Learning from East Asia’s
FDI-led Industrializing
Economies
Preparing for New Problems and Scaling Upin Proper Steps

Hanoi, VietnamJakarta, Indonesia

Kenichi Ohno (GRIPS)
Addis Ababa, August 2014

As Light Manufacturing FDI
Rushes into Ethiopia…
Lessons from East Asian high-growth economies become more
relevant (both positive and negative):
1. Anticipating and avoiding industrialization bottlenecks
Rapidly industrializing countries face similar issues.
Whether they are solved competently or left unattended
will determine the long-term fate of the economy.
2. Policy upgrading in proper steps
Key policy components must be installed in reasonable
sequence. Fast introduction without adequate humanresource or institutional capacity will lead to policy failure.

Common Problems in FDI-led
Industrialization (Early Stage)(K. Ohno’s letter to PM Hailemariam, April 28, 2014)

For sustaining strong FDI inflow
 Steady improvement in business environment
 Maintaining wage competitiveness Selective and strategic FDI marketing SME promotion and FDI-local firm linkage

Coping with new problems
 Labor shortage (where FDI concentrates) Working & living conditions of workers
 Transport bottlenecks
 Irresponsible FDI (unlawful deals, worker mistreatment,pollution…)

East Asia & Ethiopia: Overview
Per capita
income(WB, 2013)

World Bank
incomeclassification

History ofindustrialization(approximately)

Industrial policy
quality (GDFevaluation)

Singapore$54,040High

Five decades

ExcellentTaiwan$20,930High

Six decades

Very highMalaysia$10,400

Upper middle

Six decades

HighThailand$5,370Upper middle

5.5 decades

Moderate & spotty

Indonesia$3,580 Lower middle

Five decades

PoorVietnam$1,730 Lower middle

Two decades

Poor

India

$1,570 Lower middle

Two decades

Poor

One decade

Improving…

Ethiopia

$500

Low

Note: Taiwan’s income is from IMF. India's industrialization history counts post-planning years only.

Fair

Industrial policy assessment by GDF

Singapore$54,040

1A+

Taiwan$20,930

16A

Malaysia$10,400

6B

Thailand$5,37018

B-Indonesia$3,580120

DVietnam$1,73099

DIndia$1,570134

DNA

Productivity &innovation

Industrialparks

FDI policy

Exportpromotion

ManufacturingSMEs(industrial human resource & enterprise support)

Overall

Fail

Ease ofDoingPer capita
Business
income (WB, ranking (WB,2013, USD) 2013, among189countries)

Supportingindustries

Good

Income Performance vs.
Quality of Industrial Policy
Humanresource

Very good

NA

Note: Policy assessment excludes results of external factors, private effort or foreign support.

How Many Years Does It Take to Become aSingapore?
Per capita
income(WB, 2013)

Years required for reaching if Ethiopia maintained
an annual per capita growth of
10.0%

8.0%

6.0%

4.0%

2.0%

Singapore$54,040

49.1

60.8

80.4

119.4

236.5Taiwan$20,930

39.2

48.5

64.1

95.2

188.6

Malaysia$10,400

31.8

39.4

52.1

77.4

153.3

Thailand$5,370

24.9

30.8

40.7

60.5

119.9

Indonesia$3,580

20.7

25.6

33.8

50.2

99.4

Vietnam$1,730

13.0

16.1

21.3

31.6

62.7

India

$1,570

12.0

14.9

19.6

29.2

57.8

Middle income
threshold$1,036

7.6

9.5

12.5

18.6

36.8

$500

0.0

0.0

0.0

0.0

0.0

Ethiopia

Business Environment
WB Ease of
Doing Business
Ranking 2013

RemarkSingapore

1World's top business location since 2007.

Taiwan16

Reliable environment with low corporate
income tax (17%); few incentives.

Malaysia

6MIDA provides good services & support.

Thailand18Indonesia

120

Vietnam

99

India

134

Ethiopia

125

Board of Investment supports investors well;policies are reasonably stable & predictable.
Laws & regulations are unpredictable, unclear& without stakeholder consultation
Improving slowly since mid 1990s, butirregularities still abound.
FDI deregulation & industrial zones underway.
Generally very difficult business climate.
Government's commitment & policy effort arelaudable, but many business barriers remain.

Note: World Bank’s Ease of Doing Business ranking among 189 countries and areas
benchmarked to June 2013.

