese firms who collapse weak Indian industries. Even in complementary trade areas, there have been problems recently. Indian trading companies have complained that Chinese steelmakers have backed away from orders of Indian iron ore, causing major losses. The Chinese who are doing business in India complain about discrimination. India and China still are far from forging a broad economic alliance that is the common mission. Despite both countries oppose the U.S. on farm imports at the Doha Round they compete fiercely for export markets, energy assets and investment projects.[34] In 2009, the bilateral trade between Russia and China declined 32% to $38.8 billion, according to Russian and Chinese statistics. Chinese exports to Russia fell 47% in the year to $17.5 billion[35]. China exports manufacturing goods, such as apparel, footwear, machinery and electronics to Russia. China has about 750 investment projects in Russia, involving $1 billion[36]. Russia’s crude oil is transported by rail and electricity exports via Russian electricity grids. Russia is building the Eastern Siberia-Pacific Ocean oil pipeline with a branch to Chinese border. Russia has power grid monopoly and Unified Energy System of Russia (UES) is building some of its hydropower stations with a view of future exports to China.[37] China and Russia can easy identify the complementary trade areas. The bilateral trade system is, however, restrictive and sensitive to politics.

China’s production facilities have only partly been modernized. Most of its industrial output still comes from ill-equipped facilities. The technology level and quality of industry is in average relatively low. The public sector is mainly made up of State Owned Enterprises (SOE's). Major state industries are iron, steel, coal, machine building, light industrial products, armaments, and textiles. By 2002 the share in gross industrial output by state-owned and state-holding industries had decreased to 41%, and the state-owned companies themselves contributed only 16% of China’s industrial output.

These industries completed a radical reform in the 1980s and the 1990s. The 1999 industrial census revealed that there were 7,930,000 industrial enterprises at the end of 1999 (including small-scale town and village enterprises); total employment in state-owned industrial enterprises was about 24 million.[38] The automobile industry has grown rapidly since 2000, as has the petrochemical industry. Machinery and electronic products became China's main exports. China is the world’s leading manufacturer of chemical fertilizers, cement, and steel. Out of the five busiest ports in the world, three are in China. The majority of China's FDI inflows come from Hong Kong, Macau and Taiwan. According to a study "World Investment Prospects to 2010”, China will receive over $80 billion FDI inflows when India will attract $14.3 billion[39].

[1] Jao, Y.C. (Editor) and Leung, Chi-Kueng (Editor) (1987) China's Special Economic Zones: Policies, Problems and Prospects, OUP China.
[2]China's cell phone users top 670 million and Internet users 162 million in 2007 making China the second largest Internet user after the U.S.
[3] China has 77,834 km railways (number 3 after India and Canada), 3,583,715 km roadways (number 2 after the U.S.) and 110,000 km navigable waterways (number 1) CIA - The World Factbook
[4] China is the largest producer of steel in the world, the second in electricity after the U.S., and the third in automotive vehicles after US and Japan CIA - The World Factbook
[5]Deng Xiaoping (1904-1997) was a Chinese politician, statesman, theorist, and diplomat. As leader of China from 1978 to the early 1990s, Deng was a reformer who led China towards a market economy. Deng Xiaoping: Leading Thinker in China's Market Economy
[6] Wang, Fei-Ling (1998) Institutions and Institutional Change in China: Premodernity and Modernization, New York, Palgrave Macmillan.
[7] Chui, Becky and Lewis, Mervyn K. (2006) Reforming China's State Owned Enterprises and Banks, London, Edward Elgar Publishing, p. 205.
[8] Chui and Lewis, 2006, p.11.
[9]According to the latest Forbes China Rich List (2007), China had 66 billionaires, the second largest number after the United States, which had 415 IBISWorld Newsletter March 2008, China – Let the Good Times Roll, IBISWorld
[10] According to the IMF, China belongs to the lower middle category by world standards.
[11] World Bank (2009)
[12] Fighting Poverty: Findings and Lessons from China’s Success (World Bank). Retrieved August 10, 2006.
[13]1. centred on the Pearl River Delta; 2. along the east coast, centred on the Lower Yangtze River; and 3. near the Bohai Gulf, in the Beijing–Tianjin–Liaoning region. Economy of the People's Republic of
[14] China Statistical Yearbook 2007
[15] World Bank (2009)
[16] World Bank (2009)
[17] This "M1" comprises the total quantity of currency in circulation (notes and coins) plus demand deposits denominated in the national currency, held by nonbank financial institutions, state and local governments, nonfinancial public enterprises, and the private sector of the economy. The national currency units have been converted to US dollars at the closing exchange rate on the date of the information. CIA - The World Factbook
[18]million dollars
[19]The labor costs are around 40 cents/hour in China. Zhang, W. & Zhang, T. (2005) Competitiveness of China’s Manufacturing Industry and its Impacts on the Neighbouring Countries, Journal of Chinese Economic and Business Studies, Vol. 3, No. 3, 205–229.
[20]CIA - The World Factbook
[21]CIA - The World Factbook
[24] China's economic stimulus plan targets its infrastructure
[25]China GDP grows by 8.7 percent in 2009 -
[26]China GDP grows by 8.7 percent in 2009 -
[27]China 2009 GDP World's Second Largest Economy
[28] China's April Trade Surplus Shrinks 87% on Imports
[29] China's Trade Surplus Reaches $28 Billion -
[30] Asia Pacific Trade, Asia Pacific Exports, Asia Pacific Imports
[31] Asia Pacific Trade, Asia Pacific Exports, Asia Pacific Imports
[32]IMF World Economic Outlook Database
[33] China's Trade Surplus Reaches $28 Billion -
[34] Downturn Heightens China-India Tension on Trade -
[35]Russia moves into trade surplus with China
[36] The Voice of Russia.
[37] Russia economy business opportunities in Russia government tenders
[39] 'India miles behind China in FDI inflow' - International Business
Suomi voi olla globaalivoittaja - me voimme sen tehdä yhdessä!

Suomen elinkeinorakenne on kuin luotu globalisaatiota varten. Monen teknologian alueella suomalainen yritys on globaalisti markkina- ja innovaatiojohtaja. Suomi noussee vientivoittajaksi vuoden lopulla, kun kasvu käynnistyy kilpailukykyisillä aloilla ja yrityksissä. Ruotsi tietenkin hyötyy hintaherkistä aloista - ainakin toistaiseksi. Nyt on meneillään globaalin ylikapasiteetin ja varastojen leikkaus mutta se ei kestä enää pitkään. Globaalitalouden kriisi kohdistuu raha- ja pääomamarkkinoihin. Reaalimarkkinoilla menetykset ovat hetkellisiä. Suomen kasvavat vientimarkkinat kuten Kiina kärsivät vähiten ja Venäjä on toipumassa, kun öljyn hinta nousee orastavan kasvun myötä. Irtisanomisiin toivoisi malttia, koska kohta taas tarvitaan työvoimaa.

Kauppa generoi kassoja, jolloin vientiyritykset saavat kassansa normalisoitua. Johdetun kysynnän varassa olevat yritykset ovat kassavaikeuksissa, koska rahan kierto verkostoissa on hidasta; hyvää kumppania ei voi hätyyttää. Ulkomaiset pääomansijoitukset ovat eräs kasvun moottori. Suomalainen osaaminen ja teknologia ovat halpoja. Tyhjenneet teollisuusalueet ovat mahdollisuus - infrastruktuuri on valmiina, siis osa kustannuksista on maksettu. Googlen investointi saanee jatkoa. On aika luoda uusia kasvukeskuksia. Viisaasti toimien saadaan innovaatioita vauhtiin. Suomessa on paljon teknologiaa odottamassa kaupallistamista. VTT on teknologian tavaratalo. Suomessa on keksijöitä ja tutkijoita, jotka eivät ole onnistuneet etenemään protoa pidemmälle. Tällä alueella yksikin miljardi saisi aikaan ihmeitä.

Eräs käyttämätön mahdollisuus on edelleen Venäjä. Nyt Venäjä tarvitsee kumppaneita ja siksi sinne pitäisi panostaa eikä vetäytyä pois. Energia on maailman talouskasvun avain, koska tunnetut öljyvarat riittävät nykykulutuksella vain muutaman vuosikymmenen. Kiina, Intia ja muut uudet teollisuusmaat lisäävät nopeasti hiilen tuotantoa ja kulutusta, mikä ei tiedä hyvää taistelulle ilmastomuutosta vastaan. Euraasiassa on noin 40 %:ia maailman kaasuvaroista. Siksi sinne suuntautuu geopoliittinen mielenkiinto mutta myös investoinnit. Suomalaiselle Cleantechille on tarvetta. Venäjän ja EU:n välinen strateginen kumppanuussopimus on Suomelle tärkeä. Venäjä tarvitsee Suomen teknologista osaamista ja Suomi kuten myös EU Venäjän energiaa ja markkinoita.

Sähkön hinnan nousu on tuhoisaa. Purasjoki teki selväksi, että sähkövoima tulee eriyttää omaksi yhtiöksi. Energiamarkkinoilla tulisi panostaa alueellisesti hajautettuun ja ekologiseen energiatuotantoon; tehostamismahdollisuudet ovat tätä kautta suuret. Miksi vesivoimaa ei palauteta suoraan niille maakunnille, joilta se on otettu valtionyhtiölle? Tämä olisi todellista alueellistamista. Valtion tulisi muutenkin välttää markkinoiden monopolisointia yhtiöittensä ja liiketaitostensa eduksi. Sama koskee kuntia. Yrittäjät ovat korkean tuottavuuden sektoria. Siksi kuntien ja valtion monopolit ovat syövät kysyntää. Markkinat ovat hyvinvoinnin tae. Markkinat on vain saatava palvelemaan kuluttajia ja ostajia. Siihen ratkaisu on yksinkertaisesti kilpailu.

