# **1. Introduction**

Expanding manufacturing production is often considered a necessary stepping stone for economic growth in low-income countries because manufacturing generates value-adding activities based on the existing economic resources of the country. This is certainly true for African countries, many of which are dependent on only a handful of primary commodities for earning foreign exchange without much value added generated. Manufactured products are not major exports of African countries in general. Only 21 percent of total African exports worldwide are manufactured products (Table 1).<sup>1</sup> For these commodity-dependent African countries, increasing manufacturing exports is the most direct means of diversifying their export structure and reducing their vulnerability to the fluctuations of world commodity prices.

While export diversification in Africa is discussed most often in the context of diversification of product composition ( _product diversification_ ), the question remains whether such product diversification comes with diversification of export markets or _market diversification_ of their manufacturing exports. As shown in Table 1, the European Union (EU) is the major destination of African manufactured products, importing more than a half of Africa’s manufacturing exports. Recently, some developed countries, such as EU countries and the United States, have provided preferential tariff and non-tariff treatment of the products made by low-income African countries to allow more favorable access to their markets, particularly for manufactured products.<sup>2</sup> These measures have led to considerable growth of African exports in certain sectors such as garment exports to the United States under Africa Growth and Opportunity Act (AGOA). While small in absolute size, exports of manufactured products are a large share of intra-Africa exports (43% of total intra-African trade), compared to exports to other regions. Intra-Africa exports have also grown by almost 20% per annum on average from 2001 to 2005, which is the highest growth for African manufacturing exports among destinations.

While aggregate data show some patterns of market diversification of African manufacturing exports, little has been studied on the geographical orientation of manufacturing exports at the firm level and the patterns of their market diversification. There is only a limited number of papers that look at directions of exports at the firm level across the world. Using Slovenian data, Damijan, Polanice, and Prasnikar (2004) showed that Slovenian exporters to the EU are more productive than exporters to the neighboring countries. Using French micro-data, Eaton, Kortum, and Kramarz (2004) found that most exporters sell to very few markets, whereas a small number sell almost

> 1 Manufactured products include machinery and transport equipment, textiles, apparel and footwear, and other manufactured materials.

> 2 One notable U.S. example is the Africa Growth and Opportunity Act (AGOA). The European Union also has a similar preferential program called “Everything But Arms” (EBA), as well as the Cotonou Agreement for the African, Caribbean, and Pacific (ACP) countries. The latter will soon be replaced by Economic Partnership Agreements (EPAs) that the EU is currently negotiating with those countries.

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