Introducing Proactive FDI
Policy in Ethiopia:
Suggestions from an East Asian Perspective

Kenichi Ohno (GRIPS)

Addis Ababa, January 16, 2013

Topics
1. Targeting light manufacturing FDI from Asia
2. Strategic FDI marketing
3. Improving investor support services
4. New Investment Law and EIA reform1. Targeting Light Manufacturing
FDI from Asia (& Elsewhere)
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Many Asian countries face high or rising wages (Malaysia,
Thailand, China, Vietnam…); they need to relocate laborintensive production to other countries with lower cost.
Their main destinations are low-income Asia but Africa is alsoa potential destination.
Garment factories are moving to Bangladesh, Cambodia,
Myanmar… Myanmar attracts attention as a new frontier.
Malaysia encourages outward FDI of labor-intensive
manufacturing (“cross-border investment”).
Thailand wants to move out certain auto parts manufacturing.

 Receiving light manufacturing FDI from Asia can be one of thepolicy goals for Ethiopia. This will clearly define policy targets
and necessary improvements and measures.

Average Wages in Asian Countries, 2012
Monthly salary of full-time factory worker with three years of service
JETRO survey on Japanese FDI firms in Asia
0

200

400

600

800

1000

1200

1400

USD
1600

Manufacturing
wage Increaseover 2011

Korea

4.7%

Singapore

3.8%

Taiwan2.3%

Thailand

13.4%

Malaysia

4.3%

China

11.7%

India

13.0%

Philippines

5.5%

Indonesia

15.9%

Vietnam21.0%

Bangladesh

13.7%

Myanmar18.0%- Ten countries (not all shown) recorded wage increases of over 10% in 2012.
- 71% of firms responded that rising wages are a problem.
- Many countries adopt high wage policy to expand domestic demand.

4

Ethiopia Receives Manufacturing
FDI—But It Can Do More & Better

Mozambique, Tanzania, Ghana, etc. with political stability,
large ODA and coastal access receive little manufacturing FDI(unrelated to construction, energy, or extractive activities).
Despite being poor and landlocked, Ethiopia attracts somegarment & leather FDI from Turkey, China, India, etc.
- Serious and active industrial policy (by African standard)since around 2002 with continuous learning andimprovement- Aggressive approaches to individual FDI by Ethiopian
government (PM, DPM, ministers, diplomatic missions)- Incentives, prioritized support, and high policy attention totarget sectors and firms
But this is not enough. Both investment climate and FDI
strategy have much room for improvement. Ethiopia should
build on past achievements to create a better FDI policy.
5Set Clear Goals and Concrete
Action Plans
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Customs & trade regulations, tax rates & administration, andfinance are major obstacles in Ethiopian business climate(WB survey on Chinese FDI, 2012).
In addition to general improvement in business climate, FDI
marketing should specify concrete target countries, sectors
and even firms (this presupposes existence of an effective
overall industrial strategy).
Benchmark Asian countries which are sending out and/or
receiving light manufacturing FDI, and identify necessary
conditions & policy actions for absorbing it.
Prepare concise but concrete action plans (cf. policy templateused by the Vietnam-Japan industrialization initiative).
Improve policy functions through international cooperation (cf.
JICA assistance with the Zambia Development Agency).

World Bank “Light Manufacturingin Africa” (2012)
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Produced by a team led by Hinh Dinh under the direction offormer WB chief economist Justin Lin. Ethiopia is featured
prominently, and Vietnam and China are compared.
Ethiopia’s five manufacturing sectors—constraints are
identified and recommendations are given (next slide).
Labor productivity of Ethiopian garment is about the same as
Vietnam and half of China. Ethiopia can expand light industry
but only if it adopts good policies as in China or Vietnam[I feel Vietnam’s policy quality is grossly overestimated].
General advice for Africa: (i) plug-and-play [investor-friendly]industrial parks; (ii) key input industries; (iii) trade logistics; (iv)assisting first movers; (v) entrepreneurial skills; (vi) vocational
training; (vii) implementation issues.

World Bank: Ethiopia’s Light Manufacturing

Source: H.T.Dinh, et al. (2012), p.9.