Nuoret tarvitsevat toivoa ja reaalisia mahdollisuuksia päästä kiinni yrittäjä- ja työelämään.
Suomen talouskasvatusseura ry, Sälskapet för ekonomifostran i Finland r.f., Association for HoPe Economics on perustettu tarkoituksena on edistää talouskasvatuksen monitieteistä tutkimusta, kouluopetusta ja käytäntöjä Suomessa. Tarkoituksensa toteuttamiseksi yhdistys edistää talouskasvatuksen tutkijoiden ja käytännön toimijoiden keskinäistä yhteistyötä sekä talouskasvatuksesta kiinnostuneiden yhteisöjen yhteistoimintaa. Yhdistys osallistuu yhteiskunnalliseen keskusteluun ja tekee aloitteita talouskasvatuksen edistämiseksi, kehittää alan toimijoiden kansainvälisiä yhteyksiä, tiedottaa, järjestää tapahtumia sekä harjoittaa kehitys- ja julkaisutoimintaa. Suomen Talouskasvatusseura ry, Opetushallitus ja Helsingin opetusvirasto järjestävät ajankohtaisen työseminaarin talous- ja yrittäjyyskasvatuksesta kiinnostuneille opettajille ja rehtoreille sekä muille sidosryhmille. Seminaarissa keskustellaan talous- ja yrittäjyyskasvatuksen käsitteistä, sekä haetaan työkaluja kasvattajille lasten ja nuorten taloustaitojen vahvistamiseksi koulun arjessa.

Perusopetuksen 7.–10. luokkien opettajille ja rehtoreille sekä muille sidosryhmille

Aika tiistai 21.10.2010, kello 10.00 – 15.30
Paikka Aalto-yliopiston kauppakorkeakoulu, Arkadiankatu 28, 3. kerros, luokkatila 4, Halti ja Pyhä

Ilmoittautuminen 13.10.2010 mennessä:

10.00 Seminaarin avaus / Outi Salo, linjanjohtaja, Helsingin kaupungin opetusvirasto
10.10 Talouskasvatuksella nuorille työtä ja tulevaisuutta / Arto Lahti, professori, Aalto-yliopiston kauppakorkeakoulu
10.30 Talous- ja yrittäjyyskasvatus yleissivistävässä koulutuksessa / Kristina Kaihari-Salminen, opetusneuvos, Opetushallitus
10.50 Yrittäjämäinen oppiminen yrittäjyyskasvatuksessa / Paula Kyrö, yrittäjyyskasvatuksen professori, Aalto-yliopiston kauppakorkeakoulu
11.10 Onko nuorten talous hallinnassa? / Anna-Riitta Lehtinen, tutkija, Kuluttajatutkimuskeskus
11.40 Lounas
12.30 Työryhmissä työskentely puheenjohtajien johdolla
RYHMÄ 1 Talouslukutaito kansalaistaitona globaalissa toimintaympäristössä, vetäjä Arto Lahti
RYHMÄ 2 Talous- ja yrittäjyyskasvatus koulun arjessa, vetäjät Paula Kyrö ja Katrina Harjuhahto- Madetoja
14.00 Iltapäiväkahvi
14.20 Työryhmien tulosten esittely
15.20 Päätössanat / Katrina Harjuhahto-Madetoja, toimitusjohtaja, Suomen Ekonomiliitto SEFE

Suomeen tarvitaan käytännön toimia, joilla nuoria kannustetaan oman elämänsä perusteiden rakentamiseen. Mikäli olet kiinnostunut tästä seminaarista, ilmoittaudu suoraan linkin mukaan. Voit myös soittaa minulle, joka toimin Suomen Talouskasvatusseura ry:n puheenjohtajana.

Me yhdessä voimme tehdä Suomesta globaalivoittajan!

Arto Lahti

keskiviikko 18. elokuuta 2010

Multinationals and Foreign Direct Investment (FDI)

International markets have been promising after the war. The rise of open markets for goods as the result of GATT processes and later the globalization of markets for capital, and partly for services and labor, have been understood as a set of processes in economy, culture and society. Globalization as a concept has much in common with earlier concepts like internationalization. It was Professor Theodore Levitt[1] at Harvard who first discussed global markets and global giants, multinational corporations (MNCs) or simply multinationals. It is worth noticing that parallel to globalization, there has been a shift in the comparative advantage of international trade away from traditional inputs of production, such as land, labor and capital, towards knowledge. The knowledge intensive or network intensive regions are the potential winners of the global agglomeration economies. The large home market countries, such as the U.S., are most frequently the host countries of MNC headquarters. The role of MNCs has been recognized to be important in present, intertwined global economy. The growth of the MNCs in number has been remarkable (table 1).

Year Number of MNCs

1969 7 000
1990 24 000
1995 37 000
1997 53 000
2001 60 000

Table 1: Number of MNCs in 1969-2001[2]

Stephen Hymer's dissertation[3] explicitly recognized the existence of firm-specific assets. In other words, FDI[4] draws on the role of firms as creators and exploiters of intangible firm assets. It was highly popular in those days, particularly among the general public and the political science discipline, to “see MNCs as big and bad”. Hymer was not an exception. He saw MNCs as taking advantage of barriers to entry to earn monopoly profits. Today, MNCs are embedded in practically in all contemporary capitalist societies, the most powerful actors of the Schumpeterian trustified capitalism. John Kenneth Galbraight, referring to the U.S., wrote that MNCs are the continuation of a country’s power system on an international level[5]. Peter Buckley, Mark Casson, and John Dunning are among the writers that developed a more analytical theory that argued that MNCs exist to complement the supply of markets. In the macro level, Alan Rugman has written extensively on MNCs and government policy, particularly trade and FDI policy[6]. Alan Rugman believes that MNCs are inherently increasing world welfare and are not exploitative. Government regulations of their behavior are likely to reduce overall welfare gains, since they prevents MNCs from doing what they do best (internalizing markets).

The global markets are dominated by MNCs. The logical consequence of that is to reject the neoclassical assumption of perfect competition. Referring to the IO theory[7], the existence of MNCs engaged in FDI can be explained by market imperfection that are resulted from factors like proprietary technology, scale economies, control of distribution systems, and product differentiation[8].Through their decisions, MNCs themselves restructure the markets and the rules of the game. What MNCs are doing is dependent on the oligopolistic nature of competition[9] in terms of Chamberlin. Even in a global oligopoly, firms are interdependent. They enter a market as a chain action of others[10]. Firms go abroad to follow their competitors, customers or partners. Instead of neoclassical assumptions, the relevant indicator of the market efficiency is contestability[11]. One of the major problems in that sense is the “newborn” mercantilism that at least partly is reflected by the clustering boom. Contestability is especially difficult to maintain in industries where major firm’s production function is based on country-specific matters or where there are essential governmental regulations or barriers of trade. MNCs are dominant players in the global markets. Markets are contestable, if they are open for new entrants. In other words, this can be interpreted that competition in the market is working, not perfectly, but adequate enough to give consumers new, genuine alternatives[12].

MNCs take advantage of the homogenous consumer segments[13] in the global markets. This increasing similarity or homogenization of tastes leads Levitt[14] to conclude that there are global markets for some products and services. Serving the global market segments with standardized products or services offers valuable economies of scale and scope for MNCs[15]. The fact that MNCs can have a major impact on the restructuring of consumer segments globally has lead to an assumption that oligopolistic rivalry provides MNCs a chance to empire-building at the global level. One of the major reasons behind such an assumption is that MNCs, through strategic entry deterrence[16], build-up overseas capacities in order to stop potential rivals from entering the most potential market segments. The worldwide economic growth rate is relatively low, especially in the developed countries. MNCs have competitive pressures to win market shares from local competitors, which is an explanation to FDIs in relatively mature markets. In the growth markets, MNCs attempt alternatively to reestablish market power through strategic alliances, joint ventures and collaboration over R&D. MNCs are the dominant actors of the multi-cultural supply of global commodities. Globalization has had a fundamental effect on shifts in demand from local to global. Customer tastes around the world are becoming more similar. In some product markets, MNCs attempt to improve their market share to reach an oligopolistic equilibrium, a market leadership. MNCs make portfolio investments abroad to increase and obtain control of some critical resources[17].

According to Nagesh Kumar, FDIs’ contribution to the host country’s GNP growth is more than proportionately compared to domestic investments, because of knowledge and technology spillovers to domestic firms from MNCs[18]. The externalities, such as spillovers, may not take place in some cases because of poor absorptive capacity of domestic firms. MNC’s entry may affect domestic firms adversely given the market power of their proprietary assets such as superior technology, brands and aggressive marketing. The effects of FDIs on domestic investment and growth are dynamic in nature[19]. Because of superior assets of MNCs, domestic firms may loose their market share in the short run. In the long run, domestic firms may absorb spillovers of knowledge through vertical or network linkages. Economic globalization means that economic actors in firms and public sector have a challenge to develop their abilities to genuinely operate at the global level.

