ISSN 0075-6407

KOBE
ECONOMIC & BUSINESSREVIEW
54th

ANNUAL VOLUMERESEARCH INSTITUTE FOR ECONOMICSAND BUSINESS ADMINISTRATIONKOBE UNIVERSITY
2009

KOBE ECONOMIC & BUSINESS REVIEW
Editor in Chief
Takashi Kamihigashi
Co-Editors
Atsushi Osanai; Takahiro Sato; Katsuhiko Muramiya
ISSN 0075-6407

KOBE
ECONOMIC & BUSINESSREVIEW
54th
ANNUAL VOLUMERESEARCH INSTITUTE FOR ECONOMICSAND BUSINESS ADMINISTRATIONKOBE UNIVERSITY
2009

CONTENTS

Page
Inbound M&A to Japan: Cherry Picking versus Rescue Mission?
………………………………………………………… Ralf BEBENROTH

1

A Land-Locked Africa’s Growth Strategy: Exports of Knowledge-Based Services………………………………………Matsuo WATANABE / Hiroyuki HINO

17

BEBENROTH: INBOUND
KOBE ECONOMIC
M&A TO JAPAN:& BUSINESSCHERRYREVIEW,
PICKING
54 VERSUS(2009), 1-16
RESCUE MISSION?

1

INBOUND M&A TO JAPAN:
CHERRY PICKING VERSUS RESCUE MISSION?

RALF BEBENROTH

Kobe University

Abstract:
This paper investigates differences in targets overtaken by cross-border bidders versus domestic ones.
The literature from the selection theory argues that there is “cherry picking.” Put simply, cross-border bidders overtake the comparably better performing targets. In contrast, domestic bidders acquire weaker targets
what can be termed as “rescue mission.” Targets in the study were investigated to see if this statement holds
true.
The results show that cross-border targets did not perform better but performed worse than domestic
ones. According to my sample, I have to conclude that there is no “cherry picking” of cross-border acquisitions. This lends support to the idea that foreign bidders probably come to the acquisition target at a laterstage. To put it differently, Japanese firms were being overtaken by foreign bidders in cases where no domestic firm was interested in overtaking the target. Reasons are discussed.
JEL Classification: G34, O53
Keywords: Inbound M&A, cross-border bidders, Japan

1. Introduction
Cross border M&A has been historically seen as a means for firms from developed countries
to enter less developed ones (Wilson, 1980). Nowadays, this has changed, as cross-border M&A
also appear to target companies in developed countries (Shimizu et al., 2004). In contrast to domestic acquisitions, cross-border acquisitions face additional challenges of evaluating, negotiating
and integrating targets (Shimizu et al., 2004). Uncertainty and information asymmetry in foreign
markets lead firms to difficulties in adjusting and learning both in the local market and the target
firm (Kogut and Singh, 1988; Zaheer, 1995).
Corresponding Address:
Ralf Bebenroth
Research Institute for Economics and Business Administration (RIEB), Kobe University
2-1 Rokkodai-cho Nada-ku, Kobe 657-8501 Japan
E-mail: rbeben@rieb.kobe-u.ac.jp

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There has been much research done in the international field (Goehlich 2009), concerninginvestigative post-acquisition performance with positive short term results for acquirers (Barnes,
1984; Gregory, 1997, Meshi and Metais, 2006). In the long run, however, acquirers are considered to have negative financial performance and there are mixed results for acquired target firms(King et al, 2004). These results are supported by recent studies, where acquisitions were researched in a longitudinal study framework (Barkema and Shijven, 2008). Also when investigatedin life cycles of M&A booms, with early mover advantages for acquisitions at the beginning of aboom, the performance of the bidder companies in the long run was generally negative (McNamara et al, 2008).
The M&A area has been thoroughly researched. Using patent data on pharmaceutical M&A,
Ornaghi finds that mergers are more likely to be signed between firms with relatively similar
technologies and drug portfolios and that performance implications depend on the similarity ofbidder and target (Ornaghi, 2009). Rhodes-Kropf and Robinson (2008) show that financial indicesof bidders and targets can be quite similar. Bidders with a high market-to-book-ratio acquire targets with a similar pattern. There is also research available about the post-merger effects of target
enterprises (Olatunji O. R. and Uwuigbe U. 2009). The predominant target-oriented M&A research starts one year before the acquisitions occur (Eero and Boeckerman, 2008; Munoz-Bullon,
2008). An understudied topic, however, is target performance and employment effects in the years
before the acquisitions take place.
This research aims to shed light on the pre-acquisition period of targets by comparing two
groups of Japanese target firms taken over either by a foreign (non-Japanese) bidder or by a domestic one. This is of importance, as employee downsizing activities, as well as the M&A market
in general, have recently been more active in countries like Japan (Lee, 1997; Fukao and Murakami, 2005). The wave of M&A nowadays clearly includes Japan and not only Japanese investments abroad – which were previously described as undertaking investments predominantly
through Greenfield ventures but only to a lesser extent through M&A (Bebenroth, R. 2007; Hebert et al, 2005). Since this phenomenon was relatively unknown in Japan, it served as the bases
for this investigation.
The literature states that cross-border bidders “cherry pick” targets, choosing comparably
better performing targets against domestic acquisitions (Bandick and Karpaty, 2007). In the caseof Japan, Paprzyki and Fukao (2008) state: “…on a closer inspection, it turns out that foreign
firm’s superior performance partly owes to the fact that they acquire Japanese firms that alreadyperform better than the average local firms.” (p. 7.) This “cherry picking” argument can also befound at Fukao et al. 2005 stating: “…we found that foreign firms acquire Japanese firms withhigher TFP levels and higher profit rates. In contrast, in-in M&As (‘domestic’) [remark by theauthor] seem to have the characteristics of rescue missions. Small firms with a higher total liability/total asset ratio tend to be chosen as targets of in-in M&As” (p. 298).
I wanted to challenge this view by asking two questions: 1. Do foreign bidders “cherry pick”

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in the sense that they choose financially better performing targets compared to domestic bidders?
2. Does the downsizing pattern of targets differ between foreign and domestic acquisitions? For
this, I looked into the target companies on a yearly basis, starting seven years before the acquisitions took place and ending with the target’s last financial statement before the acquisition event.
In the next two chapters theoretical arguments for cross-border acquisitions and downsizing
effects in the Japanese M&A context are described. Chapter 4 presents hypotheses. Then data andresults are empirically examined and presented. Chapter 7 ends with a discussion and conclusionof the results.
2. Theoretical arguments for cross border acquisitions and downsizing effects
The theoretical framework of this study is based on the theory of multinational firms. This
research is separated from the “inefficient management hypothesis” that states that targets werepoorly managed and were replaced by bidder firms (Mandelker, 1974).
According to this basic understanding, M&A might enhance creating value if companies put
their expertise and know-how into an acquired f irm (Buckley and Casson, 1976; Rugman, 1981).
Departing from this inefficient management hypothesis, a theoretical construct can be provided,
describing why headquarters undertake acquisitions. The “learning theory” states that a target
will benefit from a bidder through financial help and advances in technology. Therefore, throughexpertise from the foreign headquarters in financial, technical or other areas, a target will benefit
from being acquired. Beyond domestic transactions and cross-border transactions, there is a “selection theory” which states that a foreign bidder will overtake a better performing target. The
reasoning behind this is that a cross-border bidder has more at stake and higher costs than a comparable domestic one. Therefore, transactions will only be undertaken in cases where a target isespecially lucrative.
M&A has to be seen as much more than just financial transactions. Rather, it is a process
which significantly affects all employees in a given target company (Cartwright and Cooper,
1996). It is well documented in the literature that downsizing can leave employees suffering fromstress, fear and anxiety about their careers (McBain, 1999; Griffith, 2000). This naturally reduces
the productivity of the target company and leads to an increase of absenteeism and low job satisfaction. Also, negative behavior of target employees against the bidder company has been reported (Nikandrou et al., 2000). This situation is also described as “merger syndrome” (Marks,
1997). Even years before the acquisition occurs, the handling of employees is considered to be ofgreat significance for successful integration (McBain, 1999). In this sense, a systematic effort has
to be made to create an internal climate of fairness between the target employees and the bidder
company (Fairfield, 1992). In other words, there is evidence that the communication program isa vital tool for the success of the M&A (Bryson, 2003; Smith and Hershman, 1999; Gall, 1991).
Cross-border acquisitions face even more severe problems than domestic ones (Very et al.

4KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 1-16

1996). Executives of acquired cross-border firms are more likely to quit their jobs than executivesof acquired domestic firms. (Krug and Hegarty, 2001). In this sense, cross-border targets, as thetheory suggests, are more challenging to handle than domestic targets. Light will be shed on the
differences of both kinds of transactions for investigating the targets’ performance and to examine
the downsizing behavior of the targets to see whether foreign bidders “cherry picking” their targets (Bandick and Karpaty, 2007) can be proved or disproved.
3. Japanese M&A
Potential economic benefits of inward foreign direct investments (inward FDI) are highly
appreciated by all countries’ governments. A reason for this is that, through inward FDI, competition between local companies increases, leading to lower prices for consumers and job-creation in
the local economy (Fleming and Johnson 2008). Also, Japanese officials highly welcome foreign
direct investment to Japan. The Japanese government has launched a number of political measures to promote inward FDI. Former Prime Minister Junichiro Koizumi promised several years
ago in his general policy speech to the Diet in 2003 to double the cumulative amount of inward
FDI until 2008 (Fukao et al, 2005). The largest part of this inward FDI has been realized throughM&As (Schaede 2008, p. 117). However, the inward FDI to Japan is not yet seen as high enough.
Japan had only 2.5% inward FDI compared to GDP in 2006 and, therefore, the lowest inward FDI
ratio of the world’s leading economies (Nagashima et al., 2008).
The Ministry of Economy, Trade and Industry (METI) proposed amendments in 2007. Several changes were implemented, e.g. harmonizing Japanese regulations to other leading countries’
for improved inward FDI to Japan. Some of the amendments are fostering inward FDI, whileothers seem to be counterproductive. One example is regulatory changes. Before the amendments
were made, companies were regulated according to industries and subsequently, according to
products. Some companies then became more severely regulated after the amendments in cases
where they produced goods sold to defense forces (Nagashima et al. 2008).
On May 20th 2008, the Expert Committee on FDI Promotion, an advisory group to the Minister of State on Economic and Fiscal Policy, presented five recommendations to the Council on
Economic and Fiscal Policy to increase foreign inward FDI to Japan (WIP Japan, 2009). In spiteof relatively small Japanese inward FDI, the number of transactions in the Japanese M&A market
has recently been on the increase. This trend has been visible since 2000 (see the figure 1). In thisterminology, in-in refers to domestic transactions, in-out to acquisitions of Japanese firms abroadand out-in transactions to foreign firms overtaking Japanese firms. In 2007 more than 2700
M&As were undertaken, out of which 308 were foreign (non-Japanese; out-in) bidders overtaking
Japanese target companies (MARR, Febr. 2008). In 2008, there were still 2400 M&As undertakenwith 198 by foreign bidders (MARR, Febr. 2009).

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Figure 1: History of M&As in Japan

Source: MARR issues 1995 - Febr. 2009

Foreign bidders overtaking Japanese companies is a relatively new phenomenon and it has
not yet been researched to a satisfying extent. Until now, Japanese research mainly covered domestic transactions, where a decline in productivity, ROE and ROA was found in the acquirer(Yeh and Hoshino, 2001). Also, some long term studies of domestic acquisitions are available
where employment was positively related to post-merger performance (Kruse et al, 2007).
Available in Japanese, there is research on M&A and foreign direct investments to Japan (e.g.
Fukao and Amano, 2004). The English literature, however, provides only few investigations in thisarea, e.g. Paprzycki and Fukao (2008) and Fukao et al. (2005). In their valuable contribution, theyshow evidence that cross-border acquisitions with a Japanese target differ from domestic ones.
In the case of Japan, there is some evidence suggesting “cherry picking” of cross-bordertarget firms (Fukao et al, 2005). Fukao and Murakami find that cross-border target companies
show a 10% higher TFP as well as higher earnings and a higher return on capital compared todomestically-acquired targets (2005). The profit/sales ratio is 1.5% higher at foreign companies
compared to local companies. They also find significantly higher capital/labor ratio which leads
to a higher labor productivity at foreign-owned firms. Finally, Return on Capital and the annual
wages of employees were comparably higher among foreign firms.
4. Hypotheses
The structure of the targets for the financial performances and for downsizing was investigated. In each area I came up with one hypothesis comparing target enterprises of cross-borderacquisitions to domestic ones.

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In general, sources of the financial performance of targets as well as arguments for downsizing have much in common. Foreign investors face challenges, such as “liability of foreignness”(Zaheer, 1995) and a so called “double-layered acculturation” (Barkema et al., 1996). In this case,that would suggest that cross-border bidders pay a higher price for their targets and have culturaldisadvantages versus domestic bidders. This is supported by Lin et al., who find evidence in thebanking sector that shows that bank acquisitions in the same state in the US have a higher performance than out–of–state acquisitions (2006).
Foreign bidders have comparably higher costs. This starts with receiving information about
the target. At the negotiation stage, costs for traveling to the target, translation services and costs
for consulting expertise will be much higher than for a domestic acquirer. Also, the target’s management should have a better negotiating position on foreign bids as foreign bidders are not asfamiliar with the Japanese market as domestic competitors are. All these facts lead to higher costs
for cross-border bidders. Foreign buyers pay higher premiums in acquiring targets than domestic
ones (Shimizu et al., 2004). Interestingly, Dewenter (1995) found some evidence that the level ofpremiums paid between foreign and domestic bidders differ according to whether the acquisitionis hostile or not. However, only in cases of hostile takeovers, will foreign bidders pay a higher
premium than rival bidders. Otherwise their premium would be even lower. The arguments leadto the conclusion that foreign bidders should be compensated with more financially attractive
Japanese targets.
In my understanding of an acquisition, however, a potential Japanese target company sufferedeconomically for some time before it was finally taken over by a domestic company. Apart fromcost factors, it is to suggest that, in regards to information exchange, Japanese companies arecloser to each other than foreign companies are to Japanese ones. In case of financial difficulties,
therefore, potential domestic bidders are able to realize the chance of making an acquisition earlier than foreign bidders. Therefore, it is to state the following: Only in cases when no domestic
company is interested in acquiring a suffering company whatsoever will foreign bidders have achance of being able to make a bid on a Japanese target company.
Therefore, I assumed that the performance of the cross-border targets in this study is notbetter compared to domestic ones. That is to say, targets of cross-border acquisitions might outperform domestic acquisitions in the time after the acquisition has taken place. However, the reason
is not that they are the potentially better companies, but that they start from a lower base. In
other words, targets overtaken by foreign firms suffer for a longer time. As foreign bidders cometo the target relatively late in the process, target performance is already very weak and the chances of surviving become more and more questionable. After an acquisition is accomplished, aturnaround would offer more chances for recovery compared to domestic acquisitions. Therefore,in contrast to existing research results in this field, I did not assume that there is “cherry picking”
in the case of Japan, but rather to question the critical stage where the target company went in
before being acquired. The hypothesis is stated as:

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H.1. Foreign bidders come to the target in a later stage. Therefore, the financial performance of the target in the time period before the acquisition will be lower compared to targets atdomestic acquisitions.
The second area of interest consists of target downsizing before the acquisition. Management
literature deals with downsizing since the 1980s, where organizations used it as a tool to cut
costs or to improve profitability and productivity (Iverson and Pullman, 2003). There is clear
evidence that target companies in M&A reduce the number of employees after the acquisition
event (McGuckin and Nguyen, 2001, Lichtenberg and Spiegel, 1990). In Europe, unions are relatively strongly organized and powerful in protecting their employees against the management.
M&A could be seen as a way for some firms to “legally” downsize their workforce. It was lesssurprising that Gugler and Yurtoglu found European companies downsizing by 10% when involved at M&A (2004).
For the post-acquisition period, some scientific evidence reports that target-downsizing will
be more severe in cross-border acquisitions than in domestic ones (Kurg and Hegarty, 2001). A
reason for this could be that cross-border acquisitions are more costly. Therefore, to balance out
these high costs and to make a success out of the target acquisition, a foreign bidder would needa stronger focus on the core business that results in higher synergy effects. One obvious way toreceive this synergy effect would be possible through heavier downsizing of the target. Anotherexplanation for higher downsizing of cross-border targets would be that foreign acquirers are lesscommitted to countries like Japan so that acquisitions could lead to comparably more job losses
in the acquired firms than in domestically acquired ones.
Post-acquisition downsizing could also be seen from a different perspective however. A
domestic bidder is already supposed to be present in the market (at least in cases of horizontal
M&As) and does not only provide production facilities but also services and distribution. This
could result in even higher synergy effects through employee downsizing. Also Fukao and Murakami did not find evidence in Japan for foreign investors reducing employment significantly
more than domestic bidders (2005). In summation, a domestic bidder may be even more likely toconsolidate target activity and downsize employees.
In contrast to conventional studies, in this research downsizing activities of the targets isinvestigated in the time before the acquisition takes place. Assuming that the foreign bidder company comes to the target at a later stage, target employees should have been downsized to agreater extent before the acquisition compared to targets of domestic acquisitions. The hypothesisis:
H.2 Foreign bidders come to a target in a later stage. Therefore, the downsizing of the target’s employees in the time period before the acquisition will be higher in cross-border acquisitions compared to targets in domestic acquisitions.