World Bank Survey: Chinese FDI
in Ethiopia (Dec.2012)
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In Ethiopia, 372 Chinese investors are registered (May 2012);
86 in regular operation (Mar.2012); 69 responded to survey (45manufacturing/13 construction/11 services).
Manufacturing Chinese FDI covers food, garment, IT,
machinery, non-metallic minerals, and “other” (largest).
Total Chinese investment amounts to ETB7.5 (US$450m);
15,910 full-time permanent jobs created; average monthly
salary is ETB 1,445 (US$85).
Main FDI motives are informal Chinese network (friends),
Ethiopian market attraction, low wage, incentives, andincentives from Chinese government.
Major obstacles are customs clearance & trade procedure,
currency convertibility & exchange rate, tax administration
irregularities, finance, and lack of skilled workers.

Industrial Strategy Template
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Situation analysis—domestic, regional & Asian situation, etc.
Vision—e.g. “Ethiopia is a preferred destination of laborintensive manufacturing from Asia (and elsewhere)”
Targets—quantitative & qualitative targets such as receiving
garment & footwear from China, India, Turkey & Vietnam;
even labor-intensive electronic assembly from Thailand &Malaysia, etc.
Policy issues—e.g. (i) industrial parks; (ii) one-stop service;(iii) labor supply & quality; (iv) strategic FDI marketing, etc. (3to 5 areas to be improved for achieving the above targets)Action plan—what, by whom, by when, performance criteria,
monitoring mechanism

Note: The above format is being used in drafting action plans for the VietnamJapan Industrialization Strategy initiative.

About FDI Source Countries
Each source country has different motives and characteristics.
FDI strategy must be customized to each target country (andeven each sector):
 Chinese—strong overseas network, commercial and shortterm profit orientation, quick decision, very active in all sectors
around the world, policy initiative & support for outward FDI.
 India—strength in some sectors (leather, garment, IT, autoparts…), active even in remote places, kaizen
 Korea—huge investment & risk-taking by chaebols (large
business groups), official support & public promotion
 Japan—manufacturing oriented, slow decision but long-term
commitment, assistance for local capacity building,observance of labor, social & environmental codes

Characteristics of Japanese FDI
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Japan is never a first mover in new FDI frontier but comes inlarge number if the host country proves to be a good production
base (Indonesia, Thailand, Malaysia, China, Vietnam,
Cambodia, Myanmar…)
Once agglomeration forms, late start is not really a big problem
for Japanese FDI.
Manufacturing oriented (incl. industrial services & logistics); notvery active in trade, construction, real estate, banking,insurance, consultancy, etc. in comparison with China, Korea,
Singapore, US, etc.
Japanese firms often helps to improve local human & enterprisecapabilities because strong “supporting industries” (upstream
local production) enhance their competitiveness.
Some countries appreciate long-term commitment and teachingof Japanese FDI (cf. Vietnam currently targets Japanesemanufacturing SMEs instead of other nationalities).

Characteristics of Japanese FDI(More)
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China has attracted large amounts of Japanese manufacturing
FDI but political risk and wage pressure are rising. Japanesefirms want to diversify production locations (“China-plus-one”).
Among Japanese manufacturing SMEs, most popular
destinations are Thailand, Vietnam, and Indonesia. India and
Myanmar also attract general attention but they are considered
too difficult for SMEs to enter.
At present, a large wave of Japanese manufacturing FDI is
unlikely in Ethiopia (or Africa); but firms with specific objectives
may be attracted.
- Firms needing Ethiopia-specific inputs (high-quality leather & coffee,certain agro products, minerals and gems, etc.)- BOP businesses using Japanese technology

Ethiopia can target Japanese FDI for quality, but it should also
target other source countries for large volume.

2. Strategic FDI Marketing

Improving general business climate is important, but it is only
the first step toward effective FDI policy.
Publicizing priority sectors in the web may be useful, but thatalone will not attract FDI in sufficient quality or quantity.
Additional effort should be made for more strategic marketing:- Identify target sectors and countries for FDI attraction- Identify even target companies- Approach target companies individually and negotiate special
incentives if necessary; a large number of contacts and visits
may be required to produce results(cf. Malaysia’s Penang Island attracting semi-conductor giants;
Mauritius attracting Hong Kong garment firms; Singapore
attracting global aeronautic firms, etc.)