The openness of markets is one of the key questions for increasing welfare and industrial dynamism in the transition and developing countries. Terutaka Ozawa emphasizes the remarkable effect that foreign investment has on economic growth through increase in trade. Ozawa believes that the patterns and directions of inflows and outflows of foreign capital change in conjunction with the stages of structural transformations in the economy. Inward FDI is typical for the first, factor-driven stage when seeking for cheap sources of raw materials and lower labour costs compared to home countries[20]. The existence of MNCs brings market dynamics to be considered. The assumption of immobile factors of production is also no more valid for empirical purposes[21].

The growth of total capital invested into developing economies has been huge during the three decades of globalization[22]. FDI is an important source of external resources and a significant part of capital formation, despite that their share in global distribution of FDI is declining[23]. The majority of FDI still goes to the well developed countries, where wages are high relative to those in developing countries. We are in the midst of a global reallocation of production activities. China and India were the star performers in aggregate GDP growth in the 1980s and 1990s. The rush of Western firms to access these countries, with their enormous domestic market, seems to continue. What is surprising is the speed by which the local firms, especially Chinese firms, have developed their technologies and positioned themselves as potential competitors to producers in the EU and the U.S. Chinese firms have succeeded to turn the state control to their advantage by beating MNCs their home markets. Now these firms are launching their first export products to beat western MNCs globally[24]. The vitality of the Chinese “Dragon” and the Indian “Tiger economy” has risen some concerns. What is the global economy like, if virtually all production competencies will disappear from developed countries and be taken on by eager producers in China and India.[25] The recent growth in MNCs and FDI in the world economy is explained by global factors, specifically liberalization.

In the 1960s and 1970s, economists explained MNCs through their FDI location patterns. Peter Buckley and Mark Casson[26] [27] were the first who called attention to advantages which may accrue to a firm from internationalization, i.e. engaging in foreign production itself. The essence of internationalization theory are market imperfections that may arise as the result of exogenous variables (externalities) in the goods or factor markets. These externalities can take the form of government induced regulations and control actions. There is, of course, the continous risk of market failure in the foreign operations, because of the lack of relevant information or knowledge (natural externalities). MNCs attempt to overcome these negative externalities by internalizing is operations. Thereby, MNCs are able to maintain control over their international operations outside their national boundaries.

The theory of internationalization drew on the transactions costs theory[28] which provides a rationale to explain why it may be advantageous to concentrate certain international operations within the firm, rather than rely on the market mechanism[29]. Marks Casson believes that in order to explain the existence of the MNCs it is necessary to include transaction cost theory. In the global context, markets are far from being perfectly competitive, and, therefore, the market operations are not costless. There are transactions costs of many kinds. Such costs include seeking buyers and sellers, and costs involved in negotiating, co-coordinating, monitoring, and enforcing contracts. When it is cheaper for a firm to undertake transactions internally, rather than via the market mechanism, internationalization which is engaged in the foreign production will be preferred. When the market does not exist, firms internalize transactions and become organizing units that supplants the price mechanism. One major source of transaction costs is the tacit nature of firm specific knowledge. When tacitness is high external market mechanisms become unsuitable to transfer intangibles assets such as knowledge.

The essence of internationalization for the MNCs is not that it explains the existence of the firm (transaction cost theory), but that it explains MNCs’ multi-plant operations[30] over space (Casson, 1982). Internationalizing the market mechanism because of transaction costs is not a unique idea. Based on his analysis of the industrial history of Western countries from the 1880s to the 1980s, Alfred Chandler[31] proposes the concept of economies of speed. Chandler’s concept of economies of speed has much in common with the transactions costs theory. In Chandler’s thinking, the idea of speed of throughput has been important in explaining the rise of the large, vertically integrated firms. Chandler emphasizes the role of these firms as the innovators of new technologies. These firms, nowadays MNCs, exploit the potential of economies of scale and scope made possible by the new technologies of production. The economies of scale depends on the size of capacity and speed (or the intensity) with which the capacity is utilized. Chandler focuses on a managerial process, not the costs of acquiring inputs like the writers of the transactions costs theory.

When Tom Peters published his book Thriving On Chaos[32] in the end of 1980s, many felt his dramatic predictions of the fundamental changes facing U.S. firms were extreme. A decade later, it appears he may have underestimated both the intensity and complexity of those changes. Tom Peters refers to fragmented markets, and proposes a flexible specialization as a strategy, by which he means smaller economic units or firms providing a wider variety of products for narrower markets. Tom Peters declared it the time of uncertainty. It was not the first time. Both Joseph Schumpeter and John Kenneth Galbraith made the same declaration after the wartime. The Schumpeterian creative destruction has been going on since. One of the most devastating periods was in the end of 1920s and early 1930s, when the industrialized countries transferred from industrial to postindustrial society. Now, it is question of the revolution of information technology (IT) and globalization of economies. According to a modern interpretation of Chandler’s thinking, the reason why a firm decides to internalize its operations can be the threat of transaction costs because of tacitness of intangibles assets. In that case, a firm’s management is the Visible Hand[33], the powerful actor that internalizes the critical part of production. This is exactly what the Nokia management has done, for instance.

Internationalization and economies of speed are closely related to Schumpeterian-based production, which refers to fast-growing, innovative and know-how-based production. Interpreting Chandler’s concept, the first movers are often firms that through interrelated sets of investments in production, distribution, and management can achieve the competitive advantages of scale, scope or both. The global first movers, in terms of Chandler’s economies of scale and scope, are very often MNCs, although this is basically the core area of entrepreneurship. The critical managerial competence is MNCs’ ability to implement multi-plant operations globally. A counter power to MNCs’ excellence in internalizing of global markets is the so-called venture capital approach that centers on the exponential growth of innovative firms.

According to John Dunning, the IO theory failed to differentiate between structural (Bain, 1956) and transaction-type (Williamson, 1975) imperfections of markets. The transaction cost type imperfections are the main reason for MNEs to internationalize their markets. The potential cost savings provide the impetus for MNEs to expand their operations via internalization. Internationalization theory provides an explanation of the growth of the NMCs and gives insights into the reasons for FDIs[34]. John Dunning[35] establishes the eclectic theory according to which a firm possesses three advantages:

1. Ownership advantages are endogenous to the firm. According to Dunning, firms move their production abroad when they have certain ownership specific advantages over competitors. Ownership advantages primarily take the form of intangible assets, which are exclusive or specific to the firm possessing them. Globalization requires reappraisal, since a firm, reaching for ownership advantages, has to overcome barriers, which which do not confront local firms.

2. Location advantages which are external to a firm. There are extra costs for a firm investing in a foreign country related to the familiarity of local markets and institutions.

3. Internationalization advantages encourage a firm to internalize operations for production to replace the need to utilize markets. Internalization advantages result from exploiting market imperfections and internalizing them into firm advantages. Internationalization theory is thus very closely related to transaction cost theory (Rugman, 1981).

The propensity of a certain country to participate in international production is dependent on the extent to which its firms possess these advantages and the locational attraction of its endowments compared to those offered by other countries or regions. Dunning makes no predictions, about which countries, industries or firms are most likely to engage in foreign production. He says that these three advantages will not be evenly distributed across countries, industries and firms. Furthermore, Dunning expects that advantages interact with each other and that their significance and structure may change over time. In this context it is also useful to consider a country's international competitive position through the internationalization process of its firms. Dunning (1979) suggests that there really is a close connection between the ownership advantages of firms and some specific characteristics of countries.
[1]Levitt, Theodore (1983) The Globalization of Markets, Harvard Business Review, May-June.
[2]UNCTAD (2001) World Investment Report 2001: Promoting Linkages, New York and Geneva, United Nations.