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5. Data and Method
For the year 2007, 2022 domestic acquisitions and 308 inbound M&A could be identified,
where the latter cases are when a non-Japanese bidder overtook a Japanese target in the formof a cross-border acquisition. To collect the data, Recof data from the monthly printed issues ofJapanese Merger Acquisition Research Report were used (MARR, Febr. 2008 issue).
In the next step, all stock-listed target firms were collected from the sampling as non-listed
firms where data could not be retrieved. Also all cases of business transfers were eliminated because in that particular case, a target firm separates only an entity to an acquirer. After these twoprocesses were done, 241 stock-listed firms were left which underwent acquisitions, with capital
participations as well as capital increases. Then data for these firms were retrieved from the electronic database of NEEDS financial request. All of these forms count as M&A according to Recofand were collectively used in this research as M&A targets. Finally five holding companies, five
regional banks, three city banks and two security targets were dropped from the sample, as theirfinancial accounting was different from the sample. In the end, I was left with 226 target firms.
Split into two groups, there were 158 domestic targets and 68 cross-border targets.
The companies were investigated starting from the year 2001 to the last annual financial
statements in 2007. Most of the companies have their annual financial statements report at theend of March with an acquisition thereafter. However, in two minor cases, exceptions needed tobe made. Some companies had their annual financial statements reporting after March, e.g. in
September.
As variables for financial performance, revenue, operating profit, profit per share and ROE
as well as ROA was used (Yeh and Hoshino, 2001). To investigate other variables, such as downsizing developments, the number of employees, labor productivity, director salary and bonuses
and the labor equipment ratio were also investigated. Also the foreigner share ratio of the targets
was investigated1.
For the method, a descriptive approach of investigation was used and data for all companies
each year collected by dividing them into domestic and cross-border acquisitions. Data for financial performances and downsizing developments was retrieved. As a second step, three logistic
regression analyses with dependent variables in the range of domestic to cross-border acquisition
were employed. These models relate to the probability of having a foreign investor overtaking a
Japanese firm to performance and with downsizing variables X. The regression analyses include
return on assets (ROA), labor productivity (LP) and return on equity (ROE). Industry segmentation serves as control variable.
     i ii)
1 I am thankful to Dr. Hiep Nguyen, a former post-doctorate at Kobe University for his help in data collecting processof the 243 companies.

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6. Results
The aim of this research was to shed light on whether cross-border and domestic bidders
differ in picking their target. I explicitly wanted to investigate if cross-border bidders really “cherry pick” Japanese targets.
The two samples differ tremendously in their company sizes, in revenue and in number of
employees. The domestic sample of target firms in this research was about double in size compared to cross-border acquisition targets. This is clearly different when compared to the results ofFukao et al. (2005). The operating profit was therefore understandably also higher at the domestic
acquisition targets (table 1). However, while the operating profit for the cross-border targets decreased, at least in the last annual financial statement before the acquisition, the domestic targets
showed an increase of operating profit for the last three years.
Both samples had a positive ROA for cross-border targets all seven years before the acquisition, ranging from 6.9% in the year 2005 to only 3.3% in 2007. Looking at ROE data, there were
negative values for domestic targets with only two positive years in 2004 and 2007, the last year
before the acquisition occurred. Cross-border acquisitions, on the other hand, had a more positive
development at the beginning of the observations, starting in the first years from 2001 until 2004
with positive values and then turning into negative values the last three years, with even a negative of 19.9% in 2007. These descriptive results for ROE clearly showed that the cross-bordertargets took a turn for the worse the last three years before the acquisitions occurred.
The ROE as well as ROA data in this research showed significantly lower values for crossborder targets in the year 2007. That is statistically significant (table 5 and 6). Looking at the
number of employees, there is evidence that both groups downsized their workforce (table 3 and
4). Domestic targets downsized from 2203 employees in 2001 to 1907 in 2007. Cross-bordertargets downsized from 1435 employees in 2001 to 1171 in 2007. Labor productivity increased
in both groups with statistically significant lower results for cross-border targets in the year 2007.
Director and salary bonuses as well as the labor equipment ratio did not show any differences
between groups (not stated in table). Looking at the ratio of shares held by foreigners, one seesthat the level in both groups was very low. What is surprising here is that until the year 2001,
only three cross-border targets were foreign-owned and that increased to only six targets by 2007.
The hypothesis about financial performance received preliminary support as well as the hypothesis about downsizing at least in the area for labor productivity. Other downsizing variables,e.g. no. of employees did not receive any significant result. However, I also did not find evidence
for stronger downsizing at cross-border firms, as is stated in the literature. Cross-border targets
find themselves in weaker shape compared to domestic targets. This leads to the idea that thecross-border bidders come to the target at a later stage.
The industry classification shows that only in the service industry (no. 6 in the industry
classification at the tables 5, 6 and 7) has significant impact for takeovers. However, all other10

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 1-16

industries do not significantly impact the results in this study.
7. Discussion and closing
I would not call the acquisitions by foreign bidders “cherry picking” but find evidence frommy data that both groups varied in size considerably, with the smaller firms being the cross-border targets.
According to the data used in this study, cross-border targets were not the better performing
firms in the years before the acquisition event but generally weaker than domestic targets. Thatmeans cross-border acquisitions in Japan do not occur because the foreign bidder merely invests
its money for a lucrative investment. My understanding is that potential Japanese targets were left
over, not getting taken over by any domestic firm. These Japanese companies in financial trouble
then had to look to get overtaken by a non-Japanese firm. That fits well with some post-acquisition target performance research using total factor productivity as a measure for performance(Fukao et al., 2005 ). My idea is that cross-border targets might bounce back to positive financial
performance earlier and stronger, as they were in worse financial shape before they got acquired.
Bandick and Karpaty find for their Swedish sample, positive employment effects in firms
which were taken over by foreign bidders (2007). Girma and Goerg divide employment into
skilled and less skilled labor and find for their electronics industry sample that only unskilledlabor decreased in cross-border acquisition targets. However, no results of higher downsizing was
found for skilled labor (Girma Goerg, 2004).
It is still questionable to the author however, how reliable the results are when measuring
the post-acquisition performance of target companies. In the case of an acquisition, the target
company’s name regularly disappears. For example, after Panasonic overtook Sanyo Denki in
2008, no longer can be any reliable information on Sanyo Denki received, as not only their name
disappeared at some factories but also several departments of the old Sanyo Denki. Other departments got restructured, mixed with previous Matsushita departments or even sold in the form ofa business transfer. It is to argue, therefore, that jobs which were eliminated by Panasonic were
those of previous employees of Sanyo Denki.
This research has focused on strategic acquisitions, i.e. acquisitions by companies which had
strategic interest in the target companies. In contrast to strategic investors, there are financial
investors, so called “vulture” funds. These funds are often times described in Japan as reaping
quick profits by taking advantage of troubled target companies (Fukao et al. 2005). To extend thisresearch, it would be promising to compare acquisitions looking at whether the bidder has financial or strategic interests. Another future avenue of research would be to investigate if Japanesefinancial investors differ in their behavior toward non-Japanese cross-border financial investors.
This research is limited to the pre-acquisition period, as the target names regularly disappear. It
would be interesting to apply a case study format for investigating changes after the acquisition

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in target firms with regards to financial performance and downsizing behavior.
This study is not without its limitations. It is to admit that it might not be enough to divide
the sample into only two groups, but it does matter where foreign bidders come from. Accordingto Rosenkopf and Almeida, knowledge stock will increase when a geographic similarity is available (2003). That means a Japanese target acquisition by a Korean bidder, for example, might
differ from a German bidder. Another shortcoming might be the fact that Japanese targets could
not get classified as keiretsu-grouped companies. Some evidence would suggest that Japanesetargets which belong to any keiretsu group might get overtaken by a domestic company moreeasily.
In spite of its limitations, this work shows alternative explanations for cross-border target
acquisitions. I have evidence that foreign companies do not “cherry pick” Japanese targets. Thereis more of a “recovery” from almost ground zero visible. That means, cross border targets are ina more severe situation than their domestically acquired counterparts. This might lend to better
performing entities of cross-border targets in the years after the acquisition event.2
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BEBENROTH: INBOUND M&A TO JAPAN: CHERRY PICKING VERSUS RESCUE MISSION?

13

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KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 1-16

Attachments
Table 1: Japanese In-In-acquisitions: Financial performances
Year
2001
2002
2003
2004
2005
2006
2007
Obs.

Revenue215907.8
199691.5
201072.1
196573.9204598.0
218286.5
225274.1
154-158

Operating profit
8112.15274.67508.48652.311023.2
12912.1
12358.2
154-158

Profit per Share
193.7
1787.51865.51741.8
1981.8698.3
743.3
149-156

ROE
-0.9
-9.5
-0.5
3.4
-6.4
-0.3
4.6*
149

ROA
4.7
3.7
4.4
5.0
5.3
5.4
4.9*
152-158

Table 2: Japanese Out-In-acquisitions: Financial performances
Year
2001
2002
2003
2004
2005
2006
2007
Obs.

Revenue
88685.983426.980555.877020.878902.681576.8
82529.5
62

Operating profit
5401.13412.33512.24376.96188.96191.14387.966-68

Profit per Share
23514.5
13308.2
8381.73404.5
1824.41218.4
719.3
64-67

ROE
2.5
0.6
1.8
5.3
-6.0
-0.2
-19.9*
64

ROA
5.2
4.4
6.1
6.0
6.9
5.3
3.3*
64-67

Table 3: Japanese In-In-acquisitions: Downsizing developments
Year
2001
2002
2003
2004
2005
2006
2007
Obs.

No. of
Employees
2203.82129.92077.72014.2
1948.8
1898.6
1907.5154-158

Lab.
Productivity
1874.3
1859.2
1920.42113.72366.82567.22657.8*152-158

Director Sal.& andBonuses
197.7
193.9
183.8
178.1
210.5
202.3
209.6
142-146

Labor equipment
Ratio
3442.23708.84061.14336.44563.74833.44686.0152-158

Foreigners Shares
Ratio
0.00140.00170.00250.00370.00360.00330.00402-20

BEBENROTH: INBOUND M&A TO JAPAN: CHERRY PICKING VERSUS RESCUE MISSION?

15

Table 4: Cross border (Out-in) acquisitions: Downsizing developments
Year
2001
2002
2003
2004
2005
2006
2007
Obs.