Open vs. Targeted Approaches
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Open approach—offer good investment climate, set nopriorities, and welcome all investors (except in sensitive areas
such as defense) (Taiwan).
Targeted approach—set concrete and narrow targets, thenapproach and negotiate FDI firms individually.
Two-track approach—provide excellent investment climate
for all but also adopt targeted marketing (Singapore).
Balanced learning—improve investment climate generally,
but also set priority areas and introduce measures to attract
FDI in these areas (as part of policy learning); help of foreign
experts may be needed to initiate targeted marketing.

Avoid General, Non-unique FDI
Promotion
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Basic materials should be concise—investors are not very
interested in general information.
(eg. country profile; FDI data; list of industrial parks; incentives;priority sectors; general investment climate and policy measures...

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Identify main concerns of targeted firms.
(eg. parts-making Japanese SMEs need rental factories, one-stop
service in Japanese language, assistance in finding new customers,
recruitment of good engineer and professionals, good infrastructureservices, etc.)Create and offer 3 or 4 compelling reasons to choose yourlocation instead of rival countries/regions. These reasonsmust be unique and negotiable (respond to the requests oftargeted firms).

Vietnam: Ineffective Provincial FDI
Competition
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Vietnam targets Japanese manufacturing SMEs. Many highlevel missions are exchanged bilaterally at central and local
levels.
However, operational knowledge in FDI marketing andinvestor support is lacking. Vietnam cannot offer one-stop
service without strong assistance from Japanese experts.
Many provinces send investment missions to Japan but theirpresentations are too similar, too general and uninformative;
each province must identify its own unique advantages andset specific target sectors & companies.
GRIPS and Osaka/Kansai governments are jointly working tohelp break these operational barriers and link concerned
officials and experts between Vietnam and Japan.

The Case of Malaysia (MIDA)
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Main investment incentives are pioneer status (corporate tax
reduction) and investment tax allowance; import & sales tax
exemption is also available for manufacturers; customized
incentives are also possible.
Licenses and incentives are centrally managed by MIDA with nodistinction over nationalities. An effective one-stop service isoffered. Greater incentives are given to remote regions.
Provision of licenses & incentives are based on both publishedeligibility list and individual screening (no automatic approval).
Applications are reviewed by MIDA’s relevant divisions first,
then sent to MIDA’s weekly committee for final decision.
Manufacturing (not disguised trading), value creation,technology and industrial linkage are key criteria for approval.

Screening of FDI
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Beware of investors with no industrial experience, disguised
traders, and “license hunters” (obtaining license with nointention of investing).
Some FDI firms violate labor, environmental or IPR laws.
Proper screening of individual investors and project proposals
should take at least one week per case.
The case of Mozambique—all land is state-owned; land use
rights can be rented out to investors at low cost according to
official plan; however, if no investment is made as proposed
within certain time limit the right will be revoked automaticallywith no compensation.

3. Improving Investor Support
ServicesMany countries adopt “one-stop service” (“single-window”,“one-door”, etc.) but only in name. Ability to provide true onestop service varies greatly across countries (Vietnam: “onedoor with many locks”).
Ethiopia should learn to offer genuine “one-stop service.”
Malaysia’s MIDA & Thai BOI are good models.
Should industrial park developers be private or state-run? In
many countries government sets policy and provides additional
support but construction, marketing & park operation are
mainly private responsibility.
Every country is different. Work closely with the country people(eg. if you want to attract Japanese FDI, work with Japanese
officials & hire Japanese experts; similarly for other countries).

Taiwan’s Export Processing Zones(EPZs): Key Success Factors
A) Right timing (1960s: open & vibrant world economy)B) Excellent location (port, airport, freeway, metro)C) Effective policy (development strategy, land policy)D) Perfect legal system (clear and favorable law & policy)E) Single contact window (applications processed in 2 weeks)F) Excellent investment environment (infrastructure, tax breaks,
power & water, life quality, service platform…)
G) Skilled workers
H) Foreign technology transferred successfullyI) Entry of high-quality tenant companies with R&D capability,
clean production, etc.
Source: EPZ Administration, Ministry of Economic Affairs, Taiwan.