[3]Hymer, Stephen (1960, dissertation, 1976, published) The international operations of national firms: A study of direct foreign investment. Cambridge, MA: MIT Press.
[4] China’s average growth of 10% per year during 1980-2001 (World Bank (2003) World Development Indicators, Washington, DC: World Bank).
[5] Advertising is the means by which these firms manage demand and create consumer needs where none previously existed. (Galbraith, John Kenneth (1967) The New Industrial State, Princeton University Press).
[6]Rugman, Alan (1996) The Theory of Multinational Enterprises: The Selected Scientific Papers of Alan M. Rugman, Edward Elgar, Cheltenham, U.K. and Brookfield, U.S.
[7]Caves, Richard (1982) Multinational enterprise and economic analysis, Cambridge, Cambridge University Press.
[8] This is an example given by Bain, Joe (1956) Barriers to New Competition, Cambridge MA, Harward University Press.
[9] Oligopolistic rivalry refers to rivalry in a market which is shared by a small number of usually large producers or sellers. Each producer is, thereby, obliged in its market behavior to take fully into account the actions and behavior of its current and potential large rivals in the market.
[10]The strategic group theory mentioned earlier is a realistic framework to analyze this kind of mutual learning by doing of interdependent firms.
[11]William Baumol has found that a perfectly competitive market is necessarily perfectly contestable, but not vice-versa. The reason behind this stipulation is that perfect competition is applicable as a guide only if scale economies are absent, so that many kinds of rival firms can prosper. Perfect contestability also rules out productive inefficiency. (Baumol, William (1982) Contestable Markets: An Uprising in the Theory of Industry Structure, American Economic Review, Vol. 72, No. 1, March 1982, pp. 1-15).
[12] Historical article: Clark, John (1940) Toward a Concept of Workable Competition, American Economics. Review 30, no. 2 (June 1940), pp. 241-256.
[13]Advances in international communication leads to growing similarities in the fashion and music preferences of youths around the world, and to the prevalence of global products such as Coca Cola, Levi Jeans or Sony Walkman.
[14]Levitt, Theodore (1983) The Globalization of Markets, Harvard Business Review, May-June.
[15]The aggregated preferences for certain product in most countries can be of the right type almost simultaneously like the huge prospects of Nokia’s mobile phones demonstrated in the 90s.
[16]Deterrence theory is a theory of war, especially regarding nuclear weapons.
[17]Cross, Adam (2000) Modes of Internationalization, in International Business, Theories, Policies and Practices, Ed. Tayeb, Monir, Harlow, Pearson Education.
[18] Kumar, Nagesh (1990) Mobility Barriers and Profitability of Multinational and Local Enterprises in Indian Manufacturing, The Journal of Industrial Economics, 38, pp. 449-61.
Kumar, Nagesh (1994) Multinational Enterprises and Industrial Organization: The Case of India, New Delhi, Sage Publications
Kumar, Nagesh (1998) Globalization, Foreign Direct Investment and Technology Transfers: Impacts on and Prospects for Developing Countries, London and New York: Routledge
Kumar, Nagesh, and N.S. Siddharthan (1997) Technology, Market Structure and Internationalization:Issues and Policies for Developing Countries, Routledge and UNU Press, London and New York
[19] Markusen, James and Venables, Anthony (1997) Foreign Direct Investment as a Catalyst for Industrial Development, NBER Working Papers 6241.
[20] Ozawa, Terutaka (1996) Companies without Borders: Transnational Corporations in the 1990's. International Thomson Business Press, London.
[21]Sachwald, Frédérique (1994) Competitiveness and Competition: which theory of the firm? In European Integration and Competitiveness: Acquisitions and Alliances in Industry (ed. Sachwald) Edward Elgar Publishing Ltd., Gowerhouse, England.
[22]One estimation is from $104 billion in 1980 to $472 billion in 2005 (These numbers are calculated using data from the World Bank’s Global Development Finance Online database and are not adjusted for inflation) by Anil Kumar in
[23]FDIs can be a green field investment, establishing a foreign affiliate starting new production facilities, or merger and acquisition operation that aims at acquiring control of existing entities.
[24]Ming Zeng and Peter Williamson have studied the strategies and performance of 50 Chinese companies, warn against such complacency, saying: “Multinational executives who do not perceive China's state-owned and privately-held companies as potential competitors have missed the rise of the new breed of Chinese companies that have already succeeded in capturing some foreign markets.” (Zeng, Ming, and Williamson, Peter (2003) The hidden dragons, Harvard Business Review, Vol. 81 No. 10, October, pp.92-9).
[25] Andersen, Poul Houman (2005) In the shadow of the Dragon and the Tiger: Towards a new understanding of production relocation, innovation and industrial decline, 1. Draft. To be presented at IKE seminar, January 7, 2005,
[26] Buckley, Peter and Casson, Mark (1976) The Future of the Multinational Enterprise, London, MacMillan.
Buckley, Peter and Casson, Mark (1985) The Economic Theory of the Multinational Enterprise, London, MacMillan Press Ltd.
[27] Casson, Mark (1983) The Growth of International Business, London, Allen and Unwin.
[28] Coase, Ronald (1937) “The Nature of the Firm”, Economica, pp. 386-405.
Williamson, Oliver E. (1985) The Economic Organization Firms, Markets and Policy Control, Harvester Wheatsheaf Books, New York.
[29] In a perfectly competitive environment, the price system would organise the market with zero transaction costs.
[30]These include long-term contracts through more efficient governance structures, R&D to prevent the dissipation of know-how which is unpatentable; tax differentials and foreign exchange controls, which create incentives for, transfer pricing. In addition, internalization allows the firm to control quality by integrating backwards and internalizing the process to maintain required standards.
[31]Chandler, Alfred (1990) Scale and Scope. The Dynamics of Industrial Capitalism, the Belknap Press of Harvard University Press, Cam­bridge.
[32]Peters, Thomas (1990) Thriving on Chaos, Harper & Row, New York.
[33]See: Chandler, Alfred D. (1978) The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.
[34] Rugman, Alan (1981) Inside the Multinationals, London, Croom Held Ltd.
Rugman, Alan (1982) New Theories of the Multinational Enterprise, New York, St. Martin's Press.
[35] Dunning, John (1980) Toward an eclectic theory of international production: Some empirical tests, Journal of International Business Studies 11(1): pp. 9-31.
Dunning, John (1993) Multinational Enterprises and the Global Economy, Wokinghan England, Addison-Wesley.

maanantai 16. elokuuta 2010

The New Economic geography

Alfred Marshall, the most influential British economist in the era of the second industrial revolution from the 1880s to the 1930s, advanced the Ricardian analysis in his book Principles of Economics. Marshall analyzed externalities of specialized industrial locations. His prototypical industrial district was Manchester. In the Marshallian industrial district the concentration of firms enjoys the same economies of scale that giant firms normally get. In that sense, a Marshallian industrial district is an alternative to a giant firm that nowadays is a multinational. Marshall highlighted the presence of the so-called industrial atmosphere, although he did not elaborate its social foundations. Marshall was aware of the fact that there is the overlapping between the social and the productive systems.

In Marshall’s conceptualization of industrial district, the possibility to benefit from external economies, due to spatial contiguity[1], is the main reason that induces firms to locate near each others. The concept of externalities refers to the benefits that a firm takes from being located in an industrial district. In Marshall’s analysis, industrial districts can contribute to the external economies of the regionally concentrated firms. In the theory, geographical agglomerations and regional imbalances result as an equilibrium solution of a tension between centripetal[2] and centrifugal[3] forces. Marshall described the three most important centripetal forces, called Marshallian triad, that are at the base of the existence of agglomeration:

1. Effects resulting from specialization due to the division of labour with an industrial district

2. Effects resulting from creation of infrastructure, information, communication and R&D that a single firm can take advantage of

3. Effects resulting from the availability of high specialized labour force

Gunnar Myrdal[4], the famous socio-economist after the Word War II, has developed the core-periphery model that is a simple yet useful conceptualization to be used at different geographical scales (global, national, regional, etc). Myrdal proposed that the key concept of spatial development is cumulative causation that can be explained by spread and backwash effects. In relationships between core and periphery countries, there are spread and backwash effects. Spread effects are the positive benefits in terms of technology transfer from core countries to periphery countries. The brain drain, which refers to the tendency of highly educated citizens in periphery countries to migrate to core countries, can be considered as an example of the negative backwash effects[5].

Many industries (including service industries such as banking) are geographically concentrated, and such clusters are clearly an important source of international specialization and trade. Regional clusters in general seem to perform better that the national average in the US[6]. A comparative survey of 34 regional clusters (of which approximately half are traditional and half science-based) in 17 European countries reveals that that young and science-based clusters dominate the European landscape[7]. They are relatively small in size compared with the US’ clusters.

Paul Krugman is one of the leading economists that has competed the Marshallian triad. Krugman has made following summary of the centripetal agglomeration economies that are relevant in the global economy[8]:

1. Market-size effect (demand and cost linkages, also called backward and forward linkages).

A large local market creates a large local market(s) that in turn creates both demand linkages (sites close to large markets are preferred location for the production of goods) and cost linkages (the local production of intermediate goods lowers the production costs of other producers and provides savings on transportation costs). An example is the financial services industry, clients and ancillary services concentrated in New York.

2. Thick labour markets

A local concentration supports the creation of a thick labour market, especially for specialized skills (where employees and employers are readily matched) and spatial externalities (the extensive division of labor of industry-specific co-dependent innovations), so that employees find it easier to find employers and vice versa.

3. Pure external economies

A local concentration of economic activity may create more or less pure external economies through information spillovers.

But Krugman (1995) identifies also centrifugal forces that affect geographical concentration:

1. Immobile factors

Certainly land and natural resources are always immobile, and in an international context, people. Therefore, some production must go to where the workers are and from the demand side dispersed factors create a dispersed market, and some production will have an incentive to locate close to the consumers.

2. Land rents

Concentrations of economic activity generate increased demand for local land, driving up land rents and thereby providing a disincentive for further concentration. For instance in Los Angeles land rents are a centrifugal force.

3. Pure external diseconomies

Concentrations of activity can generate more or less pure external diseconomies such as congestion. Congestion is a state of excessive accumulation or overfilling, like the traffic congestion.

Krugman uses the name New Economic Geography that has been driven by considerations of modeling strategy to concentrate on the role of market-size effects in generating linkages that foster geographical concentration, on one hand, and the opposing force of immobile factors working against such concentration, on the other.

In the beginning of the 21st century, core countries are rich and developed. The average citizen achieves a high standard of living. The USA, EU, Japan, Canada and Australia are recognized as core countries. The periphery countries are less developed having low economic growth and poorly educated, housed and fed population. Many countries in Africa, Asia and Latin America are recognized as periphery countries. The semi-periphery countries seem to improve their position in the global economy whereas many periphery countries are stagnating. Newly industrializing countries (NICs) such as the ‘Four Dragons’ (South Korea, Taiwan, Hong Kong and Singapore) and the ‘Little Dragons’ (Malaysia, Thailand, Indonesia and the Philippines), owing to impressive economic growth rates in recent years, can be classified as semi-periphery.

In the EU, the economic integration has created new economic regions that are rich and developed in the global perspective. The new regional division of labour has many new forms. In the European context, in the deepening and enlargement process of the European Union the economic integration includes institutional development, which requires that participating countries have fairly high and similar levels of development[9]. Economic integration is divided into stages depending on how far the member states have advanced in cutting down barriers impeding economic activity among each other and how far the implementation of common policies has advanced[10].