No. of
Employees
1435.51341.51225.31192.51171.31163.11171.7
65

Lab.
Productivity
1977.92099.42223.12313.02482.62797.92108.9*65-68

Director Sal.& andBonuses
178.2
164.5
166.7
167.2
170.5
177.7
209.6
59-63

Labor equipment
Ratio
4276.14437.95012.15127.35054.45178.95327.464-66

Foreigners Shares
Ratio
0.00370.00960.01050.01010.00940.01740.0243
3-6

Regression analyses:
Logistic regression analyses of return on assets (ROA), labor productivity (LP) and return on
equity (ROE).
Table 5: ROA Logistic regression
Dependant variable: out-in
Independent variable: Return on assets (ROA) on a yearly basis
Control variable: Industry
Logistic regression

Number of obs =216
LR chi2(14) = 22.41
Prob>chi2= 0.0706
Pseudo R2= 0.0854

Log likelihood = -120.05633

outin
roa2001
roa2002
roa2003roa2004
roa2005
roa2006
roa2007_Inewindus~1_Inewindus~2_Inewindus~3_Inewindus~4_Inewindus~5_Inewindus~6_Inewindus~7
_cons

Coef.
.0104016-.0566827.0636541.0373782-.0540291.1186608-.1434196.1617972.8036952.4394132-.2001597.680235
1.525188.2806921-1.303647

Std. Err.
.016274.0349957.0477433.0587914.0549394.0631024.0486543.6548689.5512647.6483585.5704188.7464327.7391125.6307517.4298841

Z
0.64
-1.62
1.33
0.64
-0.98
1.88
-2.95
0.25
1.46
0.68
-0.35
0.91
2.06
0.45
-3.03

P>|Z|
0.523
0.105
0.182
0.525
0.325
0.060
0.003
0.805
0.145
0.498
0.726
0.362
0.039
0.656
0.002

[95% Conf. Interval].042298-.0214948.0119075-.125273.1572293-.0299211.1526073-.0778509.0536503-.1617084.2423392-.0050175-.0480589-.2387803
1.445317-1.121722
1.884154-.2767637
1.710172-.8313461.9178407-1.31816
2.143216-.7827461
2.973822.0765543
1.516943-.9555585-.4610901-2.146205

16

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 1-16

Table 6: LP Logistic regression
Dependant variable: out-in
Independent variable: Labor productivity (LP) on a yearly basis
Control variable: Industry
Logistic regression

Number of obs =217
LR chi2(14) = 21.06
Prob>chi2= 0.1000
Pseudo R2= 0.0795

Log likelihood = -121.94118

outin
lp2001
lp2002lp2003lp2004lp2005lp2006lp2007_Inewindus~1_Inewindus~2_Inewindus~3_Inewindus~4_Inewindus~5_Inewindus~6_Inewindus~7
_cons

Coef.
-.000264-.0003615.0005465.0002381-.0001249.0004826-.0005792-.0310596.6558625.2332117-.3363298
1.076581
1.845458.3570563-1.118339

Std. Err.
.0002547.0004326.0005795.0004223.0002889.0002658.0002926.6662479.5406332.6442017.5795439.809458.7908882.5785203.4306857

Z
-1.04
-0.84
0.94
0.56
-0.43
1.82
-1.98
-0.05
1.21
0.36
-0.58
1.33
2.33
0.62
-2.60

P>|Z|
0.300
0.403
0.346
0.573
0.666
0.069
0.048
0.963
0.225
0.717
0.562
0.184
0.020
0.537
0.009

[95% Conf. Interval].0002352-.0007632.0004865-.0012094.0016823-.0005893.0010657-.0005895.0004414-.0006912.0010036-.0000383-5.73e-06-.0011526
1.274762-1.336882
1.715484-.4037591
1.495824-1.0294.7995555-1.472215
2.663089-.5099279
3.395571.2953457
1.490935-.7768227-.274211-1.962468

Table 7: ROE Logistic regression
Dependant variable: out-in
Independent variable: Return on equity (ROE) on a yearly basis
Control variable: Industry
Logistic regression

Number of obs =210
LR chi2(14) = 31.30
Prob>chi2= 0.0050
Pseudo R2= 0.1212

Log likelihood = -113.46729

outin
roe2001
roe2002
roe2003roe2004
roe2005
roe2006
roe2007_Inewindus~1_Inewindus~2_Inewindus~3_Inewindus~4_Inewindus~5_Inewindus~6_Inewindus~7
_cons

Coef.
.0017557.0065618.0079875.0008954-.0113949.0226563-.0306429.2034105.7886594.3318029-.1862955.3819355
1.742378.153894-1.25168

Std. Err.
.0061434.0100653.0092367.0088719.0057877.0169044.0118073.6365443.5449584.6441136.6024623.7763567.7667434.6106311.4083607

Z
0.29
0.65
0.86
0.10
-1.97
1.34
-2.60
0.32
1.45
0.52
-0.31
0.49
2.27
0.25
-3.07

P>|Z|
0.775
0.514
0.387
0.920
0.049
0.180
0.009
0.749
0.148
0.606
0.757
0.623
0.023
0.801
0.002

[95% Conf. Interval].0137966-.0102852.0262894-.0131658.0260912-.0101161.018284-.0164933-.0000512-.0227385.0557883-.0104758-.007501-.0537847
1.451014-1.044193
1.856758-.2794394
1.594242-.9306365.994509-1.3671
1.903567-1.139696
3.245167.2395885
1.350709-1.042921-.4513074-2.052052

WATANABE
KOBE ECONOMIC
AND HINO: A&
LAND-LOCKED
BUSINESS REVIEW,
AFRICA’S 54
GROWTH(2009),STRATEGY
17-39

17

A LAND-LOCKED AFRICA’S GROWTH STRATEGY:EXPORTS OF KNOWLEDGE-BASED SERVICES

MATSUO WATANABE

University of Niigata Prefecture

HIROYUKI HINO Kobe University

Abstract
This paper argues for promoting exports of knowledge-based services, including skilled labour, in
Uganda as an effective growth strategy for the land-locked Africa. For sustained growth at faster rate to be      

                 -

vidual economies’ diverse conditions in political economy and geography, among others—as opposed to the             !   "     

strategy. To neutralise the disadvantages associated with its land-lockedness (i.e., high transport cost to sea),
those countries may want to focus more on exporting skilled labour and ICT-related businesses, e.g. businessprocess outsourcing, rather than on following the traditional export-oriented industrialisation in labour-intensive manufacturing.

  O14, O25, O55
  : Uganda, Africa, service, sustained growth, industrial policy, BPO
1. Introduction
Recent years have seen increasing attention to sustained growth acceleration in the international development discourse, e.g. Commission on Growth and Development (2008), following theemphasis on poverty reduction in the last decade. The economies of Sub-Saharan Africa (hereinafter Africa) have shown a good performance in the recent years. However, the income level ofthe continent as a whole is still behind other developing regions, and the growth pattern is subject
                  #Corresponding Address:
Matsuo Watanabe
Faculty of International Studies and Regional Development, University of Niigata Prefecture
471 Ebigase, Higashi-ku, Niigata City, 950-8680 Japan
Hiroyuki Hino
Research Institute for Economics and Business Administration (RIEB), Kobe University
2-1 Rokkodai-cho Nada-ku, Kobe 657-8501 Japan

18

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 17-39

       $$  $        $ %&&'  *$
economies appears to be smaller than expected at least for short-term period, the implications of
the crisis to the international political economy (such as the possible changes in the global demand
structure) may involve a substantial revision of the traditional development strategy—namely, theexport-oriented industrialisation—for Africa.
The recent international development discourse also saw a renewed interest in industrial
policy (for example, Rodrik 2004, 2006, and 2007; Stiglitz 2008; World Bank 2009), calling for abroader policy space given to the governments in developing countries, and for the respect to the     +                
best practices policies under the guidance of international development community. Individual
developing countries face different situations and times—exogenous and indigenous politicaland economic conditions, and geographies (e.g. costal versus land-locked), among others—which $$    /          $  /kyo International Conference on African Development (TICAD IV 2008; JICA/JBIC 2008; andWatanabe 2008).
This paper is intended to explore the rationale of service sector development and export
thereof for Uganda’s development strategy, based on a policy proposal submitted to the Ministryof Finance, Uganda, by the authors (Watanabe, Hino and Owa 2008). The proposal, drawing on
+   *     ! $    <   =    !$rich farm land, and central location in Central East Africa as sources of comparative advantage;ii) targets knowledge intensive services, biofuels and associated green power generation, and regional logistical services as industries leading economic development; and iii) sets out some elements of the policy framework. Services, the focus of this paper, no longer mean provision ofmanual labour. High-end service is the provision of knowledge embodied in human capital. Given
its historically high level of higher education, Uganda seems to have comparative advantages inknowledge-based industries in Africa. The globalisation, the cross-border expansion of communications network connections, and the advance of transportation technology have vastly expanded    $  $                 hub, among others. Trade in services are not bound by the geographical location—Uganda’s landlocked nature cannot be a disadvantage for the growth of services.
The plan of this paper is as follows: Section 2 presents a summary of the existing development policies/plans of the Ugandan Government and the donor documents on Uganda and Africa,
namely the World Bank and Japan International Cooperation Agency. Section 3 demonstrates theimportance of services for economic growth in the global economy. Then, taking a Philippines’
case, it shows how the service export could contribute to economic growth. Section 4 examines
Uganda’s potentials of knowledge intensive services and exports, with particular emphasis on
overseas employment and business process outsourcing (BPO). Section 5 discusses the issues inpromoting the sector as a conclusion of this paper.