Industrial Park Checklist(Vietnam)
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Location—port access, airport access, access to urban
center, soil & topography
Hard infrastructure—electricity, water, telecom, waste
treatment, rental factories
Human resources—workers, engineers, professionals
Soft infrastructure—one-stop service, on-site customs
clearance, on-site business services
Living conditions (for expats)—housing, school for children,
clinic & hospital, restaurants, recreation & sport, greenery
Incentives & costs—incentives, land cost

Source: Vietnam Development Forum (March 2012).

One-stop Service Requested by
Osaka Manufacturing SMEs
Pre-investment servicesSupport for procedural documents (corporate registration, etc.)
Introduction of factory builder and interior fitting companies
Support for importing equipment & components

Post-investment services
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Consultation for tax, accounting, labor matters
Support for domestic procurement of parts & materials
Support for marketing and finding new domestic customers
Support for trade fair participation
Support for recruiting local staff
Information updates on legal and policy matters
Support for exiting

Japanese or Japanese-speaking staff with sufficientexperience on duty, preferably 24 hrs/365 days
Source: Questionnaire to industrial park operators in Vietnam prepared by
GRIPS & Osaka Prefectural Government.

4. New Investment Law & Ethiopian
Investment Agency Reform

We are concerned about some features of policy change thatseem to go against global competitive trends and offering
welcoming attitude to investors:
Industrial zone developers shall be state-owned or JV between
state & private firm.
 Sectors permitted for FDI are now defined in a positive list insteadof a negative list.
 Minimum capital requirements are raised (eg. $200,000 for 100%
foreign owned FDI, which shuts out foreign SMEs)

Creation of contact desks of relevant organizations within EIA
is a good first physical step; however, establishment of true
one-stop service will take much time and effort.
Large-scale mining and agricultural FDI projects require more
intensive preparation and examination than manufacturing orservice FDI. One-stop service does not eliminate such needs.

Remarks by HE Mr. Hailemariam(Jan.15, 2013)
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We are a beginner in the learning process; not sure if our FDI
policy is on the right track. Free discussion and frank advice
are welcome.
Investment proclamation can be changed as needed. Anychange will be for better for the majority of investors.
Our priority is private IZ developers, but we have to adjust
policy because we cannot wait forever: private (no result)JV (unsuccessful)  state-owned IZ development
Regarding minimum capital requirement, previously we
wanted to reserve SME sector for local firms and invite only
large FDI. But we now know that some foreign SMEs are
creative. Foreign SMEs are welcome as long as they add
value and transfer technology to Ethiopia.

Board of Investment, Thailand(Thamrong Mahajchariyawong, Deputy Secretary
General, March 2005)
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Our FDI policy is changing every five years (synchronizedwith five-year plans) but always for better. We havecentralized general incentives and promotion. We do not havecase-by-case treatment.
Technical transfer measures are tricky because investors
become angry if you regulate them too much. We implement
only broad measures to encourage technical absorption. We
just open up and let the market decide.
The greatest attractiveness of Thailand is its welcoming
attitude toward FDI. “Red carpet treatment” for investors
should always be maintained in the future.

References
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K. Ohno, Learning to Industrialize: From Given Growth to Policy-aided Value
Creation, Routledge, 2012.
Hinh T. Dinh, Vincent Palmade, Vandana Chandra, and Frances Cossar, Light
Manufacturing in Africa: Targeted Policies to Enhance Private Investment andCreate Jobs, World Bank Africa Development Forum, 2012.
United Nations Conference on Trade and Development, Creating Business
Linkages: A Policy Perspective, 2010.
Small and Medium Enterprise Administration, White Paper on Small andMedium Enterprises in Taiwan, 2010.
GRIPS and Osaka Prefectural Government, Questionnaire for Industrial Park
Developers in Vietnam, 2012.
Vietnam Development Forum, “Industrial Park Checklist,” compiled for policy
discussion, 2012.
Vietnam Industrialization Strategy Working Group, Industrial Action Plan
Template (for the case of agricultural machinery), work in progress, 2012.