The economic integration and globalization are the two trends of the current development of the world economy, and the role of states has been declining. Economic decision making has been devolving downwards to sub national units. At the same time some part of this power has also moved upwards to multiregional organizations (like the EU) due to formal integration[11].

According to customs union theory, the creation of customs union will lead to trade creation and trade diversion. Trade creation occurs when domestic production is replaced by importing from a cheaper member country. This means specialization according to comparative advantage. Trade diversion means that original imports from world markets are replaced by imports from a more expensive member country. This phenomenon leads to a move from efficient producers, to less efficient producers, causing welfare losses. For similar reasons it is not invariably in the interests of a particular multinational or country to promote regional integration if that would mean subjecting an established market to increased competition from new entrants.

Due to liberalization of trade, Krugman’s agglomeration economies are all relevant. Market-size effect in the core areas of the EU markets is remarkable. Demand linkages mean that the area from Milan in Italy to London in England is a preferred location for the production of high value-added service industries like financing. Some growth areas have a historical ground and have existed for a long time in certain growth poles like the ‘Third Italy’, Baden-Württemberg, and London-City. Regionally contemporary emerging economies of scale might be found in the new transition economies of Central and Eastern Europe. The development of these countries will depend on both internal as well as on external factors. There are new local, regional and supra-national location alternatives for firms to build up their competitive position and develop networks of relationships in the value chain. This can be done in order to reduce production costs, create distribution and logistics channels, outsourcing of non-core production and so forth.

The core-periphery model by Myrdal is dynamic. Paul Krugman (1995) has proposed increasing returns to scale (through backwash) and expansion to other nearby areas (through spread). Referring to Albert Hirschman[12], it is possible to claim that core cities grow through increasing returns (to knowledge), with the satellites of leading technology innovators’ spread by knowledge exploitation nearby. Urban ghettos are parts of the famous Silicon Valley production system as are the engineering laboratories at Stanford, or the military R&D facilities.[13] In the US, the main reason for the clustering around universities has been the availability of government-funded technology has been a catalyst of agglomeration economies in modern science-based industries. Today, universities and their related research laboratories spread throughout most regions in the US. Geographical proximity can be expected to serve the incubation of new technologies. As firms expand their competitive edges, their activities may move out of the region generating ‘spread’ of technological innovations globally.

According to Krugman[14], differences in economic development are the very least associated with location. Those countries that are located close to the equator tend to be poorer than those in colder temperate zones. Krugman has also found that per capita income within Europe seems to follow a downward gradient from the northwest corner of the continent. The Nordic countries are success stories of the EU and the global economy. How much this fact is dependent on geography is the key issue in application of cluster models. It is apparent that there are both large regional inequalities in development within countries and, often, a powerful tendency for populations to concentrate in a few densely populated regions. The problem of countries that are located close to the equator is not the tropical climates. It is more or less political history. These countries were colonies during the time from the 1880s to the 2000’s when the technological and commercial dominance of Northern Hemisphere regions, especially the US, the EU and Japan, was created.

The economic destinies of locations are not determined by location. Like Krugman points out small historical accidents can cause one country to become part of the industrial core or periphery with the site of a 10-million-person metropolitan nightmare. What is the pattern of evolution of countries and continents in the global economy is an interesting research question to tackle. Michael Porter presents a model to describe the different stages of competitive development that a nation’s industries move through. Porter (1990, 545-565) suggests four distinct stages of national competitive development:

1. Factor-driven

Practically, any of the internationalized or globalized industries have drawn their competitiveness from the basic factor conditions, such as low-cost labor and access to national resources. Firms typically produce commodities more than specialities. The rate of technology and R&D investments is low. The local economies are highly sensitive to fluctuations in commodity prices and exchange rates. There are only a few truly international firms. Domestic demand for exported goods is modest. The role of foreign firms is considerable, as they act as a channel for foreign markets and they bring foreign technology, knowledge and management with them to the host country. Technology is assimilated through imports, imitation, or foreign direct investment.

2. Investment-driven

In the investment-driven stage, countries develop their competitive advantages by improving their efficiency in producing standard products and services, which become increasingly sophisticated. While the advanced technology still comes mainly from abroad, with licensing and joint ventures, local firms’ invest in process technology and modernization of production facilities etc. Firms often produce under contract to foreign manufacturers that control marketing channels. Home demand is still rather undeveloped, and related and supporting industries are not functioning optimally. It is typical to this stage that wages and input prices are higher than before and employment is increasing. Public policy concentrates on long-term matters. One of the major areas are infrastructure projects. Harmonization of customs, taxation, and corporate law may allow the economy to integrate more fully with global markets.

3. Innovation-driven

In the innovation-driven stage, the number of industries operating successfully at international level increases and broadens. Firms create new technologies and methods and compete with low costs due to high productivity rather than low production factor costs. Home demand increases and becomes more sophisticated. Clusters are well developed, fostering innovation and technological change. A country's competitive advantage lies in its ability to produce innovative products and services at the global technology frontier using the most advanced methods. Institutions and incentives supporting innovation are crucial for further development. The economy becomes stronger against outer shocks, like cost shocks, because of its ability to compete with technology and product differentiation. Improvements related to externalities, market imperfections and incentives are important to develop the well-functioning factors, product and financial markets.

4. Wealth-driven

Unlike other stages the wealth-driven phase is driven by past accumulation of wealth and becomes unable to generate new wealth. Firms become more vulnerable to uncompetitiveness. They innovate less and the investment rate decreases. Employees begin to lose motivation and so on. The result is that firms lose competitive advantage compared with foreign firms and may even start to move their headquarters from their original home country to other countries. The standard of living and welfare is still rather high. The policy attempts in this stage try to increase the dynamism of the economy, innovations and profitability.

The first three stages involve successive upgrading of a nation’s competitive advantages and will be associated with progressively rising economic prosperity[15]. The wealth-driven stage leads to the decline of competitive advantages of a nation, because the driving force in the economy is the wealth already been achieved. An economy driven by past wealth cannot maintain its dynamism since the motivation of investors, managers, and individuals undermine sustained investment and innovation. The transition through the four stages is not automatic since countries may get stuck in a stage. In Africa investment-intensive economies such as South African republic are finding that their relatively high-cost labor make them vulnerable to competition from really lower-wage countries, especially China.

Porter believes that we can identify the predominant pattern of the competitive advantage model that a country, through its firms, poses at a particular time[16]. For instance, in the factor-driven stage, the competitive advantage in the production of either primary goods or labour-intensive goods is different from the investment-driven stage or from the innovation-driven stage. Thus, the transition from the factor-driven to the investment-driven stage generates outward investments towards lower-wage countries in labour-intensive manufacturing, particularly if the critical competitive edge happens to be organization of mass production. Similarly, the transition from the investment-driven to the innovation-driven stage brings about simultaneously inward investments in technology-intensive industries and outward investments in intermediate goods industries.

In the global economy, any country, if it is serious about raising its standard of living, must open its economy so as to avail itself of opportunities of trade, interact with and learn from the already advanced. Japan's rapid post-war structural transformation clearly demonstrates rapid evolution through different stages of Porter’s model[17]. From US viewpoint, Rugman[18] thanks Porter for the brilliant concept of the diamond, the identification of clusters and the four stages of economic development that are justified. What is the validity of Porter’s model of economic development is the major concern. The global economy is not only economic in its nature. These phases cannot be separated too accurately. However, they describe the main components to which a country's economic and industrial competitive development at certain stages is based on. These phases also reflect the sources of advantage of a nation's enterprises in international competition and the nature and extent of internationally successful industries. The growth firm in the EU is a major challenge to be tackled. In the global markets, the mix of relevant mobility barriers is, perhaps, different from that of the GATT period from the World War II to the year 1995.

In the new paradigm based on the emergence of knowledge economy the importance of access to and the use of knowledge increases. Globalization, on the other hand, means increasing competition and also emphasizes the importance of specialization and the use of local comparative advantages. The global economy has its dark side. Substituting labor with capital and technology, along with shifting production to lower-cost locations has resulted in waves of corporate downsizing throughout Europe and North America[19].