WATANABE AND HINO: A LAND-LOCKED AFRICA’S GROWTH STRATEGY

19

2. Review of past growth strategies: constraints and opportunities for a land-locked Africa
2.1 Ugandan Government’s target areas
A number of development strategies for Uganda (and Africa at large) have been proposed bydonors, and were planned by the Ugandan Government itself such as the Poverty Eradication Action Plan (PEAP), Competitiveness and Investment Climate Strategy (CICS) as well as annual
Budget Speeches annual budget speeches. The country’s current development strategy is based on
the 2004 PEAP         ?<     %<              @<            ment, 4) good governance, and 5) human development (Republic of Uganda 2004). The CICS
2006-2010  L    $  QX*QY   =        
agro-based products (while it also looks to service and industry as potentiality) (CICS 2006).
The     ! afterwards put stress more on economic growth than poverty
reduction. The "# prioritises i) investments in energy infrastructure, ii) development
and maintenance of transportation infrastructure and iii) information communication technology
Z#[/<            *         in cash crop production, manufacturing, construction, transport and communications. The #$ $             $      $$
to increase productivity. A distinction of the #$  is that the government recognises
the contribution of remittance to the economy (e.g. in macroeconomic stability and private investment 1),while maintaining the importance to develop service export through ICT (e.g. offshoring) .2
2.2 Donor side’s views on Uganda’s growth
The World Bank’s %     '  *' ' (CEM) (World Bank 2007a, 2007b)  =                                       
ratios in the international markets. The memorandum points out that infrastructure, especially intransport and energy sector, as the major constraints for accelerating economic growth. Uganda’s
1 \       $  ]  $ $ +      $ =  /  %&&^_&'   =`q ? @{%     $ =`q |}|   
2 The development of offshoring has drawn increasing attentions in the last decade as a new type of international business
operations. According to a survey conducted in 2007 by O’Sullivan (2008a, 2008b), 57 percent of the responding companies outsource ICT functions offshore‒which is twice as many as in 2004. 49 percent of the companies with annual
revenues of $1 billion or more are accounted for by offshore service providers. The market size of offshore IT and business process outsourcing is estimated to grow double or triple between 2006 and 2011. The types of offshoring are also
expected to be more diverse from call-centre and routine tasks㧔e.g. accounts payable/ receivable and payroll processing㧕to legal research. In addition, the locations of provider are also differentiated. While India has been a major host of$$      !  #  !      $               America and Eastern Europe.

20

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 17-39

high population growth rate (3.3 percent per annum) cannot sustain high per capita income growth
rates. And as the workforce sets to double in the coming 15 years, the major challenge for Uganda is to facilitate private investments beyond agriculture for employment creation 3. The memorandum provides scenarios of long term growth of the country, simulating the impact of total factor   Z/Q<              #            /Q   #            
infrastructure will support GDP growth and private demand (i.e. consumption and investment)
than on human development (e.g. primary education, health and water). However, no paths of
TFP growth are provided in the memorandum.
Several approaches in development strategies have been suggested for Africa in the recent
literature. Collier (2007) suggests that landlocked countries in Africa focus on regional markets(rather than global markets) and facilitate thereof through regional integration, infrastructure development and improving economic policies. It appears that such strategies imply cases of manufacturing development. In fact Collier does argue that development in other sectors beyond agriculture is needed for African countries to catch up middle income countries. However, therelevance for Uganda is indistinct. First, industrial sector may not necessarily dominate the indisputable position as the engine of growth for Uganda. The TFP of industrial sector inevitably relieson the development of neighbouring countries’ infrastructure and institutions (e.g. border control
and customs clearance). This poses uncertainty on Uganda’s industrial sector to increase competitiveness. In addition, Asian counties, in the 1980s afterwards, have already developed marketoriented approach and established industrial agglomeration. Collier (ibid.) in fact admits that the
chances of newly creating such agglomeration left for Africa might be slim. Dasgupta and Singh(2005, 2006) add that the dizzy changes in world consumption trend and production technologies
make rapid industrial development a tough task for many developing countries. Second, Collier
appears to disdain the global market as the destination of Ugandan products. To realise sustain      "            
economies provide enough and stable market. Third, while Collier does mention telecommunication (e.g. call centres) and remittance as possible help for landlocked African countries, he sees         *   "     engine for growth in most of the emerging economies. The recent world economic trend showsthat GDP growth is closely associated with the development of service sector (see Section 3.1).
Both high and low income countries have seen faster growth in service—such as ICTs, business            
The Japan International Cooperation Agency (JICA/JBIC 2008) looks to more active roles ofgovernments with broader policy space to realise sustained growth acceleration in Africa. Given
3     $    $               $    #stress that government should avoid picking winners (let alone ruling out supporting declining sectors), and that there    $   $                  

WATANABE AND HINO: A LAND-LOCKED AFRICA’S GROWTH STRATEGY21 !      Z !     ! $ $      infrastructure and dysfunctional markets, among others), the governments should pursue their own“industrialisation strategies” that identify and support prospective leading industries with a focus
on latent potentialities in  +  economies .4
The JICA study contends that observation of national contexts is essential to establish andpursue successful strategies. The growth paths taken by Asian countries in the 1980’s afterwards                                     #   
Africa, the role of governments has virtually been limited. Approaches to industrial development
have become more or less identical, relying heavily on the private sector (particularly foreign
capitals), notwithstanding its weakness in an underdeveloped market. Under the strong guidance                *$   $     
with little consideration given to their diverse situations.
It is, however, unrealistic to expect all African governments have enough capacities to pursue full scale strategies (namely, so-called     5) from day one. The extent of governmental intervention should be based on the country’s institutional capacity. Policy measures commensurate with the institutional capacity should be adopted, and the institutional capacity should
be strengthened through trial-and-error. The JICA study as such stresses that the international
community should allow African countries to take diverse approaches at diverse paces as well as
short-term errors in the course of the processes .6
3. Service sector and growth: Global and Asian experience
Building on the discussions in the previous section, this paper proposes to build strong
knowledge-based service industries in Uganda for exports to the global market. To support sucha strategy, we offer in this section evidences in the global economy and in Asia that service sector is one of the key to sustain high growth rates in particular Ugandan context.

4 The term “industrialisation” refers not only to manufacturing sectors but to a broader range that includes agriculture andservices industries as well.
5 The literature largely regards industrial policy as selective government interventions for structural transformation of                  Z <  $          Zcoal). The former looks i) to providing public goods and services and ii) to market imperfection and externalities, forexample, while the latter is intended to address the imperfection of production factor mobilization and sank cost problem. (This article is concerned with the former case.) While “direct,” major measures of industrial policies include
subsidies, tax concessions, soft loans, preferential procurement, import restrictions, and export promotions, even “indirect” policies such as in exchange rate and education can be considered as the measures of industrial policy.
6 The study discusses the necessary conditions to pursue successful strategies (e.g. effective public-private partnership) andthe way to attain the capacities. See JICA/JBIC (2008) for details.

22

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 17-39

3.1 Global Experience
Economic growth is associated with the development of service sector. Figure 1 shows theaverage GDP growth of 168 countries and their growth rates of services value add for the decadeof 1996-2005. There is a strong, positive relationship between GDP growth and service sector
growth. More rapidly growing countries have experienced expansion of service sector at fasterrate than other countries during the period. As the production processes of goods become global,
a major portion of value-added (from 30 to 70 percent) comes from services inputs (UNDP 2005).
Growth in services most effectively fuels overall economic growth. Figure 2 compares theaverage annual growth rates of service value add during 2000-2005 period for the top 10 (non-oil <     $ qQ         ?& Z+    $fected ones). In the former group, the service sector grew at average 7.9 percent per year, while

Figure 1. Service sector and growth
Growth of Service Value Added (%)

25

y = 0.8588x + 0.6386
R2= 0.5839

20
15
10
5
0
-5

0

5

-5

10

15

20

25

GDP Growth (%)

Source: Data taken from World Development Indicators

Service Sector Growth (%)

Figure 2. Growth performance: GDP and service
8
6
4
2
0
Top 10 economies of GDP growth-2
Source: World Development Indicators

Bottom 10 economies of GDP growth30

WATANABE AND HINO: A LAND-LOCKED AFRICA’S GROWTH STRATEGY

23

the latter’s service sector declined at 0.08 percent per year.7 The growth of service sector directly      $  /            $ nomic performance in the world over is largely accounted for by the development of service
sector.
# $   $ $     Zq#<    $     =[/*q(2007c) points out services account for 58 percent of inward FDI stock in developing countries in%&&                     @?
percent was for manufacturing and 9 percent for primary sector. These developments clearlyshow a paradigm shift of investor’s interest in FDI to developing countries from conventional
low-skilled, labour-intensive manufacturing to new knowledge-based and/or service sectors.
As the share of service in an economy increases, its income level also rises. Figure 3 reports
GDP per capita of 138 non-oil producing countries and their share of service sector in GDP for
1996-2005. The positive correlation between the two suggests that the countries of higher income
level tend to see higher share of service sector in their economies. Expansion of service sector has
been a key to achieve economic growth and long-term economic development.
q $                 "tatively changes services and the way they are provided. Besides the traditional services such asretail and distribution, services are now provided in entire production processes, i) as up-stream
inputs (e.g. research and development, product design and staff training), ii) as on-stream inputs

Figure 3. Service and income levely = 0.0008x + 50.615
R2= 0.3003

Service/GDP(%)

80

60

40

20
0

5,000

10,00015,00020,00025,00030,00035,00040,000GDP/capta(US$)
Source: Data taken from World Development Indicators

7 /   ?&  [  *  [ X     " =!           / average GDP growth rate of these was 8.5 percent per year. The bottom 10 are Guinea-Bissau, Gabon, Italy, Papua New
Guinea, Eritrea, Dominica, Uruguay, Guyana, Seychelles and Zimbabwe. The average GDP growth rate was 0.09 percent.