Wage and Productivity
Unskilledmonthly wage,

Labor productivity
increase per year,

Labor market condition & issues

JETRO Dec. 2013 APO index 1970-2011

Singapore$1,433

3.3%

Taiwan$1,054

4.9%

Malaysia

$429

3.1%

Thailand

$366

3.5%

Indonesia

$234

3.0%

Vietnam

$162

4.5%

India

$217

5.0%

Ethiopia

$50

N.A.

Highly competitive & professional; aged &foreign workers are less efficient.
ICT & industrial engineers abound.
Ethnic gap exists; high-tech shift aimed;labor-using processes sent abroad
Acute labor shortage; L-using processes
sent abroad (Thailand-plus-One)
Labor surplus; aggressive wage demand& labor dispute
Labor shortage in urban areas; rural
wages are still competitive
Auto and IT sectors have well trained
workers and engineers
Rapid growth of FDI workers in AA; futurelabor D&S and migration unknown

Note: Ethiopia’s wage is not JETRO. Vietnam’s labor productivity increase is for 1986-2011.

FDI, SME & IZ Policies
Assessment by GRIPS Development Forum based on site visits and interviews withofficials, zone operators and client firms
FDI policy

Manufacturing SME
promotion & linkage

Industrial zones

Singapore

Highly strategic basedon individual deals

Productivity support fortargeted segments

State-owned & strategic;
overseas expansion

Taiwan(No longer important;outward bound)

Highly developed andeffective

World model state-owned
science parks & EPZs

Malaysia

High-tech orientation

Well-coordinated but
results to be seen

Reasonably goodThailand

Shifting to high-techorientation

Generally weak except
auto part suppliers

Many private IZs (AMATA...);
modest state-management

Indonesia

Restrictive & unfriendly; Many scattered policies
nationalistic
but ineffective; clusters

Left to private sector

VietnamIrregular though slowly
improving

Many state, provincial, private
IZs but many are plan only

India

Restrictive; only slowly Almost none at policy
openinglevel

Ethiopia

Improving…

Almost none despite
JICA/JETRO support

State-managed; very hardland procurement

Generally weak except Initial zones under
textile, leather, kaizen… construction

Main Messages
 East Asia’s income levels range from very high to poor;
business environment & wage competitiveness also vary.
 Attained income is highly correlated with the quality of coreindustrial measures.
 The core components of industrial policy are HUMAN andENTERPRISE capacity building—engineering education, TVET& matching, SMEs, FDI & linkage, IZs, export promotion…;
these capacities must be built up over a long time.
Ethiopia, starting from low income & low policy capacity,
must also be steadfast and patient, and proceed with a goodlong-term plan.
 Quality over Speed! (Phase 1)
 Isogaba Maware! = “Slow and steady wins the race”
 “Rome was not built in a day”

Manufacturing Handholding?
PM Hailemariam (Feb. 25, 2014): “Can’t we adopt handholding fortransforming traders into manufacturers who invest, take risks, andabsorb technology?” (garment, leather, horticulture… )My response (Apr. 28, 2014):
 HH is a comprehensive program involving planning, marketing,technology, finance, taxes, accounting, IT, linkage, labor, etc.
 JETRO can help 150-200 SMEs annually to break into new export
markets because many competent experts are available in Japan.
But most countries lack such experts to do large-scale HH.

 Ethiopia is building basic support functions such as kaizen, TVET,MSEs, FDI, export, sectoral institutes, etc. Ethiopian industrial
experts are still scarce. If full-fledged HH is launched today, time &resources for basic functions will be overstretched.
 If HH is to be started, start with a small manageable scale that does
not impinge too much on existing budget & human resources.
Scaling up of pilot projects should be a future task.

Integrated & FDI-linked Technology Transfer (TT)Technology transfer as an overarching policy objective- TT to enhance quality, productivity & ownership- Firm effort + policy support + international cooperation- Targeted: light manufacturing & agro processing
Three policy pillars (to be built up and strengthened over time)Targeted
attraction of
FDI & buyers- General improvement ofbusiness climate- Strategic marketing (bringlight manuf. FDI from Asia)- One-stop service- Efficient logistics- Hard & soft infrastructure- Fast & reliable customs- Industrial parks- Reform laws, EIA, ERCA…

Local enterprise
capacity buildingfor linkage
Linkage policy- Incentives, subsidies& policy support for TT- Matching of business& JV partners- Handholding- Effective follow-up &monitoring- Kaizen- Benchmarking- Management training- Sector-specific TT & QCD- Export marketing (incl.
champion products)- TVET- Strengthening support
agencies: EKI, TIDI, LIDI…

Ethiopia: A Step-by Step Approach toPolicy Upgrading & Expansion