[1]The Law of Contiguity refers to the fact that things that occur in proximity to each other in time or space are readily associated.
[2] Centripetal forces tend to promote geographical concentration.
[3] Centrifugal forces tend to prevent geographical concentration.
[4] Myrdal, Gunnar (1957) Economic Theory & Underdeveloped Regions, London: Duckworth.
[5]Braudel, Fernand (1981) The Perspective of the World, NewYork, Harper & Row.
[6]The importance of geographic proximity is clearly shaped by the role played by the scientists who will live in the regions occupied by multinationals that are best buyers of the new, scientific knowledge. The triad of New York, London and Tokyo that dominate global financial services is an example of permanent clusters (Sassen, Saskia (1991) Global Cities: New York, London, Tokyo. Princeton: Princeton University Press).
[7] Regional clusters in Europe, Observatory of European SMEs 2002/ No. 3, European Commission.
[8]Krugman Paul (1998), What’s New About the New Economy Geography, Oxford Review of Economic Policy, Vol 14, No 2, pp. 7-17.
[9] Robson, Peter (1993) The New Regionalism and Developing Countries, Journal of Common Market Studies, Vol 31, No. 3.
[10] Balassa also makes a difference between certain types of integration, namely: 1. Trade integration, which means removing barriers, 2. Factor integration, which refers to liberalization of factor movements, 3. Policy integration consisting of harmonization of economic policies, and Total integration, i.e. complete unification of the policies of participating countries. (Balassa, Bela (1976) Types of Economic Integration, in Economic Integration: Worldwide, Regional, Sectoral (ed. Machlup, Fritz) The Macmillan Press Ltd. London.
[11]Strange, Susan (1996) The Withdrawal of State, Cambridge University Press. Cambridge.
[12] Hirschman, Albert (1958) The Strategy of Economic Development, New Haven, Yale University Press.
[13]Saxenian, Annalee (1994) Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Cambridge: Harvard University Press.
[14] Krugman, Paul (1999) The Role of Geography in Development International, Regional Science Review, Vol. 22, No. 2, pp.142-161.
[15] This is exactly what happened in Finland since the 1880s until the 1990s.
[16]As mentioned earlier, the four distinct stages are: 1. factor-driven, 2. investment-driven, 3. innovation-driven, and 4. wealth-driven.
[17]Ozawa, Terutomo (1991) Japan in a new phase of multinationalism and industrial upgrading: functional integration of trade, growth and FDI, Journal of World Trade, 25 (February), pp. 43-60.
[18] Rugman, Alan (1991) Diamond in the Rough, Business Quarterly, Vol. 55, 1991, pp.61-64.
[19] Baily, Martin, Bartelsman, Eric, and Haltiwanger, John (1996) Downsizing and Productivity Growth: Myth or Reality? Small Business Economics, 8(4), pp. 259-278.

maanantai 9. elokuuta 2010

Africa has huge and partly unused resources - What is needed is entrepreneurship!

World population has grown by one billion in the past decade. Nearly half of the population is under 25 in age. The world population is about $6.6 billion and Africa’s population $0.9 billion. Africa’s share of world population is 14 % and of trade about 3 %. Africa's population has more than doubled since 1970 and is growing near 3% per year. Africa’s consumption of its own refined oil products is about 30% and only about 3% of the global carbon emissions. Cheap fossil fuels have been the major contributor of economic growth and welfare (BNP per capita) in all other continents except Africa. The coastal and offshore Africa is the oil and gas reserve for consumers in the rich countries. Africa needs multiple linkages to the OECD countries and especially inward FDI flows. In the African country-side, small-scale farmers are left alone[1] when e.g. China and India have implemented a strong agricultural policy. The climate change can hit Africa by natural disasters[2] and increase investment costs from 1% to 2%[3] . Especially, agricultural exporters of African LDCs have a risk to fall behind of the global trade by 2030[4] without an efficient infrastructure.

The interdependency of energy and politics in Africa is a major concern. Africa needs proper electricity grids as much as clean water. Africa has unused hydro electrical power capacity[5] but unpredictable weather patterns effect on electricity supply. Hydroelectric power can only in some regions solve the energy problems, since pure water is the most limited resource[6]. Water recycling is needed in Africa. About 50% of electric power in Africa is generated by coal-based facilities, while natural gas is coming instead. The South Africa has developed energy infrastructure with a nuclear power plant, large deposits of coal and 4 oil refineries. The electrification level in the South Africa and Eqypt is 70% but in Sub-Saharan Africa[7] only 20%. Africa needs foreign investors in transmission lines. The privatization of state-owned power firms is one option. Both the SADC[8] and the ECOWAS[9] have organized regional networks and power pools for regional electricity markets. Countries with limited power generation capacity can get access to power, without investments in new facilities. The surplus power stations can be run at maximum output to achieve the scale-economies. The South Africa, Ghana and Zambia are net exporters of power[10]. There is a social issue: Countries can purchase power in bulk and redistribute it locally at a cheap price. Unfortunately, the rural Africa is excluded of that because of the lack of electricity grids.

Africa is well endowed with oil and gas reserves. Africa’s economically recoverable oil and natural gas reserves account for 10% of the world’s total. Africa consumes 3.4% of global oil and 2% of gas but produces 12% of global production of oil and 6% of gas. Africa consumes less than 30% of its oil and gas and exports the rest. Oil and gas resources are concentrated in the North-West-Africa. Algeria, Angola, Libya, Nigeria are the major producers[11]. In the North Africa, the diversification towards energy clusters is going on. Global oil firms are all reliant on the North Africa’s oil because of its high-quality[12]. The Gulf of Guinea has proven oil reserves of 50 billion barrels (Saudi Arabia has 261 billion) that are locating out of the coastlines. The offshore location is an advantage for extractors, since big oil tankers can tank crude oil directly from oil platforms and navigate across the Atlantic towards America, Europe or Asia. Along the coast of West Africa from Mauritania to Angola, off-coast exploration is yielding major results. Oil industry experts predict that by 2022 the industry will invest over $40 billion in the Gulf of Guinea[13]. There have been noticeable changes in the geography of oil and gas in Africa since Africa is still open to foreign oil exploration[14].

The US is the world’s leading oil consumer. Rapid economic growth in China will increase oil demand[15]. Africa is a key region for China’s oil supply. Chinese companies are active even in Sudan. China’s trade, investment and aid activities in Africa have been growing rapidly over the past decade. In 2006, China’s aid to Africa totaled $5.75 billion and trade trade with Africa reached $56 billion[16]. China activity for partnership with Africa has a technological resoning. Africa’s high-quality crude oil is ideal for most of Chinese refineries that cannot refine heavy, sulphur-rich crude oil from the Middle East or Venetzuela. The North Africa countries have modern and large-scale refineries that are lacking in most of oil fields in the Gulf of Guinea countries[17] where downstream investments in current or new oil plants are desperately needed to increase the refinery capacity. Without efficient industrial infrastructure, the West Africa cannot utilize its rich oil and gas resources. Because of technology and financial barriers to overcome when building a new refinery[18], the Gulf of Guinea region needs reliable partners.

Nigeria, Africa’s most populous country[19], accounted for $52 billion from exports of crude oil, natural gas and refined petroleum products in 2006. Nigeria exports 90 % of its oil production[20]. Increased exploration in deep water has been successful and the proven reserves can reach 40 billion barrels by 2010[21]. Nigerias’ oil and gas industry will double its production offshore in the near future through development of LNG (Liquefied natural gas) plants[22]. Offshore Nigeria's gas earlier flared will hopefully soon be converted into the LNG and integrated with the West African Gas Pipeline (WAGP) for natural gas export to Benin, Togo and Ghana[23]. Nigeria's national oil company needs to take the control of oil and gas sector since Nigeria’s economic development is strongly dependent on oil business[24]. Angola, another big producer in the Gulf of Guinea region, exports 95 % of its oil production. Angola exports of crude oil, natural gas and refined petroleum products are near $28 billion[25]. The U.S. and China have both roughly 40 % shares of Angola exports production. Angola has also been successful in deep-water discoveries. Oil reserves are 9 billion barrels. China assists Angola in infrastructure reconstruction[26]. China’s primary interest is to get a trong foothold in Angola’s oil fields when Angola’s oil production is doubling in the near future. Angolan national oil company (Sonangol) is the one that grants exploration licenses[27]. However, China is doing serious collaboration with African countries. The term of rules can be more favourable to China than to Nigeria or Algeria but this is exactly what global trading is all about. The best players are the winners.

São Tomé, a former Portuguese colony, consists of two small islands with population of 200,000. São Tomé could become the Kuwait of Africa of having the biggest per capita income. Nigeria controls most of the islands nearby its coastlines. The treaty made provides 60% of the revenue to Nigeria and the rest to São Tomé. The proven oil reserves allocated to São Tomé are 4 billion barrels[28]. São Tomé is a sad story of oil politics. The contracts with oil yets are favourable[29]. The president is accused of being part of the bad deals[30]. In São Tomé the petro-wealths have been more a curse than a blessing[31]. Equitorial Guinea with 500,000 people consists of consists of the mainland Río Muni, islands of Bioko, Annobón and of some small islands. The country has become one of the largest oil and gas producers in region[32]. GE Petrol, Equatorial Guinea’s national oil company manages the government’s interest stakes in production sharing contracts with multinationals. Oil reserves are 12 billion barrels. In 2006, oil exports income was $9 billion[33]. The major export markets are: the U.S. 24% and China 28%. The average income is $5,000 per capita that might indicate that oil incomes have been more a blessing than a curse.

African countries need to control their national oil reserves. The North Africa has made a lot of progress in that. The Gulf of Guinea is lacking behind. What is needed is the diversification towards related industries like the plastic industry. Most of countries in the region have the state-owned, national petroleum firms aimed to control licenses to exploration and extraction. This is a good starting point assuming that national petroleum firms have mandates and competences to negotiate efficiently with multinationals. Russia and Venezuela have solved to problem by the national monopoly. Both countries have taken energy exploration projects in government’s control and raised taxes on foreign petroleum firms. The countries in the Gulf of Guinea need resourceful foreign partners and their FDIs. They have to solve the so-called incomplete or multi-objective contracting of how to share investment risk and profit with multinationals. From the national economy point of view, the governments need annual and substantial incomes from contract-based risk-income-sharing and from taxes on foreign petroleum firms. The signature bonuses are not acceptable because there is a risk of corruption and mismanagement of public funds[34]. The major course is the corruption that has claimed to be related to the top politicians in the country[35]. Sudan is a sad example of bloody internal conflicts in which its own government ignores human rights. The major ethical problem in global markets is to what extent multinationals should take into account political issues[36].