24

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 17-39

Z                   "                <   <       Z
advertising, distribution, transportation, and storage). Many of the business services, which wereperceived as ‘non-tradable’, are now outsourced beyond boundaries. The business process outsourcing (BPO) services have grown rapidly in the last decade. The average annual growth rateof BPO exports of Brazil and China during 1995-2005 was 15 percent, and 25 percent for India.
The trend is largely explained by the global competitive pressure, in which companies’ competi                 "   /  
also chances even for non-ICT top runners. Recently the more advanced countries in BPO activities, like India, are moving from low-end services to more integrated and higher-end services,such as customer care, human resource management, product design and development. This moveis creating space for other developing countries, like Senegal, to step into the more standardized
segments of the BPO market (see Footnote 2).
3.2 Asian evidence: Non-traditional pattern of growth: the case of Philippines
Philippines’ experience illustrates a successful case of service-led growth. While the countries of the Association of Southeast Asian Nations (ASEAN) saw rapid economic growth in
the 1980 afterwards, Philippines fell behind other members. Table 1 reports the comparison of  $  $   *`X*          others until the early 1990s: the average annual growth in the 1991-95 period was 2.2 percent,while other economies saw rapid export-led industrialisation and grew at 8 percent or more; Filipino economy even shrank in 1991 due to the political instability, drought, and the great eruption$  Q     /              #    
has been always higher than other ASEAN economies (except Indonesia in the late 1990s after-

Table 1. ASEAN: economic performances

GDP growth(annual %)#  
ZqQ  
annual %)Philippines
Indonesia
Malaysia
Singapore
ThailandPhilippines
Indonesia
Malaysia
Singapore
ThailandSource: World Development Indicators

1981-85
-0.1
6.2
5.5
7.0
5.4
20.0
12.4
3.3
4.2
5.6

1986-90
4.7
7.1
6.9
8.5
10.3
8.4
9.2
1.8
2.7
4.8

1991-95
2.2
7.9
9.5
8.9
8.6
9.8
8.1
3.5
3.2
4.9

1996-00
4.0
1.0
5.0
6.4
0.6
7.7
26.3
4.1
-0.3
2.9

2001-05
4.5
4.7
4.4
4.1
5.1
5.4
9.8
4.2
0.0
2.4

WATANABE AND HINO: A LAND-LOCKED AFRICA’S GROWTH STRATEGY

25

Figure 4. Share of Roads Paved
100
90% of total road80

Philippines

70

Indonesia

60

Malaysia

50

Singapore

40

Thailand

30
20
10
0
Av1986-90

Av1991-95

Av1996-2000

Av2001-05

Source: World Development Indicators

Figure 5. Net FDI inflows/GDP
16
14

(%)

12

Philippines

10

Indonesia

8

Malaysia
Singapore

6

Thailand4
2
0
Av1981-85

Av1986-90

Av1991-95

Av1996-2000

Av2001-05

Source: World Development Indicators

wards). In addition, infrastructure is weak: for instance, the ratio of paved roads has been far
lower (Figure 4). These conditions discouraged foreign investors to operate in the country. The
 $ q#            
   ?{'& Z
5).
*$     ! $  ?{{^            
economic growth at 4-7 percent in recent years, largely due to service sector growth (Figure 6).
/        $      $        retail and personal services. In 2004, the GNP growth rate was 6.9 percent, of which service sector growth accounted for 3.3 point. In fact the economic structure is shifting to service sector
whose share in the economy increased from 44 to 54 percent in 1990 and 2005, respectively,
while agriculture sector shrank from 22 to 14 percent (Figure 7).
/        $   $ $            

26

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 17-39

Figure 6. Phillipines’ GNP growth and contribution by sector
8

(%)

6

4

2

0
2002

2003

2004

Agriculture, fishery, forestry

Industry

Service

2005

2006

Income from abroad

Source: Central Bank of Phillipnes

Figure 7. Transformed structure of economy
100%
80%
60%
40%
20%
0%
1990

2005
Agriculture

Industry

Service

Source: World Development Indicators

ICT services, such as software programming, and business process outsourcing (Horie 2007). For
+  #   !$    Z                     <   Q   /  qX   
opened a large-scale call centre in the country. These developments are facilitated by Englishspeaking ability of the people in the country.
Besides such BPO services, one of the most prominent characteristic of Philippines’ economy
is its reliance on remittance from abroad (Figure 8). Although the country’s trade balance in goods           $ Z   <       
makes the current account surplus from 2003. This remittance allows the expansion of domestic
retail and personal services sectors—which uphold the recent economic growth as mentioned
above.
Table 2 and 3 report the destinations and types of business of overseas workers (OWs). The

WATANABE AND HINO: A LAND-LOCKED AFRICA’S GROWTH STRATEGY

27

Figure 8. Philipines’ Balance of Payment
15000

US$millions

10000
5000
0
-5000
-10000

1999

2000

Trade goods & service

2001

2002
Income2003

2004

Current transfer

2005

2006

Current accountSource: Central Bank of Philippines

Table 2. Overseas workers by region: 2005
Middle East
Asia
EuropeAmericas
AfricaTrust territory
Oceania
OthersSea based//*

Number394,419259,209
52,146
14,886
9,103
7,596
2,866
135
247,497
987,857

Share (%)
39.9
26.2
5.3
1.5
0.9
0.8
0.3
0.0
25.1
100.0

Source: Overseas Employment Statistics, Philippine Overseas Employment Administration

Table 3. Overseas Workers (New hires) by occupation
1992
Administrative, manager*  $   Clerical workers
Production, transport operator
Professional, technicalo/w Nurses
o/w Medical dental veterinary
Sales worker
Service worker
o/w Domestic helper, householdo/w Care taker//*

Number
289
2,023
5,369
95,062
72,881
5,747
924
2,701
82,267
57,903n.a.
260,5932006
Share (%)
0.1
0.7
2.0
36.4
28.0
2.2
0.4
1.0
31.7
22.2
n.a.
100.0

Number
817
807
7,912
103,584
41,25813,5251,038
5,517
144,321
91,412
14,412
308,122

Source: Overseas Employment Statistics, Philippine Overseas Employment Administration

Share (%)
0.3
0.3
2.6
33.6
13.4
4.4
0.3
1.8
46.8
30.0
4.7
100.0

28

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 17-39

most popular destination of Filipino OWs is Middle East (about 40 percent), followed by Asia (26percent) and Europe (5 percent). The prejudice that OWs are non- or low-skilled, such as construction workers, does not bear out in the Philippines’ case. Although ‘Production, transport
operator’ represented by construction workers and ‘Domestic helper, household’ account for largepart of the deployed population (combined 63.6 percent in 2006), ‘Nurses’ and ‘Care taker’ haveseen an increasing trend. The number and share in total overseas Filipino workers of newly hired
nurses more than doubled from 1992 to 2006 (i.e. 5,747 to 13,525). In 2006, 14,412 care takers(who provide care for children, elderly persons or persons with disabilities in private homes) were
deployed in foreign countries (4.7 percent of the total OWs)—this shows a spectacular increase
from 1992 when there was virtually no such type of deployment (even considering the difference$       < Z` * + ? $       <
Philippines’ economic growth strategy is increasingly dependent on human resources throughexport of services, i.e. business outsourcing and natural persons. Although the country is surrounded by sea, the economic development is no longer dependent on the geographical condition.
In a broad sense, deployment of domestic labour is also considered as exporting services. In thesituation where domestic infrastructure is inferior to neighbouring countries to promote industries,
Q        $       !    $    
human resources. This example is relevant to Uganda because English speaking (and Western
style of education) is an essential part of Philippines’ success and because the success in service
has nothing with the geographical condition as an island country. The next section explores thepossibilities in services in Ugandan context.
4. Uganda’s comparative advantage and possibilities
4.1 Manufacturing vs. services exports
The above evidences from the global economy and Asia suggest that developing countries do
not necessarily have to look only to manufacturing sector development in order to sustain higheconomic growth over a long period. This is good news for Uganda, because it is landlocked andthe costs of transporting goods to the coast are high. For instance, Robusta coffee prices were  =`@'&   @{&   $   =`^  ?{       (The National Resources Institute & the International Institute of Tropical Agriculture 2002: 36).
Delay in transport also poses additional burden for Ugandan products. It takes 42 days to export
a container from Kampala and have it on the ship ready for transit at the Mombassa Port (The\ $ =  %&&^< *   =      ?'  $  
sales and 1.1 percent of exports because of the delays in transportation services (World Bank
2007b: 133). This implies that Uganda’s comparative advantage may lie more in the trade ofservices such as BPO and overseas employment of educated Ugandans (which are not bound by

WATANABE AND HINO: A LAND-LOCKED AFRICA’S GROWTH STRATEGY29

the geographical location) than in manufacturing. Then, can Uganda realistically expect to develop these service industries?
The evidence suggests that in Uganda, international trade of such services has actually been
growing rapidly, and that their potentials should not be dismissed. As shown in Table 4, the valueof service export increased from slightly above US$200 million in 2000 to more than US$500
million in 2005. The share of services in total export has been constantly more than 30 percent.
The service sector has been in fact the driving force for economic growth in Uganda in the lasttwo decades (Table 5). The contribution of the service sector to overall GDP growth has been
higher than any other sectors since 1990. The service sector now accounts for more than 40 percent of GDP, higher than that of agriculture.
Travel has traditionally been the major contributor for service exports, followed by trans     +  $   Z      $     
insurance, communications, and other business services) have seen an increasing trend. The sharein total service export increased from 3.8 percent in 2000 to 22.5 percent in 2006 (Table 6). As
such the possibility of expanding new service sub-sectors has a realistic ground.
One of the background of the policy to promote the service sector is unemployment ofyounger generations. The population of Uganda is projected to increase at 3.7 percent per year  %&&   %&?&        $        $
above that, given that a disproportionately large share of population is expected to enter the la-Table 4. Export of Goods and Services ($US million)
2000
449.9
213.2
663.1

Goods
Services
Total

2001
475.6
216.9
692.5

2002
480.7
224.7
705.4

2003
563
265.7
828.7

2004
708.9
358.3
1067.2

2005
864.2
507.7
1371.92006
1003.9489.81493.7

Source: Balance of Payments Statistics Yearbook 2007, IMF

Table 5. Sectoral Composition and Growth of GDP (1990-2005)

Supply of GDP
Agriculture
Industry
Services

Sectoral contribution to GDP growth
1990-99
2000-05
5.5 %
6.3 %
1.3 %
1.8 %
1.6 %
1.8 %
2.6 %
2.7 %

Source: World Bank (2007b: 11)
Note: GDP at factor cost

Sectoral shares in nominal GDP
1990-99
2000-05
100.0 %
100.0 %
33.8 %
46.4 %
24.6 %
18.5 %
41.6 %
35.1 %

30

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 17-39

Table 6. Export of Goods and Services ($US million)GOODS
SERVICES
o/w Transportation service
o/w Travelo/w Communications
o/w Insurance
o/w Financial
o/w Computer and information
o/w Royalties and license fees
o/w Other business services
//*

2000
449.9
213.2
31.5
165.2
8.1

2001
475.6
216.9
29.2
165.4
12.1
1.7

2002
480.7
224.7
31
171.5
9.1
1.9
0.1

663.1

692.5

2.3
705.4

2003
563
265.7
8.9
184.2
16.6
3.2
12.8
0.7
0.6
28.4
828.7

2004
708.9
358.3
9.6
255.8
18.7
4.1
16.4
7.9
33.9
1,067.2

2005
864.2
507.7
10.7
381.2
17.9
7.2
16.9
32.8
7.4
20.8
1,371.9

2006
1003.9
489.8
10.9
354.9
19.4
6.6
17.9
31.5
2.4
32.4
1,493.7

Source: Balance of Payments Statistics Yearbook 2007, IMF

bour market. Currently, Uganda’s labour force participation rate is 81.3 percent, while the annual
labour force is growing at 3.6 percent (Uganda Bureau of Statistics 2006). Given the situation, it
would be unrealistic to expect to absorb all the growing workforces domestically. Even if theeconomy was to grow at 8-9 percent annually, the associated increase in demand for labour could
not match that of the labour force. As such the government purports to expand exports of knowledge-based services to deal with the expected growth in labour force through both outsourcing
and employment overseas. The global demand for such services is huge in relation to the potential $ =          "  $      
wages in India, China and elsewhere is creating openings for late comers such as Uganda.
4.2 Potentials for overseas employment and BPO
Given the emerging role of services in Ugandan economy, what are the emerging ‘strategic’areas in services? The key is Uganda’s skilled human resources. The growing literature shows that
remittance has positive effects on the receiving countries’ economy. The recent case studies on
remittance—Orrenius and Zavodny (2009) on Mexico, and Adams, Cuecuecha, and Page (2008)
on Ghana, among others—support the positive effects of remittances to development through labour markets (i.e. lower unemployment and increase in wages) and increase investment in humancapitals. Although remittances were expected to decline in 2009 by 7-10 percent by a World Bank Z\    %&&{<              $ 
US investment bank in 2008, the negative impacts on economic performance have been smaller
than expected .8 In Ugandan context, Kihangire and Katarikawe (2008) tested the linkage between
8 According to the Central bank of Philippines (2009), for instance, the country saw remittances from overseas Pilipino
workers of US$ 11.3 billions during January to August 2009 which was 3.7 percent higher compared to the previous year.

WATANABE AND HINO: A LAND-LOCKED AFRICA’S GROWTH STRATEGY

31

remittance and GDP per capita and found positive association between them. Remittances also
tend to increase trade for the country .9/   $     $   !      =  # %&&&
21.6 percent of tertiary education graduates left for employment abroad, and 20 percent of Ugandan medical doctors are reported to reside in the U.S. and Canada (UNCTAD 2007a). Anotherdata (Shaw 2007) shows that 37 percent of Ugandan college graduates reside in the Organisation
for Economic Co-operation and Development (OECD) countries in 2000. Russell et al. (1990)
point out that in many countries like Uganda, education has expanded faster than the absorptive
capacity of the economies, leading to disparities between supply and demand of highly skilled             $   !          jobs at home. Table 7 supports this story. Remittances of Ugandans working abroad are already"   /     =` '|   %&&^ "  '%  $ qQTable 7. Workers’ inward remittances in Uganda (US$ million)
Remittances
Share of GDP (%)

2000
238
4.0

2001
342
6.1

2002
421
7.2

2003
306
4.9

2004
371
5.4

2005
423
4.8

2006
814
8.7

2007
856
8.2

Source: World Bank Migration and Remittances Factbook, World Economic Outlook Database 2007

Uganda is one of the top thirty remittance-receiving countries in the world in terms of theratio to GDP. As shown in Table 8, the top two counties, Moldova and Tajikistan, received remittances of 36 percent of their respective GDP in 2006. Uganda’s performance (8.7 percent) is        `  !     $  $    ``  *$rica in the list. What is remarkable for Uganda is that average Ugandan migrant sent US$ 5,260
 _         $  $         This illustrates that Ugandans working overseas are employed with high salary job at least statis    Z      ! %&&'< * X[q  Zq    2005) also suggests that Ugandans working overseas earn comparatively high salary because theshare of highly skilled in total Ugandan expatriates is 39.2 percent—which is the same level asthat of United Kingdom and slightly above that of Kenya.10

9 Other positive effects of the skilled emigration (e.g. technology/skill transfer and improvement of social institution in  <        `   ! Z%&&|< $ +
10 Some literature employing cross-country regressions claimes that educated OWs remit less, and concerns that further
increase in skilled OWs will hamper remittance growth. However, Bollard et al. (2009) and Clemens and MacKenzie(2009) augue that skilled (and more educated with more earnings) migration remits more. A survey by the former
shows that there is a strong positive relationship between education and the amount remitted. For example, African
physicians typically remit much more money than it cost to train them. This implies that public professional tranings(even for future migrants) by developing countries can pay.

32

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 17-39

Table 8. Top 30 Remittance-Receiving Countries: 2006
Countries
Tajikistan
Moldova
Tonga
Kyrgyz Republic
Honduras 
Guyana 
Haiti
JordanJamaica
Armenia
El Salvador
Nepal
Bosnia.Herzegovina
Serbia Montenegro
AlbaniaWest Bank, Gaza
Philippines
GambiaNicaragua
Cape Verde
GuatemalaDominican Republic
Kiribati
MoroccoGuinea-Bissau
Bangladesh
Uganda`  !

Remittance(% of GDP)
36.2
36.2
32.3
27.4
25.6
24.5
24.3
22.8
21.6
20.3
18.5
18.3
18.2
18.0
17.2
16.9
14.9
14.7
13.0
12.5
12.2
12.0
10.3
10.0
9.9
9.5
9.2
8.8
8.7
8.7

Value of remittances(US$million)
1,019
1,182
72
739
2,367
361
218
5,183
1,070
2,883
1,946
1,175
3,330
1,453
1,943
4,703
1,360
597
15,250
64
656
137
3,626
3,044
7
5,454
28
5,428
814
2,350

Migration stock(000’s)
80.6
70.5
5.6
61.3
415.0
258.6
417.5
622.0
834.4
641.1
1,037.6
812.7
1,128.7753.7
1,471.6
2,298.4
860.5
955.0
3,631.4
56.8
683.5
181.2
685.7
1,069.0
4.8
2,718.7
116.1
4,885.8
154.7
935.6

Remittance per capita
(US$)
1,279
1,675
1,396
1,201
5,704
1,396
522
8,334
1,282
4,497
1,875
1,446
2,950
1,928
1,320
2,046
1,581
625
4,199
1,128
960
756
5,288
2,848
1,447
2,006
241
1,111
5,260
2,512

Sources: World Migration Remittances Factbook, World Development Indicator 2007, Datasets created by Universityof Sussex and the World Bank.