Natural gas consumption worldwide will increase 63% until 2030. Natural gas remains the key fuel in the electric power and industrial sectors. Natural gas burns more cleanly than coal or petroleum products. The national/ regional plans to reduce carbondioxide emissions encourage the use of natural gas to displace liquids and coal. Almost 3/4 of the world’s natural gas reserves are located in the Middle East and Eurasia[37]. Africa and Asia (excluding China and India) are expected to be important sources of natural gas production in the future. These two regions combined are expected to account for 21% in 2020. About 50% of the production from Africa is exported. In 2030, the export share of production from Africa is projected to increase. Several pipelines from North Africa to Europe are under consideration, and LNG export capacity in West Africa continues to expand. Reserves in the world are fairly evenly distributed on a regional basis. Despite the increase in natural gas consumption, particularly over the past decade, regional reserves-to-production ratios are substantial. Worldwide, the reserves-to-production ratio is estimated at 65 years[38]. The leading regions in the ratio are: Middle East 100, Africa 88, Russia 80, and Central and South America 52 years.

Africa has rich resources producing over 60 metal and mineral products. The South Africa, Ghana, Zimbabwe, Tanzania, Zambia and the DRC dominate the mining industry, whilst Angola, Sierra Leone, Namibia and Botswana rely on mining as a foreign currency earner. Africa host even 30% of the world's mineral and metal reserves, including dominance in truly strategic metals: 25% of bauxite, the aluminum ore, 40% of gold, 60% cobalt and 90% of the world's PGM reserves. Africa’s deposits of antimony, fluorspar, hafnium, manganese, phosphate rock, titanium, vanadium, vermiculite and zirconium are rich[39]. The South Africa holds 35% of the world’s gold reserves, 55% platinum group metals, 80% manganese ore, 68% chrome ore and 21% titanium metals[40]. The South Africa is the world's biggest producer of gold and platinum and a big producer of base metals and coal and diamonds. The West Africa’s belt from Guinea to Togo is the most diversely mineralized and includes chrome, asbestos, talc, nickel, manganese, gold, iron (or ferroalloys), tin, niobium and tantalum[41]. Almost the entire world reserve of chromium is found in South Africa. Africa contains a major share of world reserves of tantalum and germanium in the DRC and Namibia[42]. Manganese reserves are big in South Africa, Gabon (among the largest in the world) and Ghana[43]. Guinea has 24% of the world’s bauxite reserves and over 90% of Africa’s bauxite production.

The South Africa has in its territory and in neighboring countries a mining cluster. The country has no deposits of bauxite, the aluminium ore that is exported from Guinea where the exporting of bauxite accounts for 20% of GDP and 90% of exports. Because the aluminium extraction and smelting process is energy consuming, an optimal location for it is the South Africa that has low energy costs, deriving largely from coal deposits. The South Africa produces 2.7% of global aluminium (the 8th largest producer)[44] and has world-scale primary processing facilities in carbon steel, stainless steel, aluminium, gold, platinum and diamonds[45]. The mining-based cluster has got a lot of dynamics from privatization programs. During past decade, Western, Chinese and Indian multinationals have played a vital role in the country, not only in the maining cluster. Especially, China and its emerging multinationals have been active in the South Africa. The South Africa is the most industrialized country in Africa, accumulating 25% of Africa’s GDP, 40% of industrial output, 45% of mineral production and 50% of electricity. The country is an example of the importance of mining and of the manufacturing diversified from maining.

Copper is the second in use of base metals after iron/ steel. The deposits of copper are scare[46]. The Katanga Plateau (914-1,829m high) from the DRC to neighboring countries is the enormously rich mining region, which contains 34% and 10 % of the world's copper, and some lead-zinc sulfides, uranium oxides, tin, radium, uranium, and diamonds. The world's demand for copper and cobolt is huge. Copper and cobolt are the so-called strategic base metals. Copper is widely used in the energy sector and electrical/ electronic products. Cobalt is used in aircraft engines and in globally popular mobile phones and devices. Zinc is mainly used to galvanize steel, metal alloys, die casting, batteries, paints and rubber. Although zinc is a common metal, the global demand exceeds the supply and major zinc discoveries are expensive to main. In Africa lead-zinc sulfides are the primary form in which zinc ore are in deposits. North Africa has the largest deposits and production of zinc. Lead ores are more widespread. Lead has taken the high road in the bull market[47].

Katanga became independent in 1960 supported by Belgia. Katanga is a rich region. In 1963, the Katanga’s independence was formally ended, and Katanga was joined to the DRC. From the 60s to the 90s, the mineral deposits were controlled by state-owned firms like Gécamines[48]. Since 2004, there has been an influx of foreign maining yets into Katanga[49]. These yets utilize Katanga’s cobolt and copper ores. The export primary of metal products leaves the lion’s share of value added to them. Kataga is among the poorest regions in our globe. As the UN has repeatedly declared, it is question at leat immoral exploitation of the DRC’s natural resources. Foreign companies have misused the political chaos in the Mid Africa. During the chaos, they took the control over Katanga’s mining industry. Later, the DRC has launched a review of the legality and fairness of over 60 mining licenses, most of which were negotiated during the civil war and the transitional period that followed.[50] A big part of China’s and the EU’s copper and cobalt production is based concentrates from the Katanga[51]. The global price level of copper and gobalt is favourable but the DRC leaves the major part of value added to foreign yets. What are needed in the Mid Africa is industrial investments and win-win-partnership.

The investments in exploration and mining in Africa has been focused on gold and diamonds and some precious metals[52]. Gold and allied metals are widely disseminated in Africa. The South Africa’s reserves of gold constitute 50% of the world total and the gold mining employs 60% of about a half million miners. Gold is found in the Katanga’s copper belt, and in Burundi, Côte d'Ivoire, Gabon, Ghana, Mali and Zimbabwe[53]. Guinea has large reserves of gold, base metals, iron ore, bauxite and diamonds[54]. Gold and allied metals could boost Africa’s technology entrepreneurship[55]. Ghana has a long tradition of goldsmiths. Ghana’s economy is burdened with debt. The government is selling the biggest gold producer, Ashanti Goldfields Company[56]. The Ghanaian economy needs FDIs to develop the Ghanaian gold cluster. What is the critical catalyst of cluster development is, however, the variety of business firms and, of course, export orientation. Hopefully, the pritization of Ashanti Goldfields Company and other state-owned enterprises could be a step towards industrial dynamics. Countries like Ghana needs desperately the transfer of foreign technologies in the fine-mechanics to ultize these minerals in the small-scale industrial activities.

Stones have bull markets globally. Namibia is an example of the countries that have deposits of good-quality stones, displaying a variety of attractive colours, patterns and textures. The main rock types are marble, granite, dolerite, picture stone, conglomerate and sodalite. Until recently, Namibia has exported first-grade blocks of marble, granite and other dimension-stone varieties to countries such as Germany and Italy to be cut and polished. To achieve a sustained contribution from the mining sector to its economy, Namibia has stipulated a conducive and enabling legislative, fiscal and institutional environment[57]. However, the major growth area of Namibia’s mining industry is offshore diamond mining, and the country features among the world’s top-five producers. The problems are the same as in Ghana. Diamonds and other precious metals are strategic in the global perspective. Namibia needs investments in the fine-mechanics to ultize these minerals in the small-scale industrial activities. The EU countries such as Germany and Italy sell the value-added products (as tiles and ornaments) produced of Namibia’s stones all over the world at premium prices. Namibia receives less than 10% of the final value of a unique natural resource. This type of business model benefits only marginally Namibia and other poor countries[58].

The least developed countries, LDCs lag behind as the rest of the world advances. Many of the LDCs locate in the Sub-Saharan Africa. Many of LDCs in Sub-Saharan Africa are logistically isolated from the world trade flows and, a small portion of population is living within 100 km of the coast or of a navigable river compared 89% in high-income countries. Africa has poor roads and most of the rural areas are land-locked. In average, the LDCs’ merchandise exports have three distinct weaknesses[59]: A narrow range of products, a lack of diversification of export markets and low technology content. In 2004, LDCs as a group accounted for only 0.6% of world exports, $61.8 billion with 34% growth. Growth figures mask the division of LDCs into three groups of exporters[60]:

1. Oil exporters (Angola, Equatorial Guinea, Yemen, Sudan, and Chad) accounted for 47 % of total LDC exports with the growth rate of 52 % in 2004. Angola alone earned $18 billion[61] in 2005. However, the boom in oil exports seems not to provide the development logic away from the poverty. Oil incomes fortunate few and ecological problems are escalating.

2. Manufacturers of goods (Bangladesh, Myanmar, Cambodia, Madagascar, Nepal, Lesotho, Haiti, and Laos) are dependent on exports of ready-made garments. They have lost their positions in competition against China and India.

3. The rest 37 of LDCs are commodity exporters, often dependent on primary agricultural products. They have difficulties to overcome trade barriers created by the subsidies in the EU and US. The weak export performance of LDCs is partly dependent on the unfairness of the commitments of their trading partners, particularly of multinationals.

The UN’s aspiration[62] is the duty-free and quota-free market access to global markets on a non-reciprocal basis for all products originating from LDCs. This is the issue of politics. The US treatment of LDCs has blamed to be dependent on its world politics. Japan favors oil importer LDCs. The EU’s weakness is its unfair agricultural policy that has stopped imports from African LDCs. In spite of the good will that the leading industrial countries convince in the UN or in the WTO, the average level of preferential (reciprocal and non-reciprocal) imports from LDCs into these countries is marginal. In terms of markets, the EU-15-countries absorbed about 40 % of LDC exports in 1995. During the WTO-period from 1995, the LDCs’ share has dropped to about 30 %. The US has increased its relative share into about 23 %. Japan has not yet its market open to LDCs, the share is 4.2 % that is even lower than that of Thailand, 5 %. China has increased its relative share from 3.5 % to 17.8 %. China’s politics is to favor LDCs both in trade and investments.