4.3 Potentials for ICT services and BPO
Telecommunication services have shown a remarkable growth in Uganda. The number ofmobile phone subscribers increased fourfold from 1999 to 2007 reaching 3 millions (Table 9).
There are now 17 internet service providers (both domestic and foreign capitals) from 2 providers
10 years ago, and ICT-related businesses are gaining markets in Europe and North America as
well as in Africa .11
11 IF (2006a) reports that there are 17 ICT companies engaged in outsourcing business as of 2005 in software development
and training, internet and e-commerce related consulting, ICT consultancy services (e.g. software designing, call centre,
customer relationship management, desk outsourcing services), telecom value-added services, data processing, bookkeeping as online outsourcing. World Bank (2007b) points out that the English speaking population and the presence of alarge number of unemployed university graduates reinforce Uganda’s potential for the further development of ICT exports
in the long run.

WATANABE AND HINO: A LAND-LOCKED AFRICA’S GROWTH STRATEGY

33

Table 9. Uganda’s Communications Sector
Fixed phone lines
Dec 1996
Dec 1999
Dec 2002
Dec 2005
Mar 2007

45,14558,261
59,472
100,777
137,916

Mobile phone
Subscribers
3,000
72,602505,627
1,525125
3,015,493

Internet Service
Providers
2
9
17
17
17

Courier Service
Providers
2
11
11
22
25

Source: Uganda Communications Commission website

To promote outsourcing businesses in Uganda, a series of public support has been launched.
For example, in 2006, the government has launched a joint programme with private companies,             Q $$  #[/     for call centre technologies and management. Besides this, in order to address the problem of                  ]     $
Uganda’s ICT service exports, the World Bank is supporting the East African Sub-marine Cable`          X *$  ?& &&&!      
projects are planned with support of the Commonwealth Business Council or the Chinese government.
5. Issues ahead in knowledge-based service export
To support the strategy to harness knowledge-based industries and export in the long run, it
is obviously critical not only to strengthen education at all levels but to focus in particular on
higher education and vocational training. Historically, Uganda used to have a strong higher edu    /  ! =   Z=<      "    
Africa. After established in 1922 as a technical college to serve students from the British East*$   $   /  !   =  $     =     duced many renowned graduates in Africa. As of July 2007, the number of students in MUK is33,488 (of which 1,626 are postgraduates; 2,128, or 6.4 percent, are international students fromover 10 countries) and up to 5,000 students graduate annually (See www.makerere.ac.ug). However, the current level of higher education in Uganda seems to lag behind globally and regionally.
According to the Webometrics Ranking of World Universities (http://www.webometrics.info), thecurrent ranking for MUK is 53 out of 100 African universities, that is far below the ranking of
the University of Dar Es Salaam (21st) or the University of Nairobi (23rd). The percentage of
Uganda’s enrolment for secondary school has been approximately 15 percent since 2000, again
lagging behind other regional countries, Kenya (40 percent), Ghana (36 percent), Ethiopia (25percent) and Zambia (24 percent) (Table 10).

34

KOBE ECONOMIC & BUSINESS REVIEW, 54 (2009), 17-39

Table 10. Secondary School Enrolment rate, 2004
Philippines
Cape Verde
Botswana
Gambia, The
Bangladesh
Kenya Qq\Ghana
Ethiopia
Malawi
ZambiaUgandaBurkina Faso"

61 %
55 %
55 %
45 %
44 %
40 %
37 %
36 %
25 %
25 %
24 %
15 %
10 %
4%

Source: World Development Indicator 2007

The policy shift towards primary education by both donor support and the government in the
1990’s afterwards may have contributed to the deterioration of Uganda’s higher education. Sucha shift occurred in most African countries with the introduction of the Poverty Reduction Strategy
endorsed by the World Bank. Uganda’s effort was more pronounced than that of other countries,
which in turn undermined the budget allocation for higher education.
An emerging good sign, however, is that an increase in enrolment ratio is observed in thesecondary and tertiary education; the increase of the secondary is from 12.0 percent to 18.7 in thedecade from 1995 to 2005, and that of tertiary is from 1.7 percent to 3.4 during the same period(World Bank Edstats website). In addition, Uganda remains as an higher education hub, especially for students from the neighbouring countries. In 2005, over 28,000 secondary students andabout 5,000 higher education students studied in Uganda from abroad (The Republic of Uganda
2007b). Most of them are from Kenya (20,716), Tanzania (5,211), Sudan (2,457), Rwanda (1,228)
and Democratic Republic of the Congo (2,435). As of March 2005, foreign students comprised
approximately 8 percent of the total number of students in the major tertiary institutions in Uganda. Another good sign is that Uganda’s position in the Knowledge Economy Index of the WorldBank is improving while that of entire Africa sees a decline (Figure 9). Uganda’s Knowledge
Economy Index improved by 0.52 point from 2005 to 2007. The improvement of 0.52 point isranked 6th among the world .12 To ensure the trend, the government may want to establish an integrated policy and make a longer-term commitment in the area.
            $       

12 The Knowledge Economy Index of the World Bank assesses to what degree the country’s environment is conducive forknowledge to be used effectively for economic development. It is based on four factors: Economic Incentive Regime, Innovation, Education and ICT.

WATANABE AND HINO: A LAND-LOCKED AFRICA’S GROWTH STRATEGY

35

Figure 9. Knowledge Economy Index
10
9
8
7
6
5
4
3
2
1

World

AfricaIndonesia

Honduras

India

Chile

Brazil

Lao PDR

Turkey2007

Mozambique

1995

UgandaQatar

RussiaPolandMalaysia

Iceland0

Source: Knowledge for Development databse, World Bankpriorities consistent with the country’s comparative advantages and industrialisation strategies    #      $   $ #[/                   "  $ =            $ Q
and other export of services.
/      $     =        The textbook manufacturing-led industrialisation may not necessarily be appropriate for land–
locked Uganda as export of manufacturing goods is handicapped by high transport cost and inevitably depends on uncertain situation of neighbours. What is important for a developing country               $      "    +     $$       "   
changing global situation.

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Appendix 1
Having been recognising the contribution of remittance to the economy, the government    $               /       lished the Philippine Overseas Employment Administration (POEA) in 1982 to promote deployment and support OWs through, for example, concluding bilateral agreements on overseas employment (Table A1). The POEA’s mandate includes i) to regulate private agencies in hiring anddeploying workers, ii) to promote and supervise overseas employment, iii) to guard welfare andrights of overseas workers, iv) to recruit and coordinate deployment of professional/skilled workers under bilateral agreements, and v) to train returned workers and to promote recruitment ofthem.
Deployment of nursing and care workers is one of the priorities of the Government. Filipino    X     *         ! 
wage level of Filipino nurses higher than other nationals. There are 28 medical schools and 191
nursing schools in the country: every year 1,500-3,000 doctors and 5,000-30,000 nurses are newly registered. Besides nursing, the number of deployed caretakers is increasing. For example,
Q     [  ]      # [ Q     
taking training and orientation courses in Canadian culture before coming to Canada. In addition,
Canadian government offers Filipino caretakers the permanent residency of Canada after 2 yearsof the job. (See  p ppl<;k X + dp  for details of the Program.)

WATANABE AND HINO: A LAND-LOCKED AFRICA’S GROWTH STRATEGY

39

Table A1. Philippines’ Bilateral agreements on overseas employment
TaiwanSaudi Arabia
NorwayUK

General Agreement on labour movement/   $       Z   $!   !<Saudi Arabia regulates minimum wage for Filipino workers
Health care-related agreement
Provision of condition for Filipino nurses working at public hospitals in host countries;
Provision of pre-deployment training contents
Agreement on sea workers

Denmark
NorwayNetherlands/ 

US

Agreement on Filipino Workers at US military bases
To promote employment of Filipino workers at US bases in Guam, Okinawa, Taiwan aswell as to ban discrimination and exploitation` q   "    Q     $    X

Q  

KOBE ECONOMIC & BUSINESS REVIEWCONTENTS

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Railroad Regulation in the United States in the Nineteenth Century:
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      …………………………………………………………… Hideki Izawa   !" !#  $      ………………………………………………… Nobuaki Hamaguchi
A Note on Political EU-Japan Relations and Economic Ties:
Efforts through Cooperation Programs ………………………………………………………………… Ralf BebenrothNo.51 (2006)
A Note on East Asian Community: ASEAN+3 or ASEAN+3+3 ………………………………………… Kazuhiro Igawa%  ' # ! (  "    )  *,  

          . * ………… Kazuhisa Otogawa / Hidetoshi Yamaji    !     ( …………………………………………………… Nobuaki Hamaguchi

No.50 (2005)
    .  % /Climbing Technology Ladder and Trade Surplus in East Asia ……………………………………… Kazuhiro Igawa
The Analysis of Price Declines Factors*  ( %  ,!#  %  * ………………………………………………………… Munehiko ItohIn Defense of the Autonomy in Neoliberal Economic
Policy Reform in Latin America ………………………………………………………………… Nobuaki Hamaguchi

No.49 (2004)     0     ,     …………………………………………… Junichi Goto
Implicit Collusion Models of Export Pricing: An Econometric Application to the Japanese Case ……… Eiichi Tomiura
National Money of Account, with a Second National Money or Local Monies as Means of Payment:
A Way of Finessing the Zero Interest Rate Bound. ………………………………………………… Stephen J. Davies" !# %.!.   ! " !#    # 
*4 #%   ! 4 # % #    %  ,!#  * …………………………… Munehiko Itoh

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