Africa’s LDCs need export incomes. The MFA/ ATC framework in the international trade of textile, clothing, leather and footwear favorable for LDCs in integrating their trade into WTO disciplines. LDCs were not able to do that. Africa’s LDCs are dependent on the flexible rules of origin in preferential agreements what the U.S. has provided under the AGOA. The EU favors its potential members[64]. Under the WTO, the EU and the U.S. can favour imports from geographically proximate major preferential trading partners like Tunisia and Morocco in Africa. The Sub-Saharan Africa has lost its share. The high growth in cotton clothing exports by Asian suppliers has been the reason for downsizing 250 000 jobs in Africa[65]. African countries did not invoke the special safeguard mechanism to temporarily restrict Chinese exports. This is paradox, since the ATC’s anti-dumping measure that is available until 2008 could provide time for African textile and clothing producers to improve competitiveness and add more value to their exports[66]. African countries reacted too late, although the damages to domestic producers were serious in Africa. They did not expect the quota system to end so soon, despite the ATC.

[1] The US cotton subsidies are out of mind. Africa’s small farmers have no access to inputs and their harvests cannot get to the markets on time.
[2]The UN’s Environment Programme
[3]The World Bank Development Report 2005
[4] The World Trade Report 2006
[5]Congo alone reported to be sufficient to provide three times as much power as Africa presently consumes.
[6]Many African countries view hydroelectric power dependency with skepticism. Low rainfalls have forced temporary power cuts e.g. in Ghana's hydroelectric facilities.
[7] Ghana, Senegal, Burkina Faso and Cote d’Ivoire in West Africa have rural electrification programmes.
[8]The Southern African Development Community
[9] The Economic Community of West African States
[11]Other producers are Egypt, Sudan, Equatorial Guinea, Congo Republic, Chad, Gabon, Tunisia and Cameroon. In fact, many more African countries like Ghana could become important net oil exporters in the long run if recent trends will continue.
[12] The North African nations have already revised oil law which restored state-control to exploration projects. Algeria has planned a new windfall tax
[13] West African Oil, U.S. Energy Policy, and Africa’s Development Strategies by J. Anyu Ndumbe
[14] Some West African producers such as Cameroon, Chad, Congo, Equatorial Guinea, Gabon, Ghana, Mauritania, Niger, Sao Tome and Principe, and Ivory Coast are expected to benefit from the substantial exploration activity, especially if current high oil prices persist. International Energy Outlook 2007. Chapter 3: Petroleum and Other Liquid Fuels
[15]. China contributed 35% of the worldwide demand growth for crude oil in the period 2001-05
[16]About 80 % of China Exim Bank’s projects in 36 African countries are committed to infrastructure development, such as railways (Benguela and Port Sudan), dams (Merowe in Sudan; Bui in Ghana; and Mphanda Nkuwa in Zambia), thermal power plants (Nigeria and Sudan), oil facilities (Nigeria), and copper mines (Congo and Zambia). China Exim lending practices tend to follow China’s foreign policy, with package deals frequently focusing on projects that provide access to raw materials, and on concessional loans for economically and politically important countries.
[17] The states have mainly small, inefficient, poorly maintained and outdated refineries in states’ ownership control. The quality of the oil products produced in many of the refineries does not meet international standards. The refining production mix is not either in balance with the oil product demand in export markets.
[18]The investments of a new refinery producing 100,000 barrels per day of is estimated to be 1-$1.2 billion.
[19]In Nigeria, over 50 % of the population is living on incomes below $1 per day.
[21]Commercial discoveries by Triton, Chevron, Shell, Exxon-Mobil, and Texaco.
[22] Royal Dutch Shell, which produces nearly half of Nigeria’s oil, will invest $10 billion in the near future to develop another deep offshore hub and other prospects including natural gas. ExxonMobil will raise Nigeria’s about $10 billion investments in Nigeria of which $3 billion would be invested in gas flaring
[23]The 500 million-dollar West African Gas Pipeline (WAGP), the flagship project of the sub-regional body the ECOWAS. West African Gas Pipeline inaugurated, Posted on: 28-Apr-2007
[25]However, 70 % of Angola’s 12 million people live in poverty in one of Africa’s wealthiest countries.
[26] In 2004, China offered Angola $2 billion ‘soft’ loan without political strings attached. The money was earmarked for reconstruction in railways, electricity and administration. Judith van de Looy (2006) Africa and China: A Strategic Partnership? ASC Working Paper 67/2006.
[27]A joint venture with Angola’s national oil company (Sonangol) and Chinese Sinopec (ownes 75% of the consortium) of a $3 billion refinery investmen at Lobito
[28] Simon Robinson, "Black Gold," Time Europe, 28 October 2002,9263,901021028,00.html
[29] ExxonMobile, ChevronTexaco and Royal Dutch/Shell have expressed interest in bidding for exploration licenses that would pour millions of dollars into the islands.
[30] Fradique de Menezes was elected president in 2001. A small army group made a bloodless coup during a state visit to Nigeria. After the coup, São Tomé problems exist. São Tomé gets a lot of money but has not the political and financial institutions to manage that. The risk still is that a lot of money could disappear into private pockets.
[31] The list of problems includes e.g.: massive corruption and human rights abuses perpetrated, environments wrecked and coups and militarization common.
[32]ExxonMobil, Marathon and others invested $3 billion oil and natural gas extraction in the Atlantic
[34]The signature bonuses have claimed to be hundreds of millions in countries like Angola and Nigeria. Angola and Nigeria.
[35] Catholic Relief Services (CRS) says that without fundamental changes by international actors in Equatorial Guinea "the current mix of oil dependence, neglect of agriculture, corruption, poor administration and authoritarian rule are the recipe for a bleak future."
[36]China National Petroleum is the largest shareholder and controls the Sudanese energy sector. China covered the cost of most of the $15 billion 932-mile pipeline to Port Sudan where it is building a tanker terminal. Oil exports to China accounted for 64% of Sudan’s oil exports. Japan’s share of export is 14%. Sudan has an Asia orientation in its economy. About 10,000 Chinese workers employ in Sudan.Africa and China: A Strategic Partnership? Judith van de Looy, ASC Working Paper 67/2006
[37]Russia owns 27.2% of the total, 1,680 trillion cubic feet of the world total 6,183. Source of gas deposits: “Worldwide Look at Reserves and Production,” Oil & Gas Journal, Vol. 104, No. 47 (December 18, 2006), pp. 22-23.
[38] BP Statistical Review of World Energy 2006 (London, UK, June 2006), p. 22.
[44]China was the largest producer with 23.1%, and Russia second with 11.7%.
[46]Chile generates nearly 40% of all global mined copper annually has reached its peak production and copper prices to continue to rise.The large global copper mines have not only reached their threshold for expansion but will be exhausted in the next five to ten years.
[47]In his book Hot Commodities, Jim Rogers talks extensively about lead and the major production shortfalls the world will be faced with now and into the future.
[48] In end of the 90s, when the privatization was started, Gécamines was among five major copper and cobalt producers in the world, yielding a turnover of about $1 billion and providing jobs to 33.000 workers. Because of bad management and undue politics, Gécamines was run into the de facto bankrupt in 2003 and unable to pay regular salaries to 12.400 workers. The capital Kinshasa’s politicians approved several large contracts with big, foreign multinationals, leaving only a small share for Gécamines.
[52]New mines opening in Africa are in the South Africa, Namibia, Botswana, Tanzania, and Gabon producing gold, diamonds, niobium products, PGE’s, chrome and base metals. Major discoveries include diamondiferous kimberlites in Mauritania, and still in the diamond scene, the potential marine deposits in offshore southern Namibia.
[54]A new mining code introduced in mid-1995 offers a range of guarantees and tax incentives to new investors, who may now own up to 85% of any venture in Guinea.
[55]Gold is a strategic precious metal, widely used is technical devices, e.g. computer.
[56] Ashanti has about 195 million tonnes of proven and probable gold reserves ready to be exploited. Ashanti is listed on the London and New York stock exchanges.
[57] This includes a competitive policy and regulatory framework, security of tenure and the provision of national geo-scientific data.
[59] ECONOMIC OBSERVER, 35, World export and status of LDCs by Bijan Lal Dev.
[60] Despite the global growth, 852 million people, mostly of LDCs, suffer from hunger and malnutrition, 1.1 billion do not have access to clear drinking water, and every hour 1,200 children die from preventable diseases. The poorest 40 % of the world population, who live on less than 2 dollar a day, account for 5 % of global income. The richest 10 %, that is 620 million, account for 50 % of global income. ECONOMIC OBSERVER, 35, World export and status of LDCs by Bijan Lal Dev.
[61] This figure contains also mining. The World Trade Report 2006.
[62] Millennium Development Goals.
[63] Source: UNSd, Comtrade data base and WTO
[64] Millennium Development Goals.
[65]Africa’s production stagnated and were lost in countries like Lesotho, South Africa, Swaziland, Nigeria, Ghana, Mauritius, Zambia, Madagascar, Tanzania, Malawi, Namibia and Kenya. Loss of textile market costs African jobs by Bloomberg, Published 22 Aug 06
[66] Mills Soko, a researcher at the South African Institute of International Affairs in Johannesburg.